International Investment Law and Competition Law [1st ed.] 9783030339159, 9783030339166

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European Yearbook of International Economic Law Katia Fach Gómez Anastasios Gourgourinis Catharine Titi Editors

Special Issue: International Investment Law and Competition Law

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European Yearbook of International Economic Law Special Issue

Series Editors Marc Bungenberg, Saarbrücken, Germany Markus Krajewski, Erlangen, Germany Christian J. Tams, Glasgow, UK Jörg Philipp Terhechte, Lüneburg, Germany Andreas R. Ziegler, Lausanne, Switzerland

The European Yearbook of International Economic Law (EYIEL) is an annual publication in International Economic Law, a field increasingly emancipating itself from Public International Law scholarship and evolving into a fully-fledged academic discipline in its own right. With the yearbook, the editors and publisher intend to make a significant contribution to the development of this “new” discipline and provide an international reference source of the highest possible quality. The EYIEL covers all areas of IEL, in particular WTO Law, External Trade Law for major trading countries, important Regional Economic Integration agreements, International Competition Law, International Investment Regulation, International Monetary Law, International Intellectual Property Protection and International Tax Law. In addition to the regular annual volumes, EYIEL Special Issues routinely address specific current topics in International Economic Law. More information about this subseries at http://www.springer.com/series/8848

Katia Fach Gómez • Anastasios Gourgourinis • Catharine Titi Editors

International Investment Law and Competition Law

Editors Katia Fach Gómez Law School University of Zaragoza Zaragoza, Spain

Anastasios Gourgourinis Athens Public International Law Center National and Kapodistrian University of Athens Athens, Greece

Catharine Titi French National Centre for Scientific Research (CNRS)-CERSA University Paris II Panthéon-Assas Paris, France

ISSN 2364-8392 ISSN 2364-8406 (electronic) European Yearbook of International Economic Law ISSN 2510-6880 ISSN 2510-6899 (electronic) Special Issue ISBN 978-3-030-33915-9 ISBN 978-3-030-33916-6 (eBook) https://doi.org/10.1007/978-3-030-33916-6 © Springer Nature Switzerland AG 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Editorial

This special issue brings together a selection of chapters that were presented and discussed at the Colloquium on “International Investment Law and Competition Law”, which took place at the University of Zaragoza (Spain) on 27 and 28 September 2018.1 Although international investment law and competition law coexist regularly in international praxis, scholarly analysis has largely treated them as parallel universes, and as a result their actual and potential overlap was not sufficiently explored. This edited book International Investment Law and Competition Law aims to redress this issue by focusing on the commonalities and synergies between the two legal fields, thus encouraging a scholarly debate that lays the foundations for future interdisciplinary legal studies. The book opens with a chapter authored by Friedl Weiss and entitled “Quest for a Sustainable International Investment Regime: Leveling Up Through Competition (Policy) Rules?”. The chapter corresponds to the Colloquium’s Opening Keynote Lecture. In it, the author explores the functioning of trade, investment and competition law and the interface between them, both at the national and international level. He documents international cooperation in competition policy and the failed attempts to negotiate multilateral rules in trade and investment law and argues in favour of a multilateral system in order to redress inequalities on a worldwide scale. Marc Bungenberg and Fabian Blandfort co-author a chapter on “International Investment Law and Public Procurement: An Overview”. The authors ask the question of whether international investment law can serve as a gap-filling regime

1 This Colloquium was generously sponsored by both the Department of Innovation, Research and University of the Aragon Government (ORDEN IIU/1000/2018, de 30 de mayo, por la que se convocan subvenciones para la realización en Aragón, durante el año 2018, de eventos y actividades de promoción, divulgación y difusión de la ciencia, la investigación, el desarrollo tecnológico y la innovación) and the Vice-rectorade of Scientific Policy of the University of Zaragoza (Convocatorias de Ayudas a la organización de congresos de carácter científico). In addition, the Colloquium received financial support from an important number of local and national sponsoring institutions, all of them mentioned in the conference programme and on the registration website.

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to protect foreign tenderers against harmful state conduct during procurement proceedings. The chapter therefore examines whether international investment agreements (IIAs) are applicable to the procurement process and whether a tender and pre-award expenditures qualify as protected investments. After observing that the question is neither adequately regulated in IIAs nor has arbitral practice developed a concrete approach, the authors consider that while successful bidders can claim compensation for damages arising from the pre-award phase, the protection of unsuccessful bidders must be answered in a differentiated manner depending on whether the award procedure is open or pre-elective. Assuming that international investment law is applicable, the authors conclude that the ordinary business risks of being part of a tender procedure should be taken into account when assessing liability. Lukas Vanhonnaeker canvasses the “Impacts of Local Equity Requirements on Competition”. Local equity requirements tend to oblige foreign investors to join forces with a local partner in order to access the national market while preventing them from acquiring a majority stake in the local entity. The chapter explains the notion of local equity requirements and gives an overview of their historical and ideological underpinnings and context. Ultimately, the chapter analyses the far-reaching and potentially harmful impact of local equity requirements on the competitive state of markets. Phil Baumann addresses the topic “When State Enterprises Have Deeper Pockets: Ensuring Competitive Neutrality in Cross-Border M&A”. The author argues that state enterprises may have undue competitive advantages over their private competitors, which may result in market inefficiencies, and that the current legal framework does not address this concern adequately. In order to overcome this unsatisfactory status quo, the chapter critically discusses viable approaches to securing competitive neutrality in cross-border mergers and acquisitions and ultimately a level playing field. Gustavo Prieto’s chapter on “The Review of National Competition Authorities’ Acts in Investment Arbitration: Setting Limits to ‘Economic Lawfare’ in the 21st Century” looks into what would constitute an appropriate standard of review for investment arbitrators when evaluating the lawfulness of acts of national competition authorities in the context of the contemporary notion of “economic lawfare”. The author argues in favour of a three-principle standard of review, taking into account arbitrariness, denial of justice and proportionality, in order to take account of current standards of treatment contained in IIAs. Belen Olmos Giupponi’s addresses the question “Are Market Competition and Investment Protection Incompatible in the EU Energy Sector?”. Her contribution underscores recent developments in the European Union’s investment policy and unveils the intricacies of the EU state aid regime. At the centre of her critical analysis lies the legal nature of the Energy Charter Treaty as an international investment agreement. Whereas the Commission’s role in international investment law has increased over the last few years, the author considers that internal obstacles operate as a resistance to the implementation of an authentic EU investment policy. The chapter draws on a joint examination of the evolution of case law of arbitral

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investment tribunals, the Court of Justice of the European Union (CJEU) and the European Commission’s position on intra-EU investment treaty and state aid in the energy sector. Karsten Nowrot and Emily Sipiorski co-author a chapter entitled “Stipulating Investors’ Obligations in Investment Agreements as a Suitable Regulatory Approach to Prevent and Remedy Anti-Competitive Behaviour?”. The authors assess the feasibility and potential benefits of introducing investor obligations in IIAs targeting anti-competitive behaviour by foreign investors. While similarities between the policy goals of competition law and international investment law argue in favour of a potential “cooperation” between the two regimes, the chapter also stresses the difficulties in ensuring the respect of such obligations once inserted in IIAs. Elena Belova pens the following chapter entitled “Investors’ Anti-Competitive Behaviour and Illegal Investments in Investment Treaty Arbitration”. The chapter discusses the legal consequences of investors’ anti-competitive behaviour in the context of investment treaty arbitration and argues that anti-competitive strategies may lead to breaches not only of competition law but also of a variety of host state laws and regulations. The author advocates the adoption of a functional definition of anti-competitive actions that taint investments with illegality and explores ways in which such investments may be excluded from IIA protection. Paschalis Paschalidis considers “The Impact of EU State Aid Law on International Investment Law and Arbitration”. The author focuses on the manner in which legitimate expectations have been applied by arbitral tribunals in relation to state aid measures and examines whether award of damages to foreign investors can constitute unlawful state aid. He studies in particular whether arbitral awards can constitute an economic advantage and whether they are attributable to the member state involved. The chapter further considers the fate of arbitral awards granting damages to investors in relation to state aid and studies the remedies available to member states against such awards. Millán Requena Casanova’s chapter addresses “The Complex Relationship between Competition Law and Investment Arbitration after Achmea: The Novenergía v. Spain Case”. Within the framework of the investor-state arbitrations initiated against Spain under the Energy Charter Treaty (ECT), this chapter focuses on the Novenergía arbitration, highlighting the difficult relationship between competition law and investment arbitration in intra-EU investment disputes. After analysing Spain’s position in Novenergía, the author reflects on new issues that the Judgements rendered in Achmea and Micula may open. He further highlights the difficulties that investors attempting to obtain recognition and enforcement of the awards issued in the renewable energy arbitrations against Spain may encounter. In “Using GATS Article II to Resort to Investment Arbitration”, Sébastien Manciaux focuses on a recent arbitration, the Menzies v. Senegal case. In Menzies v. Senegal, an investor from Luxembourg attempted to establish the jurisdiction of an investment tribunal by combining the most-favoured-nation clause provided in Article II of the General Agreement on Tariffs and Trade (GATS) and the investorstate arbitration clause contained in a bilateral investment treaty (BIT) between the host state and a third country. The author critically discusses this case in order to

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shed some light on the links between the law of the World Trade Organization (WTO), seen as global competition law, and international investment law. The chapter co-authored by Krystle M. Baptista and Bianca M. McDonnell on “The Use of Evidence Obtained through a State’s Special Antitrust Powers in Investment Arbitration” explores the use of evidence obtained by states in investment arbitration. The authors consider whether a state may use information it obtains through the special powers of supervision, investigation and seizure granted to its antitrust agency in order to defend itself against an investment arbitration. They argue that such a use of a state’s special powers would constitute a misuse of power under domestic law and a violation of due process in investment arbitration and that, as a consequence, states should resort instead to document production. Putting the finishing touches to this book, Thomas Cottier discusses “Competition and Investment: The Case for 21st Century WTO Law”. This chapter corresponds to the Colloquium’s Concluding Keynote Lecture. The author addresses the close relationship between trade regulation, competition and investment law. He argues in favour of integrating these three areas within WTO law, thus returning to conceptual foundations laid out in the Havana Charter. Global value chains and an increasing need to address behind-the-border issues call for enhanced common and approximated rules in international economic law and, according to the author, reveal the need for an integrated dispute settlement system within the WTO covering trade, investment and competition law issues. The editors would like to thank Munia El Harti Alonso and Vanessa Manzin for their editorial assistance with some aspects of this volume. Zaragoza, Spain Athens, Greece Paris, France

Katia Fach Gómez Anastasios Gourgourinis Catharine Titi

Contents

Quest for a Sustainable International Investment Regime: Leveling Up Through Competition (Policy) Rules? . . . . . . . . . . . . . . . . . . . . . . . . Friedl Weiss

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International Investment Law and Public Procurement: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marc Bungenberg and Fabian Blandfort

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The Impacts of Local Equity Requirements on Competition . . . . . . . . . . Lukas Vanhonnaeker When State Enterprises Have Deeper Pockets: Ensuring Competitive Neutrality in Cross-Border M&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Phil Baumann The Review of National Competition Authorities’ Acts in Investment Arbitration: Setting Limits to ‘Economic Lawfare’ in the 21st Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . José Gustavo Prieto Muñoz

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Are Market Competition and Investment Protection Incompatible in the EU Energy Sector? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 Belen Olmos Giupponi Stipulating Investors’ Obligations in Investment Agreements as a Suitable Regulatory Approach to Prevent and Remedy Anti-Competitive Behaviour? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Karsten Nowrot and Emily Sipiorski Anti-competitive Investor Behaviour and Illegal Investments in Investment Treaty Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157 Elena Belova

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The Impact of EU State Aid Law on International Investment Law and Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Paschalis Paschalidis The Complex Relationship Between Competition Law and Investment Arbitration After Achmea: The Novenergía v. Spain Case . . . . . . . . . . . . 203 Millán Requena Casanova Using GATS Article II to Resort to Investment Arbitration . . . . . . . . . . 223 Sébastien Manciaux The Use of Evidence Obtained Through a State’s Special Antitrust Powers in Investment Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 Krystle M. Baptista and Bianca M. McDonnell Competition and Investment: The Case for 21st Century WTO Law . . . 261 Thomas Cottier

Quest for a Sustainable International Investment Regime: Leveling Up Through Competition (Policy) Rules? Friedl Weiss

Contents 1 Browsing Documents for “Competition” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 By Way of Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Linkages and Fissures: Interactions of Trade, Investment, Competition . . . . . . . . . . . . . . . . . . . . 3.1 Sketching Antecedents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Trade-Investment “Interface Economics” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Role of Competition in Trade & FDI Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 International Cooperation in the Field of Competition Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Proposals for Multilateral Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Failed Attempts to Establish Multilateral Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract Competition (policy) rules are ubiquitous as well as an essential element of the legal and institutional framework for the global economy. It is widely recognized that, linked to inclusive and sustainable development, they can best harness foreign direct investment (FDI)’s potential benefits as drivers of economic transformation. Against the background of politically regressive skepticism and growing protectionist retreat from the institutionalized and rule-based liberal practice initiated after the Second World War, this article seeks to retrace the role, utility, design, and interface of the legal regimes governing trade, investment and competition, at the national level and as main pillars and governance ideas of global economic law. It also documents international cooperation in the field of competition policy, as well as proposals for and failed attempts to establish multilateral rules, for trade and FDI. The article concludes with a plea for such rules in an effort to redress existing worldwide inequalities.

F. Weiss (*) Department of European, International and Comparative Law, Faculty of Law, University of Vienna, Vienna, Austria e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_1

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1 Browsing Documents for “Competition” Competition has weakened, is a common lament. Markets have become more concentrated as firms prefer to merge than to compete, forming monopolies which limit production and restrain their investment to keep prices and profits high. Evidence of some of the pernicious consequences of less competition include markups associated with less investment in physical capital and a smaller share of economic value created being paid to workers, eroding their purchasing power. These, in a nutshell, are the key findings of a couple of recent International Monetary Fund (IMF) studies.1 Conversely several “industrialized” economies experience de-industrialization, de-unionization and rising global competition for the export of industrial goods, factors which contribute to higher levels of income inequality. Yet, a recent World Trade Organization (WTO) Staff Working Paper tersely asserts that “competition policy, today, is an essential element of the legal and institutional framework for the global economy”.2 The inaugural issue of the World Bank Group’s Global Investment Competitiveness Report 2017/20183 presents analytical insights and empirical evidence on foreign direct investment (FDI) drivers and contributions to economic transformation. It is focused on developing countries (DCs) given their growing role as both sources and recipients of FDI, and explores how policy makers and local companies can best harness FDI’s potential benefits for inclusive and sustainable development.4 Moreover, work undertaken by the Organisation for Economic Co-operation and Development (OECD), the United Nations Conference on Trade and Development (UNCTAD), the World Bank and at the WTO has identified overarching links between competition policy and development, including an economy’s ability to attract and maximise the benefits of investment.5 More generally, the World 1

The rise of corporate market power and its macroeconomic effects. International Monetary Fund, World Economic Outlook, April 2019, www.imf.org/en/Publications/WEO/Issues/2019/03/28/ world-economic-outlook-april-2019, pp. 55–76. Díez FJ, Leigh D, Tambunlertchai S, Global Market Power and its Macroeconomic Implications. International Monetary Fund, WP/18/137, 15 June 2018, www.imf.org/en/Publications/WP/Issues/ 2018/06/15/Global-Market-Power-and-its-Macroeconomic-Implications-45975, pp. 3–5. 2 Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/english/ res_e/reser_e/ersd201812_e.htm, p. 1. 3 Foreign Investor Perspectives and Policy Implications. World Bank Group, Global Investment Competitiveness Report 2017/2018, 2018, https://openknowledge.worldbank.org/handle/10986/ 28493. 4 “Competition” does not feature in the most recent advanced unedited version of the Report of the Committee for Development Policy of the United Nations’ ECOSOC on its 21st session, E/2019/ 33, 11–15 March 2019, https://undocs.org/en/E/2019/33. 5 Conference on Investment for Development: Making it Happen. OECD, 25–27 October 2005, www.oecd.org/investment/investmentfordevelopment/ conferenceoninvestmentfordevelopmentmakingithappen.htm.

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Economic Forum’s contemporaneous Global Competitiveness Report 2017–2018, concludes that goods market efficiency and thus business productivity, depends on healthy market competition, both domestic and foreign, as important drivers of market efficiency, so that the most efficient firms, producing goods demanded by the market, are those that thrive.6 For many DCs, the World Bank’s Report claims, FDI has become the largest source of external finance, surpassing official development assistance (ODA), remittances, or portfolio investment flows. But the financing required to achieve the Sustainable Development Goals (SDGs) remains prohibitively large and largely unmet by current FDI inflows. To maximize the development impact of FDI and thus help meet the SDGs, private investment will have to expand into areas where it has not yet ventured, notwithstanding the associated risks. The Report also recalls that the benefits of FDI extend well beyond attracting needed capital. FDI also confers technical know-how, managerial and organizational skills, and access to foreign markets and has a significant potential to transform economies through innovation, enhancing productivity, and creating better-paying and more stable jobs in host countries. Importantly, foreign investors are becoming increasingly prominent players in delivering global public goods, addressing climate change, improving labor conditions, setting global industry standards, and delivering infrastructure to local communities and more generally, in increasing competitiveness and stability. Despite abundant evidence on the development benefits of FDI, the global economic outlook remains uncertain, clouded by risks of trade and investment protectionism—whether in form of investment screening,7 strategic industrial policies8—and geopolitical risk.

6 Schwab K, The Global Competitiveness Report 2017–2018. World Economic Forum, 2017, www. weforum.org/reports/the-global-competitiveness-report-2017-2018, p. 318. The idea of “market efficiency” underlies EU competition law, a regulatory system ensuring that competition in the internal market is not distorted (Protocol No. 27 to the Lisbon Treaty) and which aims at “effective” (or workable) rather than perfect competition, designed to protect not only the immediate interests of individual competitors or consumers but also to protect the structure of the market and thus competition as such: ECJ Case C-8/08, T-Mobile, June 4, 2009. 7 In its briefing on “FDI screening. A Debate in light of China-EU FDI flows”, of 17 May 2017 the EP pointed to screening mechanisms operated by Australia, Canada, Japan and the USA and that their deterrence effect on Chinese investors in a growing protectionist climate is likely to have an impact on the EU, Grieger G, PE 603.941, www.europarl.europa.eu/thinktank/en/document.html? reference¼EPRS_BRI%282017%29603941. 8 See e.g. “A Franco-German Manifesto for a European industrial policy fit for the 21st Century” of 19 February 2019: recognizing that “competition rules are essential”, but also calling for a necessary adaptation of the Merger Control Regulation 139/2004 and current merger guidelines so that European companies are enabled to “successfully compete on the world stage”, Bundesministerium für Wirtschaft und Energie, Ministère de l’Économie et des Finances, Paris, www.gouvernement.fr/ en/a-franco-german-manifesto-for-a-european-industrial-policy-fit-for-the-21st-century; this manifesto echoes of course Jean-Jacques Servan-Schreiber’s “The American Challenge”, today, probably rebranded “The Chinese Challenge”. See Servan-Schreiber (1967).

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2 By Way of Introduction Adam Smith, remembered as the proverbial father of economics, lived at a time of great change, when the industrial revolution got under way, while people began to question the authority of religion. To him both free trade and free thinking were forces for good.9 Yet both are still ideologically though perhaps not theoretically embattled. Smith also praised the virtues of competition as a way to ensure both allocative and productive efficiency. Today, once again, we witness great change—political, societal, economic—and the surge and spread of multiple discontents in civil societies. Uncannily, like in the days of Adam Smith, people also question the authority of established scientific certainties underpinning contemporary socio-economic governance systems and practices. People’s belief in the ability of managed or heavily guided capitalism10 based on these to deliver economic welfare and sustainable development has become brittle. Science itself has become suspect; and the stories that experts tell about scientific discoveries, whether readily embraced, anxiously hedged against, or rejected, are ultimately subject to the scrutiny of fickle markets and increasingly irascible public opinion. Amongst many challenges facing designers of policies as well as regulatory regimes today two are rarely mentioned at all: their weakened ability or willingness, both to eschew the temptations to yield to populist or group-specific demands for all kinds of protection—mostly against import competition—and, proverbially, to learn from egregious past policy mistakes, notably the Great Depression, shattering many people’s faith in unmanaged capitalism. Fortunately, however, proven scientific insights or even certainties tend to be resilient, not up for grabs as it were, by willful manipulation and exploitable populist prejudice or merely whimsical esoteric obscurantism. Can the same be claimed to hold for the prevalent science of socioeconomic political economy, such as it is, supporting the legal regimes governing trade, investment and competition, the main pillars of global economic law? Role, utility and design of each of these governance ideas and implementing rules, once thought settled, i.e. accepted, have slipped again into the mode of politically regressive skepticism, even retreat.11

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Adam Smith, An enlightened life, book review, The Economist, July 28th 2018, p. 64f, www. economist.com/books-and-arts/2018/07/26/rescuing-adam-smith-from-myth-andmisrepresentation. 10 Friedrich Hayek: intellectual godfather of free-market Thatcherism v. John Maynard Keynes as the patron saint of heavily guided capitalism; Was he a liberal?, The Economist, 18th August 2018, p. 54f. www.economist.com/schools-brief/2018/08/18/was-john-maynard-keynes-a-liberal. 11 See e.g. the US Foreign Investment Risk Review Modernization Act 2018, giving the Committee on Foreign Investment in the United States (CFIUS) greater authority to examine deals where foreign investors gain control of critical infrastructure or technology or of personal data.

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3 Linkages and Fissures: Interactions of Trade, Investment, Competition 3.1

Sketching Antecedents

Recent scholarly preoccupation with the International Law Commission (ILC)’s report on the fragmentation of international law,12 triggered, somewhat surprisingly, intense discussions of strategies and policies of reconceptualization of coherence in international economic law.13 How come? Had the separate institutionalized tenets of the New Post Second World War Order been overlooked, simply forgotten, deemed obsolete, one might ask? After all, with the exception of the comprehensive mandate under the abortive Havana Charter of 1948, stewardship and administration of specific rules for the conduct of international economic relations had been entrusted to separate intergovernmental institutions of limited jurisdictional scope. It is also noteworthy that initial imperfections of rule-based governance systems and/or their rejection for political or ideological reasons (Havana Charter) and incremental misalignment with newly emerging and diversified interests and regulatory needs—General Agreement on Tariffs and Trade (GATT)/WTO producer bias14 (favouring producers in rich countries) and lack of competition culture v. health and welfare of consumers (though Technical Barriers to Trade & Sanitary and Phytosanitary measures are more sensitive to social concerns)—further compounded existing inadequacies, thereby boosting calls for supplementary or updated rules. Still, in order to overcome such fragmentation and the resulting overlap and potential conflict in policy-making and standard-setting, scholars and institutions attempted to piece together seemingly disparate concerns within and between organizations through a variety of devices including interlinkages of complementary aspects of economic policymaking,15 their “constitutionalization”,16 12 Koskenniemi M, Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law. United Nations, A/CN.4/L682, 13 April 2006, http://legal.un. org/docs/?symbol¼A/CN.4/L.682, p. 8. 13 See e.g. the Ministerial Declaration on the Contribution of the World Trade Organization to Achieving Greater Coherence in Global Economic Policymaking adopted by the Trade Negotiations Committee on 15 December 1993, www.wto.org/english/docs_e/legal_e/32-dchor_e.htm. 14 The protection of foreign consumer interests by trade negotiators demanding access to foreign markets was indirect and likewise driven by producer interests (export industries), Petersmann EU, Preparing the Doha Development Round: Challenges to the Legitimacy and Efficiency of the World Trading System. European University Institute, May 2004, http://cadmus.eui.eu/handle/1814/ 2531, p. 14. 15 See e.g. the Ministerial Declaration on the Contribution of the World Trade Organization to Achieving Greater Coherence in Global Economic Policymaking adopted by the Trade Negotiations Committee on 15 December 1993, www.wto.org/english/docs_e/legal_e/32-dchor_e.htm. Also para. 36 of the Doha WTO Ministerial Declaration of 20 November 2001 on a mandate for a Working Group on trade, debt and finance, WT/MIN(01)/DEC/1, www.wto.org/english/thewto_ e/minist_e/min01_e/mindecl_e.htm. 16 Kingsbury et al. (2005).

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integration, reconciliation through “balancing”17 or “spill-over” adjudicative interpretation or bridging conceptual innovation, to name but the most common. However, none of these papering-over- the-cracks or gap-filling efforts could conceal the fact that more standard setting is needed to keep up with the pace of changes in the global economy.18 “Wettbewerb ist eine staatliche Veranstaltung”, principally a domestic function, legal scholars once proclaimed.19 Indeed, it is enforced at the national level by national authorities. This holds true since Roman legislators first sought to control price fluctuations and unfair trade practices, Medieval kings cracked down on monopolies and the English common law doctrine of restraint of trade evolved as the precursor to modern competition law, notably the US antitrust statutes.20 Multilateral cooperation in competition policy remains limited, much of it in bilateral arrangements. Increasingly, though the focus has moved to international competition enforcement in a globalized economy, despite setbacks and unsuccessful efforts to establish a general agreement on competition policy through multilateral standard setting.21 Clearly, competition today is everywhere,22 transparent and impartial competition law enforcement a pervasively international phenomenon.23 However, despite an enormous amount of cross-fertilization, harmonizing different competition laws continues to present a major challenge due to rooted differences in countries’ preferences indicative of a low feasibility of convergence.24

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See Knill et al. (2008). International/global economic law is the ideal habitat for scientific (comparative) interdisciplinarity, there being no room for pure theorists: (international) lawyers, political scientists and (political) economists, once reciprocally regarded as “invasive species”, extend their prowess to each others domains. 19 Hopt (1985), Meessen (2004), p. 228. 20 The Sherman Act of 1890 is the oldest antitrust law of the US making it illegal for competitors to make agreements with each other that would limit competition; The Clayton Act of 1914 helps American consumers by stopping mergers or acquisitions that are likely to stifle competition; the Federal Trade Commission Act (FTC) of 1914 gave a new federal agency authority to investigate and stop unfair methods of competition and deceptive practices; and the 1982 Foreign Trade Antitrust Improvements Act extends US jurisdiction to restraints overseas that have a “direct, substantial, and reasonably foreseeable effect” on US imports or domestic commerce, or on the export commerce of US exporters; see Address by Wood DP (former Deputy Assistant Attorney General, Antitrust Division, US Department of Justice), The Internationalization of Antitrust Law: Options for the Future, DePaul Law Review Symposium on Cultural Conceptions of Competition: Antitrust in the 1990s, 3 February 1995, www.justice.gov/atr/speech/internationalization-antitrustlaw-options-future. 21 Cf. Chapter V of the Havana Charter on restrictive business practices. 22 Sauvant (2016), p. 9. 23 Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/ english/res_e/reser_e/ersd201812_e.htm, pp. 37, 53. 24 Richardson et al. (1998), pp. 375, 376. See also the discussion of the historical arguments for and against a WTO multilateral agreement on competition policy, in Kennedy (2001), p. 610; and by Stiglitz (2000), pp. 31–60. 18

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3.2

7

Trade-Investment “Interface Economics”

Much has been written about the relationship between investment and trade, or the lack thereof.25 Less about the role of competition regarding both of them26 and about the erstwhile study of them in WTO Working Groups.27 Generally, though there is growing awareness of the links between FDI policy, trade policy and competition policy as a means of maintaining contestable and competitive markets.28 The link, more specifically, between investment and competition is regarded one of the most important relationships to examine in economics.29 For more than two centuries economists have had conflicting views on the question which market structures create the most favourable environment for economic growth, particularly whether the presence of large firms capable of extensive investment should be promoted or discouraged to protect small firms and preserve competition. The fundamental purpose of bilateral investment treaties (BITs) remains to encourage FDI flows between pairs of countries. However, empirical evidence that BITs are effective is ambiguous. Yet the numbers of BITs and other international investment agreements (IIAs) and preferential trade agreements (PTAs) with investment provisions continue to grow, as ever more host DCs apparently race to accept stricter bilateral and plurilateral FDI-related provisions, notably with regard to investor-state dispute settlement (ISDS) and pre-establishment national treatment of foreign investors.30 While the argument is not new, strands in economic literature have advanced different theories explaining the phenomenon.31

25 Lal Das B, Dangers of Negotiating Investment and Competition Rules in the WTO. Third World Network (TWN), 16 TWN Trade & Development Series, 2001. 26 See, however, the essays of The Weimar Symposium of October 1998 on “The Competition Law of Deregulation” in vol.23 Fordham International Law Journal 2000. 27 See, e.g. the 1997 Report to the General Council of the Working Group on the Interaction between Trade and Competition Policy, especially Item III of the Work Programme for Meetings at Annex 2 which includes “the relationship between investment and competition policy”, Working Group on the Interaction between Trade and Competition Policy – Report (1997) to the General Council. WTO, WT/WGTCP/1, 28 November 1997, https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_ S009-DP.aspx?language¼E&CatalogueIdList¼43538,42759,58169,18158,45943,19500,33826& CurrentCatalogueIdIndex¼6&FullTextHash¼&HasEnglishRecord¼True& HasFrenchRecord¼True&HasSpanishRecord¼True, p. 4. 28 Roffe (1999), p. 145. 29 Mathis J, Sand-Zantman W, Competition and Investment: What do we know from the literature?. Institut d’Economie Industrielle, March 2014, http://idei.fr/sites/default/files/medias/doc/by/sand_ zantman/Competition_and_Investment.pdf. 30 Kingsbury et al. (2005). 31 Allee and Peinhardt refer to legal scholars who have singled out ISDS clauses in BITs; Simmons concurs, adding that host DCs are more likely to agree to strict ISDS provisions in harder economic times; Baldwin points to DC’s concern about trade diversion when their competitors engage in closer economic integration; Lupu and Poast corroborate that host countries conclude BITs with specific source countries in order to divert FDI away from competing hosts of FDI by this specific source country.

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Role of Competition in Trade & FDI Policy

The vigorous debate about the balance between investor protection and the right to regulate in over 3000 existing investment treaties concerns mainly four areas: types of regulation potentially at issue in investment treaty claims by covered investors; types and levels of investor protection; the degree of impact of treaties on regulation; and the processes and institutions that may be involved in balancing interests in investor protection and the right to regulate.32 As is well known, critics of the alleged impact of treaties on the right to regulate include the international law scholar Koskenniemi33 and the Nobel-prize winning economist Stiglitz, who even suggested that FDI treaty provisions are no longer designed to protect property rights in exchange for FDI but have instead become a weapon to fight regulation, to impede health, environmental, safety, and even financial regulation.34 Cases and claims such as Vattenfall35 are used to illustrate how the right to regulate in key areas is now excessively subject to the rulings of arbitrators in ISDS. Defenders contend that the right to regulate can be exercised to the detriment of investor rights and that existing treaties protect covered investors from government misrule and can have a positive impact on the quality of government regulation. It has been argued, and disputed by others, that some extended versions of fair and equitable treatment (FET) which encompass issues of stability of regulation and due process can make positive contributions to governance and the rule of law, policy goals largely absent from early treaty policy.36 Governments strive to create an environment which is attractive to investors, both foreign and domestic, while identifying and eliminating unwanted and to reduce unnecessary barriers to entry. Barriers, structural and behavioral,

32 Gaukrodger D, The balance between investor protection and the right to regulate in investment treaties: A scoping paper. OECD, OECD Working Papers on International Investment 2017/02, 24 February 2017, www.oecd-ilibrary.org/finance-and-investment/the-balance-between-investorprotection-and-the-right-to-regulate-in-investment-treaties_82786801-en, p. 3. 33 In his view, “essentially, it’s a transfer of power from public authorities to an arbitration body, where a handful of people would be able to rule whether a country can enact a law or not and how the law must be interpreted.” 34 [“. . .investors who want to protect themselves can buy insurance from the Multilateral Investment Guarantee Agency, a World Bank Affiliate (the US and other governments provide similar insurance)”], cited by Gaukrodger D, The balance between investor protection and the right to regulate in investment treaties: A scoping paper. OECD, OECD Working Papers on International Investment 2017/02, 24 February 2017, www.oecd-ilibrary.org/finance-and-investment/the-bal ance-between-investor-protection-and-the-right-to-regulate-in-investment-treaties_ 82786801-en, p. 6. 35 Vattenfall against Germany under the Energy Charter Treaty, Vattenfall AB and others v. Federal Republic of Germany, ICSID Case No. ARB/12/12, https://icsid.worldbank.org/en/Pages/cases/ casedetail.aspx?CaseNo¼ARB%2f12%2f12. 36 Gaukrodger D, The balance between investor protection and the right to regulate in investment treaties: A scoping paper. OECD, OECD Working Papers on International Investment 2017/02, 24 February 2017, www.oecd-ilibrary.org/finance-and-investment/the-balance-between-investorprotection-and-the-right-to-regulate-in-investment-treaties_82786801-en, p. 11.

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consist in a wide array of factors which discourage investment. The subject is broad, ranging across practically the entire range of government regulatory activity. Does it include competition laws, though? It has been reported that this may not be enough and that even relatively open trade and investment regimes, whether in developed countries or DCs, need to complement them with the implementation and active enforcement of competition laws.37 One of the challenges faced by governments has been to sort out, between various structural and behavioral market barriers, those that do not unduly harm competition and those that can and should be eliminated.38

3.3.1

Brief Recap 1: Evolution of Liberating Rules for the Global Marketplace

GATT originally focused on direct barriers to trade, tariffs and quotas, although it had also modest provisions addressing non-trade barriers (NTBs),39 and in successive rounds of tariff negotiations achieved ever-greater tariff cuts. Increasingly NTBs required serious attention and took center stage in the Uruguay Round.40 “Each step along this road – from high to lower tariffs, from tariffs in any form to other direct trade restrictions (such as quotas), from direct restrictions to innumerable trade barriers (NBs), and finally government policies that affect the international trading system (such as intellectual property rules and investment regimes) – has had one thing in common: they all dealt with governmental rules and regulations.”41 However, do antitrust rules contribute to the problem of private restraints affecting international trade and investment? At a time of mounting social and environmental challenges, all countries recognize that economic growth for sustainable development is imperative and that they need to mobilize, even compete for investment as a primary driver of such growth and to ensure that it contributes to sustainable development.42 As a result, the 37

Study on Issues Relating to a Possible Multilateral Framework on Competition Policy. WTO, T/WGTCP/W/228, 19 May 2003, www.wto.org/english/tratop_e/comp_e/wgtcp_docs_e.htm. 38 Gaukrodger D, The balance between investor protection and the right to regulate in investment treaties: A scoping paper. OECD, OECD Working Papers on International Investment 2017/02, 24 February 2017, www.oecd-ilibrary.org/finance-and-investment/the-balance-between-investorprotection-and-the-right-to-regulate-in-investment-treaties_82786801-en, op. cit., fn.4, p. 5. 39 E.g. on discriminatory customs valuation, government procurement practices and subsidies. 40 See the Anti-Dumping Codes of the Kennedy and Tokyo Rounds, www.wto.org/english/docs_e/ legal_e/prewto_legal_e.htm. 41 Address by Wood DP (former Deputy Assistant Attorney General, Antitrust Division, US Department of Justice), The Internationalization of Antitrust Law: Options for the Future, DePaul Law Review Symposium on Cultural Conceptions of Competition: Antitrust in the 1990s, 3 February 1995, www.justice.gov/atr/speech/internationalization-antitrust-law-options-future. 42 Zhan J, G20 Guiding Principles for Global Investment Policymaking: A Facilitator’s Perspective. The E15 Initiative, December 2016, http://e15initiative.org/publications/g20-guiding-principlesfor-global-investment-policymaking-a-facilitators-perspective/.

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defining characteristic of national FDI policies has been investors. As was pointed out by the eminent scholar Sauvant, “95% of all FDI policy changes around the world during the 1990s involved the liberalization of national investment regimes or otherwise facilitating inward FDI”. Typically, he noted, governments have reduced entry barriers, especially by opening up sectors to foreign investors, but also by facilitating the operations of such investors in their countries, and by offering various kinds of incentives. Investment promotion agencies (IPAs) established in virtually every country complement such policy measures and are mandated to attract investment by foreign investors in competition with other IPAs,43 sometimes to match or even surpass offers by competing countries to compensate44 for adverse geography, small size, or distance to markets, in order to remain attractive for foreign investors. This kind of competition has evolved over time. In a first generation of investment promotion, countries simply opened up to FDI, by liberalizing their FDI regimes. In a second generation of investment promotion, countries generally advertised being open for FDI. In a third generation, IPAs focused on targeting foreign investors fitting their development priorities, such as transfer of technology and the establishment of innovative capacities including research and development (R&D) facilities. All the while competition among IPAs to attract FDI has become more sophisticated, for instance by paying more attention to policy advocacy and focusing more on after-investment services. As national FDI regulatory frameworks have become similar worldwide, investment promotion gains in importance. Nonetheless, investment policymaking is manifestly faced with a dilemma, as there appears to be a dichotomy between simultaneous moves to liberalize and promote investment and to regulate and restrict it.45 Evidently, national policies toward FDI have become more nuanced as is reflected in the increasing share of national policy measures that make the investment climate less welcoming. While recent national investment policy measures mostly favoured liberalization and promotion,46 regulatory or restrictive measures such as strengthened review mechanisms for incoming FDI, have been on the rise,47 as have concerns that some of 43

Some 10,000 such agencies operate at national, sub-national even city levels. IBRD, Foreign Investor Perspectives and Policy Implications. World Bank Group, Global Investment Competitiveness Report 2017/2018, 2018, https://openknowledge.worldbank.org/han dle/10986/28493, p. 6ff. 45 Zhan J, G20 Guiding Principles for Global Investment Policymaking: A Facilitator’s Perspective. The E15 Initiative, December 2016, http://e15initiative.org/publications/g20-guiding-principlesfor-global-investment-policymaking-a-facilitators-perspective/, p. 1. 46 Investment facilitation and promotion do not feature in 90% of existing IIAs, only in some of the most recent treaties, Zhan J, G20 Guiding Principles for Global Investment Policymaking: A Facilitator’s Perspective. The E15 Initiative, December 2016, http://e15initiative.org/publications/ g20-guiding-principles-for-global-investment-policymaking-a-facilitators-perspective/, p. 6. 47 Industrial policies, tighter screening/monitoring procedures, closer scrutiny of cross-border M&As. Restrictive administrative measures often apply to extractive industries and infrastructure or are based on national security considerations, Zhan J, G20 Guiding Principles for Global Investment Policymaking: A Facilitator’s Perspective. The E15 Initiative, December 2016, http:// e15initiative.org/publications/g20-guiding-principles-for-global-investment-policymaking-a44

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these measures may be taken for protectionist purposes. “While red tape has not replaced red carpet for incoming FDI, governments are taking a more differentiated approach towards such investment.”48 More broadly, government expectations concerning inward FDI are changing. “After all, for them such investment is just a tool to contribute to economic growth and development of their countries. This influences not only their attitude towards the benefit of mergers and acquisitions (M&As), but governments are now beginning actively to encourage more sustainable FDI, investment that makes a maximum contribution to the economic, social and environmental development of host countries.”49 In short, sustainable FDI for sustainable development. Ultimately, this may give rise to a fourth generation of investment promotion, i.e. efforts to attract sustainable FDI, concerned with the quality of investment not simply its quantity. “At the same time, governments are paying more attention to competing objectives, especially national interests, essential security, the promotion of national champions and the protection of certain national industries.”50

3.3.2

Brief Recap 2: Competition, Competition Policy, Competition Law

Competition, the process of rivalry between firms striving to gain sales and make profits is the central driving force behind the operation of markets and fosters innovation, productivity and growth, all of which create wealth and reduce poverty.51 Competition guarantees, more than other market structures, where the consumers’ needs are best satisfied and minimizes the rents left to the firms, providing consumers with the entire surplus created by trade. The main objective of competition law is to preserve and promote competition as a means to ensure the effective allocation of resources in an economy, resulting in the best possible choice of quality, the lowest prices and adequate supplies for consumers. In addition many competition laws make reference to other related objectives, such as controlling the concentration of economic power, stimulating innovation, supporting SMEs and encouraging regional integration.52 According to this approach, the state (or existing competition authorities) should both help small firms to survive and prevent the development of dominant firms, in

facilitators-perspective/, p. 1.; Chapter IV, Investment and New Industrial policies, World Investment Report 2018, UNCTAD, https://unctad.org/en/pages/PublicationWebflyer.aspx? publicationid¼2130. 48 Sauvant (2016), p. 9. 49 Sauvant (2016), p. 9. 50 Sauvant (2016), p. 9. 51 Godfrey N, Why is Competition Important for Growth and Poverty Reduction?. OECD, OECD Global Forum on International Investment, March 2008, www.oecd.org/investment/globalforum/ session13competitionpolicy.htm, p. 3. 52 See generally Wagner-von Papp (2009).

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order to promote the greatest number of firms on the market.53 This vision was developed at Harvard and is known as the structure-conduct-performance paradigm (SCP), but was viewed critically by Hayek of the Austrian school claiming that the competitive process not the number of firms per se is the most important aspect of competition; and by Schumpeter who deemed concentrated, in particular monopolistic market structures in many situations optimal.54 Clearly, various traditions and studies suggest that one can look at this issues from different perspectives. Yet the most “natural” one amounts to searching for the market structure most likely to foster investment.55 Be that as it may, but effective and fair competition is not automatic. It can be harmed and weakened both by inappropriate government policies and legislation and by anti-competitive conduct of firms,56 both of which can distort trade and investment flows. Competition policy includes the full range of governmental measures to suppress or deter anti-competitive behavior the combined effect of which promote the efficient and competitive operation of markets (which is itself influenced by many factors) including, but not limited to, the enforcement of competition law per se.57 It deals with anti-competitive or restrictive business practices of companies which reduce the efficiency of the market mechanisms thereby diminishing opportunities for innovation and growth and making consumers worse off.58 It is aimed at preventing firms from forming cartels or monopolies and from abusing a dominant market position and at ensuring that mergers and

53 Mathis J, Sand-Zantman W, Competition and Investment: What do we know from the literature?. Institut d’Economie Industrielle, March 2014, http://idei.fr/sites/default/files/medias/doc/by/sand_ zantman/Competition_and_Investment.pdf, p. 3. 54 Mathis J, Sand-Zantman W, Competition and Investment: What do we know from the literature?. Institut d’Economie Industrielle, March 2014, http://idei.fr/sites/default/files/medias/doc/by/sand_ zantman/Competition_and_Investment.pdf, p. 4. 55 Mathis J, Sand-Zantman W, Competition and Investment: What do we know from the literature?. Institut d’Economie Industrielle, March 2014, http://idei.fr/sites/default/files/medias/doc/by/sand_ zantman/Competition_and_Investment.pdf, p. 4. 56 US antitrust laws are there to protect US consumers, US businesses, and US markets, see Address by Wood DP (former Deputy Assistant Attorney General, Antitrust Division, US Department of Justice), The Internationalization of Antitrust Law: Options for the Future, DePaul Law Review Symposium on Cultural Conceptions of Competition: Antitrust in the 1990s, 3 February 1995, www.justice.gov/atr/speech/internationalization-antitrust-law-options-future. 57 Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/ english/res_e/reser_e/ersd201812_e.htm, p. 5. 58 Markets are often dominated by big business with close ties to government, and more effective competition reduces opportunities for corruption and creates more space for entrepreneurs and SMEs to grow, Godfrey N, Why is Competition Important for Growth and Poverty Reduction?. OECD, OECD Global Forum on International Investment, March 2008, www.oecd.org/investment/ globalforum/session13competitionpolicy.htm, p. 4.

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acquisitions are subjected to proper scrutiny.59 An effective competition policy should safeguard the rights of entrepreneurs to enter and leave markets.

3.3.3

Competition, Competition Law, Competition Policy and FDI

There are two confronting views on the link between competition and investment. On the one hand, conventional arguments extol the virtues of competition in ensuring both allocative and productive efficiencies (Smithian view) and also providing firms with the incentives to invest in innovation to escape from competition (pre-innovation incentives). On the other hand, the tradition stemming from Schumpeter puts monopoly rents at the heart of the innovative process (postinnovation incentives). The main interface between competition law and FDI occurs when a foreign affiliate is established by means of a significant merger, acquisition or joint venture. Competition law is concerned with FDI not only at the entry stage but also postestablishment since it may result in anti-competitive behavior. In fact, even in a national framework in which trade and investment are fully liberalized, the possibility of anti-competitive practices justifies competition laws. In other words, the removal of international barriers to trade and investment would not by itself ensure competitive behavior in all instances. Therefore, while the initial FDI may not raise concerns from a competition point of view, or may even be beneficial in itself, it could, nevertheless raise competition problems in the longer term. Nonetheless, competition authorities may also have to deal with direct investments by foreign government-controlled investors, which could be of several types: state-owned enterprises (SOEs), pension funds or other state-controlled entities such as sovereign wealth funds (SWFs). Whether a company is foreign or domestic matters little to competition authorities, except inasmuch as it raises issues of jurisdiction.60 But officials will be interested in determining the exact nature of a foreign governmentcontrolled investor, both with respect to their impact on competition and to enforcement actions. These characteristics will interact with recipient country competition laws in complex ways to determine whether and which actions might be taken by competition authorities.61

59

Paasman BR, Multilateral rules on competition policy: an overview of the debate. International Trade Unit, Division of Trade and Development Finance, CEPAL, Santiago, December 1999, https://repositorio.cepal.org/bitstream/handle/11362/4369/1/S9890697_en.pdf, p. 5. 60 When asserting anti-trust jurisdiction, most OECD countries require that illegal conduct has some anti-competitive effect within the country: “effects doctrine”. 61 Antonio Capobianco, Competition Law and Foreign-Government Controlled Investors, Nineth OECD Freedom of Investment Roundtables, Investment Division, Directorate for Financial and Enterprise Affairs, January 2009; www.oecd.org/daf/inv/investment-policy/41976200.pdf; built on the OECD’s Guidelines on Corporate Governance of State-Owned Enterprises, some OECD countries have also introduced competitive neutrality arrangements to mitigate or eliminate competitive advantages of SOEs, see Anderson RD, Kovacic WE, Müller AC, Sporysheva N,

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An important effect of FDI liberalization has been greatly to reduce the role of traditional mechanisms used by host countries, especially DCs, such as screening at the time of entry.62 The central assumption underlying these controls was that FDI should only be allowed if it is beneficial to the host economy and subject to approval of host governments. The opening of countries across the world to FDI and increasing competition to attract it have challenged the ability to apply such controls. Thus, the priority has become ensuring and increasing inward FDI flows, efficiency gains for the host economy and, ultimately, a positive impact on welfare. Competition policy can in this respect be an essential component of the process of liberalization, notably to ensure that markets are kept as open as possible to new entrants, both foreign and local, and that firms do not frustrate this by engaging in anti-competitive practices. In this manner, a strong competition law and enforcement can provide reassurance that FDI liberalization will not leave a government powerless against anti-competitive transactions.63 The remaining question resurfaces, however, whether the international community requires a strengthened framework of regulatory arrangements governing restrictive business practices, in an era of deep integration and globalization of markets and structures of production. This has, in turn, aroused renewed interest in exploring options for strengthening international cooperation in competition policy. Indeed, it is widely recognized that the liberalization of FDI policies could promote competition among firms provided that, as legal obstacles to market entry are reduced, they are not replaced by anti-competitive practices by international firms.64 The internationalization of competition issues has given rise to trade tensions which stem from a perception that countries are not enforcing their competition laws.65

Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/english/res_e/reser_e/ersd201812_e.htm, p. 52. 62 Entry barriers can be classified in 3 groups. 1. Regulatory, imposed by government policies (including investment licensing, tariff and non-tariff measures, antidumping); 2. Structural, barriers due solely to conditions outside the control of market participants, e.g. costs of production (when firms must attain a minimum size to have average cost as low as possible. If the minimum efficient scale is so large that only one firm of that size can serve the entire market, there will be a monopoly, which often occurs with public utilities such as distribution of water, electricity, gas; 3. Behavioral, abuse of dominant position where “relatively large” firms engage in anti-competitive conduct by preventing entry or forcing exit of competitors through various kinds of monopolistic conduct including predatory pricing and market foreclosure (horizontal: barriers imposed through collaborating actions by firms that sell in the same market, often referred to as “naked” restraints of trade, cartel behavior, or collusion, e.g. price-fixing, bid rigging, allocation of territories or customers, output restriction agreements; vertical: restrictions imposed through restrictive contractual agreements between supplier and purchasers/retailers, both in up-and downstream markets, e.g. resale price maintenance. 63 Roffe (1999), p. 146. 64 Roffe (1999), p. 147. 65 Janow (2005), p. 491.

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4 International Cooperation in the Field of Competition Policy 4.1

Proposals for Multilateral Rules

Proposals to control restrictive business practices by private enterprises date back to Chapter V of the Havana Charter and to the initial GATT negotiations on the subject in the 1960s. The abortive Havana Charter dealt with such practices affecting international trade which restrain competition, limit access to markets or foster monopolistic control in a surprisingly comprehensive manner.66 Generally, GATT/ WTO agreements focus of course on governmental measures and action and do not regulate anti-competitive practices by firms. Some of them, however, are relevant for competition policy, in as much as they deal with practices of enterprises that may distort or impede international trade and the actions that governments are allowed or required to take to regulate or remedy such practices.67 Some core GATT provisions, particularly those of national treatment (Article III), most-favoured-nation treatment (Article I) and transparency (Article X) are also inherently essential for impartial competition regimes. Indeed one of the earliest GATT cases involved a discriminatory Italian domestic credit scheme which applied only to purchasers of domestically produced tractors.68 Moreover, in several WTO cases differential taxation of imported alcohol was found to be “directly competitive or substitutable” to like domestic products, in violation of Article III GATT.69 Provisions of some specific

66 Nine articles (46–54) of the Charter deal with competition issues; Art. 50(1) referred to practices such as: price-fixing, discriminating against particular enterprises, limiting production or fixing production quotas, preventing by agreement the development or application of technology or inventions, extending the use of intellectual property rights etc. Final Act and Related Documents, UN documents E/Conf 2/78, www.wto.org/english/docs_e/legal_e/havana_e.pdf. 67 Art. VI GATT; several WTO agreements prohibit “less favorable treatment” to imported relative to domestic “like” products and services: Arts III:4 GATT; 2.1 TBT; XVII GATS; the Appellate Body examines whether a measure results in a modification of the conditions of competition between them: AB Report, US-Clove Cigarettes (Panel Report, United States—Measures Affecting the Production and Sale of Clove Cigarettes, WT/DS406/R, adopted 24 April 2012, as modified by Appellate Body Report WT/DS406/AB/R), para. 87; AB Report, US-COOL (Panel Reports, United States—Certain Country of Origin Labelling (COOL) Requirements, WT/DS384/R/WT/DS386/R, circulated to WTO Members 18 November 2011), para. 267; and related case law directly address private parties’ restrictive business practices: TBT, AGP, Articles VIII, IX GATS, Article 9 TRIMS, Articles 8, 31, 40 TRIPS, cf. Roffe (1999), p. 149; Kennedy (2001), p. 12, 602. 68 GATT Panel Report, Italian Discrimination Against Imported Agricultural Machinery, L/833, adopted 23 October 1958, BISD 7S/60. 69 Japan—Taxes on Alcoholic Beverages, WT/DS8, 10, 11/AB/R (1996); Korea-Taxes on Alcoholic Beverages, WT/DS75,84/AB/R (1999); Chile-Taxes on Alcoholic Beverages, WT/DS87,110/ AB/R (1999).

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WTO agreements too contain principles supportive of an effective competition policy regime.70 Despite the failure to reach consensus on multilateral competition rules, there are evidently complementarities between trade liberalization and the suppression of anticompetitive practices or arrangements: Both private and state-designed arrangements are apt to undermine gains from trade liberalization in many ways, namely rising living standards, sustainable development and growth, through trade and international investment.71 The rationale for multilateral rules on competition policy in bilateral and multilateral trade agreements can be summarized as follows: first, such agreements may effectively prevent businesses from distorting competition through exports; secondly, they can prevent companies from erecting new trade and investment barriers after theses have been reduced or abolished in the liberalization and integration processes; and thirdly, an international agreement on competition could replace antidumping legislation which is often misused with protectionist intent. After many other protective measures have been outlawed in various trade negotiating rounds, however, governments may be tempted to allow restrictive business practices or to not enforce existing competition rules or only leniently, which may lead to extra profit for domestic industry and a transfer of welfare into the country. According to game theory, however, the best situation for world welfare is that in which both countries adopt strict legislation.72 Furthermore, because territorial jurisdiction and relevant market are no longer identical, a multilateral agreement on competition policy is necessary to avoid associated jurisdictional problems. “Relevant market”, i.e. the geographical arena in which companies compete on more or less equal costs and terms, is a central concept in the theory on competition policy. For most companies the relevant market used to coincide with a country’s national

70

Provisions of the WTO Basic Telecommunications Services Agreement, known as the Fourth Protocol to the GATS, stipulate competitive safeguards to prevent major suppliers from engaging in anticompetitive conduct; Art. VIII:1, and VIII:2 of the GATS provide that monopoly service providers must not act inconsistently with the national treatment obligation of Art. XVII GATS or with their scheduled commitments; and require WTO Members to ensure that domestic monopolies do not abuse their monopoly positions. Art. 9 TRIMs requires the Council for Trade in Goods to review the operation and to propose possible amendments to it including provisions on competition policy by the end of 1999; the proscription approach in these agreements differs from that in the TRIPS agreement which imposes affirmative obligations to introduce intellectual property laws and to provide for minimum levels of protection and for their effective enforcement. 71 See preambles of the Marrakesh Agreement establishing the WTO and of the Agreement on Trade-Related Investment Measures (TRIMS); commitments to competition policy also feature in WTO Accession Protocols and in the work of the WTO’s Trade Policy Review Body (TPRB); see also treatment of competition issues relating to State trading enterprises (STEs), dual pricing practices and government procurement in WTO Accession Protocols, Marhold and Weiss (2018). Kireyev and Osakwe (2018), pp. 299–319. 72 Paasman BR, Multilateral rules on competition policy: an overview of the debate. International Trade Unit, Division of Trade and Development Finance, CEPAL, Santiago, December 1999, https://repositorio.cepal.org/bitstream/handle/11362/4369/1/S9890697_en.pdf, p. 26.

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boundaries, before it shifted to regional and global markets giving rise to several potential sources of conflict.73

4.2

Failed Attempts to Establish Multilateral Rules

Most countries agree that a strong relationship exists between trade and competition, and that a fundamental purpose of the WTO system is to open markets to fresh competition. However, countries diverge on the merits, potential modalities, and even the necessity of adopting competition law in the WTO. Different approaches in early state practice dealing with international competition problems74 and all attempts in almost seven decades to establish strong multilateral rules on competition have failed. The story of the reasons for these failures has been retold many times.75 Suffice it to recall that these failures are primarily attributable to opposition from the United States where businesses were afraid that enforcement in other countries would be less stringent than in the United States, leading to a comparative disadvantage.76 By contrast, the EU has strongly advocated the integration of competition policies into international institutions. DCs on the other hand resolutely oppose an international competition regime in the framework of the WTO, concerned that its rules will constrain their ability to utilize infant industry policies, social policies and other development tools.77 While WTO negotiations on an international competition regime have stalled, some countries have addressed competition policy issues in their bilateral or regional agreements. These attempts include the OECD Guidelines for Multinational Enterprises adopted in 1976 as updated in 2011 as well as, more pertinently, the Recommendation of the OECD Council concerning International cooperation on Competition Investigations and Proceedings.78 In 1980 the UN General Assembly adopted 73

Paasman lists: 1. Difficulty of enforcing laws against foreign-based companies; 2. Cross-border mergers and acquisitions; 3. Extraterritoriality; 4. Anti-competitive behavior of state-owned companies, Paasman BR, Multilateral rules on competition policy: an overview of the debate. International Trade Unit, Division of Trade and Development Finance, CEPAL, Santiago, December 1999, https://repositorio.cepal.org/bitstream/handle/11362/4369/1/S9890697_en.pdf, pp. 29–30. 74 Ernst-Ulrich Petersmann, The Need for Integrating Trade and Competition Rules in the WTO World Trade and Legal System 7, Occasional Paper, The Graduate Institute of International Studies, Geneva, WTO Series No. 3 (1996). 75 Weiss (1999), passim. 76 Paasman BR, Multilateral rules on competition policy: an overview of the debate. International Trade Unit, Division of Trade and Development Finance, CEPAL, Santiago, December 1999, https://repositorio.cepal.org/bitstream/handle/11362/4369/1/S9890697_en.pdf, p. 5. 77 Janow (2005), p. 31. 78 Recommendation concerning International Co-operation on Competition Investigations and Proceedings. OECD, C(2014)108 – C/M(2014)10, 16 September 2014, www.oecd.org/competition/ international-coop-competition-2014-recommendation.htm.

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UNCTAD’s Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices.79 Sectoral and regional liberalization agreements also include competition policy provisions, though few are as strong as those in the EU. In chapter 15 of the NAFTA, members agreed to maintain national measures to prohibit anti-competitive behavior by firms, but not on mutually agreed competition rules. Likewise, the Energy Charter Treaty calls for the adoption of competition laws and policies, and for cooperation on exchange of information and consultation among signatory countries. The competition law and policy group (CLPG) of the Asia-Pacific Economic Cooperation promotes understanding of regional competition laws and policies, examines their impacts on trade and investment flows, and identifies areas for technical cooperation and capacity building among member economies.80 Certain provisions in the Comprehensive Economic and Trade Agreement (CETA) as well as other free trade agreements (FTAs) and regional trade agreements (RTAs) prohibit and sanction practices which distort competition and trade,81 specifically in investment chapters.82 In practice approaches differ.83 However, recent FTAs such as the Comprehensive Agreement for Trans-Pacific Partnership

79 General Assembly resolution 35/63, Restrictive Business Practices, A/RES/35/63 (5 December 1980), www.un.org/documents/ga/res/35/a35r63e.pdf. 80 At CPLG’s annual meetings member economies update each other about their respective competition policies and laws, including recent cases and discuss challenges to competition policy and advocacy efforts. 81 Of the total of 280 RTAs notified to the WTO, 155 have chapters or provisions on competition policy, cf. Appendix Table 1. The Treatment of Competition Policy in RTAs: Basic Coverage of Agreements with Dedicated Chapters, Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/english/res_e/reser_e/ersd201812_e.htm, p. 28ff. 82 For a detailed discussion of regional approaches to addressing competition policy in RTAs see Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/english/ res_e/reser_e/ersd201812_e.htm. 83 Provisions based on the NAFTA model require both the adoption or maintenance of “competition laws that prescribe anticompetitive business conducts” and the taking of “appropriate action with respect to such conduct”; most of those in RTAs involving EU or EFTA countries contain an obligation to adopt or maintain competition laws which also “effectively address anticompetitive practices”; only about 34% of RTAs with dedicated provisions provide for RTA dispute settlement, most merely for consultations, Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/english/res_e/reser_e/ersd201812_e.htm, pp. 31, 33.

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(CPTPP)84 and the Japan-Australia Economic Partnership Agreement (JAEPA)85 contain different chapters, on investment and competition policy, without addressing links or overlaps, let alone conflict86 between them. This perhaps explains the relative scarcity of academic interest in discussion of the relationship between competition law and investment law.87 It has been said on the other hand, that when it comes to investment attraction, the role of competition need not be generalized: while it is desirable to introduce competition in all sectors of the economy, it is arguably equally important to note that there are sectors that are more conducive to investment under monopolistic conditions than under competition.88 In short, the importance of competition policy for trade liberalization and market integration is recognized in a diverse set of economies worldwide.89

4.2.1

FDI and Competition Policy at the WTO

Clearly, competition law and policy are centrally concerned with the exclusionary conduct of corporations which restrict markets and raise costs to consumers. In contrast, trade policy is centrally concerned with governmental measures which restrict foreign access to markets and discriminate against foreign market participants. The effect of both are the same, however, since firms, governments or some combination of the two can impose anticompetitive or exclusionary restraints on trade. Trade and competition policies are two methods of addressing such problems.90 In theory, economists have argued insistently, trade, investment and competition policies share goals and objectives, they ought to work in harmony, “teaming rules against private anti-competitive behavior with rules on the elimination of government barriers to international trade and investment.”91 Clearly, the objectives of a 84

Chapter 16 on Competition Policy, Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP, 2018), upon withdrawal of the US. 85 Japan-Australia Economic Partnership Agreement (2014) contains chapters on investment (but not on ISDS) and on competition and consumer protection, albeit from the perspective of SOEs. 86 Arts 1, 2(2) and note attached to the latter of the U.S. 2012 Model BIT acknowledges that SOEs often gain special privileges, thought to mean that the US approves certain instances of differential treatment between foreign and domestic investors, Dai T, Discriminatory Application of Competition Law and International Investment Agreements. RIETI, 15-E-125, November 2015, www. rieti.go.jp/en/publications/summary/15110008.html, p. 6. 87 Even the comprehensive “International Investment Law. A Handbook”, by Bungenberg et al. (2015), does not feature a single entry in its index on “competition” eo nomine. 88 Dube C, The Relationship between Competition and Investment. CUTS Centre for Competition, Investment & Economic Regulation, #3/2009, 2009, http://www.cuts-ccier.org/pdf/The_Relation ship_between_Competition_and_Investment.pdf, p. 3. 89 At least 135 countries are now considered equipped with active competition regimes, Kovacic and Lopez-Galdos (2016), p. 86. 90 Janow (2005), p. 489. 91 Kennedy (2001), p. 585.

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liberal trade policy closely match and complement those of competition policy, both striving to eliminate or reduce market distortions and barriers to market entry. The two policies are thus mutually reinforcing. Yet, there are also areas of overlap and divergence, even contradiction, in emphasis and application. For instance, trade policy features trade promotion and trade protection in form of trade remedy laws (e.g. safeguards-, antidumping- and countervailing duty laws) including, for example, legal tests for injury which differ from those under e.g. US antitrust law.92 Multilateral trade liberalization is designed to increase aggregate world wealth and global productive efficiency. Competition policy is focused on national concerns, enhancing national consumer or total welfare (consumer plus producer welfare) not that of foreign consumers and producers,93 so that the welfare of the latter, i.e. in the country of importation may be sacrificed for the benefit of producers in the country of exportation.94 Competition policy can also clash with the market access goal of trade policy—an international perspective built on reciprocity and mutually beneficial concessions on market access—to the extent that it fails to regulate, condones or actively encourages anti-competitive business practices such as export or import cartels. If competition policy allows or tolerates such anti-competitive behavior, by foreclosing market access to exporters it undermines trade policy, eroding the benefit of negotiated market access bargains as well as the support of exporters for a liberal trade policy.95 Nonetheless, even after the deletion of competition policy from the Doha Round agenda of multilateral negotiations at the Cancun Ministerial Conference 2003,96 anticompetitive practices—murky cartels and cross-border mergers and acquisitions (M&As) often escaping the scope of national regimes - raised concerns about possible negative impacts.97 While the multilateral system of the WTO is bogged down with regard to competition issues,98 various FTAs, PTAs and RTAs continue

92

Janow (2005), p. 488. Export cartels are authorized under the competition laws of many countries. 94 Kennedy (2001), p. 592. 95 Hudec (1999), pp. 79, 83, cited by Kennedy (2001), p. 593. 96 Para. 25 of the Doha Ministerial Declaration defined the focus of future work of the Working Group on the Interaction between Trade and Competition Policy (WGTCP) launched at the Singapore WTO Ministerial Conference 1996; Fox (2003), p. 911. 97 For a summary of the pros and cons of linking competition policy to the WTO see Janow (2005), pp. 506–508. 98 The WTO is also lagging behind PTAs in addressing issues of the digital economy, see Joint statement of 76 WTO Members of 25 January 2019 launching negotiations on trade-related aspects of electronic commerce, Joint Statement on Electronic Commerce, WTO, WT/L/1056, 25 January 2019, https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language¼E& CatalogueIdList ¼251085,251084,251083,251082,251086,251022,251023,251024,251025,251037& CurrentCatalogueIdIndex¼4&FullTextHash¼371857150&HasEnglishRecord¼True& HasFrenchRecord¼False&HasSpanishRecord¼False. 93

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or begin to embrace them.99 At the same time, the EU is called upon to elaborate a more ambitious European industrial strategy with clear objectives for 2030 entailing changes to existing European competition rules to ensure that European companies can actually grow and effectively compete globally.100

4.2.2

FDI and Competition Policy in National Law

For a long time it has been confirmed—in literature and by International Organizations forming the “Geneva-Paris consensus”, as it were101—that the effects of investment are beneficial for investor country and host country alike. Since national laws and regulations that discriminate against FDI distort international trade in much the same way as do tariffs, quotas, and other NTBs, national laws have been changed to attract FDI by creating a more favourable environment for FDI. Evidently, a liberal investment policy can simultaneously promote competition and trade in the host country market, and perhaps in the global market as well.102 Indeed, liberal trade, investment and competition policies can and should be mutually reinforcing.103

5 Concluding Remarks The G20 Guiding Principles for Global Investment Policymaking identify four building blocks of investment policy and treaty making: establishment, protection and treatment, promotion and facilitation, and dispute settlement. The Principles also 99 For a discussion of competition policy provisions in ASEAN blocwide and regional agreements see Banda OGD, Whalley J, Beyond Goods and Services: Competition Policy, Investment, Mutual Recognition, Movement of Persons, and Broader Cooperation Provisions of Recent FTAs involving ASEAN Countries. NBER, Working Paper 11,232, March 2005, www.nber.org/papers/w11232. 100 See “A Franco-German Manifesto for a European industrial policy fit for the 21st Century”, Bundesministerium für Wirtschaft und Energie, Ministère de l’Économie et des Finances, Paris, www.gouvernement.fr/en/a-franco-german-manifesto-for-a-european-industrial-policy-fit-for-the21st-century. 101 OECD, WTO, UNCTAD. 102 Kennedy (2001), p. 599. 103 See the Korean Communication submitted to the WTO Working Group on Trade and Investment: “One can generalize that trade policy determines the relevant market for competition policy, and investment policy determines the relevant players in the market. Therefore, investment policy cannot attain its competition objective unless the effect of trade policy in determining the relevant market is carefully considered”, Working Group on the Interaction between Trade and Competition Policy—Working Group on the Relationship between Trade and Investment—Communication from the Republic of Korea—Relationship between Investment and Competition Policy, WTO, WT/WGTCP/W/109; WT/WGTI/W57, 22 October 1998, https://docs.wto.org/dol2fe/Pages/FE_ Search/FE_S_S009-DP.aspx?language¼E&CatalogueIdList¼37675,38270,24496,22122& CurrentCatalogueIdIndex¼1&FullTextHash¼&HasEnglishRecord¼True& HasFrenchRecord¼True&HasSpanishRecord¼True, p. 6.

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seek to strike a balance between the rights and obligations of firms and states, between liberalization and regulation and between the strategic interests of host and home countries.104 Together with the rise of proportionality review in investorState Arbitration—seen by some as “Governance”105 and as the “most astounding success in international law over the past decades” by others106—they might be considered as evidence of an emerging world-wide consensus in constitutional matters.107 The tools for strengthening, reforming, perhaps saving liberal practice in the global political economy in a sustainable manner are in place, possibly with the assistance of reinforced legal cosmopolitanism. To that end, it has been plausibly argued, that the time has perhaps come for a resumption of work on the relationship of competition policy to the multilateral trading system in the WTO108 and to build on, reinforce and carry forward work done by the OECD, UNCTAD and in the International Competition Network (ICN) on forms of international cooperation. While the contemporary environment may be more promising than it was at the beginning of the century to ensure an appropriately transparent and non-discriminatory framework for the application of competition policy in today’s global economy,109 additional contextual challenges which were not then prominent may also need to be tackled. Indeed, issues closely related to competition policy such as trade, FDI, the free movement of goods, services and capital, intellectual property (IP) protection, and industrial policies, adopted or proposed, must also be taken into account in any future multilateral decision-making. Regardless of whether pathologies in the world economic system are primarily the result of dysfunctional decision-making by states, or of inadequate responses to the welfare interests of their populations, only a purposefully integrated and sustainable approach to competition law and policy in trade and investment relations, one rooted in human and environmental rights, can

104

G20 represents more than two-thirds of global FDI, Zhan J, G20 Guiding Principles for Global Investment Policymaking: A Facilitator’s Perspective. The E15 Initiative, December 2016, http:// e15initiative.org/publications/g20-guiding-principles-for-global-investment-policymaking-a-facili tators-perspective/, p. 3. 105 Kingsbury and Schill (2010). 106 Wälde (2009), pp. 514, 543. 107 Schneidermann (2016), p. 23. 108 WTO Working Group on the Interaction between Trade and Competition Policy 1997–2003, www.wto.org/english/tratop_e/comp_e/wgtcp_docs_e.htm. Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/english/res_e/reser_e/ersd201812_e.htm, pp. 58, 60. 109 Anderson RD, Kovacic WE, Müller AC, Sporysheva N, Competition Policy, Trade and the Global Economy: Existing WTO Elements, Commitments in Regional Trade Agreements, Current Challenges and Issues for Reflection. WTO, ERSD-2018-12, 21 October 2018, www.wto.org/ english/res_e/reser_e/ersd201812_e.htm, p. 55.

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reinvigorate the world economic system and make a measurable contribution to greater global distributive justice. If policymakers do not put them to beneficial use for mankind as a whole, “the foreign proletariat”, better known as the Third World, an enormous mass of people without even a bare living income will sooner or later tire of waiting to see vast inequalities redressed. If they are failed, they could bring civilizations, and civilization, to an end.110

References Braudel F (1995) A history of civilizations. Penguin Books, London Bungenberg M et al. (eds) (2015) International investment law. A handbook. C.H. Beck/Hart/ Nomos, Munich/Oxford/Baden-Baden Fox EM (2003) International antitrust and the Doha Dome. Va J Int Law 43:911 Hopt KJ (1985) Wettbewerbsbeschränkungen und Verrechtlichung. In: Kübler F (ed) Verrechtlichung von Wirtschaft, Arbeit und sozialer Solidäritat: Vergleichende Analysen, 2nd edn. Suhrkamp Verlag, Berlin, pp 229–287 Hudec RE (1999) A WTO perspective on private anti-competitive behavior in world markets. New Eng Law Rev 34:97–100 Janow ME (2005) Trade and competition policy. In: Macrory PFJ, Appleton AE, Plummer MG (eds) The World Trade Organization: legal, economic and political analysis, vol. 2. Springer, New York, pp 487–510 Kennedy KC (2001) Foreign direct investment and competition policy at the World Trade Organization. George Wash Int Law Rev 33(3/4):585–650 Kingsbury B, Schill SW (2010) Public law concepts to balance investors’ rights with state regulatory actions in the public interest—the concept of proportionality. In: Schill SW (ed) International investment law and comparative public law. Oxford University Press, New York Kingsbury B, Krisch N, Stewart RB (2005) The emergence of global administrative law. Law Contemp Probl 68(3):15–62 Kireyev A, Osakwe C (eds) (2018) Trade multilateralism in the twenty-first century: building the upper floors of the trading system through WTO accessions. Cambridge University Press, Cambridge Knill C, Tosun And J, Heichel S (2008) Balancing competitiveness and conditionality: environmental policy-making in low-regulation countries. J Eur Publ Policy 15(7):1019–1040. https:// doi.org/10.1080/13501760802310512 Kovacic WE, Lopez-Galdos M (2016) Lifecycles of competition systems: explaining variation in the implementation of new regimes. Law Contemp Probl 79(4):85–122 Marhold A, Weiss F (2018) Energy and fossil fuels as a topic of WTO accession protocols. In: Bungenberg M et al (eds) European Yearbook of International Economic Law, vol 9. Springer, Cham, pp 61–80 Meessen KM (2004) Competition in the Doha round of WTO negotiations. In: Schrijver NJ, Weiss F (eds) International law and sustainable development: principles and practice. Martinus Nijhoff Publishers/Brill Academic Publishers, Leiden, pp 217–230 Richardson JD, Fox EM, Rill J (1998) Multilateralizing conventions [with comments and discussion]. Brookings Trade Forum 1998:335–394

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Roffe P (1999) Transfer of technology and competition policy in the context of a possible multilateral investment agreement. In: Picciotto S, Mayne R (eds) Regulating international business—beyond liberalization. Palgrave Macmillan, London, pp 142–160 Sauvant KP (2016) National FDI policy competition and the changing international investment regime. In: Oppong RF, Agyebeng WK (eds) A commitment to law: essays in honor of Nana Dr. Samuel Kwadwo Boaten Asante. Wildy, Simmonds & Hill Publications, London, pp 136–150 Schneidermann D (2016) Global constitutionalism and international economic law: the case of international investment law. In: Bungenberg M, Herrmann C, Krajewski M, Terhechte JP (eds) European Yearbook of International Economic Law, vol 7. Springer, Cham, pp 23–43 Servan-Schreiber JJ (1967) The American challenge. Scribner, New York Stiglitz J (2000) Addressing developing country priorities and needs in the millennium round. In: Porter RB, Sauvé P (eds) Seattle, the WTO, and the future of the multilateral trading system. Harvard University and John F. Kennedy School of Government, Boston, pp 31–60 Wagner-von Papp F (2009) Internationales Wettbewerbsrecht. In: Tietje C (Hrsg) Internationales Wirtschaftsrecht, 2nd edn. De Gruyter, Berlin, pp 455–513 Wälde TW (2009) Improving the mechanisms for treaty negotiation and investment disputes: competition and choice as the path to quality and legitimacy. In: Sauvant KP (ed) Yearbook on International Investment Law & Policy, 2008–2009. Oxford University Press, New York, pp 505–584 Weiss F (1999) From world trade to world competition law. Fordham Int Law J 23(6):S250–S273

Friedl Weiss is a graduate of the Universities of Vienna, Brussels and Cambridge. Formerly lecturer in law at LSE and Professor of International Economic Law and International Organisations at the University of Amsterdam and Professor of European Union Law at the University of Vienna. He held Visiting Professorships at several universities including Louvain-la-Neuve, PanthéonAssas Paris II, HEI Geneva, Bocconi Milano, Bratislava, Minnesota, Tulane, Wuhan and Tianjin. He has been legal adviser in the EFTA Secretariat and legal consultant in GATT. He has provided contract research and expert advisory services for various UN bodies, the EU and institutions of several countries. He has published articles and books focused on EU and international (economic) law.

International Investment Law and Public Procurement: An Overview Marc Bungenberg and Fabian Blandfort

Contents 1 Introduction: Public Procurement Law as Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Main Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Public Procurement and the Investment Treaty Protection of Foreign Investors . . . . . . . . . . . 3.1 The Scope of Application of International Investment Agreements . . . . . . . . . . . . . . . . . . 3.2 Explicit Treaty Provisions on Public Procurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 The Notion of Investment in the Context of Public Procurement . . . . . . . . . . . . . . . . . . . . . 4 Application of Investment Treaties to the Different Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Measures Affecting Tenderers During the Procurement Proceeding . . . . . . . . . . . . . . . . . . 4.2 Measures Affecting Tenderers During the Procurement Proceeding: “Protection” of Successful Tenderers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Measures Affecting Tenderers During the Procurement Process: “Protection” of Unsuccessful Tenderers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Overview of the Relevant Standards of Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Transparency and Due Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 Discriminatory State Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Summary and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26 28 29 30 30 32 33 34 34 36 43 43 45 46 47

Abstract Public procurement law inter alia provides a means to foster competition in the purchasing of goods and services by governments. For tenderers incurring significant expenditures during the procurement procedure, legal remedies are of vital importance. Since these are not equally guaranteed by all states, the issue occurs as to whether international investment law can serve as a gap-filling regime to protect foreign tenderers against harmful state conduct during procurement proceedings. The chapter therefore examines the applicability of international investment agreements (IIAs) to the procurement procedure and, hence, the qualification of a tender and the pre-award expenditure as protected investments. However, the question is neither regulated adequately in most IIAs, nor has a definite approach

M. Bungenberg (*) · F. Blandfort Saarland University, Saarbrücken, Germany e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_2

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developed in arbitral practice so far. While successful bidders can claim compensation for damages arising from the pre-award phase, the protection of unsuccessful bidders must be answered in a differentiated manner. The chapter argues that a distinction has to be made between an open and a pre-elective award procedure. In the latter case, the host state invites the foreign tenderer to participate in the procurement proceeding and thus provides the consent to admit the investment in its territory. Moreover, foreign tenders increase competition within the award procedure, fostering competition in the host state’s procurement market. Assuming that the IIA is applicable, the chapter argues that the ordinary business risks of participating in a tender procedure can be sufficiently taken into account when assessing liability.

1 Introduction: Public Procurement Law as Competition Law In the European Union (EU), antitrust and merger control rules and public procurement law complement each other,1 being committed to the Union’s general objectives, thus, inter alia to an effective competition in a “social market economy”. Moreover, EU public procurement law is largely defined by reciprocal market access in the internal market and is intended to foster competition as a public institution.2 The regulatory framework governing public procurement, therefore, has also been described as “public competition law”.3 Public procurement and competition law in this sense are interrelated in multiple aspects. Due to its purchasing power, the state can influence and disturb market competition. Furthermore, when purchasing, “the state” can take advantage of competitive effects on the supply side leading to lower costs for goods and services of similar or better quality purchased by the procuring state (entity). This at least is the general assumption in this field. The term “public procurement law” in a broad sense refers to any acquisition of goods and services directly or indirectly by public authorities. Thus, the (public) procurement market, in addition to the private market, is of particular importance for a state’s economy4; the average percentage of general government procurement amounts to around 13% of the national gross domestic product (GDP) within the member states of the Organisation for Economic Co-Operation and Development (OECD).5 Because of this purchasing power, the

1

Kennedy-Loest et al. (2011), p. 78. Dreher et al. (2015), para. 6. 3 Bovis (2015), para. 1.42. 4 Bovis (2015), paras 1.22 et seq. Critically on the term “public market” see Sánchez Graells (2011), pp. 35 et seq. 5 OECD statistics 2017, https://stats.oecd.org/Index.aspx?QueryId¼78413# (30.01.2019). 2

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public authorities can influence and disturb market competition,6 awarding contracts on different non-micro-economic criteria. The conceivable political interference in the procurement procedure cannot be underestimated, especially since the state is not subject to the same budget restrictions as private purchasers. The awarding of public procurement contracts based on the lowest offer reflects price competition in the sense of neo-classical economic theory relying on selfregulating markets. The main criterion of price competition to promote economic efficiency inevitably results in the requirement to generate competition between the different bidders.7 Furthermore, in specific sectors the purchasing state might even have a “monopoly”. In those economic sectors procurement law and procedures implementing non-discrimination and transparency requirements might directly serve as a means of avoiding the abuse of a dominant position by the state authorities. The decisive factors for an efficient implementation of competition are transparency and non-discrimination. Furthermore, especially effective legal remedies enable losing bidders to obtain a review of tendering procedures leading to an award and enable the public to monitor the procurement procedure as a whole.8 As the Court of Justice of the European Union (CJEU) states, the “principles of equal treatment and non-discrimination imply, in particular, a duty of transparency” allowing judicial review of measures taken by public bodies during the procurement process by the Member States’ courts.9 In European public procurement law, judicial redress is mainly ensured by means of primary legal protection. Claims for compensation on a secondary level are also considered and have to be guaranteed.10 A reason for losing tenderers to raise claims for reliance damages might, inter alia, arise from the potential costs, duration and uncertainties of the review procedure as a means of primary legal protection.11 However, only a few jurisdictions worldwide do provide for effective and adequate means for judicial review in procurement matters comparable to those in the EU and other members of the Agreement on Government Procurement (GPA).12 Especially countries that have rich reserves of raw materials and natural resources are regularly characterised by low rule of law standards. Due to often only limited legal remedies available for foreign investors tendering in a host state’s procurement

6

Behrens (2017), para. 1713. Bungenberg (2007), p. 178; Snider Smith (2008), pp. 110 et seq. 8 From a European perspective, see Bovis (2015), paras 5.01 et seq. and 12.01 et seq. Specifically on the legal remedies, see Shirvani (2016), pp. 59 et seq. On the US reforms, highlighting competition and transparency as the two major aspects, see Snider Smith (2008), pp. 110 et seq. 9 CJEU, case C-458/03, Parking Brixen, ECLI:EU:C:2005:605, paras 49 et seq. 10 As for the EU, see e.g. Article 2(1) lit. d of Council Directive 92/13/EEC of 25 February 1992, OJ L 76 of 23.3.1992, p. 14. 11 See Burgi (2018), p. 248. 12 See inter alia Reich (1999), pp. 133 et seq. On the GPA in general Matsushita et al. (2015), pp. 675 et seq. 7

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market, the question arises to what extend international investment law, and particularly investor-state dispute settlement (ISDS), can serve as a gap-filling instrument providing substantial standards of protection against arbitrary, discriminatory or non-transparent procurement proceedings. However, it has not been clarified whether investment law can be effectively applied in public procurement. Therefore, the present paper aims to assess the applicability of international investment agreements (IIAs) to state measures in procurement procedures (Sect. 3 and 4) after a brief illustration of potential scenarios in which investment protection can become relevant to foreign tenderers (Sect. 2). Finally, the authors take a look at the potentially violated standards of protection (Sect. 5).

2 The Main Scenarios For the realisation of large-scale public infrastructure projects states frequently utilise forms of a public-private partnership (PPP), typically through the awarding of a contract at the end of a public procurement proceeding. Common contract types of a PPP are inter alia design-build-finance-operate (DBFO), build-transfer-operate (BTO), build-operate-transfer (BOT) and build-own-operate (BOO) contracts.13 Furthermore, public procurement principles gain relevance to awarding service contracts or concession agreements e.g. in the raw materials exploitation sector. The principles of transparency and competitiveness as well as accountability mentioned above have a particularly high importance with regard to PPPs.14 In order to prepare for a tender regarding for instance the construction of public infrastructures or energy supply facilities, investors generally have to go through a long process. Pre-award expenditures includes risk assessments, negotiations, feasibility studies and the preparation of a tender for the public procurement procedure itself.15 Indeed, tenderers incur significant expenses even before the contract is awarded, in particular for the internal decision as to whether to participate in the public procurement procedure and subsequently for the preparation of the tender.16 The activities and the costs in the pre-awarding phase increase proportionally to the complexity and scale of the relevant procurement project, especially with regard to large-scale public infrastructure projects, raw materials exploitation and the construction of extraction or energy supply facilities. Therefore, an investor has to

13

Yescombe (2007), pp. 11 et seq. Bovis (2015), paras 13.76 et seq. 15 See inter alia Hamida (2005), p. 50 et seq; Yescombe (2002), p. 257. With regard to the construction industry Metje (2008), pp. 29 et seq. 16 On the procurement process and the different phases from an economic point of view see Yescombe (2007), pp. 74 et seq. 14

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calculate the expenditure also with regard to the length of the bidding and development process, including the costs for its development staff and for external advisers.17 For instance, the pre-award expenditure for the negotiations of a later not-concluded BOT contract in the arbitration Mihaly v. Sri Lanka18 amounted to almost US$ 6 million.19 Hence, there are different scenarios in which investment treaty claims might be raised with regard to national procurement proceedings. Firstly, the rights of a successful foreign tenderer who has been awarded the contract may be infringed either within the procurement procedure or subsequently, during the execution of the project. Secondly, during the award procedure, a violation of the foreign investor’s rights might occur, in particular through the application of discriminatory or non-transparent award criteria resulting in a dismissal of the foreigner’s tender. Here again, a distinction can be made between cases in which the foreign investor was already aware of the for example discriminatory conduct in the award procedure in advance and cases in which it was not apparent that the host state would prefer domestic tenderers or apply other discriminatory or non-transparent criteria in the award procedure. Economic activities in the preliminary stages of the actual execution of the investment are only protected by the treaty if those pre-awarding expenditures can be qualified as investments that fall within the scope of application. The decisive factor for the legal protection of foreign investors under international investment law in each of the scenarios is, thus, in particular the notion of investment.

3 Public Procurement and the Investment Treaty Protection of Foreign Investors The treaty protection of foreign investors against harmful state conduct within procurement procedures essentially depends on whether the mentioned expenditures qualify as investments. Therefore, following an analysis of specific provisions in IIAs on public procurement (Sect. 3.1), the scope of application of IIAs and the notion of investment according to arbitral jurisprudence have to be assessed (Sect. 3.2), taking into consideration specific IIA provisions or investment chapters on public procurement. The findings shall subsequently be applied to the main scenarios outlined above (Sect. 3.3).

17

Yescombe (2007), p. 107. Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2. 19 Williams (2008), p. 881. 18

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3.1

M. Bungenberg and F. Blandfort

The Scope of Application of International Investment Agreements

The differentiation between the pre-establishment phase governing the market access and the post-establishment phase regarding the treatment of existing investments is of considerable importance for the protection of foreign investors during the award procedure. The decision to admit a specific foreign investment to the domestic market is of a highly political nature and is traditionally regulated differently in IIAs, especially in a transatlantic comparison. While the EU and its Member States merely lay down so-called soft obligations for market access, the United States, Canada and Japan are implementing stronger market access rights for foreign investors.20 Besides most of the EU’s member states’ BITs, the CETA and the EU-Singapore Investment Protection Agreement also provide, in principle, solely for a postestablishment protection of foreign investments. Likewise, the Energy Charter Treaty (ECT)21 states rather soft-law obligations for the pre-establishment phase.22 According to Article 10(1) of the ECT, “[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”. The contracting parties “shall endeavour to accord” foreign investors treatment no less favourable than that accorded to nationals or to investors of any other contracting or third state, pursuant to Article 10(2) and (3) of the ECT. Article 1(6)(f) of the ECT defines (established) investments inter alia as “any right conferred by law or contract”. However, those expenditures before the granting of the contract, such as studies, negotiations, prefeasibility and risk assessments are not “conferred by contract”.23 The question therefore remains as to whether the participation in a tender can be seen as a post-establishment activity. It is, thus, decisive at which stage of a public procurement procedure an investment begins to exist, leading to the applicability of the standards of protection of the post-establishment phase.

3.2

Explicit Treaty Provisions on Public Procurement

Irrespective of the general notion of investment, the IIA might contain specific provisions on government procurement and the applicability of the standards of protection or the ISDS mechanism on state measures during and prior to the award decision. Traditionally, IIAs do not exclude public procurement from their scope of application. There are, however, some recently concluded treaties providing specific

20

Dolzer and Schreuer (2012), p. 89. See also Schill (2017), pp. 16 et seq. The Energy Charter Treaty, UNTS 2080, p. 95. 22 See Wälde (1996), pp. 277 et seq. 23 Wälde (1996), p. 280. 21

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exemptions. According to Article 2.1.3(a) of chapter two of the EU-Singapore Investment Protection Agreement, the provision on national treatment shall not apply to “the procurement by governmental agencies of goods and services purchased for governmental purposes and not with a view to commercial resale or with a view to use in the supply of goods or the supply of services for commercial sale”. Moreover, Article 8.15.5(a) of the CETA states that neither the market access provision of Article 8.4 nor the non-discrimination rules of the most-favoured-nation (MFN) treatment (Article 8.6) and national treatment (Article 8.7) apply to “procurement by a Party of a good or service purchased for governmental purposes and not with a view to commercial resale or with a view to use in the supply of a good or service for commercial sale, whether or not that procurement is “covered procurement” within the meaning of [the chapter on government procurement]”.24 The same approach can be found in Article 1108(7)(a) of the North American Free Trade Agreement (NAFTA),25 which, however, leaves the relationship of Chapter 11 to Chapter 10 of the NAFTA uncertain in several respects.26 Furthermore, the new US-Mexico-Canada Agreement (USMCA) states comparable exemptions in Article 14.12.5 (a) regarding inter alia the national treatment and the mostfavoured-nation treatment, as well as a clause in Article 14.10.3 (a) with respect to performance requirements.27 An even more far-reaching provision has been implemented in Article 5.2 (b) of Chapter XX of the EU-Mexico Free Trade Agreement (FTA), which excludes government procurement from the whole of Section A on the liberalisation of investments.28 A different clause on the interrelation between investment protection and the government procurement chapter can be found in Article 2.1.6 of the not yet ratified EU-Vietnam Investment Protection Agreement, which states that inter alia the national treatment and the most-favoured nation treatment do neither limit the obligations of the parties according to the chapter on government procurement nor do they “impose any additional obligation with respect to government procurement”.29 Moreover, those state measures which are in compliance with the provisions on government procurement of the EU-Vietnam FTA “shall not be considered as a breach” of the provisions inter alia on the treatment of investments. The aforementioned agreements therefore already reflect an increased sensitivity of the treaty makers to the interrelation between international investment law and public procurement law and procedure. However, in the absence of specific

24

Text available at http://ec.europa.eu/trade/policy/in-focus/ceta/ceta-chapter-by-chapter/. See also the additional exemptions with regard to the performance requirements according to Article 1106 of the NAFTA and Article 1108(8)(b) of the NAFTA. 26 Bjorklund (2013), p. 490. See on public procurement under NAFTA in general Reich (1999), pp. 261 et seq. 27 Text available at https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexicocanada-agreement/agreement-between. 28 Text available at http://trade.ec.europa.eu/doclib/press/index.cfm?id¼1833. 29 Text available at http://trade.ec.europa.eu/doclib/press/index.cfm?id¼1437. 25

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exemptions, state acts in relation to public procurement are likely to fall within the scope of application of most IIAs in force. Furthermore, it can be argued that ISDS in general seems possible and is accepted in the event of a violation of procurement principles, and it is only excluded when the procurement procedures as well as exceptions from the scope of application laid down in the specific chapters are respected.

3.3

The Notion of Investment in the Context of Public Procurement

The term “investment” is decisive both for the jurisdiction of the arbitral tribunal and the applicability of the standards of protection. With regard to the applicability of IIAs in the context of public procurement the key question is whether the mere (and probably unsuccessful) participation in a public procurement process can already be seen as an investment. The notion of investment obviously is essential and academic literature and investment arbitration alike have tried to find a satisfactory definition for some time.30 However, treaty practice and arbitral jurisprudence lack a common interpretation. With regard to the ICSID Convention, significant difficulties arise out of the fact that Article 25(1) of the Convention does not provide a definition. Rather, it only limits the jurisdiction of the Centre “to any legal dispute arising directly out of an investment” without any specifications.31 In IIAs different approaches with regard to the definition of investment have evolved, either providing a broad asset-based definition or a rather restrictive closed-list concept.32 According to Article 1(6) of the Energy Charter Treaty, investment “means every kind of asset, owned or controlled directly or indirectly by an Investor”. It therefore encompasses a very broad notion of the term. In a similar vein, the German Model BIT of 2009 states in Article 1(1) that the term “comprises every kind of asset which is directly or indirectly invested by investors”. However, this extensive definition in some agreements is limited by further requirements, such as in the US Model BIT of 2012, stating in its Article 1 that the term 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.” An even more restrictive approach is found in Article 1139 of NAFTA and Article 14.1 of the USMCA, providing an exhaustive list of possible forms of investments and excluding various others explicitly. The same approach was implemented in Article 1 of the Canadian Model BIT of 2004. 30

See e.g. Bischoff and Happ (2015), para.1; Rubins (2004), p. 283. See Schlemmer (2008), pp. 62 et seq.; Schreuer et al. (2009), Article 25 paras 113 et seq. 32 Bischoff and Happ (2015), paras 8 et seq.; Vandevelde (2010), pp. 122 et seq. 31

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Concerning the notion of investment according to Article 25(1) of the ICSID Convention, the tribunal in Salini v. Morocco held that “[t]he doctrine generally considers that investment infers: contributions, a 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.”33 These five criteria of the latter so-called Salini test had already been previously defined by the arbitral tribunal in Fedax v. Venezuela.34 However, the Salini test is not applied equally by all ICSID-tribunals, which sometimes either do consider the five criteria insufficient or unnecessary.35 Some tribunals, thus, deemed only the criteria of duration, profit and the involvement of risk relevant,36 whereas others requested additional requirements.37 It is, however, widely accepted that not only the parties’ consent, but also at least some of the objective criteria mentioned must be taken into account when assessing whether an investment in the sense of Article 25(1) of the ICSID Convention exists.38 Therefore, a uniform concept of the notion of investment cannot be applied in the following. For the purpose of this paper, the analysis will take the Salini criteria and arbitration under the ICSID Convention as a starting point.

4 Application of Investment Treaties to the Different Scenarios Measures affecting the pure execution of the procurement project are obviously covered by the scope of application of IIAs in general. At the end of a successful participation in the procurement procedure regularly lies the execution phase of the investment project. If the respective investor reaches this phase and his rights are infringed, the various standards of protection apply since, at that time, an investment undoubtedly already exists. The award at the end of the procurement proceeding

33

Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, Decision on Jurisdiction of 23 July 2001, ICSID Case No. ARB/00/4, para. 52. See also Consortium R.F.C.C. v. Kingdom of Morocco, Decision on Jurisdiction of 16 July 2001, ICSID Case No. ARB/00/6, Rn. 60. 34 FEDAX N.V. v. The Republic of Venezuela, Decision on Jurisdiction of 11 July 1997, ICSID Case No. ARB/96/3, para. 43. 35 Bischoff and Happ (2015), para. 35. On the criteria see Schreuer et al. (2009), Article 25 paras 154 et seq. 36 See Saba Fakes v. Republic of Turkey, Award of 14 July 2010, ICSID Case No. ARB/07/20, para. 110; Consortium Groupement L.E.S.I. - DIPENTA v. People’s Democratic Republic of Algeria, Award of 10 January 2005, ICSID Case No. ARB/03/8, para. II.13(iv). 37 For instance, the tribunal in Phoenix Action Ltd v. Czech Republic, Award of 15 April 2009, ICSID Case No. ARB/06/5, para. 100, is limiting the notion to bona fide investments. 38 See e.g. Autopista Concesionada de Venezuela, C.A. v. Bolivarian Republic of Venezuela, Decision on Jurisdiction of 27 September 2001, ICSID Case No. ARB/00/5, para. 97.

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coincides with the state’s offer to conclude the contract.39 The binding contract itself between the host state and the investor certainly constitutes an investment within the meaning of the IIA and the ICSID Convention.40 Therefore, the respective assets within the sense of the definition of investment depend on the subject of the procurement procedure. The asset may be either, in case of a long-term service contract, the investor-state contract or concession as such or, in case of a large-scale BOT-project, the ownership of the infrastructure or power plant constructed. Thus, an infrastructure project expropriated before keys are handed over as well as an interference with a concession or service contract for the exploitation of raw materials can cause the host state’s liability under IIAs. However, according to the foregoing, two potential scenarios arise in which the application of international investment law to state measures related to the procurement procedure have to be considered. These will be discussed in the following.

4.1

Measures Affecting Tenderers During the Procurement Proceeding

Here, the question arises of whether not only interference with the executed investment itself, but also those state measures affecting the tenderer during the procurement procedure can be claimed as IIA violations in ISDS. With regard to the purpose of the ICSID Convention and the respective IIA, there is indeed an undeniable interest on the part of the foreign investor in its expenditures being covered by the scope of application of the agreements. Furthermore, legal protection of the development phase would foster the investment treaties’ objective to promote and encourage foreign investments.41

4.2

Measures Affecting Tenderers During the Procurement Proceeding: “Protection” of Successful Tenderers

Arbitral decisions have recognised that once the investment is executed and a violation of an IIA standard of protection occurs, compensation can be claimed under an IIA also for expenditures inter alia within the procurement procedure. The subsequent liquidation of such costs is of particular importance if the host state

39

As for German procurement law see Burgi (2018), p. 220. See for Article 25 ICSID Convention Schreuer et al. (2009), Art. 25, para. 180. Regarding contract awarded after a procurement proceeding see Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, Decision on Jurisdiction of 23 July 2001, ICSID Case No. ARB/00/4, para. 58. 41 On the concerns see also Robinson (2004), p. 265. 40

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concludes a contract with the foreign investor at the end of the award procedure, which then fails in the executive phase. Indeed, the tribunal in Malicorp v. Egypt held: In the case of a contract, it has been rightly held42 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 [. . .]. It is true that Malicorp does not appear to have performed many services in connection with it. Nonetheless, the fact of being bound by that Contract implied an obligation to make major contributions in the future. That commitment constitutes the investment; it entails the promise to make contributions in the future for the performance of which that party is henceforth contractually bound. In other words, the protection here extends to deprivation of the revenue the investor had a right to expect in consideration for contributions that it had not yet made, but which it had contractually committed to make subsequently.43

In a similar vein, the tribunal in PSEG v. Turkey emphasised: A contract is a contract. The Concession Contract exists, is valid and is legally binding. This conclusion is sufficient to establish that the Tribunal has jurisdiction on the basis of an investment having been made in the form of a Concession Contract.44

Therefore, the tribunal rejected the respondent’s argument, according to which, since no mining was undertaken and no plants were built, there would be nothing to compensate for. Rather, the arbitrators stated: This, however, is not a reason sufficient in itself to rule out the existence of damages subject to compensation. 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.45

The arbitration proceedings in Jan de Nul and and Dredging International v. Egypt46 were also influenced by circumstances of the procurement procedure itself. The investor had concluded a contract with the host state’s authorities to undertake dredging services in several southern stretches of the Suez Canal. However, the execution of the project caused damages to the investor due to allegedly incorrect information that the state authorities had given during the procurement

42

Footnote added by the authors; it is referred to Schreuer, ICSID-Commentary, Article 25. Malicorp Limited v. Arab Republic of Egypt, Award of 7 February 2011, ICSID Case No. ARB/08/18, para. 113. 44 PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, Decision on Jurisdiction of 4 June 2004, ICSID Case No. ARB/02/5, para. 104. 45 PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, Award of 19 January 2007, ICSID Case No. ARB/02/5, para. 304. 46 Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, ICSID Case No. ARB/04/13. 43

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proceedings.47 Since there was a binding state contract between the disputing parties, the tribunal held that it was not necessary to evaluate whether in the construction industry an investment exists beginning with the investor making expenditures when preparing the offer and deciding whether to participate in the procurement process or not.48 Rather, “the duration of the operation was sufficient for it to qualify as an investment within the meaning of Article 25 of the ICSID Convention, even starting from the execution of the Contract”.49 However, due to a lack of evidence, the claims were later dismissed on the merits. Nevertheless, the tribunal did not answer the question whether or not the pre-award phase as such is covered by the notion investment. Thus, according to the case law, expenditures for the preparation of an offer can be liquidated if a binding contract has been concluded, thus, an investment exists. However, solely after the contract has been awarded at the end of the procurement process an investment has been explicitly recognised as such by arbitral tribunals. Here, the expenditures become relevant in assessing the damage.50

4.3

Measures Affecting Tenderers During the Procurement Process: “Protection” of Unsuccessful Tenderers

It remains questionable whether the expenditures of the procurement procedure and the preparation of an unsuccessful tender, can be regarded as an investment if no binding contract is awarded. The qualification of development expenditures as elements of the overall investment does not prejudice the assessment of whether such costs constitute an autonomous investment. The latter question has not been negatively answered either in Jan de Nul and and Dredging International v. Egypt51 or in PSEG v. Turkey52; on the contrary, the above cited paragraphs (“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, [. . .]”53) 47

Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, Decision on Jurisdiction of 16 June 2006, ICSID Case No. ARB/04/13, para. 14. 48 Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, Decision on Jurisdiction of 16 June 2006, ICSID Case No. ARB/04/13, paras 94 et seq. 49 Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, Decision on Jurisdiction of 16 June 2006, ICSID Case No. ARB/04/13, para. 95. 50 Schreuer et al. (2009), Article 25 para. 180; Bischoff and Happ (2015), paras 110 et seq. 51 Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, Decision on Jurisdiction of 16 June 2006, ICSID Case No. ARB/04/13, paras 94 et seq. 52 PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, Award of 19 January 2007, ICSID Case No. ARB/02/5, para. 304. 53 PSEG Global Inc. and Konya Ilgin Elektrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, Award of 19 January 2007, ICSID Case No. ARB/02/5, para. 304.

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as well as clarifications in the Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada and other recent agreements indicate that a protection of unsuccessful bidders seems also possible. Finally, the tribunal in Malicorp v. Egypt ruled on the qualification of negotiation expenses solely in an obiter dictum and did not have to decide the issue for the merits of the case.54

4.3.1

Protection of Foreign Investors Tendering in a Procurement Proceeding

With regard to the qualification of the preparation of an offer as an investment irrespective of the closure of a binding contract the tribunal in Lemire v. Ukraine held: Pre-investment activities are those which precede the actual investment. Whether pre-investment activities merit treaty protection is debatable. But it is irrelevant for the purpose of adjudicating Claimant’s claims in this arbitration [. . .].55

The question was not decisive in Lamire, Jan de Nul or PSEG. In contrast to these cases, no binding contract was concluded in Mihaly v. Sri Lanka, since Sri Lanka only issued several letters of intent. Therefore, the tribunal stated The Claimant has not succeeded in furnishing any evidence of treaty interpretation or practice of States, let alone that of developing countries or Sri Lanka for that matter, to the effect that pre-investment and development expenditures in the circumstances of the present case could automatically be admitted as “investment” in the absence of the consent of the host State to the implementation of the project. [. . .] 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.56

The decisive factor for the arbitral tribunal’s assessment was therefore the lack of consensus of the host state, as expressed in a binding contract at the end of a procurement procedure. It should be noted that the arbitral tribunal rejected the existence of an investment even though there were several letters of intent issued by the government of Sri Lanka. According to the tribunal, a mere participation in the procurement procedure cannot, a fortiori, result in the requisite expenditures being qualified as an investment. Although signing the unanimous award, arbitrator David Suratgar issued an individual concurring opinion highlighting the need for greater transparency in the procurement process in the pre-execution phase due to the high

54 Malicorp Limited v. Arab Republic of Egypt, Award of 7 February 2011, ICSID Case No. ARB/08/18, para. 113. 55 Joseph Charles Lemire v. Ukraine, Decision on Jurisdiction and Liability of 14 January 2010, ICSID Case No. ARB/06/18, para. 89. 56 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Award of 15 March 2002, ICSID Case No. ARB/00/2, paras 60 et seq.

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expenditure and risks associated with large-scale BOT-infrastructure projects.57 He therefore concluded: If private foreign investors are to be encouraged to pursue transparency in seeking such BOT opportunities the international community must address the lessons of this case. Expenditure incurred by successful bidders do indeed produce “economic value” as specified by Article 1 of [the BIT] and the protection mechanism developed under the aegis of the World Bank in the form of the ICSID Convention should be available to those who are encouraged to embark on such expensive exercises.58

Suratgar refers to several documents supporting a theoretical and abstract possibility for such expenditures to qualify as an investment.59 Indeed, the World Bank Report on Submission and Evaluation of Proposals for Private Power Generation Projects in Developing Countries of September 1994 emphasises that the project capital costs of a power plant “comprise all project development and construction costs, including but not limited to prefeasibility, engineering, legal, and auditing services.”60 Hence, it is arguable that those expenditures may qualify as an investment. Moreover, Suratgar refers to the broad interpretation of eligible investments with regard to investment guarantees and insurances.61 Finally, one can criticise the fact that letters of intent which open up the procurement market or are rendered within the negotiation phase are not seen as a consensus in this regard or at least as leading to responsibilities of the procuring state for his procuring bodies. Another award based on facts relating to procurement has been rendered in Zhinvali Development Ltd v. Georgia.62 Here the tribunal, relying on the award in Mihaly v. Sri Lanka, held that since no contract was signed and no consent between the parties was reached as to whether the negotiation expenditures constituted an investment it had no jurisdiction under the ICSID Convention.63 However, the award only related to the enterprise’s costs arising from rather informal contract negotiations and not to the tendering in a formal public procurement award procedure. Indeed, the reason for stopping negotiations with the foreign investor was that

57 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Concurring Opinion by Mr. David Suratgar of 7 March 2002, ICSID Case No. ARB/00/2. See Hornick (2003), pp. 192 et seq. 58 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Concurring Opinion by Mr. David Suratgar of 7 March 2002, ICSID Case No. ARB/00/2, para. 10. 59 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Concurring Opinion by Mr. David Suratgar of 7 March 2002, ICSID Case No. ARB/00/2, para. 6. 60 Submission and evaluation of proposals for private power generation projects in developing countries, World Bank Discussion Papers No. 250 of September 1994, p. 14, http://documents. worldbank.org/curated/en/353541468782149070/pdf/multi-page.pdf (1.2.2019). 61 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Concurring Opinion by Mr. David Suratgar of 7 March 2002, ICSID Case No. ARB/00/2, para. 6. 62 Zhinvali Development Ltd v. Georgia, ICSID Case No. ARB/00/1, unpublished. A summary is provided by Happ and Rubins (2009), pp. 8 et seq. See also Schreuer et al. (2009), Article 25 para. 178, and Hamida (2005), pp. 67 et seq. 63 Happ and Rubins (2009), p. 9.

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after long negotiations between the investor and the host state, the World Bank intervened and demanded that Georgia establish a competitive and transparent bidding process for the project.64 Therefore, a distinction should be made, on the one hand, between mere contract negotiations and, on the other, a tendering in a (ostensibly) transparent and non-discriminatory procurement proceeding. Although the awards rendered so far do not support the assumption that the expenditures related to the preparation of an offer already constitute an investment within the meaning of Article 25(1) of the ICSID Convention so long as no binding state contract has been concluded,65 they do not preclude it either. Based on the Salini criteria, the answer to the question ultimately depends on whether or not there is a strict distinction between the procurement procedure up to the point in time when the award decision is taken and/or the contract is concluded on the one hand and a post-award or contract conclusion performance. The achievement of a regular profit depends on the discretionary decision of the procurement authority, since returns can only be achieved if the contract is finally awarded. But since the expectation of a regular profit and a long-term relationship is considered to be sufficient, also according to Salini, an investment does exist.66 Furthermore, the investor has the expectation that the procurement proceeding is conducted in good faith and that no discrimination occurs between the different tenderers. Foreign investors, however, are aware of the business risk which is inherent in the participation in a public procurement procedure. There are attempts to restrict the notion of investment through the requirement of a contribution to the host state’s economy.67 Here, the interrelation between public procurement law and “competition” emphasised above has to be considered, as well. Indeed, having regard to the purpose of international investment law which is to encourage foreign investment and thus the host state’s economy and welfare, one can endorse a protection of investors during the procurement proceeding. Competition is essential for the functioning of a market economy. Foreign tenderers certainly foster competition within public procurement as a major sector of economy by simply participating in the procurement procedure. Therefore, the protection of invested costs for the participation in the procurement proceeding is not only beneficial for the foreign investors but also contributes to a functioning market economy with an efficient and functioning procurement mechanism based on competition principles. Such a procurement mechanism will foster the public welfare of the respective host state. Hence, even on the (criticised) assumption that an investment has to contribute to the host state’s economy, expenditures during the tendering

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Hamida (2005), p. 68. See Johannsen (2009), p. 32. 66 Schreuer et al. (2009), Article 25, para. 153. 67 Consortium R.F.C.C. v. Kingdom of Morocco, Decision on Jurisdiction of 16 July 2001, ICSID Case No. ARB/00/6, para. 65; Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, Decision on Jurisdiction of 23 July 2001, ICSID Case No. ARB/00/4, para. 52. On the debate see inter alia Bischoff and Happ (2015), para. 39. 65

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procedure can be considered as a protected investment, since the respective offers make an essential contribution to competition within the bidding process and therefore to the economy of the host state. From a public international law perspective, the host state is not obliged to grant foreign tenderers access to a procurement proceeding so long as no such commitment has been made.68 Indeed, multiple public procurement regimes and markets are not at all open to enterprises from third countries.69 Therefore, the admission of a foreign enterprise to a tendering proceeding could as a sovereign act of the state provide for the required consent between investor and host state. As pointed out in Malicorp v. Egypt,70 the investor’s commitment constitutes an investment. Generally, in public procurement the submitted offer is the commitment; already the participation in the procurement procedure implies obligations for the enterprise submitting the offer. For instance, in German public procurement law, a binding offer cannot be withdrawn by the bidder pursuant to the German Civil Code (BGB).71 The state authorities only have to give their unilateral approval within a certain time frame, once the offer has been submitted. Nevertheless, it is doubtful whether the expenditures for a tender can be qualified as an investment in the case of an open award procedure, in which the number of potential bidders is not limited and therefore no admission to participate in the procurement process by state authorities is required. However, in a public procurement procedure by invitation the respective tenderer is specifically and individually requested to submit an offer. Here, the invitation by the host state can be seen as an offer to reach a consent with the foreign tenderer and investor that finally leads to a contract. Furthermore, it can be taken into account whether the tenderer is bound by its submitted offer, as mentioned earlier. In this case also the procuring state would have to be considered bound by pre-contractual obligations. For instance, according to sections 180 and 181 of the German Competition Act (GWB), the tenderer can claim inter alia reliance damages if the state has violated a provision protecting its rights. Moreover, obligations before the signature of a contract are also recognised in the lex mercatoria.72 In sum, pre-contractual obligations bind the participating enterprises and the state authorities alike, once a binding offer is submitted.

On the access of investments in the natural resources exploitation field see Bungenberg (2015), pp. 129 et seq. 69 See because of this the Proposal for a Regulation of the European Parliament and of the Council on the access of third-country goods and services to the Union’s internal market in public procurement and procedures supporting negotiations on access of Union goods and services to the public procurement markets of third countries, COM(2016) 34 final. 70 Malicorp Limited v. Arab Republic of Egypt, Award of 7 February 2011, ICSID Case No. ARB/08/18, para. 113. 71 Burgi (2018), p. 220. 72 See with regard to the United Nations Convention on Contracts for the International Sale of Goods (CISG), 1489 UNTS 3, Schütz (1996), pp. 173 et seq. 68

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In Mihaly v. Sri Lanka the host state had invited five investors out of around twenty-five interested applicants to enter into negotiations.73 Nevertheless the tribunal did not deem the phase before the award of the contract sufficient to constitute consent, although the state had carried out a preselection. The ruling in Mihaly v. Sri Lanka was, however, based to a large degree on the facts of the case, since the host state “clearly signalled, in the various documents which are relied upon by the Claimant, that it was not until the execution of a contract that it was willing to accept that contractual relations had been entered into and that an investment had been made.”74 In the absence of such an explicit reservation on the part of the host state’s authorities, the admission of the tenderer to the procurement proceeding could arguably be sufficient to also constitute consent. Moreover, the tribunal only emphasised that there was no evidence for pre-investment expenditures “automatically”75 amounting to an investment and hence giving rise to the tribunal’s jurisdiction.76 The abstract possibility for such expenditures to constitute a covered investment was, thus, deliberately not excluded by the arbitral tribunal, irrespective the fact that no binding precedents exist in international investment arbitration, in any case.77 Therefore, even in the absence of a binding contract, claims of the investor against the host state could be raised due to the existence of an investment.78 If the host state acted in bad faith during the contract negotiations and the signature of the contract therefore failed, claims for reliance damages might be given, qualifing as a claim for money and, thus, a protected asset.79 These considerations should also be applicable to misconduct by the host state during the procurement procedure. However, the respective IIA certainly has to include claims for money within its definition of investment. Therefore, as an interim conclusion, the decisive criterion cannot (solely) be whether a contract was finally concluded but whether there was a (binding) (also pre-contractual) commitment or obligation by especially the foreign enterprise. Moreover, it is argued that the protection of those expenditures would cause sensitive issues such as bribery or corruption to fall under the jurisdiction of an ICSID arbitral tribunal, which, however, would not be competent to assess such questions.80 However, the abstract risk that such issues fall under the jurisdiction of

73 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Award of 15 March 2002, ICSID Case No. ARB/00/2, para. 39. 74 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Award of 15 March 2002, ICSID Case No. ARB/00/2, para. 51. 75 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Award of 15 March 2002, ICSID Case No. ARB/00/2, para. 60. 76 See also Hamida (2005), p. 63. 77 On this Bungenberg and Titi (2015), paras 2 et seq. 78 See with a similar result Yala (2005), pp. 122 et seq.; Bischoff and Happ (2015), para. 112. 79 Yala (2005), p. 123; Bischoff and Happ (2015), para. 112. 80 See Johannsen (2009), p. 32; Hamida (2005), p. 51; Hornick (2003), p. 192.

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the arbitral tribunal cannot inevitably prejudge the qualification of a tender and related expenditures as investments. Furthermore, corruption practices by the bidder could lead to an outright denial of protection under an IIA since in this case the investment would not be in conformity with the host state’s law. Besides, the mere qualification of those expenditures as an investment does not predetermine the level of protection granted by substantive treaty standards. The ordinary business risk of participating in a procurement proceeding can and indeed has to be taken into account with regard to the assessment of whether a violation of a standard of protection actually has occurred, limiting the factual level of protection. The mere reference to the possibly high number of treaty claims arising out of award procedures81 is therefore not convincing. Hence, an assessment of the issue at stake should also take into account the substantive treaty standards and their level or protection with regard to public procurement proceedings. Considering the inherent business risks and uncertainties of tendering, only under specific circumstances a violation of an IIA could be assumed.

4.3.2

Protection of Foreign Shareholders of a Domestic Subsidiary Tendering in a Procurement Proceeding

Reference has already been made to the Lemire v. Ukraine arbitration, in which the tribunal emphasised that the shareholding in a subsidiary which was involved in the procurement proceedings was sufficient to constitute an investment even in the absence of an awarded contract.82 In a similar vein, the tribunal in Emmis v. Hungary considered the shares in a Hungarian broadcasting corporation to be a covered investment.83 However, in the latter proceeding the respondent had not contested the existence of an investment as such. Nevertheless, it can be assumed that, in principle, the investor’s shares in a domestic subsidiary are considered to be a covered investment. Thus, potential infringements of the subsidiary’s rights as the investor’s assets during the procurement proceeding could give rise to a claim under an IIA. The option for foreign tenderers to sue the host state for alleged violations within the public procurement proceedings through shareholdings in a subsidiary has caused criticism.84 This approach would circumvent the differentiation between the pre-establishment and the post-establishment phase and, thus, undermine the requirement of the host state’s admission. For instance, arbitrator Jürgen Voss

81

Hornick (2003), pp. 192 et seq. Joseph Charles Lemire v. Ukraine, Decision on Jurisdiction and Liability of 14 January 2010, ICSID Case No. ARB/06/18, para. 55. 83 Emmis International Holding, B.V., Emmis Radio Operating, B.V., MEM Magyar Electronic Media Kereskedelmi és Szolgáltató Kft. v. Hungary, Award of 16 April 2014, ICSID Case No. ARB/12/2, para. 155. 84 See on the criticism Fischer (2018), p. 121. 82

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argued in his dissenting opinion in Lemire v. Ukraine that the protection of foreign investors would be improperly strengthened compared to domestic tenderers.85 An assessment of this critique, however, cannot succeed without taking a position on the fundamental question of a possible privileged treatment of foreign investors by international investment law as a whole. The question of legitimacy, indeed, shall not be raised here. Therefore, it can be stated, relying on awards rendered, that an IIA can be applied to state measures within a procurement procedure if the foreign investor is involved in the tendering via a domestic subsidiary.

5 Overview of the Relevant Standards of Protection Given that the agreement can be applied, the question emerges as to which standards of protection might be violated by host state conduct during the procurement proceeding. Possible acts of infringement relate in particular to a lack of transparency in the award procedure or a deliberate or arbitrary discrimination and/or violation of the national treatment or the MFN standards when comparing foreign investors with domestic tenderers.

5.1

Transparency and Due Process

A main element of a competitive procurement proceeding is transparency which, as stated by arbitrator Suratgar in Mihaly v. Sri Lanka,86 is also a major achievement that could be guaranteed through the protection of pre-award expenditures under an IIA and the respective ISDS forum. Whereas some tribunals refer to transparency as a host state’s obligation to obey the representations made by its authorities,87 others emphasise procedural elements, such as inter alia public hearings or access to documents.88 However, such obligations are mainly assigned to the category of due process both by arbitral tribunals and in academic literature. Tribunals have stated that the fair and equitable treatment (FET) standard entails the obligation to afford due process and thus a transparent

85

Joseph Charles Lemire v. Ukraine, Dissenting Opinion of Arbitrator Voss of 1 March 2011, ICSID Case No. ARB/06/18, paras 121 et seq. 86 Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, Concurring Opinion by Mr. David Suratgar of 7 March 2002, ICSID Case No. ARB/00/2, para. 10. 87 Metalclad Corporation v. The United Mexican States, Award of 30 August 2000, ICSID Case No. ARB(AF)/97/1, paras 76 et seq. 88 Merrill & Ring Forestry L.P. v. The Government of Canada, Award of 31 March 2010, ICSID Case No. UNCT/07/1, para. 231; Siemens A.G. v. The Argentine Republic, Award of 6 February 2007, ICSID Case No. ARB/02/8, para. 308. The importance of transparency is emphasized by Schreuer (2005), p. 374.

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administrative procedure.89 The tribunal in Al-Bahloul v. Tajikistan held that some of the facets of due process are “[t]he obligation to notify an investor of hearings and not to decide about a claim in his absence or in gross violation of procedural rules. Breaches may also exist if the procedure is delayed, if the Government influences administrative or court procedures, or if the composition of courts responsible for a certain procedure is altered.”90 The tribunal in Jan de Nul and Dredging International v. Egypt also stated, referring to the award in Waste Management v. Mexico,91 that FET could be denied inter alia in the event of “a complete lack of transparency and candour in an administrative process.”92 The tribunal assessed whether the host state had violated the FET standard through a “wilful withholding of vital information” constituting a fraud during the negotiation phase.93 Hence, the tribunal held that it “needs to first establish whether there was a fraud” and if so “it will then have to examine if the [national court judgment] was improper because it did not redress it.”94 However, tribunals have raised a rather high threshold before a host state violates the obligation to afford due process and take into account whether other discriminatory state conduct has occurred.95 A denial of due process is therefore likely to be dismissed as long as the host state does not act in an obviously non-transparent manner and contrary to the principle of good faith. However, an infringement of the FET standard might be considered with regard to the protection of legitimate expectations concerning the validity of the award criteria. If it was not apparent to the foreign investor that domestic tenderers are unduly favoured, contrary to the published awarding criteria, it seems at least arguable that there has been a breach of the obligation not to frustrate investor’s legitimate expectations. The decisive issue would, thus, be the qualification of the published award criteria as a potential basis for legitimate expectations, which in general, indeed, is controversial.96 However, an

89

Metalclad v. Mexico, Award of 25 August 2000, ICSID Case No. ARB(AF)/97/1, para. 91: “Moreover, the permit was denied at a meeting of the Municipal Town Council of which [the claimant] received no notice, to which it received no invitation, and at which it was given no opportunity to appear.” See also Middle East Cement v. Egypt, Award of 12 March 2002, ICSID Case No. ARB/99/6, para. 143. 90 Mohammad Ammar Al-Bahloul v. The Republic of Tajikistan, Award of 2 September 2009, SCC Case No. 064/2008, para. 221. On the obligations see also Dolzer (2013), pp. 29 et seq.; Schill (2006), pp. 24 et seq. 91 Waste Management v. United Mexican States (II), Award of 30 April 2004, ICSID Case No. ARB (AF)/00/3, para. 98. 92 Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, Award of 6 November 2008, ICSID Case No. ARB/04/13, para. 187. 93 Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, Award of 6 November 2008, ICSID Case No. ARB/04/13, para. 210. 94 Jan de Nul N.V. and Dredging International N.V. v. Arab Republic of Egypt, Award of 6 November 2008, ICSID Case No. ARB/04/13, para. 207. 95 See e.g. Kläger (2011), p. 227. 96 Kläger (2011), pp. 175 et seq.; Schill (2006), pp. 15 et seq.

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infringement is more likely to arise through the concurrence of various elements which separately would not suffice.97 In Lemire v. Ukraine, the tribunal held that significant shortcomings in the procedure for the issuance of radio frequencies “facilitated arbitrary or discriminatory decision taking” by the tendering authorities violating the FET standard of the applicable BIT in several respects.98 In any event, considering the high threshold for a breach, it cannot be assumed that in all cases when there is a violation of the transparency requirements under public procurement law principles, an infringement of the FET standard should also be presumed.

5.2

Discriminatory State Measures

With regard to discriminatory behaviour, a distinction can be made between a discrimination apparent and known to the investor already before the offer was made and a discrimination which only becomes public after the procurement contract has been concluded or the tender has been made. As stated above, arbitrary and discriminatory state conduct has to be considered within the assessment of whether a non-transparent procurement proceeding constitutes a breach of FET. However, an infringement exclusively on grounds of nationality is excluded a priori if the respective IIA states that the national and MFN treatment standards do not apply to public procurement.99 A discrimination against foreign tenderers, indeed, is more likely to be a relevant criterion for a breach of the FET standard or the standard against arbitrary or discriminatory measures.100 In this regard, arbitrator Voss emphasised in his dissenting opinion in Lemire v. Ukraine that the FET standard has to be applied restrictively to tenders.101 The majority ruling, however, was deemed appropriate in the literature with regard to the flexible approach with a proportionality analysis.102 An application of the FET standard also to procurement procedures can therefore lead to appropriate rulings if sufficient consideration is given to the specific circumstances, in particular to the inherent risks involved even in a properly conducted procurement procedure. In sum, only manifest and obvious breaches of the principles of transparency and non-discrimination, in particular in their cumulation, are likely to merit a breach of the FET Standard.

97

See with regard to legitimate expectations Dolzer (2013), pp. 26 et seq. Joseph Charles Lemire v. Ukraine, Decision on Jurisdiction and Liability of 14 January 2010, ICSID Case No. ARB/06/18, paras 419 et seq. 99 See supra Sec. 3.2. 100 On the interaction of FET with the standard against unreasonable or discriminatory measures, see also Schreuer (2007), pp. 4 et seq. 101 Joseph Charles Lemire v. Ukraine, Dissenting Opinion of Arbitrator Voss of 1 March 2011, ICSID Case No. ARB/06/18, para. 128. 102 Jacob and Schill (2015), paras 97 et seq.; Fischer (2018), p. 255. 98

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6 Summary and Outlook Public procurement law can qualify as a means to foster and ensure competition with regards to the purchasing of goods and services by governments of market economy states. In order to ensure efficient competition among bidders, legal remedies are particularly indispensable. However, these are not provided equally by all states. Since tenderers incur significant expenditures during the procurement procedure, the issue arises as to whether international investment law can serve as a gap-filling regime to provide legal protection with regard to harmful state conduct during procurement proceedings. In particular in those states which do not ensure sufficient legal remedies against discriminatory and non-transparent award procedures, IIA protection benefits both foreign investors and a functioning market economy in the host states. However, the interrelation between government procurement and investment protection is not regulated adequately in most IIAs, although more detailed provisions are implemented in recently negotiated treaties, especially by the EU. Relying on the common treaty practice, expenditures by successful foreign tenderers become a component of the overall investment. Hence, also damages resulting from state conduct during the procurement procedure can be liquidated, as recognised by arbitral tribunals. In contrast, the protection of expenditures by unsuccessful tenderers is more controversial. Ultimately, the possibility of such protection depends on the notion of investment. Since there is no binding precedent in investment treaty arbitration, based on the existing arbitral awards, no definite assessment can yet be made as to whether and under which conditions pre-award expenditures can be recognised as an independent investment.103 The question whether expenditures for a tendering procedure can qualify as protected investments under IIAs and the ICSID Convention has not been answered by arbitral tribunals so far. Although jurisdiction has been denied by some tribunals due to the fact that after long-term negotiations the state finally failed to sign the contract and no consent was reached, these awards are without prejudice to the assessment. Besides the absence of a rule of precedent in investment treaty arbitration, the tribunals explicitly have not opposed the abstract possibility of tendering expenditures qualifying as investments. Rather, the decisive factor is the requirement of the host state’s consent to admit the investment in its territory. The admission of a tenderer in a procurement procedure can, indeed, provide for the necessary consent, since the sovereign state is not obliged to grant it from a public international law perspective. However, a distinction should be made between open procurement proceedings and those by invitation. In the latter case, the host state explicitly invites the foreign tenderer and hence admits the offer as an investment in its territory. Besides, it seems relevant to

103 See also Bischoff and Happ (2015), para. 112. Critically Schreuer et al. (2009), Article 25 para. 181; Fischer (2018), pp. 114 et seq.

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assess, if the tenderer is bound by the offer submitted leading to pre-contractual obligations of the investor and the host state alike. Moreover, the various tenders increase competition within the award procedure. This is a major requirement for well-functioning and efficient government procurement. Therefore, foreign tenderers contribute significantly to the host state’s economy and public welfare by fostering competition. This demonstrates that the host state can indeed also benefit from the protection of foreign investors during the award procedure. From the foreign investor’s perspective, the vital interest in a treaty protection is also evident since regularly high expenditures arise during the preparation phase of the tender. Finally, the argument of too much litigation in the case of the protection of foreign bidders through IIAs against harmful state conduct during the award procedure cannot be decisive. Since tenderers should be aware of the inherent risk of a procurement procedure, only obviously discriminatory or non-transparent state conduct could merit a treaty claim. It also seems contradictory to refuse protection or to grant it depending on whether the tenderer in question was later awarded the contract; the criterion could be whether or not the tenderer has already entered into binding obligations. Indeed, it is recognised that a successful tenderer can also liquidate those damages arising out of harmful state conduct before the contract is finally awarded. Also, the protection under the IIA cannot depend on whether the foreign tenderer participates indirectly in the award procedure through a local subsidiary.

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Wälde T (1996) International investment under the 1994 Energy Charter Treaty. In: Wälde T (ed) The Energy Charter Treaty: an East-West gateway for investment & trade. Kluwer Law International, The Hague, pp 251–320 Williams D (2008) Jurisdiction and admissibility. In: Muchlinski P, Ortino F, Schreuer C (eds) The Oxford handbook of international investment law. Oxford University Press, Oxford, pp 868–931 Yala F (2005) The notion of “investment” in ICSID case law: a drifting jurisdictional requirement? Some “un-conventional” thoughts on Salini, SGS and Mihaly. J Int Arbitr 22:105–126 Yescombe E (2002) Principles of project finance. Academic Press, Boston and Amsterdam Yescombe E (2007) Public-private partnerships: principles of policy and finance. Elsevier, Burlington and Oxford

Marc Bungenberg is Director of the Europa-Institut and a professor of public law, European law and public international law at Saarland University in Germany and (permanent) visiting professor at the University of Lausanne (Switzerland). Marc received his doctorate in law from the University of Hannover and wrote his habilitation treatise at the Friedrich-Schiller-University Jena. He holds an LL.M. from Lausanne University. His main fields of research are European (common commercial policy, public procurement and state aid law) and international economic law, particularly international investment and WTO law. His working languages are German, English and French. Fabian Blandfort is a research assistant and Ph.D. candidate at the Chair for public law, European law and public international law of Professor Marc Bungenberg at Saarland University in Germany. He completed his law degree at Saarland University (First State Exam) at the top of his class, specialising in European Union and public international law as well as human rights protection law. His main fields of research are international investment law and European Union law. His working languages are German, English and French.

The Impacts of Local Equity Requirements on Competition Lukas Vanhonnaeker

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Local Equity Requirements Defined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Local Equity Requirements in Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 The Historical and Ideological Origins of Local Equity Requirements . . . . . . . . . . . . . . . 3.2 The Modern Justifications for Local Equity Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Impacts of Local Equity Requirements on the Competitive State of Domestic Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Preserving Monopolies: A Hidden Justification for Local Equity Requirements? . . . . 4.2 Local Equity Requirements and Joint Ventures: Between Pro- and Anti-competition . . . 5 Concluding Remarks and the Way Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52 52 56 56 59 61 62 63 69 71

Abstract In international investment law, local equity requirements are often provided in domestic investment laws and compel foreign investors to enter the market of the host state by joining forces with a local partner. Further, local equity requirements generally guarantee that control over the domestic entity rests with the local partner by prohibiting foreign investors from acquiring a majority stake in the local entity. In past eras with priority given to state planning, such requirements were explained by the dominance of the state in all aspects of the domestic economy. In the current era of privatization, they have been justified on different grounds. However, one key element that is often absent from the debate surrounding local equity requirements is their far-reaching, and possibly negative, impacts on the competitive state of markets.

L. Vanhonnaeker (*) McGill University, Montreal, QC, Canada e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_3

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1 Introduction Local equity requirements, also known as “joint venture requirements”, are a well know concept in international trade and investment law and they require foreign investors to acquire domestic equity in order to enter a host market. Such requirements generally provide that the foreign investor cannot hold a majority stake in a domestic company in order to guarantee that control of the economic operations rests with the host state or the local partner. Local equity requirements can have far-reaching consequences for the competitive state of a given market. In particular, they can have anti-competitive impacts as a result of the limits they impose on the entry of foreign investors in host state markets and because they lead to the creation of joint ventures. Local equity requirements necessarily entail the creation of such vehicles to conduct economic operations which themselves can impact negatively the competitive state of markets. This chapter sheds light on the far-reaching consequences of international investment law’s local equity requirements for the competitive state of markets. First, it analyses the notion of local equity requirement. Second, it identifies and explains the main justifications for such requirements: the historical and ideological underpinnings of local equity requirements as well as the more recent arguments that have been used for their inclusion in domestic investment laws. Finally, it analyses the impacts of local equity requirements on the competitive state of markets.

2 Local Equity Requirements Defined Local equity requirements refer to the obligation for foreign investors investing in a country to partner with a local corporation, whether private or public, i.e. a stateowned enterprise (SOE). Local equity requirements, which can be imposed as a condition for the admission of a given foreign investment, are generally provided in domestic foreign investment laws that identify the sectors of the economy to which these requirements apply and establish the maximum percentage of permissible foreign participation in a project. Local equity requirements aim to ensure that control of the investment rests with a local partner, whether a local private actor or the state itself. That is why domestic investment laws generally provide that foreign investors can only acquire less than 50% of equity in a local company. Such requirements, which regulate the entry and movement of capital into a country, are generally provided in domestic “investment laws”1 which are sometimes known as

1

See e.g. the Turkish Foreign Direct Investment Law, Law no. 4875, 5 June 2003, published in the official Gazette of 17 June 2003. Domestic investment laws are also sometimes known as investment promotion statutes (see e.g. the Ghana Investment Promotion Centre Act 2013 (Act 865)) or foreign investment codes (see e.g. the Senegalese Loi n 2004-06 du 6 février 2004 portant Code des investissements, modifiée par la loi n 2012-32 du 31 décembre 2012).

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“joint venture laws” because they force foreign investors to enter into such structures. Local equity requirements are not per se illegal and do not need to be justified by the host state. The sovereignty of states dictates that they have complete control over the entry and movement of capital within their territory.2 Constraints on the sovereign power of states to impose limitations on the entry of foreign investments such as local equity requirements can, however, derive from international obligations binding upon host states. For instance, in the services sector, Article XVI(2)(e)-(f) of the General Agreement on Trade in Services (GATS) provides that: 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: [. . .] (e) measures which restrict or require specific types of legal entity or joint venture through which a service supplier may supply a service; and (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.3

In the context of international investment law, the draft Multilateral Agreement on Investment (MAI), in contrast with the World Trade Organization’s (WTO) Trade-Related Investment Measures (TRIMS) agreement,4 provided for the prohibition of joint venture requirements.5 Current investment treaty practice, in an effort to promote foreign direct investment (FDI),6 is following a similar path. For instance, Article 8.4(1) of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA)7 provides that

2

Salacuse (2013), pp. 75–88. See also de Mestral (2015), p. 685. General Agreement on Trade in Services, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, 1869 UNTS 183, 33 ILM 1167 (1994). See also De Meester and Coppens (2013), p. 105 and WTO DSB, China-Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, Report of the Panel, 12 August 2009, WT/DS363/R, paras 7.1376 and 7.1388. 4 Agreement on Trade-Related Investment Measures, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1868 UNTS 186. 5 Multilateral Agreement on Investment, Draft Consolidated Text, 22 April 1998, DAFFE/MAI(98)/ REV1, Article III(1)(k)–(l). 6 For instance, the scope of investment protections provided in international investment agreements sometimes extends to the pre-establishment phase in order to facilitate the entry of FDI on host state markets. However, the extension of investment protections to the pre-establishment phase does not grant unfettered market access as host states remain free to restrict access by foreign investors to specific sectors of the economy. If an international investment agreement provides for pre-establishment national treatment and most-favoured-nation, for example, host states can only do so without discriminating on the basis of nationality. 7 Canada-European Union Comprehensive Economic and Trade Agreement (CETA), signed 30 October 2016, entered into force 21 September 2017 (Investment chapter not yet entered into force). 3

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L. Vanhonnaeker A Party shall not adopt or maintain with respect to market access through establishment by an investor of the other Party, on the basis of its entire territory or on the basis of the territory of a national, provincial, territorial, regional or local level of government, a measure that: a. imposes limitations on: [. . .] iv. the participation of foreign capital in terms of maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment; or v. the total number of natural persons that may be employed in a particular sector or that an enterprise may employ and who are necessary for, and directly related to, the performance of economic activity in the form of numerical quotas or the requirement of an economic needs test; or b. restricts or requires specific types of legal entity or joint venture through which an enterprise may carry out an economic activity.

It is worth noting, however, that many of the international agreements that prohibit local equity requirements also provide exceptions or reservations to such a prohibition.8 Such exceptions ensure host states remain able to exercise their sovereign right to regulate and control the entry of investments in sectors such as the exploitation of natural resources or with respect to their national security.9 Local equity requirements are generally imposed in specific sectors although they can cover many parts of the domestic economy. While they are generally imposed in strategic industries and sectors related to national security, the parts of the economy that are subject to such requirements greatly vary. For instance, local equity requirements are often found in the air transportation sector, in the telecommunication sector, the energy sector or in sectors entailing the exploitation of natural resources. Sometimes, such requirements are also imposed in the media sector.10

8 See e.g. article XIV of the General Agreement on Trade in Services, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, 1869 UNTS 183, 33 ILM 1167 (1994) and Section E of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), signed 30 October 2016, entered into force 21 September 2017 (Investment chapter not yet entered into force). 9 General Assembly Resolution 1803 (XVII) of 14 December 1962, “Permanent sovereignty over natural resources”, para. 5:

The free and beneficial exercise of the sovereignty of peoples and nations over their natural resources must be furthered by the mutual respect of States based on their sovereign equality. See also Article 8.4 (2) of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), signed 30 October 2016, entered into force 21 September 2017 (Investment chapter not yet entered into force); For greater certainty, the following are consistent with paragraph 1: [. . .] d. a measure seeking to ensure the conservation and protection of natural resources and the environment, including a limitation on the availability, number and scope of concessions granted, and the imposition of a moratorium or ban; [. . .] 10

See e.g. Mexican Foreign Investment Law, Published in the Official Gazette of the Federation on 27 December 1993, last amended on 11 August 2014, Article 7; République de Guinée, Assemblée Nationale, Loi L/2015/N 008/AN Portant Code des Investissements de la République de Guinée,

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As explained above, the key rationale of local equity requirements is to ensure that control of the economic operation rests with the state or the local partner. Thus, the question of the ownership of the local company is not as important as the effective control over that entity, especially since control and titles of ownership of the locally incorporated entity are not always inextricably linked.11 For instance, the issuance of non-voting shares or the spreading of ownership among shareholders can allow retaining effective control over a corporation despite strictly speaking holding minority stakes in the entity.12 The realization of the importance of the function of ownership (control) over titles of ownership (shares) can be witnessed in some domestic investment laws imposing joint venture requirements. For instance, after listing the local equity requirements applicable in some sectors of the economy, the last paragraph of Article 7 of the 1993 Mexican Foreign Investment Law provides that: [. . .] foreign investment participation limits in the activities and companies mentioned in this article may not be surpassed directly nor through trusts, contracts, partnerships or by-law agreements, pyramiding schemes or other mechanisms granting any control or a higher participation than the one established. (emphasis added).13

Another example can be found in Article 6 of the 2015 Guinean Investment Code which provides: Natural or legal persons of foreign nationality cannot hold, directly or through Guinean companies, more than 40% of the shares of companies operating in Guinea in the following sectors: – the publication of newspapers or periodicals of general or political information; – the broadcasting of television or radio programs. The effective management of the companies referred to in the preceding paragraph is ensured by natural persons of Guinean nationality residing in Guinea. (emphasis added).14

Although local equity requirements aim to ensure that the control of the economic operation rests with the host state or the local partner, the reasons why host states want to maintain a tight grip on the economic operations taking place within their territory is not always clear. Indeed, even if the first appearances of such requirements in domestic laws can be explained by historical and ideological factors, their preservation in more recent domestic investment codes can be justified by different reasons.

Article 6; No. 4 Decree of the National Development and Reform Commission and the Ministry of Commerce of the People’s Republic of China, http://www.fdi.gov.cn/1800000121_39_4851_0_7. html. 11 Wallace (2002), p. 314. 12 See United Nations (1973), pp. 12–13. 13 Mexican Foreign Investment Law, Published in the Official Gazette of the Federation on 27 December 1993, last amended on 11 August 2014, Article 7 [official translation]. 14 République de Guinée, Assemblée Nationale, Loi L/2015/N 008/AN Portant Code des Investissements de la République de Guinée, Article 6 [unofficial translation].

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3 Local Equity Requirements in Context 3.1

The Historical and Ideological Origins of Local Equity Requirements

Local equity requirements can be explained by historical and ideological factors. On the one hand, the appearance of such requirements in many developing countries that were once under colonial rule goes hand in hand with the decolonization process of the 1960s. On the other hand, in Eastern European countries, local equity requirements enabled communist states to “marry socialist ideology with the admission of foreign investment on the ground that ultimate control over the investment remained with the state”.15 This pattern remained dominant in these states even after the fall of communism and spread to communist Asian states, such as China, where local equity requirements remain an important means through which FDI is regulated.16 In both newly independent countries and socialist states, the core elements that led to a broader inclusion of local equity requirements in domestic investment laws are similar. Indeed, willing to reaffirm their sovereignty, newly independent countries nationalized as many sectors of their economies as possible by extending their public sectors and creating SOEs to carry a vast array of economic activities under their control, including manufacturing, transportation, insurance and retail sales. This period marked the apogee of the fundamental belief that economic development could not take place unless the state started planning and directing economic and social life.17 The core idea that state planning was essential in order to allow economic development to take place18 is also the root of socialist ideologies,

15

Sornarajah (2010), p. 106. The Catalogue of Industries for Guiding Foreign Investment (No. 4 Decree of the National Development and Reform Commission and the Ministry of Commerce of the People’s Republic of China, http://www.fdi.gov.cn/1800000121_39_4851_0_7.html) was revised in 2017 and provides for the industries in which FDI is encouraged and in which special management measures apply. It lists 35 industries in which FDI can either take place through: a corporation with a Chinese party as the controlling shareholder; a Sino-foreign equity or contractual joint venture; or a Sinoforeign contractual educational institution with a Chinese party as the leader (the Catalogue specifies the following: “‘With the Chinese party as the leader’ refers to the principal or person primarily in charge of administration shall have Chinese nationality, and the number of Chinese members of the board of governors, the board of director or joint administrative committee of a Sino-foreign contractual educational institution shall be not less than 50%”). 17 See International Bank for Reconstruction and Development (1997), pp. 1–2; Salacuse (2013), p. 60; Mason (1958), p. x. See also e.g. Article 166(1) of the 1982 Constitution of Turkey (Constitution of the Republic of Turkey, 7 November 1982): 16

The planning of economic, social and cultural development, in particular the speedy, balanced, and harmonious development of industry and agriculture throughout the country, and the efficient use of national resources on the basis of detailed analysis and assessment and the establishment of the necessary organisation for this purpose are the duty of the State. 18

Lewis (1969), pp. 12–14.

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which explains why SOEs were—and to some extent still are—the principal vehicle through which communist states engaged in international trade and why local equity requirements became the norm in eastern European countries.19 However, the influence of the state in economic affairs was not limited to a planning role. In addition to government policies and actions intended to shape and control the economy, the states themselves also often became the main economic actors in the economy’s main sectors. This was the result of the belief that the state was responsible for generating economic development but also that the private sector was unable to enhance economic development as a consequence of limited financial resources and technical expertise and because it was perceived to be unresponsive to state needs.20 This interventionist policy materialized through the gradual expansion of public sectors, through the creation of state enterprises to conduct economic activities in key sectors and the prohibition of foreign investors to enter these markets. In addition, the expansion of the public sector necessarily meant heavily regulating and restricting the activities of the private sector.21 Rather quickly, private companies, whether domestic or foreign, could only carry out their activities after having obtained the authorization of the government which allowed the latter to “direct the private sector toward the achievement of predetermined developmental goals”.22 Countries that were once under colonial power sought to achieve both political and economic independence. With respect to foreign investors specifically, many countries adopted in the 1960s and 1970s “self reliance” policies which translated into the promotion of import-substitution industries (limitations on the import of foreign goods),23 the expropriation of existing foreign investments24 and restrictions on the inflow of FDI. The policies that were adopted by newly independent countries were characterized by an unprecedented degree of hostility towards foreign investors and had critical impacts on national legal frameworks.25 In particular, in addition to the nationalization of foreign enterprises and prohibitions for foreign investors to enter some markets, local equity requirements started to make their general appearance in regulatory frameworks through the enactment of foreign investment codes. Numerous countries now required foreign investors to operate via joint ventures with a local partner or the state itself in order to penetrate host state markets. However, the state planning model and the policy of self-reliance adopted by many newly independent countries rapidly became unsustainable. Indeed, the state

19

Sornarajah (2010), p. 63. Mason (1958), p. 43. 21 For accounts of this dynamic in different countries see e.g. Edwards (1995), p. 173 and Salacuse (1980), p. 321. 22 Salacuse (2013), p. 62. 23 For an account of this dynamic in African countries, see e.g. Akiwumi (1975) and Sebalu (1972), p. 360. 24 UNCTAD (1993), p. 17 and Piper (1979). 25 See Salacuse (2013), pp. 63–66. 20

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planning model was based on the premise that development is a purely economic phenomenon and that in order to bring about economic growth, it would suffice to elevate the state as the ultimate regulator and actor in the domestic economy. The inefficiency of the state planning model and the realization that development cannot only be defined or measured in terms of economic growth and wealth but that it is also about the equitable distribution of the fruits of economic growth (such that it entails institutional, political and social dimensions) led to the privatization movement.26 This process started to take root in the mid-1980s and can be explained by several reasons. It rapidly became evident that the state planning model did not work and that it did not enable states to reach development as initially understood. Instead of leading to economic growth, state planning paralyzed domestic economies which were unable to function as a consequence of important debts and the constant injection of government subsidies into markets to support inefficient state enterprises. The general consensus was decisive: the state cannot do everything.27 Privatization thus appeared to be the solution to many of the problems faced by countries that had adopted the state planning model. In particular, it allowed achieving relief of government budget deficits by getting rid of unprofitable SOEs, reducing indebtedness.28 In addition, by allowing privately owned and operated companies to enter the market, privatization induced and stimulated competition in domestic markets. The rise of the privatization model was also encouraged by the new economic policies that emerged on the international level and enshrined in the Washington Consensus.29 The emphasis was now on the liberalization of economic activities, the opening of borders to trade and investments as well as the privatization of state corporations. The state planning model was also losing traction in Eastern Europe with the end of communism and the collapse of the Soviet Union, “depriv[ing] many developing countries of sources of moral and material support”30 for state planning and intervention policies. Accordingly, with the realization of the failures of state planning and of the benefits of trade and investment liberalization, the wind of privatization, fast-paced and massive,31 blew throughout the globe and triggered a plethora of changes in legal regimes. States started to increasingly rely on markets and switched from public to private ordering. Another consequence of the shift in models from state planning to privatization was a movement of both deregulation (to free economies 26

Corbridge (1995), p. 4. International Bank for Reconstruction and Development (1997), p. 23. 28 OECD (2003), p. 22. 29 The 1989 Washington Consensus between the World Bank, the IMF and the US Treasury focused on policies for developing states’ economic development and stabilization as well as on fiscal austerity, privatization and market liberalization and the promotion of foreign direct investment together with the enforcement of property rights. On the Washington Consensus, see generally Williamson (1990) and Stiglitz (2003). 30 Salacuse (2013), p. 66. 31 World Bank (1996), p. 11; Salacuse (2013), p. 68. 27

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from the grip of governments) and reregulation (to ensure that private actors and especially foreign multinational corporations entering domestic markets would abide by a regulatory framework).32 Finally, the privatization model was characterized by the opening of economies to foreign investors. This was not only a consequence of the privatization movement but it was seen as a necessity in order to answer the substantial deficit accumulated by states that crippled economies under the unsustainable state planning model. The consequences of privatization were thus substantial and led to an important increase in FDI flows.33 Despite this radical change in policy from state planning to privatization, one rule justified under the old ideology remained largely unchallenged: local equity requirements imposed on foreign investors. Indeed, this rule that was developed in a specific context (i.e. the era of state planning and intervention) was maintained and given a new meaning in the era of the privatized economy.

3.2

The Modern Justifications for Local Equity Requirements

Decades after the privatization movement replaced the state planning model, local equity requirements are still found in many domestic laws. The justification for such requirements under the state planning model was clear: the state is the main regulator and actor in the economy. However, the privatization model, being characterized by the disinvolvement of the state from economic affairs, prompted new justifications for local equity requirements. The survival of local equity requirements is, in fact, explained by how privatization itself took place. Indeed, privatization does not necessarily mean the absolute and unconditional transfer of the economic sphere in the hands of the private sector. In particular, although material privatization entails the transfer of both functions and assets into the private sector,34 privatization can also be formal (which involves the transformation of a public company into a private one with the state being the sole shareholder)35 or functional (which entails entrusting the private sector with the operation of a given company (transfer of functions) but keeping the company’s assets in the hands of the state (i.e. public-private partnerships)).36 With respect to FDI, privatization often meant selling or transferring state assets to private foreign investors.37

32

This process also guaranteed that private actors operating key functions of public services would continue to provide said services at a fair price while maintaining quality. For other types of regulatory changes entailed by the new model, see Salacuse (2013), pp. 71–73. 33 See UNCTAD (2010), p. 16 (Table I.5). 34 Weber and Alfen (2010), p. 60. 35 Weber and Alfen (2010), p. 57. 36 Weber and Alfen (2010), p. 59. 37 Hemming and Mansoor (1987), p. 6.

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Privatization thus created many new opportunities for foreign investors that were allowed to enter foreign markets, for example by acquiring shares in existing stateowned corporations. In a way, therefore, domestic investment laws providing for privatization programs can be “seen as yet another method of encouraging direct foreign investment and the national legislation governing the process as a specialized investment promotion statute”.38 However, this dynamic, and especially the mechanisms of formal and functional privatization, illustrates that although states were willing to engage in the process of privatization, it would have to be on their own terms. That is why one of the means39 by which sectors of the economy were privatized was through the introduction of private capital in existing structures in order to avoid having to sell state enterprises. In addition, the privatization of the economy was quickly coupled with the enactment of post-privatization control devices aimed at ensuring that at least minimum control over the activities of private actors would remain with the state. The interplay between privatization and post-privatization measures illustrates the careful balance that many states attempt to achieve through their domestic investment laws: the promotion of FDI and control over foreign investments. Accordingly, domestic investment laws are a good indicator of the policies pursued by states: an emphasis on post-privatization control devices often depicts the sceptical nature of states with respect to the benefits of FDI while an emphasis on the promotion and encouragement of FDI in domestic laws generally illustrates the positive stance of host states towards FDI and the will to signal a favourable and safe (i.e. certain and predicable) investment climate for foreign investors. Similar to the policies pursued by states, the proper equilibrium between privatization and post-privatization control devices changes over the course of time.40 As a post-privatization control device directed at foreign investors, local equity requirements have been—and still are—provided in numerous domestic laws. Two main categories of local equity requirements can be distinguished: the requirement to enter into a joint venture with the state or a state agency and the requirement to enter into a joint venture with a local partner which is not necessarily the state or a state agency. With respect to the former, such requirements are nowadays often justified on grounds of national or economic security and the protection of key national interests, i.e. to avoid seeing key economic sectors falling under the control of foreigners.41 The notion of “national security” is, however, protean, which can be

38

Salacuse (2013), p. 111. For other types of privatization transactions such as the public offering and private sale of shares, the sale of state assets, the reorganization of state enterprises into component parts, management and employee buyouts or leases and concessions and management contracts, see Salacuse (2013), pp. 118–120 and OECD (2010). 40 In this regard, although some periods were characterized by an emphasis on the encouragement of FDI, other periods were defined by an increase in means of restriction and control of FDI. See generally Sauvant (2011). 41 See UNCTAD (2003), pp. 6–9. 39

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one explanation why different countries impose local equity requirements in different sectors. With respect to local equity requirements mandating foreign investors to penetrate a host state market through a joint venture with a private local partner, they have often been justified on the basis of “indigenisation” policies which aim at guaranteeing the participation of local populations in the economy of the host state.42 Local equity requirements have also been justified on the ground that they maximize the investment’s potential in terms of host state development by allowing for a more efficient transfer of management skills and technology to that host state.43 In addition, they enable the development of domestic human capital44 and lead to faster and easier access to the local market for foreign investors. This last set of justifications suggests that local equity requirements can have positive impacts on the competitive state of a market by allowing the easier entrance on domestic markets and faster acclimatization by foreign investors with the domestic state of play as well as by facilitating transfers of technology. Nevertheless, competition is rarely explicitly discussed in the context of local equity requirements despite the far-reaching impacts of such requirements on the competitive state of domestic markets.

4 The Impacts of Local Equity Requirements on the Competitive State of Domestic Markets Local equity requirements were once justified by the need to ensure the dominant role of the state in all aspects of the economy in order to promote development. Today, they are justified by the necessity to protect national security but also in terms of facilitating transfers of technology and management skills within the host country. In addition, they are explained by the increased likelihood that the project will be managed in accordance with national interests or by “indigenisation” considerations comprising the need to include local populations and disadvantaged groups in the functioning of the local economy. Although such justifications are legitimate, they In Malaysia, for instance, as part of the country’s 1970s “New Economic Policy”, preference was given to Bumiputra (indigenous people) which required specific shareholding arrangements to ensure the participation of local populations in the domestic economy (see e.g. Milne 1976; Thillainathan and Cheong 2016). The same process took place in African countries such as in Nigeria that adopted indigenisation measures to ensure the divestment of foreign companies’ shares into local hands (see e.g. Beveridge 1991, p. 302; Tobi 1991; Osunbor 1988) and South Africa (see Section 2 of the Broad-Based Black Economic Empowerment Amendment Act, 2013, Act No. 46 of 2013, Government Gazette Republic of South Africa, Vol. 583, 27 January 2014, No. 37271) and Zimbabwe (see Section 3(1) of the Indigenisation and Economic Empowerment Act, 2007, Act 14/2007). 43 Another positive aspect of local equity requirements mandating the creation of joint ventures for the host state is that they ensure that a smaller portion of the profits generated by the economic operation will be repatriated to the investor’s home state. 44 Blomström et al. (2000), p. 30. 42

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are not always realistic or materialized. More importantly, however, one aspect of local equity requirements that is often absent from the debate is their potentially damaging and far-reaching impacts on the competitive state of a given market.

4.1

Preserving Monopolies: A Hidden Justification for Local Equity Requirements?

Local equity requirements might pursue legitimate objectives, even in the era of privatization. Nevertheless, pursuing legitimate goals, such as guaranteeing the participation of local populations in the economy of the host state, does not mean that local equity requirements cannot also have detrimental effects on economies. In particular, local equity requirements can negatively impact the competitive state of markets, often to the advantage of host states or local private actors. Indeed, opening sectors of the economy which are dominated by SOEs to foreign investors inevitably changes the status quo by introducing an element of competition on the market.45 The end of a monopoly means the end of the ultimate control over a sector and, perhaps more importantly, the sharing of profits. Local equity requirements allow states, however, to maintain their legal monopolies in diverse sectors of the economy even in the era of privatization. In essence, even though new actors (foreign investors) enter the host state’s market, they do not enter the market as new competitors but join forces with existing SOEs. Although this can favour both host states (which can maintain their monopoly) and foreign investors (which are “assured a share of the monopoly profits and a ready source of supply of products or resources”46), it is at the expense of consumers which remain trapped in a monopolistic market. The same is often true with respect to joint ventures with local partners which are not attached to the state. In such instances, local equity requirements can serve the goal of protecting or strengthening the interests of some national elites on domestic markets rather than pursuing the broader aim of benefiting the public interest.47 The economic objective of preserving or strengthening monopolies or oligopolies on domestic markets is never stated explicitly. Yet, despite local equity requirements sometimes being justified on the basis of legitimate reasons, divergent state practice with respect to the sectors in which local equity requirements are imposed seems to indicate that the anti-competitive justification of local requirements might be more important than it appears at first sight.48 This applies even through imposing such requirements to pursue anti-competitive goals is counter-intuitive in the era of

45

Sornarajah (2010), p. 64. Sornarajah (2010), p. 64. In addition, the local partner can act as an effective mediator with the local government. 47 Salacuse (2013), p. 94. 48 Salacuse (2013), p. 92. 46

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privatization that took place after the realization of the failures of the state planning model. In particular one of the reasons for privatization was the realization of the benefits of increased competition.49 As observed above, however, while fostering a competitive market was one of the main objectives pursued by many states following the failures of state planning, it would have to be on their own terms. In addition to the possible anti-competitive goals that can be pursued by host states through the imposition of local equity requirements, such requirements can also entail inherent (i.e. regardless of the motives for which states impose them) anti-competitive characteristics by forcing the creation of joint ventures between foreign investors and a local partner in order for the former to penetrate host state markets.

4.2

Local Equity Requirements and Joint Ventures: Between Pro- and Anti-competition

Local equity requirements necessarily entail the creation of a joint venture between the foreign investor and the local partner. This is partly why “[t]he joint venture has become the most important vehicle for foreign investment in recent times across the world”.50 The joint venture is a complex instrument, especially when it is the vehicle for competitors’ collaboration, which can have both positive and negative impacts on the competitive state of markets. In the specific context of international investment law, when they are created as a consequence of local equity requirements, they entail specific considerations.

4.2.1

The Anti-competitive Effects of Joint Ventures Established Through Local Equity Requirements

Setting-up a joint venture pursuant to local equity requirements directly impacts the competitive state of a given market as a consequence of the sole fact that such collaborations necessarily imply that from two competitors on the market, there is only one left: the joint venture.51 That is why joint ventures are generally associated with anti-competitive effects.52 The anti-competitive impacts of joint ventures can be 49

Salacuse (2013), pp. 113–114. Sornarajah (2010), p. 115. 51 Pitofsky (1986), p. 1608. 52 The US Supreme Court, for instance, made it clear that the first concern raised by joint ventures is their potential anti-competitive effects: “[o]verall, the same considerations apply to joint ventures as to merger, for each instance we are but expounding a national policy enunciated by the Congress to preserve and promote a free competitive economy” (United States v. Penn Olin Chemical Co., 378 US 158, 1964, p. 171). The EU also regulates joint ventures through its competition laws. See Council Regulation (EC) 139/2004 of 20 January 2004 on the Control of Concentrations Between Undertakings, OJ 2004, L 24/1 and Commission Notice Guidelines on the Applicability of Article 50

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especially important in contractual joint ventures that entail only a minimum amount or no integration at all and that can thus be analysed as “naked” cartels.53 However, integrated joint ventures (or “equity joint ventures”) created through shared equity in a common entity can also negatively impact the competitive state of the market.54 The anti-competitive impacts of establishing a joint venture emerge either between the joint venture partners or between the joint venture and its parent companies. Between the partners, a reduction of potential competition materializes by the effect the joint venture has to unite the interests of both (or more) parties into the sole interests of the joint venture.55 Between the parent companies and the joint venture, potential competition “may be inhibited if the existence of the joint venture reduces the incentive for each to enter the other’s market”.56 Although joint venture agreements generally include non-compete provisions to prohibit both partners from entering into a competitive relationship either among them or with the joint venture,57 local equity requirements provide yet an additional legal guarantee that this cannot happen in the context of international investment law.58 Joint ventures can be analysed as vehicles to reinforce cartel-like strategies by restricting market entry or access to an essential requirement to enter a given market. In particular, joint ventures can greatly affect competition if a given collaboration owns or develops an asset or facility that is necessary to remain competitive in a

101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements, OJ 2011, C11/1. 53 Naked agreements often refer to agreements between competitors aiming at fixing prices or to engage in other market policies that have direct effects on the market’s structure. 54 In particular, in case of a high degree of integration, the operation can be seen as “a full merger between two or more companies” (Pitofsky 1986, p. 1605). These joint ventures will thus be analysed under the rules applied to mergers. 55 This effect of setting-up a joint venture represents an advantage of equity-based collaborations compared to purely contractual projects in light of the dangers of uncertainty and appropriability hazards affecting most collaborations. 56 Brodley (1982), p. 1531. 57 For example, in the case of the joint venture between Brunswick and Yamaha the United States Court of Appeals, Eight Circuit, stated that “there was an agreement between Brunswick and Yamaha to limit competition between themselves in certain ‘non-exclusive markets,’ for the most part in Europe and South America. In essence the parties agreed not to seek out the other’s dealers in these markets, but rather to concentrate their competitive efforts against other manufacturers. This is merely an agreement between horizontal competitors to direct their efforts elsewhere”. (Yamaha Motors Co v. FTC, 657 F 2d 971, 981 (8th Cir. 1981), cert. denied, 50 USLW 3799 (US 4 April 1982)). In addition to non-compete provisions, joint venture agreements also often contain ancillary restrictions involving purchase and supply arrangements as well as intellectual property licences. Under competition laws, it is often required that such arrangements restricting competition must “truly contribute (that is, are ‘ancillary’) to the organization or further the purpose of the joint venture, and are not broader in scope than necessary” (Pitofsky 1986, p. 1611). 58 It is noteworthy that foreign investors have attempted to avoid local equity requirements by engaging in illegal activities involving holding shares through a nominee to meet the requirements of local participation. See Fraport AG Frankfurt Airport Services Worldwide v. The Republic of the Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007.

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specific market. By giving a significant competitive advantage to the members of the joint venture, the partners have the power to preserve the market for themselves, rendering their competitors unable to develop their activities, operate or expand on the same market successfully. Such anti-competitive behaviours are more likely to arise in cases where the partners are competitors with important market power (for example in terms of input or know-how) and which, by unifying their forces into a single structure, create a joint venture with monopolistic characteristics. With respect to local equity requirements, this characteristic will almost always be met, especially when the market is dominated by a state-owned enterprise. In such instances, local equity requirements do not create a joint venture with monopolistic characteristics but rather reinforce an existing monopoly. This is also true where local equity requirements allow partnering with a local private actor in which case the requirements can aim to protect local champions. In the light of the anti-competitive effects that joint ventures can have on a given market, it is sometimes argued at the formation stage of the joint venture that the impacts of the contemplated vehicle on the competitive state of a given market are only theoretical. It has also been contended that without the creation of the joint venture, the parents would not be able to enter the market and that it is thus preferable in terms of competition to create the joint venture rather than not.59 Others have opined that without the joint venture, it would be less likely that the parent companies would enter the market.60 It has also been explained that the entry of at least one of the parties is more likely in the absence of a joint venture.61 Finally, it has been argued that if the different economic actors are willing to enter the market independently, it would take more time since they need to be self-financed and acquire the necessary resources (for example, technology and equipment), and that it

59

Beside representing an access to additional resources—often taking the form of extra capital that is invested in the project by the other partner(s)—joint ventures also provide an access to complementary resources which are sometimes critical to enable the entry on a given market. These complementary resources can vary in type: material (for example, specific machinery) or immaterial (for example, intellectual property rights which often play an important role in R&D joint ventures) and will often be indispensable for the development of new products. One example which illustrates this indispensable element of complementarity can be found in the childhood vaccine industry in which to produce a “multi-valent” vaccine multiple vaccines protected by patents owned by different companies had to be combined. In order to develop the “multi-valent” vaccine, the different patent holders created a joint venture (see Kattan 1993, p. 940). This complementarity provided by joint ventures is very important: while “it is increasingly necessary to specialize within certain areas, [m]ost firms do not have the resources to become experts in all of the technologies required of an effective competitor” (Piraino 1994, p. 887). In this context, joint ventures offer the possibility for competitors to benefit from their respective specialized assets and knowledge in order to be more efficient on the market. For example, General Motors (GM), through its joint venture with Toyota, became more efficient by learning manufacturing techniques, which ultimately led GM to produce a new compact car (see Piraino 1994, pp. 887–888). 60 See Sherman and Willet (1967), pp. 400–403. 61 See generally Goldberg and Moirao (1973).

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would thus “reduc[e] the benefits of new entry”62 particularly in comparison with their immediate entry in the market by way of a joint venture. Many of these considerations are not, arguably, applicable with respect to joint ventures created as a consequence of local equity requirements. Indeed, foreign investors deciding to invest abroad are generally already well established in their home countries. Furthermore, foreign investments are increasingly undertaken by multinational corporations63 that have both the necessary financial capacity, resources and expertise in conducting commercial operations to penetrate a market alone. For the same reasons, not entering into a joint venture should not significantly delay such foreign investors from entering the market of a host state. It has been argued that without the joint venture it would be less likely that the parent companies would enter the market or, alternatively, that the entry of at least one of the parties is more likely in the absence of a joint venture. However, since the entrance of a foreign investor into a host market with local equity requirements will generally involve partnering with a domestic actor (whether public or private) already operating in that given market, these arguments do not apply.

4.2.2

The Pro-competitive Effects of Joint Ventures Established Through Local Equity Requirements

Despite the strong collusive and anti-competitive effects inherent to joint ventures, these collaborations also have pro-competitive impacts that are materialized in terms of economic efficiency64 and which are put forward to justify local equity requirements. In particular, one of the major advantages the joint venture structure provides to the partners is its intrinsic reduction of risks. Indeed, in the sectors of the economy where the costs associated with some products is extremely high, few firms dare enter the market alone, especially if it is a foreign market.65 In this context, entering into a joint venture allows the participants to share the investment of capital in the project.66 In addition, the competitors involved in the joint venture lose all incentives to act opportunistically as the setting-up of a joint venture involves the creation of a

62

Brodley (1982), p. 1532. UNCTAD (2018), pp. 2 ff. 64 It is worth observing that besides showing strong pro-competitive aspects, joint ventures sometimes have no anti-competitive effects at all on the market. Such is the case, for example, of joint ventures “set up to reap important economies of scale through common production of inputs accounting for a minor portion of the parent’s total costs” (OECD 2000, p. 9). 65 This is especially true when the commercial operation involves the development of a new technology. For an extensive study of the competitive effects and the antitrust treatment of R&D joint ventures, see generally Grossman and Shapiro (1986). 66 Sometimes, however, the contributions of the partners will not be similar. In the joint venture that took place between Danone and the Wahaha Group in 1996 for example, Danone was the only one to invest money in the joint venture while its Chinese partner, Wahaha, only transferred its trademark (see generally Dickinson and Harris 2008). 63

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common interest in the shared structure and the success of its activities.67 Establishing a joint venture thus gets rid of the “free riding” problem and drastically reduces transaction costs that take the form of opportunism and problems of appropriability hazards to which collaborations are particularly vulnerable as a consequence of their inherent high degree of unpredictability.68 Equity-based joint ventures, in particular, answer such risks in two ways. First, the collaborators’ contributions taking the form of equity in the joint venture, it is in both their interests to protect the joint venture’s own interest, thus creating a “mutual hostage position”69 as “the ongoing returns to each partner are based on the profits of the venture as a whole (usually with distributions in proportion of equity shares), so that the incentives of the ‘parent’ firms are more closely aligned than in the case of an armslength transaction”.70 In addition, creating a joint venture eliminates risks of a duplication of activities, which often occurs in technology-intensive sectors. By joining their forces and working together on a same project, the collaborators will thus not only be more efficient, but they will also be avoiding the “shameful and needless duplication of effort”.71 Ultimately, the economic efficiencies generated by joint ventures and their pro-competitive effects are a direct consequence of the economies of scale created by the pooling of resources. For instance, it allows the parent companies to reduce costs of production or to benefit from a more efficient distribution network. Such economic efficiency can also benefit the consumers if it translates into a lower selling price on the market. Furthermore, for investments involving advanced technologies, the creation of a joint venture can lead to the promotion of innovation and to the introduction of more substitutable goods on a given market, making the market “self-

67 Oxley (1997), p. 390. See also Hagedoorn et al. (2005), p. 176 (equity sharing is “expected to align the motivation of the partners, creating mutual interests, which reduces the possibilities for opportunistic behaviour by partners”). 68 This is especially true in the case of R&D collaborations where “it is by definition impossible to contractually specify all concrete results” in advance (Hagedoorn et al. 2005, p. 176). 69 Kogut (1988), p. 321. 70 Oxley (1997), p. 390. This equity-sharing model also has the advantages of having a dissuasive effect on the parties to over evaluate their own assets when entering the joint venture. Indeed, these assets often serve as a basis to evaluate the respective shares of the parties in the jointly owned structure and each partner is thus likely to be careful when valuating the shares of the other party (ies) as the degree of control over the joint venture is generally proportional to the amount of shares owned in the shared company. Setting-up a joint—equity-based—structure will also have the advantage, compared to purely contractual collaborations, to provide the parties with an efficient control over the joint venture’s activities through a hierarchical type of governance in order to face the uncertainty often associated with collaborations. Indeed, an equity-based structure allows the parties to, “[t]hrough the board of directors, [. . .] monitor the use of contributed assets, the development of new assets, and the overall returns from the cooperative effort” (Pisano 1989, p. 112), which is particularly useful for resolving issues which were not anticipated at the formation stage of the joint venture or when facing a deadlock during the life of the joint venture. 71 Jorde and Teece (1989), p. 538, fn. 28 (quoting William Norris, CEO of Central Data Corporation).

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encouraging as the presence of those substitutable goods results in more incentives to innovate (i.e. to distinguish)”.72 However, in order for a joint venture to deploy its pro-competitive effects through enhanced economic efficiency, the joint venture must be—at least partially—integrated: it is commonly accepted that “[a] cooperative arrangement among competitors is only capable of generating efficiencies when the parties have achieved a true integration of resources”.73 Only then, the pro-competitive aspects of joint ventures will be able to outweigh their anti-competitive features. Indeed, if the joint venture does not entail at least a minimum amount of integration and rather limits itself to a coordination of parallel activities, it would in fact be an “empty shell” whose carapace would consist in sole agreements concerning prices, production of goods or division of territories. This type of collaboration represents “one of the essential features of a successful cartel”74 which results in a limited inter-partners efficiency, having negative impacts on the rest of the market and especially on consumers. With respect to joint ventures created pursuant to local equity requirements, the extent to which these collaborations deploy pro-competitive effects on the market is limited. Indeed, economic efficiency arises when two partners bring their resources and know-how together in order to engage in a common adventure. There must be chemistry or, at least, a common will to do things together as well as a minimum of trust. Although the condition of having, at a minimum, a partially integrated joint venture will often be met even if the joint venture is created pursuant to a local equity requirement, the fact that they are forced collaborations severely reduces their pro-competitive potential.75 Whereas a joint venture should bring together two partners pursuing a similar goal, foreign investors will usually not share the same objectives as their local partner, especially if it is a state-owned entity. Whereas foreign investors will often be driven by the prospect of rapid profit, SOEs will generally contemplate economic objectives of development on the long-term. Accordingly, “[t]he synergy that is essential for the success of the joint venture will be lacking in such an association and the potential for conflict is great”.76

72

Billiet (2009), p. 8. Piraino (1994), p. 885. 74 Piraino (1994), p. 884. 75 See Salacuse (2013), p. 97: 73

Strong arguments exist that these restrictions raise the cost of private capital to the host country and may prevent it from using the investment received to maximum advantage. For example, there is evidence that foreign investors in joint ventures tend to transfer less advanced technology to joint ventures than to wholly owned subsidiaries which give them a greater ability to protect their technology from appropriation by local partners and others. Also, in such imposed joint ventures, the investor’s commitment to the future development of the project may be less than optimal; consequently, it may focus on gaining revenues through its contractual arrangements with the project (for example as a supplier of technology) rather than as a project owner. 76

Sornarajah (2010), p. 64.

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Both partners to a joint venture must be able to have a say in the conduct of their joint operations. However, local equity requirements generally insure that the majority of the shares and, more importantly, that the control of the joint venture, rests with the local partner.77 In addition, even if foreign investors might give priority to maintaining a dominant position in a given market, and thus be more inclined to subject themselves to the will of their local partner, the host state can at any time decide to favour the local partner by enacting laws that would disregard the interests of the foreign investor.78 The foreign investor has limited recourse to remedies in such an instance, especially if it wants to preserve a good relation with the state. Local equity requirements can thus severely impact the project’s potential for growth, either because of a lack of trust in the local partner, because of the local partner’s lack of resources or expertise or because the state is only interested in what is brought to the joint venture by the foreign investor. Consequently, joint ventures created pursuant to local equity requirements are less prone to deploy pro-competitive effects which can alleviate their inherent anti-competitive characteristics.

5 Concluding Remarks and the Way Forward Local equity requirements are not a new phenomenon in international investment law. Such requirements, initially justified on historical and ideological grounds when state planning was prioritized, have remained an essential component of domestic investment laws albeit justified on different grounds in the era of privatization. Although some justifications, such as the protection of national and economic security or indigenisation policies, are legitimate, another objective that can sometimes be pursued by local equity requirements is to restrict the competitive state of a given market through the preservation of monopolies or oligopolies. Indeed, by keeping control over foreign investments, host states safeguard their ability to protect domestic interest groups from competition by foreign investors or even to keep intact their own monopoly. Furthermore, investors willing to be at the mercy of host state decisions when entering into a joint venture with an SOE or with a private local partner can also benefit from such anti-competitive behaviour as, by doing so, they can enter a domestic oligopolistic or monopolistic market and benefit from this position. Regardless of the justifications put forward for local equity requirements, the latter inevitably impact the competitive state of markets through the creation of joint ventures. While joint ventures do not necessarily have anti-competitive effects and can, in fact, be beneficial to competition on a given market, when such collaborations are forced through local equity requirements, the pro-competitive effects of joint

77 78

Sornarajah (2010), p. 64. Sornarajah (2010), p. 65.

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venture are unlikely to outweigh their anti-competitive impacts. Indeed, if “[g]oing it alone’ is no longer an option for many [. . .] businesses”,79 forced joint ventures are not the most optimal avenue either. The desirability of local equity requirements in the era of privatization thus deserves serious consideration, especially in light of the fact that the legitimate objectives they sometimes pursue can be achieved by other means with less damaging impacts on the competitive state of markets. For instance, host states could provide incentives to foreign investors to include local populations in their commercial operations undertaken in the host state. Another such way, which warrants further investigation, consists in broader use of screening mechanisms. The screening of foreign investment is dealt with by administrative agencies that may require a feasibility study highlighting the benefits that a given investment entails for the local economy. Screening mechanisms also allow states to identify the dangers that may be associated with an investment for the local economy. In particular, screening mechanisms can allow states to refuse the entry of an investment to protect given segments of the economy, such as low-technology or labour-intensive sectors, as well as specific industries which raise national security concerns. With respect to competition, screening mechanisms such as those applicable in the EU through competition laws can be used to ensure that large foreign investors do not penetrate a market and drive out smaller local firms by abusing their dominant position. Although screening mechanisms and requirements raise some issues of their own, such as with respect to non-discrimination applied on a pre-establishment basis, this method of keeping some control over inward flows of FDI should be considered to a broader extent by host states.

79 Piraino (1994), p. 873. This is especially true for smaller businesses: not only will these smaller market actors benefit from the above-mentioned advantages but in addition, through joint venturing, these smaller firms become able to “achieve the types of economies of scale usually available only to larger businesses” (Piraino 1994, p. 886). In this perspective, a small business becomes able to compete with larger companies by proposing lower prices to consumers and to achieve the same production efficiency as their larger competitors. See Northwest Wholesale Stationers, Inc. v. Pacific Stationary & Printing Co., 472 US 284, 1985. These efficiencies, which are beneficial both for the collaborators and the consumers have been recognised by the US Supreme Court in the Pacific Stationary case. Indeed, the Court stated that “[t]he arrangement [at issue] permits the participating retailers to achieve economies of scale in both the purchase and warehousing of wholesale supplies, and also ensures ready access to a stock of goods that might otherwise be unavailable on short notice. The cost of savings and order-filling guarantees enable smaller retailers to reduce prices and maintain their retail stock so as to compete more effectively with bigger retailers” (p. 295) or to engage in large advertising and promotion campaigns “by collectively amassing a sufficient share of the market to make name brand promotion economical” (Kattan 1993, p. 939).

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Lukas Vanhonnaeker is a post-doctoral fellow at McGill University, Faculty of Law where he is conducting research in the field of international economic law with an emphasis on international investment law and arbitration, international trade law and international aspects of corporate law. Dr. Vanhonnaeker completed his bilingual (French/English) bachelor’s degree in law at the Facultés Universitaires Saint-Louis (Brussels, Belgium) in 2010 and his master’s degree in law at the Catholic University of Louvain, Belgium, in 2012. He received his LL.M. in international business law from the Free University of Brussels in 2013 and he also holds an LLM (2014) and a PhD (2018) from McGill University.

When State Enterprises Have Deeper Pockets: Ensuring Competitive Neutrality in Cross-Border M&A Phil Baumann

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Issue of Competitive Neutrality in IM&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The ChemChina-Syngenta Transaction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Economic Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 The Role of Chinese State Enterprises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Empirical Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Competitive Neutrality in IM&A Under the Current Investment and Competition Law Regime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Domestic Investment Screening Regimes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 How to Ensure Competitive Neutrality in IM&A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract State enterprises (SEs) are playing an increasingly important role in crossborder mergers and acquisitions (M&A). Due to their special relationship with the government, SEs often have undue competitive advantages over their private competitors. SEs may leverage these undue competitive advantages in cross-border M&A to outbid private investors. This results in an inefficient allocation of production resources and prevents private competitors from reaching their full potential of economic efficiency. Although this problem is accentuated in the context of Chinese SEs, it is also of general importance, as SEs in numerous countries benefit from undue competitive advantages. However, the current national competition laws, international investment agreements (IIAs) and domestic investment screening regimes inadequately address this concern. In particular, international investment agreements traditionally focus on investor protection and less on achieving P. Baumann (*) Center for Public Economic Law, Zurich University of Applied Sciences, Winterthur, Switzerland e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_4

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competitive neutrality. Even the provisions on competitive neutrality contained in recently concluded international investment and trade agreements do not apply to cross-border M&A. Investment screening regimes, on the other hand, primarily assess foreign acquisitions with regard to national security. Merger control under competition law also has a limited focus. It deals with the impact of M&A on the relevant markets and does not assess whether the acquisition itself is in accordance with the principle of competitive neutrality. Regulatory reform proposals in this regard are largely missing. A three-pillar approach, focusing on international investment principles, international investment agreements and domestic investment screening and competition law regimes, may prove useful for further regulatory attempts to ensure competitive neutrality in cross-border M&A.

1 Introduction State enterprises (SEs)1—enterprises that are either state-owned, state-controlled or whose commercial operations are de facto state-controlled or state-influenced—are playing an increasingly significant role in the global economy.2 This development has been reflected by the increasing share of state-owned enterprises (SOEs) among the world’s largest companies, the rising level of outward investments by SOE, the growing participation of SOEs in international trade and the amount of disputes involving SOEs under European Union (EU) and World Trade Organization (WTO) rules as well as bilateral investment treaties (BITs) and national competition laws.3 A main driver in this rapid internationalization of SEs has been international mergers and acquisitions (IM&A).4 Whereas fully SOEs attributed only 0.9% of total IM&A value in 1996, this number increased significantly to 7% in 2013.5 IM&A by SOEs peaked 2009 in the aftermath of the financial crisis and although, it subsequently decreased, it continued to grow much faster than overall IM&A in the following

1

As pointed out by Kowalski and Rabaioli (2017), p. 7, the definitions used of state enterprises, state-owned enterprises, state-controlled or state-influenced enterprises vary in the different legal and policy contexts in which they are used. Following Kowalski and Rabaioli (2017), the term SE in this chapter does not only apply to situations where there is a de jure ownership or control by a state, but also to enterprises whose commercial operations are de facto either influenced or controlled by a state. By using this rather broad definition, it is more likely that all relevant constellations are captured. It should be noted however, that many studies focused on state-owned enterprises (SOEs), which is the reason why this term is used when referring to the respective studies. 2 Biau et al. (2016), p. 1; Christiansen and Kim (2014), p. 8, with reference to several OECD studies measuring the prominence of SOEs among the world’s largest enterprises. 3 Kowalski and Rabaioli (2017), pp. 8 et seq. 4 Biau et al. (2016), p. 2; see also UNCTAD (2017), p. 38. 5 OECD (2016), p. 50.

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years.6 SOEs from emerging economies were mainly responsible for this development. In 2013, China alone accounted for approximately 50% of all IM&A by SOEs.7 The increasing importance of SEs in IM&A has raised certain concerns, which can be roughly divided into two categories.8 First, in comparison to private entities, SEs usually have different guiding objectives and governance structures. It is alleged that SEs are not making acquisitions based on commercial considerations but on policy objectives defined by their home state such as espionage, sabotage, critical infrastructure or natural resources control.9 Governments thus fear that if industries of strategic importance fall under foreign control, the foreign government might use this control to attack the host state.10 How to address these security concerns appropriately, without discriminating against foreign direct investment (FDI) is currently intensively discussed at the policy level.11 However, this chapter will address these national security concerns only in passing, when looking at different national investment screening regimes. Rather, this chapter is devoted to an issue related to the following second category of concerns. SEs often have inherent, merely government created, undue competitive advantages that are not available to their privately-owned competitors.12 For instance, these advantages can take the form of preferential financing from statebacked institutions, preferential regulatory treatment, or a privileged market position conferred by the government. In order to avoid market distortions, policymakers at the international and domestic level aim to ensure a level playing field between SEs and private entities.13 These efforts are commonly referred to as the concept of “competitive neutrality” which requires that no entity operating in an economic market is subject to undue competitive advantages or disadvantages.14 Whereas certain jurisdictions have implemented effective domestic competitive neutrality

6

Biau et al. (2016), p. 2; OECD (2016), p. 50. Kowalski and Rabaioli (2017), p. 9; see also Gökgür (2011), p. 1, pointing out that emerging market economies are increasingly encouraging their SEs to become multinational enterprises. 8 See OECD (2016), pp. 52 et seq.; see also Chaisse (2016a), pp. 239 et seq. These two categories are, however, related to each other and cannot be clearly separated. 9 See for an overview of this kind of concerns OECD (2016), pp. 59 et seq. 10 Chaisse (2016b), p. 586. 11 See e.g. The Economist, How to safeguard national security without scaring off investment, 11 August 2018, https://www.economist.com/leaders/2018/08/11/how-to-safeguard-national-secu rity-without-scaring-off-investment. 12 Willemyns (2016), p. 659; see Capobianco and Christiansen (2011), pp. 5 et seq. For a detailed assessment of competitive advantages by SOEs; see also already Nielsen (1981), pp. 57 et seq. 13 Yun (2016), p. 22. 14 OECD (2012), p. 9; see further Sauvant et al. (2014), pp. 97 et seq. For a concise description of competitive neutrality distinguishing between competitive neutrality at the domestic level (i.e., equal treatment of public and private entities within the same regulatory environment) and at the international level (i.e. in an economic market no entity provides over undue competitive advantages). 7

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frameworks, the relatively recent efforts to ensure competitive neutrality in the international context remain exceptionally challenging.15 In this regard, this chapter tries to shed some light on one competitive neutrality issue that has so far only received limited attention by policy makers and academic literature. Generally, on the IM&A market target companies are purchased by the bidder who is willing to offer the largest premium over the target’s stock price.16 However, by leveraging undue competitive advantages, SEs seeking to take over firms abroad may be in a better buyer position than their private competitors. In particular, SEs often have access to low-cost state-backed financing enabling them to outbid private investors in IM&A transactions. This may lead to distortions in investment and cause economic welfare losses. Against the background of SEs’ growing involvement in IM&A, it seems thus important to gain a deeper understanding of this issue, analyze how it is currently dealt with and to assess future policy options. The first section of this chapter will use the recent ChemChina-Syngenta merger as an example to illustrate how undue competitive advantages by SEs may influence IM&A transactions. It is followed by a brief general theoretical and empirical analysis of this issue. The second section then assesses to what extent international investment law, domestic investment screening regimes and competition law contribute to competitive neutrality in IM&A. It notes that this issue remains largely unaddressed by international investment law and domestic investment screening laws and that competition law can only prevent to a limited degree the use of undue competitive advantages by SEs in IM&A. The chapter concludes by discussing different possible approaches to ensuring a level playing field in IM&A in the future.

2 The Issue of Competitive Neutrality in IM&A 2.1

The ChemChina-Syngenta Transaction

In 2017, the China National Chemical Corporation (ChemChina) completed its $43 billion takeover of the Swiss agrochemical company Syngenta. ChemChina is fully owned by the Chinese Central Government and overseen by The State-owned Asset Supervision and Administration Commission of the State Council (SASAC), a government agency that acts both as holding company and as a supervisory authority.17 Shortly before the takeover ChemChina had become China’s largest chemical

15

Capobianco and Christiansen (2011), pp. 14 et seq.; see OECD (2016), pp. 151 et seq. For a description of the competitive neutrality frameworks in the EU and Australia.; see further Sauvant et al. (2014), p. 98 for a description of the challenges and policy options. 16 Gordon and Milhaupt (2018), p. 2. 17 Milhaupt and Zheng (2015), pp. 676 and 710.

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company.18 The transaction attracted worldwide attention, not only because of its size and its multijurisdictional focus but also as it represented the largest foreign acquisition by a Chinese company, public or private, to date.19 Just 2 years before, Syngenta had fended off successfully a takeover proposal by its American rival Monsanto, by raising regulatory concerns and by claiming that the offer significantly undervalued the Swiss firm.20 In comparison to the Monsanto offer, which provided for a 50% of the takeover price to be settled with own shares; ChemChina acquired all Syngenta shares in cash.21 At the time of the transaction, ChemChina was in a poor financial shape. It had neither generated profits nor sufficient free cash flows to make such a huge transaction and had high levels of debt on its balance sheet.22 The question thus arises how it was financially capable to support this acquisition and this method of payment.23 While ChemChina was quick to arrange for huge bridge loans to acquire the Syngenta shares, the long-term financing of the transaction remained unclear for quite some time, leading even to speculations of direct aid by the Chinese state.24 Eventually, while ChemChina supplied (for Western standards) little equity, Chinese state-owned or state-controlled financial institutions provided for the bulk of the funding by purchasing $18 billion in perpetual bonds (a hybrid financial instrument)

18

Collier (2018), pp. 12 et seq. Collier (2018), pp. 12 et seq.; Financial Times, ChemChina edges closer to sealing Syngenta deal, 31 May 2017, https://www.ft.com/content/2dc58756-45dd-11e7-8519-9f94ee97d996. 20 Reuters, Syngenta rejects $45 billion Monsanto takeover offer, 8 May 2015, https://www.reuters. com/article/us-syngenta-m-a-monsanto-reject/syngenta-rejects-45-billion-monsanto-takeoveroffer-idUSKBN0NT0JM20150508. 21 Neue Zürcher Zeitung, Wie chinesisch wird die Schweizer Syngenta?, 5 April 2017, https://www. nzz.ch/wirtschaft/fragen-und-antworten-zur-uebernahme-durch-chem-china-wie-chinesisch-wirdsyngenta-ld.155475?reduced¼true. According to this report, the different deal structure seems to be one of the main reasons why the board of directors of Syngenta agreed to the deal with ChemChina and opposed the Monsanto-offer. 22 Collier (2018), pp. 89 et seq.; see also New York Times, To Pay for Syngenta, ChemChina Looks to Beijing for Help, 26 May 2017, https://www.nytimes.com/2017/05/26/business/dealbook/topay-for-syngenta-chemchina-looks-to-beijing-for-help.html. 23 Collier (2018), pp. 89 et seq., pointing out that ChemChina’s profit ratios were either negative or below average in the years before the Syngenta-Deal. 24 Financial Times, Beijing rules out direct aid of ChemChina’s $44bn Syngenta purchase, 28 September 2017, https://www.ft.com/content/4a449fc4-a411-11e7-9e4f-7f5e6a7c98a2. 19

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from ChemChina.25 The cost of this perpetual debt was not disclosed and it even remained unclear if regular interest payments were to be expected.26 The information available does not allow to unambiguously assess whether the financing granted to ChemChina by the Chinese state banks was at market conditions. However, the characteristics of the transaction give legitimate cause for speculation that a SE with weak financials was only able to conclude a significant cross-border acquisition by means of preferential financing provided by state-owned banks. This is all the more remarkable given that the transaction was subject to detailed regulatory review.27

2.2

Economic Implications

The ChemChina-Syngenta example illustrates how SEs may leverage their undue competitive advantages in IM&A. However, one might question—and in fact some do—why this should even be an issue. In order to answer this question, the economic implications of such behavior need to be assessed. IM&A can increase economic efficiency as merging companies achieve economies of scale and scope and thus improve productivity.28 In addition, IM&A transaction enable management innovation, the purchase of weak firms and moving capital from declining to growth sectors. Further, available evidence suggests that IM&A creates a more competitive business environment in the host state thereby leading to a more efficient use of resources in the host economy and higher productivity of domestically owned companies.29

25

Financial Times, ChemChina edges closer to sealing Syngenta deal, 31 May 2017, https://www. ft.com/content/2dc58756-45dd-11e7-8519-9f94ee97d996; New York Times, To Pay for Syngenta, ChemChina Looks to Beijing for Help, 26 May 2017, https://www.nytimes.com/2017/05/26/ business/dealbook/to-pay-for-syngenta-chemchina-looks-to-beijing-for-help.html. The Chinese financial institutions were Bank of China ($10 bn), China Reform Holdings ($7 bn) and China Reform and Industrial Bank ($1 bn). As a foreign bank, Morgan Stanly bought $2 bn in convertible preference shares. 26 New York Times, To Pay for Syngenta, ChemChina Looks to Beijing for Help, 26 May 2017, https://www.nytimes.com/2017/05/26/business/dealbook/to-pay-for-syngenta-chemchina-looksto-beijing-for-help.html. According to Lin and Milhaupt (2017), pp. 24 et seq., due to the absence of default, SOEs in China not only benefit from preferential access to bank loans from the state-owned banking sector but also from preferential access to low-cost capital provided by the bond market. 27 The ChemChina-Syngenta deal was reviewed by 13 regulatory authorities. Among others, it was subject to EU and U.S. antitrust approval and was assessed by the Committee on Foreign Investment in the United States (CFIUS) and the Swiss Takeover Board (see Neue Zürcher Zeitung, Syngenta auf der Zielgeraden, 8 February 2017, https://www.nzz.ch/wirtschaft/vor-chem-chinauebernahme-syngenta-mit-gewinnrueckgang-ld.144271). 28 Jones and Davies (2014), pp. 453 et seq. With further references. 29 OECD (2007), pp. 68 et seq.

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However, these positive effects only hold true if the IM&A market is not distorted. In a competitive market for corporate assets, the price for foreign assets acquired reflects the discounted present value of the assets when used in an efficient and profit-maximizing way.30 Therefore, the asset will be awarded to the investor who can make the most efficient use of it and thus generate the greatest profit, as he will offer the highest price. If in this process SEs provide over an undue competitive advantage over conventional acquirers, the allocation mechanism is likely to be distorted.31 The price offered by the SEs for the assets will be inflated by undue competitive advantage (for example, the cheaper financing). If this inflated price is high enough, private investors who could potentially use the assets more efficiently are outbid and thus crowded out of the IM&A market by SEs. This results in an inefficient allocation of resources and prevents private competitors from reaching their full potential of economic efficiency.32 Consequently, both allocative and productive efficiency decrease, leading to welfare losses.33 Some observers, however, do not consider the crowding out of private investors by SEs to be an issue of severe concern. According to their reasoning, it is even for the benefit of shareholders of the acquired companies in host economies as they receive an above market premium from the overpaying SEs.34 Further, they argue that governments face financial limits to their ability to support SEs. Therefore, SEs will have to re-sell acquired assets eventually, if they are not able to run them efficiently. At this point, efficient private investors will be able to re-enter the market.35 This argumentation does not seem to adequately address the concerns described above. First, it does not take negative welfare effects to society into account, which are caused by the inefficient allocation of resources and the resulting productive inefficiencies. Secondly, it fails to recognize the dynamics of competition. Private competitors may not be in a position to hold out until SEs exit the respective market again. Rather, if the asset to be acquired is essential for future company growth, private entities may be forced out of business if they are outbid by inflated SEs’ takeover offers. Leaving this issue unaddressed is thus not an option.36 Finally, it should be mentioned that a rather new line of research is evolving about the distortion of competitive neutrality in outward FDI by home country measures (HCM).37 HCM are advantages granted by the home country government that are

30

Globermann (2015), p. 1. Gordon and Milhaupt (2018), p. 36. 32 Gordon and Milhaupt (2018), p. 36. 33 Geddes (2004), p. 29. 34 Globermann (2015), p. 2. 35 Globermann (2015), p. 2. 36 See also Nakagawa (2012), p. 2. According to Healey (2015), p. 12, in Australia, entry in newer markets by SEs had the capacity to take business away from private competitors that were more efficient if issues of competitive neutrality were left unaddressed. 37 Sauvant et al. (2014), pp. 4 et seq. 31

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specifically meant to facilitate, support or promote outward FDI.38 In this chapter, however, the cause of concern is the undue advantages of SEs, regardless whether these advantages were provided in connection with outward FDI or are completely unrelated to it. The scope is therefore broader, whereas HCM may be considered as a subset of such general undue advantages.

2.3

The Role of Chinese State Enterprises

Chinese SEs are of particular interest in this context, since, as mentioned above, they have become an increasingly important player in outbound IM&A transactions.39 In 2016, for example, Chinese companies invested $92 billion in cross-border acquisitions, corresponding to 10% of the worldwide total and clearly outspending the United States of America (USA) with $78 billion.40 According to one estimate, Chinese SOEs were responsible for 64% of total Chinese investment in Europe and North America in 2017.41 It is further argued that due to extensive government involvement in the economy and financial system, Chinese SEs often enjoy undue competitive advantages, which have been instrumental in easing the costs of their acquisitions abroad.42 In particular, it is reported that Chinese SEs are granted cheap loans by state-owned banks, receive tax privileges, and benefit from privileged market access.43 Such privileged access to finance allows Chinese SEs to make generous offers, when bidding for foreign acquisitions. Although, the issue of competitive neutrality in IM&A is accentuated with regard to Chinese SEs it should be noted that it is not merely a China-related problem. SEs in many jurisdictions benefit from undue competitive advantages, which can be leveraged in outbound IM&A deals.44 In Switzerland for example, both the telecommunication company Swisscom, which belongs to 51% to the Swiss state, and the fully state-owned postal service provider “Die Schweizerische Post AG” received substantially higher credit ratings than they would have been awarded

38

Sauvant et al. (2014), pp. 11 et seq. Gordon and Milhaupt (2018), pp. 9 et seq.; see generally for the rise of China’s outward FDI Sauvant and Nolan (2015), pp. 893 et seq. 40 UNCTAD (2017), p. 231; Gordon and Milhaupt (2018), p. 3. 41 Baker McKenzie, Rising tension, assessing China’s FDI drop in Europe and North America, 2018, https://www.bakermckenzie.com/en/insight/publications/2018/04/rising-tension-china-fdi. According to UNCTAD (2018), pp. 6 and 85, recently, Chinese investment in Europe and North America has dropped, which is partly attributed to growing regulatory scrutiny towards Chinese investment in these regions and Chinese policies clamping down on outward investments. 42 Briguet (2018), p. 852; Guo and Clougherty (2015), p. 144; Milhaupt and Zheng (2015), p. 707. 43 Guo and Clougherty (2015), pp. 144 et seq. 44 Nielsen (1981), pp. 58 et seq. 39

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without the assumption of implicit government support.45 As a higher rating translates into lower borrowing costs, both Swiss SEs might have used this advantage for their acquisitions of target companies abroad. SEs in numerous countries enjoy this financial advantage of perceived government guarantees.46

2.4

Empirical Evidence

Whereas the theoretical concept of the use of undue competitive advantages by SEs is intuitive and anecdotal evidence to support it seems readily available, the picture becomes more nuanced when the available IM&A data is assessed. This is demonstrated by the most frequently raised distortion of competition: preferential financing for SEs. The first starting point to determine whether SEs benefit from preferential financing in IM&A is to analyze the premiums paid by SEs in their acquisitions. It is argued that using the discounted cash flow analysis as valuation method, SEs with lower cost of capital can attribute a higher present value to future free cash flows due to a lower discount rate.47 More generally, all other things being equal, if a SE has lower capital costs, it has more resources available to pay for an acquisition. Therefore, one would expect that SEs offer higher prices than their private competitors for target companies in IM&A. Analyses conducted by the Organisation for Economic Co-operation and Development (OECD) in this respect show that compared to privately owned companies, SOEs pay on average substantially more for the acquisition of smaller stakes in their targets. However, SOEs generally do not seem to pay higher premiums for targets than their private competitors.48 In contrast, studies concerning IM&A by Chinese SOEs observe that Chinese SOEs symptomatically pay relatively high acquisition premiums.49 The modality of payment and financing chosen by SEs is another indication that SEs use their preferential access to capital in IM&A transactions. Generally, firms have three available options for financing IM&A: assets—including cash—debt and equity. Shareholders of potential targets always prefer cash over equity as payment, as the latter contains the risk of dilution. Firms will move from cash to debt and

45

Credit Opinion by Moody’s, 7 April 2017, https://www.swisscom.ch/content/dam/swisscom/de/ about/investoren/fremdkapital/2017/moody-s_credit-opinion20170407.pdf.res/moody-s_creditopinion20170407.pdf; Credit Rating by Standard and Poors, 19 December 2016, https:// geschaeftsbericht.post.ch/app/themes/post-gb/downloads/de/DE_Post_S&P_Ratingreport_2016. pdf. 46 Christiansen and Kim (2014), p. 17. 47 OECD (2016), p. 55. 48 OECD (2016), p. 59. 49 Guo and Clougherty (2015), p. 148 with further references. For instance, Guo and Clougherty (2015), p. 148, found that Chinese SOEs engaging in North American acquisitions pay premiums of 96% whereas the average premiums paid for US targets are in the range of 30–50%.

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finally equity the more they are faced with capital constraints. SEs benefiting from preferential financing would thus be expected to finance larger proportions of their M&A-deals with cash than their private competitors would do. Pursuant to IM&A analyses, this seems to be exactly the case. SEs finance their deals by using a higher percentage of cash and internal funds and employing less debt and far less equity than private companies do. However, the lower use of equity may also be a result of their state-ownership.50 Finally, the interest rates paid by SEs can be assessed to evaluate whether SEs benefit from cheaper finance than private competitors. A study comparing per approximation the interest rates paid by SEs and private companies in the airline, electricity, mining, oil and gas and telecom sectors found the evidence to be inconclusive.51 Against the background of these somewhat inconsistent findings it has been pointed out that further analyses based on micro-level lending data is required to conclusively assess the extent of financial advantages enjoyed by SEs in IM&A transactions.52 Without intending to anticipate these future studies, it would seem odd if the preferential access to financing for SEs that has been identified in many jurisdictions, did not also affect IM&A.

3 Competitive Neutrality in IM&A Under the Current Investment and Competition Law Regime In contrast to cross-border trade, there is no explicit international governance regime for IM&A.53 Rather, the current international framework governing SE investments is highly fragmented and consists of a wide range of national and international regulations.54 For this reason, in this chapter it will not be possible to make an in-depth assessment of all the relevant legal fields that IM&A transactions touch on. However, the subsequent part aims to give an overview of how international

50

OECD (2016), pp. 55 et seq. Christiansen and Kim (2014), p. 22. 52 OECD (2016), p. 51. 53 Gordon and Milhaupt (2018), p. 2; see Nakagawa (2012), pp. 3 et seq., for an assessment of how undue competitive advantages of SEs are addressed under the multilateral rules of trade, emphasizing that WTO law does not secure a level playing field between SEs and private entities in investment markets; see also OECD (2016), pp. 83 et seq. and 156, pointing out that trade regulators are generally well equipped to deal with undue advantages of SEs in the global trading system; see further Wu (2016), pp. 302 et seq., describing with reference to recent WTO case law, that preferential loans provided by state-owned banks are considered to be subsidies subject to WTO-rules if such state-owned banks exercise governmental functions. 54 See for instance Chaisse (2016a), p. 247, stating that foreign direct investment is also covered through the General Agreement on Trade in Services (GATS) commercial presence mode of supply. However, with regard to the issue at hand it seems unlikely that the basic principles and general obligations of the GATS will have a disciplinary effect. 51

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investment law, domestic investment screening regimes and competition law deal with this issue.

3.1

International Investment Law

In recent decades, international investment law has mainly developed around international investment agreements (IIAs).55 Two major types of IIAs are to be distinguished: bilateral investment treaties (BITs) and multilateral preferential trade and investment agreements.56 Traditionally, the aim of BITs is to grant certain rights to and ensure protection of foreign investors. Considerations regarding competitive conditions and ensuring a level playing field are not their primary purpose.57 Coming from this perspective it is not surprising that only few BITs address the issue of uneven competition between SEs and private companies at all. While some of these BITs contain specific provisions that aim to ensure fair competition between SEs and private companies, others even explicitly refer to the principle of competitive neutrality.58 However, the scope of such provisions is mostly limited to ensuring that private investments are on an equal footing with SEs when competing with them in one of the parties’ markets.59 This is usually expressed by obligations to treat (foreign) private companies equally with (domestic) SEs.60 In contrast, there are no requirements that SEs should not enjoy undue competitive advantages in foreign investment. Beyond BITs, multilateral preferential trade and investment agreements are of growing importance for the international investment agenda.61 Both, the recently concluded Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Comprehensive Economic and Trade Agreement (CETA) contain sections dealing with international investment and address issues regarding SOEs and competitive neutrality. The CPTPP is the first international agreement that went into force with a comprehensive chapter concerning SOEs.62 The chapter contains

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Subedi (2016), p. 8. Chaisse (2016b), p. 604, for a description of these two types. 57 Kowalski and Rabaioli (2017), p. 26; Sauvant (2018), p. 7. 58 Shima (2015), p. 15. 59 An illustrative example for such a provision is Article II.7 of the US-Senegal BIT (1983): “The Parties recognize that, consistent with paragraphs 1 and 2 of this Article, conditions of competitive equality should be maintained where investments owned or controlled by a Party or its agencies or instrumentalities are in competition, within the territory of such Party, with privately owned or controlled investments of national or companies of the other Party.” See also Article II.5 of the US-Bangladesh BIT (1986). 60 See the examples given by Shima (2015), pp. 15 et seq. 61 OECD (2016), p. 80. 62 Matsushita (2017), p. 188. In comparison to the initial Trans-Pacific Partnership Agreement (TPP) the chapter on SOEs has not been altered in the CPTPP. 56

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several rules on SOEs, which the contracting parties are obliged to comply with. These rules shall ensure that SOEs that have undue competitive advantages do not impede trade and investment activities by other companies.63 In particular, the contracting parties have to ensure that SOEs act in accordance with commercial considerations.64 Pursuant to Article 17.1 CPTPP, commercial considerations mean factors such as price, quality, availability, marketability, transportation, etc. that a privately owned enterprise in the relevant business or industry would normally take into account when taking a commercial decision. However, this obligation applies only to SOE’s purchases or sales of goods or services but not with respect to their cross-border investments.65 Further, the CPTPP raises the issue of non-commercial assistance provided to SOEs. According to the definition in Article 17.1 CPTPP, such non-commercial assistance includes for example loans and infrastructure that are provided to SOEs on better terms than those commercially available to such SOEs.66 While the CPTPP does not generally prohibit the (direct or indirect) provision of non-commercial assistance to SOEs, such assistance shall not cause adverse effects to the interests of other parties. Again, however, this obligation only applies to commercial assistance provided with regard to the production and sale of goods and the supply of services.67 Commercial assistance provided to SOEs in connection with their outward investments does not fall under the scope of this provision. The CETA seems to follow this pattern. It also provides over an obligation to act in accordance with commercial considerations, which is once more limited to the purchase and sale of goods.68 Consequently, although the CPTPP and the CETA deal more comprehensively with SEs and competitive neutrality, they fall short when it comes to ensuring competitive neutrality in the context of IM&A. Finally, the international investment regime is increasingly influenced by non-binding international investment frameworks.69 Given their non-binding nature, they may address competitive neutrality issues in IM&A more comprehensively. Indeed, the Sovereign Wealth Funds: Generally Accepted Principles and Practices (GAPP), usually referred to as the Santiago Principles, contain some provisions that might be helpful in this regard.70 For example, the GAPP require funding transparency and stipulate that investment decisions by sovereign wealth funds (SWFs)

63

Matsushita (2017), p. 190. I.e. Article 17.4(1)(a) CPTPP; see further Matsushita (2017), pp. 190 and 193; Yun (2016), pp. 8 et seq. 65 Kawase and Ambashi (2017), p. 19. 66 Fleury and Marcoux (2016), pp. 459 et seq. and Yun (2016), pp. 10 et seq., for a discussion of non-commercial assistance under the CPTPP. 67 Article 17.6 of the CPTPP. 68 See Article 18.5 para. 1 of CETA. 69 Joubin-Bret and Chiffelle (2017), p. 10. 70 Chaisse (2016b), pp. 627 et seq. and Kratsas and Truby (2015), pp. 139 et seq., for a short description of the GAPP. 64

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should maximize risk-adjusted financial returns and are based on economic and financial grounds.71 Furthermore, SWFs are not to take advantage of government influence or privileged information in competing with private entities.72 However, these principles only apply to SWFs and not all SEs and do not seem to address explicitly the issue raised in this chapter regarding competitive neutrality in IM&A.73 Accordingly, the recently concluded G20 Guiding Principles for Global Investment Policy-Making may be considered to be an important stepping stone for establishing a multilateral investment framework.74 Nonetheless, they remain silent on SEs’ use of undue competitive advantages in IM&A.75

3.2

Domestic Investment Screening Regimes

Most domestic investment regimes do not treat foreign SEs differently than foreign private investors.76 Faced with the growing importance of SEs as global competitors, however, some countries have set in place or strengthened domestic policy frameworks dealing with inward investment by SEs.77 In most cases, governments point to national security and national interests as well as the protection of strategic assets as justification for such measures. Consequently, domestic review of IM&A deals with SE involvement usually focuses on whether such transactions are compatible with the national security and national interest of the respective host country.78 In the following paragraphs it will be briefly assessed, to what extent the investment screening frameworks in the USA, Canada and Australia are also taking into account competitive neutrality when reviewing SEs’ IM&A deals.79 In the USA, the Committee on Foreign Investment in the United States (CFIUS) is the inter-agency body charged with reviewing the effects of “foreign governmentcontrolled transactions” on the national security.80 Due to the broad definition of “foreign government-controlled transactions” inward-transactions by SEs into the

71

See GAPP 4.1 and 19. GAPP 20. 73 Furthermore, SWFs provide over very specific investment patterns (risk-averse, passive, longterm oriented) that not necessarily apply to SEs in general (see Kratsas and Truby (2015), pp. 99 et seq.). 74 Joubin-Bret and Chiffelle (2017), p. 10. 75 Sauvant (2018), p. 10. 76 OECD (2016), p. 72. 77 OECD (2016), p. 71. 78 OECD (2016), p. 72. 79 Chaisse (2016a), pp. 252 et seq., and Chaisse (2016b), pp. 636 et seq., for a description of the according regulations in the UK, Germany and France. 80 50 USCA §4565(b)(2)(A) and (B). See Gordon and Milhaupt, pp. 22 et seq. and Schweitzer, pp. 259 et seq., for an overview of the national security review process in the USA. 72

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USA are thus automatically subject to investigation by CFIUS.81 In 2007, the foreign investment review process has even been amended to particularly toughen the examination of transactions involving SEs.82 Upon recommendation by CFIUS, the US President may block the transaction in question.83 While the existing investment review process concentrates on national security effects of the relevant transactions, there are currently reform efforts underway, that would allow CFIUS to consider also broader economic effects in their assessment.84 This is already the case under the Australian foreign investment framework. Foreign government investors must get approval by the Treasurer of the Commonwealth of Australia before acquiring a direct interest in Australia.85 When assessing investment proposals, the Australian government considers apart from national security also factors like competition and impact on the economy. With regard to investments by “foreign government investors”, it is further examined whether the investment is commercial in nature or pursues political or strategic objectives contrary to Australia’s national interest. In this regard, investments by foreign government investors operating on a full at arm’s length and commercial basis are less likely to raise national interest concerns.86 As a consequence, investments by SEs benefitting from undue competitive advantages might be likely to face higher scrutiny. Similarly, the Canadian foreign investment framework distinguishes between a national security review and a net benefit review. The latter applies to investments exceeding a certain threshold. When reviewing investments made by foreign SOEs, Canada is particularly considering the commercial orientation of and adherence to free market principles by the respective SOE.87 Finally, it should be noted that the European Union (EU) has recently adopted Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the EU.88 The regulation provides for greater scrutiny of 81

Shima (2015), p. 22. Enderwick (2017), p. 269. 83 Gordon and Milhaupt (2018), p. 24, who note that foreign acquires usually withdraw their filings before such negative decisions in order to avoid adverse consequences resulting from a blocked transaction. 84 Gordon and Milhaupt (2018), p. 24; see Kirchner and Mondschein (2018), pp. 19 et seq., for an overview of the proposed CFIUS reforms. 85 Treasurer of the Commonwealth of Australia, Australia’s Foreign Investment Policy, 2018 January 2018, https://cdn.tspace.gov.au/uploads/sites/82/2017/06/Australias-Foreign-Invest ment-Policy.pdf for an overview of the Australian regulatory regime for FDI. 86 Treasurer of the Commonwealth of Australia, Australia’s Foreign Investment Policy, 2018 January 2018, https://cdn.tspace.gov.au/uploads/sites/82/2017/06/Australias-Foreign-Invest ment-Policy.pdf stating that the national interest test affords the treasurer a broad discretion to reject foreign acquisitions. 87 Guidelines—Investment by state-owned enterprises—Net benefit assessment, http://www.ic.gc. ca/eic/site/ica-lic.nsf/eng/lk00064.html#p2. 88 See Svetlicinii (2018), p. 5, for a short overview of the regulation. Several member states of the EU already have specific rules governing foreign investments. See Jones and Davies (2014), pp. 465 et seq., for a description of the respective regulations in Germany, France, Austria and Italy. 82

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foreign direct investments by SOEs as member states and the Commission may take into account whether the foreign investor is “controlled by the government of a third country” when considering whether such investment is affecting security or public order.89 However, in contrast to the Canadian and Australian legislations, the regulation lacks provisions regarding commercial orientation or adherence to free market principles. In summary, the domestic investment screening frameworks generally do not distinguish between SEs and private entities as foreign investors. Further, inward investments by SEs are typically only assessed with regard to their implication on national security and national interests. Some countries also consider other factors when evaluating investment by foreign SEs, particularly the extent to which such SEs operate on commercial terms. However, the question whether a State enterprise has benefited from undue competitive advantages in the investment process is not part of the investment screening process.

3.3

Competition Law

Competition law plays an important role in ensuring a level playing field in markets where SEs and private actors compete.90 In this respect, the rise of IM&A deals and the growing importance of SEs as global investors has created additional complexity for the enforcement of domestic competition laws and has demonstrated a need for increased cooperation among local competition authorities.91 There are two entry points in competition law to enhance competitive neutrality in IM&A. First, competition law can prevent certain anti-competitive conduct by SEs. The unique characteristics of SEs, such as for example entrenched market positions or subsidies and public service obligations, may lead to specific anti-competitive conduct like predation by cross-subsidisation from subsidised non-commercial activities to commercial ones. Generally, competition law is believed to offer a wide range of disciplines to address such behavior.92 Provided that SEs’ businesses are of sufficient size and have sufficient impact on the market to fall in scope of competition law, competition law enforcement by the home state may thus reduce certain undue competitive advantages by SEs.93 Of course, this is only the case if SEs are not exempt from competition laws and face the same scrutiny by competition

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Article 4 of Regulation (EU) 2019/452. OECD (2016), p. 98. 91 Chaisse (2016a), pp. 243 et seq.; OECD (2016), p. 98; see further Weber (2016), p. 204. 92 OECD (2016), pp. 98 et seq. 93 Capobianco and Christiansen (2011), p. 22. 90

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authorities as their private competitors. In this regard, it is encouraging to note that emerging countries appear to be increasingly subjecting SEs to competition law.94 If SEs lose certain undue competitive advantages due to competition law, they cannot leverage these advantages for their IM&A. However, this only holds true for undue competitive advantages falling within the scope of competition law. Significantly, beneficial access to capital that SEs often enjoy usually does not belong to this category. Secondly, IM&A by SEs are often subject to merger control by competition authorities.95 Merger control under competition law aims at identifying competitionrelated concerns arising from M&A activities.96 Therefore, competition authorities will usually assess whether the IM&A transaction by the foreign SE will substantially lessen or prevent competition in the markets where the SE and the target company are active. This may be the case if the transaction increases the market power of the companies involved, resulting in higher prices for consumers or if it is to be expected that firms will be significantly more likely to coordinate and raise prices or otherwise harm competition after the transaction in terms of lower product quality or less innovation.97 Moreover, in order for merger control rules to apply, most jurisdictions require that control or decisive influence over the target company is acquired and that certain notification thresholds are met.98 The question whether the acquirer benefitted from undue competitive advantages when acquiring the target company, however, is generally not a factor to be considered in the competition law analyses when evaluating an IM&A transaction.99 Therefore, access to preferential financing by foreign SEs when carrying out IM&A transactions will typically not raise competition law concerns. Illustrative in this regard is the recent decision by the EU Commission on the acquisition of Syngenta by ChemChina.100 As part of its “single entity” assessment the EU Commission elaborated on the relationship of ChemChina and the Chinese government.101 In its extensive merger review it did not assess, however, whether ChemChina benefitted

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Nourry and Jung (2012), p. 5; see further Capobianco and Christiansen (2011), p. 26; see with regard to Chinese antitrust regulations Zhang (2015), p. 228, who is of the opinion, that due to the lack of independent and effective judicial supervision, it is unlikely that China will have an effective antitrust policy to regulate SOEs. 95 OECD (2009), p. 4. 96 OECD (2016), p. 106. 97 Capobianco and Christiansen (2011), p. 23; OECD (2009), p. 5. 98 OECD Secretariat (2016), p. 12. 99 See also Chaisse (2016a), p. 246, using the example of Canada to show that also the commercial orientation of SEs is typically not assessed under merger control. 100 Case No. COMP/M.7962 ChemChina/Syngenta, decision of 5 April 2017. 101 COMP/M.7962, paras 80–88, see further Svetlicinii (2018), p. 35. The EU Commission did not decide whether ChemChina is to be regarded as one single entity with other Chinese state-owned companies but simply assumed it in the sense of a “worst case”-assessment. According to the single entity theory, the EU Commission will consider SOEs a forming only one common undertaking if there is a common center of commercial decision-making, Briguet (2018), p. 841.

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from access to preferential financing when acquiring Syngenta. Accordingly, a broader application of the single entity theory in EU merger controls involving Chinese SEs, as some observers argue for in order to ensure competitive neutrality in IM&A,102 may subject more SEs to merger control but will be ineffective to prevent or sanction the use of preferential financing by SEs. The above analysis shows that due to its restricted scope of application, competition law is only of limited assistance in ensuring competitive neutrality in IM&A. Therefore, other means are required to ensure a level playing field between SEs and private investors. On the domestic level, a small but growing number of jurisdictions have enacted competitive neutrality policies ranging from subsidy control to regulatory impact assessment.103 These domestic competitive neutrality policies are tailored, however, to deal with domestic SEs. For this reason, even if such domestic competitive neutrality policies exist, they do not provide the tools to avoid the distortion of IM&A transactions by foreign SEs. For instance, the EU state aid rules, which are considered a very effective competitive neutrality framework, do not apply to subsidies granted by a third-country state to its SEs, even if such third-country SE conducts business within the EU.104 On the other hand, remarkably, EU state aid rules seem to apply when EU-companies invest in non-EU countries, thus ensuring competitive neutrality of EU-companies investing outside the EU.105

4 How to Ensure Competitive Neutrality in IM&A The preceding paragraphs have shown that despite the growing importance of SEs in IM&A, the issue of ensuring competitive neutrality in IM&A remains largely unaddressed by the applicable international and national investment and competition law regimes. Consequently, the question arises which regulatory approaches should be undertaken to ensure a level playing field in IM&A. In a first step, this section will lay out some general observations that are to be taken into account for any future regulatory effort. Subsequently, possible regulatory measures on the level of

102 Briguet (2018), pp. 852 and 857, stating that there should be a presumption that all Chinese SEs are government controlled. In contrast, Zhang (2017), pp. 216 et seq. Argues that the application of the single entity concept to Chinese SOE will lead to over inclusive and under inclusive outcomes. 103 OECD (2016), p. 113. 104 Frenz (2017), p. 195; Schweitzer (2010), p. 285. 105 See e.g. EGC, case T-422/07, Djebel – SGPS SA v European Commission, ECLI:EU:T:2012:11, concerning planned aid for a commercial company in the form of a soft loan in order to help finance an investment by that company in Brazil. The decision declared the aid to be incompatible with the common market.

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multilateral non-binding investment principles, IIAs, domestic investment legislation and competition law are discussed. The ultimate purpose of any regulatory reform should be to offer a level playing field between SEs and private actors and at the same time to ensure that the international investment environment remains open.106 Otherwise, there is a risk that the regulation itself will cause more welfare reduction through impeding investments than the unaddressed issue of competitive neutrality in IM&A it intended to solve.107 Further, ensuring competitive neutrality is an issue that transcends the boundaries of investment, trade and competition law.108 As each legal field is developed by different institutions and uses distinct legal instruments, there is a significant risk that the issue of competitive neutrality in IM&A is addressed incoherently.109 Therefore, in order to achieve competitive neutrality comprehensively, any regulatory action in this regard should be careful to take into account the efforts already undertaken in the different fields. Additionally, competitive neutrality in IM&A is by definition an international issue. For this reason, solely issuing and applying national laws (such as for example competition law) will lead to fragmented rules, instead of the required coherency.110 So far, competitive neutrality has been predominantly analysed with regard to SOEs.111 Several authors point out that the dichotomy between SOEs and privatelyowned enterprises (POEs) is not adequate to ensure a level playing field within the area of IM&A, as in many jurisdictions advantages such as HCMs are not only granted to SOEs but also extend to POEs.112 This chapter tried to address this legitimate concern by using the broad SE-definition instead of the term SOE. Regulators and policymakers are thus well advised not to base future legislation solely on ownership characteristics. Vice versa, the debate on HCMs’ interference with the principle of competitive neutrality should be broadened to include any undue competitive advantage in the IM&A context and not to focus exclusively on HCMs.

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Christiansen and Kim (2014), p. 48. Kratsas and Truby (2015), p. 106 are using this line of argument with regard to the regulation of SWF. For this reason, the Swiss government recently declined to introduce investment controls although it recognized the risk of violations of competitive neutrality by foreign SEs (see for the report by the Swiss government in this matter https://www.seco.admin.ch/seco/de/home/seco/nsbnews.msg-id-73973.html). 108 Kowalski and Rabaioli (2017), p. 32. 109 Chaisse (2016a), p. 258. 110 Weber (2016), p. 204 pointing out that that non co-ordinated competition laws will result in similar activities being treated differently due to geographical borders. See further Willemyns (2016), p. 670. 111 Sauvant and Nolan (2015), p. 900. 112 With regard to HCM see Sauvant and Nolan (2015), p. 900 and Sauvant and Ortino (2013), pp. 116 et seq. See further explicitly with regard to China Milhaupt and Zheng (2015), pp. 707 et seq. and Zhang (2017), pp. 210 et seq., noting that in China, the line between SOEs and privately-owned enterprises will become increasingly blurred. 107

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The most far-reaching measure to the matter at hand would be to establish a binding multilateral framework ensuring competitive neutrality comprehensively at the international level. Indeed, Gordon and Milhaupt suggest a global M&A regime, under which firms would only be eligible to engage in IM&A if they meet certain requirements.113 According to their proposal, SEs engaged in IM&A transactions would have to commit to commercial objectives, must have at least two members of their board of directors appointed by private investors and to open up at least 25% of their equity to private investors. The role of the appointed independent directors would be to check and confirm that the SE’s IM&A transactions are in accordance with commercial considerations and without government involvement. Although a detailed discussion of this proposal would go beyond the scope of this chapter, some obvious challenges (if not shortcomings) are apparent. The requirement to have two independent directors would interfere heavily with domestic corporate law. Furthermore, it is doubtful that these directors are able to remain truly independent in fulfilling these special review duties assigned to them. Rather, the proposed obligations are likely to create conflicts of interest and potentially be contrary to directors’ duty of care towards the company. Further, although opening up SEs to foreign investment may lead to improved governance and commercial orientation, it still seems questionable whether such a strict requirement is really required to ensure competitive neutrality in IM&A or if not other, less invasive measures may be better suited to this end. Applying this requirement as an essential prerequisite for IM&A by SEs runs the risk of deterring investment by SEs just on formal grounds. In addition, it has been pointed out that such multilateral, extra-territorially binding commitment is not feasible in the near future.114 Rather, it seems advisable to work towards international guidelines first, outlining what issues need to be further assessed and what domestic policy measures can be taken by countries to achieve a level playing field in IM&A without unnecessary protectionist consequences.115 This would promote a common understanding of the subject matter and serve as guidance for any further regulatory action in this regard.116 As the G20 Guiding Principles for Global Investment Policymaking seem to represent the current lowest common denominator on investment rule-making, it may be worth considering a corresponding further development of these principles. Subsequently, any binding agreement should focus on resolving the most important departures from competitive neutrality such as, for example, preferential financing of SEs.117 Particularly, IIAs are likely to be further amended to account for the 113

See for a detailed description of their proposal Gordon and Milhaupt, pp. 32 et seq. It must be noted, however, that their proposal is not primarily aimed at addressing competitive neutrality concerns. Rather, according to their reasoning, it intends to deal with the problem that Chinese enterprises act as “national strategic buyers”, whose transactions are motivated mainly by the pursuit of industrial policy or national security concerns. 114 Christiansen and Kim (2014), pp. 15 and 46; see also Sauvant (2018), p. 11. 115 OECD (2016), p. 155. 116 Joubin-Bret and Chiffelle (2017), p. 10. 117 Christiansen and Kim (2014), p. 46.

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growing challenge of investments by SEs. It is to be expected that countries will be reluctant to include broad binding commitments with regard to competitive neutrality in IM&A in these agreements.118 Therefore, a narrower approach, focusing on the funding and financing of SEs outward investments, may be advisable.119 In this respect, it may prove useful to extend the concept of commercial assistance used in the CPTPP to investments together with according transparency obligations. Thirdly and lastly, host countries may wish to amend their regulations applying to inward investments in order to maintain a level playing field between private entities and SEs in IM&A transactions. This is particularly the case, if the process to establish respective obligations at the international level should prove to become rather difficult and lengthy. Here, the spectrum of possible approaches is wide, ranging from mere disclosure obligations for SEs with regard to their (cost of) financing of IM&A, to according evaluation and blocking competences for competent domestic regulatory authorities. Competition authorities may be the appropriate government body to assess this issue, as they are often already involved in the respective transaction and due to their expertise regarding the assessment of competitive effects.120 Investment screening authorities on the other hand, assess investment from a more political perspective, which seems to be of less importance for the issue at hand. In any case, coordination of the various authorities involved must be ensured.

5 Conclusion This chapter has outlined that SEs which have undue competitive advantages and engage in IM&A activities may distort prices in IM&A transactions and thus cause negative welfare effects. Although this issue is accentuated in the context of Chinese SEs, it would be a mistake to consider it a purely China-related problem. Rather, undue competitive advantages for SEs, such as access to preferential financing, exist in numerous jurisdictions and SEs globally are becoming increasingly active in the IM&A arena. Against this background, it is important to understand how this issue is currently dealt with under the regulations covering IM&A. This chapter has shown that international investment law, domestic investment screening regimes and competition laws do not adequately address this problem. International investment law, mainly in the form of IIA, is still primarily focused on protecting investors’ rights and thus ensuring that private investments are on equal

118

Christiansen and Kim (2014), pp. 15 et seq. Christiansen and Kim (2014), p. 16. In this respect, it needs to be ensured that SEs’ business relations with state-owned banks are purely based on commercial grounds, OECD (2015), p. 48. 120 See e.g. Chapter 4a of the Finish Competition Act, according to which the Finish Competition and Consumer Authority has the authority to intervene, if SEs’ operation models or operating structures prevent or distort competition in the market. 119

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footing with domestic SEs when competing in the host state’s market. Some recently concluded IIAs contain provisions regarding SEs and competitive neutrality but they do not apply to IM&A. Domestic investment screening regimes, on the other hand, usually focus on interests like national security or critical infrastructure. Undue competitive advantages used by SEs in the acquisition process, however, are not of major concern to the authorities when examining the respective transactions. Finally, competition law is of assistance in restraining certain undue competitive advantages that SEs enjoy. However, the scope of competition law is limited and does notably not include financing advantages in particular. Merger review assesses the effects of an IM&A on competition in the relevant markets but does not examine how SEs succeed in securing the bid for an acquisition. Proposals for regulatory reform in this regard are largely missing and have remained vague or over-intrusive. As the issue of competitive neutrality in IM&A touches on many different legal fields at the national and international level, a threepillar approach is recommended. A common understanding is to be achieved via international investment principles. More specific obligations, e.g. focusing on preferential financing may be included in IIAs. Finally, governments intending to extend their domestic investment screening and competition law regimes to undue competitive advantages by foreign SEs should be careful to avoid protectionism.

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Phil Baumann is a post-doctoral research associate at the Center of Public Economic Law at the Zurich University of Applied Sciences. His research focuses on state-owned enterprises (SOEs), state aid law and competitive neutrality. Admitted to the Zurich bar, he previously worked as a senior associate in the banking and finance practice group of a major Swiss law firm in Zurich. He completed his bachelor’s and master’s degrees in law and economics at the University of St. Gallen and received his LL.M. in international economic law from the Chinese University of Hong Kong. He also holds a Ph.D. (Dr. iur.) from the University of Lucerne.

The Review of National Competition Authorities’ Acts in Investment Arbitration: Setting Limits to ‘Economic Lawfare’ in the 21st Century José Gustavo Prieto Muñoz

Contents 1 2 3 4

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Economic Lawfare and the Judicialization of Geopolitical Conflicts . . . . . . . . . . . . . . . . . . . . . . The Case of Gazprom and Ukraine’s Antimonopoly Committee . . . . . . . . . . . . . . . . . . . . . . . . . . Finding a Standard of Review of National Competition Authorities Acts in Investment Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Arbitrariness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Denial of Justice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Proportionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter explores what could be an appropriate standard of review that investment arbitrators could use to evaluate the lawfulness of acts of national competition authorities in the context of “economic lawfare”. The interest in international investment arbitration and competition law adjudicators is justified since both are empowered with effective coercion mechanisms. Also, both fields have developed a highly specialized legal vocabulary to codify economic transactions. Therefore, in the context of current developments especially with the intervention of state-owned enterprises in the markets of other states, it is possible that these two fields could be used (or abused) by the states involved in an international conflict. These dynamics are explored with reference to the arbitration case between Gazprom, the state-owned enterprise of Russia and the Ukrainian competition authority. The chapter argues in general for the need of a three-principles standard of review to examine the acts of national competition authorities in light of the current standards of treatment contained in international investment agreements (IIAs).

J. G. Prieto Muñoz (*) Università degli Studi di Torino, Turin, Italy © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_5

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1 Introduction Economic means have been used for centuries to influence an international conflict. In international relations and international law, scholars have focused on the concept of “economic warfare”, to describe various strategies and actions that aim to inflict economic damage on a perceived adversary. New actions on the global stage have revived this notion for the twenty-first century at a different level. For example, the new saga of economic sanctions and countermeasures in the aftermath of the annexation of Crimea, or the call from the 45th President of the United States for an open “economic war” against China reveal the role of economic measures on the international stage. Two factors in the emergence of the current “economic warfare” show how it differs from that of the past. First, “economic warfare” is now orchestrated in a more interdependent and interconnected global economy that is characterized by the activity of state-owned enterprises and sovereign wealth funds under different jurisdictions. Second, economic strategies are developed within the context of a pluralist international legal framework. Thus, the global legal arena is composed of overlapping legal regimes and authorities that regulate international economic transactions. Also, the reported existence of a new case of investment arbitration, Gazprom v. Ukraine, which content is still confidential, could point in the direction that soon investment arbitration could have the task of evaluating the decisions of national competition authorities in complex geopolitical scenarios. In the case, the Russian state-owned enterprise is seeking the review of the decision of the Ukrainian competition authority (Антимонопольного комітету України), that imposed a large fine that was later confirmed by the High Commercial Court of Ukraine. Therefore, these new challenges demand the closer study of the legal standards that could be used to give answers inside the legal sphere. In concrete, the chapter aims to explore what could be an appropriate standard of review that investment arbitrators could use to evaluate the lawfulness of acts of national competition authorities in the context of “economic lawfare.” The interest in these two fields is justified since both are empowered with effective coercion mechanisms. Also, both fields have developed a highly specialized legal vocabulary to codify economic transactions. Therefore, in the context of current developments, especially with the intervention of state-owned enterprises in the markets of other states, it is possible that these two fields could be used (or abused) by the states involved. The roadmap of the inquiry goes as follows. The next section (Sect. 2) provides some conceptual background on “economic lawfare” as a general analytical tool for the study of interactions between competition authorities and investment arbitration. The third part (Sect. 3) explores how this type of new conflicts unfolds by describing the dispute between Gazprom, the state-owned enterprise of Russia and the Ukrainian competition authority. In the last section (Sect. 4) I argue for the need of a three-principles standard of review to examine the acts of national authorities in

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light of the current standards of treatment contained in international investment agreements. This standard could be useful to review the lawfulness of the acts of national competition authorities without the need for an arbitral tribunal to decide upon a broader geopolitical context.

2 Economic Lawfare and the Judicialization of Geopolitical Conflicts The application of economic means to influence an international conflict is something that has been done for centuries. In international relations and international law, scholars have focused on the study of various strategies used to inflict economic damages on a perceived adversary. In the nineties, Førland defined those strategies under the concept of “economic warfare.” He details this concept as follows: “Economic warfare” here implies an intense, coercive disturbance of the economy of an adversary state, aimed at diminishing its power. It is analytically distinguished from ‘military warfare’, which attacks the adversary’s military capabilities, not its economic resources. In practice of course the two forms of warfare may overlap, as for example strategic bombing destroying military targets as well as industrial plants. Economic warfare can be waged separately - in which case the measures are often called ‘sanctions’ - or in conjunction with military warfare.1

Førland’s definition allows us to differentiate three elements contained in the notion of “economic warfare”: (i) Intention: distinguishing between hostile acts and those that constitute a concrete strategy to harm the economy of a perceived adversary; (ii) intensity: establishing that these actions are sufficient to destabilize the economy of the adversary; (iii) context: demonstrating that a state’s actions are consistent with a broader context of hostilities between two states. Taking these elements into account, the most common actions referred to in the literature as “economic warfare” are blockades and sanctions.2 However, in recent years, the notion of “economic warfare” has acquired new dimensions. The first relates to the involvement of “non-state actors” in international conflicts. This implies that new strategies implemented to disrupt an adversary’s economy may be complicated by the difficulty of not knowing in many cases who the combatants may be. For example, this might occur within the so-called “financial war on terrorism”3 aimed at freezing and confiscating terrorist assets.

1

Førland (1993), p. 151. In this context sanctions mean “economic measures – in contrast to diplomatic or military ones – taken by states to express disapproval of the acts of the target state or to induce that the state has to change some policy or practice or even its governmental structure” Lowenfeld (2009), p. 850. 3 This term started to appear in the literature after the 9/11 attacks in the United States. For an account of the first use of the term see, OECD (2004a) The Financial War on Terrorism. 2

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A second factor influencing the way in which international conflicts currently unfold is the insertion of new tactics and technologies, which can cause damage to an opponent without recourse to military force. These tactics are now referred to as “soft war”, a term that has been used to encompass “all non-kinetic measures whether persuasive or coercive”.4 The term “soft war” has been used in the study of a range of diverse topics including cyber warfare, economic sanctions, propaganda, civil disobedience, and others.5 Among these topics, the notion of “lawfare” has been used in recent years, especially by International Humanitarian Law scholars and practitioners. The word is a semantic fusion of “law” and “warfare” used to evoke a situation were legal norms and procedures can be used as an alternative means to harm an adversary. In 2005, in one of its earliest uses, Charles Dunlap6 defined the term as a “strategy of using – or misusing- law as a substitute for traditional military means to achieve an operational objective”. Since then the term has been used to describe different situations in which law, and especially international law, is involved in the way that international conflicts unfold. The problem with this broad definition is that it might affect the efficiency of law in the international sphere. If any use or misuse of law in the context of an international conflict could be interpreted as “lawfare” there would be no need to resort to the term “law” as an independent element in the first place. This definition, of course, also entails the need to define what uses of the law in war can be considered “abuse”. To address this question, Jannina Dill has decomposed the notion of “abuse of law” into two elements: on the one hand, the existence of a breach of law, and on the other, the existence of bad faith. In turn, bad faith implies the existence of a decision to “misrepresent the facts to induce compliance in a belligerent”.7 Despite these debates over the use of the term “lawfare” within the discipline of international humanitarian law, the term has not been used in international economic law more concretely in the sense of “economic warfare”. However, there are three reasons that justify the use of this notion also in an economic context. The first reason is that since the creation of international economic regimes, there has also been a proliferation of possible adjudicators in economic disputes. Usually this phenomenon has been studied under the topic of “fragmentation” in international law. The study of fragmentation first attracted attention when a working group of the International Law Commission (ILC) tackled the issue producing a report on fragmentation in 2006. Since then the term has been used in various contexts. Here the word fragmentation is used to stress a deep transformation of the law “from a stable, unitary system to a complex pluralism”.8 Second, the decision of an 4

Gross and Meisels (2017), p. 195. Gross and Meisels (2017). 6 Dunlap (2005), p. 95. 7 Dill (2017). 8 Koskenniemi (2009), p. 798. 5

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economic adjudicator can add legitimacy to a specific economic measure used in the context of economic warfare. In other words, a specific actor could take advantage of the state of fluidity in the global legal arena and use different legal regimes for strategic purposes, abusing international economic regimes in bad faith to legitimize a measure that intentionally targets the economy of an adversary. Finally, a third reason is the growing intervention of state-owned enterprises in a globally interconnected economy. A state-owned enterprise is defined as “all those non-financial companies where the state exercises control, regardless of the size of ownership”.9 Already in 2011, state-owned enterprises accounted for “about USD 2 trillion of assets and more than six million jobs in the Organisation for Economic Co-Operation and Development (OECD) member countries combined”.10 Therefore, these new actors could be means used by a controlling state to apply economic pressure on a third state, and the target of measures by a third state to disrupt the economy of the controlling state. In this context, the notion of “economic lawfare”, could be useful for studying situations where the following elements exist: (i) A broader strategy to harm the economy of a perceived adversary; (ii) the abuse of economic legal regimes— misrepresentation of facts in bad faith in a legal procedure—by an international actor that aims to legitimatize measures against the economy of an adversary, directly, or through a state-owned enterprise (SOE).

3 The Case of Gazprom and Ukraine’s Antimonopoly Committee The Gazprom v. Naftogaz legal saga following the “new gas war”11—that includes a legal process for national jurisdictions as well as several investment and commercial arbitration proceedings—could offer an example of how international disputes and economic tactics are judicialized in different legal regimes. In 2009, the Russian state-owned enterprise, with considerable participation from the international shareholders Gazprom and the Ukrainian SOE Naftogaz, entered into a contract for the transport of gas in Ukraine territory. However, according to Naftogaz, since the beginning of the contract in 2009, Gazprom systematically failed to comply with its obligations regarding the volume of natural gas transported which influenced the profitability of the economic operation.12 This dispute developed in the context of the conflicts and tensions between Russia and Ukraine after the annexation of Crimea to the Russian Federation in 2014 and

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European Comission (2016), p. 6. European Comission (2016), p. 7. 11 Financial Times https://www.ft.com/content/b85f8f48-2768-11e8-b27e-cc62a39d57a0. 12 Antimonopoly Committee of Ukraine [Антимонопольний Комітет України Рішення] (2016), p. 4, para. 35. 10

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the armed conflict in the Donbass—Donetsk and Luhansk regions. Since that year, relations between Ukraine and Russia had deteriorated to such a degree that they were categorized by a WTO panel as “emergency in international relations”.13 As result, a series of legal disputes arose between the SOEs of the two countries. In this context, in 2016, following a complaint from Naftogaz, the competition authority of Ukraine, the Antimonopoly Committee of Ukraine found the actions of Gazprom in violation of articles 13 and 50 of the Law of Ukraine On Protection of Economic Competition.14 It reached this conclusion by reasoning that Gazprom had abused its dominant position from 2009 to 2015, as a single buyer in the Ukrainian market, as defined in article 12 of Ukraine law regarding “protection of economic competition”.15 The defense of Gazprom relied on the fact that, according to the contract, which contains a clause stipulating arbitration under the Stockholm Chamber of Commerce, the competition authority did not have competence over the claim. The Ukranian Antimonopoly Committee rejected this argument by stating that the matter in question was not the execution or non-execution of the contract, but rather the actions taken by a business entity in the Ukrainian market and the consequent assessment of compliance with competition law in Ukraine. All of these actions fell, according to the committee, under its competence16 and it sanctioned Gazprom with a fine of 85,965,927,000 Hryvnas17 (equivalent to 3.2 billion USD). Gazprom used the Ukrainian legal system to review the resolution and the fine imposed, a process that ended with a resolution by the Highest Ukrainian Commercial Court deciding that the actions of the competition authority were legal, but additionally adjusting the amount of the fine to roughly 170 billion Hryvnas (equivalent to 6.4 billion USD). After this decision, it was reported that Gazprom initiated an arbitration based on the Ukraine—Russia bilateral investment treaty (BIT).18 However, since this process is not public there is not enough information available on the central claims Gazprom has made in the arbitration process.19 The Ukraine—Russia BIT was signed in 1998 and entered into force in 2000. Like most of the BITs signed during the nineties, it lacks a full development of the concepts addressed in current IIAs and it is even less developed than other BITs

13

The WTO panel arrived to such conclusion based on the analysis of several of UN General Assembly resolutions in WT/DS512/R (2019), Russia - Measures Concerning Traffic in Transit report, para. 7.121–7.123. 14 Antimonopoly Committee of Ukraine (2016), resolution 2, p. 9. 15 Antimonopoly Committee of Ukraine (2016), p. 4, para. 32. 16 Antimonopoly Committee of Ukraine (2016), p. 7 and 8 para. 64. 17 Antimonopoly Committee of Ukraine (2016), resolution, p. 9. 18 BIT Russian Federation – Ukraine BIT signed in Moscow, November 27, 1998. 19 Russian Energy Firm Gazprom Reportedly Notifies Ukraine of Bit Claim, Investment Arbitration Reporter 2018. https://www.iareporter.com/articles/russian-energy-firm-gazprom-reportedlynotifies-ukraine-of-bit-claim/.

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signed during the same time. For instance, the Ukraine—Russia BIT does not contain a fair and equitable treatment (FET) clause. The only standard relevant to this case could be found in a formulation of ‘unconditional legal protection’ in the following way: Each Contracting Party shall guarantee, in conformity with its legislation, the complete and unconditional legal protection of investments of investors of the other Contracting Party.20

Also, there is a standard of expropriation and “other measures” laid out in Article 5(1) of the treaty: The investments of investors of either Contracting Party, carried out on the territory of the other Contracting Party, shall not be subject to expropriation, nationalization or other measures, equated by its consequences to expropriation (hereinafter referred to as expropriation)

In this scenario, the review of the arbitration tribunal could operate if the decision of the Antimonopoly Committee of Ukraine and the subsequent decision of the High Commercial Court to confirm and double the fine was either “other measure” equivalent to expropriation, or a violation of the “unconditional legal protection” standard laid out in Article 2.2. The answer to these legal aspects of the decision implies a general context of ‘emergency in international relations’ between Ukraine and the Russian Federation and the judicialization of geopolitical disputes. In consequence, the decision of an arbitral tribunal could reflect the difference between the two narratives. The first one implies that Ukraine was the victim of an economic measure—the possible abuse of an SOE’s dominant position to reduce the supply of gas—to harm its economy. Under this narrative, the response first of the Ukranian national competition authority was only the recognition of national law, that later was ratified by the local courts. On the other hand, the second narrative portrays the Russian SOE as the target of an abusive legal process on the part of the competition authority of Ukraine, which imposed a considerable fine that damage its economy. In any case, it seems possible that with the proliferation of international adjudicative bodies, the fields of competition and international investment law will soon overlap in providing legal answers to the complex geopolitical conflict. In the end, these interactions could determine when countries are either the victims or authors of economic lawfare.

4 Finding a Standard of Review of National Competition Authorities Acts in Investment Arbitration If the plurality of legal regimes that can be applied to international economic transactions could be abused by an actor in order to inflict economic damage on the economy of an adversary, then competition and investment law could play an 20

Article 2.2 of the Ukraine – Russia BIT (1998).

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important role. These two fields, international investment law and competition law, are empowered by two interrelated elements. The first is the existence of effective coercion mechanisms within the competences of the adjudicators of each discipline. Both national competition authorities and investment arbitrators possess the legal capacity—the latter contained in national law, the former contained in IIAs—to categorize acts of the subjects controlled by the other as lawful or unlawful. Also, the categorization of an act as “unlawful” allows each adjudicator to impose and ensure the payment of a specific sum of money by the “transgressor”. In addition, both fields have developed a highly specialized legal vocabulary to codify the lawfulness of economic transactions. International investment law and competition law are complex disciplines whose epistemic communities have fostered the construction of legal categories and vocabulary. Therefore, in the context of tensions between two or more states, especially with the intervention of state-owned enterprises in the markets of other states, it is possible that these two fields could be used (or abused) by the states. In a hypothetical example, if State A wanted to expropriate an investor from State B, decades ago, it would have typically had to do so by calling the measure an “expropriation” or something similar. However, if State A decides to inflict economic damage equivalent to expropriation on an investor from State B, it is possible to do so by labeling a specific case using the vocabulary and conceptual categories of a highly specialized legal subfield, such as the term “abuse of dominant position”, a term taken from competition law. The difference between these two regimes is the fact that investment arbitration not only sources its authority from international agreements but that its mechanisms of execution are more effective outside the borders of a single state. In short, in a case where a competition authority imposes a fine on a foreign investor, this fine can only be executed within the territory of the state. If later the investor seeks redress for grievances in an arbitration process, a tribunal could find the actions of the competition authority attributable to the State to be a breach of international law and order compensation. The hypothetical amounts that could be granted by a tribunal could be collected in almost every place were a state holds assets, making the original fine of the competition authority ineffective. In sum, an investment tribunal would have the “last word” in these types of conflicts. An investment tribunal, however, cannot become the natural reviewer of a decision taken by a national competition authority, neither can it serve as a sort of appellate body for the court decisions that upheld competition fines. It is not sufficient that the actions of a competition authority be legal for them to be reviewed by international law, those actions must also violate the standards of treatment established in international investment agreements. There is a need for a standard of review that could be used to determine whether the actions of a competition authority in a country amount to an internationally wrongful act. In this sense, it can be assumed that the use of competition authorities as “weapons” of an economic lawfare constitutes an abuse of law contrary to the obligations of international investment agreements. The problematic part is to determine when such abuse occurs. In this regard transporting the “economic lawfare” from the international relations context into a legal arbitration process

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could be a difficult task. Consequently, a legal standard that transport the concept of economic warfare or lawfare will have to look not into the existence in a specific case the Førland’s elements (i.e. intention; intensity; context). In other words, to establish that one state has “abused the national competition law” imposing a considerable fine as a mean to disturb the economy of another state will put investment arbitration in a position of being “judges” of geopolitical conflicts. Also, arbitrators will have to “judge” the systemic independence of a national authority. Both functions were not the reasons that state parties of an IIA agree on arbitration as a method of dispute settlement. Then, it seems more plausible to construct a general legal standard of review that could be applied by investment arbitrators to determine the international lawfulness/ unlawfulness of any action of competition authorities. Two options could be used to form this standard of review. The first option is to use the indirect expropriation standard to evaluate the actions of national competition authorities. In general, conflicts that arise from foreign investment involve the deprivation or transfer of property from the investor to the state, a process also known as “nationalization”. However, the insertion in many IIAs of a prohibition on indirect expropriation represents a standard that also seeks to prevent any interference by a state in the enjoyment of the benefits from an investment, that would have similar effects to an expropriation.21 Nevertheless, there is no widely accepted definition of indirect expropriation. That means that it would be difficult to rely only on the concept of indirect expropriation in assessing the fines imposed by the national competition authority. The second option is to construct a more structured standard of review with the aim of providing a legal tool that could assess three concepts of international investment law: arbitrariness, denial of justice and proportionality. Thus, a standard of review based of these concepts provides a stricter assessment than indirect expropriation, when the motivation of a measure could be not only the intention of nationalization, but also inflicting economic damage to a third state.

4.1

Arbitrariness

There are several cases of international investment arbitration where protection against arbitrariness and discrimination is recognized and developed. In most cases, the prohibition is interpreted as part of the FET standard, but it is also a self-standing standard incorporated in IIAs that precludes states from acting in an arbitrary, unjustifiable or discriminatory way. There are two criteria in arbitral jurisprudence to identify when a measure taken by a state may be considered arbitrary or discriminatory regarding international law. The first more restrictive criterion is established when different arbitral tribunals 21

OECD (2004b), p. 4.

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interpret the term “arbitrary” in line with the criteria that the International Court of Justice (ICJ) developed in the ELSI case. Here the ICJ stated that “[a]rbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law [. . .] deliberate disregard of due process, an act that shocks, or at least surprises a sense of legal property”.22 A second, broader and less restrictive criterion is applied when international responsibility has been determined more generally without a particular analysis as in the case of Occidental v. Ecuador in 2004.23 In order to advance a more restrictive criterion it is possible to characterize an arbitrary measure as one that is taken with great discretion, beyond any legal standard, and that at the same time does not pursue any public purpose. The first element (excess of discretion) could be extracted from the reasoning of the Crystallex v. Venezuela ICSID tribunal that argued that a measure could be arbitrary if it is “not based on legal standards but on excess of discretion, prejudice or personal preference, and taken for reasons that are different from those put forward by the decision maker.”24 The second element of arbitrariness is the absence of a “legitimate public objective”. This idea was applied in the Genin v. Estonia case, where the tribunal pays special attention to establish whether a legitimate public objective was the reason for the act of the state. In this case, the competent Estonian authority canceled an operation license by alleging a legitimate public purpose for reforming its banking system during a period of economic transition. The international arbitral tribunal of the Genin case reasoned as follows: The Tribunal has further considered whether the Bank of Estonia’s actions constituted an “arbitrary” treatment of investment as that term is used in Article II(3)(b) of the BIT. In this regard, it is relevant that the Tribunal has found no evidence of discriminatory action. In addition, the Tribunal accepts Respondent’s explanation that it took the decision to annul EIB’s license in the course of exercising its statutory obligations to regulate the Estonian banking sector. The Tribunal further accepts Respondent’s explanation that the circumstances of political and economic transition prevailing in Estonia at the time justified heightened scrutiny of the banking sector. Such regulation by a state reflects a clear and legitimate public purpose.25

If the described elements of arbitrariness are analyzed together, i.e., the lack of a legal standard and the pursuit of a public purpose, it is not enough for a measure to simply mention any reason for acting an investment again. For instance, in the same Crystallex v. Venezuela case, the responded state denied a permit arguing about environmental reasons including a reference to “global warming”. The tribunal

22 Concerning Elettronica Sicula S.P.A. (Elsi) United States of America v. Italy, International Court of Justice, 20 July 1989. 23 Occidental v. Ecuador (I), LCIA Case No. UN 3467, Award, 1 July 2004. 24 Crystallex v. Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 578. 25 Genin v. Estonia, ICSID Case No. ARB/99/2, Award 25 June 2001, para. 370.

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concluded that there was not in question that Venezuela had the responsibility to raise concerns relating to “global warming”,26 but the lack of evidence and consistency with its previews acts of the state in this line constituted an arbitrary act.27 If the same elements are transposed to the analysis of a national competition authority acts, it implies that a decision could not simply be justified as pursuing a public purpose. In concrete, for imposing a large fine to an economic actor solely mention simply abuse due to the dominant position, without the proper motivation and evidence, could be considered as an arbitrary act.

4.2

Denial of Justice

The second concept that could form the standard of review for national competition authorities is the relation of an arbitrary act with the concept of “access to justice” or “denial of justice”, which implies that the competition system of a country includes the judicial system, as a whole, since the former one could prevent a wrongdoing. The denial of justice concept has been interpreted as an element that has to be respected by host states either as part of the international customary minimum standard of treatment, the FET standard or as an independent standard expressly incorporated into treaties. Regardless of the origin (custom, FET, or independent standard), the idea of denial of justice as an internationally wrongful act is difficult to prove. In this line, denial of justice cannot be attributed to the procedural unfairness of a national system, but only to actions that ‘shock’ an independent observer. The exhaustion of local remedies, therefore, has become an important element to define denial of justice. The Arif v. Moldova ICSID tribunal analyzed that investment arbitration is not intended to be a subsidiary system of dispute settlement, but deciding a claim for denial of justice, the conduct of the “whole judicial system is relevant”28 should be taken into account. This element is not expressly stated in treaties, but it has been accepted that claims of denial of justice imply that legal remedies at the national level have already been exhausted. This is because, for a “denial” to amount to international wrongfulness it has to have come from the legal system of the host state as a whole, not from one particular body or judge. This was also concluded in recent cases such as Corona Materials v. Dominican Republic, where it was expressly recognized that a claim of denial of justice could only be applied after a “final decision” by the highest judicial authority or if any further step in the domestic level proved to be “manifestly ineffective.” The Corona tribunal expresses this idea in the following way:

26 Crystallex v. Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 578, paras 590–591. 27 Crystallex v. Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 578. 28 Arif v. Moldova, ICSID Case No. ARB/11/23, Award, 8 April 2013, para. 345.

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there can be no denial of justice without a final decision of a State’s highest judicial authority. In the instant case, not only is there no final decision of a State’s highest judicial authority, there is no decision of an administrative adjudicatory body or judicial authority at all [. . .] Based on the Claimant’s allegations and the evidence submitted by the Parties in this arbitration, it has not been shown that taking a further step in the domestic legal system of the Dominican Republic would have been futile or manifestly ineffective.29

Taking this into account, denying justice could also be caused by the dealy of the judicial system of the host state to give a response to a legal remedy within a reasonable time. In Toto v. Lebanon, the ICSID tribunal in a dispute arising out of the construction of a section of a highway linking Beirut and Damascus held that “the failure to render justice within a reasonable period might constitute a breach of international customary law”.30 The Toto v. Lebanon tribunal mentioned that the notion of a reasonable period has been developed within the right to due process and fair and equitable trial developed by the European Court of Human Rights (ECHR), but acknowledging that these decisions are not relevant since Lebanon is not a party to the ECHR.31 Probably for this reason, the Toto tribunal analyze the ‘reasonable period’ element by referring to an old case of from nineteenth century, the Fabiani case (1896), that stated that as a “general principles of international law, denial of justice includes wrongful delays of the judicial authority in giving judgment.”.32 The question that stands is if the “exhaustion of local remedies” could or should be applied as a legal standard of evaluation of the acts of national competition authorities. In this sense, article 4 of the ILC draft articles on state responsibility points in the direction that the act of a national competition authority could amount by itself without the exclusion of local judicial remedies: 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 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.33

From the perspective of the ILC draft articles, national competition authorities are categorized as state organs and their acts, including imposing a fine on a foreign enterprise, could be considered an act of the state subject to review. However, it seems reasonable to apply the ‘exhaustion of local remedies’ of denial of justice to

29

Corona Materials v. Dominican Republic, ICSID Case No. ARB(AF)/14/3 Award (2016), paras 264, 265. 30 Toto v. Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, Award, 7 June 2009, para. 156. 31 Toto v. Lebanon, ICSID Case No. ARB/07/12, Award, 7 June 2009, para. 157. 32 Quote from the Fabiani case, in Toto v. Lebanon, ICSID Case No. ARB/07/12, Decision on Jurisdiction, 7 June 2009, para. 156. 33 Article 4 of the Draft articles on Responsibility of States for Internationally Wrongful Acts (2001).

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competition matters. Mainly, the impact of decisions from national competition law in international law should be evaluated as a whole; this implies considering the response of the judicial system, preventing a situation of multiple proceedings. The issue of multiple adjudicators is not an entirely new topic on competition law since there is the experience of parallel proceedings that occur with the existence when the same competition issues that arise in arbitration are subject to an investigation by a national competition authority.34 The difference with investment arbitration is that unlike competition arbitration, the jurisdiction of the investment tribunal does not arise from an arbitration agreement, it does from an international agreement; the competition arbitration proceeding is governed usually by national law35; and the object of the matter is related with competition law, rather than international law. Therefore, the “exhaustion of local remedies” on competition matters in the national level will prevent that investment arbitration could be seen as a parallel or even a third track to the judicial system. Also, it raises the threshold of responsibility, because an act of national authorities could only be relevant internationally after the whole competition system, including judicial review, has breach international law obligations of treatment.

4.3

Proportionality

One last principle that could encompass the standard of review of competition authorities is the analysis of proportionality of the act. The use of proportionality will occur in extraordinary cases when an action imposes a financial hardship that could amount to international wrongdoing despite that could haven taken for a legitimate public purpose. Proportionality has gained momentum in international investment law in recent years, but it had existed as a doctrine for almost a century, when it emerged in the Prussian administrative courts and was expanded by German courts in the postWorld War II era,36 as a check on state power. It has also been used by international tribunals including the European Court of Justice, the ECHR and the World Trade Organization panels37 (WTO). In this vein, the Tecmed v. Mexico tribunal,38 when it interpreted as a principal part of the FET standard case introduced for the first time the concept of proportionality to investment arbitration, and since then there has been a debate about the contours of the concept.39

34

Nazzini (2011), p. 885. Nazzini (2011), p. 886. 36 Martinez and Martinez (2015), p. 262. 37 Martinez and Martinez (2015). 38 Tecmed v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003. 39 Sweet (2010). 35

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In the context of evaluating a decision made by a national competition authority, the prism of proportionality does not imply determining if the decision that sanctioned an investor was lawful under national competition law, but rather if the sanction imposed was proportional with the act committed by the investor. This stance has not been widely accepted, but there are already some arbitration cases where international responsibility has been established by applying proportionality criteria. In 2012 the Tribunal of Occidental v. Ecuador (II) determined that the investor broke Ecuadorian law by transferring its economic rights without proper authorization from the home state. However, the Occidental tribunal decided that the punishment (termination of contract and seizure of all the assets of the investor) was not proportional to the fault committed by the investor: It can be accepted that some punishment or other step may well have been justified, or at the very least defensible. [. . .] The Tribunal does not necessarily disagree with the reasoning that the Respondent could justifiably have wished to re-emphasize the importance of adherence to its regulatory regime. But the overriding principle of proportionality requires that any such administrative goal must be balanced against the Claimants’ own interests and against the true nature and effect of the conduct being censured. The Tribunal finds that the price paid by the Claimants – total loss of an investment worth many hundreds of millions of dollars – was out of proportion to the wrongdoing alleged against OEPC [. . .]40

In a more recent case, the tribunal of PL Holdings v. Poland goes further with the concept of proportionality, while analyzing the actions taken by the Komisja Nadzoru Finanswego, a Polish government entity that supervised the activity of all banks and credit institutions in Poland. Here the tribunal analyzed the principle of proportionality in its three elements extensively: suitability, meaning that the measures taken by the host state should be “appropriate in achieving its stated public interest concerns”41; necessity, meaning in the words of the tribunal that there were no “less draconian means available”42; and excessiveness, meaning that measures taken by the host state were not “excessive in light of the magnitude of the public interest”.43 This evolution of proportionality in investment arbitration, including the mentioned cases, could point in the direction where this principle could be further developed to a complementary standard of review in which acts of the competition authority are evaluated.

40

Occidental v. Ecuador (I), LCIA Case No. UN 3467, Award, 1 July 2004. Pl Holdings v. Poland SCC Case No. 2014/163, Partial Award (2017), paras 356–373. 42 Pl Holdings v. Poland (2017), paras 374–383. 43 Pl Holdings v. Poland (2017), paras 384–410. 41

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5 Conclusion The Gazprom v. Antimonopoly Committee of Ukraine case shows that investment arbitration could be involved in new global dynamics of “economic lawfare”, where there is not only at stake a specific legal problem, but the legitimation of geopolitical narratives in broader conflicts. It is not the function of investment arbitrators to decide on which narrative should prevail in these scenarios, not only because this is beyond the scope of investment agreements, but also because investment arbitration does not have the substantive and procedural legal means for such an enterprise. Except for a 2006 ICSID case, Telenor v. Hungary,44 where a tribunal dismissed all claims of a Norwegian company including one related to a competition authority, there has been no previous decision on the revision of this type of cases. Therefore, a three-principle standard of review—arbitrariness, denial of justice, and proportionality—could prove useful for assessing the lawfulness of an act of a national competition authority. First, the application of this standard of review implies that a national authority’s decision should be based on a previously established “legal standard”, pursue a “legitimate public” purpose and, in any case, it could not establish a non-proportional sanction. Furthermore, a claim of this type could only be brought after the “exhaustion of local remedies” or where any further step in the domestic level proved to be “manifestly ineffective”.

References Antimonopoly Committee of Ukraine [Антимонопольний Комітет України Рішення] (2016) Antimonopoly Committee of Ukraine - Gazprom, About the Violation Legislation on Protection Economic Competition and Imposing a Penalization Dill J (2017) Abuse of law on the twenty-first-century battlefield: a typology of lawfare. In: Gross ML, Meisels T (eds) Soft war: the ethics of unarmed conflict. Cambridge University Press Dunlap C (2005) Remarks at the Keystone Leadership Summit. The Reporter Keystone Edition European Comission (2016) State-owned enterprises in the EU: lessons learnt and ways forward in a post-crisis context. European Comission Førland TE (1993) The history of economic warfare: international law, effectiveness, strategies. J Peace Res 30(2):151–162 Gross ML, Meisels T (2017) Soft war the ethics of unarmed conflict. Cambridge University Press Koskenniemi M (2009) Legal fragmentation(s): an essay on fluidity and form. In: Calliess C, Fischer-Lescano A, Wielsch D, Zumbansen P (eds) Soziologische Jurisprudenz: Festschrift Für Gunther Teubner, De Gruyter Recht, Berlin Lowenfeld A (2009) International economic law, 2nd edn. Repr. Oxford University Press Martinez C, Martinez L (2015) Proportionality in investment treaty arbitration and beyond: an “irresistible attraction”? BCDR Int Arbitr Rev 2:261–288 Nazzini R (2011) Parallel proceedings before the tribunal and the courts/competition authorities. In: Blanke G, Landolt P (eds) EU and US antitrust arbitration: a handbook for practitioners. Kluwer Law International

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Telenor v. Hungary, ICSID Case No. ARB/04/15, Award (2006).

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OECD (2004a) The financial war on terrorism. OECD OECD (2004b) Working papers on international investment, 2004/04. “Indirect Expropriation” and the “Right to Regulate” in international investment law. OECD Russian Energy Firm Gazprom Reportedly Notifies Ukraine of Bit Claim, IA REPORTER2018 Sweet AS (2010) Investor-state arbitration: proportionality’s new frontier. Law Ethics Human Rights 4(1):48–76

José Gustavo Prieto Muñoz is a Postdoctoral Fellow at the Law Department of University of Turin, Italy. His field of expertise is International Economic Law. He have been studying different legal regimes that regulate economic cross-border transactions in many countries including Ecuador (his country of origin), Italy, Germany, Ukraine, and Russia. Currently, his research interests focuses on the relation between Constitutional Courts and international investment arbitration, the history of international investment adjudication in the twentieth century, and the governance of transnational digital infrastructures, such as Distributed Ledger Technology.

Are Market Competition and Investment Protection Incompatible in the EU Energy Sector? Belen Olmos Giupponi

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Interface Between International Investment Law and EU Law in the Energy Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 The “Sisyphean” Task of Articulating a Proper EU Investment Policy . . . . . . . . . . . . . 2.2 The “Renewable Energy Hurdle” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Fair and Equitable Treatment in Renewable Energy Cases Before International Investment Tribunals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 EU Competition Law as an Obstacle to the Enforcement of Arbitral Awards . . . . . . . . . . . . 3.1 State Aid and Investments in the Renewable Energy Sector . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 The Spanish Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Clashes Between International Investment Law and EU Competition Law . . . . . . . . . 3.4 The Interpretation of the FET Clause in Light of EU Competition Law . . . . . . . . . . . . 3.5 Compatibility Between Compensation Awarded by an Investment Tribunal and EU Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract The chapter explores the interface between international investment law and EU competition law in the realm of renewable energy disputes. It underscores recent developments in the configuration of European Union (EU) investment policy and unveils the intricacies of the EU state aid regime. At the centre of this critical analysis lies the legal nature of the Energy Charter Treaty (ECT) as an international investment agreement. Whereas the Commission’s role in international investment law has increased over the last years, internal factors impede the development of an authentic EU investment policy. The chapter examines jointly the evolution of the case law of arbitral investment tribunals, the Court of Justice of the European Union (CJEU) and the European Commission’s position on intra-EU investment treaties and state aid in the energy sector. B. Olmos Giupponi (*) Kingston University, London, UK e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_6

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1 Introduction Interactions between European Union (EU) competition law and international investment law have become critical in the energy law realm, as several clashes between these two areas of law have recently occurred. This boils down to the following question: Are market competition and investment protection incompatible? The beginnings of an answer can be found in cases decided by international investment tribunals involving investments in the renewable energy sector. The various renewable energy cases, such as Novenergia v. Spain decided in February 2018 by an arbitral tribunal, may be a turning point in the investor-state dispute settlement system. In November 2017, the European Commission (EC) recommended that EU law should take precedence during the enforcement of an arbitral award in a dispute between an investor of one member state and another member state or on the basis of an intra-EU bilateral investment treaty (BIT).1 The EC has requested member states on several occasions to terminate intra-EU BITs. While it has sometimes provided direct guidelines, it has also used more persuasive means to convey the message, such as amicus curiae briefs in arbitral cases.2 The Achmea judgment, handed down in March 2018, addressed again the question of intra-EU BITs and the effective investment and investor protection within the EU.3 The Court of Justice of the European Union (CJEU) ruled that investment treaty arbitration based on intra-EU BITs is not compatible with EU law.4 This might lead to two levels of protection as EU investors will need to have their rights protected in the domestic courts of the member states, whereas non-European investors could benefit from the safeguards afforded by BITs.5 The chapter is divided into three main sections. The first section explores the interface between international investment law (IIL) and EU competition and investment law in the energy sector. In particular, this section looks at various arbitral awards (such as Charanne Constructions, Isolux and Eiser) and CJEU judgments which have defined these relations in dissimilar manner. The second section turns its attention to the legal nature of the Energy Charter Treaty (ECT) as an international investment agreement. The Commission’s request to terminate intra-EU BITs raises

1 Decision of the European Commission C(2017) 7384 final, State Aid SA.40348 (2015/NN)— Spain, Support for electricity generation from renewable energy sources, cogeneration and waste, 10 November 2017. 2 See, for instance, Novenergia II—Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. The Kingdom of Spain, SCC Case No. 2015/063. Proposed Brief of the European Commission on Behalf of the European Union as Amicus Curiae in Support of the Respondent, Novenergia II v Kingdom of Spain, US District Court for the District of Columbia, 28 February 2019. This brief contains a special reference to the Achmea Decision at page 2. 3 CJEU, Achmea, C-284/16, ECLI:EU:C:2018:158. 4 Ibid, para. 57. 5 To illustrate, in Spain, the national courts (Constitutional Court and Supreme Court) confirmed the legality of the reforms leaving the claimants empty-handed. See the rulings issued in 2018.

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the question of whether the ECT is an intra-EU investment agreement, as observed in cases like Micula and Achmea. In response to the CJEU’s Achmea judgment, member states issued declarations undertaking to terminate BITs concluded between them by the end of 2019.6 In the Declaration the member states reaffirmed that Union law takes precedence over intra-EU BITs. An arbitral tribunal instituted on the basis of these investor-state arbitration clauses lacks jurisdiction. In addition, the ECT as other international investment agreements concluded by the Union are an integral part of the EU legal order and should be compatible with the Treaties.7 Some preliminary rulings issued by the CJEU with regard to energy disputes may have a decisive influence on pending and future disputes. Thus, this section analyses the legal nature of the ECT in light of these jurisprudential developments. Third, the next section is specifically devoted to examining the relations between EU competition law and international investment law. EU competition law has emerged as an obstacle to award of compensation under international investment law, as the EU competition rules may prevent foreign investors from enforcing investment arbitral awards which, in turn, brings about the question of compatibility or conflict between these different areas of law. Drawing on these arguments, the paper aims to throw light on the debate about the relation between the international settlement of energy disputes and EU competition law.

2 The Interface Between International Investment Law and EU Law in the Energy Sector Energy investment disputes in Europe have prompted discussions about the interaction between international investment law and different sectors of EU law. Specifically, renewable energy disputes have raised the question of the compatibility of international investment provisions with EU law. Various arbitral awards (such as Charanne Constructions, Isolux and Eiser) and CJEU judgments have shaped these relations in dissimilar manners. In a broad sense, renewable energy disputes have been defined as encompassing controversies “under international law that concern international investment law and WTO law; renewable energy disputes at European level [. . .] and national

6

E.g. Declaration of the Member States of 15 January 2019 on the legal consequences of the Achmea judgment and on investment protection, available at https://ec.europa.eu/info/sites/info/ files/business_economy_euro/banking_and_finance/documents/190117-bilateral-investmenttreaties_en.pdf accessed 15 May 2019. 7 Declaration of the Member States of 15 January 2019 on the legal consequences of the Achmea judgment and on investment protection, available at https://ec.europa.eu/info/sites/info/files/busi ness_economy_euro/banking_and_finance/documents/190117-bilateral-investment-treaties_en.pdf accessed 15 May 2019.

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disputes”.8 The disputes have been brought in different fora: World Trade Organisation (WTO) panels, the CJEU, international investment tribunals, and national courts. The resolution of disputes thus follows different logics. Accordingly, the arguments raised depend on the specific features of each dispute settlement system. At the WTO, main legal claims have concerned the compatibility of subsidies with trade liberalisation and GATT-consistent exceptions. Under EU law, disputes are framed in the context of the single market in light of EU treaty law. In international investment law, legal claims are based upon investment protection as they arise out of breach of standards of treatment, such as fair and equitable treatment (FET), full protection and security and protection against illegal expropriation. In national law, administrative law questions, contract law aspects and compatibility with constitutional provisions are at issue.

2.1

The “Sisyphean” Task of Articulating a Proper EU Investment Policy

In the framework of the EU investment policy emerging after the adoption of the Lisbon Treaty, the EU embarked on the quest for the definition of a genuinely European investment policy. This translates into the articulation of a common investment policy vis-à-vis third countries and the adoption of a consistent position regarding intra-EU treaties. Well before CJEU’s Achmea judgment, the EC had requested EU member states to terminate intra-EU BITs and submitted various amicus curiae briefs underlining the lack of jurisdiction of arbitral tribunals. In most of the cases, arbitral tribunals nevertheless found that they had jurisdiction over the merits of the case. This has led to the question of the nature of the ECT as an intra-EU BIT, as seen in Micula.9 Micula and Achmea are paradigmatic cases in this evolution. In Micula the investment claim arose in the manufacturing sector from the government’s decision to introduce a series of investment incentives in the context of Romania’s accession to the EU favouring the development of certain disfavoured regions of Romania and from the subsequent partial withdrawal or amendment of those incentives.10 The EC sent a letter to Romania concerning the investigation of state aid in January 2014 stating that “any implementation of the Award would constitute new aid and would have to be notified to the Commission”.11 The Commission further claimed that “any

8

Talus (2015). Lavranos (2018). 10 Ioan Micula, Viorel Micula, S.C. European Food S.A., S.C. Starmill S.R.L. and S.C. Multipack S. R.L. Claimants v. Romania Respondent, ICSID Case No. ARB/05/20, 11 December 2013. 11 State aid SA.38517(2014/C) (ex 2014/NN)—Romania. Implementation of Arbitral award Micula v Romania of 11 December 2013. 9

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execution of the Award of 11 December 2013 would amount to the granting of incompatible ‘new aid’”.12 After that, the EC adopted a decision prohibiting the implementation of the arbitral award.13 In Micula, the respondent submitted that all substantive obligations contained in the BIT must be interpreted in a manner consistent with EU law.14 In a subsequent ruling rendered on 18 June 2019, the General Court quashed the Commission’s decision on the incompatibility of the compensation as a state aid.15 The main argument referred to the question of the competence ratione temporis as the investment had taken place before Romania became a member of the EU and, therefore, the said EU state aid rules were not applicable and the Commission had no competence to apply these rules prior to Romania’s accession to the EU.16 As another key element in the analysis, the Court decided that compensation for damage did not constitute, in principle, state aid.17 The Court recalled that “compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid”.18 Furthermore, the Court took the view that the right to compensation had arisen before Romania joined the EU.19 Turning now to Achmea, the investment tribunal had ruled on the merits that the Slovak Republic was liable for breaching investment protection standards under the BIT.20 As a consequence, the arbitral tribunal granted the investor compensation.21 The CJEU in its preliminary ruling determined that intra-EU arbitration clauses should be deemed incompatible with EU law. Precisely, in March 2018, the CJEU handed down its preliminary judgment in the Achmea case.22 In the Court’s view, investor-state arbitration clauses in intra-EU BITs are not compatible with EU law. EU member states cannot derogate from the provisions of EU instruments, especially

12

Ibid, para. 71. Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN). 14 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, 11 December 2013, para. 308. 15 General Court, Cases T 624/15, T 694/15 and T 704/15, Judgment of 18 June 2019, Spain and Hungary intervened to support the Commission’s arguments (Micula Judgement). 16 Micula Judgement, paras 59–93. 17 Micula Judgement, paras 94–111. 18 Micula Judgement, para. 103. 19 Micula Judgement, para. 107. 20 Achmea B.V. v. Slovak Republic, PCA Case No. 2008-13, Award, 7 December 2012, para. 295. 21 Achmea B.V. v. Slovak Republic, PCA Case No. 2008-13, Award, 7 December 2012, B. The Tribunal’s Decision on Damages, paras 319–334. 22 Achmea B.V. v. Slovak Republic, PCA Case No. 2008-13, Award, 7 December 2012. 13

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the Treaty on the Functioning of the EU (TFEU), which provide for the primacy of EU law. Arbitral tribunals should apply EU law, however, they are not entitled to submit preliminary ruling requests.

2.2

The “Renewable Energy Hurdle”

This controversy concerning international investment law and EU law returned and was accentuated in cases arising out of the roll-back of the subsidies in the renewable energy sector in, among others, Spain and Italy.23 In 2016 and 2017, four awards were rendered in respect of claims by investors from one EU state against another EU state: Charanne v. Spain24; Eiser v. Spain25; Isolux Netherlands, BV v. Spain26; and Blusun v. Italy.27 In 2018 some further awards were delivered raising some similar issues: Novenergia v. Spain,28 Antin v. Spain29 and Masdar Solar v. Spain.30 Investment arbitration claims in the renewable energy sector might have prompted Italy’s withdrawal from the ECT (notified in December 2014), although, the state remained liable for a period after the denunciation of the treaty.31 As for the legal nature of the ECT, arbitral tribunals referred to the character of the Charter as an international treaty.32 Some preliminary rulings by the CJEU may have a crucial impact on future disputes. Thus, this section analyses the legal nature of the ECT in light of these jurisprudential developments. The question at issue consists in determining whether the ECT could be considered as an intra-EU investment agreement and, therefore, non-enforceable.

23

Selivanova (2018). Charanne and Construction Investments v. Spain, SCC Case No. V 062/2012, Award, 21 January 2016. 25 Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017. 26 Isolux Netherlands, BV v. Kingdom of Spain, SCC Case V2013/153, Award, 17 July 2016. 27 Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, ICSID Case No. ARB/14/3, Award, 27 December 2016. 28 Novenergia II—Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. The Kingdom of Spain, SCC Case No. 2015/063, Award, 25 February 2018. 29 Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v. Kingdom of Spain, ICSID Case No. ARB/13/31. 30 Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1. 31 On 31 December 2014, the Italian Republic notified the Depository of the ECT, its withdrawal from the treaty. According to the Article 47, para. 2 of the ECT (sunset clause), any such withdrawal shall take effect upon the expiry of one year after the date of the receipt of the notification by the Depositary. Accordingly, the withdrawal from the ECT by Italy became effective on the 1st January 2016. 32 Leal Arcas (2018). 24

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The ECT is a “sui generis” treaty encompassing the protection of foreign energy investments. The goals set in the ECT touch upon different areas of energy policy (not only investment protection) as follows: trade liberalisation in energy materials, products and energy-related equipment based on WTO rules; the resolution of disputes between participating states and between investors and host states, and the promotion of energy efficiency, minimising the environmental impact of energy production and use. Governing principles set in the ECT are sustainable development and permanent sovereignty over energy resources. Investment protection is articulated around FET (Article 10) and the prohibition of illegal expropriation (Article 13). The ECT can be seen as instituting a regime in light of the object and purpose of the treaty.33 Clearly, there is an “inherent” intra-EU character of the ECT as it was signed by EU member states and was also seen as “a cross-European initiative”.34 The relations between investment protection provisions of the ECT and EU law have been at issue in many cases particularly after the Commission’s request to remove intra-EU BIT. AES v. Hungary35 and Electrabel v. Hungary36 paved the way for the discussion of the nature of the ECT. In AES, the expert opinion submitted by Professor Piet Eeckhout threw light on the nature of the ECT.37 Two aspects of the expert opinion are worth noting. First, Eeckhout submitted that the ECT is not an EU instrument. Second, he considered that the ECT prevails over EU law.38 The renewable energy cases under the ECT, from Charanne Constructions (January 2016) to Foresight (November 2018), have further fuelled the controversy.39 Because of the importance of these cases, examination will focus on them. These cases arose out of changes to the 2007 regulatory framework introduced by 2010 and 2013/2014 regulations.40 These claims relied on application of Articles 10(1) and 13 of the ECT. Although some cases focused on the 2010 reforms, a number of investors initiated investor-state arbitration against Spain on the basis of the ECT against the changes brought by the Royal Decree 413/2014 to beneficiaries of the premium remuneration scheme it replaces. There are interpretation issues as well as legal and policy implications deriving from the decisions adopted in these cases.

33

Selivanova (2018) and Alvarez (2018). Alvarez (2018). 35 AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, ICSID Case No. ARB/07/22, Award 23 September 2010. 36 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015. 37 AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, Expert Opinion of Professor Piet Eeckhout, ICSID Case No. ARB/07/22, 30 October 2008. 38 AES Summit Generation Limited and AES-Tisza Erömü Kft v. Hungary, Expert Opinion of Professor Piet Eeckhout, ICSID Case No. ARB/07/22, 30 October 2008. 39 More than thirty cases are still pending against Spain. 40 Real Decreto 1565/2010, Real Decreto Ley 9/2013, Real Decreto 413/2014 and Orden IET/1045/ 2014. 34

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Contradictions between international law (international energy law and international investment law) and the EU legal system are at the heart of these cases. The main submissions by the respondent state were as follows: (a) As the EU itself is a signatory of the ECT and both parties are from the EU, Article 26(1) ECT does not apply i.e. the claimant is not from an “area” of “another Contracting Party”; (b) The ECT includes a “disconnection clause”, preventing EU member states from applying the ECT inter se; (c) EU law is an independent legal system taking precedence over other international law and domestic law, providing an exclusive source of legal rights and remedies for intra-EU relations, including investor protection; (d) The arbitral tribunal should apply EU law in reaching its decision. The EC submitted amicus curiae briefs, arguing that the arbitral tribunals lacked jurisdiction to hear ECT claims between an EU member state and an investor from another EU state. In turn, the position held by arbitral tribunals underlined the following elements: (a) The EU is not the only signatory of the ECT but also EU member states are individually parties to it; (b) From the wording of the ECT, a disconnection clause cannot be inferred; (c) The claims and the jurisdiction of the arbitral tribunals are based on the ECT and not on EU law; (d) Therefore there is no clash between the ECT and EU law. As a more recent development, the preliminary ruling in Achmea may contribute new arguments to resolve the controversy. Notwithstanding this, arguably, the cases have arisen in different contexts: while a BIT between two EU member states was the subject-matter of Achmea, in the renewable energy arbitral proceedings the EU itself is a signatory to the ECT. Therefore, it may be contended that the EU has agreed to the settlement of claims arising under the ECT by the arbitration mechanism set therein.41

2.3

Fair and Equitable Treatment in Renewable Energy Cases Before International Investment Tribunals

FET is at the centre of the discussion. The notion of legitimate expectations was interpreted differently by the various arbitral tribunals dealing with renewable energy disputes, spanning from a narrow interpretation of the term to a broader meaning encompassing specific assurances to unilateral concessions made to foreign investors regardless of the state’s intention. A common element in the analysis of the international investment tribunals on the violation of the FET clause is their conclusion that Article 10(1) ECT does not prevent a state from amending its regulatory regime, unless (a) it has given specific assurances that it will keep that regime in place for the lifetime of the investment

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CJEU, Achmea, C-284/16, ECLI:EU:C:2018:158, paras 56 and 57.

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(in Charanne the arbitral tribunal referred to “stabilisation clauses”)42; and/or (b) such changes are disproportionate to the aim of the legislative reforms disregarding investors’ legitimate expectations. In Charanne, the criteria used by the tribunal are articulated around three key concepts: public interest, reasonableness and proportionality.43 Although the first renewable energy cases (Charanne and Eiser) were decided in favour of the state, the award rendered in Eiser reversed the trend as it was the first case decided in favour of the foreign investor. In Eiser, the claimant distinguished the 2010 amendments to Spain’s solar incentives regime from the more extensive 2013/14 reforms. The tribunal held that Article 10(1) ECT entitled the claimants to expect that Spain would not revise the regime upon which their investments were based to such a degree that all value in them was lost. According to the arbitral tribunal, legitimate expectations were based on the 2007 legislation and Spain’s further conduct in 2010–2011. The tribunal stated that the 2013/14 reforms amounted to a “total and unreasonable change” in violation of those legitimate expectations.44 Two other developments have stirred up further controversy, leading to a “rollercoaster” effect for foreign investors in the renewable energy sector. In Novenergia v. Spain, the tribunal ordered Spain to pay €53 million to Novenergia, a Luxembourg fund which had invested in photovoltaic plants in Spain. The award departed from the previous cases adopting a more expansive approach to investor claims (including Eiser). The Novenergia tribunal put forward a particular analysis of the ECT in light of the Vienna Convention. A broader approach to legitimate expectations was also taken by the arbitral tribunal as it held that “legitimate expectations” may “arise naturally from undertakings and assurances” given by the host state. In Antin, the tribunal confirmed the trend initiated by Eiser.45 It noted that ensuring stability of conditions for investors “is a leitmotiv in [. . .] the ECT”, referring to the award in Charanne further underlining that changes to a state’s regulatory framework must be “consistent with assurances on stability of the regulatory framework provided by the State and required by the ECT”.46 Relying on arguments similar to those deployed in Eiser, Isolux and Novenergia, the Antin arbitral tribunal held that investors’ legitimate expectations must be assessed objectively at the time the investment was made. Such expectations must originate in some “affirmative action of the State” (either specific commitments or representations), which could derive from “features of a regulation aimed at 42 Charanne and Construction Investments v. Spain, SCC Case No. V 062/2012, Award, 21 January 2016, para. 490. 43 Charanne and Construction Investments v. Spain, SCC Case No. V 062/2012, Award, 21 January 2016, paras 487 and 488. 44 Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017, para. 363. 45 Antin Infrastructure Services Luxembourg Sàrl and Antin Energia Termosolar BV v. Spain, ICSID Case No. ARB/13/31, Award, 15 June 2018, paras 363–386. 46 Antin Infrastructure Services Luxembourg Sàrl and Antin Energia Termosolar BV v. Spain, ICSID Case No. ARB/13/31, Award, 15 June 2018, para. 363.

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encouraging investments in a specific sector”.47 Accordingly, the tribunal asserted that Spain had repeatedly given assurances for the stability of its renewable incentive regime through reports, press releases, in the preamble of its royal decrees, government plans and advertising material. As a consequence, Antin had legitimate expectations that the legal framework for concentrated solar power (CSP) plants would remain stable and predictable.48 The arbitral tribunal rejected Spain’s argument that Antin had a legitimate expectation to a “reasonable return” on its investment as guaranteed by the modified regulatory framework. In response to Spain’s position, the tribunal clarified that for the reformed regime to be compliant with the ECT’s “stable and predictable” conditions for investment, the payment due to CSP installations should have been based on “identifiable criteria”. Spain failed to identify the parameters by which it determined the “standard installation” on which the “reasonable return” was based. In a similar fashion, the respondent state could not explain how the revision of the “reasonable rate” would be calculated.49 Antin raises similar problems to those previously discussed in relation to payment of awards that might constitute state aid. As discussed in Sect. 3, the EC has warned Spain that it cannot pay out any investment awards regarding its renewable incentives scheme; for, such compliance would constitute a state aid, thus requiring previous approval by the EC. Furthermore, any attempt to enforce the award in EU member state courts would be probably rejected based on the grounds put forward in the Achmea judgment, as ISDS provisions in intra-BITs shall be interpreted as incompatible with Articles 267 and 344 TFEU. However, Carducci points out, the Court’s wording “is not tantamount to invalidating the BIT” which is a matter still regulated by the specific provisions of public international law.50 Following this interpretation, the “Member State concerned is to take all appropriate steps to eliminate such investor-State arbitration provision”.51 In turn, Alvarez suggests that rather than real legal conflicts between the ECT and the TFEU, there is a clear relationship of policy tension.52

47 Antin Infrastructure Services Luxembourg Sàrl and Antin Energia Termosolar BV v. Spain, ICSID Case No. ARB/13/31, Award, 15 June 2018, para. 565. 48 Antin Infrastructure Services Luxembourg Sàrl and Antin Energia Termosolar BV v. Spain, ICSID Case No. ARB/13/31, Award, 15 June 2018, para. 409. 49 Antin Infrastructure Services Luxembourg Sàrl and Antin Energia Termosolar BV v. Spain, ICSID Case No. ARB/13/31, Award, 15 June 2018, para. 567. 50 Carducci (2018). 51 Carducci (2018). 52 Alvarez (2018).

Provisions invoked

Provisions challenged

Type of investment

Cases Dispute settlement forum and date of award Panel

2010 measures imposing new conditions on investors ECT, Articles 10 (1), 13 ECT, Articles 10 (1), 13

2012–2014 measures

2012–2014 measures, particularly, the 7% of estimated return ECT, Articles 10 (1), 13

Professor John R. Crook, President Dr. Stanimir A. Alexandrov, Arbitrator Professor Campbell McLachlan QC, Arbitrator Investment in a series of Concentrated Solar Plants (CSP)

Yves Derains (President), Guido Santiago Tawil (appointed by Claimants) and Claus Von Wobeser (Appointed by Respondent)

Alexis Mourre (President), Guido Santiago Tawil (Appointed by Claimants), Claus Von Wobeser (Appointed by Respondent) 34 photovoltaic (PV) plants in Spain in 2009

Eiser ICSID—May 2017

Indirect investment that involved 117 PV plants

Isolux Stockholm Chamber of Commerce, July 2016

Charanne Stockholm Chamber of Commerce, January 2016

Awards in renewable energy cases with Spain as a Respondent

ECT, Articles 10 (1), 13

Novaenergia Stockholm Chamber of Commerce, February 2018 Johan Sidklev (President) Professor Antonio Crivellaro, Arbitrator Judge Juez Bernardo Sepúlveda Investment: Investments in photovoltaic solar plants 2012–2014 measures

ECT, Articles 10 (1), 13

2012–2014 measures

Investment in a series of Concentrated Solar Plants (CSP)

Mr. J. Christopher Thomas QC, Arbitrator Prof. Francisco Orrego Vicuña, Arbitrator Dr. Eduardo Zuleta, President

Antin ICSID—June 2018

ECT, Articles 10 (1), 13 (set out in the Request for Arbitration, but not maintain)

2012–2014 measures

Operation of three concentrated solar power plants in Spain:

Mr. John Beechey CBE, President of the Tribunal Mr. Gary Born, Arbitrator Professor Brigitte Stern, Arbitrator

Masdar ICSID—May 2018

(continued)

ECT, Article 10 (1)

2012–2014 measures

Investments in three solar photovoltaic facilities

Dr Michael Moser, Chairperson Prof Dr Klaus Michael Sachs, Co-Arbitrator Dr Raúl Emilio Vinuesa, Co-Arbitrator

Foresight SCC—November 2018

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In favour of the state No indirect expropriation Dissenting opinion: Tawill

Final outcome

In favour of the state Dissenting opinion: Tawill raised the issue of foreseeability of the measures

Isolux Investor: FET, and “legitimate expectations” Non-profitable investment State: Right to regulate Case before the Spanish Supreme Court

In favour of the investor

Eiser Investor: FET, and “legitimate expectations” The measures constituted “a complete value destruction” of the investment State: Right to regulate

In favour of the investor

Novaenergia Investor: FET, and “legitimate expectations” State: Right to regulate

Source: Author’s analysis—Information retrieved from UNCTAD Investment Hub Date: May 2019

Charanne Investor: FET, and “legitimate expectations” Detrimental effect on profits—changes reduced the profitability of their plants by 10% State: Right to regulate

Cases Main claims/ arguments

Antin Investor claims: Claims arising out of a series of energy reforms undertaken by the Government affecting the renewables sector, including a 7% tax on power generators’ revenues and a reduction in subsidies for renewable energy producers. State: Right to regulate In favour of the investor In favour of the investor

Masdar Investor claims: Declaration that the Respondent has breached Article 10 (1) of the ECT; an order that the Respondent make full reparation to the Claimant for the injury to its investments arising out of Spain’s breach of the ECT and international law In favour of the investor Dissenting opinion: Vinuesa

Foresight Investor claims: Declaration that the Respondent has breached Article 10(1) of the ECT

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3 EU Competition Law as an Obstacle to the Enforcement of Arbitral Awards In the EU, the interaction between energy law and EU competition law has gone through distinctive periods since the adoption of the TFEU. Regulated in Article 194 TFEU, the EU competence in the energy market was re-defined after the Lisbon reforms. EU energy objectives were set out in Article 194(1) TFEU, with the competence in the energy sector regulated as a shared competence in light of Articles 4(2)(i) and 194(2) TFEU. Notably, the EU is habilitated to adopt measures in the field of energy through the ordinary legislative procedure pursuant to Article 194(2) TFEU. However, this clause also provides that this competence is “without prejudice to the application of other provisions of the Treaties”. Some authors have raised questions about the interpretation of this provision and in particular whether energy can be seen as a lex specialis.53 But Article 194(2) TFEU also provides that member states have the “right to determine the conditions for exploiting [their] energy resources”. According to a joint reading of Articles 194(2) and 192(2)(c) TFEU, the Council may seek to legislate or take measures significantly affecting a member state’s choice between different sources of energy and the general structure of the energy supply particularly relating to the configuration of the internal market and EU competition policy.54 Although the competence allocation in energy matters follows, in principle, a shared competence scheme, other EU-level competences overlap, bringing about the question of the “separation of powers” and legitimacy issues. The EU competition policy presents a contradiction to this shared competence structure, as the Commission can enforce free movement and competition law in individual cases. In other words, by circumventing the shared competences allocation, the EU may seek to achieve energy objectives through directly effective TFEU provisions such as Article 107 relating to state aid. As an example, the Commission has adopted the State Aid and General Block Exemption Regulation (GBER)55 and the Energy and Environmental Aid Guidelines (EEAG)56 especially relevant for the question under analysis. Even though the Commission issued these legal instruments in the exercise of its competence over state aid, their nature is prescriptive for the energy sector. An extensive practice has developed in terms of member states’ notifications to the Commission for national promotion schemes for renewable energies. In view of this, the legislative effect of the above instruments on member states is to curtail their power to choose energy sources. 53

Johnston and Block (2012). CJEU, Case C-490/10, EP v. Council, 6 September 2012. Leal Arcas et al. (2016). 55 Council Regulation No 994/98 of 7 May 1998, amended by Council Regulation No 733/2013 of 22 July 2013. 56 Communication from the Commission—Guidelines on state aid for environmental protection and energy 2014–2020, OJ C 200, 28.6.2014, pp. 1–55. 54

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Clearly, the question at issue concerns the role of the Commission as the anti-trust watchdog to ensure fair competition in the energy markets. Prior cases concerning traditional energy sectors, such as oil, gas and nuclear energy, have been examined by the EC.57 Renewable energy cases inaugurated a new era of litigation. Cases such as Preussen Elektra,58 Alands Vindkraft59 and Essent60 gave the CJEU the opportunity to discuss the compatibility of restrictions in the internal market concerning member states’ promotion of the national production of green electricity (in accordance with Directive 2009/28) with Article 34 TFEU. Currently, the application of EU competition law gives rise to several controversies related to the implementation of investment arbitral awards.61 Ultimately, EU competition rules may prevent foreign investors from receiving compensation which, in turn, raises the question of compatibility or conflict between two distinct areas of law.62

3.1

State Aid and Investments in the Renewable Energy Sector

Arbitral awards rendered in the period 2016–2018 in respect of investors’ claims under the ECT in relation to renewable incentive schemes across Europe raised again the issue of the contradiction between EU competition law and international investment law. The EC’s Decision 2017/C 442 issued in November 201763 demonstrates the difficulties in finding common ground between competition law and international investment law. In its claims, Spain alleged that it had complied with Directive 2000/ 60/EC64 establishing a framework for Community action in the field of water policy with regard to the support provided to hydropower plants under the notified scheme,

57 UK state aid to nuclear energy concerning Hinkley Point C. On 12 July 2018, the General Court dismissed an action by Austria and Luxembourg that challenged the EC’s decision. Judgment in Case T-356/, Austria v. Commission. 58 CJEU, PreussenElektra AG v. Schleswag AG (2001) C-379/98. 59 Case C-573/12, Ålands Vindkraft AB, Judgment of the Court (Grand Chamber) of 1 July 2014, Ålands vindkraft AB v. Energimyndigheten. 60 1/1, C-204/12—Essent Belgium, Essent Belgium NV v. Vlaamse Reguleringsinstantie voor de Elektriciteits- en Gasmarkt. 11 September 2014. 61 Jones (2016). 62 Scholz and Vohwinkel (2017). 63 Authorisation for State aid pursuant to Articles 107 and 108 of the Treaty on the Functioning of the European Union. Cases where the Commission raises no objections (Text with EEA relevance, except for products falling under Annex I of the Treaty) (2017/C 442/02). Official Journal of the European Union, C 442, 22 December 2017. 64 Directive 2000/60/EC of the European Parliament and the Council of 23 October 2000.

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in line with point 117 EEAG.65 As another relevant directive for the analysis, Spain referred to waste hierarchy as set out in Directive 2008/98/EC (Waste Framework Directive)66 in terms of the support provided under the notified scheme to plants using waste.67 Third-party intervention was allowed in this case on the part of the investors which assessed state aid to existing installations.68 The investors made submissions on the application of this scheme to existing installations arguing that the previous scheme would not qualify as state aid, or would in any event be compatible with the internal market.69 In its decision, the EC analysed the measures adopted to support renewable energy against the requirements of Article 107(3)(c) TFEU, in light of the primary objective of the measures concerning environmental protection.70 This chapter was considered the legal basis for certain economic activities/areas. The secondary legal basis relates to environment and energy and the application of the Guidelines on state aid for environmental protection and energy 2014–2020.71 On the whole, the Commission underlined that there is “no right to state aid”. Simply put, it is up to the member states not to grant a state aid, or to stop an aid scheme. If the Commission has not authorized the aid, the member state is under the obligation to suspend the scheme until the Commission has declared its compatibility with the internal market pursuant to Article 108(3) TFEU.72 Then, the Commission assessed the measure notified by Spain to determine if existing installations receive overcompensation, and found that on the basis of the total payments received under both schemes (the specific remuneration scheme and the premium economic scheme) that was not the case.73

3.2

The Spanish Case

Spain had decided to replace the premium economic scheme with the notified aid measure. However, this was not considered relevant for the scope of the decision to

65

Decision 2017/C 442, para. 152. Directive 2008/98/EC on waste (Waste Framework Directive) of 19 November 2008. 67 Decision 2017/C 442, para. 153. 68 Decision 2017/C 442, 3.5.1, Assessment of State aid to existing installations, para. 154. 69 Decision 2017/C 442, 3.5.1. Comments of third parties and compliance with other EU law, para. 157. 70 European Commission. Energy law. SA.40348 Support for electricity generation from renewable energy sources, cogeneration and waste. Member state: Spain. 71 Sector: D.35.11—Production of electricity. Aid instrument: Direct grant. Scheme. Duration: From 11.06.2014 to 10.06.2024, 3.4.8. Compliance with environmental legislation. 72 Decision 2017/C 442, para. 155. 73 Decision 2017/C 442, para. 156. 66

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assess whether the originally foreseen payments under the previous schemes would have been compatible or not. The Commission may give aid subject to an evaluation where the potential distortion of competition is particularly high, i.e. when the measure may risk significantly restricting or distorting competition if their implementation is not reviewed in due time. Given its objectives, evaluation only applies to aid schemes with large aid budgets, containing novel characteristics or when significant market, technology or regulatory changes are scheduled.74 The Spanish scheme had to be subject to an evaluation since it had a large aid budget and contained novel characteristics.75 Spain had notified the Commission about an evaluation plan along with the aid scheme, defining the scope and methods for the evaluation, taking into consideration the Commission Staff Working Document on a Common Methodology for State Aid Evaluation.76 In assessing the notification, the Commission considered that the evaluation plan contained the necessary elements to be considered compatible with EU law: “the objectives of the aid scheme to be evaluated, the evaluation questions, the result indicators, the proposed methodology to conduct the evaluation, the data collection requirements, the proposed timing of the evaluation including the date of submission of the final evaluation report, the description of the independent body conducting the evaluation or the criteria that will be used for its selection and how the evaluation will be published”.77 The Commission found that the evaluation plan had been properly drafted as, among others, it set out and explained the main methods used to identify the impact of the scheme, and discussed why these methods are likely to be appropriate for the scheme in question.78 The Commission acknowledged the commitments made by Spain on ensuring that the evaluation was conducted by an independent evaluation body in accordance with the notified evaluation plan. Spain must submit the final evaluation report by the end of 2020.79 In examining the case, the Commission cited the Opinion of Advocate General Wahl in Kotnik, to assert that “under EU state aid rules, no undertaking can claim a right to receive state aid; or, to put it differently, no member state can be considered obliged, as a matter of EU law, to grant state aid to a company.”80 At the intersection

74

Decision 2017/C 442, 3.6. Evaluation. para. 167. Decision 2017/C 442, para. 168. 76 Decision 2017/C 442, para. 169. 77 Decision 2017/C 442, para. 170. 78 Decision 2017/C 442, para. 171. 79 Decision 2017/C 442, para. 172. 80 CJEU, Opinion of Advocate General Wahl in Kotnik, C-526/14, ECLI:EU:C:2016:102, para. 79. See also to that effect Order in Milchindustrie-Verband e.V. und Deutscher Raiffeisenverband e.V. v. Commission, T-670/14, EU:T:2015:906, para. 29. 75

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between international investment law and EU competition law, the EC examined the concept of legitimate expectations.81 Foreign investors’ claims were the same before both investor-state arbitration tribunals and in their submissions to the EC. Essentially, they held that by modifying the support scheme with regard to existing installations, Spain had violated the general principles of the EU law of legal certainty and legitimate expectations.82 In response to these claims, the Commission advanced the argument that “where a Member State grants state aid to investors, without respecting the notification and stand-still obligation of Article 108(3) TFEU, legitimate expectations with regard to those state aid payments are excluded.”83 This interpretation draws on the case-law of the ECJ, which held that a recipient of state aid cannot, in principle, have legitimate expectations built upon the lawfulness of state aid which has not been notified to the Commission. The EC cited Case C-24/95 Land Rheinland-Pfalz v. Alcan Deutschland, in which the Court of Justice concluded that “[i]n view of the mandatory nature of the supervision of state aid by the Commission under Article [108] of the Treaty, undertakings to which aid has been granted may not, in principles, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in that article. A diligent businessman should normally be able to determine whether that procedure has been followed.”84 Investors also alleged violation of provisions of the ECT.85 As a preliminary observation, the Commission submitted that most of the investors that brought cases against Spain were based in other member states of the EU. The EC took the view that any clause providing for investor-state arbitration between two member states is in breach of EU law.86 This position is based on Article 19(1) TEU, the freedom of establishment, the freedom to provide services and the free movement of capital, as established by the Treaties and the general principles of EU law of primacy, unity and effectiveness of EU law, of mutual trust and of legal certainty.87

81 Decision 2017/C 442, 3.5.2. General principles of Union law of legal certainty and legitimate expectations. 82 Decision 2017/C 442, para. 157. 83 Decision 2017/C 442, para. 158. In the very specific situation of the present case. 84 Case C-24/95, paras 13 and 14 and Judgment in case C-169/95, Spain v. Commission EU: C:1997:10. (paras 13 and 14); see also the Judgment in case C-169/9, Spain v. Commission EU: C:1997:10. EU:C:1997:163, para. 25. 85 Decision 2017/C 442, 3.5.3, para. 159. 86 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015; EDF v. Romania, ARB/05/13, Award, 8 October 2008, paras 279 to 283; Al Bahloul v. Tajikistan, SCC/64/2008, Award, 8 June 2010, paras 221 to 225; ADF Group v. United States of America, ARB(AF)/00/1, Award, 9 January 2003, para. 189. 87 In particular Articles 49, 52, 56, and 63 TFEU), as well as Articles 64(2), 65(1), 66, 75, 107, 108,65 215, 267 and Article 344 TFEU.

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Clashes Between International Investment Law and EU Competition Law

Moreover, in its decision the EC pointed out two specific dimensions of the conflict between international investment law and EU law: substance and enforcement. Substantively, EU law comprises a complete set of investment protection rules.88 As a result, member states are not competent to conclude bilateral or multilateral investment agreements. The EC availed of numerous cases on jurisdiction at EU level, including the investment tribunal award in Micula.89 The EC observed that there is a risk of conflicts between international investment treaties and EU law since the two sets of rules on investment protection regulating relations between an EU member state and an investor of another state (i.e. the Treaties and intra-EU BITs and the ECT in an intra-EU setting) are not identical, being applied by different adjudicators.90 On enforcement, the EC held that an arbitration tribunal constituted on the basis of the ECT to hear a dispute between an investor of one member state and another member state or an intra-EU BIT has to rely on EU law as applicable law (both as international law applicable between the parties and, where relevant, as domestic law of the host state). However, according to the case-law, an arbitral tribunal is not equivalent to a court or tribunal of a member state, and hence cannot make references to the CJEU, because in particular the requirements of permanence, being a body of a state with mandatory competence, are not fulfilled.91 The resulting treaty conflict is to be solved, in line with the case-law of the Court, on the basis of the principle of primacy in favour of European Union law. For those reasons, the ECT does not apply to investors from other member states initiating disputes against a member state.92

88 See, in particular, Articles 49, 52, 56, and 63 TFEU, as well as Articles 64(2), 65(1), 66, 75 and 215 TFEU. 89 Concerning the implementation of Articles 107 and 108 TFEU, see Decision (EU) 2015/1470 of the Commission of 30 March 2015 on state aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania—Arbitral award of 11 December 2013 in Micula v. Romania (OJ L 232 of 4.9.2015, p. 43). CJEU, Opinion 2/13, paras 168, 191, 194 and 258 first indent. 90 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, 11 December 2013, para. 317. 91 Decision 2017/C 442, para. 162. See Case C-370/12, Pringle EU:C:2012:756, paras 100 and 101. Cases C-249/06, Commission v. Sweden EU:C:2009:119, para. 42; C-205/06, Commission v. Austria EU:C:2009:118, para. 42; and Case C-118/07, Commission v. Finland EU: C:2009:715, para. 33. See also Case C-471/98, Commission v. Belgium (Open Skies) EU: C:2002:628, paras 137 to 142; and Opinion 2/13, paras 198, 199 and 208. 92 Decision 2017/C 442, para. 163.

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The Interpretation of the FET Clause in Light of EU Competition Law

On this issue, the EC found that on substance there had not been a breach of FET. According to the Commission, in the specific case, Spain had not violated the principles of legal certainty and legitimate expectations under Union law.93 In the Commission’s view, EU law is part of the applicable law to an intra-EU dispute, as it constitutes international law applicable in the relations between the parties to the dispute.94 The EC argued that FET cannot have a broader scope than the EU law notions of legal certainty and legitimate expectations in the context of a state aid scheme.95 In an extra-EU scenario, the investor cannot have, as a matter of fact, a legitimate expectation stemming from illegal state aid. The EC argued that as previously decided by investment arbitral tribunals in “settled case-law [. . .] a measure that does not violate domestic provisions on legitimate expectation generally does not violate the FET provision”.96

3.5

Compatibility Between Compensation Awarded by an Investment Tribunal and EU Competition Law

The Commission recalled that any compensation which international investment tribunals were to grant to an investor would constitute in itself state aid and would be subject to notification to the EC. Precisely, in the EC’s interpretation, international investment tribunals are not competent to authorise the granting of state aid since this is an exclusive competence of the Commission. If they award compensation, such as in Eiser, or were to do so in the future, this compensation would be notifiable state aid pursuant to Article 108(3) TFEU and subject to the standstill obligation.97 Finally, the Commission stressed that Decision 2017/C 442 is part of EU law, and as such it is also binding on arbitration tribunals, where they apply EU law, and the judicial system of the EU is the exclusive forum where its validity can be challenged.98

93

Decision 2017/C 442, para. 158. Decision 2017/C 442, para. 162. 95 Decision 2017/C 442, para. 164. 96 Decision 2017/C 442, para. 164. 97 Decision 2017/C 442, para. 164. 98 Decision 2017/C 442, para. 166. 94

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4 Conclusions The relationship between international energy law and EU law has come under scrutiny as contradictions between international energy law and international investment law, on the one hand, and EU investment law and competition law, on the other hand, have emerged. This is particularly so in the area of renewable energy disputes in the EU. In relation to the features of international energy law as a specialised field, the question that arises concerns the interpretation of the ECT as a sui generis legal instrument. The ECT has created a specific regime based on public international law which goes beyond mere investment protection and, essentially, differs from EU law. In terms of dispute resolution and enforcement of arbitral awards, Decision 2017/C 442 and the Achmea judgment may discourage the enforcement of an ECT award in the EU. Any attempt by the respondent EU member state to satisfy the award may fall into the state aid regime, triggering the question of (in)compatibility of such actions with EU law and thus undermining the enforcement of foreign arbitral awards. Finally, in terms of compensation, the Micula judgment has clarified that compensation does not per se represent state aid unless it is linked to the withdrawal of an unlawful state aid. The impact of this judgment on renewable energy cases will depend on the subsequent state practice and foreign investors’ legal strategies.

References Alvarez GM (2018) Redefining the relationship between the Energy Charter Treaty and the treaty of functioning of the European Union: from a normative conflict to policy tension. ICSID Rev Foreign Invest Law J 33(2):560–581 Carducci G (2018) A state’s capacity and the EU’s competence to conclude a treaty, invalidate, terminate – and “Preclude” in Achmea – a treaty or BIT of Member States, a State’s consent to be bound by a treaty or to arbitration, under the law of treaties and EU law, and the CJEU’s decisions on EUSFTA and Achmea: their roles and interactions in treaty and investment arbitration. ICSID Rev Foreign Invest Law J 33(2):582–619 Johnston A, Block G (2012) EU energy law. Oxford University Press, Oxford Jones C (2016) EU energy law. Volume II. EU competition law and energy markets. Claeys & Casteels, Deventer/Leuven Lavranos N (2018) A new Micula-type case on the horizon? January 25, 2018. Available at https:// www.nl-investmentconsulting.com/2018/01/a-new-micula-type-case-on-the-horizon/. Accessed 15 Sept 2018 Leal Arcas R (2018) Commentary on the Energy Charter Treaty. Edward Elgar, Cheltenham Leal Arcas R et al (2016) Energy security, trade and the EU. Edward Elgar, Cheltenham Scholz U, Vohwinkel T (2017) The application of EU competition law in the energy sector. J Eur Compet Law Pract 8(3):190–204 Selivanova Y (2018) Changes in renewables support policy and investment protection under the Energy Charter Treaty: analysis of jurisprudence and outlook for the current arbitration cases. ICSID Rev Foreign Invest Law J

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Talus K (2015) Special Issue on Renewable Energy Disputes TDM 3 (2015), www.transnationaldispute-management.com. Available at www.transnational-dispute-management.com/article. asp?key¼2214. Accessed 15 Sept 2018

Belen Olmos Giupponi is an Associate Professor and Head of Law at Kingston University London. She holds a Ph.D. in International Law—University Carlos III of Madrid (2004—Suma Cum Laude) and an LL.M in Human Rights (University Carlos III). Throughout her career, Dr Olmos Giupponi has undertaken research in EU law, international economic law and dispute resolution. She has published more than fifteen articles in leading peer-reviewed journals, including the Leiden Journal of International Law, Transnational Environmental Law, ICSID Review, European Union Journal, Journal of Business Law, Arbitration International, European Energy and Environmental Law Review, Journal of European Legal Studies and the Spanish Yearbook of International Law.

Stipulating Investors’ Obligations in Investment Agreements as a Suitable Regulatory Approach to Prevent and Remedy Anti-Competitive Behaviour? Karsten Nowrot and Emily Sipiorski

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Background: Towards a Merger of Investors’ Rights and Obligations in Investment Treaty Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Substantive Law Perspective: Three Main Types of Investors’ Obligations in IIAs . . . . . . 3.1 Stipulating Direct Obligations of Conduct for Foreign Investors . . . . . . . . . . . . . . . . . . . . 3.2 Regulating Indirect Obligations of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Provisions Signalling a Commitment to Corporate Social Responsibility . . . . . . . . . . . 4 Competition Law Perspective: Introducing Investors’ Treaty Obligations Aimed at Promoting and Protecting Market Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Enforcement Perspective: Implementing Investors’ Obligations in International and Domestic Investment Dispute Settlement Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter approaches the regulatory option of integrating provisions of competition law into the normative structure of international investment agreements (IIAs). Grounded in the growing trend to include investors’ obligations in the new generation of IIAs, the analysis attempts to assess the feasibility and potential benefits of this regulatory approach as a means to prevent and remedy anti-competitive behaviour by foreign investors. By identifying three main types of obligations currently integrated into agreements, including direct obligations, indirect obligations, and commitments to corporate social responsibility, the chapter pushes forward the proposition of including obligations aimed at promoting and protecting market competition. The similarities between the policy aims of competition law and international investment law, among them the protection of human rights and the environment, the promotion of core labour and social standards as well as the prevention of corruption, create an opening for cooperation. Further legitimizing the integration between the two spheres, foreign investors have the potential K. Nowrot (*) · E. Sipiorski University of Hamburg, Hamburg, Germany e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_7

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to interfere with the free play of market forces and thus contravene the aims pursued by competition policy. The chapter illustrates the potential applicability and extension of incorporating investors’ obligations designed to prevent and remedy anticompetitive behaviour into IIAs. The chapter concludes by addressing the underlying burdens of enforcement and implementation with regard to any inclusion of such obligations for the investors.

1 Introduction Although the interfaces between, and mutual influences of, foreign investments and competition policies as well as their economic and societal implications have been identified and analysed already some time ago,1 the relationship and overlaps between competition law and investment law themselves are still underexplored in the legal literature.2 Thereby, one out of many issues potentially arising in connection with this—from a de lege lata as well as de lege ferenda perspective—truly multifaceted relationship concerns the regulatory option of integrating provisions of competition law into the normative structure of international investment agreements (IIAs). Against this background, the present chapter more specifically intends to connect this broader topic to the current scholarly discussions as well as developments in recent investment treaty-practice dealing with stipulations of investors’ obligations. In this regard, it attempts to assess the feasibility and potential benefits of this regulatory approach as a means to prevent and remedy anti-competitive behaviour by foreign investors. In the following, we plan to approach this research subject in four main steps and by way of adopting four different perspectives. In the first section, adopting an overarching kind of bird’s-eye view, the background of the current policy shift on the issue of investors’ obligations will be briefly illustrated (Sect. 2). The second section adopts a substantive law perspective and identifies the different manifestations of investors’ obligations in current investment agreements in general (Sect. 3). Building up on the findings made in these two sections, the subsequent third section, adopting a competition law perspective, evaluates the possibilities of, and reasons for, stipulating investors’ treaty obligations aimed at promoting and protecting market competition (Sect. 4). Finally, in the fourth section, adopting an enforcement perspective, the approaches to this regulatory experiment as well as its implications for the realm of investment dispute settlement are addressed (Sect. 5).

1 2

UNCTAD (1997), pp. 123 et seq. Tamada (2015), p. 2.

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2 Background: Towards a Merger of Investors’ Rights and Obligations in Investment Treaty Law International investment law is definitively in an era of reformation and “reconceptualization”.3 The current phase is characterized in part by intensified efforts in all parts of the world to progressively realize sustainable development objectives within investment protection.4 These efforts include states regaining some of their “policy space” vis-à-vis foreign investors.5 In light of certain negatively perceived effects of the previously established framework of international investment protection,6 the central challenge in investment agreement design is finding an appropriate and acceptable balance between the legally protected economic interests of foreign investors and the domestic and international steering capacity of host states. From the states’ interest, a balance would allow the promotion and protection of other (non-economic) public interest concerns like the protection of human rights and the environment, the promotion of public health, and the enforcement of internationally recognized labour and social standards. As a consequence of these developments, also a broader discussion on possible “counterweights” to investors’ rights7 is gaining momentum in recent years. By incorporating broader public interest concerns into IIAs, the issue of investors’ obligations in the respective investment treaty-making processes is increasingly discussed and considered. Obligations of investors have until recently not featured very prominently in the discussions on and policy approaches towards the international treaty regime dealing with the protection of foreign investments. Most bilateral investment treaties (BITs)8 are titled “Treaty Concerning the Promotion and Protection of Investments” or some close variation. International investment law is traditionally—and also today—primarily concerned with the protection of foreign investors and their investments.9 In furtherance of these goals, most investment treaties so far still confine themselves to stipulating obligations of the contracting state parties and do not impose any direct legal responsibilities on investors under international law.10

3

Miles (2010), pp. 295 et seq.; Lavranos (2016), pp. 309 et seq.; Puig and Shaffer (2018), p. 361, Roberts (2018), pp. 411 et seq. 4 UNCTAD (2017a), pp. 119 et seq. 5 Tietje (2009), p. 461. 6 Butler and Subedi (2017), pp. 46 et seq. 7 Tietje and Crow (2017), pp. 107 et seq.; Peters (2016), p. 339. 8 UNCTAD (2018) p. 88. 9 Salacuse (2015), pp. 124 et seq. 10 Dolzer and Schreuer (2012), p. 25 (“BITs give guarantees to investors but do not normally address obligations of investors.”); Muchlinski (2017), p. 367; Mbengue and Schacherer (2018), pp. 558 et seq.; as well as UNCTAD (2017b), p. 61 (“Most IIAs are asymmetrical in that they set out obligations only for States and not for investors.”).

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The overarching approach of incorporating investors’ obligations into IIAs is not entirely new. At the domestic level, the idea of corporate social responsibility has long embraced the idea that private investors and other economic actors are expected and required to also contribute in the course of their economic activities to the realization of broader public interests, such as the protection of human rights, core labour and social standards as well as the environment where they operate.11 Regarding implications in the field of international investment relations, as early as the 1770s Edmund Burke remarked on the activities of the East India Company12 that “the prosperity of the natives must be previously secured, before any profit from them whatsoever is attempted”.13 Within the international regime governing foreign investments, however, these concerns have been conventionally addressed in separate fora and on the basis of distinct steering approaches. These approaches largely remained outside of the realm of modern international investment law in the narrower sense of the meaning.14 The requirements of these private actors to contribute to the promotion of community interests had been, beginning in the 1970s, until recently mainly listed in soft law or other non-binding steering instruments and regimes. Only in the course of the previous decade, an understanding has emerged that foreign investors are—as a kind of quid pro quo for the legal protection they enjoy under investment agreements15—expected and required to contribute in the course of their business activities to the promotion and realization of other public interest concerns based on internationally recognized standards. Further, these expectations and obligations are now increasingly addressed in international investment treaties as well as other sources of investment law. External factors are pushing forward this approach in international investment law. The activities of non-state actors in the international system are becoming more carefully examined and their impacts on the international system more fully realized. There is a corresponding intensified discussion on whether and how to integrate them into the global legal order as addressees of rights. These non-state actors also promote community interests.16 In this regard, NGOs have become actively involved in and concerned with the rule-making and enforcement processes in this area of law, with recommendations for an international regulation of foreign investors.17 As one example, the ‘Model International Agreement on Investment for Sustainable Development’, published by the International Institute for Sustainable Development

11

ISO Advisory Group on Social Responsibility (2004), para. 1. On the chartered trading corporations as predecessors of modern transnational enterprises, see Carlos and Nicholas (1988), pp. 399 et seq. 13 Metcalf (1994), p. 19. 14 Salacuse (1985), p. 1008; Muchlinski (2010), pp. 28 et seq. 15 UNCTAD (2001), p. 5. 16 Clapham (2006), Alston (2005), pp. 3 et seq.; Nowrot (1999), pp. 579 et seq.; Noortmann et al. (2015), d’Aspremont (2011), Klabbers (2003), pp. 351 et seq. 17 Concerning the importance of NGOs as a contributing factor to the current policy shift in investment law see Muchlinski (2011), pp. 33 et seq. 12

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(IISD) in April 2005 provides, inter alia, an extensive list of investors’ obligations,18 and has been utilized in part in recent IIAs.19

3 Substantive Law Perspective: Three Main Types of Investors’ Obligations in IIAs The public international law ‘backbone’ is formed by BITs and other international agreements that provide for investment provisions.20 In an attempt to conceptualize 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: (1) direct obligations of conduct, (2) indirect obligations of conduct, and (3) provisions signalling a commitment to corporate social responsibility by the contracting parties.

3.1

Stipulating Direct Obligations of Conduct for Foreign Investors

The first category concerns legal obligations of investors explicitly stipulated and directly addressed in BITs and other investment agreements. Although this is the most expected and natural approach in light of common regulatory techniques, this normative steering method has de lege lata until now not gained widespread recognition in investment treaty practice. There are, however, increased examples from the last decade of obligations being included in investment agreements. The Investment Agreement for the Common Market for Eastern and Southern Africa (COMESA) Common Investment Area, adopted on 22–23 May 2007, states in its second part—tellingly titled ‘rights and obligations’—in Article 11 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”.21 Moreover, the treaty stipulates in Article 13 that foreign investors are to “comply with all applicable domestic measures of the Member State in which their investment is made.” A

18

The text of the IISD Model Agreement is for example available under: http://www.iisd.org/pdf/ 2005/investment_model_int_agreement.pdf. All references to websites in this contribution have been last accessed on 26 Nov 2018. 19 See for example, Model Text for the Indian Bilateral Investment Treaty (2016) available under: http://www.dea.gov.in/sites/default/files/ModelBIT_Annex_0.pdf. 20 UNCTAD (2018) World Investment Report 2018, Investment and New Industrial Policies, p. 88. 21 Investment Agreement for the COMESA Common Investment Area of 22/23 May 2007, http://vi. unctad.org/files/wksp/iiawksp08/docs/wednesday/Exercise%20Materials/invagreecomesa.pdf.

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similar provision is also included in Article 8 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 and amended on 31 August 201622 as well as in Article 11 of the BIT concluded between Argentina and Qatar on 6 November 2016.23 More noticeable and specific regarding labour, Article 16 of the 2007 COMESA Investment Agreement indicates 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. Furthermore, and again in the geographical context of Africa, the Economic Community of West African States (ECOWAS) Supplementary Act A/SA.3/12/08 Adopting Community Rules on Investment and the Modalities for their Implementation with ECOWAS24 stipulates in Chapter III (Obligations and Duties of Investors and Investments) a number of direct obligations of conduct. This includes the requirement for foreign investors “to strive through their management policies and practices, to contribute to the development objectives of the host States and the local levels of government” under Article 11(3), the duty to conduct environmental and social impact assessments of planned investments (Article 12), the obligation to refrain from involvement in corrupt practices in accordance with Article 13 as well as the normative expectation to establish and maintain “liaison processes” with local communities under Article 15(3). In addition, Article 14(2) of the ECOWAS Supplementary Act stipulates that foreign investors: shall uphold human rights in the workplace and the community in which they are located. Investors shall not undertake or cause to be undertaken, acts that breach such human rights. Investors shall not manage or operate the investments in a manner that circumvents human rights obligations, labour standards as well as regional environmental or social obligations, to which the host State and/or home State are Parties.

This provision is supplemented and concretized by Article 14(3) of the referred text, foreseeing that foreign investors shall not “by complicity with, or in assistance with others, including public authorities, violate human rights in times of peace or during socio-political upheavals”, as well as by Article 14(4), requiring that investors shall act in accordance with the fundamental labour standards as enshrined in

22

Southern African Development Community (SADC), Agreement Amending Annex 1 (Co-operation on Investment) of the Protocol on Finance and Investment, as signed by the Heads of State or Government of SADC Member States in the Kingdom of Swaziland on 31 August 2016, http://investmentpolicyhub.unctad.org/IIA/treaty/3383. 23 Reciprocal Promotion and Protection of Investments between the Argentine Republic and the State of Qatar of 6 November 2016, http://investmentpolicyhub.unctad.org/IIA/treaty/3706. 24 Economic Community of West African States (ECOWAS) Supplementary Act A/SA.3/12/08 Adopting Community Rules on Investment and the Modalities for their Implementation with ECOWAS of 19 December 2008, http://investmentpolicyhub.unctad.org/IIA/treaty/3547.

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the International Labour Organization (ILO) Declaration on Fundamental Principles and Rights at Work as adopted on 18 June 1998.25 Another recent example is provided by the BIT concluded between Morocco and Nigeria on 3 December 2016.26 Article 14 of this investment treaty requires foreign investors, in the respective pre-establishment phase, to conduct environmental as well as social impact assessments of their potential investments and, in this regard, to apply the precautionary principle to their environmental assessment screening processes. Article 17 stipulates a prohibition of investors to engage in practices of corruption and Article 19 requires these actors to “meet or exceed national and internationally accepted standards of corporate governance for the sector involved, in particular for transparency and accounting practices” (lit. a) as well as to establish local community liaison processes in accordance with internationally accepted standards (lit. b). Furthermore, Article 18 of the agreement states in the realm of post-establishment obligations that investments have to maintain an environmental management system (paragraph 1), that investors “shall uphold human rights in the host state” (paragraph 2), that they act in accordance with core labour standards (paragraph 3) and do not “manage or operate the investments in a manner that circumvents international environmental, labour and human rights obligations to which the host state and/or home state are Parties” (paragraph 4). From a broader perspective, these examples support the perception that modern public international law includes more international legal subjects to limited degrees. And thus, from the point of view of general public international law, it is possible and admissible to include such obligations within the agreements. Nevertheless, because of the long history of investment agreements in their current form, most agreements still do not contain direct obligations for investors. Moreover, the states including such obligations, as noted above, are often from Asia, Africa, and Latin America. The stretch for new mechanisms of balance within the international investment regime is derived from the states that desired the system to achieve more than mere protection for investments. Beyond reluctance to incorporate such obligations from the perspective of economic entities, certain substantive and procedural challenges connected with the implementation of such a regulatory approach in treaty practice still exist. From a substantive law perspective, the complex issues arise as to which standards 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 these actors’ conduct. The express inclusion of substantive requirements would need to sit in parallel with domestic law standards of the host states and other existing international obligations for the protection of human

25 ILO Declaration on Fundamental Principles and Rights at Work of 18 June 1998 (Annex revised 15 June 2010), https://www.ilo.org/declaration/thedeclaration/textdeclaration/lang%2D%2Den/ index.htm. 26 Reciprocal Investment Promotion and Protection Agreement between Morocco and Nigeria of 3 December 2016, http://investmentpolicyhub.unctad.org/IIA/treaty/3711.

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rights, the environment, and labour.27 Merely incorporating standards by reference to existing international agreements on respective issues, as done in Article 2 of the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement in the realm of the World Trade Organization (WTO), would not necessarily adequately bind non-state actors. Providing feasible and acceptable answers to all these substantive questions in practice both complicates and prolongs the negotiating and drafting processes on new bilateral or multilateral investment agreements. Beyond the substantive limitations, equally important are the procedural questions regarding enforcement of obligations. 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 needs not—provide any procedures for the enforcement of investors’ obligations. In order to be effective, incorporating respective direct legal responsibilities thus also requires a decision on and inclusion of new enforcement venues, another step that would considerably modify the normative structure of investment agreements.28 Some proposals have been implemented in investment treaty practice. Despite the recognized need for a 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 these, the analysis now turns.

3.2

Regulating Indirect Obligations of Conduct

Among these regulatory techniques is the inclusion of what might be characterised 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 (EU) and its member states, entitled “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 Declaration on Fundamental Principles and Rights

27

Muchlinski (2008), pp. 37 et seq. García-Bolívar (2009), p. 484 (“It seems that the most difficult task would be to devise the enforcement mechanisms for those obligations [. . .]”).

28

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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).29

Furthermore, the Investment Agreement for the COMESA Common Investment Area (CCIA) provides in its Article 7(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. 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 11 of the BIT between Japan and Myanmar of 15 December 2013 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”.30

3.3

Provisions Signalling a Commitment to Corporate Social Responsibility

The third type of stipulations worth highlighting in the present context are provisions in investment agreements that signal a commitment to corporate social responsibility by the contracting parties. This regulatory approach is in particular gaining ground in current treaty practice.31 Thereby, a number of agreements emphasize the importance of these issues in their preambles.32 Among them is the BIT concluded by China and Tanzania on 24 March 2013 whose preamble states that the contracting

29

Economic Partnership Agreement between the CARIFORUM States and the European Union and its Member States, reprinted in: Official Journal of the European Union, No. L 289/I/3 of 30 October 2008. 30 Agreement between Japan and Myanmar for the Liberalization, Promotion and Protection of Investment of 15 December 2013, http://investmentpolicyhub.unctad.org/IIA/country/105/treaty/ 2155. 31 On this perception see also already also UNCTAD (2011), pp. 119–120; Hepburn and Kuuya (2011), pp. 601 et seq. 32 On the functions and importance of preambles for treaty interpretation, see for example ICJ, Case Concerning Sovereignty over Pulau Ligitan and Pulau Sipadan (Indonesia v. Malaysia), Judgment (17 December 2002), ICJ Reports 2002, 625, p. 652, para. 51); Gardiner (2015), pp. 205 et seq.; Dörr and Schmalenbach (2018), Article 31, para. 49; Compania de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Award, 20 August 2007, para. 7.4.4.

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parties encourage investors to respect corporate social responsibility.33 In addition, the BIT concluded between Iran and Slovakia, signed on 19 January 2016 and entered into force on 30 August 2017, emphasizes in its preamble the determination of the contracting parties to “promote corporate social accountability”.34 Other BITs and free trade agreements even provide in their operational sections 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 provided by Article 14 of the BIT concluded between Canada and Mongolia on 8 September 2016 and entered into force on 24 February 2017: 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 practices and 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 should remind those enterprises of the importance of incorporating such corporate social responsibility standards in their internal policies.35

In addition, Article 11 of the BIT between Nigeria and Singapore of 4 November 2016 stipulates that: “Singapore reaffirms the importance of encouraging enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognized standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by Singapore” (paragraph 1), and that “Nigeria is to encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their practices and internal policies such as statements of principles that have been endorsed or are supported by Nigeria. These principles address issues such as labour, the environment, public health, human rights, community relations and anti-corruption” (paragraph 2).36

Article 5(2) of Chapter 9 (Investment) of the Pacific Agreement on Closer Economic Relations (PACER Plus) concluded on 14 June 2017 between Australia, New Zealand as well as 12 Pacific island states holds that: [t]he Parties reaffirm the importance of each Party encouraging enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies

33

Agreement between the Government of the People’s Republic of China and the Government of the United Republic of Tanzania Concerning the Promotion and Reciprocal Protection of Investments of 24 March 2013, http://investmentpolicyhub.unctad.org/IIA/country/42/treaty/990. 34 The text of the agreement is available under: http://investmentpolicyhub.unctad.org/IIA/treaty/ 3633. 35 Agreement between Canada and Mongolia for the Promotion and Protection of Investments of 8 September 2016, http://investmentpolicyhub.unctad.org/IIA/country/35/treaty/3698. 36 Investment Promotion and Protection Agreement between the Government of the Federal Republic of Nigeria and the Government of the Republic of Singapore of 4 November 2016, http:// investmentpolicyhub.unctad.org/IIA/treaty/3705.

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internationally recognized standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party.37

Related stipulations are also enshrined, inter alia, in Article 9.17 of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) concluded on 8 March 2018 between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam,38 in Article 16 of the BIT between the Hong Kong Special Administrative Region of the People’s Republic of China and the Republic of Chile of 18 November 2016,39 in Article 14 of the Intra-MERCOSUR Cooperation and Facilitation Investment Protocol of 7 April 2017,40 and in Article 15 of the investment cooperation and facilitation agreement signed between Brazil and Suriname on 2 May 2018.41 Although this last mentioned type of provisions does not envision any legally binding obligations for foreign investors, it is noteworthy for its explicit recognition of investors’ public responsibilities and the importance attached to them by the contracting parties.42 The creation of certain linkages as a result of these developments between the previously largely separated realms of IIAs and the protection of investments enshrined therein on the one side and expectations on the conduct of investors on the other side is another obvious indication that the idea of a merger of investors’ rights and responsibilities is slowly but steadfastly gaining momentum in investment treaty practice.

37

Pacific Agreement on Closer Economic Relations (PACER Plus) of 14 June 2017, https://www. mfat.govt.nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/ pacer/pacer-plus-full-text/. 38 For the text of this agreement and its annexes see the information under: https://www.mfat.govt. nz/en/trade/free-trade-agreements/free-trade-agreements-concluded-but-not-in-force/cptpp/compre hensive-and-progressive-agreement-for-trans-pacific-partnership-text/. 39 The text of the agreement is available under: http://investmentpolicyhub.unctad.org/IIA/ mostRecent/treaty/3717. 40 The text of the protocol is available under: http://investmentpolicyhub.unctad.org/IIA/treaty/ 3772. 41 The text of the agreement is available under: http://investmentpolicyhub.unctad.org/IIA/ mostRecent/treaty/3815. 42 See also, e.g., UNCTAD (2011), p. 120 (“such clauses nevertheless serve to flag the importance of CSR in investor–State relations, which may also influence the interpretation of IIA clauses by tribunals in investor–State dispute settlement cases, and create linkages between IIAs and international CSR standards”); as well as UNCTAD (2017b), pp. 62–63.

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4 Competition Law Perspective: Introducing Investors’ Treaty Obligations Aimed at Promoting and Protecting Market Competition In light of the increasing practical importance of the issue of investors’ obligations in the investment treaty-making processes, the question arises as to possible motives for, as well as suitable regulatory means of, applying this normative ordering idea and comparatively new regulatory experiment also to provisions of competition law and their incorporation into investment agreements. There are at least two main reasons that speak in favour of stipulating in investment treaties also investors’ obligations aimed at promoting and protection market competition. First, there are obvious similarities between the aims pursued by the policy issues already enshrined in provisions stipulating investors’ obligations—among them the protection of human rights and the environment, the promotion of core labour and social standards as well as the prevention of corruption—and the goals of competition policy. In the same way as these other existing rules of behaviour, also competition law regulates business practices in order to promote broader public interest concerns, namely in particular consumer welfare and the efficient allocation of resources.43 Second, it should be recalled that it is especially also the activities of (large) foreign investors that have the potential to interfere with the free play of market forces and thus contravene the aims pursued by competition policy. In order to illustrate and confirm this perception, attention might for example be drawn to the respective findings made by the Organisation for Economic Co-operation and Development (OECD) Secretariat, highlighting that “many MNEs [multinational enterprises] have considerable financial resources at their disposal, they operate in industries that are often dominated globally by a handful of large firms, and they are able to establish dominant positions in many national markets through their foreign investments”. Consequently, “the activities of MNEs can have structural implications with potentially negative effects on competition in some national markets”.44 In addition, the EU has stated in one of its communications to the WTO dealing with the relation between investment and competition policy that “many countries, including developing ones, may remain concerned that investment liberalization could lead to unfair competition or monopolisation by capital-intensive foreign companies seeking to enter the market. In all such cases, antitrust agencies can perform an important task to protect consumers and competitors against anticompetitive practices”.45 Against this background, it is therefore unsurprising that issues of competition policy also form part of international corporate social responsibility (CSR) steering instruments addressed to foreign investors. This is evidenced by 43 On the goals pursued by competition law see Lowenfeld (2008), p. 419, 456; Khan et al., Article 101 TFEU, in: Geiger et al. (2015), para. 1; OECD Secretariat, A Policy Framework for Investment: Competition Policy, 2005, pp. 2 et seq. 44 OECD Secretariat (2005), A Policy Framework for Investment: Competition Policy. 45 WTO, Communication from the European Community and its Member States, WT/WGTI/W/63 of 12 November 1998, para. 13.

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Chapter X of the OECD Guidelines for Multinational Enterprises, 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 last updated in May 2011.46 When considering the present issue from the perspective of implementation and operationalization, the three categories of provisions are all of relevance in the context of investors’ obligations and in principle also provide for suitable regulatory means to stipulate respective rules of behaviour in the realm of competition law. To begin with, this finding applies to provisions signalling a commitment to corporate social responsibility by the contracting parties. In fact, these rules already, at least indirectly, refer to societal expectations with regard to competition policy. This is particularly the case in those investment treaties that explicitly mention the OECD Guidelines for Multinational Enterprises and thus also refer to their Chapter X. Among them is the BIT between Austria and Kosovo of 22 January 2010; the 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”.47 However, this type of provision might also be taken recourse to in order to even more directly emphasize the importance attached by the contracting parties to an effective competition policy in general and the observance of competition rules in particular. This logic is in line with respective stipulations to be found in free trade agreements like Article 17.2(1) of the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU of 30 September 2016.48 A respective example from the realm of normative steering instruments in international investment relations is provided by Article 28 lit. a of the African Union’s Draft Pan-African Investment Code of December 2016 proscribing that the member states shall “[p]romote, maintain and encourage competition to enhance economic efficiency in investment at the national and regional level”.49 Furthermore, and again in the same way as corresponding regulations in regional economic integration agreements such as Article 11.13 of the Economic Partnership

46

Reprinted in: I.L.M. 15 (1976), pp. 969 et seq.; for the text of the updated OECD Guidelines as well as accompanying documents see OECD Guidelines for Multinational Enterprises, 2011, http:// www.oecd.org/dataoecd/43/29/48004323.pdf. On the issue of competition law and policy in the OECD Guidelines see Hawk (1977), pp. 241 et seq. 47 Agreement for the Promotion and Protection of Investment between the Government of the Republic of Austria and the Government of the Republic of Kosovo of 22 January 2010, https:// www.ris.bka.gv.at/. . ./COO_2026_100_2_726968.pdfsig. See also, e.g., Reinisch (2013), p. 21. 48 OJ EU L 11/23 of 14 January 2017. 49 Draft Pan-African Investment Code, African Union Commission, Economic Affairs Department, December 2016, in: United Nations Economic and Social Council, Draft Pan-African Investment Code, UN Doc. E/ECA/CM/50/1, AU/STC/FMEPI/MIN/1(III) of 8 February 2017.

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Agreement signed by the EU and Japan on 17 July 2018,50 the stipulation of indirect obligations of conduct also appears among the proper regulatory approaches aimed at more effectively integrating competition law into investment agreements. Article 28 lit. b and c of the African Union’s Draft Pan-African Investment Code provides one of the few examples in the area of transnational investment regulations. This provision requires the member states to: [p]rohibit any anti-competitive investment conduct that prevents, restricts or distorts competition at the national and regional levels” (lit. b) as well as to “[a]dopt and implement clear and transparent rules on competition to increase the ability of the regional economy to attract investment and to maximize the benefits of such investment (lit. c).

Lastly attention can—and in fact should—also in the present context be drawn to the ordering idea of including direct obligations of conduct for foreign investors aimed at preventing anti-competitive behaviour. In the same way as with regard to the promotion and protection of other public interest concerns as already noted above, this normative steering technique has, in particular also concerning the field of competition law, not frequently been applied in treaty practice. One of the rare but comparatively well-known manifestations in the realm of regional economic integration agreements is the normative framework on competition enshrined in the Treaty on the Functioning of the European Union (TFEU), in particular Article 101 TFEU outlawing anti-competitive collusions between two or more economic actors in the form of cartels as well as Article 102 TFEU prohibiting abuses of a dominant market position by individual business entities.51 The Court of Justice of the European Union (CJEU) clarified several decades ago that both provisions are directly applicable and produce direct effects in relations between individuals,52 thereby also underlining their character as what is here referred to as direct obligations of conduct. In addition, among the few examples that the present authors are aware of in the transboundary normative framework dealing with foreign investments itself is Article 17(1) 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 that list a number of obligations incumbent upon multinational enterprises and their subsidiaries. Among them is, according to lit. d of this provision, the duties to “refrain from entering into restrictive business practices that have

50

The text of the agreement is for example available under: http://trade.ec.europa.eu/doclib/press/ index.cfm?id¼1684. 51 For a more detailed discussion of these two provisions Jones and Townley (2017), pp. 514 et seq.; Schütze (2018), p. 709 et seq. 52 CJEU, Case 127/73, BRT et al. v. SABAM et al., Judgement of 30 January 1974, para. 16; as well as subsequently for example CJEU, Case C-282/95 P, Guérin Automobiles v. Commission, Judgement of 18 March 1997, para. 39; CJEU, Joined Cases C-295/04 to C-298/04, Vincenzo Manfredi et al. v. Lloyd Adriatico Assicurazioni SpA et al., Judgement of 13 July 2006, para. 39. See also, e.g., Khan et al., Article 101 TFEU, in: Geiger et al. (2015), para. 36; Khan et al., Article 102 TFEU, in: Geiger et al. (2015), para. 2. For a more comprehensive treatment of the concepts of direct applicability and direct effect in EU law see for example Schütze (2018), pp. 76 et seq.

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an adverse effect on: (i) the acquisition and transfer of technology; and (ii) the competitiveness of other enterprises owned by nationals of Member States”.53 Some of the primary reasons why contracting state parties in most parts of the world are as of today still rather reluctant to stipulate in particular direct obligations of investors in investment treaties have already been identified above. Many of these motives most certainly also apply in the present context. Nevertheless, they do not principally prevent the inclusion of respective investors’ obligation into international agreements, in particular if the contracting parties are willing and able to also adequately address the challenges connected with the enforcement of this type of provisions. And, to this enforcement perspective we now turn.

5 Enforcement Perspective: Implementing Investors’ Obligations in International and Domestic Investment Dispute Settlement Proceedings The idea of investors’ responsibilities does not involve issues of substantive 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. In light of the fact that until now very few investment treaties proscribe respective direct obligations, this issue has hardly been dealt with in the practice of investment arbitration. The conduct of investors has previously been taken into account by tribunals when misconduct occurs. However, it needs to be emphasized 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” has been widely discussed in arbitral practice,54 and the implications of other forms of “unconscionable conduct” on the side of the foreign investor,55 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,56 a violation of which does not give rise to compensation, but “merely” results in a legal disadvantage with the investor forfeiting the 53 Charter on a Regime of Multinational Industrial Enterprises in the Preferential Trade Area for Eastern and Southern African States of 21 November 1990, reprinted for example in: UNCTAD (1996), pp. 427 et seq. 54 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.; as well as from the literature for example Douglas (2014), pp. 155 et seq. 55 Azinian et al. v. Mexico, ICSID Case No. ARB(AF)/97/2, Award, 1 November 1999, reprinted in: I.L.M. 39 (2000), p. 537, pp. 553 et seq.; see also for example Muchlinski (2006), p. 536 et seq. 56 On the principle of good faith as the basis of these behavioural expectations see Phoenix Action, Ltd. v. Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, paras 100, 106 et seq.;

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protection under the respective investment agreement57 or, alternatively, might be taken into account in calculating the damages to be awarded to the claimant investor.58 Counterclaims initiated by the host country in investor-state arbitration proceedings59 are another mechanism for enforcement of investors’ direct obligations of conduct as stipulated in investment agreements. Indeed, respective provisions explicitly allowing counterclaims by host states can, in current treaty practice, also be found in some of the few investment agreements that actually overtly stipulate direct obligations for investors. Article 28(9) of the 2007 Investment Agreement for the COMESA Common Investment Area states 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.

The same applies for example to Article 18 of the 2008 ECOWAS Supplementary Act A/SA.3/12/08 Adopting Community Rules on Investment and the Modalities for their Implementation with ECOWAS entitled “Relations of Investor’s Liability to Dispute Settlement” and stipulating, among others, in its paragraph 4: A host Member State may initiate a counterclaim before any tribunal established pursuant to this Supplementary Act for damages resulting from an alleged breach of the Supplementary Act.

From the perspective of traditional international investment law, the attractiveness of this more indirect approach that primarily relies on counterclaims initiated by the host country lies undoubtedly in its procedural connectivity and thus the possibility to incorporate it in the present system of investor-state arbitration. However, other more far-reaching and advanced procedural options on how to enforce investors’ direct obligations of conduct in the realm of international investment arbitration and beyond would 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.

Plama Consortium Ltd. v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 144. 57 Nowrot (2010), p. 40. 58 Creek Mining Company v. Peru, ICSID Case No. ARB/14/21, Award, 30 November 2017, Partially Dissenting Opinion of Philippe Sands, paras 4 et seq. See in this connection also Article 23 of the new Dutch Model BIT, adopted by the Dutch government on 19 October 2018 https:// www.lexology.com/library/detail.aspx?g¼c5bb3ed4-08ea-440e-9a77-43deff073842: “Without prejudice to national administrative or criminal law procedures, a Tribunal may, in deciding on the amount of compensation, take into account non-compliance by the investor with its commitments under the UN Guiding Principles on Business and Human Rights, and the OECD Guidelines for Multinational Enterprises.” 59 On counterclaims in international investment arbitration see, e.g., Waibel (2015), pp. 1235 et seq.; Hoffmann (2013), pp. 438 et seq.

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This approach, even in the practice of contract-based investor-state arbitration, is still quite rarely taken recourse to.60 Furthermore, it has even sporadically been proposed in the literature to also consider the option of providing for standing of, inter alia, individuals, juridical persons and indigenous communities in the host states to launch respective claims for compensation against foreign investors—in the fora of international investment arbitration proceedings—based on an alleged violation of obligations imposed on them in an investment agreement.61 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,62 states would be reluctant to agree to such a system.63 The door to legal remedies in the form of access to international investment arbitration proceedings for societal actors in the host countries negatively affected by the conduct of foreign investors thus seems to be currently not widely available. However, recent investment treaty practice, in particular in the African context, reveals the emergence of a regulatory approach that relies on the still not infrequently overlooked or neglected steering potential of the foreign investors’ home countries. An example illustrating this comparatively new approach is provided by Article 20 of the BIT treaty concluded between Morocco and Nigeria in December 2016: “Investors shall be subject to civil actions for liability in the judicial process of their home state for the acts or decisions made in relation to the investment where such acts or decisions lead to significant damage, personal injuries or loss of life in the host state”.64 A related provision can be found in the 2008 ECOWAS Supplementary Act whose Article 29 stipulates that “[h]ome States shall ensure that their legal systems and rules allow for, or do not prevent or unduly restrict, the bringing of court actions on their merits before domestic courts relating to the civil liability of investors for damages resulting from alleged acts or decisions made by investors

60

On the limited number of cases in which the host state acted as claimant in contract-based investor-state arbitration proceedings see, e.g., Toral and Schultz (2010), pp. 589 et seq.; Laborde (2010), p. 97 et seq. 61 Weiler (2004), pp. 437 et seq. 62 On the underlying fundamental issue of providing individuals and groups affected by foreign investments with adequate access to justice, see also Francioni (2009), pp. 71 et seq. 63 See thereto for example Mann (2008), p. 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.”). 64 On this provision see also already, e.g., Gazzini (2017), p. 4 (“The final innovation is the provision on the investor liability before the tribunals of the home state, which may have a considerable impact on domestic litigation against investors – especially multinational companies – and help overcome jurisdictional hurdles and most prominently the forum non conveniens doctrine. This can be considered as an important development from the standpoint of the responsible conduct of investments, the redress of wrongful doings and the role of the home state.”); as well as UNCTAD (2017a), p. 63.

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in relation to their investments in the territory of other Member States”.65 Furthermore, Article 7(4) of the new Dutch model BIT adopted by the Dutch government on 19 October 2018 states that “[i]nvestors shall be liable in accordance with the rules concerning jurisdiction of their home state for the acts or decisions made in relation to the investment where such acts or decisions lead to significant damage, personal injuries or loss of life in the host state”. In addition, one final example is Article 19 (4) of the 2012 SADC Model BIT Template that a quite similar stipulation: In accordance with the domestic law of the Home State, the Host State, including political subdivisions and officials thereof, private persons, or private organizations, may initiate a civil action in domestic courts of the Home State against the Investor, where such an action relates to the specific conduct of the Investor, and claims damages arising from an alleged breach of the obligations set out in this Agreement.66

In the same way as for example Article 4(2) of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions,67 that stipulates: “Each 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”, these provisions require the contracting state parties to provide for an extraterritorial application of their domestic laws to the activities of their private business actors while operating abroad. The regulations at issue thus establish, in addition to the national courts of the host state, also the domestic judicial bodies of the home states of foreign investors as suitable and potentially promising fora for the enforcement of investors’ obligations at the initiative of individuals and other societal actors that have been negatively affected by the conduct of respective foreign investors. While most certainly also the other approaches as identified and outlined above provide for suitable enforcement options likewise in the present context of competition law, it is submitted that in particular also this last-mentioned enlistment of the national courts of the host as well as home states and thus the possibility for private actors, prominently among them affected consumers and business competitors, to

65 See also on the stipulation of investor liability in the courts of the host state the provision of Article 17 of the 2008 ECOWAS Supplementary Act: “Investors shall be subject to civil actions for liability in the judicial process of their host State for acts or decisions made in relation to the investment where such acts or decisions lead to significant damage, personal injuries or loss of life in the host State.” 66 SADC Model Bilateral Investment Treaty Template with Commentary (July 2012) Articles 10 et seq. https://www.iisd.org/itn/wp-content/uploads/2012/10/sadc-model-bit-template-final.pdf. See also, again, concerning the respective stipulation of investor liability in the courts of the host state Article 19(3) of the 2012 SADC Model Bilateral Investment Treaty Template: “In accordance with its applicable domestic law, the Host State, including political subdivisions and officials thereof, private persons, or private organizations, may initiate a civil action in domestic courts against the Investor or Investment for damages arising from an alleged breach of the obligations set out in this Agreement.” 67 OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions of 21 November 1997. http://www.oecd.org/corruption/oecdantibriberyconvention. htm.

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engage into antitrust litigation should be regarded as a notable and in principle effective technique to remedy anti-competitive behaviour by foreign investors. A telling role model for this regulatory approach in the transnational economic system, specifically in the realm of regional economic integration agreements, is provided by the entitlement of individuals and other actors, as recognized under EU law by the CJEU68 and for example more recently concretized in Directive 2014/104/EU69 with the aim to ensure maximum effectiveness of the competition rules, to compensation for harm resulting from infringements of EU competition law—prominently among them the already mentioned Articles 101 and 102 TFEU—on the basis of private enforcement actions before the domestic courts of the EU member states.70 There seems to be no major reason speaking against, and quite to the contrary a considerable number in favour of, at least seriously considering a transfer of this noteworthy enforcement approach to the realm of international investment law and thus also its incorporation into investment agreements.

6 Conclusion 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 reforming this area of law by rebalancing the rights and obligations of states and investors. Against this background, the present chapter illustrates the potential applicability and extension of this regulatory approach to the realm of competition law by stipulating respective investors’ obligations aimed at preventing and remedying anti-competitive behaviour to be incorporated into IIAs.

68

CJEU, Case C-453/99, Courage Ltd. v. Crehan, Judgement of 20 September 2001, paras 23 et seq.; CJEU, Joined Cases C-295/04 to C-298/04, Vincenzo Manfredi et al. v. Lloyd Adriatico Assicurazioni SpA et al., Judgement of 13 July 2006, paras 56 et seq. 69 Directive 2014/104/EU of the European Parliament and of the Council of 26 November 2014 on Certain Rules Governing Actions for Damages under National Law for Infringements of the Competition Law Provisions of the Member States and of the European Union, OJ EU L 349/1 of 5 December 2014. 70 Komninos (2002), p. 447 et seq.; Reich (2005), p. 35 et seq.; Schütze (2018), pp. 430 et seq.; Jones and Townley (2017), p. 514.

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Karsten Nowrot received his legal education at the Universities of Kiel (Germany), Surrey (UK), Halle-Wittenberg (Germany) and Indiana University School of Law (USA). He is Professor of Public Law, European Law and International Economic Law, Director of the Research Institute for Economic Law and Labour Law as well as the current 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 also serves as Deputy Director of the Master Programme “European and European Legal Studies” at the Institute for European Integration of the Europa-Kolleg in Hamburg. Emily Sipiorski is an associated researcher at the University of NOVA, Lisbon, Centre of Research and Development for Law and Society (CEDIS) and was previously a post-doctoral researcher in the Department of Law at the School of Socio-Economics at the University of Hamburg, Germany. She worked at Martin Luther University, Halle-Wittenberg, Germany as a lecturer and senior researcher, where she completed her PhD, and at Luther Rechtsanwaltsgesellschaft on the complex disputes team.

Anti-competitive Investor Behaviour and Illegal Investments in Investment Treaty Arbitration Elena Belova

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A Definition of Anti-competitive Investor Behaviour that Taints Investments with Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Anti-competitive Investor Behaviour as a Matter That Falls Within “In Accordance with Host State’s Laws” Clauses Under the Relevant BIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Anti-competitive Investor Behaviour That Falls Within the “Substantial Scope” Test . 3.2 Anti-competitive Behaviour That Falls Within the “Time Scope” Test . . . . . . . . . . . . . 4 Anti-competitive Investor Behaviour as a Separate or Additional Ground of Illegality Under International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Anti-competitive Investor Misconduct Under the Emergent General Principle of Law to Comply with Host State Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Anti-competitive Investor Behaviour Under the Developing Components of Truly International Public Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract Anti-competitive behaviour on the part of investors can lead to breaches of the host state legal order and cause market distortions. This chapter discusses the legal consequences of such behaviour within the framework of investment treaty arbitration and aims to show that anti-competitive strategies may lead to breaches not only of competition law, but also of a variety of host state national laws and regulations. It consequently proposes the adoption of a functional definition of anti-competitive actions that taint investments with illegality and explores the ways in which such investments may be excluded from the protection offered by bilateral investment treaties (BITs). The study of recent case law tends to show that investors are likely to face the consequences of their anti-competitive conduct in investment treaty arbitration. Two main hypotheses are explored: first, the issue of illegality when the BIT in question contains a specific legality requirement, and E. Belova (*) University of Lille, Lille, France e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_8

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second, the possibility for states to rely on international law when challenging investors’ anti-competitive behaviour.

1 Introduction Our faith in freedom does not rest on the foreseeable results in particular circumstances but on the belief that it will, on balance, release more forces for the good than for the bad.1

The conclusion of bilateral investment treaties (BITs) as a step towards market liberalization reflects the belief that if states ensure protection for foreign investors in exchange for capital flows, this will contribute to economic development.2 The resulting international investment agreements (IIAs) are part of states’ broader competition strategy, aimed at promoting fairness and equity, political and economic pluralism, and consumer welfare.3 When states limit their sovereignty by concluding IIAs with a view to inter alia encouraging foreign competition, any breaches on the part of investors of the domestic laws and regulations guaranteeing these values place an economic burden on the host state.4 In investment treaty arbitration the state can claim that the investments in question are tainted with illegality because they were made in violation of domestic laws, and may consequently ask the tribunal to deny the benefit of substantial treaty protection on this ground.5 Within investorstate dispute settlements, any wrongdoings on the part of investors that are the outcome of anti-competitive behaviour are therefore related to complex issues arising from the illegality of the investment. With this in mind, the chapter is organised as follows. The first task is to clarify the relationships between anti-competitive behaviour on the part of investors and investment illegality in investment treaty arbitration; then, a definition of the anticompetitive behaviour in violation of host state domestic laws is suggested. Secondly, the question of how such conduct may fall within the scope of the investment treaty’s legality requirement (the “in accordance with host state’s laws” clause of the BIT) is discussed. Thirdly and finally, the chapter will explain how investment tribunals have relied on other sources, namely transnational standards and principles, 1

Hayek (1960). Alvarez (2011), pp. 287–288. 3 Working Group on the Interaction between Trade and Competition Policy, The fundamental principles of competition policy, Background note by the Secretariat, WT/WGTCP/W/127, 7 June 1999, https://www.wto.org/english/tratop_e/comp_e/wgtcp_docs_e.htm. 4 Alasdair Ross Anderson and others v. Costa Rica, ICSID Case No. ARB (AF)/07/3, Award, 19 May 2010, para. 53: “[t]he assurance of legality with respect to investment has important, indeed crucial, consequences for the public welfare and economic well-being of any country.” In a “criminal” context, see also Betz (2017), pp. 281–282. 5 Moloo and Khachaturian (2011), p. 1475; Schill (2012), pp. 281 and 309; El Gawhary (2015), p. 300. 2

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either on a complementary fashion, or even in the absence of an “in accordance with host state’s laws” clause of the BIT. In this situation, some types of anti-competitive investor conduct may trigger the application of these standards. The chapter closes with some brief conclusions.

2 A Definition of Anti-competitive Investor Behaviour that Taints Investments with Illegality As mentioned above, illegality arises when a foreign investor breaches host state domestic laws and regulations. However, the concept of “anti-competitive behaviour” which transgresses domestic laws is more difficult to define. A narrow definition is to be found in the Japan-Mongolia Agreement for an Economic Partnership, which states that: “the term ‘anticompetitive activities’ means any conduct or transaction that may be subject to penalties or relief under the competition laws and regulations of the respective Parties.”6 Under an approach such as this, anticompetitive behaviour is limited to investor actions that are forbidden by national competition law. States especially prohibit and penalize a great many business practices which artificially distort market equilibrium.7 Despite the fact that legal norms vary from one jurisdiction to another, competition law normally refers to “control of mergers and acquisitions, control of restrictive business practices and control of unfair trade practices.”8 Restrictive business practices include abuses during the concluding of anti-competitive agreements (e.g. forming cartels) and abuses of market domination in the form of maintaining or increasing market powers.9 Unfair trade practices, in turn, are those that directly harm the consumer (e.g. misleading advertising); as these are subject to consumer protection laws, they may fall outside the scope of competition laws.10 This approach is reflected in the Energy Charter Treaty (ECT), the preamble to which recalls the importance of “competition rules concerning mergers, monopolies, anti-competitive practices and abuse of dominant position”.11

6

Article 11.1, Chapter 11 of the Agreement between Japan and Mongolia for an Economic Partnership, concluded 10 February 2015. It must be specified that under this Chapter the parties agreed to include each state’s obligations in the matter of competition laws and that all disputes connected to such commitments are non-arbitrable, in conformity with Article 11.6 of this Agreement. 7 Khemani and Shapiro (1993). See also UNCTAD (2007), UNCTAD Model Law on Competition: Substantive elements for a competition law including commentaries and alternative approaches, https://unctad.org/en/Docs/tdrbpconf5d7rev3_en.pdf. 8 Mehta et al. (2008). 9 Mehta et al. (2008), pp. 45–46. 10 Mehta et al. (2008), p. 46. 11 Para. 11, Preamble, Energy Charter Treaty, adopted in Lisbon on 17 December 1994.

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However, given the differences among national legislations, anti-competitive investor behaviour does not necessarily correspond to anti-competitive practices as these are understood under national competition law. Rather, the notion of “anticompetitive behaviour” encompasses “the way in which [the investor] acts”12 resulting in adverse effects on market competition. For the purposes of this study, therefore, anti-competitive behaviour is defined under a functionally-based approach, which matches economic realities. From this perspective, anti-competitive investor conduct could be regulated by a wide range of domestic laws, including competition laws, consumer laws,13 privatization laws, criminal laws and investment laws. Foreign investors may breach some or many of them. Arbitral practice provides some useful examples of anti-competitive behaviour on the part of investors that is related to investments acquired by illegal means that are sanctioned under a wide range of local laws. There is certainly evidence to show that foreign investors may engage in corruption,14 which “affects the correct and proper functioning of markets.”15 For instance, a personal donation made by an investor to the president of the host state with the aim of concluding an investment agreement and thus being able to conduct business was at the heart of the World Duty Free v. Kenya case.16 This was a clear example of corruption involving a high-ranking official17; in the same vein, making excessive payments to private consultants, allegedly conducting lobbying activities concerning an investment project, and in fact having important connections to public officials in charge of the claimants’ investments were all discussed by the parties in Metal-Tech v. Uzbekistan.18 Market competition can therefore be artificially distorted when there is no equal access to the market. Although corruption is primarily sanctioned under criminal law, it can still be a tool by which foreign investors can engage in unfair competition.

12

Oxford Dictionary online, https://en.oxforddictionaries.com/definition/behaviour. In fact, if the purpose of competition law is to fight against certain behavioural patterns and to ensure market equilibrium at a horizontal level (between firms), consumer laws adopted by states complement this objective in a vertical sense by addressing relationships between firms and consumers. For more explanations, see: Dhall (2008). 14 Pradhan et al. (2000). See more explanations in Kryvoi (2018), https://ssrn.com/ abstract¼3212741 (electronic version used hereinafter). 15 OECD, Fighting corruption and promoting competition, Executive Summary of key findings from the discussion held during Session I of the 13th meeting of the Global Forum on Competition on 27–28 February 2014, DAF/COMP/GF(2014)12/FINAL, 20 November 2014, http://www.oecd. org/competition/fighting-corruption-and-promoting-competition.htm. 16 World Duty Free Co. Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, paras 62–66. 17 World Duty Free Co. Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 136. 18 Metal-Tech Ltd. v. Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, paras 199–203 and 225–227. The arbitral tribunal also considered other factors, namely the absence of services or proof of services, the lack of qualifications on the part of the consultants, fake consulting contracts and the lack of payee transparency (paras 204–224). For a deeper analysis of corruption in investment arbitration, see: Lamm et al. (2014), pp. 328–349; Llamzon (2014); Kryvoi (2018). 13

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Another hypothesis concerns different kinds of serious misrepresentation or massive fraud entailing market distortion during tender and privatization processes, which also have to be considered part of anti-competitive investor behaviour. In his dissenting opinion in Lemire v. Ukraine, Professor Jürgen Voss recalled that if market participants were not competing in the tender process on the same terms and conditions, there was no fair competition.19 The effects of illegal acts may lead to the violating of fundamental pillars of the process (the bidding process, procurement, privatization), influencing the host state’s choice of the successful company. To take one example, the investor in the ICSID Inceysa v. El Salvador arbitration had not only supplied forged documentation and false information during the bidding process, but had also concealed its links with a related company, whereas the state argued that it had prohibited the participation of associated companies in order to avoid the forming of a monopoly.20 Fraudulent investor behaviour aimed at inducing the host state to authorize the transfer of shares during a privatization process was also examined in Plama v. Bulgaria.21 Investors can therefore commit abuses resulting from fraud, or other violations of good faith which are sanctioned under national competition law22 or under the rules governing privatization or bidding processes, in order to gain an illegal advantage over their competitors. For the purposes of this chapter, anti-competitive investor behaviour therefore embraces all types of private actions that lead to serious market distortions, and at the same time breach the host state’s laws.

3 Anti-competitive Investor Behaviour as a Matter That Falls Within “In Accordance with Host State’s Laws” Clauses Under the Relevant BIT Many BITs contain “in accordance with host state’s laws” clauses.23 The arbitral tribunal in Electrabel v. Hungary noted that, depending on the wording, “the legality of the investment and the investor’s good faith may be relevant as elements of the definition of an investment or as a bar to the exercise of jurisdiction or to investment

19

Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Dissenting Opinion of Arbitrator Dr. Jürgen Voss, 1 March 2011, para. 117. 20 Inceysa Vallisoletana S.L. v. El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006, paras 53 and 58. 21 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 133. For an in-depth analysis of fraud and misrepresentations in investment arbitration, see Llamzon and Sinclair (2015), pp. 469–478. 22 Federal Act of December 19, 1986, on Unfair Competition (status as of January 1st, 2016). 23 Moloo and Khachaturian (2011), p. 1476; El Gawhary (2015), p. 300.

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protection on the merits.”24 Interpreting the legality requirement under the BoliviaChile BIT in light of previous arbitral decisions, the tribunal in Quiborax v. Bolivia found it to be framed by both subject-matter (laws and regulations) and time (the time at which the alleged illegal action took place) limitations.25 An “in accordance with laws” clause is applicable only if anti-competitive investor conduct satisfies the subject-matter and time limitations tests established by arbitral tribunals.

3.1

Anti-competitive Investor Behaviour That Falls Within the “Substantial Scope” Test

At first glance, the “in accordance with host state’s laws” clause seems clear, as it refers to host state national laws and regulations. However, although the “ordinary meaning of the phrase ‘made in compliance with legislation’ is inclusive and without explicit substantial limitations”, this legality requirement is not “entirely without limits”.26 The question of whether specific anti-competitive investor conduct falls within the scope of an “in accordance with host state’s laws” clause depends on the arbitral tribunal’s preferred approach.27 Broadly speaking, there are two different approaches: one based on the nature of the relevant laws and regulations, and another based on the importance of the values protected by national laws as compared to the seriousness of the breach committed.

3.1.1

Anti-competitive Behaviour Under the Nature of Laws and Regulations Approach

Where the nature of local laws and regulations is concerned, arbitral tribunals consider the different degree of connectedness between the legislation that has allegedly been violated and the investments. A variety of laws may be linked with the investment process, from special laws targeting foreign investments to generally

24 Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015, para. 5.43; Schill (2012), pp. 283–291. For a more in-depth analysis of the wording of “in accordance with laws” clauses, see also Obersteiner (2014), pp. 268–269. 25 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, para. 266. The arbitral tribunal in Metal-Tech v. Uzbekistan supported this approach when ruling on the legality requirement under the Israel-Uzbekistan BIT. See Metal-Tech Ltd. v. Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 164. 26 Vladislav Kim and al. v. Uzbekistan, ICSID Case No. ARB/13/6, Decision on Jurisdiction, 8 March 2017, para. 19. 27 For general criticisms of arbitral tribunals’ limitations of these clauses, see Hepburn J, In accordance with which host state laws? Restoring the ‘defence’ of investor illegality in investment arbitration, 24 April 2014, http://ssrn.com/abstract¼2428859.

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applicable rules under the national legal order, e.g. criminal law. Hence, the nature of the domestic laws that have allegedly been violated may either be irrelevant for challenging anti-competitive investor conduct or may condition it. When analysing the way in which the investments had been obtained, the arbitral tribunal in Anderson v. Costa Rica noted that the “process by which that possession or ownership was acquired [would have] complied with all of the prevailing laws.”28 In this case the tribunal verified that the requirements of the Organic Law of the Central Bank of Costa Rica had been met in the disputed transaction. The arbitral tribunal in Phoenix v. The Czech Republic echoed this in its general observation that “no violation of a rule of the Czech Republic legal order [might be found] [. . .] as it ha[d] not been contended that the acquisition was against Czech laws”.29 This broad approach demonstrates that a wide range of laws and regulations covering the investors’ anti-competitive behaviour may become the subject of the arbitral tribunal’s scrutiny. A narrower approach for assessing the degree of connection between any breaches and the investments involved can limit the clause’s scope. The arbitral tribunal in Saba Fakes v. Turkey concluded that only laws and regulations related to the very essence of investments—i.e. the host state’s domestic laws governing the acceptance of investments—could trigger the application of the legality clause.30 The arbitral tribunal rejected the respondent’s allegations that the claimant had also breached competition laws and regulations in the telecommunications sector on a different ground (discussed below), and then clearly stated that a host state was not allowed to rely on “domestic legislation beyond the sphere of the investment regime”.31 Thus, the legality requirement may fail to or may only partially cover anti-competitive behaviour.

3.1.2

The Significance of the Protected Values and Gravity of Anti-competitive Investor Conduct

When assessing a state’s illegality defence, arbitral tribunals have often acted by comparing the degree of importance of the values protected by national laws and regulations to the seriousness of the investor’s breach of them. They have generally proceeded in one of two ways: some tribunals have defined these values universally and reduced them to values of the utmost importance, namely the fundamental principles of municipal law, while others have taken a more flexible approach that 28

Alasdair Ross Anderson and others v. Costa Rica, ICSID Case No. ARB (AF)/07/3, Award, 19 May 2010, para. 57. 29 Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 134. 30 Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 119. See also Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Albania, ICSID Case No. ARB/11/24, Dissenting Opinion of Steven A. Hammond, 30 March 2015, para. 130. 31 Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 119.

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did not rely on these pre-ranked values, based on an assessment of the significance of the rules in concreto. (a) A Pre-definition of the Values Protected by Domestic Laws in the Form of Fundamental Principles As commented above, some arbitral tribunals choose to adopt a narrow approach to this issue, holding that investments were only excluded from the BIT’s scope if the investors had used methods to achieve private goals that compromised the corresponding interest of the state as expressed in fundamental legal principles.32 In Desert Lines v. Yemen the tribunal relied on “fraudulent misrepresentations or the dissimulation of true ownership” as an example of the violation of fundamental principles, quoting the Fraport v. Philippines case,33 in which the arbitral tribunal stressed the investor’s “egregious” conduct and its deliberate violations of a “serious provision of a Philippine law”.34 The arbitral tribunal in Hochtief v. Argentina also evoked corruption,35 and Allard v. Barbados provides a further example of this duality. Having acknowledged the legitimate interest of Barbados in tracking and regulating monies remitted into its territory, the arbitral tribunal observed neither a violation of the state’s public policy nor criminality,36 and the illegality objection therefore failed.37 With respect to the “fundamental principles of municipal law” test, anticompetitive behaviour in the form of fraud or corruption is likely to trigger the application of the clause. As Professor Reisman explained in the individual declaration attached to the Allard v. Barbados case, even if the investor’s conduct was far from being exemplary, the investor was not “engaged in any effort to mislead, defraud or gain unlawful advantage” by means of non-compliance.38 Hence, the effect of the non-compliance with domestic rules that had been established did not meet the gravity threshold for the

32

LESI SpA and Astaldi SpA v. People’s Democratic Republic of Algeria, ICSID Case No. ARB/05/03, Decision on Jurisdiction, 12 July 2006, para. 83(iii); Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 104; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 319. 33 Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 104. 34 Fraport A.G. Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, paras 397–398. 35 Hochtief AG v. Argentine, ICSID Case No. ARB/07/31, Decision on Liability, 29 December 2014, para. 199. 36 Peter A. Allard v. Barbados, PCA Case No. 2012-06, Award on Jurisdiction, 13 June 2014, para. 92. 37 Peter A. Allard v. Barbados, PCA Case No. 2012-06, Award on Jurisdiction, 13 June 2014, paras 92–95. 38 Peter A. Allard v. Barbados, PCA Case No. 2012-06, Declaration of Professor Reisman, 27 June 2016.

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violation of fundamental principles.39 Compliance with competition law may also fall within the scope of host state public policy.40 (b) The Contextualization of Values Protected by the Host State Legal Order Some arbitral tribunals have taken a more flexible approach and acknowledged that the values protected by national law are not necessarily limited to its fundamental legal principles, and their assessment is subject to contextualization. From this perspective, investors’ anti-competitive behaviour falls more easily within the legality requirement’s scope of application. The arbitral tribunal in Quiborax v. Bolivia combined different approaches adopted by previous arbitral tribunals and found that the following violations to be considered serious: [t]he subject-matter scope of the legality requirement is limited to (i) non-trivial violations of the host State’s legal order (Tokios Tokelés, LESI and Desert Line), (ii) violations of the host State’s foreign investment regime (Saba Fakes), and (iii) fraud – for instance, to secure the investment (Inceysa, Plama, Hamester) or profits (Fraport).41

These violations correspond to three categories of equally important values: a wide range of values protected by national laws irrespective of their nature42; specific values connected with a foreign investment regime, and universally accepted values in the form of fighting corruption and fraud in international economic operations. Hence, anti-competitive investor conduct that violates various host state laws and regulations falls within different categories of the violations categorized by the Quiborax arbitral tribunal. Another arbitral tribunal has confirmed that the importance of the protected values must be contextualized. In Vladilam Kim v. Uzbekistan the investors had allegedly breached a wide range of national laws by manipulating prices on the stock exchange and artificially distorting market competition.43 Relying on the principle of proportionality, the arbitral tribunal held that if the BIT’s “application is triggered by noncompliance with a law that results in a compromise of a

39 Peter A. Allard v. Barbados, PCA Case No. 2012-06, Award on Jurisdiction, 13 June 2014, para. 94. 40 See, for example, Swedish Supreme Court, Systembolaget Aktiebolag v. The Absolut Company Aktiebolag, T 5767-13, 17 June 2015. 41 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, para. 266 (footnotes omitted); MetalTech Ltd. v. Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 165. For another approach based on the type of wrongdoings, see Llamzon and Sinclair (2015), pp. 503–505. 42 See, for example, Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Albania, ICSID Case No. ARB/11/24, Award, 30 March 2015, para. 489: “the Tribunal rejects the argument that the non-application for and the non-issuance of the [exploitation] permits were but minor administrative errors”. 43 Vladilam Kim and others v. Uzbekistan, ICSID Case No. ARB/13/6, Decision on Jurisdiction, 8 March 2017, para. 421.

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correspondingly significant interest of the Host State”, the investor shall not be entitled to the treaty’s protection.44 The arbitral tribunal considered, among other things, the severity of sanctions for non-enforcement under domestic law in order to determine the significance of the obligation with which the investor is alleged to not comply.45 Should one follow the same line of reasoning, it becomes clear that the enforcement of competition and other laws regulating anti-competitive investor conduct would also be found to be of the utmost importance. The issue of anti-competitive behaviour depends mainly on the sanctions imposed by national law, and also on whether finding a transaction illegal renders it void or otherwise under domestic regulations. To sum up, there are not only two different approaches to this issue, but each one has also been interpreted both narrowly and broadly. The choice of the exact approach and the scope of interpretation influence whether the anti-competitive behaviour is covered by the clause or not.

3.2

Anti-competitive Behaviour That Falls Within the “Time Scope” Test

The application of the “in accordance with host state’s law” clause in cases of anticompetitive behaviour is subject to a time criterion, which has been developed by arbitral tribunals. Two issues are relevant here: the possibility of changing the law, and the time at which the breach occurred. The first limitation needs no special comments: states can only rely on domestic laws that existed when the investment was initiated.46 The second concerns the distinction between legality at different stages. Despite the fact that “in accordance with host state’s law” clauses are worded differently, a number of arbitral tribunals have concluded that they are limited to a jurisdictional bar and thus only control an investment’s legality at the time that it is made.47 The assessment of the time at which investments were made thus excludes

44 Vladilam Kim and others v. Uzbekistan, ICSID Case No. ARB/13/6, Decision on Jurisdiction, 8 March 2017, paras 19–20. For the approval of this analysis and more comments, see Kryvoi (2018). 45 Vladilam Kim and others v. Uzbekistan, ICSID Case No. ARB/13/6, Decision on Jurisdiction, 8 March 2017, para. 406. 46 Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 103. 47 Fraport A.G. Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 345; 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, para. 266; Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentine, ICSID Case No. ARB/07/26, Decision on Jurisdiction, 19 December 2012, para. 260; Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentine, ICSID Case No. ARB/09/1, Decision on Jurisdiction, 21 December 2012, paras 317–322; Vannessa Ventures Ltd. v. Venezuela, ICSID Case No. ARB(AF)04/6, Award,

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the question of their subsequent performance, i.e. whether they were operated, managed or conducted illegally.48 It follows from this arbitral practice that the standard time criterion applies only to the initiation of the investments. As a matter of fact, assessing the time when an investment truly begins is fraught with difficulties, since at least three scenarios can be identified. First, an investment can be acquired by a sole act, which must be legal. Second, it can be constituted by various interrelated acts that form the overall operation that is qualified as the investment.49 When an investment is made in tranches (a series of transactions), all the consecutive acts must be legal.50 Finally, an investment project may be rolled out over a period of time and include a great many steps; in these cases, guidance can be sought from arbitral tribunals’ findings on the ratione materiae jurisdiction. To take an example, the tribunal in the M. Houben v. Burundi case concluded that the acquisition of a plot of land, as a first step of the building project, was deemed an investment.51 If the components of the investment can be separated, only the legality of the first step has jurisdictional consequences under the legality requirement. Bearing in mind such limitations, only the anti-competitive investor behaviour during a bidding or privatization process which gave rise to an investment is likely to satisfy the time criterion. If an investor commits even one serious breach of the rules governing the processes, let alone a chain of clearly illegal interrelated acts (as was the case in Inceysa v. El Salvador) with the aim of eliminating other competitors and winning a contract, this investment cannot benefit from BIT protection. The question is more complicated where competition law is concerned. In the Saba Fakes case, the arbitral tribunal rejected the state’s allegations that the violations of competition laws triggered the legality requirement under the BIT, explaining that the breaches of Turkish competition law, if established, fell outside the time criterion.52 Any breach of competition rules must occur during the investment process, and, as mentioned above, it is not easy to draw the line between different stages of an investment.

16 January 2013, para. 167; ECE Projektmanagement v. The Czech Republic, UNCITRAL, PCA Case No. 2010-5, Award, 19 September 2013, para. 3.166; Metal-Tech Ltd. v. Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 193; Bernhard von Pezold and others v. Zimbabwe, ICSID Case No. ARB/10/15, Award, 28 July 2015, para. 420. See also Schill (2012), pp. 307–309; Obersteiner (2014), pp. 278–280; El Gawhary (2015), p. 303. 48 Copper Mesa Mining Corporation v. Ecuador, PCA No. 2012-2, Award (Redacted), 15 March 2016, paras 5.54–5.57. 49 Ceskoslovenska Obchodni Banka, A.S. v. Slovakia, ICSID Case No. ARB/97/4, Decision of the Tribunal on Objections to Jurisdiction, 24 May 1999, para. 72. 50 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 18 July 2014, para. 1369; Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Albania, ICSID Case No. ARB/11/24, Award, 30 March 2015, para. 369. 51 Joseph Houben v. Burundi, ICSID Case No. ARB/13/7, Award, 12 January 2016, paras 127–130. 52 Saba Fakes v. Turkey, ICSID Case No. ARB/07/20, Award, 14 July 2010, para. 120.

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On the other hand, if investors fail to respect the competition laws while an investment is being set up and the investment is subsequently found to be void ab initio, the legality requirement may be considered inapplicable. The Arif v. Moldova case, in which the investor’s company won a tender to operate border duty free stores, illustrates this difficulty. On the basis of the exclusivity clause in the agreement that formalized the result of the tender, the company concluded four lease agreements with local customs offices to operate four cross-border stores, and a further lease agreement with the state airport authorities. As a result of lawsuits filed by the investing company’s competitors, the national antitrust agency found that the exclusivity clause breached national competition laws, thereby vitiating the results of the tenders and leading to the cancellation of the airport lease agreement by local courts.53 The arbitral tribunal decided that the respondent’s illegality defence, which was based on the “in accordance with laws” clause had no bearing on the BIT’s scope of application and commented as follows: There are temporal limitations on a jurisdictional argument based on the illegality of an investment, where the legality of the investment has been accepted and acted upon in good faith by both parties over a period of time. This is not a case of a concealed illegality [. . .]. The investment was not made fraudulently or on the basis of corruption. In cases like the present one, the passage of time and the actions of the parties on the mutual assumption of legality cannot be ignored in the determination of jurisdiction. [. . .] [The illegality at stake shall] be treated as an issue of liability.54 (Emphasis added)

When deciding whether the investment was void, the arbitral tribunal seems to have considered both the absence of the intent to violate national laws and “the mutual assumption of legality” of the investment at the time it was set up. By way of an analogy, if a state-owned company concludes an agreement with a foreign investor which is subsequently held to be void ab initio due to the violation of competition laws, the arbitral tribunal can reject the legality defence. Furthermore, regardless of whether or not the applicable treaty expressly stipulates that investments must comply with domestic laws, the investor’s disputed conduct has to be addressed from the international law perspective.

4 Anti-competitive Investor Behaviour as a Separate or Additional Ground of Illegality Under International Law The investor’s misconduct vis-à-vis competition may also be at the heart of the state’s illegality defence on the basis of international principles and standards. Certain arbitral tribunals have endorsed the legality requirement as part of the general principles of law in the absence of an express requirement for compliance with local laws and regulations in the applicable BIT. Furthermore, the need to abide

53 54

Mr. Franck Charles Arif v. Moldova, ICSID Case No. ARB/11/23, 8 April 2013, paras 41–124. Mr. Franck Charles Arif v. Moldova, ICSID Case No. ARB/11/23, 8 April 2013, para. 376.

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by local laws and regulations also seems to be at least partially covered by “truly international or transnational public policy”.

4.1

Anti-competitive Investor Misconduct Under the Emergent General Principle of Law to Comply with Host State Laws

Even if the applicable treaty does not expressly deal with an investor’s duty to comply with host state national rules and regulations, investments vitiated by illegality, including anti-competitive behaviour, preclude investors from seeking remedies under the terms of the relevant BIT. Although the legal consequences of this may differ, (bar of jurisdiction as in Ampar v. Egypt, or substantial inadmissibility as in Plama v. Bulgaria),55 the emergent general principle of law56 to respect the host state’s legal order at the time that the investment is made57 provides a common legal basis for dismissing such cases. Some arbitral tribunals have been reluctant to deny protection at the jurisdictional stage when there was no implicit requirement in the treaty. The tribunal in Stati v. Kazakhstan stated that the ECT contained no legality requirement and that “[a]t least with regard to jurisdiction, the Tribunal [did] not see where such a requirement could come from.”58 More recently, the tribunal in Bear Creek Mining Corporation v. Peru concurred with the claimant and concluded that “under international law, the Tribunal may not import a requirement that limits its jurisdiction when such a limit is not specified by the parties.”59 Finally, in the Achmea v. Slovakia case, the respondent argued that the investors had breached both competition laws and rules on public procurement when making their investments.60 Although the tribunal considered that there was no legal basis for interpreting the BIT as containing the legality requirement,61 it seems to have rejected the jurisdictional objection because

55

For the analysis of the appropriate stages for dealing with investor misconduct, see for example Moloo and Khachaturian (2011), pp. 1418–1494; Newcombe (2011), pp. 187–200; Llamzon and Sinclair (2015), pp. 507–508; Kryvoi (2018). 56 For criticisms of the limitations of the state’s consent entailed by general principles of international law, see Douglas (2014), pp. 169–172. 57 Scholars have already discussed some aspects related to the idea of an “emerging principle requiring compliance with the law of the host state”. See Moloo and Khachaturian (2011), p. 1475. 58 Anatolie Stati, Gabriel Stati, Ascom Group SA and Terra Raf Trans Traiding Ltd v. Kazakhstan, SCC Case No. V (116/2010), Award, 19 October 2013, para. 812. 59 Bear Creek Mining Corporation v. Peru, ICSID Case No. ARB/14/2, Award, 30 November 2017, paras 309 and 320. 60 Achmea B.V. v. Slovakia, UNCITRAL, PCA Case No. 2008-13, Award, 7 December 2012, paras 135–139. 61 Achmea B.V. v. Slovakia, UNCITRAL, PCA Case No. 2008-13, Award, 7 December 2012, para. 176.

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the state had failed to meet the “fundamental principles of municipal law” test applied in this case.62 Most arbitral tribunals have agreed with the idea of the general principle of compliance with domestic laws and regulations. As the tribunal in Phoenix v. Czech Republic commented, the “purpose of the international mechanism of protection of investments through ICSID arbitration cannot be to protect investments made in violation of the laws of the host State or investments not made in [the] good faith”.63 It also added that “the conformity of the establishment of the investment with national laws [. . .] is implicit even when not expressly stated in the relevant BIT.”64 A number of tribunals have reached a similar conclusion within and outside the ICSID framework.65 Those in Fraport v. Philippines (II) and Ampal v. Egypt both noted that over time the legality requirement had become a “well-established principle of international law”, at least in the words of the former, related to illegality that “goes to the essence of the investment”.66 Arbitral tribunals can therefore reject claims on the grounds of anti-competitive behaviour on the part of investors, provided that the subject-matter and time limitations are met. The question of subject-matter limitations in cases involving anti-competitive investor behaviour becomes immaterial in the context of the Energy Charter Treaty (ECT). Most arbitral tribunals follow the general trend to deny protection for investments that contravene local laws or are made in bad faith,67 “which is in conformity with the object and purpose of the ECT”.68 Since both the ECT’s design and structure confirm the importance of competition, it is highly unlikely to protect illegal investments resulting from anti-competitive misconduct. This specific feature,

62 Achmea B.V. v. Slovakia, UNCITRAL, PCA Case No. 2008-13, Award, 7 December 2012, para. 177. 63 Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 100 (footnote omitted). 64 Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, 15 April 2009, para. 101. 65 Yaung Chi Oo Trading Pte. Ltd. v. Government of the Union of Myanmar, Asean I.D. Case No. ARB/01/1, Award, 31 March 2003, para. 58; Gustav F. W. Hamester GmbH & Co. KG v. Ghana, ICSID Case No. ARB/07/24, Award, 18 June 2010, para. 123–124; SAUR International S.A. v. Argentine, ICSID Case No. ARB/04/4, Decision on Jurisdiction and Liability, 6 June 2012, para. 308; Oxus Gold plc v. Uzbekistan, the State Committee of Uzbekistan for Geology & Mineral Resources, and Navoi Mining & Metallurgical Kombinat, UNCITRAL, Final Award, 17 December 2015, para. 706. 66 Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines (II), ICSID Case No. ARB/11/12, Award, 10 December 2014, para. 332; Ampal-American Israel Corporation and others v. Arab Republic of Egypt, ICSID Case No. ARB/12/11, Decision on Jurisdiction, 1st February 2016, para. 301. 67 Khan Resources Inc., Khan Resources B.V., and Cauc Holding Company Ltd. v. The Government of Mongolia, UNCITRAL, Decision on Jurisdiction, 25 July 2012, para. 383; Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Albania, ICSID Case No. ARB/11/24, Award, 30 March 2015, para. 360. 68 Energoalians TOB v. Moldova, UNCITRAL, Award, 23 October 2013, para. 261.

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which distinguishes the ECT from other treaties that lack express legality requirements, can be illustrated through an analysis of arbitral tribunal findings in two cases. In Plama v. Bulgaria the tribunal addressed deliberate investor fraud during the privatization process, which consisted of inducing the host state to transfer its shares to an entity that lacked sufficient capacity to operate a refinery. The arbitral tribunal considered that although such a “situation [did] not involve the ‘straw man’ provision set out in the Bulgarian Privatization Law”, such “behaviour [was] contrary to other provisions of Bulgarian law”.69 The tribunal decided that the ECT could not cover investments made in contravention of local laws, in light of its fundamental aim of strengthening the rule of law on energy issues, as stated in the introductory note to the treaty.70 This aim is essential for safeguarding competition: the introductory note mentioned by the Plama arbitral tribunal stressed that “the strategic value of [the ECT] is likely to increase in the context of efforts to build a legal foundation for global energy security, based on the principles of open, competitive markets”.71 Thus, if an investor procures investments by illegal means with the aim of bypassing competition in the market, it will be precluded from the protection offered by the ECT because such actions run counter to the treaty’s specific purpose. In the second case, Yukos v. Russia, the arbitral tribunal analysed whether, in light of the ECT’s object and purpose, the treaty in its entirety could make the protection of investments conditional on their legality.72 It decided that in “imposing obligations on states to treat investors in a fair and transparent fashion investment treaties [sought] to encourage legal and bona fide investments”,73 and concluded that an investor must be excluded from ECT protection if the investment had been made in violation of host state laws.74 Where anti-competitive behaviour is concerned, the treaty structure also reflects the importance of competition rules: first, as mentioned above, the preamble to the ECT refers to generally recognized competition laws, and second, Article 6 provides for states’ obligation to guarantee free competition. Hence, treaty protection is also to be denied for competition law violations.

69 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, paras 135–145. 70 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 139. 71 Energy Charter Secretariat, The Energy Charter Treaty and Related Documents. A Legal Framework for International Energy Cooperation, An Introduction to the Energy Charter Treaty, September 2004, http://www.ena.lt/pdfai/Treaty.pdf. 72 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 18 July 2014, para. 1346. 73 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 18 July 2014, para. 1352. A similar conclusion had also been made in Fraport A.G. Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 402. 74 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 18 July 2014, para. 1364.

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Anti-competitive Investor Behaviour Under the Developing Components of Truly International Public Policy

Investor misconduct may breach not only domestic but also international law.75 Investor breaches can be covered by different components of transnational or truly international public policy. The arbitral tribunal in World Duty Free v. Kenya distinguished between international public policy in narrow terms and as a broader concept. In narrow sense, international public policy covers national public policy applied to foreign awards during enforcement proceedings.76 These international public policies differ substantially and each state defines them subjectively.77 In the broader version, “[t]he term “international public policy” [. . .] signif[ies] 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’.”78 Professor Mathias Forteau has developed this concept further from the public international law standpoint and found that it has been characterized by an expansion of the protected values.79 Bearing this in mind,80 truly international public policy covers anti-competitive behaviour in two ways. First of all, it includes anti-competitive behaviour that results in fraudulent acts. Secondly, anti-competitive investor behaviour may fall within a developing component of truly international public policy in the form of the requirement to comply with the rule of law. However, there does not currently seem to be sufficient leeway to distinguish competition law as an autonomous component of truly international public policy.

75 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, para. 138. 76 World Duty Free Co. Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 138. 77 EWHC, Anatolie Stati, Gabriel Stati, Ascom Group S.A., Terra Raf Trans Traiding Ltd v. Kazakhstan, [2017] EWHC 1348 (Comm), 6 June 2017, para. 84. See also Fry (2009), pp. 86–87. 78 World Duty Free Co. Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 139 (quoting Lalive 1987). For more detailed explanations, see Douglas (2014), pp. 180–183; Llamzon and Sinclair (2015), pp. 517–523; Jagusch (2014), pp. 24–27. 79 Forteau (2011), paras 10–15. 80 For other definitions of truly international public policy, see Fry (2009), pp. 88–89.

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Anti-competitive Practices as a Matter of Fraudulent Conduct, Broadly Interpreted

Fraudulent behaviour has come to be recognized as a matter of truly international public policy,81 which may therefore cover some types of anti-competitive strategies on the part of investors. Arbitral tribunals have often followed the broad definition of international public policy used by the tribunal in World Duty Free v. Kenya and have found that fraudulent acts resulted in investments that were tainted with illegality. A useful example is provided by Plama v. Bulgaria, in which the tribunal concluded that the claimants’ investments that were made in breach of local laws would also be contrary to principles of international law, namely to the “basic notion of international public policy – that a contract obtained by wrongful means (fraudulent misrepresentation) should not be enforced by a tribunal”82—a conclusion that appears to have been tacitly shared by the Yukos arbitral tribunal.83 The Churchill Mining and Planet Mining v. Indonesia tribunal confirmed this more explicitly by finding particularly serious cases of fraudulent conduct to be contrary to “international or transnational public policy”.84 This tribunal especially distinguished corruption and forgery from among universally shared categories of fraudulent behaviour. It can be said that the latter in fact constitutes an example of a more general case of the fraudulent manipulation of information that was essential for setting up the investments. Where corruption is concerned, the conclusions reached by the World Duty Free arbitral tribunal have received considerable support in investment arbitration.85 The tribunal addressed a contract claim and found that a contract procured by corrupt means breached both truly international public policy and English public order, as part of the law applicable to the contract.86 Other arbitral tribunals that were dealing with both treaty claims (e.g., Metal-Tech v. Uzbekistan and Infinito Gold

81

Llamzon and Sinclair (2015), p. 519. Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, paras 140 and 143. 83 Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award, 18 July 2014, paras 1350 and 1352. 84 Churchill Mining PLC and Planet Mining Pty Ltd v. Indonesia, ICSID Case No. ARB/12/14 and 12/40, Award, 6 December 2016, para. 493. 85 For example, Bottini (2010), p. 298: “there is a growing consensus that corruption is against the international ordre public”. 86 World Duty Free Co. Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, paras 129, 137–188. For further explanation, see, Kryvoi (2018). 82

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Ltd. v. Costa Rica87) and contract claims (Niko v. Bangladesh88) confirmed the prohibiting of corruption to be of such great importance for the international legal order that it forms part of truly international public policy. The arbitral tribunal in Vladislav Kim v. Uzbekistan also noted that this truly international public policy was implicitly present in BITs.89 Another component of fraudulent conduct that is sanctioned by truly international public policy is the serious manipulation of information that is critical for acquiring the investment. The arbitral tribunals in both Plama v. Bulgaria and Inceysa v. El Salvador declared that the investors’ fraudulent misrepresentation during the privatization process (deliberately concealing essential information) and the bidding process (falsifying essential information) was contrary to truly international public policy.90 By the same token, the arbitral tribunal in Churchill Mining and Planet Mining v. Indonesia agreed with the respondent “that claims arising from rights based on fraud or forgery which a claimant deliberately or unreasonably ignored are inadmissible as a matter of international public policy”.91 In this case the arbitral tribunal tackled repeated acts of forgery aimed at orchestrating, legitimizing and perpetuating a fraudulent scheme to gain access to valuable mining rights.92 The claims were dismissed in their entirety. Investors may potentially use these illegal means—to the detriment of other market participants—with the aim of inducing the host state to authorize their investment projects (corruption) or to grant them the rights to implement a stateproposed project through bidding or privatization processes. Truly international public policy does not allow investors to benefit from investment treaty protection in cases of fraudulent conduct.

87

Metal-Tech Ltd. v. Uzbekistan, ICSID Case No. ARB/10/3, Award, 4 October 2013, para. 292; Infinito Gold Ltd. v. Costa Rica, ICSID Case No. ARB/14/5, Decision on Jurisdiction, 4 December 2017, para. 137. 88 Niko Resources (Bangladesh) Ltd. v. Bangladesh Petroleum Exploration & Production Company Limited (Bapex) and Bangladesh Oil Gas and Mineral Corporation (Petrobangla), ICSID Case No. ARB/10/18, Decision on Jurisdiction, 19 August 2013, para. 431–433. 89 Vladislav Kim and al. v. Uzbekistan, ICSID Case No. ARB/13/6, Decision on Jurisdiction, 8 March 2017, para. 593. 90 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award, 27 August 2008, paras 141 and 143 (quoting the arbitral tribunal in Inceysa). 91 Churchill Mining PLC and Planet Mining Pty Ltd v. Indonesia, ICSID Case No. ARB/12/14 and 12/40, Award, 6 December 2016, para. 508. 92 Churchill Mining PLC and Planet Mining Pty Ltd v. Indonesia, ICSID Case No. ARB/12/14 and 12/40, Award, 6 December 2016, paras 507 and 515.

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Anti-competitive Behaviour Under a Developing Component of the Rule of Law?

Respect for the rule of law may also be considered an emergent component of truly international public policy93 which can bar claims on grounds of illegality resulting from anti-competitive conduct. Both state practice and arbitral awards94 support the idea of the importance of complying with the rule of law. As the World Duty Free v. Kenya tribunal pointed out, truly international public policy is characterized by the adherence of the international community to protected values (or international consensus) and the immediate and universal protection of these values in all forums, including by international tribunals. In Inceysa v. El Salvador the arbitral tribunal felt that the BIT’s inclusion of “in accordance with laws” clauses “follows international public policies [of each of the signatory states] designed to sanction illegal acts and their resulting effects”.95 It further observed that respect for the rule of law was in fact not only the respondent’s concern, but that of “any civilized country”.96 This is in line with the notion of general principles of law provided for in Article 38 of the International Court of Justice Statute. Furthermore, the proliferation of these clauses in various investment treaties can be considered to contribute to the existence of an international consensus through a custom.97 In the same vein, arbitral tribunals have come to recognise the duty of investors to comply with local laws, which is inherent to investment treaties and can thus be considered a general principle of law. The arbitral tribunal in Blusun v. Italy was relying on this practice when it concluded recently that the ECT does “not cover investments which are actually unlawful under the law of the host state at the time they were made because protection of such investments would be contrary to the international public order”.98 Taking into account that not all violations of domestic law constitute breaches of a truly international public policy,99 arbitral tribunals will 93

Forteau (2011), para. 92 (discussing Phoenix, Plama, Mytilineos Holdings, LESI, Rumeli). World Duty Free Co. Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 141: “Tribunals must be very cautious in this respect and must carefully check the objective existence of a particular transnational public policy rule in identifying it through international conventions, comparative law and arbitral awards”. See also Douglas (2014), p. 181. 95 Inceysa Vallisoletana S.L. v. El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006, para. 247. 96 Inceysa Vallisoletana S.L. v. El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006, para. 248. 97 See, for example., Sempra Energy International v. Argentine, ICSID Case No. ARB/02/16, Decision on Objections to Jurisdiction, 11 May 2005, para. 156: ‘there is no obstacle in international law to the expression of the will of states through treaties being at the same time an expression of practice and of the opinion juris necessary for the birth of a customary rule if conditions for it are met’. On the customary nature of truly international public policy from the standpoint of public international law, see Forteau (2011), paras 55–69. 98 Blusun S.A., Jean-Pierre Lecorcier and Michael Stein v. Italy, ICSID Case No. ARB/14/3, Final Award, 27 December 2016, para. 264 and footnote 490. 99 Douglas (2014), pp. 181–182. 94

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have to specify the content of the rule of law when considering this ground of illegality.

4.2.3

The Insufficiency of Grounds for Qualifying Competition Law as a Separate Component?

Scholars have debated whether competition law is covered by truly international public policy.100 In investment arbitration, as already mentioned, the arbitral tribunal in World Duty Free v. Kenya considered international conventions, comparative law and arbitral awards to conclude that the prohibition of corruption forms part of truly international public policy. When analysing the relevant sources of law, it seems that compliance with competition rules is unlikely to presently be recognized as an autonomous component under truly international public policy. Although in 1980 the United Nations General Assembly adopted the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices,101 confirming the importance of competition law for the international community,102 and competition law has been adopted by an increasing number of states being undoubtedly the core element of many states’ economic policy103—approximately of 130 states104—, it is by no means “universal”.105 The further internationalisation of competition law through international conventions, combined with (quasi-) universal adherence to this value, may one day result in the creation of a truly international policy against private anti-competitive behaviour.

100 See Gaillard and Savage (1999), p. 824, para. 1468 (and references given by the authors); Jagusch (2014), pp. 37–38 (arguing that truly international public policy includes competition laws). 101 UNCTAD (2000), “The Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices”, http://unctad.org/en/docs/tdrbpconf10r2.en.pdf. 102 Jagusch (2014), p. 38. 103 UNCTAD (2014), Handbook on Competition Legislation, Vol. II, http://unctad.org/en/ PublicationsLibrary/ditcclp2012_handbook_en.pdf. 104 Aydin and Büthe (2016), p. 2. 105 World Duty Free Co. Ltd. v. Kenya, ICSID Case No. ARB/00/7, Award, 4 October 2006, para. 139 (referring to “universal standards” when defining the concept of truly international public policy) and para. 140 (observing that “active and passive corruption, are sanctioned by criminal law in most, if not all, countries”); see also Douglas (2014), p. 181: “the grounds of international public policy are limited to conduct that is universally condemned and abhorred by the international community” (quoting World Duty Free); Llamzon and Sinclair (2015), p. 519: “In determining the existence and content of a certain transnational public policy, it therefore must be shown that [. . .] [values are] (1) essential; (2) supported by a large adherence or what in a usual language is called a large consensus, let alone a universal one; and (3) therefore requiring immediate application, regardless of any contrary agreement’.”

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5 Conclusion In order to liberalize markets and remove barriers for foreign investors, states grant investors protection in exchange for capital flows. If investors hinder competition in the market, not only do they harm the host state’s socio-economic welfare, but they also weaken the rule of law. This chapter has discussed the relationship between the functional approach to defining anti-competitive illegal behaviour and the applicable law approach. It has argued that investors can violate competition laws, use unfair tools to achieve their goals and seriously distort market competition by fraud or corruption. For this reason, a functional definition of anti-competitive investor behaviour which is in breach of domestic laws would appear to be the most appropriate for the purposes of this study. This anti-competitive behaviour taints the investments affected with illegality and may lead to the denial of protection under the applicable treaty. In the presence of an “in accordance with host state’s law” clause under a relevant treaty, both substantial and time limitations may restrict the possibility of successfully triggering the application of the clause when investors resort to anti-competitive conduct. In the absence of such a clause, investor obligations to comply with host state’s laws, including those that directly or indirectly frame and guarantee market equilibrium, stem from the emergence of a general principle of law or truly international public policy. Future disputes are likely to provide more guidelines with regard to the scope and extent of investors’ obligations to respect the legal order of host states.

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Gaillard E, Savage J (eds) (1999) Fouchard Gaillard Goldman on international commercial arbitration. Kluwer Law International Hayek FA (1960) The constitution of liberty. The University of Chicago Press, Chicago Jagusch S (2014) Issues of substantive transnational public policy. In: Bray D, Bray HL (eds) International arbitration and public policy, pp 23–45 Khemani RS, Shapiro DM (1993) Glossary of industrial organisation economics and competition law. OECD. http://www.oecd.org/regreform/sectors/2376087.pdf Kryvoi Y (2018) Economic crimes in international investment law. Int Comp Law Q 67:577–605 Lalive P (1987) Transnational (or truly international) public policy and international arbitration. In: Sanders P (ed) Comparative arbitration practice and public policy in arbitration, ICCA Congress Series 1986, vol 3. Kluwer Law International, New York, pp 258–318 Lamm C, Greenwald B, Young K (2014) From “World Duty Free” to “Metal-Tech”: a review of international investment treaty arbitration cases involving allegations of corruption. ICSID Rev Foreign Invest Law J 29:328–349 Llamzon A (2014) Corruption in international investment arbitration. Oxford University Press Llamzon A, Sinclair AC (2015) Investor wrongdoing in investment arbitration: standards governing issues of corruption, fraud, misrepresentation and other investor misconduct. In: van den Berg A (ed) Legitimacy: myths, realities, challenges, ICCA Congress Series, vol 18. Kluwer Law International, pp 451–530 Mehta PS, Mitra S, Dube C (2008) Competition policy and consumer policy: complementarities and conflicts in the promotion of consumer welfare. In: Qaqaya H, Lipimile G (eds) The effects of anti-competitive business practices on developing countries and their development prospects. UNCTAD. http://unctad.org/en/docs/ditcclp20082_en.pdf Moloo R, Khachaturian A (2011) The compliance with the law requirement in international investment law. Fordham Int Law J 34(6):1473–1501 Newcombe A (2011) Investor misconduct: jurisdiction, admissibility or merits? In: Brown C, Miles K (eds) Evolution in investment treaty law and arbitration. Cambridge University Press, Cambridge, pp 187–200 Obersteiner T (2014) “In accordance with domestic law” clauses: how international investment tribunals deal with allegations of unlawful conduct of investors. J Int Arbitr 31(2):265–288 Pradhan S et al (2000) Anticorruption in transition: a contribution to the policy debate. World Bank. https://siteresources.worldbank.org/INTWBIGOVANTCOR/Resources/contribution.pdf Schill SW (2012) Illegal investments in investment treaty arbitration. Law Pract Int Courts Tribunals 11:281–323

Elena Belova is currently a PhD candidate (doctorante contractuelle) and a teaching assistant in the European law and the French administrative law at the University of Lille, Faculty of Law (France). She is also a research fellow (doctorante associée) at the University Paris-Nanterre, CEDIN (France). Her current research focuses on international investment law and arbitration, as well as on international and the European system of human rights protection. She holds a Master’s degree in Human Rights and Humanitarian Law from the University Panthéon-Assas (France).

The Impact of EU State Aid Law on International Investment Law and Arbitration Paschalis Paschalidis

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Inconsistencies Between the FET Standard and EU State Aid Law . . . . . . . . . . . . . . . . . . . . . . . 2.1 The Concept of “State Aid” Under EU Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The Protection of Investors’ Legitimate Expectations Through the FET Standard . . . . 2.3 Problems Arising from the Application of the FET Standard in the Area of EU State Aid Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Can Arbitral Awards Constitute State Aid Under EU Law? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Imputability of Arbitral Awards to the State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Damages as Economic Advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Are There Remedies Against Arbitral Awards Conflicting with EU State Aid Law? . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter examines the overlap between European Union (EU) state aid law and international investment law and arbitration. First, it enquires whether there is a systemic incompatibility between the fair and equitable treatment (FET) standard and EU state aid law. This chapter focuses in particular on the principle of legitimate expectations and the manner that it was applied by several arbitral tribunals in relation to state aid measures. For the purposes of this enquiry, this chapter sets out the basic components of the notion of state aid under EU law and points out the severely restrictive application by the Court of Justice of the European Union (CJEU) of the principle of legitimate expectations in the field of state aid. Second, this chapter examines whether arbitral awards granting damages to an investor can constitute, as such, incompatible and unlawful state aid. The chapter focuses on two key questions, namely whether arbitral awards can constitute an economic advantage and whether they are attributable to the member state in question. Third, this chapter looks at the issue of the fate of arbitral awards granting

P. Paschalidis (*) Shearman & Sterling LLP, Paris, France e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_9

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damages to investors in state aid matters. It examines what remedies are available to member states against such awards. In doing so, it takes into account the different legal regimes applicable to awards issued under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) and non-ICSID awards. It also examines the possibility of safeguarding the enforcement of ICSID awards that may be incompatible with EU law under Article 351 TFEU.

1 Introduction European Union (EU) state aid law and international investment law are creatures of the world order that emerged after the Second World War. The project of European integration started off with the establishment of the European Coal and Steel Community (ECSC) in 1952 and the conclusion of the Treaty establishing the European Economic Community (EEC Treaty) in 1957. Only a couple of years later, in 1959, Germany and Pakistan concluded the first modern bilateral investment treaty (BIT). Yet, despite a common interest in promoting economic development, EU law and international investment law pursue different aims. For the ECSC and EEC Treaties as well as their successors, including the Treaty on the Functioning of the European Union (TFEU), economic development is not an aim as such but a means to a much broader political goal, namely to achieve and preserve peace in the European continent.1 The first step in this direction was to achieve a significant degree of economic integration through the establishment of the internal market. EU state aid law protects the EU’s internal market by preventing member states for engaging in a subsidy race in support of their respective domestic undertakings.2 Indeed, Article 107(1) TFEU declares that, subject to certain exceptions laid down in Article 107(2)-(3) TFEU, “any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between member states, be incompatible with the internal market”. Unlike EU state aid law, international investment law is concerned with the protection of the interests of investors and states alike. It safeguards the interests of foreign investors by protecting their investments against interference by the host state while simultaneously respecting the interests of the host state, in particular its

See Schuman Declaration (9 May 1950): “World peace cannot be safeguarded without the making of creative efforts proportionate to the dangers which threaten it [. . .] Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity”. 2 See Kassim and Lyons (2013), p. 9; Bacon QC (2017), para. 1.04; Hofmann and Micheau (2016), pp. 9–11, 18–21. For the origins of subsidy control, see Piernas López (2015), pp. 21–44. 1

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right to regulate.3 In order to achieve these goals, investment treaties guarantee certain substantive rights to investors, subject to certain limits, and give jurisdiction to arbitral tribunals to adjudicate disputes between investors and states. As will be seen below, investment protection is ensured, to a considerable extent, through the guarantee of fair and equitable treatment (FET)4 which inter alia protects the investors’ legitimate expectations arising from state conduct, such as specific promises and agreements. Even at this level of abstraction, one can notice the tension between the opposing aims pursued by international investment law and EU state aid law. EU state aid law prevents member states from encouraging investment through subsidies and it requires that such subsidies be abolished where they have been granted unlawfully. By contrast, the FET standard may grant protection to investors who have benefitted from such subsidies and therefore perpetuate the distortion of competition and trade created by the subsidies. This article explores this tension by, first, setting out the inconsistencies that may arise between the FET standard and EU state aid law. Second, it examines whether arbitral awards compensating investors for state aid measures that have been granted and then altered or withdrawn may themselves constitute state aid. Finally, it looks at the consequences for arbitral awards that are incompatible with EU state aid law.

2 Inconsistencies Between the FET Standard and EU State Aid Law 2.1

The Concept of “State Aid” Under EU Law

The term “state aid”5 refers to an economic advantage granted directly or indirectly through state resources, which is imputable to the state and is selective because it favours certain undertakings or the production of certain goods.

2.1.1

The Definition of Aid as an Economic Advantage

According to the Court of Justice of the European Union (CJEU), the notion of economic advantage covers measures “which, whatever their form, are likely directly or indirectly to favour certain undertakings . . . or are to be regarded as an

3

See Scheuer (2013), para. 1. See Vannessa Ventures v. Venezuela, ICSID Case No. ARB(AF)/04/6, Award, 16 January 2013, para. 222, where the arbitral tribunal held that the FET standard requires that “the treatment of investments not fall below a minimum standard of fairness and equitableness that all investors have a right to expect”. 5 On the notion of state aid under EU law, see Hofmann and Micheau (2016), pp. 17–90. 4

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economic advantage which the recipient undertaking would not have obtained under normal market conditions”.6 Identification of a measure as an economic advantage is, therefore, based on the so-called “market economy investor principle” (MEIP). According to this principle, one should assess whether the measure adopted by the state would have been adopted in normal market conditions by a private investor in a situation as close as possible to that of the state, having regard in particular to the information that was available and the developments that were foreseeable at the date when the state measure whose adopted.7 As a result of this broad definition of economic advantage, state aid encompasses a variety of measures having a direct or indirect effect on the public purse, such as direct financial measures (capital investments and injections, interest-free loans etc.), indirect financial measures (such as waivers of public debt), state guarantees, tax exemptions and reductions, etc.8

2.1.2

State Aid Must Be Granted by a Member State or Through State Resources

Article 107(1) TFEU refers to aid granted by a member state or through state resources. On this basis, the CJEU has held that only advantages granted by the state or through state resources are to be considered aid within the meaning of that provision. According to the CJEU: [t]he distinction made in that provision between ‘aid granted by a Member State’ and aid granted ‘through State resources’ does not signify that all advantages granted by a State, whether financed through State resources or not, constitute aid but is intended merely to bring within that definition both advantages which are granted directly by the State and those granted by a public or private body designated or established by the State.9

For the purposes of establishing the existence of state aid, a sufficiently direct link must be established between, on the one hand, the advantage given to the beneficiary and, on the other, a reduction of the state budget or a sufficiently concrete economic risk of burdens on that budget.10 However, according to the CJEU, “it is not

6

CJEU, Judgment of 24 July 2003, Altmark Trans and Regierungspräsidium Magdeburg, C-280/00, EU:C:2003:415, para. 84. 7 See CJEU, Judgment of 16 May 2002, France v. Commission, C-482/99, EU:C:2002:294, para. 70; Judgment of 5 June 2012, Commission v. EDF, C-124/10 P, EU:C:2012:318, paras 78–79; Judgment of 1 October 2015, Electrabel and Dunamenti Erőmű v. Commission, C-357/14 P, EU: C:2015:642, para. 144. 8 See Bacon QC (2017), para. 2.06. 9 CJEU, Judgment of 13 March 2001, PreussenElektra, C-379/98, EU:C:2001:160, para. 58. For the subsequent development of this notion in CJEU case-law, see Rusche (2015), pp. 79–117. 10 See CJEU, Judgment of 19 March 2013, Bouygues and Bouygues Télécom v. Commission and Others and Commission v. France and Others, C-399/10 P and C-401/10 P, EU:C:2013:175, para. 109. See also Judgment of 28 March 2019, Germany v. Commission, C-405/16 P, EU:C:2019:268, para. 60.

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necessary that such a reduction, or even such a risk, should correspond or be equivalent to that advantage, or that the advantage has as its counterpoint such a reduction or such a risk, or that it is of the same nature as the commitment of State resources from which it derives”.11

2.1.3

Imputability of the Aid Measure to the State

In addition to being provided through state resources, state aid must be imputable to the state. In certain cases, the measure in question can be easily imputed to the State. This is the case, for example, for economic advantages granted directly by the state through legislation or other acts of the state’s public administration. Where, however, aid is granted through a publicly owned undertaking, the CJEU has held that imputability “may not be inferred from the mere fact that they have been provided by a public undertaking controlled by the State”.12 Instead, in such circumstances imputability to the state depends on whether public authorities were actually involved in the adoption of the measure in question or in deciding its compass, its content, and its conditions.13

2.1.4

The Economic Advantage Granted by the State or Through State Resources Must Be Selective

To constitute state aid, an economic advantage must be selective. This requirement flows from the wording of Article 107(1) TFEU which refers to measures “favouring certain undertakings or the production of certain goods”. An economic advantage is, therefore, selective if it favours certain undertakings or goods over other undertakings or goods which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and, accordingly, suffer different and, hence, discriminatory treatment.14 In addition, where the measure at issue is conceived as an aid scheme and not as individual aid, that measure is selective even if it confers an advantage of general

11 See CJEU, Judgment of 19 March 2013, Bouygues and Bouygues Télécom v. Commission and Others and Commission v. France and Others, C-399/10 P and C-401/10 P, EU:C:2013:175, para. 110. See also Piernas López (2015), pp. 172–176. 12 CJEU, Judgment of 17 September 2014, Commerz Nederland, C-242/13, EU:C:2014:2224, para. 31. See also Judgment of 16 May 2002, France v. Commission, C-482/99, EU:C:2002:294, para. 51. 13 CJEU, Judgment of 16 May 2002, France v. Commission, C-482/99, EU:C:2002:294, paras 51–55; Judgment of 17 September 2014, Commerz Nederland, C-242/13, EU:C:2014:2224, paras 31–32. 14 See CJEU, Judgment of 21 December 2016, Commission v. World Duty Free Group and Others, C-20/15 P and C-21/15 P, EU:C:2016:981, para. 54 and case law cited.

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application, when the benefit of that advantage is in fact conferred exclusively on certain undertakings or certain sectors of activity.15

2.1.5

The Notions of “Incompatible” and “Unlawful” State Aid

State aid is incompatible with the internal market when it is liable to distort competition and affect trade between member states. This requirement is met in cases where aid strengthens the position of an undertaking compared with other undertakings that are or could be competing in intra-EU trade.16 However, Article 107(2)-(3) TFEU sets out certain exceptions to the rule that state aid is incompatible with the internal market. Article 107(2) TFEU lists the types of aid that are automatically considered as compatible, including social aid, aid destined as response to natural disasters and other extraordinary circumstances as well as aid granted to certain areas of Germany affected by the division of the country during the Cold War period.17 Article 107(3) TFEU covers certain types of aid which can be considered compatible with the internal market, subject to the European Commission (EC)’s discretionary assessment, such as regional aid, aid to important projects and to remedy serious economic disturbances, aid to promote the development of certain economic activities, and aid for culture and heritage conservation.18 Unlawful aid is a concept distinct from that of incompatible aid. Aid is unlawful if it is implemented in contravention of Article 108(3) TFEU, meaning without notification to and approval by the EC.19 Consequently, aid can be unlawful even if it is compatible with the internal market. Pursuant to Article 108(2) TFEU, if the EC finds that unlawful aid granted by a member state is incompatible with the internal market, it shall require the member state concerned to abolish or alter the aid. Any aid already paid must be recovered,20 15 See CJEU, Judgment of 21 December 2016, Commission v. World Duty Free Group and Others, C-20/15 P and C-21/15 P, EU:C:2016:981, para. 55. 16 See CJEU, Judgment of 17 September 1980, Philip Morris Holland v. Commission, Case 730/79, EU:C:1980:209, para. 11; Judgment of 15 December 2005, Unicredito Italiano, C-148/04, EU: C:2005:774, para. 56. 17 For further analysis, see Hofmann and Micheau (2016), pp. 235–239; Bacon QC (2017), paras 3.09–3.18. 18 For further analysis, see Hofmann and Micheau (2016), pp. 240–307; Bacon QC (2017), paras 3.19–3.3.45. 19 See Article 1(f) of Council Regulation (EU) 2015/1589 of 13 July 2015 laying down detailed rules for the application of Article 108 TFEU, [2015] OJ L248/9. However, aid schemes meeting the requirements of the so-called General Block Exemption Regulation are deemed compatible with the internal market within the meaning of Article 107(2)-(3) TFEU and are exempted from the notification requirement of Article 108(3) TFEU. See, to this effect, Article 3 of Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty, [2014] OJ L187/1. 20 See Article 16 of Regulation 2015/1589.

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unless recovery is absolutely impossible.21 By contrast, where unlawful aid is found to be compatible by the EC after its implementation, the EC has no power to order its recovery on the sole basis that the requirement of prior notification and approval had not been respected. Such power lies with the national courts.22

2.2

The Protection of Investors’ Legitimate Expectations Through the FET Standard

Many arbitral tribunals have sought to describe rather than to define the FET23 as a flexible standard that must be adapted to the circumstances of each case.24 The protection of investors’ legitimate expectations is one of the most significant facets of the FET.25 Essentially, an investor is entitled to compensation, if he can establish that he legitimately or reasonably relied on a specific promise or representation made to him by the state in making the investment, and that the state subsequently reneged on this commitment to the detriment of the investment.26 However, the protection of legitimate expectations under investment treaties is not an “insurance policy against the risk of any changes in the host State’s legal and economic framework”.27 In the words of the Micula v. Romania tribunal: an overwhelming majority of cases supports the contention that, where the investor has acquired rights, or where the state has acted in such a way so as to generate a legitimate expectation in the investor and that investor has relied on that expectation to make its

21

See CJEU, Judgment of 9 July 2015, Commission v. France, C-63/14, EU:C:2015:458, para. 48; Judgment of 6 November 2018, Scuola Elementare Maria Montessori v. Commission and Commission v. Scuola Elementare Maria Montessori and Ferracci, C-622/16 P to C-624/16 P, EU: C:2018:873, para. 80. 22 See CJEU, Judgment of 21 October 2003, van Calster and Others, C-261/01 and C-262/01, EU: C:2003:571, paras 73–76. 23 See Tudor (2008), p. 6; Angelet (2011), paras 5–6. See also Demirkol (2018), pp. 31–39. For a detailed analysis of the conceptual challenges posed by the FET standard, see Kläger (2011), in particular pp. 115–128. 24 See Waste Management v. Mexico, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 99; Micula v. Romania, ICSID Case No. ARB/05/20, Final Award, 11 December 2013, para. 506. 25 See Electrabel v. Hungary, ICSID Case No. ARB/07/19, Decision on jurisdiction, applicable law and liability, 30 November 2012, para. 7.75; Micula v. Romania, ICSID Case No. ARB/05/20, Award, 11 December 2013, para. 667; Novenergia v. Spain, SCC Case No. 2015/063, Final Arbitral Award,15 February 2018, paras 648–649. See also Kläger (2011), pp. 164–187. 26 See, for example, Peter A. Allard v. The Government of Barbados, PCA Case No. 2012-06, Award, 27 June 2016, para. 194. For a detailed analysis of the notion of legitimate expectations in investment treaty arbitration, see Wongkaew (2019). 27 EDF (Services) Ltd. v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 217.

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investment, action by the state that reverses or destroys those legitimate expectations will be in breach of the [FET] standard and thus give rise to compensation.28 (footnotes omitted)

Nonetheless, in the absence of a stabilization clause, the principle of legitimate expectations does not provide investors with an absolute guarantee that the regulatory framework in which they operate will not change. Indeed, the FET standard calls for a balance between the protection of investors’ rights and the host state’s public interest.29 Indeed, after pointing out that “an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host states from admitting foreign investments”,30the Saluka v. Czech Republic tribunal held that: [n]o investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investor’s expectations was justified and reasonable, the host State’s legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well.31

In this respect, it has been held that insofar as the investors’ expectations arising from the legislation applicable were legitimate and reasonable when the investment was made the FET standard protects against radical changes in the law that alter the essential characteristics of that legislation.32

2.3

Problems Arising from the Application of the FET Standard in the Area of EU State Aid Law

The FET standard and EU state aid law will come into conflict if a member state encourages investment in a way that both gives rise to legitimate expectations and constitutes incompatible or unlawful state aid. Depending on how arbitral tribunals

28 See Micula v. Romania, ICSID Case No. ARB/05/20, Award, 11 December 2013, para. 667. See also Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015, para. 7.77. 29 See McLachlan et al. (2017), p. 309; Angelet (2011), para. 6. 30 Saluka Investments v. Czech Republic, UNCITRAL, PCA Case No. 2001-04, Partial Award, 17 March 2006, para. 300. 31 Saluka Investments v. Czech Republic, UNCITRAL, PCA Case No. 2001-04, Partial Award, 17 March 2006, para. 305. See also, to the same effect, Arif v. Moldova, ICSID Case No. ARB/11/ 23, Award, 8 April 2013, para. 537; Micula v. Romania, ICSID Case No. ARB/05/20, Award, 11 December 2013, para. 666; Electrabel v. Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015, paras 165–166; Eiser v. Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017, para. 362; Novenergia v. Spain, SCC Case No. 2015/063, Final Arbitral Award, 15 February 2018, para. 688. 32 See Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, Award, 4 May 2017, para. 382; Novenergia v. Spain, SCC Case No. 2015/063, Final Arbitral Award, 15 February 2018, para. 656.

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will interpret the FET standard and in particular the principle of legitimate expectations and on whether they will find a breach for the withdrawal or modification of a state aid scheme, they may reach results incompatible with EU state aid law insofar as the scope of application of the principle of legitimate expectations in this field is severely restricted. The CJEU has held in relation to the principle of legitimate expectations that: In view of the mandatory nature of the review of State aid by the [EC] under Article [108 TFEU], undertakings to which aid has been granted may not, in principle, entertain a legitimate expectation that the aid is lawful unless it has been granted in compliance with the procedure laid down in that article and, second, a diligent businessman should normally be able to determine whether that procedure has been followed. In particular, where aid is implemented without prior notification to the [EC], so that it is unlawful under Article [108(3) TFEU], the recipient of the aid cannot have at that time a legitimate expectation that its grant is lawful [. . .] Neither the Member State in question nor the operator involved can plead the principle of legal certainty either, in order to prevent recovery of the aid, since the risk of national proceedings [. . .] was foreseeable from the moment that the aid was implemented.33

This holds true even when the behaviour of a national authority charged with the task of applying EU law and creating the expectation turns out to be contrary to EU law. That expectation cannot be a legitimate one.34 Essentially, nothing short of precise assurances given by the EC and leading an investor to entertain well-founded expectations will give rise to legitimate expectations that will prevail over the principle that incompatible aid has to be abolished and recovered.35 Turning now to arbitral practice in this area, it is useful to distinguish between cases where there is a definitive finding by the EC that the investor benefitted from an economic advantage that constitutes incompatible state aid and those where there is no such finding but there is good reason to believe that the state conduct relied upon by the investor constitute state aid. The Electrabel v. Hungary and EDF v. Hungary arbitrations are prominent examples of the first category of cases.36 Both dealt with the termination by Hungary of long-term power purchase agreements (PPAs) granted in favour of Belgian and French investors who had invested in the modernization of Hungarian power plants. In doing so, Hungary had complied with a decision of the EC finding that the PPAs constituted incompatible state aid.37 33 See CJEU, Judgment of 15 December 2005, Unicredito Italiano, C-148/04, EU:C:2005:774, para. 104 and case law cited. 34 See CJEU, Judgment of 4 October 2007, Commission v. Italy, C-217/06, EU:C:2007:580, para. 23 and case law cited. 35 See CJEU, Judgment of 16 December 2010, Kahla Thüringen Porzellan v. Commission, C-537/ 08 P, EU:C:2010:769, paras 65–66. See also Bacon QC (2017), para. 18.134. 36 The Micula v. Romania arbitration is not listed here because it concerned an aid scheme put in place prior to accession and, therefore, at a time when EU law was not applicable to it. Whether the Micula v. Romania award constitutes per se state aid incompatible with the internal market is examined below. 37 See Commission Decision of 4 June 2008 on the State aid C 41/05 awarded by Hungary through Power Purchase Agreements [2009] OJ L225/53, affirmed by General Court, Judgment of

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In this context, the Electrabel v. Hungary and EDF v. Hungary tribunals reached opposing results. The Electrabel v. Hungary tribunal did not examine whether Hungary breached Electrabel’s legitimate expectations by terminating the PPA. Rather, it reviewed the way Hungary brought about that termination and held that there was no evidence suggesting that Hungary had treated Electrabel unfairly in its dealings with the EC or that Hungary had acted irrationally or arbitrarily in understanding that the EC’s decision required it to terminate the PPAs.38 The EDF v. Hungary tribunal’s award is not publicly available but it appears that the tribunal found a breach of the FET standard because, regardless of the termination of the PPAs, Hungary had the possibility under EU law to compensate the investor’s stranded costs39 but had failed to do so in a fair and equitable manner.40 Whether international investment law can offer complementary protection to investors in a manner compatible with EU law is not obvious,41 especially in light of the CJEU’s holding that “matters covered by the transfer of powers from the member states to the EU are governed by EU law to the exclusion, if EU law so requires, of any other law”.42 A series of arbitrations against Spain (Charanne v. Spain,43 Isolux v. Spain,44 Eiser v. Spain,45 Novenergia v. Spain,46 Masdar v. Spain,47 Foresight v. Spain,48 RREEF v. Spain49 and 9REN v. Spain50) are prominent examples of cases where the EC has not taken a decision characterizing the scheme relied upon by the investor as

13 February 2012, Budapesti Erőmű v. Commission, T-80/06 and T-182/09, EU:T:2012:65; General Court, Judgment of 30 April 2014, Dunamenti Erőmű v. Commission, T-179/09, EU: T:2014:236; CJEU, Judgment of 1 October 2015, Electrabel and Dunamenti Erőmű v. Commission, C-357/14 P, EU:C:2015:642. 38 See Electrabel v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Admissibility and Liability, 30 November 2012, paras 6.66–6.69 and 6.91. 39 See letter of the European Commission to the Hungarian Minister for Foreign Affairs dated 27 April 2010, regarding “State aid SA N 691/2009 - Hungarian stranded costs compensation scheme”, C (2010) 2532 final. 40 See Judgment of the Tribunal fédéral (Federal Tribunal, Switzerland) of 6 October 2015, 4A_34/ 2015, para. 5.3.2; Electrabel v. Hungary, ICSID Case No. ARB/07/19, Award, 25 November 2015, para. 225. 41 For further analysis, see Paschalidis (2018), pp. 51–115. 42 Opinion 2/13 (Accession of the European Union to the ECHR) of 18 December 2014, EU: C:2014:2454, paras 193. Emphasis added. 43 SCC Case No. 2012/062, Final Award, 21 January 2016. 44 SCC Case No. 2013/153, Award, 12 July 2016). 45 ICSID Case No. ARB/13/36, Award, 4 May 2017. 46 SCC Case No. 2015/63, Final Arbitral Award, 15 February 2018. 47 ICSID Case No. ARB/14/1, Award, 16 May 2018. 48 SCC Case No. 2015/150, Final Award, 14 November 2018. 49 ICSID Case No. ARB/13/30? Decision on Responsibility and on the Principles of Quantum, 30 November 2018. 50 9REN Holding S.a.r.l v. Kingdom of Spain, ICSID Case No. ARB/15/15, Award, 31 May 2019.

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state aid.51 They all dealt with the modification by Spain, especially through Royal Decree 413/2014, of a scheme introduced by Royal Decrees 661/2007 and 1578/ 2008 and supporting the production of electricity from renewable sources through guaranteed feed-in tariffs paid to investors in photovoltaic panels. Certain investors considered that the modification to the support scheme, which considerably reduced these amounts, violated the FET standard contained in Article 10 of the Energy Charter Treaty (ECT). The original scheme had not been notified to the EC and was implemented without its approval. According to the EC, the measures modifying that scheme, in particular Royal Decree 413/2014, and causing prejudice to the investors constituted compatible state aid which was nonetheless unlawful as it had been implemented without its approval.52 None of the arbitral tribunals seized in the context of the Spanish renewable energy arbitrations under the ECT seems to have taken into account the fact that the original Spanish support scheme on which the investors in renewable energy based their expectations may have constituted state aid implemented in contravention of the notification requirement laid down in Article 108(3) TFEU. The Foresight v. Spain tribunal went as far as to hold that the EC’s decision of 10 November 2017 “ha[d] no bearing on the issue of the [investors’] legitimate expectations of regulatory stability at the time of their investment”53 on the basis that the EC’s decision did not concern the regulatory regime relied upon by the investors but the subsequent modifications to that regime introduced by Spain. In so holding, the Foresight v. Spain tribunal did not examine whether the original regime constituted state aid under EU law and, in the affirmative, whether such aid was implemented in conformity with Article 108(3) TFEU. As the CJEU held in its ruling in Unicredito italiano, unlawful aid is not capable of generating legitimate expectations because investors can easily verify whether the procedure laid down in Article 108(3) TFEU has been respected.54 The fact that Spain’s modification of the original support scheme was subsequently declared by the EC as compatible with the internal market under Article 107(3)(c) TFEU55 does not alter the fact that the investors’ expectations arising out of the original scheme 51

One could also add Blusun v. Italy, ICSID Case No. ARB/14/3, Award, 27 December 2016 and Greentech & NovEnergia v. Italy, SCC Arbitration V (2015/095), Final Award, 23 December 2018, which dealt with claims arising out of Italy’s modification to its solar power aid regime establishing long-term fixed rates for investors investing in solar plants. 52 See letter of the European Commission to the Spanish Minister for Foreign Affairs and Cooperation dated 10 November 2017, regarding “State aid SA.40348 (2015/NN) – Spain, Support for electricity generation from renewable energy sources, cogeneration and waste”, C(2017) 7384 final. 53 See Foresight Luxembourg Solar 1 Sàrl and others v. Kingdom of Spain, SCC Case No. 2015/ 150, Final Award, 14 November 2018, para. 381. On this point, see Partial Dissenting Opinion of Co-Arbitrator Raul E. Vinuesa, paras 22–38. 54 See CJEU, Judgment of 15 December 2005, Unicredito Italiano, C-148/04, EU:C:2005:774, para. 104. See also Bacon QC (2017), para. 18.132. 55 Aid to facilitate the development of certain economic activities or of certain economic areas, where such aid does not adversely affect trading conditions to an extent contrary to the common interest.

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would not be legitimate, if it were found to constitute state aid. Indeed, although the EC cannot order recovery of the aid in cases of unlawful but compatible aid, the fact is that in such a case the aid beneficiary has obtained a competitive advantage vis-à-vis other market operators because he received the aid prematurely. This advantage consists in the interest that he would have paid if he had borrowed the value of the aid in the market for the period of aid’s unlawfulness. Other market operators can obtain compensation from member states courts on this basis.56 However, these remarks are subject to one assumption, namely that the original scheme constituted state aid. In this respect, it is worth noting that the EC’s thesis on the existence of state aid in the Spanish cases relies on two key elements: the electricity producers received support sourced (i) from the Spanish treasury budget and (ii) from a charge collected from electricity consumers managed by a public body, the CNMC.57 On the basis of these two elements, the EC considered that the scheme in question constituted aid granted by the state or through state resources. However, it is not clear whether the support from the Spanish treasury budget existed under the original scheme on which the investors rely.58 Nor is it a given that the charge in question would constitute a state resource. Indeed, certain investors may have believed that the original scheme did not constitute state aid on the basis of the CJEU’s PreussenElektra ruling, in which the CJEU held that the obligation imposed on private electricity suppliers to purchase electricity produced from renewable energy sources at fixed minimum prices did not constitute state aid because it did not involve any direct or indirect transfer of state resources to undertakings which produced that type of electricity.59 The EC relies60 on the CJEU’s ruling in the Elcogás case, which held that amounts financed by the end-users of electricity as a whole and paid to electricity

56

See CJEU, Judgment of 18 December 2008, Wienstrom, C-384/07, EU:C:2008:747, paras 28–32. See letter of the European Commission to the Spanish Minister for Foreign Affairs and Cooperation dated 10 November 2017, regarding “State aid SA.40348 (2015/NN) – Spain, Support for electricity generation from renewable energy sources, cogeneration and waste”, C(2017) 7384 final, para. 84. 58 For example, in its decision the EC refers to Law 15/2012, which suggests that this element was not part of the original scheme. See letter of the European Commission to the Spanish Minister for Foreign Affairs and Cooperation dated 10 November 2017, regarding “State aid SA.40348 (2015/ NN) – Spain, Support for electricity generation from renewable energy sources, cogeneration and waste”, C(2017) 7384 final, para. 10. 59 CJEU, Judgment of 13 March 2001, PreussenElektra, C-379/98, EU:C:2001:160, para. 59. The EC initially hesitated as to how to interpret the principle laid down in this Judgment but it subsequently sought to limit its ambit through a series of cases brought before the CJEU. See Rusche (2015), pp. 85–108. 60 See letter of the European Commission to the Spanish Minister for Foreign Affairs and Cooperation dated 10 November 2017, regarding “State aid SA.40348 (2015/NN) – Spain, Support for electricity generation from renewable energy sources, cogeneration and waste”, C(2017) 7384 final, para. 84. 57

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companies by a public body according to criteria predefined by law constitute aid granted by state intervention or through state resources.61 However, in its more recent Judgment in Germany v. Commission,62 the CJEU found against the EC in relation to a surcharge introduced by the German law concerning renewable energy sources (EEG 2012). The surcharge in question was collected and administered by the transmission system operators. It was intended ultimately to cover the costs generated by the feed-in tariffs and market premium provided for in the EEG 2012 by guaranteeing producers of EEG electricity a price for the electricity they produced that is above the market price. The CJEU decided that such a surcharge did not constitute aid granted through state resources because (i) the surcharge in question did not constitute a levy and therefore a state resource63; (ii) the state did not hold a power of disposal over the funds generated by the EEG surcharge64; and (iii) the transmission system operators responsible for managing the funds generated by the surcharge in questions were not constantly under public control or subject to such control.65 This last criterion may ultimately show that the question of passing on the cost to the consumer may turn out to have little impact in the examination of the criterion of “state resources”, if it turns out the funding of the national support scheme is under public control, regardless of the origin of the funds.66 Having said that, it should be noted that despite the importance of these questions, arbitral tribunals are not entitled to seek guidance from the CJEU on the correct interpretation of the notion of “state resources” because they do not qualify as courts or tribunals of a member state, which are able to submit references for preliminary rulings to the CJEU pursuant to Article 267 TFEU.67 They are, however, able to request the EC to give them guidance on this point, especially when the EC has intervened in the arbitration proceedings as an amicus curiae.

61 See CJEU, order of 22 October 2014, Elcogás, C-275/13, EU:C:2014:2314, para. 33. It is noteworthy that this case concerned another Spanish aid scheme in the field of electricity whose essential similarity with the one examined by the arbitral tribunals consisted in the fact that the amounts paid to the electricity producers were financed by the end-users. In its Elcogás ruling, the CJEU distinguished this scenario from the one at issue in PreussenElektra on the basis that the funds at issue in PreussenElektra originated solely from private undertakings and their payment to the aid beneficiaries never went through public undertakings. Nor had the state put in place a mechanism for the compensation of surcharges (see para. 32). 62 See CJEU, Judgment of 28 March 2019, Germany v. Commission, C-405/16 P, EU:C:2019:268. 63 See CJEU, Judgment of 28 March 2019, Germany v. Commission, C-405/16 P, EU:C:2019:268, paras 65–71. 64 See CJEU, Judgment of 28 March 2019, Germany v. Commission, C-405/16 P, EU:C:2019:268, paras 73–76. 65 See CJEU, Judgment of 28 March 2019, Germany v. Commission, C-405/16 P, EU:C:2019:268, paras 77–85. 66 See to that effect, CJEU, Judgment of 15 May 2019, Achema and Others, C-706/17, EU: C:2019:407, paras 50–55. 67 See CJEU, Judgment of 6 March 2018, Achmea, C-284/16, EU:C:2018:158, paras 43–49.

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3 Can Arbitral Awards Constitute State Aid Under EU Law? Whether arbitral awards awarding damages to investors can constitute state aid and therefore be incompatible with the EU’s internal market is a thorny question. It was raised for the first time in relation to the award handed down in the Micula v. Romania arbitration.68 That arbitration concerned an aid scheme that Romania had put in place and terminated prior to its accession to the EU as a pre-condition to that accession. EU law was not applicable to the aid scheme in question, because the scheme was implemented and terminated prior to accession. Consequently, the tribunal did not need to deal with any potential conflict that could exist (assuming that the scheme would be found to constitute state aid under EU law) between the FET standard and EU state aid law. Subsequently, the EC took the view that the award of damages corresponding to the value of the economic advantage that the investor would have received from Romania if the scheme had not been prematurely terminated, is per se state aid incompatible with the internal market.69 The EC, therefore, declared as incompatible state aid the payment of damages under the Micula award for the entire period from the repeal of the aid scheme in 2005 until 2009, when the scheme would have normally ended. The General Court then annulled the EC’s decision, holding that the right of the Micula brothers and their companies to receive the damages, granted by the Micula award, arose and began to take effect when Romania repealed the aid scheme in question, before Romania’s accession to the EU. According to the General Court, the award did no more than recognize the existence of a right prior to accession and any payment of damages post-accession represented the enforcement of a right which arose prior to accession.70 This coupled with the fact the EC declared the payment of damages under the award as incompatible state aid even in relation to the portion of damages pertaining to the period prior to accession (2005–2007) was sufficient for the General Court to conclude that the EC had exercised its powers retroactively in respect of facts and amounts lying outside the temporal scope of application of EU law.71

68

This part of the article is based on Paschalidis (2018), pp. 145–154. See Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania — Arbitral award Micula v. Romania of 11 December 2013 [2015] OJ L232/43. 70 See GCEU, Judgment of 18 June 2019, European Food and Others v. Commission, Cases T-624/ 15, T-694/15 and T-704/15, EU:T:2019:423, paras 70–78. The Commission has lodged an appeal against the General Court’s Judgment in the pending case Commission v. European Food and Others, Case C-638/19 P. 71 See GCEU, Judgment of 18 June 2019, European Food and Others v. Commission, Cases T-624/ 15, T-694/15 and T-704/15, EU:T:2019:423, paras 89–92 and 106–109. 69

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Given that the aid at issue in Micula was offered and terminated pre-accession, the General Court did not have to address in detail whether the payment of damages under an investment award could constitute incompatible aid. The question, however, could be raised in relation to other arbitral awards, such as the one rendered in Eiser v. Spain, if these awards were considered to quantify damages for the revocation of measures that constituted unlawful state aid.72 Such awards do not raise the questions of temporal application of EU law. In this context, the critical question is, therefore, whether damages can constitute state aid. According to the EC, damages are a selective advantage in the sense that only certain undertakings benefit from them (namely the investor-claimant in the arbitration).73 They are also paid through state resources.74 The more difficult questions are whether arbitral awards satisfy the criterion of imputability to the state75 and whether damages constitute an economic advantage in accordance with the MEIP.76

3.1

Imputability of Arbitral Awards to the State

Arbitral tribunals are, in principle, not part of the state or its administration and do not constitute public bodies. In addition, they must satisfy certain requirements of independence and impartiality so that, in the normal course of things, it will be hard to argue that the state and its authorities are involved in the adoption of the arbitral award by influencing its compass and content.77 The CJEU’s recent Judgment in the Achmea case, which rejected the idea that investment tribunals can be considered as courts or tribunals of a member state for the purposes of the Article 267 TFEU, is also consistent with this line of reasoning, which excludes the imputability of arbitral awards to the state. The EC recognized that arbitral awards are not, in principle, imputable to the state in the context of a complaint filed in 2013 by DEI, the Greek public power corporation. DEI argued that the price for electricity set by an arbitral award handed down in a pricing dispute between DEI and Alouminion SA was so far below market price that the selling of electricity to Alouminion at such a low price constituted state aid. The EC decided not to pursue this complaint considering that the arbitral award 72

See letter of the European Commission to the Spanish Minister for Foreign Affairs and Cooperation dated 10 November 2017, C(2017) 7384 final, regarding “State aid SA.40348 (2015/NN) – Spain, Support for electricity generation from renewable energy sources, cogeneration and waste”, at para. 165. 73 See Commission Decision 2015/1470, paras 109–115. 74 See Commission Decision 2015/1470, para. 116. 75 See Commission Decision 2015/1470, paras 117–121. 76 See Commission Decision 2015/1470, paras 92–108. 77 See Judgment of 16 May 2002, France v. Commission, C-482/99, EU:C:2002:294, para. 56; Judgment of 17 September 2014, Commerz Nederland, C-242/13, EU:C:2014:2224, para. 33.

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did not constitute state aid for several reasons including the lack of imputability of the award to the Greek State because “the State [did] not seem to have had the possibility to dictate the decision of the arbitration tribunal”.78 This position can be contrasted to the position the EC subsequently took in relation to the Micula v. Romania award. In its Micula decision, the EC concluded that an award issued under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, opened for signature at Washington, on 18 March 1965 (ICSID Convention) was imputable to the state because Romania had agreed to enter into the BIT with Sweden and had partially, but voluntary, implemented the award. In addition, several organs of the Romanian State whose acts are attributable to the Romanian State, such as courts, bailiffs and government branches, had cooperated in the payment of compensation to the investor.79 It is worth noting that, 5 days before issuing its Micula decision, the EC revoked the letter relating to the DEI/Alouminion dispute by adopting a formal decision rejecting DEI’s complaint without addressing the question of imputability of the arbitral award to the Greek State.80 This issue was not addressed by the General Court’s Micula Judgment and will thus continue to require clarification from the EU courts.

3.2

Damages as Economic Advantage

In its landmark Altmark Judgment, the CJEU defined aid as “[m]easures which, whatever their form, are likely directly or indirectly to favour certain undertakings [. . .] or are to be regarded as an economic advantage which the recipient undertaking would not have obtained under normal market conditions”.81 It is difficult to see how the payment of damages can fit this definition. Indeed, although damages may be likely to directly or indirectly to favour certain undertakings, the application of the

78

See letter of the European Commission COMP/E3/ON/AB/ark2014/61460 dated 12 June 2014 quoted at Opinion of Advocate General Wathelet in DEI v. Commission, C-228/16 P, EU: C:2017:133, para. 8 at footnote 2. 79 See Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania — Arbitral award Micula v. Romania of 11 December 2013 [2015] OJ L232/43, paras 118–120. The validity of this decision is challenged before the General Court of the European Union in pending Joined Cases European Food and others v. Commission, T-624/15, and Micula v. Commission, T-694/15. The hearing took place on 20 March 2018. 80 See letter of the European Commission to the Greek Minister for Foreign Affairs dated 25 March 2015 regarding “SA.38101 (2015/NN) (ex 2013/CP) – Greece – Alleged State aid to Aluminium SA in the form of electricity tariffs below cost following Arbitration Decision” C(2015) 1942 final. The case has been referred back to the General Court (see Judgment of 31 May 2017, DEI v. Commission, C-228/16 P, EU:C:2017:409). 81 CJEU, Judgment of 24 July 2003, Altmark Trans and Regierungspräsidium Magdeburg, C-280/ 00, EU:C:2003:415, para. 84.

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MEIP to damages may be a futile exercise. Indeed, the quantification and award of damages in a judicial or arbitral process is not likely to differ if damages were due by a private investor. The CJEU was confronted with this issue in the Asteris litigation which arose from certain technical errors that the EC committed when fixing coefficients to be applied to production aid for tomato concentrates in the context of the EU’s Common Agricultural Policy. These errors led to unequal treatment of Greek tomato concentrate producers vis-à-vis such producers from other member states. On this basis, the CJEU annulled the EC’s regulation containing those errors.82 The Greek tomato concentrate producers commenced separate proceedings against the EC seeking to obtain compensation for their loss but the CJEU decided that the illegality stemming from the EC’s errors was not sufficiently serious to condemn the EC to pay damages.83 Having failed to obtain damages from the EC, the Greek tomato concentrate producers brought an action for damages against the Greek State seeking to obtain the difference between the production aid actually received and the production aid to which they would have been entitled but for the unlawfulness of the EC’s regulation. In that context, the Greek courts submitted a reference for a preliminary ruling to the CJEU inquiring inter alia whether the granting of compensation in that case would constitute state aid in the meaning of Articles 107 and 108 TFEU, which had to be notified to the EC. The response of the CJEU to this question was threefold. First, it held that damages paid to individuals as compensation for damage caused to them did not constitute state aid because “State aid, that is to say measures of the public authorities favouring certain undertakings or certain products, [was] fundamentally different in its legal nature”,84 without however explaining this any further. Second, it drew a distinction between an action for damages and an action for payment of amounts due under EU legislation. On that basis, it noted that subsequent EU legislation had granted the Greek tomato producers the additional production aid that had not been paid to them as a result of the EC’s technical error.85 Third, it therefore ruled that an action for damages before the Greek courts could only concern “damage suffered in excess of those amounts as a result of the fact that they did not receive the amounts in question on the date on which they would normally have been entitled to them”.86 As it had already rejected the Greek tomato concentrate producers’ claim against the EC for damages on the basis of unequal treatment, the CJEU added that “an 82

See CJEU, Judgment of 19 September 1985, Greece v. Commission, 192/83, EU:C:1985:356. See CJEU, Judgment of 19 September 1985, Asteris and Others v. Commission, 194/83 to 206/83, EU:C:1985:357. 84 CJEU, Judgment of 27 September 1988, Asteris and Others, 106/87 to 120/87, EU:C:1988:457, para. 23. 85 See CJEU, Judgment of 27 September 1988, Asteris and Others, 106/87 to 120/87, EU: C:1988:457, paras 25–27. 86 See CJEU, Judgment of 27 September 1988, Asteris and Others, 106/87 to 120/87, EU: C:1988:457, para. 28. 83

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action for damages against the Greek State would have to be on different grounds from the actions dismissed by the [CJEU]”.87 The net outcome was that the action for damages brought by the Greek tomato concentrate producers did not lead to compensation calculated on the basis of due but unpaid aid because those amounts had already been paid by the EC and therefore their action only concerned any excess amounts for loss incurred by the non-timely payment of the full amount of production aid. It is significant that the production aid that had not been paid to the Greek tomato concentrate producers constituted a subsidy approved under the EU’s common agricultural policy. By consequence, its lawfulness was not disputed. Therefore, if awarded, the damages requested by the Greek tomato concentrate producers would not constitute incompatible and unlawful state aid. This scenario should be contrasted with an arbitral award that grants damages as compensation for a breach of the FET standard where a member state reneged on its promise to grant a certain economic advantage to the investor, especially when the damages represent the amount of the aid promised but not paid. If the aid in question is incompatible and unlawful state aid, compensation representing the amount of promised but unpaid aid is in itself such aid. The fact that the arbitral award may not be imputable to the state does not alter the fact that the amount of compensation is state aid in disguise. The General Court recognized this in its Micula Judgment by holding that “compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid”.88 Two observations are called for in this respect. First, in the case of damages granted for aid promised but not given, the state aid test, and in particular the criterion of imputability, must be applied not to the damages but the underlying measure for which damages were granted. Second, and more importantly, damages constitute aid when they have the effect of compensating for the withdrawal of “unlawful or incompatible aid”. This means that provided that the underlying scheme for which damages are granted constitutes state aid, the EC can take a decision ordering a Member State not to comply with the award even if the aid is simply unlawful, i.e. it has been implemented in breach of the standstill obligation contained in Article 108(3) TFEU regardless of whether it is fact compatible or not with the internal market. This finding may be of particular relevance in the context of the renewable energy arbitrations against Spain discussed above.

87

See CJEU, Judgment of 27 September 1988, Asteris and Others, 106/87 to 120/87, EU: C:1988:457, para. 29. 88 See GCEU, Judgment of 18 June 2019, European Food and Others v. Commission, Cases T-624/ 15, T-694/15 and T-704/15, EU:T:2019:423, para. 103.

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4 Are There Remedies Against Arbitral Awards Conflicting with EU State Aid Law? Articles 107 and 108 TFEU constitute fundamental norms of the EU legal order and form part of its public policy.89 Given the primacy of EU law over their other obligations, EU member states are required not to comply with awards that are incompatible with EU law,90 unless such awards could benefit from the grandfathering clause of Article 351 TFEU. According to this provision, the obligations that member states assumed towards third countries prior to 1 January 1958 (for the founding member states91) or their accession to the EU (for all other member states) and by necessary implication the corresponding rights of those third countries shall not be affected by the provisions of the EU Treaties. Against this background one should distinguish between awards rendered pursuant to the ICSID Convention and non-ICSID awards due to the different legal regime that applies to the annulment, recognition and enforcement of such awards.92 Turning first to ICSID awards, all EU member states (save for Poland) have acceded to the ICSID Convention. As a treaty concluded with third countries, the ICSID Convention comes within the scope of Article 351(1) TFEU but only in respect of those member states that ratified it prior to their accession to the EU,93 namely all member states except for Belgium, Germany, Ireland, Spain, France, Italy, Luxembourg and the Netherlands. In addition, to successfully rely on Article 351 TFEU, the ICSID Convention must confer upon a third country rights that it can require the Member State concerned to respect.94 In this respect, the obligation of an EU Member State to comply with and enforce an ICSID award rendered against it stems not for the underlying BIT or other investment treaty, but from Article 54(1) of the ICSID Convention.95 The EC seems to have ignored this point when it concluded that the Micula v. Romania award did not benefit from Article 351 TFEU on the basis that 89

See Opinion of Advocate General Wathelet in Achmea, C-284/16, EU:C:2017:699, para. 236. See Article 4(3), second paragraph, of the Treaty on European Union, according to which “[t]he Member States shall take any appropriate measure [. . .] to ensure fulfilment of the obligations arising out of the [EU] Treaties or resulting from acts of the institutions of the Union”. 91 Belgium, France, Germany, Italy, Luxembourg and the Netherlands. 92 See Articles 52–54 of the ICSID Convention. See also Schreuer et al. (2009), pp. 890–1151; Alexandrov (2009), Káposznyák (2019), pp. 428–430; de Stefano (2019), p. 443. 93 See CJEU, Opinion of Advocate General Wathelet in Genentech, C-567/14, EU:C:2016:177, footnote 39. 94 See CJEU, Judgment of 10 March 1998, T. Port, C-364/95 and C-365/95, EU:C:1998:95, para. 61; Opinion 2/15 (EU-Singapore Free Trade Agreement) of 16 May 2017, EU:C:2017:376, para. 254. 95 “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final Judgment of a court in that State. A Contracting State with a federal constitution may enforce such an award in or through its federal courts and may provide that such courts shall treat the award as if it were a final Judgment of the courts of a constituent state.” 90

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the parties to the BIT in question (Sweden and Romania) are both EU member states96 and that, as it argued at the hearing before the General Court, Romania’s obligation to enforce the award was owed solely to Sweden as the investors’ home state. One could argue, however, that on a correct construction of Articles 54(1) and 6497 of the ICSID Convention, this obligation is owed to all third countries which are parties to that Convention and who can request that the member state concerned comply with it,98 even when the underlying arbitration is intra-EU.99 Be that as it may, it should be noted that the Luxembourg, Swedish and English courts took a different approach in relation to their obligation to enforce the Micula v. Romania award while the proceedings regarding the validity of the EC’s Micula decision were pending before the General Court. Indeed, the Court of Appeal of Luxembourg relied solely on the obligatory character that the EC’s decision has in all member states and effectively ignored the clear language of Articles 53 and 54 of the ICSID Convention requiring all contracting states to enforce ICSID awards.100 It is understood that, in the same vein, the Nacka District Court (Sweden) found that Article 351 TFEU did not apply because the obligation to enforce the award in question under the ISCID Convention did not involve the rights of non-EU states. It also concluded that it was required to enforce the EC’s Micula decision by the principle of sincere cooperation enshrined in Article 4(3) TEU.101 The High Court (England & Wales) took a more nuanced approach. Blair J. reasoned that: This court cannot [. . .] proceed to enforce the Judgment consequent on registration of the Award in circumstances in which the [EC] has prohibited Romania from making any payment under the Award to the claimants because in doing so, the court would, in effect, be acting unlawfully. This does not (in the court’s view) create a conflict with the international obligations of the UK as contained in the 1966 Arbitration Act implementing the

96

See Commission Decision (EU) 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania — Arbitral award Micula v. Romania of 11 December 2013 (2015) OJ L232/43, para. 129. 97 “Any dispute arising between Contracting States concerning the interpretation or application of this Convention which is not settled by negotiation shall be referred to the International Court of Justice by the application of any party to such dispute, unless the States concerned agree to another method of settlement.” 98 See Broches (1972), p. 379; Schreuer et al. (2009), p. 1109. See also Micula and Others v. Romania (2018) EWCA Civ 1801, paras 190–195 (per Arden LJ). 99 See Paschalidis (2018), pp. 140–141. 100 See Judgment No. 71/18, of 21 March 2018, of the Luxembourg Court of Appeal in Romania v. Micula and Others, p. 20 (“En l’espèce, la Décision de la Commission du 30 mars 2015 est exécutoire et elle entrave l’exécution du titre constitué par la Sentence arbitrale. Elle est obligatoire dans tous ses éléments et dans tous les États membres en vertu de l’article 288 du TFUE et même si elle fait actuellement l’objet d’un recours devant les juridictions [de l’Union], ce recours n’est pas suspensif en vertu de l’article 278 du TFUE”). 101 See Nacka District Court, decision of 23 January 2019 in Micula and others v. Romania, Case No Ä 2550-17, pp. 8–9 and 13.

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ICSID Convention in UK law, because a purely domestic Judgment would be subject to the same limitation.102

However, this position was not endorsed by the Court of Appeal of England and Wales which held that Article 54 of the ICSID Convention, as incorporated into English law through Article 2(1) of the Arbitration (International Investments) Act 1966, does not authorize the English courts to refuse to enforce an ICSID award for a reason that would justify staying enforcement of an ordinary domestic Judgment.103 It recognised, however, that there was some limited discretion under Article 54 of the ICSID Convention to stay the enforcement of the award and that this stay should be granted while the proceedings before the General Court are pending.104 In upholding the stay of enforcement granted by Blair J., the majority of the Court of Appeal considered that it was necessary in view of the fact that the correct interpretation of Article 351 TFEU was a litigious matter in the Micula proceedings pending before the GC.105 The situation is different in relation to non-ICSID awards. When seized of actions to set aside an award because it is contrary to public policy because it conflicts with EU state aid law, the courts of EU member states must set aside the award in accordance with the principles laid down by the CJEU in its Eco Swiss ruling.106 Likewise, in the context of recognition and enforcement proceedings, the courts of EU member states must refuse to recognize and enforce an award that is incompatible with EU state aid law.107

5 Conclusion Arbitral practice thus far has given examples where a tension could arise between EU law and international investment law by the application of the FET standard in the field of EU state aid law. Indeed, several tribunals have dealt with investor claims alleging a breach of legitimate expectations on the basis of a state’s withdrawal or modification of measures that constitute or might constitute state aid. This may be problematic in cases where the EC has not taken a decision declaring a specific measure as state aid and the member state in question has not notified the EC of the

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Micula and Others v. Romania (2017) EWHC 31 (Comm) para. 132. See Micula and Others v. Romania (2018) EWCA Civ 1801, paras 120–121 (per Arden LJ). 104 See Micula and Others v. Romania (2018) EWCA Civ 1801, paras 124–132 (per Arden LJ), paras 162–163 (per Hamblen LJ) and paras 257–262 (per Leggatt LJ). 105 See Micula and Others v. Romania (2018) EWCA Civ 1801, paras 153–165 (per Hamblen and Leggatt LJJ). 106 See CJEU, Judgment of 1 June 1999, Eco Swiss, C-126/97, EU:C:1999:269. See also Judgment of 7 July 2016, Genentech, C-567/14, EU:C:2016:526. 107 See CJEU, Opinion of Advocate General Wathelet in Gazprom, C-536/13, EU:C:2014:2414, paras 173–177. 103

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measure before implementing it. In such circumstances, the risk that arbitral tribunals may be enforcing unlawful state aid schemes cannot be excluded. However, the application of the FET standard in the field of EU state aid law should not automatically lead to a result incompatible with EU law. When applying the principle of legitimate expectations in this field, arbitral tribunals must first assess whether the state’s conduct relied upon by the investor constitutes state aid that has been implemented without EC approval. In that context, arbitral tribunals should take into account the limited scope of operation of the principle of legitimate expectations in that field. Finally, arbitral awards granting compensation for revoked state aid schemes that were incompatible with the EU’s internal market and/or unlawful because they were implemented in contravention of Article 108(3) TFEU may themselves constitute state aid. Such an award would be incompatible with Articles 107 and 108 TFEU and, therefore, may be annulled or refused recognition and enforcement, unless the obligation to enforce the award is safeguarded by Article 351 TFEU.

References Alexandrov SA (2009) Enforcement of ICSID awards: Articles 53 and 54 of the ICSID convention. In: Binder C, Kriebaum U, Reinisch A, Wittich S (eds) International investment law for the 21st century: essays in honour of Christoph Schreuer. OUP, Oxford, pp 322–337 Angelet N (2011) Fair and equitable treatment. In: Wolfrum R (dir) Max Planck Encyclopaedia of Public International Law, vol 3. OUP, Oxford, pp 1094–1103 Bacon QC K (ed) (2017) European Union law of state aid, 3rd edn. OUP, Oxford Broches A (1972) The convention on the settlement of investment disputes between states and nationals of other states. Collect Courses Hague Acad Int Law 136:331–410 de Stefano C (2019) The circulation of international investment awards under the New York Convention In: Fach Gómez K, López Rodríguez AM (eds) 60 years of the New York Convention: key issues and future challenges. Kluwer AH, Alpena an den Rijn, pp 441–455 Demirkol B (2018) Judicial acts and investment treaty arbitration. CUP, Cambridge Hofmann H, Micheau C (eds) (2016) State aid law of the European Union. OUP, Oxford Káposznyák A (2019) The expanding role of the New York Convention in enforcement of international investment arbitral awards In: Fach Gómez K, López Rodríguez AM (eds) 60 years of the New York Convention: key issues and future challenges. Kluwer AH, Alpena an den Rijn, pp 425–440 Kassim H, Lyons B (2013) The new political economy of EU state aid policy. J Ind Compet Trade 13:1–21 Kläger R (2011) “Fair and Equitable Treatment” in International Investment Law. CUP, Cambridge McLachlan C, Shore L, Weiniger M (2017) International investment arbitration: substantive principles, 2nd edn. OUP, Oxford Paschalidis P (2018) International investment law and EU law: are there systemic conflicts and incompatibilities? In: Gaillard E, Ruiz Fabri H (eds) EU law and international investment arbitration, IAI Series No. 11. JURIS, Huntington, New York, pp 7–169 Piernas López JJ (2015) The concept of state aid under EU law. OUP, Oxford Rusche TM (2015) EU renewable electricity law and policy: from national targets to a common market. CUP, Cambridge Scheuer Ch (2013) Investments, international protection. In: Wolfrum R (dir) Max Planck Encyclopaedia of Public International Law, vol 6. OUP, Oxford, pp 328–343

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Schreuer C, Malintoppi L, Reinisch A, Sinclair A (2009) The ICSID convention: a commentary, 2nd edn. CUP, Cambridge Tudor I (2008) The fair and equitable treatment standard in the international law of foreign investment. OUP, Oxford Wongkaew T (2019) Protection of legitimate expectations in investment treaty arbitration: a theory of detrimental reliance. CUP, Cambridge

Paschalis Paschalidis is a senior associate in Shearman & Sterling’s International Arbitration and Public International Law practices. Paschalis is also a Board Member of the Luxembourg Arbitration Association and a Visiting Lecturer at the Executive M.B.L.-HSG course organized by the University of St. Gallen. He represents and advises companies and States in international arbitrations conducted under the auspices of a variety of rules, ICSID, SCC, ICC and UNCITRAL Rules. His practice focuses on investment and commercial disputes with a European Union law nexus. From 2012 to 2018, Paschalis served as a référendaire at the Court of Justice of the European Union, where he assisted First Advocate General Melchior Wathelet in a variety of cases raising, amongst others, questions of international law and arbitration. Paschalis holds a LLB from the Aristotle University of Thessaloniki and a MJur, MPhil and DPhil from the University of Oxford. He is the author of many publications regarding the interaction of EU law with international arbitration.

The Complex Relationship Between Competition Law and Investment Arbitration After Achmea: The Novenergía v. Spain Case Millán Requena Casanova

Contents 1 Introduction: The Spanish Renewable Energy Regulatory Framework and Alleged Violation of the ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Relationship Between Competition Law and the ECT: The Achmea Case and Its Implications for Intra-EU and Extra-EU Arbitrations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Is It Reasonable to Extend the Achmea Judgement to the ECT? . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Novenergía Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 The Dispute Between Novenergía and Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The European Commission’s Decision in Support of Spain’s Jurisdictional Objections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Spain’s Petition to Annul the Award Before the Svea Court of Appeal . . . . . . . . . . . . . 4.4 Novenergía’s Petition for the Recognition and Enforcement of the Award Before US Courts: State Aid Regime and US Public Policies as Grounds for Dismissal of the Petition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract In recent years several European investors have initiated investor-state arbitration against Spain under the Energy Charter Treaty (ECT) as a result of the radical changes adopted by the Spanish authorities in the regulatory framework of the renewable energy sector. The Novenergía arbitration highlights the complex relationship between competition law and investment arbitration, especially in intraEU investment disputes. This type of dispute has caused much controversy because EU competition law often plays a central role in investment arbitration. According to

The present chapter has been prepared in the framework of the research Project title “La Unión Europea ante los Estados fracasados de su vecindario: retos y respuestas desde el Derecho Internacional (II)” (ref. DER2015-63498-C2-2-P), financed by the Spanish Ministry of Economy and Competitiveness. M. Requena Casanova (*) University of Alicante, Alicante, Spain e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_10

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Spain’s position, arbitral tribunals are jurisdictionally not competent to render an award since the power to authorize state aid falls within the exclusive competence of the European Commission (EC). When an arbitral tribunal orders the payment of compensation to an investor, that tribunal could act ultra vires, deciding a matter that EU competition law (state aid regime) establishes as beyond any submission to arbitration. But the new scenario opened by Achmea can allow Spain to challenge the jurisdiction of the arbitral tribunal created on the basis of the ECT, request the set-aside of the award issued and oppose recognition and enforcement, at least before the courts of the member states. The EC has underlined the public order nature of the EU competition rules, already established by the Court of Justice of European Union (CJEU) in Eco Swiss, and has pointed out the difficulties that US courts would face when asked to recognize and enforce the international awards. However, in the recent Micula judgment, the General Court of the EU observed that compensation for damage suffered did not constitute state aid unless it represented compensation for the withdrawal of aid that was unlawful, since the EC had no power to review Romanian conduct prior to Romania’s accession to the EU. However, while Micula appears to be closely related to measures taken by Romania prior to its accession to the EU in 2007, other cases seem to relate only to incentive schemes (cuts to renewable energies) implemented after EU accession, thus giving the EC a clearer path to intervene. Finally, the Novenergía arbitration, highlights the difficulties for the recognition and enforcement of the awards issued in the saga of renewable energy arbitrations against Spain, especially where that award is issued under arbitration rules other than the International Centre for Settlement of Invesment Disputes Convention.

1 Introduction: The Spanish Renewable Energy Regulatory Framework and Alleged Violation of the ECT At the beginning of the last decade, Spain set in place a regulatory framework to promote the development of its clean energy sector, including through commitments to the stability of electricity tariffs and to a reasonable return on investment.1 A massive influx of investment resulted. However, following a change of government in late 2011, Spain rolled back its commitments to clean energy investors in order to bolster the public coffers. With the aim of tackling the deficit, the Spanish government has promulgated seven new decrees since 2012, removing the entitlement to subsidies available for alternative energy technologies and imposing a tax on power generation. Such drastic reforms, foreign investors contend, will virtually wipe out

1 Through the 2000 Plan for Renewable Energy, the 2005 Spanish Renewable Energy Plan, and Royal Decree 661/2007.

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profits for photovoltaic, solar thermal and wind plants, in particular those highly leveraged. Many of the investors who had relied on Spain’s clean energy commitments have subsequently resorted to Energy Charter Treaty (ECT) arbitration to vindicate their rights, lodging approximately €10 billion in claims against Spain.2 A number of investors, most of them based in other member states of the EU, have initiated investor-state arbitration against Spain on the basis of the ECT in reaction to changes brought but the Royal Decree 413/2014.3 The increasing number of arbitrations against Spain on the basis of the ECT has become a “saga of arbitrations”. Spain currently faces 42 known cases under the ECT (and three non-ECT cases); 40 out of those cases have been brought by investors from other European Union (EU) member states.4 Because all of these disputes stem from the same renewable energy measures, Spain’s “unconditional consent” to arbitrate in Article 26(3) of the ECT has emerged as a key protection for energy investors within the EU.5 ECT arbitration has became widely employed to resolve energy disputes often worth hundreds of millions or billions of dollars. At present, 60 intra-EU arbitrations are pending, and in a number of additional cases enforcement proceedings are ongoing.6 The current wave of ECT arbitrations against Spain is a case in point.

2

Ali (2013), pp. 5–6. Two major changes were made to this initial regulatory framework to try to alleviate the considerable economic losses for Spain in the electricity sector: the “package of regulatory measures of 2010” came about essentially with decrees RD 1614/2010 and RDL 14/2010 (a reduction of incentives for the promotion of renewables originally planned), and the “package of regulatory measures of 2013–2014”, especially with decrees RDL 9/2013, RD 413/2014 and Ministerial Order IET/1045/2014 (elimination of said incentives). This radical regulatory change is the fundamental reason that has given rise to more than 40 investment arbitrations against Spain by foreign investors with economic interests in photovoltaic and thermoelectric plants in Spain. See López Escudero (2014), pp. 228–229, Fernández Masiá (2017), p. 669 and Hernández Mendible (2017), pp. 230–236. 4 According to the data from the United Nations Conference on Trade and Development (UNCITRAL), in March 2019 Spain had a total of 42 renewable energy arbitral proceedings pending. It was the second State with the highest number of claims initiated against it after Argentina: https://investmentpolicyhub.unctad.org/ISDS/FilterByCountry. 5 ECT investors can choose to submit their disputes with Contracting Parties to one of three international arbitration regimes: (1) arbitration at ICSID; (2) arbitration before a sole arbitrator or an ad hoc tribunal under the UNCITRAL Arbitration; or (3) arbitration at the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). 6 See https://energycharter.org/what-we-do/dispute-settlement/cases-up-to-18-may-2018/. 3

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2 The Relationship Between Competition Law and the ECT: The Achmea Case and Its Implications for Intra-EU and Extra-EU Arbitrations The conflict between investment law and competition law concerns both substance and enforcement. On substance, EU law provides for a set of rules on investment protection.7 As the two sets of rules on investment protection potentially applicable in the relations between an EU member state and an investor of another state (i.e. the Treaties and intra-EU bilateral investment treaties (BITs) or the ECT in an intra-EU setting) are not identical in content and are applied by different adjudicators, there is also a risk of conflicts between the ECT and EU law. Likewise, competition law bestows upon the European Commission (EC) the exclusive competence to authorize state aid, and prohibits EU member states from granting state aid without its authorization. Where a member state grants aid to investors, without respecting the notification and obligation of Article 108(3) of the Treaty on the Functioning of the European Union (TFEU), the legitimate expectations of investors under the fair and equitable treatment (FET) with respect to such state aid payments could be excluded. That is because according to the case law of the Court of Justice of the European Union (CJEU), a recipient of state aid cannot, in principle, have legitimate expectations in the lawfulness of aid that has not been notified to the EC.8 Therefore, an arbitral tribunal would not have jurisdiction to make an award obligating an EU member state to provide state aid. In relation to enforcement, an arbitration tribunal constituted on the basis of the ECT to hear a dispute between a European investor and an EU member state or an “intra-EU” BIT has to apply EU law (both as international law applicable between the parties and, where relevant, as part of the domestic law of the host state). Since the CJEU has denied arbitral tribunals the right to submit a preliminary question,9 arbitral case law has also indicated that an arbitral tribunal “is not a court of a

7 In particular, Articles 49, 52, 56 and 63 of the TFEU, as well as Articles 64(2), 65(1), 66, 75 and 215 of the TFEU. 8 Case C-536/13, Gazprom, Judgement, 13 May 2015, EU:C:2015:316, para. 56. 9 Case C-102/81, Nordsee, Judgement, 23 March 1982, EU:C:1982:107, paras 10–13; Case C-126/ 97, Eco Swiss, Judgement, 1 June 1999, EU:C:1999:269, para. 34; Case C-536/13, Gazprom, Judgement, 13 May 2015, EU:C:2015:316, para. 36. See also Opinion 2/15, 16 May 2017, EU: C:2017:376, para. 292. The CJEU emphasizes that the fact that an arbitral tribunal renders decisions pursuant to law, that its award has res judicata between the parties, or that it may be enforceable, does not suffice. For the CJEU, preliminary reference would only be possible if the jurisdiction of a tribunal is mandatory for the parties and emanates directly from a public act and not from an act of the parties’ free will, and if there is a sufficiently proximate link between the legal order of the member state and the arbitration proceeding. The CJEU has established in the Nordsee case that the national courts should refer a question for preliminary ruling in such situations, see Case C-102/81, Nordsee, Judgement, 23 March 1982, EU:C:1982:107, paras 14–15.

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member State”.10 Moreover, member states are obliged to provide remedies sufficient to ensure the effective legal protection of investors’ rights under EU law (Article 19(1) of the TFEU). In particular, every member state must ensure that its courts meet the requirements of effective judicial protection.11 In the EC’s view, the treaty conflict would be solved on the “basis of the principle of primacy in favour of Union law. For those reasons, ECT [arbitration] does not apply to investors from other member States initiating disputes against another Member States”.12 For that reason, an award rendered by an arbitral tribunal should be declared invalid if it awarded compensation that qualifies as unauthorized state aid in contravention of EU competition law. However, following the Achmea judgment, we may ask again the question of whether the relations between the ECT provisions and EU law may vary if Spain invokes this decision in the still pending arbitrations. In its judgment of 6 March 2018, the CJEU affirmed that the investor-state arbitration mechanism provided for in the Slovak Republic-Netherlands BIT is not compatible with the EU legal order, in light of the principles of autonomy and primacy that, as recognized in CJEU case law and included in articles 267 and 344 of the TFEU. Therefore, the CJEU determined that arbitration clauses such as the one in Achmea are barred by the TFEU.13 Likewise, Articles 267 and 344 of the TFEU are EU constitutional provisions that member states should uphold also in the context of proceedings brought for the recognition and enforcement of foreign arbitral awards through the European public policy rules. One of the questions that arise as a result of the Achmea judgment is how to assess whether this decision also affects the ECT, insofar as the latter allows arbitration proceedings between a European investor and an EU member state. Although the EU itself is a party to the ECT, it does not seem that the conclusions of the Achmea 10 Electrabel v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, 30 November 2012, paras 4.111 and 4.112. Similarly, the tribunal in Eiser v. Spain recalled that its jurisdiction derives from the ECT, stating that the tribunal “is not an institution of the European legal order and is not subject to the requirements of said order”, ICSID Case No. ARB/13/36, Award, 4 May 2017, para. 199. 11 Case C-65/16, Associaçao Sindical dos Juízes Portugueses, Judgement, 25 January 2018, EU: C:2018:117, paras 31–37. 12 See EC Decision 7384 of 10 November 2017 on State aid SA.40348(2015/NN)—Spain Support for electricity generation from renewable energy sources, cogeneration and waste, para. 163. 13 Specifically, the CJEU held that: “Articles 267 and 344 TFEU must be interpreted as precluding a provision in an international agreement concluded between Member States” under which “an investor from one of those Member States may, in the event grounds for concluding that Achmea provides not of a dispute concerning investments in the other Member State, bring proceedings against the later member State before an arbitral tribunal whose jurisdiction that Member state has undertaken to accept”, Case C-284/116, Achmea, Judgement, 6 March 2018, EU:C:2018:158, para. 60. For an analysis of this Judgement, see, Barausova (2018), pp. 129–153; Bilanová and Kudrna (2018), pp. 261–281; Cavedon and Weber (2019), pp. 223–241; Cimiotta (2018), pp. 337–344; Contartese and Andenas (2019), pp. 157–192; Gaillard (2018), pp. 616–630; Gourgourinis (2018), pp. 282–315; Iruretagoyena (2018), pp. 1–23; Pinna (2018), pp. 73–95; and Overduin (2018), pp. 242–260.

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judgment might also be extrapolated to the intra-EU ECT disputes.14 In this sense, it is necessary to insist on the relevance of this fact, specifically for Spain, insofar as it draws a new horizon within the framework of the disputes regarding renewable energies, where Spain already accumulates several condemnatory awards.15

3 Is It Reasonable to Extend the Achmea Judgement to the ECT? Like the CJEU, the EC has confirmed that the principles of EU law enshrined in Articles 267 and 344 of the TFEU prohibit resort to arbitration in such circumstances. Following the Achmea judgment, the EC informed the European Parliament (EP) and the Council that the CJEU confirmed that investors may not “have recourse to arbitration tribunals established [. . .] under the Energy Charter Treaty”.16 So, the EC used the Achmea judgment to argue against the possibility of arbitration under the ECT as regards intra-EU disputes. The EC added that “the fact that the EU is also party to the Energy Charter Treaty does not affect this conclusion: the participation of the EU in that Treaty has only created rights and obligations between the EU and third countries and has not affected the relations between the EU Member States”.17 On the other hand, on 15 January 2019, EU member states issued a political declaration addressing the consequences of the CJEU’s Achmea judgment in relation to intra-EU BITs.18 In the majority Declaration signed by 22 governments, these signatories pledged to take actions to terminate their intra-EU BITs,19 to use their influence as home states and respondent-states to notify tribunals of the non-arbitrability of intra-EU BIT and ECT claims, and to request the set-aside or non-enforcement of such intra-EU awards. In the opinion of these states, according

14

In this regard, for example, Hindelang (2013), pp. 5–6. Verburg and Lavranos (2018), pp. 197–222. 16 Communication from the Commission to the European Parliament and the Council: “Protection of intra-EU investment”, COM (2018) 547 final, 19 July 2018, p. 26. 17 Ibid. p. 4. Nevertheless, the EC has indicated that it will maintain its opposition to investor-state arbitration even in the event that the EU itself is named as a respondent in an ECT arbitration. For an early discussion of some aspects of such an ECT scenario, see Bermann (2012), pp. 397–445. For the withdrawal of an EU member state from the ECT, see Rao (2018), pp. 154–182. 18 “Declaration of the Representatives of the Governments of the Member States, of 15 January 2019, on the Legal Consequences of the Judgement of the Court of Justice in Achmea and on Investment Protection in the European Union”, 15 January 2019. 19 Member states adopted a dealine of 6 December 2019 to carry out these terminations. But even if the EC should convince member states to terminate all intra-EU BITs, a termination of the ECT is inconceivable and would run counter to the EU’s own (energy) interests. Likewise, an amendment of the treaty through which the EU withdraws its consent to arbitration under Article 26 of the ECT is unlikely given the need for a consensus of all signatories, Stier (2015), p. 170. 15

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to the case law of the CJEU,20 the provisions of a BIT between member states containing an investor-state arbitration clause such as the one described in the Achmea Judgement are contrary to EU law and thus inapplicable. As a consequence, the use of such an investor-state arbitration clause would be contrary to EU law. But member states remain divided with respect to the implications of Achmea for the ECT, with several countries preferring not to prejudge a question that is presently before an EU member state court.21 In the Declaration, member states maintain that international agreements concluded by the EU, including the ECT, “are integral part of the EU legal order and must therefore be compatible with the Treaties”.22 Arbitral tribunals have interpreted the ECT as also containing an investor-state arbitration clause applicable between member states (Article 26(3) of the ECT). Construed in such a manner,23 that clause would be incompatible with the EU Treaties, at least according to the majority Declaration, and thus would have to be disapplied. In addition, member states have committed to ensure that the ECT cannot be used as a basis for arbitration between investors based in the EU, which is a boost to the interests of Spain. In relation to the ECT, the majority Declaration states that: Beyond actions concerning the Energy Charter Treaty based on this declaration, Member States together with the Commission will discuss without undue delay whether any additional steps are necessary to draw all the consequences from the Achmea judgment in relation to the intra-EU application of the Energy Charter Treaty.

In any case, this Declaration recalls that the Achmea judgment only affects the claims of European investors and not those of investors from third countries. Reflecting divergences between member states, two additional declarations (one made by Finland, Luxembourg, Malta, Slovenia and Sweden, and another by Hungary) depart from the majority Declaration in several respects, chiefly with respect to the application of the Achmea judgment to the ECT. The Declaration

In its Judgement Budĕjovický Budvar, the CJEU noted that “since the bilateral instruments at issue now concern two Member States, their provisions cannot apply in the relations between those States if there are found to be contrary to the rules of the Treaty”, Judgement 8 September 2009, Budĕjovický Budvar, Case C-478/07 (EU:C:2009:521, para. 98). 21 An ECT award in favour of Novenergía is currently being reviewed by the Svea Court of Appeal. In the context of these proceedings, the Court of Appeal might opt to ask for further guidance from the CJEU with respect to the application of the Achmea precedent to the ECT. 22 A “systemic interpretation” of the ECT in accordance with the EU Treaties could exclude arbitration between the state and the investor in the EU. This approach to “systemic interpretation” was foreseen in the Judgement of 27 February 2018, Western Sahara Campaign UK v. Commissioners for Her Majesty’s Revenue and Customs, Secretary of State for Environment, Food and Rural Affairs, Case C-266/16 (EU:C:2018:118, paras 42 to 51). According to this reasoning, any provision of a treaty that is part of the EU [i.e. ECT provisions] must be fully compatible with the EU Treaties and with the fundamental principles that derive from them (primacy and autonomy), as they have been recognized in CJEU case law. 23 This interpretation is currently contested before a national court in Sweden: See Case No. 4658-18 Svea Court of Appeal, Novenergía II – Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR, v. Spain, SCC Arbitration (2015/06). 20

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signed by Finland, Luxembourg, Malta, Slovenia and Sweden argues that the Achmea judgment concerns the interpretation of EU law in relation to an investorstate arbitration clause in a BIT between member states. This group of states claimed that the Achmea Judgement is silent on the investor-state arbitration clause in the ECT. A number of arbitration tribunals post-Achmea have concluded that the ECT contains an investor-state arbitration clause applicable between EU member states.24 Against this background, a group of member states have expressed their views as regards the compatibility of the investor-state arbitration clause provided in ECT with EU law, especially with regard to pending arbitrations.25 The fact that the Achmea judgment is limited to BITs between EU member states—and that it contains no mention of the ECT—is no accident. As was explained by the CJEU’s Advocate General (AG) M. Wathelet in his opinion submitted in advance of the Achmea judgment, no EU member state or institution had ever sought the CJEU’s opinion concerning the compatibility of the ECT with EU law, because no one ever had the “slightest suspicion” that any provision in the ECT could violate EU law.26 The different approaches to the legal implications of the Achmea Judgement demonstrates that it is not clear that investor-state arbitration based on the ECT in intraEU disputes infringes EU law. As Iruretagoyena points out, this new scenario opened by Achmea will “allow Spain to challenge the jurisdiction of the arbitral tribunals created on the basis of the ECT, request the annulment of the awards issued and oppose the recognition and enforcement of the awards, at least, before the jurisdictional organs of the member

24 Masdar Solar & Wind Cooperatief UA v. Spain, ICSID Case No. ARB/14/1, Award, 16 May 2018; Eiser Infrastructure Limited AND Energía Solar Luxemburg Sàrl v. Spain, ICSID Case No. ARB/13/36; Antin Infrastructure Services Luxembourg Sàrl v. Spain and Antin Energía Termosolar BV v. Spain, ICSID Case No. ARB/13/2, Award, 15 June 2018; Vatenfall AB; Vatenfall GMBH; Vattenfal Europé Nuclear Energy GMBH; Kernkraftwerk Krümmel GMBH & Co. HG; Kernkraftwerk Brunbüttel GMBH & Co. Ohg vs Germany, ICSID Case No. ARB/12/12; Antaris Solar GmbH and Michael Gode v. Czech Republic, PCA Case No. 2014-01; Athena Investmetns A/S v. Spain, SCC Case No. 150/2015 and RREEF Infrastructure (G.P.) Limited and RREEF Pan-European Infrastructure Two Lux Sàrl, v. Spain, ICSID Case No. ARB/13/30, Decision on Responsibility and of the Principles of Quantum, 30 November 2018. 25 “Declaration of the Representatives of the Governments of the Member States, of 16 January, on the enforcement of the Judgement of the Court of Justice in Achmea and on Investment protection on the European Union”, p. 3. In addition, Hungary stresses that the Achmea Judgement concerns “only intra-EU bilateral investments treaties”. This judgment is silent on the investor-state arbitration clause in the ECT and “it does not concern any pending or prospective arbitration proceedings initiated under the ECT”, “Declaration of the Representative of the Government of Hungary, of 16 January, on the enforcement of the Judgement of the Court of Justice in Achmea and on Investment protection on the European Union”, p. 3. 26 In particular, the AG noted that: “If no EU institution and no EU Member State sought an opinion from the Court on the compatibility of that treaty [i.e., the ECT] with the EU and FEU Treaties, that is because none of them had the slightest suspicion that it might be incompatible”, Case C-284/16, Slovak Republic v. Achmea BV, Opinion of Advocate General Wathelet (EU:C:2017:699, para. 43, emphasis added).

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States”.27 For instance, the Novenergía arbitration highlights the difficulties for the recognition and enforcement of the awards issued in the “saga of arbitrations” on renewable energies against Spain, especially where that award is issued in arbitration fora other than International Centre for Settlement of Invesment Disputes (ICSID).

4 The Novenergía Arbitration 4.1

The Dispute Between Novenergía and Spain

On 8 May 2015, Novenergía, an investor from Luxembourg, an EU member state, commenced an arbitration against Spain, another member state, under the ECT. It did so despite the EC having determined that the dispute settlement provisions of investment treaties between EU member states, such as the ECT, are inoperative. In its Decision 7384, the EC considered that any provision that provides for investorstate arbitration between two member states is contrary to EU law.28 Novenergía’s claims concerned Spain’s regulation of the solar energy sector, an area falling within EU competence.29 In 2007, Spain established a regime for investments in the field of photovoltaic energy that guaranteed certain fixed prices for energy produced through a feed-in-tariff. Spain subsequently adopted new Decrees in 2013 and 2014 to remedy unsustainable growth of the tariff deficit resulting from this special regime, which had accumulated debt of more than €22 billion.30 Novenergía claimed, inter alia, that these energy sector reforms violated its right to FET under Article 10(1) of the ECT to which the EU, Spain and Luxembourg are parties. Novenergía submitted the dispute to arbitration under the Stockholm Chamber of Commerce Rules (SCC Rules) and Stockholm was chosen as the seat of arbitration.31

27

Iruretagoyena Agirrezabalaga (2018), p. 11. According to CJEU case law, when investors from member states exercise one of the fundamental freedoms such as the freedom of establishment or the free movement of capital, they act within the scope of application of EU law and therefore enjoy the protection granted by those freedoms and, as the case may be, by the relevant secondary legislation, by the Charter of Fundamental Rights of the EU, and by the general principles of Union law, which include in particular non-discrimination, proportionality, legal certainty and the protection of legitimate expectations, Judgement 30 April 2014, Pfleger, Case C-390/12 (EU:C:2014:281, paras 55 to 57). Likewise, where a member state enacts a measure that derogates from one of the fundamental freedoms guaranteed by EU law, that measure falls within the scope of Union law and the fundamental rights guaranteed by the Charter also apply, Judgement 14 june 2017, Online Games Handels, Case C-685/15 (EU:C:2017: paras 55–57). 29 Article 194 TFEU. 30 Novenergía II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. Spain, Award, SCC Arbitration (2015/063), paras 131–152. 31 Novenergía invoked the dispute settlement provisions in Article 26 of the ECT which provides that where “[d]isputes between a Contracting Party and an Investor of another Contracting Party 28

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On the merits, the tribunal unanimously concluded that Spain had violated Article 10 of the ECT and that it failed to afford FET to Novenergía’s investments. The award provides that Spain’s changes to the tariff regime following Novenergía’s investment were “radical and unexpected”, and “had a significant damaging economic effect on [Novenergía]’s investments”. In the Tribunal’s view “[t]he measures implemented in 2013 and 2014 by [Spain] certainly constitute a substantial deprivation of the Claimant’s investment” and, consequently, it considers Spain’s actions “contrary to the [. . .] Spain’s obligation to provide [FET] to investors”.32 The adopted changes “amounted to a breach [. . .] of [Spain’s] obligation to accord to the investor [FET] as set out in Article 10(1) of the ECT”.33 The award ordered Spain to pay Novenergía €53.3 million in compensation, plus interest “from 15 September 2016 at the rate of 1.5%, compounded monthly, until full payment has been made”.34

4.2

The European Commission’s Decision in Support of Spain’s Jurisdictional Objections

On 10 November 2017, the EC issued a Decision regarding the renewable energy policy in Spain’s legal framework. Taking note of the fact that investors had commenced arbitrations against Spain under Article 26 of the ECT, the EC determined that “any provision” of an investment treaty which “provides for investorState arbitration between two member States is contrary to Union law”, including Articles 267 and 344 of the TFEU.35 The EC further stated that EU law precludes arbitration under Article 26 of the ECT because an “Arbitration Tribunal created on the basis of the Energy Charter Treaty in a dispute between an investor of one Member State and another Member State” would “apply Union law” even though the tribunal cannot make references to the CJEU.36 The EC concluded that the ECT

relating to an Investment of the latter in the area of the former” cannot be “settled amicably”, an investor may submit such a dispute to arbitration pursuant to certain enumerated arbitral rules. These include the rules of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC Rules) (Article 26 (2)(4) of the ECT). 32 Novenergía II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. Spain, Award, SCC Arbitration (2015/063), para. 695. 33 The Tribunal concluded that “the legislation introduced through RDL 9/2013, Law 24/2013, RD 413/2014 and Order 1045/2014 amount to a breach by the Kingdom of Spain of its obligation to accord to the investor FET as set out in Article 10(1) of the ECT and entitles the Claimant to compensation”, ibid. para. 697. 34 Ibid. para. 860(b). The Final Award further requires Spain to pay Novenergía €2.6 million for the cost of the arbitration and reasonable costs incurred by Novenergía. 35 EC Decision 7384 of 10 November 2017 on State aid SA.40348 (2015/NN)—Spain Support for electricity generation from renewable energy sources, cogeneration and waste, para. 160, emphasis added. 36 Ibid. paras 162–163.

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could not be applied to energy disputes between European investors and EU member states.37 As the EC pointed out, in the specific situation of the measures adopted by Spain in the renewable energy sector, Spain has not violated the principles of legal certainty and legitimate expectations under EU law. In the intra-EU context, EU law is part of the applicable law, as is constitutes international law applicable between the parties to the dispute. As a result, FET cannot have a broader scope than the EU law notions of legal certainty and legitimate expectations in the context of a state aid scheme. In the extra-EU context, the FET provision of the ECT is respected since no investor could have, as a matter of fact, a legitimate expectation stemming from illegal state aid. This has been expressly recognized by arbitration tribunals on several occasions.38 The EC held its Decision to be “binding on Arbitration Tribunals”.39 Likewise, the EC Decision referred to the EU state aid regime in connection with arbitrations commenced against Spain, that seek compensation for the regulatory reforms adopted in Spain’s solar and photovoltaic energy sector. It stated that awards which require payment of compensation would constitute state aid, and because such “Arbitration Tribunals are not competent to authorize that granting of state aid. This is an exclusive competence of the Commission. If they award compensation, such as in Eiser v. Spain, or were to do in the future, this compensation would be notifiable State aid pursuant to Article 108(3) TFEU and be subject to standstill obligations”.40 This would mean that the damages awarded by the arbitral tribunal that purport to compensate Novenergía for its alleged losses could not be paid by Spain without the Commission’s prior approval.41 For this reason, Spain’s payment of the Novenergía award would qualify as illegal state aid and, therefore, it would be in violation of EU competition law.42 In accordance with its procedural strategy, Spain challenged EC Decision 7384 in the Novenergía proceedings. In sum, Spain argued that the tribunal’s award of compensation constitutes impermissible state aid under EU law. In Spain’s view,

37 In the same Decision, the EC also ruled that the energy sector reforms challenge by Novenergía were compatible with EU law, para. 34. 38 Electrabel SA v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability (30 November 2012) and Award (25 November 2015). 39 Novenergía II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. Spain, Award, SCC Arbitration (2015/063), para. 166. 40 EC Decision 2017/7384, para. 165, emphasis added. 41 The view taken in Decision 7384 was consistent with a previous Decision by the EC that determined that the payment by Romania of an arbitral award rendered under an investment treaty with another EU member state was unauthorized state aid, see EC Decision 2015/1470 of 30 March 2015 on State aid SA.38517 (2014/C) (ex 2014/NN) implemented by Romania—arbitral award Micula v. Romania of 11 December 2013, OJ L 232, paras 94 et seq. 42 Novenergía II – Energy & Environment (SCA), v. Spain, “Expert Declaration of Steffen Hindelang in Support of Respondent the Kingdom of Spain’s Motion to Dismiss and to Deny Confirmation of Foreign Arbitral Award”, Civil Action No. 1:18-cv-1148, para. 51.

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the arbitral tribunal would not have jurisdiction oblige Spain to provide state aid.43 Separately, the EC supported Spain’s objection to the tribunal’s jurisdiction on the ground that the offer to arbitrate provided for in Article 26(3) of the ECT is limited to investors from non-EU member states, asserting that allowing Novenergía to refer the dispute to arbitration would violate Articles 267 and 344 of the TFEU. The EC pointed out that arbitration is “outside the complete system created by those articles, and, in particular, does not have the possibility or the obligation to refer preliminary questions to ECJ pursuant to Article 267 TFEU”.44 On 15 February 2018, the arbitral tribunal issued a final award. Disregarding EC Decision 7584, the tribunal rejected Spain’s jurisdictional objections based on the assertion that the arbitration was “not constituted on the basis of the European legal order and it is not subject to any requirements of such legal order”.45 Postcriptum: In a Judgement rendered on 18 June 2019, in the Micula case, after this chapter was written, the General Court of the EU annulled the EC’s decision to bar Romania from complying with the 2013 ICSID award rendered favour of Swedish investors Ioan Micula and Viorel Micula. The General Court considered that the award recognized that the investors’ right to compensation existed before Romania’s accession to the EU. As a result, the EC was precluded from applying EU state aid rules at least with respect to the pre-accession period. After recalling that “new rules apply, as a matter of principle, immediately to the future effects of a situation which arose under the old rule”, the General Court highlighted that, contrary to the Commission’s contention, “it cannot be considered that the effects of the award constitute the future effects of a situation arising prior to accession [. . .], since that award retroactively produced definitively acquired effects which it merely ‘stated’ for the past, that is to say, effects which, in part, were already established before accession”.46 In its reasoning, the General Court emphasized that the fact that the disputed measures pre-dated Romania’s accession to the EU distinguished the Micula case from the Achmea case: the Micula tribunal, unlike the Achmea tribunal, was not bound to apply EU law, as EU law could not be applicable to the measures. As a result, the General Court held that “the decision by which [the EC] classified the 43

In particular, Spain drew the Tribunal’s attention to the fact that the EC Decision restates that: “(i) the jurisdictional conflict between EU judicial institutions and ECT arbitral tribunals on intraEU investment disputes should be solved on the basis of the principle of primacy in favour of EU law; and (ii) any compensation granted by ECT tribunals to investors based on the Kingdom of Spain’s changes in legislation on renewable energy would constitute a state aid that arbitral tribunals are not competent to authorise as this belongs to the exclusive competence of the EU Commission. Accordingly, the Respondent underlines that the EC Decision, which is binding upon the Kingdom of Spain, provides further support to its objection that this Tribunal lacks jurisdiction over the Claimant’s claims”: Novenergía II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v. Spain, Award, SCC Arbitration (2015/063), para. 424. 44 Amicus Curiae Brief of the European Commission, 2 May 2017, para. 98. 45 Novenergía II - Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v Spain, Award, SCC Arbitration (2015/063), para. 461. See Eiser Infrastructure Limited and Energía Solar Luxembourg Sàrl v. Spain, ICSID Case No. ARB/13/36, Final Award, 4 May 2017, para. 199. 46 Cases T-624/15, T-694 and T-704/15, European Food and others v. European Commission (Micula case), 18 June 2019, EU:T:2019:423, paras 83 and 84.

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entirety of the compensation as aid is necessarily unlawful” and “must be annulled in its entirety”.47

4.3

Spain’s Petition to Annul the Award Before the Svea Court of Appeal

On 14 May 2018, Spain submitted an application to set aside the Novenergía award to the Svea Court of Appeal. Simultaneously, Spain requested that the Svea Court order that “the recognition and enforcement of the award be suspended until the Court of Appeal has given its Judgement and this Judgement gained legal force”.48 On 17 May 2018, the Svea Court granted Spain’s request for suspension, and ordered that “the arbitral award may not be enforced until further notice”.49 More recently, on 22 February 2019, the Svea Court of Appeal announced its Judgement in a case regarding the invalidity and setting aside of two arbitral awards between Poland and PL Holdings, an investment company from Luxembourg.50 Poland claimed that the awards should be declared invalid, or be set aside. It argued that the provision regarding dispute settlement resolution in the BIT between Poland, on the one hand, and Luxembourg and Belgium, on the other, was incompatible with the EU law according the Achmea Judgement. Poland also claimed that the arbitral tribunal had committed several other errors which should result in the awards being set aside. In its application, Spain explained that the award suffers from at least five fatal defects that require that it be set aside under the Swedish Arbitration Act (SAA). First, the award “is not covered by a valid arbitration agreement between the parties” (Section 34(1) of the SAA). In particular, the tribunal lacked jurisdiction because Article 26 of the ECT does not apply between Spain and other EU member states, and thus does not contain a valid offer by Spain to arbitrate disputes with investors from EU member states, such as Novenergía. As a result, there was no enforceable arbitration agreement permitting the arbitral tribunal to decide the dispute.51 According to Spain’s assertions, the Achmea Judgement applies to any “international agreement concluded between member states”, including the ECT. As a result, arbitration clauses in treaties like the ECT are not applicable between EU member

47

Ibid. paras 108 and 111. See Summons Application and Request for Suspension of the Kingdom of Spain, May 14, 2018, para. 4. 49 Decision of the Svea Court of Appeal, May 17, 2018, p. 2. 50 Judgement of the Svea Court of Appeal, Poland v. PL Holdings, Sàrl, February 22, 2019, Case n . T 8538-17 and T 12033-17, p. 2. 51 See Summons Application and Request for Suspension of the Kingdom of Spain, May 14, 2018, para. 8.2. 48

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states.52 Because Article 26 of the ECT does not apply between Spain and Luxembourg, Spain made no legally binding offer to arbitrate with Luxembourg companies, such as Novenergía. Second, the award must be set aside under Section 34(1) of the SAA because Article 26 of the ECT would violate higher-ranking rules of EU law, including, inter alia, the principle of autonomy of EU law and Articles 267 and 344 of the TFEU.53 Under Swedish case law, a finding of invalidity in such circumstances requires a determination by the CJEU. However, in its Judgement in the case Poland v. PL Holdings, the Svea Court of Appeal concluded that “articles 267 and 344 TFUE would not as a such preclude Poland and PL Holdings from entering into arbitration agreement and participating in arbitral proceedings regarding and investment-related dispute”.54 For that reason, this Court of Appeal held that “a Member State is, based on party autonomy, free [. . .] to enter into arbitration agreement with an investor regarding the same dispute at a later stage, e.g., when the investor has initiated arbitral proceedings. An arbitration agreement and arbitral proceedings between, on the one hand, and investor from a Member State and, on the other hand, a Member State, is therefore as such not in violation of the TFUE”.55 Third, the award would be invalid under Section 33(1) of the SAA,56 because it interprets and applies EU law thereby addressing matters that fall within the exclusive competence of the EC and the CJEU. As a result, the award purports to resolve matters that are not arbitrable under Swedish law. Fourth, the award would be invalid under Section 33(2) of the SAA, which requires a finding of invalidity “if the award, or the manner in which the award arose, is clearly incompatible with the basic principles of the Swedish legal system”. In particular, the award was rendered pursuant to an arbitration agreement that is contrary to EU law and, by means of its incorporation in Swedish law, to the laws of Sweden. Similarly, according to Poland’s assertions, arbitral awards issued by the arbitral tribunal in the arbitration between PL Holdings and Poland, as well as the manner in which the arbitral awards were issued, are manifestly incompatible with Swedish ordre public, and therefore invalid.57

“Expert Declaration of Steffen Hindelang in Support of Respondent the Kingdom of Spain’s Motion. . .”, paras 35–45. 53 See Summons Application and Request for Suspension of the Kingdom of Spain, May 14, 2018, para. 8.3. 54 Judgement of the Svea Court of Appeal, Poland v. PL Holdings, Sàrl, February 22, 2019, Case n . T 8538-17 and T 12033-17, p. 43. The Court of Appeal also noted that the arbitral tribunal “is not considered to be a court in a Member State within the meaning of article 267 TFEU, and therefore cannot request a preliminary ruling from the CJEU”. Ibid., p. 44. 55 Ibid., p. 44. 56 Which requires the invalidation of an award that “includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators.” 57 According to Poland, it is of public interest that the autonomy of EU law is not undermined, and that the full effectiveness of EU law is ensured. Therefore, the arbitration clause that is incorporated in Article 9 of the BIT, would be contrary to the foundation of the EU legal system and thereby the 52

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Fifth, the award must be declared invalid pursuant to Section 33(1) of the SAA because it is contrary to the Swedish legal order insofar as it awarded damages that qualify as unauthorized state aid in contravention of EU competition law. For that reason, the arbitral tribunal would be jurisdictionally incompetent to make such an award since the power to authorize state aid falls within the exclusive competence of the EC. This was also pointed out by the EC in Decision 7348.58 In that sense, the EC has underlined the public order nature of EU competition rules, already stressed in Eco Swiss case, and has pointed out the difficulties that national courts would face when asked to enforce the award.59 However, since the Micula judgment, compensation for damage suffered cannot be regarded as state aid “unless it has the effect of compensation for the withdrawal of unlawful aid”.60 At the time of writing this chapter, Spain’s application to set aside the award is pending with the Svea Court of Appeal. Novenergía did not attempt to enforce the award in any EU member state. Instead, on 16 May 16, 2018, Novenergía filed a petition before the US District Court for the District of Columbia to enforce the international award under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).61 As far as investment awards (other than ICSID awards) are concerned, and in accordance with the CJEU’s Achmea judgment, dispute settlement provisions allowing an arbitral tribunal to apply or interpret EU law are not compatible with Articles 267 and 344 of the TFEU. These are fundamental EU constitutional provisions that EU member states must uphold also in the context of proceedings brought for the recognition and enforcement of foreign arbitral awards through the public policy exception.62

Swedish legal system. However, in its reasoning the Svea Court of Appeal understood that the arbitral awards are not invalid under Section 33 of the SAA. 58 EC Decision 2017/7384, para. 165. 59 The Eco Swiss case clearly shows that an award must be annulled where it gives effect to an agreement between undertakings which infringe Article 101 of the TFEU, even if the award itself does not constitute an agreement between undertakings, Judgement 1 June 1999, Eco Swiss, Case C-126/97 (EU:C:1999:269). Otherwise, the parties could place anticompetitive agreements beyond the reach of Article 101 of the TFEU by inserting arbitration clauses in those agreements. 60 Cases T-624/15, T-694 and T-704/15, European Food and others v. European Commission (“Micula case”), 18 June 2019, EU: T:2019:423, paras 103–104. 61 Novenergía II – Energy & Environmental (SCA), Petitioner v. Spain, Respondent, Civil action No.1:18-cv-1148. This District Court has subject-matter jurisdiction over this proceeding pursuant to Section 203 of the Federal Arbitration Act (FAA), which provides that actions or proceedings falling within the New York Convention arise under the laws and treaties of the US and are subject to the original jurisdiction of the district courts of the US. The proceeding arises under the New York Convention because it is an action to recognize and enforce in the US an arbitral award made in Sweden, a state-party to the New York Convention. Moreover, the arbitration giving rise to the Final Award, administered by the SCC, was conducted pursuant to Spain’s agreement to submit to binding arbitration under the ECT. 62 Paschalidis (2019), p. 233.

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Novenergía’s Petition for the Recognition and Enforcement of the Award Before US Courts: State Aid Regime and US Public Policies as Grounds for Dismissal of the Petition

For its part, Spain claimed that the Novenergía’s petition for the recognition and enforcement of the award should be rejected by the US Court because the arbitral tribunal exceeded its jurisdiction. In Spain’s opinion, the award addressed matters that, in light of Article V(1)(c) of the New York Convention, exceed the terms of submission to arbitration.63 If any such submission had validly been made—which Spain argued had not—the submission would be circumscribed by Article 26(6) of the ECT, a provision that only permits arbitral tribunals to “decide the issues in dispute in accordance with this Treaty and applicable rules and principles of international law.” EU law forms part of those “applicable rules and principles of international law,” thereby restricting “the scope of submission to arbitration” to matters that are arbitrable under that legal order. In that sense, the EC’s functions include regulating state aid provided by EU member states.64 Other bodies, such as arbitral tribunals, may not do so. The EC made precisely this point in its Decision on Spain’s renewable energy policy, when it determined that “any compensation which an Arbitral Tribunal were to grant to an investor” would be unauthorized state aid that Spain is prohibited from paying.65 The tribunal was on notice that “any compensation” it might order Spain to pay for having modified its tariff regime would constitute unauthorized state aid. Spain brought the Commission’s decision to the tribunal’s attention.66 According, the tribunal could act ultra vires, deciding a matter that competition law (the legal regime on state aid) establishes as beyond any submission to arbitration. Further, according to Spain assertion’s, Novenergía’s petition for the recognition and enforcement of the award should be rejected under Article V (2)(b) of the

63

Article V (1)(c) of the New York Convention provides the following grounds to refuse recognition and enforcement of the award: The award “deals with a difference not contemplated by or not falling within the terms of the submission to arbitration” and “contains decisions on matters beyond the scope of submission to arbitration”. 64 The EU Treaties prohibit member states from granting subsidies to private actors (state aid) that might disrupt or treaten to distort competition within the EU (Article 107(1) of the TFEU). Likewise, according to Article 108(3) of the TFEU, state aid is permissible only when first notified to and approved by the EC. To establish whether a particular measure constitutes state aid, the CJEU has adopted a broad reading of the notion, Judgement of 7 March 2002, Italy v. European Commission, Case C-310/99 (EU:C:2002:143), para. 51. The award, even though issued by the tribunal, is imputable to Spain as it would have to be financed through Spain’s state resources. Spain’s payment of the award would qualify as state aid. 65 EC Decision 2017/7384, para.165. 66 See Award, paras 63 and 68: “According to the Respondent, the EC Decision concerned the Spanish state aid framework for renewable sources and was, according to the Respondent, relevant for the case, both as regards jurisdiction and the merits”, para. 63.

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New York Convention because recognizing and enforcing the award would contravene the public policy of the United States.67 With regard to the New York Convention, the CJEU has held in Eco Swiss that the EU competition law provision (Article 101 of the TFEU), should be regarded as a public policy rule within the meaning of Article V(2)(b) of the Convention under certain conditions.68 If Novenergía’s petition was accepted, Spain would be asked to violate its legal obligations under EU competition rules and would transgress the basic constitutional arrangements that EU member states have agreed upon in the EU Treaties. The US courts should refuse to recognize and enforce the award because to do otherwise would be “contrary” to at least two US “public policies: (1) According to Spain, to recognize and enforce the award would result in Spain violating EU rules on state aid69 in direct contravention of a Decision of the EC stating that “any compensation” that “an Arbitral Tribunal” might “grant to an investor” as a remedy for the regulatory actions Spain undertook in regard to its renewable energy sector is unauthorized state aid70; (2) Recognizing and enforcing the award would be contrary to the respect owned by the US to the constitutional order that EU member states have established in the EU Treaties. The EU Treaties endow the EC with the exclusive competence to authorize state aid and give the EU judicial system the exclusive authority to interpret and apply EU competition law rules. The award rendered in Novenergía would violate the foundational principles of the EU legal system reflected in Articles 267 and 344 of the TFEU, as pronounced by CJEU in Achmea,71 and grant a form of compensation that only the EC is competent to authorize under EU competition law rules. US courts must respect the EU’s constitutional choices, and should not enforce an award that transgresses them.72 To do otherwise would fail to give effect to the paramount values of “predictability and stability through satisfaction of [states’] mutual expectations”.73 Where an international award would “undermine the public interest” and “public confidence in the administration of the law,” it should be denied recognition and enforcement under Article V (2)(b) of the New York Convention.74

67

See Hardy Exploration & Prod. (India) v. Gov’t of India, 314 F. Supp. 3d 95, 109–114 (D.D.C. 2018). 68 Eco Swiss, Case C-126/97 (EU:C:1999:269), at paras 36 and 39. 69 See Revere Copper & Brass, Inc. v. Overseas Private Inv. Corp., 628 F.2d 81, 83 (D.C. Cir. 1980): (“[T]he public policy exception to the enforcement of arbitration awards” extends to awards that “compel [. . .] the violation of law”). As the D.C. Circuit has ruled, it would cause “considerable discomfort to think that a court of law should order a violation of law, particularly on the territory of the sovereign whose law is in question”: In re Sealed Case, 825 F.2d 494, 498 (D.C. Cir. 1987). 70 EC Decision 7384 of 10 November 2017 on State aid SA.40348(2015/NN)—Spain Support for electricity generation from renewable energy sources, cogeneration and waste, para. 165. 71 Case C-284/116, Achmea, Judgement, 6 March 2018, EU:C:2018:158, para. 60. 72 Novenergía II – Energy & Environmental (SCA), Petitioner v. Spain, Respondent, Civil action No.1:18-cv-1148, p. 32. 73 Laker Airways, Ltd. v. Sabena, Belgian World Airlines, 731 F.2d 909, 937 (D.C.Cir. 1984). 74 Enron Nigeria Power Holding, Ltd. v. Nigeria, 844 F.3d 281, 289 (DC. Cir. 2016). Nonotheless, the US courts’ practice reveals that “the public policy exception pursuant to Article (V)(2)(b) of the

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By contrast, in its amicus curiae brief submitted to the District Court of Columbia in support of the petitioner, MOL Hungarian Oil & Gas Plc (MOL), a Hungarian company argued that such attempts to retroactively nullify an arbitration agreement would be contrary to the US public policy in favour of binding arbitration clauses and repugnant to fundamental notions of fairness.75 In its brief, the said company argued that Achmea provides no basis for the US courts to refuse the recognition and enforcement of the award. The arbitration clause in Achmea was contained in a BIT between two EU member states (not a multilateral treaty, such as the ECT). The questions that the German Federal Court referred to the CJEU were specifically limited to “the application of a provision in a bilateral investment protection agreement between Members of the European Union (a so-called intra-EU BIT).76 Thus, by its very terms, the Achmea judgment is limited to arbitration clauses in intra-EU BITs, to which the EU is not a party. For this reason, the District Court of Columbia is not empowered, in the context of an enforcement proceeding, to extend Achmea beyond its clearly defined limits. Thus, contrary to Spain’s assertions, there is no basis on which this District Court could conclude that, as a matter of EU law, Achmea extends to the ECT, and on those grounds, refuse to recognize and enforce an arbitral award in an intra-EU dispute under the ECT.77 Finally, Spain argued that the District Court of Columbia should stay this action pending the resolution of the Swedish proceedings.78 Novenergía’s push to enforce the award in the United States creates a serious risk: if the award is enforced against Spain’s assets in the United States, but the Svea Court subsequently sets it aside, Novenergía will have enforced an annulled award. If this case proceeds to recognition and enforcement, and the Svea Court later vacates the award, Spain would have to seek recovery of any assets obtained by Novenergía in the interval. By contrast, US courts do not normally apply EU law and cannot seek an authoritative interpretation from the CJEU. Finally, in my opinion, it is likely that the Svea Court could consider grounds for setting aside the award that have no equivalent in Article V of the New York Convention and thus are not before US courts, including whether the award should be declared invalid for violating the Swedish legal order. New York Convention could not be substantiated through revamping considerations relating to the sovereign or public status of a party or its property, especially where such defences have been already tried in the arbitral phase. Consequently, the ordre public defence should be assessed on the basis of international standards and narrowly construed so as not to thwart the effectiveness of arbitration agreements and awards circulating under the New York Convention”, see de Stefano (2019), p. 454. 75 See Corporación Mexicana de Mantenimiento Integral, S. de RL v. Pemex-Exploración y Prod., 962 F. Supp. 2d 642, 656-57 (S.D.N.Y. 2013); Chromalloy Aeroservices, a Division of Chromalloy Gas Turbine Corp. v. Egypt, 939 F. Supp. 907, 913 (D.D.C. 1996). 76 German Federal Court of Justice, Slovak Republic v. Achmea, Judgment (Oct. 31 2018), Case I ZB/15. Emphasis added. 77 “Brief of MOL hungarian oil and gas PLC as amicus curiae in Support of Petitioner’s response to respondent Kingdom of Spain’s motion to dismiss and to deny petition to confirm foreign arbitral award”: Civil Action No. 1:18-cv-1148 (TSC), p. 20. 78 According to Article VI of the New York Convention.

The Complex Relationship Between Competition Law and Investment. . .

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5 Conclusion In the last years several foreign investors, most of them based in EU member states, have initiated investor-state arbitration against Spain under the ECT as a result of the radical changes brought to the regulatory framework in the renewable energy sector since 2010. The relationship between ECT provisions and competition law (state aid regime) has changed after the CJEU Achmea judgment. The latter concluded that investor-state arbitration clauses provided for in intra-EU BITs are incompatible with EU law, as they remove disputes concerning the interpretation or application of the EU law from the jurisdictional system of the EU. However, taking into account the arguments used by the CJEU, the consequences of Achmea can go far beyond intra-EU BITs. In that sense, the intervention of the EC in order to prevent the enforcement of the Novenergía award before US courts illustrates its strong opposition to intra-EU arbitration under the ECT. It should be recalled that while the EC can defend its position on illegal state aid derived from awarding compensation, EU courts and tribunals can reject this position. However, we must inevitably take into account the recent Judgement issued by the General Court of the EU in the Micula case. With respect to the intra-EU aspect of the applicable BIT, the General Court further distinguished, very briefly, the Micula case from Achmea, ruling that the arbitral tribunal in the former case was not bound to apply EU law to events occurring prior to the host state’s accession to it. For that reason, the EC exceeded its powers since, in its Decision, it did not draw a distinction between the period prior to and post accession. Likewise, every international arbitral tribunal that has considered the argument that EU law prohibits international arbitration in intra-EU disputes under the ECT has rejected it, including in decisions rendered after Achmea (Novenergía, Masdar, Antin and REEEF). Last, but not least, the uncertainty about how ICSID tribunals will react and the limited grounds for annulment under the New York Convention, especially when enforcement is sought in a non-EU member state (i.e. US), still constitute important aspects that prevent an accurate assessment of the impact of the Achmea judgment on ECT arbitrations Spain faces for cuts in the renewable energy sector.

References Ali AH (2013) In the eye of the storm: Spain’s nexus to investment disputes. Revista del Club Español del Arbitraje 18:5–36 Barausova V (2018) Slovak Republic v. Achmea from a public international law perspective: is state consent to arbitrate under intra-EU BITS still valid? Eur Invest Law Arbitr Rev 3 (1):129–153 Bermann GA (2012) Navigating EU law and the law of international arbitration. Arbitr Int 28 (3):397–445 Bilanová A, Kudrna J (2018) Achmea: the end of investment arbitration as we know it? Eur Invest Law Arbitr Rev 3(1):261–281 Cavedon A, Weber S (2019) Digging deeper: summary of the hearing before the CJEU in the Achmea case. Eur Invest Law Arbitr Rev 3(1):223–241

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Cimiotta E (2018) The first ever interpretative preliminary ruling concerning the validity of an international agreement between EU member states: the Achmea Case. Eur Pap 3(1):337–334 Contartese C, Andenas M (2019) EU autonomy and investor-state dispute settlement under inter se agreement between EU member states: Achmea. Common Mark Law Rev 56(1):157–192 de Stefano C (2019) The circulation of international investment awards under the New York Convention. In: Fach Gómez K, López Rodriguez AM (eds) 60 Years of the New York Convention. Key Issues and Future Challenges, Netherlands, Kluwer, pp 441–455 Fernández Masiá E (2017) España ante el arbitraje internacional por los recortes a las energías renovables: una representación en tres actos, por ahora. Cuadernos de Derecho Transnacional 9 (2):666–676 Gaillard E (2018) L’affaire Achmea ou les conflits de logiques. Revue critique de droit international privé 3:616–630 Gourgourinis A (2018) After Achmea: maintaining the EU law compatibility of intra-EU BITS through treaty interpretation. Eur Invest Law Arbitr Rev 3(1):282–315 Hernández Mendible VR (2017) El Tratado sobre la Carta de la Energía y el arbitraje internacional de inversiones en fuentes de energías renovables. Caso Charanne B.V. y Construction Investments S.a.r.l. vs. Reino de España. Revista de Administración Pública 202:223–253 Hindelang S (2013) The Limited Immediate Effects of CJEU’s Achmea Judgment, VerfBlog, pp 1–6, 9 March 2018. Available at https://verfassungsblog.de/the-limited-immediate-effects-ofcjeus-achmea-judgement/ Iruretagoyena Agirrezabalaga I (2018) La sentencia del TJUE en el asunto Achmea: el adiós al arbitraje de inversiones de los APPRI intra-UE en la Unión Europea (y algo más). La Ley Unión Europea 60(junio):1–23 López Escudero M (2014) Arbitrajes de inversiones contra España por los recortes en los incentivos a la generación eléctrica mediante energías renovables. In: España y la práctica del Derecho internacional: LXXV Aniversario de la Asesoría Jurídica Internacional del MAEC, Madrid, MAEC, pp 223–265 Overduin D (2018) Turning tides: the landmark decision in the Achmea case – the ecosystem of EU law means the end of intra-EU BITS. Eur Invest Law Arbitr Rev 3(1):242–260 Paschalidis P (2019) Challenges under EU law to the enforcement of arbitral awards under the New York Convention. In: Fach Gómez K, López Rodriguez AM (eds). 60 Years of the New York Convention Key Issues and Future Challenges, Netherlands, Kluwer, pp 219–235 Pinna A (2018) The Incompatibility of intra- EU BITs with European Union Law, annotation following ECJ, 6 March 2018, Case 284/16, Slovak Republic v. Achmea BV, Cahiers de l’arbitrage (1):73–95 Rao G (2018) The withdrawal of a European state from the ECT in light of the Achmea case. Eur Invest Law Arbitr Rev 3(1):154–182 Stier A (2015) The jurisdiction of the arbitral tribunal in intra-EU investment treaty disputes after the decision in Electrabel v Hungary. Arbitr Int 31(1):163–170 Verburg C, Lavranos N (2018) Recent awards in Spanish reneawable energy cases and the potential consequences of the Achmea judgement for intra-EU ECT arbitrations. Eur Invest Law Arbitr Rev 3(1):197–222

Millán Requena Casanova is a lecturer in Public International Law and International Relations at the University of Alicante (Spain). Guest Professor at the University of Lisbon since 2013 to present. He is Jean Monnet Professor, title awarded by the European Commission, since 2011 to present. Professor Requena is specialized in international commercial arbitration and investment arbitration by the American University (Washington D.C.). Former Secretary of the Faculty of Law at the University of Alicante (2012–2016). He has published numerous articles in the field of international law, investment arbitration and European Union law.

Using GATS Article II to Resort to Investment Arbitration Sébastien Manciaux

Contents 1 Introduction: Is It Possible to Use a WTO Rule to Resort to Investment Arbitration? . . . . 2 Discussions Based on the Drafting of GATS Article II and on the Nature of WTO Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Are WTO Rules Directly Invocable by Private Persons? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Is an Offer to Arbitrate a “Measure by a Member Affecting Trade in Services”? . . 2.3 A Commitment to Be Respected Only in the Future? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Discussions Based on the Relationship Between WTO Law and Investment Law . . . . . . . 3.1 What Were the States’ Intentions at the Time the GATS Was Adopted? . . . . . . . . . . . 3.2 Is the Ejusdem Generis Principle a Bar to Using GATS Article II to Attract the ISDS Clause of a BIT? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Systemic Consequences of Using GATS Article II to Resort to Investment Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract It is widely known that links between international investment law and World Trade Organization (WTO) rules—which are part of competition law at the global level—are numerous. But is it possible to use a WTO rule to resort to investment arbitration? This is what a corporation from Luxembourg attempted to do recently as a consequence of a dispute arising from an investment made in the airport sector in Senegal. Since Luxembourg had no investment treaty with the investor’s host state, the claimant sought to establish the jurisdiction of an investment tribunal by combining the most-favoured-nation clause provided in General Agreement on Trade in Services (GATS) Article II and the investor-state dispute settlement (ISDS) clause contained in a bilateral investment treaty (BIT) concluded between the host state and a third country. This case has given rise to extensive arguments and exchanges between the claimant and the respondent on this issue and eventually to the 2016 Menzies v. Senegal award declining jurisdiction. This paper S. Manciaux (*) University of Burgundy, Dijon, France e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_11

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will address some of the arguments developed by the parties and in the tribunal’s award that shed some light on the links between global competition law and international investment law.

1 Introduction: Is It Possible to Use a WTO Rule to Resort to Investment Arbitration? The history of competition law reaches back over two millennia. Roman Emperors and medieval monarchs used tariffs to stabilise prices or to supporting local production. But economic competition between states has only been studied as a whole since the eighteenth century, notably thanks to Adam Smith.1 Modern competition law started to develop at the domestic level at the end of the nineteenth century, notably in the United States with the Shearman Anti-Trust Act of 1890. The first rules seeking to regulate competition at the global level did not appear until the second half of the twentieth century, first thanks to the entry into force of the General Agreement on Tariffs and Trade (GATT) and later with the creation of the World Trade Organization (WTO). With more than 160 WTO Member States to date, WTO rules play a major role in keeping all over the world states’ trade policies within agreed limits, with the overriding purpose of reducing obstacles to international trade and ensuring a level playing field. Non-discrimination as a tool for fair trade is based on two major principles: the most-favoured-nation (MFN) rule, and the national treatment (NT) rule. Both are embedded in the GATT, the General Agreement on Trade in services (GATS) and the Trade-Related Aspects of Intellectual Property Rights (TRIPS), even if their precise scope and nature differ across these three agreements.2 The MFN rule requires that a product made in one member country be treated no less favourably than a “like” product that originates in any other country.3 The NT rule requires that foreign goods, once they have satisfied applicable border measures, be treated no less favourably—notably in terms of internal (indirect) taxation—than like or directly competitive domestically produced goods. Obviously, fair international trade requires many other rules developed outside the WTO (in order to regulate cartels, dominant positions and the like) but these two WTO rules are essential to ensure a level playing field in world trade.

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Smith (1776). For a clear presentation of the history and functions of WTO, see for instance Hoekman (2002), pp. 41–49. 3 For instance, if a State decides to apply a 7% tariff to a specific produce coming from another state, this rate must be applied immediately and unconditionally to imports of this good originating in all WTO members. 2

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Roots of international investment law are also old if one considers the protection of foreigners and their properties, addressed by Hugo de Groot (Grotius) in the seventeenth century4 as the beginnings of what is now an autonomous and flourishing branch of international economic law. Interestingly enough, the non-discrimination principle was also at the heart of Grotius’ works on the treatment of foreigners. Currently, international trade law and international investment law share common objectives and rules despite having been dissimilarly regulated for decades.5 Their common objective is to help market traders, producers of goods and services, and investors to develop their business abroad in fair conditions. Therefore, it is hardly surprising to find both the MFN and the NT rules in almost all international investment agreements (IIAs) for more than 50 years.6 It could be added that the predictability and the transparency of the rule of law is a major concern both within the WTO system and in IIAs. The failure to create the International Trade Organization (ITO) following the conclusion in 1948 of the Havana Charter certainly explains that international trade law and international investment law followed different paths in the past. The Havana Charter did contain an important article XII entitled “International Investment for Economic Development and Reconstruction” that provided rules for the regulation of foreign investments. As the ITO never came into being, further negotiations only led to the adoption of GATT, leaving international investment law to develop in another forum through the adoption of other instruments, essentially bilateral investment treaties (BITs). Distinct evolutionary pathways have led to variances in treaty form, institutional culture, and dispute settlement. Through the late twentieth to early twenty-first centuries, those weak boundaries have become more and more meaningless. Investing abroad is indeed another way to practice international trade. As a result, free trade agreements with an “investment” chapter started to “supersede” BITs at the end of the twentieth century. Another illustration of this phenomenon is given by the expansion of European Union (EU) competences, originally limited to international trade and extended in 2009 with the Lisbon Treaty to foreign direct investment. As the European Commission (EC) explained in a 2010 Communication entitled Towards a comprehensive European international investment Policy, “[i]nvestment presents itself as a new frontier for the common commercial policy. [. . .] The Treaty grants the Union exclusive competence to that effect”.7

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Grotius (1625). Broude (2013), p. 139; Garcia-Bolivar (2010), Kurtz (2004), p. 861; Alford (2014), and Puig (2015). 6 OECD (2004), Dimascio and Pauwelyn (2008), p. 71; Kurtz (2005), p. 525. 7 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/2010/0343 final. 5

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If there is today a clear and natural rapprochement between international investment law and WTO law, is this evolution sufficient justification to allow the use of a WTO rule to resort to investment arbitration? This is what a corporation from Luxembourg attempted to do in 2015 in Menzies Middle East and Africa S.A. and Aviation Handling Services International Ltd. v. Senegal. Since Luxembourg had no investment treaty with the Republic of Senegal, the claimant sought to establish the jurisdiction of an investment tribunal by combining the MFN clause in GATS Article II and the investor-state dispute settlement (ISDS) clause contained in the Netherlands-Senegal BIT.8 The Menzies v. Senegal case has given rise to extensive arguments and exchanges between the claimant and the respondent and eventually led to an award declining jurisdiction by an investment tribunal acting under the auspices of the International Centre for Settlement of Investment Disputes (ICSID).9 The purpose of this chapter is to present some of the arguments developed by the parties and the award rendered by this ICSID tribunal that shed some light on the links between global competition law and international investment law.10 The remainder of this chapter will explore in turn arguments based on the drafting of GATS Article II and on the nature of WTO rules (Sect. 2) and arguments based on the relationship between WTO law and investment law (Sect. 3).

2 Discussions Based on the Drafting of GATS Article II and on the Nature of WTO Rules Discussions based on the drafting of GATS Article II and on the nature of WTO rules mainly focused on the direct invocability of WTO rules by non-state actors, on the question of whether an offer to arbitrate contained in an investment treaty is a “measure by a member affecting trade in services”, and on the on temporal scope and legal effectiveness of GATS Article II.

The MFN treatment has been defined as follows by the International Law Commission: “Mostfavoured- nation treatment is a 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 or to a third State or to persons or things in the same relationship with that third State”, Article 5 of the Draft Articles on Most-Favoured-Nation Clauses (ILC Draft), in Yearbook of the international Law Commission, 1978, Vol. II, Part Two, p. 21. For an overall presentation of the MFN Clause, see “Most-Favoured-Nation Treatment in International Investment Law”, OECD Working Papers on International Investment, 2004/02, OECD Publishing. 9 Menzies Middle East and Africa S.A. and Aviation Handling Services International Ltd. v. Senegal, ICSID Case No ARB/15/21, Award (rendered in French), 5 August 2016, hereafter Menzies v. Senegal. The arbitral tribunal was composed as follows: Hamid G. Gharavi (arbitrator appointed by the claimants), Pierre Mayer (arbitrator appointed by the Respondent) and Bernard Hanotiau (president of the tribunal appointed by the parties). 10 The author must disclose that he acted as legal adviser for Senegal in this case. Nevertheless, the following developments seek to be as objective as possible. 8

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Are WTO Rules Directly Invocable by Private Persons?

This is a key issue. If the reply is “WTO rules are not invocable by private persons”, there is not much to discuss: foreign investors cannot use WTO rules in general and GATS Article II in particular, for any purpose, notably for establishing state consent to investment arbitration. Obviously, Senegal argued that WTO member states never agreed to allow WTO rules to be directly invoked by private persons.11 To the contrary, the claimant argued that GATS gives rise to an individual right of action for the benefit of service providers.12 WTO rules do not contain any specific provision on this issue because private persons whether individuals or companies are not actors (stakeholders) of the WTO system, nor are they the direct recipients of the rules that are elaborated within this international organisation. Moreover, it is generally accepted that private parties have no direct access to any of the WTO Geneva-based bodies to complain about government practices that allegedly infringe on a WTO agreement, nor can they rely on rights granted by WTO law before domestic courts, since they lack direct effect.13 Only one WTO panel has thus far addressed the issue of whether WTO rules have a direct effect or not. It was in 1999 in United States—Sections 301–310 of the Trade Act of 1974, and the WTO panel held as follows14: Under the doctrine of direct effect, which has been found to exist most notably in the legal order of the EC (now EU) but also in certain free trade area agreements, obligations addressed to States are construed as creating legally enforceable rights and obligations for individuals. Neither the GATT nor the WTO has so far been interpreted by GATT/WTO institutions as a legal order producing direct effect. Following this approach, the GATT/ WTO did not create a new legal order with subjects comprising both contracting parties or Members and their nationals.15

On the EU side, the European Council in the Preamble of its decision 94/800/EC of 22 December 1994 concerning the conclusion on behalf of the European Community, as regards matters within its competence, of the agreements reached in the

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Menzies v. Senegal, Award, para. 75. Menzies v. Senegal, Award para. 103. 13 Alemanno (2004), p. 202; Ruiz-Fabri (2014), p. 154; Berkey (1998), p. 633; Bourgeois (2000), p. 71; Cottier (1998), p. 325; Snyder (2003), p. 365. 14 Report of the panel in United States—Sections 301–310 of the Trade Act of 1974, 22 December 1999, WT/DS152/R, para.7.72. 15 The Panel continued as followed: “We make this statement as a matter of fact, without implying any judgment on the issue. We note that whether there are circumstances where obligations in any of the WTO agreements addressed to members would create rights for individuals which national courts must protect, remains an open question, in particular in respect of obligations following the exhaustion of Dispute Settlement Understanding procedures in a specific dispute see Eeckhout (1997), p. 11; Berkey (1998), p. 626. The fact that WTO institutions have not to date construed any obligations as producing direct effect does not necessarily preclude that in the legal system of any given member, following internal constitutional principles, some obligations will be found to give rights to individuals. Our statement of fact does not prejudge any decisions by national courts on this issue”. 12

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Uruguay Round multilateral negotiations (1986–1994) held that “by its nature, the Agreement establishing the World Trade Organization, including the Annexes thereto, is not susceptible to being directly invoked in Community or Member State courts”. The case law of the Court of Justice of the European Union (CJEU) is consistent with this interpretation for decades, starting with International Fruit Company NV.16 On the other side of the Atlantic Ocean, the Uruguay Round Agreements Act enacted by the US Congress in December 1994 provides that: No person other than the United States (A) shall have any cause of action or defense under any of the Uruguay Round Agreements or by virtue of congressional approval of such an agreement.17

To the best of our knowledge, until the present moment no domestic court decision of a WTO member state gives direct effect to WTO rules.18 The arbitral tribunal in Menzies did not expressly take a position on this issue. But it did so indirectly, by analysing other arguments of the claimant based on the content and meaning of GATS Article II. For instance, the tribunal asked whether GATS Article II contained consent to arbitration. The arbitrators noted that such was not the case. But raising this question only makes sense if it is admitted, as a prerequisite, that GATS Article II can be directly invoked by foreign investors. It seems then that, according to this tribunal, WTO rules, or at least GATS rules, are directly invocable by private persons. This is not the only curiosity that one can find in this award.

2.2

Is an Offer to Arbitrate a “Measure by a Member Affecting Trade in Services”?

As GATS Article I:1 provides that “[t]his Agreement applies to measures by Members affecting trade in services”, the following question arises: is an offer to arbitrate contained in an investment treaty a “measure by a Member affecting trade in services”? This question is twofold. First, is an offer to arbitrate provided by an investment treaty a “measure”? Answering this question is not that difficult: GATS

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International Fruit Company NV, CJEU, 12 December 1972, C-21 to 24–72, p. 1225; Germany v. Council of the European Union UECJ, 5 October 1994, C-280/93, § 36; Portugal v. Council of the European Union, CJEU 23 November 1999, C-149/96; LVP NV v. Belgische Staat, CJEU, 18 December 2014, C-306/13, and Uruguay Round Agreements Act 108 Stat. 4815. 17 Public Law 103-465, 12 August 1994, 108 Stat. 4815, Title I, 102.c.1.A. 18 However, in the event of a member violating WTO rules, private companies can petition their governments to have recourse to the WTO Dispute Settlement System to challenge the legality of the measure with the WTO agreements. Both the US and the EU have created trade remedy mechanisms that allow private parties to complain about illegal practices of third countries and to request their trade authorities (US Trade Department; the EU Commission), to intervene before the WTO. As for the US trade mechanism, see Morrison and Hudec (1993), p. 130; as for the EU, see Bronckers and McNelis (2001), p. 427.

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Article XXVIII (a) contains a broad list (rather than a definition) of what the term “measure” means: For the purpose of this Agreement: “measure” means any measure by a Member, whether in the form of a law, regulation, rule, procedure, decision, administrative action, or any other form.

It seems difficult to argue that the ISDS provision of a BIT is not a measure when such a broad meaning is given to this concept.19 It is interesting to note that the North American Free Trade Agreement (NAFTA) follows a similar approach in its Article 201: “Measure includes any law, regulation, procedure, requirement or practice”. Applying this rule, some investment tribunals have already adopted a broad interpretation within the NAFTA framework, deciding for instance that this term encompasses a domestic court ruling (in Loewen Group Inc. and Raymond L. Loewen v. United States of America)20 or a law not yet into force (in Ethyl Corp. v. Canada).21 Secondly, is an offer to arbitrate a “measure affecting trade in services”? This is a more difficult question. It could be said that the offer to arbitrate disputes does not directly affect trade in services, making no difference between service providers that benefit from it and service providers that do not. The rationale of this interpretation is that an arbitration clause is only a procedural rule that applies only in case of a dispute (which is not supposed to happen too often), with no guarantee that the outcome of the arbitral proceeding will be more favourable than the ruling rendered by a domestic court. Nevertheless, the possibility of resorting to international arbitration against a state in the event of a dispute, rather than bringing the case before its courts, is generally considered as a clear advantage. More precisely, the legal security conferred by the arbitration clause allows service providers that can rely on it the possibility to offer services at a lower price, giving them a real advantage over other service providers. That was precisely an argument developed by the claimant.22 This discussion is very much linked to a well-known debate in investment law: is an arbitration clause a simple procedural provision or a part of the treatment granted to foreign investors subject to the MFN clause? This is an interesting topic that exceeds the limits of this chapter. But it is clear that choosing one of these interpretations over another will also answer the question of whether an offer to arbitrate is, or not, a measure affecting trade in services.

19

Menzies v. Senegal, claimant’s argument, Award, para. 118. Loewen Group Inc. and Raymond L. Loewen v. United States of America, ICSID Case No ARB (AF)/98/3, Decision on Jurisdiction, 9 January 2001, para. 39. 21 Ethyl Corp. v. Canada, ad hoc arbitral proceedings with application of the UNCITRAL Arbitration Rules, Decision on Jurisdiction, 24 June 1998, para. 728. 22 Menzies v. Senegal, Award, para. 117. 20

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A Commitment to Be Respected Only in the Future?

The claimant argued that GATS gives rise to an individual and effective right of action to the benefit of the service provider. This argument was disputed by the respondent state. The tribunal engaged in a grammatical analysis of GATS Article II:1 (Most-Favoured-Nation Treatment).23 The latter provides: With respect to any measure covered by this Agreement, each Member shall accord immediately and unconditionally to services and service suppliers of any other Member treatment no less favourable than that it accords to like services and service suppliers of any other country.

The tribunal observed that GATS Article II:1 provides “shall accord”, thus only creating commitments to be respected in the future. This analysis is not convincing. First, in English, the term “shall”—such as in other languages e.g. in French the future tense—is routinely used by rule-makers to create present commitments.24 Secondly, in its analysis the tribunal made a particular interpretation of Article II:1 that provides precisely that “each Member shall accord immediately [. . .]”. The least that can be said is that the difference between the present tense and “shall” is a very narrow one. In order to strengthen its reasoning, the arbitral tribunal added that within the WTO system, it is possible for states not to abide by the commitment they took, as a consequence of their sovereignty. The tribunal conceded that it was better for states to meet their commitments, but that they were free not to do so, being then only subject to a procedure before the WTO dispute settlement system.25 This argument appears strange, especially coming from arbitrators whose function is to enforce the rule of law. Fortunately, the part of the award dedicated to the relationship between WTO law and investment law is far more convincing.

3 Discussions Based on the Relationship Between WTO Law and Investment Law The discussions between the parties focused in particular on the states’ intentions (at the time the GATS was adopted) regarding the relationship between WTO law and investment law, as well as on the effect of the ejusdem generis principle and on the systemic consequences of the interpretation of GATS Article II proposed by the investor.

23

Menzies v. Senegal, Award, paras 136–137. For instance, Articles I to IV and VII (English and French versions) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). 25 Menzies v. Senegal, Award, para. 137. 24

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What Were the States’ Intentions at the Time the GATS Was Adopted?

The respondent claimed that by becoming a WTO member state, Senegal never intended to extend the scope of the MFN clause of GATS Article II to investor-state disputes. The respondent added that an MFN clause cannot be used in order to create consent to arbitrate when this consent does not exist,26 quoting in this sense the Plama v. Bulgaria decision on jurisdiction.27 The claimant relied on a discussion that took place during the Uruguay Round negotiations. The Secretariat raised the issue of whether ISDS clauses included in investment treaties could affect the GATS non-discrimination principle in the sense that these clauses would provide another forum for asserting a right under the GATS. Several members, such as Canada, Chile and Poland, have included the arbitration offers contained in BITs to the Article II exemption list. These exemption lists were circulated to members of the Negotiating Group on Services, including Senegal, and became part of the GATS According to the claimant, despite being aware of the scope of the GATS MFN clause, Senegal did not include in its list of exemptions the arbitration offers contained in the BITs that it had already concluded with other states.28 The arbitral tribunal noticed that during the negotiations on GATS, the delegations did not reach an agreement on whether BITs and investment arbitration are within the scope of the GATS. The discussions ended with no clear reply on this issue.29 The tribunal added that the position taken by states in 1994 should not be over-interpreted as, at that time, investment arbitration was at its very beginning.30 Indeed, at the end of 1994, the SPP and the AAPL awards had just been made public and AMT v. Democratic Republic of Congo was still pending.31 At that time, one needed to be a visionary to predict the fantastic development of investment arbitration. Thus, according to the tribunal, it is impossible to infer from the GATS

26

Menzies v. Senegal, state’s argument, award, para. 90. “It is one thing to add to the treatment provided in one treaty more favourable treatment provided elsewhere. It is quite another thing to replace a procedure specifically negotiated by parties with an entirely different mechanism. [. . .][A]n 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.”, Plama Consortium Limited v. Bulgaria, ICSID Case No ARB/03/24, Decision on Jurisdiction, 8 February 2005, paras 209 and 223. 28 Menzies v. Senegal, Claimant’s argument, award, para. 116. 29 On this issue, see for instance Allen and Soave (2014), p. 13. 30 Menzies v. Senegal, Award, paras 147 and following. 31 Southern Pacific Properties (Middle East) v. Egypt, ICSID Case No ARB/84/3, Decisions on Jurisdiction, 27 November 1985 and 14 April 1988, first published (abstracts) in 16 Y.B.Com. Arb., 1991, 19; Asian Agricultural Products Ltd. v. Sri Lanka, ICSID Case No ARB/87/3, Award, 27 June 1990, first published in 6 ICSID Rev.-FILJ, 1991, 526; American Manufacturing & Trading Inc. v. Democratic Republic of the Congo, ICSID Case No ARB/93/1, Award, 21 February 1997. 27

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negotiation the states’ clear will to consent to investment arbitration through the MFN clause of GATS Article II.

3.2

Is the Ejusdem Generis Principle a Bar to Using GATS Article II to Attract the ISDS Clause of a BIT?

The ejusdem generis principle is the rule according to which an MFN clause can only attract matters belonging to the same subject-matter or the same category of subject as the clause. Invoking Maffezini v. Spain, the respondent submitted that the ejusdem generis principle allows MFN clauses to be applied only to the same subject-matter or the same category of subjects as those to which the clause relates. However, the GATS and the Senegal-Netherlands BIT are two international instruments with distinct objects. Moreover, the GATS is only an annex and a part of a bigger multilateral agreement while the Senegal-Netherlands BIT is a bilateral agreement. Additionally, according to the respondent, the GATS only contains rules for states while the Senegal-Netherlands BIT essentially contains rules for the foreign investors covered by this treaty. Furthermore, GATS does not create rights directly invocable by private persons, when the Senegal-Netherlands BIT allows its direct invocation. As a final argument on this issue, the respondent claimed that the purpose of the GATS is to liberalize international trade in services, while the Senegal-Netherlands BIT protects investment in general, with no specific provisions dedicated to service providers.32 The claimant relied on a more accurate interpretation of the ejusdem generis principle, stressing that what was to be taken into account was not the object of the treaty but that of the clause.33 According to the claimant, since GATS Article II concerns treatment and as the arbitration clause is a part of foreign investors’ treatment, the ISDS clause falls within the scope of application of the MFN clause. The tribunal did not explicitly decide between these two approaches, but the award shows a clear reluctance to accept the claimant’s argument. The tribunal considered that it was asked by the claimant to create consent to arbitration by sticking disparate pieces, some coming from the WTO world, others coming from investment treaties.34 The tribunal concluded that this exercise was a manifest example of an equivocal and doubtful “consent” to arbitration when such consent has to be clear.

32

Menzies v. Senegal, Respondent’s argument, Award, para. 87. Menzies v. Senegal, Investor’s argument, Award, para. 115. 34 Menzies v. Senegal, Award, para. 135. 33

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Systemic Consequences of Using GATS Article II to Resort to Investment Arbitration

The respondent highlighted the systemic consequences of the thesis developed by the claimant.35 Indeed, if it were possible to build consent to arbitration through the GATS MFN clause, this would mean that it would be sufficient for one WTO member state to have entered into a single BIT to be bound through that BIT to the 161 other WTO member states. To put it in another way, it would mean that an investor coming from one of these 161 other countries would be able to use the MFN clause in GATS Article II to claim application of the material and procedural rules included in a BIT to which its home state is not party. Such a thesis would lead either to the advent of a global multilateral system for international investments or, more probably, to the collapse of the network of international investment treaties on which international investment law is built. The claimant did not really contest this argument and the arbitral tribunal shared the respondent’s views on this issue and stressed that such intentions of the WTO member states did not appear to exist.36 No doubt this reasoning weighed heavily in the tribunal’s decision not to uphold jurisdiction.

4 Conclusion The award rendered in Menzies v. Senegal is not convincing in all its aspects, even if its outcome can be seen as satisfactory. As the question of the direct invocability of WTO rules by non-state actors is widely disputed, it is unlikely that this award will be considered a leading case on this point. Direct effect of the WTO rules is indeed a key issue. Consequences of any interpretation on the possible combination of WTO rules and investment law rules, especially for procedural issues, must be carefully taken into account because of the systemic outcome they may produce.

References Alemanno A (2004) Private parties and WTO dispute settlement system. Cornell Law School InterUniversity Graduate Student Conference Papers. Paper 1:1–33 Alford RP (2014) The convergence of international trade and investment arbitration. Santa Clara J Int Law 12(1):35–63 Allen BE, Soave T (2014) Jurisdictional overlap in WTO dispute settlement and investment arbitration. Arbitr Int 30(1):1–58

35 36

Menzies v. Senegal, Respondent’s argument, Award, para. 89. Menzies v. Senegal, Award, paras 143 et seq.

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Berkey JO (1998) The European Court of Justice and direct effect for the GATT: a question worth revisiting. Eur J Int Law 9:629–633 Bourgeois JHJ (2000) The European Court of Justice and the WTO: problems and challenges. In: Weiler JHH (ed) The EU, The WTO and the NAFTA. Toward a common law of international trade, Collected courses of the Academy of European Law. Oxford University Press, Oxford, 9 (1):71–124 Bronckers M, McNelis N (2001) The EU trade barriers regulation comes of age. J World Trade 35 (4):427–482 Broude T (2013) Investment and trade: the “Lottie and Lisa” of international economic law? In: Echandi R, Sauvé P (eds) Prospects in international investment law and policy: world trade forum. Cambridge University Press, Cambridge, pp 139–155 Cottier T (1998) Dispute settlement in the world trade organization: characteristics and structural implications for the European Union. Common Mark Law Rev 35(2):325–378 Dimascio N, Pauwelyn J (2008) Non-discrimination in trade and investment treaties: worlds apart or two sides of the same coin. Am J Int Law 102(1):48–89 Eeckhout P (1997) The domestic legal status of the WTO agreement: interconnecting legal systems. Common Mark Law Rev 34(1):11–58 Garcia-Bolivar O (2010) Comparing arbitrator standards of conduct in international commercial, trade and investment disputes. In: AAA/ICRD (ed) AAA handbook on international arbitration practice, New York, pp 251–269 Grotius H (1625) De jure belli ac pacis, libri lres. In: Scott JB (ed) (trans: Kelsey FW). Clarendon Press, Oxford, p 1925 Hoekman B (2002) The WTO, functions and basic principles. In: Hoekman B, English P, Mattoo A (eds) Development, trade and the WTO: a handbook. The World Bank, Washington, DC, pp 41–49 Kurtz J (2004) The MFN standard and foreign investment: an uneasy fit? J World Invest Trade 5 (6):861–886 Kurtz J (2005) The delicate extension of the most-favoured-nation treatment to foreign investors: Maffezini v. Kingdom of Spain. In: Weiler T (ed) International investment law and arbitration: leading cases from the ICSID, NAFTA, bilateral treaties and customary international law. Cameron, London, pp 525–555 Morrison FL, Hudec RE (1993) Judicial protection of individual trade rights in the US. In: Hilf M, Petersmann EU (eds) National constitutions and international economic law. Kluwer, The Hague, pp 91–133 OECD (2004) Most-Favoured-Nation treatment in international investment law. In: OECD Working papers on international investment. OECD Puig S (2015) The merging of international trade and investment law. Berkeley J Int Law 33 (1):1–59 Ruiz-Fabri H (2014) Is there a case – legally and politically – for direct effect of WTO obligations? Eur J Int Law 25(1):151–173 Smith A (1776) An inquiry into the nature and causes of the wealth of nations. Strahan W and Cadell, London Snyder F (2003) The gatekeepers: the European Courts and WTO law. Common Mark Law Rev 40 (2):313–367

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Sébastien Manciaux is Law Professor at the University of Burgundy, France, and a member of the Research Centre on Investment and International Trade Law (CREDIMI). He teaches International Investment Law, International Trade Law and International Arbitration to graduated students in France and abroad (Tunis, Marrakech, Quebec, Rio de Janeiro, Tehran, Kobe). He has written many articles and contributions dealing with International Arbitration and/or Investment Law in French, English and Spanish. He has been called as expert or counsel in several arbitration proceedings (ICSID, ICSID (AF), ICC or ad hoc arbitration proceedings).

The Use of Evidence Obtained Through a State’s Special Antitrust Powers in Investment Arbitration Krystle M. Baptista and Bianca M. McDonnell

Contents 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Special Powers of State Agencies to Gather Information: A Brief Comparative Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Spain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 United States of America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Use of State Agency’s Special Powers in the Context of Investment Arbitration . . . . 3.1 The Rule of Law and the Prohibition of a Misuse of Powers . . . . . . . . . . . . . . . . . . . . . . . . 3.2 International Due Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The State’s Defence Under International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 State as a Single Body Under International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Differing Treatment of State’s Subdivisions Under Domestic Law . . . . . . . . . . . . . . . . . 4.3 Misuse of a State’s Domestic Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Is Document Production the Solution? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Abstract This chapter explores the use of evidence obtained by states in investment arbitration. In particular, it examines whether a state may use information it obtains through special powers of supervision, investigation and seizure granted to the antitrust agency, to defend itself against an investor’s claim in an investment arbitration. The chapter finds that such use of a state’s special powers constitutes a misuse of power under domestic law and a violation of due process in investment arbitration. Further, the treatment of a state as a single body for the purpose of establishing standing for international claims, does not entitle the state to blur domestic divisions of state powers to allow a special power to be used in a way that would contradict its intended purpose under domestic law. States should use the

K. M. Baptista (*) · B. M. McDonnell Armesto y Asociados, Madrid, Spain e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_12

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proper procedure for obtaining documents in an international arbitration: document production.

1 Introduction This chapter explores the use of evidence obtained by states in investment arbitration. In particular, the chapter examines whether a state may use information it lawfully obtains through the state’s special antitrust powers of supervision, investigation and seizure (special powers), to defend itself against an investor’s claim in an investment arbitration. The factual background that gives rise to the topic is simple. The state conducts an antitrust investigation against a company owned wholly or partially by a foreign investor. Through the state’s sweeping powers prescribed by domestic law, the antitrust agency collects numerous documents and information throughout the investigation. Unrelated to the investigation the foreign investor files an investment arbitration against the state. The antitrust agency finds that some of the seized documents could be helpful to the state attorneys in defending the state in the investment arbitration, and provides such documents to the state’s defence team.1 The question that arises is the following: Can the state use evidence and information obtained during the domestic antitrust investigation to defend itself in the investment arbitration? The chapter argues that the state should not be allowed to use evidence obtained in antitrust investigations to defend itself in an investment arbitration. After a brief comparative analysis of special powers to state agencies, the chapter argues that such use of evidence obtained in antitrust investigations is prevented by domestic rule of law (Sect. 3.1) and basic principles of fairness, good faith and equality of arms (Sect. 3.2). A state’s classification as a single body for the purpose of establishing state responsibility does not change this conclusion (Sect. 4). Instead, states should rely on the procedure of document production to properly obtain documents in an investment arbitration (Sect. 5).

1

One can imagine certain variations to this fact pattern that will give rise to the same question, i.e. the antitrust state agency conducts its investigation and seizes documents once the arbitration has started.

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2 Special Powers of State Agencies to Gather Information: A Brief Comparative Analysis In many jurisdictions an administrative body known as an antitrust agency is in charge of enforcing antitrust laws. To fulfill its function of protecting the national economy from anticompetitive conduct, the law usually endows such agencies with powers of inspection, vigilance and control over antitrust matters; this includes the power to carry out inspections, to seize documents during such inspections and to request information, reports, books and financial papers (special powers). It is usually very clear from the domestic law of the state that the antitrust agency is only empowered to exercise its special powers for the specific purpose articulated by law: to investigate individuals or companies for suspected breaches of antitrust laws and anticompetitive conduct. Both civil and common law jurisdictions entrust similar special powers to antitrust agencies, as evident through an examination of the following distinct jurisdictions:

2.1

Spain

The Comisión Nacional de los Mercados y la Competencia (National Commission on Markets and Competition) (CNMC)2 is the administrative agency that enforces antitrust law in Spain.3 To fulfill its function of protecting the Spanish economy from anticompetitive conduct, Articles 27, 28 and 29 of Law 3/2013 of June 4, grant the CNMC powers of inspection, vigilance and control in antitrust matters. This includes the power to carry out inspections, to seize documents and close premises during such inspections, to request information, reports, books and commerce papers, and obtain copies of all documents.4 Spanish law specifies that data and information obtained during inspections carried out by the CNMC may only be used by the

2

https://www.cnmc.es. All websites included in the Chapter were last accessed on 4 May 2019. Article 1(2) of Law 3/2013, on the creation of the Comisión Nacional de los Mercados y la Competencia: “La Comisión Nacional de los Mercados y la Competencia tiene por objeto garantizar, preservar y promover el correcto funcionamiento, la transparencia y la existencia de una competencia efectiva y de una regulación eficiente en todos los mercados y sectores productivos, en beneficio de los consumidores y usuarios”. 4 Articles 27, 28 and 29 of Law 3/2013, on the creation of the Comisión Nacional de los Mercados y la Competencia: 3

Artículo 27 Facultades de inspección 1. El personal funcionario de carrera de la Comisión Nacional de los Mercados y la Competencia, debidamente autorizado por el director correspondiente, tendrá la condición de agente de la autoridad y podrá realizar cuantas inspecciones sean necesarias en las empresas y asociaciones de empresas para la debida aplicación de esta Ley. 2. El personal habilitado a tal fin tendrá las siguientes facultades de inspección:

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agency for the purpose provided for in the antitrust laws, Law 3/2013 of June 4 and Law 15/2007 of July 3.5

2.2

France

In France the agency in charge of monitoring anticompetitive behaviour is the Autorité de la concurrence (Competition Authority),6 regulated in the fourth book

a) Acceder a cualquier local, instalación, terreno y medio de transporte de las empresas y asociaciones de empresas y al domicilio particular de los empresarios, administradores y otros miembros del personal de las empresas. Asimismo podrán controlar los elementos afectos a los servicios o actividades que los operadores o quienes realicen las actividades a las que se refiere esta Ley, de las redes que instalen o exploten y de cuantos documentos están obligados a poseer o conservar. b) Verificar los libros, registros y otros documentos relativos a la actividad de que se trate, cualquiera que sea su soporte material, incluidos los programas informáticos y los archivos magnéticos, ópticos o de cualquier otra clase. c) Hacer u obtener copias o extractos, en cualquier formato, de dichos libros o documentos. d) Retener por un plazo máximo de diez días los libros o documentos mencionados en la letra b). e) Precintar todos los locales, libros o documentos y demás bienes de la empresa durante el tiempo y en la medida en que sea necesario para la inspección. f) Solicitar a cualquier representante o miembro del personal de la empresa o de la asociación de empresas explicaciones sobre hechos o documentos relacionados con el objeto y la finalidad de la inspección y guardar constancia de sus respuestas [. . .]. Artículo 28 Requerimientos de información, deber de secreto y acceso a los registros estatales 1. Toda persona física o jurídica y los órganos y organismos de cualquier Administración Pública quedan sujetos al deber de colaboración con la Comisión Nacional de los Mercados y la Competencia en el ejercicio de la protección de la libre competencia y están obligados a proporcionar, a requerimiento de ésta y en plazo, toda clase de datos e informaciones de que dispongan y que puedan resultar necesarias para el desarrollo de las funciones de dicha Comisión [. . .]. Artículo 29 Potestad sancionadora 1. La Comisión Nacional de los Mercados y la Competencia ejercerá la potestad de inspección y sanción [. . .]. Martinez Sánchez and Rodríguez Ordóñez (2015), pp, 293–303. 5

Article 6 of the Law 3/2013, on the creation of the Comisión Nacional de los Mercados y la Competencia: “Los datos e informaciones obtenidos sólo podrán ser utilizados por la Comisión Nacional de los Mercados y la Competencia para las finalidades previstas en esta Ley y en la Ley 15/2007, de 3 de julio”. Also Guerra Fernández and Vélez Fraga (2013), pp. 33–34. Guillén Caramés (2015), pp. 41–89. 6 http://www.autoritedelaconcurrence.fr.

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of the Code of Commerce.7 The agents of l’Autorité are authorized to carry out all investigations necessary to enforce the antitrust regulations.8 In particular, they may carry out searches and seizures of books, receipts, professional documents of all nature and all other documents that may aid their mission.9 A recent European Union (EU) Directive10—applicable to both Spain and France—empowers the competition authorities of the member states to be more effective enforcers of antitrust laws and to ensure the proper functioning of the internal market. This Directive, which shall be transposed by February 2021, requires the member states to ensure that the national competition authorities are granted sweeping investigative powers,11 which at a minimum permit them12: (a) to enter any premises, land, and means of transport of undertakings and associations of undertakings; (b) to examine the books and other records related to the business irrespective of the medium on which they are stored, and to have the right to access any information which is accessible to the entity subject to the inspection; (c) to take or obtain, in any form, copies of or extracts from such books or records and, where they consider it appropriate, to continue making such searches for information and the selection of copies or extracts at the premises of the national competition authorities or at any other designated premises; (d) to seal any business premises and books or records for the period and to the extent necessary for the inspection;

7

Similar to what occurs in Spain, some antitrust competencies are regulated at the EU level. Article L450-1 of the French Code of Commerce: “I.-Les agents des services d’instruction de l’Autorité de la concurrence habilités à cet effet par le rapporteur général peuvent procéder à toute enquête nécessaire à l’application des dispositions des titres II et III du présent livre. Ils peuvent également, pour l’application du titre VI du présent livre, mettre en œuvre les pouvoirs d’enquête définis à l’article L. 450-3. [. . .] II.-Des fonctionnaires habilités à cet effet par le ministre chargé de l’économie peuvent procéder aux enquêtes nécessaires à l’application des dispositions du présent libre [. . .]”. 9 Article L450-3 of the French Code of Commerce: “Les agents peuvent exiger la communication et obtenir ou prendre copie, par tout moyen et sur tout support, des livres, factures et autres documents professionnels de toute nature, entre quelques mains qu’ils se trouvent, propres à faciliter l’accomplissement de leur mission. Ils peuvent exiger la mise à leur disposition des moyens indispensables pour effectuer leurs vérifications. Ils peuvent également recueillir, sur place ou sur convocation, tout renseignement, document ou toute justification nécessaire au contrôle”. Nicinski (2009), pp. 1237–1247. Laigneau (2013), repère 2. 10 Directive (EU) 2019/1 of the European Parliament and of the Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market, complete text: https://eur-lex.europa.eu/legalcontent/EN/TXT/HTML/?uri¼CELEX:32019L0001&from¼EN#d1e633-3-1. 11 For an analysis on the limits of the European Commission’s requests for information see: González and Contreras (2016), pp. 331–338. 12 Article 6 of the Directive (EU) 2019/1 of the European Parliament and of the Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market. 8

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(e) to ask any representative or member of staff of the undertaking or association of undertakings for explanations on facts or documents relating to the subject matter and purpose of the inspection and to record the answers.

2.3

United States of America

In the United States of America anticompetitive conduct is regulated through state and federal laws. The main federal statutes are the Sherman Antitrust Act, the Clayton Act and the Federal Trade Commission Act.13 The Antitrust Division of the Department of Justice, including the Office of the Assistant Attorney General, has jurisdiction to enforce such acts through criminal and civil enforcement actions, whilst the Federal Trade Commission’s jurisdiction is restricted to civil enforcement actions. Both bodies have wide reaching powers to obtain evidence for suspected breaches of domestic or international antitrust laws. The Federal Trade Commission Act provides that unfair methods of competition in or affecting commerce, and unfair or deceptive acts affecting commerce, are unlawful, and empowers the Federal Trade Commission to prevent persons, partnerships, or corporations, from using unfair methods of competition and unfair or deceptive acts affecting commerce.14 The Federal Trade Commission has the power to “gather and compile information concerning, and to investigate from time to time the organization, business, conduct, practices, and management of any person, partnership, or corporation engaged in or whose business affects commerce”.15 If the Commission encounters evidence which indicates that a breach of a Federal criminal law may have occurred, it is permitted to transmit such evidence to the Attorney General, who may institute criminal proceedings under the appropriate statute.16 The United States plays a role in the gathering of evidence for alleged breaches of foreign antitrust statutes. Antitrust mutual assistance agreements are created between the United States Government and foreign states to allow for the collection and sharing of evidence relating to potential breaches of foreign antitrust laws. If the Attorney General or the Federal Trade Commission obtain evidence that could be of use to a foreign antitrust authority in determining whether a person has violated or is about to violate a foreign antitrust law, or in enforcing a foreign antitrust law, such

13 U.S. Department of Justice Antitrust Division (2017), Antitrust Laws and You, https://www. justice.gov/atr/antitrust-laws-and-you. 14 Section 45(a)(1)-(2) of the U.S. Code Title 15. 15 Section 46(a) of the U.S. Code Title 15. 16 Section 46(k)(1) of the U.S. Code Title 15: “Whenever the Commission obtains evidence that any person, partnership, or corporation, either domestic or foreign, has engaged in conduct that may constitute a violation of Federal criminal law, to transmit such evidence to the Attorney General, who may institute criminal proceedings under appropriate statutes. Nothing in this paragraph affects any other authority of the Commission to disclose information.”

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evidence can be provided to the foreign antitrust authority by virtue of the antitrust mutual assistance agreements.17 In addition, foreign antitrust authorities are permitted to submit requests for investigative assistance to the US Attorney General, who along with the Federal Trade Commission, is empowered to conduct and obtain evidence related to possible violations of foreign antitrust laws, and provide such antitrust evidence to the foreign antitrust authority.18 The United States has concluded antitrust mutual assistance agreements with many states, one example being the Agreement Between the Government of the United States of America and the Government of Australia on Mutual Antitrust Enforcement Assistance. Pursuant to this agreement the antitrust authority is empowered to execute searches at the request of a foreign antitrust authority, to take the testimony or statements of individuals, to obtain documents, records, or other forms of documentary evidence, and to locate or identify persons or things.19 Under the Sherman Act the Attorney General can apply to a US district court to obtain an order requiring an individual to provide a testimony or statement, or to produce a document or other thing, in determining whether a person has violated or is about to violate any of the foreign antitrust laws, or in enforcing any foreign antitrust laws.20 The Sherman Act provides that evidence received by the Commission from a foreign law enforcement agency which was obtained through the investigation or enforcement of a foreign criminal law, may be used for the purpose of investigating, prosecuting, or preventing violations of US criminal laws.21 This implies that such evidence should only be used for the specific purpose for which it was obtained, to investigate, prosecute or prevent violations of criminal laws.

2.4

Australia

In Australia the main statute regulating competition law is the Federal Competition and Consumer Act 2010, which established the Australian Competition and Consumer Commission (ACCC),22 an independent non-corporate Commonwealth entity responsible for monitoring anticompetitive behaviour. 17

Section 6201 of the U.S. Code Title 15. Section 6202 of the U.S. Code Title 15. 19 Article 2(E) of the Agreement Between the Government of the United States of America and the Government of Australia on Mutual Antitrust Enforcement Assistance. 20 Section 6203(a) of the U.S. Code Title 15. 21 Section 46(k)(2) of the U.S. Code Title 15: “The Commission shall endeavor to ensure, with respect to memoranda of understanding and international agreements it may conclude, that material it has obtained from foreign law enforcement agencies acting to investigate or pursue the enforcement of foreign criminal laws may be used for the purpose of investigation, prosecution, or prevention of violations of United States criminal laws.” (Emphasis added) 22 https://www.accc.gov.au. 18

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The ACCC has wide powers to investigate antitrust violations. Like most antitrust authorities, the ACCC has the power to order documents or information to be produced,23 enter premises either by consent or through a search warrant, and seize evidential material with the consent of the owner or through a search warrant.24 When executing a search warrant an officer may operate electronic equipment on the premises and take data believed to be evidential material,25 require a person at the premises to answer questions or produce evidential material to which the warrant relates (the right against self-incrimination will not excuse an individual from answering such questions).26 Further, an executing officer is permitted to use “such force against persons and things as is necessary and reasonable in the circumstances”.27

Section 155 of the Federal Competition and Consumer Act 2010: “[. . .] if the Commission, the Chairperson or a Deputy Chairperson has reason to believe that a person is capable of furnishing information, producing documents or giving evidence relating to a matter that constitutes, or may constitute, a contravention of this Act [. . .] a member of the Commission may, by notice in writing served on that person, require that person: (a) to furnish to the Commission, by writing signed by that person or, in the case of a body corporate, by a competent officer of the body corporate, within the time and in the manner specified in the notice, any such information; (b) to produce to the Commission, or to a person specified in the notice acting on its behalf, in accordance with the notice, any such documents; or (c) to appear before the Commission, or before a member of the staff assisting the Commission who is an SES employee or an acting SES employee and who is specified in the notice, at a time and place specified in the notice to give any such evidence, either orally or in writing, and produce any such documents.” 24 Section 154(E) of the Federal Competition and Consumer Act 2010: “(1) The inspector or an assistant may do any of the following after entering premises under this Division: 23

(a) search the premises, and anything on the premises, for the evidential material; (b) make copies of the evidential material found on the premises; (c) operate electronic equipment at the premises to see whether the evidential material is accessible by doing so; (d) remove the evidential material from the premises with the consent of the owner of the material; (e) secure the evidential material, pending the obtaining of a search warrant to seize it; (f) take equipment and material onto the premises, and use it, for any of the above purposes”. Section 154F of the Federal Competition and Consumer Act 2010: “(1) If: (a) an inspector or an assistant enters premises under this Division; and (b) he or she believes on reasonable grounds that any data accessed by operating electronic equipment at the premises (including data not held at the premises) might constitute evidential material; he or she may do only 1 of 2 things. Removal of documents (2) One thing he or she may do is operate the equipment or other facilities at the premises to put the data in documentary form and remove the documents so produced from the premises. Removal of disk, tape or other storage device (3) The other thing he or she may do is operate the equipment or other facilities at the premises to transfer the data to a disk, tape or other storage device that: (a) is brought to the premises for the exercise of the power; or (b) is at the premises and the use of which for the purpose has been agreed to in writing by the occupier of the premises; and remove the disk, tape or other storage device from the premises.” 26 Section 154R of the Federal Competition and Consumer Act 2010. 27 Section 154L of the Federal Competition and Consumer Act 2010. 25

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The ACCC is only empowered to exercise its special powers of investigation and enforcement in pursuit of the purpose for which it is empowered under the law, that is, to investigate whether a contravention of the FCCA has occurred.28

3 The Use of State Agency’s Special Powers in the Context of Investment Arbitration As the examples from different jurisdictions illustrate, states are generally empowered by law to obtain large amounts of information and evidence during antitrust investigations, including many documents that might be irrelevant to the antitrust investigation, but that may be useful to other state agencies for different proceedings. The question then arises, may the state use information lawfully obtained by the antitrust agency through its special powers, to defend itself against an investor’s claim in an investment arbitration. The authors submit that the state should not be permitted to use such information to defend itself in an investment arbitration for two principal reasons: The state’s domestic rule of law (Sect. 3.1) and due process in investment arbitration proceedings (Sect. 3.2).

3.1

The Rule of Law and the Prohibition of a Misuse of Powers

Domestic rule of law requires that the use of special powers entrusted by law to antitrust agencies always be purpose oriented29: administrative agencies are only

28 See for example, Section 154 of the Federal Competition and Consumer Act 2010: “This Part sets out an enforcement regime for the purposes of finding out whether there has been a contravention of this Act”, and Section 155 of the Federal Competition and Consumer Act 2010: “[I]f the Commission, the Chairperson or a Deputy Chairperson has reason to believe that a person is capable of furnishing information, producing documents or giving evidence relating to a matter that constitutes, or may constitute, a contravention of this Act [. . .] a member of the Commission may, by notice in writing served on that person, require that person:

(a) to furnish to the Commission, by writing signed by that person or, in the case of a body corporate, by a competent officer of the body corporate, within the time and in the manner specified in the notice, any such information; (b) to produce to the Commission, or to a person specified in the notice acting on its behalf, in accordance with the notice, any such documents [. . .] (2) For the purposes of subsection (1), the matter must be a matter that: (a) constitutes, or may constitute, a contravention of: (i) this Act [. . .]”. 29 Martínez Useros (1955), pp. D11, 25, 29, 30, 33. López Mendoza (2013), pp. 302, 304, 311.

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permitted to use their special powers within the confines of their legally mandated mission, as articulated by the law empowering the agency.30 In the domestic sphere, a misuse of special powers can occur if a state agency uses its special powers for a purpose different to that entrusted to it by law. In that case, the state incurs in an administrative irregularity known in civil law systems as a desviación de poder31 or détournement de pouvoir,32 literally a deviation or a misuse of power. The legal concept of misuse of powers is considered a vice or irregularity of administrative acts, which must be corrected by judicial review.33 The regulation of this concept has evolved over time: The legal concept was initially created by the French Conseil d’Etat.34 The leading case under French administrative law is Lesbats.35 In that case, the Conseil d’Etat annulled a decision by Foantainebleau’s Prefect that prohibited a motorist from parking in the train station’s parking, because, although there was a prior law (of 15 November 1848) that allowed public authorities to regulate parking of vehicles, public authorities could not exceed their police powers by exercising them for purposes other than the maintenance of transit order and organisation.36 And in this case, it was proven that the annulled decision intended to ensure the monopoly of private transportation companies. The concept was quickly imported to other civil law systems. In Spanish law the concept was officially codified in the Municipal Statute of 1924, adding to a similar but limited principle which already existed.37 The modern version of the legal principle is wide spread in civil law systems. For example, the legislation regulating judicial review in Spain defines desviación de poder as: the exercise of administrative powers for a purpose other than those set by legislation.38 In Argentina the concept is derived from Article 28 of the Constitution.39 30

See examples cited in Sect. 2 above. García de Enterría and Fernández (2011), p. 489. Fierro Rodríguez (2014). Decision of the Spanish Tribunal Supremo 11-11-93, EDJ 10146; Decision of the Spanish Tribunal Supremo 14-7-95, EDJ 4348. 32 Hauriou (1921), p. 455. Aucoc (1878), pp. 197, 531. Laferriere (1896), p. 548. Décision Ministre de l’agriculture c/ Dame Lamotte Accueil, 17 février 1950 (http://www.conseil-etat.fr/ Decisions-Avis-Publications/Decisions/Les-decisions-les-plus-importantes-du-Conseil-d-Etat/17fevrier-1950-Ministre-de-l-agriculture-c-Dame-Lamotte). 33 Martínez Useros (1955), pp. D33. Fierro Rodríguez (2014). 34 Martínez Useros (1955), pp. D31. Fierro Rodríguez (2014). López Mendoza (2013), p. 302. 35 Conseil d’Etat, 25 février 1864, Lesbats, rec. p. 210. 36 French Conseil d’Etat, session of 15 February 1864, Sirey, refont T 9, III, p. 46 cited in López Mendoza (2013), pp. 299–315. 37 Municipal Statute of 8 March 1924 (Real Decreto Ley de 8 de marzo de 1924), which states in the Explanatory Memorandum of the Law “la actividad de los Ayuntamientos, si careciese de cauce y freno preventivos, cuando toca a los intereses particulares de contribuyentes, podría degenerar en peligrosa arbitrariedad, difícilmente subsanable a posteriori con recursos judiciales que a lo sumo corregirán el caso individual, nunca el error de principio o el absurdo técnico.” 38 Article 70(2) of the Act 29/1998 of 13 July. 39 López Mendoza (2013), pp. 313–315. 31

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EU law provides that a misuse of powers will be subject to the judicial review of the Court of Justice of the European Union (CJEU). Article 263 of the Treaty on the Functioning of the European Union (TFEU) ensures that the CJEU shall: “have jurisdiction in actions [. . .] on grounds of lack of competence, infringement of an essential procedural requirement, infringement of the Treaties or of any rule of law relating to their application, or misuse of powers.”40 (Emphasis added) In the United States judicial review has been the main instrument used to control the exercise of administrative power. In the words of Coughlin41: First, judicial review functions to protect the legislative intent behind the statutory authorization of the exercise of administrative power. Pursuant to the conventional model, an administrative agency exercises restricted legislative and judicial functions under judicial scrutiny to insure compliance with congressional intent. Judicial review insures that ‘a congressional delegation of power. . . must be accompanied by discernible standards, so that the delegatee’s action can be measured for its fidelity to the legislative will’. Additionally, the opportunity for judicial review of administrative action corrects and prevents abuses of government power exercised by non-elected bureaucrats and administrators such as corruption and bribery, incompetence, inaction, bias and prejudice.

Antitrust agencies—like any other administrative state agency—must use the powers provided to it by law, to act in pursuit of the goal entrusted to it by the law: the protection of a fair market. Thus, if an administrative agency were to provide documents obtained during an antitrust investigation to the state’s attorneys to be used in the defence of the state in an investment arbitration, it would incur in a desviación de poder, as it would be using its special powers for a purpose different than the one for which it is empowered by law. As the above jurisdictions illustrate, most domestic legal systems (including the EU through the power given to the CJEU to review misuses of power) would not condone the use of evidence that is obtained for a specific antitrust purpose, to be used for the different purpose of defending the state in an investment arbitration.42

3.2

International Due Process

The following section analyses the reason why from an international perspective, the state should not be allowed to use evidence obtained through an antirust agency’s special powers to defend itself in investment arbitration.

40

Treaty on the Functioning of the European Union (2012/C 326/01). Coughlin (2001–2002), p. 92. 42 Since the factual topic that inspires this article is fictional, the authors have been unable to find domestic jurisprudence with a similar factual pattern. However, the review of administrative acts based on a misuse of powers is well established also with regards to antitrust agencies. See for example the webpage of the CNMV where the agency makes available several judicial decisions dealing with a misuse of power by the agency: https://www.cnmv.es/portal/legislacion/ LibroJurisprudencia/ArbolSentencias.aspx?id¼2&page¼440. 41

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Fairness and Good Faith

In investment arbitrations claimants are investors that are often private companies, whilst respondents are generally sovereign states, whose various agencies and branches enjoy, by law, special powers to investigate and sanction administrative misbehaviour. Arbitral tribunals have consistently held that parties have an obligation to arbitrate in good faith43 and fairly, and that arbitral tribunals have the inherent power to enforce this obligation.44 The arbitral tribunal in Libananco expressed this principle in the following terms45: Nor does the Tribunal doubt for a moment that, like any other international tribunal, it must be regarded as endowed with the inherent powers required to preserve the integrity of its own process – even if the remedies open to it are necessarily different from those that might be available to a domestic court of law in an ICSID Member State. The Tribunal would express the principle as being that parties have an obligation to arbitrate fairly and in good faith and that an arbitral tribunal has the inherent jurisdiction to ensure that this obligation is complied with; this principle applies in all arbitration, including investment arbitration, and to all parties, including States (even in the exercise of their sovereign powers).

In Methanex the tribunal expressed itself in similar terms, precisely in the context of introduction of evidence—in that case—illegally obtained by the claimant46: In the Tribunal’s view, the Disputing Parties each owed in this arbitration a general legal duty to the other and to the Tribunal to conduct themselves in good faith during these arbitration proceedings and to respect the equality of arms between them, the principles of “equal treatment” and procedural fairness being also required by Article 15(1) of the UNCITRAL Rules. As a general principle, therefore, just as it would be wrong for the USA ex hypothesi to misuse its intelligence assets to spy on Methanex (and its witnesses) and to introduce into evidence the resulting materials into this arbitration, so too would it be wrong for Methanex to introduce evidential materials obtained by Methanex unlawfully.

3.2.2

Equality of Arms

Linked to the parties’ obligation to arbitrate in good faith,47 is the principle of equality of arms—a founding procedural principle of investment arbitration,48

43

Bédard et al. (2010), p. 738; Newcombe (2010). Cementownia “Nowa Huta” S.A. v. Turkey, ICSID Case ARB(AF)/06/2, Award (17 September 2009), para. 153. 45 Libananco Holdings Co. Limited v. Turkey, ICSID Case ARB/06/8, Decision on Preliminary Issues (23 June 2008), para. 78. 46 Methanex Corporation v. United States of America, UNCITRAL Final Award of the Tribunal on Jurisdiction and Merits (3 August 2005), para. 54, Part II—Chapter I—p. 26. 47 Wälde (2010a), p. 161. For a comprehensive analysis of the principle of good faith in investment arbitration, Sipiorski (2016), pp. 349–350. 48 Wälde (2010a), p. 161. Euler (2016), p. 356. 44

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which attempts to balance the natural inequalities faced by a private investor against a state with wide-ranging powers. In Tadic v. Prosecutor the Appeals Chamber of the International Criminal Tribunal for the former Yugoslavia (ICTY) conducted an in-depth analysis of the principle of equality of arms. In that case, the Appeals Chamber relied on jurisprudence of the European Court of Human Rights (ECtHR) to conclude that equality of arms means that each party must have a reasonable opportunity to present its case— including evidence49—“under conditions which do not place him at a substantial disadvantage vis-à-vis his opponent”.50 Based on such jurisprudence, the Appeals Chamber concluded that “equality of arms obligates a judicial body to ensure that neither party is put at a disadvantage when presenting its case.”51 The principle of equality of arms implies a proactive duty of the tribunal to create a situation of material equality, or to restore it if necessary, “in particular if affected by the abuse of a state respondent of its dual role as both equal party to an arbitration and, simultaneously, sovereign state with the ability to unleash its police powers to penalize the claimant and reduce its chances of prevailing in a fair arbitration.”52

3.2.3

Marshaling of Evidence in Good Faith and Taking into Consideration Equality of Arms

The parties’ obligation to arbitrate in good faith and respect the principle of equality of arms extends to the collection and marshalling of evidence and creates an obligation on states and investors to obtain evidence only through proper means.53 Whilst a foreign investor’s capacity to obtain evidence from a state party through improper means is significantly low, the duty not to engage in such conduct applies equally to the foreign investor.54 Under the International Bar Association Rules on the Taking of Evidence in International Arbitration (IBA Rules), arbitral tribunals are generally authorised to exclude evidence from the record for compelling reasons of “fairness or equality of the Parties”.55 The IBA Rules are a soft law instrument, which provides guidance to the parties and the tribunal on the taking of evidence in an arbitration, and is widely

49

Appeals Chamber ICTY, Judgment of 15 July 1999, paras 51–52. Appeals ICTY, Judgment of 15 July 1999, para. 48, citing Kaufman v. Belgium, 50 DR 115. 51 Appeals Chamber ICTY, Judgment of 15 July 1999, para. 48. 52 Wälde (2010b), p. 1087. 53 Wälde (2010b), p. 1087; Appeals Chamber ICTY, Judgment of 15 July 1999, paras 51–52. 54 Methanex Corporation v. United States of America, UNCITRAL Final Award of the Tribunal on Jurisdiction and Merits (3 August 2005), para. 54, Part II—Chapter I—p. 26. 55 Article 9.2(g) of the IBA Rules. 50

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regarded as reflecting an almost universal standard of document production.56 The IBA Rules can apply by virtue of the parties’ agreement, and they may elect to be bound or merely guided by the Rules, which are then used in conjunction with the applicable institutional or ad hoc rules of procedure.57 In addition, Article 17(1) of the United Nations Commission on International Trade Law (UNCITRAL) Rules 2010 provides that the tribunal must treat the parties with equality and maintain procedural fairness: Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting its case. The arbitral tribunal, in exercising its discretion, shall conduct the proceedings so as to avoid unnecessary delay and expense and to provide a fair and efficient process for resolving the parties’ dispute. (Emphasis added)

The International Centre for Settlement of Investment Disputes (ICSID) Arbitration Rules do not have a similar provision, merely providing that the tribunal is the judge of the admissibility of evidence and of its probative value.58 However, the Proposals for Amendment of the ICSID Rules—Working Paper #259 recommend the inclusion of an article that imposes on the parties the duty to conduct the proceedings in good faith and recognises that parties shall be treated equally and be provided a reasonable opportunity to present their case.60 The proposed rule would only codify in the ICSID Rules, established principles of international arbitration, whereby the tribunal has an obligation to ensure that the parties are treated equally and are given a fair opportunity to be heard.61 Whilst states are capable of legally forcing evidence from investors by exercising their special powers, such evidence should only be used for the purpose for which it was obtained: to further the antitrust investigation. To allow the state to marshal such evidence to defend itself in investment arbitration would allow the state to violate its duty to arbitrate in good faith and disrupt the equality of arms between the parties.62 56 The IBA Rules were adopted by a resolution of the IBA Council on the 29 May 2010, are considered to be an “almost universally recognized [. . .] international standard for and effective . . . document production regime”; Blackaby et al. (2009), para. 6.107. 57 Foreword of IBA Rules, p. 2. 58 Rule 34(1) of the ICSID Rules of Procedure for Arbitration Proceedings (the ICSID Arbitration Rules). 59 Working Paper #2 was discussed at a meeting of State experts in Washington, DC on April 7–9, 2019. The Center hopes to propose a final text in the summer of 2019. The amendment process can be followed at https://icsid.worldbank.org/en/amendments. 60 The proposed text of the Rule is as follows: “Rule 2 General Duties (1) The parties shall conduct the proceeding and implement the Tribunal’s orders and decisions in good faith. (2) The Tribunal shall treat the parties equally and provide each party with a reasonable opportunity to present its case. (3) The Tribunal and the parties shall conduct the proceeding in an expeditious and costeffective manner”. 61 Proposals for Amendment of the ICSID Rules—Working Paper # 1 Comment to Rule 11, paras 185–186, available here https://icsid.worldbank.org/en/Documents/III.Amendments_Vol_3_AR. pdf. 62 Wälde (2010a), p. 163.

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The breach of the arbitral tribunal’s duty to proactively ensure a fair proceeding and the parties’ equality of arms, could place the award at risk of annulment under Article 52 of the ICSID Convention as a “serious departure from a fundamental rule of procedure.”63 If tribunals were to admit into the record evidence gathered through the special powers of a state’s antitrust agency in unrelated administrative procedures, this would open the gate to the admission of evidence obtained by other administrative agencies with similar powers, such as the tax authority or the securities and exchange authority. This could create a perverse incentive: to commence administrative investigations once a dispute with an investor arises, in order for the state to capitalise on search and seizure powers of its administrative authorities, a power not available to investors. Therefore, arbitral tribunals should not permit a state to use evidence obtained through its own administrative powers and to marshal it thereafter in an investment arbitration; to do so would violate the obligation on tribunals to ensure that the power balance and equality of arms between the parties is maintained. This conclusion preserves two intersecting principles with contradictory objectives: First, that investment arbitration should not limit a government’s inherent and legitimate powers of enforcement; and second, that the government cannot be permitted to enhance its litigation position by misusing its special powers.64

4 The State’s Defence Under International Law States may attempt to argue that the classification of a state as a subject of international law and as a single body for the purpose of establishing liability, means that the state must be viewed as a whole, entitling it to use all domestic powers available to it to mount its defence in an investment arbitration. This includes making use of special powers to search and seize evidence from a claimant investor, normally reserved for administrative agencies. The idea derives from the treatment of a state as a single body for the purpose of establishing responsibility for internationally wrongful acts; however, such treatment does not entitle the state to bypass its 63

Wälde (2010b), p. 1087. It should be noted that this conclusion is focused on the use of evidence obtained by a state’s antitrust agencies, but may additionally extend to other administrative agencies with similar special powers (such as, tax agencies or securities and exchange commissions). However, the authors have not included an analysis of the consequences of a state obtaining evidence through criminal proceedings, which has had a different treatment in ICSID jurisprudence, with most tribunals acknowledging that the state is free to conduct a criminal investigation and that evidence gathered therein may be of interest to the arbitral tribunal. The authors also clarify that documents and information obtained by the state during antitrust investigations that indicate behaviour which may constitute a criminal offence, should be handed over to the relevant authorities (Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Bolivia, ICSID Case ARB/06/2, Decision on Provisional Measures (26 February 2010), para. 123).

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domestic separation of powers to utilise the special powers provided to its antitrust agency, for a purpose other than that prescribed by law. This section explains the treatment of a state as a single body under international law (Sect. 4.1), as opposed to the distinct classification of a state’s constituent subdivisions under domestic law (Sect. 4.2), and then explains why the treatment of a state as a single body does not entitle it to misuse its domestic special powers to mount its defence in an investment arbitration (Sect. 4.3).

4.1

State as a Single Body Under International Law

A cornerstone of the law of state responsibility is the principle that the conduct of any state organ or official that is attributable to the state, will result in liability on behalf of the state if a breach of an international obligations occurs.65 This is because international law treats a state as a single body66; it has one legal personality, with full capacity to bring international claims in the name of the state, and have claims brought against it.67 In this way, a state is viewed in the abstract, as comprised of its various constituent organs, levels of government and state officials, which take action on behalf of the state.68 Such organs and officials have different rights and duties under domestic law, as proscribed by the state’s Constitution and administrative law.69 However, under international law, the actions of a state’s organs and officials bind the state on an international level, as if they were carried out by the state itself. For example, if a local government commits an expropriatory act towards a foreign investor, the state cannot claim a lack of knowledge to escape liability for the conduct of its local government.70 This principle is articulated in the International Law Commission’s Articles on the Responsibility of States for Internationally Wrongful Acts (ILC Articles), which is regarded as codifying customary international law.71 Article 4 of the ILC Articles

65 Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro), Judgment, I.C.J. Reports 2007, p. 43, p. 2, para. 385; Articles 2 and 4 of the ILC Articles; Crawford (2006), p. 1; Hobér (2008), pp. 550 and 554; Momtaz (2010), p. 237; Dolzer and Schreuer (2012), p. 216. 66 Crawford (2006), p. 1. 67 Commentary to Article 2 of the ILC Articles, p. 35, para. 5. 68 Article 4 of the ILC Articles; Commentary to Article 2 of the ILC Articles, p. 35, para. 5; Crawford (2006), p. 1; France and Mexico: Mixed Claims Commission (1929); Gertrude Parker Massey (USA) v. Mexico, RIAA iv. 155 (15 April 1927), p. 159, para. 18; Crawford (2012), pp. 437–438. 69 Commentary to Article 2 of the ILC Articles, p. 35, para. 6. 70 Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case ARB/97/3, Award (21 November 2011), para. 49 and references cited therein. 71 Crawford (2012), p. 540.

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provides that regardless of the internal position of a state organ, its actions will bind the state: 1. 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 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. 2. An organ includes any person or entity which has that status in accordance with the internal law of the State.

This reflects the principle of objective responsibility: a breach of a responsibility of the state will be established through the occurrence of a breach committed by its official organs.72 This well-established principle was expressed by the President of the Franco-Mexican Claims Commission73: [T]he doctrine of the objective responsibility of the State, that is to say, a responsibility for those acts committed by its official or its organs, and which they are bound to perform, despite the absence of faute on their part. . . The State also bears an international responsibility for all acts committed by their officials or its organs which are delictual according to international law.

In addition, in Massey v. Mexico, Commissioner Nielsen stated that it is a74: [S]ound general principle that, whenever misconduct on the part of any such persons [within the state service], whatever may be their particular status or rank under domestic law, results in the failure of a nation to perform its obligations under international law, the nation must bear the responsibility for the wrongful acts of its servants.

Thus, a breach of a duty arising from an act or omission of an organ or official of a state, will result in the responsibility of the state, provided that agency and causal connection can be established.75

4.2

Differing Treatment of State’s Subdivisions Under Domestic Law

The legal treatment of a state’s internal subdivisions differs under domestic law and international law. Domestically, state organs are treated as different legal persons, which possess distinct powers, obligations and rights. For example, federalist states such as Australia provide state governments with the exclusive competence to legislate over certain areas, whilst the federal government has exclusive jurisdiction over other areas.76

72

Crawford (2012), pp. 437–438. France and Mexico: Mixed Claims Commission (1929). 74 Gertrude Parker Massey (USA) v. Mexico, RIAA iv. 155 (15 April 1927), p. 159, para. 18. 75 Crawford (2012), pp. 437 and 445. 76 Article I, Sections 8–10 of the Constitution of the United States of America. 73

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The Australian Constitution provides that the legislative power of the Commonwealth shall be vested in the federal Parliament, consisting of the Queen, the Senate and the House of Representatives.77 Article 51 of the Australian Constitution empowers the federal Parliament to make laws for the peace, order and good government of the Commonwealth in defined areas, such as trade and commerce, taxation, and marriage. The executive power of the Australian Government is vested in the Queen and is exercisable by the Governor-General and extends to the maintenance and enforcement of the laws and constitution.78 The judicial power is vested in the High Court of Australia, and in such other federal courts created by Parliament.79 France is not a federal state, but power is also divided into three branches: executive, legislative and judicial. The executive power is exercised by the President of the Republic80 and the Government.81 The power to legislate lies with Parliament, comprised of the National Assembly and the Senate.82 It votes on the budget, passes statutes and controls the executive branch. The judiciary is divided into a judicial branch (dealing with civil and criminal law) and an administrative branch (dealing with appeals against executive decisions), each with their own supreme court: the Cour de Cassation (judiciary) and the Conseil d’Etat (administrative courts).83 France also has independent agencies (Autorités Administratives Independents), such as the Autorité de la Concurrence. Whilst domestically these various facets of government act independently and only within the sphere of their allocated powers, for the purpose of state responsibility for internationally wrongful acts, a state is viewed differently. Internal government structures and domestic separation of powers are not considered by international courts or tribunals when judging a state’s conduct against international standards. Instead, a state is viewed as one whole body which is comprised of all levels of government.84 An act by a local government agency would be treated the

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Article 1 of the Commonwealth of Australia Constitution Act. Article 61 of the Commonwealth of Australia Constitution Act. 79 Article 71 of the Commonwealth of Australia Constitution Act. 80 Articles 5–19 of the French Constitution. 81 Articles 20–23 of the French Constitution. 82 Articles 24–33 of the French Constitution. 83 Articles 64–66(1) of the French Constitution. 84 Article 4 of the ILC Articles; Crawford (2006), p. 1; France and Mexico: Mixed Claims Commission (1929); Gertrude Parker Massey (USA) v. Mexico, RIAA iv. 155 (15 April 1927), p. 159, para. 18; Crawford (2012), pp. 437–438. 78

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same as an act of the head of state for the purpose of determining responsibility for internationally wrongful acts.85 Further, it is irrelevant whether an act is committed by a component unit of a federal state or an autonomous area for it to be attributable to the state; this is true even where a state’s internal law prohibits the federal government from exercising control to compel a competent unit to comply with the state’s international obligation.86 As outlined by the arbitral tribunal in Vivendi v. Argentina87: Under international law, and for purposes of jurisdiction of this Tribunal, it is well established that actions of a political subdivision of [a] federal state, such as the Province of Tucumán in the federal state of the Argentine Republic, are attributable to the central government. It is equally clear that the internal constitutional structure of a country can not alter these obligations. Finally, the Special Rapporteur of the International Law Commission, in discussing the proposed Commentary that confirms the attribution of conduct of political subdivisions to the federal State, has referred to the “established principle” that a federal state “cannot rely on the federal or decentralized character of its constitution to limit the scope of its international responsibilities.

This principle is reflected in the reasoning of the International Court of Justice (ICJ) in LaGrand and Avena, in relation to the international obligation of states under the Vienna Convention on Consular Relations (VCCR).88 The ICJ ruled that a state’s obligations under the VCCR must be complied with irrespective of its Constitutional limitations, and a federalist state will incur liability for the wrongful acts of its subdivisions.89

4.3

Misuse of a State’s Domestic Powers

Against this international law background, respondent states may be tempted to raise the following defence: if the state is to be regarded as a single body for the purposes of establishing international responsibility for the actions of its domestic organs, it should therefore be entitled to use the powers given to such organs by domestic law to defend itself against an international claim; this would entail the use of special powers entrusted to a state’s antitrust agency to investigate domestic antitrust violations, to search and seize evidence helpful for the state’s defence in an investment arbitration, or to use documents obtained by a different state agency through its special powers.

85

Article 4 of the ILC Articles; Crawford (2012), pp. 437–438; Gertrude Parker Massey (USA) v. Mexico, RIAA iv. 155 (15 April 1927), p. 159, para. 18. 86 Commentary to Article 4 of the ILC Articles, p. 41, para. 9. 87 Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case ARB/97/3, Award (21 November 2011), para. 49 and references cited therein. 88 Vienna Convention on Consular Relations (1963). 89 LaGrand (Germany v. US), ICJ Reports (2001), pp. 446 and 514; Avena and Other Mexican Nationals (Mexico v. US), ICJ Reports (2014), pp. 12 and 65–66.

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However, the reason behind this classification of a state must be analysed. The law of state responsibility was created for the purpose of ensuring that states are held accountable for breaches of international obligations. In order to ensure that a wronged individual is not left without a remedy under international law, a state will be held responsible for internationally wrongful acts, regardless of whether the wrongful act was perpetrated by a state organ which would not have standing to have an international claim brought against it, as only the state itself has standing under international law.90 As put plainly by Higgins, “the law of jurisdiction is about entitlements to act, the law of state responsibility is about obligations incurred when a state does act.”91 The abstract classification of a state as a single unit is therefore intended as a sword to ensure that the state does not escape liability, not as a shield to enhance the state’s position in an investment arbitration. A state should not be permitted to use this principle as a tool to justify the blurring of domestic divisions of a state’s special powers.

5 Is Document Production the Solution? States will naturally be tempted to marshal documents obtained by an antitrust agency to enhance their defence in an investment arbitration. The use of such documents will generally be incompatible with domestic administrative law as it would constitute a misuse of power. The burden would fall on the respondent state to prove the contrary, and for the tribunal to examine whether the use of the documents is permissible under the relevant domestic law.92 In principle, documents which were obtained through a misuse of domestic special powers, or an improper sharing of documents from a legitimate antitrust investigation, should not be allowed by an arbitral tribunal. Nevertheless, the resolution of this issue must be analysed on a case-by-case basis. Based on the facts, the tribunal must weigh the alleged relevance and materiality of the documents with the issues in dispute, with the need to respect due process and the equality of arms between the parties. 90

Article 4 of the ILC Articles; Commentary to Article 4 of the ILC Articles, pp. 40–42; Commentary to Article 2 of the ILC Articles, p. 35, paras 5–6; Hobér (2008), pp. 550, 554; Momtaz (2010), p. 237; Dolzer and Schreuer (2012), p. 216; Crawford (2006), p. 1; Crawford (2012), pp. 437–439; Higgins (1995), p. 147; France and Mexico: Mixed Claims Commission (1929); Gertrude Parker Massey (USA) v. Mexico, RIAA iv. 155 (15 April 1927), p. 159, para. 18. 91 Higgins (1995), p. 146. 92 It is important to note that the situation can occur in the reverse. A claimant investor may request the production of documents in possession of the state obtained by virtue of the legitimate use of its anti-trust powers. However, the state may use its domestic administrative law as a defence for the production of the documents, based on the fact that it is not empowered to transfer documents obtained by one state agency to another. This can be rebutted by the claimant investor with the argument that the state is considered as a single body under international law, and therefore has an obligation to produce the documents.

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To avoid the potential of having such documents excluded from the record, a state should use the appropriate process to obtain documents in arbitral proceedings: document production. Parties in ICSID arbitration proceedings are empowered to request documents from the other party, pursuant to Article 43(a) of the ICSID Convention,93 Rule 34 of the ICSID Arbitration Rules,94 and Article 3 of the IBA Rules (in the event that the IBA Rules apply to the proceedings). The tribunal controls the document production process by ensuring that it only grants a state’s request for the production of documents if it fulfils the specific requirements for document production. The state must establish that the requested documents are relevant to the case and material to its outcome,95 and are not in its possession, custody or control (in situations where the documents are held by a different branch of government the state should explain that whilst the documents are within the state’s control, they cannot be delivered to the state’s legal team without incurring in an administrative violation).96 If the documents fulfill such requirements and are not covered by legal or settlement privilege,97 commercial or technical confidentiality,98 or special political or institutional sensitivity,99 the tribunal should order their production and the documents should be produced by the investor.

93 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, formulated in Washington, on March 18, 1965 (the ICSID Convention): “Article 43: Except as the parties otherwise agree, the Tribunal may, if it deems it necessary at any stage of the proceedings, (a) call upon the parties to produce documents or other evidence [. . .]”. 94 ICSID Arbitration Rules:

Rule 34 Evidence: General Principles (1) The Tribunal shall be the judge of the admissibility of any evidence adduced and of its probative value. (2) The Tribunal may, if it deems it necessary at any stage of the proceeding: (a) call upon the parties to produce documents, witnesses and experts; and (b) visit any place connected with the dispute or conduct inquiries there. (3) The parties shall cooperate with the Tribunal in the production of the evidence and in the other measures provided for in paragraph (2). The Tribunal shall take formal note of the failure of a party to comply with its obligations under this paragraph and of any reasons given for such failure. (4) Expenses incurred in producing evidence and in taking other measures in accordance with paragraph (2) shall be deemed to constitute part of the expenses incurred by the parties within the meaning of Article 61(2) of the Convention. 95

Articles 3.3(b) and 9.2(a) of the IBA Rules. Article 3.3(c) (i) and (ii) of the IBA Rules. 97 Article 9.2(b) and 9.3 (b) of the IBA Rules. 98 Article 9.2(e) of the IBA Rules. 99 Article 9.2(f) of the IBA Rules. 96

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However, the process of document production does not necessarily cure all inequalities: a respondent state that possesses, or is aware of the existence of documents or information obtained as a result of domestic (internal) investigations or which may be in the custody of its antitrust agency as a result of it exercising its special powers, could target its document requests to obtain such documents. Thus, the document production process would be used as a legitimate means of gaining access to the documents, in order to use them in the arbitral proceeding. Detecting and preventing such a situation becomes difficult for the tribunal. In most cases the tribunal will not know that a state has acquired knowledge of the existence of documents through a blurring of domestic state powers. In the event that the tribunal does possess such knowledge, should it reject a document production request solely on this basis? The tribunal has the duty to maintain the equality between the parties, and under the IBA Rules it may reject a request if it considers that production would be detrimental to the fairness or equality of the parties.100 However, the tribunal additionally has an obligation to review relevant evidence to understand the facts underlining the dispute, in order to ensure that the dispute is resolved in a just way. The tribunal will have to resolve the procedural issue by weighing, on the one hand, the need to maintain fairness and the equality of arms between the parties, and on the other, the need to discover the truth of the events that transpired in the interests of achieving justice.

6 Conclusion In investment arbitration proceedings an inherent power imbalance exists between a respondent state and an investor. The arbitral tribunal is entrusted with the role of ensuring that this power imbalance is minimised, and that both parties are provided with an equal opportunity to present and defend their case. Tribunals are therefore tasked with preventing the use of tactics which disrupt the equality of arms between the parties. A respondent state’s use of its domestic antitrust agency’s special powers to gain access to information and documents to use as evidence in an investment arbitration, which it would otherwise not be able to access, is an example of such improper conduct. The rule of law requires that special powers entrusted by law to an antitrust agency always be purpose oriented: any exercise of special powers for a purpose outside the confines of the agency’s legal mandate will constitute a domestic misuse of power in many jurisdictions. Further, to allow evidence obtained through a misuse of a state’s special powers to be marshalled in an investment arbitration, would constitute a violation of the state’s obligation to arbitrate fairly and with equality of arms, and would allow the state to obtain an unfair advantage in the proceeding.

100

Article 9.2(g) of the IBA Rules.

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A state’s treatment as a single unit under international law does not entitle the state to bypass the domestic separation of powers and utilise the special powers provided to its antitrust agency for a purpose other than that prescribed by law. To prevent an imbalance of powers and to ensure that equality of arms between the parties is maintained, arbitral tribunals should refuse to admit evidence obtained through a state’s misuse of its domestic special powers, and instead only admit evidence that is legally obtained by a party on its own accord, or through the document production process.

References Aucoc L (1878) Conférences sur l’ administración et le droit administratif. 3rd edn. vol I. Paris Bédard J, Nelson T, Raymond Kalantirsky A (2010) Arbitrating in good faith and protecting the integrity of the arbitral process. Paris J Int Arbitr 2010(3):737–756 Blackaby N et al (2009) Redfern and Hunter on international arbitration, 5th edn. Oxford University Press, Oxford/New York Coughlin JJ (2001–2002) The history of the judicial review of administrative power and the future of regulatory governance. Idaho Law Rev 38:89–133. Available at: https://scholarship.law.nd. edu/law_faculty_scholarship/736 Crawford J (2006) State responsibility, Max Planck encyclopedia of public international law. Oxford University Press Crawford J (2012) Brownlie’s principles of public international law, 8th edn. Oxford University Press, Oxford Dolzer R, Schreuer C (2012) Principles of international investment law, 2nd edn. Oxford University Press, Oxford Euler D (2016) Transparency rules and the Mauritius Convention: a favourable haircut of the state’s sovereignty in investment arbitration? ASA Bull 34(2):355–374 Fierro Rodríguez D (2014) La desviación de poder en el derecho administrativo. El Jurista. Available at: http://www.eljurista.eu/2014/12/01/la-desviacion-de-poder-en-el-derechoadministrativo/ García de Enterría E, Fernández TR (2011) Curso de derecho administrativo I, 15th edn. S.L. Civitas, Madrid González H, Contreras M (2016) Límites a los requerimientos de información de la Comisión Europea (II). In: Recuerda Cirela M-A(Dtr) Problemas prácticos y actualidad del Derecho de la Competencia [Anuario de Derecho de la Competencia 2016], pp 331–338 Guerra Fernández A, Vélez Fraga M (2013) Guía práctica de la Ley 3/2013, de 4 de junio, de creación de la Comisión Nacional de los Mercados y la Competencia, Uría Menéndez, pp 33–34. Available at: https://www.uria.com/documentos/publicaciones/3842/documento/ guiaPractica4Junio2013.pdf?id¼4641 Guillén Caramés J (2015) Régimen jurídico de los requerimientos de información efectuados por las autoridades de competencia. Revista de Administración Pública 197:41–89 Hauriou M (1921) Précis de droit administratif et de droit public à l’usage des étudiants en licence (2e et 3e années) et en doctorat, Librairie de la Société du Recueil Sirey, Paris Higgins R (1995) Problems and process: international law and how we use it. Oxford University Press, Oxford Hobér K (2008) State responsibility and attribution. In: Muchlinski PT, Ortino F, Schreuer C (eds) The Oxford handbook of international investment law. Oxford University Press, Oxford, pp 549–582

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Laferriere E (1896) Traité de la jurisdiction administrative et des recours contentieux. 2nd edn. vol II. Paris Nancy: Berger-Levrault, Paris Laigneau M (2013) Inspections surprise des autorités de concurrence (“Dawn raid”) : l’expérience d’EDF. Revue juridique de l’économie publique 705, repère 2 López Mendoza JA (2013) La desviación de poder. In: Alonso Regueira EM (ed) Estudios de derecho público. Asociación de Docentes UBA, Buenos Aires, pp 299–315. Available at http:// www.derecho.uba.ar/docentes/pdf/estudios-de-derecho/003-edp-2-lopez-mendoza.pdf Martínez Sánchez A, Rodríguez Ordóñez J (2015) Inspecciones de competencia y consentimiento informado de la empresa investigada (comentario a la STS de 15/6/2015, “Montibello”) Comunicaciones en propiedad industrial y derecho de la competencia 76 (septiembrediciembre):293–303 Martínez Useros E (1955) Desviación de poder. Anales de la Universidad de Murcia (Derecho), 1955–1956, pp D5–D65. Available at http://www.derecho.uba.ar/docentes/pdf/estudios-dederecho/003-edp-2-lopez-mendoza.pdf Momtaz D (2010) Attribution of conduct to the state: state organs and entities empowered to exercise elements of governmental authority. In: Crawford J, Pellet A, Olleson S, Parlett K (eds) The law of international responsibility. Oxford University Press, Oxford, pp 237–246 Newcombe A (2010) The obligation to arbitrate fairly and in good faith in investment treaty arbitration, Kluwer Arbitration Blog, April 19. Available at: http://arbitrationblog. kluwerarbitration.com/2010/04/19/the-obligation-to-arbitrate-fairly-and-in-good-faith-in-invest ment-treaty-arbitration/ Nicinski S (2009) L’autorité de la concurrence. Revue française de droit administrative 25(6): 1237–1247 Sipiorski E (2016) Evidence and the principle of good faith in investment arbitration: finding meaning in public international law. In: Moura Vicente D (ed) Towards a universal justice? Putting international courts and jurisdictions into perspective. Brill Nijhoff, Leiden/Boston, pp 347–362 Wälde T (2010a) Equality of arms in investment arbitration: procedural challenges. In: YannacaSmall K (ed) Arbitration under international investment agreements: a guide to key issues. Oxford University Press, Oxford, pp 161–188 Wälde T (2010b) Procedural challenges in investment arbitration under the shadow of the dual role of the state: asymmetries and tribunals’ duty to ensure, pro-actively, the equality of arms. Arbitr Int 26(1):3–42

Krystle M. Baptista is a lawyer and arbitrator specialized in international arbitration. She intervenes as arbitrator and tribunal secretary in commercial and investment arbitration cases. She is of-counsel at Armesto & Asociados (Madrid) as well as an associate professor at IE Law School and the University of Navarra. She completed her law degree at the University of Navarra graduating at the top of her class with diplomas in Anglo-American Law and Global Law. Mrs Baptista holds an LLM in International Legal Studies from New York University. She is admitted to practice in Madrid and New York. Mrs. Baptista is fluent in Spanish and English, and has an intermediate level of French and Portuguese. Bianca M. McDonnell is an associate at Armesto & Asociados in Madrid where she works as assistant and secretary to the tribunal in investment arbitrations and commercial arbitrations with state entities. She obtained her Bachelor of Laws with First Class Honours from the University of Technology, Sydney and received her LL.M. in International Legal Studies from Georgetown Law, graduating with Distinction and on the Dean’s Merit List. She previously worked as a judicial assistant for the President of the United Nations International Criminal Tribunal for the former Yugoslavia (ICTY) Judge Carmel Agius. She is a lawyer in Australia and is eligible for admission in New York. Bianca is fluent in English, Spanish and has an intermediate level of French.

Competition and Investment: The Case for 21st Century WTO Law Thomas Cottier

Contents 1 2 3 4

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Triangle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taking Stock in the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Changing Structure of International Economic Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 From Trade Liberalisation to Trade Regulation and Behind-the-Border Issues . . . . . 4.2 The Facts of International Trade and the Limits of Bilateralism . . . . . . . . . . . . . . . . . . . . . 5 How Much Regulatory Cooperation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Implications for Competition and Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1 Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Investment Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The TRIPS Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 Restructuring Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Restructuring International Investment Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

262 263 264 267 267 270 273 274 274 277 280 281 282 283 284

Abstract This chapter expounds on the close relationship of trade regulation, competition and investment law. Taking stock of current linkages, it argues in favour of integrating the three areas within the law of the World Trade Organization (WTO) and thus returning to conceptual foundations laid out the Havana Charter at the outset of the Post World War II international economic order but ever since forgotten in a history of fragmentation. Future integration of the three areas is argued on the factual basis of global value chains, predominant trade in components and thus an increasing need to address what are called behind-the-border issues calling for enhanced common and approximated rules in international economic law. Accordingly, the chapter also argues in favour of an integrated system of dispute settlement within the WTO for trade, investment and competition based upon rules which could be modelled after the approach of the Agreement on Trade-Related Aspects of T. Cottier (*) World Trade Institute, University of Bern, Bern, Switzerland e-mail: [email protected] © Springer Nature Switzerland AG 2020 K. Fach Gómez et al. (eds.), International Investment Law and Competition Law, European Yearbook of International Economic Law, https://doi.org/10.1007/978-3-030-33916-6_13

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Intellectual Property Rights (TRIPS), setting out standards which members are obliged to implement in domestic law.

1 Introduction After World War II, and in a clean-slate, the Havana Charter laid out the foundations of future international economic law and relations. It comprised provisions on trade, investment and competition law, and also included labour standards.1 Next to the Bretton Woods institutions of the International Monetary Fund (IMF) and World Bank Group, it drew the lessons learnt from failures produced after World War I and the Great Depression in the 1930s. The United Nations, succeeding the League of Nations, aspired to provide the multilateral framework of international peace and security, placing the protection of human rights at the heart of it. It was a remarkable and farsighted design towards international cooperation, the international law of cooperation, starkly departing from European traditions of imposed peace treaties which often bore the nucleus of future conflict and war. We know how the project worked out. The ideological debate between communism and capitalism, between authoritarian and democratic governance, hampered the post-War framework from the very beginning. The Havana Charter did not materialise, mainly due to opposition from the United States and concerns that it would overly restrict the power of the new hegemon at the time. Human rights protection remained without effective enforcement at the global level. The areas of trade, investment and competition departed and fell back into modes of traditional fragmentation of public international law. Trade rules were broken out of the Havana Charter project and established in the provisional framework of the General Agreement on Tariffs and Trade (GATT) in 1947. Investment protection first followed the traditions of customary international law, in particular addressing communist expropriations in the 1950s. Efforts to create a new multilateral framework in the International Chamber of Commerce (ICC) and in the Organisation for Economic Co-operation and Development (OECD) repeatedly failed and resulted by 2019 in a wide range of 2932 bilateral investment treaties (BITs) of which 2343 were in force.2 These agreements sought and still seek to secure what Carl Schmitt had called securing dominium in the process of decolonization and transition of imperium.3 As to competition law, it essentially remained a matter of domestic law, dominated by the United States and the European Union (EU), both extensively

1

United Nations Conference on Trade and Employment, held at Havana, Cuba, from November 21, 1949 to March 24, 1948, Final Act and Related Documents, Charter for an International Trade Organization; https://www.wto.org/english/docs_e/legal_e/prewto_legal_e.htm. 2 https://investmentpolicyhub.unctad.org/IIA. 3 Slobodian (2018), p. 10.

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applying the doctrine of extraterritorial effects and thus creating internationally effective regimes of their own. Trade law and customary law on investment were largely framed on intergovernmental law, while competition policy has remained the prerogative on domestic law. The three pillars of economic law thus operate on different levels of governance. A common roof, however, was created in regional law. The European Economic Community, founded in 1957, englobed all three elements: free trade in goods, competition rules and investment protection by means of freedom of capital flows and of services. It extended judicial protection to individuals. Eventually, external trade policy prerogatives of the EU also included investment protection and competition law. But for most countries around the world, the three essential components of economic law form part of national law, but follow different patterns in international relations, creating synergies and legal conflict and tensions alike. This chapter argues that the time has come to review the state of play of fragmentation in light of the changing structure of international economic law. It sets out the arguments in support of creating a common and comprehensive framework for trade, investment and competition under the roof and umbrella of the World Trade Organization (WTO) founded in 1995, integrating the GATT 1947 and multilateral agreements developed in the course of eight major trade rounds. The experience of the EU, operating under a single jurisdiction and under the auspices of the Court of Justice of the European Union (CJEU) encourages us to identify the benefits of creating a common framework within the WTO, its negotiating structure, committee work and dispute settlement system. It sets out what 21st WTO law should develop and comprise, harnessing globalisation and an integrated world economy.

2 The Triangle Trade, investment and competition undoubtedly form the core of economic law shaping the framework for market and mixed economies and operators alike. The same holds true defining international economic law.4 In the process of globalisation, operators depend upon the rule of law in international trade for cross-border sales. They depend upon the rule of law and predictability for investment and production abroad. And they depend upon clear rules framing conditions of competition within countries by means of anti-trust law. To a substantial part, these disciplines overlap and are mutually supportive.5 Trade regulation, competition and investment law and policy are essentially based upon the idea of

4

They form the core of international economic law, Cottier and Nakakvukaren (2017). Much of the background information on the triangle of trade, investment and competition and further references can be found is that volume. 5 Anderson and Müller (2017).

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non-discrimination and the creation of equal conditions of competition irrespective of the origin of the product (goods and services). Some fields are motivated and informed by all three areas and distinctions are difficult to draw. This is in particular true for disciplines on services which serve both trade and investment. The same holds true for intellectual property protection. The current fragmentation between different layers of legal governance, however, also creates difficult problems of interfacing and coordinating different legal regimes.6 Or, disciplines in one area, such as intellectual property, may allegedly conflict with legitimate expectations and fair and equitable treatment (FET).7 The protection of intellectual property rights may also conflict with competition law and restrictions of monopolies and of parallel importation. Similar effects may be deployed by import restrictions for goods, services, and labour. Investment protection may conflict with competition rules prohibiting cartels, mergers and market segmentation. To some extent, such conflicts can be resolved on the basis of treaty interpretation in accordance with the rules of the Vienna Convention on the Law of Treaties. To some extent, tensions remain as courts of law may have to operate under limited jurisdiction and a hierarchy of sources, unable to take into account a full range of rules and considerations with a view to achieve a fair and equitable result. Conflicts may be solved to the detriment of one of the fields involved. Finally, the fragmentation also results in different institutions and departments being responsible for the field. It leads to the usual and frequently observed policy incoherence and lack of coordination among government departments and international organisations within limited responsibilities assigned to them in the tradition of functionalism. Could they be brought under one roof? We start by taking stock of rules relating to investment and competition in the WTO’s multilateral trade regime.

3 Taking Stock in the WTO The WTO was built upon the tradition of GATT which essentially deals with cross border trade. Tariffs, quantitative restrictions and trade remedies come to mind. Most-favoured-nation (MFN) treatment secures that all countries are equally dealt with, subject to regional integration and free trade agreement. The reduction of tariffs, from an average of 40% down to 4% on industrial goods, increased competition among domestic and imported products by reducing restrictions at the border.

6

For an example of such complexity see Vattenfall AB and others v. Germany, ICSID Case No ARB/12/12 (pending) and corresponding judgments by the German Constitutional Court BvR 2821/11, 321/12, 1465/12 of 6 December, 2016 and the CJEU in Slovak Republic v Achmea BV (C-284/16) in 6 March, 2018. 7 Eli Lilly and Company v. Canada, UNCITRAL, ICSID Case No. UNCT/14/2, Award of March 16, 2017; https://www.italaw.com/cases/1625.

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The field, however, is much broader today and increasingly overlaps with areas traditionally pertaining to investment protection and competition.8 Firstly, WTO rules essentially focus on condition of competition within national or regional markets. MFN treatment secures that products from all countries are dealt with on par. The disciplines of national treatment in Article III of the GATT, Article XVII of the GATS and Article 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) are at the centre of the system. It secures treatment no less favourable of imported products within markets, once goods pass customs clearance and national treatment is scheduled for services. These rules also address competition law and restrictive business practices and investment law to the extent that governments are involved.9 The WTO disciplines on state trading and monopolies in Articles XVII of the GATT and VIII of the GATS and the ban on import restrictions in Article XI of the GATT inherently relate to competition. Article IX of the GATS explicitly recognises detrimental effects of restrictive business practices. Regulatory space to deviate for purposes of public policy and non-trade concerns in Article XX of the GATT and Article XIV of the GATS, such as environmental protection or domestic regulations, including competition law, is at the heart of WTO dispute settlement. Secondly, while trade in goods is inherently cross-border, the disciplines on services also comprise the establishment of operations within a jurisdiction in modes 3 and 4, and thus equally pertain to investment protection. Levels of market access achieved and secured by means of non-discrimination, conditional or not, define terms for international trade and for investment protection alike. The GATS explicitly addresses disciplines of competition in the reference paper related to telecommunication services.10 Thirdly, the TRIPS Agreement with its minimal, but extensive standards of protection and enforcement of rights equally shapes cross-border trade of protected goods as much as the production of such goods under terms of foreign direct investment. For example, a protected trade mark impacts exports, imports and local production by foreign direct investors. And these rights are explicitly subject to disciplines of competition law of the law of members under Article 40(2) of the TRIPS Agreement. These rules mainly relate to licensing and restrictive business practices as applied to exclusive intellectual property rights. The TRIPS Agreement also includes principles of unfair competition entailed in Article 10bis of the Paris Convention for the Protection of Industrial Property as incorporated, obliging all members to protect companies against unfair, confusing and deceptive commercial practices.11 This provision also provides the basis for the protection of core labour

8

For a comprehensive discussion of the system and its components see Cottier and Oesch (2005). Japan – Measures Affecting Consumer Photographic Film and Paper, WT/DS44/R (March 31, 1998). 10 https://www.wto.org/english/tratop_e/serv_e/telecom_e/tel23_e.htm. 11 These provisions are extensively discussed in Australia – Certain Measures concerning Trademarks, Geographical Indications and other Plain Packaging Requirements applicable to Tobacco 9

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standards and traditional knowledge12 and the enforcement of corporate social responsibility.13 Fourthly, the WTO Agreement on Trade-Related Investment Measures (TRIMS) focuses on national treatment and transparency but also entails an illustrative list of practices which are deemed to be inconsistent with the Agreement, in particular relating to local content requirements.14 These provisions directly support foreign direct investment and protect the modes of production of foreign direct investors. Fifthly, the revised Agreement on Government Procurement (GPA) defines conditions and requirements which governments and public entities, often in a monopolistic position, need to follow in procuring goods and services in a fair manner.15 The Agreement essentially serves the purpose of creating equal conditions of competition between local and foreign providers of such goods and services. Sixthly, Article 11 of the Agreement on Safeguards prohibits voluntary export restrictions (VERs) and orderly marketing agreements induced governments.16 It is thus closely related to competition policy. Finally, WTO law is no longer limited to the protection of goods but extends to the protection of persons. The GATS also addresses the rights of service providers. It is not limited to services as a product. The TRIPS Agreement only protects rightholders of intellectual property as its focal point, rather than goods and services. These differences should not be exaggerated as in practice the system protects the interests of traders. Most disputes are incited by trading companies, seeking redress and governments to complain in an intergovernmental dispute. Yet, it is remarkable that rights or individual companies no longer are limited to competition law and BITs. Both investment and competition beyond the achievement of the Uruguay Round were tabled in the Doha Development Agenda in 2001 for further elaboration and work under the so-called Singapore Issues. In competition law, a working group, supported by the WTO secretariat, produced a host of interesting materials and reflections.17 However, the Ministerial Conference in 2003 in Cancun decided to discontinue the effort. Developing countries increasingly felt uneasy about taking up an area without sufficient domestic experience. They were not willing, at the time, to repeat the experience of negotiating the TRIPS Agreement which essentially worked from standards developed by industrialised countries. Moreover, the United States was not keen on reducing the impact of the extraterritorial effect of the Sherman Act

Products and Packaging, pp. 766–806, WT/DS435/R, WT/DS441/R, WT/DS458/R, WT/DS467/R, joint Report of the Panels (June 28, 2018). 12 Riffel (2016). 13 Cottier and Wermelinger (2014). 14 https://www.wto.org/english/docs_e/legal_e/18-trims_e.htm. 15 https://www.wto.org/english/docs_e/legal_e/rev-gpr-94_01_e.htm. 16 https://www.wto.org/english/docs_e/legal_e/25-safeg_e.htm. 17 WTO, Working Group on the Interaction between Trade and Competition Policy (WGTCP)— History, Mandates and Decisions; https://www.wto.org/english/tratop_e/comp_e/history_e.htm.

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and to submit to international disciplines, similarly to the Havana Charter. Negotiations on TRIMS faced increasing resistance as developing countries questioned the restrictiveness of local content rules in the WTO. Linkages to competition law, however, clearly emerged in negotiations on access to essential drugs following the Declaration on the TRIPS Agreement and Public Health in 2001, adopted prior the opening of the Doha Development Agenda.18 The introduction of patent protection for pharmaceuticals in emerging countries, in particular Brazil and India, excluded the exportation of generic human immunodeficiency viruses (HIV) drugs off-patent protection to other developing countries in need and curbed competition from generic producers. Developing countries, in particular South Africa, increasingly addressed the problem in terms of competition law,19 while others relied upon a waiver and eventual amendment of Article 31 (f) TRIPS Agreement, which banned compulsory licensing for the purpose of exportation. The amendment of the TRIPS Agreement with Article 31bis allowing such exports enhanced competition and essentially encouraged research companies to reduce prices for exported drugs.20 Today, these costs no longer are the main problem and obstacle in combatting epidemics. Investment and competition issues thus are inherent to WTO law as the overall system seeks to establish equal conditions of competition for imported and domestic products. The question arises whether these linkages should be made more explicit and more coherent by integrating multilateral disciplines on competition law and investment into the multilateral system. The main issue will be whether they should include rights and obligations of private actors beyond governments. How to address the issue of standing of corporations in international trade law? Should the triangle be formally linked and the fragmentations overcome? We think so due to the changing structure of international economic law. There has been a shift to behindthe-border issues (BBIs) and to trade in components in global value chains.

4 The Changing Structure of International Economic Law 4.1

From Trade Liberalisation to Trade Regulation and Behind-the-Border Issues

After World War II, international trade law evolved in different regulatory generations.21 At the outset, the main task was to reduce high levels of inter-war tariffs, amounting on average to 40% on industrial goods in 1945. The GATT essentially

18

https://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm. Abbott et al. (2014). 20 Entered into force 23 January 2017, https://www.wto.org/english/news_e/news17_e/trip_ 23jan17_e.htm. 21 Cottier and Oesch (2005), pp. 58–65. This section essentially draws on Cottier (2018a). 19

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focused on the process and law of tariff reductions, entailing non-discrimination and necessary flanking measures to secure the effectiveness of tariff reductions. While GATT was conceived as a provisional agreement pending the entry into force of the comprehensive economic Havana Charter, it became one of the most successful and effective international agreements. In eight trade rounds, the average level of industrial tariffs was reduced to some 4% by 1995, greatly enhancing international trade and its share in gross domestic product (GDP) in particular of smaller and medium-sized countries. The emphasis at the time was on tariff reduction and elimination of quantitative restrictions.22 It was a matter of deregulation, and it is here that the term free, or freer, trade was fully appropriate. The successful reduction of tariffs under the MFN principle shifted attention to non-tariff barriers to trade. A second generation of rules refined disciplines on dumping and subsidisation and addressed increasingly emerging technical barriers to trade. The emphasis was no longer on deregulation, but rather on reregulation. It was a matter of defining common disciplines and thresholds for domestic regulation in addressing differences in product regulation in order to avoid unnecessary trade barriers and thus to bring about trade facilitation. Increasingly, the process was accompanied by enhanced recognition of non-trade concerns, resulting in high non-discriminatory levels of protection and regulation, subject to the disciplines of WTO law. A third generation finally turned to regulatory areas essentially unrelated to border issues but traditionally pertaining to domestic affairs and thus the prerogatives of parliament and government. Indeed, modern and water-front trade policy today is mainly concerned with regulatory issues.23 They are increasingly called BBIs. Except for trade in agriculture where tariffs continue to play a dominant role, attention mainly moved to non-tariff barriers ever since the GATT Kennedy Round in the 1960s. It culminated in the Technical Barriers to Trade Agreement (TBT) and the Agreement on Application of Sanitary and Phytosanitary (SPS) Measures, the inclusion of services (GATS) and intellectual property (TRIPS) and of government procurement in the GATT Uruguay Round. All pillars of the WTO today mainly focus on domestic regulation rather than on border measures and customs.24 It should be noted that the importance of product standards for goods and services will further increase in the future. In the context of climate change mitigation and adaptation, production and process methods (PPMs) will take centre stage in distinguishing sustainably produced products from conventional like and

22

Jackson (1969). WTO, World Trade Report 2012, Trade and public policies: A closer look at non-tariff measures in the 21st century, https://www.wto.org/english/res_e/booksp_e/anrep_e/world_trade_report12_e. pdf. 24 Cottier (2014). 23

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substitutable products.25 More and more, in determining treatment in trade law how products are made will matter more than their physical properties. BBIs address regulatory barriers inside jurisdictions, traditionally pertaining to domestic affairs. Politically, they are highly sensitive to concerns of sovereignty and self-determination, the prerogatives of parliament and the electorate. They are structurally not different from addressing anti-trust disciplines or conditions for investors in domestic law. It is not a coincidence that international efforts to deal with these issues have been under attack by nationalist and populist movements for some time. These efforts impinge upon traditional perceptions of national sovereignty and independence. Modern standards also entail problems of extraterritorial effects to the extent that they address production and process methods (PPMs) that leave no traces in the final product. At the same time, removing such barriers is essential for cross-border trade, in particular for SMEs which do not operate in vertically integrated value chains and private standards. Most of the modern regulatory challenges lie within the realm of BBIs. The same holds true for virtually all the impending and future topics of trade negotiations, currently including electronic commerce and fisheries’ subsidies. Equally, negotiations on private standards (food technology), climate change related topics (technology diffusion, reduction of fossil fuel subsidies, interconnection of renewable energy production and grids, labour standards, human rights, financial regulations and monetary affairs all amount to essentially behind-the-border issues. Coming to terms with the ownership of electronic data and personality protection in cyberspace calls for common global rules, albeit the matter pertains to the domain of traditional legislation of nation states. True, the current trade war between the United States and China plays out on tariffs. Yet, the underlying issue to be addressed relates to defining rules on state capitalism, state trading, subsidisation and control of information technologies and property rights to Big Data—all are behind-the-border issues of a complex regulatory nature which no longer can be dealt with in isolation in domestic law. They are structurally not different from addressing anti-trust disciplines or conditions for investors in domestic law. The shift of traditional regulatory matters to the realm of international law is the primary significant structural change to be noted. Another and related one deploys significant effects upon the treaty system. Due to MFN obligations, but also the nature of regulation, additional disciplines negotiated in bilateral and plurilateral agreements and implemented in domestic law normally deploy general effects and equally affect trade with third countries. Other than tariffs, they are rarely preferential in effect. Whatever the source, domestic regulation is, in most instances, applied uniformly to all persons and nations alike. Regulation of non-tariff barriers in bilateral or plurilateral agreements thus has significant spill-over effects in the field of non-tariff barriers (NTBs) on third parties other than tariff preferences limited to the parties of an agreement, they lift the water for all boats alike and reduce discrimination. At the same time, non-tariff barrier regulations they often refer to

25

Holzer (2014).

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WTO law for reasons discussed below. The two cannot be separated. They are complementary and jointly form what I call the common law of international trade.26

4.2

The Facts of International Trade and the Limits of Bilateralism

Contemporary international trade is essentially characterised by trade in components. More than 60% of goods cross borders at least twice before reaching final consumers.27 Complex products identifiable on a purely national basis are increasingly rare. Companies operate in regional or global value chains, and operations are increasingly mixing goods and services in the age of information technology; trade in goods and services no longer can be neatly separated.28 We speak of “servicification” of goods and their production. Moreover, trade it is increasingly entangled with intellectual property and foreign direct investment and a complex web of technical standards relating to products and to modes of production. Intellectual Property Rights (IPRs) and production of goods often differ geographically and thus in terms of jurisdictions. Trade increasingly depends upon close coordination of legal rules of different countries trading with each other. These structures and interdependencies evolved over time due to trade liberalization. They are essential to the process of globalization and modern division of labour. They are both a cause and a foundation of enhanced global welfare, but also of the accompanying problems and challenges addressed below. The structures are unlikely to return to previous patterns of domestic industrialization. More important in changes to value chains is the process of automation. To the extent that production can be effected by robots and three dimensional printing of component, labour and production costs will be reduced and production may be repatriated. Mercantilist trade policies witnessed in current US trade policy and the call for an independent trade policy by Brexiters in the United Kingdom (UK) fail to take these facts into consideration.29 The introduction of border measures and quantitative restrictions, advocated by President Trump’s Administration, harms consumers, in particular the lower income strata. Such measures reduce trade in components and privilege more expensive domestic products, reducing the purchasing power of domestic consumers. Border measures moreover will affect domestic jobs, as they hurts domestic industries dependent upon the export of incorporated imported components, as much as it harms companies exporting components, disrupting established value chains. Moreover, import restrictions do not take into account

26

Cottier (2015). In 2009, the total of export share of final goods and services amounted to 34% (World) and 47% (China), Baldwin and Lopez-Gonzales (2013), p. 13. 28 Elms and Low (2013). 29 Cottier (2018b). 27

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the importance and relevance of transnational services in running the supply chains. Restrictions on service providers will further disrupt value chains and modes of production. Mercantilist trade policies thus may reduce or eliminate global value chains, but they are hardly able to bring back traditional structures and jobs outsourced as they may impair the creation of new jobs in new industries as access to competitive labour and components are restricted. Traditional trade policy instruments are largely unable to deliver the results promised in the US electoral and the Brexit campaigns. Consumers will face more expensive products and will find less on offer. Shareholders will see the value of their assets being reduced. Voters, finally, will turn away from mercantilism once they learn that it increases prices but does not bring back jobs promised. As set out, the true challenges in international trade law are elsewhere. They mainly lie in the field of regulatory cooperation, which is of key importance for growth and job creation as production is based upon interdependent international markets and products. Such cooperation inherently is multilateral or plurilateral. It cannot be achieved bilaterally or unilaterally except for dominant markets. The same holds true for international law on competition. Unless it results in unilateral adjustment to a particular system of one of the parties, true international disciplines cannot be addressed in bilateral agreements. They require at least plurilateral approaches and are best addressed in the WTO. The WTO provides a robust and solid framework to address domestic regulations that limit market access without sufficient justification. The GATT and the TBT Agreement offer legal guidance to discern what is excessive and protectionist from legitimate domestic regulations.30 But the latter does not offer mutual recognition or harmonization of domestic regulation. WTO law generally does not engage in prescribing recognition of foreign rules for market approval or in harmonising domestic legal standards. An exception to this the TRIPS agreement which establishes global minimal standards for the protection of IPRs, Another exception is the SPS Agreement for binding food standards, in combination with World Health Organization (WHO)/Food and Agriculture Organization (FAO) Codex Alimentarius standards, yet subject to more restrictive domestic rules. Finally, joint regulation of services in the GATS Agreement are still is in its infant stage, mainly codifying domestic standards in members’ schedules of commitment. Trade in Services Agreement (TISA) may bring some further progress to this effect. It is important to note that most of the existing bilateral preferential trade agreements do not go much beyond multilateral non-tariff rules and standards.31 Behind-the-border issues are merely partly addressed in PTAs. The agreements essentially rely upon WTO rules or build upon them, if at all. Technical barriers to trade going beyond WTO TBT disciplines are typically addressed in preferential Mutual Recognition Agreements (MRAs). They reciprocally allow testing market

30 31

van den Bossche and Zdoug (2017). Molina and Khoreshvina (2015).

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conformity with export destinations by home institutions and thus facilitating conformity assessment and reducing costs. Additional provisions on intellectual property rely upon the TRIPs Agreement. Essential reliance of BBIs upon multilateral rules is not a coincidence. Bilateral harmonization of rules and extension of mutual recognition are of limited advantage as they formally are merely applicable to the parties to the PTA. They are not extended to third parties and thus merely add to the complexity of production standards of a country. Or, they must be extended, as in the case of IPRs, on the basis of MFN, yet without obtaining privileges in return. Such limitations may be the prime reason why most bilateral agreements have remained of limited added value beyond WTO rules affecting BBIs. Instead, BBIs are essentially addressed in non-reciprocal configurations of preferential trade agreements (PTAs) which entail one large and dominant market to which others adjust. In particular the EU, the US, and increasingly China, are in a position to impose and export their own domestic standards due to market size and market power. To the extent that PTAs address non-tariff barriers and BBIs, they usually adopt the standards of the larger market. For example, Switzerland and other European Free Trade Association (EFTA) Members within the European Economic Area (EEA) largely align their rules to those of the EU and ensure consistency with them both in preferential agreements and autonomous regulation.32 Even in the absence of an obligation, reliance on European Union rules is chosen to avoid unnecessary trade barriers and burdens on production within the country. The same holds true for Canada in relation to the United States under North America Free Trade Agreement (NAFTA) and United States-Mexico-Canada Agreement (USMCA) rules. When Canada called for greater regulatory cooperation in NAFTA talks,33 it is likely to adjust to US standards in the end. The same would happen in the context of EU-Canada Comprehensive Economic and Trade Agreement (CETA) in relations to the EU. In current preferential agreements, there is little genuine negotiation on new approaches to regulation of BBIs, comparable to what was achieved for example in the TRIPS Agreement, merging European and American legal traditions. Instead, the preferential trade agreements normally follow a hub and spike approach. Compromise and new and innovative standards are the exception. It is the same in competition law and investment protection. Both essentially follow templates set out by industrialised countries in bilateral treaty negotiations. And they do not deploy effects beyond the parties unless MFN obligations are included.

32

E.g. Cottier et al. (2015). Canada pushing regulatory cooperation in second round of NAFTA talks, Inside US Trade, September 3, 2017; https://insidetrade.com/daily-news/canada-pushing-regulatory-cooperation-sec ond-round-nafta-talks. 33

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5 How Much Regulatory Cooperation? The shift of regulatory powers to international law and the opposition it faces begs the question how much regulatory convergence can and should be achieved. The issue is essentially related to the question of division of labour and transnational value chains. On what level should matters best be addressed? On what level can public goods best be produced in order to fulfil its regulatory purposes? The experience of TTIP, even before it was stalled, and those with many other agreements shows that this controversial issue ever since has been at the heart of trade policy debate. The same holds true for the experience made with the negotiations and adoption of CETA. These issues go to the heart of regulatory powers, selfdetermination, sovereignty and democracy. Regulatory convergence greatly varies among different areas, from the absence of common rules (such as for electrical plugs still requiring travellers to use adapters) to full harmonization (such as interconnection and telecommunication). The OECD lists no less than 12 different stages, from exchange of information to full harmonization. They comprise (1) regulatory dialogue, exchange of information, (2) soft law, guidelines, principles, (3) recognition of international standards, (4) domestic standards based upon international standards, (5), transnational networks, (6) intergovernmental organizations, (7) mutual recognition agreements, (8) regulatory partnerships between countries, (9) specific conventions and treaties, (10) mutual recognition (11) economic regionalism, and (12) harmonization.34 Mutual recognition and harmonization are most developed in the EU and federate states while much less frequently applied in international trade relations. They require certain level of mutual confidence which is generally absent outside of customs unions. Yet, even within the EU, and even within federate states, the allocation of regulatory powers amounts to one of the most controversial and constantly debated issues in politics and in constitutional law.35 It is even more difficult on the international realm. Yet, the shift towards behind-the-border issues and towards global value chains structurally shifts rule-making into international law in the long run. Modern theories relating to sovereignty thus stress the concept and idea of shared and cooperative sovereignty, and the allocation of powers among different layers of government as the essence of modern sovereignty within an overall global legal system.36

34 OECD, International Regulatory Cooperation – Better rules of Globalisation, http://www.oecd. org/gov/regulatory-policy/irc.htm. 35 Anderson (2012). 36 Jackson (2006), Cottier and Hertig (2003) and Cottier (2011).

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6 Implications for Competition and Investment Law These reflections made on trade regulation may also be applied as indicated to competition law and investment law. It is generally recognised that they form important components of the international trading system and are frequently addressed in trade policy reviews of the WTO and in accession protocols calling for the establishment of anti-trust rules. Both areas are classical behind-the-border issues, much like intellectual property and services. Main regulations pertain to domestic law. To what extent can the needs still be met with decentralised rules on anti-trust and myriad of bilateral investment protection agreements? To what extent is harmonization and approximation required in order to serve the levels of division of labour and global and regional value chains? How are they affected by fragmentation? It is submitted, for structural reasons discussed above and a closer examination below, that they need to be addressed multilaterally or in plurilateral agreements.

6.1

Competition Law

Competition law in terms of anti-trust and merger control is a classical field of domestic economic law. Disciplines relating to the conduct of private actors have essentially remained in this realm. Rules on cartels, restrictive business practices, abuse of dominant positions and merger regulation pertains to domestic law, including the law of the EU. Efforts to address restrictive business practices such as price fixing and geographical limitations or boycotts, has not gone beyond soft law. The shift to behind-the-border issues in international economic law and the fact of global value chains depending on the interface and compatibility of different legal regimes increasingly questions this tradition. Extraterritorial application of domestic law is not properly able to address the problem of export cartels as domestic markets are not affected. Many questions arise, for example: How to deal with private export restrictions on pharmaceuticals imposed on the basis of patent rights to low cost markets? How to square and effectively balance an extensive international agreement on IPRs without competition law? Is it sufficient to rely upon domestic law? Does the multilateral TRIPS Agreement not beg the question for rules on the same regulatory level with a view to bring about an overall balance?37 Some problems apparently call for greater convergence. Transnational problems caused by information technology and the internet are difficult to address nationally in a coherent manner. How to deal, for example, with geo-blocking of sales in the internet without international cooperation? How to address the problem of excessive roaming charges for transnational telecommunication services? How do different competition rules affect the regulation of Big Data and the internet which is inherently transnational? 37

Cottier and Meitinger (1999).

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How to combat the abuse of dominant positions by global information technology (IT) companies if standards are not harmonised? Indeed, the application of diverging standards of competition law in different jurisdictions may cause significant problems. Different rules may produce market segmentation and the disruptions of value chains. If a merger is accepted on one jurisdiction, but rejected in another or subject to different conditions, it renders structuring the new company difficult. As decision by different anti-trust authorities are not taken at the same time, and often with considerable delays, restructuring companies becomes exceedingly difficult. If conditions imposed are not met, the company cannot operate in, and export to, this jurisdiction. Similar problems arise in the operation of cartel rules. One jurisdiction may consider cooperation in research and development (R&D) between two or more companies acceptable. Others may reject. The result is that this company and its assets in one jurisdiction will be subject to fines and products cannot be imported, while its activity is lawful elsewhere. Differences of regulatory standards on competition law may influence foreign direct investment. Companies may choose to invest where protection is low and eventually confront difficulties on exporting markets due the extraterritorial application of competition law. Obviously, global companies are affected by such implications. But they equally affect small and medium-sized enterprises (SMEs) dependent upon transnational value chains. Finally, problems of enforcing anti-trust rules exist without the existence of administrative and judicial cooperation. Anti-trust investigations heavily depend upon credible foreign evidence. Without the possibility to access it lawfully, procedures cannot be successfully completed. They depend upon cooperation and harmonization.38 Countries, for such purposes enter into bilateral agreements. But their effects do not extend to operators in third states. For all such reasons, domestic law no longer is the most suitable and exclusive layer of governance to deal with competition law. High levels of division of labour in the international economy and global value chains call for a more coherent framework of anti-trust rules. The issue has been increasingly addressed in international relations beyond the European Union. Regional Trade Agreements increasingly entail disciplines on competition policy. Efforts at the OECD and UNCTAD on restrictive business practices and good corporate governance set out guiding recommendations. The International Competition Network (ICN) strongly contributed to the evolution of soft law addressing issues of interfacing different regimes and enforcing anti-trust rules internationally. A Multilateral Framework on Procedures in Competition Law Investigations and Enforcement was proposed by the US Department of Justice in August 2018.39 These standards may eventually inform a new agenda in the WTO for the twenty-first century. A 2018 WTO working paper suggests taking up again the work of the suspended Committee on Trade and

38

Merkt (2000). International antitrust cooperation in the age of Trump; https://trustinip.com/is-enhanced-interna tional-cooperation-on-antitrust-procedure-soon-to-come/#more-1361. 39

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Competition Law and sets out the following agenda points worth fully quoting for further work within the WTO40: a) The relevance of the WTO’s core principles of non-discrimination, transparency, and procedural fairness (also referred to as due process) to competition law enforcement. As we have seen, this interest derives from the arising challenges related to ensuring impartiality of competition law enforcement and potential conflicts of jurisdictions. The work of the original WTO Working Group, much subsequent work in the ICN and at the level of national competition policies, the recently-developed Multilateral Framework on Procedures in Competition Law Investigation and Enforcement and provisions in RTAs are all relevant in this regard. b) Further codification of generally agreed norms, such as the general commitments by WTO Members relating to action against hard-core cartels and international cooperation. Again, this element is common to both the work of the original WTO Working Group and the subsequent developments in RTAs and in related discussions as well as in the work of the ICN. It also acknowledges the priority given to these arrangements in the work of competition agencies themselves. The case for common action or commitments in relation to cross-border anti-competitive practices, including in digital markets. The difficulty of detecting such practices calls for cooperative action and information sharing. In this regard, existing provisions of the TRIPS Agreement (such as Articles 40 and 67) may play a potential role. While significant efforts have been undertaken in the framework of the ICN and RTAs, high-level discussions on the international level could be needed in order to find effective solutions. Potentially, jurisdictional issues concerning the application of competition law to export cartels. Potentially, this issue unites interest from developing countries and at least some elements of the business community. Fox suggests that the cartel externality problem has a natural home in the WTO. c) An even broader array of issues is evident with respect to the interaction of trade and competition policy recognizing that the distinction between law and policy is certainly not watertight). These would include, at a minimum, measures addressing the following: c1) The treatment of SOEs and the concept of competitive neutrality. This concern already figured importantly in the original work of the WTO Working Group. It has only been amplified in the subsequent norm setting in RTAs and in the work of other international organizations such as the OECD. The latter provides a conceptual framework for relevant discussions. As we have seen, there is also a clear link to elements of the existing WTO agreements. c2) The relationship between competition policy and industrial policy merits discussion/reflection. As suggested by Fox, work might be done at the WTO to narrow the bounds of permissible trade remedies laws and subsidies in view of their distortion of international trade and particular harm to developing countries. c3) The significance for competition policy of governmental barriers to participation in public procurement markets. This issue is ripe for consideration at the international level. As we have seen, the area of government procurement is already a dynamic and vital one in the WTO. The issues manifest important confluence between the interests of export-oriented businesses (seeking access to foreign procurement markets) and those of competition authorities (who know that closed markets both intrinsically limit competition and facilitate bid rigging). c4) The potential significance of competition policy-related disciplines such as those contained in the WTO Reference Paper on Basic Telecommunications for other infrastructure sectors, and for trade in services more generally. As discussed, the

40

Anderson et al. (2018), pp. 57/58.

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Reference Paper is arguably the area of the WTO agreements in which competition policy concepts have been used most explicitly and which goes the furthest in committing Members to action against anti-competitive practices. Yet, other infrastructure sectors (for example, electrical energy) share, or arguably share, similar structural problems. c5) The competition policy and IP interface is arguably an area of competition law that requires additional guidelines at the multilateral level in order to balance out any differences in international regulation between the two policy areas. The TRIPS Agreement specifically invokes concerns about the impact of anti-competitive licensing practices and anticipates the application of competition rules. Still, the relevant provisions offer only very limited guidance on questions such as (i) the set of anticompetitive practices that attract particular scrutiny (beyond the three examples mentioned); (ii) the standards under which such practices are to be evaluated (per se or rule of reason); and (iii) the remedies that may be adopted in particular cases, beyond making clear that any measures adopted must be consistent with other relevant provisions of the Agreement.

It will be interesting to square, in further research, the relationship of this agenda with the general debate on BBIs and the impact of global value chains. Both are likely to support the agenda, stressing the need for harmonization or approximation. We note that the appropriate form and level of approximation for each of the issues remains to be identified in accordance with the doctrine of multilevel governance. The same holds true for particular linkages with investment protection in the triangle.

6.2

Investment Protection

Comparable normative challenges exist in the field of investment protection. While focusing on conditions in a particular jurisdiction and the conduct of authorities, differences in levels of protection lead to favouring locations protected by a BIT, while others are left out. The need to conclude BITs with main capital exporting countries in competing for investment and inclusive global value chains forced developing countries to accept high standards of protection at the expense of domestic policy space. Also, they were forced to accept private-state arbitration, replacing ordinary courts of law in the application of international law obligations incurred. The bilateral avenue stresses the asymmetries of economic power between industrialised and developing countries. Newer trends are only due to extending investment disciplines between industrialised countries, such as NAFTA or CETA, resulting in enhanced policy space of host countries. The law of investment protection in international law is founded in customary law, developing rules on expropriation and regulatory taking. Efforts to developing more stringent rules resulted in bilateral BITs, but failed to develop multilateral disciplines beyond GATS, TRIPS and TRIMS discussed before. The fragmentation was mainly caused by the level of ambition by capital exporting countries vis-à-vis developing countries. In particular, the 1998 OECD draft Multilateral Agreement on

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Investment (MAI)41 failed due to insufficient inclusiveness of developing country interests. With progressing development, developing county governments are increasingly wary of BITs. Brazil, despite being a major market, never entered such agreements, and other decided to withdraw existing agreements in the light of costly experiences made.42 With the extension of investment disciplines to bilateral trade and cooperation agreements among industrialised states, beginning with NAFTA, the scope of policy space of host states gradually increased.43 At the same time, private-state dispute settlement is increasingly questioned. These developments, in return, provide further incentives to revise or even withdraw from existing earlier agreements. Moreover, the multitude of 2346 diverging BITs in force (2019) renders the task difficult to bring about a body of precedents and case law which guide the overall field. Agreements vary in their terms, and transportation of case law in trade law and under other investment agreements remains difficult. For a long time, transparency was secured as many arbitration awards were not published. Standards varied and lacked common understanding. A 2004 OECD Report worth quoting summarised the then development of case law on FET44: a) There is diversity in the way the “fair and equitable treatment” standard is formulated in investment agreements. Certain agreements, in particular some BITs, expressly define the standard by reference to international law while others do not make such reference to international law. b) Because of the differences in its formulation, the proper interpretation of the “fair and equitable treatment” standard depends on the specific wording of the particular treaty, its context, the object and purpose of the treaty, as well as on negotiating history or other indications of the parties’ intent. For example, some treaties include explicit language linking or, in some cases limiting, fair and equitable treatment to the minimum standard of international customary law. Other treaties which either link the standard to international law without specifying custom, or lack any reference to international law, could, depending on the context of the parties’ intent, for example, be read as giving the standard a scope of application that is broader than the minimum standard as defined by international customary law. c) Independently of the way governments interpret the “fair and equitable treatment” standard, it is understood that the minimum standard refers to an evolving international customary law which is not “frozen” in time, but may evolve over time depending on the general and consistent practice of states and opinio juris, as may be reflected in jurisprudence related to the interpretation and application of these treaties. d) An analysis of the opinions of the arbitral tribunals which have attempted to interpret and apply the “fair and equitable treatment” standard identified a number of elements

41 OECD, Multilateral Agreement on Investment; http://www.oecd.org/investment/ internationalinvestmentagreements/multilateralagreementoninvestment.htm. 42 Baker McKenzie, Withdrawal from Investment Treaties: an Omen for Waning Investor Protection in AP? (Bolivia, Venezuela, Ecuador and South Africa, Indonesia, India); https://www. bakermckenzie.com/en/insight/publications/2017/05/withdrawal-from-investment-treaties. 43 For a discussion of CETA provisions, e.g. Cottier (2019). 44 OECD (2004), “Fair and Equitable Treatment Standard in International Investment Law”, OECD Working Papers on International Investment, 2004/03, OECD Publishing, at 40; https://doi.org/10. 1787/675702255435.

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which, singly or in combination, have been treated as encompassed in the standard of treatment. Most of the arbitral opinions in the present survey mention two elements, due diligence and due process (including non-denial of justice and lack of arbitrariness), while only a few mention transparency and good faith. Due diligence and due process including non-denial of justice and lack of arbitrariness are elements well-grounded in international customary law while transparency is an element which is often defined in international agreements as an obligation under a separate provision. Good faith seems to be considered more a basic principle underlying an obligation rather than a distinct obligation owed to investors pursuant to the “fair and equitable treatment” standard. e) The identified elements appear to have sufficient legal content to allow cases to be judged on the basis of law in accordance with the Vienna Convention on the Law of Treaties, and decisions are not made by a process approaching ex aequo et bono. f) It would be inappropriate at this stage to establish a definitive interpretation of the “fair and equitable treatment” standard. The jurisprudence which has applied it and identified elements of its normative content is relatively recent and is not uniform, and therefore does not allow for a firm and conclusive list.

The situation has been changing in the meantime due to enhanced electronic publication of awards. Comparative analysis may eventually allow bringing about common and coherent standards. Such efforts have been studied by the OECD and are essentially negotiated in a newer generation of investment rules within comprehensive economic and trade agreements among developed countries, in particular CETA between Canada and the EU. These standards may eventually influence the overall relationship of protection and domestic policy space in case law, but leaves divergences with existing and older agreements untouched.45 The main reason, however, to review bilateral investment agreements relies in the facts of trade in components and global value chains. Investment law is shifting from investment protection to investment promotion and cooperation.46 Countries are keen to participate in global value chains but secure, at the same time, against the risk of volatile and mobile investment. They seek to secure adequate policy space which, due to power asymmetries, they cannot secure bilaterally. Industrial countries, on the other hand, are increasingly called upon to assume responsibilities at home for the conduct of incorporated corporations and nationals in host countries, in particular for human rights abuses and violations.47 Liability rules have become an important component in realizing and enforcing corporate social responsibility abroad. It would seem that much work so far, in particular in the WTO working group on trade and investment, focuses on cooperation between WTO and UNCTAD in assisting developing and developed countries.48 Recent work focused on investment

45

Cottier (2019), p. 135. Polanco (2019). 47 Simons and Macklin (2014). 48 WTO, Future WTO-UNCTAD Secretariat Cooperation in the Area of Investment on Technical Assistance and Capacity-Building for Developing and Least Developed Countries, Note by the WTO and UNCTAD Secretariats WTI/WG/GTI/W/161/(May 27, 2003). Other than committee reports, working papers on the topic no longer are available on the WTO website. 46

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promotion in the context of the new Trade Facilitation Agreement (TFA).49 In April 2017, an informal group of “Friends of Investment and Facilitation for Development” (FIFD) called for work in the WTO on improving regulatory transparency, streamlining administrative procedures, enlarging international cooperation and addressing, inter alia, corporate social responsibility.50 While the new TFA focuses on facilitating transboundary trade, it is apparent that its underlying effort will also benefit foreign direct investment in a world of global value chains and trade in components. Particular disciplines on investment protection and promotion can build upon this record in the WTO. Increasingly, trade and investment issues need to be developed in tandem. No longer are they substitutes, but complement each other. In addition, they need to take into consideration rules and disciplines on competition law in integrating the triangle in international economic law. In conclusion, multilateral negotiations on investment need to go beyond the classical issues of FET and expropriation. The WTO is best placed to bring about adequate coordination of all these topics. It is supported by effective dispute settlement and offers with the TRIPS Agreement a successful model for regulatory convergence.

7 The TRIPS Approach The TRIPS Agreement was the first agreement addressing regulatory convergence by setting out ambitious minimal standards for the protection of intellectual property rights.51 With hind sight, it was much ahead of its time and developed a successful model for legal approximation and particular harmonization.52 The TRIPS approach obliges members to implement the minimal standards on substantive standards and enforcement in their legislation. It does not harmonize IPRs, but leaves members ample space to shape their rules in accordance with public policy goals. The principles and rules of the Agreement inform domestic law, and are subject to the jurisdiction of domestic courts in monist countries. To the extent that domestic law fails to properly implement these rules, Members of the WTO can file complaints before the DSB and seek the establishment of a panel. The ruling of the panel is subject to appeal and cross-appeal before the Appellate Body of the WTO. Since the TRIPS Agreement entered into force, an important body of case law emerged,

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Agreement on Trade Facilitation, adopted November 27, 2017, entered into force February 22, 2017; https://www.wto.org/english/tratop_e/tradfa_e/tradfa_e.htm. 50 WTO, Investment Facilitation: Relationship of Trade and Investment; https://www.wto.org/ english/thewto_e/minist_e/mc11_e/briefing_notes_e/bfinvestfac_e.htm. 51 E.g. Cottier (2005). 52 Taubman and Jayashree (2015).

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offering guidance as to the exact meaning of different provisions.53 Compared to other areas of WTO law, TRIPs cases, however, are less numerous and mainly relate to disputes among industrialised countries. It proofs the quality of the approach and of the agreement. The case law, in return, further informs the interpretation of domestic law and should be taken into account under the doctrine of consistent interpretation by national courts, both under monist and dualist systems of law. It is submitted that the TRIPS approach could also be used for competition and investment law. Both areas will be dealt with in tandem, and overlapping issues can be addressed accordingly. Most countries, in flexible coalitions, will find themselves in a better position to defend their interest and if left to extraterritorial effects of large jurisdictions or bilateral agreements negotiated in asymmetric power relations. Based upon the experience with TRIPS and TRIPSplus commitments in subsequent preferential trade agreements, the TRIPS approach, however, should also include the notion and concept of maximum standards and of graduation.54 International rules not only provide for minimal standards, but partly prohibit countries from adopting excessive protection. Also treaties should consider levels of social and economic development and define appropriate thresholds as to when specific obligations may take effect.

7.1

Restructuring Competition Law

The future multilateralization of competition law can build upon work of OECD, United Nations Conference on Trade and Development (UNCTAD), the Munich Group Draft International Anti-Trust Rules and other proposals, developed in the 1990s.55 They provide the basis for common standards in an agreement on competition law within the WTO. Following the TRIPS approach, an agreement on competition law would establish mandatory standards forming the basis upon which domestic law would be built and enforced. These standards relate to cartels and restrictive business practices, but also enforcement and legal assistance. They would also elaborate on unfair competition law principles of Article 10bis of the Paris Convention. Developing countries, reluctant to take the matter up, today are much better prepared as most of them were able to gain experience in past decades in the field. They would be able to come to the table to secure their own interest and goals. The risk that the agreement would result from copying and pasting EU and US law is much smaller today. For example, and given the experience of access to drugs, developing countries could stress the importance of human rights in assessing antitrust, going beyond economic efficiency and consumer welfare. State trading and the

53 For the extensive and detailed case law on IPRs in the WTO see https://www.wto.org/english/ tratop_e/dispu_e/dispu_agreements_index_e.htm. 54 Kur and Grosse Ruse-Khan (2009) and Grosse Ruse-Khan (2017). 55 For a comprehensive review: Taylor (2006), Anderson and Sen (2017) and Martynsiszyn (2017).

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role of government-controlled companies will be an important component of a work agenda. Again, it goes beyond the scope of this paper to assess to what extent standards should be uniform and harmonized, and to what extent they should be left to domestic law. Defining policy space will be at the heart of work. The standards of the agreement provide the basis for domestic law. Assessment of domestic law and case would be subject to WTO dispute settlement before panels and the Appellate Body (AB). As to mergers and acquisitions of large transnational corporations, it is conceivable to create a supranational body, securing participatory procedures and making a single determination, taking into account the particular needs of different jurisdictions. The agreement would also define thresholds for mergers and acquisitions which are directly assessed and dealt with under WTO law achieving a single determination, taking into consideration particular needs of particular jurisdictions. It is here that supranational standards for global companies would directly operate and bind companies. Accordingly, procedures need to include direct participation of the governments and companies concerned. Much would be gained from achieving a single international decision for mergers and acquisitions with implications for global value chains. Private rights would essentially operate on the level of domestic law and are indirectly protected as States are able to file complaints before the WTO if such standards are not met in domestic law and practice. Private actors could be granted a right to petition their governments to take up a case, as provided for today in US and EU law.56

7.2

Restructuring International Investment Law

A WTO multilateral investment agreement would go beyond existing disciplines of BITs for reasons discussed above. It needs achieving an appropriate balance between investment protection and investment promotion and cooperation in the triangle of home state, host state and investor. Other than competition law, it cannot readily build upon existing templates and needs to stress cooperation. It should be termed investment cooperation agreement. We submit that the TRIPS model offers a suitable foundation to work on a multilateral investment cooperation agreement within the WTO. The agreement sets forth substantive and procedural standards (both minimum and maximum) on

US Trade Act of 1974 § 301. Section 301 cases can be initiated as a result of a petition filed by an interested party with the USTR or initiated by the USTR; Regulation (EU) No 654/2014 of the European Parliament and of the Council of 15 May 2014 concerning the exercise of the Union’s rights for the application and enforcement of international trade rules and amending Council Regulation (EC) No 3286/94 laying down Community procedures in the field of the common commercial policy in order to ensure the exercise of the Community’s rights under international trade rules, in particular those established under the auspices of the World Trade Organization.

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the level of international law which domestic law must respect and enforce. Much emphasis will be paid to securing judicial independence of domestic courts. The agreement thus would strongly contribute to reinforce the rule of law. Placing such standards under the roof of the WTO with a multilateral investment cooperation agreement, would thus alter private-state arbitration. While the private sector and corporate lawyers (often involved in cases alternatively as counsel and arbitrator) continue to emphasise the importance of it, governments are increasingly seeking to channel arbitration to ordinary courts of law. The compromise resulted in CETA established a two-tear international court system which is still pending implementation. It is questionable whether such a system will generate sufficient work and allow building an expensive institutional framework and memory necessary to develop consistent case law comparable to the WTO. The effort thus should best be seen as a precursor to embedding judicial review of investment related decision within the WTO dispute settlement mechanism, benefitting from critical mass of an experienced institution. Under a WTO investment cooperation agreement, disputes would be subject to WTO dispute settlement. Cases not satisfactorily settled before domestic courts in accordance with internationally agreed and domestic standards, could be challenged before the WTO, much like anti-dumping, safeguards or countervailing duties (CVD) determinations, or assessments of intellectual property protection in the light of TRIPS rights and obligations. Domestic courts would primarily be responsible for dispensing justice. Should they fail to do within tight timelines defines by the investment agreement, the matter would be adjudicated by a WTO panel and possibly the AB of the WTO. In such a way, domestic and international arbitration can be combined without circumventing domestic courts of law in building the rule of law around the globe. As a substitute to private state arbitration, the investment agreement could prescribe that members introduce the right to petition the government to take up a dispute commensurate to existing procedures under US and EU law. The agreement would extend remedies to include financial damages to companies and private actors concerned, but also the obligation to adjust legislation found incompatible with WTO law.

8 Conclusions Trade, investment and competition were found to be addressed in different fora and different regulatory levels. While trade is multilateralised, investment protection is part of customary law and bilateral investment agreements. Competition law has almost entirely remained in the realm of domestic law, but is the subject of an international network. The shift in trade regulation to behind-the-border issues and facts of predominant trade in components and international value chains renders the three areas functionally much closer. They should form coherent parts of international economic law under the same roof. There is no longer a structural difference

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between the three areas. All three essentially pertain to behind-the-border issues and regulation. It is suggested that the TRIPS Agreement provides an appropriate and successful model to integrate competition and investment law in the WTO. Commensurate with the different layers of regulatory cooperation, it will a matter to study to what extent these behind-the-border issues should be taken up, and if yes, on what level of regulatory cooperation best results in advancing welfare can be achieved both in the fields of competition and investment law. The inclusion of private operators, their rights and obligations, will be at the heart of the problem. The TRIPs approach, however, shows an appropriate way as to how the needs of governments to control foreign policy and international economic relations can be accommodated with the needs of private operators mainly protected in domestic law. Obviously, these propositions are at odds with current populist policies, stressing national sovereignty and reducing global value chains. They are not made for this time. They are written for the future when the high costs and detrimental effects of populist policies will materialise and people rethink and learn to move ahead, recalling the lessons drawn after World War II and the proposals of the Havana Charter. They continue to provide a farsighted and hopeful agenda for international economic law in the twenty-first century.

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Thomas Cottier is Professor emeritus of European and International Economic Law at the University of Bern, a senior research fellow at the World Trade Institute, adjunct professor at the University of Ottawa, Faculty of Law. He was the founder and managing director of the World Trade Institute from 1999 to 2015 and of the SNF National Centre of Competence NCCR on International Trade Regulation. Previously, he was the Deputy Director General of the Swiss Intellectual Property Office and legal advisor to the Swiss Department of Foreign Economic Affairs. He served on the Swiss negotiating team of the Uruguay Round and on EFTA-EU EEA negotiations. He has been a member and chair of several GATT and WTO panels. He has published widely in international economic law.