International Investment Law: Understanding Concepts and Tracking Innovations: A Companion Volume to International Investment Perspectives 9264042024, 978-92-64-04202-5, 9789264042032, 9264042032

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International Investment Law

International Investment Law

UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS A Companion Volume to International Investment Perspectives

The full text of this book is available on line via this link: www.sourceoecd.org/finance/9789264042025 Those with access to all OECD books on line should use this link: www.sourceoecd.org/9789264042025 SourceOECD is the OECD’s online library of books, periodicals and statistical databases. For more information about this award-winning service and free trials, ask your librarian, or write to us at [email protected].

ISBN 978-92-64-04202-5 20 2008 01 1 P www.oecd.org/publishing

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UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS

The “Definition of investor and investment” reviews the determinants of the scope of application of international investment treaties in light of recent state practice and jurisprudence. The article on the “Interpretation of the umbrella clause in investment agreements” sheds light on a controversial provision whose meaning has been disputed recently before international arbitral tribunals. “International Investment Agreements: A survey on environmental, labour and anti-corruption issues” reviews the treatment of societal issues in 295 investment agreements and in related arbitration decisions. “The interaction between investment and services chapters in selected regional trade agreements” looks at the implications for investment protection and liberalisation of 20 treaties’ investment and services chapters.

International Investment Law

International investment agreements set ground rules for how host governments treat foreign investors. This publication provides an unparalleled source of information on four key issues: the definition of investor and investment; the interpretation of umbrella clauses in investment agreements; coverage of environmental, labour and anti-corruption issues; and the interaction between investment and services chapters in selected regional trade agreements.

UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS

A Companion Volume to International Investment Perspectives

International Investment Law UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS Companion Volume to International Investment Perspectives

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT The OECD is a unique forum where the governments of 30 democracies work together to address the economic, social and environmental challenges of globalisation. The OECD is also at the forefront of efforts to understand and to help governments respond to new developments and concerns, such as corporate governance, the information economy and the challenges of an ageing population. The Organisation provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and work to co-ordinate domestic and international policies. The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of the European Communities takes part in the work of the OECD. OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and research on economic, social and environmental issues, as well as the conventions, guidelines and standards agreed by its members.

This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments employed herein do not necessarily reflect the official views of the Organisation or of the governments of its member countries.

Also available in French under the title: Le droit international de l’investissement COMPRENDRE LES CONCEPTS ET SUIVRE LES INNOVATIONS Complément aux Perspectives de l’investissement international

Corrigenda to OECD publications may be found on line at: www.oecd.org/publishing/corrigenda.

© OECD 2008 No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to OECD Publishing [email protected] or by fax 33 1 45 24 99 30. Permission to photocopy a portion of this work should be addressed to the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, fax 33 1 46 34 67 19, [email protected] or (for US only) to Copyright Clearance Center (CCC), 222 Rosewood Drive, Danvers, MA 01923, USA, fax 1 978 646 8600, [email protected].

FOREWORD

Foreword

I

nternational Investment Law: Understanding Concepts and Tracking

Innovations is a companion volume to International Investment Perspectives. The present volume is the second edition of the International Investment Law series. It follows the 2005 publication of International Investment Law: A Changing Landscape. This publication is part of the OECD Investment Committee’s continuing effort to enhance common understanding and to improve outcomes of international investment agreements by providing analysis of core provisions and of critical legal issues arising out of their interpretation and application. International investment agreements are key instruments of co-operation for the promotion, protection and liberalisation of foreign investment. Their proliferation, including South-South treaties and investment chapters in regional integration agreements, the increase in the number of investment disputes and the emergence of new legal issues in this context are all factors which have contributed to the complexity of the legal framework for foreign investment. This publication consists of four surveys on: i) the definition of investor and investment; ii) the interpretation of umbrella clauses; iii) “societal” issues in investment treaties (mainly environmental, labour, human rights and anticorruption); and iv) the interaction between investment and services chapters in selected regional trade agreements. The present publication sheds light on some of the recent issues that have arisen in connection with certain substantive provisions of international investment agreements. The common theme of the four papers is the international investment community’s search for greater clarity in the interpretation of concepts and in the language used in these treaties. In some cases, the surveys also track innovations in treaty language and in arbitral decisions. As a collection of factual surveys, the publication does not necessarily reflect the views of the Organisation for Economic Co-operation and Development or those of its member governments. It cannot be construed as prejudging ongoing or future negotiations or disputes arising out of international investment agreements.

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TABLE OF CONTENTS

Table of Contents Chapter 1.

Definition of Investor and Investment in International Investment Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Annex 1.A1.Definition of Investment in Bilateral Investment Treaties . . .

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Chapter 2.

Interpretation of the Umbrella Clause in Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

Annex 2.A1.Examples of Umbrella Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Annex 2.A2.2004 US Model Bilateral Investment Treaty . . . . . . . . . . . . . . . . 133 Chapter 3.

International Investment Agreements: A survey of Environmental, Labour and Anti-corruption Issues . . . . . 135

Annex 3.A1.Methodology and List of IIAs Included in Survey . . . . . . . . . . . Annex 3.A2.Inventory of Environmental, Labour and Anti-corruption Texts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annex 3.A3.A Fact-finding Survey of the Social Content of Non-OECD International Investment Agreements . . . . . . . . Annex 3.A4.Methodology and List of BITs Included in Survey . . . . . . . . . . . Chapter 4.

162 173 229 236

The Interaction Between Investment and Services Chapters in Selected Regional Trade Agreements . . . . . . . . . . . . . . . . . . 241

Annex 4.A1.Key Features of the RTAs Reviewed . . . . . . . . . . . . . . . . . . . . . . 301 Annex 4.A2.Analysis of the Schedules of Commitments: Methodology, Caveats and Summary Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . 324 Annex 4.A3.The GATS W/120 Services Sectoral Classification List . . . . . . . 333

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ISBN 978-92-64-04202-5 International Investment Law: Understanding Concepts and Tracking Innovations © OECD 2008

Chapter 1

Definition of Investor and Investment in International Investment Agreements*

The definition of investor and investment is key to the scope of application of rights and obligations of investment agreements and to the establishment of the jurisdiction of investment treaty-based arbitral tribunals. This factual survey of state practice and jurisprudence aims to clarify the requirements to be met by individuals and corporations in order to be entitled to the treatment and protection provided for under investment treaties. It further analyses the specific rules on the nationality of claims under the ICSID Convention. As far as the definition of investment is concerned, most investment agreements adopt an openended approach which favours a broad definition of investment. Nevertheless recent developments in bilateral model treaties provide explanatory notes with further qualifications and clarifications of the term investment. The survey further reviews the definition of investment under ICSID as well as non-ICSID case-law for jurisdictional purposes.

∗ This survey was prepared by Catherine Yannaca-Small, Investment Division, OECD Directorate for Financial and Enterprise Affairs. Lahra Liberti, Investment Division, OECD Directorate for Financial and Enterprise Affairs prepared Section II of Part II and revised the document in light of the discussions in the OECD Investment Committee. This paper is a factual survey which does not necessarily reflect the views of the OECD or those of its member governments. It cannot be construed as prejudging ongoing or future negotiations or disputes arising under international investment agreements.

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Executive summary The definition of investor and investment are among the key elements determining the scope of application of rights and obligations under international investment agreements. There are two types of investors: natural and legal persons. For natural persons, investment agreements generally base nationality exclusively on the law of the state of claimed nationality. Some investment agreements also introduce alternative criteria, such as a requirement of residency or domicile. The issues related to the nationality of legal persons are more complicated. Companies today operate in ways that can make it very difficult to determine nationality. Tribunals have usually adopted the test of incorporation or seat rather than control when determining the nationality of a juridical person, unless the test of control is provided for in the agreement. Accordingly, it is the general practice in investment agreements to specifically define the objective criteria which make a legal person a national, or investor, of a Party, for purposes of the agreement. When the objective criteria used may include investors to whom a Party would not wish to extend the treaty protection, some treaties include “denial of benefits” clauses allowing exclusion of investors in certain categories. The ICSID Convention, the main instrument for the settlement of investor-state disputes, limits the jurisdiction of its Centre to disputes between one Contracting State and a national of another Contracting State. It provides specific rules on the nationality of claims. For natural persons, it requires nationality to be established on two important dates: the date of consent to arbitration and the date of registration, and does not cover dual nationals when one of the nationalities is the one of the other Contracting State party to one dispute. The ICSID jurisprudence as to the nationality of natural persons is so far limited to four cases brought by dual nationals. For legal persons, the ICSID Convention requires nationality to be established only on the date on which the parties consented to submit such dispute to arbitration and allows a departure from the principle of incorporation or seat, when the Parties agree to treat a legal entity with the nationality of the Contracting State as a national of another Contracting State because of foreign control. A related issue is the question of the extent to which shareholders can bring claims for injury sustained by the corporation. Recent jurisprudence has

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decided in favour of the right of shareholders, to be accepted as claimants with respect to the portion of shares they own or control. There is no single definition of what constitutes foreign investment. International investment agreements usually define investment in very broad terms. They refer to “every kind of asset” followed by an illustrative but usually non-exhaustive list of assets, recognising that investment forms are constantly evolving. The ICSID Convention does not define the term investment. It is, however, possible to identify certain typical characteristics of investment under the Convention which have been increasingly used by arbitral tribunals: i) duration of the project; ii) regularity of profit and return; iii) risk for both sides; iv) a substantial commitment; and v) the operation should be significant for the host state’s development.

Introduction The definition of investor and investment are among the key elements determining the scope of application of rights and obligations under international investment agreements. An investment agreement applies only to investors and investments made by those investors who qualify for coverage under the relevant provisions. Only such investments and investors may benefit from the protection and be eligible to take a claim to dispute settlement. Why is the definition of investor and investment so important? From the perspective of a capital exporting country, the definition identifies the group of investors whose foreign investment the country is seeking to protect through the agreement, including, in particular, its system for neutral and depoliticised dispute settlement. From the capital importing country perspective, it identifies the investors and the investments the country wishes to attract; from the investor’s perspective, it identifies the way in which the investment might be structured in order to benefit from the agreements’ protection.1 This definition may also be central to the jurisdiction of the arbitral tribunals established pursuant to investment agreements since the scope of application rationae personae may depend directly on what “investor” means, i.e. being an investor of a state party to the treaty is a necessary condition of eligibility to bring a claim. In addition, the scope of application rationae materiae depends on the definition of investment and in particular with respect to the jurisdiction of the International Centre for the Settlement of Investment Disputes (ICSID), as it extends to “any dispute arising out of an investment”. 1. B. Legum “Defining Investment and Investor: Who is Entitled to Claim?” presentation at the Symposium “Making the Most of International Investment Agreements: A Common Agenda” co-organised by ICSID, OECD and UNCTAD, 12 December 2005, Paris.

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The Investment Committee, in its discussions on the interpretations of provisions of investment agreements, identified the definition of investor and investment as among the core elements of these agreements. It requested the Secretariat to undertake legal research and analysis, looking at state practice and jurisprudence related to these issues, with a view to improving mutual understanding and outcomes of agreements. As a factual survey this paper does not necessarily reflect the views of the OECD or those of its member governments. It cannot be construed as prejudging ongoing or future negotiations or disputes arising under international investment agreements. The issue is becoming of increased relevance in the current context where national security and other essential interest concerns are on the rise and the nationality and identity of an investor and the nature of an investment face growing scrutiny by regulators and policy makers in a number of OECD and non-member countries, taking into account their countries’ rights and obligations under international investment agreements. The definition of investor and investment under these agreements is relevant in relation to such concerns, including protecting intellectual property and politically motivated corporate takeovers by foreign government-controlled investors or sovereign investment funds. The present document responds to the Investment Committee’s request. First, this paper addresses the definition of investor by examining the way in which natural persons qualify as investors under both international customary and treaty law with reference to the arbitral awards that address such qualification. It then looks at the criteria used by investment agreements to qualify a legal person as an investor and the way they have been interpreted by arbitral tribunals. Second, it examines the definition of investment as included in international investment agreements as well as the jurisprudence arising out of the interpretation of the term “investment” included in these agreements. In Annex 1.A1, it gives samples of a large number of investment agreement provisions defining investment.

Part I. Definition of “Investor” I. Natural persons It is a firmly established principle in international law that the nationality of the investor as a natural person is determined by the national law of the state whose nationality is claimed. However, some investment agreements introduce alternative criteria such as a requirement of residency or domicile. The ICSID Convention requires nationality to be established on two important dates: the date of consent to arbitration and the date of registration. The Convention does not cover dual nationals when one of the nationalities is

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the one of the Contracting State. The jurisprudence as to the nationality of natural persons is so far limited to four cases brought by dual nationals.

1. Customary international law The right to grant and withdraw nationality of natural persons remains part of the sovereign domain. The question before tribunals has been whether and to what extent a state can refuse to recognise the nationality of a claimant. International law practice on questions of nationality has developed primarily in the context of diplomatic protection. In the Nottebohm case,2 the ICJ held that even though a state may decide on its own accord and in terms of its own legislation whether to grant nationality to a specific person, there must be a real connection between the state and the national. The Court made the following statement: “Nationality is a legal bond having as its basis a social fact of attachment, a genuine connection of existence, interests and sentiments, together with the existence of reciprocal rights and duties. It may be said to constitute the juridical expression of the fact that the individual upon whom it is conferred, either directly by the law or as the result of an act of the authorities, is in fact more closely connected with the population of the State conferring nationality than with that of any other State. Conferred by a State, it only entitles that State to exercise protection vis-à-vis another State, if it constitutes a translation into juridical terms of the individual’s connection with the State which has made him its national.” However, in today’s circumstances of the modern world it would be very difficult to demonstrate effective nationality following the Nottebohm considerations, i.e. the person’s attachment to the state through tradition, interests, activities or family ties.3 The International Law Commission’s (ILC)

2. The Nottebohm case (Liechtenstein v. Guatemala), 2nd phase, Judgment of 6 April 1955, 1955 ICJ Reports 4, at 23. The case concerned Mr. Nottebohm, a German national who resided in Gu atemala (since 1 905). In 193 9, he travelled to Lichtenstein to visit his brother and obtained Liechtenstein nationality “in exceptional circumstances of speed and accommodation” in order to gain the status of a neutral State instead of the one of a belligerent State. He returned to Guatemala in 1940 and remained there until his deportation to the US in 1943. He then tried to rely on his Liechtenstein nationality to seek diplomatic protection against Guatemala. In these circumstances, the Court said he could not assert his Liechtenstein nationality against Guatemala where he had settled for 34 years. 3. Amerasinghe comments that: “There is a distinction between diplomatic protection and jurisdiction for the purposes of the [ICSID] Convention … [E]ven if the Nottebohm Case were to be used as an applicable precedent, it is arguable that an effective link is relevant to negating the existence of nationality only in the particular circumstances of that case, or at any rate, in very limited circumstances” in “The Jurisdiction of the International Centre for Settlement of Investment Disputes” (1979) 19 Indian Journal of International Law 166, 203.

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Report on Diplomatic Protection recognised the limitations presented by the Nottebohm ruling in the context of modern economic relations: “[…] it is necessary to be mindful of the fact that if the genuine link requirement proposed by Nottebohm was strictly applied it would exclude millions of persons from the benefit of diplomatic protection as in today’s world of economic globalisation and migration there are millions of persons who have moved away from their State of nationality and made their lives in States whose nationality they never acquire or have acquired nationality by birth or descent from States with which they have a tenuous connection.”4 However, the Nottebohm principles are still useful in cases of dual or multiple nationality when the nationality of the claimant in order to be accepted has to be “predominant”. In the case of dual nationality, Article 7 of the ILC Draft Articles on Diplomatic Protection states: “A State of nationality may not exercise diplomatic protection in respect of a person against a State of which that person is also a national unless the nationality of the former State is predominant, both at the time of the injury and the date of the official presentation of the claim.”5 Under customary international law, a state may exercise diplomatic protection on behalf of one of its nationals with respect to a claim against another state, even if its national also possessed the nationality of the other state, provided that the dominant and effective nationality of the person was that of the state exercising diplomatic protection. In this respect, customary law has evolved from the earlier rule of non-responsibility under which diplomatic protection could not be exercised in those circumstances.6

4. ILC, “Report of the International Law Commission on the Work of its fifty-eighth Session” (1 May-9 June and 3 July-11 August 2006) UN Doc A/61/10, Chapter IV, 33. 5. Draft Articles on Diplomatic Protection, ibidem, 43. 6. Support for the rule of non-responsibility can be found in the 1930 Hague Convention on Certain Questions Relating to the Conflict of Nationality Laws. Article 4 provides that: “A State may not afford diplomatic protection to one of its nationals against a State whose nationality such person also possesses.” See also Art. 16(a) of the 1929 Harvard Draft Convention of Responsibility of States for Damage Done in Their Territory to the Person or Property of Foreigners, (1929) 23 AJIL Special Supplement 133-139. See Art. 23(5) of the 1960 Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, reproduced in (1961) 55 AJIL 548; Article 4(a) of the resolution on “Le caractère national d’une réclamation internationale présentée par un État en raison d’un dommage subi par un individu” adopted by the Institute of International Law at its 1965 Warsaw Session.

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The Iran-United States Claims Tribunal 7 had recourse to the test of dominant and effective nationality in that it had to determine whether a claimant with dual US-Iranian nationality was to be regarded as predominantly American or Iranian for purposes of bringing a claim before the Tribunal. In Esphahanian v. Bank Tejarat,8 Chamber Two found that the claimant could claim before the Tribunal because his “dominant and effective nationality at all relevant times [was] that of the United States and the funds at issue in the present case related primarily to his American nationality, not his Iranian nationality”. Nevertheless, the Chamber distinguished the case as one in which the dual national, rather than the state, brought his own claim before the international tribunal against one of the states whose nationality he possessed.

2. Investment agreements Some Bilateral Investment Treaties (BITs) include a single definition of “national” which applies to both parties. Other BITs offer two definitions, one relating to one Contracting Party and the other to the second Contracting Party. For example the Finland-Egypt BIT9 provides that the term “national” means: “a)In respect of Finland, an individual who is a citizen of Finland according to Finnish law. b) In respect of Egypt, an individual who is a citizen of Egypt according to Egyptian Law.” The US-Uruguay BIT10 defines national to mean: “a)For the United States, a natural person who is a national of the United States as defined in Title III of the Immigration and Nationality Act. b) For Uruguay, a natural person possessing the citizenship of Uruguay, in accordance with its laws.” Some investment agreements require some link beyond nationality. For example, the Germany-Israel BIT11 provides in its Article (1)(3)(b), that the term “nationals” means with respect to Israel, “Israeli nationals being permanent residents of the State of Israel”.

7. The Algiers Accords resolved the hostage crisis between Iran and the United States. Pursuant to these Accords the Iran-US Claims Tribunal was established in 1981 in order to adjudicate claims by nationals of each country following the Iranian revolution. 8. Esphahanian v. Bank Tejarat (Case No. 157), Award No. 31-157-2 (29 March 1983), reprinted in 2 IRAN-US C.T.R. 157 (1983). See also Case No. A/18, 5 IRAN-US C.T.R. 251 (1984). 9. Finland-Egypt BIT, entered into force on 5 February 2005. 10. US-Uruguay BIT, entered into force on 1 November 2006. 11. Germany-Israel BIT, signed on 24 June 1974, not entered into force yet.

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The criterion of permanent residence is sometimes used as an alternative to citizenship or nationality. For instance in the Canada-Argentina BIT12 the term “investor” means “i) any natural person possessing the citizenship of or permanently residing in a Contracting Party in accordance with its laws”. Natural persons that are covered by the Energy Charter Treaty (ECT)13 are similarly defined by reference to each state’s domestic laws determining citizenship or nationality but also extends coverage to permanent residents: “Investor” means: “a) with respect to a Contracting Party: i) a natural person having the citizenship or nationality of or who is permanently residing in that Contracting Party in accordance with its applicable law”. Article 201 of NAFTA equally provides in part that: “National means a natural person who is a citizen or permanent resident of a Party.” The new Canada Model FIPA which replaces the 2004 Model FIPA covers citizens as well as permanent residents of Canada, but it expressly provides that a natural person who is a national of both contracting parties shall be deemed to be exclusively a national of the party of his or her dominant or effective nationality. Not many investment agreements address the issue of dual nationality.14 Nevertheless Dolzer and Stevens15 say that in the absence of treaty regulation, general principles of international law would apply, according to which the “effective” nationality of the individual would govern.16

3. ICSID Convention Article 25(1) of the ICSID Convention provides that: “The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment between a Contracting State […] and a national of another Contracting State […]”. With respect to natural persons, Article 25(2) of the Convention defines “National of another Contracting State” to mean: “a) Any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties

12. Canada-Argentina BIT, entered into force on 29 April 1993. 13. Energy Charter Treaty, entered into force in April 1998. 14. See also the 2005 United States-Uruguay BIT, Art. 1: Investor of a Party means a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of the other Party; provided, however, that a natural person who is a dual citizen shall be deemed to be exclusively a citizen of the State of his or her dominant and effective citizenship. 15. R. Dolzer and M. Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, The Hague/Boston/London, 1995). 16. Ibidem, at 34. See the 1991 BIT between Israel and Romania which in its Protocol provides that: “With respect to physical persons – an individual who possesses both Israeli and Romanian citizenship who invests in Israel shall be considered as Romanian investors, under Israeli law in force, for the purposes of this Agreement.”

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consented to submit such dispute to conciliation or arbitration as well as on th e d ate on wh ich th e req uest was registered p ursuan t to paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include any person who on either date also had the nationality of the Contacting State party to the dispute.” The ICSID Convention requires claimants to establish that they had the nationality of a Contracting State on two different dates: the date at which the parties consented to ICSID’s jurisdiction and the date of the registration of the request for arbitration. An extension of treaty rights to permanent residents cannot extend ICSID’s jurisdiction beyond nationals of Contracting States to the ICSID Convention.17 With respect to dual nationality, the ICSID Convention excludes dual nationals, if one of the nationalities is that of the host state.18 In practice, investment treaty jurisprudence under the ICSID Convention as to the nationality of natural persons is limited to four cases brought by dual nationals. The first case is Eudoro A. Olguín v. Republic of Paraguay.19 Mr. Olguín, a dual national of Peru and the United States, brought a claim against the Republic of Paraguay under the Peru-Paraguay BIT, for the treatment allegedly received from the Paraguayan authorities, in relation to his investment in a company for the manufacture and distribution of food products in Paraguay. The arbitral tribunal rejected Paraguay’s objection to jurisdiction based on the claimant’s dual nationality by relying on the fact that Mr. Olguín’s Peruvian nationality was effective, which was deemed enough for purposes of the ICSID Convention and the BIT. In Soufraki v. United Arab Emirates,20 the claim was related to a port concession in Dubai. When a dispute arose, Mr. Soufraki, a dual Italian and Canadian national, invoked the Italy-United Arab Emirates BIT to bring a claim based on his Italian nationality. The Tribunal investigated his claim of Italian nationality and found that he had lost it when he acquired Canadian citizenship.

17. Schreuer refers to the Report of the Executive Directors which explains the provision of dual nationality as follows: “It should be noted that under clause a)of Article 25(2) a natural person who was a national of the State party to the dispute would not be eligible to be a party in proceedings under the auspices of the Centre, even if at the same time he had the nationality of another State. This ineligibility is absolute and cannot be cured even if the State party to the dispute had given its consent” in “ICSID Convention: A Commentary” (CUP, Cambridge 2000). 18. Amerasinghe (n. 3) at 205. 19. Eudoro A. Olguín v. Republic of Paraguay, ICSID Case No. ARB/98/5, Award, 26 July 2001. 20. Hussein Nuaman Soufraki v. United Arab Emirates, ICSID Case No. ARB/02/7, Award, 7 July 2004.

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The fact that he could present certificates of nationality only provided prima facie evidence of his Italian nationality.21 The tribunal therefore held that he was not entitled to bring a claim under the Italy-U.A.E. BIT as an Italian national.22 The Tribunal recognised the difference between the ease with which an investor may incorporate an investment in a favourable jurisdiction in order to have the most advantageous BIT coverage and the many difficulties faced by Mr. Soufraki as a natural person in proving that he had Italian nationality, when he had previously lost it: “… had Mr. Soufraki contracted with the United Arab Emirates through a corporate vehicle incorporated in Italy, rather than contracting in his personal capacity, no problem of jurisdiction would now arise. But the Tribunal can only take the facts as they are and as it has found them to be.”23 On 4 November 2004, Mr. Soufraki submitted a request for annulment of the Arbitral Award issued on 7 July 2004 because of a manifest excess of power by the Tribunal and its failure to state reasons. The core issue was whether the Tribunal could make an independent determination of the nationality of the claimant or whether it was bound by the determination made by the Italian authorities relying on passports and certificates of nationality issued to the claimant. The ad hoc Committee found that the arbitral tribunal correctly stated that certificates issued by consular authorities are not binding on the tribunal’s determination of the claimant’s nationality in order to ascertain its own jurisdiction. The presumption in favor of the existence of the Italian n ationality was not corroborated by further evidence sh ow ing that Mr. Soufraki had reacquired his lost Italian nationality. In the case Champion Trading v. Egypt, 24 US nationals who were also found to be Egyptian nationals were denied the right to bring a claim against Egypt (based on the US-Egypt BIT) because of the rule in Article 25(2)a) excluding nationals having the nationality of the Contracting State Party to the dispute. The tribunal dismissed three claims brought by these individual shareholders in the National Cotton Company (NCC), a firm involved in cotton processing and trading, although it affirmed jurisdiction over two related

21. Soufraki, para. 63. 22. An interesting argument was raised by the defendant but was not elaborated by the Tribunal: had Mr. Soufraki qualified as an Italian national, would he still need to meet a further test of “effective” or “dominant” nationality under international law? Such a test might have required that, as a dual passport-holder, he demonstrate that he had closer or more “effective” ties with the “home” State under whose BIT he sought to bring a claim (i.e. Italy). 23. Soufraki, para. 83. 24. Champion Trading Company Ameritrade International Inc., James T. Wahba, John B. Wahba, Timothy T. Wahba v. Arab Republic of Egypt, ICSID Case No. ARB/02/9, Decision on Jurisdiction 21 February 2003.

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claims brought by US corporate entities, Champion Trading Company and Ameritrade International Inc., which each held larger stakes in the NCC. The individual claimants argued that the tribunal should employ the international law test of “real or effective nationality”, which they contended would show that they “have not effectively acquired Egyptian nationality”. In the end, the tribunal did not wholly rule out the applicability of such a test in the ICSID context, where it would be manifestly absurd or unreasonable for a person to be classified as a dual national, perhaps where a third or fourth generation individual “has no ties whatsoever with the country of its forefathers” – and where a test of real or effective nationality might be appropriate to use in ICSID. However, the tribunal was convinced that there could be little doubt that the claimants in this case had sufficient ties to Egypt and that that they were therefore clearly excluded from ICSID arbitration. It was relevant that their Egyptian nationality had been used for the registration of their business. After dismissing jurisdiction for the individual claims, the tribunal upheld jurisdiction for the claims brought by the two corporate entities observing that there was no bar to ICSID claims by companies whose shares were held by dual nationals of the two parties engaged in the arbitration. In the case Siag and Vecchi v. Egypt,25 Mr. Siag and his mother Ms. Vecchi, former Egyptian nationals submitted a claim under the Italy-Egypt BIT as Italian nationals. Because the ICSID Convention does not allow persons to initiate arbitration against their own state, the tribunal examined extensively the Egyptian law in order to determine whether they had ceased to be Egyptian nationals. Although all three arbitrators held that Ms. Vecchi had lost her Egyptian nationality on the date she re-acquired her Italian nationality, one tribunal member,26 in a partial dissenting opinion disagreed that this was the case with Mr. Waguih Siag. Two of the three arbitrators held that Mr. Waguih Siag had lost his Egyptian nationality by virtue of his failure to take formal steps to retain it.

II. Legal persons The issues related to the nationality of legal persons can be even more complicated than for natural persons. Companies today operate in ways that can make it very difficult to determine nationality. Layers of shareholders, both natural and legal persons themselves, operating from and in different countries make the traditional picture of a company established under the

25. Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt, ICSID case No. ARB/05/15, Decision on Jurisdiction, 11 April 2007. Mr. Siag and his mother Ms. Vecchi claimed that Egypt confiscated a property which had been purchased by their Egyptian company and slated for development into a resort property. 26. See F.O. Vicuña’s Dissenting Opinion in the Decision cited above.

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laws of a particular country and having its centre of operations in the same country, more of a rarity than a common situation. It is quite common that a company can be established under the laws of country A, have its centre of control in country B and do its main business in country C. Tribunals have usually refrained from engaging in substantive investigations of a company’s control and they have usually adopted the test of incorporation or seat rather than control when determining the nationality of a juridical person.27 Accordingly, it is the general practice in investment treaties to specifically define the objective criteria which make a legal person a national, or investor, of a Party, for purposes of the agreements, rather than to simply rely on the term “nationality” and international law. Since the objective criteria used may include investors to whom a Party would not wish to extend the treaty protection, some treaties themselves include “denial of benefit clauses” allowing exclusion of investors in certain categories. OECD governments are often confronted with requests by their investors to advocate on their behalf in their relations with the host state, before any arbitral claims are presented. It seems that in such situations government determinations on the nationality of an investor are not based exclusively on BITs provisions, but often use different, more flexible tests. The ICSID Convention which limits the jurisdiction of the Centre to disputes between one contracting state and a national of another contracting state, provides specific rules on the nationality of claims in its Article 25 and investment treaties specify any other or additional requirements that the contracting states wish to see apply to determine the standing of claimants. A related issue is the question of the extent to which shareholders can bring claims for injury sustained by the corporation, an issue that has evolved significantly since the ICJ decision of Barcelona Traction.

1. Investment agreements There is no single test used by all investment treaties to define the link required between a legal person seeking protection under the treaty and the contracting state under whose treaty the investor asks for protection. 28 Bilateral investment treaties have essentially relied on the following tests29 for

27. Schreuer (n. 17) Article 25, para. 465. 28. Judge Jessup, in his Separate Opinion in Barcelona Traction said: “[t]here are two standard tests of the ‘nationality’ of a corporation. The place of incorporation is the test generally favoured in the legal systems of the common law, while the siege social is more generally accepted in the civil law systems.” 29. Judge Jessup, in his Separate Opinion in Barcelona Traction said: “[t]here are two standard tests of the ‘nationality’ of a corporation. The place of incorporation is the test generally favoured in the legal systems of the common law, while the siege social is more generally accepted in the civil law systems.”

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determining the nationality of legal persons: i) the place of constitution in accordance with the law in force in the country; ii) the place of incorporation or where the registered office is; iii) the country of the seat, i.e. where the place of administration is; and iv) less frequently, the country of control. Most investment treaties use a combination of the tests30 for nationality of legal persons so that a company must satisfy two or more of them in order to be covered. The most common approach is a combination of the place of incorporation or constitution and seat, although the combination of incorporation or constitution and control and also of all three tests is also found. Place of constitution in accordance with the law. In order to determine the nationality of a legal person, some bilateral investment treaties have adopted the test of the place of constitution in accordance with the law in force in the country. By so doing, the contracting parties simply make reference to national law provisions of each contracting party in order to establish the legal persons entitled to protection. A legal person constituted in accordance with the laws of a contracting party will be considered an investor of that state. Since states are free to chose the criteria for the attribution of nationality to legal persons, such criteria – be they incorporation, seat or control, etc. – may vary in accordance with the specific provisions of the applicable laws of each contracting party. Investment treaties concluded by Greece have often followed this pattern in order for legal persons to qualify as investors under investment agreements. Article 1 of the Greece-Cuba BIT31 defines as investors: “with regard to either Contracting Party, legal persons constituted in accordance with the laws of that Contracting Parties.” The US-Uruguay BIT32 for instance provides that: “Enterprise of a Party’ means an enterprise constituted or organised under the law of a Party and a branch located in the territory of a Party and carrying out business activities there.”33

30. A. Sinclair notes that, “cultural, economic and political factors will influence which test a particular State will prefer to apply […] No question arises as to the validity of the choices, nor is it appropriate to identify a general rule in the abstract because different States legitimately take different approaches to qualification for protection” in “The Substance of Nationality Requirements in Investment Treaty Arbitration” (2005) 20(2) ICSID Review – Foreign Investment Law Journal. 31. Greece-Cuba BIT, entered into force on 18 October 1997. 32. US-Uruguay BIT, entered into force on 1 November 2006. 33. In the US Model BIT, “enterprise” is further defined as “any entity constituted or organised under applicable law, whether or not for profit, and whether privately or governmentally owned or controlled, including a corporation, trust, partnership, sole proprietorship, joint venture, association, or similar organisation; and a branch of an enterprise.”

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The most recent definitions section of the Canada Model FIPA34 reads: “enterprise means: i) Any entity constituted or organised under applicable law, whether or not for profit, whether privately-owned or governmentally-owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association.” The Energy Charter Treaty (ECT) in its article 1(7)(a)(ii) defines “investor” with respect to a contracting Party to include a “company or other organisation organised in accordance with the law applicable in that Contracting Party”. This broad definition is somewhat qualified by Article 17 of the ECT which calls for an inquiry into a company’s substantive connection with the state in which it is incorporated35 (see below, denial of benefits clause). The draft MAI defined as investor: “A legal person or any other entity constituted or organised under the applicable law of a Contracting Party […]”, whether or not for profit, and whether private or government owned or controlled, and includes a corporation, trust, partnership, sole proprietorship, joint venture, association or organisation. Place of incorporation. In othe r trea ties the pla ce of constitution in a ccordan ce w ith the law s is ofte n found in combin ation w ith the incorporation test. Because of its potential opening for treaty shopping, it may be accompanied by a “denial of benefits” clause which allows the state party c on cern e d to de ny trea ty protection to a com pa ny, un d er c e rtain circumstances, which is controlled by nationals of a non-party. The UK is one of the countries which, in the majority of their BITs, use the place of incorporation or constitution as the sole test. The UK-El Salvador36 and the UK-Yugoslavia BIT37 for instance, define an investor as: “i) in respect of the United Kingdom: […] corporations, firms and associations incorporated or constituted under the law in force in any part of the United Kingdom or in any territory to which this Agreement is extended […].” The two cases that follow show how arguments related to the economic reality have not succeeded in preventing tribunals from applying the test that the contracting parties have agreed upon and included in their treaties.

34. See Article 1, Definitions. The 2004 Canada Model FIPA has been recently revised. 35. These companies are usually called “mailbox” or “brass-plate” companies. They are typically favoured for tax and regulatory reasons and also for treaty protection availed to the investors. 36. UK-El Salvador BIT, 1 December 2001. 37. UK-Yugoslavia BIT, not yet in force, presented to the UK Parliament in February 2007.

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In Tokios Tokelés v. Ukraine, 38 the Tribunal held that a company incorporated in Lithuania was entitled to bring a claim against the Ukraine under the Lithuania-Ukraine BIT although it was controlled and 99 per cent owned by Ukrainian nationals. Tokios Tokelés, the claimant company, was qualified as a Lithuanian investor under the Lithuania-Ukraine BIT that defined corporate nationality by incorporation:39 “According to the ordinary meaning of the terms of the Treaty, the Claimant is an ‘investor’ of Lithuania if it is a thing of real legal existence that was founded on a secure basis in the territory of Lithuania in conformity with its laws and regulations. The Treaty contains no additional requirements for an entity to qualify as an ‘investor’ of Lithuania.”40 Ukraine argued, however, that the tribunal should deny jurisdiction on the ground that the Ukrainian owners had incorporated the company in Lithuania for the sole purpose of availing themselves of the protection of the Lithuania-Ukraine BIT. Although the Tribunal acknowledged that a number of investment agreements provide for the denial of benefits to entities controlled by the host state’s own nationals, it noted that the Ukraine-Lithuania BIT did not do so: it is not for Tribunals to impose limits on the scope of BITs not found in the text.41 The tribunal held that, consistent with the ICJ’s ruling in the Barcelona Traction,42 the clear treaty language could only be avoided and the corporate veil doctrine applied if there was a showing of “abuse” or “fraud”.43 The tribunal

38. Tokios Tokelés v. Ukraine, Case No. ARB/02/18, 29 April 2004. 39. The language in the BIT was: “Any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations.” 40. Tokios Tokelés v. Ukraine, para. 28. 41. Idem, para. 36. 42. In Barcelona Traction, the ICJ had to consider an application by Belgium espousing a claim of Belgian nationals who were the majority shareholders in a Canadian incorporated company whose assets included Spanish subsidiaries. The Court held that Belgium was unable to pursue claims against Spain for damage done to the company. 43. In Barcelona Traction, the ICJ indicated that “the wealth of practice already accumulated on the subject in municipal law indicates that the veil is lifted, for instance, to prevent the misuse of the privileges of legal personality, as in certain of fraud or malfeasance, to protect third persons such as a creditor or purchaser, or to prevent the evasion of legal requirements or of obligations”. Barcelona Traction, Light and Power Co. Ltd. (Belgium. v. Spain), 1970 I.C.J., Reports 3, para. 58.

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found that there was no such abuse or fraud as the founding of Tokios Tokelés predated the Lithuania-Ukraine BIT.44 In Saluka v. The Czech Republic,45 an arbitral tribunal arrived at similar conclusions as to the validity of the place of incorporation. The arbitration arose out of the reorganisation and privatisation of the Czech bank system. Saluka Investments BV, a Dutch Company, which had acquired shares of the Czech state-owned bank IPB, claimed a violation of Article 5 (deprivation of investment) and Article 3 (fair and equitable treatment) of the BIT between the Netherlands and the Czech Republic. According to the Czech Republic, the real investor was not Saluka but an English-registered company, Nomura Europe (a subsidiary of the Japanese Investment Bank). It asserted that Saluka was merely a shell company with no real economic interest in the IPB shares and therefore it failed to meet the definition of an investor under the BIT, because as an agent for the parent corporation Nomura could not benefit from the BIT. The tribunal rejected these arguments and decided based on the language of the treaty which defined the investor as “legal persons constituted under the law of one of the Contracting Parties”. The tribunal considered the disadvantages of the formalistic test, in particular the risk for “treaty shopping”, but respected the contracting parties’ choice of definition of investor.46 Company seat. Possibly with the intention of preventing “treaty shopping” by acquiring or establishing a shell company in a jurisdiction where a relevant BIT applies, some states require that in order to qualify as an investor, a legal person should not only be constituted or incorporated in the host country but also have its seat and/or effective management there. The rationale is different with respect to BITs of EU member states (e.g. Germany-China BIT). Such BITs extend their benefits to companies which transfer their seat to another member state without giving up the original form of incorporation. An example of a treaty using the company seat as the basis for attributing nationality is the 2003 Germany-China BIT.47 The treaty defines company to

44. This decision of the Tribunal was taken by majority of the arbitrators. The President of the Tribunal, Professor P. Weil, issued a strong dissenting opinion on this part of the decision. He felt that the ICSID mechanism and remedy were not meant for investments made in the State by its own citizens with domestic capital through the channel of a foreign entity. He Stated: “When it comes to mechanisms and procedures involving States and implying therefore, issues of public international law, economic and political reality is to prevail over legal structure, so much that the application of the basic principles rules of public international law should not be frustrated by legal concepts and rules prevailing in the relations between private economies and juridical players”, Tokios Tokelés, para. 24. 45. Saluka Investments B.V. v. The Czech Republic, under UNCITRAL Rules, Partial Award 17 March 2006. 46. Saluka, paras. 240-1. 47. Germany-China BIT, entered into force on 11 November 2005.

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include in respect of Germany “any juridical person as well as any commercial or other company or association with or without legal personality having its seat in the territory of the Federal Republic of Germany […]”. Other BITs make the location of the investor’s seat or “siège social” one of the necessary conditions. Examples include: The France-Singapore BIT48 in its article 1(3)(a) restricts its coverage in the case of French “bodies corporate”, to “legal persons constituted in France conforming to the French law and having a Head Office in France”. The Italy-Libya BIT49 in its article 1(3) also applies to juridical persons organised under the law of the contracting state and having in that territory its siège social or main headquarters. The ASEAN Agreement for the Promotion and Protection of Investments also uses a combination of the tests of the place of constitution or incorporation and the company seat. It provides that “the term ‘company’ of a contracting Party shall mean a corporation, partnership or other business association, incorporated or constituted under the laws in force in the territory of any Contracting Party wherein the place of effective management is situated” [emphasis added]. In the first case under the ASEAN Agreement, Yaung Chi Oo Trading Pte Ltd. v. Government of the Union of Myanmar,50 the tribunal observed that this effective management requirement was primarily included in the ASEAN Treaty to avoid what has been referred to as protection shopping, i.e. the adoption of a local corporate form without any real economic connection in order to bring a foreign entity or investment within the scope of treaty protection. It finally held that the claimant was a Company of a Contracting State other than Myanmar. It noted that unless some indication of improper protection shopping exists, the company would be a company of the state of incorporation when the legal requirements of that state on this issue are satisfied and there are some other indicia of management in that state.51 The Tribunal decided that the requirements were satisfied: i) the claimant had a resident director in Singapore; and ii) the claimant also conducted certain business activities (procurement) from Singapore. According to the Tribunal,

48. France-Singapore BIT, entered into force on 18 October 1976. 49. Italy-Libya BIT, entered into force on 20 October 2004. 50. Yaung Chi Oo Trading Pte Ltd v. Government of the Union of Myanmar, ICSID Additional Facility Rules Case No. ARB/01/1 (31 March 2003), 42 ILM 540 (2003). Yaung Chi Oo Trading Pte Ltd., a Singapore-incorporated company maintained a brewery investment in Myanmar which, it claimed, had been expropriated in violation of the ASEAN Agreement. The fact that the Claimant’s management spent considerable time in Myanmar attending to its investment prompted Myanmar to claim that the claimant’s place of “effective management” had shifted to Myanmar. 51. Idem, paras. 49 and 62.

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with these conditions satisfied, the nationality of the company’s shareholders was irrelevant, as was the source of the capital. The UK-Philippines BIT52 in its article 1(4) stipulates that: “A ‘Company’ of a Contracting Party must be incorporated or constituted and actually doing business under the laws in force in any part of the territory of that Contracting Party where a place of effective management is situated”[emphasis added]. The Belgian-Luxembourg-Croatia BIT53 in its article 2(b), provides that an investor’s “seat” must be in its home state, and that the investor must “engage in local activities in the home State territory”. Control. It is not an easy task to determine what control means. The Draft 4th Edition of the OECD Benchmark Definition of Foreign Investment 54 emphasises the percentage of ownership or voting power in a company as the measure of control, constituting the quantitative approach: “To classify an enterprise within a country on the basis of the presence or absence of effective foreign control [emphasis in original text], the criterion recommended for use is whether or not a majority of ordinary shares or voting power (more than 50% of the capital) is held by a single foreign direct investor or by a group of associated investors acting in concert […]. Application of this criterion avoids the use of subjective concepts or case by case review […].” The Tribunal in the NAFTA case Thunderbird v. Mexico 55 gave the following interpretation of what might constitute control: “Control can also be achieved by the power to effectively decide and implement the key decisions of the business activity of an enterprise and, under certain circumstances, control can be achieved by the existence of one or more factors such as technology, access to supplies, access to markets, access to capital, knowhow and authoritative reputation.”56 The Convention establishing the Multilateral Investment Guarantee Agency combines the tests of the place of incorporation with the company seat but also allows the use of the place of ownership or control as an alternative. Article 13a)ii) provides that a legal entity is an eligible investor under the Agency’s insurance program provided that “such juridical person is incorporated and has its principal place of business in a member or the majority of its capital is owned by a member or members or nationals thereof, provided that such member is not the host country in any of the above cases”. 52. UK-Philippines BIT, entered into force on 2 January 1981. 53. Belgium/Luxembourg-Croatia BIT, entered into force on 19 December 2003. 54. OECD Benchmark Definition of Foreign Investment (Draft) – 4th Edition, DAF/INV/STAT(2006)2/REV. 3, 2007. 55. International Thunderbird Gaming Corporation v. United Mexican States, Award, 26 January 2006. 56. Thunderbird, para. 180.

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The test of control is often combined with other formal criteria such as incorporation and seat to justify coverage of an investor under the treaty. This element can be found in the French model BIT and some other BITs concluded by Sweden, Switzerland, Belgium-Luxembourg and the Netherlands. The French model BIT defines the term investor as follows: “… b) Toute personne morale constituée sur le territoire de l’une des Parties contractantes, conformément à la législation de celle-ci et y possédant son siège social, ou contrôlée directement ou indirectement par des nationaux de l’une des Parties contractantes, ou par des personnes morales possédant leur sièg e social sur le territoire de l’une des Parties contractantes et constituées conformément à la législation de celle-ci.” Article 1 of the Swedish-India BIT 57 uses as well a combination of incorporation/ownership/control tests and provides that: “… d) ‘companies’ mean any corporations, firms and associations incorporated or constituted under the law in force in the territory of either Contracting Party, or in a third country if at least 51 per cent of the equity interest is owned by investors of that Contracting Party, or in which investors of that Contracting Party control at least 51 per cent of the voting rights in respect of shares owned by them.” The Belgium/Luxembourg-Philippines BIT58 does the same: “ ‘Investor’ shall mean […] the ‘companies’, i.e. with respect to both Contracting Parties, a legal person constituted on the territory of one Contacting Party in accordance with the legislation of that Party having its head office on the territory of that Party, or controlled directly or indirectly by the nationals of one Contracting Party, or by legal persons having their head office in the territory of one Contracting Party and constituted in accordance with the legislation of that Party”. The Switzerland-Ethiopia BIT 59 uses different language to describe control: “Le terme « investisseur » désigne, en ce qui concerne chaque Partie contractante : […] b. toute personne morale qui est constituée ou autrement organisée conformément à la législation de cette Partie contractante et qui exerce d’importantes activités économiques sur le territoire de cette même Partie contractante ;

57. Sweden-India BIT entered into force on 1 April 2001. 58. Belgium/Luxembourg-Philippines BIT entered into force on 19 December 2003. 59. Switzerland-Ethiopia BIT entered into force on 7 September 1998.

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c. toute personne morale qui n’est pas établie conformément à la législation de cette Partie contractante : i) lorsque plus de 50 % de son capital social appartient à des personnes de cette Partie contractante ; ii) lorsque des personnes de cette Partie contractante ont la capacité de nommer une majorité de ses administrateurs ou sont autrement habilitées en droit à diriger ses opérations.” The Netherlands-Bulgaria BIT60 covers: “Legal persons constituted under the law of one of the Contracting Parties […] Legal persons not constituted under the law of that Contracting Party but controlled directly, or indirectly by natural persons as defined in a) or by legal persons as defined in b).” The Netherlands-Bolivia BIT61 includes the following additional language: “[…] legal persons constituted in accordance with the law of that Contracting Party […] Legal persons controlled directly or indirectly, by nationals of that Contracting Party, but constituted in accordance with the law of the other Contracting Party.” This latter BIT was the basis for the case Aguas de Tunari, S.A. v. Republic of Bolivia.62 Aguas del Tunari (“AdT”) initiated ICSID arbitration proceedings alleging that several acts of Bolivia amounted to an expropriation of its investment in violation of the Netherlands-Bolivia BIT. The majority of the Tribunal dismissed Bolivia’s objections to jurisdiction. When Bechtel informed the Bolivian water and electricity authorities of proposed changes in AdT’s ownership, transferring International Water Ltd.’s shares to a Dutch company, the Bolivian water authorities gave their approval. However, Bolivia disputed both the content and the legal effect of such approval. At the core of Bolivia’s objections was the argument that Bolivia could not have consented to an arrangement by which a company registered in Bolivia

60. Netherlands Bulgaria BIT, entered into force on 1 March 2001. 61. Netherlands-Bolivia BIT, entered into force on 1 November 1994. 62. Aguas de Tunari v. Bolivia, ICSID case No. ARB/02/03, Decision on Jurisdiction, 21 October 2005. The background of the dispute concerns Bolivia’s international tender process to privatise water, sewage services and an electricity generation license in 1998. Aguas de Tunari (AdT) is the locally incorporated Bolivian entity for a consortium led by International Water, Ltd., incorporated in the Cayman Islands, and 100% owned by Bechtel Enterprise Holding, a US company. A concession agreement between the Bolivian government and AdT took effect in 1999, and provided for a 40-year relationship between AdT and the Bolivian water and electricity authorities. The concession agreement resulted in significant public controversy in Bolivia, especially among labor organisations and civil society groups.

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such as AdT could, at any time, restructure itself as a Dutch company in 1999 in a post facto attempt to claim the benefit of the Netherlands-Bolivia BIT. It argued that the claimant was “controlled” by the US-based Bechtel Corporation, and that the Netherlands shareholders were merely “shell” companies which did not exert any real “control”. The Tribunal examined the question of whether AdT was a national of the Netherlands in accordance with Article 1b) of the treaty which includes “legal persons controlled directly or indirectly, by nationals of that Contracting Party, but constituted in accordance with the law of the other Contracting Party”. The Tribunal, after a lengthy analysis of the meaning of the phrase “controlled directly or indirectly” in the treaty, concluded that Bolivia’s interpretation would frustrate the treaty’s purpose. It concluded “that the phrase ‘controlled directly or indirectly’ means that one entity may be said to control another entity (either directly, that is without an intermediary entity, or indirectly) if that entity possesses the legal capacity to control the other entity”:63 “[I]t is not uncommon in practice and – absent a particular limitation – not illegal to locate one’s operations in a jurisdiction perceived to provide a beneficial regulatory and legal environment in terms, for example, of taxation or the substantive law of the jurisdiction, including the availability of a BIT.”64 “Although titled ‘bilateral’ investment treaties, this case makes clear that which has been clear to negotiating States for some time, namely, that through the definition of ‘national’ or ‘investors’, such treaties serve in many cases more broadly as portals through which investments are structured, organised, and, most importantly, encouraged through the availability of a neutral forum.”65 Sedelmayer v. Russia66 is the first case in which an arbitral tribunal has interpreted the notion of investor in a way that allowed the protection of an investment made by the intermediary of a company incorporated in a third state.67 In this case, Sedelmayer, a German national, was the sole owner and CEO of SGC International incorporated in Missouri, USA. The latter made an investment in Russia in the area of enforcement equipment. When a dispute arose from this activity, Mr. Sedelmayer initiated an arbitration procedure under the German-Russia BIT (since the US-Russia BIT was not in force).

63. One of the arbitrators, José Luis Alberro-Semerana, issued a declaration of dissent in which he maintained that Bolivia could not have consented to face arbitration from an unlimited “universe of beneficiaries” and that the tribunal should have undertaken further inquiry as to the “motivations and the timing” of Bechtel’s decision to restructure the corporate ownership of the claimant company. 64. Idem, para. 330(d). 65. Idem, para 332. 66. Franz Sedelmayer v. The Russian Federation, SCC Award, 7 July 1998. 67. See the analysis of the case by W. Ben Hamida “La notion d’investisseur”, La Gazette du Palais, December 2005.

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The Tribunal held that SGC international was a simple vehicle by which Mr. Sedelmayer has transferred his capital to Russia and that he was a de facto investor. Although the language of the Treaty did not mention the element of control but only the elements of incorporation and siège social, the Tribunal accepted jurisdiction and noted that: “The question then arises whether an individual who makes his investments through a company might be regarded as an investor – a de facto – investor under the treaty. This question concerns the general issue to what extent the ‘theory of control’ may be applied. […] during recent years, there has been a growing support of the control theory […] In the Tribunal’s opinion, the mere fact that the Treaty is silent on the point now discussed should not be interpreted so that Mr. Sedelmayer cannot be regarded as a de facto investor”[emphasis in the original].68 Denial of benefits. As investors try to build their legal structure in their favour, states may also seek in advance to avoid claims from certain entities to which they did not intend to offer treaty protection. Therefore, some treaties include a denial of benefits clause by which the state party to the Treaty is entitled to deny the treaty protection to investors incorporated in one of the states party to the treaty but under control of investors of a third country not party to the treaty or when they do not have any substantial activity in the country of incorporation. This provision gives the host state the authority effectively to carve out from the definition of “investor” shell companies owned by nationals of a third-country or the host state and companies owned by certain third-country aliens.69 The Austria-Libya70 and Austria-Lebanon71 BITs also include a denial of benefits clause: “A Contracting Party may deny the benefits of this Agreement to an investor of the other Contracting Party and to its investments, if investors of a Non-Contracting Party own or control the first mentioned investor and that investor has no substantial business activity in the territory of the Contracting Party under whose law it is constituted or organised.”

68. One of the arbitrators, Professor S. Zykin, issued a very forceful dissenting opinion based in particular on the lack of the criterion of control in the BIT. He concluded that: “The claimant could have made investments personally or through a German company, but instead he preferred to act […] for tax reasons through a company of a third State. It seems unlikely that the purpose of the 1989 Treaty between Russia and Germany was to encourage such kind of investment and to offer them protection […].” Dissenting opinion, paras. 1-4. 69. See B. Legum (n. 1). 70. Austria-Libya BIT, entered into force on 1 January 2004. 71. Austria-Lebanon BIT, entered into force on 20 September 2002.

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The draft MAI provided for a choice of clauses for denial of benefits.72 “a. [Subject to prior notification to and consultation with the Contracting Party of the investor] a Contracting Party may deny the benefits of the Agreement to an investor [as defined in 1ii)] and to its investments if investors of a non-Party own or control the first mentioned investor and that investor has no substantial business activities in the territory of the Contracting Party under whose law it is constituted or organised, or b. [Subject to prior notification and consultation in accordance with Articles XXX (Transparency) and XXX (Consultations),] a Contracting Party may deny the benefits of this Agreement to an investor of another Contracting Party that is an enterprise of such Contracting Party and to investments of such investors if investors of a non-Contracting Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the Contracting Party under whose law it is constituted or organised.” The NAFTA in its Article 1132(2),73 the new US74 and Canada75 Model BITs, the US FTAs with Chile,76 US-CAFTA-Dominican Republic,77 Australia,78 Colombia,79 72. Views differed on whether the definition of investment should cover investments indirectly owned or controlled by investors of a Party. Some delegations are of the opinion that covering such investment offers maximum protection to investors, including access to MAI dispute settlement. In addition, those delegations believe that this approach offers the most flexibility to investors in managing their capital flows, and avoids diverting investment flows from developing countries. The Group considered four cases: a) investment by an investor established in another MAI Party, but owned or controlled by a non-MAI investor (example: an investment in Austria by a Belgian subsidiary of a non-MAI parent); b) investment by an investor established in a non-MAI Party, but owned or controlled by a MAI Party investor (example: an investment in Canada by a non-MAI subsidiary of a Danish parent); c) investment by an investor established in another MAI Party, but owned or controlled by an investor of a third MAI Party (example: an investment in France by a German subsidiary of a Hungarian parent); and d) investment in a MAI Party by an investment there covered by the MAI (example: an investment in Italy by an Italian subsidiary of a Japanese parent). There was a broadly shared view that case a) investments should be covered by the MAI. Most delegations favoured providing for certain exclusions in a denial of benefits clause which would permit, but not require, exclusion. Some delegations were concerned about possible abuse of this provision. It was suggested that the condition for exclusion would be where the MAI investor lacked substantial business activity in the MAI Contracting Party. One delegation suggested limiting this to cases in which the investor was constituted “for no other purpose than obtaining MAI benefits” (exact wording not finalised). There was wide support for covering case b) investments; however, whether to do so was considered a policy issue to be considered by the Negotiating Group. There was consensus that case c) and case d) investments would be covered by the MAI. 73. NAFTA Article 1113(2). 74. US Model BIT, Article 17. 75. Canada FIPA, Article 18. 76. Article 10.11, US-Chile FTA.

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Morocco,80 Panama,81 Peru82 and the Canada-Chile FTA83 contain similar language with some variation. Article 17 of the US Model BIT provides as follows: “1. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if persons of a non-Party own or control the enterprise and the denying Party: a) does not maintain diplomatic relations with the non-Party; or b) adopts or maintains measures with respect to the non-Party or a person of the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Treaty were accorded to the enterprise or to its investments. 2. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and persons of a non-Party, or of the denying Party, own or control the enterprise.” This clause is also found in Part III, Article 17, of the Energy Charter Treaty which stipulates: “Each Contracting Party reserves the right to deny the advantages of this Part to: 1) a legal entity if citizens or nationals of a third State own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organised.” The two qualifications of i) substantial business connection and ii) ownership or control residing in the territory of an ECT Contracting Party are cumulative. The Plama v. Bulgaria 84 decision on jurisdiction rendered by an ICSID tribunal under the Energy Charter Treaty provides guidance for the interpretation of the meaning of the denial of benefits clauses with regard both to its conditions of exercise and substantial requirements. Unlike most investment treaties, the denial of benefits clause provided for under the ECT, Article 17(1) does not operate as a denial of all benefits to a covered investor 77. Article 10.12(2), US-CAFTA-Dominican Republic. 78. Article 11.12, US-Australia FTA. 79. Article 10.12, US-Colombia FTA. 80. Article 10.11, US-Morocco. 81. Article 10.12, US-Panama FTA (under negotiation text as of January 2007). 82. Article 10.12, US-Peru FTA. 83. Article G-13, Canada-Chile FTA. 84. Plama Consortium Limited v. Republic of Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005, reprinted in 20 ICSID Rev.-FILJ 262 (2005).

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under the treaty but is expressly limited to a denial of the advantages related to the substantial protection under Part III of the ECT.85 Taken into account the specific language of the ECT, the Tribunal ruled against Bulgaria submissions and held that Art. 17(1) is related to the merits of the dispute and cannot be invoked to support a complaint to the jurisdiction of the tribunal. By contrast, the right to deny provision provided for in many other BITs can result in a filter on the admissibility of claims.86 The Tribunal addressed the question of the conditions under which the right to deny the benefits under the treaty may be exercised. The issue at stake was whether the denial of benefits under Article 17(1) operates automatically and requires no further action from the host state as argued by the respondent, or whether it requires the right to deny to be exercised through positive action taken by the host state as argued by the claimant. In this case, Bulgaria, after it had received the request for arbitration, sent to ICSID a letter by which, in accordance with Article 17(1) of the ECT, it denied ECT protection to the claimant on the grounds that the claimant was “a ‘mailbox’ company with no substantial business activities in the Republic of Cyprus”87 and it was not owned or controlled by a national of an ECT state. Bulgaria further argued that the ECT’s drafters intended to confer on a host state a direct and unconditional right of denial, which may be exercised at any time and in any manner. The tribunal clarified that “the existence of a ‘right’ is distinct from the exercise of that right…”.88 It further held that: “The exercise would necessarily be associated with publicity or other notice so as to become reasonably available to investors and their advisers. To this end, a general declaration in a Contracting State’s official gazette could suffice; or a statutory provision in a Contracting State’s investment or other laws; or even an exchange of letters with a particular investor or class of investors.” By way of comparison, the tribunal contrasted Art. 17(1) with the different language of Article VI of the 1995 ASEAN Framework Agreement on

85. See E. Gaillard, “Energy Charter Treaty: International Centre for Settlement Decision”, (2005) 233(66) New York Law Journal; Id., “Investment and Investors Covered by the Energy Charter Treaty” in C. Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (Juris Net LLC, 2006) 67-73 and S. Jagusch and A. Sinclair “The Limits of Protection for Investments and Investors under the Energy Charter Treaty”, ibidem, 89-103. See also Sinclair (n. 30); and Ben Hamida (n. 67). 86. See the Sweden-Bulgaria BIT (1994) at Art. 1(c), cited by Gaillard, “Investment and Investors Covered by the Energy Charter Treaty”, op. cit., p. 71. See also Generation Ukraine v. Ukraine, ICSID Case No. ARB/00/9, Award 16 September 2003, paras. 15.7 and 15.9. 87. Plama Consortium Limited v. Republic of Bulgaria, para. 31. 88. Ibidem, paras. 155-165.

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Services to clarify in which case no exercise or other action by a contracting state to deny a covered investor the benefits of the treaty would be required. Article VI stipulates that: “The benefits of this Framework Agreement shall be denied to a service supplier who is a natural person of a non-member State or a juridical person owne d or controlled by person s of a non-member State constituted under the laws of a member State, but not engaged in substantive business operations in the territory of member States.” On the substantial business requirement, the tribunal held that the lack of substantial business activity “cannot be made good with business activities undertaken by an associated but different legal entity”, even where the latter owns or controls the claimant. The requirement of ownership and control by a third party is also difficult to determine and may prove highly controversial. In the tribunal’s view, “ownership includes indirect and beneficial ownership; and control includes control in fact, including an ability to exercise substantial influence over the legal entity’s management, operation and the selection of members of its board of directors or any other managing body”. The burden of proof to establish the lack of substantial business activity falls with the respondent state. This was also confirmed by the Generation Ukraine v. Ukraine 89 case. In this case, the claimant was a company registered in the US which had established a subsidiary in Ukraine. Ukraine invoked Article 1(2) of the US-Ukraine BIT to deny the claimant the advantages of the BIT because the claimant had no substantial business in the US and was in fact controlled by Canadians. Article 1(2) provides: “Each Party reserves the right to deny to any company the advantages of this treaty, if nationals of any third country control such company and, in the case of a company of the other Party, that company has no substantial business activities in the territory of the other Party or is controlled by nationals of a third country with which the denying Party does not maintain normal economic relations.” However, Ukraine failed to produce evidence to support the assertion and therefore the objection was not retained. The Tribunal concluded that “this [the denial of benefits clause] is not, as the Respondent [Ukraine] appears to have assumed, a jurisdictional hurdle for the Claimant to overcome in the presentation of its case; instead, it is a potential filter on the admissibility of claims which can be invoked by the respondent State”.90 Finally the tribunal found that denial of Part III investment Protection benefits under Article 17(1) could only be prospective and that it had

89. Generation Ukraine Inc. v. Ukraine, ICSID Case No. ARB/00/9, 16 September 2003. 90. Generation Ukraine, para. 15.7.

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jurisdiction under Part V to hear the merits of these claims, which arose prior to the time the investor was notified of the denial of benefits. In anticipation of potential disputes, a number of investment treaties provide for consultations when the lack of meaningful links between a company and contracting party is at issue. The US BIT practice has provided for examples of prior recourse to consultations to seek a mutually satisfactory resolution to the matter.91 Though in different terms, NAFTA Article 1113(2) also provides for a form of prior notification and consultation. Since recent US and Germany model BITs no longer offer this possibility, the interpretation of requirements to be met for the exercise of the right to deny will be increasingly submitted to judicial scrutiny.

2. ICSID Convention If a dispute is submitted to ICSID, it must qualify for coverage not only under the investment treaty but also under the ICSID Convention. That means that each Party must be either an ICSID Convention Contracting State or a national of another Contracting State, and that their dispute must be a legal dispute arising directly out of an investment under both the ICSID Convention and the investment treaty in question. With the evolving legal order, however, the rule of nationality has lost some of its importance. As A. Broches, one of the main drafters of the ICSID Convention noted: “… The significance of nationality in traditional instances of espousal of a national’s claim should be distinguished from its relatively unimportant role within the framework of the Convention. In the former case, the issue of nationality is of substantive importance as being crucial in determining the right of State to bring an international claim, while under the Convention it is only relevant as regards the capacity of the investor to bring a dispute before the Centre.”92 Article 25(1) of the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington Convention) provides that: “The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, 91. Dolzer and Stevens, (n. 15) at 42. See the reference made to the text of the US and Morocco BIT (1985), at Art. I(2). 92. A. Broches, Chairman’s Report on the Preliminary Draft of the Convention, 9 July 1964, doc. Z11, reprinted in ICSID, Documents Concerning the Origin and Formulation of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States Vol. II, (1968) at 557, 579-582.

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which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.” With respect to legal persons, a national of a Contracting State is defined in Article 25(2) as: “Any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have ag reed should be treated as a national of another Contracting State for the purposes of this Convention.” The Convention in its Article 25(2)(a) requires the claimants to establish that they had the nationality of a Contracting State on the date on which the parties consented to ICSID’s jurisdiction. Article 25(2)(b) allows a foreign investor and the host State to agree that the local company, established in the host state by the foreign investor in order to make the investment, may be considered as a national of another Contracting State in order that the local subsidiary may have recourse to available ICSID arbitration.93 These narrowly circumscribed conditions of Article 25(2)(b) allow a departure from the principle of incorporation or siege social in favour of foreign control. As explained by A. Broches, the purpose of the control test in the second part of Article 25(2)(b) is to expand the jurisdiction of ICSID.94 The Energy Charter Treaty, although using place of incorporation as a criterion for its application to investors, specifically provides the agreement

93. Several cases dealt with this question: Holiday Inns v. Morocco; Klöckner v. Cameroon; Amco Asia v. Indonesia; Vacuum Salt v. Ghana; Aucoven v. Venezuela; Soabi v. Senegal. 94. “There was a compelling reason for this last provision. It is quite usual for host States to require that foreign investors carry on their business within their territories through a company organised under the laws of the host country. If we admit, as the Convention does implicitly, that this makes the company technically a national in the host country, it becomes readily apparent that there is need for an exception to the general principle that the Centre will not have jurisdiction over disputes between a Contracting State and its own nationals. If no exception were made for foreign-owned but locally incorporated companies, a large and important sector of foreign investment would be outside the scope of the Convention” A. Broches, “The Convention on the Settlement of Investment Disputes Between States and Nationals of Other States” (1972) 136, Recueil des Cours de l’Académie de Droit International, 331 at 358-9 and 361.

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required for the application of Article 25(2)(b) of the ICSID Convention. In its Article 26(7) it states that: “An Investor other than a natural person which has the nationality of a Contracting Party to the dispute on the date of the consent in writing referred to in paragraph (4) and which, before a dispute between it and that Contracting Party arises, is controlled by Investors of another Contacting Party, shall for the purpose of Article 25(2)(b) of the ICSID Convention be treated as a ‘national of another Contracting State’ […].” A similar approach was taken in the draft MAI which included a blanket consent to the controlled enterprise having standing to bring a claim directly on its own behalf, whether in ICSID or under other MAI dispute settlement options.95 A somewhat different approach was taken in NAFTA.96 The question of the judicial person’s nationality could be clarified through an agreement between the host state and the investor. Such an agreement cannot however create a nationality that does not exist. An agreement on nationality was very useful in the case MINE v. Guinea.97 An agreement between the parties providing for the settlement of their dispute by ICSID arbitration stated that the parties specified that the investor was Swiss

95. “Standing of the Investment: An enterprise constituted or organised under the law of a Contracting Party but which, from the time of the events giving rise to the dispute until its submission for resolution under paragraph 2.c. was an investment of an investor of another Contracting Party, shall, for purposes of disputes concerning that investment, be considered ‘an investor of another Contracting Party’ under this article and a ‘national of another Contacting State’ for purposes of Article 25(2)(b) of the ICSID Convention regarding a dispute not submitted for resolution by the investor which owns or controls it”. The MAI negotiators inserted this provision because they were concerned to provide a more efficient and economically rational remedy for the many cases in which the investment was not wholly owned by the foreign investor. 96. NAFTA parties, two of which (Canada and Mexico) were not parties to the ICSID Convention, included Article 1117, Claim by an Investor of a Party on Behalf of an Enterprise, which provides in part: “1. An investor of a Party, on behalf of an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly, may submit to arbitration under this Section a claim that the other Party has breached an obligation under: … Section A [Investment Protection] … and … the enterprise has incurred loss or damage by reason of, or arising out of, that breach […]” Similar language can be found in Article 24(b) of the 2004 US Model BIT, “Submission of a Claim to Arbitration”. 97. MINE v. Guinea, as discussed in Schreuer (n. 17).

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(incorporated in Lichtenstein, a non ICSID Party but under Swiss control).98 Definitions of corporate nationality in treaties providing for ICSID jurisdiction w ill be important for the dete rmin ation of whether the nation ality requirements of Article 25(2)(b) have been met. A question that arises is how closely tribunals should examine foreign control and the nationality of such control. Amco v. Indonesia,99 Klöckner v. Cameroon100 and AMT v. Zaire101 involved a local subsidiary incorporated in the host state. The protection was granted to the foreign investor for investments made through a local company in the host state.102 In Amco v. Indonesia for instance, the Tribunal looked at the first instance of control103 and held that: “The concept of nationality is there a classical one, based on the law under which the juridical person has been incorporated, the place of incorporation and the place of the social seat. An exception is brought to this concept in respect of juridical persons having the nationality, thus defined, of the Contracting State Party to the dispute, where said juridical persons are under foreign control […].”104 In Banro v. Democratic Republic of Congo 105 Banro Resource Corporation was the Canadian parent company that signed a concession agreement with the Congolese state. The concession agreement contained an ICSID arbitration agreement, though it was not effective for Banro since Canada was not Party to the ICSID Convention. No BIT existed between Congo and Canada. Banro Resource Corporation subsequently transferred its rights under the concession agreement to Banro American Resource, a wholly owned US subsidiary. A BIT existed between Congo and the US. The tribunal found that Banro American could not avail itself of its Canadian parent’s consent to

98. According to C. Schreuer, “An agreement on the investor’s nationality need not be made in the form of an express stipulation. Consent to ICSID’s jurisdiction expressed in a direct agreement between the parties implies an understanding that the investor fulfils the Convention’s nationality requirements. This would hold true only if two conditions are fulfilled: the host State must have expressed its consent specifically with respect to the particular investor […] and the parties must have been fully aware of the circumstances surrounding the investor’s nationality”, Schreuer (n. 17). 99. Amco Asia Corporation, Pan American Development Ltd. and P.t. Amco Indonesia v. The Republic of Indonesia, Decision on Jurisdiction, ICSID case No. ARB/81/1, 25 September, 1 ICSID reports. 100. Klöckner v. Cameroon , Award, ICSID case No. ARB/81/2, 21 October 1983, 2 ICSID Reports. 101. American Manufacturing & Trading (AMT) v. Zaire, Award, ICSID Case No. ARB/93/1, 21 February 1997. 102. For a detailed analysis of these decisions and commentaries see E. Gaillard, La jurisprudence du CIRDI (Pédone, Paris, 2004); Schreuer (n. 17). 103. C. Schreuer points out that there was no need to go further since the determination of the controlling nationality was of no relevance since all the parties involved were Contracting States. 104. Amco, p. 396. 105. Banro v. Democratic Republic of Congo, Award, 1 September 2000, (2003)17 ICSID Rev-FILJ 382.

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ICSID arbitration under the concession agreement, as that consent was invalid and could not be transferred due to the fact that Banro Resource did not have the requisite nationality at the time the concession agreement was entered into and therefore could not transfer any valid consent to Banro American. It therefore found that the requirements of the Article 25(2)(b) of the ICSID Convention were not fulfilled. The Tribunal indicated that: “In view of the approach adopted by the jurisprudence of ICSID tribunals concerning relationships between companies of the same group, [it] could have addressed the issue of jus standi of Banro American in a flexible manner if the issue raised by the present case were limited to the jus standi of a subsidiary in the presence of an arbitration clause which concerns the parent company only. But this is not the case.”106 A different decision was reached by the Tribunal in the case Aucoven v. Venezuela.107 Venezuela objected to the Tribunal’s jurisdiction by pointing out that Aucoven108 was in fact controlled by ICA Holding, a company incorporated under the laws of Mexico, and therefore it could not initiate an ICSID arbitration proceeding, since Mexico was not a Contracting State of the ICSID Convention. Venezuela claimed that the transfer of 75% of Aucoven’s shares from ICA Holding to ICATECH (a US company) did not diminish the Holding’s control over Aucoven’s operations in Venezuela. It further stated that even if the parties had agreed on majority shareholding as constituting control, the pervasive control by Mexican nationals over, and involvement in the affairs of Aucoven should lead the Tribunal to decline jurisdiction. On 27 September 2001, the Tribunal upheld jurisdiction on the basis that the tests

106. Idem, para. 10. See further paras. 11-12, in which the tribunal added that “[…] in general, ICSID tribunals do not accept the view that their competence is limited by formalities, and rather they rule on their competence based on a review of the circumstances surrounding the case, and, in particular, the actual relationships among the companies involved. […] It is for this reason that [they] are more willing to work their way from the subsidiary to the parent company rather than the other way around. Consent expressed by a subsidiary is considered to have been given by the parent company, the actual investor, whose subsidiary is merely an ‘instrumentality.’ The extension of consent to subsidiaries that are not designated or not yet created, even following a transfer of shares, is less readily accepted”. 107. Autopista Concesionada de Venezuela [Aucoven] v. Bolivarian Republic of Venezuela, Decision on Jurisdiction, 27 September 2001, published in (2001)16 ICSID Review 469. 108. The arbitration was brought under the ICSID arbitration clause contained in a concession agreement with Venezuela for the construction and maintenance of two major highways linking Caracas to La Guaira. The claimant is a company incorporated under the laws of Venezuela and owned by ICATECH Corporation, a US company. On 24 January 1996, ICA and Baninsa consortium incorporated the Autopista Concesionada de Venezuela, Aucoven C.A., a Venezuelan corporation, to serve as concessionaire. On 23 December 1996, the claimant entered into the concession agreement with Venezuela.

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chosen by the parties to define foreign control were reasonable. The Tribunal held that “an Arbitral Tribunal may not adopt a more restrictive definition of foreign control, unless the parties have exercised their discretion in a way inconsistent with the purpose of the [ICSID] Convention.”109 It added that: The Convention does not contain any definition of the objective requirements such as foreign control. It cited A. Broches who had stated that: the purpose of Article 25(2)(b) being to indicate the outer limits within which disputes may be submitted to conciliation or arbitration under the auspices of the Centre, the parties should be given ‘the widest possible latitude’ to agree on the meaning of nationality. Any definition of nationality based on a ‘reasonable criterion’ should be accepted.110 As a result, the Tribunal “must respect the parties’ autonomy and may not discard the criterion of direct shareholding, unless it proves unreasonable. Direct shareholding confers voting right, and, therefore, the possibility to participate in the decision-making of the company. Hence, even if it does not constitute the sole criterion to define ‘foreign control’, direct shareholding is certainly a reasonable test for control.”111

3. Nature of the investor Private or public entity? The ICSID definition is not explicit as to whether eligibility is limited to investors who are private entities or whether they could be state-controlled.112 ICSID was confronted with this question of the access to the Centre of an investor with legal personality but controlled by a state in the case CSOB v. Slovak Republic 113 (the state retained 65% of the capital). The tribunal noted that the term “investor” in the Convention, did not exclusively concern the companies with private capital but also companies partially or entirely controlled by a state.114 It therefore decided that a legal person could have access as an investor to proceedings under ICSID unless it acts as a state agent or undertakes a governmental function.115

109. See discussion on the case by E. Gaillard (n. 102); E. Teynier “Notion d’investisseur : sentences commentées” in (2003) 2 Gazette du Palais, Les Cahiers de l’Arbitrage, 2e partie. 110. Broches (n. 94) at 361. 111. Aucoven, paras. 120-1. 112. On this issue see the discussion by S. Manciaux: Investissements étrangers et arbitrage entre États et ressortissants d’autres États : trente années d’activité du CIRDI (Travaux du Centre de recherche sur le droit des marchés et des investissements internationaux, Paris, Litec, 2004). 113. Ceskoslovenska Ochodni Banka (CSOB) v. Slovak Republic, ICSID case ARB/97/4, Decision on Jurisdiction, 24 May 1999. 114. CSOB v. Slovak Republic, para. 16. 115. Idem, paras. 17, 20-25.

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Some investment agreements make it clear that state entities are included. For instance, the 2004 US Model BIT and Canada Model FIPA cover governmentally owned or controlled entities. According to Article 1, Definitions, enterprise means any entity constituted or organised under applicable law, whether or not for profit, and whether privately or governmentally owned or controlled […] [emphasis added]. Similarly, Article 13(a)(iii) of the Convention establishing the Multilateral Investment Agency, defines eligible investors to include a juridical person “whether or not is privately owned […]” [emphasis added]. Some investment agreements include in addition to state entities, the government itself. For instance, in the 1996 Czech Republic-Kuwait BIT and in the 2001 Belgium-Saudi Arabia BIT, the Government qualifies as an investor.116 Different legal forms. Some BITs include language indicating that all legal entities, regardless of form may be considered investors. The US and Canada Model BITs for instance, provide that investors may consist of legal entities including a corporation, trust, partnership, sole proprietorship, joint venture, association, or similar organisation; and a branch of any such enterprise. The Swiss Model BIT also provides that the term investor refers to “legal entities including companies, corporations, business associations and other organisations”. The German Model BIT, in addition to the above forms of companies, includes also non-profit entities in the definition of “investor”. In its Article 1.2a), it defines “companies” to include “any juridical person as well as any commercial or other company or association with or without legal personality […] irrespective of whether or not its activities are directed at profit” [emphasis added]. In the case Impregilo v. Pakistan,117 based on the Italy-Pakistan BIT, the tribunal found that it did not have jurisdiction rationae personae because Impregilo was only one of the companies of a joint venture and could not bring a claim on behalf of the others. 118 Pakistan argued inter alia that Impregilo, which claimed to be “entitled to claim the entirety of the

116. A number of governments expressed some concern about the insistence of their counterparts in BIT negotiations to include the Government itself as an investor, in particular with respect to national security issues. 117. Impregilo S.p.A. v. Pakistan, ICSID case No. ARB/03/3, Decision on Jurisdiction, 22 April 2005. 118. GBC (Ghazi-Barotha Contractors), a joint venture (“JV”) established under the laws of Switzerland, concluded two contracts (“the Contracts”) in 1995 with the Pakistan Water and Power Development Authority (“WAPDA”). The Contracts called for the construction of a barrage downstream and the construction of a channel respectively. Impregilo, an Italian company, was one of the five joint venture participants. The JV was established between an Italian, German, French, and two Pakistani companies, and Impregilo was selected to act as “leader” of the JV.

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damages suffered by GBC because of its role in the JV with the partners”, lacked locus standi due to the fact that GBC itself had no legal personality. Moreover, the respondent continued, the claimant could not have the right to bring claims on behalf of the other parties of the JV, as the BIT was only concluded to confer privileges to Italian investors. The tribunal, citing a treatise on the drafting history of the ICSID Convention, indicated that “legal personality is a requirement for the application of Art. 25(2)(b) and that a mere association of individuals or of juridical persons would not qualify”. As a result, the tribunal found that Impregilo was not able to bring claims on behalf of the JV. The tribunal then examined whether Impregilo could make claims on behalf of the other participants in the JV. The tribunal reiterated that “consent of the parties is the cornerstone of the jurisdiction of the Centre”. Due to the fact that the other investors did not fall within the ambit of the BIT, Impregilo could not make claims on their behalf.

4. Rights of Shareholders to bring claims Investment protection treaties in their definitions of investments very often include shares or participation in companies as forms of investment. The US-Argentina BIT 119 for instance which is the basis of numerous concluded and pending cases, includes in its definition of “investment”: “A company or shares of stock or other interests in a company or interests in the assets thereof.” An investment may therefore include shareholders that may be controlling or non-controlling; they may be majority or minority and they may be direct or indirect through another company. Barcelona Traction120 recognised the central role of shareholders as investors. In this case, the ICJ held that the state of nationality of the majority shareholders (Belgium) of a company incorporated in Canada was not entitled to pursue claims against Spain for damage done to the company.121 The ICJ Chamber held: “Notwithstanding the separate corporate personality, a wrong done to the company frequently causes a prejudice to its shareholders. But the mere fact that damage is sustained by both company and shareholder does not imply that both are entitled

119. US-Argentina BIT, entered into force on 20 October 1994. 120. Case Concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), 5 February 1970 (1970) I.C.J. Reports 3 at 35-36, 9 I.L.M. 227. 121. For a discussion on the Barcelona Traction case see I. Laird “A Community of Destiny – The Barcelona Traction case and the Development of Shareholder Rights to Bring Investment Claims” in T. Weiler (ed.), International Investment law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron, May 2005); R. Higgins, “Aspects of the Case Concerning the Barcelona Traction Company” (1971) 11 Virginia J. Int. Law.

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to claim compensation […]. In such cases, no doubt, the interests of the aggrieved are affected, but not their rights. Thus whenever a shareholder’s interests are harmed by an act done to the company, it is to the latter that he must look to institute appropriate action; for although two separate entities may have suffered the same wrong, it is only one entity whose rights have been infringed.”122 The Court suggested however that international law may provide for three narrow exceptions in which shareholders’ claims may be brought in particular where: i) the rights of shareholders are directly affected; ii) the company has ceased to exist in the country of incorporation; or iii) the state of incorporation lacks capacity to take action. It is interesting to note that the ICJ was well aware of the new trends in respect of the protection of foreign investors under the growing web of bilateral investment treaties.123 On this point it held that: “Considering the important developments of the last half-century, the growth of foreign investments and the expansion of international activities of corporations […] and considering the way in which economic interests of States have proliferated, it may at first sight appear surprising that the evolution of law has not gone further and that no generally accepted rules in the matter have crystallised on the international plane […]. Thus, in the present State of the law the protection of shareholders requires that recourse be to treaty stipulations or special agreements directly concluded between the private investors and the State in which the investment is placed.”124

122. (1970) I.C.J. Reports 3, at 35. 123. Judge Jessup in his separate opinion stated the following: “The International Court of Justice in the instant case is not bound by formal conceptions of corporate law. We must look at the economic reality of the relevant transactions and identify the overwhelmingly dominant feature.” The overwhelmingly dominant feature in the affairs of Barcelona Traction was “control which may constitute the essential link”. At n. 1. 124. Ibid., at 46-47. The Court identified these BITs and other agreements as a lex specialis – thus allowing the conclusion that customary international law had not yet develope d and that recourse of shareholders can only be found in international instruments such as BITs or the Washington Convention. It should be noted that 1970 was only four years since the entry into force of the Washington Convention (1966) and there were only a few hundred BITs instead of the thousands today.

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As it was to be expected, this decision drew a considerable discussion.125 It also constituted the basis for Argentina’s defence126 in the numerous claims brought against this country in the recent years. However, an important element to retain in relation to this case is that, as the ICJ itself recognised, it was decided under customary international law and limited to the exercise of diplomatic protection and did not rule on the protection of shareholders in a corporation outside of that context under investment protection agreements. A few years later, a Chamber of the ICJ, in the case concerning Elettronica Sicula S.p.A. (ELSI),127 permitted the US to bring a claim against Italy on behalf of US shareholders with respect to their wholly owned Italian company, ELSI. This case was based on a claim brought by the ELSI shareholders whose plant and assets were requisitioned by local Italian authorities, allegedly interfering with certain rights of the shareholders to own and manage the company. In that case the Chamber did not rule on the basis of Barcelona Traction, but rather focused on terms of the governing Treaty of Friendship, Commerce and Navigation, which expressly provided for the protection of US shareholders in Italy. Since then, the jurisprudence related to investor-state disputes has decided in favour of the right of shareholders to be accepted as claimants with respect to the portion of shares they own or control.128 Minority shareholders. Tribunals have found in some cases that minority shareholders may also rely on the inclusion of shares as part of the definition of qualifying investments in the investment treaty concerned and claim for loss of shareholder value rather than for loss or damage to the company.129

125. Recent writings on the rights of shareholders in general, with comments on the Barcelona Traction case include: C.H. Schreuer, “Shareholder Protection in International Investment Law”, (2005) 2(3) Transnational Dispute Management, available at www.transnational-dispute-management.com; S. Alexandrov, “The ‘Baby Boom’ of Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals – Shareholders as ‘Investors’ under Investment Treaties”, (2005) 6(3) The Journal of World Investment and Trade. 126. Argentina repeatedly stated in its defence that the shareholders are entitled to bring a claim only when their own rights have been infringed and not the rights of the corporation of which they are shareholders. 127. Elettronica Sicula S.p.A (US v. Italy), I.C.J. Reports, 20 July 1989, 15. 128. Schreuer (n. 125). 129. Other cases which dealt with the rights of the minority shareholders are: Compania de Aguas Aconquija, S.S. & Compagnie Générale des Eaux v. Argentine Republic (the Vivendi case), ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, 6 ICSID Reports 340; Champion Trading Co. and Others v. Arab Republic of Egypt, ICSID Case No. ARB/02/9, Decision on Jurisdiction, 21 October 2003; LG&E Energy Corp. v. Argentine Republic, ICSID Case No. ARB/02/01, Decision on Objections to Jurisdiction, 30 April 2004.

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AAPL v. Sri Lanka 130 was a case based on the UK-Sri Lanka BIT. AAPL was a minority shareholder in a Sri Lankan company. Its status was never challenged nor its right to bring a claim. In Lanco v. Argentina, 131 18.3% shareholding was sufficient to find jurisdiction as an investment. It was the first time an ICSID tribunal expressly recognised a minority shareholder’s right to asset claims under an investment treaty.132 The Tribunal noted that there was nothing in the Treaty that required an investor in the capital stock to have either control over the administration of a company, or a majority share, in order to qualify as an investor for the purposes of the Treaty.133 The Tribunal further noted inter alia that Lanco was liable for all contractual obligations “to the extent of its equity share” and concluded that Lanco was a party to the Agreement “in its own name and right”.134 In CMS v. Argentina,135 the CMS Gas Transition Company (“CMS”) purchased shares of an Argentine company, Transportadora de Gas del Norte (“TGN”), pursuant to Argentina’s privatisation program in 1995. Argentina argued that CMS lacked standing to file its claim because it was merely a minority noncontrolling shareholder and thus did not have standing to claim damages suffered by TGN.136 The Tribunal ruled that the Convention did not require control over a locally-incorporated company in order to qualify under the Convention. It also ruled that the Convention does not bar a claim brought by a minority non-controlling shareholder such as CMS, observing that previous ICSID tribunals in also finding jurisdiction had “not been concerned with the question of majority [ownership] or control but rather whether shareholders can claim independently from the corporate entity”.137 In affirming the acceptance of this

130. AAPL v. Sri Lanka. Award, 27 June 1990, 4 ICSID Reports 246. 131. Lanco Int’l Inc. v. Argentina Republic, Preliminary Decision on Jurisdiction, 40 I.L.M.457, 463 (2001). 132. See Alexandrov (n. 125). 133. Lanco, Sect. 10. 134. Ibid., Sect. 12, 14. 135. CMS Gas Transmission Company v. The Republic of Argentina, ICSID case No. ARB/01/8, Decision on Objections to Jurisdiction , in (2003) 42 ILM 788, www.asil.org/ilib/cms-argentina.pdf. 136. The only claim that it could make, argued Argentina, was one regarding direct damages to its shares in TGN (infringement of voting rights) not for its proportionate share of TGN’s damages. Because the ICSID Convention does not provide a definition of the term “investment”, the Tribunal analysed both the preConvention commentary on ownership of shares and a line of cases dealing with the issue of majority ownership of control. The Tribunal ruled that the Convention did not require control over a locally-incorporated company in order to qualify under the Convention. 137. CMS, para. 55.

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concept, the Tribunal referred to the “approach now prevailing in international law in respect of claims arising out of foreign investments”.138 In Sempra v. Argentina,139 the Tribunal made findings in line with those cited above. Based on the definition of investment and investor in the US-Argentina BIT, it held that “there is no question that this is a broad definition, as its intent is to extend comprehensive protection to investors”.140 It then referred to previous tribunals acting under both ICSID and UNCITRAL rules [the Goetz, Enron, CMS and Enron (Additional Claim) Tribunals] which have concluded that “in the light of the very terms of the provision, it [the definition] encompasses not only the majority shareholders but also the minority ones, whether they control the company or not”.141 It finally concluded that “if the purpose of the Treaty and the terms of its provisions have the scope the parties negotiated and accepted, they could not now, as has been noted, be ignored by the Tribunal since that would devoid the Treaty of all useful effect”.142 In GAMI v. Mexico, 143 GAMI, a US company held 14 per cent equity interest in Grupo Azucarero Mexico S.A. de C.V. (GAM). After the Mexican government expropriated five of GAM’s sugar mills, GAMI initiated a NAFTA claim against Mexico. The tribunal held that GAMI had an independent right to seek redress for damages to its investment and the fact that it was “only a minority shareholder does not affect its right”.144 Indirect shareholders. In some cases the claimant is not the immediate shareholder of the affected company. This raises the issue whether an investor can claim for damages inflicted to a company of which it owns shares only indirectly through the intermediary of another company.

138. CMS, para. 49. 139. Sempra Energy International v. Argentina, ICSID case No. ARB/02/16, Decision on Objections to Jurisdiction, 11 May 2005. Sempra, participated in Argentina’s privatisation of the gas sector, a program beginning in 1989. It owns 43.09% share capital of Sodigas Sur S.A. (“Sodigas Sur”) and Sodigas Pampeana S.A. (“Sodigas Pampeana”), Argentine companies that hold licenses granted by Argentina to supply and distribute natural gas in several Argentine provinces. Sempra maintained that the suspension of licensee companies’ tariff increases that were based on the US producer index and the subsequent pesification of these tariffs pursuant to Law No. 25561, gave rise to a breach of investment protections afforded under the BIT. 140. Ibid., para. 93. 141. Idem. 142. Ibid., para. 94. 143. GAMI Investments, Inc. v. United Mexican States, Final Award, 15 November 2004. 144. GAMI, at 15, para 37. The US, in its submission argued that “[…] a minority noncontrolling shareholder may not bring a claim under the NAFTA for loss or damages incurred directly by an enterprise. A minority non-controlling shareholder has standing to bring a claim only for loss or damage to itself proximately caused by a breach”, Submission of the United States of America, 30 June 2003.

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In Azurix v. Argentina,145 the Tribunal found that “given the wide meaning of investment in the definition of Article, the provisions of the BIT [US-Argentina] protect indirect claims”. It cited the CMS Tribunal saying that “jurisdiction can be established under the terms of the specific provision of the BIT. Whether the protected investor is in addition a party to a concession agreement or license agreement with the host State is immaterial for the purpose of finding jurisdiction under those treaty provisions since there is a direct right of action of shareholder”. In Gas Natural SDG S.A. v. Argentina,146 Argentina also maintained that the claimant could not, pursuant to the BIT between Argentina and Spain, qualify as an investor under the BIT as it was only an indirect shareholder of the Argentine company. The Tribunal found that the claimant qualified within the definition of investment clearly stating that “assertion that a claimant under a Bilateral Investment Treaty lacked standing because it was only an indirect investor in the enterprise that had a contract with or a franchise from the State party to the BIT, has been made numerous times, never, so far as the Tribunal has been made aware, with success”. The Tribunal made clear that for example the CMS v. Argentina tribunal’s analysis “was very close to the analysis of the present Tribunal”. In Siemens v. Argentina,147 the underlying BIT between Germany and Argentina defined investment to include shares and other forms of interests in legal entities. The claim was brought by Siemens A.G., which wholly owned SNI A.G. Both German companies owned SITS S.A., an Argentinian company. Argentina argued that indirect claims could only be brought, if there was express authorisation to do so in the treaty. The tribunal rejected Argentina’s argument and concluded that the shareholder was allowed to bring proceedings for a wrong inflicted upon an indirect subsidiary: “The plain meaning of this provision [Article 1(1)b) of the Treaty] is that shares held by a German shareholder are protected under the Treaty. The Treaty does not require that there be no interposed companies between the investment and the ultimate owner of the company. Therefore, the 145. Azurix Corp. v. Argentina, ICSID case No. ARB/01/12, Decision on Jurisdiction, 8 December 2003. 146. Gas Natural SDG S.A. v. Argentina, Decision of the Tribunal on Preliminary Questions on Jurisdiction Case No. ARB/03/10, 17 June 2005. Gas Natural is a corporation organised under Spanish law and has its principal place of business in Spain. In 1992, the claimant took part in a tender offer by the Argentine government as part of the privatisation of its gas sector. It then participated in a consortium that purchased 70% of the shares of an Argentine corporation and formed an Argentine company. According to the claimant, it invested in Argentina in reliance on Law No. 23, 928 and Decree 2/28 of 1991, which established the parity and convertibility of the Argentine peso with the US dollar. The claimant alleged that the measures taken by the Argentine government pursuant to the emergency law breached the guarantees set forth in the BIT. 147. Siemens A.G. v. Argentine Republic, ICSID case No. ARB/02/8, Decision on Jurisdiction, 3 August 2004, 44 ILM 138 (2005).

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literal reading of the Treaty does not support the allegation that the definition of investment excludes indirect investments.”148 In Enron v. Argentina,149 the claimants owned 35.2 per cent of the shares in TGS, an Argentine corporation. Enron’s shareholdings in the affected local company TGS was not only indirect but involved a number of other locally registered companies and several layers of ownership. Argentina again argued the governmental measures affected only TGS. The tribunal decided not to repeat the reasoning of prior ICSID tribunals on this point. It upheld the “concept that shareholders may claim independently from the corporation concerned, even if those shareholders are not in the majority or in control of the company”150 but was nevertheless concerned by the several intermediate companies that were also involved.151 It sought and found a solution in Argentina’s consent to arbitration – Enron had been specifically invited by Argentina to make its i nve s tm e nt an d t he inve s t ors h ad d ec is ion m aking p owe rs in the management of TGS.152 Therefore Enron had jus standi to pursue its claim.

Part II. Definition of “investment” I. Definition of “investment” in international instruments There is no single definition of what constitutes foreign investment. According to Juillard and Carreau, the absence of a common legal definition is due to the fact that the meaning of the term investment varies according to the object and purpose of different investment instruments which contain it.153 The multiplication of definitions of investment thus results from the proliferation of different sources.154

148. Siemens 149. Enron Corp. and Ponderosa Assets, L.P. v. Argentine Republic, ICSID case No. ARB/01/3, Decision on Jurisdiction, 14 January 2004. 150. Enron, para. 39. 151. The tribunal noted that: “[…] The Argentine Republic has rightly raised a concern about the fact that if minority shareholders can claim independently from the affected corporation, this could trigger an endless chain of claims, as any shareholder making an investment in a company that makes an investment in another company, and so on, could invoke a direct right of action for measures affecting a corporation at the end of the chain […] there is indeed a need to establish a cut-off point beyond which claims would not be permissible as they would have only a remote connection to the affected company.” Enron, paras. 50, 52. 152. See analysis by Schreuer (n. 125). 153. D. Carreau, P. Juillard, Droit international économique (3e édition, Dalloz, Paris, 2007), 403 : “La difficulté que l’on rencontre, lorsque l’on veut proposer une définition de l’investissement international, vient de la multiplicité des conceptions en cette matière – cette multiplicité des conceptions, en définitive, ne reflétant que la prolifération des sources.”

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Customary international law and earlier international agreements did not use the notion of investment but the one of “foreign property”155 dealing in a similar manner with imported capital and property of long-resident foreign nationals.156 According to Juillard the static notion of property has been substituted by the more dynamic notion of investment which implies a certain duration and movement.157 Traditionally, investments have been categorised as either direct or portfolio investments. During the nineteenth and the early years of the twentieth century, the predominant form of foreign investment was portfolio investment, mainly in the form of bonds issued by governments of developing countries floated in the financial markets. The first half of the twentieth century was marked by the contraction of investment flows brought about by the two Wars, stagnation of direct investment and virtual collapse of portfolio investment in developing countries.158 The post-war period was characterised by the growing expansion of multinational corporations setting up wholly or majority owned subsidiaries with the consequent change in the form of foreign investments which became predominantly direct in character. The increase of direct investment in several sectors led to the steady evolution of new forms of investment, when the investor enters a country and markets a product or service but does not own the asset.159 A great variety of assets are included today in the definition of investment and broad definitions appeared in national investment codes and international instruments. A narrow approach was followed by earlier agreements which were aiming at the gradual liberalisation of capital movements and preferred to enumerate the transactions covered by these agreements. Today, most 154. See also Ph. Khan, “Les investissements internationaux, nouvelles donnes : vers un droit transnational de l’investissement”, in Ph. Kahn, Th. Wälde (eds.), New Aspects of International Investment Law (Martinus Nijhoff Publishers, Leiden/Boston 2007) 17-19. See also Id., “L’extension de la notion d’investissement” in J. Bourrinet (ed.), Les investissements français dans le tiers-monde (Economica, Paris, 1984). 155. UNCTAD “Scope and Definition”, UNCTAD Series on issues in international investment agreements (1999) UNCTAD/ITE/IIT/11 (Vol. II). 156. See for instance the “OECD Draft Convention on the protection of foreign property” (OECD, Paris, 1967). 157. “[…] la notion d’investissement, notion dynamique, a fait son apparition dans la langue du droit international, et s’est substituée à la notion de bien, notion statique. La notion d’investissement est, en effet, une notion dynamique, en ce sens qu’elle ne peut se concevoir que dans la durée et dans le mouvement […] ” P. Juillard, “L’évolution des sources du droit des investissements” (1994), 250 Recueil des cours de l’Académie de droit international, 9-216, 24. 158. Ibid., 11. 159. These new forms are found in license agreements, management contracts, joint venture, service and production sharing agreements in which there is transfer of capital but no establishment of an entity, nor is the transaction executed through the stock exchange.

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international investment instruments, in particular investment protection treaties, adopt a broad definition of investment.

A. OECD Code of Liberalisation of Capital Movements Among the liberalisation instruments, the OECD Code of Liberalisation of Capital Movements160 is the main representative example. The Code covers all categories of capital operations, including direct investment. In the Code, the investor’s control over the company is a necessary element of a direct investment which is defined in its Annex A as follows: “Investment for the purpose of establishing lasting economic relations with an undertaking such as, in particular, investments which give the possibility of exercising an effective influence on the management thereof: A. In the country concerned by non-residents by means of: 1. Creation or extension of a wholly-owned enterprise, subsidiary or branch, acquisition of full ownership or an existing enterprise; 2. Participation in a new or existing enterprise; 3. A loan of five years or longer. B. Abroad by residents by means of: 1. Creation or extension of a wholly-owned enterprise, subsidiary or branch, acquisition of full ownership or an existing enterprise; 2. Participation in a new or existing enterprise; 3. A loan of five years or longer.” The existence of a direct investment requires the combination of several elements: ●

There should be a contribution.

●

This contribution should be in capital.

●

It should allow the establishment of durable relations between the investor and an enterprise.

●

The investor should be in a position to exercise a real influence on the management of the company where it had invested. A similar list of elements is found in the OECD Benchmark Definition of

Foreign Direct Investment (Benchmark Definition), which sets the standard for foreign direct investment statistics. This definition characterises direct investment as follows: “Direct investment is a category of cross-border investment made by a resident in one economy (the direct investor) with the objective of establishing a lasting interest in an enterprise resident in an economy 160. See www.oecd.org/dataoecd/10/62/4844455.pdf.

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other than that of the investor (the direct investment enterprise). The motivation of the direct investor is a strategic long-term relationship between the direct investment and the enterprise which allows a significant degree of influence by the direct investor in the management of the direct investment enterprise. The lasting interest’ is evidenced where the director investor owns at least 10 per cent of the voting power of the direct investment enterprise”. 161

B. Investment Agreements Most multilateral and bilateral investment treaties and trade agreements with investment chapters include a broad definition of investment. They usually refer to “every kind of asset” followed by an illustrative but usually non-exhaustive list of covered assets. Most of these definitions are openended and cover both direct and portfolio investment. Their approach is to give the term “investment” a broad, non exclusive definition, recognising that investment forms are constantly evolving. However, there are some agreements which provide a different approach to defining investment, setting forth a broad but exhaustive list of covered economic activities.162 Multilateral and Regional Instruments. The draft MAI defined investment broadly in terms of assets. It was however accompanied by an interpretative note stipulating that in order to qualify as an investment under the MAI, an asset must have the characteristics of an investment, such as the commitment of capital or other resources, the expectation of gain or profit or the assumption of risk.163 Article 1(6) of the Energy Charter Treaty defines investment as “every kind of asset” and refers to any investment associated with an economic activity in the energy sector. NAFTA, in its Article 1139 provides for a broad business activity related, exhaustive list of assets, with specific exclusions. Investments under the NAFTA include FDI, portfolio investment (equity securities), partnership and other interests and tangible and intangible property acquired “in the expectation […] of economic benefit”. Loan financing is only protected when funds flow within a business group or when debt is issued on a relatively long-term basis (more than three years). Contract rights not falling under other categories of investment are

161. OECD Benchmark Definition of Foreign Investment (Draft) – 4th Edition, DAF/INV/STAT(2006)2/REV. 3, 2007. 162. Rubins uses three categories of International Investment Agreements in order to organise the different approaches to defining investment: those which contain an “illustrative list of elements” (broad definition, most BITs), an “exhaustive list” (NAFTA) or a “hybrid list” (US-Singapore FTA for instance). See N. Rubins, “The Notion of ‘Investment’ in International Investment Arbitration” in N. Horn, S. Kroll (eds.), Arbitrating Foreign Investment Disputes (Kluwer Law International, The Hague, 2004). 163. See Schreuer (n. 17).

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covered only if they involve a “commitment of capital or other resources in the territory of a party […] to economic activity in such territory”. NAFTA complements its exhaustive list of investment categories with a negative definition, establishing certain types of property not to be considered investments, such as money claims arising solely from commercial contracts for the sale of goods or services. BITs. The broad formula which refers to “every kind of asset” has become a standard definition in most BITs 164 which contain a general statement followed by a non-exhaustive list of categories of covered investments directly or indirectly controlled by investors of either Party. An exception is the new Canadian Model FIPA which continues to use the NAFTA approach with a broad definition of investment combined with specific exclusions.165 According to some commentators, most BITs take four basic definitional dimensions into consideration: 1) the form of the investment; 2) the area of the investment’s economic activity; 3) the time when the investment is made; and 4) the investor’s connection with the other contracting state. 166 Usually, the broad definition is followed by a list that typically includes at least five categories: iii) Movable and immovable property which covers tangible property. iv) Interests in companies which usually covers debt and equity investment. v) Claims to money and claims under a contract having a financial value which suggests that investment includes not only property but also certain contractual rights. Some agreements however, such as BITs negotiated by Canada, Mexico and the United States exclude from the definition of investment claims to money that arise exclusively from commercial contracts for the sale of goods and services. In addition, some of these BITs also exclude from the definition of investment debt instruments with short-term maturity periods, usually less than three years (Mexico). vi) Intellectual property rights, which may include trademarks, patents and copyrights. In some investment agreements such as the 2005 UK Model BIT, intellectual property rights include “goodwill”, “technical processes” and “know how”. vii) Business concessions under public law, including concessions to search for, extract and exploit natural resources (1995 and 2001, German Model BITs, Art. 1).

164. Dolzer and Stevens (n. 15). 165. The 2004 Canada FIPA has recently undergone a revision which is reflected in the new definitions section reproduced in Annex 1.A1. 166. J.W. Salacuse and N.P. Sullivan, “Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and their Grand Bargain”, (2005) Harv. Int’l L.J. 67.

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Such a definition is sufficiently broad to encompass foreign direct investments as well as portfolio investment. There are BITs which expressly include in the list of covered assets bonds, debentures and other debt instruments (2007 Canada FIPA, 1998 Austria-Mexico BIT) as well as futures, options and other derivatives (2004 US Model BIT). While referring to the same broad asset-based definition, other BITs do not contain such a provision. Examples may be found in the 2005 Germany Model BIT and Turkey treaty practice. Under the 1994 US Model BIT, the notion of investment is described as “any kind of investment owned or controlled directly or indirectly” followed by a non-exhaustive list of asset categories falling within the definition of investment. The 2004 US Model BIT and the recent US FTAs represent a departure from the previous definition: they define investment broadly as every asset owned or controlled, directly or indirectly, by an investor, “which has the characteristics of an investment” and include a non-exhaustive list of “forms” such investments may take. Besides the typical “core” investment types, they also cover various debts instruments, “futures, options and other derivatives” and “turnkey, construction management production, concession, revenue sharing and other similar contracts”. They also include certain explanatory notes, designed to clarify certain elements of the definition.167 Hence, the “characteristics of an investment include the commitment of capital, the expectation of gain or profit, or the assumption of risk”.168

167. Footnote 1 stipulates that some forms of debt such as bonds, debentures, and longterm notes that are more likely to have the characteristics of an investment while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services are less likely to have such characteristics. Footnote 2 provides indications as to whether or not a particular type of license, authorisation, permit or similar instrument has the characteristics of an investment: “whether a particular type of license, authorisation, permit, or similar instrument (including a concession, to the extent that it has the nature of such an instrument) has the characteristics of an investment depends on such factors as the nature and extent of the rights that the holder has under the law of the Party. Among the licenses, authorisations, permits, and similar instruments that do not have the characteristics of an investment are those that do not create any rights protected under domestic law. For greater certainty, the foregoing is without prejudice to whether any asset associated with the license, authorisation, permit, or similar instrument has the characteristics of an investment”. Footnote 3 clarifies that the term “investment” does not include an order or judgment entered in a judicial or administrative action. 168. Some forms of debts, such a bonds, debentures and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics. (US-Singapore FTA, Art. 15.1.13; US-Chile FTA, Art. 10.27; US-Australia FTA, Art. 11.17.4; US-DR-CAFTA, Art. 10.28; US-Morocco FTA, Art. 10.27; US Model BIT, Art. 1).

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The new Canadian Model FIPA which replaces the 2004 model still provides for a finite but more comprehensive definition of investments based on NAFTA’s Article 1139 definition. The highly detailed requirements for a loan to qualify as an investment which characterised the 2004 model no longer figure in the revised model, while intellectual property rights have been added to the list of covered assets. The new definition of investment still follows the NAFTA model by excluding ordinary commercial transactions from the definition of investment. It now reads as follows: “investment means: a) an enterprise; b) shares, stocks and other forms of equity participation in an enterprise; c) bonds, debentures, and other debt instruments of an enterprise; d) a loan to an enterprise; e) notwithstanding subparagraphs c) and d) above, a loan to or debt security issued by a financial institution is an investment only where the loan or debt security is treated as regulatory capital by the Party in whose territory the financial institution is located; f) an interest in an enterprise that entitles the owner to a share in income or profits of the enterprise; g) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution; h) interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory, such as under: i) contracts involving the presence of an investor’s property in the territory of the Party, including turnkey or construction contracts, or concessions such as to search for and extract oil and other natural resources, or ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise; i) intellectual property rights; and j) any other tangible or intangible, moveable or immovable, property and related property rights acquired in the expectation or used for the purpose of economic benefit or other business purpose; but investment does not mean, k) claims to money that arise solely from: i) commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Contracting Party to an enterprise in the territory of the other Contracting Party, or ii) the extension of credit in connection with a commercial transaction, such as trade financing, other than a loan covered by subparagraph d); or l) any other claims to money, that do not involve the kinds of interests set out in subparagraphs a) to j).”

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In Article 1.2 of the Belgium-Luxembourg Model BIT (2002), investment is defined as “any kind of asset and any direct or indirect contribution in cash, in kind or in services, invested or reinvested in any sector of economic activity”. Article 1.2 of the Japan/Korea BIT (2003) provides a straightforward definition of investment that includes namely “[…] an enterprise; […] shares, stocks or forms of equity participation […] bonds, debentures, loans and other forms of debt, including rights derived there from, […] rights under contracts, […] claims to money and to any performance under contract having a financial value, intellectual property rights, […] any other tangible and intangible […] property [...]”. In addition, the term investment includes “the amounts yielded by investment, in particular profit, interest, capital gains, dividends, royalties and fees”. While Article 1 of the Mexico-Greece BIT (2000) explicitly provides for a non-exhaustive definition of investment, it also provides a negative definition of investment “… but investment does not include, a payment obligation from, or the granting of a credit to a Contracting Party or to a state enterprise […] but investment does not mean, claims to money that arise […] from: i) commercial contracts for the sale of goods or services by an investor in the territory of a Contracting Party to a company or a business of the other Contracting Party; or ii) the extension of credit in connection with commercial transaction […]; iii) any other claims to money that do not involve the kinds of interests set out in subparagraphs a) through e).”

II. “Investment” for jurisdictional purposes The definition of investment is also crucial for the establishment of the jurisdiction of arbitral tribunals. Dispute settlement clauses in investment treaties usually provide for the submission of investment disputes between states and investors to arbitration. Foreign investors are frequently given the choice to submit the investment dispute to more than one dispute settlement mechanism. International arbitration under either the ICSID Convention or its Additional Facility is widely included in many investment treaties. Alternatively reference is frequently made to the Rules of arbitration of the International Court of Arbitration of the International Chamber of Commerce (ICC), the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) or to ad hoc arbitration under the UNCITRAL Arbitration Rules. Jurisdictional questions relating to the scope of arbitrable investment disputes may arise, no matter which forum of arbitration is selected, since the jurisdiction of an arbitral tribunal under an applicable BIT relies on a showing of the existence of an “investment.” At the same time it should be pointed out that neither the ICC, nor UNCITRAL nor

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SCC arbitration rules “filter claims through their own autonomous notion of investment as a condition of jurisdiction rationae materiae”.169 In this section the interplay between the definition of investment under investment treaties and the choice of different potential venues for the settlement of investment disputes is reviewed and compared.

A. Definition of investment and non-ICSID arbitration Recently one of the most critical question in BIT cases has been whether rights conferred by contract constitute covered investments. 1. Trade in goods. In the case Petrobart v. Kyrgyz Republic170 brought under the Energy Charter Treaty (ECT) under the auspices of the Arbitration Institute of the Stockholm Chamber of Commerce, the arbitral tribunal had to decide whether a contract for the sale of gas condensate, which did not involve any transfer of money or property as capital in a business, qualified as an investment under the ECT. It should be pointed out that in a previous action brought by Petrobart against the Kyrgyz Republic under Kyrgyz Foreign Investment Law, an UNCITRAL Tribunal declined jurisdiction. The question before the Stockholm Tribunal was whether the sale of goods constituted an investment under the ECT. In the Tribunal’s view: “There is no uniform definition of the term investment, but the meaning of this term varies (cf. Dolzer-Stevens, Bilateral Investment Treaties, 1995, p. 25-31, and Sacerdoti, Bilateral Treaties and Multilateral Instruments on Investment Protection, Collected Courses of the Hague Academy of International Law 1997, Tome 269, p. 305-310). While in ordinary language investment is often understood as being capital or property used as a financial basis for a company or a business activity with the aim to produce revenue or income, wider definitions are frequently found in treaties on the protection of investments, whether bilateral (BITs) or multilateral (MITs). The term investment must therefore be interpreted in the context of each particular treaty in which the term is used. Article 31(1) of the Treaty on the Law of Treaties provides, as the main rule for treaty interpretation, that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. It is obvious that, when there is a definition of a term in the treaty itself, that definition shall apply and the words used in the definition shall be interpreted in the light of the principle set out in Article 31(1) of the Treaty on the Law of Treaties.

169. S. Jagusch and A. Sinclair, “The Limits of Protection for Investments and Investors under the Energy Charter Treaty” in C. Ribeiro (ed.), Investment Arbitration and the Energy Charter Treaty (Juris Publishing, 2006), 73, 75. 170. Petrobart v. Kyrgyz Republic, Stockholm Chamber Case No. 126/2003, Final Award, 29 March 2005.

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The relevant treaty in this case is the Energy Charter Treaty which protects investments of an investor of one Contracting Party in the Area of another Contracting Party, and the terms Investor and Investment are defined in Article 1 of the Treaty.”171 In order to appreciate whether Petrobart’s right to payment for goods delivered constituted an investment the tribunal turned to Article 1(6) of the ECT. The tribunal found that relevant items of the provisions were Article 1(6)c) which covers claims to money and claims to performance pursuant to contract having an economic value and associated with an investment and Article 1(6)f) relating to any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector. “Economic Activity in the Energy Sector” is in Article 1(5) defined as “economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing, or sale of Energy Materials and Products except those included in Annex NI, or concerning the distribution of heat to multiple premises”. The Tribunal found that a right conferred by contract to undertake an economic activity concerning the sale of gas, including the right to be paid for such a sale, is an investment according to the Treaty. Although supported by some commentators who have interpreted the extensive definition of investment in the ECT to encompass proprietary rights of any sort, including claims to money based on sales contract,172 it has been pointed out by some others that this conclusion is not indisputable with regard to the requirement that the claims to money and performance be associated with an investment under Article 1(6)c).173 In NAFTA-based cases submitted to arbitration under the UNCITRAL rules, a few tribunals have shown some readiness to retain jurisdiction even when the governmental measures of the host state concern trade in goods, so long as those measures relate to an “investor” or its “investment” within the meaning of Chapter 11.

171. Ibid., pp. 69-70. 172. Th. Wälde, “Energy Charter Treaty-based Investment Arbitration – Controversial Issues”, (2004) The Journal of World Investment & Trade, 373, 409-410. 173. The reference to the presence of distribution facilities in the host state in the “understandings” which appear in the text of the Final Act for the adoption of the ECT regarding economic activities in the energy sector has also been interpreted as casting into doubt the conclusion that international supply contracts qualify as investments under Art. 1(6)(f). See further B. Poulain, “Petrobart vs. The Kyrgyz Republic – a few reservations regarding the Tribunal’s constructions of the material, temporal and spatial application of the Treaty” (2005) 2(5) Transnational Dispute management 1, www.tra nsnational-disp ute-management.com. See also F. Yala, “La notion d’investissement”, Gazette du Palais, December 2005, (2006) 3(2) Transnational Dispute management 22, 24-27 www.transnational-dispute-management.com.

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In Pope and Talbot v. Canada,174 the claimant challenged the implementation of the Canada-US Softwood Lumber Agreement and the allocations of export quota that had been made under that Agreement and alleged multiple breaches of the NAFTA. The respondent claimed that “softwood lumber” was a “good” and therefore the dispute related to trade in goods, which should be heard under Chapter 20, rather than Chapter 11, of the NAFTA. In response, the tribunal observed that the claimant had alleged breaches of the NAFTA that both related to, and harmed, the “investor” or its “investment” within the maning of Chapter 11. Assuming the truth of those allegations, the tribunal found jurisdiction over the claim. It added: “There is no provision to the express effect that investment and trade in goods are to be treated as wholly divorced from each other […].”175 In S.D. Myers, Inc v. Canada 176 the US company alleged that Canada violated Chapter 11 by banning the export of PCB waste to the United States where S.D. Meyers operated a PCB remediation facility. S.D. Meyers claimed that the promulgation of the export ban by Canada was done in a discriminatory and unfair manner. Unlike the Pope & Talbot tribunal, the one in S.D. Meyers looked first at the definition of “investment” contained in NAFTA and found that the Canadian subsidiary was an “enterprise” and therefore among the assets enumerated in Article 1139. In addition, the tribunal noted that the chapters of NAFTA form part of a “single undertaking” under which a measure can relate to an “investor” or its “investment” within the meaning of Chapter 11 even if the measures concern “goods” within the meaning of Chapter 3: “The chapters of the NAFTA are part of a ‘single undertaking’. There appears to be no reason in principle for not following the same preference as in the WTO system for viewing different provisions as ‘cumulative’ and complementary. The view that different chapters of the NAFTA can overlap and that the rights it provides can be cumulative except in cases of conflict, was accepted by the decision of the Arbitral Tribunal in Pope and Talbot. The reasoning in the case is sound and compelling. There is no reason why a measure which concerns goods (Chapter 3) cannot be a measure relating to an investor or an investment (Chapter 11).”177 Notably, although a measure concerning trade in goods does not necessarily preclude jurisdiction under Chapter 11, claimants must demonstrate that they were seeking to make, were making, or had made an investment in the territory of the host state to qualify as an “investor” under Chapter 11.178

174. Pope & Talbot, Inc. v. Government of Canada, UNCITRAL Award, 26 January 2000. 175. Idem, para. 26. 176. S.D. Myers, Inc. v. Government of Canada, Partial Award, 13 November 2000. 177. Idem., paras. 292-294. 178. See Bayview Irrigation District v. United Mexican States, ICSID Case No. ARB(AF)/05/1, Award on Jurisdiction, 11 June 2007.

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2. Debt and rights derived from shares. In the case Link-Trading v. Department for Customs of Republic of Moldova,179 the claimant submitted to an ad hoc UNCITRAL arbitration a claim under the 1993 US-Republic of Moldova BIT alleging to have suffered an indirect expropriation because of a change in the rates of duties and VAT exemptions, the effect of which was to destroy the economic viability of the claimant’s business consisting essentially of the duty-free import of consumer products into the Free Economic Zone of Chisinau and their resale to Moldovan customers. Since the BIT permits claims to expropriation to be brought to UNCITRAL arbitration if they constitute an investment dispute, the arbitral tribunal found that an investment was defined very broadly in Article I(1)a), including: “Every kind of investment in the territory of one Party owned or controlled directly or indirectly by […] companies of the other Party, such as equity, debt, and service and investment contracts; and includes: i) tangible and intangible property […] (V) any right conferred by law or contract, and any licences and permits pursuant to law.” The tribunal was satisfied with the evidence submitted by the claimant showing the existence of such investments, both equity and debt. In the tribunal’s view, the fact that an investment consists of debt financing did not appear to affect its characterisation as an investment under the BIT. The tribunal thus recognised to have jurisdiction over the subject matter of the dispute before it. In Eureko B.V. v. Poland,180 the claimant submitted to an ad hoc arbitration a dispute arising from the privatisation of a Polish insurance company and the related alleged breaches of the 1992 Netherlands-Poland BIT. Eureko sought protection for its investment in Poland which allegedly consisted not only of PZU 20% shareholding, but also of the rights derived from those shares, namely corporate governance rights and the right under certain conditions to acquire additional shares in the company. To establish whether the claimant made an investment entitled to protection, the tribunal noted that the term investment used in Article 1 of the Dutch-Polish BIT is very broad: covered investments include inter alia […] ii) rights derived from shares, bonds and other kind of interests in companies and joint ventures; iii) title to money and other assets and to any performance having an economic value; […] v) right to conduct economic activity […] granted under contract […]. The tribunal examined in turn the different rights, which Eureko derived from its shareholding in PZU and considered whether they amounted to investments entitled to protection under the treaty. The tribunal held that the grant to Eureko to its corporate governance rights derived from the shareholding as a key element of the investment had some economic value and are thus entitled to protection as well as the right to an international public offer. 179. Link-Trading v. Department for Customs of Republic of Moldova, UNCITRAL Arbitration, Award on Jurisdiction, 6 February 2001. 180. Eureko B.V. v. Republic of Poland, Partial Award on Liability, 19 August 2005. INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS – ISBN 978-92-64-04202-5 – © OECD 2008

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The Tribunal found that the Republic of Poland contracted obligations and Eureko acquired rights derived from its shareholding in PZU which were an investment entitled to protection under the Treaty. 3. Limitations as to what can be an investment. In the case William Nagel v. Czech Republic 181 brought under the 1990 UK-Czech BIT before the Arbitration Institute of the Stockholm Chamber of Commerce, the claimant filed a request of arbitration, arguing that he had been deprived of his rights, claims to money or to any contractual performance under a cooperation agreement with a Czech wholly owned state-enterprise created in order to make joint efforts to obtain the n ecessary lice nses to establish and operate a telecommunication business. The Czech authorities went on to hold a public tender for two mobile phone contracts, neither of which was awarded to Mr. Nagel. The tribunal had to determine first whether the claimant had an asset, which constituted an investment under the bilateral investment treaty. The tribunal found that the rights derived from a co-operation agreement between the Claimant and a state owned enterprise were not deemed to have a financial value, and therefore did not constitute an investment in the meaning of the bilateral investment treaty. The tribunal recognised that: “the question as to whether or not [Mr. X] was an investor who made an investment within the meaning of Article 1 of the Investment Treaty is an important question in this case.”182 Article 1(1) of the UK-Czech BIT contains a broad asset-based definition of investment, including claims to money or to any performance under contract having a financial value. The claimant argued that his rights arising from the Cooperation Agreement were indeed “investments” within the definition of the BIT because they were “claims to money or to any performance under contract having a financial value”. After a careful examination of the terms of the cooperation agreement, the arbitral tribunal came to the conclusion that the basic undertaking under the contract was that the parties should work together for the purpose of obtaining a licence. The tribunal considered that a claim could have financial value “only if it appears to be well-founded or at the very least creates a legitimate expectation of performance in the future.” In the tribunal’s view, the claimant’s mere prospects of obtaining the deal could not be raised to the level of legitimate expectations with a financial value since there was not and could not be a guarantee that a licence would in fact be obtained. The arbitral tribunal therefore concluded that Mr. Nagel’s rights under the Cooperation Agreement were not such as to constitute an “asset” and an “investment” within the meaning of Article 1 of the investment treaty. 181. SCC Case 49/2002, Award 9 September 2003, in 1 Stockholm Arbitration Report (2004) 141 with observations by Sarah Françoit-Poncet & Caline Mouawad. 182. Ibid.

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B. Definition of investment and ICSID arbitration Investor-state arbitration under the aegis of the ICSID Convention and ICSID Arbitration Rules deserves a separate analysis in consideration of its specific features. Unlike other arbitral regimes, bilateral and multilateral investment treaties which include ICSID clauses, provide for the submission of investment disputes between states and foreign investors under another multilateral treaty, namely the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States. As clearly put by A. Parra in these cases the dispute concerned must qualify for coverage not only under the bilateral or multilateral investment treaty, but also under the ICSID Convention.183 In other words, the dispute must be a legal dispute arising out of what is an investment for investment treaties as well as for ICSID Convention purposes. The outer limits of the jurisdiction ratione materiae of the Centre are clearly set out in Article 25(1) which provides as follows: “The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the centre by that State ) and a national of another Contacting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.” The term investment is not defined in the Convention. The relevant passage of the World Bank Executive Directors’ Report accompanying the Convention reads as follows: “no attempt was made to define the term ‘investment’ given the essential requirement of consent by the parties, and the mechanism through which Contracting States can be made known in advance, if they so desire, the classes of disputes which they would or would not consider submitting to the centre [Article 25(4)]”. An account of these negotiations given by A. Broches is pertinent: “During the negotiations, several definitions of ‘investment’ were considered and rejected. It was felt in the end that a definition could be dispensed with ‘given the essential requirement of consent by the parties’. This indicates that the requirement that the dispute must have arisen out of an ‘investment’ may be merged into the requirement of consent to jurisdiction. Presumably, the parties’ agreement that a dispute is an ‘investment dispute’ will be given great weight in

183. A. Parra “Investments and Investors covered by the ECT and other investment protection treaties” in C. Ribeiro (n. 169) 51.

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any determination of the Centre’s jurisdiction, although it would not be controlling.”184 The Report of the Executive Directors on the ICSID Convention further remarked that: “[w]hile the consent of the parties is an essential prerequisite for the jurisdiction of the Centre, consent alone will not suffice to bring dispute within its jurisdiction. In keeping with the purpose of the Convention, the jurisdiction of the Centre is further limited by reference to the nature of the dispute and the parties thereto.”185 In order to accept jurisdiction under the ICSID Convention, arbitral tribunals have to consider whether there is an “investment” under Article 25(1) of the Convention, as well as under the relevant investment agreement. So far, they have given wide interpretations of the term.186 The approach adopted in the Convention gives parties to ICSID arbitration wide discretion to describe a particular transaction as an investment which results from the fact that the notion of investment is broad. But the parties do not have unlimited freedom in determining what constitutes an investment. Any s uch determination is not conclusive for a tribunal de ciding on its competence. Under Article 41 of the Convention, a Tribunal may examine on its own motion whether the requirements of jurisdiction are met. In this connection the ICSID tribunal in the Joy Mining v. Egypt, case made it clear that: “The parties to a dispute cannot by contract or treaty define as investment, for the purposes of ICSID jurisdiction, something which does not satisfy the objective requirements of Article 25 of the Convention. Otherwise Article 25 and its reliance on the concept of investment, even if not specifically defined, would be turned into a meaningless provision.”187 In 1985, the Secretary General of ICSID refused to accept a request for arbitration of a dispute involving a sale of goods, on the ground that such an

184. A. Broches “The Convention on the Settlement of Investment Disputes: Some Observations on Jurisdiction” (1966) 5 Columbia Journal of Transnational Law, 261-280, 268. 185. Report of the Executive Directors on the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (1993) 1 ICSID Reports 23, 28. 186. The tribunal in CSOB v. Slovak Republic observed in this regard: “This statement [in the Report of the ICSID Executive Directors] also indicates that investment as a concept should be interpreted broadly because the drafters of the Convention did not impose any restrictions on its meaning […].” Ceskoslovenska Obchodni Banka AS (CSOB) v. The Slovak Republic, ICSID Case No. ARB/97/4, 24 May 1999, para. 64. 187. Joy Mining Machinery Ltd. v. The Arab republic of Egypt, Award, 6 August 2004.

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operation could not be considered an investment.188 This was done despite the fact that the request “had been made on the basis of a BIT [bilateral investment treaty] providing for arbitration under the Convention in respect of disputes arising out of investments which, as defined in the BIT, could be understood as including sale of good transaction.”189 1. Typical features of an investment According to C. Schreuer,190 it is possible to identify certain features of an investment under the Convention on the basis of ICSID case-law: ●

the project should have a certain duration;

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there should be a certain regularity of profit and return;

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there is typically an element of risk for both sides;

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the commitment involved would have to be substantial;

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the operation should be significant for the host state’s development.

C. Schreuer has clarified that these features should not be necessarily understood as jurisdictional requirements but as typical characteristics of an investment. The expectation of a long-term relationship and return would exclude that a one-spot transaction or a one-time lump sum agreement can qualify as an investment. With regard to the last feature, Schreuer also remarked that, although not necessarily a characteristic of investments in general, the operation’s significance for the host state’s development becomes a relevant feature under the ICSID Convention: “The only possible indication of an objective meaning that can be gleaned from the Convention is contained in the Preamble’s first sentence, which speaks of ‘the need for international co-operation for economic development and the role of private international investment therein’. This declared purpose of the Convention is confirmed by the Report of the Executive Directors which points out that the Convention was ‘prompted by the desire to strengthen the partnership between countries in the cause of economic development.’ Therefore it may be argued that the Convention’s object and purpose indicate that there should be some positive impact on development.”191

188. See Asian express v. Greater Colombo Economic Commission (1985) ICSID Annual Report 6. 189. I. Shihata and A. Parra “The Experience of the International Centre for Settlement of Investment Disputes” (1999) 14 ICSID Review – Foreign Investment Law Journal 299, 308. 190. See C. Schreuer (n. 17) 139-141. 191. See C. Schreuer (n. 17) 124-5.

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Under ICSID case-law, the reference to the these typical features of an investment operation has varied according to the specific circumstances of each case and to the more or less readily recognisable character of the activity at stake. i) Readily-recognisable investments.192192Until the tribunal in Fedax N.V. v. Venezuela193 was faced with an objection to jurisdiction on the ground that the underlying transaction, promissory notes, did not meet the investment requirement under the Washington Convention, the term “investment” had been broadly understood in the ICSID practice as well as in scholarly writings. Before this case, ICSID tribunals194 had examined on their own initiative the question whether an investment was involved, and in each case have reached the conclusion that the “investment” requirement of the Convention had been met on the basis of a global assessment of an economic operation often composed of interrelated transactions. In Kaiser Bauxite v. Jamaica as in Alcoa Minerals of Jamaica Inc. v. Jamaica, the Tribunal established the Centre’s jurisdiction both on the consent given by the parties and on the fact that the case “in which a mining company has invested substantial amounts in a foreign state in reliance upon an agreement with that state, is among those contemplated by the Convention”. Amounts paid out to develop a concession and other undertakings based on a concession agreement, were also considered to qualify as an investment under the Convention in LETCO v. Liberia. Also in SOABI v. Senegal the tribunal considered the issue of jurisdiction in respect of an operation encompassing separate agreements, but this dealt only indirectly with the existence of an investment. In Holiday Inns v. Morocco, the tribunal emphasised “the general unity of an investment operation”, in spite of it being composed of multiple interrelated transactions. Even in certain recent cases, ICSID tribunals have not deemed it necessary to review all the hallmarks of an investment. In the PSEG Global Inc. v. Republic of Turkey,195 the dispute concerned a contract for the development

192. A. Broches, cited by C. Schreuer, (n. 17), 124, para. 86: “[…] Mr. Broches recalled that none of the suggested definitions of the word ‘investment’ had proved acceptable. He suggested that while it might be difficult to define the term, an investment was in fact readily recognisable.” 193. Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3 Decision on Objection to Jurisdiction, 11 June 1997, (1998) 37 ILM 1378. 194. Kaiser Bauxite Company v. Government of Jamaica, 1975 (1993), 1 ICSID Reports, 296; Alcoa Minerals of Jamaica Inc. v. Government of Jamaica 1975, (1979) Yearbook Commercial Arbitration, Vol. IV, 206; Liberian Eastern Timber Corporation (LETCO) v. Government of the Republic of Liberia, 1984, (1994), 2 ICSID Reports, 346; Société Ouest Africaine des Bétons Industriels (SOABI) v. State of Senegal; 1988, (1994), 2 ICSID Reports, 165; Holiday Inns S.A., Occidental Petroleum Corporation et al. v. Government of Morocco; case No. ARB/72/1. 195. PSEG Global Inc., The North American Coal Corporation, and Konya Ilgin Elektrik Üretimve Ticaret Limited Sirketi v. Republic of Turkey, ICSID Case No. ARB/02/5 Decision on Jurisdiction, 4 June 2004.

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of an energy plant in Turkey. The tribunal did not discuss in detail how a concession contract amounted to an investment, because the operation in question was a readily recognisable investment. In M.C.I. Power Group L.C. and New Turbine, Inc. v. Republic of Ecuador,196 the claimant carried on the business of acquiring, assembling and installing two electricity generating plants and selling their power to INECEL, an Ecuadorian state-owned entity. After these operations were completed and the power generating assets sold, Seacoast continued to hold and manage its accounts receivable and other contractual rights against INECEL. In the tribunal’s view, Article Ia) of the Ecuador-United States BIT gives a broad definition of investment. The rights and interests alleged by the Claimants to have subsisted as a consequence of the so-called Seacoast project, after the entry into force of the BIT – such as the intangible assets of accounts receivable, the existence of an operating permit – would fit that definition. It also added that “the requirements that were taken into account in some arbitral precedents for purposes of denoting the existence of an investment protected by a treaty (such as the duration and risk of the alleged investment) must be considered as mere examples and not necessarily as elements that are required for its existence”.197 Nevertheless, without giving a detailed explanation, the tribunal concluded that the very elements of the project and the consequences thereof did fall within the characterisations required in order to determine the existence of protected investments. ii) Construction contracts In several other cases ICSID arbitral tribunals have scrutinised more closely whether the operation under consideration was an investment under the BIT and whether it did meet the features of an investment under the ICSID Convention. In Salini Costruttori S.P.A. and Italstrade S.P.A. v. Marocco198 the arbitral tribunal held that a civil construction contract was an investment within the meaning of the Italy-Morocco BIT since it created “a right to a contractual benefit having an economic value” covered by Article 1c) as well as a “right of economic nature conferred […] by contract” under Article 1e). The tribunal observed that the investment requirement must be respected as an objective condition of the jurisdiction of the Centre, which cannot be diluted by the consent of the parties. Of the contributions made by the two claimants, the Tribunal considered that:

196. M.C.I. Power Group L.C. and New Turbine, Inc. v. Republic of Ecuador, ICSID Case No. ARB/03/6, Award, 31 July 2007. 197. Ibid., para. 165. 198. Salini Costruttori S.P.A. and Italstrade S.P.A. v. Marocco ICSID Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001.

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“It is not disputed that they [i.e. the two claimants] used their know-how, that they provided the necessary equipment and qualified personnel for the accomplishment of the works, that they set up the production tool on the building site, that they obtained loans enabling them to finance the purchases necessary to carry out the works and to pay the salaries of the workforce, and finally that they agreed to the issuing of bank guarantees, in the form of a provisional guarantee fixed at 1.5% of the total sum of the tender, then at the end of the tendering process, in the form of a definite guarantee fixed at 3% of the value of the contract in dispute. The Italian companies, therefore, made contributions in money, in kind, and in industry.” The project indeed required not only heavy capital investment but also services and other long-term commitments. The risk, as noted by the tribunal in that case, was quite evident, as were the elements of duration (36 months) and contribution to development. With particular regard to this last feature the tribunal observed that: “[…] the contribution of the contract to the economic development of the Moroccan State cannot seriously be questioned. In most countries, the construction of infrastructure falls under the tasks to be carried out by the State or by other public authorities. It cannot be seriously contested that the highway in question shall serve the public interest. Finally, the Italian companies were also able to provide the host State of the investment with know-how in relation to the work to be accomplished.”199 While recalling the usual hallmarks of investment such as contributions, a certain duration of performance of the contract, a participation in the risks of the transaction and, as an additional condition derived from the Convention’s preamble, the contribution to the economic development of the host state, the tribunal pointed out that “in reality, these various elements may be interdependent” and that “these various criteria should be assessed globally, even if, for the sake of reasoning” they are considered individually. The acknowledgment of the interdependent character of the various hallmarks of “investment” and the favor for a global assessment indicates that the tribunal was actually approaching the issue of whether there was an “investment” from an empirical perspective. The need for the contribution to the host state’s development in the qualification process was cast into doubt by the ICSID tribunal in the L.E.S.I. S.p.A. and ASTALDI S.p.A. v. Algeria.200 The dispute arose out of a concession agreement for the costruction of a dam. The tribunal acknowledged that some 199. Ibid., para. 57. 200. L.E.S.I. S.p.A. et ASTALDI S.p.A. v. République Algérienne Démocratique et Populaire, Decision on Jurisdiction, ICSID Case No. ARB/05/3, 12 July 2006. See also L.E.S.I. – DIPENTA v. Algeria, ICSID Case No. ARB/03/8, Award, 10 January 2005.

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objective criteria have emerged from ICSID case-law and that a contract should fulfill the following three conditions: 1) the contracting party has made contributions in the host country which have an economic value such as loans, materials, labour and services. The investor must also incur some outlay of expenses, in pursuit of an economic objective; 2) those contributions had a certain duration, keeping in mind that an excessively rigorous appreciation of this test should be avoided; 3) they involved some risks for the contributor. The tribunal was satisfied that the claimant had made initial expenditures or loans justifying payment. It also went on to note that it was not necessary that the investment contributes more specifically to the host country’s economic development, something that is difficult to ascertain and that is implicitly covered by the other three criteria. In Bayindir v. Pakistan 201 the operation at stake was a highway construction contract. In determining whether there was an investment, the Tribunal relied once again on the Salini-test. It took the view that Bayindir made a significant contribution, both in terms of know-how, equipment and personnel and in financial terms. The duration of the contract was considered as a paramount factor to distinguish investments from ordinary commercial transactions, having in mind that the bar should not be put very high. In the present case, the project extending over three years was deemed sufficient to meet the duration test. The tribunal recognised that besides taking the risk inherent to long-term contracts, Bayindir incurred an obvious risk related to the very existence of a defect liability period of one year and of a maintenance period of four years against payment. On the last feature, the tribunal while recognising that an investment should be significant to the host state’s development, it also pointed out that as stated by the LESI tribunal this condition is often already included in the three classical conditions set out in the Salini test. In any event, Pakistan did not challenge the declarations of its own authorities on the importance of the road infrastructure for the development of the country. The tribunal indicated that all these elements “may be closely interrelated, should be examined in their totality, and will normally depend on the circumstances of each case”.202 In Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt,203 the tribunal concurred in relying on the so-called Salini-test to qualify as an investment the activities carried out in connection with the dredging operation of the Suez Canal. It identified the following elements as indicative

201. Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan ICSID Case No. ARB/03/29, Decision on Jurisdiction ,14 November 2005. 202. Ibid., para. 130. 203. Jan de Nul N.V. Dredging International N.V. v. Arab Republic of Egypt, ICSID Case No. ARB/04/13, Decision on Jurisdiction, 16 June 2006.

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of an investment for purposes of the ICSID Convention: 1) a contribution; 2) a certain duration over which the project is implemented; 3) sharing of operational risks and 4) a contribution to the host state’s development. The tribunal also emphasised that these elements may be closely interrelated, should be examined in their totality and will normally depend on the circumstances of each case. The tribunal found that the amount of work involved and the related compensation showed that the Claimants’ contribution was substantial. The operation was deemed of such magnitude and complexity that there could be no question as to the involvement of a risk. Lastly, the tribunal noted that it could not be seriously denied that the operation of the Suez Canal was of paramount significance for Egypt’s economy and development. The typical features of an investment operation have also been referred to in the Helnan International Hotel A/S v. The Arab Republic of Egypt.204 The tribunal accepted the Respondent’s argument that to be characterised as an investment a project must show a certain duration, a regularity of profit and return, an element of risk, a substantial commitment, and a significant contribution to the host state’s development. The tribunal found that the project for the refurbishment and transformation of a hotel into a five-star tourist site did me et these requirements in spite of their excessive narrowness. A twenty-six years project was deemed to be of a certain duration, the refurbishing ativity implied some risk of no commercial success and the amount of money necessary to transform the hotel into a five-star building and keep such classification was supposed to involve a substantial commitment and to provide the claimant with regular remuneration. As to the contribution to the development of the Egypt economy, the tribunal held that the importance of the tourism industry in the Egyptian economy made it obvious. According to the tribunal, the project did qualify as an investment under both the ICSID Convention and Art. 1 of the bilateral investment treaty be twee n De nmark and Egypt, wh ich by cove ring “any othe r rights […] pursuant to contract having an economic value” encompasses the management contract and the obligations deriving from it. In Saipem S.P.A. v. The People’s Republic of Bangladesh,205 Saipem and Petrobangla entered into a contract to build a pipeline of 409 km to carry condensate and gas in various locations of the north east of Bangladesh. To determine whether Saipem made an investment within the meaning of

204. Helnan International Hotel A/S v. The Arab Republic of Egypt, ICSID Case No. ARB 05/19, Decision of the Tribunal on Objection to Jurisdiction, 17 October 2006. 205. Saipem S.P.A. v. The People’s Republic Of Bangladesh, ICSID Case No. Arb/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, 21 March 2007.

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Article 25 of the ICSID Convention, the Tribunal applied the Salini-test, making reference to the following elements: a) a contribution of money or other assets of economic value, b) a certain duration, c) an element of risk, and d) a contribution to the host state’s development. However, the Tribunal emphasised that for the purpose of determining whether there is an investment under Article 25 of the ICSID Convention the entire operation should be taken into consideration. In the present case, the entire or overall operation included the construction contract as well as the credits for sums of money deriving from an ICC award. iii) Financial instruments. The Fedax v. Venezuela and CSOB v. Slovak Republic cases are frequently invoked to demonstrate that financial instruments such as promissory notes and loans were held to qualify as investments both under the bilateral treaties and the ICSID Convention. But, in Joy Mining Machinery Limited v. The Arab Republic of Egypt, the arbitral tribunal declined jurisdiction considering that bank guarantees did not qualify as an investment neither under the bilateral investment treaty nor under the ICSID Convention. The reference to the typical features mentioned above has assisted tribunals in assessing whether and to what extent the operation under consideration was an investment. In the case of Fedax v. Venezuela,206 the respondent challenged the claimant’s argument that promissory notes acquired by way of endorsement from the respondent qualified as investments under the NetherlandsVenezuela BIT and the ICSID Convention, because they did not amount either to foreign direct investment or to portfolio investment carried out through approved stock market transactions. The tribunal disagreed, noting that according to the underlying BIT, the phrasing “every asset” justifies a broad interpretation and that in addition “[…] this interpretation is also consistent with the broad reach that the term ‘investment’ must be given in light of the negotiating history of the Convention”.207 It held that promissory notes were covered by the definition of investment in both instruments and stated that: “Loans qualify as an investment within ICSID’s jurisdiction […] Since promissory notes are evidence of a loan and a rather typical financial and credit instrument there is nothing to prevent their purchase from qualifying as an investment under the Convention in the circumstances of a particular case such as this.” The particular circumstances of the case which the tribunal referred to have regard to the fact that promissory notes were issued by the Republic of Venezuela under the terms of the Law on Public Credit, which specifically

206. Fedax N.V. v. Republic of Venezuela, ICSID Case No. ARB/96/3, Decision on Objection to Jurisdiction, 11 June 1997, 37 ILM 1378 (1998). 207. Ibid., para. 29.

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governs public credit operations aimed at raising funds and resources “to undertake productive works, attend to the needs of national interest and cover transitory needs of the treasury”. It is quite apparent that the transactions involved in this case are not ordinary commercial transactions and indeed involve a fundamental public interest. The tribunal further noted that: “The status of the promissory notes under the Law of Public Credit is also important as evidence that the type of investment involved is not merely a short–term, occasional financial arrangement, such as could happen with investments that come in for quick gains and leave immediately thereafter – i.e. ‘volatile capital.’ The basic features of an investment have been described as involving a certain duration, a certain regularity of profit and return, assumption of risk, a substantial commitment and a significance for the host State’s development. The duration of the investment in this case meets the requirement of the Law as to contracts needing to extend beyond the fiscal year in which they are made. The regularity of profit and return is also met by the scheduling of interest payments through a period of several years. The amount of capital committed is also relatively substantial. Risk is also involved as has been explained. And most importantly, there is clearly a significant relationship between the transaction and the development of the host State, as specifically required under the Law for issuing the pertinent financial instrument. It follows that, given the particular facts of the case, the transaction meets the basic features of an investment.”208 In CSOB v. Slovakia209 the respondent argued that the transaction underlying the claimant’s case, a loan, did not involve a transfer of resources into the Slovak Republic and therefore, did not constitute an investment.210 Although loans were not expressly mentioned under the Czech RepublicSlovakia BIT, the tribunal found that terms as broad as “assets” and “monetary receivables or claims” clearly encompassed loans extended to a Slovak entity by a national of the other Contracting Party. In order to establish whether there was an investment under Art. 25(1) of the ICSID Convention, the tribunal recalled that an investment is frequently a rather complex operation, composed of various interrelated transactions, each element of which, standing alone, might not in all cases qualify as an investment.211 The Slovak Republic suggested that an investment should be essentially understood as the acquisition of property or assets through the expenditure of resources by one party in the territory of a foreign country which was expected to produce

208. Ibid., para. 43. 209. Ceskoslovenska Obchodni Banka, A.S.(CSOB) v. The Slovak Republic, ICSID Case No. ARB/97/4, Decision on Jurisdiction, 24 May 1999. 210. Ibid., para 76. 211. Idem, para. 72.

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a benefit on both sides and to offer a return in the future, subject to the uncertainties of the risk involved. In the tribunal’s view, while these elements tend as a rule to be present in most investments, they are not a formal prerequisite for the finding that a transaction constitutes an investment as that concept is understood under the Convention. Nevertheless, the tribunal found that the resources provided through CSOB’s banking activities in the Slovak Republic were designed to produce a benefit and to offer CSOB a return in the future, subject to an element of risk that is implicit in most economic activities. The tribunal upheld jurisdiction by stressing the basic and ultimate goal of the Consolidation Agreement which was to ensure a continuing and expanding role of the banking sector: “[…] this undertaking involved a significant contribution by CSOB to the economic development of the Slovak Republic […] this is evident from the fact that CSOB’s undertakings include the spending or outlays of resources in the Slovak Republic in response to the need for the development of the Republic’s banking infrastructure.”212 In Joy Mining Machinery Limited v. The Arab Republic of Egypt 213 the arbitral tribunal had to decide whether bank guarantees issued in support of a project entailing the supply, installation of equipment and the provision of related incidental services for a fixed, pre-determined and certain price constituted an investment within the meaning of the bilateral investment treaty between the United Kingdom and Egypt. The tribunal noted that “[e]ven if a claim to return of performance and related guarantees has a financial value it cannot amount to recharacterising as an investment dispute a dispute which in essence concerns a contingent liability”. 214 The tribunal summarised the elements that an activity must have in order to qualify as an investment by making reference to a certain duration, a regularity of profit and return, an element of risk, a substantial commitment and that it should constitute a significant contribution to the host state’s development. But at the same time the tribunal clarified that the appreciation of the existence of these criteria “is of course specific to each particular case as they will normally depend on the circumstances of each case. The requirement mentioned above, that a given element of a complex operation should not be examined in isolation because what matters is to assess the operation globally or as a whole, is a perfectly reasonable one in the view of the Tribunal”.215 On these basis, the tribunal noted that the activities carried out by the claimant fell squarely under the features

212. Idem, para. 88. 213. Joy Mining Machinery Limited v. The Arab Republic of Egypt, ICSID Case No. ARB/03/11, Award on Jurisdiction, 6 August 2004. 214. Ibid., para. 47. 215. Ibid.

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of the contract for the supply of complex equipment with the related additional activities and incidental services, which cannot be considered an investment. Under the specific circumstances of the case, the duration of the commitment was not particularly significant as evidenced by the fact that the total price was paid at an early stage. Neither was therefore the regularity of profit and return. As to the element of risk, that was not different from that involved in any commercial contract. The tribunal drew a distinction between the present case and Fedax in which financial contributions made in the form of promissory notes did qualify as an investment, being the proceeds of an earlier credit transaction pursuant to which the state received value in exchange for its promise of future payment. In reaching this conclusion, the tribunal relied on the fact that “the financing in question had and was being used by the State to finance its budget under a law of public credit, designed for raising funds and resources to undertake productive works, attend to the needs of national interest and cover transitory needs of the treasure”. Unlike the Fedax case in which the transactions at stake involved a fundamental public interest, in Joy Mining the Egyptian Government did not benefit from the bank guarantees. The Tribunal declined jurisdiction because the claim fell outside both the Treaty and the Convention. It held the view that a bank guarantee is simply a contingent liability and “to conclude that a contingent liability is an asset under Article 1a) of the Treaty and hence a protected investment, would really go far beyond the concept of investment, even if broadly defined, as this and other treaties normally do”. iv) Services. SGS v. Pakistan216 and SGS v. Philippines217 have been relied on as having recognised inspection services as an investment. In both cases the dispute arose out of the non-payment by Pakistan and the Philippines respectively, of invoices allegedly due to SGS, a Swiss company, under contracts for the provision of pre-shipment inspection and certification services. In SGS v. Pakistan, the tribunal held that the provision of pre-shipment inspection services did fall under the non-exhaustive and sufficiently broad definition of investment of the Switzerland-Pakistan BIT, which included claims to money deriving from rights conferred by law or by contract. The tribunal also emphasised the fact that Pakistan entrusted SGS with the public function of raising the financial revenue of the state by putting into place trustful and simplified proceedings, conduct enquiries in conjunction with the Pakistan Customs, educate the Pakistani Custom authorities on the techniques of evaluation and application of Customs rules. The tribunal

216. SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Objection to Jurisdiction, 6 August 2003. 217. SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on Objection to Jurisdiction, 29 January 2004.

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concluded that by doing so SGS did not perform a simple commercial activity, but was granted the right to operate in a field which is normally left to the public power of the state. Accordingly, the tribunal held that the expenditures made by SGS pursuant to the agreement constituted an investment within the meaning of the BIT and that it amounted to a concession under public laws falling well within the BIT’s definition of investment. Moreover, the tribunal found that the ICSID Convention’s requirement that there be a legal dispute arising directly out of an investment was satisfied. In ord er to de cide w hethe r an inve stme nt was ma de, th e SGS v. Philippines tribunal also considered relevant that the functions delegated to SGS were performed in aid of the collection of tax revenue. v) Non-readily recognisable investments ICSID Tribunals have also been confronted with the question of whether such activities as the provision of professional services or a salvage operation could qualify as investments. In the Patrick Mitchell v. Democratic Republic of Congo218 arbitration, the ad hoc Committee which was formed to preside over the annulment proceedings ultimately annulled the award rendered under the 1984 US-Zaire (now DRC) BIT in which the tribunal upheld jurisdiction over the alleged expropriation of claimant’s law firm. The ad hoc Committee held that the tribunal had “manifestly exceeded its power” and failed to state its reasons for finding that Mr. Mitchell had made “investments” in the DRC covered under the relevant BIT and the ICSID Convention. The Committee expressly recalled that the case at hand did not involve a “readily recognisable” investment, as it concerned a legal counseling firm established by a US citizen in the DRC, which was deemed to be a rather “uncommon” operation from the standpoint of the concept of investment. As noted by Schreuer, it would be atypical to qualify a contract with an individual consultant as an investment.219 In spite of the fact that it was the first time that such an operation was brought before ICSID, the arbitral tribunal affirmed its jurisdiction by identifying the elements of the operation falling within the scope of application of the BIT and assuming that the definition of investment under the BIT was as broad as that found under the Convention. No further discussion was devoted to the existence of an investment within the meaning of the ICSID Convention. With regard to the terms of both the ICSID Convention and the US-Zaire BIT, the ad hoc Committee held that the arbitral tribunal’s “[a]ward is incomplete and obscure as regards what it considers an investment: it refers to various fragments of the operation, without finally indicating the

218. Mr. Patrick Mitchell v. The Democratic Republic of Congo, Case No. ARB/99/7, Decision on the Application for Annulment of the Award, 1 November 2006. 219. Schreuer (n. 17) 140.

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reasons why it regards it overall as an investment, that is, without providing the slightest explanation as to the relationship between the ‘Mitchell & Associates’ firm and the DRC. Such an inadequacy of reasons is deemed to be particularly grave, as it seriously affects the coherence of the reasoning and, moreover, as it opens the door to a risk of genuine abuses, to the extent that it boils down to granting the qualification as investor to any legal counseling firm or law firm established in a foreign country, thereby enabling it to take advantage of the special arbitration system of ICSID.”220 The existence of an investment was seriously contested by the respondent mainly in respect of the criterion of the contribution to the economic development of the country. The ad hoc Committee did not exclude the possibility that the services provided by a legal counseling firm could qualify as an investment under the ICSID Convention if the contribution to the economic development or at least the interests of the state were somehow present. As pointed out by the ad hoc Committee, it was the same BIT which expressly recognised in its preamble the relevance of the economic development of both parties. That’s why it would have been necessary for the arbitral tribunal to indicate that, through his know-how, the claimant had concretely assisted the DRC, for example by providing it with legal services in a regular manner or by specifically bringing investors. Doing otherwise would imply the risk of genuine abuses by granting the qualification as investor to any legal counselling firm or law firm established in a foreign country, thereby enabling it to take advantage of the special arbitration system of ICSID. The ad hoc Committee clarified that: “the existence of a contribution to the economic development of the host State as an essential – although not sufficient – characteristic or unquestionable criterion of the investment, does not mean that this contribution must always be sizable or successful; and, of course, ICSID tribunals do not have to evaluate the real contribution of the operation in question. It suffices for the operation to contribute in one way or another to the economic development of the host State, and this concept of economic development is, in any event, extremely broad but also variable depending on the case.”221 The tribunal in Malaysian Historical Salvors, SDN, BHD v. Malaysia222 declined jurisdiction in a case involving a salvage operation off the coast of Malaysia. The investor, Malaysian Historical Salvors, had retrieved some 24 000 pieces of Chinese porcelain from the Strait of Malacca in the early 1990s. Much of the porcelain was sold at auction in 1995 for USD 3.4 million. Malaysian 220. Mr. Patrick Mitchell v. The Democratic Republic of Congo (n. 226), para. 40. 221. Ibid., para. 33. 222. Malaysian Historical Salvors SDN, BHD v. The Government of Malaysia, ICSID Case No. ARB/05/10, Award on Jurisdiction, 17 May 2007.

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Historical Salvors later alleged that it received a smaller share of the profits than it was promised under its contract with Malaysia. The company sought relief through international arbitration under the UK-Malaysia BIT. In coming to a decision on jurisdiction, the sole arbitrator wrestled with whether the company had an investment in Malaysia as required under the ICSID Convention. After reviewing previous cases where there was discussion on the definition of investment, he considered to what degree the hallmarks of investment’ were met: i) regularity of profits and returns; ii) contributions in money, in kind and in industry; iii) the duration of the contract; iv) the risks assumed under the contract and v) contribution to the economic development of the host sta te. The Tribunal found that the Claimant made contributions in money, in kind and in industry although, as the Respondent has pointed out, their size was in no way comparable to those found in Salini, Bayindir and Jan de Nul or even in Joy Mining. The criterion of duration was not satisfied in the qualitative sense envisaged by ICSID jurisprudence. The fact that salvage contracts are typically on a no-finds-no-pay basis also showed that risks assumed under the Contract were no more than ordinary commercial risks assumed by many salvors in a salvage contract. Finding that the unusual nature of the salvage company’s activities meant that some of these criteria were either not met, or met only superficially, the arbitrator paid particular attention to the criterion whether the contract made a significant contribution to the economic development of the host state. In the tribunal’s view, the term investment should be interpreted in light of the Preamble of the ICSID Convention so that the contributions result in some form of positive economic development for the host state. The tribunal ultimately decided that the retrieved treasure did not make a significant contribution to the Malaysian economy. The claim that local residents were employed to “wash, pack, inventory and photograph the porcelains” did not meet the “quantity or quality” envisaged by ICSID jurisprudence, nor should cultural and historical benefits be conflated with economic benefits. Having decided that Malaysian Historical Salvors’ contract with Malaysia did not constitute an investment under the ICSID Convention, the arbitrator found it unnecessary to determine whether it met the definition of an investment under the UK-Malaysia BIT. 2. Limitations as to what can be an investment Pre-investment expenditures. The question if expenditures prior to a mutual agreement w ith the host country on a project constitute an investment was raised in the cases Mihaly v. Sri Lanka, Zhinvali v. Georgia and Nagel v. the Czech Republic (see above). In Mihaly v. Sri Lanka,223 an ICSID tribunal constituted under the US-Sri Lanka BIT, held that that pre-investment expenditure is not an investment

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within the meaning of Article 25 of the ICSID Convention and that therefore it lacked jurisdiction. The Tribunal stated that: “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.”224 In Zhinvali Development Ltd. v. Georgia, Zhinvali mounted a claim under the terms of the Georgian national investment law. The dispute arose out of the firm’s negotiations for the rehabilitation of a hydro-electric power plant in Georgia. The firm reclaimed expenses of more than USD 26 million incurred during negotiations with the government. However, in the award rendered by an ICSID tribunal, the Tribunal argued that these up-front costs do not fall under the definition of investment as set out in the ICSID Convention. In addition, the required consent of the host state to treat development costs as an investment was missing. 3. Typical characteristics v. jurisdictional requirements: A meaningful distinction? The review of the ICSID case-law suggests that in most cases the various features of an investment have been examined in their totality, that they have been frequently seen as interdependent and not always decisive.225 A closer look at ICSID case-law also shows that the approach of ICSID tribunals towards the issue of “investment” within the meaning of Article 25(1) tends more towards an empirical rather than a dogmatic analysis, the qualification of a specific operation essentially depending on the circumstances of each case. The need for a global assessment of the indicative elements of an investment and the recurring remarks calling for caution against casting them

223. Mihaly International Corporation v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/00/2, Award and Concurrent Opinion of 15 March 2002, 17 ICSID Review – FILJ 142 (2002); 41 ILM 867 (2002). Mihaly Internatioanl Corp., a US company, wanted to build a power plant in Sri Lanka. Although the negotiations between Mihaly and Sri Lanka were never finalised, Mihaly invested in the preparation of the BOT (build, operate, transfer) agreement and Sri Lanka issued a number of documents guaranteeing the exclusivity of negotiations with Mihaly. 224. Zhinvali Development Ltd. v. Republic of Georgia, ICSID case No. ARB/00/1, Award of 24 January 2003, not published. 225. Malaysian Historical Salvors SDN, BHD v. The Government of Malaysia (n. 228) para. 108. The tribunal agrees with the claimant that the criterion of regularity of profits and return is not always critical. The claimant cited the example of a pharmaceutical company’s investment in the development of a drug. Before any profits and returns could be realised the drug would have to be discovered, tested, approved by the regulatory authority and accepted by the market.

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as prerequisites, tend to deprive of any meaningful distinction any attempt to oppose the so-called typical characteristic approach to the jurisdictional requirements approach.226

C. Investment and ICSID Additional Facility The Additional Facility provides for conciliation and arbitration proceedings for the settlement of legal disputes that fall short of the jurisdiction of the Centre because they do not arise directly out of an investment. However, as pointed out by C. Schreuer, this does not mean that any kind of dispute may be brought under the Additional Facility. The approval of the Secretary-General being always necessary, the underlying transaction must show features that distinguish it from an ordinary commercial transaction such as: “Economic transactions which a) may or may not, depending on their terms be regarded by the parties as investments for the purposes of the Convention; which b) involve long-term relationships or the commitment of substantial resources on the part of either party; and which, c) are of special importance to the economy of the State party, can be clearly distinguished from ordinary commercial transactions. Examples of such transactions may be found in various forms of industrial cooperation agreements and major civil works contracts”.227 Although many bilateral investment treaties expressly provide in their dispute settlement clauses for proceedings under the Additional Facility to fill a jurisdictional gap ratione personae, that would also open the door to for the settlement of disputes that are covered by the BIT but excluded from ICSID jurisdiction ratione materiae.

226. Ibid., para. 72: “The Typical Characteristics Approach seeks to identify the established hallmarks of ‘investment,’ but cautions against casting them as prerequisites, no doubt to guard against the infinite variety of cases that would arise before ICSID tribunals that may deserve to be categorised as an ‘investment’ notwithstanding the absence, whether qualitatively or quantitatively, of a particular hallmark of ‘investment’ since these hallmarks of ‘investment’ may be interdependent. Similarly, the Jurisdictional Approach seeks to identify these established hallmarks of ‘investment’ but is expressed in such language as to lead to the conclusion that the failure to satisfy one or more of the hallmarks of ‘investment’ may be fatal to an investor’s claim. However, within the Jurisdictional Approach, ICSID tribunals often remark that these hallmarks may be interrelated, and must be examined in relation to other hallmarks as well as in relation to the circumstances of the case. In other words, it may be that a particular hallmark of ‘investment’ may not be present when it is viewed in isolation; yet, when examined in the light of other hallmarks of ‘investment’ or taking into account the circumstances of the case, a tribunal may still find jurisdiction for the Centre.” 227. Comment iii) to Art. 4 of the Additional Facility Rules, 1 ICSID Reports 220.

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D. The relevance of the “in accordance with the laws” requirement Many BITs provide for additional requirements by limiting the treaty protection to investments that have been made “in accordance with the laws and regulations” of the host state. Similar provisions are to be found, for example, in the Sweden-Bosnia BIT, Art. 1(1). An analogous provision is contained in the Italy-Morocco BIT according to which investments include “all categories of assets invested […] by a natural or legal person, […] on the territory of the other Contracting Party, in accordance with the laws and regulations of the aforementioned party”. In the ICSID case Salini v. Morocco, the tribunal interpreted the reference to the requirement of the conformity with national laws and regulations as follows: “The Tribunal cannot follow the Kingdom of Morocco in its view that paragraph 1 of Article 1 refers to the law of the host State for the definition of ‘investment’. In focusing on the ‘categories of invested assets […] in accordance with the laws and regulations of the aforementioned party’, this provision refers to the validity of the investment and not to its definition. More specifically, it seeks to prevent the Bilateral Treaty from protecting investments that should not be protected, particularly because they would be illegal”228 [emphasis added]. In LESI-Dipenta v. Algeria, the ICSID tribunal similarly held that: “the reference by the provision to the requirement of the conformity to the applicable laws and regulations does not constitute a formal recognition of the notion of investment as defined by Algerian law in a restrictive manner, but, in line with a standard and perfectly justified rule, the exclusion of the protection for all investments that have been made in violation of the fundamental principles that apply”229 [emphasis added]. The non-compliance with municipal law and regulations would not result in a jurisdictional bar since it “does not create an obstacle to treaty coverage per se and access to a neutral forum for the resolution of investment disputes, to the extent that the asset under consideration falls under the definition of an investment provided by the applicable treaty; rather, such alleged non-compliance may constitute a limitation with respect to the merits of the claim related to the covered investment”.230 In Saipem v. Bangladesh the tribunal concurred with the Salini v. Morocco tribunal previous case-law by noting that the phrase “in conformity with the laws and regulations [of the host state]” following the “investment” in Article 1(1) of

228. Salini Costruttori S.p.A. & Italstrade S.p.A., v. Kingdom of Morocco, (ICSID Case No. ARB00/4), Decision on Jurisdiction, 16 July 2001, (2003) 42 ILM 606. 229. Consortium Groupement LESI-Dipenta v. Algeria, ICSID Case No. ARB/03/08, Award, 10 January 2005, para. 24 (unofficial translation from the original French text available at www.worldbank.org/icsid). 230. E. Gaillard, “Investments and Investors Covered by the Energy Charter Treaty”, in C. Ribeiro (n. 169), 62.

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the BIT does not limit the definition of investment under the treaty to investment within the laws and regulations of Bangladesh.231 However, the non-compliance with national laws has been recently interpreted as a jurisdictional requirement. In Fraport v. The Republic of the Philippines,232 the tribunal held by majority that an investment intentionally structured in violation of Philippine Law in order for the investor to gain the prohibited management and control of a project did not qualify as an investment and fell outside the ICSID jurisdiction and the competence of the tribunal. As a consequence, since the tribunal held by majority that there was no “investment in accordance with law”, it also found that it lacked jurisdiction ratione materiae. According to the majority of the tribunal economic transactions undertaken by a national of one of the parties to the BIT have to meet certain legal requirements of the host state in order to qualify as an “investment”. In the dissenting opinion appended to the award, the third arbitrator took the view that since the claimant’s shareholdings do constitute an investment covered by Article 1(1) of the Germany-Philippines BIT which defines investment as an “asset” and includes shares as a kind of asset, the requirement that the investment shall be accepted in accordance with the Philippine law could not be interpreted as a jurisdictional bar. As pointed out in the dissenting opinion, “[t]he purpose of these provisions is not to condition the right to arbitrate on the minute compliance by the investor at all times and in all respects with the domestic law and regulation of the Host State. […] Such an argument has been raised before an international arbitral tribunal and was properly rejected because ‘to exclude an investment on the basis of such minor errors would be inconsistent with the object and purpose of the Treaty’ (see Tokios Tokeles v. Ukraine, ICSID Case No. ARB/02/18, Decision on Jurisdiction of 29 April 2004, paras 83-86)”. The dissenting arbitrator also took care in distinguishing the present case form the award rendered in Inceysa Vallisoletana S.L. v. Republic of El Salvador 233 which involved systematic fraud in securing a contract with the Republic of El Salvador, for the operation of vehicle inspection stations. In that case, the tribunal held that there was no jurisdiction on a number of grounds, including that the investment was not made in accordance with the laws of El Salvador. But both good faith and international public policy considerations were relevant in reaching this conclusion.

231. See also PSEG et al. v. Turkey, Decision on Jurisdiction, 4 June 2004, paras. 109, 116-120; Plama v. Bulgaria, Decision on Jurisdiction, 8 February 2005, 44 ILM 721 (2005), paras. 126-131; Bayindir v. Pakistan, Decision on Jurisdiction, 14 November 2005, paras. 105-110. 232. Fraport AG Frankfurt Airport Services Worldwide v. The Republic of the Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007. 233. Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award, 2 August 2006.

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E. Final remarks The review of the investment treaty based arbitration case-law dealing with the question of the definition of investment confirms that a variety of activities can be included within this concept, which so far has been interpreted in broad terms within certain outer limits under both ICSID and non-ICSID arbitration. Another issue concern borderline operations, especially those related to the supply of services. As made clear by ICSID tribunals, the possibility that the supply of services might qualify as investments is not to be excluded. As clearly shown by analysis of the arbitral awards, ICSID jurisdiction is not open to any kind of operation that the parties might qualify as an investment. Contracts for the international supply or the sale of goods, no matter how complex they might be, have fallen outside ICSID jurisdiction. Nevertheless, any claim not related to a purely commercial transaction could be brought before ICSID under the Additional facility rules, if the parties do provide their consent in the submission clause. Purely commercial disputes have been successfully brought before ad hoc UNCITRAL tribunals or under the auspices of the Stockholm Chamber of Arbitration, which have upheld their jurisdiction on the basis of the ECT or BITs by extending the notion of investment to encompass sales transactions, thus covering mere commercial risks. Once the claim has been brought before an ICSID tribunal and jurisdiction denied on the basis of lack of investment for the purposes of Article 25 of the ICSID Convention, the same dispute could be resubmitted to one of the other available fora. But if the ICSID tribunal rejects its jurisdiction under both Art. 25 and the BIT, claimants would have no alternative options on the basis of Art. 53 of the ICSID Convention, according to which the award shall be binding on the parties.

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ANNEX 1.A1

Definition of Investment in Bilateral Investment Treaties Model BITs Canada model FIPA (2007) Article 1 – Definitions “investment means: a) an enterprise; b) shares, stocks and other forms of equity participation in an enterprise; c) bonds, debentures, and other debt instruments of an enterprise; d) a loan to an enterprise; e) notwithstanding subparagraphs c) and d) above, a loan to or debt security issued by a financial institution is an investment only where the loan or debt security is treated as regulatory capital by the Party in whose territory the financial institution is located; f) an interest in an enterprise that entitles the owner to a share in income or profits of the enterprise; g) an interest in an enterprise that entitles the owner to share in the assets of that enterprise on dissolution; h) interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory, such as under: i) contracts involving the presence of an investor’s property in the territory of the Party, including turnkey or construction contracts, or concessions such as to search for and extract oil and other natural resources; or ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise;

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i) intellectual property rights; and j) any other tangible or intangible, moveable or immovable, property and related property rights acquired in the expectation or used for the purpose of economic benefit or other business purpose; but investment does not mean, k) claims to money that arise solely from: i) commercial contracts for the sale of goods or services by a national or enterprise in the territory of a Contracting Party to an enterprise in the territory of the other Contracting Party; or ii) the extension of credit in connection with a commercial transaction, such as trade financing, other than a loan covered by subparagraph d); or l) any other claims to money, that do not involve the kinds of interests set out in subparagraphs a) to j).”

France model BIT Article 1 – Definitions For the purpose of this Agreement: 1. The term “investment” means every kind of assets, such as goods, rights and interests of whatever nature, and in particular though not exclusively: a) movable and immovable property as well as any other right in rem such as mortgages, liens, usufructs, pledges and similar rights; b) shares, premium on share and other kinds of interest including minority or indirect forms, in companies constituted in the territory of one Contracting Party; c) title to money or debentures, or title to any legitimate performance having an economic value; d) intellectual, commercial and industrial property rights such as copyrights, patents, licenses, trademarks, industrial models and mockups, technical processes, know-how, trade names and goodwill; e) business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources, including those which are located in the maritime area of the Contracting Parties. It is understood that those investments are investments which have already been made or may be made subsequent to the entering into force of this Agreement, in accordance with the legislation of the Contracting Party on the territory or in the maritime area of which the investment is made.

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Any alteration of the form in which assets are invested shall not affect their qualification as investments provided that such alteration is not in conflict with the legislation of the Contracting Party on the territory or in the maritime area of which the investment is made.

German model BIT (2005) Article 1 For the purposes of this Treaty: 1. the term “investments” comprises every kind of asset, in particular: a) movable and immovable property as well as any other rights in rem, such as mortgages, liens and pledges; b) shares of companies and other kinds of interest in companies; c) claims to money which has been used to create an economic value or claims to any performance having an economic value; d) intellectual property rights, in particular copyrights, patents, utilitymodel patents, industrial designs, trade-marks, trade-names, trade and business secrets, technical processes, know-how, and good will; e) business concessions under public law, including concessions to search for, extract and exploit natural resources. Any alteration of the form in which assets are invested shall not affect their classification as investment.

UK model BIT (2005) Article 1 – Definitions For the purposes of this Agreement: “investment” means every kind of asset and in particular, though not exclusively, includes: i) movable and immovable property and any other property rights such as mortgages, liens or pledges; ii) shares in and stock and debentures of a company and any other form of participation in a company; iii) claims to money or to any performance under contract having a financial value; iv) intellectual property rights, goodwill, technical processes and knowhow; v) business concessions conferred by law or under contract, including concessions to search or, cultivate, extract or exploit natural resources.

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A change in the form in which assets are invested does not affect their character as investments and the term “investment” includes all investments, whether made before or after the date of entry into force of this Agreement.

US model BIT (2004) Article 1 – Definitions […] “investment” means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: a) an enterprise; b) shares, stock, and other forms of equity participation in an enterprise; c) bonds, debentures, other debt instruments, and loans;234 d) futures, options, and other derivatives; e) turnkey, construction, management, production, concession, revenuesharing, and other similar contracts; f) intellectual property rights; g) licenses, authorisations, permits, and similar rights conferred pursuant to domestic law;235, 236 and h) other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges.

234. Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics. 235. Whether a particular type of license, authorisation, permit, or similar instrument (including a concession, to the extent that it has the nature of such an instrument) has the characteristics of an investment depends on such factors as the nature and extent of the rights that the holder has under the law of the Party. Among the licenses, authorisations, permits, and similar instruments that do not have the characteristics of an investment are those that do not create any rights protected under domestic law. For greater certainty, the foregoing is without prejudice to whether any asset associated with the license, authorisation, permit, or similar instrument has the characteristics of an investment. 236. The term “investment” does not include an order or judgment entered in a judicial or administrative action.

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BIT by countries Australia-Czech Republic BIT (Canberra, 30 September 1993 – Entry into force: 29 June 1994) Article 1 – Definitions 1) For the purposes of this Agreement: a) “investment” means every kind of asset, owned or controlled by investors of one Contracting Party and admitted by the other Contracting Party subject to its law and investment policies applicable from time to time including activities associated with investments. Investment includes but is not limited to: i) tangible and intangible property, including rights, such as mortgages, liens and pledges; ii) shares, stocks, bonds and debentures and any other form of participation in a company; iii) a loan or other claim to money or a claim to performance having economic value; iv) intellectual property rights, including industrial property rights such as patents, trademarks, trade names, industrial designs, copyright, know-how and goodwill; and v) business concessions and any other rights required to conduct economic activity and having economic value conferred by law or under a contract, including rights to engage in agriculture, forestry, fisheries and animal husbandry, to search for, extract or exploit natural resources and to manufacture, use and sell products.

Austria-Mexico BIT (29 June 1998 – Entry into force: 26 March 2001) Article 1 – Definitions […] 2) “Investment by an investor of a Contracting Party” means every kind of asset in the territory of one Contracting Party, owned or controlled, directly or indirectly, by an investor of the other Contracting Party, including: a) an enterprise constituted or organised under the applicable law of the first Contracting Party; b) shares, stocks and other forms of equity participation in an enterprise as referred to in subparagraph a), and rights derived therefrom; c) bonds, debentures, loans and other forms of debt and rights derived therefrom;

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d) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts; e) claims to money and claims to performance pursuant to a contract having an economic value; f) intellectual and industrial property rights as defined in the multilateral agreements concluded under the auspices of the World Intellectual Property Organisation, including copyright, trademarks, patents, industrial designs and technical processes, know-how, trade secrets, trade names and goodwill; g) rights conferred by law or contract such as concessions, licenses, authorisations or permits to undertake an economic activity; h) any other tangible or intangible, movable or immovable property, or any related property rights, such as leases, mortgages, liens, pledges or usufructs. Commercial transactions designed exclusively for the sale of goods or services and credits to finance commercial transactions with a duration of less than three years, other credits with a duration of less than three years, as well as credits granted to the State or to a State enterprise are not considered an investment.

Belgian-Luxembourg-Economic Union-China treaty (Brussels, 4 June 1984 – Entry into force: 5 October 1986) Article 1 […] 2. “Investments” means every kind of asset or property used as investments or reinvestment, in particular, though not exclusively, includes: a) movable, or immovable property and any other property rights such as mortgages, liens, pledges, usufructs and other similar rights; b) shares, stock, and interests in other forms; c) debentures, claims or claims to any performance having a financial value; d) copyrights, industrial property rights, technical process, registered trademarks, trade names and goodwill; or e) concessions to search for, extract or exploit natural resources. The above asset or property used as investment shall be in conformity with the laws of the Contracting Party accepting the investment. Any change in the form in which assets or property are invested does not affect their character as “investments” defined in this Agreement.

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Canada-Argentina BIT (Toronto, 5 November 1991 – Entry into force: 29 April 1993) Article 1 – Definitions For the purpose of this agreement: a) the term means any kind of asset defined in accordance with the laws and regulations of the Contracting Parties – in whose territory the investment is made, held or invested either directly, or indirectly through an investor of a third State, by an investor of one Contracting Party in the territory of the other Contracting Party, in Accordance with the latter’s laws It includes in particular, though not exclusively: i) movable and immovable property and any related property rights, such as mortgages, liens or pledges; ii) shares, stock, bonds and debentures or any other form of participation in a company, business enterprise or joint venture money, claims to contract having a and loans; iii) money, claims to performance under financial value, related to a specific investment; iv) intellectual property rights, including rights with respect to copyrights, patents, trademarks as well as trade names, industrial designs, good will, trade secrets and know-how; v) rights, conferred by law or under contract, to undertake any economic and commercial activity, including any rights to search for, cultivate, extract or exploit natural resources. Any change in the form of an investment does not affect its character as an investment.

Czech Republic-United States BIT (Washington, 22 October 1991 – Entry into force: 19 December 1992) Article 1 1. For the purposes of this Treaty: a) “investment” means every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts; and includes: i) tangible and intangible property, including movable and immovable property, as well as rights, such as mortgages, liens and pledges; ii) a company or shares of stock or other interests in a company or interests in the assets thereof;

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iii) a claim to money or a claim to performance having economic value, and associated with an investment; iv) intellectual property which includes, inter alia, rights relating to: literary and artistic works, including sound recordings, inventions in all fields of human endeavour, industrial designs, semiconductor mask works, trade secrets, know-how, and confidential business information, and trademarks, service marks, and trade names; and v) any right conferred by law or contract, and any licenses and permits pursuant to law.

Denmark-India BIT (New Delhi, 6 September 1995 – Entry into force: 28 August 1996) Article 1 – Definitions For the purpose of this Agreement: 1) the term “investment” means every kind of asset established or acquired in accordance with the national laws of the Contracting Party in whose territory the investment is made and shall include in particular, but not exclusively: a) movable and immovable property, as well as any other rights such as leases, mortgages, liens, pledges, privileges, guarantees and any other similar rights; b) shares, stock or other forms of participation in a company or business enterprise and bonds and debt of a company or business enterprise; c) returns reinvested, rights to money and performance pursuant to contract having an economic or financial value; d) industrial and intellectual property rights, such as copy rights, patents, trade names, technical processes, trademarks, goodwill and know-how in accordance with relevant laws of the respective Contracting Party; e) concessions or other rights conferred by law or under contract, including concessions to search for, extract or exploit oil and other minerals.

Finland-Turkey BIT (Ankara, 13 May 1993 – Entry into force: 12 April 1995) Article 1 – Definitions 1. For the purposes of this Agreement: […] b) “investment” means any kind of asset and in particular, though not exclusively, includes:

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i) movable and immovable property and any other property rights such as mortgages, liens or pledges; ii) shares or any other form of participation; iii) title or claim to money or right to any performance having an economic value and related to an investment; iv) intellectual and industrial property rights, including rights with respect to copyrights, patents, trademarks, business names, industrial designs, trade secrets, technical processes, know-how and goodwill; v) concessions conferred by law or under contract including concessions to search for, cultivate, extract or exploit natural resources.

France-Mexico BIT (12 November 1998) Article 1 – Definitions For the purpose of this Agreement: 1. the term “investment” means every kind of asset, such as goods, rights and interest of whatever nature, including property rights, acquired or used for the purpose of economic benefit or other business purposes, and in particular though not exclusively: a) movable and immovable property as well as any other right in rem such as mortgages, liens, usufructs, pledges and similar rights; b) shares, premium on share and other kinds of interest including minority or indirect forms, in companies constituted in the territory of one Contracting Party; c) title to money or debentures, or title to any legitimate performance having an economic value; d) intellectual, commercial and industrial property rights such as copyrights, patents, licenses, trademarks, industrial models and mockups, technical processes, know-how, trade names and goodwill; e) rights derived from any concession conferred by any legal means. In accordance with the definition here above, any alteration of the form in which assets are invested shall not affect their qualification as investments provided that such alteration is nor in conflict with the legislation of the Contracting Party in the territory or in the maritime area of which the investment is made. But investment does not mean claims to money derived solely from commercial transactions designed exclusively for the sale of goods or services

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by a national or legal person in the territory of one Contracting Party to a national or legal person in the territory of the other Contracting Party, credits to finance commercial transactions such as trade financing, and other credits with a duration of less than three years, as well as credits granted to the State or to a State enterprise. However, this shall not apply to credits or loans provided by an investor of a Contracting Party to an enterprise of the other Contracting Party which is owned or controlled by that investor.

Germany-Russian Federation BIT (Bonn, 28 January 1993) Article 1 1) For the purposes of this Agreement: a) the term “investment” shall apply to all types of assets which an investor of one Contracting Party invests in the territory of the other Contracting Party in accordance with its legislation, in particular: i) property, and other real rights such as usufructs, mortgages and similar rights ; ii) shares and other forms of participation in commercial enterprises and organisations; iii) claims to money invested to create an economic value, or services having an economic value; iv) copyright, industrial property rights such as rights to inventions, including rights deriving from patents, trademarks, industrial models, trading marks of retail bodies, models, trade names, and technology and know-how; v) rights to engage in economic activity, including concessions for prospecting for, cultivating, mining or developing natural resources accorded under the legislation of the Contracting Party in whose territory the investments are made, or by virtue of a contract.

Greece-Korea BIT (Athens, 25 January 1995 – Entry into force: 4 November 1995) Article 1 – Definitions For the purposes of this Agreement: 1. “investments” shall mean every kind of asset invested by investors of one Contracting Party in the territory of the other Contracting Party, and in particular, though not exclusively, include:

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a) movable and immovable property and any other property rights such as mortgages, liens and pledges; b) shares in, stocks and debentures of a company and any other form of participation in a company; c) claims to money or to any performance under contract having an economic value; d) industrial and intellectual property rights, including rights with respect to copyrights, patents, trademarks, trade names, industrial designs, trade secrets, technical processes and know-how and goodwill; e) business concessions of economic value necessary for conducting economic activities, conferred by law or under contract, including concessions to search for, cultivate, extract and exploit natural resources; and f) goods that, under a leasing agreement, are placed at the disposal of a lessee in the territory of a Contracting Party in conformity with its laws and regulations. Any alteration of the form in which assets are invested shall not affect their character as investments, provided that such a change does not contradict the laws and regulations of the relevant Contracting Party.

Hungary-Spain BIT (Budapest, 9 November 1989 – Entry into force: 1 August 1992) Article 1 For the purposes of the present Agreement: 1. the term “investments” shall comprise every kind of asset connected with the participation in companies and joint ventures, more particularly, though not exclusively: a) movable and immovable property as well as any other rights in rem in respect of every kind of asset; b) rights derived from shares, bonds and other kinds of interests in companies; c) title to money, goodwill and other assets and to any performance having an economic value; d) rights in the field of intellectual property, technical processes and know-how; e) business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources.

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Iceland-Lebanon BIT (Montreux, 24 June 2004) Article l – Definitions For the purposes of this Agreement: l. the term “investment” shall mean every kind of asset invested in connection with economic activities by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the legislation of the latter and shall include, in particular, though not exclusively: a) movable and immovable property and derived rights, such as leases, mortgages, liens or pledges; b) shares, stocks and any other form of participation in a company; c) claims to money or to any performance under contract having a financial value associated with an investment or returns reinvested; d) intellectual property rights, including trademarks, patents, registered design rights, copyright, semiconductor topographies rights and plant varieties rights associated with an investment; e) any right conferred by laws or under contract and any licenses and permits pursuant to laws, including the concessions to search for, extract, cultivate or exploit natural resources. Any alteration of the form in which assets are invested shall not affect their character as investment.

Ireland-Czech Republic BIT (Dublin, 28 June 1996 – Entry into force: 1 August 1997) Article 1 – Definitions For the purpose of this Agreement: 1. the term investment shall comprise every kind of asset investment in connection with business activities by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter and shall include, in particular, though not exclusively: a) movable and immovable property and any other property rights such as mortgages, liens or pledges; b) shares, stocks and debentures of a company and any other form of participation in a company; c) claims to money or to any performance under contract having a financial value associated with an investment;

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d) intellectual property rights, including copyrights, trademarks, patents, industrial designs, technical processes, know how, trade secrets, trade names and goodwill associated with an investment; e) any right conferred by laws under contract and any licenses and permits pursuant to laws, including the concessions to search for, extract, cultivate or exploit natural resources. Any alteration of the form in which assets are invested does not affect their character as investments.

Italy-Korea BIT (Seoul, 10 January 1989 – Entry into force: 26 June 1992) Article 2 For the purpose of this Agreement: 1. the term “investment” means every kind of asset accepted in accordance with the respective laws and regulations of either Contracting party, and more particularly, though not exclusively: a) movable and immovable property as well as any other rights in rem, such as mortgages, liens, pledges, usufructs and similar rights; b) shares, stocks and debentures of companies or interests in the property of such companies; c) claims to money utilised for the purpose of creating an economic value or to any performance having an economic value; d) copyrights, industrial property rights, technical process, know-how, trademarks and trade names; e) business concessions conferred by law or under contract, including concessions to search for, extract or exploit natural resources. Any admitted alternation of the form in which assets are invested shall not affect their classification as an investment.

Japan-Turkey BIT (Ankara, 12 February 1992 – Entry into force: 12 March 1993) Article 1 For the purposes of the present Agreement: 1. the term “investments” comprises every kind of asset including: a) shares and other types of holding of companies; b) claims to money or to any performance under contract having a financial value which are associated with investment; c) rights with respect to movable and immovable property;

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d) patents of invention, rights with respect to trademarks, trade names, trade labels and any other industrial property, and rights with respect to know-how ; and e) concession rights including those for the exploration and exploitation of natural resources.

Korea-Belgian-Luxemburg economic union treaty (Brussels, 20 December 1974 – Entry into force: 3 September 1976) Article 3 1) The term “investments” shall comprise every direct or indirect contribution of capital and any other kind of assets, invested or reinvested in enterprises in the field of agriculture, industry, mining, forestry, communications and tourism. The following shall more particularly, though not exclusively, be considered as investments within the meaning of the present Agreement: a) movable and immovable property as well as any other right “in rem” such as mortgages, pledges, usufructs and similar rights; b) shares and other kinds of interest in companies; c) debts and rights to any performance having economic value; d) copyrights, marks, patents, technical processes, trade-names, trademarks and goodwill; e) concessions under public law.

Mexico-Greece BIT (Mexico City, 30 November 2000 – Entry into force: 26 September 2002) Article 1 – Definitions For the purposes of this Agreement: 1. “investment” means every kind of asset acquired or used for economic purposes and invested by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter Contracting Party and, in particular though not exclusively, includes: a) movable and immovable property and any rights in rem such as servitudes, ususfructus, mortgages, liens or pledges; b) shares in and stock of a company and any other form of participation in a company; c) claims to money, to other assets and to any performance having an economic value, except for: i) claims to money that arise solely from commercial contracts for the sale of goods and services;

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ii) the extension of credit in connection with a commercial transaction, such as trade financing; iii) credits with a maturity of less than three years, by an investor in the territory of a Contracting Party to a natural or legal person in the territory of the other Contracting Party. However, the exception concerning credits with a maturity of less than three years, shall not apply to credits granted by an investor of a Contracting Party to a legal person of the other Contracting Party that is an affiliate of that investor. d) intellectual property rights; e) rights, derived from a concession, conferred by any legal means; f) returns. A possible change in the form in which the investments have been made does not affect their character as investments, provided that such a change is included in the definition of investment. A payment obligation from, or the granting of a credit to a Contracting Party or to a state enterprise is not considered an investment.

Netherlands-China BIT (26 November 2001) Article 1 – Definitions For the purpose of this Agreement: 1. the term “investment” means every kind of asset invested by investors of one Contracting Party in the territory of the other Contracting Party, and in particularly, though not exclusively, includes: a) movable and immovable property and other property rights such as mortgages and pledges; b) shares, debentures, stock and any other kind of participation in companies; c) claims to money or to any other performance having an economic value associated with an investment; d) intellectual property rights, in particularly copyrights, patents, trademarks, trade-names, technological process, know-how and goodwill; e) business concessions conferred by law or under contract permitted by law, including concessions to search for, cultivate, extract or exploit natural resources. Any change in the form in which assets are invested does not affect their character as investments.

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New Zealand-China BIT (Wellington, 22 November 1988 – Entry into force: 25 March 1989) Article 1 – Definitions For the purposes of this Agreement: 1) the term “investments” means all kinds of assets which have been invested in accordance with the laws of the Contracting Party receiving them including though not exclusively any: a) movable and immovable property and other property rights such as mortgage, usufruct, lien or pledge; b) share, stock, debenture and similar interests in companies; c) title or claim to money or to any contract having a financial value; d) copyright, industrial property rights (such as patents for inventions, trademarks, industrial design), know-how, technical processes, trade names and goodwill; and e) business concessions conferred by law or under contract including any concession to search for, cultivate, extract or exploit natural resources.

Norway-Czech Republic BIT (Oslo, 21 May 1991 – Entry into force: 6 August 1992) Article I – Definitions For the purpose of the present agreement: 1. the term “investment” shall comprise every kind of asset invested by an investor of one contracting party in the territory of the other contracting party, provided that the investment has been made in accordance with the laws and regulations of the other contracting party and shall include in particular, though not exclusively: a) movable and immovable property and any other property rights such as mortgages, liens, pledges and similar rights; b) shares, debentures or any other forms of participation in companies; c) claims to money which has been used to create an economic value or claims to any performance under contract having an economic value; d) copyrights, industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), know-how and good-will; e) business concessions conferred by law, or under contract if permitted by law, including concessions to search for, cultivate, extract and exploit natural resources.

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Poland-China BIT (Beijing, 7 June 1988 – Entry into force: 8 January 1989) Article 1 For the purpose of this Agreement: a) the term “investments” means every kind of asset made as investment in accordance with the laws and regulations of the Contracting Party accepting the investment in its territory, including mainly: i) movable and immovable property and other rights in rem; ii) shares in companies or other form of interest in such companies; iii) a claim to money or to any performance having an economic value; iv) copyrights, industrial property rights, know-how and technical process;

Portugal-Mexico BIT (11 November 1999 – Entry into force: 4 September 2000) Article 1 – Definitions For the purpose of this Agreement: 1. the term “investment” shall mean every kind of asset and rights invested by investors of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter including, in particular, though not exclusively: a) movable and immovable property, acquired or used for economic purposes, as well as any other rights in rem, such as mortgages, liens, pledges and similar rights; b) shares, stocks, debentures, or other forms of interest in the equity of companies or other forms of participation and/or economic interests from the respective activity; c) claims to money, to other assets and to any performance having an economic value, except for: i) claims to money that arise solely from commercial contracts for the sale of goods or services; ii) the extension of credits in connection with a commercial transaction, such as trade financing; iii) credits with a maturity of less than three years, by an investor in the territory of a Contracting Party to an investor in the territory of the other Contracting Party. However, the exception concerning credits with a maturity of less than three years, shall not apply to credits granted by an investor of a Contracting Party

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to a company of the other Contracting Party owned by the former investor. d) intellectual property rights such as copyrights, patents, utility models, industrial designs, trademarks, trade names, trade and business secrets, technical processes, know-how and good will; e) concessions conferred by law under a contract or administrative act of a competent authority; f) assets that are placed at the disposal of a lessee, in the territory of a Contracting Party, under a leasing agreement and in conformity with its laws and regulations. Any alteration on the form in which assets are invested does not affect their character as investments, provided that such alteration is included in the aforesaid definition and do not contradict the laws and regulations of the Contracting Party in which territory the investment was made. A payment obligation from, or the granting of a credit to a Contracting Party or to a state enterprise is not considered an investment.

Slovak Republic-Republic of Korea BIT (Seoul, 24 May 2005) Article 1 – Definitions For the purposes of this Agreement: 1. “investment” means every kind of assets or rights invested by investors of one Contracting Party in the territory of the State of the other Contracting Party in accordance with the legislation of the latter Contracting Party and in particular, though not exclusively, includes: a) movable and immovable property and any other property rights such as mortgages, liens, leases or pledges; b) shares in, stocks and debentures of, and any other form of participation in a company or any business enterprise and rights or interest derived therefrom; c) claims to money or to any performance under contract having an economic value; d) intellectual property rights including rights with respect to copyrights, patents, trademarks, trade names, industrial designs, technical processes, trade secrets and know-how, and goodwill; and e) business concessions having an economic value conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources.

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Any change of the form in which assets or rights are invested or reinvested shall not affect their character as an investment.

Spain-Czech Republic BIT (Madrid, 12 December 1990 – Entry into force: 28 November 1991) Article 1 – Definitions For the purposes of this Agreement: 1. the term “investments” shall apply to all types of assets acquired in accordance with the laws of the country in which such investment is made and particularly, but not exclusively, to: a) movable and immovable property and all other real rights such as mortgages, sureties, beneficial interests and similar rights as regards any type of assets; b) rights deriving from shares, bonds, and other types of participation in private or public companies, whether having a fixed or variable income, commercial financial bans and whether capitalised or not; c) monetary assets, claims and cash, other assets and any other benefit having an economic value; d) industrial property rights, trademarks and other rights derived from intellectual property including business assets and technical know-how; e) concessions accorded by law or by virtue of a contract, including concessions for prospecting, cultivating, mining or developing natural resources.

Sweden-Argentina BIT (Stockholm, 22 November 1991 – Entry into force: 28 September 1992) Article 1 – Definitions 1) The term “investment” shall comprise every kind of asset, invested by an investor of one Contracting Party in the territory of the other Contracting Party, provided that the investment has been made in accordance with the laws and regulations of the other Contracting Party, and shall include un particular, though not exclusively: a) movable and immovable property as well as any other property rights, such as mortgage, lien, pledge, usufruct and similar rights; b) shares and other kinds of interest in companies; c) title to money which is directly related to specific investment or to any performance under contract having an economic value;

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d) patents, other industrial property rights, technical processes, trade names, know-how and other intellectual property rights as well as good-will; and e) business concessions conferred by law, administrative decisions or contracts, including concessions to search for, cultivate, extract or exploit natural resources. The meaning and scope of the assets above mentioned shall be determined by the laws and regulations of the Contracting Party in whose territory the investment was made. No alteration of the legal form under which the assets have been invested or reinvested shall affect their qualification as investments according to this Agreement.

Switzerland-Mexico BIT (10 July 1995 – Entry into force: 14 March 1996) Article 1 – Definitions For the purposes of this Agreement: […] 3. investment means every kind of asset and particularly: a) movable property, immovable property acquired or used for economic purposes, as well as any other rights in rem, such as servitudes, mortgages, liens, pledges; b) shares, parts or any other kind of participation in companies; c) claims to money or to any performance having an economic value, except for claims to money that arise solely from commercial contracts for the sale of goods or services, and the extension of credit in connection with a commercial transaction, which maturity date is less than three years, such as trade financing; d) copyrights, industrial property rights (such as patents, utility models, industrial designs or models, trade or service marks, trade names, indications of origin), know-how and goodwill; e) interests arising from the commitment of capital or other resources in the territory of one Party to economic activity in such territory, such as under contracts involving the presence of an investor’s property in the territory of such Party, including turnkey or construction contracts, or concessions. A payment obligation from, or the granting of a credit to, the State or a state enterprise is not considered an investment.

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Turkey-Denmark BIT (Copenhagen, 7 February 1990 – Entry into force: 1 August 1992) Article 1 – Definitions For the purpose of this Agreement: 1) a) The term “investment” means every kind of asset and in particular, but not exclusively: i) stocks or any other form of participation in companies; ii) returns reinvested, claims to money or other rights having a financial value to an investment; iii) movable and immovable property, as well as any other rights as mortgages, liens, pledges and any other similar rights as defined in conformity with the law of the Contracting Party in the territory where the property is situated; iv) industrial and intellectual property rights, patents, industrial designs, trademarks, goodwill, know-how and any other similar rights, business concessions conferred by law or by contract, including the concessions related to natural resources. b) The said term shall refer to all direct investments made in accordance with the laws and regulations in the territory of the Contracting Party where the investments are made. The term “investments” covers all investments made in the territory of a Contracting Party by investors of the other Contracting Party before or after the entry into force of this Agreement.

United Kingdom-South Africa BIT (Cape Town, 20 September 1994 – Entry into force: 27 May 1998) Article 1 – Definition For the purpose of this Agreement: a) “investment” means every kind of asset and in particular, though not exclusively, includes: i) movable and immovable property and any other property rights such as mortgages, liens or pledges; ii) shares in and stock and debentures of a company and any other form of participation in a company; iii) claims to money or to any performance under contract having a financial value; iv) intellectual property rights, goodwill, technical processes and knowhow;

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v) business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources. A change in the form in which assets are invested does not affect their character as investments and the term “investment” includes all investments, whether made before or after the date of entry into force of this Agreement.

United States-Argentina BIT (Washington, 14 November 1991 – Entry into force: 20 October 1994) Article 1 1. For the purposes of this Treaty: a) “investment” means every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts; and includes without limitation: i) tangible and intangible property, including rights, such as mortgages, liens and pledges; ii) a company or shares of stock or other interests in a company or interests in the assets thereof; iii) a claim to money or a claim to performance having economic value and directly related to an investment; iv) intellectual property which includes, inter alia, rights relating to: literary and artistic works, including sound recordings, inventions in all fields of human endeavour, industrial designs, semiconductor mask works, trade secrets, know-how, and confidential business information, and trademarks, service marks, and trade names; and v) any right conferred by law or contract, and any licenses and permits pursuant to law.

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Chapter 2

Interpretation of the Umbrella Clause in Investment Agreements*

Umbrella clauses have become a regular feature of international investment agreements and have been included to provide additional protection to investors by covering the contractual obligations in investment agreements between host countries and foreign investors. The meaning of the umbrella clauses is one of the most controversial issues with which international arbitral tribunals have been recently confronted with while adjudicating investment disputes brought before them. Through a wide review of the specific textual provisions included in investment agreements, the survey seeks to serve as guidance for negotiators by clarifying the implications deriving from the choice of different drafting options. The paper further examines the interpretation of the clause given by arbitral tribunals on a case-by-case basis. Caution is recommended in trying to draw any conclusions on the interpretation of the clause since the jurisprudence in this field is constantly evolving.

* This paper was prepared by Katia Yannaca-Small, Legal Advisor, Investment Division, Directorate for Financial and Enterprise Affairs, OECD. Thanks are due to Catriona Paterson, a consultant to the Investment Division, for research input. The paper as a factual survey does not necessarily reflect the views of the OECD or those of its member governments. It cannot be construed as prejudging ongoing or future negotiations or disputes pertaining to international investment agreements.

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Introduction An increasing number of investment treaty arbitrations involve not only the treaties themselves but also investor-state contracts. The extent of subject matter (rationae materiae) jurisdiction is not uniform under Bilateral Investment Treaties (BITs). Some BITs cover only disputes relating to an “obligation under this agreement”, i.e. only for claims of BIT violations. Others extend the jurisdiction to “any dispute relating to investments”. Some others create an international law obligation that a host state shall, for example, “observe any obligation it may have entered to”; “constantly guarantee the observance of the commitments it has entered into”; “observe any obligation it has assumed”, and other formulations, in respect to investments. These provisions are commonly called “umbrella clauses”, although other formulations have also been used: “mirror effect”, “elevator”, “parallel effect”, “sanctity of contract”, “respect clause” and “pacta sunt servanda”. Clauses of this kind have been added to provide additional protection to investors and are directed at covering investment agreements that host countries frequently conclude with foreign investors. Although the “umbrella clause” has been known since the 1950s and its effects have been discussed in literature and doctrine, it was not until the recent two SGS Société Générale de Surveillance SA cases where it started to be tested.1 Given the very frequent occurrence of the umbrella clause in modern investment treaties, and the different language used in these treaties, it would be useful to examine further the meaning of this clause in particular by taking stock of the specific language included in a number of BITs. The aim of this examination is to improve an understanding of the interpretations of this clause and assist treaty negotiators and parties in taking informed decisions. For a better understanding of the clause, the present paper first gives a brief overview of its history and its place in the literature and doctrine. Second, it takes stock of the specific language included in a number of BITs, using those of Switzerland, Germany, Denmark, Japan and the United States 1. As Thomas Wälde notes: “The question of whether an international arbitration tribunal had jurisdiction over contractual counter-claims was never fully examined, nor was the question of whether contractual jurisdiction clauses should oust – or precede – the jurisdiction of treaty-based tribunals” in “The Umbrella Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases”, The Journal of World Investment and Trade, Vol. 6 No. 2, April 2005, Geneva.

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as representative examples of the different types. Third, it looks at the interpretation given to the clause by arbitral tribunals.

I. History of the clause and literature A. History of the clause and state practice The first occurrence of the “umbrella clause”2 as a distinct investment protection clause can be traced to the 1956-59 Abs Draft International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (the Abs draft) (article 4):3 “In so far as better treatment is promised to non-nationals than to nationals either under intergovernmental or other agreements or by administrative decrees of one of the High contracting Parties, including most-favoured nation clauses, such promises shall prevail.” This approach was reformulated in the 1959 Abs-Shawcross Draft Convention on Foreign Investment (Article II):4 “Each Party shall at all times ensure the observance of any undertakings which it may have given in relation to investments made by nationals of any other party.” The clause appeared right afterwards in the first BIT between Germany and Pakistan in 1959 (Article 7): “Either Party shall observe any other obligation it may have entered into with regard to investments by nationals or companies of the other party.” The clause was also one of the core substantive rules of the 1967 OECD draft Convention on the Protection of Foreign Property (Article 2)5 which provided that:

2. For a complete history of the umbrella clause see A.C. Sinclair: “The Origins of the Umbrella Clause in the International Law of Investment Protection”, Arbitration International 2004, Vol. 20, No. 4, pp. 411-434. Sinclair’s research suggests that the origins can be traced to the advice provided by Sir Elihu Lauterpracht in 1953-54 to the Anglo-Iranian Oil Company in connection with the settlement of the Iranian oil nationalisation dispute. The so-called “umbrella” or “parallel protection” treaty was again proposed in Lauterpracht’s advice given in 1956-57 to a group of oil companies contemplating a trunk pipeline from Iraq in the Persian Gulf through Syria and Turkey to the Eastern Mediterranean. 3. See H.J. Abs “Proposals for Improving the Protection of Private Foreign Investments”, In Institut International d’Études Bancaires, Rotterdam, 1958 as cited by A. Sinclair, op. cit., note 2. 4. The text of the Abs-Shawcross Draft is reprinted in UNCTAD International Investment Instruments: A Compendium in United Nations, New York, 2000, Vol. V. p. 395. 5. “Draft Convention on the protection of foreign property and Resolution of the Council of the OECD on the Draft Convention”, OECD Publication No. 23081, November 1967.

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“Each Party shall at all times ensure the observance of undertakings given by it in relation to property of nationals of any other Party.” The Notes and Commentaries accompanying the draft Convention describe this article as an application of the general principle of pacta sunt servanda in favour of the property of nationals of another party, and their lawful successors in title unless the undertaking expressly excludes such succession. According to the Commentaries, property included but is not limited to investments which are defined in Article 9 as all property, rights and interests whether held directly or indirectly, including the interest which a member of a company is deemed to have in the property of the company. Property is to be understood in the widest sense.6 However, the commentary limits the scope of Article 2 by insisting that undertakings must relate to the property concerned; it is not sufficient if the link is incidental.7 The draft MAI text provided – in the Annex, listing negotiating proposals, two formulations for a “respect clause”: Respect Clause: “Each Contracting Party shall observe any obligation it has entered into with regard to a specific investment of an investor of another Contracting Party” and, Substantive approach to the respect clause: “Each contacting Party shall observe any other obligation in writing, it has assumed with regard to investments in its territory by investors of another Contracting Party. Disputes arising from such obligations shall only be settled under the terms of the contracts underlying the obligations.” The Energy Charter Treaty8 in the final sentence of Article 10(1) requires that: “Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.”9 This is however accompanied by a derogation provision included in the Annex IA. This provision allows the contracting parties to opt out of the final sentence of Article 10(1) by not permitting their investors to submit a dispute concerning this provision to international arbitration. Four ECT contracting

6. For a detailed analysis of this provision and the Notes and Commentaries as well as related reactions by scholars, see A. Sinclair, op. cit., note 2, pp. 427-433. 7. Notes and Comments to Article 2, para. 3(a), op. cit., note 5. 8. The Energy Charter Treaty was signed on 17 December 1994, available at www.encharter.org. 9. The accompanying Secretariat document defines the scope of the provision as follows: “Article 10(1) has the important effect that a breach of an individual investment contract by the host state country becomes a violation of the ECT. As a result, a foreign investor and its home country may invoke the dispute settlement mechanism of the Treaty”, The Energy Charter Treaty: A Reader’s Guide, June 2002, p. 26.

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parties have chosen to apply this derogation: Australia, Canada, Hungary and Norway. It is estimated that, of the 2 500 or more BITs currently in existence approximately forty per cent contain an umbrella clause.10 Treaty practice of States does not point to a uniform approach to the treatment of these clauses. While Switzerland, the Netherlands, the United Kingdom and Germany,11, 12 often include umbrella clauses in their BITs, France, Australia and Japan include umbrella clauses in only a minority of their BITs. Of 35 French BITs e xam in ed, only 4 contain a n umbre lla claus e 1 3 w hile on ly 5 out of 20 Australian BITs14 and 2 of the 9 Japanese BITs examined.15 Canada is the only OECD member state examined in this study which has never included an umbrella clause in its BITs.16 Treaty practice of the United States has changed with the new model BIT; while 34 of the 41 US BITs examined, based on the former Model, contained an umbrella clause, its presentation is very different in the 2004 US Model BIT.

B. Literature The understanding of commentators and drafters on the umbrella clause provision at the time of the draft OECD Convention was that while the clause probably did cover international obligations, its focus was contractual obligations accepted by the host state with regard to foreign property.17 Commenting on the same provision, Brower,18 raised the possibility that the article’s scope rationae materiae may have been limited so as only “to apply

10. Figure cited in Gill, Gearing and Birt, Contractual Claims and Bilateral Investment Treaties: A Comparative Review of the SGS Cases (2004) 21:5 J. Int. Arb. 397 at footnote 31. 11. Article 10 Swiss Model BIT, Article 3(4) Netherlands Model BIT, Article 2(2) UK Model BIT and Article 8 Germany Model BIT 1991(2). 12. Of 66 Swiss BITs examined, 48 contain an umbrella clause; of 89 UK BITs examined 87 contain an umbrella clause; of 86 Dutch BITs examined 76 contained an umbrella clause; of 71 German BITs examined 68 contain an umbrella clause. 13. Article 3 France-Hong Kong BIT 1995; Article 2 France-Peru BIT 1993; Article 8 France-Russia BIT 1989; Article 2(2) France-Yemen BIT 1984. 14. Article 11 Australia-Chile BIT 1996; Article 11 Australia-China BIT 1988; Article 2(2) Australia-Hong Kong BIT 1993; Article 11 Australia-Papua New Guinea BIT 1990; Article 10 Australia-Poland BIT 1991. 15. Article 2(3) Japan-Hong Kong BIT 1997; Article 3(3) Japan-Russia BIT 1998. 16. 23 Canadian BITs were examined in this study; the BITs not examined are those concluded with Bangladesh (1990) and Slovakia (2001). 17. See Sinclair, op. cit., note 2. 18. C.N. Brower, “The Future of Foreign Investment-Recent Developments in the International Law of Expropriation and Compensation” in V.S. Cameron (eds.), Private Investors Abroad – Problems and Solutions in International Business in 1975 (Southwestern Legal Foundation Symposium Series, Private Investors Abroad, Matthew Bender, New York, 1976), pp. 93, 105, note 27, as cited by A. Sinclair, op. cit., note 2.

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Box 2.1. The discussions during the MAI negotiations The MAI Drafting Group considered the question of provisions which might be included in the MAI on investor rights arising from other agreements. Three broad conceptual approaches emerged. These were, in ascending order of ambition: i) a “zero” option, i.e., no special provision in the MAI on rights under investor-state agreements; ii) a procedural provision, i.e., a dispute settlement clause; or iii) a substantive and procedural provision, i.e., a “respect clause”. The third approach was considered the most ambitious. It would make respect for such investor-state agreements into a MAI obligation, giving them substantive protection of the international law rule, pacta sunt servanda. Arguably, this could affect the defences of or damages owed by a government asserting rights to cancel or modify a contract for sovereign reasons or to change laws affecting an investment. It also has the following essential procedural effect: violations of the investor-state agreement would be subject to the full range of MAI dispute settlement mechanisms, including state-state consultations and arbitration. In such settlement, the issues would be considered in a broad context including both domestic and international law. The MAI Drafting Group considered that: “the second and third approaches would, in effect, amend investor-state agreements. They could introduce uncertainties about the law and remedies to be applied in case of dispute. They raise the questions of whether and how to draw a line between the kinds of agreements for which the additional protection might be appropriate and those for which it might not, such as purely commercial bargains, or agreements settling tax or other administrative claims.” There was no consensus in the Group on the basic choice of approach. That choice might have also been affected by outcome on a provision stating that the more favourable of the MAI or those investor-state agreements prevailed. If a decision were taken to pursue either the second (procedural) or third (substantive and procedural) approach, there would be subsidiary questions, the most important being scope of coverage. Should the provision apply broadly to all investor rights under investor-state agreements? If not, should it be limited by, for example, distinguishing between rights arising under essentially commercial agreements (presumably excluded) and those under which a state is acting as a sovereign (presumably covered) – a distinction which may be difficult to make in practice; or enumerating or defining categories of covered rights, such as those arising out of investment agreements and authorisations on which an investor has relied. The Group examined the strategic choices and issues thoroughly, in the time available, and clarified their implications. Given the range of views, the Group did not elaborate draft provisions for inclusion in the MAI. However, it agreed to provide the above mentioned provisions to aid in understanding the basic choices. These texts were not examined by the Group and did not represent specific recommendations. See “Report of The Drafting Group Concerning the Protection of Investor Rights Arising from Other Agreements”, DAFFE/MAI/DG1(96)REV1, 18 March 1996, in www1.oecd.org/daf/mai/pdf/dg1/dg1961r1e.pdf.

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specifically to large-scale investment and concession contracts – in the making of which the state is deliberately ‘exercising its sovereignty’ – and thus it might be argued that the ordinary commercial contracts are an implied exception to the general rule set forth in Article 2”.19 Tod ay, it s e e m s t h at a mo re c on s i st en t v iew e m e rg e s a m on g commentators on the scope of the umbrella clause. In his Hague lecture, Prosper Weil presented the idea that an investment treaty would transform a mere contractual obligation between state and investor into an international law obligation, in particular if the treaty included a clause obliging the state to respect such contract.20 F. Mann also was of the view that the umbrella clause in the BITS protects the investor against a mere breach of contract: “This is a provision of particular importance in that it protects the investor against any interference with his contractual rights, whether it results from a mere breach of contract or a legislative or administrative act, and independently of the question whether or not such interference amounts to expropriation. The variation of the terms of a contract or license by legislative measures, the termination of the contract or the failure to perform any of its terms, for instance, by nonpayment, the dissolution of the local company with which the investor may have contracted and the transfer of its assets (with or without the liabilities) – these and similar acts the treaties render wrongful.”21 I. Shihata, former Secretary-General of ICSID, also recognised that “treaties may furthermore elevate contractual undertakings into international law obligations, by stipulating that breach by one State of a contract with a 19. Wälde notes that contracts related to investment – at this time seen in a much more narrow way as “foreign direct investment” than today – did by their very nature always involve a governmental dimension. Treaties at this time also only provided for state-to-state arbitration which was a screening mechanism against exorbitant and gratuitous use of treaties by private commercial operators. “The ‘Umbrella’ (or Sanctity of Contract/Pacta Sunt Servanda) Clause in Investment Arbitration: A Comment on Original Intentions and Recent Cases”, Transnational Dispute Management, Vol. 1, Issue #04, October 2004. 20. “Il n’y a, en effet, pas de difficultés particulières [en ce qui concerne la mise en jeu de la responsabilité contractuelle de l’État] lorsqu’ il existe entre l’État contractant et l’État national du cocontractant un traité de « couverture » qui fait de l’obligation d’exécuter le contrat une obligation internationale à la charge de l’État contractant envers l’État national du cocontractant. L’intervention du traité de c ou ve r tu re t ra n sfo r me le s obli g a t io ns c o nt r ac t u e lle s e n o blig at i on s internationales et assure ainsi, comme on l’a dit, « l’intangibilité du contrat sous peine de violer le traité » ; toute inexécution du contrat, serait-elle même régulière au regard du droit interne de l’État contractant, engage dès lors la responsabilité internationale de ce dernier envers l’État national du cocontractant”. Recueil des Cours III, 1969, pp. 132 et seq. 21. F.A. Mann “British Treaties for the Promotion and Protection of Investments”, 52 British Yearbook of International Law 241 (1981), p 246.

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private party from the other State will also constitute a breach of the treaty between the two States”.22 Dolzer and Stevens along the same lines state that: “These provisions seek to ensure that each Party to the treaty will respect specific undertakings towards nationals of the other Party. The provision is of particular importance because it protects the investor’s contractual rights against any interference w hich migh t be caused by either a simple breach of contract or by administrative or legislative acts and because it is not entirely clear under general international law whether such measures constitute breaches of an international obligation.”23 E. Gaillard notes that an historical examination of the origins of observance of undertakings clauses – “clauses with a mirror effect” – shows “in the clearest manner” that the intention of States negotiating and drafting such clauses is to permit a breach of contract to be effectively characterised as the breach of an international treaty obligation by the host state. The effect of the clause is to reflect at the level of international law what is analysed at the level of applicable private law as simple contractual violation.24 C. Schreuer states that “umbrella clauses have been added to some BITs to provide additional protection to investors beyond the traditional international standards. They are often referred to as ‘umbrella clauses’ because they put contractual commitments under the BIT’s protective umbrella. They add the compliance with investment contracts, or other undertakings of the host State, to the BIT’s substantive standards. In this way, a violation of such a contract becomes a violation of the BIT”.25 UNCTAD’s26 analysis of the provision is less categorical. It notes that “the language of the provision is so broad that it could be interpreted to cover all kinds of obligations, explicit or implied, contractual or non-contractual, undertaken with respect to investment generally. A provision of this kind might possibly alter the legal regime and make the agreement subject to the rules of international law”. A middle approach is expressed by T. Wälde. He believes that the principles of international law would only protect breaches and interference

22. I. Shihata, “Applicable Law in International Arbitration: Specific Aspects in Case of the Involvement of State Parties”, in I.F.I. Shihata and J.D. Wolfensohn (eds.), The World Bank in a Changing World: Selected Essays and Lectures, Vol. II, Brill Academic Publishers, Leiden, Netherlands, 1995, p. 601. 23. R. Dolzer and M. Stevens “Bilateral Investment Treaties”, Kluwer Law, 1995, pp. 81-82. 24. E. Gaillard, “L’arbitrage sur le fondement des traités de protection des investissements”, Revue de l’Arbitrage, p. 868, note 43. 25. C. Schreuer, “Travelling the BIT Route: of Waiting Periods, Umbrella clauses and Forks in The Road”, J. World Inv. (2004) pp. 231-256. 26. “Bilateral Investment Treaties in the mid-1990s”, United Nations, 1998, p. 56.

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with contracts made with government or subject to government powers, if the government exercised it particular sovereign prerogatives to escape from its contractual commitments or to interfere in a substantial way with such commitments. This would apply as well to contracts concluded only with private parties in the host state if such contracts are destroyed by government powers. “[…] If the core or centre of gravity of a dispute is not about the exercise of governmental powers […] but about ‘normal’ contract disputes, then the BIT and the umbrella clause has no role.”27 A different view is expressed by P. Mayer, who maintains that the nature of the inter pares relationship remains unchanged and is subject to the lex contractus and that only the interstate relation ship is s ubject to international law.28

II. Significance of the language of the umbrella clause in treaties A comparative analysis of the umbrella clauses reveals some common features but also a certain disparity in language use which leads to the question of the scope and effect of each particular clause (Annex 2.A1). Arbitral jurisprudence and doctrine demands each clause to be interpreted on its own terms; as such, the specific wording of an umbrella clause is crucial to its scope and effect. More specifically, these questions relate to i) whether the placement of the clause has any effect on the interpretation of umbrella clauses; ii) what obligations or commitments are protected under umbrella clauses and iii) which investors and/or investments can benefit from the protection of an umbrella clause.

Common features of a general nature As a general proposition, a common factor between umbrella clauses is the use of mandatory language. For example, Article 8(2) of the German Model BIT 1991(2) reads: “Each Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by nationals or companies of the other Contracting Party”. A different formulation is found in Article 10 of the Australia-Poland BIT 1991 which is phrased in less forceful terms: “A Contracting Party shall, subject to its law, do all in its power to ensure that a written undertaking given by a competent authority to a national of the other Contracting Party with regard to an investment is respected”.

27. T. Wälde, op. cit., notes 1 and 19. 28. P. Mayer, “La neutralisation du pouvoir normatif de l’État en matière de contrats d’État”, JDI, 1986, pp. 36-37.

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A second feature common to the majority of BITs examined is that they relate to obligations undertaken by the State and do not refer to obligations between private individuals. The Czech Republic-Singapore BIT 1995 however, provides a noteworthy exception to this general proposition by providing that it is also incumbent on the State not to interfere with contracts relating to the investment entered into between private parties. Article 15 reads: “(2) Each Contracting Party shall observe commitments, additional to those specified in this Agreement it has entered into with respect to investments of the investors of the other Contracting Party. Each Contracting Party shall not interfere with any commitments, additional to those specified in this Agreement, entered into by nationals or companies with the nationals or companies of the other Contracting Party as regards their investments”.

Structure of the Bilateral Investment Treaty The placement of the umbrella clause within the framework of the bilateral investment treaty is a point of variance in treaty practice. The Netherlands Model BIT29 places the umbrella clause within an article detailing the substantive protections provided under the Treaty. This structure can also been seen in a number of BITs including those concluded by the United Kingdom, New Zealand, Japan, Sweden and the US. By contrast, the Swiss Model BIT places the umbrella clause in a provision entitled “other commitments” and separates it from the substantive provisions by two dispute resolution clauses and a subrogation clause. The majority of BITs concluded by Switzerland follow this format; a notable exception however, is the Switzerland-Kuwait BIT 1998 which places the umbrella clause in Article 3 on protection of investments. The Swiss Model BIT format is also found in the Finnish and Greek Model BITs and BITs concluded by Mexico.30 A third variant is to place the umbrella clause in a separate provision from the substantive protections but before the dispute resolution clauses. This structure can be seen in the German Model BITs which place the umbrella clause in Article 8. The effect of the placement of the umbrella clause within the overall framework of the BIT is uncertain. The Tribunal in SGS v. Pakistan (see below) was of the opinion that the placement of the clause near the end of the SwissPakistan BIT, in the same manner as the Swiss Model BIT, was indicative of an intention on the part of the Contracting Parties not to provide a substantive obligation. The Tribunal considered that had the Contracting Parties intended to

29. Article 3 Netherlands Model BIT; but see the Netherlands-Malaysia BIT 1971 and the Netherlands-Senegal BIT 1971 which place the umbrella clause in Articles 14 and 8, respectively. 30. France-Mexico BIT 1998, Mexico-Switzerland BIT 1995, Mexico-Austria BIT, Belgium and Luxembourg-Mexico BIT 1998.

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create a substantive obligation through the umbrella clause it would logically have been placed alongside the other so-called “first order” obligations. By contrast, the SGS v. Philippines Tribunal opined that while the placement of the clause may be “entitled to some weight”, it did not consider this factor as decisive. In this respect, the Tribunal stated “it is difficult to accept that the same language in other Philippines BITs is legally operative, but that it is legally inoperative in the Swiss-Philippines BIT merely because of its location”.31

Scope and effect A crucial issue in respect of umbrella clauses is the scope and nature of the obligations undertaken. Textual differences can be seen between umbrella clauses that refer to “commitments”,32 “any obligation”33 and “any other obligation”.34 Importantly, the phrase “any obligation” was given greater elucidation in the Partial Award rendered in Eureko v. Poland; the Tribunal stated: “‘Any’ obligations is capacious; it means not only obligations of a certain type, but ‘any’ – that is to say, all – obligations.”35 While some umbrella clauses refer to obligations “entered into”36 by a State, others refer to obligations “assumed”37 by the State. The Finnish Model BIT refers to obligations which the State may “have” with regard to a specific investment.38 These variations raise the question whether the obligation referred to is a contractual obligation between the State and the investor or whether it could extend to unilateral obligations undertaken by the State through, inter alia, promises, legislative acts or administrative measures. It has been suggested that the words “obligations entered into” may be interpreted as confining the obligations in question to those undertaken vis-à-vis the other Contracting Party.39 On the other hand, the Tribunal in SGS v. Pakistan found the language “commitments entered into” broad enough to encompass unilateral obligations, including municipal acts and administrative measures.40 While in most of the BITs which contain an umbrella clause the language is clear and straightforward: “shall observe” or “shall respect”, in some others it is more ambiguous and may leave room for different interpretations. This is the

31. Ibid., note 2, para. 124. 32. Article 7(2), Belgium and Luxembourg-Saudi Arabia BIT 2002. 33. Article 11(2), Greek Model BIT 2001. 34. Article 2(3), Greece-Argentina BIT 1999 [not in force]. 35. Eureko B.V. v. Poland, Partial Award 19, August 2005, para. 246. 36. UK Model BIT Article 2, Promotion and protection of investment. 37. UK-Lebanon BIT 1999, Article 10, Other obligations. 38. Article 12, Application of other rules Finland Model BIT. 39. W. Ben Hamida, La clause relative au respect des engagements dans les traités d’investissement, Institut des Hautes Études Internationales, 21 May 2005 and arguments of the Parties in SGS v. Pakistan, ibid., note 1. 40. SGS v. Pakistan, at 163-166.

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case for instance of the Switzerland-Pakistan BIT (the basis for the SGS v. Pakistan case) where either contracting Party “shall constantly guarantee the observance of the commitments”; the Italy-Jordan BIT (the basis for the Salini v. Jordan case) “each contracting Party shall maintain in its territory a legal framework apt to guarantee to investors the continuity of legal treatment, including the compliance, in good faith of all undertakings assumed with regards to each specific investor”. Certain BITs provide greater specificity as to their scope of application by identifying more precisely the types of obligations covered by the clause. Australian BITs concluded with Chile, China, Papua New Guinea and Poland all refer to “written obligations”.41 In a similar vein Article 2 of the Austria-Chile BIT 1997 refers to “contractual obligations”. The majority of BITs concluded by Mexico that contain an umbrella clause appear to qualify its scope of application, stating that “disputes arising from such obligations shall be settled under the terms of the contract underlying the obligation”.42 A number of Mexican BITs also make explicit reference to “written obligations”;43 in contrast, both the Mexico-Netherlands44 and MexicoSwitzerland BITs are phrased in broader terms. Article 10 of the latter BIT provides: “Each Party shall observe any other obligation it has assumed with regard to investments in its territory by investors of the other Party.” A further distinction between various BITs is the degree to which the object of the obligations is specified. An example of a broadly phrased umbrella clause is in the 1983, 1984 and 1987 US Model BITs,45 as found in Article 2(2)(c) of the USArgentina BIT 1991, for instance, which states: “Each Party shall observe any obligation it may have entered into with regard to investments”, and in many UK BITs as well, including its first with Egypt in 1975: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party.” This can be contrasted to Article 9 of the Austrian Model BIT which provides “Each Contracting Party shall observe any obligation it may have entered into with regard to specific investments by investors of the other Contracting Party”.

41. Article 11, Australia-Chile BIT 1996; Article 11, Australia-China BIT 1988; Article 11, Australia-Papua New Guinea BIT 1990; and Article 10, Australia-Poland BIT 1991. 42. Article 9, Austria-Mexico BIT 1998. 43. Article 9, Mexico-Austria BIT 1998; Article 9, Mexico-Belgium and Luxembourg BIT 1998; Article 8(2), Mexico-Germany BIT 1998 [not in force]; Article 19, MexicoGreece BIT 2000; Article 10, Mexico-France BIT 1998. 44. Article 3(4), Mexico-Netherlands BIT 1998 “Each Contracting Party shall observe any other obligation it may have entered into with regard to investments in its territory by nationals of the other Contracting Party […]” 45. US-Senegal BIT, US-Panama, US-Zaire BITs. See R.S. Gudgeon, “United States Bilateral Investment Treaties: Comments on their Origin, Purposes, and General Treatment Standards” in 11 Int’l Tax and Bus. L. 105 at 111 (1986).

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Similar language is included in the Swiss-Philippines BIT (basis for the SGS v. Philippines arbitration).

Example 1: Treaty Practice of Switzerland Even within the Treaty practice of a single state, it is difficult to find uniformity in use of umbrella clauses. As noted above, the Swiss Model BIT separates the umbrella clause from the other substantive provisions, placing it near the end of the Treaty after the dispute resolution and subrogation clauses. Its Article 10(2) reads: “Each Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party.” Of the 66 Swiss BITs examined, 12 contained no umbrella clause while 22 followed the text and format of the Model BIT. A notable departure from this Model can be seen in the Switzerland-Kuwait BIT 1998 which places the umbrella clause in Article 3 on Protection of investments. Article 11 of the SwitzerlandPakistan BIT (the basis for the SGS v. Pakistan case) uses a different language: “Either contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party”. All the above clauses can be contrasted to Article 13 of Switzerland-India BIT 1997 which provides: “Each Contracting Party shall observe any obligation it may have entered into with regard to an investment of an investor of the other Contracting Party. In relation to such obligations dispute resolution under Article 9 of this Agreement shall however only be applicable in the absence of normal local judicial remedies being available.”46

Example 2: Treaty Practice of Denmark A small difference in language is apparent between the Danish Model BIT and the Denmark-Korea BIT 1988. Article 3 on the Promotion and protection of investment of the Model BIT reads: “Each Contracting Party shall observe any obligation it may have entered into with regard to investment of investors of the other Contracting Party”. The Denmark-Korea BIT, on the other hand, in its Article 3 on Protection of investment provides: “[…] Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party”.

46. For similar language in an umbrella clause see also the Germany-India BIT 1995.

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In sharp contrast to these two provisions is the Denmark-China BIT 1985 Article 3 on Protection of Investment which provides: “[…] Each Contracting Party shall observe any obligation it may have entered into with regard to approved investment contracts of nationals or companies of the other Contracting Party”. In a similar vein, the Denmark-Kuwait BIT 2001 refers to obligations entered into with regard to “any particular investment of an investor” while the Denmark-India BIT 1995 closely follows the Model BIT but adds “with disputes arising from such obligations being only redressed under the terms of the contracts underlying the obligations”.

Example 3: Treaty Practice of Germany The German Model BIT 47 places the umbrella clause in a separate Article 8 and reads: “Each Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by nationals or companies of the other Contracting Party 48/investments in its territory by investors of the other Contracting State”.49 Of 71 German BITs examined, 3 contained no umbrella clause and 16 paralleled the Model BITs. The Germany-Bangladesh BIT 1981 provides greater specificity by providing in Article 7(2): “Each Contracting Party shall observe any other obligation it may have entered into with regard to investments in its territory by agreement with nationals or companies of the other Contracting Party”.50 The Germany-India BIT 1995 departs from the above-mentioned BITs. In its Article 13(2) “Application of other rules” it provides: “Each Contracting Party shall observe any other obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party, with dispute arising from such obligations being only redressed under the terms of the contracts underlying the obligations”.

47. J. Karl, in an analysis of this Model BIT, states that this clause “relates particularly to investment contracts between the investor and the host country” and that “the protection of such contracts is now a standard clause in bilateral investment agreements”. He notes that some countries are “reluctant to accept this provision which transforms responsibility incurred towards a private investor under a contract into international responsibility”. “The Promotion and Protection of German Foreign Investment Abroad”, 11 ICSID Rev.-F.I.L.J. 1, No. 1, Spring 1996 at 23. 48. Model BIT 1991(2). 49. Model BIT (No. 201). 50. This language is reproduced in a further 9 BITs.

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Example 4: Treaty Practice of Japan Only two of the 9 Japanese BITs examined in this study contain an umbrella clause. While both include the clause in a provision relating to substantive protections accorded under the BIT, the language used in each clause differs. Article 2(3) of the Japan-Hong Kong BIT 1997 reads: “Each Contracting Party shall observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party.” This can be contrasted to the Japan-Russia BIT 1998 which reads in its Article 3(3): “Each Contracting Party shall observe any of its obligations assumed in respect of the capital investments made by an investor of the other Contracting Party.”

Example 5: Treaty Practice of the United States As mentioned above, an umbrella clause is contained in 34 of the 41 US BITs examined that are based on the former Models: “Each Party shall observe any obligation it may have entered into with regard to investments.” This clause is not present in the most recent 2004 US Model BIT. Article 24(1) of the model BIT limits the application of this clause to cover only claims stemming from an investment agreement and not other contractual obligations (Annex 2.A2). “[…] the claimant may submit to arbitration under this Section a claim that the respondent has breached […] c) an investment agreement.” In its Article 26, it provides for an explicit waiver of this right: “No claim may be submitted to arbitration under this Section unless: b) the notice of arbitration is accompanied i) for claims submitted to arbitration under Article 24(1)a by the claimant’s written waiver […] of any right to initiate or continue before any administrative tribunal or court under the law of either Party or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 24.” The Model BIT, in its Article 1, provides for a detailed definition of an investments agreement: “ ‘investment agreement’ means a written agreement51 that takes effect on or after the date of entry into force of this Treaty between a national authority 52 of a Party and a covered investment or an investor of the other Party that grants the covered investment or investor rights: a) with respect to natural resources or other assets that a national authority controls; and b) upon which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself.”

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III. Jurisprudence Although as mentioned above, the umbrella clause has been a subject of discussion among scholars for some decades now, it has never been part of jurisprudence until very recently.53 The first ICSID case that addressed the umbrella clause arose in 1998: Fedax NV v. Republic of Venezuela54 based on the BIT between the Netherlands and the Republic of Venezuela. In this case, the tribunal was unaware that there was an umbrella clause, and did not carry out any in-depth examination of the clause or its application. It simply applied the “plain meaning” of the provision, that commitments should be observed under the BIT, to the promissory note contractual document. It found that Venezuela was under the obligation to “honour precisely the terms and conditions governing such investment, laid down mainly in Article 3 of the Agreement, as well as to honour the specific payments established in the promissory notes issued”.55 The merits of the case were partially settled by the parties.

A narrow interpretation The first time 56 an arbitral tribunal evaluated the scope of an umbrella clause was in the SGS Société Générale de Surveillance S.A. v. Pakistan case, 57 (2003) based on the Pakistan-Switzerland BIT. The Tribunal rejected SGS’s contention that this clause elevated breaches of a contract to breaches of the treaty: “The text itself of Article 11 does not purport to state that breaches of contract alleged by an investor in relation to a contract it has concluded with a State 51. Written agreement refers to an agreement in writing, executed by both parties, whether in a single instrument or in multiple instruments, that creates an exchange of rights and obligations, binding on both parties under the law applicable under Article XX [Governing Law](2). For greater certainty, a) a unilateral act of an administrative or judicial authority, such as a permit, license, or authorisation issued by a Party solely in its regulatory capacity, or a decree, order, or judgment, standing alone; and b) an administrative or judicial consent decree or order, shall not be considered a written agreement. 52. For purposes of this definition, “national authority” means for the United States, an authority at the central level of government. 53. For a detailed discussion on all recent ICSID cases dealing with the umbrella clause see E. Gaillard, Journal du droit international, Clunet No. 1/2006, Janvier-FévrierMars 2006 at 326-350. 54. Fedax NV v. Republic of Venezuela, Award, 9 March 1998, 37 ILM 1391 (1998). 55. Id., paras. 25, 29. (2002) 5 ICSID report, 186 pp. 56. The first Energy Charter Treaty tribunal in Nycomb v. Latvia could have rendered its judgment on the basis of the ECT umbrella clause as was proposed by the claimant, but preferred to rest its decision on national treatment. By doing so, it avoided having to decide whether, in this case, the contract’s jurisdictional clause in favour of domestic courts should be overridden by the ECT’s arbitral jurisdiction. 57. SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID case No. ARB/01/13, decision on Jurisdiction, 6 August 2003, 18 ICSID rev- F.I.L.J. 307 (2003).

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(widely considered to be a matter of municipal rather than international law) are automatically ‘elevated’ to the level of breaches of international treaty law.”58 The Tribunal added that “the legal consequences were so far-reaching in scope and so burdensome in their potential impact on the State” that “clear and convincing evidence of such an intention of the parties” would have to be proved. Such proof was not brought forward according to the Tribunal.59 It also argued that the claimant’s interpretation “would amount to incorporating by reference an unlimited number of state contracts” the violation of which “would be treated as a breach of the treaty”.60 It is worth noting that after the publication of the decision, the Swiss authorities explained in a letter their intention when entering into the Switzerland-Pakistan BIT as follows: “[…] the Swiss authorities are alarmed about the very narrow interpretation given to the meaning of Article 11 by the Tribunal, which not only runs counter to the intention of Switzerland when concluding the Treaty but is quite evidently neither supported by the meaning of similar articles in BITs concluded by other countries nor by academic comments on such provisions […] With regard to the meaning behind provisions such as Article 11 the following can be said: […] they are intended to cover commitments that a host State has entered into with regard specific investments of an investor or investment of a specific investor, which played a significant role in the investor’s decision to invest or to substantially change an existing investment, i.e. commitments which were of such a nature that the investor could rely on them […] It is furthermore the view of the Swiss authorities that a violation of a commitment of the kind described above should be subject to the dispute settlement procedures of the BIT.”61 The Tribunal in Joy Mining Machinery, Ltd. v. The Arabic Republic of Egypt62 interpreted the “umbrella clause” in a way similar to the SGS v. Pakistan tribunal, i.e. that the disputes at issue, which related to the release of bank

58. Ibid., para. 166. 59. Ibid., paras. 167 and 173. 60. Ibid., para. 168. 61. Note on the Interpretation of Article 11 of the Bilateral Investment Treaty between Switzerland and Pakistan in the light of the Decision of the Tribunal on Objections to Jurisdiction of ICSID in Case No. ARB/01/13 SGS Société Générale de Surveillance SA v. Islamic Republic of Pakistan, attached to the Letter of the Swiss Secretariat for Economic Affairs to the ICSID Deputy Secretary-General dated 1 October 2003, published in 19, Mealey’s: Int’l Arb. Rep. E3, February 2004, as referred to by E. Gaillard in “Investment Treaty Arbitration and Jurisdiction Over Contract Claims – the SGS Cases Considered” in International Investment Law and Arbitration: Leading cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, Tod Weiler Editor (2005).

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guarantees, were commercial and contractual disputes to be settled through the mechanism set forth by contract. It held that: “[i]n this context, it could not be held that an umbrella clause inserted in the treaty, and not very prominently, could have the effect of transforming all contract disputes into investment disputes under the Treaty, unless of course there would be a clear violation of Treaty rights and obligations or a violation of contract rights of such a magnitude as to trigger the Treaty protection, which is not the case. The connection between the Contract and the Treaty is the missing link that prevents any such effect. This might be perfectly different in other cases where that link is found to exist, but certainly it is not the case here.”63 In Salini Construttori S.P.A. and Italstrade S.P.A. v. The Hashemite Kingdom of Jordan,64 the Claimant requested the Tribunal to recognise that the Treaty [Article 2(4) of the Italy-Jordan BIT (see above in paragraph 33)], contained a commitment to observe obligations from investor-state contracts. The Tribunal did not agree and found that the only obligation Jordan had, was to “create and maintain a legal framework apt to guarantee the compliance of undertakings”: “[…] under Article 2(4), each Contracting Party did not commit itself to ‘observe’ any ‘obligation’ it had previously assumed with regards to specific investments of investors of the other contracting Party as did the Philippines. It did not even guarantee the observance of commitments it had entered into with respect to the investments of the investors of the other Contracting Parties as did Pakistan. It only committed itself to create and maintain a legal framework apt to guarantee the compliance of all undertakings it has assumed with regards to each specific investor.”65 In El Paso Energy International Company v. The Argentine Republic, 66 the Tribunal rejected the arguments advanced by the US-based energy firm 62. Joy Mining Machinery Limited v. The Arabic Republic of Egypt, Award on Jurisdiction, ICSID case No. ARB/03/11, 6 August 2004. Joy Mining, a company incorporated under the laws of the United Kingdom initiated an ICSID arbitration pursuant to the UK-Egypt BIT. The dispute concerned a “Contract for the Provision of Longwall Mining Systems and Supporting Equipment for the Abu Tartur Phosphate Mining Project”, executed in April 1998 between Joy Mining and the General Organisation for Industrial Projects of the Arab Republic of Egypt. The parties’ disagreement related to performance tests of the equipment and to the release of guarantees. The Tribunal addressed the issue of whether bank guarantees may be considered to be an investment under the BIT. Noting that bank guarantees are simply contingent liabilities, concluded that they could not constitute assets under the BIT and were not protected investments. 63. Idem, para. 81. 64. Salini Construttori S.p.A. and Italstrade S.p.A v. The Hashemite Kindgom of Jordan, ICSID case No. ARB/02/13), Decision on Jurisdiction, 29 November 2004, available at www.worldbank.org/icsid/cases/salini-decision.pdf. 65. Ibid., para. 126.

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El Paso, which would have permitted contractual breaches to be considered as breaches of the US-Argentina BIT under the treaty’s wide “proper” umbrella clause provision that “each Party shall observe any obligation it may have entered into with regard to investments”. The tribunal took issue with earlier arbitral tribunals and in particular the SGS v. Philippines one, who had held that ambiguities in investment treaty terms should be resolved in favor of foreign investors. Instead, the El Paso tribunal called for a balanced approach to investment treaty interpretation, one which takes into account “both State sovereignty and the State’s responsibility to create an adapted and evolutionary framework for the development of economic activities, and the necessity to protect foreign investment and its continuing flow”.67 This rejection of the view that interpretive doubts should be resolved in favor of foreign investor interests would guide the interpretation of the tribunal with respect the “umbrella clause” of the treaty. It rejected a wide interpretation of the clause distancing itself from the ones which had provided broad scope for contractual breaches to be asserted as treaty breaches and aligned itself with several earlier tribunal rulings which adopted a narrow meaning. “In view of the necessity to distinguish the State as a merchant, especially when it acts through instrumentalities, from the States as a sovereign, the Tribunal considers that the ‘umbrella clause’ in the Argentine-US BIT […] can be interpreted in the light of Article VII(1) which clearly includes among the investment disputes under the Treaty all disputes resulting from a violation of a commitment given by the State as a sovereign State, either through an agreement, an authorization, or the BIT […] Interpreted this way, the umbrella clause read in conjunction with Article VII, will not extend the Treaty protection to breaches of an ordinary commercial contract entered into by the State or a State-owned entity, but will cover additional investment protections contractually agreed by the State as a sovereign – such as stabilisation clause – inserted in an investment agreement.”68 The tribunal went on to say that the broad interpretation of the so-called umbrella clauses would have “far reaching consequences, quite destructive of the distinction between national legal orders and the international legal order”. In addition, it expressed its conviction that the investors “will not use appropriate restraint – why should they? – if the ICSID Tribunals offer them unexpected remedies. This responsibility for showing appropriate restraint rests rather in the hands of the ICSID Tribunals”.69

66. El Paso Energy International Company v. The Argentine Republic, ICSID Case No. ARB/03/15, Decision on Jurisdiction, 27 April 2006. 67. Decision on Jurisdiction, para. 70. 68. Idem, para. 81. 69. Idem, para. 82.

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Another tribunal in the case Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic,70 presiding over a dispute brought by BP America and several subsidiaries of the energy firm Pan American, has followed the approach laid down in the earlier El Paso arbitration. The tribunal consisting of two of the same three arbitrators of the El Paso tribunal held that the contested provision in the US-Argentina BIT could not be considered to be an “umbrella clause” which would transform contract claims into breaches of international law. It observed that: “It would be strange indeed if the acceptance of a BIT entailed an international liability of the State going far beyond the obligation to respect the standards of protection of foreign investments embodied in the Treaty and rendered it liable for any violation of any commitment in national or international law ‘with regard to investments.’”71 The Tribunal in CMS Gas Transmission Company v. Republic of Argentina,72 in its final award, found Argentina internationally responsible pursuant to the umbrella clause contained in the Article II(2)c) of the US-Argentina BIT. It expressed however the view that the application of this “proper” umbrella clause was restricted to contracts concluded between an investor and the State acting as sovereign: “Purely commercial aspects of a contract might not be protected by the treaty in some situations, but the protection is likely to be available when there is significant interference by governments or public agencies with the rights of the investor.”73 “While many, if not all, such interferences are closely related to other standards of protection under the Treaty, there are in particular two stabilisation clauses contained in the License that have significant effect when it comes to the protection extended to them under the umbrella clause. The first is the obligation undertaken not to freeze the tariff regime or subject it to price controls. The second is the obligation not to alter the basic rules governing the License without TGN’s written consent.”74

70. Pan American Energy LLC and BP Argentina Exploration Company v. Argentine Republic, ICSID Case No. ARB/03/13 and BP America Production Co. and Others v. Argentine Republic, ICSID Case No. ARB/04/8; Decision on Preliminary Objections, 27 July 2006. 71. Decision on Preliminary Objections, para. 110. 72. CMS v. Republic of Argentina, ICSID case No. ARB/01/8, Award 12 May 2005. 73. Award, p. 299. 74. Award, paras. 302, 303.

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A wide interpretation At the same time as the SGS brought the claim against Pakistan, it brought another case against the Philippines,75 based on the PhilippinesSwitzerland BIT.76 The Tribunal in this case examined the interpretation of the clause in the SGS v. Pakistan decision and although it recognised that the language of the clause was not the same, it found the decision unconvincing77 and highly restrictive.78 It concluded that: “To summarise the Tribunal’s conclusions on this point, Article X(2) makes it a breach of the BIT for the host State to fail to observe binding commitments, including contractual commitments, which it has assumed with regard to specific investments. But it does not convert the issue of the extent of content of such obligations into an issue of international law.”79 However, while the Tribunal took a wider reading of the scope of the umbrella clause, than the SGS v. Pakistan Tribunal, it required at the end that if the contract vests exclusive jurisdiction over disputes arising under its terms to another tribunal (domestic court or a contractual arbitral tribunal) then this tribunal has the primary jurisdiction. The Tribunal decided to suspend the proceedings indefinitely until the claimant got a judgment from the domestic courts and then return to it if he considered that such judgment was not satisfactory.80 The Tribunal in Sempra Energy International v. Argentina81 noted that the dispute arose from “how the violation of contractual commitments with the licensees [Sempra] […] impacts the rights of the investor claims to have in the light of the provisions of the treaty and the guarantees on the basis of which it made the protected investment”. 82 It recognised that these contractual claims were also treaty claims and was reinforced in its view by the fact that: “the Treaty also includes the specific guarantee of a general ‘umbrella clause’, [such as that of Article II(2)(c)], involving the obligation to observe contractual

75. SGS Société Générale de Surveillance SA v. the Republic of the Philippines, ICSID case No. A RB /02/6, D ec isi on on Ju ri sdi c ti on , 2 9 Jan u ar y 2004 , ava il able at www.worldbank.org/icsid/cases/SGSvPhil-final.pdf. 76. On both cases, see the analysis by E. Gaillard, op. cit., note 61; C. Schreuer, op. cit., note 25; T. Wälde, op. cit., notes 1 and 19; and S. Alexandrov in “Breaches of Contract and Breaches of Treaty – The Jurisdiction of Treaty-based Arbitration Tribunals to Decide Breach of Contract Claims in SGS v. Pakistan, and SGS v. Philippines” in The Journal of World Investment and Trade, No. 4, Vol. 5, August 2004. 77. Ibid. 78. Ibid., paras. 119 and 120. 79. Ibid., para. 128. 80. Ibid., paras. 136-155 and 170-76. One of the three members of the Tribunal, Professor A. Crivellaro, dissented. 81. Sempra Energy International v. Republic of Argentina, ICSID case No. ARB/02/16, Decision on Objections to Jurisdiction, 11 May 2005. 82. Idem, para. 100.

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commitments concerning the investment, creates an even closer link between the contract, the context of the investment and the Treaty.”83 The Partial Award in Eureko B.V. v. Poland84 examined the question of the “umbrella clause” included in the Netherlands-Poland BIT in great detail. It interpreted this provision according with its ordinary meaning as stipulated in Article 31, paragraph 1 of the Vienna Convention. It stated that: “the plain meaning – the ‘ordinary’ meaning – of a provision prescribing that a State ‘shall observe any obligations it may have entered into’ with regard to certain foreign investments is not obscure. The phrase ‘shall observe’ is imperative and categorical. ‘Any’ obligations is capacious; it means not only obligations of a certain type, but ‘any’ – that is to say, all obligations entered into with regards to investments of investors of the other Contracting Party.”85 It therefore concluded that Eureko’s contractual arrangements with the Government of Poland were subject to the jurisdiction of the Tribunal.86 One analytical point in dispute before the tribunal in Noble Ventures, Inc. v. Romania 87 was the question of whether contractual obligations also amounted to international obligations by virtue of the “umbrella clause” in the US-Romania BIT. The tribunal, in a thorough discussion on this clause, in which it expressed its view on all previous decisions on this matter,

83. Idem, para. 101. 84. Eureko B.V. v. Poland, Partial Award, 19 August 2005, can be found at www.investmentclaims.com/decisions/Eureko-Poland-LiabilityAward.pdf. 85. Idem, para. 246. 86. The decision was taken by the majority of two arbitrators with the third arbitrator dissenting. In his dissenting opinion, Professor Jerzy Rajski the third member of the arbitral tribunal, declared that the majority’s jurisdictional reasoning – including its analysis of the umbrella clause – might “lead to a privileged class of foreign parties to commercial contract who may easily transform their contractual disputes with State-owned companies into BIT disputes”. Paragraph 11 of the dissenting opinion, 19 August 2005. 87. Noble Ventures, Inc. v. Romania, Award, 12 October 2005, ICSID Case No. ARB/ 01/11. The decision concerns a dispute between a US company, Noble Ventures, Inc. (“the claimant”) and Romania arising out of a privatisation agreement concerning the acquisition, management and operation of a Romanian steel mill, Combinatul Siderugic Resita (“CSR”) and other associated assets. The privatisation agreement was entered into between the claimant and the Romanian State Ownership Fund (“SOF”). Noble Ventures paid SOF the initial instalment of the purchase price and SOF transferred to Noble Ventures its shares of CSR, comprising almost all of CSR’s equity share capital. Noble Ventures alleged, inter alia, that Romania failed to honour the terms of several agreements related to the control of CSR, that Romania misrepresented CSR’s assets in the tender book prepared for the privatisation, that Romania failed to carry out its obligation to negotiate debt rescheduling with state budgetary creditors in good faith, that Romania failed to provide full protection and security to its investment during a period of labour unrest in 2001, and that Romania’s initiation of insolvency proceedings were in bad faith, in violation of fair and equitable treatment, and tantamount to expropriation.

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found that Article II(2)(c) of the BIT intended to create obligations and “obviously obligations beyond those specified in other provisions of the BIT itself” and by doing so it referred clearly to investment contracts. It also noted that such an interpretation was also supported by the object and the purpose rule: “any other interpretation would deprive Article II(2)c) of practical content, reference has necessarily to be made to the principle of effectiveness […]” On this point, it stated that: “a clause that is readily capable of being interpreted in this way and which would otherwise be deprived of practical applicability is naturally to be understood as protecting investors also with regard to contracts with the host State generally in so far as the contract was entered into with regard to an investment.” It then added that by the negotiation of a bilateral investment treaty, two States may create an exception to the general separation of States’ obligations under municipal and under international law: in the interest of achieving the objects and goals of the treaty, the host state may incur international responsibility by reason of a breach of its contractual o bliga tio n [… ] th e b rea ch of con tra ct b eing thus ‘int ern at iona lised , i.e. assimilated to a breach of a treaty. The “umbrella clause” introduces this exception. The Tribunal in LG&E v. Argentina 88 was also called to examine the umbrella clause included in the US-Argentine BIT. It characterised the umbrella clause as one which “creates a requirement by the host State to meet its obligations towards foreign investors, including those that derive from a contract; hence such obligations receive extra protection by virtue of their consideration under the bilateral treaty”. It had to decide whether the abrogation of the guarantees under the statutory framework (Gas Law) – calculation of the tariffs in dollars before conversion to pesos, semi-annual tariff adjustments and no price controls without indemnification – violated Arg entina’s obligations to LG&E’s investments. It concluded in the positive, by expressing the view that the provisions of the Gas Law obligations were not legal obligations of a general nature but were very specific in relation to LG&E’s investment in Argentina. It stated that “these laws and regulations became obligations […] that gave rise to liability under the umbrella clause” of the treaty. Two tribunals, although not confronted with an umbrella clause, expressed their views as for the meaning of such a clause. In Waste

88. LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. the Argentine Republic, ICSID case No. ARB/02/1, Decision on Liability, 3 October 2006, paras. 169-175.

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Management v. United Mexican States,89 the NAFTA Tribunal, expressed its view on the “umbrella clause” although NAFTA Chapter 11 does not contain such a clause. It observed that: “NAFTA Chapter 11 – unlike many bilateral and regional investment treaties, does not provide jurisdiction in respect of breaches of investment contracts such as [the Concession Agreement]. Nor does it contain an ‘umbrella clause’ committing the host state to comply with its contractual commitments” [emphasis added]. Along the same lines, the Tribunal in Consorzio Groupement L.E.S.I.– DIPENTA v. Republic of Algeria,90 although it held that the BIT between Italy and Algeria did not contain an umbrella clause, it stated that: “the effect of such clauses is to transform the violations of the State’s contractual commitments into violations of the treaty umbrella clause and by this to give jurisdiction to the Tribunal over the matter […]” 91 [translation by the Secretariat].

IV. Summary remarks The umbrella clause made its appearance in investment agreements since the 1950s. It has been a regular, although not omnipresent, feature of bilateral investment treaties. Until recently, it had retained only the attention of scholars, who in their majority considered it as a clause elevating contractual obligations to treaty obligations. No arbitral tribunal had yet considered the issue until the ones arbitrating the SGS v. Pakistan and v. Philippines cases. Since then, it has attracted considerable discussions both by arbitral tribunals and scholars. The interpretation by the Swiss authorities of the clause, in the aftermath of the SGS v. Pakistan Decision on Jurisdiction, is the only interpretation by a State expressing what its intention had been at the time of the inclusion of that clause into its treaties – in the circumstance, to subject contractual commitments to treaty disciplines.

89. Waste Management Inc. v. United Mexican States, ICSID Case No. ARB (AF)/00/3, Award, 30 April 2004, para. 73, in www.economiasnci.gob.mx/sphp_pages/importa/sol_contro/ consultoria/ Casos_Mexico/Waste_2management/laudo/laudo_ingles.pdf. 90. Consorzio Groupement L.E.S.I.-DIPENTA v. République algérienne démocratique et p o p u l a i re , I C S I D c a s e N o . A R B / 0 3 / 0 8 , Awa r d , 1 0 Ja n u a r y 2 0 0 5 , i n www.worldbank.org/icsid/cases/lesi-sentence-fr.pdf. 91. Idem, para. 25ii). “[…] Cette interprétation est confirmée a contrario par la rédaction que l’on trouve dans d’autres traités. Certains traités contiennent en effet ce qu’il est convenu d’appeler des clauses de respect des engagements ou « umbrella clauses ». Ces clauses ont pour effet de transformer les violations des engagements contractuels de l’État en violation de cette disposition du traité et, par là-même, de donner compétence au tribunal arbitral mis en place en application du traité pour en connaître […]”.

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There is diversity in the way the umbrella clause is formulated in investment agreements. Because of this diversity, the proper interpretation of the clause depends on the specific wording of the particular treaty, its ordinary meaning, context, the object and purpose of the treaty as well on negotiating history or other indications of the parties’ intent. The review of the language of this clause included in a representative sample of treaties indicate that, although there are some disparities, the ordinary meaning of “shall observe” “any commitments/obligations” seem to point towards an inclusive, wide interpretation which would cover all obligations assumed/entered into by the contracting States, including contracts, unless otherwise stated. A different wording such as “shall guarantee the observance” or “shall maintain a legal framework apt to guarantee the continuity of legal treatment” might lead to a narrower interpretation. On the other hand, there are clauses which specifically exclude the jurisdiction of the treaty-based arbitral tribunal in favour of an administrative tribunal or a court, by preserving the distinctive jurisdictional order for the existing contracts. Arbitral tribunals, in their majority, when faced with a “proper” umbrella clause, i.e. one drafted in broad and inclusive terms, seem to be adopting a fairly consistent interpretation which covers all state obligations, including contractual ones. At the same time, prudence requires to recognise that no conclusions can be drawn as for the interpretation of the clause since jurisprudence is constantly evolving. Case-by-case consideration which may shed additional light will continue to be called for. In addition, further interpretations by governments which are parties to investment agreements including an umbrella clause, as for their intention regarding this clause, as well as the insertion of clear language in new treaties, would be a welcome and much needed development.

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ANNEX 2.A1

Examples of Umbrella Clauses Model clauses and standard clauses Austria model BIT92 Article 9. Other obligations (1) Each Contracting Party shall observe any obligation it may have entered into with regard to specific investments by investors of the other Contracting Party.

Belgium and Luxembourg-Albania BIT 199993 Article 9. Accords particuliers (2) Chacune des Parties contractantes assure à tout moment le respect des engagements qu’elle aura pris envers les investisseurs de l’autre Partie contractante.94

92. This umbrella clause is also found in BITs concluded with the following countries: Armenia (2001); Bosnia and Herzegovina (2000); Jordan (2001); Libya (2002); the Former Yugoslav Republic of Macedonia (2001); Oman (2001); Slovenia (2001); United Arab Emirates (2001); Uzbekistan (2000). 93. See also BITs concluded with: Algeria (1991); Bolivia (1990); Estonia (1996); Georgia (1993); Latvia (1996); Lithuania (1997); Republic of Moldova (1996); Mongolia (1992); Paraguay (1992); Ukraine (1996); Uruguay (1991). BITs concluded with Benin (2001), Burkina Faso (2001), Comoros (2001), The Former Yugoslav Republic of Macedonia (1999) contain the same language with the exception “envers les investisseurs” is replaced by “à l’égard des investisseurs”. 94. This umbrella clause is repeated in 15 other BITs concluded by Belgium and Luxembourg: Algeria (1991); Bolivia (1990); Estonia (1996); Georgia (1993); Latvia (1996); Lithuania (1997); Republic of Moldova (1996); Mongolia (1992); Paraguay (1992); Ukraine (1996); Uruguay (1991). BITs concluded with Benin (2001), Burkina Faso (2001), Comoros (2001), The Former Yugoslav Republic of Macedonia (1999) contain the same language with the exception “envers les investisseurs” is replaced by “à l’égard des investisseurs”.

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Denmark model BIT95 Article 3. Promotion and protection of investments (3) Each Contracting Party shall observe any obligation it may have entered into with regard to investment of investors of the other Contracting Party.

Finland model BIT96 Article 12. Application of other rules (2) Each Contracting Party shall observe any other obligation it may have with regard to a specific investment of an investor of the other Contracting Party.

German model BIT 1991(2)97 Article 8. (2) Each Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by nationals or companies of the other Contracting Party.

German model BIT (No. 201)98 Article 8. (2) Each Contracting State shall observe any other obligation it has assumed with regard to investments in its territory by investors of the other Contracting State.

95. The Model BIT language is repeated in BITs with the following states: Algeria (1999); Bulgaria (1993); Chile (1993); Croatia (2000); Cuba (2001); Egypt (1999) [not in force]; Estonia (1991); Ethiopia (2001) [not in force]; Ghana (1992; Hong Kong (1994); Kyrgyzstan (2001) [not in force]; People’s Democratic Republic of Lao (1998); Latvia (1992); Lithuania (1992); Mongolia (1995); Nicaragua (1995); Pakistan (1996); Philippines (1997); Poland (1990); Slovenia (1999); Turkey (1990); Uganda (2001) [not in force]; Ukraine (1992); United Republic of Tanzania (1999) [not in force]. 96. See also BITs concluded with: Bosnia and Herzegovina (2000); Kyrgyzstan (2003); Nicaragua (2003) [not in force] and; United Republic of Tanzania (2001). 97. The Model BIT is followed in BITs with: Barbados (1994); Botswana (2000) [not in force]; Cambodia (1999); Guyana (1989); Hong Kong (1996) [but replaces “territory” with “area”]; Jamaica (1992); Kenya (1996); Namibia (1994); Sri Lanka (2000); Zimbabwe (1995). 98. This umbrella clause is reproduced in BITs with the following countries: Antigua and Barbuda (1998); Bosnia and Herzegovina (2001) [not in force]; Lebanon (1997); Nigeria (2000); Philippines (1997); Thailand (2002).

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Greek model BIT 200199 Article 11. Application of other rules (2) Each Contracting Party shall observe any obligation it may have entered into with regard to a specific investment of an investor of the other Contracting Party.

Korea-Belarus BIT 1997100 Article 10. Application of other rules (3) Each Contracting Party shall observe any other obligation it may have entered into with regard to investments in its territory by investors of the other Contracting Party.

Netherlands model BIT101 Article 3(4). Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals of the other Contracting Party.

Sweden model BIT 2002102 Article 2. Promotion and protection of investment (4) Each Contracting Party shall observe any obligation it has entered into with investors of the other Contracting Party with regard to their investment.

99. Greece-Turkey BIT 2000. 100. See also BITs concluded with: Algeria (1999); Costa Rica (2000); El Salvador (1998); Guatemala (2000); Honduras (2000); Hong Kong (1997); Nicaragua (2000); Panama (2001); Qatar (1999); Romania (1990); Saudi Arabia (2003) [not in force]; South Africa(1995); Tajikistan (1995); Trinidad and Tobago (2002); Ukraine (1996); Vietnam (2003). 101. The model BIT umbrella clause is reproduced in BITs with the following countries: Albania (1994); Bangladesh (1994); Belarus (1995); Bolivia (1992); Bosnia and Herzegovina (1998); Chile (1998); Croatia (1998); Egypt (1996); Estonia (1992); Gambia (2002); Georgia (1998); Ghana (1989); Honduras (2001); Indonesia (1994); Jamaica (1991); Jordan (1997); Kazakhstan (2002); People’s Democratic Republic of Lao (2003); The Former Yugoslav Republic of Macedonia (1998); Republic of Moldova (1995); Mongolia (1995); Mozambique (2001); Namibia (2002); Nicaragua (2000); Paraguay (1992); Peru (1994); Slovenia (1996); Tajikistan (2002); Tunisia (1998); Ukraine (1994); Uruguay (1988); Uzbekistan (1996); Vietnam (1994); Zambia (2003); Zimbabwe (1996). 102. Sweden-Bosnia Herzegovina BIT 2000.

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Switzerland model BIT103 Article 10. Other commitments (2) Each Contracting Party shall observe any obligation it has assumed with regard to investments in its territory by investors of the other Contracting Party.

United Kingdom model BIT104 Article 2. Promotion and protection of investment (2) […] Each Contracting Party shall observe any obligation it may have entered into with regard to investments of nationals or companies of the other Contracting Party.

US-Argentina BIT 1991105 Article 2. (2)(c) Each Party shall observe any obligation it may have entered into with regard to investments.

103. See also BITs concluded with: Argentina (1991); Belarus (1993); Cape Verde (1991); Estonia (1992) Gambia (1993); Ghana (1991); Honduras (1993); People’s Democratic Republic of Lao (1996); Latvia (1992); Lithuania (1992); Former Yugoslav Republic of Macedonia (1995); Nicaragua (1998); Pakistan (1995); Paraguay (1992); Peru (1991); Slovakia (1990); Turkey (1988); Uruguay (1988); Uzbekistan (1993); Vietnam (1992); Zambia (1994). 104. The umbrella clause in the model BIT is repeated in the BITs with the following countries: Albania (1994); Angola (2000); Antigua and Barbuda (1987); Armenia (1993); Azerbaijan (1996); Bahrain (1990); Bangladesh (1980); Barbados (1993); Belarus (1994); Belize (1982); Benin (1987); Bulgaria (1995); Burundi (1990); China (1986); Congo (1989); Côte d’Ivoire (1995); Croatia (1997); Cuba (1995); Dominica (1987); Ecuador (1994); Egypt (1997); Estonia (1994); Georgia (1995); Grenada (1988); Guyana (1989); Haiti (1985); Honduras (1993); Indonesia [Article 3] (1976); Jordan (1979); Kazakhstan (1995); Republic of Korea (1976); Kyrgyzstan (1994); People’s Democratic Republic of Lao (1995); Latvia (1994); Lesotho (1981); Lithuania (1993); Malaysia (1981); Malta (1986); Mauritius (1986); Republic of Moldova (1996); Mongolia (1991); Nepal (1993); Nicaragua (1996); Nigeria (1990); Oman (1995); Pakistan (1994); Panama (1983); Papua New Guinea (1981); Paraguay (1981); Peru (1983); Poland (1987); Saint Lucia (1983); Senegal (1980); Sierra Leone (2000); Singapore (1975); Slovenia (1996); South Africa (1994); Sri Lanka (1980); Swaziland (1995); Tonga (1997); Turkey (1991); Turkmenistan (1995); Uganda (1998); United Republic of Tanzania (1994); Uruguay (1991); Vietnam (2002); Yemen (1982); Zimbabwe (1995). 105. See also BITs concluded with: Armenia (1992); Bulgaria (2003); Congo (1990); Ecuador (1993); Estonia (2003); Grenada (1986); Jamaica (1994); Kazakhstan (1994); Kyrgyzstan (1993); Latvia (2003); Lithuania (2003); Republic of Moldova (2003); Mongolia (1994); Morocco (1985); Romania (2003); Sri Lanka (1991); Ukraine (1994).

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Clauses of note Australia-Chile BIT 1996/China BIT 1988 Article 11. Undertakings given to investors A Contracting Party shall, subject to its law, adhere to any written undertakings given by a competent authority to a national of the other Contracting Party with regard to an investment in accordance with its law and the provisions of this Agreement.

Australia-Hong Kong BIT 1993 Article 2. Promotion and protection of investment and returns (2) […] Each Contracting Party shall observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party.

Australia-Poland BIT 1991 Article 10. Undertakings given to investors A Contracting Party shall, subject to its law, do all in its power to ensure that a written undertaking given by a competent authority to a national of the other Contracting Party with regard to an investment is respected.

Austria-Chile BIT 1997 Article 2. Promotion, admission and protection of investments (4) Each Contracting Party shall observe any contractual obligation it may have entered into towards an investor of the other Contracting Party with regard to investments approved by it in its territory.

Belgium and Luxembourg-Malta BIT 1987 Article 8. (1) Where a dispute arises between an investor of one of the Contracting Parties and the other Contracting Party affecting an investment of the former and relating to a matter with respect to which the latter has undertaken an obligation in favour of the other Contracting Party under this Agreement, such a dispute shall in the first instance be dealt with in pursuit of local remedies, unless some other method, including arbitration, has been agreed between the investor and the Contracting Party.

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Czech Republic-Singapore BIT 1995 Article 15. Other obligations (2) Each Contracting Party shall observe commitments, additional to those specified in this Agreement, it has entered into with respect to investments of the investors of the other Contracting Party. Each Contracting Party shall not interfere with any commitments, additional to those specified in this Agreement, entered into by nationals or companies with the nationals or companies of the other Contracting Party as regards their investments.

Finland-Estonia BIT 1992 Article 4. Most favoured nation provisions (1) […] Each Contracting Party shall observe any obligation it may have entered into with regard to investments.

France-Peru BIT 1993 Article 2. Les investissements ayant fait l’objet d’un engagement particulier de l’une des Parties contractantes à l’égard des nationaux et sociétés de l’autre Partie contractante sont régis, sans préjudice des disposition du présent Accord, par les termes de cet engagement dans la mesure où celui-ci comporte des dispositions plus favorables que celles qui sont prévues par le présent Accord.

France-Yemen BIT 27 April 1984 Article 2. Encouragement et protection des investissements (2) […] Chaque Partie contractante s’engage à honorer les obligations qu’elle peut avoir contractées relativement aux investissements des nationaux ou sociétés de l’autre Partie contractante.

Greece-Serbia and Montenegro BIT 1997 Article 2. Promotion and protection of investment (4) Each Contracting Party shall, in its territory, respect in good faith all obligations concerning a particular investor of the other Contracting Party undertaken within its legal framework.

France-Mexico BIT 1998 Article 10. Special commitments (2) Chacune des Parties contractantes respecte tout autre engagement qu’elle a contracté par écrit au titre des investissements réalisés sur son

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territoire par des investisseurs de l’autre Partie contractante. Les différends soulevés au sujet de ces engagements sont réglés conformément aux conditions des contrats régissant lesdits engagements.

Netherlands-Philippines BIT 1985 Article 3(3). Each Contracting Party shall observe any obligation arising from a particular commitment it may have entered into with regard to a specific investment of nationals of the other Contracting Party.

UK-Philippines BIT 1980 Article 3(3). Each Contracting Party shall observe any obligation arising from a particular commitment it may have entered into with regard to a specific investment of nationals or companies of the other Contracting Party.

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ANNEX 2.A2

2004 US Model Bilateral Investment Treaty Article 24: Submission of a Claim to Arbitration 1. In the event that a disputing party considers that an investment dispute cannot be settled by consultation and negotiation: a) the claimant, on its own behalf, may submit to arbitration under this Section a claim i) that the respondent has breached (A) an obligation under Articles 3 through 10, (B) an investment authorisation, or (C) an investment agreement; and ii) that the claimant has incurred loss or damage by reason of, or arising out of, that breach; and b) the claimant, on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls directly or indirectly, may submit to arbitration under this Section a claim i) that the respondent has breached A) an obligation under Articles 3 through 10, B) an investment authorisation, or C) an investment agreement; and ii) that the enterprise has incurred loss or damage by reason of, or arising out of, that breach, provided that a claimant may submit pursuant to subparagraph a)i)(C) or b)i)(C) a claim for breach of an investment agreement only if the subject matter of the claim and the claimed damages directly relate to the covered investment that was established or acquired, or sought to be

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established or acquired, in reliance on the relevant investment agreement. 2. […]

Article 26: Conditions and Limitations on Consent of Each Party 1. No claim may be submitted to arbitration under this Section if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged under Article 24(1) and knowledge that the claimant [for claims brought under Article 24(1)a)] or the enterprise [for claims brought under Article 24(1)b)] has incurred loss or damage. 2. No claim may be submitted to arbitration under this Section unless: a) the claimant consents in writing to arbitration in accordance with the procedures set out in this Treaty; and b) the notice of arbitration is accompanied, i) for claims submitted to arbitration under Article 24(1)a), by the claimant’s written waiver, and ii) for claims submitted to arbitration under Article 24(1)b), by the claimant’s and the enterprise’s written waivers of any right to initiate or continue before any administrative tribunal or court under the law of either Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 24. 3. Notwithstanding paragraph 2b), the claimant [for claims brought under Article 24(1)a)] and the claimant or the enterprise [for claims brought under Article 24(1)b)] may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant’s or the enterprise’s rights and interests during the pendency of the arbitration.

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ISBN 978-92-64-04202-5 International Investment Law: Understanding Concepts and Tracking Innovations © OECD 2008

Chapter 3

International Investment Agreements: A survey of Environmental, Labour and Anti-corruption Issues*

This paper surveys the societal dimension of 296 international investment agreements (IIAs) signed by the 30 member countries and of by the 9 non-member countries that participate formally in OECD investment work. Annex 3.A1 to the paper looks at the same issues for 131 IIAs signed by 15 developing countries (including China and India) that are not part of the OECD sample. The survey finds that, in practice, the societal dimension covers mainly environment and labour issues, but some (usually) more recent agreements contain language on human rights and anti-corruption. More generally, however, the survey shows that few of the countries in both the OECD and non-OECD samples include language on societal issues in their IIAs – 16 of the 39 countries in the OECD-related sample and 6 out of the 15 countries in the non-OECD sample include such language in any of their IIAs. The others never include societal language in their IIAs, although they emphasise that this does not diminish the importance that they attach to such issues. For the countries in the OECD sample that do include such language, the most common approach is to include a short text in the preamble; however, Canada, Mexico and the United States include lengthy texts in preambles, articles and annexes. While the OECD texts focus on such issues as upholding internationally agreed principles, right to regulate and not lowering standards, the issue most frequently encountered in the non-OECD sample is exceptions to most favoured nations in relation to benefits stemming from regional co-operation in the economic, social or labour fields. The survey of recent arbitration decisions revealed several claims dealing with environmental permits and regulation and two cases involving corruption allegations. One observation is that arbitration panels in some of these cases refer to broader international instruments in the environmental and anti-corruption fields when making their decisions, even if these instruments are not explicitly cited in the IIA under which the case has been brought.

* This survey was prepared by Kathryn Gordon, Investment Division, OECD Directorate for Financial and Enterprise Affairs, with the contribution of Monica Bose working as a consultant to the Investment Division. This document, as a factual survey, does not necessarily reflect the views of the OECD or those of its member governments. It cannot be construed as prejudging ongoing or future negotiations or disputes pertaining to international investment agreements.

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Executive summary This scoping paper looks at the “societal” dimension of international investment agreements (defined as bilateral investment treaties and regional trading agreements with an investment chapter). It reviews environmental, labour and anti-corruption texts in a sample of 296 agreements signed by the 30 OECD member countries or by the 9 non-member countries that adhere to the OECD Declaration on International Investment and Multinational Enterprises. The paper also reviews investor-state arbitration decisions dealing with the same issues. The aim of the paper is to provide institutional information and to propose topics for discussion within the Investment Committee on the role (if any), nature and scope of language in investment agreements relating to certain societal issues. The paper’s key findings are: ●

Incidence of language in investment agreements. Twenty-four countries do not include any language on societal issues in their agreements. Among the 16 countries that have included such language in one or more agreements, the language covers mainly environmental and labour issues. More recently, anti-corruption issues have been mentioned in a few treaties. Treatment of these issues varies from language in the Preambles of some agreements (e.g. Finland and the Netherlands) to language including texts in preambles as well as substantive and procedural language in provisions, annexes and side agreements (e.g. many North American agreements).

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Changes in coverage of issues over time. Over the past two decades, more countrie s have been including such languag e in their investment agreements. In the sample of treaties surveyed for this paper, the first agreem en t c ove rin g such is sues was the 19 90 Polis h-US bilateral investment treaty (BIT). Since the mid-1990s, Canada, Mexico and the United States have accumulated a large stock of agreements that include language on environmental and labour issues. More recently, other countries (Belgium, Finland, Japan) and regional organisations (European Union and European Free Trade Area) have included environmental and labour language in agreements. Anti-corruption language is a more recent innovation – it appears in four US agreements in the sample as well as in three co-operation and partnership agreements (Japan-Philippines and EURussia and the Cotonou Cooperation Agreement between the EU and the Africa, Caribbean and Pacific (ACP) countries).

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Variation and harmonisation in treatment of issues. The survey shows that some countries routinely include labour and environmental texts (anticorruption texts are much less common) and that the treatment of these issues varies considerably from one agreement to the other. However, some treaties appear to have been influenced by broader international initiatives and that some explicitly refer to relevant international instruments (e.g. Universal Declaration of Human Rights). The sample texts also show that innovations in language in one agreement are often adopted by other countries for use in their own agreements and that this process of mutual influence has resulted in partial harmonisation of texts (for example, NAF TA- like e nvironme nt al and labour la ng uag e on performa nce requirements appears in the 2005 Korea-Singapore agreement).

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Arbitration decisions. The review of arbitration decisions shows that claims dealing with environmental permits and regulation have frequently been brought to arbitration panels. Two recent decisions have also dealt with allegations of corruption. Two points emerge with respect to these decisions: 1) the decisions dealing with environmental matters shed little direct light on the role of explicit environmental language in influencing arbitration panels (as opposed, for example, to provisions on “fair and equitable” treatment), either because the agreement’s environmental provisions are not referred to directly in the arbitration decision or because the agreement in question does not contain environmental language; 2 ) arbitration pa ne ls re fe r to broad er in tern ation al in s trume nts (e.g. conventions) in the environmental and anti-corruption fields.

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Relationship to broader international policy goals. The environmental, labour and anti-corruption content of investment agreements occurs in a context of rapid development of related international norms and of active involvement of national governments in the development of these norms and in setting the international policy agenda. For example, international initiatives in the environmental, labour and anti-corruption fields have produced a rich array of international instruments (conventions, declarations and protocols). In anti-corruption, for example, six major conventions or protocols have been signed since 1996. Several hundred international environmental agreements have been signed since the Stockholm Conference of 1972 and the International Labour Organisation has been active in the development and promotion of labour norms.

I. Introduction The core mission of the OECD Investment Committee is to promote investment for growth and sustainable development worldwide. The

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Committee’s work on international investment agreements helps it achieve this mission by enhancing understanding of emerging legal and policy issues.1 This scoping paper looks at the inclusion – if any – of language addressing “societal issues” in a sample of 296 international investment agreements (defined as bilateral investment treaties plus regional trade agreements with an investment chapter). In practice, this language deals with three main issue areas: environment, labour and anti-corruption. The paper aims to support dialogue in the Investment Committee about these texts’ purpose and impacts. It also looks at decisions arising from investor-state arbitration in relation to th ese issues. Finally, it provide s ba ckg roun d ma te rial relevant for understanding how these issues relate to the broader aims of international investment agreements and how they fit into the existing framework of international initiatives in the environmental, labour and anti-corruption fields. The paper provides factual background and proposes issues for discussion in the following sections: ●

Section II. What are the major initiatives for international co-operation in the environmental, labour and anti-corruption fields? How do international investment agreements and related institutions interact with these other processes of international co-operation?

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Section III. Which international investment agreements contain texts on environmental, labour and anti-corruption issues? What do these texts say?

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Section IV. How have arbitration tribunals dealt with environmental and anti-corruption issues (no disputes involving labour issues were found in the survey of arbitration cases)?

II. IIAs and International Co-operation on Environment, Labour and Anti-corruption Policies While nearly all OECD and non-OECD governments can be assumed to be committed to sus tainable development objectives, mos t do not use international investment agreements as a mechanism for achieving these objectives.2 Indeed, governments use many policy instruments and processes 1. The present paper aims to provide a factual basis for discussing the treatment of environmental, social and anti-corruption issues in international investment agreements and by related institutions. It takes previous OECD work on international investment agreements as given. This work has looked at: Relationships between international investment agreements; most-favoured nation treatment in international investment law; fair and equitable treatment standard in international investment law; indirect expropriation and the right to regulate in international investment law; transparency; third party participation in investor state dispute settlement; the umbrella clause; consolidation of claims; interaction between the investment and trade in services chapter of regional trade agreements. For more information on this work, see www.oecd.org/daf/investment/agreements.

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in order to achieve them. In addition to domestic policy instruments and processes, governments participate in a wide array of international cooperation processes (e.g. in the International Labour Organisation and the United Nations Environment Programme) and cooperate internationally in law making and law enforcement (e.g. the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, pursuant to which the Parties have agreed to outlaw foreign bribery, and monitoring process of the OECD Working Group on Bribery, which ensures effective enforcement of the laws). As will be seen in the next section, most of the governments whose agree men ts are s tudied in th is s urvey focus th eir e fforts on the se international and domestic policy processes and do not use international investment agreements as a means for pursuing their environmental, labour and anti-corruption objectives. This practice of focusing investment agreements on a fairly standard set of issues – investment promotion and protection and economic co-operation and development – can be seen in many of the preambles in the sample. Other countries include explicit references in one or more of their agreements to sustainable development or to related issues or refer to international instruments in the environmental and labour fields. The survey shows that some international investment agreements explicitly cite international co-operation processes in the environmental, labour and anti-corruption fields and that some of these instruments are also cited in several arbitration decisions. 3 Thus, the international framework provides concepts and principles that interact with international investment agreements in at least three ways. First, it influences investment via its effects on domestic and international laws and practices and therefore constitutes a central pillar of the broader legal context in which investment agreements evolve. Second, it provides a source of concepts and principles that are directly integrated into the texts of these agreements. Third, it is sometimes used as guidance in decision making by investor-state arbitration panels. Over the past several decades, significant progress has been made in developing international norms in all three fields. Concerted work on labour 2. Annex 3.A1 to this paper presents the results of a fact-finding study looking at the environmental, labour and anti-corruption language contain in investment agreements signed between non-OECD member countries. It finds a pattern of inclusion of such language with is similar to the pattern found in this study – most countries do not include such language, but some do. Moreover, the language that is included in the non-OECD agreements shows some common patterns, but also wide variations in subjects covered and in treatment of issues. 3. For further discussion of this issue, see also Moshe Hirsch, “Interactions between Investment and Non-Investment Obligations in International Investment Law,” International Law Forum, the Hebrew University of Jerusalem (November 2006).

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norms can be dated from at least the early twentieth century, with the creation of the International Labour Organisation. Since its creation in 1972, of the United Nations Environment Programme has extended work on environmental agreements and greatly expanded international environmental co-operation. The rapid development of anti-corruption conventions is a more recent phenomenon, but six major initiatives have been undertaken since the mid1990s. This sub-section briefly reviews these developments.

Labour Most work on international labour standards takes place in the International Labour Organisation (ILO). Since its creation in 1919, the ILO has sought inter alia to define and guarantee labour rights and improve conditions for working people by building a system of international labour standards expressed in the form of Conventions, Recommendations and Codes of Practice. Th e ILO has adopted more than 18 0 IL O Conve ntion s an d 190 Recommendations covering all aspects of working life. A supervisory process helps to ensure that standards ratified by individual member States are applied and the ILO provides advice in the drafting of national labour laws. With the adoption of the Declaration on Fundamental Principles and Rights at Work in 1998, ILO member States decided to uphold a set of core labour standards that are relevant for all members regardless of whether they had ratified the relevant conventions.4

Environment Th e framework of environm ental tre aties has bee n developin g progressively throughout the twentieth century. The birth date of modern international environmental law is often given as 1972, when countries gathered for the United Nations Stockholm Conference on the Human Environme nt and the Unite d Nation s Environment Programme was established.5 The Conference gave currency to an all-embracing concept of the biosphere’ … [i]t approached not sectorally but holistically the earth’s seas and atmosphere, outer space, non-renewable resources, biogenetic diversity and much else.6 Since then, hundreds of international environmental agreements have been concluded (including bilateral, regional and global instruments and

4. This description of the history of ILO standards-setting is taken from page 4 of The ILO at a Glance, which can be found at: www.ilo.org/public/english/download/glance.pdf (no date provided in publication). 5. Edith Brown Weiss, “International Environmental Law: Contemporary Issues and the Emergence of a New World Order”, Georgetown Law Journal number 81, volume 675. March 1993. 6. Thomas M. Franck, Fairness in International Law and Institutions; Oxford University Press, 1995, p. 358.

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both binding and non-binding agreements).7 These cover such areas as biodiversity, climate chang e and protection of the ozone layer. The agreements’ implementation mechanisms vary with their subject matters, but implementation often includes information exchang e, research, monitoring and efforts to meet specific targets.

Anti-corruption Global and regional initiatives in the anti-corruption field have evolved rapidly over the past decade. The OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, which came into force in 1999, is the first and so far the only international instrument specifically aimed at the supply side of bribery of foreign public officials. The United Nations Convention against Corruption, which was adopted in 2003 and came into force in 2005, addresses various forms of corruption, including the active and passive bribery of domestic and foreign public officials as well as bribery in the private sector. The Organisation of American States InterAmerican Convention against Corruption, signed in 1996, was the first major regional initiative. Other regional initiatives include those of the African Union,8 the Council of Europe9 and the Southern African Development Community.10 All of these initiatives involve processes of global or regional co-operation that are designed to help the parties to the agreement to implement their anticorruption commitments more effectively. For example, Parties to the OECD Convention on Bribery of Foreign Public Officials participate in a two-phase peer-review monitoring process. In the first Phase, the Working Group on Bribery assesses Parties’ national enabling legislation and, in Phase 2, the Group assesses how effectively Parties are enforcing relevant legislation.

III. Environmental, labour and anti-corruption issues in IIAs Overview This section reviews the language dealing with environmental, labour and anti-corruption issues in a sample of 296 international investment agreements (IIAs). The sample consists of 269 bilateral investment treaties11 (BITs) signed by the thirty OECD member countries or by the nine non-

7. See www.unep.org for a discussion of the major environmental instruments housed in the UN system. 8. African Union Convention on Preventing and Combating Corruption, 2002. 9. Council of Europe Criminal Law Convention on Corruption, 1999 and the Civil Law Convention of Corruption, 1999. 10. The Southern African Development Community Protocol on Corruption, 2001. 11. Also included are the model treaties of: Belgium, Canada, Estonia, Finland, France, Germany, Greece, Netherlands, Portugal, Slovakia, Slovenia, Sweden, United Kingdom, and United States.

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member adherents to the OECD Declaration on International Investment and Multinational Enterprises.12 The sample also includes the NAFTA and 25 free trade, co-operation or partnership agreements signed by Australia, Canada, Chile, Japan, Korea, Mexico, the United States, the European Union, and the European Free Trade Area. Only agreements including explicit investment agreements were included in the sample. These agreements may also contain independent chapters or side letters concerning environmental, labour and anti-corruption issues. For example, the EU-Russia Partnership Agreement contains independent articles13 that deal with co-operation on all three issues, but these issues are not referred to in Article 58 (on “Investment promotion and protection”). Annex 3.A1 describes the methodology and lists the investments agreements included in the sample. Annex 3.A2 contains an inventory of the texts found in the sample of agreements. Table 3.1 summarises the findings for the 39 countries covered in the survey. It shows that 16 countries include texts dealing with environmental, labour or anti-corruption issue s in at least one of the ir investment agreements. While such language was found in relatively few of the bilateral investment treaties, the Free Trade Agreements (FTAs) in the sample almost always include language on environmental and labour issues and, in many cases, such language is detailed and, often, is found in independent chapters or side letters that are separate from the investment text.14 Based on the survey of BIT and FTA language, countries’ policies in this area can be categorised as follows: 1. No language is included. Twenty three of the 39 countries covered in the survey do not deal with these issues in any of the international investment agreements in the sample (Table 3.1). 2. Countries with a policy of including such language. Eleven of the countries shown in Table 3.1 appear to have a policy of including such language in

12. The nine non-member adherents are: Argentina, Brazil, Chile, Estonia, Israel, Latvia, Lithuania, Romania and Slovenia. 13. These are Article 69 on the “Environment”, Article 74 on “Social Cooperation” (which covers co-operation on many aspects of labour market regulation) and Article 84 on “Cooperation on the Prevention of Ilegal Activities” (which specifically cites corruption). 14. This finding echoes a similar finding reported in the Joint Working Party on Trade and Environment’s study Regional Trade Agreements and Environment. The study finds that […] the number of RTAs including significiant environmental provisions remains small and also documents variability in the scope and detail of treatment of environmental issues. However, the study also finds, in contrast to the results reported here, that RTAs negotiated by most OECD members include some type of environmental provisions. Pages 7-8 COM/ENV(2006)47. See also Labour and Employment Issues in Foreign Direct Investment: Public Support Conditionalities Working Paper No. 95, International Labour Office Geneva.

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Table 3.1.

Environmental, labour and anti-corruption texts in the sample of International Investment Agreements Texts IIAs in sample that contain such texts in at least one IIA surveyed?

OECD countries Australia Austria Belgium-Luxembourg Canada Czech Republic Denmark Finland France Germany Greece Hungary Iceland Ireland Italy Japan Korea Mexico Netherlands New Zealand Norway Poland Portugal Slovak Republic Spain Sweden Switzerland Turkey United Kingdom United States

Yes No Yes Yes No No Yes No No* No No No No No Yes Yes Yes Yes No No Yes No No No Yes Yes No No Yes

FTA with the United States Covered in many recent agreements (starting in 2004) Covered in many agreements (starting in 1994)

Preambles of Finland’s Model BIT and of its most recent BITs (starting in 2000)

Japan’s BITs with Korea and Vietnam; Cooperation agreement with the Philippines Bilateral treaties with Belgium, Japan, FTA with Chile and Singapore Covered in many agreements Preamble of 2004 Model BIT

Bilateral treaty with the United States

Preamble of 2003 Model BIT and bilateral treaty with Russia Bilateral treaty with Mexico

Covered in many agreements (starting in 1994)

Non-member adherents Argentina Brazil Chile Estonia Israel Latvia Lithuania Romania Slovenia

No No Yes No No Yes No No No

Covered in FTAs with China, Korea, Panama and Peru

Preamble of Model BIT

Regional Parties European Union EFTA NAFTA members

Yes Yes Yes

EU-Russia and EU-ACP (Cotonou) Partnership Agreements EFTA-Singapore Agreement North American Free Trade Agreement

* The German BITs indicated with asterisks in Annex 3.A1 list public health measures as exceptions to national treatment.

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their international investment agreements (Belgium, Canada, Finland, Japan, Luxembourg, Mexico, Netherlands, Sweden, United States, Chile and Latvia). Evidence that countries have such a policy is of two types: 1) such language appears in their model agreements; and/or 2) they have two or more agreements containing similar or identical environmental and/or labour texts. Within this group there are substantial variations in: 1) the extent of the language on environmental and labour issues; 2) the number of agreements; and 3) the length of time such language has appeared in the agreements. Some countries (e.g. Canada, Mexico and the United States) have included such language since the early 1990s and are parties to many agreements with environmental and labour texts. The earliest example in the sample is the labour texts contained in the 1990 United States-Poland BIT. The NAFTA addresses these issues in its preamble, provisions and side agreements. All of the Canadian and US BITs signed in 1994 and after con tain some environm en tal an d/or labour la nguage. Mexi co systematically includes such language in agreements signed with Latin American and North American countries, but not with European countries. Other countries have adopted such language in more recent agreements or have included it in their model BITs (e.g. Belgium, Finland, Japan, the Netherlands and Sweden).15 3. Other cases. Some countries are party to agreements containing environmental and/or labour texts, but do not appear to have a set policy on whether or not such language should be included and, if so, on the type of language that should be used. For example, Australia’s 2004 FTA with the United States contains environmental and labour language that resembles language found in other US agreements in the sample, but that is not duplicated in other Australian agreements.16 Likewise, Korea’s agreement with Japan uses environmental and labour language found in other Japanese treaties (e.g. with Vietnam), but not in other Korean treaties. Kore a’s agreements with Singapore and Chile contain NAFTA-like language17 on performance requirements that is not found in other Korean agreements. In other cases, the inclusion of environmental and/or labour language appears to be related to the idiosyncrasies of the negotiations – for example, the 1995 treaty between Russia and Sweden contains a text dealing with exceptions to national treatment and the environment (see Annex 3.A1 section 1.8) which is found only in this agreement.

15. Japan’s two most recent treaties – with Korean (2002) and Vietnam (2003) – contain identical environmental texts (see Annex 3.A2, section 1.4), but the earlier 9 treaties in the sample (signed between 1988 and 1998) do not. 16. See list for Australian BITs in Annex 3.A1. 17. In Annex 3.A2, compare language in NAFTA section 2.3 (Investment Chapter under Article 1106) with performance requirements language in section 4.5.

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Extent of text Countries adopt different approaches to environmental, labour and anticorruption issues in their international investment agreements. In some cases, this language appears only in the Preamble, which may offer a broad picture of the relationship between the agreement and the promotion of labour standards and protection of the environment. Examples of such preamble language can be found in the recent BITs for Finland and in the Finnish and Latvian Model BITs (see also, in Annex 3.A2 section 1.7, the preambular language in the Netherlands Model BIT, which contains very similar language): RECOGNISING that the development of economic and business ties can promote respect for internationally recognised labour rights; AGREEING that these objectives can be achieved without relaxing health, safety and environmental measures of general application… In other cases, the treatment of these issues is lengthier. For example, NAFTA (signed 1992) contains language on environmental and labour issues in the preamble, the investment chapter (which contains environmental articles), and in separate side agreements dealing with labour and the environment (see Annex 3.A2, section 2).18

Set of issues addressed The environmental, labour and anti-corruption texts in the sample cover many of the issues already discussed by the Investment Committee in a variety of other contexts. For example, the various texts address: right to regulate, not lowering standards, indire ct expropriation, promoting sustainable development,19 performance requirements, and consultation. The environmental and/or labour texts most often take the form of language addressing on “not lowering standards” and “right to regulate”.

18. NAFTA contains texts on inter alia: promotion of respect for internationallyrecognised standards, co-operation among Parties, transparency, right to regulate, continuous improvement of domestic policy frameworks; creation of institutions in support of co-operation and consultation in the labour and environment fields; resolution of disputes; creation of institutions for promoting public participation and raising public awareness. 19. See, for example, NAFTA (Annex 3.A2, section 2.1) and Annex 3.A2 section 3 for the following FTAs: Canada-Chile, Canada-Costa Rica, Chile-China, Chile-Panama and all US FTAs.

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Table 3.2 reviews the coverage of environmental and labour issues for all countries whose bilateral treaties contain such content. These are: Table 3.2. Environmental and labour texts in selected bilateral investment treaties US Belgium/ model Luxembourg BIT 2004 model BIT

Canadian model BIT 2004

Japan’s Finland/ BITs with Swedish Netherlands Latvia Korean model model model and BIT BITs Vietnam

Preamble Labour issues (e.g. promotion of labour rights)

No preamble

No preamble

Yes

Yes

Yes

Yes

Not lowering environmental standards

No preamble

No preamble

Yes

Yes

Yes

Yes

Not lowering labour standards

No preamble

No preamble

Promoting sustainable development

No preamble

No preamble

Yes

No preamble

No preamble

Not lowering standards

Yes

Yes

Yes

Right to regulate

Yes

Yes

Yes

Indirect expropriation

Yes

Yes

Environmental exception for rules on performance requirements

Yes

Yes

State to state consultation

Yes

Yes

Yes

Not lowering standards

Yes

Yes

Yes

Right to regulate

Yes

Yes

Labour exception for rules on performance requirements

Yes

State to state consultation

Yes

Environmental protection and promotion of international standards

Yes

Provisions1 Environment Yes

Labour

Yes (employment creation and training) Yes

Yes

1. Provisions cover language in chapters, articles, annexes and protocols.

Other issues appear less often in the sample of agreements. For example: ●

Anti-corruption. References in the sample to this issue were found in agreements signed by Japan, the United States, by the European Union. They can be found in US FTAs with Oman (2005), Morocco (2004) and Singapore (2003) (see Annex 3.A2, section 3.3) and the preamble of the US-Peru agreement, in which the Parties agree to “promote transparency and prevent and combat corruption, including bribery, in international trade and investment”. Article 8 of the “General Provisions” Chapter of the Japan-Philippines Economic

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Partnership Agreement (2006) contains the following text: “Each 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.” The EU-Russia Cooperation and Partnership Agreement states that: “The Parties shall establish co-operation aimed at preventing illegal activities such as: […] illegal activities in the sphere of economics, including corruption.” ●

Human rights are explicitly cited in two of the sample agreements: The EURussia Agreement and the Agreement between the EFTA States and Singapore. The EU-Russia Agreement commits the Parties to cooperating on “matters pertaining to the observance of the principles of democracy and human rights, and hold consultations, if necessary, on matters related to their due implementation”. The EFTA-Singapore Agreement reaffirms the Parties’ commitment to the Universal Declaration of Human Rights.

Differences and similarities in treaty language Among the 16 countries whose agreements contain languag e on environmental, labour and corruption matters, the texts show both similarities and differences. Sometimes similarities appear to arise from countries adopting each other’s language, a process that gives rise to a partial harmonisation of texts. For example: ●

The Netherlands’ and the Finnish/Latvian Model BITs contain very similar language on promoting internationally-recognised labour rights and on not compromising or relaxing “health, safety and environmental measures of general application”.

●

In some cases, alignment of texts appears to be a matter of deliberate policy of harmonisation: the recently-signed agreements or the Model BITS of Canada, Mexico and the United States show similar or identical language in such areas as performance requirements, right to regulate and not lowering standards. This language also appears in the Chile/Korea FTA and (for performance requirements) in the Korea-Singapore Agreement. Likewise, Chile, the United States and Canada have similar or (in some cases) identical Annex language relating to indirect expropriation and nondiscriminatory regulatory measures designed to protect public health, safety, and the environment.

●

Other similarities texts can be found in the preamble language on “promoting sustainable development”, protecting “basic workers’ rights” in the Chile/Panama FTA and in US and Canadian FTA preambles with Chile.

●

As shown in the Box 3.1, the 2004 US Model BIT and the 2006 JapanesePhilippines Partnership Agreement contain identical lists of “internationallyrecognised labour rights”.

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Box 3.1. Lists of labour rights in the ILO Declaration and selected IIAs List of fundamental labour rights from Article 2 of the ILO Declaration on Fundamental Principles and Rights at Work 2. Declares that all members, even if they have not ratified the Conventions in question, have an obligation arising from the very fact of membership in the Organisation to respect, to promote and to realise, in good faith and in accordance with the Constitution, the principles concerning the fundamental rights which are the subject of those Conventions, namely: a) freedom of association and the effective recognition of the right to collective bargaining; b) the elimination of all forms of forced or compulsory labour; c) the effective abolition of child labour; and d) the elimination of discrimination in respect of employment and occupation.

List of core labour standards from the Belgian model BIT The terms “labour legislation” shall mean legislation of the Kingdom of Belgium, of the Grand-Duchy of Luxembourg or of XXX, or provisions thereof, that are directly related to the following internationally recognised labour rights: a) the right of association; b) the right to organise and bargain collectively; c) a prohibition on the use of any form of forced or compulsory labour; d) a minimum age for the employment of children; e) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

List of core labour standards from the 2004 US Model BIT and the 2006 Japan-Philippines Economic Partnership Agreement: For purposes of this Article, “labour laws” means each Party’s statutes or regulations,or provisions thereof, that are directly related to the following internationally recognised labour rights: a) the right of association; b) the right to organise and bargain collectively; c) a prohibition on the use of any form of forced or compulsory labour; d) labour protections for children and young people, including a minimum age for the employment of children and the prohibition and elimination of the worst forms of child labour; and e) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

The differences in textual approaches include: ●

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Location of text. Table 3.2 shows that BITs differ in terms of where these issues are treated. Some place them in the preamble whereas others include texts in both the preamble and in the main body of the agreement or in annexes).

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●

Lists of labour rights. The Box 3.1 reproduces the lists of five “internationally recognised labour rights” contained in the Belgian and US Model BITS and in the Japanese-Philippines Economic Partnership Agreement). The language is identical for four of the five rights, but Belgium differs in relation to child labour. The Belgian text mentions “a minimum age for the employment of children” and the US and Japan text additionally cites “labour protections for children and young people” and “prohibition and elimination of the worst forms of child labour”.

●

Cooperative relationships between labour and management. The Japanese BIT preamble language (which recognises “the importance of the cooperative relationship between labour and management in promoting investment”) stresses the importance of promoting harmonious labour relations and of labour and management working toward shared goals. All other countries whose preambles cite labour issues couch these issues in terms of internationally recognised labour rights or standards (e.g. Netherlands, Finland, Latvia, the United States and Japan in its Partnership Agreement with the Philippines).

●

How investment issues are linked with environmental, labour and anti-corruption issues. Some agreements make explicit the links between environmental and labour issues and investment issues – for example, most of the BITs in Table 3.2 discuss environmental issues in relation to right to regulate, indirect expropriation and not lowering standards. In contrast, the EURussia Partnership and Cooperation Agreement contains lengthy texts on c o- op e ra tio n in re l ati on to in t er a lia inve st me n t , e nvi ron m e n t, labour/societal security issues and law enforcement/anti-corruption. For the most part, though, the Agreement deals with these matters in parallel and as part of an ambitious blueprint for policy co-operation and economic integration with Russia. Nevertheless, the Agreement’s blueprint for cooperation in the environment, labour and anti-corruption fields, if fully realised, can be expected to have major impacts on investment processes.

References to other international instruments Generally, the investment agreements do not discuss in detail the relationship between the agreement and other international commitments in the environmental, labour and anti-corruption fields. However, several US Agreements in the sample (with Australia, Chile, Morocco, Oman, Peru, Sin gapore and CAFTA) disc uss th e “relation sh ip to environ men tal agreements”: For example, Article 19.8 of the US-Australia FTA states: “The Parties recognise that multilateral environmental agreements to which they are both party play an important role, globally and domestically, in protecting the environment and that their respective implementation of these agreements is critical to achieving the environmental objectives of these agreements. Accordingly, the Parties shall

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continue to seek means to enhance the mutual supportiveness of multilateral environmental agreements to which they are both party and international trade agreements to which they are both party. The Parties shall consult regularly with respect to negotiations in the WTO regarding multilateral environmental agreements.” Nevertheless, the language used in some IIAs has clearly been influenced by international conventions, declarations and protocols and, in some cases, these are explicitly cited. For example: ●

The Belgian Model BIT and the Labour Chapters of US FTAs explicitly cite the ILO Declaration on Fundamental Principles and Rights at Work.

●

The NAFTA preamble cites the Convention on International Trade in Endangered Species; the Montreal Protocol on Substances that Deplete the Ozone Layer, the Basel Convention on the Control of Trans-boundary Movement of Hazardous Wastes and their Disposal.

●

The EU-Russia Partnership and Cooperation Agreement refers to the European Energy Charter, the Declaration of the Lucerne Conference of 1993, the Basel Convention and the Espoo Convention on Environmental Impact Assessment in a Trans-boundary Context.

●

The EFTA-Singapore Agreement reaffirms, in its preamble, the Parties’ “commitment to the principles set out in the United Nations Charter and the Universal Declaration of Human Rights”.

In some cases, international instruments appear to have influenced the content of investment agreements, even though they are not explicitly cited in the agreement. For example, the anti-corruption texts found in the US FTAs with Oman and Morocco deal inter alia with criminalisation of “active bribery.” These treaties define active bribery using language that is very similar to that used in Article 1 of the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. The US-Morocco FTA definition is as follows: “To offer, promise, or give any undue pecuniary or other advantage, directly or indirectly, to a foreign official, for that official or for another person, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business.”20 Thus, some of the environmental and labour texts in international investment agreements promote or have been influenced by the framework of

20. Under Article 1 of the OECD Convention on Combating Bribery of Foreign Public Officials, each Party must establish that it is a criminal offence “for any persona intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official or for a third party, in order that the official act or refrain from acting in relation to the perform of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business”.

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international norms. However, these texts also occasionally differ from i n t e r n a t i o n a l l y - r e c o g n i s e d s t a n d a rd s. Fo r e x a m p l e , th e l i s t s o f internationally-recognised labour rights found in Belgian, Japanese and US agreements (see Box 3.1) differ not only from each other, but also from the list of “fundamental rights” set forth in the ILO Declaration (the ILO’s list of fundamental rights is also produced in the Box 3.1). In particular, they do not mention “elimination of discrimination in respect of employment and occupation” (one of the ILO’s four fundamental rights). In addition, the Belgian and US texts mention “acceptable conditions of work with respect to minimum wages, hours of work and occupational health and safety” (all of which are covered by other ILO instruments, but are not included in the ILO list of fundamental rights). Only one treaty in the sample – the 2001 Mexican-Switzerland BIT – refers to OECD Investment Instruments. It states: The Parties recognise that the entry and the expansion of investments in their territory by investors of the other Party shall be subject to relevant instruments of the Organisation for Economic Cooperation and Development (OECD) in the field of international investments.

Adaptation and innovation in treaty language The environmental and labour texts in the sample agreements show evidence of both innovation and progressive dissemination of innovations. The inclusion of environmental and labour languag e is, in itself, an innovation. As noted earlier, the chronological listing provided in Annex 3.A1 shows that the earliest environmental and labour texts in this sample of agreements are to be found in the 1990 Poland-US BIT, in NAFTA (signed in 1992) and in two bilateral treaties signed by the United States in 1992. Canada and the United States systematically included such language in all agreements in the sample after 1994. In 1995, Mexico signed a BIT21 with Switzerland containing such language and has since signed many FTAs (particularly with other Latin American countries) containing environmental and/or labour texts. Thus, the initial impetus for the inclusion of such language appears to have originated in North America. The policy of including such language was later taken up by other member countries (e.g. Belgium, Finland, Japan).

21. The Mexican-Swiss text uses language on “not lowering standards” and on consultation that is identical to a passage in NAFTA; compare texts in Annex 3.A2 section I.6 and Annex 3.A2, section 2.6)

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Several factors appear to be driving innovations in this field: ●

Learning from experience. For countries that have the longest history of including such language in their agreements, innovation may reflect learning from experience. One example of such an innovation might be the language on indirect expropriation listed above,22 several variants of which exist in recent Canadian, Chilean and US agreements and in the Canadian and US Model BITs. Such language appears to be designed to lower the risks that arbitration under the agreements will be used in ways that were not intended by the parties to the agreements.

●

Emerging international priorities. Other innovations in environmental, labour and anti-corruption language appear to reflect the dynamic nature of priority-setting in international economic policy. For example, the relatively recent inclusion of anti-corruption lang uag e in Japanese, US and EU agreements may reflect growing recognition that corruption is a major international policy issue.

Comparison of the older and more recent agreements in the sample shows that innovations in investment-treaty language are not reflected quickly into a country’s entire stock of international investment agreements. Once a country adopts an innovation, it does not immediately go back to older treaties to incorporate the innovation in all of its other agreements (presumably because of the high costs of treaty renegotiation). For countries that are actively innovating with treaty language (as is the case of the environmental, labour and corruption language), this gives rise to distinct “vintage” effects in the stock of treaties – that is, older treaties contain language that differs from the language found in newer treaties.

IV. Arbitration decisions BITs and FTAs typically provide that certain disputes between an investor and a state that are not settled through negotiations may be submitted to arbitration. The following discussion is based on a review of a sample of recent publicly-available decisions. Because treaties of some countries contain environmental and labour language in the preamble only, the paper first looks at the role of preambular language in arbitral tribunals’ interpretation of treaties. Next, it examines a few recent decisions that address environmental and anti-corruption issues.

22. An example of this language is: Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

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Preamble language in arbitration cases The interpretation of any treaty begins with Article 31(1) of the Vienna Convention on the Law of Treaties, which states that a treaty “shall be interpreted in good faith in accordance with the ordinary meaning to be given the terms of the treaty in their context and in light of its object and purpose”. In interpreting an investment treaty, arbitration tribunals may, as part of its analysis, be “guided by the purpose of the Treaty as expressed in its title and preamble”. 23 In interpreting the Germany-Argentina BIT, the preamble of which speaks about economic co-operation and protection of investments, a tribunal found that it was intended to “create favourable conditions for investments and to stimulate private initiative”. 24 Another tribunal noted that where the preamble of a treaty speaks to maintaining favourable conditions for investment, “[i]t is legitimate to resolve uncertainties in its interpretation so as to favour the protection of covered investments”.25 By contrast, another tribunal called “for a balanced approach to the interpretation of the [Netherlands-Czech Republic BIT’s] substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties’ mutual economic relations”.26 In inte rpreting NAF TA, th e S.D. Myers tribunal con sid ered the environmental language in NAFTA’s preamble as well as its companion, the North American Agreement on Environmental Cooperation (“NAAEC”), to conclude that the provisions of NAFTA should be interpreted in light of several principles, including that the parties “have a right to establish high levels of environmental protection,” and “are not obliged to compromise their standards merely to satisfy the political or economic interests of other states”, and that “environmental protection and economic development can and should be mutually supportive”.27

23. Siemens AG v. the Argentine Republic, ICSID Case No. ARB/02/08, Decision on Jurisdiction, 3 Aug. 2004, para. 81, available at www.worldbank.org/icsid/cases/cases.htm. 24. Idem., para. 81. 25. SGS Société Générale de Surveillance S.A. v. Republic of the Philippines, ISCID Case No. ARB/02/06, 29 Jan. 2004, para. 116, available at www.worldbank.org/icsid/cases/cases.htm. 26. Saluka Investments B.V. v. The Czech Republic, Partial Award, 17 Mar. 2006, para. 300, available at www.investmentclaims.com/decisions/Saluka-CzechRep-Partial_Award.pdf. 27. S.D. Myers, Inc. v. Canada, UNICTRAL/NAFTA case, Partial Award, 13 Nov. 2000, para. 220, available at www.naftalaw.org/disputes_canada_sdmyers.htm.

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Environmental and anti-corruption issues in investor-state arbitrations Environmental and anti-corruption issues have arisen in a number of arbitrations under NAFTA and under BITs. Before describing these cases, it is worth noting some issues which do not appear to have been addressed by any arbitral tribunals. No decisions were found that address: 1) labour issues; 2) provisions relating to expropriation contained in recent US and Canadian treaties; 3) the environmental, labour, and anti-corruption provisions found in the articles28 and side agreements of many of the North American investment agreements. Thus, the impact of treaty language dealing with these issues on resolution of disputes cannot be ascertained by looking at arbitration decisions. This section reviews several recent publicly-available decisions dealing with environmental issues or corruption.29 While there are other decisions that discuss environment or corruption, the cases below were chosen because they are recent decisions that contain significant analysis of the issues and provide useful examples of how disputes on these issues have been resolved by certain tribunals. Some of the cases involve investment agreements that contain no language on any of the societal issues addressed in this paper.

Denial of permits for projects with environmental impacts Investors that have been denied permits on alleged environmental grounds have prevailed in a number of arbitrations, including Metalclad Corporation v. Mexico, Tecnica Mediambientales v. Mexico, and MTD Equity Sdn. Bhd and MTD Chile S.A. v. Republic of Chile.30 In Metalclad, a tribunal interpreting the inve stment chapter of NAF TA found that the denial of a municipal construction permit to a hazardous waste landfill amounted to indirect expropriation31 and a violation of the “fair and equitable treatment” requirement of NAFTA32 where the federal government of Mexico had granted 28. For examples of such language, see Annex 3.A2. For language in bilateral investment treaties, see section 1.2 (Canada); 1.6 (Mexico) and 1.9 (United States). Se e also Anne x 3 .A2 , sec tion 2 (NA F TA), se ction 2.3 (which deals with environmental language in NAFTA’s Chapter 11 (the Investment Chapter). 29. To locate relevant decisions, all published final awards available on the ICSID website were reviewed. In addition, recent decisions on environmental and social issues that have been in publications were reviewed. There are some pending arbitration claims that might implicate human rights issues, but they are not discussed here because no final decision has been rendered. See, for example, Suez, Sociedad General de Aquas de Barcelona, SA and Vivendi Universal SA v. the Argentine Republic (ICSID Case No. ARB/03/19). 30. Metalclad Corporation v. Mexico, ICSID Case No. ARB (AF)/97/1, Award, 30 Aug. 2000; Tecnica Mediambientales Tecmed S.A. v. United Mexican States, ISCID Case No. l ARB (AF)/00/2, Award, 29 May 2003; and MTD Equity Sdn. Bhd and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/07, Award, 25 May 2004; all available at www.worldbank.org/icsid/cases/cases.htm.

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federal permits for the project and assured Metalclad, a US-based company, that municipal permits were not needed. Public opposition to the landfill appeared to have been a factor in the municipality’s decision making. The tribunal noted that: 1) Metalclad had been assured by federal officials that municipal permits would not be required; and 2) Metalclad was not notified of the town meeting where the municipal permit was denied. The tribunal observed that NAFTA’s statement of principles and rules gives prominence to “transparency,” which the tribunal reasoned must include provision of clear information regarding the legal requirements for an investment. 33 The tribunal also ruled that a subsequent Ecological Decree issued by the municipality that prevented operation of the landfill was “a further ground for a finding of expropriation”.34 The Metalclad tribunal’s decision was partially set aside by the British Columbia Supreme Court in Canada, which has jurisdiction to review arbitration decisions when the legal seat of arbitration is in British Columbia. United Mexican States v. Metalclad, 2001 BCSC 664, Supreme Court of British Columbia, Reasons for the Judgment (2 May 2001). The court ruled that the tribunal had improperly imposed a requirement of “transparency” into Chapter 11 of NAFTA. Because the “transparency” rationale was used by the tribunal to find that the denial of the municipal permit constituted an expropriation and a violation of the fair and equitable standard, the court set aside that portion of the decision.35 However, the court did not set aside the tribunal’s separate finding that the Ecological Decree was an expropriation. I n a n o t h e r l a n d f i l l d i s p u t e , t h e S p a n i s h i n v e s t o r Te c n i c a Mediambientales challenged, under the Spain-Mexico BIT, the Mexican federal government’s denial of the renewal of a permit to operate a hazardous waste landfill. Again, the principal impetus for the non-renewal of the permit was substantial public opposition to the landfill, which was located eight kilometres from an urban centre. The Spanish investor claimed that the resolution denying renewal of the permit constituted indirect expropriation.

31. For a discussion of indirect expropriation and the right to regulate, see Indirect Expropriation and the Right to Regulate in International Investment Law, Chapter 2 in International Investment Law: A Changing Landscape, OECD (2005). 32. For a discussion of the “fair and equitable” standard see “Fair and Equitable Treatment Standard in International Investment Law”, Chapter 3 in International Investment Law: A Changing Landscape, OECD (2005). 33. Metalclad Corporation v. Mexico, ICSID, Case No. ARB (AF)/97/1, Award, 30 Aug. 2000, para. 76. 34. Idem, para. 109. 35. NAFTA allows investors to arbitrate only issues under Chapter 11, the Investment Chapter. The court reasoned that the “Transparency” provisions are in Chapter 18. By contrast, Chapter 11 does contain the most-favoured-nation standard and the minimum treatment standard (including “fair and equitable” treatment).

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The tribunal considered the environmental reasons proffered by Mexico for the decision, and found that there were no significant environmental concerns that justified non-renewal of the permit,36 but that the decision was made principally to put an end to the political problems – defined as community pressure’ – caused by the Landfill.37 On the question of a state’s right to regulate, the Tribunal reasoned: we find no principle stating that regulatory administrative actions are per se excluded from the scope of [the expropriation provision in the Spain-Mexico BIT], even if they are beneficial to society as a whole – such as environmental protection – particularly if the negative impact of such actions on the financial position of the investor is sufficient to neutralise in full the value, or economic or commercial use of its investment without receiving any compensation whatsoever.38 The SpainMexico BIT does not have any environmental language. Similarly, a Malaysian investor that signed a Foreign Investment Contract (“FIC”) with the government of Chile to develop a model township in the Pirque Metropolitan Region prevailed in an arbitration against Chile for failure to grant the necessary permits. The municipal government rejected the zoning modifications required for the project as well as the Environmental Impact Statement for the project, concluding that the proposal conflicted with existing urban development policy. While the tribunal agreed that Chile “has a right to decide its urban policies and legislation,” it concluded that Chile’s “approval of an investment by the FIC for a project that is against the urban policy of the Government is a breach of the obligation to treat an investor fairly and equitably”. 39 The tribunal held that the fair and equitable treatment standard of the Chile-Malaysia BIT would be breached “by failing to grant the necessary permits to carry out an investment already authorised”.40 Notably, however, the tribunal substantially reduced the award to the investor, finding that a large portion of its losses resulted from other business risks that are properly borne by the investor. The Chile-Malaysia BIT does not have any environmental language. 36. While the record showed a few relatively minor past violations of environmental requirements by the facility, the government of Mexico conceded that the facility was generally in compliance with environmental laws and that the site met all applicable criteria for the siting of a hazardous waste disposal facility. 37. Tecnica Mediambientales Tecmed S.A. v. United Mexican States, ISCID, Case No. l ARB (AF)/00/2, Award, 29 May 2003, para. 129. 38. Tecnica Mediambientales Tecmed S.A. v. United Mexican States, ISCID, Case No. l ARB (AF)/00/2, 29 May 2003, para. 121. 39. MTD Equity Sdn. Bhd and MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/07, Award, 25 May 2004, paras. 104 and 166. 40. Idem, paras. 104 and 105. This quoted language is found in the Chile-Croatia Treaty and not in Chile’s BIT with Malaysia. Under the Most Favoured Nation Clause of the Malaysia-Chile BIT, the tribunal agreed to include within the scope of the BIT the more favourable language on granting of permits contained in Chile’s treaty with Croatia.

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Challenges to environmental regulation A recent NAFTA decision, Methanex v. United States,41 sheds light on the right to regulate in the environmental context. Methanex, a Canadian investor and the world’s largest producer of methanol, which is feedstock for the gasoline additive “MTBE” (methyl tertiary-butyl ether), brought a claim against the United States challenging the state of California’s ban on the sale and use of MTBE in gasoline.42 Methanex argued that the California law violated national treatment, was inconsistent with the fair and equitable treatment article, and constituted indirect expropriation. The tribunal held that national treatment was not violated because the law applied equally to all MTBE manufacturers, whether domestic or foreign. In so ruling, the tribunal rejected M e th an e x’s arg um e n t th at th e re l ev an t c om p ar is on s h ou ld be to manufacturers of all gasoline additives. Further, the tribunal did not find any evidence of intentional discrimination, concluding that “the scientific and administrative record establishes clearly that Governor Davis and the California agencies acted with a view to protecting the environmental interests of the citizens of California, and not with the intent to harm foreign methanol producers”.43 After reviewing at length the scientific studies and other information that formed the basis for the law as well as the expert scientific testimony proffered as part of the arbitration, the tribunal found that California’s legislation was a reasonable response to the widespread MTBE contamination of its water resources. The tribunal found no violation of the fair and equitable treatment article. Finally, the tribunal found that there was no indirect expropriation, reasoning: [A]s a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and which affects, inter alios, a foreign investor or investment is

41. Methanex Corporation v. United States of America, UNCITRAL/NAFTA, Final Award of t h e Tr i b u n a l o n J u r i s d i c t i o n a n d M e r i t s , 3 A u g . 2 0 0 5 , av a i l a bl e a t www.state.gov/documents/ organisation/51052.pdf. 42. The first NAFTA arbitration was also a challenge to the ban of a gasoline additive. Ethyl Corporation challenged Canada’s adoption of legislation that banned the import of another gasoline additive known as “MMT” (methylcyclopentadienyl manganese tricarbonyl). Ethyl Corporation v. Canada, UNCITRAL/NAFTA, Award on Jurisdiction, 24 June 1998, available at www.investmentclaims.com/oa1.html. Ethyl, a US-based manufacturer and distributor of MMT, challenged the law on a number of grounds, including that it violated national treatment, was an unlawful performance requirement, and amounted to expropriation. After the tribunal rejected Canada’s challenge to jurisdiction and a separate domestic adjudicatory body found that the Act was inconsistent with Canada’s Agreement on Internal Trade, Canada moved to resolve other challenges to the legislation and settled the case for USD 13 million. The Ethyl case attracted significant attention, though the tribunal never reached a decision on the merits. 43. Methanex, Part IV, Chapter E, para. 20.

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n o t d e e m e d e xp r o p r ia to ry a n d c o m p e n sa bl e u n l e s s sp e c i f i c commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.44 The exception for “specific commitments” given by the government echoes the reasoning in the Metalclad case. In finding that no promises were made regarding future regulation of MTBE, the tribunal noted that “Methanex entered a political economy in which it was widely known, if not notorious, that governmental environmental and health protection institutions at the federal and state level, […] continuously monitored the use and impact of chemical compounds and commonly prohibited or restricted the use of some of those compounds for environmental and/or health reasons”. 45 Another NAFTA challenge to environmental regulation is S.D. Myers v. Canada, where Canada’s regulation imposing a temporary ban on the export of PCB waste was held to violate the national treatment and the fair and equitable treatment provisions of NAFTA. Because the export ban was found to favour the use of Canadian companies for disposal of the waste and because the government of Canada conceded that there were environmental benefits to allowing export of the waste,46 the tribunal found that the Canadian measure was discriminatory in intent. Noting the preamble language in NAFTA and the NAAEC, the tribunal clearly recognised that states have the “right to establish high levels of environmental protection” and that “environmental protection and economic development can and should be mutually supportive.” However, in this case, it found that there was “no legitimate environmental reason” for Canada’s export ban.47 The tribunal also found that the type of measure at issue did not constitute a “performance requirement” because no “requirements’” were imposed on S.D. Myers. Finally, the measure was not tantamount to expropriation because the ban was only temporary and only resulted in a delayed opportunity for S.D. Myers.48

Arbitration cases involving allegations of corruption The issue of corruption in connection with foreign investment has arisen in some recent investor-state disputes, where international arbitration tribunals have considered allegations of corruption, reviewed evidence

44. Idem, Part IV, Chapter D, para. 7. 45. Idem, Part IV, Chapter D, para. 9. 46. Canada’s PCB wastes were located in closer proximity to the waste disposal sites in the US than to domestic disposal options. 47. S.D. Myers, Inc. v. Canada, UNICTRAL/NAFTA case, Partial Award, 13 Nov. 2000, paras. 220 and 195.

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presented, including circumstantial evidence, and made inferences from the evidence to decide whether corruption took place.49 In the Methanex case (discussed above), Methanex made allegations of improper payments against California’s then governor, Gray Davis. Methanex claimed that Archer Daniels Midland (“ADM”), a US-based ethanol producer, made large campaign contributions to Governor Davis’ reelection campaign and in return was able to secure California’s ban on MTBE. Methanex claimed that concerns about MTBE’s effect on water were a mere pretext for the ban, and that it was really motivated by a desire to help ADM and others in the domestic ethanol industry and hurt foreign methanol producers like Methanex. The tribunal carefully considered the evidence put forward by Methanex and agreed that a “connect the dots” approach could be used to consider the evidence, i.e., that circumstantial evidence and reasonable inferences from the evidence could be considered by a tribunal in determining whether corruption took place.50 The tribunal rejected Methanex’s allegation because the campaign contributions were not unlawful and because the circumstantial evidence did not lead to an inference of a “quiproquo,” i.e., that the contributions were given in return for enactment of the MTBE ban. The tribunal noted that the timing of the payments did not support an inference that they helped gain passage of the ban because 1) at the time of the first ADM contribution to Davis, the California legislature had already required a study on the effects of MTBE and had already passed legislation requiring the Governor to take all appropriate action to protect the public based on the future results of the study; 2) the second campaign contribution came long after Governor Davis had already 48. The S.D. Myers tribunal was also called upon to determine whether Canada’s actions did not violate NAFTA because they were authorized by the US-Canada bilateral Transboundary Agreement on Hazardous Waste or the Basel Convention on Transboundary Movement of Hazardous Waste. The tribunal reasoned that while NAFTA’s Article 104 states that obligations under the Basel Convention shall prevail in the event of inconsistency with NAFTA, it also requires that parties should choose such means of compliance with the other treaty obligations that are least inconsistent with NAFTA. Both the bilateral agreement and the Basel Convention permit the export of hazardous waste if certain conditions for safe management of the waste are met. Based on the language of the waste treaties and the evidence that Canada was motivated by protectionism, the tribunal concluded that NAFTA had been violated. For a further discussion of the relationship between other international obligations and IIAs, see Moshe Hirsch, “Interactions between Investment and Non-Investment Obligations in International Investment Law”, International Law Forum, the Hebrew University of Jerusalem (November 2006). 49. Many more arbitrations involving corruption in foreign investment have arisen in disputes between private companies. See Martin, Timothy, “International Arbitration and Corruption: An Evolving Standard,” in Transnational Dispute Management, Vol. I, Issue No. 2 (May 2004). 50. Methanex, Part III, Chapter B, paras. 2-3.

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signed an Executive Order banning MTBE, which was later codified into a statute; and 3) California, during this same time period, had also sought a waiver from the federal government’s oxygenate requirement which, had it been granted, would have harmed ADM.51 Another recent decision, World Duty Free Limited v. The Republic of Kenya,52 addresses the issue of corruption raised as a defence by the government.53 World Duty Free, a UK company, contended that, through a series of actions, the government of Kenya expropriated its investment in a duty free shop which had been established pursuant to an investment contract with the Kenyan authorities. Kenya argued in defence that the investment contract was unenforceable because it was procured by payment of a bribe of USD 2 million to the then President of Kenya, Daniel arap Moi. The claimant conceded that the payment had been made, but argued that it saw the payment not as a bribe but as “a gift of protocol or a personal donation made to the President to be used for public purposes within the framework of the Kenyan system of Harambee”. 54 Based on the claimant’s statement that the payments were concealed (given in cash and “left in a brown briefcase by the wall”) and that claimant perceived that the payments were required to secure the investment contract, the tribunal determined that the payments “must be regarded as a bribe made in order to obtain the conclusion of the 1989 Agreement”. 55 As to the consequences of the bribe, the tribunal reviewed the international conventions on corruption, including the OAS, OECD, and African Union conventions, the domestic laws criminalising corruption in Kenya and elsewhere, as well a number of court and arbitral decisions considering corruption, to conclude that “bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to trans-national public policy” and therefore “claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal”.56 Moreover, the fact that the President of Kenya had sought

51. The tribunal also noted that the contributions were not a substantial portion of Davis’s re-election funds and that domestic methanol producers also contributed to Davis’s campaign (showing that campaign contributions came not just from Methanex’s competitors in the ethanol industry). 52. World Duty Free Company Limited v. the Republic of Kenya, ICSID Case No. Arb./00/7, Award, 5 Sep. 2006 (provisional copy), available at www.investmentclaims.com/oa1.html. 53. Although the decision focuses on the investment contract rather than a BIT, we discuss the decision because the same claims could have been raised under a BIT. 54. Idem, para. 133. “Harambee” is explained by the tribunal as follows: “[T]he concept of Harambee had its root in the African culture where societies made collective contribution toward individual or communal activities and this practice became popularized by President Kenyatta just after Kenyan independence.” Idem, para. 134. 55. Idem, para. 136. 56. Idem., para. 157.

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the bribe did not prevent the State of Kenya from raising the bribe as a defence. The tribunal reasoned that the President held elected office under the Constitution, was subject to the rule of law, and was separate from the State. The tribunal held that the claimant was not legally entitled to maintain any of its pleaded claims, but that the arbitration clause of the agreement remained valid and gave the tribunal jurisdiction.

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ANNEX 3.A1

Methodology and List of IIAs Included in Survey Methodology This survey is based on a sample of 296 international investment agreements signed by the 30 OECD member countries or by the 9 non-member adherents to the OECD Declaration on International Investment and Multinational Enterprises. The sample contains 269 bilateral treaties (including 14 model treaties) and of 25 free trade agreements with investment provisions. The relevant texts of NAFTA are also reviewed. For BITs, the “population” of treaties is that available on the UNCTAD website at www.unctadxi.org/templates/DocSearch____779.aspx. For Free Trade Agreements, it is those listed on the US Treasury and OAS websites (www.ustr.gov/Trade_Agreements/SEction_Induex.html) and www.sice.oas.org/Trade). The only exception to this are four treaties signed by Belgium (with the Democratic Republic of Congo, Korea, the People’s Republic of China and the United Arab Emirates, which were provided directly by Belgium. The research was conducted in December 2006. Because of the time lag between signature of treaties and their inclusion on the internet, some recent treaties might not be included in this survey. The survey uses a flexible sampling methodology – more emphasis was put on countries with many investment agreements and with significant environmental, labour or anti-corruption texts. Treaties that were not available electronically or that were not available in English, French or Spanish were not considered. The sample was also selected so as to give a time dimension to the survey results. While more effort was spent in examining recent agreements, older treaties were also examined. In particular, the oldest treaty still in force and available electronically was read and, where relevant, several treaties from the early nineties were selected.

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The intent of the survey methodology was to produce a comprehensive inventory of the international investment agreements’ treatment of societal issues (mainly, labour, environment and anti-corruption). However, because the survey is based on a sample and not the complete set of all treaties, some relevant texts may be missing. The BITs were reviewed to see whether any texts (including the preamble, articles and annexes) discussed the environment, human rights, labour rights or corruption. Where the texts were searchable, searches were made for the following terms: “environment”, “societal”, “human”, “labour”, “labor”, “worker”, and “corruption”.

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Annex Table 3.A1.1. Bilateral investment treaties Country

Treaty

Australia

Austria

Belgium/Luxembourg

Environment

Labour

Sri Lanka 2002

no

no

Egypt 2001

no

no

Uruguay 2001

no

no

India 1999

no

no

Lithuania 1998

no

no

Argentina 1995

no

no

Indonesia 1995

no

no

Chile 1996

no

no

Hong Kong 1993

no

no

Czech Republic 1993

no

no

Hungary 1991

no

no

China 1988

no

no

Philippines 2002

no

no

Slovenia 2001

no

no

Mongolia 2001

no

no

Saudi Arabia 2001

no

no

Armenia 2001

no

no

Egypt 2001

no

no

Mexico 1998

no

no

Chile 1997

no

no

Korea 1991

no

no

Malaysia 1985

no

no

Model BIT

yes

yes

Korea 2006 People’s Republic of China

Canada

164

yes

yes

yes (MOA)

yes (MOA)

Uganda 2005

no

no

Democratic Republic of Congo 2005

yes

yes

United Arab Emirates 2004

yes

yes

Costa Rica 2002

no

no

Thailand 2002

no

no

Benin 2001

no

no

Burkina Faso 2001

no

no

Estonia 1996

no

no

Mexico 1996

no

no

Czech Republic 1989

no

no

Sri Lanka 1982

no

no

Indonesia 1970

no

no

Model BIT

yes

yes

El Salvador 1999

yes

no

Costa Rica 1998

yes

no

Uruguay 1997

yes

no

Croatia 1997

yes

no

Thailand 1997

yes

no

Lebanon 1997

yes

no

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

Czech Republic

Denmark

Finland

Treaty

Environment

Labour

Armenia 1997

yes

no

Barbados 1996

yes

no

Egypt 1996

yes

no

Ecuador 1996

yes

no

Panama 1996

yes

no

Venezuela 1996

yes

no

Romania 1996

yes

no

South Africa 1995

yes

no

Philippines 1995

yes

no

Latvia 1995

yes

no

Trinidad and Tobago 1995

yes

no

Ukraine 1994

yes

no

Slovakia 1992

no

no

Hungary 1991

no

no

Argentina 1991

no

no

Czech Republic 1990

no

no

Poland 1990

no

no

Russian Federation 1989

no

no

Model BIT 2005

no

no

Bosnia and Herzegovina 2002

no

no

Nicaragua 2002

no

no

Mexico 2002

no

no

Lithuania 1994

no

no

Ireland 1996

no

no

Israel 1997

no

no

Turkey 1992

no

no

Australia 1993

no

no

Greece

no

no

United States 1991

no

yes

Canada 1990

no

no

Finland 1990

no

no

Belgium and Luxembourg 1989

no

no

Ethiopia 2001

no

no

Kuwait 2001

no

no

Uganda 2001

no

no

Slovenia 1999

no

no

Estonia 1991

no

no

Poland 1990

no

no

Hungary 1988

no

no

Indonesia 1968

no

no

Model BIT

yes

Yes

Armenia 2004

yes

yes

Uruguay 2005

yes

yes

Nicaragua 2003

yes

yes

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

France

Germany

Greece

166

Treaty

Environment

Labour

Kyrgyzstan 2003

yes

yes

Tanzania 2001

yes

yes

Bosnia and Herzegovina 2000

yes

yes

Croatia 1999

no

No

Slovenia 1998

no

no

Poland 1996

no

no

Brazil 1995

no

no

Argentina 1993

no

no

Turkey 1993

no

no

Czech Republic 1990

no

no

Model BIT

no

No

Iran 2003

no

No

Madagascar 2003

no

No

Cambodia 2000

no

No

Slovenia 1998

no

No

Mexico 1998

no

No

Brazil 1995

no

No

Hong Kong 1995

no

No

Romania 1995

no

No

Chile 1992

no

no

Lithuania 1992+B98

no

no

Estonia 1992

no

no

China 1984

no

no

Korea 1977

no

no

Dem. Republic of the Congo 1972

no

no

Model BIT 2005

no*

no

China 2003

no*

no

Thailand 2002

no*

no

Sri Lanka 2000

no*

no

Mexico 1998

no*

no

Romania 1996

no

no

Poland 1989

no*

no

Russian Federation 1989

no

no

Yemen 1974

no

no

Ethiopia 1964

no

no

Indonesia 1968

no

no

Malaysia 1960

no

no

Model BIT

no

no

Azerbaijan 2004

no

no

Kazakhstan 2002

no

no

Turkey 2000

no

no

Mexico 2000

no

no

Slovenia 1997

no

no

Chile 1996

no

no

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

Environment

Labour

Korea 1995

no

no

Estonia 1994

no

no

Egypt 1993

no

no

Czech and Slovak Republics 1991

no

no

Yemen 2004

no

no

India 2003

no

no

Latvia 1999

no

no

Romania 1993

no

no

Australia 1991

no

no

Israel 1991

no

no

Norway 1991

no

no

Canada 1991

no

no

Denmark 1990

no

no

Lebanon 2004

no

no

China 1994

no

no

Chile 2003

no

no

Ireland

Czech Republic 1996

no

no

Italy

Nicaragua 2004

no

no

Jordan 2001

no

no

Tanzania 2001

no

no

Korea 1989

no

no

Vietnam 2003

yes

yes

Korea 2002

yes

yes

Bangladesh 1998

no

no

Russian Federation 1998

no

no

Turkey 1992

no

no

Egypt 1977

no

no

Dem. Republic of the Congo 2005

no

no

Mauritania 2005

no

no

Slovakia 2005

no

no

Albania 2003

no

no

Japan 2002

yes

no

Mexico 2000

no

no

Greece 1995

no

no

Austria 1991

no

no

Romania 1990

no

no

Russian Federation 1990

no

no

Italy 1989

no

no

France 1977

no

no

Czech Republic 2002

no

no

Cuba 2001

yes

no

Sweden 2000

No

no

Korea 2000

No

no

Greece 2000

No

no

Hungary

Iceland

Japan

Korea

Mexico

Treaty

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

Netherlands

New Zealand

Norway

Poland

Portugal

Slovakia

168

Treaty

Environment

Labour

Austria 1998

No

no

France 1998

No

no

Germany 1998

No

no

Spain 1998

No

no

Netherlands 1998

No

no

Belgium/Luxembourg 1996

no

no

Switzerland 1995

yes

no

Model BIT

yes

yes

Cambodia 2003

no

no

Laos 2003

no

no

Zambia 2003

no

no

Malawi 2003

no

no

Belize 2002

no

no

Tajikistan 2002

no

no

Kazakhstan 2002

no

no

Brazil 1998

no

no

Mexico 1998

no

no

Venezuela 1991

no

no

Russian Federation 1989

no

no

Turkey 1986

no

no

Yemen 1985

no

no

Argentina 1999

no

no

Chile 1999

no

no

Hong Kong 1995

no

no

China 1988

no

no

Russian Federation 1998

no

no

Peru 1995

no

no

Hungary 1991

no

no

Malaysia 1984

no

no

United States 1990/2004

no

yes

Jordan 1997

no

no

Finland 1996

no

no

Canada 1990

no

no

Denmark

no

no

Germany 1989

no*

no

Model Bit

no

no

Turkey 2002

no

no

Bosnia and Herzegovina 2002

no

no

Philippines 2002

no

no

India 2000

no

no

Romania 1993

no

no

Model BIT

no

no

Korea 2005

no

no

Israel 1999

no

no

Turkey 1992

no

no

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

Treaty

Spain

Sweden

Switzerland

Turkey

United Kingdom

Environment

Labour

Model BIT

no

no

Chile 1991

no

no

Albania 2003

no

no

Jamaica 2002

no

no

Uruguay 1992

no

no

Syrian Republic 2003

no

no

Namibia 2003

no

no

Serbia and Montenegro 2002

no

no

Iran 2002

no

no

Mexico 1998

no

no

Model BIT

no

no

Romania 2002

no

no

Uzbekistan 2001

no

no

Mexico 2000

no

no

Bosnia and Herzegovina 2000

no

no

Slovenia 1999

no

no

Russia 1995

yes

no

China 1992

no

no

Latvia 1992

no

no

Estonia 1992

no

no

Sri Lanka 1984

no

no

Chile 2003

no

no

Sudan 2002

no

no

Lebanon 2000

no

no

Bangladesh 2000

no

no

Mexico 1995

yes

no

Czech and Slovak Republics 1990

no

no

Model BIT

no

no

Lebanon 2004

no

no

Portugal 2002+B346

no

no

Greece 2000

no

no

Russian Federation 1997

no

no

Finland 1993

no

no

Japan 1992

no

no

Slovakia 1992

no

no

United Kingdom 1991

no

no

Netherlands 1986

no

no

United States 1985

no

no

Model BIT

no

no

Bosnia and Herzegovina 2002

no

no

Vietnam 2002

no

no

Hong Kong 1998

no

no

Slovenia 1996

no

no

Latvia 1995

no

no

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

United States

Argentina

Brazil

170

Treaty

Environment

Labour

Estonia 1994

no

no

Czech and Slovak Republic 1994

no

no

Turkey 1991

no

no

Argentina 1990

no

no

Korea 1978

no

no

Model BIT 2004

yes

yes

Uruguay 2005

yes

yes

Bahrain 1999

yes

yes

El Salvador 1999

yes

yes

Mozambique 1998

yes

yes

Bolivia 1998

yes

yes

Jordan 1997

yes

yes

Azerbaijan 1997

yes

yes

Albania 1995

yes

yes

Nicaragua 1995

yes

yes

Honduras 1995

yes

yes

Jamaica 1994

no

yes

Mongolia 1994 (1992 prototype)

no

yes

Georgia 1994

yes

yes

Trinidad and Tobago 1994

yes

yes

Ukraine 1994

no

yes

Uzbekistan 1994

yes

yes

Armenia 1992

no

yes

Ecuador 1993

no

yes

Lithuania 2000 (1992 prototype)

no

yes

Kazakstan 1992

no

yes

Argentina 1991

no

no

Poland 1990/2004 protocol

no

yes

Egypt

no

no

Cameroon 1986

no

no

Bangladesh 1986

no

no

Turkey 1985

no

no

Panama 2004

no

no

Thailand 2000

no

no

New Zealand 1999

no

no

Australia 1995

no

no

Finland 1993

no

no

Canada 1991

no

no

Netherlands 1998

no

no

Finland 1995

no

no

Venezuela 1995

no

no

France 1995

no

no

Chile 1994

no

no

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

Treaty

Chile

Estonia

Israel

Latvia

Lithuania

Romania

Environment

Labour

Spain 2004

no

no

Chile 2003

no

no

Peru 2000

no

no

Switzerland 2003

no

no

New Zealand 1999

no

no

Austria 1997

no

no

Australia 1996

no

no

Brazil 1994

no

no

Greece 1996

no

no

France 1992

no

no

Belgium 1996

no

no

Greece 1994

no

no

Israel 1994

no

no

United Kingdom

no

no

United States 1994

no

yes

France 1992

no

no

Denmark 1991

no

no

Model BIT

no

no

Ethiopia 2003

no

no

Romania 1998

no

no

Slovakia 1999

no

no

Czech Republic 1997

no

no

Estonia 1994

no

no

Hungary 1991+B109

no

no

United States 1995

no

yes

United Kingdom 1994

no

no

Hungary 1999

no

no

Canada 1995

yes

no

Sweden 1992

no

no

Kuwait 2001

no

no

Australia 1998

no

no

France 1992

no

no

United States 1998

no

yes

Czech Republic 1994

no

no

Sweden 2002

no

no

Hungary 1993

no

no

Israel 1998

no

no

Portugal 1993

no

no

United States 1992

no

no

Germany 1996

no

no

Canada 1996

yes

no

Korea 1990

no

no

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Annex Table 3.A1.1. Bilateral investment treaties (cont.) Country

Treaty

Environment

Labour

Slovenia

Model BIT

no

no

Bosnia and Herzegovina

no

no

Austria

no

no

Finland 1998

no

no

China 1997

no

no

Greece 1997

no

no

Denmark 1999

no

no

Annex Table 3.A1.2. Free trade agreements or Cooperation/Partnership agreements with investment content Australia-Singapore

Mexico-Nicaragua

US-Singapore

Canada-Chile

Mexico-El Salvador-Guatemala-Honduras

CAFTA

Canada-Costa Rica

Mexico-Uruguay

Chile-China

Japan-Philippines

US-Australia

Chile-Korea

Korea-Singapore

US-Chile

Chile-Panama

Mexico-Colombia-Venezuela

US-Morocco

Chile-Peru

Mexico-Bolivia

US-Oman

EU-Russia

Mexico-Chile

US-Peru

EU-ACP (Cotonou)

Mexico-Costa Rica

172

EFTA-Singapore

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ANNEX 3.A2

Inventory of Environmental, Labour and Anti-corruption Texts 1. Bilateral Investment Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1. Belgium/Luxembourg. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2. Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3. Finland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4. Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5. Latvia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6. Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7. Netherlands. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

175 175 177 179 180 180 181 182

1.8. Sweden. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9. United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1. Preamble and objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2. Relation to other environmental agreements . . . . . . . . . . . . . 2.3. Investment chapter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4. Side egreements to NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.1. Labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4.2. Environment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Free trade agreements with investment provisions – North and South America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

182 182 186 186 187 187 190 190 191

3.1. Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Canada-Chile FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.2 Canada-Costa-Rica FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2. Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1. Mexico-Colombia-Venezuela FTA . . . . . . . . . . . . . . . . . . 3.2.2. Mexico-Bolivia FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.3. Mexico-Chile FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.4. Mexico-Costa Rica FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.5. Mexico-Nicaragua FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . .

192 192 193 194 194 194 195 196 196

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174

3.2.6. Mexico-El Salvador-Guatemala-Honduras FTA . . . . . . .

197

3.2.7. Mexico-Uruguay FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3. United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.1. Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.2. US-Australia FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3. US-Chile FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.4. US-Morocco FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.5. US-Oman FTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.6. US-Peru Trade Protection Agreement . . . . . . . . . . . . . . . 3.3.7. US-Singapore FTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.8. CAFTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4. Chile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.1. Chile-China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

198 198 198 205 206 207 209 210 211 212 215 215

3.4.2. Chile-Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.3. Chile-Panama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4.4. Chile-Peru . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Other agreements with investment provisions. . . . . . . . . . . . . . . 4.1. Australia-Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2. Japan-Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3. EU-ACP Partnership Agreement (Cotonou Agreement) . . . . . 4.4. EU-Russia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5. EFTA-Singapore. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6. Korea-Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

215 215 216 216 216 217 218 219 225 226

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1. Bilateral investment treaties This section summarises the environmental, labour and anti-corruption provisions in the signed BITs and model BITs for Belgium/Luxembourg, Canada, Finland, Japan, Latvia, Mexico, the Netherlands, Sweden, and the United States.57 In cases where the Parties to the treaty are two OECD countries (e.g. the bilateral investment treaty between Japan and Korea), we have listed the relevant provisions under the OECD member that has more treaties with the noted language.

1.1. Belgium/Luxembourg The Belgian/People’s Republic of China BIT has a “Memorandum of Agreement on Cooperation in the Field of Environment” and a “Memorandum of Agreement on Cooperation in the Field of Employment, Labour, Social Dialogue and Social Affairs”. The preamble of the Belgian/Korea BIT contains the following language: Recognising the right of each Contracting Party to establish its own levels of domestic environmental protection, development policies, priorities an d labour s tan dards , an d to adop t or mo dify ac cordin g ly its environmental and labour legislation, Understanding that no Contracting Party shall change or relax its domestic environmental and labour legislation in a way that undermines internationally recognised labor rights to encourage investment, investment maintenance or the expansion of the investment that shall be made in its territory. The “Definitions” section of the Belgian/Luxembourg Model BIT and its BITs with the Democratic Republic of Congo contain the following texts (Note: The Belgian-United Arab Emirates BIT contains the chapeaux of the texts

57. The summary is based on signed BITs available on the UNCTAD database as of December 2006. Many of the more recent treaties were not available in the database and therefore could not be included. Model BITs were obtained from the governments or found online.

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below, but not the lists of environmental measure and internationally recognised labour rights): 5.

The terms “environmental legislation” shall mean any legislation of the Contracting Parties, or provision thereof, the primary purpose of which is the protection of the environment, or the prevention of a danger to human, animal, or plant life or health, through: a) the prevention, abatement or control of the release, discharge, or emission of pollutants or environmental contaminants; b) the control of environmentally hazardous or toxic chemicals, substances, materials and wastes, and the dissemination of information related thereto; c) the protection or conservation of wild flora or fauna, including endangered species, their habitat, and specially protected natural areas in the Contracting Party’s territory.

6.

The terms “labour legislation” shall mean legislation of the Kingdom of Belgium, of the Grand-Duchy of Luxembourg or of .XXX, or provisions thereof, that are directly related to the following internationally recognised labour rights: a) the right of association; b) the right to organise and bargain collectively; c) a prohibition on the use of any form of forced or compulsory labour; d) a minimum age for the employment of children; e) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

In addition, Article 5 of the Belgium/Luxembourg Model BIT and in the Belgian/DRC BIT contain the following environmental provisions:

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1.

Recognising the right of each Contracting Party to establish its own levels of domestic environmental protection and environmental development policies and priorities, and to adopt or modify accordingly its environmental legislation, each Contracting Party shall strive to ensure that its legislation provides for high levels of environmental protection and shall strive to continue to improve this legislation.

2.

The Contracting Parties recognise that it is inappropriate to encourage investment by relaxing domestic environmental legislation. Accordingly, each Contracting Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such legislation as an encouragement for the establishment, maintenance or expansion in its territory of an investment.

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3.

The

Contracting

Parties

reaffirm

their

commitments under

the

international environmental agreements, which they have accepted. They shall strive to ensure that such commitments are fully recognised and implemented by their domestic legislation. 4.

The Contracting Parties recognise that co-operation between them provides enhanced opportunities to improve environmental protection standards. Upon request by either Contacting Party, the other Contracting Party shall accept to hold expert consultations on any matter falling under the purpose of this Article.

The Model BIT and the Belgian DRC BIT also contain detailed labour provisions in Article 6: 1.

Recognising the right of each Contracting Party to establish its own domestic labour standards, and to adopt or modify accordingly its labour legislation, each Contracting Party shall strive to ensure that its legislation provide for labour standards consistent with the internationally recognised labour rights set forth in paragraph 6 of Article 1 and shall strive to improve those standards in that light.

3.

The Contracting Parties recognise that it is inappropriate to encourage investment by relaxing domestic labour legislation. Accordingly, each Contracting Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such legislation as an encouragement for the establishment, maintenance or expansion in its territory of an investment.

4.

The Contracting Parties reaffirm their obligations as members of the International Labour Organisation and their commitments under the International Labour Organisation Declaration on Fundamental Principles and Rights at Work and its Follow-up. The Contracting Parties shall strive to ensure that such labour principles and the internationally recognised labour rights set forth in paragraph 6 of Article 1 are recognised and protected by domestic legislation.

5.

The Contracting Parties recognise that co-operation between them provides enhanced opportunities to improve labour standards. Upon request by either Contacting Party, the other Contracting Party shall accept to hold expert consultations on any matter falling under the purpose of this Article.

The Belgian BIT with the United Arab Emirates contains similar language to that reproduced above in its Articles 5 and 6 on the environment and labour, respectively.

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1.2. Canada Canada’s most recent treaties contain language specifically addressing environmental protection. The Canada-El Salvador BIT, signed in 1999, was the most recent Canadian treaty available in the UNCTAD inventory. Annex I, Article III of this treaty contains the following provision, providing exceptions from the agreement: Nothing in this Agreement shall be construed to prevent a Contracting Party from adopting, maintaining or enforcing any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures, including environmental measures: ●

necessary to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement;

●

necessary to protect human, animal or plant life or health; or

●

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

Similar language is found in Canada’s BITs with the following nations: Costa Rica, signed in 1998 (Annex I, Article III); Armenia, signed in 1997 (Article XVII); Croatia, signed in 1997 (Annex I, Article III); Lebanon, signed in 1997 (Annex I, Article III ); Thailand, signed in 1997 (Article XVII); Uruguay, signed in 1997 (Annex I, Article III ); Venezuela, signed in 1996 (see Annex, Paragraph 2); Egypt, Ecuador, Barbados, Panama, and Romania, all signed in 1996 (Article XVII in each treaty); South Africa, the Philippines, Trinidad and Tobago, and Latvia, all signed in 1995 (Article XVII in each treaty); and with Ukraine signed in 1994 (see Article XVII). The earlier Canadian BITs reviewed did not contain any environmental, labour or anti-corruption provisions. Canada’s 2004 Model BIT58 contains the following environmental provisions: Article 10. General exceptions 1.

Subject to the requirement that such measures are not applied in a manner that would constitute arbitrary or unjustifiable discrimination between investments or between investors, or a disguised restriction on

58. Available at http://ita.law.uvic.ca/investmenttreaties.htm/.

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international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary: a) to protect human, animal or plant life or health; b) to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; or c) for the conservation of living or non-living exhaustible natural resources. 2.

Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining reasonable measures for prudential reasons, such as: a) the protection of investors, depositors, financial market participants, policy-holders, policy-claimants, or persons to whom a fiduciary duty is owed by a financial institution; b) the maintenance of the safety, soundness, integrity or financial responsibility of financial institutions; and c) ensuring the integrity and stability of a Party’s financial system.

Article 11. Health, safety and environmental measures The Parties recognise that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that the other Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement. Annex B.13(1) of the Model BIT also provides that environmental measures shall not usually be considered indirect expropriation: c) Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation. There is also a provision in the Model BIT allowing an arbitration panel to use experts or environmental, health or safety issues. Article 42. The UNCTAD inventory does not include any new treaties that use as a base the new Canadian model BIT.

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1.3. Finland Finland’s 2004 Model BIT and recent signed treaties contain preamble language (but no provisions in the main text) on the environment and labour issues. Finland’s model treaty and its BITs with Uruguay, signed in 2005, Armenia, signed in 2004, Nicaragua and Kyrgyzstan, signed in 2003, Tanzania, signed in 2001, and Bosnia and Herzegovina, signed in 2000, all have the following relevant preamble language: RECOGNISING that agreement on the treatment to be accorded such investments will stimulate the flow of private capital and the economic development of the Contracting Parties; AGREEING that a stable framework for investment will contribute to maximising the effective utilisation of economic resources and improve living standards; RECOGNISING that the development of economic and business ties can promote respect for internationally recognised labour rights; AGREEING that these objectives can be achieved without relaxing health, safety and environmental measures of general application […] The earlier Finnish BITs (before 2000) reviewed for this paper did not include such language.

1.4. Japan Japan’s most recent BITs contain environmental provisions as well as a reference to co-operation between labor and management. Japan’s BIT with Vietnam, signed in 2003, and with Korea, signed in 2002, both contain the following preamble language: Recognising that these objectives can be achieved without relaxing health, safety and environmental measures of general application; Recognising the importance of the cooperative relationship between labour and management in promoting investment between both countries; […] Both BITs also include an Article 21 which provides that: [Both contracting parties] recognise that it is inappropriate to encourage investment by investors of the other Contracting Party by relaxing environmental measures. To this effect each Contracting Party should not waive or otherwise derogate from such environmental measures as an encouragement for the establishment, acquisition or expansion in its territory of investments by investors of the other Contracting Party. The earlier Japanese BITs reviewed for this paper did not include any environmental language.

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1.5. Latvia Latvia’s current Model BIT contains the following environmental and labour language in the preamble: Agreeing that a stable framework for investments will contribute to maximising the effective utilisation of economic resources and improve living standards; Recognising that the development of economic and business ties can promote respect for internationally recognised labour rights, Agreeing that these objectives can be achieved without relaxing health, safety and environmental measures of general application […] The general exceptions section of the Model BIT has the following “right to regulate” language on environment and health: 2.

Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures, including environmental measures: a) necessary for the maintenance of public order; b) necessary to protect human, animal or plant life or health.

1.6. Mexico Article 5(2) of Mexico’s BIT with Cuba, signed in 2001, has the following environmental provision (in Spanish) on performance requirements: La medida que exija que una inversión emplee una tecnología para cumplir en lo general con requisitos aplicables a salud, seguridad o medio ambiente, no se considerará incompatible con el párrafo 1f). Para brindar mayor certeza, los Artículos 3 y 4 se aplican a la citada medida. Ad Article 3 of Mexico’s BIT with Switzerland, signed in 1995, has the following environmental provision: The Parties recognise that it is inappropriate to encourage investment by re la xin g d om e sti c h e alth , s afe ty or e nv iron me n ta l me a su re s . Accordingly, neither Party should waive or otherwise derogate from, or offer to waive or derogate, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If either Party considers that the other Party has offered such an encouragement, it may request consultations. In Protocol, Ad Article 3, the treaty also references the OECD’s instruments: The Parties recognise that the entry and the expansion of investments in their territory by investors of the other Party shall be subject to relevant

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instruments of the Organisation for Economic Co-operation and Development (OECD) in the field of international investments. However, Mexico’s BITs with the Czech Republic, signed in 2002, with Sweden and Korea, signed in 2000, and with the Netherlands, signed in 1998, contain no environmental or societal provisions. As noted below, Mexico’s FTAs do have environmental provisions.

1.7. Netherlands The Netherlands’ 2004 Model BIT contains the following environmental and labour language in the preamble (but no provisions in the main text): Recognising that the development of economic and business ties will promote internationally accepted labour standards; Considering that these objectives can be achieved without compromising health, safety and environmental measures of general application […]

1.8. Sweden The preamble of Sweden’s 2003 Model BIT contains the following text: Recognising that the development of economic and business ties can promote respect for internationally recognised labour rights; and Agreeing that these objectives can be achieved without relaxing health, safety and environmental measures of general application; Article 2 of Sweden’s BIT with the Russian Federation, signed in 1995, contains the following environmental language in the article on “Protection and Reciprocal Protection of Investments”: 3) “Each Contracting Party may have in its legislation limited exceptions to national treatment provided for in Paragraph 2) of this Article. Any new exception will not apply to investments made in its territory by investors of the other Contracting Party before the entry into force of such an exception, except when the exception is necessitated for the purpose of the maintenance of defence, national security and public order, protection of the environment, morality and public health.” The other Swedish BITs reviewed did not contain such language. Sweden’s 2002 Model BIT contains no environmental, labour or anticorruption language.

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1.9. United States The United States’ 2004 Model BIT59 contains detailed language in the text and preamble specifically addressing environmental protection and health and labour rights, as well as other societal issues: Preamble Agreeing that a stable framework for investment will maximise effective utilisation of economic resources and improve living standards; Desiring to achieve these objectives in a manner consistent with the protection of health, safety, and the environment, and the promotion of internationally recognised labour rights; […] Article 8: Performance requirements […] c) Provided that such measures are not applied in an arbitrary or unjustifiable manner, and provided that such measures do not constitute a disguised restriction on international trade or investment, paragraphs 1b), c), and f), and 2a) and b), shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures: i) necessary to secure compliance with laws and regulations that are not inconsistent with this Treaty; ii) necessary to protect human, animal, or plant life or health; or iii) related to the conservation of living or non-living exhaustible natural resources. Article 12: Investment and environment 1. The Parties recognise that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic environmental laws. Accordingly, each Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces the protections afforded in those laws as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory. If a Party considers that the other Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement. 2. Nothing in this Treaty shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent

59. Available at http://ita.law.uvic.ca/investmenttreaties.htm.

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with this Treaty that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. Article 13: Investment and labour 1. The Parties recognise that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic labor laws. Accordingly, each Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces adherence to the internationally recognised labor rights referred to in paragraph 2 as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory. If a Party considers that the other Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement. 2. For purposes of this Article, “labor laws” means each Party’s statutes or regulations, or provisions thereof, that are directly related to the following internationally recognised labor rights: a) the right of association; b) the right to organise and bargain collectively; c) a prohibition on the use of any form of forced or compulsory labor; d) labor protections for children and young people, including a minimum age for the employment of children and the prohibition and elimination of the worst forms of child labor; and e) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health. Article 32: Expert reports Without prejudice to the appointment of other kinds of experts where authorised by the applicable arbitration rules, a tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree. Annex B. Expropriation The Parties confirm their shared understanding that: […] b) Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public

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welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations. The UNCTAD inventory includes just one BIT, the US-Uruguay BIT signed in 2005, which was concluded after creation of the 2004 Model BIT. The USUruguay BIT contains the same main text language quoted above from the 2004 Model BIT. The US-Uruguay BIT has an additional phrase regarding “consumer protection” in the preamble: Desiring to achieve these objectives in a manner consistent with the protection of health, safety, and the environment, and the promotion of consumer protection and internationally recognised labor rights; […] The United States 1994 Model BIT contained preamble language on the environment and worker rights (but no language in the main text of the treaty) and therefore a number of the treaties signed in the mid- to late 1990’s contain this preamble language. For example, the US BIT with Albania, signed in 1995, provides the following preamble language: Agreeing that a stable framework for investment will maximise effective utilisation of economic resources and improve living standards; Recognising that the development of economic and business ties can promote respect for internationally recognised worker rights; Agreeing that these objectives can be achieved without relaxing health, safety and environmental measures of general application… The Letter of Submittal from the United States Department of State accompanying the US-Albania BIT, has the following statement: Title and Preamble The Title and Preamble state the goals of the Treaty. Foremost is the encouragement and protection of investment. Other goals include economic co-operation on investment issues; the stimulation of economic development; higher living standards; promotion of respect for internationally-recognised worker rights; and maintenance of health, safety, and environmental measures. While the Preamble does not impose binding obligations, its statement of goals may assist in interpreting the Treaty and in defining the scope of Party-to-Party consultations pursuant to Article VIII. Letter of Submittal, US-Albania BIT, submitted by Peter Tarnoff, US Department of State, 3 August 1995. Other US BITs signed during the midto late-1990’s contain the same language in the preamble and the letters of submittal. Such language is included, for example, in the US BITs with Azerbaijan, signed in 1997; Bolivia, signed in 1998; El Salvador, signed in 1999; Georgia, signed in 1994; Honduras, signed in 1995; Jordan, signed in 1997; Mozambique, signed in 1998; and Uzbekisthan, signed in 1994.

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The US BITs reviewed that predate the 1994 protocol did not include any environmental language but sometime included language on worker rights. For example, US BITs with Argentina, signed in 1991; Kazakstan, signed in 1992; Ecuador, signed in 1993; and Jamaica, signed in 1994, contain the following preamble language on worker rights but nothing on the environment: Recognising that the development of economic and business ties can contribute to the well-being of workers in both Parties and promote respect for internationally recognised worker rights;… The 1992 treaty between the US and the Czech and Slovak Republics provides the following preamble language regarding raising living standards and worker rights: Convinced that private enterprise operating within free and open markets offers the best opportunities for raising living standards and the quality of life for the inhabitants of the Parties, improving the well-being of workers, and promoting overall respect for internationally recognised worker rights […].

2. NAFTA We set forth below the environmental and societal provisions in NAFTA. We also provide a brief summary of NAFTA’s side agreements on environment and labor.

2.1. Preamble and objectives The North American Free Trade Agreement (“NAFTA”), signed in 1992 by Canada, Mexico, and the US, includes investment provisions with environmental language as well as environmental and social issues in the preamble.60 The following relevant language is in the NAFTA preamble: CREATE new employment opportunities and improve working conditions and living standards in their respective territories; UNDERTAKE each of the preceding in a manner consistent with environmental protection and conservation; PRESERVE their flexibility to safeguard the public welfare; PROMOTE sustainable development; STRENGTHEN the development and enforcement of environmental laws and regulations; and PROTECT, enhance and enforce basic workers’ rights […]

60. Available at www.sice.oas.org/trade/nafta/naftatce.asp.

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NAFTA also has an “Objectives” article, which does not contain any language on environmental or social issues. It reads as follows. 1.

The objectives of this Agreement, as elaborated more specifically through its principles and rules, including national treatment, most-favorednation treatment and transparency, are to: a) eliminate barriers to trade in, and facilitate the cross-border movement of, goods and services between the territories of the Parties; b) promote conditions of fair competition in the free trade area; c) increase substantially investment opportunities in the territories of the Parties; d) provide adequate and effective protection and enforcement of intellectual property rights in each Party’s territory; e) create effective procedures for the implementation and application of this Agreement, for its joint administration and for the resolution of disputes; and f) establish a framework for further trilateral, regional and multilateral co-operation to expand and enhance the benefits of this Agreement.

2.

The Parties shall interpret and apply the provisions of this Agreement in the light of its objectives set out in paragraph 1 and in accordance with applicable rules of international law.

2.2. Relation to other environmental agreements NAFTA also contains an article titled “Relation to Environmental and Conservation Agreements” which provides: 1.

In the event of any inconsistency between this Agreement and the specific trade obligations set out in: a) the Convention on International Trade in Endangered Species of Wild Fauna and Flora, done at Washington, 3 March 1973, as amended 22 June 1979; b) the Montreal Protocol on Substances that Deplete the Ozone Layer, done at Montreal, 16 September 1987, as amended 29 June 1990; c) the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, done at Basel, 22 March 1989, on its entry into force for Canada, Mexico and the United States; or d) the agreements set out in Annex 104.1,

such obligations shall prevail to the extent of the inconsistency, provided that where a Party has a choice among equally effective and reasonably available means of complying with such obligations, the Party chooses the alternative that is the least inconsistent with the other provisions of this Agreement.

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2.

The Parties may agree in writing to modify Annex 104.1 to include any amendment to an agreement referred to in paragraph 1, and any other environmental or conservation agreement.

Article 104. Annex 104.1 sets forth the following bilateral agreements: 1. The Agreement Between the Government of Canada and the Government of the United States of America Concerning the Transboundary Movement of Hazardous Waste, signed at Ottawa, 28 October 1986. 2. The Agreement Between the United States of America and the United Mexican States on Cooperation for the Protection and Improvement of the Environment in the Border Area, signed at La Paz, Baja California Sur, 14 August 1983.

2.3. Investment Chapter The Investment Chapter, Chapter 11, contains the following language: Article 1114: Environmental measures 1.

Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.

2.

The Parties recognise that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement.

In addition, Article 1106, which prohibits certain “performance requirements” such as export quotas or minimum domestic content requirements in products, states that bona fide environmental measures are not precluded and that investment incentives may be conditioned inter alia on requirements for employing or training workers (emphasis added in texts quoted below): 1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory: a) to export a given level or percentage of goods or services; b) to achieve a given level or percentage of domestic content;

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c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory; d) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; e) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings; f) to transfer technology, a production process or other proprietary knowledge to a person in its territory, except when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal or competition authority to remedy an alleged violation of competition laws or to act in a manner not inconsistent with other provisions of this Agreement; or g) to act as the exclusive supplier of the goods it produces or services it provides to a specific region or world market. 2.

A measure that requires an investment to use a technology to meet generally applicable health, safety or environmental requirements shall not be construed to be inconsistent with paragraph 1(f). For greater certainty, Articles 1102 and 1103 apply to the measure.

3.

No Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements: a) to achieve a given level or percentage of domestic content; b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory; c) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or d) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

4.

Nothing in paragraph 3 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory.

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5.

Paragraphs 1 and 3 do not apply to any requirement other than the requirements set out in those paragraphs.

6.

Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraph 1b) or c) or 3a) or b) shall be construed to prevent any Party from adopting or maintaining measures, including environmental measures: a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; b) necessary to protect human, animal or plant life or health; or c) necessary for the conservation of living or non-living exhaustible natural resources.

Article 1131 on “expert reports” also stipulates that experts may be appointed to provide information on environmental, health, or safety matters: Without prejudice to the appointment of other kinds of experts where authorised by the applicable arbitration rules, a Tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree.

2.4. Side agreements to NAFTA NAFTA was accompanied by separate detailed agreements on labour and environment, the North American Agreement on Labor Cooperation (“NAALC”) and the North American Agreement on Environmental Cooperation (“NAAEC”).61

2.4.1. Labour The NAALC affirms the right of each party to establish its own labour standards, requires each party to ensure high labour standards and to enforce its labour laws. Articles 2 and 3. Each party shall provide access to persons to administrative, quasi-judicial, judicial or labour tribunals that are fair, equitable and transparent and comply with due process. Article 5. The parties shall ensure that their laws are published in advance of adoption and provide an opportunity to interested persons to comment. Article 6. The parties shall promote awareness of their labor laws. Article 7.

61. Idem.

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The NAALC creates a Commission for Labor Cooperation comprising a ministerial Council and a Secretariat. Article 8. The Council will oversee the implementation of the NAALC and address questions and differences that may arise between the parties regarding the NAALC. Article 10. The Council is to promote co-operation among the Parties on labor issues, including by holding trainings, seminars and providing technical assistance. Article 11. A party may seek consultations with any other party on whether there has been a persistent failure to enforce occupational safety and health, child labour, or minimum wage technical labour standards. Article 27. If the matter is not resolved after consultations, it may be referred to the Council, which shall attempt to resolve the dispute through recourse to good offices, conciliation, mediation or other dispute resolution procedures. Article 28. If the matter remains unresolved it may go to an arbitral panel if the matter is trade-related and covered by mutually recognised labour laws. Article 29. The NAALC also defines “labor laws” as laws covering certain issues, including labor protections for children and young persons, the right to bargain collectively and to strike, elimination of employment discrimination, equal pay for women and men, prevention of and compensation for occupational injuries and illnesses, and protection of migrant workers. Article 49.

2.4.2. Environment The NAAEC is structured much like the NAALC. It recognises that each government has the right to set its own levels of domestic environmental protection and priorities and requires each party to ensure high levels of environmental protection and to enforce its environmental laws and regulations. Articles 3 and 5. The parties shall ensure that their laws are published in advance of adoption and provide an opportunity to interested persons to comment. Article 4. Each party shall provide access to persons with a legally recognised interest to administrative, quasi-judicial, judicial or administrative proceedings to enforce environmental laws. Article 6. Such proceedings shall be fair, open, and equitable and comply with due process. Article 7. The NAAEC creates a Commission for Environmental Cooperation comprising a Council, a Secretariat, and a Joint Public Advisory Committee. Article 8. The Council will oversee the implementation of the NAAEC and address questions and differences that may arise between the parties regarding the NAAEC. Article 10. The Council is to promote co-operation among the Parties on environmental issues, including establishing a process for developing recommendations on greater compatibility of environmental technical regulations, standards and conformity assessment procedures in a manner consistent with NAFTA. Article 10. The Council shall cooperate with

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the NAFTA Free Trade Commission to achieve the environmental goals and objectives of NAFTA by acting as a point of inquiry and receipt for comments from NGOS and persons and by providing assistance in consultations where a Party considers that another Party is lowering or offering to lower environmental measures to encourage investment. Article 10. The Secretariat will have an Executive Director, who will be chosen by the Council and will manage the staff of the Secretariat. Article 11. The Secretariat may consider a submission from NGOs or persons asserting that a Party is failing to effectively enforce its environmental law. Article 14. After considering certain criteria, the Secretariat may request a response from the Party, which shall submit a response to the Secretariat. If the Secretariat determines that the matter warrants developing a factual record, and if the Council agrees by a two-thirds vote, then the Secretariat shall develop a factual record for the matter. A Party may comment on the factual record and the Council may determine to make the record publicly available. Article 15. The Joint Public Advisory Committee will have 15 members. It may provide advice to the Council on any matter under the NAAEC and provide technical and scientific information to the Secretariat including for developing a factual record under Article 15. Article 16. Each Party may also convene a national advisory committee, comprising members of its public, including representatives of NGOs and persons, to advise it on the implementation of the NAAEC. Article 17. Any party may request a consultation with any other party regarding whether there has been a persistent pattern of failure by the other party to effectively enforce its environmental laws. Article 22. If the parties are unable to resolve the matter after consultations, the matter may be referred to the Council, which shall attempt to resolve the dispute through recourse to good offices, conciliation, mediation or other dispute resolution procedures. Article 23. If the matter remains unresolved it may go to an arbitral panel if the lack of enforcement relates to a situation involving workplaces, firms, companies or sectors that produce goods or provide services traded between the parties or that compete, in the territory of the party complained against, with goods or services produced or provided by persons of another party. Article 24. The NAAEC defines “environmental laws” as domestic laws and regulations on protecting the environment or preventing danger to human life or health, through 1) prevention or control of the release or emission of pollutants or environmental contaminants; 2) the control of environmentally hazardous or toxic chemicals, substances, or wastes; or 3) the protection of wild flora or fauna, including endangered species and their habitat, but not including any laws directly related to worker safety or health. Article 45.

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3. Free Trade Agreements with investment provisions – North and South America We summarise below the environmental and social provisions in the FTAs signed by the US, Mexico, Canada, and Chile.

3.1. Canada 3.1.1 Canada-Chile FTA Canada has entered into an FTA with investment provisions with Chile.62 The FTA, signed in 1996, has the following environmental and social language on the environment in the Preamble: CREATE new employment opportunities and improve working conditions and living standards in their respective territories; UNDERTAKE each of the preceding in a manner consistent with environmental protection and conservation; PRESERVE their flexibility to safeguard the public welfare; PROMOTE sustainable development; STRENGTHEN the development and enforcement of environmental laws and regulations; PROTECT, enhance and enforce basic workers’ rights […] The FTA contains the following language on the right to regulate the environment and not lowering standards to encourage investment: Article G-14: Environmental measures 1.

Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.

2.

The Parties recognise that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that the other Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement.

62. Available at www.sice.oas.org/Trade/can_e.ASP.

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There is also a provision allowing tribunals to appoint experts on environmental issues. Article G-34. Canada and Chile have entered into side agreements on co-operation on environment and labour issues, similar to the NAFTA side agreements.

3.1.2 Canada-Costa-Rica FTA Canada has an FTA with Costa Rica, signed in 2001, which contains a few investment provisions, but the substance of which refers to the existing BIT (discussed above). Its FTA with Costa Rica has the following preamble language on environmental and social issues: PROMOTE sustainable development; UNDERTAKE each of the preceding in a manner consistent with environmental protection and conservation; PRESERVE their flexibility to safeguard the public welfare; RECOGNISE that States have the ability to preserve, develop and implement their cultural policies for the purpose of strengthening cultural diversity; and RECOGNISE the increased co-operation between our countries on labour and environmental co-operation. Canada and Costa Rica have also entered into side agreements on cooperation on environment and labour issues.

3.2. Mexico Mexico has signed a number of bilateral and multilateral FTAs with investment provisions.63 These FTAs contain environmental provisions, which are set forth below. The agreements were in Spanish; the following are unofficial translations.

3.2.1. Mexico-Colombia-Venezuela FTA This FTA, signed in 1994, contains a provision prohibiting the lowering of environmental standards to attract investment: Article 17-13: Policy measures pertaining to the environment No Party shall eliminate domestic policy measures applicable to health, safety, or pertaining to the environment, nor undertake to exempt from the application thereof an investment by an investor from any country as a means of bringing about the establishment, procurement, expansion, or retention of said investment on said Party’s territory. If one Party believes that another 63. All available at www.sice.oas.org/Trade/mex_e.ASP.

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Party has encouraged such an investment in such a manner, the former Party may request consultations with the aforementioned other Party.

3.2.2. Mexico-Bolivia FTA This FTA, signed in 1994, contains a right to regulate provision on the environment and a provision prohibiting the lowering of environmental standards to attract investment: Article 15-14: Policy measures pertaining to the environment, health and safety 1.

None of the provisions set forth in this Chapter shall be interpreted as an impediment to a Party’s adoption, retention, or implementation of any measure compatible with this Chapter when said Party deems this appropriate to ensuring that investments on its territory comply with environmental laws.

2.

The Parties recognise that it is inappropriate to encourage investment by means of the relaxation of domestic policy measures applicable to the environment, health and safety. Accordingly, neither Party shall eliminate such measures or undertake to exempt investors or their investments from the application thereof as a means of bringing about the establishment, procurement, expansion, or retention of said investment on said Party’s territory. If one Party believes that the other Party has encouraged such an investment in such a manner, the former Party may request consultations with the latter Party.

3.2.3. Mexico-Chile FTA This FTA, signed in 1998, contains an environmental exception from the definition of performance requirements, a “right to regulate” provision on the environment, a provision against lowering of environmental standards to encourage investment provision, and a provision allowing environmental experts in dispute resolution: Article 9-07: Performance requirements 2.

Provided that these measures are not applied in an arbitrary or unwarranted fashion, and provided they do not constitute a covert restraint of international investment or trade, none of the provisions set forth in Paragraph 1b), 1c) or Paragraph 3a) or 3b) shall be interpreted as preventing a party from adopting or retaining policy measures, including environmental policy measures, if necessary to: a) ensure compliance with laws and regulations that are not incompatible with the provisions of this Treaty; b) protect human, animal, or plant life; or

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c) preserve nonrenewable natural resources, whether or not living. Article 9-15: Measures pertaining to the environment 1.

None of the provisions set forth in this Chapter shall be interpreted as an impediment to a Party’s adoption, retention, or implementation of any measure which is compatible with this Chapter and which said Party deems appropriate to ensuring that investment activities on its territory are carried out having due regard for environmental considerations.

2.

The Parties recognise that it is inappropriate to encourage investment by means of the relaxation of domestic policy measures applicable to health, safety, or pertaining to the environment. Accordingly, no Party shall waive the implementation of or in any way abolish – nor offer to waive or abolish – the aforesaid measures as a means of bringing about the establishment, procurement, expansion, or retention of an investment by an investor on said Party’s territory. If one Party believes that the Party has encouraged such an investment in such a manner, the former Party may request consultations with the latter Party and both shall work together to help prevent the use of incentives of this nature.

Article 9-34: Expert opinions Without prejudice to the option to appoint other types of experts when applicable rules of arbitration so authorise, the Court – at the request of a litigant party, or on its own initiative unless the litigants refuse to accept this – may appoint one or more experts to issue a written opinion on any question of fact pertaining to issues relating to the environment, health, safety, or such other scientific matters as may have been raised by a party that is a litigant in a proceeding, in accordance with the terms and conditions agreed upon by the litigant parties.

3.2.4. Mexico-Costa Rica FTA This FTA, signed in 1994, contains a right to regulate provision on the environment and a provision prohibiting the lowering of environmental standards to attract investment: Article 13-15: Policy measures pertaining to the environment

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None of the provisions set forth in this Chapter shall be interpreted as an impediment to a Party’s adoption, retention, or implementation of any measure consistent with this Chapter when said Party deems this appropriate to ensuring that investments on its territory comply with said Party’s ecological or environmental laws.

2.

The Parties recognise that it is inappropriate to encourage investment by means of the relaxation of domestic policy measures applicable to health, safety, or pertaining to ecology or the environment. Accordingly, neither

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Party shall eliminate such measures or undertake to exempt an investor’s investment from the application thereof as a means of bringing about the establishment, procurement, expansion, or retention of the investment on said Party’s territory. If one Party believes that the other Party has encouraged such an investment in such a manner, the former Party may engage in consultations with the latter Party.

3.2.5. Mexico-Nicaragua FTA This FTA, signed in 1992, contains a right to regulate provision on the environment and a provision prohibiting the lowering of environmental standards to attract investment: Article 16-14: Policy measures pertaining to the environment 1.

None of the provisions set forth in this Chapter shall be interpreted as an impediment to a Party’s adoption, retention, or implementation of any measure compatible with this Chapter when said Party deems this appropriate to ensuring that investments on its territory comply with ecological laws.

2.

The Parties recognise that it is inappropriate to encourage investment by means of the relaxation of domestic policy measures applicable to health, safety, or pertaining to the environment. Accordingly, no Party shall eliminate such measures or undertake to exempt an investor’s investment from the application thereof as a means of bringing about the establishment, procurement, expansion, or retention of the investment on said Party’s territory. If one Party believes that the other Party has encouraged such an investment in such a manner, the former Party may engage in consultations with the latter Party.

3.2.6. Mexico-El Salvador-Guatemala-Honduras FTA This FTA, signed in 2000, contains preamble text on improving working conditions, protecting and conserving the environment and promoting sustainable development as well as an environmental exception from the definition of performance requirements: 2.

A policy measure which requires that an investment utilise a technology in order to comply with generally applicable health, environment, or safety requirements shall not be deemed incompatible with Paragraph 1f). For the sake of greater certainty, Article 14-04 and Article 14-05 shall apply to the aforementioned measure.

Article 14-07. The FTA also contains provisions on the right to regulate the environment and prohibiting the lowering of environmental standards to attract investment:

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Article 14-16 Policy measures pertaining to the environment 1.

None of the provisions set forth in this Chapter shall be interpreted as an impediment to a Party’s adoption, retention, or implementation of any measure compatible with this Chapter when said Party deems this appropriate to ensuring that investments on its territory comply with environmental laws.

2.

The Parties recognise that it is inappropriate to encourage investment by means of the relaxation of domestic policy measures applicable to health, safety, or pertaining to the environment. Accordingly, no Party shall eliminate such measures or exempt an investor’s investment from the application thereof as a means of bringing about the establishment, procurement, expansion, or retention of the investment on said Party’s territory. If one Party believes that another Party has encouraged such an investment in such a manner, the former Party may request consultations with the aforementioned other Party.

3.2.7. Mexico-Uruguay FTA This FTA, signed in 2003, contains preamble language on an environmental exception from the definition of performance requirements and a provision allowing environmental experts in dispute resolution: Article 13-07: Performance requirements 2.

A policy measure which requires that an investment utilise a technology in order to comply in general with health, safety, or environmental requirements shall not be deemed incompatible with Paragraph 1f). For the sake of greater certainty, Articles 13-03 and 13-04 shall be applicable to the aforementioned policy measure.

6.

Provided that such measures are not applied in an arbitrary or unwarranted fashion and provided they do not constitute a covert restraint of international investment or trade, none of the provisions set forth in Paragraph 1b) or c) or Paragraph 3a) or b) shall be interpreted as preventing a Party from adopting or retaining measures, including measures pertaining to the environment, competition, consumer protection, or other provisions necessary to: a) ensure compliance with laws and regulations that are not incompatible with the provisions of this Treaty; b) protect human, animal, or plant life; or c) safeguard nonrenewable natural resources, whether or not alive.

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Article 13-33: Expert opinions Without prejudice to the option to appoint other types of experts when applicable rules of arbitration so authorise, the Court – whether at the request of a litigant party, or on its own initiative unless the litigant parties refuse to accept this – may appoint one or more experts to issue a written opinion on any question of fact pertaining to issues relating to the environment, health, safety, or such other scientific matters as may have been raised by a litigant that is a party to a proceeding, in accordance with the terms and conditions agreed upon by the litigant parties.

3.3. United States 3.3.1. Overview The US has signed FTAs containing investment provisions with Australia, Chile, Morocco, Oman, and Singapore. In addition, in 2004, the US, Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua signed the Central American Free Trade Agreement (“CAFTA”). The US is negotiating FTAs with many other nations. It has also signed a Trade Promotion Agreement containing investment provisions with Peru [Note: In November 2006, Colombia and the United States signed a Trade Promotion Agreement; this agreement is not included in the sample of agreements surveyed here]. For ease of reference, we will call CAFTA and the group of six agreements with Australia, Chile, Morocco, Oman, Peru, and Singapore the “US FTAs reviewed”. All of these US FTAs reviewed have detailed language in the preamble and main text regarding the environment and worker and labor rights. The investment chapters of the US FTAs reviewed have environmental provisions that are almost the same as the language in the US 2004 Model BIT. In addition, all the US FTAs reviewed have separate chapters with detailed requirements on labor and the environment. CAFTA and the US FTAs with Morocco, Oman, and Singapore, have “anti-corruption” provisions, the first time this language appears in investment agreements. 1. Similarities among the US FTAs – Summary of the common provisions Preambles Each US FTA reviewed has language in the preamble on creating new employment opportunities, improving living standards and implementing the agreement in a manner that protects the environment and promotes sustainable development. With the exception of the US-Singapore FTA, each preamble contains a commitment to high labour standards. The preambles of CAFTA, and the US-Morocco, US-Oman, and US-Singapore FTAs also cover elimination of bribery.

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Investment chapters All the US FTAs reviewed have a chapter on investment and each contains the following environmental language. First, the provision on “Performance Requirements,” which prohibits certain performance requirements such as export quotas or minimum domestic content requirements in products, states that the bona fide environmental measures are not precluded: c) Provided that such measures are not applied in an arbitrary or unjustifiable manner, and provided that such measures do not constitute a disguised restriction on investment or international trade, paragraphs 1b), c), and f), and 2a) and b), [which preclude certain performance requirements] shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures: i) necessary to secure compliance with laws and regulations that are not inconsistent with this Agreement; ii) necessary to protect human, animal, or plant life or health; or iii) related to the conservation of living or non-living exhaustible natural resources. 64 Second, there is a provision entitled “Investment and Environment”, making it clear that a Party may take steps to ensure that investment is sensitive to the environment: Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.65 Third, a provision entitled “Expropriation” states that: b) Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to achieve legitimate public welfare objectives, such as the protection of public health, safety, and the environment, do not constitute indirect expropriations.66

64. US-Australia FTA, Article 11.9; see also US-Chile FTA, Article 10.5(3); US-Morocco FTA, Article 10.8(3); US-Oman FTA, Article 10.8(3); US-Peru TPA, Article 10.9(3); USSingapore FTA, Article 15.8(3); CAFTA, Article 10.9(3). 65. US-Australia FTA, Article 11.11; see also US-Chile FTA, Article 10.12; US-Morocco FTA, Article 10.10; US-Oman FTA, Article 10.10; US-Peru TPA, Article 10.11; USSingapore FTA, Article 15.10; CAFTA, Article 10.11. 66. US-Australia FTA, Annex 11-B; see also US-Chile FTA, Annex 10-D, section 4(b); US-Morocco FTA, Annex 10-B, section 4(b); US-Oman FTA, Annex 10-B, section 4(b); US-Peru TPA, Annex 10-B, section 4(b), CAFTA, Annex 10-B, section 4(b). In the US-Singapore FTA, this expropriation language is contained in an exchange of letters between the parties, signed on 6 May 2003.

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Many of the US FTAs reviewed also have a provision allowing a tribunal set up to resolve disputes to appoint experts on may appoint experts on “environmental, health, safety, or other scientific matters.” See e.g, US-Chile FTA, Article 10.23. Labour chapters All the US FTAs reviewed have a labour chapter. The first two articles in the labour chapters are substantively similar in all the US FTAs reviewed. First, the “Statement of Shared Commitment” reaffirms the parties’ obligations under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up (1998) (“ILO Declaration”) and states that each Party “shall strive to ensure that” such principles in the ILO Declaration and “the internationally recognised labor rights” listed in a separate article “are recognised and protected by law”. US-Australia FTA, Article 18.1; see also US-Chile FTA, Article 18.1; US-Morocco FTA, Article 16.1; US-Oman FTA, Article 16.1; US-Peru TPA, Article 17.1; US-Singapore FTA, Article 17.1. The first article also recognises that each party has the right to “establish its own domestic labor standards and to adopt or modify its labour laws and standards” and shall strive to improve those standards. id. All the US FTAs reviewed define “internationally recognised labour principles and rights” as: a) the right of association; b) the right to organise and bargain collectively; c) a prohibition on the use of any form of forced or compulsory labour; d) labour protections for children and young people, including a minimum age for the employment of children and the prohibition and elimination of the worst forms of child labour; and e) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.67 The second article of the labour chapter, on enforcement of labour laws, recognises that each Party “retains the right to exercise discretion” with respect to enforcement and to allocation of resources to “labour matters determined to have higher priority,” but requires that a Party shall “not fail to effectively enforce its labour laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties”. US-Australia FTA, Article 18.2; see also US-Chile FTA, Article 18.2; US-Morocco FTA, Article 16.2; US-Oman FTA, Article 16.2; US-Peru TPA, Article 17.2;

67. US-Australia FTA, Article 18.7; see also US-Chile FTA, Article 18.8 [note item (d) is worded somewhat differently]; US-Morocco FTA, Article 16.7; US-Oman FTA, Article 16.7; US-Peru TPA, Article 17.7 [uses “minors” instead of “young people” in (d)]; US-Singapore FTA, Article 17.7.

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US-Singapore FTA, Article 17.2. The second article also contains a provision stating that labour standards should not lowered to encourage investment: The Parties recognise that it is inappropriate to encourage trade or investment by weakening or reducing the protections afforded in their respective labour laws. Accordingly, each Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces adherence to the internationally recognised labour principles and rights referred to in Article 18.7 as an encouragement for trade with the other Party, or as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory.68 While the US FTAs reviewed have somewhat different language on mechanisms for public involvement and settlement of disputes between Parties, there are commonalities as well. Each of the US FTAs reviewed provides that the Parties shall ensure that interested persons have access to administrative, judicial, quasi-judicial, or labour tribunals to seek enforcement of the Party’s labour standards and that such tribunals are “fair, equitable and transparent.” US-Australia FTA, Article 18.3; see also US-Chile FTA, Article 16.3; US-Morocco FTA, Article 16.3; US-Oman FTA, Article 16.3; US-Peru FTA, Article 17.3; US-Singapore FTA, Article 17.3. Each of these provisions also provides for the Parties to increase “public awareness” of labour requirements. Idem. With respect to settlement of labor disputes between Parties, four of the US FTAs reviewed (with Australia, Morocco, Oman, and Singapore) establish a Joint Committee, comprised of government officials of the Parties to oversee implementation of the FTA and to help resolve disputes between the Parties. US-Australia FTA, Chapter 21; US-Morocco FTA, Chapter 19; US-Oman FTA, Chapter 19; US-Singapore FTA, Article 20.1. These Joint Committees may establish subcommittees on labor affairs comprised of labor officials of each Party. Disputes between the parties are to be resolved by consultations, and failing that by convening a subcommittee on labor affairs, which can resolve the dispute by a variety of means, including good offices, concialition, and mediation. US-Australia FTA, Article 18.5; US-Morocco FTA, Article 16.6; US-Oman FTA, Article 16.4 and 16.6; US-Singapore FTA, Article 17.6. For disputes regarding enforcement of labor laws, the parties are to engage in consultations, and failing that to take the matter to the Joint Committee. Idem.

68. US-Australia FTA, Article 18.2 (2); see also US-Chile FTA, Article 18.2; US-Morocco FTA, Article 16.2 ; US-Oman F TA, Article 1 6.2; US-Pe ru TPA, A rticle 17.2; US-Singapore FTA, Article 17.2.

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The other two FTAs (with Chile and Peru), establish a Free Trade Commission, comprised of government officials of the Parties to implement the FTA and settle disputes. US-Chile FTA, Chapter 21 and Article 18.4; US-Peru TPA, Chapter 19. These two FTAs also establish a Labor Affairs Council, comprised of senior labor officials of each party, to discuss implementation of the labor chapter and to settle disputes among parties on labor issues. US-Chile FTA, Article 18.4; US-Peru TPA, Article 17.4. Disputes on labor issues between the parties are to resolved in the first instance through consultations, next by reference to the Labor Affairs Council, and finally by the Free Trade Commission if the Labor Affairs Council is unable to resolve the matter. US-Chile FTA, Article 18.6; US-Peru TPA, Article 17.6. All the US FTAs reviewed require that each Party designate an office within its central government to serve as the contact point on labor matters with the other party and with the public. Such office is to provide for consultations with the public including consideration of public communications on matters under the labor chapter. See US-Australia FTA, Article 18.5; US-Chile FTA, Article 18.4; US-Morocco FTA, Article 16.4; US-Oman FTA, Article 16.4; US-Peru FTA, Article 17.4; US-Singapore FTA, Article 17.4. Each party may also convene an advisory commission, comprising members of the public, including representatives of labor and business, to advise on implementation of the labor chapter. US-Australia FTA, Article 18.4; US-Chile FTA, Article 18.4; US-Morocco FTA, Article 16.4; US-Oman FTA, Article 16.4; US-Peru FTA, Article 17.4; US-Singapore FTA, Article 17.4. All the US FTAs reviewed provide that the Parties agree to cooperate to further advance labor standards, and in many cases, there are side agreements that further detail labor co-operation. See US-Australia FTA, Article 18.5; US-Chile FTA, Article 18.5 and Annex 18.5; US-Morocco FTA, Article 16.5 and Annex 16-A; US-Oman FTA, Article 16.5 and Annex 16-A; US-Peru FTA, Article 17.5 and Annex 17A; US-Singapore FTA, Article 17.5 and Annex 17A. Environment chapters Each US FTA reviewed has a separate chapter on environment. Each one provides that each party has the right to regulate environmental matters pursuant to its own priorities but must ensure that its laws provide high levels of environmental protection: Recognising the right of each Party to establish its own levels of environmental protection and environmental development priorities, and to adopt or modify accordingly its environmental laws and policies, each Party shall ensure that its laws provide for and encourage high levels of environmental protection and shall strive to continue to improve their respective levels of environmental protection, including through such environmental laws and policies.69

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Further, recognising that each Party retains the right to exercise discretion with respect to enforcement and to allocation of resources to environmental matters of higher priorities, a “Party shall not fail to effectively enforce its environmental laws, through a sustained or recurring course of action or inaction, in a manner affecting trade between the Parties, after the date of entry into force of this Agreement.” US-Australia FTA, Article 19.2; see also US-Chile FTA, Article 19.2; US-Morocco FTA, Article 17.2; US-Oman FTA, Article 17.2; US-Peru TPA, Article 18.2; US-Singapore FTA, Article 18.2; CAFTA, Article 17.2. In addition, there is a provision stating that environmental standards should not be lowered to encourage investment: The Parties recognise that it is inappropriate to encourage trade or investment by weakening or reducing the protections afforded in their respective environmental laws. Accordingly, each Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces the protections afforded in those laws as an encouragement for trade with the other Party, or as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory.70 While the US FTAs reviewed have somewhat different language on mechanisms for public involvement and settlement of disputes between Parties, there are commonalities as well. Each of the US FTAs reviewed provides that the Parties shall ensure that interested persons have access to administrative, judicial, or quasi-judicial proceedings to seek enforcement of the Party’s environmental laws, and that such proceedings are “fair, equitable and transparent.” US-Australia FTA, Article 19.3; US-Chile FTA, Article 19.8; US-Morocco FTA, Article 17.4; US-Oman FTA, Article 17.3; US-Peru FTA, Article 18.3; US-Singapore FTA, Article 18.3. As noted in the labor section, with respect to settlement of disputes between Parties, four of US FTAs reviewed (with Australia, Morocco, Oman, and Singapore) establish a Joint Committee, comprised of government officials of the Parties to oversee implementation of the FTA and to help resolve disputes between the Parties. US-Australia FTA, Chapter 21; US-Morocco FTA, Chapter 19; US-Oman FTA, Chapter 19; US-Singapore FTA, Article 20.1. These Joint Committees may establish subcommittees on environmental affairs comprised of environmental officials of each Party. Disputes between the

69. US-Australia FTA, Article 19.1; see also US-Chile FTA, Article 19.1; US-Morocco FTA, Article 17.1; US-Oman FTA, Article 17.1; US-Peru TPA, Article 18.1; US-Singapore FTA, Article 18.1, CAFTA, Article 17.1. 70. US-Australia FTA, Article 19.2; see also US-Chile FTA, Article 19.2; US-Morocco FTA, Article 17.2; US-Oman FTA, Article 17.2; US-Peru TPA, Article 18.2; US-Singapore FTA, Article 18.2; CAFTA, Article 17.2.

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parties are to be resolved by consultations, and failing that by convening a subcommittee on environmental affairs, which can resolve the dispute by a variety of means, including good offices, conciliation, and mediation. For disputes regarding enforcement of environmental laws, the parties are to engage in consultations, and failing that to take the matter to the Joint Committee. US-Australia FTA, Article 19.7; US-Morocco FTA, Article 16.6; US-Oman FTA, Article 17.8; US-Singapore FTA, Article 18.7. As noted in the labor section above, the other two FTAs (with Chile and Peru), establish a Free Trade Commission, comprised of government officials of the Parties to implement the FTA and settle disputes. US-Chile FTA, Chapter 21 and Article 18.4; US-Peru TPA, Chapter 19. These two FTAs also establish an Environmental Affairs Council, comprised of senior environmental officials of each party, to discuss implementation of the environmental chapter and to settle disputes among parties on environmental issues. US-Chile FTA, Article 19.3; US-Peru TPA, Article 18.5. Disputes on environmental issues between the parties are to resolved in the first instance through consultations, next by reference to the Environmental Affairs Council, and finally by the Free Trade Commission if the Environmental Affairs Council is unable to resolve the matter. US-Chile FTA, Article 19.5; US-Peru TPA, Article 18.10. Though level of specificity in the text varies, each of the US FTAs reviewed require that the parties provide opportunities for public participation, including receipt and consideration of public comments, on environmental matters under the chapter. US-Australia FTA, Article 19.5; US-Chile FTA, Article 19.4; US-Morocco FTA, Article 17.6; US-Oman FTA, Article 17.5; US-Peru FTA, Article 18.6; US-Singapore FTA, Article 18.5. Each party may also convene an advisory body, comprising members of the public, including representatives of business and environmental organisations, to seek advice on implementation of the labor chapter. US-Australia FTA, Article 19.5; US-Chile FTA, Article 19.4; US-Morocco FTA, Article 17.6; US-Oman FTA, Article 17.5; US-Peru FTA, Article 18.6 (“shall” convene advisory council); US-Singapore FTA, Article 18.5. Three of the US FTAs reviewed specifically require steps to increase “public awareness” of environmental laws. US-Australia FTA, Article 19.3; US-Oman FTA, Article 16.3; US-Peru FTA, Article 18.6. All the US FTAs reviewed provide that the Parties agree to cooperate to further advance environmental standards, and in many cases, there are side agreements that further detail environmental co-operation. All the US FTAs reviewed also have a provision entitled “Relationship to Environmental Agreements” Recognising the importance of multilateral environmental agreements to which they are party and agree to seek means to enhance the mutual supportiveness of the multilateral environmental

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agreements to which they are both party and international trade agreements to which they are both party. The exact language in such provisions varies somewhat from FTA to FTA. Notes on each of the US FTAs We set forth below the special features of the different US FTAs reviewed, particularly the preamble language, the provisions for co-operation on labor and environmental issues, and the language on relationship to other environmental agreements.

3.3.2. US-Australia FTA The US-Australia FTA (signed in 2004) 71 contains the following preamble language on environmental and social issues: ENCOURAGE a closer economic partnership that will bring economic and social benefits, create new employment opportunities, and improve living standards for their people; […] IMPLEMENT this Agreement in a manner consistent with their commitment to high labour standards, sustainable development, and environmental protection; […] With respect to labour co-operation, the Parties also agree to cooperate to further advance labour standards on a bilateral, regional, and multilateral basis. Article 18.5. The Parties also agree to negotiate a United States-Australia Joint Statement on Environmental Cooperation to explore ways “to promote sustainable development in concert with strengthening bilateral trade and investment relations”. Article 19.6. The US-Australia FTA has the following provision Recognising the importance of other environmental agreements: ARTICLE 19.8: RELATIONSHIP TO ENVIRONMENTAL AGREEMENTS The Parties recognise that multilateral environmental agreements to which they are both party play an important role, globally and domestically, in protecting the environment and that their respective implementation of these agreements is critical to achieving the environmental objectives of these agreements. Accordingly, the Parties shall continue to seek means to enhance the mutual supportiveness of multilateral environmental agreements to which they are both party and international trade agreements to which they

71. The full text of the FTA is available at www.ustr.gov/Trade_Agreements/Bilateral/ Australia_FTA/Final_Text/Section_Index.html.

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are both party. The Parties shall consult regularly with respect to negotiations in the WTO regarding multilateral environmental agreements.

3.3.3. US-Chile FTA The US-Chile FTA (signed in 2003) 72 contains several preamble clauses that reference the environment and social issues. The parties resolve to: CREATE new employment opportunities and improve working conditions and living standards in their respective territories; BUILD on their respective international commitments and strengthen their co-operation on labour matters; PROTECT, enhance, and enforce basic workers’ rights; IMPLEMENT this Agreement in a manner consistent with environmental protection and conservation; PROMOTE sustainable development; CONSERVE, protect, and improve the environment, including through managing natural resources in their respective territories and through multilateral environmental agreements to which they are both parties; PRESERVE their flexibility to safeguard the public welfare; […] With respect to labour co-operation, the US-Chile FTA states that the Parties recognise that co-operation provides enhanced opportunities for the Parties to promote respect for the principles embodied in the ILO Declaration and the ILO Convention No. 182 Concerning the Prohibition and Immediate Action for the Elimination of the Worst Forms of Child Labour (1999) (ILO Convention 182). Article 18.5. The Parties agree to cooperate on labour issues under a Labour Cooperation Mechanism. Article 18.5 and Annex 18.5. With respect to environmental co-operation, Annex 19.3 of the US-Chile FTA sets forth detailed provisions and further agrees to pursue additional cooperation under a US-Chile Environmental Cooperation Agreement. The provision on “Relationship to Environmental Agreements” has slightly different language from the US-Australia FTA and reads as follows: The Parties recognise the importance of multilateral environmental agreements, including the appropriate use of trade measures in such agreements to achieve specific environmental goals. Recognising that in paragraph 31(i) of the Ministerial Declaration adopted on 14 November 2001 in Doha, WTO members have agreed to negotiations on the relationship between existing WTO rules and specific trade obligations set out in multilateral

72. The full text of the US-Chile FTA is set forth at www.ustr.gov/Trade_Agreements/ Bilateral/Chile_FTA/Final_Texts/Section_Index.html.

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environmental agreements, the Parties shall consult on the extent to which the outcome of the negotiations applies to this Agreement. US-Chile FTA, Article 19.9.

3.3.4. US-Morocco FTA The US-Morocco FTA (signed in 2004)73 contains several preamble clauses that reference the environment and social issues, such as: Recognising Morocco’s commitment to reform to improve the lives of its people; Desiring to raise living standards, promote economic growth and stability, create new employment opportunities, and improve the general welfare in their territories by liberalising and expanding trade and investment between them; […] Desiring to protect human, animal, and plant health conditions in the Parties’ territories, enhance the Parties’ implementation of the SPS Agreement, and provide a forum to address sanitary and phytosanitary matters between the Parties, thereby expanding trade opportunities; Affirming their commitment to transparency and their desire to eliminate corruption in international trade and investment; […] Desiring to strengthen the development and enforcement of labor and environmental laws and policies, promote basic workers’ rights and sustainable development, and implement this Agreement in a manner consistent with environmental protection and conservation; We note that this FTA has an explicit reference to elimination of corruption in the preamble. Like the US-Chile FTA, the US-Morocco FTA recognises that co-operation between the parties will promote respect for core labor standards embodied in the ILO Declaration and ILO Convention 182 and establishes a Labor Cooperation Mechanism (Annex 16-A) to further advance labor standards. US-Morocco FTA, Article 16.5. The US and Morocco agree to cooperate on environmental matters pursuant to a US-Morocco Joint Statement on Environmental Cooperation. Article 17.3. The provision on Relationship to Environmental Agreements has the same language as the provision in the US-Australia FTA, except that the last sentence in the US-Morocco provision has one additional phrase, marked in italics: The Parties shall consult regularly with respect to negotiations in the

73. Available at www.ustr.gov/Trade_Agreements/Bilateral/Morocco_FTA/FInal_Text/Section_ Index.html.

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WTO regarding multilateral environmental agreements and on the extent to which the outcome of those negotiations may affect this Agreement. Article 17.7. The US-Morocco FTA has explicit anti-corruption provisions in its transparency chapter. It provides: ARTICLE 18.5: ANTI-CORRUPTION 1.

The Parties reaffirm their continuing resolve to eliminate bribery and corruption in international trade and investment.

2.

Each Party shall adopt or maintain the necessary legislative or other measures to establish that it is a criminal offence under its law, in matters affecting international trade or investment, for: a) a public official of the Party or a person who performs public functions for the Party intentionally to solicit or accept, directly or indirectly, any article of monetary value or other benefit, such as a favour, promise, or advantage, for himself or for another person, in exchange for any act or omission in the performance of his public functions; b) any person subject to the jurisdiction of the Party intentionally to offer or grant, directly or indirectly, to a public official of the Party or a person who performs public functions for the Party any article of monetary value or other benefit, such as a favour, promise, or advantage, for himself or for another person, in exchange for any act or omission in the performance of his public functions; c) any person subject to the jurisdiction of the Party intentionally to offer, promise, or give any undue pecuniary or other advantage, directly or indirectly, to a foreign official, for that official or for another person, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business; and d) any person subject to the jurisdiction of the Party to aid or abet, or to conspire in, the commission of any of the offences described in subparagraphs a) through c).

3.

Each Party shall make the commission of an offense described in paragraph 2 liable to sanctions that take into account the gravity of the offense.

4.

Each Party shall strive to adopt or maintain appropriate measures to protect persons who, in good faith, report acts of bribery described in paragraph 2.

5.

The Parties recognise the importance of regional and multilateral initiatives to eliminate bribery and corruption in international trade and investment. The Parties shall work jointly to encourage and support appropriate initiatives in relevant international fora.

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3.3.5. US-Oman FTA The US-Oman FTA (signed in 2005) contains the following preamble language on environmental and social issues: Desiring to create new employment opportunities and raise the standard of living for their citizens by liberalising and expanding trade between them; […] Affirming their commitment to transparency and their desire to eliminate bribery and corruption in international trade and investment; […] Desiring to protect, enhance, and enforce basic workers’ rights and to strengthen the development and enforcement of labor laws and policies; Desiring to strengthen the development and enforcement of environmental laws and policies, promote sustainable development, and implement this Agreement in a manner consistent with the objectives of environmental protection and conservation. The US-Oman FTA recognises that “co-operation provides enhanced opportunities to promote respect for core labor standards embodied in” the ILO Declaration and ILO Convention 182. The Parties agree to cooperate on labor issues under a Labor Cooperation Mechanism. Article 16.5 and Annex 16-A. The US and Oman agree to cooperate on environmental matters pursuant to a US-Oman Memorandum of Understanding on Environmental Cooperation. Article 17.7. The provision on “Relationship to Environmental Agreements” has the same language as the US-Australia FTA except for the last sentence, which reads as follows: “To this end, the Parties shall consult, as appropriate, with respect to negotiations on environmental issues of mutual interest.” US-Oman FTA, Article 17.9. The US-Oman FTA has explicit anti-corruption provisions in its transparency chapter. US-Oman FTA, Article 18.5. The provision has the same language as the anti-bribery provision in the US-Morocco FTA, with the exception of paragraph 3. In the US-Oman FTA, paragraph 3 reads: “Each Party shall adopt or maintain appropriate penalties and procedures to enforce the criminal measures that it adopts or maintains in conformity with paragraph 2.” By contrast, the language in the US-Morocco paragraph 3 is: “Each Party shall make the commission of an offense described in paragraph 2 liable to sanctions that take into account the gravity of the offense.”

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3.3.6. US-Peru Trade Protection Agreement The US has entered into a Trade Protection Agreement (“TPA”) with Peru (signed 2006), which is similar in structure to the FTAs discussed above. The preamble contains the following language on environmental and social issues: PROMOTE broad-based economic development in order to reduce poverty and generate opportunities for sustainable economic alternatives to drug-crop production; CREATE new employment opportunities and improve labor conditions and living standards in their respective territories; […] PROMOTE transparency and prevent and combat corruption, including bribery, in international trade and investment; PROTECT, enhance, and enforce basic workers’ rights, strengthen their co-operation on labor matters, and build on their respective international commitments on labor matters; IMPLEMENT this Agreement in a manner consistent with environmental protection and conservation, promote sustainable development, and strengthen their co-operation on environmental matters; PRESERVE their ability to safeguard the public welfare; […] With respect to labor co-operation, the US-Peru TPA recognises that co-operation enhances development and advances the commitments on labor matters embodied in the ILO Declaration and ILO Convention 182. Article 17.5. The Parties agree to cooperate on labour issues under a Labour Cooperation and Capacity Building Mechanism. Article 17.5 and Annex 17.5. The Parties agree to increase co-operation on environmental issues pursuant to an Environmental Cooperation Agreement. Article 18.9. The TPA’s provision on “Relationship to Environmental Agreements” is somewhat different in form from that provision in the FTAs discussed above, with Article 18.12. providing: 1.

The Parties recognise that multilateral environmental agreements to which they are all party, play an important role globally and domestically in protecting the environment and that their respective implementation of these agreements is critical to achieving the environmental objectives thereof. The Parties further recognise that this Chapter and the ECA can contribute to realising the goals of those agreements. Accordingly, the Parties shall continue to seek means to enhance the mutual supportiveness of multilateral environmental agreements to which they are all party and trade agreements to which they are all party.

2.

To this end, the Parties shall consult, as appropriate, with respect to negotiations on environmental issues of mutual interest.

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3.

Each Party recognises the importance to it of the multilateral environmental agreements to which it is a party.

3.3.7. US-Singapore FTA The US-Singapore FTA (signed in 2003)74 contains the following preamble language on environmental and social issues: Recognising that economic development, social development, and environmental protection are interdependent and mutually reinforcing components of sustainable development, and that an open and nondiscriminatory multilateral trading system can play a major role in achieving sustainable development; […] Reaffirming the importance of pursuing the above in a manner consistent with the protection and enhancement of the environment, including through regional environmental cooperative activities and implementation of multilateral environmental agreements to which they are both parties; […] The Parties recognise that “co-operation provides enhanced opportunities to promote respect for core labour standards embodied in the ILO Declaration and compliance with [ILO Convention 182].” US-Singapore FTA, Article 17.5. The Parties agree to cooperate on labour issues under a Labour Cooperation Mechanism. US-Singapore FTA, Article 17.5 and Annex 17-A. With respect to environmental co-operation, the parties agree to engage in further cooperative activities under a separate Memorandum of Intent on Cooperation in Environmental Matters and in other fora. Article 18.6. The US-Singapore FTA has the following provision on “Relationship to Environmental Agreements”: The Parties recognise the critical role of multilateral environmental agreements in addressing some environmental challenges, including through the use of carefully tailored trade measures to achieve specific environmental goals and objectives. Recognising that WTO Members have agreed in paragraph 31 of the Ministerial Declaration adopted on 14 November 2001 in Doha to negotiations on the relationship between existing WTO rules and specific trade obligations set out in multilateral environmental agreements, the Parties shall consult on the extent to which the outcome of those negotiations applies to this Agreement. Article 18.8.

74. Available at www.ustr.gov/Trade_Agreements/Bilateral/Singapore_FTA/Final_Texts/Section_ Index.htm.l

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The US-Singapore FTA also has the following anti-corruption language: ARTICLE 21.5: ANTI-CORRUPTION 1.

Each Party reaffirms its firm existing commitment to the adoption, maintenance, and enforcement of effective measures, including deterrent penalties, against bribery and corruption in international business transactions. The Parties further commit to undertake best efforts to associate themselves with appropriate international anticorruption instruments and to encourage and support appropriate anticorruption initiatives and activities in relevant international fora.

2.

The Parties shall cooperate to strive to eliminate bribery and corruption and to promote transparency in international trade. They will look for avenues in relevant international fora to address these issues and build upon the potential anti-corruption efforts in these fora.

3.3.8. CAFTA CAFTA was signed in 2004 and is similar in structure to the FTAs discussed above. The preamble contains the following language on environmental and social issues: PROMOTE transparency and eliminate bribery and corruption in international trade and investment; CREATE new opportunities for economic and social development in the region; PROTECT, enhance, and enforce basic workers’ rights and strengthen their co-operation on labor matters; CREATE new employment opportunities and improve working conditions and living standards in their respective territories; BUILD on their respective international commitments on labor matters; IMPLEMENT this Agreement in a manner consistent with environmental protection and conservation, promote sustainable development, and strengthen their co-operation on environmental matters; PROTECT and preserve the environment and enhance the means for doing so, including through the conservation of natural resources in their respective territories; PRESERVE their flexibility to safeguard the public welfare. CAFTA recognises that co-operation between the parties will promote respect for core labor standards embodied in the ILO Declaration and ILO Convention 182 and establishes a Labor Cooperation and Capacity Building Mechanism (Annex 16-5) to further advance labor standards. CAFTA, Article 16.5.

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The CAFTA parties agree to cooperate on environmental matters pursuant to an Environmental Co-operation Agreement. Article 17.9. The provision on “Relationship to Environmental Agreements” (Article 17.12) provides: 1.

The Parties recognise that multilateral environmental agreements to which they are all party play an important role in protecting the environment globally and domestically and that their respective implementation of these agreements is critical to achieving the environmental objectives of these agreements. The Parties further recognise that this Chapter and the ECA can contribute to realising the goals of those agreements. Accordingly, the Parties shall continue to seek means to enhance the mutual supportiveness of multilateral environmental agreements to which they are all party and trade agreements to which they are all party.

2.

The Parties may consult, as appropriate, with respect to ongoing negotiations in the WTO regarding multilateral environmental agreements.

CAFTA’s Chapter 18, Section B contains the following “Anti-Corruption” provisions: Section B: Anti-Corruption Article 18.7: Statement of principle The Parties affirm their resolve to eliminate bribery and corruption in international trade and investment. Article 18.8: Anti-corruption measures 1.

Each Party shall adopt or maintain the necessary legislative or other measures to establish that it is a criminal offense under its law, in matters affecting international trade or investment, for: a) a public official of that Party or a person who performs public functions for that Party intentionally to solicit or accept, directly or indirectly, any article of monetary value or other benefit, such as a favor, promise, or advantage, for himself or for another person, in exchange for any act or omission in the performance of his public functions; b) any person subject to the jurisdiction of that Party intentionally to offer or grant, directly or indirectly, to a public official of that Party or a person who performs public functions for that Party any article of monetary value or other benefit, such as a favor, promise, or advantage, for himself or for another person, in exchange for any act or omission in the performance of his public functions; c) any person subject to the jurisdiction of that Party intentionally to offer, promise, or give any undue pecuniary or other advantage, directly or indirectly, to a foreign official, for that official or for another person,

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in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business; and d) any person subject to the jurisdiction of that Party to aid or abet, or to conspire in, the commission of any of the offenses described in subparagraphs a) through c). 2.

Each Party shall adopt or maintain appropriate penalties and procedures to enforce the criminal measures that it adopts or maintains in conformity with paragraph 1.

3.

In the event that, under the legal system of a Party, criminal responsibility is not applicable to enterprises, that Party shall ensure that enterprises shall be subject to effective, proportionate, and dissuasive non-criminal sanctions, including monetary sanctions, for any of the offenses described in paragraph 1.

4.

Each Party shall endeavor to adopt or maintain appropriate measures to protect persons who, in good faith, report acts of bribery or corruption described in paragraph 1.

3.4. Chile 3.4.1. Chile-China The 2005 Chile/China FTA (which deals with “promoting investment” in Article 112) contains the following preamble language: Recognising that this Agreement should be implemented with a view toward raising the standard of living, creating new job opportunities and promoting sustainable development in a manner consistent with environment protection and conservation. Its Article 10 on “Labour, Social Security and Environmental Cooperation” states: The Parties shall enhance their communication and co-operation on labour, social security and environment through both the Memorandum of Understanding on Labour and Social Security Cooperation and the Environmental Cooperation Agreement between the Parties.

3.4.2. Chile-Korea The 2003 Chile/Korea FTA contains the same preamble language as that reproduced above for the Chile-China agreement. It also duplicates the ChileChina language on exceptions to performance requirements, investment incentives, environmental measures, and expert reports.

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3.4.3. Chile-Panama The Panama-Chile FTA contains the following preamble language: CREATE new employment opportunities and improve working conditions and living standards in their respective territories; BUILD on their respective international commitments and strengthen their co-operation on labour matters; PROTECT, enhance, and enforce basic workers’ rights; IMPLEMENT this Agreement in a manner consistent with environmental protection and conservation; PROMOTE economic development in a manner that is consistent with protection and conservation of the environment and also with sustainable development; CONSERVE, protect, and improve the environment, including through managing natural resources in their respective territories and through multilateral environmental agreements to which they are both parties; PRESERVE their flexibility to safeguard the public welfare; […]

3.4.4. Chile-Peru In addition to Preamble language, the Chile-Peru FTA contains the following Article 11.13 on “Investment and Environment”: Nothing in this Agreement shall be construed to prevent a Contracting Party from adopting, maintaining or enforcing any measure otherwise consistent with this Agreement that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. As well as language on indirect expropriation in Annex 11.D: Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

4. Other agreements with investment provisions 4.1. Australia-Singapore The

Australia-Singapore

Free

Trade

Agreement

was

signed

on

17 February 2003 and came into force on 28 July 2003. SAFTA is a comprehensive agreement covering areas such as trade in goods, trade in services, investment, telecommunication, financial services, movement of

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business persons, government procurement, intellectual property rights, competition policy, e-commerce and education co-operation. The Investment Chapter, Chapter 8 does not contain “environmental” provision but has a general exceptions clause:

any

ARTICLE 12 General exceptions Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between the Parties where the same conditions prevail, or a disguised restriction on international trade, nothing in this Chapter shall be construed to prevent the adoption or enforcement by a Party of measures: a) necessary to protect public morals; b) necessary to protect human, animal or plant life or health; c) relating to the importations or exportations of gold or silver; d) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Chapter, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII of the GATT 1994, the protection of patents, trade marks and copyrights, and the prevention of deceptive practices;

4.2. Japan-Philippines Article 8 of the General Provisions chapter of the Economic Partnership Agreement between Japan and the Philippines (signed 2006) contains the following anti-corruption text: Each 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. Chapter 8 contains the following environmental and labour texts: Article 102 – Environmental measures Each Party recognises that it is inappropriate to encourage investments by investors of the other Party by relaxing its environmental measures. To this effect each Party should not waive or otherwise derogate from such environmental measures as an encouragement for establishment, acquisition or expansion in its Area of investments by investors of the other Party. Article 103 – Investment and labour 1.

The Parties recognise that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic labor laws.

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Accordingly, each Party shall strive to ensure that it does not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such laws in a manner that weakens or reduces adherence to the internationally recognised labor rights referred to in paragraph 2 below as an encouragement for the establishment, acquisition, expansion or retention of an investment in its Area. If a Party considers that the other Party has offered such an encouragement, it may request consultations with the other Party and the Parties shall consult with a view to avoiding any such encouragement. 2.

For purposes of this Article, “labour laws” means each Party’s laws or regulations that are directly related to the following internationally recognised labour rights: a) the right of association; b) the right to organise and bargain collectively; c) a prohibition on the use of any form of forced or compulsory labour; d) labour protections for children and young people, including a minimum age for the employment of children and the prohibition and elimination of the worst forms of child labour; and e) acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

4.3. EU-ACP Partnership Agreement (Cotonou Agreement) The February 2000 expiration of the Lomé Convention provided an opportunity for reviewing ACP-EU relations. Negotiations of a new agreement started in September 1998 and were successfully concluded in early February 2000. The new ACP-EC agreement was signed on 23 June 2000 in Cotonou, Benin, and was concluded for a twenty-year period from March 2000 to February 2020. The agreement contains numerous references to human rights, environment, labour rights and the fight against corruption. Relevant preamble language includes: ASSERTING their resolve to make, through their co-operation, a significant contribution to the economic, social and cultural development of the ACP States and to the greater well-being of their population, helping them facing the challenges of globalisation and strengthening the ACP-EU Partnership in the effort to give the process of globalisation a stronger social dimension; REAFFIRMING their willingness to revitalise their special relationship and to implement a comprehensive and integrated approach for a strengthened partnership based on political dialogue, development cooperation and economic and trade relations;

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ACKNOWLEDGING that a political environment guaranteeing peace, security and stability, respect for human rights, democratic principles and the rule of law, and good governance is part and parcel of long term development; acknowledging that responsibility for establishing such an environment rests primarily with the countries concerned; ACKNOWLEDGING that sound and sustainable economic policies are prerequisites for development; REFERRING to the principles of the Charter of the United Nations, and recalling the Universal Declaration of Human Rights, the conclusions of the 1993 Vienna Conference on Human Rights, the Covenants on Civil and Political Rights and on Economic, Social and Cultural Rights, the Convention on the Rights of the Child, the Convention on the Elimination of all forms of Discrimination against Women, the International Convention on the Elimination of all forms of Racial Discrimination, the 1949 Geneva Conventions and the other instruments of international humanitarian law, the 1954 Convention relating to the status of stateless persons, the 1951 Geneva Convention relating to the Status of Refugees and the 1967 New York Protocol relating to the Status of Refugees; CONSIDERING the Convention for the Protection of Human Rights and Fundamental Freedoms of the Council of Europe, the African Charter on Human and Peoples’ Rights and the American Convention on Human Rights as positive regional contributions to the respect of human rights in the European Union and in the ACP States; RECALLING the Libreville and Santo Domingo declarations of the Heads of State and Government of the ACP countries at their Summits in 1997 and 1999; CONSIDERING that the development targets and principles agreed in United Nations Conferences and the target, set by the OECD Development Assistance Committee, to reduce by one half the proportion of people living in extreme poverty by the year 2015 provide a clear vision and must underpin ACP-EU co-operation within this Agreement; Article 75 (Investment Promotion) of Chapter 7 (Investment and Private Sector Development) of the Cotonou Agreement does not deal explicitly with societal issues, though it does note that partner countries will: implement measures to encourage participation in their development efforts by private investors who comply with the objectives and priorities of ACP-EC development co-operation and with the appropriate laws and regulations of their respective States […] Many of the other Chapters contain numerous references to such issues as human rights, protection of the environment, upholding labour rights and the fight against bribery and other forms of corruption.

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4.4. EU-Russia The EU-Russia Agreement on Partnership and Cooperation, which came into force in 1997 for a period of 10 years and which, after 2007, will automatically extended on annual basis unless one of the Parties withdraws from the Agreement. The provisions of the Partnership and Cooperation Agreement cover a wide range of policy areas including political dialogue; trade in goods and services; business and investment; financial and legislative co-operation; science and technology; education and training; energy, nuclear and space co-operation; environment, transport; culture; and co-operation on the prevention of illegal activities. Rules of procedure for the dispute settlement provisions of the PCA were adopted in April 2004. Thus, the Agreement provides a broad blueprint for co-operation in many policy areas and it contains quite lengthy texts on co-operation in the areas of environment, labour/social and anti-corruption legislation and law enforcement. The strategy of the Agreement seems to be one of setting forth broad objectives for policy co-operation in these areas, which would presumably influence investment co-operation indirectly. The investment texts appear in Title IV of the Agreement (Provisions on Business and Investment) and in some of the sectoral articles (e.g. energy). Title IV does not explicitly link investment co-operation and with these other forms of cooperation, though the sectoral texts do (see Article 65 on Energy). The Agreement establishes an institutional framework for regular consultations between the European Union and Russia. TITLE II – POLITICAL DIALOGUE Article 6 A regular political dialogue shall be established between the Parties which they intend to develop and intensify. It shall accompany and consolidate the rapprochement between the European Union and Russia, support the political and economic changes underway in Russia and contribute to the establishment of new forms of co-operation. The political dialogue: ●

shall bring about an increasing convergence of positions on international issues of mutual concern thus increasing security and stability;

●

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shall foresee that the Parties endeavour to cooperate on matters pertaining to the observance of the principles of democracy and human rights, and hold consultations, if necessary, on matters related to their due implementation.

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TITLE VI – COMPETITION, INTELLECTUAL, INDUSTRIAL AND COMMERCIAL PROPERTY PROTECTION, LEGISLATIVE COOPERATION (NB. Some texts have been put in bold type to call attention to them) Article 55 – Legislative Cooperation 1.

The Parties recognise that an important condition for strengthening the economic links between Russia and the Community is the approximation of legislation. Russia shall endeavour to ensure that its legislation will be gradually made compatible with that of the Community.

2.

The approximation of laws shall extend to the following areas in particular: company law, banking law, company accounts and taxes, protection of workers at the workplace, financial services, rules on competition, public procurement, protection of health and life of humans, animals and plants, the environment, consumer protection, indirect taxation, customs law, technical rules and standards, nuclear laws and regulations, transport.

TITLE VII – ECONOMIC CO-OPERATION Article 56 1.

The Community and Russia shall foster economic co-operation of wide scope in order to contribute to the expansion of their respective economies, to the creation of a supportive international economic environment and to the integration between Russia and a wider area of co-operation in Europe. Such co-operation shall strengthen and develop economic links to the benefit of both Parties.

2.

Policies and other measures of the Parties related to this title shall in particular be designed to bring about economic and social reforms and restructuring in Russia and shall be guided by the requirements of sustainability and harmonious social development; they shall also fully incorporate environmental considerations.

3.

The co-operation shall, inter alia, cover: ●

development of their respective industries and transport;

●

exploration of new sources of supply and of new markets;

●

encouragement of technological and scientific progress;

Article 57 – Industrial co-operation 1.

Co-operation shall aim at promoting the following in particular: ●

the development of business links between economic operators, including small and medium-size enterprises;

●

the improvement of management on enterprise level;

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●

the process of privatisation in the context of economic restructuring, and the strengthening of the private sector;

●

efforts in both public and private sector, to restructure and modernise the industry, during the transition period leading towards a market economy and under conditions ensuring environment protection and sustainable development;

Article 61 – Mining and raw materials 1.

The Parties shall cooperate with a view to fostering the development of the sectors of mining and raw materials. Special attention shall be paid to co-operation in the sector of nonferrous metals.

2.

The co-operation shall focus in particular on the following areas: ●

exchange of information on all matters of interest to the Parties concerning the mining and raw materials sectors, including trade matters;

●

the adoption and implementation of environmental legislation;

●

training.

Article 64 – Agriculture and the agro-industrial sector Co-operation shall aim at the modernisation, restructuring and privatisation of agriculture and the agro-industrial sector in Russia in conditions which ensure that the environment is respected. This co-operation shall be through, inter alia, developing private farms and distribution channels, methods of storage, marketing and management, modernising the rural infrastructure and improvement of agricultural land-use planning, improving productivity, quality and efficiency, and the transfer of technology and know-how. The Parties shall aim at achieving compatibility between their sanitary and phytosanitary standards. Article 65 – Energy

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1.

Co-operation shall take place within the principles of the market economy and the European Energy Charter, against a background of the progressive integration of the energy markets in Europe.

2.

The co-operation shall include among others the following areas: ●

[…]

●

improvement in management and regulation of the energy sector in line with a market the introduction of the range of institutional, legal, fiscal and other conditions necessary to encourage increased energy trade and investment;

●

promotion of energy saving and energy efficiency;

●

[…]

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●

the environmental impact of energy production, supply and consumption, in order to prevent or minimise the environmental damage resulting from these activities;

●

[…]

●

management and technical training in the energy sector.

Article 68 – Construction The Parties shall co-operate in the field of construction industry, particularly in the areas covered by Articles 55, 57, 60, 62, 63 and 77 of this Agreement. This co-operation shall, inter alia, aim at modernising and restructuring the construction sector in Russia in line with the principles of a market economy and duly taking into account related health, safety and environmental aspects. Article 69 – Environment 1.

Bearing in mind the European Energy Charter and the Declaration of the Lucerne Conference of 1993, the Parties shall develop and strengthen their co-operation on environment and human health.

2.

Co-operation shall aim at combating environment and in particular: ●

effective

monitoring

of

pollution

the

levels

deterioration and

of

assessment

the of

environment; system of information on the state of the environment; ●

combating local, regional and transboundary air and water pollution;

●

ecological restoration;

●

sustainable, efficient and environmentally effective production and use of energy; safety of industrial plants;

●

classification and safe handling of chemicals;

●

water quality;

●

waste reduction, recycling and safe disposal, implementation of the Basle Convention;

●

the environmental impact of agriculture, soil erosion, and chemical pollution;

●

the protection of forests;

●

the conservation of biodiversity, protected areas and sustainable use and management of biological resources;

●

land-use planning, including construction and urban planning;

●

use of economic and fiscal instruments;

L/CE/RU/en 61 ●

global climate change;

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3.

●

environmental education and awareness;

●

implementation of the Espoo Convention on Environmental Impact Assessment in a transboundary context.

Co-operation shall take place particularly through: ●

disaster planning and other emergency situations;

●

exchange of information and experts, including information and experts dealing with the transfer of clean technologies and the safe and environmentally sound use of biotechnologies;

●

joint research activities;

●

improvement of laws towards Community standards;

●

co-operation at regional level, including co-operation within the framework of the European Environment Agency, established by the Community and at international level;

●

development of strategies, particularly with regard to global and climatic issues and also in view of achieving sustainable development;

●

environmental impact studies.

Article 74 – Social co-operation 1.

With regard to health and safety, the Parties shall develop co-operation between them with the aim of improving the level of protection of the health and safety of workers. The co-operation shall include notably:

2.

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●

education and training on health and safety issues with specific attention to high risk sectors of activity;

●

development and promotion of preventive measures to combat work related diseases and other work related ailments;

●

prevention of major accident hazards and the management of toxic chemicals;

●

research to develop the knowledge base in relation to working environment and the health and safety of workers.

With regard to employment, the co-operation shall include notably technical assistance to: ●

optimisation of the labour market;

●

modernisation of the job-finding and consulting services;

●

planning and management of the restructuring programmes;

●

encouragement of local employment development; L/CE/RU/en 67;

●

exchange of information on the programmes of flexible employment, including those stimulating self-employment and promoting entrepreneurship.

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3.

The Parties shall pay special attention to co-operation in the sphere of social protection which, inter alia, shall include co-operation in planning and implementing social protection reforms in Russia.

These reforms shall aim to develop in Russia methods of protection intrinsic to market economies and shall comprise all directions of social security activities. The co-operation shall also include technical assistance to the development of social insurance institutions with the aim of promoting gradual transition to a system consisting of a combination of contributory and social assistance forms of protection, as well as respective non-governmental organisations providing social services. TITLE VIII – CO-OPERATION ON PREVENTION OF ILLEGAL ACTIVITIES Article 84 The Parties shall establish co-operation aimed at preventing illegal activities such as: ●

[…]

●

illegal activities in the sphere of economics, including corruption;

L/CE/RU/en 75 ●

[…]

The co-operation in the abovementioned areas will be based on mutual consultations and close interactions and will provide technical and administrative assistance including: ●

drafting of national legislation in the sphere of preventing illegal activities;

●

creation of information centres;

●

increasing the efficiency of institutions engaged in preventing illegal activities;

●

training of personnel and development of research infrastructures;

●

elaboration activities.

of

mutually

acceptable

measures

impeding

illegal

PROTOCOL 1 ON THE ESTABLISHMENT OF A COAL AND STEEL CONTACT GROUP 4.

The Contact Group exchanges all useful information on the structure of the industries concerned, the development of their production capacities, the science and research progress in the relevant fields, and the evolution of employment. The Group also examines pollution and environmental problems.

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JOINT DECLARATION IN RELATION TO ARTICLE 6 OF PROTOCOL 2 The Parties agree to take the necessary measures in order to assist each other, as provided for in this Protocol and without delay, for the following movements of goods: a) […] b) […] c) movement of poisonous goods as well as the substances dangerous for the environment and the public health; d) […]

4.5. EFTA-Singapore The EFTA*-Singapore Agreement was signed on 26 June 2002. Its preamble mentions human rights and environment and article 43 covers right to regulate, including “to meet environmental concerns”. PREAMBLE REAFFIRMING their commitment to the principles set out in the United Nations Charter and the Universal Declaration of Human Rights; […] RECOGNISING that trade liberalisation should allow for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking both to protect and preserve the environment; Article 43 – Domestic regulation Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure consistent with this Chapter that is in the public interest, such as measures to meet health, safety or environmental concerns.

4.6. Korea-Singapore The Korea-Singapore Agreement was signed on 4 August 2005 and came into force on 2 March 2006. It is a comprehensive agreement covering trade in goods, trade in services, investment, customs procedures, mutual recognition agreements, intellectual property rights, competition policy, government procurement and co-operation in a wide range of areas. The following language on performance requirements closely resembles NAFTA language on performance requirements (emphasis added). Investment, Chapter 10 Article 10.7: PERFORMANCE REQUIREMENTS 1.

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Neither Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the

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establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party in its territory: a) to export a given level or percentage of goods or services; b) to achieve a given level or percentage of domestic content; c) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; d) to purchase, use or accord a preference to services provided in its territory, or to purchase services from persons in its territory; e) to relate the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; f) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales to the volume or value of its exports or foreign exchange earnings; g) to transfer technology, a production process or other proprietary knowledge to a person in its territory, except when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal or competition authority to remedy an alleged violation of competition law or to act in a manner not inconsistent with other provisions of this Agreement; or h) to supply exclusively from the territory of the Party the goods that it produces or the services that it supplies to a specific regional market or to the world market. 2.

The provisions of paragraph 1 do not preclude either Party from conditioning the receipt or continued receipt of an advantage, in connection with investment and business activities in its territory of an investor of the other Party or of a non-Party, on compliance with any of the requirements set forth in paragraphs 1 d), g) and h).

3.

Nothing in paragraph 1 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory.

4.

Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraphs 1b), c) or d) shall

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be construed to prevent a Party from adopting or maintaining measures, including environmental measures: a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; b) necessary to protect human, animal or plant life or health; or c) necessary for the conservation of living or non-living exhaustible natural resources. Article 10.18: ENVIRONMENTAL MEASURES Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. Separate provision on environmental co-operation: Article 18.9: ENVIRONMENT Desiring to promote closer co-operation between interested organisations and industries of the Parties in the field of CNG technologies and applications to environmental protection, the Parties have concluded a Memorandum of Understanding to facilitate such co-operation. Article 21.2: GENERAL EXCEPTIONS 2.

Subparagraphs a), b) and c) of Article XIV of GATS are incorporated into and made part of this Agreement, for the purposes of: a) Chapters 3 (National Treatment and Market Access for Goods), 4 (Rules of Origin), 5 (Customs Procedures), 6 (Trade Remedies), and 14 (Electronic Commerce), to the extent that a provision of those chapters applies to services; b) Chapter 9 (Cross Border Trade in Services); c) Chapter 10 (Investment); d) Chapters 11 (Telecommunication) and 12 (Financial Services); and e) Chapter 16 (Government Procurement), to the extent that a provision applies to services.

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ANNEX 3.A3

A Fact-finding Survey of the Social Content of Non-OECD International Investment Agreements I. Introduction and summary of results This paper presents a companion study – focused on international investment agreements concluded among non-OECD countries – to the OECDfocused survey described in “International Investment Agreements: A Survey of Environmental, Labour and Anti-Corruption Issues”. The present survey documents the treatment of “social issues” (e.g. labour, environment, anticorruption and human rights) in 131 bilateral investment treaties signed between non-OECD. Comparison of the results of the two surveys allows one to ascertain whether or not there are differences between OECD and nonOECD countries in terms of their propensity to address these issues and in terms of the way they are addressed. This comparison of findings reveals both similarities and differences: ●

Propensity to include language covering social issues. The overall propensity to include such language is approximately the same in the OECD and non-OECD samples – about two fifths of the countries in both samples include such language in one or more of their agreements. Like for the OECD sample, the non-OECD sample is skewed toward a limited number of countries that are quite likely to include such language. In the non-OECD sample, the two countries with a high propensity are Singapore (half of its agreement contain such language) and China (17 per cent of its agreements). These two countries account for 11 of the 16 treaties in the sample found to contain such language. No country in the non-OECD sample appears to have a systematic policy of including such language in all of its investment agreements (whereas several OECD countries have such a policy).

●

Set of “societal” issues covered. While, broadly speaking, the same set of “social” issues is covered in the OECD and on-OECD samples (e.g. in relation

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to right to regulate in order to protect the environment, not lowering environmental or labour standards, and environmental exceptions to performance requirements), the weight placed on these issues differs. The issue most likely to be dealt with in the non-OECD sample (covered in agreements signed by China, Singapore, South Africa…) is “exceptions to most favoured nation” in relation to benefits or treatments stemming from regional co-operation in the “economic, social or labour” fields. Two issues that were often addressed in the OECD sample (not lowering standards and right to regulate) are addressed only to a limited extent in the non-OECD sample. Like the OECD sample, the non-OECD sample contains (in two agreements) language addressing a number of idiosyncratic issues – in the non-OECD sample, these are preventing fraud, protecting or advancing persons disadvantaged by unfair discrimination, protecting national treasures. ●

Placement of language. In the OECD sample, environmental and/or labour language, if it is found at all, is most likely to be found in the Preamble. In the non-OECD sample, preambular language of this type is found only in three of China’s agreements. All other non-OECD language appears in the articles of the agreements.

The non-OECD survey takes as its sample investment agreements (all of them bilateral investment treaties) of 15 non-member countries with whom the OECD Investment Committee has had recent dealings.75 These countries are: China, Democratic Republic of Congo, Egypt, India, Indonesia, Jordan, Malaysia, Morocco, Peru, Russia, Serbia, Singapore, South Africa Vietnam and Zambia. The sample consists of 131 bilateral investment treaties having as signatories these countries and another non-OECD country.76 These treaties were reviewed for their content with respect to a variety of social issues: environment, labour, anti-corruption (including bribery), human rights, and consumer affairs.77 More details on the methodology (which is the same as that used for the companion survey) can be found in Annex 3.A1. The Annex also contains a list of the treaties in the sample and their dates of signature.

II. The findings of the survey of non-OECD BITs This section provides a more detailed description of the findings of the survey of language dealing with social issues in the sample of 131 non-OECD agreements.78 Annex Table 3.A3.1 summarises these findings.

75. Non-member countries that adhere to OECD investment instruments were included in the sample for the other paper. 76. Investment agreements having a non-member country as a signatory that is also an adherent to the OECD Declaration on Inte rnational Inve stme nt and Multinational Enterprises were not included in the sample. 77. This list is derived from the list of issues that were addressed in the OECD sample.

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Annex Table 3.A3.1. Social issues in a sample of international investment agreements signed between non-OECD countries Non-OECD countries

China

Texts in No. at least of IIAs Details of coverage of these issue in IIAs one IIA in sample surveyed? 30

Yes (5 mention at least one issue)

Preamble of BIT with Brunei Darussalam recognises the importance of “human resources development”). Preamble of BITs with Guyana and Trinidad and Tobago state that parties agree that investment objectives can be achieved without “relaxing health, safety and environmental measures of general application”. Article 5 (Exceptions) of the China-Singapore BIT states that Parties are not obliged to extend to the other’s nationals and companies “any arrangement with a third State or States in the same geographical region designed to promote regional co-operation in the economic, social, labour […] fields within the framework of specific projects”. Article 8 of Thailand-China BIT contains the same text on exceptions.

Democratic Republic of Congo

2

No

Egypt

26

No

India

8

No

Indonesia

26

No

Jordan

13

Yes (2 mention at least one issue)

The Jordan-Kuwait BIT’s Article 3 contains a text on exceptions to provisions on performance requirements when these are “considered vital for public health, public order or the environment which shall be applied according to a publicly applicable legal instrument.” The Jordan-Singapore BIT’s Article 19 (“General Exceptions”) states that nothing in the BIT prevents the Parties from taking measures necessary to secure compliance with “laws and regulations which are not inconsistent with the provisions of this treaty” and lists: “the prevention of deceptive or fraudulent practices or to deal with the effects of freau on a default of contract”; and “the protection of privacy of individuals, of confidentiality of records and accounts”; “safety”; “the protection of national treasures of artistic, historic or archaeological value” and “conservation of exhaustible natural resources”.

Malaysia

14

Morocco

5

No No

Peru

9

Yes (one mentions at least one issue)

Russia

4

No

Serbia

1

No

Singapore

11

Yes (6 mention at least one issue)

The Peru-El Salvador BIT’s Article 5 (“Performance requirements”) states that a measure “that requires that an investment employ a technology to comply with generally applicable regulation with regulations applicable to health, safety or environment, will not be considered incompatible with paragraph 1 [a list of prohibited performance requirements].”

Article 5 (“Exceptions”) of the BIT with China (see entry above). Article 5 (“Exceptions”) of Singapore’s BITs with Mauritius, Mongolia, Pakistan and Vietnam contain identical language to the language on exceptions to national treatment found in the China-Singapore BIT (see entry under China above). Article 18 of Jordan Singapore BIT contains a text on right to regulate that includes references to prevention of fraud, protection of privacy, protection of national treasures, and conservation of natural resources (see entry under Jordan).

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Annex Table 3.A3.1. Social issues in a sample of international investment agreements signed between non-OECD countries (cont.) Non-OECD countries

Texts in No. at least Details of coverage of these issue in IIAs of IIAs one IIA in sample surveyed?

South Africa

3

Yes (one mentions at least one issue)

Article 3 (“Treatment of Investments”) of South Africa-Mauritius BIT states that Parties are not obliged to extend to the other’s nationals and companies “any arrangement with a third State or States in the same geographical region designed to promote regional co-operation in the economic, social, labour […] fields within the framework of specific projects”. It further states that Parties are not obliged to extend treatments under laws “designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination in its territory”.

Vietnam

8

Yes Article 5 (“Exceptions”) if the Singapore-Vietnam BIT contain same text on MFN (one exceptions as in China-Singapore BIT (see entry under China above). mentions at least one issue)

Zambia

1

No

Propensity to include social language Annex Table 3.A3.1 shows that 16 out of the 131 treaties include on one or more of these issues in one or more of their BITs and that 6 of the 15 countries in the sample include such language. These six countries are China, Jordan, Peru, Singapore, South Africa and Vietnam.79 Singapore was the most likely to include such language in its treaties – it is included in 6 out of the eleven treaties in the sample to which it is a signatory. China is also relatively likely to include such language – it appears in 5 out of the 30 treaties in the sample signed by China. Thus, there is no equivalent in the non-OECD sample of the countries in the OECD sample that have a systematic policy of including such language. In the OECD survey, these countries include the United States and Canada (which have included such language in every agreement they have signed since the mid-1990s), Mexico (which also has a large number of treaties containing such language) as well as Belgium, Finland, Netherlands (which have included it in their model BITs).

78. This total number of treaties is corrected for double counting – thus, it is the total number of treaties given for each county in Annex Table 3.A3.1, corrected for the treaties that the countries on the list have signed with each other. 79. Note that the Framework Agreement for Establishing a Free trade Area between the Republic of India and the Kingdom of Thailand (singed 2003) contains language on environmental issues. However, its investment chapter refers back to the 200 India-Thailand BIT (which does not contain such references). The sample contains the 2000 BIT, not the Framework Agreement.

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Social/Investment issues covered The non-OECD countries’ investment agreements addressed the same broad set of issues in relation to social matters as in the OECD sample, but they show differences of emphasis and approach. The survey of OECD agreements found the following set of issues in relation to labour and environment: not lowering standards, right to regulate, indirect expropriation and promoting internationally agreed standards. The first two issues are found in the non-OECD sample, whereas the latter do are not. In addition, the OECD survey found, in five more recent agreements, some language addressing anti-corruption issues and a direct reference to “human rights” (in two recent agreements). Neither of these issues were explicitly cited in the non-OECD sample (though more specific human rights, notably freedom from discrimination in the workplace and protection of privacy) are addressed in two non-OECD agreements.

Most favoured nation The most common “social” text in the sample of non-OECD agreements addresses the social and labour dimension of regional co-operation and creates an exception to most favoured nation (MFN) for legal arrangements that might arise from this co-operation. This language accounts is found in 7 of the 16 treaties containing social language. Thus, unlike the OECD sample (where treaties containing “social” language often refer to international instruments, standards or norms), the non-OECD sample of language is more likely to focus on regional co-operation. The earliest use of this language on social and labour issues in regional co-operation is found first in Article 5 of China’s 1985 BITs with Singapore and Thailand. It is worth noting that this is also the earliest mention of a social issue in the combined OECD and non-OECD samples. The text is as follows (identical or closely-related language appears in five other agreements; see fourth column of Annex Table 3.A3.1): The provisions of this Agreement relating to the grant of treatment not less favourable than that accorded to the nationals and companies of any third State shall not be construed so as to oblige one Contracting Party to extend to the nationals and companies of the other Contracting Party the benefit of any treatment, preference or privilege resulting from […] a) […] b) any arrangement with a third State or States in the same geographical region designed to promote regional co-operation in the economic, social, labour […] fields within the framework of specific projects.

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The South African-Mauritius BIT contains a text which is very similar to the one just quoted, but adds the following item (c): any law or measure in pursuance of any law, the purpose of which is to promote the achievement of equality in its territory, or designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination in its territory.

Exceptions to performance requirements Environmental or other social exceptions to performance requirements are mentioned in two agreements. The Jordan-Kuwait BIT states: “[…] investments of the host contracting country may not be subject to performance requirements […] unless these requirements are considered vital for public health considerations or public order or the environment which shall be applied according to a publicly applicable legal instrument.” Article 5 (“Performance Requirements”) of the Peru-El Salvador BIT contains a text on exceptions to performance requirements that resembles closely those found in agreements signed by OECD members or adherents to OECD investment instruments (e.g. NAFTA, the Mexico-Cuba BIT, several Mexican FTAs, the US model BIT). The Peru-El Salvador BIT states: 2. A measure that requires an investment to use a technology to meet generally applicable health, safety or environmental requirements shall not be construed to be inconsistent with paragraph 1(f) […] 3. Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraph 1b) or c) or 3a) or b) shall be construed to prevent any Party from adopting or maintaining measures, including environmental measures: a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; b) necessary to protect human, animal or plant life or health; or c) necessary for the conservation of living or non-living exhaustible natural resources.

Right to regulate While right to regulate was one of the most frequently encountered issue in the OECD sample of agreements, it is found only once in the non-OECD sample. Article 18 (“General Exceptions”) of the Jordan-Singapore BIT contains the following text: Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination, […] Nothing in

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this Treaty shall be construed to prevent the adoption or enforcement by the Party of measures: b) Necessary to protect human, animal or plant health; c) necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Treaty including those relating to: i) the prevention of deceptive and fraudulent practices or to deal with the effects of fraud on a default of contract; ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal date and the protection of confidentiality of individual records and accounts; iii) safety; d) imposed for the protection of national treasures of artistic, historic or archaeological value; e) relating to the conservation of exhaustible resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.

Placement of language in the agreement In the OECD sample, if a country has any language on environmental and social issues, it is most likely to be a statement in the preamble (e.g. referring to promoting “sustainable development” or “internationally recognised labour rights”. A more limited number of countries also include language in the articles of the agreement or in side agreements. The situation is reversed in the non-OECD sample. China is the only country that includes such language in its preambles (in 3 of its 30 agreements). In the preambles of the China’s BITs with Guyana and with Trinidad and Tobago, the Parties agree that their “objectives can be achieved without relaxing health, safety and environmental measures of general application.” In the preamble of the China-Brunei Darussalam, the Parties recognise “the importance of the transfer of technology and human resources development arising from such investments”.

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ANNEX 3.A4

Methodology and List of BITs Included in Survey The methodology used for this study is identical to that used for the survey whose results are reported the companion study, “International Investment Agreements: A Survey of Environmental, Labour and Anticorruption Issues.” This survey reported in this paper is based on a sample of 131 bilateral investment treaties signed between countries that are not members of the OECD (note non-members that adhere to the OECD Declaration on International Investment and Multinational Enterprises are included in the companion paper). The “population” of BITs is that available on the UNCTAD website at www.unctadxi.org/templates/DocSearch____779.aspx. Treaties that were not available in English, French or Spanish were not considered. The intent of the survey methodology was to produce a comprehensive inventory of non-OECD bilateral investment treaties’ treatment of social issues. However, because the survey is based on a sample and not the complete set of all treaties, some relevant texts may be missing. The BITs were reviewed to see whether any texts (including the preamble, articles and annexes) discussed the environment, human rights, labour rights or corruption. Where the texts were searchable, searches were made for the following terms: “environment,”“social”, “human”, “labour”, “labor”, “worker”, and “corruption”. The list of bilateral investment treaties included in the sample appears in Annex Table 3.A4.1.

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Annex Table 3.A4.1. Bilateral investment treaties included in the sample Country

Treaty signed with:

China

Madagascar Guyana

Year signed

Environment

Labour

2005

no

no

2003

yes

no

Ivory Coast

2002

no

no

Trinidad and Tobago

2002

yes

no

Jordan

2001

no

no

Botswana

2000

no

no

Brunei Darussalam

2000

no

yes

Costa Rica

2000

no

no

Qatar

1999

no

no

Swaziland

1998

no

no

Cameroon

1997

no

no

Cambodia

1996

no

no

Lebanon

1996

no

no

Cuba

1995

no

no

Morocco

1995

no

no

Ecuador

1994

no

no

Egypt

1994

no

no

Indonesia

1994

no

no

Jamaica

1994

no

no

Peru

1994

no

no

Georgia

1993

no

no

Uruguay

1993

no

no

Bolivia

1992

no

no

Philippines

1992

no

no

Vietnam

1992

no

no

Ghana

1989

no

no

Pakistan

1989

no

no

Kuwait

1985

no

no

Singapore

1985

no

yes

Thailand

1985

no

yes

Democratic Republic of Congo

Egypt

1998

no

no

Guinea

No date given

no

no

Egypt

Serbia

2005

no

no

Mauritius

2003

no

no

Nigeria

2000

no

no

Pakistan

2000

no

no

Central African Republic

2000

no

no

Thailand

2000

no

no

Zambia

2000

no

no

Georgia

1999

no

no

Dem. Republic of Congo

1998

no

no

Ghana

1998

no

no

Guinea

1998

no

no

Senegal

1998

no

no

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Annex Table 3.A4.1. Bilateral investment treaties included in the sample (cont.) Country

Treaty signed with:

Year signed

Environment

Labour

Belarus

1997

no

no

Malaysia

1997

no

no

Russia

1997

no

no

Singapore

1997

no

no

Vietnam

1997

no

no

Jordan

1996

no

no

Sri Lanka

1996

no

no

Uganda

1995

no

no

Egypt

1994

no

no

Indonesia

1994

no

no

Albania

1993

no

no

Kazakhstan

1993

no

no

Ukraine

1992

no

no

No date given

no

no

Thailand

2001

no

no

Ghana

2000

no

no

Indonesia

1999

no

no

Mauritius

1998

no

no

Egypt

1997

no

no

Oman

1997

no

no

Sri Lanka

1997

no

no

Kazakhstan

1996

no

no

Philippines

2001

no

no

Algeria

2000

no

no

Singapore

2000

no

no

Cambodia

1999

no

no

India

1999

no

no

Jamaica

1999

no

no

Zimbabwe

1999

no

no

Bangladesh

1998

no

no

Sudan

1998

no

no

Thailand

1998

no

no

Yemen

1998

no

no

Cuba

1997

no

no

Mauritius

1997

no

no

Morocco

1997

no

no

Syria

1997

no

no

Jordan

1996

no

no

Pakistan

1996

no

no

Sri Lanka

1996

no

no

Ukraine

1996

no

no

Uzbekistan

1996

no

no

China

1994

no

no

Egypt

1994

no

no

Togo India

Indonesia

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Annex Table 3.A4.1. Bilateral investment treaties included in the sample (cont.) Country

Jordan

Malaysia

Morocco

Peru

Treaty signed with:

Year signed

Environment

Labour

Laos

1994

no

no

Malaysia

1994

no

no

Tunisia

1992

no

no

Vietnam

1991

no

no

Thailand

2005

no

no

Singapore

2004

yes

no

Lebanon

2002

no

no

Kuwait

2001

yes

no

Syria

2001

no

no

Bahrain

2000

no

no

Sudan

2000

no

no

Morocco

1998

no

no

Algeria

1996

no

no

Indonesia

1996

no

no

Yemen

1996

no

no

Tunisia

1995

no

no

Malaysia

1994

no

no

Saudi Arabia

2000

no

no

Ethiopia

1999

no

no

Lebanon

1998

no

no

Egypt

1997

no

no

Ghana

1996

no

no

Kazakhstan

1996

no

no

Kyrgyzstan

1995

no

no

Mongolia

1995

no

no

Peru

1995

no

no

Uruguay

1995

no

no

Cambodia

1994

no

no

Indonesia

1994

no

no

Jordan

1994

no

no

United Arab Emirates

1991

no

no

Pakistan

2001

no

no

Jordan

1998

no

no

Indonesia

1997

no

no

China

1995

no

no

Benin

No date given

no

no

Singapore

2003

no

no

Colombia

2001

no

no

Ecuador El Salvador

1999 1996

no no

no yes

Malaysia

1995

no

no

Paraguay

1994

no

no

Bolivia Thailand

1993 1991

no no

no no

Cuba

1965

no

no

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Annex Table 3.A4.1. Bilateral investment treaties included in the sample (cont.) Country

Treaty signed with:

Year signed

Environment

Labour

Russia

Thailand

2002

no

no

Ethiopia

1999

no

no

1997

no

no

No date given

no

no

Lebanon Serbia

Egypt

2005

no

no

Singapore

Jordan

2004

no

no

Peru

2003

no

no

Mauritius

2000

no

yes

Sri Lanka

1998

no

no

Egypt

1997

no

no

Cambodia

1996

no

yes

Mongolia

1995

no

yes

Pakistan

1995

no

yes

Vietnam

1992

no

no

China

1985

no

yes no

Sri Lanka South Africa

Vietnam

Zambia

240

1980

no

No date given

no

no

Mauritius

1998

no

yes

Iran

1997

no

no

Cambodia

2001

no

no

Tajikistan

1999

no

no

Egypt

1997

no

no

Bulgaria

1996

no

no

China

1992

no

no

Madagascar

1992

no

no

Indonesia

1991

no

no

Thailand

1991

no

no

Egypt

2000

no

no

Madagascar

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Chapter 4

The Interaction Between Investment and Services Chapters in Selected Regional Trade Agreements *

This report analyses the interactions between the investment and services chapters of 20 regional trade agreem ents. It classifies agreements into two broad categories of NAFTA-inspired and GATSinspired agreements and identifies four major types of interaction between the investment and trade in services chapters. The report then looks at the implications of the services/investment interface for levels of investment protection and liberalisation.

* This study has been prepared by Marie-France Houde and Akshay Kolse-Patil of the OECD Directorate for Financial and Enterprise Affairs (DAF) and Sébastien Miroudot of the OECD Trade and Agriculture Directorate (TAD), under the supervision of Dale Andrew, Head of the Trade Policy Linkages and Services Division of TAD and Pierre Poret, Head of the Investment Division of DAF. It has been discussed in the Investment Committee and Working Party of the Trade Committee and was declassified on the responsibility of the Secretary-General. The authors wish to thank Martin Molinuevo and Martin Roy for helpful comments and discussions during the preparation of this study. The study is also available as OECD Trade Working Paper No. 55.

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Key findings This report analyses the interactions between the investment and services chapters of 201 Regional Trade Agreements (RTAs), in terms of the implications for levels of investment protection and liberalisation. RTAs can generally be classified into two broad categories of NAFTAinspired and GATS-inspired agreements. Investment disciplines in the former are lodged in the investment chapter and there is limited interaction with the services chapter. In GATS-inspired agreements, investment disciplines are divided between the services and the investment chapters and as a consequence interactions between them are more prevalent and are governed in either the investment or in the services chapter. The level of investment protection is determined by the scope and coverage of the investment protection provisions and not by the type of interaction between the two chapters. In both types of RTAs, investment in services industries may benefit from the protections provided by the investment chapter (such as on expropriation, transfers, compensation for losses or investor-to-state dispute settlement). As investment provisions vary from one RTA to another, some countries have decided to maintain a former BIT alongside the more recently negotiated RTA. Concerning the level of investment liberalisation, NAFTA-inspired agreements tend to have an advantage in terms of the number of sectors covered by non-discrimination disciplines and the degree of transparency and predictability through a “one-shot” liberalisation encompassing all sectors and a “ratchet” mechanism that locks in future reforms. GATS-inspired agreements are often favoured by countries that want to preserve a certain flexibility and progressiveness in their liberalisation, while they reform and establish new regulatory frameworks. But the differences between the two approaches should not be overstated. Provisions on future liberalisation and transparency can add transparency and predictability in the context of GATS-inspired agreements,

1. The list includes one North/North agreement (AUSFTA), 13 North/South agreements (NAFTA, US-CAFTA-DR, US-Morocco, Japan-Singapore, Japan-Mexico, JapanMalaysia, TAFTA, EC-Chile, EC-Jordan, EFTA-Korea (EFTA-Singapore, TPSEP and ANZSCEP) and six South/South agreements (Chile-Korea, India-Singapore, ASEAN agreements, COMESA and Andean Community Decisions).

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while flexibility also exists in NAFTA-inspired agreements through reservations on existing and future non-conforming measures. An ambitious level of investment liberalisation in a GATS-inspired agreement is possible by taking commitments in additional sectors or by increasing the transparency of schedules. Progressive liberalisation of investment can in principle also be pursued in NAFTA-inspired RTAs. Even more recently, some GATS-inspired agreements provide insights into the possibilities offered by a combination of positive and negative listing. Several factors influence the choice of a GATS- or NAFTA-inspired approach: existing liberalisation of the negotiating partners’ regimes; their administrative capacity; past approaches; and the pace at which they wish to liberalise. Choosing between positive or negative listing (or a hybrid approach) is a matter for negotiation between partners. Not all agreements include a most-favoured-nation clause (MFN). When they do, GATS-inspired agreements tend to prevent the MFN rule from applying to third parties through a regional economic integration organisation (REIO) exception clause. Nonetheless, new investment liberalisation in third party agreements may be extended to parties of earlier RTAs, following a review of commitments. A difference in NAFTA-inspired agreements tends to be that the MFN rule can apply as regards future agreements that might contain better treatment for investors. However some countries have listed reservations in specific sectors limiting the extension of any possible better treatment. In the light of this, one can question the effectiveness of the MFN rule with respect to investment liberalisation in creating a level playing field between investors from various Parties.

Synthesis This document presents the results of the joint work carried out in 2006-07 by the Working Parties of the Investment and Trade Committees on the interaction between investment and trade in services provisions in regional trade agreements (RTAs). The study is divided in three parts preceded by a one page summary of the Key Findings and synthesis. Part I analyses the interactions between the investment and services chapters in a representative sample of 20 agreements. Part II analyses their implications for the level of investment protection provided. Part III analyses the implications of the services/investment interface and of the MFN rule for the level of the liberalisation provided.2

The embracing trend of RTAs After the abandonment of the Havana Charter of the International Trade Organisation in 1950, rule-making in international trade and investment largely

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evolved along two separate tracks, the first largely dominated by the GATT system, the second by the conclusion of bilateral investment treaties (BITs) aimed at “protecting”, “promoting” and in the case of some later agreements, “liberalising” foreign investment. This general pattern started to change, however, with the entry into force of North American Free Trade Agreement (NAFTA) in 1994 and the establishment of the World Trade Organisation (WTO) in 1995. The NAFTA was the first agreement to combine BIT-like disciplines with comprehensive trade in services disciplines. The WTO brought in, for the first time, through the GATS, the supply of services into the realm of multilateral trade rules. These two important developments have expanded the landscape of regional agreements and the possible types of interactions between investment and service disciplines. Since 1994, some 180 regional agreements combining investment and trade in services rules, mainly in the form of Free Trade Areas (FTAs), have come into existence as compared with 38 RTAs during the previous forty years altogether. The pace has markedly picked up since 2000. Over forty per cent of the cumulative total has come into being since 2000, cutting across countries or regions increasingly further apart and with more diversified economic backgrounds. Some 70 more agreements are reported to be under active consideration or negotiation. Mexico, Chile, Singapore, the United States, Australia and New Zealand are leading in terms of agreements concluded. EFTA, the EU and ASEAN stand out as the most active country groupings.

Two distinct cultures and sets of disciplines RTA investment chapters essentially take their origins in BITs introduced in the late 1950s or early 1960s to provide absolute standards of protection for the foreign investor and their investments as regards transfers, expropriation and compensation, fair and equitable treatment, and investor-to-statearbitration of investment disputes. Comprehensive obligations on national treatment and MFN treatment obligations at all phases of operation including establishment as well as the prohibition of performance requirements were later introduced in the US and Canadian treaties in the early 1990s. Today’s RTA investment chapters typically provide broad investment coverage, strong protection and non-discrimination commitments and recourse to investorstate international arbitration.

2. In the present study, the term “investment protection” is intended to cover the typical core protections found in BITs while the term “investment liberalisation” is principally intended to cover the non-discrimination obligations found in OECD liberalisation instruments as well as the WTO and other trade liberalisation agreements. The BITs and FTA/RTA investment chapters of some OECD countries also include some of the non-discrimination obligations characterised here as “investment liberalisation” provisions.

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Investment disciplines lodged in RTA services chapters, are, on the other hand, usually based on the GATS. Investment is covered only in the narrower form of a “commercial presence”. Transparency and MFN treatment are the only general obligations. Obligations on market access and national treatment arise only to the extent liberalisation commitments are listed in separate schedules. Because of the importance they play in the ability to supply a service, domestic regulatory issues are also addressed. Avoidance of restrictions on international payments and transfers is the only significant “protection” provided by the trade in services chapters, and even so, only in sectors where liberalisation commitments are scheduled. The Investment and Services chapters of NAFTA-inspired and GATSinspired agreements differ, therefore, in their coverage of investment in services.3 This leads to four major types of interaction between these chapters.

1) NAFTA-inspired agreements – Limited interaction The first type of interaction is characterised by a clear separation between the Investment chapter and Cross-Border Trade in Services (CBTS) chapters designed to limit the interaction between the two chapters. The Investment chapter acts as the depositary of, or controls, all the investment provisions of both goods and services (except for financial services). The CBTS chapter, which is partly inspired by the GATS, is uniquely devoted to the liberalisation of services provided without a commercial presence. Both chapters use a negative list approach for lodging reservations to their respective obligations. NAFTA provides the classical example of no interaction between the Investment and Services chapters. More recent NAFTA-inspired agreements (US-CAFTA-DR or US-Morocco for example) allow for a limited interaction. In this latter case, the Market Access, Domestic Regulation and Transparency articles of the CBTS chapter apply to the Investment chapter subject to certain limitations. The Financial Service chapters may incorporate from the Investment chapter and the Trade in Services chapters the provisions to be applied to this sector. A “Relations to Other Chapters” clause states that in the event of any inconsistency between the Investment chapter and other chapters, these other chapters shall prevail to the extent of the inconsistency.

3. The two EU agreements examined here due to their specificities are separately discussed in paragraph 25.

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2) GATS-inspired agreements where the interaction is stated in the Investment chapter GATS-inspired agreements also generally have separate chapters on investment and services. However, investment in services is typically covered by both chapters. Liberalisation of the supply of services, including through commercial presence is controlled by the Trade in Services chapter whereas the protection of investments in services, notably the clauses on expropriation, compensation for losses, investor state dispute resolution, is located in the chapter on Investment. In addition, these agreements also usually employ a positive list approach for specific commitments for Trade in Services. A majority of th ese agreemen ts have adopted a second type of interaction between the investment and services chapters which is stated in the Investment chapter. The Trade in Services chapter comes first and contains the market access an d non-discrimin ation oblig ations on commercial presence. The Investment chapter – which has a broader coverage based on an asset-based definition of investment – identifies the scope of its application and rules to deal with potential inconsistency between this chapter and the Trade in Services chapter(s). The Financial Service chapters however are responsible for the core obligations on financial services. EFTA agreements provide clear examples of this mode of interaction. In these agreements, the limitations mainly take the form of the non-application of the National Treatment and Most Favoured Nation Treatment obligations to Mode 3 (commercial presence) operations. A similar approach is followed by other agreements such as TAFTA or New Zealand-Singapore Agreement. Japan’s Economic Partnership Agreements also generally fall in this category as the Investment chapter’s scope article describes how inconsistencies between overlapping provisions should be resolved. In the case of JapanSingapore FTA, the interaction is not stated in the Investment chapter but in the parties’ reservations to this chapter.

3) GATS-inspired agreements where the interaction is stated in the Trade in Services chapter In a third type of interaction between the investment and services chapters, it is the Trade in Services chapter through a “Service-Investment” linkage clause which determines which provisions from the Investment chapter listed therein would apply. This approach has recently been introduced by the India-Singapore CECA. The specific provisions borrowed from the Investment chapter concern compensation for losses, expropriation, repatriation, subrogation, measures in public interest, special formalities and information requirements, access to courts of justice, senior management, investment disputes, other obligations and performance requirements. This

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type of interaction seeks to minimize any possible conflict between the two chapters by listing the various liberalisation and protection obligations that would apply to investment in services.

4) GATS-inspired agreements where no interaction is stated A fourth group of agreements are silent on the interaction. This approach solely relies on the rules of interpretation of international law to sort out the relationship between the investment and services provisions. This case mainly concerns separate agreements on investment and trade in services (ASEAN agreements and Andean Community Decisions). But this situation may also arise within individual agreements. For example, in the JapanSingapore or EFTA-Korea agreements, the clause on transfers is contained in two chapters, the Trade in Service and Investment chapters, with one less permissive than the other. However, this duplication does not necessarily lead to conflict. Rath er, both the se oblig ations apply simultaneously to investments in services, which are subject to the obligations of both chapters. More recent agreements, however, are abandoning this approach in favour of an explicit and more precise mode of interaction between the investment and services chapters.

EC Trade Agreements Even though European Communities (EC) Association Agreements with non-European partners generally follow the GATS approach, other features set them apart from the GATS-inspired agreements described above. The European Community and the member states share competence in the investment area. The coverage and structure of EC agreements are also un iq ue. For exa mp le, t he EC -C hi le A g re e me n t , wh ich is t h e mos t comprehensive agreement concluded so far, has separate chapters on Trade in Services (covering all four modes of supply of services), Financial Services, Establishment and Current Payments and Capital Movements. In this case, it is the establishment chapter which excludes services from its coverage. In the EC-Jordan Association Agreement, however, the services chapters only cover the cross-border supply of services while the establishment chapter applies to all investments. The methodology for listing liberalisation commitments also differs in the two agreements, the EC-Chile agreement follows a positive list approach while the EC-Jordan agreement list the reservations to the obligations. EC agreements provide for national treatment (and MFN in some cases) on post-establishment and for protection of transfers-capital movements. Other protection issues are addressed by the BITs concluded by member States.

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Level of investment protection provided The level of investment protection does not seem to be affected by the types of interaction chosen. In all the agreements reviewed with dual coverage of investment in services, all investment in services benefits from the basic protections provided by the Investment chapter (such as on expropriation, transfers, compensation for losses or investor-to-state dispute settlement). This is because the “asset-based” definition of investment normally used for applying the basic standard protections of the Investment chapter obligations includes the narrower concept of “commercial presence”, which is used for the liberalisation of investment in services in GATS-inspired agreements. This broad-asset based definition typically includes, in addition to majority or controlling participations in an enterprise, minority interests, intellectual property rights, concessions and other forms of property. If the level of investment protection is indifferent to the type of RTA adopted, it is certainly determined by the scope and coverage of the investment protection provisions. Judging from the sample, the level of investment protection provided by RTAs is largely comparable if not interchangeable to that traditionally provided by BITs (as in the case of US BITs and RTA Investment chapters). Nonetheless, the investment provisions may still vary from one RTA to another. For a significant number of agreements reviewed (such as NAFTA, AUSFTA, Japan EPAs, India-Singapore CECA, Australia-Thailand), these obligations are new in the absence of former BITs between the parties. But in a number of other agreements reviewed, BITs remain in place alongside RTAs, with both sets of rules complementing each other (EC agreements, ASEAN agreements, Andean Community Decisions). BITs have been replaced by RTAs only when the latter’s contents and coverage are clearly superior to that of BITs (for example EFTA-Korea Investment Agreement, as compared to Korea-Switzerland BIT).

Levels of liberalisation commitments achieved The study provides a detailed analysis of the schedules of commitments in ten RTAs,4 focusing on investment in services. The difference between the NAFTA-inspired and the GATS-inspired approach that was described before is also relevant for the analysis of the schedules of commitments. It is often presented as a difference between the negative list (or “top-down”) approach and the positive list (or “bottom-up”) approach, but it should be understood mainly as a difference in the objective of the agreements and their coverage with respect to investment liberalisation. Although it is technically possible to 4. The list includes five NAFTA-inspired agreements (AUSFTA, NAFTA, US-Morocco, Japan-Mexico and Chile-Korea) and five GATS-inspired agreements (JapanSingapore, TAFTA, EU-Chile, EFTA-Singapore and India-Singapore).

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offer the same level of commitments with a negative list of reservations or with the hybrid approach used in GATS (with a positive list of sectors where commitments are made and a list of reservations for these commitments), this is not the case from what can be observed in the schedules of the agreements analysed. The NAFTA-inspired agreements aim at liberalising all kinds of investments and grant national treatment and MFN in all sectors covered. The coverage of the agreements is generally wider than in GATS-inspired agreements and reservations are fewer, although some of them can be quite general and give an opportunity to parties to maintain or to adopt nonconforming measures in a certain number of activities. The “ratchet” effect of NAFTA-inspired agreements locks in the investment regime and includes as commitments under the RTA any new effort towards liberalisation. Therefore, thes e agreem ents g en erally bring a high er degre e of certain ty an d predictability for investors. Their higher degree of transparency should however be nuanced in cases where not all restrictions are listed in the Annex (e.g., sub-federal non conforming measures). There are other provisions in NAFTA-inspired agreements that also illustrate the liberalisation intent such as phasing-out commitments for certain non-conforming measures and other disciplines beyond national treatment and MFN on performance requirements or citizenship and residency requirements. GATS-inspired agreements (where investment in services is covered in the services chapter) provide schedules of commitments with commitments in a higher number of sectors and sub-sectors compared with those made at the multilateral level (under the GATS). On the other hand, there is no willingness to expand the coverage of non-protection disciplines to all sectors. The approach remains close to GATS with commitments in a set of sectors and sub-sectors, flexibility and progressive liberalisation through a review of the commitments.5 An important perceptible difference is that the number of commitments tends to be more reciprocal in RTAs than in GATS schedules. From countries’ experience, the “hybrid” approach of GATS-inspired agreements is appreciated for its flexibility, as it allows countries to conduct a selective liberalisation of investment and to keep options in sectors where there are on-going regulatory reforms, while the NAFTA-inspired approach is

5. While some of the NAFTA-inspired RTAs can organise a gradual liberalisation of investment through phasing-out reservations, the approach is different in the sense that GATS-inspired agreements foresee a review of their commitments and further negotiations with a view to deepening liberalisation. In NAFTA-inspired agreements, such mechanisms are not necessary as almost all sectors are already committed and the ratchet effect locks in any new liberalisation. The negative list approach is also embodied in other mechanisms such as in the OECD Codes of Liberalisation for instance.

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favoured for its higher degree of predictability and transparency for investors through a “one-shot” liberalisation encompassing all sectors. However, there is no specific constraint coming from one approach or the other and countries can use either a positive list or negative list to achieve an ambitious degree of liberalisation. The negative list approach can also be flexible through its reservations on existing and future measures while transparency and predictability can be improved in the context of a positive list by providing e nough in formation to investors, simplifyin g th e way sche dules of commitments are presented and by a clear commitment to future liberalisation. The comparison between the schedules of commitments in the RTAs and GATS commitments in Mode 3 confirms that all agreements analysed are WTO-plus. The liberalisation of investment in services goes further than in the GATS both in NAFTA- and GATS-inspired agreements. This should be the case as these regional agreements need to provide for a higher degree of liberalisation in order to be consistent with WTO rules (GATS Article V). In the regional trade agreements, there is a tendency to create a degree of bilateral reciprocity in the commitments, unlike what can be observed in the GATS. It is particularly the case in agreements between developed countries and developing or emerging countries that have made fewer commitments under the GATS. This may well be a positive sign of how RTAs have the potential of promoting further investment liberalisation in services.

The MFN rule and its implications The most-favoured-nation clause (MFN) is a common provision found both in the investment and trade in services chapters of RTAs. The MFN clause requires a party to a given agreement to provide investors and investments from the other party treatment “no less favourable” than that it accords to investors and investments of any other party or non-party to the agreement. MFN provisions in RTAs tend to be unconditional and to apply to all covered investments both pre- and post-establishment. However, not all of the agreements analysed in this study have an MFN provision. COMESA, EC-Chile, Japan-Singapore, Korea-Singapore and the India-Singapore Comprehensive Economic Co-operation Agreement have no MFN treatment for investment. In services chapters modelled after the GATS, MFN clauses are generally inspired by GATS article II with a negative list of exemptions. The MFN clause found in investment chapters inspired by NAFTA has its scope more precisely defined, as the “no less favourable treatment” applies to both “investors” and “investment of investors” with respect to “the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments”. However, the clause specifies that such treatment should be granted “in like circumstances”. Another important distinction between the NAFTA and the GATS approach is that no further exceptions can be negotiated

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in a GATS-type agreement after it has entered into force. The NAFTA approach allows for members to adopt new exceptions and non-conforming measures when they have listed the sectors concerned in the annex on future measures. As some countries have signed both NAFTA-inspired and GATS-inspired agreements with different levels of liberalisation commitments, one could wonder if through the MFN rule there is a “multilateralisation” of regional commitments. In an RTA, the MFN rule is not only designed to ensure nondiscriminatory treatment between the parties to the agreement but also to benefit from better treatment in third-party agreements. In the case of bilateral RTAs, it is only as regard to third-party investors that the MFN rule has any application. However, many agreements tend to prevent the extension of some liberalising commitments from one agreement to another through the MFN rule. In GATS-inspired agreements, there is often a regional economic integration organisation (REIO) exception similar to GATS article V where a more favourable treatment granted to members of a third party RTA is not automatically extended to the parties of the current RTA on the basis of MFN treatment. The existence of an REIO exception does not require discriminatory treatment between members of different RTAs but it does allow for it and therefore can undermine the effect of the MFN clause. The result therefore is a risk of discriminatory treatment between the parties of different RTAs signed by the same country. To prevent this from happening, GATS-inspired agreements rely on a review of commitments to extend the more favourable treatment of a new agreement to parties of a prior RTA. In practice, commitments can be easily extended through a simple exchange of letters or a joint meeting between the Parties. In NAFTA-inspired agreements, there is, in principle, an automatic extension of the more favourable treatment granted in a new agreement through the MFN clause (in many agreements, this principle applies to new agreements only, as there is often an MFN exception for past agreements). In some NAFTA-inspired agreements however, countries have also listed certain sectoral exceptions for future agreements. Such sectors will not automatically benefit from the better treatment of future agreements through the MFN clause. But very few sectors are concerned. It is also possible to avoid investment distortions by signing RTAs with the same commitments as some countries tend to do. While the MFN rule can still operate in NAFTA-inspired agreements to extend new liberalisation commitments to investors from countries parties to a former agreement, a review of commitments is necessary in GATS-inspired agreements to ensure a level playing field between investors. Hence, one may question the de facto impact of the MFN clause in RTAs and its capacity to “multilateralise” regional commitments.

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Part I. Interactions Amongst Investment and Trade in Services Chapters of Different Types of RTAs 1. The study sample At the end of 2005 around 218 RTAs.6 were known to contain investment provisions of one kind or another. While initially they belonged to the same region with similar levels of economic development, an increasing number of RTAs are being concluded between countries with different level of economic development and located in regions or continents far apart. Individually, Mexico, Chile, Singapore, the United States, Australia and New Zealand are leading in terms of the number of agreements concluded while EFTA, the EU and ASEAN stand out as the most active country groupings. A rapid rise in the number of agreements between developing countries is also apparent. This picture is far from frozen as a relatively large number of RTAs – 70 or so – are under negotiation or under consideration. RTAs are therefore covering a growing share of world trade and investment, increasingly moved by strategic market considerations unbound by geographical considerations, and this trend is likely to continue.7 Not all these agreements are comparable, however, in terms of objectives and purposes, coverage, depth, legal robustness, sophistication or impact. RTAs are also in constant evolution and various types of RTAs co-exist. This study examines a sample of 20 North/North, North/South and South/South agreements that would appear to represent the latest approaches across countries, regions or continents, about the role of investment-related

6. In a speech delivered in mid-January 2007, WTO Director General Pascal Lamy estimated that the number of these agreements could rise to 400 by 2010, See WTO News – 17 January 2007. For a comprehensive inventory of regional agreements with investment content up the end of 2005, see www.unctad.org/en/docs/ iteiit200510annex_en.pdf. “Economic integration” is the expression used by Article V for designating preferential trade in service liberalisation agreements. GATT Article XXIV refers to customs unions and free trade areas. Customs unions require the establishment of a common external tariff and harmonization of trade policies. In an FTA, each party maintains its own trade policy vis-à-vis third parties. “Regional Trade Agreements” is the generic term used for notification to WTO of all these preferential agreements. See also Jo-Ann Crawford and Robertino V. Fiorentino, the “Changing Landscape of Regional Trade Agreements” Discussion Paper No. 8 , WTO, www.wto.org/english/res_e/booksp_e/discussion_papers8_e.pdf. 7. According to the WTO, at least one half of world trade now takes place between members of RTAs and all WTO Member engaged in RTAs of one sort or another A similar trend has been observed on the investment side. It is estimated that RTAs capture about 60 per cent of outward investment in Australia, 44 per cent in Canada and 20 per cent in the United States. See “Novel Features in OECD Countries’ Recent Investment Agreements: An Overview”, pp. 1-2, www.oecd.org/dataoecd/42/9/ 35823420.pdf.

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provisions in RTAs, including on services.8 All but one9 have been notified to the WTO:

1. North/North Agreements ●

(1) Australia-United States Free Trade Agreement (AUSFTA) (2004) as the most recent example of a comprehensive North/North Agreement.

2. North/South Agreements ●

(2) The North American Free Trade Area (NAFTA) – The first RTA to combine the disciplines of Services and Investment.

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(3) Free Trade Agreement between Central America, the Dominican Republic and the United States of America (US-CAFTA-DR) (2006) as an example of the last generation of NAFTA-inspired agreements concluded by the United States with Latin American countries.

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(4) US-Morocco Free Trade Agreement (2006) as an illustration of a US FTA with a MENA region country.

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(5), (6) and (7) Japan-Singapore New-Age Economic Partnership Agreement (JSEPA) (2002), Japan-Mexico Economic Partnership (2005) and Japan-Malaysia Economic Partnership (JMEPA) (2006) as an illustration of FTAs concluded between countries with different levels of economic development.

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(8) Thailand-Australia Free Trade Agreement (TAFTA) (2005) as example of an Australia’s FTA with an Asian developing country.

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(9) and (10) EC-Chile Association Agreement (2003-05) and EuroMediterranean Agreement establishing an Association with Jordan (2002) as representatives of the last generation of EU trade agreements, one with a Latin American country, the other as part of the Euro-Mediterranean FreeTrade Area initiative.

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(11) and (12) Free Trade Agreement between EFTA States (Switzerland, Liechtenstein, Norway and Iceland) and Singapore (ESFTA) (2003) and Free Trade Agreement between EFTA States and Korea (2006) as examples of the new generation of EFTA FTAs. ESFTA is also the first FTA concluded between the continents of Europe and Asia and the first EFTA agreement to

8. A deliberate decision has been made to leave intra-European RTAs – that is the European Community and the European Free Trade Association and their agreements with other European countries – outside the scope of this study on the grounds that they constitute a unique process of economic and political integration. The study also leaves out the RTAs that have succeeded the trading arrangements between former Soviet republics. 9. Namely the India-Singapore Comprehensive Economic Co-operation Agreement (2005).

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address the right of establishment. The Investment Agreement between Korea and Iceland, Liechtenstein and Switzerland is, in addition, the most comprehensive investment agreement ever concluded by EFTA. ●

(13) and (14) Trans-Pacific Strategic Economic Partnership among Brunei Darussalam, Chile, New Zealand and Singapore (TPSEP) (May 2006) as an example of an intercontinental agreement combining four APEC economies including one OECD country. The New Zealand-Singapore Closer Economic Partnership (ANZSCEP) (2001) is also analysed separately.

3. South/South RTAs ●

(15) and (16) Free Trade Agreement between the Republic of Korea and the Republic of Chile (2004) and Free Trade Agreement between the Republic of Korea and the Republic of Singapore (KSFTA) (2006) as examples of one intercontinental FTA between two successful emerging market economies and one economically successful Asian economies.

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(17) India-Singapore Comprehensive Economic Co-operation Agreement (2005) as an illustration of India’s new policy towards FTAs.

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(18) ASEAN Agreement for the Promotion and Protection of Investment (1987), as amended by the 1996 Protocol, and 1998 Framework Agreement on ASEAN Investment Area and the ASEAN Framework Agreement on Services (1995) as amended by the 2003 Protocol, as an example of a more gradual approach but with the potential of serving as a platform for the negotiation of FTAs with major players (such as China, India, EU, Australia or New Zealand).

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(19) Common Market for Eastern and Southern Africa (COMESA) (1993) although created to be a common market, is included as an illustration of a co-operative arrangement on investment among African countries.

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(20) Andean Community – Community instruments on Foreign Investment and Transfer of Technology (Commission Decisions 291 and 292 (1991) and Decision 439 on a General Framework for the Liberalisation of Trade in Services (1998) as an illustration of a sub-regional initiative to liberalise investment and trade in services.

2. Key features of the investment and trade in services chapters of RTAs As elaborated in Annex 4.A1 to the present document, recent RTAs address an increasing number of issues with the general intent of creating opportunities for developing the parties’ economic potential and growth in a more integrated and complementary way.10 Investment and services chapters 10. For a recent survey, see Investment Provisions in Economic Integration Agreements, UNCTAD, 2005.

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are one of the most important additions to recent RTAs.11 The disciplines in the investment chapters are usually based on those of BITs while the disciplines in the services chapters are usually based on those of the GATS. Taken together, these two chapters create two sets of disciplines for investment in services, one horizontal which applies to goods and services and the other exclusively devoted to services. Table 4.1 below lists the broad categories of disciplines and associated measures that can be found in RTA Investment chapters. They typically include a broad asset-based definition of investment, universal coverage of g oods an d s ervices, core leg al protections , establish me nt and non discriminatory treatment, investment promotion and facilitation and capacity building, and recourse to investor-state international arbitration. These chapters also employ, as a general rule, a negative list of reservations or exceptions with respect to liberalisation. Annex 4.A1 provides an overview of how these various provisions are covered in the sampled agreements. Table 4.2 lists the broad categories of investment disciplines and associated measures that can be found in GATS-based RTA trade in services chapters. Striking differences emerge from a comparison with the investment template provided in Table 4.1. Trade in services is generally defined as the supply of a service through four distinct modes: cross-border trade (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3) and temporary movement of natural persons (Mode 4). All the measures listed in the chapter apply to these four modes of supply. If the inclusion of Modes 3 and 4 underlines the importance of factor mobility to trade in services, these two Modes are also those that come the closest to the activities covered by investment chapters. The concept of “commercial pres ence” for trade in se rvices is significantly narrower than the standard definition of investment in the investment chapter. While it covers matters relating to both the establishment and post-establishment phase and applies to both existing and de novo agreements, it remains an “enterprise-based” 12 as opposed to an “assetbased” definition of investment. In other words this definition only encompasses foreign investment in services where the foreign investor holds more than 50 per cent of the equity interest or exercises control over the

11. In addition, in addition to trade in goods, RTAs may cover intellectual property, government procurement competition, labour, environment, e-commerce, capacity building issues among others. 12. The standard definition of commercial presence given by Article XXVIII (d) of the GATS consists of any type of business or professional establishment, including through the constitution, acquisition or maintenance of an enterprise or the creation of maintenance of a branch or a representative office.

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Table 4.1. Assessing Investment chapters of RTAs1 Definition

Coverage

– Asset Based definition of investment Open/Closed Direct/Indirect – Definition of investor

– National measures – Sub-national measures – State enterprises – Corporate responsibility

Investment liberalisation

Investment protection

General obligations – Transparency – Establishment – Postestablishment – National treatment – MFN treatment – Performance requirements – Senior management/ Board of directors – Temporary movement of key personnel – Standstill/ Rollback – Country exceptions – Economic integration clause – General exceptions – Monopolies and concessions – Taxation – Environment – Labour – Origin requirements/ Denial of benefits

General obligations – Payments and transfers – Fair and equitable/ Minimum standard – Full protection and security – Expropriation – Compensation

Investment Promotion/ Facilitation

Dispute Settlement

Schedule of commitments

– Investment – State-to- Negative promotion State or positive – Co-operation/ arbitration Capacity – Investorbuilding State mechanisms arbitration

1. Investment liberalisation covers the provisions which essentially aim to promote and secure nondiscriminatory treatment and limit departures from this treatment. These provisions correspond to the traditional obligations of the OECD Codes of Liberalisation, the WTO and other trade liberalisation agreements, Investment protection covers the obligations typically found in bilateral investment protection and promotion agreements that provide absolute levels of protection. The dividing line between these two concepts is not always clear cut however. The provisions aimed at protecting the investment of an investor may reinforce liberalisation commitments. Conversely liberalisation commitments can also be viewed as providing legal security against future changes in the investment regimes of host countries. This categorisation of the various provisions of investment chapters helps highlight the main differences with the main provisions of trade in services chapters as presented in Table 4.2.

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Table 4.2. GATS-based investment provisions in RTA services chapters

Definition

Coverage

Commercial – All services presence with carve(Mode 3) as one outs2 of four modes 1 – National of supplying measures services – Sub-national measures – State enterprises

Investment liberalisation

Investment protection

General Specific obligations commitments – Transparency – Transfers – MFN treatment – Domestic regulation – Recognition – Monopolies and exclusive service suppliers – Business practices – BOP safeguards – General exceptions – Security exceptions – Origin requirements/ denial of benefits

Investment promotion/ facilitation provisions – Co-operation/ Capacity building mechanisms

Dispute settlement provisions State-to-State (separate chapter) Investor-tostate (investment chapter)

Schedule of commitments

Positive list

Specific commitments – Market access – National treatment – Specific commitments – Annexes3 and decisions 1. The other three are: cross-border supply (Mode 1), Movement of consumer (Mode 2), Movement of Supplier (Mode 4). 2. The GATS does not apply to air traffic rights and services supplied in the exercise of a governmental authority. 3. These include special annexes on financial services, telecommunications and air transport services.

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foreign investment enterprises.13 The coverage of Mode 4 may generally be considered broader, on the other hand, to that of key personnel and the movement of business persons covered by Investment or other RTA chapters. Transparency and MFN treatment are usually framed as “general obligations” in contrast to that of market access14 and national treatment which apply solely in sectors listed in separate schedules of commitments. Other obligations are conditioned by these schedules such as the objective administration of domestic regulations and the avoidance of restrictions on international payments and transfers. The latter is often the only investment protection provision incorporated in trade in services chapters. At the same time, the Trade in Services chapters normally contain special disciplines on non-discriminatory quantitative restrictions and other behind-the-border regulatory issues.15 These chapters usually employ a positive list approach for specific commitments. Annex 4.A1 describes how these various provisions are covered in the sampled agreements. While the new generation of FTAs often feature separate chapters on Investment and Services, the interactions are largely a function of the respective contents of these chapters. NAFTA-inspired and GATS-inspired agreements markedly differ in their coverage of investment in services. This leads to four major types of interaction between the investment and services chapters in the investment area.

1) NAFTA-inspired Agreements – Limited interaction The first type of interaction is characterised by a clear separation between the investment and cross-border trade in services chapters designed to limit the interaction between the two chapters. The Investment chapter acts as the depositary of, or controls, all investment protection and liberalisation obligations (except for financial services). The Cross-border Trade in Services (CBTS) chapter excludes services supplied through an

13. Article XXVIII (g) of the GATS defines a “service supplier” as “any person that supplies a service”. “A person means either a natural person or a juridical person” [Article XXVIII (j)]. A juridical person means in the case of a supply of a service through commercial presence any person “owned” or “controlled” by juridical persons from a member. Ownership requires holding more 50 per cent of the equity interest in the commercial presence; control requires the power to name a majority of the directors or the direct control over the actions of the juridical person in question. [Article XVIII, paragraph (m)(ii), (n)(i) and n(n)(ii)]. 14. Article XVI(2) of the GATS defines six limitations to market access, namely limitations on the number of service suppliers, service operations or employees in a sector, the value of transactions, the legal form of the service supplier, or the participation of foreign capital. 15. These paragraphs are derived from Chapter 3 “Investment”, Regionalism and the Multilateral Trading System, OECD, 2003.

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investment, akin to Mode 3 of the GATS (commercial presence). As in GATS, the CBTS chapter also addresses some behind-the-border regulatory issues. NAFTA was the first RTA to introduce this form of agreement. Countries in the Western Hemisphere have been especially influenced by this approach. They have also subsequently “exported” this model to nations in different parts of the world through bilateral agreements. For instance, the USSingapore FTA, the Australia-US FTA, the US-Morocco FTA, the Japan-Mexico EPA and Chile-Korea FTA are clearly inspired by the NAFTA approach. The NAFTA model has also been adopted by a number of Asian countries in their FTAs with regional partners such as in the case of Singapore-Australia or Singapore-Korea FTAs. As a result, this approach has proliferated beyond the Americas. NAFTA provides the classical example of no interaction between the Investment and Services chapters. The refore NAFTA has a separate Investment Chapter, which covers investment in goods and services, and an independent chapter on Cross Border Trade in Services (CBTS). This means that none of the obligations contained in the CBTS chapter apply to investment in services. More recent NAFTA-inspired agreements provide, however, for a limited interaction between the Investment and the CBTS chapter by allowing application of specific provisions from the CBTS chapter to investment in services. For example, Article 11.1(2) of the Chapter on CBTS in US-Morocco Agreement provides that “Articles 11.4 (Market Access), 11.7 (Transparency in Developing and Applying Regulations), and 11.8 (Domestic Regulation) also apply to measures by a Party affecting the supply of a Service in its territory by a covered investment”. This enables to bring in behind-of-the border issues of particular relevance to services, including investment. However, a footnote provides that “nothing contained in the Chapter on CBTS, including in paragraph Article 11.1(2) shall be subject to investor-state dispute settlement.” Thus, this approach, whilst generally separating Investment in Services from CBTS, does allow for a limited interaction between the two. It affords the protections provided in the investment chapter for investments in services while simultaneously allowing more limited benefits from the CBTS chapter. A “Relation to Other Chapters” clause removes any possible ambiguities in regard to the application of other chapters. This clause states that “in case of an inconsistency between the Investment chapter and another chapter, the other chapter shall prevail to the extent of the inconsistency”. This implies that commitments contained elsewhere in the agreement takes precedence over commitments in the investment chapter in case of conflict. In short, NAFTA-inspired agreements establish a clear distinction between the Investment chapter and the CBTS chapter. The end result is to

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provide investors in services with the same protections that are offered to other investors, while a separate set of protection provisions applies to crossborder suppliers of services.

2) GATS-inspired agreements where the interaction is stated in the Investment chapter GATS-inspired agreements also generally have separate chapters on investment and services. However, investment in services is typically covered by both the Investment and Trade in Services chapters (and the Financial Services chapter when this sector is treated separately). Liberalisation of the supply of services, including through commercial presence, is controlled by the services chapter(s) whereas the protection of investments in services, notably the clauses on expropriation, compensation for losses, investor state dispute resolution, is controlled by the chapter on Investment. In addition, these agreements usually employ a positive list approach for specific commitments for Trade in Services. In the majority of the agreements reviewed, the interaction is stated in the Investment chapter. This is the second type of interaction observed in the sampled agreements. The Trade in Service chapter comes first and contains liberalisation obligations on commercial presence. The Investment chapter – w hich has a broader cove rage due to its asset-based definition of investment – then identifies the limitations that need to be applied to ensure consistency with the Trade in Services chapter. Financial Service chapters are responsible for the obligations on financial services. This approach has also the advantage of preserving the integrity of the GATS Agreement whose provisions are often reproduced verbatim in the services chapters. EFTA, TAFTA, JSEPA, JMEPA provide concrete examples of this approach despite significant variations in the number and coverage of the provisions of the chapters concerned. EFTA. EFTA agreements provide for a GATS-based chapter on Trade in Services followed by a chapter on Investment. Investment in services (commercial presence) is covered by both the Trade in Services chapter and the Investment chapter. The Investment chapter explicitly states the limitations concerning its application to services. This approach can be seen in the EFTA-Singapore and EFTA-Korea FTAs (the EFTA-Korea FTA has a separate Investment Agreement to which Norway is not a party), which belong to the second generation of EFTA’s FTAs. The Trade in Services chapter includes commercial presence as defined by GATS. As the narrower concept of “commercial presence” is included in the “asset-based” definition of an investment in the Investment Chapter, investment in services through this mode of supply is entitled to all the rights and protections provided to

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investments. The EFTA approach borrows heavily, in the form of definitions, clauses, etc., from the GATS and uses a positive listing methodology to specify each party’s commitments. For example Article 2(2) of the separate Investment Agreement16 between Korea, Iceland, Liechtenstein and Switzerland defining the scope and coverage of this agreement provides that “Article 4 (National and MFN Treatment) shall not apply to measures affecting trade in services, provided that the sector concerned is covered by Chapters 3 (Trade in Services) or 4 (Financial Services) of the EFTA-Korea Free Trade Agreement”. Thus the Investment Agreement provides for interaction with the services chapters of the EFTA-Korea Agreement. A service provider falling within the definition of an investor or an investment would be entitled to all the rights provided for in the Trade in Services or Financial Services chapters as well as those provided in the Investment chapter, except to the extent of the express limitations relating to National Treatment and MFN Treatment. An investor can, however, raise a dispute with a Party only with regards to infringements of his rights under the Investment chapter. It is also interesting to note that the scope and coverage of the investment provisions varies across EFTA agreements. So whilst the agreement with Korea excludes sectors covered by the Trade in Services and Financial Services chapters of the EFTA-Korea Trade Agreement, the EFTASingapore FTA exclusion is somewhat broader in stating that in Article 38.2 and 38.3 on Scope and Coverage that “Article 40(1) (National and Most Favoured Nation Treatment) shall not apply to measures affecting trade in services whether or not a sector concerned is scheduled in Chapter III (Trade in Services) […] as well as to investors of a Party in services sectors and their investments in such sectors”. The EFTA-Korea FTA is therefore more “liberal” than the EFTA-Singapore agreement, which could be considered more “prudent” on the subject of services and investment in services. New-Zealand-Singapore. The New Zealand-Singapore Agreement has a similar approach. The Investment chapter at the outset proclaims in Article 26.1 that it applies to all investments in goods and services and then lays down exceptions to its scope and coverage. Article 26.2 states that Article 28 (Most Favoured Nation Status), Article 29 (National Treatment) and Article 30 (Standard of Treatment) shall not apply to any measures affecting investments adopted or maintained pursuant to Part 5 (of the Agreement relating to Services) to the extent that they relate to the supply of any specific service through commercial presence […] whether they or not they are covered by Annex 2 (devoted to the parties schedules of specific commitments).

16. This agreement does not include Norway.

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Thailand-Australia Free Trade Area (TAFTA).

The TAFTA FTA also provides

for an interaction between the Trade in Services and Investment chapters. The Trade in Services chapter (Chapter 8) follows the GATS approach by defining commercial presence. At the same time the Investment chapter (Chapter 9) does not exclude from its ambit trade in services unless a limitation is provided for. Clause 903 states that the part on “Liberalisation of Investments” does not apply to “the measure which is a measure by that Party affecting trade in services as set out in Article 803(1)”. Similarly, the Post-Establishment National Treatment is also excluded. However, the part on “Promotion and Protection of Investments” would apply to investment in services. Unlike the general practice in GATS-inspired agreements, there is also a single country schedule of commitme nts for presen tation of the sch edule of commitments on investment and services. This enhances the transparency of investment liberalisation commitments. Japan EPAs. The Japan-Singapore Economic Agreement for a New Age Partnership (JSEPA) provides an example of an agreement with dual coverage of investment in services but where the Services and Investment chapters remain silent on the interactions. It is an annex to the JSEPA which provides an answer to this ambiguity. Annex V(b), which contains the list of Singapore’s exceptions in the area of investment, provides that “National treatment and prohibition of performance requirements shall not apply to services sectors not scheduled in Chapter 7” (Trade in Services). This entry also goes to state that “Where a service sector is scheduled in Chapter 7, the provisions, terms, limitations, conditions and qualifications in Chapter 7 (including market access measures) shall apply to investments in that service sector under Chapter 8”. Thus investment in a sector listed under Chapter 7 (Trade in Services) is entitled to coverage both under the Chapter on Trade in Services and Chapter on Investment subject to any stated conditions or qualifications. It is worth noting that the list of Japan’s exceptions in the area of investment does not provide for any limitations of that sort. This would not appear; however, to be a general trend in more recent Japanese EPAs.17 The Japan-Malaysia EPA which entered into force in July 2007 establishes a clearer articulation between the Investment chapter (Chapter 7) and the Trade in Services chapter. Article 73 of the Investment chapter states that with respect to matters covered by the National Treatment, MFN and

17. Japan is actively pursuing FTAs and particularly in their broader form, the economic partnership agreements (EPAs), which cover trade liberalisation and extend to other areas. Japan's EPAs with Singapore, Mexico and Malaysia took effect in November 2002, April 2005 and July 2006 respectively. In addition, Japan has signed an EPA with the Philippines and the texts of the EPAS with Thailand, Indonesia and Chile are largely completed. In addition, Japan is currently negotiating a broad agreement with the ASEAN as a whole.

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Performance Requirements the Trade in Services chapter “shall prevail to the extent of any inconsistency”. With respect to any other matter, the Investment chapter shall prevail to “the extent of inconsistency”. This approach implies that all the obligations should be applied simultaneously in the absence of any inconsistency. The two chapters also provide for own separate lists of reservations/exceptions and commitments following a negative scheduling approach in the first instance and a positive one in the second. The construction requires nevertheless a full analysis of the relevant provisions and annexes of the agreement. There are exceptions. Japan’s EPA with Mexico follows the NAFTA approach by clearly separating investment from services obligations. In addition to the standard NAFTA Relation to Other Chapter article (Article 69), the Investment chapter excludes financial services from its coverage. This is stated in its Article 57 (Scope and Coverage) which provides that Nothing in this Chapter shall apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter 9 (Financial Services). The Financial Services chapter states in turn, in its Article 111 (Relation to Other Chapters), that the provisions of Chapter 7 (Investment Chapter) and 8 (CBTS) shall not apply to measures mentioned in paragraph 1 of Article 107 which refers to measures adopted or maintained by a Party affecting (a) cross-border trade in financial services; (b) financial institutions of the other Party; and (c) investors of the other Party, and investments of such investors, in financial institutions in the Party.

3) GATS-inspired agreements where the interaction is stated in the Trade in Services chapter According to the third type of interaction, it is the Trade in Services chapter through a “Service-Investment” linkage clause which determines which provisions from the Investment chapter listed therein would apply. This approach has recently been introduced by the India-Singapore CECA. The order of the two chapters is also reversed as compared to other GATS-based agreements, with the Investment chapter preceding the Trade in Services chapter. CECA’s Trade in Services (Chapter 7) covers all four modes of supply of service. A “Services-Investment Linkage” clause (Article 7.24) states that a number of clauses in the chapter on Investment apply, mutatis mutandis, to “measures affecting the supply of a service by a service supplier of a Party through commercial presence in the territory of the other party, only to the extent that they relate to an investment, regardless of whether or not such service sector is scheduled in a Party’s Schedule of Specific Commitments”. These clauses cover compensation for losses, expropriation, repatriation, subrogation, measures in public interest, special formalities and information requirements, access to courts of justice, senior management, investment disputes, other obligations and

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performance requirements. Article 6.2 of the Investment chapter18 also states that “In the event of any inconsistency between the Investment chapter and another Chapter, the other Chapter shall prevail to the extent of the inconsistency.” This type of interaction thus selectively chooses rights and protections provided under the Chapter on Investment to apply to commercial presence. It is a clear but a la carte approach. This approach leads to transparency and leaves no room for ambiguity in the relationship between provisions on investment and those on services.19

4) GATS-inspired agreements where no interaction is stated A fourth group of agreements, accounting for a minority of those reviewed, are silent on the interaction(s). This approach therefore would rely on the rules of interpretation of international law 20 to determine the relationship between investment and services provisions. This case mainly concerns separate agreements on investment and services or agreements with a partial coverage of investment or services issues. This situation can arise as well within individual agreements where there is a duplication of clauses of general application in the investment and services chapters. ASEAN. ASEAN provides a clear example of the absence of a stated interaction between investment and service provisions. Instead of a comprehensive all inclusive agreement, ASEAN has separate “Agreements” on Investment and Services, namely the ASEAN Agreement for Promotion and Protection of Investment, 1987 (amended in 1996), the Framework Agreement on ASEAN Investment Area (AIA), 1998 and the ASEAN Framework Agreement on Services, 1998 (amended in 2001). The ASEAN Agreement for Promotion and Protection of Investment offers to all investments, including investment in services, the typical protections found in BITs. The ASEAN Framework Agreement on Services includes “commercial presence” and related schedules of liberalisation commitments. The AIA covers “investment in incidental services” in five sectors, namely manufacturing, agriculture, fishery, forestry and mining and quarrying. This means that instead of providing interlinking between these two agreements, the AIA lists the specific sectors and related 18. Paragraph 6.2.3 of this Scope of Application article also states that “The Provisions of this Chapter as specified in Article 7.24 shall apply mutatis mutandis to the measures affecting the supply of services by a service provider of a Party through commercial presence in the territory of the other Party”. 19. As regards other interesting innovations introduced by CECA, see “Salient Features of India’s Investment Agreements”, OECD, Investment for Development, Annual Report 2006. 20. For a succinct clear description of the applicable principles of public international law, see OECD Working Paper Moshe Hirsch, “Interactions between Investment and Non-Investment Obligations in International Law”, Section II, in Trade Dispute Management, 2006, Vol. 3, Issue 5.

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services sectors which are entitled to the liberalisation provisions of the agreement while liberalisation of services in general is covered by the ASEAN Framework Agreement on Services. Andean Community. Decision 439 of the Andean community provides for liberalisation of trade in services. The decision lays down th at the Commission will adopt an inventory of all the measures that are inconsistent with the principles of Article 6 (Market Access) and Article 8 (National Treatment) with the intention to eventually eliminate these measures and create an Andean Common Market in Services. Protection to investments in general is provided by Andean Decision 291. It is worth mentioning that both Decisions follow a negative list approach to the scheduling of specific commitments. Trans-Pacific Strategic Economic Partnership (TPSEP). The TPSEP contains a GATS based chapter on trade in services but no chapter on investment. The agreement however uses the negative list approach for the parties’ nonconforming measures. Therefore, even though the agreement does provide for liberalisation of the services sector, it does not provide for protection of investment in the services sector. COMESA. COMESA contains a BIT-like chapter on Investment Promotion and Protection. COMESA is still negotiating the liberalisation of services. Duplication of clauses. An oth er charac te ris tic of Japan ’s EPAs is the duplication, in both the Investment and Trade in Services chapters, of certain clauses which are of general application and not subject to country specific exceptions of reservations. This concerns in particular the Transfers clause, which, as in the case of the JSEPA, is much broader in scope in the Investment chapter than in the Trade in Services chapter. Neither chapter however addresses the issue of possible conflict in applying these two provisions. The obligations should therefore be looked at as “cumulative” where each party has to abide by the two transfer provisions. The duplication would not always lead to conflict.21 In case of conflict, unless otherwise provided, when issues fall under the coverage of the two different chapters, the parties would have to abide by the higher standard as provided by the rules of interpretation of international law.22

21. Martin Roy, “Implications for the GATS Negotiations on a Multilateral Investment Framework”, Journal of World Investment 4 (6, 2003) pp. 963-986. 22. Relationships between Investment Agreements, OECD Working Papers on International Investment 2004/1.

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EC Trade Agreements. The EC Trade Agreements with the Mediterranean reg ion . 23 and Chile. 24 provide two variations in the EC’s FTAs. The EC Agreements with countries in the Mediterranean mainly seek to liberalize services and investment in the future and to that end establish the necessary institutional framework and co-operation mechanisms. The EC-Chile Agreement is more recent and achieves greater liberalisation of Trade in Services and allows for “commercial presence/investment in services”. Other features set them apart, however, from other agreements described above. First, because of the shared competence between the European Community and the member states in the investment area, investment protection is largely covered by the member states’ own bilateral investment treaties while liberalisation of establishment and trade in services is covered by EC agreements. The structure of the investment obligations is also unique. These agreements may have separate chapters on trade in services, financial services, establishment and current payments and capital movements. The EC-Chile agreement has a chapter on Trade in Services (Title III, Chapter 1) inspired from the GATS.25 The chapter on Trade in Services defines a commercial presence and provides for specific commitments (positive lists) on both national treatment and market access. The Establishment chapter provides for National Treatment with respect to establishment in sectors listed in a separate Annex and subject to any conditions and qualifications set out therein (Article 132) but it “shall not apply to trade in services or financial services” (Article 130).26 The freedom of current account transactions and free movements of capital relating to direct investments is provided by Title V (Current Payments and Capital Movements) subject to certain exceptions.27 23. The relevant articles on investment are Articles 1, Title III (Right of Establishment and Services), Article 30-36 Title IV (Payments, Capital Movements and Other Economic Matters), Articles 48-52, 67 and Annexes V and VI (EU-Jordan). See http:/europa.eu.int/comm./external_relations/euromed/med_ass_agreements.htm. 24. The relevant articles on services investment in the Association Agreement with Chile: Part I, Title I, Articles 20-21; Part IV, Titles III, V, Annexes VII, VIII, X and XIV. See http:/europa.eu.int/comm./trade/issues:bilateral/countries/chile/euchlagr_en.htm. 25. Financial services are covered however separately by Chapter II of Title III. 26. Article 133 also states that each Party may regulate the establishment of legal and natural persons subject to the provisions of Article 132. 27. Article 164 provides that the the Parties shall allow, in freely convertible currency and in accordance with the Articles of Agreement of the International Monetary Fund, any payments and transfers of the Current Account between the Parties. Article 165 provides that the Parties shall allow the free movements of capital relating to direct investments made in accordance with the laws of the host country and investments established in accordance with the provisions of Title III (Trade in Services and Establishment) of this Part (of the Agreement) and the liquidation or repatriation of these capitals and of any profit stemming there from Article 165 provides that the Parties shall allow the free movements of capital relating to direct investments made in accordance with the laws of the host country and investments established in accordance with the provisions of Title III (Trade in Services and Establishment) of this Part (of the Agreement) and the liquidation or repatriation of these capitals and of any profit stemming there from. In addition, under Annex XIV, Chile reserves the right to maintain certain requirements regarding the transfers of the proceeds from the sale or liquidation of investments in Chile.

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The EC-Jordan Association Agreement is different. As for NAFTA-inspired agreements, it provides for a separate chapter on CBTS. With regards to investment, the agreement has a chapter on Establishment and a chapter on Payments and Capital Movements which apply to both goods and services. The chapter on establishment contains MFN and National Treatment obligations28 as well as certain provisions on key personnel. The Chapter on Payments and Capital Movements provides for the freedom of current and capital transactions subject to certain exceptional safeguards. The agreement, however, does not provide for other issues relating to investment protection such as expropriation.29 The methodology for listing liberalisation commitments also differ in the two agreements, the establishment and trade in services chapters in the EC-Chile agreement follow a positive list approach while the disciplines of the EU-Jordan agreement apply unless excluded by explicitly listed reservations.

Financial Services NAFTA-inspired Agreements All the NAFTA-inspired agreements reviewed, except for the Korea-Chile agreement, have separate chapters for financial services. The Financial Services chapter acts, in this case, as the depositary of the obligations with respect to investment and cross-border trade in financial services and states the interaction with the Investment and CBTS chapters. Only the provisions that are explicitly incorporated in the Financial Services chapter shall apply subject to any stated qualifications. This interaction has the effect of minimising the relationship with other chapters while allowing it to define provisions adapted to the special needs and requirements of this sector. For example, the chapter on Financial Services in the AUSFTA begins by first stating in Article 13.1 that the scope of the chapter is limited to measures adopted or maintained by a Party relating to a) financial institutions of the other Party;

28. Article 30.1 provides for MFN treatment for the establishment of Jordanian companies and National Treatment (post-establishment) by the Community and its member states to Jordanian companies; Article 30.2 provides for the best of MFN treatment or National Treatment as regards the establishment and postestablishment of Community companies. 29. In the realm of investment protection the chapter on Capital Movements provides: i) Article 48 of the agreement says that “Subject to the provisions of Articles 51 (difficulties for the operation of exchange-rate policy or monetary policy) and 52 (Balance of Payments), current payments connected with the movement of goods, person, services and capital within the framework of this Agreement shall be free of restrictions.” ii) Thereafter Article 49 provides that “there shall be no restrictions on the movement of capital from the Community to Jordan and on the movement of capital involving direct investment from Jordan to the Community”.

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b) investors of the other Party, and investments of such investors, in financial institutions in the Party’s territory; and c) cross-border trade in financial services (which excludes supply of a financial service in the territory of a Party by an investment in that territory). Thereafter article 13.1[1(2)] states that Chapters Ten (Cross-Border Trade in Services) and Eleven (Investment) apply to measures described in paragraph 1 only to the extent that such Chapters or Articles of such Chapters are incorporated into this Chapter. Then it goes on to incorporate Articles 10.11 (Denial of Benefits), 11.7 (Expropriation and Compensation), 11.8 (Transfers), 11.11 (Investment and the Environment), 11.12 (Denial of Benefits), and 11.14 (Special Formalities and Information Requirements). It also provides that Article 10.10 (Transfers and Payments) is incorporated into and made a part of the Chapter to the extent that cross-border trade in financial services is subject to obligations pursuant to Article 13.5 (National Treatment of Cross-Border Trade in Financial Services). Dispute settlement is also given a special treatment. Article 13.18 of the AUSFTA states that Section B (Dispute Settlement Proceedings) of Chapter TwentyOne (Dispute Settlement) applies as modified by this Article to the settlement of disputes arising under this Chapter. The scope and coverage of the financial services in KSFTA is more precise; Article 12.12(c) states that Section C of Chapter 10 (Investment) is hereby incorporated into and made a part of this Chapter solely for claims that a Party has breached Article 10.11 (transfers), 10.13 (expropriation and compensation), 10.16 (special formalities and information requirements) and 10.17 (denial of benefits), as incorporated into this Chapter. When an investor invokes the national treatment clause of the investment or the country exceptions on financial services, Article 12.13 (investment disputes in financial services) requires that the matter be referred to the Financial Services Committee for decision.

GATS-inspired Agreements Among the GATS-inspired agreements reviewed, only the EFTA-Korea, EFTA-Singapore and EC-Chile agreements contain a chapter on financial services. In the other agreements, financial services are covered by the Trade in Services Chapters. The EFTA-Korea chapter is clearly inspired by GATS as it contains verbatim many of its provisions. The chapter on Financial Services also provides that the provisions of chapter 3 (Trade in Services) apply to financial services only where specifically stated. Thereafter, the chapter goes on to include some of the definitions contained in GATS Annex on Financial Services and chapter on Trade in Services. All the provisions of the Investment Agreement apply to the chapter on Financial Services except to the extent of express limitations contained in the agreement. The Investment Agreement also has a specialised investor-state dispute settlement mechanism for issues relating to financial services. The EFTA-

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Singapore agreement contains additional provisions relating to Financial Services in Annex VIII agreement. This Annex mainly defines the relevant terms and provides for national treatment of financial service suppliers. The EC-Chile agreement contains a separate chapter on Financial Services which covers all four modes of supply. Annex IV to the Agreement lists the specific commitments by each Party on Market Access and National Treatment.

Part II. Implications for Investment Protection Since the Investment chapters of the RTAs are the main depositary of the traditional protections offered by bilateral investment treaties, the implications that various types of interaction may have for the level of investment protection thus impinge upon whether these disciplines apply to services as well to non-services sectors. Three key findings emerge from the analysis of the sampled agreements. First, the level of investment protection does not seem to be affected by the types of interaction followed. In all the agreements reviewed, investment in services benefits from the basic protections provided by the Investment chapter (namely expropriation, transfers, compensation for losses or investorstate dispute settlement). This is because the broad “asset-based” definition of investment which generally delineates the scope of application of these protections encompasses the narrower concept of “commercial presence” upon which the liberalisation obligations of GATS-inspired agreements are normally based. This is illustrated in Table 4.3. Even when the Trade in Services chapters incorporates basic protections from the Investment chapters – as it is the case of the India-Singapore Comprehensive Economic Co-operation Agre emen t or s ome Fin ancial Service s chapters – the Investment chapters’ protections apply to other investments that meet the asset-based definition of these chapters. Put differently, “commercial presence” defines the level of liberalisation provided by GATS-inspired services disciplines but not the level of investment protection. Second, if the protection accorded by the Investment chapters appears to be indifferent to the mode of interaction chosen, the level of investment protection is no doubt determined by the coverage and scope of the protection provisions. As with any other obligations, this depends on what the negotiators set themselves to achieve at the beginning of the negotiations and what they ultimately obtain at the end of the negotiating process. As no negotiation is the same, the types of investment protection included and/or the way they are formulated may vary from one agreement to another. This is illustrated by Table 4.4. Although both the NAFTA-inspired and GATS-inspired

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Table 4.3. Scope of application of Investment chapters’ protections1 Agreement(s)

Definition of commercial presence in Services chapter

Definition of investment in Investment chapter

Scope of application of investment protection disciplines

NAFTA and NAFTA-inspired agreements NAFTA

Asset based definition – Closed list – includes FDI, portfolio investment and various forms of tangible and intangible property

All protection (and liberalisation) disciplines of the Investment chapter apply to goods and services.

Japan-Mexico EPA

Asset based definition – Closed list – includes FDI, portfolio investment and various forms of tangible and intangible property

All protection (and liberalisation) disciplines of the Investment chapter apply to goods and services.

US-CAFTA-DR US-Morocco FTA Australia-US FTA Chile-Korea FTA Korea-Singapore FTA

Asset based definition – Open List – includes FDI, portfolio investment and various forms of tangible and intangible property

All protection (and liberalisation) disciplines of the Investment chapter apply to goods and services.

GATS-inspired agreements EFTA-Singapore FTA New ZealandSingapore FTA EFTA-Korea FTA

Asset-based definition – Open list – includes FDI, portfolio investment and various forms of tangible and intangible property

GATS definition of commercial presence

All the protections of the Investment chapter (separate Investment Agreement in the case of EFTA-Korea FTA) apply to commercial presence.

Japan-Singapore EPA Japan-Malaysia EPA

Asset based definition – Open list – includes FDI, portfolio investment and various forms of tangible and intangible property

GATS definition of commercial presence

All the protections of the Investment chapter apply.

Australia-Thailand FTA

Foreign direct investment, as defined by IMF

GATS definition of commercial presence

The protection of the Investment Chapter (limited to post-establishment, fair and equitable treatment and full protection and security of investment) apply to commercial presence.

India-Singapore ECA

Asset based definition – Open list: includes FDI, portfolio investment and various forms of tangible and intangible property

GATS definition of commercial presence

The Services chapter incorporates selected protections of the Investment chapter to be applied to commercial presence. The protection of the Investment chapter applies to other investments.

ASEAN Agreement Asset-based definition of investment for Promotion in AAPI – Open list and Protection of Investment, 1987 (AAPPI) and ASEAN Framework Agreement on Services (AFAS)

Commercial presence in AAPPI protection applies AFAS not explicitly defined, to investment in services. but implicitly follows GATS

Andean Community

Direct Foreign Investment

GATS definition of commercial presence

Except for Free Transfers of intra-Andean direct investments, no investment protection disciplines.

EC-Chile Association Agreement

Direct investment including branches

GATS definition of commercial presence

Free Transfers.

EC-Jordan Association Direct investment including branches Agreement

GATS definition of commercial presence

Trans-Pacific EPA

GATS definition of commercial presence

COMESA

Closed list

No investment disciplines (only GATSinspired obligations. Non investment protection disciplines.

1. These are the general obligations on payments and transfers, fair and equitable/minimum standard, full protection and security, expropriation and compensation.

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Table 4.4. Key investment Protections of Investment chapters

Agreement(s)

Protection Fair and Full from strife/ equitable protection Transfers Compensation treatment and security for losses

Expropriation Direct

Indirect

InvestorState arbitration

NAFTA and NAFTA-inspired agreements NAFTA

Yes

Yes

Yes 1

Yes

Yes

Yes

Yes

Japan-Mexico EPA

Yes1

Yes1

Yes 1

Yes

Yes

Yes

Yes

Yes1

Yes1

Yes 1

Yes

Yes

Yes2

Yes3

Korea-Singapore FTA Australia-US FTA US-CAFTA-DR US-Morocco FTA GATS-inspired agreements EFTA Singapore FTA

Yes

Yes

Yes 1

Yes

Yes

EFTA-Korea

Yes

Yes

Yes 1

Yes

Yes

Yes

Yes1

Japan-Singapore EPA

Yes

Yes

Yes 1

Yes

Yes

Yes

Yes

Japan-Malaysia EPA

Yes

Yes

Yes 1

Yes

Yes

Yes

Yes

India-Singapore ECA

No

Yes

Yes 1

Yes

Yes

Yes

Yes

Australia-Thailand FTA

Yes

Yes

Yes 1

Yes

Yes

Yes

Yes3

ASEAN Agreement for Promotion and Protection of Investment, 1987 (AAPPI) as confirmed by ASEA Investment Framework

Yes

Yes

Yes 1

Yes

Yes

Yes

Yes3

New-Zealand Singapore CER

No

No

Yes 1

No

No

No

Yes1

No

No

No

No

EC-Chile Association Agreement EC Jordan Andean Community

Yes No

No

Yes2

2

Yes 2

No investment protection disciplines

Trans-Pacific EPA

No investment disciplines

COMESA

No Investment disciplines

F&ET – Fair and equitable treatment 1. Interpretative Note on minimum standard of treatment. Full protection and security 2. Interpretative Note on minimum standard of treatment. Transfer of funds 1. Allows for current and capital transactions. 2. Free movements of capital relating to direct investment and the liquidation and repatriation of these capitals. Expropriation Investor-state arbitration 1. No automatic consent given by the states. 2. No automatic consent for pre-establishment disputes. 3. Post-establishment only.

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agreements are largely based on BIT-like protections30 and are thus broadly similar, some differences can still be observed. A number of the reviewed NAFTA-inspired agreements have developed interpretative notes to clarify the scope of application of the fair and equitable treatment standard and/or that of the expropriation provisions. If this practice is not apparent in GATS-inspired agreements, there are other distinctive features. The India-Singapore ECA does not contain any fair and equitable treatment standard. Some pre-conditions are imposed on the recourse to investor-state arbitration in the case of the EFTA-Singapore and EFTA-Korea agreements and New-Zealand Singapore agreement. In the case of the ASEAN agreements and the Australia-Thailand FTA, investor-to-state arbitration applies only to post-establishment. Three agreements (Andean Decisions, Trans-Pacific EPA and COMESA) do not contain any investment protection or investment disciplines. A great majority of the reviewed agreements contain robust provisions on transfers however. In EC agreements, they apply to free movements of capital relating to direct investment and the liquidation and repatriation of these capitals. These observations are consistent with the recent findings of the work of the Investment Committee on international investment agreements.31 Third, if there are no apparent legal or technical impediments to the inclusion of BIT-like protections into RTAs, this does not necessarily imply that RTAs’ investment chapters always supplant BITs. Again this depends on the particular circumstances and outcome of each negotiation. As Table 4.5 shows, various situations are possible. For a majority of the RTAs reviewed, the basic protections of the Investment chapters constitute, in the absence of BITs, the first obligations ever contracted by the parties between them. This is the case for AUSFTA, NAFTA, KSFTA, TAFTA, Japan’s EPAs or CECA. But the pre-existence of BITs may also lead the parties to continue maintain them along side RTAs, with both set of rules complementing each other. This is the case for several other agreements reviewed (EFTA-Chile agreement, EC agreements, ASEAN Agreements and Andean Decisions). In other words, BITs seem to be replaced by RTAs only when the latter’s contents and coverage are considered to be clearly superior or more comprehensive to those of BITs (for example EFTAKorea Investment Agreement as compared to Korea-Switzerland BIT or US-Morocco FTA as compared to US-Morocco BIT). In the absence of any RTA 30. These provisions were initially elaborated by the 1967 OECD Draft Convention on the Protection of Foreign Property. 31. Stocktaking of Developments in Investment Agreements, DAF/INV/WD/(2005)10/ FINAL and International Investment Law: A Changing Landscape, (2005).

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Table 4.5. BITs concluded by RTA partners Agreement(s)

BITs?

Partners NAFTA and NAFTA-inspired agreements

NAFTA (1994)

No

Japan-Mexico EPA (2006)

No

Japan-Singapore EPA (2006)

No

Korea-Singapore FTA (2006)

No

Australia-US FTA (2005)

No

US-CAFTA-DR FTA (2006)

Yes

US-Honduras (2001).

US-Morocco FTA (2006)

Yes

US-Morocco (1991). GATS-inspired agreements

EFTA Singapore FTA (2003)

Yes

Singapore-Switzerland (1978).

EFTA-Korea (2006)

Yes

Korea-Switzerland (1971).

Japan-Singapore EPA (2006)

No

Japan-Malaysia EPA (2006)

No

India-Singapore ECA (2005)

No

Australia-Thailand FTA (2005)

No

ASEAN Agreement for Promotion and Protection of Investment, 1987 (AAPPI) and AIA (1998)

Yes

New-Zealand Singapore CER (2001)

No

EC-Chile Association Agreement (2005)

Yes

Chile-Poland (2000), Chile-Portugal (1998), Chile-Spain (2003), Chile-Romania (1997), Chile-Sweden (1995) and Chile-United Kingdom (1997).

EC-Jordan (2003)

Yes

Jordan-Austria (2001), Jordan-Bulgaria (2003), Jordan-Czech Republic (2001), Jordan-France (1979), Jordan-Germany (1977), Jordan-Greece (2005), Jordan-Italy (2001), JordanNetherlands (1998), Jordan-Poland (1999), Jordan-Romania (1999), Jordan-Spain (2000), Jordan-Switzerland (2001) and Jordan-United Kingdom (1980).

Andean Community (1991)

Yes

Bolivia-Ecuador (1997), Bolivia-Peru (1995), Columbia-Peru (1994), Ecuador-Peru (1999), Ecuador-Venezuela (1995) and Peru-Venezuela (1997).

Trans-Pacific EPA (2006)

No

COMESA (1994)

Cambodia-Indonesia (1999), Cambodia-Malaysia (1994), Cambodia-Philippines (2000), Cambodia-Singapore (1996), Cambodia-Thailand (1997), Cambodia-Viet Nam (2001), Indonesia-Lao People’s Democratic Republic (1994), Indonesia-Malaysia (1994); IndonesiaPhilippines (2001), Indonesia-Singapore (2000), Indonesia-Thailand (1998), Lao People’s Democratic Republic-Malaysia (1992), Lao People’s Democratic Republic-Myanmar (2003), Lao People’s Democratic Republic-Singapore (1998), Lao People’s Democratic RepublicThailand (1990), Lao People’s Democratic Republic-Viet Nam (1996), Malaysia-Viet Nam (1990), Myanmar-Philippines (1998), Myanmar-Viet Nam (2000), Philippines-Thailand (1996), Philippines-Viet Nam (1993), Singapore-Viet Nam (1992) and Thailand-Viet Nam (1992).

Burundi-Comoros (2001), Comoros-Egypt (2000), D.R. Congo-Egypt (1998), D.R. CongoSouth Africa (2004), D.R. Congo-Switzerland (1973), Djibouti-Egypt (1998), Egypt-Malawi (1999), Egypt-Mauritius (2003), Egypt-Sudan (2003), Egypt-Swaziland (2000), EgyptUganda 1995), Egypt-Zambia (2000), Egypt-Zimbabwe (1999), Eritrea-Uganda (2001), Ethiopia-Libya (2004), Ethiopia-Mauritius (2003), Ethiopia-Sudan (2000), EthiopiaUganda (2003), Libya-Egypt (1991), Madagascar-Mauritius (2005), Malawi-Zimbabwe (2003), Mauritius-Burundi (2001), Mauritius-Comoros (2001), Mauritius-Rwanda (2001), Mauritius-Swaziland (2000), Mauritius-Zimbabwe (2000), Uganda-Ethiopia (2003), Uganda-Zimbabwe (2003), and Zimbabwe-Malawi (2003).

Sources: Andean Community, COMESA, OECD and UNCTAD.

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investment disciplines, the parties have to rely on the legal guarantees provided by BITs. Those contracted between COMESA partners, for instance, are listed in the last entry of the table.

Part III. Implications for Investment Liberalisation 1. GATS and the NAFTA-inspired approach to the liberalisation of investment in services Part I of the study has described the interaction between provisions on investment and trade in services and Part II has addressed the implications for the protection of investment. We turn now to the implications for the degree of liberalisation achieved. Two models of liberalisation commitments can be identified. The first model is represented by NAFTA, the first major RTA with investment content, which groups provisions on investment for all sectors and grants national treatment and most-favoured-nation treatment in all covered sectors with a negative list of reservations. The second model is based on the GATS approach that is followed in other types of agreements and combines th e positive listing of s ectors wh ere countries undertake commitments with a negative list of limitations that countries wish to maintain in scheduled sectors. This part of the study focuses on investment in services and assesses the degree of liberalisation achieved according to the approach adopted with respect to the investment/services interaction. The first section describes the GATS approach and the secon d s ection the NAFTA-ins pired lists of reservations. Section three provides the results of the analysis of the schedules of commitments in ten of the RTAs presented in Part I.32 Section four compares the regional schedules of commitments with GATS schedules of commitments. It identifies to what extent the regional agreements are “WTO-plus”, that is whether they offer more at the regional level than the multilateral liberalisation of inve stment in the GATS (Mode 3). The methodology used to analyse the schedules of commitments is detailed in Annex 4.A2. It is also in this Annex that can be found the tables describing the commitments on investment in services in the RTAs and the comparison with GATS schedules of commitments on Mode 3.

a) The GATS-inspired approach to scheduling commitments The General Agreement on Trade in Services (GATS) covers all forms of trade in services, including Mode 3, “the supply of a service […] by a service 32. Five of these agreements have NAFTA-inspired lists of reservations (AUSFTA, NAFTA, US-Morocco, Japan-Mexico and Chile-Korea) and the other five have GATSinspired schedules of commitments (Japan-Singapore, TAFTA, EU-Chile, EFTASingapore and India-Singapore).

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supplier of one member, through commercial presence in the territory of any other member” (Article I). It organises “a multilateral framework of principles and rules for trade in services with a view to the expansion of such trade under conditions of transparency and progressive liberalisation”. The liberalisation of investment in GATS is undertaken through commitments in sectors and sub-sectors. Although the GATS is often presented as a model of a “positive list” approach, it can be more accurately described as an hybrid model where specific commitments on market access (Article XVI) and national treatment (Article XVII) are made in a positive list of sectors, but where limitations to these commitments are presented in a negative list. The MFN principle in GATS is a general obligation and applies to all services sectors covered by the agreement with a negative list of exemptions. Another characteristic of GATS schedules is that limitations are listed by mode of supply. GATS schedules of commitments are considered by some authors as difficult to read or lacking transparency (Hoekman, 1995; Stephenson, 2002; Mattoo, 2005).33 To assess the real level of market access, it is necessary to determine the activities covered in a given sector, to read the limitations on market access and national treatment listed for this sector according to the mode of supply, to check that there is no horizontal limitation that could apply and also to look at the possibility of MFN exemptions that can be found in a separate table. As only sectors where commitments are made are listed, it is necessary to make a deduction to find the sectors or sub-sectors that were excluded from the schedule and a minimum knowledge of the classification is therefore required. The absence of a commitment in a sector does not mean that foreign investment is prohibited or that discriminatory treatment is effectively applied to foreign investors. There is simply no information on the kind of restrictions that can exist in non-committed sectors (and it could be the case that no restriction exists). Additional research would be needed to know the kind of regulation applicable and the information cannot be in the schedule of commitments. Hence the “lack of transparency” pointed out by some analysts. In financial services, parties have the option to schedule their commitments in accordance with the n eg a tiv e l i st a p p ro ac h o f th e G AT S A n n e x o n U n d e r st a n d in g o n Commitments in Financial Services. Virtually all OECD countries and a few non-OECD countries have indicated to use this option.

33. Guidelines for the scheduling of specific commitments under GATS have been adopted by the WTO Council for Trade on Services (S/L/92, 28 March 2001). Transparency is a general obligation of GATS (Article III) requiring that all measures affecting trade in services shall be made publicly available.

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Moreover, as GATS covers the four modes of supply of services, the definitions provided for market access, national treatment and mostfavoured-nation treatment are not specific to investment (which is “commercial presence” in GATS, already a somewhat more restrictive concept). In particular, there is no distinction made in GATS between pre- and post-establishment. Market access is defined in Article XVI through a list of limitations that cannot be adopted or maintained in sectors where market access commitments are taken.34 While the concept of “market access” could be understood as an equivalent of “pre-establishment” in the realm of investment, this definition does not lend itself to such an interpretation as national treatment limitations can also cover the pre-establishment phase. As a consequence, some authors point out that there is some confusion in GATS about the relationship between market access and national treatment, especially in the case of investment (Low and Mattoo, 2000).35 A generally accepted interpretation(although not shared by all) is that national treatment applies to any existing or future market access commitment even when they are not scheduled (Mattoo, 1997). Despite these issues, the GATS approach to scheduling commitments on investment in services has been quite popular in regional trade agreements. In the list of RTAs analysed in this study, TAFTA, Japan-Singapore, JapanMalaysia, EC-Chile, EFTA-Singapore, EFTA-Korea, New Zealand-Singapore, and India-Singapore have GATS-like schedules of commitments. There are several reasons to explain why the GATS approach is followed in these agreements. First, it is an easy way to ensure the consistency of the regional liberalisation with multilateral disciplines and to use a model wellknown by negotiators where commitments are fully understood. Reproducing GATS at the regional level certainly help negotiators to strike a deal and ensure consistency with the GATS, at least for governments who are used to the GATS approach and have already determined in the GATS context the kind of commitments they are willing to make (or not make). Second, it is likely that those countries that used the GATS as a model endorsed its approach and in particular the flexibility offered not to bind themselves in a given sector even if no restriction may actually apply. In that sense, one can expect agreements 34. This list includes limitations on: (1) the number of service suppliers; (2) the value of service transactions or assets; (3) the total number of service operations or total quantity of service output; (4) the total number of natural persons that may be employed; (5) the type of legal entity or joint venture that may supply a service; and (6) the participation of foreign capital. 35. The confusion comes also from a scheduling convention set out in Article XX:2 of GATS. This article states that when a limitation is relevant for both Articles XVI (market access) and XVII (national treatment), it should be entered in the “market access” column of the schedule and should be understood as being also a limitation to national treatment.

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with a GATS approach to reproduce the same kind of commitments as in GATS, going further at the regional level or with a bilateral partner than it is possible at the multilateral level. When an agreement is described as reproducing the GATS approach, it goes further than simply having a positive list of commitments or a schedule of commitments presented in the same way as in a GATS schedule. These agreements tend to incorporate different provisions of the GATS and make many explicit references to it. First, they generally refer to GATS for the definitions of the main terms used in the services chapter and their schedules of commitments such as “trade in services”, “service supplier” or “market access”. For example, Article 3.3 of the EFTA-Korea agreement says that “The following definitions of Article I of the GATS are incorporated into and made part of this Chapter […]” and subsequently “The following definitions of Article XXVIII of the GATS are hereby incorporated and made part of this Chapter […]”. Similarly, the articles on MFN treatment, market access, and national treatment usually refer to, respectively, Article II, Article XVI and Article XVII of the GATS. Most of the GATS-inspired RTAs tend to reproduce a schedule of commitments similar to their GATS schedule, with additional commitments in specific sub-sectors (see Section 4 below). In the case of the ThailandAustralia Free Trade Agreement (TAFTA), the presentation of the schedule is however different. Instead of reiterating the commitments made in the GATS, only the additional sub-sectors liberalised are listed. In particular, while limitations are scheduled both horizontally, and by reference to specific sectors and sub-sectors, per the GATS approach, they are not scheduled by reference to mode of supply, market access or national treatment. Instead, all limitations in relation to each horizontal commitment and sector specific commitment are listed together. Future liberalisation is often foreseen in the RTAs along the same lines as in GATS Article XIX on progressive liberalisation. The mechanism involved is generally a review of the commitments after the entry into force of the agreement. For example, in the EU-Chile association agreement, Article 100 indicates that the Parties shall review Chapter 1 on services “three years after the entry into force of [the] Agreement, with a view to further deepening liberalisation and reducing or eliminating remaining restrictions on a mutually advantageous basis and ensuring an overall balance of rights and obligations”. An agreement like the EFTA-Singapore FTA shows a stronger commitment to future liberalisation, as it aims at “the elimination of substantially all remaining discrimination between the Parties with regard to trade in services […] at the end of a transitional period of ten years from the date of entry into force of [the] Agreement”. It also indicates that “such review

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shall continue if substantially all remaining discrimination has not been eliminated at the end of this transitional period”.

b) NAFTA-inspired lists of reservations In NAFTA Chapter 11, national treatment (Article 1102) and MFN (Article 1103) are granted to all covered investments “with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments”. However, there are exceptions and reservations to the application of these two obligations. Article 1108 states that national treatment and MFN do not apply to a list of non-conforming measures set out in Annex I (Reservations for existing measures and liberalisation commitments), Annex II (Reservations for future measures), Annex III (Activities reserved to the State) and Annex IV (Exceptions from most-favoured-nation treatment). The reservations are all presented according to the same layout with information on the sector and sub-sector concerned, the industry classification (where national classifications can be used), the obligations against which a reservation is taken, level of government, the measure, and its description. Some guidelines on the interpretation of the schedules are provided at the beginning of each annex. In that sense, the NAFTA-inspired schedules of commitments are easier to read. They also tend to be shorter as a consequence of the top-down approach, since it is not necessary to give an exhaustive list of all the sectors and sub-sectors where commitments are made. Originally, Annex I of NAFTA was to have listed all non-conforming measures maintained at the sub-national level, within two years of the date of entry into force of the agreement. However, in 1996, NAFTA countries decided to “grandfather” existing restrictions (that is to freeze existing measures with a commitment to not make measures more non-conforming in the future) and no list of non-conforming measures at the local or sub-federal level is annexed to the agreement. The difference between existing and future measures (between Annex I and Annex II in NAFTA) is important. Existing non-conforming measures that are listed in Annex I cannot be changed unless it is to increase the conformity of the measure with the obligation (“ratchet” effect). Only for activities or sectors listed in Annex II can future non-conforming measures be adopted. That is why the NAFTA scheduling has been presented as a “list it or lose it” approach. If a government has not included a reservation in its schedule in the period where it could do so, it cannot adopt any new measure that would be discriminatory for foreign investors. For each reservation listed, a phase-out commitment can be taken. However, there is no obligation to commit to future liberalisation and the phase-out element in the schedule can be filled in with

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“none”. However, as in the GATS, nothing prevents the parties from progressively liberalising measures and lifting reservations if they so wish. A key difference between the GATS and NAFTA approaches is that the ratchet mechanism of the latter locks in liberalisation as it occurs and thus provides an added degree of predictability for investors. In the Annex on future measures (Annex II in NAFTA), some reservations can be very broad with potentially a wide impact on the investment regime. For example, it is not uncommon to find reservations such as Country X “reserves the right to adopt or maintain any measure relating to investment in […].” In that case, the outcome is not different than an “unbound” in a GATS schedule. In the Annex on future measures, it is possible to identify sectors that may be subject to non-conforming measures without listing a specific measure. It should also be kept in mind when comparing NAFTA lists of nonconforming measures and GATS-inspired schedules of commitments that in the latter, a broad reservation with a potentially discriminatory treatment affecting different sectors will have to be reiterated for each sector (unless it can be put in the horizontal section of the schedule). With the negative list approach it is possible to state one time the law involved and to list the actual sectors implicated by the reservation. The NAFTA approach seems to have gained ground among regional trade agreements. In the sample of RTAs analysed in this study, AUSFTA, CAFTA-DR, US-Morocco, Japan-Mexico, the Trans-Pacific Strategic Economic Partnership, C h i le - Kor e a a n d Ko re a - S i n g a p or e h av e N A F TA - l i k e sch e d u l e s o f commitments. The approach has diffused beyond original NAFTA signatories, as the Trans-Pacific Strategic Economic Partnership, Chile-Korea or KoreaSingapore are agreements where no party is a member of NAFTA. What is common to these agreements is not only the negative list approach but also the way the lists are organised and presented, in particular the difference between existing measures and future measures. There are however small variations in the NAFTA-inspired agreements. For example, the phase-out element is not always present and some agreements, such as USMorocco, have reservations that apply during a transitory period. But the way investment is liberalised and commitments are made is the same. NAFTA-inspired agreements are nonetheless influenced by GATS in the financial services chapters which incorporate the results of the WTO negotiation on financial services that took place after the signature of GATS. An equivalent to the concept of “market access” appears in Article 1403 of NAFTA as “establishment of financial institutions”. There is even a more explicit reference to GATS in the agreement between Mexico and Japan where GATS commitments on financial services are incorporated in the agreement.

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It highlights that GATS schedules and NAFTA lists of reservations are not incompatible and can be combined. In the NAFTA approach, new services are automatically granted national treatment and most-favoured-nation treatment, since no reservation could have been taken for them at the time the agreement was signed (another manifestation of the “ratchet” effect previously mentioned). In a GATS-like schedule of commitments, these new services would not be covered if they are in sectors or sub-sectors without commitments.36 However, it is possible in the NAFTA approach, through the list of reservations on future measures, to prevent new services from falling automatically under the disciplines of the agreement. In the Mexico-Japan FTA for example, Japan has a reservation to deal with new services. As highlighted before regarding GATS, the defining characteristic of the approach is not solely in the way commitments are scheduled. If a negative list approach can be seen as contributing to promote the liberalisation of investment, the pro-liberalisation approach in NAFTA relies on a broader set of disciplines that supplement national treatment and MFN treatment disciplines and that have been described in Part I: ●

Article 1104 (standard of treatment) accords to investors the better of MFN or national treatment.

●

NAFTA includes provisions on performance requirements (Article 1106) that are very comprehensive and that are extended to services.

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There are also provisions prohibiting certain types of nationality requirements for senior management (Article 1107).37

●

Lastly, as emphasised before, the definition of the investor is broader than the GATS commercial presence of a service provider. The origin requirement is thus more liberal and all types of established companies benefit from the liberalisation commitments (Stephenson, 2002).

To the extent that NAFTA-inspired RTAs follow this approach – and they generally do so – they have the same liberalising bias that can be found in NAFTA.

36. An example often mentioned is the case of sectors “unbound due to lack of technical feasibility”. Mode 3 is however not concerned. When the new service is in sectors or sub-sectors where commitments have been made, its classification and the existence of the commitment could be questioned. 37. Article 1107 of NAFTA prohibits in its first paragraph requirements that an investor “appoint to senior manag ement positions individuals of any particular nationality”. The second paragraph specifies that a Party may require that a majority of a board of directors, or any committee thereof, “be of a particular nationality, or resident in the territory of the Party”, provided that such requirements do not materially impair an investor’s control over its investment.

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c) The degree of liberalisation achieved in the RTAs To assess to what extent investment in services has been liberalised in regional trade agreements and to compare the NAFTA and GATS approaches, an analysis of the schedules of commitments on investment in services has been conducted for ten RTAs. The details of the methodology are presented in Annex 4.A2, including a certain number of caveats that have to be acknowledged in such an analysis. The exercise aims to provide some transparency on the schedules of commitments in RTAs and to understand the underlying forces of liberalisation of investment in services. The interesting question is to know if there is a relationship between the a pp roa ch foll owe d in sch e dulin g com mitm en ts a nd th e deg ree of liberalisation achieved. One might expect GATS-inspired agreements to reproduce the same level of commitments as in the GATS and some authors have questioned the real liberalisation of services trade in regional trade agreements of this type (as GATS schedules at the time of the end of the Uruguay round were seen as a status quo rather than a higher level of access to the market). While NAFTA and the negative list approach are often considered as more favourable to liberalisation, it is also important to check if lists of reservations do not introduce restrictions that would make these agreements not so different than the ones following a GATS approach. Many authors have asked such questions but there is very little detailed analysis of the schedules of commitments in RTAs.38 Tables 4.A2.1 to 4.A2.3 summarise the results of the analysis. Table 4.A2.1 shows the commitments in five RTAs with a NAFTA-inspired approach to liberalisation (Australia-US, NAFTA, US-Morocco, Mexico-Japan and ChileKorea). All the agreements using a negative list approach are agreements with very few reservations and where no sector has been totally excluded. There are some sectors where some activities or sub-sectors have no commitments, either because of a public monopoly (“activities reserved to the State” in the schedules of Mexico) or because of a broad reservation on future measures (where the country reserves the right to maintain or adopt any measure in a given sub-sector). There are only a few reservations of this type in sectors that have been traditionally more regulated with a certain degree of state intervention (communication services, health related and social services, transport services and some specific business services). No sector is however in our analytical category of “commitments in a limited number of sub-sectors” (where less than 75% of the sector has no limitations). A number of reservations are listed, in particular in business

38. Such an analysis can be found in Stephenson (2002) and recently in Roy et al. (2006) and Fink and Molinuevo (2007).

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services, communication services, financial services, health-related and social services and transport services. But their number is again not very high and these reservations are not here to exclude some services from the liberalisation but to pinpoint exceptions to national treatment or mostfavoured-nation treatment (that is the difference in the table between the colour of the cell – which shows the level of commitments – and the number reported – which indicates the reservations listed). Table 4.A2.2 presents the results of an analysis carried out for five agreements with a GATS-inspired schedule of commitments on investment in services. There is a definite difference with Table 4.A2.1. Entire sectors can be without commitments in the case of these agreements. For example, Chile in the EU-Chile Association Agreement has no commitments in educational services, health related and social services and “other services not included elsewhere”. India in its agreement with Singapore has also 3 out of 12 sectors without any commitment (educational services, environmental services and “other services not included elsewhere”). There are also sectors where only a limited number of commitments have been made (appearing as grey plain cells in the Table). This means that less than 75% of the sub-sectors of the GATS W/120 classification have commitments. It is often the case for communication services (where few or no commitments are made in postal and courier services, as well as audiovisual services) or transport services (where not all of the means of transportation are generally included). There are very few “blank cells” that would indicate a commitment in the whole sector and the most frequently found category is “commitments in most of the sector”. Here the positive rather than negative listing approach plays a role. Countries generally do not list the “other” sub-category in their schedules. It is often the case that commitments are made in all the subsectors of the classification but not the last one which is the “other” category, grouping services of the same sector not listed before.39 The comparison between Tables 4.A2.1 and 4.A2.2 should therefore be made carefully. In practice, there might be a very small difference in the investment regime when the cell is blank or has a lattice pattern in the Table, especially if the “other” sub-sector does not correspond to any meaningful activity. The difference that is worth taking note of is in the sectors where few commitments or no commitments are made. This is the main difference between agreements in Tables 4.A2.1 and 4.A2.2.

39. This is true for the twelfth sector “Other services not included elsewhere” where only 8 countries among all WTO Members have taken commitments. But it is also the case that few commitments are made inside each of the other eleven sectors where there is also a sub-category for sub-sectors not listed in the classification.

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As far as the number of limitations is concerned, there is a tendency to find higher numbers in the GATS-inspired agreements, but as pointed out before, this can be a consequence of the way the limitations are listed. The limitations are also concentrated in a few sectors, in particular financial services and business services. Another characteristic of the GATS-inspired agreements seems to be that countries prefer to exclude a sub-sector (i.e. to not list it in the schedule) rather than including it with all the existing limitations. This cautious approach is not possible in the top-down approach of NAFTA where all reservations must be listed. Another caveat regarding the number of limitations concerns the non-conforming measures at the local or sub-federal level. In GATS-inspired agreements, the schedule generally covers all government levels. Limitations that apply only in a province or state and not at the federal level are separately listed. In NAFTA-inspired agreements, while this need not be inherent to the negative list approach, non-conforming measures at the sub-federal level are generally not listed, as previously mentioned regarding NAFTA. Technically, there could be the same level of commitments with a positive list or a negative list. Results similar to those found in Table 4.A2.1 for NAFTA-inspired agreements could be reproduced in GATS-type agreements by scheduling all the sectors of the W/120 classification. Looking at the schedule of Japan in the Japan-Singapore FTA, it is interesting to see that there are several sectors with full coverage of all sub-sectors (construction, distribution, education, environmental and financial services). Conversely, it would be possible for countries in NAFTA-inspired agreements to reserve the right to maintain or adopt any measure in a whole sector, such as educational services or health related and social services. But this is not the case in the agreements analysed. Parties to the US-Australia, NAFTA, US-Morocco, Japan-Mexico and Chile-Korea FTAs have listed reservations, including the possibility of taking any discriminatory measure in some activities or even prohibiting investment when the sub-sector is a public monopoly but it does not lead to the exclusion of full sectors of the scope of the liberalisation commitments. From the comparison between Table 4.A2.1 and 4.A2.2 in Annex 4.A2, it is clear that NAFTA-inspired agreements have the advantage in terms of sectors covered by non-discriminatory principles when the agreement is signed. However, the analysis should be completed by taking into account several differences in the GATS-inspired and NAFTA-inspired approaches to scheduling liberalisation commitments. Table 4.6 provides a summary of these main differences. It is not the objective of this study to settle the debate on positive versus negative lists of commitments but the following points should be considered: ●

GATS-inspired agreements establish a progressive and selective liberalisation of investment in services. The full liberalisation is generally

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referred to as an objective in the agreement and the RTA provides for reviews of commitments in order to achieve this objective. NAFTA-inspired agreements in contrast can be described as “one-shot agreements” where from the onset all sectors are covered by the non-discriminatory disciplines and where further liberalisation is likely to occur through autonomous liberalisation (automatically binding in the agreement through the “ratchet” mechanism). To fully assess the degree of liberalisation achieved in each type of agreement would require taking into account future liberalisation in the GATS-inspired agreements.40 ●

While the sectoral coverage of agreements provides useful information on the degree of liberalisation achieved, the type of commitments also matters. For example, GATS-inspired agreements cover non-discriminatory quantitative restrictions as one type of limitation to market access while NAFTA-inspired agreements do not deal with this type of barriers in their investment chapter. On the other hand, while commitments are bound in both GATS- and NAFTA-inspired agreements, there is in addition a ratchet me ch an ism in NA FTA -ins pired agre eme n ts tha t locks in furthe r liberalisation of non-conforming measures.

●

Regarding the transparency achieved, the top-down approach of NAFTAinspired agreements lists in theory all reservations to non-discriminatory disciplines and can offer predictability and certainty to investors as the investment regime is fully stated in the agreement. The idea of greater transparency for negative lists can however be nuanced when not all limitations are listed (e.g. sub-federal non-conforming measures). In GATSinspired agreement, if schedules of commitments can be said to a certain extent to be less transparent, transparency is a general obligation (that applies therefore to all sectors) and information on the investment regime has to be provided to investors.

●

Moreover, the way reservations are listed in the GATS-inspired agreements is not very different than in the NAFTA-inspired agreements. In both cases, it is a negative list explaining where there are exceptions to the nondiscriminatory treatment. The positive versus negative list approach concerns only the coverage of the schedule (the number of sectors where commitments are made). There is a complexity inherent to the nature of the exercise and negative lists as well as positive lists have to manage the issue of limitations that apply to all sectors, the interpretation of “national treatment”, “MFN” or “market access” in the context of the specific measure scheduled, the issue of the definition of services sectors and activities, the

40. As the agreements analysed are relatively recent it is not possible to assess yet the pace at which new sub-sectors or sectors are added in schedules of commitments that are reviewed.

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difference between temporary, existing and future non-conforming measures, etc. One advantage of NAFTA-inspired schedules is that the reservation can be explained in greater detail and more information provided (in particular on the domestic laws involved). ●

The negative list approach is also more favourable to liberalisation when new services are introduced or become tradable as a consequence of technological progress. These new services are automatically covered by non-discriminatory disciplines in NAFTA-inspired RTAs (unless provided otherwise in the Annex on future reservations), whereas measures can be adopted if these new services are not in a sector scheduled in the case of a GATS-inspired agreement.

●

GATS-inspired agreements can be said to provide for a higher degree of flexibility because a country can have a more liberal investment policy than reflected in its schedule of commitments while preserving options to regulate a given sector. As long as the sector is not committed or reservations have been made, it is possible to (re-)introduce nonconforming measures. Of course, this added flexibility reduces the transparency and predictability of the investment regime, thus creating a trade-off. In NAFTA-inspired agreements, the ratchet and standstill mechanisms automatically bind any liberalisation of a non-conforming measure that was listed in the Annex on reservations for existing measures. Any liberalisation of a measure becomes a commitment in the RTA. In the context of NAFTA-inspired agreements, flexibility can however be introduced through the Annex on future reservations, where full sectors can also be exempted from non-discriminatory treatment with the possibility of introducing non-conforming measures in the future.

What emerges from the above points is that the differences between the positive and negative list approach are not so marked in the sense that any country can use one approach or the other to achieve the same degree of liberalisation, transparency, flexibility and predictability. It is important to make a distinction between the practice (the current investment regime in GATS-inspired and NAFTA-inspired regional trade agreements) and what would be theoretically possible to achieve through one model or the other. So far, GATS-inspired agreements tend to have a smaller number of sub-sectors liberalised, as illustrated by Table 4.A2.2, and as a consequence may offer less transparency and predictability for investors while being more suitable for a certain number of developing countries to reform and establish their regulatory framework. The analysis however shows that this flexibility can also be sought in ag reements w ith a negative list approach or that transparency, if not through the schedules of commitments, is also part of GATS-inspired agreements.

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Table 4.6. A comparison between the GATS-inspired and NAFTA-inspired approach to scheduling liberalisation commitments in regional trade agreements NAFTA-inspired negative list approach

GATS-inspired “hybrid” approach with a positive list of sectors where commitments are made

Type of commitments or National treatment and MFN reservations reservations listed are listed.1

Market access and national treatment commitments (covering also nondiscriminatory quantitative restrictions).2

Bound commitments?

Commitments are bound. Standstill and ratchet mechanism (any new liberalisation of non-conforming measures becomes a commitment in the agreement).

Commitments are bound. Standstill in sectors where commitments are made (subject to reservations listed).

Further liberalisation?

No further liberalisation foreseen. The agreement might include phasing out non-conforming measures (but already stipulated when the agreement is signed).

Further liberalisation foreseen in the agreement through a review of commitments (sometimes with a view to provide for the elimination of all remaining discrimination at the end of a certain period).

Transparency

The top-down approach offers a higher degree of transparency for investors as all sectors are covered by non-discriminatory disciplines and only listed limitations apply. This transparency is reduced when some of these reservations are not listed (e.g., non-conforming measures at the sub-federal level).

No information is provided in the schedules of commitments on the liberalisation of investment in services sectors where no commitments are made. However, transparency is a general obligation of the agreement and information on the investment regime in all sectors should be made available.

Flexibility

Flexibility can be introduced through reservations on future measures but such reservations have to be taken when the agreement is signed.

Countries can take commitments in the sectors of their choice and limitations are listed only in committed sectors, leaving some flexibility on the degree of liberalisation offered in other sectors.

Predictability

The ratchet mechanism locks in any new liberalisation of a non-conforming measure. New services sectors are automatically covered by non-discriminatory disciplines.

Predictability is limited to the sectors where commitments are made.

1. Some NAFTA-inspired agreements also list reservations to obligations related to performance requirements and citizenship or residency requirements for senior managements and boards of directors. 2. The MFN principle is a general obligation that is not found in all agreements.

Therefore, countries are not constrained by one approach or the other. It is possible to reach an ambitious level of investment liberalisation in a GATSinspired agreement by taking commitments in new sectors or to increase the transparency of GATS-like schedules of commitments. It is also possible to pursue a progressive and cautious liberalisation of investment through negative lists that include enough reservations on existing and future measures. The most recent agreements give some insights of the many possibilities offered by the combination of positive and negative lists in GATSinspired agreements (see Part I).

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To conclude, it should also be recalled that whether the negative or positive list approach is adopted in an agreement depends on several factors: ●

First, the degree of liberalisation of the negotiating partners and their willingness to create a substantially preferential investment regime. The advantages of the negative list approach have been emphasised for countries aiming at a high degree of investment liberalisation in a relatively short term.

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Countries are also inclined to stay with the same approach once they have started to negotiate NAFTA-style or GATS-style agreements. It is easier for them to draft annexes and schedules of commitments following the same model and it becomes an updating exercise. It also ensures the consistency of commitments across different regional trade agreements.

●

The administrative capacity of countries can be another factor. Some lesser developed countries may not have the expertise or resources to develop a negative list for the first time. Negative lists can be demanding as the transparency achieved requires a detailed description of non-conforming measures and a full assessment of the reservations that have to be introduced to preserve some flexibility in future public policies.41

●

For developing countries that consider in their interest to preserve flexibility to introduce new restrictions in the future or to liberalise gradually at a pace that remains to be determined, the GATS-inspired approach has attraction. Table 4.A2.1 and 4.A2.2 show that India or Thailand are part of regional agreements that follow a GATS-approach, while early reformers such as Korea, Mexico and Chile are the developing countries that are signatories of NAFTA-inspired agreements. Developed countries and emerging economies are more likely to use the negative list approach (Fink and Molinuevo, 2007).

●

Last but not least, the choice between the positive or the negative list approach is matter of negotiation between the Parties to the agreement. While some Parties may favour positive list and others the negative list, they have sometimes to negotiate on the basis of another approach than the one they would have preferred to use.

41. However, once it has been done, it requires much less level of effort to update such a list. There is also the possibility of using a negative list approach without explicitly listing non-conforming measures as it is the case in some Bilateral Investment Treaties signed by Canada or the US. These agreements do not list reservations for existing measures (reservations for future measures are however listed).

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d) Regional agreements and multilateral liberalisation: to what extent are the regional agreements “WTO-plus”? Another question that has been asked regarding the schedules of commitments in reg ional trade agreements is to what extent these agreements go beyond GATS commitments in investment in services. It has been argued that RTAs are not offering much in terms of liberalisation, especially when they reiterate GATS schedules for trade in services. This section looks at what happens in Mode 3. Table 4.A2.3 includes the GATS schedules in Mode 3 for all the countries parties to RTAs analysed in Table 4.A2.1 and 4.A2.2. A comparison between the regional and multilateral commitments is thus possible. It is clear that NAFTAinspired agreements offer a much wider schedule of commitments than in GATS. The difference is especially striking for countries like Mexico, Morocco or Singapore. They make full commitments with very few reservations in the bilateral agreements in sectors where they have no commitments at the multilateral level. And the US, Australia or Japan have also more commitments in their bilateral agreements than in their GATS schedules. For this group of countries, the regional agreement is clearly a way of liberalising investment in services with specific partners by offering them a substantially preferential treatment. Comparing Tables 4.A2.2 and 4.A2.3 throws up a less clear-cut result but a careful analysis also shows that the GATS-inspired RTAs go further in terms of liberalising investment than what is committed under the GATS. Again there is a difference between developing countries (as defined in WTO) and developed countries. In the case of the EFTA-Singapore agreement for example, Switzerland has almost the same schedule of commitments as in GATS. The regional schedule has however additional commitments, in particular in supporting services for railway transport (CPC 743) and in freight transportation (CPC 7123). But Singapore offers a lot more than it does under GATS. The country has commitments in distribution services, educational services, environmental services and health-related and social services in the RTA, whereas these sectors were excluded from their GATS schedule. The regional agreement thus represents an opportunity for Singapore to liberalise services trade in Mode 3 with EFTA countries. The same analysis can be applied to the Sing apore-Japan Economic Agreement for a New Age Partnership. The difference is that Japan has a schedule also with a substantial improvement in its commitments. Japan – together with Australia – is a country that has used both the negative and the positive list approach with different trading partners. Commitments from Japan under the positive list of the GATS-inspired agreement are closer to the ones that can be found in Table 4.A2.1 in NAFTA-inspired agreements where Japan is a party.

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A similar analysis can be carried out in the case of the EU-Chile agreement. Sectors where there are EU commitments in the RTA that are not in GATS are the following: interdisciplinary R&D services (CPC 853), services relating to the handling of postal items (a list of sub-sectors in postal and courier services), electronic mail, voice mail, on-line information and data retrieval, electronic data interchange (EDI), code and protocol conversion, libraries, and some maritime and internal waterways transport services. For Chile, commitments are extended to the following sectors in the RTA: legal services (not limited to public international law or international commercial law), computer and related services, research and development services, real estate services, many business services in the category “other business services”, a few additional financial services, but also new commitments in construction, distribution services, environmental services, recreational, cultural and sporting services that had no equivalent in their GATS schedule. Reciprocity in the commitments is an objective of the agreement. Article 94 of Title III on Trade in Services and Establishment states that “The Parties shall reciprocally liberalise trade in services, in accordance with the provisions of this Title and in conformity with Article V of the GATS”. This reciprocity element is not part of GATS and implies larger commitments from Chile. The analysis shows that all the agreements studied are “WTO-plus” and that even agreements following the GATS model offer a more liberal schedule of commitments. This is not surprising since RTAs have to achieve a higher degree of liberalisation to be consistent with multilateral rules. Of course, there is again a difference between NAFTA-inspired and GATS-inspired agreements. In the case of the NAFTA approach, the agreements show that they aim at universal coverage of all sectors in the schedules of commitments, an approach different than GATS flexibility and progressive liberalisation. This is true for both countries from the North and the South in the case of NorthSouth RTAs. In GATS-inspired schedules of commitments, the same philosophy as under GATS applies at the regional level. However, the fewer commitments the country has in its GATS schedule, the more the effort towards liberalisation in the regional agreement is visible. As pointed out in the case of EU-Chile, there is also a tendency for more reciprocal commitments than in GATS. To the extent that regional liberalisation can serve as a laboratory for future liberalisation and that RTAs can be “building blocks” towards multilateral liberalisation, the two kinds of RTAs described can help to make progress in this evolution. Developing countries that can be reticent about liberalising investment and trade in services have achieved a much higher degree of liberalisation with bilateral or regional partners in GATS-inspired as well as NAFTA-inspired agreements. To be complete, the analysis should take into account the future liberalisation that is foreseen in GATS-inspired

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agreements as well as future developments at the WTO in the services negotiations. We have assessed only one type of agreement, but liberalisation of investment in services can also rely on other types of agreements, including bilateral investment treaties, and also on domestic (unilateral) reforms.

2. The implications of the Most-Favoured-Nation clause for the liberalisation of investment42 To complete the analysis of the role of regional trade agreements in promoting the liberalisation of investment in services, it is also interesting to look at the implications of the most-favoured-nation clause (MFN). This clause is a common element of trade agreements and creates specific interactions between investment and services agreements, as well as regional and multilateral agreements. The MFN clause aims to put foreign investors on a level playing field within a particular host country by extending to investors from one foreign country the same treatment given to investors from any other foreign country. Preferential trade agreements are by definition an exception to the MFN principle as they can give more favourable treatment to parties to the agreement. They nonetheless include various types of MFN clauses that can serve as a guarantee that investors from non-parties will not receive better treatment or that this more favourable treatment can be extended to the parties of this agreement. MFN clauses in investment chapters of the RTAs tend to be unconditional and to apply to all covered investments and investors, although exceptions may be added through the RTA schedules of commitments. This section first describes the different types of MFN clauses that can be found in the sample of RTAs studied and the exemptions to MFN treatment, distinguishing between GATS-inspired and NAFTA-inspired agreements. It then examines to what extent the provisions of the regional trade agreements are extended to other RTAs or “multilateralised” and what is the value of the MFN provision in practice. Among the 20 RTAs covered in this study, five have no MFN provision (COMESA, EC-Chile, Japan-Singapore, Korea-Singapore and the IndiaSingapore Comprehensive Economic Co-operation Agreement).43 In other cases, when investment in goods and services is dealt with in separate chapters, it may be the case that MFN treatment is accorded to either goods or

42. This section will not address the application and interpretation of the MFN clause in regard to the investment protection and procedural aspects of investment agreements. These issues have been addressed by a recent study by the Investment Committee “Most-Favoured-Nation in International Investment Law”, OECD (2005), International Investment Law: A Changing Landscape, Chapter 4. 43. See Table 4.A1.5 for a summary table.

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services or partly to certain obligations relating to both. This is another consequence of the interaction between investment and services chapters described in Part I. For example, TAFTA and the New Zealand-Singapore CEP grant MFN treatment for goods but not for services, while the Trans-Pacific SEP has a MFN clause only in the services chapter (that covers Mode 3).44 A first observation is hence that there is less regularity in the prevalence of MFN treatment as compared to national treatment.

a) The MFN provision in GATS-inspired agreements In services chapters dealing with investment, MFN clauses are generally inspired by GATS Article II with a list of exemptions. Article II of the GATS (that can be found reproduced – sometimes with slight changes – in some of the RTAs) states that “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”. As the MFN clause is the same for all kinds of trade in services in GATSinspired agreements (that is for the 4 modes of supply), the scope of the provision can be ambiguous regarding the pre- or post-entry MFN treatment. There is however no doubt that the MFN provision inspired from Article II of GATS covers both pre- and post-establishment. MFN treatment does not come without exceptions and RTAs with a MFN clause include a list of specific exceptions. The NAFTA and GATS approach come close to each other in this area, as both have a negative list of reservations. There is nonetheless a difference. In GATS-inspired agreements, the member countries may make any exemption to the MFN clause that they can negotiate, but exemptions have to be made at the time the agreement enters into force. The elimination or narrowing of MFN exemptions may be negotiated in at a later time. An important exception to the MFN treatment that can be found in certain GATS-inspired agreements is the regional economic integration organisation (REIO) exception. According to this clause, a more favourable treatment granted to members of another (third party) regional grouping by a Party of a given RTA is not (automatically) accorded on an MFN basis to the other Parties of the current (first) agreement. It is only through a request, a review of commitments, a renegotiation or through the unilateral decision of this Party to extend the more favourable treatment to its partners that the other Parties could benefit from the more favourable treatment.

44. In the case of the Trans-Pacific SEP, the investment chapter has not yet been negotiated and will be added later in the framework of the agreement.

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The REIO exception in GATS-like agreements is generally inspired by Article V of GATS. This article provides that any member of GATS may be a party to a REIO while containing safeguards for non-REIO members. EFTASingapore and EFTA-Korea are examples of the GATS approach for investment in services. EFTA-Korea excludes from MFN treatment the “other agreements concluded by one of the Parties and notified under Article V or Article Vbis of the GATS”. Article 3.4 adds that “If a Party enters into an agreement of the type referred to in paragraph 2, it shall upon request from another Party afford adequate opportunity to that Party to negotiate the benefits granted therein.” It is thus through a renegotiation that the benefits of another (third party) RTA can be extended to the parties of the (first) RTA and not through the application of the MFN clause. When a GATS-inspired agreement has no REIO exception clause, it is assumed that the commitments are already reflecting the “most favoured” treatment available in a preferential trade agreement. There is then an article about the better treatment that could be granted in the future to a third party in another RTA. For example, in the Japan-Malaysia EPA, article 101 indicates that “if a Country has entered into an agreement on trade in services with a third State or enters into such an agreement after this Agreement comes into force […], it shall, upon the request of the other Country, consider according to services and service suppliers of the other Country, treatment no less favourable than that it accords to like services and service suppliers of that third State pursuant to such an agreement”. In some cases the request has to be “favourably” considered or the Party has to “afford adequate opportunity to the other Parties” to negotiate the new benefits, but there is no binding obligation to grant a no less favourable treatment than the one accorded in the more recent agreement.

b) The MFN provision in NAFTA-inspired agreements The scope of the MFN clause is more precisely described in NAFTAinspired agreements. The treatment “no less favourable” applies “with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments” (Article 1103 of NAFTA). It is also clear that both “investors” and “investments of investors” benefit from the MFN standard. However, the MFN clause found in NAFTA and the NAFTA-inspired agreements specifies that the treatment “no less favourable” is accorded “in like circumstances”.45 The Australia-United States FTA, the FTA between Central America, the Dominican Republic and the United States (CAFTA-DR), US-Morocco and the Japan-Mexico Economic

45. See OECD (2005), International Investment Law: A Changing Landscape, Chapter V for a discussion of the implications of the “like circumstances”.

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Partnership are other examples of NAFTA-like agreements, according pre- and post-establishment MFN treatment “in like circumstances.” In EFTA-Singapore and EFTA-Korea, the MFN clause reflects the hybrid inspiration of these agreements with a MFN clause in the services chapter modelled after GATS and a MFN clause in the investment chapter modelled after NAFTA (with the difference that NT and MFN are merged in a single article). It remains to be seen if the difference in the way the two MFN clauses are drafted has practical implications. In NAFTA-inspired agreements, an equivalent to the REIO exception can be found as a reservation in the annex on reservations for future measures or in a specific annex on exceptions from MFN treatment (as in the NAFTA treaty, see Box 4.1). This creates another difference between GATS-inspired and NAFTA-inspired agreements. There is a wide exception to MFN treatment for all other RTAs in the case of GATS-inspired agreements, while in NAFTAinspired agreements the parties can benefit from better treatment granted to third parties in another RTA signed after the entry into force of the later one.

c) The difference between a multilateral and regional MFN rule The implications of the MFN rule are different at the regional and bilateral level as compared to the multilateral level since in the former group only the partner countries benefit from “no less favourable” treatment. The multilateral MFN rule ensures that all partners to the (global) trade agreement are given non-discriminatory treatment. It is a guarantee for an investor to receive treatment no less favourable than other investors from other countries. If more favourable treatment is granted to one of these investors it is automatically extended to all investors from all parties. At the multilateral level, the MFN rule is a principle of non-discriminatory treatment between a broad number of countries (e.g. currently 150 in the WTO). The MFN rule has a different function in a regional trade agreement. To begin with, RTAs are the major exception to the above mentioned nondiscriminatory treatment at the multilateral level. With the multiplication of RTAs, the scope of application of the multilateral MFN rule is reduced as mostfavoured-nation treatment is replaced by preferential treatment not extended to other parties in the multilateral agreement because of REIO exception clauses. The preferential treatment of the RTA is thus not “multilateralised” (unless it is a unilateral decision from the country to do so – the MFN treatment is a guarantee of non-discrimination but nothing prevents a country from applying non-discriminatory treatment to all partners and extending a more favourable treatment to them in the absence of any MFN obligation or any RTAs).

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Box 4.1. NAFTA-inspired reservations on MFN treatment In NAFTA-like agreements, there is often an exception to MFN treatment regarding commitments made in other regional or multilateral agreements signed before the entry into force of the RTA in question. The exception is listed as a non-conforming measure in the annex of the agreement. However the exception does not cover future regional or multilateral agreements (with the exception of a few designated sectors). For example, the US schedule in NAFTA (Annex IV) says: “The United States takes an exception to Article 1103 [MFN] for treatment accorded under all bilateral or multilateral international agreements in force or signed prior to the date of entry into force of this Agreement. For international agreements in force or signed after the date of entry into force of this Agreement, the United States takes an exception to Article 1103 for treatment accorded under those agreements involving: a) aviation; b) fisheries; c) maritime matters, including salvage; or d) telecommunications transport networks and telecommunications transport services […]”. Apart from the four sectors mentioned, there is no reservation for future agreements and parties to RTAs in force can benefit from more favourable treatment granted in later agreements signed by the US. In that sense it is better than a provision excluding all other RTAs from the application of MFN treatment. In CAFTA-DR, the Dominican Republic has the same MFN reservation about past and future agreements as the US in its schedule, while El Salvador, Guatemala, Honduras and Nicaragua have included it only vis-à-vis the United States and the Dominican Republic. US-Australia, US-Morocco and Japan-Mexico also have this wide MFN reservation.* The Chile-Korea FTA, although inspired by NAFTA does not use a reservation in the annex to exclude other regional trade agreements from the application of MFN. It has a REIO exception stated in the MFN Article (Article 10.4). The Trans-Pacific Strategic Economic Partnership has a GATS-inspired services chapter that lists reservations through a NAFTA-inspired negative list. It also reproduces the NAFTA-approach towards MFN exemptions with the same kind of reservation regarding past and future third-party RTAs in the schedules of Chile, New Zealand and Singapore. * In the other agreements than NAFTA, only three sectors are concerned for future agreements: aviation, fisheries and maritime matters (including salvage).

The “regional” MFN rule, which is the same most-favoured nation treatment included this time in a regional or bilateral trade agreement, organises non-discrimination among countries that benefit from preferential treatment (as an exception to the multilateral MFN rule). The purpose is different as parties are less interested by the no less favourable treatment granted to the other parties within the RTA than by a more favourable treatment that could be granted to other parties in another RTA and could be extended to them through the MFN principle. The first RTA that includes the MFN provision can be called the “basic agreement” while the other agreement with more favourable treatment can be referred to as the “third-party agreement”.

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In the case of a bilateral RTA, it is clear that the MFN rule is not there to guarantee a treatment no less favourable than the one granted to other parties since there is only one partner in the agreement. In RTAs with a sufficiently large number of parties, the MFN rule could have a similar purpose than at the multilateral level. But even in a regional agreement with several parties, the value of the MFN rule will lie more often in comparing the preferential treatment of the basic agreement with the treatment obtained in third-party RTAs, in particular in more recent agreements that could offer more favourable treatment. To put it in a nutshell, the MFN clause in a RTA has a value for investors, not only as a standard to prevent any discriminatory treatment vis-à-vis other investors, but also if it can create a liberalisation dynamic. One can even question if a MFN clause is required in a regional trade agreement. If national treatment is also granted (both pre- and postestablishment), the usefulness of the MFN clause may be questioned. The treatment afforded to domestic companies can generally be expected to be more favourable and the national treatment standard could be sufficient. It is only if market access is limited and reservations on national treatment have been listed that, as a “second best”, investors can turn to the MFN principle to be at least treated as well as other foreign investors. However, once again, this rationale is less likely to apply in the context of a regional trade agreement. The MFN provision at the multilateral level already offers the level playing field that is sought by foreign investors. A regional trade agreement is interesting only if it creates a preferential treatment that would give an advantage to investors from the signatory countries. Regarding investment, a noticeable difference is that there is a MFN rule at the multilateral level for investment in services, as MFN is a general obligation of the GATS. But there is no corresponding principle for nonservices sectors. There is no multilateral agreement with non-discriminatory provisions for investment in the production of goods. In this context, the MFN principle in regional trade agreements has certainly more value for goods than for services. But that would suppose that through the MFN rule, countries could be granted the same kind of treatment than provided to investors from third-party agreements. The only case where the MFN treatment might be more advantageous than national treatment is for investment incentives granted to foreign investors only (UNCTAD, 2004). In this case, foreign investors are favoured over domestic companies and the MFN treatment can be more enjoyable than the national treatment. Another difference between the multilateral and regional MFN rule is that at the multilateral level the MFN clause can create a “free rider” situation,

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by unilaterally extending to all partners any additional rights that are granted to other parties in future agreements. Such a situation has the potential of creating an asymmetrical contractual imbalance between parties. This is not the case in a RTA where the MFN provision has a more limited scope of application. To conclude, it seems that in a regional trade agreement, the MFN principle can have value for investors only if it creates a link with the treatment granted to foreign investors in third-party agreements. Either these other agreements provide an equivalent treatment and the MFN principle acts as a guarantee of non-discrimination among investors receiving a preferential treatment, or this third-party agreement is more advantageous for foreign investors and the MFN rule plays a positive role in extending this better treatment to all investors from signatory countries.

c) Are liberalising commitments extended to third parties through the MFN rule? However, there are several obstacles for the MFN clause to operate in the context of RTAs. As pointed out before, RTAs themselves have exceptions to the application of the MFN treatment. REIO exception clauses or NAFTAinspired reservations can prevent the commitments made in a third-party RTA to be extended to parties of the basic agreement. As GATS-inspired agreements reproduce the multilateral MFN clause found in GATS Article V, they often include a REIO exception where nonparties to the RTA cannot claim the benefits of the preferential treatment accorded at the regional level under the multilateral MFN clause. The result therefore is a risk of discriminatory treatment between the parties of different RTAs signed by the same country. To prevent this from happening, GATSinspired agreements rely on a review of commitments or further negotiations to extend the more favourable treatment of a new agreement to parties of a prior RTA. In GATS-inspired agreements, the existence of an REIO exception does not require discriminatory treatment between members of different RTAs but it does allow for it. The selective liberalisation in GATS-inspired agreements (where countries choose sectors where commitments are taken) can to some extent encourage a different treatment for investors from different RTAs. However, there is no tangible sign of such a practice when looking at Table 4.A2.2. A detailed analysis at the sub-sector level could say otherwise, but one observes in the Table a certain consistency in the schedules of commitments made by the same country in different RTAs. The only visible trend is that more recent agreements tend to include more commitments.

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If not through the MFN rule, the extension of more favourable treatment across RTAs can take place in GATS-inspired agreements through a request or a review of commitments. For example, the Thailand-Australia FTA allows for different mechanisms to incorporate treatment more favourable made in a newer agreement. Article 812 states that “If, after the Agreement enters into force, a Party enters into any agreement on trade in services with a non-Party, it shall consider a request by the other Party for the incorporation in this Agreement of treatment no less favourable than that provided under the former agreement”. A requirement that is however sometimes found for such an extension is that it be made on a reciprocal basis. But nothing prevents a party from unilaterally extending the benefit of new commitments to all parties of other RTAs. Of course, the review of commitments is less interesting for investors than the MFN rule, as additional rights from future third party agreements are not granted automatically. But it should be noted that the review of commitments tends to be different from a renegotiation of the treaty, e.g. by not creating a new agreement that would have to be ratified and to go through the Parliament in each country. A simple exchange of letters between Parties or th e de cis ion taken during a joint mee ting may be sufficien t for commitments to be improved or to be aligned on new concessions made in third-party agreements. In NAFTA-inspired agreements, there is an automatic extension of the more favourable treatment granted in a new agreement through the MFN clause, as there is no REIO exception clause and the general MFN exception mentioned applies only to past agreements. It is the only example of a MFN rule that could be applied to extend the commitments of newer agreements to parties of former RTAs. However, in most of the NAFTA-inspired agreements, countries have listed exceptions in certain sectors. Such sectors will not automatically benefit from the better treatment of future agreements through the MFN clause. Another way of limiting the risk of investment distortions is to negotiate RTAs with the same liberalisation commitments and same reservations (and this is true for both GATS-inspired and NAFTA-inspired agreements). By looking at Tables 4.A2.1 and 4.A2.2, it seems to be what most countries have done. The US schedules of commitments for example show very few variations from one agreement to another. However, the situation of countries having negotiated a NAFTA-inspired agreement with a partner and a GATSinspired agreement with another country can lead to distortions as the coverage of commitments varies between the two kinds of agreements. As far as non-discrimination among investors is concerned, the question of the scope of the MFN clause is an important issue that is beyond the scope

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of this paper but should be kept in mind. Special privileges or incentives can be granted to an individual investor without falling under the scope of the MFN provision.46 Some agreements specify that the MFN principle apply “in like circumstances” but even without such a mention, international law has recognised the ejusdem generis principle according to which a MFN clause can only apply to the same subject matter.47 In the context of BITs, different ICSID cases have also brought questions on the scope of application of the MFN principle, in particular if it applies to procedural matters in addition to substantive matters.48 As the exact scope of application of the MFN principle is not always clear, it seems that a cautious approach has been followed in recent RTAs with the different forms of “neutralisation” of the MFN rule that we have described. In sum, one may question the de facto impact of the most-favoured nation clause in regional trade agreements. It certainly has a value as a principle of non-discrimination among the parties of the agreement when the RTA has a large number of parties. However, while the MFN clause has also the potential to bestow additional benefits on investors and investments that are not specially negotiated by that party, it is unclear that this happens in practice. In GATS-inspired agreements where the MFN rule cannot apply because of the REIO exception clause, the review of commitments offers no guarantee of a non-discriminatory treatment, especially if the agreement asks for reciprocity in the new concessions made. In NAFTA-inspired agreements, the practice so far has been to have very few reservations on MFN treatment as regard to future RTAs, but as noted above newer agreements are generally signed with very similar schedules of commitments. In other words, the scope for MFN benefits is very limited and one can question the potential liberalising effect of RTAs and their capacity to “multilateralise” investment commitments.

46. UNCTAD (2004). 47. OECD (2005), International Investment Law: A Changing Landscape, Chapter V provides a review of the principle and its application. 48. Idem.

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References Crawford, J.A. and R. Fiorentino (2005), “Changing Landscape of Regional Trade Agreements”, Discussion Paper No. 8, www.wto.org/english/res_e/booksp_e/discussion_papers8_e.pdf. Fink, C. and A. Mattoo (2002), “Regional Agreements and Trade in Services: Policy Issues”, World Bank Policy Research Working Paper 2852, June. Fink, C. and M. Molinuevo (2007), “East Asian Free Trade Agreements in Services: Roaring Tigers or Timid Pandas?”, mimeo. Hirsch, M. (2006), “Interactions Between Investment and Non-Investment Obligations in International Investment Law” in Trade Dispute Management, Vol. 3, Issue 5. Hoekman, B. (1995), “Tentative First Steps. An Assessment of the Uruguay Round Agreement on Services”, World Bank Policy Research Working Paper 1455, May. Kemp, S. (2000), “Trade in Education Services and the Impacts of Barriers to Trade”, in Findlay, C.and T. Warren (Eds), Impediments to Trade in Services: Measurement and Policy Implications, Routledge: London and New York, 231-44. Lesher, M. and S. Miroudot (2006), “Analysis of the Economic Impact of Investment Provisions in Regional Trade Agreements”, OECD Trade Policy Working Paper No. 36, TD/TC/WP(2005)40/FINAL. Low, P. and A. Mattoo (2000), “Is There a Better Way? Alternative Approaches to Liberalisation under the GATS”, World Bank. OECD (Organisation for Economic Co-Operation and Development) (2002), The Relationship between Regional Trade Agreements and the Multilateral Trading SystemServices, Working Party of the Trade Committee, TD/TC/WP(2002)27/FINAL. OECD (2003), Regionalism and the Multilateral Trading System, http://publications.oecd.org/acrobatebook/2203031E.PDF. OECD (2005), “Novel Features in OECD Countries’ Recent Investment Agreements: An Overview”, www.oecd.org/dataoecd/42/9/35823420.pdf. OECD (2005), International Investment Law: A Changing Landscape, Paris. OECD (2005), Relationships Between International Investment Agreements, Working Paper 2004/1. OECD (2006), “Novel Features in Recent OECD Bilateral Investment Treaties”, in International Investment Perspectives. OECD (2006), “Salient Features of India’s Investment Agreements”. Roy, M. (2003) “Implications for the GATS of Negotiations on a Multilateral Investment Framework: Potential Synergies and Pitfalls”, Journal of World Investment, 4(6), 963-986. Roy, M., J. Marchetti and H. Lim (2006), “Services Liberalisation in the New Generation of Preferential Trade Agreements (PTAs): How Much Further than the GATS?”, WTO Staff Working Paper, ERSD-2006-07. Stephenson, S.M. (2002), “Regional Versus Multilateral Liberalisation of Services”, World Trade Review, 1(2), 187-209. Szepesi, S. (2004), Comparing EU Free Trade Agreements: Investment, (ECDPM InBrief 6D), Maastricht: ECDPM, www.ecdpm.org.

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Ullrich, H. (2004), Comparing EU Free Trade Agreements: Services, (ECDPM InBrief 6C), Maastricht: ECDPM, www.ecdpm.org. UNCTAD (United Nations Conference on Trade and development) (1998), CountrySpecific Lists of BITs, www.unctad.org/Templates/Page.asp?intItemID=2344&lang=1. UNCTAD (2004), International Investment Agreements: Key Issues, Vol. I, New York and Geneva, United Nations. UNCTAD (2005), Series on International Investment Policies for Development: International Investment Agreements in Services, www.unctad.org/en/docs/iteiit20052_en.pdf. UNCTAD (2005), Investment Provisions in Economic Integration Agreements, www.unctad.org/en/docs/iteiit200510_en.pdf. UNCTAD (2005), International Investment Arrangements: Trends and Emerging Issues, www.unctad.org/en/docs/iteiit200511_en.pdf. UNCTAD (2006), Systemic Issues in International Investment Agreements (IIAs), www.unctad.org/sections/dite_dir/docs/webiteiia20062_en.pdf. Websites Andean Community – Treaties and Legislation, www.comunidadandina.org/ingles/treaties.htm. Australian Government – Department of Foreign Affairs and Trade, www.dfat.gov.au/trade. Europa – Trade – Trade Issues, http://ec.europa.eu/comm/trade/issues/bilateral/countries/index_en.htm. Organisation for Economic Co-operation and Development, www.oecd.org. Singapore Free Trade Agreement, http://app.fta.gov.sg/asp/index.asp. Foreign Trade Information System (SICE), www.sice.oas.org. United Nations Conference on Trade and Development, www.unctad.org. USTR – Bilateral Trade Agreements, www.ustr.gov/Trade_Agreements/Bilateral/Section_Index.html. WorldTradeLaw.Net – Bilateral and Regional Trade Agreements Notified to the WTO, www.worldtradelaw.net/fta/ftadatabase/ftas.asp.

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ANNEX 4.A1

Key Features of the RTAs Reviewed A. General contents of recent RTAs Today’s RTAs cover diverse policy areas with the purpose of developing the parties’ economic potential and growth in a more integrated and complementary way. Their obligations often go beyond the WTO regulatory framework and include issues not traditionally covered by trade agreements such as investment, trade services, competition policy, intellectual property protection, technical co-operation and policy capacity building. The review of the general contents of the 20 RTAs included the present study leads to the following observations. ●

Apart from the preambles and general sections on objectives and purposes, and definitions, the agreements are typically divided into three distinct parts covering a) trade in goods; b) trade in investment, services and/or other related issues; and c) implementation and review. Schedules of commitments and special understandings are usually lodged in separate annexes. In some cases, exchanges of letters also clarify the scope of application of the agreements.

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All but two of the agreements contain separate chapters on Investment and Trade in Services. In the case of ASEAN, services and investment disciplines are lodged in two separate “Framework Agreements”, the first concluded in 1995,49 the second in 1998.50 In the case of the Andean Community, the main obligations are contained in two separate Decisions, Decision 29151 and Decision 43952 respectively adopted in 1991 and 1998.

49. The ASEAN Framework Agreement on Services (AFAS). 50. The Framework Agreement on ASEAN Investment Area (AIA). 51. Decision 291 establishes a Regime for the Common Treatment of Foreign Capital and Trademarks, Patents, Licensing Agreements and Royalties. 52. Decision 439 establishing a General Framework of Principles and Rules and for Liberalising the Trade in Services in the Andean Community.

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The investment and services disciplines are embedded in a wider web of mutually supportive and complementary disciplines. In addition to trade rules for goods, which still remain the core of the agreements, all but 4 contain separate chapters on government procurement and intellectual property, all but 5 contain separate chapters on competition policy and all but 5 contain separate chapters on transparency. Ten agreements also have a chapter on the movement of natural persons or business persons and 7 on environment and labour. New subjects (E-commerce) or forms of co-operation (science and technology, education and media) are also emerging. Corporate responsibility is included in one instance.

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The agreements are based on the trade-in-goods rules developed in the WTO. They all contain binding obligations on market access and nondiscrimination, detailed provisions on rules of origin, customs procedures, sanitary and phytosanitary measures and technical barriers to trade. Trade remedies and safeguards are also covered in separate chapters in most of the cases.53

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On the implementation side, all agreements contain their own special administrative and institutional arrangements to monitor compliance of the obligations and dispute settlement provisions to resolve disputes over the application of the agreement. In the majority of cases dispute settlement provisions also include investor-to-state procedures as regards investment disputes.

B. Key features of investment chapters RTA investment chapters typically include different types of disciplines and associated measures dealing with the subjects of investment liberalisation, investment protection, investment promotion and facilitation and dispute settlement. The review of the investment chapters of the 20 RTAs covered by the present study leads to the following observations. Tables 4.A1.1a, Table 4.A1.3a and 4.A1.4 present the observed features in a schematic form.

Regarding coverage ●

All the investment chapters are tri-dimensional in that they provide for, albeit to various degrees, a) investment liberalisation; b) investment protection; and c) investment promotion, co-operation and facilitation.

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All agreements (except for those concluded by the EU and the ASEAN Investment Area which follow an FDI based approach) have adopted an “asset-based” definition of investment. The list of assets is also an open one

53. Except in the case of Japan-Singapore EPA, EFTA-Korea and EU-Jordan.

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except for Japan-Mexico EPA (which follows an exhaustive closed list). They also cover investment directly or indirectly owned or controlled except for CECA, the ASEAN Investment Agreement and Decision 291 of the Andean Community. ●

Only the EFTA agreements reviewed contain umbrella clauses, provisions that place undertakings made by host States vis-à-vis investors under the investment chapter’s protective umbrella. 54

Regarding liberalisation ●

Transparency – which may range from the publication of laws and regulations to procedural transparency – is provided for in all the agreements but, as a general rule, as a horizontal obligation lodged in a separate chapter applicable to the whole RTA. The investment chapters of the EFTA-Korea FTA, India-Singapore CECA and the ASEAN Investment Area include provisions in this area. COMESA or the Andean Community agreements do not contain such provisions.

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All agreements provide for national treatment with respect to establishment and post-establishment – except for COMESA and the EU Agreements which do not cover establishment. EFTA agreements and the New Zealand-Singapore CERTA excludes Mode 3 delivery of services from this obligation. In TAFTA, the National Treatment obligation at the establishment phase applies to covered “direct” investment and investments other than Mode 3; at the post-establishment to all investments other than Mode 3. In Japan-Malaysia FTA, the National Treatment obligation in the Investment chapter does not apply to the establishment, acquisition and expansion of portfolio investments. The ASEAN Investment Agreement only applies to five listed sectors and incidental services.55

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Similarly all agreements provide for MFN treatment, except CECA, JapanSingapore FTA (concerning establishment), Korea-Singapore and the Andean Pact. TAFTA, however, has an unqualified coverage of MFN treatment as it applies across the board, including to Mode 3.

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Obligations on performance requirements are absent from the EU and EFTA agreements, the New-Zealand-Singapore CERTA, the ASEAN Investment Area and COMESA. The NAFTA-based agreements have “TRIMS plus” obligations.

54. See “Interpretation of Umbrella Clauses in Investment Agreements”, OECD Working Papers on International Investment, 2006/3. 55. Manufacturing, agriculture, fishery, forestry, mining and quarrying.

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Obligations on key personnel (Senior Management and Boards of Directors) are also absent from Japan-Singapore EPA, TAFTA, EC-Chile Agreement, NewZealand-Singapore FTA, ASEAN, COMESA and the Andean Pact. The investment chapter in EFTA agreements and Japan-Malaysia EPA also include provisions on the temporary movement of business or certain other natural persons, as do Japan-Singapore EPA, Korea-Singapore FTA, TAFTA, NewZealand-Singapore CERTA and India-Singapore CECA but in a separate chapter.

●

All agreements except COMESA provide for country exceptions for nonconforming measures to the investment chapters. The scheduling of these commitments follows a negative list approach in all cases except for India’s commitments under India-Singapore CECA and the EC-Chile Agreement which follow a positive list approach.

●

Economic integration: except for the EC-Jordan and EU-Chile agreements, all the others do not contain a special regional integration clause.

●

Horizontal exceptions, often lodged in separate chapters, relating to the protection of essential security interests or taxation is a common feature of all agreements.

●

General exceptions based on GATT Article XX and/or GATS Article XIV provisions are also provided for except for COMESA and the Andean Community Decision 291.

●

Some agreements (AUSFTA, CAFTA-DR, US-Morocco FTA, CECA) also maintain separate provisions in separate chapters (except for CECA) on disclosure of information.

●

Most of the reviewed agreements (except CAFTA-DR, US-Morocco FTA, COMESA, Andean Community) contain balance of payments safeguards to deal with BOP difficulties and/or temporary safeguard measures for addressing serious difficulties for the operation of monetary and exchange rate policy. These provisions generally share the features of temporality, non-discrimination, necessity, phase out, notification and consistency with IMF Articles. In addition, CAFTA-DR, US-Morocco, Japan-Malaysia JapanMexico and Japan-Singapore EPAs, Chile-Korea FTA, EFTA-Korea FTA and Korea-Singapore have included prudential derogation provisions that deal with more precision and in detailed situations relating to the need for preserving the parties’ financial and monetary stability and integrity.

●

304

The chapter on Investment in a majority of agreements contains a clause on Denial of Benefits that denies the benefits of the agreement to investors not conducting substantial business operations in the territory of a party and certain other circumstances.

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

Regarding protection ●

All but the EU agreements and the Andean Decisions give guarantees on both direct and indirect expropriation. In the New-Zealand Singapore Agreement, the protection and expropriation obligations are subject to MFN and National Treatment.

●

Free transfers are provided for by all agreements studied.

●

Clauses on standard treatment or minimum standard of treatment are found, on the other hand, in only five agreements (Australia-USA FTA, CAFTA-DR, US-Morocco FTA, Japan-Mexico EPA and Korea-Singapore FTA). The Japan-Singapore FTA does not contain a general treatment clause.

●

As indicated above, umbrella clauses have been found only in EFTA-based agreements.

Regarding dispute settlement ●

All the agreements reviewed except AUSFTA, the EC agreements, COMESA and the Andean Community provisions contain investor-to-state dispute settlement procedures. Prior consent is given in a majority of these cases except for the EFTA-Singapore FTA56 and New Zealand-Singapore Agreement. Transparency of awards or proceedings, amicus curiae submissions and consolidation of claims are only provided for in a handful of agreements, namely the US-modelled agreements.

Investment promotion and facilitation ●

Investment promotion and facilitation provisions are clearly on an upward trend, particularly in Japan EPAs. These provisions may be of the co-operation mechanisms set up for implementing the agreement. In some more recent agreements (EFTA-Singapore and EFTA-Korea Agreements, TAFTA, Japan-Malaysia and Japan-Singapore EPAs), these issues are singled out in the investment chapters or separate chapters (EC agreements) for further action.

C. Key features of services chapters Tables 4.A1.2a, Table 4.A1.3b and 4.A1.4 list the investment disciplines and associated measures that can be found in the 20 agreements reviewed. Two different approaches are taken. RTAs based on the GATS provide only for cross-border trade-in-services and excludes investment in services unless

56. Article 48(3) provides that “A Party may conclude contractual agreements with investors of another Party giving its unconditional and irrevocable consent to the submission of all or certain types of disputes to international conciliation or arbitration in accordance with paragraph 2 above”.

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

otherwise specified. From the sampled agreements it can be particularly observed that:

Market access ●

All the agreements make market access commitments in the chapter on services (except for EC-Jordan which aims for future liberalisation of services). The commitments may be in the form of a positive list or a negative list depending on whether the agreements subscribe to the GATS approach or are NAFTA based. In the case of some NAFTA based agreements which distinguish between Investment in Services (contained in the Investment chapter) and Cross-Border Trade in Services the provisions on Market Access are contained in the Chapter on Cross-Border Trade in Services. However, as elaborated in Part III of the study, these provisions also apply to Investment in Services.

National treatment ●

All the agreements also provide for pre and post-establishment national treatment. The commitments again can be in the form of positive or negative lists.

Most Favoured Nation treatment ●

Except for EC-Chile, New Zealand-Singapore, Japan-Singapore, IndiaSingapore, Korea-Chile, all other agreements provide for pre and post establishment MFN.

Temporary movement of natural persons ●

All the agreements except US-Australia, US-Morocco and CAFTA-DR provide for movement of natural persons either in the chapter on trade in services or in a different chapter. The EC-Chile contains a review provision to improve the liberalistation commitments on Mode 4. In the EC-Jordan agreement, Mode 4 is to be liberalised in the course of future negotiations.

Domestic regulation ●

The Domestic regulation clause requires parties to apply measures relating to services in a reasonable, objective and impartial manner. All agreements except for Japan-Mexico, Chile-Korea and the Andean Community decision provide for a clause on domestic regulation.

Recognition ●

306

All the agreements provide for working towards the recognition of qualifications of service providers who are nationals of other parties. Some

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

of the agreements provide for a specific time frame within which the parties shall work towards recognition. For example, the EFTA-Singapore agreement provides that within three years rules shall be framed for mutual recognition.

Monopoly service providers ●

GATS based agreements like Japan-Singapore and Japan-Malaysia, EFTAKorea, EFTA-Singapore, New Zealand-Singapore and India-Singapore generally address monopoly service providers. The Korea-Singapore FTA’s CBTS chapter includes this provision. The clause on Monopoly service providers requires parties to prevent any abuse of monopolies.

Horizontal exceptions ●

All the agreements analysed provide for General and Security exceptions either in the chapter on services or in an independent chapter. The agreements based on a NAFTA approach do not provide for general exceptions dealing with investment but some do provide General Exceptions for Cross-Border Trade in Services by referring to Article XIV of GATS.

Country exceptions ●

Depending on whether they are based on the GATS approach (except for Andean Community and Trans-Pacific SEP) or the NAFTA approach, agreements use positive or negative lists.

Clause for further liberalisation ●

Korea-Singapore, TAFTA, EC-Jordan, India-Singapore, ASEAN Framework Agreement and the Andean Community Decision 439 contain a clause for further liberalisation.

Transparency ●

All the agreements, except for EC-Jordan agreement have either an independent clause on transparency in the chapter on services or elsewhere in the agreement.

Denial of Benefits ●

All agreements, except for EC-Chile and EC-Jordan agreements, EFTA agreements with Singapore and Korea, New Zealand-Singapore and the Andean Community Decision 439, contain this provision a Denial of Benefits clause. This clause extends preferential treatment to all legal persons conducting substantial business operations in the territory of a party.

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

Services promotion and facilitation ●

Almost all the agreements establish the necessary institutional mechanisms for aiding in the implementation of the agreement, review of commitments and future negotiations on the commitments made under the agreements.

Business Practices ●

For ensuring fair competition GATS has the Business Practices clause (Article IX). This clause seeks to remedy the inequities that maybe caused due to monopolies and unfair competition. Only Japan-Singapore, EFTA Korea and India-Singapore provide for an independent clause on Business Practices, based on GATS Article IX.

Transfers ●

On the protection front most agreements allow for free transfers in the chapter on services. Except for Japan-Mexico, EFTA-Singapore and KoreaChile all agreements have clauses relating to transfers. Some of the GATS based agreements refer only to transfers relating to “current transactions” in accordance with GATS, while NAFTA based agreements allow all transfers related to cross border supply of services and also list exceptions to the rule.

Expropriation ●

Only the India-Singapore agreement provides for provision on expropriation in the services chapter. The services chapter in Article 7.24 provides for services investment linkage. This article lists provisions of the investment chapter which apply mutatis mutandis to the services chapter. This includes expropriation of a commercial presence. REM : ATTENTION TOUS LES TABLEAUX QUI SUIVENT ONT ETE

RETRAVAILLES IL FAUT LES VERIFIER

308

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Open Closed Direct Indirect list list

Establishment

NT

MFN

Post establishment Performance requirements

NT

MFN

Performance requirements

+

+

+

+

Temporary movement of business/ natural persons

Investment

Senior management/ key personnel

Asset based

Treatment of Investment Umbrella clause

Agreement

Date of agreement

Definitions/scope/coverage

Investment protection Expropriation Standard Compenof treatsation ment/ Transfers for Direct Indirect fair and losses equitable

North-North Australia-USA

1 Jan. 2005

NAFTA

1 Jan. 2004

CAFTA-DR

1 July 2006

US-Morocco

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

1 July 2006

+

+

+

+

+

+

+

+

+

+

+

Japan-Malaysia 13 July 2006

+

+

+

+ (except portfolio investments

+

+

+ (portfolio investment is excluded from establishment, acquisition, expansion of investment)

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

North-South

Japan-Mexico

1 Jan. 2006

JapanSingapore

1 May 2006

+

+ +

+

±

+

±

309

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

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Table 4.A1.1a. Substantive provisions in Investment and related chapters of recent RTAs – Part 1

TAFTA

1 Jan. 2005

EC-Chile

1 Apr. 2005

EC-Jordan

1 Feb. 2003

Open Closed Direct Indirect list list

+

+

+

Establishment

NT

MFN

+ (only for covered direct investment and other than Mode 3)

Post establishment Performance requirements

Performance requirements

NT

MFN

+

+ (other than Mode 3)

+

+

+

+

+

Temporary movement of business/ natural persons

Investment

Senior management/ key personnel

Asset based

Treatment of Investment Umbrella clause

Agreement

Date of agreement

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS – ISBN 978-92-64-04202-5 – © OECD 2008

Definitions/scope/coverage

±

Investment protection Expropriation Standard Compenof treatsation ment/ Transfers for Direct Indirect fair and losses equitable +

+

+

+

+

+

+

+

+

+ ±

EFTA-Singapore 1 Jan. 2003

+

+

+

+

+ (other than Mode 3)

+ (other than Mode 3)

+ (other than Mode 3)

+ (other than Mode 3)

+

+

+

+

EFTA-Koreaa

1 Sept. 2006

+

+

+

+

+ (other than Mode 3)

+ (other than Mode 3)

+ (other than Mode 3)

+ (other than Mode 3)

+

+

+

+

Trans-Pacific SEP

1 May 2006

New ZealandSingapore

1 Jan. 2001

+

+

+

+ (other than Mode 3)

+ (other than Mode 3)

+ (other than Mode 3)

+ (other than Mode 3)

±

+ (other than Mode 3)

+

+

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

310

Table 4.A1.1a. Substantive provisions in Investment and related chapters of recent RTAs – Part 1 (cont.)

Open Closed Direct Indirect list list

Establishment

NT

MFN

Post establishment Performance requirements

NT

MFN

Performance requirements

+

+

+

Temporary movement of business/ natural persons

Investment

Senior management/ key personnel

Asset based

Treatment of Investment Umbrella clause

Agreement

Date of agreement

Definitions/scope/coverage

Investment protection Expropriation Standard Compenof treatsation ment/ Transfers for Direct Indirect fair and losses equitable

South-South Chile-Korea

1 Apr. 2004

+

+

+

+

+

+

KoreaSingapore

2 March 2006

+

+

+

+

+

+

+

+

±

+

+

+

+

+

+

+

±

+

+

India-Singapore 1 Aug. CECA 2005 ASEAN Investment Areab

1998

COMESA

8 Dec. 1994

Andean Community (Decisions 291 and 292)

1 Jan. 1991

+ +

+

+ +

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

a) Separate Agreement on investment, referred to in FTA, between Korea, Iceland, Liechtenstein and Switzerland. b) Protection of Investment contained in ASEAN Agreement for Promotion and Protection of Investment, 1987. Article 12 of the AIA provides that “Member States affirm their existing rights and obligations under the 1987 ASEAN Agreement for the Promotion and Protection of Investments and its 1996 Protocol.” Key: 1. + Provisions contained in the Investment chapter. 2. ± provisions are contained in a different chapter.

311

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

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Table 4.A1.1a. Substantive provisions in Investment and related chapters of recent RTAs – Part 1 (cont.)

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Exceptions Agreement

Transparency EIA

General Security Prudential Country exceptions interests measures exceptions

Future Balance of Denial Liberali- payments/ of sation safeguards benefits

Investment promotion and co-operation

Disclosure of information

Taxation

Environment

±

±

+

±

±

±

±

±

±

+

±

Invest- Co-operation ment mechan- Review promotion isms

North-North Australia-USA

±

±

+

+ North-South

NAFTA

±

±

±

+

±

+

CAFTA-DR

±

±

+

+

±

±

+

US-Morocco

±

+

±

±

Japan-Malaysia Japan-Mexico

+ ±

+

+ +

±

Japan-Singapore

±

+

+

+

+

+

+

+

+

+

±

+

+

±

+

+

+

TAFTA

±

+

±

±

±

+

±

EC-Chile

±

±

+

±

+

+

EC-Jordan

±

±

+

±

+

+

EFTA-Singapore

±

±

+

±

+

EFTA-Korea

+

±

+

+

+

+

+

+

±

+

±

+

±

±

±

+

±

±

±

±

±

+

+

±

±

+

+

+

+

+

+

+

+

+

Trans-Pacific SEP New ZealandSingapore

±

±

±

±

±

±

South-South Chile-Korea

±

±

+

+

+

+

Korea-Singapore

±

±

±

+

+

+

+

India-Singapore CECA

+

+

+

+

+

+ +

±

+

±

+

± ±

±

± +

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

312

Table 4.A1.1b. Substantive provisions in Investment and other related chapters of recent RTAs – Part 2

Exceptions Agreement

Transparency EIA

ASEAN Investment Area

+

General Security Prudential Country exceptions interests measures exceptions +

Future Balance of Denial Liberali- payments/ of sation safeguards benefits

Disclosure of information

Investment promotion and co-operation Taxation

Environment

Invest- Co-operation ment mechan- Review promotion isms

+

COMESA Andean Community (Decisions 291 and 292)

+

Key: 1. + Provisions contained in the Investment chapter. 2. ± means that the stated provisions are contained in a different chapter.

313

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

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Table 4.A1.1b. Substantive provisions in Investment and other related chapters of recent RTAs – Part 2 (cont.)

Market access

Protection of services

Temporary Establishment Post establishment movement of business Performance Market Performance persons/ NT MFN NT MFN requirements access requirements professionals

Recognition

Agreements

Treatment of services Umbrella clause

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS – ISBN 978-92-64-04202-5 – © OECD 2008

Definitions/Scope/Coverage Date Investment of entry Mode 3/ chapter covers into Mode 3/ Commercial force presence Commercial presence

Expropriation Transfer of payments Direct Indirect

North-North Australia-USA*

1 Jan. 2005

+

+

+

+

+

+

+

+

+

+

+

North-South NAFTA**

1 Jan. 2004

+

CAFTA-DR*

1 July 2006

+

US-Morocco*

1 Jan. 2006

Japan-Malaysia

13 July 2006

Japan-Mexico**

1 Apr. 2005

Japan-Singapore

30 Nov. 2002

+

1 Jan. 2005 1 March 2005

TAFTA EC-Chile EC-Jordan

1 May 2002

EFTA-Singapore

1 Jan. 2003

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

±

+

+

+ +

±

+

+

+

+

+

±

±

+

+

+

+

+

+

±

+

+

+

+

+

+

+

+ (future lib)

+

± ±

+

+

+

+

+

+

+

+

+

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

314

Table 4.A1.2a. Substantive provisions in Services and related chapters – Part 1

Market access

Protection of services

Temporary Establishment Post establishment movement of business Performance Market Performance persons/ NT MFN NT MFN requirements access requirements professionals

Recognition

Agreements

Treatment of services Umbrella clause

Definitions/Scope/Coverage Date Investment of entry Mode 3/ chapter covers into Mode 3/ Commercial force presence Commercial presence

Expropriation Transfer of payments Direct Indirect

EFTA-Korea

1 Sept. 2006

+

+

+

+

+

+

+

+

+

+

Trans-Pacific SEP

1 May 2006

+

+

+

+

+

+

+

±

+

+

New ZealandSingapore

1 Jan. 2001

+

+

+

+

+

±

+

+

+

±

+

+

+

+

+

+

+

+

+

+

South-South Chile-Korea**

1 Apr. 2004

+

+

+

+

Korea-Singapore

2 March 2006

+

+

+

India-Singapore CECA

1 Aug. 2005

+

+

+

ASEAN Framework Agreement on Services

1995

+

+

+

+

+

COMESA

8 Dec. 1994

Andean Community (Decision 439)

25 May 1998

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

Key: 1. + Provisions contained in the Services chapter. 2. ± provisions are contained in a different chapter. * Contains chapter on Cross Border Trade in Services. Only provisions on Market Access, Domestic Regulation and Transparency in Developing and Applying Regulation apply to Investment in Services. ** Contains chapter on Cross Border Trade in Services which does not apply to Investment in Services.

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

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Table 4.A1.2a. Substantive provisions in Services and related chapters – Part 1 (cont.)

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS – ISBN 978-92-64-04202-5 – © OECD 2008

Services promotion Clause and facilitation Balance for Monopoly Disclosure of Financial Domestic TransDenial Business Country exceptions further Coof Telecom service Taxation General Review practices payments/ services regulation parency of benefits operation Security Prudential providers information liberaliExcepof comSafeguards –ve mechaInterests measures +ve sation tions mitments List List nisms Exceptions

Agreement

North-North Australia-USA

±

±

NAFTA

±

±

+

±

±

+

+

±

+

±

±

North-South

CAFTA-DR

±

±

±

±

+

±

±

+

+

±

+

±

±

+

±

±

+

+

±

+

±

±

+

+

±

+

±

±

+

+

+

±

±

+

±

±

±

±

+

+

+

+

±

±

+

±

±

±

±

+

±

+

US-Morocco

±

±

Japan-Malaysia

±

±

Japan-Mexico

±

±

JapanSingapore

+

±

TAFTA

±

±

EC-Chile

+

±

EC-Jordan

+

EFTA-Singapore

+

+

+

EFTA-Korea

+

+

+

Trans-Pacific SEP

±

±

New ZealandSingapore

±

±

+

+ +

+ ±

1. Applies only to interstate disputes.

+

+

+

+ +

±

+

+

±

±

+

+

+

+

±

+

+

±

±

+

+

+

±

±

+

+

+

+

+

+

±

+1

+

± ±

+ +

+

+

+

+

±

±

+ +

+

±

+

±

±

+

+

+ ±

±

±

+

+

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

316

Table 4.A1.2b. Substantive provisions in Services and related chapters – Part 2

Services promotion Clause and facilitation Balance for Monopoly Disclosure of Financial Domestic TransDenial Business Country exceptions further Coof Telecom service Taxation General Review practices payments/ services regulation parency of benefits operation Security Prudential providers information liberaliExcepof comSafeguards –ve mechaInterests measures +ve sation tions mitments List List nisms Exceptions

Agreement

South-South Chile-Korea

±

±

+

±

±

±

+

KoreaSingapore

±

±

+

±

±

±

+

+1

±

±

+

+ (Financial services)

±

±

India-Singapore CECA

+

+

+

+

+

+

+

+

+

+

±

±

ASEAN Framework Agreement on Services

+

+

+

+

±

+

±

+

COMESA Andean Community (Decision 439)

+

+

+

Chile-Korea

±

±

+

+

1. Also applies to investments covered by the Investment Chapter. Key: 1. + Provisions contained in the Services chapter. 2. ± provisions are contained in a different chapter.

+

±

+

+

±

+

±

±

+

±

+

317

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Table 4.A1.2b. Substantive provisions in Services and related chapters – Part 2 (cont.)

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS – ISBN 978-92-64-04202-5 – © OECD 2008

Establishment

Agreement

Date of entry into force

Markets access Positive list

Negative list

National treatment Positive list

Post-establishment Most Favoured Nation treatment

Negative list

Positive list

Negative list

Market access Positive list

Negative list

National treatment Most Favoured Nation Positive list

Negative list

Positive list

Negative list

North-North Australia-USA

1 Jan. 2005

+

+

+

+

North-South NAFTA

1 Jan. 2004

+

+

+

+

CAFTA-DR

1 July 2006

+

+

+

+

US-Morocco

1 July 2006

+

+

+

+

Japan-Malaysia

13 July 2006

+

+

+

+

Japan-Mexico

1 Jan. 2006

+

+

+

+

Japan-Singapore

1 May 2006

+

TAFTA

1 Jan. 2005

+

EC-Chile

1 Apr. 2005

+

EC-Jordan

1 Feb. 2003

EFTA-Singapore

1 Jan. 2003

+

+

+

+

EFTA-Korea

1 Sept. 2006

+

+

+

+

Trans-Pacific SEP

1 May 2006

New Zealand-Singapore

1 Jan. 2001

+

+

+

+

1 Apr. 2004

+

+

+

+

2 March 2006

+

+ +

+

+

+

+ +

South-South Chile-Korea Korea-Singapore India-Singapore CECA ASEAN Investment Area

1 Aug. 2005 1998

COMESA

8 Dec. 1994

Andean Community (Decisions 291 and 292)

1 Jan. 1991

+ India

+

+ Singapore + +

+ +

+ +

+

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

318

Table 4.A1.3a. Country exceptions/commitments in Investment chapter

Establishment

Agreement

Date of entry into force

Markets access Positive list

Australia-USA

1 Jan. 2005

Negative list

National treatment Positive list

+

US-Morocco

1 Jan. 2006

Japan-Malaysia

13 July 2006

Japan-Mexico

1 Apr. 2005

Japan-Singapore

Most Favoured Nation treatment Positive list

+

+

+

+

+

+

+

+

+

+

+

+ +

Market access

Negative Negative Positive list list list

+

NAFTA CAFTA-DR

Negative list

Post-establishment National treatment Positive list

+

+ +

+

+

+

+

+

+

+

+

+

+

+

+

TAFTA

1 Jan. 2005

+

+

+

+

EC-Chile

1 Feb. 2003

+

+

+

+

EC-Jordan

1 Jan. 2005

EFTA-Singapore

1 Jan. 2003

+

+

+

+

+

EFTA-Korea

1 Sept. 2006

+

+

+

+

+

Trans-Pacific SEP

1 May 2006

New Zealand-Singapore

1 Jan. 2001

Chile-Korea Korea-Singapore India-Singapore CECA ASEAN Framework Agreement on Services

+

+

1995

+

8 Dec. 1994

Andean Community Decision 1998

28 May 1998

+ +

+ =

+

+ +

+

+ +

+

+ +

+

+

+

+ +

1 Aug. 2005

COMESA

+

+

1 Apr. 2004 2 March 2006

+ +

+

Negative list

+

+

+

Positive list

+

30 Nov. 2002

+

Negative list

Most Favoured Nation

+

+ +

+

+

+

+

+

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Table 4.A1.3b. Country exceptions/commitments in Services chapter

Interim measures

Experts

Consolidation

Applicable law

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

+

Protection Amicus of sensitive curiae information submissions

Monetary awards and no punitive damages

Comment period before effectiveness of awards/delay of enforcement

North-North AUSFTA

±

±

±

±

±

North-South NAFTA

±

+

+

+

+

+

CAFTA-DR

±

+

+

+

+

+

US-Morocco

±

+

+

+

+

JapanMalaysia

±

+

+ (for authorised investments)

Article 85 (3) allows nondisputing Party to submit interpretation of the Agreement to arbitral tribunal.

JapanMexico

±

+

+

+

Japan Singapore

±

+

(Article 82 (10 (e))

+

TAFTA

±

EC-Chile

+

EC-Jordan

+

+

(it provides monetary award but there is no prohibition clause for punitive damage)

+

+

+

(Article 85 (15)

+

+

+

+

+ +

Appeals

Enforcement

Waivers of initiating/ Transparency continuing a Participation (access to proceeding by the filing, minutes, before local non-disputing transcripttions courts/ party and decisions) Non-exhaustion of local remedies

Open hearings

Claims by an investor of a party on its own behalf and on behalf of an enterprise

Prior consent

State/State

Investor/State

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Table 4.A1.4. Dispute settlement with respect to Investments

+

±

EFTA-Korea

±

+

New ZealandSingaporeb

±

+

Chile- Korea

±

+

+

+

+

Korea-Singapore

±

+

+

+

+

India-Singapore CECA

±

+

+

ASEAN Investment Area

+

+c

+

COMESA

±

Andean Community (Decisions 291 and 298)

±

+

±

±

±

±

+

+

Appeals

Experts

Applicable law

±

Consolidation

EFTA-Singaporea

Enforcement

Monetary Comment awards period before Protection Amicus and no effectiveness of sensitive curiae information submissions punitive of awards/delay damages of enforcement

Interim measures

Waivers of initiating/ Participation Transparency continuing a by the (access to proceeding nonfiling, minutes, before local disputing transcripttions courts/ party and decisions) Non-exhaustion of local remedies

Open hearings

Claims by an investor of a party on its own behalf and on behalf of an enterprise

Prior consent

Investor/State

State/State

Specific Investor/State provisions

± +

±

Trans-Pacific SEP ±

±

South-South

±

1 Jan. 1991

Key: 1. + Provisions contained in the Investment chapter. 2. ± provisions are contained in a different chapter. c) In the EFTA-Singapore agreement the provisions marked by “±” symbol apply only to State/State dispute. d) In the New Zealand-Singapore agreement the provisions marked by “±” symbol apply only to State/State dispute. e) Obligation contained in the 1987 ASEAN Agreement for the Promotion and Protection of Investments. f) Applies only to interstate disputes.

+

+

+

±

±

+

+

±d

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Table 4.A1.4. Dispute settlement with respect to investments (cont.)

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Agreements

Chapter

MFN treatment?

Reservations on MFN treatment

REIO exception clause?

Specific MFN reservation regarding third party agreements?

Request for incorporation of treatment no less favourable in a third party agreement

Review of commitments foreseen in the agreement with the aim of improving overall commitments?

NAFTA and NAFTA-inspired agreements AUSFTA

Investment

Yes

Negative list

No

Reservation for all past agreements and in 3 sectors for future agreements

No

No

NAFTA

Investment

Yes

Negative list

No

Reservation for all past agreements and in 4 sectors for future agreements

No

No

US-CAFTA-DR

Investment

Yes

Negative list

No

Reservation for all past agreements and in 4 sectors for future agreements (US, Dominican Republic); only vis-à-vis the US and Dominican Republic for the other countries

No

No

US-Morocco

Investment

Yes

Negative list

No

Reservation for all past agreements and in 3 sectors for future agreements

No

No

Japan-Mexico

Investment

Yes

Negative list

No

Reservation for all past agreements and in 3 sectors for future agreements

No

No

Korea-Chile

Investment

Yes

Negative list

Yes

–

Yes

Every two years

Korea-Singapore

Investment

No

–

–

–

Yes

Annually

GATS-inspired agreements Japan-Singapore Japan-Malaysia

TAFTA

Investment

No

–

–

–

Yes

No

Services

No

–

–

–

Yes

No

Investment

Yes

Negative list

No

Malaysia has a reservation with respect to preferential treatment granted in any ASEAN agreement

–

No

Services

Yes

Negative list

No

No

Yes

Within five years

Investment

Yes

None

No

No

Yes

No

Services

No

–

–

–

Yes

Within three years

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

322

Table 4.A1.5. MFN treatment provisions in selected regional trade agreements

Agreements

EFTA-Singapore

Chapter

MFN treatment?

Reservations on MFN treatment

REIO exception clause?

Specific MFN reservation regarding third party agreements?

Request for incorporation of treatment no less favourable in a third party agreement

Review of commitments foreseen in the agreement with the aim of improving overall commitments?

Investment

Yes

Negative list

Yes

–

Yes

Every two years

Services

Yes

Negative list

Yes

–

Yes

Every two years

EFTA-Korea

Investment

Yes

Negative list

Yes

–

Yes

Within three years and in regular intervals thereafter

Services

Yes

Negative list

Yes

–

Yes

Every two years

Trans-Pacific SEP

Services

Yes

Negative list

No

Chile, New Zealand and Singapore have a reservation for all past agreements and in 3 sectors for future agreements

–

Within two years and every three years thereafter

New Zealand-Singapore CEP

Investment

Yes

Negative list

No

No

–

Every two years

Services

No

–

–

–

No

Every two years

India-Singapore CECA

Investment

No

–

–

–

Yes

Every two years

Services

No

–

–

–

Yes

Every two years

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Table 4.A1.5. MFN treatment provisions in selected regional trade agreements (cont.)

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

ANNEX 4.A2

Analysis of the Schedules of Commitments: Methodology, Caveats and Summary Tables This Annex explains the methodology used in Part II to assess the degree of liberalisation achieved in the RTAs and to make a comparison between the schedules of commitments contained in RTAs and GATS schedules.

A. Methodology The analysis has been conducted on 10 of the agreements listed in Part I: AUSFTA, NAFTA, US-Morocco, Japan-Mexico, Japan-Singapore, ThailandAustralia, EC-Chile, EFTA-Singapore, Chile-Korea, and India-Singapore. To illustrate the commitments from EFTA countries, the schedule of Switzerland has been used in the analysis of the agreement between EFTA states and Singapore. The assessment of liberalisation commitments focuses on services as it is in the services sector that the main obstacles to FDI remain. The analysis of the schedules of commitments shows that most reservations, exceptions, non-conforming measures listed deal with services. There are very few entries on manufacturing goods in the schedules. There are sometimes reservations in the primary sector (in particular mining and fishing activities) but the vast majority are in services sectors. This is not surprising since FDI in services accounts for 60% of total FDI flows; and this share of total FDI flows is considerably lower than the 80 to 90 per cent of total reservations or limitations in the schedules taken by services. There are several difficulties involved in analysing schedules of commitments on investment in services and making comparisons among different trade agreements (and in particular between RTA schedules and GATS schedules for Mode 3): ●

324

First, there is no agreed and official classification of services sectors and countries can schedule their liberalisation commitments according to their

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own definitions of services sectors. During the Uruguay Round which established the GATS, a services sectoral classification list (GNS_W/120) was widely used and is reproduced in Annex 4.A3. WTO members were free to use this classification or the UN Central Product Classification (CPC)57 to which the GATS list refers (or their own classification). Many RTAs – especially when they follow a GATS approach – list commitments using W/120. ●

Liberalisation commitments are presented differently in NAFTA-inspired agreements (with a negative list of reservations) and GATS-inspired agreements (with a positive list of sectors where commitments are taken and a list of limitations that apply in these sectors). There are also several models and concepts involved in “liberalising” investment: national treatment (pre- and post-entry), most-favoured-nation treatment (pre- and post-entry), right of establishment, market access. Foreign investors have access to domestic markets and benefit from non-discriminatory treatment according to different models of liberalisation.

●

There are also several issues with the definition of national treatment, MFN and market access. In the NAFTA approach, the two principles are national treatment and MFN and they are granted pre- and post-establishment. Things become more complicated in GATS and in agreements that reproduce the GATS approach for investment in services. In the GATS, there is no distinction between pre- and post-establishment and it is not always clear whether limitations listed as “market access” are not also, de facto, limitations on “national treatment”.

●

Lastly, there is an intrinsic difference between a RTA covering investment in services and a multilateral agreement on trade in services covering Mode 3 (the GATS). For several of the RTAs analysed, their objective is to liberalise all forms of investment between two countries, while the GATS is a multilateral agreement on trade in services including supply through commercial presence (Mode 3). Also the GATS allows countries to take varying degrees of commitments. RTA schedules and the GATS schedules should be compared bearing in mind this difference. There is also a difference in chronology as the GATS was negotiated in 1994 and the agreements analysed are more recent (with the exception of NAFTA) and therefore may reflect policy developments towards investment in services. An early methodology to quantitatively assess GATS schedules by

creating an index (Hoekman, 1995) cannot be extended to analyse investment commitments in RTAs where liberalisation commitments take various forms.

57. The CPC has been updated twice, in 1997 and 2002, and CPC 2.0 is foreseen for 2007.

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An index of the extensiveness of commitments would not be robust enough when calculated in the context of negative lists of reservations in NAFTAinspired agreements and GATS-inspired schedules in other agreements. The comparison between a GATS index and an index of commitments in RTAs could also be misleading. Here therefore a simpler methodology has been developed based on a graphical and numerical analysis at a less disaggregated level (the 12 services sectors in W/120).58 The W/120 classification covers all sectors relevant for investment, although their economic importance may vary. The W/210 classification has often been criticised for inadequately reflecting the reality of trade in services (for example, regarding environmental services or energy services). An analysis at a more aggregated level has the advantage of limiting the distortions inherent to classification issues. Tables 4.A2.1 and 4.A2.2 summarise the results of the analysis. They provide a “mapping” of the schedules of commitments in the RTAs with respect to the three disciplines usually found in the agreements: national treatment, MFN treatment and market access commitments. The first column of the table reports the reservations that apply to all sectors or “horizontal limitations” in GATS language (this is why the column is tagged with “H”). The subsequent columns describe the 12 sectors of the W/120 classification. Box 4.A2.1 details how the schedules were analysed to construct the tables. For each sector, the tables report two kinds of information: ●

First, the degree of commitments in the sector is indicated by the colour (or pattern) of the cell. The typology is the following: ❖ No commitments in the sector or sector excluded (dark cell with black hatched lines). ❖ Commitments in a limited number of sub-sectors: it means that the number of sub-sectors liberalised is less than 75% of the sub-sectors where commitments can potentially be made (dark grey cell). ❖ Commitments in most of the sector: more than 75% of the sub-sectors where commitments can potentially be made are scheduled. Only a few sub-sectors have been excluded (light grey lattice pattern). ❖ Commitments across the entire sector describes the situation where there are commitments in the totality of the sector (no sub-sector is excluded).

58. Roy et al. (2006) analyse commitments undertaken by 29 WTO members under mode 1 and mode 3 in 28 RTAs at the level of the 152 sub-sectors (for mode 3) of the W/120 Classification List. For each country and each RTA, they report the proportion of sub-sectors where commitments are made. They also indicate if in comparison to GATS schedules and GATS offers the commitments are further improved in the regional agreement.

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Box 4.A2.1. Specific rules that were followed when analysing the schedules and counting the limitations ● Only limitations or reservations on investment in services are taken into

account. For NAFTA-inspired agreements, the services sectors were identified on the basis of their description in the relevant annex. Reservations for “all sectors” are reported when they are relevant for investment in services. For GATS-like schedules of commitments, only info rmation on Mo de 3 has b een us ed (i ncluding for hori zo ntal limitations). ● Only limitations to national treatment, MFN treatment and market access

are reported. The definition used is the one from the agreement (and can therefore be different according to the RTA analysed). ● Non-conforming

measures

that

are

phased-out

(NAFTA-inspired

agreements) are not counted and pre-commitments in GATS-inspired schedules are included (we look at the degree of liberalisation achieved at the end of the transitory periods). ● There are commitments in the totality of the sector (blank cells) if no

reservation is listed in the case of a negative list or if all the sub-sectors of the W/120 classification have commitments in the case of a GATS-inspired schedule. ● The number of limitations tries to reflect the real number of measures that

are inconsistent with the disciplines of the agreements but maintained by the parties. When several measures are listed in a same paragraph or a same “entry” in the schedule, they are counted separately. When a nonconforming measure is described through lengthy paragraphs that detail the reservation, it is counted as one. However, the number of limitations is still influenced by the way the schedule is organised (the same measure that applies to several sectors can be counted several times). ● When a sector or sub-sector is listed in the annex on future measures in a

NAFTA-inspired agreement and the country can take any measure in the future, it is treated in the same way as an unbound sector in a GATS schedule (absence of commitment).

If no figure appears in the cell, there are no limitations at all, i.e. full nondiscriminatory treatment applies (white cells). ●

The second information reported in the table is the number of limitations in each sector. It is indicated by a figure in the middle of the cell. There is no figure when no limitations are listed in the schedule.

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B. Caveats This methodology comes with certain caveats. It should be kept in mind that commitments do not reflect the actual level of liberalisation of investment. A country that makes no commitment in a sector can nonetheless allow foreign investment. But it will be without guarantee of nondiscriminatory treatment and the country may take any kind of measure in the sector. The schedules may be understood as reflecting the minimal treatment that is guaranteed. On the other hand, investment may be restricted more than indicated by the schedules of commitments. “Liberalisation” in the context of services is measured through non-discriminatory treatment (national treatment, MFN) and/or the concept of “market access” (as defined in the agreements). For example, a restrictive investment regime can be applied equally to domestic and foreign investors. The analysis is about the schedules of commitments and not the actual level of investment liberalisation (or the implementation of these schedules). The number of limitations should be interpreted with care, especially when comparing different agreements.59 Countries have adopted different approaches in reporting their limitations to national treatment, MFN treatment, or market access. In particular, schedules of commitments that are provided at a disaggregated sectoral level will tend to have a higher number of limitations reported, some of them being reiterated for different sub-sectors. Some double-counting may therefore occur. The number of limitations is also not a very good indicator of how detrimental these limitations are for investment. A limitation can be very general and wide with a potentially high impact on investment. It can also be very specific and not essential. While limitations reported can be real barriers to foreign investment (such as a limitation on the percentage of foreign participation or a citizenship requirement), they can also be clarifications or indications about domestic legislation that does not necessarily represent a barrier to investment. The number of limitations can also be higher when there are more commitments in the schedule. It can be surprising to see in the tables that there are sometimes more limitations in a RTA than in the GATS schedule but it is important also to consider the number of sub-sectors where commitments are taken. A country can open up to its bilateral partner more sub-sectors while listing additional limitations for these sub-sectors. The number of limitations is thus higher but the schedule has a greater coverage.

59. In the case of the EU, it should be noted that most limitations concern specific Member states and only limitations that exist across all EU countries are reported in the tables.

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From the point of view of investors, this situation is better than facing sectors with no commitments or where many sub-sectors are excluded (rather than included with limitations). Despite these limitations, the advantage of the methodology is to its simplicity and providing a quick snapshot of the level of commitments by looking along the line which adds up the different sectors. It is also easy to make a comparison between the schedules of the parties to a same agreement or with schedules in another agreement.

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Business services 1

All sectors H

Investment commitments

NT

Communication services 2

Construction and related engineering services 3

Distribution services 4

Educational services 5

Environmental services 6

MA MFN NT

M A M FN N T

M A M FN N T

MA MFN NT

M A M FN N T

M A M FN N T

MA MFN NT

n/a n/a

n/a n/a

n/a n/a

n/a n/a

3 10

11

5

n/a n/a n/a

n/a n/a n/a

1 10 7

12

1

7 10

11 11

4 3

n/a n/a

2 4

1 1

n/a n/a

1 1

5 2

n/a n/a

3 2

NAFTA Canada Mexico United States

8 6 4

n/a n/a n/a

2 1 5

2 3 2

n/a n/a n/a

2 2

1 10 3

n/a n/a n/a

1 4 2

US-Morocco FTA Morocco United States

2 3

1 4

10 1

4

5 1

1 1

6

1

1

n/a n/a n/a

1

3

1

n/a n/a n/a

1

2

2

1

Japan-Mexico Economic Partnership* Mexico 8 n/a 1 9 n/a 2 8 n/a 4 1 n/a 1 n/a 1 n/a n/a 4 n/a 1 5 n/a 1 4 n/a n/a n/a n/a 1 n/a Japan * The commitments in financial services are those of the OECD Code of Liberalisation of Capital Movements and of the GATS. Chile-Korea FTA* Chile 5 n/a 8 n/a 11 n/a n/a n/a n/a n/a 8 n/a 6 n/a 26 n/a n/a n/a 3 n/a n/a Korea * Financial services are not in the agreement yet (a negotiation is scheduled four years after the entry into force of the agreement) No commitments in the sector - sector excluded Commitments in a limited number of sub-sectors Commitments in most of the sector Commitments across the entire sector Horizontal limitations (affect all sectors) * first column only *

Non applicable

Health related and social services 8

MA MFN NT

US-Australia FTA Australia United States

Number of limitations

Financial services 7

2 n/a

Tourism and travel related services 9

Recreational, cultural and sporting services 10

Other services not included elsewhere 12

Transport services 11

MA MFN NT

M A M FN N T

M A M FN N T

MA MFN NT

M A M FN

2 1

n/a n/a

1 1

n/a n/a

n/a n/a

6 4

n/a n/a

3

n/a n/a

1 1 1

n/a n/a n/a

1

1 4

n/a n/a n/a

n/a n/a n/a

2 10 5

n/a n/a n/a

2 2 4

n/a n/a n/a

7 1

4

5 1

3 4

4

5

2 3

GATS & OECD GATS & OECD

1 1

n/a n/a

n/a n/a

18 11

n/a n/a

1 4

1 3

n/a n/a

n/a n/a

24 9

n/a n/a

1

1

3

n/a n/a

n/a n/a

1

n/a n/a

n/a n/a

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

330

Annex Table 4.A2.1. Commitments and reservations in 5 NAFTA-inspired regional trade agreements

All sectors H

Investment commitments

NT

Business services 1

MA MFN NT

Communication services 2

MA MFN NT

MA MFN NT

Japan-Singapore New Age Economic Partnership Agreement 2 8 14 1 Japan 3 5 5 Singapore

1 2

Thailand-Australia FTA (TAFTA) Australia 4 Thailand 1

5 10

9 12

2 32

3 15

Construction and related engineering services 3

10

MA MFN NT

5

3 3

3 7

3

MA MFN NT

3

2

3 2 1

No commitments in the sector - sector excluded Commitments in a limited number of sub-sectors Commitments in most of the sector Commitments across the entire sector Horizontal limitations (affect all sectors) * first column only * 2

1

*

2 5

Environmental services 6

MA MFN NT

1

*

1

1

1

Financial services 7

MA MFN NT

1 1

4

3 3

India-Singapore Comprehensive Economic Co-operation Agreement 7 2 9 13 8 19 India Singapore 3 4 6 5

Number of limitations

Educational services 5

1

EU-Chile Association Agreement Chile 5 5 7 8 1 4 1 2* 1* * 1* 1 * EU* * Limitations that apply in specific EU Member States are not reported but an asterisk signals their presence EFTA-Singapore FTA Singapore Switzerland

Distribution services 4

9

*

Health related and social services 8

MA MFN NT

1 15

2 34

2 6

13 29

1 3*

25 3*

7 2

22 2

2

3 42

30 45

1 1

2

Tourism and travel related services 9

MA MFN NT

Recreational, cultural and sporting services 10

MA MFN NT

MA MFN NT

2

1 5

*

2 2

7 1

7 1

2

4

1 15

2 9

*

1 *

1 *

6 3

7 3*

2 3

2 4

1 1

2 1

1 1

Other services not included elsewhere 12

MA MFN NT

4

2 2

Transport services 11

MA MFN

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Table 4.A2.2. Commitments and reservations in 5 GATS-inspired regional trade agreements

INTERNATIONAL INVESTMENT LAW: UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS – ISBN 978-92-64-04202-5 – © OECD 2008

All sectors H

GATS Mode 3 commitments

NT

Business services 1

MA MFN NT

Australia

4

1

Communication services 2

MA MFN NT

2

2

European Union*

2

1*

2*

*

1*

Canada

8

2

1

4

4

Chile

4

3

1

India

1

1

4 4

3

Construction and related engineering services 3

MA MFN NT 3

2

*

5*

3

2

4

1

12

3

1

MA MFN NT

Educational services 5

MA MFN NT

*

*

1

3

*

Jordan

1

1

Korea

4

2

Mexico

1

1

Morocco

1

2

2

3

Switzerland

3

United States

3

Thailand

1

33

5 7

3 2

3

4

1

1 2

1

1

2

3

6

5

17

7

4

4

1

2

2

2

3

1

3

9

10

3

1

Horizontal limitations (affect all sectors) * first column only * 2

13

*

2*

1*

9

2

1

21

8

20

1

3

1

8

4

4

36

Tourism and travel related services 9

MA MFN NT

1

3

9

MA MFN NT

Other services not included elsewhere 12

Transport services 11

MA MFN NT

MA MFN NT

MA MFN

*

* 1

*

*

2

2

1* 1

5

2* 3 5

1

2

1

2 2

2

4

1

1

1

30

1

Recreational, cultural and sporting services 10

1

9

4

Health related and social services 8

MA MFN NT

2

1

2

2

* Limitations that apply in specific EU Member States are not reported but an asterisk signals their presence No commitments in the sector - sector excluded Commitments in a limited number of sub-sectors Commitments in most of the sector Commitments across the entire sector

MA MFN NT

*

2

3

Financial services 7

4

10

1

3

4 29

MA MFN NT

1

4

1

Singapore

14

Environmental services 6

1

8

Japan

Number of limitations

Distribution services 4

2

1

1

5

4

8

1

5

6

1

3

1

4

4

2

5

8

3

3

10

16

2

2

2

1

5

36

5

6

29

1 2 1

2

1

2

2 5

1

1 2

15

6

4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

332

Table 4.A2.3. Mode 3 commitments in GATS schedules

4.

THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS IN SELECTED REGIONAL TRADE

ANNEX 4.A3

The GATS W/120 Services Sectoral Classification List Sectors and sub-sectors 1. Business services A. Professional services a. Legal Services b. Accounting, auditing and bookkeeping services c. Taxation Services d. Architectural services e. Engineering services f. Integrated engineering services g. Urban planning and landscape architectural services h. Medical and dental services i. Veterinary services j. Services provided by paramedical personnel

midwives,

nurses,

physiotherapists

and

k. Other

B. Computer and related services a. Consultancy services related to the installation of computer hardware b. Software implementation services c. Data processing services d. Data base services e. Other

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

C. Research and development services a. R&D services on natural sciences b. R&D services on social sciences and humanities c. Interdisciplinary R&D services

D. Real estate services a. Involving own or leased property b. On a fee or contract basis

E. Rental/leasing services without operators a. Relating to ships b. Relating to aircraft c. Relating to other transport equipment d. Relating to other machinery and equipment e. Other

F. Other business services a. Advertising services b. Market research and public opinion polling services c. Management consulting service d. Services related to management consulting e. Technical testing and analysis services f. Services incidental to agriculture, hunting and forestry g. Services incidental to fishing h. Services incidental to mining i. Services incidental to manufacturing j. Services incidental to energy distribution k. Placement and supply services of Personnel l. Investigation and security m. Related scientific and technical consulting services n. Maintenance and repair of equipment (not including maritime vessels, aircraft or other transport equipment) o. Building-cleaning services p. Photographic services q. Packaging services

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

r. Printing, publishing s. Convention services t. Other

2. Communication services A. Postal services B. Courier services C. Telecommunication services a. Voice telephone services b. Packet-switched data transmission services c. Circuit-switched data transmission services d. Telex services e. Telegraph services f. Facsimile services g. Private leased circuit services h. Electronic mail i. Voice mail j. On-line information and data base retrieval k. Electronic data interchange (EDI) l. Enhanced/value-added facsimile services, incl. store and forward, store and retrieve m. Code and protocol conversion n. On-line information processing)

and/or

data

processing

(incl.

transaction

o. Other

D. Audiovisual services a. Motion picture and video tape production and distribution services b. Motion picture projection service c. Radio and television services d. Radio and television transmission services e. Sound recording f. Other

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

E. Other 3. Construction and related engineering services A. General construction work for buildings B. General construction work for civil engineering C. Installation and assembly work D. Building completion and finishing work E. Other 4. Distribution services A. Commission agents’ services B. Wholesale trade services C. Retailing services D. Franchising E. Other 5. Educational services A. Primary education services B. Secondary education services C. Higher education services D. Adult education E. Other education services 6. Environmental services A. Sewage services B. Refuse disposal services C. Sanitation and similar services D. Other

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

7. Financial services A. All insurance and insurance-related services a. Life, accident and health insurance services b. Non-life insurance services c. Reinsurance and retrocession d. Services auxiliary to insurance (including broking and agency services)

B. Banking and other financial services (excl. insurance) a. Acceptance of deposits and other repayable funds from the public b. Lending of all types, incl., inter alia, consumer credit, mortgage credit, factoring and financing of commercial transaction c. Financial leasing d. All payment and money transmission services e. Guarantees and commitments f. Trading for own account or for account of customers, whether on an exchange, in an over-the-counter market or otherwise, the following: – money market instruments (cheques, bills, certificate of deposits, etc.) – foreign exchange – derivative products incl., but not limited to, futures and options – exchange rate and interest rate instruments, inclu. products such as swaps, forward rate agreements, etc. – transferable securities – other negotiable instruments and financial assets, incl. bullion. g. Participation in issues of all kinds of securities, incl. under-writing and placement as agent (whether publicly or privately) and provision of service related to such issues h. Money broking i. Asset management, such as cash or portfolio management, all forms of collective investment management, pension fund management, custodial depository and trust services j. Settlement and clearing services for financial assets, incl. securities, derivative products, and other negotiable instruments k. Advisory and other auxiliary financial services on all the activities listed in Article 1B of MTN.TNC/W/50, incl. credit reference and

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

analysis, investment and portfolio research and advice, advice on acquisitions and on corporate restructuring and strategy l. Provision and transfer of financial information, and financial data processing and related software by providers of other financial services

C. Other 8. Health related and social services (other than those listed under 1.A.h-j.) A. Hospital services B. Other human health services C. Social services D. Other 9. Tourism and travel related services A. Hotels and restaurants (incl. catering) B. Travel agencies and tour operators services C. Tourist guides services D. Other 10. Recreational, cultural and sporting services (other than audiovisual services) A. Entertainment services (including theatre, live bands and circus services) B. News agency services C. Libraries, archives, museums and other cultural services D. Sporting and other recreational services E. Other 11. Transport services A. Maritime transport services a. Passenger transportation b. Freight transportation c. Rental of vessels with crew d. Maintenance and repair of vessels e. Pushing and towing services f. Supporting services for maritime transport

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

B. Internal waterways transport a. Passenger transportation b. Freight transportation c. Rental of vessels with crew d. Maintenance and repair of vessels e. Pushing and towing services f. Supporting services for internal waterway transport

C. Air transport services a. Passenger transportation b. Freight transportation c. Rental of aircraft with crew d. Maintenance and repair of aircraft e. Supporting services for air transport

D. Space transport E. Rail transport services a. Passenger transportation b. Freight transportation c. Pushing and towing services d. Maintenance and repair of rail transport equipment e. Supporting services for rail transport services

F. Road transport services a. Passenger transportation b. Freight transportation c. Rental of commercial vehicles with operator d. Maintenance and repair of road transport equipment e. Supporting services for road transport services

G. Pipeline transport a. Transportation of fuels b. Transportation of other goods

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4. THE INTERACTION BETWEEN INVESTMENT AND SERVICES CHAPTERS

H. Services auxiliary to all modes of transport a. Cargo-handling services b. Storage and warehouse services c. Freight transport agency services d. Other

I. Other transport services 12. Other services not included elsewhere

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International Investment Law

International Investment Law

UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS A Companion Volume to International Investment Perspectives

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UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS

The “Definition of investor and investment” reviews the determinants of the scope of application of international investment treaties in light of recent state practice and jurisprudence. The article on the “Interpretation of the umbrella clause in investment agreements” sheds light on a controversial provision whose meaning has been disputed recently before international arbitral tribunals. “International Investment Agreements: A survey on environmental, labour and anti-corruption issues” reviews the treatment of societal issues in 295 investment agreements and in related arbitration decisions. “The interaction between investment and services chapters in selected regional trade agreements” looks at the implications for investment protection and liberalisation of 20 treaties’ investment and services chapters.

International Investment Law

International investment agreements set ground rules for how host governments treat foreign investors. This publication provides an unparalleled source of information on four key issues: the definition of investor and investment; the interpretation of umbrella clauses in investment agreements; coverage of environmental, labour and anti-corruption issues; and the interaction between investment and services chapters in selected regional trade agreements.

UNDERSTANDING CONCEPTS AND TRACKING INNOVATIONS

A Companion Volume to International Investment Perspectives