The Role of the State in Investor-State Arbitration [1 ed.] 9789004282254, 9789004282247

Citation preview

The Role of the State in Investor-State Arbitration

Nijhoff International Investment Law Series Series Editors Dr. Eric De Brabandere (Leiden University) Dr. Tarcisio Gazzini (University of Lausanne) Dr. Stephan Schill (Max Planck Institute for Comparative Public Law and International Law, Heidelberg) Professor Attila Tanzi (University of Bologna) Editorial Board Andrea K. Bjorklund (Montreal) – Juan Pablo Bohoslavsky (El Bolsón, Río Negro) – Chester Brown (Sydney) – David Caron (London) – Patrick Dumberry (Ottawa) – Michael Ewing-Chow (Singapore) – Susan D. Franck (Lexington) – Ursula Kriebaum (Vienna) – Makane Mbengue (Geneva) – Catherine A. Rogers (Carlisle) – Christian Tams (Glasgow) – Andreas Ziegler (Lausanne)

VOLUME 3

The titles published in this series are listed at brill.com/iils

The Role of the State in Investor-State Arbitration Edited by

Shaheeza Lalani and Rodrigo Polanco Lazo

LEIDEN | BOSTON

Library of Congress Cataloging-in-Publication Data The role of the state in investor-state arbitration / edited by Shaheeza Lalani, Rodrigo Polanco Lazo.   pages cm. -- (Nijhoff international investment law series ; volume 3)  Includes bibliographical references and index.  ISBN 978-90-04-28224-7 (hardback : alk. paper) -- ISBN 978-90-04-28225-4 (e-book) 1. Investments, Foreign--Law and legislation 2. Investments, Foreign (International law) 3. International commercial arbitration I. Lalani, Shaheeza, editor. II. Polanco Lazo, Rodrigo.  K3830.R65 2015  346’.092--dc23 2014033818

This publication has been typeset in the multilingual “Brill” typeface. With over 5,100 characters covering Latin, ipa, Greek, and Cyrillic, this typeface is especially suitable for use in the humanities. For more information, please see www.brill.com/brill-typeface. issn 2351-9542 isbn 978-90-04-28224-7 (hardback) isbn 978-90-04-28225-4 (e-book) Copyright 2015 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Nijhoff and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill nv provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, ma 01923, usa. Fees are subject to change. This book is printed on acid-free paper.

Contents Foreword ix Shaheeza Lalani The Role of the State in Investor-State Arbitration Introductory Remarks 1 Michael E. Schneider

Part 1 State Powers and Investor-State Dispute Settlement 15 Krista Nadakavukaren Schefer

1

States and Foreign Investment A Law of the Treaties Perspective 23 Tarcisio Gazzini

2

The Regulatory State and the Duty of Consistency 49 Danielle Morris

3 The Transplantation of Legitimate Expectations in Investment Treaty Arbitration A Critique 69 Teerawat Wongkaew 4

Host States as Claimants Corruption Allegations 103 Dai Tamada

Part 2 States and the Investor-State Arbitration Regime 123 Stephen Gelb

5 The Concept of the State in Investor-State Arbitration A Social Science Perspective 131 Todd Tucker

vi

contents

6 The Impact of Investment Treaty Law on Host State Behavior Some Doctrinal, Empirical, and Interdisciplinary Insights 162 Mavluda Sattorova 7 Domestic Demands and International Agreements What Causes Investor State Disputes? 187 Zoe Williams 8 Exit, Voice, and Loyalty In Investment Treaty Arbitration A Summary 211 Anna T. Katselas 9 Inter-Governmental Consideration of Investor-State Dispute Settlement at the OECD-Hosted Freedom of Investment (FOI) Roundtable 220 David Gaukrodger

Part 3 The Changing Role of the State in Investor-State Disputes 241 Rodrigo Polanco Lazo

10  Towards a Greater Role for State-to-State Arbitration in the Architecture of Investment Treaties? 249 Michele Potestà 11 The Role of the State after an Award is Rendered in Investor-State Arbitration 274 Tomonori Mizushima 12 The Return of the Home State and the Rise of ‘Embedded’ Investor-State Arbitration 293 Wolfgang Alschner 13  Illegal Investments and Actions Attributable to a State under International Law 334 Sergey Usoskin

vii

c ontents

Part 4 Attribution of Conduct of Non-State Organ Entities: An Introduction 351 Georgios Petrochilos

14 The European Union Investment Arbitration Regime and Local Governments The Need for a Synchronization of Efforts 361 Cornel Marian 15 State-Owned Enterprises in the Current Regime of Investor-State Arbitration 380 Ji Li 16 The Many Faces of States in International Investment Law Supranational Organizations, Unrecognized States, and Sub-State Entities 405 Chien-Huei Wu The Changing Role of the Home and the Host State in Investor-State Arbitration Some Conclusions 430 Rodrigo Polanco Lazo Bibliography 437 Index 494

Foreword Shaheeza Lalani Since 1999, the World Trade Institute (WTI) of the University of Bern has been offering graduate-level education through the MILE (Master of International Law and Economics) Program, and for almost a decade, it has provided the infrastructure for doctoral, post-doctoral and professorial researchers employed within the framework of a National Center of Competence in Research (NCCR) on Trade Regulation. Pushing the boundaries of teaching and research on the law, economics and politics of international trade, the WTI inaugurated its first structured Doctoral Program in 2012. The Program offers the 20 resident doctoral candidates a forum for the presentation of their research. In addition to interdisciplinary courses, technical training, academic writing support and career guidance, doctoral students benefit from the WTI’s wide network of lawyers, judges, scientists, economists, diplomats, and politicians who regularly teach courses in the MILE Program and participate in monthly meetings of the NCCR. In 2013, a conference series was added to the mix of courses offered within the framework of the Doctoral Program. The purpose of the series is to assist doctoral candidates in building their professional network outside of the WTI. The conference series exposes doctoral candidates to research being done by others in the same field and encourages their involvement in publications aside from their doctoral theses. With the launch of the WTI’s International Investment Initiative (I3) and the arrival of a doctoral candidate conducting research from a legal perspective on the role of the State in investor-State arbitration,1 it was fitting to host a first interdisciplinary conference on this topic. The conference was held on November 8, 2013 at the WTI and fifteen papers were selected for presentation at the conference from over sixty proposals submitted. Selected papers examine the development of the concept of the ‘State’ in investor-State arbitration, as well as concerns about ‘fair and equitable treatment’, ‘attribution’ and public policy under international law. These papers individually and collectively make a valuable contribution to the literature on

* Shaheeza Lalani, PhD (University of Lausanne), Director of the World Trade Institute’s Doctoral Program. ** Rodrigo Polanco Lazo is a doctoral candidate at the WTI whose studies are sponsored by the Swiss Secretariat for Economic Affairs (SECO).

x

foreword

investment arbitration, which has focused – to date – on the rights of the investor rather than on an analysis of the ‘State’. With the generous sponsorship of the Swiss State Secretariat for Economic Affairs, the Swiss National Foundation and Martinus Nijhoff BRILL, the WTI hosted doctoral and postdoctoral researchers in law, political science and economics, as well as professors and legal practitioners from Canada, China, Germany, Italy, Japan, the Netherlands, Russia, Sweden, Taiwan, Thailand, the United Kingdom, and the United States for the one-day conference in Bern. The conference began with a welcome speech by Professor Dr. Thomas Cottier, Managing Director of the World Trade Institute. Key-note speakers, Michael E. Schneider of Lalive Lawyers in Geneva and Georgios Petrochilos then of Freshfields Bruckhaus Deringer in Paris, made introductory remarks at the beginning of the morning and afternoon sessions. Their speeches are published in this edited volume. Panel chairs, including Krista Nadakavukaren Schefer, Professor of International Law at the University of Basel; David Gaukrodger, Senior Legal Advisor in the Investment Division of the Organisation for Economic Co-operation and Development; Sergey Ripinsky, Legal Affairs Officer at the United Nations Conference on Trade and Development; and Stephen Gelb, Director of the I3 at the WTI, each provided valuable comments on a set of 3-4 presentations. Their comments have been taken into account in each of the contributions to this edited volume, which is hopefully the first of a series of edited books that will be based on the conferences of the WTI’s Doctoral Program.

The Role of the State in Investor-State Arbitration Introductory Remarks

Michael E. Schneider The role of the State in Investor-State Arbitration is a subject that has come into fashion, and in our profession, fashion is just as important as in other fields. In reality, the subject of Investor-State Arbitration is an old one but in recent years, it has taken on a totally new dimension and it has attracted attention in much wider circles. I have been in the business of arbitration for about 35 years and would like to start by looking back for a moment at the 1960s and 1970s when there was a very lively debate about the subject under the heading of State contracts, the applicable law and arbitration. With the advent of Bilateral Investment Treaties and treaty-based investment arbitration, interest in issues raised by State contracts seems to have diminished. But I continue to believe that the subject remains important, and I was pleased to note that there is still some interest in it: for example, at the Graduate Institute in Geneva, there is now a course on State contracts. The debate about State contracts was particularly animated in the 1950s, 1960s and 1970s. Recall the seminal study of Professor Böckstiegel,1 who continues to act as a prominent arbitrator in disputes arising out of such contracts. Similarly Professor Prosper Weil, whose Hague lecture on stabilization clauses was of great influence in this debate,2 is also well-known as an arbitrator in such disputes. Among the arbitration cases of the period, the three cases about the Libyan nationalizations have marked the discussion,3 especially the award of * Michael E. Schneider is Partner, LALIVE; Immediate Past President of the Swiss Arbitration Association (ASA). This is a lightly edited version of the introductory remarks made on November 8, 2013. 1 Karl-Heinz Böckstiegel, “Der Staat als Vertragspartner ausländischer Privatunternehmen” (Frankfurt am Main, Athenäum Verlag, 1971), see also “Arbitration of Disputes Between States and Private Enterprises in the International Chamber of Commerce”, The American Journal of International Law 59, no. 3 (Jul., 1965): 579–586; and Karl-Heinz Böckstiegel, “The Legal Rules Applicable in International Commercial Arbitration Involving States or StateControlled Enterprises”, in ICC International Arbitration – 60 Years On. A Look at the Future (Paris, 1984), 117–176. 2 Prosper Weil, “Problemes relatifs aux contrats passes entre un état et un particulier”, Recueil des Cours III, vol. 128 (1969): 95–240. 3 Texaco Overseas Petroleum Co. & California Asiatic Oil Co. v. The Government of the Libyan Arab Republic, Preliminary Award (Nov. 27, 1975), and Award on the Merits (Jan. 19, 1977),

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_002

2

Schneider

Professor René-Jean Dupuy in the Texaco/Calasiatic case, in which I was privileged to be involved. On the level of international regulation, the UN resolutions on permanent sovereignty over natural resources deserve particular attention.4 But the subject is older. If you look at the period after the First World War, you will come across such cases as the Lena Goldfields case, which had its origin in Lenin’s New Economic Policy – which arose during a short window of time when the Soviet Union invited capitalists to take a role in the State’s development.5 Other examples are the Kreuger matchsticks concessions and resulting arbitration cases,6 the Losinger case,7 the RCA case8 as well as a number of issues arising in cases involving foreign bond holders.9 Peter Fischer, an Austrian professor, assembled an impressive collection of historic concessions and investment agreements.10 One of the oldest

International Law Reports 53 (1979): 389 [hereinafter Texaco/Calasiatic case]; BP Exploration v. Libyan Arab Republic, Award (Aug. 1, 1974), International Law Reports 53 (1979): 297; and Libyan American Oil Company v Libyan Arab Republic, Award (Apr. 12, 1977), International Law Reports 62 (1982): 140. See Brigitte Stern’s commentary on the three Libyan arbitration cases in, Brigitte Stern, “Trois arbitrages, un meme probleme, trois solutions - Les nationalisations petrolieres libyennes devant I’arbitrage international”, in Revue de l’arbitrage 1980, no. 1 (1980): 3–43. 4 United Nations, General Assembly Resolution 1803 on Permanent Sovereignty over Natural Resources (14 December 1962), U.N. G.A. Res. 1803 (XVII), 17 UN GAOR Supp. (No.17) at 15, UN Doc. A/5217 (1962); United Nations, General Assembly Resolution 2158 on Permanent Sovereignty over Natural Resources (Nov. 25, 1966), U.N. G.A. Res. 2158 (XXI), 21 UN GAOR Supp. No. 16, p. 29, UN Doc. A/6518; United Nations, General Assembly Resolution 3171 on Permanent Sovereignty over Natural Resources (Dec. 17, 1973), U.N. G.A. Res. 3171 (XXVIII), 28 UN GAOR, Supp. No. 30, p. 52, UN Doc. A/9030; and United Nations, General Assembly, Charter of Economic Rights and Duties of States (Dec. 12, 1974), U.N. G.A. Res. 3281 (XXIX), 29 UN GAOR, Supp. No. 31, p. 50, UN Doc. A/9631. 5 See, Arthur Nussbaum, “The Arbitration Between the Lena Goldfields, Ltd. and the Soviet Government”, Cornell Law Quarterly 36 (1950/51): 31–53; and Andrea Ernst, “Lena Goldfields Arbitration”, in Max Planck Encyclopedia of Public International Law (MPEPIL), ed. Rüdiger Wolfrum (online edition), accessed March 3, 2014, http://opil.ouplaw.com/home/EPIL. 6 See, e.g. Stephen M. Schwebel, “The Alsing Case”, The International and Comparative Law Quarterly 8, no. 2 (Apr., 1959): 320–345. 7 Losinger & Co. (Switz. v. Yugo.), 1936 P.C.I.J. (ser. A/B) No. 67 (Order of June 27). 8 Decision In the Arbitration Case between Radio Corporation of America versus the National Government of the Republic of China (Apr. 13, 1935), The American Journal of International Law 30, no. 3 (Jul., 1936): 535–551. 9 See, e.g. Michael Waibel, Sovereign Defaults before International Courts and Tribunals, Cambridge Studies in International and Comparative Law (Cambridge University Press, 2013). 10 Peter Fischer, “A Collection of International Concessions and Related Instruments”, 14 vols. (Dobbs Ferry, New York 1976–1988); see also: “Historic Aspects of Concession Agreements,” in

The Role of the State in Investor-State Arbitration

3

agreements in this collection is that which an Italian investor concluded with the Spanish Crown in 1492 for the areas to be discovered on his trip to the West. This Italian investor, Christopher Columbus, had an unfortunate fate: he fell into disgrace and his heirs brought legal action against the Crown to claim the benefits of the concession. After many years of court proceedings (referred to as “los pleitos colombinos”), the dispute was submitted to arbitration. The award restored, to the family, some of the rights that had been granted to Columbus by the 1492 concession and were subsequently withdrawn. Now things have changed a bit. Perhaps the most important feature of the predominant form of modern investment arbitration is what has been called arbitration without privity. The first case of this kind was based on a stroke of genius by Jan Paulsson: South Pacific Properties (SPP) had concluded a joint venture agreement with the Egyptian General Organization for Tourism and Hotels (EGOTH); the Egyptian government was a party to a prior heads of agreement but not to the joint venture which contained an ICC arbitration clause. When the Egyptian Government cancelled the project after popular protest, SPP brought ICC arbitration against the Government but the award in its favor was set aside by the French Court of Cassation for lack of jurisdiction of the ICC tribunal. At that stage, Jan Paulsson had the great idea of relying on an Egyptian law which provided for arbitration of disputes with foreign investors. On this basis SPP brought arbitration before an ICSID11 tribunal which accepted jurisdiction and granted some relief to the investor.12 In a seminal article, Paulsson called this procedure “arbitration without privity”,13 that is to say arbitration in the absence of a direct arbitration agreement between the parties before the commencement of the arbitration. This approach was extended to bilateral investment treaties and similar international instruments and started a whole wave of treaty-based arbitrations. These treaties and arbitration relying on them are the focus of most of the present day discussion on disputes between investors and States. This new dimension can be looked at from at least two different perspectives: The first perspective is that of the investor. For the investor, new remedies and a new level of protection are now available. This is of great

11 12 13

Studies in the History of the Law of Nations, ed. Charles Henry Alexandrowicz (The Hague: Martinus Nijhoff, 1972), 222–261. Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 575 UNTS 159 [hereinafter ‘ICSID Convention’]. Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award (May 20, 1992), 32 I.L.M. 933 (1993). Jan Paulsson, “Arbitration Without Privity,” ICSID Review 10, no. 2 (September 1, 1995): 232–257, doi:10.1093/icsidreview/10.2.232.

4

Schneider

practical importance. The importance here is perhaps not so much in the award of damages which the investor might obtain. Compensation of losses is, of course, a consolation; but obtaining an award of damages is not the normal objective for an investors. If the investor knew in advance that the venture would end in an arbitration (often in long, complex and costly proceedings), it is unlikely that the investment would be made. What really matters here for the investor, in my view is the very existence of a remedy, a sort of a safety net. In many cases, the availability of a remedy obviates the need to have recourse to it. The practical implication of this existence may not have received enough attention in the research: I have no statistical information but it would appear to me that many interventions into the rights of private investors have not taken place precisely because there is a remedy. One of the contributions to this book deals with an aspect of this question: why the State breaches investment agreements and why the State goes ahead nevertheless?14 It would seem to be a useful subject for a study to find out what motivates the relevant decisions. One should consider not only the State in the abstract but also the persons that make the decisions: the ministers, the civil servants, the parties, and more generally, the political context in which the decisions are taken. Does the existence of a treaty and a remedy for the investor play a role in the political process and in the decisions that lead to the intervention? What use can the investor make of the availability of the remedy in order to protect its investment without actually using the remedy by resorting to arbitration? The title, The Role of the State in Investor-State Arbitration, directs me to look at the other perspective, that of the State. For many States, the fact that treaty claims have become available to foreign investors must have been a ‘sea change’. These investment protection treaties introduce some outside control or supervision over governmental actions, a recourse against the decisions of a government. Such recourse is something of great importance. When such treaties first were concluded, the then capital exporting countries assumed that the principal if not the only target of these treaties were governments in developing countries. But we have seen recently that developing countries are not the only ones which find themselves on the side of the respondent. Now there is hardly any government which does not face the risk of arbitration claims if it violates its commitments towards foreign investors or breaches treaty guarantees. I consider this as an important and useful development for all of our governments.

14

See Zoe Williams, “Domestic Demands And International Agreements: What Causes Investor State Disputes?”, ch. 7 of this book.

The Role of the State in Investor-State Arbitration

5

This supervision and recourse is not limited to Investor-State Arbitration. Speaking here in Berne, at the World Trade Institute, one must mention first of all, the World Trade Organization (WTO) and its Dispute Settlement Understanding (DSU). The investigations and decisions in this organization do not just relate to matters of customs and trade. Quite a number of cases have more far-reaching implications. Consider such cases as ShrimpTurtle15 with its environmental implications; the Banana cases16 with their implications on development and aid policy; and the cases involving genetically modified organisms and their implications on public health policies.17 These cases have repercussions on governmental policies and form part of this growing network of rules and remedies to which governmental action is increasingly subjected. In this context, one may also mention the Law of the Sea Tribunal. Arbi­ tration cases in this forum are less frequent but may also provide checks on governmental action. The entire field of the protection of human rights, with a variety of more or less effective controls over governmental action, also falls into this category. The protection of property rights is perhaps the aspect which is most relevant to our subject as illustrated most recently by the decision of the European Court of Human Rights in the Yukos case,18 in parallel to an Energy Charter Treaty (ECT) arbitration in The Hague.19 And finally one must mention the International Court of Justice and regional courts as potential sources of outside control of governmental action. 15

16

17

18 19

WTO Appellate Body Report on U.S. - Import Prohibition of Certain Shrimp and Shrimp Products, WT/DS58/AB/R adopted 6 November 1998 [hereinafter Shrimp/Turtle], accessed March 3, 2014, http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds58_e.htm. See, e.g., Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas, WT/DS27/AB/R, adopted 25 September 1997, DSR 1997: II, 591 [hereinafter EC – Bananas III]; Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas – Second Recourse to Article 21.5 of the DSU by Ecuador, WT/DS27/AB/RW2/ECU, adopted 11 December 2008, and Corr.1, DSR 2008: XVIII, 7165 [hereinafter EC – Bananas III(Article 21.5 – Ecuador II)]; Appellate Body Report, European Communities – Regime for the Importation, Sale and Distribution of Bananas – Recourse to Article 21.5 of the DSU by the United States, WT/ DS27/AB/RW/USA and Corr.1, adopted 22 December 2008, DSR 2008: XVIII, 7165 [hereinafter EC – Bananas III(Article 21.5 – U.S.]. Panel Report, European Communities – Measures Affecting the Approval and Marketing of Biotech Products, WT/DS291/R, WT/DS292/R, WT/DS293/R, Add.1 to Add.9, and Corr.1, adopted 21 November 2006, DSR 2006: III–VIII. Case of OAO Neftyanaya Kompaniya Yukos v. Russia (Application no. 14902/04), Judgment, Jul. 31, 2014. Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Award (Jul. 18, 2014).

6

Schneider

Today, treaty-based Investor-State Arbitration is one of the areas in which this type of supervision or control over State activity – is most frequently invoked. I have looked for historic precedents for the outside control exercised through this treaty-based arbitration. The only example that came to mind was the practice of the Mixed Arbitral Tribunals in States like Egypt in the follow-up to consular jurisdiction, especially in the 19th century.20 While there is some resemblance insofar as these tribunals provided some outside judicial control of governmental action involving foreigners, the principal difference is that the present day network of investment protection treaties is freely accepted by the States concerned and in most cases of a bilateral nature. Nevertheless some States now consider investment arbitration and a possibility of control exercised in this form as a similarly intrusive mechanism, or a form of post-colonial intervention. They find it objectionable that governmental action could be controlled by independent third parties and, most importantly, that this is done, by preference, to norms which the government cannot change unilaterally. This was one of the principal issues in the debate about State contracts: stabilization clauses, the freezing of the law governing the investments. The protective role which these clauses were meant to play is now assigned to treaties under public international law, enshrining rights of the private investor – an extraordinary development. In the 1950s/1960s this type of outside control of governmental action and of the law applicable to it gave rise to some debate in the United Nations, and especially in the United Nations Conference on Trade and Development (UNCTAD); but the matter was perceived as a problem of the ‘Third World’.21 Today the problem has reached us here in the West. The debate in Australia, Canada, the United States, as well as in Europe, sheds light on the reaction of developing countries in earlier years. There was recently a very interesting debate between an investment arbitrator, a former attorney general in Australia, and an economist about the usefulness of Investor-State Arbitration in Australia, highlighting precisely these issues.22 20 21

22

See, e.g. Henry Wheaton and Coleman Phillipson, Wheaton’s Elements of International Law (London, Stevens and sons, limited; New York, Baker, Voorhis & co., 1916), 183. For an updated discussion, see, e.g. United Nations Conference on Trade and Development (UNCTAD), State Contracts, UNCTAD Series on Issues in International Investment Agreements (United Nations, 2004). For the debate of these issues in Australia, see, e.g. Kyla Tienhaara and Patricia Ranald, “Australia’s rejection of investor-state dispute settlement: Four potential contributing factors”, Investment Treaty News 1, no. 4 (2011): 6–7; and Leon Trakman, “Investor State Arbitration or Local Courts: Will Australia Set a New Trend?”, Journal of World Trade 46, no. 1 (2012): 83–120.

The Role of the State in Investor-State Arbitration

7

Similarly, complaints could be heard in the United States that some European professors decide about the taxes which U.S. citizens have to pay in the U.S. The Swiss may understand when I say “fremde Richter”, the catchword for an ongoing debate in this country.23 Despite these reactions, I must say that I find the availability of control over governmental action an immensely beneficial institution. The system developing through this worldwide network of treaty-based arbitration has the potential of becoming something comparable to administrative or constitutional jurisdiction in some parts of the world. Of course, the system has deficiencies, even serious deficiencies. One of these deficiencies might be seen in its ad hoc nature. The fact that the decisions are made by tribunals composed of private judges, called ‘arbitrators’, may cause a problem for the acceptance of decisions with possibly far-reaching consequences for the country, especially since in most cases a majority of the arbitrators are foreigners. The concerns are well illustrated by the present discussion in Switzerland. But I do not see, within the next 20 years or longer, any chance of a fundamental change in the present system. I have seen suggestions to create an appellate body. I believe that this is unlikely to bring a solution; worse, it would bring more problems. Given the present state of the international community it would mean that possibly incompetent arbitrators are replaced by possibly no more competent supervisory judges; the decisions by tribunals which have been set up with the participation of the parties would be supervised by appellate tribunals selected by bureaucrats.24 Therefore, I believe that what we would have to do now is to examine where the system, as it works now, can be improved. From the contributions to this book, I can see that this is what researchers are doing and I encourage you to continue in this direction. From my perspective the most serious deficiency, the biggest problem with the present system is that it is open only to foreigners. The fact that, under the treaties only foreigners can get the protection and the arbitral control which this system provides is, in my view, a serious disadvantage. There may be some justification for this difference in that the foreign investor is expected not to intervene in the politics of the host State, while the national is part of the host 23 24

See e.g., Peter Jung, “Fremde Richter in Schweizer Tälern”, European Union Private Law Review (GPR) 5 (October, 2013): 241. See, e.g., Irene M. Ten Cate, “International Arbitration and the Ends of Appellate Review”. New York University Journal of International Law and Politics (JILP) 44, no. 4 (2012): 1109–1204.

8

Schneider

State with all the rights that this system may provide. The distinction may get blurred when foreign investors exercise political influence in the host country, but as a distinction it remains an important one that we need to bear in mind. One of the areas which deserves particular attention, more attention than it seems to receive now, is that of the applicable law, the substance of the rules applicable to the protected rights of the investor. The issue is more complex than what I have seen in some of the recent debates. Extreme positions, for or against the treaties and the protections which they provide, are not helpful. In particular they mask what I consider the truly important issues in treaty-based Investor-State arbitration: the practice of this arbitration and the insufficient treatment of the inherent conflict between individual rights and the needs of governmental action. The system of our type of arbitration consists of a wide network of treaties which do not provide a detailed regulation for the treatment of foreign investors, but merely a few principles expressed in similar terms in most of these treaties. These principles are applied not by permanent bodies with a coherent jurisprudence seeking consistency but by a group of specialists selected on a case-by-case basis. The world of investment treaty arbitration remains a small world, largely closed to itself. At the origin, the process was nourished by the practice of commercial arbitration; but the leading arbitration practitioners in our field now form their own universe, a world which seems to be – to a large extent – removed both from commercial arbitration and from public international law. Recently, I argued a case where my opponent quoted only decisions from other investment arbitration cases; when I centered my argument on a case from the International Court of Justice (ICJ), he replied that in investment disputes the principal reference should be other investment cases. The chairman of the tribunal, who had many years of experience in international relations, made it understood in an aside, how pleased he was to hear references to the ICJ in an investment dispute. The incident may serve as an indication of the increasing specialization of treaty-based investment arbitration. Indeed, the references with which cases in this field are argued, decided and debated in academia seems to have narrowed: apart from occasional references to the Draft Articles of the International Law Commission (ILC) on State Responsibility,25 there is hardly any reference to public international law. 25

International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts 2001, Report of the International Law Commission: 53rd Sess. (2001) (New York: United Nations, 2008).

The Role of the State in Investor-State Arbitration

9

There are references to other investment cases and the obligatory reference to Professor Schreuer’s seminal work,26 but that is about it. The cases are decided by individual arbitrators. These arbitrators are chosen for a variety of reasons, but the last reason for which they are chosen is to develop the law. When, in my practice, I have to choose an arbitrator for a client, government or private company, I certainly do not think that his or her function is to develop the law. I want to win my client’s case. What I expect from the arbitrator is some understanding of the industry to which the case relates, but also an understanding of how governments function, a sensitivity to certain types of arguments favorable to my case, a familiarity with the relevant legal principles and an understanding of quantification issues. My opponent is likely to have the same considerations, but with a different orientation, driven by the case he defends. The decisions that these tribunals render are determined primarily by the circumstances of the case, the arguments put to them and their own reasoning. Nevertheless, when these decisions are published and discussed, they frequently are categorized by reference to the procedural rules under which they were rendered and the institutions which provided for some administration – ICSID, UNCITRAL,27 SCC28 and the like, as if these institutions had anything to do with the substance of the awards rendered under their rules. The authors of these awards are rarely mentioned. One would expect that the quality of an award, the weight which it commands as inspiration for other arbitrators, or counsel appearing before them, would depend primarily on the person of the arbitrators and the quality of their reasoning. But when reference is made to an award, the parties and the rules under which the proceedings took place are mentioned, but rarely are the names of the arbitrators mentioned, except those who have issued a dissenting opinion.29 The awards themselves often are referred to as if they were binding precedent. And in a case when your opponent can rely on an award with conclusions that are contrary to your position, you have an uphill struggle, 26

27 28

29

Christoph Schreuer, The ICSID Convention : A Commentary (Cambridge : Cambridge University Press, 2nd edition, 2009, with Loretta Malintoppi, August Reinisch, Anthony Sinclair). United Nations Commission on International Trade Law (UNCITRAL), Arbitration Rules, UN Doc. A/RES/31/98; 15 ILM 701 (1976), revised 2010. Arbitration Rules and the Rules for Expedited Arbitrations, of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), accessed March 3, 2014, http://www .sccinstitute.com/?id=23718. Cf. Danielle Morris, “The Regulatory State and the Duty of Consistency”, ch. 2 of this book, for a rare example where arbitrators are mentioned as authors of an award.

10

Schneider

regardless of the strength of reasons in the award or the authorities cited by its author(s). In this context, one also hears, among practitioners and in academia, complaints regarding a lack of consistency in the ‘case law’.30 I find this complaint itself to be inconsistent, as if consistency was possible or even desirable. The cases involve individual treaties in a network of thousands of other treaties which often use similar or the same words but with different nuances. These words are interpreted by different arbitrators with different backgrounds and different objectives. Under these circumstances, it is surprising how often individual awards relate to others, relying on their reasoning and, where this is found necessary, distinguishing the circumstances of the one case from the others. Despite some differences between awards and occasional conflicting decisions, there seems to be a relatively high degree of consistency in the reasoning of many awards. Indeed, the degree of consistency which can be found in the practice of investment treaty arbitration practice should be a source of concern: the system of treaty-based investment arbitration is a new institution of great complexity in international law. The wording of the treaties, as mentioned, differs in varying degrees, the factual situations differ widely and the arbitrators differ in qualifications, experience and competence. In such a situation, we are progressing by trial and error. Diversity of results is not objectionable but desirable so as to ensure a progressive development of the system, rather than restraining it by the coincidence or repetition of past decisions. Beyond the differences in the rules prescribed by the individual treaties, there is a more fundamental legal issue which often is masked by an antagonistic debate between those who defend investment treaty arbitration and the access of foreign investors to its benefits, and those who oppose the system. This fundamental issue concerns the actual or potential conflict between the rights of the individual investor, as they are protected by a specific treaty, and the needs of governmental action, including changes in the law and administrative practices to respond to changing factual and political situations. 30

UNCTAD mentions “problems of consistency” on divergent legal interpretations of identical or similar treaty provisions, as one of the main concerns of the investor-State dispute settlement (ISDS) regime. See UNCTAD, “Reform of Investor-State Dispute Settlement: In Search of A Roadmap”, International Investment Agreements - Issues Notes no. 2 (June, 2013), accessed March 3, 2014, http://unctad.org/en/PublicationsLibrary/ webdiaepcb2013d4_en.pdf. For a divergent view, see, e.g., Irene M. Ten Cate, “The Costs of Consistency: Precedent in Investment Treaty Arbitration”. Columbia Journal of Transnational Law 51, no. 2 (2013): 418–477.

The Role of the State in Investor-State Arbitration

11

Some of the contributions in this book address aspects of this issue, dealing with the relationship between governmental action, at the level of general regulation or of individual action, on the one hand, and individual rights on the other hand.31 That is the central issue, an issue with which our societies must deal internally and which must be addressed in the relations between States and foreign investors. It appears to me that the concepts and solutions developed in systems like French administrative law deserve particular attention. The distinction between public and private law, perhaps more developed in the Roman tradition than in the Common law world (where it takes a different shape), may well be the direction in which we should look when addressing these issues in investor-State relations.32 This tradition, including the French contrat administratif, deserves much more attention in this context. The legal principles, norms and practices developed in some of these systems with respect to the relationship between public law and private law, the interest of the State and the interest of the individual, the inter-relationship and priorities are matters that deserve to be further considered when addressing this fundamental issue.33 Some of the contributions in this book go to the heart of the problem, dealing with, for instance, the question of the regulatory powers of the State and the rights of the individual. This work should be continued and developed. There is still a long way to the development of a general theory which reconciles these opposing positions.34 But there are useful and interesting contributions in this direction and I look forward to a productive debate in the future. A subject related to this fundamental issue of the relationship between governmental action and the rights of the investor is the valuation of the compensation which the investor should receive when its rights are violated. The matter generally is left to the accountants, loss adjusters and similar specialists. The lawyers seem to have abandoned the field or never entered it – judex (or advocatus) non calculat. 31 32 33

34

See, e.g. Mavluda Sattorova, “The Impact of Investment Treaty Law on Host State Behavior: Some Doctrinal, Empirical and Interdisciplinary Insights”, ch. 6 of this book. About legal transplants, see, e.g. Teerawat Wongkaew, “The Transplantation of Legitimate Expectations in Investment Treaty Arbitration: A Critique”, ch. 3 of this book. For studies in this direction see e.g. Pierre-Marie Dupuy, Francesco Francioni and ErnstUlrich Petersmann (eds), Human Rights in International Investment Law and Arbitration, Oxford: Oxford University Press, 2009; Stephan W. Schill (ed), International Investment Law and Comparative Public Law Oxford: Oxford University Press, 2010. In this direction Andreas Kulick in his review of Schill infra note 37 in European Journal of International Law 22 (2011) 917–925.

12

Schneider

The legal contribution to this question of quantification largely is limited to the occasional references to the Factory at Chorzów case35 before the Permanent Court of International Justice (predecessor of the ICJ) and the principle of reparation stated therein. For the rest, the discounted cash flow method and other valuation methods and principles reign with hardly any challenge. There would seem to be a field which calls for greater intellectual investment by lawyers. The lawyers may benefit from modern economic thinking, like the contributions to asset pricing of the 2013 laureates of the Nobel prize for economics,36 but they must integrate these contributions into legal concepts, in particular those involving the compensation which the investor should receive in case of damaging governmental action. There are indications that investment arbitrators make allowance for public interest considerations at the level of compensation without expressly stating so and largely in the absence of general theory in this respect.37 There are many other issues which are worth exploring when considering the role of the State in Investor-State Arbitration, some of which have been dealt with in this book. I mention just a few: the interrelationship of investment protection arbitration and the political process of the host country is a complex matter of great importance.38 I may mention the example of a case in which my firm acted for the government which had conducted a criminal investigation of the investor in the context of a privatization programme. The entire political scene in the State was affected, including those who had much to lose from the investigation and those who benefited politically or otherwise. The concerns were not just to win the case, but to prevent the arbitration from being used to undermine the anti-corruption efforts. This subject of investment arbitration and the politics in the host country would seem to be grounds for very interesting studies, relevant for an understanding of the system and instructive for arbitrators and counsel. This subject is likely to become even more interesting following the moves towards greater 35 36

37 38

Factory at Chorzow (Germ. v. Pol.), 1927 P.C.I.J. (ser. A) No. 9 (July 26). See, Economic Sciences Prize Committee of the Royal Swedish Academy of Sciences, “Understanding Asset Prices”, Scientific Background on the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2013, awarded to Eugene Fama, Lars Peter Hansen and Robert Shiller, accessed March 3, 2014, http://www.nobelprize.org/nobel _prizes/economic-sciences/laureates/2013/advanced-economicsciences2013.pdf. Andreas Kulick, “Sneaking Though the Backdoor - Reflections on Public Interest in Inter­ national Investment Arbitration,” Arbitration International 29 no. 3 (2013), 435–451. See. e.g., Cornel Marian, “The European Union Investment Arbitration Regime and Local Governments: The Need for a Synchronization of Efforts”, ch. 14 of this book.

The Role of the State in Investor-State Arbitration

13

transparency in treaty based disputes, as they are now reflected in the UNCITRAL Rules on Transparency which entered into force on 1 April 2014.39 Similarly, the impact that remedies under a treaty may have on governmental action deserves further attention. As I said before, the very existence of a remedy for the investor can be presumed to have prevented interventions in the investor’s rights. This seems plausible, but is it correct? Are the decisions of governments and those of individual players really influenced by the existence of such remedies, and if so, how? The subject is touched upon in some of the contributions to this book,40 but a more systematic treatment and case studies may provide useful information about the efficacy of the system. Another area of interest relates to the question of illegality in the investor’s actions. The illegality may involve the acquisition of the investment or its implementation. But the claims themselves may be tainted by illegality41 Arbitral tribunals have dealt with these questions and the solutions adopted have differed. How do we deal with abusive claims which are brought in order to embarrass the respondent government in the hope of collecting some form of compensation? Should treaty arbitration be bilateral in the sense that the respondent State may bring a counterclaim? There are many issues which are raised by the fascinating contributions to this book.42 They provide the basis for a rich Conference Program for which the organizers and contributors must be congratulated. 39

40 41 42

UNCITRAL Rules on Transparency in Treaty-based investor-State Arbitration, accessed March  3,  2014,  http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2014 Transparency.html. See, Sattorova, The Impact of Investment Treaty Law, ch. 6 and Williams, Domestic Demands And International Agreements, ch. 7. See. e.g., Sergey Usoskin, “Illegal Investments and Actions Attributable to a State under International Law”, ch. 13 of this book. See e.g., Dai Tamada, “Host States as Claimants: Corruption Allegations”, ch. 4 of this book.

part 1 State Powers and Investor-State Dispute Settlement Krista Nadakavukaren Schefer

∵

16

Schefer

The Peace of Westphalia, often mentioned as the beginning of international law, did not create the idea of the power of the State, but it is generally regarded as establishing the idea of the powers of States.1 Sovereignty – the concept that has shaped international law since the 17th Century – gives each State government the equal right to rule within its borders and the equal right to be free from interference from outside its borders. According to the sovereignty-story, States’ powers are limited only through the necessity of co-existence with other sovereigns or through voluntary self-restraint in pursuit of cooperation with others. Yet sovereignty remains – and it remains a question of powers. The establishment of the United Nations (UN) system can be seen as an alternative to the sovereign-States’ powers-only approach that was in place until the Second World War. The idea promulgated by the drafters of the UN Charter was one that foresaw two changes to the Westphalian regime: a new role for non-State actors through an international demand for the protection of the rights of individuals within a State’s territory on the one hand; and a multilaterally-governed set of controls on State actions taken outside its territory on the other. In the decades following the UN Charter’s establishment, human rights and the prohibition on aggression have not replaced the centrality of sovereignty in international law’s practice (or even its theoretical framework as viewed by most international law scholars), but they have changed the look of international law in a number of ways. One of those ways is in the growing acceptance of States’ duties (in addition to States’ powers) as a defining feature of statehood.2 It is no longer sufficient for a government to merely refrain from waging war on its neighbors – a government is expected to cooperate with them to resolve shared problems, to notify them of impending danger and to remove barriers to the flow of goods, services, and capital flows from abroad. Nor is it sufficient to simply refrain from abusing aliens – a State can be legitimately expected to refrain from violating the rights of its own citizens by not subjecting them to harm, * Krista Nadakavukaren Schefer is SNF Professor of International Law and International Economic Law, University of Basel, [email protected]. 1 See Stéphane Beaulac, “The Westphalian Model in Defining International Law: Challenging the Myth,” Australian Journal of Legal History 8 (2004): 182–185; Leo Gross, “The Peace of Westphalia, 1648–1948,” American Journal of International Law 42 (1948): 20; and David Held, “The Changing Structure of International Law: Sovereignty Transformed?” in The Global Transformations Reader: An Introduction to the Globalization Debate, ed. David Held and Anthony McGrew (Cambridge: Polity Press, 2003), 162–176. 2 Sandra Fredman, Human Rights Transformed: Positive Rights and Positive Duties (Oxford: Oxford University Press, 2008), 10–30.

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_003

State Powers and Investor-State Dispute Settlement

17

threats, or discriminatory treatment. The movement to recognizing State duties goes further, however hesitatingly, with calls for States to be even better “global citizens,” to ensure ever-better “good governance,” and to provide for the subsistence needs of its population and even to protect persons in another State’s territory who are in danger.3 Distinguishing between the positive and negative State duties is difficult, in part because their analysis has so often been tied to the analysis of rights.4 But State duties exist throughout international law, not only in the area of human rights, and the fact of demands for action is highly relevant. Significant for the investor-State dispute settlement context is the recognition that in modern international law, States may be called upon either to refrain from acting or to be active against their will in order to support the community value of upholding individual rights.5 What does this discussion of State duties have to do with the chapters in this part? Well, despite the title, “State Powers and Investor-State Dispute Settlement,” the underlying problems to which the authors address their attention are those relating to States’ duties: duties of consistency, and to act – if not wonderfully well, then at least not badly, and a suggested duty to use tools available to them to protect their citizens from investment claims.

The Contributions

The chapters in Part I tackle four different aspects of States’ duties. Tarcisio Gazzini’s contribution looks at the legal instruments lying at the heart of the investor-State dispute settlement system. The international investment agreement containing the investment protection standards is – whether bilateral or regional – a treaty falling within the definition of the Vienna Convention on 3 Krista Nadakavukaren Schefer, “Preface,” in Poverty and the International Economic Legal System: Duties to the World’s Poor, ed. Krista Nadakavukaren Schefer (Cambridge: Cambridge University Press, 2013), xxviii–xxix; Stephanie Leinhardt and Krista Nadakavukaren Schefer, “Positive or Negative, Legal or Moral: What Duties to Reduce Poverty?” in Poverty and the International Economic Legal System: Duties to the World’s Poor, ed. Krista Nadakavukaren Schefer (Cambridge: Cambridge University Press, 2013), 393, footnote 11 and accompanying text. 4 Fredman, Human Rights Transformed, 66–70. 5 Krista Nadakavukaren Schefer and Thomas Cottier, “Responsibility to Protect (R2P) and the Emerging Principle of Common Concern,” in Die Schutzverantwortung (R2P): Ein Paradigmenwechsel in der Entwicklung des internationalen Rechts?, ed. Peter Hilpold (Leiden: Martinus Nijhoff, 2013), 134.

18

Schefer

the Law of Treaties. As treaties, these instruments are negotiated agreements consented to by each of the parties before becoming binding on the parties. This conscious creation of law, argues the author, opens the possibility of providing the parties with sufficient flexibility to protect social values while still affording a predictable investment framework. In order to ensure a “balance” between social values and investment protection, parties can draft obligations in precise and narrow language, or include general exceptions clauses. They may insert clauses to provide for regular review and possible adjustments of treaty text to ensure that current economic relations are reflected in the language. Even pre-existing treaties can be made more protective of social values if the parties should choose to adjust them. Parties can amend or renegotiate obligations or even terminate the treaty entirely. The next contribution, by Danielle Morris, discusses the obligation that States’ regulatory authorities be consistent in their actions and decisionmaking. Based on the legal myth of a unified State, investment law supports holding States accountable to investors when different governmental actors send conflicting signals regarding the investment. How far such a duty should extend is Morris’ concern. Seeing the value in coherent policy making, the author nevertheless fears that if the standard of fair and equitable treatment (FET) should include positive duties on the State to coordinate its sub-units’ actions, investors will be absolved of any need of being diligent themselves. Teerawat Wongkaew takes up the discussion of FET by examining the relationship between FET and the protection of legitimate expectations. The investment law system, he says, has placed much emphasis on the principle of legitimate expectations in the recent past, but the emphasis has been shifting from a protection of investors’ subjective beliefs to one that is more accommodating of hosts’ sovereignty. This change reflects the greater investment law system’s increased attention to sovereignty, but is still unsatisfactorily vague. Wongkaew then warns that the vagueness may be inherent in using legitimate expectations in the investment context for legitimate expectations is a principle transplanted from the domestic law system by arbitrators without sufficient consideration for the differences in basic goals of these two systems. The final chapter is that by Dai Tamada, examining corruption claims in investment-State dispute settlement arbitrations. Calling the investment arbitration setting unbalanced, the author claims that denying investment protection to investors engaged in corruption would help to establish a more evenhanded setting for resolving the dispute. Yet, having reviewed the possible consequences of denying treaty protections to investors while corruption is a problem implicating both sides of the dispute, Tamada leaves us with the

State Powers and Investor-State Dispute Settlement

19

question of what is the best path for investment arbitration in these cases – procedural balance is not, it seems, all we need to worry about. Comments All of the papers, I would say, take a distinctly pro-State stance. This is interesting, and a clear sign that a new generation of investment lawyers is emerging. Equally interesting is that the papers take a pro-active State stance. Host States are to be given space to pursue their sovereign policies, but they are expected to make good use of this space. According to our authors, States should more effectively use their drafting possibilities to protect policy space from infringement through investment treaties; States should not be under a duty of absolute consistency, because investors must be encouraged to be diligent, but they do need to organize their administrative systems so as to ensure adequate and transparent regulation of investors; States should decide the extent to which the principle of legitimate expectations should be considered within the bounds of FET provisions; and investors engaging in corrupt behavior should (perhaps) not be able to get compensation for investment treaty violations but neither should states allow for corruption. Reading these papers, my question is whether these proposals swing the pendulum too far in the direction of giving host States too much room for bad behavior. At their core, investment protection treaties, with their investorState dispute settlement provisions, are – or at least could be – instruments to promote good governance. Indirectly they promote regulatory foreseeability by increasing the transparency of laws – in their existence, creation, and application; they ensure that governmental agents can be held accountable for violations of legal norms through the imposition of compensation where the investor can prove harmful effects stemming from the State’s unlawful or unfair behavior; and they may broaden participation in international governance by allowing natural and legal persons to bring an action directly against a government on the international level. Admittedly, offering investors the possibility of launching a claim against a State is neither a comprehensive framework for governance nor a particularly efficient one. Good governance requires more than simply allowing foreign investors to know about laws – citizens must as well, and they must know how such laws are being applied to others (such as foreign investors) as well as to themselves. Participation in governance, too, must be broadened to ensure that not only the economic concerns of corporations are considered by

20

Schefer

governmental decision-makers, but also to individuals within the State. Citizens and groups within the State must be given the opportunity to raise complaints about how their government treats them or fails to treat their grievances – whether the grievances are economic or financial in nature, or are affecting their political, social, or cultural lives. Investor-State dispute settlement cannot adequately ensure that the separation of powers within States is maintained, nor can it promote the free and vigilant media that is called for by some governance scholars. Perhaps most problematic of all, investor-State dispute settlement is highly inequitable. Giving access to international dispute settlement only to foreign investors fosters distortions in political decision-making processes, threatening the responsiveness of a government to its electorate. Where legal rights depend on propertied interests, factual social inequalities lead to de facto legal disempowerment. Unless consciously thwarted, such results may become the basis for a State’s justified attention to foreign persons but at the cost of repudiating its duties toward its own disadvantaged populations. There is, in short, much to be done to improve the system if investment law protection is to become the instrument for good governance in practice that it is in theory. There are a number of arbitrations in which governments explained themselves with noble purposes for their actions, but the arbitrators looked only to the problems of how such actions were implemented to strike down the regulations as violating the investment agreement. From the point-of-view of the international community as a whole, such ‘wins’ for investors may not be desirable, even where legally justified. The investor-State dispute system may, indeed, be placing too much emphasis on individual property rights and excessively discounting the governmental dilemma of weighing numerous policy considerations to fulfill their multiple duties. However, is restricting foreign investors’ protection the most effective response to such criticism? Does the system impose too many duties on States to protect investment? Or is the larger problem not – as it appears to me – that States have too little accountability toward their domestic populations. Should we, in other words, be lowering protections of FDI or strengthening governance at home? While I can well see the potential benefits of (if not the absolute necessity for) explicit general exceptions provisions in international investment agreements for principles such as non-discrimination, compensated expropriations, or full protection and security, what would it mean for governance if States should be permitted, even encouraged, to insert a general exception to principles such as non-arbitrariness or FET? These principles are not only beneficial for investors – they are fundamental to the rule of law. What grounds could

State Powers and Investor-State Dispute Settlement

21

justify arbitrary actions? Or unfair treatment? Is the problem really that investors get ‘fair’ treatment or that what is ‘fair’ is being determined on the basis of an overly-narrow view of what fair is and of misplaced emphasis on what determines the legitimacy of an expectation? Addressing corruption through restrictions on investors’ claims where corruption is proven, too, has much to speak for it. Intuitively, blocking compensation for violations of expected investment benefits would seem to promise a corresponding reduction in willingness to engage in corrupt practices. Yet, in practice, calling for these limits on investor rights may not be bringing us much closer to a corruption-free world. In addition, many corruption charges are brought by new regimes trying to capitalize on their predecessors’ ‘dirty hands’. Yet, the investments have been made and there is no guarantee that the current regime is any cleaner. How should these realities be reconciled? And are investment arbitrators wellsuited to determine the equities of such determinations? These questions brought up by the following chapters are important. Now, as investment law is in the process of rebalancing the interests of states and investors, we need to remain committed to pursuing a goal of improving States as regulators of individuals’ lives, not just to State powers for the sake of preserving sovereignty.

chapter 1

States and Foreign Investment A Law of the Treaties Perspective Tarcisio Gazzini 1.1 Introduction Several States have criticized or expressed dissatisfaction with the current regime of the protection of foreign investment. They believe that investment treaties often require the surrender of important sovereign prerogatives and unacceptable limitations on regulatory powers.1 It is certainly true that the overwhelming majority of these treaties are manifestly unbalanced. They are essentially about the legal relationship between the host State and the foreign investor, but as a rule impose obligations exclusively upon the host States.2 This is not inherent in these treaties: it is a deliberate choice of the contracting parties. In some cases, the problem is further complicated by the negotiators’ poor understanding of the implications and potential consequences of these treaties.3 Yet, the real question is how States can take full advantage of investment

* Tarcisio Gazzini is Senior Researcher at the University of Lausanne and Visiting Professor at the Graduate Institute Geneva. Email: [email protected]. 1 In literature, see, in particular, Michael Waibel et al., ed., The Backlash against Investment Arbitration, (The Hague: Kluwer, 2010), especially Part IV. For an overview, see United Nations Conference on Trade and Development (UNCTAD), “Reform of Investor-State Dispute Settlement: In Search of a Roadmap,” UNCTAD Issue Note 2 (May 2013), accessed January 23, 2014, http://unctad.org/en/PublicationsLibrary/webdiaepcb2013d4_en.pdf. 2 This paper does not deal with the question of the better protection that foreign investors might enjoy in comparison with domestic investors. This differential treatment has raised concern in several countries, including the United States. According to the Trade Act of 2002, for instance, “the principal negotiating objectives of the United States regarding foreign investment are to reduce or eliminate artificial or trade-distorting barriers to foreign investment, while ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States, and to secure for investors important rights comparable to those that would be available under United States law,” Trade Act of 2002, H.R. 3009–62, 107th Cong., 2nd sess, Sec. 2102 (b) (3), accessed January 23, 2014, http://www.gpo.gov/fdsys/pkg/ BILLS-107hr3009enr/pdf/BILLS-107hr3009enr.pdf. 3 See, for instance, the oral evidence given by Prof. Christoph Schreuer in Wintershall Aktiengesellschaft v. Argentine Republic, ICSID ARB/04/14, Award, ¶ 85 (Dec. 8, 2008). Unless

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_004

24

Gazzini

treaties as a vehicle for economic development, without compromising on their social values and most prominently the protection of the environment, labor standards and human rights. The first section of this chapter discusses how States could better define their treaty obligations, preserve more efficiently their sovereign prerogatives, and ensure an appropriate level of accountability and responsibility of multinational companies. The second section examines the tools available to States under the law of the treaties to uphold the deal they have entered and consolidate a stable and predictable legal framework. The third section explores how, during the period of application of the treaty, States could seek to strike what they perceive as a more optimal balance between the private and public interests of the various stakeholders. The final section deals with termination of investment treaties. It is argued that the tools available to States under the law of the treaties and often expressly foreseen in investment treaties may significantly contribute to improve the legal certainty and fairness in the field of foreign investment, but remain largely underused by States. 1.2

Preliminary Remarks

This contribution builds upon the following five assumptions that seem to be undisputed. First, as any other treaties, investment treaties are manifestations of the sovereignty of the contracting parties. They are based on the freely expressed consent of the parties, and they must be complied with in good faith.4 They fall squarely within the definition of treaty for the purpose of the Vienna Convention on the Law of Treaties (VCLT), the provisions of which reflect, to a large extent, customary international law.5 This is certainly true of the pacta sunt servanda rule and the provisions on interpretation of treaties.6

otherwise indicated, all cases cited in this chapter are available online at “Investment Treaty Arbitration (ITA),” accessed January 23, 2014, http://italaw.com. 4 Paragraph 8 of the U.N. General Assembly Resolution on Permanent Sovereignty over Natural Resources (14 December 1962), for instance, reads: “[f]oreign investment agreements freely entered into by or between sovereign States shall be observed in good faith.” United Nations General Assembly Resolution 1803 on Permanent Sovereignty over Natural Resources (14 December 1962) U.N. G.A. Res. 1803 (XVII), 17 UN GAOR Supp. (No.17) at 15, UN Doc. A/5217 (1962). 5 Vienna Convention on the Law of Treaties 1155 UNTS 331. 6 See, amongst many cases, Saluka Investments BV (The Netherlands) v. The Czech Republic, UNCITRAL, Partial Award, ¶ 296 (17 March 2006). With regard to investment arbitration, it has been pointed out that the interpretation of investment treaties calls for a “particular duty

States And Foreign Investment

25

The fact that foreign investors are the main beneficiaries of investment treaties, the peculiar provisions on the termination of these treaties, and the hybrid nature of investment arbitration7 are all immaterial as to the application to these treaties of the VCLT – if the concerned States have ratified it – or the relevant customary international rules on the law of treaties. Second, States are and remain the exclusive and absolute domini of investment treaties. They negotiate, supplement, amend, suspend, and terminate them. With regard to termination, it must be emphasized that foreign investors are exposed to a double risk of termination of investment treaties: unilateral denunciation, in accordance with the applicable provisions, not only by the host State, but also by their home States; and termination by mutual consent under Article 54 (b) of the VCLT. This is without prejudice to the contribution of various stakeholders to the process leading to the conclusion or modification of investment treaties, or to the adoption of relevant domestic or international provisions on transparency, publicity, consultation, and public scrutiny. Third, once admitted within the jurisdiction of the host State, foreign investors must respect its sovereignty and comply with its laws and regulations. The preamble of the bilateral investment treaty (BIT) between Switzerland and Nigeria, for instance, reiterates the duty of the investor to respect the sovereignty of the host country and observe its laws.8 Fourth, the host State continues to exercise its regulatory powers, but must do so in accordance with its international commitments, including those contained in investment treaties. Indeed, investment standards contribute to establish the limits within which these powers may be exercised. The crux of the matter remains the definition of these limits, bearing in mind the difficulties to balance the different public and private interests at stake. Finally, it is widely accepted that foreign investment may play a pivotal role to improve overall productivity, enhance competitiveness and entrepreneurship, transfer knowledge and technology, create jobs, and ultimately eradicate poverty.9 Yet, the extent to which the host State will benefit from foreign of caution” as one of the parties to the dispute was a stranger to the treaty negotiation (Sir Franklin Berman, dissenting opinion in Industria Nacional de Alimentos, S.A. and Indalsa Peru, S.A. v. Peru, ICISD ARB/03/4, Decision on Annulment, ¶ 9 (5 September 2007). 7 See Zachary Douglas, “The Hybrid Foundations of Investment Treaty Arbitrations,” British Yearbook of International Law 74, no 1 (2003): 151. 8 The French text refers to: “le devoir de l’investisseur de respecter la souveraineté du pays d’accueil et d’observer ses lois.” 9 See, in particular, Monterrey Consensus of the International Conference on Financing for Development, 2003: United Nations Department of Economic and Social Affairs, Financing for Development: Monterrey Consensus of the International Conference on Financing for

26

Gazzini

investment will depend, to a large extent, on its capacity to develop sound investment policies and to effectively translate them into legal instruments adopted internationally, domestically and contractually with foreign multinational companies. 1.3

Striking a Balanced Deal

Many States, especially in the developing world, have expressed two major concerns regarding modern investment treaties. The first concern relates to the substantive and procedural provisions of these treaties, which normally impose obligations exclusively upon the host State and grant rights exclusively to the foreign investor. Not surprisingly, in the arbitral proceedings that they generate, the host State is systematically the respondent in investment arbitration.10 Certain treaties, such as the Energy Charter Treaty11 or the BIT between Switzerland and Chile,12 expressly provide access to international arbitration exclusively to foreign investors. The manifestly unbalanced character of most investment treaties is the result of the deliberate – although admittedly not always thoroughly evaluated – choice of the contracting parties. It is up to them to include in the treaty obligations for foreign investors and / or the home State, as well as to introduce any remedy in case of non-compliance with these obligations. Needless to say, the capacity of achieving such a result will hinge – as in any other treaty – on the contracting parties’ interests and bargaining power.



10

11 12

Development: The Final Text of Agreements and Commitments Adopted at the International Conference on Financing for Development, Monterrey, Mexico, 18–22 March 2002 (United Nations, 2003), http://www.un.org/esa/ffd/monterrey/MonterreyConsensus.pdf, and the preamble of Model Bilateral Investment Treaty Template prepared by the Southern African Development Community (SADC), SADC Model Bilateral Investment Treaty Template with Commentary, July 2012, accessed January 23, 2014, http://www.iisd.org/ itn/wp-content/uploads/2012/10/SADC-Model-BIT-Template-Final.pdf. Mehmet Toral and Thomas Schultz, “The State, a Perpetual Respondent in Investment Arbitration? Some Unorthodox Considerations,” in The Backlash against Investment Arbitration, Waibel et al., 577. Energy Charter Treaty, Dec. 17, 1994, art. 26, 2080 UNTS 95. Accord entre la Confédération suisse et la République du Chili concernant la pro­ motion  et la protection réciproque des investissements, Sep. 24, 1999, Switzerland-Chile, art. 9 (2) accessed January 23, 2014, http://unctad.org/sections/dite/iia/docs/bits/chile _switzerland_fr.pdf.

States And Foreign Investment

27

It is important to stress that the flexibility of the current legal framework in the field of foreign investment, which is essentially constituted of BITs and other treaties with a normally limited number of parties, permits States to tailor their commitments in accordance with their specific and changing needs.13 Indeed, States have enjoyed such a flexibility not only to negotiate different agreements with different partners, but also to conclude BITs with asymmetrical provisions for the parties. From this perspective, flexibility may compensate the main advantages offered by a multilateral framework, namely greater simplicity and uniformity. In this respect, the Economic Community of West African States (ECOWAS) Supplementary Act on Foreign Investment14 and the Southern African Development Community (SADC) Model BIT Template15 offer innovative responses to the criticism expressed by many States, especially in the developing world, to the unbalanced content of investment treaties. Both treaties abandon the practice of including, in investment treaties, obligations exclusively upon the host State, and introduce obligations also for foreign investors and the home State. Chapter 3 of ECOWAS Supplementary Act on Foreign Investment, in particular, contains a comprehensive catalogue of foreign investors’ obligations and duties. Article 12 imposes upon foreign investors the obligation to conduct an environmental and social impact assessment of the potential investment, to duly apply the precautionary principle, and to make the related documents available to the local community. Article 13, in turn, enjoins foreign investors to refrain from getting involved in any corruption practice. Interestingly, a finding by a domestic tribunal that a foreign investor has breached its obligations under Article 13 would terminate the foreign investors’ access to the dispute 13

As noted by Kevin C. Kennedy, “A WTO Agreement on Investments: A Solution in Search of a Problem,” University of. Pennsylvania Journal of International Economic Law 24 (2003): 183, “Bilateral investment agreements offer the flexibility that is not possible under a multilateral framework. BITs can be tailored to fit country-specific needs in a way that is not possible under a multilateral framework.” 14 See Supplementary Act A/SA.3/12/08 Adopting Community Rules on Investment and the Modalities for their Implementation with ECOWAS, enacted by the ECOWAS Authority on Dec. 19, 2008. ECOWAS Commission, ECOWAS Common Investment Market Vision (Abuja, Nigeria, 2009), app. 3, 71, accessed January 23, 2014, http://www.ecobiz.ecowas .int/en/pdf/cim-vision-english-version.pdf. COWAS Commission, ECOWAS Common Investment Market Vision (Abuja, Nigeria, 2009), 71, http://www.ecobiz.ecowas.int/en/ pdf/cim-vision-english-version.pdf. It is annexed to the ECOWAS Treaty of which it constitutes an integral part (Article 42 (2)), Id. 15 SADC, Model BIT.

28

Gazzini

settlement mechanism provided for in the treaty (Article 14). Under Article 14 (2) and (4) investors shall uphold human rights in the workplace and the community in which they are located, and comply with fundamental labor standards as stipulated in the 1998 ILO Declaration on Fundamental Principles and Rights of Work.16 The second source of concern relates to the perceived undue limitations of the sovereignty of the host State and the curtailing of its regulatory powers. Along these lines, it has recently been argued that: [o]ne common issue is the need to clarify the interaction between international investment instruments and domestic investment policy as well as policy in other areas – for e.g., sustainable development and environmental regulation. Governments must always be concerned about ensuring that there is sufficient policy space for them to engage in reconciling competing interests.17 This issue must be dealt with carefully. It must be emphasized that the host State always retains its inherent sovereign power to regulate any subjects and activities within its jurisdiction, even if the treaty is silent on the issue. Equally important, it is not liable to compensate the negative economic impact that may be caused by bona fide regulations within the accepted police powers of the host State.18 As the tribunal pointed out in Parkerings-Compagniet AS v. Lithuania:

16

17

18

International Labour Organization (ILO), Declaration on Fundamental Principles and Rights at Work, 37 I.L.M. 1233 (1998); CIT/1998/PR20A, accessed January 23, 2014, http:// www.ilo.org/declaration/thedeclaration/textdeclaration/lang--en/index.htm. Commonwealth Investment Experts Group Meeting for the African Region, “Summary Record,” Kampala, Uganda, October 20–21, 2011, accessed January 23, 2014, http://secretariat.thecommonwealth.org/files/243514/FileName/FINALIEGOutcomesSummary%282% 29.pdf. As emphasized in Técnicas Medioambientales Tecmed, S.A. v. Mexico, ICSID ARB (AF)/00/2, Award, ¶ 119 (29 May 2003): ‘[t]he principle that the State’s exercise of its sovereign powers within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever is undisputable’. See also S.D. Myers Inc. v. Government of Canada, UNCITRAL (NAFTA), First Partial Award ¶ 285 (13 November 2000); Saluka v. Czech Republic, Partial Award, ¶ 252, and, with regard to indirect expropriation, Methanex Corporation v United States, NAFTA, Final Award, pt. IV, ch. D, ¶ 7 (3 August 2005).

States And Foreign Investment

29

[i]t is each State’s undeniable right and privilege to exercise its sovereign legislative power. A State has the right to enact, modify or cancel a law at its own discretion. Save for the existence of an agreement, in the form of a stabilisation clause or otherwise, there is nothing objectionable about the amendment brought to the regulatory framework existing at the time an investor made its investment. As a matter of fact, any businessman or investor knows that laws will evolve over time. What is prohibited however is for a State to act unfairly, unreasonably or inequitably in the exercise of its legislative power.19 The real problem lies with the establishment of the limits within which the host State is entitled to exercise its inherent sovereign powers over foreign investors. These limits are set, inter alia, by international treaties binding the host State. It is therefore important for the parties negotiating an investment treaty to define, as clearly as possible, these limits for their own benefit as well as for the benefit of the respective foreign investors.20 States have plenty of options to achieve this objective. Article VII (1) of the BIT concluded in 2009 between the Belgium-Luxemburg Economic Union and Colombia, for instance, reads: [r]ecognising the right of each Contracting Party to establish its own level of domestic environmental protection and environmental development policies and priority, and to adopt or modify accordingly its environmental legislation, each Contracting Party shall strive to ensure that

19

20

Parkerings-Compagniet AS v. Republic of Lithuania, ICSID ARB/05/8, Award, ¶ 332 (11 September 2007). With regard to NAFTA investment regime, in S.D. Myers v. Canada, First Partial Award, ¶ 220, the Tribunal held that in the context of NAFTA, a Tribunal has upheld that the host State has “the right to establish high level of environmental protection. They are not obliged to compromise their standards merely to satisfy the political or economic interests of other states.” In this respect, Principle 9 of the UN Human Rights Council (HRC), Guiding Principles on Business and Human Rights: Implementing the UN “Protect, Respect and Remedy” Framework, adopted on 16 June 2011, reads: “States should maintain adequate domestic policy space to meet their human rights obligations when pursuing businessrelated policy objectives with other States or business enterprises, for instance through investment treaties or contracts.” See Special Rep. of the Secretary-General, Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework, U.N. Doc. A/HRC/17/31 (Mar. 21, 2011) (by John Ruggie).

30

Gazzini

its legislation provides for high levels of environmental protection and shall strive to continue improving this legislation.21 In the same vein, Article 12 (3) of the United States 2012 Model BIT states that: [t]he Parties recognize that each Party retains the right to exercise discretion with respect to regulatory, compliance, investigatory, and prosecutorial matters, and to make decisions regarding the allocation of resources to enforcement with respect to other environmental matters determined to have higher priorities. Accordingly, the Parties understand that a Party is in compliance with paragraph 2 where a course of action or inaction reflects a reasonable exercise of such discretion, or results from a bona fide decision regarding the allocation of resources.22 Intimately related to the exercise of regulatory power is the question of indirect expropriation and the obligation incumbent upon the host State to compensate the foreign investor. While it is undisputed that the exercise of regulatory powers may amount under certain circumstances to indirect expropriation, drawing the line between the non-compensable exercise of regulatory powers and indirect expropriation remains problematic.23 The contracting parties to investment treaties may agree upon a presumption against indirect expropriation in case of the non-discriminatory exercise of regulatory powers by the host State designed to protect public health, safety, and the environment.24 Another effective option, available to contracting parties to better safeguard and define the exercise of their regulatory powers over foreign investors, is the 21

22 23

24

Agreement between the Belgium-Luxemburg Economic Union and the Republic of Colombia, on the Reciprocal Promotion and Protection of Investments, Feb. 4, 2009, Belg.-Lux-Colom., accessed January 23, 2014, http://unctad.org/sections/dite/iia/docs/ bits/Belgium_colombia.pdf. 2012 U.S. Model Bilateral Investment Treaty, accessed January 23, 2014, http://italaw.com/ sites/default/files/archive/ita1028.pdf. Amongst many awards, see, for example, Marvin Roy Feldman Karpa v. United Mexican States, ICSID ARB(AF)/99/1, Award, ¶ 100 (16 December 2002); Ronald S. Lauder v. Czech Republic, UNCITRAL, Award, ¶ 200 (3 September 2004); Saluka v. Czech Republic, Partial Award, ¶ 263. Article 4 (b) of Annex B (Expropriation) of the US Model BIT, above note 22, for instance, reads: “[e]xcept in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.”

States And Foreign Investment

31

introduction in the treaty of general or special exception clauses.25 These clauses are increasingly frequent in investment treaties and may significantly differ from each other.26 Some of them are strongly-worded and may have a real impact on the exercise of regulatory powers as well as on the assessment by tribunals of the interests and legitimate expectations involved. Article VII(4) of the BIT between the Belgium-Luxemburg Economic Union and Colombia, for instance, reads: [n]othing in this Agreement shall be construed as to prevent a Contracting Party from adopting, maintaining, or enforcing any measures that it considers appropriate to ensure that an investment activity in its territory is undertaken in accordance with environmental law of the Party.27 Provisions like Article VII(4) do not normally fall within the scope of the provisions on the settlement of disputes. However, they may be important in at least three respects. First, they can be invoked by the host State to defend before an 25

26

27

See, for instance, Suzanne A. Spears, “The Quest for Policy Space in a New Generation of International Investment Agreements,” Journal of International Economic Law 13, no. 4 (December 1, 2010): 1037; William J. Moon, “Essential Security Interests in International Investment Agreements,” Journal of International Economic Law 15, no. 2 (June 1, 2012): 481; and Kenneth J. Vandevelde, “Rebalancing through exceptions,” Lewis & Clark Law Review 17, no. 2 (2013): 449. A selection of these clauses the can be found in Kathryn Gordon and Joachim Pohl, Environmental Concerns in Investment Agreements: A Survey, OECD Working Papers on International Investment, No. 2011/1 (May 2011). Belgium-Luxemburg and Colombia BIT, emphasis added. Article I (5) defines “environmental legislation” as any legislation or provision “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 […]”. Similarly, Article 14 (Right to regulate) of the SADC Protocol on Finance and Investment reads: “[n]othing in this Annex shall be construed as preventing a State Party from exercising its right to regulate in the public interest and to adopt, maintain or enforce any measure that it considers appropriate to ensure that investment activity is undertaken in a manner sensitive to health, safety or environmental concerns” (emphasis added), SADC Protocol on Finance and Investment, Aug. 18, 2006, accessed January 23, 2014, http://www.sadc.int/files/ 4213/5332/6872/Protocol_on_Finance__Investment2006.pdf. Other provisions, such as Article VIII of the Colombian Model BIT, expressly allow the host State to adopt, maintain and enforce any environmental measure that it considers appropriate, provided that such measures are proportional to the objectives sought. Colombian Model BIT, August 2007, accessed January 23, 2014, http://italaw.com/documents/inv_model_bit_colombia.pdf.

32

Gazzini

arbitral tribunal conduct that otherwise would amount to a breach of the treaty. The level of review exercised by the tribunal will depend on whether the relevant clause is self-judging or not. In the first case, the role of the tribunal is limited to verify the good faith of the host State, whereas in the second case it will precede to a full review.28 Second, provisions like Article VII(4) may be considered as context for the purpose of interpreting other substantive treaty provisions, including those on fair and equitable treatment and expropriation. Finally, they must be taken into account when dealing with the legitimate expectations of foreign investors, who must be aware of the expressed intentions of the Parties to the treaty concerning the protection of non-investment interests, as in the case of the provision referred to above the protection of the environment. Some exception clauses are closely modeled after Article XX GATT.29 This is the case for Article 10(1) of the Canada Model BIT, which reads: [s]ubject 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 international trade or investment, nothing in this Agreement shall be construed to prevent a Party from adopting or enforcing measures necessary: 28

29

On the importance of subjecting self-judging clauses to the obligation of good faith, whose compliance may be reviewed by an arbitral tribunal, see Kenneth J. Vandevelde, “Of Politics and Markets: The Shifting Ideology of the BITs,” International Tax & Busisness Law. 11 (1993): 159, 179–181. The Letter of Submittal of the US President to the Senate on the conclusion of the BIT with Bahrain, reads: “[t]his Treaty makes explicit the implicit understanding that measures to protect a Party’s essential security interests are self-judging in nature, although each Party would expect the provisions to be applied by the other in good faith.” Treaty between the Government of the United States of America and the Government of the State of Bahrain Concerning the Encouragement and Reciprocal Protection of Investment, Letter of Submittal, Apr. 24, 2000, accessed January 23, 2014, http://www.state.gov/documents/organization/43479.pdf. General Agreement on Tariffs and Trade (GATT 1947), 55 UNTS 194. It is worth recalling that in Appellate Body Report, Korea – Measures Affecting Imports of Fresh, Chilled and Frozen Beef, WT/DS161/AB/R, WT/DS169/AB/R, ¶ 164 (adopted Jan. 10, 2001), DSR 2001:I, the WTO Appellate Body explained that applying Article XX GATT implies “a process of weighing and balancing a series of factors which prominently include the contribution made by the compliance measure to the enforcement of the law or regulation at issue, the importance of the common interests or values protected by that law or regulation, and the accompanying impact of the law or regulation on imports or exports.”

States And Foreign Investment

33

(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.30 An interesting variation of provisions inspired by Article XX GATT is Article 22 of the Investment Agreement elaborated by the Common Market for Eastern and Southern Africa (COMESA), which reads: [s]ubject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between investors where like conditions prevail, or a disguised restriction on investment flows, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member State of measures: (a) designed and applied to protect national security and public morals; (b) designed and applied to protect human, animal or plant life or health; (c) designed and applied to protect the environment; or (d) any other measures as may from time to time be determined by a Member State, subject to approval by the COMESA [Common Investment Area Committee].31 The wording of this provision is noteworthy, especially insofar as it replaces the adjective “necessary,” which appears in Article XX GATT with the objectives “designed and applied,” thus departing from the strict conditions under which the host State can adopt, on grounds of necessity, measures otherwise inconsistent with its international commitments. Finally, contracting parties may further safeguard the exercise of their regulatory powers by including in the investment treaty a clause regulating conflicts of obligations contained in the treaty, with obligations stemming 30 31

Canada 2004 Model BIT, accessed January 23, 2014, http://italaw.com/documents/ Canadian2004-FIPA-model-en.pdf. Investment Agreement for the COMESA Common Investment Area, May 23, 2007, accessed January 23, 2014, http://vi.unctad.org/files/wksp/iiawksp08/docs/wednesday/ Exercise%20Materials/invagreecomesa.pdf. (adopted at the 12th Summit of COMESA Authority of Heads of State and Government, held in Nairobi, Kenya, May 22–23, 2007).

34

Gazzini

from other treaties, and in particular environment treaties, in favor of the latter obligations. In so doing, the host State will be able to adopt, in a nondiscriminatory and non-arbitrary manner, measures required under the noninvestment treaty without incurring responsibility for breach of the investment treaty. Article 104(1) NAFTA provides a useful example as it reads: 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 […], b) the Montreal Protocol on Substances that Deplete the Ozone Layer […], c) the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal […], 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.32

In all the examples provided above, the clauses must be interpreted and applied on a case-by-case basis. As long as they are invoked by the parties in good faith33 and in strict compliance with the principles of nondiscrimination and non-arbitrariness, they do not represent a significant risk to the principles underpinning the legal protection of foreign investment, which are largely expressions of the rule of law. Yet, they can contribute to rebalance the content of investment treaties, safeguard the police space of the host State, and ultimately provide adequate responses to the legitimate criticism voiced by some States and civil society against the current form of these treaties. 32 33

North American Free Trade Agreement (NAFTA), Dec. 17, 1992, art. 104(1), 32 ILM 289, 605 (1993). As Cheng noted in his treatise on the principles of international law, “[t]he principle of good faith requires that every right be exercised honestly and loyally. Any fictitious exercise of a right for the purpose of evading either a rule of law or a contractual obligation will not be tolerated. Such an exercise constitutes an abuse of the right, prohibited by law.” Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Cambridge University Press, 1953), 121.

States And Foreign Investment

1.4

35

Keeping the Balance

The flexibility of a framework, which remains to a large extent bilateral or based on treaties with few contracting parties, means that States may intervene more effectively than in the case of large multilateral treaties to clarify the content of investment treaties or to preserve the balance struck at the time of the treaty’s conclusion. This may occur typically when a provision contained in an investment treaty appears to be ambiguous or controversial. Indeed, several treaty provisions in the field of foreign investment remain in a state of flux and have been – and continue to be – the object of inconsistent arbitral decisions. In this regard, one may mention the controversial questions related to the scope of umbrella clauses,34 the jurisprudence inconstante related to the clause included in several BITs concluded by Argentina before 1994 according to which foreign investors are allegedly required to resort to domestic courts of the host State for a period of 18 months prior to resorting to international arbitration,35 or the uncertainty surrounding the inclusion of dispute 34 In Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC BV v. Paraguay, ICSID ARB/07/9, Decision of the Tribunal on Objections to Jurisdiction, ¶ 141 (29 May 2009), the Tribunal admitted that “there is no jurisprudence constante on the effect of umbrella clauses, that the subject is one on which legal opinion is divided, that the relationship between commercial and sovereign acts of government is not free from difficulty, and that each particular clause falls to be interpreted and applied according to its precise wording and in the context it is included in a BIT.” In literature see Christoph Schreuer, “Travelling the BIT Route. Of Waiting Period, Umbrella Clauses and Forks in the Road,” The Journal of World Investment & Trade 5, no. 2 (2004): 231; Stanimir A. Alexandrov, “Breaches of Contract and Breaches of Treaty. The Jurisdiction of Treaty-based Arbitration Tribunals to Decide of Contract Claims in SGS v. Pakistan and SGS v. Philippines,” The Journal of World Investment & Trade 5, no. 3 (2004): 555; Thomas W. Wälde, “The ‘Umbrella’ Clause in Investment Arbitration – A Comment on Original Intentions and Recent Cases,” Journal of World Investment & Trade 6, no 2 (2005): 183; Katia Yannaca-Small, “Inter­ pretation of the Umbrella Clause in Investment Agreements,” OECD Working Papers on International Investment 2006/3 (October 2006); Stephan W. Schill, “Enabling Private Ordering: Function, Scope and Effect of Umbrella Clauses in International Investment Treaties,” Minnesota Journal of International Law 18 (2009): 1; Katia Yannaca-Small, “What about this Umbrella Clause,” in Arbitration under International Investment Arbitration, ed. Katia Yannaca-Small (New York: Oxford University Press, 2010), 479. 35 Compare, for instance, TSA Spectrum de Argentina S.A. v. Argentina, ICSID Case ARB/05/5, Award (19 December 2008), with concurring opinion by Georges Abi-Saab and dissenting opinion by Grant D. Aldonas; Impregilo S.p.A. v. Argentina, ICSID Case ARB/07/17, Award (21 June 2011), with concurring and dissention opinions by Brigitte Stern and Charles N. Brower; Abaclat and Others v. Argentina, ICSID Case No. ARB/07/5, Decision

36

Gazzini

settlement provisions within the functioning of the most favored nation treatment (MFN).36 The most efficient manner for States to dissipate any legal uncertainty with regard to the content or scope of a treaty provision is the adoption by the parties of a joint interpretation in the form of joint declarations, agreed minutes, protocols, exchanges of notes, or any other suitable form.37 Such a joint interpretation will contribute to clarify the matter and be binding for the

on Jurisdiction and Admissibility (4 August 2011, with dissenting opinion by George AbiSaab; ICS Inspection and Control Services Limited (United Kingdom) v. Argentina, UNCITRAL, PCA Case 2010–9, Award on Jurisdiction (10 February 2012); Daimler Financial Services AG v. Argentine Republic, ICSID Case ARB/05/1, Award (22 August 2012), with dissenting opinion by Charles N. Brower and opinion by Domingo Bello Janeiro; Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. Argentina, ICSID Case ARB/07/26, Decision on Jurisdiction (19 December 2012); Teinver S.A., Transportes de Cercanías S.A. and Autobuses Urbanos del Sur S.A. v. Argentina, ICSID Case ARB/09/1, Decision on Jurisdiction (21 December 2012), with dissenting opinion by Kamal Hossein; Ambiente Ufficio S.p.A. and others v. Argentina, ICSID Case No. ARB/08/9, Decision on Jurisdiction and Admissibility (8 February 2013), with dissenting opinion by Santiago Torres Bernárdez. 36 In Wintershall Aktiengesellschaft v. Argentina, Award ¶ 189, in particular, the Tribunal referred to “a welter of inconsistent and confusing dicta of different tribunals.” In literature, see Pia Acconci, “Most-Favoured-Nation Treatment and International Law on Foreign Investment,” in The Oxford Handbook of International Investment Law, eds. Peter Muchlinski, Federico Ortino and Christoph Schreuer (Oxford: Oxford University Press, 2008), 363; Andreas Ziegler, “Most-Favoured-Nation (MFN) Treatment,” in Standards of Investment Protection, ed. August Reinisch (Oxford: Oxford University Press, 2008), 59; Zachary Douglas, “MNF Clause in Investment Arbitration: Treaty Arbitration Off the Rails,” Journal of International Dispute Settlement 2 (2011): 97; Stephan Schill, “Allocating Adjudicatory Authority: MFN Clauses as a Basis of Jurisdiction – A Reply to Zachary Douglas,” Journal of International Dispute Settlement 2 (2011): 353; Tony Cole, “The Boundaries of Most Favored Nation Treatment in International Investment Law,” Michigan Journal of International Law 33 (2012): 537. See also the Report of the Study Group on The Most-Favoured-Nation clause of the International Law Commission (ILC), contained in the ILC Report to the General Assembly, 63rd Sess., ch. XII, U.N. Doc. A/66/10 (2011). 37 The common position of the Netherlands and the Czech Republic on three issues concerning the interpretation and application of the BIT between the two countries, for instance, were recorded in the Agreed Minutes dated 1 July 2002, see CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, UNCITRAL, Final Award, ¶ 89 (14 March 2003). Another example is the exchange of diplomatic notes between Argentina and Panama on the interpretation of the MFN clause contained in the BIT they concluded in 1996. The diplomatic notes were referred to by the Tribunal in National Grid v. The Argentine Republic, UNCITRAL, Decision on Jurisdiction, ¶ 85 (20 June 2006).

States And Foreign Investment

37

parties38 and tribunals alike. Some BITs expressly foresee the possibility of a joint interpretation,39 but of course the parties to a treaty can seek and possibly issue a joint interpretation any time regardless of the existence of any treaty provision in this respect. Other treaties provide for consultation between the parties40 or for the adoption of binding interpretation by a Joint Committee.41 The obligations related to consultation or participation to the joint committee must be discharged in good faith and with a positive and constructive attitude. However, there is no obligation to negotiate and even less to reach an agreement. When the treaty is silent on the issue of joint interpretation, nothing prevents a party from seeking the consent of the other party (or parties) on the interpretation of a given provision. It may either submit to the other party 38

39

40

41

As observed by the ILC, “an agreement as to the interpretation of a provision reached after the conclusion of a treaty represents an authentic interpretation by the parties that must be read into the treaty for purposes of its interpretation.” ILC, Documents of the second part of the 17th session and of the 18th session including the reports of the Commission to the General Assembly, Yearbook of the International Law Commission 18, no. II (1966): 221, U.N. Doc, A/CN.4/SER.A/1966/Add.l (1966). Article 17 (2) of the BIT between the United Kingdom and Mexico, for instance, reads: “[a] n interpretation jointly formulated and agreed upon by the Contracting Parties with regard to any provision of this Agreement shall be binding on any tribunal established under this section.” Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United Mexican States for the Promotion and Reciprocal Protection of Investments, May 12, 2006, U.K.-Mex., Mexico No.1 (2006) Cm 6860, Treaty Series No. 22 (2007). See, for example, Article 9 of the BIT between the Netherlands and China, according to which “[e]ither Contracting Party may propose to the other Party that consultations be held on any matter concerning interpretation, application and implementation of the Agreement. The other Party shall accord sympathetic consideration to the proposal and shall afford adequate opportunity for such consultations.” Agreement on encouragement and reciprocal protection of investments between the Government of the People’s Republic of China and the Government of the Kingdom of the Netherlands, Nov. 26, 2001, P.R.C.-Neth., accessed January 23, 2014, http://unctad.org/sections/dite/iia/docs/bits/ china_netherlands.pdf. Article 15.21(2) of the FTA between the United States and Singapore, for instance, reads: “[a] decision of the Joint Committee declaring its interpretation of a provision of this Agreement under Article 20.1.2 (Joint Committee) shall be binding on a tribunal established under this Section, and any award must be consistent with that decision,” United States – Singapore Free Trade Agreement, May 6, 2003, U.S.-Sing., accessed January 23, 2014, http://www.ustr.gov/sites/default/files/uploads/agreements/fta/singapore/asset _upload_file708_4036.pdf.

38

Gazzini

(or parties) what it believes to be the accurate interpretation of a given provision, or simply invite it (or them) to discuss the meaning to be attached to such a provision. Due to the absence of any treaty or customary obligations in this respect, the other party (or parties) would be entirely free as to the reaction to either initiative.42 The various options available include the refusal to express any view. This option was cunningly chosen by the United States with regard to the diplomatic note dated June 8, 2010 issued by Ecuador on the interpretation of Article II (7) of the BIT between the two countries, which – according to Ecuador – was incorrectly interpreted in Chevron v. Ecuador.43 Ecuador then filed a request for arbitration with a view to obtaining an award on the interpretation of Article II (7). It has been reported that the Tribunal, by majority, declined to exercise jurisdiction due inter alia to the fact that no legal dispute had arisen between the two States since the United States remained silent.44 From this perspective, the legal claim put forward by Ecuador was not accepted by the United States. It remains to be seen how the Tribunal would have ruled had the United States contested the interpretation offered by Ecuador. In the event the parties agree on a joint interpretation, a caveat is nonetheless necessary: since the parties to the treaty and those to the dispute are not the same, foreign investors must be protected against the retroactive effects of joint declarations or other documents amounting to disadvantageous modifications of the treaty.45 Although the distinction between interpretations and 42

See, in this sense, Republic of Ecuador v. United States of America, PCA No. 2012–5, Memorial of Respondent United States of America on Objections to Jurisdiction (Apr. 25, 2012), sec. II (2). 43 Chevron Corporation and Texaco Petroleum Company v. The Republic of Ecuador, UNCITRAL, PCA Case No. 34877, Partial Award on the Merits (30 March 2010). 44 See Jarrod Hepburn and Luke Eric Peterson, “U.S.-Ecuador Inter-State Investment Treaty Award Released to Parties: Tribunal Members Part Ways on Key Issues,” International Arbitration Reporter, 30 October 2012, accessed January 23, 2014, http://www.iareporter .com/articles/20121030_1. The decision, which was rendered on September 29, 2012, is not available to the public. On the questions of the existence of a legal dispute between the parties and of the relationships between State-State arbitration, on the one hand, and investor-State arbitration and domestic litigation, on the other hand, see the opinions offered to the Tribunal by several experts in Chevron v. Ecuador: Expert Opinion with Respect to Jurisdiction, Prof. W. Michael Reisman (Apr 24, 2012), Expert Opinion on the Construction of Article VII, Prof. Christian Tomuschat (Apr. 24, 2012), Expert Opinion of Prof. Alain Pellet (May 23, 2012), Expert Opinion of Stephen C. McCaffrey on Jurisdiction (May 23, 2012), and Expert Opinion of C.F. Amerasinghe (May 23, 2012). 45 In Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID ARB/01/3, Award (22 May 2007), the Tribunal pointed out that “States are of course free to amend

States And Foreign Investment

39

amendments is not always clear,46 foreign investors must be given the possibility to challenge the application of what they perceive as an amendment to the treaty with regard to pending disputes or disputes over facts that have occurred before the adoption of the alleged amendment. It will be for the tribunal to establish whether the parties have merely confirmed their interpretation of a certain provision or altered its meaning. Instead of seeking a joint interpretation, a party to an investment treaty may consider issuing unilateral interpretative declarations. Similar declarations are not unknown in investment treaty practice.47 Although these declarations would not be legally binding per se, tribunals could take them into account as elements of State practice for the purpose of establishing any possible agreement between both or all parties on the interpretation of any given provision under Article 31(3)(b) VCLT. When no agreement between the parties can be established, the declaration may still have some practical consequences, as tribunals may take it into account when assessing the legitimate expectations of foreign investors. The above suggested course of action would inevitably involve a risk that the parties would issue conflicting interpretative declarations. Even in this case, it may be argued that unilateral declarations would nonetheless be beneficial since both investors and tribunals would be aware of the diverging positions of the parties, as well as the difficulties to predict any future arbitral pronouncement on this point. 46

47

the Treaty by consenting to another text, but this would not affect rights acquired under the Treaty by investors or other beneficiaries.” On the difficulties to distinguish interpretations from amendments, see the debate provoked by NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, July 31, 2001, accessed January 23, 2014, http://www.naftaclaims.com/files/ NAFTA_Comm_1105_Transparency.pdf. For a sharp critique of the Commission interpretation, see Methanex Corporation v United States, Second Opinion of Professor Sir Robert Jennings (Sep. 6, 2001). As pointed out by Ian Sinclair, The Vienna Convention on the Law of Treaties, 2nd ed. (Manchester: Manchester University Press, 1984), 138, “[i]t is inevitably difficult, if not impossible, to fix the dividing line between interpretation properly so called and modification effected under the pretext of interpretation.” See, for instance, Note on the Interpretation of Article 11 of the Bilateral Investment Treaty between Switzerland and Pakistan in the light of SGS Société Générale de Surveillance S.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/01/13, Decision of the Tribunal on Objections to Jurisdiction (Aug. 6, 2003); attached to the Letter of the Swiss Secretariat for Economic Affairs to the ICSID Deputy Secretary-General dated 1 October, 2003, published in “ICSID Tribunal’s Interpretation Of BIT Article 11 Worries Swiss,” 19, no. 2 (February 2004): 1.

40

Gazzini

It is somehow surprising that States are reluctant to seek joint interpretations or to issue unilateral declarations even when they are – or should be – concerned with the legal uncertainty that characterizes certain provisions of investment treaties. Such uncertainty is detrimental to the concerned States and foreign investors alike. The latter cannot rely on stable and predictable legal protection, while the former are exposed to the risk of arbitral proceedings with unpredictable outcomes, not to mention that their organs and agents may struggle to ensure compliance with the treaty. After all, it would be relatively easy for States to issue a joint declaration or arrange an exchange of notes on the meaning of a given treaty provision. The initiative may clarify, for instance, whether a Most Favored Nation (MFN) clause does cover the procedural provisions contained in the treaty; whether an ambiguously drafted provision can be considered an umbrella clause and, as such, may attract umbrella clauses included in other treaties through a MNF clause; or, whether an umbrella clause does apply to certain types of special undertakings. It is equally surprising that States are so hesitant to issue unilateral official statements on their interpretation and application of a given provision, especially when the provision has been the object of a variety of conflicting decisions as in the case of the (in)famous provision contained in several BITs concluded by Argentina before 1994 and related to the 18-month period of submission of the dispute to domestic tribunals before starting arbitral proceedings. Since a significant number of BITs concluded by Argentina contain this clause, the Argentinian government – but also the other party to these BITs – should carefully consider the opportunity to clarify its position regarding the interpretation of the 18-month clause. Another important means at the disposal of States to uphold the balance struck at the time of the conclusion of the investment treaty is allowing the non-disputing party or parties to express their position regarding the interpretation of a given treaty provision through written or oral submissions. This type of clause belongs to the North American tradition and can be found in NAFTA48 and in the Model BITs of the United States49 and Canada.50 Yet, the overwhelming majority of investment treaties do not provide for participation of the non-disputing party to the arbitral proceedings. Such reluctance seems to be related to the risks States may perceive that nondisputing State submissions may lead to a comeback of diplomatic protection. The risk may be more apparent than real, provided that non-disputing State 48 49 50

NAFTA Article 1128. 2012 US Model BIT, Article 28 (2). 2004 Canada Model BIT, Article 35.

States And Foreign Investment

41

submissions are confined to matters of treaty interpretation.51 Submissions by non-disputing party or parties directed at clarifying the meaning of a given provision, without taking sides in the pending proceedings or politicizing the dispute, may assist the arbitral tribunal in discharging its responsibilities.52 In this regard, there are instances in which the home State has made a submission disfavoring the claimant,53 or all NAFTA members shared the same view.54 1.5

Further Improving the Balance

Consistent with the second assumption made above that States are and remain the exclusive and absolute domini of investment treaties, the parties to an investment treaty can at any time amend or renegotiate the treaty, thus modifying the legal protection originally enjoyed by their respective investors. This is a risk that foreign investors have no choice but to accept and against which there is no protection through clauses such as sunset provisions that may apply in case of termination. As mentioned above with regard to interpretation, 51

52

53

54

It is worth noting, by way of example, that Annex B, Art. II (1) BIT between Canada and the Czech Republic, reads: “[u]pon the request of the Tribunal or both disputing parties, the non-disputing Contracting Party may make written submissions to the Tribunal, but only on a question of interpretation of this Agreement,” Agreement between Canada and the Czech Republic for the Promotion and Protection of Investments, Nov. 15, 1990, Can.Czech Rep., accessed January 23, 2014, http://unctad.org/sections/dite/iia/docs/bits/ canada_czech%20republic.pdf. See Gabrielle Kaufmann-Kohler, “Non-Disputing State Submissions in Investment Arbitration: Resurgence of Diplomatic Protection?”, in Diplomatic and Judicial Means of Dispute Settlement, ed. L. Boisson de Chazournes, Marcelo G. Kohen and Jorge E. Viñuales (The Hague: Martinus Nijhoff, 2012), 307. See, for instance, GAMI Investment Inc. v. The Government of the United Mexican States, UNCITRAL, Submission of the United States of America (June 30, 2003), accessed January 23, 2014, http://www.state.gov/documents/organization/22212.pdf; and Mondev v. United States, Second Submission of Canada Pursuant To NAFTA Article 1128 (Jul. 6, 2001), accessed January 23, 2014, accessed January 23, 2014, http://www.state.gov/documents/organization/18271.pdf. See, for instance, the following submissions in Methanex v United States: United States, First Submission re: FTC Statement on Article 1105 (Oct. 26, 2001) and Second Submission re: FTC Statement on Article 1105 (Dec. 17, 2001); Canada, Article 1128 Submission re: FTC Statement on Article 1105 (Feb. 8, 2002); Mexico, Article 1128 Submission re: FTC Statement on Article 1105 (Feb. 11, 2002). All documents available at “Methanex Corporation and the United States of America,” accessed January 23, 2014, http://www .naftaclaims.com/disputes_us_methanex.htm.

42

Gazzini

however, the amendment produces its effects only prospectively and does not affect pending cases or cases related to facts that occurred prior to the entry into force of the amendment. The bilateral nature or the small number of parties to investment treaties facilitates the progressive updating of BITs in order to keep them in line with the evolution of international law, especially in relation to the protection of the environment, labor standards and human rights. From this perspective, the States that are more sensitive to these issues may take the lead and progressively introduce appropriate provisions in their model BITs and at the negotiating table.55 In due time, it may be expected that these new provisions will cross-contaminate other BITs and progressively gain general acceptance. The process may be further enhanced by the so-called “evolutionary clause” contained in certain treaties, whereby the contracting parties undertake to review the legal protection of foreign investment, possibly through a joint committee, in order to make the changes dictated by the subsequent developments in international economic relations. An example may be found in the Free Trade Agreement between European Free Trade Association (EFTA) and Croatia.56 When the revision of the treaty puts an end to substantive provisions, the parties to the treaties may still be bound to them as a matter of customary international law, as in the case of the rules governing expropriation. Failure to comply with any of the conditions under which the host State may expropriate foreign investment, for instance the non-discriminatory nature of the measure, would attract international responsibility. Foreign investors, however, would be unable to invoke the remedies envisaged in the treaty and must rely on those available under customary international law.

55

56

For example, the first Chile-Peru BIT (2000) had no provision about environmental concerns. It was recently replaced by Chile-Peru FTA Investment Chapter that provides: “Article 11.13: Investment and 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.” Acuerdo de Libre Comercio Chile – Perú, Aug. 22, 2006, accessed January 23, 2014, http://www.sice .oas.org/TPD/CHL_PER/CHL_PER_e.ASP. Free Trade Agreement between the EFTA States and the Republic of Croatia, Jun. 21, 2001, art. 30, accessed January 23, 2014, http://wits.worldbank.org/GPTAD/PDF/archive/EFTA -Croatia.pdf. This agreement was replaced by the relevant arrangements between the EFTA States and the EU, after Croatia became member of the European Union in July 1, 2013.

States And Foreign Investment

43

The revision may also concern contingent standards, namely national and MFN treatment. The parties to the treaty could, for instance, introduce exceptions to the functioning of these clauses either with regard to a specific sector or product, to specific measures adopted by the host State,57 or to a specific provision or section of the treaty.58 Revising contingent standards could be an important option available to the contracting parties, assuming they are able to reach an agreement, to protect their own domestic industries and ultimately regain control over the regulation of foreign investment. It is worth noting that the revision can be asymmetrical and/or temporary. The revision may finally affect procedural provisions contained in investment treaties. In this case, the parties to the treaty may revise the domestic and / or international fora available to foreign investors, for instance, by suppressing the right originally granted to the investor to request the constitution of an arbitral tribunal; by limiting rationae materiae, personae or temporis the jurisdiction of the competent arbitral tribunals; or, by reducing the list of the available arbitral tribunals. The parties could also agree upon the revision of the conditions and / or limitations for resorting to the remedies available under the investment treaty. Amongst the options at their disposal, one could mention the introduction of ‘fork in the road’ clauses,59 the obligation to withdraw cases pending before national instances prior to requesting the constitution of an arbitral tribunal,60 a waiver of any right to initiate or continue proceedings before any domestic administrative tribunal or court with regard to claims brought before

57

58

59

60

For example, according to Article 3(2) in fine of the Model BIT of Germany, measures taken for reasons of public security and order are not deemed treatment less favorable for the purpose of the MNF clause. German 2008 Model BIT, accessed January 23, 2014, http://www.italaw.com/sites/default/files/archive/ita1025.pdf. Article IV.2 of the Colombia Model BIT, for instance, expressly states that MFN “does not encompass mechanisms for the settlement of investment disputes.” Colombia 2007 Model BIT, accessed January 23, 2014, http://italaw.com/documents/inv_model_bit _colombia.pdf. See, for instance, Article 10 (2) of the BIT between Greece and Albania, Agreement between the Government of the Hellenic Republic and the Government of the Republic of Albania, for the Encouragement and Reciprocal Protection of Investments, Aug. 1, 1991, Greece-Alb., accessed January 23, 2014, http://unctad.org/sections/dite/iia/docs/bits/ greece_albania.pdf. See also Pantechniki S.A. Contractors & Engineers (Greece) v. The Republic of Albania, ICSID Case No.ARB/07/21, Award (Jul. 30, 2009). See, for instance, China-Netherlands BIT, Ad Article 10 (applicable only to claims against China).

44

Gazzini

arbitral tribunals,61 or, less likely, the exhaustion of the domestic remedies requirement.62 It has been reported that 19 BITs had been renegotiated in 2009, corresponding to almost a quarter of the total BITs concluded in the year. The Czech Republic, China and Romania have been particularly active in renegotiating BITs.63 It may be expected that more investment treaties will be renegotiated in the coming years for two main reasons. On the one hand, a significant number of BITs were concluded in the 1960s and 1970s and are now obsolete both in terms of substantive and procedural provisions. On the other hand, the increasingly important role played in the field of foreign investment by regional and sub-regional organizations – such as the European Union after the entry into force of the Lisbon Treaty or ECOWAS, SADC, COMESA – may lead in due time to the renegotiation and replacement of investment treaties concluded between Member States and third States. A final point deserves to be made with regard to the renegotiation of investment treaties. If the renegotiated treaty contains a MFN treatment clause, the renegotiation effort could be frustrated when foreign investors may rely on MFN clauses in order to enjoy the protection granted under another treaty concluded by the host State with third States. This obviously presupposes the satisfaction of the ejusdem generis principle. 1.6

Putting an End to the Deal

The most drastic option available to States under the law of the treaties, in case of serious dissatisfaction with investment treaties, is unilateral termination.64 61 62

63

64

See, for instance, 2012 US Model BIT, Article 26 (2). Although the exhaustion of domestic remedies is almost unknown in modern investment treaties, it has recently made its appearance in SADC Protocol on Finance and Investment, Article 28. See Mahnaz Malik, “Recent Developments in International Investment Agreements: Negotiations and disputes,” IV Annual Forum for Developing Country Investment Negotiators Background Papers, New Delhi, October 27–29, 2010, International Institute for Sustainable Development (IISD), accessed January 23, 2014, http://www.iisd.org/ pdf/2011/dci_2010_recent_developments_iias.pdf. Investment treaties can also be terminated by mutual consent of the parties. As investment treaties are silent on the issue, termination in this case is governed by Article 54 (b) of the VCLT, which can be considered as reflecting customary international law, see Murphy Exploration and Production Company International v. Republic of Ecuador, ICSID ARB/08/4, Award on Jurisdiction, ¶ 86 (15 December 2010). Instances of termination of

States And Foreign Investment

45

Keeping in mind the long-term nature of most foreign investment, a balance must be struck between the need to preserve the right of States to denounce investment treaties and the need to ensure that foreign investors enjoy sufficiently stable protection under the treaty. This is obtained through peculiar clauses contained in virtually all BITs that allow the parties to the treaty to terminate it, either at the end of the initial or any subsequent period of validity, or any time in the case of unlimited duration or extension. The right to terminate the treaty must be exercised in accordance with the notice period requirement, which is normally six or twelve months.65 What makes investment treaties unique from the point-of-view of termination is the systematic inclusion of sunset or survival provisions according to which these treaties continue to produce their effects after the date of termination in respect of the investment made before such date. Examples of this clause can be found in numerous BITs, including BITs concluded between developing countries.66 The period is normally 10 or 15 years, and occasionally 5 or 20 years.67 It is submitted that nothing in sunset or survival clauses militates against the integral application of the treaty to existing investment during the

65

66

67

investment treaties by mutual consent remain quite exceptional in practice and so far have been confined to intra-European Union BIT. See for example the BIT between Italy and the Czech Republic, which was terminated on 30 April 2009 following an exchange of notes between the two parties. UNCTAD, “Recent Developments in International Investment Agreements (2008–June 2009),” IIA MONITOR no.3 (Jul. 3, 2009): 5, accessed January 23, 2014, http://unctad.org/en/Docs/webdiaeia20098_en.pdf. UNCTAD, “Denunciation of the ICSID Convention and BITS: Impact on Investor-State Claims,” IIA Issues Note no. 2 (December 2010), accessed January 23, 2014, http://unctad .org/en/docs/webdiaeia20106_en.pdf. In literature, see Federico M. Lavopa, Lucas E. Barreiros, M.Victoria Bruno, “How to Kill a BIT and Not Die Trying: Legal and Political Challenges of Denouncing or Renegotiating Bilateral Investment Treaties,” Journal of International Economic Law 16, no. 4 (December 1, 2013): 869–891. See, for instance, Egypt – India BIT, Article 15 (2), Agreement between the Government of the Republic of India and the Government of the Arab Republic of Egypt for the Promotion and Reciprocal Protection of Investments, Apr. 9, 1997, India-Egypt, accessed January 23, 2014, http://finmin.nic.in/bipa/Egypt.pdf; Lebanon – Malaysia, BIT, Article 12 (4), Agreement between the Government of the Lebanese Republic and the Government of Malaysia for the Promotion and Protection of Investments, Feb. 26, 1998, Leb.Malay, accessed January 23, 2014, http://unctad.org/sections/dite/iia/docs/bits/lebanon _malaysia.pdf. See also India Model Treaty, Article 15 (2), India 2003 Model BIT, accessed January 23, 2014, http://www.italaw.com/sites/default/files/archive/ita1026.pdf. See, for instance, the BIT concluded by Bolivia and Ecuador, UNCTAD, Denunciation of the ICSID Convention and BITS, Annexes 1 and 2.

46

Gazzini

period beyond its formal termination. Accordingly, qualifying investors fully enjoy the protection offered by the treaty and can rely on all its provisions, including those related to the settlement of disputes and the MFN clause, if any. In the last few years, several BITs have been unilaterally terminated. In 2013, in particular, South Africa notified its decision to terminate the BITs with Spain (23 June), Luxembourg and Belgium (7 September), Germany (23 October), Switzerland (30 October) and The Netherlands (1 November) in accordance with the relevant termination clauses. All these treaties require a notice period of 6 or 12 months and contain a sunset clause providing for the further application of the treaty to existing investments for a period ranging from 10 to 20 years. The decision to terminate these treaties reflects the disaffection of the Government of South Africa with the current form of BITs, which are perceived as hampering the sustainable development of the country and undermining the Government’s capacity to implement its political agenda. In the words of the Government: South Africa’s updated approach would aim to achieve an appropriate balance between the rights and obligations of investors, the need to provide adequate protection to foreign investors, while ensuring that constitutional obligations are upheld, and that government retains the policy space to regulate in the public interest.68 In parallel with the termination of several BITs, South Africa is adopting a new piece of legislation on the promotion and protection of investment.69 In a 68

69

Speech delivered by the Minister of Trade and Industry Dr Rob Davies at the South African launch of the United Nations Conference on Trade and Development (UNCTAD) Investment Policy Framework for sustainable development at the University of The Witwatersrand (Jul. 26, 2012), accessed January 23, 2014, http://www.info.gov.za/speech/ DynamicAction?pageid=461&sid=29391&tid=77861. The move has been welcome by J.E. Stiglitz, according to whom “[i]t is no surprise that South Africa, after a careful review of investment treaties, has decided that, at the very least, they should be renegotiated. Doing so is not anti-investment; it is pro-development. And it is essential if South Africa’s government is to pursue policies that best serve the country’s economy and citizens,” Joseph E. Stiglitz “South Africa Breaks Out,” Project Syndicate, Nov. 5, 2013, accessed January 23, 2014,  http://www.project-syndicate.org/commentary/joseph-e--stiglitz-on-the-dangers -of-bilateral-investment-agreements. Republic of South Africa, Promotion and Protection of Investment Bill, Government Gazette, vol. 581, no. 36,995 (1 November 2013).

States And Foreign Investment

47

manner reminiscent of the so-called Calvo doctrine,70 the bill is expressly intended (a) to promote and protect investment in a manner that is consistent with public interest and a balance between the rights and obligations of investors; and (b) to ensure the equal treatment between foreign investors and citizens of the Republic, subject to applicable legislation.71 In its current form, the bill contains some of the standards of treatments similar to those typically included in BITs. Some key provisions of the bill, however, present significant differences. Under Article 8 of the bill, in particular, in case of expropriation, the foreign investor is entitled to receive just and equitable compensation, which must reflect “an equitable balance between the public interest and the interests of those affected, having regard to all relevant circumstances including (a) the current use of the investment; (b) the history of the acquisition and use of the investment; (c) the market value of the investment; and (d) the purpose of the expropriation.” The most important departure from current BITs relates to the settlement of disputes between the host State and foreign investors, as the bill provides exclusively for domestic remedies, namely mediation, adjudication by domestic courts or statutory bodies, or domestic arbitration under the 1965 Arbitration Act. As a result of these developments, foreign investment not covered by an investment treaty in force or applicable by virtue of a sunset clause will be protected by customary international rules as well as domestic legislation and a State’s contract, if any. The application and co-ordination of the rules stemming from these sources – including those related to expropriation – may be expected to be problematic. It remains also to be seen what impact the new legal framework will have on the flow of foreign investment to South Africa and whether South Africa will be willing to replace the treaties it has terminated or will terminate in the future with new BITs, presumably inspired by the SADC Model BIT template. In the alternative and probably more efficiently, the promotion and protection of 70

71

On the doctrine, see Amos S. Hershey, “The Calvo and Drago Doctrine,” American Journal of International Law 1 (1907): 26; Kurt Lipstein, “The Place of the Calvo Clause in International Law,” British Yearbook of International Law 22 (1945): 130; Donald U. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (Minneapolis: Univ. of Minnesota Press, 1955); Christoph Schreuer, “Calvo’s Grandchildren: The Return of Local Remedies in Investment Arbitration,” The Law & Practice of International Court and Tribunals 4 (2005): 1; and Bernardo M. Cremades, “Resurgence of the Calvo Doctrine in Latin America,” Business Law International 7 (2006): 53. South Africa, Promotion and Protection of Investment Bill, Article 3 (Purpose of the Act).

48

Gazzini

foreign investment in South Africa will be ensured through regional agreements such as the regional Economic Partnership Agreement currently being negotiated among the European Union and some SADC members, including South Africa.72 1.7 Conclusions Investment treaties, as any other category of treaties, are the typical international legal instrument through which States express their sovereignty by exchanging rights and obligations with a view to protect their common interests. The content of these treaties hinges on the bargaining power of the contracting parties and that the sacrosanct pacta sunt servanda rule must be observed. Contracting parties – especially developing countries – must be aware of the implications of investment treaties and must carefully negotiate substantive and procedural treaty provisions. The unbalanced condition that characterizes most investment treaties is clearly unsatisfactory and indeed one of the main sources of criticism of these treaties. The allegations that investment treaties unduly limit the host State’s sovereign prerogatives and unavoidably undermine its capacity to meet its responsibilities related to the protection of public values, however, are often exaggerated. Recent practice reveals two significant trends showing the intention of contracting parties to strike a better balance between the private and public interests involved. First, certain treaties have been innovative in introducing obligations upon foreign investors and occasionally the home State. Second, exception clauses have proliferated in various forms with a view to better defining and safeguarding the policy space of the host State. Once the treaty has entered into force, contracting parties have several options not only to safeguard the balance struck in the original agreement (in particular by adopting unilateral or joint interpretations), but also to improve it partially or entirely through amendments or renegotiation. Generally, States have been reluctant to use these options and to take full advantage of the flexibility of the current network of investment treaties. By adjusting investment treaties, States would reduce the risk of the most drastic action concerning treaties, namely unilateral termination. 72

“European Trade Commissioner Karel De Gucht on visit to Kenya, Namibia, Botswana and South Africa,” European Commission Press Release, July 12, 2013, accessed January 23, 2014, http://europa.eu/rapid/press-release_IP-13-686_en.htm.

chapter 2

The Regulatory State and the Duty of Consistency Danielle Morris 2.1 Introduction Treating the State as a unified entity for purposes of attribution and liability is a well-established principle of international law. This monolithic approach ensures that wrongful acts are subject to redress, regardless of the government actor or level of government involved. Yet this approach also risks potential complications or unintended consequences as the so-called ‘regulatory State’ develops. As States use specialized agencies to create and implement public policy, the number of government actors making and enforcing rules increases. The policy goals of one regulatory agency may conflict with those of another. This potential for disagreement is multiplied in a federal structure, in which different levels of government are also at work. A foreign investor may thus require administrative approval from a multitude of entities that do not have a mechanism to coordinate their decisions. Assuming none of the government actors involved has acted unlawfully for purposes of international law, what responsibility, if any, does the State nevertheless have to ensure consistency? In other words, is there – or should there be – an independent international law obligation to ensure consistent decisions by all relevant government actors with respect to foreign investment? Several investor-State arbitral awards have suggested that such a ‘duty of consistency’ may in fact be a component of the fair and equitable treatment (FET) obligation, found in the vast majority of investment treaties. These awards have required consistency among different levels of government, different branches of government, and different government ministries. They can be read to suggest that the FET obligation demands not only proper conduct by individual government actors within the scope of their competence, but also coordination by the State of all government actors potentially affecting foreign investment. Such an absolute duty of consistency, however, would be difficult

* Danielle Morris is a Senior Associate in the International Arbitration Group at Wilmer Cutler Pickering Hale and Dorr LLP. I would like to thank Gary Born, Rachael Kent, and Claudio Salas for their comments on earlier drafts of this paper. The views expressed herein, and of course any errors, are my own, and do not necessarily reflect the views of the Firm.

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_005

50

Morris

to implement and risks rewarding a foreign investor’s lack of diligence. Ultimately, it highlights the potential problems in treating the State as fully unified in an age of increasing regulation. The first section of this contribution briefly discusses international law principles governing the attribution of conduct to the State for purposes of international responsibility. The next section examines recent investor-State awards in which the tribunal has found a violation of the FET obligation as a result of inconsistent actions by multiple State actors. It then considers the implications of those awards for the development of an absolute duty of consistency and what the contours of such a duty might be. The last section concludes with a discussion of the potential benefits and risks of a more robust duty of consistency. 2.2

Principles of Attribution: The Unified State

The International Law Commission’s Draft Articles on State Responsibility (ILC Draft Articles) are widely recognized to codify customary international law on the subject.1 These Articles make clear that the State is treated as a unit for purposes of international responsibility.2 As the rapporteur, Professor Crawford, explains: In internal law, it is common for the “State” to be subdivided into a series of distinct legal entities. For example, ministries, departments, component units of all kinds, State commissions or corporations may have separate legal personality under internal law, with separate accounts and separate liabilities. But international law does not permit a State to escape its international responsibilities by a mere process of internal subdivision. The State as a subject of international law is held responsible for the conduct of all the organs, instrumentalities and officials which 1 As the introduction to the ILC Draft Articles states: “[t]hese articles seek to formulate, by way of codification and progressive development, the basic rules of international law concerning the responsibility of States for their internationally wrongful acts.” International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts 2001, Report of the International Law Commission: 53rd Sess. (2001) (New York: United Nations, 2008), General Commentary, cmt. 1 [hereinafter ILC Draft Articles]. 2 See ILC Draft Articles, art. 2, cmt. 6 (“For the purposes of the international law of State responsibility […] [t]he State is treated as a unity, consistent with its recognition as a single legal person in international law.”).

The Regulatory State And The Duty Of Consistency

51

form part of its organization and act in that capacity, whether or not they have separate legal personality under its internal law.3 Most relevant for present purposes is the reference to State organs, such as government ministries, regulatory agencies, and courts.4 All of the acts taken by these entities in the scope of their duties are attributable to the State.5 As the ILC Draft Articles emphasize: [T]he reference to a State organ […] is intended in the most general sense. It is not limited to the organs of the central government, to officials at a high level or to persons with responsibility for the external relations of the State. It extends to organs of government of whatever kind or classification, exercising whatever functions, and at whatever level in the hierarchy, including those at provincial or even local level. No distinction is made for this purpose between legislative, executive or judicial organs.6 The State will thus be responsible for an entity’s acts if the latter is “empowered by the law of that State to exercise elements of the governmental authority” and is “acting in that capacity in the particular instance.”7 This is true even when the entity in question is not officially designated as an organ by municipal law.8 These longstanding rules of attribution and State responsibility have recently taken on a new light. As States’ regulatory efforts have expanded in scope, there has been a corresponding tendency towards specialization and so fragmentation. States may choose to delegate authority for policy 3 ILC Draft Articles, art. 2, cmt. 6. 4 The ILC Draft Articles define a ‘State organ’ as including “any person or entity which has that status in accordance with the internal law of the State.” ILC Draft Articles, art. 4(2). 5 See ILC Draft Articles, art. 4(1) (“The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central Government or of a territorial unit of the State.”). 6 ILC Draft Articles, art. 4, cmt. 6. 7 ILC Draft Articles, art. 5. 8 See ILC Draft Articles, art. 4, cmt. 11 (“The internal law of a State may not classify, exhaustively or at all, which entities have the status of ‘organs’. In such cases, while the powers of an entity and its relation to other bodies under internal law will be relevant to its classification as an ‘organ’, internal law will not itself perform the task of classification.”).

52

Morris

creation and enforcement to a variety of government actors. The resulting structure, by which the State “applies and extends rule-making, monitoring and enforcement via bureaucratic organs,” has been dubbed the ‘regulatory State’.9 The regulatory State poses potentially significant difficulties for the traditional conceptions of attribution and international responsibility. This is due to the sheer number of government actors involved. States commonly delegate authority to ministries within the executive branch and regulatory agencies, for example. Yet these entities may exist at both the federal level and at the provincial, state, or local level. In this way, the number of entities for whose acts the State is liable may increase rapidly, along with the potential for disagreement among the various government decision-makers. This disagreement may be the result of acknowledged differences of opinion or different policy goals. It may also be unknowing, with the implicated government actors simply unaware of each other’s decisions. In either case, the State is responsible for all of these decisions under international law. 2.3

Investor-State Awards and the Duty of Consistency

2.3.1 The Current State of the Law Questions of inconsistent State action have arisen in a variety of circumstances. These have involved different levels of government, different branches of government, and different ministries within a branch of government. Regardless of the actors involved, one common denominator is often a claim by the investor that it had received some form of official approval of its investment on which the investor was entitled to rely. The investor accordingly asserts that the State was obligated to ensure that subsequent government conduct was consistent with that prior representation. In analyzing such claims, tribunals have generally conducted a fact-specific analysis that seeks to balance the reasonable expectations of the investor with the State’s right to regulate and to organize its internal administration as it sees fit. As the following examples demonstrate, however, different tribunals have emphasized different aspects of that analysis, with implications for the existence and scope of a duty of consistency under international law.

9 David Levi-Faur, “The Odyssey of the Regulatory State, Episode One: The Rescue of the Welfare State,” Jerusalem Papers in Regulation & Governance, Working Paper No. 39 (November 2011): 14.

The Regulatory State And The Duty Of Consistency

53

2.3.1.1 Metalclad v. Mexico10 In Metalclad, the claimant sought to construct a hazardous landfill in Guadalcázar, a municipality in the Mexican state of San Luis Potosí, through its local subsidiary, COTERIN.11 Metalclad had conditioned its purchase of COTERIN on the receipt of the relevant federal and state permits for construction and operation of the landfill.12 Once Metalclad began construction, however, the municipality of Guadalcázar ordered a stop to the building activities on the ground that Metalclad lacked a municipal construction permit.13 Metalclad asserted in the arbitration that Mexican federal authorities had assured it that a municipal construction permit was not necessary and that if it were, the muni­ cipality had no legal basis on which to deny said permit. Nevertheless, the federal authorities suggested that Metalclad apply for the permit as a gesture of goodwill. Metalclad did so, resuming construction at the same time.14 Approximately a year later – well after construction had finished – the municipality denied the permit.15 Metalclad had not received notice of the Town Council meeting in which the permit application was discussed and, as a result, was denied the opportunity to participate. Metalclad requested that the municipality reconsider its denial of the permit, but that request was similarly rejected.16 Metalclad, a U.S. corporation, then filed an arbitration claim against Mexico under Chapter 11 of the North American Free Trade Agreement (NAFTA), asserting a violation of the NAFTA’s FET and expropriation provisions.17 The tribunal found both an indirect expropriation and an FET violation as a result of the inconsistent government actions.18 Specifically, the tribunal pointed to 10

11 12 13 14 15 16

17 18

Metalclad Corporation v. United Mexican States, ICSID Case No. ARB(AF)/97/1, Award (August 30, 2000) (Civiletti, Siqueiros, Lauterpacht P). Unless otherwise indicated, all cases cited in this chapter are available online at “Investment Treaty Arbitration (ITA),” accessed January 23, 2014, http://www.italaw.com. See Metalclad, Award, ¶ 3. See Metalclad, Award, ¶¶ 28–36. See Metalclad, Award, ¶ 40. See Metalclad, Award, ¶¶ 41–42. See Metalclad, Award, ¶ 50. See Metalclad, Award, ¶ 54. Eventually, when the municipality’s other efforts to stop the landfill failed, the governor of San Luis Potosí issued an “Ecological Decree declaring a Natural Area for the protection of rare cactus […] encompass[ing] the area of the landfill.” Id., ¶ 59. The decree effectively barred Metalclad from operating the landfill or selling the land on commercial terms. See Metalclad, Award, ¶ 72. See Metalclad, Award, ¶¶ 101, 107. The tribunal also held that the Ecological Decree had resulted in an indirect expropriation of Metalclad’s investment. Id., ¶ 109.

54

Morris

statements by the Mexican federal government that federal and state construction and operation permits sufficed. It also pointed to provisions of Mexican law to the effect that any municipal construction permit could only address physical details of the construction process itself. Accordingly, the municipality’s denial of the construction permit on environmental and political grounds was impermissible.19 2.3.1.2 Arif v. Moldova20 Mr. Arif, an individual French investor, established a Moldovan investment vehicle (Le Bridge Corp.) through which to develop a series of duty-free stores along the Moldovan border with Romania and at the Chișinău Airport. He encountered difficulties in both respects, but of primary interest for present purposes is the fate of the airport duty-free store. Mr. Arif had signed a lease agreement with the State Enterprise Chișinău International Airport (Airport State Enterprise) that required the subsequent approval of the State Administration of Civil Aviation (SACA).21 The SACA did in fact approve the lease shortly thereafter, and the lease was then formally adopted by the Board of Directors of the Airport State Enterprise.22 A few months later, the Licensing Chamber of the Government of Moldova updated Le Bridge’s license to include the airport duty-free store.23 A competitor of Le Bridge’s, Dufremol, then initiated litigation against the Airport State Enterprise and Le Bridge. Dufremol sought the cancellation of the lease on the basis that Moldovan law required that the SACA approve private negotiations to lease State property before any contract to that effect could be executed.24 That very day, the court suspended the lease agreement by ex parte order pending a decision on the merits. The Director-General of the Airport State Enterprise then immediately restricted access to the airport by Le Bridge’s 19

20 21 22 23 24

See Metalclad, Award, ¶¶ 85–86. Although this portion of the award was later annulled due to particularities in the wording of the NAFTA’s FET provision, see United Mexican States v. Metalclad Corporation, 2001 BCSC 664 (Can. B.C.), the reasoning of the tribunal remains applicable to more broadly worded FET provisions and is consonant with the approach of other arbitral tribunals, including those discussed infra. Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award (April 8, 2013) (Hanotiau, Knieper, Cremades P). See Arif, Award, ¶¶ 87, 89. See Arif, Award, ¶¶ 90–91. See Arif, Award, ¶ 92. See Arif, Award, ¶¶ 93, 452. The default, preferred mechanism for the lease of State property was a tender, which was intended to guarantee the best and most profitable use of unused State property. See id., ¶ 451.

The Regulatory State And The Duty Of Consistency

55

employees.25 The Special Transport Prosecutor, an official in the Moldovan Attorney General’s Office, confirmed that the Airport State Enterprise had complied with Moldovan law in leasing the airport premises to Le Bridge.26 Nevertheless, the Moldovan courts ultimately upheld Dufremol’s claim and declared the lease null and void.27 The Airport State Enterprise then successfully initiated eviction proceedings against Le Bridge.28 Mr. Arif, in turn, brought a claim under the France-Moldova BIT, arguing inter alia that Moldova had violated the FET obligation through the inconsistent actions of the relevant State entities.29 Specifically, Mr. Arif complained that “Moldova’s organs did not act as part of the same unit, but in opposite ways.”30 The tribunal agreed with Mr. Arif. The tribunal noted in this respect that [c]onsistency by the State in its relations with the investor is an important element of the fair and equitable treatment standard, whether viewed independently or within the context of legitimate expectations.31 25 26 27

28 29

30 31

See Arif, Award, ¶ 93. See Arif, Award, ¶ 97. See Arif, Award, ¶¶ 122, 452. The procedural details of the litigation are complex, involving various lawsuits by different competitors of Le Bridge’s and a number of appeals and reconsiderations, but the ultimate result was that Le Bridge was denied access to the premises (and its merchandise there) for over two years; Le Bridge was only permitted to recover its stock in November 2011, over five months after the conclusion of legal proceedings at the Supreme Court. See id., ¶¶ 545–546. See Arif, Award, ¶ 124. Mr. Arif also alleged a denial of justice with respect to the cancellation of the lease. The tribunal rejected the claim, however, concluding that the requirement of pre-approval by the SACA was not “void of economic sense” and that the conduct of the Moldovan courts did not rise to the level of a denial of justice. See Arif, Award, ¶ 453. Arif, Award, ¶ 520 (italics omitted). Arif, Award, ¶ 538. “Accordingly, an investor’s legitimate expectations might be breached not only by a substantive change in policy, but also by the treatment of the investor during the process of the change in policy.” Id. With respect to Mr. Arif’s duty-free stores at the border, the tribunal “recogni[zed] that the potential inconsistency between the expectations created by Respondent’s administrative organs and the decisions of its judicial organs may be a source of problems in the future.” Id., ¶ 555(f). Specifically, “[h]aving created the legitimate expectation that Claimant is entitled to operate these stores, Respondent has an obligation to ensure that Claimant’s investment in the four border stores is respected or Claimant is compensated for any loss. Accordingly, should subsequent judicial proceedings arising from the Dufremol litigation lead to court orders for closure of these stores, Respondent would be required to take action to remedy the consequences of a breach of [Claimant’s] legitimate expectations.” Id., ¶ 555(g).

56

Morris

The tribunal emphasized that “there was a contract entered into by a state entity, approval of the contract by a regulatory authority, and an updated license.”32 The tribunal accordingly held that Mr. Arif had a legitimate expectation that his investment in the airport duty-free store complied with Moldovan law.33 Moldova frustrated this legitimate expectation through “a direct inconsistency between the attitudes of different organs of the State to the investment,” which “in itself amounts to a breach of the fair and equitable treatment standard.”34 The tribunal also pointed to Moldova’s “secondary legal obligation to remedy or ameliorate the consequences of its breach.”35 The tribunal thus considered that “[t]he manner that the Airport State Enterprise washed its hands of the consequences of its own illegality is the most reprehensible element of Respondent’s conduct.”36 2.3.1.3 MTD v. Chile37 This claim arose out of efforts by MTD, a Malaysian company, to build a planned community in Pirque, a small town outside of Santiago, Chile. MTD employees had visited the area and met with the owner of the land in question, a Mr. Fontaine Aldunate. Mr. Fontaine informed MTD that the land was currently zoned for agricultural use. Nevertheless, he assured MTD that the land could “readily be rezoned, particularly if it would attract foreign investment.”38 MTD then met with the Foreign Investment Committee (FIC) and other Chilean government officials.39 Having decided to proceed with the investment, MTD created a local investment vehicle and entered into a joint venture agreement with Mr. Fontaine.40 32 33

34

35 36

37 38 39 40

Arif, Award, ¶ 541. See Arif, Award, ¶ 541. Moreover, “[t]his legitimate expectation strengthened over time as Le Bridge made its investment in the preparation of the Airport shop with the knowledge and consent of the Airport State Enterprise and other organs of the State.” Id., ¶ 542. Arif, Award, ¶ 547(b). The tribunal also emphasized that “at the international level, the State has a unitary nature, and a contradiction in the actions of the State cannot be resolved on the international plane by reference to its internal legal order.” Id., ¶ 547(c). Arif, Award, ¶ 547(e), (f). Arif, Award, ¶ 547(e), (f). Indeed, the tribunal concluded: “[i]ndependently of the legitimate expectations created and not fulfilled, this inertia [on the part of the Airport State Enterprise] in the face of the paralysis and then destruction of an investment is a breach of the fair and equitable treatment standard under the BIT.” Id., ¶ 547(f). MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Award (May 25, 2004) (Lalonde, Oreamuno Blanco, Rigo Sureda P). MTD Equity, Award, ¶ 42 (quotation marks omitted). See MTD Equity, Award, ¶ 44. See MTD Equity, Award, ¶ 49.

The Regulatory State And The Duty Of Consistency

57

Shortly thereafter, MTD filed an application with the FIC for approval of its investment. The application described the proposed project and identified the location as “Pirque, Metropolitan Region.”41 The FIC approved the application, and MTD and the FIC then entered into a foreign investment contract. The contract specified that MTD would develop “a real estate project on 600 acres of Fundo El Principal de Pirque. The aforementioned project consists of the construction of a self-sufficient satellite city, with houses, apartments, schools, hospitals, commerce, services, etc.”42 The FIC later approved a second investment application as well, resulting in a similar foreign investment contract.43 After the first contract had been signed and shortly before the second, MTD consulted local architectural firms regarding the development of the planned community. These firms informed MTD that the Municipality of Pirque would need to initiate the process to change the zoning of the land and that the Ministry of Housing and Urban Development (MINVU) would need to approve those changes.44 Although the Mayor of Pirque supported the project, the MINVU ultimately declined to approve the requested zoning change. The MINVU justified its decision on the basis of its pre-existing urban development policy, which sought to promote the expansion of Santiago to the north, rather than to the south where Pirque was located.45 MTD and Chile disagreed as to whether government officials had brought this possibility to MTD’s attention prior to its initial application. For its part, the FIC disclaimed responsibility by pointing to the fact that “its role is strictly limited to approving the inflow of foreign investment funds into Chile […] and was without prejudice to other necessary approvals.”46 MTD then brought a claim under the Malaysia-Chile BIT. In that arbitration, MTD alleged that Chile had violated the FET provision when it created and encouraged strong expectations that the Project, which was the object of the investment, could be built in the specific proposed location and entered into a contract confirming that location, but then

41 42 43 44

45 46

MTD Equity, Award, ¶¶ 51–52 (quotation marks omitted). MTD Equity, Award, ¶¶ 53–54. See MTD Equity, Award, ¶ 57. See MTD Equity, Award, ¶ 56. Although Chile later argued that only the MINVU could initiate the zoning change process, the end result was the same; a lack of approval by the MINVU meant that the project could not proceed. See id., ¶¶ 74, 118. See MTD Equity, Award, ¶ 80. MTD Equity, Award, ¶ 1.

58

Morris

disapproved that location as a matter of policy after MTD irrevocably committed its investment to build the project in that location.47 Chile countered by pointing to the FIC’s limited mandate, arguing that the FIC’s jurisdiction does not extend to determining the legal, administrative, technical or economic feasibility of those investments, nor does it restrict or limit the authority or jurisdiction of any government agency. The jurisprudence of domestic courts has uniformly recognized the limited jurisdiction of the Committee and the limited scope of the Investment Contract.48 The tribunal began its analysis by recognizing Chile’s “right to decide its urban policies and legislation.”49 In this respect, the tribunal noted that by entering into the BIT, the Contracting Parties did not limit the exercise of their authority under their national laws or policies except to the extent that this exercise would contravene obligations undertaken in the BIT itself.50 The tribunal nevertheless found a violation of the FET obligation, which it defined as “treatment in an even-handed and just manner, conducive to fostering the promotion of foreign investment.”51 Of central importance to the tribunal was the makeup of the FIC and the significance of its approval of MTD’s investment. Specifically:

47

48

49 50 51

MTD Equity, Award, ¶ 116 (quotation marks omitted). MTD further noted that “the project and its location are clearly identified [in the foreign investment contract] and the contract states that the purpose of the investment is exclusive and it could only be modified with the prior authorization of FIC.” Id., ¶ 128. MTD Equity, Award, ¶ 122 (quotation marks omitted). Chile further argued that “[i]t is not within the FIC’s authority or mandate to perform a risk assessment with respect to the investments that are the subject of the capital inflows it approves. The resolution of questions involving risk is wholly within the investor’s sphere, and such issues have no bearing on the FIC’s approval or disapproval of foreign investment applications.” Id., ¶ 123 (quotation marks omitted). MTD Equity, Award, ¶ 98. MTD Equity, Award, ¶¶ 98–99. MTD Equity, Award, ¶ 113.

The Regulatory State And The Duty Of Consistency

59

The Tribunal considers that the ministerial membership of the FIC is by itself proof of the importance that Chile attributes to its function, and it is consequent [sic] with the objective to coordinate foreign investment at the highest level of the Ministries concerned. It is also evident from the [Chilean foreign investment law] that the FIC is required to carry out a minimum of diligence internally and externally. Approval of a Project in a location would give prima facie to an investor the expectation that the project is feasible in that location from a regulatory point of view […]. This is not to say that approval of a project in a particular location entitles the investor to develop that site without further governmental approval […]. What the Tribunal emphasizes here is the inconsistency of action between two arms of the same Government vis-à-vis the same investor even when the legal framework of the country provides for a mechanism to coordinate.52 In reaching this conclusion, the tribunal stressed the fact that “[u]nder international law […] the State of Chile needs to be considered by the Tribunal as a unit.”53 Yet despite finding a violation of the BIT, the tribunal reduced MTD’s damages by 50% in recognition of the investor’s failure to conduct sufficient due diligence prior to investing.54 52

53

54

MTD Equity, Award, ¶ 163. The members of the FIC in attendance at the session in which MTD’s application was approved included the President of the FIC (the Minister of Economy, Development and Reconstruction), the President of the Central Bank, the Undersecretary of Finance, the Undersecretary of Mining, and the Undersecretary of Planning and Cooperation. See id., ¶ 53. Under Article 13 of the Foreign Investment Law, the MINVU arguably could have attended the relevant meeting of the FIC as a “relevant Minister, in case of investment applications that refer to activities related to Ministries not represented in this Committee […].” Foreign Investment Statute, Decree Law 600, art. 13(d), accessed January 24, 2014, http://www.ciechile.gob.cl/wp-content/uploads/2010/ 10/DL600_English.pdf. MTD Equity, Award, ¶ 165; accord id., ¶ 166 (“Minister Hermosilla [at the MINVU] and the FIC were different channels of communication of the Respondent with outside parties, but, for purposes of the obligations of Chile under the BIT, they represented Chile as a unit, as a monolith, to use the Respondent’s term.”). See MTD Equity, Award, ¶¶ 178, 243 (“The BITs are not an insurance against business risk and the Tribunal considers that the Claimants should bear the consequences of their own actions as experienced businessmen. Their choice of partner, the acceptance of a land valuation based on future assumptions [i.e., that the zoning change would be approved] without protecting themselves contractually in case the assumptions would not materialize, including the issuance of the required development permits, are risks that the

60

Morris

Chile sought to annul the tribunal’s award, in part on the ground that the tribunal had “ignored the law of the host State and the necessary separation of powers which is the basis for the rule of law.”55 As Chile argued: Organs of the State can have different mandates and concerns: inconsistency of policy between them does not necessarily entail any breach of international law. Just because the decisions of the FIC are attributable to the State of Chile is no reason to accord the FIC more authority than it actually had, and to do so is to confuse the distinct concepts of attribution and breach. Despite the Tribunal’s repetition of the ‘unity’ argument, it is left essentially unexplained.56 The ad hoc committee recognized that the tribunal would have erred if it had “mix[ed] up attribution and breach,” but it found no such confusion and refused to annul the award.57 *** These three awards, while each recognizing the importance of consistency in government action towards a foreign investor, have different implications for an absolute duty of consistency. The tribunals in Metalclad and Arif imposed liability primarily for the host State’s failure to respect prior assurances to the foreign investor that its investment complied with local law. In Metalclad, the tribunal found that the federal authorities had explicitly assured the foreign investor that it had all the necessary permits to build and operate the landfill. In Arif, the Airport State Enterprise had executed a contract with the investor and had officially adopted that contract after it had been approved by another government entity, the SACA. Mr. Arif had also received an explicit assurance from the Attorney General’s Office that his investment was lawful.58 The

55 56 57 58

Claimants took irrespective of Chile’s actions. […] The Tribunal considers therefore that the Claimants should bear part of the damages suffered and the Tribunal estimates that share to be 50% after deduction of the residual value of their investment […].”). MTD Equity Sdn. Bhd. & MTD Chile S.A. v. Republic of Chile, ICSID Case No. ARB/01/7, Decision on Annulment (March 21, 2007) (Crawford, Ordóñez Noriega, Guillaume P). MTD Equity, Decision on Annulment, ¶ 88. MTD Equity, Decision on Annulment, ¶ 89. That the contract was approved by the SACA despite the failure of the Airport State Enterprise to gain the SACA’s pre-approval is somewhat puzzling; one would think that the SACA, at the very least, would be familiar with its own prerogatives. The opinion of

The Regulatory State And The Duty Of Consistency

61

Metalclad and Arif Tribunals considered the investors’ reliance on these representations reasonable and deserving of protection under the BIT. In both of these cases, then, the subsequent challenged State action was not only inconsistent but also in violation of a prior representation to the investor. The State’s failure to respect prior assurances could equally have taken any number of guises. For example, if the Mexican federal authorities in Metalclad had themselves changed their position regarding the investment’s compliance with local law, the inconsistent action would have involved a single government actor, rather than multiple actors, but Mexico would still have been liable for failing to respect its prior assurances to the investor.59 Accordingly, neither Metalclad nor Arif depended for its holding on inconsistent action by multiple State actors, and thus neither provides support for an absolute duty of consistency. MTD, on the other hand, can be read to support a broader, more absolute duty of consistency. The tribunal found an FET violation as a result of inconsistent actions by executive branch ministries with respect to a foreign investment, but without identifying a clear representation by either ministry that the investment complied with local law. Indeed, the foreign investment contract contained an explicit disclaimer to the effect that approval by the FIC was without prejudice to other permits or licenses required under other provisions of Chilean law. As such, the core of the violation was the failure to coordinate per se. The tribunal referred in passing to Chilean legal provisions it interpreted as requiring the FIC to coordinate among the various government ministries. Of at least equal importance to the tribunal, however, was the composition of the FIC. The tribunal considered that the FIC’s high-ranking membership, including the head of the central bank and various government ministers, itself implied a duty to coordinate. The MTD award accordingly adopted an expansive notion of the duty of consistency.



59

the Attorney General’s Office to the effect that the contractual process was proper is also puzzling, especially given the lack of indication by the tribunal that there was anything particularly complicated or obscure in the Moldovan legal provisions in this respect. The inconsistent State action in Metalclad, by contrast, was readily explained by local political opposition to the location of the hazardous landfill. See, e.g., Occidental Exploration & Production Company v. Republic of Ecuador, LCIA Case No. UN 3467 (UNCITRAL), Final Award, ¶¶ 183–187 (July 1, 2004) (Brower, Barrera Sweeney, Orrego Vicuña P) (finding an FET violation where the Ecuadorian tax authority adopted inconsistent positions over time regarding the meaning of certain tax provisions to the detriment of the foreign investor).

62 2.4

Morris

Extending the Duty of Consistency: Possibilities and Implications

Taking MTD as a guide, one may extrapolate the contours of a possible absolute duty of consistency under international law. As part of its obligation to provide foreign investment fair and equitable treatment, a host State would be required to monitor decisions taken by all relevant government actors. It would then need to ensure that any inconsistent decisions are either avoided or remediated. Possible mechanisms for accomplishing this goal include a pre-decision coordination process or the creation of a centralized agency able to provide a ‘consistency check’ before a final decision is communicated to the foreign investor. Where the host State fails to ensure such consistency, a breach of the FET obligation would result. The due diligence of the foreign investor and the international lawfulness of each State actor’s decision taken separately would be irrelevant, except perhaps in calculating damages. This formulation is extreme and has not yet been adopted by any tribunal. One could, however, find support for this approach in the more affirmative conception of the FET obligation that some tribunals have already endorsed. Under this rubric, a host State must actively foster and encourage investment. As the MTD Tribunal emphasized with respect to the Malaysia-Chile BIT, the “terms [of the FET provision] are framed as a pro-active statement – ‘to promote’, ‘to create’, ‘to stimulate’ – rather than prescriptions for passive behavior of the State or avoidance of prejudicial conduct to the investors.”60 Although this analysis was grounded in the language of a particular provision, tribunals could also reach such a conclusion on the basis of more general language in a treaty, such as the preamble or even the title. After all, a fundamental purpose of BITs is to encourage reciprocal investment, and an absolute duty of consistency arguably aligns with that goal. Over time, then, the FET obligation may come to be seen as requiring affirmative action by the host State. Implementing an adequate and transparent legislative framework and avoiding improper administrative decision-making may no longer be enough. Foreign investors – and investment tribunals – may instead begin to expect the State to ensure not just proper but also consistent government action.61 60

61

MTD Equity, Award, ¶ 113; see also Ioannis Kardassopoulos & Ron Fuchs v. Republic of Georgia, ICSID Case Nos. ARB/05/18 & ARB/07/15, Award, ¶ 443 (March 3, 2010) (Orrego Vicuña, Lowe, Fortier P) (“The standard of FET in Article 2(2) must therefore be understood in the context of this aim of encouraging the inflow and retention of foreign investment.”). See, e.g., Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, ¶ 7.78 (November 30, 2012) (KaufmannKohler, Stern, Veeder P) (“Fairness and consistency must be assessed against the

The Regulatory State And The Duty Of Consistency

63

Nor would such a duty of consistency be without precedent in international law. It could, for example, be seen as analogous to a creeping expropriation, made up of various acts that in and of themselves do not rise to the level of a treaty violation.62 It could also be considered a composite act as described in the ILC Draft Articles, which entails “a series of actions or omissions defined in aggregate as wrongful.”63 In such a case, “the obligation itself is defined in terms of the cumulative character of the conduct, i.e. where the cumulative conduct constitutes the essence of the wrongful act.”64 Most of the examples discussed in the commentary to Article 15 involve systemic practices, such as genocide, apartheid, or crimes against humanity. A duty of consistency could nevertheless be considered a composite act in that the essence of the wrong is the inconsistency that results from a series of government acts, rather than the unlawfulness of any one act standing alone.65 Before considering some of the potential benefits and risks of such an absolute duty of consistency in the next section, it is important to recall the significant protections already offered by the FET standard. For example, as made clear in Metalclad and Arif, where a host State has offered a specific assurance to an investor, the resultant legitimate expectations will be protected by the



62

63 64 65

background of information that the investor knew and should reasonably have known at the time of the investment and of the conduct of the host State. While specific assurances given by the host State may reinforce the investor’s expectations, such an assurance is not always indispensable […].”). See, e.g., El Paso Energy International Company v. Argentine Republic, ICSID Case No. ARB/03/15, Award, ¶ 518 (October 31, 2011) (Bernardini, Stern, Caflisch P) (“The Tribunal considers that, in the same way as one can speak of creeping expropriation, there can also be creeping violations of the standard. According to the case-law, a creeping expropriation is a process extending over time and composed of a succession or accumulation of measures which, taken separately, would not have the effect of dispossessing the investor but, when viewed as a whole, do lead to that result. A creeping violation of the FET standard could thus be described as a process extending over time and comprising a succession or an accumulation of measures which, taken separately, would not breach that standard but, when taken together, do lead to such a result.”). ILC Draft Articles, art. 15(1) (emphasis added). ILC Draft Articles, art. 15, cmt. 4. See, e.g., Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, ¶ 2.71 (June 1, 2012) (Santiago Tawil, Stern, Veeder P) (“The fact that a composite act is composed of acts that are legally different from the composite act itself means that the composite act can comprise legal acts and still be unlawful or that it can comprise unlawful acts violating certain norms which are different from the legal norm violated by the composite act.”).

64

Morris

FET obligation.66 Foreign investors are also already protected against a lack of transparency and regularity in the governmental decision-making process.67 As explained by the tribunal in Saluka v. Czech Republic:68 A foreign investor protected by the Treaty may in any case properly expect that the [host State] implements its policies bona fide by conduct that is, as far as it affects the investors’ investment, reasonably justifiable by public policies and that such conduct does not manifestly violate the requirements of consistency, transparency, even-handedness and non-discrimination.69 Furthermore, although bad faith on the part of the State is not a prerequisite for an FET violation, it certainly suffices. As the tribunal in Waste Management v. Mexico made clear: The Tribunal has no doubt that a deliberate conspiracy – that is to say, a conscious combination of various agencies of government without justification to defeat the purposes of an investment agreement – would constitute a breach of [the FET obligation]. A basic obligation of the State under [the FET obligation] is to act in good faith and form, and not deliberately to set out to destroy or frustrate the investment by improper means.70

66

See, e.g., Metalclad, Award, ¶ 89 (“Metalclad was entitled to rely on the representations of federal officials and to believe that it was entitled to continue its construction of the landfill.”). 67 The TECMED v. Mexico Tribunal adopted a particularly expansive approach: “[t]he foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations.” Técnicas Medioambientales TECMED S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, ¶ 154 (May 29, 2003) (Fernández Rozas, Bernal Verea, Grigera Naón P). 68 Saluka Investments BV (Netherlands) v. Czech Republic, UNCITRAL, Partial Award (March 17, 2006) (Fortier, Behrens, Watts P). 69 Saluka Investments, Partial Award, ¶ 307. 70 Waste Management, Inc. v. United Mexican States (Waste Management II), ICSID Case No. ARB(AF)/00/3, Award, ¶ 138 (April 30, 2004) (Civiletti, Magallón Gómez, Crawford P).

The Regulatory State And The Duty Of Consistency

65

Thus, inconsistent actions apparently taken with the intent to harm a foreign investment would already fall within the scope of the FET obligation.71 In Kardassopoulos v. Georgia, for example, various government entities addressed the same issue of compensation owed by the State to the investor. After nearly a decade of delay, the ultimate result was a determination that the State in fact had no obligation to compensate the claimant. This despite a direct expropriation of the claimant’s investment and a recognition – by at least certain government officials – that compensation was due. The Tribunal did not hesitate to find a violation of the FET obligation. In no uncertain terms, it condemned Georgia’s apparent attempt to avoid its international law responsibilities by means of “an overall obfuscation of the compensation process.”72 Along the same lines, the tribunal in Rompetrol v. Romania suggested that an underlying purpose or pattern may permit a finding that various acts collectively constitute an FET violation, even where the acts taken alone would not suffice.73 71

72

73

See, e.g., EnCana Corporation v. Republic of Ecuador, UNCITRAL, Award ¶ 158 (February 3, 2006) (Grigera Naón, Thomas, Crawford P) (“In the Tribunal’s view it could well be a breach of [the BIT’s FET provision] for a State entity such as Petroecuador, having negotiated the terms of an investment agreement on a certain basis, subsequently to deny the other party the right to renegotiate in accordance with the agreement in the event that the basis for it has been changed as a result of decisions of other State organs. Under standards such as those in [the BIT’s FET provision] the State must act with reasonable consistency and without arbitrariness in its treatment of investments. One arm of the state cannot finally affirm what another arm denies to the detriment of a foreign investor.”). Kardassopoulos, Award, ¶ 443 (“Lamentably, despite this initial instruction [from President Shevardnadze to “find a decision acceptable for all the parties”], the spirit of settlement appears to have diminished over time as lengthy delays, refusals by various government officials to address the matter, and internal disputes over who carried responsibility for the matter combined to result in an overall obfuscation of the compensation process and disregard for the duty to provide compensation.”) (citation and italics omitted). See The Rompetrol Group N.V. v. Romania, ICSID Case No. ARB/06/3, Award, ¶ 271 (May 6, 2013) (Donovan, Lalonde, Berman P) (“[T]his Tribunal can join other recent tribunals in accepting that the cumulative effect of a succession of impugned actions by the State of the investment can together amount to a failure to accord fair and equitable treatment even where the individual actions, taken on their own, would not surmount the threshold for a Treaty breach. But this would only be so where the actions in question disclosed some link of underlying pattern or purpose between them; a mere scattered collection of disjointed harms would not be enough.”) (footnote omitted); see also Swisslion DOO Skopje v. Former Yugoslav Republic of Macedonia, ICSID Case No. ARB/09/16, Award, ¶ 275 (July 6, 2012) (Price, Thomas, Guillaume P) (holding that “there was a series of

66

Morris

Finally, the FET standard already requires consistency where a State has affirmatively taken on such an obligation. This would be the case if the State specifically created a government agency intended to serve as a ‘one-stop shop’ for foreign investors, as the tribunal in MTD arguably viewed the FIC. That agency would have an obligation to coordinate among the relevant government actors. The State would then be liable for any failure to provide a coherent message to the foreign investor. Similarly, where a State’s municipal law provides some guarantee of consistent administrative action, a foreign investor would have a legitimate expectation of treatment in accordance with that law. The frustration of those expectations could result in a breach of the FET obligation, provided the other requirements for a treaty claim are met. In considering the potential benefits and costs inherent in an absolute duty of consistency, then, the focus should be on the incremental value to the FET standard. 2.5

Conclusion: A Step Too Far?

The potential benefits of an absolute duty of consistency are readily comprehensible.74 Such a duty would provide additional protection for foreign investors, which may be particularly important in the context of inconsistent regulatory decisions. Local regulations and approval processes are often complex and likely to be unfamiliar to foreign investors. Although various tribunals have recognized the dangers of interpreting a BIT solely in favor of the investor,75 it cannot be denied that a primary purpose of BITs is to facilitate foreign 74

75

measures that collectively amount to a composite act in breach of the fair and equitable treatment standard”). Indeed, various authors have previously discussed aspects of the relationship between consistency and the FET standard. See, e.g., Martins Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (Oxford: Oxford University Press, 2013): 256–259; Kenneth J. Vandevelde, “A Unified Theory of Fair and Equitable Treatment,” New York University Journal of International Law & Policy 43 (2010): 43; Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford: Oxford University Press, 2008): 163–168; Stephan Schill, “Fair and Equitable Treatment under Investment Treaties as an Embodiment of the Rule of Law,” International Law & Justice Working Papers, Working Paper 2006/6 (2006). See, e.g., Saluka Investments, Partial Award, ¶ 300 (“The protection of foreign investments is not the sole aim of the Treaty, but rather a necessary element alongside the overall aim of encouraging foreign investment and extending and intensifying the parties’ economic relations. That in turn calls for a balanced approach to the interpretation of the Treaty’s

The Regulatory State And The Duty Of Consistency

67

investment and to ameliorate the difficulties that foreign investors might otherwise encounter. Moreover, as suggested by the tribunals in Arif and MTD, an absolute duty of consistency is a logical implication of the international law principle of the unified State. If the State is truly considered a ‘monolith’ for purposes of attribution, there is no obvious reason why it should not be expected to speak with one voice regarding foreign investment. On the other hand, an international law requirement for a mechanism to coordinate State action is in tension with the international law principle that States are entitled to organize themselves internally as they see fit.76 It is true that a State may not point to its internal organization to avoid an international law obligation.77 Nevertheless, the potentially dramatic implications of an absolute duty of consistency for the State’s internal administration caution against interpreting the FET obligation in such a broad way. Requiring States to ensure consistency among all government actors would also entail substantial effort and expense, assuming the goal is even attainable. Finally, it is important to consider the kind of conduct on the part of a foreign investor that States, and tribunals, should encourage. Provided that relevant laws and regulations are transparent and accessible – as already required by the FET obligation – international investment law should aim to encourage due diligence. Foreign investors are in the best position to know the details of their own investment plans. They should accordingly share responsibility with the host State for the regulatory compliance of that investment. An absolute duty of consistency, on the other hand, risks rewarding an investor’s lack of diligence. The reduction of a damages award, as in MTD, may not be a sufficient deterrent.



76

77

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.”). See, e.g., ILC Draft Articles, Chapter II (Attribution of Conduct to a State), cmt. 6 (“The structure of the State and the functions of its organs are not, in general, governed by international law. It is a matter for each State to decide how its administration is to be structured and which functions are to be assumed by government. But while the State remains free to determine its internal structure and functions through its own law and practice, international law has a distinct role.”). See supra note 2 and accompanying text; cf. ILC Draft Articles, art. 3, cmt. 1 (“An act of a State must be characterized as internationally wrongful if it constitutes a breach of an international obligation, even if the act does not contravene the State’s internal law – even if, under that law, the State was actually bound to act in that way.”).

68

Morris

Ultimately, despite its arguable benefits and logical force, an absolute duty of consistency risks excessive intrusion into the State’s prerogatives and could encourage unrealistic expectations in this age of the ‘regulatory State’. The better course is to focus on what a reasonably diligent investor would have believed about the compliance of its investment with municipal law, taking into account the regulatory system of the host State and any representations or disclaimers made to the foreign investor by government officials. In this way, tribunals can encourage both diligence on the part of the investor and transparency on the part of the State, while respecting the host State’s internal organization and regulatory framework.

chapter 3

The Transplantation of Legitimate Expectations in Investment Treaty Arbitration A Critique Teerawat Wongkaew 3.1 Introduction Investors’ legitimate expectations have played a significant role in the assessment of whether a State’s conduct is fair and equitable.1 It is unimaginable to read a legal analysis of fair and equitable treatment provisions of investment treaties which does not consider protection of legitimate expectations. Given its deep entrenchment in the jurisprudence,2 it seems prima facie objectionable to question the relevance or the value of protection of legitimate expectations. Nevertheless, its application has not been without criticism. For instance, the tribunal in Arif v Moldova recently observed that legitimate expectations are problematic in many respects despite being ‘an established feature’ of the fair and equitable treatment standard.3 The tribunal explained that a claim based on legitimate expectations is subject to ‘a certain easy circularity  of argument’ in that an investor can postulate an expectation to condemn the sovereign conduct without articulation of the origins and scope of ­expectations. This leads to the so-called ‘moving target’ problem because one expectation can be expressed at different levels of generality.4 A distinct and * Teerawat Wongkaew, Ph.D Candidate, Graduate Institute of International and Development Studies, [email protected]. I am grateful to Michele Potestà for his comments on earlier drafts of this piece. All errors and omissions are mine. 1 See Electrabel S.A. v. Republic of Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, ¶ 7.75, (30 November 2012) describing the protection of legitimate expectations as the “most important function” of the FET standard. Unless otherwise indicated, all cases cited in this chapter are available online at “Investment Treaty Arbitration (ITA),” accessed January 23, 2014, http://italaw.com. 2 Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford: Oxford University Press, 2008), 134: the protection of legitimate expectations is by now “firmly rooted in arbitral practice.” 3 Mr. Franck Charles Arif v. Republic of Moldova, ICSID Case No. ARB/11/23, Award, ¶ 533, (Apr. 8, 2013). 4 Arif v. Moldova, Award, ¶¶ 533–535.

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_006

70

Wongkaew

unique role of legitimate expectations remains unclear in different types of situations. This has led to a superfluous reliance on legitimate expectations as a basis for a breach of fair and equitable treatment in various situations.5 Yet, some tribunals explicitly view that a breach of legitimate expectations does not ipso facto amount to a breach of the fair and equitable treatment obligation.6 The ‘legitimacy’ of the principle has also been questioned due to its expansive scope of application,7 its unclear juridical basis,8 its lack of rationale and justification,9 its intrusive effect on sovereign powers and its hindrance to development objectives.10 In order to avoid the concept of legitimate expectation’s “collapse into an inchoate justification for judicial intervention,”11 it is

5

For an analysis of the application of the principle in different situations, see Michele Potestà, “Legitimate Expectations in Investment Treaty Law: Understanding the Roots and the Limits of a Controversial Concept,” ICSID Review – Foreign Investment Law Journal 28, no. 1 (May 1, 2013): 88–122. 6 Arif v. Moldova, Award ¶ 536; Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability, ¶ 226 (Jul. 30, 2010). The tribunal also considered that “it was not the investor’s legitimate expectations alone that led tribunals to find a denial of fair and equitable treatment. It was the existence of such expectations created by host country laws, coupled with the act of investing their capital in reliance on them, and a subsequent, sudden change in those laws that led to a determination that the host country had not accorded protected investments fair and equitable treatment.” Id. 7 MTD Equity Sdn Bhd. and MTD Chile SA v. Chile, ICSID Case No. ARB/01/07, Decision on Annulment, ¶ 67 (21 March 2007): “[t]he obligations of the host State towards foreign investors derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or claim to have.” See also Martins Paparinskis, “Investment Treaty Arbitration and the (New) Law of State Responsibility,” European Journal of International Law 24, no. 2 (2013): 617–647. 8 Martins Paparinskis, The International Minimum Standard and Fair and Equitable Treatment, Oxford Monographs in International Law, (Oxford: Oxford University Press: 2013). 9 Potestà, Legitimate Expectations, 2. 10 Dr Yenkong Ngangjoh Hodu, “A Critique of the Legitimate Expectations Principle in Invest­ ment Treaty Arbitration,” EJIL: Talk!, September 16, 2003, accessed January 24, 2014, http://www.ejiltalk.org/a-critique-of-the-legitimate-expectations-doctrine-in-investment -treaty-arbitration/. 11 See Christopher Forsyth, “Legitimate Expectations Revisited,” ALBA/BEG Paper, BEG and  ALBA Annual Summer Conference “General Principles of Review in EU and Domestic Law,” May 29–30, 2011, accessed January 24, 2014, http://www.adminlaw.org .uk/events_consultations/event_2011_05_29.php, who suggests that the concept of legitimate expectations in English law often gives little guidance and plays a rhetorical role.

The Transplantation of Legitimate Expectations

71

important to evaluate how the concept has become part of the investment treaty regime and what function and purpose it can serve. This contribution assesses the application of legitimate expectations in the investment treaty regime through the prism of legal transplant. This approach is premised on the theory that legitimate expectations as applied in investorState relationships has been ‘transplanted’ from domestic public laws. The doctrine of legitimate expectations is a well-recognized legal principle in domestic administrative laws.12 It will be argued that notwithstanding the absence of explicit recognition, the principle is ‘borrowed’ from domestic public laws; such an approach offers the best explanation for the origins of the principle because there were no rules in international law on the protection of individuals’ legitimate expectations prior to its incorporation in the investment treaty regime.13 In addition, the conception of legitimate expectations elaborated by the investment treaty jurisprudence is most analogous to that adopted in domestic public laws. The article aims to contribute to the debate on legitimate expectations in two ways. First, it analyzes the genesis and evolution of legitimate expectations through legal transplant which emphasizes the need to customize and tailor legal rules borrowed from another legal regime. Second, it identifies some fundamental problems which need to be addressed. This chapter has three main sections. The first section sets out the legal trans­ plant framework for examining the borrowing of a legal rule from one regime to another regime. Section II examines the origins of legitimate expectations as applied in fair and equitable treatment as a legal transplant. Section III focuses on the evaluative assessment of the legal transplant of legitimate expectations. It will be argued that the legal transplant of legitimate expectations has certain value in investment treaty arbitration but there remain some fundamental issues to be addressed. The value lies in its ‘malleable’ and ‘elastic’ characteristic in ensuring justice and fairness, through the balancing of host State’s interests and investors’ interests. The three fundamental problems pertain to: (1) the controversial juridical basis for protecting legitimate expectations; (2) the lack of identification of precise legal relevance and role of legitimate expectations; and (3) the lack of clear criteria or methods of defining the contours of reasonableness or legitimacy of investors’ expectations. 12

13

See, Søren Schønberg, Legitimate Expectations in Administrative Law (Oxford University Press, 2000); for a brief analysis of the doctrine of legitimate expectations in comparative public law in the light of international investment law, see Potestà, Legitimate Expectations. Trevor Zeyl, “Charting the Wrong Course: The Doctrine of Legitimate Expectations in Investment Treaty Law,” Alberta Law Review 49, no. 1 (July, 2011): 203–235.

72 3.2

Wongkaew

The Concept of a Legal Transplant and Possible Criteria for Assessment of the Transplantation Process

3.2.1 The Concept of a Legal Transplant Whilst there is a lack of uniform meaning of the term ‘legal transplant’, the notion of a legal transplant can be understood as “any legal notion or rule which, after being developed in a ‘source’ body of law, is then introduced  into another, ‘host’ body of law.”14 Why should such borrowing take place? According to the literature on legal transplants, laws and legal concepts are borrowed to fill in systematic lacunae of a legal system15 or to increase legitimacy of judicial decisions.16 Judicial borrowing has been stimulated by the emergence of transjudicial communication,17 which leads to a crossfertilization of legal norms and ideas. In the context of investment treaty arbitration, actors with different backgrounds, in particular arbitrators, contribute to this dynamism.18 There is a long-standing debate about whether a legal transplant is possible.19 The proponents of a legal transplant argue that legal borrowing has been the usual feature of legal development because laws can be accepted in other 14

Paul Edward Geller, “Legal Transplants in International Copyright: Some Problems of Method,” UCLA Pacific Basin Law Journal 13 (1994): 199. 15 Alan Watson, Legal Transplants: An Approach to Comparative Law (Athens: University of Georgia Press, 1993): 128 “transplanting is, in fact, the most fertile source of development […].” See also Valentina Vadi, “Critical Comparisons: The Role of Comparative Law In Investment Treaty Arbitration,” Denver Journal of International Law and Policy, 39, no. 1 (2010): 89 “judicial borrowing is particularly useful to cope with systematic lacunae of a given legal system.” 16 Gilles Cuniberti, “Enhancing Judicial Reputation through Legal Transplants – Estoppel Travels to France,” American Journal of Comparative Law 60, no. 2 (2012): 383. The author argues that the legal transplant of the ‘rule of estoppel’ in French arbitration law “is best explained by the Court’s desire to enhance its reputation, both as an institution and with regard to individual members.” 17 Anne-Marie Slaughter, “A Typology of Transjudicial Communications,” 29 University of Richmond Law Review 29 (1994): 99–137. 18 Anthea Roberts, “Clash of Paradigms: Actors and Analogies Shaping the Inves­ tment  Treaty System,” The American Journal of International Law 107, no. 1 (January 2013): 55 “other professional communities have joined the field, including those with backgrounds in public law, international human rights law, environmental law and trade law.” 19 Alan Watson, “Aspects of Reception of Law,” American Journal of Comparative Law 44 (1995): 335; Pierre Legrand, “The Impossibility of “Legal Transplants” Maastricht Journal of European and Comparative Law 4 (1997): 113–114.

The Transplantation of Legitimate Expectations

73

legal systems without difficulty.20 Such views rest on the notion that laws are separate from other social systems. Opponents of the legal transplant theory, such as Legrand, argue that legal transplants are ‘impossible’ because legal rules are socially and culturally embedded.21 The difference lies in conceptions of laws. If laws are merely substantive rules, the transplanting of legal rules may be easy. However, it is more complex to transplant the laws which are considered to include legal cultures.22 A more nuanced approach is proposed by Kahn-Freund who suggests that there are ‘degrees of transferability’ depending on a range of factors, such as geographical, economic, social and, above all, political factors.23 Some authors prefer the term ‘legal transposition’24 or ‘legal translation’25 because they find the term ‘legal transplant’ to be too rigid and inflexible to capture the instance where the concept is transferred at a conceptual level or the transformation which occurs when transferred from the source to the target system. The literature on legal transplants mostly addresses the circulation of legal ideas between national systems. The consideration of a transplantation of legitimate expectations from national systems to the international system (known as vertical legal borrowing) has to caution against relying on such guidance.26 20

Alan Watson, “Legal Transplants and Law Reform” Law Quarterly Review 92 (1976): 79; Alan Watson, “Comparative Law and Legal Change” Cambridge Law Journal 37, no. 2 (1978): 313–336. 21 Legrand, Impossibility of “Legal Transplants,” 114–116. 22 Pierre Legrand, “Legal Traditions in Western Europe: The Limits of Commonality,” eds. Annie J. de Roo, Esin Örücü and Robert W. Jagtenberg, Transfrontier Mobility of Law (1995): 68–82. 23 Otto Kahn-Freund, “On Uses and Misuses of Comparative Law” Modern Law Review 37 (1974): 1, 6, 8, 27. 24 Esin Örücü, “Law as Transposition” International and Comparative Law Quarterly 51 (2002): 205 “[e]ach legal institution or rule introduced is used in the system of the recipient, as it was in the system of the model, the transposition occurring to suit the particular socio-legal culture and needs of the recipient […].” 25 Maximo Langer, “From Legal Transplants to Legal Translations: The Globalization of Plea Bargaining and the Americanization Thesis in Criminal Procedure,” Harvard International Law Journal 45, no. 1 (Winter 2004): 1–64. 26 Wiener, suggests that “[v]ertical legal borrowing is importantly different from the pervasive horizontal legal borrowing and views that that line of scholarship offers little guidance. What is needed is a more rigorous analytic approach to how, why, and when these trans-echelon transplantations occur and when we choose to undertake them.” Jonathan B. Wiener, “Something Borrowed for Something Blue: Legal Transplants and the Evolution of Global Environmental Law,” Ecology Law Quarterly 27 (2001): 1297.

74

Wongkaew

Nevertheless, the value of conceptualizing the principle of legitimate expectations through the prism of judicial transplants is to caution against the outright transposition of rules and a tendency for free decision-making27 and to encourage contextual and purposive tailoring of legal rules28 in the process of judicial borrowing. This is particularly the case when a legal concept from national law is transplanted into international law in a different institutional framework.29 In this light, Kahn-Freund observed that “[t]he use of comparative law for practical purposes becomes an abuse only if it is informed by a legalistic spirit which ignores [the] context of the law.”30 Regardless of the term adopted, the important value drawn from the legal transplant approach is that a legal rule from one legal system has to be adapted and fitted into another system. 3.2.2 Criteria for Assessment of the Transplantation Process This section will establish the criteria for evaluating whether and to what extent legitimate expectations as a legal transplant has been successful and what problems can be identified. It is important to recognize the difficulty of defining the meaning of success,31 in particular the most fundamental question of who determines the success. In the context of investment treaty arbitration, investors and host States may have different views regarding a successful transplant of legitimate expectations. Arbitrators may take a more impartial view of the concept. States may see the transplant as a failure because the principle excessively encroaches upon sovereign powers. The legal transplant literature proposes a few criteria for success. The notion of success can be seen as how the transplanted law fits a new environment. Further questions can be asked regarding the meaning of ‘fit’ and the standards used to assess the 27 Vadi, Critical Comparisons, 182: “the problem with judicial borrowing is that it is a very powerful instrument which must be handled properly. The major risk consists in adopting an ideology of free decision making and creating anarchy.” 28 Aleksandar Momirov and Andria Naudé Fourie, “Vertical Comparative Law methods: tools for conceptualizing the international rule of law,” Erasmus Law Review 02, no. 3 (2009): 292–309. 29 Wiener, Something Borrowed for Something Blue, 1298: “legal concepts from national law cannot be imported carelessly into international law; if they are to succeed, they must be carefully selected and then adapted to the significantly different institutional framework.” 30 Otto Kahn-Freund, “On Uses and Misuses of Comparative Law” (1974) Modern Law Review 37 (1974): 27. 31 David Nelken, “The Meaning of Success in Transnational Legal Transfers,” Windsor Yearbook of Access to Justice 19, (2001): 350.

The Transplantation of Legitimate Expectations

75

fitting: the exporting or importing regime.32 Success may be measured by the extent to which the goals are met. It is suggested that the best evidence of success of a legal transfer is its complete absorption into the legal and political culture of the host regime.33 Friedman notes that evaluation of a legal transplant is problematic if we do not know the extent to which a legal rule ever ‘penetrated’ the recipient society.34 It is argued that the best way to conceive of a successful transplant is as follows: “a concept borrowed advertently, with a clear understanding of its nature and functions in the exporting legal system and crafted carefully to consciously suit the objectives of the borrowing legal culture.”35 Therefore, in the context of the investment treaty regime, the nature and functions of legitimate expectations must be clearly understood and adapted to the objectives of the investment treaty regime. 3.3

Legitimate Expectations as a Legal Transplant: Problematic Genesis and Evolution

Why and how should legitimate expectations be considered a legal transplant? It is well known that the principle of legitimate expectations, as part of fair and equitable treatment provisions, was articulated for the first time in Tecmed v Mexico.36 32 33

34 35

36

Id., 361. David Nelken, “Towards a Sociology of Legal Adaptation” in Adapting Legal Cultures, eds. David Nelken and Johannes Feest (Oxford: Hart Publishing, 2001): 7, 9; David Nelken, “The ‘Gap Problem’ in the Sociology of Law: A Theoretical Review”; Windsor Yearbook of Access to Justice 1 (1981): 35–61; David Nelken, “Comparatists and Transferability” in Comparative Legal Studies: Traditions and Transitions, eds. Pierre Legrand and Roderick Munday (Cambridge: Cambridge University Press, 2003): 451–452. Lawrence M. Friedman, “Legal Culture and Social Development,” Law and Society Review 4, no. 1,(1969): 29–44. Joel M. Ngugi, “Promissory Estoppel: The Life History of An Ideal Legal Transplant,” University of Richmond Law Review 41, no. 2 (January 2007): 425–497; J.H.H. Weiler and Joel P. Trachtman, “European Constitutionalism and Its Discontents,” Northwestern Journal of International Law & Business 17, no. 1, (1997): 355 “[t]he dangers of ‘borrowing’ from one legal system to another are famous: the law of any polity is a construct embedded in a specific social and political culture and its transmutation to other polities is not easily achieved.” Técnicas Medioambientales TECMED, S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2, Award, ¶121 (29 May 2003): “[t]he Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments

76

Wongkaew

The tribunal in that case37 and subsequent cases seemed to articulate the juridical basis and origins of legitimate expectations in terms of good faith and have never explicitly accepted the public law origins of legitimate expectations as the source of transplantation. Nevertheless, the argument regarding the domestic public law origin of legitimate expectations is supported by tribunals who advocate comparative public law as a benchmark for developing the concept of legitimate expectations in the investment treaty regime.38 Several legal scholars argue that the principle of legitimate expectations has its legal basis in a general principle of law as recognized by Article 38(1) (C) of the International Court of Justice (ICJ) Statute.39 However, such a view is not without objections.40 Some authors

37

38

39

40

treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment. The foreign investor expects the host State to act in a consistent manner, free from ambiguity and totally transparently in its relations with the foreign investor, so that it may know beforehand any and all rules and regulations that will govern its investments, as well as the goals of the relevant policies and administrative practices or directives, to be able to plan its investment and comply with such regulations.” The language of legitimate expectations was even invoked in an earlier case of Southern Pacific Properties (Middle East) Limited v Arab Republic of Egypt, ICSID Case No. ARB/84/3, Award (May 20, 1992), 32 I.L.M. 933 (1993). However, the tribunal in that case did not fully elaborate the concept in the same manner as in Tecmed. International Thunderbird Gaming Corporation v. The United Mexican States (UNCITRAL), Separate Opinion of Thomas Wälde, ¶ 28 (Dec. 1, 2005): “[t]he principle of legitimate expectation is also recognised in several developed systems of administrative law. The common principles of the principal administrative law systems are in my view an important point of reference for the interpretation of investment treaties to the extent investment treaty jurisprudence is not as yet firmly established.” See Elizabeth Snodgrass, “Protecting Investors’ Legitimate Expectations – Recognizing and Delimiting a General Principle,” ICSID Review – Foreign Investment Law Journal 21, no. 1 (2006): 21–22, who contends that the legitimate expectation can be founded on the general principles framework. See also Chester Brown, “The Protection of Legitimate Expectations as a ‘General Principle of Law’: Some Preliminary Thoughts” Transnational Dispute Management 6 (2009):1, who suggests that the principle of legitimate expectation achieves a general principle of law status despite differences existing from one legal system to another. Finally, see Potestà, Legitimate Expectations, 34, who suggests that there is an ‘emerging general principle of protection of legitimate expectations’. See Zeyl, Charting the Wrong Course, 203, who suggests that “recognizing substantive expectations as part of the general principles of law is at this point premature and amounts to a misstatement of a general principle of law.” See also M. Sornarajah, The International Law on Foreign Investment, (Cambridge: Cambridge University Press, 3rd ed. 2010), 355: “it is an error to state that there is a general principle of law that violations of legitimate expectations give rise to substantive remedies.”

The Transplantation of Legitimate Expectations

77

explicitly argue that the doctrine of legitimate expectations as applicable in investment treaty arbitration is a creation “borrowed from [domestic] administrative law”41 and suggest that the principle developed under international investment law has exceeded the domestic law doctrine.42 The scope of protection of legitimate expectations introduced by the seminal jurisprudence (Tecmed v Mexico) for the Utopian vision of good governance43 was extensively criticized by both scholars and arbitral tribunals44 for its thin-reasoning and overreaching scope.45 In addition, subsequent cases have delimited the contours of protected expectations with reference to public interests along the same lines of the public law concept. The emergence of substantive expectations in some domestic jurisdictions has acted as ‘a catalyst’ for its introduction into investment treaty arbitration.46 41

Campbell McLaclan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (New York: Oxford University Press, 2007), 234. 42 Stephen Fietta, “Expropriation and the ‘Fair and Equitable’ Standard: The Developing Role of Investors’ ‘Expectations’ in International Investment Arbitration,” Journal of International Arbitration 23 (2006): 375–399 “[t]o indicate that the principle will be of dominant importance even in the absence of any specific assurance or other representation by the host government is to go too far. Not only does such an approach extend far beyond any previous authority on the relevance of legitimate expectations to the fair and equitable standard, it also runs counter to the domestic public law origins of the legitimate expectations principle […].” 43 In El Paso Energy International Company v. Argentine Republic, ICSID Case No ARB/03/15, Award, ¶ 342 (31 October 2011), the tribunal referred to ‘a program of good governance’. 44 MTD v. Chile, Decision on Annulment, ¶ 66: “the TECMED Tribunal’s apparent reliance on the foreign investor’s expectations as the source of the host State’s obligations (such as the obligation to compensate for expropriation) was questionable.” See also White Industries Australia Limited v The Republic of India, UNCITRAL, Final Award, ¶ 10.3.5 (30 November 2011), the Tribunal referred to the Tecmed statement as having been “subject to what it considers to be valid criticism”; and Saluka Investments BV (The Netherlands) v The Czech Republic, Partial Award, ¶ 304, (March 17, 2006). 45 See McLachlan, Shore and Weiniger, International Investment Arbitration, 325, who suggest that this notion represents “the most far-reaching exposition of the principle underlying the developing notion of legitimate expectations as applied to fair and equitable treatment in investment law.” See also Zachary Douglas, “Nothing if Not Criti­ cal  for Investment Treaty Arbitration: Occidental, Eureko and Methanex,” Arbitration International 22, no. 1 (2006): 28: “[a] description of perfect public regulation in a perfect world, to which all states should aspire but very few (if any) will ever attain.” 46 Francisco Orrego Vicuña, “From Preston to Prescott: Globalizing Legitimate Expectation,” in Law in the Service of Human Dignity: Essays in Honour of Florentino Feliciano, eds. Steve Charnovitz, Debra P. Steger and Peter Van den Bossche (New York: Cambridge University Press, 2005), 307.

78

Wongkaew

One alternative view could be that the principle of legitimate expectations has been derived from international law. The rules on protection of legitimate expectations, estoppel or unilateral acts could be the legal basis for legitimate expectations in international investment law.47 However, it is unclear how inter-State rules may be applied to an investor-State relationship. Furthermore, the concept of legitimate expectations in the investment treaty regime has embraced the consideration of the ‘public interests’ of the host States which makes it analogous to the doctrine of legitimate expectations in domestic public laws. Some even argue that international human rights law, especially the jurisprudence from the European Court of Human Rights can provide a compelling source of comparison.48 This source of analogy is powerful because international human rights law deals with the similar relationship between an individual and a State. However, we must be cautious in drawing the analogy, given the different characteristics of ‘human rights’ and investors’ rights. 3.4

The Transplantation of Legitimate Expectations: A Partial Success

The legal transplant of legitimate expectations can be considered a partial success. On the one hand, the transplanted principle of legitimate expectations has served as an arbitral armory in interpreting an abstract concept of fairness and equity in such a way that enables individual circumstances to be evaluated. This is reflected in the consideration of host State’s conditions and other factors in the assessment of investor’s legitimate expectations. On the other hand, the principle of legitimate expectations still lacks a conceptual development and constitutes “a patchwork of possible elements to consider, rather than organized system of rules, is little more than a mechanism to dispense palm-tree justice.”49 47

48

49

Total S.A. v. The Argentine Republic, ICSID Case No. ARB/04/01, Decision on Liability, ¶ 131 (Dec. 27, 2010): “[u]nder international law, unilateral acts, statements and conduct by States may be the source of legal obligations which the intended beneficiaries or addressees, or possibly any member of the international community, can invoke. The legal basis of that binding character appears to be only in part related to the concept of legitimate expectations – being rather akin to the principle of ‘estoppel’.” Rimantas Daujotas, and Ramūnas Audzevičius, “The Concept of Legitimate Expectation in Investor-State Arbitration and the European Court of Human Rights,” Bulletin of the International Commercial Arbitration 6, no. 2, (2012): 1–12, accessed January 25, 2014, http://ssrn.com/abstract=2197157. See the criticism of the English doctrine of legitimate expectations by Jack Watson, “Clarity and Ambiguity: A New Approach to the Test of Legitimacy in the Law of Legitimate Expectations” Legal Studies 30, no. 4 (December 2010): 633–652.

The Transplantation of Legitimate Expectations

79

It will be argued that despite the value of legal transplantation, three fundamental issues remain to be addressed, namely the identification of a juridical basis; the precise legal relevance of legitimate expectations in the interpretation of fair and equitable treatment and the delimitation of contours of legitimate expectations. 3.4.1 Is This Legal Transplant Necessary? The jurisprudence has never explained the reason for ‘transplanting’ the principle of legitimate expectations, except that it has the potential to enhance investors’ protection by circumventing the high threshold test of expropriation.50 The tribunal in Suez v Argentina considered the principle of legitimate expectations as “an operational method for determining the existence or nonexistence of fair and equitable treatment.”51 It may be argued that the rules on legitimate expectations borrowed from domestic public laws can provide legal protection to individuals in case of breach of a specific promise or commitment by a State. This argument rests on its aforementioned argument that the existing rules in international law do not offer an adequate remedy in this situation. Some legal scholars question the value and utility of the principle of legitimate expectations by suggesting that other traditional rules such as reasonableness, non-discrimination, transparency, consistency, and due process (even-handedness) are adequate to discipline the State in the circumstances covered by legitimate expectations, and criticize its subjective nature.52 There is force to such arguments considering the underlying rationale of the awards on legitimate expectations. For instance, the far-reaching language of expectations in Tecmed v Mexico may have disguised the underlying rationale 50

Separate Opinion of Thomas Wälde in Thunderbird v. Mexico, ¶ 37, explaining that legitimate expectation “provides a more supple way of providing a remedy appropriate to the particular situation as compared to the more drastic determination and remedy inherent in concept of regulatory expropriation” and represents “a preferred way of providing protection to claimants in situations where the tests for a ‘regulatory taking’ appear too difficult, complex and too easily assailable for reliance on a measure of subjective judgment.” 51 Suez v Argentina, Decision on Liability, ¶ 203. 52 Paparinskis, The International Minimum Standard, 259: “the focus on expectations seems to distract attention from the sophisticated criteria for evaluating different forms of arbitrariness already in existence, therefore deconstructing the progress of the twentieth century back to the subjective perception of the normative beholder.” See also Christopher Campbell, “House of Cards: The Relevance of Legitimate Expectations under Fair and Equitable Treatment Provisions in Investment Treaty Law,” Journal of International Arbitration 30, no. 4 (August 2013): 361–379.

80

Wongkaew

of foreseeability and predictability of the conduct of the municipality.53 Similarly, the tribunal’s reasoning in MTD v Chile can be interpreted as focused on the “inconsistency of action between two arms of the same Government vis-à-vis the same investor”54 rather than the ascribing of an instrumental role to the principle of legitimate expectations. However, the task of allocating normative weight is complicated when the expectations and the object of such expectations (stability) are closely linked, as in LG&E.55 It may be argued that the difference between legitimate expectations and those principles is that the former takes into account ‘objective’ perceptions of treaty right holders (investors) whilst the latter is primarily concerned with the conduct of host States. Furthermore, legitimate expectations enable regulatory interests and conditions of host States to be taken into account. It may be the case that a breach of specific promise or commitment does not entail arbitrary or discriminatory treatment. In addition, the invocation of legitimate expectations serves to articulate the fact that an investor’s trust and confidence, reposed in a host State’s representation, is protected. The principle of legitimate expectations is a tool to protect an investor’s trust and not simply a ground for reviewing sovereign conduct. The criticism pertaining to the subjective nature of legitimate expectations has not taken sufficient account of recent jurisprudence which affirms the ‘objective’ expectation requirement based on consideration of various balancing factors. 3.4.2 Fundamental Problems Inadequately Addressed The tribunals have never clearly determined the juridical basis for the protection of legitimate expectations in terms of Article 38 of the ICJ Statute or provided the rationale or justification in terms of legal theories.56 It is submitted 53 54

55

56

Tecmed v Mexico, Award, ¶¶ 162–164. MTD v Chile, Award (May 25, 2004), ¶¶ 163–164: the tribunal emphasized “the coherent action of the various officials…is the responsibility of Chile.” See also ¶165: the tribunal stated that “Chile also has an obligation to act coherently and apply its policies consistently, independently of how diligent an investor is. Under international law (the law that this Tribunal has to apply to a dispute under the BIT), the State of Chile needs to be considered by the Tribunal as a unit.” LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability, ¶ 131 (Oct. 3, 2006): “the obligation to grant and maintain a stable and predictable legal framework necessary to fulfill the justified expectations of the foreign investor.” With the exception of the tribunal in Suez v Argentina who made a reference to the principle of legal certainty and predictability based on Max Weber’s theory (Suez v Argentina, Decision on Liability, ¶ 203).

The Transplantation of Legitimate Expectations

81

that the lack of clarity regarding the juridical basis and rationale for protecting legitimate expectations is a fundamental flaw in the transplantation process.57 It is not clear which of the sources of law stipulated at Article 38 provides a stable basis for ‘transplanting’ the principle of legitimate expectations. The principle of legitimate expectations as applied in fair and equitable treatment has no treaty basis. Some opinions reject the principle on a textual basis58 and affirm that host State’s obligations must be derived from treaty terms and not from investors’ expectations.59 A theory of legitimate expectations based on customary international law is without any legal basis.60 The most plausible legal basis seems to be the ‘general principles of law’ as recognized in Article 38(C). This conception is mostly found in legal writings whilst tribunals have never fully engaged in the discussion on this issue. The proponents essentially argue that the principle of legitimate expectations is recognized in major legal systems in the world; therefore, it constitutes ‘general principles of law’ notwithstanding differences amongst those systems.61 The contrary view is taken with different nuances. One view holds that there is no general principle of law protecting investors’ substantive legitimate expectations.62 Another view emphasizes that such recognition at this point in time is premature.63 An ‘intermediate’ approach suggests that such a general principle is ‘emerging’.64 ‘Judicial decisions65 and the teachings of the most highly 57

Erlend M. Leonhardsen, “Looking for Legitimacy: Exploring Proportionality Analysis in Investment Treaty Arbitration,” Journal of International Dispute Settlement 3, no. 1 (2012): 95–136. 58 Suez v Argentina, Separate Opinion of Arbitrator Pedro Nikken, ¶¶ 3, 20, 21 (Jul. 30, 2010). He suggests that “the assertion that fair and equitable treatment includes an obligation to satisfy or not to frustrate the legitimate expectations of the investor […] does not correspond, in any language, to the ordinary meaning […].” 59 MTD v Chile, Decision on Annulment, ¶ 67: “[t]he obligations of the host State towards foreign investors derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or claim to have.” 60 Paparinskis, The International Minimum Standard, 254: “even if general customary law does not contain a rule on legitimate expectations, a special customary rule may be created to the effect”; Campbell, House of Cards, 379: “it [legitimate expectations] finds no legitimate support in treaty texts or in international law. It is an invention.” 61 See Snodgrass, Protecting Investors’ Legitimate Expectations, 21–22; see also Brown, The Protection of Legitimate Expectations, 1. 62 Sornarajah, The International Law on Foreign Investment, 355. 63 Zeyl, Charting the Wrong Course, 203–235. 64 See Potestà, Legitimate Expectations, 34. 65 Read in light of the phrase “subject to the provisions of Article 59,” it seems to suggest that this refers only to ICJ decisions.

82

Wongkaew

qualified publicists of the various nations’ as stipulated in Article 38(1)(d) of the ICJ Statue, are unlikely to serve as a legal basis, given the current diversity of opinions. Alternatively, based on the rule of treaty interpretation in the Vienna Convention on the Law of Treaties, ‘supplementary means of interpretation’, such as judicial cases (previous arbitral awards, as well as decisions of international courts and tribunals and national courts) can enrich investment treaty tribunals with useful materials, techniques and analogies66 in developing the principle of legitimate expectations. The current jurisprudence seems to analyze the juridical basis for protection of legitimate expectations in terms of ‘good faith’.67 Yet the jurisprudence in investment treaty arbitration has not fully explained how good faith can create a legal obligation to protect expectations.68 The ICJ jurisprudence confirmed that good faith cannot generate a legal obligation where none would otherwise exist.69 It is submitted that like the principle of estoppel,70 the principle of legitimate expectations does not fit easily into the framework of the source of laws 66 Vadi, Critical Comparisons, 98. 67 Tecmed v Mexico, Award, ¶. 121: “[t]he Arbitral Tribunal considers that this provision of the Agreement, in light of the good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that does not affect the basic expectations that were taken into account by the foreign investor to make the investment […].” Likewise, see Total v Argentine Republic, Decision on Liability, ¶ 128: “since the concept of legitimate expectations is based on the requirement of good faith, one of the general principles referred to in Article 38(1) (c) of the Statute of the International Court of Justice as a source of international law, the Tribunal believes that a comparative analysis of the protection of legitimate expectations in domestic jurisdictions is justified at this point.” See also Separate Opinion of Thomas Wälde, Thunderbird v Mexico, ¶ 25: “[l]egitimate expectation” is not explicitly mentioned in Art. 1105 nor in other similar investment treaties. It is, however, considered to be part of the “good faith” principle which is a guiding principle (also a general principle of international law.” 68 The English doctrine of legitimate expectation is said to originate from Lord Denning’s head, in C. F. Forsyth, “The Provenance and Protection of Legitimate Expectations” Cambridge Law Journal 47, no 2 (July, 1998): 238, 241, quoting Lord Denning in a letter to the author writing he felt “sure it came out of my own head and not from any continental or other source.” 69 See Border and Transborder Armed Actions (Nicaragua v Honduras), Judgment, 1988 I.C.J. Reports 69, ¶ 94 (Dec. 20, 1988): “[t]he principle of good faith is, as the Court has observed, ‘one of the basic principles governing the creation and performance of legal obligations’ (Nuclear Tests, I.C.J. Reports 1974, p. 268, para. 46; p. 473, para. 49); it is not in itself a source of obligation where none would otherwise exist,” quoted by Potestà, Legitimate Expectations, 5. 70 Thomas Cottier and Jörg Paul Müller, “Estoppel,” in Max Planck Encyclopedia of Public Inter­ national Law (MPEPIL), ed. Rüdiger Wolfrum (online edition, accessed January 27, 2014,

The Transplantation of Legitimate Expectations

83

stipulated in Article 38 of the ICJ Statute and should be considered as a rule developed on the basis of estoppel and the general principle of laws based on judicial decisions. This is reflected in the requirement of ‘reliance’ and the consideration of public interests. The second problematic aspect with respect to the application of legitimate expectations is that a breach has been alleged in all circumstances such that it is difficult to determine the precise role of legitimate expectations and how it forms the legal basis for liability of host States. It is important to recognize that the source of legitimate expectations has an implication for the level of entitled protection.71 The recent jurisprudence has made it clear that expectations generated from the specific commitment is more worthy of legal protection than expectations created by general legislative frameworks.72 However, the jurisprudence has not identified the legal weight of legitimate expectations in determining liability in different situations. The superfluous invocation of the principle of legitimate expectations can be attributed to the lack of the justificatory principle, which would otherwise help to identify its ‘proper and distinct’ function and its relation to other principles, such as fairness, equity, due process, and proportionality. Whilst scholars and courts dealing with domestic administrative laws have sought to justify the principle of legitimate expectations in the context of judicial review,73 such reflection is hardly addressed in the context of investment treaty arbitration. This section examines the jurisprudence with a view to identify the legal relevance of legitimate expectations in case of contractual arrangements, administrative representations and legislative changes. It will be argued that

71

72

73

http://opil.ouplaw.com/home/EPIL), ¶ 10, observe that “estoppel does not easily fit into the straitjacket of Art. 38 of the ICJ, and it is more suitable to base it upon a combination of general principles of law, precedent and doctrine…it may be best considered as a rule of judge-made public international law, as confirmed and developed by the ICJ on the basis of good faith and equity, comparable to the doctrine of equitable principles in maritime boundary delimitation.” Arif v Moldova, Award, ¶ 535: “[a]ccordingly, a claim based on legitimate expectations must proceed from the exact identification of the origin of the expectation alleged, so that its scope can be formulated with precision.” Continental Casualty v Argentina, ICSID Case No ARB/03/9, Award, ¶ 261 (5 September 2008), suggests that political statements have the least legal value, whereas general legislative statements engender reduced expectations; unilateral modification of contractual undertakings deserve clearly more scrutiny. Paul Reynolds, “Legitimate Expectations and the Protection of Trust in Public Officials,” Public Law (2011): 330–352.

84

Wongkaew

legitimate expectations have a clear legal relevance in limited circumstances, especially when a State makes a specific commitment to an investor. 3.4.2.1 Contractual Arrangements What is the role of legitimate expectations in establishing a breach of fair and equitable treatment arising from a breach of contractual obligations? A twostep inquiry must be adopted to assess the relevance of legitimate expectations. First, in what circumstances does a breach of contract violate fair and equitable treatment? Second, what role does a breach of expectations play in forming the basis for liability? It is important to recall a well-established principle in international law that a contract breach does not per se constitute a treaty breach.74 However, it is generally accepted that for a breach of a treaty obligation to occur from a breach of contract, some additional elements are needed, as reflected in the Commentary to the ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts: “the breach by a State of a contract does not as such entail a breach of international law. Something further is required before international law becomes relevant, such as a denial of justice by the courts of the State in proceedings brought by the other contracting party.”75 The approach adopted in investment treaty jurisprudence is generally in line with international law which does not allow legitimate expectations alone to be the legal basis for establishing international responsibility.76 However, some other jurisprudence emphasizes an important role for legitimate expectations, but no precise normative weight is clarified. Most investment treaty jurisprudence affirms a distinction between ‘contractual expectations’ and expectations protected under international law. The tribunal in Parkerings v Lithuania stressed that “the expectation a party to an 74

International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts with Commentaries. Report of the International Law Commission: 53rd Sess. (2001) (United Nations Publications, 2008), art. 4, cmt. 6, 41; Stephen M. Schwebel, “On whether the breach by a State of a contract with an alien is a breach of international law” in International Law at the Time of its Codification – Essays in Honour of Roberto Ago, vol. 3 (A. Giuffrè, 1987), 401. For a critical view, see Sornarajah, International Law on Foreign Investment; Chittharanjan F. Amerasinghe, “State Breaches of Contracts with Aliens and International Law,” the American Journal of International Law 58, no. 4 (Oct., 1964): 881–913. 75 ILC, Draft Articles on Responsibility of States for Internationally Wrongful Acts, 41. 76 Thomas W. Wälde, “Contract Claims under the Energy Charter Treaty’s Umbrella Clause: Original Intentions Versus Emerging Jurisprudence,” in Investment Arbitration and the Energy Charter Treaty, ed. Clarisse Ribeiro (New York, Juris Publishing, 2006): 205, 209.

The Transplantation of Legitimate Expectations

85

agreement may have of the regular fulfillment of the obligation by the other party is not necessarily an expectation protected by international law.”77 The tribunal in Gustav v Ghana also rejected the contention that contract violations could amount to a violation of the FET standard based on a theory of ‘legitimate expectations’.78 The jurisprudence seems to require that additional elements, such as sovereign authority,79 discrimination or denial of justice,80 ‘outright and unjustified repudiation of the transaction’,81 or a ‘substantial breach’ ‘under certain limited circumstances’82 must be present to establish international responsibility based on a breach of contractual obligation. The element of sovereign power may be conceived as a procedural fulfillment of the rule that only a sovereign State acting with sovereign power can incur international responsibility. It also prevents the introduction of the umbrella clause through the back-door.83 77 78

Parkerings v Lithuania, Award, ¶ 344. Gustav FW Hamester GmbH & Co KG v Republic of Ghana, ICSID Case No ARB/07/24, Award ¶ 335 (18 June 2008) para 335: “[i]t is important to emphasise that the existence of legitimate expectations and the existence of contractual rights are two separate issues.” 79 Impregilo S.p.A. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/3, Decision on Jurisdiction, ¶ 260 (Apr. 22, 2005). The tribunal in Impregilo v. Pakistan argued similarly as in Consortium RFCC when explaining under which circumstances a breach of contract amounted to a breach of an international obligation: “[i]n order that the alleged breach of contract may constitute a violation of the BIT, it must be the result of behavior going beyond that which an ordinary contracting party could adopt Only the State in the exercise of its sovereign authority (‘puissance publique’), and not as a contracting party, may breach the obligations assumed under the BIT.” See also Bayindir Insaat Turizm Ticaret VE Sanay A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award, ¶ 180 (Aug. 27, 2009). Consortium RFCC v. Royaume du Maroc, ICSID Case No. ARB/00/6, Award (Dec. 22, 2003) and Waste Management, Inc. v. United Mexican States (Waste Management II), ICSID Case No. ARB(AF)/00/3, Award (Apr. 30, 2004) follow the same reasoning. 80 Glamis Gold, Ltd v United States of America, NAFTA/UNCITRAL, Award, ¶ 620 (8 June 2009): “a mere contract breach, without something further such as denial of justice or discrimination, normally will not suffice to establish a breach of Article 1105 […].” 81 In Waste Management v. Mexico, Award, ¶ 115, the tribunal noted that even the persistent non-payment of debts by a municipality would not equate a violation of article 1105 NAFTA, “provided that it does not amount to an outright and unjustified repudiation of the transaction and provided that some remedy is open to the creditor to address the problem.” 82 Parkerings v Lithuania, Award, ¶ 316. 83 Christoph Schreuer, “Fair and Equitable Treatment: Interactions with other Standards,” Transnational Dispute. Management 4, no. 5 (September 2007): 18, “[t]aken to its logical conclusion this argument would put all agreements between the investor and the host State under the protection of the FET standard. If this position were to be accepted, the

86

Wongkaew

Where does this position leave the role of legitimate expectations? It is argued that the requirement for those additional elements seems to render the legal relevance of investors’ expectations ‘obsolete and merely rhetorical’ because those elements form the basis for liability, as observed by Oppenheim: [i]t is doubtful whether a breach by a state of its contractual obligations with aliens constitutes per se a breach of an international obligation, unless there is some such additional element as denial of justice, or expropriation, or breach of treaty, in which case it is that additional element which will constitute the basis for the state’s international responsibility [emphasis added].84 Moreover, it is not clear at all what is being referred to by ‘expectations as ­protected in international law’. It is suggested that the type of expectation protected under international law in the context of contractual arrangements seems to be the expectation that the State does not use its sovereign power to upset the contractual equilibrium.85 Some arbitral awards can be read to support the considerable relevance of legitimate expectations. For instance, the tribunal in Total v Argentina viewed that investors’ expectations which were crystallized in contracts became legitimate and hence entitled to legal protection: [t]he expectation of the investor is undoubtedly ‘legitimate’, and hence subject to protection under the fair and equitable treatment clause if the host State has explicitly assumed a specific legal obligation for the future, such as by contracts, concessions or stabilisation clauses on which the investor is therefore entitled to rely as a matter of law.86 Furthermore, the tribunal in Walter Bau v Thailand seems to accord a great deal of legal relevance to legitimate expectations as a basis for a breach of fair and equitable treatment. FET standard would be nothing less than a broadly interpreted umbrella clause.” This was endorsed by the tribunal in Hamester v Ghana, ¶ 337. 84 Robert Jennings and Arthur Watts, eds., Oppenheim’s International Law (Harlow: Longman, 1996), 927. 85 Paparinskis, The International Minimum Standard, 226 suggests that the expectation is only that the State would not breach the contract by stepping outside the contractual framework and employing extra-contractual public or governmental powers. 86 Total v Argentina, Decision on Liability, ¶117.

The Transplantation of Legitimate Expectations

87

In Walter Bau v Thailand, a dispute arose from an alleged breach of a concession contract to build a toll way to the airport in Thailand. The failure by the government agency to authorize a toll increase, in accordance with the terms of the concession contract, led to a breach of investment treaty obligations. The tribunal stated as follows: [i]n spite of the fact that there was no guarantee by the Respondent of an explicit rate of return, the Tribunal considers that a reasonable rate of return – reasonable in all the circumstances, including the signing of MoA2 – was part of the Claimant’s legitimate expectations and the failure to fulfil such a reasonable expectation was a breach of the Respondent’s FET obligations.87 In the cases where legitimate expectations are generated by a combination of contractual and legislative terms, the normative weight of expectations created by the contract is unclear. The tribunal in Continental Casualty v Argentina seems to suggest that a legislative framework creates legal rights for contractual undertakings, therefore expectations of compliance.88 However, the tribunal in Suez v Argentina seemed to view the concession as a predominant source of expectations which warrants legal protection.89 If a government official enters into a contract by exceeding its regulatory powers, how should this affect the legal protection of investors’ expectations? This question highlights the conflict between protecting individuals’ interests 87 88

89

Walter Bau AG (In Liquidation) v The Kingdom of Thailand, UNCITRAL, Award, ¶ 12.3 (Jul. 1, 2009). Continental Casualty v Argentina, Award, ¶ 261: “unilateral modification of contractual undertakings by governments, notably when issued in conformity with a legislative framework and aimed at obtaining financial resources from investors deserve clearly more scrutiny, in the light of the context, reasons, effects, since they generate as a rule legal rights and therefore expectations of compliance.” Suez v Argentina, Decision on Liability, ¶ 212: “[l]ike any rational investor, the Claimants attached great importance to the tariff regime stipulated in the Concession Contract and the regulatory framework.… These expectations of the Claimants were later included in the Concession Contract, a document which certainly reflects in detail the Claimants’ legitimate expectations, as well as those of the Province. In view of the central role that the Concession Contract and legal framework placed in establishing the Concession and the care and attention that the Province devoted to the creation of that framework, the Claimants’ expectations that the Province would respect the Concession Contract throughout the thirty-year life of the Concession was legitimate, reasonable, and justified.”

88

Wongkaew

and defending the value of legality. This is the issue that was at stake in SPP v Egypt.90 In SPP v Egypt , the claimant entered into agreements with Egypt to establish a joint venture with a view to develop an international tourist complex at the Pyramids Oasis. Subsequently, the Government effectively cancelled the project placing ETDC in judicial trusteeship. The interesting issue is whether illegal acts by officials affect legal protection of legitimate expectations. The tribunal took the view that even if certain acts of Egyptian officials were illegal under Egyptian law, such acts were performed by governmental authorities  which created a legitimate expectation for the investor. The tribunal explained that these acts were cloaked with the mantle of Governmental authority and communicated as such to foreign investors who relied on them in making their investments […] which are now alleged to have been in violation of the Egyptian municipal legal system, created expectations protected by established principles of international law.91 This case, as well as those analyzed above, suggests an unclear role of legitimate expectations in converting a contract breach into a treaty breach. After all, a breach of contract may rise to the level of treaty breach by virtue of other elements, such as an exercise of sovereign power or arbitrary or discriminatory treatment. In such cases, however, legitimate expectations seem to have no additional normative value. Rather, the principle plays a rhetorical role in forming the legal basis for a treaty breach. 3.4.2.2 Administrative Representations Investors make their investments based on various kinds of administrative representations as to certain benefits or outcomes. These representations can take the form of a promise, an undertaking, a statement or information, as well as policy statements, guidelines, or established practice. To what extent should the law protect expectations based on such representations? Investment treaty jurisprudence has affirmed that clear and specific representations can form the basis for protecting legitimate expectations.92 The analysis below will 90 91 92

Southern Pacific Properties v Egypt, Award, ¶ 82–83. Id., ¶ 83. EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, ¶ 216 (Oct. 9, 2009): “[protection of legitimate expectations] comes into consideration whenever the treat­ ment attributable to the State is in breach of representations made by it which were

The Transplantation of Legitimate Expectations

89

­illustrate how different degrees of specificity of the undertaking or representation are relevant to evaluate the legitimacy of expectations.93 Expectations arising from unambiguous and repeated representations, policy statements, and correspondence and records of meetings will be examined. Legitimate expectations can potentially constitute a legal basis for liability where administrative representations have been made because the investor’s protection will not usually be based on any prior legal right (contrary to a contractual right or a right granted by law). However, in such cases, the jurisprudence has imposed quite a high threshold for specificity that investors have generally failed to meet. In Metalclad v Mexico, the investor obtained necessary permits at federal and state levels for the construction of a waste landfill and believed that a permit at the municipal level was not required. This was confirmed by the representations of the federal government. Subsequently, it emerged that Metalclad was required to obtain a municipal construction permit. The tribunal held that Metalclad was entitled to rely on the representations of federal officials and to believe that it was entitled to continue its construction of the landfill. Such representation was characterized as “definitive, unambiguous and repeated.”94 The Metalclad v Mexico case can be contrasted with Feldman v Mexico, where the Tribunal characterized the assurances in the case as “at best ambiguous and largely informal.” The Separate Opinion of Thomas Wälde in Thunderbird v Mexico confirms that “a legitimate expectation is assumed more readily if an individual investor receives specifically formal assurances that display visibly an official character.”95 The tribunal in White Industries v India had to determine whether the representations made by Indian officials to an investor to the effect that “it was safe for Claimant to invest in India and that the Indian legal system was, to all intents and purposes, the same as the Australian legal system”96 created

93

94 95 96

said to be reasonably relied upon by the Claimant.” Similarly, the tribunal in Sempra Energy International v The Argentine Republic, ICSID Case No. ARB/02/16, Award ¶ 298 (Sep. 28, 2007), noted that: “[t]his requirement to protect legitimate expectations becomes particularly meaningful when the investment has been attracted and induced by means of assurances and representations.” Continental Casualty v Argentina, Award, ¶ 261; Parkerings v Lithuania, Award, ¶ 331: “[an] expectation is legitimate if the investor received an explicit promise or guaranty from the host State.” Marvin Roy Feldman Karpa v United Mexican States, ICSID Case No ARB(AF)/99/1, Award ¶ 89 (Dec. 16, 2002). Separate Opinion of Thomas Wälde in Thunderbird v Mexico, ¶ 32. White Industries v India, Final Award, ¶ 5.2.6.

90

Wongkaew

­legitimate expectations. The Tribunal held that such vague and general representations could not give rise to legitimate expectations.97 The jurisprudence has recognized that political statements may have the effect of inducing an investor to make an investment but they have the least legal value. In Continental Casualty v Argentina, the investor relied on a series of acts and pronouncements by Argentina’s authorities as a basis for legitimate expectations, and mainly the Intangibility Law of 2001. However, the investor relied on “Argentina’s representation to keep its money in Argentina” and certain public statements by Minister Cavallo amongst others. The tribunal ascribed “the least legal value, regrettably but notoriously so” to political statements.98 In BG Group v Argentina, liability was found for breach of guarantees in the regulatory framework. However, the tribunal addressed the legal relevance of the Information Memorandum which was distributed amongst foreign investors about the tariff and adjustment regimes of the Gas Laws99 and the statement by the Argentinian president to Congress about the BIT and the need to create a climate of stability and confidence to attract investment.100 However, it is not clear what legal weight the tribunal gave to these statements. The tribunal in El Paso v Argentina refused to give effect to a political statement by the President of the Republic, even though such representation could induce potential investors to invest in the sector concerned. The tribunal made it clear that political proposals might induce an economic decision but it is not the same as claiming legal guarantees.101 In PSEG v Turkey,102 an American investor was granted authorization to conduct a feasibility study into the building of a coal-fired power plant in the Turkish province of Konya. A dispute arose out of the background of Turkey’s liberalization of the energy sector to meet increased energy demands in the 1980s. A series of negotiations ensued between the parties but the investor and the Turkish Ministry of Energy and Natural Resources failed to reach 97

White Industries v India, Final Award, ¶ 10.3.17: “representations suffer from vagueness and generality, such that they are not capable of giving rise to reasonable legitimate expectations that are amenable to protection under the fair and equitable treatment standard.” 98 Continental Casualty v Argentina, Award, ¶ 261. 99 BG Group Plc. v The Republic of Argentina, UNCITRAL, Final Award ¶ 171–2 (Dec. 24, 2007). 100 BG Group v Argentine Republic, Final Award, ¶ 300. 101 El Paso v Argentina, Award, ¶ 399. 102 PSEG Global Inc. and Konya Ilgin Elektrik Uretim ve Ticaret Limited Sirketi v Republic of Turkey, ICSID Case No. ARB/02/5, Award (Jan. 10, 2007).

The Transplantation of Legitimate Expectations

91

agreement on the capacity of the plant and the tariffs. In the meantime, the legal framework underwent a change with the enactment of a new law barring investors from obtaining a Treasury guarantee. The new law was subsequently quashed by the Supreme Court. The investor sued Turkey alleging breaches of United States-Turkey BIT obligations. The relevant issue was whether the government’s encouragement policy could give rise to legitimate expectations. The tribunal established that legitimate expectations by definition require a ‘promise of the administration’ on which the Claimants rely to assert a right that needs to be observed103 and held that investment promotion policy could not constitute a basis for legitimate expectations because it “did not entail a promise made specifically to the Claimants about the success of their proposed project.”104 However, the tribunal found a breach of fair and equitable treatment based on the ‘roller-coaster’ effect of continuing legislative changes.105 Claims for breach of legitimate expectations have been based on correspondence or records of meetings with officials. However, the expectations arising therefrom usually lack the requisite clarity and specificity. In Frontier Petroleum v Czech Republic, the tribunal had to address whether the two letters by the Czech Ministry of Industry and Trade in which the Ministry indicated that “the state would have the possibility to enter into negotiations” with the investor created legitimate expectations. The Tribunal found that the relevant statements did not exhibit the level of specificity necessary to generate legitimate expectations. In addition, these statements were made after Claimant had already invested in the Czech Republic and therefore could not have generated legitimate expectations by Claimant vis-à-vis the State’s treatment of its investment.106 The tribunal in Nations Energy v Panama stated that legitimate expectations based on a government official’s response to a hypothetical query that did not refer expressly and clearly to the claimant’s was not protected.107 103 PSEG v Turkey, Award, ¶ 241. 104 PSEG v Turkey, Award, ¶ 243: “the whole [Build-Operate-Transfer] BOT policy was built on the premise that foreign investments would be needed, encouraged and welcome, but this was a matter of general policy that did not entail a promise made specifically to the Claimants about the success of their proposed project.” 105 PSEG v Turkey, Award, ¶ 250. 106 Frontier Petroleum Services Ltd. v The Czech Republic, UNCITRAL, Award, ¶ 468 (Nov. 12, 2010). 107 Nations Energy Corporation, Electric Machinery Enterprises Inc., and Jamie Jurado v. The Republic of Panama, ICSID Case No. ARB/06/19, Award, ¶ 619 (Nov. 24, 2010).

92

Wongkaew

In GEA v Ukraine, the claimant alleged Ukraine’s breach of its promise to compensate for property wrongfully taken.108 The tribunal considered the record of a meeting which stated that Ukraine would promptly “work out” the amount of property and the repayment timetable and ruled that this could not amount to a promise to pay, especially the Parties’ indication that they would “make a final decision on this problem” on a later date. In addition, the claimant relied on a series of letters and records of meetings, such as the recommendation to prepare an inventory and a promise to “take control of the missing quantities,”109 the conclusion of the Settlement Agreement between a legal entity separate from Ukraine, and the undertaking that “the Ministry of Industrial Policy would ensure that the provisions of the protocol would be fulfilled by the Ukrainian party.”110 The tribunal denied that those documents amounted to promises by Ukraine to pay the claimant for the lost products. Furthermore, the tribunal also considered that the Vice Prime Minister’s statements regarding debt levels deterring investors and Ukraine doing its part to resolve the problem could not be interpreted as a promise by Ukraine to pay for lost products.111 In addition, the claimant argued that Ukraine violated its expectations that the debt would be recovered in the bankruptcy. The claimant relied on a series of letters which gave rise to these expectations, including a letter from the Ministry of Industrial Policy which stated, “the Cabinet of Ministers of Ukraine will pass a document which […] will cancel these bankruptcy proceedings;” protocols of meetings, which stated, “the Ukrainian party shall carry out all acts permitted by applicable legislation of Ukraine in order to terminate the bankruptcy proceedings pending against JSC Oriana.”112 The tribunal held that these statements could not be considered as unconditional promises for payment. Rather, they suggested that best efforts would be made to assist in bringing the bankruptcy proceedings to an end according to Ukrainian law.113 The analysis above demonstrates the high threshold for a specific representation or promise to create a legal obligation. However, two important issues have not been adequately addressed. First, why is the specificity requirement a  necessary condition? It seems circular to contend that expectations are 108 GEA Group Aktiengesellschaft v. Ukraine, ICSID Case No. ARB/08/16, Award ¶ 277 (Mar. 31, 2011): “[i]n the Tribunal’s view, it is entirely unclear from the documents that Ukraine in fact made any such promises to the Claimant, or failed to keep any promises made.” 109 GEA v Ukraine, Award, ¶ 279. 110 GEA v Ukraine, Award, ¶ 281. 111 GEA v Ukraine, Award, ¶ 282. 112 GEA v Ukraine, Award, ¶ 288. 113 GEA v Ukraine, Award, ¶ 291.

The Transplantation of Legitimate Expectations

93

­legitimate and worthy of legal protection if they are based on specific representations. Second, what is the requisite level of specificity and to whom and to what does that specificity relate? These questions deserve some reflection. With respect to the first question, specificity is a necessary condition because the principle of legitimate expectations under investment treaty law is underlined by various doctrines, such as estoppel, unilateral acts or promissory obligations, which require a certain degree of specificity. Various theories provide the rationale for explaining why representations and commitments create legal obligations. Host States incur moral, promissory obligations by making clear representations and commitments because they have invited an investor to place his trust in the promise made. According to the speech act theory, the promise, which is a social convention of trust, includes an act of engaging in a morally binding social institution.114 It is argued that promisebreaking entails a form of moral harm because of the detrimental impact on individual autonomy.115 Therefore, the enforcement of a legitimate expectation is the judicial protection of a moral obligation that the host State has freely incurred.116 Such a view seems to accord with Rawls’ rule of promisekeeping that for a binding promise, a promisor must be fully conscious and know the meaning of the operative words.117 The second question pertaining to requisite specificity and the addressee is analyzed in Total v Argentina, which discusses such requirements in the context of legislative frameworks. However, such rules may be applied to the administrative representations. The general rule is that “no general definition of what constitutes a specific commitment can be given, as all depends on the circumstances.”118 The tribunal suggests that specific commitments must be “made directly to the investor” in various forms, such as in a contract, or a letter of intent, or even through a specific promise in a business meeting.119 As for the subject of the expectation, a commitment must be made in relation to the expected object, namely a guarantee of stability in case of legislative change. The question as to the required level of specificity is not uniformly answered 114 See, John Searle ‘What is a speech act?’ in The Philosophy of Language, ed. John Searle (Cambridge: Cambridge University Press, 1971). 115 See, Schønberg, Legitimate Expectations, 9–11, 112. 116 William David Ross, Foundations of Ethics (Oxford: Clarendon Press: 1939), 100–101: “[i]f what we promise is important to the other person, or if we have been emphatic in our promise by being explicit or by repeating it, we raise the level of expectation and of our responsibility to follow through.” 117 See, John Rawls, A Theory of Justice (Harvard University Press: 1971), 345. 118 El Paso v Argentina, Award, ¶ 375. 119 El Paso v Argentina, Award, ¶ 376.

94

Wongkaew

because tribunals seem to use varying formulations, such as ‘targeted representations or assurances’120 and ‘definitive, unambiguous and repeated’.121 Some tribunals reject the claims and simply leave the requisite level of specificity undefined.122 3.4.2.3 Regulatory Changes Legal stability is an important consideration for an investor making an investment. It is recognized that regulatory frameworks can create expectations.123 However, “the host State’s legitimate right to regulate domestic matters in the public interest” has to be taken into account in determining whether expectations in a particular case are legitimate.124 How should the law seek to balance the two objectives? What is the precise role of legitimate expectations turning a change of law into a breach of fair and equitable treatment? It will be argued that legitimate expectations, in the absence of specific commitments or promises play a rhetorical role. The concepts of promise and commitment seem to be at the forefront of the reasoning relating to regulatory changes. The tribunal in Total v Argentina asks whether the laws invoked by the claimant can constitute a promise and  commitment.125 Changes in regulatory frameworks alone are not sufficient grounds for creating legitimate expectations protected by the fair and 120 Grand River Enterprises Six Nations, Ltd., et al. v. United States of America, UNCITRAL, Award ¶140 (Jan. 12, 2011). 121 Feldman v Mexico, Award, ¶ 148. 122 Frontier Petroleum v Czech Republic, Award, ¶ 468: “[the letters] did not ‘exhibit the level of specificity necessary to generate legitimate expectations”; White Industries v India, Final Award, ¶ 10.3.17, holding that the representations are not capable of giving rise to reasonable legitimate expectations due to their vagueness and generality. 123 Dolzer and Schreuer, Principles of International Investment Law, 134. “The legal framework on which the investor is entitled to rely will consist of legislation and treaties, of assurances contains in decrees, licenses similar executive assurances as well as in contractual undertakings. A reversal of assurances made by host state that have led to legitimate expectations will violate the principle of fair and equitable treatment.” See also Jeswald W. Salacuse, The Law of Investment Treaties (Oxford University Press, 2010), 231: “[t]Thus, when a state has created certain expectations through its laws and acts that have led the investor to invest, it is generally considered unfair for the state to take subsequent actions that fundamentally deny or frustrate those expectations.” 124 Saluka v Czech Republic, Partial Award, ¶ 305. 125 Total v Argentina, Decision on Liability, ¶ 99: “[t]he first issue…is to determine whether the legislation, regulation and provisions invoked by Total constitute a set of promises and commitments towards Total whose unilateral modifications entail a breach of the legitimate expectations of Total.”

The Transplantation of Legitimate Expectations

95

equitable treatment standard.126 However, deducing from the current jurisprudence, regulatory changes will constitute a breach of fair and equitable treatment in two sets of circumstances. First, if there is a specific commitment127 or a stabilization clause.128 Second, a certain extent and manner of regulatory change may constitute a breach of a treaty obligation.129 For instance, in Occidental Exploration v Ecuador, the tribunal focused on the manner in which the framework was totally dismantled contrary to the prior specific commitment made.130 The tribunal in El Paso v Argentina suggested that a “total alteration of the legal framework”131 could give rise to a breach of fair and equitable treatment. The tribunal in Toto v Lebanon suggested that “changes in the regulatory framework would be considered as breaches of the duty to grant full protection and fair and equitable treatment only in case of a drastic or discriminatory change in the essential features of 126 Moshe Hirsch, “Between Fair and Equitable Treatment and Stabilization Clause: Stable Legal Environment and Regulatory Change in International Investment Law,” The Journal of World Investment & Trade 12, no. 6 (December 2011): 783–806. 127 Ioan Micula, Viorel Micula, S.C. European Food S.A, S.C. Starmill S.R.L. and S.C. Multipack S.R.L. v. Romania, ICSID Case No. ARB/05/20, Award, ¶ 673 (Dec. 11, 2013): “when the alleged legitimate expectation is one of regulatory stability, the reasonableness of the expectation must take into account the underlying presumption that, absent an assurance to the contrary, a state cannot be expected to freeze its laws and regulations.” Similarly, the tribunal in GEA v Ukraine, Award, ¶ 272–305, considered various claims on legitimate expectations in terms of promise, declaring in ¶ 283: “there is basis on the record before it to find that Ukraine breached its obligation to give GEA’s investment fair and equitable treatment, by failing to fulfil a promise to pay for the lost Products, as no such promise was ever made.” [emphasis added]. 128 Mobil Investments Canada Inc. and Murphy Oil Corporation v. Canada, ICSID Case No. ARB(AF)/07/04, Decision on Liability, ¶ 153 (May 22, 2012). 129 Arif v Moldova, Award, ¶ 538: accordingly, an investor’s legitimate expectations might be breached not only by a substantive change in policy, but also by the treatment of the investor during the process of the change of policy. 130 CMS Gas Transmission Company v Argentine Republic, ICSID Case No. ARB/01/8, Award, ¶ 277 (May 12, 2005): “[i]t is not a question of whether the legal framework might need to be frozen as it can always evolve and be adapted to changing circumstances, but neither is it a question of whether the framework can be dispensed with altogether when specific commitments to the contrary have been made. The law of foreign investment and its protection has been developed with the specific objective of avoiding such adverse legal effects.” 131 El Paso v Argentina, Award, ¶ 374: “No reasonable investor can have such an expectation unless very specific commitments have been made towards it or unless the alteration of the legal framework is total.”

96

Wongkaew

the transaction.”132 The PSEG v Turkey award emphasizes the “roller-coaster effect of the regulatory modifications” with “endless” legislative changes.133 Furthermore, the tribunal in Impregilo v Argentina referred to a protection of investors’ expectations from “unreasonable modifications of that legal framework.”134 The introduction of ‘unreasonableness’ here muddles the precise role of expectations. It is interesting to observe divergent approaches on the role of legitimate expectations and regulatory change in two recent cases, namely Micula v Romania135 and Teco v Guatemala.136 The tribunal in the first case considered that the premature ending of the tax incentives scheme (EGO 24) which were crystallized through the granting of the “Permanent Investor Certificate” (PIC) and the change of related regulations frustrated the investor’s legitimate expectation.137 The tribunal accords considerable weight to legitimate expectation in the assessment of Romania’s liability.138 To the contrary, the tribunal in the second case considered the expectations induced by specific provisions of the General Electricity Law, its related regulations and other kind of specific representations.139 However, the tribunal opined that the investor’s expectation is ‘irrelevant’ to the assessment of State responsibility because ‘a willfull disregard of the law or an arbitrary application of the same…constitutes a breach of the minimum standard, with no need to resort to the doctrine of legitimate expectations’. [emphasis added]140 132 Toto Construzioni Generali SpA v Republic of Lebanon, ICSID Case No ARB/07/12, Award, ¶ 244 (7 June 2012). 133 PSEG v Turkey, Award, ¶ 250: “[t]he fair and equitable treatment obligation was seriously breached by what has been described above as the “roller-coaster” effect of the continuing legislative changes. This is particularly the case of the requirements relating, in law or practice, to the continuous change in the conditions governing the corporate status of the Project, and the constant alternation between private law status and administrative concessions that went back and forth. This was also the case, to a more limited extent, of the changes in tax legislation.” 134 Impregilo SpA v Argentine Republic, Award, ¶ 291. 135 Micula v. Romania, Award, ICSID Case No. ARB/05/20, Award (Dec. 11, 2013). 136 TECO Guatemala Holdings, LLC v. Republic of Guatemala, ICSID Case No. ARB/10/23, Award (Dec. 19, 2013). 137 Micula v Romania, Award, ¶ 677. 138 Micula v Romania, Award, ¶ 673: “[a]ccordingly, for a state to violate the fair and equitable treatment standard by changing the regulatory framework, the investor must have received a legitimate assurance that the relevant laws and regulations would not be changed in his or her respect.” 139 Teco v Guatemala, Award, ¶¶ 611–623. 140 Teco v Guatemala, Award, ¶ 616: (“in absence of a stabilization clause, it is perfectly acceptable that the State amends the relevant laws and regulations as appropriate. It is

The Transplantation of Legitimate Expectations

97

One way to reconcile the two decisions is to have recourse to different treaty  provisions. The fair and equitable provision in Micula v Romania141 has no reference to customary international law minimum standard of treatment, whereas the provision in Teco v Guatemala does.142 However, if one accepts that the customary and treaty fair and equitable treatment standards have been converging,143 two distinct positions must be accepted as the state of play. In light of the analysis above, it is argued that the role of legitimate expectations is misplaced and merely rhetorical in these cases because the jurisprudence seems to illustrate that legitimate expectations, at best, play a rhetorical role in strengthening the ‘unreasonableness’, ‘due process’ or ‘discrimination’ claim. 3.5

Imprecise Contours of Legitimate Expectations

The fundamental element in the analysis of legitimate expectations is to determine which expectations are reasonable. The task is challenging because the boundary of the ‘reasonableness’ concept is malleable and elastic, as each side exerts some pull on one’s sense of fairness.144 The concept of reasonableness serves as the fundamental criterion for evaluating the validity of the public conception of justice and all political claims and decisions. Under Rawls’s theory,145 reasonable citizens have to recognize the right of others to develop, pursue and realize their own visions of the good life. Such recognition is necessary to establish and preserve a ‘well-ordered’ liberal democracy. Transposing that framework to the context of an investment treaty, investors as rational and

141

142 143 144 145

only if a change to the regulatory framework is made in bad faith or with the intent to deprive the investor of the benefits of its investment that it could entail the State’s international responsibility.”) [emphasis added]. Article 2(3) of the Romania-Sweden BIT. Agreement between the Government of the Kingdom of Sweden and the Government of Romania on the Promotion and Reciprocal Protection of Investments, Rom.-Swed., May 29, 2002, accessed January 27, 2014, http:// unctad.org/sections/dite/iia/docs/bits/sweden_romania.pdf. Article 10.5, ¶ 2, of the CAFTA-DR. Dominican Republic-Central America-United States Free Trade Agreement, Aug. 5, 2004, 119 Stat. 462. Dozler and Schreuer, Principles of International Investment Law, 128. Abdi v Secretary of State for the Home Department [2005] EWCA Civ 1363 (22 November 2005), ¶ 66 (Laws LJ). Shaun P. Young, “Rawlsian Reasonableness: A Problematic Presumption?” Canadian Journal of Political Science / Revue canadienne de science politique 39, no. 1 (Mar., 2006): 159–180.

98

Wongkaew

reasonable agents have to recognize that in some circumstances, especially in times of crisis, States may have to take draconian measures to protect public interests.146 It is argued that despite numerous approaches for defining the boundaries of expectations, no coherent rules have been developed to apply those approaches in a principled and systematic manner. Most tribunals emphasize the importance of taking into account the particular circumstances in interpreting ‘reasonableness or legitimacy’. The tribunal in LG&E v Argentina stated that “the investor’s fair expectations cannot fail to consider parameters, such as business risk or industry’s regular patterns.”147 The tribunal in Suez v Argentina suggested the so-called ‘reasonable investor’ approach which considers “what would have been the legitimate and reasonable expectations of a reasonable investor in the position of the Claimants, at the time they made their investment…bearing in mind that country’s history and its political, economic and social circumstances.”148 The tribunal in Duke v Ecuador emphasized the importance of considering all circumstances surrounding the investment and the detrimental reliance by the investor.149 The notion of reasonableness also has a temporal aspect, meaning that expectations must occur at the time the investment is made.150 Host State’s conditions have been relevant in assessing the reasonableness of investors’ expectations. The jurisprudence has recognized the following factors as pertinent: ‘political, socioeconomic, cultural and historical conditions prevailing in the host State’,151 ‘political volatility’,152 ‘post-civil war’,153 146 El Paso v. Argentina, Award, ¶ 363: “if the circumstances change completely, any reasonable investor should expect that the law also would drastically change. It is reasonable to foresee that a small change in circumstances might entail minor changes in the law, while a complete change might entail major changes in the law.” 147 LG&E v. Argentina, Award, ¶ 130. 148 Suez v Argentina, Decision on Liability, ¶ 209. 149 Duke Energy Electroquil Partners and Electroquil S.A. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award, ¶ 340 (Aug. 18, 2008): “[t]he assessment of the reasonableness or legitimacy must take into account all circumstances, including not only the facts surrounding the investment, but also the political, socioeconomic, cultural and historical conditions prevailing in the host State. In addition, such expectations must arise from the conditions that the State offered the investor and the latter must have relied upon them when deciding to invest.” 150 Christoph Schreuer and Ursula Kriebaum; “At What Time Must Legitimate Expectations Exist?” TDM 1 (2012), accessed January 27, 2014, www.transnational -dispute-management.com. 151 Duke Energy v Ecuador, Award, ¶ 340. 152 Bayindir Insaat v Pakistan, Award, ¶ 194. 153 Toto v Lebanon, Award, ¶ 245.

The Transplantation of Legitimate Expectations

99

­transition,154 high regulatory risk,155 ‘financial crisis’, ‘energy crisis and national shortage’,156 ‘vicissitude of the economy of the State’,157 and a ‘highly regulated banking climate’.158 This trend highlights the important role of the concept of State in the assessment of ‘reasonableness’ of expectations.159 A tribunal will be inclined to infer a constructive knowledge of the circumstances and context which would engender a reduced expectation.160 Reasonableness or legitimacy is also defined by a degree of specificity of commitment.161 Investors’ expectations are considered ‘legitimate’ if a government agency of a host State has made a promise or given an undertaking or representation as to a particular outcome/benefit to an investor.162 The crucial 154 Parkerings v Lithuania, Award, ¶¶ 335–336. 155 Methanex Corporation v United States of America, NAFTA/UNCITRAL, Final Award of the Tribunal on Jurisdiction and Merits, ¶ 9 (3 August 2005): “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.” 156 Duke Energy v Ecuador, Award, ¶ 347. 157 Generation Ukraine, Inc v Ukraine, ICSID Case No ARB/00/9, Award, ¶ 20.37 (Sep. 16, 2003). 158 Alex Genin and others v Republic of Estonia, ICSID Case No ARB/99/2, Award, ¶ 370 (Jun. 25, 2001). 159 El Paso v Argentina, Award, ¶ 358: “legitimate expectations cannot be solely the subjective expectations of the investor, but have to correspond to the objective expectations that can be deduced from the circumstances and with due regard to the rights of the State’”); ¶ 356 (‘The notion of legitimate expectations’ is an objective concept, that it is the result of a balancing of interest and rights, and that it varies according to the context’.). 160 Nordzucker v Poland (UNCITRAL), Second Partial Award (Merits), ¶ 88 (Jan. 28, 2009): “[t]he expectations must be tested in relation to the circumstances and context. Nordzucker was or must have been aware of the threat that a national sugar company might be created and that the groups it targeted might also be interesting for that new entity. In the political context of Poland at the time, Nordzucker should have been aware that political opposition could make the privatization difficult if not impossible and it was or must have been aware that this political situation could be a reason why the consent of the Ministry in the GAM or the Sugar Holding companies might be withheld.” 161 Total v Argentina, Decision on Liability, ¶ 117: “[t]he expectation of the investor is undoubtedly “legitimate,” and hence subject to protection under the fair and equitable treatment clause, if the host State has explicitly assumed a specific legal obligation for the future, such as by contracts, concessions or stabilisation clauses on which the investor is therefore entitled to rely as a matter of law.” 162 Parkerings v Lithuania, Award, ¶ 331: “[t]he expectation is legitimate if the investor received an explicit promise or guarantee from the host-State, or if implicitly, the hostState made assurances or representation that the investor took into account in making the investment.”

100

Wongkaew

point is that the State has contributed to the creation of a reasonable expectation. The tribunal in Micula v Romania seemed to imply that intention is not required so long as the conduct could be understood to create an expectation.163 However, the jurisprudence has not agreed on the requisite degree of specificity.164 The tribunal in Parkerings v Lithuania required “an explicit promise or guaranty from the host-State,”165 whilst the tribunal in Feldman v Mexico referred to “definitive, unambiguous and repeated”166 representation. The tribunal in El Paso stated that political statements did not equate to “a specific commitment to foreign investors not to modify the existing framework […].”167 PSEG v Turkey requires “a promise of the administration,”168 whilst the tribunal in Continental Casualty reiterates the specificity of the undertaking.169 The undertaking expressed by the authorities with greater clarity makes the claim for legitimate expectations more credible.170 Reasonableness or legitimacy is also mentioned in terms of having an objective basis, being “not fanciful or the result of misplaced optimism.”171 Reasonableness of expectations must take into account “the underlying presumption that, absent an assurance to the contrary, a State cannot be expected to freeze its laws and regulations,”172 especially measures “in response to unpredictable circumstances.”173 Some tribunals went further in recognizing that a State owes a duty to its people to be able to respond to the emerging needs174 163 Micula v Romania, Award, ¶ 669. 164 Some tribunals suggest that an explicit assurance is not necessary. Saluka v Czech Republic, Partial Award, ¶ 329: “legitimate expectation need not be based on an explicit assurance from the Czech Government”; Electrabel. v. Hungary ¶ 7.78: “specific assurances may reinforce investor’s expectations, such assurance is not always indispensable.” 165 Parkerings v Lithuania, Award, ¶ 331. 166 Feldman v Mexico, Award, ¶ 148. 167 El Paso v Argentina, Award, ¶¶ 395–396. 168 PSEG v Turkey, Award, ¶ 241. 169 Continental Casualty v Argentina, Award, ¶ 261. 170 Total v Argentina, Decision on Liability, ¶ 121. 171 Arif v Moldova, Award, ¶ 532. 172 Micula v Romania, Award, ¶. 673. 173 Suez v Argentina, Decision on Liability, ¶ 236: “the legitimate expectation and reasonable expectations of the investors in APSF must have included the expectation that the Provincial government would exercise its legitimate regulatory interests with respect to the APSF Concession throughout the period of thirty years and in response to unpredictable circumstances that might arise during that time.” 174 According to Total v Argentina, Decision on Liability, ¶ 115, BIT signatories have ‘to amend their legislation in order to adapt it to change and the emerging needs and requests of their people in the normal exercise of their prerogatives and duties’.

The Transplantation of Legitimate Expectations

101

and ensure maximum effective use of its economic resources.175 It would be unconscionable for a State not to be able to respond to changing needs and circumstances.176 Expansive recognition of legitimate expectations will create excessive burden on States.177 The reasonableness or legitimacy of expectations includes a minimum protection of what may be termed as procedural expectations.178 The tribunal in Arif v Moldova suggests that in case of regulatory action which has a reasonable public policy basis, “the investor should be treated with an appropriate degree of due process and, if possible, the State should seek to ameliorate the effects of the change of policy on the investor.”179 Similarly, the rule on legitimate expectations requires that a change of policy is accompanied by justification of an economic, social or other nature.180 3.6

Fundamental Challenge Left Unaddressed

It is laudable that tribunals have elaborated on the criteria for defining reasonableness or legitimacy. However, the challenge remains: how can the abovementioned elements be developed into coherent legal rules? How do they interact with each other in the broader task of defining the contours of protected expectations? Some scholars point to the need for criteria to assist in the balancing of conflicting arguments to minimize uncertainty.181 The criteria for resolving the balance of investors’ expectations and States’ interests may be drawn from comparative domestic public laws. For instance, one English case suggests the following test for justifying frustration of 175 El Paso v Argentina, Award, ¶. 369. 176 Continental Casualty v Argentina, Award, ¶ 258: “it would be unconscionable for a country to promise not to change its legislation as time and needs change, or even more to tie its hands by such a kind of stipulation in case a crisis of any type or origin arose…reliance on such an implication by a foreign investor would be misplaced and, indeed, unreasonable.” 177 EDF v. Romania, Award, ¶ 217: “[t]he idea that legitimate expectations, and therefore FET, imply the stability of the legal and business framework, may not be correct if stated in an overly-broad and unqualified formulation…Such expectation would be neither legitimate nor reasonable.” 178 Arif v Moldova, Award, ¶ 538. 179 Arif v Moldova, Award, ¶ 536. 180 El Paso v Argentina, Award, ¶ 372. 181 Roland Kläger, ‘Fair and Equitable Treatment’ in International Investment Law (Cambridge: Cambridge University Press, 2011), 187.

102

Wongkaew

­legitimate expectations:182 the public interest is a legitimate aim that is ‘manifest and pressing’, the measure is proportionate,183 and there are fair procedures before the measure is taken. Such a test may be more sophisticated and more structured than the simple balancing exercise suggested by the current jurisprudence. A word of caution, though: the application of the proportionality test, which usually applies in human rights cases, may equate legitimate expectations, which fall short of rights, with fundamental rights, such as human rights. 3.7 Conclusions This chapter has traced the origins of the principle of legitimate expectations through the prism of legal transplant based on arbitral awards and scholarly work. Whilst protection of legitimate expectations is a well-recognized principle in domestic public laws, it is unclear how the legal rules on protection of legitimate expectations are ‘transplanted’ into the investment treaty regime. No particular jurisdiction is identified as the source of inspiration. The transplantation may have occurred at a conceptual level by drawing on elements from a public law concept and a principle of estoppel in international law (as reflected in the reliance element). More importantly, the contribution has identified the ‘trilogy’ of fundamental problems, namely the lack of juridical basis and rationale for protection of legitimate expectations, the lack of a distinct role for legitimate expectations and the unclear boundaries of protected expectations. It is argued that once the juridical basis is identified, it will be possible to determine the distinct and unique role of legitimate expectations and to delimit the contours of expectations protected in each circumstance. 182 The test adopted in Wood, R (on the application of ) v Secretary of State for Education [2011] EWHC 3256 (Admin) (09 December 2011) ¶¶ 53–57 (Singh J). 183 Laws LJ in Abdi v Secretary of State for the Home Department, ¶ 68 suggest that to resile from a legitimate expectation, it must be “a proportionate response to a legitimate aim pursued by the public body in the public interest.”

chapter 4

Host States as Claimants Corruption Allegations Dai Tamada 4.1 Introduction Investor-State arbitration, also called ISDS (Investor-State Dispute Settlement), was allegedly designed, not to protect the host States’ interests, but to protect investments and investors. ISDS, of which the ICSID1 arbitration is the most famous example, is based on the imbalanced relationship between investors (the claimants) and host States (the respondents), exclusively in favor of the former. It has thus been called “asymmetric,” “unilateral” and “pro-investor.”2 This imbalance stems from the basic purpose of the IIAs (International Investment Agreements): to protect and promote the investment. In other words, investment arbitration has not been designed to create liability for investors. This basic characteristic of ISDS has provoked many problems, one of which is the limited ability to address the issue of corruption in foreign investments. Although corruption is widely regulated by domestic laws and international law, it is not yet clear what kind of legal consequences on individuals can be found with regard to corruption, especially in the framework of international investment law. If the legal sanction is limited to the domestic level, it must be the same as in traditional regulations. It may, however, be possible to hold investors responsible in ISDS and thereby re-balance the relationship between investors and States, at least with respect to corruption allegations. This contribution refers to some basic characteristics of arbitration in order to explore this possibility and proposes solutions in this regard. IIAs normally do not impose obligations on investors, and as a result, it is not easy to attribute liability to an investor in ISDS. However, even if one * Dai Tamada is Professor of Public International Law, Kobe University, [email protected] .ac.jp. 1 International Centre for Settlement of Investment Disputes (ICSID), created by 1965 Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, Mar. 18, 1965, 575 UNTS 159. 2 Mehmet Toral and Thomas Schultz, “The State, a Perpetual Respondent in Investment Arbitration? Some Unorthodox Considerations,” in The Backlash against Investment Arbitration: Perceptions and Reality, eds. Michael Waibel et al. (Kluwer, 2010): 578–580.

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_007

104

Tamada

accepts that ISDS is an unbalanced system, such imbalances are not supported by the text of IIAs. In fact, the purpose of IIAs is not only to protect investments, but also to promote the economic development of host States, and for that reason there must be some regulation or control regarding investors’ wrongful acts that are detrimental to the host States’ economy.3 Some NGOs have taken pro-active steps in order to make this clearer. The International Institute for Sustainable Development (IISD) has elaborated a model IIA which provides for investors’ responsibility and includes provisions on corporate governance (Article 15), corporate social responsibility (Article 16), investors’ liability for civil wrongs (Article 17), as well as mandatory provisions for the protection of minimum environmental and labour standards (Article 22).4 This model IIA, although not yet incorporated in real IIAs, has the purpose of rebalancing the rights and obligations between investors and host States.5 Some States have followed this path not only in Model Bilateral Investment Treaties (BITs) but also in actual treaties. On the practical level, as well, there is a similar tendency to “rebalance” the interests of the host State and the investor. Arbitral tribunals tend to exclude illegal or illegitimate investments, especially those established through corruption, fraud or illegal acts, from the scope of protection afforded by IIAs. Why, then, should we deny the protection under IIAs of corrupt investments? The basic idea, provided by Wälde, was that: [t]here is ample jurisprudence that a legitimate expectation [of investors protected under the NAFTA] cannot be created if deception, fraud or other illicit means were used to obtain the governmental assurance or other rights obtained from the government in this way. There can be  no international treaty protection for rights obtained by illicit 3 For example, the preamble of the Agreement among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment (signed in 2012 and entered into force in 2014) stipulates that “Recognizing that the reciprocal promotion, facilitation and protection of such investment and the progressive liberalization of investment will be conducive to stimulating business initiative of the investors and increase prosperity among the Contracting Parties.” 4 International Institute for Sustainable Development (IISD), Model International Agreement on Investment for Sustainable Development (2005), accessed January 27, 2014, http://www .iisd.org/pdf/2005/investment_model_int_agreement.pdf. 5 In fact, Article 25 (c) stipulates that “the pursuit of these rights shall be understood as embodied within a balance of the rights and obligations of investors and investments and host states.”

Host States As Claimants

105

means. In such cases, there may be an expectation, but not a ‘legitimate’ one.6 For any investment to be protected by the applicable IIAs, they must be ‘legitimate’. In fact, as described below, the ISDS tribunals tend to deny the protection of corrupt investments in every case. If sanctions are imposed on corrupt investments and investors, this would necessarily lead to a rebalancing of relations between investors and host States. In this chapter, we examine the substantive legal regulations against corruption, as well as their impact in the framework of investment arbitration. We then analyze the implications of arbitral tribunals’ findings with respect to corruption before making some concluding remarks. 4.2

Legal Regulation of Corruption

According to Transparency International, the most famous NGO dealing with issues of corruption, bribery means “the abuse of entrusted power for private gain.”7 This definition covers a vast range of activity, and it is difficult to offer a unanimous definition of bribery or corruption. Moreover, since the meaning of the terms depends on different domestic law definitions, no specific article in IIAs is directly applicable for the regulation of corruption and bribery. The United States was the first country to fight against corruption at the international level through its Foreign Corrupt Practices Act (FCPA), enacted in 1977.8 The aim of this Act was to punish, through American criminal law, corrupt U.S. officials who had engaged in corruption abroad (extraterritorially). As described below, bribery is the most typical form of corruption, which is prohibited not only in the U.S., but also by domestic laws in almost all countries. The notion of corruption is not unknown in international law and there have been several provisions enacted at the international level to sanction ­corrupt behavior. Article 50 of the Vienna Convention on the Law of Treaties (1969), for example, stipulates that: 6 International Thunderbird Gaming Corporation v. United Mexican States, UNCITRAL, Separate Opinion of Prof. Wälde, ¶ 112 (December 2005). Unless otherwise indicated, all cases cited in this chapter are available online at “Investment Treaty Arbitration (ITA),” accessed January 23, 2014, http://italaw.com. 7 Transparency International is a NGO that publishes CPI Corruption Perceptions Index (CPI), accessed January 27, 2014, http://www.transparency.org/. 8 Foreign Corrupt Practices Act, Pub. L. No.95-213, 15 U.S.C. 78dd-1 (1977), as amended 1988 and 1998.

106

Tamada

[i]f the expression of a State’s consent to be bound by a treaty has been procured through the corruption of its representative directly or indirectly by another negotiating State, the State may invoke such corruption as invalidating its consent to be bound by the treaty.9 The Committee on International Arbitration of the International Law Association (ILA) [1989–2010] stated in 2000 that there is “an international consensus that corruption and bribery are contrary to international public policy.”10 In this context, the most remarkable progress was the Organisation for Economic Co-operation and Development (OECD) Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions, which was signed in 1997 and entered into force in 1999.11 The OECD Convention recognizes, first of all, that “bribery […] raises serious moral and political concerns, undermines good governance and economic development, and distorts international competitive conditions” (preamble of the Convention). The Convention then stipulates certain obligations of the contracting States: to criminalize the bribery of foreign public officials (Article 1 (1)), to “establish the liability of legal persons for the bribery” (Article 2), and to punish the bribery (Article 3). It is notable that the Convention establishes an obligation to punish legal persons. Even when it is difficult in the domestic legal system to punish legal persons, alternative measures are required (Article 3 (2)). The OECD Convention was followed by certain conventions signed at the regional level in the Organization of American States (OAS),12 the Council of Europe,13 and the

9 10

11

12

13

Vienna Convention on the Law of Treaties, May 23, 1969, UN Doc. A/Conf.39/27; 1155 UNTS 331. ILA Committee on International Arbitration, Interim Report on Public Policy as a Bar to Enforcement of International Arbitral Award (London Conference, 2000), 0.22, accessed January 27, 2014, http://www.ila-hq.org/en/committees/index.cfm/cid/19. The text and commentary of the OECD Convention is available at: Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, Dec. 17, 1997, DAFFE/IME/BR(97)20, accessed January 27, 2014, http://www.oecd.org/ daf/anti-bribery/ConvCombatBribery_ENG.pdf. Inter-American Convention against Corruption, Mar. 29, 1996, OEA/Ser.K/XXXIV.1 CICOR/doc.14/96 rev.2, 35 I.L.M. 724 (1996), accessed January 27, 2014, http://www.oas .org/juridico/english/Treaties/b-58.html. Council of Europe, Criminal Law Convention on Corruption, Jan. 27, 1999, accessed January 27, 2014, http://conventions.coe.int/Treaty/en/Treaties/Html/173.htm, and the Civil Law Convention on Corruption, Nov. 4, 1999, accessed January 27, 2014, http:// conventions.coe.int/Treaty/en/Treaties/Html/174.htm.

Host States As Claimants

107

African Union (AU),14 as well as at the international level, the United Nations Convention against Corruption (UNCAC).15 The fight against corruption has rapidly expanded in international society. The problem, however, has been the applicability of corruption regulation in the international arena, such as in investment arbitration. Even though the above mentioned conventions require contracting States to criminalize corrupt acts in their own domestic laws, there is no uniform or effective implementation mechanism at the international level. The sectors most prone to corruption are public works and construction, real estate and property development, oil and gas, heavy machinery and mining.16 This means that corruption can be closely linked to foreign investment in countries where these sectors flourish and this must be the reason for which ISDS cases dealing with corruption have become numerous. 4.3

Corruption in Investment Arbitration

Almost all domestic legal systems have already outlawed corrupt acts, such as bribery, by officials. Besides domestic regulation, international instruments of fundamental importance have been adopted to fight corruption. Furthermore, there is a growing consensus that corruption is against the international public order (ordre public). In the framework of international commercial arbitration, criticism against corruption was initially pronounced by Judge Lagergren in his 1963 award: “there exists a general principle of law recognised by civilised nations that contracts which seriously violate bonos mores or international public policy are invalid or at least unenforceable and that they cannot be sanctioned by courts or arbitrators.”17 Judge Lagergren continued to make it clear that “corruption is an international evil; it is contrary to good morals and to an international public policy common to the community of nations.”18 It is clear that Judge 14 15

16 17 18

African Union Convention on Preventing and Combating Corruption, Jul. 11, 2003, accessed January 27, 2014, http://www.au.int/en/treaties. UN Convention against Corruption, Dec. 9, 2003, GA res. 58/4, UN Doc. A/58/422 (2003); 43 I.L.M. 37 (2004), accessed January 27, 2014, http://www.unodc.org/documents/ treaties/UNCAC/Publications/Convention/08-50026_E.pdf. See: Deborah Hardoon and Finn Heinrich, Global Corruption Barometer 2013, ed. Transparency International, 2013. International Chamber of Commerce (ICC), Case No.1110 of 1963, Award, Arbitration International 10, no. 3 (1994): 293. Ibid., 294.

108

Tamada

Lagergren used the notion of “general principle of law recognised by civilised nations”19 for justifying the application of international public policy. This finding became the basic stance of arbitrators who are confronted with the issue of corruption and significantly influenced future arbitral tribunals, including investment arbitration tribunals. The question then is how do we actually sanction, in investor-State arbitration, the investments established through bribery? An investment established through corruption can easily become subject-matter for arbitration. More than one hundred States have already ratified the UNCAC and are, consequently, required to criminalize corrupt acts by their own officials under their domestic laws. Moreover, IIAs normally contain a clause which requires the establishment of investments “in accordance with the laws and regulations” of the host States (a ‘legality clause’). The purpose of this clause is to exclude the ‘illegally’ established investment from the scope of the IIA’s protection. Thus, an investment established through corruption will likely violate the host State’s law and, as a result, will be denied protection under the IIA.20 In Fraport [2007], the claimant had invested in a Philippine company known as PIATCO which was a party to a concession contract for the construction and operation of an international airport terminal in Manila.21 Before the completion of the terminal, disputes arose between Fraport/PIATCO and the Philippine Government. The Philippine Supreme Court ruled that PIATCO’s concession contract was null and void. In response to the claimant’s claim before the ICSID, the Philippines, in its jurisdictional objections which were joined to the merits, claimed that Fraport’s investment in PIATCO violated nationality restrictions, provided in its Constitution and the Anti-Dummy Law relating to those restrictions, and that the investment, therefore, did not fall within the scope of the BIT.22

19

20

21 22

A general principle of law is originally a domestic law, but can be applied in the public international law arena. Article 38 (1) (c) of the Statute of the ICJ provides that the ICJ applies “the general principles of law recognized by civilized nations.” Statute of the International Court of Justice, 3 Bevans 1179; 59 Stat. 1031; T.S. 993; 39 AJIL Supp. 215 (1945). Andrea J. Menaker, “The Determinative Impact of Fraud and Corruption on Investment Arbitrations,” ICSID Review-Foreign Investment Law Journal 25, no. 1 (2010): 69; Giorgio Sacerdoti, “Corruption in Investment Transactions: Policy Initiatives, Legal Principles and Arbitral Practice,” ICSID Review-Foreign Investment Law Journal 24, no. 2 (2009): 585. Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, ICSID Case No. ARB/03/25, Award, ¶ 2 (Aug. 16, 2007). Fraport, Award, ¶¶ 285–291.

Host States As Claimants

109

On this issue, the tribunal stated that Fraport “was consistently aware that the way it was structuring its investment in the Philippines was in violation of the [Anti-Dummy Law] and accordingly sought to keep those arrangements secret.”23 It took note of four articles of the Germany/Philippines BIT provisions concerning the compatibility of an investment with the domestic legal order. Article 1(1), among others, defines “investment” as “any kind of asset accepted in accordance with the respective laws and regulations of either Contracting State.”24 Based on the applicable law, the tribunal considered that “Fraport from the outset understood, with precision, the Philippine legal prohibition […] but it proceeded with the investment by secretly violating Philippine law through the secret shareholder agreements.”25 It concluded that Fraport cannot claim to have made an investment “in accordance with law” and that it lacked jurisdiction ratione materiae.26 As is clearly demonstrated in the Fraport case, the ‘legality clause’ can be used by an arbitral tribunal to exclude illegally established investments from the scope of an IIA’s protection and to deny accordingly the jurisdiction ratione materiae of the tribunal. However, even when an applicable IIA lacks the ‘legality clause’, the arbitral tribunal is not necessarily precluded from examining whether or not an investment should be protected under the applicable IIA since the tribunal can take principles of law, including ‘international public policy (ordre public)’ into account. In this context, it is generally accepted that a State is not bound by an agreement if it has been induced by bribery because it is contrary to international public policy.27 In order to understand the mechanism of this finding, it is necessary to examine the decisions of relevant investment arbitration tribunals (concerning not only corruption cases, but also illegal investment cases more generally). In SIREXM [2000], Burkina Faso, the respondent, claimed that SIREX/ SIREXM failed to disclose to Burkina Faso that an employee of the Ministry of Industry, Commerce and Mines, who later became the general director of CEMOB, was also a shareholder of SIREXM, and that the government representatives had a reasonable basis to assume that the director, as a Ministry 23 24 25 26 27

Fraport, Award], ¶ 332. Fraport, Award], ¶ 335. Fraport, Award], ¶ 355. Fraport, Award], ¶¶ 401, 402. Alexis Martinez, “Invoking State Defenses in Investment Treaty Arbitration,” in The Backlash against Investment Arbitration. Perceptions and Reality, eds. Michael Waibel et al (Kluwer International, 2010), 327.

110

Tamada

employee, would have disclosed this relationship to the government. Subsequently the respondent alleged that this situation created a conflict of interest and that, if it had been properly informed, it would not have concluded the Agreement.28 On this issue, the tribunal observed that the Agreement between the parties had been concluded based on a fraudulent misrepresentation29 and thus found that the claimant’s investment agreement was void, based on both the applicable substantive law and ‘public order (ordre public)’ as a result of its finding that the claimant had engaged in fraudulent behavior in relation to that agreement.30 In World Duty Free (WDF) [2006], an Isle of Man company had entered into a contract in 1989 with Kenya for the construction, maintenance and operation of duty free complexes at Nairobi and Mombasa International Airports.31 At the moment of the conclusion of contract, WDF made a “personal donation” of 2 million US dollars to Mr. Daniel arap Moi, then President of Kenya, in order to obtain the chance of contract.32 Because of the participation of WDF in a massive fraud at the President’s re-election, the Kenyan Government registered a duplicate entity named “World Duty Free” in the British Virgin Islands and used it to take the place of the original company. In response to WDF’s allegation of the government’s illegal expropriation in violation of the contract, Kenya claimed as follows: the contract “was procured by paying a bribe to the then President of Kenya” and “the resulting contract does not have the force of law” and “is unenforceable,” and “the claims cannot be heard as a matter of public policy.”33 Regarding the existence of bribery, the tribunal found that the donation at issue “must be regarded as a bribe made in order to obtain the conclusion of the 1989 Agreement.”34 The tribunal then referred to international policy as an applicable principle in the sense of an “international consensus as to universal 28 29 30 31

32

33 34

Société d’investigation de recherché et d’exploitation minière (SIREXM) v. Burkina Faso, ICSID Case No. ARB/97/1, Award, ¶¶ 5.13, 5.29 (Jan. 19, 2000). SIREXM, Award, ¶ 5.29. SIREXM, Award, ¶¶ 5.41, 5.44. World Duty Free (WDF) Company Limited v. The Republic of Kenya, ICSID Case No. ARB/00/7, Award, ¶ 62 (Oct. 4, 2006). This contract was characterised by WDF as a ‘foreign investment agreement’, and therefore no breaches of any BIT were alleged in this case. Ibid., ¶0.79. World Duty Free, Award, ¶ 66. More precisely, Mr. Ali, claimant’s principal, transferred US$2 million to the business contact, US$500,000 of which was handed over to the President in cash. The President then approved the proposed contract and investment. World Duty Free, Award, ¶¶ 105, 128. World Duty Free, Award, ¶136.

Host States As Claimants

111

standards and accepted norms of conduct that must be applied in all fora,” also known as ‘transnational public policy’.35 To clarify the content of transnational public policy, the tribunal observed that “bribery or influence peddling, as well as both active and passive corruption, are sanctioned by criminal law in most, if not all, countries,”36 and referred also to the international instruments concerning corruption,37 as well as to the international commercial arbitration cases.38 On that basis, the tribunal concluded that: [i]n light of domestic laws and international conventions relating to corruption, and in light of the decisions taken in this matter by courts and arbitral tribunals, this Tribunal is convinced that bribery is contrary to the international public policy of most, if not all, States or, to use another formula, to transnational public policy and it concluded that claims based on contracts of corruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal.39 Thus, the tribunal made it clear that corruption is contrary to international public policy, which encompasses domestic law, international conventions and arbitral cases. In Inceysa [2006],40 a Spanish company initiated arbitration against El Salvador, alleging numerous violations of the Spain-El Salvador BIT when an El Salvadorian ministry chose not to proceed with a contract for the operation of vehicle inspection services. El Salvador responded that the claimant could not benefit from the protection of the BIT since it had obtained the investment fraudulently.41 The claim of El Salvador was that the BIT’s protection extended “only to investments made […] in accordance with its laws,” and it never consented to treaty protection of investments “that were procured by fraud, forgery and corruption,”42 in other words “the BIT protects only legitimate investments.”43 On this issue, the ICSID tribunal, recognized that in its tender the claimant “did not present its real financial condition and […] during the bidding process 35 36 37 38 39 40 41 42 43

World Duty Free, Award, ¶¶138, 139. World Duty Free, Award, ¶142. World Duty Free, Award, ¶¶143–147. World Duty Free, Award ¶¶148–156. World Duty Free, Award, ¶157. Inceysa Vallisoletane, SL v. El Salvador, ICSID Case No. ARB/03/26, Award (Aug. 2, 2006). Inceysa, Award, ¶ 3. Inceysa, Award, ¶ 45. Inceysa Award, ¶ 46.

112

Tamada

it made false statements concerning its true financial condition, which is one of the fundamental elements taken into account to adjudicate any type of bid.”44 With regard to the legality of the investment, the El Salvador/Spanish BIT did not define the term ‘investment’ by reference to a requirement of compliance with domestic law. However, the tribunal, after having referred to the travaux préparatoires of the BIT, observed that “the BIT leaves investments made illegally outside of its scope and benefits.”45 Furthermore, as for the applicable criteria of illegality, the tribunal observed that because the BIT did not contain “substantive rules that permit a determination whether Inceysa’s investment was made in accordance with the law of El Salvador […] the Tribunal must analyse other legal instruments to decide this issue,”46 and turned to the “generally recognised rules and principles of International Law,” which it equated with the “general principles of law” referred to in Article 38 of the Statute of the International Court of Justice (ICJ).47 In connection to the applicable principles, the tribunal observed that the following general principles of law had been violated; (i) the principle of good faith,48 (ii) the principle of nemo auditur propriam turbitudinem allegans (no one can benefit from his own wrong),49 (iii) international public policy,50 and (iv) the principle that prohibits unjust enrichment.51 Finally, the tribunal concluded that, because Inceysa’s investment was made illegally, “it is not included within the scope of consent [of two States] and, consequently, the disputes arising from it are not subject to the jurisdiction of the Centre [ICSID].”52 From the finding of the tribunal, we can draw the following conclusions. Firstly, “international public policy” as applied to corruption consists of “a series of fundamental principles that constitute the very essence of the State, and its essential function is to preserve the values of the international legal system against actions contrary to it.”53 Even though the tribunal suggests the 44 45 46 47 48 49 50

51 52 53

Inceysa Award, ¶0.104. Inceysa Award, ¶0.206. Inceysa Award, ¶0.223. Inceysa Award, ¶¶ 224–228. Inceysa, Award, ¶¶ 230–239. Inceysa, Award, ¶¶ 240–244. Inceysa, Award, ¶¶ 245–252. In particular the tribunal stated that “respect for the law is a matter of public policy not only in El Salvador, but in any civilized country,” and that “there is a meta-positive provision that prohibits attributing effects to an act done illegally.” Ibid., ¶ 248. Inceysa, Award, ¶¶ 253–257. Inceysa, Award, ¶ 257. Inceysa, Award, ¶¶ 245–246.

Host States As Claimants

113

similarity between international public policy and the general principles of law (Article 38 of the ICJ Statute), there remain doubts as to their equivalence. Secondly, in response to the objection to jurisdiction by El Salvador,54 the tribunal treated the issue of fraud as a jurisdictional one and held that it lacked jurisdiction.55 This treatment of fraud as a jurisdictional issue rather than a substantive issue came up in Plama [2008]. In Plama [2008], the Cypriot claimant’s investment consisted of 96.78% of the shares of a Bulgarian company, Nova Plama AD, which owned an oil refinery in Bulgaria.56 In the jurisdictional phase, Bulgaria claimed that the Cypriot company had not established an ‘investment’ under Article 6(1) of the Energy Charter Treaty (ECT), because it “had materially misrepresented or wilfully failed to disclose the claimant’s true ownership to the Bulgarian authorities in violation of Bulgarian law.”57 This problem was not fully dealt with in the jurisdictional phase. During the merits phase, Bulgaria claimed again that the Cypriot company could not invoke the ECT because its consent to the sale of the shares had been procured by misrepresenting the identity of the investors in the refinery. On this issue, the tribunal firstly observed that the “behaviour [of the claimant] is contrary to other provisions of Bulgarian law and to international law and that it, therefore, precludes the application of the protection of the ECT.”58 Although the ECT did not contain a ‘legality clause’,59 the tribunal did not interpret this fact to mean that “protections provided for by the ECT cover all kinds of investments, including those contrary to domestic or international law.”60 According to the tribunal, even without a ‘legality clause’, an investment established in a manner that does not conform to host State law cannot enjoy protection under the IIA. The tribunal emphasized that the ECT should be interpreted “in a manner consistent with the aim of encouraging respect for the rule of law.”61 54 55 56 57 58

59 60 61

Inceysa, Award, ¶ 45. Inceysa, Award, ¶¶ 153, 339. Plama [2005], para.19. Plama, Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Award ¶ 126 (27 August 2008). Plama, Award, ¶ 135. The tribunal observed that “the investor violated the contract laws of Bulgaria whereby the ‘parties must negotiate and enter contracts in good faith’.” Ibid., ¶136. Article 1 (6) of the Energy Charter Treaty gives a broad definition of investment. Energy Charter Treaty, Dec. 17, 1994, art. 26, 2080 UNTS 95. Plama, Award, ¶ 138. Plama, Award, ¶ 139. The Introduction to the ECT provides that “[t]he fundamental aim of the Energy Charter Treaty is to strengthen the rule of law on energy issues, by creating

114

Tamada

With regard to the content of applicable ‘law’, the tribunal found that the investment in this case violated not only Bulgarian law, but also applicable rules of international law, and in this context, it referred to Article 26 (6) of the ECT, which provides that disputes are to be decided in accordance with “applicable rules and principles of international law.”62 As applicable principles, the tribunal mentioned the following: nemo auditur propriam turpitudinem allegans,63 the basic notion of international public policy (a contract obtained by wrongful means or fraudulent misrepresentation should not be enforced by a tribunal),64 and good faith under the Bulgarian law and international law.65 It concluded that it “cannot grant the substantive protections of the ECT to the claimant.”66 Thus, in this case, the tribunal made it clear that an investment established in a manner that violated the host State’s domestic law or the general principles of law, could not be protected by the applicable IIA even if the IIA did not contain a ‘legality clause’. This finding was criticized by commentators since the good faith principle in domestic laws varies from one legal system to another,67 and it is not clear whether the good faith principle, applicable between private actors in contract law, can be directly applied to the investorState relationship.68 This is why the tribunal in Plama [2008] intentionally tried to connect the good faith standard, defined in domestic contract law, to the public international law principle. In Phoenix Action [2009], an Israeli company, owned by a former Czech national, purchased two Czech companies: one had a long-running litigation with a former Czech business partner and the other’s assets were frozen by the Czech authorities.69 The Israeli company claimed that the failure of the Czech courts to resolve the litigation, its freezing of the company’s funds and its seizure of the company’s documents were in violation of the Israel-Czech BIT.70

62 63 64 65 66 67

68 69 70

a level playing field of rules to be observed by all participating governments, thus minimising the risks associated with energy- related investments and trade.” Plama, Award, ¶ 140. This principle means that “nobody can benefit from his own wrong.” Plama, Award, ¶ 143. Plama, Award, ¶ 144. Plama, Award, ¶ 325. Virginie Colaiuta, “When Does a Violation of the Domestic Law of the Host State Amount to a Violation of a Public International Law Principle in Determining Protection of Investors’ Claims?,” in Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty, ed. Graham Coop (Juris, 2011),14. Ibid. Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award (Apr. 15, 2009), ¶¶ 21–43. Phoenix Action, Award, ¶¶ 44–48.

Host States As Claimants

115

The respondent objected to the tribunal’s jurisdiction, alleging that the claimant company was created simply to convert a domestic dispute into an ICSID dispute and such action “violated the principle of good faith, and consequently the claimant’s purchase of the Czech companies was not an ‘investment’ within the meaning of the ICSID Convention and the BIT.”71 On this issue, the tribunal firstly clarified that the ICSID arbitration’s purpose cannot be “to protect investments made in violation of the laws of the host State or investments not made in good faith, obtained for example through misrepresentations, concealments or corruption, or amounting to an abuse of the international ICSID arbitration system.”72 In other words, according to the tribunal, “the purpose of international protection is to protect legal and bona fide investments.”73 The tribunal emphasized the requirement that investments adhere to the law and made it clear that the investment made contrary to law cannot be protected under the ICSID arbitration.74 In addition to the issue of conformity with domestic law, the tribunal referred to the general principles of international law as follows: the protection of international investment arbitration cannot be granted “if such protection would run contrary to the general principles of international law, among which the principle of good faith is of utmost importance.”75 The tribunal concluded that the claimant made an investment “for the sole purpose of bringing international litigation against the Czech Republic” in order to “transform a pre-existing domestic dispute into an international dispute subject to ICSID arbitration under a BIT.”76 It found that this kind of transaction was not “a bona fide transaction and cannot be a protected investment under the ICSID system.”77 Thus, the tribunal clarified that an investment that is not established through a bona fide transaction, contrary to the principle of good faith, cannot be protected by an applicable BIT. 4.4

Implications of ICSID Case Law on Corruption

The cases studied above illustrate the various approaches that arbitrators take to address the issue of corruption and bribery. These approaches can be 71 72 73 74 75 76 77

Phoenix Action, Award, ¶¶ 34–35. Ibid. Ibid. Phoenix Action, Award, ¶¶ 102–104. Phoenix Action, ¶ 142. Ibid. Ibid.

116

Tamada

classified into three categories:78 a tribunal taking the ‘zero tolerance’ approach does not admit jurisdiction ratione materiae since an illegal or corrupt investment does not constitute a protectable investment under the applicable IIA; a tribunal taking the more flexible ‘closer look’ approach finds that it has jurisdiction but, further along in the proceedings, will reject claims on grounds of corruption; a tribunal taking the ‘it depends’ approach takes various elements and facts into consideration, such as whether the allegedly corrupt host State official still has power and whether there is a commercial custom of bribery in the host State’s market.79 The most severe reaction by arbitrators is the criticism of corrupt investments and, more generally, illegally established investments. Normally, the most efficient sanction against corruption is to deny the existence of an ‘investment’ under the applicable IIA, as the investment must exist in order to establish the tribunal’s jurisdiction ratione materiae. There are two ways to find a lack of jurisdiction. Through the ‘legality clause’, the tribunal can easily deny the IIA’s protection of investments which were established in violation of the host State’s domestic law. But the ‘legality clause’ is not indispensable: in Phoenix action [2009], the tribunal, reaffirming the finding of Plama [2008], stated that “this condition – the conformity of the establishment of the investment with the national laws – is implicit even when not expressly stated in the relevant BIT.”80 Thus, the tribunal can examine the compatibility of investments with the host State’s domestic law even without the ‘legality clause’, and as a result, can deny the IIA’s protection with regard to corrupt investments.81 When tribunals impose sanctions on corruption and similar illegal or wrongful acts by investors, they rely on the notion of “international public 78

79 80

81

Stephan Wilske and Eilla Obel, “The “Corruption Objection” to Jurisdiction in Investment Arbitration: Does It Really Protect the Poor?,” in Poverty and the International Economic Legal System: Duties to the World’s Poor, ed. Krista Nadakavukaren Shefer (Cambridge University Press, 2013), 183. Ib., 185. Phoenix Action, Award, ¶ 101. However, this finding of the tribunal was not necessary, since the Czech-Israel BIT provides in Article 1 (1) that ‘“investment” shall comprise any kind of assets […] in accordance with the laws and regulations of the latter and shall include, in particular, though not exclusively’. Agreement between the Government of the Czech Republic and the Government of the State of Israel for the Reciprocal Promotion and Protection of Investments, Sep. 23, 1997, Czech Rep.-Isr., accessed January 27, 2014, http://unctad.org/sections/dite/iia/docs/bits/czech_israel.pdf. Gabriel Bottini, “Legality of Investments under ICSID Jurisprudence,” in The Backlash against Investment Arbitration: Perceptions and Reality, eds. Michael Waibel et al. (Kluwer, 2010), 299.

Host States As Claimants

117

­ olicy” and, more broadly, general principles such as good faith. However, the p notion of “international public policy” is not perfectly clear,82 and the following question arises as a consequence: what is the public order and why it is applicable in arbitration in the absence of any express or relevant provision? International public policy was initially regarded as a fundamental principle of private international law.83 As such, it has been argued that a reference to international public policy under public international law would have been more pertinent and needed.84 It can also be said, on the other hand, that there is no distinction between public and private since this distinction fades when it comes to investment protection.85 Instead, we should use the term ‘transnational public policy’, rather than ‘international public policy’. The former consists of international conventions, convergence of national laws, arbitral decisions, and scholarly opinion.86 This explanation, based on the mixture of private and public law, will properly reflect and correspond to the hybrid character of investor-State arbitration. Finding lack of jurisdiction means that the investor’s claims are dismissed and that the tribunal consequently intends to re-balance the interests between the investor and the host State in favor of the latter. This results in a slight improvement on the disproportionately pro-investor character of ISDS. With the expansion, by arbitral tribunals, of the scope of applicable principles, i.e. not only of domestic laws, but also of vaguer principles, such as ‘general principles of international law’, ‘international public policy’ (ordre public) and ‘good faith’, the ‘investment’ protected under the IIA is subject to general principles that can be expanded as a result of the development of international regulation on corruption (other than the IIAs themselves). Moreover, tribunals can make efforts to equalize the interests between parties by using their discretion to award costs. In Plama [2008], for example, the tribunal, after having reaffirmed that the claimant “was guilty of fraudulent misrepresentation in obtaining its investment in Bulgaria,”87 held that the claimant should bear “all of the fees and expenses of the Tribunal and 82 83 84 85

86 87

Ibid., 313. Inceysa, Award, ¶¶ 245–246. See the footnotes 66 and 67 of the award. Gabriel Bottini, Legality of Investments under ICSID, 304. Bernardo M. Cremades, “Investment Protection and Compliance with Local Legislation,” ICSID Review-Foreign Investment Law Journal 24, no. 2 (2009): 560. With regard to the public/private distinction in the investment arbitration, see Heikki Marjosola, “Public/ Private Conflict in Investment Treaty Arbitration – A Study on Umbrella Clause,” Helsinki Law Review (2009): 103–134. Andrea J. Menaker, The Determinative Impact of Fraud and Corruption, 73. Plama, Award, ¶ 321. Emphasis added.

118

Tamada

ICSID’s administrative charges plus the reasonable legal fees and other costs incurred by Respondent.”88 This approach seems to be reasonable and fair since it enables the respondent to avoid paying the unnecessary costs of arbitration. Host States generally prefer arbitral decisions denying jurisdiction even though this is not always the best way to impose sanctions on corrupt investments. Other considerations in terms of responsibility for corruption and bribery should be taken into account, and it is for this reason that some commentators criticize arbitrators who deny jurisdiction ratione materiae. If there was complicity between the investor and the host State in the establishment of the investment, then the tribunal’s denial of jurisdiction based on the corruption inevitably results in decreased attractiveness of investing in that corrupt State.89 The denial of jurisdiction does not favor economic development in the host State, particularly when the government party is equally responsible for the corruption: “[i]f the result is the denial of jurisdiction, not only does the claimant suffer disproportionately, but also those citizens of the host state which incontestably need the investment and its benefits the most.”90 In the same sense, the successful reliance of a host State on the corruption defense may both weaken foreign investment protection and exacerbate domestic corruption while leaving its root causes untreated.91 This new approach of interest-rebalancing can have a large impact on investment arbitration. However, it is said that this rebalancing is excessively favorable to host States. The problem is that the tribunal’s treatment of the ­corruption claim as a jurisdictional objection,92 i.e. as a ‘threshold matter’,93 88 89

90 91 92

93

Plama, Award, ¶ 322. Wilske and Obel, The “Corruption Objection,” 186. It is pointed out that “dismissing all claims may no longer be fair and reasonable once the investor has performed a major part of its obligations. This not only results in clear losses to the claimant, but deters other investors, decreasing the chances of investment and reduced poverty in the host state.” Ibid., 185. Ibid.,184. Tamar Meshel, “The Use and Misuse of the Corruption Defence in International Investment Arbitration,” Journal of International Arbitration 30, no. 3 (2013): 268–269. The corruption claims are normally treated as objections to jurisdiction ratione materiae. This treatment by the tribunals depends largely on the respondents’ characterization of its claim. Abby Cohen Smutny and Petr Polášek, “Unlawful or Bad Faith Conduct as a Bar to Claims in Investment Arbitration,” in A Liber Amicorum: Thomas Wälde – Law Beyond Conventional Thought, eds. Jacques Werner and Arif Hyder Ali (Cameron May, 2009), 296.

Host States As Claimants

119

inevitably leads to the denial of all possibilities of investment protection, and consequently to a severe result against the investors’ interest.94 On this point, the tribunal in Phoenix [2009] explained that if it is “manifest that the investment has been performed in violation of the law, it is in line with judicial economy not to assert jurisdiction.”95 Thus, the issue of corruption should be treated, not in the jurisdictional phase, but rather in the merits phase. Bernardo Cremades rightly asserted, in his dissenting opinion attached to the award in Fraport [2007], that the legality of the investor’s conduct should be an issue affecting the merits of the investor’s claim.96 In other words, a failure by an investor to comply with good faith obligations should be treated as a substantive issue rather than a jurisdictional issue.97 On the basis of this presupposition, the tribunal would be able to more carefully consider the impact of corruption on the establishment of investments. It is also necessary to take variations of corruption into account in terms of their effects, context, level and extent, and legal implications. For example, bribes paid by a company to obtain a contract from a government and bribes to continue a contract that had been legally and properly obtained are different in their impact on the investment and, as a result, should be assessed differently in the evaluation of damages by arbitrators.98 It seems then to be more reasonable to deal with the corruption claim in the merits phase, ­especially during the assessment of damages, rather than during the jurisdictional phase. Corruption is always based on the conduct of both parties – the investor and the host State. For example, bribery stems from both the investor’s business custom to offer bribes and the government officials’ custom to accept them. Thus, a corruption claim before an investment arbitration tribunal is a 94

95 96 97 98

Virginie Colaiuta, When Does a Violation of the Domestic Law of the Host State Amount to a Violation of a Public International Law, 21. For example, if an investment was established some decades ago and substantially contributed to the economic development of the host State, but originally established through corruption or fraud, it will be unfair to deprive the investors of the IIA protection on the investment. Phoenix Action, Award, ¶104. Fraport, Award, Dissenting Opinion of Mr. Bernardo Cremades, ¶ 22 (Jul. 19, 2007). Virginie Colaiuta, When Does a Violation of the Domestic Law of the Host State Amount to a Violation of a Public International Law, 18. Doak Bishop, “Toward a More Flexible Approach to the International Legal Consequences of Corruption,” ICSID Review-Foreign Investment Law Journal 25, no. 1 (2010): 65. In my view, while the former will be treated as a jurisdiction or admissibility issue, the latter will be regarded as interference with investments and should be regulated by FET or expropriation clauses.

120

Tamada

double-edged sword:99 the corruption is not only the investor’s problem, but also the problem of the host State. If the investor is able to prove that the host State acted corruptly causing damage to the investment, the tribunal is likely to find violations of the applicable BIT/IIA. In EDF [2009], it was alleged that Romania failed to extend contractual arrangements because the claimant refused to pay a USD 2.5 million bribe. The tribunal stated on this point that, if proven, “a request for a bribe by a State agency is a violation of the Fair and Equitable Treatment (FET) obligation […] as well as a violation of international public policy.”100 Similarly, in F-W Oil Interest [2006], the claimant alleged that Trinidad and Tobago demanded payment of USD 1.5 million, including an initial payment of USD 200,000, as a condition for continuing negotiation of the operating agreement, which was the subject of the bid.101 The tribunal made it clear that it is bound to take “the most serious view of allegations of State corruption – if backed by proper evidence.”102 According to the tribunal, this is because of “the dire and pernicious effect that corruption has been shown to have on economic development (notably in developing countries), and economic development is after all the purpose which BITs and the World Bank itself were created to serve.”103 Although the tribunals in those cases found insufficient proof of the alleged corrupt acts, they clarified that corruption by the host State must be criticized through investor-State arbitration. If an investment agreement is concluded through corruption or illegally under the host State’s domestic law, the host State could and should know of the illegality. It is consequently reasonable to think that the host State should  be estopped from using the ‘illegality’ or corruption defense.104 In Fraport [2007], for example, the arbitral tribunal observed that: “principles of fairness should require a tribunal to hold a government stopped from raising violations of its own law as a jurisdictional defense when it knowingly

99

Despite the persistent rumour of corruption of judges and arbitrators, there has been no case of corruption of a tribunal itself. Thomas W. Wälde, “‘Equality of Arms’ in Investment Arbitration: Procedural Challenges,” in Arbitration under International Investment Agreements. A Guide to the Key Issues, ed. Katia Yannaca-Small (Oxford UP, 2010), 164. 100 EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award (Oct. 8, 2009), ¶ 221. 101 F-W Oil Interests, Inc. v. The Republic of Trinidad and Tobago, ICSID Case No. ARB/01/14, Award (Mar. 3, 2006), ¶ 50. 102 F-W Oil Interests, Award, ¶ 212. 103 Ibid. 104 Meshel, The Use and Misuse of the Corruption Defence, 269.

Host States As Claimants

121

o­ verlooked them and endorsed an investment which was not in compliance with its law.”105 Similarly, in Kardassopoulos [2007], the tribunal stated that “a host State cannot avoid jurisdiction under the BIT by invoking its own failure to comply with its domestic law.”106 In this case, the tribunal admitted that the claimant had every reason to believe the agreements at issue were in accordance with Georgian law, not only because they were entered into by Georgian State-owned entities, but also because their content was approved by Georgian government officials without objection as to their legality on the part of Georgia for many years thereafter. Therefore, the tribunal stated that the claimant “had a legitimate expectation that his investment in Georgia was in accordance with relevant local laws” and the respondent was accordingly “estopped from objecting to the Tribunal’s jurisdiction ratione materiae under the ECT and the BIT” on the basis that the agreement could be void ab initio under Georgian law.107 4.5 Conclusions The development of substantive law on corruption has had a significant impact on investor-State arbitration. Through the application of ‘international public policy’ and the general principles of law, tribunals have successfully incorporated the prohibition against corruption, established in international instruments, into the jurisdictional issues addressed in investment arbitration, and have consequently denied jurisdiction ratione materiae. In this sense, there was collaboration between the substantive law aspects of corruption regulation and the procedural law aspects of investment arbitration. The fact that illegally established investments cannot, however, be protected by IIAs is not equivalent to saying that investors have an international responsibility vis-à-vis host States. Since IIAs normally contain no provision which directly prohibits or regulates corrupt acts, it is not realistic to suppose or expect tribunals to rule on investors’ responsibility. 105 Fraport, Award, ¶ 346. However, since there was “no indication in the record that the Republic of the Philippines knew, should have known or could have known of the covert arrangements which were not in accordance with Philippine law,” the tribunal concluded that the Philippines was not estopped from invoking the illegality of the investment. Id., ¶ 347. 106 Ioannis Kardassopoulos v. Georgia, ICSID Case No. ARB/05/18, Decision on Jurisdiction (Jul. 6, 2007), ¶ 182. 107 Kardassopoulos, Decision on Jurisdiction, ¶194.

122

Tamada

Corruption and its legal consequences in the framework of investment arbitration have a large potential for rebalancing the interests of investors and host States in favor of the latter. However, it is still early to positively evaluate this rebalancing process since it simultaneously hurts investor and host State interests. The corruption allegation and the illegality defense are, therefore, two sides of a double-edged sword; it would be difficult to expect one-sided consequences and the success of the corruption allegation depends largely on the circumstances of each case.

part 2 States and the Investor-State Arbitration Regime Stephen Gelb

∵

124

Gelb

The papers in this section are concerned with understanding host State behavior and its determinants, in the context of their commitments under investment treaties and the International Investment Agreements (IIA) regime and Investor-State Dispute Settlement (ISDS) in particular. The issue of State behavior and its determinants has of course been a long-standing concern for social scientists, as Todd Tucker briefly discusses. But it is worth situating IIAs discussing the evolution of theories of the State over the past three to four decades during which IIAs have become common. A useful distinction in examining this evolution is between ‘societycentered’ and ‘State-centered’ perspectives. The society-centered view, which dominated the post-war period up to the mid-1980s, essentially saw the State as an instrument of social groups. In Marxist theory, still quite influential then, the State was the instrument of the dominant capitalist class, “the executive committee of the bourgeoisie”1 in Marx’s colorful phrase, shaping class relations in the interests of capitalism and if necessary acting against individual firms in the interests of the class and the system as a whole. In liberal approaches, including both Keynesian and neo-classical economics, the State was similarly seen as an instrument of ‘society’, to be used – neutrally, in the broad public interest – to enhance economic efficiency and sustain growth. From the late 1970s, as the strong post-war economic growth boom ran into difficulties reflected in rising inflation, the diagnosis of the problems emphasized the pressures upon the State, and its expenditure, arising from labor and other interest groups in society striving to achieve sectional interests. The policy prescription therefore was to insulate the State from such pressures emanating from society and limit its role to a small set of core functions: first, the promotion of investor confidence by protecting property rights and contract enforcement and by maintaining macroeconomic stability, and second, the provision of basic (pure) public goods, the proverbial street lights and defense, as well as basic health and education. These functions had to be performed effectively, but by promoting investor confidence and restricting the scope of State action, market opportunities would be opened to private investment, which, it was implied, would ‘naturally’ ensue and lead to economic growth. This view underpinned the stabilization and structural adjustment programmes of the International Monetary Fund (IMF) and World Bank during the early 1980s attached to loans to countries suffering balance of payments or fiscal crises. * Stephen Gelb is Director of I3: International Investment Initiative at the WTI, [email protected]. 1 Karl Marx and Friedrich Engels, Manifesto of the Communist Party (New York: International Publishers, 1948).

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_008

States and the Investor-State Arbitration Regime

125

The same approach also underpinned arguments for Bilateral Investment Treaties (BITs) which started to become more widespread at the same time. The rationale was that domestic institutions in developing countries were too weak to insulate the host State from pressures of domestic interest groups, so that secure property rights for foreign investors, who then originated almost exclusively from industrialized home countries, required an international institutional mechanism. Thus, if capital-importing countries signed BITs, including ISDS, larger foreign direct investment (FDI) flows would follow in an automatic but unspecified way. From the mid-1980s, a State-centered perspective re-emerged at the theoretical level, asking why States acted as they did, often autonomously from social groups, and how effective States were when they acted in this way. This was in part because of the increased economic role of the State in both advanced countries and newly-decolonized developing countries, with societycentered views having difficulty in explaining State ‘leadership’ of society. The issue which was seen to have contributed to growth difficulties – the lack of State insulation from social interest group pressures – made more urgent the need for autonomous State action, demanding a better understanding of when and how this would be possible.2 The State-centered approach emphasized that the State was not a unitary actor reflecting a single logic, but a disaggregated set of institutions, with uneven capacities and differentiated links with society. Politics happens inside the State, as well as outside of it. Processes of democratization after the collapse of the Soviet model in 1989 and the end of authoritarian regimes in Latin America and Africa, together with the increasingly evident inability of the ‘structural adjustment programmes’ (SAPs), promoting a minimalist State, to restore growth in developing countries, led to the State-centered approach becoming more influential in development policy from the early 1990s. State reconstruction was necessary, aiming to create a capable State to lead the development and growth process. The emphasis in development policy was now on the ‘Weberian’ values of ‘good governance’, as part of a wider discourse which emerged at this time on the importance of democracy in promoting development. Good governance implied firstly non-arbitrary and non-personalistic decisions by the State, or as Sattorova puts it, consistent, predictable and stable policies. But secondly, good governance meant accountability of the State to society: the Statecentered view gives rise to fears of a predatory State, as distinct from the predatory 2 Theda Skocpol, “Bringing the State Back in”, in Bringing the State Back in, eds. Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol (Cambridge: Cambridge University Press, 1985), 3–41.

126

Gelb

interest groups in the society-centered approach, so that restraints on State action are needed, particularly in relation to the appropriation and expenditure of resources by public agencies. The problem is that effective accountability of public agencies and officials requires, in addition to ‘judges and journalists’ (independent courts and media), strong political organizations outside the State – parties and interest group associations – which themselves value good governance, including their own independence from the State. Without these, accountability can all too easily deteriorate into the sorts of pressures on States which the society-centered view fears. This risk is all the greater in new not-yet-consolidated democracies, not to mention autocracies yet to democratize. Thus, international external mechanisms were needed in many contexts to promote governance, and the rationale for BITs shifted in this direction, as Sattorova reminds us, with the understanding of fair and equitable treatment (FET) clauses now emphasizing indirect expropriation, underlining the need for host States to adhere to existing policies and regulatory orientations. Investment chapters of free trade agreements also emerged in this context, starting with the North American Free Trade Agreement (NAFTA), one explicit aim of which is to ‘lock in’ economic policy reforms. Setting out the two narratives for understanding ‘the State’ in this way demonstrates that it is too simplistic to see them as alternatives. During the ‘growth via globalization’ period from the late 1990s through to the onset of the global financial crisis in 2008, developing countries were enjoined both to limit the scope of State economic interventions, especially those restricting international flows of goods and services, capital and labor, and to improve governance in relation to public spending and public services, in order to reduce poverty. The number of IIAs continued to rise very rapidly, though the growth rate slowed slightly as compared to the 1990s. The consensus on development policy which could be discerned just five or six years ago, no longer exists. The financial crisis, the rise of China and other large developing countries to global economic power status, the acknowledgment of the threat posed by climate change have all disrupted the conventional wisdom, and posed afresh the question of the role of the State in the economy. These same factors, together with others, such as the internal dynamics within the EU between Member States and the Commission, have also disrupted the IIA regime, which is in no danger of collapse but will surely undergo significant renovation in the coming years. A core issue in debates about this renovation is the ‘re-balancing’ of the rights and obligations of host States. Understanding ‘the State’ and the determinants of ‘its’ behavior – the theme of the chapters in this Part of the book – remains a priority item on the international investment law agenda. The contributions in this section use very

States and the Investor-State Arbitration Regime

127

diverse methodologies, but each grapples with the complexities of analyzing the interplay of domestic political pressures and international legal constraints, in producing State behavior.

The Contributions

Mavluda Sattorova uses the ‘governance’ prism to examine whether IIAs can and do affect host State behavior. Defining good governance as stable, predictable and transparent action, she assesses the potential for both the content of IIAs and the operation of the overall IIA regime to induce improvement in host States where governance is poor. Sattorova points to contradictions and inconsistencies in relation to good governance in standard IIA features, and within the IIA regime itself. Although fair and equitable treatment ostensibly overlaps strongly with transparency, predictability and stability, Sattorova highlights that FET clauses usually contain standards far too broad to incorporate meaningfully into domestic law. She points out that the oft-noted ‘regulatory chill’ impact of IIAs on host governments may work against governance improvements. She argues that the lack of obligations on investors, and in particular the absence of any requirement that investors themselves behave transparently and eschew corruption, presents a serious flaw, as a result of which IIAs might contribute to entrenching bad governance. The IIA remedy system – compensation to damaged investors rather than amendment of inappropriate action – does not encourage behavior change. Anna Katselas’s paper uses Albert Hirschman’s well-known “exit, voice and loyalty’ framework to analyze host States’ options in relation to the IIA regime. The framework is widely-used to understand actions by agents on the demand side of markets, by consumers of semi-public goods, or by members of clubs and similar voluntary associations. Katselas argues that the IIA regime is akin to the latter, with both exit and voice options available and important, though neither option a priori dominates the other. She suggests full exit is difficult but partial exit may be possible, meaning that States can denounce the ICSID3 system but then must resort to other arbitral options. Though she does not mention it, several Latin American States – Venezuela, Bolivia, Ecuador – have in fact recently acted in precisely this manner, proposing a still-to-be-established Latin American arbitral forum as an 3 International Centre for Settlement of Investment Disputes (ICSID), created by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 575 UNTS 159 (‘ICSID Convention’).

128

Gelb

alternative.4 In 2010, Australia indicated it was exiting – no future agreements would incorporate international investor-State dispute settlement, but a new government reversed this decision in 2013. The problem with the exit option, as Katselas points out, is the presence of continuing effects clauses in IIAs, often for as long as 20 years. Instead she advocates in favor of the voice option, arguing the possibilities here are both numerous and potentially substantial, in the sense that States can change the rules, either unilaterally (affecting their own individual engagement with the system) or multilaterally. She argues that contrary to conventional wisdom, the existence of differentiated treaties and multiple arbitral systems within the IIA regime in fact provide an advantage to the voice option, since ‘single undertaking’-type agreements such as those of the WTO are extremely difficult to conclude. Todd Tucker takes on the (somewhat heroic) task of identifying arbitrators’ ‘theories’ of the State, using a complex methodology of close textual examination of IIA merits awards, to analyze arbitrators’ underlying conceptions of host State behavior. In Tucker’s framework, arbitrators’ ‘mode’ refers to the form of the concept, with the ‘stating’ mode referring to a normative perspective (States should act this way) being distinguished from the ‘positioning’ mode (States can act in a variety of ways). Arbitrators’ ‘tenor’ refers to their stance on the substance of host States’ behavior: a tenor is ‘affirming’ if it accepts host States’ behavior towards investors, but ‘disciplining’ if it insists on host States meeting fixed external standards. The substantive issues he is concerned with are the degree of stability and flexibility of host States’ actions, the degree to which market-friendly considerations as opposed to public interest considerations characterize host State actions, and the degree to which host States act to promote efficiency and growth narrowly-defined, versus development in a broader sense. Adding a further layer to his analytical framework, Tucker also distinguishes between arbitral panels which found for the host State, and panels which found for the complainant investor. Counting the extent (number of words) of arbitrators’ discourse for each cell of his framework in a small random sample of five awards (to be enlarged in future work), Tucker concludes that panels which found for host States (investors) tended to be more affirming (disciplining), though all panels were relatively market-friendly rather than State-friendly. 4 Rodrigo Polanco Lazo, “Is There a Life for Latin American Countries After Denouncing the ICSID Convention?”, in Reform of Investor-State Dispute Settlement: In Search of A Roadmap, eds. Jean E. Kalicki and Anna Joubin-Bret, Transnational Dispute Management 1 (2014), www.transnational-dispute-management.com.

States and the Investor-State Arbitration Regime

129

His conclusions from this preliminary study are that arbitrators are not reflecting standard social science perspectives on ‘the State’. Zoe Williams seeks to identify the economic and political conditions which, as she expresses it, lead host States “to enter into disputes with investors”, or, to put it differently, lead host States to act in ways which investors feel have contravened their rights, thereby triggering disputes. Using a sample of 538 cases involving 147 countries between 1990 and 2012, she deploys a standard econometric cross-country analytical approach in which the dependent variable is the initiation (or not) of a dispute against a host State in each year. Williams tests five hypotheses, arguing that four are confirmed by the econometrics. One hypothesis suggests that host States are less likely to contravene investor interests if they face greater domestic political constraints, including the number of ‘veto players’, presidential versus parliamentary systems (the relative power of the executive), and authoritarian versus democratic politics. A second hypothesis argues that leftist regimes are more likely to “trigger disputes” in order to win political support. In other words, Williams implicitly distinguishes domestic political constraints from ideology, arguing that the former are business-friendly. Economic conditions she examines include financial crises – the Argentina government’s steps to address its 2001 crisis led of course to numerous investor disputes – and limited dependence on FDI inflows, though she recognizes that dependence on extractive industry FDI makes disputes more likely as a result of what Raymond Vernon called the ‘obsolescing bargain’.5 Finally, she deploys a time variable, as an increase in the number of treaties signed may increase the possibility of disputes. Her independent variables are drawn from public datasets commonly used in such cross-country panel regressions. Williams’s econometric analysis leads her to conclude that all hypotheses are confirmed, barring those concerning left-wing regimes and presidential systems. As with all cross-country regressions, her analysis identifies factors which ‘on average’ produce the outcome (one or more disputes) – in any specific instance, they may or may not be relevant and there may be limited capacity to change them. But the analysis helps us to understand where and when disputes are most likely to occur. 5 Raymond Vernon, Sovereignty at Bay: The Multinational Spread of US Enterprises (New York: Basic Books, 1971).

chapter 5

The Concept of the State in Investor-State Arbitration A Social Science Perspective Todd Tucker 5.1 Introduction Social scientists spend a great deal of time crafting and testing theories of the State and its relation to economic development, but this work has little obvious influence in the work of international investment lawyers. Indeed, many of the contributions in this book on the Role of the State in Investor-State Arbitration, while representing valuable tools for lawyers and policymakers, consider the State primarily in its practical dimension as a respondent or treaty negotiator. International lawyers certainly work with a concept of the State, but it often consists of little more than the criteria of statehood (population, territory, government and independence) expressed in the Montevideo Convention on Rights and Duties of States.1 These criteria say little to nothing about how modern administrative States should or do interact with economic and political actors within their territories. Certainly, some arbitrators and treaties defer to States’ regulatory prerogatives in greater or lesser degree. But absent a consistent theory of appropriate State behavior vis-à-vis other economic actors, there is a risk that some Statesociety interactions that promote long-run development may also trigger treaty liability under international investment agreements in the short-term.

* Todd Tucker, Gates Scholar at the University of Cambridge’s Centre of Development Studies, [email protected]. This work was supported through the generous assistance of the Gates Cambridge Trust. Thanks to Ha-Joon Chang, Michael Waibel, Shailaja Fennell, Heather Boushey, Virginia Rutter, Todd Allee, Shaheeza Lalani, Rodrigo Polanco Lazo, Stephen Gelb, David Gaukrodger and Zoe Williams for their comments on earlier drafts and presentations of this piece. I also benefited from conversations with Jonathan Bonnitcha, Gabriel Bottini, Andrew Gruen, Martin Hearson, Mihaela Popescu, and David Rosnick. All errors and omissions are mine. 1 Convention on the Rights and Duties of States (Montevideo Convention), Dec. 26, 1933, 165 L.N.T.S. 19, cited by Ian Brownlie, Principles of Public International Law, 7th ed. (Oxford: Oxford University Press, 2008), 70.

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_009

132

Tucker

This chapter has two goals. First, it hopes to introduce readers in the legal community to some of the ways in which social scientists study the State and various judicial processes. Second, it shows that investment arbitrators are already working with concepts of the State, even if these do not constitute fullblown theories. The qualitative methodology used in the chapter involves a coding of a sample of awards drawn from a population of 132 investment merits awards. The coding analysis offers a preliminary account of the concepts of the State that arbitrators are creating, and how they are creating them. The contribution identifies two modes (stating/positioning) and two tenors (affirming/disciplining) of concept creation, as well as seven substantive concepts related to State characteristics. It is argued that arbitrators may be (perhaps inadvertently) helping to reinforce norms2 that States should be constrained in their interactions with economies and societies. The first section reviews social science theory on the State, and on concept and norm creation in investment adjudication. The next section describes the methodology for converting the award texts into manageable data. Finally, the last section reports the findings on concepts about State behavior expressed in investment arbitration. The chapter concludes with some mention of how this preliminary work fits into a broader research agenda. Before going further, a definition: the term ‘international investment agreement’ (IIA) refers, in this chapter, to a treaty-like instrument between two or more nations that marries substantive investor protections with the procedural right of investors of one party to sue the government of one of the 2 Norms can be defined in a variety of ways. Lawyers may define them as simply the legal rules to be interpreted. This definition contrasts with that from institutional economics, which defines norms as ‘informal constraints’ in opposition to formal rules such as statutes (Douglass C. North, Institutions, Institutional Change and Economic Performance (Cambridge: Cambridge University Press, 1990), 42–45, 88–91). The former are said to be powerful and lasting because actors and organizations have internalized them (because of cognitively and culturally driven needs to reduce uncertainties) and therefore involve minimal transaction costs to enforce but high transition costs to change. Finally, the constructivist literature in international relations defines norms as standards of ‘appropriate behavior for actors with a given identity’. Norms can consist of ‘softer’ categories such as mere exhortations as to how actors ought to behave, or in ‘harder’ regulative norms that are widely observed in society and that actually order and constrain behavior (Martha Finnemore and Kathryn Sikkink, “International Norm Dynamics and Political Change.” International Organization 52, no. 4 (October 1, 1998): 887–917, doi:10.2307/2601361). When I use the word ‘norm’ in this chapter, I am referring to the ‘soft’ exhortation variety from the constructivist literature, and I will use the word somewhat interchangeably with the word ‘concept’ when discussing ‘concepts’ of the State.

The Concept Of The State In Investor-state Arbitration

133

other parties.3 The first public award rendered under an IIA came in 1990 in a challenge by a UK investor against Sri Lanka.4 Today, there are around 250 public awards made in over 500 known disputes – most of which take place under the auspices of the World Bank’s arbitration arm, the International Centre for the Settlement of Investment Disputes (ICSID). Country respondents ‘win’ these cases 42 percent of the time, and investor claimants ‘win’ 31 percent of the time, with the remainder resulting in various settlement agreements.5 Over 95 States have been sued,6 and most cases (over 90 percent at ICSID) are brought against developing countries.7 This contribution examines a subset of these awards where tribunals examined the merits of the dispute under IIA law.

3 This phrase comes from the United Nations Conference on Trade and Development (UNCTAD), which first used the phrase in its 1996 World Investment Report (UNCTAD, World Investment Report 1996: Investment, Trade and International Policy Arrangements, 181 (Geneva: United Nations, 1996), accessed January 28, 2014, http://unctad.org/en/pages/ PublicationArchive.aspx?publicationid=646. By the 1998 report, the agency systematically used the phrase to capture the incorporation of rights originally from bilateral investment treaties into regional and multilateral agreements (UNCTAD, Bilateral Investment Treaties in the Mid-1990s, xx, UNCTAD/ITE/IIT/7 (Geneva: United Nations, 1998)). However, UNCTAD includes treaties that do not have investor-state dispute settlement (Jason Webb Yackee, “Sacrificing Sovereignty: Bilateral Investment Treaties, International Arbitration, and the Quest for Capital” (PhD diss., Chapel Hill: UNC-Chapel Hill, 2007), 33–35, accessed January 28, 2014, http://gradworks.umi.com/32/57/3257573.html), so my definition is somewhat different. 4 Antonio R. Parra, The History of ICSID (Oxford: Oxford University Press, 2012), 183. 5 Investors ‘win’ under this definition when they prevail on at least one count. This may strike some as an unbalanced way to tally highly complex cases where parties may care not only if, but also how they lose (Daphna Kapeliuk, “The Repeat Appointment Factor: Exploring Decision Patterns of Elite Investment Arbitrators,” Cornell Law Review 96 (2010): 71). I think it is appropriate, however, since the counter-factual is States not being sued at all under IIAs. 6 UNCTAD, “Recent Developments in Investor-State Dispute Settlement,” IIA Issues Note 1 (May 2013), accessed January 28, 2014, http://unctad.org/en/PublicationsLibrary/ webdiaepcb2013d3_en.pdf. 7 This is my calculation, based on numbers published by ICSID. I define ‘developed’ countries as the International Monetary Fund (IMF) Advanced Economies, minus the Asian and former Soviet bloc countries. I believe this grouping best classifies the diffusion dynamic from the ‘West to the rest’ that various scholars have identified as of theoretical importance (Antony Anghie, Imperialism, Sovereignty and the Making of International Law (Cambridge: Cambridge University Press, 2007) (Turan Kayaoğlu, Legal Imperialism: Sovereignty and Extraterritoriality in Japan, the Ottoman Empire, and China (Cambridge: Cambridge University Press, 2010).)

134 5.2

Tucker

Literature Review

5.2.1 State Theory For several decades in the post-war period, many social scientists (encompassing right-leaning international affairs realists to left-leaning Marxists) saw State power as reflecting solely the balance of power within exogenous settings, whether international or inter-class.8 Traditional development scholars, on the other hand, had tremendous faith in State intervention as the essential ingredient for economic transformation.9 All these approaches tended to see the State in relatively unproblematic terms: it was an efficient manager of foreign policy, an able corrector of market failure, or a terrain or tool of class struggle. During this period, lawyers had a relative monopoly on the detail of how States were actually organized, and how they accomplished or fell short of ideals. This began to change in the 1970s and 1980s, when social scientists renewed their interest in State theory. The development successes of interventionist States in East Asia,10 coupled with their failures in Africa,11 led a diverse range of scholars to pay greater attention to the conditions under which States could be expected to facilitate development. Today, debates about effective governance are the mainstream in economics, political science and sociology. One line of thought has been particularly influential, what I call the Stateconstraint approach. This approach marries insights from the economist Mancur Olson (who argued that States have incentives to ‘grasp’ national wealth instead of allow the market’s invisible hand12 to efficiently allocate resources) with the economic historian Douglass North (who saw institutional restraints on States as the best guarantor of economic outcomes).13 These lines 8

9

10

11 12 13

Theda Skocpol, “Bringing the State Back in,” in Bringing the State Back in, eds. Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol (Cambridge: Cambridge University Press, 1985): 4–6. Ha-Joon Chang, “Breaking the Mould: An Institutionalist Political Economy Alternative to the Neo-Liberal Theory of the Market and the State,” Cambridge Journal of Economics 26, no. 5 (2002): 540. Dietrich Rueschemeyer and Peter B. Evans, “The State and Economic Transformation,” in Bringing the State Back in, eds. Peter B. Evans, Dietrich Rueschemeyer, and Theda Skocpol (Cambridge: Cambridge University Press, 1985). Robert H. Bates, Markets and States in Tropical Africa: The Political Basis of Agricultural Policies (Berkeley, Calif.: University of California Press, 1981). Mancur Olson, “Dictatorship, Democracy, and Development,” The American Political Science Review 87, no. 3 (September 1, 1993): 569. doi:10.2307/2938736. Douglass C. North, Structure and Change in Economic History (New York: Norton, 1981), 20.

The Concept Of The State In Investor-state Arbitration

135

of inquiry have motivated much of the data collection efforts on ‘good governance’ in the decades since. The widely used Polity IV indicators relate almost exclusively to procedures that represent constraints on States, such as the existence of multiple veto points on executive decisions.14 The International Country Risk Guide published by the PRS Group contains similar indicators.15 Finally, the Worldwide Governance Indicators developed by the World Bank – another widely used dataset – has been criticized for relying on the subjective views of international businessmen that favor constraints.16 These indicators reveal that most developing country regions fall short of State-constraint ideals. For instance, every developing country region ranks 15 to 50 percentage points lower on average than the Polity IV indicator on executive constraints for developed nations (as defined in this chapter). An influential regression analysis by economist Daron Acemoğlu and colleagues found that State-constraining institutions boosted economic growth.17 These authors see States as needing to be simultaneously strong enough to tax but restrained enough from doing much else.18 In this theory, States are primarily sites of rent-seeking,19 a theory the authors trace back to Marx and North.20 In a sense, this literature has come full circle to the early post-war period, with the State representing little more than an arena of power struggle. Or, as Francis Fukuyama puts it, “everyone is interested in studying political institutions that limit or check power – democratic accountability and rule of law – but very few people pay attention to the institution that accumulates and uses 14

15 16 17

18

19 20

Monty G. Marshall, Ted Robert Gurr, and Keith Jaggers, “Political Regime Characteristics and Transitions, 1800–2012 Dataset Users’ Manual,” POLITY IV Project (2013), accessed January 28, 2014, http://www.systemicpeace.org/inscr/inscr.htm. Llewellyn Howell, “ICRG Methodology,” The PRS Group (2013), accessed January 28, 2014, http://www.prsgroup.com/ICRG_Methodology.aspx. Christiane Arndt and Charles Oman, Uses and Abuses of Governance Indicators (Development Centre Studies, OECD Publishing, 2006), 70. Daron Acemoğlu, Simon Johnson, and James A. Robinson, “The Colonial Origins of Comparative Development: An Empirical Investigation,” The American Economic Review 91, no. 5 (December 1, 2001): 1387, doi:10.2307/2677930. Daron Acemoğlu and James A. Robinson, “Industrial Policy Déjà Vu,” Why Nations Fail (2012), accessed January 28, 2014, http://whynationsfail.com/blog/2012/4/12/ industrial-policy-deja-vu.html. Daron Acemoğlu, “Politics and Economics in Weak and Strong States,” Journal of Monetary Economics 52, no. 7 (October 2005): 1199–1226, doi:10.1016/j.jmoneco.2005.05.001. Daron Acemoğlu, Simon Johnson, and James A. Robinson, “The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth,” American Economic Review 95, no. 3 (June 2005): 551, doi:10.1257/0002828054201305.

136

Tucker

power, the state.”21 It makes little sense to think (exclusively) about how to restrain a State that is fundamentally incapable of accomplishing policy goals or delivering services. There are alternative bodies of thought that do theorize about the conditions under which States can actually become powerful enough to be worth thinking about restraining. Weberians emphasize the importance of the procedures that effective States would follow, including career tracks and meritocratic promotions within a professionalized and consistent civil service.22 At the same time, a perfect Weberian State might be highly consistent, but not very adaptable or good at getting things done.23 Sociologist Michael Mann has outlined how power networks within and outside of States need to be able to mobilize ideological, military, economic and political infrastructure in order to be successful.24 At a minimum, this includes the capacity of a State to extract taxes, but could include the ability to attract the most educated workers in society, as studies of Brazil have shown.25 An insight from the ‘embedded autonomy’ line of thought finds that States in certain social settings may be more likely to achieve sufficient autonomy to have an independent influence on economic development. For instance, Theda Skocpol finds that States’ ability to upgrade their capacity without a revolution depends significantly on States’ international position and relationship with domestic landed classes.26 Peter Evans notes that States can regulate or substitute for the private sector. But he attributes Korea’s successful cultivation of an information technology sector to a different State strategy. First, the State ‘midwifed’ (or gave birth to) a whole different set of capabilities in the private sector, through the use of infant industry protection and other tools. Secondly, the State ‘husbanded’ these reborn firms into powerful new partnerships. This role required planning bureaucracies that were autonomous from the private sector in terms of the setting of priorities, but always embedded in communication networks with the businesspeople affected by the plans.27 21

Francis Fukuyama, “What Is Governance?”, Governance 26, no. 3 (2013): 347, doi:10.1111/ gove.12035. 22 Max Weber, Economy and Society: An Outline of Interpretive Sociology (Berkeley, Calif.: University of California Press, 1978). 23 Fukuyama, What Is Governance?, 353. 24 Michael Mann, The Sources of Social Power, Vol. 2: The Rise of Classes and Nation States, 1760–1914 (1st edition. Cambridge: Cambridge University Press, 1993). 25 Fukuyama, What Is Governance ?, 353–355. 26 Theda Skocpol, States and Social Revolutions: A Comparative Analysis of France, Russia, and China (Cambridge: Cambridge University Press, 1979). 27 Peter B. Evans, Embedded Autonomy: States and Industrial Transformation (Princeton, N.J.: Princeton University Press, 1995).

The Concept Of The State In Investor-state Arbitration

137

Indeed, shaking up markets and property rights might lead to lower scores on ‘good governance’ indices, but actually be a prerequisite for dynamic growth patterns.28 The 1950 Korean land redistribution quashed property rights of existing landholders, but permitted a more rapid economic transition.29 ‘Bad governance’ (through the manipulation and distribution of rents to agents capable of blocking economic change) may be a necessary part of managing developmental transition costs. When dominant classes would otherwise have the power to block economic change, it may be better to buy them off through otherwise inefficient payments than to not develop. Moreover, payments that would be inefficient in a static world may actually be growth-promoting in a dynamic long-term context, as subsidies to industrial upgrading in various successful East and South Asian experiences show.30 Indeed, development preceded ‘good institutions’ like democracy, independent judiciaries and intellectual property rights in virtually all of today’s richest countries.31 5.2.2 IIAs: A Unique Lab for State Theory? Do judges think differently about what States should be doing in their domestic territory than social scientists and other actors? Until recent decades, this was difficult to answer. International judges concerned themselves with the external aspects of State relations, and only looked in extreme instances (genocide, etc.) to actions within a State’s borders. Domestic judges were themselves part of the State apparatus, and faced restraints on the extent to which they could judge their own institution. The power of domestic courts typically grew in lockstep32 and regular negotiation with33 other parts of national State power. Executive agencies have high rates of success as both plaintiffs and 28

Robert Wade, “The Market as Means rather than Master: The Crisis of Development and the Future Role of the State,” in Towards New Developmentalism: Market as Means rather than Master, ed. Shahrukh Rafi Khan and Jens Christiansen (London: Routledge, 2010). 29 In a historical irony, this was accomplished during the occupation of the South by the North (Bruce Cumings, “The Abortive Abertura: South Korea in the Light of Latin American Experience,” New Left Review I 173 (January-February 1989): 12), now a consistent bottom-ranker in good governance indices like the Polity IV executive constraint variable. 30 Mushtaq H. Khan and Kwame Sundaram Jomo, Rents, Rent-Seeking and Economic Development: Theory and Evidence in Asia (Cambridge: Cambridge University Press, 2000). 31 Ha-Joon Chang, “Institutions and Economic Development: Theory, Policy and History,” Journal of Institutional Economics 7, no. 4 (2011). 32 Joseph R. Strayer, On the Medieval Origins of the Modern State, 2nd ed. (Princeton, N.J.: Princeton University Press, 2005). 33 Justin Crowe, Building the Judiciary: Law, Courts, and the Politics of Institutional Development (Princeton, N.J.: Princeton University Press, 2012).

138

Tucker

defendants in national courts generally34 even when the taking of property is involved,35 where the legitimacy of State power might be at its weakest. Moreover, doctrines have emerged to facilitate court deference to a wide range of administrative decisions.36 The growth of trade and investment law may signal the emergence of judicial institutions willing to question the very ‘if’ of executive power. Trade tribunals have questioned countries’ weighing and balancing of health risks37 in a system where governments not only lose often, but also much more frequently than defendants in domestic courts.38 IIA tribunals – even though they side with States most of the time – have been willing to question fundamental structures of the State.39 International economic tribunals do not apply national law, nor are they a part of State structure. This positions them to pass judgment on fundamental questions of statehood, including the quality and availability of judicial remedies at the national level.40 They may also display greater variation in the norms that they create than national courts, due to the absence of binding precedent;41 the fact that the practical remedies they provide are typically payments by governments to investors in specific cases rather than changes in policy;42 and (in the case of investment tribunals) the lack of 34

35 36 37

38

39

40 41

42

Reginald S. Sheehan, William Mishler and Donald R. Songer, “Ideology, Status, and the Differential Success of Direct Parties before the Supreme Court,” The American Political Science Review 86, no. 2 (June 1, 1992): 464–471, doi:10.2307/1964234. Lawrence Baum, “Linking Issues to Ideology in the Supreme Court: The Takings Clause.” Journal of Law and Courts 1, no. 1 (March 2013): 105, doi:10.1086/668414. Anna Katselas, “Do Investment Treaties Prescribe a Deferential Standard of Review?”, Michigan Journal of International Law 34, no. 1 (Fall 2012): 87–150. Todd Tucker, “The WTO Ruling on the United States’ Flavoured Cigarettes Ban,” in The Global Tobacco Epidemic: Legal Challenges, ed. Tania S. Voon and Andrew D. Mitchell (London: Edward Elgar Publishing, 2014). Matthew C. Turk, “Why Does the Complainant Always Win at the WTO: A ReputationBased Theory of Litigation at the World Trade Organization,” Northwestern Journal of International Law & Business 31 (Spring 2011): 385. Todd Tucker, “Investment Agreements versus the Rule of Law?”, UNCTAD-IPFSD-Forum (2013), accessed January 28, 2014, http://investmentpolicyhub.unctad.org/Views/ Public/FeaturedDiscussionDetails.aspx?fdid=25. Jan Paulsson, Denial of Justice in International Law (Cambridge: Cambridge University Press, 2005). Susan D. Franck, “The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions,” Fordham Law Review 73 (2005): 1521–1625. Joost Pauwelyn, Optimal Protection of International Law: Navigating between European Absolutism and American Voluntarism (Cambridge: Cambridge University Press, 2008).

The Concept Of The State In Investor-state Arbitration

139

an appellate mechanism to bring uniformity to case law.43 The combination of novel subject matter, institutional dynamics and processes may therefore encourage greater improvisation in the elaboration of concepts of the State. While there are therefore theoretical reasons to suspect that investment lawyers would have a unique concept (or concepts) of the State, there has been little systematic social science examination of what those concepts might be, or how they are generated. In part, this gap is due to the inherent uncertainties of studying judicial and deliberative processes that are closed to the public.44 In part, this is because social scientists interested in IIAs have focused their attention elsewhere.45 As a consequence, who arbitrators 43

44

45

Donald McRae, “The WTO Appellate Body: A Model for an ICSID Appeals Facility?”, Journal of International Dispute Settlement 1, no. 2 (August 1, 2010): 371–387, doi:10.1093/jnlids/idq003. This opacity has led to divergent theories of judging. In the US context, some scholars argue that judges seek to simply apply the law (Michael A. Bailey and Forrest Maltzman, The Constrained Court: Law, Politics, and the Decisions Justices Make (Princeton, N.J.: Princeton University Press. 2011), 143) while others argue that judges attempt to ‘impose on society’ their personal (Richard A. Posner, Economic Analysis of Law (2nd Edition. New York: Little Brown & Co Law & Business, 1977)) or party-political preferences (Cass R. Sunstein, David Schkade, Lisa M. Ellman, and Andres Sawicki, Are Judges Political?: An Empirical Analysis of the Federal Judiciary (Washington, DC: Brookings Institution Press, 2006)). A more synthetic argument holds that judges vote according to a complex strategic calculus, involving desires to further their own reputation within their courts and their courts’ reputation in the larger world (Jack Knight and Lee Epstein, The Choices Justices Make (Washington, DC: CQ Press, 1997). Extensions of the strategic account beyond the outcome and to the content of judicial decisions have found that judges cite more precedent (Yonatan Lupu and James H. Fowler, “Strategic Citations to Precedent on the U.S. Supreme Court,” The Journal of Legal Studies 42, no. 1 (January 2013): 151–186, doi:10.1086/669125) and use more complex sentence structure (Ryan J. Owens and Justin P. Wedeking, “Justices and Legal Clarity: Analyzing the Complexity of U.S. Supreme Court Opinions,” Law & Society Review 45, no. 4 (2011): 1027–1061, doi:10.1111/ j.1540-5893.2011.00464.x) when they are attempting to hold together an internally divided majority. Finally, an extension of these insights to international law notes that international judges are reliant on domestic governments to implement their rulings. As a consequence, they attempt to bolster their courts’ legitimacy through citing more precedent when ruling against a country and in favor of non-State actors – especially when the respondents are common law countries that value precedent (Yonatan Lupu and Erik Voeten, “Precedent in International Courts: A Network Analysis of Case Citations by the European Court of Human Rights,” British Journal of Political Science 42, no. 02 (2012): 413–439, doi:10.1017/S0007123411000433). Indeed, social scientists interested in IIAs have focused their attention in other areas. While many social scientists have examined IIA signing as commitment devices to attract

140

Tucker

are and how they do their job has been left to empirically-minded legal scholars. For instance, Yves Dezalay and Bryant Garth showed that arbitrators in transnational investment disputes are densely connected through academic and professional networks.46 The study predated most investment agreement disputes, although their basic model remains relevant: according to one

46

FDI (See Andrew Kerner and Jane Lawrence, “What’s the Risk? Bilateral Investment Treaties, Political Risk and Fixed Capital Accumulation,” British Journal of Political Science 44, no. 01 (January 2014): 107–121, doi:10.1017/S0007123412000725, for a recent review), few have considered subsequent arbitrations. The few exceptions include studies of the institutional characteristics of States (Nathan W. Freeman, “Domestic Institutions, Capacity Limitations, and Compliance Costs: Host Country Determinants of Investment Treaty Arbitrations, 1987–2007,” International Interactions 39, no. 1 (2013): 54–78, doi:10.1080/03050629.2013.751296) and administrations (Pedro Silva, “Turnover and the Enforcement of International Investment Agreements,” APSA 2012 Annual Meeting Paper, SSRN Scholarly Paper ID 2106620 (Rochester, NY: Social Science Research Network, 2012), accessed January 28, 2014, http://papers.ssrn .com/abstract=2106620) that are sued, how developing countries fare in case outcomes (Kevin P. Gallagher and Elen Shrestra, “Investment Treaty Arbitration and Developing Countries: A Re-Appraisal,” Journal of World Investment and Trade 12, no. 6 (January 2011): 919–928), when cases are made public (Emilie M. Hafner-Burton, Zachary SteinertThrelkeld, and David G. Victor, “Leveling the Playing Field,” Laboratory on International Law and Regulation, School of International Relations and Pacific Studies, University of California, San Diego, ILAR Worging Paper 18, (March 2013), accessed January 28, 2014, http://irps.ucsd.edu/ehafner/pdfs/ILAR_Working%20Paper_18_2013.pdf?abstract _id=2132948), and the impact of an award on the pace of subsequent IIA signings (Lauge N. Skovgaard Poulsen and Emma Aisbett, “When the Claim Hits: Bilateral Investment Treaties and Bounded Rational Learning,” World Politics 65, no. 02 (2013): 273–313, doi:10.1017/S0043887113000063) (Srividya Jandhyala, Witold J. Henisz, and Edward D. Mansfield, “Three Waves of BITs The Global Diffusion of Foreign Investment Policy,” Journal of Conflict Resolution 55, no. 6 (December 1, 2011): 1047– 1073, doi:10.1177/0022002711414373) and FDI (Todd Allee and Clint Peinhardt, “Contingent Credibility: The Impact of Investment Treaty Violations on Foreign Direct Investment,” International Organization 65, no. 03 (2011): 401–432, doi:10.1017/ S0020818311000099) (Rachel L. Wellhausen, “Investor–State Disputes: When Can Governments Break Contracts?”, Journal of Conflict Resolution (September 13, 2013), accessed January 28, 2014, http://jcr.sagepub.com/content/early/2013/09/12/0022002 713503299.full.pdf+html, doi:10.1177/0022002713503299). These studies leave the content of the awards mostly unexamined. Yves Dezalay and Bryant G. Garth, Dealing in Virtue: International Commercial Arbitration and the Construction of a Transnational Legal Order (Chicago: University of Chicago Press, 1998).

The Concept Of The State In Investor-state Arbitration

141

estimate, the 15 arbitrators that have most frequently served in IIA disputes have served in over 55 percent of the cases.47 More recent work by legal scholars has attempted to rebut accusations of ‘bias’ against arbitrators that are appointed by investors, are appointed multiple times,48 or come from developed countries.49 However, the theoretical basis for why these characteristics might plausibly account for arbitrator decisions in the first place has not been fully explained.50 Another ongoing study has theorized that arbitrators are socialized through their national, career and academic backgrounds. The authors’ regression analysis found that party appointees were more likely to vote with their appointers at the jurisdictional stage, while presidents would likely side with claimants at the merits stage.51 Other scholars have suggested that the asymmetric qualities of the system (i.e. investors can challenge States but not vice versa) leads to a ‘systemic bias’ in that arbitrators interested in reappointment have to appease the powerful interests that generate a demand for cases. This research concluded that arbitrators as a group adopted ‘expansive’ interpretations of jurisdiction much more frequently than would be predicted by chance alone.52 But, as these authors note, these findings should be treated with caution, as there are serious methodological obstacles to meaningful quantitative analysis of IIA awards – not least of which is the small sample size.53 47

48 49 50 51

52

53

Pia Eberhardt and Cecilia Olivet (with contributions from Tyler Amos & Nick Buxton), Profting from Injustice: How Law Firms, Arbitrators and Financiers Are Fuelling an Investment Arbitration Boom (Amsterdam: Corporate Europe Observatory and Transnational Institute, 2012): 20, 38, accessed January 28, 2014, http://www.tni.org/ sites/www.tni.org/files/download/profitingfrominjustice.pdf. Daphna Kapeliuk, “Collegial Games: Analyzing the Effect of Panel Composition on Outcome in Investment Arbitration,” Review of Litigation 31 (2012): 287–289. Susan Franck, “Development and Outcomes of Investment Treaty Arbitration,” Harvard International Law Journal 50, no. 2 (2009): 448–453. Kapeliuk’s model simply assumes that arbitrators are utility maximizers although this is not demonstrated, nor is there an exploration of what arbitrators value. Michael Waibel and Yanhui Wu, “Are Arbitrators Political?”, Working Paper (December 11, 2011), accessed January 28, 2014, http://www.wipol.uni-bonn.de/lehrveranstaltungen -1/lawecon-workshop/archive/dateien/waibelwinter11-12. Gus Van Harten, “Arbitrator Behaviour in Asymmetrical Adjudication: An Empirical Study of Investment Treaty Arbitration,” Osgoode Hall Law Journal 50, no. 1 (2012): 216– 223, 238, accessed January 28, 2014, http://www.ohlj.ca/english/current.htm. Gus Van Harten, “The Use of Quantitative Methods to Examine Possible Bias in Investment Arbitration,” in Yearbook of International Investment Law and Policy 2010–2011, ed. Karl P. Sauvant (Oxford: Oxford University Press, 2011): 859–882.

142

Tucker

How, then, to conceive of concept generation in IIA arbitration? First, we can say which theories are unlikely to offer guidance. Widely influential rational choice models focus on incentives rather than norms. They start from the premise that States (in the absence of IIAs) make promises to investors that they break after the investment is made. Since States (and other actors) understand this incentive, they guard and signal against it by empowering arbitrators to help them give credibility to the contract.54 But there is no contract in any traditional sense: empirical work in the behavioral economics school of thought has shown that many State officials do not understand and may not be aware of investment agreements signed by previous governments or even their own administration. As a consequence, States could be said to have only a bounded rationality at best.55 And while any efficient contract mechanism would allow for either party to exit as their calculations change, anecdotal interview evidence suggests that IIAs may have outsize economic exit costs relative to entrance benefits. For instance, one political risk insurer said that IIAs “don’t play any direct role for the ranking of investment risk” and are only “relevant if claims arise”.56 Another analytical construct for understanding the architecture of international dispute resolution – the ‘legalization’ model – appears to also be illsuited for examining IIAs. Highly ‘legalized’ international institutions are characterized by high degrees of legal obligation (binding-ness), precision in legal phraseology, and delegation of power to international tribunals.57 But, as even the model’s authors recognize, many international tribunals are characterized by imprecise rules combined with high degrees of delegation of State authority to tribunals. When these features are combined with standing rules that allow non-State actors to initiate cases, it is anticipated that tribunals will see exploding caseloads and be able to autonomously develop international

54 55

56

57

Andrew T. Guzman, How International Law Works: A Rational Choice Theory (Oxford: Oxford University Press, 2010). Lauge N. Skovgaard Poulsen, “Bounded Rationality and the Diffusion of Modern Investment Treaties,” International Studies Quarterly (2013): 1–14, doi:10.1111/ isqu.12051. Lauge N. Skovgaard Poulsen, “The Importance of BITs for Foreign Direct Investment and Political Risk Insurance: Revisiting the Evidence,” in Yearbook on International Investment Law & Policy 2009–2010, ed. Karl P. Sauvant, ch. 14 (New York: Oxford University Press, 2010): 539–574. Kenneth W. Abbott, Robert O. Keohane, Andrew Moravcsik, Anne-Marie Slaughter, and Duncan Snidal, “The Concept of Legalization,” International Organization 54, no. 3 (July 1, 2000): 404, doi:10.2307/2601339.

The Concept Of The State In Investor-state Arbitration

143

law.58 These gaps in the theory lead to a neglect of institutions like IIAs that do not fit the legalization model.59 When these omissions are coupled with assumptions of rational calculation by States,60 scholars are left spinning, trying to explain the persistence of ‘uncontrolled’ tribunals like those under IIAs. Indeed, given the absence of precision in IIA obligations, IIA arbitrators have to determine not only whether States broke the rules, but what the rules are in the first place. This means arbitrators resemble the ‘norm entrepreneurs’ that are theorized in the norm life cycle literature. Under this theory, a norm originates as the rhetorical product of a ‘norm entrepreneur’. If successful, a norm will ‘cascade’ or diffuse and (perhaps) eventually become internalized by States. But IIA arbitrators show up in the ‘wrong place’ in the theory. In the original formulation, it is intellectuals, advocates and politicians who create norms, while dispute settlers (professionally trained to maximize consistency and institutionalization) are brought in at the norm internalization stage.61 In IIAs, by contrast, it is the arbitrators that float the draft-form ideas,62 and they arrive at their own conclusions with relatively little reference to norms observed from State practice.63 Combine States with bounded rationality, treaties with outsize exit costs, tribunals with high levels of delegated authority and unpredictable entrepreneur-driven doctrinal evolution, and IIA arbitration starts to sound like a new form of wielding power.64 Yet the gaps in existing theoretical tools suggest a need to generate new theory, a task to which this chapter now turns. 58

59

60 61 62 63

64

Robert O. Keohane, Andrew Moravcsik, and Anne-Marie Slaughter, “Legalized Dispute Resolution: Interstate and Transnational,” International Organization 54, no. 3 (July 1, 2000): 457–488, doi:10.2307/2601341. See IIA absence in survey by Laurence R. Helfer and Anne-Marie Slaughter, “Why States Create International Tribunals: A Response to Professors Posner and Yoo,” California Law Review 93, no. 3 (May 1, 2005): 899–956, doi:10.2307/3481479. As in, Eric A. Posner and John C. Yoo, “Judicial Independence in International Tribunals,” California Law Review 93, no. 1 (January 31, 2005): 1–74. Finnemore and Sikkink, International Norm Dynamics, 887–917. Jose E. Alvarez, “The Return of the State,” Minnesota Journal of International Law 20, no. 2 (2011): 223–264. Ole Kristian Fauchald, “The Legal Reasoning of ICSID Tribunals – An Empirical Analysis,” European Journal of International Law 19, no. 2 (April 1, 2008): 301–364, doi:10.1093/ ejil/chn011. This could constitute what is called ‘productive power’ stemming from constraints imposed by legal discourse, which some scholars claim deserves a space alongside outright compulsory, institutional and structural power (Michael N. Barnett and Raymond Duvall, Power in Global Governance (Cambridge: Cambridge University Press, 2005)).

144 5.3

Tucker

Methodology and Data

The paucity of relevant theories of arbitrators’ conceptualization of the State makes deductive-oriented quantitative analysis difficult. Accordingly, the researcher must first produce valid inductive qualitative work that can lead to the formulation of theory.65 One of the leading methodologies for this type of qualitative work is ‘grounded theory’, also known as the ‘constant comparison’ approach. It has long been used in the field of medical sociology to study patients’ experience of pain, and is beginning to be applied to fields like judicial discourse.66 This methodology starts with analysis and organization of available data, and attempts to systematically build many concepts by abstracting upwards – creating categories that fit the data because they arise from it. This data-based theory will rarely be refuted, but instead expanded and qualified by future work, and examined for the predominance or importance of certain categories versus others in larger samples. Grounded theory is not evaluated foremost by quantitative metrics like frequencies and means, but instead by the credibility, plausibility and integration of the qualitative concepts.67 My dataset consists of a sample of the merits awards from 132 investment treaty disputes from 1990 to mid-2013 – the total ‘population’ of all such disputes for which there is a publicly available merits award.68 Following previous empirical work on IIAs, I necessarily exclude non-public awards from the population.69 I also exclude awards in disputes that terminated prior to the merits 65

66

67 68

69

Gary King, Robert O. Keohane, and Sidney Verba, Designing Social Inquiry: Scientific Inference in Qualitative Research (Princeton, N.J.: Princeton University Press, 1994): 37–38. An example of this new scholarship is a systematic analysis of judges’ discourse in obscenity-related rulings in U.S. courts (Mihaela Popescu, “Judicial Discourse as Feeling Rules: Obscenity Regulation and Inner Life Control, 1873–1956,” Law, Culture and the Humanities (May 8, 2012), doi:10.1177/1743872111435874). Like that author, I depart from a pure grounded theory approach, in that I pose a specific question of the texts: what are the norms about the State represented herein? Barney Glaser and Anselm L. Strauss, The Discovery of Grounded Theory: Strategies for Qualitative Research (Chicago: Aldine Transaction, 1967), 2–4, 235. I wrote a computer program to construct this population from the Investment Treaty Arbitration website (www.italaw.com). To ensure completeness, I checked the resultant data against other sources, including data from the ICSID (https://icsid.worldbank.org/ ICSID/Index.jsp) and Investor-State Law Guide (http://www.investorstatelawguide.com/) websites. This introduces some unquantifiable selection bias, although some scholars have suggested that the majority of awards are eventually made public (Franck, Development and

The Concept Of The State In Investor-state Arbitration

145

stage (such as settlements and disputes where an arbitral tribunal declined jurisdiction). This exclusion serves as an imperfect proxy for frivolous cases.70 Finally, my population includes all merits awards, whether or not they were annulled, set aside or subject to dissents and separate opinions. I chose to take this inclusive approach because many factors external to a case can explain whether or not it is annulled – including the financial resources of the appealing party, and parties’ strategic calculus about what issues to appeal.71 Because the goal of this paper is an introduction and exploration of qualitative concepts for further coding (rather than an exhaustive quantitative coding in and of itself), I drew a sample of five awards from the larger population of 132 disputes. The sample was constructed using a random number generator linked to an index of the cases.72 Table 1 offers some descriptive data about the cases that were analyzed. I unitized the texts of arbitral decisions in the following manner. First, I coded the portion of awards where arbitrators are advancing their own interpretations, rather than the portions of awards where they simply recount the positions of the parties. These are demarcated by well-established ‘categorial’ distinctions (like the header ‘Tribunal’s analysis’ marking off a series of paragraphs). Then, I coded at least one paragraph (or ‘string’, in computing parlance) at a time, and up to several dozen.

70

71

72

Outcomes, 475). In any case, the import of this bias is limited in my larger research agenda, which looks at which depictions of the state become most influential. Non-public awards necessarily have limited influence on the development of norms (since they cannot by definition be influential if not known). However, as the literature on domestic courts notes, there are ample opportunities for adjudicators to ‘set agendas’ in pre-merits stages by deciding what cases to hear (Ryan C. Black and Christina L. Boyd, “US Supreme Court Agenda Setting and the Role of Litigant Status,” Journal of Law, Economics, and Organization 28, no. 2 (June 1, 2012): 286–312, doi:10.1093/jleo/ewq002. Future research could apply similar methods to jurisdictional awards. Moreover, we do not know a priori whether or not current un-appealed cases could have been successfully appealed. Exclusion of annulled awards would limit the concept generation potential that comes with having more awards to analyze – especially since even annulled awards can contribute to norm generation, as I show later in this article. I converted the awards from PDF to plain text format. I wrote a program in the R programing language to help with the substantial data cleaning necessary to ensure the readability (and processability) of the text, and to organize each award text as a series of strings corresponding to section headers, paragraphs and footnotes – later converted to inline citations. The header strings helped classify which remaining strings corresponded to a tribunal’s own interpretation. Strings corresponding to a tribunals’ recounting of procedure or party views were not subject to further coding.

146

Tucker

Table 1

Descriptive information about case sample

Case (year)

Number of strings Did state Arbitrators: President, (and word count) win? investor appointee, state appointee

Bayindir v. Pakistan (2009)

491 (346, 274)

Yes

CMS v. Argentina (2005)

472 (266, 948)

No

Nykomp v. Latvia (2003)

280 (139, 400)

No

Suez v. Argentina (2010)

276 (284, 438)

No

Ulysseas v. Ecuador (2012)

372 (239, 414)

Yes

Total

1,891 (1,276,474)

Kaufmann-Kohler, Böckstiegel, Berman Orrego Vicuña, Lalonde, Rezek Haug, Schutze, Gernandt Salacuse, KaufmannKohler, Nikken (dissent) Bernardini, Pryles, Stern

In the nVivo computer program,73 I coded each paragraph in the Bayindir award74 with concepts reflecting these broad inquiries. The names that I produced were of my own making: my only guidelines were to try to use phrases that described the action in each passage. Initially, these names closely reflected the phraseology of the original text. After generating over 150 codes for about as many paragraphs, I compared each code to every other code to test for resemblance, overlap or dis-juncture. These comparisons gave intellectual warrants to accordingly collapse, merge, or rename nodes down to about half of that amount.75 For instance, the unwieldy early codes I termed 73

74

75

nVivo is a qualitative data analysis software originally developed in the 1980s by social scientist Tom Richards that facilitates management, analysis and visualization of textual  data (Tom Richards, “An Intellectual History of NUD*IST and NVivo,” International  Journal of Social Research Methodology 5, no. 3 (2002): 199–214, doi:10.1080/13645570210146267). Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Award (Aug. 27, 2009). Unless otherwise indicated, all cases cited in this chapter are available online at “Investment Treaty Arbitration (ITA),” accessed January 23, 2014, http://italaw.com. Kathy Charmaz, Constructing Grounded Theory: A Practical Guide through Qualitative Analysis (Introducing Qualitative Methods Series) (1st edition. London: SAGE Publications Ltd, 2006), 49.

The Concept Of The State In Investor-state Arbitration

147

‘state gave investors’ successor certain benefits because investor had left project in a bad state’, ‘during alleged harm, state was actually helping investor’ and ‘factual record didn’t support claimant’s complaint of fear’ became together ‘faulting claimant’. I permitted a few nodes to overlap, since a variety of different norm construction techniques and contents could be at work in the same unit of text. After each coding session, I wrote theoretical memos to describe and document the types of concepts (or nodes) that had been created.76 At this stage of the work, I prepared a set of sensitizing questions to help focus subsequent rounds of coding. Following the literature on theoretical sensitization, I purposefully sought to frame these questions with non-legal jargon, and my coding choices sought distance from the worldviews of law and ‘good governance’. By attempting to approach language in a new way, I encouraged novel comparisons and a maximum generation of concepts.77 My questions included: 1. How are arbitrators creating or discussing the concept? 2. Is this a concept about: a procedure that State should follow; an ability that the State needs; an outcome that the State should ensure; a relationship between the State and other actors that is appropriate? 3. I also considered to whom arbitrators attributed acts, and how they drew the line between exogenous and endogenous causes of events. Accordingly, I reexamined text coded by aggregations like ‘faulting claimant’ (which were more related to what the tribunal was doing) for what the passages normalized for a State’s obligations. I repeated this fragmentation, parsing, code reassignment and re-fragmentation of text half a dozen times, until arriving at two primary modes of norm creation (stating/positioning, along with an auxiliary managing mode), two tenors of norm creation (disciplinary/affirming) and seven core substantive categories. Such rupture of the integrity of texts would not be smiled upon for legal analysis. However, this research project necessarily comes from a methodological position external to the law78 and uses legal texts as mere data for analyzing a social phenomenon. The fracturing also allows us to step outside of whether an arbitration decision was correct as a matter of law, or whether a particular arbitrator, State or investor is at fault. Whatever one feels of the United States or Zimbabwean governments, for instance, it is useful to 76 77 78

Patricia Bazeley and Kristi Jackson, Qualitative Data Analysis with NVivo, (2nd edition. London: SAGE Publications Ltd, 2013), 5. Anselm L. Strauss and Juliet M Corbin, Basics of Qualitative Research: Grounded Theory Procedures and Techniques (Newbury Park, Calif.: Sage Publications, 1990), 75–91. Mathieu Deflem, Sociology of Law: Visions of a Scholarly Tradition (Cambridge: Cambridge University Press, 2008).

148

Tucker

­ nderstand the types of detachable concepts and norms that are being created u in disputes involving them. 5.4 Results This section describes a first approximation of a grounded theory of IIA arbitrators’ conceptualization of States. First, I outline the concepts that emerged, and provide examples of each category. I then provide information about the relative word count frequencies of certain concepts. Note, however, that my use of a qualitative methodology means that this is for illustration rather than robust quantitative inference purposes. That said, most of the trends I discuss are pronounced enough in the data that they are unlikely to be solely the result of coder bias – a major concern in quantitative textual analysis. 5.4.1 Mode of Concept Creation Early in the coding process, several key distinctions emerged from the text fragments. Firstly, the majority of all award texts relate to a process (or mode) I call ‘managing’. This process includes 12 sub-modes where tribunals define and cite IIA terms, quote from the arguments of the parties, review their own proceedings, recite key facts in the dispute, and more. This process does not create obvious concepts of States, although selective recitation of party facts or arguments could ‘set the agenda’ for how these concepts can be later defined. Another early distinction was the mode of concept creation in the fragments: in some cases, a single concept of appropriate State behavior was established, and in other cases, multiple substantive concepts were pitted against one another. I called these modes ‘stating’ and ‘positioning’ respectively. My word choice takes advantage of the etymology of the word ‘state’, which means ‘condition’ (including of a country). When a tribunal ‘states’, it not only declares (as in the traditional use of the verb ‘to state’), but it normalizes a set of conditions and attributes for the State respondent. In contrast, ‘positioning’ allowed for one potentially legitimate State activity to be trumped by a more persuasive norm, as when the need to regulate is trumped by the need to provide a stable investment climate. The data included roughly equal word count of the ‘managing’ mode, irrespective of whether the State won or lost the overall case. However, tribunals that ruled against governments tended to rely more on the ‘positioning’ than the ‘stating’ mode. This could be due to tribunals’ legitimacy needs: it may be legitimating to recognize that governments perform many useful and appropriate functions when nonetheless ruling against them. However,

The Concept Of The State In Investor-state Arbitration

149

‘positioning’ was also employed by tribunals that ultimately sided with the government.79 5.4.2 Tenor of Concept Creation ‘Positioning’ and ‘stating’ became my overall parent nodes for various subconcepts relating to the substantive standards for State behavior, which I then grouped by the tenor of whether it was ‘affirming’ or ‘disciplining’ of the State. A concept or norm was ‘affirming’ if it supported a State’s right to regulate, to be internally inconsistent, or to vary its preferences across time – all of these mirror the actually existing States we see in the world. In contrast, a norm was ‘disciplining’ if it suggested a higher bar for State conduct than what we see in most of the world: that State policy be efficient, that it not vary, or that it be flexible in meeting an investor’s needs. 5.4.3 Substantive Concepts The following sections describe the seven substantive concepts created by the tribunals in the dataset. The exposition below describes them in their singular ‘stating’ mode. As the following charts show, however, these were often pitted against one another in the ‘positioning’ mode. 5.4.3.1 Stability and Flexibility One set of substantive concepts related to State consistency across time and space. In the ‘affirming’ variant of this concept that I call ‘diverse-changing’, arbitrators painted a pragmatic or sociological picture of the State. States are depicted as heterogeneous. They consider various points-of-view, which at the end of the day they are under no obligation to follow. There are legitimate differences between branches, agencies or staff of the State. They can change their approach through time and elections, i.e. be somewhat unstable. For example, in one case, an investor claimed that a State had conspired to terminate its contract. Although the project was directly overseen by an agency with substantial autonomy from the central State, a State policymaker had nonetheless made a handwritten note in the margins of a briefing document (introduced as evidence in the arbitration) that appeared to outline a way for the contract to be terminated for non-performance based reasons. In contrast, other policymakers argued that the termination of the contract was solely for 79

This could provide future litigants and tribunals an opportunity to push State-critical norms, covered in the legitimacy of a citation to a tribunal that sided with a State. A future tribunal could then ask whether a State complied with the norm already established, rather than having to ask whether a State should even have to comply with it.

150

Tucker

performance-based reasons. The arbitrators wrote that, “[t]he Tribunal does not see in such divergences, which are not an unusual occurrence among administrations, evidence of a conspiracy.”80 As the italicized portion makes clear, arbitrators saw internal dissonance as a natural feature of States. In another ‘diverse-changing’ example, an investor claimed damages for lost future profits for the termination of a concession over a period that included not only the original license term, but also an additional ten-year extension. The arbitrators wrote: [t]he License is very clear about the fact that this right is conditional and subject to a number of steps, both substantive and procedural, which might or might not take place. As it would be impossible to establish at present whether these conditions might be met, the Tribunal is persuaded by the Respondent’s argument to the effect that no damages should be considered beyond the year 2027. This will therefore be the year which the Tribunal will rely on for its determination of damages.81 In other words, State leaders in the future might be expected to have different preferences than the leaders that initialed the license.82 In addition to the ‘affirming’ concept that States can and do change, there were two ‘disciplining’ concepts that compared State behavior to an unrealized norm. In a first concept herein, States were chastised for not being stable or consistent – the very opposite of the ‘diverse-changing’ norm mentioned above. Thus, even as policymakers and constituents’ preferences might change, States must not. An example of this ‘be stable-consistent’ concept was a tribunal’s factual evaluation of whether an investor in a gas utility had a right to charge a dollar-denominated tariff. When the State respondent argued contrarily, the tribunal wrote: 80 81 82

Bayindir, Award, ¶ 227, italics added. CMS Gas Transmission Company v. The Republic of Argentina, ICSID Case No. ARB/01/8, Award, ¶ 199 (May 12, 2005). These passages illustrate a distinction central to my research agenda: the difference between a legal norm and a concept of the State. The first text fragment was only but a part of the tribunal’s legal and factual assessment of State liability under the fair and equitable treatment legal norm, and could even be considered obiter dicta. The second text fragment is a part of a key passage related to damages assessment. Despite these two fragments’ differing legal-interpretive provenance, they both reveal concepts that normalize the notion that State personalities or agencies can differ from one another at different times (CMS) or space (Bayindir).

The Concept Of The State In Investor-state Arbitration

151

[i]t was precisely because the right to tariff calculations in dollars was guaranteed that the privatization program was as successful as it was. The program attracted hundreds of companies to the country with investments that ran into over 10 billion dollars. Numerous bilateral investment treaties were also entered into at the time to provide additional guarantees under international law. It is not credible that so many companies and governments and their phalanxes of lawyers could have misunderstood the meaning of the guarantees offered in a manner that allowed for their reversal within a few years.83 In a second example, a tribunal (as part of a fair and equitable treatment assessment) noted that a State had put an investor on notice that the former was not planning on honoring the original terms of a contract. When the State respondent raised this as a factor that should have tempered the investor’s expectations for contractually outlined treatment, the tribunal wrote that the IIA requires that the State honor the ‘legally valid and binding’ obligation it had undertaken at the outset.84 In a second ‘disciplinary’ concept, States were chastised for not changing rapidly enough. In an example of this ‘be flexible’ norm, a tribunal wrote: [t]he Claimants, having entered into a thirty-year relationship with [a State] […] were entitled to expect that [the State] would manage that relationship in a cooperative manner, that is to say, that they would ‘work together’ so that the relationship was mutually advantageous. […] During the first eight years, such a cooperative relationship seemed to prevail. With the economic crisis and subsequent changes in government and in policies, that cooperative relationship clearly evaporated and all signs of fluidity disappeared. Indeed, as is further discussed below, the […] authorities demonstrated extreme rigidity in their dealings with […] the Claimants.85 In other words, this conceptual norm prizes not stability and consistency, but an investor-friendly adaptability that shifts with exogenous change.86 83 84

CMS, Award, ¶ 137. Nykomb Synergetics Technology Holding AB v. The Republic of Latvia, SCC, Arbitral Award, ¶ 37 (Dec. 16, 2003). 85 Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic, ICSID Case No. ARB/03/19, Decision on Liability, ¶ 233 (Jul. 30, 2010). 86 The CMS tribunal wrote similar passages.

152

Tucker

5.4.3.2 Are States Special? The foregoing set of concepts, relating to stability and change, are norms for States that could be equally applied in non-IIA contexts to non-State actors. For example, firms can be characterized as much as States by their adaptability or consistency. In contrast, the second set of substantive concepts I established revolved around whether States were fundamentally different from other entities in society. In the ‘affirming’ variation of this concept, States were not seen as particularly different from businesses. Here, a State doesn’t have to insure the business success of the claimant, and is not responsible for their failures, nor for variation between investors in the national economy. This ‘business-like’ concept worked to States’ advantage, since following business norms helped the States avoid liability. In contrast, when States were seen as unusual entities with ‘asymmetric’ powers over those in their territory that arbitrators must help check, this often worked to States’ disadvantage. Unlike the previous norm (which posits that there may be nothing special about the State), the ‘avoid asymmetry’ disciplinary norm suggests that the State needs to minimize the impact of the inherent capacities that adhere in its State-ness. It has more information about why and how it regulates than private parties do. Even its non-actions are powerful. It is never a mere counter-party, in that when it ‘negotiates’, private groups may be afraid of retaliation. If a claimant has fears of the State, they are presumed justified. Another feature of asymmetry is that a State’s policies (say devaluation) may have upsides (more exports) and downsides (higher input costs), but the downsides are always seen as not outweighed or outweigh-able by the upsides. Finally, it is not enough for the State to simply have sound regulations – efforts must be made to ensure that no single investor experiences a difficult time when relating to the State. An example of the ‘business-like’ concept came in passages where an investor equated a State’s failure to allow it to receive better terms for electricity generation (or alternatively quit the country) as indirect expropriation. The tribunal sided with the State, saying that the latter made “no guarantee of profitability of the regulatory system,” and that the investor “was unable to secure a ‘better power purchase agreement (PPA)’ because it proposed price and other terms and conditions that no distribution company was willing to accept”: This is confirmed by the fact that all generators, except Claimant, had secured viable PPAs […] The fact that Claimant was not allowed to quit [the country] may not be imputed to Respondent considering that it had

The Concept Of The State In Investor-state Arbitration

153

undertaken to produce electricity for fifteen years under freely accepted contractual conditions […].87 In other words, it was normal for States to behave within the confines of contractual obligations. In a second example, an investor claimed that a State terminated its contract in order to replace it with local subcontractors that had already been employed on the ground by the investor. The investor argued that this was corrupt and an element of unfair and inequitable treatment. The tribunal disagreed, noting the following: [a]ny employer facing the unpleasant prospect of having to terminate a construction contract before completion would by necessity seek to identify alternative solutions. Envisaging the use of [the] subcontractors to continue the works was certainly a sensible alternative. Indeed, it goes without saying that it makes more sense to try to retain the subcontractors who have already worked on the project rather than to resort to newcomers.88 In contrast to the affirming ‘business-like’ norm, an example of the disciplinary ‘avoid asymmety’ norm was a tribunal’s perspective on a State that sought to renegotiate an investor’s concession following an economic crisis. The investor participated in the renegotiation and did not object, which under other circumstances might have limited its ability to launch a grievance against the process. Yet the State had asymmetric power in that its renegotiation tactics had ‘an extremely forceful character’ including a freeze on tariff adjustments until after the renegotiation. As a consequence, the tribunal wrote in its fair and equitable treatment assessment that: [i]n light of the severity of these measures, the Tribunal questions whether in reality the process thus established constituted a ‘renegotiation’ in reality or whether it was actually an effort to compel changes in the Concession under that label. The essence of a renegotiation is that the parties freely agree to revise or amend an existing agreement. As the tribunal in Enron stated: “[a]ny process of negotiation requires of course that the parties genuinely agree on the outcome and this cannot be imposed or forced upon one party.” It appears that [the State] sought to 87 88

Ulysseas, Inc. v. The Republic of Ecuador, UNCITRAL, Final Award ¶¶ 187, 190, 199 (Jun. 12, 2012). Bayindir, Award, ¶ 300.

154

Tucker

structure the ‘renegotiation’ process in such a way as to severely limit or indeed curtail the contractual freedom of [the investor] in order to arrive at a predetermined result desired by [the State]. In the opinion of the Tribunal, such a process cannot in fairness be said to constitute a renegotiation as that term is generally understood.89 Other examples can be found in Table 2. Table 2

Examples from awards of positioning concepts

Substantive concept

Textual example

Avoid asymmetry A state whose organs were able to change the conditions an beats business-like investor faced in a country through legislative means “cannot regard the purchase contract as purely commercial” for the sake (disciplining) of evading liability (Nykomb, Award, ¶ 4.3.3) This shows that States cannot rely on behavioral norms from the business world: their policy power is simply too great and requires different types of constraints. Avoid asymmetry An executive agency cannot be excused from paying an investor simply because a legislature decided to repeal a “statutory right”, beats diverseespecially when courts may eventually side with the investor. In changing such a situation, the state as a whole must somehow “act in order (disciplining) to correct the situation” (Nykomb, Award, ¶ 4.2). Here, States must be prepared to upset their internal inter-branch division of power in order to compensate for alleged harm that an investor suffered as a result of inter-branch differences in treatment. Avoid asymmetry “An intent to discriminate is” is not required when “an investor who happens to be a foreigner” suffers discrimination. Requiring beats regulates proof “that discrimination is based on…nationality could be an (disciplining) insurmountable burden…as that information may only be 89

Suez, Decision on Liability, ¶¶ 241–242. In an ironic twist that affirms some of my methodological decisions, the Suez tribunal released its Enron-citing merits award to the parties on the same day that the Enron decision was annulled by an ad hoc ICSID committee. Any study of norm and concept diffusion in IIA arbitration must not lightly exclude concepts from its analysis – even those that have been formally annulled. Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, ICSID Case No. ARB/01/3, Award (May 22, 2007), Decision on the Application for Annulment of the Argentine Republic (Jul. 30, 2010).

The Concept Of The State In Investor-state Arbitration Substantive concept

155

Textual example

available to the government” (Bayindir, Award, ¶ 390). In other words, regulation may not intend to specifically harm the foreign investor, but a State’s asymmetric informational advantage means that this is never knowable. As a result, States’ regulatory powers must be curtailed to compensate for the possibility that they are not telling the truth. A “country cannot persuasively allege its historic instability to Be stableavoid its responsibility to foreign investors when it specifically consistent beats diverse-changing endeavored to remove this disincentive to foreign investment by providing specific assurances in a Concession Contract and in (disciplining) bilateral investment treaties” (Suez, Decision on Liability. ¶234). The “state of necessity under domestic law does not offer an Be stableexcuse if the result of the measures in question is to alter the consistent beats substance or the essence of contractually acquired rights” (CMS, regulates Award, ¶ 217). Here, the need to ensure stability trumps (disciplining) otherwise reasonable uses of police power. Business-like beats Investors need not be privy to “the internal decision-making of avoid asymmetry the administration concerning the management” of a contract that involved the state not as an administrator but a private (affirming) contract party (Bayindir, Award, ¶¶ 343–348). However, the tribunal went on to note that it may be legitimate at least in theory to require due process even in contracts. A state that otherwise behaves in a business-like manner is not Business-like responsible for improvised comments by a government minister beats be stablethat got an investor’s hopes up, even though this is “lacking of consistent the transparency and straightforwardness required from such a (affirming) high level of authority when dealing with a foreign investor” (Ulysseas, Award, ¶¶ 196). Diverse-changing States aren’t held responsible for investors’ expectations if the latter “could not reasonably have ignored the volatility of the beats be stablepolitical conditions prevailing” in the country at the time it consistent made its investment (Bayindir, Award, ¶ 193). (affirming) In situations where investors lease but do not own an asset, and Regulates beats avoid asymmetry where they signed a contract committing to “various conditions concerning such matters as efficiency, adequacy of service, and (affirming) achievement of investment commitments,” then State regulation is normal (Suez, Decision on Liability. ¶ 148).

156

Tucker

5.4.3.3 State Economy A final set of substantive concepts related to State economy, or States’ allocations of burdens internally and externally. In an affirming variant I call ‘regulates’, States were applauded for doing exactly that: the State has police powers, can monitor and condition investments, and take actions to pursue its diplomatic objectives. In an example of this concept, an investor complained of a State leader commenting on the contractual process between the former and the independent agency overseeing an infrastructure project. In cross-examination, the tribunal established that the involvement of the State leaders was due to diplomatic sensitivities regarding the investor’s home country. In its fair and equitable treatment assessment, the tribunal wrote, “[t]his appears unsurprising if not normal for a project of major economic importance for the development of the country. It is certainly not an indication of a conspiracy to put an end to the Contract without justification.”90 In a disciplinary variant of State economy, States were chastised for not making efficient economic decisions. This ‘act efficiently’ norm arose in a tribunal’s analysis of an economic crisis-related necessity defense by a State. In the case, the tribunal complained of “excessive public spending, inefficient tax collection, delays in responding to the early signs of the crisis, insufficient efforts at developing an export market, and internal political dissension and problems inhibiting effective policy making”: [i]n listing these factors, the Tribunal does not by any means intend to minimize the substantial external forces that were buffeting the [State’s] economy. Its intent is to show that [the State] itself contributed to its situation of emergency.91 5.4.3.4 Positioning Variants of Substantive Concepts The ‘positioning’ variants of these substantive concepts were especially associated with those cases where States ultimately lost. Table  2 below contains excerpts for these ‘positioning’ modes, which were instances of a tribunal pitting two of the ‘stating’ concepts outlined above against one another. I classify each as having an ‘affirming’ or ‘disciplining’ tenor based on the tenor of the underlying dominating concept.

90 91

Bayindir, Award, ¶ 237. Suez, Decision on Liability, ¶ 264. The tribunal went on to favorably cite the CMS panel (also a part of this chapter’s dataset) on a similar point.

The Concept Of The State In Investor-state Arbitration

157

5.4.3.5 Summary Charts 1 and 2 show the relationship between tribunals’ substantive concepts of the State and case disposition, for affirming and disciplining tenors respectively (as measured by word count). The green portions of the bar graphs (both shades of green) indicate word counts from tribunals that sided with the State, while the red portions (both shades) indicate word counts from tribunals that did not. Furthermore, the magenta shade of red and light shade of green indicate use of the positioning mode, while the other shades represent the stating mode. The clearest conclusion one can draw from the two charts is that the first (on the affirming tenor) has much more green, while the second (on the disciplining tenor) has much more red. Indeed tribunals that ultimately sided with governments used over twice as many words related to affirming concepts

Words

9000

Outcome Mode Loss-Positioning Loss-Stating Win-Positioning Win-Stating

6000

3000

0 Business-like

Diverse-changing Concept

Chart 1

Affirming concepts by case outcome

Regulates

158

Tucker

15000

Outcome Mode Loss-Positioning Loss-Stating Win-Positioning Win-Stating

Words

10000

5000

0 Act efficiently Avoid asymmetry

Be flexible Be stable-consistent

Concept

Chart 2

Disciplining concepts by case outcome

(19,674) as did tribunals that did not (8,600). State-favoring tribunals almost never used any disciplining tenor, while investor-favoring tribunals used at least some affirming tenors. As Chart 2 shows, disciplining concepts were the near exclusive province of investor-favoring tribunals, with words counts at over 25 times that of State-favoring tribunals (22,712 to 892). Moreover, investor-favoring tribunals – whether or not they used affirming or disciplining tenors – were particularly fond of the positioning mode, as demonstrated by the ample magenta in both Charts 1 and 2. They rarely used the stating mode (indicated by the fire engine red). Specifically, investor-favoring tribunals had a word count of two percent stating to 98 percent positioning whilst in affirming mode, and 29 percent stating to 71 percent positioning whilst in disciplining mode. In contrast, State-favoring tribunals were more evenly split between modes and tenors: fifty-nine percent stating to 40 percent

The Concept Of The State In Investor-state Arbitration

159

positioning whilst in affirming mode, as against 42 percent stating to 57 percent positioning whilst in disciplining mode. In contrast, investor-favoring tribunals were much more inclined towards the positioning mode irrespective of tenor: This suggests that – even in the best-case scenario when States are favored in the final outcome – these tribunals will quite often weigh Stateaffirming norms against State-disciplining norms. In the ‘worst-case’ scenario for States of losign their cases, disciplining norms are almost all that will be considered. What about the substantive State concepts? The State-favoring tribunals made ample recourse to the ‘diverse-changing’ concept about States varying their preferences through time and space – amounting to 10,916 words coded. However, it is worth noting that State-favoring tribunals were drawn nearly as much to the ‘business-like’ concept – at 7,407 words coded in the two modes. While the ‘business-like’ concept is State-affirming, it is also the affirming concept that has the State behaving least like a State. This suggests that States will be given considerable indulgence in IIAs if they model their behavior on that of private parties – rather than as heterogeneous representative institutions. The ‘regulates’ norm was used the least of the three affirming concepts by State-favoring tribunals. Investor-favoring tribunals split their words less evenly among the substantive concepts. In the data for Chart 2, over 75 percent of their word count corresponded to stability-consistency norms, and about 17 percent to antiasymmetry norms. And while Chart 2 shows that investor-favoring tribunals favored concepts that States were uniquely powerful asymmetric entities against which investors need protection, Chart 1 shows that their entertaining of such concepts was not absolute. States that behaved in a business-like fashion and (especially) those that had legitimate regulatory prerogatives were excused for some otherwise legitimate concerns about their asymmetric power. The heavy presence of magenta in the right-most bars in each chart shows that investor-favoring tribunals were willing to entertain competing norms when it came to investor allegations. In particular, arguments that States should be stable-consistent was not an absolute ‘right’, and had to be weighed against other legitimate State prerogatives. Likewise, the right-most bar in Chart  1 shows that investor-favoring tribunals subjected State arguments about regulatory prerogatives to various ‘disciplining’ considerations. This is not the place for quantitative hypothesis testing. We cannot know why tribunals articulate themselves in these ways, or even if these ways of articulating themselves are broadly consistent across the broader population of arbitrations. This analysis is a first pass, however, at looking at tribunals’ expression above and beyond the specific legal provisions they consider.

160

Tucker

5.5 Conclusion This chapter argues that arbitration is a process whereby social actors (including arbitrators, lawyers, companies and governments) create and contest concepts about what States should be doing in national territories. It finds that international investment arbitrators use a mix of assertive ‘stating’ and relative ‘positioning’ modes, as well as a mix of ‘affirming’ and ‘disciplining’ tenors when creating concepts of the State. While investor-favoring tribunals relied heavily on disciplining tenors and positioning modes, even tribunals that sided with States made frequent use of these concept generation tools. Indeed, tribunals that sided with States appeared drawn to those that behaved in a business-like (read: private sectorlike) fashion. The analysis demonstrates that, while awards contain competing notions of strong and constrained States, constrained State norms appear to be particularly influential. These concepts do not line up neatly with legal norms like fair and equitable treatment, discrimination claims, or necessity defenses. Indeed, tribunals can and do utilize affirming tenors, positioning modes or stabilityfavoring substantive concepts for all three legal norms. Much like the legal reasoning itself, these concepts can and do outlive the immediate investorState dispute, as they are cited as persuasive authorities in subsequent cases. Indeed, there is some evidence that State-disciplining concepts created by arbitrators that ultimately side with these States may provide ample citation material for arbitrators that would rule against States.92 Individual disputes are thus a type of ‘concept and norm lab’, where prescriptions for State behavior are beta-tested for potential consideration, use and adoption by other actors.

92

For instance, one tribunal famously accused a US court of behavior that was “clearly improper and discreditable [that] cannot be squared with minimum standards of international law and fair and equitable treatment,” before siding with the United States on jurisdiction (Loewen Group, Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3 Award, ¶ 137 (Jun. 26, 2003). This language was later quoted by the investor when it tried (ultimately unsuccessfully) to have a US court vacate the tribunal’s award (Loewen Group Inc. and Raymond L. Loewen v. United States of America, ICSID Case No. ARB(AF)/98/3, Reply to United States’ Opposition to Petitioners’ Motion to Vacate and Remand Arbitration Award, p. 3 (Apr. 8, 2005), and also by arbitrator Charles Brower in his critique of State behavior nearly a decade later in (Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1, Dissenting Opinion of Judge Charles N. Brower, n. 60 (Aug. 15, 2012).

The Concept Of The State In Investor-state Arbitration

161

The analysis in this chapter suggests that arbitrators may be reflecting certain social science concepts of the State, but not others – and none particularly consistently. While the concept that States are uniquely powerful asymmetric entities that often do more harm than good would be at home in a Mancur Olson, Douglass North or Daron Acemoğlu monograph, these authors would be less likely to believe (as per other arbitrator-generated concepts) that States could be relied upon to regulate or to flexibly and quickly respond to market signals. While at least one tribunal grounded its notion that States should be relatively stable and unchanging in its reading of Max Weber93 empirical studies of successful developing States instead show a great deal of upending of commercial expectations in order to break path dependency. This chapter is just one part of a larger research agenda of coding the entire population of awards from the 169 disputes that reached the merits phase, which will then be verified and supplemented by interviews and automated text analysis.94 As we learn more about the content of the existing stock of arbitration awards, we will be better positioned to see if the concepts and norms outlined in this chapter are broadly influential among arbitrators, and – perhaps of more interest to policymakers – if these norm generation activities constitute forms of arbitral wielding of power that actually change how States act.95

93

94

95

After outlining the doctrine of legitimate expectations (that tends to be associated with the stability-consistency concept, the Suez tribunal wrote that, “[t]he theoretical basis of this approach no doubt is found in the work of the eminent scholar Max Weber, who advanced the idea that one of the main contributions of law to any social system is to make economic life more calculable and [who] also argued that capitalism arose in Europe because European law demonstrated a high degree of ‘calculability’.” (Suez, Decision on Liability, ¶ 222). Justin Grimmer and Brandon M. Stewart, “Text as Data: The Promise and Pitfalls of Automatic Content Analysis Methods for Political Texts,” Political Analysis (2013): 1–31, doi:10.1093/pan/mps028. Indeed, while we have anecdotes of regulatory chill (Kyla Susanne Tienhaara, The Expropriation of Environmental Governance : Protecting Foreign Investors at the Expense of Public Policy (Cambridge: Cambridge University Press, 2009), one of the weaknesses of critiques of investment arbitration is the lack of evidence that it systematically affects how States act. Rather, there is more evidence that States do not know much about arbitration, and when they find out more (as when they are frequently sued), they reduce IIA signings or – in rare instances – denounce and exit them (UNCTAD, World Investment Report 2013: Global Value Chains: Investment and Trade for Development, 108 (Geneva: United Nations, 2013), accessed January 29, 2014, http://unctad.org/en/pages/ PublicationWebflyer.aspx?publicationid=588.

chapter 6

The Impact of Investment Treaty Law on Host State Behavior Some Doctrinal, Empirical, and Interdisciplinary Insights Mavluda Sattorova 6.1 Introduction This chapter is intended as a mapping exercise to introduce a project which examines the effectiveness of international investment law, with particular focus on the role of international investment treaties in fostering good governance and rule of law on a national plane. The aim of the project is to analyze if investment treaty rules and remedies can have a transformative effect on the behavior of governmental agencies and officials in host States. Originally conceived with a view to protecting foreign undertakings from opportunistic governmental behavior, international investment treaties have gradually come to be interpreted as also requiring host States to maintain good governance standards in their dealings with foreign investors. Lack of transparency, stability, predictability as well as the lack of effective remedies and enforcement mechanisms at a national level can now lead to a host State’s liability in damages. The scope of investment treaty protection – and the extent of host State exposure to international arbitral review and monetary liability – has dramatically expanded, enabling investors to challenge a diverse range of national measures in an infinite variety of socio-economic settings. One of the emerging justifications for this expansion of international investment law is that the global network of treaties and its arbitration mechanism can act as (i) a catalyst of regulatory reform in host States or (ii) a substitute of otherwise lacking and ineffective governmental institutions in host States.

* Lecturer in International Economic Law at the University of Liverpool, m.sattorova@liver pool.ac.uk. I am grateful to Shaheeza Lalani and Rodrigo Polanco Lazo, peer reviewers, and the participants at the WTI conference for their comments and suggestions. The earlier version of the chapter was also presented at the 2013 ASIL Midyear Research Forum, the 2013 Society of Legal Scholars Conference, and the 4th Biennial Conference of the AsianSIL; I gratefully acknowledge feedback received from participants at these conferences. All remaining errors are mine alone.

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_010

The Impact of Investment Treaty Law on Host State Behavior

163

The project will test these claims and examine the role of international investment law in promoting the rule of law and good governance at a national level. Can investment treaty remedies induce governments into compliance with the rule of law and good governance standards? To what extent and how do investment treaty norms influence government decision-making in host states? How do host States respond to investment treaty remedies? To answer these questions, the project will undertake a critical analysis of evolving objectives and scope of international investment law. This will be followed by sociolegal and interdisciplinary analysis of the impact, both ex ante and ex post, of international investment law on governmental conduct. The capacity of the investment treaty regime to foster the rule of law and good governance reforms in host States will also be examined from a comparative perspective, with focus on the rule of law and regulatory compliance initiatives undertaken by the World Bank, IMF, and the European Union The overarching aim of the project is to offer an exposition of the evolving international investment law, examine the function of its remedial mechanism, and to engage with the hitherto underexplored questions of effectiveness and compliance in the investment treaty context. The aim of this chapter is to introduce some of the key research questions of the project and outline some of the principal strands of the argument. In particular, the chapter will focus on the genesis of the good governance arguments in investment treaty law and scholarship, as well as setting the stage for a socio-legal, interdisciplinary and comparative inquiry into the investment treaty regime’s power to bring about change in domestic legal and bureaucratic culture. 6.2

Genesis of the Good Governance Rationale in International Investment Law and Scholarship

Historically, references to good governance, the rule of law and transformation of legal and bureaucratic culture in host States were sporadic and made predominantly in the context of justifications for the foreign investors’ right to claim monetary damages directly against host States. Since its inception in early international investment treaties, the private right to damages has been justified by reference to broader objectives of the international investment regime.1 Such objectives included the need to lower risks associated with

1 Alan O. Sykes, “Public Versus Private Enforcement of International Economic law: Standing and Remedy”, Journal of Legal Studies 34, no. 2 (2005): 631.

164

Sattorova

investing in a foreign country and thus to reduce the cost of capital for host States. This, in turn, would increase the flow of inward investment and accelerate host States’ economic development. In order to achieve such risk reduction, host States would need to commit themselves not to engage in proscribed conduct, such as arbitrary and discriminatory action, uncompensated takings and breaches due process. This promise would be enforced by conferring upon the investor the right to claim monetary redress against the host State. The remedy of damages was thus regarded as “a relatively inexpensive commitment device”2 which would act as a means of attracting foreign investment and discourage host States from behaving unlawfully. It was not until the first wave of investment arbitrations that the rhetoric of good governance was amplified and expressly embraced de lege lata. In a rising tide of investment claims challenging various host government acts, the boundaries of the notion of proscribed conduct have been pushed beyond the familiar. Expropriation has ceased to be a dominant cause of action, with investors increasingly making use of broader guarantees of fair and equitable treatment (FET) and sanctity of contract. A string of arbitral awards, including the famous Metalclad, Tecmed, and Occidental awards,3 proclaimed that transparency, stability, predictability, consistency ought to be construed as elements of FET. A failure to create and maintain a transparent, stable and predictable regime was found to be a sufficient ground for claiming compensation against the host State. These arbitral pronouncements have met with considerable skepticism. As one critic noted, transparency “is actually not a standard at all; it is rather a description of a perfect public regulation in a perfect public world, to which all States should aspire, but very few (if any) will ever attain.”4 However, in spite of a welter of criticism from various quarters, a number of subsequent tribunals have endorsed the interpretation of FET as requiring

2 Ibid., 644. 3 See Metalclad Corporation v The United Mexican States, ICSID Case No ARB (AF)/97/1, Award ¶¶ 71–99 (Aug. 25, 2000), (2001) 40 ILM 36, Técnicas Medioambientales Tecmed, S.A. v The United Mexican States, ICSID Case No ARB(AF)/00/2, Award, ¶¶ 154–164 (May 29, 2003) 10 ICSID Rep 130, Occidental Exploration and Production Company v The Republic of Ecuador, LCIA Case No UN 3467, Award, ¶¶ 184–191 (Jul. 1, 2004). Unless otherwise indicated, all cases cited in this chapter are available online at “Investment Treaty Arbitration (ITA)”, accessed January 23, 2014, http://italaw.com. For a critique, see Santiago Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Oxford: Hart Publishing, 2009), 309. 4 Zachary Douglas, “Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko, and Methanex” Arbitration International 22, no. 1 (2006): 28.

The Impact of Investment Treaty Law on Host State Behavior

165

a duty to ensure transparency, stability and predictability. States have also been found to be under a duty to act proactively as opposed to merely avoiding prejudicial conduct to the investors. Even State action displaying “a relatively lower degree of inappropriateness”5 may now suffice to establish an investment treaty breach. Beyond arbitral jurisprudence, references to good governance standards can be discerned in investment treaty instruments. Some treaties expressly require that States ensure “effective means of asserting claims and enforcing rights.”6 This ‘effective means’ provision was invoked in a number of investment disputes, including AMTO v Ukraine, where the claimants went as far as contending that the host State should be held to monetary responsibility for failing to create and maintain effective bankruptcy legislation.7 There are also international investment treaties that contain a host state obligation to “create and maintain in its territory a legal framework apt to guarantee to investors the continuity of legal treatment.”8 To borrow the phrase from the award in El Paso v Argentina, such provisions advance “a programme of good governance that no State in the world is capable of guaranteeing at all times.”9 The proliferation of references to good governance in arbitral jurisprudence and investment treaty texts has coincided with a new wave of scholarship where considerable emphasis is made on the importance of the investment treaty regime in transforming governance culture and practices in host States. It has been argued that “…investment treaties aim at binding States into a legal framework that gives them an incentive and a yardstick for transforming their legal systems into ones that are conducive to market-based investment activities and provide the institutions necessary for the functioning of such 5 Saluka Investments BV v. The Czech Republic, PCA—UNCITRAL Arbitration Rules, Partial Award, ¶ 293 (Mar.17, 2006). 6 See e.g. art II(7) of the Treaty Between the United States of America and the Republic of Ecuador Concerning the Encouragement and Reciprocal Protection of Investment, Aug. 27, 1993, U.S.-Ecuador, accessed January 29, 2014, http://unctad.org/sections/dite/iia/ docs/bits/us_ecuador.pdf; also art 10(12) of the Energy Charter Treaty, Dec. 17, 1994, 2080 UNTS 100. 7 Limited Liability Company AMTO v Ukraine, SCC Case No 080/2005, Final Award, ¶¶ 75, 85 (Mar. 26, 2008). 8 See Article 2 (4) of the Italy–Jordan BIT, discussed in Salini Costruttori SpA and Italstrade SpA v Jordan, ICSID Case No ARB/02/13, Decision on Jurisdiction, ¶ 126 (Nov. 15, 2004) (2005) 44 ILM 563. 9 El Paso Energy International Company v Argentina, ICSID Case no ARB/03/15, Award, ¶ 342 (Oct. 31, 2011), IIC 519 (2011).

166

Sattorova

markets.”10 The Oxford Handbook on International Investment Law states in its preface that “standards of due process and good governance required for foreign investment may spill over into domestic law and may set new standards also for the domestic legal system.”11 Dolzer has suggested that, especially in cases involving review of administrative law of host States, investment arbitration “may provide a powerful incentive to review and modernize their domestic legal systems.”12 This argument is also echoed in Vandevelde’s remark that BITs “embody norms that all countries committed to the rule of law should follow” and “can contribute greatly to institutional quality in host countries.”13 The recent scoping paper from the Organization for Economic Cooperation and Development (OECD) suggest that “indirect collective benefits” of international investment law for host societies comprise not only the ability of host States to attract investment even despite lacking domestic governance standards, but also the potential for change in “the political dynamic of reform of domestic dispute resolution and policy making institutions.”14 The increasing frequency in which such claims are being made in scholarly discourse compels one to question their juridical underpinnings. Indeed, do investment treaties and their remedial mechanism intend to transform governance practices in host States? When approaching this question from a descriptive, historical and doctrinal, angle, one is faced with very limited textual support for interpreting international investment treaties as instruments designed to promote good governance in host States. The very fact that investment treaty forefathers and the founders of the ICSID Convention15 emphasized the importance of moving the resolution of investment disputes away 10

Stephan Schill, The Multilateralization of International Investment Law (Cambridge: Cambridge University Press, 2009), 377. 11 Peter Muchlinski, Federico Ortino and Christoph Schreuer, “Preface”, in The Oxford Handbook of International Investment Law, eds. Peter Muchlinski, Federico Ortino and Christoph Schreuer (Oxford: Oxford University Press, 2008), vi. 12 Rudolf Dolzer, “The Impact of International Investment Treaties on Domestic Administrative Law”, New York University Journal of International Law and Policy 37, no. 4 (2005): 972. 13 Kenneth J. Vandevelde, “Model Bilateral Investment Treaties: The Way Forward”, Southwestern Journal International Law 18, no. 1 (2012): 313. 14 David Gaukrodger and Kathryn Gordon, “Investor-state dispute settlement: A scoping paper for the investment policy community” (OECD Working Papers on International Investment, No. 2012/3, OECD Investment Division): 13, accessed January 29, 2014, www.oecd.org/daf/investment/workingpapers. 15 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 575 UNTS 159 (‘ICSID Convention’).

The Impact of Investment Treaty Law on Host State Behavior

167

from the (weak, biased and incompetent) domestic institutions and to independent international panels appears to provide ample evidence to the historical emphasis on the substitute nature of the investment treaty regime.16 Recent debates over the local remedies requirement and the role of domestic courts in adjudicating investment disputes in Australia and the European Union too have made it clear that investment treaty law and its remedial mechanisms were created and continue to function as an alternative to domestic structures and not as a means of bringing about change on a national level.17 The primary concern for advocates of the international investment regime was not to improve governance in host States but rather to limit foreign investors’ exposure to lacking domestic structures and practices by offering investors the possibility of exiting the domestic legal regime and using international remedies. The lack of textual support, as well as the historical emphasis on the internationalization of remedies as opposed to promoting change at a national level, seems to invite a conclusion that the good governance objective was never in the minds of treaty drafters but has become a popular banner inasmuch as it offered an additional justification for the recent expansion of the investment treaty regime and its increasingly intrusive reach. Indeed, a historical analysis of the investment treaty regimes exposes a noticeable circularity of the good governance argument: the weaknesses and shortcomings of domestic legal systems in developing States have been traditionally cited as a rationale for providing foreign investors with access to a stronger and more effective alternative mechanism on the international plane;18 however, as this 16

17

18

Commentary on the ICSID Convention has almost invariably stressed its role in the depoliticization of investor-State dispute settlement by offering moving matters from the control of domestic institutions to independent third-party panels. Finally, an overview of primary texts on international investment law shows that most authors are in agreement as to the intention behind the creation of International Investment Law (IIL) and its remedial mechanism, such intention being mostly to offer an alternative to domestic structures. See, for instance, Christoph Scheurer et al, The ICSID Convention: A Commentary (Cambridge: Cambridge University Press, 2009), 352; Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles (Oxford: Oxford University Press, 2007), 128. See Mavluda Sattorova, “Return to the Local Remedies Rule in European BITs?: Power (Inequalities),Dispute Settlement, and Change in Investment Treaty Law,” Legal Issues of Economic Integration 39, no. 2 (2012): 223–248. Aron Broches, “The Convention on the Settlement of Investment Disputes between States and Nationals of Other States”, Recueil des Cours de l’Academie de Droit International 136 (1972), 337, 343; Jeswald W. Salacuse, The Law of Investment Treaties (Oxford: Oxford

168

Sattorova

international mechanism came of age, its ability to spill over into the domestic arena and to strengthen governance institutions and practices at a national level is now being invoked as an example of positive side-effects of such internationalization. One is left with an impression that the good governance argument has been engineered in an attempt to deflect criticism that has been increasingly mounted against the widening scope of investment treaty rules and the growing reach of the institute of investor-State arbitration. It could, of course, be argued that, even though initially created as a substitute for lacking and ineffective domestic regimes and not intended as a catalyst of regulatory reform in host States, international investment law has subsequently developed into a mechanism that can foster positive transformations at a national level. In other words, the ability to foster good governance and to strengthen the rule of law in host States may not have been a shared goal of investment treaty instruments but rather is an unintended and welcome side effect. Thus, although only legally enforceable by foreign investors, strict investment protection standards create a “spill over” effect that benefits national citizens and residents as the host country gradually develops better administrative practices to comply with international investment best practices.19 The need to comply effectively with the rule of law and principles of due process imposed by investment treaties may entail legal reforms and foster a more legalistic and rule-oriented administrative practice.20 However, given the investment treaty regime was conceived so as to insulate foreign investors from shortcomings of domestic regimes, by replacing the latter with a stronger and more effective international alternative, would host States not lose the incentive to carry out legal reforms? International investment law may indeed benefit individual investors by providing them with the option of side-stepping “what may be poorly functioning or biased domestic dispute resolution and policy-making processes”.21 However, the benefits of such internationalization for host state communities are less apparent. As Ginsburg has convincingly argued, by allowing foreign investors to resort to international treaties and arbitration and thereby avoid domestic law and institutions, international investment law does not ameliorate but in fact entrenches

19

20 21

University Press, 2010), 358; Rudolf Dolzer & Christoph Schreuer, Principles of International Investment Law (Oxford: Oxford University Press, 2008), 214–215. Roberto Echandi, “What Do Developing Countries Expect from the International Investment Regime?” in The Evolving International Investment Regime: Expectations, Realities, Options, ed. Jose E. Alvarez et al. (Oxford: Oxford University Press, 2011), 13. Ibid., 14. Gaukrodger and Gordon, Scoping Paper, 13.

The Impact of Investment Treaty Law on Host State Behavior

169

weaknesses of domestic legal orders.22 The availability of the investor-state dispute settlement regime on the international level, it has been argued, makes it easier for host governments to attract international investment without having to improve domestic governance mechanisms and practices.23 6.3

Does the International Investment Regime Conform to the Good Governance Standards That It Imposes on Host States?

Whilst contesting the juridical underpinnings of the argument that postulates the positive, albeit incidental, effect of international investment law on national governance structures and practices, this paper does not deny that such effect would be desirable. Numerous studies have doubted the positive  effect of investment treaty instruments on foreign investment flows.24 Likewise, the role of investments in bringing about economic development of host States has been debated,25 with none other than investment tribunals 22 See Tom Ginsburg, “International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance”, International Review of Law and Economics, 25(2005): 107, 121. By allowing foreign investors to exit domestic legal orders, IIL also creates the problems of reverse discrimination against domestic investors as well as regulatory chill. See also UNCTAD Series on Issues in International Investment Agreements II: Fair and Equitable Treatment: A Sequel (United Nations, New York and Geneva, 2012), 12. 23 Ibid., see also Gaukrodger and Gordon, Scoping Paper, 14. 24 One of the leading texts is Karl P. Sauvant and Lisa E. Sachs, The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows (New York: Oxford University Press, 2009). See also Mary HallwardDriemeier, “Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit…and They Could Bite,” World Bank Development Research Group Policy Research Working Paper 3121 (Washington, D.C., 2003); Jennifer Tobin and Susan Rose-Ackerman, “When BITs Have Some Bite: The Political-Economic Environment for Bilateral Investment Treaties,” Review of International Organizations 6, no. 1 (2011): 1–32. However, compare Jeswald W. Salacuse and Nicholas P. Sullivan, “Do BITs Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain,” Harvard International Law Journal 46 (2005): 67–130; and Eric Neumayer and Laura Spess, “Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?” World Development 33, no. 10 (2005): 1567–1585. 25 See, for instance, Jason W. Yackee, “Do BITs Really Work? Revisiting the Empirical Link between Investment Treaties and Foreign Direct Investment” in The Effect of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties, and Investment Flows, eds. Karl P. Sauvant and Lisa E. Sachs (New York: Oyford University Press, 2009), 1–23; also Olivier De Schutter, Johan F. Swinnen and Jan Wouters, eds.

170

Sattorova

themselves at times downplaying the importance of the development objectives in interpreting key investment treaty provisions.26 As the existing foundations of investment treaty law are being increasingly criticized and contested, the regime’s capacity to transform legal and bureaucratic institutions and culture in host States could provide a very much needed raison d’être. From a theoretical perspective, an inquiry into the capacity of international investment law to bring about a positive change will provide new insights into the hitherto largely unexplored question of compliance in the investment treaty context. So does the investment treaty regime possess the necessary characteristics that would enable it to have a transformative impact on domestic governance? To begin with, if international investment law is to foster good governance and the rule of law in host States, it should be rule-of-law compliant in the first place. In more specific terms, if subjecting host States to stringent standards of conduct, such as the duty to maintain transparency, stability, consistency and predictability, were to result in the host States embracing such standards in the domestic sphere, it could be argued that the international investment regime should also be transparent, stable, consistent and predictable. It has been noted earlier that the imposition of good governance standards by investment tribunals was seen by many as a step too far: is it fair and just to hold developing States responsible for a failure to conform to good governance standards that even developed States might frequently fail to achieve? A similar line of argument could be advanced in connection with the investment treaty regime’s role in fostering good governance in host States: is it fair, appropriate and desirable to impose monetary sanctions on host States that failed to ensure transparency, stability, predictability, and consistency where both substantive treaty rules and dispute settlement mechanisms fail to achieve the same? It is telling that the arguments claiming spill-over effects of investment treaty law into the domestic arena and its capacity to foster good governance at a national level appear to have been prompted by a proliferation of claims brought under the FET standard. It was in the course of establishing the substantive content of FET that investment tribunals proclaimed a duty to

26

Foreign Direct Investment and Human Development: The Law and Economics of International Investment Agreements (Abingdon: Routledge, 2013). While many tribunals interpreted a contribution to the economic development as one of the key criteria in identifying the existence of a protected investment, a number of arbitral panels dismissed the criterion. See, e.g. Saba Fakes v. Republic of Turkey, ICSID Case No. ARB/07/20, Award ¶ 111 (Jul. 12, 2010); and Mr. Patrick Mitchell v the Democratic Republic of the Congo, ICSID Case No ARB/99/7, Decision on the Application for Annulment of the Award, ¶ 39 (Oct. 27, 2006).

The Impact of Investment Treaty Law on Host State Behavior

171

maintain good governance standards to be required by the notions of fairness and equity. Yet the very jurisprudence of investment tribunals on FET as well as the formulation of the standard in investment treaty texts has attracted scathing criticism for lack of clarity, consistency, and predictability in arbitral practice. A recent UNCTAD report has observed that such shortcomings within international investment law would present considerable challenges to host States and their agencies that interact with investors.27 Indeed, “if the State and its subnational entities do not know in advance what type of conduct may be considered a breach of a treaty, then it cannot organize its regulatory and administrative decision-making processes and delegation in a way that ensures that its conduct will not incur liability under the FET standard.”28 The question also arises about the design of investment treaty norms and the role it plays in facilitating the regime’s good governance mission. This calls for a comparative analysis of international legal regimes that expressly require changes in domestic administrative practices and procedures and those that do not require such norm adoption. One can draw useful insights from scholarly analyses of compliance in the GATT/WTO context. For example, Sykes observes that the “GATT had changed behavior and induced members to behave in ways that they would not have otherwise.”29 What lies beneath the GATT’s success in bringing about changes in government conduct? Could this be due to the nature of the GATT/WTO obligations many of which require substantive and concrete changes in domestic laws of States? One is also reminded of the concept of direct effect and its role in fostering compliance with European Union laws at a national level. In order to be effectively incorporated into national legal orders, rules must be clear, precise and unconditional.30 In contrast with multilateral trade norms, investment treaty rules are framed broadly and in abstract terms. This is especially true of FET standard which has been used as a basis for transforming a failure to comply with good governance standards into an actionable investment treaty breach. Not only is the FET standard phrased in what many consider broad and ambiguous terms, but its constitutive elements have not been adequately and consistently spelled out to enable their embedding in domestic regimes. Some of the 27 UNCTAD, Fair and Equitable Treatment, 12. 28 Ibid. 29 Alan O. Sykes, “The Inaugural Robert A. Kindler Professorship of Law Lecture: When is International Law Useful?,” New York University Journal of International Law & Politics 45, no. 3 (2013): 793. 30 See Sacha Prechal, “Does Direct Effect Still Matter?,” Common Market Law Review 37, no. 5 (2000): 1047–1069.

172

Sattorova

prevailing interpretations of FET do not qualify “as a system of objective and accessible commands, commands which can be seen to flow from collective agreement rather than from exercise of discretion or preferences by those persons who happen to be in positions of authority.”31 Besides the FET standard, investment treaties may also contain a loose obligation to create conditions favorable to foreign investment. In most cases, there is a declaratory statement to this effect contained in a preamble.32 In few investment treaty texts, such a loose commitment is encapsulated in a standalone provision mandating the state to create and maintain effective legal frameworks for investment.33 Beyond this often loose form of commitment, the bulk of existing treaties do not contain norms that would compel signatory states to enact appropriate domestic legislation and to effectively implement substantive obligations. Neither do such treaties have direct effect. Given the prevailing design of investment treaty norms, the extent to which procedural and substantive limitations imposed by decisions of arbitral tribunals on respondent states may be effectively embraced in daily bureaucratic practices is questionable. One might agree that arbitral review extends procedural and substantive limitations onto domestic regulators,34 but is it a one-off extension or one that affects the deep matter of domestic governance? Another shortcoming of the existing investment treaty regime, which detracts from its capacity to command ex ante compliance (i.e. compliance with investment treaty norms before a dispute arises), and can discourage rather than encourage positive change in host States, is its lop-sided nature and the resulting ambiguity of normative values that it stands for and is able to export into domestic regimes. Of particular interest here is the much-criticized 31 Montt, State Liability, 309. 32 See Preamble to the Chile—Malaysia BIT, Agreement between the Government of Malaysia and the Republic of Chile on the Promotion and Protection of Investments, Nov. 11, 1992, Chile-Malay., accessed January 29, 2014, http://unctad.org/sections/dite/ iia/docs/bits/chile_malasia_sp.pdf. 33 See Article 2(4) the Italy-Jordan BIT (Agreement between the Government of the Hashemite Kingdom of Jordan and the Government of the Italian Republic on the Pro­ motion and Protection of Investments, Jul. 21, 1996, Jordan-Italy, accessed January 29, 2014, http://unctad.org/sections/dite/iia/docs/bits/italy_jordan.pdf ) and Article II(1) of the Canada – Ecuador BIT (Agreement between the Government of Canada and the Government of the Republic of Ecuador for the Promotion and Reciprocal Protection of Investments, Apr. 29, 1996, Can.-Ecuador, accessed January 29, 2014, http://unctad.org/sections/dite/iia/docs/bits/canada_ecuador.pdf). 34 Benedict Kingsbury, Nico Krisch and Richard Stewart, “The Emergence of Global Administrative Law,” Law & Contemporary Problems 68, no. 3–4 (2005): 15, 36.

The Impact of Investment Treaty Law on Host State Behavior

173

failure of international investment law to balance investment rights with investment responsibilities. Hirsch observes that “existing literature consistently emphasizes the importance of foreign investment as a channel for the diffusion of knowledge, technology and management practices.”35 Might this ‘channeling’ be useful in advancing our understanding of the role that investments and investment protection rules could play in entrenching, rather than eliminating, weaknesses in governance culture practices in host States? It has been reported, for instance, that the introduction of more stringent sanctions for bribery in U.S. legislation has arguably led to the loss of the Americans’ competitive position in the African market as compared to Chinese investors.36 Based on this analysis, it is safe to conclude that (1) prior to the adoption of more stringent anti-corruption laws, U.S. companies were complicit in corrupt practices in host States (2) Chinese investments may also connive at existing practices as they are unencumbered by fear of financial and criminal sanctions either in host States (due to intrinsic weaknesses of domestic anticorruption laws) or in China (due to its reportedly relaxed attitude to Chinese companies operating abroad). A number of investment awards have also publicized instances of foreign investors’ participation in corrupt practices.37 Evidence of misconduct by multinational corporations and their complicity in illegal acts committed by governmental agencies in host States is an illustration of how investments can affect local communities not by eliminating inadequate governance practices but by entrenching them. As Hirsch notes, “international investments [and, I would add, international investment agreements] are not only affected by socio-cultural factors, they often influence the socio-cultural features of the involved communities.”38 The actual impact of investment treaty regime on socio-cultural settings of host communities would depend on the stance the regime takes on investor behavior. If investment treaty instruments and arbitral tribunals applying them in investor-State disputes turn a blind eye to illegality committed by an investor in host States, including the instances of bribery and complicity in other forms of illegal 35

Moshe Hirsch, “The Sociology of International Investment Law” in The Foundations of International Investment Law: Bringing Theory into Practice, ed. Zachary Douglas, Joost Pauwelyn, and Jorge E. Viñuales (Oxford: Oxford University Press, 2014), 146. 36 Andrew B. Spalding, “The Irony of International Business Law: U.S. Progressivism, China’s New Laissez Faire, And Their Impact in the Developing World,” UCLA Law Review 59 (2011): 354. 37 See World Duty Free Company Limited v Republic of Kenya, ICSID Case No ARB/00/7, Award (Oct. 4, 2006); Fraport AG Frankfurt Airport Services Worldwide v Republic of the Philippines, ICSID Case No ARB/03/25, Award (Aug. 16, 2007). 38 Hirsch, Sociology, 146.

174

Sattorova

behavior, one cannot speak of a transformative effect and of fostering good governance. If investment treaty law continues to remain silent on investor responsibilities and, furthermore, extends protection to investment projects tarnished by illegality, it is not only far from exerting positive influence on domestic governance culture and practices but can arguably be seen as being complicit in perpetuating inadequate and undesirable patterns of government behavior in host States. 6.4

Socio-Legal Insights into Compliance with Investment Treaty Standards

At the heart of the argument that posits a transformative impact of investment treaty law on governance in host States is rational choice theory assumption that investment treaty rules act as “a deterrent mechanism against short-term policy reversals and assist developing countries in promoting greater effectiveness of the rule of law at the domestic level.”39 Thus, “[d]amages as a remedy sufficiently pressure States into complying with and incorporating the normative guidelines of investment treaties into their domestic legal order.”40 Despite having recurred in various arbitral decisions and scholarly writings, the claim that investment protection treaties promote the rule of law and improve governance on a national level has not yet been supported either theoretically or through empirical appraisal. The question of how the objectives of international law are to be achieved “necessarily includes social science knowledge; norm idealism without a reality check is at best naive, at worst untruthful.”41 Particularly in the context of legal policy and institutional design, “there is broad consensus that social science should be taken into account.”42 Just as with many areas of international law and policy, the claims regarding effectiveness of international investment law, including in the context of fostering good governance and the rule of law in host States, remain empirically and theoretically untested.43 39 Echandi, What Do Developing Countries Expect, 13. 40 Schill, Multilateralization, 373. 41 Anne van Aaken, “Towards Behavioral International Law and Economics,” University of Illinois Law Review 1 (2008): 47, 51. 42 Ibid., 51. 43 Except for a burgeoning body of research, including recent studies authored by Jonathan Bonnitcha, Emma Aisbett, Lauge Poulsen, Jason Yackee and Susan Franck. Although Bonnitcha has examined the impact of investment treaty law on government decisionmaking, the focus, thrust and methodology of his research are different from that which

The Impact of Investment Treaty Law on Host State Behavior

175

This project intends to fill this gap and examine the interplay between investment treaty disciplines and governmental conduct by focusing on the so-called incentive effects of investment treaty rules on bureaucratic behavior. If host States are expected to respond to investment treaty norms by adjusting their legal orders and ensuring ex ante compliance with the prescribed standards of governmental conduct, government officials ought to understand the scope and meaning of investment protection guarantees under existing bilateral and multilateral agreements. To what extent are government officials actually aware of and influenced by investment treaty disciplines in making their decisions? Preliminary empirical insights drawn from tentative case-studies involving government officials in developing States suggest that decision-makers with whom investors interact in the course of their business are rarely if at all aware of the fact that their behavior may lead to host State liability.44 Most of them are similarly uninformed of the very existence and relevance of investment treaty instruments in investor-host government relations. This lack of awareness has been discerned not only among government officials in local and regional governmental bodies but also among high-ranking officers at the top of government hierarchy. Interestingly, the surveyed officials were unaware of international investment law even after respective countries had been exposed to investment arbitration claims. The fact that those who interact with foreign investors have limited if any knowledge of investment law standards (to which host States have committed themselves and which would serve as benchmarks in assessing legality of their conduct) casts doubt on the deterrent effect of investment treaties, and in particular, their capacity to transform governance practices at the domestic level. The claim that investment treaty law and its remedial mechanism promote good governance in host States is premised on the assumption that governments are rational decision-makers, and that the monetary consequences will

44

we use in this project. See respectively Jonathan Bonnitcha and Emma Aisbett, “An Economic Analysis of the Substantive Protections Provided by Investment Treaties,” in Yearbook on International Investment Law & Policy 2011–2012, ed. Karl Sauvant et al (New York: Oxford University Press, 2013), 681–204; Lauge N. Skovgaard Poulsen and Emma Aisbett, “When the Claims Hit: Bilateral Investment Treaties and Bounded Rational Learning”, World Politics 65, no. 2 (2013) 273–313; Jason Webb Yackee, “Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence,” Virginia Journal of International Law 51, no. 2 (2010–2011) 397–441; Susan D. Franck, “Development and Outcomes of Investment Treaty Arbitration,” Harvard Journal of International Law 50, no. 2 (2009): 435–489. By the time of finalizing this chapter, the author completed small scale interviews in 4 developing countries which had exposure to investment treaty claims.

176

Sattorova

necessarily lead to preventative practices in the form of better decision-making and ex ante compliance with investment treaty standards. Again, however, much of the existing scholarship tends to assume rather than examine in any real detail the impact of investment treaty remedies beyond the immediate effect of damages awards on the economic interests of investors.45 To what extent can States and public officials involved in investor-State relations be viewed as rational actors? A wealth of useful insights can be drawn from emerging empirical evaluations as well as interdisciplinary legal studies, including law and economics and behavioral legal analyses of the effect of liability rules on the behavior of the State.46 The assumption that States and public officials are rational actors is based on the premise that, under conditions of resource-scarcity, humans act as utility-maximizing, self-interested beings that respond to incentives in accordance with stable preference-ordering. When applied to investment treaty law, this assumption raises at least two questions: (1) what is the relationship between individual acts and collective decisionmaking in the context of governmental conduct that affects a foreign investor? (2) what would ‘preference ordering’ mean in a concrete situation involving a government official in a developing/underdeveloped host State? Experimental and empirical research has already shown that in many cases human behavior diverges from theoretical assumptions about rationality. To mention one example, as part of their recent study into why states sign investment treaties, Aisbett and Poulsen have concluded that developing countries have acted “predictably irrationally” by ignoring available information about the consequences of investment treaties and their potency.47 It should also be acknowledged that “individuals’ behavior and normative choices are significantly affected by the social context and socio-cultural factors.”48 Human action is not only “shaped by relevant economic constraints but also highly affected by people’s endogenous preferences, knowledge, skills, 45

So far, the majority of scholarly works positing a transformative effect of investment treaties on domestic governance contain no reference to empirical or other evidence to support the existence of such an effect. See Schill, The Multilateralization of International Investment Law, 377; Muchlinski, Ortino and Christoph Schreuer, Preface, vi; Dolzer, The Impact of International Investment Treaties, 972; Vandevelde, Model Bilateral Investment Treaties, 313; and Echandi, What Do Developing Countries Expect, 13. 46 See Bonnitcha and Aisbett, An Economic Analysis of the Substantive Protections, 681–204; Poulsen and Aisbett, When the Claims Hit, 273–313; Yackee, Do Bilateral Investment Treaties Promote Foreign Direct Investment?, 397–441; and Franck, Development and Outcomes of Investment Treaty Arbitration, 435–489. 47 Poulsen and Aisbett, When the Claims Hit, 301. 48 Hirsch, Sociology, 145.

The Impact of Investment Treaty Law on Host State Behavior

177

endowments, and a variety of psychological and physical constraints.”49 Indeed, bureaucratic behavior in developing States can be significantly influenced by conditions that are dramatically different from those in which western bureaucrats operate. Furthermore, international investment disputes usually arise from investor encounters with individual bureaucrats as well as with collective decision-makers. Each of these should be analyzed separately as individual and collective conduct may be subject to different influences. As Broude suggests, methodological statism ought to be avoided in favor of “recognition that states do not make decisions relating to international law; people do, or most often, groups of people.”50 Given that many decisions on compliance or non-compliance with international law are ultimately made by individuals,51 would holding a host government to monetary liability have a subsequent deterrent effect and promote ex ante compliance with investment treaty rules, thus arguably leading to improved governance at a national level? In theory, the imposition of monetary liability on the State should compel a governmental agency to assume a responsibility for detecting, identifying, and controlling risk-increasing activities in which its departments and employees engage.52 Governments could be expected to put in place risk management measures to identify potential exposure to, and reduce the probability and magnitude of monetary liability.53 Such measures may include employee training programs and remuneration policies that link the cost of governmental responsibility to salaries and promotions. The capacity of the external regime to induce government officials to act in a certain manner and to refrain from certain types of behavior will hinge on the targeted government’s “monitoring ability”.54 A lack of proper incentive to avoid harm arises where neither the government nor its employees bear the costs of the harms that they cause.55 Thus, in order for investment treaty law to 49

50 51 52 53 54 55

Tomer Broude, “Behavioural International Law” Hebrew University of Jerusalem Interna­ tional Law Forum Research Paper No. 12–13 (2013), 20–21, accessed January 30, 2014, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2320375, citing Francesco Parisi and Vernon Smith, “The Law and Economics of Irrational Behavior: An Introduction”, in The Law and Economics of Irrational Behaviour, (Stanford University Press, 2005), 1. Ibid., 40. Ibid., 44. David Cohen, “Regulating Regulators: The Legal Environment of the State,” University of Toronto Law Journal 40 (1990): 245. Ibid., 246. Eric A. Posner and Alan O. Sykes, Economic Foundations of International Law (Cambridge, Mass.: Harvard University Press, 2013), 115. Ibid., 115.

178

Sattorova

have an incentivizing and transformative effect on national governance practices in a host State, an internal loss-allocation regime should be in place to ensure that monetary losses incurred as a result of damages awards are shifted to a governmental agency which has managerial, supervisory, and budgetary authority and political power over bureaucrats whose activities lead to state liability.56 However, in practice imposing liability on host governments does not necessarily lead to a risk-averse bureaucratic behavior. This preliminary conclusion draws on sample case-studies of national legal rules governing the payment of damages in connection with claims against state organs and government officials.57 It transpires that governments may often fail to respond to liability rules in the expected manner, and this finding undermines the strength of arguments postulating the positive impact of investment treaty norms on governance in host States. Sociologically, the very ability of the host government to act sensitively and thus respond to the harmful consequences of international liability by changing relevant practices can be severely circumscribed by the very weaknesses in the domestic legal and bureaucratic culture which international investment law can allegedly improve. Such shortcomings interfere with government ability to create and maintain an effective internal lossallocation mechanism. Governments in democratic States with high levels of institutional capacity are more likely to show sensitivity to the imposition of international liability than those with a long record of pervasive corruption and cronyism.58 6.5

The Negative Impact of Investment Treaty Remedies: Deterring Good Governance?

Theoretically, if one accepts the argument that investment treaty standards and the imposition of monetary liability for their breach would act as a powerful incentive to change bureaucratic practices and culture in host States, then the very existence of such an incentivizing effect can be seen as confirming the 56 Cohen, Regulating Regulators, 213. 57 On file with the author; these preliminary studies looked into the legislation in a developing country, two developed States and two emerging economies. 58 A somewhat similar conclusion has been made by Aisbett and Poulsen, who suggest that developing country governments may be “more prone to biased processing of information about the implications of BITs than developed country counterparts with higher levels of administrative capacity.” See Poulsen and Aisbett, When the Claims Hit, 302.

The Impact of Investment Treaty Law on Host State Behavior

179

possibility of a chilling effect on government decision-making. Put differently, if investment treaty law is capable of producing a transformative effect on government behavior, there is a likelihood that such effect will not always be positive (i.e. stimulate compliance with good governance standards) but in some cases negative (i.e. inhibit governments from otherwise desirable action and lead to the so-called regulatory chill). The existence of a chilling effect of investment treaty law on national regulatory activity is a matter of an ongoing scholarly debate, particularly in the context of a clash between investment protection and States’ regulatory freedom to pursue environment protection, health and safety, and other public policy measures. Some scholars have argued that investment treaties “should not lead to a chill on environmental regulation nor obstruct measures that are introduced in an attempt to mitigate climate change.”59 This proposition, however, does not engage with empirical and theoretical studies on the effect of international rules on government conduct. Other contributions to the debate indicate that international investment treaties are likely to and in some cases do have a chilling effect on regulatory conduct.60 The aim of this project is not to record the fact that investment treaties restrict regulatory powers but rather to test this claim from various angles. First, the effect of investment treaty norms on government decision-making needs to be examined against the backdrop of existing scholarship on regulatory chill in international economic law, with focus on qualitative evidence of a chilling effect of international norms on policy-making in such areas as environment protection and renewable energy development. It has been reported, for instance, that even in polities such as the EU, regulatory innovation can be hampered by a threat of international review and economic sanctions.61 59 60

61

Stephan Schill, “Do Investment Treaties Chill Unilateral State Regulation to Mitigate Climate Change?,” Journal of International Arbitration 24, no. 5 (2007): 469. See e.g. Emily Barrett Lydgate, “Biofuels, Sustainability, and Trade-related Regulatory Chill,” Journal of International Economic Law 15, no. 1 (2012): 157; Kyla Tienhaara, “Regulatory Chill and the Threat of Arbitration: A View From Political Science,” in Evolution in Investment Treaty Law and Arbitration, ed. Chester Brown and Kate Miles (Cambridge: Cambridge University Press, 2011), 606–628. It has been reported that suggestions for a stronger articulation of environmental and sustainability requirements in the EU Renewable Energy Directive failed to make way into the final version of the document since a compromise had to be made between the EU’s commitment to environment protection and sustainable development and its obligations under multilateral trade agreements. The European Commission has acknowledged that the desire to prevent claims under WTO law was a motivating factor for not adopting stronger criteria. See Lydgate, Biofuels, 164.

180

Sattorova

Second, it is suggested that regulatory chill should be examined as a form of excessive risk-reduction strategy triggered by the imposition of monetary liability on the host State. Host States where internal risk-reduction mechanisms are in place are likely to be more susceptible to a chilling effect of investment treaty norms. This preliminary conclusion is supported by a recent study on bounded rationality, which suggests that decision-making in the investment treaty context varies with the extent of expertise in relevant government agencies and that developed countries with higher levels of administrative capacity may display different patterns of learning from their investment treaty experience.62 Another neglected facet of the relationship between good governance and regulatory chill is the fact that good governance is not confined to the requirements of transparency and consistency in dealing with foreign investors; it should also encompass the host State’s obligation to adopt and implement policies that address challenges faced by a modern society, including protection of the environment, mitigation of climate change, and safeguarding of human rights. If States are expected to comply with good governance standards in their treatment of foreign investors, they should be afforded the corresponding degree of regulatory flexibility to ensure good governance in pursuing other policy objectives. Finally, not only may developing countries respond differently to investment treaty norms than their more developed counterparts, but the effect of such norms – be it incentivizing or chilling – may also take different forms. Quite apart from fostering good governance and the rule of law in host States, investment treaty law may have a chilling effect not just by subjecting host governments to the threat of monetary liability but also by exposing them to the vagaries of inconsistency, ambiguity and unpredictable interpretation of its substantive provisions.63 Likewise, the imposition of stringent and demanding good governance standards on host States tends to highlight the difference in the respective positions of domestic and foreign claimants: the former can rarely if ever avail themselves of the opportunity to obtain monetary damages against their own governments, let alone on such grounds as a failure to maintain transparency, stability and predictability. Scholars have persuasively argued that “requiring governments to compensate foreign investors for their losses, while not extending equivalent protection to other private actors, is likely to lead decision-makers to over-value the interests of foreign

62 Poulsen and Aisbett, When the Claims Hit, 302. 63 UNCTAD, Fair and Equitable Treatment, 12.

The Impact of Investment Treaty Law on Host State Behavior

181

investors.”64 Holding the State liable for failing to maintain good governance standards vis-à-vis foreign investors may translate into a pressure to treat foreign investors better than other businesses, as opposed to changing the generally prevailing governance culture and practices that had led to liability in the first place. There is little doubt that over-valuing foreign investors’ interests is unlikely to benefit host communities through a spill-over of good governance practices into the domestic sphere.65 Instead, the disadvantaging of domestic investors may lead to the internal political opposition and backlash against investment treaty law.66 The very fact that investment treaty remedies may lead to domestic discontent, backlash and even withdrawal shows that States do not always respond to such remedies positively. 6.6

The Role of Remedy Design in Inducing Compliance with Investment Treaty Rules: Functional, Sociological, and Comparative Observations

The focus of the foregoing analysis was on the conceptual flaws and practical problems besetting the argument that claims a transformative impact of investment treaty law on governance in host States. Given its historical origins and existing design, the international investment regime appears to be an unlikely candidate for bringing about positive transformation in legal and bureaucratic culture and practices in host States. This, however, does not obviate the need to examine how the regime could be reformed and optimized to facilitate its good governance mission, including whether and how ex ante compliance with investment treaty prescriptions could be maximized through re-calibration of investment treaty remedies. In examining the effectiveness of monetary sanctions as a means of encouraging host governments to improve domestic governance, one can start with an observation that “the gains of economic liberalization should not be lost to its beneficiaries”.67 It has been shown earlier, with reference to the genesis of 64

Jonathan Bonnitcha, “Outline of a Normative Framework for Evaluating Interpretations of Investment Treaty Protections” in Evolution in Investment Treaty Law and Arbitration, ed. Chester Brown and Kate Miles (Cambridge: Cambridge University Press, 2011), 128. 65 Ginsburg, International Substitutes for Domestic Institutions, 121. 66 See Michael Waibel et al, ed., The Backlash against Investment Arbitration (Alphen aan den Rijn: Kluwer Law International, 2010). 67 Celine Tan, “The New Disciplinary Framework: Conditionality, New Aid Architecture and Global Economic Governance” in International economic law, globalization and develop­ ing countries, ed. Celine Tan and Julio Faundez (Cheltenham: Edward Elgar, 2010), 122.

182

Sattorova

good governance standards in investment treaty law, that the creation of the international investment regime was historically justified by the need to foster economic development. Yet can good governance, and for that matter, economic development be fostered through the externally imposed and crippling financial sanctions on host States? Political science literature offers interesting insights: in areas where furthering policy reforms is an express and primary mandate of relevant international institutions, the implementation of regulatory and legal changes in national frameworks has been encouraged by a promise of financial assistance rather than a threat of financial sanctions. To mention some pertinent examples, World Bank and IMF norms “have transformed, or are in the process of transforming, domestic administration in large parts of the world.”68 A parallel can also be drawn with the politics of conditionality – a bargaining strategy of reinforcement by reward69 – deployed by the European Union as part of its rule of law initiatives in the context of EU enlargement. In prompting the targeted post-communist countries in Eastern and Central Europe to embrace certain standards of good governance, the EU did not resort to reinforcement by support (unconditional assistance) or reinforcement by punishment (inflicting extra costs for failing to comply). Rather, it has followed a strategy of reinforcement by reward, with rewards delivered in cases of rule adoption and withheld in cases of non-compliance.70 This raises questions about the strategy of reinforcement by punishment which lies at heart of the remedial mechanism through which international investment law can allegedly transform domestic governance. Can host States be coerced into embracing good governance values? Is it fair, desirable, and effective to hold a host State to monetary liability for failing to ensure good governance, where such failure is the result of the host State’s lack of financial, institutional, political and social capacity? The role of the currently prevailing monetary remedies in inducing ex ante compliance by host State authorities with first order investment treaty rules (and facilitating a positive impact on national governance) cannot be fully examined without analyzing the goal and design of remedies. Notwithstanding a large and growing body of scholarship engaging with various aspects of investment treaty remedies, the question of their function and goals remains largely unexplored. An overview of scholarly debates over remedies in GATT/ 68 69

70

Kingsbury, Krisch and Stewart, The Emergence of Global Administrative Law, 37. Frank Schimmelfennig and Ulrich Sedelmayer, “Governance by Conditionality: EU Rule Transfer to the Candidate Countries of Central and Eastern Europe,” Journal of European Public Policy 11, no. 4 (2004): 662. Ibid.

The Impact of Investment Treaty Law on Host State Behavior

183

WTO law offers useful insights.71 The primary remedy for a breach of multilateral trade rules is withdrawal (or modification) of a breaching measure. Compensation and suspension of concessions (also known as retaliation) are also available but not as an alternative to withdrawal; rather, compensation and retaliation can be used as temporary remedies pending the withdrawal of an inconsistent measure by the offending member. While the principal aim of withdrawal is to ensure compliance with multilateral trade rules, the goals of temporary remedies, including that of retaliation, have been the subject of scholarly debates. Pauwelyn, for instance, observes that “there has been a gradual evolution from ‘compensation’ (or simple rebalancing) to ‘sanction’ (or rule compliance).”72 Drawing on the negotiating history of the GATT/WTO, he concludes that “the movement from GATT to WTO has been one from regarding retaliation as aimed at rebalancing or compensation in GATT, to inducing compliance or sanction in WTO.”73 In contrast with GATT/WTO law, pecuniary relief – the remedy of damages – has traditionally been regarded as a principal form of redress and a primary means of enforcing substantive investment protections. What is the goal of the remedy of damages in international investment law? Is it to induce compliance with substantive protection rules or to rebalance economic interests of parties to an investment dispute by compensating the aggrieved investor? From a historical and doctrinal perspective, the long-standing emphasis on monetary redress and the fact that the latter has rarely been accompanied by other remedies74 suggests that the primary goal of the remedial mechanism of international investment law has been to rebalance. The focus is thus on the victim (a foreign investor) and on eliminating negative economic consequences she incurred as a result of a breach. 71

72

73 74

See Article 3.7 of the Understanding on Rules and Procedures Governing the Settlement of Disputes, Annex 2 of the Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867 U.N.T.S. 154. See also, Peter van den Bossche, The Law and Policy of the World Trade Organization: Text, Cases and Materials, 2nd ed. (Cambridge: Cambridge University Press, 2008), 218–233. Joost Pauwelyn, “The Calculation and Design of Trade Retaliation in Context: What is the Goal of Suspending WTO obligations?”, in, The Law, Economics and Politics of Retaliation in WTO Dispute Settlement, eds. Chad P. Bown and Joost Pauwelyn (Cambridge University Press, 2010) 36. Ibid. For an overview and discussion of primary and secondary remedies in investment treaty law, see OECD, “Investor-State Dispute Settlement: Summary Reports by Experts at 16th Freedom of Information Roundtable”, OECD, Investment Division (Mar. 20, 2012), accessed January 30, 2014, http://www.oecd.org/daf/inv/investment-policy/50241347.pdf.

184

Sattorova

Contrastingly, had the primary goal been to induce compliance, the remedies would have been focused on the breaching party, i.e. the host State, and on the need to punish it to deter future violations and induce it into acting in accordance with standards prescribed by international investment treaties. In view of the traditional focus on restoring economic interests of aggrieved investors, one could argue that compliance, including ex ante compliance, has not been the primary goal of remedies in international investment law. This evidence provides an antithesis to the argument postulating the capacity of investment treaty law to induce governments into ex ante compliance and to foster the rule of law and good governance on a national scale. Far from being aimed at achieving ex ante compliance, international investment law can in fact be seen as enabling host States to violate their commitments. In her recent analysis of remedy design, Brewster has convincingly shown that “[d]ispute settlement provisions can sometimes make international obligations easier to breach, and governments may design dispute resolution systems to facilitate breach, rather than deter it. Where dispute resolution systems include specific remedy provisions, the system may price breach, permitting states to deviate from the agreement as long as the remedy is paid.”75 Indeed, whilst the function of remedies – even of those aimed at rebalancing economic interests – is to punish and disapprove, they can also operate as “permission, even entitlement, to undertake certain actions” and a “license to engage in behavior at a certain cost.”76 This is certainly true of redress to which investors are entitled under expropriation clauses in international investment agreements: States are allowed to expropriate foreign investment as long as expropriation is accompanied by the payment of compensation. One can only agree that “the structure of the remedy – one of compensation, without any assessment or incorporation of fault – indicates that the bilateral investment treaties is a pricing scheme.”77 Thus, where the costs of breaching investment treaty provisions are less than the host State’s gain from the same breach, the availability of monetary remedies may render it considerably more attractive for the State to choose breach over compliance. So, “have [the States] promised to adopt policies that conform to the policy terms of the treaty, or have they only promised to provide a set level of compensation?”78 As noted earlier, the design of first order rules in investment 75 76 77 78

Rachel Brewster, “Pricing Compliance: When Formal Remedies Displace Reputations Sanctions,” Harvard International Law Journal 54, no. 2 (2013): 259. Ibid., 271–272. Ibid., 294. Ibid., 279.

The Impact of Investment Treaty Law on Host State Behavior

185

treaties is not such that allows interpreting them as promises to conform to specific policy terms. Investment treaty protections lack the requisite specificity, and are frequently phrased negatively as a promise to refrain from certain types of behavior. Investment treaty remedies too, are more readily classified as a promise to pay compensation than a commitment to comply. Indeed, it has been observed earlier that the primacy of monetary remedies and the relatively limited role of non-pecuniary relief in investment treaty law points to the subordinate role that compliance plays in the hierarchy of the regime’s goals. Thus, if host governments are allowed to not comply with substantive investment treaty prescriptions, it becomes all the more difficult to convincingly maintain that the existing regime could bring about a positive transformation in governance practices in host States through a spillover of good governance standards into the domestic sphere. If good governance standards that form part of investment treaty protections can themselves be ignored in return for the payment of compensation, it is difficult to envisage how host States would be motivated to commit to the same standards in domestic settings. Undeterred by the existing investment treaty remedy design, host States are not properly incentivized to undertake domestic reform and inculcate good governance standards in national legal and bureaucratic culture. Might a re-orientation of international investment law towards greater use of non-pecuniary remedies facilitate ex ante compliance with its prescriptions? The desirability of monetary remedies in the long term has been questioned in a number of scholarly sources and policy discussions.79 The traditional opposition to non-pecuniary remedies in the investment treaty context may in fact be gradually abating, even despite Article 54 of the ICSID Convention offering what many consider as limited enforcement possibilities. In his seminal paper on the subject, Schreuer has examined jurisprudence of international courts and tribunals, as well as the drafting history of the ICSID Convention to conclude that investment tribunals have the power to grant non-pecuniary remedies.80 Non-pecuniary relief has been awarded in investor-State arbitration, including in ICSID cases.81 Insofar as its capacity to induce governments to act in a certain way is concerned, non-pecuniary relief appears to be a functionally more suitable alternative to the remedy of damages. 79 See, OECD, 16th Freedom of Information Roundtable. 80 Christoph Schreuer, “Non-pecuniary Remedies in ICSID Arbitration” Arbitration International 20, no. 4 (2004): 325. 81 Of more recent cases, see e.g. ATA Construction, Industrial and Trading Company v. The Hashemite Kingdom of Jordan, ICSID Case No. ARB/08/2, Award (May 12, 2010).

186

Sattorova

However, if investment treaty law were more receptive to the use of nonpecuniary remedies that focus on compliance rather than enabling host States to “breach and pay”, would that enhance the regime’s capacity to foster good governance and the rule of law at a national level? In most cases, the choice of remedy would be dictated by a claimant-investor who may prefer to request non-pecuniary relief only in those situations where compliance by the State with investment treaty rules is in the investor’s best economic interests, not because the investor is concerned about the long-term positive consequences of non-pecuniary remedies on host State behavior and its compliance record. Tribunals, too, may have a certain degree of discretion in choosing the appropriate remedy; however, the ultimate choice will usually be determined by their mandate which is to resolve the dispute as opposed to promoting good governance and the rule of law in host States. Thus, the capacity of investment treaty law to command ex ante compliance and induce governments to act in a certain way hinges on the institutional design of the investment dispute settlement mechanism and the allocation of power and control between its key players. 6.7 Conclusion Why this project and why this chapter? The overarching aim of the project is to unpack existing assumptions concerning the effects of international investment law on host State conduct and the function of remedies in achieving investment treaty objectives as regards the promotion of good governance and rule of law in the domestic legal environment. The project is conceived to facilitate a more informed development of international investment law by contributing to a better understanding of its evolving functions and factors influencing compliance with its prescriptions at national and international levels. By focusing on the relationship between international investment law and host State behavior, the project aims to uncover some of the hitherto less explored aspects of the interplay between national legal systems and international law in general. This, in turn, will provide a basis for analyzing the ways in which such a relationship can be optimized, including through the creation of requisite legal and institutional mechanisms. The purpose of this chapter was to introduce the project and outline its research agenda, thus contributing to a burgeoning debate over the broader effects of the international investment  regime on host communities and over the role of domestic agencies in shaping international law through their involvement in implementing its prescriptions.

chapter 7

Domestic Demands and International Agreements What Causes Investor State Disputes? Zoe Williams 7.1 Introduction International Investment Agreements (IIAs) – either bilateral investment treaties (BITs) or investment chapters embedded in broader trade agreements – commit States to the protection of the rights of foreign investors by means of substantive provisions and an arbitration mechanism. For States interested in attracting foreign capital, investment treaties are a way of signaling a commitment to liberal market policies; they proscribe certain State behavior, and the arbitration mechanism allows foreign investors to challenge States over policy measures or other state actions perceived to negatively affect an investment. This has sovereignty costs for States and potential implications for their ability to pursue public policy options.1 The impact of the investment regime on States’ ability to balance the potentially competing goals of investment protection and regulatory flexibility or policy space is attracting increasing attention in the investment community as well as among States and international organizations.2 “In contrast to the security arena, political and legal analysts have tended to assume that there is a very high degree of compliance with most international commercial law […] there is no realistic alternative to cooperation; no State would want to risk withdrawal from the network of liberalizing treaties that presumably have done so much to further market integration.”3 However, * Zoe Williams, Ph.D Candidate, Berlin Graduate School of Transnational Studies, Hertie School of Governance, [email protected]. 1 Zachary Elkins, Andrew T. Guzman, and Beth a. Simmons, “Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000,” International Organization 60, no. 04 (October 25, 2006). 2 UNCTAD’s recently launched Investment Policy Framework for Sustainable Development attempts to address these issues. United Nations Conference on Trade and Development (UNCTAD), Investment Policy Framework for Sustainable Development, 2012. 3 Beth Simmons, “Treaty Compliance and Violation,” Annual Review of Political Science 13, no. 1 (May 2010): 283.

© koninklijke brill nv, leiden, 2015 | doi 10.1163/9789004282254_011

188

Williams

critics of the regime argue that in signing investment agreements, States are relinquishing control over domestic regulatory decisions, and thus constraining their domestic ‘policy space’.4 The growing number of investor-State disputes5 demonstrates that States are still (or increasingly, in some regions) taking measures at the domestic level that contravene investors’ rights.6 Under what political or economic conditions are States most likely to enter into disputes with investors? Furthermore, for what domestic purposes do they do so? This contribution is based on initial work on a dataset of investor-State disputes from 1990–2012, and a review of related literature. A number of possible hypotheses are put forward regarding the conditions under which States are more likely to enter into a dispute with investors, and preliminary results indicate that domestic political pressures have an impact on the likelihood of investor-State disputes. From an international relations (IR) perspective, this can easily be understood as a study on compliance with international agreements. However, the regime-focused explanations of compliance in IR may not provide the best tools to understand investor-State disputes, and the focus of this research is not on ultimate compliance with IIAs, but on the domestic conditions under which investor-State disputes arise. The literature on political risk and expropriation provides a theoretical jumping-off point, as determinants of political risk and expropriation are clearly relevant to investor-State disputes. However, an overview of investorState disputes indicates that outright expropriations are not the basis for the majority of investor claims. States take a wide variety of regulatory measures which may be perceived by investors as violations of IIAs. Therefore, investorState disputes under the current investment regime may not be best explained by the literature on the determinants of political risk, which has focused narrowly on expropriation. Moreover, the statistical results presented at the end of this chapter raise more questions about the common conclusions found in the political risk literature. Specifically, under the investment protection regime, democracies appear more likely to be involved in investor-State disputes than non-democracies, challenging the assumption that governments 4 Nicole Yazbek, “Bilateral Investment Treaties: The Foreclosure of Domestic Policy Space,” South African Journal of International Affairs 17, no. 1 (April 2010): 103–120. 5 Fifty-eight new cases were filed in 2012 – the highest number of new cases ever to be filed in one year. There has been a steady increase of cases filed per year since the mid-1990s. UNCTAD, World Investment Report 2013: Global Value Chains: Investment and Trade for Development, 110 (Geneva: United Nations, 2013), accessed January 29, 2014, http://unctad .org/en/pages/PublicationWebflyer.aspx?publicationid=588. 6 Nathalie Bernasconi-Osterwalder et al., Investment Treaties & Why They Matter to Sustainable Development: Questions and Answers (Winnipeg, 2012).

Domestic Demands And International Agreements

189

facing more political constraints and holding democratic values will be less likely to violate treaties. While much scholarly work has been done on political risk determinants and expropriation, there appears to be very little research focusing on factors related to investor-State disputes beyond expropriation. This is surprising, given the acknowledgement in both academic and international governmental organization (IGO) and non-governmental organization (NGO) accounts of the increasing number of investor-State arbitration proceedings, and the criticism directed at the regime from both legal and development perspectives.7 Indeed, these treaties and their attendant arbitration mechanisms combine public and private actors in rule-making and monitoring, and endow transnational actors with a significant role in defining policy possibilities at the domestic level. Thus, the international investment regime is vulnerable to the criticism leveled against much of global governance – that it is undemocratic, excludes important policy decisions from the public (political) realm and exhibits an over-reliance on the neutrality of international law.8 Research on the “whys” and “hows” of investor-State disputes also contributes to a broader discussion of the ways in which States navigate through the competing demands placed on them by public and private actors at home and internationally in the context of economic liberalization. 7.2

Background: FDI and IIAs

7.2.1 Foreign Direct Investment (FDI) While an important source of capital, especially for developing countries, the economic and political impact of FDI on host States remains ambiguous. Beyond generating foreign exchange, FDI can contribute to technology transfer, 7 Gus Van Harten, “Private Authority and Transnational Governance: The Contours of the International System of Investor Protection,” Review of International Political Economy 12, no. 4 (October 2005): 600–623; Benedict Kingsbury and Stephan Schill, “Investor-State Arbitration as Governance: Fair and Equitable Treatment, Proportionality and the Emerging Global Administrative Law,” NYU School of Law, Public Law Research Paper No. 09–46 (September 2, 2009), accessed January 30, 2014, http://ssrn.com/abstract=1466980 or http://dx.doi.org/10.2139/ssrn.1466980; Susan D Franck, “Development and Outcomes of Investment Treaty Arbitration” (2009): 1–56., Harvard International Law Journal 50, no. 2 (2009): 448–453. 8 Nitsan Chorev, “The Institutional Project of Neo-Liberal Globalism: The Case of the WTO,” Theory and Society 34, no. 3 (2005): 317–355; David Schneiderman, “Investment Rules and the New Constitutionalism,” Law and Social Inquiry 25, no. 3 (July 2000): 757–787.

190

Williams

the spread of new management practices, and increased levels of employment at higher wages in the host country.9 However, a number of possible drawbacks include the crowding out of domestic industries and the creation of greater inequality. Moreover, the increased presence of foreign firms may generate political resistance if it is perceived that these firms wield an undue influence over national governments.10 Negative host population perceptions of FDI may be accompanied by increased political risk for investors. Political risk factors include war and civil unrest, changes in rules and regulations concerning FDI, and financial measures that restrict activities of business.11 Although outright expropriations have declined, IIAs are meant to secure investors from this type of political risk, as well as other, less extreme State measures. 7.2.2 Why States Sign Investment Treaties As Büthe and Milner argue, the most pressing political problem for governments of developing countries who wish to attract FDI is to ensure potential investors of their commitment to liberal economic policies; arguably, in the absence of a Multilateral Agreement on Investment (MAI), bilateral investment treaties (BITs) have become the most viable means of making these assurances.12 Thus, investment treaties have two primary purposes. Capi­ tal  exporting countries sign IIAs in order “to secure additional and higher standards of legal protection and guarantees for the investments of [their] firms than those offered under national laws” of the host State.13 To this end, investment treaties protect investor rights by means of treaty provisions as 9

Imad A Moosa, Foreign Direct Investment Theory, Evidence and Practice, 2003 (New York: Palgrave, 2002); S.L. Reiter and H. Kevin Steensma, “Human Development and Foreign Direct Investment in Developing Countries: The Influence of FDI Policy and Corruption,” World Development 38, no. 12 (December 2010): 1678–1691. 10 Moosa, Foreign Direct Investment Theory, Evidence and Practice. 11 Nathan M Jensen and Rene Lindstadt, “Globalization with Whom: Context Dependent Foreign Direct Investment Preferences” (St. Louis, 2013), http://pages.wustl.edu/files/ pages/imce/nathanjensen/globalization_with_whom_working_paper.pdf. 12 Tim Buthe and Helen Milner, “The Interaction of International and Domestic Institutions: Preferential Trade Agreements, Democracy and Foreign Direct Investment,” in 108th Annual Meeting of the American Political Science Association, Panel 16-15/17-4 (IPE/Int’l Collaboration), "The Domestic and International Politics of Economic Liberalization: Causes and Consequences of Trade Agreements (New Orleans, 2012). http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=2106599. 13 Paul Haslam, “BITing Back: Bilateral Investment Treaties and the Struggle to Define an Investment Regime for the Americas,” Policy and Society 23, no. 3 (January 2004): 196.

Domestic Demands And International Agreements

191

well as by significantly raising the ex post costs of non-compliance through the arbitration mechanism.14 For capital importing countries, IIAs signal a commitment to the promotion and protection of investment, increasing, at least in theory, their ability to attract FDI;15 States are most likely to sign IIAs when they have low credibility in the eyes of possible investors; when their regional neighbors do; and when they are competing for investment in relatively footloose industries (i.e. manufacturing as opposed to extractives or primary goods).16 Moreover, by signing an IIA, governments hope to commit future leaders to the maintenance of the same liberal economic policies, thereby reducing the time inconsistency problem. 7.2.3 Concerns The international investment regime enshrined in IIAs raises a number of concerns related to the constitutive nature of the regime itself, as well as the effect of the agreements and investor-State arbitration on States’ regulatory capacity or domestic ‘policy space’.17 The ability of foreign corporations and individuals to make claims against States is a major development in international law, and represents a shift in adjudicative authority, as legal or regulatory changes that affect investors may be subject to review by an arbitration tribunal.18 Overall, critics argue that the investor rights enshrined in BITs and enforced through private arbitration represent a significant shift in power from States to private investors.19 It is important to remember that, from a development perspective, FDI inflows alone are not a panacea for developing countries, and the positive impacts of FDI noted above may not be realized if States are unable to strike

14 15

16 17 18 19

Elkins, Guzman, and Simmons, “Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000.” Whether BITs actually increase investment flows is contested (See Gus Van Harten, “Five Justifications for Investment Treaties: A Critical Discussion,” Trade, Law & Development. 2, no. 1 (2010): 19–58, accessed January 30, 2014, http://ssrn.com/abstract=1622928. Elkins, Guzman, and Simmons, “Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000.” 825–827. Yazbek, “Bilateral Investment Treaties: The Foreclosure of Domestic Policy Space.” 103–120. Elkins, Guzman, and Simmons, “Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000.” Gus Van Harten, “Private Authority and Transnational Governance: The Contours of the International System of Investor Protection.” (2004), Review of International Political Economy 12, no. 4 (October 2005): 600–623, accessed January 30, 2014, http://ssrn.com/ abstract=1468690.

192

Williams

the right balance between markets and government; “FDI inward flows are more positively related to human development when FDI policy strategically  controls foreign investment by limiting the economic sectors open to foreign investment or by discriminating against foreign investors in favor of domestic ones.”20 7.3

Review of the Literature

Under the investment protection regime, state actors operate in an environment of competing pressures. On the one hand, the international investment regime holds States to demanding, if at times vague, standards of investor protection and domestic liberalization. On the other, domestic constituencies and interest groups may lobby for favorable policies at the national level, which conflict with the interests of foreign investors. Therefore, on the one hand, this research can be framed as a question of compliance with an international agreement, while on the other, it is a question of why States choose to enact certain regulatory policies under a regime which may pose significant costs for doing so. The following literature review discusses the ways in which economic liberalization frames domestic policy as the object instead of the subject of regulation, and how this may affect domestic policy space. It provides a brief overview of the main approaches to compliance with international agreements, as found in the International Relations (IR) literature, and their relevance to IIAs. Finally, drawing from the literature on political risk and expropriation, violation of trade agreements, and public regulation, it presents some key variables which may contribute to investor-State arbitration. 7.3.1 International Legalization and Domestic Regulation This section draws from the literature on the legalization of international relations in order to historically situate the emergence of investment treaties and investor-state arbitration within the relatively recent development of “ever more extensive multilevel governance.”21 While regulating the behavior of States and private actors at the global level is undoubtedly important, global governance may also place competing demands on States; governments are 20 21

Reiter and Steensma, “Human Development and Foreign Direct Investment in Developing Countries: The Influence of FDI Policy and Corruption,” 1680. Ernst-Ulrich Petersmann, “Multilevel Trade Governance in the WTO Requires Multilevel Constitutionalism,” in Constitutionalism, Multilevel Trade Governance and International Economic Law (Oxford: Hart Publishing, 2011), 8.

Domestic Demands And International Agreements

193

increasingly constrained by and beholden to international norms and actors, but they are first and foremost responsible to domestic actors – both voters and powerful interest groups. International relations in the post-Cold War era are increasingly legalized.22 The strengthening of the rule of law at the international level, and the motivation of States to transfer autonomy over legal decisions to international judicial bodies is based on the assumption that law provides a more neutral and predictable means of solving conflict.23 For example, the move from the GATT to the WTO was primarily a product of States’ frustration with the increasing politicization of the former.24 Increasingly, dispute settlement often falls to international tribunals, removing trade disputes from the political sphere of diplomatic relations to the more predictable legal realm.25 Thus, while investment treaties are generally taken as a sign of liberalization, this should not be conflated with less regulation: [i]n spite of a tendency to view globalization as a system in which economic actors act free of political chains, numerous examples suggest rather than a dismantling of the political framework, one merely replaces another. The practice of free trade, for example, requires as many laws, regulations and enforcement mechanisms as closed markets, if not more.26 This move towards legalization may be a necessary facet of economic globalization, as it creates “constitutional rights and an ‘economic constitution’” which aid in the functioning of global markets.27 BITs have remedied 22 23

24

25

26 27

Judith Goldstein et al., “Introduction: Legalization and World Politics,” in Legalization and World Politics (MIT Press, 2001). Anne Marie Slaughter and Kal Raustiala, “International Law, International Relations and Compliance,” in The Handbook of International Relations, ed. Walter Carlsnaes, Thomas Risse, and Beth A. Simmons (London: SAGE Publications Ltd., 2002), 538–558. Alec Stone Sweet, “The New GATT: Dispute Resolution and Judicialization of the Trade Regime,” in Law above Nations: Supranational Courts and the Legalization of Politics, ed. Mary Volcansek (Gainesville: University Press of Florida, 1997), 118–141. Robert O Keohane, Andrew Moravcsik, and Anne-Marie Slaugher, “Legalized Dispute Resolution: Interstate and Transnational,” in Legalization and World Politics (Boston: MIT Press, 2001), 73–104., International Organization 54, no. 3 (July 1, 2000): 457–488, doi:10.2307/2601341. Nitsan Chorev, “The Institutional Project of Neo-Liberal Globalism: The Case of the WTO,” 319. Petersmann, “Multilevel Trade Governance in the WTO Requires Multilevel Constitu­ tionalism,” 14.

194

Williams

deficiencies that existed in foreign investment protection when investors were dependent on home States to advocate on their behalf.28 However, international legalization has an impact on legislative and regulatory processes at the domestic level, thus highlighting the changing spatial nature of regulation as opposed to its outright decline. In order to meet the standards of investment protection, IIAs require States to maintain an appropriate legal and regulatory framework; one that, with the inclusion of a provision that waives the requirement of investors to first seek legal restitution in domestic courts (local remedies), endows unelected arbitrators with the power to decide on the legality of domestic regulation.29 Moreover, the normative content of the investment treaty regime – which privileges property rights while limiting regulatory flexibility and policy space – may directly conflict with domestic interests.30 For example, the salience of the norms of economic liberalization at the domestic level31 may be relevant to situations in which States have repeatedly violated investor treaties or withdrawn completely from the investment regime.32 Of course, conflicts between international and domestic demands are not purely normative but often involve economic and political concerns based on the material interests of domestic actors. Governments may have to make cost-benefit calculations in terms of political and economic costs and rewards when choosing to comply with investment agreements or take measures that are seen by investors as violations of the treaties. 7.3.2 Compliance and IIAs The ways in which States balance potentially competing demands from investors and domestic actors, and specifically, the conditions under which States will risk a dispute with foreign investors can be framed as a discussion of

28

29 30 31

32

Stephan W. Schill, “Crafting the International Economic Order: The Public Function of Investment Treaty Arbitration and Its Significance for the Role of the Arbitrator,” Leiden Journal of International Law 23, no. 02 (April 27, 2010): 401–430. Santiago Montt, State Liability in Investment Treaty Arbitration: Global Constitutional and Administrative Law in the BIT Generation (Oxford: Hart Publishing, 2009), 323–327. Yazbek, “Bilateral Investment Treaties: The Foreclosure of Domestic Policy Space.” Andrew P. Cortell and James W. Davis, “When Norms Clash: International Norms, Domestic Practices, and Japan’s Internalisation of the GATT/ WTO,” Review of International Studies 31, no. 1 (2005): 3–25. Particularly in Latin American countries governed by “new left” leaders, such as Venezuela, Ecuador and Bolivia. These countries have in fact withdrawn from the ICSID, and at least give lip-service to normative motivations for doing so.

Domestic Demands And International Agreements

195

compliance. The following section gives a brief overview of the main approaches to compliance, and how they relate to the international investment protection regime. Compliance with international agreements is a widely explored topic in IR, focusing on both international legal and non-legal agreements and can be defined in a relatively straightforward manner as “rule-consistent behavior of those actors, to whom a rule is formally addressed and whose behavior is targeted by the rule.”33 Two important perspectives – the managerial and enforcement approaches – provide different reasons for compliance which are endogenous to the agreements or regimes themselves. The enforcement approach argues that the widespread observed compliance with international agreements today is largely a result of treaties which do not place heavy demands on States – treaty-compliant behavior is prevalent because States do not negotiate and sign treaties with which they would find it difficult to comply.34 Thus, the deeper the regime (the greater the behavioral changes that the treaty demands) the more important is an attendant enforcement mechanism to ensure compliance; punishment for violations must be greater than the benefits accrued from defecting from the regime.35 According to this perspective, as IIAs are fairly deep once an arbitration has been triggered – they may require significant adjustments at the domestic level that States would not otherwise undertake –violations of these treaties are due to the fact that they place too great of a demand on States compared to domestic pressures, even in the face of possible retribution through the arbitration process. On the other hand, the managerial approach argues that noncompliance is not based on interest calculations but is generally inadvertent – due to a lack of capacity, the vagueness of treaty provisions, and the inflexibility of agreements to accommodate changes over time. Therefore, capacity building and less ambiguous (but perhaps more flexible) treaties will increase compliance.36 IIAs, especially in crisis situations (financial or otherwise), place demands on States that they may be unable to uphold. Similarly, States with weak bureaucracies may simply not have the capacity to respect treaties and 33

34

35 36

T Börzel, “Private Actors on the Rise? The Role of Non-State Actors in Compliance with International Institutions,” Preprints Aus Der Max-Planck-Projektgruppe Recht Der Gemei Schaftsgüter (2000): 4. George W. Downs, David M. Rocke, and Peter N. Barsoom, “Is the Good News about Compliance Good News about Cooperation?,” International Organization 50, no. 3 (1996): 379–406. Ibid. Abrams Chayes and Antonia Handler Chayes, The New Sovereignty. Complinace with International Regulatory Agreements (Cambridge: Harvard University Press, 1995).

196

Williams

disseminate information among various departments and ministries about what compliance with these agreements, often signed by previous administrations, actually entails. Furthermore, as will be discussed below, the real impact of IIAs may not have been understood by governments at the time of signing – often these treaties were thought of as merely diplomatic overtures, and it was many years before an investor first made use of the arbitration mechanism.37 Compliance theory in IR focuses on characteristics of the regime itself that facilitate compliance or violation of international agreements. It does not, however, provide much insight into the domestic conditions which significantly determine the ways in which states interact with international rules. 7.3.3 Expropriation and Political Risk While at times it may be difficult to identify rule-consistent behavior with regards to the investment regime, one type of State behavior that is quite clearly a breach of State responsibility towards investors is expropriation. Perhaps not surprisingly, political risk and the conditions under which expropriations are likely to occur have received a fair amount of scholarly attention. Historically, expropriations were most common throughout the immediate post-colonial period of the 1950s and 1960s, when they were often motivated at least in part by nationalist or left-leaning ideological commitments.38 Other factors identified as contributing to more recent instances of expropriation are civil war, a focus on State-led development, and the host of issues related to State control of natural resources and extractives.39 Domestic political institutions may also determine a government’s propensity to expropriate and the assumption has been that autocracies are more prone to expropriate than democracies. Jensen argues that democracies contain more veto players which make deviations from the status quo – in this case the rules and norms enshrined in the IIA – more difficult.40 Democratic officials are further constrained from enacting anti-investor policies after the 37 38

39

40

Emma Aisbett and Lauge Poulson, “When the Claim Hits: Bilateral Investment Treaties and Bounded Rational Learning,” World Politics 65 (2013). Quan Li, “Democracy, Autocracy, and Expropriation of Foreign Direct Investment,” in International Studies Association Annual Meeting (St. Louis, 2005). Comparative Political Studies 42, no. 8 (August 2009): 1098–1127, doi: 10.1177/0010414009331723. Ibid.; Nathan M Jensen, Noel P Johnston, and Chia-yi Lee, “Crisis and Contract Breach: The Domestic and International Determinants of Expropriation” (St Louis, 2013); Moosa, Foreign Direct Investment Theory, Evidence and Practice. Nathan M. Jensen, “Democratic Governance and Multinational Corporations: Political Regimes and Inflows of Foreign Direct Investment,” International Organization 57, no. 03 (July 24, 2003): 587–616.

Domestic Demands And International Agreements

197

signing of an IIA by “audience costs,” as domestic constituents are generally assumed to be pro-compliance.41 On the other hand, Li argues that the decision to expropriate is made on the basis of cost-benefit calculations of governments, which weigh the short-term gain of expropriation against the long-term gain of fostering a friendly environment for foreign investors.42 This in turn depends on the time-horizon of the government actors; the more secure or stable their position, the more willing governments will be to avoid expropriation in favor of long-term gains. This mechanism can function in both autocracies and democracies.43 Moreover, different electoral rules generate different incentives and veto player formations, as the extensive literature on veto players makes clear.44 While an in-depth discussion is beyond the scope of this chapter, it may be that the executive in presidential systems are more able to act unilaterally.45 Li ultimately concludes that while leaders in both regime types may have incentives to expropriate, the political constraints in a democracy decrease expropriations overall. While earlier work assumed that financial crises made expropriations more likely, Jensen et al. find that economic crises and related international agreements (primarily with the International Monetary Fund (IMF)) decrease the likelihood of expropriation.46 They posit that governments in the midst of financial crises are more sensitive to the disciplining effect of the market – namely, the reputational costs of expropriation, as well as the conditionalities contained in international agreements. This work undoubtedly holds some relevance for an examination of violations of investment agreements, as it provides insight into the conditions under which political actors may make cost-benefit calculations in favor of expropriation. However, expropriations remain a relatively rare event, and the institutional conditions that are favorable to it – few veto players, and

41 42 43 44 45

46

Ibid. Based in part on the assumption that State-led firms will be less profitable long-term than private firms. Li, “Democracy, Autocracy, and Expropriation of Foreign Direct Investment.” 1098–1127. George Tsebelis, “Veto Players and Institutional Analysis,” Governance 13, no. 4 (October 2000): 441–474. Rachel Brewster and Adam Chilton, “Supplying Compliance: Domestic Sources of Trade Law and Policy” (2012). (August 21, 2013), Yale Journal of International Law 39 (2014, Forthcoming): 1–51, accessed January 30, 2014, http://ssrn.com/ abstract=2334941. Jensen, Johnston, and Lee, “Crisis and Contract Breach: The Domestic and International Determinants of Expropriation.” 1–35.

198

Williams

governments interested in short-term gains – likely occur quite frequently. An investigation into the source of political support that makes expropriation viable is lacking – in other words, what political or economic conditions change the interests of key veto players in favor of or against expropriation? Moreover, as has been noted, violations of investment agreements more commonly consist of regulatory or ‘creeping’ expropriation, or other breaches of treaty provisions that fall short of expropriation. Furthermore, macroeconomic crises, such as those experienced by Argentina in 2001–2002, have certainly given rise to a large number of investor-State disputes under the IIA regime, resulting in questions about the intentionality of IIA violation.47 Therefore, whether or not the models that explain political risk factors and expropriation can also explain the range of less extreme violations often triggering investor-state disputes remains to be seen. 7.3.4 Foreign Investment and Domestic Interests Another source of theoretical insight is the literature on trade agreements, which focuses on the ways in which political institutions and domestic interest groups allow States to take a variety of domestic factors that contribute to noncompliance with trade agreements. Unsurprisingly, given the subject matter, Slaughter and Raustiala found that factors related to economic interests were a key variable that explained compliance with GATT rulings – the more highly dependent a losing defendant was on the plaintiff’s export market, the more likely was compliance.48 Therefore, a State’s dependence on FDI flows may similarly determine its compliance with investment treaties. This supports the enforcement approach to compliance, and is related to the endogeneity problem in compliance research.49 States may be more willing to sign (and comply) with agreements

47

48 49

The majority of claims against Argentina are related to the Public Emergency Law, enacted during the financial crisis in 2001–2002. The government required privatized utilities companies to accept payments in the severely devalued peso, while maintaining a one-to-one convertibility with the US dollar, as well as freezing tariff rates, resulting in a significant loss of profits for these foreign companies (see Paolo Di Rosa, “The Recent Wave of Arbitrations Against Argentina Under Bilateral Investment Treaties: Background and Principal Legal Issues,” University of Miami Inter-American Law Review 36, no. 1 (2004): 41–74. Slaughter and Raustiala, “International Law, International Relations and Compliance.” 538–558. Beth Simmons, “Compliance With International Agreements,” Annual Review of Political Science 1, no. 1 (June 1998): 75–93.

Domestic Demands And International Agreements

199

that prescribe activities in which they had planned to engage anyway. States that see it in their economic interest to open themselves up to foreign investment or rely heavily on FDI, are more likely to sign, and may be less likely to violate, investment treaties. Another factor that determines State interest in liberalization may be the industries on which they rely. For example, States relying on investment in light manufacturing must go to greater lengths to attract investment than States endowed with important natural resources.50 Investment in oil and gas is dictated by the location of deposits; investors are literally tied to the ground once investments are made and they are less likely to pull out of a country if investment conditions worsen. Therefore, as the “obsolescing bargain” argument proposes, once an investor has sunk significant resources into an investment, the bargaining power shifts from the investor to the State.51 However, while models that predict support for free trade focus on interest group pressure resulting from the gains or losses groups can expect in the face of liberalization, the impact of inward FDI is more ambiguous, and domestic interest groups with a stake in investment liberalization may not be so easy to identify. Indeed, while partisan and institutional conditions were found to be important in understanding support for capital account liberalization, the dynamics are different from those involved in trade reform, with less importance placed on interest group formation.52 Moreover, Jensen and Lindstadt argue that, in contrast with much of the literature on globalization preferences dominated by the Heckscher-Ohlin53 model, respondents to opinion surveys on foreign investment rely on a number of non-economic contextual factors to evaluate the impact of investment, including the nationality of the foreign investor. Indeed, if governments are pressured by their constituents to take actions against investors, these may be for less concretely material reasons; xenophobia and concerns over national sovereignty may contribute to popular anti-FDI

50 51 52 53

Elkins, Guzman, and Simmons, “Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000.” Mark Manger, “International Investment Agreements and Services Markets: Locking in Market Failure?,” World Development 36, no. 11 (November 2008): 2456–2469. Sarah M Brooks and Marcus J Kurtz, “Capital, Trade and the Political Economies of Reform,” American Journal of Political Science 51, no. 4 (2007): 703–720. A model of international trade which predicts that those who work in import-competing industries will oppose free trade, while those who work in exporting industries will support it.

200

Williams

sentiments.54 Moreover, as was the case with expropriations in the post-colonial period, ruling party ideology may have an impact on the pace and content of privatization and service sector reforms.55 In recent years, not only the leftist governments of Venezuela, Ecuador and Bolivia, but also relatively moderate governments in Chile and Argentina seem to have adopted a ‘post-neoliberal’ attitude towards investors, including the renegotiation of public service agreements with private enterprises, and tax increases for foreign-owned mining companies.56 This is due to a “change in policy-maker perceptions regarding the opportunity costs of regulating foreign companies”57 which is part of a broader rejection of the Washington- consensus model in Latin America over the past decade. Indeed, the withdrawal from ICSID58 of Bolivia, Venezuela and Ecuador – ruled by governments with a strong support from indigenous social movements committed to an anti-neoliberal normative agenda – suggests that normative motivations may have an effect on engagement with the investment regime. Therefore, it is unrealistic to assume that democratic systems will ensure compliance with IIAs; if relevant domestic constituencies do not hold pro-investor values, democracies may in fact be less likely to respect these agreements. 7.3.5 IIAs, Regulation and the Provision of Public Services In their study of bounded rational learning and BIT negotiations, Poulson and Aisbett found that both negotiators and stakeholders did not understand the potential impact of BITs on domestic policy flexibility and were often taken by surprise when faced with an arbitration claim for the first time.59 This lends some support to the managerial approach to compliance, and suggests that it may be fruitful to look beyond the determinants of expropriation to more routine sources of regulation to explain investment agreement violation.

54 Moosa, Foreign Direct Investment Theory, Evidence and Practice; Jensen and Lindstadt, “Globalization with Whom: Context Dependent Foreign Direct Investment Preferences.” 55 Maria Victoria Murillo, Political Competition, Partisanship, and Policy Making in Latin American Public Utilities (Cambridge: Cambridge University Press, 2009). 56 Paul Haslam, “Is There a Post-Neoliberal Policy Towards Foreign Direct Investment in Chile and Argentina?,” in Post-Neoliberalism in the Americas, ed. Laura Macdonald and Arne Ruckert (London, 2009), 120–134. 57 Ibid., 121. 58 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, Mar. 18, 1965, 575 UNTS 159 (‘ICSID Convention’). 59 Poulson and Aisbett and Poulson, “When the Claim Hits: Bilateral Investment Treaties and Bounded Rational Learning.”

Domestic Demands And International Agreements

201

Complex modern economic systems require extensive regulation in order to function, and the making of these rules implies distributional choices; “many countries force firms providing things like electricity, telephone, postal service and railway services to provide a ‘universal service’” and lower income customers have been negatively affected by recent moves to deregulate these industries.60 Indeed, as discussed below, these types of public (or formerly public) services, along with energy, are some of the industries that are most commonly implicated in investor-State disputes. In many States, both public services such as water and telecommunications, and energy services, place obligations on the government to provide certain levels of universally accessible service – obligations which are often enshrined both at the domestic level in ministry policies, and at the international level, for example in the recently declared human right to water.61 However, the move towards privatization and the opening up of these sectors to foreign investment creates situations in which investor-State disputes become likely. First, if certain services or industries have not been excluded from protection under IIAs, countries in which these services remain publicly funded may be faced with investor claims that they are unfairly subsidizing domestic industries at the expense of foreigners.62 Furthermore, developing States which have liberalized public services before their regulatory frameworks were fully developed may find it impossible to introduce new regulations or controls once the sector has been opened to foreign investment, despite changes in political preferences.63 Similarly, in the energy sector, a range of State obligations and regulatory goals including ensuring affordable and continuous supply; sustainable consumption; and environmental concerns may pit State interests against those of foreign investors.64 Under what conditions will State actors be more likely to honor their commitments to provide public services, or take measures to increase access to

60 61 62

63 64

Ha-joon Chang, “The Economics and Politics of Regulation” no. March (1997): 719. Markus Krajewski, “Investment Law and Public Services,” (April 1, 2012): 4, accessed January 30, 2014, http://ssrn.com/abstract=2038514. For example, Canada has faced a claim under UNCITRAL arbitration rules, from UPS over its public postal service (United Parcel Service of America v. Government of Canada, UNCITRAL, Award on the Merits, (May 24, 2007), accessed January 30, 2014, http:// italaw.com). Krajewski, “Investment Law and Public Services,” 7. Markus Krajewski, “The Impact of International Investment Agreements on Energy Regulation", European Yearbook of International Economic Law (EYIEL), ed. Christoph Herrmann and Jörg Philipp Terhechte vol. 3 (2012): 343–369.

202

Williams

public services that have been privatized? In her study on the effect of partisanship and electoral competition on service privatization, Murillo argues that during the post-reform period, electoral incentives dictated the nature of further regulatory measures taken by the government.65 Specifically, incumbents had the incentive to take regulatory measures which benefitted residential consumers “if electoral competition and public salience were high.”66 It is not surprising that the salience of issues concerning basic services such as water, electricity and fuel is high among the electorate – Latin America particularly has experienced widespread civil protest in the wake of privatization measures.67 Moreover, extractive industries have been the target of increasing protest in Latin America (and beyond) in recent years – both due to negative environmental impacts and demands for windfall profits to remain at home.68 Therefore, when parties face a credible electoral challenger, or if their key constituencies are most affected by these privatizations, they may be more likely to take market controlling measures post-privatization.69 These are the types of measures which often lead to investor-State disputes; thus, direct electoral pressure could encourage governments to take regulatory measures which jeopardize their standing with investors, and may also concentrate these disputes in specific industries. The expectations of domestic constituencies regarding public services may be an important contributor to investor-state disputes involving regulatory expropriation. While State actors may not initially realize that regulatory measures will lead to an investor-State dispute, the managerial approach to compliance does not adequately explain this phenomenon, as it makes the assumption that domestic interests can be reconciled with the demands of international agreements. As this discussion of energy and public service regulation implies, this may not be the case.

65 Murillo, Political Competition, Partisanship, and Policy Making in Latin American Public Utilities. 66 Ibid., 169. 67 See, Eduardo Silva, Challenging Neoliberalism in Latin America (Cambridge: Cambridge University Press, 2009). 68 Deanna Kemp, “Community Relations in the Global Mining Industry: Exploring the Internal Dimensions of Externally Orientated Work” 14, no. June 2009 (2010): 1–14, doi:10.1002/csr; Andy Whitmore, “The Emperors New Clothes: Sustainable Mining?,” Journal of Cleaner Production 14, no. 3–4 (January 2006): 309–314. 69 Murillo, Political Competition, Partisanship, and Policy Making in Latin American Public Utilities.

Domestic Demands And International Agreements

7.4

203

Research Design and Results

The preliminary results of this research are based on a dataset of 538 cases of investor State arbitration, involving 147 State Parties to at least one investment treaty, from the years 1990–2012. The information on these cases has been drawn primarily under ICSID arbitration rules70 and (to a lesser extent) UNCITRAL arbitration rules proceedings, as well as the International Arbitration Reporter service.71 Unfortunately, there are some data limitations inherent to this project. Many cases of investor-State arbitration are not made public, and those case proceedings which are publicized are occasionally significantly redacted – therefore information on the specific industries involved and measures taken cannot be found for each case. Based on the literature review, a number of hypotheses regarding the conditions under which States are most likely to enter into a conflict with investors are outlined below. H1: Governments facing greater political constraints will be less likely to take measures that trigger a dispute with a foreign investor. Thus, the number of veto players present will be negatively correlated with disputes, while perhaps presidential systems will have a higher likelihood of investor-State disputes. Accordingly, autocracies will also be more likely to enter into disputes with investors. H2: Governments in the midst of a financial crisis will find it more difficult to comply with the demands of investment protection treaties. Therefore, financial crises indicators such as inflation rates will be positively correlated with investor-State disputes. H3: Countries in a weak bargaining position vis-à-vis foreign investors will be less likely to enter into disputes with investors. Therefore, countries that depend heavily on FDI will be less likely to take measures against investors, while countries with high levels of investment in extractive industries may be more likely to do so (obsolescing bargain). H4: States led by left-leaning incumbents are more likely to take measures that trigger a dispute with investors due to support by key constituencies on economic and/or ideological grounds.

70 71

United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules, UN Doc. A/RES/31/98; 15 ILM 701 (1976). Investment Arbitration Reporter (IA Reporter), http://www.iareporter.com/.

204

Williams

H5: Investor awareness and time may increase investor-State disputes; the number of treaties entered into force, as well as the passage of time (to account for increased awareness of arbitration) may be positively correlated with investor state disputes. Clearly, these hypotheses are not necessarily mutually exclusive. Instead, they aim to explore the relative impact of various economic and political variables on the States’ propensity to be involved in a dispute with foreign investors. 7.4.1 Descriptive Statistics Descriptive statistics and a preliminary coding of the measures taken allow for an initial overview of the industries and policy areas most often implicated in investor-State disputes and the types of measures that are triggering arbitration. As can be seen in the figure above, the States most frequently involved in investor-State disputes are a mix of high, middle and low income countries. However, in the sample as a whole, the mean GDP of countries involved in at least one dispute is $8,885 (USD) which is firmly in the upper middle income range. Sixty per cent of the instances in which at least one claim was filed in a given year are against democratic States.72 Respondents to 10+ Cases

60 50 40 30 20 10 0

Argentina Venezuela Mexico Ecuador Canada Czech Republic

Figure 1

72

Egypt

India

USA

Poland

Frequency of top investor-state disputes for respondents with over ten claims

Source: author’s database, compiled from known ICSID and UNCITRAL cases

In this case, above 6 on the PolityIV scale. This is the cut-off that the Polity project itself uses for democracies. The Polity project assigns States a value on a scale ranging from −10 (most autocratic) to 10 (most democratic) (see: Monty G. Marshall, Ted Robert Gurr, and

Domestic Demands And International Agreements

205

An identifiably leftist incumbent was in power for only 28 per cent of the country years in the sample; however 33 per cent of disputes took place under a leftist regime. 7.4.2 The Industries As predicted by the literature, the majority of investor-State disputes occur in “key industries” – namely, energy, mining and public utilities (water and telecommunications here). These are politically sensitive industries in a number of contexts – as mentioned above; privatized public services are at the heart of a number of investor-State disputes. In some cases oil and mining projects generate significant public opposition for concerns ranging from sovereignty and control of natural resources to environmental and health concerns. Thus, the high number of disputes related to these industries is not surprising, and they may place greater pressures on governments in terms of balancing public and private interests. 7.4.3 The Measures Finally, after reading the available case proceedings, as well as the reporting from the International Arbitration Reporter service, I have coded the measures taken into a number of broad categories. As the chart below shows, by a small Measures 3% 2%

7%

Regulatory change or existing law

4% 26%

8%

Contractual dispute Agreement terminated Expropriation/nationalization Refusal to grant licence Other

14% 21% 15%

Figure 2

Domestic legal proceedings Failure to enforce award Failure to protect investment

Ten industries/sectors most frequently implicated in investor-state disputes

Source: author’s database, compiled from known ICSID and UNCITRAL cases

Keith Jaggers, POLITYTM IV PROJECT: Political Regime Characteristics and Transitions 1800–2012, Dataset Users’ Manual (Center for Systemic Peace and Societal-Systems Research, 2012)).

206

Williams Transportation 5%

Manufacturing 5% Other 5% Agriculture, Fishing & Forestry 7% Telecom Financial 7% Services & Banking 8% Construction 10%

Figure 3

Industries

Food & Beverage Production 4%

Oil, Gas & Mining 33%

Electric Power & Other Energy 16%

Categories of measures which trigger arbitration proceedings

Source: author’s database, compiled from known ICSID and UNCITRAL

margin, the majority of disputes relate to changes in regulations or existing laws, with contractual disputes a close second. I have differentiated “contractual dispute” from “agreement terminated,” with the former being primarily breaches of payment or the alleged failure to uphold obligations on the part of the State (generally related to the content of the contract) while “agreement terminated” relates to the alleged premature cancelling of an agreement or project. “Failure to grant license” is generally the refusal to grant operating permits or other required documents once some degree of investment has already been made. “Failure to enforce an award” is the failure of a host State to meet the terms of an award from previous investor-State arbitration. 7.4.4 Estimation The country-year panel data used includes observations for 147 countries, all respondents in investor-State arbitration cases, over the years 1990–2012. A zero inflated negative binomial regression (ZINB) is employed to test the above hypotheses. A ZINB model simultaneously estimates two equations. The first, in which the dependent or outcome variable is binary (0 or 1), measures whether or not a State has at least one claim against it – thus entering into the population of States involved in investor-State disputes. The dependent variable of the second equation is a count of the number of arbitration cases in which a State is involved.73 73

For a similar use of the ZINB, see Mark S. Copelovitch and Jon C. Pevehouse, “The Trilemma and Trade Policy: Exchange Rates, Financial Openness, and WTO Disputes” (London, 2012). http://personal.lse.ac.uk/RICKARD/markc.pdf.

Domestic Demands And International Agreements

207

An arbitration case is taken as an indicator that the investor perceives a treaty violation, and that the State is committed enough in its position that it is willing to risk arbitration rather than immediately settle with the investor.74 The incidence of the measure taken, rather than the case itself, would be a preferable dependent variable, as an arbitration case is often registered some time after the events in question. However, using this would greatly limit the number of cases included in the dataset, due to data constraints – for many cases it is not possible to determine the timing of the measure taken which triggered an investor-State dispute. The hypotheses outlined above provide the basis for the independent variables included in the model. Economic variables of interest include the logged term of country GDP (giving it a normal distribution); FDI inflows as a percentage of GDP; total FDI stock, rate of inflation, and fuel exports as a percentage of GDP. Political variables include the political constraints index score75 measuring the effect of the presence of veto players; a binary measure of democracy (if greater than 6 on the PolityIV scale); the number of years in office of the executive taken from the World Bank’s database of political institutions;76 a dummy variable indicating if the country is a presidential system; and dummy variable indicating if executive is left-leaning.77 Finally, the number of investment treaties entered into force, as well as a variable controlling for time, is included. This should account for the possibility that the increase in claims registered against States is due in part to growing awareness of investor-State arbitration on the part of investors. A squared term of time is also included to account for a possible quadratic relationship – namely one in which the effects of increased investor awareness diminish over time. Findings The results of the statistical estimation are displayed in the table below. Contrary to the predictions of the political risk literature, democracy has a positive and significant correlation with the likelihood of an investor-State dispute, and is significant at the 1 percent level. Political constraints or veto 74

Rachel L Wellhausen, “Investor – State Disputes: When Can Governments Break Con­ tracts?,” Journal of Conflict Resolution 23 (2013). 75 See, Witold Jerzy Henisz, “POLCON_2005 Codebook,” 2013. Dataset, accessed January 10, 2014, http://mgmt5.wharton.upenn.edu/henisz/POLCON/ContactInfo.html. 76 Thorsten Beck et al., “New Tools in Comparative Political Economy: The Database of Political Institutions,” World Bank Economic Review 15, no. 1 (2001): 165–176. 77 Ibid.

208

VARIABLES numtreat lnfdi_gdp lnstock lncountry_gdp linf lnfuel_ex 1.democracy 1.pres 1.leftinc polconv t tsq case

Williams (1) Totcase 0.00610* (0.00349) −0.147** (0.0716) 0.0228 (0.114) 0.0328 (0.112) 0.211*** (0.0626) 0.0694** (0.0338) 0.400*** (0.150) −0.122 (0.149) 0.0731 (0.111) −0.586** (0.268) 0.102 (0.0749) −0.00311 (0.00234)

(2) Inflate

Constant

−1.882 (1.990)

−32.64 (52,627) 5.379*** (0.452)

Observations

1,878

1,878

Standard errors in parentheses ***p