Foreign investment disputes: cases, materials, and commentary [2 ed.]

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Acknowledgements

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Acknowledgements

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In preparing the second edition of this book, the authors have received extraordinary assistance in research, editing, proofreading, and typing from many people without whom this manuscript would never have seen the light of day. The authors owe a debt of gratitude to these people who contributed so much to this book. The list of these people include: Louis-Alexis Bret, Callista Harris, Heide Iravani McHugh, Julie Jirikowic, Nathaniel Khng, Sarah Kraus, Jorge Mattamouros, Tiina Pajueste, Mike VanderHeijden, Eileen Zelek and Yeqing Zheng. Above all, we acknowledge the extraordinary assistance of Mr. Cameron Miles, Ms. Cina Teixeira Santos and Ms. Carol Tamez.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

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Investment Arbitration

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The authors also wish to acknowledge the invaluable assistance they received in preparing the first edition of this book from Kylie Evans, Adam Muchmore, Darren Peacock, Bart Szewczyk, Deborah Egurrola, William Russell, Roberto Aguirre Luzi, Craig Miles, Carol Tamez and Cina Santos. Pv

'Acknowledgements', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. v - v

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Chapter 1: Foreign Investment Disputes

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§1.01 INTRODUCTION

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The field of foreign investment law continues to expand rapidly and to change. The number of investment treaties in effect has continued to increase, and there has been a veritable explosion of foreign investment disputes being resolved through international arbitration. The best-known institution specializing in investment disputes – the International Centre for Settlement of Investment Disputes, known by its acronym of ICSID – was established in 1965. In the first thirty years of its existence, ICSID handled an average of only one case per year. Since 1995, up to 30 cases have been filed in a year. Just as significant for the growth of the law is the fact that most of the ICSID decisions are being published. In the meantime, the Permanent Court of Arbitration (PCA), the London Court of International Arbitration (LCIA), the International Court of Arbitration of the International Chamber of Commerce (ICC) and the Stockholm Chamber of Commerce Arbitration Court (SCC) have also become significant venues for investment arbitration. Since the first edition of this book was published, the International Court of Justice (ICJ) has decided another investment case.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

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Investment Arbitration

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'Chapter 1: Foreign Investment Disputes', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 1 20

Of even greater significance has been the proliferation of bilateral investment treaties (BITs). Almost 3,000 BITs have been signed in the past forty years with remarkably similar provisions, leading some scholars to conclude that they may now express the customary international law standards for foreign investment. Each of these treaties creates actionable standards of conduct for governments in their treatment of foreign investment, when the governments consent, through the conclusion of the treaty, to international arbitration for disputes arising from allegations of a violation of the treaty. In 1992, the governments of Canada, Mexico and the United States of America (USA) concluded the North American Free Trade Agreement (NAFTA). Chapter 11 of NAFTA includes obligations by governments providing standards of treatment for investors from another NAFTA country. As in BITs, each of the governments consents to international arbitration of any investment disputes with qualifying private investors from the other contracting countries. Since NAFTA entered into force, each of the contracting governments has been the target of several NAFTA arbitrations. Although the awards are technically confidential, the NAFTA governments have laudably embarked on a policy of transparency for NAFTA decisions, publishing them for future reference. The Association of Southeast Asian Nations (ASEAN) members have created the ASEAN Comprehensive Investment Agreement. Other multilateral investment treaties have been concluded, however, without institutional arrangements that are comparable to NAFTA's. ICSID and NAFTA awards have substantially developed foreign investment jurisprudence, P 2 adding to the ‘case law’ from mixed arbitral tribunals, such as the Iran-United States

Claims Tribunal (IUSCT), and a few well-publicized decisions of the ICJ and ad hoc arbitral tribunals. Under traditional international law, corporations and individuals did not have standing to bring claims directly against governments. Only governments were subjects of international law. If one government's citizens were mistreated by another government, the citizen's only remedy lay in seeking diplomatic protection from its own government. The government, if it were so inclined, would espouse the claim of its citizen against the offending government, most often through an exchange of diplomatic notes, but occasionally, in the nineteenth century by military force, or more recently by bringing a claim before the ICJ. For an individual or corporation to bring a claim in its own name directly against a government required the consent of the government. Consent is a critical factor. Underlying the enormous number of new cases against governments filed by companies and individuals is the prior consent of the impleaded governments, which is to be found in contracts, bilateral or multilateral treaties or in domestic foreign investment laws. This widespread pattern of consent to arbitration of investment disputes is one of the more remarkable developments in international law in the past forty years. But with the restrictive doctrine of foreign sovereign immunity in many national legal systems, the possibility of investment disputes being brought before national courts has also increased. Arbitration proceedings instituted by individuals and corporations directly against governments are sometimes referred to as mixed arbitral tribunals to distinguish them from private commercial arbitrations brought by an individual or corporation against another private individual or corporation and from state-to-state (or inter-state) arbitrations in which one government initiates an arbitral proceeding against another government. A proceeding at the international level brought by a corporation against a government is ‘mixed’ in the sense that it involves both private and public parties.

§1.02 A BRIEF HISTORY OF FOREIGN INVESTMENT Foreign investment in some sense likely dates back to the days of the pharaohs in Egypt, with investments being made by the State itself or by merchants from Egypt, Phoenicia and Greece in other countries. The Egyptians, for example, mined tin (necessary for forging bronze) and other metals beyond their borders. The Phoenicians built harbors for

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their trading ships around the Mediterranean, each at a day's sail from another, at some points establishing trading centers, and at later dates colonizing areas like Carthage. They made a significant investment in ancient Israel in the reign of Solomon, providing the skilled craftsmen and lumber to build his Temple. Ancient Israel, for its part, invested in areas as distant as Spain. In more recent times, England invested in India and Canada at the beginning of the seventeenth century through the establishment of a new form of business association – charter companies, such as the British East India Company and the Hudson Bay Trading Company. The Dutch created their own East India Company. Although the most prevalent form of foreign investment in the early nineteenth century was indirect, through loans and government bonds, modern foreign direct investment (FDI) began to take shape in the mid-nineteenth century, stimulated by two independent, but interrelated, trends – the rapidly-increasing rate of technological invention and the P 3 growth of corporations and other forms of business association as methods of raising, accumulating and deploying capital. Railroad and telegraph companies, for example, located in Europe and the USA contracted to construct the infrastructure necessary to operate railroads and telegraph systems in Latin America, Asia and Africa. These companies brought together under one roof the technology, expertise and capital required to build and operate such large infrastructure projects. Given the scale of their investments, and the insufficiency of a local market to provide an economic return, the markets they sought were necessarily worldwide in scope. Other FDI at this time was directed to the operation of plantations for the cultivation of export crops and to the exploitation of natural resources such as mining for minerals and drilling for oil. Shortly thereafter came the construction of telephone systems, electrical power systems, street lighting, automobile factories, and road building projects. Much of this was not simply financed, but built and often operated by foreign investors. The large infrastructure projects introduced by foreign companies and based on new technologies had an important, but unintended effect on the countries where they were constructed. They allowed for more and faster travel and communication, increasing the power of national governments and perhaps stimulating or contributing to a sense of nationalism among their populations. Because the large infrastructures came to be seen as vital to the welfare of the populations and the security of the State, it was soon felt by the politically conscious strata in many of those countries that they should be controlled by the governments, or at least by citizens of those countries. When the national governments of States hosting foreign investments expropriated foreign-owned projects, they purported to rely upon the international law principle of territorial sovereignty. Local courts were often unsympathetic to foreign investors or obliged to give effect to the local expropriating decree, so the investors turned to their own governments for assistance. The investors' governments, if they were inclined to help their nationals, responded either with a show of military force (so-called ‘gunboat diplomacy’) or by providing ‘diplomatic protection’. The latter was based on the international law principle of nationality, the governments of the foreign investors claiming an interest in the treatment of their nationals by other governments. Diplomatic protection was usually pursued through exchanges of diplomatic notes between governments, with the investor's government formally protesting the taking of the investor's property and demanding either its return or the payment of compensation. It could also be exercised by the investor's government espousing a formal claim on behalf of its national, on a government-to-government basis, creating, by joint action, ad hoc arbitral tribunals or mixed claims commissions to adjudicate a single claim or certain categories of claims. The vigorous investor State reactions to the expropriations of the railroads in parts of Latin America in the nineteenth century prompted Carlos Calvo, a distinguished Argentine lawyer, to propound what came to be known as the Calvo Doctrine in 1868. According to the Calvo Doctrine, foreign investors were entitled to treatment no different or better than the citizens of the country where they invested and were to have their claims heard only by the courts of the countries where they invested. But they were not entitled to seek the diplomatic protection of their governments or to have their claims presented to international arbitral tribunals. Capital-exporting governments, like the USA, rejected the Calvo Doctrine but many Latin American governments adopted it as their view of international law. Diplomatic protection proved unsatisfactory for many reasons. For the investor, the willingness of its government to act was always uncertain, for the government always had many interests to consider. For the government, it was an unwieldy instrument for dealing P 4 with the problems arising from foreign investments. The intervention of the investor's government inevitably created confrontation and conflicts with the host government. As the problems that governments faced became more complex and governments developed larger organizations to handle them, it became clear that more economical alternatives to the full intervention of governments were necessary, but an analogue to national adjudication was not feasible, for international law at that time did not recognize natural or juridical persons as proper subjects of its realm. The first problem to be addressed was the prohibition of the heavy-handed use of military force to collect foreign debts. It was put to rest by the Hague Convention (No. II) Respecting the Limitations of the Employment of Force for the Recovery of Contract Debts

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[Drago-Porter Convention] of 1907, which imposed limitations on the use of military force to collect public debts. The second problem, the inherently cumbersome and politically costly procedure of diplomatic protection, was not effectively addressed until the latter half of the twentieth century. In the first half of the twentieth century, foreign investment disputes were precipitated, for example, by land reform measures in certain countries, the nationalization of the petroleum industry in Mexico in the 1930s, the repudiation of some government concessions in Central America, the transformation of the entire Czarist economy in the Soviet Union to socialism in 1917, and the disruptions and displacements that resulted from World War I. The dismantling of the Ottoman Empire and the creation of new governments (e.g., Iraq), with new nationalities for the inhabitants of certain areas, provided fertile ground for foreign investment disputes. The 1899 and 1907 Hague Convention for the Pacific Settlement of International Disputes were the first multilateral treaties providing an established structure for arbitration – and thus peaceful resolution – of inter-state disputes. But the existence of these conventions failed to prevent World War I. The period following World War I witnessed the creation of the Permanent Court of International Justice (PCIJ), which heard three important investment disputes in the 1920s: the Oscar Chinn case, (1) the Chorzow Factory case (2) and the Mavrommatis Palestine Concessions case. (3) Many mixed claims commissions and ad hoc arbitral tribunals were also created to handle particular claims for one country's nationals against a foreign government. Following World War II, investment disputes resulted from the imposition of socialist economies in Eastern Europe, the nationalization of certain industries in Western Europe (France and the United Kingdom), the emergence to independence of former colonial territories, and the nationalization of certain petroleum and mining concessions in various countries like Libya, Kuwait, Iran, Chile, and Jamaica, among others. Significant law-making achievements occurred after World War II. Property rights (including the right to compensation for expropriation) were enshrined in the Universal Declaration of Human Rights (UDHR), the European Convention on Human Rights (ECHR) and its protocols and the American Convention on Human Rights, as well as in the constitutions of many governments. Efforts to organize both international protection for foreign investment and methods for resolving disputes began in earnest after World War II. The Final Act of the United Nations P5 Conference on Trade and Employment [Havana Charter] of 1948, which sought but failed to create an international trade organization, included some provisions dealing with investment issues but foundered on conflicts between developed and developing nations. The Economic Agreement of Bogotá of 1948, involving western hemisphere governments, which was specifically designed to address the treatment of foreign investors, also failed to become effective. Some private initiatives were more successful: in 1949, the ICC adopted the International Code of Fair Treatment for Foreign Investors. Some countries sought to regulate and limit foreign investment through a variety of methods. Many socialist countries banned FDI in their territories altogether. Some governments required formal approval for FDI proposals. Others excluded or limited any FDI in certain strategic industries. Still others mandated certain preconditions for FDI, such as the participation of local investors in some specified percentage of ownership (sometimes local nationals had to be the majority owners) or the transfer of certain technologies or know-how. After the 1970s, many countries eased these restrictions. In the 1950s, countries still negotiated treaties of Friendship, Commerce and Navigation (FCN), a genre of treaty from the late nineteenth century. FCN treaties contained a few provisions regulating the treatment of foreign investment but did not commit States to arbitration with investors. The British government brought an investment dispute against Iran to the newly-formed ICJ arising out of the nationalization of the Anglo-Iranian Oil Company. In 1952, the ICJ found it lacked jurisdiction. In 1959, a Draft Convention on Investments Abroad was proposed by European business leaders and attorneys, but it never became effective. In 1961, Harvard Law School Professors Louis Sohn and Richard Baxter, published a Draft Convention on the International Responsibility of States for Injuries to Aliens. Although only a proposal, it had a profound influence on the development of international investment law. A different direction was taken in 1962, when the United Nations General Assembly adopted Resolution 1803 (XVII), entitled ‘Permanent sovereignty over natural resources', declaring the authority of governments to nationalize investments in their natural resources, provided that ‘appropriate compensation’ was paid to the investors whose property was taken. Resolution 1803 also stated that foreign investment agreements ‘shall be observed in good faith’. This and other UN resolutions stimulated the debate over the standard of compensation for expropriations of natural resources. In 1963, a Draft Convention on the Protection of Foreign Property was published by the Organization for Economic Cooperation and Development (OECD). A revised version was adopted by the Council of the OECD in 1967. Although this Draft Convention never came

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into effect, it too influenced later efforts to protect foreign investment. In 1965, under the auspices of the International Bank on Reconstruction and Development (World Bank), the Convention on the Settlement of Investment Disputes between States and Nationals of Other States [ICSID or Washington Convention] was concluded and came into effect in 1966. The Convention created the ICSID to administer arbitrations between contracting governments and nationals of other contracting governments for disputes relating directly to an investment. ICSID, in turn, promulgated sets of arbitral and conciliation rules. ICSID was the first institution designed specifically to administer arbitrations of foreign investment disputes. As of this publication, almost 150 countries have ratified the ICSID Convention. P6

In the late 1960s, the ICJ considered the Barcelona Traction, Light and Power Co. Ltd. case, (4) in which Belgium espoused the claims of its nationals who were shareholders in a Canadian company (Barcelona Traction) for measures taken against the company itself by the government of Spain. The ICJ disappointed many observers who had hoped to see the Court address the merits of the case. Instead, the ICJ found that Belgium lacked standing to bring this foreign investment dispute on behalf of its nationals as shareholders because the relevant company was incorporated in a third country. If the 1960s were prolific in creating foreign investment law and institutions, the 1970s provided severe tests for them. In the early 1970s, the then new regime of Mu'ammar Qaddafi in Libya nationalized the petroleum industry, an action that provoked three celebrated ad hoc arbitration awards for, respectively, British Petroleum, (5) Texaco (6) and the Libyan American Oil Company. (7) Chile nationalized copper mining and Jamaica drove foreign bauxite mining companies out of the country by repudiating its contracts and imposing higher levies on the companies. The end of the decade saw Kuwait nationalize the petroleum interests of the American Independent Oil Company, which led to another famous ad hoc arbitration award in the early 1980s. (8) In this same period occurred the Iranian Revolution of 1979, which led to the expulsion of US companies and the establishment of the IUSCT. In the decade of these turbulent expropriations, the United Nations General Assembly adopted Resolutions 3201 (S-VI) and 3281 (XXIX) in 1974, entitled, respectively, ‘Declaration on the Establishment of a New International Economic Order’ and ‘Charter of Economic Rights and Duties of States'. These resolutions were designed to create a socalled ‘new international economic order’, asserting each country's right to choose its own economic system and exercise sovereignty over its own natural resources, and providing that any disputes over expropriations must be resolved by the law of the host government and in its own courts. These declarations were backed by a majority of developing States but by almost no developed countries. In the late-1960s and early-1970s, many concessions and other international investment agreements were renegotiated to the benefit of the host governments; the host government often took over all or a portion of the investment. The 1970s also saw international attempts to regulate the conduct and activities of corporations that did business on a worldwide scale, with the OECD drafting a set of voluntary Guidelines for Multinational Enterprises and the promulgation of a United Nations Draft Code of Conduct on Transnational Corporations. Some developments in the 1970s were more favorable to investors. First, in the early1970s, the USA incorporated the Overseas Private Investment Corporation (OPIC) as a wholly owned US government company to provide political risk insurance to US investors doing business overseas. OPIC took over the USA's political risk insurance program from the US Agency for International Development (AID), which had previously operated it. P 7 There were also positive developments on the prescriptive front. Although a few countries had begun negotiating BITs in the 1960s, the USA commenced its BIT program in the late-1970s, developing a Model BIT. The USA has now entered into more than forty BITs, but it is by no means the leader in the field. Switzerland, for example, has entered into more than one hundred BITs, as have China and South Korea. As we will see later, the proliferation of BITs has profoundly transformed international investment law. The 1980s saw the evolution of the USA's first Model BIT: the developed countries of the USA and Europe concluded many new BITs. In 1985, the World Bank sponsored the Convention Establishing the Multilateral Investment Guarantee Agency (MIGA). MIGA was created to provide political risk insurance to foreign investors, particularly those investors whose own governments do not have a national political risk insurance program, such as OPIC for USA investors. MIGA has developed an official commentary on the MIGA Convention, a standard form contract of guarantee, a set of general conditions of guarantee for equity investments, and a set of arbitral rules similar to ICSID's for resolving political risk insurance claims. In the late 1980s, the USA brought the Electronica Sicula S.p.A. (ELSI) foreign investment dispute to a Chamber of the ICJ. In 1989, the ICJ accepted jurisdiction but rejected the claim. (9) But importantly, the Chamber elaborated the meaning of certain substantive standards provided in the Italy-USA Treaty of Friendship, Commerce and Navigation. In the 1990s, the USA's Model BIT continued to evolve and the number of BITs entering

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into force increased dramatically. The European Community negotiated successive Lomé Conventions with countries in Africa, Asia and the Caribbean. In 1992, the World Bank issued its Guidelines on the Treatment of Foreign Direct Investment, and that same year also saw the conclusion of NAFTA. In 1994, the Energy Charter Treaty (ECT) came into effect, and now includes more than fifty member States, mostly in Eastern and Central Europe; the ECT deals with investment issues specifically targeted toward the energy industry. Also in 1994, two protocols to MERCOSUR addressed issues of foreign investment in South America. In Asia in the 1990s, the Asia-Pacific Economic Cooperation (APEC) adopted Non- Binding Investment Principles, and the ASEAN prepared the Framework Agreement on the ASEAN Investment Area. Perhaps the most ambitious initiative in the area of international investment law in the 1990s was the ultimately-unsuccessful effort by the OECD in 1995 to negotiate a comprehensive Multilateral Agreement on Investment (MAI). The first decade of the twenty-first century showed some contrary trends. More bilateral and multilateral investment treaties and Free Trade Agreements (FTAs) with investment chapters were concluded. Moreover, many more BITs were concluded between developing countries. At the same time, criticisms of BITs for supposedly being one-sided became sharper. A few States withdrew from ICSID and threatened denunciation of their BITs. Australia declared that it would henceforth not conclude investment agreements P 8 providing for binding arbitration.

§1.03 THE INTERNATIONAL COMMITMENT TO ENCOURAGING AND PROTECTING FOREIGN INVESTMENT Although developed and developing countries have not always agreed on the standards for treatment of foreign investment or the content of the international law that governs it, there is no dispute concerning the necessity for foreign investment. Since the late-1970s, a remarkable consensus has emerged concerning the standards for treatment of foreign investment as demonstrated by the proliferation of BITs and other investment treaties such as NAFTA and the ECT, which contain remarkably similar provisions. Foreign investment was once viewed as an evil in certain quarters, although at times a necessary evil; now it is universally viewed as a necessity. Authorities have estimated that in the past few decades the gap between the standard of living in developed and developing countries has increased. Many developing countries have populations with high birth rates, low levels of education, relatively few opportunities for employment, and low wages, often below the poverty line. In these countries, health care is usually poor, in some places virtually non-existent. Life expectancy may be significantly lower than in developed countries. In some nations, corruption by government officials siphons off a significant percentage of the gross national product, leaving little for improving the national infrastructure. Moreover, poverty begets poverty. Parents with little education are less likely to send their children to school for a sustained period. Uneducated people are less likely to develop the modern skills to deal with complex equipment and technological changes and, more generally, with the daunting challenges of rapid social change. Poor parents are unlikely to possess much land, goods or money to pass on to their children. Perhaps most importantly, parents with poor diets, few good economic role models, little motivation, and little hope for the future are more likely to pass on the same habits and attitudes to their children. The economic and legal structures of some developing countries often stifle financial risk-taking and entrepreneurial innovation, disincentivizing citizens from starting or growing businesses. Such disincentives may be found in many parts of the legal system, but most prominently appear in the corporate, criminal, bankruptcy, tax, and labor laws. Many such laws were promulgated in a good faith effort to protect workers, creditors and society, but may have unintended consequences of discouraging citizens from undertaking the risks of starting their own businesses. Foreign investment is not a panacea for all that ails such societies, but in many cases it can provide a way to jump-start economies, a short cut to higher wages, an improved infrastructure, better schools and hospitals, and more efficient and cost effective public services. Psychologically, it can provide economic role models, generate financial incentives and create hope. In short, it can be a motivational force. At a minimum, it can build, maintain and operate important parts of a country's infrastructure or introduce complex technology to a country lacking it. Because of these substantial benefits, the international community today endorses and encourages foreign investment. According to the International Monetary Fund (IMF), as of the end of 2001, the book value of the world's FDI stood at approximately USD 6.8 trillion. P9 (10) Foreign affiliates employ about 54 million people, and their sales have amounted to almost US USD 19 trillion. Global FDI inflows, according to the United Nations Conference on Trade and Development (UNCTAD), rose 10% in 2011, against a background of higher profits of transnational corporations and high economic growth in developing countries. (11) From the perspective of foreign investors, the most important aspects of any potential

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investment are financial (i.e., the potential to earn a reasonable profit) and legal (i.e., the ability to protect the corpus of the investment and its profit-making potential from confiscation, either directly or through unreasonable interference). Prudent investors generally will not risk substantial capital in a foreign enterprise unless the financial prospects are promising and the legal structure is sufficient to protect the investment, the sine qua non of a prudent investment. With the importance of increasing foreign investment recognized and authoritatively endorsed, the international community has acted to lay the foundation for an adequate legal infrastructure for foreign investment. Although no comprehensive worldwide convention on the standards for the treatment of foreign investment yet exists, almost 3,000 BITs have been concluded by both developed and developing countries covering every region of the world. While differences in some standards may be found among these many treaties, there is an astonishing similarity in the most important rules. In addition, strong regional investment treaties exist. These include NAFTA (covering North America), the ECT (covering most countries in Central and Eastern Europe and the Commonwealth of Independent States (CIS) countries, with respect to the energy industry), the protocols to MERCOSUR (covering large portions of South America), the Non-Binding Investment Principles and the Framework Agreement on the ASEAN Investment Area (covering much of Asia), the Agreement on Promotion, Protection, and Guarantee of Investments among Member States of the Organization of the Islamic Conference (covering the Middle East), and the Fourth ACP-EEC Convention (Lomé IV) (between the African, Caribbean and Pacific Group of States (ACP) and the European Community). With the ICSID Convention having been ratified by almost 150 countries, the ICSID Centre provides an almost universal forum for resolving investment disputes through arbitration. The PCA at The Hague constitutes another forum, comparable in some respects to ICSID. To the extent other forums are necessary, the LCIA, ICC, SCC and the Arbitration Rules promulgated by the United Nations Commission on International Trade Law (UNCITRAL) provide attractive alternatives. MIGA provides an institution for offering affordable political risk insurance worldwide in order to protect investors from non-commercial risks. The substantive standards created by investment treaties and buttressed by customary international law, the arbitral forums for resolving investment disputes provided by ICSID, the PCA, the ICSID Additional Facility, and the UNCITRAL Arbitration Rules, and the political risk insurance program offered by MIGA (as well as national programs like OPIC) constitute an infrastructure that evidences a strong international commitment to legal P 10 stability, transparency and predictability for foreign investment.

§1.04 WHAT IS A FOREIGN INVESTMENT DISPUTE? The foregoing discussion has set the stage for locating disputes between private entities and States, but the full panoply of possible disputes is not the subject of this treatise. This book is limited to foreign investment disputes. It is natural then to ask, what is an investment dispute? The present discussion is only intended to introduce the subject. A foreign investment dispute is one between an investor from one country and a government that is not its own that relates to an investment in the host country. While this definition seems simple on its face, hidden within it are various complex issues. The critical question is what is an ‘investment’? Once this is known, the relationship of the dispute to the investment can be examined to determine if it qualifies, jurisdictionally, as an investment dispute. The term ‘investment’ is not defined in the ICSID Convention, but usually is defined in most BITs. Whether the BITs' definition of investment is sufficient, or whether additional ‘inherent’ characteristics are necessary, is a matter of some controversy in interpreting Article 25 of the ICSID Convention. The characteristics sometimes asserted as inherent in the nature of investment include the following. First, it has a certain temporal duration. It does not involve a single sale. Second, there is a commitment by the investor of capital or something of monetary value. Third, there is an expectation of profit. It is not a nonprofit enterprise. Fourth, there is an undertaking of risk by the investor, and sometimes by the host government as well. Another frequent (but subjective and therefore controversial) characteristic is the contribution of the investment to the development of the State, by building or enhancing its infrastructure or its economy, or otherwise contributing to it. Examples of investments include oil exploration and production projects, mining operations, and the construction and operation of factories and hotels. Even the issuance of promissory notes and the making of loans for the development of a country's infrastructure have been held to constitute investments. A conflict between a State and a foreign-controlled but locally-incorporated entity in the country may also constitute a foreign investment dispute under the ICSID Convention and some investment treaties. The rules here express an important international policy. Much of foreign investment is conducted through companies that are locally incorporated,

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either because of local law requirements or because of a desire to isolate the risks inherent in the foreign investment by creating a separate investment vehicle. If the capital or expertise comes from abroad, the fact that it is funneled through a local entity should not disqualify it as a foreign investment dispute.

§1.05 INVESTMENT TREATIES Since the 1970s, as noted earlier, the US government has made a concerted effort to negotiate a series of bilateral investment treaties (BITs) with various governments. In the course of that effort, the US government has developed a series of model treaties, which have been refined and changed over time. The USA has recently promulgated its 2012 Model BIT. The USA is presently a party to more than forty BITs. The United Kingdom, The Netherlands, Germany, France, Spain, Japan, Switzerland, Belgium, Luxembourg, Denmark, and other developed countries have also entered into BITs with developing P 11 countries. The typical US BIT includes obligations that each government undertakes towards investors from the other country. These obligations fall into four categories: (1) general obligations toward the investment; (2) standards for expropriation; (3) currency transfer standards; and (4) dispute settlement procedures. Three of these types of obligations are substantive in character (although they may also require certain internal procedural safeguards), while the fourth provides governmental consent, in advance, to the jurisdiction of an international arbitral forum for resolving disputes that may arise concerning the substantive obligations. It should be noted that the consent provided in the treaty may enable a foreign investor to initiate arbitration in an international arbitral forum even if the investor does not have an arbitration clause in its contract with the government or, for that matter, even if the investor has no contract with the government at all. One noted authority has coined this state of affairs as ‘arbitration without privity’. The consent to international arbitration given by governments in BITs is a key factor accounting for the recent explosion of foreign investment disputes. In many of the BITs, governments make a commitment to provide foreign investors with national treatment (treatment as favorable as that provided to the host country's citizens), most favored nation treatment (treatment as favorable as that given to other countries' citizens), fair and equitable treatment, full protection and security for the investment, and treatment at least as favorable as that provided by international law. In addition, governments often agree not to engage in arbitrary, unreasonable or discriminatory conduct that restricts the operation, management, maintenance, or expansion of the investment. Standards for lawful expropriation are also established. Property may be expropriated if it is taken for a public purpose, in a non- discriminatory manner, in accordance with due process of law, and full, adequate and effective compensation is promptly paid. Some BITs also require the host government to comply with any obligations it may have undertaken with the investor. This is the so-called ‘umbrella clause’. The precise meaning and application of the fair and equitable treatment provision and the umbrella clause, as well as the contours of regulatory and ‘value’ expropriations, are a matter of debate and are still being developed. Provisions similar to those found in bilateral investment treaties are found in two multilateral investment treaties – NAFTA and the ECT. Chapter 11 of NAFTA has been mentioned. Suffice it to say that it includes substantive obligations undertaken by the three governments toward foreign investors similar to, but not necessarily the same as, those found in BITs. It also includes governmental consent to international arbitration of NAFTA Chapter 11 claims. The ECT is an unusual investment treaty because it is specific to the energy industry. More than fifty nations are parties to the ECT, mostly in Europe. Like the BITs and NAFTA Chapter 11, the ECT provides governmental consent to international arbitration to resolve disputes with foreign investors arising from their substantive obligations, which are also similar to those of BITs and NAFTA. The USA has also entered into FTAs with countries such as Australia, Chile and Singapore and has negotiated a regional FTA with Central American governments, known as CAFTADR. Each of these agreements include a chapter on investment, replete with provisions for arbitration. Interestingly, these FTAs also contain references to an Appellate Body for P 12 foreign investment disputes, although no such body has been created.

§1.06 INTERNATIONAL FORUMS FOR RESOLVING INVESTMENT DISPUTES Two arbitral institutions and a set of ad hoc arbitral rules are responsible for most foreign investment disputes that are arbitrated. The arbitral institution that specifically specializes in international investment disputes is ICSID, which has already been mentioned above. It is important to understand ICSID, not only because it specializes in investment disputes, but also because it has certain unique features which make it advantageous to both investors and host States. Unlike any other arbitral institution, ICSID is a division of the World Bank. As part of a multilateral lending institution, ICSID thus enjoys a ‘perception’ advantage – it is perceived that most countries will comply with their ICSID obligations so as not to forfeit

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the good will of the World Bank. ICSID is also supported by a multilateral treaty – the ICSID Convention. As a result, any violation of an ICSID Convention obligation is a treaty violation, and thus, a violation of international law. The ICSID Centre is available to administer three types of procedures: a fact finding procedure, a conciliation, and a binding arbitration. The ICSID Convention provides that when the arbitration procedure is used, ICSID is the exclusive forum for any disputes submitted to it, and the annulment procedure provided before a second ICSID tribunal, known as an ‘ad hoc committee’, is the only recourse against an ICSID arbitral award; no appeal of an award may be taken to a national or other international court. A final ICSID award must be complied with by the host country and enforced by any other country that is a party to the ICSID Convention as if it were a final, non-appealable decision of a court of the contracting country where enforcement is sought. Thus, national courts are expected to play no role in a dispute submitted to ICSID arbitration, except for the implementation of an ICSID award. Unlike other arbitral institutions, the ICSID Convention contains some special jurisdictional requirements, which are set out in Article 25. To satisfy the jurisdictional prerequisites of the ICSID Convention, an investor must show (1) the existence of a legal dispute; (2) that arises directly out of an investment; (3) that arises between a government that is a party to the ICSID Convention and a private investor from another country that is a party to the ICSID Convention; and (4) the consent of both parties to ICSID jurisdiction to resolve the dispute. Even if the jurisdictional prerequisites are not met, the ICSID Additional Facility is available to arbitrate investment disputes if the parties consent to it and the ICSID Secretary General approves. In addition to the ICSID and the ICSID Additional Facility forums, many governments have also agreed to arbitrate investment disputes under the UNCITRAL Arbitration Rules in ad hoc arbitrations (i.e., those that are not administered by an institution). UNCITRAL has prepared a set of arbitration rules and the Model Law on International Commercial Arbitration, but it does not administer arbitral cases. Other arbitral institutions may supervise UNCITRAL arbitrations. Arbitration under the UNCITRAL Arbitration Rules is one of the choices, along with ICSID, specifically provided to investors under many BITs, NAFTA Chapter 11 and the ECT. If the UNCITRAL Arbitration Rules apply and an administering institution becomes necessary, the parties may agree to the institution; in the absence of such agreement, the Permanent Court of Arbitration (PCA) at The Hague P 13 will appoint an institution, or the parties may agree to it. When major upheavals have occurred in countries, often involving a change in governments, other nations whose investors have been affected have at times negotiated the establishment of mixed arbitral tribunals with jurisdiction to hear and decide claims of the other nations' investors against the host government. An example of such a tribunal is the IUSCT, which, following the 1979 revolution, was set up in 1981 to decide the claims of US investors against the Islamic Republic of Iran. A similar institution, although not technically involving investment disputes, is the United Nations Compensation Commission, established to hear claims of various companies and individuals against the government of Iraq arising from the damage suffered by companies and individuals as a consequence of its invasion of Kuwait. Although no public international tribunal specializes only in investment disputes, international tribunals that may at times adjudicate investment disputes include the ICJ (if espoused by the investor's government), the European Court of Human Rights (ECtHR), the Inter-American Commission on Human Rights (IACHR) and the Inter-American Court of Human Rights (I/A Court HR). The latter two institutions deal with investment disputes only to the extent of expropriation claims in violation of the European and American conventions on human rights. The I/A Court HR only exercises jurisdiction over claims of individuals against governments; it has decided not to exercise jurisdiction over claims filed by corporations. When large numbers of US citizens have been harmed by other governments, the USA has at times found it convenient to negotiate a lump sum settlement of all of its citizens' claims. For such situations, the US government has created the Foreign Claims Settlement Commission (FCSC) as a domestic institution to determine the claims of US citizens against foreign governments and to allocate the proceeds of the government-togovernment settlements of such claims. Although a domestic entity, the FCSC adjudicates claims based on the application of international law. Finally, investment claims by foreign investors may be brought in national courts, usually the courts of the host country but occasionally in the courts of another country. In the United Kingdom, cases brought against a foreign government must meet the requirements of the State Immunities Act of 1978, while in the USA, the Foreign Sovereign Immunities Act (FSIA) of 1976 governs all claims against foreign sovereigns brought in any courts in the USA, whether state or federal.

§1.07 POLITICAL RISK INSURANCE An alternative to suing a foreign government is for the foreign investor to make a claim under a political risk insurance policy, depending upon the terms of the particular policy. Some policies allow a claim to be brought directly under the policy without first pursuing

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a claim against the government, while others require that claims against the relevant government be pursued first. OPIC was established by the US government to insure the investments of US nationals abroad against various political risks. The three historically-covered political risks include expropriation, damage caused by political violence and currency transfer and convertibility risks. Other types of political risks may also be covered. Other developed countries such as the United Kingdom, France, Germany, and Japan have their own P 14 political risk programs that cover their own nationals. MIGA is an international institution within the World Bank system. It performs internationally services similar to those that OPIC provides for US companies. Some private insurance companies also write political risk insurance policies.

§1.08 APPLICABLE LAW The application of international law to investor-state contracts has evolved over the past fifty years. Historically, such contracts were grounded in the national law of a particular country. For investment disputes, that law was almost always the law of the host country. The past fifty years, however, have witnessed a trend toward the internationalization – or denationalization – of the law applicable to investor-state contracts. Thanks to the international aspects of the foreign investor-state relationship, either international law or general principles of law are now applied to many investor-state agreements. Some commentators have opined that this trend is reversing because of the absence of an international law of contracts and the development of investment treaties. For cases brought before ICSID, the ICSID Convention provides that a tribunal will apply the law chosen by the parties or, in the absence of such a choice, the law of the host country and ‘such principles of international law as are applicable’. This formulation has inspired a spirited debate over the role of international law in the absence of a choice by the parties. Some arbitrators and commentators take the view that international law is limited to a supplementary and corrective role. It is supplementary in that it may fill lacunae in the host country's law, and it is corrective in the sense that it applies if the host State's law violates international law. Other commentators see this role as even more limited, noting that national law often contains rules to fill its own gaps, which would exclude international law from a supplementary role in those instances, and national law violates international law only if the relevant principle of international law rises to the level of jus cogens or peremptory rule. Other experts have suggested that international law always applies because either national law is consistent with it or, if it is not, then international law prevails over it. Many nations incorporate international law into their national laws, thus avoiding, at least theoretically any conflict. Even when the host State's law applies, many countries' legal systems derive from older and more developed systems such as the French or British legal systems, which can sometimes be consulted at least as persuasive authority to fill gaps or interpret the law of the host State.

§1.09 INTERNATIONAL CLAIMS Some claims may arise under customary international law. The most common international claim in the foreign investment area is for expropriation of an investor's property without adequate compensation. Under international law, a government has the right to expropriate the property of foreign investors for a public purpose, in a nondiscriminatory manner, and according to due process of law, provided that compensation is paid. An expropriation may be direct, which is to say it is executed by an act or decree of the government that expressly takes property or rights, or it may be indirect – a socalled ‘creeping’ expropriation that results from a series of acts none of which purports P 15 expressly to be a taking. Many investment treaties employ the term ‘measures tantamount to expropriation’ to express a similar concept. The factual threshold for an expropriation is the subject of some disagreement in the international community. Some arbitral tribunals have suggested that an expropriation may occur only if the government intends to expropriate, takes title to particular property and benefits from the expropriation. More often, however, tribunals and commentators state that an expropriation may occur in the absence of a change of title and regardless of any expropriatory intent, if the government takes action that substantially and unreasonably interferes with the control, use or enjoyment of property to an extent that is more than ephemeral. The concepts of regulatory expropriation and ‘value’ expropriation, that is non- discriminatory measures that reduce the value of an investment, have only recently begun to be explored in international law. The standard for compensation for an expropriation has also been controversial. The best-known formulation of ‘full, prompt and effective compensation’ was strongly criticized in the 1960s and 1970s by some developing country governments and by some commentators as too restrictive. Alternative standards of ‘just compensation’, ‘equitable compensation’ or ‘appropriate compensation’ were proposed; the content to be given to any of these tests was to be left to the discretion of the decision-maker. Some developing country governments argued during that same timeframe that compensation should be

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limited to the net book value of the investment. In practice, tribunals have generally not limited their options in determining compensation; often compensation has been based on the discounted cash flow methodology, fair market value, or the going concern value of a company. The remedy of specific performance (restitutio in integrum) for expropriation has only rarely been awarded. Discriminatory action taken against a foreign investor gives rise to a venerable claim under customary international law. In investment treaties, this claim is based on a negative prohibition against discriminatory treatment of the foreign investor or as a positive undertaking to provide national treatment (treatment the same as that provided to the host country's citizens) or most favored nation treatment, which is that treatment promised to similarly-situated citizens of other countries. Customary international law also incorporates a claim for denial of justice. A denial of justice may occur when a local court or administrative tribunal denies access to its machinery, unreasonably delays a case, commits grave procedural irregularities, or when it decides a case in a manifestly unjust way. A decision that is merely wrong will not rise to the level of a denial of justice. Another claim recognized as a general principle of law is abuse of rights, which is a specific application of the doctrine of good faith. If, for example, a government changes the form of a company it owns in order to allow the company to evade its obligations, or if a government issues acts, decrees or regulations aimed specifically at a company it owns in order to provide the company with the defense of force majeure to its obligations, then the government may become internationally responsible for an abuse of rights. Parties may otherwise abuse the rights they possess if they exercise them in bad faith. Finally, a further claim well recognized as a general principle of law is that of unjust enrichment. Most developed legal systems recognize the doctrine of unjust enrichment. Some arbitral tribunals have decided investment cases on the basis that the government was unjustly enriched by taking certain actions against foreign investors. This doctrine is P 16 equitable in nature. It is doubtful whether the doctrine may be invoked as an alternative to a breach of contract when an agreement exists.

§1.10 PROCEDURE AND PROOF Procedure in international arbitral international tribunals is often very different from that employed in national courts and domestic arbitrations. The ICSID Arbitration Rules, for example, provide for both a written and oral procedure. During the written procedure, the parties file memorials and counter-memorials (and sometimes replies and rejoinders) that brief their respective cases fully. They attach to these written submissions all of the written evidence upon which they rely to make their respective cases, including documents, witness statements and expert reports. During the oral procedure, oral witness testimony is usually permitted and cross examination allowed, but it may be more abbreviated than in US or British court proceedings. In the IUSCT, for example, only a single day was allocated to the oral proceeding for many cases. Discovery in international arbitrations is usually limited to certain document exchanges. US-style discovery involving voluminous broad-category document requests and oral depositions are usually not permitted unless the parties agree. As a result of the limited discovery available, there is a premium on developing a party's own case and anticipating the other side's case in order to prepare a response in advance of the oral hearing. There are no formal rules of evidence and no formal rules as to the burden of proof. Typically, each side is said to bear the burden of proving each factual proposition it advances. The International Bar Association (IBA) Rules on the Taking of Evidence in International Arbitration have sometimes been referred to by tribunals as guidelines.

§1.11 TRANSPARENCY AND THE ROLE OF NGOs Recently, certain non-governmental organizations (NGOs) have protested the lack of transparency in NAFTA arbitrations because some of the cases involve questions of great public importance, for example, environmental issues. In the Methanex case, for example, a Canadian company sought almost USD 1 billion in damages against the US government because of California's ban of MTBE, a chemical additive to gasoline. Methanex claimed, inter alia, that the ban was based on junk science and constituted an expropriation of its business, as well as being a violation of other sections of Chapter 11 of NAFTA. An NGO sought the right to intervene and participate in the case on the side of the government, but its request to intervene was denied. The NAFTA Tribunal did, however, permit the NGO to file an amicus curiae brief. Subsequently, the NAFTA parties issued an interpretive declaration permitting third-party amicus briefs and the Methanex merits P 17 hearing was opened to the public.

§1.12 SOVEREIGN IMMUNITY AND THE ENFORCEMENT OF STATE AWARDS Foreign governments generally enjoy varying measures of immunity, both from

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jurisdiction and from enforcement, in national courts. Investors usually seek an express waiver of immunity in their contracts with governments or government-owned companies. A waiver may be explicit or implicit. An agreement to arbitrate is generally considered as an implicit waiver of sovereign immunity. In the USA, any lawsuits against foreign sovereigns or their companies, including attempts to enforce foreign judgments or arbitral awards, must meet the requirements of the federal FSIA. (12) The FSIA adopts the restrictive theory of sovereign immunity, allowing foreign sovereigns to be sued in the USA for acts of a commercial, but not a governmental, nature.

§1.13 SOURCES OF INFORMATION ABOUT FOREIGN INVESTMENT DISPUTES [A] Selected Websites and Other On-line Resources [1] International Centre for Settlement of Investment Disputes (ICSID), https://icsid. worldbank.org/ICSID/Index.jsp [2] Digest of International Investment Jurisprudence, http://www.investment-lawdigest.com/ [3] International Arbitration Case Law (IACL), http://www.internationalarbitrationcaselaw. com/ [4] UNCTAD Database on Treaty-Based Investor-State Dispute Settlement Cases, http:// iiadbcases.unctad.org/ [5] Investment Treaty Arbitration, http://italaw.com/ [6] Investment Arbitration Reporter, http://www.iareporter.com/ [7] Investment Treaty News, http://www.iareporter.com/ [8] Kluwer Arbitration Blog, http://kluwerarbitrationblog.com/ [9] Transnational Dispute Management, http://www.transnational-dispute-management. com/welcome.asp [10] International Court of Justice (ICJ), http://www.icj-cij.org/ [11] European Court of Human Rights (ECTHR), http://www.echr.coe.int/ [12] United Nations Commission on International Trade Law (UNCITRAL), http://www. uncitral.org/ P 18 [13] US Department of State, http://www.state.gov/

[14] North American Free Trade Agreement (NAFTA), https://www.nafta-sec-alena.org/ (NAFTA Secretariat) and http://www.naftaclaims.com (NAFTA Chapter 11 disputes) [15] Overseas Private Investment Corporation (OPIC), http://www.opic.gov/

[B] Selected Sources for Locating Case Law [1] ICSID Reports (Cambridge University Press) [2] International Legal Materials (American Society of International Law) [3] Mealey’s International Arbitration Report (LexisNexis Mealey's) [4] International Law Reports (Cambridge University Press) [5] International Council Commercial Arbitration (ICCA), Yearbook Commercial Arbitration (Kluwer Law International) [6] Stockholm [International] Arbitration Report ( Juris Publishing)

[C] Selected Authoritative Treatises [1] Charles N. Brower and Jason Brueschke, The Iran-United States Claims Tribunal (Martinus Nijhoff Publishers 1998) [2] David D. Caron and Lee M. Caplan, The UNCITRAL Arbitration Rules: A Commentary (2nd ed., Oxford University Press 2013) [3] John Collier and Vaughan Lowe, The Settlement of Disputes in International Law– Institutions and Procedures (Oxford University Press 1999) [4] W. Laurence Craig, William W. Park and Jan Paulsson (eds), International Chamber of Commerce Arbitration (3rd ed., Oceana Publications 2000) [5] James R. Crawford, The International Law Commission’s Articles on State Responsibility (Cambridge University Press 2002) [6] Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers 1995) [7] ICSID, Investment Laws of the World (Oceana Publishing 1973)

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[8] K.V.S.K. Nation, ICSID Convention: The Law of the International Centre for Settlement of Investment Disputes ( Juris Publishing 2000) [9] Richard B. Lillich (ed.), The Valuation of Nationalized Property in International Law, Vols 1-4 (University Press of Virginia 1972-1987) [10] Antonio R. Parra, The History of ICSID (Oxford University Press 2012) [11] Christoph H. Schreuer et al., The ICSID Convention: A Commentary (2nd ed., Cambridge P 19 University Press 2009)

[12] M. Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International 2000) [13] UNCTAD, International Investment Instruments: A Compendium (United Nations Publications 1996 et seq.) [14] UNCTAD, Issues in International Investment Agreements – ‘Pink Series' and its Sequels (United Nations Publications 1999 et seq.) [15] UNCTAD, Bilateral Investment Treaties in the Mid-1990s (United Nations Publications 1998) [16] Kenneth J. Vandevelde, United States Investment Treaties: Policy and Practice (Kluwer Law International 1992)

[D] Selected Journals [in alphabetical order] [1] The American Review of International Arbitration ( Juris Publishing) [2] Arbitration International (Kluwer Law International) [3] ICSID Review – Foreign Investment Law Journal (Oxford University Press) [4] Journal of International Arbitration (Kluwer Law International) [5] Journal of World Investment & Trade (Martinus Nijhoff Publishers) P 19 [6] The Transnational Dispute Management Journal (MARIS BV Publishing)

References 1) Oscar Chinn (United Kingdom v. Belgium), [1934] P.C.I.J. (ser. A/B) No. 63 (December 12). 2) Factory at Chorzow (Germany v. Poland), [1927] P.C.I.J. (ser. A) No. 9 ( July 26). 3) Mavrommatis Palestine Concessions (Greece v. United Kingdom), [1924] P.C.I.J. (ser. B)

No. 3 (August 30). 4) Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), 1964 I.C.J. 6 (

July 24).

5) BP Exploration Co. (Libya) Ltd v. The Government of the Libyan Arab Republic, Award of

10 October 1973, 53 I.L.R. 297 (1979).

6) Texaco Overseas Petroleum Company (TOPCO) v. The Government of the Libyan Arab

Republic, Award of 19 January 1977, 53 I.L.R. 389 (1979). 7) Libyan American Oil Company (LIAMCO) v. The Government of the Libyan Arab Republic,

Award of 12 April 1977, 20 I.L.M. 1 (1981).

8) The Government of the State of Kuwait v. American Independent Oil Company

(AMINOIL), Award of 24 March 1982, 21 I.L.M. 976 (1982).

9) Elettronica Sicula S.p.A. (ELSI) (United States v. Italy), [1989] I.C.J. 15 ( July 20) 10) IMF, Foreign Direct Investment Trends and Statistics: A Summary, available at

http://www.imf.org/external/np/sta/ fdi/eng/2003/102803s1.pdf (accessed 1 September 2013). 11) UNCTAD, World Investment Report 2012: Towards A New Generation of Investment Policies, available at http://www. unctad-docs.org/files/UNCTAD-WIR2012-Full-en.pdf (accessed 1 September 2013). 12) Codified at 28 U.S.C. § 1601, et seq

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Chapter 2: Treaty Arrangements for Bilateral Investment Disputes

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Publication

In the absence of a conventional legal regime governing foreign investment in a particular state, the foreign investor would be subject to the law of the host state and customary international law. While, as will be explained in chapter 8 in detail, customary international law provides significant substantive protections to the foreign investor, it does not include default dispute resolution modalities that would supplant those in the host state. Bilateral investment treaties (and latterly multilateral investment treaties) establish a regime of protections for the foreign investor as well as dispute resolution mechanisms external to those of the host state, which operate at the initiative of the investor. This chapter reviews the history of these bilateral and multilateral efforts and their structures.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Topics

Investment Arbitration

§2.01 INTRODUCTION: WHY TREATIES HAVE BEEN CONCLUDED WITH RESPECT TO INTERNATIONAL INVESTMENT

Bibliographic reference

Professor Salacuse, writing in 1990, set out some of the reasons underlying the increasing efforts by a large number of states to conclude bilateral investment treaties.

'Chapter 2: Treaty Arrangements for Bilateral Investment Disputes', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 21 212

[A] Jeswald W. Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries, 24 Int’l Law. 655, 659-660 (1990) (Citations selectively omitted) *** The impetus for this flurry of treaty-making activity over the last thirty years has been the strong drive by nationals and companies of certain states to undertake direct foreign investments in other countries and the consequent need to create a stable international legal framework to facilitate and protect those investments. These investors felt that relying on host country law alone subjected foreign investment capital to a variety of risks. Host countries may easily change the law after an investment is made, and host government officials responsible for applying local law may not always act impartially toward foreign investors and their enterprises. Moreover, investors and their home country governments considered that local law in some countries impeded the entry of foreign capital, treated foreign investments in an arbitrary and discriminatory manner, and imposed onerous conditions on the operation of privately owned foreign enterprises. These concerns proved to be more than theoretical, for the 1960s and 1970s witnessed numerous interferences by host governments with foreign investments in their territories. P 22

International law offered foreign investors little effective protection. Not only did customary international law contain no generally accepted rules on the subject, it also lacked a binding mechanism to resolve investment disputes. Moreover, the very nature of the international law governing foreign investment became a matter of serious controversy in the 1970s with the demand by developing countries for the establishment of a New International Economic Order. While capital-exporting countries asserted that customary international law imposed an obligation on the host country to respect a minimum standard of protection in dealing with foreign investors, many developing countries rejected this view of customary international law. Their position appears to be summarized in article 2(c) of the United Nations Charter of Economic Rights and Duties of States, which provides that each state has the right to nationalize or expropriate foreign property, and that the exercise of this right is not subject to any condition beyond the duty to pay appropriate compensation having regard to all the circumstances. Moreover, article 2(c) also holds that the host country is not required to give foreign companies preferential treatment, and that it has the power to revise and renegotiate contracts it has made with foreign companies. This lack of consensus creates great uncertainty as to the degree of legal protection that an investor might expect under international law. What is clear under customary international law is that the ability of a foreigner to undertake an investment in the host country is subject exclusively to the sovereignty of the host country. The host country has the right to control the movement of capital into its territory, to regulate all matters pertaining to the acquisition and transfer of property within its national boundaries, to determine the conditions for the exercise of economic activity by natural and legal persons, and to control the entry and activity of aliens. Foreign investors and their home countries often consider these sovereign rights as having the potential to create barriers to foreign capital and to limit their freedom to undertake investments in the first place. Despite various efforts, no multilateral arrangements emerged to supplant the uncertainties of customary international law. Accordingly, western capital-exporting countries sought to conclude bilateral treaties with individual developing states to establish specific legal rules governing investment and economic activities by their nationals in the territories of other states. For their part, many Third World countries have seen such bilateral agreements as a way to promote

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foreign investment in their territories and have therefore willingly negotiated and ratified them. ***

[B] Comments and Questions 1.

P 23

2.

3.

4.

5.

P 24

In the nineteenth century, a number of scholars contended that foreign investment was a right of developed states and an obligation of a state in which such investments might be made. Thus, the United States justified the forcible opening of Japan by Commodore Perry on these grounds. By the twentieth century, that view had largely been repudiated, but, ironically, by the many developing countries themselves that actively sought foreign investment. Nonetheless, Professor Salacuse's statement as to the exclusive competence of a host country to determine whether or not to permit the entrance of an investment is a correct statement of international law. Once an investment has been permitted by a host state, however, Professor Salacuse may have minimized the clarity and force of customary and international law with respect to protection of those investments. The matter is discussed in more detail in Chapter 8 infra. On the much-debated question of the utility of bilateral investment treaties, see Lauge Skovgaard Poulsen, The Importance of BITs for Foreign Direct Investment and Political Risk Insurance: Revisiting the Evidence, Y.B. on Int'l Inv. L. and Pol'y 2009/2010 (K. Sauvant ed., 2010); Anthea Roberts, Power and Persuasion in Investment Treaty Interpretation, 104 Am. J. of Int'l L. 179, 179-225 (2010); Jennifer L. Tobin & Susan Rose-Ackerman, When BITs Have Some Bite: The Political-Economic Environment for Bilateral Investment Treaties, 6 Rev. of Int'l Org., no. 1, March 2011, at 1-32; Jason Webb Yackee, Do Bilateral Investment Treaties Promote Foreign Direct Investment-Some Hints from Alternative Evidence, 54 Va. J. Int'l L. 397 (2010); and Mary Hallward-Driemeier, Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit…And They Could Bite (World Bank Dev. Research Grp. Inv. Climate, Policy Research Working Paper No. 3121, 2003). For further discussion, see Todd Allee & Clint Peinhardt, Delegating Differences: Bilateral Investment Treaties and Bargaining over Dispute Resolution Provisions, 54 Int'l Stud. Q., no. 1, 2010, at 1-26; Nina Bandeli & Matthew Mahutga, Structures of Globalization: Evidence from the Worldwide Network of Bilateral Investment Treaties (1959-2009), Int'l J. of Comp. Soc. (2012); Julien Chaisse & Christian Bellak, Do Bilateral Investment Treaties Promote Foreign Direct Investment?, 3 Transnat'l Corp. Rev., no. 4, 2011, at 3-10; Peter Egger & Valeria Merlo, BITs Bite: An Anatomy of the Impact of Bilateral Investment Treaties on Multinational Firms, 114 Scandinavian J. of Econ. 1240, 1240-1266 (2012); Nikos Lavranos, Member States’ Bilateral Investment Treaties (BITs): Lost in Transition?, Hague Y.B. of Int'l L. 2011 281-311 (2012); Kong Qingjiang, US-China Bilateral Investment Treaty Negotiations: Context, Focus, and Implications, 7 Asian J. of WTO & Int'l Health L. & Pol'y, no. 1, March 2012, at 181-94; and Federico Lavopa, Lucas Barreiros, & M. Bruno, How to Kill a BIT and Not Die Trying: Legal and Political Challenges of Denouncing or Renegotiating Bilateral Investment Treaties (Soc'y of Int'l Econ. L. (SIEL), 3rd Biennial Global Conference, Working Paper No. 2012/49, 2012). The recent ICSID case Brandes v. Venezuela, in which the Tribunal interpreted Article 22 of the Venezuelan Investment Law to not allow foreign investors access to ICSID arbitration unless the investors' countries of nationality had signed particular treaties with Venezuela, demonstrates the risks faced by foreign investors “relying on host country law alone.” Brandes Investment Partners, LP v. The Bolivarian Republic of Venezuela, ICSID Case No. ARB/08/3, Decision on Jurisdiction (Aug. 2, 2011). Venezuela's January 2012 withdrawal from ICSID will not likely affect the pending arbitration claims asserting jurisdiction under relevant BITs that provide for ICSID arbitration, as the treaties all bind the state for the next ten to fifteen years. See Elisabeth Eljuri, Ramón J. Alvins, & Gustavo A. Mata, Venezuela Denounces the ICSID Convention, Norton Rose ( January 2012), http://www.nortonrose. com/knowledge/publications/62427/venezuela-denounces-the-icsid-convention; Michael Nolan & Edward Baldwin, Venezuela: Venezuela Withdraws from the World Bank’s International Centre for Settlement of Investment Disputes, Mondaq (Feb. 7, 2012), http://www.mondaq.com/x/163554/Arbitration+Dispute+Resolution/Venezuela +Withdraws+From+The+World+Banks+International+Centre+For+Settlement+Of+ Investment+Disputes. But investors bringing claims solely under the Investment Law will have no recourse through ICSID. This is the case of many U.S. investors, who will need an additional form of consent from Venezuela to arbitrate under ICSID.

§2.02 PRECURSORS OF MODERN INVESTMENT TREATIES [A] Treaties of Friendship, Commerce and Navigation Although there are many variations of FCN treaties concluded by the United States, and they have evolved since their inception, the Israel-United States FCN treaty is a relatively

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late example of this type of instrument. [1] John F. Coyle, The Treaty of Friendship, Commerce and Navigation in the Modern Era, 51 Colum. J. Transnat’l L. 302, 303-304, 319-323 (2013) (1) (Citations selectively omitted) *** The bilateral treaty of friendship, commerce and navigation (FCN treaty) was once a staple of international diplomacy. Throughout the nineteenth century and well into the twentieth, the United States and other nations routinely entered into agreements that sought to determine “the legal status that each country grants to citizens of the other country living on its territory.” These treaties covered what today seems an extraordinary number of topics – human rights, trade, intellectual property, investment protection, immigration, shipping, taxation, establishment, inheritance and even workers' compensation – in a single legal text. Today, the conventional wisdom is that FCN treaties are historical relics; no new treaties of this type have been concluded by the United States in over forty years. Nations have instead entered into specialized agreements on topics that were historically addressed in FCN treaties. The General Agreement on Tariffs and Trade, for example, now covers trade issues. The International Covenant on Civil and Political Rights now covers many human rights issues. Bilateral investment treaties now cover issues relating to foreign investment. The conventional wisdom, in short, is that the wide-ranging FCN treaties have outlived their usefulness. *** In the absence of robust constitutional protections, discriminatory laws that prohibited aliens from working in certain occupations proliferated. As late as 1946, forty-nine states barred noncitizens from practicing law, thirty-nine states barred them from the liquor trade, seventeen states barred them from working as embalmers at funeral homes … During this era, FCN treaties served as an important check on the ability of the states and localities to enforce those laws that imposed limitations on an alien's ability to work in the occupation of his choosing. Consider the case of Asakura v. City of Seattle, in which the P 25 Supreme Court considered a challenge to a Seattle ordinance that banned noncitizens from operating pawnshops. This ordinance was challenged by a Japanese national on the grounds that it violated an FCN treaty provision guaranteeing him the right to “carry on trade” in the United States. A unanimous Supreme Court held that the term “trade” was broad enough to encompass pawnbroking and that the ordinance could not be validly applied to Japanese citizens. Thereafter, although Seattle could legally apply the ordinance to prevent certain aliens from operating pawnshops, it could not apply the ordinance to Japanese citizens or, indeed, to nationals of any other state that had negotiated an FCN treaty with the United States guaranteeing the right of establishment on the same terms. In the face of state and local legislation that imposed restrictions on the ability of aliens to work in certain occupations, and in light of many courts' reluctance to strike down such legislation on constitutional grounds, FCN treaties served as a vital source of protection against state discrimination. In 1948, however, this dynamic began to change. In that year, the Supreme Court struck down a California statute that prohibited the issuance of a fishing license to any “person ineligible for citizenship.” In its decision, the Court noted that under the U.S. Constitution, “the power of a state to apply its laws exclusively to alien inhabitants as a class is confined within narrow limits.” In the years that followed this decision, the lower federal courts and the state courts relied upon it to strike down a number of discriminatory state statutes on constitutional grounds. In 1971, the Supreme Court went a step further in Graham v. Richardson, holding that all state classifications based on alienage were subject to strict scrutiny. Over the next twenty years, state laws that discriminated on the basis of alienage were challenged and, in many cases, removed from the statute books. As a result, legal aliens residing in the United States today enjoy rights under the U.S. Constitution – including the right to work in the occupation of their choice – that are far more robust than in 1947. Ironically, this revolution in the Supreme Court's equal protection jurisprudence had the effect of undermining an instrument that had played a key role in guaranteeing the rights of aliens for the previous century – the FCN treaty. As a consequence of this shift, many of the rights that had historically been included in the FCN treaty were read directly into in the U.S. Constitution. Once this process was completed, these rights were exercisable by all aliens in the United States, not just those aliens whose country of origin had entered into an FCN treaty with the United States. In the wake of these decisions, however, litigants had little cause to invoke FCN treaties. Instead, discriminatory state laws were challenged as violating the Equal Protection Clause of the U.S. Constitution. *** [2] Kenneth J. Vandevelde, The Bilateral Investment Treaty Program of the United States, 21 Cornell Int’l L.J. 201, 203-208 (1988)

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(Citations selectively omitted) P 26 * * *

A. Early FCN Treaties The United States first obtained treaty protection for United States investment abroad through brief provisions inserted in a long series of Friendship, Commerce, and Navigation treaties (“FCNs”). Until recently, however, purposes of investment protections were merely incidental to the FCNs, which focused upon trade and navigation. FCN agreements date from the founding of the Republic. Benjamin Franklin, Arthur Lee, and Silas Deane negotiated the first FCN, with France, shortly after the signing of the Declaration of Independence. The treaty, signed in 1778, established trade between the two countries on a most-favored- nation basis and adopted certain principles of maritime trade related to war. The United States concluded similar agreements with the Netherlands in 1782, and with Sweden in 1783. In 1784, following the end of the War of Independence, Congress established a commission consisting of Benjamin Franklin, John Adams, and Thomas Jefferson to negotiate additional FCNs and renegotiate the three existing treaties. The United States signed agreements with Prussia in 1785, and Morocco in 1787. In 1794 the United States signed an FCN with England, and a comparable agreement with Spain in 1795. From the beginning of the nineteenth century until the mid-1960s the United States negotiated several additional waves of FCNs. Typically, these agreements provided for MFN treatment with respect to trade, mutual guarantees against discrimination, exchange of consuls, and duties of parties with respect to neutral trade in time of war. Investment protection provisions did not play a prominent part in these early FCNs. Of the four principal provisions of the BIT, only the treatment provision is found in early nineteenth century FCNs. The early FCNs imposed an absolute standard of treatment for the property of the other party's nationals by guaranteeing “special protection” or “full and perfect protection.” By the mid-nineteenth century, antecedents of the BIT's expropriation provision prohibited the seizures of “vessels, cargoes, merchandise and effects” of the other party's nationals without payment of “equitable and sufficient compensation.” Later treaties broadened this guarantee to “property” generally. The FCNs also forbade the confiscation of debts or other property during hostilities. Toward the end of the century, FCNs began to address currency transfer restrictions. An 1881 FCN with Serbia guaranteed the right to “export proceeds of the sale of property” without paying higher duties than nationals of the host state or any third state. Protection against currency restrictions thus was relative rather than absolute. FCNs of that period also began to include relative standards of treatment for investment. FCNs concluded in the late nineteenth century guaranteed either national treatment, MFN treatment, or both for commercial activities in each party's territory. During the 1920s and 1930s, the United States negotiated a series of FCNs containing a uniform protection of investment provision. The absolute treatment standard language guaranteed “the most constant protection and security” and the protection “required by international law.” The relative treatment standard language guaranteed MFN treatment, national treatment, or both for commercial activity. The expropriation provision provided that “property [of the other party's nationals] shall not be taken without due process of law and without payment of just compensation.” Although currency transfer P 27 provisions were not common, at least one of the FCNs in this series provided MFN or national treatment for certain transfers. The Trade Agreements Act of 1934, authorizing negotiation of a series of reciprocal trade agreements, diminished the FCN's importance as the United States's primary instrument of international trade policy. The United States's signing of the General Agreement on Tariffs and Trade (“GATT”), which obliged all contracting parties to afford MFN treatment with respect to trade, further eroded the FCN's importance. The GATT's multilateral provisions largely obviated the need for the FCN's bilateral trade obligations. B. The Modern FCN Treaty Series Following World War II, the United States negotiated a new series of FCNs (“the modern FCNs”). This was the first series of United States treaties in which the protection of United States investment abroad was a primary goal. The United States negotiated these treaties using a model text derived from the FCNs concluded during the 1920s and 1930s. The earlier FCNs served as the model because they provided an existing framework into which new provisions for investment protection could be inserted and they were demonstrably acceptable to potential treaty partners. Moreover, the FCNs covered a diverse range of subjects with respect to which concessions could be made in return for investment protection. Indeed, contemporary commentators believed that a treaty limited to investment-specific provisions would be “unrealistic and inadequate.” They also believed that the FCN trade provisions helped establish a generally favorable investment climate, furthering the protection of United States investment abroad.

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The modern FCNs contained antecedents to three of the four BIT core provisions. First, both aspects of the treatment provision were largely anticipated. As a relative standard of treatment, they guaranteed that certain types of investment of a national of one party would be given national and MFN treatment by the other party with respect to certain types of transactions, a protection that the BITs broadened. The modern FCNs contained antecedents to all but one of the absolute standards present in the BIT treatment provision. Second, the modern FCNs contained an expropriation provision that guaranteed prompt, adequate, and effective compensation. Although the BITs revised and expanded the wording of this provision, the protection afforded remains essentially the same. Finally, the modern FCN continued protection against exchange controls, although not as extensive as that provided by the BITs. Nevertheless, the modern FCNs marked the first time that the United States had negotiated a series of bilateral agreements that protected investors from exchange controls. The United States successfully negotiated modern FCN agreements with major developed countries but had difficulty concluding them with third world states. The United States ultimately negotiated twenty-one such agreements, beginning with Taiwan in 1946, and concluding with Togo and Thailand in 1966. *** [3] Comments and Questions 1. P 28

2.

For a detailed review of earlier United States commercial treaties, see R. Wilson, United States Commercial Treaties and International Law (1960). For a judicial discussion of the United States bilateral treaties, see Sumitomo ShajiAmerica, Inc. v. Adagliano, 457 U.S. 176 (1982). See generally H. Hawkins, Commerical Treaties and Agreements: Principles and Practice (1951) (discussing the modern FCNs); R. Wilson, The International Law Standard in Treaties of the United States (1953); Herman Walker, Jr., Modern Treaties of Friendship, Commerce and Navigation, 42 Min. L. Rev. 805 (1958); Herman Walker, Jr., Treaties for the Encouragement and Protection of Foreign Investment: Present United States Practice, 5 Am. J. Comp. L. 229 (1956); Robert R. Wilson, A Decade of New Commercial Treaties, 50 Am. J. Int'l L. 927 (1956); Robert R. Wilson, Postwar Commercial Treaties of the United States, 43 Am. J. Int'l L. 262 (1949); Robert R. Wilson, Property-Protection Provisions in United States Commercial Treaties, 45 Am. J. Int'l L. 83 (1951). A list of FCN treaties of the United States in force as of January 1, 2011 are listed in United States Department of State, Treaties in Force (Department of State Publication 2011), available at http://www.state.gov/documents/organization/169274.pdf.

[B] Treaty of Friendship, Commerce and Navigation Between the United States of America and Israel [1] Treaty of Friendship, Commerce and Navigation Between the United States of America and Israel (1951), 5 U.S.T. 550 (1954) Article I Each Party shall at all times accord equitable treatment to the persons, property, enterprises and other interests of nationals and companies of the other Party. Article II 1. Nationals of either Party shall be permitted to enter the territories of the other Party and to remain therein: (a) for the purpose of carrying on trade between the territories of the two Parties and for the purpose of engaging in related commercial activities; and (b) for other purposes subject to the laws relating to the entry and sojourn of aliens. 2. Nationals of either Party, within the territories of the other Party, shall be permitted: (a)to travel therein freely, and to reside at places of their choice; (b) to enjoy liberty of conscience; (c) to hold both private and public religious services; (d)to bury their dead according to their religious customs in suitable and convenient places; (e) to gather and to transmit material for dissemination to the public abroad; and (f) to communicate with other persons inside and outside such territories by mail, telegraph and other means open to general public use. 3. The provisions of the present Article shall be subject to the right of either Party to apply measures that are necessary to maintain public order and necessary to protect the public health, morals and safety. Article III 1. Nationals of either Party within the territories of the other Party shall be free from unlawful molestations of every kind, and shall receive the most constant protection and P 29 security, in no case less than that required by international law.

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2. If, within the territories of either Party, a national of the other Party is accused of crime and taken into custody, the nearest diplomatic or consular representative of his country shall on the demand of such national be immediately notified. Such national shall: (a) receive reasonable and humane treatment; (b) be formally and immediately informed of the accusations against him; (c) be brought to trial as promptly as is consistent with the proper preparation of his defense; and (d) enjoy all means reasonably necessary to his defense, including the services of competent counsel. Article IV 1. Nationals of either Party shall be accorded national treatment in the application of laws and regulations within the territories of the other Party that establish a pecuniary compensation, or other benefit or service, on account of disease, injury or death arising out of and in the course of employment or due to the nature of employment. 2. In addition to the rights and privileges provided in paragraph 1of the present Article, nationals of either Party shall, within the territories of the other Party, be accorded national treatment in the application of laws and regulations establishing systems of compulsory insurance, under which benefits are paid without an individual test of financial need: (a) against loss of wages or earnings due to old age, unemployment, sickness or disability, or (b) against loss of financial support due to the death of father, husband or other persons on whom such support had depended. Article V 1. Nationals and companies of either Party shall be accorded national treatment and most- favored-nation treatment with respect to access to the courts of justice and to administrative tribunals and agencies within the territories of the other Party, in all degrees of jurisdiction, both in pursuit and in defense of their rights. It is understood that companies of either Party not engaged in activities within the territories of the other Party shall enjoy such access therein without any requirement of registration or domestication. 2. Contracts entered into between nationals and companies of either Party and nationals and companies of the other Party, that provide for the settlement by arbitration of controversies, shall not be deemed unenforceable within the territories of such other Party merely on the grounds that the place designated for the arbitration proceedings is outside such territories or that the nationality of one or more of the arbitrators is not that of such other Party. No award duly rendered pursuant to any such contract, and final and enforceable under the laws of the place where rendered, shall be deemed invalid or denied effective means of enforcement within the territories of either Party merely on the grounds that the place where such award was rendered is outside such territories or that the nationality of one or more of the arbitrators is not that of such Party. Article VI 1. Property of nationals and companies of either Party shall receive the most constant P 30 protection and security within the territories of the other Party.

2. The dwellings, offices, warehouses, factories and other premises of nationals and companies of either Party located within the territories of the other Party shall not be subject to unlawful entry or molestation. Official searches and examinations of such premises and their contents, when necessary, shall be made with careful regard for the convenience of the occupants and the conduct of business. 3. Property of nationals and companies of either Party shall not be taken except for public purposes, nor shall it be taken without the payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the equivalent of the property taken; and adequate provision shall have been made at or prior to the time of taking for the determination and prompt payment thereof. 4. Neither Party shall take unreasonable or discriminatory measures that would impair the legally acquired rights or interests within its territories of nationals and companies of the other Party in the enterprises which they have established or in the capital, skills, arts or technology which they have supplied; nor shall either Party unreasonably impede nationals and companies of the other Party from obtaining on equitable terms the capital, skills, arts and technology it needs for its economic development. 5. Nationals and companies of either Party shall in no case be accorded, within the territories of the other Party, less than national treatment and most-favored-nation treatment with respect to the matters set forth in paragraphs 2 and 3 of the present Article. Moreover, enterprises in which nationals and companies of either Party have a controlling interest shall be accorded, within the territories of the other Party, not less than national treatment and most-favored- nation treatment in all matters relating to the taking of privately owned enterprises into public ownership and to the placing of such enterprises under public control. Article VII 1. Nationals and companies of either Party shall be accorded national treatment with

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respect to engaging in all types of commercial, industrial, financial and other activity for profit (business activities) within the territories of the other Party, whether directly or by agent or through the medium of any form of lawful juridical entity. Accordingly, such nationals and companies shall be permitted within such territories: (a) to establish and maintain branches, agencies, offices, factories and other establishments appropriate to the conduct of their business; (b) to organize companies under the general company laws of such other Party, and to acquire majority interests in companies of such other Party; and (c) to control and manage enterprises which they have established or acquired. Moreover, enterprises which they control, whether in the form of individual proprietorships, companies or otherwise, shall, in all that relates to the conduct of the activities thereof, be accorded treatment no less favorable than that accorded like enterprises controlled by nationals and companies of such other Party. 2. Each Party reserves the right to limit the extent to which aliens may establish, acquire interests in, or carry on enterprises engaged within its territories in communications, air or water transport, banking, or the exploitation of land or other natural resources. However, neither Party shall deny to transportation, communications and banking companies of the other Party the right to maintain branches and agencies to perform functions necessary for essentially international operations in which they are permitted P 31 to engage. 3. The provisions of paragraph 1 shall not prevent either Party from prescribing special formalities in connection with the establishment of alien-controlled enterprises within its territories; but such formalities may not impair the substance of the rights set forth in said paragraph. 4. Nationals and companies of either Party, as well as enterprises controlled by such nationals and companies, shall in any event be accorded most-favored-nation treatment with reference to the matters treated in the present Article. Article VIII 1. Nationals and companies of either Party shall be permitted to engage, within the territories of the other Party, accountants and other technical experts, executive personnel, attorneys, agents and other specialists of their choice. Moreover, such nationals and companies shall be permitted to engage accountants and other technical experts regardless of the extent to which they may have qualified for the practice of a profession within the territories of such other Party, for the particular purpose of making examinations, audits and technical investigations for, and rendering reports to, such nationals and companies in connection with the planning and operation of their enterprises, and enterprises in which they have a financial interest, within such territories. 2. Nationals of either Party shall not be barred from practising the professions within the territories of the other Party merely by reason of their alienage; but they shall be permitted to engage in professional activities therein upon compliance with the requirements regarding qualifications, residence and competence that are applicable to nationals of such other Party. 3. Nationals and companies of either Party shall be accorded national treatment and most-favored-nation treatment with respect to engaging in scientific, educational, religious and philanthropic activities within the territories of the other Party, and shall be accorded the right to form associations for that purpose under the laws of such other Party. Nothing in the present Treaty shall be deemed to grant or imply any right to engage in political activities. Article IX 1. Nationals and companies of Israel shall be accorded, within the territories of the United States of America: (a)

(b)

national treatment with respect to leasing land, buildings and other immovable property appropriate to the conduct of commercial, manufacturing, processing, financial, construction, publishing, scientific, educational, religious, philanthropic and professional activities and for residential and mortuary purposes and with respect to occupying and using such property; and other rights in immovable property permitted by the applicable laws of the States, Territories and possessions of the United States of America.

2. Nationals and companies of the United States of America shall be accorded, within the territories of Israel, national treatment with respect to acquiring by purchase, or otherwise, and with respect to owning, occupying and using land, buildings and other immovable property. However, in the case of any such national domiciled in, or any such company constituted under the laws of, any State, Territory or possession of the United P 32 States of America that accords less than national treatment to nationals and companies of Israel in this respect, Israel shall not be obligated to accord treatment more favorable in this respect than such State, Territory or possession accords to nationals and companies of Israel. 3. Nationals and companies of either Party shall be accorded national treatment within

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the territories of the other Party with respect to acquiring, by purchase or any other method, and with respect to owning and using movable property of all kinds, both tangible and intangible. However, each Party may limit or prohibit: (a) alien ownership of interests in enterprises carrying on particular types of activity, but only to the extent that this can be done without impairing the rights and privileges secured by Article VII, paragraph 1, or by other provisions of the present Treaty; and (b) alien ownership of materials that are dangerous from the standpoint of public safety. 4. Nationals and companies of either Party shall be permitted freely to dispose of property within the territories of the other Party with respect to the acquisition of which through testate or intestate succession their alienage has prevented them from receiving national treatment, and they shall be permitted a term of at least five years in which to effect such disposition. 5. Nationals and companies of either Party shall be accorded within the territories of the other Party national treatment and most-favored-nation treatment with respect to disposing of property of all kinds. Article X Nationals and companies of either Party shall be accorded, within the territories of the other Party, national treatment and most-favored-nation treatment with respect to obtaining and maintaining patents of invention, and with respect to rights in trade marks, trade names, trade labels and industrial property of all kinds. Article XI 1. Nationals of either Party residing within the territories of the other Party, and nationals and companies of either Party engaged in trade or other gainful pursuit or in scientific, educational, religious or philanthropic activities within the territories of the other Party, shall not be subject to the payment of taxes, fees or charges imposed upon or applied to income, capital, transactions, activities or any other object, or to requirements with P 33 respect to the levy and collection thereof, within the territories of such other Party, more burdensome than those borne by nationals and companies of such other Party. 2. With respect to nationals of either Party who are neither resident nor engaged in trade or other gainful pursuit within the territories of the other Party, and with respect to companies of either Party which are not engaged in trade or other gainful pursuit within the territories of the other Party, it shall be the aim of such other Party to apply in general the principle set forth in paragraph 1 of the present Article. 3. Nationals and companies of either Party shall in no case be subject, within the territories of the other Party, to the payment of taxes, fees or charges imposed upon or applied to income, capital, transactions, activities or any other object, or to requirements with respect to the levy and collection thereof, more burdensome than those borne by nationals, residents and companies of any third country. 4. In the case of companies of either Party engaged in trade or other gainful pursuit within the territories of the other Party, and in the case of nationals of either Party engaged in trade or other gainful pursuit within the territories of the other Party but not resident therein, such other Party shall not impose or apply any tax, fee or charge upon any income, capital or other basis in excess of that reasonably allocable or apportionable to its territories, nor grant deductions and exemptions less than those reasonably allocable or apportionable to its territories. A comparable rule shall apply also in the case of companies organized and operated exclusively for scientific, educational, religious or philanthropic purposes. 5. Notwithstanding the provisions of the present Article, each Party may: (a) accord specific advantages as to taxes, fees and charges to nationals, residents and companies of third countries on the basis of reciprocity, if such advantages are similarly extended to nationals, residents and companies of the other Party; (b) accord to nationals, residents and companies of a third country special advantages by virtue of an agreement with such country for the avoidance of double taxation or the mutual protection of revenue; and (c) accord to its own nationals and to residents of contiguous countries more favorable exemptions of a personal nature with respect to income taxes and inheritance taxes than are accorded to other non-resident persons. Article XII 1. The treatment prescribed in the present Article shall apply to all forms of control of financial transactions, including (a) limitations upon the availability of media necessary to effect such transactions, (b) rates of exchange, and (c) prohibitions, restrictions, delays, taxes, charges and penalties on such transactions; and shall apply whether a transaction takes place directly, or through an intermediary in another country. As used in the present Article, the term “financial transactions” means all international payments and transfers of funds effected through the medium of currencies, securities, bank deposits, dealings in foreign exchange or other financial arrangements, regardless of the purpose or nature of such payments and transfers. 2. Financial transactions between the territories of the two Parties shall be accorded by

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each Party treatment no less favorable than that accorded to like transactions between the territories of that Party and the territories of any third country. Each Party, however, reserves rights and obligations it may have under the Articles of Agreement of the International Monetary Fund, except as may be otherwise provided in paragraphs 4 and 5 of the present Article. 3. Nationals and companies of either Party shall be accorded by the other Party national treatment and most-favored-nation treatment with respect to financial transactions between the territories of the two Parties or between the territories of such other Party and of any third country. 4. Nationals and companies of either Party shall be permitted to withdraw freely from the territories of the other Party, by obtaining exchange in the currency of their own country, (a) P 34

(b)

earnings, whether in the form of salaries, interest, dividends, commissions, royalties, payments for technical services or otherwise, and funds for amortization of loans and depreciation of direct investments and transfers of the whole or any portion of the compensation referred to in paragraph 3 of Article VI, and funds for capital transfers.

If more than one rate of exchange is in force, the rate applicable to the withdrawals referred to in the present paragraph shall be a rate which is specifically approved by the International Monetary Fund for such transactions or, in the absence of such specifically approved rate, an effective rate which, inclusive of any taxes or surcharges on exchange transfers, is just and reasonable. 5. Each Party shall retain the right in periods of exchange stringency to apply: (i) exchange restrictions to the extent necessary to assure the availability of foreign exchange for payments for goods and services essential to the health and welfare of its people, and (ii) specific exchange restrictions approved by the International Monetary Fund. In the event that either Party applies exchange restrictions, it shall make reasonable and specific provision for the withdrawals referred to in paragraph 4 (a) above, together with such provision for the withdrawals referred to in paragraph 4 (b) above as may be feasible, giving consideration to special needs for other transactions. 6. In general, any control imposed by either Party over financial transactions shall, subject to the reservation set forth in paragraph 2 of the present Article, be so administered as not to influence disadvantageously the competitive position of the commerce or investment of capital of the other Party in comparison with the commerce or the investment of capital of any third country. Article XIII Commercial travelers representing nationals and companies of either Party engaged in business within the territories thereof shall, upon their entry into and departure from the territories of the other Party and during their sojourn therein, be accorded most-favorednation treatment in respect of the customs and other matters, including, subject to the exceptions in paragraph 5 of Article XI, taxes and charges applicable to them, their samples and the taking of orders. Article XIV 1. Each Party shall accord most-favored-nation treatment to products of the other Party, from whatever place and by whatever type of carrier arriving, and to articles destined for exportation to the territories of such other Party, by whatever route and by whatever type of carrier, in all matters relating to customs duties and other charges, and with respect to all other regulations, requirements and formalities imposed on or in connection with imports and exports. 2. Neither Party shall impose any prohibition or restriction on the importation of any product of the other Party, or on the exportation of any article to the territories of the other Party, that: (a) P 35

(b) (c)

if imposed on sanitary or other customary grounds of a noncommercial nature or in the interest of preventing deceptive or unfair practices, arbitrarily discriminates in favor of the importation of the like product of, or the exportation of the like article to, any third country; if imposed on other grounds, does not apply equally to the importation of the like product of, or the exportation of the like article to, any third country; or if a quantitative regulation involving allotment to any third country with respect to an article in which such other Party has an important interest, fails to afford to the commerce of such other Party a share proportionate to the amount by quantity or value supplied by or to such other Party during a previous representative period, due consideration being given to any special factors affecting the trade in the article.

3. Nationals and companies of either Party shall be accorded national treatment and most- favored-nation treatment by the other Party with respect to all matters relating to importation and exportation.

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4. As used in the present Treaty the term “products of “means “articles the growth, produce or manufacture of “. The provisions of the present Article shall not apply to advantages accorded by either Party: (a) (b) (c)

to products of its national fisheries; to adjacent countries in order to facilitate frontier traffic; or by virtue of a customs union of which either Party, after consultation with the other Party, may become a member.

Article XV 1. Each Party shall promptly publish laws, regulations and rulings of general application pertaining to rates of duty, taxes or other charges, to the classification of articles for customs purposes, and to requirements or restrictions on imports and exports or the transfer of payments therefor, or affecting their sale, distribution or use; and shall administer such laws, regulations and rulings in a uniform, impartial and reasonable manner. 2. Each Party shall provide an appeals procedure under which nationals and companies of the other Party, and importers of products of such other Party, shall be able to obtain prompt and impartial review, and correction when warranted, of administrative action relating to customs matters, including the imposition of fines and penalties, confiscations, and rulings n questions of customs classification and valuation by the administrative authorities. Penalties imposed for infractions of the customs and shipping laws and regulations shall be merely nominal in cases resulting from clerical errors or when good faith can be demonstrated. Article XVI 1. Products of either Party shall be accorded, within the territories of the other Party, national treatment and most-favored-nation treatment in all matters affecting internal taxation, sale, distribution, storage and use. 2. Articles produced by nationals and companies of either Party within the territories of the other Party, or by companies of the latter Party controlled by such nationals and companies, shall be accorded therein treatment no less favorable than that accorded to like articles of national origin by whatever person or company produced, in all matters affecting exportation, taxation, sale, distribution, storage and use. Article XVII 1. Each Party undertakes (a) that enterprises owned or controlled by its Government, and that monopolies or agencies granted exclusive or special privileges within its territories, P 36 shall make their purchases and sales involving either imports or exports affecting the commerce of the other Party solely in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sale; and (b) that the nationals, companies and commerce of such other Party shall be afforded adequate opportunity, in accordance with customary business practice, to compete for participation in such purchases and sales. 2. Each Party shall accord to the nationals, companies and commerce of the other Party fair and equitable treatment, as compared with that accorded to the nationals, companies and commerce of any third country, with respect to: (a) the governmental purchase of supplies, (b) the awarding of concessions and other government contracts, and (c) the sale of any service sold by the Government or by any monopoly or agency granted exclusive or special privileges. Article XVIII 1. The two Parties will, upon the request of either of them, have discussions regarding the actual or prospective existence of business practices which may have harmful effects upon commerce between their respective territories; and each will take such measures as it deems appropriate with a view to eliminating such undesirable practices. Business practices which may have harmful effects are those which restrain competition, limit access to markets or foster monopolistic control, and which are engaged in or made effective by one or more private or public commercial enterprises or by combination, agreement, or other arrangement among such enterprises. 2. Rights and privileges with respect to commercial, manufacturing and processing activities accorded, by the provisions of the present Treaty, to privately owned and controlled enterprises of either Party within the territories of the other Party shall extend to rights and privileges of an economic nature granted to publicly owned or controlled enterprises of such other Party, in situations in which such publicly owned or controlled enterprises operate in fact in competition with privately owned and controlled enterprises. The preceding sentence shall not, however, apply to subsidies granted to publicly owned or controlled enterprises in connection with: (a) manufacturing or processing goods for government use, or supplying goods and services to the Government for government use; or (b) supplying, at prices substantially below competitive prices, the needs of particular population groups for essential goods and services not otherwise

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practically obtainable by such groups. 3. No enterprise of either Party, including corporations, associations, and government agencies and instrumentalities, which is publicly owned or controlled shall, if it engages in commercial, manufacturing, processing, shipping or other business activities within the territories of the other Party, claim or enjoy, either for itself or for its property, immunity therein from taxation, suit, execution of judgment or other liability to which privately owned and controlled enterprises are subject therein. Article XIX 1. Between the territories of the two Parties there shall be freedom of commerce and P 37 navigation.

2. Vessels under the flag of either Party, and carrying the papers required by its law in proof of nationality, shall be deemed to be vessels of that Party both on the high seas and within the ports, places and waters of the other Party. 3. Vessels of either Party shall have liberty, on equal terms with vessels of the other Party and on equal terms with vessels of any third country, to come with their cargoes to all ports, places and waters of such other Party open to foreign commerce and navigation. Such vessels and cargoes shall in all respects be accorded national treatment and mostfavored-nation treatment within the ports, places and waters of such other Party; but each Party may reserve exclusive rights and privileges to its own vessels with respect to the coasting trade, inland navigation and national fisheries. 4. Vessels of either Party shall be accorded national treatment and most-favored-nation treatment by the other Party with respect to the right to carry all articles that may be carried by vessel to or from the territories of such other Party; and such articles shall be accorded treatment no less favorable than that accorded like articles carried in vessels of such other Party, with respect to: (a) duties and charges of all kinds, (b)the administration of the customs, and (c) bounties, drawbacks and other privileges of this nature. 5. Vessels of either Party that are in distress shall be permitted to take refuge in the nearest port or haven of the other Party, and shall receive friendly treatment and assistance, including such repairs, as well as supplies and materials for repairs, as may be necessary and available. 6. The term “vessels”, as used herein, means all types of vessels, whether privately owned or operated, or publicly owned or operated; but this term does not, except with reference to paragraph 5of the present Article, include fishing vessels or vessels of war. Article XX There shall be freedom of transit through the territories of each Party by the routes most convenient for international transit: (a) (b) (c)

for nationals of the other Party, together with their baggage; for other persons, together with their baggage, en route to or from the territories of such other Party; and for articles of any origin en route to or from the territories of such other Party.

Such persons and articles in transit shall be exempt from transit, customs and other duties, and from unreasonable charges and requirements; and shall be free from unnecessary delays and restrictions. They shall, however, be subject to measures referred to in paragraph 3 of Article II, and to nondiscriminatory regulations necessary to prevent abuse of the transit privilege. Article XXI 1. The present Treaty shall not preclude the application of measures: (a) (b) (c) P 38

(d) (e)

regulating the importation or exportation of gold or silver; relating to fissionable materials, to radioactive byproducts of the utilization or processing thereof or to materials that are the source of fissionable materials; regulating the production of or traffic in arms, ammunition and implements of war, or traffic in other materials carried on directly or indirectly for the purpose of supplying a military establishment; necessary to fulfill the obligations of a Party for the maintenance or restoration of international peace and security, or necessary to protect its essential security interests; and denying to any company in the ownership or direction of which nationals of any third country or countries have directly or indirectly a controlling interest, the advantages of the present Treaty, except with respect to recognition of juridical status and with respect to access to courts.

2. The most-favored-nation provisions of the present Treaty relating to the treatment of goods shall not apply to: (a) advantages accorded by the United States of America or its Territories and possessions to one another, to the Republic of Cuba, to the Republic of

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the Philippines, to the Trust Territory of the Pacific Islands or to the Panama Canal Zone; or (b) advantages which Israel may accord and which existed under arrangements in force on May 13, 1948. 3. The provisions of the present Treaty relating to the treatment of goods shall not preclude action by either Party which is required or specifically permitted by the General Agreement on Tariffs and Trade (2) during such time as such Party is a contracting party to the General Agreement. Similarly, a contracting party to said Agreement may withhold from countries that have not acceded thereto particular advantages reciprocally negotiated thereunder. In the event that, pursuant to the foregoing sentence, either Party to the present Treaty withholds most-favored-nation treatment from any product of the other Party, such other Party may thereupon terminate Article XIV, paragraph 1, of the present Treaty on giving six months' notice. 4. The present Treaty does not accord any rights to engage in political activities. 5. Nationals of either Party admitted into the territories of the other Party for limited purposes shall not enjoy rights to engage in gainful occupations in contravention of limitations expressly imposed, according to law, as a condition of their admittance. Article XXII 1. The term “national treatment” means treatment accorded within the territories of a Party upon terms no less favorable than the treatment accorded therein, in like situations, to nationals, companies, products, vessels or other objects, as the case may be, of such Party. 2. The term “most-favored-nation treatment” means treatment accorded within the territories of a Party upon terms no less favorable than the treatment accorded therein, in like situations, to nationals, companies, products, vessels or other objects, as the case may be, of any third country. It is understood that established concessions and régimes which antedate the independence of Israel do not come within the purview of Article VII, paragraph 4, and Article VIII, paragraph 3. 3. As used in the present Treaty, the term “companies” means corporations, partnerships, companies and other associations, whether or not with limited liability and whether or P 39 not for pecuniary profit. Companies constituted under the applicable laws and regulations within the territories of either Party shall be deemed companies thereof and shall have their juridical status recognized within the territories of the other Party. 4. National treatment accorded under the provisions of the present Treaty to companies of Israel shall, in any State, Territory or possession of the United States of America, be the treatment accorded therein to companies created or organized in other States, Territories, and possessions of the United States of America. Article XXIII The territories to which the present Treaty extends shall comprise all areas of land and water under the sovereignty or authority of each of the Parties, other than the Panama Canal Zone and, except to the extent that the President of the United States of America shall otherwise determine, the Trust Territory of the Pacific Islands. Article XXIV 1. Each Party shall accord sympathetic consideration to, and shall afford adequate opportunity for consultation regarding, such representations as the other Party may make with respect to any matter affecting the operation of the present Treaty. 2. Any dispute between the Parties as to the interpretation or application of the present Treaty, not satisfactorily adjusted by diplomacy, shall be submitted to the International Court of Justice, unless the Parties agree to settlement by some other pacific means. Article XXV 1. The present Treaty shall be ratified, and the ratifications thereof shall be exchanged at Washington as soon as possible. 2. The present Treaty shall enter into force on the thirtieth day following the day of exchange of ratifications. It shall remain in force for ten years and shall continue in force thereafter until terminated as provided herein. 3. Either Party may, by giving one year's written notice to the other Party, terminate the present Treaty at the end of the initial ten-year period or at any time thereafter. *** [2] Comments and Questions 1.

The FCN Treaty, in its “mature” form, had become an omnibus instrument, covering many issues besides and not directly to related to investment. Investment treaties emerged from the FCN, as did multilateral trade agreements, multilateral human rights instruments, etc. Yet it is doubtful if the parties to these treaties saw the jurisdiction they established as extending to security matters. Hence, the

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P 40

2.

considerable surprise over the decision of the International Court of Justice in the Case Concerning Oil Platforms (Islamic Republic of Iran v. United States of America) Preliminary Objection, in which the Court found jurisdiction for matters concerning uses of military force in the maritime area on the basis of a jurisdictional clause in a Treaty of Amity, Economic Relations and Consular Rights between Iran and the United States from August 15, 1955. Oil Platforms (Islamic Republic of Iran v. United States of America), 1996 I.C.J. 803 (Dec. 12). The FCN treaty assumed that if the host state honored the restraints in the treaty, a foreign investment could flourish. The BIT, which may be viewed as the private dimension to the structural readjustment programs of the international financial agencies, operates on a different paradigm: that in order for the foreign investment to flourish to the benefit of the investor and the host state, the host state requires a legal infrastructure that is transparent and approximates the international standard of rule of law.

§2.03 HISTORY OF ATTEMPTS TO CREATE BILATERAL INVESTMENT TREATIES [A] Jeswald W. Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries, 24 Int’l Law. 655, 655-658 (1990) (3) (Citations selectively omitted) The negotiation of bilateral investment treaties, commonly known as BITs, has been quantitatively one of the more active areas of public international lawmaking during the last three decades. West Germany and Pakistan signed the first BIT in 1959. By 1989 over three hundred BITs had been concluded, and their signatories included all of the world's principal capital-exporting states and approximately eighty developing nations. Thus, in thirty years, the nations of the world fashioned an instrument of public international law to create rules for private foreign investments, an area that, despite western nations' claims to the contrary, has few generally accepted principles of customary international law. Although a BIT binds only the two signatory states, the general effect of the BIT movement has been to establish an increasingly dense network of treaty relationships between capital-exporting states and developing countries, a trend that appears likely to continue, and indeed accelerate, in the future. The Third World's increasing need for capital, its lack of other financial alternatives, and its growing willingness to accept foreign investment will undoubtedly lead it to sign many more BITs in the years ahead. As the nations of Eastern Europe seek to attract foreign capital, they too many conclude BITs with capital-exporting states. This article examines the BIT phenomenon, the process by which it has come about, the substantive rules it has created, and the effect it has had on foreign investment transactions. I. History of the BIT Bilateral commercial treaties have been a traditional method of facilitating trade between states. Since its earliest days, the United States has made a large number of such agreements, generally known as treaties of friendship, commerce, and navigation, and their geographic spread has reflected the expansion of American foreign trade. Although these early treaties were intended to facilitate trade and shipping, they P 41 occasionally contained provisions affecting the ability of one country's nationals to do business or own property in the territory of the other state. After World War I, the United States' treaties of friendship, commerce, and navigation increasingly dealt with investment abroad by securing agreement with other states on the treatment to be accorded U.S. nationals with respect to the establishment of businesses, the protection of American-owned property from arbitrary or discriminatory action, the mechanisms for the settlement of disputes, and the protection of patents and trademarks. With the great expansion in U.S. foreign investment following World War II, the United States Government undertook a program to conclude a network of bilateral treaties of friendship, commerce, and navigation that, in addition to other commercial matters, specifically sought to facilitate and protect U.S. direct investments abroad. From 1946 until 1966 the United States signed approximately twenty-two such treaties. This effort soon lost momentum, however, as developing countries, increasingly skeptical of the benefits that they might derive from unregulated foreign investment, demonstrated growing reluctance to make the types of guarantees requested by the United States Government to protect investments by American nationals. A new and important phase in the historical development of the BIT began on the eve of the 1960s, as individual European countries undertook to negotiate bilateral treaties that, unlike previous commercial agreements, dealt exclusively with foreign investment and sought to create a basic legal framework to govern investments by nationals of one country in the territory of the other country. The modern BIT was thus born. Germany, which had lost all of its foreign investments as a result of its defeat in World War II, took the lead in this new phase of bilateral treaty making. After concluding the first such agreement with Pakistan in 1959, Germany proceeded to negotiate similar

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treaties with countries throughout the developing world, and today it numerically remains the leader, having signed nearly seventy BITs. Switzerland, France, Italy, the United Kingdom, the Netherlands, and Belgium followed in a relatively short time. By the beginning of 1980, European countries had concluded approximately 150 BITs with a broad array of developing countries. The reason for the greater success of the European programs, as compared to earlier American efforts, is not completely clear, but it may lie in the fact that the European countries were less demanding than was the United States with respect to guarantees on such matters as free convertibility of local currency, abolition of performance requirements, and protection against expropriation. Moreover, the special relationship between European countries and their former colonies may have predisposed some newly independent nations to look favorably on concluding investment treaties with their previous colonial rulers. Encouraged by the experience of the Europeans, the United States in 1981 launched its own program to negotiate specific BITs with developing countries. By 1986 the United States had signed ten such treaties, and President Reagan submitted them in that year for Senate approval. Concerns in the Senate about the effect of the treaties on the United States' ability to take action to protect its national security delayed ratification for a time. But ultimately, in late 1988, the Senate approved, and President Reagan subsequently signed, eight of these treaties with the proviso that “either Party may take all measures necessary to deal with any unusual and extraordinary threats to national security.” The eight countries with which the United States has concluded BITs as of January 1, 1990, are Senegal, Zaire, Morocco, Turkey, Cameroon, Bangladesh, Egypt, and Grenada. The Senate deferred consideration of the signed BITs with Haiti and Panama P 42 for political reasons. Negotiations are continuing with other countries. ***

[B] Alice Hadley, Do China’s BITs Matter? Assessing the Effect of China’s Investment Agreements on Foreign Direct Investment Flows, Investors’ Rights, and the Rule of Law (unpublished paper, Yale Law School 2013) (Citations selectively omitted) *** Before assessing whether China's BITs have served the purposes for which the parties concluded them, it is important to understand what those purposes are and the role BITs play in the legal regime governing foreign investment. This section, therefore, briefly describes the development of the modern BIT regime and the purposes that BITs are thought to serve. It then summarizes the key components of BITs that, at least in theory, are important to strengthening investors' legal protections and attracting investment. A. The Development and Spread of BITs Unlike the international trade regime, liberalization of the international legal regime governing foreign investment has occurred primarily on a bilateral basis through Agreements for the Promotion and Protection of Investment, or BITs. In such treaties, partner countries extend binding promises to accord certain types of favorable treatment to investors of the other country and their investments within the partner country's territory. The practice of entering BITs began in the 1950s and 60s in response to the wave of expropriation and nationalization by developing countries of critical assets held by foreign investors. These expropriations demonstrated the dangers of investing in developing countries and undermined the Hull Rule of customary international law, which stated that investors whose investments were expropriated were entitled to “prompt, adequate, and effective” compensation. As the Hull Rule declined, developed countries turned to BITs as a new, more stable, and potentially more investor-friendly way of protecting their investors. Since Germany and the Islamic Republic of Pakistan signed the first BIT on November 25, 1959, BITs have become one of the most widely used tools for structuring economic relations between countries. Several Western European countries developed extensive BIT programs in the 1960s and 70s, and other developed countries soon followed suit. According to the United Nations Conference on Trade and Development (UNCTAD), there were 165 BITs in effect by 1980, and this number swelled to 1,859 by the end of 1999. By the end of 2011, there were 2,833 BITs in force, compared with 331 other international agreements concerning investment, principally bilateral and regional trade agreements containing investment provisions. In the early decades, BITs were primarily concluded between a developed country that was a significant exporter of FDI and a developing country that was primarily an FDI recipient. Today, however, countries of diverse levels of development and of all regime types conclude BITs. The rise in the last decade of BITs between two developing countries has been significant. China's rising importance as a BIT partner is partly responsible for this trend, combined with new BIT programs in Iran, P 43 India, and the states of the former Yugoslavia. B. The Purposes of BITs Generally, economists and legal scholars believe that countries sign BITs in order to promote foreign investment between the treaty partners. They argue that developing

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countries, which are primarily importers of FDI, want to attract investment but often face reluctance from developed countries investors due to the perception that the developing country lacks strong legal protections of property rights and that, therefore, an investment would be risky. Developing country governments view BITs as way of reassuring developed country investors and increasing the flow of investment, and therefore of capital, jobs, and new technologies, into their countries. Developed countries, on the other hand, are thought to conclude BITs primarily to protect investments made by their nationals and companies in foreign countries, particularly countries where the rule of law is weak. Most developed countries have strong property rights protections, and consequently BITs are not seen primarily as devices to increase inbound investment. Rather, by guaranteeing minimum standards of treatment and empowering investors to resolve their own disputes through international arbitration, BITs enable developed countries to protect their nationals' investments without the costly and politically charged process of espousing investors' claims. The language of the nearly three thousand BITs in effect supports this account of countries' motives: most announce that their purpose is to promote economic cooperation and investments between the parties. Although investment promotion is thought to be the primary goal of most countries in signing BITs, some developed countries have objectives beyond increasing FDI flows. These capital-exporting countries, particularly the liberal, market-oriented democracies, view BITs as part of a strategy to promote market liberalization around the world. The goals of the U.S. BIT program, for example, include “encourage[ing] adoption in foreign countries of market- oriented domestic policies that treat private investment fairly.” The OECD has also endorsed the “liberalisation of investment regimes” as a goal of investment treaties. Proponents of this view believe that BITs induce developing host countries to remove impediments in their regulatory systems to foreign investment, which creates more favorable conditions in the countries for private enterprise generally. A 2012 U.S. State Department press release articulated this view, proclaiming: “Highstandard BITs, such as those based on the U.S. model, … promote market-based economic reform and strengthen the rule of law.” As this statement suggests, some countries also view BITs as part of a larger campaign to promote good governance and the rule of law in developing countries. Proponents of this view argue that some developing countries sign BITs to remedy deficiencies in their own legal systems and to promote enforcement of the rule of law. The institutions of international investment arbitration substitute for domestic institutions, allowing countries to refrain from taking arbitrary actions toward their own as well as foreign investors. Ultimately, the reforms initiated by BITs may stimulate domestic legal reform along similar lines. The United States and other Western democracies have supported this theory, as have some officials of developing countries. The United States also views BITs as part of a broader program to strengthen ties with developing countries, particularly countries in strategically important regions, and assure positive long-term relations. P 44 * * *

[C] Comments and Questions 1.

2.

For further detail, see International Chamber of Commerce, Bilateral Treaties for International Investment (1980); United Nations Centre on Transnational Corporations, Bilateral Investment Treaties in the 1990s (1998); and United Nations Conference on Trade and Development, Bilateral Investment Treaties in the Mid1990s (1998). See also K. Scott Gudgeon, United States Bilateral Investment Treaties: Comments on their Origin, Purposes, and General Treatment Standards, 4 Int'l Tax & Bus. L. 105, 110 (1986); Andrew T. Guzman, Why LDCs Sign Treaties That Hurt Them: Explaining the Popularity of Bilateral Investment Treaties, 38 Va. J. Int'l L. 639 (1998); Kenneth J. Vandevelde, Investment Liberalization and Economic Development: The Role of Bilateral Investment Treaties,26 Colum. J. Transnat'l L. 501 (1998). See generally Jeswald W. Salacuse, The Law of Investment Treaties (OUP Oxford, 2010); William E. Coughlin, The U.S. Bilateral Investment Treaty: An Answer to Performance Requirements?, in Regulating the Multinational Enterprise: National and International Challenges 136-37 (B. Fisher & J. Turner eds, 1983); Zachary Elkins, et al., Competing for Capital: The Diffusion of Bilateral Investment Treaties, 2008 U. Ill. L. Rev. 265, 277 (2008); Pamela B. Gann, The U.S. Bilateral Investment Treaty Program, 21 Stan. J. Int'l L. 373 (1985); Ahmad Ali Ghouri, Resolving Incompatibilities of Bilateral Investment Treaties of the EU Member States with the EC Treaty: Individual and Collective Options, 16 Eur. L. J., no. 6, Nov. 2010, at 806-30; Stephan Schill, Crafting the International Economic Order: The Public Function of Investment Treaty Arbitration and Its Significance for the Role of the Arbitrator, 23 Leiden J. of Int'l L., no. 2, June 2010, at 401-30; Gus Van Harten, Five Justifications for Investment Treaties: A Critical Discussion, 2 Trade, L. & Dev., no. 1, 2010. Rudolf Dolzer and Margrete Stevens, in Bilateral Investment Treaties 14 (1995), observe: In drafting a BIT, the most difficult problem is probably striking the balance between details and generalities. A more detailed wording of a

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treaty would tend to make it easier for a potential foreign investor to ascertain his rights. On the other hand, in order to allow for some flexibility, it may be necessary to leave certain obligations in more general and therefore vague terms. On the whole, a trend in favor of more precisely worded BITs can be ascertained in comparison to the wording of traditional FCNs. It remains questionable, however, whether this trend has gone far enough or whether the appropriate balance between clarity and flexibility has been found. One important area, for example, which might benefit from a greater degree of specificity (and consequently predictability), concerns measures which do not formally deprive the owner of his title to property but which on the whole have the same effect as expropriation. In this context it may be recalled that the International Court of Justice (ICJ) was presented with the question of expropriation in the 1989 ELSI case where jurisdiction was founded on the 1948 FCN Treaty between Italy and United States. (4) In the event, the Court did not find it necessary to decide on whether the Treaty's protection extended to such “indirect” expropriation as had allegedly taken place.

P 45

3.

4.

5.

6.

The content of each investment treaty, in Eli Lauterpacht, The Drafting of the Treaties for the Protection of Investment, Brit. Inst. Int'l & Comp. L.Q. 18, 19-21, 23, 2832 (The Encouragement and Protection of Investment in Developing Countries, Supp. Publ. No. 3, 1962), is a function of the interests of the parties, domestic lobbies and pressure groups in each of them, and any restraints that may derive from the participation of one or both of the negotiating states in a multilateral trade or investment agreement. While each agreement must address the identity of beneficiaries, the scope of investments and activities that will be included, the scope of the protections and infrastructural services to be provided by the host state, and the regime establishing standards for protection, their content will inevitably reflect the idiosyncratic interests of the two parties as well as the power balance between them. Given the domestic pressures that operate on governments which invite foreign investments into their territories, should a highly legal dispute resolution mechanism be adopted or would a more flexible and politically sensitive dispute resolution procedure be preferred? Discuss. It is striking that treaty regimes establishing significant protections for direct foreign investment are almost exclusively the result of bilateral negotiations. To date, multilateral treaty making exercises have not been able to establish comparable general rules for the protection of direct foreign investment. Thus, the World Trade Organization has encountered great difficulty in clarifying and expressing general rules in this area. Is the reason for this the enhanced power of the capital-exporting party in the negotiation of a bilateral treaty and the enhanced power of a large number of capital-importing states in multilateral fora? At the 1996 Singapore Ministerial Conference, ministers from the WTO memberstates set up, among other things, a working group on trade and investment. In the 2001 Doha Ministerial Declaration, the member-states agreed to start negotiations on the issue of trade and investment at the Ministerial Conference in Cancun, Mexico in 2003. However, the member-states failed to reach an agreement on the terms as the overall talks at the Cancun Conference broke down, primarily due to differences between developed and developing countries over agriculture reform. In August 2004, the member-states finally agreed to drop the issue from the Doha agenda.

§2.04 MODERN INVESTMENT TREATIES [A] Bilateral Treaties [1] Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties, 10-11 (Martinus Nijhoff Publishers 1995) (Citations selectively omitted) Under customary international law, the alien was traditionally accorded limited rights and States therefore frequently sought to protect those of their subjects who engaged in foreign business ventures. Even though modern international law recognizes and protects minimum rights of aliens, the desire to establish special rules governing the treatment of P 46 foreign investment has remained. The forerunners of bilateral investment agreements, the FCNs, contained provisions relating to foreign property but these agreements were primarily concerned with facilitating trade as opposed to regulating foreign investment. A wide variety of matters were in fact covered by FCNs, ranging from the right to enter, access to local courts, enforceability of arbitral awards, the right to engage technical experts, questions concerning the lease of land, tax issues, customs treatment of commercial travellers, treatment of products and consultations regarding restrictive business practices.

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In the course of time, it became desirable to separate the various subject matters and treat them each in greater detail. But more importantly, the emergence of newly independent countries in the developing world, from the late 1950s onwards, brought about economies for which existing treaty arrangements were unsuited. Many of these new States were concerned that the broad spectrum of close political, economic and cultural cooperation which was envisaged by FCNs was probably more appropriate for agreements between States of comparable economic stature. Furthermore, key features of traditional FCNs (such as the unrestricted right to entry and the unqualified right of national treatment) were thought to be incompatible with the new political realities. These trends were reflected in various U.N. Resolutions, which, although vague in their legal implications, underscored the desire of developing countries not to be bound closely to the economies of developed countries. Further, developing countries were increasingly embarking on macro-economic policies that would take greater account of the different potential of the various sectors of their economy, and rigid legal obligations allowing for unrestricted access of foreign investors to national markets were incompatible with such policies. As a result of these factors, the FCN was no longer viewed as the proper instrument for bilateral economic cooperation and the BIT emerged to become the preferred type of agreement for forging bilateral protection agreements on investments. [2] Kenneth J. Vandevelde, United States Investment Treaties: Policy and Practice, 19-20 (Kluwer Law International 1992) (Citations selectively omitted) At the very time the United States' FCN program was winding down, several European countries, including the Federal Republic of Germany, the United Kingdom, Switzerland, the Netherlands, Belgium, and France, as well as Japan were commencing negotiation of new bilateral investment protection agreements (‘BIPAs') with a large number of developing and developed countries. Between 1962 and 1972, for example, the Federal Republic of Germany entered into 46 bilateral investment protection agreements while Switzerland entered into 27. During that same period, the United States concluded only the two modern FCNs with Togo and Thailand. Indeed, by the late 1970s, more than 170 BIPAs had been negotiated among some 65 nations. The European BIPAs differed from the modern FCNs in that the former were concerned solely with investment protection. The active European programs contrasted sharply with the moribund modern FCN program. A General Accounting Office report in 1977, for example, noted that the United States had modern FCNs with only two African countries while the Federal Republic of Germany, as of June 30, 1974, had signed BIPAs with 26 African countries. This was despite the fact that, at the end of 1975, United States firms had investments in 47 African nations P 47 with a total reported value of about $2.4 billion, excluding investments of less than $2 million each. Increasingly, the United States business community began to call for an investment protection treaty program comparable to that of the Europeans. Groups such as the International Chamber of Commerce and the State Department's Advisory Committee on Transnational Enterprises recommended to the State Department that it initiate a bilateral investment treaty program. [3] US Model Bilateral Investment Treaty (2012) (5) The Government of the United States of America and the Government of [Country] (hereinafter the “Parties”); *** SECTION A Article 1: Definitions For purposes of this Treaty: “central level of government” means: (a) (b)

for the United States, the federal level of government; and for [Country], [ ].

“Centre” means the International Centre for Settlement of Investment Disputes (“ICSID”) established by the ICSID Convention. “claimant” means an investor of a Party that is a party to an investment dispute with the other Party. “covered investment” means, with respect to a Party, an investment in its territory of an investor of the other Party in existence as of the date of entry into force of this Treaty or established, acquired, or expanded thereafter. “disputing parties” means the claimant and the respondent. “disputing party” means either the claimant or the respondent.

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“enterprise” means any entity constituted or organized under applicable law, whether or not for profit, and whether privately or governmentally owned or controlled, including a corporation, trust, partnership, sole proprietorship, joint venture, association, or similar organization; and a branch of an enterprise. “enterprise of a Party” means an enterprise constituted or organized under the law of a Party, and a branch located in the territory of a Party and carrying out business activities there. P 48

“existing” means in effect on the date of entry into force of this Treaty. “freely usable currency” means “freely usable currency” as determined by the International Monetary Fund under its Articles of Agreement. “GATS” means the General Agreement on Trade in Services, contained in Annex 1B to the WTO Agreement. “government procurement” means the process by which a government obtains the use of or acquires goods or services, or any combination thereof, for governmental purposes and not with a view to commercial sale or resale, or use in the production or supply of goods or services for commercial sale or resale. “ICSID Additional Facility Rules” means the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes. “ICSID Convention” means the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, done at Washington, March 18, 1965. [“Inter-American Convention” means the Inter-American Convention on International Commercial Arbitration, done at Panama, January 30, 1975.] “investment” means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) (b) (c) (d) (e) (f) (g) (h)

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an enterprise; shares, stock, and other forms of equity participation in an enterprise; bonds, debentures, other debt instruments, and loans; (6) futures, options, and other derivatives; turnkey, construction, management, production, concession, revenuesharing, and other similar contracts; intellectual property rights; licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; (7) , (8) and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges.

“investment agreement” means a written agreement (9) between a national authority (10) of a Party and a covered investment or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor: (a) (b) (c)

with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution, or sale; to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government.

“investment authorization” (11) means an authorization that the foreign investment authority of a Party grants to a covered investment or an investor of the other Party. “investor of a non-Party” means, with respect to a Party, an investor that attempts to make, is making, or has made an investment in the territory of that Party, that is not an investor of either Party. “investor of a Party” means a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of the other Party; provided, however, that a

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natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality. “measure” includes any law, regulation, procedure, requirement, or practice. “national” means: (a) (b)

for the United States, a natural person who is a national of the United States as defined in Title III of the Immigration and Nationality Act; and for [Country], [ ].

“New York Convention” means the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York, June 10, 1958. “non-disputing Party” means the Party that is not a party to an investment dispute. “person” means a natural person or an enterprise.

P 50

“person of a Party” means a national or an enterprise of a Party. “protected information” means confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law. “regional level of government” means: (a) (b)

for the United States, a state of the United States, the District of Columbia, or Puerto Rico; and for [Country], [ ].

“respondent” means the Party that is a party to an investment dispute. “Secretary-General” means the Secretary-General of ICSID. “state enterprise” means an enterprise owned, or controlled through ownership interests, by a Party. “territory” means: (a)

with respect to the United States, (i)

(b) (c)

the customs territory of the United States, which includes the 50 states, the District of Columbia, and Puerto Rico; (ii) the foreign trade zones located in the United States and Puerto Rico. with respect to [Country,] [ ]. with respect to each Party, the territorial sea and any area beyond the territorial sea of the Party within which, in accordance with customary international law as reflected in the United Nations Convention on the Law of the Sea, the Party may exercise sovereign rights or jurisdiction.

“TRIPS Agreement” means the Agreement on Trade-Related Aspects of Intellectual Property Rights, contained in Annex 1C to the WTO Agreement. (12) “UNCITRAL Arbitration Rules” means the arbitration rules of the United Nations Commission on International Trade Law. “WTO Agreement” means the Marrakesh Agreement Establishing the World Trade Organization, done on April 15, 1994. Article 2: Scope and Coverage 1. This Treaty applies to measures adopted or maintained by a Party relating to: (a) (b) (c)

investors of the other Party; covered investments; and with respect to Articles 8 [Performance Requirements], 12 [Investment and Environment], and 13 [Investment and Labor], all investments in the territory of the Party.

P 51 2. A Party's obligations under Section A shall apply:

(a) (b)

to a state enterprise or other person when it exercises any regulatory, administrative, or other governmental authority delegated to it by that Party; (13) and to the political subdivisions of that Party.

3. For greater certainty, this Treaty does not bind either Party in relation to any act or fact that took place or any situation that ceased to exist before the date of entry into force of this Treaty. Article 3: National Treatment

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1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 3. The treatment to be accorded by a Party under paragraphs 1 and 2 means, with respect to a regional level of government, treatment no less favorable than the treatment accorded, in like circumstances, by that regional level of government to natural persons resident in and enterprises constituted under the laws of other regional levels of government of the Party of which it forms a part, and to their respective investments. Article 4: Most-Favored-Nation Treatment 1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. Article 5: Minimum Standard of Treatment (14) 1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to P 52 covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide: (a) (b)

“fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and “full protection and security” requires each Party to provide the level of police protection required under customary international law.

3. A determination that there has been a breach of another provision of this Treaty, or of a separate international agreement, does not establish that there has been a breach of this Article. 4. Notwithstanding Article 14 [Non-Conforming Measures](5)(b) [subsidies and grants], each Party shall accord to investors of the other Party, and to covered investments, nondiscriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife. 5. Notwithstanding paragraph 4, if an investor of a Party, in the situations referred to in paragraph 4, suffers a loss in the territory of the other Party resulting from: (a) (b)

requisitioning of its covered investment or part thereof by the latter's forces or authorities; or destruction of its covered investment or part thereof by the latter's forces or authorities, which was not required by the necessity of the situation,

the latter Party shall provide the investor restitution, compensation, or both, as appropriate, for such loss. Any compensation shall be prompt, adequate, and effective in accordance with Article 6 [Expropriation and Compensation](2) through (4), mutatis mutandis. 6. Paragraph 4 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 3 [National Treatment] but for Article 14 [NonConforming Measures](5)(b) [subsidies and grants]. Article 6: Expropriation and Compensation (15) 1. Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”), except: (a) (b) (c)

for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation; and

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(d)

in accordance with due process of law and Article 5 [Minimum Standard of Treatment] (1) through (3).

2. The compensation referred to in paragraph 1(c) shall: P 53 (a)

(b) (c) (d)

be paid without delay; be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“the date of expropriation”); not reflect any change in value occurring because the intended expropriation had become known earlier; and be fully realizable and freely transferable.

3. If the fair market value is denominated in a freely usable currency, the compensation referred to in paragraph 1(c) shall be no less than the fair market value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment. 4. If the fair market value is denominated in a currency that is not freely usable, the compensation referred to in paragraph 1(c) – converted into the currency of payment at the market rate of exchange prevailing on the date of payment – shall be no less than: (a) (b)

the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date, plus interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment.

5. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property rights, to the extent that such issuance, revocation, limitation, or creation is consistent with the TRIPS Agreement. Article 7: Transfers 1. Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include: (a) (b) (c) (d) (e) (f)

contributions to capital; profits, dividends, capital gains, and proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment; interest, royalty payments, management fees, and technical assistance and other fees; payments made under a contract, including a loan agreement; payments made pursuant to Article 5 [Minimum Standard of Treatment](4) and (5) and Article 6 [Expropriation and Compensation]; and payments arising out of a dispute.

2. Each Party shall permit transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer. 3. Each Party shall permit returns in kind relating to a covered investment to be made as authorized or specified in a written agreement between the Party and a covered investment or an investor of the other Party. 4. Notwithstanding paragraphs 1 through 3, a Party may prevent a transfer through the equitable, non-discriminatory, and good faith application of its laws relating to: (a) P 54 (b)

(c) (d) (e)

bankruptcy, insolvency, or the protection of the rights of creditors; issuing, trading, or dealing in securities, futures, options, or derivatives; criminal or penal offenses; financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; or ensuring compliance with orders or judgments in judicial or administrative proceedings.

Article 8: Performance Requirements 1. Neither Party may, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party in its territory, impose or enforce any requirement or enforce any commitment or undertaking: (16) (a) (b) (c) (d)

to export a given level or percentage of goods or services; to achieve a given level or percentage of domestic content; to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such

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P 55

(e) (f) (g) (h)

investment; to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings; to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory; to supply exclusively from the territory of the Party the goods that such investment produces or the services that it supplies to a specific regional market or to the world market; or (i) to purchase, use, or accord a preference to, in its territory, technology of the Party or of persons of the Party (17) ; or (ii)that prevents the purchase or use of, or the according of a preference to, in its territory, particular technology, so as to afford protection on the basis of nationality to its own investors or investments or to technology of the Party or of persons of the Party.

2. Neither Party may condition the receipt or continued receipt of an advantage, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment in its territory of an investor of a Party or of a non-Party, on compliance with any requirement: (a) (b) (c) (d)

to achieve a given level or percentage of domestic content; to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

3. (a)

(b)

Nothing in paragraph 2 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory. Paragraphs 1(f) and (h) do not apply: (i)

(c)

when a Party authorizes use of an intellectual property right in accordance with Article 31 of the TRIPS Agreement, or to measures requiring the disclosure of proprietary information that fall within the scope of, and are consistent with, Article 39 of the TRIPS Agreement; or (ii) when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal, or competition authority to remedy a practice determined after judicial or administrative process to be anticompetitive under the Party's competition laws. (18) Provided that such measures are not applied in an arbitrary or unjustifiable manner, and provided that such measures do not constitute a disguised restriction on international trade or investment, paragraphs 1(b), (c), (f), and (h), and 2(a) and (b), shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures: (i)

(d) (e) (f)

necessary to secure compliance with laws and regulations that are not inconsistent with this Treaty; (ii) necessary to protect human, animal, or plant life or health; or (iii) related to the conservation of living or non-living exhaustible natural resources. Paragraphs 1(a), (b), and (c), and 2(a) and (b), do not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs. Paragraphs 1(b), (c), (f), (g), and (h), and 2(a) and (b), do not apply to government procurement. Paragraphs 2(a) and (b) do not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas.

4. For greater certainty, paragraphs 1 and 2 do not apply to any commitment, undertaking, or requirement other than those set out in those paragraphs. 5. This Article does not preclude enforcement of any commitment, undertaking, or requirement between private parties, where a Party did not impose or require the

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P 56 commitment, undertaking, or requirement.

Article 9: Senior Management and Boards of Directors 1. Neither Party may require that an enterprise of that Party that is a covered investment appoint to senior management positions natural persons of any particular nationality. 2. A Party may require that a majority of the board of directors, or any committee thereof, of an enterprise of that Party that is a covered investment, be of a particular nationality, or resident in the territory of the Party, provided that the requirement does not materially impair the ability of the investor to exercise control over its investment. Article 10: Publication of Laws and Decisions Respecting Investment 1. Each Party shall ensure that its: (a) (b)

laws, regulations, procedures, and administrative rulings of general application; and adjudicatory decisions

respecting any matter covered by this Treaty are promptly published or otherwise made publicly available. 2. For purposes of this Article, “administrative ruling of general application” means an administrative ruling or interpretation that applies to all persons and fact situations that fall generally within its ambit and that establishes a norm of conduct but does not include: (a) (b)

a determination or ruling made in an administrative or quasi-judicial proceeding that applies to a particular covered investment or investor of the other Party in a specific case; or a ruling that adjudicates with respect to a particular act or practice.

Article 11: Transparency 1. The Parties agree to consult periodically on ways to improve the transparency practices set out in this Article, Article 10 and Article 29. 2. Publication To the extent possible, each Party shall: (a) (b)

publish in advance any measure referred to in Article 10(1)(a) that it proposes to adopt; and provide interested persons and the other Party a reasonable opportunity to comment on such proposed measures.

3. With respect to proposed regulations of general application of its central level of government respecting any matter covered by this Treaty that are published in accordance with paragraph 2(a), each Party: (a) (b) (c) (d) P 57

shall publish the proposed regulations in a single official journal of national circulation and shall encourage their distribution through additional outlets; should in most cases publish the proposed regulations not less than 60 days before the date public comments are due; shall include in the publication an explanation of the purpose of and rationale for the proposed regulations; and shall, at the time it adopts final regulations, address significant, substantive comments received during the comment period and explain substantive revisions that it made to the proposed regulations in its official journal or in a prominent location on a government Internet site.

4. With respect to regulations of general application that are adopted by its central level of government respecting any matter covered by this Treaty, each Party: (a) (b)

shall publish the regulations in a single official journal of national circulation and shall encourage their distribution through additional outlets; and shall include in the publication an explanation of the purpose of and rationale for the regulations.

5. Provision of Information (a)

(b) (c)

On request of the other Party, a Party shall promptly provide information and respond to questions pertaining to any actual or proposed measure that the requesting Party considers might materially affect the operation of this Treaty or otherwise substantially affect its interests under this Treaty. Any request or information under this paragraph shall be provided to the other Party through the relevant contact points. Any information provided under this paragraph shall be without prejudice as to whether the measure is consistent with this Treaty.

6. Administrative Proceedings

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With a view to administering in a consistent, impartial, and reasonable manner all measures referred to in Article 10(1)(a), each Party shall ensure that in its administrative proceedings applying such measures to particular covered investments or investors of the other Party in specific cases: (a)

(b) (c)

wherever possible, covered investments or investors of the other Party that are directly affected by a proceeding are provided reasonable notice, in accordance with domestic procedures, when a proceeding is initiated, including a description of the nature of the proceeding, a statement of the legal authority under which the proceeding is initiated, and a general description of any issues in controversy; such persons are afforded a reasonable opportunity to present facts and arguments in support of their positions prior to any final administrative action, when time, the nature of the proceeding, and the public interest permit; and its procedures are in accordance with domestic law.

7. Review and Appeal (a)

(b)

Each Party shall establish or maintain judicial, quasi-judicial, or administrative tribunals or procedures for the purpose of the prompt review and, where warranted, correction of final administrative actions regarding matters covered by this Treaty. Such tribunals shall be impartial and independent of the office or authority entrusted with administrative enforcement and shall not have any substantial interest in the outcome of the matter. Each Party shall ensure that, in any such tribunals or procedures, the parties to the proceeding are provided with the right to: (i) (ii)

P 58

(c)

a reasonable opportunity to support or defend their respective positions; and a decision based on the evidence and submissions of record or, where required by domestic law, the record compiled by the administrative authority. Each Party shall ensure, subject to appeal or further review as provided in its domestic law, that such decisions shall be implemented by, and shall govern the practice of, the offices or authorities with respect to the administrative action at issue.

8. Standards-Setting (a)

(b)

(c)

Each Party shall allow persons of the other Party to participate in the development of standards and technical regulations by its central government bodies. (19) Each Party shall allow persons of the other Party to participate in the development of these measures, and the development of conformity assessment procedures by its central government bodies, on terms no less favorable than those it accords to its own persons. Each Party shall recommend that non-governmental standardizing bodies in its territory allow persons of the other Party to participate in the development of standards by those bodies. Each Party shall recommend that non-governmental standardizing bodies in its territory allow persons of the other Party to participate in the development of these standards, and the development of conformity assessment procedures by those bodies, on terms no less favorable than those they accord to persons of the Party. Subparagraphs 8(a) and 8(b) do not apply to: (i)

(d)

sanitary and phytosanitary measures as defined in Annex A of the World Trade Organization (WTO) Agreement on the Application of Sanitary and Phytosanitary Measures; or (ii) purchasing specifications prepared by a governmental body for its production or consumption requirements. For purposes of subparagraphs 8(a) and 8(b), “central government body”, “standards”, “technical regulations” and “conformity assessment procedures” have the meanings assigned to those terms in Annex 1 of the WTO Agreement on Technical Barriers to Trade. Consistent with Annex 1, the three latter terms do not include standards, technical regulations or conformity assessment procedures `for the supply of a service.

Article 12: Investment and Environment 1. The Parties recognize that their respective environmental laws and policies, and multilateral environmental agreements to which they are both party, play an important role in protecting the environment. 2. The Parties recognize that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic environmental laws. Accordingly, each Party shall ensure that it does not waive or otherwise derogate from or offer to waive or otherwise derogate from its environmental laws (20) in a manner that weakens or reduces the protections afforded in those laws, or fail to effectively enforce those laws through a sustained or recurring course of action or inaction, as an encouragement for the P 59 establishment, acquisition, expansion, or retention of an investment in its territory.

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3. The 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. 4. For purposes of this Article, “environmental law” means each Party's statutes or regulations, (21) or provisions thereof, the primary purpose of which is the protection of the environment, or the prevention of a danger to human, animal, or plant life or health, through the: (a) (b) (c)

prevention, abatement, or control of the release, discharge, or emission of pollutants or environmental contaminants; control of environmentally hazardous or toxic chemicals, substances, materials, and wastes, and the dissemination of information related thereto; or protection or conservation of wild flora or fauna, including endangered species, their habitat, and specially protected natural areas,

in the Party's territory, but does not include any statute or regulation, or provision thereof, directly related to worker safety or health. 5. Nothing in this Treaty shall be construed to prevent a Party from adopting, maintaining, or enforcing any measure otherwise consistent with this Treaty that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. 6. A Party may make a written request for consultations with the other Party regarding any matter arising under this Article. The other Party shall respond to a request for consultations within thirty days of receipt of such request. Thereafter, the Parties shall consult and endeavor to reach a mutually satisfactory resolution. 7. The Parties confirm that each Party may, as appropriate, provide opportunities for public participation regarding any matter arising under this Article. Article 13: Investment and Labor 1. The Parties reaffirm their respective obligations as members of the International Labor Organization (“ILO”) and their commitments under the ILO Declaration on Fundamental Principles and Rights at Work and its Follow-Up. 2. The Parties recognize that it is inappropriate to encourage investment by weakening or reducing the protections afforded in domestic labor laws. Accordingly, each Party shall P 60 ensure that it does not waive or otherwise derogate from or offer to waive or otherwise derogate from its labor laws where the waiver or derogation would be inconsistent with the labor rights referred to in subparagraphs (a) through (e) of paragraph 3, or fail to effectively enforce its labor laws through a sustained or recurring course of action or inaction, as an encouragement for the establishment, acquisition, expansion, or retention of an investment in its territory. 3. For purposes of this Article, “labor laws” means each Party's statutes or regulations, (22) or provisions thereof, that are directly related to the following: (a) (b) (c) (d) (e) (f)

freedom of association; the effective recognition of the right to collective bargaining; the elimination of all forms of forced or compulsory labor; the effective abolition of child labor and a prohibition on the worst forms of child labor; the elimination of discrimination in respect of employment and occupation; and acceptable conditions of work with respect to minimum wages, hours of work, and occupational safety and health.

4. A Party may make a written request for consultations with the other Party regarding any matter arising under this Article. The other Party shall respond to a request for consultations within thirty days of receipt of such request. Thereafter, the Parties shall consult and endeavor to reach a mutually satisfactory resolution. 5. The Parties confirm that each Party may, as appropriate, provide opportunities for public participation regarding any matter arising under this Article. Article 14: Non-Conforming Measures 1. Articles 3 [National Treatment], 4 [Most-Favored-Nation Treatment], 8 [Performance Requirements], and 9 [Senior Management and Boards of Directors] do not apply to: (a)

any existing non-conforming measure that is maintained by a Party at: (i)

the central level of government, as set out by that Party in its Schedule to Annex I or Annex III,

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(ii)

(b) (c)

P 61

a regional level of government, as set out by that Party in its Schedule to Annex I or Annex III, or (iii) a local level of government; the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Article 3 [National Treatment], 4 [Most-Favored-Nation Treatment], 8 [Performance Requirements], or 9 [Senior Management and Boards of Directors].

2. Articles 3 [National Treatment], 4 [Most-Favored-Nation Treatment], 8 [Performance Requirements], and 9 [Senior Management and Boards of Directors] do not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors, or activities, as set out in its Schedule to Annex II. 3. Neither Party may, under any measure adopted after the date of entry into force of this Treaty and covered by its Schedule to Annex II, require an investor of the other Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective. 4. Articles 3 [National Treatment] and 4 [Most-Favored-Nation Treatment] do not apply to any measure covered by an exception to, or derogation from, the obligations under Article 3 or 4 of the TRIPS Agreement, as specifically provided in those Articles and in Article 5 of the TRIPS Agreement. 5. Articles 3 [National Treatment], 4 [Most-Favored-Nation Treatment], and 9 [Senior Management and Boards of Directors] do not apply to: (a) (b)

government procurement; or subsidies or grants provided by a Party, including government-supported loans, guarantees, and insurance.

Article 15: Special Formalities and Information Requirements 1. Nothing in Article 3 [National Treatment] shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with covered investments, such as a requirement that investors be residents of the Party or that covered investments be legally constituted under the laws or regulations of the Party, provided that such formalities do not materially impair the protections afforded by a Party to investors of the other Party and covered investments pursuant to this Treaty. 2. Notwithstanding Articles 3 [National Treatment] and 4 [Most-Favored-Nation Treatment], a Party may require an investor of the other Party or its covered investment to provide information concerning that investment solely for informational or statistical purposes. The Party shall protect any confidential business information from any disclosure that would prejudice the competitive position of the investor or the covered investment. Nothing in this paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law. Article 16: Non-Derogation This Treaty shall not derogate from any of the following that entitle an investor of a Party or a covered investment to treatment more favorable than that accorded by this Treaty: 1. 2. 3. P 62

laws or regulations, administrative practices or procedures, or administrative or adjudicatory decisions of a Party; international legal obligations of a Party; or obligations assumed by a Party, including those contained in an investment authorization or an investment agreement.

Article 17: Denial of Benefits 1. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if persons of a nonParty own or control the enterprise and the denying Party: (a) (b)

does not maintain diplomatic relations with the non-Party; or adopts or maintains measures with respect to the non-Party or a person of the nonParty that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Treaty were accorded to the enterprise or to its investments.

2. A Party may deny the benefits of this Treaty to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of the other Party and persons of a nonParty, or of the denying Party, own or control the enterprise. Article 18: Essential Security

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Nothing in this Treaty shall be construed: 1. 2.

to require a Party to furnish or allow access to any information the disclosure of which it determines to be contrary to its essential security interests; or to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

Article 19: Disclosure of Information Nothing in this Treaty shall be construed to require a Party to furnish or allow access to confidential information the disclosure of which would impede law enforcement or otherwise be contrary to the public interest, or which would prejudice the legitimate commercial interests of particular enterprises, public or private. Article 20: Financial Services 1. Notwithstanding any other provision of this Treaty, a Party shall not be prevented from adopting or maintaining measures relating to financial services for prudential reasons, including for the protection of investors, depositors, policy holders, or persons to whom a fiduciary duty is owed by a financial services supplier, or to ensure the integrity and stability of the financial system. (23) Where such measures do not conform with the provisions of this Treaty, they shall not be used as a means of avoiding the Party's commitments or obligations under this Treaty. 2. (a) P 63

(b)

Nothing in this Treaty applies to non-discriminatory measures of general application taken by any public entity in pursuit of monetary and related credit policies or exchange rate policies. This paragraph shall not affect a Party's obligations under Article 7 [Transfers] or Article 8 [Performance Requirements]. (24) For purposes of this paragraph, “public entity” means a central bank or monetary authority of a Party.

3. Where a claimant submits a claim to arbitration under Section B [Investor-State Dispute Settlement], and the respondent invokes paragraph 1 or 2 as a defense, the following provisions shall apply: (a)

(b)

(c)

The respondent shall, within 120 days of the date the claim is submitted to arbitration under Section B, submit in writing to the competent financial authorities (25) of both Parties a request for a joint determination on the issue of whether and to what extent paragraph 1 or 2 is a valid defense to the claim. The respondent shall promptly provide the tribunal, if constituted, a copy of such request. The arbitration may proceed with respect to the claim only as provided in subparagraph (d). The competent financial authorities of both Parties shall make themselves available for consultations with each other and shall attempt in good faith to make a determination as described in subparagraph (a). Any such determination shall be transmitted promptly to the disputing parties and, if constituted, to the tribunal. The determination shall be binding on the tribunal. If the competent financial authorities of both Parties, within 120 days of the date by which they have both received the respondent's written request for a joint determination under subparagraph (a), have not made a determination as described in that subparagraph, the tribunal shall decide the issue or issues left unresolved by the competent financial authorities. The provisions of Section B shall apply, except as modified by this subparagraph. (i)

P 64

In the appointment of all arbitrators not yet appointed to the tribunal, each disputing party shall take appropriate steps to ensure that the tribunal has expertise or experience in financial services law or practice. The expertise of particular candidates with respect to the particular sector of financial services in which the dispute arises shall be taken into account in the appointment of the presiding arbitrator. (ii) If, before the respondent submits the request for a joint determination in conformance with subparagraph (a), the presiding arbitrator has been appointed pursuant to Article 27(3), such arbitrator shall be replaced on the request of either disputing party and the tribunal shall be reconstituted consistent with subparagraph (c)(i). If, within 30 days of the date the arbitration proceedings are resumed under subparagraph (d), the disputing parties have not agreed on the appointment of a new presiding arbitrator, the Secretary-General, on the request of a disputing party, shall appoint the presiding arbitrator consistent with subparagraph (c)(i). (iii) The tribunal shall draw no inference regarding the application of paragraph 1 or 2 from the fact that the competent financial authorities have not made a determination as described in subparagraph (a). (iv) The non-disputing Party may make oral and written submissions to the

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(d)

tribunal regarding the issue of whether and to what extent paragraph 1 or 2 is a valid defense to the claim. Unless it makes such a submission, the nondisputing Party shall be presumed, for purposes of the arbitration, to take a position on paragraph 1 or 2 not inconsistent with that of the respondent. The arbitration referred to in subparagraph (a) may proceed with respect to the claim: (i)

(e)

10 days after the date the competent financial authorities' joint determination has been received by both the disputing parties and, if constituted, the tribunal; or (ii) 10 days after the expiration of the 120-day period provided to the competent financial authorities in subparagraph (c). On the request of the respondent made within 30 days after the expiration of the 120-day period for a joint determination referred to in subparagraph (c), or, if the tribunal has not been constituted as of the expiration of the 120-day period, within 30 days after the tribunal is constituted, the tribunal shall address and decide the issue or issues left unresolved by the competent financial authorities as referred to in subparagraph (c) prior to deciding the merits of the claim for which paragraph 1 or 2 has been invoked by the respondent as a defense. Failure of the respondent to make such a request is without prejudice to the right of the respondent to invoke paragraph 1 or 2 as a defense at any appropriate phase of the arbitration.

4. Where a dispute arises under Section C and the competent financial authorities of one Party provide written notice to the competent financial authorities of the other Party that the dispute involves financial services, Section C shall apply except as modified by this paragraph and paragraph 5. (a)

(b)

The competent financial authorities of both Parties shall make themselves available for consultations with each other regarding the dispute, and shall have 180 days from the date such notice is received to transmit a report on their consultations to the Parties. A Party may submit the dispute to arbitration under Section C only after the expiration of that 180-day period. Either Party may make any such report available to a tribunal constituted under Section C to decide the dispute referred to in this paragraph or a similar dispute, or to a tribunal constituted under Section B to decide a claim arising out of the same events or circumstances that gave rise to the dispute under Section C.

5. Where a Party submits a dispute involving financial services to arbitration under Section C in conformance with paragraph 4, and on the request of either Party within 30 days of the date the dispute is submitted to arbitration, each Party shall, in the appointment of all arbitrators not yet appointed, take appropriate steps to ensure that the tribunal has expertise or experience in financial services law or practice. The expertise of particular candidates with respect to financial services shall be taken into P 65 account in the appointment of the presiding arbitrator. 6. Notwithstanding Article 11(2)-(4) [Transparency – Publication], each Party, to the extent practicable, (a) (b) (c)

shall publish in advance any regulations of general application relating to financial services that it proposes to adopt and the purpose of the regulation; shall provide interested persons and the other Party a reasonable opportunity to comment on such proposed regulations; and should at the time it adopts final regulations, address in writing significant substantive comments received from interested persons with respect to the proposed regulations.

7. The terms “financial service” or “financial services” shall have the same meaning as in subparagraph 5(a) of the Annex on Financial Services of the GATS. 8. For greater certainty, nothing in this Treaty shall be construed to prevent the adoption or enforcement by a party of measures relating to investors of the other Party, or covered investments, in financial institutions that are necessary to secure compliance with laws or regulations that are not inconsistent with this Treaty, including those related to the prevention of deceptive and fraudulent practices or that deal with the effects of a default on financial services contracts, subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where like conditions prevail, or a disguised restriction on investment in financial institutions. Article 21: Taxation 1. Except as provided in this Article, nothing in Section A shall impose obligations with respect to taxation measures. 2. Article 6 [Expropriation] shall apply to all taxation measures, except that a claimant that asserts that a taxation measure involves an expropriation may submit a claim to arbitration under Section B only if: (a)

the claimant has first referred to the competent tax authorities (26) of both Parties

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(b)

in writing the issue of whether that taxation measure involves an expropriation; and within 180 days after the date of such referral, the competent tax authorities of both Parties fail to agree that the taxation measure is not an expropriation.

3. Subject to paragraph 4, Article 8 [Performance Requirements] (2) through (4) shall apply to all taxation measures. 4. Nothing in this Treaty shall affect the rights and obligations of either Party under any tax convention. In the event of any inconsistency between this Treaty and any such convention, that convention shall prevail to the extent of the inconsistency. In the case of a tax convention between the Parties, the competent authorities under that convention shall have sole responsibility for determining whether any inconsistency exists between P 66 this Treaty and that convention. Article 22: Entry into Force, Duration, and Termination 1. This Treaty shall enter into force thirty days after the date the Parties exchange instruments of ratification. It shall remain in force for a period of ten years and shall continue in force thereafter unless terminated in accordance with paragraph 2. 2. A Party may terminate this Treaty at the end of the initial ten-year period or at any time thereafter by giving one year's written notice to the other Party. 3. For ten years from the date of termination, all other Articles shall continue to apply to covered investments established or acquired prior to the date of termination, except insofar as those Articles extend to the establishment or acquisition of covered investments. SECTION B Article 23: Consultation and Negotiation In the event of an investment dispute, the claimant and the respondent should initially seek to resolve the dispute through consultation and negotiation, which may include the use of non-binding, third-party procedures. Article 24: Submission of a Claim to Arbitration 1. In the event that a disputing party considers that an investment dispute cannot be settled by consultation and negotiation: (a)

the claimant, on its own behalf, may submit to arbitration under this Section a claim (i)

(b)

that the respondent has breached

(A) an obligation under Articles 3 through 10, (B) an investment authorization, or (C) an investment agreement; and (ii) that the claimant has incurred loss or damage by reason of, or arising out of, that breach; and the claimant, on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls directly or indirectly, may submit to arbitration under this Section a claim (i)

that the respondent has breached

(A) an obligation under Articles 3 through 10, (B) an investment authorization, or (C) an investment agreement; and (ii) that the enterprise has incurred loss or damage by reason of, or arising out of, that breach, provided that a claimant may submit pursuant to subparagraph (a)(i)(C) or (b)(i) (C) a claim for breach of an investment agreement only if the subject matter of the claim and the claimed damages directly relate to the covered investment that was established or acquired, or sought to be established or acquired, in reliance on the relevant investment agreement. 2. At least 90 days before submitting any claim to arbitration under this Section, a claimant shall deliver to the respondent a written notice of its intention to submit the P 67 claim to arbitration (“notice of intent”). The notice shall specify: (a) (b) (c) (d)

the name and address of the claimant and, where a claim is submitted on behalf of an enterprise, the name, address, and place of incorporation of the enterprise; for each claim, the provision of this Treaty, investment authorization, or investment agreement alleged to have been breached and any other relevant provisions; the legal and factual basis for each claim; and the relief sought and the approximate amount of damages claimed.

3. Provided that six months have elapsed since the events giving rise to the claim, a

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claimant may submit a claim referred to in paragraph 1: (a) (b) (c) (d)

under the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings, provided that both the respondent and the non-disputing Party are parties to the ICSID Convention; under the ICSID Additional Facility Rules, provided that either the respondent or the non-disputing Party is a party to the ICSID Convention; under the UNCITRAL Arbitration Rules; or if the claimant and respondent agree, to any other arbitration institution or under any other arbitration rules.

4. A claim shall be deemed submitted to arbitration under this Section when the claimant's notice of or request for arbitration (“notice of arbitration”): (a) (b) (c) (d)

referred to in paragraph 1 of Article 36 of the ICSID Convention is received by the Secretary-General; referred to in Article 2 of Schedule C of the ICSID Additional Facility Rules is received by the Secretary-General; referred to in Article 3 of the UNCITRAL Arbitration Rules, together with the statement of claim referred to in Article 20 of the UNCITRAL Arbitration Rules, are received by the respondent; or referred to under any arbitral institution or arbitral rules selected under paragraph 3(d) is received by the respondent.

A claim asserted by the claimant for the first time after such notice of arbitration is submitted shall be deemed submitted to arbitration under this Section on the date of its receipt under the applicable arbitral rules. 5. The arbitration rules applicable under paragraph 3, and in effect on the date the claim or claims were submitted to arbitration under this Section, shall govern the arbitration except to the extent modified by this Treaty. 6. The claimant shall provide with the notice of arbitration: (a) (b)

the name of the arbitrator that the claimant appoints; or the claimant's written consent for the Secretary-General to appoint that arbitrator.

Article 25: Consent of Each Party to Arbitration 1. Each Party consents to the submission of a claim to arbitration under this Section in accordance with this Treaty. 2. The consent under paragraph 1 and the submission of a claim to arbitration under this P 68 Section shall satisfy the requirements of:

(a) (b) (c)

Chapter II of the ICSID Convention ( Jurisdiction of the Centre) and the ICSID Additional Facility Rules for written consent of the parties to the dispute; [and] Article II of the New York Convention for an “agreement in writing[.”] [;” and Article I of the Inter-American Convention for an “agreement.”]

Article 26: Conditions and Limitations on Consent of Each Party 1. No claim may be submitted to arbitration under this Section if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged under Article 24(1) and knowledge that the claimant (for claims brought under Article 24(1)(a)) or the enterprise (for claims brought under Article 24(1)(b)) has incurred loss or damage. 2. No claim may be submitted to arbitration under this Section unless: (a) (b)

the claimant consents in writing to arbitration in accordance with the procedures set out in this Treaty; and the notice of arbitration is accompanied, (i)

for claims submitted to arbitration under Article 24(1)(a), by the claimant's written waiver, and (ii) for claims submitted to arbitration under Article 24(1)(b), by the claimant's and the enterprise's written waivers of any right to initiate or continue before any administrative tribunal or court under the law of either Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 24. 3. Notwithstanding paragraph 2(b), the claimant (for claims brought under Article 24(1) (a)) and the claimant or the enterprise (for claims brought under Article 24(1)(b)) may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant's or the enterprise's rights and interests during the pendency of the arbitration.

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Article 27: Selection of Arbitrators 1. Unless the disputing parties otherwise agree, the tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. 2. The Secretary-General shall serve as appointing authority for an arbitration under this Section. 3. Subject to Article 20(3), if a tribunal has not been constituted within 75 days from the date that a claim is submitted to arbitration under this Section, the Secretary-General, on the request of a disputing party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed. 4. For purposes of Article 39 of the ICSID Convention and Article 7 of Schedule C to the ICSID Additional Facility Rules, and without prejudice to an objection to an arbitrator on P 69 a ground other than nationality: (a) (b)

(c)

the respondent agrees to the appointment of each individual member of a tribunal established under the ICSID Convention or the ICSID Additional Facility Rules; a claimant referred to in Article 24(1)(a) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant agrees in writing to the appointment of each individual member of the tribunal; and a claimant referred to in Article 24(1)(b) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant and the enterprise agree in writing to the appointment of each individual member of the tribunal.

Article 28: Conduct of the Arbitration 1. The disputing parties may agree on the legal place of any arbitration under the arbitral rules applicable under Article 24(3). If the disputing parties fail to reach agreement, the tribunal shall determine the place in accordance with the applicable arbitral rules, provided that the place shall be in the territory of a State that is a party to the New York Convention. 2. The non-disputing Party may make oral and written submissions to the tribunal regarding the interpretation of this Treaty. 3. The tribunal shall have the authority to accept and consider amicus curiae submissions from a person or entity that is not a disputing party. 4. Without prejudice to a tribunal's authority to address other objections as a preliminary question, a tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 34. (a)

(b)

(c)

(d)

Such objection shall be submitted to the tribunal as soon as possible after the tribunal is constituted, and in no event later than the date the tribunal fixes for the respondent to submit its counter-memorial (or, in the case of an amendment to the notice of arbitration, the date the tribunal fixes for the respondent to submit its response to the amendment). On receipt of an objection under this paragraph, the tribunal shall suspend any proceedings on the merits, establish a schedule for considering the objection consistent with any schedule it has established for considering any other preliminary question, and issue a decision or award on the objection, stating the grounds therefor. In deciding an objection under this paragraph, the tribunal shall assume to be true claimant's factual allegations in support of any claim in the notice of arbitration (or any amendment thereof) and, in disputes brought under the UNCITRAL Arbitration Rules, the statement of claim referred to in Article 20 of the UNCITRAL Arbitration Rules. The tribunal may also consider any relevant facts not in dispute. The respondent does not waive any objection as to competence or any argument on the merits merely because the respondent did or did not raise an objection under this paragraph or make use of the expedited procedure set out in paragraph 5.

5. In the event that the respondent so requests within 45 days after the tribunal is constituted, the tribunal shall decide on an expedited basis an objection under P 70 paragraph 4 and any objection that the dispute is not within the tribunal's competence. The tribunal shall suspend any proceedings on the merits and issue a decision or award on the objection(s), stating the grounds therefor, no later than 150 days after the date of the request. However, if a disputing party requests a hearing, the tribunal may take an additional 30 days to issue the decision or award. Regardless of whether a hearing is requested, a tribunal may, on a showing of extraordinary cause, delay issuing its decision or award by an additional brief period, which may not exceed 30 days. 6. When it decides a respondent's objection under paragraph 4 or 5, the tribunal may, if warranted, award to the prevailing disputing party reasonable costs and attorney's fees

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incurred in submitting or opposing the objection. In determining whether such an award is warranted, the tribunal shall consider whether either the claimant's claim or the respondent's objection was frivolous, and shall provide the disputing parties a reasonable opportunity to comment. 7. A respondent may not assert as a defense, counterclaim, right of set-off, or for any other reason that the claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract. 8. A tribunal may order an interim measure of protection to preserve the rights of a disputing party, or to ensure that the tribunal's jurisdiction is made fully effective, including an order to preserve evidence in the possession or control of a disputing party or to protect the tribunal's jurisdiction. A tribunal may not order attachment or enjoin the application of a measure alleged to constitute a breach referred to in Article 24. For purposes of this paragraph, an order includes a recommendation. 9. (a)

(b)

In any arbitration conducted under this Section, at the request of a disputing party, a tribunal shall, before issuing a decision or award on liability, transmit its proposed decision or award to the disputing parties and to the non-disputing Party. Within 60 days after the tribunal transmits its proposed decision or award, the disputing parties may submit written comments to the tribunal concerning any aspect of its proposed decision or award. The tribunal shall consider any such comments and issue its decision or award not later than 45 days after the expiration of the 60-day comment period. Subparagraph (a) shall not apply in any arbitration conducted pursuant to this Section for which an appeal has been made available pursuant to paragraph 10.

10. In the event that an appellate mechanism for reviewing awards rendered by investorState dispute settlement tribunals is developed in the future under other institutional arrangements, the Parties shall consider whether awards rendered under Article 34 should be subject to that appellate mechanism. The Parties shall strive to ensure that any such appellate mechanism they consider adopting provides for transparency of proceedings similar to the transparency provisions established in Article 29. Article 29: Transparency of Arbitral Proceedings 1. Subject to paragraphs 2 and 4, the respondent shall, after receiving the following documents, promptly transmit them to the non-disputing Party and make them available P 71 to the public: (a) (b) (c) (d) (e)

the notice of intent; the notice of arbitration; pleadings, memorials, and briefs submitted to the tribunal by a disputing party and any written submissions submitted pursuant to Article 28(2) [Non-Disputing Party submissions] and (3) [Amicus Submissions] and Article 33 [Consolidation]; minutes or transcripts of hearings of the tribunal, where available; and orders, awards, and decisions of the tribunal.

2. The tribunal shall conduct hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements. However, any disputing party that intends to use information designated as protected information in a hearing shall so advise the tribunal. The tribunal shall make appropriate arrangements to protect the information from disclosure. 3. Nothing in this Section requires a respondent to disclose protected information or to furnish or allow access to information that it may withhold in accordance with Article 18 [Essential Security Article] or Article 19 [Disclosure of Information Article]. 4. Any protected information that is submitted to the tribunal shall be protected from disclosure in accordance with the following procedures: (a)

(b) (c)

(d)

Subject to subparagraph (d), neither the disputing parties nor the tribunal shall disclose to the non-disputing Party or to the public any protected information where the disputing party that provided the information clearly designates it in accordance with subparagraph (b); Any disputing party claiming that certain information constitutes protected information shall clearly designate the information at the time it is submitted to the tribunal; A disputing party shall, at the time it submits a document containing information claimed to be protected information, submit a redacted version of the document that does not contain the information. Only the redacted version shall be provided to the non-disputing Party and made public in accordance with paragraph 1; and The tribunal shall decide any objection regarding the designation of information claimed to be protected information. If the tribunal determines that such information was not properly designated, the disputing party that submitted the

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information may (i) withdraw all or part of its submission containing such information, or (ii) agree to resubmit complete and redacted documents with corrected designations in accordance with the tribunal's determination and subparagraph (c). In either case, the other disputing party shall, whenever necessary, resubmit complete and redacted documents which either remove the information withdrawn under (i) by the disputing party that first submitted the information or redesignate the information consistent with the designation under (ii) of the disputing party that first submitted the information. 5. Nothing in this Section requires a respondent to withhold from the public information P 72 required to be disclosed by its laws.

Article 30: Governing Law 1. Subject to paragraph 3, when a claim is submitted under Article 24(1)(a)(i)(A) or Article 24(1)(b)(i)(A), the tribunal shall decide the issues in dispute in accordance with this Treaty and applicable rules of international law. 2. Subject to paragraph 3 and the other terms of this Section, when a claim is submitted under Article 24(1)(a)(i)(B) or (C), or Article 24(1)(b)(i)(B) or (C), the tribunal shall apply: (a) (b)

the rules of law specified in the pertinent investment authorization or investment agreement, or as the disputing parties may otherwise agree; or if the rules of law have not been specified or otherwise agreed: (i) (ii)

the law of the respondent, including its rules on the conflict of laws; (27) and such rules of international law as may be applicable.

3. A joint decision of the Parties, each acting through its representative designated for purposes of this Article, declaring their interpretation of a provision of this Treaty shall be binding on a tribunal, and any decision or award issued by a tribunal must be consistent with that joint decision. Article 31: Interpretation of Annexes 1. Where a respondent asserts as a defense that the measure alleged to be a breach is within the scope of an entry set out in Annex I, II, or III, the tribunal shall, on request of the respondent, request the interpretation of the Parties on the issue. The Parties shall submit in writing any joint decision declaring their interpretation to the tribunal within 90 days of delivery of the request. 2. A joint decision issued under paragraph 1 by the Parties, each acting through its representative designated for purposes of this Article, shall be binding on the tribunal, and any decision or award issued by the tribunal must be consistent with that joint decision. If the Parties fail to issue such a decision within 90 days, the tribunal shall decide the issue. Article 32: Expert Reports Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree. Article 33: Consolidation 1. Where two or more claims have been submitted separately to arbitration under Article 24(1) and the claims have a question of law or fact in common and arise out of the same events or circumstances, any disputing party may seek a consolidation order in P 73 accordance with the agreement of all the disputing parties sought to be covered by the order or the terms of paragraphs 2 through 10. 2. A disputing party that seeks a consolidation order under this Article shall deliver, in writing, a request to the Secretary-General and to all the disputing parties sought to be covered by the order and shall specify in the request: (a) (b) (c)

the names and addresses of all the disputing parties sought to be covered by the order; the nature of the order sought; and the grounds on which the order is sought.

3. Unless the Secretary-General finds within 30 days after receiving a request under paragraph 2 that the request is manifestly unfounded, a tribunal shall be established under this Article. 4. Unless all the disputing parties sought to be covered by the order otherwise agree, a tribunal established under this Article shall comprise three arbitrators: (a)

one arbitrator appointed by agreement of the claimants;

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(b) (c)

one arbitrator appointed by the respondent; and the presiding arbitrator appointed by the Secretary-General, provided, however, that the presiding arbitrator shall not be a national of either Party.

5. If, within 60 days after the Secretary-General receives a request made under paragraph 2, the respondent fails or the claimants fail to appoint an arbitrator in accordance with paragraph 4, the Secretary-General, on the request of any disputing party sought to be covered by the order, shall appoint the arbitrator or arbitrators not yet appointed. If the respondent fails to appoint an arbitrator, the Secretary-General shall appoint a national of the disputing Party, and if the claimants fail to appoint an arbitrator, the SecretaryGeneral shall appoint a national of the non-disputing Party. 6. Where a tribunal established under this Article is satisfied that two or more claims that have been submitted to arbitration under Article 24(1) have a question of law or fact in common, and arise out of the same events or circumstances, the tribunal may, in the interest of fair and efficient resolution of the claims, and after hearing the disputing parties, by order: (a) (b) (c)

assume jurisdiction over, and hear and determine together, all or part of the claims; assume jurisdiction over, and hear and determine one or more of the claims, the determination of which it believes would assist in the resolution of the others; or instruct a tribunal previously established under Article 27 [Selection of Arbitrators] to assume jurisdiction over, and hear and determine together, all or part of the claims, provided that (i)

(ii)

that tribunal, at the request of any claimant not previously a disputing party before that tribunal, shall be reconstituted with its original members, except that the arbitrator for the claimants shall be appointed pursuant to paragraphs 4(a) and 5; and that tribunal shall decide whether any prior hearing shall be repeated.

7. Where a tribunal has been established under this Article, a claimant that has submitted a claim to arbitration under Article 24(1) and that has not been named in a request made under paragraph 2 may make a written request to the tribunal that it be P 74 included in any order made under paragraph 6, and shall specify in the request: (a) (b) (c)

the name and address of the claimant; the nature of the order sought; and the grounds on which the order is sought.

The claimant shall deliver a copy of its request to the Secretary-General. 8. A tribunal established under this Article shall conduct its proceedings in accordance with the UNCITRAL Arbitration Rules, except as modified by this Section. 9. A tribunal established under Article 27 [Selection of Arbitrators] shall not have jurisdiction to decide a claim, or a part of a claim, over which a tribunal established or instructed under this Article has assumed jurisdiction. 10. On application of a disputing party, a tribunal established under this Article, pending its decision under paragraph 6, may order that the proceedings of a tribunal established under Article 27 [Selection of Arbitrators] be stayed, unless the latter tribunal has already adjourned its proceedings. Article 34: Awards 1. Where a tribunal makes a final award against a respondent, the tribunal may award, separately or in combination, only: (a) (b)

monetary damages and any applicable interest; and restitution of property, in which case the award shall provide that the respondent may pay monetary damages and any applicable interest in lieu of restitution.

A tribunal may also award costs and attorney's fees in accordance with this Treaty and the applicable arbitration rules. 2. Subject to paragraph 1, where a claim is submitted to arbitration under Article 24(1) (b): (a) (b) (c)

an award of restitution of property shall provide that restitution be made to the enterprise; an award of monetary damages and any applicable interest shall provide that the sum be paid to the enterprise; and the award shall provide that it is made without prejudice to any right that any person may have in the relief under applicable domestic law.

3. A tribunal may not award punitive damages. 4. An award made by a tribunal shall have no binding force except between the disputing parties and in respect of the particular case.

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5. Subject to paragraph 6 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an award without delay. 6. A disputing party may not seek enforcement of a final award until: P 75 (a)

in the case of a final award made under the ICSID Convention, (i)

(b)

120 days have elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award; or (ii) revision or annulment proceedings have been completed; and in the case of a final award under the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules, or the rules selected pursuant to Article 24(3)(d), (i) (ii)

90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside, or annul the award; or a court has dismissed or allowed an application to revise, set aside, or annul the award and there is no further appeal.

7. Each Party shall provide for the enforcement of an award in its territory. 8. If the respondent fails to abide by or comply with a final award, on delivery of a request by the non-disputing Party, a tribunal shall be established under Article 37 [State-State Dispute Settlement]. Without prejudice to other remedies available under applicable rules of international law, the requesting Party may seek in such proceedings: (a) (b)

a determination that the failure to abide by or comply with the final award is inconsistent with the obligations of this Treaty; and a recommendation that the respondent abide by or comply with the final award.

9. A disputing party may seek enforcement of an arbitration award under the ICSID Convention or the New York Convention [or the Inter-American Convention] regardless of whether proceedings have been taken under paragraph 8. 10. A claim that is submitted to arbitration under this Section shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention [and Article I of the Inter-American Convention]. Article 35: Annexes and Footnotes The Annexes and footnotes shall form an integral part of this Treaty. Article 36: Service of Documents Delivery of notice and other documents on a Party shall be made to the place named for that Party in Annex C. SECTION C Article 37: State-State Dispute Settlement 1. Subject to paragraph 5, any dispute between the Parties concerning the interpretation or application of this Treaty, that is not resolved through consultations or other diplomatic channels, shall be submitted on the request of either Party to arbitration for a binding decision or award by a tribunal in accordance with applicable rules of international law. In the absence of an agreement by the Parties to the contrary, the UNCITRAL Arbitration Rules shall govern, except as modified by the Parties or this Treaty. 2. Unless the Parties otherwise agree, the tribunal shall comprise three arbitrators, one arbitrator appointed by each Party and the third, who shall be the presiding arbitrator, appointed by agreement of the Parties. If a tribunal has not been constituted within 75 P 76 days from the date that a claim is submitted to arbitration under this Section, the Secretary-General, on the request of either Party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed. 3. Expenses incurred by the arbitrators, and other costs of the proceedings, shall be paid for equally by the Parties. However, the tribunal may, in its discretion, direct that a higher proportion of the costs be paid by one of the Parties. 4. Articles 28(3) [Amicus Curiae Submissions], 29 [Investor-State Transparency], 30(1) and (3) [Governing Law], and 31 [Interpretation of Annexes] shall apply mutatis mutandis to arbitrations under this Article. 5. Paragraphs 1 through 4 shall not apply to a matter arising under Article 12 or Article 13. *** Annex A Customary International Law The Parties confirm their shared understanding that “customary international law” generally and as specifically referenced in Article 5 [Minimum Standard of Treatment] and Annex B [Expropriation] results from a general and consistent practice of States that they follow from a sense of legal obligation. With regard to Article 5 [Minimum Standard of Treatment], the customary international law minimum standard of treatment of aliens

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refers to all customary international law principles that protect the economic rights and interests of aliens. Annex B Expropriation The Parties confirm their shared understanding that: 1. 2. 3. 4.

Article 6 [Expropriation and Compensation](1) is intended to reflect customary international law concerning the obligation of States with respect to expropriation. An action or a series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in an investment. Article 6 [Expropriation and Compensation](1) addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure. The second situation addressed by Article 6 [Expropriation and Compensation](1) is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. (a)

The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a caseby-case, fact-based inquiry that considers, among other factors: (i)

P 77

(b)

the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action. Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

*** [4] German Model Bilateral Investment Treaty (2008) (28) The Federal Republic of Germany and *** Article 1 – Definitions Within the meaning of this Treaty, 1.

the term “investments” comprises every kind of asset which is directly or indirectly invested by investors of one Contracting State in the territory of the other Contracting State. The investments include in particular: (a)

2. 3. P 78

movable and immovable property as well as any other rights in rem, such as mortgages, liens and pledges; (b) shares of companies and other kinds of interest in companies; (c) claims to money which has been used to create an economic value or claims to any performance having an economic value; (d) intellectual property rights, in particular copyrights and related rights, patents, utility-model patents, industrial designs, trademarks, plant variety rights; (e) trade-names, trade and business secrets, technical processes, know-how, and goodwill; (f) business concessions under public law, including concessions to search for, extract or exploit natural resources; any alteration of the form in which assets are invested shall not affect their classification as investment. In the case of indirect investments, in principle only those indirect investments shall be covered which the investor realizes via a company situated in the other Contracting State; the term “returns” means the amounts yielded by an investment for a definite period, such as profit, dividends, interest, royalties or fees; the term “investor” means (a)

in respect of the Federal Republic of Germany: –

any natural person who is a German within the meaning of the Basic Law of the Federal Republic of Germany or a national of a Member State of the European Union or of the European Economic Area who, within the context of freedom of establishment pursuant to Article 43 of the EC

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Treaty, is established in the Federal Republic of Germany; any juridical person and any commercial or other company or association with or without legal personality which is founded pursuant to the law of the Federal Republic of Germany or the law of a Member State of the European Union or the European Economic Area and is organized pursuant to the law of the Federal Republic of Germany, registered in a public register in the Federal Republic of Germany or enjoys freedom of establishment as an agency or permanent establishment in Germany pursuant to Articles 43 and 48 of the EC Treaty; which in the context of entrepreneurial activity is the owner, possessor or shareholder of an investment in the territory of the other Contracting State, irrespective of whether or not the activity is directed at profit; in respect of … –

* 4.

(b) ** the term “territory” refers to the area of each Contracting State including the exclusive economic zone and the continental shelf insofar as international law allows the Contracting State concerned to exercise sovereign rights or jurisdiction in these areas.

Article 2 – Admission and protection of investments 1. Each Contracting State shall in its territory promote as far as possible investments by investors of the other Contracting State and admit such investments in accordance with its legislation. 2. Each Contracting State shall in its territory in every case accord investments by investors of the other Contracting State fair and equitable treatment as well as full protection under this Treaty. 3. Neither Contracting State shall in its territory impair by arbitrary or discriminatory measures the activity of investors of the other Contracting State with regard to investments, such as in particular the management, maintenance, use, enjoyment or disposal of such investments. This provision shall be without prejudice to Article 7 (3). 4. Returns from an investment, as well as returns from reinvested returns, shall enjoy the same protection as the original investment. Article 3 – National and most-favoured-nation treatment 1. Neither Contracting State shall in its territory subject investments owned or controlled by investors of the other Contracting State to treatment less favourable than it accords to P 79 investments of its own investors or to investments of investors of any third State. 2. Neither Contracting State shall in its territory subject investors of the other Contracting State, as regards their activity in connection with investments, to treatment less favourable than it accords to its own investors or to investors of any third State. The following shall, in particular, be deemed treatment less favourable within the meaning of this Article: 1. 2. 3.

different treatment in the event of restrictions on the procurement of raw or auxiliary materials, of energy and fuels, and of all types of means of production and operation; different treatment in the event of impediments to the sale of products at home and abroad; and other measures of similar effect.

Measures that have to be taken for reasons of public security and order shall not be deemed treatment less favourable within the meaning of this Article. 3. Such treatment shall not relate to privileges which either Contracting State accords to investors of third States on account of its membership of, or association with, a customs or economic union, a common market or a free trade area. 4. The treatment granted under this Article shall not relate to advantages which either Contracting State accords to investors of third States by virtue of an agreement for the avoidance of double taxation in the field of taxes on income and assets or other agreements regarding matters of taxation. 5. This Article shall not oblige a Contracting State to extend to investors resident in the territory of the other Contracting State tax privileges, tax exemptions and tax reductions which according to its tax laws are granted only to investors resident in its territory. 6. The Contracting States shall within the framework of their national legislation give sympathetic consideration to applications for the entry and sojourn of persons of either Contracting State who wish to enter the territory of the other Contracting State in connection with an investment; the same shall apply to employed persons of either Contracting State who in connection with an investment wish to enter the territory of the other Contracting State and sojourn there to take up employment. Where necessary,

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applications for work permits shall also be given sympathetic consideration. 7. Notwithstanding any bilateral or multilateral agreements which are binding on both Contracting States, the investors of the Contracting States are free to select the means of transport for the international transportation of persons and of capital goods directly related to an investment within the meaning of this Treaty. Transport companies of the Contracting States shall not be discriminated against thereby. Article 4 – Compensation in case of expropriation 1. Investments by investors of either Contracting State shall enjoy full protection and security in the territory of the other Contracting State. 2. Investments by investors of either Contracting State may not directly or indirectly be expropriated, nationalized or subjected to any other measure the effects of which would be tantamount to expropriation or nationalization in the territory of the other Contracting State except for the public benefit and against compensation. Such P 80 compensation must be equivalent to the value of the expropriated investment immediately before the date on which the actual or threatened expropriation, nationalization or other measure became publicly known. The compensation must be paid without delay and shall carry the usual bank interest until the time of payment; it must be effectively realizable and freely transferable. Provision must have been made in an appropriate manner at or prior to the time of expropriation, nationalization or other measure for the determination and payment of such compensation. The legality of any such expropriation, nationalization or other measure and the amount of compensation must be subject to review by due process of law. 3. Investors of either Contracting State whose investments suffer losses in the territory of the other Contracting State owing to war or other armed conflict, revolution, a state of national emergency, or revolt, shall be accorded treatment no less favourable by such other Contracting State than that State accords to its own investors as regards restitution, indemnification, compensation or other valuable consideration. Such payments must be freely transferable. 4. Investors of either Contracting State shall enjoy most-favoured-nation treatment in the territory of the other Contracting State in respect of the matters provided for in the present Article. Article 5 – Free transfer 1. Each Contracting State shall guarantee to investors of the other Contracting State the free transfer of payments in connection with an investment, in particular 1. 2. 3. 4. 5.

the principal and additional amounts to maintain or increase the investment; the returns; the repayment of loans; the proceeds from the liquidation or the sale of the whole or any part of the investment; the compensation provided for in Article 4.

2. Transfers under Article 4 (2) or (3), under the present Article or Article 6, shall be made without delay at the market rate of exchange applicable on the day of the transfer. A transfer shall be deemed to have been made without delay if made within such period as is normally required for the completion of transfer formalities. The period shall commence with the submission of the corresponding application, where such an application is necessary, or the notification of the intended transfer, and must in no circumstances exceed two months. 3. Should it not be possible to ascertain a market rate pursuant to paragraph (2), the cross rate obtained from those rates which would be applied by the International Monetary Fund on the date of payment for conversions of the currencies concerned into Special Drawing Rights shall apply. Article 6 – Subrogation If either Contracting State makes payment to any of its investors under a guarantee it has assumed in respect of an investment in the territory of the other Contracting State, the latter Contracting State shall, without prejudice to the rights of the former Contracting State under Article 9, recognize the assignment, whether under a law or pursuant to a legal transaction, of any right or claim from such investors to the former Contracting State. Furthermore, the latter Contracting State shall recognize the subrogation of that Contracting State to any such right or claim (assigned claim), which that Contracting P 81 State shall be entitled to assert to the same extent as its predecessor in title. As regards the transfer of payments on the basis of such assignment, Article 4 (1) and (2) and Article 5 shall apply mutatis mutandis. Article 7 – Other provisions 1. If the legislation of either Contracting State or international obligations existing at present or established hereafter between the Contracting States in addition to this

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Treaty contain any provisions, whether general or specific, entitling investments by investors of the other Contracting State to a treatment more favourable than is provided for by this Treaty, such provisions shall prevail over this Treaty to the extent that they are more favourable. 2. Each Contracting State shall fulfil any other obligations it may have entered into with regard to investments in its territory by investors of the other Contracting State. 3. With regard to the treatment of income and assets for the purpose of taxation, precedence shall be given to the application of the agreements in force at the time between the Federal Republic of Germany and … for the avoidance of double taxation in the field of taxes on income and assets. Article 8 – Scope of application This Treaty shall also apply to investments made prior to its entry into force by investors of either Contracting State in the territory of the other Contracting State consistent with the latter's legislation. Article 9 – Settlement of disputes between the Contracting States 1. Disputes between the Contracting States concerning the interpretation or application of this Treaty should as far as possible be settled by the Governments of the two Contracting States. 2. If a dispute cannot thus be settled, it shall upon the request of either Contracting State be submitted to an arbitral tribunal. 3. The arbitral tribunal shall be constituted for each case as follows: each Contracting State shall appoint one member, and these two members shall agree upon a national of a third State as their chairman to be appointed by the Governments of the two Contracting States. The members shall be appointed within two months, and the chairman within three months, from the date on which either Contracting State has informed the other Contracting State that it wants to submit the dispute to an arbitral tribunal. 4. If the periods specified in paragraph (3) have not been observed, either Contracting State may, in the absence of any other relevant agreement, invite the President of the International Court of Justice to make the necessary appointments. If the President is a national of either Contracting State or if he is otherwise prevented from discharging the said function, the Vice-President should make the necessary appointments. If the VicePresident is a national of either Contracting State or if he, too, is prevented from discharging the said function, the Member of the Court next in seniority who is not a P 82 national of either Contracting State should make the necessary appointments. 5. The arbitral tribunal shall reach its decisions by a majority of votes. Its decisions shall be binding. Each Contracting State shall bear the cost of its own member and of its representatives in the arbitration proceedings; the cost of the chairman and the remaining costs shall be borne in equal parts by the Contracting States. The arbitral tribunal may make a different regulation concerning costs. In all other respects, the arbitral tribunal shall determine its own procedure. Article 10 – Settlement of disputes between a Contracting State and an investor of the other Contracting State 1. Disputes concerning investments between a Contracting State and an investor of the other Contracting State should as far as possible be settled amicably between the parties to the dispute. To help them reach an amicable settlement, the parties to the dispute also have the option of agreeing to institute conciliation proceedings under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965 (ICSID). 2. If the dispute cannot be settled within six months of the date on which it was raised by one of the parties to the dispute, it shall, at the request of the investor of the other Contracting State, be submitted to arbitration. The two Contracting States hereby declare that they unreservedly and bindingly consent to the dispute being submitted to one of the following dispute settlement mechanisms of the investor's choosing: 1.

2.

3.

arbitration under the auspices of the International Centre for Settlement of Investment Disputes pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965 (ICSID), provided both Contracting States are members of this Convention, or arbitration under the auspices of the International Centre for Settlement of Investment Disputes pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965 (ICSID) in accordance with the Rules on the Additional Facility for the Administration of Proceedings by the Secretariat of the Centre, where the personal or factual preconditions for proceedings pursuant to figure 1 do not apply, but at least one Contracting State is a member of the Convention referred to therein, or an individual arbitrator or an ad-hoc arbitral tribunal which is established in accordance with the rules of the United Nations Commission on International Trade

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4.

5.

Law (UNCITRAL) as in force at the commencement of the proceedings, or an arbitral tribunal which is established pursuant to the Dispute Resolution Rules of the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA) or the Arbitration Institute of the Stockholm Chamber of Commerce, or any other form of dispute settlement agreed by the parties to the dispute.

3. The award shall be binding and shall not be subject to any appeal or remedy other than those provided for in the Convention or arbitral rules on which the arbitral proceedings chosen by the investor are based. The award shall be enforced by the P 83 Contracting States as a final and absolute ruling under domestic law. 4. Arbitration proceedings pursuant to this Article shall take place at the request of one of the parties to the dispute in a State which is a Contracting Party to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958. 5. During arbitration proceedings or the enforcement of an award, the Contracting State involved in the dispute shall not raise the objection that the investor of the other Contracting State has received compensation under an insurance contract in respect of all or part of the damage. Article 11 – Relations between the Contracting States This Treaty shall be in force irrespective of whether or not diplomatic or consular relations exist between the Contracting States. *** [5] United States-Singapore Free Trade Agreement (2004), (29) Chapter 15: Investment (Citations selectively omitted) CHAPTER 15 – INVESTMENT Section A – Definitions Article 15.1: Definitions For purposes of this Chapter, it is understood that: central level of government means: (a) (b)

for the United States, the federal level of government; and for Singapore, the national level of government;

Centre means the International Centre for Settlement of Investment Disputes (“ICSID”) established by the ICSID Convention; claimant means an investor of a Party that is a party to an investment dispute with the other Party; covered investment means, with respect to a Party, an investment in its territory of an investor of the other Party in existence as of the date of entry into force of this Agreement or established, acquired, or expanded thereafter; disputing parties means the claimant and the respondent; disputing party means either the claimant or the respondent;

P 84

enterprise means any entity constituted or organized under applicable law, whether or not for profit, and whether privately or governmentally owned or controlled, including a corporation, trust, partnership, sole proprietorship, joint venture, association, or similar organization; and a branch of an enterprise; enterprise of a Party means an enterprise constituted or organized under the law of a Party, and a branch located in the territory of a Party and carrying out business activities there; freely usable currency means “freely usable currency” as determined by the International Monetary Fund under its Articles of Agreement; government enterprise means “government enterprise” as defined in Chapter 12; ICSID Additional Facility Rules means the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes; ICSID Convention means the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, done at Washington, March 18, 1965; investment means every asset owned or controlled, directly or indirectly, by

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an investor, that has the characteristics of an investment. Forms that an investment may take include: (a) (b) (c) (d) (e) (f) (g) (h)

an enterprise; shares, stock, and other forms of equity participation in an enterprise; bonds, debentures, other debt instruments, and loans; futures, options, and other derivatives; turnkey, construction, management, production, concession, revenuesharing, and other similar contracts; intellectual property rights; licenses, authorizations, permits, and similar rights conferred pursuant to applicable domestic law;and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges.

investment agreement means a written agreement that takes effect on or after the date of entry into force of this Agreement between a national authority of a Party and a covered investment or an investor of the other Party (i) that grants rights with respect to natural resources or other assets that a national authority controls, and (ii) that the covered investment or the investor relies on in establishing or acquiring the covered investment; investment authorization means an authorization that the foreign investment authority of a Party grants to a covered investment or an investor of the other Party; investor of a non-Party means, with respect to a Party, an investor that is seeking to make, is making, or has made an investment in the territory of that Party, that is not an investor of either Party; investor of a Party means a Party or a national or an enterprise of a Party that is seeking to make, is making, or has made an investment in the territory of the other Party; provided, however, that a natural person who is a dual national shall be deemed to be exclusively a national of the State of his/her dominant and effective nationality; monopoly means “monopoly” as defined in Chapter 12;

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New York Convention means the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York, June 10, 1958; non-disputing Party means the Party that is not a party to an investment dispute; protected information means confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law; regional level of government means, for the United States, a state of the United States, the District of Columbia, or Puerto Rico. For Singapore, “regional level of government” is not applicable, as Singapore has no government at the regional level; respondent means the Party that is a party to an investment dispute; Secretary-General means the Secretary-General of ICSID; tribunal means an arbitration tribunal established under Article 15.18 or 15.24; and UNCITRAL Arbitration Rules means the arbitration rules of the United Nations Commission on International Trade Law. Section B – Investment Article 15.2: Scope and Coverage This Chapter applies to measures adopted or maintained by a Party relating to: (a) (b) (c)

investors of the other Party; covered investments; and with respect to Articles 15.8 and 15.10, all investments in the territory of the Party.

Article 15.3: Relation to Other Chapters 1. In the event of any inconsistency between this Chapter and another Chapter, the other Chapter shall prevail to the extent of the inconsistency. 2. A requirement by a Party that a service provider of the other Party post a bond or other form of financial security as a condition of providing a service into its territory does not of itself make this Chapter applicable to the provision of that cross-border service. This Chapter applies to that Party's treatment of the posted bond or financial security.

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3. This Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter 10. Article 15.4: National Treatment and Most-Favored-Nation Treatment 1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. The treatment each Party shall accord under this paragraph is “national P 86 treatment.” 2. The treatment to be accorded by a Party under paragraph 1 means, with respect to a state, territory or possession, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that state, territory, or possession, to investors, and to investments of investors, of the Party of which it forms a part. 3. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. The treatment each Party shall accord under this paragraph is “most-favored-nation treatment.” 4. Each Party shall accord to investors of the other Party and to their covered investments the better of national treatment or most-favored-nation treatment. Article 15.5: Minimum Standard of Treatment (30) 1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. (a)

(b)

The obligation in paragraph 1 to provide “fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and The obligation in paragraph 1 to provide “full protection and security” requires each Party to provide the level of police protection required under customary international law.

3. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article. 4. Without prejudice to paragraph 1 and notwithstanding Article 15.12(5)(b), each Party shall accord to investors of the other Party, and to covered investments, nondiscriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife. 5. Paragraph 4 does not apply to existing measures relating to subsidies or grants that

P 87 would be inconsistent with Article 15.4(1) and (2) but for Article 15.12(5)(b).

Article 15.6: Expropriation (31) 1. Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”) except: (a) (b) (c) (d)

for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation in accordance with paragraphs 2, 3, and 4; and in accordance with due process of law and Article 15.5(1), (2), and (3).

2. Compensation shall: (a) (b)

be paid without delay; be equivalent to the fair market value of the expropriated investment immediately

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(c) (d)

before the expropriatory action was taken (“the date of expropriation”); be fully realizable and freely transferable; and not reflect any change in value occurring because the expropriatory action had become known before the date of expropriation.

3. If the fair market value is denominated in a freely usable currency, the compensation paid shall be no less than the fair market value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment. 4. If the fair market value is denominated in a currency that is not freely usable, the compensation paid – converted into the currency of payment at the market rate of exchange prevailing on the date of payment – shall be no less than: (a) (b)

the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date, plus interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment.

5. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS Agreement”), or to the revocation, limitation, or creation of intellectual property rights, to the extent that such issuance, revocation, limitation, or creation is consistent with Chapter 16 of this Agreement. Article 15.7: Transfers (32) 1. Each Party shall permit all transfers relating to a covered investment to be made freely

P 88 and without delay into and out of its territory. Such transfers include:

(a) (b) (c) (d) (e) (f)

contributions to capital; profits, dividends, capital gains, and proceeds from the sale of all or any part of the investment or from the partial or complete liquidation of the investment; interest, royalty payments, management fees, and technical assistance and other fees; payments made under a contract entered into by the investor, or the covered investment, including payments made pursuant to a loan agreement; payments made pursuant to Article 15.6 and Article 15.5(4); and payments arising under Section C.

2. Each Party shall permit transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer. 3. Each Party shall permit returns in kind relating to a covered investment to be made as authorized or specified in an investment authorization or other written agreement between the Party and a covered investment or an investor of the other Party. 4. Notwithstanding paragraphs 1, 2, and 3, a Party may prevent a transfer through the equitable, non-discriminatory, and good faith application of its law relating to: (a) (b) (c) (d) (e)

bankruptcy, insolvency, or the protection of the rights of creditors; issuing, trading, or dealing in securities, futures, options, or derivatives; financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; criminal or penal offenses; or ensuring compliance with orders or judgments in judicial or administrative proceedings.

Article 15.8: Performance Requirements (33) 1. Neither Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party in its territory: (a) (b) (c) (d) (e) (f)

to export a given level or percentage of goods or services; to achieve a given level or percentage of domestic content; to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings; to transfer a particular technology, production process, or other proprietary knowledge to a person in its territory; or

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(g) P 89

to supply exclusively from the territory of the Party the goods that it produces or the services that it supplies to a specific regional market or to the world market.

2. Neither Party may condition the receipt or continued receipt of an advantage, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements: (a) (b) (c) (d)

to achieve a given level or percentage of domestic content; to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

3. (a)

(b)

Nothing in Paragraph 2 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory. Paragraph 1(f) does not apply: (i)

(c)

when a Party authorizes use of an intellectual property right in accordance with the provisions of Article 16.7(6), and to measures requiring the disclosure of proprietary information that fall within the scope of, and are consistent with, Article 39 of the TRIPS Agreement; or (ii) when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal, or competition authority to remedy a practice determined after judicial or administrative process to be anticompetitive under the Party's competition laws. Paragraphs 1(b), (c), and (f), and 2(a) and (b), shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures: (i)

(d) (e) (f)

necessary to secure compliance with laws and regulations that are not inconsistent with this Agreement; (ii) necessary to protect human, animal, or plant life or health; or (iii) related to the conservation of living or non-living exhaustible natural resources; provided that such measures are not applied in an arbitrary or unjustifiable manner, and provided that such measures do not constitute a disguised restriction on investment or international trade. Paragraphs 1(a), (b), and (c), and 2(a) and (b), do not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs. Paragraphs 1(b), (c), (f), and (g), and 2(a) and (b), do not apply to government procurement. Paragraphs 2(a) and (b) do not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas.

4. For greater certainty, paragraphs 1 and 2 do not apply to any requirement other than

P 90 the requirements set out in those paragraphs.

Article 15.9: Senior Management and Boards of Directors 1. Neither Party may require that an enterprise of that Party that is a covered investment appoint to senior management positions individuals of any particular nationality. 2. A Party may require that a majority of the board of directors, or any committee thereof, of an enterprise of that Party that is a covered investment, be of a particular nationality, or resident in the territory of the Party, provided that the requirement does not materially impair the ability of the investor to exercise control over its investment. Article 15.10: 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. Article 15.11: Denial of Benefits A Party may deny the benefits of this Chapter to an investor of the other Party that is an

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enterprise of such other Party and to investments of that investor if: (a)

investors of a non-Party own or control the enterprise and the denying Party: (i) (ii)

(b)

does not maintain diplomatic relations with the non-Party; or adopts or maintains measures with respect to the non-Party or an investor of the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments; or the enterprise has no substantial business activities in the territory of the other Party, and investors of a non-Party, or of the denying Party, own or control the enterprise.

Article 15.12: Non-Conforming Measures 1. Articles 15.4, 15.8, and 15.9 do not apply to: (a)

any existing non-conforming measure that is maintained by a Party at: (i)

(b) (c)

the central level of government, as set out by that Party in its Schedule to Annex I, (ii) a regional level of government, as set out by that Party in its Schedule to Annex I, or (iii) a local level of government; the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Articles 15.4, 15.8, and 15.9.

2. Articles 15.4, 15.8, and 15.9 do not apply to any measure that a Party adopts or maintains with respect to sectors, sub-sectors, or activities, as set out in its Schedule to Annex II. 3. Neither Party may, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to Annex II, require an investor of the other Party, P 91 by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective. 4. Article 15.4 does not apply to any measure that is an exception to, or derogation from, the obligations under Article 16.1(3) as specifically provided for in that Article. 5. Articles 15.4 and 15.9 do not apply to: (a) (b)

government procurement; or subsidies or grants provided by a Party, including government-supported loans, guarantees, and insurance.

Article 15.13: Special Formalities and Information Requirements 1. Nothing in Article 15.4(1) and (2) shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with covered investments, such as a requirement that investors be residents of the Party or that covered investments be legally constituted under the laws or regulations of the Party, provided that such formalities do not materially impair the protections afforded by a Party to investors of the other Party and covered investments pursuant to this Chapter. 2. Notwithstanding Article 15.4, a Party may require an investor of the other Party, or a covered investment, to provide information concerning that investment solely for informational or statistical purposes. The Party shall protect such business information that is confidential from any disclosure that would prejudice the competitive position of the investor or the covered investment. Nothing in this paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law. Section C – Investor-State Dispute Settlement Article 15.14: Consultation and Negotiation In the event of an investment dispute, the claimant and the respondent should initially seek to resolve the dispute through consultation and negotiation, which may include the use of non-binding, third-party procedures. Article 15.15: Submission of a Claim to Arbitration (34) 1. In the event that a disputing party considers that an investment dispute cannot be settled by consultation and negotiation: (a)

the claimant, on its own behalf, may submit to arbitration under this Section a claim (i)

that the respondent has breached

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P 92

(b)

(A) an obligation under Section B, (B) an investment authorization, or (C) an investment agreement; and (ii) that the claimant has incurred loss or damage by reason of, or arising out of, that breach; and the claimant, on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls directly or indirectly, may submit to arbitration under this Section a claim (i)

(c)

(d)

that the respondent has breached

(A) an obligation under Section B, (B) an investment authorization, or (C) an investment agreement; and (ii) that the enterprise has incurred loss or damage by reason of, or arising out of, that breach. For greater certainty, a claimant may submit to arbitration under this Section a claim that the respondent has breached an obligation under Section B through the actions of a designated monopoly or a government enterprise exercising delegated governmental authority as described in Articles 12.3(1)(c)(i) and 12.3(2)(b) respectively. Without prejudice to Article 10.1(2), no claim may be submitted under this Section that alleges a violation of any provision of this Agreement other than an obligation under Section B or the letter exchange on land expropriation.

2. At least 90 days before submitting any claim to arbitration under this Section, a claimant shall deliver to the respondent a written notice of its intention to submit the claim to arbitration (“notice of intent”). The notice shall specify: (a) (b) (c) (d)

the name and address of the claimant and, where a claim is submitted on behalf of an enterprise, the name, address, and place of incorporation of the enterprise; for each claim, the provision of this Agreement, investment authorization, or investment agreement alleged to have been breached and any other relevant provisions; the legal and factual basis for each claim; and the relief sought and the approximate amount of damages claimed.

3. Provided that six months have elapsed since the events giving rise to the claim, a claimant may submit a claim referred to in paragraph 1: (a) (b) (c) (d)

under the ICSID Convention and the ICSID Rules of Procedures for Arbitration Proceedings, provided that both the disputing Party and the Party of the claimant are parties to the ICSID Convention; under the ICSID Additional Facility Rules, provided that either the disputing Party or the Party of the claimant, but not both, is a party to the ICSID Convention; under the UNCITRAL Arbitration Rules; or if the claimant and respondent agree, to any other arbitration institution or under any other arbitration rules.

4. A claim shall be deemed submitted to arbitration under this Section when the claimant's notice of or request for arbitration (“notice of arbitration”): (a) (b) (c) P 93

(d)

referred to in paragraph 1 of Article 36 of the ICSID Convention is received by the Secretary-General; referred to in Article 2 of Schedule C of the ICSID Additional Facility Rules is received by the Secretary-General; referred to in Article 3 of the UNCITRAL Arbitration Rules, together with the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules, are received by the respondent; or referred to under any other arbitral institution or arbitral rules selected under paragraph 3(d) is received by the respondent.

5. The arbitration rules applicable under paragraph 3, and in effect on the date the claim or claims were submitted to arbitration under this Section, shall govern the arbitration except to the extent modified by this Agreement. 6. The claimant shall provide with the notice of arbitration referred to in paragraph 4: (a) (b)

the name of the arbitrator that the claimant appoints; or the claimant's written consent for the Secretary-General to appoint the claimant's arbitrator.

Article 15.16: Consent of Each Party to Arbitration 1. Each Party consents to the submission of a claim to arbitration under this Section in accordance with this Agreement.

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2. The consent under paragraph 1 and the submission of a claim to arbitration under this Section shall satisfy the requirements of: (a) (b)

Chapter II of the ICSID Convention ( Jurisdiction of the Centre) and the ICSID Additional Facility Rules for written consent of the parties to the dispute; and Article II of the New York Convention for an “agreement in writing.”

Article 15.17: Conditions and Limitations on Consent of Each Party 1. No claim may be submitted to arbitration under this Section if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged under Article 15.15(1) and knowledge that the claimant (for claims brought under Article 15.15(1)(a)) or the enterprise (for claims brought under Article 15.15(1)(b)) has incurred loss or damage. 2. No claim may be submitted to arbitration under this Section unless: (a) (b)

the claimant consents in writing to arbitration in accordance with the procedures set out in this Agreement; and the notice of arbitration referred to in Article 15.15(4) is accompanied, (i) (ii)

for claims submitted to arbitration under Article 15.15(1)(a), by the claimant's written waiver, and for claims submitted to arbitration under Article 15.15(1)(b), by the claimant's and the enterprise's written waivers of any right to initiate or continue before any administrative tribunal or court under the law of either Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 15.15.

3. Notwithstanding paragraph 2(b), the claimant (for claims brought under Article 15.15(1) (a)) and the claimant or the enterprise (for claims brought under Article 15.15(1)(b)) may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant's or the enterprise's rights and interests during the pendency of the arbitration. P 94

Article 15.18: Selection of Arbitrators 1. Unless the disputing parties otherwise agree, the tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. 2. The Secretary-General shall serve as appointing authority for an arbitration under this Section. 3. If a tribunal has not been constituted within 75 days from the date that a claim is submitted to arbitration under this Section, the Secretary-General, on the request of a disputing party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed. 4. For purposes of Article 39 of the ICSID Convention and Article 7 of Schedule C to the ICSID Additional Facility Rules, and without prejudice to an objection to an arbitrator on a ground other than nationality: (a) (b)

(c)

the respondent agrees to the appointment of each individual member of a tribunal established under the ICSID Convention or the ICSID Additional Facility Rules; a claimant referred to in Article 15.15(1)(a) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant agrees in writing to the appointment of each individual member of the tribunal; and a claimant referred to in Article 15.15(1)(b) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant and the enterprise agree in writing to the appointment of each individual member of the tribunal.

Article 15.19: Conduct of the Arbitration 1. The disputing parties may agree on the legal place of any arbitration under the arbitral rules applicable under Article 15.15(3)(b), (c), or (d). If the disputing parties fail to reach agreement, the tribunal shall determine the place in accordance with the applicable arbitral rules, provided that the place shall be in the territory of either Party or of a third State that is a party to the New York Convention. 2. The non-disputing Party may make oral and written submissions to the tribunal regarding the interpretation of this Agreement. 3. The tribunal shall have the authority to accept and consider amicus curiae submissions from any persons and entities in the territories of the Parties and from interested persons and entities outside the territories of the Parties.

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4. Without prejudice to a tribunal's authority to address other objections as a preliminary question, a tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 15.25. (a) P 95

(b)

(c)

(d)

Such objection shall be submitted to the tribunal as soon as possible after the tribunal is constituted, and in no event later than the date the tribunal fixes for the respondent to submit its counter-memorial (or, in the case of an amendment to the notice of arbitration referred to in Article 15.15(4), the date the tribunal fixes for the respondent to submit its response to the amendment). On receipt of an objection under this paragraph, the tribunal shall suspend any proceedings on the merits, establish a schedule for considering the objection consistent with any schedule it has established for considering any other preliminary question, and issue a decision or award on the objection, stating the grounds therefor. In deciding an objection under this paragraph, the tribunal shall assume to be true claimant's factual allegations in support of any claim in the notice of arbitration (or any amendment thereof) and, in disputes brought under the UNCITRAL Arbitration Rules, the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules. The tribunal may also consider any relevant facts not in dispute. The respondent does not waive any objection as to competence or any argument on the merits merely because the respondent did or did not raise an objection under this paragraph or make use of the expedited procedure set out in the following paragraph.

5. In the event that the respondent so requests within 45 days after the tribunal is constituted, the tribunal shall decide on an expedited basis an objection under paragraph 4 or any objection that the dispute is not within the tribunal's competence. The tribunal shall suspend any proceedings on the merits and issue a decision or award on the objection(s), stating the grounds therefor, no later than 150 days after the date of the request. However, if a disputing party requests a hearing, the tribunal may take an additional 30 days to issue the decision or award. Regardless of whether a hearing is requested, a tribunal may, on a showing of extraordinary cause, delay issuing its decision or award by an additional brief period of time, which may not exceed 30 days. 6. When it decides a respondent's objection under paragraph 4 or 5, the tribunal may, if warranted, award to the prevailing disputing party reasonable costs and attorneys' fees incurred in submitting or opposing the objection. In determining whether such an award is warranted, the tribunal shall consider whether either the claimant's claim or the respondent's objection was frivolous, and shall provide the disputing parties a reasonable opportunity to comment. 7. A respondent may not assert as a defense, counterclaim, right of set-off, or for any other reason that the claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract. 8. A tribunal may order an interim measure of protection to preserve the rights of a disputing party, or to ensure that the tribunal's jurisdiction is made fully effective, including an order to preserve evidence in the possession or control of a disputing party or to protect the tribunal's jurisdiction. A tribunal may not order attachment or enjoin the application of a measure alleged to constitute a breach referred to in Article 15.15. For purposes of this paragraph, an order includes a recommendation. 9. (a)

P 96

(b)

In any arbitration conducted under this Section, at the request of a disputing party, a tribunal shall, before issuing an award on liability, transmit its proposed award to the disputing parties and to the non-disputing Party. Within 60 days after the tribunal transmits its proposed award, the disputing parties may submit written comments to the tribunal concerning any aspect of its proposed award. The tribunal shall consider any such comments and issue its award not later than 45 days after the expiration of the 60-day comment period. Subparagraph (a) shall not apply in any arbitration conducted pursuant to this Section for which an appeal has been made available pursuant to paragraph 10.

10. If a separate multilateral agreement enters into force as between the Parties that establishes an appellate body for purposes of reviewing awards rendered by tribunals constituted pursuant to international trade or investment arrangements to hear investment disputes, the Parties shall strive to reach an agreement that would have such appellate body review awards rendered under Article 15.25 of this Section in arbitrations commenced after the appellate body's establishment. Article 15.20: Transparency of Arbitral Proceedings 1. Subject to paragraphs 2 and 4, the respondent shall, after receiving the following documents, promptly transmit them to the non-disputing Party and make them available to the public:

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

the notice of intent referred to in Article 15.15(2); the notice of arbitration referred to in Article 15.15(4); pleadings, memorials, and briefs submitted to the tribunal by a disputing party and any written submissions submitted pursuant to Article 15.19(2) and (3) and Article 15.24; minutes or transcripts of hearings of the tribunal, where available; and orders, awards, and decisions of the tribunal.

2. The tribunal shall conduct hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements. However, any disputing party that intends to use information designated as protected information in a hearing shall so advise the tribunal. The tribunal shall make appropriate arrangements to protect the information from disclosure. 3. Nothing in this Section requires a respondent to disclose protected information or to furnish or allow access to information that it may withhold in accordance with Article 21.2 or Article 21.4. 4. Protected information shall, if such information is submitted to the tribunal, be protected from disclosure in accordance with the following procedures: (a)

(b) (c)

P 97

(d)

Subject to paragraph 4(d), neither the disputing parties nor the tribunal shall disclose to the non-disputing Party or to the public any protected information where the disputing party that provided the information clearly designates it in accordance with paragraph 4(b). Any disputing party claiming that certain information constitutes protected information shall clearly designate the information at the time it is submitted to the tribunal. A disputing party shall, at the same time that it submits a document containing information claimed to be protected information, submit a redacted version of the document that does not contain the information. Only the redacted version shall be provided to the non-disputing Party and made public in accordance with paragraph 1. The tribunal shall decide any objection regarding the designation of information claimed to be protected information. If the tribunal determines that such information was not properly designated, the disputing party that submitted the information may (i) (ii)

withdraw all or part of its submission containing such information, or agree to resubmit complete and redacted documents with corrected designations in accordance with the tribunal's determination and paragraph 4(c). In either case, the other disputing party shall, whenever necessary, resubmit complete and redacted documents which either remove the information withdrawn under by the disputing party that first submitted the information or redesignate the information consistent with the designation under (ii) of the disputing party that first submitted the information.

5. Nothing in this Section authorizes a respondent to withhold from the public information required to be disclosed by its laws. Article 15.21: Governing Law 1. Subject to paragraph 2, a tribunal shall decide the issues in dispute related to an alleged breach of an obligation in Section B in accordance with this Agreement and applicable rules of international law. 2. A decision of the Joint Committee declaring its interpretation of a provision of this Agreement under Article 20.1.2 shall be binding on a tribunal established under this Section, and any award must be consistent with that decision. Article 15.22: Interpretation of Annexes 1. Where a respondent asserts as a defense that the measure alleged to be a breach is within the scope of a reservation or exception set out in Annex I or Annex II, the tribunal shall, on request of the respondent, request the interpretation of the Joint Committee on the issue. The Joint Committee shall submit in writing any decision declaring its interpretation under Article 20.1.2 to the tribunal within 60 days of delivery of the request. 2. A decision issued by the Joint Committee under paragraph 1 shall be binding on the tribunal, and any award must be consistent with that decision. If the Joint Committee fails to issue such a decision within 60 days, the tribunal shall decide the issue. Article 15.23: Expert Reports Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or

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other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree. Article 15.24: Consolidation 1. Where two or more claims have been submitted separately to arbitration under Article 15.15(1) and the claims have a question of law or fact in common and arise out of the P 98 same events or circumstances, any disputing party may seek a consolidation order in accordance with the agreement of all the disputing parties sought to be covered by the order or the terms of paragraphs 2 through 10. 2. A disputing party that seeks a consolidation order under this Article shall deliver, in writing, a request to the Secretary-General and to all the disputing parties sought to be covered by the order and shall specify in the request: (a) (b) (c)

the names and addresses of all the disputing parties sought to be covered by the order; the nature of the order sought; and the grounds on which the order is sought.

3. Unless the Secretary-General finds within 30 days after receiving a request under paragraph 2 that the request is manifestly unfounded, a tribunal shall be established under this Article. 4. Unless all the disputing parties sought to be covered by the order otherwise agree, a tribunal established under this Article shall comprise three arbitrators: (a) (b) (c)

one arbitrator appointed by agreement of the claimants; one arbitrator appointed by the respondent; and the presiding arbitrator appointed by the Secretary-General, provided, however, that the presiding arbitrator shall not be a national of either Party.

5. If, within 60 days after the Secretary-General receives a request made under paragraph 2, the respondent fails or the claimants fail to appoint an arbitrator in accordance with paragraph 4, the Secretary-General, on the request of any disputing party sought to be covered by the order, shall appoint the arbitrator or arbitrators not yet appointed. If the respondent fails to appoint an arbitrator, the Secretary-General shall appoint a national of the disputing Party, and if the claimants fail to appoint an arbitrator, the SecretaryGeneral shall appoint a national of the non-disputing Party. 6. Where a tribunal established under this Article is satisfied that two or more claims that have been submitted to arbitration under Article 15.15(1) have a question of law or fact in common, and arise out of the same events or circumstances, the tribunal may, in the interest of fair and efficient resolution of the claims, and after hearing the disputing parties, by order: (a) (b) (c)

assume jurisdiction over, and hear and determine together, all or part of the claims; assume jurisdiction over, and hear and determine one or more of the claims, the determination of which it believes would assist in the resolution of the others; or instruct a tribunal previously established under Article 15.18 to assume jurisdiction over, and hear and determine together, all or part of the claims, provided that (i)

(ii)

P 99

that tribunal, at the request of any claimant not previously a disputing party before that tribunal, shall be reconstituted with its original members, except that the arbitrator for the claimants shall be appointed pursuant to paragraphs 4(a) and 5; and that tribunal shall decide whether any prior hearing shall be repeated.

7. Where a tribunal has been established under this Article, a claimant that has submitted a claim to arbitration under Article 15.15(1) and that has not been named in a request made under paragraph 2 may make a written request to the tribunal that it be included in any order made under paragraph 6, and shall specify in the request: (a) (b) (c)

the name and address of the claimant; the nature of the order sought; and the grounds on which the order is sought.

The claimant shall deliver a copy of its request to the Secretary-General. 8. A tribunal established under this Article shall conduct its proceedings in accordance with the UNCITRAL Arbitration Rules, except as modified by this Section. 9. A tribunal established under Article 15.18 shall not have jurisdiction to decide a claim, or a part of a claim, over which a tribunal established or instructed under this Article has assumed jurisdiction. 10. On application of a disputing party, a tribunal established under this Article, pending its decision under paragraph 6, may order that the proceedings of a tribunal established under Article 15.18 be stayed, unless the latter tribunal has already adjourned its proceedings.

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Article 15.25: Awards 1. Where a tribunal makes a final award against a respondent, the tribunal may award, separately or in combination, only: (a) (b)

monetary damages and any applicable interest; restitution of property, in which case the award shall provide that the respondent may pay monetary damages and any applicable interest in lieu of restitution.

A tribunal may also award costs and attorneys' fees in accordance with this Section and the applicable arbitration rules. 2. Subject to paragraph 1, where a claim is submitted to arbitration under Article 15.15(1) (b): (a) (b) (c)

an award of restitution of property shall provide that restitution be made to the enterprise; an award of monetary damages and any applicable interest shall provide that the sum be paid to the enterprise; and the award shall provide that it is made without prejudice to any right that any person may have in the relief under applicable domestic law.

3. A tribunal may not award punitive damages. 4. An award made by a tribunal shall have no binding force except between the disputing parties and in respect of the particular case. 5. Subject to paragraph 6 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an award without delay. 6. A disputing party may not seek enforcement of a final award until: P 100 (a)

in the case of a final award made under the ICSID Convention (i)

(b)

120 days have elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award; or (ii) revision or annulment proceedings have been completed; and in the case of a final award under the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules, or the rules selected pursuant to Article 15.15(3)(d) (i) (ii)

90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside, or annul the award, or a court has dismissed or allowed an application to revise, set aside, or annul the award and there is no further appeal.

7. Each Party shall provide for the enforcement of an award in its territory. 8. If the respondent fails to abide by or comply with a final award, on delivery of a written notification by the non-disputing Party, a panel shall be established under Article 20.4.4(a). The requesting Party may seek in such proceedings: (a) (b)

a determination that the failure to abide by or comply with the final award is inconsistent with the obligations of this Agreement; and in accordance with the procedures set forth in Article 20.4.5(b), a recommendation that the respondent abide by or comply with the final award.

9. A disputing party may seek enforcement of an arbitration award under the ICSID Convention or the New York Convention regardless of whether proceedings have been taken under paragraph 8. 10. A claim that is submitted to arbitration under this Section shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention. [Letter exchanges deleted] [6] United States-Chile Free Trade Agreement (2005), (35) Chapter 10: Investment (2005) Section A – Investment Article 10.1: Scope and Coverage (36) 1. This Chapter applies to measures adopted or maintained by a Party relating to: (a) (b) P 101 (c)

investors of the other Party; covered investments; and with respect to Articles 10.5 and 10.12, all investments in the territory of the Party.

2. In the event of any inconsistency between this Chapter and another Chapter, the other Chapter shall prevail to the extent of the inconsistency. 3. A requirement by a Party that a service provider of the other Party post a bond or other form of financial security as a condition of providing a service into its territory does not of itself make this Chapter applicable to the provision of that cross-border service. This

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Chapter applies to that Party's treatment of the posted bond or financial security. 4. This Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Twelve (Financial Services). Article 10.2: National Treatment 1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 3. The treatment to be accorded by a Party under paragraphs 1 and 2 means, with respect to a regional level of government, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that regional level of government to investors, and to investments of investors, of the Party of which it forms a part. Article 10.3: Most-Favored-Nation Treatment 1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. Article 10.4: Minimum Standard of Treatment (37) 1. Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. 2. For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection P 102 and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph to provide: (a) (b)

“fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and “full protection and security” requires each Party to provide the level of police protection required under customary international law.

3. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article. 4. Notwithstanding Article 10.7(5)(b), each Party shall accord to investors of the other Party, and to covered investments, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife. 5. Notwithstanding paragraph 4, if an investor of a Party, in the situations referred to in that paragraph, suffers a loss in the territory of the other Party resulting from: (a) (b)

requisitioning of its covered investment or part thereof by the latter's forces or authorities; or destruction of its covered investment or part thereof by the latter's forces or authorities, which was not required by the necessity of the situation, the latter Party shall provide the investor restitution or compensation, which in either case shall be prompt, adequate, and effective, and, with respect to compensation, shall be in accordance with Article 10.9(2) through (4).

6. Paragraph 4 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 10.2 but for Article 10.7(5)(b). Article 10.5: Performance Requirements Mandatory Performance Requirements 1. Neither Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition,

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expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party in its territory: (a) (b) (c) (d) (e) (f) P 103

(g)

to export a given level or percentage of goods or services; to achieve a given level or percentage of domestic content; to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings; to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory; or to supply exclusively from the territory of the Party the goods that it produces or the services that it supplies to a specific regional market or to the world market.

Advantages Subject to Performance Requirements 2. Neither Party may condition the receipt or continued receipt of an advantage, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements: (a) (b) (c) (d)

to achieve a given level or percentage of domestic content; to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

Exceptions and Exclusions 3. (a)

(b)

Nothing in paragraph 2 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory. Paragraph 1(f) does not apply: (i)

(c)

when a Party authorizes use of an intellectual property right in accordance with Article 31 (38) of the TRIPS Agreement, or to measures requiring the disclosure of proprietary information that fall within the scope of, and are consistent with, Article 39 of the TRIPS Agreement; or (ii) when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal, or competition authority to remedy a practice determined after judicial or administrative process to be anticompetitive under the Party's competition laws. (39) Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, paragraphs 1(b), (c), and (f), and 2(a) and (b), shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures: (i)

(d) P 104

(e) (f)

necessary to secure compliance with laws and regulations that are not inconsistent with this Agreement; (ii) necessary to protect human, animal, or plant life or health; or (iii) related to the conservation of living or non-living exhaustible natural resources. Paragraphs 1(a), (b), and (c), and 2(a) and (b), do not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs. Paragraphs 1(b), (c), (f), and (g), and 2(a) and (b), do not apply to procurement. Paragraphs 2(a) and (b) do not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas.

4. For greater certainty, paragraphs 1 and 2 do not apply to any requirement other than

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the requirements set out in those paragraphs. 5. This Article does not preclude enforcement of any commitment, undertaking, or requirement between private parties, where a Party did not impose or require the commitment, undertaking, or requirement. Article 10.6: Senior Management and Boards of Directors 1. Neither Party may require that an enterprise of that Party that is a covered investment appoint to senior management positions individuals of any particular nationality. 2. A Party may require that a majority of the board of directors, or any committee thereof, of an enterprise of that Party that is a covered investment, be of a particular nationality, or resident in the territory of the Party, provided that the requirement does not materially impair the ability of the investor to exercise control over its investment. Article 10.7: Non-Conforming Measures (40) 1. Articles 10.2, 10.3, 10.5, and 10.6 do not apply to: (a)

any existing non-conforming measure that is maintained by a Party at: (i)

(b) (c)

the central level of government, as set out by that Party in its Schedule to Annex I, (ii) a regional level of government, as set out by that Party in its Schedule to Annex I, or (iii) a local level of government; the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Articles 10.2, 10.3, 10.5, and 10.6.

2. Articles 10.2, 10.3, 10.5, and 10.6 do not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors, or activities, as set out in its Schedule to Annex II. 3. Neither Party may, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to Annex II, require an investor of the other Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective. 4. Articles 10.2 and 10.3 do not apply to any measure that is an exception to, or derogation from, the obligations under Article 17.1(6) (General Provisions) as specifically P 105 provided for in that Article. 5. Articles 10.2, 10.3, and 10.6 do not apply to: (a) (b)

procurement; or subsidies or grants provided by a Party, including government-supported loans, guarantees, and insurance.

Article 10.8: Transfers (41) 1. Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include: (a) (b) (c) (d) (e) (f)

contributions to capital; profits, dividends, interest, capital gains, royalty payments, management fees, and technical assistance and other fees; proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment; payments made under a contract entered into by the investor, or the covered investment, including payments made pursuant to a loan agreement; payments made pursuant to Article 10.4(4) and (5) and Article 10.9; and payments arising under Section B.

2. Each Party shall permit returns in kind relating to a covered investment to be made as authorized or specified in an investment authorization or other written agreement (42) between the Party and a covered investment or an investor of the other Party. 3. Each Party shall permit transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing on the date of transfer. 4. Neither Party may require its investors to transfer, or penalize its investors that fail to transfer, the income, earnings, profits, or other amounts derived from, or attributable to, investments in the territory of the other Party. 5. Notwithstanding paragraphs 1 through 3, a Party may prevent a transfer through the equitable, nondiscriminatory, and good faith application of its laws relating to:

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

bankruptcy, insolvency, or the protection of the rights of creditors; issuing, trading, or dealing in securities, futures, or derivatives; criminal or penal offenses; financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; or ensuring compliance with orders or judgments in judicial or administrative proceedings.

6. Notwithstanding paragraph 2, a Party may restrict transfers of returns in kind in circumstances where it could otherwise restrict such transfers under this Agreement, P 106 including as set out in paragraph 5. Article 10.9: Expropriation and Compensation (43) 1. Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”), except: (a) (b) (c) (d)

for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation in accordance with paragraphs 2 through 4; and in accordance with due process of law and Article 10.4(1) through (3).

2. Compensation shall: (a) (b) (c) (d)

be paid without delay; be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“the date of expropriation”); not reflect any change in value occurring because the intended expropriation had become known earlier; and be fully realizable and freely transferable.

3. If the fair market value is denominated in a freely usable currency, the compensation paid shall be no less than the fair market value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment. 4. If the fair market value is denominated in a currency that is not freely usable, the compensation paid – converted into the currency of payment at the market rate of exchange prevailing on the date of payment – shall be no less than: (a) (b)

the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date, plus interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment.

5. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property rights, to the extent that such revocation, limitation, or creation is consistent with Chapter 17. Article 10.10: Special Formalities and Information Requirements 1. Nothing in Article 10.2 shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with covered investments, such as a requirement that investors be residents of the Party or that covered investments be legally constituted under the laws or regulations of the Party, provided that such formalities do not materially impair the protections afforded by a P 107 Party to investors of the other Party and covered investments pursuant to this Chapter. 2. Notwithstanding Articles 10.2 and 10.3, a Party may require an investor of the other Party, or a covered investment, to provide information concerning that investment solely for informational or statistical purposes. The Party shall protect such information that is confidential from any disclosure that would prejudice the competitive position of the investor or the covered investment. Nothing in this paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its domestic law. Article 10.11: Denial of Benefits 1. A Party may deny the benefits of this Chapter to an investor of the other Party that is an enterprise of such other Party and to investments of that investor if an investor of a nonParty owns or controls the enterprise and the denying Party: (a) (b)

does not maintain diplomatic relations with the non-Party; or adopts or maintains measures with respect to the non-Party or an investor of the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to

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its investments. 2. Subject to Article 22.4 (Consultations), a Party may deny the benefits of this Chapter to: (a)

(b)

an investor of the other Party that is an enterprise of such other Party and to investments of that investor if an investor of a non-Party owns or controls the enterprise and the enterprise has no substantial business activities in the territory of the other Party; or an investor of the other Party that is an enterprise of such other Party and to investments of that investor if an investor of the denying Party owns or controls the enterprise and the enterprise has no substantial business activities in the territory of the other Party.

Article 10.12: 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. Article 10.13: Implementation The Parties shall consult annually, or as otherwise agreed, to review the implementation of this Chapter and consider any investment matter of mutual interest, including consideration of the development of procedures that could contribute to greater transparency of measures described in Article 10.7(1)(c). Section B – Investor-State Dispute Settlement Article 10.14: Consultation and Negotiation In the event of an investment dispute, the claimant and the respondent should initially seek to resolve the dispute through consultation and negotiation, which may include the P 108 use of non-binding, third-party procedures. Article 10.15: Submission of a Claim to Arbitration (44) 1. In the event that a disputing party considers that an investment dispute cannot be settled by consultation and negotiation: (a)

the claimant, on its own behalf, may submit to arbitration under this Section a claim (i)

(b)

that the respondent has breached

(A) an obligation under Section A or Annex 10-F, (B) an investment authorization, or (C) an investment agreement; and (ii) that the claimant has incurred loss or damage by reason of, or arising out of, that breach; and the claimant, on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls directly or indirectly, may submit to arbitration under this Section a claim (i)

(ii)

that the respondent has breached (A) an obligation under Section A or Annex 10-F, (B) an investment authorization, or (C) an investment agreement; and that the enterprise has incurred loss or damage by reason of, or arising out of, that breach.

2. For greater certainty, a claimant may submit to arbitration under this Section a claim that the respondent has breached an obligation under Section A or Annex 10-F through the actions of a designated monopoly or a state enterprise exercising delegated government authority as described in Article 16.3 (Designated Monopolies) and Article 16.4 (State Enterprises), respectively. 3. Without prejudice to Article 12.18 (Investment Disputes in Financial Services), no claim may be submitted under this Section that alleges a violation of any provision of this Agreement other than an obligation under Section A or Annex 10-F. 4. At least 90 days before submitting any claim to arbitration under this Section, a claimant shall deliver to the respondent a written notice of its intention to submit the claim to arbitration (“notice of intent”). The notice shall specify: (a) (b)

the name and address of the claimant and, where a claim is submitted on behalf of an enterprise, the name, address, and place of incorporation of the enterprise; for each claim, the provision of this Agreement, investment authorization, or investment agreement alleged to have been breached and any other relevant provisions;

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(c) (d)

the legal and factual basis for each claim; and the relief sought and the approximate amount of damages claimed.

5. Provided that six months have elapsed since the events giving rise to the claim, a claimant may submit a claim referred to in paragraph 1: (a) P 109

(b) (c) (d)

under the ICSID Convention, provided that both the disputing Party and the Party of the claimant are parties to the ICSID Convention; under the ICSID Additional Facility Rules, provided that either the disputing Party or the Party of the claimant, but not both, is a party to the ICSID Convention; under the UNCITRAL Arbitration Rules; or if the disputing parties agree, to any other arbitration institution or under any other arbitration rules.

6. A claim shall be deemed submitted to arbitration under this Section when the claimant's notice of or request for arbitration (“notice of arbitration”): (a) (b) (c) (d)

referred to in paragraph 1 of Article 36 of the ICSID Convention is received by the Secretary-General; referred to in Article 2 of Schedule C of the ICSID Additional Facility Rules is received by the Secretary-General; referred to in Article 3 of the UNCITRAL Arbitration Rules, together with the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules, are received by the respondent; or referred to under any other arbitral institution or arbitral rules selected under paragraph 5(d) is received by the respondent.

7. The arbitration rules applicable under paragraph 5, and in effect on the date the claim or claims were submitted to arbitration under this Section, shall govern the arbitration except to the extent modified by this Agreement. 8. The claimant shall provide with the notice of arbitration referred to in paragraph 6: (a) (b)

the name of the arbitrator that the claimant appoints; or the claimant's written consent for the Secretary-General to appoint the claimant's arbitrator.

Article 10.16: Consent of Each Party to Arbitration 1. Each Party consents to the submission of a claim to arbitration under this Section in accordance with this Agreement. 2. The consent under paragraph 1 and the submission of a claim to arbitration under this Section shall satisfy the requirements of: (a) (b) (c)

Chapter II of the ICSID Convention ( Jurisdiction of the Centre) and the ICSID Additional Facility Rules for written consent of the parties to the dispute; Article II of the New York Convention for an “agreement in writing;” and Article I of the Inter-American Convention for an “agreement.”

Article 10.17: Conditions and Limitations on Consent of Each Party 1. No claim may be submitted to arbitration under this Section if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged under Article 10.15(1) and knowledge that the claimant (for claims brought under Article 10.15(1)(a)) or the enterprise (for claims brought under Article 10.15(1)(b)) has incurred loss or damage. 2. No claim may be submitted to arbitration under this Section unless: (a) P 110

(b)

the claimant consents in writing to arbitration in accordance with the procedures set out in this Agreement; and the notice of arbitration referred to in Article 10.15(6) is accompanied, (i) (ii)

for claims submitted to arbitration under Article 10.15(1)(a), by the claimant's written waiver, and for claims submitted to arbitration under Article 10.15(1)(b), by the claimant's and the enterprise's written waivers of any right to initiate or continue before any administrative tribunal or court under the law of either Party, or other dispute settlement procedures, any proceeding with respect to the events alleged to give rise to the claimed breach.

3. Notwithstanding paragraph 2(b), the claimant (for claims brought under Article 10.15(1) (a)) and the claimant or the enterprise (for claims brought under Article 10.15(1) (b)) may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant's or the enterprise's rights and interests during the pendency of the arbitration.

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Article 10.18: Selection of Arbitrators 1. Unless the disputing parties otherwise agree, the tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. 2. The Secretary-General shall serve as appointing authority for an arbitration under this Section. 3. If a tribunal has not been constituted within 75 days from the date that a claim is submitted to arbitration under this Section, the Secretary-General, on the request of a disputing party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed. 4. For purposes of Article 39 of the ICSID Convention and Article 7 of Schedule C to the ICSID Additional Facility Rules, and without prejudice to an objection to an arbitrator on a ground other than nationality: (a) (b)

(c)

the respondent agrees to the appointment of each individual member of a tribunal established under the ICSID Convention or the ICSID Additional Facility Rules; a claimant referred to in Article 10.15(1)(a) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant agrees in writing to the appointment of each individual member of the tribunal; and a claimant referred to in Article 10.15(1)(b) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant and the enterprise agree in writing to the appointment of each individual member of the tribunal.

Article 10.19: Conduct of the Arbitration 1. The disputing parties may agree on the legal place of any arbitration under the arbitral rules applicable under Article 10.15(5)(b), (c), or (d). If the disputing parties fail to reach agreement, the tribunal shall determine the place in accordance with the applicable P 111 arbitral rules, provided that the place shall be in the territory of a State that is a party to the New York Convention. 2. The non-disputing Party may make oral and written submissions to the tribunal regarding the interpretation of this Agreement. 3. The tribunal shall have the authority to accept and consider amicus curiae submissions from a person or entity that is not a disputing party (the “submitter”). The submissions shall be provided in both Spanish and English, and shall identify the submitter and any Party, other government, person, or organization, other than the submitter, that has provided, or will provide, any financial or other assistance in preparing the submission. 4. Without prejudice to a tribunal's authority to address other objections as a preliminary question, such as an objection that a dispute is not within a tribunal's competence, a tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 10.25. (a)

(b)

(c)

(d)

Such objection shall be submitted to the tribunal as soon as possible after the tribunal is constituted, and in no event later than the date the tribunal fixes for the respondent to submit its counter-memorial (or, in the case of an amendment to the notice of arbitration referred to in Article 10.15(6), the date the tribunal fixes for the respondent to submit its response to the amendment). On receipt of an objection under this paragraph, the tribunal shall suspend any proceedings on the merits, establish a schedule for considering the objection consistent with any schedule it has established for considering any other preliminary question, and issue a decision or award on the objection, stating the grounds therefor. In deciding an objection under this paragraph, the tribunal shall assume to be true claimant's factual allegations in support of any claim in the notice of arbitration (or any amendment thereof) and, in disputes brought under the UNCITRAL Arbitration Rules, the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules. The tribunal may also consider any relevant facts not in dispute. The respondent does not waive any objection as to competence or any argument on the merits merely because the respondent did or did not raise an objection under this paragraph or make use of the expedited procedure set out in the following paragraph.

5. In the event that the respondent so requests within 45 days after the tribunal is constituted, the tribunal shall decide on an expedited basis an objection under paragraph 4 or any objection that the dispute is not within the tribunal's competence. The tribunal shall suspend any proceedings on the merits and issue a decision or award on the objection(s), stating the grounds therefor, no later than 150 days after the date of the request. However, if a disputing party requests a hearing, the tribunal may take an additional 30 days to issue the decision or award. Regardless of whether a hearing is

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requested, a tribunal may, on a showing of extraordinary cause, delay issuing its decision or award by an additional brief period of time, which may not exceed 30 days. 6. When it decides a respondent's objection under paragraph 4 or 5, the tribunal may, if warranted, award to the prevailing disputing party reasonable costs and attorneys' fees incurred in submitting or opposing the objection. In determining whether such an P 112 award is warranted, the tribunal shall consider whether either the claimant's claim or the respondent's objection was frivolous, and shall provide the disputing parties a reasonable opportunity to comment. 7. A respondent may not assert as a defense, counterclaim, right of set-off, or for any other reason that the claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract. 8. A tribunal may order an interim measure of protection to preserve the rights of a disputing party, or to ensure that the tribunal's jurisdiction is made fully effective, including an order to preserve evidence in the possession or control of a disputing party or to protect the tribunal's jurisdiction. A tribunal may not order attachment or enjoin the application of a measure alleged to constitute a breach referred to in Article 10.15. For purposes of this paragraph, an order includes a recommendation. 9. (a)

(b)

At the request of a disputing party, a tribunal shall, before issuing an award on liability, transmit its proposed award to the disputing parties and to the nondisputing Party. Within 60 days after the tribunal transmits its proposed award, only the disputing parties may submit written comments to the tribunal concerning any aspect of its proposed award. The tribunal shall consider any such comments and issue its award not later than 45 days after the expiration of the 60-day comment period. Subparagraph (a) shall not apply in any arbitration for which an appeal has been made available pursuant to paragraph 10.

10. If a separate multilateral agreement enters into force as between the Parties that establishes an appellate body for purposes of reviewing awards rendered by tribunals constituted pursuant to international trade or investment agreements to hear investment disputes, the Parties shall strive to reach an agreement that would have such appellate body review awards rendered under Article 10.25 in arbitrations commenced after the appellate body's establishment. Article 10.20: Transparency of Arbitral Proceedings 1. Subject to paragraphs 2 and 4, the respondent shall, after receiving the following documents, promptly transmit them to the non-disputing Party and make them available to the public: (a) (b) (c) (d) (e)

the notice of intent referred to in Article 10.15(4); the notice of arbitration referred to in Article 10.15(6); pleadings, memorials, and briefs submitted to the tribunal by a disputing party and any written submissions submitted pursuant to Article 10.19(2) and (3) and Article 10.24; minutes or transcripts of hearings of the tribunal, where available; and orders, awards, and decisions of the tribunal.

2. The tribunal shall conduct hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements. However, any disputing party that intends to use information designated as confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law in a hearing shall so advise the tribunal. The tribunal shall P 113 make appropriate arrangements to protect the information from disclosure. 3. Nothing in this Section requires a respondent to disclose confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law or to furnish or allow access to information that it may withhold in accordance with Article 23.2 (Essential Security) or Article 23.5 (Disclosure of Information). 4. Confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law shall, if such information is submitted to the tribunal, be protected from disclosure in accordance with the following procedures: (a)

(b)

Subject to subparagraph (d), neither the disputing parties nor the tribunal shall disclose to the non-disputing Party or to the public any confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law where the disputing party that provided the information clearly designates it in accordance with subparagraph (b); Any disputing party claiming that certain information constitutes confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law shall clearly designate the information at the time it

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(c)

(d)

is submitted to the tribunal; A disputing party shall, at the same time that it submits a document containing information claimed to be confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law, submit a redacted version of the document that does not contain the information. Only the redacted version shall be provided to the non-disputing Party and made public in accordance with paragraph 1; and The tribunal shall decide any objection regarding the designation of information claimed to be confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law. If the tribunal determines that such information was not properly designated, the disputing party that submitted the information may: (i) (ii)

withdraw all or part of its submission containing such information; or agree to resubmit complete and redacted documents with corrected designations in accordance with the tribunal's determination and subparagraph (c). In either case, the other disputing party shall, whenever necessary, resubmit complete and redacted documents which either remove the information withdrawn under subparagraph (d)(i) by the disputing party that first submitted the information or redesignate the information consistent with the designation under subparagraph (d) (ii) of the disputing party that first submitted the information. 5. Nothing in this Section authorizes a respondent to withhold from the public information required to be disclosed by its laws. Article 10.21: Governing Law 1. Subject to paragraph 3, when a claim is submitted under Article 10.15(1)(a)(i)(A) or in accordance with this Agreement and applicable rules of international law.

P 114 Article 10.15(1)(b)(i)(A), the tribunal shall decide the issues in dispute

2. Subject to paragraph 3, when a claim is submitted under Article 10.15(1)(a)(i)(B) or (C), or Article 10.15(1)(b)(i)(B) or (C), the tribunal shall decide the issues in dispute in accordance with the rules of law specified in the pertinent investment agreement or investment authorization, or as the disputing parties may otherwise agree. If the rules of law have not been specified or otherwise agreed, the tribunal shall apply the law of the respondent (including its rules on the conflict of laws), the terms of the investment agreement or investment authorization, such rules of international law as may be applicable, and this Agreement. 3. A decision of the Commission declaring its interpretation of a provision of this Agreement under Article 21.1 (Free Trade Commission) shall be binding on a tribunal established under this Section, and any award must be consistent with that decision. Article 10.22: Interpretation of Annexes 1. Where a respondent asserts as a defense that the measure alleged to be a breach is within the scope of a reservation or exception set out in Annex I or Annex II, the tribunal shall, on request of the respondent, request the interpretation of the Commission on the issue. The Commission shall submit in writing any decision declaring its interpretation under Article 21.1 (Free Trade Commission) to the tribunal within 60 days of delivery of the request. 2. A decision issued by the Commission under paragraph 1 shall be binding on the tribunal, and any award must be consistent with that decision. If the Commission fails to issue such a decision within 60 days, the tribunal shall decide the issue. Article 10.23: Expert Reports Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree. Article 10.24: Consolidation 1. Where two or more claims have been submitted separately to arbitration under Article 10.15(1) and the claims have a question of law or fact in common and arise out of the same events or circumstances, any disputing party may seek a consolidation order in accordance with the agreement of all the disputing parties sought to be covered by the order or the terms of paragraphs 2 through 10. 2. A disputing party that seeks a consolidation order under this Article shall deliver, in writing, a request to the Secretary-General and to all the disputing parties sought to be covered by the order and shall specify in the request: (a)

the names and addresses of all the disputing parties sought to be covered by the

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(b) (c)

order; the nature of the order sought; and the grounds on which the order is sought.

3. Unless the Secretary-General finds within 30 days after receiving a request under paragraph 2 that the request is manifestly unfounded, a tribunal shall be established P 115 under this Article. 4. Unless all the disputing parties sought to be covered by the order otherwise agree, a tribunal established under this Article shall comprise three arbitrators: (a) (b) (c)

one arbitrator appointed by agreement of the claimants; one arbitrator appointed by the respondent; and the presiding arbitrator appointed by the Secretary-General, provided, however, that the presiding arbitrator shall not be a national of either Party.

5. If, within 60 days after the Secretary-General receives a request made under paragraph 2, the respondent fails or the claimants fail to appoint an arbitrator in accordance with paragraph 4, the Secretary-General, on the request of any disputing party sought to be covered by the order, shall appoint the arbitrator or arbitrators not yet appointed. If the respondent fails to appoint an arbitrator, the Secretary-General shall appoint a national of the disputing Party, and if the claimants fail to appoint an arbitrator, the SecretaryGeneral shall appoint a national of the non-disputing Party. 6. Where a tribunal established under this Article is satisfied that two or more claims that have been submitted to arbitration under Article 10.15(1) have a question of law or fact in common, and arise out of the same events or circumstances, the tribunal may, in the interest of fair and efficient resolution of the claims, and after hearing the disputing parties, by order: (a) (b) (c)

assume jurisdiction over, and hear and determine together, all or part of the claims; assume jurisdiction over, and hear and determine one or more of the claims, the determination of which it believes would assist in the resolution of the others; or instruct a tribunal previously established under Article 10.18 to assume jurisdiction over, and hear and determine together, all or part of the claims, provided that (i)

(ii)

that tribunal, at the request of any claimant not previously a disputing party before that tribunal, shall be reconstituted with its original members, except that the arbitrator for the claimants shall be appointed pursuant to paragraphs 4(a) and 5; and that tribunal shall decide whether any prior hearing shall be repeated.

7. Where a tribunal has been established under this Article, a claimant that has submitted a claim to arbitration under Article 10.15(1) and that has not been named in a request made under paragraph 2 may make a written request to the tribunal that it be included in any order made under paragraph 6, and shall specify in the request: (a) (b) (c)

the name and address of the claimant; the nature of the order sought; and the grounds on which the order is sought.

The claimant shall deliver a copy of its request to the Secretary-General. 8. A tribunal established under this Article shall conduct its proceedings in accordance with the UNCITRAL Arbitration Rules, except as modified by this Section. 9. A tribunal established under Article 10.18 shall not have jurisdiction to decide a claim, or a part of a claim, over which a tribunal established or instructed under this Article has P 116 assumed jurisdiction. 10. On application of a disputing party, a tribunal established under this Article, pending its decision under paragraph 6, may order that the proceedings of a tribunal established under Article 10.18 be stayed, unless the latter tribunal has already adjourned its proceedings. Article 10.25: Awards 1. Where a tribunal makes a final award against a respondent, the tribunal may award, separately or in combination, only: (a) (b)

monetary damages and any applicable interest; restitution of property, in which case the award shall provide that the respondent may pay monetary damages and any applicable interest in lieu of restitution.

A tribunal may also award costs and attorneys' fees in accordance with this Section and the applicable arbitration rules. 2. Subject to paragraph 1, where a claim is submitted to arbitration under Article 10.15(1) (b): (a)

an award of restitution of property shall provide that restitution be made to the

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(b) (c)

enterprise; an award of monetary damages and any applicable interest shall provide that the sum be paid to the enterprise; and the award shall provide that it is made without prejudice to any right that any person may have in the relief under applicable domestic law.

3. A tribunal may not award punitive damages. 4. An award made by a tribunal shall have no binding force except between the disputing parties and in respect of the particular case. 5. Subject to paragraph 6 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an award without delay. 6. A disputing party may not seek enforcement of a final award until: (a)

in the case of a final award made under the ICSID Convention (i)

(b)

120 days have elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award; or (ii) revision or annulment proceedings have been completed; and in the case of a final award under the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules, or the rules selected pursuant to Article 10.15(5)(d) (i) (ii)

90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside, or annul the award, or a court has dismissed or allowed an application to revise, set aside, or annul the award and there is no further appeal.

7. Each Party shall provide for the enforcement of an award in its territory. 8. If the respondent fails to abide by or comply with a final award, on delivery of a request by the non-disputing Party, a panel shall be established under Article 22.6 P 117 (Request for an Arbitral Panel). The requesting Party may seek in such proceedings: (a) (b)

a determination that the failure to abide by or comply with the final award is inconsistent with the obligations of this Agreement; and if the Parties agree, a recommendation that the respondent abide by or comply with the final award.

9. A disputing party may seek enforcement of an arbitration award under the ICSID Convention, the New York Convention, or the Inter-American Convention regardless of whether proceedings have been taken under paragraph 8. 10. A claim that is submitted to arbitration under this Section shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention and Article I of the Inter-American Convention. Article 10.26: Service of Documents Delivery of notice and other documents on a Party shall be made to the place named for that Party in Annex 10-G. *** Annex 10-A – Customary International Law The Parties confirm their shared understanding that “customary international law” generally and as specifically referenced in Articles 10.4 and 10.9 results from a general and consistent practice of States that they follow from a sense of legal obligation. With regard to Article 10.4, the customary international law minimum standard of treatment of aliens refers to all customary international law principles that protect the economic rights and interests of aliens. Annex 10-B – Public Debt Chile The rescheduling of the debts of Chile, or of its appropriate institutions owned or controlled through ownership interests by Chile, owed to the United States and the rescheduling of its debts owed to creditors in general are not subject to any provision of Section A other than Articles 10.2 and 10.3. Annex 10-C – Special Dispute Settlement Provisions Chile 1. Where a claimant submits a claim alleging that Chile has breached an obligation under Section A, other than Article 10.3, that arises from its imposition of restrictive measures with regard to payments and transfers, Section B shall apply except as modified below: (a) (b)

A claimant may submit any such claim only after one year has elapsed since the events giving rise to the claim; If the claim is submitted under Article 10.15(1)(b), the claimant may, on behalf of the enterprise, only seek damages with respect to the shares of the enterprise for which the claimant has a beneficial interest;

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(c) P 118

(d)

Loss or damages arising from restrictive measures on capital inflows shall be limited to the reduction in value of the transfers and shall exclude loss of profits or business and any similar consequential or incidental damages; Paragraph 1(a) shall not apply to claims that arise from restrictions on: (i)

(e)

(f)

(g)

transfers of proceeds of foreign direct investment by investors of the United States, excluding external debt financing covered in subparagraph (d)(ii), and excluding investments designed with the purpose of gaining direct or indirect access to the financial market; or (ii) payments pursuant to a loan or bond issued in a foreign market, including inter- and intra-company debt financing between affiliated enterprises made exclusively for the conduct, operation, management, or expansion of such affiliated enterprises, provided that these payments are made in accordance with the maturity date agreed on in the loan or bond agreement; Excluding restrictive measures referred to in paragraph 1(d), Chile shall incur no liability, and shall not be subject to claims, for damages arising from its imposition of restrictive measures with regard to payments and transfers that were incurred within one year from the date on which the restrictions were imposed, provided that such restrictive measures do not substantially impede transfers; A restrictive measure of Chile with regard to payments and transfers that is consistent with this Annex shall be deemed not to contravene Article 10.2 provided that, as required under existing Chilean law, it does not discriminate among investors that enter into transactions of the same nature; and Claims arising from Chile's imposition of restrictive measures with regard to payments and transfers shall not be subject to Article 10.24 unless Chile consents.

2. The United States may not request the establishment of an arbitral panel under Chapter 22 relating to Chile's imposition of restrictive measures with regard to payments and transfers until one year has elapsed since the events giving rise to the dispute. 3. Restrictive measures on payments and transfers related to claims under this Annex shall otherwise be subject to applicable domestic law. Annex 10-D – Expropriation The Parties confirm their shared understanding that: 1. 2. 3. 4.

Article 10.9(1) is intended to reflect customary international law concerning the obligation of States with respect to expropriation. An action or a series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in an investment. Article 10.9(1) addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure. The second situation addressed by Article 10.9(1) is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. (a)

P 119

The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a caseby-case, fact-based inquiry that considers, among other factors: (i)

(b)

the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action. Except in rare circumstances, nondiscriminatory 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 expropriation.

Annex 10-E – Submission of a Claim to Arbitration Chile 1. An investor of the United States may not submit to arbitration under Section B: (a)

a claim that Chile has breached an obligation under Section A or Annex 10-F either: (i) (ii)

on its own behalf under Article 10.15(1)(a), or on behalf of an enterprise of Chile that is a juridical person that the investor owns or controls directly or indirectly under Article 10.15(1)(b), if the investor or the enterprise, respectively, has alleged that breach of an obligation under Section A or Annex 10-F in proceedings before a court or administrative tribunal of Chile; or

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(b)

a claim that Chile has breached an investment agreement or investment authorization either: (i) (ii)

on its own behalf under Article 10.15(1)(a), or on behalf of an enterprise of Chile that is a juridical person that the investor owns or controls directly or indirectly under Article 10.15(1)(b), if the investor or the enterprise, respectively, has alleged that breach of an investment agreement or investment authorization in proceedings before a court or administrative tribunal of Chile.

2. For greater certainty, if an investor of the United States elects to submit a claim of the type described in this Annex to a court or administrative tribunal of Chile, that election shall be definitive and the investor may not thereafter submit the claim to arbitration under Section B. Annex 10-F – DL 600 Chile 1. Without prejudice to paragraphs 3 through 7, Chile shall accord to an investor of the United States or to a covered investment that is a party to an investment contract under Estatuto de la InversiónExtranjera, Decreto Ley 600 de 1974 (DL 600) the better of the treatment required under this Agreement or the treatment under the investment contract. 2. Without prejudice to paragraphs 3 through 7, Chile shall permit an investor of the United States or a covered investment that has entered into an investment contract under DL 600 to amend the investment contract to make it consistent with Chile's P 120 obligations under this Agreement. 3. Subject to paragraph 4, when an investor of the United States or a covered investment has entered into an investment contract under DL 600, an investor, on its own behalf or on behalf of the investment, may only submit a claim against Chile under Section B with regard to the contract if the investor alleges that Chile has breached an obligation under: (a) (b)

Section A in connection with the investment contract; or this Annex.

provided, however, that such an investor may not submit any claim under Section B on the basis of the equity/debt ratio requirement of an investment contract under DL 600 except for claims that Chile has accorded the investor or its covered investment treatment less favorable than Chile accords under DL 600 to an investor of a non-Party or its investment in like circumstances. 4. When an investor of the United States or a covered investment has entered into an investment contract under DL 600, and the investor, on its own behalf or on behalf of the investment, claims that Chile has breached the tax provisions of that contract, it shall, with regard to that claim, only have recourse to the dispute settlement provisions of the investment contract or the dispute settlement provisions of this Agreement relevant to taxation measures. 5. For greater certainty, execution of an investment contract under DL 600 by an investor of the United States or a covered investment does not create any right on the part of the investor or covered investment to engage in particular activities in Chile. 6. Nothing in this Agreement shall limit the right of Chile's Comite de Inversiones Extranjeras, its Vicepresidencia Ejecutiva, or their successors to decide whether to authorize an investor of the United States or a covered investment to enter into an investment contract under DL 600, or to establish conditions in such contract, provided that Chile does so in a manner that is not inconsistent with Chile's obligations under Section A. 7. Notwithstanding any other provision in this Agreement, Chile may prohibit an investor of the United States or a covered investment from transferring from Chile proceeds of the sale of all or any part of an investment made pursuant to a contract under DL 600 for up to one year after the date that the investor or covered investment transferred funds to Chile to establish the investment. [7] Comments and Questions 1.

P 121

“Model BITs” are prepared by States as templates for negotiation. The following countries have prepared such models: Canada (2004); Colombia (2007); France (2006); Germany (2008); India (2003); Italy (2003); Norway (2007). The 2012 U.S. Model BIT was preceded by other versions. For further discussion on BITs, see Joshua B. Boone, How Developing Countries can Adapt Current Bilateral Investment Treaties to Provide Benefits to Their Domestic Economies, Global Bus. L. Rev. (2010); Paul Alexander Haslam, Th Evolution of the Foreign Direct Investment Regime in the Americas, 31 Third World Q. 1181, 1181-203 (2010); Srividya Jandhyala, Witold J. Henisz, & Edward D. Mansfield, Three Waves of BITs: The Global Diffusion of Foreign Investment Policy, 55 J. of Conflict Resolution 1047, 1047-73 (2011); Dan Wei, Bilateral Investment Treaties: An Empirical Analysis of the Practices of Brazil and

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2.

3.

4.

5.

6.

P 122

China, 33 Euro. J. of L. & Econ., no. 3, 2012, at 663-90; Carrie E. Anderer, Note, Bilateral Investment Treaties and the EU Legal Order: Implications of the Lisbon Treaty, 35 Brook. J. Int'l L. 851 (2010); Selen Guerin, Do the European Union’s Bilateral Investment Treaties Matter? (CEPS, Working Doc. No. 333, 2010); and Roos Van Os & Roeline Knottneru, Dutch Bilateral Investment Treaties: A Gateway to ‘Treaty Shopping’ for Investment Protection by Multinational Companies, available at SSRN 1961585 (2011). There are several differences between the recent FTAs and the BITs. The FTAs contain much more specific terms regarding the minimum standard of treatment insofar as they articulate what obligations are included in the concepts “fair and equitable treatment” and “full protection and security,” while the BITs referred to international law for interpretation. The FTAs have also added clauses designed to ensure transparency of arbitral proceedings (Art. 15.20 of the US-Singapore FTA and Art. 10.20 of the US-Chile FTA). Finally, the FTAs have included new mechanisms, under which arbitral awards can be subject to review if an appellate body is established by a separate multilateral agreement between the Parties to the dispute (Art. 15.19 of the US-Singapore FTA and Art. 10.19 of the US-Chile FTA). It is too early to say whether FTAs represent a new genre of investment treaties in which the protections for direct foreign investment have evolved further than BITs or whether FTAs will essentially be trade agreements with relatively little to add to the international regime for the protection of direct foreign investment. The United States has also concluded FTAs with Australia, Jordan, Morocco, Guatemala, and the Central American countries (El Salvador, Honduras, Nicaragua, Costa Rica). It has also launched FTA negotiations with Bahrain and the Southern African Customs Union (Botswana, Lesotho, Namibia, South Africa, and Swaziland). For further reference, see Jeswald W. Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries, 24 Int'l Law. 655 (1990); and Kenneth J. Vandevelde, The Bilateral Investment Treaty Program of the United States, 21 Cornell Int'l L.J. 201 (1988). For a discussion on the way in which traditional transparency issues have been addressed in international investment agreements (IIAs) since 2004, see Transparency: UNCTAD Series on Issues in International Investment Agreements II, United Nations Conference on Trade and Dev. (2012), http://unctad.org/en/PublicationsLibrary/unctaddiaeia2011d6_en.pdf. This paper “outlines possible sustainable development implications of the different transparency-related formulations used in IIAs and points to some of the most progressive provisions that are appearing more frequently in investment instruments.” Id. at xi.

[B] Multilateral Treaties [1] North American Free Trade Agreement (1992), (45) Chapter Eleven: Investment (1992) Section A – Investment Article 1101: Scope and Coverage 1. This Chapter applies to measures adopted or maintained by a Party relating to: (a) (b) (c)

investors of another Party; investments of investors of another Party in the territory of the Party; and with respect to Articles 1106 and 1114, all investments in the territory of the Party.

2. A Party has the right to perform exclusively the economic activities set out in Annex III and to refuse to permit the establishment of investment in such activities. 3. This Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Fourteen (Financial Services). 4. Nothing in this Chapter shall be construed to prevent a Party from providing a service or performing a function such as law enforcement, correctional services, income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care, in a manner that is not inconsistent with this Chapter. Article 1102: National Treatment 1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 3. The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a state or province, treatment no less favorable than the most favorable treatment

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accorded, in like circumstances, by that state or province to investors, and to investments of investors, of the Party of which it forms a part. 4. For greater certainty, no Party may: (a) (b) P 123

impose on an investor of another Party a requirement that a minimum level of equity in an enterprise in the territory of the Party be held by its nationals, other than nominal qualifying shares for directors or incorporators of corporations; or require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment in the territory of the Party.

Article 1103: Most-Favored-Nation Treatment 1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. Article 1104: Standard of Treatment Each Party shall accord to investors of another Party and to investments of investors of another Party the better of the treatment required by Articles 1102 and 1103. Article 1105: Minimum Standard of Treatment 1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. 2. Without prejudice to paragraph 1 and notwithstanding Article 1108(7)(b), each Party shall accord to investors of another Party, and to investments of investors of another Party, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife. 3. Paragraph 2 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 1102 but for Article 1108(7)(b). Article 1106: Performance Requirements 1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory: (a) (b) (c) (d) (e) (f) P 124

(g)

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

2. A measure that requires an investment to use a technology to meet generally applicable health, safety or environmental requirements shall not be construed to be inconsistent with paragraph 1(f). For greater certainty, Articles 1102 and 1103 apply to the measure. 3. No Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements: (a) (b)

to achieve a given level or percentage of domestic content; to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory;

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(c) (d)

to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

4. Nothing in paragraph 3 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory. 5. Paragraphs 1 and 3 do not apply to any requirement other than the requirements set out in those paragraphs. 6. Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraph 1(b) or (c) or 3(a) or (b) shall be construed to prevent any Party from adopting or maintaining measures, including environmental measures: (a) (b) (c)

necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; necessary to protect human, animal or plant life or health; or necessary for the conservation of living or non-living exhaustible natural resources.

Article 1107: Senior Management and Boards of Directors 1. No Party may require that an enterprise of that Party that is an investment of an investor of another Party appoint to senior management positions individuals of any particular nationality. 2. A Party may require that a majority of the board of directors, or any committee thereof, of an enterprise of that Party that is an investment of an investor of another Party, be of a particular nationality, or resident in the territory of the Party, provided that the requirement does not materially impair the ability of the investor to exercise control P 125 over its investment. Article 1108: Reservations and Exceptions 1. Articles 1102, 1103, 1106 and 1107 do not apply to: (a)

any existing non-conforming measure that is maintained by (i) (ii)

(b) (c)

a Party at the federal level, as set out in its Schedule to Annex I or III, a state or province, for two years after the date of entry into force of this Agreement, and thereafter as set out by a Party in its Schedule to Annex I in accordance with paragraph 2, or (iii) a local government; the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Articles 1102, 1103, 1106 and 1107.

2. Each Party may set out in its Schedule to Annex I, within two years of the date of entry into force of this Agreement, any existing nonconforming measure maintained by a state or province, not including a local government. 3. Articles 1102, 1103, 1106 and 1107 do not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors or activities, as set out in its Schedule to Annex II. 4. No Party may, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to Annex II, require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective. 5. Articles 1102 and 1103 do not apply to any measure that is an exception to, or derogation from, the obligations under Article 1703 (Intellectual Property National Treatment) as specifically provided for in that Article. 6. Article 1103 does not apply to treatment accorded by a Party pursuant to agreements, or with respect to sectors, set out in its Schedule to Annex IV. 7. Articles 1102, 1103 and 1107 do not apply to: (a) (b)

procurement by a Party or a state enterprise; or subsidies or grants provided by a Party or a state enterprise, including government supported loans, guarantees and insurance.

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8. The provisions of: (a) (b) (c) P 126

Article 1106(1)(a), (b) and (c), and (3)(a) and (b) do not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs; Article 1106(1)(b), (c), (f) and (g), and (3)(a) and (b) do not apply to procurement by a Party or a state enterprise; and Article 1106(3)(a) and (b) do not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas.

Article 1109: Transfers 1. Each Party shall permit all transfers relating to an investment of an investor of another Party in the territory of the Party to be made freely and without delay. Such transfers include: (a) (b) (c) (d) (e)

profits, dividends, interest, capital gains, royalty payments, management fees, technical assistance and other fees, returns in kind and other amounts derived from the investment; proceeds from the sale of all or any part of the investment or from the partial or complete liquidation of the investment; payments made under a contract entered into by the investor, or its investment, including payments made pursuant to a loan agreement; payments made pursuant to Article 1110; and payments arising under Section B.

2. Each Party shall permit transfers to be made in a freely usable currency at the market rate of exchange prevailing on the date of transfer with respect to spot transactions in the currency to be transferred. 3. No Party may require its investors to transfer, or penalize its investors that fail to transfer, the income, earnings, profits or other amounts derived from, or attributable to, investments in the territory of another Party. 4. Notwithstanding paragraphs 1 and 2, a Party may prevent a transfer through the equitable, non-discriminatory and good faith application of its laws relating to: (a) (b) (c) (d) (e)

bankruptcy, insolvency or the protection of the rights of creditors; issuing, trading or dealing in securities; criminal or penal offenses; reports of transfers of currency or other monetary instruments; or ensuring the satisfaction of judgments in adjudicatory proceedings.

5. Paragraph 3 shall not be construed to prevent a Party from imposing any measure through the equitable, non-discriminatory and good faith application of its laws relating to the matters set out in subparagraphs (a) through (e) of paragraph 4. 6. Notwithstanding paragraph 1, a Party may restrict transfers of returns in kind in circumstances where it could otherwise restrict such transfers under this Agreement, including as set out in paragraph 4. Article 1110: Expropriation and Compensation 1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except: (a) (b) (c) P 127 (d)

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

2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“date of expropriation”), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value. 3. Compensation shall be paid without delay and be fully realizable. 4. If payment is made in a G7 currency, compensation shall include interest at a commercially reasonable rate for that currency from the date of expropriation until the date of actual payment. 5. If a Party elects to pay in a currency other than a G7 currency, the amount paid on the date of payment, if converted into a G7 currency at the market rate of exchange prevailing on that date, shall be no less than if the amount of compensation owed on the

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date of expropriation had been converted into that G7 currency at the market rate of exchange prevailing on that date, and interest had accrued at a commercially reasonable rate for that G7 currency from the date of expropriation until the date of payment. 6. On payment, compensation shall be freely transferable as provided in Article 1109. 7. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with Chapter Seventeen (Intellectual Property). 8. For purposes of this Article and for greater certainty, a non-discriminatory measure of general application shall not be considered a measure tantamount to an expropriation of a debt security or loan covered by this Chapter solely on the ground that the measure imposes costs on the debtor that cause it to default on the debt. Article 1111: Special Formalities and Information Requirements 1. Nothing in Article 1102 shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with the establishment of investments by investors of another Party, such as a requirement that investors be residents of the Party or that investments be legally constituted under the laws or regulations of the Party, provided that such formalities do not materially impair the protections afforded by a Party to investors of another Party and investments of investors of another Party pursuant to this Chapter. 2. Notwithstanding Articles 1102 or 1103, a Party may require an investor of another Party, or its investment in its territory, to provide routine information concerning that investment solely for informational or statistical purposes. The Party shall protect such business information that is confidential from any disclosure that would prejudice the competitive position of the investor or the investment. Nothing in this paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in P 128 connection with the equitable and good faith application of its law. Article 1112: Relation to Other Chapters 1. In the event of any inconsistency between this Chapter and another Chapter, the other Chapter shall prevail to the extent of the inconsistency. 2. A requirement by a Party that a service provider of another Party post a bond or other form of financial security as a condition of providing a service into its territory does not of itself make this Chapter applicable to the provision of that crossborder service. This Chapter applies to that Party's treatment of the posted bond or financial security. Article 1113: Denial of Benefits 1. A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investor if investors of a non-Party own or control the enterprise and the denying Party: (a) (b)

does not maintain diplomatic relations with the non-Party; or adopts or maintains measures with respect to the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments.

2. Subject to prior notification and consultation in accordance with Articles 1803 (Notification and Provision of Information) and 2006 (Consultations), a Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investors if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the Party under whose law it is constituted or organized. Article 1114: Environmental Measures 1. Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. 2. The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement. Section B – Settlement of Disputes between a Party and an Investor of Another Party Article 1115: Purpose

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Without prejudice to the rights and obligations of the Parties under Chapter Twenty (Institutional Arrangements and Dispute Settlement Procedures), this Section establishes a mechanism for the settlement of investment disputes that assures both equal treatment among investors of the Parties in accordance with the principle of P 129 international reciprocity and due process before an impartial tribunal. Article 1116: Claim by an Investor of a Party on Its Own Behalf 1. An investor of a Party may submit to arbitration under this Section a claim that another Party has breached an obligation under: (a) (b)

Section A or Article 1503(2) (State Enterprises), or Article 1502(3)(a) (Monopolies and State Enterprises) where the monopoly has acted in a manner inconsistent with the Party's obligations under Section A,

and that the investor has incurred loss or damage by reason of, or arising out of, that breach. 2. An investor may not make a claim if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage. Article 1117: Claim by an Investor of a Party on Behalf of an Enterprise 1. An investor of a Party, on behalf of an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly, may submit to arbitration under this Section a claim that the other Party has breached an obligation under: (a) (b)

Section A or Article 1503(2) (State Enterprises), or Article 1502(3)(a) (Monopolies and State Enterprises) where the monopoly has acted in a manner inconsistent with the Party's obligations under Section A, and that the enterprise has incurred loss or damage by reason of, or arising out of, that breach.

2. An investor may not make a claim on behalf of an enterprise described in paragraph 1 if more than three years have elapsed from the date on which the enterprise first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the enterprise has incurred loss or damage. 3. Where an investor makes a claim under this Article and the investor or a noncontrolling investor in the enterprise makes a claim under Article 1116 arising out of the same events that gave rise to the claim under this Article, and two or more of the claims are submitted to arbitration under Article 1120, the claims should be heard together by a Tribunal established under Article 1126, unless the Tribunal finds that the interests of a disputing party would be prejudiced thereby. 4. An investment may not make a claim under this Section. Article 1118: Settlement of a Claim through Consultation and Negotiation The disputing parties should first attempt to settle a claim through consultation or negotiation. Article 1119: Notice of Intent to Submit a Claim to Arbitration The disputing investor shall deliver to the disputing Party written notice of its intention to submit a claim to arbitration at least 90 days before the claim is submitted, which notice shall specify: (a) (b) P 130 (c)

(d)

the name and address of the disputing investor and, where a claim is made under Article 1117, the name and address of the enterprise; the provisions of this Agreement alleged to have been breached and any other relevant provisions; the issues and the factual basis for the claim; and the relief sought and the approximate amount of damages claimed.

Article 1120: Submission of a Claim to Arbitration 1. Except as provided in Annex 1120.1, and provided that six months have elapsed since the events giving rise to a claim, a disputing investor may submit the claim to arbitration under: (a) (b) (c)

the ICSID Convention, provided that both the disputing Party and the Party of the investor are parties to the Convention; the Additional Facility Rules of ICSID, provided that either the disputing Party or the Party of the investor, but not both, is a party to the ICSID Convention; or the UNCITRAL Arbitration Rules.

2. The applicable arbitration rules shall govern the arbitration except to the extent modified by this Section. Article 1121: Conditions Precedent to Submission of a Claim to Arbitration

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1. A disputing investor may submit a claim under Article 1116 to arbitration only if: (a) (b)

the investor consents to arbitration in accordance with the procedures set out in this Agreement; and the investor and, where the claim is for loss or damage to an interest in an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly, the enterprise, waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in Article 1116, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.

2. A disputing investor may submit a claim under Article 1117 to arbitration only if both the investor and the enterprise: (a) (b)

consent to arbitration in accordance with the procedures set out in this Agreement; and waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in Article 1117, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.

3. A consent and waiver required by this Article shall be in writing, shall be delivered to the disputing Party and shall be included in the submission of a claim to arbitration. 4. Only where a disputing Party has deprived a disputing investor of control of an enterprise: (a) P 131 (b)

a waiver from the enterprise under paragraph 1(b) or 2(b) shall not be required; and Annex 1120.1(b) shall not apply.

Article 1122: Consent to Arbitration 1. Each Party consents to the submission of a claim to arbitration in accordance with the procedures set out in this Agreement. 2. The consent given by paragraph 1 and the submission by a disputing investor of a claim to arbitration shall satisfy the requirement of: (a) (b) (c)

Chapter II of the ICSID Convention ( Jurisdiction of the Centre) and the Additional Facility Rules for written consent of the parties; Article II of the New York Convention for an agreement in writing; and Article I of the InterAmerican Convention for an agreement.

Article 1123: Number of Arbitrators and Method of Appointment Except in respect of a Tribunal established under Article 1126, and unless the disputing parties otherwise agree, the Tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. Article 1124: Constitution of a Tribunal When a Party Fails to Appoint an Arbitrator or the Disputing Parties Are Unable to Agree on a Presiding Arbitrator 1. The Secretary-General shall serve as appointing authority for an arbitration under this Section. 2. If a Tribunal, other than a Tribunal established under Article 1126, has not been constituted within 90 days from the date that a claim is submitted to arbitration, the Secretary- General, on the request of either disputing party, shall appoint, in his discretion, the arbitrator or arbitrators not yet appointed, except that the presiding arbitrator shall be appointed in accordance with paragraph 3. 3. The Secretary-General shall appoint the presiding arbitrator from the roster of presiding arbitrators referred to in paragraph 4, provided that the presiding arbitrator shall not be a national of the disputing Party or a national of the Party of the disputing investor. In the event that no such presiding arbitrator is available to serve, the Secretary-General shall appoint, from the ICSID Panel of Arbitrators, a presiding arbitrator who is not a national of any of the Parties. 4. On the date of entry into force of this Agreement, the Parties shall establish, and thereafter maintain, a roster of 45 presiding arbitrators meeting the qualifications of the Convention and rules referred to in Article 1120 and experienced in international law and investment matters. The roster members shall be appointed by consensus and without regard to nationality. Article 1125: Agreement to Appointment of Arbitrators

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For purposes of Article 39 of the ICSID Convention and Article 7 of Schedule C to the ICSID Additional Facility Rules, and without prejudice to an objection to an arbitrator based on Article 1124(3) or on a ground other than nationality: (a) P 132

(b)

(c)

the disputing Party agrees to the appointment of each individual member of a Tribunal established under the ICSID Convention or the ICSID Additional Facility Rules; a disputing investor referred to in Article 1116 may submit a claim to arbitration, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the disputing investor agrees in writing to the appointment of each individual member of the Tribunal; and a disputing investor referred to in Article 1117(1) may submit a claim to arbitration, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the disputing investor and the enterprise agree in writing to the appointment of each individual member of the Tribunal.

Article 1126: Consolidation 1. A Tribunal established under this Article shall be established under the UNCITRAL Arbitration Rules and shall conduct its proceedings in accordance with those Rules, except as modified by this Section. 2. Where a Tribunal established under this Article is satisfied that claims have been submitted to arbitration under Article 1120 that have a question of law or fact in common, the Tribunal may, in the interests of fair and efficient resolution of the claims, and after hearing the disputing parties, by order: (a) (b)

assume jurisdiction over, and hear and determine together, all or part of the claims; or assume jurisdiction over, and hear and determine one or more of the claims, the determination of which it believes would assist in the resolution of the others.

3. A disputing party that seeks an order under paragraph 2 shall request the Secretary-

P 133 General to establish a Tribunal and shall specify in the request:

(a) (b) (c)

the name of the disputing Party or disputing investors against which the order is sought; the nature of the order sought; and the grounds on which the order is sought.

4. The disputing party shall deliver to the disputing Party or disputing investors against which the order is sought a copy of the request. 5. Within 60 days of receipt of the request, the Secretary-General shall establish a Tribunal comprising three arbitrators. The Secretary-General shall appoint the presiding arbitrator from the roster referred to in Article 1124(4). In the event that no such presiding arbitrator is available to serve, the Secretary-General shall appoint, from the ICSID Panel of Arbitrators, a presiding arbitrator who is not a national of any of the Parties. The Secretary-General shall appoint the two other members from the roster referred to in Article 1124(4), and to the extent not available from that roster, from the ICSID Panel of Arbitrators, and to the extent not available from that Panel, in the discretion of the Secretary-General. One member shall be a national of the disputing Party and one member shall be a national of a Party of the disputing investors. 6. Where a Tribunal has been established under this Article, a disputing investor that has submitted a claim to arbitration under Article 1116 or 1117 and that has not been named in a request made under paragraph 3 may make a written request to the Tribunal that it be included in an order made under paragraph 2, and shall specify in the request: (a) (b) (c)

the name and address of the disputing investor; the nature of the order sought; and the grounds on which the order is sought.

7. A disputing investor referred to in paragraph 6 shall deliver a copy of its request to the disputing parties named in a request made under paragraph 3. 8. A Tribunal established under Article 1120 shall not have jurisdiction to decide a claim, or a part of a claim, over which a Tribunal established under this Article has assumed jurisdiction. 9. On application of a disputing party, a Tribunal established under this Article, pending its decision under paragraph 2, may order that the proceedings of a Tribunal established under Article 1120 be stayed, unless the latter Tribunal has already adjourned its proceedings. 10. A disputing Party shall deliver to the Secretariat, within 15 days of receipt by the disputing Party, a copy of: (a)

a request for arbitration made under paragraph (1) of Article 36 of the ICSID Convention;

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(b) (c)

a notice of arbitration made under Article 2 of Schedule C of the ICSID Additional Facility Rules; or a notice of arbitration given under the UNCITRAL Arbitration Rules.

11. A disputing Party shall deliver to the Secretariat a copy of a request made under paragraph 3: (a) (b)

within 15 days of receipt of the request, in the case of a request made by a disputing investor; within 15 days of making the request, in the case of a request made by the disputing Party.

12. A disputing Party shall deliver to the Secretariat a copy of a request made under paragraph 6 within 15 days of receipt of the request. 13. The Secretariat shall maintain a public register of the documents referred to in paragraphs 10, 11 and 12. Article 1127: Notice A disputing Party shall deliver to the other Parties: (a) (b)

written notice of a claim that has been submitted to arbitration no later than 30 days after the date that the claim is submitted; and copies of all pleadings filed in the arbitration.

Article 1128: Participation by a Party On written notice to the disputing parties, a Party may make submissions to a Tribunal on a question of interpretation of this Agreement. Article 1129: Documents 1. A Party shall be entitled to receive from the disputing Party, at the cost of the P 134 requesting Party a copy of:

(a) (b)

the evidence that has been tendered to the Tribunal; and the written argument of the disputing parties.

2. A Party receiving information pursuant to paragraph 1 shall treat the information as if it were a disputing Party. Article 1130: Place of Arbitration Unless the disputing parties agree otherwise, a Tribunal shall hold an arbitration in the territory of a Party that is a party to the New York Convention, selected in accordance with: (a) (b)

the ICSID Additional Facility Rules if the arbitration is under those Rules or the ICSID Convention; or the UNCITRAL Arbitration Rules if the arbitration is under those Rules.

Article 1131: Governing Law 1. A Tribunal established under this Section shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law. 2. An interpretation by the Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section. Article 1132: Interpretation of Annexes 1. Where a disputing Party asserts as a defense that the measure alleged to be a breach is within the scope of a reservation or exception set out in Annex I, Annex II, Annex III or Annex IV, on request of the disputing Party, the Tribunal shall request the interpretation of the Commission on the issue. The Commission, within 60 days of delivery of the request, shall submit in writing its interpretation to the Tribunal. 2. Further to Article 1131(2), a Commission interpretation submitted under paragraph 1 shall be binding on the Tribunal. If the Commission fails to submit an interpretation within 60 days, the Tribunal shall decide the issue. Article 1133: Expert Reports Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a Tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree. Article 1134: Interim Measures of Protection A Tribunal may order an interim measure of protection to preserve the rights of a

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disputing party, or to ensure that the Tribunal's jurisdiction is made fully effective, including an order to preserve evidence in the possession or control of a disputing party or to protect the Tribunal's jurisdiction. A Tribunal may not order attachment or enjoin the application of the measure alleged to constitute a breach referred to in Article 1116 P 135 or 1117. For purposes of this paragraph, an order includes a recommendation. Article 1135: Final Award 1. Where a Tribunal makes a final award against a Party, the Tribunal may award, separately or in combination, only: (a) (b)

monetary damages and any applicable interest; restitution of property, in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution.

A tribunal may also award costs in accordance with the applicable arbitration rules. 2. Subject to paragraph 1, where a claim is made under Article 1117(1): (a) (b) (c)

an award of restitution of property shall provide that restitution be made to the enterprise; an award of monetary damages and any applicable interest shall provide that the sum be paid to the enterprise; and the award shall provide that it is made without prejudice to any right that any person may have in the relief under applicable domestic law.

3. A Tribunal may not order a Party to pay punitive damages. Article 1136: Finality and Enforcement of an Award 1. An award made by a Tribunal shall have no binding force except between the disputing parties and in respect of the particular case. 2. Subject to paragraph 3 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an award without delay. 3. A disputing party may not seek enforcement of a final award until: (a)

in the case of a final award made under the ICSID Convention (i)

(b)

120 days have elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award, or (ii) revision or annulment proceedings have been completed; and in the case of a final award under the ICSID Additional Facility Rules or the UNCITRAL Arbitration Rules (i) (ii)

three months have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside or annul the award, or a court has dismissed or allowed an application to revise, set aside or annul the award and there is no further appeal.

4. Each Party shall provide for the enforcement of an award in its territory. 5. If a disputing Party fails to abide by or comply with a final award, the Commission, on delivery of a request by a Party whose investor was a party to the arbitration, shall establish a panel under Article 2008 (Request for an Arbitral Panel). The requesting Party may seek in such proceedings: (a) P 136 (b)

a determination that the failure to abide by or comply with the final award is inconsistent with the obligations of this Agreement; and a recommendation that the Party abide by or comply with the final award.

6. A disputing investor may seek enforcement of an arbitration award under the ICSID Convention, the New York Convention or the InterAmerican Convention regardless of whether proceedings have been taken under paragraph 5. 7. A claim that is submitted to arbitration under this Section shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention and Article I of the InterAmerican Convention. Article 1137: General Time when a Claim is Submitted to Arbitration 1. A claim is submitted to arbitration under this Section when: (a) (b) (c)

the request for arbitration under paragraph (1) of Article 36 of the ICSID Convention has been received by the Secretary-General; the notice of arbitration under Article 2 of Schedule C of the ICSID Additional Facility Rules has been received by the Secretary-General; or the notice of arbitration given under the UNCITRAL Arbitration Rules is received by

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the disputing Party. Service of Documents 2. Delivery of notice and other documents on a Party shall be made to the place named for that Party in Annex 1137.2. Receipts under Insurance or Guarantee Contracts 3. In an arbitration under this Section, a Party shall not assert, as a defense, counterclaim, right of setoff or otherwise, that the disputing investor has received or will receive, pursuant to an insurance or guarantee contract, indemnification or other compensation for all or part of its alleged damages. Publication of an Award 4. Annex 1137.4 applies to the Parties specified in that Annex with respect to publication of an award. Article 1138: Exclusions 1. Without prejudice to the applicability or non-applicability of the dispute settlement provisions of this Section or of Chapter Twenty (Institutional Arrangements and Dispute Settlement Procedures) to other actions taken by a Party pursuant to Article 2102 (National Security), a decision by a Party to prohibit or restrict the acquisition of an investment in its territory by an investor of another Party, or its investment, pursuant to that Article shall not be subject to such provisions. 2. The dispute settlement provisions of this Section and of Chapter Twenty shall not apply

P 137 to the matters referred to in Annex 1138.2.

[2] Energy Charter Treaty (1994) (46) (Citations selectively omitted) Article 10 – Promotion, Protection and Treatment of Investments (1)Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party. (2)Each Contracting Party shall endeavour to accord to Investors of other Contracting Parties, as regards the Making of Investments in its Area, the Treatment described in paragraph (3). (3)For the purposes of this Article, “Treatment” means treatment accorded by a Contracting Party which is no less favourable than that which it accords to its own Investors or to Investors of any other Contracting Party or any third state, whichever is the most favourable. (4)A supplementary treaty shall, subject to conditions to be laid down therein, oblige each party thereto to accord to Investors of other parties, as regards the Making of Investments in its Area, the Treatment described in paragraph (3). That treaty shall be open for signature by the states and Regional Economic Integration Organizations which have signed or acceded to this Treaty. Negotiations towards the supplementary treaty shall commence not later than 1 January 1995, with a view to concluding it by 1 January 1998. (5)Each Contracting Party shall, as regards the Making of Investments in its Area, endeavour to: (a) (b)

limit to the minimum the exceptions to the Treatment described in paragraph (3); progressively remove existing restrictions affecting Investors of other Contracting Parties.

(6) (a)

(b)

A Contracting Party may, as regards the Making of Investments in its Area, at any time declare voluntarily to the Charter Conference, through the Secretariat, its intention not to introduce new exceptions to the Treatment described in paragraph (3). A Contracting Party may, furthermore, at any time make a voluntary commitment to accord to Investors of other Contracting Parties, as regards the Making of Investments in some or all Economic Activities in the Energy Sector in its Area, the

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Treatment described in paragraph (3). Such commitments shall be notified to the Secretariat and listed in Annex VC and shall be binding under this Treaty.

P 138

(7)Each Contracting Party shall accord to Investments in its Area of Investors of other Contracting Parties, and their related activities including management, maintenance, use, enjoyment or disposal, treatment no less favourable than that which it accords to Investments of its own Investors or of the Investors of any other Contracting Party or any third state and their related activities including management, maintenance, use, enjoyment or disposal, whichever is the most favourable. (8)The modalities of application of paragraph (7) in relation to programmes under which a Contracting Party provides grants or other financial assistance, or enters into contracts, for energy technology research and development, shall be reserved for the supplementary treaty described in paragraph (4). Each Contracting Party shall through the Secretariat keep the Charter Conference informed of the modalities it applies to the programmes described in this paragraph. (9)Each state or Regional Economic Integration Organization which signs or accedes to this Treaty shall, on the date it signs the Treaty or deposits its instrument of accession, submit to the Secretariat a report summarizing all laws, regulations or other measures relevant to: (a) (b)

exceptions to paragraph (2); or the programmes referred to in paragraph (8).

A Contracting Party shall keep its report up to date by promptly submitting amendments to the Secretariat. The Charter Conference shall review these reports periodically. In respect of subparagraph (a) the report may designate parts of the energy sector in which a Contracting Party accords to Investors of other Contracting Parties the Treatment described in paragraph (3). In respect of subparagraph (b) the review by the Charter Conference may consider the effects of such programmes on competition and Investments. (10)Notwithstanding any other provision of this Article, the treatment described in paragraphs (3) and (7) shall not apply to the protection of Intellectual Property; instead, the treatment shall be as specified in the corresponding provisions of the applicable international agreements for the protection of Intellectual Property rights to which the respective Contracting Parties are parties. (11)For the purposes of Article 26, the application by a Contracting Party of a traderelated investment measure as described in Article 5(1) and (2) to an Investment of an Investor of another Contracting Party existing at the time of such application shall, subject to Article 5(3) and (4), be considered a breach of an obligation of the former Contracting Party under this Part. (12)Each Contracting Party shall ensure that its domestic law provides effective means for the assertion of claims and the enforcement of rights with respect to Investments, investment agreements, and investment authorizations. Article 11 – Key Personnel (1)A Contracting Party shall, subject to its laws and regulations relating to the entry, stay and work of natural persons, examine in good faith requests by Investors of another Contracting Party, and key personnel who are employed by such Investors or by P 139 Investments of such Investors, to enter and remain temporarily in its Area to engage in activities connected with the making or the development, management, maintenance, use, enjoyment or disposal of relevant Investments, including the provision of advice or key technical services. (2)A Contracting Party shall permit Investors of another Contracting Party which have Investments in its Area, and Investments of such Investors, to employ any key person of the Investor's or the Investment's choice regardless of nationality and citizenship provided that such key person has been permitted to enter, stay and work in the Area of the former Contracting Party and that the employment concerned conforms to the terms, conditions and time limits of the permission granted to such key person. Article 12 – Compensation for Losses (1)Except where Article 13 applies, an Investor of any Contracting Party which suffers a loss with respect to any Investment in the Area of another Contracting Party owing to war or other armed conflict, state of national emergency, civil disturbance, or other similar event in that Area, shall be accorded by the latter Contracting Party, as regards restitution, indemnification, compensation or other settlement, treatment which is the most favourable of that which that Contracting Party accords to any other Investor, whether its own Investor, the Investor of any other Contracting Party, or the Investor of any third state. (2)Without prejudice to paragraph (1), an Investor of a Contracting Party which, in any of the situations referred to in that paragraph, suffers a loss in the Area of another Contracting Party resulting from

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(a) (b)

requisitioning of its Investment or part thereof by the latter's forces or authorities; or destruction of its Investment or part thereof by the latter's forces or authorities, which was not required by the necessity of the situation,

shall be accorded restitution or compensation which in either case shall be prompt, adequate and effective. Article 13 – Expropriation (1)Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as “Expropriation”) except where such Expropriation is: (a) (b) (c) (d)

for a purpose which is in the public interest; not discriminatory; carried out under due process of law; and accompanied by the payment of prompt, adequate and effective compensation.

Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the Investment (hereinafter referred to as the “Valuation Date”). Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of P 140 payment. (2)The Investor affected shall have a right to prompt review, under the law of the Contracting Party making the Expropriation, by a judicial or other competent and independent authority of that Contracting Party, of its case, of the valuation of its Investment, and of the payment of compensation, in accordance with the principles set out in paragraph (1). (3)For the avoidance of doubt, Expropriation shall include situations where a Contracting Party expropriates the assets of a company or enterprise in its Area in which an Investor of any other Contracting Party has an Investment, including through the ownership of shares. Article 14 – Transfers Related to Investments (1)Each Contracting Party shall with respect to Investments in its Area of Investors of any other Contracting Party guarantee the freedom of transfer into and out of its Area, including the transfer of: (a) (b) (c) (d) (e) (f) (g)

the initial capital plus any additional capital for the maintenance and development of an Investment; Returns; payments under a contract, including amortization of principal and accrued interest payments pursuant to a loan agreement; unspent earnings and other remuneration of personnel engaged from abroad in connection with that Investment; proceeds from the sale or liquidation of all or any part of an Investment; payments arising out of the settlement of a dispute; payments of compensation pursuant to Articles 12 and 13.

(2)Transfers under paragraph (1) shall be effected without delay and (except in case of a Return in kind) in a Freely Convertible Currency. (3)Transfers shall be made at the market rate of exchange existing on the date of transfer with respect to spot transactions in the currency to be transferred. In the absence of a market for foreign exchange, the rate to be used will be the most recent rate applied to inward investments or the most recent exchange rate for conversion of currencies into Special Drawing Rights, whichever is more favourable to the Investor. (4)Notwithstanding paragraphs (1) to (3), a Contracting Party may protect the rights of creditors, or ensure compliance with laws on the issuing, trading and dealing in securities and the satisfaction of judgements in civil, administrative and criminal adjudicatory proceedings, through the equitable, non-discriminatory, and good faith application of its laws and regulations. (5)Notwithstanding paragraph (2), Contracting Parties which are states that were constituent parts of the former Union of Soviet Socialist Republics may provide in agreements concluded between them that transfers of payments shall be made in the currencies of such Contracting Parties, provided that such agreements do not treat Investments in their Areas of Investors of other Contracting Parties less favourably than

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either Investments of Investors of the Contracting Parties which have entered into such agreements or Investments of Investors of any third state. (6)Notwithstanding subparagraph (1)(b), a Contracting Party may restrict the transfer of a Return in kind in circumstances where the Contracting Party is permitted under Article 29(2)(a) or the GATT and Related Instruments to restrict or prohibit the exportation or the P 140 sale for export of the product constituting the Return in kind; provided that a Contracting Party shall permit transfers of Returns in kind to be effected as authorized or specified in an investment agreement, investment authorization, or other written agreement between the Contracting Party and either an Investor of another Contracting Party or its Investment. Article 15 – Subrogation (1)If a Contracting Party or its designated agency (hereinafter referred to as the “Indemnifying Party”) makes a payment under an indemnity or guarantee given in respect of an Investment of an Investor (hereinafter referred to as the “Party Indemnified”) in the Area of another Contracting Party (hereinafter referred to as the “Host Party”), the Host Party shall recognize: (a) (b)

the assignment to the Indemnifying Party of all the rights and claims in respect of such Investment; and the right of the Indemnifying Party to exercise all such rights and enforce such claims by virtue of subrogation.

(2)The Indemnifying Party shall be entitled in all circumstances to: (a) (b)

the same treatment in respect of the rights and claims acquired by it by virtue of the assignment referred to in paragraph (1); and the same payments due pursuant to those rights and claims,

as the Party Indemnified was entitled to receive by virtue of this Treaty in respect of the Investment concerned. (3)In any proceeding under Article 26, a Contracting Party shall not assert as a defence, counterclaim, right of set-off or for any other reason, that indemnification or other compensation for all or part of the alleged damages has been received or will be received pursuant to an insurance or guarantee contract. Article 16 – Relation to Other Agreements Where two or more Contracting Parties have entered into a prior international agreement, or enter into a subsequent international agreement, whose terms in either case concern the subject matter of Part III or V of this Treaty, (1) (2)

nothing in Part III or V of this Treaty shall be construed to derogate from any provision of such terms of the other agreement or from any right to dispute resolution with respect thereto under that agreement; and nothing in such terms of the other agreement shall be construed to derogate from any provision of Part III or V of this Treaty or from any right to dispute resolution with respect thereto under this Treaty,

where any such provision is more favourable to the Investor or Investment. Article 17 – Non-Application of Part III in Certain Circumstances Each Contracting Party reserves the right to deny the advantages of this Part to: (1) P 200

(2)

a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized; or an Investment, if the denying Contracting Party establishes that such Investment is an Investment of an Investor of a third state with or as to which the denying Contracting Party: (a) (b)

does not maintain a diplomatic relationship; or adopts or maintains measures that: (i) (ii)

prohibit transactions with Investors of that state; or would be violated or circumvented if the benefits of this Part were accorded to Investors of that state or to their Investments.

*** Article 20 – Transparency (1)Laws, regulations, judicial decisions and administrative rulings of general application which affect trade in Energy Materials and Products are, in accordance with Article 29(2) (a), among the measures subject to the transparency disciplines of the GATT and relevant Related Instruments. (2)Laws, regulations, judicial decisions and administrative rulings of general application

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made effective by any Contracting Party, and agreements in force between Contracting Parties, which affect other matters covered by this Treaty shall also be published promptly in such a manner as to enable Contracting Parties and Investors to become acquainted with them. The provisions of this paragraph shall not require any Contracting Party to disclose confidential information which would impede law enforcement or otherwise be contrary to the public interest or would prejudice the legitimate commercial interests of any Investor. (3)Each Contracting Party shall designate one or more enquiry points to which requests for information about the above mentioned laws, regulations, judicial decisions and administrative rulings may be addressed and shall communicate promptly such designation to the Secretariat which shall make it available on request. Article 21 – Taxation (1)Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency. (2)Article 7(3) shall apply to Taxation Measures other than those on income or on capital, except that such provision shall not apply to: (a) (b)

an advantage accorded by a Contracting Party pursuant to the tax provisions of any convention, agreement or arrangement described in subparagraph (7)(a)(ii); or any Taxation Measure aimed at ensuring the effective collection of taxes, except where the measure of a Contracting Party arbitrarily discriminates against Energy Materials and Products originating in, or destined for the Area of another Contracting Party or arbitrarily restricts benefits accorded under Article 7(3).

(3)Article 10(2) and (7) shall apply to Taxation Measures of the Contracting Parties other than those on income or on capital, except that such provisions shall not apply to: (a)

(b)

impose most favoured nation obligations with respect to advantages accorded by a Contracting Party pursuant to the tax provisions of any convention, agreement or arrangement described in subparagraph (7)(a)(ii) or resulting from membership of any Regional Economic Integration Organization; or any Taxation Measure aimed at ensuring the effective collection of taxes, except where the measure arbitrarily discriminates against an Investor of another Contracting Party or arbitrarily restricts benefits accorded under the Investment provisions of this Treaty.

(4)Article 29(2) to (6) shall apply to Taxation Measures other than those on income or on capital. (5) (a) (b)

Article 13 shall apply to taxes. Whenever an issue arises under Article 13, to the extent it pertains to whether a tax constitutes an expropriation or whether a tax alleged to constitute an expropriation is discriminatory, the following provisions shall apply: (i)

The Investor or the Contracting Party alleging expropriation shall refer the issue of whether the tax is an expropriation or whether the tax is discriminatory to the relevant Competent Tax Authority. Failing such referral by the Investor or the Contracting Party, bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) shall make a referral to the relevant Competent Tax Authorities; (ii) The Competent Tax Authorities shall, within a period of six months of such referral, strive to resolve the issues so referred. Where non-discrimination issues are concerned, the Competent Tax Authorities shall apply the nondiscrimination provisions of the relevant tax convention or, if there is no nondiscrimination provision in the relevant tax convention applicable to the tax or no such tax convention is in force between the Contracting Parties concerned, they shall apply the non-discrimination principles under the Model Tax Convention on Income and Capital of the Organisation for Economic Co-operation and Development; (iii) Bodies called upon to settle disputes pursuant to Article 26(2)(c) or 27(2) may take into account any conclusions arrived at by the Competent Tax Authorities regarding whether the tax is an expropriation. Such bodies shall take into account any conclusions arrived at within the six-month period prescribed in subparagraph (b)(ii) by the Competent Tax Authorities regarding whether the tax is discriminatory. Such bodies may also take into account any conclusions arrived at by the Competent Tax Authorities after the expiry of the six-month period; (iv) Under no circumstances shall involvement of the Competent Tax Authorities, beyond the end of the six-month period referred to in subparagraph (b)(ii), lead to a delay of proceedings under Articles 26 and 27.

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(6)For the avoidance of doubt, Article 14 shall not limit the right of a Contracting Party to impose or collect a tax by withholding or other means. (7)For the purposes of this Article: (a)

The term “Taxation Measure” includes: (i)

(b)

(c)

(d)

any provision relating to taxes of the domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein; and (ii) any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound. There shall be regarded as taxes on income or on capital all taxes imposed on total income, on total capital or on elements of income or of capital, including taxes on gains from the alienation of property, taxes on estates, inheritances and gifts, or substantially similar taxes, taxes on the total amounts of wages or salaries paid by enterprises, as well as taxes on capital appreciation. A “Competent Tax Authority” means the competent authority pursuant to a double taxation agreement in force between the Contracting Parties or, when no such agreement is in force, the minister or ministry responsible for taxes or their authorized representatives. For the avoidance of doubt, the terms “tax provisions” and “taxes” do not include customs duties.

*** [3] Dominican Republic–Central America Free Trade Agreement (2004), (47) Chapter Ten: Investment (Citations selectively omitted) Section A: Investment Article 10.1: Scope and Coverage (1)This Chapter applies to measures adopted or maintained by a Party relating to: (a) (b) (c)

investors of another Party; covered investments; and with respect to Articles 10.9 and 10.11, all investments in the territory of the Party.

(2)A Party's obligations under this Section shall apply to a state enterprise or other person when it exercises any regulatory, administrative, or other governmental authority delegated to it by that Party. (3)For greater certainty, this Chapter does not bind any Party in relation to any act or fact that took place or any situation that ceased to exist before the date of entry into force of this Agreement. Article 10.2: Relation to Other Chapters (1)In the event of any inconsistency between this Chapter and another Chapter, the other Chapter shall prevail to the extent of the inconsistency. (2)A requirement by a Party that a service supplier of another Party post a bond or other form of financial security as a condition of the cross-border supply of a service does not of itself make this Chapter applicable to measures adopted or maintained by the Party relating to such cross-border supply of the service. This Chapter applies to measures adopted or maintained by the Party relating to the posted bond or financial security, to the extent that such bond or financial security is a covered investment. (3)This Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Twelve (Financial Services). Article 10.3: National Treatment (1)Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. (2)Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. (3)The treatment to be accorded by a Party under paragraphs 1 and 2 means, with respect to a regional level of government, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that regional level of government to investors, and to investments of investors, of the Party of which it forms a part. Article 10.4: Most-Favored-Nation Treatment

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(1)Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. (2)Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any other Party or of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. Article 10.5: Minimum Standard of Treatment (1)Each Party shall accord to covered investments treatment in accordance with customary international law, including fair and equitable treatment and full protection and security. (2)For greater certainty, paragraph 1 prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to covered investments. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by that standard, and do not create additional substantive rights. The obligation in paragraph 1 to provide: (a) (b)

“fair and equitable treatment” includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world; and “full protection and security” requires each Party to provide the level of police protection required under customary international law.

(3)A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article. Article 10.6: Treatment in Case of Strife (1)Notwithstanding Article 10.13.5(b), each Party shall accord to investors of another Party, and to covered investments, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife. (2)Notwithstanding paragraph 1, if an investor of a Party, in the situations referred to in paragraph 1, suffers a loss in the territory of another Party resulting from: (a) (b)

requisitioning of its covered investment or part thereof by the latter's forces or authorities; or destruction of its covered investment or part thereof by the latter's forces or authorities, which was not required by the necessity of the situation,

the latter Party shall provide the investor restitution or compensation, which in either case shall be in accordance with customary international law and, with respect to compensation, shall be in accordance with Article 10.7.2 through 10.7.4. (3)Paragraph 1 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 10.3 but for Article 10.13.5(b). Article 10.7: Expropriation and Compensation (1)No Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”), except: (a) (b) (c) (d)

for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation in accordance with paragraphs 2 through 4; and in accordance with due process of law and Article 10.5.

(2)Compensation shall: (a) (b) (c) (d)

be paid without delay; be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“the date of expropriation”); not reflect any change in value occurring because the intended expropriation had become known earlier; and be fully realizable and freely transferable.

(3)If the fair market value is denominated in a freely usable currency, the compensation paid shall be no less than the fair market value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment.

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(4)If the fair market value is denominated in a currency that is not freely usable, the compensation paid – converted into the currency of payment at the market rate of exchange prevailing on the date of payment – shall be no less than: (a) (b)

the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date, plus interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment.

(5)This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement, or to the revocation, limitation, or creation of intellectual property rights, to the extent that such issuance, revocation, limitation, or creation is consistent with Chapter Fifteen (Intellectual Property Rights). Article 10.8: Transfers (1)Each Party shall permit all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include: (a) (b) (c) (d) (e) (f)

contributions to capital; profits, dividends, capital gains, and proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment; interest, royalty payments, management fees, and technical assistance and other fees; payments made under a contract, including a loan agreement; payments made pursuant to Article 10.6.1 and 10.6.2 and Article 10.7; and payments arising out of a dispute.

(2)Each Party shall permit transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer. (3)Each Party shall permit returns in kind relating to a covered investment to be made as authorized or specified in a written agreement between the Party and a covered investment or an investor of another Party. (4)Notwithstanding paragraphs 1 through 3, a Party may prevent a transfer through the equitable, nondiscriminatory, and good faith application of its laws relating to: (a) (b) (c) (d) (e)

bankruptcy, insolvency, or the protection of the rights of creditors; issuing, trading, or dealing in securities, futures, options, or derivatives; criminal or penal offenses; financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; or ensuring compliance with orders or judgments in judicial or administrative proceedings.

Article 10.9: Performance Requirements (1)No Party may, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment of an investor of a Party or of a non-Party in its territory, impose or enforce any of the following requirements, or enforce any commitment or undertaking: (a) (b) (c) (d) (e) (f) (g)

to export a given level or percentage of goods or services; to achieve a given level or percentage of domestic content; to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings; to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory; or to supply exclusively from the territory of the Party the goods that such investment produces or the services that it supplies to a specific regional market or to the world market.

(2)No Party may condition the receipt or continued receipt of an advantage, in connection with the establishment, acquisition, expansion, management, conduct, operation, or sale or other disposition of an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements: (a)

to achieve a given level or percentage of domestic content;

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(b) (c) (d)

to purchase, use, or accord a preference to goods produced in its territory, or to purchase goods from persons in its territory; to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or to restrict sales of goods or services in its territory that such investment produces or supplies by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

(3) (a)

(b)

Nothing in paragraph 2 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, supply a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory. Paragraph 1(f) does not apply: (i)

(c)

when a Party authorizes use of an intellectual property right in accordance with Article 31 of the TRIPS Agreement, or to measures requiring the disclosure of proprietary information that fall within the scope of, and are consistent with, Article 39 of the TRIPS Agreement; or (ii) when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal, or competition authority to remedy a practice determined after judicial or administrative process to be anticompetitive under the Party's competition laws. Provided that such measures are not applied in an arbitrary or unjustifiable manner, and provided that such measures do not constitute a disguised restriction on international trade or investment, paragraphs 1(b), (c), and (f), and 2(a) and (b), shall not be construed to prevent a Party from adopting or maintaining measures, including environmental measures: (i)

(d) (e) (f)

necessary to secure compliance with laws and regulations that are not inconsistent with this Agreement; (ii) necessary to protect human, animal, or plant life or health; or (iii) related to the conservation of living or non-living exhaustible natural resources. Paragraphs 1(a), (b), and (c), and 2(a) and (b), do not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs. Paragraphs 1(b), (c), (f), and (g), and 2(a) and (b), do not apply to procurement. Paragraphs 2(a) and (b) do not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas.

(4)For greater certainty, paragraphs 1 and 2 do not apply to any requirement other than the requirements set out in those paragraphs. (5)This Article does not preclude enforcement of any commitment, undertaking, or requirement between private parties, where a Party did not impose or require the commitment, undertaking, or requirement. Article 10.10: Senior Management and Boards of Directors (1)No Party may require that an enterprise of that Party that is a covered investment appoint to senior management positions natural persons of any particular nationality. (2)A Party may require that a majority of the board of directors, or any committee thereof, of an enterprise of that Party that is a covered investment, be of a particular nationality, or resident in the territory of the Party, provided that the requirement does not materially impair the ability of the investor to exercise control over its investment. Article 10.11: 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. Article 10.12: Denial of Benefits (1)A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such other Party and to investments of that investor if persons of a nonParty own or control the enterprise and the denying Party: (a) (b)

does not maintain diplomatic relations with the non-Party; or adopts or maintains measures with respect to the non-Party or a person of the non-

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Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments. (2)Subject to Articles 18.3 (Notification and Provision of Information) and 20.4 (Consultations), a Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such other Party and to investments of that investor if the enterprise has no substantial business activities in the territory of any Party, other than the denying Party, and persons of a non-Party, or of the denying Party, own or control the enterprise. Article 10.13: Non-Conforming Measures (1)Articles 10.3, 10.4, 10.9, and 10.10 do not apply to: (a)

any existing non-conforming measure that is maintained by a Party at: (i)

(b) (c)

the central level of government, as set out by that Party in its Schedule to Annex I, (ii) a regional level of government, as set out by that Party in its Schedule to Annex I, or (iii) a local level of government; the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Article 10.3, 10.4, 10.9, or 10.10.

(2)Articles 10.3, 10.4, 10.9, and 10.10 do not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors, or activities, as set out in its Schedule to Annex II. (3)No Party may, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to Annex II, require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective. (4)Articles 10.3 and 10.4 do not apply to any measure that is an exception to, or derogation from, the obligations under Article 15.1.8 (General Provisions) as specifically provided in that Article. (5)Articles 10.3, 10.4, and 10.10 do not apply to: (a) (b)

procurement; or subsidies or grants provided by a Party, including government-supported loans, guarantees, and insurance.

Article 10.14: Special Formalities and Information Requirements (1)Nothing in Article 10.3 shall be construed to prevent a Party from adopting or maintaining a measure that prescribes special formalities in connection with covered investments, such as a requirement that investors be residents of the Party or that covered investments be legally constituted under the laws or regulations of the Party, provided that such formalities do not materially impair the protections afforded by a Party to investors of another Party and covered investments pursuant to this Chapter. (2)Notwithstanding Articles 10.3 and 10.4, a Party may require an investor of another Party, or a covered investment, to provide information concerning that investment solely for informational or statistical purposes. The Party shall protect any confidential business information from any disclosure that would prejudice the competitive position of the investor or the covered investment. Nothing in this paragraph shall be construed to prevent a Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law. Section B: Investor-State Dispute Settlement Article 10.15: Consultation and Negotiation In the event of an investment dispute, the claimant and the respondent should initially seek to resolve the dispute through consultation and negotiation, which may include the use of non-binding, third-party procedures such as conciliation and mediation. Article 10.16: Submission of a Claim to Arbitration (1)In the event that a disputing party considers that an investment dispute cannot be settled by consultation and negotiation: (a)

the claimant, on its own behalf, may submit to arbitration under this Section a claim (i)

that the respondent has breached

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(b)

(A) an obligation under Section A, (B) an investment authorization, or (C) an investment agreement; and (ii) that the claimant has incurred loss or damage by reason of, or arising out of, that breach; and the claimant, on behalf of an enterprise of the respondent that is a juridical person that the claimant owns or controls directly or indirectly, may submit to arbitration under this Section a claim (i)

(ii)

that the respondent has breached (A) an obligation under Section A, (B) an investment authorization, or (C) an investment agreement; and that the enterprise has incurred loss or damage by reason of, or arising out of, that breach.

(2)At least 90 days before submitting any claim to arbitration under this Section, a claimant shall deliver to the respondent a written notice of its intention to submit the claim to arbitration (“notice of intent”). The notice shall specify: (a) (b) (c) (d)

the name and address of the claimant and, where a claim is submitted on behalf of an enterprise, the name, address, and place of incorporation of the enterprise; for each claim, the provision of this Agreement, investment authorization, or investment agreement alleged to have been breached and any other relevant provisions; the legal and factual basis for each claim; and the relief sought and the approximate amount of damages claimed.

(3)Provided that six months have elapsed since the events giving rise to the claim, a claimant may submit a claim referred to in paragraph 1: (a) (b) (c)

under the ICSID Convention and the ICSID Rules of Procedures for Arbitration Proceedings, provided that both the respondent and the Party of the claimant are parties to the ICSID Convention; under the ICSID Additional Facility Rules, provided that either the respondent or the Party of the claimant is a party to the ICSID Convention; or under the UNCITRAL Arbitration Rules.

(4)A claim shall be deemed submitted to arbitration under this Section when the claimant's notice of or request for arbitration (“notice of arbitration”): (a) (b) (c)

referred to in paragraph 1 of Article 36 of the ICSID Convention is received by the Secretary-General; referred to in Article 2 of Schedule C of the ICSID Additional Facility Rules is received by the Secretary-General; or referred to in Article 3 of the UNCITRAL Arbitration Rules, together with the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules, are received by the respondent.

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

the name of the arbitrator that the claimant appoints; or the claimant's written consent for the Secretary-General to appoint such arbitrator.

Article 10.17: Consent of Each Party to Arbitration (1)Each Party consents to the submission of a claim to arbitration under this Section in accordance with this Agreement. (2)The consent under paragraph 1 and the submission of a claim to arbitration under this Section shall satisfy the requirements of: (a) (b) (c)

Chapter II of the ICSID Convention ( Jurisdiction of the Centre) and the ICSID Additional Facility Rules for written consent of the parties to the dispute; Article II of the New York Convention for an “agreement in writing;” and Article I of the Inter-American Convention for an “agreement.”

Article 10.18: Conditions and Limitations on Consent of Each Party

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(1)No claim may be submitted to arbitration under this Section if more than three years have elapsed from the date on which the claimant first acquired, or should have first acquired, knowledge of the breach alleged under Article 10.16.1 and knowledge that the claimant (for claims brought under Article 10.16.1(a)) or the enterprise (for claims brought under Article 10.16.1(b)) has incurred loss or damage. (2)No claim may be submitted to arbitration under this Section unless: (a) (b)

the claimant consents in writing to arbitration in accordance with the procedures set out in this Agreement; and the notice of arbitration is accompanied, (i)

for claims submitted to arbitration under Article 10.16.1(a), by the claimant's written waiver, and (ii) for claims submitted to arbitration under Article 10.16.1(b), by the claimant's and the enterprise's written waivers of any right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 10.16. (3)Notwithstanding paragraph 2(b), the claimant (for claims brought under Article 10.16.1(a)) and the claimant or the enterprise (for claims brought under Article 10.16.1(b)) may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant's or the enterprise's rights and interests during the pendency of the arbitration. (4)No claim may be submitted to arbitration: (a) (b)

for breach of an investment authorization under Article 10.16.1(a)(i)(B) or Article 10.16.1(b)(i)(B), or for breach of an investment agreement under Article 10.16.1(a)(i)(C) or Article 10.16.1(b)(i)(C),

if the claimant (for claims brought under Article 10.16.1(a)) or the claimant or the enterprise (for claims brought under Article 10.16.1(b)) has previously submitted the same alleged breach to an administrative tribunal or court of the respondent, or to any other binding dispute settlement procedure, for adjudication or resolution. Article 10.19: Selection of Arbitrators (1)Unless the disputing parties otherwise agree, the tribunal shall comprise three arbitrators, one arbitrator appointed by each of the disputing parties and the third, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. (2)The Secretary-General shall serve as appointing authority for an arbitration under this Section. (3)If a tribunal has not been constituted within 75 days from the date that a claim is submitted to arbitration under this Section, the Secretary-General, on the request of a disputing party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed. (4)For purposes of Article 39 of the ICSID Convention and Article 7 of Schedule C to the ICSID Additional Facility Rules, and without prejudice to an objection to an arbitrator on a ground other than nationality: (a) (b)

(c)

the respondent agrees to the appointment of each individual member of a tribunal established under the ICSID Convention or the ICSID Additional Facility Rules; a claimant referred to in Article 10.16.1(a) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant agrees in writing to the appointment of each individual member of the tribunal; and a claimant referred to in Article 10.16.1(b) may submit a claim to arbitration under this Section, or continue a claim, under the ICSID Convention or the ICSID Additional Facility Rules, only on condition that the claimant and the enterprise agree in writing to the appointment of each individual member of the tribunal.

Article 10.20: Conduct of the Arbitration (1)The disputing parties may agree on the legal place of any arbitration under the arbitral rules applicable under Article 10.16.3. If the disputing parties fail to reach agreement, the tribunal shall determine the place in accordance with the applicable arbitral rules, provided that the place shall be in the territory of a State that is a party to the New York Convention. (2)A non-disputing Party may make oral and written submissions to the tribunal regarding the interpretation of this Agreement. (3)The tribunal shall have the authority to accept and consider amicus curiae submissions from a person or entity that is not a disputing party.

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(4)Without prejudice to a tribunal's authority to address other objections as a preliminary question, a tribunal shall address and decide as a preliminary question any objection by the respondent that, as a matter of law, a claim submitted is not a claim for which an award in favor of the claimant may be made under Article 10.26. (a)

(b)

(c)

(d)

Such objection shall be submitted to the tribunal as soon as possible after the tribunal is constituted, and in no event later than the date the tribunal fixes for the respondent to submit its counter-memorial (or, in the case of an amendment to the notice of arbitration, the date the tribunal fixes for the respondent to submit its response to the amendment). On receipt of an objection under this paragraph, the tribunal shall suspend any proceedings on the merits, establish a schedule for considering the objection consistent with any schedule it has established for considering any other preliminary question, and issue a decision or award on the objection, stating the grounds therefor. In deciding an objection under this paragraph, the tribunal shall assume to be true claimant's factual allegations in support of any claim in the notice of arbitration (or any amendment thereof) and, in disputes brought under the UNCITRAL Arbitration Rules, the statement of claim referred to in Article 18 of the UNCITRAL Arbitration Rules. The tribunal may also consider any relevant facts not in dispute. The respondent does not waive any objection as to competence or any argument on the merits merely because the respondent did or did not raise an objection under this paragraph or make use of the expedited procedure set out in paragraph 5.

(5)In the event that the respondent so requests within 45 days after the tribunal is constituted, the tribunal shall decide on an expedited basis an objection under paragraph 4 and any objection that the dispute is not within the tribunal's competence. The tribunal shall suspend any proceedings on the merits and issue a decision or award on the objection(s), stating the grounds therefor, no later than 150 days after the date of the request. However, if a disputing party requests a hearing, the tribunal may take an additional 30 days to issue the decision or award. Regardless of whether a hearing is requested, a tribunal may, on a showing of extraordinary cause, delay issuing its decision or award by an additional brief period, which may not exceed 30 days. (6)When it decides a respondent's objection under paragraph 4 or 5, the tribunal may, if warranted, award to the prevailing disputing party reasonable costs and attorney's fees incurred in submitting or opposing the objection. In determining whether such an award is warranted, the tribunal shall consider whether either the claimant's claim or the respondent's objection was frivolous, and shall provide the disputing parties a reasonable opportunity to comment. (7)A respondent may not assert as a defense, counterclaim, right of set-off, or for any other reason that the claimant has received or will receive indemnification or other compensation for all or part of the alleged damages pursuant to an insurance or guarantee contract. (8)A tribunal may order an interim measure of protection to preserve the rights of a disputing party, or to ensure that the tribunal's jurisdiction is made fully effective, including an order to preserve evidence in the possession or control of a disputing party or to protect the tribunal's jurisdiction. A tribunal may not order attachment or enjoin the application of a measure alleged to constitute a breach referred to in Article 10.16. For purposes of this paragraph, an order includes a recommendation. (9) (a)

(b)

In any arbitration conducted under this Section, at the request of a disputing party, a tribunal shall, before issuing a decision or award on liability, transmit its proposed decision or award to the disputing parties and to the non-disputing Parties. Within 60 days after the tribunal transmits its proposed decision or award, the disputing parties may submit written comments to the tribunal concerning any aspect of its proposed decision or award. The tribunal shall consider any such comments and issue its decision or award not later than 45 days after the expiration of the 60-day comment period. Subparagraph (a) shall not apply in any arbitration conducted pursuant to this Section for which an appeal has been made available pursuant to paragraph 10 or Annex 10-F.

(10)If a separate multilateral agreement enters into force as between the Parties that establishes an appellate body for purposes of reviewing awards rendered by tribunals constituted pursuant to international trade or investment arrangements to hear investment disputes, the Parties shall strive to reach an agreement that would have such appellate body review awards rendered under Article 10.26 in arbitrations commenced after the multilateral agreement enters into force as between the Parties. Article 10.21: Transparency of Arbitral Proceedings (1)Subject to paragraphs 2 and 4, the respondent shall, after receiving the following documents, promptly transmit them to the non-disputing Parties and make them

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available to the public: (a) (b) (c) (d) (e)

the notice of intent; the notice of arbitration; pleadings, memorials, and briefs submitted to the tribunal by a disputing party and any written submissions submitted pursuant to Article 10.20.2 and 10.20.3 and Article 10.25; minutes or transcripts of hearings of the tribunal, where available; and orders, awards, and decisions of the tribunal.

(2)The tribunal shall conduct hearings open to the public and shall determine, in consultation with the disputing parties, the appropriate logistical arrangements. However, any disputing party that intends to use information designated as protected information in a hearing shall so advise the tribunal. The tribunal shall make appropriate arrangements to protect the information from disclosure. (3)Nothing in this Section requires a respondent to disclose protected information or to furnish or allow access to information that it may withhold in accordance with Article 21.2 (Essential Security) or Article 21.5 (Disclosure of Information). (4)Any protected information that is submitted to the tribunal shall be protected from disclosure in accordance with the following procedures: (a)

(b) (c)

(d)

Subject to subparagraph (d), neither the disputing parties nor the tribunal shall disclose to any non-disputing Party or to the public any protected information where the disputing party that provided the information clearly designates it in accordance with subparagraph (b); Any disputing party claiming that certain information constitutes protected information shall clearly designate the information at the time it is submitted to the tribunal; A disputing party shall, at the same time that it submits a document containing information claimed to be protected information, submit a redacted version of the document that does not contain the information. Only the redacted version shall be provided to the non-disputing Parties and made public in accordance with paragraph 1; and The tribunal shall decide any objection regarding the designation of information claimed to be protected information. If the tribunal determines that such information was not properly designated, the disputing party that submitted the information may (i) withdraw all or part of its submission containing such information, or (ii) agree to resubmit complete and redacted documents with corrected designations in accordance with the tribunal's determination and subparagraph (c). In either case, the other disputing party shall, whenever necessary, resubmit complete and redacted documents which either remove the information withdrawn under (i) by the disputing party that first submitted the information or redesignate the information consistent with the designation under (ii) of the disputing party that first submitted the information.

(5)Nothing in this Section requires a respondent to withhold from the public information required to be disclosed by its laws. Article 10.22: Governing Law (1)Subject to paragraph 3, when a claim is submitted under Article 10.16.1(a)(i)(A) or Article 10.16.1(b)(i)(A), the tribunal shall decide the issues in dispute in accordance with this Agreement and applicable rules of international law. (2)Subject to paragraph 3 and the other terms of this Section, when a claim is submitted under Article 10.16.1(a)(i)(B) or (C), or Article 10.16.1(b)(i)(B) or (C), the tribunal shall apply: (a) (b)

the rules of law specified in the pertinent investment agreement or investment authorization, or as the disputing parties may otherwise agree; or if the rules of law have not been specified or otherwise agreed: (i) (ii)

the law of the respondent, including its rules on the conflict of laws; and such rules of international law as may be applicable.

(3)A decision of the Commission declaring its interpretation of a provision of this Agreement under Article 19.1.3(c) (The Free Trade Commission) shall be binding on a tribunal established under this Section, and any decision or award issued by the tribunal must be consistent with that decision. Article 10.23: Interpretation of Annexes (1)Where a respondent asserts as a defense that the measure alleged to be a breach is within the scope of Annex I or Annex II, the tribunal shall, on request of the respondent, request the interpretation of the Commission on the issue. The Commission shall submit in writing any decision declaring its interpretation under Article 19.1.3(c) (The Free Trade Commission) to the tribunal within 60 days of delivery of the request.

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(2)A decision issued by the Commission under paragraph 1 shall be binding on the tribunal, and any decision or award issued by the tribunal must be consistent with that decision. If the Commission fails to issue such a decision within 60 days, the tribunal shall decide the issue. Article 10.24: Expert Reports Without prejudice to the appointment of other kinds of experts where authorized by the applicable arbitration rules, a tribunal, at the request of a disputing party or, unless the disputing parties disapprove, on its own initiative, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, health, safety, or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree. Article 10.25: Consolidation (1)Where two or more claims have been submitted separately to arbitration under Article 10.16.1 and the claims have a question of law or fact in common and arise out of the same events or circumstances, any disputing party may seek a consolidation order in accordance with the agreement of all the disputing parties sought to be covered by the order or the terms of paragraphs 2 through 10. (2)A disputing party that seeks a consolidation order under this Article shall deliver, in writing, a request to the Secretary-General and to all the disputing parties sought to be covered by the order and shall specify in the request: (a) (b) (c)

the names and addresses of all the disputing parties sought to be covered by the order; the nature of the order sought; and the grounds on which the order is sought.

(3)Unless the Secretary-General finds within 30 days after receiving a request under paragraph 2 that the request is manifestly unfounded, a tribunal shall be established under this Article. (4)Unless all the disputing parties sought to be covered by the order otherwise agree, a tribunal established under this Article shall comprise three arbitrators: (a) (b) (c)

one arbitrator appointed by agreement of the claimants; one arbitrator appointed by the respondent; and the presiding arbitrator appointed by the Secretary-General, provided, however, that the presiding arbitrator shall not be a national of any Party.

(5)If, within 60 days after the Secretary-General receives a request made under paragraph 2, the respondent fails or the claimants fail to appoint an arbitrator in accordance with paragraph 4, the Secretary-General, on the request of any disputing party sought to be covered by the order, shall appoint the arbitrator or arbitrators not yet appointed. If the respondent fails to appoint an arbitrator, the Secretary-General shall appoint a national of the disputing Party, and if the claimants fail to appoint an arbitrator, the Secretary-General shall appoint a national of a Party of the claimants. (6)Where a tribunal established under this Article is satisfied that two or more claims that have been submitted to arbitration under Article 10.16.1 have a question of law or fact in common, and arise out of the same events or circumstances, the tribunal may, in the interest of fair and efficient resolution of the claims, and after hearing the disputing parties, by order: (a) (b) (c)

assume jurisdiction over, and hear and determine together, all or part of the claims; assume jurisdiction over, and hear and determine one or more of the claims, the determination of which it believes would assist in the resolution of the others; or instruct a tribunal previously established under Article 10.19 to assume jurisdiction over, and hear and determine together, all or part of the claims, provided that (i)

(ii)

that tribunal, at the request of any claimant not previously a disputing party before that tribunal, shall be reconstituted with its original members, except that the arbitrator for the claimants shall be appointed pursuant to paragraphs 4(a) and 5; and that tribunal shall decide whether any prior hearing shall be repeated.

(7)Where a tribunal has been established under this Article, a claimant that has submitted a claim to arbitration under Article 10.16.1 and that has not been named in a request made under paragraph 2 may make a written request to the tribunal that it be included in any order made under paragraph 6, and shall specify in the request: (a) (b) (c)

the name and address of the claimant; the nature of the order sought; and the grounds on which the order is sought.

The claimant shall deliver a copy of its request to the Secretary-General.

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(8)A tribunal established under this Article shall conduct its proceedings in accordance with the UNCITRAL Arbitration Rules, except as modified by this Section. (9)A tribunal established under Article 10.19 shall not have jurisdiction to decide a claim, or a part of a claim, over which a tribunal established or instructed under this Article has assumed jurisdiction. (10)On application of a disputing party, a tribunal established under this Article, pending its decision under paragraph 6, may order that the proceedings of a tribunal established under Article 10.19 be stayed, unless the latter tribunal has already adjourned its proceedings. Article 10.26: Awards (1)Where a tribunal makes a final award against a respondent, the tribunal may award, separately or in combination, only: (a) (b)

monetary damages and any applicable interest; restitution of property, in which case the award shall provide that the respondent may pay monetary damages and any applicable interest in lieu of restitution.

A tribunal may also award costs and attorney's fees in accordance with this Section and the applicable arbitration rules. (2)Subject to paragraph 1, where a claim is submitted to arbitration under Article 10.16.1(b): (a) (b) (c)

an award of restitution of property shall provide that restitution be made to the enterprise; an award of monetary damages and any applicable interest shall provide that the sum be paid to the enterprise; and the award shall provide that it is made without prejudice to any right that any person may have in the relief under applicable domestic law.

(3)A tribunal is not authorized to award punitive damages. (4)An award made by a tribunal shall have no binding force except between the disputing parties and in respect of the particular case. (5)Subject to paragraph 6 and the applicable review procedure for an interim award, a disputing party shall abide by and comply with an award without delay. (6)A disputing party may not seek enforcement of a final award until: (a)

in the case of a final award made under the ICSID Convention (i)

(b)

120 days have elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award; or (ii) revision or annulment proceedings have been completed; and in the case of a final award under the ICSID Additional Facility Rules or the UNCITRAL Arbitration Rules (i) (ii)

90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside, or annul the award; or a court has dismissed or allowed an application to revise, set aside, or annul the award and there is no further appeal.

(7)Each Party shall provide for the enforcement of an award in its territory. (8)If the respondent fails to abide by or comply with a final award, on delivery of a request by the Party of the claimant, a panel shall be established under Article 20.6 (Request for an Arbitral Panel). The requesting Party may seek in such proceedings: (a) (b)

a determination that the failure to abide by or comply with the final award is inconsistent with the obligations of this Agreement; and in accordance with Article 20.13 (Initial Report), a recommendation that the respondent abide by or comply with the final award.

(9)A disputing party may seek enforcement of an arbitration award under the ICSID Convention, the New York Convention, or the Inter-American Convention regardless of whether proceedings have been taken under paragraph 8. (10)A claim that is submitted to arbitration under this Section shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention and Article I of the Inter-American Convention. Article 10.27: Service of Documents Delivery of notice and other documents on a Party shall be made to the place named for that Party in Annex 10-G. Section C: Definitions

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Article 10.28: Definitions For purposes of this Chapter: Centre means the International Centre for Settlement of Investment Disputes (“ICSID”) established by the ICSID Convention; claimant means an investor of a Party that is a party to an investment dispute with another Party; disputing parties means the claimant and the respondent; disputing party means either the claimant or the respondent; enterprise means an enterprise as defined in Article 2.1 (Definitions of General Application), and a branch of an enterprise; enterprise of a Party means an enterprise constituted or organized under the law of a Party, and a branch located in the territory of a Party and carrying out business activities there; freely usable currency means “freely usable currency” as determined by the International Monetary Fund under its Articles of Agreement; ICSID Additional Facility Rules means the Rules Governing the Additional Facility for the Administration of Proceeding by the Secretariat of the International Centre for Settlement of Investment Disputes; ICSID Convention means the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, done at Washington, March 18, 1965; Inter-American Convention means the Inter-American Convention on International Commercial Arbitration, done at Panama, January 30, 1975; investment means every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: (a) (b) (c) (d) (e) (f) (g) (h)

an enterprise; shares, stock, and other forms of equity participation in an enterprise; bonds, debentures, other debt instruments, and loans; futures, options, and other derivatives; turnkey, construction, management, production, concession, revenuesharing, and other similar contracts; intellectual property rights; licenses, authorizations, permits, and similar rights conferred pursuant to domestic law; and other tangible or intangible, movable or immovable property, and related property rights, such as leases, mortgages, liens, and pledges;

investment agreement means a written agreement that takes effect on or after the date of entry into force of this Agreement between a national authority of a Party and a covered investment or an investor of another Party that grants the covered investment or investor rights: (a) (b)

with respect to natural resources or other assets that a national authority controls; and upon which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself;

investment authorization means an authorization that the foreign investment authority of a Party grants to a covered investment or an investor of another Party; investor of a non-Party means, with respect to a Party, an investor that attempts to make, is making, or has made an investment in the territory of that Party, that is not an investor of a Party; investor of a Party means a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of another Party; provided, however, that a natural person who is a dual national shall be deemed to be exclusively a national of the State of his or her dominant and effective nationality; national means a natural person who has the nationality of a Party according to Annex 2.1 (Country-Specific Definitions); New York Convention means the United Nations Convention on the

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Recognition and Enforcement of Foreign Arbitral Awards, done at New York, June 10, 1958; non-disputing Party means a Party that is not a party to an investment dispute; protected information means confidential business information or information that is privileged or otherwise protected from disclosure under a Party's law; respondent means the Party that is a party to an investment dispute; Secretary-General means the Secretary-General of ICSID; tribunal means an arbitration tribunal established under Article 10.19 or 10.25; and UNCITRAL Arbitration Rules means the arbitration rules of the United Nations Commission on International Trade Law. *** Annex 10-F – Appellate Body or Similar Mechanism (1)Within three months of the date of entry into force of this Agreement, the Commission shall establish a Negotiating Group to develop an appellate body or similar mechanism to review awards rendered by tribunals under this Chapter. Such appellate body or similar mechanism shall be designed to provide coherence to the interpretation of investment provisions in the Agreement. The Commission shall direct the Negotiating Group to take into account the following issues, among others: (a) (b) (c) (d) (e) (f)

the nature and composition of an appellate body or similar mechanism; the applicable scope and standard of review; transparency of proceedings of an appellate body or similar mechanism; the effect of decisions by an appellate body or similar mechanism; the relationship of review by an appellate body or similar mechanism to the arbitral rules that may be selected under Articles 10.16 and 10.25; and the relationship of review by an appellate body or similar mechanism to existing domestic laws and international law on the enforcement of arbitral awards.

(2)The Commission shall direct the Negotiating Group to provide to the Commission, within one year of establishment of the Negotiating Group, a draft amendment to the Agreement that establishes an appellate body or similar mechanism. On approval of the draft amendment by the Parties, in accordance with Article 22.2 (Amendments), the Agreement shall be so amended. *** [4] ASEAN Comprehensive Investment Agreement (2009) (48) The Governments of Brunei Darussalam, the Kingdom of Cambodia, the Republic of Indonesia, the Lao People's Democratic Republic, Malaysia, the Union of Myanmar, the Republic of the Philippines, the Republic of Singapore, the Kingdom of Thailand and the Socialist Republic of Viet Nam, Member States of the Association of Southeast Asian Nations (“ASEAN”), hereinafter collectively referred to as “Member States” or singularly as “Member State”; *** RECOGNISING the different levels of development within ASEAN especially the least developed Member States which require some flexibility including special and differential treatment as ASEAN moves towards a more integrated and interdependent future; REAFFIRMING the need to move forward from the AIA Agreement and the ASEAN Agreement for the Promotion and Protection of Investments signed in Manila, Philippines on 15 December 1987 (“ASEAN IGA”), as amended, in order to further enhance regional integration to realise the vision of the ASEAN Economic Community (“AEC”); CONVINCED that sustained inflows of new investments and reinvestments will promote and ensure dynamic development of ASEAN economies; RECOGNISING that a conducive investment environment will enhance freer flow of capital, goods and services, technology and human resource and overall economic and social development in ASEAN; and DETERMINED to further intensify economic cooperation between and among Member States, HAVE AGREED as follows: SECTION A

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Article 1 – Objective The objective of this Agreement is to create a free and open investment regime in ASEAN in order to achieve the end goal of economic integration under the AEC in accordance with the AEC Blueprint, through the following: (a) (b) (c) (d) (e)

progressive liberalisation of the investment regimes of Member States; provision of enhanced protection to investors of all Member States and their investments; improvement of transparency and predictability of investment rules, regulations and procedures conducive to increased investment among Member States; joint promotion of the region as an integrated investment area; and cooperation to create favourable conditions for investment by investors of a Member State in the territory of the other Member States.

Article 2 – Guiding Principles This Agreement shall create a liberal, facilitative, transparent and competitive investment environment in ASEAN by adhering to the following principles: (a) (b) (c) (d) (e) (f) (g) (h)

provide for investment liberalisation, protection, investment promotion and facilitation; progressive liberalisation of investment with a view towards achieving a free and open investment environment in the region; benefit investors and their investments based in ASEAN; maintain and accord preferential treatment among Member States; no back-tracking of commitments made under the AIA Agreement and the ASEAN IGA; grant special and differential treatment and other flexibilities to Member States depending on their level of development and sectoral sensitivities; reciprocal treatment in the enjoyment of concessions among Member States, where appropriate; and accommodate expansion of scope of this Agreement to cover other sectors in the future.

Article 3 – Scope of Application 1. This Agreement shall apply to measures adopted or maintained by a Member State relating to: (a) (b)

investors of any other Member State; and investments, in its territory, of investors of any other Member State.

2. This Agreement shall apply to existing investments as at the date of entry into force of this Agreement as well as to investments made after the entry into force of this Agreement. 3. For the purpose of liberalisation and subject to Article 9 (Reservations), this Agreement shall apply to the following sectors: (a) (b) (c) (d) (e) (f) (g)

manufacturing; agriculture; fishery; forestry; mining and quarrying; services incidental to manufacturing, agriculture, fishery, forestry, mining and quarrying; and any other sectors, as may be agreed upon by all Member States.

4. This Agreement shall not apply to: (a) (b) (c) (d)

(e)

any taxation measures, except for Articles 13 (Transfers) and 14 (Expropriation and Compensation); subsidies or grants provided by a Member State; government procurement; services supplied in the exercise of governmental authority by the relevant body or authority of a Member State. For the purposes of this Agreement, a service supplied in the exercise of governmental authority means any service, which is supplied neither on a commercial basis nor in competition with one or more service suppliers; and measures adopted or maintained by a Member State affecting trade in services under the ASEAN Framework Agreement on Services signed in Bangkok, Thailand on 15 December 1995 (“AFAS”).

5. Notwithstanding sub-paragraph 4 (e), for the purpose of protection of investment with

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respect to the commercial presence mode of service supply, Articles 11 (Treatment of Investment), 12 (Compensation in Cases of Strife), 13 (Transfers), 14 (Expropriation and Compensation) and 15 (Subrogation) and Section B (Investment Disputes Between an Investor and a Member State), shall apply, mutatis mutandis, to any measure affecting the supply of a service by a service supplier of a Member State through commercial presence in the territory of any other Member State but only to the extent that they relate to an investment and obligation under this Agreement regardless of whether or not such service sector is scheduled in the Member States' schedule of commitments made under AFAS. 6. Nothing in this Agreement shall affect the rights and obligations of any Member State under any tax convention. In the event of any inconsistency between this Agreement and any such convention, that convention shall prevail to the extent of the inconsistency. Article 4 – Definitions For the purpose of this Agreement: (a)

(b) (c)

“covered investment” means, with respect to a Member State, an investment in its territory of an investor of any other Member State in existence as of the date of entry into force of this Agreement or established, acquired or expanded thereafter, and has been admitted according to its laws, regulations, and national policies, and where applicable, specifically approved in writing (49) by the competent authority of a Member State; “freely usable currency” means a freely usable currency as determined by the International Monetary Fund (“IMF”) under its Articles of Agreement and any amendments thereto; “investment” (50) means every kind of asset, owned or controlled, by an investor, including but not limited to the following: (i)

(d) (e)

(f)

movable and immovable property and other property rights such as mortgages, liens or pledges; (ii) shares, stocks, bonds and debentures and any other forms of participation in a juridical person and rights or interest derived therefrom; (iii) intellectual property rights which are conferred pursuant to the laws and regulations of each Member State; (iv) claims to money or to any contractual performance related to a business and having financial value (51) ; (v) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts; and (vi) business concessions required to conduct economic activities and having financial value conferred by law or under a contract, including any concessions to search, cultivate, extract or exploit natural resources. The term “investment” also includes amounts yielded by investments, in particular, profits, interest, capital gains, dividend, royalties and fees. Any alteration of the form in which assets are invested or reinvested shall not affect their classification as investment; “investor” means a natural person of a Member State or a juridical person of a Member State that is making, or has made an investment in the territory of any other Member State; “juridical person” means any legal entity duly constituted or otherwise organised under the applicable law of a Member State, whether for profit or otherwise, and whether privately-owned or governmentally-owned, including any enterprise, corporation, trust, partnership, joint venture, sole proprietorship, association, or organisation; “measures” means any measure of a Member State, whether in the form of laws, regulations, rules, procedures, decisions, and administrative actions or practice, adopted or maintained by: (i) (ii)

(g) (h) (i) (j)

central, regional or local government or authorities; or non-governmental bodies in the exercise of powers delegated by central, regional or local governments or authorities; “natural person” means any natural person possessing the nationality or citizenship of, or right of permanent residence in the Member State in accordance with its laws, regulations and national policies; “newer ASEAN Member States” means the Kingdom of Cambodia, the Lao People's Democratic Republic, the Union of Myanmar and the Socialist Republic of Viet Nam; “WTO” means the World Trade Organization; and “WTO Agreement” means the Marrakesh Agreement Establishing the World Trade Organization, done at Marrakesh, Morocco on 15 April 1994, as may be amended.

Article 5 – National Treatment 1. Each Member State shall accord to investors of any other Member State treatment no

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less favourable than that it accords, in like circumstances, to its own investors with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. 2. Each Member State shall accord to investments of investors of any other Member State treatment no less favourable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. Article 6 – Most-Favoured-Nation Treatment (52) 1. Each Member State shall accord to investors of another Member State treatment no less favourable than that it accords, in like circumstances, to investors of any other Member State or a non-Member State with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. 2. Each Member State shall accord to investments of investors of another Member State treatment no less favourable than that it accords, in like circumstances, to investments in its territory of investors of any other Member State or a non-Member State with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. 3. Paragraphs 1 and 2 shall not be construed so as to oblige a Member State to extend to investors or investments of other Member States the benefit of any treatment, preference or privilege resulting from: (a) (b)

any sub-regional arrangements between and among Member States (53) ; or any existing agreement notified by Member States to the AIA Council pursuant to Article 8(3) of the AIA Agreement. (54)

Article 7 – Prohibition of Performance Requirements 1. The provisions of the Agreement on Trade-Related Investment Measures in Annex 1A to the WTO Agreement (TRIMs), which are not specifically mentioned in or modified by this Agreement, shall apply, mutatis mutandis, to this Agreement. 2. Member States shall undertake joint assessment on performance requirements no later than 2 years from the date of entry into force of this Agreement. The aim of such assessment shall include reviewing existing performance requirements and considering the need for additional commitments under this Article. 3. Non-WTO Members of ASEAN shall abide by the WTO provisions in accordance with their accession commitments to the WTO. Article 8 – Senior Management and Board of Directors 1. A Member State shall not require that a juridical person of that Member State appoint to senior management positions, natural persons of any particular nationality. 2. A Member State may require that a majority of the board of directors of a juridical person of that Member State, be of a particular nationality, or resident in the territory of the Member State, provided that this requirement does not materially impair the ability of the investor to exercise control over its investment. Article 9 – Reservations 1. Articles 5 (National Treatment) and 8 (Senior Management and Board of Directors) shall not apply to: (a)

any existing measure that is maintained by a Member State at: (i)

(b)

the central level of government, as set out by that Member State in its reservation list in the Schedule referred to in paragraph 2; (ii) the regional level of government, as set out by that Member State in its reservation list in the Schedule referred to in paragraph 2; and (iii) a local level of government; the continuation or prompt renewal of any reservations referred to sub-paragraph (a).

2. Each Member State shall submit its reservation list to the ASEAN Secretariat for the endorsement of the AIA Council within 6 months after the date of signing of this Agreement. This list shall form a Schedule to this Agreement. 3. Any amendment or modification to any reservations contained in the Schedule referred to in paragraph 2 shall be in accordance with Article 10 (Modification of Commitments). 4. Each Member State shall reduce or eliminate the reservations specified in the Schedule in accordance with the three phases of the Strategic Schedule of the AEC Blueprint and Article 46 (Amendments).

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5. Articles 5 (National Treatment) and 6 (Most-Favoured-Nation Treatment) shall not apply to any measure covered by an exception to, or derogation from, the obligations under Articles 3 and 4 of the Agreement on Trade-Related Aspects of Intellectual Property Rights in Annex 1C to the WTO Agreement, as may be amended (“TRIPS Agreement”), as specifically provided in those Articles and in Article 5 of the TRIPS Agreement. Article 10 – Modification of Commitments For a period of 12 months after the date of submission of each Member State's reservation list, a Member State may adopt any measures or modify any of its reservations made in the Schedule under Article 9 (Reservations) for prospective applications to investors of any other Member States and their investments, provided that such measures or modification shall not adversely affect any existing investors and investments. After the expiration of the period referred to in paragraph 1, a Member State may, by negotiation and agreement with any other Member States to which it made commitments under this Agreement, adopt any measure, or modify or withdraw such commitments and reservations, provided that such measure, modification or withdrawal shall not adversely affect any existing investors or investments. (55) In any such negotiations and agreement referred to in paragraph 2, which may include provisions for compensatory adjustments with respect to other sectors, the Member States concerned shall maintain a general level of reciprocal and mutually advantageous commitments and reservations that is not less favourable to investors and investments than that provided for in this Agreement prior to such negotiations and agreements. Notwithstanding paragraphs 1 and 2, a Member State shall not, under any measure adopted pursuant to this Article after the entry into force of this Agreement, require an investor of any other Member State, by reason of that investor's nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective, unless otherwise specified in the initial approval by the relevant authorities. Article 11 – Treatment of Investment Each Member State shall accord to covered investments of investors of any other Member State, fair and equitable treatment and full protection and security. For greater certainty: (a) (b)

fair and equitable treatment requires each Member State not to deny justice in any legal or administrative proceedings in accordance with the principle of due process; and full protection and security requires each Member State to take such measures as may be reasonably necessary to ensure the protection and security of the covered investments.

A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article. Article 12 – Compensation in Cases of Strife Each Member State shall accord to investors of any other Member State, in relation to their covered investments which suffered losses in its territory due to armed conflict or civil strife or state of emergency, non-discriminatory treatment with respect to restitution, compensation or other valuable consideration. Article 13 – Transfers Each Member State shall allow all transfers relating to a covered investment to be made freely and without delay into and out of its territory. Such transfers include: (a) (b) (c) (d) (e) (f) (g)

contributions to capital, including the initial contribution; profits, capital gains, dividends, royalties, license fees, technical assistance and technical and management fees, interest and other current income accruing from any covered investment; proceeds from the total or partial sale or liquidation of any covered investment; payments made under a contract, including a loan agreement; payments made pursuant to Articles 12 (Compensation in Cases of Strife) and 14 (Expropriation and Compensation); payments arising out of the settlement of a dispute by any means including adjudication, arbitration or the agreement of the Member States to the dispute; and earnings and other remuneration of personnel employed and allowed to work in connection with that covered investment in its territory.

2. Each Member State shall allow transfers relating to a covered investment to be made in a freely usable currency at the market rate of exchange prevailing at the time of transfer.

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3. Notwithstanding paragraphs 1 and 2, a Member State may prevent or delay a transfer through the equitable, non-discriminatory, and good faith application of its laws and regulations relating to: (a) (b) (c) (d) (e) (f) (g) (h) (i)

bankruptcy, insolvency, or the protection of the rights of creditors; issuing, trading, or dealing in securities, futures, options, or derivatives; criminal or penal offences and the recovery of the proceeds of crime; financial reporting or record keeping of transfers when necessary to assist law enforcement or financial regulatory authorities; ensuring compliance with orders or judgments in judicial or administrative proceedings; taxation; social security, public retirement, or compulsory savings schemes; severance entitlements of employees; and the requirement to register and satisfy other formalities imposed by the Central Bank and other relevant authorities of a Member State.

4. Nothing in this Agreement shall affect the rights and obligations of the Member States as members of the IMF, under the Articles of Agreement of the IMF, including the use of exchange actions which are in conformity with the Articles of Agreement of the IMF, provided that a Member State shall not impose restrictions on any capital transactions inconsistently with its specific commitments under this Agreement regarding such transactions, except: (a) (b) (c)

at the request of the IMF; under Article 16 (Measures to Safeguard the Balance-of-Payments); or where, in exceptional circumstances, movements of capital cause, or threaten to cause, serious economic or financial disturbance in the Member State concerned.

5. The measures taken in accordance with sub-paragraph 4(c): (56) (a) (b) (c) (d) (e) (f) (g)

shall be consistent with the Articles of Agreement of the IMF; shall not exceed those necessary to deal with the circumstances described in subparagraph 4(c); shall be temporary and shall be eliminated as soon as conditions no longer justify their institution or maintenance; shall promptly be notified to the other Member States; shall be applied such that any one of the other Member States is treated no less favourably than any other Member State or non-Member State; shall be applied on a national treatment basis; and shall avoid unnecessary damage to investors and covered investments, and the commercial, economic and financial interests of the other Member State(s).

Article 14 – Expropriation and Compensation (57) 1. A Member State shall not expropriate or nationalise a covered investment either directly or through measures equivalent to expropriation or nationalisation (“expropriation”), except: (58) (a) (b) (c) (d)

for a public purpose in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation; and in accordance with due process of law.

2. The compensation referred to in sub-paragraph 1(c) shall: (a) (b) (c) (d)

be paid without delay; (59) be equivalent to the fair market value of the expropriated investment immediately before or at the time when the expropriation was publicly announced, or when the expropriation occurred, whichever is applicable; not reflect any change in value because the intended expropriation had become known earlier; and be fully realisable and freely transferable in accordance with Article 13 (Transfers) between the territories of the Member States.

3. In the event of delay, the compensation shall include an appropriate interest in accordance with the laws and regulations of the Member State making the expropriation. The compensation, including any accrued interest, shall be payable either in the currency in which the investment was originally made or, if requested by the investor, in a freely usable currency. 4. If an investor requests payment in a freely useable currency, the compensation referred to in sub-paragraph 1(c), including any accrued interest, shall be converted into the currency of payment at the market rate of exchange prevailing on the date of payment.

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5. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights in accordance with the TRIPS Agreement. Article 15 – Subrogation 1. If a Member State or an agency of a Member State makes a payment to an investor of that Member State under a guarantee, a contract of insurance or other form of indemnity it has granted on non-commercial risk in respect of an investment, the other Member State shall recognise the subrogation or transfer of any right or title in respect of such investment. The subrogated or transferred right or claim shall not be greater than the original right or claim of the investor. This, however, does not necessarily imply recognition of the latter Member State of the merits of any case or the amount of any claims arising therefrom. 2. Where a Member State or an agency of a Member State has made a payment to an investor of that Member State and has taken over rights and claims of the investor, that investor shall not, unless authorised to act on behalf of the Member State or the agency of the Member State making the payment, pursue those rights and claims against the other Member State. 3. In the exercise of subrogated rights or claims, a Member State or the agency of the Member State exercising such rights or claims shall disclose the coverage of the claims arrangement with its investors to the relevant Member State. Article 16 – Measures to Safeguard the Balance-of-Payments 1. In the event of serious balance-of-payments and external financial difficulties or threat thereof, a Member State may adopt or maintain restrictions on payments or transfers related to investments. It is recognised that particular pressures on the balance-ofpayments of a Member State in the process of economic development may necessitate the use of restrictions to ensure, 1. inter alia, the maintenance of a level of financial reserves adequate for the implementation of its programme of economic development. 2. The restrictions referred to in paragraph 1 shall: (a) (b) (c) (d) (e)

be consistent with the Articles of Agreement of the IMF; avoid unnecessary damage to the commercial, economic and financial interests of another Member State; not exceed those necessary to deal with the circumstances described in paragraph 1; be temporary and be phased out progressively as the situation specified in paragraph 1 improves; be applied such that any one of the other Member States is treated no less favourably than any other Member State or non-Member State.

Any restrictions adopted or maintained under paragraph 1, or any changes therein, shall be promptly notified to the other Member States. To the extent that it does not duplicate the process under WTO, IMF, or any other similar processes, the Member State adopting any restrictions under paragraph 1 shall commence consultations with any other Member State that requests such consultations in order to review the restrictions adopted by it. Article 17 – General Exceptions 1. Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between Member States or their investors where like conditions prevail, or a disguised restriction on investors of any other Member State and their investments, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any Member State of measures: (a) (b) (c)

necessary to protect public morals or to maintain public order; (60) necessary to protect human, animal or plant life or health; necessary to secure compliance with laws or regulations which are not inconsistent with this Agreement, including those relating to: (i)

(d) (e)

the prevention of deceptive and fraudulent practices to deal with the effects of a default on a contract; (ii) the protection of the privacy of individuals in relation to the processing and dissemination of personal data and the protection of confidentiality of individual records and accounts; (iii) safety; aimed at ensuring the equitable or effective (61) imposition or collection of direct taxes in respect of investments or investors of any Member State; imposed for the protection of national treasures of artistic, historic or archaeological value;

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(f)

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

2. Insofar as measures affecting the supply of financial services are concerned, paragraph 2 (Domestic Regulation) of the Annex on Financial Services of the General Agreement on Trade in Services in Annex 1B to the WTO Agreement (“GATS”) shall be incorporated into and form an integral part of this Agreement, mutatis mutandis. Article 18 – Security Exceptions 1. Nothing in this Agreement shall be construed: (a) (b)

to require any Member State to furnish any information, the disclosure of which it considers contrary to its essential security interests; or to prevent any Member State from taking any action which it considers necessary for the protection of its essential security interests, including but not limited to: (i)

(c)

action relating to fissionable and fusionable materials or the materials from which they derived; (ii) action relating to the traffic in arms, ammunition and implements of war and to such traffic in other goods and materials as is carried on directly or indirectly for the purpose of supplying a military establishment; (iii) action taken in time of war or other emergency in domestic or international relations; (iv) action taken so as to protect critical public infrastructure, including communication, power and water infrastructures, from deliberate attempts intended to disable or degrade such infrastructure; or to prevent any Member State from taking any action pursuant to its obligations under the United Nations Charter for the maintenance of international peace and security.

Article 19 – Denial of Benefits 1. A Member State may deny the benefits of this Agreement to: (a)

(b)

(c)

an investor of another Member State that is a juridical person of such other Member State and to investments of such investor if an investor of a non-Member State owns or controls the juridical person and the juridical person has no substantive business operations in the territory of such other Member State; an investor of another Member State that is a juridical person of such other Member State and to investments of such investor if an investor of the denying Member State owns or controls the juridical person and the juridical person has no substantive business operations in the territory of such other Member State; and an investor of another Member State that is a juridical person of such other Member State and to an investment of such investor if investors of a non-Member State own or control the juridical person, and the denying Member State does not maintain diplomatic relations with the non-Member State.

2. Following notification to the Member State of the investor, and without prejudice to paragraph 1, a Member State may deny the benefits of this Agreement to investors of another Member State and to investments of that investor, where it establishes that such investor has made an investment in breach of the domestic laws of the denying Member State by misrepresenting its ownership in those areas of investment which are reserved for natural or juridical persons of the denying Member State. 3. A juridical person is: (a) (b)

“owned” by an investor in accordance with the laws, regulations and national policies of each Member State; “controlled” by an investor if the investor has the power to name a majority of its directors or otherwise to legally direct its actions.

Article 20 – Special Formalities and Disclosure of Information 1. Nothing in Articles 5 (National Treatment) or 6 (Most-Favoured-Nation Treatment) shall be construed to prevent a Member State from adopting or maintaining a measure that prescribes special formalities in connection with investments, including a requirement that investments be legally constituted or assume a certain legal form under the laws or regulations of the Member State and compliance with registration requirements, provided that such formalities do not materially impair the rights afforded by a Member State to investors of another Member State and investments pursuant to this Agreement. 2. Notwithstanding Articles 5 (National Treatment) or 6 (Most-Favoured-Nation Treatment), a Member State may require an investor of another Member State, or a covered investment, to provide information concerning that investment solely for informational or statistical purposes. The Member State shall protect any confidential information from any disclosure that would prejudice legitimate commercial interests or particular juridical persons, public or private or the competitive position of the investor

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or the covered investment. Nothing in this paragraph shall be construed to prevent a Member State from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law. Article 21 – Transparency 1. In order to achieve the objectives of this Agreement, each Member State shall: (a) (b)

(c) (d)

promptly and at least annually inform the AIA Council of any investment-related agreements or arrangements which it has entered into and where preferential treatment was granted; promptly and at least annually inform the AIA Council of the introduction of any new law or of any changes to existing laws, regulations or administrative guidelines, which significantly affect investments or commitments of a Member State under this Agreement; make publicly available, all relevant laws, regulations and administrative guidelines of general application that pertain to, or affect investments in the territory of the Member State; and establish or designate an enquiry point where, upon request of any natural person, juridical person or any other Member State, all information relating to the measures required to be published or made available under sub-paragraphs (b) and (c) may be promptly obtained.

2. Nothing in this Agreement shall require a Member State to furnish or allow access to any confidential information, including information concerning particular investors or investments, the disclosure of which would impede law enforcement, or otherwise be contrary to the public interest, or which would prejudice legitimate commercial interests of particular juridical persons, public or private. Article 22 – Entry, Temporary Stay and Work of Investors and Key Personnel Subject to its immigration and labour laws, regulations and national policies relating to the entry, temporary stay and authorisation to work, and consistent with its commitments under AFAS, each Member State shall grant entry, temporary stay and authorisation to work to investors, executives, managers and members of the board of directors of a juridical person of any other Member State, for the purpose of establishing, developing, administering or advising on the operation in the territory of the former Member State of an investment to which they, or a juridical person of the other Member States that employs such executives, managers and members of the board of directors, have committed or are in the process of committing a substantial amount of capital or other resources. Article 23 – Special and Differential Treatment for the Newer ASEAN Member States In order to increase the benefits of this Agreement for the newer ASEAN Member States, and in accordance with the objectives and principles set out in the Preamble and Articles 1 (Objective) and 2 (Guiding Principles), Member States recognise the importance of according special and differential treatment to the newer ASEAN Member States, through: (a) (b) (c)

technical assistance to strengthen their capacity in relation to investment policies and promotion, including in areas such as human resource development; commitments in areas of interest to the newer ASEAN Member States; and recognising that commitments by each newer ASEAN Member State may be made in accordance with its individual stage of development.

Article 24 – Promotion of Investment Member States shall cooperate in increasing awareness of ASEAN as an integrated investment area in order to increase foreign investment into ASEAN and intra-ASEAN investments through, among others: (a) (b) (c) (d) (e)

encouraging the growth and development of ASEAN small and medium enterprises and multi-national enterprises; enhancing industrial complementation and production networks among multinational enterprises in ASEAN; organising investment missions that focus on developing regional clusters and production networks; organising and supporting the organisation of various briefings and seminars on investment opportunities and on investment laws, regulations and policies; and conducting exchanges on other issues of mutual concern relating to investment promotion.

Article 25 – Facilitation of Investment Member States shall endeavour to cooperate in the facilitation of investments into and within ASEAN through, among others: (a)

creating the necessary environment for all forms of investments;

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(b) (c) (d) (e) (f) (g)

streamlining and simplifying procedures for investment applications and approvals; promoting dissemination of investment information, including investment rules, regulations, policies and procedures; establishing one-stop investment centres; strengthening databases on all forms of investments for policy formulation to improve ASEAN's investment environment; undertaking consultation with the business community on investment matters; and providing advisory services to the business community of the other Member States.

Article 26 – Enhancing ASEAN Integration Member States recognise the importance of fostering ASEAN economic integration through various initiatives, including the Initiative for ASEAN Integration, Priority Integration Sectors, and AEC, all of which include cooperation on investment. In order to enhance ASEAN economic integration, Member States shall endeavour to, among others: (a) (b) (c) (d)

harmonise, where possible, investment policies and measures to achieve industrial complementation; build and strengthen capacity of Member States, including human resource development, in the formulation and improvement of investment policies to attract investment; share information on investment policies and best practices, including promoted activities and industries; and support investment promotion efforts amongst Member States for mutual benefits.

Article 27 – Disputes Between or Among Member States The ASEAN Protocol on Enhanced Dispute Settlement Mechanism signed in Vientiane, Lao PDR on 29 November 2004, as amended, shall apply to the settlement of disputes concerning the interpretation or application of this Agreement. SECTION B – Investment Dispute Between an Investor and a Member State Article 28 – Definitions For the purpose of this Section: (a)

“Appointing Authority” means: (i)

(b)

(c) (d) (e) (f) (g) (h) (i) (j)

in the case of arbitration under Article 33(1)(b) or (c), the Secretary-General of ICSID; (ii) in the case of arbitration under Article 33(1)(d), the Secretary-General of the Permanent Court of Arbitration; or (iii) in the case of arbitration under Article 33(1)(e) and (f), the Secretary-General, or a person holding equivalent position, of that arbitration centre or institution; “disputing investor” means an investor of a Member State that makes a claim on its own behalf under this Section, and where relevant, includes an investor of a Member State that makes a claim on behalf of a juridical person of the other Member State that the investor owns or controls; “disputing Member State” means a Member State against which a claim is made under this Section; “disputing parties” means a disputing investor and a disputing Member State; “ICSID” means the International Centre for Settlement of Investment Disputes; “ICSID Additional Facility Rules” means the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes; “ICSID Convention” means the Convention on the Settlement of Investment Disputes between States and National of other States, done at Washington, D.C., United States of America on 18 March 1965; “New York Convention” means the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, done at New York, United States of America on 10 June 1958; “non-disputing Member State” means the Member State of the disputing investor; and “UNCITRAL Arbitration Rules” means the arbitration rules of the United Nations Commission on International Trade Law, approved by the United Nations General Assembly on 15 December 1976.

Article 29 – Scope of Coverage 1. This Section shall apply to an investment dispute between a Member State and an investor of another Member State that has incurred loss or damage by reason of an

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alleged breach of any rights conferred by this Agreement with respect to the investment of that investor. 2. A natural person possessing the nationality or citizenship of a Member State shall not pursue a claim against that Member State under this Section. 3. This Section shall not apply to claims arising out of events which occurred, or claims which have been raised prior to the entry into force of this Agreement. 4. Nothing in this Section shall be construed so as to prevent a disputing investor from seeking administrative or judicial settlement available within the country of a disputing Member State. Article 30 – Conciliation 1. The disputing parties may at any time agree to conciliation, which may begin at any time and be terminated at the request of the disputing investor at any time. 2. If the disputing parties agree, procedures for conciliation may continue while procedures provided for in Article 33 (Submission of a Claim) are in progress. 3. Proceedings involving conciliation and positions taken by the disputing parties during these proceedings shall be without prejudice to the rights of either disputing parties in any further proceedings under this Section. Article 31 – Consultations 1. In the event of an investment dispute, the disputing parties shall initially seek to resolve the dispute through consultation and negotiation, which may include the use of non-binding, third party procedures. Such consultations shall be initiated by a written request for consultations delivered by the disputing investor to the disputing Member State. 2. Consultations shall commence within 30 days of receipt by the disputing Member State of the request for consultations, unless the disputing parties otherwise agree. 3. With the objective of resolving an investment dispute through consultations, a disputing investor shall make all reasonable efforts to provide the disputing Member State, prior to the commencement of consultations, with information regarding the legal and factual basis for the investment dispute. Article 32 – Claim by an Investor of a Member State If an investment dispute has not been resolved within 180 days of the receipt by a disputing Member State of a request for consultations, the disputing investor may, subject to this Section, submit to arbitration a claim: (a)

(b)

that the disputing Member State has breached an obligation arising under Articles 5 (National Treatment), 6 (Most-Favoured-Nation Treatment), 8 (Senior Management and Board of Directors), 11 (Treatment of Investment), 12 (Compensation in Cases of Strife), 13 (Transfers) and 14 (Expropriation and Compensation) relating to the management, conduct, operation or sale or other disposition of a covered investment; and that the disputing investor in relation to its covered investment has incurred loss or damage by reason of or arising out of that breach.

Article 33 – Submission of a Claim 1. A disputing investor may submit a claim referred to in Article 32 (Claim by an Investor of a Member State) at the choice of the disputing investor: (a) (b) (c) (d) (e) (f)

to the courts or administrative tribunals of the disputing Member State, provided that such courts or tribunals have jurisdiction over such claims; or under the ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings, (62) provided that both the disputing Member State and the nondisputing Member State are parties to the ICSID Convention; or under the ICSID Additional Facility Rules, provided that either of the disputing Member State or the non-disputing Member State is a party to the ICSID Convention; or under the UNCITRAL Arbitration Rules; or to the Regional Centre for Arbitration at Kuala Lumpur or any other regional centre for arbitration in ASEAN; or if the disputing parties agree, to any other arbitration institution, provided that resort to any arbitration rules or fora under sub-paragraphs (a) to (f) shall exclude resort to the other.

2. A claim shall be deemed submitted to arbitration under this Section when the disputing investor's notice of or request for arbitration (“notice of arbitration”) is received under the applicable arbitration rules. 3. The arbitration rules applicable under paragraph 1, as in effect on the date the claim

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or claims were submitted to arbitration under this Section, shall govern the arbitration except to the extent modified by this Agreement. 4. In relation to a specific investment dispute or class of disputes, the applicable arbitration rules may be waived, varied or modified by written agreement between the disputing parties. Such rules shall be binding on the relevant tribunal or tribunals established under this Section, and on individual arbitrators serving on such tribunals. 5. The disputing investor shall provide with the notice of arbitration: (a) (b)

the name of the arbitrator that the disputing investor appoints; or the disputing investor's written consent for the Appointing Authority to appoint that arbitrator.

Article 34 – Conditions and Limitations on Submission of a Claim 1. The dispute shall be submitted to arbitration under Article 33(1)(b) to (f) in accordance with this Section, and shall be conditional upon: (a)

(b)

(c)

the submission of the investment dispute to such arbitration taking place within 3 years of the time at which the disputing investor became aware, or should reasonably have become aware, of a breach of an obligation under this Agreement causing loss or damage to the disputing investor or a covered investment; and the disputing investor providing written notice, which shall be submitted at least 90 days before the claim is submitted, to the disputing Member State of its intent to submit the investment dispute to such arbitration and which briefly summarises the alleged breach of the disputing Member State under this Agreement (including the provisions alleged to have been breached) and the loss or damage allegedly caused to the disputing investor or a covered investment; and the notice of arbitration under Article 33(2) being accompanied by the disputing investor's written waiver of the disputing investor's right to initiate or continue any proceedings before the courts or administrative tribunals of the disputing Member State, or other dispute settlement procedures, of any proceeding with respect to any measure alleged to constitute a breach referred to in Article 32 (Claim by an Investor of a Member State).

2. Notwithstanding sub-paragraph 1(c), the disputing investor shall not be prevented from initiating or continuing an action that seeks interim measures of protection for the sole purpose of preserving the disputing investor's rights and interests and does not involve the payment of damages or resolution of the substance of the matter in dispute, before the courts or administrative tribunals of the disputing Member State. 3. A Member State shall not give diplomatic protection, or bring an international claim, in respect of a dispute which one of its investors and the other Member State have consented to submit or have submitted to arbitration under this Section, unless such other Member State has failed to abide by and comply with the award rendered in such dispute. Diplomatic protection, for the purposes of this paragraph, shall not include informal diplomatic exchanges for the sole purpose of facilitating a settlement of the dispute. 4. A disputing Member State shall not assert, as a defence, counter-claim, right of set off or otherwise, that the disputing investor in relation to the covered investment has received or will receive, pursuant to an insurance or guarantee contract, indemnification or other compensation for all or part of any alleged loss. Article 35 – Selection of Arbitrators 1. Unless the disputing parties otherwise agree, the tribunal shall comprise three arbitrators: (a) (b)

one arbitrator appointed by each of the disputing parties; and the third arbitrator, who shall be the presiding arbitrator, appointed by agreement of the disputing parties. The third arbitrator shall be a national of a non-Member State which has diplomatic relations with the disputing Member State and nondisputing Member State, and shall not have permanent residence in either the disputing Member State or non-disputing Member State.

2. Any person appointed as an arbitrator shall have expertise or experience in public international law, international trade or international investment rules. An arbitrator shall be chosen strictly on the basis of objectivity, reliability, sound judgment and independence and shall conduct himself or herself on the same basis throughout the course of the arbitral proceedings. 3. Subject to Article 36 (Conduct of the Arbitration), if a tribunal has not been constituted within 75 days from the date that a claim is submitted to arbitration under this Section, the Appointing Authority, on the request of a disputing party, shall appoint, in his or her discretion, the arbitrator or arbitrators who have not been appointed. 4. The tribunal shall reach its decisions by a majority of votes and its decisions shall be binding.

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5. The parties to the dispute shall bear the cost of their respective arbitrators to the tribunal and share equally the cost of the presiding arbitrator and other relevant costs. In all other respects, the tribunal shall determine its own procedures. 6. The disputing parties may establish rules relating to expenses incurred by the tribunal, including remuneration of the arbitrators. 7. Where any arbitrator appointed as provided for in this Article resigns or becomes unable to act, a successor shall be appointed in the same manner as prescribed for the appointment of the original arbitrator and the successor shall have all the powers and duties of the original arbitrator. Article 36 – Conduct of the Arbitration 1. Where issues relating to jurisdiction or admissibility are raised as preliminary objections, the tribunal shall decide the matter before proceeding to the merits. 2. A disputing Member State may, no later than 30 days after the constitution of the tribunal, file an objection that a claim is manifestly without merit. A disputing Member State may also file an objection that a claim is otherwise outside the jurisdiction or competence of the tribunal. The disputing Member State shall specify as precisely as possible the basis for the objection. 3. The tribunal shall address any such objection as a preliminary question apart from the merits of the claim. The disputing parties shall be given a reasonable opportunity to present their views and observations to the tribunal. If the tribunal decides that the claim is manifestly without merit, or is otherwise not within the jurisdiction or competence of the tribunal, it shall render an award to that effect. 4. The tribunal may, if warranted, award the prevailing party reasonable costs and fees incurred in submitting or opposing the objection. In determining whether such an award is warranted, the tribunal shall consider whether either the claim or the objection was frivolous or manifestly without merit, and shall provide the disputing parties a reasonable opportunity to comment. 5. Unless the disputing parties otherwise agree, the tribunal shall determine the place of arbitration in accordance with the applicable arbitration rules, provided that the place shall be in the territory of a State that is a party to the New York Convention. 6. Where an investment dispute relate to a measure which may be a taxation measure, the disputing Member State and the non-disputing Member State, including representatives of their tax administrations, shall hold consultations to determine whether the measure in question is a taxation measure. 7. Where a disputing investor claims that the disputing Member State has breached Article 14 (Expropriation and Compensation) by the adoption or enforcement of a taxation measure, the disputing Member State and the non-disputing Member State shall, upon request from the disputing Member State, hold consultations with a view to determining whether the taxation measure in question has an effect equivalent to expropriation or nationalisation. 8. Any tribunal that may be established under this Section shall accord serious consideration to the decision of both Member States under paragraphs 6 and 7. 9. If both Member States fail either to initiate such consultations referred to paragraphs 6 and 7, or to make such joint decisions, within the period of 180 days from the date of the receipt of request for consultation referred to in Article 31 (Consultations), the disputing investor shall not be prevented from submitting its claim to arbitration in accordance with this Section. Article 37 – Consolidation Where two or more claims have been submitted separately to arbitration under Article 32 (Claim by an Investor of a Member State) and the claims have a question of law or fact in common and arise out of the same or similar events or circumstances, all concerned disputing parties may agree to consolidate those claims in any manner they deem appropriate. Article 38 – Expert Reports Without prejudice to the appointment of other kinds of experts where authorised by the applicable arbitration rules, the tribunal, at the request of the disputing parties, may appoint one or more experts to report to it in writing on any factual issue concerning environmental, public health, safety or other scientific matters raised by a disputing party in a proceeding, subject to such terms and conditions as the disputing parties may agree. Article 39 – Transparency of Arbitral Proceedings 1. Subject to paragraphs 2 and 3, the disputing Member State may make publicly available all awards, and decisions produced by the tribunal. 2. Any of the disputing parties that intend to use information designated as confidential

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information in a hearing shall so advise the tribunal. The tribunal shall make appropriate arrangements to protect the information from disclosure. 3. Any information specifically designated as confidential that is submitted to the tribunal or the disputing parties shall be protected from disclosure to the public. 4. A disputing party may disclose to persons directly connected with the arbitral proceedings such confidential information as it considers necessary for the preparation of its case, but it shall require that such confidential information is protected. 5. The tribunal shall not require a Member State to furnish or allow access to information the disclosure of which would impede law enforcement or would be contrary to the Member State's law protecting Cabinet confidences, personal privacy or the financial affairs and accounts of individual customers of financial institutions, or which it determines to be contrary to its essential security. 6. The non-disputing Member State shall be entitled, at its cost, to receive from the disputing Member State a copy of the notice of arbitration, no later than 30 days after the date that such document has been delivered to the disputing Member State. Th disputing Member State shall notify all other Member States of the receipt of the notice of arbitration within 30 days thereof. Article 40 – Governing Law 1. Subject to paragraphs 2 and 3, when a claim is submitted under Article 33 (Submission of a Claim), the tribunal shall decide the issues in dispute in accordance with this Agreement, any other applicable agreements between the Member States, and the applicable rules of international law and where applicable, any relevant domestic law of the disputing Member State. 2. The tribunal shall, on its own account or at the request of a disputing party, request a joint interpretation of any provision of this Agreement that is in issue in a dispute. The Member States shall submit in writing any joint decision declaring their interpretation to the tribunal within 60 days of the delivery of the request. Without prejudice to paragraph 3, if the Member States fail to issue such a decision within 60 days, any interpretation submitted by a Member State shall be forwarded to the disputing parties and the tribunal, which shall decide the issue on its own account. 3. A joint decision of the Member States, declaring their interpretation of a provision of this Agreement shall be binding on a tribunal, and any decision or award issued by a tribunal must be consistent with that joint decision. Article 41 – Awards 1. The disputing parties may agree on a resolution of the dispute at any time before the tribunal issues its final award. 2. Where a tribunal makes a final award against either of the disputing parties, the tribunal may award, separately or in combination, only: (a) (b)

monetary damages and any applicable interest; and restitution of property, in which case the award shall provide that the disputing Member State may pay monetary damages and any applicable interest in lieu of restitution.

3. A tribunal may also award costs and attorney's fees in accordance with this Agreement and the applicable arbitration rules. 4. A tribunal may not award punitive damages. 5. An award made by a tribunal shall have no binding force except between the disputing parties and in respect of the particular case. 6. Subject to paragraph 7 and the applicable review procedure for an interim award, the disputing party shall abide by and comply with an award without delay. (63) 7. The disputing party may not seek enforcement of a final award until: (a)

in the case of a final award under the ICSID Convention: (i)

(b)

120 days has elapsed from the date the award was rendered and no disputing party has requested revision or annulment of the award; or (ii) revision or annulment proceedings have been completed; in the case of a final award under the ICSID Additional Facility Rules, the UNCITRAL Arbitration Rules, or the rules selected pursuant to Article 33(1)(e): (i) (ii)

90 days have elapsed from the date the award was rendered and no disputing party has commenced a proceeding to revise, set aside, or annul the award; or a court has dismissed or allowed an application to revise, set aside, or annul the award and there is no further appeal.

8. A claim that is submitted for arbitration under this Section shall be considered to arise out of a commercial relationship or transaction for purposes of Article 1 of the New York

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Convention. 9. Each Member State shall provide for the enforcement of an award in its territory. *** ANNEX 1 – Approval in Writing Where specific approval in writing is required for covered investments by a Member State's domestic laws, regulations and national policies, that Member State shall: (a) (b) (c) (d)

inform all the other Member States through the ASEAN Secretariat of the contact details of its competent authority responsible for granting such approval; in the case of an incomplete application, identify and notify the applicant in writing within 1 month from the date of receipt of such application of all the additional information that is required; inform the applicant in writing that the investment has been specifically approved or denied within 4 months from the date of receipt of complete application by the competent authority; and in the case an application is denied, inform the applicant in writing of the reasons for such denial. The applicant shall have the opportunity of submitting, at that applicant's discretion, a new application.

ANNEX 2 – Expropriation and Compensation 1. An action or a series of related actions by a Member State cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in a covered investment. 2. Article 14(1) addresses two situations: (a) (b)

the first situation is where an investment is nationalised or otherwise directly expropriated through formal transfer of title or outright seizure; and the second situation is where an action or series of related actions by a Member State has an effect equivalent to direct expropriation without formal transfer of title or outright seizure.

3. The determination of whether an action or series of actions by a Member State, in a specific fact situation, constitutes an expropriation of the type referred to in subparagraph 2(b), requires a case-by-case, fact-based inquiry that considers, among other factors: (a)

(b) (c)

the economic impact of the government action, although the fact that an action or series of actions by a Member State has an adverse effect on the economic value of an investment, standing alone, does not establish that such an expropriation has occurred; whether the government action breaches the government's prior binding written commitment to the investor whether by contract, licence or other legal document; and the character of the government action, including, its objective and whether the action is disproportionate to the public purpose referred to in Article 14(1).

4. Non-discriminatory measures of a Member State that are designed and applied to protect legitimate public welfare objectives, such as public health, safety and the environment, do not constitute an expropriation of the type referred to in sub-paragraph 2(b). [5] 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 (2012) (64) The Government of Japan, the Government of the Republic of Korea and the Government of the People's Republic of China, Desiring to further promote investment in order to strengthen the economic relationship among Japan, the Republic of Korea and the People's Republic of China (hereinafter referred to in this Agreement as “the Contracting Parties”); Intending to create stable, favorable and transparent conditions for investment by investors of one Contracting Party in the territory of the other Contracting Parties; 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; Recognizing that these objectives can be achieved without relaxing health, safety and environmental measures of general application; Recognizing the importance of investors' complying with the laws and regulations of a Contracting Party in the territory of which the investors are engaged in investment activities, which contribute to the economic, social and environmental progress; and

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Bearing in mind their respective rights and obligations under the WTO Agreement and other multilateral instruments of cooperation; Have agreed as follows: Article 1 – Definitions For the purposes of this Agreement: (1)

the term “investments” means every kind of asset that an investor owns or controls, directly or indirectly, which has the characteristics of an investment, such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that investments may take include: (a) (b)

an enterprise and a branch of an enterprise; shares, stocks or other forms of equity participation in an enterprise, including rights derived therefrom; (c) bonds, debentures, loans and other forms of debt, including rights derived therefrom; (d) rights under contracts, including turnkey, construction, management, production or revenue sharing contracts; (e) claims to money and claims to any performance under contract having a financial value associated with investment; (f) intellectual property rights, including copyrights and related rights, patent rights and rights relating to utility models, trademarks, industrial designs, layout-designs of integrated circuits, new varieties of plants, trade names, indications of source or geographical indications and undisclosed information; (g) rights conferred pursuant to laws and regulations or contracts such as concessions, licenses, authorizations and permits; and (h) any other tangible and intangible, movable and immovable property, and any related property rights, such as leases, mortgages, liens and pledges; Note: Investments also include the amounts yielded by investments, in particular, profit, interest, capital gains, dividends, royalties and fees. A change in the form in which assets are invested does not affect their character as investments. (2) the term “investor of a Contracting Party” means a natural person or an enterprise of a Contracting Party that makes investments in the territory of another Contracting Party; (3) the term “natural person of a Contracting Party” means a natural person that has the nationality of that Contracting Party in accordance with its applicable laws and regulations; (4) the term “enterprise of a Contracting Party” means any legal person or any other entity constituted or organized under the applicable laws and regulations of that Contracting Party, whether or not for profit, and whether private-or governmentowned or controlled, and includes a company, corporation, trust, partnership, sole proprietorship, joint venture, association or organization; Note: For greater certainty, a branch of an enterprise is not, in and by itself, deemed to be an enterprise. (5) the term “investment activities” means management, conduct, operation, maintenance, use, enjoyment and sale or other disposition of investments; (6) the term “freely usable currencies” means freely usable currencies as defined under the Articles of Agreement of the International Monetary Fund; (7) the term “ICSID Convention” means the Convention on the Settlement of Investment Disputes between States and Nationals of Other States, done at Washington, March 18, 1965; (8) the term “UNCITRAL Arbitration Rules” means the arbitration rules of the United Nations Commission on International Trade Law; (9) the term “WTO Agreement” means the Marrakesh Agreement Establishing the World Trade Organization, done at Marrakesh, April 15, 1994; (10) the term “ICSID Additional Facility Rules” means the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes. Article 2 – Promotion and Protection of Investments 1. Each Contracting Party shall encourage and create favorable conditions for investors of the other Contracting Parties to make investments in its territory. 2. Each Contracting Party shall, subject to its rights to exercise powers in accordance with the applicable laws and regulations, including those with regard to foreign ownership and control, admit investment of investors of another Contracting Party. Article 3 – National Treatment 1. Each Contracting Party shall in its territory accord to investors of another Contracting

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Party and to their investments treatment no less favorable than that it accords in like circumstances to its own investors and their investments with respect to investment activities. 2. Paragraph 1 shall not apply to non-conforming measures, if any, existing at the date of entry into force of this Agreement maintained by each Contracting Party under its laws and regulations or any amendment or modification to such measures, provided that the amendment or modification does not decrease the conformity of the measure as it existed immediately before the amendment or modification. Treatment granted to investment once admitted shall in no case be less favorable than that granted at the time when the original investment was made. 3. Each Contracting Party shall take, where applicable, all appropriate steps to progressively remove all the nonconforming measures referred to in paragraph 2. Note: The People's Republic of China confirms that its measures referred to in paragraph 2 shall not be inconsistent with paragraph 2 of Article 3 of, and paragraph 3 of the Protocol to, the Agreement between Japan and the People's Republic of China Concerning the Encouragement and Reciprocal Protection of Investment, signed at Beijing, August 27, 1988. Article 4 – Most-Favored-Nation Treatment 1. Each Contracting Party shall in its territory accord to investors of another Contracting Party and to their investments treatment no less favorable than that it accords in like circumstances to investors of the third Contracting Party or of a non-Contracting Party and to their investments with respect to investment activities and the matters relating to the admission of investment in accordance with paragraph 2 of Article 2. 2. Paragraph 1 shall not be construed so as to oblige a Contracting Party to extend to investors of another Contracting Party and to their investments any preferential treatment resulting from its membership of: (a) (b) (c)

any customs union, free trade area, monetary union, similar international agreement leading to such union or free trade area, or other forms of regional economic cooperation; any international agreement or arrangement for facilitating small scale trade in border areas; or any bilateral and multilateral international agreements involving aviation, fishery and maritime matters including salvage.

3. It is understood that the treatment accorded to investors of the third Contracting Party or any non-Contracting Party and to their investments as referred to in paragraph 1 does not include treatment accorded to investors of the third Contracting Party or any nonContracting Party and to their investments by provisions concerning the settlement of investment disputes between a Contracting Party and investors of the third Contracting Party or between a Contracting Party and investors of any non-Contracting Party that are provided for in other international agreements. Note: For the purposes of this Article, the term “non-Contracting Parties” shall not include any separate customs territory within the meaning of the General Agreement on Tariffs and Trade or of the WTO Agreement that is a member of the World Trade Organization as of the date of entry into force of this Agreement. Article 5 – General Treatment of Investments 1. Each Contracting Party shall accord to investments of investors of another Contracting Party fair and equitable treatment and full protection and security. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond any reasonable and appropriate standard of treatment accorded in accordance with generally accepted rules of international law. A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not ipso facto establish that there has been a breach of this paragraph. 2. Each Contracting Party shall observe any written commitments in the form of an agreement or contract it may have entered into with regard to investments of investors of another Contracting Party. Article 6 – Access to the Courts of Justice Each Contracting Party shall in its territory accord to investors of another Contracting Party treatment no less favorable than that it accords in like circumstances to its own investors, investors of the third Contracting Party or of a non-Contracting Party, with respect to access to the courts of justice and administrative tribunals and agencies in all degrees of jurisdiction, both in pursuit and in defense of such investors' rights. Article 7 – Prohibition of Performance Requirements 1. The provisions of the Agreement on Trade-Related Investment Measures in Annex 1A to the WTO Agreement are incorporated into and made part of this Agreement, mutatis

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mutandis and shall apply with respect to all investments under this Agreement. 2. No Contracting Party shall, in its territory, impose unreasonable or discriminatory measures on investment by investors of another Contracting Party concerning performance requirements on export or transfer of technology. Article 8 – Entry of Personnel Each Contracting Party shall endeavor, to the extent possible, in accordance with its applicable laws and regulations, to facilitate the procedures for the entry, sojourn and residence of natural persons of another Contracting Party who wish to enter the territory of the former Contracting Party and to remain therein for the purpose of conducting business activities in connection with investments. Article 9 – Intellectual Property Rights 1. (a) (b)

Each Contracting Party shall, in accordance with its laws and regulations, protect intellectual property rights. Each Contracting Party shall establish and maintain transparent intellectual property rights regimes, and will, under the existing consultation mechanism on intellectual property, promote cooperation and communications among the Contracting Parties in the intellectual property field.

2. Nothing in this Agreement shall be construed so as to derogate from the rights and obligations under international agreements in respect of protection of intellectual property rights to which two or more Contracting Parties are parties. 3. Nothing in this Agreement shall be construed so as to oblige a Contracting Party to extend to investors of another Contracting Party and their investments treatment accorded to investors of the third Contracting Party or of a non-Contracting Party and their investments by virtue of international agreements in respect of protection of intellectual property rights, to which, respectively, the first-mentioned Contracting Party and the third Contracting Party and the first-mentioned Contracting Party and the nonContracting Party are parties. Article 10 – Transparency 1. Each Contracting Party shall promptly publish, or otherwise make publicly available, its laws, regulations, administrative procedures and administrative rulings and judicial decisions of general application as well as international agreements to which the Contracting Party is a party and which pertain to or affect investment activities. The Government of each Contracting Party shall make easily available to the public, the names and addresses of the competent authorities responsible for such laws, regulations, administrative procedures and administrative rulings. 2. When a Contracting Party introduces or changes its laws or regulations that significantly affect the implementation and operation of this Agreement, the Contracting Party shall endeavor to provide a reasonable interval between the time when such laws or regulations are published or made publicly available and the time when they enter into force, except for those laws or regulations involving national security, foreign exchange rates or monetary policies and other laws or regulations the publication of which would impede law enforcement. 3. Each Contracting Party shall, upon the request by another Contracting Party, within a reasonable period of time and through existing bilateral channels, respond to specific questions from, and provide information to, the latter Contracting Party with respect to any actual or proposed measure of the former Contracting Party, which might materially affect the interests of the latter Contracting Party and its investors under this Agreement. 4. Each Contracting Party shall, in accordance with its laws and regulations: (a) (b)

make public in advance regulations of general application that affect any matter covered by this Agreement; and provide a reasonable opportunity for comments by the public for those regulations related to investment and give consideration to those comments before adoption of such regulations.

5. The provisions of this Article shall not be construed so as to oblige any Contracting Party to disclose confidential information, the disclosure of which: (a) (b) (c)

would impede law enforcement; would be contrary to the public interest; or could prejudice privacy or legitimate commercial interests.

Article 11 – Expropriation and Compensation 1. No Contracting Party shall expropriate or nationalize investments in its territory of investors of another Contracting Party or take any measure equivalent to expropriation or nationalization (hereinafter referred to in this Agreement as “expropriation”) except:

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(a) (b) (c) (d)

for a public purpose; on a non-discriminatory basis; in accordance with its laws and international standard of due process of law; and upon compensation pursuant to paragraphs 2, 3 and 4.

2. The compensation shall be equivalent to the fair market value of the expropriated investments at the time when the expropriation was publicly announced or when the expropriation occurred, whichever is the earlier. The fair market value shall not reflect any change in market value occurring because the expropriation had become publicly known earlier. 3. The compensation shall be paid without delay and shall include interest at a commercially reasonable rate, taking into account the length of time from the time of expropriation to the time of payment. It shall be effectively realizable and freely transferable and shall be freely convertible, at the market exchange rate prevailing on the date of expropriation, into the currency of the Contracting Party of the investors concerned, and into freely usable currencies. 4. Without prejudice to the provisions of Article 15, the investors affected by expropriation shall have a right of access to the courts of justice or the administrative tribunals or agencies of the Contracting Party making the expropriation to seek a prompt review of the investors' case and the amount of compensation in accordance with the principles set out in this Article. Article 12 – Compensation for Losses or Damages 1. Each Contracting Party shall accord to investors of another Contracting Party that have suffered loss or damage relating to their investments in the territory of the former Contracting Party due to armed conflict or a state of emergency such as revolution, insurrection, civil disturbance or any other similar event in the territory of that former Contracting Party, treatment, as regards restitution, indemnification, compensation or any other settlement, that is no less favorable than that it accords to its own investors, to investors of the third Contracting Party or to investors of a non-Contracting Party, whichever is more favorable to the investors of another Contracting Party. 2. Any payments as a means of settlement referred to in paragraph 1 shall be effectively realizable, freely transferable and freely convertible at the market exchange rate into the currency of the Contracting Party of the investors concerned and into freely usable currencies. Article 13 – Transfers 1. Each Contracting Party shall ensure that all transfers relating to investments in its territory of an investor of another Contracting Party may be made freely into and out of its territory without delay. Such transfers shall include, in particular, though not exclusively: (a) (b) (c) (d) (e) (f) (g)

the initial capital and additional amounts to maintain or increase investments; profits, capital gains, dividends, royalties, interests, fees and other current account incomes accruing from investments; proceeds from the total or partial sale or liquidation of investments; payments made under a contract including loan payments in connection with investments; earnings and remuneration of personnel from the latter Contracting Party who work in connection with investments in the territory of the former Contracting Party; payments made in accordance with Articles 11 and12; and payments arising out of the settlement of a dispute under Article 15.

2. Each Contracting Party shall further ensure that such transfers may be made in freely usable currencies at the market exchange rate prevailing on the date of each transfer. 3. Notwithstanding paragraphs 1 and 2, a Contracting Party may delay or prevent such transfers through the equitable, non-discriminatory and good faith application of its laws relating to: (a) (b) (c) (d) (e)

bankruptcy, insolvency or the protection of the rights of creditors; issuing, trading or dealing in securities, futures, options or other derivatives; criminal or penal offenses; ensuring compliance with orders or judgments in adjudicatory proceedings; or reports of transfers of currency or other monetary instruments.

4. The transfers referred to in this Article shall comply with relevant formalities stipulated by the laws and regulations, if any, of each Contracting Party relating to exchange administration which are in force at the time of investment by investors of another Contracting Party. These formalities include, but are not limited to those related to: (a)

overseas investment;

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(b) (c) (d)

liquidation, transfer of ownership and registered capital reduction, including those related to reinvestment of funds derived therefrom; the repayment of principal and interest of registered external debts (including loans from foreign investors); or external guarantee provided by domestic guarantors.

5. The period required for the completion of the formalities referred to in paragraph 4 shall commence on the day on which a written request for each transfer with necessary documentation is submitted by the investor referred to in paragraph 1 to the foreign exchange authorities of the Contracting Party in the territory of which the investor's investments exist. The necessary authorizations should be granted in a period of approximately one month, which shall not exceed two months, from the submission of the request. Such formalities shall not be used as a means of avoiding the obligations of the Contracting Party under this Agreement. Article 14 – Subrogation 1. If a Contracting Party or its designated agency makes a payment to any of its investors pursuant to an indemnity, guarantee or insurance contract, pertaining to investments of that investor in the territory of another Contracting Party, the latter Contracting Party shall: (a) (b)

recognize the assignment, to the former Contracting Party or its designated agency, of any right or claim of the investor that formed the basis of such payment; and recognize the right of the former Contracting Party or its designated agency to exercise by virtue of subrogation such right or claim to the same extent as the original right or claim of the investor.

2. If a Contracting Party or its designated agency has made a payment to its investors and thereby entered into the rights of the investor, the investor may not make a claim based on these rights against another Contracting Party without the consent of the former Contracting Party or its designated agency making the payment. For greater certainty, the investor shall continue to be entitled to exercise its rights that have not been subrogated pursuant to paragraph 1. 3. Articles 11, 12 and 13 shall apply mutatis mutandis as regards payment to be made to the Contracting Party or its designated agency referred to in paragraph 1 by virtue of such assignment of right or claim, and the transfer of such payment. Article 15 – Settlement of Investment Disputes between a Contracting Party and an Investor of Another Contracting Party 1. For the purposes of this Article, an investment dispute is a dispute between a Contracting Party and an investor of another Contracting Party that has incurred loss or damage by reason of, or arising out of, an alleged breach of any obligation of the former Contracting Party under this Agreement with respect to the investor or its investments in the territory of the former Contracting Party. 2. Any investment dispute shall, as far as possible, be settled amicably through consultation between the investor who is a party to the investment dispute (hereinafter referred to in this Article as “disputing investor”) and the Contracting Party that is a party to the investment dispute (hereinafter referred to in this Article as “disputing Contracting Party”). A written request for consultation shall be submitted to the disputing Contracting Party by the disputing investor before the submission of the investment dispute to the arbitration set out in paragraph 3. Such a written request shall specify: (a) (b) (c) (d)

the name and address of the disputing investor; the obligations under this Agreement alleged to have been breached; a brief summary of the facts of the investment dispute; and the relief sought and the approximate amount of damages. Note: The written consultation request shall be delivered to the following competent authorities of the disputing Contracting Party: (a) (b) (c)

in the case of the People's Republic of China, the Treaty and Law Department, Ministry of Commerce; in the case of Japan, the Ministry of Foreign Affairs or the entity in lieu of or replacing the aforementioned; and in the case of the Republic of Korea, International Legal Affairs Division, Ministry of Justice.

3. The investment dispute shall at the request of the disputing investor be submitted to either: (a) (b) (c)

a competent court of the disputing Contracting Party; arbitration in accordance with the ICSID Convention, if the ICSID Convention is available; arbitration under the ICSID Additional Facility Rules, if the ICSID Additional Facility

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(d) (e)

Rules are available; arbitration under the UNCITRAL Arbitration Rules; or if agreed with the disputing Contracting Party, any arbitration in accordance with other arbitration rules, provided that, for the purposes of subparagraphs (b) through (e): (i)

the investment dispute cannot be settled through the consultation referred to in paragraph 2 within four months from the date of the submission of the written request for consultation to the disputing Contracting Party; and (ii) the requirement concerning the domestic administrative review procedure set out in paragraph 7, where applicable, is met. Note: For the purposes of subparagraph (a), this paragraph shall not be construed to prevent, where applicable, preliminary trial by administrative tribunals or agencies. 4. Each Contracting Party hereby gives its consent to the submission of an investment dispute by a disputing investor to the arbitration set out in paragraph 3 in accordance with the provisions of this Article. 5. Once the disputing investor has submitted an investment dispute to the competent court of the disputing Contracting Party or to one of the arbitrations set out in paragraph 3, the choice of the disputing investor shall be final and the disputing investor may not submit thereafter the same dispute to the other arbitrations set out in paragraph 3. 6. Notwithstanding paragraphs 3 and 4, no claim may be submitted to the arbitration set out in paragraph 3 unless the disputing investor gives the disputing Contracting Party written waiver of any right to initiate before any competent court of the disputing Contracting Party with respect to any measure of the disputing Contracting Party alleged to constitute a breach referred to in paragraph 1. 7. When the disputing investor submits a written request for consultation to the disputing Contracting Party under paragraph 2, the disputing Contracting Party may require, without delay, the investor concerned to go through the domestic administrative review procedure specified by the laws and regulations of that Contracting Party before the submission to the arbitration set out in paragraph 3. The domestic administrative review procedure shall not exceed four months from the date on which an application for the review is filed. If the procedure is not completed by the end of the four months, it shall be deemed to be completed and the disputing investor may submit the investment dispute to the arbitration set out in paragraph 3. The investor may file an application for the review unless the four months consultation period as provided in paragraph 3 has elapsed. Note: It is understood that any decision made under the domestic administrative review procedure shall not prevent the disputing investor from submitting the investment dispute to the arbitration set out in paragraph 3. 8. The applicable arbitration rules shall govern the arbitration set out in paragraph 3 except to the extent modified in this Article. 9. The award rendered by an arbitral tribunal established under paragraph 3 (hereinafter referred to in this Article as the “Tribunal”) shall include: (a) (b)

a finding whether or not there has been a breach by the disputing Contracting Party of any obligation under this Agreement with respect to the disputing investor and its investments; and one or both of the following remedies, only if the disputing investor's loss or damage is attributed to such breach: (i) (ii)

monetary damages and applicable interest; and restitution of property, in which case the award shall provide that the disputing Contracting Party may pay monetary damages and any applicable interest, in lieu of restitution.

10. The award which is rendered by the Tribunal shall be final and binding upon both parties to the investment dispute. This award shall be executed in accordance with the applicable laws and regulations concerning the execution of award in force, in the country in whose territory such execution is sought. 11. Notwithstanding paragraph 3, no claim may be submitted to the arbitration set out in that paragraph, if more than three years have elapsed from the date on which the disputing investor first acquired, or should have first acquired, whichever is the earlier, the knowledge that the disputing investor had incurred the loss or damage referred to in paragraph 1. 12. Paragraph 3 (except subparagraph (a)) and paragraph 4 shall not apply to any investment dispute with respect to: (a) (b)

the obligations of a Contracting Party under subparagraph 1(b) of Article 9; and the measures of a Contracting Party that fall within the scope of Article 20.

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Article 16 – Special Formalities and Information Requirements 1. Nothing in Article 3 shall be construed to prevent a Contracting Party from adopting or maintaining a measure that prescribes special formalities in connection with investment activities by investors of another Contracting Party in its territory, such as the requirement that investments be legally constituted under the laws or regulations of the former Contracting Party, provided that such formalities are consistent with this Agreement and do not materially impair the protections afforded by the former Contracting Party to investors of the latter Contracting Party and their investments pursuant to this Agreement. 2. Notwithstanding Articles 3 and 4, a Contracting Party may require an investor of another Contracting Party, in its territory, to provide information concerning its investments solely for informational or statistical purposes. The former Contracting Party shall protect such information that is confidential from any disclosure that would prejudice the competitive position of the investor of the latter Contracting Party or its investments. Nothing in this paragraph shall be construed so as to prevent a Contracting Party from otherwise obtaining or disclosing information in connection with the equitable and good faith application of its law. Article 17 – Settlement of Disputes among Contracting Parties 1. Any Contracting Party may request in writing consultations with another Contracting Party to resolve any dispute relating to the interpretation or application of this Agreement. The former Contracting Party (hereinafter referred to in this Article as “the complaining Party”) shall at the time of the request deliver to the third Contracting Party a copy of that request. Where the third Contracting Party considers that it has a substantial interest in the dispute, it shall be entitled to participate in such consultations. 2. (a)

(b) (c) (d)

Where the consultations referred to in paragraph 1 do not satisfactorily resolve the dispute within six months after the date of receipt of the request referred to in that paragraph, the complaining Party or the Contracting Party to which such request was addressed (hereinafter collectively referred to in this Article as “the disputing Parties”) may, upon written request to the other disputing Party, submit the dispute to an arbitral tribunal. The disputing Party that submits the dispute to an arbitral tribunal under subparagraph shall deliver to the third Contracting Party a copy of the request for arbitration under that subparagraph. The third Contracting Party may make submissions to the arbitral tribunal referred to in subparagraph (a) on a question of the interpretation of this Agreement, upon written notice to the disputing Parties. Where the third Contracting Party considers that it has a substantial interest in the dispute, it shall be entitled to participate in the arbitration proceedings by joining either of the disputing Parties on delivery of a written notice of its intention to participate to the disputing Parties and to the arbitral tribunal referred to in subparagraph (a). Such written notice shall be delivered to the disputing Parties at the earliest possible time and in any event no later than seven days after the date of delivery of the copy of the request under subparagraph (b).

3. Unless otherwise provided for in this Article, or in the absence of an agreement by the disputing Parties to the contrary, the UNCITRAL Arbitration Rules shall apply mutatis mutandis to the proceedings of the arbitral tribunal. However, these rules may be modified by the disputing Parties or modified by the arbitrators appointed pursuant to paragraph 4, provided that none of the disputing Parties objects to the modification. The arbitral tribunal may, for its part, determine its own rules and procedures. 4. Within sixty days from the date of receipt of the request under subparagraph 2(a), each disputing Party shall appoint an arbitrator. The two arbitrators shall, in consultation with the disputing Parties, select a third arbitrator as the chairperson, who shall be a national of a non- Contracting Party. The UNCITRAL Arbitration Rules applicable to appointing members of three-member panels shall apply mutatis mutandis to other matters relating to the appointment of the arbitrators of the arbitral tribunal provided that the appointing authority referenced in those rules shall be the President of the International Court of Justice. If the President is a national of any Contracting Party or otherwise prevented from discharging the said function, the Vice-President shall be invited to make the appointment. If the Vice-President also is a national of any Contracting Party or otherwise prevented from discharging the said function, the member of the International Court of Justice next in seniority who is not a national of any Contracting Party shall be invited to make the appointment. 5. Unless otherwise agreed by the disputing Parties, all submissions of documents shall be made and all hearings shall be completed within a period of one hundred and eighty days from the date of selection of the third arbitrator. The arbitral tribunal shall render its award, in accordance with the provisions of this Agreement and the rules of international law applicable to the disputing Parties, within sixty days from the date of

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the final submissions of documents or the date of the closing of the hearings, whichever is the later. Such award shall be final and binding upon the disputing Parties. 6. The third Contracting Party that is not participating in the arbitration proceedings in accordance with subparagraph 2(d) shall, on delivery of a written notice to the disputing Parties and to the arbitral tribunal, be entitled to attend all hearings, to make written and oral submissions to the arbitral tribunal and to receive a copy of the written submissions of the disputing Parties to the arbitral tribunal. 7. Unless otherwise agreed by the disputing Parties, expenses incurred by the chairperson and other arbitrators, and other costs of the proceedings, shall be borne equally by the disputing Parties. Article 18 – Security Exceptions 1. Notwithstanding any other provisions in this Agreement other than the provisions of Article 12, each Contracting Party may take any measure: (a)

which it considers necessary for the protection of its essential security interests; (i)

(b)

taken in time of war, or armed conflict, or other emergency in that Contracting Party or in international relations; or (ii) relating to the implementation of national policies or international agreements respecting the non-proliferation of weapons; in pursuance of its obligations under the United Nations Charter for the maintenance of international peace and security.

2. In cases where a Contracting Party takes any measure, pursuant to paragraph 1, that does not conform with the obligations of the provisions of this Agreement other than the provisions of Article 12, that Contracting Party shall not use such measure as a means of avoiding its obligations. Article 19 – Temporary Safeguard Measures 1. A Contracting Party may adopt or maintain measures not conforming with its obligations under Article 3 relating to cross-border capital transactions and Article 13: (a) (b)

in the event of serious balance-of-payments and external financial difficulties or threat thereof; or in cases where, in exceptional circumstances, movements of capital cause or threaten to cause serious difficulties for macroeconomic management, in particular, monetary and exchange rate policies.

2. The measures referred to in paragraph 1: (a) (b) (c) (d) (e) (f)

shall be consistent with the Articles of Agreement of the International Monetary Fund, so long as the Contracting Party taking the measures is a party to the said Articles; shall not exceed those necessary to deal with the circumstances set out in paragraph 1; shall be temporary and eliminated as soon as conditions permit; shall be promptly notified to the other Contracting Parties in an appropriate manner; shall ensure that any of the other Contracting Parties is treated as favorably as the third Contracting Party and any non-Contracting Party; and shall be adopted or maintained endeavoring to avoid unnecessary damage to the commercial, economic and financial interests of the other Contracting Parties.

3. Nothing in this Agreement shall be regarded as altering the rights enjoyed and obligations undertaken by a Contracting Party as a party to the Articles of Agreement of the International Monetary Fund. Article 20 – Prudential Measures 1. Notwithstanding any other provisions of this Agreement, a Contracting Party shall not be prevented from taking measures relating to financial services for prudential reasons, including measures for the protection of investors, depositors, policy holders or persons to whom a fiduciary duty is owed by an enterprise supplying financial services, or to ensure the integrity and stability of the financial system. 2. Where the measures referred to in paragraph 1 do not conform with the provisions of this Agreement, they shall not be used as a means of avoiding the Contracting Party's obligations under this Agreement. Article 21 – Taxation 1. Nothing in this Agreement shall apply to taxation measures except as expressly provided for in paragraphs 3, 4 and 5. 2. Nothing in this Agreement shall affect the rights and obligations of any Contracting Party under any tax convention. In the event of any inconsistency between this Agreement

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and any such convention, that convention shall prevail to the extent of the inconsistency. Note: In resolving issues relating to taxes, the competent authorities of each Contracting Party under the relevant tax convention shall determine whether or not such convention governs such issues. 3. Article 11 shall apply to taxation measures. 4. Article 15 shall apply to disputes under paragraph 3. 5. (a)

(b)

(c)

No investor may invoke Article 11 as the basis for the submission of an investment dispute to the arbitration set out in paragraph 3 of Article 15, where it has been determined pursuant to subparagraph (b) the taxation measure in question is not an expropriation. The disputing investor shall refer the issue, at the time of the submission of a written request for consultation to the disputing Contracting Party under paragraph 2 of Article 15, to the competent authorities of the Contracting Party of the disputing investor and the disputing Contracting Party to determine whether such measure is not an expropriation. If the competent authorities of both Contracting Parties do not consider the issue or, having considered it, fail to determine that the measure is not an expropriation within six months from the date on which the written request for consultation is submitted to the disputing Contracting Party under paragraph 2 of Article 15, the investor may submit its claim to the arbitration set out in paragraph 3 of Article 15. For the purposes of subparagraph (b), the term “competent authorities” means: (i)

in the case of the People's Republic of China, the Ministry of Finance and State Administration of Taxation or their authorized representatives; (ii) in the case of Japan, the Minister of Finance or his or her authorized representatives, who shall consider the issue in consultation with the Minister for Foreign Affairs or his or her authorized representatives; and (iii) in the case of the Republic of Korea, the Deputy Minister for Tax and Customs Office of the Ministry of Strategy and Finance or his or her authorized representatives. Article 22 – Denial of Benefits 1. A Contracting Party may deny the benefits of this Agreement to an investor of another Contracting Party that is an enterprise of the latter Contracting Party and to its investments if the enterprise is owned or controlled by an investor of a non-Contracting Party and the denying Contracting Party: (a) (b)

does not maintain normal economic relations with the non-Contracting Party; or adopts or maintains measures with respect to the non-Contracting Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Agreement were accorded to the enterprise or to its investments.

2. A Contracting Party may deny the benefits of this Agreement to an investor of another Contracting Party that is an enterprise of the latter Contracting Party and to its investments if the enterprise is owned or controlled by an investor of a non-Contracting Party or of the denying Contracting Party, and the enterprise has no substantial business activities in the territory of the latter Contracting Party. Note: For the purposes of this Article, the term “non-Contracting Parties” shall not include any separate customs territory within the meaning of the General Agreement on Tariffs and Trade or of the WTO Agreement that is a member of the World Trade Organization as of the date of entry into force of this Agreement. Article 23 – Environmental Measures Each Contracting Party recognizes that it is inappropriate to encourage investment by investors of another Contracting Party by relaxing its environmental measures. To this effect each Contracting Party should not waive or otherwise derogate from such environmental measures as an encouragement for the establishment, acquisition or expansion of investments in its territory. Article 24 – Joint Committee 1. The Contracting Parties shall establish a Joint Committee (hereinafter referred to in this Article as the “Committee”) with a view to accomplishing the objectives of this Agreement. The functions of the Committee shall be: (a) (b)

to discuss and review the implementation and operation of this Agreement; and to discuss other investment-related matters concerning this Agreement, including the scope of the existing non-conforming measures referred to in paragraphs 2 and 3 of Article 3.

2. The Committee may, as necessary, decide to make appropriate recommendations to

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the Contracting Parties for the more effective functioning or the attainment of the objectives of this Agreement. 3. The Committee shall be composed of representatives of the Governments of the Contracting Parties and may decide to invite representatives of relevant entities other than the Governments of the Contracting Parties with the necessary expertise relevant to the issues to be discussed. The Committee shall decide on the modalities of its operation as necessary. 4. Any decision of the Committee shall be made by consensus. 5. Unless otherwise decided by the Contracting Parties, the Committee shall convene once a year. Article 25 – Relation to Other Agreements Nothing in this Agreement shall affect the rights and obligations of a Contracting Party, including those relating to treatment accorded to investors of another Contracting Party, under any bilateral investment agreement between those two Contracting Parties existing on the date of entry into force of this Agreement, so long as such a bilateral agreement is in force. Note: It is confirmed that, when an issue arises between an investor of a Contracting Party and another Contracting Party, nothing in this Agreement shall be construed so as to prevent the investor from relying on the bilateral investment agreement between those two Contracting Parties which is considered by the investor to be more favorable than this Agreement. *** PROTOCOL At the time of signing the Agreement among the Government of Japan, Government of the Republic of Korea and the Government of the People's Republic of China for the Promotion, Facilitation and Protection of Investment (hereinafter referred to as “the Agreement”), the undersigned have agreed upon the following provisions which shall form an integral part of the Agreement: 1. Paragraph 1 of Article 4 of the Agreement shall not apply to matters related to the acquisition of land property. 2. (a)

The Contracting Parties confirm their shared understanding that paragraph 1 of Article 11 of the Agreement addresses the following two situations: (i)

(b)

the first situation is direct expropriation, where investments are nationalized or otherwise directly expropriated through formal transfer of title or outright seizure; and (ii) the second situation is indirect expropriation, where an action or a series of actions by a Contracting Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. The determination of whether an action or a series of actions by a Contracting Party, in a specific fact situation, constitutes an indirect expropriation requires a case-bycase, fact-based inquiry that considers, among other factors: (i)

(c)

the economic impact of the action or series of actions, although the fact that such action or series of actions has an adverse effect on the economic value of investments, standing alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which the action or series of actions interferes with distinct and reasonable expectations arising out of investments; and (iii) the character and objectives of the action r series of actions, including whether such action is proportionate to its objectives. Except in rare circumstances, such as when an action or a series of actions by a Contracting Party is extremely severe or disproportionate in light of its purpose, non-discriminatory regulatory actions adopted by the Contracting Party for the purpose of legitimate public welfare do not constitute indirect expropriation.

*** ANNEX III: Settlement of Disputes Any dispute arising between the States Parties as a result of the application of the Treaty shall be settled by means of direct negotiations. If no solution can be found, the States Parties shall refer the dispute to the Common Market Group which, after evaluating the situation, shall within a period of 60 days make the relevant recommendations to the Parties for settling the dispute. To that end, the Common Market Group may establish or convene panels of experts or groups of specialists in order to obtain the necessary technical advice.

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If the Common Market Group also fails to find a solution, the dispute shall be referred to the Council of the common market to adopt the relevant recommendations. Within 120 days of the entry into force of the Treaty, the Common Market Group shall propose to the Governments of States Parties a system for the settlement of disputes which shall apply during the transition period. Before 31 December 1994, the States Parties shall adopt a permanent disputes settlement system for the common market.

§2.05 STRUCTURE OF THE TREATIES AND OBLIGATIONS UNDERTAKEN BY STATES [A] Dispute Resolution The imperative to develop a jurisdictional clause in investment treaties as one of the ensemble of techniques to facilitate trade and investment is reflected in every modern international investment treaty. Consider the following comment:

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Trade and investment across state lines is on the rise, and parties from different jurisdictions who engage in such activity frequently seek the comparative neutrality of a non-state tribunal to resolve their differences. Parties to a transaction from different states may be reluctant to submit to the jurisdiction of the courts of the other. This reluctance may arise from lack of enthusiasm about operating in another language, or according to the procedures and, insofar as it infiltrates procedure, the substantive law of another state. In some circumstances, one party may fear that the courts of the other may have a preference for their own nationals, may share a dislike of a particular foreign nationality or may, in cases involving very large amounts of money, lean toward finding in favor of their national because of the consequences for their national economy and political system. Where one of the parties is a state or state agency, a non-state party may prefer arbitration to submitting a dispute to the courts of the other contracting party. Arbitration may thus serve to “equalize” the non-state entity by transferring the dispute to a setting which may be designed to minimize or ignore the sovereign character of one of the parties rather more than would a national court. W. Michael Reisman, W. Laurence Craig, William Park and Jan Paulsson, International Commercial Arbitration: Cases, Materials and Notes on the Resolution of International Business Disputes, lxxvii (1997). [1] Forums to Which Consent is Given A significant evolution has occurred since the earlier generation of FCN Treaties, in which the primary function of forum identification was to exclude national courts. Hence the forum selection was often in the most general terms and, before the rise of institutionalized private international arbitration, did not even mention a specific arbitration institution. In contrast, BITs provide a wide range of arbitral options, usually assigning the choice to the foreign investor. [2] Compañía de Aguas del Aconquija, S.A. and Compagnie Générale des Eaux v. Argentine Republic (ICSID Case No. ARB/97/3), Award of 21 November 2000 (65) [Francisco Rezek (pres.), Thomas Buergenthal, Peter D. Trooboff] (Citations selectively omitted) [This case arose from a 1995 Concession Contract that a French company, Compagnie Générale des Eaux, and its Argentine affiliate, Compania de Aguas del Aconquija, S.A. (collectively referred to as “Claimants” or “CGE”), made with Tucuman, a province of Argentina, and the investment in Tucuman resulting from that agreement. The Republic of Argentina was not a party to the Concession Contract or to the negotiations that led to its conclusion. Argentina and France are parties to a bilateral investment treaty (“BIT”) of July 1991 and also to the ICSID Convention, which entered into force for both states prior to signature of the Concession Contract by CGE and Tucuman … The Concession Contract made no reference to either the BIT or ICSID Convention or to the remedies available to a French foreign investor in Argentina under these treaties. Articles 3 and 5 of the BIT provide that each of the Contracting Parties shall grant “fair and equitable treatment according to the principles of international law to investments made by investors of the other Party,” that investments shall enjoy “protection and full security in accordance with the principle of fair and equitable treatment,” and that Contracting Parties shall not adopt expropriatory or nationalizing measures except for a public purpose, without discrimination and upon payment of “prompt and adequate compensation” … Article 8 of the Argentine-French BIT provides that, if an investment dispute arises between one Contracting Party and an investor from another Contracting Party and that dispute cannot be resolved within six months through amicable consultations, then the investor may submit the dispute either to the national jurisdictions of the Contracting Party involved in the dispute or, at the investor's option, to arbitration under the ICSID Convention or to an ad hoc tribunal pursuant to the

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Arbitration Rules of the United Nations Commission on International Trade Law … Article 16.4 of the Concession Contract between CGE and Tucuman provided for the resolution of contract disputes, concerning both its interpretation and application, to be submitted to the exclusive jurisdiction of the contentious administrative courts of Tucuman … The Tribunal found jurisdiction to hear CGE's claims against Argentina, but held that the evidence presented did not establish grounds for finding a violation by the Argentine Republic of its legal obligations under the BIT either through its own acts or P 202 omission or through attribution to it of acts of Tucuman.] 42. Claimants answer that, notwithstanding the terms of Article 16.4 of the Concession Contract, they are not obligated by the BIT to pursue a domestic judicial remedy prior to bringing a treaty claim against the Argentine Republic. Claimants argue that had if they had pursued any domestic legal remedy in the Argentine courts, whether against the Argentine Republic or the Province of Tucuman, they would have been held to have made the choice presented under Article 8 of the BIT and now be faced with the argument by the Respondent that Claimants had waived their right to seek arbitration under the ICSID Convention. (The parties referred to such a waiver as taking the “fork in the road” under Article 8 of the BIT.) *** 55. By this same analysis, a suit by Claimants against Tucuman in the administrative courts of Tucuman for violation of the terms of the Concession Contract would not have foreclosed Claimant from subsequently seeking a remedy against the Argentine Republic as provided in the BIT and ICSID Convention. That is, submission of claims against Tucuman to the contentious administrative tribunals of Tucuman for breaches of the contract, as Article 16.4 required, would not, contrary to Claimants' position, have been the kind of choice by Claimants of legal action in national jurisdictions (i.e., courts) against the Argentine Republic that constitutes the “fork in the road” under Article 8 of the BIT, thereby foreclosing future claims under the ICSID Convention. *** The Tribunal herewith dismisses the claims filed by the Claimants against the Republic of Argentina. [3] Compañía de Aguas del Aconquija, S.A. and Vivendi Universal (formerly Compagnie Générale des Eaux) v. Argentine Republic (ICSID Case No. ARB/97/3), Decision on Annulment of 3 July 2002 (66) [L. Yves Fortier, C.C., Q.C. (pres.), James R. Crawford, José Carlos Fernandez Rozas] [This extract is from the annulment proceeding before the ad hoc annulment committee.] (Citations selectively omitted) 36. The second point concerns the Tribunal's explanation of why, in its view, the so-called “fork in the road” provision of Article 8(2) of the BIT has no application to Claimants in the circumstances of this case. Article 8(2) provides in relevant part that, “once an investor has submitted the dispute to the courts of the Contracting Party concerned or to international arbitration, the choice of one or the other of those procedures is final.” In the Tribunal's view, recourse by Claimants to the contentious administrative courts of Tucuman would not have precluded them from subsequently bringing claims before an ICSID tribunal in accordance with the BIT, i.e., it would not have amounted to a final “choice of one or the other of those procedures” within Article 8(2). The Tribunal P 203 addressed this question twice, in paragraphs 55 and 81 of the Award. 37. In paragraph 55, the Tribunal announced this conclusion with the prefatory words “by this same analysis.” The analysis in question is found in paragraphs 53 and 54, where, after analysing the decision in the Lanco case, the Tribunal stated: 53. … In this case the claims filed by CGE against Respondent are based on violation by the Argentine Republic of the BIT … As formulated, these claims against the Argentine Republic are not subject to the jurisdiction of the contentious administrative tribunals of Tucuman, if only because, ex hypothesi, those claims are not based on the Concession Contract but allege a cause of action under the BIT. 54. Thus, Article 16.4 of the Concession Contract cannot be deemed to prevent the investor from proceeding under the ICSID Convention against the Argentine Republic on a claim charging the Argentine Republic with a violation of the Argentine-French BIT. 55. By this same analysis, a suit by Claimants against Tucuman in the administrative courts of Tucuman for violation of the terms of the Concession Contract would not have foreclosed Claimant from subsequently seeking a remedy against the Argentine Republic as provided in the BIT and ICSID Convention … 40 ILM 426 (2001), pp. 438-439 (emphasis added, footnote omitted). 38. As these passages show, the Tribunal interpreted Article 8(2) as applying only to claims of a breach of the BIT, and not to purely contractual or other claims within the

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jurisdiction of the administrative courts of Tucuman, even if those claims overlapped with the claims for breach of the BIT. In other words, in the view of the Tribunal, the fork in the road set out in Article 8(2) is limited in its application to claims which explicitly “allege a cause of action under the BIT” or which “[charge] the Argentine Republic with a violation of the Argentine-French BIT;” it does not apply in the circumstance of claims “based on the Concession Contract” or to “a suit by Claimants … for violation of the terms of the Concession Contract.” 39. That this is the correct interpretation of the Tribunal's ruling as to Article 8(2) is reinforced by the discussion contained in footnote 19, at paragraph 53 of the Award, where the Tribunal explicitly rejected Respondent's contention that the Tucuman courts would have had jurisdiction over “a claim against the Argentine Republic based on the BIT.” It gave two reasons: first, “the Argentine Republic could have engaged in conduct or failed to act in violation of its obligations under the BIT even if Tucuman were not in violation of the Concession Contract;” and second, “the Tucuman courts do not have jurisdiction over such a suit [against the Argentine Republic] absent consent by Respondent.” The underlying assumption is, again, that for a claim before the Tucuman courts to be covered by Article 8(2), it would have to be “based on the BIT.” 40. The Tribunal returned to the question in paragraph 81 of its Award: That is why the Tribunal rejects Claimants' position that they had no obligation to pursue such local remedies against the Province or that, in the event of a denial of justice of [sic] rights under the BIT, that any such legal action in the Tucuman courts would have waived their right to resort to arbitration against the Argentine Republic before ICSID under the BIT.

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41. The Tribunal's stated rationale for rejecting Claimants' position is “the impossibility, on the facts of the instant case, of separating potential breaches of contract claims from BIT violations without interpreting and applying the Concession Contract, a task that the contract assigns expressly to the local courts.” The Tribunal appears to have considered that, because Claimants' contract and treaty claims could not be separated, a distinct claim “based on the BIT” was impossible in the circumstances of the case, at least prior to submission of the dispute to the provincial courts. 42. Thus, it seems that the Tribunal's conclusion that the fork in the road was never reached in this case is based on an interpretation of Article 8(2) which limits its application exclusively to claims alleging a breach of the BIT, that is, to treaty claims as such. *** 113. In the light of Article 8 of the BIT, the situation carried risks for Claimants. Having declined to challenge the various factual components of its treaty cause of action before the administrative courts of Tucuman, instead choosing to commence ICSID arbitration – and having thereby, in the Committee's view, taken the “fork in the road” under Article 8(4) – CAA took the risk of a tribunal holding that the acts complained of neither individually nor collectively rose to the level of a breach of the BIT. In that event, it would have lost both its treaty claim and its contract claim. But on the other hand it was entitled to take that risk, with its associated burden of proof. A treaty cause of action is not the same as a contractual cause of action; it requires a clear showing of conduct which is in the circumstances contrary to the relevant treaty standard. The availability of local courts ready and able to resolve specific issues independently may be a relevant circumstance in determining whether there has been a breach of international law (especially in relation to a standard such as that contained in Article 3). But it is not dispositive, and it does not preclude an international tribunal from considering the merits of the dispute.

[B] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States [ICSID or Washington Convention] (1965), 575 U.N.T.S. 159 PREAMBLE The Contracting States Considering the need for international cooperation for economic development, and the role of private international investment therein; Bearing in mind the possibility that from time to time disputes may arise in connection with such investment between Contracting States and nationals of other Contracting States; Recognizing that while such disputes would usually be subject to national legal processes, international methods of settlement may be appropriate in certain cases; Attaching particular importance to the availability of facilities for international conciliation or arbitration to which Contracting States and nationals of other Contracting P 205 States may submit such disputes if they so desire; Desiring to establish such facilities under the auspices of the International Bank for

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Reconstruction and Development; Recognizing that mutual consent by the parties to submit such disputes to conciliation or to arbitration through such facilities constitutes a binding agreement which requires in particular that due consideration be given to any recommendation of conciliators, and that any arbitral award be complied with; and Declaring that no Contracting State shall by the mere fact of its ratification, acceptance or approval of this Convention and without its consent be deemed to be under any obligation to submit any particular dispute to conciliation or arbitration, Have agreed as follows: CHAPTER I – International Centre for Settlement of Investment Disputes Section 1 – Establishment and Organization Article 1 1. There is hereby established the International Centre for Settlement of Investment Disputes (hereinafter called the Centre). 2. The purpose of the Centre shall be to provide facilities for conciliation and arbitration of investment disputes between Contracting States and nationals of other Contracting States in accordance with the provisions of this Convention. Article 2 The seat of the Centre shall be at the principal office of the International Bank for Reconstruction and Development (hereinafter called the Bank). The seat may be moved to another place by decision of the Administrative Council adopted by a majority of twothirds of its members. Article 3 The Centre shall have an Administrative Council and a Secretariat and shall maintain a Panel of Conciliators and a Panel of Arbitrators. Section 2 – The Administrative Council Article 4 1. The Administrative Council shall be composed of one representative of each Contracting State. An alternate may act as representative in case of his principal's absence from a meeting or inability to act. (2) In the absence of a contrary designation, each governor and alternate governor of the Bank appointed by a Contracting State shall be ex officio its representative and its alternate respectively. Article 5 The President of the Bank shall be ex officio Chairman of the Administrative Council (hereinafter called the Chairman) but shall have no vote. During his absence or inability P 206 to act and during any vacancy in the office of President of the Bank, the person for the time being acting as President shall act as Chairman of the Administrative Council. Article 6 1. Without prejudice to the powers and functions vested in it by other provisions of this Convention, the Administrative Council shall: (a) (b) (c) (d) (e) (f) (g)

adopt the administrative and financial regulations of the Centre; adopt the rules of procedure for the institution of conciliation and arbitration proceedings; adopt the rules of procedure for conciliation and arbitration proceedings (hereinafter called the Conciliation Rules and the Arbitration Rules); approve arrangements with the Bank for the use of the Bank's administrative facilities and services; determine the conditions of service of the Secretary-General and of any Deputy Secretary-General; adopt the annual budget of revenues and expenditures of the Centre; approve the annual report on the operation of the Centre.

The decisions referred to in sub-paragraphs (a), (b), (c) and (f) above shall be adopted by a majority of two-thirds of the members of the Administrative Council. 2. The Administrative Council may appoint such committees as it considers necessary. 3. The Administrative Council shall also exercise such other powers and perform such other functions as it shall determine to be necessary for the implementation of the provisions of this Convention.

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Article 7 1. The Administrative Council shall hold an annual meeting and such other meetings as may be determined by the Council, or convened by the Chairman, or convened by the Secretary-General at the request of not less than five members of the Council. 2. Each member of the Administrative Council shall have one vote and, except as otherwise herein provided, all matters before the Council shall be decided by a majority of the votes cast. 3. A quorum for any meeting of the Administrative Council shall be a majority of its members. 4. The Administrative Council may establish, by a majority of two-thirds of its members, a procedure whereby the Chairman may seek a vote of the Council without convening a meeting of the Council. The vote shall be considered valid only if the majority of the members of the Council cast their votes within the time limit fixed by the said procedure. Article 8 Members of the Administrative Council and the Chairman shall serve without

P 207 remuneration from the Centre.

Section 3 – The Secretariat Article 9 The Secretariat shall consist of a Secretary-General, one or more Deputy SecretariesGeneral and staff. Article 10 1. The Secretary-General and any Deputy Secretary-General shall be elected by the Administrative Council by a majority of two-thirds of its members upon the nomination of the Chairman for a term of service not exceeding six years and shall be eligible for reelection. After consulting the members of the Administrative Council, the Chairman shall propose one or more candidates for each such office. 2. The offices of Secretary-General and Deputy Secretary-General shall be incompatible with the exercise of any political function. Neither the Secretary-General nor any Deputy Secretary-General may hold any other employment or engage in any other occupation except with the approval of the Administrative Council. 3. During the Secretary-General's absence or inability to act, and during any vacancy of the office of Secretary-General, the Deputy Secretary-General shall act as SecretaryGeneral. If there shall be more than one Deputy Secretary-General, the Administrative Council shall determine in advance the order in which they shall act as SecretaryGeneral. Article 11 The Secretary-General shall be the legal representative and the principal officer of the Centre and shall be responsible for its administration, including the appointment of staff, in accordance with the provisions of this Convention and the rules adopted by the Administrative Council. He shall perform the function of registrar and shall have the power to authenticate arbitral awards rendered pursuant to this Convention, and to certify copies thereof. Section 4 – The Panels Article 12 The Panel of Conciliators and the Panel of Arbitrators shall each consist of qualified persons, designated as hereinafter provided, who are willing to serve thereon. Article 13 1. Each Contracting State may designate to each Panel four persons who may but need not be its nationals. 2. The Chairman may designate ten persons to each Panel. The persons so designated to a Panel shall each have a different nationality. Article 14 1. Persons designated to serve on the Panels shall be persons of high moral character and recognized competence in the fields of law, commerce, industry or finance, who may be P 208 relied upon to exercise independent judgment. Competence in the field of law shall be of particular importance in the case of persons on the Panel of Arbitrators. 2. The Chairman, in designating persons to serve on the Panels, shall in addition pay due regard to the importance of assuring representation on the Panels of the principal legal systems of the world and of the main forms of economic activity.

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Article 15 1. Panel members shall serve for renewable periods of six years. 2. In case of death or resignation of a member of a Panel, the authority which designated the member shall have the right to designate another person to serve for the remainder of that member's term. 3. Panel members shall continue in office until their successors have been designated. Article 16 1. A person may serve on both Panels. 2. If a person shall have been designated to serve on the same Panel by more than one Contracting State, or by one or more Contracting States and the Chairman, he shall be deemed to have been designated by the authority which first designated him or, if one such authority is the State of which he is a national, by that State. 3. All designations shall be notified to the Secretary-General and shall take effect from the date on which the notification is received. *** CHAPTER II – Jurisdiction of the Centre Article 25 1. The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally. 2. “National of another Contracting State” means: (a)

(b) P 209

any natural person who had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered pursuant to paragraph (3) of Article 28 or paragraph (3) of Article 36, but does not include any person who on either date also had the nationality of the Contracting State party to the dispute; and any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration and any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention.

3. Consent by a constituent subdivision or agency of a Contracting State shall require the approval of that State unless that State notifies the Centre that no such approval is required. 4. Any Contracting State may, at the time of ratification, acceptance or approval of this Convention or at any time thereafter, notify the Centre of the class or classes of disputes which it would or would not consider submitting to the jurisdiction of the Centre. The Secretary- General shall forthwith transmit such notification to all Contracting States. Such notification shall not constitute the consent required by paragraph (1). Article 26 Consent of the parties to arbitration under this Convention shall, unless otherwise stated, be deemed consent to such arbitration to the exclusion of any other remedy. A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention. Article 27 1. No Contracting State shall give diplomatic protection, or bring an international claim, in respect of a dispute which one of its nationals and another Contracting State shall have consented to submit or shall have submitted to arbitration under this Convention, unless such other Contracting State shall have failed to abide by and comply with the award rendered in such dispute. 2. Diplomatic protection, for the purposes of paragraph (1), shall not include informal diplomatic exchanges for the sole purpose of facilitating a settlement of the dispute. ***

[C] Comments and Questions 1.

The Washington Convention on the Settlement of Investment Disputes between States and Nationals of other States, the so-called ICSID Convention, is unique among the modern treaties concerned with foreign investment disputes. While the

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P 210 2.

3.

ICSID Convention is, in common with all the other modern investment conventions, committed to “the need for international cooperation for economic development and the role of private investment therein,” as the first considerandum of the Convention puts it, the ICSID Convention does not include a specific set of substantive rules, which is characteristic of modern investment treaties. Indeed, it does not even assign a primary role for international law, restricting the operation of international law to the absence of agreement between the parties as to an applicable law and, somewhat more uncertainly, for certain supplementary purposes, when the law selected by the parties proves laconic with respect to a matter before a tribunal. Rather, the ICSID Convention is essentially a forum and procedural regime whose availability, once a government anxious to induce foreign investment in its territory has become a party to it, precludes the operation of that state's domestic courts. For a rich history of ICSID, see Antonio Parra, The History of ICSID (2012). The ICSID system will be examined in substantial detail in Chapter 4.

§2.06 INTERPRETATION OF TREATIES [A] Vienna Convention on the Law of Treaties (1969) 1155 U.N.T.S. 331 Article 31 provides: General rule of interpretation 1. 2.

A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a)

3.

any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. There shall be taken into account, together with the context: (a)

4.

any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. A special meaning shall be given to a term if it is established that the parties so intended.

Article 32 provides: Supplementary means of interpretation Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31: (a) (b)

leaves the meaning ambiguous or obscure; or leads to a result which is manifestly absurd or unreasonable.

Article 33 Interpretation of treaties authenticated in two or more languages 1. P 211

2. 3. 4.

When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail. A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree. The terms of the treaty are presumed to have the same meaning in each authentic text. Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and

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purpose of the treaty, shall be adopted.

[B] Comments and Questions 1.

2.

3.

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The Vienna Convention on the Law of Treaties applies to all treaties as do Articles 31 to 33 with respect to interpretation. Are investment treaties so unique a genre that they should be subject to a different set of rules? For example, Article 31(2) refers the interpreter to the entire body of a treaty which is deemed to be part of its context. Many trade and investment treaties, which are extremely long, are negotiated in segments with little relation between their component parts. Is it appropriate for subsequent appliers to follow Article 31(2)? Article 31 also directs the applier to take into account, together with the context, “any relevant rules of international law applicable in the relations between the parties.” Should international investment treaties be viewed as a species of lex specialis without reference to other relevant rules of international law? For further reference, see Shabtai Rosenne, The Law of Treaties; A Guide To The Legislative History of the Vienna Convention (1970); Sir Ian Sinclair, The Vienna Convention on the Law of Treaties (1984); J. Romesh Weeramantry, Treaty Interpretation in Investment Arbitration (Oxford Univ. Press 2012); and Mahnoush H. Arsanjani & W. Michael Reisman, Interpreting Treaties for the Benefit of Third Parties: The “Salvors’ Doctrine” and the Use of Legislative History in Investment Treaties, 104 Am. J. Int'l L. 597 (2010).

References 1) 2) 3) 4) 5) 6)

7)

8) 9)

10) 11) 12)

13)

14) 15)

Reproduced with the permission of the Columbia Law School via the Copyright Clearance Center. Treaties and Other International Acts Series 1700; 61 Stat., pts. 5 and 6. Reprinted by permission from the American Bar Association. Case Concerning Elettronica Sicula S.p.A. (ELSI) (United States v. Italy), International Court of Justice, decision of July 20, 1989 … Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September 2013). Some forms of debt, such as bonds, debentures, and long-term notes, are more likely to have the characteristics of an investment, while other forms of debt, such as claims to payment that are immediately due and result from the sale of goods or services, are less likely to have such characteristics. Whether a particular type of license, authorization, permit, or similar instrument (including a concession, to the extent that it has the nature of such an instrument) has the characteristics of an investment depends on such factors as the nature and extent of the rights that the holder has under the law of the Party. Among the licenses, authorizations, permits, and similar instruments that do not have the characteristics of an investment are those that do not create any rights protected under domestic law. For greater certainty, the foregoing is without prejudice to whether any asset associated with the license, authorization, permit, or similar instrument has the characteristics of an investment. The term “investment” does not include an order or judgment entered in a judicial or administrative action. “Written agreement” refers to an agreement in writing, executed by both parties, whether in a single instrument or in multiple instruments, that creates an exchange of rights and obligations, binding on both parties under the law applicable under Article 30[Governing Law](2). For greater certainty, (a) a unilateral act of an administrative or judicial authority, such as a permit, license, or authorization issued by a Party solely in its regulatory capacity, or a decree, order, or judgment, standing alone; and (b) an administrative or judicial consent decree or order, shall not be considered a written agreement. For purposes of this definition, “national authority” means (a) for the United States, an authority at the central level of government; and (b) for [Country], [ ]. For greater certainty, actions taken by a Party to enforce laws of general application, such as competition laws, are not encompassed within this definition. For greater certainty, “TRIPS Agreement” includes any waiver in force between the Parties of any provision of the TRIPS Agreement granted by WTO Members in accordance with the WTO Agreement. For greater certainty, government authority that has been delegated includes a legislative grant, and a government order, directive or other action transferring to the state enterprise or other person, or authorizing the exercise by the state enterprise or other person of, governmental authority. Article 5 [Minimum Standard of Treatment] shall be interpreted in accordance with Annex A. Article 6 [Expropriation] shall be interpreted in accordance with Annexes A and B.

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16) For greater certainty, a condition for the receipt or continued receipt of an 17)

18) 19) 20) 21)

22)

23)

24)

25)

26)

advantage referred to in paragraph 2 does not constitute a “commitment or undertaking” for the purposes of paragraph 1. For purposes of this Article, the term “technology of the Party or of persons of the Party” includes technology that is owned by the Party or persons of the Party, and technology for which the Party holds, or persons of the Party hold, an exclusive license. The Parties recognize that a patent does not necessarily confer market power. A Party may satisfy this obligation by, for example, providing interested persons a reasonable opportunity to provide comments on the measure it proposes to develop and taking those comments into account in the development of the measure. Paragraph 2 shall not apply where a Party waives or derogates from an environmental law pursuant to a provision in law providing for waivers or derogations. For the United States, “statutes or regulations” for the purposes of this Article means an act of the United States Congress or regulations promulgated pursuant to an act of the United States Congress that is enforceable by action of the central level of government. For the United States, “statutes or regulations” for purposes of this Article means an act of the United States Congress or regulations promulgated pursuant to an act of the United States Congress that is enforceable by action of the central level of government. It is understood that the term “prudential reasons” includes the maintenance of the safety, soundness, integrity, or financial responsibility of individual financial institutions, as well as the maintenance of the safety and financial and operational integrity of payment and clearing systems. For greater certainty, measures of general application taken in pursuit of monetary and related credit policies or exchange rate policies do not include measures that expressly nullify or amend contractual provisions that specify the currency of denomination or the rate of exchange of currencies. For purposes of this Article, “competent financial authorities” means, for the United States, the Department of the Treasury for banking and other financial services, and the Office of the United States Trade Representative, in coordination with the Department of Commerce and other agencies, for insurance; and for [Country], [ ]. For the purposes of this Article, the “competent tax authorities” means: (a)

27) 28) 29) 30) 31) 32) 33) 34) 35) 36)

37) 38) 39) 40) 41) 42) 43) 44) 45) 46) 47) 48)

for the United States, the Assistant Secretary of the Treasury (Tax Policy), Department of the Treasury; and (b) for [Country], [ ]. The “law of the respondent” means the law that a domestic court or tribunal of proper jurisdiction would apply in the same case. Available at http://www.italaw.com/sites/default/files/archive/ita1025.pdf (accessed 1 September 2013). Available at http://www.ustr.gov/trade-agreements/free-tradeagreements/singapore-fta (accessed 1 September 2013). Article 15.5 is to be interpreted in accordance with the letter exchange on customary international law. Article 15.6 is to be interpreted in accordance with the letter exchange on customary international law and the letter exchange on expropriation, and is subject to the letter exchange on land expropriation. Article 15.7 is subject to Annex 15-A. Article 15.8 is subject to Annex 15-B and Annex 15-C. Article 15.15 is subject to the letter exchange on land expropriation. Available at http://www.ustr.gov/trade-agreements/free-trade-agreements/chile-fta (accessed 1 September 2013). For greater certainty, the provisions of this Chapter do not bind either Party in relation to any act or fact that took place or any situation that ceased to exist before the date of entry into force of this Agreement. Also, for greater certainty, this Chapter is subject to and shall be interpreted in accordance with Annexes 10-A through 10-H. For greater certainty, Article 10.4 shall be interpreted in accordance with Annex 10-A. The reference to “Article 31" includes footnote 7 to Article 31. The Parties recognize that a patent does not necessarily confer market power. For greater certainty, Article 10.7 is subject to Annex 10-B. For greater certainty, Article 10.8 is subject to Annex 10-C. Notwithstanding any other provision of this Chapter, this paragraph takes effect on the date of entry into force of this Agreement. For greater certainty, Article 10.9 shall be interpreted in accordance with Annex 10-A and Annex 10-D. For greater certainty, Article 10.15 is subject to Annex 10-E. Available at http://www.nafta-sec-alena.org/ (accessed 1 September 2013). Available at http://www.encharter.org/ (accessed 1 September 2013). Available at http://www.ustr.gov/trade-agreements/free-trade-agreements (accessed 1 September 2013). Available at http://www.asean.org (accessed 1 September 2013).

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49) For the purpose of protection, the procedures relating to specific approval in writing

shall be as specified in Annex 1 (Approval in Writing).

50) Where an asset lacks the characteristics of an investment, that asset is not an

investment regardless of the form it may take. The characteristics of an investment include the commitment of capital, the expectation of gain or profit, or the assumption of risk. 51) For greater certainty, investment does not mean claims to money that arise solely from: (a) commercial contracts for sale of goods or services; or (b) the extension of credit in connection with such commercial contracts. 52) For greater certainty: (a)

53)

54) 55) 56) 57) 58)

59) 60) 61) 62) 63)

this Article shall not apply to investor-State dispute settlement procedures that are available in other agreements to which Member States are party; and (b) in relation to investments falling within the scope of this Agreement, any preferential treatment granted by a Member State to investors of any other Member State or a non-Member State and to their investments, under any existing or future agreements or arrangements to which a Member State is a party shall be extended on a most-favoured-nation basis to all Member States. For greater certainty, sub-regional arrangements between and among Member States shall include but not be limited to Greater Mekong Sub-region (“GMS”), ASEAN Mekong Basin Development Cooperation (“AMBDC”), Indonesia-Malaysia-Thailand Growth Triangle (“IMT-GT”), Indonesia-Malaysia-Singapore Growth Triangle (“IMS-GT”), Brunei-Indonesia-Malaysia-Philippines East ASEAN Growth Area (“BIMP-EAGA”). This sub-paragraph refers to the Treaty of Amity and Economic Relations between the Kingdom of Thailand and the United States of America signed in Bangkok, Thailand on 29 May 1966. For the avoidance of doubt, Member States shall not adopt any measures or modify any of its reservation under the Schedule for a period of 6 months after the expiration of the period specified in paragraph 1. For greater certainty, any measures taken to ensure the stability of the exchange rate including to prevent speculative capital flows shall not be adopted or maintained for the purpose of protecting a particular sector. This Article shall be read with Annex 2 (Expropriation and Compensation). For the avoidance of doubt, any measure of expropriation relating to land shall be as defined in the Member States' respective existing domestic laws and regulations and any amendments thereto, and shall be for the purposes of and upon payment of compensation in accordance with the aforesaid laws and regulations. Member States understand that there may be legal and administrative processes that need to be observed before payment can be made The public order exception may be invoked by a Member State only where a genuine and sufficiently serious threat is posed to one of the fundamental interests of society. For the purpose of this sub-paragraph, footnote 6 of Article XIV of the General Agreement on Trade in Services in Annex 1B to the WTO Agreement (GATS) is incorporated into and forms an integral part of this Agreement, mutatis mutandis. In the case of the Philippines, submission of a claim to ICSID and the ICSID Rules of Procedure for Arbitration Proceedings shall be subject to a written agreement between the disputing parties in the event that an investment dispute arises. The Parties understand that there may be domestic legal and administrative processes that need to be observed before an award can be complied with.

64) Available at http://www.meti.go.jp/ (accessed 1 September 2013). 65) Available at http://www.italaw.com/sites/default/files/case-documents/ita0206.pdf

(accessed 1 September 2013).

66) Available at http://www.italaw.com/sites/default/files/case-documents/ita0210.pdf

(accessed 1 September 2013).

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Chapter 3: Investment Contracts and Key Clauses

Document information

§3.01 INTRODUCTION

Publication

This Chapter presents an overview of investment agreements that may be negotiated between foreign investors, on the one hand, and governments, government agencies or state-owned companies, on the other hand, focusing on the key contract clauses that are often contained within them. No attempt is made here to provide exhaustive treatment. Such treatment could easily consume an entire treatise of its own.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Topics

Investment Arbitration

Bibliographic reference

'Chapter 3: Investment Contracts and Key Clauses', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 213 - 280

The types of investment contracts, or long-term economic development agreements as some have termed them, are as varied as the interests of investors and governments. One major field of foreign investment in the past century has been the development of natural resources, particularly oil and gas exploration and production. In the lateNineteenth and early-Twentieth centuries, governments often awarded very large concessions to explore for and produce oil. At that time, there was virtually no market or infrastructure for natural gas so gas wells were typically plugged and gas associated with oil production was flared. Under these early concessions, private companies often obtained title to the oil within their large concession areas, paid a bonus for the concession to the government and paid a royalty upon each barrel of oil produced. The private companies were under virtually no obligation to explore or produce oil within a specified time period. Although concessions are still used today in some countries, they have little in common with those used in the early-Twentieth Century. The second half of the Twentieth Century saw these concessions replaced by other types of agreements between oil companies and governments – most commonly, the Production Sharing Agreement (PSA). While many PSAs were signed by the government, usually by the minister of energy, some were signed by the state-owned oil company, either as a direct agent of the government or as the entity charged with the responsibility for managing the country's hydrocarbon resources. The PSA typically provided that the oil or gas in place was owned by the government, that the private company would explore and drill for oil within a specified area and time at its own cost and risk, that upon a commercial discovery, the private company would take a disproportionately larger share of the oil until its costs were recovered, and thereafter the private company and the government or its state-owned oil company would divide the oil produced between them in a specified percentage. These agreements were not nearly as beneficial to oil companies as earlier concessions had been. Some countries have used other types of agreements with foreign companies to exploit their oil and gas reserves such as licenses and service contracts. While under some service contracts the oil company may be paid a negotiated fee for its services, these agreements typically provide that the costs and risks of exploration fall solely upon the P 214 oil company, while making clear that it has no title or claim to the oil or gas. They are merely licensees or service contractors who provide the expertise and put up the costs in the first instance at their own risk. Other types of investment contracts include infrastructure and utility agreements by which investors build, improve and operate various types of utilities such as power plants to generate electricity, electrical distribution or transportation systems, potable water and sewage systems, toll roads, telephone systems, airports, port facilities, natural gas distribution or transportation systems, and others. Joint ventures of different types represent another kind of agreement between governments and investors. These may include, for example, agreements to operate various types of factories to produce goods needed within the country. Finally, construction contracts to build large infrastructure projects such as hydroelectric dams or other kinds of facilities may also be entered into by governments or their agencies. Each of these agreements differs in some respects, but most contain a core of similar provisions. One of the most important clauses in an investment contract is the dispute resolution clause. The clause may contain a forum selection clause that specifies a particular court or the courts of a specific city or region to hear the dispute; the parties may simply agree to the jurisdiction of that court or they may agree that the court selected will have exclusive jurisdiction over any disputes. More often, however, the parties agree to international arbitration as the procedure to resolve their disputes, often in a neutral location using the arbitral rules of an administering institution such as ICSID or the ICC, or they may use the UNCITRAL Arbitration Rules for a non-administered, ad hoc arbitration. Another key provision is the choice-of-law clause selecting the governing law. Quite understandably, host governments often insist upon their own law to govern any agreements, but at times other law is chosen such as international law, general principles of law, or occasionally a neutral state's law. Sometimes a formula is used such as the host government's law and international law to the extent they are consistent or contain common principles, and to the extent they are not, general principles of law may be applied. While examples of choice-of-law clauses are given in this section, the reader is also referred to Chapter 6, which specifically focuses on the applicable law for investment disputes.

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When the law of a civil law country applies, the civil law generally contains within one of its codes a force majeure provision excusing contract performance when the conditions set out in the law are satisfied. The code provision applies to the parties' agreement and supplies the excusing condition even if the contract does not contain a force majeure clause. Under the common law, however, no such statutes exist so a contract provision is necessary to authorize the excusing condition. Even under the civil law, a contractual force majeure provision can generally alter the code conditions that are specified. Another issue that occasionally arises is whether the actions of a government can satisfy the conditions of an event of force majeure in order to excuse the performance of its state-owned company. These issues are treated in this chapter. Perhaps the most controversial clauses are those that seek to stabilize or freeze the law at the moment the contract is signed. These clauses arise from the investor's need for economic stability when making a major financial investment, particularly in a capital intensive industry. Fiscal increases, in particular, can drastically affect the economics of projects. If the government's power is not restricted by contract, it can by altering its laws effectively capture all or much of the substantial value of a sunk investment. These P 215 clauses have been the subject of some arbitral decisions as to their precise meaning and scope. Issues concerning the sovereignty of governments and their ability to bind future administrations have been raised as a defense to such clauses. Over the past 30 years, stabilization clauses have tended to evolve into their less controversial cousins – adaptation and renegotiation clauses, although other clauses have been developed that put the burden of such increases on the state-owned company that is a party to the contract. A variety of hybrid clauses have also been developed, combining various features of stabilization, adaptation and renegotiation clauses. The issues dealing with all of these important clauses are treated in detail here. A detailed treatment of the issues of sovereign immunity and enforcement of arbitral awards against governments may be found in Chapter 13. This chapter deals briefly with the contractual clauses waiving sovereign immunity. Generally, governments enjoy immunity both from jurisdiction and enforcement, which are conceptually distinct. An international arbitration clause may be construed as an implied waiver of immunity from jurisdiction, although it is good practice for investors to obtain an express waiver. Immunity from enforcement is not generally implied, and an investor is well advised to obtain a waiver of immunity from enforcement whenever possible. Language for such a waiver may be found in the examples of clauses provided herein. The examples of key contractual provisions provided here add context to the discussions in the following chapters and should be helpful not only in drafting but in analyzing the issues involved in this complex field.

§3.02 INVESTMENT AGREEMENTS [A] US Model Bilateral Investment Treaty (2012), (1) Definition of Investment Agreement “Investment agreement” means a written agreement between a national authority of a Party and a covered investment or an investor of the other Party, on which the covered investment or the investor relies in establishing or acquiring a covered investment other than the written agreement itself, that grants rights to the covered investment or investor: (a) (b) (c)

with respect to natural resources that a national authority controls, such as for their exploration, extraction, refining, transportation, distribution, or sale; to supply services to the public on behalf of the Party, such as power generation or distribution, water treatment or distribution, or telecommunications; or to undertake infrastructure projects, such as the construction of roads, bridges, canals, dams, or pipelines, that are not for the exclusive or predominant use and benefit of the government.

P 216

[B] Case Law [1] Chevron Corp (USA) and Texaco Petroleum Co (USA) v. Republic of Ecuador (PCA Case No. 34877), Interim Award of 1 December 2008, (2) 59-60 [Karl-Heinz Böckstiegel (pres.), Charles N. Brower, Albert Jan van den Berg] [Chevron, a US Corporation, held an interest in an oil field located in Ecuador, which had been returned to Petro Ecuador, Ecuador's state-owned oil company. Chevron initiated UNCITRAL arbitration proceedings administered by the PCA, claiming that Ecuador failed to treat its investment fairly and equitably, as mandated under the US-Ecuador BIT. In particular, Chevron's claim involved a denial of justice in violation of BIT for Ecuadorian courts' failure to decide seven local cases for more than a decade.] (Citations selectively omitted) 206. … the Claimants make a claim for denial of justice under customary international law. However, they take pains to state that the denial of justice relates to the lawsuits for

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breaches of the investment agreements. 207. … The customary international law claim for denial of justice by Ecuador's judiciary with regard to the breach-of-contract claims is fundamentally different than the breachof contract claims themselves. As the Claimants correctly point out, their investment agreement claims “are based on different conduct by a different State organ that violated different legal obligations” … At the same time, and despite their distinct nature, the claims' connection to the investment agreements is sufficient to qualify them as “arising out of or relating to investment agreements” within the meaning of Article VI(1) (a) of the BIT. *** 209. The Tribunal finds that Article VI(1)(a) does confer jurisdiction over customary international law claims. Article VI(1)(a), in contrast to Article VI(1)(c) and the wording of a large number of other BITs, is not limited to causes of action based on the treaty. Its language includes all disputes “arising out of or relating to” investment agreements and this language is broad enough to allow the Tribunal to hear a denial of justice claim relating to the Concession Agreements… *** 211. Although this point was never seriously disputed, it remains to be answered: do the Concession Agreements qualify as “investment agreements”? The Tribunal agrees with the Claimants that, in the ordinary meaning of the term, the 1973 and 1977 Agreements are investment agreements. Furthermore, according to its conclusions regarding the existence of the Claimants' investment above, the lawsuits based on the 1973 and 1977 Agreements are within the definition of “investment” in Article I(1)(a) of the BIT… The Concession Agreements, being the agreements from which that “investment” arose, must P 217 be considered to be “investment agreements.” 212. The Respondent, however, objects that the principle of non-retroactivity of treaties precludes reliance on an investment agreement that had expired by the time the BIT came into force. For the reasons given with regard to the Claimants' “investments” under the BIT… , the Tribunal views this again not as an issue of retroactivity, but of applying Article XII of the BIT, which allows for the protection of “investments existing at the time of entry into force.” Given that the claims and rights arising from these agreements were still pending before the courts, the Claimants' “investment” was not fully wound-up. The rights and claims relating to the Concession Agreements still constituted an existing investment at the time of [the BIT's] entry into force. Therefore, the agreements pertaining to that covered “investment” must also be covered by the BIT as “investment agreements.” 213. … The Claimants' denial of justice claims still relate to the Concession Agreements even if the agreements expired before entry into force of the BIT. [2] Chevron Corp (USA) and Texaco Petroleum Co (USA) v. Republic of Ecuador (PCA Case No. 2009-23), Third Interim Award on Jurisdiction and Admissibility of 27 February 2012, (3) 10-12 [V.V. Veeder (pres.), Horacio Alberto Grigera Naón, Vaughan Lowe] [Chevron, a US Corporation, held an interest in the Lago Agrio oil field located in Ecuador, which had been returned to Petro Ecuador, Ecuador's state-owned oil company. Chevron claimed that an Ecuadorian environmental lawsuit and resulting judgment for $19 billion had been procured by fraud and resulted in a denial of justice under the US-Ecuador BIT. Chevron subsequently initiated UNCITRAL arbitration proceedings administered by the PCA under the US-Ecuador BIT.] (Citations selectively omitted) 4.31 TexPet: In the Tribunal's view, the 1973 Concession Agreement was an “investment agreement” within the meaning of Article VI(1)(a) of the BIT. TexPet, as a named party to this agreement with the Respondent, made investments in Ecuador, as both alleged by the Claimants and indeed acknowledged by the Respondent… 4.32 In the Tribunal's view, having already decided above upon the broad interpretation of “investment” under Article I(1)(a) of the BIT, there is an inextricable link between the 1973 Concession Agreement and the 1995 Settlement Agreement [relating to environmental liabilities], to which TexPet and the Respondent were named and signatory parties. Again, the latter would not have come into existence without the former; and, accordingly, the Tribunal similarly determines that, for the purpose of applying Article VI(1)(a), it is not possible to divorce one from the other. In the Tribunal's view, the 1995 Settlement Agreement must be treated as a continuation of the earlier concession agreement, so that it also forms part of the overall “investment agreement” invoked by TexPet under Article VI(1)(a) of the BIT. 4.33 The Tribunal rejects the Respondent's argument that the 1995 Settlement Agreement came too long after the expiry of the 1973 Concession Agreement, some three years later P 218 (in 1992). In the Tribunal's view, there could be no doubt that if the 1995 Settlement Agreement had been made during the contractual term of the 1973 Concession Agreement (say in 1975), it could only have been regarded as an elaboration of that agreement and thus clearly forming part of one overall investment agreement. A long term oil concession

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must inevitably involve extensive clean-up costs and related responsibilities to others for the environmental consequences of its activities, particularly at or after the end of such activities. It is also well known scientifically that the consequences of environmental pollution caused by oil production are generally measured over many years, if not several decades. As the Claimants' Counsel rightly submitted at the Jurisdictional Hearing: “Environmental remediation is a normal and natural part of an oil concession project”… 4.34 The Tribunal therefore dismisses any chronological distinction between remedial agreements made the day before and the day after the expiry of a concession agreement; and there is equally no logical reason to treat differently a much longer period after the concession's agreement expiry, so long as the same link remains between them (as is the case here). 4.35 Moreover, the requirement for an “investment dispute” under Article VI(1)(a) of the BIT (which introduces the Arbitration Agreement [in the BIT]) is broadly defined to mean a dispute “arising out of or relating to” an investment agreement. In the Tribunal's view, such wording would not limit an investment dispute to one only arising under a particular investment agreement but would include a wider range of disputes “relating to” the investment agreement. In the Tribunal's view, TexPet's claims under the BIT do “relate” to the 1973 Concession Agreement, even if (contrary to the Tribunal's decision above) the 1973 Concession Agreement were to be isolated from the 1995 Settlement Agreement and the Parties' dispute did not arise under or even “out of “that concession agreement at all. 4.36 On the other hand, the Tribunal is not minded to treat the 1995 Settlement Agreement, by itself or (in the Claimants' phrase) free-standing, as an “investment agreement” under Article VI(1)(a) of the BIT. It was of course an “agreement” whereby TexPet in fact incurred substantial expenditure and paid significant monies to actual and putative claimants in Ecuador; but TexPet's activities thereunder cannot fairly be described, by themselves, as having been made as an “investment”. These activities were, as rightly submitted by the Respondent, performed by way of amicable settlements for past actual or alleged wrongs and not for investment purposes. Accordingly, standing alone, the Tribunal rejects the 1995 Settlement Agreement as founding its jurisdiction; and it is only when that 1995 Settlement is considered along with the 1973 Concession Agreement that it forms part of an “investment agreement” under Article VI(1) (a) of the BIT… *** 4.38 Chevron: In the Tribunal's view, additional considerations again apply to Chevron, because it was not a party to any concession agreement; and it was not a named or signatory party in the 1995 Settlement Agreement. Indeed, Chevron was not a named or signatory party to any contractual agreement made with the Respondent before the P 219 commencement of these arbitration proceedings. 4.39 The first issue is whether Chevron, under Article VI(1)(a) of the BIT, can assert contractual rights against the Respondent as a “Releasee” under Article 5.1 of the 1995 Settlement Agreement… 4.40 The Tribunal does not consider that this first issue is answered by the mere fact that Chevron was not a contractual party to the 1995 Settlement Agreement at the time when it was signed by TexPet and the Respondent. In the Tribunal's view, as considered above, the broad language of Article VI(1) of the BIT (“relating to”) does not require such original contractual privity between Chevron and the Respondent; and moreover the term “between” in Article VI(1)(a) cannot be interpreted as requiring Chevron to be an actual signatory or named party to the investment agreement. However, the Tribunal does consider that Article VI of the BIT requires Chevron to be entitled to assert contractual or other legal rights against the Respondent under the 1995 Settlement Agreement as a “Releasee”. The Parties' experts on Ecuadorian law agree that a “Releasee” can enforce the 1995 Settlement Agreement (by its terms and Article 1465 of the Ecuadorian Civil Code); and the question is therefore whether or not Chevron became such a Releasee in or after its “merger” with Texaco in 2001.

§3.03 KEY INVESTMENT CONTRACT CLAUSES [A] Arbitration Clauses [1] Arbitration Clauses [a] Noah Rubins and N. Stephen Kinsella, International Investment, Political Risk, and Dispute Resolution: A Practitioner’s Guide, 43-45, 261 (Oceana Publications 2005) (4) (Citations selectively omitted) Should the host State fail to carry out its obligations to a foreign investor under a contract, its own national investment code, or a treaty with the investor's home State, the investor may be able to vindicate its rights through international arbitration. As explained elsewhere, in many cases arbitration offers the parties the only neutral forum in which to resolve disputes, and the only means to obtain a remedy enforceable across

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borders. Such a right is hardly automatic, however. As in arbitration between private parties, the State must expressly consent to such extra-judicial dispute resolution, consent which must be contained in the relevant contract, investment code, or investment protection treaty. *** In recent decades, arbitration clauses have become nearly ubiquitous in international contracts, including those concluded with State parties. The advantages of arbitration over litigation for both private and public parties are well documented and widely accepted. Nevertheless, some governments remain hesitant to agree to the adjudication P 220 of disputes abroad before an international tribunal, particularly in relation to public infrastructure and natural resources extraction projects, which are seen as close to the core of State sovereignty. Foreign private parties are nevertheless generally well-advised to seek the inclusion of an arbitration clause in State contracts. In the absence of such a clause, disputes that arise in relation to the investment contract may be subject to the jurisdiction of the host State's courts, perhaps exclusively. As a result, the investor may be left without any neutral forum to obtain effective recourse against the State. Even if he is able to obtain a favorable judgment through litigation, he may find it difficult to enforce abroad. *** If an investor is unable to include an arbitration clause in project contracts, or is compelled to assent to arbitration in a forum he fears is less than neutral, he may nevertheless have access to international arbitration of investment disputes… [I]nvestors can initiate arbitration without the benefit of any direct arbitration agreement at all, if they benefit from the protections of bilateral or multinational investment treaties binding the investor's home State and the host State… [T]hese treaties also provide foreign businesses a range of guarantees separate from their contractual rights, which can be vindicated directly against the host State through arbitration, as long as certain jurisdictional requirements are met. [b] R. Doak Bishop, A Practical Guide For Drafting International Arbitration Clauses, 1 Int’l Energy L. & Tax’n Rev. 16, 16, 20-23 (2000) (Citations selectively omitted) B. Factors Relevant to the Enforceability of an Arbitration Clause 1. Treaty Requirements The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and the Inter-American Convention on International Commercial Arbitration (Panama Convention) list the requirements that must be met for an arbitral agreement to be enforceable by the authority of the treaties. Both Conventions include similar requirements for enforcing arbitral agreements. First, the arbitration agreement must be reduced to writing. (5) A writing may consist of a separate arbitration agreement or an arbitral clause contained in a contract. (6) Second, the writing must either be signed by the parties or be contained in an exchange of letters or telegrams. (7) P 270 * * *

C. General Considerations 1. Institutional Model Clauses Each of the leading arbitral organizations provides a sample arbitration clause for inclusion in international contracts. For example, the International Chamber of Commerce (ICC) suggests the following clause: All disputes arising out of or in connection with the present contract shall be finally settled under the Rules of Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the said Rules. This clause has been said to contain the three “key expressions” for an arbitral clause: – “All disputes”… “in connection with”… “finally settled”. The term “all disputes” encompasses all types of controversies, without exception. The language, “in connection with”, creates a broad form clause that will cover non-contractual claims such as tort and fraud in the inducement, while “finally settled” indicates the parties intend the arbitrator's ruling to be final so a court will not try the case de novo. *** 4. Pathological Arbitration Clauses Pathological arbitration clauses might be defined as those drafted in such a way that they may lead to disputes over the interpretation of the arbitration agreement, may result in the failure of the arbitral clause or may result in the unenforceability of an award. Examples of such problems include (1) equivocation as to whether binding

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arbitration is intended, (2) naming a specific person as arbitrator who is now deceased or who refuses to act, (3) naming an institution to administer the arbitration proceeding or to appoint the arbitrators if the institution never existed, is misnamed in the clause or refuses to act, (4) providing unreasonably short deadlines for action by the arbitrators, (5) providing too much specificity with respect to the arbitrators' qualifications, or (6) providing for conflicting or unclear procedures. *** Negotiating and drafting arbitration clauses are inherently practical exercises, but evaluating their validity and effectiveness requires an analytical framework. One authority has listed four essential functions of an arbitration clause: (1) to produce mandatory consequences for the parties, (2) to exclude the intervention of State courts in the resolution of disputes (at least prior to the rendering of an award), (3) to empower the arbitrators to resolve the parties' disputes, and (4) to adopt a procedure for resolving the disputes. These criteria provide the essential ingredients necessary for an arbitration clause to be effective, and clauses may usefully be examined against them to determine whether they are valid and will accomplish the intended goal. [c] Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing, 38 (Kluwer Law International 2010) A. Critical Elements of International Arbitration Agreements There are several critical elements which must be addressed in almost every international arbitration clause. These are: – – – – – – – –

Agreement to binding arbitration Scope of the arbitration agreement Selection of an arbitral seat (or place of the arbitration) Use of an arbitral institution and its rules Appointment, number, and qualifications of the arbitrators Language of the arbitration Formalities, capacity, and validity Choice-of-law clause

*** c. Drafting Broad Arbitration Agreements With Broad Scope Drafting a broad arbitration clause, like drafting an expansive forum clause, requires addressing several components. First, it is generally desirable to begin with a descriptive preamble broadly submitting “all disputes, claims, controversies, and disagreements” to arbitration, rather than a simple reference to “any disputes” or “all claims.” This reduces the risk of litigation or arbitral proceedings over whether a “dispute” is involved (as distinguished, in some litigant's submissions, from a mere “claim” or “disagreement”). Second, this preambular formula should ordinarily be used together with one or more broad connecting phrases, such as disputes “relating to” or “arising in connection with” the parties' agreement. It is usually desirable to avoid confining an arbitration clause merely to disputes “arising under” or “arising from” an agreement, because of the risk that these formulae will exclude non-contractual claims… In addition, disputes sometimes arise over the question whether an arbitration clause extends to disputes regarding the formation of a contract (e.g., claims of fraudulent inducement or invalidity) or the termination of a contract. Some arbitration institution's model clauses (such as that of the LCIA) address this possibility by expressly providing that disputes, including “any question regarding [the contract's] existence, validity or termination,” will be arbitrated. In general, courts in developed states have concluded that commonly-used arbitration clauses extend to disputes about the validity, enforceability and legality of the parties' underlying agreement… Nonetheless, where the issue is considered important, an arbitration clause can be drafted to apply expressly to disputes relating to the validity of the parties' underlying agreement, “including its existence, formation, validity, enforceability, performance, or termination.” Where an institution's model clause contains such a reference, agreements to arbitrate in accordance with the institution's rule should virtually always preserve the reference. Finally, references to the “subject matter of the Agreement” are also often appropriate. This widens the scope of the arbitration clause, and will often extend to disputes regarding the formation and validity of the underlying contract. Taken together, the foregoing guidelines produce a “broad” clause along the following lines: All disputes, claims, controversies, and disagreements relating to or arising out of this Agreement, or the subject matter of this Agreement, shall be finally resolved by arbitration… Or:

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All disputes, claims, controversies, and disagreements relating to or arising out of this Agreement (including the formation, existence, validity, enforceability, performance, or termination of this Agreement), or the subject matter of this Agreement, shall be finally resolved by arbitration… An alternative formulation, drafted as concisely as possible, would provide: All disputes relating to this Agreement shall be finally resolved by arbitration… As noted earlier, where a set of institutional arbitration rules are incorporated, care should be taken in considering alterations to the institution's model clause. Although the addition of language in order to broaden the scope of a clause is often appropriate, it is important to recall that any changes to a model clause will be subject to special scrutiny in the event of future disputes. Finally, issues of interpretation and enforceability under the law(s) applicable to particular arbitration clauses must also be considered… [2] Examples of Arbitration Clauses [a] ICSID Model Clauses Clause 1 The [Government]/[name of constituent subdivision or agency] of name of Contracting State (hereinafter the “Host State”) and nameof investor (hereinafter the “Investor”) hereby consent to submit to the International Centre for Settlement of Investment Disputes (hereinafter the “Centre”) any dispute arising out of or relating to this agreement for settlement by [conciliation]/ [arbitration]/[conciliation followed, if the dispute remains unresolved within time limit of the communication of the report of the Conciliation Commission to the parties, by arbitration] pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (hereinafter the “Convention”). *** Clause 3 It is hereby stipulated that the transaction to which this agreement relates is an investment. *** Clause 5 The name of constituent subdivision or agency is [a constituent subdivision]/[an agency] of the Host State, which has been designated to the Centre by the Government of that State in accordance with Article 25(l) of the Convention. In accordance with Article 25(3) of the Convention, the Host State [hereby gives its approval to this consent agreement] (8) /[has given its approval to this consent agreement in citation of instrument in which approval is expressed]/ [has notified the Centre that no approval of [this type of consent agreement]/[of consent agreements by the name of constituent subdivision or agency is required]). *** Clause 6 It is hereby stipulated by the parties that the Investor is a national of name of another Contracting State. *** Clause 7 It is hereby agreed that, although the Investor is a national of the Host State, it is controlled by nationals of name(s) of other Contracting State(s) and shall be treated as a national of [that]/ [those] State[s] for the purposes of the Convention. *** Clause 14 Without prejudice to the power of the Arbitral Tribunal to recommend provisional measures, either party hereto may request any judicial or other authority to order any provisional or conservatory measure, including attachment, prior to the institution of the arbitration proceeding, or during the proceeding, for the preservation of its rights and interests. *** Clause 15 The Host State hereby waives any right of sovereign immunity as to it and its property in

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respect of the enforcement and execution of any award rendered by an Arbitral Tribunal constituted pursuant to this agreement. *** Clause 20 The Government of name of host State (hereinafter the ‘Host State’) and name of investor (hereinafter the “Investor”), a national of name of home State (hereinafter the “Home State”), hereby consent to submit to the International Centre for Settlement of Investment Disputes (hereinafter the “Centre”) any dispute arising out of or relating to this agreement for settlement by arbitration pursuant to: (a)

(b)

the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (hereinafter the “Convention”) if the Host State and the Home State have both become parties to the Convention at the time when any proceeding hereunder is instituted, or the Arbitration (Additional Facility) Rules of the Centre if the jurisdictional requirements ratione personae of Article 25 of the Convention remain unfulfilled at the time specified in (a) above.

[b] UNCITRAL Model Arbitration Clause Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules as at present in force. Note – Parties may wish to consider adding: (a) (b) (c) (d)

The appointing authority shall be… (name of institution or person); The number of arbitrators shall be… (one or three); The place of arbitration shall be…(town or country); The language(s) to be used in the arbitral proceedings shall be…

[c] Angola Model Production Sharing Agreement for Deep Water Blocks (February 1992), 141 Basic Oil Laws & Concession Contracts: South & Central Africa 1, 84 (2004) (9) Article 42 – Arbitration 1.

2.

3. 4. 5.

Any disputes, differences, or claims arising out of this Agreement or relating thereto, or relating to the breach, termination, or invalidation of the same, which it has not been possible to resolve amicably shall be finally and exclusively settled by arbitration, in accordance with the UNCITRAL Rules of Arbitration of 1976 as existing on the Effective Date. The number of arbitrators shall be three (3). They shall be appointed in accordance with the above mentioned UNCITRAL rules of arbitration. The appointing authority shall be the International Chamber of Commerce, acting in accordance with its relevant rules. The arbitration tribunal shall decide according to Angolan substantive Law. As prescribed in the law in force, the arbitration tribunal shall be set up in Luanda and the language of arbitration shall be Portuguese. The Parties agree that this arbitration clause is an explicit waiver of immunity against validity and enforcement of the award or any judgment thereon and that the award or judgment thereon, if unsatisfied, shall be enforceable against any Litigant in any court having jurisdiction in accordance with its laws.

[d] UMC Production Sharing Contract Dated 29 June 1992 Between the Republic of Equatorial Guinea & United Meridian International Corp., 135 Basic Oil Laws & Concession Contracts: South & Central Africa 1, 55-57 (1998) (10) Section 13 – Arbitration 13. 1The Parties agree to submit any dispute, controversy, claim or difference arising out of or in connection with this Contract to arbitration under and in accordance with the Arbitration (Additional Facility) Rules in force on the Effective Date (“Facility Rules”) of the International Center for Settlement of Investment Disputes (“Center”). As of the Effective Date, the State is not a Contracting State as that term is defined in the Convention on the Settlement of Investment Disputes between States and Nationals of Other States which entered into force on October 14, 1966 (“Convention”). Under this Contract, the Parties waive all exemptions with respect to arbitration and to all proceedings and actions that enforce the arbitral award, and the State hereby waives any right of sovereign immunity as to it and its property in respect of the enforcement and execution of any award rendered by an arbitral tribunal constituted pursuant to this Contract. 13.2 Each of the Parties agrees to and hereby gives its consent to the jurisdiction of the Center under Article 25 of the Convention in the event that the jurisdictional requirements “ratione personae” of this Article shall have been met at the time when

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arbitration proceedings are instituted under this Contract. In such event, the Parties agree to submit any dispute, controversy, claim or difference arising out of or in connection with this Contract to the Center in accordance with the Arbitration Rules in force on the Effective Date set forth by the Convention. 13.3 In the event of any dispute, controversy, claim or difference arising out of or in connection with this Contract, the Parties shall endeavor to settle such dispute amicably. If within thirty (30) days after a notice of such a dispute the Parties have not reached a settlement, the dispute shall at the request of either Party be referred to arbitration in accordance with this Section 13. 13.4 It is hereby agreed that the consent to the jurisdiction of the Center expressed above shall equally bind any successor in interest to the present Government of The Republic of Equatorial Guinea and to the Contractor to the extent that the Center can assume jurisdiction over a dispute between such successor and the other Party. *** 13.6 Any arbitral tribunal constituted pursuant to this Contract shall apply the law of The Republic of Equatorial Guinea and generally accepted principles of international law. Such arbitral tribunal constituted pursuant to this Contract shall have the power to decide a dispute ex aequo et bono. 13.7 Any arbitration under this Section 13 shall be conducted by a tribunal constituted by three (3) arbitrators who shall not have the same nationality as the Parties. The arbitration shall be held in Geneva, Switzerland using the Spanish and English languages. [3] Comments and Questions 1. 2. 3. 4. 5. 6. 7.

Why is an arbitration clause important in an investment agreement? What requirements exist in international conventions for the validity and enforceability of arbitration clauses? What problems should be identified and avoided in the drafting of an arbitration clause? How can they be avoided? What elements should be incorporated into a well drafted arbitration clause? What is a pathological arbitration clause? What is the purpose of each of the ICSID model arbitration provisions? Is a short and simple arbitration clause preferable to a more complex clause? Why or why not? See Eric Schwartz, Choosing Between Broad Clauses and Detailed Blueprints, in ICCA series no. 9, Improving the Efficiency of Arbitration Agreements and Awards: 40 Years of Application of the New York Convention, p. 105 (Kluwer 1999).

[B] Choice-of-Law Clauses [1] M. Sornarajah, The Settlement of Foreign Investment Disputes, § 3.1 at 47-49 (Kluwer Law International 2000) (Citations selectively omitted) 3.1. The Choice of Law Clause *** The generally accepted principle is that the choice by the parties is limited to the legal systems with which the contract has some contacts. In the absence of any choice by the parties, the courts or the tribunals which come later to be concerned with the contract will have to second-guess what the intentions of the parties as to the applicable law would have been. In doing so, the courts will have to take into consideration the points of contact the contract has with different legal systems and choose the legal system with which the contract has the most preponderant connections. Having regard to this rule, one may say that parties also have a choice only between legal systems, which are connected with the contract. Another limitation on party autonomy is that a mandatory rule that is applicable to the contract of any legal system that has relevance to the contract cannot be evaded simply by resorting to a choice of law technique. This principle limits the scope for party autonomy in foreign investment contracts. There could be several mandatory legislation, like the foreign investment entry legislation, environmental legislation, legislation on transfer of technology and legislation preventing antitrust practices and malpractice affecting consumer interests. A further limitation, which has been indicated in dicta in some cases, is that a choice of law clause made through the use of overweening bargaining power will not be recognised by the courts. Given these limitations, the scope for party autonomy is somewhat circumscribed. But, despite this, the strategy that has been devised in investment protection by capital exporting country lawyers has been to lift the foreign investment contract out of the scope of the national laws and subject it to an international regime. The argument is that the nature of the foreign investment contract exhibits features, which indicate that it has heavy international contacts. The money and assets come from overseas. They are

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brought in by foreign nationals entitled to the diplomatic protection of their home states. State responsibility of the host state is engaged in circumstances where the foreigners or their assets are injured. The assets could belong to several foreigners particularly if they are the result of pooling of resources among several foreign companies or consist of loans from multinational banks. The assets are brought in with the aim of promoting the development of the host state. These external contacts of the foreign investment contract are supposed to justify the application of neutral principles of law to the agreement. These neutral principles are referred to variously as “general principles of law”, “transnational law” or simply as international law. The theory is that the security of foreign investment contracts can be assured only if there is a body of neutral principles beyond the legislative reach of the host state which can govern such contracts. Arbitral bodies as well as writers have sought to establish the existence of such a body of principles. But, these sources are weak sources for the creation of internationally acceptable principles. The creation of this body of principles depends on the selective culling of rules of contract law from various Western legal systems and regarding them as general principles of law. The principles are culled selectively to promote the notion of the sanctity of foreign investment contracts. As much as developed, capital exporting states have sought to externalise the foreign investment contract by subjecting it to a supranational body of legal principles, the capital receiving, developing states have articulated principles which are supportive of the idea that foreign investment is a process which is entirely subject to the laws of the host country. This is a stance that is antagonistic to the creation of any supranational principles applying to foreign investment contracts. It insists on the exclusive competence of the domestic laws of the host state to deal with all aspects of the foreign investment contract as well as the later working of the foreign investment. The developing states have articulated these principles internationally in the forms of resolutions of the General Assembly of the United Nations, a body in which they have numerical superiority and in other fora, like the conferences of the non-aligned nations. The view that they have taken may be theoretically sound for the overriding principle of territoriality of states supports the view that the foreign investment process which takes place entirely within the territory of the host state should be subject to the exclusive jurisdiction of that state. In the natural resources sphere, this idea has been entrenched through the development of the principle of permanent sovereignty over natural resources. It has been extended as a general principle to the whole sphere of a nation's economy as a logical principle flowing from the notion of state sovereignty. At the international level, then, there is much conflict as to the existence of a body of supranational principles governing foreign investment transactions. The effectiveness of any international principle governing foreign investment must be doubted in view of the existence of this conflict. Bilateral processes have assumed greater significance in the context of this conflict. It has already been pointed out that several states have sought to devise sui generis principles of foreign investment protection through the conclusion of bilateral investment treaties. The importance of bilateral investment treaties to the foreign investment process should not be underestimated. Nevertheless, the usefulness of a choice of law provision referring to a supranational body of rules as the law governing the contract should be exploited. Since the task of the lawyer drawing up a foreign investment contract is to maximise the avenues of protection for the contract he draws up, the inclusion of a choice of law clause in the agreement must always be considered, despite what its later relevance may be. The prudent lawyer advising a foreign investor should consider the inclusion of a clause referring disputes arising from the foreign investment contract for settlement according to principles of a supranational system. The existence of a choice of law clause is also vital for invoking other avenues of protection like arbitration. But, whether these advantages can be secured, ultimately depends on the extent of the bargaining power of the foreign investor. [2] Noah Rubins and N. Stephen Kinsella, International Investment, Political Risk, and Dispute Resolution: A Practitioner’s Guide, 47-49 (Oceana Publications 2005) (Citations selectively omitted) 2. Choice of Law Clause *** An alternative solution is to designate the agreement itself as the governing law, supplemented either by the laws of the host State, “international law,” or rules common to both the host state and international law. In MINE v. Guinea, for example, the parties had selected the law of Guinea as the governing law, fixed at the date of the agreement, but only as to issues as to which the contract was silent or incomplete. The parties to a State contract may also agree to “international law” as the governing law. But however attractive “international law” might appear at first blush to foreign contracting parties, many commentators recognize the drawbacks of such a designation. Most importantly, international law may be poorly adapted to complex commercial or financial arrangements. Even where international law precedent exists in a certain area,

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the rules of customary international law are often only vaguely defined, and with significant lacunae. Furthermore, international law rules (formed in relations between States) can only be applied to private parties by rough analogy. Professor Bowett concludes in this regard that at present there are no international law rules of contract law. This is not to doubt the capacity of international law to develop such rules, but simply to state that at present it is difficult to identify any such body of rules. *** He [Professor Vagts] opines that a contractual designation of international law will lead arbitrators to “examine the civil/commercial law systems of the leading jurisdictions and deduce from them those commercial law concepts that are common to all.” This is similar to “general principles of law common to civilized nations,” which constitute one of the primary sources of customary international law. Since the function of a choice-of-law clause is to increase predictability and lower political risk, the practical utility of “international law” or “general principles of law” as governing a high-stakes State contract is open to serious doubt. In some State contracts, a compromise is reached between the interests of private and public parties, resulting in a designation of the host State's laws as governing, but only to the extent that they are consistent with international law. For example, in Kaiser Bauxite v. Jamaica, the governing law provision provided that “the Arbitral Tribunal shall apply the law of Jamaica and such rules of international law as may be applicable.” In this and other cases, tribunals have ruled that such a formulation calls for the application of local law, but only within the confines of internationally-accepted norms. A similar approach was taken in a concession agreement between Texaco Overseas Petroleum Company (TOPCO) and the Libyan Arab Republic. The choice of-law clause in that agreement established the governing law as: the principles of law of Libya common to the principles of international law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by international tribunals. The problem that arose in the interpretation of this clause was that, as discussed above, international law does not cover private contractual relations. As a result, one could argue that there are no relevant principles of Libyan law that are “common to international law.” There are two other constructions of this sort of provision which better preserve the intent of the parties. First, international law principles, while created in the context of State-to-State interaction, can be analogized to identify principles that usefully apply to private parties or investor-State relations. Second, a judge or arbitrator can find limiting principles in internationally-accepted commercial guidelines, most notably the UNIDROIT Principles of International Commercial Contracts… [3] Examples of Choice-of-Law Clauses [a] Trinidadian & Tobagon Model Production Sharing Contract for Deep Water Areas, HIS Energy, Petroleum, Economics and Policy Solutions (PEPS) Database (11) Article 32 – Applicable Law 32. 1The validity, interpretation and implementation of the Contract shall be governed by the laws of the Republic of Trinidad and Tobago. [b] UMC Production Sharing Contract Dated 29 June 1992 Between the Republic of Equatorial Guinea & United Meridian International Corp., 135 Basic Oil Laws & Concession Contracts: South & Central Africa 1, 59 (1998) (12) Section 16 – Laws and Regulations 16. 1For purposes of this Contract the laws of The Republic of Equatorial Guinea as existing and in force on the Effective Date of this Contract and generally accepted principles of international law shall govern this Contract. [c] Oil Concession Agreement Dated 13 October 1980 Between the Government of Abu Dhabi & Amerada Hess Petroleum Abu Dhabi Ltd., 75 Basic Oil Laws & Concession Contracts: Middle East 5, 17 (1982) (13) Art. 35 (G) This Agreement shall have the force of law. It shall be given effect and shall be interpreted and applied in conformity with the principles of law normally recognized by civilized states in general including those which have been applied by International Tribunals.

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[d] Pennzoil/Lukoil Group Agreement Dated 10 November 1995 on Production Sharing for the Karabakh and Area Adjacent in the Azerbaijan Sector of the Caspian Sea Between the State Oil Co. of the Azerbaijan Republic (Socar) and Lukoil International, et al., 23 Basic Oil Laws & Concession Contracts Russia & NIS 1, 105 (2003) (14) This Agreement shall be governed and interpreted in accordance with principles of law common to the law of the Azerbaijan Republic and English law, and to the extent that no common principles exist in relation to any matter then in accordance with the principles of the common law of Alberta, Canada (except for laws regarding conflicts of laws). This Agreement shall also be subject to the international legal principle of pacta sunt servanda (agreements must be observed). [e] Texaco Exploration Pakistan Petroleum Concession Agreement Dated 6 November 1990 Between the Islamic Republic of Pakistan, Oil & Gas Development Corp., & Texaco Exploration Pakistan Inc., 116 Basic Oil & Concession Contracts: Asia & Australia 2, 97 (1993) (15) Art. 29.5 This Agreement shall be governed and interpreted in accordance with and shall be given effect under the laws of Pakistan to the extent that such laws and interpretations are consistent with generally accepted standards of International Law including principles as may have been applied by international tribunals. [4] Case Law on Choice-of-Law Clauses See Chapter 6. [5] Comments and Questions 1. 2. 3.

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

What major concern drives foreign investors to seek a governing law other than that of the host state? What options or formulas exist for drafting the choice-of-law clause in foreign investment agreements? Does a choice of the host state's law in the contract necessarily prevent the application of other law to the parties' disputes? Under what circumstances may other law be applied to the parties' disputes? What issues may require the application of other law? See Yves Derains, Choice of the Law Applicable to the Contract and International Arbitration, 6 ICC Int'l Ct. Arb. Bull. 10 (May 1995) What differences do you find in the examples of choice-of-law clauses provided above? Will they lead to different results? How? Is the law chosen in the Trinidadian and Tobagon Model Production Sharing Contract limited in any way? If so, how? What is the significance of the first sentence of the governing law clause in the Abu Dhabi Oil Concession Agreement? Does a choice of international law, general principles of law or the lex mercatoria necessarily prevent the application of all host country law? In what circumstances might at least some aspects of host country law still apply? If a foreign investor brings a case before ICSID under a bilateral investment treaty, what law applies? For additional reading on this topic, see Marc Blessing, Choice of Substantive Law in International Arbitration, 14 J. Int'l Arb. 39 (1997); Pierre Lalive, Transnational (or Truly International) Public Policy and International Arbitration, in Comparative Arbitration Practice and Public Policy in Arbitration, 3 ICCA 257 (1986); Mohammad Reza Baniassadi, Do Mandatory Rules of Public Law Limit Choice of Law in International Commercial Arbitration, 10 Int'l Tax & Bus. Law 59 (1992); Klaus Lionnet, Should the Procedural Law Applicable to International Arbitration Be Denationalized or Unified?, 8 J. Int'l Arb. 5 (1991).

[C] Force Majeure Clauses [1] Karl-Heinz Böckstiegel, Arbitration and State Enterprises: A Survey on the National and International State of Law and Practice, 37-39, 42-48 (Kluwer Law International 1984) (Citations selectively omitted) *** 5.3 Acts of State as Force Majeure for the State Enterprise? A well-known and highly disputed issue is whether a state enterprise may be excused from non-fulfilment or a breach of contract by claiming force majeure, if the state owning or controlling the state enterprise by an act of public authority has interfered. Wellknown cases in this context are the USSR ban on oil export leading to the arbitration between Jordan Investments Ltd. v. Sojusneftexport of 1958 (1653) and the Polish ban on sugar export leading to the arbitrations between Czarnikow Ltd. and other West European sugar trading houses on one side and Rolimpex on the other side which were finally

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decided by the House of Lords in 1978 to the effect that Rolimpex could in fact claim force majeure in that case. (17) Similar questions have come up in relation to Iranian state enterprises in the recent past. *** … in many arbitration cases where this issue might be of relevance, the primary and most important source to deal with the problem should be the contract, especially if it defines cases of force majeure on one side and the respective responsibilities of the parties on the other side. Sometimes even if not expressly dealt with in the contract, the general conception and structure of the contract as well as conclusions from specific contractual clauses may permit the definition of ‘areas of responsibility’ for each of the parties. If impossibility of performing certain contractual obligations is then due to causes within one of these areas of responsibility, the respective party may be held responsible for non-fulfilment or at least for damages even if the respective cause is not due to that Party's fault. Commercial contracts very often hold a party responsible without the need to prove fault of that party simply because, in the view of the contractual parties, certain risks are in any case located or placed with one party. Thus, if contractual obligations cannot be fulfilled by a party because its own sub-contractors have not supplied it in time with the necessary materials, no arbitration tribunal would hesitate to hold that party responsible even if it proves that that sub-contractor was in no way due to its own fault. Similarly, parties may give express or implied indication in a contract that they consider the granting of certain government licences or the non-issuing of certain governmental prohibitions as falling within the area of responsibility of one of the parties simply because that party has the nationality of the respective state and has therefore in any case more means of influencing respective government action or non-action in that particular state. Only if the contract does not permit such an evaluation, the generally suggested principles mentioned below might have to be applied. *** 5.6 Suggested Principles for Lifting the Corporate Veil *** … If a state chooses to participate in international commerce by private or state enterprises, that should lead neither to discrimination nor to privileges for the state enterprise… As an example of a privilege one may refer to an eventual claim of immunity or to the possibility that the state may help its state enterprise avoid fulfillment of disliked contractual obligations by an appropriate act of public authority. States should not be able to manipulate obligations in international business relations in contracts of their state enterprises. Private enterprises contracting with foreign state enterprises should on the other hand not have additional advantages from the specific character of that contractual partner… On the basis of the material available from this research and other sources, it seems to me that the attempt to try to come to common denominators and criteria should start from what, in our context, the private enterprise and the state enterprise have in common – their function as partners in an international business relationship. This approach, well known from the doctrine of restrictive immunity, takes up the fundamental difference between a state – no matter in what legal form – participating in international commerce on one side and on the other side making use of its sovereign power as a legislator, public administrator or in any other way as a public authority. A functional approach, not dissimilar to Friedmann's ‘functional comparison’, therefore seems to be best fitted to come to common criteria. *** Starting from a presumption in favor of respecting the legal separation between the state and the state enterprise, therefore, those exceptional cases where the lifting of the corporate veil must be considered possible and necessary will have to be described hereafter. *** 5.6.2 Functional Identity with the State Furthermore, a state enterprise must be considered as so far identical with the state as it performs acts of public authority, because that is a function exclusively reserved in all countries through the world to the state itself. If therefore the state empowers a state enterprise to perform such functions, it must expect that contractual partners thereby identify that enterprise with the state and therefore consider the legal relationship to that extent as one between the private enterprise and the foreign state. In our context this may become especially relevant with regard to foreign investments, because in investment contracts and development contracts between states and foreign investors, we often find clauses dealing with such aspects of public authority as taxation, expropriation, exploitation licences and concessions, transfer authorizations, police requirements, etc. If contracts dealing with such matters are concluded by state enterprises with the permission of the state, then the invalidity of such clauses may not be claimed later on the basis of the legal separation between the state enterprise and

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the state. Whether a specific function is to be considered as one of public authority will normally have to be decided on the basis of the law of the state and state enterprise… *** 5.6.3 Evasion of Obligations – Abuse of Rights It is a generally accepted principle in both national and international law, already recognized by the Permanent Court of International Justice, that a state may not abuse legal forms and rights to evade obligation… *** When a state makes use of its powers of control and legislation to change the legal form of a state enterprise in order to evade the obligations of that state enterprise in a contract and an arbitration clause, this must be considered an abuse of rights. An example is the case Société des Grand Travaux de Marseille v. (East Pakistan Industrial Development Corporation), Bangladesh Industrial Development Corporation and the Republic of Bangladesh. Therefore, the arbitration award of May 31, 1973, holding the defendants severally liable seems convincing, while the decision of the Swiss Federal Tribunal of May 5, 1976, with a contrary result is most objectionable, as has been pointed out by Pierre Lalive. It is only in international arbitrations in which public international law is the applicable law, or at least part of the applicable law, that the corporate veil between the state enterprise and the state itself may have to be lifted if a state has tried to evade its own obligations in public international law by letting one of its state enterprises perform functions which for the state itself would be a breach of public international law. This is a consequence of the well-known principle that a state may not excuse itself for breaches of obligations in public international law by reference to its own national law and therefore also not by reference to legal forms for state enterprises available in its own national law… 5.6.4 Responsibility for Acts of Public Authority Finally, coming to the disputed question of whether and under what circumstances state enterprises may excuse non-fulfilment of contractual obligations by claiming force majeure due to acts of public authority by their own state, here also the starting point will have to be the principle that the separation between the state enterprise and the state is respected and that therefore normally acts of public authority by the state have to be accepted as an excusing case of force majeure. On the other hand, it should be realized that the question of force majeure does not arise in all cases of state interference. If the contract itself stipulates that the state enterprise is to be considered responsible for certain acts of state, no force majeure can be claimed if such an act of state then actually occurs. The same applies, if the applicable national law – as some do (18) – expressly holds the exporting party responsible for getting the required export licence. The INCOTERMS of the International Chamber of Commerce also provide for such a responsibility, and therefore in cases where the contract contains a reference to FOB-delivery, again the seller cannot claim force majeure. (19) In addition, an act of state cannot be considered as force majeure if it is proved that a party has formally applied or informally asked for the act; and often a party may be held responsible for an act of state because available remedies against the act were not exhausted. As mentioned above under section 5.3, interpretation of the contract may also lead to certain ‘areas of responsibility’ with the effect that causes within such areas will lead to liability, even if the party was not negligent or at fault in any way. In all such cases, a party may not claim force majeure regardless of whether it is a private enterprise or a state enterprise. Only in cases when no such specific provisions or considerations are applicable, does the general question arise of which rule should apply in view of the fact that it is after all a state enterprise claiming force majeure due to the act of some other organ of that same state. Here also the basic approach must be that the state enterprise must be neither privileged nor discriminated against in comparison with the private enterprise. Thus, the mere fact that a socialist state decides to exercise a state monopoly on foreign trade does not justify the conclusion that all acts of state are attributed to it as a contractual partner and therefore no act of state could be considered as an excused case of force majeure. On the other hand, not every act of state can be recognized as a force majeure just because a different organ of the state issues the act, for, in centrally planned economies and state trading countries the state could then always ‘provide a force majeure’ if the fulfilment of the contract is no longer considered advantageous. Therefore, even in commerce and arbitrations between the socialist countries, varying solutions, sometimes recognizing, sometimes refusing, force majeure for state enterprises have been disputed and practised. Finally, this again is to a certain extent also an application of the abuse of rights principle mentioned above. In view of the above-mentioned consideration that, for an arbitration tribunal, the question will mostly pose itself as a matter of proof and presumption, and taking further into account that the state party is in a much better position to provide details of proof on the background of its own acts of state, the following rules (20) could be applied:

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A. Acts of state in the form of administrative acts 1. 2. 3.

Due to the presumption that a state will not have its executive organs act to the detriment of its own foreign trade organs, including state enterprises, administrative acts of state should in principle not be considered as force majeure. This presumption is not applied, however, if it can be seen prima facie or can be proved by the state enterprise that the administrative act was caused by general considerations not connected with this contract or this sort of contract. In spite of rule A2 the presumption under A1 is applicable again, if the private party proves that in its specific case the general considerations did not apply.

B. Acts of state in the form of law 1. 2. 3.

If it is not a general law but a law for an individual case, the same rules apply as under A. A general law, due to its per definitionem general character, will in principle have to be recognized as force majeure. Rule B2 does not apply, however, if the private enterprise supplies at least prima facie evidence that it was in the interest of the state not to fulfill its contractual obligations which was the motivation of the law.

It should be noted that these rules, which were suggested by this author on an earlier occasion, have been accepted in a large international arbitration in Switzerland by a decision of September 9, 1983, in which the arbitral tribunal evaluated a claim of force majeure by an Eastern European state enterprise on the basis of these rules. It might also be of interest that these rules, when they were presented by the author in his main report on ‘The Legal Rules applicable in International Commercial Arbitration Involving States and State Controlled Corporations' to the 1983 Paris conference for the 60th anniversary of the ICC Court of Arbitration, found wide support from participants including Jiminez de Arechaga, former President of the International Court of Justice. In practical examples the rules mean: if in a state-trading country the state refuses an export or import licence, this is not normally a case of force majeure (A1). If the state party proves that general political considerations such as a food shortage for its population or a war in the designated delivery country has led to the refusal of the export licence, this is accepted as force majeure (rule A2). If a foreign investor does not receive the transfer of profits due from a state enterprise because the transfer law has been changed by the legislative body, this is a case of force majeure (rule B2). If, however, he applies evidence that the law was directed to stop payments to the foreign investors and keep the funds for other purposes of the respective state enterprises, the law is not accepted as a case of force majeure (rule B3). It is not seriously suggested that the criteria mentioned above would solve every problem in relation to claims of force majeure by state enterprises or that the undisputed acceptance of these criteria can be expected by all private enterprises, state enterprises and arbitrators having to deal with that question. But it is suggested that these general presumptions, on the basis of practical cases and legal literature in this field, could be of assistance in dealing with this issue in a way which can be calculated in advance and which takes into account the reasonable interests, procedural possibilities and access to eventual evidence of both sides concerned. [2] Examples of Force Majeure Clauses [a] Angola Model Production Sharing Agreement For Deep Water Blocks (February 1992), 141 Basic Oil Laws & Concession Contracts: South & Central Africa 1, 85 (2004) (21) 1.

2.

3.

4.

Non-performance or delay in performance by SONANGOL or CONTRACTOR, or both of them, of any of the contractual obligations, except an obligation to pay money, shall be excused if, and to the extent that, such non-performance or delay is caused by force majeure. If the force majeure restrains temporarily the performance of a contractual obligation subject to a time limit, the time given in this Agreement for the performance of such obligation and for the performance or exercise of any right or obligation dependent thereon, and, if relevant, the term of the Agreement, shall be suspended until the restoration of the status quo prior to the occurrence of the event(s) constituting force majeure, but only with respect to the areas affected. “Force Majeure”, for the purposes of this Article, shall be any occurrence beyond the reasonable control of the Party claiming to be affected by such event, such as, and without limitation, state of war, either declared or not, rebellions or mutinies, natural catastrophes, fires, earthquakes and communications cuts and unavoidable accidents. The Party which understands that it may claim a situation of force majeure shall immediately serve notice to the other Party.

[b] Concession Contract of 31 May 2001 Between the Republic of Cameroon & RSM Production Corp., 157 Basic Oil Laws & Concession Contracts: South & Central Africa 1, 3435 (2004) (22)

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Article 25 – Force Majeure 25. 1No Party shall be liable for the non-performance or the partial or late performance of any of its obligations, if the Party which is obligated is prevented by reason of Force Majeure. An event shall be considered to be an event of Force Majeure if it meets the following conditions: – –

it has the effect of temporarily or permanently preventing either of the Parties from performing the obligations incumbent upon it under this Contract; and it is unforeseeable or irresistible or beyond the control of either of the Parties, it is being understood that a failure to meet a payment obligation is never excused by Force Majeure.

25. 2For purposes of this Contract, the following occurrences, inter alia, shall be considered as Force Majeure if they meet the conditions referred to above: strikes, work stoppages, territorial disputes, fires, earthquakes, mudslides, disruption of the means of transportation, floods, hurricanes, volcanic eruptions, explosions, wars, guerrilla warfare, terrorist acts, blockades. 25.3 The Party prevented by the Force Majeure must immediately so inform the other Party and later confirm it in writing together with any useful and detailed information. In the event that performance of an obligation is only partial or late, by reason of an event of Force Majeure, the Parties shall continue to carry out the clauses of this Contract which they are in a position to carry out, despite the Force Majeure. Moreover, the prevented Party must do its best to meet its obligations, pursuant to this Contract. The Party prevented by the Force Majeure must renew its compliance with the provisions of this Contract within a reasonable period of time after the event of Force Majeure has ceased to exist. The Party which is not prevented shall do its best to assist the prevented Party in renewing its compliance with the provisions of this Contract. [c] UMC Production Sharing Contract Dated 29 June 1992 Between the Republic of Equatorial Guinea & United Meridian International Corp., 135 Basic Oil Laws & Concession Contracts: South & Central Africa 1, 59-60 (1998) (23) Section 17 – Force Majeure 17. 1Except as otherwise provided in this Section 17.1, each Party shall be excused from complying with the terms of this Contract, except for the payment of monies then due, if any, for so long as such compliance is hindered or prevented by riots, strikes, wars (declared or undeclared), insurrections, rebellions, terrorist acts, civil disturbances, dispositions or orders of governmental authority, whether such authority be actual or assumed, acts of God, inability to obtain labor, equipment, supplies or fuel, shortages of or delays in transportation or by act or cause that is reasonably beyond the control of such Party, such cases being herein sometimes called “Force Majeure.” If any failure to comply is occasioned by a governmental law, rule, regulation, disposition or order of the Government of The Republic of Equatorial Guinea as aforesaid and the affected Party is operating in accordance with accepted international petroleum industry practice in the Contract Area and is making reasonable efforts to comply with such law, rule, regulation, disposition or order, the matter shall be deemed beyond the control of the affected Party except that the State cannot claim Force Majeure because of such act of the State. In the event that either Party hereto is rendered unable, wholly or in part, by any of these causes to carry out its obligations under this Contract, it is agreed that such Party shall give notice and details of Force Majeure in writing to the other Party within seven (7) calendar days after its occurrence. In such cases, the obligations of the Party giving the notice shall be suspended during the continuance of any inability so caused. Both parties shall do all things reasonably within their power to remove such cause. [d] Agip/BP/Etal Production Sharing Agreement Dated 18 November 1997 in respect of the North Caspian Sea (Kashagan) Among Agip Caspian Sea V.B., et al., 39 Basic Oil Laws & Concession Contracts: Russia & NIS 1, 102-104 (2003) (24) Article XXXV – Force Majeure SECTION 35.1. Effect. Neither Contractor, the Republic nor Authority shall in any event be under any liability for failure to perform or delay in performing any obligation hereunder if and to the extent that such failure is caused by Force Majeure; provided, however, that (i) Force Majeure shall not excuse any obligation to make any payments called for pursuant to this Agreement nor the obligation to procure the grant or provision of any permit, license or approval required to carry out Petroleum Operations and (ii) circumstances which affect fewer than all of the Contracting Companies shall not constitute Force Majeure with respect to Contractor. SECTION 35.2. Notice of Occurrence. Following an occurrence of Force Majeure, the Party affected thereby shall, as soon as practicable after that occurrence has come to its attention, give prompt notice thereof to each other Party describing in reasonably full detail such Force Majeure, the effect which such Force Majeure is claimed to have on the

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affected Party's performance of this Agreement, the expected duration of such effect and the actions the affected Party intends to take to remedy the Force Majeure and mitigate its effects in accordance with Section 35.3. The notice as aforesaid shall be periodically updated to the extent necessary to ensure that such notice accurately reflects the circumstances relating to the Force Majeure and in any case not less than monthly. SECTION 35.3. Mitigation. A Party affected by Force Majeure shall use reasonable efforts to remedy such Force Majeure and mitigate the effects caused thereby. SECTION 35.4. Notice of Cessation. As soon as a Party affected by Force Majeure ceases to be so affected and is no longer delayed, hindered or prevented from complying with its obligations hereunder, such Party shall promptly notify the other Parties accordingly and resume performance of its obligations hereunder. SECTION 35.5. Certain Limitations. (a)

(b)

(c) (d)

A Party may not assert as Force Majeure its own acts. As applied to Contractor, “its own acts” shall mean the act of any Contracting Company, any Parent Guarantor or any Affiliate of a Contracting Company acting on behalf of or at the direction of such Contracting Company or Parent Guarantor. As applied to the Republic, “its own acts” means the acts of the Republic and any Governmental Authority which is acting on behalf of or at the direction of the Republic. With respect to governmental bodies or agencies, “acts” include the promulgation of Laws or other exercise of governmental authority. Where a Party has, in accordance with the terms of this Agreement, delegated the performance of an obligation hereunder to an Affiliate or Subcontractor, Force Majeure as to the Affiliate or Subcontractor shall constitute Force Majeure as to the delegating Party to the extent that the delegating Party is itself delayed, prevented or hindered from performing or procuring the performance of the obligation and the event or circumstance giving rise to such Force Majeure is not its own act, provided that the delegating Party diligently pursues all reasonable means of performing or procuring the performance of the obligation as promptly as practicable after the occurrence of Force Majeure has come to its notice. Changes in the price of Petroleum and changes in the availability of capital or financing to Contractor, any Contracting Company or any Parent Guarantor shall not constitute Force Majeure. Where a Force Majeure arises in respect of any part of the evacuation or transportation infrastructure, whether within or outside the Republic, thereby preventing Contractor from exporting to world markets the Petroleum produced in the Contract Area, (i) the Republic and Contractor shall endeavor to reach agreement on the basis of and level at which production can be continued provided it is technically feasible and there is no material adverse effect on Contractor or the Republic and (ii) the Republic shall use all reasonable efforts (but without any requirement to make any expenditure or assume any financial obligation), to the extent that it is within the Republic's power, to assist Contractor in remedying the Force Majeure.

SECTION 35.6. Prolonged Force Majeure. Should the occurrence of Force Majeure endure more than one hundred and eighty (180) calendar days, any Party may request that the other Parties meet to consider the desirability of amending this Agreement, the Exploration Work Program, any Appraisal Work Program, any Development Plan, any Gas Evaluation Plan, any Utilization Plan or any Budget to accommodate the effects of the Force Majeure; provided, however, that this Section 35.6 shall not be interpreted to impose any obligation upon any Party to agree to any such amendment. SECTION 35.7. Extension of Periods. The Exploration Term (and each Exploration Phase, as appropriate) and each Development and Production Period shall be extended for a period of time equal to the period of time during which the activities to be undertaken during such period (or phase) are entirely suspended as a result of Force Majeure, plus such additional period as is necessary to undertake remedial works and to reflect seasonal windows to enable operations to resume at the level immediately prior to the declaration of Force Majeure. In the event activities to be undertaken during such period (or phase) are only partially suspended, the Parties shall meet to discuss and agree on an appropriate extension (if any) of such period (or phase) (including such extension as is necessary to accommodate remedial works as contemplated above) in light of all the relevant circumstances. In the event the Parties are unable to agree to such an extension, the matter shall be deemed a dispute and such dispute shall be finally settled by an Expert pursuant to Section 38.4. [3] Case Law on Force Majeure Clauses [a] National Oil Corp. v. Libyan Sun Oil (ICC Case No. 4462/AS), First Award of 31 May 1985, 29 I.L.M. 565, 568-570, 584-600 (1990) [Schmelck (pres.), Koetz, Muskie] [In 1980, National Oil Corp., a Libyan state-owned oil company, and Sun Oil, a US company, signed a production sharing agreement which called for Sun to carry out and fund an oil exploration program in Libya. In 1981, Sun Oil suspended operations because its personnel were not able to enter the country under a new US Governmental order that

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US passports would no longer be valid for travel to Libya. Four months later, the US placed strict export regulations on technology exports to Libya. Sun Oil informed Libya that it would not be able to perform under the production sharing agreement due to these export regulations. Libya brought an ICC arbitration against Sun Oil and Sun Oil claimed force majeure as a defense.] Section 1 – The Agreement 1. 1On the 13th day of Moharam, 1390 corresponding to November 20, 1980, the National Oil Corporation (“N.O.C.”), a state owned Libyan corporation entered into an Exploration and Production Sharing Agreement (“EPSA”) with the Libyan Sun Oil Company (“SUN-OIL”), a Delaware (USA) wholly owned subsidiary of Sun Company Inc., a Pennsylvania (USA) corporation, in order to discover new petroleum resources on the territory of the Socialist People's Libyan Arab Jamahiriya (“Libya”) in a specific area called the Contract Area” (EPSA, art. 1.11)… This agreement was a risk contract to be governed by and interpreted in accordance with the laws and regulations of Libya including the Petroleum law (EPSA Art. 21). SUN-OIL was to undertake, under the conditions hereinafter summarized, to finance and to carry out Petroleum Operations in the Contract Area in accordance with the terms of the EPSA… *** Article 22 – Force Majeure 22.1– Excuse of Obligations Any failure or delay on the part of a Party in the performance of its obligations or duties here- under shall be excused to the extent attributable to force majeure. Force majeure shall include, without limitation: Acts of God; insurrection; riots; war; and any unforeseen circumstance and acts beyond the control of such Party. 22.2– Extension of Term; Termination If operations are delayed, curtailed or prevented by force majeure, and the time for carrying out obligations under this Agreement is thereby affected, the term of this Agreement and all rights and obligations hereunder shall be extended for a period equal to the period thus involved; provided, however, that either Party may terminate this Agreement upon written notice to the other if (a) the fulfillment of the obligation of either Party under this Agreement during the period commencing the Effective Date and ending on the date of commencement of commercial production under this Agreement in the Contract Area is affected by force majeure for a continuous period exceeding one (1) year or (b) the fulfillment of the obligations of either Party under this Agreement after the date of the commencement of commercial production under this Agreement in the Contract Area is affected by force majeure for a continuous period exceeding two (2) years. In the event of any such termination, all amounts owed hereunder by either Party to the other shall become immediately due and payable, except (in the case of such termination during the Exploration Periods) for costs of the Exploration Program to be paid to First party under Article 8.2 hereof. 22.3 Notification The Party whose ability to perform its obligations is affected by force majeure shall notify the other Party thereof in writing, stating the cause. *** Section I – Legal concept of force majeure 1.1 It is admitted by both Parties that the expression “force majeure” covers, under general Libyan law, a legal notion which is reflected in Article 360 of the Libyan Civil Code. According to said article and to the interpretation given thereof by the Supreme Court of Libya, the effect of force majeure is to release the obligor from his obligation under the agreement and force majeure is established when an event, meeting the three following conditions occurs: (i) being beyond the control of the Parties; (ii) being unforeseeable at the time the agreement is entered into and (iii) rendering the performance of the obligation absolutely impossible. *** 1.2 The Parties also acknowledge that Article 360 of the Libyan Civil Code is not a public order provision and that it is therefore possible to contractually waive its provisions. It is admitted that contracting parties are entirely free either to exclude force majeure, or on the contrary, make its conditions more flexible. *** 1.6 Such are the respective positions of the Parties on the legal concept of force majeure which concept this Tribunal has now to define. The fact that the Parties felt it necessary to include in the EPSA a force majeure clause, demonstrates that they were not satisfied with the mere application of the rules of the Libyan Civil Code relating thereto.

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*** 1.7 The Tribunal does not exclude the possibility that in selecting the adjective “unforeseen” instead of “unforeseeable”, SUN-OIL and N.O.C. expressed their intention to exclude the requirement of unforseeability or at least, not to give such requirement a strict meaning. However, what of the other condition required under general Libyan law, namely the impossibility to perform? Article 22 does not make any reference thereto. Does this mean that any circumstance beyond the control of the Parties would excuse the nonperformance of the obligation or the delay in performing subject to the sole condition that such circumstance was not foreseen? *** The word “attributable” underlines the requirement for a direct causal link between the event invoked as a force majeure event and the non-performance or delay in performing the obligation. It does not, however, give the key to the problem… It is true that more and more international long term agreements contain provisions according to which is considered as an event of force majeure any event beyond the control of the parties which renders the performance of the agreement very difficult and/or more expensive than anticipated or any event which cannot be overcome by the use of reasonable means at reasonable costs. Such provisions when agreed upon, leave no doubt as to the intent of the parties. They clearly reflect that the parties intended to avoid the impossibility to perform be considered as the sine qua non requirement for force majeure. However, in order to be accepted, such exceptions to the common law of force majeure must be expressly provided for; they should not be presumed or implied. *** All this leads to the conclusion that it would be unjustified, in the absence of any specific provision to such effect in Article 22, to construe such article as revealing an intent of the parties to waive an essential rule of Libyan common law according to which force majeure is only established when the event invoked by the defaulting party created an impossibility to perform whether on a temporary or a permanent basis. *** 1.9 To summarize, the Tribunal considers that Article 22 expresses the intent of the Parties not to strictly apply the usual criteria of force majeure, in particular with respect to the unforseeability requirement that the event must have rendered definitively or temporarily impossible the performance of the contractual obligations. The Arbitral Tribunal is satisfied that in entering into the EPSA, the Parties, whether inadvertently or on purpose, adopted a force majeure provision under which a Party's non-performance or delay in performance is excused only if it has become impossible for that Party to perform the Agreement according to its terms. *** 1.11 As regards Libyan Civil Law, one must rely upon Article 360 of the Libyan Civil Code and upon the case law of the Supreme Court of Libya in order to determine what is the meaning of “impossibility to perform”. Article 360 of the Libyan Civil Code reads in its English translation as follows: “Impossibility of Performance An obligation is extinguished if the debtor establishes that its performance has become impossible by reason of causes beyond its control”. *** 1.12 The oral and written testimonies of the experts on Libyan Law submitted on this subject as well as a careful examination of the LATSIS case leave no doubt as to the fact that, under Libyan Civil Law, the impossibility must not be determined subjectively, i.e., by reference to the capabilities and personal means available to the defaulting obligor but rather objectively. It is because of such meaning that the impossibility is said to be “absolute… ”… *** 2.1 In view of the forgoing meaning of Article 22, SUN-OIL, which has the burden of proof, must show evidence that each of the two regulations successively enacted by the U.S. Government did constitute (i) a circumstance “beyond the control” of the Parties, (ii) an “unforeseen circumstance” and (iii) an impossibility to continue exploration. 2.2 The first requirement is certainly met since the regulations were acts of Government and thus clearly beyond the control of the Parties. 2.3 As to the second requirement, the Arbitral Tribunal considers that both regulations constitute “unforeseen circumstances” at the time the agreement was signed (November 1980)…

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*** 2.4 There remains to consider the third requirement which is the crucial point. Was SUNOIL in the impossibility to continue exploration as a consequence of each of the two regulations and for as long as they would remain in force? In other words, was there any solution for SUN-OIL, any possible avenue other than the mere discontinuance of exploration? *** 2.6 The Passport Order There is no question that the order on passports in that it prohibited U.S. citizens from traveling or staying in Libya, did not allow SUN-OIL to continue, in the immediate future, exploration under the same conditions as when it started. But did such order render exploration impossible as long as the restrictions to the issuance of passports to Libya would remain in force? *** 2.7 The Arbitral Tribunal is willing to admit that, upon signing the EPSA, it was assumed by both Parties that SUN-OIL would carry out the exploration with its own management and personnel. It also admits that the majority of SUN-OIL's personnel were American citizens. However, the Arbitral Tribunal takes note that: – –

on the one hand, it was at all times possible for SUN-OIL to hire non-US personnel, both for permanent work in and occasional travel to, Libya. on the other hand, it is not proven that the possibility to use non-US personnel was outside the intention of the Parties.

2. 8As to the first point, SUN-OIL has maintained that the relations between SUN-OIL and its Canadian affiliate, SUN-COR… did not allow SUN-OIL to use the non-U.S. personnel of SUN-COR in order to continue the exploration program provided for by EPSA. *** (i) SUN-OIL held 75% of the capital of SUN-COR and thereby had some leverage with this company even if, as of December 1982, the majority of the directors of SUN-COR were Canadian directors, (ii) SUN-OIL could have asked to assist it in the exceptional situation which SUN-OIL was faced with in December 1981, and it is not proven or even alleged that SUN-OIL has ever taken such steps. In this respect, it seems important to note that SUN-COR fell under the definition of SUNOIL's “affiliated companies” referred to in Article 17 of the EPSA and that, under said Article, SUN-OIL “(…) shall furnish, and shall cause its parent and affiliated companies to furnish, all aid, including technical aid, foreign personnel (subject to the provisions of Article 5.4 and 5.5 hereof), training and services required or requested by Operator or the Management Committee in connection with Petroleum Operations hereunder(… )(…)” 2. 9In addition, and still on the question of whether SUN-OIL could have found non U.S. technicians on the oil market, the Tribunal relies upon the testimony of Mr. BLOM. *** Mr. BLOM has testified that Occidental Oil Corporation was able to continue its Libyan production and exploration operations despite the Passport Order by replacing, within a few months, no less than 230 American nationals by an equal number of non-U.S. personnel partly from within the Occidental group of companies, partly from outside sources. *** 2.11 For the reasons mentioned above, the Arbitral Tribunal finds that SUN-OIL failed to show evidence that it was possible for SUN-OIL: – – –

to hire non-US personnel either from within the SUN group of companies or from outside sources in order to fill the 5 “key slots” in the SUN office and Benghazi; to add a sufficient number of non-US scientists to its scientific personnel and to send them to Libya from time to time to supervise the local work; to organize outside Libya meetings of the Management Committee and other meetings which might have been attended by SUN-OIL's US managerial personnel.

*** 2.17 The Export Regulations On March 12, 1982, the U.S. Government enacted a regulation limiting the exports to Libya, in particular with respect to technical equipment and data not essentially available abroad, and concerning gas and hydrocarbons.

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On April 21, 1982, SUN-OIL informed N.O.C. that pursuant to this new regulation it had to obtain an export license in order to continue conducting its operations in Libya and that this constituted a new event of force majeure until it would obtain such licence. On June 23, 1982, SUN-OIL advised N.O.C. that it had been denied the licence which it had applied for in the meantime. 2.18 To support its contention that the regulation on exports constituted for it a new impossibility to continue exploration, SUN-OIL puts forward the following reasons: *** c)

It was an essential condition of the agreement that SUN-OIL as Operator uses its own technological resources to perform EPSA.

*** 2.20 *** May one conclude that the only mode of performing the EPSA commonly contemplated by the two parties was through the use of SUN-OIL's own in-house technology? The terms of the EPSA which, pursuant to Article 27.6, cited above, constitute the entire Agreement of the Parties, do not confirm such an alleged common intention. Unlike the LATSIS case where there was clear contract language on which the Libyan Supreme Court was able to base its finding that the only mode of performing the contract was “by way of the Suez Canal”, the Tribunal finds nothing in the EPSA to support the view that the only commonly agreed mode of performing was by way of using SUN-OIL's own in-house technology. On the contrary, the language of the EPSA indicates that it was the common intention of the Parties to confer on SUN-OIL, as Operator, the broadest possible flexibility and discretion in selecting appropriate technologies, contractors, consultants, scientists, and technical personnel. *** 2.22 SUN-OIL argues that it would be incompatible with the position of an “Operator” under EPSA agreement if the “Operator” were required to wholly delegate its managing and supervisory functions to outside contractors. The Tribunal agrees. But the Arbitral Tribunal does not see why SUN-OIL would have been forced to divest itself from management control if it had decided to adjust to the emergency created by the Export Regulations by choosing from among the available companies (including its own affiliates in countries other than the US) those with similarly advanced and appropriate technologies, by bringing together a team of qualified non-US explorationists, by co-ordinating their work in an efficient manner, and by using the overall exploration effort in the most effective and economic manner. Thus, one reaches the conclusion that the exclusive use by SUN-OIL of its own technology was not an essential condition of the agreement. *** The test to be applied here is whether a reasonable person placed in the same circumstances as the party seeking to be excused would have been able, despite the supervening event, to perform the contract… Normally, the judge must refer to a theoretical reasonable person. In this case, there is an unusual situation in which parties placed in the same circumstances exist in reality and have been able to overcome the supervening obstacle to performance. It would be most difficult to accept that another similarly situated party can successfully rely on that same obstacle as a ground of force majeure. It is to be concluded that the U.S. Export Regulations enacted on March 12, 1982 did not constitute for SUN-OIL an event of force majeure excusing the discontinuance of exploration for such time as such regulations would remain in force, whether viewed separately or in conjunction with the Passport Order. *** The Arbitral Tribunal Unanimously Decides As Follows: 1)

Neither the US government passport order… nor the US government export regulations… constitute events of “force majeure” within the meaning of Article 22 of the Exploration and Production Sharing Agreement… which would have excused SUN-OIL's cessation of performance under said Agreement.

[b] Karaha Bodas Company L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (‘Pertamina’) and Pt. PLN (Persero) (‘PLN’) (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 18 December 2000, 16(3) Mealey’s Int’l Arb. Rep. C-2, C-7 to C-8 (2001) [Yves Derains (pres.), Piero Bernardini, Ahmed Sadek El Kosheri] [In November 1994, Karaha Bodas Company L.L.C. (“KBC”), Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (“Pertamina”) and PT. PLN (Persero) (“PLN”) entered into two contracts regarding the management and development of a geothermal plant (“Karaha

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Project). Both Pertamina and PLN are state-owned companies. In 1997, after a severe economic crisis, the Government of Indonesia decided to postpone the Karaha Project. After negotiations between the parties broke down, in April 1998, KBC served its notice for arbitration against both PLN and Pertamina (“Respondents).] (Citations selectively omitted) 53. It is a fact that with the Presidential Decree n.5/1998 of January 10, 1998, the parties were not able to perform their main obligations under the contracts and that they actually ceased to perform them… 54. … It is common ground among the parties that the decision by the Presidential Decree to postpone the Karaha Project is a “Government Related Event”, as defined both in the JOC and the ESC. The JOC (Article 15.2(e)) reads: … ”… Events of Force Majeure shall include, but not limited to:… (e) with respect to Contractor only, any Government Related Event… ”… Thus, it results from the two contracts that the Presidential Decrees were Force Majeure Events for KBC, but not for PERTAMINA and PLN [Indonesian state-owned companies]. The legal consequence is that, while KBC was entitled to invoke the Presidential Decrees as a legitimate excuse not to perform its obligations, PERTAMINA and PLN were not entitled to do so as far as the performance of their own obligations was concerned. To assert the contrary, as the Respondents do, is just an attempt to deprive of any significant meaning the provisions of Article 15.2 (e) of the JOC and Section 9.2 (e) of the ESC which clearly indicate that a Government Related Event is not a Force Majeure Event with respect to PERTAMINA and PLN. 55. Since PERTAMINA and PLN were not in a position to rely on the Presidential Decrees as a valid excuse not to perform their obligation, under the ESC and the JOC, the nonperformance of such obligations is a breach of contract for which they are liable, unless they can show another exonerating circumstance. They have not, and in this respect, the Respondent's allegations that KBC failed to prove its readiness, willingness and ability to perform the Project are immaterial. 56. … Contrary to the Respondents' point of view, the fact that they are not responsible for the Governmental decision to prevent the performance of the Contracts does not exempt them from liability if they do not perform their own obligations in abiding by the decision. The Governmental decisions, in this case the Presidential Decrees n.-39/1997 and n.5/1988, do not amount to a breach of PERTAMINA's and PLN's obligations. However, since a Governmental event is not a Force Majeure event for them, their non-performance has no legitimate excuse and must be considered as a breach of contract. [c] Mobil Cerro Negro, Ltd. v. Petróleos de Venezuela, S.A. and PDVSA Cerro Negro, S.A. (ICC Case No. 15416/JRF/CA), Final Award of 23 December 2011, (25) 48-49, 64-65, 315-316, 323325 [Karl-Heinz Böckstiegel (pres.), Jacques Salés, Henri C. Alvarez] [This dispute arose out of a joint venture between the Claimant, Mobil Cerro Negro (“Mobil”), and one of the Respondents, PDVSA Cerro Negro, to exploit heavy oil resources located in the Orinoco Belt in Venezuela. The joint venture had been set up as part of the apertura petrolera, a Venezuelan Government campaign to attract foreign investments in the 1990s. This policy came to an abrupt end when President Chávez moved to reassert control over the oil industry to capture a larger share of the petroleum rent. In April 2007, the Venezuelan Government seized the project's assets without offering compensation. Mobil took the claim to arbitration, seeking indemnification under the terms of its joint venture agreement with PDVSA Cerro Negro, as well as under Petróleos de Venezuela's parent guarantee. The contracts required PDVSA to indemnify Mobil against the effects of any expropriation, seizure of assets, or discriminatory measure imposed by the Venezuelan Government causing a “Materially Adverse Impact” on Mobil's cash flows from the project.] (Citations selectively omitted) E.I.10.Articles 21.1(a) & (b) – Force Majeure Claimant’s Translation 21.1Non-imputable Extraneous Cause – Definition (a) (b)

There shall not be considered to be a breach by any of the Parties for purposes of this Agreement, when such breach is caused by an Event of Force Majeure. For the purposes of this Agreement, an “Event of Force Majeure” shall mean any event or circumstance, other than lack of funds, beyond the reasonable control of, or unforeseen by, the Party obligated to perform the corresponding obligation, or which, being foreseeable, could not be avoided in whole or in part by the exercise of due diligence, including, but not limited to, strikes, boycotts lockouts and other labor difficulties, fires, earthquakes, tremors, landslides, avalanches, floods, hurricanes, tornadoes, storms, or other natural phenomena or calamities, explosions, epidemics, wars (declared or not), hostilities, guerilla activities, terrorist acts, riots, insurrections, civil disturbances, acts of sabotage, blockades, embargoes, or acts of the government or orders, judgments, resolutions, decisions or other acts or omissions of any governmental authority, civil or military.

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*** E.1.1. Article 1 – Definitions *** “Discriminatory Measure” shall mean any change in (or any change in the interpretation or application of) Venezuelan law, or any Governmental Measure which is unjust and is applicable to the Project or any Foreign Party in its capacity as a participant in the Project and is not generally applied to public or private entities engaged in Extra-heavy crude upgrading projects in the Republic of Venezuela; or, with respect to tax rates, foreign exchange controls or the expropriation or seizure [“ocupación”] of assets of the Project or of a Foreign Party's interests in the Project, provided that such change in (or any change in the interpretation or application of) Venezuelan law, or any Governmental Measure is not generally applicable to Companies in the Republic of Venezuela (including the imposition of income tax on the Project or on any Foreign Party in its capacity as a participant in the Project, at a rate that does not correspond with what is provided in the last sentence of the Fifteenth Condition); or, with respect to municipal taxes (license to perform industrial and commercial activities), the imposition of municipal taxes on the Foreign Parties in their capacity as participants in the Association notwithstanding the provision in the Fifteenth Condition, only if the aggregate burden of the municipal tax on the affected Foreign Party's gross revenue from the Project, exceeds by four percent (4%) the affected Foreign Party's gross revenue from the Project in the fiscal Year at issue, in which event, the amount of municipal taxes that exceeds such four percent (4%) shall be a discriminatory measure. A measure that falls within the definition of Discriminatory Measure shall be deemed unjust if it results in a Materially Adverse Impact. *** 522. The Tribunal is aware that, indeed, there have been many arbitrations where a state party or state entities tried to excuse themselves from performance based on their own government's actions and such an excuse was not accepted by the tribunals. The Tribunal sees no reason why this principle should not be applicable here. Respondents are government companies. PDVSA's President, Mr. Ramirez, was simultaneously both the President of PDVSA and the Minister of Energy. The Tribunal also notes that, although the government and PDVSA are separate legal entities, under Article 15.2(b) of the AA [Association Agreement] there is no obligation for indemnification if the government reduces its direct or indirect interest in Respondents. In this manner, there is a link to government control within the contract. 523. However, in the present case, the Tribunal considers that it does not have to rely on this general principle or such general considerations in view of the specific provisions agreed in the AA. 524. While the two Respondents in the present arbitration are different legal entities from the Republic of Venezuela, they are, by the AA and the Guaranty, contractual parties subject to the respective arbitration clauses referring disputes to ICC arbitration and to the contractual remedies provided in these legal instruments. Regardless of whether an act of government emanates from the same public entity that is a party to the contract or from another public entity, Respondents have a responsibility to compensate Claimant for acts of government in so far as such a responsibility is expressly provided for in the AA, and particularly in its Article 15. The definition of Discriminatory Measure in Clause I expressly refers to both changes in the law and governmental measures and thereby clearly indicates the scope of the contractual responsibility of the Respondents. In so far as that scope goes, it is therefore clear that neither type of state act can be considered a hecho del principe which may excuse the contractual parties from non-fulfillment of their contractual obligations. *** 539. Article 1271 of the Venezuelan Civil Code provides, in English translation, that “the debtor shall be ordered to pay damages, both for failure to perform the obligation and for delay in performance, unless he proves that the failure or delay are due to an extraneous cause not imputable to him… …” Article 1272 of the Civil Code provides for its part, also in English translation, that “the debtor is not obligated to pay damages when, as a consequence of a fortuitous event or force majeure, he fails to give or do what he was obligated [… ].” 540. In the light of these two consecutive articles of the Venezuelan Civil Code, the Tribunal finds that the terms “non-imputable extraneous cause” and “force majeure” can be used interchangeably for present purposes to refer to an excuse for the failure to perform or delay in performing an obligation. 541. The Tribunal further notes that, under Article 1159 of the Venezuelan Civil Code, “contracts have the force of law between the parties.” Consequently, the Tribunal finds that the operation of the general “force majeure” or “non-imputable extraneous cause” excuse can be modified if such modification is mutually agreed by the Parties. 542. More specifically, the Tribunal finds that where risk of an event that would otherwise

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qualify as a “non-imputable extraneous cause” or “force majeure” is contractually allocated to a party, the occurrence of the event can no longer serve as an excuse for non performance under Venezuelan law. 543. The Tribunal also finds that if a given governmental act fits within the scope of “Discriminatory Measure” and also within the scope of “non-imputable extraneous cause”/”force majeure”, the characterization of the act under Clause XV of the AA and the definition of “Discriminatory Measure” must be considered as a lex specialis and must prevail. In other words, assuming an alleged event of force majeure is a “Discriminatory Measure”, it falls under Clause XV (“Consequences of Governmental Actions”), not under Clause XXI (“Force Majeure”). 544. Finally, without espousing Claimant's view that Minister Ramirez was “the chief architect” of the alleged “Discriminatory Measures”, or that as a general proposition an enterprise owned and controlled by the State cannot rely on acts of that State as an excuse for non fulfillment of a contract, the Tribunal, addressing again the matter of extraneousness, finds that it is not “irrelevant” that Mr. Ramirez was simultaneously both the Minister of Energy and the President of PDVSA, and, in the same vein, that Decree-Law 5200 is not necessarily extraneous to the Minister of Energy / President of PDVSA. 545. The Tribunal thus concludes that Article 15 AA, as a lex specialis over Article 21, allocates the risk for actions of the Republic of Venezuela that might otherwise be force majeure. Indeed, the Tribunal considers that this must have been the intention of the Parties in view of the well known history among the Parties before the conclusion of the AA. 546. Therefore, the Tribunal rules that any responsibility found for the Respondents for Discriminatory Measures due to Article 15 AA is not excused by force majeure. [4] Comments and Questions 1. 2. 3. 4.

5.

6. 7. 8.

What differences do you find among the examples of force majeure clauses provided in the text above? What is the significance of each difference? Is there a generally-accepted definition of a force majeure event? Is it possible for an event to constitute force majeure if it does not meet the generally accepted definition? Under what circumstances? Do any of the examples of force majeure clauses provided above allow an event to constitute force majeure without meeting the generally-accepted definition? How does it permit this result? If the law of a common law country is applicable to a contract and no provision is made in the agreement for force majeure, do the parties have any protection from an event of force majeure that disrupts the performance of the contract? Does the analysis change if the law of a civil law country governs? May a code provision of a civil law country providing for force majeure be waived by the parties? Can a state-owned company rely upon an act of the government that owns it as an event of force majeure? Under what circumstances? What rationale permits such a result? Are there any exceptions? What are they? What limits are provided by the examples of clauses set out above upon the ability of a party to invoke an event of force majeure?

[D] Stabilization Clauses [1] Stabilization Clauses [a] Thomas W. Walde and George Ndi, Stabilizing International Investment Commitments: International Law Versus Contract Interpretation, 31 Tex. Int’l L.J. 215, 226-228, 260-266 (1996) (26) (Citations selectively omitted) D. The Special Emphasis on Tax Stabilization by Energy/Mineral Investors Resource and energy projects (oil, gas, mining) have a very acute need for stability which goes beyond the normal stability requirements of other shorter-term industrial projects. It is therefore not surprising that negotiations for energy and resource investment tend to employ very extensively contractual methods of political risk management, including stabilization guarantees… *** The foremost characteristic of investment projects undertaken by these industries is the typically long period of exploration, appraisal, and development. As a rule, mineral projects involve ten years or more of exploration in various phases… Costs incurred, particularly in the latter stages, are very substantial (e.g., ten to thirty million dollars for a major mineral exploration venture; ten to twenty million dollars for each single oil exploration well drilled offshore, with comprehensive oil/gas exploration programs costing $100 million and more). Success in exploration is very elusive; in some geological

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provinces, it may take ten ventures to find a commercial field. Companies employ quite sophisticated financial analysis models based on the quantity and timing of expected future cash flows, but forecasting these cash flows, while looking like a mathematical exercise, is in fact quite speculative since the size and quality of a mineral deposit (oil, gas, or hard minerals) is rarely known in any meaningful way before substantial, highly uncertain, and costly drilling. Companies, as a rule, tend to try to base tax negotiations on a marginal case. If the agreed fiscal regime reflects only the marginal case conditions, a much better than assumed project performance can put the contract's tax mechanism under considerable renegotiation pressure. The prices of all mineral commodities are, in addition, unpredictable; all one knows is that they move in unfathomable cycles. Some decision models now use probability functions and incorporate exploration risk and various approaches (scenario ranges or probability distribution functions) to deal with the uncertainty of price risk. Given these massive uncertainties, which do not exist in most other cases of industrial foreign investment, it is understandable that the one thing the natural resources industry abhors is the addition of more factors of great uncertainty (such as the fiscal regime) into their decision process. Fiscal uncertainty could wreak havoc upon these models; at the very least, it means that considerable investment, already at high risk of failure, will be exposed to additional risk. Uncertainty thus distorts the risk/reward equation which is at the heart of mineral investment. Since it is the expectation of an above-average reward which motivates the mineral investor and compensates for the often massive exploration risk, uncertainty of the reward (driven by the prospect of fiscal intervention into negotiated terms) means that the prior risk is not worth taking. If a government can take away the reward once the risk has been overcome by the company, then it does not make sense to assume the heavy risk (not shared by the government) in the first place. As we know from the dynamics of the government/company interaction, governments are often quite ready to promise a large reward when the risk looms large and unmanageable for a national company. After it has been assumed and successfully mastered by a foreign investor, the reward, in this ex-post perspective, no longer seems justified. This change of host state perspective to the risk/reward equation becomes particularly acute once a new government takes office, retains new advisers operating with the benefit of hindsight, and contrasts the largesse of its predecessor – eyed with suspicion anyway – with the magnitude of the foreign company's financial success. Greater uncertainty does not mean investment will not be undertaken. A very promising or fashionable geological resource can attract investors even under conditions of severe political risk… Resource companies are moved by the competition to secure mineral acreage and deposits – attractive in terms of geology, technology, and commercial feasibility. Very high attractiveness can overcome perceptions of serious political risk in the case of adventurous companies or companies desperate to maintain their reserve/production ratio. But uncertainty does penalize the average type of mineral investment opportunity. It also adds considerably to the transaction cost of mineral investment since complicated and costly risk management strategies must be implemented. A mineral investor/project sponsor is likely to experience a negative cash flow on an exploration project for many years. This cash outlay, with a very uncertain payoff, must be funded in some way… All these mechanisms of funding the high-risk early stages of mineral development are imperiled if the mechanisms to secure the payback in case of successful exploration are undermined by the government's lack of credibility in keeping its commitments. *** VIII. Stabilization Clauses – Contractual Practice *** The traditional form of the stabilization clause – underlying all of the arbitral awards – had as its objective the freezing of the applicable law, the fiscal regime, or other essential investment conditions. The government was contractually prohibited from enacting legislation inconsistent with the agreement. In a more moderate version, such legislation, if enacted, was declared not applicable to the agreement. This Article is directed toward this type of provision. Its frequency diminished substantially in the 1970s, when the conflict between stabilization clauses and the principle of permanent sovereignty over natural resources was highlighted in major U.N. resolutions and in basically all writings from LDC [less developed countries] lawyers and their sympathizers. The stabilization clause practice made an unexpected comeback in the 1980s and 1990s, as developing countries' policies reversed from restriction to encouragement of foreign investment. A country with a previously poor record in dealing with foreign investors was usually persuaded that its readiness to accept stabilization guarantees would reduce the perception of political risk and was, in fact, an instrument of managing, from the host state's side, the political risk. We also know that freezing clauses of all sorts are currently being revived in transition economies where there is an acute perception of extreme legal, institutional, and political uncertainty (a situation which instinctively causes Western legislative advisers and company negotiators to respond via stabilization

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clauses). The 1970s debate over nationalization, forced renegotiations, and arbitral awards dealing with compensation is likely to resurface over the next decade when the countries in the East question the deals made during the transition period. This traditional form of stabilization clause – intended to commit the state per se and at the core of its legislative sovereignty – evolved under the impact of both LDC assertiveness and the legal controversy surrounding freezing provisions in state contracts. First, some clauses, rather than unequivocally committing government to refrain from legislation, focused instead on defining the relationship between general law and specific agreements. Consistency clauses emphasized the character of the agreement as a special regime which was to prevail over general legal regimes, even if based on subsequent legislation. Such formulations should be seen rather as interpretative guidelines. While they are not meant to be an unequivocal restriction on future legislative action (and would not have been accepted by the state's negotiators), they will require subsequent legislation to explicitly override them in order to affect the agreement. Until such explicit repeal – which states may often be reluctant to do – subsequent legislation is inapplicable by the operation of the contractually anchored lex specialis rule. Further refinements made stabilization clauses focus not on any subsequent law, but on legislative interventions into specific core areas of the contractual regime – primarily, the fiscal regime set up by the agreement. Again, depending on the status of the agreement (ratified as law, authorized by law to set up its own fiscal regime, or subject to overriding national tax regulation), such a clause can serve as an interpretative guideline, protecting the contractual tax regime until such time as subsequent tax laws explicitly abrogate the contractual tax terms. The emergence of state enterprises in the 1970s (mostly as the exclusive holders of mineral rights) transformed the foreign investment agreement. In place of the traditional “state contract” concluded between the foreign company and the government, the foreign company now provides contract services (albeit in function and content more or less equivalent to the traditional concession contract) to the state company. While the system of remuneration set up under most service contracts, in effect, mirrors the tax regime applicable to more traditional concession and other equity-based investment arrangements, the foreign investor is converted, in law and form, into the role of a contractor to the state company. Since the company no longer deals directly with the government, it is more difficult to find a mechanism to keep the government from intervening in the contractual relationship between the state company and the foreign contractor. As a rule, state enterprises would act ultra vires if they would commit the state as such not to exercise its general sovereign and legislative powers against contracts concluded by the state company. Theoretically, the state could, through a separate agreement, enter into a contractual relationship with the foreign company; however, this is now quite rare. Given the often close relationship between governments and state companies, the risk of government intervention into such contractual relationships still exists. *** One way to lessen this risk would be to hold the government directly contractually liable for actions taken against a contract with a state company, on the theory of its full control over the state company. This line of argument has, in fact, been played out in earlier cases with state companies arguing force majeure for government-imposed impossibility of performance. This approach, however, must overcome the separate legal personality of the state company, and such lifting of the corporate veil is rarely accepted. Contractual practice, though, has been creative in finding a mechanism to overcome the disassociation of the state as such. In our view, the predominant “modern” stabilization clause no longer looks towards the government as such, but makes the state enterprise responsible for unilateral intervention by its own government. While state enterprises do not control their governments and cannot reasonably be made legally responsible for what their governments do, they can assume the mainly financial risk of government intervention into their contractual relationship. Indeed, current practice has moved towards allocating the risk of government action to the state company – on the theory that the state company is better positioned to influence such risk, is closer to the source of the risk, and is likely to have the resources for shouldering such risk. Thus, the modern stabilization clause is, in effect, a risk allocation provision. The state company promises to compensate the foreign contractor should his financial burden increase due to subsequent government legislation. Such compensation can take the form of an offset of the financial value of subsequent legislation against payments due by the contractor to the state company or of a corresponding counter-payment by the state company to the contractor. Modern service contracts – especially production-sharing agreements – create a financial regime where the contractor assumes risk and expenditures and is repaid out of production. Here, the mechanism for remuneration (often part of the annexed accounting rules of the agreement) sometimes provides that the recoverable expenses due the contractor out of production (‘cost oil’) include all taxes and comparable government levies except for those expressly mentioned in the agreement. In other words, the government may play with its tax levies, but this is of reduced relevance to a contractor who will, according to the agreement, recover

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whatever additional taxes and levies the government wishes to impose. The cost recovery mechanism expressed in production-sharing agreements and accounting rules thus can function effectively as a limited stabilization clause, without all the problems of tainting the government's exercise of sovereign powers of legislation. When viewed from this perspective, the function of the stabilization clause has been effectively converted from an instrument aimed at the government's legislative powers to a risk allocation mechanism in a purely – or mainly – commercial contract with the state company. *** In summary, contractual practice has moved away from the traditional freezing clause and developed two major successors: (1) a renegotiation clause which intends to restore a disrupted equilibrium (and hence functions much like the original stabilization clause) and (2) an almost universally practiced mechanism whereby the risk of governmental disruption is placed squarely on the shoulders of the state company contracting with the foreign company by explicit allocation or by implication in the contract's cost recovery and cost accounting rules. None of these methods, however, is absolutely foolproof; they cannot exclude the possibility that the state, no longer party to the contract, might annul such contracts by legislative fiat. Should the state pursue this strategy, the discussion should move toward state responsibility for “creeping expropriation” and perhaps toward “lifting of the veil” of separate legal personality between the state and its enterprises. [b] M. Sornarajah, The Settlement of Foreign Investment Disputes, § 3.2 at 50-51 (Kluwer Law International 2000) Chapter 2 – 3.2. Stabilisation Clause The stabilisation clause seeks to freeze the law of the host state as at the time of entry so that the operating conditions of the foreign investment process will remain constant throughout the life of the foreign investment contract. What the foreign investor fears is that later changes to the legal system will erode the rights he acquires at the time of entry. Besides, the predictability of profits and calculation as to risks will not be possible if the contract is not insulated from later changes. The stabilisation clause seeks to achieve such insulation by requiring that later changes in the law of the host state do not apply to the foreign investment contract. The major concern of the foreign investor is that later legal changes may affect the tax or royalty regimes, which existed at the time of entry. Other favourable treatment like access to licenses and import and export permits which may have existed at the time of entry to attract foreign investors may later be withdrawn. His concern would be to ensure that his investment would not be affected by these changes. The stabilisation clause is intended to address these concerns. For such a clause to be effective, it must be contained in an agreement to which the state is directly or indirectly a party. Its inclusion in a private agreement is meaningless for private parties cannot agree among themselves that the law of the state should not apply to their agreement. The stabilisation clause will have meaning where a state is directly a party to a contract or is a party through the agency of some state entity or corporation. It is possible to argue that a foreign investment type of contract between two essentially private parties which requires approval by the state or the screening agency of a state could contain an effective stabilisation clause. In such a case, it is possible to argue that the state has committed itself not to extend the application of later changes it makes to its law to the particular contract. Obviously, the more important function of the stabilisation clause is to preclude the possibility of legislation nationalising all foreign investment from applying to the particular foreign investment made on the basis of a foreign investment contract containing a stabilisation clause. Though the conventional wisdom is that such clauses are binding on the state party which had directly or indirectly participated in the making of the contract, there are theoretical difficulties in the way of accepting such a conclusion. The first theoretical difficulty is that a mere contractual provision cannot fetter the legislative sovereignty of the host state. Unless the state wishes to exempt a particular foreign investment contract from the scope of the law, it is to be assumed that the legislative change applies to all foreign investment contracts. To overcome this problem, the argument is made that the contract containing a stabilisation clause is akin to a treaty and that the “treaty” is beyond the scope of national legislation. This is a far-fetched argument. Treaties are made by states. The foreign investor does not have the capacity to enter into relationships involving treaties or anything akin to treaties. A treaty involves a mutual surrender of sovereign rights and the foreign investor has no sovereign rights to surrender. He brings in only money and other assets. But, most arbitration tribunals, which have considered the inclusion of a stabilisation clause in a foreign investment contract, have taken the view that the inclusion of the clause must have some practical effect. On one view, the termination of the foreign investment agreement contract, which includes a stabilisation clause, justifies the award of higher damages. On another view, there may arise a duty to interpret the legislation effecting the changes as prima facie not applying to the particular foreign investment,

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unless the intention to apply the legislation is clearly intended in the legislation itself. So, the inclusion of the stabilisation clause, even if it does not achieve its direct objective of precluding the application of legislative changes to the foreign investment, does have some effect that could be beneficial to the foreign investor. Again, caution dictates that such a clause is included in a foreign investment agreement. [c] Noah Rubins and N. Stephen Kinsella, International Investment, Political Risk, and Dispute Resolution: A Practitioner’s Guide, 53-57 (Oceana Publications 2005) (Citations selectively omitted) International law and practice generally uphold the validity of stabilization clauses and the State's right to bind itself through the adoption of such clauses. The tribunal in TOPCO [Texaco Overseas Petroleum Company v. Libya] stated that “[n]othing can prevent a State, in the exercise of its sovereignty, from binding itself irrevocably by the provisions of a concession and from granting to the concessionaire irretractable rights”. Some commentators have objected that State sovereignty cannot be fettered by an agreement with a private party, particularly to the extent that the State is barred from carrying out its legislative authority. As the TOPCO tribunal explained, however, “in entering into concession contracts with the plaintiffs, the Libyan State did not alienate but exercised its sovereignty.” More importantly, a stabilization clause does not prevent the State from enacting legislation as it sees fit, but only from enforcing new regulations against the concessionaire or licensee. *** In TOPCO, Libya nullified the property rights of several oil companies in violation of the terms of a concession agreement. The agreement contained a stabilization clause… The tribunal recognized the validity of a stabilization clause in a concession agreement. The clause was one factor in the tribunal's decision to declare the taking illegal and to award the claimant the very uncommon relief of restitution (i.e., a return of the property). Although the award was quite atypical, the tribunal stated that this was “the normal sanction for non- performance of contractual obligations.” The tribunal held that where the contract has been stabilized on a certain date by specific clauses, “the decision of a State to take nationalizing measures… carries international consequences… …” This holding demonstrates the potential significance of a stabilization clause to help convince an arbitrator to grant a remedy to an aggrieved investor. In LIAMCO v. Libya, Libya had awarded concessions to Liamco in 1955, and then nationalized those concession rights in 1973. The tribunal held this to be a breach of the concession, and awarded the claimant approximately US$80 million in damages. In light of the stabilization clause requirement that “contractual rights expressly created by this Concession shall not be altered except by mutual consent of the parties,” the tribunal held that a “nationalization of concession rights… constitutes… a. source of liability to compensate the concessionaire for said premature termination of the concession agreement.” The court declined to award lost profits. However, the inclusion of a stabilization clause in the concession was one of the factors the tribunal considered in awarding “equitable compensation.” The tribunal in [Kuwait v.] Aminoil dedicated significant space to a discussion of stabilization clauses. In 1948, Kuwait granted the Aminoil company a concession “for the exploration and exploitation of petroleum and natural gas in what was then called the Kuwait ‘Neutral Zone. “‘ In 1961, Kuwait became fully independent, and the concession was modified by a supplemental agreement. In December 1974, OPEC countries adopted the “Abu Dhabi formula,” which effectively raised taxes on the oil that Aminoil was producing. Aminoil objected to the change in tax levies. Negotiations between the parties were unsuccessful, and Kuwait seized Aminoil's assets in 1977. In the ensuing arbitration, Aminoil claimed that both the initial regulatory change and the eventual taking violated the stabilization clause contained in the concession agreement. The stabilization clause read: The Sheikh shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement except as provided in Article 11. No alteration shall be made in the terms of this Agreement by either the Sheikh or the Company except in the event of the Sheikh and the Company jointly agreeing that it is desirable in the interest of both parties to make certain alterations, deletions or additions to this Agreement. The tribunal affirmed the validity of stabilization clauses in general, although it reasoned that this particular clause could not accomplish what it appeared to contemplate on its face. First, the tribunal held that the stabilization clause did not prohibit nationalization, because it contained no express prohibition on such takings. The arbitrator stated that a “contractual limitation on the state's right to nationalise… would be a particularly serious undertaking which would have to be expressly stipulated for… …” He reasoned further that “[t]he case of nationalization is certainly not expressly provided against by the stabilization clauses of the Concession.” Thus, this particular clause was found to imply no contractual responsibility for the seizure, although the tribunal did recognize that

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where language is clearer, stabilization clauses can have such an effect. Second, the tribunal held that during protracted negotiations Aminoil had consented to allow changes to the agreement, and that this “brought about a metamorphosis in the whole character of the Concession.” The tribunal concluded that by compromising with the State, the investor had implicitly agreed to dilute the stabilization clause. Under this weakened stabilization clause, nationalization did not violate the concession agreement, as long as compensation was paid. The Aminoil tribunal held that the stabilization clause justified only an award of damages, and not injunctive relief to reinstate the previous regulatory regime. Nevertheless, the existence of the stabilization clause – even weakened – was an important element in the tribunal's award of damages. The investor negotiating a stabilization clause can learn two valuable lessons from the Aminoil decision. The first is that a stabilization clause should be very explicit in what it is meant to prohibit. The second is that a stabilization clause should provide that, absent express written agreement to the contrary, its terms are binding regardless of subsequent compromise, negotiation, or amendment of the contract. This should allow the parties to negotiate changes in concession terms if circumstances change, without jeopardizing the overall stability of project terms and regulatory conditions. Negotiating parties might consider the following stabilization clause text, which takes into account the case law discussed above: All laws, decrees, and regulations of [the Host State], whether legislative, judicial, or administrative, applicable to this Agreement or the relationship between the parties and in effect as of the date of this Agreement in accordance with (the governing law clause], including, without limitation, [cite investment laws of the Host State prohibiting expropriation without compensation, currency transfer laws, and any other laws of critical interest to the investor] shall be the only laws, decrees, and regulations governing this Agreement and the parties in relation thereto. This provision may be modified only with the express consent of both parties, as evidenced by a written agreement between the parties specifically referring to this clause, and shall not otherwise be considered modified by subsequent compromise or negotiation between the parties or amendments or modifications to this Agreement. [2] Examples of Stabilization Clauses [a] Offshore Agreement Dated 10 January 1978 between Government of Ghana & Offshore Hydrocarbons Corporation (Later Transferred to Agri-Petco), 58 Basic Oil Laws & Concession Contracts: South & Central Africa 22, 50-51 (1980) (27) 40. (1) The Licensees shall be liable to pay to the Government an income tax computed in accordance with clause 64 of this Agreement in respect of its income arising from its operations under this Agreement and no tax shall be imposed under any other Act or law on such income or dividends or remittances paid out of such income or upon the export of petroleum produced by and belonging to the Licensees. (2) The Licensees shall be free from all other taxation, charges, duties and fees payable to the Government or to any governmental authority in Ghana in relation to such petroleum operations except payments which would be made in accordance with this Agreement and the application of the Mineral Oil Taxation Ordinance as amended, as provided for in clause 64 of this Agreement, and charges and fees for services rendered by governmental authorities on request or to the public generally provided that such charges and fees are reasonable and non-discriminating. [b] Amoco Group Agreement Dated 14 December 1996 on the Exploration, Development & Production Sharing for Prospective Structures Ashrafi, Dan Ulduzu & Area Adjacent in the Azerbaijan Sector of the Caspian Sea, 24 Basic Oil Laws & Concession Contracts: Russia & NIS 1, 91 (1997) (28) Art. 22.1 Upon approval by the Parliament of the Azerbaijan Republic of this Agreement, this Agreement shall constitute a law of the Azerbaijan Republic and shall take precedence over any other current or future law, decree or administrative order (or part thereof) of the Azerbaijan Republic which is inconsistent with or conflicts with this Agreement except as specifically otherwise provided in this Agreement. [c] Oman Model Exploration & Production Sharing Agreement of 2002, Basic Oil Laws & Concession Contracts: Middle East, 45 (2003) (29) 26. 2In the event that any provisions contained in the laws, rules or regulations of the Government are inconsistent with the terms and conditions of this Agreement, the Government shall take such action as is necessary to relieve the Company from any loss, liability or jeopardy as a result of such inconsistency and shall also take such action as may be necessary to maintain the economic equilibrium existing between the Parties on

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the Effective Date of this Agreement. [d] Concession Contract of 31 May 2001 Between the Republic of Cameroon & RSM Production Corp., 157 Basic Oil Laws & Concession Contracts: South & Central Africa 1, 40 (2004) (30) Article 30 – Stabilisation Clause 30. 1In the event of a change to the provisions of Part VII of the Petroleum Code, to the measures taken for its implementation, to the General Tax Code, including the annual finance law, which may take place after the Effective Date and which would affect in a significant manner the economic or tax equilibrium of this Contract to the detriment of the CONTRACTOR, the CONTRACTOR shall request to the STATE, that its implementation be suspended as concerns the latter. In this regard, the CONTRACTOR shall send to the Minister in charge of hydrocarbons a request setting forth its justifications. 30.2 Within a two (2) month period starting from receipt of the CONTRACTOR's request referred to it in Article 30.1 above, the Minister in charge of hydrocarbons may either: 30.2.1Accept the request of the CONTRACTOR and make arrangements so that the legislative or regulatory provision in question no longer applies to the CONTRACTOR; or 30.2.2Reject CONTRACTOR's request. If the Minister in charge of hydrocarbons does not respond to the request within the given timeframe, such request shall be considered to be accepted. 30.3 If the Minister in charge of hydrocarbons rejects CONTRACTOR's request, the Parties shall negotiate possible readjustments to be made to the Contract, in order to reestablish the economic or fiscal equilibrium of the Contract as it had been agreed to on the Effective Date, while taking into account the legislative or regulatory provision referred to in the request. The Parties shall make their best efforts to agree upon revisions to be made to the Contract within ninety (90) Days as from the notification of the rejection of the abovementioned request by the CONTRACTOR. The revisions to be made to the Contract may not in any event diminish or increase the rights or obligations of the CONTRACTOR which had been agreed to as of the Effective Date. 30.4 If agreement cannot be reached between the Parties within the timeframe provided in Article 30.3 above, the dispute may be submitted by either Party to the conciliation procedure and, if applicable, to the arbitration procedure, which are provided in Article 28.3 of this Contract. 30.5 The introduction of the request procedure by the CONTRACTOR referred to in Article 30.1 above shall cause the suspension of the measure, up until the ruling of the Minister in charge of hydrocarbons and, in the case of rejection, up until the close of the time period provided by Article 30.3 above. [3] Case Law on Stabilization Clauses [a] Amoco International Finance Corp. v. Government of the Islamic Republic of Iran (IUSCT Case No. 56), Partial Award No. 310-56-3 of 14 July 1987 (31) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [Amoco International Finance claimed that a series of actions by the government of Iran resulted in an expropriation of its interests by 1 August 1979. Amoco was notified in May 1979 that its expatriate employees would not be allowed to return to Iran, and in June and July 1979 Amoco was informed that the sale of products would be managed by the National Petrochemical Company of Iran (NPC) and the National Iranian Oil Company (NIOC). The tribunal decided, however, that Amoco had already concluded it had no future in the petrochemical industry in Iran, and both parties had substantially agreed to terminate Amoco's involvement. As a result, for purposes of determining whether the expropriation violated Iranian law, the tribunal concluded that the expropriation was a lengthy process that was ambiguous for a long period, and was not complete until 24 December 1980, when Amoco was notified that the Special Committee set up under the Single Article Act had decided that the Khemco agreement was null and void. Thus, the expropriation did not violate domestic law. For purposes of determining compensation, however, the tribunal held Amoco's expropriated interest in Khemco would be valued as of 31 July 1979 because Iran caused NPC and NIOC to act in July 1979 in a manner contrary to the position taken by Khemco's Board of Directors, thereby depriving Amoco of its rights in the management of Khemco.] The “Stabilization” Clauses 165. The Claimant alleges that the conduct of Iran in terminating the Khemco Agreement violated two articles thereof which the Claimant characterizes as “stabilization” clauses, namely Article 21, paragraph 2 and Article 30, paragraph 2. These clauses are actually quite different in nature, as revealed by the heading of the respective articles. Article 21

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is headed “Guarantee of Performance and Continuity” and Article 30 “Applicable Laws.” 166. Article 30, paragraph 2… had the effect of affirming the validity of contractual clauses inconsistent with Iranian laws and regulations. This cannot be considered as a stabilization clause in the usual meaning of the term, however, since that term normally refers to contract language which freezes the provisions of a national system of law chosen as the law of the contract as of the date of the contract, in order to prevent the application to the contract of any future alterations of this system. Article 30, paragraph 2 applied only to the provisions of any current laws and regulations, clearly referring solely to the laws and regulations existing at the time of execution of the Khemco Agreement. Therefore it provided no guarantee for the future and is not a stabilization clause. 167. Article 30, paragraph 2, furthermore, must be read in conjunction with Article 2, which… referred to the grant of facilities and privileges conferred by the Government under the two Acts, but with the proviso that “any future amendments to such Acts” would also apply. This is the contrary of a stabilization clause. 168. Article 21, paragraph 2 is of a quite different nature. It does not relate to applicable law but to performance of the Khemco Agreement. It reads as follows: Measures of any nature to annul, amend or modify the provisions of this Agreement shall only be made possible by the mutual consent of NPC and AMOCO. 169. The Claimant contends that this paragraph must be read in conjunction with the first paragraph of the same Article by which the parties to the Khemco Agreement undertook to perform the Khemco Agreement “in accordance with the principles of mutual good will and good faith and to respect the spirit as well as the letter of the provisions of the Agreement.” It maintains that the reference to the principle of good faith is a clear indication of the intention of the parties to submit the contract to international law, where this principle plays an important role. The Tribunal cannot accept such a construction in view of the clear wording of Article 30. The principles of good will and good faith apply in practically all systems of law to contracts as well as to treaties. Article 21, paragraph 1 simply sets forth a principle of interpretation and implementation of the Khemco Agreement, which, as a long-term contract, implies a continuous cooperation between the parties and therefore must not be performed in a strict and formalistic way. 170. Paragraph 2 of Article 21 has a more precise meaning in so far as it prohibited changes in the provisions of the Khemco Agreement by unilateral measures. According to the Claimant the term “measures” in this context refers to legislative or regulatory measures. Such an interpretation is not easily reconcilable with the terms of Article 21, however, which mentions “[m]easures of any nature” and distinctly states that such measures “shall only be made possible by the mutual consent of NPC [an Iranian stateowned company] and Amoco,” neither of which has power to take legislative or regulatory measures. 171. Article 21, paragraph 2 led the Parties to a discussion about the nature of the Khemco Agreement. It was questioned whether the Khemco Agreement was an administrative agreement, an international agreement or an economic development agreement. The Tribunal does not see any reason to decide this issue. It observes, however, that in State practice relating to contracts in the oil industry, at the time of the drafting of the Khemco Agreement and before, numerous examples of unilateral changes imposed by States parties to agreements with foreign companies can be found. For this reason, contracts concluded at this time often include a clause of renegotiation, in order to avoid such unilateral changes. This applies to contracts between foreign companies and States as well as to contracts between such companies and national entities controlled by the States, such as NPC in the present Case. On its face, Article 21, paragraph 2 appears to be a guarantee against unilateral changes by one party. 172. This does not mean, however, that Article 21, paragraph 2 imposed an obligation on the government of Iran. It certainly creates obligations for NPC and Amoco, confirming the preceding conclusions that they are the only parties to the Khemco Agreement. It should be noted that Khemco is not mentioned in Article 21, although pursuant to Article 28 Khemco is to be treated “as if [it] were” a party to the Khemco Agreement, but it did not become a party to the Khemco Agreement in the fullest sense of the term. Similarly, the government did not become a party to the Khemco Agreement and had nothing to do with the process of amending it. 173. In conclusion, the Tribunal does not find that the Khemco Agreement contains any “stabilization” clauses binding on the government. The clauses referred to by the Claimant bind only the parties to the Khemco Agreement, namely NPC and Amoco. According to its own terms, Article 30, paragraph 2 cannot be construed as a stabilization clause and Article 21, paragraph 2 only prohibits unilateral measures by NPC or Amoco to “annul, amend or modify” the provisions of the Khemco Agreement. [b] Libyan American Oil Company (LIAMCO) v. Government of the Libyan Arab Republic (ad hoc arbitration under the 1958 ILC Draft Convention on Arbitral Procedure), Award of 12 April 1977, 20 I.L.M. 1, 30-31, 55-56 (1981) [Sobhi Mahmassani, sole arbitrator]

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[In 1955, LIAMCO obtained three concessions to explore and exploit oil reserves in Libya. The Deeds of Concessions were approved by the Libyan Minister of Petroleum in the form prescribed by the Libyan Petroleum Law. After a change of government in 1969 in which Colonel Moammar Khadafi assumed power, the Libyan Revolutionary Command Council issued Law No. 66 in 1973 nationalizing 51% of the concession rights of LIAMCO and certain other companies. In 1974, LIAMCO's remaining 49% interest was nationalized. Law No. 66 provided that compensation would be paid to the concessionaires, with such compensation to be set by a committee consisting of a Libyan judge, a representative of the Libyan Ministry of Treasury and a member from the Libyan National Oil Corporation, a state-owned company, but LIAMCO initiated international arbitration as allowed by the Deeds of Concession.] To strengthen this contractual character in LIAMCO's and similar other concession agreements as a precaution against the fact that one of the parties is the State, it was deemed necessary to ensure a certain protection for the contractual rights of the concessionaire. Usually, foreign investors before taking the risk of investing substantial amounts of money and labor for “working” their concessions, are anxious to seek sufficient assurance for the respect of the principle of the sanctity of contracts. In other words, they seek to be guaranteed against the possibility of arbitrary exercise by the State of its sovereignty power either to alter or to abrogate unilaterally their contractual rights. Any such alteration or abrogation of concession agreements should be made by mutual consent of the parties. To ensure such protection in LIAMCO's Concessions, a specific provision has been inserted to that effect in Clause 16 of its Agreements. That Clause has been legally authorized by and modeled upon the same standard clause of Schedule II annexed to the Petroleum Laws of 1955 and 1965. In its amended final version, it reads as follows: “(1) The Government of Libya, the Commission and the appropriate provincial authorities will take all steps necessary to ensure that the Company enjoys all the rights conferred by this Concession. The contractual rights expressly created by this Concession shall not be altered except by mutual consent of the parties.” “(2) This Concession shall throughout the period of its validity be construed in accordance with the Petroleum Law and the Regulations in force on the date of execution of the Agreement of Amendment by which this paragraph (2) was incorporated into this Concession Agreement. Any amendment to or repeal of such Regulations shall not affect the contractual rights of the Company without its consent.” The above Clause comes under what has been termed “stabilization” and “intangibility” clauses, which have been considered as legally binding under international law… Moreover, Clause 16 is justified not only by the said Libyan Petroleum legislation, but also by the general principle of the sanctity of contracts recognized also in municipal and international law… It is likewise consistent with the principle of non-retroactivity of laws, which denies retrospective effect to a new legislation and asserts the respect of vested rights (droits acquis) acquired under a previous legislation. The principle of nonretroactivity of laws is also admitted by Islamic law… *** Further, and as a corollary to the binding force of the contract, its repeal or alteration requires a contrary mutual consent (contrarius consensus) of the contracting parties. This is well underscored in said paragraph 1 of Article 147 of the Libyan Civil Code, as well as in most legal systems mentioned above. Consequently, one of the parties cannot unilaterally cancel or modify the contents of the agreement, unless it is so authorized by the law, by a special provision of the agreement, or by its nature which implies such presumed intention of the parties. Likewise, the same rule is recognized in Islamic law, in which cancellation of a contract is not valid except by mutual consent… Furthermore, some contracts explicitly emphasize the above mentioned principles and corollaries in a special provision, as in Clause 16 of LIAMCO's Concession Agreements, wherein it is provided that the “contractual rights expressly created by this Concession shall not be altered except by mutual consent of the parties”. The said Libyan law, whether in the text of the civil code or in the complementary Islamic Jurisprudence appears clearly consistent with international law in this connection, as exemplified by international statutes and custom. [c] Phillips Petroleum Company Venezuela Ltd. and ConocoPhillips Petrozuata B.V. v. Petroleos de Venezuela, S.A. (ICC Case No. 16848/JRF/CA (C-16849/JRF/CA), Final Award of 17 September 2012 (32) [Pierre Tercier (pres.), Horacio Alberto Grigera Naón, Ahmed Sadek El Kosheri] [The dispute arose out of the two association agreements concluded between Philips Petroleum Company Venezuela Ltd. and ConocoPhillips Petrozuata B.V. (“ConocoPhillips”)

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and subsidiaries of PDVSA (“PDVSA”) in 1995 and 1997 for the Petrozuata and Hamaca extra heavy crude oil projects located in the Orinoco belt area. Claimants raised claims on the basis of these agreements and in relation to subsequent production and/or export curtailments allegedly imposed by the Venezuelan government in relation to the latter's commitments as an OPEC member state. ConocoPhillips claimed that under the association agreement and related guarantees/side letters, PDVSA had undertaken to guarantee and indemnify ConocoPhillips for such production/export cuts. ConocoPhillips sought compensation for PDVSA's failure to honor this obligation for an amount of US$ 165 million.] (Citations selectively omitted) 44. … Mr. Constantine S. Nicandros, as authorized representative (“Apoderado”) of Conoco Orinoco, and Mr. Emilio Abouhamad, as President of Maraven, signed the ‘Petrozuata Side Letter’, which stipulated as follows: *** This letter is made in reference to the Association Agreement between MARAVEN S.A. [a Venezuelan state-owned company] and CONOCO ORINOCO INC., effective as of November 10, 1995,… This is to place on record that the parties to the Association Agreement recognize that in order to obtain the necessary financing for the construction, operation and final years investments of the Project (as defined in the Association Agreement), it will be necessary to ensure the ability of the Company [Conoco] to produce the extra heavy oil volumes contemplated in the Project Description (as defined in the Association Agreement), and, therefore, the parties hereto have agreed as follows: In the event that any crude oil restrictions are imposed on the Venezuelan oil industry during the term of the Association Agreement., the Class A Privileged Shareholder [Maraven] shall fulfill any production cutback requirements out of its own production so that: (i) the Company shall be able to keep the upgrader facilities working at Full Capacity; (ii) any company production above that necessary to keep the upgrader at Full Capacity shall be affected (cut back) by the same percentage as the one affecting the Class A Privileged Shareholder's own production; and (3) the Company's total crude oil production shall not be reduced below 120 MBPCD [sic!] at any time in which the upgrader is working at Full Capacity, it is understood that any production restriction protection mechanism or treatment which is generally applied to all extra heavy crude oil strategic associations, and which is more favorable than the one established herein, shall prevail. [… ] *** 209. The aim of the Side Letter was to ensure at all times a minimum level of production in order to ensure the financial viability of the Project as well as the good functioning of the Upgrader. The main idea was thus that in case production cuts were imposed by the government in implementation of its OPEC [Organization of Petroleum Exporting Countries] commitments and affecting the level of production required by the Project, such cuts would be absorbed by the state-owned entity to the Project, i.e. Maraven, out of its own production. 210. Therefore, the core question is whether the curtailments for which Claimants are seeking indemnification (i.e. the curtailments imposed from January to May 2007) were of a nature to endanger the financial viability of the Project and/or good functioning of the Upgrader. While Respondent's challenges are mainly based on the wording of the Petrozuata Side Letter rather than on what the Letter was meant to achieve, Respondent does express certain objections concerning the relevance of the Petrozuata Side Letter with regard to ensuring suitable financing of the Project. However, to the extent that the Petrozuata Side Letter itself expressly contemplates as its main ‘raison d’être’ the concern to ensure sufficient financing, and in the light of the Offtake Agreement and the way in which the Project was supposed to operate, it is difficult to deny the financial relevance of the object of this Side Letter. Whether and to what extent Claimants may or may not have used the Letter as such in their search for adequate financing is only secondary, the main point being that ensuring minimum production level at all times notwithstanding possible OPEC curtailments was essential to the viability of the Project from a financial and operational perspective. 211. Consequently, the Arbitral Tribunal finds that the production curtailments for which Claimants seek redress fall within the scope of the Petrozuata Side Letter. ( f) Non-Performance o/the Petrozuata Side Letter and ‘Hecho del Principe’ 212. It is not disputed between the Parties that Maraven did not absorb the relevant production curtailments as provided for in the Petrozuata Side Letter. Respondent disputes the validity and scope of the Petrozuata Side Letter, and in the case the Arbitral Tribunal would nevertheless confirm such validity and consider it applicable, Respondent disputes Maraven's liability for any non-performance thereunder.

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213. In this regard, Respondent argues that the production curtailments ordered by the Venezuelan government were of a mandatory nature and could not be avoided by the Parties to the Project. Therefore, they constituted an ‘hecho del principe’ i.e. an ‘external non-imputable cause’ (‘causa extraña no imputable’) excusing any non-performance. In contrast, Claimants argue that the application of the principle of ‘hecho del principe’ requires an absolute impossibility to perform due to an external and non-imputable cause at the time of due performance. Such requirement is not fulfilled in the present case given that until the promulgation of the Migration Law there were ways to ensure sufficient production level in the Petrozuata site, such as for example by transferring crude oil from other sites to the Petrozuata site. As to the promulgation of the Migration Law, it cannot serve as a basis to justify Maraven's non-performance, which occurred prior to such date. 214. First of all, it should be noted that there is a high burden of proof when establishing an ‘hecho del principe’. Without entering into all the details, the principle of ‘hecho del principe’ constitutes one type of ‘causa extraña non-imputable’ which may excuse performance under Article 1271 of the Venezuelan Civil Code. However, the application of such principle requires – among others – an absolute impossibility of compliance, meaning that the noncompliance cannot be avoided, and, based on the principle of good faith, a lack of foreseeability of such impossibility when undertaking the relevant obligation. Where non-performance is avoidable or was foreseeable, such nonperformance may not be excused. 215. In the present case, Respondent does not contend that any sort of protection from production curtailments would necessarily constitute a ‘causa extraña non-imputable’, but this would be the case of the curtailments at stake because these curtailments were imposed on a ‘project-specific’ basis and not generally to the entire industry. In other words, Respondent argues that absorption of the imposed curtailments by Maraven was impossible because the cuts were imposed on the project itself, and neither Maraven nor the other Joint Venture partners had therefore the leeway to maintain production rates notwithstanding such specific curtailment orders. 216. The Arbitral Tribunal is of the opinion that Respondent's arguments do not stand for the following reasons: (i)

As mentioned above… the fact that the curtailments were imposed on the project is the mere result of the implementation of an OPEC curtailment imposed on the entire Venezuelan industry. Relieving Maraven of obligations that it undertook under the Petrozuata Side Letter just because of the way the Venezuelan government chose to implement these curtailments would undermine the entire idea of the Petrozuata Side Letter. (ii) Even if Respondent's argument was to be followed, Respondent has not established that the project-specific implementation of OPEC imposed curtailments was unforeseeable at the time of conclusion of the Petrozuata Side Letter. (iii) Finally, even if the Joint Venture was prevented from maintaining certain production or export levels, it has not been established that the minimum required production and operational activities of the site could not have been ensured otherwise, for example by transferring crude oil from other projects of Maraven to the Petrozuata site. 217. Consequently, the Arbitral Tribunal finds that Respondent has failed to meet the burden of proof justifying the application of the principle of ‘hecho del principe’ or ‘external non-imputable cause’ to excuse any non-performance by Maraven of its obligations under the Petrozuata Side Letter. [4] Comments and Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

What is the purpose and function of a stabilization clause? What types of stabilization clauses exist? Have stabilization clauses evolved over time? How? Give an example of a stabilization clause. What is the legal effect of a stabilization clause? Can a stabilization clause be held to be ineffective? Under what circumstances? To what extent? Is Article 30 of the Cameroon Concession Contract a stabilization clause or an adaptation and renegotiation clause? Why? Can an effective stabilization clause be included in a contract between a foreign company and a state-owned company? If so, how? In the absence of a stabilization clause, may a government always modify its laws, applying the changes to the foreign investor? Is the Phillips Petroleum case an example of a stabilization clause? If not, how would you classify the quoted provisions from the Side Letter?

[E] Adaptation & Renegotiation Clauses

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[1] Thomas W. Walde and George Ndi, Stabilizing International Investment Commitments: International Law Versus Contract Interpretation, 31 Tex. Int’l L.J. 215, 265-266 (1996) (33) Another line of evolution from the traditional freezing clauses has moved towards a combination of freezing with adaptation mechanisms. This combination, though at first sight incongruous, illustrates the ingenuity of negotiators squeezed between political risk on one side and national sovereignty on the other. In this form of contractual mechanism, the occurrence of unilateral government intervention in the contractual regime results in an adaptation of the agreement to restore its original equilibrium. As a consequence of the disruptive act, the parties are under obligation to negotiate in good faith to restore the original balance. If this fails, either a specific adaptation procedure or the contract's general dispute settlement mechanism is competent to carry out such restorative adaptation. The renegotiation clause – originally meant to open the agreement to the government's desire for change – has thus been turned on its head and functions like a stabilization clause of yore. Naturally, given the variety and ingenuity of real-life situations, hybrid forms are possible and do exist. Renegotiation clauses meant to adapt the agreement to changed circumstances can coexist, in the same clause or in different places in the agreement, with adaptation clauses, the primary function of which is to restore an agreement's original terms in response to governmental disruption. [2] M. Sornarajah, The Settlement of Foreign Investment Disputes, § 3.7 at 54-55 (Kluwer Law International 2000) Chapter 2 – 3.7. Renegotiation Clause A renegotiation clause is intended to bring the parties together when the changed circumstances affect the contractual equilibrium which had been struck between them in the original contract. The idea that parties should provide an opportunity for the renegotiation of their original bargain periodically or in the light of changed circumstances is becoming commonplace in long-term contracts. In some legal systems, courts recognise the need for renegotiation in long-term contracts and will supply a fresh contractual balance if requested by a party. The renegotiation clause stands in marked contrast with the stabilisation clause. The latter clause is intended to keep the original balance alive throughout the life of the contract. The renegotiation clause, in contrast, intends that the relationship should be kept alive by requiring the parties to strike a new balance whenever there are circumstances justifying a change in the original obligations in the contract. The use of a renegotiation clause in a foreign investment agreement has several attractions. The foreign investor's utility to the state diminishes after entry and commencement of the project. The investment becomes a captive of the host state in many senses. The opportunity for continuous contact with the state may help in ironing out many problems. In a games theory perspective of foreign investment, a state will always intervene in an investment where it observes that the foreigner is having a better of the deal all the time. The foreign investor will be wise to demonstrate in such circumstances that he continues to be an asset to the state, and be willing to go some way towards ensuring that his presence benefits the state as well. It may be strategically more wise to enter with an accommodative spirit reflected in the contract than with a conflict oriented spirit which contemplates disputes. An actress who approaches a marriage with an alimony agreement signed before marriage does not show much intention of making the marriage a success. Neither does a foreign investor who insists on clauses such as stabilisation clauses. It may be a good idea that investment contracts should be modelled on a more accommodative approach than has been attempted so far. Business experts have suggested that contracts like joint ventures and other foreign investment transactions really provide for relationships. Hence, it is best to approach such relationships not on the basis of legal documents set in stone but on the basis of legal structures that are flexible and accommodative so that as the relationship grows the contract could be changed to provide for the changes. The Asian business style also favours such an approach. This style seeks to avoid conflict wherever possible, and seeks to keep the relationship alive in times of adversity. In the Asian context, an approach based on renegotiation and flexibility would be more suitable than one that provides for confrontation in the event of conflict. This is not to say that the contract should not have requirements on arbitration, but that, there must be avenues of ensuring that the parties have an obligation to negotiate a settlement by themselves in a manner that preserves their business relationship. [3] Piero Bernardini, Stabilization and Adaptation in Oil and Gas Investments, 1(1) J. World Energy Law & Bus. 98, 101-105 (2008) (Citations selectively omitted) *** As an alternative to or in combination with a stabilization clause, the adaptation/renegotiation clause may offer both parties protection against the hardship caused to either of them by a change of those circumstances which were present at the

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time of the conclusion of the agreement. By undertaking to renegotiate in good faith the agreement in case of any such change the State (or the State entity) binds itself to conduct negotiations with the private investor instead of unilaterally altering the terms of the agreement. Two types of renegotiation clauses are recorded by the practice of petroleum agreements. Doubts concerning the legal effectiveness of stabilization clauses… and the State's desire to preserve its sovereign prerogatives have brought about in the most recent phase a new approach providing that if future laws or regulations enacted by the host State should affect the foreign investor's contractual position, negotiations shall be entered into in good faith in order to reach an equitable solution to maintain or restore the economic equilibrium of the agreement… Other agreements provide that, in addition to the renegotiation of their terms with the aim of restoring the economic equilibrium of the parties, the State entity shall indemnify the foreign party for any loss or damage ensuing from the change of circumstances… The inventory of clauses reflecting the new approach in petroleum agreements, far from being exhaustive, is sufficient to reveal the basic features of the stipulations under consideration. These, with their variants, may be summarized as follows: (i)

The clause is alternative to a stabilization clause, the latter more and more rarely to be found in these agreements. (ii) Contrary to a stabilization clause, which records the State's undertaking not to apply new laws and regulations to the private party's detriment, an economic stabilization clause is more in the nature of a private law arrangement between the parties. (iii) The clauses in question give rise to the State's, or the State entity's, undertaking to compensate the private party for the economic prejudice suffered by the reason of any new laws or regulations affecting specific contractual terms (eg in the field of taxation) or, more generally, the terms and conditions of the agreement. (iv) They do not infringe upon the State's sovereign prerogatives, which remain unfettered consonant to their nature, but open the way to the renegotiation of certain terms of the agreement. (v) They may be agreed upon by the State entity as signatory to the petroleum agreement. The renegotiation process described above is triggered by a pre-defined change of circumstances, the one caused by the issuance by the host State of new legislation negatively affecting the private investor's interest, and is directed to protect only the latter's interests (as any stabilization clause). The other type of renegotiation clause is an adaptation clause of general application, leading to the renegotiation of the agreement upon initiative of either the State (or the State entity) or the investor. The clause is triggered by supervening events which are beyond the control of the parties and which negatively affect the contractual equilibrium to the detriment of either of them. A workable renegotiation clause of this kind presupposes the definition of (a) (b) (c) (d) (e)

the change of circumstances triggering the renegotiation; the effect of the change on the contract; the objective of the renegotiation; the procedure for the renegotiation; the solution in case of failure of the renegotiation process.

*** Adaptation clauses should apply only in exceptional circumstances. This requirement is defined in a variety of ways having all, as a common denominator, the conditions that the change must be such as to cause a disproportionate prejudice or substantial detriment or substantial economic imbalance to the interest of one of the parties or to “materially affect the economic and financial basis of the agreement” or “the consequences and effect of which are fundamentally different to what was contemplated by the parties at the time of entering the agreement.”… *** Whenever all conditions are met for implementing the adaptation clause, a negotiation phase is open, normally for a specified period of time, in view of restoring the contractual equilibrium. This originates various problems: (i)

(ii)

The parties' obligation during this phase should be precisely defined. The engagement to use their best endeavours or to do their outmost to reach an agreement does not imply an obligation to conclude an agreement on the revised terms; failure to agree is not therefore a breach of contract for which either party might be held responsible. The clause may leave open by its wording whether the objective of restoring the original equilibrium implies, in the parties' common intent, that full compensation should be paid to the aggrieved party or that some consideration should also be

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given to the public party's interest, particularly when the clause sets as a target the reaching of an equitable solution. (iii) A common feature of any process of renegotiation is that the same should be conducted in good faith. Lack of good faith will be taken into consideration by a judge or an arbitrator called upon to settle the dispute resulting from the failure of P 271 the renegotiation process. [4] Examples of Adaptation and Renegotiation Clauses [a] Restated LNG Development & Production Sharing Agreement for the North Field Gas Dated 31 January 1993 Between the Government of the State of Qatar and (as Contractor) Qatar General Petroleum Corporation, et al., 58 World LNG Contracts: Qatar 1 (2003) Article XXIV – Flag and Applicable Laws *** B.The laws and regulations of the State of Qatar shall apply to the exercise by the Government and the Contractor of their rights under this Agreement. C.Without prejudice to the foregoing, if any restrictions are imposed by a law, regulation or administrative order countervailing the provisions hereof so as to prejudice the Contractor's rights and interest hereunder, the Parties shall enter into negotiations in good faith to define an equitable remedy thereto, including amending the terms hereof. [b] Agip/BP/Etal Production Sharing Agreement Dated 18 November 1997 in respect of the North Caspian Sea (Kashagan) Among Agip Caspian Sea V.B., et al., 39 Basic Oil Laws & Concession Contracts: Russia & NIS 1, 114 (2003) (34) SECTION 40.2. Change of Law. Without prejudice to rights of Contractor under Article 9 of the Investment Law of the Republic and Article 57 of the Petroleum Law of the Republic, if at any time after the signing of this Agreement there is (a) a change in the Laws of the Republic (or of any subdivision or governmental instrumentality thereof), whether through amendment of existing Laws or enactment of new Laws, or a change having the force of law in the interpretation or application thereof by any judicial, arbitral or administrative body or (b) any binding adjudication by any judicial, arbitral or administrative body that any provision of this Agreement is rendered invalid by reason of the Petroleum Law, the Customs Code or the Tax Code, and such change or adjudication has a materially adverse effect on the economic benefits (including those resulting from the fiscal regime provided by this Agreement) accruing to Contractor hereunder or provided hereunder to accrue to Contractor during the term of this Agreement, the Parties shall amend this Agreement or take such other action as is appropriate or necessary so as to restore the overall economic benefit (including the economic effect resulting from the fiscal regime provided by this Agreement) to Contractor; provided, however, that no amendment to this Agreement shall be required hereunder as the result of (i) changes to Laws concerning health, safety or environmental protection that cause such Laws to be consistent with international standards for health, safety or environmental legislation and are applied on a non-discriminatory basis or (ii) changes to export quotas by any country other than the Republic or (iii) changes to Laws affecting Contractor's obligation to maintain insurance under Article XXIV that cause such Laws to be consistent with international standards for insurance and are applied on a nonP 272 discriminatory basis. [5] Case Law on Adaptation Clauses [a] Burlington Resources Inc. v. Republic of Ecuador (ICSID Case No. ARB/08/5), Decision on Liability of 14 December 2012, (35) 111-113 [Gabrielle Kaufmann- Kohler (pres.), Brigitte Stern, Francisco Orrego Vicuña] [Burlington Resources, an American investor, acquired participating interests in the production sharing contracts relating to two oil blocks in Ecuador in 2001. As crude oil prices rose considerably during the following decade, the Ecuadorean Government decided that it was entitled to capture a higher percentage of the oil profits and imposed the forced renegotiation of relevant production sharing contracts and a “windfall” profit tax of 50% and then 99% on the crude sales prices above a certain threshold. A dispute – opposing Burlington and its partners, on the one hand, and the Ecuadorean Government and national oil company, on the other hand – ensued as to the validity of that renegotiation process and the windfall taxes, which culminated in the seizure of crude oil owned by Burlington. Burlington subsequently initiated ICSID arbitration proceedings against Ecuador.] (Citations selectively omitted) 328. The tax modification clause of the PSC for Block 21 is set forth in clause 11.7: “Modification to the tax system and to the employment contribution: In the event of a modification to the tax system, the employment contribution or its interpretation, which have an impact on the economics of this Contract, a correction factor will be included in the production sharing percentages to

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absorb the increase or decrease in the tax. This adjustment will be approved by the Administrative Board on the basis of a study that the Contractor will present to that effect” (emphasis added). 329. In addition, clause 15.2 of the PSC for Block 21 provides as follows: “Contract amendments: There shall be negotiation and execution of contract amendments, with prior agreement of the Parties, particularly in the following cases:… c) When the tax system… … applicable to this type of Contract in the country is modified, in order to restore the economy of the Contract… … …” (emphasis added). *** 331. First, clause 11.7, first sentence, provides that a correction factor “will be included” in the event of a modification to the tax system. In addition, the second sentence of this clause states that this adjustment “will be approved” by the Administrative Board (“the Board”). This approval requirement means that the Board may verify and eventually suggest modifications to the correction factor proposed by the contractor. However, the Board has no discretion to refuse the application of a correction factor, which “will be included.” Clause 15.2, in turn, stipulates that a contract amendment “shall” be negotiated and executed in order to restore the economy of the contract in the event of a tax change… [T]his language suggests that the application of a correction factor is P 273 mandatory. 332. Second, the purpose of the application of this correction factor is “to absorb the increase or decrease in the tax” in order “to restore the economy of the Contract.” This purpose would be defeated if a party could simply refuse to apply a correction factor. While the computations required for the application of the correction factor are subject to the “prior agreement of the Parties”, this does not mean that the application of a correction factor is optional. As Mr. Dávalos, Ecuador's head negotiator for the Block 21 PSC, acknowledged on examination by the Tribunal, “if the [p]arties do not agree on a correction factor”, this disagreement “could be subject to international arbitration”, i.e. resolved by a third-party adjudicator. 333. All in all, both the language and the purpose of these contractual provisions show that the tax modification clause of the PSC for Block 21 is mandatory. This conclusion is confirmed by Article 16 of Decree No. 1417… the language of which calls for the mandatory adjustment of the parties' oil production shares “in order to restore the economics of the contract in place before the tax modification.” 334. For the foregoing reasons, the Tribunal deems that the application of a correction factor is mandatory when a tax affects the economy of the PSCs for Blocks 7 or 21. This correction factor must be of such extent as to wipe out the effects of the tax on the economy of the PSC. Otherwise stated, the correction factor must restore the economy of the PSC to its pre-tax modification level. 335. In conclusion, and for the sole purpose of the resolution of the Treaty claim before it, the Tribunal considers that the PSCs provided for the following rights: (i) the right to receive and sell the contractor's share of oil production irrespective of the price of oil and its internal rate of return, subject to the payment of the taxes and employment contributions specified in the PSCs; and (ii) the right to the application of a mechanism that would absorb the effects of any tax increase affecting the economy of the PSCs, i.e. a right to tax absorption under certain conditions. [b] Mobil Cerro Negro, Ltd. v. Petróleos de Venezuela, S.A. and PDVSA Cerro Negro, S.A. (ICC Case No. 15416/JRF/CA), Final Award of 23 December 2011, (36) 48-49, 269-271, 347-351 [Karl-Heinz Böckstiegel (pres.), Jacques Salés, Henri C. Alvarez] [Case Summary Chapter 3] (Citations selectively omitted) E.1.1. Article 1-Definitions *** “Discriminatory Measure” shall mean any change in (or any change in the interpretation or application of) Venezuelan law, or any Governmental Measure which is unjust and is applicable to the Project or any Foreign Party in its capacity as a participant in the Project and is not generally applied to public or private entities engaged in Extra-heavy P 274 crude upgrading projects in the Republic of Venezuela; or, with respect to tax rates, foreign exchange controls or the expropriation or seizure [“ocupación”] of assets of the Project or of a Foreign Party's interests in the Project, provided that such change in (or any change in the interpretation or application of) Venezuelan law, or any Governmental Measure is not generally applicable to Companies in the Republic of Venezuela (including the imposition of income tax on the Project or on any Foreign Party in its capacity as a participant in the Project, at a rate that does not correspond with what is provided in the last sentence of the Fifteenth Condition); or, with respect to municipal taxes (license to perform industrial and commercial activities), the imposition of municipal taxes on the Foreign Parties in their capacity as participants in the Association notwithstanding the provision in the Fifteenth Condition, only if the aggregate burden of

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the municipal tax on the affected Foreign Party's gross revenue from the Project, exceeds by four percent (4%) the affected Foreign Party's gross revenue from the Project in the fiscal Year at issue, in which event, the amount of municipal taxes that exceeds such four percent (4%) shall be a discriminatory measure. A measure that falls within the definition of Discriminatory Measure shall be deemed unjust if it results in a Materially Adverse Impact. 419. Article 15 of the AA [Association Agreement] may also be of relevance. *** (a)

(b)

P 275

In the event that one of the Foreign Parties determines that a ‘Discriminatory Measure has occurred which may result in a Materially Adverse Impact, such Foreign Party shall immediately provide notice of the Discriminatory Measure to Lagoven CN. Further, in the event that such Foreign Party determines that it has actually suffered a Materially Adverse Impact as a result of the Discriminatory Measures of which it has previously notified Lagoven CN, it shall immediately give notice of such determination to Lagoven CN (a “Notice of Discriminatory Measure”). To the extent any legal recourse is available to reverse or obtain relief from such Discriminatory Measure, the Foreign Party shall commence and pursue legal actions to mitigate any damages suffered as a result of the Discriminatory Measure. If Lagoven CN concurs that the Discriminatory Measure has occurred and has resulted in a Materially Adverse Impact, Lagoven CN shall cooperate with the Foreign Party in the pursuit of the aforesaid legal actions and the Parties shall negotiate in good faith the compensatory damages and/or possible modifications to the Agreement in order to restore the economic benefit that the Foreign Party would have received had the Discriminatory Measure not occurred. Any net benefits received by the Foreign Party as a result of the pursuit of the aforesaid legal actions (after deduction of the legal costs incurred by the Foreign Party in connection therewith) shall be (i) applied against any amount ultimately determined to be owed by Lagoven CN pursuant to this Clause or (ii) reimbursed to Lagoven CN if Lagoven CN has previously made payments to the Foreign Party with respect to the Discriminatory Measure in question. If, within the ninety (90) days following the receipt of the Notice of Discriminatory Measure, Lagoven CN does not give the Foreign Party notice of its concurrence that Discriminatory Measures resulting in a Material Adverse Impact have occurred, any Party may commence arbitration proceedings in accordance with Section 18.2. In no event, however, may any one of the Parties initiate arbitration proceedings more than once per calendar year. The scope of the arbitration proceedings shall include: (i) a determination of whether one or more Discriminatory Measures have occurred and, if so, whether such measures have had a Materially Adverse Impact on the Foreign Party; and (ii) in the event of an affirmative answer to the two questions specified in clause (i) of this paragraph an award for damages to compensate the Foreign Party for the economic consequences of the Discriminatory Measure suffered by it to date and recommendations on amendments to the Agreement that would restore the economic benefit that the Foreign Party would have received had the Discriminatory Measure not occurred.

*** 603. The basic obligation upon PDVSA-CN pursuant to Article 15.1 is the payment of compensatory damages and/or the possible modification of the AA in order to restore the economic benefit that the Foreign Party would have received absent the Discriminatory Measure. Pursuant to Article 15.1(b), an arbitral tribunal has the power to issue an award for compensatory damages, subject to any limitations contained elsewhere in the Agreement and the formulas in the accounting procedures. Further, the Tribunal has the authority to recommend amendments to the agreement that would restore the benefit the foreign party would have received had the Discriminatory Measure not occurred. This reflects the intention to permit the Foreign Party to recover the portion of the injury or damages not remedied by an award because of the limitations contained in Article l5.2(a) and is also forward looking in that it addresses the future effect of the Discriminatory Measure by authorizing recommendations on amendments to the AA. The provisions of Articles 15.l(a) and (b) contemplate an ongoing concession and a duty to cooperate and negotiate to maintain the benefit that the Foreign Party (the Claimant) would have received during the course of the AA had the Discriminatory Measures not occurred. These requirements and the Tribunal's power to make recommendations to restore the economic benefit of the Foreign Party are relevant for both additional compensation in any given fiscal year which might not be remedied by an arbitral award because of the limitation placed on compensation in Article l5.2(a) and for future fiscal years during the term of the AA. While Article l5.l(b) provides that a party may only initiate one arbitration proceeding per calendar year, which is consistent with assessment of indemnification on an annual basis in an ongoing concession and agreement, an arbitration may be commenced in the following year in the event that negotiations between the Parties are not successful or recommendations by the Tribunal under Article l5.1(b) are not adopted by the Parties. 604. In the Tribunal's view, these provisions foresee an ongoing concession and intention to maintain the economic benefit of the Foreign Party for the duration of the AA within

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the limitations contained in that Agreement. In the event of a termination of the contract and the seizure of all of the Claimant's interest, the application of the limitation contained in Article l5.2(a) is made more difficult and the Arbitral Tribunal's authority to make recommendations on amendments to the AA that would restore the economic benefit to the Foreign Party absent the Discriminatory Measure is defeated. In the Tribunal's view, it would not be consistent with the intention of the Parties to prevent the Claimant from recovering any compensation due to the nature of the Discriminatory Measure and the ensuing difficulty in applying the limitation contained in Article I5.2(a). P 276

605. The Tribunal is unable to accept the Respondents' interpretation of what they say is the very limited scope of an arbitration pursuant to Article 15.1(b) of the AA. In this regard, the Tribunal notes that the arbitration clause contained in article 18.2 is very broad. Further, Article 15.1 (b), in referring to arbitration pursuant to article 18.2, states that the arbitration proceedings “shall include” a determination as to whether a qualifying Discriminatory Measure has occurred and, if so, an award to compensate the Foreign Party for the economic consequences of the Discriminatory Measure suffered by it to date and recommendations on amendments to the agreement that would restore the economic benefit to the Foreign Party. Neither article contains any express exclusion or limitation on the granting of a remedy for the future. Indeed, the express language of Article 15.1(b) contemplates the jurisdiction of the Arbitral Tribunal to recommend modifications to the agreement to restore the economic benefit that the Foreign Party would have received had the Discriminatory Measure not occurred. In addition, Article 15.2(b) seems to imply that PDVSA-CN may have some obligation to agree to the Tribunal's recommendations while the Venezuelan State maintains the requisite holdings on the Project and/or PDVSA-CN. 606. Further, the Tribunal is not persuaded that the authority to award compensation to the Foreign Party is limited to the “economic consequences” suffered “to date” in the sense that only those economic consequences suffered and reflected in actual figures for a fiscal year and suffered “to date” can be compensated. While the English translation of article 15.1(b) maybe, to some extent ambiguous in this regard, the official Spanish version of the relevant part of the article is clear. The words “suffered by it to date” (“sufrida por ella hasta la fecha”), refers to “Discriminatory Measure” (“Medida Discriminatoria”) and not to “economic consequences” (“consecuencias econ6micas”). This emerges clearly from the Claimant's analysis of the Spanish text of the AA. In this case, the Discriminatory Measure at issue, the expropriation of the Claimant's interest in the Project, had clearly occurred or been suffered by both the date on which the Claimant requested indemnification and the date on which it requested arbitration. Further, and in any event, in the case of the complete seizure or expropriation of the Claimant's interest in the project, it is logical to conclude that the economic consequences were suffered at the time of the expropriation. The evidence clearly established that the Claimant would earn nothing from the Project in the future and there is no need to wait to confirm this. 607. The Claimant argues that if the limitation in Article 15.2(a) does not apply, or the formulas are impossible to implement in the case of a complete seizure or expropriation of the Foreign Party's entire interest in the Project, then the Tribunal's powers are those granted by the general arbitration clause contained in Article 15.2 and by the general principles of Venezuelan law which require full indemnification for breach of a contractual obligation. In certain regards, this argument has some appeal since the Discriminatory Measure in this case has deprived the Claimant of any Net Cash Flow in the future. Nevertheless, in the Tribunal's view, the basic formula contained in Section VII of the accounting procedures can properly apply in the absence of a Net Cash Flow and respect the Parties' intention to apply a limitation on compensation payable pursuant to the indemnification formula when the price of oil meets the conditions described in Article 15.2(a). 608. The indemnity provisions of the AA reflect an intention to ensure that in the event of

P 277 Discriminatory Measures, the Foreign Party will receive cash flow calculated pursuant

to the Reference Cash Flow Formula. The history of the Project and the profits it generated, as well as the world price of oil at the relevant times, indicate that using the Reference (Threshold) Cash Flow in these circumstances would be consistent with this intention and reasonable on the facts. The calculation of a limitation on compensation on the basis of the difference between a Reference (Threshold) Cash Flow and Adjusted Cash Flow of zero is consistent with the intention of the Parties. As discussed below in addressing quantum, in circumstances where the Discriminatory Measure deprives the Claimant of any future cash flow, the limitation on indemnification contained in Article 15.2 can properly apply in a manner consistent with the intention of the Parties. 609. In reaching this conclusion, the Tribunal is not deciding in equity or ex aequo at bono. Rather, the Tribunal's conclusion is the result of the interpretation of the AA pursuant to the rules of contractual interpretation of Venezuelan law, which include the interpretation of contracts in good faith and the obligation to perform contracts in good faith. The interpretation resulting from these principles applies the common intention of the Parties to provide a basic level of compensation in the event of the occurrence of the Discriminatory Measures found to have occurred in this case.

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610. Therefore, this Tribunal concludes that it has jurisdiction to award compensation according to Article 15 of the AA, whether related to past fiscal years or the balance of the term of the AA as originally agreed by the Parties. [6] Comments and Questions 1. 2. 3. 4. 5. 6.

What is the purpose of adaptation and renegotiation clauses? Does a stabilization clause differ from an adaptation or renegotiation clause? If so, how? Is there a difference between adaptation and renegotiation clauses? If so, what is it? Give examples of adaptation and renegotiation clauses. What happens under a renegotiation clause if the parties do not reach an agreement in the renegotiations? Is Article 15 of the Mobil Association Agreement an example of a stabilization, adaptation or renegotiation clause? Why?

[F] Waiver of Sovereign Immunity Clauses [1] Noah Rubins and N. Stephen Kinsella, International Investment, Political Risk, and Dispute Resolution: A Practitioner’s Guide, 63-65 (Oceana Publications 2005) (Citations selectively omitted) 4. Waiver of Sovereign Immunity … it has been widely recognized that States are free to explicitly or implicitly waive immunity irrevocably – a vital power if governments are to be able to engage in economic activity with private parties. Therefore, as a general rule, sovereign immunity will not prevent an arbitration tribunal or court from assuming jurisdiction over a State or its instrumentality if the parties have signed a valid agreement to resolve disputes in the P 278 given forum. However, the enforcement of judgments and arbitral awards present a very different problem. Most legal systems bestow a higher level of sovereign immunity on State assets, in order to reduce the disruption of international relations and diplomacy that can result from the seizure of government property to satisfy an award or judgment. This is true even for awards covered by the Washington (ICSID) Convention, which obligates member States to recognize ICSID awards as local judgments, but preserves each State's law on sovereign immunity for the attachment of assets. There is some authority in the United States and elsewhere for the proposition that a State's consent to arbitration constitutes a waiver of immunity from execution of an award that results from that process. But the dominant approach in most legal systems is that even if the agreement to arbitrate is explicit, sovereign immunity over property will not be deemed waived unless there is clear evidence that this was the State's intent. Consequently, a private investor who enters into a State contract should not consider an arbitration clause to be sufficient evidence of the State's waiver of immunity from execution on its assets. While many States may be reluctant to provide a sweeping waiver of sovereign immunity, limited waiver of immunity clauses are a standard element of State contracts. Such a provision is normally linked clearly to the arbitration clause and limits the waiver of sovereignty to enforcement of an award rendered under the contract in question. The waiver may also be limited to particular assets or areas of activity. ICSID provides a sample waiver of immunity clause: The Host State hereby waives any right of sovereign immunity as to it and its property in respect of the enforcement and execution of any award rendered by an Arbitral Tribunal constituted pursuant to this agreement. The waiver of immunity clause was of vital assistance to the foreign investor in Karaha Bodas v. Pertamina. As noted above, KBC contracted with Indonesia's State-owned national oil company, Pertamina. In the project agreements, Pertamina expressly waived: “any… right of immunity (sovereign or otherwise) which it or its assets now has or may acquire in the future… …” and “consent[ed) in respect of the enforcement of any judgment against it… …” After an award of US$261 million was rendered in KBC's favor, the company sought enforcement in a number of jurisdictions, including Canada, Hong Kong, and Texas and New York in the United States. The courts involved took particular notice of the waiver of immunity clause, allowing KBC to seize any assets within their jurisdiction shown to belong to Pertamina. [2] Examples of Sovereign Immunity Waiver Clauses [a] Agip/BP/Etal Production Sharing Agreement Dated 18 November 1997 in respect of the North Caspian Sea (Kashagan) Among Agip Caspian Sea V.B., et al., 39 Basic Oil Laws & Concession Contracts: Russia & NIS 1, 109 (2003) (37)

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SECTION 38.3. Sovereign Immunity. To the extent the Republic or Authority has or hereafter may acquire any immunity from jurisdiction, with respect to themselves or their property which is used in a commercial capacity, in any arbitration under Section 38.2, or in any proceeding to confirm or enforce such an arbitration award, each hereby P 279 irrevocably waives such immunity in respect of its obligations under this Agreement and agrees that it shall not raise the defense of sovereign immunity in respect of (i) any arbitration or arbitration award under Section 38.2, (ii) any proceeding to confirm or enforce such an arbitration award or (iii) any execution of such an arbitration award with respect to assets used in a commercial capacity. The foregoing waiver and agreement are intended to be effective in any jurisdiction in which any such arbitration or any such proceeding with respect to an arbitration under this Agreement may be commenced. This waiver and agreement shall not be effective in respect of any person other than Contractor and the Contracting Companies and their permitted assignees acting under the specific circumstances contemplated hereby. [b] Oman Model Exploration & Production Sharing Agreement of 2002, Basic Oil Laws & Concession Contracts: Middle East, (38) 45 (2003) 24.5 Each party irrevocably agrees not to claim and irrevocably waives any sovereign or other immunity that it may now or hereafter have to the fullest extent permitted by the laws of the applicable jurisdiction from any arbitration proceedings; any proceeding to confirm, enforce or give effect to any arbitral award by the arbitral tribunal; service of process; suit; jurisdiction; attachment prior to judgment; attachment in aid of execution of judgment; execution of judgment or from any other legal or judicial process or remedy; and to the extent that in any jurisdiction there shall be attributed such an immunity. Each Party further acknowledges and agrees that its rights and obligations hereunder are of a commercial and not governmental nature, and irrevocably submits to the jurisdiction of the arbitral tribunal and any proceeding to recognize, confirm, enforce or give effect to any arbitral award rendered by the tribunal. Government hereby represents that no law of the Sultanate of Oman would prevent a valid and effective waiver by Government of any such immunity were it to exist. [3] Comments and Questions 1. 2.

If you were representing a private party in contracting with a state, what provisions would you want to include in a waiver of sovereign immunity clause? Why? If you were representing a state, what provisions would you be willing or not willing to include in a waiver of sovereign immunity clause? Why?

This Chapter presents an overview of investment agreements that may be negotiated between foreign investors, on the one hand, and governments, government agencies or state-owned companies, on the other hand, focusing on the key contract clauses that are P 279 often contained within them.

References Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September 2013). 2) Available at http://www.italaw.com/sites/default/files/casedocuments/ita0150.pdf (accessed 1 September 2013). 3) Available at http://www.italaw.com/sites/default/files/casedocuments/ita0175.pdf (accessed 1 September 2013). 4) Reprinted with permission of Oxford University Press. All rights reserved. 5) New York Convention art. II(1) & (2); Panama Convention art. 1. 6) New York Convention art. II(1) & (2). 7) New York Convention art. II(2); Panama Convention art. 1 (also includes telex communications in the list of non-signed documents that may contain an enforceable arbitration agreement). See DIETF, Ltd. v. RF, AG, decision of Obergericht [Court of Appeal], Basel-Land (Switzerland), 5 July 1994, 21 Y.B. Com. Arb. 685, 688 (1996) (telefax acceptance of written confirmation of order, which explicitly referred to general conditions, which contained an arbitration clause, satisfied writing requirement). 8) This alternative can only be used if the government is also a party to the agreement. 9) Reprinted with permission of Barrows Company, Inc., New York, NY. 10) Reprinted with permission of Barrows Company, Inc., New York, NY. 11) Available at http://www.ihsenergy.com (accessed 1 September 2013). Includes data supplied by Petroconsultants S.A.; © 1996 Petroconsultants S.A. 12) Reprinted with permission of Barrows Company, Inc., New York, NY. 13) Reprinted with permission of Barrows Company, Inc., New York, NY. 14) Reprinted with permission of Barrows Company, Inc., New York, NY. 15) Reprinted with permission of Barrows Company, Inc., New York, NY. 1653) AJIL (1959) 804 ff. See Comments by Domke 24 LCP (1959) 323 f.; Pisa 72 Harv. LR (1959) 1442 with note 98; Berman, 24 RabelsZ (1959) 449 ff. 1)

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17)

18) 19) 20)

21) 22) 23) 24) 25)

26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36)

37) 38)

House of Lords July 6, 1978: [1978] 2 All E.R. 1043m. Court of Appeal May 26, 1955: [1955] 1 All E.R. 81. Comment: Becker, ‘The Rolimpex Exit from International Contract Responsibility’ 10 New York University Journal of International Law and Politics (1978) 447 ff. Called a ‘usual role’ for US law in Banking and Trading Corp, Ltd. v. Reconstruction Finance Corp., 147 F.Supp., 193 (1956) 208 f. For the UK see Peter Cassidy Seed Ltd. v. Osuustrukakaupa J.L. [1957] 1 All E.R. 484, 487, 489. ICC, Incoterms (1980 edition) FOB, A.3. See also the Commentary to the Incoterms by Elsemann/Melis (Vienna 1980) 102 ff. Principles which go further have been suggested by Khadjavi-Gontard/Hausmann, RIW (1980) 533 ff. and RIW (1983). 1 ff. and exemplified by application to Iranian state enterprises. Reprinted with permission of Barrows Company, Inc., New York, NY. Reprinted with permission of Barrows Company, Inc., New York, NY. Reprinted with permission of Barrows Company, Inc., New York, NY. Reprinted with permission of Barrows Company, Inc., New York, NY. Available at http://arbitrationlaw.com/files/free_pdfs/mobil_cerro_negro_ltd._v._petroleos_d e_venezu- ela_sa_award_icc_arbitration_case_no._15416.pdf (accessed 1 September 2013). This article has been archived in TDM, http://www.transnational-disputemanagement.com. Reprinted with permission of Barrows Company, Inc., New York, NY. Reprinted with permission of Barrows Company, Inc., New York, NY. Available at http://www.barrowscompany.com (accessed 1 September 2013). Reprinted with permission of Barrows Company, Inc., New York, NY. Reprinted with permission of Barrows Company, Inc., New York, NY. Available at http://www.iusct.net/Default.aspx. Available at http://www.iareporter.com/downloads/20120924/download (accessed 1 September 2013). This article has been archived in TDB, http://www.transnational-disputemanagement.com. Reprinted with permission of Barrows Company, Inc., New York, NY. Available at http://www.italaw.com/sites/default/files/casedocuments/italaw1094_0.pdf (accessed 1 September 2013). Available at http://arbitrationlaw.com/files/free_pdfs/mobil_cerro_negro_ltd._v._petroleos_d e_venezu- ela_sa_award_icc_arbitration_case_no._15416.pdf (accessed 1 September 2013). Reprinted with permission of Barrows Company, Inc., New York, NY. Available at http://www.barrowscompany.com (accessed 1 September 2013). Reprinted with permission of Barrows Company, Inc., New York, NY.

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Chapter 4: Forums for Resolving Foreign Investment Disputes

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Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Chapter 2 demonstrated the multiple objectives of investment treaties. One of the major objectives is the establishment of a set of optional forums for resolving foreign investment disputes. In this chapter, the major forums that are used for investment disputes are reviewed. The forums can be placed under four main categories – foreign investment arbitration regimes, other international arbitral regimes, international courts, and national forums.

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§4.01 FOREIGN INVESTMENT ARBITRATION REGIMES

Investment Arbitration

Bibliographic reference

'Chapter 4: Forums for Resolving Foreign Investment Disputes', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 281 - 380

ICSID, which was considered briefly in Chapter 2, is the preeminent example of an arbitral institution that has the resolution of foreign investment disputes as its focus. It is permanent in terms of its infrastructure and secretariat, even though the identity of the arbitrators in particular cases is determined pro hac vice. As will be seen, ICSID's jurisdiction may be secured by a unilateral statement on behalf of a contracting state party to the ICSID Convention and may, also, be incorporated in BITs as well as other investment instruments. ICSID offers two forms of arbitration. Arbitration under the ICSID Convention is available where states are a party to the ICSID Convention. For states that are not parties to the ICSID Convention, the World Bank established the Additional Facility. The Additional Facility, however, does not have the same internalized enforcement procedure for awards that is available under the ICSID Convention. Both of these ICSID regimes will be discussed in this chapter. In the past, it was more common in international law for two states to establish a tribunal for a class of disputes so large that the tribunal would be expected to endure over a period of time, in contrast to the very evanescent bilateral tribunal which is much more common today. Such tribunals, sometimes referred to as permanent mixed arbitration tribunals, were important institutions in resolving many of the disputes that arose out of the detritus of the First World War. The IranUnited States Claims Tribunal, which will be discussed in this chapter, and the United Nations Compensation Commission are more recent examples of this phenomenon. Although many of the permanent mixed arbitration tribunals dealt with investment disputes, there is nothing quite yet akin to these type of dispute resolution forum in contemporary international investment dispute law.

[A] International Centre for Settlement of Investment Disputes (ICSID) ICSID is a state-neutral international dispute resolution institution that has the primary goal of providing a forum for the resolution of foreign investment disputes. Arbitration under the ICSID Convention, the instrument that created ICSID, is the most popular choice for the settlement of foreign investment disputes today. ICSID reported that as of P 282 December 31, 2012, it had registered a total of 419 cases, out of which 369 are arbitrations under the ICSID Convention. To have a better theoretical and practical understanding of the ICSID Convention regime for the resolution of foreign investment disputes, it is necessary to know the background of ICSID, the advantages of ICSID arbitration, and the jurisdiction of ICSID under the ICSID Convention. These will be discussed in turn. [1] Background – W. Michael Reisman, Systems of Control in International Adjudication and Arbitration: Breakdown and Repair, 46-47 (Duke University Press 1992) [ICSID was created by the ICSID Convention, otherwise known as the Washington Convention. The Convention was formulated by the World Bank and has over 140 state parties.] (Citations selectively omitted) The Background of ICSID In 1963 the International Bank convened a conference to create a system of international arbitration associated with the bank. The nexus between a public international development bank and international arbitration may not be immediately apparent, but, in fact, it is very close. The purpose of the planned arbitration center was closely related to the major purpose of the International Bank: to encourage and accelerate economic development in the poorer countries. Since it had become apparent that available public funds were quite insufficient for the task, the bank sought to recruit private capital by encouraging direct foreign investment in developing countries. But potential investors had become skittish about investing in poorer countries, at a time when a synergy of recent independence and radical ideology was provoking expansive claims of sovereignty and national rights to expropriate foreign property. The new arbitral center sought to create an impartial and reliable system of arbitration, under the aegis of the World Bank, for disputes between direct foreign investors and host governments. The assurance of such a system, it was thought, would assuage the anxieties of foreign investors and encourage them to invest, while, at the same time, cooling the enthusiasm of host governments for expropriatory initiatives. The fundamental idea

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underlying the ICSID experiment was brilliantly simple: developing countries anxious to induce private foreign investment in their countries would agree to submit disputes about those investments to a tribunal while the governments of foreign investors would agree to refrain from what is often euphemistically called “diplomatic protection,” a term which includes national actions on behalf of investors abroad ranging from the gentlest of persuasion to very high coercion. As in all international commercial arbitration, the designers of the World Bank scheme knew that they had to provide a neutral forum, which would avoid both the courts of the host state, which foreign investors usually felt could be prejudicial to their interests, and the courts of the foreign investor which the host government would usually assume to be less than sympathetic to its aspirations. Moreover, for many states, the prospect of submitting to the jurisdiction of a foreign court was taken as an affront to its sovereignty and national dignity. The International Centre for the Settlement of Investment Disputes or “ICSID,” as the World Bank system came to be acronymically known, addressed both of these problems. Sensitive to the political elements in the cases it would be processing, the ICSID system also sought to reduce the role of national courts in enforcement even more than in other P 283 available systems of private international arbitration by providing for direct enforcement with no possibility of challenging an award in those national courts where enforcement of awards would otherwise have been sought. The developing countries which were anxious to attract foreign investment would have been loath to submit to the jurisdiction of a foreign court in an enforcement action. From the perspective of the foreign investor, such enforcement, as of 1963, hardly looked worth the effort. If the developing country even had assets in an industrialized state, those assets were probably protected by the then still broad doctrine of sovereign immunity. [2] Advantages of ICSID Arbitration – Lucy Reed, Jan Paulsson and Nigel Blackaby, Freshfields Guide to ICSID Arbitration, 14-17 (2nd ed., Kluwer Law International 2011) [ICSID arbitration is advantageous for a number of reasons, hence its popularity. Be that as it may, it should not be assumed to be the most appropriate forum for all foreign investment disputes. In certain instances, other forums may prove to be more suitable. Therefore, there is a need to have familiarity with its main advantages.] (Citations selectively omitted) Why choose ICSID? Particular features of ICSID arbitration Counsel to any corporation making a foreign investment in an ICSID Contracting State should always carefully evaluate the inclusion of an ICSID arbitration clause in its contract with the host State. Likewise, when a dispute has arisen under an investment treaty counsel should carefully consider using the ICSID arbitration option. However, ICSID arbitration is not the best option in every situation. There may well be considerations militating in favor of other dispute resolution options … We address some of the main advantages of ICSID arbitration below. Neutral and self-contained system In typical international commercial arbitration, the parties select the place (or seat) of arbitration. In the absence of such selection, the relevant arbitration rules will provide a mechanism for determining the seat. The seat of arbitration, in turn, determines the procedural law for the conduct of the arbitration. The local courts of the seat of arbitration may, depending on the local law, have the opportunity to intervene to designate the arbitral tribunal, grant interim measures, or rule on applications to set aside awards. By contrast … the ICSID Convention provides that the arbitration law of the place (or seat) of arbitration, wherever it may be, has no impact whatsoever on the proceedings. The ICSID process is entirely self-contained and hence delocalized. The Centre oversees the appointment of arbitrators to the tribunal, the tribunal handles provisional measures, and an ICSID-appointed ad hoc committee conducts annulment proceedings. ICSID awards are final and binding on the parties. They are not subject to any appeal or review by national courts, but only to the limited remedies provided in the Convention itself: rectification, interpretation, revision and annulment … Furthermore, … under the Convention, monetary obligations arising from ICSID awards must be recognized and enforced in all Contracting States as if they were final judgments of the local courts. This is a distinctive feature of ICSID arbitration, as other international arbitration regimes leave enforcement to domestic laws or other applicable treaties such P 284 as the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards … and the Inter-American Convention on International Commercial Arbitration … These domestic laws and treaties typically provide for a minimum standard of review of arbitral awards in setting-aside proceedings, and provide limited grounds for refusal to recognize and enforce arbitral awards, including uncertain public policy grounds. Increasing transparency Most international arbitral proceedings are private, and some degree of confidentiality

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may be preserved (although attempts to define the nature of the confidentiality obligation and its exceptions have defeated drafters of legislation and many sets of arbitration rules). As in other international arbitrations, ICSID hearings generally are private and submissions are confidential. However, as a result of the 2006 amendments to ICSID Arbitration Rules 32(2) and 37(2), it is possible for ICSID tribunals to allow nondisputing parties to observe oral hearings (unless either party objects) and file written submissions. As of January 2010, non-disputing parties (including various nongovernmental organizations and the European Commission) had filed written observations in five registered ICSID cases. In contrast to other arbitration mechanisms, the Registers maintained by the ICSID Secretariat (under Administrative and Financial Regulations 22 and 23) – which are available on both the ICSID website and in the ICSID Annual Reports – ensure that the existence, current status and ultimate disposition of ICSID arbitrations are matters of public record. Article 48 of the Convention allows ICSID to publish awards itself only when both parties consent, but parties frequently publish unilaterally and, as a result of the 2006 amendments, ICSID must include excerpts of the legal reasoning of ICSID tribunals in its publications. The Secretariat actively seeks consent of the parties to publish the awards and decisions and in practice, most ICSID awards are published and readily available. This comparative transparency may have one strategically important side effect. Because many States want to be considered investment-friendly, the prospect of a host State being named – publicly – in an ICSID arbitration may provide investors with more leverage in early negotiations with the host State than the threat of international arbitral proceedings conducted under other rules. Clear and reasonable cost schedules Like most major international arbitral institutions, ICSID provides a transparent cost structure and keeps its administrative fees relatively low. ICSID is unusual, however, in including a fixed rate for the remuneration of conciliators, arbitrators and ad hoc annulment committee members. The fixed rate for conciliators, arbitrators and ad hoc annulment committee members alike, per day, is US$3,000, in addition to certain allowances and reimbursement of expenses. These fees remain modest when compared with those typically charged by leading arbitration professionals in their other work. The parties in individual cases may agree to different rates for the arbitrators. The “World Bank factor” It remains true that most ICSID awards have been either successfully settled or voluntarily executed by the parties, although recent unpaid awards against the Argentine Republic are challenging this trend. This success (other than Argentina) may be due to P 285 ICSID being an organ of the World Bank, and the perception that failure to respect an ICSID award would have indirect political consequences in terms of credibility with the World Bank. Whether the World Bank actively promotes respect for ICSID awards is open to question. ICSID claims no special clout and is obviously unlikely to browbeat the very States that constitute its governing Administrative Council. Nevertheless, it is difficult to imagine a World Bank lawyer seriously recommending the use of ICSID clauses in documentation for projects in a country whose government has notoriously ignored an ICSID award. [3] Jurisdiction: ICSID Convention Art. 25 Jurisdiction for ICSID arbitration is governed by Article 25 of the ICSID Convention. Four key requirements for jurisdiction can be identified from Article 25(1). First, there must be a “legal dispute”. Second, the legal dispute must be one “arising directly out of an investment”. Third, the investment must be “between a Contracting State … and a national of another Contracting State”. Lastly, the parties to the dispute must have consented in writing to submit to the jurisdiction of ICSID. Article 25 (1) The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally. [a] The Presence of a Legal Dispute [i] Christoph H. Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary, 93-95, 98-101 (2nd ed., Cambridge University Press 2009) (1) (Citations selectively omitted) 1. The Existence of a Dispute

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The existence of a dispute may be in doubt in several ways. An open question may not have matured into a dispute between the parties. Or a difference of opinion may not be sufficiently concrete to amount to a dispute that is susceptible of conciliation or arbitration. There may have been a dispute that has since become moot. The International Court of Justice has defined a dispute as “a disagreement on a point of law or fact, a conflict of legal views or interests between parties”. ICSID Tribunals have adopted similar descriptions of “disputes”, often relying on the ICJ's definition. The existence of a dispute presupposes a minimum of communication between the parties. The matter must have been taken up with the other party, which must have opposed the claimant's position if only indirectly. Thus, failure to respond to a specific demand within a reasonable time would be sufficient to establish the existence of a P 286 dispute. In AAPL v. Sri Lanka, the Tribunal noted that the claim remained outstanding without a reply for more than the three months' negotiation period provided for in the Bilateral Investment Treaty and that hence AAFL had become entitled to institute the proceedings. On the other hand, it is not necessary that other means of settlement, notably negotiations, have been utilized unsuccessfully before the Centre is seized of a dispute unless the terms of the consent provide for the prior use of other means of settlement. The disagreement between the parties must also have some practical relevance to their relationship and must not be purely theoretical. It is not the task of the Centre to clarify legal questions in abstracto. The dispute must relate to clearly identified issues between the parties and must not be merely academic. This is not to say that a specific action must have been taken by one side or that the dispute must have escalated to a certain level of confrontation, but merely that it must be of immediate interest to the parties. The dispute must go beyond general grievances and must be susceptible of being stated in terms of a concrete claim. In some cases the respondents contended that the claims were hypothetical and hence there was no dispute. In Enron v. Argentina some provinces of Argentina had assessed taxes that the Claimants described as exorbitant and enough to wipe out the entire value of their investment. Argentina argued that the claim was hypothetical since the taxes had been assessed but not collected. Claimants pointed out that the taxes had not been collected only because there was a temporary injunction ordered by the Supreme Court. The Tribunal refused to accept that under these circumstances the dispute was merely hypothetical. It said: The Tribunal is mindful of the fact that once the taxes have been assessed and the payment ordered there is a liability of the investor irrespective of the actual collection of those amounts. This means that a claim seeking protection under the Treaty is not hypothetical but relates to a very specific dispute between the parties. In some cases the allegedly hypothetical nature of the claims related to the quantum of damages. In Pan American v. Argentina the Respondent complained that the damages claimed were hypothetical, conjectural and speculative. The Tribunal found that a certain degree of uncertainty about the quantum of damages was inevitable at the jurisdictional stage. This did not affect its jurisdiction provided the Claimants were able prima facie to demonstrate that some damage had occurred. In several decisions tribunals rejected the argument that negotiations pending between the parties or proceedings pending in domestic courts made their claims premature or hypothetical. A dispute may clearly have existed, but one party may feel that it has taken steps to satisfy any claims that the other party may have had. In AGIP v. Congo, the Government had expropriated the Claimant's assets without compensation in violation of a prior agreement. Before the ICSID Tribunal, the Government declared that there was no longer any dispute since it had recognized the principle of compensation. The Tribunal found that the declarations made by the Government were so lacking in precision that the continuing existence of the dispute was not in doubt. It noted that the Claimant had not, in fact, received any compensation. In addition, the claim was directed not only at compensation for the nationalization but also at damages for losses resulting from the Government's violations of its contractual obligations. P 287 * * *

3. The Legal Nature of the Dispute a) Legal and Non-Legal Disputes The requirement that a dispute must be “legal” in order to qualify for settlement by the Centre gave rise to much debate during the Convention's preparation … *** Commentators on the ICSID Convention have endeavoured to come to terms with the concept of legal dispute by listing typical factual situations and the questions that they entail. These include expropriation, breach or termination of an agreement or the application of tax and customs provisions. While these descriptions are undoubtedly

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useful, it must be borne in mind that fact patterns alone do not determine the legal character of a dispute. Rather, it is the type of claim that is put forward and the prescription or policy that is invoked that decides whether a dispute is legal or not. Thus, it is entirely possible to react to a breach of agreement by relying on moral standards, by invoking concepts of justice or by pointing to the lack of political and economic wisdom of such a course of action. The dispute will only qualify as legal if legal remedies such as restitution or damages are sought and if legal rights based on, for example, contracts, treaties or legislation are claimed. Consequently, it is largely in the hands of the claimant to present the dispute in legal terms. Institutional Rule 2(1)(e) makes it incumbent upon the claimant to demonstrate the legal nature of the dispute … *** Tribunals have at times mentioned in passing that the dispute before them was a legal dispute since it concerned legal rights and obligations. More recently, tribunals addressing the issue of the existence of a legal dispute have pointed out that the claimants had asserted rights, had relied on legal arguments and had sought legal remedies. It followed that the disputes were legal in nature. In Continental Casualty v. Argentina, the Claimant had invested in the insurance business in Argentina. It claimed that Argentina had enacted a series of decrees and resolutions that destroyed the legal security of the assets held by the investor. Argentina submitted that in order to meet the requirement of a legal dispute, the dispute must concern rights, obligations and legal titles and not some undesirable consequences that have not as the proximate cause the host State's conduct in respect of its investment. The Tribunal found that the Claimant had made legal claims. It said: In this case, the Claimant invokes specific legal acts and provisions as the foundation of its claim: it indicates that certain measures by Argentina have affected its legal rights stemming from contracts, legislation and the BIT. The Claimant further indicates specific provisions of the BIT granting various types of legal protection to its investments in Argentina, that in its view have been breached by those measures. In Suez v. Argentina the Claimants had invested in water distribution and waste water services in Argentina. When the Argentine economy experienced a severe crisis, the government enacted measures that resulted in a significant depreciation of the Argentine Peso. Claiming that these measures injured their investments violation of the commitments made to them, the Claimants sought to obtain adjustments in the tariffs as well as modifications in their operating conditions. Argentina argued that there was no P 288 legal dispute but rather a business or commercial dispute. The dispute over the effects of the devaluation measures was one over policy and fairness and hence not legal in nature. The Tribunal rejected this objection and said: A legal dispute, in the ordinary meaning of the term, is a disagreement about legal rights or obligations. In the present case, the Claimants clearly base their case on legal rights which they allege have been granted to them under the bilateral investment treaties that Argentina has concluded with France and Spain. In their written pleadings and oral arguments, the Claimants have consistently presented their case in legal terms … the dispute as presented by the Claimants is legal in nature. It follows from the practice of tribunals that the legal nature of a dispute is determined by the way the claimant presents its claim. If the claim is couched terms of violation of legal rights, is based on legal arguments and seeks legal remedies there is a legal dispute. [ii] UNCTAD, Scope and Definition: A Sequel, Series on Issues on International Investment Agreements II, 46 (United Nations Publications 2011) (Citations selectively omitted) Timing of disputes. Some agreements that apply to investments made prior to as well as after the entry into force of the agreement may also deal with the timing of disputes. Thus, the agreement may specify that it applies only to disputes that arise after the entry into force of the agreement. This requires the tribunal to determine when the dispute actually arises. For jurisdiction to be available, the dispute must arise after the treaty has entered into force. In this matter, the awards of tribunals do not offer a clear guide as there are inconsistent findings, though it is clear that the mere fact that the investment has ceased to exist by the time of the claim does not negate jurisdiction. Otherwise investments could be expropriated without any duty to pay compensation on the ground that there is no longer an owner of the investment. [iii] Georgios Petrochilos, Sylvia Noury and Daniel Kalderimis, ICSID Convention, Chapter II, Article 25 [Jurisdiction of the Centre], in Concise International Arbitration, 66, 67-69 (Loukas A. Mistelis (ed.), Kluwer Law International 2010) (Citations selectively omitted)

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2.The existence of a dispute. A dispute may be defined as ‘a disagreement on a point of law or fact, a conflict of legal views or interests between parties' (ICJ East Timor case and the references to prior case-law). In Maffezini v Spain, the tribunal concluded that ‘there tends to be a natural sequence of events that leads to a dispute. It begins with the expression of a disagreement and the statement of a difference of views. In time these events acquire a precise legal meaning through the formulation of legal claims, their discussion and eventual rejection or lack of response by the other party. The conflict of legal views and interests will only be present in the latter stage, even though the underlying facts predate them.’ The failure to respond to a demand is sufficient to establish the existence of a dispute (AARL v Sri Lanka). The mere acknowledgement of the claimant's rights without any further action is not sufficient to settle the dispute (AGIP v Congo). Another distinction that has to be made is that between ‘disputes' and ‘divergences'. This distinction is illustrated in the Helnan Hotels v Egypt case where the P 289 Tribunal concluded that ‘although, the terms “divergence” and “dispute” both require the existence of a disagreement between the parties on specific points and their respective knowledge of such disagreement, there is an important distinction to make between them as they do not imply the same degree of animosity. Indeed, in the case of a divergence, the parties hold different views but without necessarily pursuing the difference in an active manner. On the other hand, in case of a dispute, the difference of views forms the subject of an active exchange between the parties under circumstances which indicate that the parties wish to resolve the difference, be it before a third party or otherwise. Consequently, different views of parties in respect of certain facts and situations become a “divergence” when they are mutually aware of their disagreement. It crystallises as a “dispute” as soon as one of the parties decides to have it solved, whether or not by a third party.’ The Centre cannot decide on legal questions in abstracto. Purely theoretical disputes fall out of the Centre's jurisdiction. The claimants must establish that they have a justiciable legal interest in the dispute. Although the Convention does not place any temporal limitations on the jurisdiction of Centre, the parties' consent to the jurisdiction of the Centre may contain such limitations. 3.Legal nature of the dispute. The Convention does not define the term ‘legal dispute’. The Report of the Executive Directors clarified its meaning by pointing out that ‘while conflicts of rights are within the jurisdiction of the Centre, mere conflicts of interests are not. The dispute must concern the existence or scope of a legal right or obligation, or the nature or extent of the reparation to be made for breach of a legal obligation.’ In one instance, an ICSID tribunal concluded that the legal nature of a dispute resulted from the fact that it concerned legal rights and obligations under an agreement between the parties (Alcoa Minerals v Jamaica; see also DIPENTA-LESI v Algeria). Choosing conciliation as a method of dispute settlement does not necessarily imply that the dispute does not have a legal nature. 4.Excluded disputes. During the drafting of the Convention there were some attempts to exclude certain types of disputes, such as disputes that could affect the sovereign powers of States, had major political significances or affected or could affect vital interests, security or national policy. However, no such limitations exist in the final version of the Convention and this has been recognised by a number of ICSID tribunals (Amco v Indonesia (I) (DA); CSOB v Slovakia). States can exclude certain types of disputes by notification to the Centre pursuant to art. 25(4). A notification under art. 25(4) is not a reservation to the Convention. Such notifications cannot be interpreted as the expression of a State's consent to jurisdiction (SPP v Egypt (DJ)) nor can they limit the State's ability to give consent in respect of a dispute falling into one of the excluded classes (Schreuer, Commentary, p. 343). In the event that a Contracting State has specifically consented to arbitrate a certain dispute which would otherwise have been excluded pursuant to art. 25(4), such specific consent will prevail. The notifications under art. 25(4) are mere statements of intent. Specific consent, once given, cannot be withdrawn by a notification under art. 25(4). 5.List of exclusions under art. 25(4). To date there have been seven notifications of exclusions pursuant to art. 25(4). Jamaica excluded disputes ‘arising directly out of an investment relating to minerals or other natural resources' (8 May 1974). Papua New Guinea consented only to disputes ‘which are fundamental to the investment itself ‘ (14 September 1978), though the impact of this is rather unclear. UAE excluded ‘all questions pertaining to oil and to acts of sovereignty’ (8 May 1980). Turkey consented only to P 290 disputes regarding investments that ‘obtained necessary permission, in conformity with the relevant legislation of the Republic of Turkey on foreign capital, and that have effectively started’ and excluded all disputes relating to ‘the property and real rights upon the real estates' (3 March 1989); which has been given effect to in, e.g., the 2006 France-Turkey BIT. China gave its consent only for disputes arising from expropriations and nationalisations (7 January 1993). Guatemala excluded ‘any dispute that arises from a compensation claim against the State for damages due to armed conflicts or civil disturbances' (16 January 2003). Ecuador excluded from the Centre's jurisdiction disputes resulting from an investment relating to ‘the exploitation of natural resources, such as oil, gas, minerals or others' (4 December 2007). [iv] Comments and Questions Is this a requirement that is easy to meet to meet in practice? Gary Born, in his treatise

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International Arbitration: Law and Practice, which was published in 2012, observes in note 43 of page 421 that thus far, no published ICSID award has denied jurisdiction on the basis that no “legal dispute” existed. [b] The Presence of a Legal Dispute Arising Directly Out of an Investment [i] Commentary on the Directness Requirement [aa] Christoph H. Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary, 106 (2nd ed., Cambridge University Press 2009) (2) (Citations selectively omitted) The First Draft foresaw the Centre's jurisdiction for all legal disputes “arising out of or in connection with any investment”. These words were criticized as giving a tribunal wide and indefinite authority, and it was suggested that only disputes directly relating to an investment should be included. A motion to insert the word “directly” as an additional qualification to the word “investment” was adopted by 26 to 8 votes. No definition or explanation of the word “directly” was ever offered. Art. 46 of the Convention provides for the tribunal's competence to determine incidental or additional claims or counterclaims arising directly out of the subject-matter of the dispute. But under the terms of Art. 46, these claims too must be within the scope of the parties' consent and otherwise within the Centre's jurisdiction. Therefore, Art. 46 does not add to the scope of ICSID's jurisdiction but adopts the “arising directly” requirement by reference. The requirement of directness is one of the objective criteria for jurisdiction and is, therefore, independent of the parties' consent. This means that, no matter what the parties have agreed, the dispute must not only be connected to an investment but must also be reasonably closely connected. In practical terms, the objective and the subjective elements may be related. Disputes arising from ancillary or peripheral aspects of the investment operation are likely to give rise to the objection that they do not arise directly from the investment and that they are not covered by the consent agreement. P 360 Nevertheless, the two objections are analytically distinct. [bb] Georgios Petrochilos, Sylvia Noury and Daniel Kalderimis, ICSID Convention, Chapter II, Article 25 [Jurisdiction of the Centre], in Concise International Arbitration, 66, 69 (Loukas A. Mistelis (ed.), Kluwer Law International 2010) (Citations selectively omitted) 6.The directness requirement. The Centre only has jurisdiction over disputes that arise directly out of an investment. The requirement of directness does not relate to the nature of the investment itself but rather to the relationship between the dispute and the investment. Jurisdiction can exist even in respect of indirect investments as long as the dispute arises directly out of such investments (Fedax v Venezuela (DJ)). Directness is an objective criterion for establishing the Centre's jurisdiction. Therefore, even if parties agree on the fact that a certain dispute arose directly out of an investment, a tribunal, or commission, is entitled to satisfy itself as to its own jurisdiction. Investments can comprise complex operations and involve various transactions expressed in diverse agreements which are not always directly linked to the investment. Tribunals have taken the view that such complex operations should not be regarded narrowly, and that the term ‘investment’ should be interpreted to include the overall operation (Holiday Inns v Morocco; Fedax v Venezuela (DJ); CSOB v Slovakia (DJ)). Art. 2(b) of the Additional Facility Rules provides for an alternative dispute settlement mechanism which is available in relation to disputes which do not arise directly from an investment. This provision encompasses transactions that do not qualify as investments. Ordinary commercial disputes are, however, excluded. [ii] Commentary on the Investment Requirement [aa] Christoph H. Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary, 114-117, 125-128 (2nd ed., Cambridge University Press 2009) (3) (Citations selectively omitted) 1. General Meaning under the Convention The concept of investment is central to the Convention. Yet, the Convention does not offer any definition or even description of this basic term. The Working Paper's draft on jurisdiction did not even contain a reference to “investments”. Mr. Broches advised against limiting or defining disputes since it would be difficult to find a satisfactory definition and since any definition was likely to lead to jurisdictional controversies. On the other hand, a number of delegates found more precision desirable. The Preliminary Draft included the requirement of the existence of an investment dispute but failed to offer a definition. The subsequent discussions showed a widely held opinion that a definition of the term “investment” was necessary. At the same time some suggestions as to possible definitions were put forward. But Mr. Broches continued to oppose a

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definition. The First Draft introduced a definition in the following terms: Article 30 For the purposes of this Chapter(i) “investment” means any contribution of money or other assets of economic value for an indefinite period or, if the period be defined, for not less than five years; This draft led to a broad critical discussion and a flurry of counterproposals. Some delegates found the draft unsatisfactory, especially since it was too imprecise. There was considerable opposition to the word “contribution” but also to the introduction of a specific time element. Some alternative proposals emphasized aspects of money and profit, property rights or the host State's interest in development. The various suggested definitions of “investment” prompted Mr. Broches to remark that they were, in fact, definitions of what the delegates believed their governments would wish to submit to the Centre. Some definitions in bilateral investment treaties and domestic statutes were also quoted but were not acceptable … Mr. Broches insisted that the precise delimitation of the Centre's jurisdiction was best left to the parties. He found support with the United Kingdom delegate who agreed that a definition would only create jurisdictional difficulties. This view was endorsed by a number of other delegates. Yet another group advocated the inclusion of a descriptive list only. Eventually, a British proposal that omitted any definition of the term “investment” was adopted by a large majority in the Legal Committee. Consequently, neither the Revised Draft nor the Convention itself contain a definition. *** In the debate over the draft for the Executive Directors' Report, Mr. Broches recalled that none of the suggested definitions for the word “investment” had proved acceptable. He suggested that while it might be difficult to define the term, an investment was in fact readily recognizable. He proposed that the Report should say that the Executive Directors did not think it necessary or desirable to attempt a definition. After some further debate about the desirability of a definition, the more neutral statement was adopted that no attempt had been made to define the term “investment”. Historically, this is, of course, incorrect. There were a number of attempts but they all failed. The relevant portion of the Report of the Executive Directors, as adopted, says: 27. No attempt was made to define the term “investment” given the essential requirement of consent by the parties, and the mechanism through which Contracting States can make known in advance, if they so desire, the classes of disputes which they would or would not consider submitting to the Centre (Article 25(4)). Therefore, the Convention offers no explanation of the concept of investment. It is left to the parties what kinds of investments they wish to bring to ICSID. The only possible indication of an objective meaning that can be gleaned from the Convention is contained in the Preamble's first sentence, which speaks of “the need for international cooperation for economic development and the role of private international investment therein.” This declared purpose of the Convention is confirmed by the Report of the Executive Directors which points out that the Convention was “prompted by the desire to strengthen the partnership between countries in the cause of economic development.” Therefore, it is arguable that the Convention's object and purpose indicate that there should be some positive impact on development. But it does not necessarily follow that an activity that does not contribute to the host State's development cannot be an investment in the sense of Art. 25 and is hence outside the Centre's jurisdiction. *** 6. Types of Investments A perusal of cases that come before ICSID tribunals demonstrates the diversity of matters covered by the concept of investment. Investment in the sense of Art. 25 of the Convention may cover almost any area of economic activity. Not surprisingly, the concept of investment includes immovable and movable property. It is also well established that rights arising from contracts may amount to investments. Financial instruments such as loans or the purchase of bonds may qualify as investments. In Fedax v. Venezuela, Venezuela argued that the purchase of promissory notes issued by the government did not qualify as an investment since they involved neither a long-term transfer of financial resources in order to acquire interests in a corporation nor a portfolio investment. The Tribunal concluded that loans and other credit facilities were within the jurisdiction of the Centre and that the purchase of the promissory notes constituted an investment. Similarly, in CSOB v. Slovakia, the Tribunal held that the broad meaning which must be given to the notion of an investment may include a loan, especially if it contributes substantially to a State's economic development. In Sempra v. Argentina, the Tribunal also accepted loans as an investment, noting that they were part

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of the overall investment's continuing financing arrangements. On the other hand, tribunals have found that a bank guarantee and an option were not covered by the concept of an investment. Participation in companies or shareholding constitutes a frequently invoked form of investment. This is important in view of the common requirement that the investment be made through a company incorporated in the host State. The number of cases that have accepted shareholding as a form of investment is considerable. The locally incorporated company is treated not as the foreign investor but as the investment. This form of investment includes minority shareholding. It also includes indirect shareholding through an intermediate company. Another sizeable group of cases concerns civil engineering and construction projects. Tribunals have not entertained doubts that these were investments. Similarly, infrastructure projects are the basis of numerous investment disputes. The provision of services has been accepted as an investment in some cases but not in others. Investment operations have extended, inter alia, to mining operations, the construction and operation of hotels, banking and agriculture. [bb] Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles, 164 (Oxford University Press 2007) (4) (Citations selectively omitted) 6.4 Article 25 of the ICSID Convention limits the Centre's jurisdiction to legal disputes arising ‘directly out of an investment’. No definition of this central term is offered. The Report of the Executive Directors explains this lack of further clarification by saying: ‘No attempt was made to define the term “investment” given the essential requirements of consent by the parties, and the mechanisms through which Contracting States can make known in advance, if they so desire, the classes of disputes which they would or would not consider submitting to the Centre (Article 25(4)). 6.5 As Schreuer points out, this statement of the position is historically inaccurate. Schreuer explains how a number of differing views relating to the definition of ‘investment’ were discussed, but no resolution was reached. The absence of any clarification in the ICSID Convention means that, within a wide area of discretion, the parameters of what constitutes an investment fall to be supplied by the Parties' consent and ultimately by tribunals. [cc] Georgios Petrochilos, Sylvia Noury and Daniel Kalderimis, ICSID Convention, Chapter II, Article 25 [Jurisdiction of the Centre], in Concise International Arbitration, 66, 69-70 (Loukas A. Mistelis (ed.), Kluwer Law International 2010) (Citations selectively omitted) 7.The concept of investment. The term ‘investment’ is not defined in the Convention. It is left to the parties to determine which types of investments they wish to bring to ICSID (Joy Mining v Egypt, (DJ)). On one view, the fact that the Convention does not offer any definition should not be interpreted as allowing parties to define any operation as an ‘investment’ (Joy Mining v Egypt (DA)). That view suggests that the requirement of an investment is constitutional in nature under the Convention, and has an objective meaning. Investment treaties typically define the term ‘investment’ (see, e.g., art. 1 of the UK model BIT; art. 1139 NAFTA). The term ‘investment’ may also be defined by the law of the host State (see, e.g., art. 1 of the Albanian Law on Foreign Investments). In Zhinvali v Georgia, the tribunal's jurisdiction was based only on Georgian investment law. In that case, the tribunal had to decide if ‘development costs' could be considered investments. The tribunal declined jurisdiction, concluding that there was no specific agreement between parties to treat development costs as investments and that, under Georgian law, development costs could not be regarded as investments (see also Mihaly v Sri Lanka). An investor and a host State may also specifically agree that a particular operation will constitute an investment (1993 ICSID Model Clause 3). ICSID tribunals have identified certain features that an activity must have in order to qualify as an investment for the purposes of art. 25: a certain duration; a regularity of profit and return; an element of risk; substantial commitment; and significant contribution to the development of the host State (Salini v Morocco (DJ), Joy Mining v Egypt, (DA); see also Biwater v Tanzania; MHS v Malaysia). It is clear that, even if one accepts these criteria as relevant, their presence has to be evaluated in the entire circumstances of a given case. That is not a tick-box exercise. Nor are these criteria exhaustive in any way. In any event, the terms in which the parties agreed that a given investment should be subject to the Centre's jurisdiction are of primordial importance. Going beyond, or against, the parties' agreement in that regard must be highly exceptional – if possible at all. In LESI-DIPENTA v Algeria the tribunal concluded that it is not necessary for an investment to be made in the host State so long as it was made in the context of a project which was to be realised in the host State. Many BITs specifically limit their application, including consent to the jurisdiction of the Centre, to investments made ‘in the territory’ of the host State (SGS v Philippines; SGS v Pakistan). [iii] Definitions in International Investment Agreements

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[aa] US Model Bilateral Investment Treaty (2012) (5) See Chapter 2, supra. [bb] UNCTAD, Scope and Definition: A Sequel, Series on Issues on International Investment Agreements II, 21-48 (United Nations Publications 2011) (Citations selectively omitted) 1. Main types of definitions Traditionally, IIAs have used asset-based definitions in investor/investment protection agreements. Protection-oriented instruments seek to safeguard the interests of the investors or, in broader context, to promote foreign investment by safeguarding the investors' property rights, assets and interests. Investment is seen as something that already exists or that will exist, by the time protection becomes necessary. The older terminologies, which referred to “acquired rights” or to “foreign property” make the context clear. The exact character of the particular assets is not by itself important in this case, since protection is to be extended to assets after their acquisition by the investor, when they form part of the investor's patrimony. Instruments mainly directed at the protection of foreign investment contain definitions of investment that are generally broad and comprehensive. They cover not only the capital (or the resources) that has crossed borders with a view towards the creation of an enterprise or the acquisition of control over an existing one, but also most other kinds of assets of the enterprise or of the investor, such as property and property rights of various kinds, non-equity investment, including several types of loans and portfolio transactions, as well as other contractual rights, including sometimes rights created by administrative action of a host State (licenses, permits, etc.). Such a definition is very common in BITs. Enterprise-based definition. On the other hand, some IIAs have opted for an enterprisebased definition pioneered by the Canada-United States Free Trade Agreement (FTA) (1988). That agreement defined investment as including the establishment or acquisition of a business enterprise, as well as a share in a business enterprise which provides the investor control over the enterprise. It also limited investment to enterprises that were a direct investment and thus excluded portfolio investment. The Canada-United States FTA (1988) has since been superseded by the North American Free Trade Agreement (NAFTA) (1992), which also employs an enterprise-based definition albeit a much broader (openended) one. The NAFTA definition designates an “enterprise” owned or controlled by an investor as a type of investment as well as lists more traditional types of assets including those linked to the activities of an enterprise such as equity or debt security of an enterprise. Also in contrast to the Canada-United States FTA, the NAFTA definition includes portfolio investment. An enterprise-based approach is useful where the agreement covers pre-entry treatment as well as post-entry treatment, as the act of entry and establishment has to take place through a specific entity rather than through the mere transfer of assets such as goods and/or services. By contrast, a post-entry-only agreement stresses the protection of foreign-owned and controlled assets which do not take the form of an organized enterprise. Further, host States' laws and regulations are often addressed to enterprises (as opposed to their shareholders), so where an enterprise constitutes a type of investment, it becomes easier for such laws and regulations to be caught by the term “treatment of investments” used in various IIA obligations. Finally, by contrast to other types of investment, an “enterprise” has legal personality: treaties with enterprise-based approach often expressly enable a foreign investor to bring claims not only on its own behalf but also on behalf of its enterprise, which may have implications in terms of the amount of recoverable damages. Definition by reference to “commercial presence”. In some IIAs, covered investments are limited to those that take the form of “commercial presence”, i.e. to legal entities established by an investor in the host State and branches or representative offices. This type of definition is not used in classical investment protection treaties, however. Being very narrow in scope, it is most often taken in agreements that have a specific aim of liberalizing trade in services. In these treaties, “commercial presence” is seen as one mode of cross-border supply of a service. Since it implies establishing a presence in a host State, it is also a form of FDI, and thus such agreements form part of the IIA universe. Treaties that employ the “commercial presence” definition do not include substantive protections of established investments (such as fair and equitable treatment, protection against expropriation, etc). Instead, they focus solely on providing market access opportunities. *** 2. The broad asset-based definition of investment As already noted, the broad asset-based definition is dominant in the vast majority of IIAs and BITs and has been subject of significant arbitral interpretation. It states, initially, that investment includes “every kind of asset”, suggesting that the term embraces everything of economic value, virtually without limitation. Some BITs include the language “every kind of economic interest”, which begs a distinction between “asset” and

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“interest” and is likely even broader. The general definition is followed by an illustrative list of the main categories of investment to be protected. Typically these categories will cover: – – – – –

Movable and immovable property and any other property rights such as mortgages, liens and pledges; Shares, stocks and debentures of companies or interests in the property of such companies; Claims to money or to any performance under contract having a financial value; Intellectual property rights and goodwill; and Business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources.

These categories are expressly included within the definition of “investment”, but the listing is not exhaustive. Accordingly, assets of “every kind” are included, even if they do not fall under the five categories. These categories are typical of those that appear in investment agreements with broad definitions of “investment”. *** Reinvestment. A further question is whether the term “investment” covers reinvestment, that is to say, the investment of the proceeds of the initial investment or whether only such reinvestment that is formally authorized is covered. Those proceeds have presumably been earned in the host country and have not been imported from abroad, as may have been the initial capital (or part of it) … [F]oreign investors, in making investment decisions, will take into account a host country's policies regarding treatment of all their assets and are likely to prefer that they be treated in the same manner, whether purchased initially by imported capital or financed through subsequent reinvestment. For instance, the China-Finland BIT (2004) specifically provides in Article 1(1): “Reinvested returns shall enjoy the same treatment as the original investment.” Change in the form of investment. Many BITs provide that change in the form of investment is covered to the same extent as the original investment. For example, Article I of the United Kingdom-Mexico BIT (2006) provides that “A change in the form in which assets are invested does not affect their character as investments as long as they are covered by this definition.” This additional wording will have significance as and when foreign investors change the form of their original investment, for example from a claim under a contract into shares in a company. Investors will want to be able to restructure their investments without being concerned that they will no longer be protected by the relevant IIA. Some investment treaties state explicitly that reinvestment is covered only if established in accordance with the conditions placed on the initial investment. For example, Article 2 of the Belgium/Luxembourg-Cyprus BIT (1991) provides that “[a]ny alteration of the form in which assets are invested shall not affect their classification as investment, provided that such alteration is not contrary to the approval, if any, granted in respect of the assets originally invested”. 3. Narrowing the scope of the term “investment” The possibility of taking a wide approach to the definition of investment may be contrasted with developments in recent treaty practice that seek to narrow down the scope of this term. A number of narrowing approaches need to be highlighted here: – – – – – – –

Excluding specific types of assets such as portfolio investments, certain commercial contracts, certain loans and debt securities, etc; Using a “closed list” definition with a wide asset-based list of examples which are exhaustive rather than illustrative; Limiting investments to those made “in accordance with host country law”; Supplementing definitions of “investment” by express references to investment risk and other factors commonly associated with investment, thereby introducing objective criteria to the analysis of the term; Restricting covered investments depending on the time of their of establishment; Limiting covered investments to certain industry sectors; Restricting the range of covered intellectual property rights (IPRs).

(i) Exclusion of specific types of assets Portfolio investments. Some investment agreements specify that they apply to foreign direct, as opposed to portfolio, investment. Portfolio investment is investment of a purely financial character, where the investor remains passive and does not control the management of the investment. The main concern of portfolio investors is the appreciation of the value of their capital and the return that it can generate, regardless of any long-term relationship consideration or control of the enterprise. Portfolio investment does not lead to technology transfer, training of local employees and other benefits associated with direct investment. Where an agreement is limited to foreign direct investment, the covered investment must be more than a passive financial investment and must include in addition an element of

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management control over the investment … *** Certain commercial contracts. The performance of a contract in a host country by a foreign entity may involve the creation of an investment and, as such, would be a natural element of a definition of investment. Indeed, contracts such as turnkey, construction, management, production, concession, revenue-sharing and other similar contracts are routinely included in a definition of investment. However, the fact that some IIAs also included “claims to money and claims to any performance under contract having a financial value” has led some tribunals to recognize even ordinary one-off sales and services contracts as investments. A number of countries have recognized that including ordinary commercial contracts in the definition of investment would lead to the term becoming overly broad and thus have started to add language specifically excluding such contracts from the definition of investment … *** (ii) “Closed list” approaches The “closed list” approach … differs from the broad open-ended approach in that it does not contain a conceptual chapeau to define investment (“every kind of asset …”) but contains an extensive but finite list of tangible and intangible assets to be covered by the treaty as well as certain clear exclusions of certain purely commercial transactions, including sales contracts and pure financial loan agreements involving no capital risk … *** (iii) Limitation to permitted investment under host country laws Certain IIAs contain a specification that investment is covered only if made in accordance with the laws of the host country. For example, most of the BITs concluded by the People's Republic of China provide that “[t]he term ‘investment’ means every kind of asset invested by investors of one Contracting Party in accordance with the laws and regulations of the other Contracting Party in the territory of the latter …”. This has the effect of making the protection of the investment under the BIT subject to the obtaining of any required approvals under the national laws of the host Contracting State party. Similarly, Article 1(9) of the Common Market for Eastern and Southern Africa (COMESA) Common Investment Area agreement (2007) states that “‘investment’ means assets admitted or admissible in accordance with the relevant laws and regulations of the COMESAMember State in whose territory the investment is made”. In agreements that apply this limitation, investment that is not established in accordance with the host country's laws and regulations will not be considered protected investment. One tribunal has emphasized that the relevant analysis “has to be performed taking into account the laws in force at the moment of the establishment of the investment” rather than later modifications in legislation. An alternative approach is to include a separate provision stating that an agreement shall apply only to investment made in accordance with the laws and regulations of the host country and/or previously approved by host State officials. Thus, in the new ASEAN Comprehensive Investment Agreement of 2009 the term “covered investment” means, with respect to a Member State, “an investment in its territory of an investor of any other Member State in existence as of the date of entry into force of this Agreement or established, acquired or expanded thereafter, and has been admitted according to its laws, regulations, and national policies, and where applicable, specifically approved in writing by the competent authority of a Member State”. Particular attention is paid to this feature of investments, whether strictly in terms of definitions or otherwise, by agreements providing investment insurance or guarantees. For example, Article 15.6 of the Convention Establishing the Inter-Arab Investment Guarantee Corporation provides that “[t]he conclusion of insurance contracts shall be subject to the condition that the investor shall have obtained the prior approval of the competent official authority in the host country for the making of the investment and for its insurance with the Corporation against the risks to be covered”. And the Convention Establishing the Multilateral Investment Guarantee Agency, in Article 12 (d) on eligible investments provides that “In guaranteeing an investment, the Agency shall satisfy itself as to: (ii) compliance of the investment with the host country’s laws and regulations; (iii) consistency of the investment with the declared development objectives and priorities of the host country”. Limiting the applicability of an investment agreement only to investments made in accordance with applicable laws and/or approval procedures is intended to induce foreign investors to ensure that all local laws and regulations are satisfied in the course of establishing an investment. This will have the additional effect of ensuring that both foreign and domestic investors are required to observe the laws of the land, thereby ensuring a “level playing field”. Moreover, on the assumption that the host country's investment laws will be written and applied to further its development policy, this limitation also is intended to ensure that investment is covered only if it is consistent

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with the host country's development policy, and other policies, such as immigration or internal security, that impact on investment. Depending on the exact formulation of the requirement, it could conceivably be used to deprive an investor of the treaty protection for serious violations of host country law admitted during the life of an investment, i.e. after it is made. Arbitral practice. Failure to comply with national laws and regulations could result in a tribunal refusing jurisdiction over any subsequent claim made by the investor. Some tribunals have treated the requirement to comply with local laws as implicit even where not expressly stated in the relevant BIT. There is also an emerging understanding that national legal systems include a general requirement of good faith that should prevent investments made through misrepresentations, concealments or corruption. However, the respondent country cannot rely on an interpretation of its national law that effectively excludes any recourse to remedies under the BIT. The overriding concern of good faith in the application of national investment approvals and other national regulatory requirements may be important in this connection. Thus, the withdrawal of an approval will not negate the fact that an investment has been made under applicable investment law. Otherwise, the host country could unilaterally undermine the protection of the applicable BIT. Furthermore, as the tribunal in Ioannis Kardassopoulos v. Georgia observed, the State cannot preclude the protection of the BIT, “on the ground that its own actions are illegal under its own laws. In other words, a host State cannot avoid jurisdiction under the BIT by invoking its own failure to comply with its domestic laws.” The need for good faith on the part of the host country has been recently reinforced by the decision of the tribunal in Desert Line Projects LLC v. Yemen. The case arose out of a road construction project. The claimant had agreed to build a number of tarmac roads in Yemen. A dispute arose over payment to the claimant. The latter complained that the subsequent settlement of the dispute was inadequate and erroneous, and that its workers and personnel had been attacked and harassed by Yemeni personnel. On failure to resolve the dispute before the Yemeni courts, the claimant commenced proceedings before ICSID. The respondent State argued that the claimant's investment was not “accepted, by the Host Party, as an investment according to its laws and regulations, and for which an investment certificate is issued” as required by Article 1 of the Oman-Yemen BIT (1998). According to the respondent State, no such certificate had ever been issued and so the investment was not covered. The tribunal rejected this formal argument, saying that Article 1 should be interpreted as having a “material objective” and that this would not be served by a purely formal requirement that advanced no real interest of either signatory State but would, to the contrary, constitute, “an artificial trap depriving investors of the very protection the BIT was intended to provide.” On the facts, the investment had been accepted and welcomed by the Head of State in good faith and so the imposition of formalistic qualifications and requirements would have been offensive to “the most elementary notions of good faith and insulting to the Head of State.” It should be noted that the reference to investments made in accordance with host country laws and procedures does not refer to definitions given by the laws and regulations of the host country but to the validity of the investment. In effect it determines that only investments made in accordance with host country laws and regulations are to be given protection under the agreement. Illegal investments deserve no such protection. Whether the non-use of national law to define what constitutes an investment under an IIA should remain unaltered in future agreements is open to discussion. In particular, it is at least arguable that the definition of an investment covered by an IIA should take heed of any relevant definitions of an investment used in the national law of the host contracting party. This may be defended on the grounds that there appears to be an anomaly between the central role of national law in defining who may be seen as an “investor” under the IIA and its absence in relation to defining “investment”. As will be shown below, the normal practice in relation to the definition of “investor” in IIAs is to refer to the nationality law of the home country of the investor and to see whether the candidate in question would qualify as a national under that law. If so, then they are a protected “investor”. Yet in relation to “investment” national law plays no part in determining what this term means in the IIA. Accordingly, it may be that the national law of the host country should in future determine what is and is not a covered “investment” by reference to national law definitions. In this way, the agreement could further protect the regulatory space of the host country and ensure that only such investments are seen by host country law to fall into this category are protected under the IIA … (iv) Reference to investment risk and other factors Another way to focus and control the scope of the term “investment” is to use an express reference to investment risk and other common economic features associated with an investment to provide objective criteria for a tribunal to assess whether the transaction before it is in fact a covered “investment” … An alternative approach, exemplified by United States BITs, is to limit the definition of investment to “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment” followed by an illustrative list of investments based on assets. In order to qualify as an investment under the United States model BIT (2004),

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an asset must have the characteristics of an investment, “including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk” … *** (v) Time of establishing an investment A further factor used in IIAs to delimit the scope of “investment” is a limitation based on the time of establishment. The agreement may exclude investment established prior to a certain date, such as the date on which an agreement is signed or enters into force. For example, Article 13 of the Egypt-Russian Federation BIT (1997) provides that “[t]he present Agreement shall be applied with respect to all capital investments carried out by the investors of one of the Contracting Parties on the territory of the other Contracting Party, beginning in January 1 1987". Developing countries sometimes seek to exclude investment established prior to entry into force of an investment protection agreement … *** Most bilateral investment agreements do not specifically exclude pre-existing investment. Some of them even state explicitly that they do apply to existing investment … *** (vi) Limiting to certain industry sectors Other factors that could be used to limit the scope of the term “investment” are size and industry sector. Many countries, however, seek foreign investment from small and medium- sized companies and thus limitations on the size of investment are not common in investment agreements. The term “investment” may be limited to investment only in certain sectors of the economy. For example, Article 1 of the Energy Charter Treaty provides that “investment” refers to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting Party in its Area as “Charter efficiency projects” and so notified to the Secretariat. In this particular case, the agreement was intended to cover only the energy sector and all its provisions were limited to that sector. *** … Many IIAs exclude government procurement activities from their scope of application. (vii) Intellectual property rights As noted earlier, many agreements include intellectual property rights (IPRs) in the illustrative list of assets that are “investments”. Such rights may include trademarks, trade secrets, patents and copyrights. In some investment agreements, the range of protected intellectual property includes also “technical processes” and “know- how”, which are not legally protected as traditional forms of intellectual property. For example, the Romania-United Kingdom BIT (1999) follows this approach. This category also includes goodwill, an indication that the protected assets of a company may include not only its tangible property, but also its reputation. The transfer of intellectual property or knowhow will count as a contribution to the development of the host country for purposes of being seen as an investment. *** [iv] Definitions in Local Foreign Investment Law [aa] Tradex Hellas S.A. v. Republic of Albania (ICSID Case No. ARB/94/2), Decision on Jurisdiction of 24 December 1996 (6) [Karl-Heinz Böckstiegel (pres.), Fred Fielding, Andrea Giardina] Most relevant to the present case is Albanian Law No. 7764 of November 2, 1993 … which came into force on January 1, 1994, and which, in particular, contains the following provisions: *** 3. “Foreign investment” means every kind of investment in the territory of the Republic of Albania owned directly or indirectly by a foreign investor, consisting of: (a) (b) (c) (d)

moveable and immoveable, tangible and intangible property and any other property rights; a company, shares in stock of a company and any form of participation in a company; loans, claim to money or claim to performance having economic value; (handwritten addition: “and related with an investment”) intellectual property, including literary and artistic works, sound recordings, inventions, industrial designs, semiconductor mask works, know how, trademarks, service marks and trade names; and

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(e)

any right conferred by law or contract, and any license or permit pursuant to law.

[bb] Zhinvali Development Ltd. v. Republic of Georgia (ICSID Case No. ARB/00/1), unreported, as commented on in Walid Ben Hamida, The Mihaly v. Sri Lanka Case: Some Thoughts Relating to the Status of Pre-Investment Expenditures, in International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law, 47, 67-70 (Todd Weiler ed., Cameron May 2005) (7) (Citations selectively omitted) The Zhinvali case was submitted on the basis of the Georgian Investment Law N° 473-1S of 12 November 1996, which provides a general offer of ICSID arbitration in its Article 16(2). The Tribunal consisted of Davis R. Robinson as President, with Andrew Jacovides and Seymour Rubin as Members. The dispute arose out of pre-investment expenditures incurred by the Zhinvali Development Ltd, an Irish company, in connection with the proposed rehabilitation of a hydro-electric power plant and its tailrace tunnel located near Tbilisi. Negotiations between the claimants and the Georgian Government spread over a three year period. After receiving pressure from the World Bank to establish and maintain a competitive and transparent bidding process for the project, no agreements were concluded, and Zhinvali was ultimately excluded from its project. The firm initiated an ICSID arbitration in order to reclaim expenses incurred during negotiations for feasibility studies, consultancy costs, travel expenses and legal fees plus lost profits on the abandoned project. … [T]he arbitral Tribunal decided that development costs did not qualify as an investment under either the 1996 Georgia Investment Law or Article 25(1) of the ICSID Convention. In determining whether the pre-investment expenditures constituted an in investment within the meaning of Georgia's Investment Law, the Tribunal based its conclusions on the following grounds. First, the tribunal insisted on the notion of territorial presence for every protected investment required by Articles I & II of Georgia's Investment Law. The Tribunal noted that this condition covered only territorial expenditures. Second, the Tribunal added that Article 3(6) that describes certain financial rights of foreign investors did not enumerate any right for recovery of development costs in failed transactions. Third, the Tribunal rejected any claims of reimbursement of development cost based on Georgia's Civil Code (breach of a preliminary agreement, violation of the principals of unjust enrichment and promissory estoppel). According to the Tribunal, any right of recovery under the Civil Code for development expenditures did come from some Statute other than that dealing with the investment. Finally, the Tribunal dismissed the Claimant's assertion that the draft concession term sheet and the content of the different documents shared with the Respondent created an intellectual value or right within the meaning of Georgia's Investment Law. The Tribunal noted that the claimant had failed to produce the necessary evidence of the monetary worth of any supposed “intellectual property” benefit received beyond publicly available standards prior to the commencement of the arbitration. In the absence of Georgia's express or implicit consent to the treatment of the claimant's development cost as an investment, the Tribunal concluded that Zhinvali's expenditures did not fit within the confines of the 1996 Investment Law and as a result, they could not be considered as an investment within the meaning of Article 25(1) of the ICSID Convention. The award was rendered by the Majority. The arbitrator appointed by Zhinvali, Mr. DL Jacovides, submitted a separate opinion in which he disagreed with the Majority finding that there was no investment within the meaning of Georgia's Investment Law. Mr. Jaccovides considered that in the circumstances of this case, there was a basic agreement between Zhinvali and Georgia and that there were a number of documents that constituted protected intellectual property within the meaning of the applicable Investment Law. He argued that grounds based upon Georgia's Civil Code (preliminary contract, promissory estoppel, unjust enrichment) could have also been validly argued. [v] Cases [aa] Malaysian Historical Salvors, SDN, BHD v. The Government of Malaysia (ICSID Case No. ARB/05/10), Award on Jurisdiction of 17 May 2007 (8) [Michael Hwang, S.C. (sole arbitrator)] and Decision on the Application for Annulment of 16 April 2009 (9) [Stephen M. Schwebel (pres.), Mohamed Shahabuddeen, Peter Tomka] [Malaysian Historical Salvors Sdn Bhd (“the Claimant”) entered into a contract (“the Contract”) with the Malaysian Government for the salvage of the cargo on board the vessel DIANA, which sank off the coast of Malaysia in 1817. The contract provided for the Claimant to receive a share of the proceeds from the recovered items. The salvage efforts took almost four years. Items that were recovered and that were not withheld from sale were auctioned by Christie's. The Claimant subsequently alleged that it did not receive what it was due for the recovered items. In the ICSID proceedings that the Claimant commenced under the UK-Malaysia bilateral investment treaty, the Malaysian

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Government objected to jurisdiction on the basis that there was no “investment”. The sole arbitrator agreed.] (Citations selectively omitted) Award: 70. The language used in some of the cases discussed below may be interpreted to advocate the defining features of “investment” as typical characteristics on the one hand (the “Typical Characteristics Approach”), or jurisdictional requirements on the other (the “Jurisdictional Approach”) … The differences between the Typical Characteristics Approach and the Jurisdictional Approach may only be the expression of the conclusion formed by a tribunal on the strength of the particular facts of a case on the issue of “investment.” While the Jurisdictional Approach, strictly defined, requires that all the established hallmarks of “investment” must be present before a contract can even be considered as an “investment,” the Typical Characteristics Approach does not necessarily mean that a tribunal would find that there is an “investment,” even if one or more of the established hallmarks of “investment” were missing. Where the evidence in support of one or more of the hallmarks of “investment” is weak, a tribunal may approach the issue from a holistic perspective and determine whether there is other evidence in support of the other hallmarks of “investment” which is so strong as to off-set the weakness in the other hallmarks of “investment.” However, even under the Typical Characteristics Approach, it would probably be exceptional for a tribunal to conclude that there was an “investment” where one or more of the hallmarks of “investment” were completely missing. 71. A possible explanation for the apparent dichotomy between the Jurisdictional Approach and the Typical Characteristics Approach is as follows. (a)

(b)

Where the agreed hallmarks of “investment” are clearly in evidence (or clearly absent), a tribunal is more likely to use language which may be interpreted as support for the Jurisdictional Approach because it can more easily rationalize its decision on the grounds of clear compliance (or lack thereof), with such hallmarks. Conversely, if the agreed hallmarks of “investment,” while present, are not so clearly evident (either in nature or extent), a tribunal, if it finds that it has jurisdiction, is more likely to use language which may be interpreted as support for the Typical Characteristics Approach.

In other words, whichever approach is adopted depends on the view of a tribunal on how the facts of the case at hand measure up against the established hallmarks of “investment.” 72. The approach of ICSID tribunals towards the issue of “investment” within the meaning of Article 25(1) tends more towards an empirical rather than a doctrinaire analysis. The Typical Characteristics Approach seeks to identify the established hallmarks of “investment,” but cautions against casting them as prerequisites, no doubt to guard against the infinite variety of cases that would arise before ICSID tribunals that may deserve to be categorised as an “investment” notwithstanding the absence, whether qualitatively or quantitatively, of a particular hallmark of “investment” since these hallmarks of “investment” may be interdependent. Similarly, the Jurisdictional Approach seeks to identify these established hallmarks of “investment” but is expressed in such language as to lead to the conclusion that the failure to satisfy one or more of the hallmarks of “investment” may be fatal to an investor's claim. However, within the Jurisdictional Approach, ICSID tribunals often remark that these hallmarks may be interrelated, and must be examined in relation to other hallmarks as well as in relation to the circumstances of the case. In other words, it may be that a particular hallmark of “investment” may not be present when it is viewed in isolation; yet, when examined in the light of other hallmarks of “investment” or taking into account the circumstances of the case, a tribunal may still find jurisdiction for the Centre. An empirical approach is also consistent with interpreting the ICSID Convention in light of the intention of its drafters because the empirical approach seeks to determine the different scenarios that may meet the standard of “investment” which the drafters of the ICSID Convention had in mind. *** 73. ICSID jurisprudence on the meaning of “investment” within the meaning of Article 25(1) typically cites Salini and Joy Mining as authorities for the various defining hallmarks of “investment.” 74. The factors considered in Salini are widely accepted as the starting point of an ICSID tribunal's analysis of whether there is an “investment” within the meaning of Article 25(1). 75. In Salini, the issue was whether a construction contract could be considered as an “investment” within the meaning of Article 25(1). The Société Nationale des Autoroutes du Maroc (“ADM”) was a Moroccan company which built, maintained and operated highways and various road-works, in accordance with a concession agreement (the “Concession Agreement”) concluded with the Minister of Infrastructure and Professional & Executive Training, acting on behalf of Morocco. Within the context of the Concession Agreement, ADM issued an international invitation to tender for the construction of a highway joining

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Rabat to Fes. The two claimants, Salini Costruttori S.p.A and Italstrade S.p.A, submitted a joint tender for the construction of a 50 km section of this highway. The joint tender was accepted, which led to a contract (the “Construction Contract”) between the two claimants and ADM. The two claimants took 36 months to complete the works, four months longer than stipulated in the Construction Contract. 76. When ADM rejected the claims of the two claimants, the latter sent a memorandum relating to the final account to the Minister of Infrastructure, in accordance with Article 51 of the Cahier des Clauses Administratives Generales (Book of General Administrative Clauses). When the two claimants did not receive any reply, they filed a Request for Arbitration against Morocco with ICSID, claiming Italian lira 132,639,617,409 as compensation for damage suffered. 77. One of the issues in dispute was whether the Construction Contract concluded between ADM and the two claimants was an “investment” within the meaning of the Bilateral Investment Treaty between Italy and Morocco as well as under the ICSID Convention. The tribunal (comprising Dr Robert Briner as President, Dr Bernardo Cremades and Professor Ibrahim Fadlallah as co-arbitrators) ruled in favour of the two claimants, holding that the Construction Contract was an “investment” within the meaning of the Italian-Morocco treaty as well as under the ICSID Convention. 78. The tribunal reiterated that the “investment” requirement under the ICSID Convention is an objective condition that cannot be diluted by the consent of the parties. The tribunal held that: The doctrine generally considers that investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction … In reading the Convention’s preamble, one may add the contribution to the economic development of the host State of the investment as an additional condition. In reality, these various elements may be interdependent. Thus, the risks of the transaction may depend on the contributions and the duration of performance of the contract. As a result, these variouscriteriashould be assessed globally even if, for the sake of reasoning, the Tribunal considers them individually here.” (emphasis added) *** 83. The use of the words “generallyconsiders that investment infers” in the passage referred to at Paragraph 78 above may indicate that the tribunal in Salini supported the view of Schreuer … (i.e., in support of the Typical Characteristics Approach) that the various hallmarks of “investment” are no more than characteristics. In contrast, the subsequent use of the word “criteria” by the tribunal in Salini may also indicate that the tribunal envisaged adopting a Jurisdictional Approach. However, the subsequent acknowledgment by the tribunal that the various hallmarks of “investment” may be interdependent and should be assessed globally indicates that the tribunal was actually approaching the issue of whether there was an “investment” from a fact-specific perspective. 84. In Joy Mining, the dispute concerned a contract for the provision of equipment by the claimant to the General Organization for Industrial and Mining Projects of the Arab Republic of Egypt (“IMC”) to be used in a mining site. The total contract price amounted to £13,325,293. Letters of guarantee amounting to £9,605,228 were provided by the claimant to IMC. Disagreement arose between the parties as to the technical aspects of the equipment. Although the claimant was paid the full contract price, the guarantees were not released by IMC. The claimant commenced ICSID arbitration, arguing that the guarantees were an “investment.” In rejecting the claimant's contention, the tribunal in Joy Mining (Professor Francisco Orrego Vicuna as President, Mr. William Laurence Craig and Judge C.G. Weeramantry as co-arbitrators) considered that: Summarizing the elements that an activity must have in order to qualify as an investment, both the ICSID decisions mentioned above and the commentators theron have indicated that the project in question should have a certain duration, a regularity of profit and return, an element of risk, a substantial commitment and that it should constitute a significant contribution to the host State's economy. To what extent these criteria are met is of course specific to each particular case as they will normally depend on the circumstances of each case. (emphasis added) 85. The tribunal in Joy Mining accepted the view in Salini that these characteristics should be examined globally, rather than in isolation. However, the earlier part of the passage may be interpreted to advocate a Jurisdictional Approach in its apparent emphasis on the mandatory nature of the hallmarks. *** 105. In any event, the differences between the two approaches are likely to be academic. In practice, it is unlikely that any difference in juristic analysis would make any

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significant difference to the ultimate finding of the tribunal. The existence of two possible approaches may be the result of the different emphases placed by the tribunal on each of the factors because the facts (or Counsel's submissions) in one case may require (or encourage) the tribunal to place a stronger emphasis on a particular factor than in another case. This will happen where, although the requisite hallmarks of “investment” under the ICSID Convention appear to exist, the presence of one or more hallmarks may appear weak, and the tribunal may need to look at the strength of the other hallmarks in arriving at its decision. 106. Furthermore, ICSID tribunals tend to adopt an empirical rather than a doctrinaire approach in determining whether there is an “investment” within Article 25(1). This may be termed a Newtonian rather than a Cartesian approach (i.e. moving from the particular to the general rather than vice versa). (a)

(b)

(c)

(d)

(e)

Where the facts are strongly in favour of a finding in each of the relevant hallmarks of “investment,” a tribunal can confirm its jurisdiction in strong terms emphasizing that the requirements of “investment” are clearly fulfilled. Such strong language may be interpreted in support of a Jurisdictional Approach. However, it may simply indicate the tribunal's views on the weakness of a respondent's jurisdictional challenge in that each of the relevant hallmarks of “investment” has clearly been satisfied by the claimant. Where the facts clearly show that one or more of the relevant hallmarks of “investment” are missing, a tribunal may uphold the jurisdictional challenge of a respondent in strong terms by using language in support of a Jurisdictional Approach in order to demonstrate more clearly why the tribunal is rejecting jurisdiction. Where the facts are not as clear-cut as in the scenarios envisaged in a) and b) above, a tribunal will have to consider whether there is any evidence in support of each of the relevant hallmarks of “investment.” Where there is some marginal evidence in support of one of the relevant hallmarks of “investment,” but more conclusive evidence in support the presence of the other relevant hallmarks of “investment,” the tribunal may choose to discount the weakness of the claimant's case in one of the relevant hallmarks of “investment” by stating that the issue of “investment” should be approached on a holistic basis. Put another way, while it is still necessary to fulfill the formal requirements of “investment” by demonstrating that the facts meet all the established hallmarks of “investment,” weak or superficial compliance with one of the hallmarks of “investment” may be compensated by more compelling evidence in the other hallmarks of “investment” so that, in the global assessment of the various factual elements, a tribunal may still conclude that there is an “investment” because these hallmarks of “investment” are (in the language of Salini) interdependent. In this situation, a tribunal is likely to use language that may be interpreted as advocating a Typical Characteristics Approach. Alternatively, in the scenario described in c) above, a tribunal may also rely on a Jurisdictional Approach but, in examining whether each of the relevant hallmarks of “investment” is satisfied, the tribunal may take a broad approach, requiring only relatively marginal evidence to establish a positive finding in favour of assuming ICSID jurisdiction. The tribunal may also state, in its overall assessment of the factual elements that, notwithstanding compliance with all the hallmarks of “investment,” the qualitative manner in which these hallmarks are satisfied are insufficient to satisfy the overall test of “investment.” In other words, the hallmarks, although essential, are not sufficient to ensure that a contract is an “investment.” The classical Salini hallmarks are not a punch list of items which, if completely checked off, will automatically lead to a conclusion that there is an “investment.” If any of these hallmarks are absent, the tribunal will hesitate (and probably decline) to make a finding of “investment.” However, even if they are all present, a tribunal will still examine the nature and degree of their presence in order to determine whether, on a holistic assessment, it is satisfied that there is an ICSID “investment.” …

*** 107. Having completed the legal analysis of the relevant authorities, the Tribunal now turns to consider to what degree the hallmarks of “investment” are met in the present case, adopting a fact-specific and holistic assessment. *** 108. The Tribunal first considers a hallmark of “investment” cited in Joy Mining, which is that there must be regularity of profits and returns … There is no regularity of profits and returns on the present facts. However, the Tribunal accepts the Claimant's answer in response, which is that this criterion may not always be decisive … Further, this has not been held to be an essential characteristic or criterion in any other case cited in this Award, and its presence or otherwise may therefore not be determinative of the question of “investment.” The Claimant also points out that, although there was no regularity of profits and returns in this case, there was a regular and steady accretion of “investment” (presumably meaning expenditure) as work progressed on the DIANA Project and more

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and more items were salvaged. Accordingly, taking into account that this is not a classical hallmark of “investment” and the submissions of the Claimant, the Tribunal concludes that the absence of this hallmark is immaterial for the reasons stated by the Claimant. *** 109. It is not in dispute that the Claimant has expended its own funds, whether in the form of equipment, know-how or personnel, or in the performance of the Contract in its entirety, without any cash payment or other financial assistance from the Respondent. Accordingly, the Tribunal finds that the Claimant has, like the claimants in Salini, made contributions in money, in kind and in industry … Furthermore, the nature of the Claimant's contributions are largely similar to those which might have been made under a commercial salvage contract (albeit with additional obligations in assisting in the ultimate sale of the salvaged articles). *** 110. The Contract took almost four years to complete. Accordingly, it complies with the minimum length of time of two to five years, as discussed in Salini. However, owing to the nature of the Contract, the Claimant only managed to satisfy this factor in a quantitative sense. The original stipulated duration of the Contract was only for 18 months, which was extended by mutual consent. One might well argue that the Contract was only able to meet the minimum length of time of two years because of the element of fortuity (since the duration of the Contract depended largely on how long the Claimant would take to find and salvage the DIANA). The nature of the project meant that the Claimant could have completed it within a shorter period than two years and was in fact contractually required to do so within 18 months. 111. … Where the underlying contract does not promote the economy and development of the host State, there may be less justification to factor in the extensions granted under the Contract … Thus, the Tribunal concludes that, although the Claimant satisfies the duration characteristic or criterion in the quantitative sense, it fails to do so in the qualitative sense. However, such failure does not, by itself, mean that the project was not an “investment” within the meaning of Article 25(1) since a holistic assessment of all the hallmarks still needs to be made. *** 112. … The fact that the risks under these contracts would be assumed by the salvor does not necessarily lead to the inevitable conclusion that the salvage contract must be considered as an “investment” under the ICSID Convention. The nature of a salvage contract would mean that the assumption of risk by the salvor would be inherent in the transaction, rather than a special feature of the Contract which affected the salvor's decision to undertake the project in question. The fact that salvage contracts are typically on a “no-finds-no-pay” basis is evidence that the risks assumed under the Contract were no more than ordinary commercial risks assumed by many salvors in a salvage contract. The Claimant has not provided any convincing reasons why the risks assumed under the Contract were anything other than normal commercial risks. It is clear under ICSID practice and jurisprudence that an ordinary commercial contract cannot be considered as an “investment.” While the Claimant may have satisfied the risk characteristic or criterion in a quantitative sense (i.e., that there was inherent risk assumed under the Contract), the quality of the assumed risk was not something which established ICSID practice and jurisprudence would recognize. Accordingly, since the Claimant can only superficially satisfy the so-called classical Salini features of investment, in the qualitative sense envisaged under established ICSID practice and jurisprudence, consideration of the remaining hallmarks of “investment” will assume greater significance on the particular facts of the case. *** 113. Finally, the Tribunal has to consider whether the Contract contributed to the economic development of Malaysia. There appears to be a difference in ICSID jurisprudence as to whether there is a need for a contract to make a significant contribution to the economic development of the host State. The tribunal in Salini considered that there should be a contribution to such economic development without stressing that it must be “significant.” However, on the facts of that case, it was likely that the tribunal would have formed the view that the contribution was significant. The tribunal in L.E.S.I.-DIPENTA took the view that this requirement need not even be considered, because it was implicitly covered in the previous three characteristics of an “investment.” 114. On the other hand, the tribunal in Joy Mining took the view that, to qualify as an “investment,” the contribution to the economic development of the host State must be “significant.” *** 123. The Tribunal considers that the weight of the authorities … swings in favour of requiring a significant contribution to be made to the host State's economy … ***

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125. Any contract would have made some economic contribution to the place where it is performed. However, that does not automatically make a contract an “investment” within the meaning of Article 25(1) … *** 130. Viewing all the circumstances of the factual matrix in this case, the Tribunal finds that the question of contribution to the host State's economic development assumes significant importance because the other typical hallmarks of “investment” are either not decisive or appear only to be superficially satisfied. *** 131. Unlike the Construction Contract in Salini which, when completed, constituted an infrastructure that would benefit the Moroccan economy and serve the Moroccan public interest, the Tribunal finds that the Contract did not benefit the Malaysian public interest in a material way or serve to benefit the Malaysian economy in the sense developed by ICSID jurisprudence, namely that the contributions were significant. *** 146. Accordingly, the Tribunal concludes that the Contract is not an “investment” within the meaning of Article 25(1) of the ICSID Convention. The Claimant's claim therefore fails in limine and must be dismissed for want of jurisdiction. *** 148. Having concluded that the Contract is not an “investment” within the meaning of Article 25(1) of the ICSID Convention, the Tribunal is impelled to find that it lacks jurisdiction in the present case. Accordingly, it is unnecessary to discuss whether the Contract is an “investment” under the BIT. Annulment Decision: 74. In the light of this history of the preparation of the ICSID Convention and of the foregoing analysis of the Report of the Executive Directors in adopting it, the Committee finds that the failure of the Sole Arbitrator even to consider, let alone apply, the definition of investment as it is contained in the Agreement to be a gross error that gave rise to a manifest failure to exercise jurisdiction. 75. Nevertheless, the Committee recognizes that the Sole Arbitrator acted in the train of several prior ICSID arbitral awards which lend a considerable measure of support to his approach … *** 78. While this Committee's majority has every respect for the authors of the Salini v. Morocco Award and those that have followed it, such as the Award in Joy Mining v. Egypt, and for commentators who have adopted a like stance – and, it need hardly add, for its distinguished co-arbitrator who attaches an acute Dissent to this Decision – it gives precedence to awards and analyses122that are consistent with its approach, which it finds consonant with the intentions of the Parties to the ICSID Convention. 79. The most recent Award that addresses the issue, of 24 July 2008, is, in the view of this Committee, the most persuasive, Biwater v. Tanzania … 80. The Committee fully appreciates that the ground for annulment set forth in Article 52(1) (b) of the ICSID Convention specifies that “the Tribunal has manifestly exceeded its powers.” It is its considered conclusion that the Tribunal exceeded its powers by failing to exercise the jurisdiction with which it was endowed by the terms of the Agreement and the Convention, and that it “manifestly” did so, for these reasons: (a)

(b)

(c)

it altogether failed to take account of and apply the Agreement between Malaysia and the United Kingdom defining “investment” in broad and encompassing terms but rather limited itself to its analysis of criteria which it found to bear upon the interpretation of Article 25(1) of the ICSID Convention; its analysis of these criteria elevated them to jurisdictional conditions, and exigently interpreted the alleged condition of a contribution to the economic development of the host State so as to exclude small contributions, and contributions of a cultural and historical nature; it failed to take account of the preparatory work of the ICSID Convention and, in particular, reached conclusions not consonant with the travaux in key respects, notably the decisions of the drafters of the ICSID Convention to reject a monetary floor in the amount of an investment, to reject specification of its duration, to leave ‘investment’ undefined, and to accord great weight to the definition of investment agreed by the Parties in the instrument providing for recourse to ICSID.

81. The Committee thus is constrained to annul the Award of the Sole Arbitrator … [bb] Abaclat and Others v. Argentine Republic (formerly Giovanna A. Beccara and Others v. The Argentine Republic) (ICSID Case No. ARB/07/5), Decision on Jurisdiction and Admissibility of 4 August 2011 (10) [Pierre Tercier (pres.), Georges Abi-Saab, Albert Jan van

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den Berg] [The Claimants commenced ICSID proceedings under the Argentina-Italy bilateral investment treaty, claiming that bonds and related security entitlements constituted investments for the purposes of ICSID jurisdiction. The tribunal, by a majority, agreed.] (Citations selectively omitted) 343. In order for the Tribunal to have jurisdiction rationae materiae over the dispute, it is necessary that a dispute, as defined by the terms of the claims, relate to an investment. Thus, the question of the definition of the concept of investment is to this extent relevant for the stage of the jurisdiction. 344. In this respect, a number of arbitral tribunals hold the view that whether or not a dispute at stake relates to an investment is subject to a two-fold test, i.e., a sort of “double barreled” test: – –

On the one hand, the alleged investment must fit into the definition of investment as provided by the relevant BIT, which reflects the limits of the State's consent; On the other hand, the alleged investment must also correspond to the inherent meaning of investment as contemplated by the ICSID Convention, which sets the limits of ICSID's jurisdiction and the Tribunal's competence.

345. Looking at the definition of investment provided in Article 1(1) BIT …, it corresponds largely to the definition of other contemporaneous BITs, such as the BIT between Italy and Bangladesh of 1990 (Article 1), between Italy and Bolivia of 1990 (Article 1), between Italy and Kuwait of 1987 (Article 1), between Italy and Uruguay of 1990 (Article 1), between Argentina and Belgium/Luxembourg of 1990 (Article 1), between Argentina and the United Kingdom of 1990 (Article 1). 346. Analysing the concept of an investment, one can identify two different aspects thereof: (i) (ii)

the contribution that constitutes the investment, and the rights and the value that derive from that contribution.

347. These two aspects are addressed somewhat differently by the BIT and the ICSID Convention as interpreted by a number of arbitral tribunals: (i)

(ii)

The definition provided at Article 1(1) BIT, and in particular the list of examples of what is considered an investment under the BIT, is drafted in a way describing the rights and values which may be endangered by measures of the Host State, such as an expropriation, and therefore deserve protection under the BIT. Thus the focus here is on the rights and the value that potential contributions from investors may generate. Nevertheless, this definition is of course based on the premise of the existence of such contribution. This namely derives from the wording of other provisions such as for example Article 2 of the BIT which provides that “[E]ach Contracting Party shall encourage investors of the other Contracting Party to invest in its territory.” In contrast, the concept of investment as contemplated by the ICSID Convention relates more to the contribution itself. As mentioned above …, Article 25 ICSID Convention does not provide for any specific definition of the concept of investment, and this silence was intended by the drafters of the Convention in order to leave certain room to further develop this notion. Thus, a number arbitral tribunals have attempted to further define the concept of investment under Article 25 ICSID Convention. This has been regularly done by reference to some or all of the so-called Salini factors, developed in the Salini decision … According to these Salini factors, for a transaction or activity to qualify as “investment” in the sense of Article 25 ICSID Convention, it would require (i) a contribution, (ii) of a certain duration, (iii) of a nature to generate profits or revenues, (iv) showing a particular risk, and (v) of a nature to contribute to the economic development of the Host State. This definition focuses on the nature of the contribution constituting the investment, and not on the rights and value deriving therefrom.

348. At this juncture, it may be recalled that whilst BITs in general, including the present BIT, address both substantive investment protection rules and dispute resolution procedure, the ICSID Convention is concerned mainly with dispute resolution rules. Bearing this distinction and the above considerations in mind, the Tribunal makes the following analysis. 349. If it is obvious that the definition of Article 1(1) BIT and the criteria developed by a number of arbitral tribunals with regard to Article 25 ICSID Convention do not coincide, this is so because they can be said to focus each on a different aspect of the investment, i.e., they each look at the investment from a different perspective. The two perspectives can be viewed to be complementary, and to merely reflect a two-folded approach of the BIT and the ICSID Convention towards investment: At first, it is about encouraging investments, i.e., creating the frame conditions to encourage foreign investors to make certain contributions, and once such contributions are made, it is about protecting the fruits and value generated by these contributions. Following this interpretation, the double approach can also be considered as being illustrated in the Preamble of the ICSID

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Convention as well as in the BIT: –

–

According to the Preamble of the ICSID Convention, one of the key considerations of the Convention is “the need for international cooperation for economic development, and the role of private international investment therein” combined with the recognized need to establish international dispute settlement mechanisms ensuring effective protection of such private international investments; According to the Preamble of the BIT, it aims to “create favorable conditions for greater economic cooperation between the two States, in particular, for the realization of investments,” which presupposes the implementation of material standards of protection of such investments as set forth in Articles 2 to 5, combined with effective procedural remedies as established in Articles 8 and 9.

350. Thus, within this interpretation, as it arises further from the wording of Article 1(1) and the aim of the BIT, the definition of investment provided in the BIT focuses on what is to be protected, i.e., the fruits and value generated by the investment, whilst the general definitions developed with regard to Article 25 ICSID Convention focus on the contributions, which constitute the investment and create the fruits and value. In summary, a certain value may only be protected if generated by a specific contribution, and – vice versa – contributions may only be protected to the extent they generate a certain value, which the investor may be deprived of. 351. In other words, if it is to be applied, the “double barreled” test does not mean that one definition, namely the definition provided by two Contracting Parties in a BIT, has to fit into the other definition, namely the one deriving from the spirit of the ICSID Convention. Rather, it is the investment at stake that has to fit into both of these concepts, knowing that each of them focuses on another aspect of the investment. 352. According to the Tribunal's own English translation of Article 1(1) BIT, the term “investment includes, without limitation”: – – – – –

–

lit. (a): “movable and immovable goods, as well as any other right in rem, including – to the extent usable as investment – security rights on property of third parties;” lit. (b): “shares, company participations and any other form of participation, even if representing a minority or indirectly held, in companies established in the territory of a Contracting State;” lit. (c): “obligations, private or public titles or any other right to performances or services having economic value, including capitalized revenues;” lit. (d): “credits which are directly linked to an investment, which is constituted and documented in accordance with the provisions in force in the State where the investment is made;” lit. (e): “copyrights, intellectual or industrial property rights – such as invention patents, licenses, registered trademarks, secrets, industrial models and designs – as well as technical processes, transfer of technology, registered trade names and goodwill;” lit. (f): “any right of economic nature conferred under law or contract, as well as any license and concession granted in compliance with the applicable provisions applicable to the concerned economic activities, including the prospection, cultivation, extraction and exploitation of natural resources.”

*** 354. Firstly, this list covers an extremely wide range of investments … In other words, the definition provided for in Article 1(1) is not drafted in a restrictive way. Based on its wording, as well as on the broader aim of the BIT as described in the Preamble, Article 1(1) cannot be seen to have intended to adopt a restrictive approach with regard to what kind of activity or dealing was meant to qualify as an investment. 355. Secondly, lit. (c) specifically addresses financial instruments. It is true that the term “obligations” is a broad term and can refer to any kind of contractual obligation, i.e., debt, and it is also true that the term “title” is also very broad. However, put in the context of the further terms listed in lit. (c) such as “economic value” or “capitalized revenue,” as well as considering that lit. (f) already deals with the more general concept of “any right of economic nature,” lit. (c) is to be read as referring to the financial meaning of these terms. Thus, the term “obligation” may be understood as referring to an economic value incorporated into a credit title representing a loan. This kind of obligations would in the English language more commonly be called “bond,” rather than “obligation.” Similarly, the term “title” in Spanish and Italian would be more accurately translated into the English term of “security,” which means nothing more than a fungible, negotiable instrument representing financial value. 356. Thus, the Tribunal finds that the bonds … constitute “obligations” and/or at least “public securities” in the sense of Article 1(1) lit. (c) of the BIT. 357. With regard to the security entitlements that Claimants hold in these bonds, they also represent “securities” in the sense of Article 1(1) lit. (c), since they constitute an instrument representing a financial value held by the holder of the security entitlement in the bond issued by Argentina.

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358. The question now is whether the connection between the security entitlements and the bonds could be seen as so remote as to consider that the dispute is not “directly” related to an investment, since the dispute related primarily to the rights arising from Claimants' security entitlements. The Tribunal sees no valid reason that would support such conclusion: –

–

–

The bonds at stake were always meant to be divided into smaller negotiable economic values, i.e., securities. It has been sufficiently demonstrated by Claimants that the underwriters would not have subscribed to any of the bonds, without having previously ensured that the bonds were re-sellable to the Intermediaries and their end customers; The security entitlements are the result of the distribution process of the bonds through their division into a multitude of smaller securities representing each a part of the value of the relevant bond. The security entitlements have no value per se, i.e., independently of the bond; The fact that the distribution process happens electronically, without the physical transfer of any title, does not change anything to the fact that rights effectively passed on to acquirers of security entitlements in the bonds.

*** 362. Under Article 25 ICSID Convention, the relevant question is whether the bonds and the security entitlements therein were generated by a contribution that is in line with the spirit and aim of Article 25 ICSID Convention. 363. One approach would be to follow the Salini criteria and check whether the contribution made by Claimants fulfil all these requirements. However, and irrespective of the adequacy of the individual Salini criteria, the Tribunal finds that this would not be the right approach, for the following main reason. 364. If Claimants' contributions were to fail the Salini test, those contributions – according to the followers of this test – would not qualify as investment under Article 25 ICSID Convention, which would in turn mean that Claimants' contributions would not be given the procedural protection afforded by the ICSID Convention. The Tribunal finds that such a result would be contradictory to the ICSID Convention's aim, which is to encourage private investment while giving the Parties the tools to further define what kind of investment they want to promote. It would further make no sense in view of Argentina's and Italy's express agreement to protect the value generated by these kinds of contributions. In other words – and from the value perspective – there would be an investment, which Argentina and Italy wanted to protect and to submit to ICSID arbitration, but it could not be given any protection because – from the perspective of the contribution – the investment does not meet certain criteria. Considering that these criteria were never included in the ICSID Convention, while being controversial and having been applied by tribunals in varying manners and degrees, the Tribunal does not see any merit in following and copying the Salini criteria. The Salini criteria may be useful to further describe what characteristics contributions may or should have. They should, however, not serve to create a limit, which the Convention itself nor the Contracting Parties to a specific BIT intended to create. 365. The other approach consists in verifying that Claimants made contributions, which led to the creation of the value that Argentina and Italy intended to protect under the BIT. Thus the only requirement regarding the contribution is that it be apt to create the value that is protected under the BIT. 366. In this respect, there is no doubt that Claimants made a contribution: They purchased security entitlements in the bonds and thus, paid a certain amount of money in exchange of the security entitlements. The value generated by this contribution is the right attached to the security entitlements to claim reimbursement from Argentina of the principal amount and the interests accrued. As mentioned above (see §§ 352-361), this right is protected under Article 1(1) lit. (c) of the BIT. 367. Consequently, the Tribunal finds that Claimants' purchase of security entitlements in Argentinean bonds constitutes a contribution which qualifies as “investment” under Article 25 ICSID Convention. *** 368. If the so-called “double-barrelled” test is not applied in the present case and no distinction is made as is stated in §§ 346-351 above, the result is the same. 369. According to one alternative view, it is argued that, in the case of a BIT arbitration under the ICSID Convention, the “double barrelled” test need not be applied since the ICSID Convention does not contain a definition of “investment” and the State Parties to the BIT have agreed to such a definition in a treaty between them, i.e., the BIT. That view leads also to the conclusion that there is an “investment” in the present case because, as mentioned above (§§ 352-361), the bonds and Claimants' security entitlements therein are both to be considered “investments” in the sense of Article 1(1) lit. (c) BIT. 370. A third view on this question also leads to the same result. Pursuant to that view, the term “investment” has an objective meaning in itself. Accordingly, the term “investment”

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under the BIT has an inherent meaning, irrespective of whether the investor resorts to ICSID or UNCITRAL arbitration … 371. The term “investment” per se in Article 1(1) of the Argentina-Italy BIT can indeed be analysed in the same manner as the term “investment” in Article 25 of the ICSID Convention (see §§ 362-367 above) … The conclusion is again that Claimants' purchase of security entitlements in Argentinean bonds constitutes a contribution which qualifies as “investment” per se under Article 1(1) of the BIT. [cc] Biwater Gauff (Tanzania) Ltd., v. United Republic of Tanzania (ICSID Case No. ARB/05/22), Award of 24 July 2008 (11) [Bernard Hanotiau (pres.), Gary B. Born, Toby Landau] and Concurring and Dissenting Opinion of 18 July 2008 (12) [Gary B. Born] [The claimant (“BGT”), argued that the project (“the Project”) in the respondent-state (“the Republic”) that it had participated in through a subsidiary, City Water, satisfied the Salini hallmarks and therefore there was an investment for the purposes of Article 25(1) of the ICSID Convention.] (Citations selectively omitted) 307. The Republic accepts that (inter alia) the City Water shares and shareholders' loans satisfy the BIT's definition of “investment”, being within the broad category of “every kind of asset”. The Republic focuses instead on Article 25 of the Convention, and submits that the Project was a “loss leader”, and that as such, being an inevitably unprofitable venturee, designed only to further BGT's interests in other possible future investments, it cannot itself be regarded as an “investment” within the meaning of the Convention. In particular, the criteria of “risk” and “substantial commitment” would not be satisfied in such circumstances. 308. As noted earlier, the Republic relies upon BGT's own expert evidence to assert that a rational investor would have required an internal rate of return on this Project of 20 to 25% to justify the risks, whereas BGT based its bid on an internal rate of return of 9 to 12%. According to the Republic, if the Project does not qualify as an “investment” for the purposes of Article 25 of the Convention, the fact that it may qualify as an “investment” under the relevant BIT is of no relevance, since Article 25 has an autonomous meaning which cannot be expanded by agreement. 309. The Arbitral Tribunal does not agree with the Republic's analysis for a number of reasons, as set out below. 310. The Criteria for an “Investment”: An initial point arises as to the relevant test to be applied. In advancing submissions on Article 25 of the ICSID Convention, parties not infrequently begin with the proposition that the term “investment” is not defined in the ICSID Convention, and then proceed to apply each of the five criteria, or benchmarks, that were originally suggested by the arbitral tribunal in Fedax v. Venezuela, and restated (notably) in Salini v. Morocco, namely (i) duration; (ii) regularity of profit and return; (iii) assumption of risk; (iv) substantial commitment; and (v) significance for the host State's development. 311. This was the approach of both BGT and the Republic in this case, and it is the alleged failure of the so-called “Salini Test” that gives rise to the Republic's jurisdictional objection. 312. In the Tribunal's view, there is no basis for a rote, or overly strict, application of the five Salini criteria in every case. These criteria are not fixed or mandatory as a matter of law. They do not appear in the ICSID Convention. On the contrary, it is clear from the travaux préparatoires of the Convention that several attempts to incorporate a definition of “investment” were made, but ultimately did not succeed. In the end, the term was left intentionally undefined, with the expectation (inter alia) that a definition could be the subject of agreement as between Contracting States … 313. Given that the Convention was not drafted with a strict, objective, definition of “investment”, it is doubtful that arbitral tribunals sitting in individual cases should impose one such definition which would be applicable in all cases and for all purposes … 314. Further, the Salini Test itself is problematic if, as some tribunals have found, the “typical characteristics” of an investment as identified in that decision are elevated into a fixed and inflexible test, and if transactions are to be presumed excluded from the ICSID Convention unless each of the five criteria are satisfied. This risks the arbitrary exclusion of certain types of transaction from the scope of the Convention. It also leads to a definition that may contradict individual agreements (as here), as well as a developing consensus in parts of the world as to the meaning of “investment” (as expressed, e.g., in bilateral investment treaties). If very substantial numbers of BITs across the world express the definition of “investment” more broadly than the Salini Test, and if this constitutes any type of international consensus, it is difficult to see why the ICSID Convention ought to be read more narrowly. 315. Equally, the suggestion that the “special and privileged arrangements established by the Washington Convention can be applied only to the type of investment which the Contracting States to that Convention envisaged” does not, in this Arbitral Tribunal's view, lead to a fixed or autonomous definition of “investment” which must prevail in all cases,

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for the “type of investment” which the Contracting States to the Convention in fact envisaged was an intentionally undefined one, which was susceptible of agreement. 316. The Arbitral Tribunal therefore considers that a more flexible and pragmatic approach to the meaning of “investment” is appropriate, which takes into account the features identified in Salini, but along with all the circumstances of the case, including the nature of the instrument containing the relevant consent to ICSID. 317. The Arbitral Tribunal notes in this regard that, over the years, many tribunals have approached the issue of the meaning of “investment” by reference to the parties' agreement, rather than imposing a strict autonomous definition, as per the Salini Test. 318. To this end, even if the Republic could demonstrate that any, or all, of the Salini criteria are not satisfied in this case, this would not necessarily be sufficient – in and of itself – to deny jurisdiction. 319. The Evidence: Upon a consideration of the evidence, the Arbitral Tribunal rejects the Republic's characterisation of the Project as a “loss leader”. Anticipated rates of return may well vary as between different investors, and may depend upon a range of different factors. There is therefore no basis to impose a rate of return of 20 to 25% upon BGT, as an absolute standard, in order for its investment to qualify under Article 25 of the ICSID Convention. 320. BGT intended the project to be profitable, albeit with a relatively low rate of return. It invested substantial amounts of equity into City Water; it posted substantial Performance Bonds; and it advanced to the company a shareholder loan of USD 1 million, together with additional support and development funds. It also considered the Project to be in its economic interest and supplied the company with key personnel and also with technology and know-how. The Arbitral Tribunal considers that, viewed overall, and against the backdrop of the scope of consent to ICSID jurisdiction as expressed in the BIT, this was clearly an “investment” within the meaning of Article 25 of the ICSID Convention. Further, even if such are required for the purposes of Article 25 of the Convention, the conditions of “risk” and “commitment” which are disputed by the Republic were present in BGT's investment. 321. Difficulties with the Republic’s Approach: Even if the Arbitral Tribunal had concluded that the Project was a “loss leader”, it remains unclear why it should not then benefit from the protection of the ICSID Convention. Put another way, the Tribunal considers that if a party has ulterior motives for undertaking a project, and perhaps anticipates only a possible long- term and indirect benefit (e.g. other profitable opportunities), it does not thereby disqualify itself or its project from the ICSID regime. Indeed, the Republic's suggested approach would entail a difficult and possibly protracted investigation into the economic profile of any given project, as well as the particular motivation of those behind it, as an initial jurisdictional issue. The Arbitral Tribunal considers that this was not the intention of Article 25 of the ICSID Convention, which was premised neither upon any particular IRR threshold, nor any particular conception of economic return or benefit. 322. For all these reasons, the Arbitral Tribunal dismisses the Republic's first jurisdictional objection. [dd] Comments and Questions In Malaysian Salvors, the Salini hallmarks were a significant facet of the sole arbitrator's analysis of whether the requirement of an “investment” for the purposes of Article 25 of the ICSID Convention was met. Abaclat and Biwater Gauff, however, cast doubts on the usefulness of the Salini hallmarks in determining whether the “investment” criterion is satisfied. Perhaps the better approach is that which was alluded to in Abaclat and Biwater Gauff and described by Professor Mortenson in the following terms: “Given the drafting history of the ICSID Convention and the practical advantages of restraint, tribunals should exercise near-total deference to state definitions of “investment”. So long as an activity or asset is colorably economic in nature, it should constitute an investment under Article 25.” See Julian Davis Mortenson, The Meaning of “Investment”: ICSID’s Travaux and the Domain of International Investment Law, 51 Harv. Int'l L.J. 257 (2010). [c] Parties [i] Contracting State or Constituent Subdivision or Agency [aa] Georgios Petrochilos, Sylvia Noury and Daniel Kalderimis, ICSID Convention, Chapter II, Article 25 [Jurisdiction of the Centre], in Concise International Arbitration, 66, 70-71 (Loukas A. Mistelis (ed.), Kluwer Law International 2010) (Citations selectively omitted) 8.Contracting State. The Centre only has jurisdiction if both the host State and the investor's State of nationality are Contracting States. The critical date for assessing the fulfilment of this jurisdictional requirement is the date of the institution of ICSID proceedings. This requirement is fulfilled if consent to jurisdiction is given prior to the ratification of the Convention but the Convention enters into force before the institution

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of proceedings (Holiday Inns v Morocco; see also Amco v Indonesia (I) (DA); LETCO v Liberia; Cable TV v St. Kitts and Nevis). Parties to a dispute may have recourse to the Additional Facility if either, but not both, the host State or the investor's State of nationality are Contracting States. However, an agreement to submit a dispute to conciliation or arbitration under the Additional Facility is subject to the approval of the SecretaryGeneral. If neither the host State nor the investor's State of nationality are Contracting States, the only way in which the parties can have recourse to ICSID arbitration is on an ad hoc basis (1993 ICSID Model Clause 22). 9.Constituent subdivisions or agencies of a Contracting State. It is not uncommon for investment agreements to be entered into by an entity that exercises public functions but has legally distinct personality from the Government. Similarly, provinces and authorised sub-regions of the host State may enter into such agreements. The extension of party status was designed to cover a wide range of entities. The expression ‘constituent subdivision’ covers any territorial entity beneath the level of the State that has full international personality. The term ‘agency’ should be interpreted in a functional way so that the relevant requirement should be performance of public/governmental functions. 10.State designation requirement. In addition to satisfying these objective criteria, there must also be designation to the Centre. The Convention does not specify the form or manner of such designation. Express notifications are advisable. Clear designation in the national legislation of the host State or in a BIT should be sufficient. Designation in an agreement with the investor will not suffice, although notification to the Centre of an agreement containing such a designation will be sufficient. The institution of proceedings may be regarded as the critical date for designation; however, there may be exceptional circumstances that will allow designation even after the commencement of proceedings (Klöckner v Cameroon, (I) (DA)). The Convention is silent on whether or not designations, once given, may be withdrawn. It would appear on general principles that if consent is already given by the constituent subdivision or agency, unilateral withdrawal of designation should not be possible. Finally, it should be noted that the host State's failure to designate a constituent subdivision or agency pursuant art. 25(3) does not deprive an investor of the right to bring a claim against the host State in relation to an investment contract entered into between an investor and a constituent subdivision or agency of the State, provided that the State has consented to the jurisdiction of the Centre (Vivendi v Argentina (I); and see more generally Maffezini v Spain and Salini v Morocco regarding rules of attribution as a matter of international responsibility). [bb] Cable Television of Nevis, Ltd. and Cable Television of Nevis Holdings, Ltd. v. Federation of St. Kitts and Nevis (ICSID Case No. ARB/95/2), Decision on Jurisdiction of 13 January 1997 (13) [Woodbine A. Davis (pres.), Arthur A. Maynard, Rex McKay] [On October 23, 1995, Cable Television of Nevis Limited and Cable Television of Nevis Holdings, Ltd. (“Cable TV”), two companies 99.9% owned by nationals of the United States of America, initiated proceedings against the Federation of St. Christopher and Nevis (“the Federation”). Cable TV claimed that it had invested over $1 million in the construction of a cable television system on the island of Nevis, and that, moreover, it had sustained approximately $50,000 damage to its system from a hurricane. Although Cable TV argued that its agreement (“the Agreement”) with the Federation for the provision of cable television services permitted it to increase its basic and premium rates after the first year, to cover these and other costs, the Federation consistently refused such increases and obtained from its High Court of Justice an ex parte order restraining and enjoining Cable TV from increasing rates prior to the ICSID arbitration.] (Citations selectively omitted) 2.01 This submission by the respondent is based on the contention that NIA (not the Federation) is the Contracting Party in the Agreement, is a constituent subdivision or agency of a Contracting State; i.e., the Federation, and has not been designated as such to ICSID by the Federation. Hence, the Arbitral Tribunal has no jurisdiction to hear the matter. 2.02 The Federation is established by Section 1 of Chapter 1 of the Constitution of Saint Christopher and Nevis (hereinafter called “the Constitution”) which sets out as follows: (1)

(2)

“The island of Saint Christopher (which is otherwise known as Saint Kitts) and the island of Nevis shall be a sovereign democratic Federal State which may be styled Saint Christopher and Nevis or Saint Kitts and Nevis or the Federation of Saint Christopher and Nevis or the Federation of Saint Kitts and Nevis.” “The territory of Saint Christopher and Nevis shall comprise all areas that were comprised in the associated state of Saint Christopher and Nevis immediately before September 19, 1983, together with such other areas as may be declared by Parliament to form part of the territory of Saint Christopher and Nevis.”

*** 2.08 … [I]t would appear that NIA possesses juridical personality and it is evident that the Constitution recognises Nevis in two ways: one, as an integral inseparate part of the Federation (Chapter I, Section 1) with both St. Kitts and Nevis being unified as one sovereign democratic federal state, and two, as a separate, distinct and somewhat

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autonomous entity within the Federation. There are several instances within the Constitution whereby NIA or Nevis or the Nevis Island Legislature is treated as distinct from the Federation but what greater evidence of this separate identity for NIA within the Constitution is there than in Section 112 which provides that “[t]he High Court shall, to the exclusion of any other Court of Law, have on final jurisdiction in any dispute between [NIA] and the Government [the Federation] if and in so far as the dispute involves any question (whether of law or fact) on which the existence or extent of a legal right depends.” … It would therefore appear that NIA, as a juridical body, has the power to enter into the Agreement on its own and independently of the Federation. The Agreement was signed by the then Premier of Nevis who is, under the Constitution, a member of NIA ex officio. 2.09 Turning to the Agreement, the parties … are the Government of Nevis (therein called the Government) of one part and Cable Television of Nevis, Ltd. and Cable Television of Nevis Holdings Ltd., (therein and herein together called Cable) of the other part. By clauses 1 and 2 of the Agreement, the Government of Nevis granted to Cable the right and permission to perform the functions of a cable television company on the Island of Nevis including certain exclusive rights, privileges and franchises in relation to a CATV system on Nevis and to provide video and entertainment services by cable or fiber and the right to receive, retransmit and redistribute over the cable television system all audio and video programming receivable on Nevis. The Requesting Parties (herein also called Cable) have consistently claimed that the Agreement was entered into by the Government of Nevis as representing the Federation, in other words that the Federation should take the place of the Government of Nevis as a party to the Agreement. It seems however that, on the face of it, the Agreement recognises the Government and the Federation separately, since both appear at separate places in the Agreement. Paragraph H of Clause 2 is obviously a case in which the Government of Nevis is intended as the body granting the right since that paragraph expressly uses the words “Government of Nevis,” as well as Clause 1 having regard to the definition of the parties in the Agreement. *** 2.17 It is manifestly evident from all the circumstances that Cable intended at all times to deal only with the Government of Nevis … *** 2.22 The consent to ICSID arbitration contained in Clause 16 of the Agreement can only take effect in the present case on the matter of jurisdiction of ICSID if the Contracting State, i.e., the Federation, is a party to the dispute, or, if it is not a party and the relevant party to the dispute is a constituent subdivision or agency of the Contracting State, then that relevant party must have been designated as such to ICSID by the Federation. In addition, the consent by a constituent subdivision or agency of a contracting state requires the approval of that state unless that state notifies ICSID that no such approval is required. No documentation has been furnished to the Tribunal evidencing that NIA or the Government of Nevis has been so designated to ICSID by the Federation, and, in the circumstances, the request by Cable for arbitration in accordance with Clause 16 of the Agreement can only pass this stage under Article 25(1) of the Convention if the Contracting State, i.e., the Federation, can by interpretation or otherwise be substituted in the Agreement in place of the Government of Nevis as the contracting party with Cable, or by some other means qualify as a party to the ICSID arbitration … *** 2.28 The last point to be considered on this issue is the meaning of the words “(or any constituent subdivision or agency of a Contracting State designated to the Centre by that State)” as appears in Article 25 (1) of the Convention. It is evident from Article 25 (1) that ICSID has no jurisdiction in matters brought by or against an entity other than a contracting state unless the entity has been designated to ICSID by the contracting state as a constituent subdivision or agency of the contracting state … 2.29 A review of the list of Designations by Contracting States Regarding Constituent Subdivisions or Agencies ICSID/8C (copies of which were delivered by ICSID to the parties and the Tribunal), reveals that, for instance, Australia has designated the State of New South Wales and four other states in addition to the Northern Territory and the Australian Capital Territory … It is also noted that Ecuador, Guinea, Madagascar, Nigeria, Portugal, and the Sudan have respectively designated what appears to be corporations, but there is no indication as to the degree of Government control therein, if any. The United Kingdom, with which we are more familiar, has designated as many as 16 of its colonies and dependencies, all of which to our knowledge are Government run … 2.30 In reviewing the list of ICSID cases up to July 1995, it would appear that there is only one reported case, at least up to 1986, involving the issue of ICSID's jurisdiction over a state agency, i.e., Klöckner Industrie Anlagen GmbH, Klöckner Belge S.A. and Klöckner Handelmaatschappij B.V. v. United Republic of Cameroon and Société Camerounaise des Engrais (SOCAME). SOCAME, a state controlled company incorporated in Cameroon pursuant to the parties' joint venture agreement, was named as a respondent even though Cameroon had not designated SOCAME as a constituent subdivision or agency. The

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issue was resolved without the need of a tribunal decision when Cameroon decided to designate SOCAME as a constituent subdivision within the meaning of Article 25 (1) of the Convention. *** 2.32 NIA is not as in the case of SOCAME a state controlled company nor is it a government statutory corporation, i.e., a corporation specially created by legislation as a government agency. The Constitution seems to be rather unique in that it creates two constituent bodies, namely Nevis on the one hand and, on the other, the independent Federal State of St. Kitts and Nevis. Attempts by counsel on both sides to find a comparable constitution have been without success. It is our view that NIA or the Government of Nevis, howsoever named, is a creature of the Constitution and is a separate juridical body, clothed with several powers and functions, over and above powers and functions normally vested in a corporation or a company. It has exclusive responsibility for the administration within the island of Nevis of certain matters. The Federation has a final say in matters other than the specified matters, especially in foreign affairs and national security, i.e., defence. The Constitution recognises the coming together of the two islands, i.e., St. Kitts by itself and Nevis by itself, to make a single sovereign democratic federal state and, almost throughout the Constitution, there is reference to Saint Christopher and Nevis, with provision for a Parliament, Governor General, Attorney General and Consolidated Fund, inter alia, for Saint Christopher and Nevis. The special treatment for Nevis in the Constitution as already dealt with in the foregoing paragraphs establishes it as constituent part, i.e., a constituent subdivision, of the Federation. 2.33 Jurisdiction in respect of such a constituent subdivision can only be available from ICSID if Nevis was designated as such by the Federation. Furthermore, consent by NIA to ICSID jurisdiction requires the approval of the Federation under Article 25(3) of the Convention unless the Federation notifies ICSID that no such approval is necessary. None of these has been done and, in the circumstances, the Arbitral Tribunal has no jurisdiction to hear this matter. Clause 16 of the Agreement has not yet in fact been activated. *** 3.02 For the reasons advanced therein, the Tribunal does not consider substitution of the Federation for the Government of Nevis as a party to the proceedings as appropriate and finds it unacceptable. It therefore must follow that the Federation is NOT eligible to be named as a party to the proceedings, notwithstanding Cable naming it as such in its Request for Arbitration. [ii] National of Another Contracting State [aa] Campbell McLachlan, Laurence Shore and Matthew Weiniger, International Investment Arbitration: Substantive Principles, 131-133 (Oxford University Press 2007) (14) (Citations selectively omitted) 5.01 The investment protection regime is based on the principle that its protections extend to investors who are nationals of a contracting State other than the host State in which the investment is made. Thus, it is the nationality of the claimant that determines whether it is entitled to take the benefit of the treaty protections, and which, in turn, determines the jurisdiction ratione personae of the tribunal. This principle is clear. However, the variety of circumstances of its application has raised difficulties. In particular, the wide range of commercial arrangements to structure investments and the desire of investors to gain the benefits of certain protections in bilateral investment treaties (BITs) have led to a number of cases in which boundaries have been stretched. This stretching has chiefly occurred in two directions: characterizing an investor corporation as a national of the contracting home State when it arguably has only a tenuous relationship with that state; and characterizing an investor corporation as foreign when it arguably has a close relationship with the host contracting State. 5.02 In considering the leading cases on nationality issues (and the commentary on them, it appears that the predominant approach has been a formal one, in which international law places few, if any, controls upon a claim of nationality determined by reference to formal incorporation under the law of the home State. That is, unless qualified by the relevant treaty, a claimant corporation's State of incorporation will serve as the claimant's nationality. Formal nationality defined by incorporation has not, to date, been significantly qualified by the application of an ‘effective control’ test, unless the treaty has done so expressly. 5.03 The point of contention regarding nationality usually arises in relation to corporate investors, and whether there is a basis for applying a controlling interests test, and if so, how to apply that test. For natural persons, the matter is generally less complex and less problematic. Many if not most BITs simply provide for the contracting States' citizenship laws to govern the issue of the nationality of natural persons. Moreover, Article 25(2) of the ICSID Convention,’ does not define the concept of nationality. In the case of natural persons, it is primarily concerned with the matter of timing and dual nationality; Article 25(2)(a) provides that nationality for natural persons must exist on the date on which the parties consented to ICSID arbitration, as well as on the date that ICSID registers the

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request for arbitration. The ICSID Convention further clarifies – by denying – arbitral jurisdiction in the case of natural persons who also hold the nationality on either date of the contracting State party to the arbitration. 5.04 Issues of some intricacy and contentiousness may nonetheless arise in establishing whether a natural person qualifies as a national of the home contracting State or whether a natural person is a dual national (ie is a national of both the home and host contracting States) … However, the nationality of corporations is likely to remain a matter of greater debate in international investment arbitration … [bb] Jeswald W. Salacuse, The Law of Investment Treaties, 186-189 (Oxford University Press 2010) (15) (Citations selectively omitted) *** Even though an asset qualifies as an ‘investment’ under an investment treaty, a person or entity will not be able to claim treaty protection for that asset unless that person or entity is deemed to be an ‘investor’ as that term is defined in the applicable treaty. Defining which investors can benefit from the treaty is important, as the goal of the contracting state is to secure benefits for its own nationals, companies, and investors, and not those of other countries. The problem is essentially one of determining what link needs to exist between an investor and a party to a treaty for the investor to benefit from the treaty's provisions. In examining this problem, one must distinguish between two types of investors: (a) natural persons and (b) legal entities. Virtually all treaties make this distinction in setting out their definitions of ‘investor’. (a) Natural persons as ‘investors’ In the case of physical persons or individuals, investment treaties specify the necessary link between the individual and a contracting state primarily on the basis of nationality or citizenship and to a lesser extent by domicile, permanent residence, or some combination thereof. Thus, for example, Article 1(7)(a)(i) of the Energy Charter Treaty defines ‘investor’ as including a ‘natural person having the citizenship or nationality of or who is permanently residing in that Contracting Party in accordance with its applicable law’. Whether a person has the necessary link is determined by the domestic law of the country with which the link is claimed. Persons having more than one nationality pose a special problem under investment treaties. Unless the treaty specifically treats this question, a variety of possible solutions present themselves. One possibility is to follow the principle of international law that a person with more than one nationality is a national of the state of that person's dominant and effective nationality. Another approach is to hold that if a person is a national of both contracting states that fact automatically denies that person protection, since the treaty is not meant to provide protection to nationals who invest in their own state. Such individuals receive protection from the legal system of the state of which they are nationals. (b) Companies and other legal entities as ‘investors’ For investors that are companies or other legal entities, the problem of determining an appropriate link with a contracting state is more complex. Such legal entities may be created and owned by persons who have no real connection with the countries that are a party to the treaty. In particular, three types of cases raise problems: (1) companies organized in a treaty country by nationals of a non-treaty country; (2) companies organized in a non-treaty country by nationals of a treaty country; and (3) companies in which nationals of a non-treaty country hold a substantial interest. For a company to be covered by the treaty, most treaties require that a treaty partner at least be one of the following: (1) the country of the company's incorporation; (2) the country of the company's seat, registered office, or principal place of business;’” or (3) the country whose nationals have control over, or a substantial interest in, the company making the investment. Sometimes these requirements are combined so that an investing company must satisfy two or more conditions to qualify for coverage under a particular investment treaty. One example of an approach taken to corporate investors in a treaty regime is the Energy Charter Treaty (ECT), which adopts the relatively simple rule that a company is an investor of a contracting party if it has been organized in accordance with the law applicable in the contracting state. Thus, even if nationals of a non-ECT state organize a company in an ECT state, such company would qualify as an investor of a contracting party under the treaty. Moreover, unlike most BITs, the ECT explicitly recognizes the possibility that a natural or legal person from a ‘third state’ (ie non-ECT state) can be considered an investor if it fulfils the treaty conditions, mutatis mutandis, specified for contracting states. So, if under the laws of an ECT state a company organized in another state was considered to be organized under the laws of the ECT state, that company would still qualify as an investor under the treaty. In order to prevent these provisions from being abused by nationals and companies of non-ECT states, Article 17 of the Energy Charter Treaty, in terms almost identical to Article 1(2) of the United States BIT Prototype, gives each contracting party the right to deny the advantages of the treaty to a legal

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entity if it is owned or controlled by third country nationals and has no substantial business activities in the state of the contracting party. A contracting party may also deny the advantages of the treaty to the investments of third country investors with which the host country does not maintain diplomatic relations or prohibits transactions. To be protected under many investment treaties, an investor must ‘own’ or ‘control’ the investment. While determining ownership is usually easy, control is a more vague and ambiguous concept. In order to give some specificity to the term, some treaties contain an annexed or supplementary agreement defining the term ‘control’ in the treaty … Bilateral treaty negotiations have sometimes dealt with the issue of control in the text of the BIT itself or in separate protocols or an exchange of letters. The concern in most investment treaties has been the same: to prevent persons and companies having no genuine link with treaty partners from obtaining benefits under the treaty. *** [cc] Hussein Nuaman Soufraki v. The United Arab Emirates (ICSID Case No. ARB/02/7), Award of 7 July 2004 (16) [L. Yves Fortier (pres.), Stephen M. Schwebel, Aktham El Kholy] [The Claimant described himself as an Italian national for the purposes of invoking the Italy-UAE bilateral investment treaty. He was unable to establish his Italian nationality before the tribunal.] (Citations selectively omitted) 47. The Tribunal must decide: (1) (2) (3) (4)

whether Claimant, prior to 1991, was an Italian national; if so, whether Claimant lost his Italian nationality when he acquired Canadian nationality and took up residence in Canada in 1991; whether Claimant reacquired automatically his Italian nationality according to Italian law after 1992; whether questions of Italian nationality are within the exclusive and dispositive competence of Italy or whether the Tribunal is entitled to look behind the passports, identity cards, certificates and assurances issued by Italian authorities certifying the Italian nationality of Mr. Soufraki.

48. As noted above, the Parties are in agreement that, prior to acquiring his Canadian nationality in 1991, Mr. Soufraki was or became an Italian national. 49. Mr. Soufraki maintains that he was – and is – an Italian national by birth, having been born on the soil of Libya which was then under the sovereignty of Italy, as the child of Italian nationals. That is to say, Mr. Soufraki claims Italian nationality by right of jus soli and jus sanguinis. 50. Mr. Soufraki has recounted the steps that he took in 1988 at the age of 51 to be recognized as an Italian national and to carry an Italian passport, and he has provided his Italian passports and identity cards valid throughout the period 1988 to the present time, as well as five Certificates of Nationality and other indicia of Italian citizenship referred to below. 51. As was noted earlier, Mr. Soufraki in his testimony before the Tribunal affirmed that he considers himself to be an Italian, as of right and choice, and that he never intended to relinquish his Italian nationality. For its part, the Tribunal accepts and respects the sincerity of Mr. Soufraki's conviction that he was and remains a national of Italy. 52. However, the terms of Article 8, paragraph 1 of the Italian Law No. 555 of 1912 are clear and leave no room for interpretation. As a consequence of his acquisition of Canadian nationality and residence in Canada, Mr. Soufraki, in 1991, lost his Italian nationality by operation of Italian law. It appears from the evidence that Mr. Soufraki was unaware of the loss of his Italian nationality at the time and became aware of it only in the course of, and as a result of expert evidence submitted in, these proceedings. 53. The first contentious question to be decided is whether, as Claimant maintains, the Certificates of Nationality issued by Italian authorities characterizing Mr. Soufraki as an Italian national,and his Italian passports, identity cards and the letter of the Italian Ministry of Foreign Affairs so stating, constitute conclusive proof that Mr. Soufraki reacquired his Italian nationality after 1992 and that he was an Italian national on the date on which the parties to this dispute consented to submit it to arbitration as well as on the date on which the request to ICSID was registered by it. 54. Claimant contends that it is for the Italian authorities to interpret Italian nationality law, and that this Tribunal should apply their conclusions. He emphasizes that Article 1(3) of the BIT specifies that the nationality of a natural person shall be determined according to the law of the Contracting State in question. 55. It is accepted in international law that nationality is within the domestic jurisdiction of the State, which settles, by its own legislation, the rules relating to the acquisition (and loss) of its nationality. Article 1(3) of the BIT reflects this rule. But it is no less accepted that when, in international arbitral or judicial proceedings, the nationality of a person is challenged, the international tribunal is competent to pass upon that challenge. It will

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accord great weight to the nationality law of the State in question and to the interpretation and application of that law by its authorities. But it will in the end decide for itself whether, on the facts and law before it, the person whose nationality is at issue was or was not a national of the State in question and when, and what follows from that finding. Where, as in the instant case, the jurisdiction of an international tribunal turns on an issue of nationality, the international tribunal is empowered, indeed bound, to decide that issue. 56. While the Claimant does not dispute the foregoing authority of this Tribunal, it submits that it should exercise it so as to override official Italian affirmations of the Italian nationality of Mr. Soufraki only in response to allegations and proof of fraud. 57. While the Respondent did not in terms maintain that evidence in support of Mr. Soufraki's acquisition or reacquisition of Italian nationality was fraudulent, counsel of the Respondent when cross-examining Mr. Soufraki did characterize the evidence that he submitted in support of his claim that he was resident in Italy for more than a year 199394 as “bogus”. Nevertheless, the Tribunal wishes to make clear that, in its view, issues of alleged fraud need not be addressed. 58. The question rather comes to this. Mr. Soufraki asserts as a fact that he was resident in Italy for business purposes for more than one year in 1993-94. In accordance with accepted international (and general national) practice, a party bears the burden of proof in establishing the facts that he asserts. Claimant accordingly bears the burden of proving to the satisfaction of the Tribunal that he was resident in Italy for more than one year in 1993-94 and accordingly that he was an Italian national on the relevant dates and that, as a result, he belongs to the class of investors in respect of whom the Respondent has consented to ICSID jurisdiction. 59. The Tribunal agrees with Claimant that, as an international Tribunal, it is not bound by rules of evidence in Italian civil procedure. 60. The “substantial” evidence rule, while it may well be required in an Italian court,has no application in the present proceedings. 61. What weight is given to oral or documentary evidence in an ICSID arbitration is dictated solely by Rule 34(1) of the ICSID Arbitration Rules: The Tribunal shall be the judge of the admissibility of any evidence adduced and of its probative value. 62. In the present instance, it is thus for this Tribunal to consider and analyse the totality of the evidence and determine whether it leads to the conclusion that Claimant has discharged his burden of proof. 63. The Tribunal will, of course, accept Claimant's Certificates of Nationality as “prima facie” evidence … 64. It is common ground between the Parties that, if Claimant reacquired his Italian citizenship after 1992, it is as a result of having established his residence in Italy for one year after that date. 65. Consequently, it is evident that Mr. Soufraki's Certificate of Nationality issued in 1988 cannot inform the Tribunal's decision. 66. As to the four Certificates of Nationality issued after 1992, there is no evidence in the record that any Italian official who issued to Mr. Soufraki any of these Certificates undertook any inquiry in order to determine whether he had lost his Italian citizenship prior to 1992 and whether he had established his residence in Italy for one year after enactment of the Law of 1992 and thus reacquired his Italian citizenship. 67. Furthermore, the Tribunal notes that, when he was cross-examined, Mr. Soufraki admitted that he had not informed any Italian official of his loss of Italian citizenship since he did not believe that he had lost it. 68. The Tribunal accordingly holds that the Claimant cannot rely on any of the pleaded Certificates of Nationality to establish conclusively that he was a national of Italy on the dates of the Request for Arbitration and its registration. Nor can it treat the letter from the Ministry of Foreign Affairs as conclusively establishing Mr. Soufraki's Italian nationality and his entitlement to invoke Italy's BIT with the UAE, essentially for the same reason, namely, that it is not shown that the Ministry knew when it wrote its letter that Mr. Soufraki had lost his Italian nationality and that hence the question was whether he had reacquired it. 69. The Tribunal must now examine the other evidence in the record which, Claimant maintains, demonstrates that Mr. Soufraki resided in Italy for one year after the enactment of Italian Law No. 91. 70. The concept of “residence” as used in Article 13(1)(d) of Italian Law No. 91 is factual. It is different from the concept of “legal residence”. 71. Consequently, actual residence for one year is a sufficient requisite for the reacquisition of Italian citizenship.

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72. Residence does not imply continuous presence and does not disallow travel. However, the Tribunal agrees with Respondent that proof of some continuity of residence during that year is required. 73. The Tribunal will consider whether the evidence discloses that Mr. Soufraki, during the relevant period, had his “habitual abode” in Italy and that he manifested his “intention to fix in Italy the center of [his] own business and affairs.” 74. The Tribunal's inquiry begins with Mr. Soufraki's Affidavit. In paragraphs 29 to 33 of his Affidavit, as we noted earlier, Mr. Soufraki deposed that, in order to oversee personally the renovation of a hotel in Viareggio acquired by one of his companies, he moved to Italy in February 1993, rented an office for a period of two years and resided in Italy “from March 1993 until April 1994.” 75. Mr. Soufraki has produced two documents to prove his claimed period of residence in Italy in 1993 and 1994. These are the affidavit sworn by Messrs Casini and Nicotra dated 17 April 2003 and the lease for office space of a flat in Viareggio dated 15 February 1993. 76. The Tribunal finds the following evidence provided by Mr. Soufraki in his Affidavit and in the course of his cross-examination particularly relevant to its inquiry: (i) (ii)

After leaving Libya in 1978, Mr. Soufraki established his “main family home” in London. From 1988 until 1997 or 1998, Mr. Soufraki had the free use of a house in Italy belonging to his friend and lawyer, Avvocato Picchi. At the same time, in his Reply Memorial of 3 March 2003, Claimant stated in respect to his periods of residence in Italy that: … the Claimant has not taken permanent residence in Italy for longer than two years at a time. However: – – –

In 1983-1984 the Claimant had the day to day management of the Fratelli Benetti shipyard in Viareggio; In 1988 the Claimant resided permanently in Massarosa and is recorded as so doing in official records; and during his subsequent frequent stays in Italy, the Claimant stays at his own hotel in Viareggio, the American Hotel, which is not documented.

(iii) After obtaining his Italian passport in 1988, Mr. Soufraki returned to his residence in Monaco “for tax purposes”. (iv) In 1988, Mr. Soufraki placed himself on the Register of Italians living overseas (the “AIRE Register”). He has remained on the AIRE Register to this date and did not, in 1993, inform the Italian authorities of a change in his residence. (v) In January 1993, when he says that he took up his residence in Italy, Mr. Soufraki states that he “had no intention of being a resident again”. (vi) During the 1993-94 period in which Mr. Soufraki maintains that he was resident in Italy while directing his international business interests, Mr. Soufraki did not personally obtain an Italian tax number. 77. The Tribunal observes that in the quotation reproduced above in paragraph 76(ii) of this Award, Claimant's Reply made no mention of Mr. Soufraki's residing in Italy in the 1993-94 period. 78. The Tribunal does not find that the affidavit of Messrs. Casini and Nicotra constitutes disinterested and convincing evidence. It should be noted that Mr. Casini is an auditor whom Mr. Soufraki has engaged over the years, and that Mr. Nicotra is a receptionist at Mr. Soufraki's hotel in Viareggio. 79. As to the lease, the Tribunal notes that it was to be used by Mr. Soufraki “as his own personal office” and that it was never registered although its terms required that, “in case of use” (in caso d’uso), it needed to be registered. 80. In the opinion of the Tribunal, neither the affidavit of Messrs. Casini and Nicotra, nor the unregistered lease of the Viareggio flat, sufficiently sustain the central submission of the Claimant that he resided in Italy for more than one year as from March 1993. 81. Having considered and weighed the totality of the evidence adduced by Mr. Soufraki, the Tribunal, unanimously, comes to the conclusion that Claimant has failed to discharge his burden of proof. He has not demonstrated to the satisfaction of the Tribunal that he established and maintained his residence in Italy during the period from March 1993 until April 1994. 82. In the circumstances, Claimant cannot rely today on Article 13(1)(d) of Italian law No. 91 of 1992. *** 84. Since, as found by the Tribunal, Claimant was not an Italian national under the laws of Italy at the two relevant times, namely on 16 May 2002 (the date of the parties' consent to

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ICSID arbitration) and on 18 June 2002 (the date the Claimant's Request for Arbitration was registered with ICSID), this Tribunal does not have jurisdiction to hear this dispute. [dd] Tokios Tokelés v. Ukraine (ICSID Case No. ARB/02/18), Decision on Jurisdiction of 29 April 2004 (17) [Prosper Weil (pres.), Piero Bernardini, Daniel M. Price] [Ukraine (“the Respondent”) argued that the Claimant, Tokios Tokelės, was not a “genuine entity” of Lithuania because it was owned and controlled by Ukrainian nationals. There was no dispute that nationals of Ukraine owned ninety-nine percent of the shares in Tokios Tokelės and comprised two-thirds of Tokios Tokelės's management. The Respondent also argued that Tokios Tokelės had no substantial business activities in Lithuania and maintained its siège social in Ukraine.] (Citations selectively omitted) 2. Nationality of Juridical Entities under Article 25 of the ICSID Convention 24. Article 25 of the Convention requires that, in order for the Centre to have jurisdiction, a dispute must be between “a Contracting State … and a national of another Contracting State …” Article 25(2)(b) defines “national of another Contracting State,” to include “any juridical person which had the nationality of a Contracting State other than the State party to the dispute …” The Convention does not define the method for determining the nationality of juridical entities, leaving this task to the reasonable discretion of the Contracting Parties. 25. Thus, we begin our analysis of this jurisdictional requirement by underscoring the deference this Tribunal owes to the definition of corporate nationality contained in the agreement between the Contracting Parties, in this case, the Ukraine-Lithuania BIT … *** 3. Definition of “Investor” in Article 1(2) of the BIT *** 28. Article 1(2)(b) of the Ukraine-Lithuania BIT defines the term “investor,” with respect to Lithuania, as “any entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations.” The ordinary meaning of “entity” is “[a] thing that has a real existence.” The meaning of “establish” is to “[s]et up on a permanent or secure basis; bring into being, found (a … business).” Thus, according to the ordinary meaning of the terms of the Treaty, the Claimant is an “investor” of Lithuania if it is a thing of real legal existence that was founded on a secure basis in the territory of Lithuania in conformity with its laws and regulations. The Treaty contains no additional requirements for an entity to qualify as an “investor” of Lithuania. 29. The Claimant was founded as a cooperative in 1989 and was registered by the municipal government of Vilnius, Lithuania on August 9 of that year. In 1991, the founders of Tokios Tokelės agreed to reorganize the cooperative into a closed joint-stock company, which the municipal government of Vilnius, Lithuania registered on May 2, 1991. According to the Certificate of Enterprise, the address of Tokios Tokelės is Vilnius, vul. Seskines, 13-3. On August 11, 2000, the Ministry of the Economy of the Republic of Lithuania re-registered the Claimant as an enterprise and re-registered the Claimant's governing statute, both of which note the company's location as Sheshkines, 13-3 (or d. 13 kv. 3), Vilnius. The Claimant, therefore, is a thing of real legal existence that was founded on a secure basis in the territory of Lithuania. The registration of Tokios Tokelės by the Lithuanian Government indicates that it was founded in conformity with the laws and regulations of that country. According to the ordinary meaning of Article 1(2)(b), therefore, the Claimant is an investor of Lithuania. 30. Article 1(2)(c) of the Ukraine-Lithuania BIT, which defines “investor” with respect to entities not established in Ukraine or Lithuania, provides relevant context for the interpretation of Article 1(2)(a) and (b). Article 1(2)(c) extends the scope of the Treaty to entities incorporated in third countries using other criteria to determine nationality – namely, the nationality of the individuals who control the enterprise and the siège social of the entity controlling the enterprise. The Respondent argues that the existence of these alternative methods of defining corporate nationality to extend the benefits of the BIT in Article 1(2)(c) should also allow these methods to be used to deny the benefits of the BIT under Article 1(2)(b). If the Contracting Parties had intended these alternative methods to apply to entities legally established in Ukraine or Lithuania, however, the parties would have included them in Article 1(2)(a) or (b) respectively as they did in Article 1(2)(c). However, the purpose of Article 1(2)(c) is only to extend the definition of “investor” to entities established under the law of a third State provided certain conditions are met. Under the well established presumption expressio unius est exclusio alterius, the state of incorporation, not the nationality of the controlling shareholders or siège social, thus defines “investors” of Lithuania under Article 1(2)(b) of the BIT. 31. The object and purpose of the Treaty likewise confirm that the control-test should not be used to restrict the scope of “investors” in Article 1(2)(b). The preamble expresses the Contracting Parties' intent to “intensify economic cooperation to the mutual benefit of both States” and “create and maintain favourable conditions for investment of investors

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of one State in the territory of the other State.” The Tribunal in SGS v. Philippines interpreted nearly identical preambular language in the Philippines-Switzerland BIT as indicative of the treaty's broad scope of investment protection. We concur in that interpretation and find that the object and purpose of the Ukraine-Lithuania BIT is to provide broad protection of investors and their investments. 32. The object and purpose of the Treaty are also reflected in the Treaty text. Article 1, which sets forth the scope of the BIT, defines “investor” as “any entity” established in Lithuania or Ukraine as well as “any entity” established in third countries that is controlled by nationals of or by entities having their seat in Lithuania or Ukraine. Thus, the Respondent's request to restrict the scope of covered investors through a control-test would be inconsistent with the object and purpose of the Treaty, which is to provide broad protection of investors and their investments. 33. The Respondent also argues that jurisdiction should be denied because, in its view, the Claimant does not maintain “substantial business activity” in Lithuania. The Respondent correctly notes that a number of investment treaties allow a party to deny the benefits of the treaty to entities of the other party that are controlled by foreign nationals and that do not engage in substantial business activity in the territory of the other party. *** 35. In addition, a number of investment treaties of other States enable the parties to deny the benefits of the treaty to entities of the other party that are controlled by nationals of the denying party and do not have substantial business activity in the other party … 36. These investment agreements confirm that state parties are capable of excluding from the scope of the agreement entities of the other party that are controlled by nationals of third countries or by nationals of the host country. The Ukraine-Lithuania BIT, by contrast, includes no such “denial of benefits” provision with respect to entities controlled by third-country nationals or by nationals of the denying party. We regard the absence of such a provision as a deliberate choice of the Contracting Parties. In our view, it is not for tribunals to impose limits on the scope of BITs not found in the text, much less limits nowhere evident from the negotiating history. An international tribunal of defined jurisdiction should not reach out to exercise a jurisdiction beyond the borders of the definition. But equally an international tribunal should exercise, and indeed is bound to exercise, the measure of jurisdiction with which it is endowed. 37. We note that the Claimant has provided the Tribunal with significant information regarding its activities in Lithuania, including financial statements, employment information, and a catalogue of materials produced during the period of 1991 to 1994. While these activities would appear to constitute “substantial business activity,” we need not affirmatively decide that they do, as it is not relevant to our determination of jurisdiction. 38. Rather, under the terms of the Ukraine-Lithuania BIT, interpreted according to their ordinary meaning, in their context, and in light of the object and purpose of the Treaty, the only relevant consideration is whether the Claimant is established under the laws of Lithuania. We find that it is. Thus, the Claimant is an investor of Lithuania under Article 1(2)(b) of the BIT. 39. We reach this conclusion based on the consent of the Contracting Parties, as expressed in the Ukraine-Lithuania BIT. We emphasize here that Contracting Parties are free to define their consent to jurisdiction in terms that are broad or narrow; they may employ a control-test or reserve the right to deny treaty protection to claimants who otherwise would have recourse under the BIT. Once that consent is defined, however, tribunals should give effect to it, unless doing so would allow the Convention to be used for purposes for which it clearly was not intended. 40. This Tribunal, by respecting the definition of corporate nationality in the UkraineLithuania BIT, fulfills the parties' expectations, increases the predictability of dispute settlement procedures, and enables investors to structure their investments to enjoy the legal protections afforded under the Treaty. We decline to look beyond (or through) the Claimant to its shareholders or other juridical entities that may have an interest in the claim … *** 4. Consistency of Article 1(2) of the BIT with the ICSID Convention 42. In our view, the definition of corporate nationality in the Ukraine-Lithuania BIT, on its face and as applied to the present case, is consistent with the Convention and supports our analysis under it. Although Article 25(2)(b) of the Convention does not set forth a required method for determining corporate nationality, the generally accepted (albeit implicit) rule is that the nationality of a corporation is determined on the basis of its siège social or place of incorporation. Indeed, “ICSID tribunals have uniformly adopted the test of incorporation or seat rather than control when determining the nationality of a juridical person.” Moreover, “[t]he overwhelming weight of the authority…points towards

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the traditional criteria of incorporation or seat for the determination of corporate nationality under Art. 25(2)(b).” As Professor Schreuer notes, “[a] systematic interpretation of Article 25(2)(b) would militate against the use of the control test for a corporation's nationality.” 43. As discussed above, the Claimant is an “investor” of Lithuania under Article 1(2)(b) of the Ukraine-Lithuania BIT based on its state-of-incorporation. Although not required by the text of the Treaty, an assessment of the siège social of the Claimant leads to the same conclusion. Among the relevant evidence of siège social, the Claimant's registration certificate (issued by the Ministry of the Economy of Lithuania),31 its statute of incorporation,32 and each of the Claimant's “Information Notices of Payment of Foreign Investment” (registered by Ukrainian governmental authorities), all record the Claimant's address as Vilnius, Lithuania. Contrary to the assertion of the Respondent, a nationality test of siège social leads to the same result as one based on state of incorporation. 44. The second clause of Article 25(2)(b) provides that parties can, by agreement, depart from the general rule that a corporate entity has the nationality of its state of incorporation. It extends jurisdiction to “any juridical person which had the nationality of the Contracting State party to the dispute on [the date on which the parties consented to submit the dispute to arbitration] and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State …” This exception to the general rule applies only in the context of an agreement between the parties. The Respondent asks the Tribunal to apply this exception in the present case, not to give effect to an agreement between the Contracting Parties, but, rather, to create an additional exception to the general state-of-incorporation or state-of-seat rule – in the absence of an agreement to that effect between the Parties. 45. We find no support for the Respondent's request in the text of the Convention. The second clause of Article 25(2)(b) limits the use of the control-test to the circumstances it describes, i.e., when Contracting Parties agree to treat a national of the host State as a national of another Contracting Party because of foreign control. In the present case, the Claimant is not a national of the host State nor have the parties agreed to treat the Claimant as a national of a State other than its state of incorporation. 46. The use of a control-test to define the nationality of a corporation to restrict the jurisdiction of the Centre would be inconsistent with the object and purpose of Article 25(2)(b). Indeed, as explained by Mr. Broches, the purpose of the control-test in the second portion of Article 25(2)(b) is to expand the jurisdiction of the Centre … 47. ICSID tribunals likewise have interpreted the second clause of Article 25(2)(b) to expand, not restrict, jurisdiction … *** 50. ICSID jurisprudence also confirms that the second clause of Article 25(2)(b) should not be used to determine the nationality of juridical entities in the absence of an agreement between the parties. In CMS v. Argentina, the tribunal states, “[t]he reference that Article 25(2) (b) makes to foreign control in terms of treating a company of the nationality of the Contracting State party as a national of another Contracting State is precisely meant to facilitate agreement between the parties …” In the present case, there was no agreement between the Contracting Parties to treat the Claimant as anything other than a national of its state of incorporation, i.e., Lithuania. 51. The second clause of Article 25(2)(b) does not mandatorily constrict ICSID jurisdiction for disputes arising in the inverse context from the one envisaged by this provision: a dispute between a Contracting Party and an entity of another Contracting Party that is controlled by nationals of the respondent Contracting Party. 52. In summary, the Claimant is an “investor” of Lithuania under Article 1(2)(b) of the BIT because it is an “entity established in the territory of the Republic of Lithuania in conformity with its laws and regulations.” This method of defining corporate nationality is consistent with modern BIT practice and satisfies the objective requirements of Article 25 of the Convention. We find no basis in the BIT or the Convention to set aside the Contracting Parties' agreed definition of corporate nationality with respect to investors of either party in favor of a test based on the nationality of the controlling shareholders. While some tribunals have taken a distinctive approach, we do not believe that arbitrators should read in to BITs limitations not found in the text nor evident from negotiating history sources. 5. Equitable Doctrine of “Veil Piercing” 53. Finally, we consider whether the equitable doctrine of “veil piercing,” to the extent recognized in customary international law, should override the terms of the 54. The seminal case, in this regard, is Barcelona Traction.44 In that case, the International Court of Justice (“ICJ”) stated, “the process of lifting the veil, being an exceptional one admitted by municipal law in respect of an institution of its own making, is equally admissible to play a similar role in international law.” In particular, the Court noted, “[t]he wealth of practice already accumulated on the subject in municipal law indicates that the veil is lifted, for instance, to prevent the misuse of the privileges of legal

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personality, as in certain cases of fraud or malfeasance, to protect third persons such as a creditor or purchaser, or to prevent the evasion of legal requirements or of obligations.” 55. The Respondent has not made a prima facie case, much less demonstrated, that the Claimant has engaged in any of the types of conduct described in Barcelona Traction that might support a piercing of the Claimant's corporate veil. The Respondent has not shown or even suggested that the Claimant has used its status as a juridical entity of Lithuania to perpetrate fraud or engage in malfeasance. The Respondent has made no claim that the Claimant's veil must be pierced and jurisdiction denied in order to protect third persons, nor has the Respondent shown that the Claimant used its corporate nationality to evade applicable legal requirements or obligations. 56. The ICJ did not attempt to define in Barcelona Traction the precise scope of conduct that might prompt a tribunal to pierce the corporate veil. We are satisfied, however, that none of the Claimant's conduct with respect to its status as an entity of Lithuania constitutes an abuse of legal personality. The Claimant made no attempt whatever to conceal its national identity from the Respondent. To the contrary, the Claimant's status as a juridical entity of Lithuania is well established under the laws of both Lithuania and Ukraine and well known by the Respondent. The Claimant manifestly did not create Tokios Tokelės for the purpose of gaining access to ICSID arbitration under the BIT against Ukraine, as the enterprise was founded six years before the BIT between Ukraine and Lithuania entered into force. Indeed, there is no evidence in the record that the Claimant used its formal legal nationality for any improper purpose. *** 7. Conclusion of the Tribunal 71. The Tribunal concludes that the Claimant is an “investor” of Lithuania under Article 1(2)(b) of the BIT and a “national of another Contracting State,” under Article 25 of the Convention. [ee] TSA Spectrum de Argentina S.A. v. Argentine Republic (ICSID Case No. ARB/05/5), Award of 19 December 2008 (18) [Hans Danelius (pres.), Georges Abi-Saab, Grant D. Aldonas] [The claimant, TSA, commenced ICSID proceedings against Argentina under the ArgentinaNetherlands bilateral investment treaty. TSA was an Argentinean company owned by a Dutch company, TSI, which was controlled by an Argentinean national. Argentina argued that TSA was not a foreign investor.] (Citations selectively omitted) I. Article 25(2)(b) of the ICSID Convention 134. Article 25 of the ICSID Convention defines the ambit of ICSID's jurisdiction. In other words, it defines the extent, hence also the objective limits, of this jurisdiction (including the jurisdiction of tribunals established therein) which cannot be extended or derogated from even by agreement of the Parties. *** 138. Article 25(2)(b) defines the juridical persons that can have access to ICSID as “nationals of another Contracting State”, classifying them in two categories: (i) (ii)

“any juridical person which had the nationality of a Contracting State other than the State party to the dispute on the date on which the parties consented to submit such dispute to conciliation or arbitration”, and “any juridical person which had the nationality of the Contracting State party to the dispute on that date and which, because of foreign control, the parties have agreed should be treated as a national of another Contracting State for the purposes of this Convention”.

139. The second clause of Article 25(2)(b) introduces a significant exception to one of the major premises of the Convention (which also reflects a general principle of international law), i.e. that it deals exclusively with disputes between parties of diverse nationalities, to the exclusion of those between a State and its own national investors. The ratio legis of this exception is the wording “because of foreign control”. Foreign control is thus the objective factor on which turns the applicability of this provision. It justifies the extension of the ambit of ICSID, but sets the objective limits of the exception at the same time … 140. A significant difference between the two clauses of Article 25(2)(b) is that the first uses a formal legal criterion, that of nationality, whilst the second uses a material or objective criterion, that of “foreign control” in order to pierce the corporate veil and reach for the reality behind the cover of nationality. 141Once the Parties have agreed to the use of the latter criterion for juridical persons having the nationality of the host State, they are bound by this criterion as a condition for ICSID jurisdiction and cannot extend that jurisdiction by other agreements. 143. The question as to whether, or to what extent, the corporate veil should be pierced or lifted in the application of Article 25(2)(b) of the ICSID Convention presents itself in a

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different light and can lead to different solutions, depending on whether the case falls under the first or the second clause of this provision. 144. The first clause of Article 25(2)(b) mentions only the “nationality” of a Contracting State other than the State party to the dispute. In other words, it uses as a criterion the formal legal concept of nationality, which for legal persons is determined by one of the two generally accepted criteria of the place of incorporation or the seat (siège social) of the corporation. There is no reference here to “control”, whether foreign or other, nor any mention of “piercing” or looking beyond this nationality. 145. This text may be interpreted in a strict constructionist manner to mean that a tribunal has to go always by the formal nationality. On the other hand, such a strict literal interpretation may appear to go against common sense in some circumstances, especially when the formal nationality covers a corporate entity controlled directly or indirectly by persons of the same nationality as the host State. 146. In the two cases of Tokios Tokelés v. Ukraine and Rompetrol Group N.V. v. Romania, the Tribunals adopted the strict constructionist interpretation in spite of the control of the foreign companies by nationals of the host States. However, this interpretation has not been generally accepted and was also criticised by the dissenting President of the Tokios Tokelés Tribunal. 147. The situation is different, however, when it comes to the second clause of Article 25(2) (b) of the Convention. Here, the text itself allows the parties to agree to lift the corporate veil, but only “because of foreign control”, which justifies, but at the same time conditions, this exception. Although the text refers to juridical persons holding the nationality of the host State that the parties have agreed should be treated as nationals of another contracting State “because of foreign control”, the existence and materiality of this foreign control have to be objectively proven in order for them to establish ICSID jurisdiction by their agreement. It would not be consistent with the text, if the tribunal, when establishing whether there is foreign control, would be directed to pierce the veil of the corporate entity national of the host State and to stop short at the second corporate layer it meets, rather than pursuing its objective identification of foreign control up to its real source, using the same criterion with which it started. 148. However, in cases falling within the second clause of Article 25(2)(b), ICSID tribunals have not been constant in dealing with this issue of whether or not to pierce the second corporate layer after the one bearing the nationality of the host State, in identifying foreign control … *** 152. Writers and commentators are also divided on the issue of piercing the corporate veil under Article 25(2)(b) in general. But a majority appear to favour piercing the veil and going for the real control and nationality of controllers. 153. The reasons for piercing of the corporate veil up to the real source of control is a fortiori more compelling under the second clause of Article 25(2)(b) when ultimate control is alleged to be in the hands of nationals of the host State, whose formal nationality is also that of the Claimant corporation. Thus, Professor Schreuer concludes his analysis with the following rhetorical question: “Is it sufficient for nationals of non-Contracting States or even of the host State to set up a company of convenience in a Contracting State to create the semblance of appropriate foreign control?” And his answer is that “the better approach would appear to be a realistic look at the true controller thereby blocking access to the Centre for juridical persons that are controlled directly or indirectly by nationals of non-Contracting States or nationals of the host State”. 154. This is also why in the one case under the second clause of Article 25(2)(b) where national control was alleged (Vacuum Salt Products Ltd. v. Republic of Ghana), the Tribunal found the presumption of jurisdiction rebutted and declined jurisdiction. And in no other such case up to date has an ICSID Tribunal, after setting aside the nationality of the host State, stopped short at the second corporate layer or rung, refusing to pursue control to its real source. II. The Circumstances of the Case 155. TSA bases “foreign control” mainly on the interpretation of Article 1(b)(iii) of the BIT between the Netherlands and Argentina, and its Protocol which provides under B: “B. With reference to Article 1, paragraph b) (iii) the Contracting Party in the territory of which the investments are undertaken may require proof of the control invoked by the investors of the other Contracting Party. The following facts, inter alia, shall be accepted as evidence of the control: i. ii.

being an affiliate of a legal person of the other Contracting Party; having a direct or indirect participation in the capital of a company higher than 49% or the direct or indirect possession of the necessary votes to obtain a predominant position in assemblies or company organs.”

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156. However, the provisions of the BIT cannot provide ICSID jurisdiction unless the conditions of Article 25(2)(b) of the ICSID Convention are satisfied. In this sense, the Vacuum Salt Products Ltd v. Republic of Ghana Tribunal stated: “(…) the parties' agreement to treat Claimant as a foreign national ‘because of foreign control’ does not ipso jure confer jurisdiction. The reference in Article 25(2)(b) to ‘foreign control’ necessarily sets an objective Convention limit beyond which ICSID jurisdiction cannot exist and parties therefore lack power to invoke same no matter how devoutly they may have desired to do so.” 157. What is decisive is therefore whether the circumstances are such that TSA, although it is an Argentinian juridical person, can base jurisdiction on the second clause of Article 25(2) (b) of the ICSID Convention. 158. TSA argues in this respect that the shares of TSA are wholly held by TSI, which is incorporated under the law of the Netherlands and is domiciled there. It thus satisfies the criterion of the Protocol and also Article 25(2)(b) of the Convention since the parties have agreed in the BIT that TSA, because of TSI's incorporation in the Netherlands and its 100% participation in TSA's capital, should be treated as a national of the Netherlands. 159. The Argentine Republic argues that TSA does not fulfil the conditions in Article 25(2) (b) of the ICSID Convention for being treated as a national of the Netherlands, since it appears from the information provided by TSA that at all possible critical dates (the request of arbitration, the consent to jurisdiction, the origin of the dispute), TSI was controlled by an Argentinian national, Mr. Jorge Justo Neuss, who held, directly or indirectly, a majority of its shares, starting with 51%, increasing over time to near totality. Therefore, TSA was not under foreign control and cannot be “treated as a national of another Contracting State”. The case must therefore be dismissed for lack of jurisdiction. 160. The Tribunal has found above that in the application of the second part of Article 25(2)(b) it is necessary to pierce the corporate veil and establish whether or not the domestic company was objectively under foreign control. It also appears from the text of Article 25(2) (b) that the relevant date is the date on which the parties consented to submit the dispute to arbitration. In a letter of 10 December 2004 to the President of the Argentine Republic, TSA consented to ICSID arbitration on the basis of the BIT which means that on that date both parties had consented to arbitration. 161. TSA has submitted a chart showing that at the time of the notice of the dispute, on 16 December 2004, thus close to the date of consent, TSA, via other companies, was wholly owned by TH Operations International NV (THOP) and that the owner of THOP's shares was Mr. Jorge Justo Neuss, a German-Argentinian citizen. TSA contends, however, that Mr. JeanNicolas d'Ancezune, a French citizen, has rights to 75% of THOP's shares through a “fiduciary encumbrance” agreed to by Mr. Neuss, who continues all the same to hold the shares on his behalf. In spite of questions put to TSA (and to Mr. d'Ancezune during his witness statement) about the arrangements made with Mr. d'Ancezune and the nature of the “fiduciary encumbrance”, only scant information – and no corroborating evidence – was provided. TSA's contention in this regard thus remains vague and unproven, and there is no evidence that TSA was, at the time of consent, under the real control of Mr. d'Ancezune who, moreover, is not a Dutch but a French citizen. 162. The only conclusion that can be drawn from the information and evidence available to the Tribunal is thus that the ultimate owner of TSA on and around the date of consent was the Argentinian citizen Mr. Jorge Justo Neuss. It therefore follows that, whatever interpretation is given to the BIT between Argentina and the Netherlands, including the Protocol to the BIT, TSA cannot be treated, for the purposes of Article 25(2)(b) of the ICSID Convention, as a national of the Netherlands because of absence of “foreign control” and that the Arbitral Tribunal therefore lacks jurisdiction to examine TSA's claims. [ff] Comments and Questions 1. Foreign investors frequently resort to the technique of the joint venture as a means of optimizing resources and sharing risk. When the parties to a joint venture are of different nationality and each of their states has a BIT with the state in which the investment is to take place, which of the BITs governs the investment? 2. In circumstances in which an investor has secured political risk insurance (see infra at Chapter ), the insurer or reinsurer may have a different nationality from that of the original investor. In case of an expropriation and subrogation, does the subrogee benefit from arbitral commitments of the host state? Does the continuous nationality rule apply in these circumstances? 3. In circumstances in which a corporation that has invested benefits from ICSID jurisdiction or BIT protections and the corporation subsequently undergoes merger or acquisition, does the change of nationality affect rights with respect to jurisdiction? [d] Consent [i] Georgios Petrochilos, Sylvia Noury and Daniel Kalderimis, ICSID Convention, Chapter II, Article 25 [Jurisdiction of the Centre], in Concise International Arbitration, 66, 74-77 (Loukas A. Mistelis (ed.), Kluwer Law International 2010)

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(Citations selectively omitted) 23.Parties’ consent: form of consent. In practice, consent may be expressed in three different ways. The first method is by a clause inserted in an agreement with a foreign investor (CDC v Seychelles, MINE v Guinea). Such consent can relate to future disputes (Holiday Inns v Morocco) or to a dispute that has already arisen (MINE v Guinea, Compania des Desarollo de Santa Elena SA v Costa Rica). The Report of the Executive Directors states that both forms are covered by the Convention. A second method is a special arbitration provision in the national law of the host State (SPP v Egypt (DJ), Tradex v Albania (DJ); Zhinvali v Georgia; see also Amco v Indonesia (I) (DJ). The legal provision containing the host State's offer to arbitration must be in force at the time of its acceptance by the investor (Tradex v Albania (DJ)). A third method is an arbitration provision in BITs or multilateral treaties or regional treaties (art. 1120 NAFTA; art. 26 ECT). In these cases, the arbitration provision represents only an offer of the host State to arbitration. In order to perfect the consent, the investor must accept the State's offer. The investor may accept the offer by simply instituting arbitration (Generation Ukraine v Ukraine). A written communication to the State as early as possible is advisable mainly because it offers comfort to the investor that the host State will not seek to withdraw its offer. (Nevertheless, questions arise as to whether an offer may be unilaterally withdrawn by giving notice of denunciation of the Convention; see art. 71.) 24.Parties’ consent: scope of consent. Particular problems may arise in defining the scope of the consent to arbitration when that consent is effected through the host State's legislation or through a BIT. Some offers to consent to arbitration in national laws are very narrow. For example, the 1993 Albanian Law on Foreign Investments limits the consent to disputes arising out of or relating to expropriation (Tradex v Albania (DJ)). The Tradex tribunal held, however, that it had jurisdiction to determine whether expropriation had occurred. The same is true of some BITs, (e.g. the United KingdomUSSR BIT), though the general tendency is to provide very broad consent encompassing ‘all disputes concerning investments'. The decisions of tribunals interpreting the scope of these broad types of clauses is divided. Most tribunals have concluded that the phrase ‘all disputes concerning investments' extends not only to a claim for violation of the applicable BIT but also to a claim based on an investment contract (Salini v Morocco (DJ); Vivendi v Argentina (I) (DA); SGS v Philippines). In SGS v Pakistan, the tribunal declined jurisdiction concluding that the wording ‘disputes with respect to investments' contained in art. 9 of the Switzerland-Pakistan BIT does not necessarily imply that ‘both BIT and purely contractual claims are intended to be covered by the Contracting Parties' (SGS v Pakistan, (DJ)). The question will be affected by the existence of an umbrella clause in a BIT, if it is accepted that contractual breaches in such cases will also constitute treaty violations (see Dolzer/Stevens, Bilateral Investment Treaties; MTD v Chile (DA); see also Noble Ventures v Romania (FA); CMS v Argentina (FA)). At any rate, umbrella clauses differ in form, and some of them may not have the effect of making a violation of an investment contract a violation of the BIT (Salini v Jordan (DJ)). 25.Parties’ consent: consent under most-favoured nation clauses. The question has been addressed in a number of cases, in which the claimants either tried to avoid certain procedural limitations in the applicable BITs or to extend the scope of the consent to arbitration in the BIT. Regarding procedural limitations and requirements (e.g. prior limitation of local-court proceedings), tribunals have held that the claimants were entitled to rely on the most-favoured nation (MFN) clause in the applicable BIT in order to invoke the more favourable dispute settlement clause of another BIT (Maffezini v Spain (DJ); Siemens v Argentina (DJ)). Where the claimant sought to rely on an MFN clause to extend the scope of consent, the attitude of tribunals has typically been more conservative. In Salini v Jordan, the tribunal was asked to apply an MFN clause to extend the scope of the applicable arbitration clause to contract claims, but it refused to do so on the basis that the MFN clause in question ‘does not apply insofar as dispute settlement clauses are concerned’. However, in RosInvest v Russian Federation, the tribunal found that the MFN clause of the United Kingdom-USSR BIT extended to the dispute resolution mechanism of the Denmark-Russia BIT (although note that the latter BIT provided for UNCITRAL or SCC, but not ICSID, arbitration). The leading case regarding ICSID arbitration probably remains Plama Consortium Limited v Bulgaria (DJ), in which the tribunal held that clear and unambiguous consent to ICSID arbitration could not be reached if the agreement to arbitrate was incorporated by reference (see Plama Consortium Limited v Bulgaria (DJ), paras. 198 and 199). 26.Parties’ consent: time of consent. In cases where the host State makes an offer to arbitrate in its national legislation or in an international treaty, the time of consent to arbitration is determined by the investor's acceptance of the offer. This acceptance may occur at the latest at the date of the Request for Arbitration. A manifest absence of consent is an absolute bar to the pursuance of the proceedings. Proceedings instituted on the basis of forum prorogatum (basically, an invitation by an investor to the host State to accept the jurisdiction of the Centre in respect of one or more claims set forth in the Request for Arbitration) have been admitted according to the principle in Klöchner v Cameroon in an obiter dictum. Nonetheless, the screening mechanism of the Centre makes this practically difficult. In the case where not all of the jurisdictional requirements were met on the date that consent is perfected (e.g. the respondent State is not yet a Contracting State) the date of consent will be the date on which all the

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conditions have been met (Schreuer, Commentary, p. 226; Holiday Inns v Morocco; Aucoven v Venezuela). 27.Parties’ consent: irrevocability of consent. Once perfected, consent may no longer be withdrawn unilaterally. The principle of irrevocability of consent is affirmed in the Preamble to the Convention and the Report of the Executive Directors. The parties may jointly agree to terminate their consent to jurisdiction at any time. 28.Parties’ consent: prohibition of indirect withdrawal of consent. Notification of the exclusion of a class of disputes under art. 25(4) may not be relied upon to withdraw or limit prior consent (Alcoa v Jamaica; Kaiser Bauxite v Jamaica; Reynolds v Jamaica). Denunciation of the Convention will not affect consent that has already been given. Similarly, once consent has been given by a designated constituent subdivision or agency, such consent cannot be withdrawn or vitiated by a revocation of the designation of the subdivision or agency (but difficulties will inevitably arise if the designated entity ceases to exist). If consent to jurisdiction is limited to investments approved by the host State, once approval and consent have been given, the consent becomes effective and irrevocable. A subsequent revocation of the authorisation cannot nullify the consent to arbitration (SPP v Egypt (DJ)). Furthermore, the invocation of the invalidity of the investment agreement will not of itself nullify consent to arbitration contained therein. The arbitral tribunal or the commission will have to decide on the alleged invalidity of the arbitration agreement (see art. 45 (1), Arbitration (Additional Facility) Rules). This approach follows the doctrine of the severability of the arbitration agreement, which is based on the assumption (to put it no higher) that when parties agree to submit their disputes to an arbitral tribunal, they agree to so submit all their disputes including those relating to the validity of the agreement. Principles of estoppel, by now well recognised in practice and theory, may also be used to counter an assertion by the respondent State that its consent was vitiated, in form or substance, ab initio (see, e.g., Benteler v Belgian State). [ii] Standard Chartered Bank v. United Republic of Tanzania (ICSID Case No. ARB/10/12), Award of 2 November 2012 (19) [William W. Park (pres.), Barton Legum, Michael C. Pryles] [Standard Chartered Bank (“SCB”) submitted an ICSID claim against Tanzania pursuant to the UK-Tanzania bilateral investment treaty. The claim was based on an alleged investment that SCB made in Tanzania by way of a loan to Independent Power Tanzania Limited (“IPTL”) to finance a power plant in Tanzania. The loan had been acquired by SCB's Hong Kong subsidiary, Standard Chartered Bank (Hong Kong) Limited (“SCB HK”), through a sale and purchase agreement. At the time of the submission of the claim to ICSID, SCB had a minority ownership interest in SCB HK. A wholly-owned Hong Kong subsidiary of SCB, SC Sherwood (HK), owned the remaining shares in SCB HK and had pledged to hold its SCB HK shares on trust for SCB. An issue that the tribunal considered was whether Tanzania had consented to ICSID arbitration.] (Citations selectively omitted) 204. Article I (a) of the BIT provides that: (a)

“investment” means every kind of asset admitted in accordance with the legislation and regulations in force in the territory of the Contracting Party in which the investment is made and, in particular, though not exclusively, includes: (i)

moveable and immovable property and any other property rights such as mortgages, liens or pledges; (ii) shares in and stock and debentures of a company and any other form of participation in a company; (iii) claims to money or any performance under contract having a financial value. 205. Article 8(1) of the BIT reads: Each Contracting Party hereby consents to submit to the International Centre for the Settlement of Investment Disputes (hereinafter referred to as the “Centre”) for settlement by conciliation or arbitration under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States opened for signature at Washington on 18 March 1965 any legal dispute arising between that Contracting Party and a national or company of the other Contracting Party concerning an investment of the latter in the territory of the former. *** 230. Having considered the ordinary meaning of the BIT's provision for ICSID arbitration when a dispute arises between a Contracting State to the BIT and a national of the other Contracting State concerning an investment “of “the latter set out in Article 8(1) of the UKTanzania BIT, the context of that provision and the object and purpose of the BIT, the Tribunal interprets the BIT to require an active relationship between the investor and the investment. To benefit from Article 8(1)’s arbitration provision, a claimant must demonstrate that the investment was made at the claimant's direction, that the claimant funded the investment or that the claimant controlled the investment in an active and

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direct manner. Passive ownership of shares in a company not controlled by the claimant where that company in turn owns the investment is not sufficient. 231. The Tribunal is not persuaded that an “investment of “a company or an individual implies only the abstract possession of shares in a company that holds title to some piece of property. 232. Rather, for an investment to be “of “an investor in the present context, some activity of investing is needed, which implicates the claimant's control over the investment or an action of transferring something of value (money, know-how, contacts, or expertise) from one treaty-country to the other. *** 257. As discussed above, the Tribunal has concluded that protection of the UK-Tanzania BIT requires an investment made by, not simply held by, an investor. To be considered to have made an investment, SCB must have contributed actively to the investment. 258. The facts of the case indicate no action by Claimant contributing to the Loans or to the 100 megawatt power facility in Tegeta that remains at the origin of this arbitration. 259. Claimant's connection to the Loans derives only from passive ownership relationships. Claimant owns SC Sherwood; Claimant and SC Sherwood co-own SCB Hong Kong. SCB Hong Kong purchased assets from a Malaysian company Danaharta, which in turn purchased assets from the Malaysian banks that made the original loan to the Tanzanian entity IPTL. 260. For a putative investor to have valid rights pursuant to the UK-Tanzania BIT, that investor should have “made” the investment in an active sense, even if operating through the agency of a company under its control. The activities qualified as relevant investment under the BIT would include the activity of purchasing debt, which was done by SCB Hong Kong, not Claimant. 261. Here, however, the record reflects no action by Claimant itself concerning the investment and Claimant has explicitly disavowed any reliance on control of SCB HK or its assets. Absent any such control, it is difficult to perceive in this record any evidence that could serve to show that the investment process was actually made at the direction of Claimant as investor. 262. Of course, failure to demonstrate control does not necessarily mean that control never existed. However, the Tribunal must decide this question of fact based on the record. The Tribunal cannot accept that the possibility that control might have existed will relieve Claimant from making that showing. Were such an approach acceptable, litigants would win cases by simply asserting that some element of their case might well have been true. 263. Respondent requested proof of Claimant's control over SCB Hong Kong from the initial stage of the proceedings. The issue of control does not relate to alleged fraud or allegedly invalid restructuring, issues as to which Respondent arguably bears the burden of proving its assertions. 264. Rather, control on these facts forms part of an element necessary to establish jurisdiction, by showing that the Loans were an investment “of “Claimant and made by Claimant. Failure to demonstrate such control inevitably leads the Tribunal to conclude that Claimant has been unable to demonstrate its active participation in the investing process with respect to the Loans. 265. Having failed to demonstrate its control over the transactions relating to the Loans, Claimant has not established an investment in the territory of Tanzania that would justify a finding of jurisdiction by this Tribunal. 266. For clarity, the Tribunal stresses that it takes no position on whether jurisdiction would have existed had Claimant actually engaged in the process of making an investment by funneling funds through an intermediary such as a special purpose vehicle. Claimant's case, however, can support no such contention, given that SCB Hong Kong, not Claimant, actually purchased the Loans on its own initiative. [iii] Daimler Financial Services AG v. Argentine Republic (ICSID Case No. ARB/05/01), Award of 22 August 2012 (20) [Pierre-Marie Dupuy (pres.), Charles N. Brower, Domingo Bello Janeiro] and Dissenting Opinion of 15 August 2012 (21) [Charles N. Brower] (Citations selectively omitted) The Majority: 268. A brief look at the ways in which various investor-State tribunals and States have since resolved the question proves that neither the arbitral community nor more importantly (as public international law is not made primarily by arbitrators) common state practice has yet reached a consensus whereby an MFN clause's reference to “treatment in the territory of the host State” may nowadays be understood as covering the international settlement of disputes. To-date, at least nine known investor-State arbitral panels have found that a particular BIT's MFN clause could be used to modify its

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international dispute resolution provisions while another ten have reached the opposite result. Eminent arbitrators have come down on opposite sides of the debate, sometimes with respect to the very same treaty – including the Treaty presently under consideration. This relatively even split shows that there is as yet no established opinio juris. 269. The Dissenting Opinion attempts to discount the bulk of the contrary authority by asserting that those cases dealt with factually distinct situations. With respect, this is a distinction without a difference. It is true that nine out of eleven arbitral panels have allowed claimants to circumvent the 18-month domestic courts requirement of various Argentine BITs in reliance upon MFN clauses. It is also true, however, that several of the ten arbitral tribunals denying the applicability of MFN clauses to BITs' international dispute resolution provisions have severely criticized both the reasoning and the outcome of the cases embraced by the Dissenting Opinion. This is not surprising, given that none of the cases finding in favor of MFN-generated extensions of jurisdiction has pointed to any principled textual basis for distinguishing between those international dispute settlement provisions which may be altered by operation of an MFN clause and those which may not. Nor does the Dissenting Opinion identify any such basis. *** 281. The Tribunal's above analysis has led to the following conclusions: (1)

(2) (3)

(4)

The Claimant does not yet have standing to assert its claims under the GermanArgentine BIT, because it has not yet satisfied the Treaty's Article 10 conditions precedent to invoke international arbitration. As such, the Tribunal lacks jurisdiction at present to entertain the Claimant's MFN or any other claim. The most-favored-nation clauses contained in Articles 3(1), 3(2), and 4(4) of the BIT do not alter this conclusion, as they do not authorize the Claimant to circumvent the conditions precedent to arbitration laid down in Article 10 of the BIT. The Treaty's MFN guarantees do not presently apply in any event, as the Claimant has not shown that the dispute resolution process prescribed by Article 10 of the German-Argentine BIT is objectively less favorable to the Claimant than that of any comparator treaty. The Claimant remains at liberty, however, upon satisfaction of the Treaty's conditions precedent to arbitration, to assert any retrospective MFN claims it may have in any future arbitration proceeding, including any claims relating to its treatment by Argentina pursuant to the Treaty's 18-month domestic courts proviso.

Judge Charles Brower: 23. … [T]he Award's attempt to describe an absence of “common state practice” with respect to the scope of MFN “treatment” is irrelevant for purposes of answering the question before us, namely how the BIT's MFN provision affects the Treaty's 18-month domestic courts requirement. According to the Award, “[a] brief look at the ways in which various investor-state tribunals and states have since resolved the question proves that neither the arbitral community nor more importantly … common state practice has yet reached a consensus …” The Award proceeds to state that “at least nine” tribunals “have found that a particular BIT's MFN clause” includes dispute settlement, “while another ten have reached the opposite result … [t]his relatively even split shows that there is as yet no established opinio juris.” 24. This conclusion lumps together cases concerning such diverse applications of the MFN clause that the Award's attempt at presenting a “divided field” is meaningless. The Award's description of this point in its paragraph 269 as “a distinction without a difference” is unpersuasive. The fact that some awards are critical of others does not do away with the palpable differences in their underlying facts and legal arguments. Here, to the contrary, we are confronted with the specific issue of whether the MFN clause is broad enough to permit Claimant to eschew resorting to the Argentine courts for 18 months. In this respect, the weight of authority overwhelmingly favors one answer: of the eleven known investor-State tribunals that have considered this particular question, all of them interpreting Argentine BITs, nine have ruled in the affirmative. 25. The only “outliers” have been Wintershall v. Argentina and ICS v. Argentina,68 whose reasoning thus is not only contrary to the opinio juris, but also flawed in important respects. For example, the Wintershall Tribunal held that the claimant in that case sought to rely on the MFN clause to gain access to a “different system of arbitration” because, while the Basic Treaty provided for ICSID arbitration, the Comparator Treaty provided for both ICSID and UNCITRAL arbitration. The Tribunal's reasoning, however, failed to take into account that the claimant in Wintershall never attempted to gain access to UNCITRAL arbitration – as the Wintershall Award explicitly acknowledged: “Claimants assert that the BIT gives them the option to submit the investment dispute with Argentina to ICSID arbitration without prior referral to the domestic courts of Argentina …” Besides, the Basic Treaty also contained a choice between ICSID and UNCITRAL, albeit one that was premised on the existence of agreement between the parties to the arbitration and on the State Parties being parties to the ICSID Convention. That difference between the Basic and Comparator Treaties hardly justifies the Wintershall Tribunal's conclusion that claimant sought to avail itself of a “different system of arbitration.” Such significant errors cannot help but call into question any analysis based on them.

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26. Thus, the eleven relevant cases, being nine-to-two, are far from being “dramatically split.” Moreover, while it is true that “public international law is not made primarily by arbitrators,” such “judicial decisions” are commonly accepted pursuant to Article 38(1)(d) of the ICJ Statute as “subsidiary means for the determination of rules of law.” [iv] Comments and Questions 1.

2. 3.

The concept of “consent” in international law is often more of a construct of judicial invention than a verification of whether one or both parties consented to jurisdiction or submitted certain matters to that jurisdiction. It is careless to generalize about the very large number of jurisdictional decisions in investment arbitration cases, each of which turned on idiosyncratic facts. But many scholars have observed a tendency for tribunals to be more expansive in interpretation of jurisdiction than were tribunals in the past. While this may be systemically beneficial in that it encourages direct foreign investment, it raises the second level question of just what consent has been given to. What are the consequences of uncertainty about the methodology of interpretation of issues of consent? On the MFN debate, see further, inter alia, Zachary Douglas, The MFNClause in Investment Treaty Arbitration: Treaty Interpretation Off the Rails, J Int'l Disp. Settlement Dispute Settlement 97 (2011); Scott D. Vesel, Clearing a Path through a Tangled Jurisprudence: Most-Favored-Nation Clauses and Dispute Settlement Provisions in Bilateral Investment Treaties, 32 Yale J. Int'l L. 125 (2007); Brigitte Stern, ICSID Arbitration and the State’s Increasingly Remote Consent: A Propos the Maffezini Case, in Law in the Service of Human Dignity: Essays in Honour of Florentino Feliciano 246 (Steve Charnovitz et al. eds, 2005).

[4] Annulment Proceedings [a] W. Michael Reisman, Systems of Control in International Adjudication and Arbitration: Breakdown and Repair, 48, 50 (Duke University Press 1992) [H]ow then police the many normative requirements and standards of the proposed system? To have used national courts, as the control system of noninstitutional private international arbitration does, would have defeated one of the cardinal purposes of ICSID, which was to avoid national courts. The drafters of ICSID took an entirely different tack, drawing on an idea that had gestated since 1928. (Citations selectively omitted) *** In designing their control system, the drafters of the ICSID Convention drew upon the experience of both the League and the United Nations International Law Commission. But they modified it in one critical way. Rather than incorporating the International Court of justice, as had the abortive proposals of Rundstein and then Scelle, the new convention created its own internal, international review instance. ICSID Convention Article 52(1) broke no new ground in setting out the grounds for annulment of an ICSID award. It stated: Either party may request annulment of the award by an application in writing addressed to the Secretary General on one or more of the following grounds: (a) (b) (c) (d) (e)

that the Tribunal was not properly constituted; that the Tribunal has manifestly exceeded its powers; that there was corruption on the part of a member of the Tribunal; that there has been a serious departure from a fundamental rule of procedure; or that the award has failed to state the reasons on which it is based.

Article 52, thus authorizes either party to request by application to the secretarygeneral of the Arbitration Centre annulment of an award rendered by an ICSID tribunal for a limited number of specified reasons, comprised of the familiar terms of art of arbitral nullity (as quoted above). The application for annulment had to be made within 120 days of the date on which the award was rendered. The innovation in ICSID was the control entity to which claims for nullification were to be submitted. Once the request has been lodged, the chairman of the ICSID Administrative Council (ex officio the president of the World Bank) appoints an ad hoc committee of three persons from a panel of names proposed by states' members and kept by the secretarygeneral, none of whom may have the nationality of the stateparty or the foreign investor. Name notwithstanding, the committee is, in effect, another tribunal, following the same procedures prescribed in the convention for the original tribunal, though its mandate is more circumscribed than the tribunal whose award it is reviewing. In the course of its proceedings, the committee may stay enforcement of the award. If it finds that there has been a violation of one or more of the standards, the ad hoc committee is authorized to annul the award in whole or in part. If the award is nullified by the

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committee, either party may submit the dispute to a new tribunal, constituted in accordance with the convention. [b] Lucy Reed, Jan Paulsson and Nigel Blackaby, Freshfields Guide to ICSID Arbitration, 162174 (2nd ed., Kluwer Law International 2011) (Citations selectively omitted) Annulment of the award The most significant remedy available under the ICSID Convention is the annulment of an award, in whole or in part, under Article 52. Unlike requests for the interpretation or revision of awards under Articles 50 and 51, which may be considered by the original tribunal that issued the award, applications for annulment must be submitted to a new three-member ad hoc committee constituted for that sole purpose. ICSID annulment proceedings differ from typical judicial appeals in two key respects. First, a successful annulment application leads to the invalidation of the award (or parts of the award), and never to its revision or amendment. Unlike an appeals court, an ad hoc annulment committee may not issue a decision substituting its views on any aspect of the case for those of the original tribunal. The effect of annulment, instead, is to restore the blank page, leaving the parties only with the opportunity to arbitrate the same issues again before a new ICSID tribunal. Second, in a related vein, an ad hoc committee lacks jurisdiction even to review the merits of the original award in any way. The annulment system is designed to safeguard the integrity, not the outcome, of ICSID arbitration proceedings. Ad hoc committees have jurisdiction to review and annul awards only on the limited grounds described in Article 52(1): “Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) (b) (c) (d) (e)

that the Tribunal was not properly constituted; that the Tribunal has manifestly exceeded its powers; that there was corruption on the part of a member of the Tribunal; that there has been a serious departure from a fundamental rule of procedure; or that the award has failed to state the reasons on which it is based.”

As of September 2010, 40 annulment proceedings had been registered by ICSID, 11 of which remained pending as this Guide went to press. The 29 concluded proceedings have resulted in 22 published decisions. These decisions provide a significant gloss on Article 52. Each of the 22 published decisions discusses a combination of the three most frequently invoked Article 52(1) grounds for annulment: 52(1)(b), manifest excess of powers; 52(1)(d), serious departure from a fundamental rule of procedure; and 52(1)(e), failure to state reasons. Two annulment decisions also discuss the allegedly improper constitution of the tribunal as a ground for annulment under Article 52(1)(a). ICSID ad hoc annulment committees have not, to date, considered the fifth possible ground for annulment, namely corruption of the tribunal under Article 52(1)(c). Looking first at “manifest excess of powers” as a ground for annulment under Article 52(1) (b), ad hoc committees have found that tribunals manifestly exceeded their powers by clearly exceeding or failing to exercise the competence granted by the ICSID Convention. A tribunal's failure to apply the applicable law has also been held to constitute a manifest excess of authority but only, it appears, when the tribunal failed to apply that law altogether, rather than to misapply it. As stated by the ad hoc committee in MINE, “[d]isregard of the applicable rules of law must be distinguished from erroneous application of those rules which, even if manifestly unwarranted, furnishes no ground for annulment”. To prevail under Article 52(1)(d) on a claim that there was “a serious departure from a fundamental rule of procedure”, a party must satisfy both prongs of the test, namely that: (a) the rule from which the tribunal departed was fundamental; and (b) the departure was serious. As explained by the ad hoc committee in Vivendi I, “[u]nder Article 52(1)(d), the emphasis is clearly on the term ‘rule of procedure’, that is, on the manner in which the Tribunal proceeded, not on the content of its decision”. A rule of procedure is fundamental if it goes to the heart of the integrity of the arbitration proceedings, as do, for example, the principles of fairness, impartiality, equal treatment and respect for the right to be heard. A departure is serious if it is substantial and material, that is, if it “deprive[s] a party of the benefit or protection which the rule was intended to provide”or causes a tribunal “to reach a result substantially different from what it would have awarded had such a rule been observed”. An award “has failed to state the reasons on which it is based” for purposes of Article 52(1)(e) if the tribunal is silent as to its reasoning on particular findings or offers radically contradictory reasoning for particular decisions. Keeping in mind that an ad hoc committee lacks authority to review the merits of the original award, it is not surprising that faulty reasoning by a tribunal does not constitute a failure to state reasons justifying annulment. Nor is insufficient or inadequate reasoning

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likely to satisfy this requirement. Ad hoc committees have been disinclined to annul awards if they are able to reconstruct missing reasoning; as stated in the MINE annulment decision, the reasons “must enable the reader to follow the reasoning of the Tribunal on points of fact and law” and enable “one to follow how the tribunal proceeded from Point A. to Point B. and eventually to its conclusion”. Improper constitution of a tribunal as a ground of annulment under Article 52(1)(a) is measured against the provisions of the ICSID Convention and the ICSID Arbitration Rules concerning constitution. For example, as stated by the Azurix ad hoc committee, annulment may be justified “under Article 52(1)(a) if a proposal for disqualification was made under Article 57, but was never decided under Article 58 before the award was given, or if a decision on a proposal for disqualification was purportedly taken by a person or body other than the person or body prescribed by Article 58". Annulment application procedure A party must submit its application for annulment to the Secretary-General within 120 days after the award is rendered; in cases of alleged corruption, the request is due within 120 days after the corruption is discovered and, in any event, within three years after the award is rendered (Article 52(2); Arbitration Rule 50(3) (b)). The application must identify the Article 52 grounds on which it is based. Upon receiving a request for annulment, the Chairman of the Administrative Council appoints three persons from the Panel of Arbitrators to constitute an ad hoc committee to decide the challenge. The criteria for appointment, in addition to the obvious restriction that the ad hoc committee members may not have sat on the original panel, are that: (a) each must be of a different nationality than all of the original arbitrators; and (b) none may be a national of either State affected by the dispute or have been designated to the Panel of Arbitrators by those States (Article 52(3)). Again, under Convention Article 52(6), if the ad hoc committee annuls the award, there is no remand to the original tribunal. All a party can do is resubmit the dispute to a new tribunal. Annulment decisions *** Commentators have described three generations (to date) of ad hoc annulment committee decisions. The first generation, in the 1980s, attracted substantial attention. The ad hoc committee in the first two cases – Klöckner v. Cameroon and Amco Asia v. Indonesia – annulled both awards under review. Each dispute was submitted to a new tribunal, leading to new awards and ultimately in each case to a second round of annulment proceedings from which the second awards emerged intact. Klöckner v. Cameroon arose out of disputes over interlocking contracts for the supply and management of a fertilizer factory in Cameroon. Both the private investor (Klöckner) and the government of Cameroon raised claims in the arbitration, all of which the original tribunal rejected in 1983. Klöckner applied for annulment, arguing that the tribunal had: (a) manifestly exceeded its power by failing to apply the applicable law and asserting jurisdiction over disputes arising out of a contract with a dispute resolution clause calling for ICC arbitration; (b) seriously departed from fundamental rules of procedure by failing to act impartially, failing to hold a true deliberation and committing other irregularities; and (c) failed to deal with all the questions submitted to it and to state adequately the reasons for deciding the questions it did address. In 1985, the ad hoc committee annulled the award in its entirety, on the basis that the tribunal had manifestly exceeded its powers by failing to apply the applicable law; the ad hoc committee found that the tribunal had postulated, but not actually demonstrated, the application of certain principles of French law. The ad hoc committee also found that the tribunal had failed to explain certain of its rulings: “Despite many readings of the text, it is impossible to discern how and why the Tribunal could reach its decision on this point”. In 1984, the tribunal in Amco Asia v Indonesia awarded Amco US$3.2 million in damages for what it found to be the government of Indonesia's unlawful revocation of the investment authorization it had granted Amco for developing and managing a hotel in Indonesia. Indonesia requested annulment of the award on the same three grounds invoked by Klöckner: (a) manifest excess of powers; (b) serious departure from fundamental procedural rules; and (c) failure to state reasons. The ad hoc committee ruled that the tribunal had correctly identified the proper law but failed actually to apply it. Having found that the tribunal had thus mistakenly held Indonesia's license revocation to be illegal, the ad hoc committee annulled the award of damages that hinged on that finding. The first ad hoc committees in Klöckner and Amco Asia were severely criticized. Commentators argued that the committees had overstepped their mandates by examining the merits of the awards under consideration, thus effectively turning into an appeals process what the ICSID Convention's drafters had intended to be only a safety net against egregiously irregular awards. Because the first two annulments seemed to presage a cycle of appellate-type proceedings, it was widely feared that the annulment process in practice would undercut the much-touted finality of ICSID awards and

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undermine investor confidence in ICSID arbitration. However, the ICSID system soon appeared to have reestablished balance in the second generation of ICSID annulment decisions, as a result of the more measured holdings of ad hoc committees in MINE, Klöckner II and Amco Asia II. In 1989, the MINE v. Guinea ad hoc committee let stand the original tribunal's rulings on Guinea's liability, annulling only the tribunal's damages ruling for failure to state reasons. In Klöckner II in 1990 and Amco Asia II in 1992, the second ad hoc committees constituted in each case rejected the parties' respective annulment applications. As stated by the ad hoc committee in CDC, “[s]ince those two Decisions, Klöckner I and Amco Asia I, ad hoc Committees consistently have taken a much more restrictive view of the role of the ad hoc Committee and the annulment process”. After a quiet decade during which no annulment applications were filed, the winter of 2000-2001 witnessed the filing of three annulment applications within weeks of one another. The annulment proceedings in Philippe Gruslin v. Malaysia were quickly discontinued because the applicant (the claimant) failed to pay the requisite ICSID fees. Those in Wena Hotels Ltd. v. Arab Republic of Egypt and Vivendi I were completed, and marked the emergence of the third generation of ICSID annulment decisions. The distinguishing factor of the third generation is that Wena and Vivendi I were brought under BITs, rather than under contractual ICSID arbitration clauses as in the Klöckner–Amco– MINE trilogy. This generation of annulments has raised a host of new issues pertaining to arbitrations under investment treaties. In Wena, the government of Egypt sought the annulment of an award holding it responsible for the expropriation of a UK hotel management company. Egypt argued that the original tribunal had: (a) manifestly exceeded its authority by failing to apply the applicable law; (b) seriously departed from fundamental rules of procedure by, among other things, depriving Egypt of its right to be heard and inappropriately shifting the burden of proof; and (c) failed both to state reasons for certain of its findings and to address all questions put to it. The ad hoc committee rejected all grounds for annulment, including Egypt's claim that the tribunal had misconstrued Convention Article 42, the choice of law article in the Convention, when it applied the relevant UK-Egypt BIT and other international law without regard for Egyptian law. In particular, the ad hoc committee held that the tribunal had not manifestly exceeded its authority when it applied the substantive provisions of the BIT and supplemented the treaty with other international law, even though the parties had not expressly selected international law as the governing law. In Vivendi I, the dispute arose out of a concession contract for the operation of the water and sewage system of the Tucumán province in Argentina. After the original tribunal dismissed the French investor's claim in its entirety, the investor sought partial annulment of the award on grounds that the tribunal had: (a) manifestly exceeded its powers in failing to exercise jurisdiction over treaty claims it mistakenly construed as contractual claims; (b) seriously departed from a fundamental rule of procedure in not giving the investor the opportunity to present its case on a jurisdictional matter; and (c) failed to state the reasons upon which the award was based. The Vivendi I ad hoc committee partially annulled the award, finding, among other things, that the tribunal had exceeded its powers by finding that it had jurisdiction of the investor's treaty breach claims against the province of Tucumán but then refusing to consider, as its mandate required, the merits of those treaty claims because they overlapped with contract claims requiring (in the tribunal's view) consideration by local administrative tribunals. Vivendi then proceeded to a second ICSID arbitration, Vivendi II, followed by a second annulment proceeding. As with the Klöckner II and Amco Asia II annulment decisions, the ad hoc committee in Vivendi II rejected the annulment application. Like the annulment decision in CMS v. Argentina (described below), the Vivendi II decision includes discussion of certain issues in obiter dicta, including alleged conflicts of interest of a tribunal member and the role of the ICSID Secretariat in the arbitral process, that have led to critical commentary. In the eight years since the ad hoc committee decisions in Wena and Vivendi I (until September 2010), annulment decisions had been rendered in 16 cases: one in 2005, two in 2006, five in 2007, three in 2009, and five in 2010. In ten of the 16 cases, ad hoc committees rejected the applications for annulment. In the remaining six cases – Mitchell v. DRC, CMS v. Argentina, MHS v. Malaysia, Helnan v. Egypt, Sempra v. Argentina and Enron v. Argentina – the ad hoc committees accepted the annulment applications in whole or in part. Each of these six decisions is described below. In Mitchell v. DRC, the DRC requested annulment of a US$750,000 award holding it responsible for the expropriation of the claimant's legal consulting firm operating in the DRC. The DRC sought annulment on the two grounds that the tribunal had: (a) manifestly exceeded its powers with regard to jurisdiction in respect of the definition of investment and with regard to the law applicable to the dispute; and (b) failed to state reasons for its subject matter jurisdiction with regard to the characterization of the disputed measures as expropriation, and the amount of damages. The ad hoc committee annulled the award on the grounds of manifest excess of power and failure to state reasons in relation to acceptance of jurisdiction on the basis of an existing investment within the meaning of the ICSID Convention. Specifically, the ad hoc committee held that the

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tribunal was “incomplete and obscure as regards what it considers an investment” and went on to state that, for purposes of the ICSID Convention, an investment must contribute to the economic development of a host state. In CMS v. Argentina, Argentina sought annulment of what was the first award in the many treaty cases arising out of the Argentine financial crisis in the early 2000s. The CMS tribunal awarded CMS US$133 million, holding that Argentina breached the US-Argentina BIT by failing to accord CMS fair and equitable treatment and by failing under the treaty's umbrella clause to observe obligations it entered into with respect to CMs's investment. In its annulment application, Argentina alleged that the tribunal had: (a) manifestly exceeded its powers by exercising jurisdiction over claims by company shareholders for income lost by a company, by transforming the fair and equitable treatment and umbrella clauses of the BIT into strict liability provisions, and by rejecting Argentina's defense of necessity under customary international law and the BIT; and (b) failed to state the reasons for its decision on jurisdiction, its findings on Argentina's necessity defense and its calculation of damages. Although noting, in obiter dicta, that the award “contained manifest errors of law” and “suffered from lacunae and elisions”, the Committee recognized its “narrow and limited mandate conferred by Article 52 of the ICSID Convention” and annulled only the holding relating to the umbrella clause. This left the full monetary award intact. In MHS v. Malaysia, a sole arbitrator declined jurisdiction on the ground that MHS, a marine salvage company based in the United Kingdom, did not make an investment in Malaysia within the ambit of the ICSID Convention. MHS sought annulment on the ground that the tribunal had manifestly exceeded its powers by failing to exercise the jurisdiction with which it was endowed. The ad hoc committee, in a two-one decision, annulled the award, finding that the tribunal manifestly exceeded its powers because it: (a) failed to take account of and apply the definition of investment in the MalaysiaUnited Kingdom BIT, which was broad and encompassing; (b) improperly elevated the ICSID Convention Article 25(1) criteria to jurisdictional conditions, and interpreted the criterion of contribution to the economic development of the host State so as to exclude small contributions and contributions of a cultural and historical nature; and (c) reached conclusions not consonant with the Convention's travaux préparatoires in key respects. In Helnan v. Egypt, the tribunal dismissed Helnan's claims that Egypt had breached the Denmark-Egypt BIT by taking actions that allegedly led to the termination of Helnan's management contract for a Cairo hotel. Helnan sought annulment of the award on the following grounds: (a) the award failed to state the reasons on which it is based; (b) the tribunal manifestly exceeded its powers; and (c) there was a serious departure from a fundamental rule of procedure. In its decision, the ad hoc committee annulled a portion of the award, finding that the tribunal manifestly exceeded its powers by rejecting Helnan's fair and equitable treatment claim because Helnan had not sought recourse first in Egyptian courts. The ad hoc committee determined, however, that the annulled portion of the award was not essential to the tribunal's dismissal of Helnan's claims on the merits and upheld the operative part of the award. Pausing here, one can say that this third generation of ICSID annulment decisions has generally stayed true to the limited function of annulment, recognizing that an ad hoc committee “cannot substitute its determination on the merits for that of the tribunal”, and that “annulment is not a remedy against an incorrect decision alone”. As stated by the ad hoc committees in Azurix and MTD, “[a] more interventionist approach by committees on the merits of disputes would risk a renewed cycle of tribunal and annulment proceedings of the kind observed in Klöckner and Amco”. However, in the wake of two annulment decisions rendered in the summer of 2010, commentators are debating whether the Klöckner and Amco cycle is perhaps beginning anew. In Sempra v. Argentina and Enron v. Argentina, both arising out of the Argentine financial crisis, ad hoc committees annulled awards rendered in favor of the claimants. The tribunals in both cases held that Argentina's actions following its financial crisis were unfair and inequitable and that Argentina failed under the umbrella clause to observe its obligations with respect to each claimant's investment, and denied Argentina's defenses based on necessity under customary international law and under Article XI of the USArgentina BIT. In Sempra, the award was annulled on the basis that the tribunal had manifestly exceeded its powers when it applied customary international law to Argentina's necessity defence but did not separately analyze Article XI of the BIT. The ad hoc committee held that the tribunal “made a fundamental error in identifying and applying the applicable law” by “its total failure to apply Article XI of the BIT”. In Enron, the ad hoc committee took issue with the tribunal's finding that the various requirements of the customary international law defense of necessity, as reflected in Article 25 of the ILC Articles on State Responsibility, were not satisfied. The committee held that, in its consideration of the Article 25 requirements, the tribunal had manifestly exceeded its powers and failed to state the reasons for its decision. It remains to be seen whether or not this more interventionist approach taken by the Sempra and Enron committees marks the beginning of a fourth generation of annulment decisions similar to the first generation, with a similar impact on users' assessment of the ICSID regime.

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*** [c] Comments and Questions 1.

See, in general, W. Michael Reisman, Nullity and Revision: The Review and Enforcement of International Judgments and Awards (1971).

[B] International Centre for Settlement of Investment Disputes (ICSID) Additional Facility ICSID's Additional Facility allows ICSID to administer arbitrations between States and nationals of other States that do not fall within the scope of the ICSID Convention. ICSID reported that as of December 31, 2012, it had registered a total of 41 Additional Facility arbitration cases. [1] Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment, 29 (Kluwer Law International 2009) (Citations selectively omitted) In 1978, ICSID created an Additional Facility that allows the ICSID Secretariat to administer arbitration proceedings where one of the parties is not a Contracting State to the ICSID Convention or a national of a Contracting State. The Additional Facility allows the ICSID Secretariat to administer arbitrations not otherwise falling within the purview of the ICSID Convention. An important difference between arbitrations under the ICSID Rules and the Additional Facility Rules is that national laws, rather than the ICSID Convention, apply to the enforcement of awards made under the Additional Facility Rules. Article 19 of the Additional Facility Rules provides that arbitration proceedings are to be held only in states that are parties to the New York Convention. Many IIAs now provide for arbitrations under the both the ICSID Arbitration Rules and the Additional Facility Rules. [2] Lucy Reed, Jan Paulsson and Nigel Blackaby, Freshfields Guide to ICSID Arbitration, 1719 (2nd ed., Kluwer Law International 2011) (Citations selectively omitted) The Additional Facility In the face of demand, the World Bank created the ICSID Additional Facility in 1978 to extend the availability of ICSID arbitration to certain types of proceedings between States and foreign nationals that fall outside the scope of the ICSID Convention. The Additional Facility is not a separate institution or even a physically separate part of ICSID. The same Secretariat serves both. Arbitrations conducted under the Additional Facility include proceedings where either the State party or the home State of the foreign investor is not a member of ICSID. This possibility is particularly important in the context of cases brought under Chapter 11 of the NAFTA, because the United States is an ICSID Contracting State but Canada and Mexico are not. Although ordinary ICSID arbitration under the ICSID Convention is thus not an option between NAFTA States, Additional Facility arbitration is available, on the one hand, between US investors and Canada or Mexico and, on the other hand, between Canadian or Mexican investors and the United States. (In disputes between Canadian investors and Mexico or between Mexican investors and Canada, only UNCITRAL arbitration is available.) Article 26 of the ECT also provides for Additional Facility arbitration among other dispute resolution methods. Under Article 4(3) of the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes (Additional Facility Rules), the Secretary-General of ICSID may approve agreements to use the Additional Facility to resolve disputes even if they do not arise directly out of an investment, but only if he or she is satisfied that “the underlying transaction has features which distinguish it from an ordinary commercial transaction”. This reflects the policy that ICSID is not to be used for commercial disputes of the type routinely handled by other international or national arbitration institutions. The provisions of the ICSID Convention do not apply to Additional Facility proceedings (although many of the guiding principles are similar). Instead, arbitrations administered under the Additional Facility are subject to: (a) the Additional Facility Rules; (b) the Administrative and Financial Rules (Additional Facility); and (c) the Arbitration (Additional Facility) Rules (Additional Facility Arbitration Rules)… Most important to potential users, these distinctions mean that the ICSID Convention's special self-contained provisions on recognition and enforcement of awards are not applicable to Additional Facility arbitrations, which have a seat of arbitration whose courts will exercise supervisory jurisdiction. Additional Facility awards thus may be equated with ordinary international commercial arbitration awards such as those rendered under the ICC, LCIA, ICDR (American Arbitration Association) and UNCITRAL arbitration rules. This explains why Article 19 of the Additional Facility Arbitration Rules provides that arbitral proceedings under the Additional Facility may be held only in

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countries that are parties to the New York Convention; otherwise the awards would be unduly vulnerable at the enforcement stage. Potential users must also be aware that access to Additional Facility arbitration is subject to the Secretary-General's specific consent. According to Article 4 of the Additional Facility Rules, any agreement providing for arbitration proceedings under the auspices of the Additional Facility whether in respect of existing or future disputes, requires the approval of the Secretary-General. As a practical matter, therefore, it is advisable for the parties to submit the relevant draft agreement to the Secretary-General for approval before the agreement is signed or enters into effect. If the dispute does not “arise directly out of an investment”, it is at this stage that the Secretariat may examine whether the transaction nevertheless has “features that distinguish it from an ordinary commercial transaction” under Article 4(3) of the Additional Facility Rules. The Additional Facility is being used increasingly in disputes between States and nationals of other States that fall outside the scope of the ICSID Convention under the NAFTA, the ECT and various BITs. As of January 2010, 28 arbitration cases had been registered by ICSID under the Additional Facility Rules, 21 of which were registered during the last ten years. (26) Of these 28 Additional Facility cases, 19 involve disputes where the State party was not a member of ICSID when the dispute arose (Canada, the Kyrgyz Republic, the Republic of Poland, the Republic of South Africa, Mexico and the Republic of Ukraine) while nine involve disputes where the home State of the foreign investor was not a member of ICSID (Canada and the Republic of Poland).

[C] Iran U.S. Claims Tribunal (Algiers Accords) The Iran-U.S. Claims Tribunal was created on January 19, 1981 by the Algiers Accords. It was one of the initiatives promulgated to resolve the fallout between the United States and Iran after the 1979 hostage crisis, and was created to provide a forum for claims by nationals of the United States against Iran and disputes between the two countries. No further claims may be filed as the deadline for the submission of claims was January 19, 1982. [1] David D. Caron, Lee M. Caplan and Matti Pellonpää, The UNCITRAL Arbitration Rules: A Commentary, 3-8 (Oxford University Press 2006) (22) (Citations selectively omitted) 2. The Origins and Structure of the Iran-US Claims Tribunal The 1979 Islamic revolution in Iran led to a disruption of extensive economic relations, as well as to a political crisis, between Iran and the United States of America. The developments reached their culmination in the seizure of the US Embassy in Tehran on 4 November 1979 and the deprivation of the liberties of the fifty-two Americans present. This incident led to countermeasures by the United States, notably the Presidential Decree of 14 November 1979, which froze all of Iran's assets held in the United States or in foreign branches of US banks. Iran thereby lost control of some US $10–12 billion worth of assets, a considerable portion of which were subjected to pre-judgment attachments in more than 2,000 law suits brought against Iran before US courts. The interests of these various private parties with claims against Iran became a necessary and important element of the painstaking negotiations seeking a comprehensive settlement of the outstanding issues between the two countries. On 19 January 1981, the conclusion of several agreements led to the release of the Americans held hostage since November 1979 and the release of the frozen Iranian assets. However, to address the many outstanding claims, it was also agreed that US $1 billion of the released assets would be held in a Security Account for possible satisfaction of the claims of Americans. The validity of those claims in turn was to be adjudicated by an international arbitral tribunal: the Iran-US Claims Tribunal. The agreements between Iran and the United States are contained in the so-called Algiers Accords, which owe their names to the central intermediary role played by Algeria in the process leading to the agreements. The Accords consist of seven interrelated documents, two of which, the General Declaration and the Claims Settlement Declaration, are of paramount importance in understanding the Tribunal. The General Declaration defines the basic obligations of the state parties regarding the release of the hostages and the unblocking of the Iranian assets. The parties agreed “to terminate all litigation as between the government of each party and the nationals of the other, and to bring about the settlement and termination of all such claims through binding arbitration.” The General Declaration also provided for the establishment of a Security Account “to be used solely for the purpose of securing the payment of, and paying, claims against Iran in accordance with the Claims Settlement Agreement.” The Claims Settlement Declaration, discussed more fully below, created the machinery and set up the procedural and substantive law framework for the settlement of the claims through the arbitration procedure called for in the General Declaration. In addition to the two central Declarations, five other agreements were entered into with a view to aiding implementation of the General Declaration and the Claims Settlement Declaration, especially with respect to the more technical aspects of the payment

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mechanism and financial transactions. The Claims Settlement Declaration contains eight articles. According to Article III(1), “the Tribunal shall consist of nine members or such larger multiple of three as Iran and the United States may agree are necessary to conduct its business expeditiously.” Given the fact that no agreement on a larger multiple of three was reached, three of the nine members have been appointed by Iran, three by the United States, and three others have been appointed by the six party-appointed arbitrators (or, failing their agreement, by a designated third party called the Appointing Authority). Most of the work of the Tribunal is conducted in three Chambers consisting of an Iranian, an American and a third-country presiding arbitrator. One of the third-country arbitrators also serves as President of the Tribunal. According to Article II(1) of the Claims Settlement Declaration, the Tribunal was established: …for the purpose of deciding claims of nationals of the United States against Iran and claims of nationals of Iran against the United States, and any counterclaim which arises out of the same contract, transaction or occurrence that constitutes the subject matter of that national's claim, if such claims and counterclaims are outstanding on the date of this Agreement, whether or not filed with any court, and arise out of debts, contracts (including transactions which are the subject of letters of credit or bank guarantees), expropriations or other measures affecting property rights … The main bulk of the Tribunal's case load consists of the claims by US nationals against Iran, broadly defined elsewhere in the Declaration. According to Article III(3), such claims “shall be presented to the Tribunal either by claimants themselves or, in the case of claims of less than US $250,000, by the government of such national.” Between 20 October 1981 and 19 January 1982 965 claims of nationals seeking over US $250,000 were filed and 2,795 claims of nationals seeking less than US $250,000 were filed. As of a few years ago, all claims by nationals had been resolved. In addition to claims of nationals, the Tribunal has jurisdiction over “official claims of the United States and Iran against each other arising out of contractual arrangements between them for the purchase and sale of goods and services,” as well as over certain interpretative disputes concerning the Algiers Accords. The latter category comprises the A-Cases; the former compromises the B-Cases. As of 2005, 107 government-to-government cases have been filed at the Tribunal: thirty-two A-Cases and seventy-five B-Cases. Article IV of the Claims Settlement Declaration contains provisions concerning the enforcement of the awards. The most interesting and innovative feature in this respect, however, is based on the provisions of the General Declaration concerning the establishment of the so-called Security Account out of which awards are paid to successful American parties before the Tribunal. The original amount of the account was US $1 billion, but Iran was obliged to replenish it to keep the balance at the minimum of US $500 million “until the president [of the Tribunal] has certified that all arbitral awards against Iran have been satisfied in accordance with the Claims Settlement Agreement, at which point any amount remaining in the Security Account shall be transferred to Iran.” Article V of the Claims Settlement Declaration deals with applicable substantive law. Although discussed in some detail later, it is worth noting here: The Tribunal shall decide all cases on the basis of respect for law, applying such choice of law rules and principles of commercial and international law as the Tribunal determines to be applicable, taking into account relevant usages of trade, contract provisions and changed circumstances. This flexible choice of law provision, together with the broad scope of the subject matter jurisdiction of the Tribunal, has provided this body with an opportunity to give interpretations on a wide variety of issues of public international law and international commercial law. The Tribunal's contribution in this regard is expected to be of lasting value. 3. The Tribunal’s Use of the UNCITRAL Arbitration Rules In seeking to design an international arbitral tribunal quickly, the negotiators of the Accords fortunately had a set of procedural rules prepared by distinguished experts representing various legal systems of the world. Instead of lengthy negotiations on the subject, the drafters of the Claims Settlement Declaration could simply make reference to the UNCITRAL Arbitration Rules. Article III of that Declaration reads: Members of the Tribunal shall be appointed and the Tribunal shall conduct its business in accordance with the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL) except to the extent modified by the Parties or by the Tribunal to ensure that this Agreement can be carried out. The UNCITRAL rules for appointing members of three-member tribunals shall apply mutatis mutandis to the appointment of the Tribunal.

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The “Tribunal Rules,” adopted provisionally on 10 March 1982 and finally on 3 May 1983, as the procedural rules of the Iran-US Claims Tribunal were based on the UNCITRAL Rules, in accordance with the above provision of the Claims Settlement Declaration. The Tribunal's practice in applying its rules represents the most extensive body of practice concerning the UNCITRAL Rules because the Tribunal's docket was so large and most importantly because the practice of the Tribunal is public. The significance of the Tribunal's practice is heightened by the fact that the UNCITRAL Rules themselves are increasingly important. They have been adopted as the procedural rules to be applied in many different connections: for inter-state cases, arbitration between a State and a private party, and international commercial arbitration between private parties. As to proceedings with public law elements, the UNCITRAL Rules play a role in the dispute settlement under the UN Convention on the Law of the Sea. In 1992 the Permanent Court of Arbitration adopted Optional Rules for Arbitrating Disputes Between two States, which are based on the UNCITRAL Rules. The Introduction to those Rules states: Experience since 1981 suggests that the UNCITRAL Arbitration Rules provide fair and effective procedures for peaceful resolution of disputes between States concerning the interpretation, application and performance of treaties and other agreements, although they were originally designed for commercial arbitration. Undoubtedly, it was the experience of the Iran-US Claims Tribunal with respect to all its categories of claims that was in the minds of the drafters of this passage. [2] David D. Caron, The Iran-U.S. Claims Tribunal and Investment Arbitration: Understanding the Claims Settlement Declaration as a Retrospective BIT, in The Iran- U.S. Claims Tribunal at 25: The Cases Everyone Needs to Know for Investor-State and International Arbitration, 378-383 (Christopher R. Drahozal and Christopher S. Gibson (eds), Oxford University Press 2007) (Citations selectively omitted) Having shown how the Claims Settlement Declaration is similar to a BIT in several ways, there is a crucial point of which the young associate lawyer approaching the Tribunal's jurisprudence needs to be aware. The Tribunal, like a BIT panel, arbitrated claims for expropriation. The Tribunal, unlike a BIT panel, also has had jurisdiction over claims arising out of “debts [and] contracts.” If my first point simplifies the Tribunal and shows its relevance to investment arbitration, then my second point makes the Tribunal more complex and stresses the need for a method to find the awards of the Tribunal that are relevant. Fortunately, there is a relatively simple – although not obvious – way to do this. In discussing the significance of the Tribunal's practice, one necessarily must take care in identifying the relevant portions of its jurisprudence. This question need not be as confusing as it has been for many. The circumstance in my view that gives rise to virtually all the confusion is the broad jurisdiction of the Tribunal. Closer examination, however, shows this circumstance to be unnecessarily confused and to pose few difficulties for the task of teasing out the significant practice. The jurisdiction of the Tribunal is much broader than that possible under a BIT. Article 11(1) of the Claims Settlement Declaration established a Tribunal “for the purpose of deciding claims of nationals … aris[ing] out of debts, contracts, … expropriations or other measures affecting property rights.” These nationals may bring their claims under Article VII(3) against “the Government …, any political subdivision …, and any agency, P 361 instrumentality, or entity controlled by the Government … or any political subdivision” of Iran or the United States as the case may be. This range of potential respondents, particularly “entities controlled by the Government,” reaches beyond the notion of the “state” as respondent in BIT arbitration. As the Tribunal wrote in International Technical Products v. Iran, “the phrase ‘Iran’ as used in the [Claims Settlement Declaration] is a broader concept than ‘the Government of Iran”’ is understood to be in customary international law. Moreover, the broad language of the choice of law clause, Article V allowed these claims of nationals to be decided both on the basis of private municipal law and public international law.” This expanded jurisdiction made the Tribunal a unique and exciting claims institution, but it also renders it confusing for those sifting through its practice. The confusion that arose for many viewing the Tribunal sometimes led them to throw their hands up and question the relevance of Tribunal jurisprudence generally. Indeed, it was this broad expansive jurisdiction that led several commentators to inquire as to the basic nature and function of the Tribunal. The crucial methodological insight is to view the broad jurisdiction of the Tribunal, as the Tribunal came to do, as composed of two categories of claims: public international law claims and private municipal law claims. It is not that either the public international law claims or the private municipal law claims before the Tribunal were unique, but rather that the capacity of the Tribunal to hear both types of claims was very unusual. The private municipal law claim typically was a claim of a U.S. national alleging breach

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of contract by an Iranian government-owned corporation or a privately owned Iranian company that had come under the control of the Iranian government after the revolution. In contrast, the public international law claim was a claim of a U.S. national alleging a breach of an international obligation of the government of Iran that, as a consequence, could be brought only against the government of Iran. In other words, the private municipal claim could be brought against the whole range of respondents possible under Article VII(3), while the public international claim could only be brought against the government of Iran. In the private municipal law claim, the Tribunal's analysis as to choice of law under Article V led to application of the law of the contract, general principles of municipal law, trade usages, and occasionally a specific municipal law. In contrast, in the public international law claim, the Tribunal necessarily applied under Article V the applicable public international law. Thus if one's search is for that portion of the Tribunal's docket involving claims similar to those arising in BIT arbitration, that portion is precisely what I have termed the public international law claim category. The simple insight required, therefore, is the recognition that the Tribunal's broad jurisdiction includes within it a rather classic group of claims based upon public international law involving almost exclusively claims of expropriation. Yet, although I term this insight and distinction between types of claims as “simple,” it is important to note that that distinction was not particularly obvious early on to the Tribunal or to Tribunal observers. Rather, it is a distinction that the Tribunal constructed as it addressed seemingly disparate issues until the general pattern became relatively clear … The Tribunal's acceptance of this distinction is manifest in many cases. In Starrett Housing, for example, the Tribunal stated that “claims based on expropriation and other acts in breach of international obligations [i.e., public international law claims] are directed exclusively against the Government of the Islamic Republic of Iran.” Given this P 362 position, the naming of the proper respondent was often crucial. In Fedders Corp. v. Loristan Refrigeration, for example, Claimant in its Statement of Claim named as respondents only Loristan Refrigeration Industries and General Industrial Corporation. However, because its claim was for expropriation and thus a public international law claim, Claimant needed to name the government of Iran as respondent and seek an amendment of its claim to that effect. In granting the amendment, the Tribunal implicitly recognized the necessity of bringing a public international claim, such as expropriation, against the State: the wording of the Statement of Claim indicated clearly that a part of the claim alleged by the Claimant was based on the nationalization or taking of assets by Iran. Therefore it was clear from the Statement of Claim that Iran was intended to be a Respondent in this Case. Although granted in Fedders, the amendment of claims was generally a hotly contested issue before the Tribunal. The Claims Settlement Declaration required that all claims be filed by January 19, 1982. Therefore, a request for amendment raised the issue of whether that amendment merely sought to clarify a timely claim or whether it sought to file a new, now time-barred, claim. The Tribunal's practice in this controversial area was not particularly consistent. A corollary was that if the claimant pleaded its claim so that it could be considered either as a public international law claim or a private municipal law claim, the Tribunal was led to choose which form of the claim would be pursued. In McLaughlin v. Iran, for example, Claimant asserted claims for breach of contract against Isiran, a 100 percent state-owned corporation (a private municipal law claim), and a vaguely stated claim against the Islamic Republic of Iran (potentially a public international law claim). The Tribunal rendered an award holding Isiran liable for breach of a contract for consulting services, and dismissed the claim against Iran, stating: The Claimant seeks an award not only against ISIRAN, but also against the Government of Iran. It does not state, however, whether it holds the Government and ISIRAN independently or jointly and severally liable, nor has it specified the legal basis for its claim against the Government at all. From the record before it the Tribunal finds that there is no basis for any liability of the Government of Iran in the present case. Similarly, in Sedco v. National Iranian Oil Co., the Tribunal, having held that NIOC's retention of specified drilling equipment was an “appropriation,” noted the dual nature of the claim, writing: If NIOC's appropriation is seen as implicating Iran's duties under international law …, then the holding of our earlier Award [finding full compensation due for expropriation] is directly relevant. If, however, NIOC is considered to have acted in a purely private capacity, its conversion of [the drilling equipment] would be unsupported by the rights of sovereignty which may justify expropriation … and thus a fortiori would give rise to a duty to pay full value for the wrongfully acquired property.

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The division of the claims of nationals into public international law claims and private municipal law claims is confirmed also by the Tribunal's practice as to the wording it employed in the dispositf of its awards. In the judgment portion of its awards, the Tribunal named only the specific respondent found liable. This practice was followed even though awards against any respondent falling within the broad Article VII(3) definition of “Iran” were to be paid with monies drawn from the Security Account, a fund established under P 363 the Algiers Accords with released assets of the government of Iran. Thus, while Iran ultimately was financially responsible for the satisfaction of awards against “Iran,” as broadly defined in the Claims Settlement Declaration, the Tribunal was careful in the dispositif to specify which respondent was liable, a specification forcing the Tribunal to distinguish between a holding that the government of Iran was liable on the merits of a public international law claim and Iran's responsibility to satisfy by virtue of the Claims Settlement Declaration an award in favor of a private municipal law claim against an Iranian-controlled private corporation. The important consequence of the distinction between private municipal law claims and public international law claims is that, inasmuch as the BIT-like investment claims potentially arise only in public international law claims, one need look only at that subset of the claims adjudicated by the Tribunal. In this sense, it is important to note that the claims of nationals based upon public international law represent only a modest portion of the docket of the Tribunal. Indeed, most of the resulting awards – some three dozen or so – are noted or included in this volume.

§4.02 OTHER ARBITRAL REGIMES Other arbitral institutions that are more generalist in nature may be utilized for the resolution of foreign investment disputes. Popular institutions in this respect would be the Permanent Court of Arbitration, the International Court of Arbitration of the International Chamber of Commerce, the London Court of International Arbitration, and the Arbitration Institute of the Stockholm Chamber of Commerce. Institutions aside, the Arbitration Rules of UNCITRAL (the UNCITRAL Rules) is a body of rules that is often chosen to govern arbitrations relating to foreign investment disputes. Arbitrations under the UNCITRAL Rules can be either ad hoc or administered by an arbitral institution.

[A] Permanent Court of Arbitration (PCA) The Permanent Court of Arbitration (“PCA”) is one of the oldest dispute resolution institutions in the world. Over a hundred states are a party to the conventions that created the PCA. Despite its name, it is not a court. Rather, it provides a comprehensive range of services for the resolution of disputes by arbitration and other means. In 2012, UNCTAD reported that at the end of 2011, 65 treaty-based investor-state disputes had been administered by the PCA with 32 outstanding. [1] PCA, 111th Annual Report: 2011, (23) 2, 3, 6, 8 (2012) Arbitration 13. The PCA was established by the Convention for the Pacific Settlement of International Disputes, concluded at The Hague in 1899 to facilitate arbitration and other forms of dispute resolution. It was the product of the first Hague Peace Conference, which was convened by Tsar Nicholas II of Russia “with the object of seeking the most effective P 364 means of ensuring to all peoples the benefits of a real and lasting peace, and above all, of limiting the progressive development of existing armaments.” The 1899 Convention, the constitutive instrument of the PCA, was revised at the second Hague Peace Conference in 1907. The PCA's founding conventions set out procedures for arbitrating disputes between states. 14. Although the 1899 and 1907 Conventions contain basic rules of procedure, parties may, by agreement, adopt their own procedural framework, or elect to use the PCA's own modern rules of procedure, which are based on the highly regarded and widely used UNCITRAL Arbitration Rules. These rules are: the Permanent Court of Arbitration Optional Rules for Arbitrating Disputes between Two States (adopted in 1992); the Permanent Court of Arbitration Optional Rules for Arbitrating Disputes between Two Parties of Which Only One Is a State (1993); the Permanent Court of Arbitration Optional Rules for Arbitration Involving International Organizations and States (1996); the Permanent Court of Arbitration Optional Rules for Arbitration between International Organizations and Private Parties (1996); the Permanent Court of Arbitration Optional Conciliation Rules (1996); the Permanent Court of Arbitration Optional Rules for Fact-finding Commissions of Inquiry (1997); the Permanent Court of Arbitration Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment (2001); and the Permanent Court of Arbitration Optional Rules for Conciliation of Disputes Relating to Natural Resources and/or the Environment (2002); the Permanent Court of Arbitration Optional Rules for Arbitration of Disputes Relating to Outer Space Activities (2011). 15. In May 2011, the PCA Administrative Council approved a proposal of the SecretaryGeneral to constitute a drafting committee of leading practitioners in international

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arbitration to revise the PCA Optional Rules in light of changes made to the UNCITRAL Arbitration Rules in 2010. 16. Although initially conceived as an instrument for the settlement of disputes between states, the PCA received a request in 1934 to administer a case between the Radio Corporation of America and the National Government of the Republic of China. Having considered the matter, the PCA Administrative Council concluded that the PCA's founding conventions permitted the International Bureau to offer its services to cases between private entities and states. This case set a precedent for the PCA's future activity providing services for the resolution of disputes involving various combinations of states, state entities, international organizations and private parties. 17. In particular, the PCA has been widely used among investors and states for administering international investment disputes arising under treaties for the protection of investments. Through the end of 2011, the PCA served as registry to 65 such investment cases. *** Provision of Services and Facilities 21. The PCA provides full registry services and administrative support to tribunals and commissions, serving as the official channel of communication and ensuring safe custody of documents, in addition to providing services such as research, financial administration, logistical and technical support at meetings and hearings, travel P 365 arrangements, translation and interpretation, and general secretarial support. At its headquarters in the Peace Palace at The Hague, the PCA has a spacious and wellappointed courtroom, as well as several other meeting rooms, all of which are available not only to tribunals for PCA-administered proceedings, but also to non-PCA tribunals that wish to hold their hearings at the Peace Palace. An additional hearing facility was built for use by the PCA as part of the new Hague Academy Building, annexed to the Peace Palace. This suite comprises a hearing room, several breakout rooms and an arbitrator deliberation room. 22. The PCA can also provide facilities for hearings at various locations around the world pursuant to its host country agreements. Designation of Appointing Authorities and the Appointment of Arbitrators by the Secretary General 49. Articles 6, 7 and 12 of the 1976 United Nations UNCITRAL Arbitration Rules … entrust the Secretary-General of the PCA with maintaining the integrity of the international arbitral process, by authorizing the Secretary-General, upon the request of a party, to designate an “appointing authority” for the purpose of appointing the members of an arbitral tribunal and ruling on challenges to arbitrators. Parties may also designate the Secretary-General as appointing authority under the UNCITRAL Rules or other instruments. 50. Articles 6 and 8 through 13 of the 2010 UNCITRAL Arbitration Rules … entrust the Secretary-General of the PCA with maintaining the integrity of the international arbitral process by authorizing the Secretary-General, upon the request of a party, to designate an appointing authority. Under the 2010 Rules, an appointing authority may be called upon to appoint arbitrators, appoint a sole arbitrator under certain circumstances including that there is no agreement on the number of arbitrators, decide challenges to arbitrators, apply a fee schedule to an arbitration, comment on deposit amounts, determine whether a party may be deprived of its right to appoint a substitute arbitrator and authorize a truncated tribunal to proceed, and review a tribunal's fees and expenses. The 2010 Rules explicitly provide that a party may propose that the PCA SecretaryGeneral act as appointing authority. In addition, the 2010 Rules establish a new role for the PCA Secretary-General in reviewing a tribunal's fees and expenses (Article 41). [2] UNCTAD, Dispute Settlement: Permanent Court of Arbitration, (24) 32-33 (United Nations Publications 2003) (Citations selectively omitted) 8. Suitability of PCA for International Trade, Investment and Intellectual Property Disputes *** With respect to disputes between a State and a non-State party, the PCA “Optional Rules for Arbitrating Disputes Between Two Parties of Which Only One Is a State” provide an effective means for conducting arbitral proceeding to resolve a wide variety of cases. As noted above, those Optional Rules are based, in large part, on the UNCITRAL Arbitration Rules that were designed for all types of disputes, regardless of their subject matter. The P 366 versatility of the UNCITRAL Arbitration Rules is demonstrated by the experience of the United States-Iran Claims Tribunal whose rules – like the PCA Rules – are also largely based on the UNCITRAL Arbitration Rules, and which has conducted thousands of arbitrations, including claims related to international trade, investments and intellectual property. Parties that agree to arbitration under the PCA Rules have the benefit of being

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able to look for guidance to the procedural decisions of the Iran-United States Claims Tribunal. Those decisions, which are published in 28 volumes to date, are readily available to assist parties who use PCA Rules. Similarly, the PCA “Optional Conciliation Rules,” based on the UNCITRAL Conciliation Rules, are also suitable for use in resolving all types of disputes, including those involving international trade, investment or intellectual property. The PCA is widely experienced in administering all types of proceedings, regardless of the facts and laws involved. In addition to being suitable for use in disputes between States and non-State parties, the PCA also provides valuable service in cases involving only non-State parties, particularly those governed by the UNCITRAL Arbitration Rules. Those Rules provide that if one party fails to designate an arbitrator, or if all of the parties are unable to agree upon the third arbitrator or upon an appointing arbitrator to designate the third arbitrator, the Secretary-General of the PCA shall designate an appointing authority. The PCA has worldwide contact with arbitration institutions and has the capacity to choose promptly an appointing authority that has experience in the particular type of dispute involved. The PCA receives a substantial number of requests to designate appointing authorities. In addition, the Secretary-General of the PCA acts on requests that he personally serve as an appointing authority.

[B] International Court of Arbitration of the International Chamber of Commerce (ICC) The International Court of Arbitration of the International Chamber of Commerce (“ICC Court”) is one of the leading arbitral institutions for international business dispute resolution. Like the PCA, it provides a comprehensive range of services for the resolution of disputes by way of arbitration, and is not a court in the normal sense of the word. According to statistics from UNCTAD that were released in 2012, at least seven treatybased investor-state arbitrations have been ICC arbitrations. The latest version of the ICC's institutional rules for arbitration came into effect in 2012. [1] ICC, ICC Dispute Resolution: A World of Experience – A Wealth of Expertise, (25) 2-5 (2012) The International Court of Arbitration, commonly known as the Court, comprises over one hundred members from many countries. They come from diverse professional, legal and P 367 cultural backgrounds. The Court is renowned for its unmatched experience and expertise as an international arbitration institution. It administers ICC arbitrations, overcomes obstacles in proceedings and strives to ensure ICC awards are enforceable. Since its launch in 1923, the Court has been in the vanguard of making arbitration the preferred method of settling cross-border disputes. From straightforward sales contracts, to intellectual property matters, joint ventures, share purchase arrangements, or statefinanced construction projects, to name but a few examples, the Court is widely viewed as the first choice for resolving disputes large and small. Today, the Court is at the leading edge of change. It continuously seeks to improve efficiency, control time and costs, and aid enforcement and confidentiality by introducing innovative new arbitration tools and procedures. This ongoing focus ensures the Court is always in touch with the concerns and interests of trading partners across the world. Supporting our arbitration services The Court Secretariat comprises a permanent staff of over eighty lawyers and support personnel working together on the Court's daily tasks. English and French are the Court's official working languages. However, we can administer cases in any language, with staff capable of communicating in all major languages including Arabic, Chinese, German, Italian, Portuguese, Russian and Spanish. At any time, the Court Secretariat administers around 1,500 cases. Although headquartered in Paris, the Secretariat manages cases all over the world. A global network of delegates also represents the Court worldwide, with presences in the regions of North America, Asia and Pacific, Eastern Mediterranean, Middle East and Africa, Latin America and the UK. Everyone in the Court Secretariat attends to the needs of our cases. Each case management team, directed by a counsel and at least two deputies, has the regional experience, insights into cultural sensitivities, legal expertise and linguistic skills to make our solutions truly adapted to your needs. The Secretary General considers such factors as the parties' nationalities, place of arbitration, and the languages and laws involved, and assigns the best team for each case. This team then becomes the main point of contact for all players in a dispute. It advises parties, counsel and arbitrators on applying the rules and briefs the Court on its decisions. ***

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Appointing the arbitral tribunal An arbitration is only as good as its arbitrators. That's exactly where the Court can help, by confirming those that the involved parties have nominated or appointing suitable arbitrators when there is no nomination. When appointing arbitrators, the Court can select from a wide choice of talent. This access to so many skilled arbitrators comes thanks to our global network of over ninety national committees and our place at the heart of the world's arbitration community. Within the Court, we have also developed sophisticated ways to overcome problems setting up arbitral panels and reduce the risk of difficulties occurring later. These measures include ensuring all arbitrators are independent and available, regardless of whether the parties nominated them. Every candidate arbitrator must provide a P 368 statement for this. If doubts remain, we may seek an alternative candidate. Our experience and expertise in constituting arbitral tribunals can be of help outside ICC arbitration. We can assist in appointing arbitrators and deciding on challenges against arbitrators in ad hoc arbitrations. To provide these and other services in ad hoc proceedings, the Court applies a special set of rules designed for use both in proceedings under the UNCITRAL Arbitration Rules and in other ad hoc proceedings. Ensuring everything proceeds smoothly Once set up, the arbitral tribunal is responsible for deciding on the merits of a dispute. The Court's role is to monitor the arbitral process from start to finish, making sure every case runs smoothly and correctly. It regularly reviews the progress of each case to ensure it advances at the right speed and in line with our rules. Scrutinizing arbitral awards Scrutiny is a distinctive feature of ICC arbitration and a key to its success. No arbitral award is issued until it has been approved by the Court. The Secretariat first reviews the award and alerts the arbitral tribunal to any issues that may be problematic. The award then undergoes examination by the Court, which may prescribe formal changes and draw attention to points of substance. The aim is to strengthen the enforceability of all arbitral awards and to flush out flaws that could lead to challenges in national courts. Thanks to scrutiny, over 90% of awards are adjusted and improved before being issued. This is an important assurance for parties, as arbitral awards are not generally subject to appeal. Setting arbitrators’ fees Our rules allow us to control fees closely. Rather than leaving arbitrators free to set their own fees or hourly rates, the Court decides remuneration. It bases the figure on the amount in dispute, the case's complexity, and the arbitrator's efficiency and performance. This helps avoid unnecessarily protracted proceedings. Before beginning an arbitration, parties can estimate how much the arbitration will cost using our online arbitration cost calculator at www.iccarbitration.org. However, the calculator's figures are only a guide. You should not assume the results will accurately reflect the final cost and expenses. Addressing emergencies Sometimes, parties may encounter a problem that needs solving immediately. If they cannot afford to wait until the arbitral tribunal has been set up, the 2012 Rules of Arbitration allow them to apply for the appointment of an emergency arbitrator. In this way, the problem can normally be solved within two weeks. If parties prefer to make other arrangements to address urgent issues, they are entirely free to do so, including opting for the ICC's pre-arbitral referee procedure. [2] Jacob Grierson and Annet van Hooft, Arbitrating Under the 2012 ICC Rules: An Introductory User’s Guide, 30 (Kluwer Law International 2012) P 369 (Citations selectively omitted)

As will have been seen, we have so far avoided answering the question of which institution is to be preferred. This is not only for diplomatic reasons but also because different institutions can be better suited to different types of disputes. Instead, we would offer the following comments relating to the ICC: – –

– –

Over the course of last 90 years, it has handled more cases than any other existing arbitral institution. It has a very well staffed secretariat, consisting of talented, multi-lingual lawyers, who follow all cases on a day-to-day basis, take the initiative to submit cases to the Court for any decision considered necessary and prepare such decisions. They are also readily available for general questions about the ICC Rules. The ICC is the only institution that engages in a thorough review of all draft arbitral awards before they are issued. This, in turn, helps to ensure a consistently high quality, and easier enforceability of the awards issued under its aegis. It has a set of well thought-out rules …

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Two criticisms are often made of ICC arbitration that are, in our view, unmerited: (1)

(2)

That ICC arbitration is more expensive than the arbitration services offered by some of its competitors. In fact, the administrative fees of the ICC (which are indeed generally higher than those of other institutions) are but a fraction of the overall costs of the arbitration. The much more important part of the costs is made up of lawyer's fees. In any case, in return for the administrative fee paid to the ICC, users get more assistance than they would get from any other institution. As to the arbitrator's fees, these are generally lower in ICC arbitrations than in ad hoc arbitrations, often significantly so. That the scrutiny of awards results in delay. Normally the delay resulting from scrutiny is three to five weeks. A three to five week delay, in the context of an overall average timetable of 12 to 24 months, is not particularly significant. In any case, it is in our view more than compensated by the benefits of the scrutiny process, as the Court, even when working with very experienced arbitrators, is virtually always able to provide suggestions that improve the award.

[3] ICC, ICC Commission Report: States, State Entities and ICC Arbitration, (26) 2 (2012) (Citations selectively omitted) 7. ICC arbitration is often used by states and state entities. Approximately 10 per cent of ICC arbitrations involve a state or a state entity. 8. ICC arbitration is chosen for disputes involving states or state entities in all parts of the world, although there is a concentration of cases from Sub-Saharan Africa, Central and West Asia, and Central and Eastern Europe. Between them, cases from these regions P 370 account for about 80 per cent of ICC arbitrations involving states or state entities. 9. ICC arbitrations involving states and state entities cover a wide variety of cases involving both large and small amounts in dispute. 10. Those arbitrations cover both commercial and investment disputes. Claims arising out of commercial contracts constitute the largest category of cases involving states or state entities. The most frequent kinds of contracts are those relating to construction, maintenance and the operation of facilities or systems. 11. Some ICC cases involving states and state entities arise from the breach of a bilateral investment treaty (“BIT”). Such cases represent a minority of the ICC's caseload. At the present time, approximately 18 per cent of BITs allow for the possibility of using the ICC Rules.

[C] London Court of International Arbitration (LCIA) The London Court of Arbitration (“LCIA”) is one of the world's oldest arbitral institutions. Like the PCA and the ICC Court, it provides a comprehensive range of services for the resolution of disputes by way of arbitration, but is not an actual court. The LCIA, according to statistics from UNCTAD that were released in 2012, has administered at least one treaty-based investor-state arbitration under its own rules, and several others under the UNCITRAL Rules. The latest version of the LCIA's institutional rules for arbitration came into effect in 1998. [1] Simon Nesbitt, LCIA Rules [Introductory Remarks], in Concise International Arbitration, 401 (Loukas A. Mistelis ed., Kluwer Law International 2010) (Citations selectively omitted) History. The LCIA is one of the oldest arbitral institutions in the world, dating back to 1892, when it was founded by the City of London as the ‘London Chamber of Arbitration’. The name of the institution was changed in 1903 to ‘London Court of Arbitration’ and in 1975 to ‘London Court of International Arbitration’. In 1998 this was abbreviated to ‘LCIA’. From 1975 to 1986 the LCIA was run by a Joint Management Committee consisting of representatives of the Chartered Institute of Arbitrators, the City of London and the London Chamber of Commerce and Industry. The committee was replaced in 1985 by the LCIA Court, and the following year the LCIA was incorporated as a ‘company limited by guarantee’. Since that time the LCIA has been autonomous. The LCIA's arbitration rules have been revised repeatedly over the years, most recently in 1985 and in 1998. (Not all editions of the rules survive.) The current edition of the rules, which is adapted to the provisions of 1996 English Arbitration Act, is available in a number of languages, including Arabic, Chinese, French, German, Russian and Spanish. Distinguishing features. The LCIA rules distinguish themselves from those of other international arbitral institutions chiefly by the emphasis they place on party autonomy (arts. 14 and 15(1)) and the confidentiality of the proceedings (art. 30); by requiring arbitrators to charge for their services by the hour rather than by reference to the sum in dispute (art. 5(3) and art. 4 Schedule of Arbitration Fees and Costs); by allowing third parties to be joined to the arbitration without the consent of all the existing parties (art. 22(1)(h)); by making the tribunal's awards ‘final and binding’ so that they cannot be reviewed by a state court save to the extent permitted by any mandatory provisions of the applicable law (art. 26(9)); and by granting to the tribunal (unless the parties agree P 371

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P 371

otherwise) some specific powers, e.g. to order the disclosure of whole classes of documents within a party's ‘possession, custody or power’ (art. 22(1)(e)) or security for a party's legal and other costs (art. 25(2)). In addition to conducting arbitrations in accordance with its own rules, the LCIA acts as the appointing authority and administrator in UNCITRAL rules cases and as fundholder for deposits filed on account of costs in otherwise ad hoc proceedings. It also provides services in relation to other forms of dispute resolution … [2] Peter Turner and Reza Mohtashami, A Guide to the LCIA Arbitration Rules, 2-3 (Oxford University Press 2009) (27) (Citations selectively omitted) 1.04 The LCIA has a complicated constitution. There are three levels of administration, a company, the Arbitration Court, and the Secretariat. The company 1.05 The LCIA is incorporated in England and Wales as a not-for-profit company limited by guarantee. It should be noted that the Board of Directors of the LCIA has no responsibility for the administration of the Rules, still less of individual arbitrations, and primarily concerns itself with the development of the LCIA itself; as well, of course, as its operational efficiency and its compliance with English company law. The Arbitration Court 1.06 The LCIA Court is the primary body, with the Secretariat, that administers arbitrations under the LCIA Rules. Indeed, it is mentioned no less than 91 times in the Rules. It is the final authority for the appointment of tribunals, determining challenges to arbitrators, and controlling costs … 1.07 In stark contrast to the Board, the Court has a truly international membership. Indeed, its Constitution provides that no more than six members (out of a total of 35) may be UK citizens at any given time. 1.08 The Court does not have the same functions as the perhaps better-known International Court of Arbitration of the ICC. In particular, the LCIA Arbitration Court does not scrutinize draft awards before they are released to the parties. The scrutiny of draft awards by the ICC's Court, together with the Terms of Reference required by the ICC Rules but not those of the LCIA, is a distinguishing feature of the ICC's procedure and parties will need to consider, when choosing a set of institutional arbitration rules, whether they are necessary or desirable in the context of the potential or actual dispute that they are facing … In contrast, the LCIA Court has a greater role in the selection of tribunals than does the ICC Court … The Secretariat 1.09 The Secretariat is responsible for the day-to-day administration of LCIA arbitrations (and LCIA-administered arbitrations under the UNCITRAL Arbitration Rules) and mediations

P 372 …

1.10 The Secretariat currently consists of the Director-General (currently also mandated to serve as Registrar), the Registrar and Deputy Director-General, and three casework administrators. This lean organization reflects the role of the LCIA as an institution: it facilitates the task of the tribunal but its administrative hand is very light. In this it is to be contrasted with the ICC.

[D] Arbitration Institute of the Stockholm Chamber of Commerce (SCC) The Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) is one of the more popular forums for the resolution of foreign investment disputes. [1] Gary B. Born, International Arbitration and Forum Selection Agreements: Drafting and Enforcing, 56 (3rd ed., Kluwer Law International 2010) (Citations selectively omitted) Founded in Stockholm in 1917, the Stockholm Chamber of Commerce Arbitration Institute (“SCC”) developed into a substantial forum for disputes involving parties from the USSR and (subsequently) China during the 1970s and 1980s. The SCC's rules leave most aspects of the arbitral procedure to the arbitral tribunal. The SCC typically appoints members of the Swedish bar, with international experience, or former Swedish judges, as arbitrators. The SCC recently adopted new rules, referred to as the 2010 SCC Rules, which took effect on January 1, 2010. Included in these revised rules is a mechanism for appointing an Emergency Arbitrator, as well as adding Rules for Expedited Arbitration. The Rules to Expedited Arbitration offer a speedy and more cost-efficient dispute resolution procedure known colloquially as “fast track arbitration.” SCC arbitrations are usually seated in Sweden, although other seats can be chosen. [2] The SCC Experience of Investment Arbitration under UNCITRAL Rules, (28) Paper

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presented by Annette Magnusson, SCC Secretary General, in October 2012 (Citations selectively omitted) 2. The SCC and Investment Arbitrations Since 1993, the SCC has seen close to 50 investment treaty arbitrations. The role of the SCC in these cases has been either to manage the case under the SCC Rules, or for the SCC to act as appointing authority, most commonly under the UNCITRAL Arbitration Rules. Today, 121 known treaties for investment protection incorporate dispute resolution clauses calling for arbitration under the SCC Rules or stipulating that the SCC is to act as appointing authority in ad hoc arbitrations. 60 of these investment treaties are Bilateral Investment Treaties (BITs) which include dispute resolution clauses calling for arbitration under SCC Rules, 61 are BITs mentioning the SCC as appointing authority and 13 stipulate Stockholm as the seat of arbitration. A BIT is the most commonly invoked instrument in investment treaty arbitrations before P 373 the SCC.

In addition, the Energy Charter Treaty (ECT), a multilateral agreement signed by 51 states, lists the SCC as one of three options for dispute resolution for investors against states, alongside with ICSID and the UNCITRAL Arbitration Rules. As of September 2012, 8 disputes have been brought before the SCC under the ECT. In total, 33 ECT disputes have been registered since the first dispute in 2001 (as of September 2012) … As far as can be ascertained from public sources, 64 countries are signatories to BITs that refer to the SCC in their dispute resolution clauses. These countries belong to Europe, Africa, Asia and South America. With 28 BITs, Belgium and Luxembourg Economic Union have the most BITs referring to SCC. The Russian Federation has signed 21 BITs referring to the SCC and China 16, while Italy has entered into 13 treaties opting for SCC arbitration in investor-state disputes. The BIT-claims before the SCC since 2001 have had an average value of EUR 122.892.936 and amount in total EUR 1.843.394.046. Claims for ECT violations range from EUR 3.718.391 to EUR 445.204.826, amounting in total EUR 912.931.816. Since 2001 to the present, parties from 29 different jurisdictions have brought 40 claims for the protection of their investments before the SCC. Most of the investment treaty protection disputes have been brought by parties from Moldova (12), followed by Russia (8), Germany (6), Ukraine (3) and Czech Republic (3). As pointed out above, the majority of cases have been brought under SCC Rules and the UNICTRAL Arbitration Rules. 3. The SCC and Investment Arbitrations under UNCITRAL Rules The SCC frequently provides services as appointing authority and as administrative body in arbitrations under the UNCITRAL Arbitration Rules. In the last a decade, from 2002 to 2012, 36 disputes before the SCC have been administrated under the UNCITRAL Arbitration Rules. This includes both commercial disputes and investment treaty arbitrations. A review of the underlying agreements in SCC's UNCITRAL cases to date revels that joint venture agreements represent 32% of the disputes; BITs appear in 22% of the disputes and supply agreements in 16% of the disputes. Other UNCITRAL disputes brought by parties before the SCC involve share transfer agreements, purchase agreements, and disputes relating to employment issues. All ECT-based disputes brought before the SCC have been conducted under SCC Rules. In the BIT-based disputes, 9 out of the 32 BIT-based disputes before the SCC since 2001 have been conducted under the UNCITRAL Rules, 19 under SCC Rules, 4 have been ad hoc proceedings. This means that close to a third of the BIT-based disputes before the SCC since 2001 are conducted under UNCITRAL Rules. The 9 BIT-disputes under UNCITRAL Arbitration Rules have involved parties from Russia, Germany, Italy, The Netherlands, Algeria, Bulgaria, Czech Republic, Poland, Slovakia and Egypt. As appointing authority the SCC, upon request from a party, appoints (i) a sole or presiding arbitrator, (ii) a second arbitrator in cases of three-member panels, and (iii) decides challenges to arbitrators, (iv) appoints substitute arbitrators, and (v) review the costs of fees of arbitrators. In 97% of the treaties that include a clause calling for arbitration under the SCC Rules, SCC arbitration is listed as a non-exclusive option. In 60 out of the 61 treaties where the P 374 SCC is listed as appointing authority, it is either the Chairman or President of the SCC who shall make requested appointment. Different reasons trigger the role of the SCC as appointing authority. Most frequently, in two-thirds of these treaties, the SCC is designated to act as appointing authority when the parties have not observed the time limits to make the relevant appointment. Other

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treaties refer to the fact that at the SCC shall act as appointing authority when the Washington Convention is not applicable, or simply state that the SCC shall fulfill this function when the case is conducted under UNCITRAL Rules. In the 9 BIT-based disputes under the UNCITRAL Arbitration Rules since 2004, the SCC has requested to appoint the chairperson (4 cases); appoint a second arbitrator (3 cases); and decide upon challenges to arbitrators (2 cases).

[E] United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules The Arbitration Rules of UNCITRAL (“UNCITRAL Rules”) are frequently selected as the governing arbitration rules for foreign investment disputes. The UNCITRAL Rules are not affiliated to any one arbitral institution, although many institutions are willing to administer arbitrations under the rules, or have adopted the rules in full or in part in their own rules. According to statistics from UNCTAD that were released in 2012, out of 450 known treaty-based investor-state arbitrations, 126 are under the UNCITRAL Rules. [1] UNCITRAL, Recommendations to Assist Arbitral Institutions and Other Interested Bodies With Regard to Arbitration Under the UNCITRAL Arbitration Rules (as Revised in 2010) (29) (2012) (Citations selectively omitted) 1. The UNCITRAL Arbitration Rules were originally adopted in 19761 and have been used for the settlement of a broad range of disputes, including disputes between private commercial parties where no arbitral institution is involved, commercial disputes administered by arbitral institutions, investor-State disputes and State-to-State disputes. The Rules are recognized as one of the most successful international instruments of a contractual nature in the field of arbitration. They have also strongly contributed to the development of the arbitration activities of many arbitral institutions in all parts of the world. 2. The 1976 UNCITRAL Arbitration Rules were revised in 2010 to better conform to current practices in international trade and to account for changes in arbitral practice over the past 30 years. The revision was aimed at enhancing the efficiency of arbitration under the 1976 UNCITRAL Arbitration Rules and did not alter the original structure of the text, its spirit or its drafting style. The UNCITRAL Arbitration Rules as revised in 2010 have been in P 375 effect since 15 August 2010. [2] David D. Caron, Lee M. Caplan, The UNCITRAL Arbitration Rules: A Commentary, 7-8 (2nd ed., Oxford University Press 2013) (30) (Citations selectively omitted) E. Investor – State Arbitration and the UNCITRAL Rules The UNCITRAL Rules have also been used extensively in the investment arbitration context, as evidenced by many references to the UNCITRAL Rules in BITs and investment chapters in free trade agreements (FTAs). In such treaties, arbitration under the UNCITRAL Rules is envisaged as the dispute settlement mechanism between a host state and the investor more often than any other procedure except for arbitration under the auspices of the International Centre for the Settlement of Investment Disputes (ICSID). Disputes resolved under international investment treaties are another important and growing source of awards and decisions rendered under the UNCITRAL Rules. Since the 1990s there has been a proliferation of international investment agreements (IIAs) at the bilaterial, regional, and multilateral level. UNCTAD reports that, by the end of 2011 the overall IIA universe consisted of 3,164 agreements, which include 2,833 BITs and 331 “other IIAs,” including, principally, FTAs with investment provisions, economic partnership agreements and regional agreements (not including double taxation treaties). Almost all of these agreements contain dispute settlement provisions granting foreign investors recourse to various mechanisms of international arbitration, often including arbitration under the UNCITRAL Arbitration Rules. The NAFTA, the Energy Charter and the Association of Southeast Asian Nations (ASEAN) Regional Investment Agreement are examples of regional and multilateral investment agreements that contain such provisions. Similar provisions are also contained in many BITs, including those influenced by the United States Model BIT program. The awards and decisions of international tribunals in this area have already enhanced our understanding of the interpretation and application of the UNCITRAL Arbitration Rules, and will likely grow in influence with time.

§4.03 INTERNATIONAL COURTS The Permanent Court of International Justice (“PCIJ”) and the International Court of Justice (“ICJ”), which succeeded the PCIJ, have only infrequently entertained investment disputes. The investment disputes that have been before the PCIJ or the ICJ have essentially been those espoused by states on behalf of their nationals.

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[A] Permanent Court of International Justice (PCIJ) [1] UNCTAD, Dispute Settlement: International Court of Justice, (31) 5 (United Nations Publications 2003) P 376 (Citations selectively omitted)

The idea of peacefully settling disputes at the international level is a very old one. Systems of mediation and arbitration were known, but not the establishment of a permanent bench of judges to settle disputes, employing strict judicial techniques. However, at the end of the First World War, and with the creation of the League of Nations, under a mandate of the Article 14 of the Covenant of the League of Nations, a concrete shape was given to the idea of a Permanent Court of International Justice (hereinafter, the Permanent Court or the PCIJ). The Permanent Court was established with 15 judges elected by the Assembly and the Council of the League of Nations. They represented the main forms of civilization and the principal forms of legal systems of the world. The Statute, which governed the operation of the Permanent Court, was however an instrument independent from the Covenant of the League of Nations. Only States could be parties before the Permanent Court. But it was empowered to give advisory opinions to the Assembly and the Council of the League of Nations. The Permanent Court, which came into operation in 1922 and ceased functioning in 1940 with the outbreak of the Second World War, dealt with 29 contentious cases and gave 27 advisory opinions. [2] Stephan W. Schill, Private Enforcement of International Investment Law: Why We Need Investor Standing in BIT Dispute Settlement, in The Backlash Against Investment Arbitration: Perceptions and Reality, 29, 37-39 (Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin (eds), Kluwer Law International 2010) (Citations selectively omitted) Consequently, in the context of foreign investment activities, the positivist conceptualization of international law understood the violation of the foreign investor's interests as a violation of the rights of the investor's home state under international law. This conceptual framework coined state practice at the time, including the exercise of diplomatic protection through gunboat diplomacy, that is, the exercise of, or threat with, the use of force by home states in view of the violation of rights and interests of their nationals by the host state, or the establishment of interstate claims commissions that settled, by judicial means, interstate disputes arising out of investment activities of foreign investors. It also found its expression in a number of decisions rendered by the Permanent Court of International Justice (PCIJ). Thus, the classical and conceptually most lucid expression of the system of international investment protection under customary international law can be found in the Mavrommatis Palestine Concessions case of 1924. In that case, the Greek Government brought a claim against the United Kingdom for breaches of a concession granted to a Greek national for the construction and operation of an electric tramway and the supply of electric light, power, and drinking water in Jerusalem. With respect to the relationship between the Greek investor, the United Kingdom as the sovereign over the host state territory, and Greece as the investor's home country, the PCIJ stated:

P 377

In the case of the Mavrommatis concessions it is true that the dispute was at first between a private person and a State – i.e. between M. Mavrommatis and Great Britain. Subsequently, the Greek Government took up the case. The dispute then entered upon a new phase; it entered the domain of international law, and became a dispute between two States … It is an elementary principle of international law that a State is entitled to protect its subjects, when injured by acts contrary to international law committed by another State, from whom they have been unable to obtain satisfaction through the ordinary channels. By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights – its right to ensure, in the person of its subjects, respect for the rules of international law. This passage clearly brings out the conceptual difference between the relations of the foreign investor and the host state, on the one hand, and the relations between home state and host state on the other. The municipal legal realm and the international sphere are irreconcilably distinct and only connected insofar as the harm done to the foreign investor in breach of international law is feigned to constitute harm done to its home state. In any event, the home state is not asserting the violation of rights of its national under the domestic law governing the investment on that national's behalf; it is asserting the violation of its own rights under international law. This conceptual approach – that the home state, by espousing a claim of its national, is asserting its own right under international law, not a right vested in its national – was affirmed by the PCIJ on a number of occasions. It also surfaced as regards the damage resulting from a violation of international law. Thus, in The Factory at Chorzców the PCIJ categorized the rights of the investor and its home state as rights pertaining to two distinct legal orders in stating that:

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The rules of law governing the reparation are the rules of international law in force between the two States concerned, and not the law governing relations between the State which has committed a wrongful act and the individual who has suffered damage. Rights or interests of an individual the violation of which rights causes damage are always in a different plane to rights belonging to a State, which rights may also be infringed by the same act. The damage suffered by an individual is never therefore identical in kind with that which will be suffered by a State; it can only afford a convenient scale for the calculation of the reparation due to the State. Overall, these decisions clarify that the individual (i.e., both natural persons and private corporations) was extraneous to the understanding of customary international law at the time and was conceived primarily as an object of state conduct, not as an entity that could genuinely enjoy rights under international law. Even today in the International Court of Justice (ICJ), individuals do not have access to dispute settlement in order to enforce the protection international law may grant to them but depend on their home state to grant diplomatic protection by bringing an interstate proceeding.

[B] International Court of Justice (ICJ) [1] UNCTAD, Dispute Settlement: International Court of Justice, (32) 5 (United Nations Publications 2003) (Citations selectively omitted) The Permanent Court was dissolved in 1946, followed by a decision at the San Francisco Conference to create a new International Court of Justice (hereinafter, the ICJ or the Court) P 378 on the same lines as the Permanent Court, but as a principal judicial organ of the United Nations.1 Contrary to the Statute of the PCIJ, the Statute of the ICJ is an integral part of the Charter of the United Nations (Article 92 of the UN Charter).2 Both instruments were adopted on 26 June 1945, and came into force on 24 October 1945. [2] Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment, 35-39 (Kluwer Law International 2009) (Citations selectively omitted) Despite the intense conflict over the past sixty years regarding the standards that apply to foreign investment under customary international law, the International Court of Justice (ICJ) has played a minimal role in resolving foreign investment disputes and in the development of jurisprudence on substantive standards of foreign investment protection. Since the Court's creation in 1945, only six foreign investment related cases have been brought before it. In three of these cases the ICJ held that it did not have jurisdiction to deal with the complaint, while the fourth was denied on the merits. The fifth (Ahmadou Sadio Diallo) and sixth (Pulp Mills on the River Uruguay) claims are currently before the Court. The first investment dispute before the ICJ was the 1952 Anglo-Iranian Co. Case, which arose out of Iran's nationalization of its oil industry in 1951. The Court held that it lacked jurisdiction because Iran's 1930 declaration accepting the jurisdiction of the Court did not apply to treaties made prior to the declaration. The second dispute, the Case of Certain Norwegian Loans, involved a claim by France that Norway had breached its obligations under a series of state bonds. Here the Court also held that it did not have jurisdiction based on the scope of Norway's declaration accepting the jurisdiction of the Court. The Barcelona Traction case (1970) was also one where the ICJ ultimately determined it did not have jurisdiction, but it remains both a controversial and important decision respecting international investment law. Belgium alleged that the acts and omissions of the Spanish courts in placing Barcelona Traction into bankruptcy constituted a denial of justice and an expropriation of the Barcelona Traction shares held by Belgian nationals. Spain objected to the ICJ's jurisdiction on the basis that Barcelona Traction was incorporated in Canada and that Belgium was not entitled to exercise diplomatic protection on behalf of a Canadian company, even if owned by Belgian shareholders. In a much criticized judgment, a majority of the Court held that ‘where it is a question of an unlawful act committed against a company representing foreign capital, the general rule of international law authorizes the national State of the company alone to make a claim.’ As a result, Canada, not Belgium, was the proper party to bring a claim before the Court. This, however, was not possible as the Court did not have jurisdiction for disputes between Canada and Spain. In determining that it did not have jurisdiction, the Court highlighted that there had been an ‘intense conflict of systems and interests' concerning the protection of foreign investment and that states ‘ever more frequently’ were providing foreign investment protection through bilateral and multilateral agreements. It noted that no such instrument was in force between Belgium and Spain. By making these statements the ICJ signalled that progressive developments in international investment law would mainly be treaty-based. The only case involving foreign investment that the ICJ has addressed on the merits to date is the Elettronica Sicula S.p.A. (ELSI) case (1982). This case was brought under the P 379 1948 Italy-US Treaty of Friendship, Commerce and Navigation (FCN), which provided for

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ICJ jurisdiction for disputes arising under the treaty. Elettronica Sicula S.p.A. (ELSI) produced electronic components in Italy and was a subsidiary of two American corporations. ELSI's board of directors decided to shut down operations and liquidate ELSI to minimize ongoing losses. In order to protect employment, the local mayor issued a requisition order under which the town took temporary control of ELSI's factory. ELSI appealed this order and subsequently made a bankruptcy petition. The requisition order was later annulled by the Italian courts and the trustee in bankruptcy brought a suit for damages, arguing that the requisition order had caused the bankruptcy. In the case before the ICJ, the US claimed that the requisition, and the delay in overturning it, interfered with the American corporations' management and control of ELSI, as well as their interests in it, and causing the bankruptcy. The ICJ, however, found that ELSI's bankruptcy was caused not by the requisition order, but rather by the company's precarious financial situation. The Court denied the Us's claim that Italy's actions were covered by the FCN Treaty as the mayor's order did not cause or trigger the bankruptcy. It also denied the Us's claim that ELSI's shareholders were deprived of their rights to dispose of property, holding that the mayor's action was not the cause of the property loss. Of particular importance with respect to the minimum standard of treatment, the Court addressed the meaning of ‘arbitrariness' in international law. The majority judgment in ELSI largely avoided the issue of whether the US was entitled to bring the claim under the FCN Treaty and proceeded on the basis that the property protected under the treaty was not ELSI's plant and equipment (its property), but ELSI itself (the company). In his Separate Opinion, Judge Oda addressed the treaty rights afforded to US nationals with respect to shareholdings in Italian companies. In his view, the treaty did not augment the rights of shareholders and the US shareholders of ELSI could only claim those rights guaranteed to them as shareholders under Italian law. In contrast, in his Dissenting Opinion, Judge Schwebel stated that the treaty protected shareholders' rights. In his view, the treaty's guarantees with respect to the organization, control and management of corporations protected the US shareholders' interests in ELSI. In its jurisprudence the ICJ has addressed few of the controversial legal issues relating to foreign investment, such as the responsibility of states to foreign investors under customary international law and the standard of compensation for the expropriation of foreign investment. The Barcelona Traction and ELSI cases, however, highlighted some of the procedural and substantive inadequacies with the diplomatic protection model in safeguarding shareholder interests. These uncertainties and inadequacies may have provided compelling rationales for the development of IIAs. The Barcelona Traction case demonstrated that, depending on the place of incorporation of the investment vehicle, a home state may be unable to espouse the claims of its nationals. In addition, the Court signalled that clarification of the law in the area of foreign investment would need to be treaty-based given the intense conflict in the area. The opposing opinions of Judges Oda and Schwebel in ELSI highlighted the need for IIAs to address the extent to which investors holding shares in a corporation incorporated in a host state are entitled to claim for breaches of an IIA where the state measures in question are directed at the locally incorporated company. Finally, both Barcelona Traction and ELSI demonstrated P 380 that the diplomatic protection model was slow and cumbersome.

[C] Other International Courts Other possible international courts that may be forums for the resolution of disputes relating to foreign investment include the European Court of Justice, the European Court of Human Rights, and the InterAmerican Commission and Court on Human Rights.

§4.04 NATIONAL FORUMS [A] General Considerations In a large number of cases, national courts may be seized with the substance or part of an international investment claim. In these circumstances, national courts should be applying international law and, as a result, become functional international tribunals. In many bilateral investment treaties, investors are required to commence proceedings in the national courts before proceeding to arbitration. In some cases, investors have been able to avoid such requirements by relying on MFN clauses (see, supra, Chapter 3). In addition to national courts, national commissions, such as the U.S. Foreign Claims Settlement Commission, may be forums for the resolution of disputes relating to foreign investment.

[B] Comments and Questions 1.

The role of national courts in constitutional democracies has presented complex problems for judiciaries. The dilemmas presented to national judges are presented most vividly in a series of decisions by the Supreme Court of the United States: Banco National de Cuba v. Sabbatino, 376 US 398; First National City Bank v. Banco National de Cuba, 406 US 759; Alfred Dunhill of London, Inc. v. Republic of Cuba, 425 US 682; and Kirkpatrick v. Environmental Tectonics, 493 US 403 (1990). For a

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2. P 380

discussion of the dilemma, see W. Michael Reisman, Tilting at Reality, 74:6 Tex. L. Rev. 1261 (May 1996). For an overview of national commissions, see Richard B. Lillich, International Claims: Their Adjudication by National Commissions (1962).

References 1) 2) 3) 4) 5) 6) 7) 8)

Copyright 2009 by Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair. Reprinted with permission of Cambridge University Press. All rights reserved. Copyright 2009 by Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair. Reprinted with permission of Cambridge University Press. All rights reserved. Copyright 2009 by Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair. Reprinted with permission of Cambridge University Press. All rights reserved. By permission of Oxford University Press. All rights reserved. Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0870.pdf (accessed 1 September 2013). Reproduced with the permission of CMP Publishing Ltd. Available at http://www.italaw.com/sites/default/files/case-documents/ita0496.pdf (accessed 1 September 2013).

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(accessed 1 September 2013).

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requestType=CasesRH&actionVal=showDoc &docId=DC681_En&caseId=C150 (accessed 1 September 2013). By permission of Oxford University Press. All rights reserved. By permission of Oxford University Press. All rights reserved. Available at http://www.italaw.com/sites/default/files/case-documents/ita0799.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0863.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0874.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/casedocuments/italaw1184.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita1082.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita1083.pdf (accessed 1 September 2013). By permission of Oxford University Press. All rights reserved. Available at http://www.pca-cpa.org/showpage.asp?pag_id=1069 (accessed 1 September 2013). © Permanent Court of Arbitration. Available at http://unctad.org/en/docs/edmmisc232add26_en.pdf (accessed 1 September 2013). Available at http://www.icc.fi/userData/5176/pdf/ICC-Arbitration-Court-Englishbrochure.pdf (accessed 1 September 2013). ICC Publication 856. © International Chamber of Commerce (ICC). Reproduced with permission of ICC. For more information on ICC dispute resolution services, please refer to http://www. iccarbitration.org. Further documentation is also available in the ICC Dispute Resolution Library at http:// www.iccdrl.com. Available at http://www.iccwbo.org/Products-and-Services/Arbitration-andADR/ICC-Arbitration- Commission-Report-on-Arbitration-Involving-States-and-StateEntities-under-the-ICC-Rules-of- Arbitration,-2012/ (accessed 1 September 2013). ICC Publication 862. © International Chamber of Commerce (ICC). Reproduced with permission of ICC. For more information on ICC dispute resolution services, please refer to http://www.iccarbitration.org. Further documentation is also available in the ICC Dispute Resolution Library at http://www.iccdrl.com. By permission of Oxford University Press. All rights reserved. Available at http://www.sccinstitute.com/filearchive/4/44668/UNCITRAL%20Disputes_The%20SC C%20 Experience_AM.pdf (accessed 1 September 2013).

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29) Available at http://www.uncitral.org/pdf/english/texts/arbitration/arb-

recommendation-2012/13-80327- Recommendations-Arbitral-Institutions-e.pdf (accessed 1 September 2013). 30) By permission of Oxford University Press. All rights reserved. 31) Available at http://unctad.org/en/docs/edmmisc232add19_en.pdf (accessed 1 September 2013). 32) Available at http://unctad.org/en/docs/edmmisc232add19_en.pdf (accessed 1 September 2013).

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Chapter 5: Political Risk Insurance

Document information

§5.01 INTRODUCTION

Publication

To protect against the non-commercial risks of investing in projects in developing countries, investors often obtain political risk insurance. Political risk insurance is available from the Multilateral Investment Guarantee Agency (MIGA), which is affiliated with the World Bank, national programs such as the French government's Compagnie Française d'Assurance pour le Commerce Extérieur (COFACE) or the Overseas Private Investment Corporation (OPIC), which is wholly-owned by the United States government, and increasingly from private insurance companies.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Topics

Investment Arbitration

Bibliographic reference

'Chapter 5: Political Risk Insurance', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 381 - 436

MIGA was created in the mid-1980's as a vehicle to provide political risk insurance to companies whose governments did not have national programs and to complement those which did. It was formed pursuant to the Convention Establishing the Multilateral Investment Guarantee Agency, to which more than 150 countries are parties. MIGA insures against the risks of expropriation, currency transfer risk, including currency inconvertibility, political violence, and breach of contract in the form of non-payment of arbitral awards. It is authorized to provide reinsurance for political risk insurance and to reinsure its own risks. MIGA has promulgated rules for arbitrating disputes that arise under its guarantee contracts. The U.S. government has been providing political risk insurance since the Marshall Plan following World War II. In the 1960's, the United States Agency for International Development (USAID) provided this benefit, but OPIC was created and took over the program in 1971. OPIC provides the same insurance coverage as MIGA, but its mandate (like most national programs) is limited to covering investments of US citizens and companies. OPIC's task is to encourage U.S. foreign investment in countries with whom OPIC maintains agreements. In these agreements, foreign governments agree to recognize OPIC's rights as transferee and successor of any rights of the investor against the government and provides for arbitration of any disputes. Because of these agreements, OPIC's early intervention in a dispute between a U.S. investor and a foreign government may facilitate the resolution of the dispute before a loss is suffered. OPIC's coverage is conditioned upon a project meeting certain environmental, labor and human rights standards. MIGA has prepared Rules of Arbitration for Disputes under Contracts of Guarantee of the Multilateral Guarantee Agency, which may be found at http://www.jurisint.org/pub/03/en/f_6986.htm. These Arbitration Rules closely resemble the ICSID Arbitration Rules, except that the MIGA Arbitration Rules provide that any arbitrations shall be administered by the Permanent Court of Arbitration at The Hague. Private insurance is available on a commercial basis without the environmental, labor and human rights restrictions often involved with MIGA or OPIC. Coverage may also be P 382 obtained after an investment has already been made. Private insurance is typically more expensive, however, and involves shorter periods of coverages.

§5.02 MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA) [A] Convention Establishing the Multilateral Investment Guarantee Agency (1985), 1508 U.N.T.S. 99 (1985) The Convention Establishing the Multilateral Investment Guarantee Agency was adopted by the IBRD on 11 October 1985 and entered into force on 12 April 1988: for text, 1508 UNTS 99. There are currently (April 2013) 179 states parties. See http://www.miga.org/. *** Preamble The Contracting States Considering the need to strengthen international co-operation for economic development and to foster the contribution to such development of foreign investment in general and private foreign investment in particular; Recognizing that the flow of foreign investment to developing countries would be facilitated and further encouraged by alleviating concerns related to non-commercial risks; Desiring to enhance the flow to developing countries of capital and technology for productive purposes under conditions consistent with their development needs, policies and objectives, on the basis of fair and stable standards for the treatment of foreign investment; Convinced that the Multilateral Investment Guarantee Agency can play an important role in the encouragement of foreign investment complementing national and regional investment guarantee programs and private insurers of non-commercial risk; ***

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Chapter III – Operations Article 11 – Covered Risks (a)

Subject to the provisions of Sections (b) and (c) below, the Agency may guarantee eligible investment against a loss resulting from one or more of the following types of risk: (i)

P 383

(b)

(c)

Currency Transfer any introduction attributable to the host government of restrictions on the transfer outside the host country of its currency into a freely usable currency or another currency acceptable to the holder of the guarantee, including a failure of the host government to act within a reasonable period of time on an application by such holder for such transfer; (ii) Expropriation and Similar Measures any legislative action or administrative action or omission attributable to the host government which has the effect of depriving the holder of a guarantee of his ownership or control of, or a substantial benefit from his investment, with the exception of non-discriminatory measures of general application which governments normally take for the purpose of regulating economic activity in their territories; (iii) Breach of Contract any repudiation or breach by the host government of a contract with the holder of a guarantee, when (a) the holder of a guarantee does not have recourse to a judicial or arbitral forum to determine the claim of repudiation or breach, or (b) a decision by such forum is not rendered within such reasonable period of time as shall be prescribed in the contracts of guarantee pursuant to the Agency's regulations, or (c) such a decision cannot be enforced; and (iv) War and Civil Disturbance any military action or civil disturbance in any territory of the host country to which this Convention shall be applicable as provided in Article 66. Upon the joint application of the investor and the host country, the Board, by special majority, may approve the extension of coverage under this Article to specific non- commercial risks other than those referred to in Section (a) above, but in no case to the risk of devaluation or depreciation of currency. Losses resulting from the following action shall not be covered: (i) (ii)

any host government action or omission to which the holder of the guarantee has agreed or for which he has been responsible; and any host government action or omission or any other event occurring before the conclusion of the contract of guarantee.

Article 12 – Eligible Investments (a)

Eligible investments shall include equity interests, including medium- or long-term loans made or guaranteed by holders of equity in the enterprise concerned, and such forms of direct investment as may be determined by the Board.

*** (d)

In guaranteeing an investment, the Agency shall satisfy itself as to: (i)

the economic soundness of the investment and its contribution to the development of the host country; (ii) compliance of the investment with the host country's laws and regulations; (iii) consistency of the investment with the declared development objectives and priorities of the host country; and (iv) the investment conditions in the host country, including the availability of fair and equitable treatment and legal protection for the investment. Article 13 – Eligible Investors (a)

Any natural person and any juridical person may be eligible to receive the Agency's guarantee provided that: (i) (ii)

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(b)

such natural person is a national of a member other than the host country; such juridical person is incorporated and has its principal place of business in a member or the majority of its capital is owned by a member or members or nationals thereof, provided that such member is not the host country in any of the above cases; and (iii) such juridical person, whether or not it is privately owned, operates on a commercial basis. In case the investor has more than one nationality, for the purposes of Section (a) above the nationality of a member shall prevail over the nationality of a nonmember, and the nationality of the host country shall prevail over the nationality of any other member.

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*** Article 58 – Disputes Involving Holders of a Guarantee or Reinsurance Any dispute arising under a contract of guarantee or reinsurance between the parties thereto shall be submitted to arbitration for final determination in accordance with such rules as shall be provided for or referred to in the contract of guarantee or reinsurance.

[B] Commentary on the Convention Establishing the Multilateral Investment Guarantee Agency, 1 ICSID Rev. – Foreign Inv. L.J. 193, 195-202 (1986) Introduction *** The concept of providing foreign investors with financial guarantees against noncommercial risks in developing countries has emerged as a means of improving the investment climate in these countries and, hence, of stimulating investment flows to them. Almost all developed countries and two developing countries have established official schemes to provide guarantees against non-commercial risks to their nationals for investments into developing countries. In addition, the InterArab Investment Guarantee Corporation provides guarantees on a regional basis. A private political risk insurance market has also been operating internationally for over a decade. The activities of these entities are subject to several limitations and the perception of political risk remains a significant barrier to investment in developing countries. There is need for a multilateral investment guarantee agency to complement these schemes and improve the investment climate by issuing guarantees and engaging in other investment promotion activities. *** I. Status, Establishment and Purposes 1. The Convention establishes the Multilateral Investment Guarantee Agency (referred to in this Commentary as the Agency) as an autonomous international organization with “full juridical personality” under international law and the domestic laws of its members (Article 1) with the main objective of encouraging the flow of investments for productive purposes among its member countries and in particular to its developing member countries (Article 2)… *** Scope of Covered Risks and Eligibility 12. The Convention provides for coverage of the three generally accepted categories of non-commercial risks: the currency transfer risk resulting from host government restrictions and delays in converting and transferring local currency earned by an P 385 investor, expropriation, and the risk of war and civil disturbance. The Convention adds to these traditionally covered risks the risk of breach or repudiation of a contractual commitment by the host government towards an investor under the limited conditions mentioned in paragraph 15 below (Article 11 (a)). 13. The currency transfer risk is broadly defined in Article 11 (a) (i). It is intended to encompass all forms of new direct restrictions, including additions to existing restrictions, as well as indirect or disguised restrictions, whether such restrictions are imposed by law or in fact. The restriction must be “attributable to the host government,” restrictions imposed by public agencies and other public organs of the host country are intended to be covered by this language. The provision is also intended to include the failure of the host government to act within “a reasonable period of time” on a transfer application. The provision does not define the specific period but it is expected that this will be accomplished in the rules and regulations to be issued by the Board and specifically in the contracts of guarantee. In determining what constitutes a “reasonable period,” the Agency will need to reconcile the investors' interest in a speedy transfer with the fact that certain delays in the processing of applications by governments may be justified. 14. Article 11 (a) (ii) defines the expropriation risk. It would encompass measures attributable to the host government such as nationalization, confiscation, sequestration, seizure, attachment and freezing of assets. The phrase “any legislative or administration action” in the provision includes measures by the executive, but not measures taken by judicial bodies in the exercise of their functions. Measures normally taken by governments to regulate their economic activities such as taxation, environmental and labor legislation as well as normal measures for the maintenance of public safety, are not intended to be covered by this provision unless they discriminate against the holder of the guarantee. In defining these measures, the Agency's practice would not be meant to prejudice the rights of a member country or of investors under bilateral investment treaties, other treaties and international law. 15. The breach of contract risk is contained in Article 11 (a) (iii). Indemnification is available only when an investor has no forum to pursue the contractual claim against the

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government or when recourse to such a forum is hampered by an unreasonable delay as defined in the guarantee contract or when, after obtaining a final decision in his favor, the investor is unable to enforce it. 16. Article 11 (a) (iv) encompasses the risk of war and civil disturbance. It is intended to include revolutions, insurrections, coups d’état and similar political events which are typically outside the control of the host government. Acts of terrorists and similar activities which are specifically directed against the holder of the guarantee are, however, not intended to be covered by this provision but may be covered under Article 11 (b), which is discussed below. 17. The Convention provides additional flexibility by allowing the coverage of other specific non-commercial risks, but only at the joint request of the investor and the host country and with approval of the Board by special majority (Article 11 (b)). Such approval may be issued on a case by case basis or in the form of regulations specifying the cases to be covered under this provision. *** P 430

19. … The term “direct investment” is a generic term whose precise scope will have to be determined by the Board. The Board is expected to be guided by the International Monetary Fund's definition of foreign direct investment as an “investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor purpose being to have an effective voice in the management of the enterprise.” The Board may consider as direct investment such new forms of investment as service and management contracts as well as franchising, licensing, leasing, and production-sharing agreements where the investor's return depends on the performance of the enterprise. In any case, it is immaterial whether the investment is made in monetary form or in kind such as the contribution of machinery, service, technical processes and technology.

[C] Comments and Questions 1. 2. 3. 4. 5. 6.

What sources would an arbitrator consult in determining the liability of MIGA for a claim? Of what general significance, if any, is MIGA's definition of expropriation? What is the scope of MIGA's definition of expropriation? What is excluded by it? What is MIGA's role with respect to private political risk insurers? What is the legal significance of the Commentary on the MIGA Convention? Ibrahim Shihata said that MIGA's agreements with governments with respect to projects it insures may “contribute to the progressive development of international law”. How can MIGA's agreements contribute to the development of international law if they are not made public?

§5.03 NATIONAL PROGRAMS – U.S. OVERSEAS PRIVATE INVESTMENT CORPORATION (OPIC) [A] OPIC Program Handbook, 1-21 (OPIC 2007) OPIC’s Mission The Overseas Private Investment Corporation (OPIC) was established as an agency of the U.S. government in 1971. OPIC helps U.S. businesses invest overseas, fosters economic development in new and emerging markets, complements the private sector in managing risks associated with foreign direct investment, and supports U.S. foreign policy. Because OPIC charges market-based fees for its products, it operates on a self-sustaining basis at no net cost to taxpayers. *** OPIC's financing and political risk insurance also help U.S. businesses of all sizes to compete in emerging markets and meet the challenges of investing overseas when private sector support is not available. OPIC promotes U.S. best practices by requiring projects to adhere to international standards on the environment and worker and human rights. *** Environmental Impact OPIC is required by statute to conduct an environmental assessment of every project proposed for insurance or financing and to decline support for projects that, in OPIC's judgment, would have an unreasonable or major adverse impact on the environment, or on the health or safety of workers in the host country. For most industrial sectors, OPIC expects projects to meet the more stringent of World Bank or host-country environmental, health and safety standards. Of particular concern are adverse effects on

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the health and safety of employees and the public, as well as on tropical forests, national parks, protected areas and endangered species. *** Other Requirements OPIC is prohibited by statute from supporting projects that contribute to violations of internationally recognized worker rights. OPIC insurance and finance agreements require the investor to agree to respect these rights, including the rights of association, collective bargaining and acceptable working conditions with respect to wages, hours of work, occupational health and safety, and minimum-age standards. OPIC does not support projects that involve illicit payments. OPIC insurance and finance documentation requires representations and covenants from the investor regarding compliance with applicable corrupt practices laws. *** Political Risk Insurance OPIC insurance can cover the following three political risks: – – –

currency inconvertibility – inability of the investor to convert profits, debt service and other investment returns from local currency into U.S. dollars, or to transfer U.S. dollars out of the host country; expropriation – loss of an investment due to expropriation, nationalization or confiscation by the host government; and political violence – loss of assets or business income due to war, revolution, insurrection, or politically motivated civil strife, terrorism or sabotage.

OPIC can insure up to $250 million per project and up to $300 million for projects in the oil and gas sector with offshore, hard currency revenues. *** General Requirements OPIC provides political risk insurance to U.S. investors, contractors, exporters and financial institutions involved in international transactions. Specifically, OPIC insurance is available to: – – – –

U.S. citizens; corporations, partnerships or other associations created under the laws of the United States, its states or territories, and beneficially owned by U.S. citizens;* foreign corporations that are more than 95 percent owned by investors eligible under the above criteria; and other foreign entities that are 100 percent U.S.-owned.

*** Coverages Currency Inconvertibility Currency inconvertibility coverage compensates investors if new currency restrictions, or other government action or inaction, prevent the conversion or transfer of investment returns from insured investments. Currency restrictions may take the form of new, more restrictive foreign exchange regulations or a failure by exchange control authorities to act on an application for hard currency. OPIC inconvertibility coverage may insure earnings, returns of capital, principal and interest payments, technical assistance fees, and similar remittances on insured investments. OPIC inconvertibility coverage does not protect against the devaluation of a country's currency. Rather, OPIC insures investors against deterioration of their ability to convert local currency or transfer dollars from the project country through any legal exchange mechanism sanctioned by the central government of the project country. Expropriation Expropriation coverage protects against the nationalization, confiscation or expropriation of an investment, including “creeping” expropriation, due to unlawful government acts (or a series of acts) that deprive the investor of its fundamental rights in a project. The coverage excludes losses due to lawful regulation or taxation by host governments and actions provoked by the investor or foreign enterprise. For equity investments, compensation is based on the book value of the investment as of the date of expropriation. In most cases, OPIC covers total expropriation only. To receive compensation, an investor must assign all rights in the insured investment to OPIC. For parent-company loans to subsidiaries, compensation is based on outstanding principal

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and accrued interest that would have been paid. Coverage for expropriation of funds only – unlawful host government blockage of funds intended to be remitted as returns of the insured investment or earnings on it – may be purchased for a reduced premium in conjunction with currency inconvertibility coverage. Insurance for specialized risks peculiar to a specific project may be available, including, for example, coverage against losses resulting from the unlawful breach of specific host government obligations identified by the insured at the outset as vital to the successful operation of the project. Under certain circumstances, OPIC is also able to cover the unlawful breach of specific contractual obligations of a subsovereign or a corporation owned or controlled by a foreign government. These coverages are available on a caseby-case basis and will be individually rated. Political Violence Political violence coverage compensates for property and income losses caused by violence undertaken for political purposes. Declared or undeclared war, hostile actions by national or international forces, civil war, revolution, insurrection, and civil strife, including politically motivated terrorism and sabotage, are all examples of political violence covered by OPIC. Actions undertaken primarily to achieve labor or student objectives are not covered. OPIC pays compensation for two types of losses: damage to tangible assets, and business income loss caused by damage to tangible assets. An investor may purchase one or both coverages. *** Institutional Loans OPIC's political risk insurance enables U.S. banks and other financial institutions to play an active role in financing projects in developing countries while managing the incremental cross-border exposure associated with these investments. A wide range of banking activities can be insured by OPIC, including: – – – –

loans made or arranged by banks; debt-for-equity investments; commodity price or interest rate swaps; and gold loans.

For institutional lenders, currency inconvertibility insurance coverage pays compensation for defaults on scheduled payments that result from deterioration in the ability to convert these payments from local currency to dollars, or to transfer dollars outside the host country. In the case of expropriation or political violence, compensation generally is payable if the borrower defaults on a scheduled payment as a direct result of one of these events, and the default lasts three months (or one month in the event of subsequent defaults caused by the same event). Loans must have a tenor of at least three years, and borrowers must be private-sector enterprises in the foreign country. Coverage may be tailored to reflect the specific nature of the project. Capital Markets Transactions In response to growing demand, especially for infrastructure projects, investors and their financial advisors have sought new sources of financing, and have turned to the capital markets to supplement traditional bank financing. Consequently, capital markets transactions, such as 144A bond issues, are playing an increasingly important role in financing projects in emerging markets. OPIC can provide inconvertibility and expropriation of funds coverage for capital markets transactions similar to the coverage provided under OPIC's institutional lender's product. The coverage may enable investors to mobilize capital markets funding for transactions where it was previously unavailable.

[B] OPIC Enabling Statute, 22 U.S.C. § 2191-2200 (1969) Ch. 22 – International Development §2191. Congressional statement of purpose; creation and functions of Corporation To mobilize and facilitate the participation of United States private capital and skills in the economic and social development of less developed friendly countries and areas, thereby complementing the development assistance objectives of the United States, there is hereby created the Overseas Private Investment Corporation (hereinafter called the “Corporation”), which shall be an agency of the United States under the policy guidance of the Secretary of State. The Corporation, in determining whether to provide insurance, financing, or reinsurance for a project, shall especially – (1)

be guided by the economic and social development impact and benefits of such a project and the ways in which such a project complements, or is compatible with,

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(2)

other development assistance programs or projects of the United States or other donors; give preferential consideration to investment projects in less developed countries …

*** In carrying out its purpose, the Corporation, utilizing broad criteria, shall undertake – (a) (b)

to conduct financing, insurance, and reinsurance operations on a self-sustaining basis, taking into account in its financing operations the economic and financial soundness of projects; to utilize private credit and investment institutions and the Corporation's guaranty authority as the principal means of mobilizing capital investment funds;

*** (d)

to conduct its insurance operations with due regard to principles of risk management including efforts to share its insurance and reinsurance risks;

*** (n)

to refuse to insure, reinsure, guarantee, or finance any investment in connection with a project which the Corporation determines will pose an unreasonable or major environmental, health, or safety hazard, or will result in the significant degradation of national parks or similar protected areas.

*** §2191a. Additional requirements (a)Worker rights (1)

Limitation on OPIC activities The Corporation may insure, reinsure, guarantee, or finance a project only if the country in which the project is to be undertaken is taking steps to adopt and implement laws that extend internationally recognized worker rights, as defined in section 2467(4) of title 19, to workers in that country (including any designated zone in that country)…

*** (b)Environmental impact The Board of Directors of the Corporation shall not vote in favor of any action proposed to be taken by the Corporation that is likely to have significant adverse environmental impacts that are sensitive, diverse, or unprecedented, unless for at least 60 days before the date of the vote – (1)

(2)

an environmental impact assessment or initial environmental audit, analyzing the environmental impacts of the proposed action and of alternatives to the proposed action has been completed by the project applicant and made available to the Board of Directors; and such assessment or audit has been made available to the public of the United States, locally affected groups in the host country, and host country nongovernmental organizations.

§2194. Investment insurance and other programs The Corporation is hereby authorized to do the following: (a)Investment insurance (1)

To issue insurance, upon such terms and conditions as the Corporation may determine, to eligible investors assuring protection in whole or in part against any or all of the following risks with respect to projects which the Corporation has approved – (A)

(B) (C) (D)

inability to convert into United States dollars other currencies, or credits in such currencies, received as earnings or profits from the approved project, as repayment or return of the investment therein, in whole or in part, or as compensation for the sale or disposition of all or any part thereof; loss of investment, in whole or in part, in the approved project due to expropriation or confiscation by action of a foreign government; loss due to war, revolution, insurrection, or civil strife; and loss due to business interruption caused by any of the risks set forth in subparagraphs (A), (B), and (C).

*** §2198. Definitions As used in this subpart –

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(a)

(b)

the term “investment” includes any contribution or commitment of funds, commodities, services, patents, processes, or techniques, in the form of (1) a loan or loans to an approved project, (2) the purchase of a share of ownership in any such project, (3) participation in royalties, earnings, or profits of any such project, and (4) the furnishing of commodities or services pursuant to a lease or other contract; the term “expropriation” includes, but is not limited to, any abrogation, repudiation, or impairment by a foreign government of its own contract with an investor with respect to a project, where such abrogation, repudiation, or impairment is not caused by the investor's own fault or misconduct, and materially adversely affects the continued operation of the project …

[C] OPIC Agreements with Foreign Governments [1] Model OPIC Investment Incentive Agreement, 1 B.D.I.E.L. 669 (1994) Investment Incentive Agreement between the Government of the United States of America and the Government of (Name of Country) *** Article 1 As used herein, the term “Coverage” shall refer to any investment insurance, reinsurance or guaranty which is issued in accordance with this Agreement by OPIC, by any successor agency of the United States of America or by any other entity or group of entities, pursuant to arrangements with OPIC or any successor agency, all of whom are hereinafter deemed included in the term “Issuer” to the extent of their interest as insurer, reinsurer, or guarantor in any Coverage, whether as a party or successor to a contract providing Coverage or as an agent for the administration of Coverage. *** Article 3 (a)

(b)

(c) (d)

If the Issuer makes payment to any party under Coverage, the Government of (Name of Country) shall, subject to the provisions of Article 4 hereof, recognize the transfer to the Issuer of any currency, credits, assets, or investment on account of which payment under such Coverage is made as well as the succession of the Issuer to any right, title, claim, privilege, or cause of action existing, or which may arise, in connection therewith. The Issuer shall assert no greater rights than those of the transferring party under Coverage with respect to any interests transferred or succeeded to under this Article. Nothing in this Agreement shall limit the right of the Government of the United States of America to assert a claim under international law in its sovereign capacity, as distinct from any rights it may have as Issuer. The issuance of Coverage outside of (Name of Country) with respect to a project or activity in (Name of Country) shall not subject the Issuer to regulation under the laws of (Name of Country) applicable to issuance or financial organizations. Interest and fees on loans made or guaranteed by the Issuer shall be exempt from tax in (Name of Country). The Issuer shall not be subject to tax in (Name of Country) as a result of any transfer or succession which occurs pursuant to Article 3(a) hereof. Tax treatment of other transactions conducted by the Issuer in (Name of Country) shall be determined by applicable law or specific agreement between the Issuer and appropriate fiscal authorities of the Government of (Name of Country).

*** Article 6 (a)

Any dispute between the Government of the United States of America and the Government of (Name of Country) regarding the interpretation of this Agreement or which, in the opinion of one of the Governments, involves a question of public international law arising out of any project or activity for which Coverage has been issued shall be resolved, insofar as possible, through negotiations between the two Governments. If at the end of three months following the request for negotiations the two Governments have not resolved the dispute by agreement, the dispute, including the question of whether such dispute presents a question of public international law, shall be submitted, at the initiative of either Government, to an arbitral tribunal for resolution in accordance with Article 6(b).

*** (ii)

The arbitral tribunal shall base its decision on the applicable principles and rules of public international law. The arbitral tribunal shall decide by majority vote. Its decision shall be final and binding.

[2] Robert C. O’Sullivan, Model OPIC Investment Incentive Agreement, 1 B.D.I.E.L. 665 (1994)

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Investment Incentive Agreements are executive agreements which provide a procedural framework for operation of the United States government's program for insuring U.S. investors against loss of their foreign investments due to political risk. Since 1971 this program has been administered by Overseas Private Investment Corporation (OPIC). *** In general terms, the purpose and structure of such agreements have remained the same. There are essentially four subjects covered: 1. 2. 3. 4.

an agreement that OPIC may offer coverage to eligible investors in projects within the foreign country; a provision that such projects must be approved by the foreign government; recognition of the United States government's rights as transferee, assignee and subrogee; and provision for resolution of any intergovernmental disputes arising from the agreement or the program by negotiation and, ultimately, arbitration.

*** Foreign government approval of each project for the purpose of issuance of the coverage provided by the U.S. government under the agreement has always been a standard provision. This so-called “FGA” is intended to preclude U.S. government support of a project that may be objectionable to the host country government on policy grounds. Earlier forms of agreement generally required ad hoc approval of each project for the explicit purpose of the OPIC program, issued by an agency designated by each foreign government according to its own procedures. In some instances, FGA procedures have proven so cumbersome as to impair the efficient operation of the OPIC program. The current approach, expressed in Article 2, permits reliance upon project approvals already granted by an agency of the foreign government for some other purpose, such as commercial registration, licensing, or regulation of foreign investment. Approval of the foreign government's own projects is considered automatic. Article 3, 4 and 5 define OPIC's rights as an issuer of coverage, with an emphasis on subrogation and salvage. From the U.S. Government perspective, these are critical provisions because they satisfy the explicit legislative requirement that “suitable arrangements” be made for recovery in the event of claim payments. The agreement does not, however, require that the government of the project country hold the U.S. government harmless in the event of a claim, nor does it require any form of counterguaranty. Article 3(b) provides that OPIC shall assert no greater rights than those of the covered party. The same article does, however, reserve the right of the United States government to espouse the claim of a U.S. investor… Article 5 deals specifically with subrogation and salvage in the case of inconvertibility claims. As executive agreements, OPIC agreements do not require Senate advice and consent to ratification, but the concluding language of the note recognizes that some form of approval may be required by the other party's constitutional law before the agreement becomes effective. Such approval may be communicated in the reply note itself or in a subsequent note from the foreign government.

[D] Comments and Questions 1. 2. 3. 4. 5.

What differences exist in the coverage and exclusions of MIGA and OPIC? What is the significance of the U.S. Congressional definition of expropriation in 22 U.S.C. § 2198? Is there any difference between OPIC's definition of expropriation and the customary international law standard for expropriation? What is the meaning of the term “civil strife”? How does it differ from war, revolution and insurrection? Why do you think civil strife is treated differently under the OPIC policy and included or excluded at the investor's choice? If OPIC insures for US $50 million a major project involving an investment of US $100 million and the host state effectively expropriates one half of the project, what would you advise the investor about its rights under its OPIC policy? Why? What are the implications of OPIC's agreements with foreign governments upon an insured investor's claim?

§5.04 OPIC CLAIMS [A] Expropriation Claims [1] Governmental Nexus [a] Otis Elevator Co. (Iran: 1982), OPIC Memorandum of Determinations: Expropriation Claim of Otis Elevator Company – Contract of Insurance No. 8982R – of 8 November 1982 [After Ayatollah Khomeini took power in Iran in 1979, anti-Western agitators encouraged by the new government threatened the life and property of foreign workers in Iran, and forced Otis to evacuate management personnel from Iran. The Foundation for the

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Oppressed, a government entity, blocked all Otis Iran Elevator funds that had been deposited, the Iranian Government appointed a “financial controller” of Otis Iran and Iran Elevator, and the Ministry of Labor did not permit the layoffs necessary to reduce operating losses. Otis alleged that these unlawful acts precluded effective participation by Otis in Iran Elevator, and the effective exercise of its fundamental shareholder rights. OPIC determined that Otis' claim was valid and granted compensation.] OPIC Memorandum of Determinations Expropriation Claim of Otis Elevator Company under Contract of Insurance No. 8982r (Iran) I.The Claim III.Determinations Under the Contract A.Section 1.09 – That Expropriatory Action Occurred Within the Meaning of Section 1.09. *** 1. Action Taken, Authorized, Ratified or Condoned by the Government of the Project Country a. The Unsafe Environment for Americans The first issue is whether the actions causing the withdrawal and continued absence of Otis personnel were actions “taken, authorized, ratified or condoned by the Government of the Project Country.” The term “Government of the Project Country” is defined in Section 1.12 as follows: Government of the Project Country. The term “Government of the Project Country means the present or any succeeding governing authority (without regard to the method of its succession or to whether it is recognized by the Government of the United States of America or to whether it is formally described as governmental) or authorized agents thereof, in effective control of all or any part of the Project Country or of any political or territorial subdivision thereof; provided, however, that in no event shall the Government of the United States of America or any military government or command in which it participates, be included within the meaning of this section. Although the political situation in Iran immediately after the Shah's departure was far from clear, OPIC finds that the group led by Ayatollah Khomeini assumed sufficient de facto control of Iran from the date of Bazargan's appointment through the period relevant to this claim, to be considered the Government of the Project Country for most areas of Iran. Certainly, Khomeini's anti-Western policy was followed throughout that period. OPIC therefore finds that, during the period beginning with the establishment of the Bazargan government on February 5, 1979 and continuing into 1981, Khomeini's faction either constituted the Government of the Project country or exercised sufficient influence over those directly in control of the GOI to insure continuation of the policies relevant to Otis' claim. Ordinarily, the acts of private individuals and organizations are not attributable to a government. However, the anti-Western violence and harassment which took place in Iran were actively encouraged by Khomeini's clique as part of a general anti-Western policy. Clearly, these actions maintained an unsafe environment for Americans, thereby causing the departure from, and preventing the return to, Iran of Otis personnel. Accordingly, OPIC finds that, from the time of Bakhtiar's departure on February 11, 1979, the actions of private individuals and groups causing the continued absence of Otis personnel were “condoned by the Government of the Project Country” within the meaning of Section 1.09 of the Contract. Khomeini's creation of an unsafe environment for expatriate employees of American companies was not only in violation of general principles of international law, it was also directly contrary to the obligations imposed upon Iran by the August 15, 1955 “Treaty of Amity, Economic Relations, and Consular Rights Between the United States of America and Iran.” … *** The Ayatollah Khomeini's policies contributed to the heightened threat of physical danger which ultimately forced Otis' foreign employees to leave the country. Since these expatriate managers were vital to Otis' investment, these arbitrary and unreasonable actions of the GOI not only denied Otis' investment the “most constant protection and security” guaranteed by Article IV, para. 2 of the Treaty, but also impaired its “legally acquired rights and interests” in violation of para. 1 of that Article. b. Actions of the Ministry of Commerce The first government appointment of a manager occurred on February 9, 1980, with the appointment by the Ministry of Commerce of Mr. Shahali as “Financial Controller” of both Iran Elevator and Otis Iran. His tenure lasted until early May. It is beyond dispute that Mr. Shahali's appointment, and the subsequent appointment of the “government Administrator,” were actions of the Government of Iran.

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c. Actions of the Foundation for the Oppressed … by the end of January 1980, Mr. Naeeni [General manager of Iran Elevator] had been forced to sign checks in the amount of rials 10 million as Indemnities. Before these checks could be honored, Mr. Naeeni reported that written instructions to the bank from the Foundation for the Oppressed, a government entity, blocked all Otis Iran and Iran Elevator accounts, as well as the workers' account in which Iran Elevator funds had been deposited. Mr. Naeeni further reported that the blockage was imposed because of complaints registered by Otis Iran workers concerned that if indemnities were paid to workers with long tenure with the company, there would be insufficient funds to pay indemnities to others, or to keep the company running. d. Actions of the Ministry of Labor The Ministry of Labor controlled labor reductions and approved negotiated termination payments. In October 1979 when Otis Iran determined that layoffs were necessary to reduce operating losses, the Ministry of Labor was not permitting any reductions in force. Thereafter, the Ministry began to permit terminations, with payment of indemnities to be negotiated on a case-by-case basis. 2. Expropriatory Effects of GOI Action – Section 1.09(b) – Fundamental Rights as Shareholders Having determined that the GOI, since Khomeini's rise to power, pursued anti-Western and, particularly, anti-American policies, and thereby condoned the unsafe environment for Otis personnel, and that the appointment of Mr. Shahali, the transfer of Iran Elevator funds, the blockage of Otis Iran and Iran Elevator accounts, and the control over labor terminations all constituted action by the GOI, the issue becomes whether these GOI actions produced an expropriatory effect under the terms of the Contract. As noted above, Otis alleges expropriatory effects of the types described in subsections (b) and (d) of Section 1.09 of the Contract. The subsection (d) claim is discussed separately below. Section 1.09(b) is satisfied when host government action directly results in preventing “the Investor from effectively exercising its fundamental rights with respect to the Foreign Enterprise … as shareholder … acquired as a result of the Investment.” In order for the claim to qualify under this standard, it must be demonstrated that the unsafe environment perpetuated by the GOI policies under Khomeini and the other actions of the GOI prevented Otis from exercising its fundamental rights as a shareholder in Iran Elevator. The “fundamental” nature of a shareholder's rights in a Foreign Enterprise cannot be determined in a vacuum. A right that is fundamental in one case may not be in another, and vice versa. In each instance, the significance of the rights in question must be examined in the context of the overall investment arrangement. Thus, even a chain of events that conclusively shows a purposeful denial of one or more rights by a host government is not sufficient to establish the denial of that investor's “fundamental” rights unless the rights denied are necessary to the enjoyment of the benefits of the investment. On the other hand, the impairment of individual rights which viewed alone may not appear fundamental may have a cumulative effect which will be found to deny the investor the effective exercise of its fundamental rights as shareholder. a. The Departure of the Expatriates Otis enjoyed the right to veto nominations for the position of Managing Director of Iran Elevator, due to the requirement that the majority of three Directors necessary to appoint the Managing Director had to include at least one of the two Otis Directors. Otis' investment arrangement thus contemplated substantial management control over the company. However, … Iran Elevator was not at the time of the revolution an operating company, and construction activity had been virtually halted in early 1978 due to changes in the market unrelated to the political situation in Iran. By mid- to late-1978, the formerly expatriate general manager had been replaced by an Iranian, and the construction manager and other employees (other than the bookkeeper who was shared with Otis Iran) had been terminated. Principal management authority was with Mr. Fayek, an Otis director, who was responsible for supervision of the general manager, whose responsibilities were limited. By October 1979, of all the former expatriate employees of Otis Iran and Iran Elevator, only Mr. Fayek and an Indian technician remained in Iran, due to increasingly threatening conditions. In late November 1979 Mr. Fayek left too. Until Mr. Fayek's departure, there is no evidence that the unsafe conditions for expatriate personnel had affected operations of Iran Elevator, as, to the extent the Company had been operating, it had used Iranian personnel with the exception of Mr. Fayek even before political conditions forced the departure of expatriates from Iran. Upon Mr. Fayek's departure, Mr. Naeeni became Otis' senior representative at Iran Elevator. The record shows that he undertook to run the company with supervision from abroad, and that at least until April 1980 he made every effort to respond to Otis' instructions and protect its interests. Nevertheless, OPIC finds that Otis management rights, and the rights

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of the shareholders as a whole, were significantly diminished by the conditions which forced Mr. Fayek to leave Iran. b. The Actions of the Ministry of Commerce … Otis was entitled under the Articles of Association to exercise a veto over the appointment of a Managing Director of Iran Elevator. The appointment by the Ministry of Commerce of a “Financial Controller” with full authority to run the company, authority that had been reserved to the Otis Managing Director, Mr. Fayek, amounted to a denial of that important right, as it denied effect to the Articles of Association with regard to the issue of management control. The rights infringed by the appointment of the “Financial Controller” were not only those of Otis, but those of all the shareholders, whose investment decisions had been made within the framework of that agreement. c. Conclusion OPIC finds that taken together, the expulsion of the expatriates and the appointment of the “Financial Controller” amounted to a denial of fundamental shareholder rights within the meaning of Section 1.09(b) of the Contract. *** IV.Conclusion Based upon the foregoing determinations, OPIC finds that the Expropriatory Action claim submitted by Otis is valid and that OPIC is liable to pay to Otis the sum of $460,305 upon the completion by Otis of the assignment required by Section 20.02 of the Contract. [2] Repudiation of Contract [a] Ponderosa Assets, L.P. (Argentina: 2005), OPIC Memorandum of Determinations: Expropriation Claim of Ponderosa Assets, L.P. – Contract of Insurance No. 733 – of 2 August 2005, (1) 1, 5, 7-14, 19 … The OPIC Contract covers an equity investment in the privatization, acquisition and operation of Transportadora de Gas del Sur (“TGS”), a gas pipeline company located in southern Argentina (the “Project”). On August 12, 2002, Ponderosa filed the Application for the expropriation of its equity interest in the Project… Based on all the information provided and certifications made by Ponderosa, OPIC finds that an expropriation within the meaning of the OPIC Contract has occurred. This finding is based upon OPIC's determination that, even if enactment of the Emergency Law can be justified in general as a valid exercise of regulatory power, the actions of the GOA in enacting the Emergency Law constitute repudiation of the GOA's contract with Ponderosa, motivated by noncommercial considerations, and for which compensatory damages were not paid, in violation of the GOA's responsibilities to a foreign investor under international law. *** 2. The acts are violations of international law (without regard to the availability of local remedies). A state is responsible under international law for injury resulting from: “(1) a taking by the state of the property of a national of another state that (a) is not for public purpose, or (b) is discriminatory, or (c) is not accompanied by provision for just compensation; … (2) a repudiation or breach by the state of a contract with a national of another state (a) where the repudiation or breach is (i) discriminatory; or (ii) motivated by noncommercial considerations, and compensatory damages are not paid; or (b) where the foreign national is not given an adequate forum to determine his claim of repudiation or breach, or is not compensated for any repudiation or breach determined to have occurred …’’ (2) If, according to these principles, the GOA bears state responsibility for injury resulting from the Emergency Law, then this provision of the OPIC Contract [the expropriation provision] has been satisfied. *** (B) By application of the Emergency Law to the Project, the GOA repudiated a contractual agreement with TGS, constituting an independent violation of international law. Under certain conditions, international law imposes state responsibility for a “repudiation or breach by the state of a contract with a national of another state …” Before evaluating whether these conditions exist, however, it is necessary to determine whether there has been a “repudiation or breach by the state of a contract.” The first threshold question to address is whether the License constitutes a contract by the state with a foreign national. The License was entered into in 1992 between the GOA, through the President of Argentina via his National Executive Power, as licensor, and TGS, as licensee, and contains various obligations and undertakings of the GOA. A contract is a legally enforceable exchange of promises. The formation of a contract can take place “by

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the acceptance of an offer.” An exclusive license is an agreement that gives the licensee the exclusive right to perform the licensed act and that prohibits the licensor from granting the right to other parties. In this case, TGS agreed to transport gas and the GOA agreed to give TGS the right to charge a specific amount for transporting the gas. Their negotiated exchange of promises is the essence of any contract, and TGS accepted the licensing offer of the GOA, thereby creating a binding contract regardless of who signed the decree. In addition, a contract is formed by “conduct of the parties that is sufficient to show agreement” and their intention to be bound. TGS and the GOA both conducted themselves in a manner that would indicate there was a contract between the parties… The second threshold question is whether the License constitutes a contract “with a foreign national.” TGS is a company incorporated under the laws of Argentina but owned entirely by foreign nationals. In the ICSID case brought by Enron and Ponderosa, Argentina unsuccessfully argued to the Tribunal that the claimants, the indirect shareholders of TGS, lacked standing to pursue a claim under the Bilateral Investment Treaty between the United States and Argentina Concerning the Reciprocal Encouragement and Protection of Investment (the “BIT”). *** Another question to address is whether there has been a “repudiation or breach” by GOA of the License. OPIC has in the past interpreted the term “repudiate” to mean an outright disclaimer by the state of any liability under the contract. The GOA has not disclaimed liability. However, GOA has materially changed the terms of the contract unilaterally, which amounts to the same thing. OPIC finds that this unilateral and material modification of the License constitutes a repudiation by GOA of its obligations under the License. The main obligation of GOA under the License is that it shall “allow [TGS] to collect Rates fixed in Chapter IX hereof in accordance with provisions of [Law 24,076, which establishes the regulatory framework of Natural Gas activity.]” Chapter IX of the License sets forth the regulatory provisions regarding the tariff rates, including the provisions that the tariff shall be paid in dollars and shall be adjusted based on the PPI index. Since Section 4.5 creates an actual obligation on the GOA to allow TGS to collect the tariff according to this particular scheme, OPIC concludes that the enactment by the GOA of the Emergency Law, which had the effect of nullifying these provisions, constitutes a repudiation or abrogation of GOA's obligations under the License. *** … The Emergency Law on its face constitutes abrogation of the License; the GOA cannot override its international law obligations to investors by enacting domestic laws that are inconsistent with those obligations. Therefore, OPIC determines that the provisions of the Emergency Law which contradict those of the License create a modification outside of the allowable provisions under Section 9.2 of the License. Thus, the application of the Emergency Law in contradiction of the explicit terms of the License is in itself a repudiation of the GOA's contractual obligations under the License. The fundamental obligation of the GOA to maintain the pricing mechanisms of the License should have survived the enactment of the Emergency Law. Therefore, OPIC finds that there has been a repudiation by the GOA of the License. The theory that certain contractual breaches may constitute expropriation has other bases in law. International arbitral tribunals have recognized that rights under contracts are property subject to expropriation. Furthermore, in its definition of expropriation in the United States Code, Congress has explicitly included impairment by a government of a contract with a foreign investor. The elements of the Code, which, although reflecting US law, can be seen as well as indicative of customary international law, are all met here: the enactment of the Emergency Law constituted a repudiation of GOA's contractual obligation under Section 4.5 of the License, the repudiation was not caused by the Investor's fault or misconduct, and the repudiation, by limiting the Investor's right to collect revenues from TGs' operations, materially and adversely affected the continued operation of the Project, and ultimately caused a write-off of the Investor's investment in TGS. *** (2) The contractual repudiation was, motivated by noncommercial reasons, and compensatory damages were not paid giving rise to state responsibility for contract repudiation under international law. International law prohibits “a repudiation or breach by the state of a contract with a national of another state (a) where the repudiation or breach is … (ii) motivated by noncommercial considerations, and compensatory damages are not paid.” OPIC finds that the GOA's repudiation of the License was motivated by noncommercial considerations. All relevant events leading up to the GOA's repudiation of the License; i.e., the initial suspension of the PPI-indexed increase, the enactment of the ENARGAS decree, the

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challenge to the indexation by the Ombudsman, and finally the enactment of the Emergency Law were all prompted by the GOA's need, in its sovereign capacity, to deal with Argentina's currency crisis, and not by commercial considerations. Additionally, the contractual obligation under the License to permit TGS to charge tariffs was created as a result of the GOA's jurisdiction over public utilities and was therefore undertaken in the GOA's capacity as a sovereign government, and not as a party with a commercial interest in the License. In fact, the License was granted to TGS by GOA in its capacity as regulator of the natural gas industry. The prevailing view is that “international law is not implicated if a state repudiates or breaches a commercial contract with a foreign national for commercial reasons as a private contractor might, e.g. due to inability of the state to pay or otherwise perform, or because performance has become uneconomical …” Because there is a fine line between commercial and policy motives where a governmental contract is concerned, this provision should be examined in light of the actual motive of the GOA in enacting the Emergency Law. In this case, the Emergency Law was purportedly enacted for public policy reasons, specifically to curb the risk of inflation and devaluation and to control the flight of foreign exchange from Argentina. The Emergency Law itself begins with GOA declaring a state of emergency and sets as its goal “to rearrange the financial, banking and exchange market system” and “to relaunch the economy.” If the GOA acted “essentially on governmental motives”; i.e., the public policy motive of curbing the risk of inflation and easing the effect of the state's severe devaluation, it cannot have been acting in its commercial capacity. The same consideration that might relieve GOA of state responsibility for a “taking” for public policy purposes gives rise to state responsibility for abrogation or repudiation of contract. *** In this case, the GOA had specific contractual obligations that were abrogated due to its enactment of the Emergency Law. As in Joseph Companies, the GOA, contrary to its undertakings, took actions that undercut entirely its obligations under the License of allowing the tariffs to be charged according to a PPI price adjustment and calculated in US dollars. While the contractual obligation could not prevent the government from carrying out sovereign acts, it does require that the government answer in damages for its conduct. Therefore, OPIC has determined that the GOA had a continuing contractual obligation under the License to maintain a protective environment for TGS to collect revenues through the tariffs calculated in accordance with Section IX of the License or through some other mechanism which would allow TGS to maintain its revenues at equivalent levels. Failure to maintain such protection constituted a repudiation of contract and gave rise to a right to compensation. The GOA's decision not to compensate TGS thereby constitutes a violation of international law. *** Ponderosa, together with its fellow consortium members, retains full control of the assets of TGS, including the License. However, the revenue stream of TGS has been reduced so drastically as a result of the provisions of the Emergency Law that it resulted in the total write-off of the investment under the equity method of accounting… *** In the context of an investment, the right to recover its economic value in accordance with the terms governing that investment is a fundamental right of the investor. In this case, the most important asset of TGS, the License, has been dramatically altered, depriving Ponderosa of its right to collect revenues via the tariffs. For these reasons, OPIC has determined that Ponderosa has been deprived of fundamental rights in the insured investment. *** V. CONCLUSION For the foregoing reasons, OPIC concludes that the claim of the Investor is valid. The Investor is entitled to compensation in the amount of the insured investment, $50,000,000. [3] Creeping Expropriation [a] Revere Copper & Brass, Inc. v. OPIC (AAA Case No. 16 10 0137 76), Award of 24 August 1978, 17 I.L.M. 1321, 1329-1332, 1338, 1340, 1342-1343, 1347-1351, 1353 (1978) [In 1967, Revere Jamaica Alumina, Limited (“RJA”), a Jamaican wholly-owned subsidiary of Revere Copper and Brass Incorporated (“Revere”), entered into an agreement with the Government of Jamaica (“GOJ”) regarding the construction and operation of a bauxite mining plant in Jamaica. The agreement provided for tax stability. Seven years later, the newly-elected Jamaican Prime Minister announced that the GOJ “cannot be bound by its agreements” with the aluminum companies, thus triggering a series of measures that stripped Revere of some of its investment guarantees. The GOJ ignored contractual prohibitions against increasing taxes and royalties, citing changes in the economic environment as the reason for the actions. After the negotiations failed, the Parliament

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amended the mining law, calling for significant tax hikes. In less than a year, Revere's share value sank and the investors shut down the plant “as a result of economic necessity.” OPIC denied Revere Copper's expropriation claim on the ground that Revere's physical assets and license had not been taken. Revere responded by filing this arbitration.] (Citations selectively omitted) OPIC contends … [t]he Jamaican Government … has neither taken nor deprived Revere of control over Revere's investment or project. The argument continues that the Bauxite Levy did not prevent RJA from exercising effective control; it did not deprive RJA of a substantial portion of its property because the Levy could be passed through to the ultimate consumer; as for the breach of contract argument, this is not a basis for determining Expropriatory Action under the OPIC Contract; and there was anyway no breach here, as the 1967 Agreement was clearly governed by Jamaican law and the Supreme Court of Jamaica rejected RJA's claim of breach on the ground that the prohibitions against increased taxes and royalties were void ab initio. On the facts, we recognize that RJA is still in possession of its plant and other properties and that it shut down its plant in 1975 for economic reasons and not because the Government had physically intervened in the affairs of RJA so as to prevent it from using or disposing of its property. We also accept OPIC's contention that a mere breach of contract does not trigger the compensation provisions of the OPIC Contract and that, if a breach is relied upon as a ground for applying Section 1.15(d), the action taken by the Government must directly prevent the exercise of effective control. We do not agree with OPIC, however, that the abrogation argument is “nonsense”. From a careful analysis of the facts, we are convinced that the Government of Jamaica intended to abrogate the 1967 Agreement and that it effectively did so notwithstanding continued references to portions of the Agreement and efforts by both parties to negotiate new terms. We do not agree that the decision of the Supreme Court of Jamaica that Clause 12 was not binding on the Government of Jamaica determines the question of breach for the purposes of the OPIC Contract… [T]he 1967 Agreement on the basis of which Revere made its $97 million investment in Jamaica is or was governed by principles of international law as well as by the law of Jamaica … A majority of this Panel have concluded that the actions taken by the Government of Jamaica, having effectively put an end to the 1967 Agreement, directly prevented RJA from exercising effective control over the use or disposition of its property. It seems to the majority convenient to deal first with this question of abrogation; for if this did not occur and the Agreement remained intact, it would not be necessary to consider whether abrogation produced the effects required by Section 1.15(d). Whether the June 1974 legislation was a breach of the 1967 Agreement in turn depends on whether Jamaican law alone was applicable; for if it was, the decision of the Supreme Court effectively ruled out this ground for contending that there was a breach. While other actions of the Government compounded the effects of the June 1974 legislation and in our view evidenced repudiation, the Bauxite Levy, the increase in royalty and the amendment of the Mining law constituted the major breach and demonstrated the Government's disregard of its commitments. If these actions were exempt from the limitations of the 1967 Agreement on the ground of parliamentary privilege, it is difficult to understand how any other actions by the Government with respect to the Agreement would not also be exempt. In the majority view, the law of Jamaica is not the only law to be considered by this Tribunal. Although the Agreement was silent as to the applicable law, we accept Jamaican law for all ordinary purposes of the Agreement, but we do not consider that its applicability for some purposes precludes the application of principles of public international law which govern the responsibility of States for injuries to aliens. We regard these principles as particularly applicable where the question is, as here, whether actions taken by a government contrary to and damaging to the economic interests of aliens are in conflict with undertakings and assurances given in good faith to such aliens as an inducement to their making the investments affected by the action. *** A majority of the Panel has concluded that the 1967 Agreement falls within this category of a long term economic development agreement and that principles of public international law apply to it insofar as the government party is concerned and therefore that the question of breach by such party cannot be determined solely by municipal law. Whatever the position may be under municipal law, it would be contrary to well established principles of international law to leave the question of State responsibility to the alien party to the determination by that State as [to]what it lawfully could or could not do… *** … the Government of Jamaica did in that Agreement [RJA/GOJ Agreement of March 10, 1967] expressly agree in Clauses 12 and 13 that: “12.No further taxes … burdens, levies … will be imposed on bauxite, bauxite

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reserves, or bauxite operations …” “13.For the purposes of taxation and royalties the provisions of this Agreement shall remain in force until the expiry of twenty five years …” *** Having thus concluded that the Agreement of March 10, 1967 was an internationalized contract and, therefore, that international law principles are applicable, we consider next what principles govern the question of abrogation. b. Applicable Principles of International Law In 1962 the United Nations General Assembly adopted Resolution 1803 (XVII) relating to “Permanent Sovereignty Over Natural Resources” which provided “Foreign investment agreements freely entered into by, or between, States shall be observed in good faith.” (57 Am. J. Int'l. L. 710, 712 (1963)). This is a basic principle of international law notwithstanding subsequent efforts in the United Nations to limit its applicability. *** The international law rule that a government is bound by its contracts with foreign parties notwithstanding the power of its legislature under municipal law to alter the contract has been repeatedly asserted in important international arbitrations and elsewhere… *** … If the sovereign power of a State cannot be fettered in this manner by entering into binding contracts, the State would be deprived of the power by such contracts to meet essential needs. Inevitably, in order to meet the aspirations of its people, the Government may for certain periods of time impose limits on the sovereign powers of the State, just as it does when it embarks on international financing by issuing long term government bonds on foreign markets. Under international law the commitments made in favor of foreign nationals are binding notwithstanding the power of Parliament and other governmental organs under the domestic Constitution to override or nullify such commitments. Any other position would mean in this case that Jamaica could not in the exercise of its sovereign powers obtain foreign private capital to develop its resources or attract foreign industries. To suggest that for the purposes of obtaining foreign private capital the Government could only issue contracts that were non-binding would be meaningless. As the contracts were made in the sense that the commitments were set out in unqualified legal form, international law will give effect to them. For the purposes of this proceeding they must be regarded as binding. *** On this phase of the case we have concluded that, so far as international law is concerned, the Government of Jamaica was bound by its commitments under the provisions of the 1967 Agreement, including its commitments under Clause 12. c. Did the Acts of June 1974 Constitute Breaches of the Agreement? *** The legislative Acts of June 1974; the earlier and related statements of the Prime Minister, the elected Chief of State, the peremptory nature of the negotiating proposals of March 15, and actions subsequent to the June 1974 legislation in total evidenced repudiation by the Government by June 30, 1974, of its obligations under the Agreement with RJA. *** In the case of RJA, what did this mean? As we see it, the status of RJA in Jamaica was no longer protected by a contract between it and the Government of Jamaica that guaranteed it against further obligations (“no obligation will be placed on the Company”) or derogations ‘from its rights to own, operate, possess, use, and realize the lands, plant, equipment and other property held in connection with the project …” It is argued that RJA still had this protection under the Constitution of Jamaica, but Constitutional guarantees are frequently less effective than those provided by contract; anyway, the Constitution could be changed as the supremacy of Parliament is provided for in certain instances. If the law of Jamaica depended on what Parliament did and Parliament decided to interfere further with RJA's operations, RJA would not be protected. RJA was also deprived of many other rights under its contract, which we need not again enumerate. Not the least among these were exemptions from exchange controls and the agreement by the Government that RJA would enjoy the same rights as those granted to those companies. The latter provision was surely of considerable significance in a highly competitive industry. Revere could hardly state in a future prospectus under the Securities Act that its rights were protected by an agreement with the Government. It would, of course, have to spell

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out the action taken by the Government in 1974 and emphasize the resulting insecurity of its position. It could no longer merely maintain a brave front pretending either that the 1967 Agreement was still in full force and effect or that its rights were otherwise protected under Jamaican law. We thus conclude that the Government did repudiate the 1967 Agreement. e. Did Repudiation of the Agreement Constitute Expropriatory Action Under Section 1.15? This is not a claim against the Government of Jamaica for damages for breach or repudiation of the Agreement on the ground that such action constituted a violation of international law. The sole question for decision here is whether the Government actions repudiating the Agreement directly prevented RJA from exercising effective control over the use or disposition of a substantial portion of its property or from operating the property. The answer to this question requires an analysis of the Agreement and its relation to the use, operation and disposition of the plant and other facilities. *** In our view the effects of the Jamaican Government's actions in repudiating its long term commitments to RJA have substantially the same impact on effective control over use and operation as if the properties were themselves conceded by a concession contract that was repudiated. In reaching this conclusion we are mindful that Government action impact must be on the exercise of control, and that the control referred to must be “effective”: that is, it must be practical and not merely theoretical control. This is not a legalistic but a practical problem. OPIC argues that RJA still has all the rights and property that it had before the events of 1974; it is in possession of the plant and other facilities; it has its Mining Lease; it can operate as it did before. This may be true in a formal sense but for the reasons stated below we do not regard RJA's “control” of the use and operation of its properties as any longer “effective” in view of the destruction by Government actions of its contract rights. Control in a large industrial enterprise, such as that conducted by RJA in Jamaica, is exercised by a continuous stress of decisions. It is this decision making process that must be examined before deciding whether effective control exists and can be exercised in the absence of a stabilization agreement with the Government. *** Without putting too fine a point on it, such factors as present cost, probable life of the facility, financing, probable impact on total operation, anticipated return, all leading to a cost-benefit analysis, are some of the factors at the heart of day-to-day decision making in small matters as well as in large ones. Rational decisions require some continuity of the enterprise. In a large enterprise like the present one, with the contract gone decisions simply become gambles. Risks are inherent in all such decision making, but without the contract the odds cannot be calculated. There is no way in which rational decisions can be made. What the Government did yesterday it can do tomorrow or next week or next month. If it did one thing yesterday, it can do something else tomorrow or next week or next month. This is the antithesis of the rational decision making that lies at the heart of control. Here “effective control” not only of the contract but of the entire operation has been lost, due directly to the action of the Government. Webster defines “directly” as “in a direct way; without anything intervening”. Nothing intervened here between the Government Actions and the loss of effective control. *** If this analysis is not valid, if physical impact on a substantial portion or all of the property or on the operation of the enterprise is needed to trigger subsection 1.15(d), one must ask at what point, if ever, in a complex industrial operation such as we have here, involving large investments, will the cumulative impact of the inability to make rational decisions in fact trigger this subsection? Must one wait until there has occurred something akin to the troops coming in, little by little or all at once, in a nineteenth century sense? Must there be some physical impact? In our view such narrow interpretation of the contract of insurance does not fit the realities of today and was not intended by the framers of subsection 1.15. *** Since in our view the actions of the Government come within subsection 1.15(d) of the OPIC contract, the last sentence of Section 1.15 is inapplicable. And since the actions violate generally accepted international law principles, paragraph (1) is inapplicable. On the issue of liability, therefore, we find on the merits for Revere and award accordingly. [b] MidAmerican Energy Holdings Company (formerly CalEnergy Company, Inc.) (Indonesia: 1999), OPIC Memorandum of Determinations: Expropriation Claim of MidAmerican Energy Holdings Company (formerly CalEnergy Company, Inc.) – Contracts of Insurance Nos. E374, E453, E527, and E759 – of November 1999, (3) 1-4, 5-6 [Himpurna California Energy Ltd. and Pathua Power Ltds, MidAmerican Energy Holdings Company's (MidAmerican) majority-owned subsidiaries in Indonesia, entered into contractual arrangements with the Indonesian Government (“GOI”), and its state-owned

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electricity (PLN) and oil & gas (Pertamina) companies, for the development of two separate geothermal fields, the construction of generation facilities and the sale of the electricity to be generated. On September 20, 1997, the GOI issued a Presidential Decree indefinitely postponing, and providing for its review of certain units of the projects. In June 1998 the President-Director of PLN announced that its agreement to both projects would be repudiated. This statement was followed by breaches of the agreements, which finally were followed by an instruction from the electricity state-owned company that had the effect of shutting one of the plants down.] (Citations selectively omitted) OPIC Memorandum of Determinations Expropriation Claim of MidAmerican Energy Holdings Company ( formerly CalEnergy Company, Inc.). *** The Contracts provide two alternative bases for an expropriation claim, the first dependent on acts of the government of Indonesia (the “GOI”) that are not breaches of contracts between the Insured or the Foreign Enterprises (as defined below) and the GOI, PLN (as defined below), or Pertamina (as defined below). The Original Claim requests compensation under this basis for coverage… The second basis for an expropriation claim is that the Foreign Enterprises have received arbitral awards against PLN or Pertamina under the project agreements … as well as against the GOI based on the GOI Support Letters … The Second Claim requests compensation under this second basis for coverage… Acting through its majority-owned subsidiaries Himpurna California Energy Ltd. (“HCE”) in connection with the Dieng Project and Patuha Power Ltd. (“PPL”) in connection with the Patuha Project, the Insured had entered into contractual arrangements (…) with P.T. Perusahaan Umum Listrik Negara (“PLN”), the wholly state owned Indonesian electricity company, Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (“Pertamina”), the wholly state owned natural resources company, and the GOI for the development of two separate geothermal fields, the construction of generation facilities thereon, and the long-term sale of the electricity to be generated. (Himpurna California Energy Ltd. and Patuha Power Ltd. are referred to herein as the “Foreign Enterprises” and each a “Foreign Enterprise”). *** … Pursuant to separate Joint Operating Contracts (each a “JOC”) between each Foreign Enterprise and Pertamina, Foreign Enterprises were to develop and operate their respective geothermal fields for a period of forty-two (42) years. Although Pertamina continued to have an interest in the fields as required under Indonesian law, each Foreign Enterprise, acting as contractor for Pertamina, had the exclusive right to develop the field and to build generation facilities thereon. Each Foreign Enterprise, PLN, and Pertamina then entered into an Energy Sales Contract (“ESC”) providing that PLN would purchase electricity generated from the field or, in the event it did not purchase the electricity, it would nevertheless be obligated to pay a fixed amount for the unused capacity. PLN's purchase obligation ran directly to Pertamina, as the owner of the field, but the payment obligations were assigned to the Foreign Enterprises irrevocably. The term of the ESCs coincided with the term of the related JOCs. The two insured Projects were each to be developed in four staged units… Each of the Projects also received a letter signed on behalf of the Government of Indonesia by the then Minister of Finance that provided that the GOI “would cause” Pertamina and PLN “to honor their obligations” under the relevant JOC and ESC (collectively, the “GOI Support Letters” and each a “GOI Support Letter”). The GOI Support Letters, the JOCs, and the ESCs are referred to herein as the “Project Agreements”. *** On September 20, 1997, Presidential Decree 39/1997 (“PD39") was issued by the GOI. This presidential decree had the force of law and affected the rights of all parties, including the state-owned enterprises, Pertamina and PLN, in connection with power projects (IPPs) being developed at that time in Indonesia. This decree divided Indonesia's various independent power projects into three categories: those that were to be “continued,” those that were to be “reviewed,” and those that were to be “postponed.” PD39 classified the Dieng project as continued in part (units 1, 2, and 3) and postponed in part (unit 4) and the Patuha project as reviewed in part (unit I) and postponed in part (units 2, 3, and 4). *** The stated intent of PD39 was to establish a transparent process for quickly determining which of the postponed IPPs should be continued, based on factors to be developed during the course of the review process. A high level committee was to be created. However, on November 1, 1997, a new presidential decree (Presidential Decree 41/1997) was issued modifying PD39. This decree reclassified certain of the IPPs without any

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reference to the committee. Patuha unit 1 was reclassified as “continued.” While this further decree did not purport to change the plan to put in place a committee to oversee the review process, the effect of the decree was to make the role of any PD39 committee uncertain. Indeed, at that time no review committee had been established. On December 16, 1997 the Foreign Enterprises each asked PLN to confirm its intention to carry out its obligations under the ESCs, but no response has ever been received. *** In June of 1998, PLN (through its President-Director) made several public statements implying that the Project Agreements of both of the Projects would be repudiated. These statements were followed by clear breaches of the Project Agreements of the Dieng Project. On June 4, 1998, PLN failed to make the first payment due under the ESC relating to that Project, even though the first unit had been “continued” under PD39. PLN's breach of its payment obligations was followed by an instruction from PLN to the Foreign Enterprise on July 8, 1998, “to dispatch Dieng Unit 1 to 0 MW,” which had the effect of shutting the plant down. Under the ESC, however, PLN's payment obligations continued whether it took power from the Dieng plant or not. PLN has made no payments since then on these obligations. During the period since the promulgation of PD39, no compensation has been paid to the Insured or the Foreign Enterprises under the Project Agreements or otherwise. Additionally, the GOI and its wholly-owned enterprise, PLN, have made it clear (both publicly and in direct conversations with OPIC) that, in their view, the Dieng and Patuha projects are not needed… PLN has informed OPIC directly that its basis for “rationalization” discussions has been that the GOI and PLN are not bound by their prior agreements… The GOI has treated all IPPs as postponed or cancelled. *** Having obtained unsatisfied awards against PLN, the Foreign Enterprises proceeded with their arbitration against the GOI. However, in June of 1999 Pertamina sought to enjoin both the second arbitration and the enforcement of the PLN Awards, and PLN separately sought to enjoin the enforcement of the PLN Awards. On July 23, 1999 Pertamina obtained from an Indonesian court an order enjoining the Insured from attempting to collect on the PLN Awards and from pursuing other remedies under the Project Agreements… In addition, the GOI has threatened to use its police powers to fine and imprison any person attempting to take any action under the remedies sections of the Project Agreements or otherwise participate in violation of the terms of the injunction. *** … On October 16, 1999, the tribunal issued final awards without the participation of the Indonesian arbitrator. Those awards found that the GOI was responsible under the terms of the GOI Support Letters for causing PLN to honor and perform its obligations to the Foreign Enterprises, including the obligation to make payment on the PLN Awards, and that the GOI was therefore liable for damages to the Foreign Enterprises in the aggregate amount of $577,000,000. *** THE A CLAIM I. Acts attributable to the GOI. The first step in evaluating the elements of an A Claim is to determine if the alleged expropriatory “act or series of acts, excluding (I) any breach or alleged breach of any provision of any Project Agreement,” is “attributable to a foreign governing authority.” There have been a number of acts attributable to the GOI that have directly affected the rights of the Insured in its investments in the Foreign Enterprises: (i)

Then-President Soeharto issued PD39, which interrupted the development of the Investor's projects. (ii) The GOI refused to respond to requests for explicit assurances that the Projects would be permitted to continue. The result of this failure was a withdrawal of financing and the Foreign Enterprises' inability to continue development and to complete construction of the Projects. (iii) The GOI failed to establish an effective review process under PD39 or to offer compensation for the deprivation of the value of the Insured's investments. (iv) The courts of Indonesia interfered in the exercise of the dispute resolution provisions of the Project Agreements and the enforcement of a properly issued arbitral award. (4) (v) The GOI further interfered in the arbitral process by using its personnel in an attempt to disrupt and cause a postponement (or even cancellation) of the tribunal's sessions. ***

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II. The acts of the GOI are violations of international law. The Draft Convention on the International Responsibility of States for Injuries to Aliens (1961) (5) defines a taking as “unreasonable interference with the use, enjoyment, or disposal of property as to justify an inference that the owner will not be able to use, enjoy, or dispose of the property within a reasonable time after the inception of such interference.” This definition would include an act or series of acts that deprived an investor of the benefit of its investment without compensation from the state or a third party. The Iran-U.S. Claims Tribunal found takings in Iran's deprivation of fundamental property or contract rights of several American companies notwithstanding the lack of a formal decree of nationalization. Additionally, arbitral tribunals have recognized that rights under contracts are property subject to expropriation. The deprivation of property is a violation of international law if prompt, adequate, and effective compensation is not paid. The GOI has failed to pay or offer to pay any compensation and has interfered with the Insured's attempts to use contractual and judicial means to obtain compensation. The acts of the Indonesian courts (which are attributable to the GOI) and acts of the GOI in connection with the tribunal hearings in The Hague were intended to deny the Foreign Enterprises their rights under the Project Agreements, and under the terms of appointment agreed to by the GOI, to arbitration as a form of dispute resolution. (6) As a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958, the GOI additionally had an international law obligation to assure that entities investing in Indonesia were afforded appropriate protection for the rights to arbitration contained in the Project Agreements. (7) The GOI has failed to comply with this obligation and has instead taken steps to prevent the exercise of those rights. While there could be debate over whether the acts described could also be viewed as breaches of the Project Agreements, it is not necessary to resolve that question definitively here, and this determination does not do so, because of the existence of an alternative basis on which compensation is payable under the Contracts, as described below. What is clear is that the acts of the GOI directly and adversely affected the rights of the Insured in its investments, that no compensation has been provided therefor, and that the GOI has taken extraordinary measures to frustrate the Insured's attempts to obtain compensation through the arbitration process to which the GOI had agreed, all in violation of international law. III. The acts attributable to the GOI have deprived the Insured of its fundamental rights in the investments. *** By permitting Pertamina to seek and to obtain an injunction against the enforcement of the PLN Awards, which had been rendered by a tribunal constituted in accordance with the terms of the Project Agreements and terms of appointment agreed to by the GOI, and by issuing that injunction, the GOI has interfered with the right of the Foreign Enterprises to enforce the awards against PLN. The PLN Awards probably have no value outside of Indonesia since it is unlikely that PLN has assets outside of Indonesia. The dispute resolution mechanisms established in the Project Agreements and the rights to independent arbitration are vital to development of any large-scale project with substantial government involvement. These provisions are customary in international power project financing and necessary both to attract financing and to assure prompt and fair resolution of controversies with a foreign counter-party. The rights established by such provisions are an essential element of the Project Agreements. By interfering with these rights, therefore, the GOI has deprived the Insured of an important element of its fundamental rights in the insured investment, and has additionally deprived the Insured and the Foreign Enterprises of the value of the PLN Awards. *** The Insured and the Foreign Enterprises have been deprived of fundamental rights in the insured investments both because the Insured has been deprived of its ability to develop the Projects and because the right to arbitration and to enforce the PLN Awards has been interfered with and effectively denied. *** THE B CLAIM II. Non-payment of the arbitral award is a violation of international law. The Restatement (Third) of Foreign Relations Law states that “… a state may be responsible … if, having committed itself to a special forum for dispute settlement, such as arbitration, it fails to honor such commitment; or if it fails to carry out a judgment or award rendered by such domestic or special forum.” Article II of the New York Convention recognizes the importance of these provisions and each signatory (including Indonesia) undertakes to support and enforce agreements to arbitrate (whether such proceeding is otherwise subject to the Convention, or not). The economic crisis that continues to affect Indonesia does not afford a defense to

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Indonesia's obligation to pay the amount of the awards. The GOI has stated that it is not able to pay the amount of the GOI Awards and will not do so. Similar arguments have been raised and rejected in other contexts. (8) According to the notes explaining the Harvard Draft Convention, The poverty of a country or its asserted inability to pay may not be set up as a defense to international responsibility. As in connection with the taking of property, a State can easily allege that it did not have enough funds for its own governmental purposes and therefore would not be in a position to discharge its obligations to aliens. The acknowledgement of any such defense would involve an international court in … inquiries into the internal affairs of States. Therefore the failure of the GOI to make payment constitutes a violation of international law. *** Amount of Compensation Pursuant to section 5.01 of the Contracts, as amended, compensation for expropriation is based on the book value of the insured investment, subject to certain adjustments and limitations… *** … The active amount at all relevant times was $217,500,000, which is less than the Investor's share of such award, and less than the book value of the insured investment, and thus constitutes the amount of compensation payable under the Contracts. *** Conclusion For the foregoing reasons OPIC concludes that compensation in the amount of $217,500,000 should be paid to the Insured. [4] Defenses [a] Central Soya Company, Inc. (Venezuela: 1967), OPIC Action Memorandum: Denial of Expropriation Claim – Contracts Nos. 5128 and 5129 – of 21 September 1967, 2-3 [In June 1965, certain employees took control of the mill and hatchery used jointly by Incubation Tropical, Alimentos Agro and Central Soya in an effort to prevent entry by creditors until the employees' own attachments had been filed in connection with overdue wages. This seizure lasted for about five days, and the employees prevented almost all shipments of merchandise and feed from leaving the premises, allowing feed to ruin and chicks to starve, and keeping all proceeds from any sales for their own benefit. There was no solid evidence that seizure of Central Soya's property by its employees was “taken, ratified or condoned” by the government of Venezuela within the meaning of the contract. The employees' action grew out of insolvency or creditors' proceedings against the foreign enterprise, which are specially exempted from coverage by the Contract. The difficulties were related to a labor dispute over unpaid wages, and therefore, it was a business risk not insured by AID.] OPIC Action Memorandum Denial of Expropriation Claim September 21, 1967 Central Soya Company, Inc. – Contracts #5128 and 5129 … Central Soya alleges that as a result of a creditor's action, the assets of the two foreign enterprises and certain other assets belonging to Central Soya were seized in a labor insurrection apparently condoned by the Venezuelan Government … *** Facts The Investor's claim is based on evidence that certain employees took control of the mill and hatchery used jointly by Incubation Tropical, Alimentos Agro and Central Soya in an effort to prevent entry by creditors until the employees' own attachments had been filed in connection with overdue wages. In the course of this seizure, which began on July 31, 1965 and lasted for about 5 days, the employees apparently prevented almost all shipments of merchandise and feed from leaving the premises, allowed feed to ruin and chicks to starve, and kept all proceeds from any sales for their own benefit. There is no solid evidence of any condonation by the GOV or any agents thereof… Conclusions While the evidence presented indicates that the laborers took over Central Soya's

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property, it does not indicate that such action was “taken, ratified or condoned” by the government within the meaning of the contract. The conclusion is that the action of the laborers grew out of insolvency or creditors' proceedings against the Foreign Enterprise which are specifically exempted from coverage by Subsection (5) Section 1.15 of the General Terms and Conditions. In other words, the difficulties were, at best, a labor dispute over unpaid wages and therefore a business risk not insured by AID. Finally, there is insufficient evidence to show efforts to take all reasonable measures, including proceeding under available administrative and judicial procedures in the project country, to prevent or postpone such action. For the above reasons, it is concluded that the action complained of was not Expropriatory under Contracts of Guaranty Nos. 5128 and 5129, and recommend that you deny said claim and sign the attached letter. [b] The Anaconda Company & Chile Copper Company v. Overseas Private Investment Corporation (AAA Case No. 16 10 0071 72), Award of 17 July 1975, 14 I.L.M. 1210, 1211, 12351246 (1975) [Anaconda Company was active in the copper mining industry in Chile during the 1960s. In September 1964, Eduardo Frei was elected President of the Republic of Chile after a political campaign in which the nationalization of the copper mining industry played a central role in the campaigns of both candidates. After the new administration took power, Anaconda entered into agreements with the Chilean Government (“GOC”) committing itself to expand its plants, but also agreeing to transfer a percentage of its interest in the local projects to a “mixed mining” company owned in part by an agency of the GOC and in part by Anaconda. In 1966, the GOC enacted the “Copper Law,” which created an autonomous government corporation called “Codelco”, with extensive powers to intervene in the copper mining business. In 1967, the Agency for International Development (“AID”) entered into contracts of guaranty with Anaconda. After several negotiations with the GOC, and under social demands to nationalize the copper industry, in 1969 Anaconda and the GOC agreed on transferring all the copper mining projects' assets to two newly-formed mixed mining companies, in which Codelco held a majority interest. Anaconda retained the minority participation, but it was in charge of mining, construction and sales operations. In 1970, Salvador Allende was elected President, and he proposed a constitutional amendment expropriating the copper industry. That amendment became law on July 16, 1971. Several decrees were enacted thereafter to implement the nationalization of the copper mining industry, and the 1969 agreements were in effect cancelled. Later, the GOC determined that no compensation was due to Anaconda. OPIC denied coverage, and this arbitration resulted.] (Citations selectively omitted) *** 1. … AID undertook to guarantee against expropriatory action … (a) an investment of $135,000,000 made by Chile Copper Company … in Chile Exploration Company (Chilex) for expansion and modernization of facilities at the latter's Chuquicamata mine in Chile and (b) and investment of not more than $25,700,000 by The Anaconda Company … in Andes Copper Mining Company (Andes) for expansion and modernization of facilities at the latter's El Salvador mine in Chile… Anaconda asserts that the “Constitutional Amendment, nationalizing the Major Mining Industry” published in Chile's Official Gazette on July 16, 1971 … constituted expropriatory action within the meaning of the Contracts of Guaranty and entitled it to compensation thereunder. OPIC denies liability on various theories, all related to an arrangement negotiated in 1969 between Anaconda and the Government of Chile which changed the relationship between Anaconda and the Chuquicamata and El Salvador mines. *** 25. … OPIC contends that there could not have been Expropriatory Action in 1971 inasmuch as Anaconda no longer had the type of interests in Chile that could be protected by the Contracts of Guaranty against such action. It advances three theories: (a) (b) (c)

that the 1969 agreement so changed the nature of Anaconda's investments as to put them outside the scope of the contract; that there could be but one Expropriatory Action under the Contracts or Guaranty and that had occurred in 1969 when there was no coverage because Anaconda had elected standby status; or that Anaconda had committed a breach of covenant or misrepresentation that would disqualify it from recovery.

26. The first issue to be considered is whether the transformation which Anaconda's interests in Chile underwent in 1969 so transformed the subjects of the Contracts of Guaranty that no further coverage existed. We note that what the expropriation coverage clauses of each Contract of Guaranty insured was the Investment. By contrast, the war damage coverage relates to the Investor's Share of the property of the Foreign Enterprise. No covenant forbade the transfer of the assets of the Foreign Enterprise. Taking the exact contract language literally, therefore, this defense by OPIC appears unfounded. However, such emphasis on the Investment carries within it the danger of an interpretation that the

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insurance coverage applies no matter what transformations were accomplished in the utilization of that Investment. Through the legislation, the Guaranty Handbook and all of the history of the investment guaranty program comes a strong emphasis on the Project approved by both the United States and the foreign government and weighed and tested by the agency issuing the guaranty. Thus we might conclude that coverage terminated if there remained no link whatsoever between the Investor and the Project. Such is not, however, the case here since the Foreign Enterprise continued to be in practical effect the “Operator” of the Project, was in the process of completing it and had a significant financial interest in its success. This we find is a sufficient nexus. 27. Experience with long term mineral concession or development contracts in the lessdeveloped areas of the world indicates that a not unusual feature of their history is that they are renegotiated by the government over the course of their life. The balance of power shift . The preliminary negotiations confront a naive government unaware of the extent of the minerals it owns with a sophisticated multinational enterprise free to select among many areas of the world the place where it will invest. Later on one finds renegotiations taking place between an increasingly skilled administration that knows what it has, believes it could soon run matters by itself and sees the returns of the investor as exorbitant (forgetting the original risks run by the firm) and an increasingly vulnerable outside firm with high sunk costs. This process was obviously operating in Chile in 1969. A contract construction that permitted responses by Anaconda to changing conditions, particularly to local sharing of the equity along lines generally accepted in the industry, seems plainly desirable and consistent with the legislative purpose. (9) 28. We, therefore, conclude that the basic requirement is no more than that the Foreign Enterprise continue to carry out the Project as demanded by Section 2.11 and … have a continuing financial interest in its success. That means that it must continue to provide the knowledge and expertise which, in the first instance, made it an appropriate candidate to undertake the task. Then one must determine what type or degree of control must persist in order for the necessary link to remain. On the evidence it is clear that from the end of 1969 to 1971 Anaconda retained de facto control in the sense that operations continued to be carried on in the same way as before, by the same personnel – with a handful of exceptions – as before, through substantially the same practical chain of command as before, and pursuant to the same plans as before. It is true that the majority of the board, representing the 51% stock interest now held by Codelco, had the power to interfere with or veto management plans and policies favored by Anaconda. Taken together, Codelco's powers amounted to de jure control of a sort on a policy level and, had it chosen to exercise those powers, it might have at least stalemated the situation at the mines. However, it did not do so and – with the exception of one tentative disagreement about development plans, not persisted in by Codelco's representatives – did not even attempt to do so. Indeed, Anaconda's practical control over operations at the mines compares favorably with that exercised by Kennecott at El Teniente, even though the verbalizations were more circumspect in the case of Anaconda. Anaconda continued to have an interest in the mines' production and the resulting earnings, constituting a type of insurable interest therein. Thus we conclude that Anaconda retained such a connection with the subject matter of the guaranty as to entitle it to continued coverage. *** 31. The next question to arise from the events of 1969 is whether Anaconda is entitled to no recovery for the 1971 events because (a) what happened in 1969, while Anaconda was on standby coverage, was an Expropriatory Action under Section 1.15 and (b) under the Contracts of Guaranty there could be no more than one Expropriatory Action. As to the occurrence of Expropriatory Action in 1969, it is Anaconda's first contention that there was no such Action within the basic definition of Section 1.15 because, in essence, Anaconda was not prevented “from exercising effective control over the use or disposition of a substantial portion of its property.” … OPIC's position on this issue is based on the contention that loss of legal ownership, as distinguished from control in a practical sense, is enough to satisfy the test of Section 1.15(d). We find this contention without support in the contract language. Thus, we conclude that no Expropriatory Action as defined took place in 1969. *** 33. Another, alternative exclusion from the definition of Expropriatory Action is one specific to guarantees of copper mining investments in Chile. That is the “Copper Law exclusion” added to Section 1.15 by the Special Terms and Conditions. It relates to actions validly taken pursuant to the Copper Law and to various specified decrees thereunder. The 1969 transformations clearly purported to be under the authority of the Copper Law, and there seems to be no reason to doubt the views of Anaconda's Chilean counsel that, as far as the Chilean legal system is concerned, the action was validly taken. There is clearly a difference here between the 1971 action, which required an amendment of the Chilean constitution and could not be regarded as pursuant to the Copper Law, and that of 1969. Thus there is prima facie reason to believe that the “Copper Law exclusion” applies. OPIC argues for a narrower reading of that clause. One version of OPIC's attack on the applicability of the clause is to say that “validly” is not to be determined under Chilean law but under a more universal standard, whether it be that of United States law

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or of international law. Interpreted by that standard, OPIC says, such an action would not be valid because it was not a “voluntary” action on Anaconda's part. The state of the law on this subject is so uncertain that it would be difficult to assert confidently that the actions of 1969 were violative even of the United States version of international law. In any event the OPIC interpretation of the adverb “validly” seems too strained to be accepted by us. 34. The second branch of OPIC's attack on the Copper Law exemption is to assert that it does not mean what it says on its face. OPIC would limit its applicability to measures of a regulatory type undertaken under the aegis of the Copper Law… Even though the Copper Law exception is not mere surplusage on OPIC's interpretation, that reading is not the more natural one. AID was aware of the full scope of the Copper Law powers, it was aware that there were mixed mining companies and it was on notice that Chile might press for participation in mining firms still wholly foreign-owned. If it wished to except from the scope of the exemption such actions by Chile it should have said so; of course, in the normal course of events a broad exception would have been against the interests of an insured copper company rather than of OPIC and it should have been the Investor's task to narrow it. In any event, it was not so narrowed and should be read as it stands. On that reading, the transactions of 1969 did not constitute Expropriatory Action under the Contracts of Guaranty. *** 37. OPIC also asserts that Anaconda is disabled from recovery because of violation on its part of covenants contained in the Contracts of Guaranty. Only Section 2.11 is of serious consequence in this connection – the one that provides that Anaconda will cause Projects to be carried out, to the extent reasonably within its control. We have already considered the elements of this matter in connection with … the question whether the subject matter of the Contracts had been so changed as to deprive Anaconda of coverage. It follows from what we said there that there was no breach of that covenant by Anaconda – even if we leave out of account the “reasonably within its control” clause. 38. OPIC further claims that Anaconda cannot recover because of material misrepresentations in the application which it filed with OPIC… Under Section 3.01 of the Contracts of Guaranty “any material misstatement of fact in applying for compensation” would give OPIC the right to terminate the Contract of Guaranty. “Material” is defined as meaning resulting in a “substantial increase in the likelihood” of the agency's paying compensation. The misrepresentation pointed to is one that the Projects had been completed by the end of 1969. The evidence presented at the hearings makes it plain that the Projects had not been completed at that time, although they were well along towards completion and were fully on schedule… Was this misrepresentation material, as defined? Note that no term of the Contracts of Guaranty required completion as a condition precedent to payment on OPIC's guaranty. Nothing in OPIC's memorandum of denial … indicates that OPIC was moved any closer to a grant rather than a denial of the claim by the misstatement. In most cases where the question of materiality is raised – as in those dealing with purchases and sales of securities – one is left to wonder at the potential impact of the misstatement. Here that element of doubt is to a major degree laid to rest by the contemporaneous statement by OPIC as to its reasons, which give no weight to the entire question. We conclude, therefore, that Anaconda's misstatement was not in the Contracts' terms “material.” … 39. In short, on every point of contract construction necessary for our decision, we find that the interpretation required to support the OPIC position is too strained for us to accept, even after giving due weight to the policy of the Foreign Assistance Act. OPIC could readily have drafted the contract forms so as to ensure in regard to each point the result it now contends for. But that was not done. It is not our proper function to rewrite the Contracts of Guaranty nor do we perceive any reasons of equity or statutory purpose for doing so. Decision 40. We therefore hold that OPIC is liable on each of its Contracts of Guaranty … both with respect to the part of the Investment represented by Codelco notes (the 51% interest in the Project) and with respect to that represented by stock in the mixed mining company (the 49% interest). [5] Comments and Questions 1. 2.

OPIC's early claims handling and its early case law of expropriation is exhaustively treated in a 1981 article, Vance R. Koven, Expropriation and the “Jurisprudence” of OPIC, 22 Harv. Int'l L.J. 269 (1981). In Findings of Fact, Conclusions of Law and Award of September 3, 2003, AAA Case No. 50 T 195 00 509 02, Bechtel Enterprises International (Bermuda) Ltd.; BEn Dabhol Holdings, Ltd.; and Capital India Power Mauritius I v. OPIC, (http://www.opic.gov/foia/ Awards/2294171_1.pdf), an AAA arbitral tribunal held OPIC liable to pay Bechtel and BEn Dabhol Holdings (jointly, Bechtel) $28,570,000 and also to pay Capital India Power (CIPMI), a subsidiary of General Electric Corp., $28,570,000, based on an expropriation of their investments in the Dabhol Power Company (DPC). DPC is an

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3.

4.

5.

6. 7. 8. 9. 10.

11.

Indian company established to construct, own and operate a combined cycle power plant, a liquid natural gas regasification facility and associated port facilities in the State of Maharashtra, India. The tribunal held that actions of the government of the State of Maharashtra (GOM), its power regulatory agency (MSEB) and the government of India (GOI) constituted an expropriation of the claimants' investments. The expropriatory acts included MSEB's cessation of payments to DPC for electricity pursuant to a Power Purchase Agreement (PPA) between them, the MSEB's purported rescission of the PPA, the refusal of the GOM and GOI to honor their guarantees of MSEB's performance under the PPA, the Indian courts' issuance of an injunction against the claimants terminating the PPA, which would have triggered MSEB's liability for a Transfer Amount, and the effective enjoining of DPC from exercising its international arbitration procedures and remedies under the PPA. The tribunal found each of these actions to be politically motivated and to violate international law. OPIC's position is not entirely clear from the Award, but appears to be that the contracts should have been renegotiated. This position was implicitly rejected by the tribunal as a defense. Soon after the AAA arbitration award was issued in the Bechtel case, OPIC issued a Memorandum of Determinations in which it held that Bank of America's expropriation claim with respect to a loan it held involving the Dabhol Power Company was valid. OPIC agreed to pay the claim for more than $27 million. The Bechtel AAA Award and the Memorandum of Determinations concerning the Bank of America claim are available on the OPIC website. On November 4, 2004, the U.S. Government filed a Request for Arbitration against the Government of India pursuant to the arbitration clause of the Investment Incentive Agreement with India, which forms part of the series of treaties supporting OPIC's political risk insurance program. The arbitration request claimed that OPIC had paid approximately $110 million in claims related to India's measures with respect to the Dabhol Power Company. The Request for Arbitration can be found on OPIC's website. In 1927, a predecessor of International Telephone & Telegraphs Corp. Sud America (ITTSA) acquired all the shares of Chile Telephone Company, Ltd (CTCo), which had a fifty-year concession. The Government of Chile (GOC) had representation in CTCo., and it increased its participation in CTCo through different acquisitions. In the 1970 Presidential elections there were three candidates, Salvador Allende, left-wing communist and Marxist-oriented candidate, that had called for radical measures like the nationalization of basic industries; the second and third candidates represented more moderate right-wing positions. During the political campaign, some executives of IIT, ITTSA's parent company, held conversations with the CIA, U.S. Government high level officials, and Allende's competitors in the presidential elections, in order to influence the presidential campaign and block Allende's aspirations. After a run-off between Allende and Alessandri, one of the right-wing oriented candidates, Allende took office on November 3, 1970. Immediately thereafter, the new administration started intervening in CTCo, and after several unsuccessful negotiations with ITTSA's officials, on September 29, 1971, the GOC took CTCo's property by force. OPIC denied coverage, which resulted in an arbitration reported as International Telephone & Telegraph Corp. Sud America v. Overseas Private Investment Corporation, 13 I.L.M. 1307 (1974). What exclusions and defenses to an expropriation claim exist under OPIC policies? What defenses did OPIC assert in the Revere Copper case? In the Anaconda Company & Chile Copper Company case? What were the respective tribunals' decisions as to the validity of those defenses? Does OPIC cover the non-payment of an arbitral award against a government? How is it covered? Is OPIC's view of the international law of expropriation consistent with customary international law? Why or why not? If the first of a series of acts leading to a creeping expropriation begins before the OPIC policy covering expropriation becomes effective, but other relevant expropriatory acts occur after the policy came into effect, is the expropriation covered? Do the usual presumptions of insurance law apply to OPIC policies? Why or why not?

[B] Currency Inconvertibility Claims [1] Reasonable Steps to Convert Local Currency [a] Philippine Geothermal, Inc. (The Philippines: 1984), OPIC Memorandum of Determinations: Inconvertibility Claim of Philippine Geothermal, Inc. – Contract of Insurance No. 8577 – of 10 August 1984 [In 1971, Philippine Geothermal, Inc. (“PGI”) and the National Power Corporation (“NPC”), a Philippine corporation, entered into a service contract to provide for the exploration and exploitation by NPC of geothermal resources. In October 1983, the Republic of the Philippines (“ROP”) went through a financial crisis, and in response to substantial

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outflows of foreign exchange, it requested a ninety-day moratorium on repayments of debt principal, instituted exchange controls, and requested banks to sell 100 % of their foreign exchange to the Central Bank in order to create a foreign currency pool. PGI applied to its bank in the Philippines for transfer of its local currency, but it was unable to obtain foreign exchange from the pool.] OPIC Memorandum of Determinations Inconvertibility Claim of Philippine Geothermal, Inc. The Philippines – Contract of Insurance No. 8577 I. Claim By letter dated December 22, 1983, supplemented by letters dated December 28, 1983 and February 2, 1984 …, Philippine Geothermal, Inc. (“PGI” or the “Investor”) filed an inconvertibility claim (the “Claim “) for the transfer of 56,008,000 Philippine pesos (the “Local Currency”) under Contract of Insurance No. 8577 (the “Contract”)… The Local Currency represents certain payments due PGI from the National Power Corporation (“NPC” or the “Foreign Enterprise”), a Philippine corporation, for the quarters ending December 1982, March 1983, and June 1983 (herein referred to as the “Payments”), under a contract dated September 10, 1971, including the amendments thereto (the “Service Contract”)… OPIC finds the Claim to be valid and the amount of compensation due to be $3,960,000. II. Discussion On September 10, 1971, PGI and NPC entered into the Service Contract, which provided for the exploration and exploitation by NPC of geothermal resources. PGI made a capital contribution and is required to render technical assistance in connection with exploration and operations and provide a portion of the operating costs. In return, PGI receives a monthly service fee and cost recovery. The total monthly payment is calculated according to a formula based on the amount of electrical energy produced every month. The Contract, executed on February 28, 1975, provides PGI coverage on its geothermal projects based at Tiwi and Los Banos in the Republic of the Philippines (“ROP”). PGI's contribution to the projects consists of capital for operations, machinery, equipment, and technical expertise. At the time the investment was made, the Constitution and laws of the Philippines granted the right to remit earnings freely and to repatriate paid-in-capital. PGI has never been prohibited from receiving payments made under its Service Agreement in U.S. dollars. Recently, however, substantial dollar outflows have caused the Philippines' balance of payments to deteriorate. In response, the Philippine Central Bank issued Circular 970 … requesting that commercial banks suspend all foreign currency transfers and turn over all foreign exchange to the Central Bank. B. Basic Facts PGI applied to the Central Bank for transfer of payments received in three consecutive quarters, ending December 1982, March 1983, and June 1983. (For income tax purposes, PGI prepares statements of amounts received under the Service Contract on a quarterly basis.) In October 1983, PGI was able to transfer approximately 41,000,000 of the total 161,000,000 Philippine pesos due under the Service Contract for those quarters. In response to substantial outflows of foreign exchange, on October 17, 1983 the ROP requested a ninety (90) day moratorium on repayments of debt principal. Since then, exchange controls have been instituted requiring commercial banks to sell 100 percent of their foreign exchange to the Central Bank for the purpose of creating a foreign currency pool. Circular 970… Under the pooling and priority system now in effect, foreign exchange is rationed for essential imports. Although PGI's remittances for the three quarters involved were approved by the Central Bank for payment by a commercial bank, when PGI applied to Citibank on November 2, 1983 for transfer of the Local Currency, it was unable to obtain foreign exchange from the pool. The funds remained non-transferable through December 5 when OPIC requested their delivery. PGI has applied to OPIC for the transfer of 56,008,000 pesos of the outstanding 120,000,000 pesos. As described in detail below, OPIC has determined that it is liable to pay PGI 3,960,000 U.S. dollars in exchange for 56,088,000 pesos in settlement of the Claim. III. Determinations Under the Contract *** 3. Section 2.01(d) – That PGI has taken all responsible steps required to transfer the Local Currency into United States dollars. PGI has certified that it has taken all available steps to secure transfer of the

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Payments. PGI's actions are in accordance with applicable laws regulating foreign currency transfer. PGI has described all of the actions it took in attempts to remit the service fees… OPIC agrees that further actions taken to obtain a transfer probably would be unsuccessful. 4. Section 2.01(d)(ii)(2) – That PGI has not been able to effect a transfer of the Local Currency into U.S. dollars in any exchange market officially recognized by the Government of the Philippines because of the failure of the Philippines to grant an application by the Investor for the transfer of such Local Currency. On November 2, 1983 PGI deposited the Local Currency with a commercial bank requesting remittances as soon as a change in ROP policy permitted. PGI had already secured the Central Bank's authorization to remit its service fees for the three quarters in which the fees accumulated… However, transfer was never effected due to the restrictions on foreign currency adopted by the Central Bank on November 17, 1983… To date the restrictions are still in effect. Realizing that the restrictions would be in effect for quite some time, OPIC waived the requirement that the application to the host government remain pending for 60 days and requested delivery of the Local Currency on December 5, 1983. Accordingly, OPIC hereby determines that the Investor has satisfied the conditions of Section 2.01(d)(ii)(2) of the Contract. *** V. Conclusion Based upon the foregoing determinations and subject to the delivery by PGI prior to closing of the certifications indicated above, I find that the inconvertibility claim submitted by PGI is valid and that OPIC is liable to transfer to PGI $3,960,000 in exchange for 56,008,000 pesos. [2] Lack of Pre-existing Law or Regulation [a] Active Inconvertibility [i] Kimberly Clark Corp. (Honduras: 1990), OPIC Memorandum of Determinations: Inconvertibility Claim of Kimberly Clark Corporation – Contract of Insurance No. A663 – of 22 May 1990, 1-3, 4, 9 [Kimberley Clark Corporation (“KCC”) had a 75% participation interest in Copal, a Honduran corporation involved in the manufacturing, packaging and distribution of disposable hygienic products. In 1990, after Copal's General Stockholders' meeting, Copal had approved a Lps. 675,555.56 cash dividend. In order to pay those dividends to KCC in U.S. dollars, Copal requested Honduran Central Bank authorization to purchase foreign exchange. Due to new regulations, the Central Bank denied that request.] OPIC Memorandum of Determinations May 22, 1990 Inconvertibility Claim of Kimberly-Clark Corporation Honduras – Contract of Insurance No. A663 (Citations selectively omitted) I. Claim On February 20, 1990, Kimberly-Clark Corporation (“KCC”) as agent for Kimberly-Clark International, S. A. (“KCI” or the “Investor”) filed an inconvertibility claim … with OPIC to transfer 608,000.00 Lempiras (“Lps.”) (the “eligible Local Currency”) in exchange for U.S. $300,960 under the inconvertibility provisions of OPIC Insurance Contract No. A663 (the “Contract”). The eligible Local Currency represents KCI's share of a dividend declared on January 29, 1990 by Comercial Papelera S. de R.L. (“Copal” or the “Foreign Enterprise”). The Contract is a standard form 234 KGT 12-70 (Revised) Contract issued on July 31, 1984 with Addenda to the Special Terms and Conditions, as modified by letter dated January 17, 1990. The Central Bank of Honduras returned the Investor's application for foreign exchange for the dividend, explaining that pursuant to Central Bank decisions remittances for such use are not authorized. OPIC finds the claim to be valid and that, under the Contract, the Investor is entitled, upon execution of the Release …, to transfer Lps. 608,000, the eligible Local Currency, to OPIC in exchange for U.S. $300,960.00. II. Discussion A. Background Copal was incorporated under the laws of the Republic of Honduras on June 8, 1981 and is

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involved in the manufacturing, packaging and distributing of disposable hygienic products. *** Honduran law requires certain procedures for the remittance of dividends by foreign investors. The procedures in effect at the time of Copal's declaration of a dividend required that the Foreign Enterprise apply to the Honduran Central Bank (“Central Bank”) for foreign exchange at the official rate of exchange (2 Lps. to 1 U.S. dollar)… Along with the application, the Foreign Enterprise had to submit copies of the minutes of the stockholders meeting at which the dividend was declared and the audited Financial Statements showing the retained earnings from the previous fiscal year. The Central Bank then approved or disapproved the request. If the Central Bank approved the request, it would authorize a particular private bank to exchange the Local Currency for dollars. However, in Copal's case, the Central Bank returned its request for remittance of dividends at the official exchange rate. The Central Bank's return form noted that pursuant to Central Bank decisions remittances for such use are not authorized (“Segun disposiciones del B.C.H. no se autorisan divisas para este destino.”)… The Investor has advised us that the Central Bank's action apparently was taken to comply with Circular No. D-018/88, dated June 24, 1988… This Circular provides that requests for payments of remittances due to royalties (“regalias”) will be transferred to the unofficial market (“mercado de autofinanciamiento”). OPIC is also aware that, effective July 10, 1989, the Central Bank approved Resolution No. D-036-89 which limits access to foreign exchange from the Central Bank to specified categories of uses. Remittance of dividends no longer qualified for access to foreign exchange through the Central Bank… Moreover, as published on March 5, 1990, the Central Bank promulgated Resolution No. D06/90, which provides that all foreign exchange resolutions contrary to such resolution are thereby derogated… Resolution No. D-06/90 also provides that remittances in amounts greater than $3,000 required by the private sector for the repatriation of investments would be processed through the free market exchange, provided that evidence is presented of the Central Bank's prior approval of the transaction. The new procedure is described in Tegucigalpa 7602 (23 April 1990)… *** III. Determinations Under the Contract *** (1) Applicability of Section 14.01(a) Anticipating the filing of “passive” inconvertibility claims pursuant to Section 14.01(b), the Investor and OPIC agreed in part, by letter dated January 17, 1990 …, that OPIC would waive the 395 day pre-filing waiting period for passive claims set forth in paragraph 5 of the Special Terms and Conditions of the Contract; in consideration therefor, KCC agreed to hold OPIC harmless for devaluations occurring while OPIC held Local Currency from the Foreign Enterprise, without regard to the waiting period. As part of the same arrangement, OPIC also agreed to allow KCC retroactively to increase its Current Insured Amount. This claim arose, however, not because of the Honduran authorities' failure to act but due to the enactment of various restrictive regulations that prevented the Foreign Enterprise from converting the Local Currency to dollars… Therefore, Section 14.01(a) applies… *** (2) The applicable waiting period The Investor did not observe the 30-day waiting period required under Section 14.01(a) of the Contract, as amended by Paragraph 5 of the Addendum to the Special Terms and Conditions, prior to filing its claim with OPIC. OPIC will treat the claim as though it were received on the first date on which it could have been submitted consistent with the waiting period. OPIC is aware that during the 30 days following the Investor's application to the Central Bank, Resolution No. D-036-89 of the Central Bank was in effect; this Resolution provides that remittance of dividends no longer qualifies for access to foreign exchange through the Central Bank… Accordingly, OPIC determines that KCI has met the eligibility requirements in Section 14.01(a) of the Contract covering active inconvertibility. ***

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D.

Section 14.01(ii)(A)

–

That KC1 has taken all reasonable steps required to transfer the Local Currency into U.S. dollars.

KCC has furnished OPIC with the minutes of Copal's January 29, 1990 General Stockholders meeting …, Financial Statements as of each of December 31, 1983 -1987 …, and the request for conversion of the Local Currency regarding the dividend… Under the applicable Honduran law and administrative regulations, Copal followed all of the procedural steps necessary to transfer the Local Currency. KCC has supplied OPIC with the Central Bank's form returning Copal's application for foreign currency exchange… *** IV. Conclusion Based upon the foregoing determinations I find that the inconvertibility claim submitted by KCC is valid and that the Investor is entitled to transfer Lps. 608,000.00, the eligible Local Currency, to OPIC in exchange for U.S. $300,960.00. [b] Passive Inconvertibility [i] Phelps Dodge Corp. (Honduras: 1999), OPIC Memorandum of Determinations: Inconvertibility Claim of Phelps Dodge Corporation and Phelps Dodge International Corporation – Contracts of Insurance Nos. A021, A022, and A023 – of 28 December 1999 [Phelps Dodge Corporation (“PDC”) had a 41% participation interest in Electrocondutores de Honduras S.A. de C.V. (“ECOHSA”), a Honduran corporation involved in the manufacture and sale of electrical building wire and cable. Also, Phelps Dodge International (“PDI”) had a Technical Assistance and Training Agreement and a General Management Agreement with ECOHSA. By mid-1988, ECOHSA's General Stockholders' meeting approved a cash dividend, and PDI was due technical assistance and management fees by ECOHSA. In order to pay those dividends and fees in U.S. dollars to PDC and PDI, respectively, ECOHSA requested Honduran Central Bank authorization to purchase foreign exchange. The Central Bank approved those requests and authorized the Banco Capitalizadora Hondureña S.A. (“BANCAHSA”) to exchange the local currency for U.S. dollars, but BANCAHSA claimed that it lacked enough U.S. dollars to make the conversion and failed to convert the funds into U.S. dollars.] OPIC Memorandum of Determinations December 28, 1999 Inconvertibility Claim of Phelps Dodge Corporation and Phelps Dodge International Corporation Honduras – Contracts of Insurance Nos. A021, A022, and A023 (Citations selectively omitted) I. Claim By letter dated October 3, 1988 and received by OPIC on October 17, 1988, Phelps Dodge Corporation (“PDC”) and Phelps Dodge International Corporation (“PDIC”) (the “Investors”) filed an inconvertibility claim … with OPIC to transfer 659,719.34 Lempiras (“Lps.”) into U.S. $326,561.07 under OPIC Insurance Contracts Nos. A021, A022, and A023 (the “Contracts”). The Local Currency represents (1) a dividend declared on May 23, 1988 by Electroconductores de Honduras, S.A. de C.V. (“ECOHSA” or the “Foreign Enterprise”), and (2) technical assistance and management services fees payable to PDIC as provided under the Technical Assistance and Training Agreement (“Technical Assistance Agreement”) and the General Management Agreement (“Management Agreement”) between PDIC and ECOHSA, both dated February 16, 1981. All three Contracts are standard form 234 KGT 12-70 (Revised) Contracts issued on July 10, 1981 with Addenda to the Special Terms and Conditions discussed below. The Investors' inability to convert the dividend and technical assistance and management services fees into U.S. dollars results from a shortage of foreign exchange in Honduras. OPIC finds the claim to be valid and that the Investors are entitled to transfer to OPIC U.S. $326,561.07 in exchange for Lps. 659,719.34, the eligible Local Currency available. II. Discussion A. Background

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ECOHSA was incorporated under the laws of the Republic of Honduras on January 11, 1980 and is involved in the manufacture and sale of electrical building wire and cable. *** Honduran law requires certain procedures for the remittance of dividends by foreign investors … In ECOHSA's case, the Central Bank approved the application for foreign exchange and authorized the Banco Capitalizadora Hondurena, S.A. (“BANCAHSA”) to exchange the Local Currency for U.S. dollars. The procedure for the remittance of technical assistance and management fees by foreign investors is basically the same as for dividends. The Foreign Enterprise applies to the Central Bank for foreign exchange using a Solicitud de Divisas Form supported by appropriate documentation. The Central Bank approved the application forms at the official exchange rate and authorized payment in dollars at BANCAHSA. B. Basic Facts On May 23, 1988, at the ECOHSA stockholders annual meeting, a cash dividend of Lps. 864,000 was declared, of which PDC's 41% share equals Lps. 321,227 … ECOHSA requested authorization for foreign exchange through the Central Bank in order to pay the dividend in U.S. dollars to PDC … On August 24, 1988 the Central Bank authorized BANCAHSA to convert PDC's dividend into U.S. dollars … However, BANCAHSA argued and still claims that it lacks enough U.S. dollars to make the conversion… As to the technical assistance and management fees due PDIC, ECOHSA applied to the Central Bank requesting foreign exchange for the period January 1987 to August 1988. The Central Bank approved the requests and authorized BANCAHSA to make the U.S. dollars available for remittance … BANCAHSA continues to state that it lacks the necessary foreign exchange … *** IV. Conclusion Based upon the foregoing determinations I find that the inconvertibility claim submitted by PDC is valid and that the Investors are entitled to transfer to OPIC U.S. $326,561.07 in exchange for the eligible Local Currency available, Lps. 659,719.34. [3] Comments and Questions 1. 2. 3. 4.

What facts must be shown by an investor to trigger an OPIC payment for currency inconvertibiity? What is the difference between active and passive inconvertibility? What is the significance of a pre-existing law or regulation that prevents currency convertibility? For a recent OPIC claim concerning currency convertibility, see the Memorandum of Determinations of OPIC with respect to the Inconvertibility Claims of Caterpillar Financial Services Corporation under OPIC Contracts of Insurance Nos. F107 and F314. These contracts involved Venezuela's currency exchange controls.

[C] Political Violence Claims [1] Direct Causation [a] Nord Resources Corporation (Sierra Leone: 1998), OPIC Memorandum of Determinations: Political Violence Claim of Nord Resources Corporation – Contract of Insurance No. A628 (as amended the ‘Contract’) – of 14 May 1998, (10) 1-2, 4 [Nord Resources Corporation (“Nord”) owned 50% of Sierra Rutile Holdings Limited, which in turn owned 100% of Sierra Rutile Limited (“SRL”). SRL owned, developed and operated a rutile project in Sierra Leone. SRL earnings represented 40 % of Sierra Leona's foreign exchange earnings. After years of political instability, in 1991, a civil war began. In January 1995, fighting between rebels and government troops broke out in the vicinity of Nord's Rutile mine and processing facility, which later came under attack. The mine and the facilities were later taken by the rebels, but the government and later SRL again took control of the mine site.] OPIC Memorandum of Determinations May 14, 1998 Political Violence Claim of Nord Resources Corporation Sierra Leone – Contract of Insurance No. A628 (as amended the “Contract”) I. Claim By letter dated October 2, 1995, Nord Resources Corporation (“Nord” or the “Investor”) filed a claim (as amended, modified and supplemented, the “Claim”) under Coverage C of the Contract, a standard form 234 KGT 12-70 (Revised), as amended, covering losses due to war, revolution, insurrection, and civil strife (“War Coverage”) for compensation in the

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amount of US $15,704,500. This claim is for Damage sustained with respect to Nord's investment in Sierra Rutile Limited… OPIC finds the Claim to be valid and the amount of compensation due to be $15,704,500 of which $1,500,000 has been paid to Nord by OPIC as an advance. II. Factual Background A. History of the Investment In 1976, Bethlehem Steel Corporation, through a subsidiary (“Bethlehem”), and Nord formed a joint venture company, Sierra Rutile Limited (“SRL” or, the “Foreign Enterprise”), to develop a rutile project in Sierra Leone. At that time, OPIC wrote coverage for both investors. Through a series of transactions, Bethlehem sold its interests, and Nord ultimately retained a fifty percent interest in Sierra Rutile Holdings Limited, of which SRL is a wholly owned subsidiary. At the time of the Damage, this investment was covered by the Contract. B. History of the Damage Sierra Leone has experienced various levels of political instability since gaining independence from Britain in 1961. Most recently, this has included a civil war, which began in 1991. Rebel activity was often intense and, over time, expanded to many regions of the country. In its first five years, the civil war killed more than 10,000 people and drove almost half of Sierra Leone's population from their homes. The conflict began during the reign of President Joseph Momoh, who headed a one-party system that had been in place since 1978. The main armed rebel group, the Revolutionary United Front (“RUF”), launched a revolt with the backing of a Liberian insurgent group, the National Patriotic Front of Liberia (“NPFL”) in March of 1991. After widespread political agitation, President Momoh consented to a national referendum concerning return to a multi-party political system. In the referendum, which was conducted in August 1991, the population voted overwhelmingly in favor of the change. On April 30, 1992, after repeated delays in the promised transition to multi-party democracy, military officers, led by Captain Valentine Melvin Strasser (a 27-year old army officer), staged a successful coup, taking power after a brief confrontation with government officials and police. With Momoh in Guinea, Captain Strasser set up the National Provisional Ruling Council (“NPRC”), whose stated priorities were to end the war, restore multi-party democracy, and institute economic reforms. The war in Sierra Leone, which had been largely confined to the southeastern regions, spread to other areas of the country in mid-1994. The presence of other smaller rebel movements and bands of renegade soldiers who appeared to be collaborating with the RUF complicated the situation, and may have precipitated the insurgency's spread. On January 1, 1995, rebel forces attacked an area near the town of Lunsar in northern Sierra Leone, only 124 km from the capital, Freetown. On the evening of January 19, 1995, fighting broke out between government troops and rebel forces in the vicinity of SRL's minesite. The fighting soon spread to the area of SRL's operations. On January 20, 1995, at approximately 5:00 AM, SRL's rutile mine and processing facility came under attack from rebel forces. SRL began evacuating personnel, and operations at the mine were suspended. The attack was defended against by a local contingent of Sierra Leone government (“GOSL”) troops. An attempt at negotiation failed and resulted in hostages being taken. All hostages were later released unharmed, some after several months of captivity. The mine was briefly retaken by government forces on February 1, 1995, but later again fell into the hands of non-government forces. On April 24, 1995, government troops once again took control of the minesite. SRL subsequently regained possession and has continued to exercise some degree of control, although the situation is far from secure. *** Determinations Under the Contract *** Three issues are presented by this provision of the Contract: (1) whether the acts causing the injury were acts of war, revolution, insurrection, civil strife, terrorism or sabotage; (2) whether such injury was the direct result of such action; and (3) whether the injury occurred to Covered Property. 1. The Acts Causing The Loss Were Acts Of War, Revolution, Insurrection, Civil Strife, Terrorism Or Sabotage As Defined In the Contract. Based on published accounts of the conditions in Sierra Leone on the date the SRL minesite was attacked by RUF rebels, and transcripts of eyewitness accounts provided to OPIC by Nord, OPIC determines that acts causing the loss were acts of revolution or insurrection. RUF rebels urged the overthrow of the government and conducted armed guerrilla campaigns throughout Sierra Leone. RUFs actions against SRL appeared to be part of a military campaign directed at the ouster of the established political regime. It

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is believed that RUF rebels overran the minesite because rutile production is a major source of funding for the government, as earnings from rutile made up about 40 percent of Sierra Leone's foreign exchange earnings. OPIC has determined that these circumstances offer sufficient evidence to support a finding that the acts causing the Loss had as their principal objective the violent overthrow of the established authorities. There is substantial evidence that much of the Damage was caused by the RUF incursion or subsequent attacks by the GOSL troops and their allies. 2. Political Violence Was the Direct Cause of the Loss. Section 1.07 of the Contract provides the principles that are to be used to determine whether the Loss was directly caused by an event with respect to which OPIC coverage is provided: [A]n act shall be considered to be the direct cause of a Loss if there is an unbroken chain of causes and effects from the act to the Loss, without the intervention of any force operating actively from an independent source, and the Loss would not have occurred but for the act. An action taken to combat or defend against an actual or anticipated act of war, revolution, insurrection, civil strife, terrorism or sabotage can constitute an element in a chain of causes and effects. Therefore, two separate conditions must be met to establish causality. The first is that there must be an unbroken chain of causes and effects from the event to the injury, without any independent force intervening. The second, which must be established independently of the first, is that the Loss would not have occurred but for the event insured against. As discussed above, substantial evidence indicates the Damage was caused either by the initial RUF incursion or by the subsequent attempts of GOSL troops and their allies to dislodge them. Both Nord and SRL have represented to OPIC, however, that as much as forty percent of the Damage (particularly including looting) resulted from organized pillaging by GOSL army forces. That this activity also falls within the chain of events is demonstrated by the fact that it has been virtually eliminated since the political violence around the project has abated and the Foreign Enterprise and its agents have retaken control of the mine-site. OPIC, therefore, finds that the direct causation test is satisfied by the chain of causes and effects from the Political Violence to the injury to the project. 3. The Property Damaged Was Covered Property Under The Contract. *** Applying the first portion of the Contract's tests, the Investor calculated the amount of Damage by determining the lesser of Actual Cash Value or the cost of repairing or replacing damaged property. With respect to the third leg of this test, however, the Investor has asserted that “The amount by which the damage reduced the fair market value in Sierra Leone is not applicable because the items damaged, destroyed or stolen were not commercially operable after the damage, nor does a fair market exist in Sierra Leone for the property in question.” OPIC finds this argument untenable. Even if the property had no value after the Damage, the provision still requires calculation of the fair market value before the Damage, as a limit on the amount of compensation payable. Nord negotiated no revision to the Contract with respect to this provision, much of the property was not specialized and Sierra Leone has a substantial mining industry. A value may be derived, however, as envisioned in the Contract. Since the Investor has not provided any information with respect to the fair market value, OPIC has sought to create a reasonable proxy. To provide such an approximation, OPIC used the depreciated book value from SRL's books. Under this analysis, the total amount of Damage is reduced by $4,338,089. *** 3. The Investor’s Share of the Amount of Damage is US $16,362,803. Pursuant to Section 1.21 of the Contract, the Investor's Share is 50 percent. OPIC finds that the Investor's Share of the Amount of Damage is $16,362,803. [b] Haitian Tropical Management, S.A. (Haiti: 1992), OPIC Executive Summary: Political Violence Claim of Haitian Tropical Management, S.A. – Contract of Insurance No. C042 – of 23 November 1992, 1 [At the end of the 1980s, Haitian Tropical Management S.A. had a mango export business in Haiti. In 1991, after weeks of political instability, and in the midst of severe violence, a military coup overthrew the democratically-elected President Aristide. The military violently suppressed all street protests and enforced strict curfews. Within weeks of the coup, about 500 people had been killed in armed confrontations. The United States and the European Community suspended economic aid to Haiti, while the Organization of American States (OAS) tried to isolate the ruling military junta and demanded Aristide's

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return to power. Many countries, including the US, imposed a trade embargo blocking all commerce with Haiti, besides humanitarian aid.] (Citations selectively omitted) OPIC Executive Summary Haitian Tropical Management, S.A. – Haiti Political Violence November 23, 1992 On February 25, 1988 OPIC issued Contract of Insurance No. C042 to D. Victor Knight, Jr. (the “Investor”) to provide coverage for his investment in Haitian Tropical Management, S.A. (“Haitian Tropical Management” or the “Foreign Enterprise”) in Haiti, which exports mangoes… On September 29, 1991, a military coup overthrew the democratically elected government. The political violence associated with the coup disrupted the Foreign Enterprise's operations of raising, packing, and exporting mangoes to the U.S. On October P 431 10, 1991, the State Department issued a travel advisory urging Americans to leave Haiti, and the USDA inspectors were withdrawn. Due to the lack of pre-shipment inspection, mangoes could not be shipped to the United States. The OAS embargo, in which the U.S. participated, foreclosed any possibility of shipping mangoes to participating nations. In May 1992, the travel advisory was relaxed, and the USDA inspectors returned to Haiti, but by that time the Investor's 1991/92 fruit crop had been lost. On March 27, 1992, OPIC received a Political Violence claim from the Investor. Additional information was mailed to OPIC under letters dated June 11, 1992, September 10, 1992, September 25, 1992, and October 13, 1992. OPIC found the claim valid and on November 23, 1992, OPIC paid the Investor $434,110. [2] Political Motivation [a] Freeport Minerals Corp. (Indonesia: 1986), OPIC Memorandum of Determinations: War, Revolution, Insurrection and Civil Strife Claim of Freeport Minerals – Contract of Guaranty No. 7034 and Contract of Insurance No. 9704 – of 30 September 1986 [Since 1963, various dissident groups in Indonesia have fought for the independence of Irian Jaya and its unification with Papua New Guinea. Some members of one of these groups worked and lived around the facilities of Freeport Mineral Corp. (“Freeport”) and Freeport Indonesia, Inc. (“Freeport Indonesia”) in Indonesia. During the spring of 1977, a series of rebel attacks caused damage to Freeport Indonesia's facilities. In February 1979, OPIC compensated Freeport for this attack under its coverage for damage caused by war, revolution or insurrection. Later, this rebel group returned and attacked Freeport Indonesia's facilities in 1986, which gave rise to a new claim before OPIC.] (Citations selectively omitted) OPIC Memorandum of Determinations September 30, 1986 Claim of Freeport Minerals – War, Revolution, Insurrection and Civil Strife Contract of Guaranty No. 7034 and Contract of Insurance No. 9704 I. Claim Freeport Minerals Company (“Freeport” or the “Investor”) has filed an application under Coverage C of its Contract of Guaranty No. 7034, a standard form 221 KGT 11-65 (Revised) Contract (“Contract 7034"), as amended, and its Contract of Insurance No. 9704, a standard form 234 KGT 12-70 Contract (“Contract 9704"), as amended, (collectively, the “Contracts”) each covering losses because of war, revolution, insurrection or civil strife (“War Risk Coverage”) for compensation in the amount of US $338,513 for Damage sustained with respect to its investment in Freeport Indonesia, Inc. (“Freeport Indonesia” or the “Foreign Enterprise”). As discussed herein, OPIC finds the claim to be valid and the proper amount P 432 of compensation to be US $201,127.48. *** B. History of the Damage During the night of February 19, 1986 and again on April 24, 1986 an unknown number of unidentified persons, alleged political dissidents, severed both the slurry and the adjacent diesel fuel pipelines operated by Freeport Indonesia, resulting in substantial loss of fuel and of valuable metal ores, as detailed below, and damaged other Covered Property. To dispose of this claim properly, it is necessary to examine the political background to the events which resulted in the Damage for which this claim has been made.

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The present political situation in Irian Jaya can be traced to 1963 when the Government of Indonesia (“GOI”) assumed control over the area after several decades of negotiations with the Dutch Government which had retained control of the area in 1949 when it granted independence to Indonesia. Within a year of the 1963 transfer, various dissident groups were organized for the purpose of promoting the independence of Irian Jaya from the rest of Indonesia and its unification with neighboring Papua New Guinea. These groups are collectively known as the Organisasi Papua Merdeka (“OPM”), although there is little evidence of coordination, either politically or tactically, among the disparate groups. In 1969 a major tribal uprising occurred in the general area of the Freeport Indonesia facilities. No damage occurred to these facilities and the revolt subsided. Late in 1976, however, company officials at the mine began to receive letters from an OPM group demanding assistance in an uprising planned for the spring. At the same time, according to reports from Freeport Indonesia, talk increased among the local populace that a major invasion of nationalist forces would enter the country from neighboring Papua New Guinea. Freeport Indonesia became aware that OPM sympathizers were working in the area of the mine and that some individuals in their work force were reputed to be OPM members. Uprisings did occur in the spring of 1977 in several areas, including one at the Freeport Indonesia facilities. GOI military units were dispatched to deal with the situation, apparently using the Freeport Indonesia facilities as a base of operations. Quartered nearby, the units used the Freeport Indonesia airfield to conduct air strikes on suspected OPM targets. During the period from July 23 until September 7, 1977, Freeport Indonesia experienced a series of actions, including the cutting of its slurry and fuel pipelines, its telephone lines and power cables, the theft and destruction of equipment, the burning of a warehouse, the discharging of explosives against various facilities and the felling of trees across the access road. On February 16, 1979 OPIC compensated Freeport under its Coverage C for damage caused by war, revolution or insurrection in the amount of $123,871.23 for the loss of and damage to covered property in connection with these attacks. The events which gave rise to the instant claim began with rumors, which reached Freeport Indonesia on or about February 14, 1986, that the OPM had returned to the area. On Tuesday, February 18, a letter, signed only by a “Rebel General”, was delivered to Freeport Indonesia warning that “On Wed. 19th, there will be some rain on Tambagapura” which was taken by police and company officials to imply a threat against Freeport Indonesia's facilities. At approximately 10:00 p.m. February 19 the slurry and fuel pipelines were severed by hacksaw in several locations resulting in a substantial loss of slurry, containing copper, silver and gold ores, and diesel fuel. Fires were set at the breaks along the fuel line. A party of police and security personnel was fired on while P 433 attempting to approach the site of the fuel fires. Shortly thereafter, the alleged saboteurs fled, the fires were extinguished, and within a few hours both pipelines had been repaired and returned to full operation. On February 24, a letter … ostensibly signed by an OPM leader and containing various OPM demands directed at Freeport Indonesia, was found at its main gate. Again in mid-April Freeport Indonesia officials heard rumors that OPM personnel had returned to the area and possibly planned another attack on the pipelines. The strike came the night of April 24. Both the slurry and the diesel fuel pipelines were again cut, related valves and plumbing were vandalized, a flush tank was drained, electrical wires were cut, the access road was blocked by felled trees and boulders and mobile construction equipment tires were burned. Several segments of the slurry pipeline were carted off. This time, because company officials responded to the rumors by interrupting the pumping of slurry, no slurry was lost through that pipeline. However, substantial diesel fuel was lost and again fires were set along the fuel line. Again security and repair crews were met with gunfire as they approached the sites of the damage. Police and GOI military personnel assisted in securing the area. One alleged saboteur was shot and killed by the security forces. By 2:30 p.m. in the afternoon of April 25 repairs were completed and the pumping of slurry was resumed. *** III. Determinations Under the Contracts OPIC hereby makes the following determinations: *** 1. That the acts causing the Loss were a revolution, insurrection, civil strife, terrorism or sabotage. The Contracts cover acts of war, both declared and undeclared, revolution, insurrection, civil strife, terrorism and sabotage. Civil strife is defined to include “a violent act undertaken by an individual or group with the primary intent of achieving a political objective.” Labor and student group demands are explicitly excluded. To establish a claim for civil strife, the individual or group responsible for the injurious acts must have been primarily motivated by a political objective. The objective of the

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individual or group need not be revolutionary or insurrectionist nor must the purpose in committing the acts be the violent overthrow of the established political authorities (as is the case for Coverage C without the amendment to cover civil strife). However, there must be evidence of political motivation. Furthermore, the acts of sabotage must have been actually committed by the politically motivated individual or group. It is not sufficient that the acts of sabotage be merely contemporaneous with the activities of, for instance, an insurrectionist group. There must be evidence to establish that the acts themselves were committed by the politically motivated individual or group. OPM is an umbrella organization encompassing a number of anti-Indonesian forces operating in Irian Jaya. In public statements it has urged the violent overthrow of the government, and has conducted armed guerrilla campaigns in various parts of Irian Jaya directed towards the overthrow of the provincial government. Its actions against Freeport Indonesia appear to be part of an ongoing military campaign directed toward the ouster of the established political authorities. Nevertheless, although it has continued to P 434 operate for the past twenty-three years and has political and military arms, the degree of unity and cohesiveness among the individual groups is questionable. Some reports suggest that some OPM operations constitute little more than banditry. Nevertheless, recognizing OPIC's prior determination in connection with Freeport's 1977 claim that OPM operations constituted political insurgency and recognizing the difficulty of proof of political motivation, OPIC has determined that these circumstances offer sufficient evidence to support a finding of political motivation. OPIC has therefore determined that the incidents which gave rise to this claim were politically motivated. Although primarily circumstantial, the preponderance of the evidence establishes that the acts were actually committed by OPM activists. OPM has in the past specifically threatened to stop Freeport Indonesia's mining operation if it did not support OPM through contributions of money and equipment. Freeport Indonesia has refused all cooperation. Suspected OPM supporters had previously worked in and were therefore familiar with the Freeport operation. Past events have demonstrated that OPM had the capability to carry out the attacks. The delivery of the protest letter … suggests an operation by an organized group pursuing established objectives rather than random acts by individuals not associated with OPM. The contents of the letter; calling, inter alia, for the withdrawal of the GOI from the area, establishes that those objectives were political. OPIC has determined that the evidence, viewed in these circumstances, is sufficient to establish that the acts were committed by OPM and were politically motivated. *** IV. Conclusion Based upon the above findings, OPIC determines that the claim is valid and that the compensation to be paid to Freeport is US $201,127.48. [b] Beckman Instruments, Inc. (El Salvador: 1982), OPIC Memorandum of Determinations: War, Revolution, Insurrection and Civil Strife Claim of Beckman Instruments, Inc. – Contracts of Insurance Nos. 9652 and 9653 – of 27 August 1982 [Beckman Instruments, Inc. (“Beckman”) through its wholly-owned subsidiary Aplar S.A., owned and operated a facility to manufacture electronic components in a free trade zone of El Salvador. In 1979, El Salvador was suffering from acts of political violence against the government. During those days, Beckman's engineer, a U.S. national, and a Salvadorian manager of the facilities were kidnapped. Due to these events Beckman decided to cease manufacturing in order to protect the U.S. technical personnel that could not be sent to El Salvador to train the local workers, and planned to lay off two hundred workers engaged in manufacturing resistors. After Beckman took this decision to cease manufacturing, a group of employees together with some union members seized the facilities and vowed not to return them until manufacturing operations were restarted.] OPIC Memorandum of Determinations Claim of Beckman Instruments, Inc., War/Revolution/Insurrection P 435 Contracts of Insurance Nos. 9652 and 9653

*** III.B. – That the acts which resulted in the injury were not undertaken for the purpose of overthrowing the existing political regime of the Project Country by violence. *** … Section 1.07 expressly requires that the injury complained of be directly caused by war, revolution or insurrection. It is manifestly insufficient to show only that the loss of Covered Property resulted, in some general fashion, from conditions of revolutionary instability. In order to establish a compensable claim under Coverage C, the Investor must demonstrate that the action resulting in the injury was undertaken for the specific

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and unambiguous purpose of ousting the Government of the Project Country by violent means. As to Fenastras, to ascribe to a labor organization the general purpose of hastening the downfall of a government by inciting labor-management disputes within the foreign business community, and thereby precipitating a massive repatriation of foreign capital with the expectation that this will ultimately cause the downfall of the existing political regime, is not to convert what are essentially labor actions into acts of revolution or insurrection. The actions of the union organizers and ex-APLAR employees were directed against the Foreign Enterprise, and not the Salvadoran Government. The injury clearly did not result from any armed confrontation among government troops, APLAR workers, and union organizers that could be characterized even arguably as having been undertaken in combating or defending against an insurrectionist attempt to overthrow the government. Even if the seizure could be directly attributable to Fenastras, and even if, as Beckman contends, Fenastras was a violent anti-government guerrilla organization organized for the single-minded purpose of overthrowing the Salvadoran government by armed revolution, it must also be shown that the seizure and retention of Beckman's property was undertaken for this specific purpose. Beckman has failed to make such a showing within the context of any reasonable interpretation of the facts presented in support of its claim. The expressed purpose in seizing the equipment was to bring about the reopening of the plant and to secure the payment of all wages and related work benefits for APLAR employees for as long as the plant remained closed. The Investor confirmed this in its original Application… Moreover, prior to the seizure, labor union organizers met with U.S. Embassy officers on at least one occasion to express, on behalf of APLAR employees, their concern about Beckman's plans to close the plant. At a January 1980 meeting, Fenastras Secretary-General Hector Bernabe Recinos sought U.S Embassy assistance in persuading Beckman to keep the factory operating. He said that his unions were opposed to the destruction of factories, disruption of harvests and other acts of violence as these actions were senseless and counterproductive to the interest of the people… Furthermore, in its February 21, 1980 announcement, Fenastras expressly states that the reopening of APLAR was the union's foremost objective… The overthrow of the Salvadoran Government is nowhere mentioned as even a secondary purpose of the seizure. In fact, the bulletin states that the intention of the organizers was to seek the assistance of the Salvadoran Ministry of the Economy in obtaining an agreement on its demands. This willingness to work in tandem with Salvadoran governmental agencies can hardly be said P 436 to be consistent with any implicit intention to bring about the downfall of the regime. Seizure of the APLAR equipment was taken to secure a commitment from Beckman to resume full operation in San Salvador, a finding which is warranted by the events which occurred subsequent to the takeover. As alleged in the Application, the Investor attempted to obtain the release of the equipment in the course of several face-to-face negotiations within the EMI-17 workers' cooperative. EMI-17 agreed to release at least part of the equipment in exchange for Beckman's commitment to purchase the cooperative's production of potentiometers. The Investor agreed to this arrangement, and in April and June 1980, was permitted to retrieve several items of equipment. The willingness to return equipment which was not deemed to be essential to the manufacture of potentiometers, and the fact that partial production was successfully resumed, tends to confirm that the principal motive underlying the seizure was the reopening of the plant and the reemployment of several hundred former APLAR workers – not, as alleged by Beckman, the overthrow of the Salvadoran Government. An expressed intention to overthrow the existing political regime is not required by the Contracts. However, on the basis of the available evidence, OPIC concludes that the workers seized the equipment not as part of a movement to oust the present government but rather in furtherance of their attempts to obtain Beckman's agreement to reopen the plant. It is clearly not within the meaning nor the intent of the Contracts to provide coverage for the seizure of Covered Property by disgruntled employees of the Foreign Enterprise. Such actions can be characterized only as uninsured labor problems. The evidence does not support Beckman's contention that the plant seizure was part of a larger effort to overthrow the Government of the Project Country by violent means. Specific benefits to workers unrelated to any revolutionary objective is the underlying purpose of the injury complained of and thus provides no basis for compensation under the Contracts. [3] Comments and Questions 1. 2. 3. 4. 5. P 436

What issues arise under OPIC's political violence coverage? What is civil strife? What is necessary to show civil strife under an OPIC policy? What was the direct cause of the losses in the Haitian Tropical Management claim? What was the basis for denial of the Beckman Instruments' claim? For a more recent OPIC political violence claim, see OPIC's Memorandum of Determinations with respect to the claims of the International Rescue Committee on OPIC Contract of Insurance No. F516, which involved the Congo.

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References 1) Available at 2) 3) 4)

5)

6) 7) 8)

9)

10)

http://www.opic.gov/sites/default/files/docs/Ponderosa_Assets_L.P._202005.pdf (accessed 1 September 2013). Restatement (Third) of the Foreign Relations Law of the United States § 712 (1987) (the “Restatement”). Available at http://www.opic.gov/sites/default/files/docs/claim_mid_american.pdf (accessed 1 September 2013). Under applicable principles of international law, the acts of the judiciary are attributable to the state. If the courts take actions that result in interference with a property right, the state may be held responsible for compensation, just as it would had the action been taken by the legislative or executive arm of the state. Islamic Republic of Iran v. U.S., Award No. 586-A27-FT (Iran-U.S. Cl. Trib. Jun. 5, 1998). Although this document is a draft and has not been accepted by any state, it reflects the opinions of experts on customary international law in this area. “Although … in the form of conventions requiring ratification or accession, they have been widely accepted as generally declaratory of existing law and therefore actually given legal effect even prior to their formal entry into force.” Oscar Schachter, International Lawin Theory and Practice 71 (1991). This conclusion would be true even if the acts of the GOI are characterized as having merely been to inform one of the members of the tribunal of the injunction. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards, Jun. 10, 1958, art. II, 9 U.S.C. § 201 (1999) [hereinafter “New York Convention”]. See e.g., Société Commercial de Belgique (Socobel) Case, P.C.I.J., Ser. C, No. 87, pp. 101; see also Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens, art. 17(2), reprinted in Louis B. Sohn & R.R. Baxter, Responsibility of States for Injuries to the Economic Interests of Aliens, 55 Am. J. Int'l L. 545, 576 (1961). We note in this connection that the definition of Expropriatory Action (Section 1.15) speaks in practical not legalistic terms. The test of Section 1.15 (d) is not whether government action affects legal relationships but whether it “directly results in preventing … the Investor from exercising effective control or from constructing the Project or operating the same.” Available at http://www.opic.gov/sites/default/files/docs/claim_nord.pdf (accessed 1 September 2013).

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Chapter 6: Applicable Substantive Law

Document information

§6.01 INTRODUCTION

Publication

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Whenever an investment dispute is referred to arbitration, the question will arise what is the applicable law, i.e. where are the arbitrators to look for the rules they are to apply in deciding the substance of the dispute? In principle each legal system has a body of rules and techniques for determining which law should be applied to transactions with some foreign element – referred to either as its rules of private international law or conflict of laws.

Topics

[A] Rudolf Dolzer and Christoph H. Schreuer, Principles of International Investment Law, 211, 288-289 (2nd ed., Oxford University Press 2012), Chapter X: Settling Investment Disputes (1)

Bibliographic reference

(Citations selectively omitted)

Investment Arbitration

(k) Applicable Law

'Chapter 6: Applicable Substantive Law', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 437 - 510

Foreign investments are regulated by international as well as national rules. There is a considerable body of substantive international law protecting foreign investors. It consists of treaty law, contained mostly in BITs, but also multilateral treaties such as NAFTA and the ECT. But there is also a good deal of customary international law that remains relevant. This customary international law includes various aspects of state responsibility and such issues as denial of justice, the law on expropriation, and rules relating to the nationality of individuals and corporations. Investments are typically complex operations involving numerous transactions of different kinds. Many of these transactions will take place under the local law and will have their closest connection to the host state's legal system. The relevant legislation relates to commercial law, company law, administrative law, labour law, tax law, foreign exchange regulations, real estate law, and many other areas of the host state's legal system. At the same time, the application of international law gives the investor assurance that the international minimum standard will be observed. The parties to the dispute, that is the host state and the investor, may agree on the governing law. Some contracts governing investments simply refer to the host state's domestic law. The choice of the law of the investor's home country or of the law of a third state is rare but not unheard of. In the majority of cases, agreements between the parties P 438 on applicable law include international law as well as host state law. Some treaties and other international documents providing for arbitration refer to the parties' agreement on choice of law. Some of the relevant treaties contain their own choice of law clauses in case there is no agreement on applicable law between the parties.… …

[B] Comments and Questions 1.

2.

3.

4.

International arbitration depends on the consent of the parties, and it is common for the contract or agreement in question to stipulate both the applicable law and the venue of the arbitration. In such cases it will appear that the agreement is the dominant instrument, and that the chosen law is in effect subordinate to the agreement. (2) Many international arbitrations are governed by institutional rules (e.g. those of the International Chamber of Commerce (ICC)) which give arbitrators substantial discretion in determining both venue and applicable law, if these are not determined by the agreement to arbitrate. These discretions in effect substitute for any specific national conflicts rules; hence it is possible for arbitrators to decide to apply some substantive law which would not be applied by a court sitting in the same place and applying its own national conflicts rules. For example, various versions of “transnational law” have been developed for application in international arbitration, and have been chosen by international arbitrators. (3) A national court would be unlikely to do the same, unless the transnational rules in question were specifically mandated by the agreement. In some cases, international arbitrations will be constituted pursuant to treaty rules, whether of some existing institution (e.g., ICSID) or on an ad hoc basis (e.g., pursuant to Chapter 11 of NAFTA or a bilateral investment treaty). In such cases the foundational instrument will be the treaty and international law will be part of the applicable law. There is a strong international public policy, supported by the main international and regional treaties for recognition and enforcement of foreign arbitral awards, (4) of non- intervention in international arbitrations, at least where the arbitrators have not strayed beyond their jurisdiction. Thus the decisions of arbitrators pursuant to their agreed mandate are accorded substantial deference. Moreover under modern arbitration codes, decisions of arbitrators on the merits of a dispute submitted to them are final and not subject to appeal. In this situation, arbitrators

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have some flexibility in choosing and determining the content of the applicable law. For example, the fact that a tribunal errs in determining the content of the applicable law to a dispute is, in general, not a ground for a national court (even one whose law was misapplied) to refuse to recognize and enforce the award. P 439 Questions:

1.

2.

In standard conflicts analysis, contractual relations are seen from within the framework of a given national legal system, whose conflicts rules determine the substantive law to be applied. Is there any basis for a different approach in international arbitration? Why should arbitration be accorded high levels of deference, as compared with first instance decisions of national trial courts?

Different Aspects of the Applicable Law It is necessary to distinguish the proper law of the contract which is the subject of the dispute and the proper law of the arbitration. These may but need not necessarily be the same. Thus an agreement to arbitrate in Stockholm in respect of a dispute arising under a contract governed by English law involves a choice of English law as the proper law and Swedish law as the arbitral law (sometimes referred to as the lex arbitri). (5) The role of these various laws is implicitly acknowledged in the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958.

[C] Convention on the Recognition and Enforcement of Foreign Arbitral Awards [New York Convention] (1958), 330 U.N.T.S. 38 (1959), Article V 1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: (a)

The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or

*** (d) (e)

The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or The award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds that: (a) (b) P 440

The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or The recognition or enforcement of the award would be contrary to the public policy of that country.

[D] Comments and Questions In particular the New York Convention acknowledges the interest of the law of the seat of the arbitration on matters such as arbitral procedure: Art V (1) (d), and the capacity of the courts of the state where the arbitration was held to set aside the award: Art V (1) (e). The Convention also acknowledges the potential relevance of other laws: the personal law of the parties (as to matters of capacity) (Art V (1) (a)), and the law of the state where recognition and enforcement is sought (Art V (2)). There is a strong presumption that the arbitral law is the law of the place where the arbitration occurs, and only a clear and express choice to the contrary would prevail. (6)

§6.02 THE CHOICE OF LAW PROCESS IN INTERNATIONAL COMMERCIAL ARBITRATION As noted already, the choice of law process in international commercial arbitration depends in the first place on the terms of the agreement to arbitrate, including whether this refers to any arbitration rules which deal with the matter.

[A] Rules of Arbitration of the International Chamber of Commerce (2012), (7) Article 21 Article 21 – Applicable Rules of Law 1. The parties shall be free to agree upon the rules of law to be applied by the arbitral

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tribunal to the merits of the dispute. In the absence of any such agreement, the arbitral tribunal shall apply the rules of law which it determines to be appropriate. 2. The arbitral tribunal shall take account of the provisions of the contract, if any, between the parties and of any relevant trade usages. 3. The arbitral tribunal shall assume the powers of an amiable compositeur or decide ex aequo et bono only if the parties have agreed to give it such powers.

[B] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States [ICSID or Washington Convention] (1965), 575 U.N.T.S. 159 (1965), Article 42 Article 42 (1) The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) P 441 and such rules of international law as may be applicable. (2) The Tribunal may not bring in a finding of non liquet on the ground of silence or obscurity of the law. (3) The provisions of paragraphs (1) and (2) shall not prejudice the power of the Tribunal to decide a dispute ex aequo et bono if the parties so agree.

[C] UNCITRAL Model Law on International Commercial Arbitration (1985, amended 2006), (8) Article 28 1. The arbitral tribunal shall decide the dispute in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute. Any designation of the law or legal system of a given State shall be construed, unless otherwise expressed, as directly referring to the substantive law of that State and not to its conflict of laws rules. 2. Failing any designation by the parties, the arbitral tribunal shall apply the law determined by the conflict of laws rules which it considers applicable. 3. The arbitral tribunal shall decide ex aequo et bono or as amiable compositeur only if the parties have expressly authorized it to do so. 4. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction.

[D] UNCITRAL Arbitration Rules (1976, revised 2010), (9) Article 35 1. The arbitral tribunal shall apply the rules of law designated by the parties as applicable to the substance of the dispute. Failing such designation by the parties, the arbitral tribunal shall apply the law which it determines to be appropriate. 2. The arbitral tribunal shall decide as amiable compositeur or ex aequo et bono only if the parties have expressly authorized the arbitral tribunal to do so. 3. In all cases, the arbitral tribunal shall decide in accordance with the terms of the contract, if any, and shall take into account any usage of trade applicable to the transaction.

[E] Regulation (EC) No. 593/2008 of the European Parliament and of the Council of 17 June 2008 on the Law Applicable to Contractual Obligations (Rome I), OJ L 177, 4.7.2008, 6, Articles 3 and 4 Article 3 – Freedom of Choice 1. A contract shall be governed by the law chosen by the parties. The choice shall be made expressly or clearly demonstrated by the terms of the contract or the circumstances of the case. By their choice the parties can select the law applicable to P 500 the whole or to part only of the contract. 2. The parties may at any time agree to subject the contract to a law other than that which previously governed it, whether as a result of an earlier choice made under this Article or of other provisions of this Regulation. Any change in the law to be applied that is made after the conclusion of the contract shall not prejudice its formal validity under Article 11 or adversely affect the rights of third parties. 3. Where all other elements relevant to the situation at the time of the choice are located in a country other than the country whose law has been chosen, the choice of the parties shall not prejudice the application of provisions of the law of that other country which cannot be derogated from by agreement. 4. Where all other elements relevant to the situation at the time of the choice are located in one or more Member States, the parties' choice of applicable law other than that of a

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Member State shall not prejudice the application of provisions of Community law, where appropriate as implemented in the Member State of the forum, which cannot be derogated from by agreement. 5. The existence and validity of the consent of the parties as to the choice of the applicable law shall be determined in accordance with the provisions of Articles 10, 11 and 13. Article 4 – Applicable law in the absence of choice 1. To the extent that the law applicable to the contract has not been chosen in accordance with Article 3 and without prejudice to Articles 5 to 8, the law governing the contract shall be determined as follows: (a) (b) (c) (d)

(e) (f) (g) (h)

a contract for the sale of goods shall be governed by the law of the country where the seller has his habitual residence; a contract for the provision of services shall be governed by the law of the country where the service provider has his habitual residence; a contract relating to a right in rem in immovable property or to a tenancy of immovable property shall be governed by the law of the country where the property is situated; notwithstanding point (c), a tenancy of immovable property concluded for temporary private use for a period of no more than six consecutive months shall be governed by the law of the country where the landlord has his habitual residence, provided that the tenant is a natural person and has his habitual residence in the same country; a franchise contract shall be governed by the law of the country where the franchisee has his habitual residence; a distribution contract shall be governed by the law of the country where the distributor has his habitual residence; a contract for the sale of goods by auction shall be governed by the law of the country where the auction takes place, if such a place can be determined; a contract concluded within a multilateral system which brings together or facilitates the bringing together of multiple third-party buying and selling interests in financial instruments, as defined by Article 4(1), point (17) of Directive 2004/39/EC, in accordance with non-discretionary rules and governed by a single law, shall be governed by that law.

2. Where the contract is not covered by paragraph 1 or where the elements of the contract would be covered by more than one of points (a) to (h) of paragraph 1, the contract shall be governed by the law of the country where the party required to effect the characteristic performance of the contract has his habitual residence. 3. Where it is clear from all the circumstances of the case that the contract is manifestly more closely connected with a country other than that indicated in paragraphs 1 or 2, the law of that other country shall apply. 4. Where the law applicable cannot be determined pursuant to paragraphs 1 or 2, the contract shall be governed by the law of the country with which it is most closely connected.

[F] Comments and Questions What are the main differences between these provisions? Which are more favourable to the investor and which to the host state?

§6.03 OPTIONS FOR THE APPLICABLE LAW In most cases involving arbitration of foreign investment disputes, the tribunal will thus either be directed as to the applicable law, or will have a measure (perhaps a considerable measure) of discretion. In the latter case, the Tribunal will have a range of options, not necessarily mutually exclusive.

[A] National Law [1] Responsibility of the State for Injuries Caused in Its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights: Fourth Report by F. V. García Amador, [1959] 2 Y.B. Int’l L. Comm’n 1, 26, U.N. Doc. A/CN.4/119 (Citations selectively omitted) II. Law Governing Contractual Relations between States and Aliens 103. The question which arises is whether the similarity which may exist between contractual relations established by States with private individuals or bodies corporate of foreign nationality and relations of the same nature which States enter into between themselves affords juridical grounds for affirming that the principle pacta sunt servanda is equally applicable to such relations. In order to answer this question properly, it is first

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necessary to know what law or legal system governs the various different contractual relations which a State may enter into with an alien. The problem is similar to, and to some extent identical with, that which is ordinarily known in private international law as the “choice of law”, and which may here be called simply the determination of the “law of the contract”; i.e., of the law or juridical rules which, by the express, tacit or presumed agreement of the parties – or, in certain cases, by virtue of overriding provisions contained in the local legislation – govern the rights and obligations stipulated in the contract. Only when this preliminary question is answered will it be possible to determine how the principle pacta sunt servanda (as a principle of international law) applies to contractual relations between States and aliens. 24. The Traditional Position 104. Strictly speaking, in traditional international law this problem did not even arise, for… the basic assumption was that all such contractual relations were always governed by municipal law. One of the most equivocal and explicit statements of the traditional position can be found in the judgement of the Permanent Court of International Justice in the Serbian Loans case (1929)… “Any contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country. The question as to which this law is forms the subject of that branch of law which is at the present day usually described as private international law or the doctrine of the conflict of laws. The rules thereof may be common to several States and may even be established by international conventions or customs, and in the latter case may possess the character of true international law governing the relations between States. But apart from this, it has to be considered that these rules form part of municipal law. The Court, which has before it a dispute involving the question as to the law which governs the contractual obligations at issue, can determine this law only by reference to the actual nature of these obligations and the circumstances attendant upon their creation, though it may also take into account the expressed or presumed intention of the parties.” 105. In the cases of the Serbian and Brazilian Loans, the Permanent Court approached the question of the “applicable law” strictly from the point of view of private international law, in that it considered the possibility of the applicable rules being those of a State other than the contracting State by reason of an express agreement between the parties or of a presumption which could be inferred from the terms of the instrument. The important point in the present context, however, is what “substantive” law governs the contractual relationship established between the State and the alien private individual. In this connexion, the Court clearly took it for granted that such relationships are governed, so far as the validity and other substantive aspects of the relevant instrument are concerned, by the municipal law of a State. Even in the hypothetical case in which the rules governing the conflict have been established by international conventions or customs and thus possess the character of “true international law governing the relations between States those rules, by reason of their strictly” adjective character, would serve no other function than to resolve the conflict between the possible applicable laws. In brief, the “choice of law” would always be a matter for the municipal law of a State. 106. The decisions of international claims commissions contain many statements of the traditional position.Basing itself on that body of judicial precedent and on diplomatic practice, the Committee established by the League of Nations for the study of international loan contracts conceded that “Every contract which is not an international agreement – i.e., a treaty between States – is subject (as matters now stand) to municipal law …”. The question has at times arisen, both in the Permanent Court and in cases dealt with by arbitral commissions, whether the municipal law governing the contractual relation is the law of the contracting State, the law of the State of which the private individual is a national or the law of some other country. This aspect of the question, however, has no bearing on the concrete problem under consideration, although it can be said that, as a general rule, the applicable law is that of the contracting State. And this is indeed easily understandable in view of the nature and purpose of the usual type of contractual relationship, which is unlikely to be governed by a law other than that of the contracting State. [2] Comments and Questions As will be seen, it is no longer the case that “Any contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country.” Nonetheless, most contracts are governed by some system of national law, and the express choice of a suitably neutral national legal system as the proper law of an investment contract may provide substantial protection to an investor. There are, however, a number of difficulties in practice. First, the host State may insist that its own law govern, or at least that the investor's national law not govern. The parties may then be unable to agree on a neutral national law, and in the absence of agreement an arbitral tribunal (a dispute having arisen between State A and Company B under the investment contract) will have no basis to choose between the law of States C and D, neither having

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any connection with the transaction. Various solutions to this dilemma have been adopted.

[B] National Law with International Guarantees One method is a development from the classical situation of a concurrence between investor rights under national law and State rights to diplomatic protection of its nationals (including national corporations) under international law. Under classical international law, diplomatic protection is a discretionary exercise of the State's power of protection, involving the right of the State and not that of the national concerned. However where the individual investor has access to a forum in which it can invoke applicable international law, the element of State discretion is removed: at some point, the international law obligation is converted into a right of the investor. Thus in the same proceedings national law (in the form of the applicable law of the investment or the contract) and international law will apply, with international law performing the role of guarantor. This is the system of Article 42 of the ICSID Convention (above, at II.B.), which envisages (in the absence of express choice of law) the concurrent application of the law of the host State and international law in lieu of diplomatic protection. [1] AGIP S.p.A. v. People’s Republic of the Congo (ICSID Case No. ARB/77/1), Award of 30 November 1979, 1 ICSID Rep. 306, 67 I.L.R. 318 (1979) [ Jørgen Trolle (pres.), René-Jean Dupuy, Fuad Rouhani] [In 1968, AGIP Spa established an oil distribution company (the Company) in the Popular Republic of the Congo. In 1974, the Government of the Congo nationalized the entire oil distribution industry in the Congo, apart from the Company. AGIP agreed to transfer 50% of the Company's capital to the Government in return for certain undertakings from the Government. The Government did not honour its obligations under the Agreement, and AGIP filed a request for arbitration in accordance with Article 15 which provided: All disputes that may arise with respect to the application or interpretation of the present Protocol of Agreement will be finally settled in accordance with the Convention for the Settlement of Investment Disputes between States and Nationals of Other States of 13 (sic) March 1965, ratified by the Popular Republic of the Congo by Law No. 6965 of 30 December 1965, by an Arbitral Tribunal consisting of three arbitrators nominated in accordance with the above-mentioned Convention. The law of the Congo, supplemented if need be by any principles of international law, will be applicable.] The Law Applicable 43. As mentioned above in paragraph 1, this case was submitted to the Tribunal by virtue of Article 15 of the Agreement. Paragraph 2 of this provision lays down that the applicable law is “the law of the Congo, supplemented if need be by any principles of international law”. Article 42(1) of the Convention provides that “the Tribunal shall decide the dispute in accordance with such rules of law as may be agreed by the parties”. 44. In its Counter-Memorial the Government in effect proposed that the Tribunal should adopt the role of a friendly arbitrator. Since AGIP has not agreed to this proposal, the Tribunal must make its decision in accordance with the provisions of the applicable law provided for in Paragraph 2 of Article 15 of the Agreement. The said article binds the parties and has force of law for the Tribunal by virtue of the above-cited article of the Convention. 45. Congolese law, as it relates to civil and commercial matters, applies French law as it was in force at the time of the accession of the country to independence (1960). This body of rules, and in particular the French Civil Code, has the force of law by virtue of Article 23 of the French Decree of 28 September 1897. 46. At a higher juridical level, one finds the Constitution of the Popular Republic of the Congo dated 24 June 1973, and the Fundamental Act of the Military Committee of the Party dated 5 April 1977, which in certain respects modifies the Consitution. 47. Article 33 of the Constitution provides that: Private property and the right of succession to assets are guaranteed. No-one shall use his right to private property to the detriment of the community. Limitations on private ownership may, when the general interest requires, be determined by an act of State. Expropriation shall not take place, except as provided by law. and Article 55: Within the province of the law are: ***

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–

The nationalization of concerns and the transfer of the property of concerns.

These last two provisions of the Constitution are preserved in Article 3 of the said Fundamental Act. [2] Klöckner Industrie-Anlagen GmbH and others v. United Republic of Cameroon and Société Camerounaise des Engrais (ICSID Case No. ARB/81/2), Decision on Annulment of 3 May 1985, 2 ICSID Rep. 95 (1994) [Pierre Lalive (pres.), Ahmed Sadek El-Kosheri, Ignaz Seidl-Hohenveldern] [In 1971, Klöckner and the Republic of Cameroon entered an agreement whereby a joint venture company was established for the purpose of construction of a fertilizer factory in Cameroon. Shares in the joint venture company were owned 51% by Klöckner and its European partners and 49% by Cameroon. In 1978, Klöckner and its European partners refused to subscribe to a capital increase and lost majority control of the joint venture company. The factory was shut down by the Cameroonian government after a period of unprofitable operation. Klöckner filed a request for ICSID arbitration against Cameroon and the joint venture company for the balance of the price of the factory. The Cameroonian government counterclaimed for damages it had incurred as a result of the abandoned project. In upholding its jurisdiction, the first Tribunal held, (10) inter alia, that in accordance with Article 42 of the ICSID Convention, the law applicable in the absence of choice was the law of the Contracting State Party, in this case, FrancoCameroonian law. In 1984, Klöckner applied for the annulment of the award, in part on the basis of the alleged manifest excess of powers by the Tribunal's incorrect application of the choice of law provisions of Article 42(1) of the ICSID Convention. The second Tribunal, in annulling the award, held that while the first Tribunal had correctly identified Franco-Cameroonian law as the applicable law, it had gone on to apply general principles which did not form part of Franco-Cameroonian law. In reaching this decision, the second Tribunal made the following comments as to the function of international law under Article 42 of the ICSID Convention. (11) ] 69. … … … [T]he reference to “other national codes which we know of,” to the “particularly appropriate” character of the rule “in more complex international ventures, such as the present one” and to the particular importance that “universal requirements of frankness and loyalty… … … be applied in cases such as this one” seem to indicate that the Tribunal may have wanted to base, or thought it was basing, its decision on the general principles of law recognized by civilized nations, as that term is used in Article 38(3) of the Statute of the International Court of Justice. It is not impossible that the Tribunal was prompted to do so by the reference in Article 42(1) in fine to the “principles of international law as may be applicable” although these are generally not to be confused with “general principles.” Such an interpretation is conjectural and cannot be accepted. Article 42 of the Washington Convention certainly provides that “in the absence of agreement between the parties, the Tribunal shall apply the law of the Contracting State party to the dispute… … … and such principles of international law as may be applicable.” This gives these principles (perhaps omitting cases in which it should be ascertained whether the domestic law conforms to international law) a dual role, that is, complementary (in the case of a “lacuna” in the law of the State), or corrective, should the State's law not conform on all points to the principles of international law. In both cases, the arbitrators may have recourse to the “principles of international law” only after having inquired into and established the content of the law of the State party to the dispute (which cannot be reduced to one principle, even a basic one) and after having applied the relevant rules of the State's law. Article 42(1) therefore clearly does not allow the arbitrator to base his decision solely on the “rules” or “principles of international law.” [The ad hoc Committee went on to annul the decision for manifest excess of power]. [3] Amco Asia Corporation and others v. Republic of Indonesia (ICSID Case No. ARB/81/1), Decision on the Application for Annulment of 16 May 1986, 1 ICSID Rep. 509 (1993) [Ignaz Seidl-Hohenveldern (pres.), Florentino P. Feliciano, Andrea Giardina] [In April 1968, Amco, a Delaware company, entered a Lease and Management Agreement with P.T. Wisma Kartika (PT Wisma), an Indonesian company, with respect to the development by Amco of an hotel and office block on a site owned by PT Wisma in Indonesia. In January 1969, Amco established an Indonesian company, P.T. Amco Indonesia (PT Amco) to take advantage of certain tax concessions. In October 1968, Amco entered an agreement with Pan American Development Limited (Pan American) purporting to recognise it as a joint investor in the project. The agreement met with no objection from the Indonesian Minister of Public Works and the Foreign Investment Board. In early 1980, disagreements between PT Wisma and PT Amco culminated in PT Wisma taking control of the hotel with the assistance of the Indonesian armed forces. PT Amco's investment licence was revoked in July 1980. In April 1980, PT Wisma brought proceedings before the Indonesian courts seeking rescission of the 1968 Lease and Management Agreement. The courts eventually upheld PT Wisma's contentions, annulling the agreement, and awarding damages to PT Wisma. On 15 January 1981 Amco, Pan American and PT Amco filed a request for ICSID arbitration. The first Tribunal decided that

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Indonesia had unlawfully revoked the investment authorization. (12) This decision was annulled by an ad hoc committee, and the case resubmitted to a new Tribunal. (13) Unlike in Klöckner v. Cameroon, the issue of application of the governing law was not central to the annulment proceedings. However, the ad hoc Committee made the following observations.] (Citations selectively omitted) 1. The law to be applied by the ad hoc Committ 18. The first general question which the ad hoc Committee must deal with preliminarily, refers to the law governing the annulment proceedings and to the law governing the resolution of the dispute among the parties. The ad hoc Committee, having been established under the provisions of an international instrument – i.e., the Convention – believes that the proceedings before it are governed by the relevant Articles of the Convention and by the Rules of Procedure for Arbitration Proceedings (Arbitration Rules) adopted by the Administrative Council of ICSID. Problems of interpretation or lacunae which emerge have to be solved or filled in accordance with the principles and rules of treaty interpretation generally recognized in international law. 19. As to the law applicable in respect of the substance of the dispute before it, the ad hoc Committee considers Article 42 of the Convention controlling, in exactly the same way that the Tribunal regarded the same Article decisive of the law governing the substantive dispute before it. Since the parties had not agreed on some other law governing their relations, the Tribunal (Award, para. 148) declared that it would apply to the dispute the law of Indonesia and such rules of international law as may be applicable. 20. It seems to the ad hoc Committee worth noting that Article 42(1) of the Convention authorizes an ICSID tribunal to apply rules of international law only to fill up lacunae in the applicable domestic law and to ensure precedence to international law norms where the rules of the applicable domestic law are in collision with such norms. 21. The above view of the role or relationship of international law norms vis-à-vis the law of the host State, in the context of Article 42(1) of the Convention, is suggested by an overall evaluation of the system established by the Convention. The law of the host State is, in principle, the law to be applied in resolving the dispute. At the same time, applicable norms of international law must be complied with since every ICSID award has to be recognized, and pecuniary obligations imposed by such award enforced, by every Contracting State of the Convention (Art. 54(1), Convention). Moreover, the national State of the investor is precluded from exercising its normal right of diplomatic protection during the pendency of the ICSID proceedings and even after such proceedings, in respect of a Contracting State which complies with the ICSID award (Art. 27, Convention). The thrust of Article 54(1) and of Article 27 of the Convention makes sense only under the supposition that the award involved is not violative of applicable principles and rules of international law. 22. The above view on the supplemental and corrective role of international law in relation to the law of the host State as substantive applicable law, is shared in ICSID case law (Decision of May 3, 1985 of an ICSID ad hoc Committee 1 Foreign Investment Law Journal p. 89 (1986), annulling the Award of October 21, 1983, in Klöckner v. Republic of Cameroon, (ICSID Case No. ARB/81/2, Clunet 1984 p. 409), hereinafter referred to as “Klöckner ad hoc Committee Decision”, para. 69) and in literature (e.g. Broches, “The Convention for the Settlement of Investment Disputes between States and Nationals of Other States”, Recueil des Cours vol. 136 (1972, II) p. 392), and finds support as well in the drafting history of the Convention (see ICSID Convention, Analysis of Documents Concerning the Origin and the Formulation of the Convention, vol. II/1, p. 804 (Washington, D.C. 1970); hereinafter referred to as “History”). 23. The law applied by the Tribunal will be examined by the ad hoc Committee, not for the purpose of scrutinizing whether the Tribunal committed errors in the interpretation of the requirements of applicable law or in the ascertainment or evaluation of the relevant facts to which such law has been applied. Such scrutiny is properly the task of a court of appeals, which the ad hoc Committee is not. The ad hoc Committee will limit itself to determining whether the Tribunal did in fact apply the law it was bound to apply to the dispute. Failure to apply such law, as distinguished from mere misconstruction of that law, would constitute a manifest excess of powers on the part of the Tribunal and a ground for nullity under Article 52(1)(b) of the Convention. The ad hoc Committee has approached this task with caution, distinguishing failure to apply the applicable law as a ground for annulment and misinterpretation of the applicable law as a ground for appeal. 24. The Tribunal recognized (Award, para. 147) that the parties had not authorized it to decide the case ex aequo et bono which the parties could have done (Art. 42(3), Convention). Amco (Rejoinder, p. 32) submits that this explicit recognition by the Tribunal created an “overwhelming” presumption, albeit a rebuttable one, that the arbitrators did indeed refrain from deciding ex aequo et bono any issue raised by the parties. The ad hoc

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Committee, however, has not been pointed to, and has been unable to discover, any legal principle or rule justifying acceptance of such a general presumption. Accordingly, the ad hoc Committee has had to examine closely both what the Tribunal said it was doing and what it was in fact doing, in resolving particular questions. 25. At the same time, the ad hoc Committee does not believe that the Tribunal had necessarily to preface each finding or conclusion with a specification of the Indonesian or international law rule on which such finding or conclusion rests. The Tribunal's conclusions or findings must of course be read in their context (cf. infra para. 40). 26. Neither does the ad hoc Committee consider that any mention of “equitable consideration” in the Award necessarily amounts to a decision ex aequo et bono and a manifest excess of power on the part of the Tribunal. Equitable considerations may indeed form part of the law to be applied by the Tribunal, whether that be the law of Indonesia or international law. The parties discussed this issue before the ad hoc Committee in respect of both Indonesian law and international law. Postponing discussion of this item in relation to Indonesian law until examination of the issue of lawfulness of the revocation of PT Amco's investment licence (infra para. 104), the ad hoc Committee will consider it here in relation to international law. 27. Indonesia asserts that the International Court of Justice has applied equitable considerations, or rather “equitable principles” (cf. ICJ Reports, 1969, p. 48), only in the context of delimitation of maritime boundaries and that application of such considerations should remain restricted to such context (Reply, p. 18). It appears to the ad hoc Committee, however, that when the International Court of Justice looked into whether a claim for compensation was “reasonable” in the Corfu Channel case (ICJ Cases, 1949, p. 249), the Court was in effect taking account of equitable considerations in a context not involving maritime boundaries delimitation. The Court did much the same thing in its Judgment on the Merits in the Barcelona Traction Case (ICJ Cases, 1970, p. 48, para. 92) and dealt directly with this problem in its Advisory Opinion of October 23, 1956 on Judgments of the Administrative Tribunal of the ILO upon complaints made against the UNESCO, (ICJ Reports, 1956, p. 100). The view that a tribunal applying international law may take account of equitable considerations in non-maritime boundaries cases, is fairly widely shared among scholars in international law (See, e.g., Verdross-Simma, Universelles Völkerrecht, p. 422 (3rd ed., 1984); Rosenne, “Equitable Principles and the Compulsory Jurisdiction of International Tribunals”, in Festschrift für Rudolf Bindschedler, p. 410 (1980); Pirotte, “La Notion d’Equité dans la Jurisprudence Récente de la CIJ”, 77 RGDIP p. 131 (1973); and W. Friedmann, “The North Sea Continental Shelf Case: a Critique”, 64 AJIL 234-235 (1970)). 28. The ad hoc Committee thus believes that invocation of equitable considerations is not properly regarded as automatically equivalent to a decision ex aequo et bono which, in view of the determination of the law applicable to the present case (supra para. 24), would constitute a decision annullable for manifest excess of powers. Nullity would be a proper result only where the Tribunal decided an issue ex aequo et bono in lieu of applying the applicable law. [4] W. Michael Reisman, The Regime for Lacunae in the ICSID Choice of Law Provision and the Question of Its Threshold, 15 ICSID Rev. – Foreign Inv. L.J. 362, 366-380 (2000) (14) (Citations selectively omitted) … The text of Article 42(1) contemplates both supplemental and corrective functions for international law. But because there is a prior reference to the law of the contracting State, the critical question is how choice of law is viewed from the perspective of public international law. Article 42(1) directs ICSID tribunals to relate two different bodies of law. Involved here is both a choice of law and, for certain matters, the contingent exercise of certain supplementations and legal controls by one system of law over another. This is especially complex, because, for example, the juridical exercise of choice of law does not involve a qualitative choice between competing systems, but the juridical exercise of control does. Hence it may be useful to consider the international legal basis of choice of law, so that the two mandates of Article 42(1) can be applied properly, without one displacing the other… … *** ICSID Article 42(1), as we have seen, is an obligatory choice of law clause and it is a central feature of the ICSID Convention. In the distribution of concessions, burdens, and benefits among developing countries, as frequent hosts to foreign investment, on the one hand, and foreign investors, on the other, the Convention determines that in the absence of agreement to the contrary, a host State may be assured that its law is and will be applied as the choice of law. That does not mean that the foreign investor may not yield some of the concessions it receives under the Convention in order to effect a change in this jus dispositivum and thereby secure the full application of, say, international law or some system of national law. But it does mean that a Tribunal that, itself, refuses to honor the default choice of law made by the Convention and confirmed by the parties, has exceeded its power by application of the incorrect law. The dispositive choice of host State law in all cases in which ICSID is incorporated and

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the parties do not make a different explicit choice of law under Article 42(1), requires a careful examination of the law of the Contracting State party with regard to the issue in dispute. The law of the State, host to the foreign investment, must be understood broadly to include its statutory as well as judicially illuminated law. In each case, the question is not whether the host State's law provides the remedies sought by the claimant or, indeed, whether any remedy provided by the host State approximates a remedy that might be granted by international law in comparable circumstances. Were that the case, the mechanism in Article 42(1) would be rendered meaningless, for international law would always govern. The question is whether or not the law of the host State addresses the issue at hand. If it does and, as part of its law, has decided not to grant remedies in such matters then there is no remedy, as none is provided in the law that must be applied. The notion of addressing a problem must be understood broadly. Even the most developed of legal systems and even the most articulated code cannot anticipate and provide for every contingency and every possible legal dispute. Thus, the question for an ICSID tribunal under Article 42(1) is not whether the host State law provides a pre-packaged answer. If the host State's law provides a general analytical framework, it is up to the Tribunal to apply that framework to the statutes, judicial precedents, and general principles of that system, in the manner followed by the Permanent Court in Brazilian Loans and the Chamber of the International Court in the ELSI case. The point bears emphasis. If an ICSID tribunal takes the claimant's demand for a remedy as the framework of inquiry and assumes that if that remedy is not provided by the host State's law, the Tribunal must then proceed to search for it in international law, the Tribunal will subvert the purpose of the dispositive choice of law in Article 42(1) and create a new regime: national law is applied insofar as it provides a particular remedy, but if it does not, international law is then searched for the remedy. I emphasize once again that the absence of a remedy is not necessarily a lacuna; it may represent a decision not to regulate a certain matter or to regulate it in a different way. A lacuna, or gap, in the law of a particular State may be said to exist only when the State engages in certain transactions for which its legal system has not yet considered regulations or remedies. In short, it exists in those circumstances in which there is a socio-legal lag. *** In private international law, a lacuna may be said to exist only in those circumstances of socio- legal lag, in which the local law allows or encourages certain activities but has plainly not yet provided for any regulation of them and does not incorporate a progressive supplementation mechanism. Where the local law does regulate those activities, but in a way different from that of competing legal systems, no lacuna can be said to exist. To characterize such regulation as a lacuna is to displace local law without acknowledging what is being done. IV. Specific Conditions for the Introduction of International Law The continuing contingent role for international law, even when the Tribunal must apply the law of the Contracting State, is supplemental and corrective. Article 42(1) instructs that the Tribunal shall apply the law of the Contracting State to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable. Note the markedly different degrees of reference here. The reference to the comprehensive law of the Contracting State is much broader than the reference to only “such rules of international law as may be applicable,” les principes de droit international en la matière, or aquellas normas de derecho internacional que pudieren ser aplicables. All latter versions contain a much more precise and restricted reference. International law rules may become applicable in a number of ways. If the Contracting State's law includes a renvoi to international law, the ICSID tribunal must apply that rule of international law in accordance with the Contracting State's law. Rules of international law might also become applicable because of a treaty relationship. For example, if a State such as Egypt passes legislation purporting to consent to ICSID jurisdiction, a mode of consent that is permissible in the ICSID system, it is plain that that expression of consent, must be interpreted vis-à-vis all other States parties to the Convention. This would be consistent with the rules of interpretation of the Vienna Convention on the Law of Treaties, which provide a consistent mode of construction for all parties to the Convention rather than by the idiosyncratic interpretation rules of a particular State party. The point of emphasis here is that Article 42(1), by its own terms, provides for a limited and contingent application of particular rules of international law. International law may be applied in another limited way: by ensuring that the result does not violate peremptory rules of international law, a matter which I will treat below. V. Supplementing Article 42(1) does not provide, by its own terms, a broader dominating and displacing role for international law. If there is a lacuna in the host State's law (and it must be borne in mind that the failure to provide a remedy for a particular matter is not necessarily a lacuna), Article 42(1) does not thereupon authorize a Tribunal promptly or automatically

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to resort to international law. The law of the Contracting State may itself provide for a method for dealing with lacunae. In Swiss law, for example, a judge, encountering an authentic lacuna, is instructed to respond as he thinks the legislator would have: selon les règles qu’il ètablirait s’il avait à faire acte de lègislateur. If Swiss law had been the choice of law, it would be inappropriate for an international arbitrator to respond to a relevant lacuna in Swiss law by applying international law. … Even if a genuine lacuna is found in the law applicable by virtue of Article 42(1) or by other choice of the parties, an ICSID tribunal cannot simply turn to international law. It is still obliged to examine the Contracting State's law to see what procedures it provides for dealing with lacunae. The Tribunal is not simply looking for a rule in a mechanical fashion. It must explore the analytical framework for decision that the designated legal system has developed for the particular issue, and address the issues within that framework. VI. Correcting: International Jus Cogens International law plays an important role under Article 42(1), but if it is wielded incautiously, it can defeat other parts of this provision. Where there is a genuine lacuna, i.e., one for which host State law does not provide a method for filling, the Tribunal may turn to international law. In addition, international law may perform a corrective function, but the contingency for correction must be more than a mere difference between international and host State law. What is required is a veritable collision. This standard allows an effective role for the law of the host State, yet ensures the foreign investor that domestic arrangements that violate fundamental international norms will not be given effect. It is plain that mere inconsistencies between the Contracting State's law and international law cannot mean ipso facto that international law prevails. If that were the case, the choice of law component of Article 42(1) would lose all of its meaning. It is to be expected that in any system in which different laws may be selected, their provisions and solutions to different types of social and economic problems will themselves be different. A demonstration of a violation, and not mere inconsistency, is required. To characterize inconsistencies that are only different as violations would simply mean that international law would often be the Tribunal's choice of law and key parts of Article 42(1) would be defeated. The test, then, is not inconsistency, but whether applying the Contracting State's law would constitute a violation of something fundamental to international law… … *** In sum, I submit that there are four situations in which an ICSID tribunal will have occasion to apply international law: (i) (ii)

where the parties have so agreed; where the law of the Contracting State party to the dispute calls for the application of international law, including customary international law; (iii) where the subject matter or issue is directly regulated by international law, such as a treaty between the states party to the dispute; and, finally, (iv) where the law of the Contracting State party to the dispute, or action taken under that law, violates international law. In this last situation, international law operates as a corrective to national law. [5] Wena Hotels Limited v. Arab Republic of Egypt (ICSID Case No. ARB/98/4), Decision on Annulment of 5 February 2002, (15) [Konstantinos D. Kerameus (pres.), Andreas Bucher, Francisco Orrego Vicuña] [Two hotels in Egypt were leased to Wena Hotels Limited (Wena), a company established in the United Kingdom, by the State-owned Egyptian Hotel Company (EHC). Disputes arose between Wena and EHC over their respective obligations under the lease agreements and Wena was evicted from the hotels. Wena filed a request for ICSID arbitration, claiming compensation from Egypt for violation of the United Kingdom-Egypt Agreement for the Promotion and Protection of Investments of 11 June 1975 (the IPPA). In its Award of 8 December 2000, the Tribunal found that Egypt had breached certain of its obligations under the IPPA and awarded Wena damages. In reaching this decision, the Tribunal relied on the IPPA as the primary source of law. On 19 January 2001, Egypt filed an application for annulment of the Award. One of the grounds for annulment was that the Tribunal had manifestly exceeded its powers under Article 52(1)(b) of the ICSID Convention by failing to apply Egyptian law in contravention of Article 42(1). On this point, the ad hoc Committee first held that although the lease agreements dealing with the commercial relationship between Wena and EHC were subject to Egyptian law, the dispute brought to ICSID arbitration was of a governmental nature, dealing with the treatment of foreign investors by Egypt. Thus for the purposes of the instant case, the parties had not made a choice of law under the first sentence of Article 42(1). The Committee went on to make the following observations:] (Citations selectively omitted) The Role of International Law

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37. The second sentence of Article 42(1) of ICSID Convention provides that, in the absence of an agreement on the applicable rules of law, the Tribunal shall apply the law of the host State, including its rules on the conflict laws, and such rules of international law as may be applicable. It is therefore necessary for the Committee to examine the meaning of this second sentence and the question of the interrelation between domestic and international law in this context. 38. This discussion brings into light the various views expressed as to the role of international law in the context of Article 42(1). Scholarly opinion, authoritative writings and some ICSID decisions have dealt with this matter. Some views have argued for a broad role of international law, including not only the rules embodied in treaties but also the rather large definition of sources contained in Article 38(1) of the Statute of the International Court of Justice. Other views have expressed that international law is called in to supplement the applicable domestic law in case of the existence of lacunae. In Klöckner I the ad hoc Committee introduced the concept of international law as complementary to the applicable law in case of lacunae and as corrective in case that the applicable domestic law would not conform on all points to the principles of international law. There is also the view that international law has a controlling function of domestic applicable law to the extent that there is a collision between such law and fundamental norms of international law embodied in the concept of jus cogens. 39. Some of these views have in common the fact that they are aimed at restricting the role of international law and highlighting that of the law of the host State. Conversely, the view that calls for a broad application of international law aims at restricting the role of the law of the host State. There seems not to be a single answer as to which of these approaches is the correct one. The circumstances of each case may justify one or another solution. However, this Committee's task is not to elaborate precise conclusions on this matter, but only to decide whether the Tribunal manifestly exceeded its powers with respect to Article 42(1) of the ICSID Convention. Further, the use of the word “may” in the second sentence of this provision indicates that the Convention does not draw a sharp line for the distinction of the respective scope of international and of domestic law and, correspondingly, that this has the effect to confer on to the Tribunal a certain margin and power for interpretation. 40. What is clear is that the sense and meaning of the negotiations leading to the second sentence of Article 42(1) allowed for both legal orders to have a role. The law of the host State can indeed be applied in conjunction with international law if this is justified. So too international law can be applied by itself if the appropriate rule is found in this other ambit. 41. In particular, the rules of international law that directly or indirectly relate to the State's consent prevail over domestic rules that might be incompatible with them. In this context it cannot be concluded that the resort to the rules of international law under the Convention, or under particular treaties relates to its operation, is antagonistic to that State's national interest. 42. Particular emphasis is put on this view when the rules in question have been expressly accepted by the host State. Indeed, under the Egyptian Constitution treaties that have been ratified and published “have the force of law”. Most commentators interpret this provision as equating treaties with domestic legislation. On occasions the courts have decided that treaty rules prevail not only over prior legislation but also over subsequent legislation. It has also 37. been held that lex specialis such as treaty law prevails over lex generalis embodied in domestic law. A number of important domestic laws, including the Civil Code and the Code of Civil Procedure of Egypt, provide in certain matters for a “without prejudice clause” in favor of the relevant treaty provisions. This amounts to a kind of renvoi to international law by the very law of the host State. 43. Most prominent among this treaty law is that embodied in investment treaties. As from 1953 Egypt has been a leader in the field. Examples of this leadership are the Convention on the Payments on Current Transactions and the Facilitation of Transfer of Capital among the States of the Arab League of 1953, the Convention on the Investment and Transfer of Arab Capital of 1971, the Convention Establishing the Arab Investment Guarantee Corporation, the ICSID Convention and numerous bilateral investment treaties. 44. This treaty law and practice evidences that when a tribunal applies the law embodied in a treaty to which Egypt is a party it is not applying rules alien to the domestic legal system of this country. This might also be true of other sources of international law, such as those listed in Article 38(1) of the Statute of the International Court of Justice… 45. Therefore, the reliance of the Tribunal on the IPPA as the primary source of law is not in derogation or contradiction to the Egyptian law and policy in this matter. In fact, Egyptian law and investment policies are fully supportive of the rights of investors in that country. The ICSID Convention and the related bilateral investment treaties are specifically mentioned in Egypt's foreign investment policy statements. 46. In the light of the above this Committee concludes that in applying the rules of the IPPA in the instant case the Tribunal did not exceed its powers.

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[6] Azurix Corp. v. Argentine Republic (ICSID Case No. ARB/01/12), Decision on the Application for Annulment of 1 September 2009 (16) [Gavan Griffith QC (pres.), Bola Ajibola, Michael Hwang] [In 1996, the province of Buenos Aires started privatising water and sewerage services. In 1999, Azurix Buenos Aires SA (ABA), a company incorporated in Argentina, was granted a concession to provide such services in the province under a concession agreement with Administracion General de Obras Sanitarias de la Provincia de Buenos Aires (AGOSBA) and the province. ABA was owned by two companies in the Azurix group, which were indirectly owned by the claimant, Azurix Corp (Azurix), a company incorporated in Delaware. In September 2001 Azurix filed a request for arbitration with ICSID against Argentina, alleging that Argentina had violated the BIT by expropriating Azurix's investment, failing to provide fair and equitable treatment and full protection and security, and had taken arbitrary measures. In its Award of 14 July 2006, the Tribunal rejected the claim of expropriation, but found several violations of the BIT. Argentina applied for the annulment of the Award. It argued, among other things, that the Tribunal had manifestly exceeded its powers by applying the wrong applicable law.] (Citations selectively omitted) 140. At paragraph 65 of the Award, the Tribunal began by noting “the agreement of the parties with the statement that the BIT is the point of reference for judging the merits of Azurix’s claim”. At paragraph 66, the Tribunal noted that “Article 42(1) has been the subject of controversy on the respective roles of municipal law and international law”, and stated that “both legal orders have a role to play, which role will depend on the nature of the dispute and may vary depending on which element of the dispute is considered”. *** 145. The Committee agrees with these findings in the Vivendi Annulment Decision and the ELSI case. 146. Here the principles are straightforward. Each of Azurix's claims in this case was for an alleged breach of the BIT. The BIT is an international treaty between Argentina and the United States. By definition, a treaty is governed by international law, and not by municipal law. It is a fundamental principle that “[a] party maynot invoke the provisions of its internal law as justification for its failure to perform a treaty”. In any claim for breach of an investment treaty, the question whether or not there has been a breach of the treaty must therefore be determined, not through the application of the municipal law of any State, but through the application of the terms of the treaty to the facts of the case, in accordance with general principles of international law, including principles of the international law of treaties. Bearing in mind that an investment treaty, whether bilateral or multilateral, is itself a source of international law as between the States parties to that treaty, the applicable law in any claim for a breach of that treaty can thus be said to be the treaty itself specifically, and international law generally. 147. Furthermore, in arbitration proceedings under the ICSID Convention, the tribunal also must comply with the terms of the ICSID Convention, which is also an international treaty to be interpreted and applied in accordance with general principles of international law, including principles of the international law of treaties. The Committee considers that, in a claim for breach of an investment treaty, the application by the tribunal of the terms of the investment treaty and of international law as the applicable law is foreseen by the words “and such rules of international law as may be applicable” in Article 42(1) of the ICSID Convention. The Committee considers that the second sentence of Article 42(1) cannot possibly be understood as having the effect that, in the absence of an express choice of law clause, the municipal law of the Contracting State will be the applicable law in claims for alleged breaches of an investment treaty. 148. The Committee concludes that the Tribunal correctly identified the law applicable under Article 42 of the ICSID Convention to Azurix's claims of breaches of the BIT to be “the ICSID Convention,… … … the BIT and… … … applicable international law”. 149. In some cases, it may be an express term of the investment treaty that the host State is required to comply with specified provisions of its own municipal law. In such cases, a breach by the host State of municipal law may thus amount to a breach of the treaty. Although municipal law does not as such form part of the law applicable to a claim for breach of a treaty, in such cases it may be necessary to determine whether there has been a breach of municipal law as a step in determining whether there has been a breach of the treaty. As the International Law Commission has said: 145. The rule that the characterization of conduct as unlawful in international law cannot be affected by the characterization of the same act as lawful in internal law makes no exception for cases where rules of international law require a State to conform to the provisions of its internal law, for instance by applying to aliens the same legal treatment as to nationals. It is true that in such a case, compliance with internal law is relevant to the question of international responsibility. But this is because the rule of international law makes it relevant, e.g. by incorporating the standard of compliance with internal law as the applicable international standard or as an aspect of it. Especially in the fields of injury to aliens and their property and of human rights, the content and application of internal law will often be relevant to the question of international responsibility. In every

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case it will be seen on analysis that either the provisions of internal law are relevant as facts in applying the applicable international standard, or else that they are actually incorporated in some form, conditionally or unconditionally, into that standard. 150. As a potential example of this, the Committee recalls the arguments of the parties concerning the effect of Article II(2)(c) of the BIT, which states that “[e]ach Party shall observe any obligation it may have entered into with regard to investments”. In the present case, Azurix argued that the reference to “obligations” in this provision included obligations both under municipal law and international law. Argentina on the other hand contended that contractual claims do not become automatically treaty claims by virtue of this provision. The Tribunal ultimately did not decide between these two competing arguments. The Tribunal rejected Azurix's claim for breach of Article II.2(c) of the BIT on the basis that the parties to the Concession Agreement were not the parties to the present case, Azurix and Argentina. The parties to the Concession Agreement were ABA (a subsidiary of Azurix) and the Province (a political subdivision of Argentina), and, in the Tribunal's view, there was “no undertaking to be honored by Argentina to Azurix other than the obligations under the BIT”. 151. If Azurix and Argentina had been the parties to the Concession Agreement, and if the Tribunal had found that the word “obligations” in Article II.2(c) of the BIT included obligations under municipal law (a matter on which the Committee is not called upon to express any view), it might have become necessary for the Tribunal to determine whether Argentina was in breach of obligations under municipal law in order to determine a claim under Article II.2(c) of the BIT. In that event, it would have been necessary for the Tribunal to apply Argentine municipal law in determining whether there was a breach of obligations under municipal law. However, even in this situation, municipal law would not thereby become part of the applicable law under Article 42 of the ICSID Convention for purposes of determining whether there was a breach of Article II.2(c) of the BIT. Rather, any breach of municipal law that might be established would be a fact or element to which the terms of the BIT and international law would be applied in order to determine whether there was a breach of Article II.2(c). 152. Having determined that its inquiry in this case was “governed by the ICSID Convention, by the BIT and by applicable international law”, the Tribunal went on to say that: While the Tribunal's inquiry will be guided by this statement, this does not mean that the law of Argentina should be disregarded. On the contrary, the law of Argentina should be helpful in the carrying out of the Tribunal's inquiry into the alleged breaches of the Concession Agreement to which Argentina's law applies, but it is only an element of the inquiry because of the treaty nature of the claims under consideration. 153. In the Committee's view, this statement is consistent with the principles set out above. The Committee therefore finds no fault with the Tribunal's identification of the applicable law under Article 42. [7] Comments and Questions 1. 2.

Why should international law tell States what is the proper law of their investment contracts, when national conflicts rules do not do so? As noted above, almost all arbitration rules dealing with applicable law begin with the principle of freedom of contract (subject only to the possible effect of mandatory rules) and thus emphasise the express or implied choice of the parties as to the applicable law. Does this practice have any status in terms of the sources of international law under Article 38 (1) of the ICJ Statute? In any event, what does this practice say for a theory that international law is – inherently – the applicable law of investment contracts?

[C] Internationalization A third option is the direct internationalization of the investment relationship, whether by holding international law to be the proper law of the contract or by other means. But there are different versions of internationalization. Indeed to some extent the issue can only be understood historically. [1] Petroleum Development (Trucial Coast) Ltd. v. Sheikh of Abu Dhabi, Award of September 1951, 18 I.L.R. 144, 148-150 (1951) [Lord Asquith (sole arbitrator)] [On 11 January 1939, Sheikh Shakhbut of Abu Dhabi (the Ruler) entered an Agreement with Petroleum Development (Trucial Coast) Limited (the Company) transferring the exclusive right to drill for oil within a certain area of Abu Dhabi. The arbitration clause in the Agreement provided for reference of disputes to two Arbitrators, and, should they fail to agree, to an Umpire. A dispute arose as to the rights of the Company with respect to the seabed and subsoil over which the Ruler may have had sovereignty, jurisdiction, control or mineral oil rights. The two Arbitrators appointed in accordance with the agreement differed and appointed Lord Asquith Umpire. Relevant discussion of the applicable law follows.]

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Article 17 is in these terms: In the translation relied upon by the Claimants: ‘ARTICLE 17. The Ruler and the Company both declare that they intend to execute this Agreement in a spirit of good intentions and integrity, and to interpret it in a reasonable mariner. The Company undertakes to acknowledge the authority of the Ruler and his full rights as Ruler of Abu Dhabi and to respect it in all ways, and to fly the Ruler's flag over the Company's buildings.’ In the translation relied upon by the Respondents: ‘ARTICLE 17. The Ruler and the Company both declare that they base their work in this Agreement on goodwill and sincerity of belief and on the interpretation of this Agreement in a fashion consistent with reason. The Company undertakes to acknowledge the authority of the Ruler and his full rights as Ruler of Abu Dhabi and to respect it in all ways, and to fly the Ruler's flag over the Company's buildings.’ The variation between the two translations of Article 17 would seem immaterial… … (b) What is the ‘Proper Law’ applicable in construing this contract? This is a contract made in Abu Dhabi and wholly to be performed in that country. If any municipal system of law were applicable, it would prima facie be that of Abu Dhabi. But no such law can reasonably be said to exist. The Sheikh administers a purely discretionary justice with the assistance of the Koran; and it would be fanciful to suggest that in this very primitive region there is any settled body of legal principles applicable to the construction of modern commercial instruments. Nor can I see any basis on which the municipal Law of England could apply. On the contrary, Clause 17 of the Agreement, cited above, repels the notion that the municipal Law of any country, as such, could be appropriate. The terms of that Clause invite, indeed prescribe, the application of principles rooted in the good sense and common practice of the generality of civilised nations – a sort of ‘modern law of nature’. I do not think that on this point there is any conflict between the parties. But, albeit English Municipal Law is inapplicable as such, some of its rules are in my view so firmly grounded in reason, as to form part of this broad body of jurisprudence – this ‘modern law of nature’. For instance, while in this case evidence has been admitted as to the nature of the negotiations leading up to, and of the correspondence both preceding and following the conclusion of the Agreement, which evidence as material for construing the contract might, according to domestic English Law, be largely inadmissible, and to this extent the rigid English rules have been disregarded; yet on the other hand the English rule which attributes paramount importance to the actual language of the written instrument in which the negotiations result seems to me no mere idiosyncrasy of our system, but a principle of ecumenical validity. Chaos may obviously result if that rule is widely departed from: and if, instead of asking what the words used mean, the inquiry extends at large to what each of the parties meant them to mean, and how and why each phrase came to be inserted. The same considerations seem to me to apply to the principle expressio unius est exclusion alterius. I defer entirely to the warnings given by Wills J. and Lopes L.J. in the case of Colquhoun v. Brooks (19 Queen's Bench Division 400 at p. 406: and 21 Q.B.D. 52 at p. 65) as to the possibilities (and indeed the frequency) of its misapplication. But confined within its proper borders it seems to me mere common sense. (If I have a house and a garden and two hundred acres of agricultural land and if I recite this and let to X ‘my house and garden’, it seems obvious that the two hundred acres are excluded from the lease.) Much more dubious to my mind is the application to this case of certain other English maxims relied on by one or the other party in this case. For instance, verba chartarum fortius accipiuntur contra proferentem: or the rule that grants by a sovereign are to be construed against the grantee. The latter is an English rule which owes its origin to incidents of our own feudal polity and royal prerogative which are now ancient history; and its survival, to considerations which, though quite different, seem to have equally little relevance to conditions in a protected State of a primitive order on the Persian Gulf. [The Umpire went on to hold that continental shelf rights to oil and gas, being imperfectly developed at the time of the Agreement, were not included in the grant to the Company.] [2] Comments and Questions 1. 2.

Some of the expressions in Lord Asquith's award seem insular, even derogatory? Does this affect his basic point? Could this decision have been reached applying orthodox conflicts principles, without regard to the view that no law of Abu Dhabi “can reasonably be said to exist”?

[3] Texaco Overseas Petroleum Company and Californian Asiatic Oil Company v. The Government of the Libyan Arab Republic, Award on the Merits of 19 January 1977, 53 I.L.R.

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420, 457-462 (1977) [René-Jean Dupuy (sole arbitrator)] [By decrees in 1973 and 1974, Libya nationalized all interests of Texaco and California Asiatic Oil Company in 14 Deeds of Concession. Clause 28(7) of the Deeds of Concession provided: This Concession shall be governed by and interpreted in accordance with the principles of law of Libya common to the principles of international law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by international tribunals.] (Citations selectively omitted) C. Meaning and Scope of the Internationalization of the Contracts in Dispute 46. The Tribunal must specify the meaning and the exact scope of internationalization of a contractual relationship so as to avoid any misunderstanding: indeed to say that international law governs contractual relations between a State and a foreign private party neither means that the latter is assimilated to a State nor that the contract entered into with it is assimilated to a treaty. This distinction is worth making, because the situation of individuals, and more generally private persons, in respect of international law, has recently been the subject matter of important doctrinal debates on the occasion of which excessive positions sometimes may have been stated. Thus, for some: “The rules of economic international law concern not only States but directly the individuals; because economic and social progress has as its objective to assure its direct application to those concerned. The result is that individuals are directly the subjects of economic or social international law.” (P. Vellas, 1 Droit International Economique et Social (1965), at 30.) 47. This Tribunal will abstain from going that far: it shall only consider as established today the concept that legal international capacity is not solely attributable to a State and that international law encompasses subjects of a diversified nature. If States, the original subjects of the international legal order, enjoy all the capacities offered by the latter, other subjects enjoy only limited capacities which are assigned to specific purposes. The proposition which has just been stated is in conformity with the statement by the International Court of Justice in its Advisory Opinion on Reparations of 11 April 1949 under which “the subjects of law, in any legal system, 46. are not necessarily identical in their nature or in the extent of their rights and their nature depends on the needs of the community” ([1949] I.C.J. 174, at 178). In other words, stating that a contract between a State and a private person falls within the international legal order means that for the purposes of interpretation and performance of the contract, it should be recognized that a private contracting party has specific international capacities. But, unlike a State, the private person has only a limited capacity and his quality as a subject of international law does enable him only to invoke, in the field of international law, the rights which he derives from the contract. 48. This is what is noted by Professor I. Seidl-Hohenveldern who, when referring to the work of Professor Böckstiegel, writes (“Contrats entre Etats et Personnes Privées Etrangères: The Theory of Quasi-International and Partly International Agreements”, Rev. Belge D.I. 567 (1975), at 570): “If it is possible to recognize international organisations, insurgents, etc. as subjects of international law and if some authors at least consider that even individual human beings under certain circumstances may be subjects of international law, why should a State be prevented from recognizing its partner to such a contract as a subject of international law? Of course such recognition does not mean that the State recognizes its partner to such a contract as a subject enjoying all rights and duties due to a State. The private partner is recognized as a subject of only those rights and duties, as are embodied in the contracts concerned.” Or, as stated by Professor Garcia Amador (“International Responsibility”, 2 Y.B. Int'l L. Comm'n 1, U.N. Doc. A/CN.4/119 (1959), at 32): … …”… In the matter of contracts, the international personality and capacity of the individual [that is to say the private person, natural or fictitious] depend on the recognition granted to them by the State in its legal relations with him. Agreements which provide in one form or another for the application of a legal system or of principles alien to municipal law, or for the settlement of disputes by international means and procedures, differ from those governed exclusively by municipal law in that the contractual relation between a State and a private person is raised to an international plane, thus necessarily conferring upon that person the necessary degree of international personality and capacity.”

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Thus, the internationalization of certain contracts entered into between a State and a private person does not tend to confer upon a private person competences comparable to those of a State but only certain capacities which enable him to act internationally in order to invoke the rights which result to him from an internationalized contract. 49. The above quotation from Mr. Garcia Amador is all the more appropriate as it refers to the conclusion of agreements which are “governed exclusively by municipal law”, implying thereby that some agreements may be governed both by municipal law and by international law. It is precisely this latter kind of hypothesis which is to be found in the case under consideration since the clause of the contracts under dispute relating to the applicable law refers to the “principles of Libyan law which are common to the principles of international law”. It is significant in this respect that, in a formula in which it must be assumed that each term has been weighed, the parties concerned referred not to Libyan law itself, but to “the principles of Libyan law”. Indeed, the parties thereby wanted to demonstrate that they intended the Arbitral Tribunal to base itself on the spirit of the Libyan law as expressed in the fundamental principles of that law, rather than by its rules which may be contingent and variable since these rules depended, in the last instance, on the unilateral will – even arbitrariness – of one of the contracting parties: hence, the reference which is also made to the principles of international law. It follows that the reference made by the contracts under dispute to the principles of Libyan law does not nullify the effect of internationalization of the contracts which has already resulted from their nature as economic development agreements and recourse to international arbitration for the settlement of disputes. The application of the principles of Libyan law does not have the effect of ruling out the application of the principles of international law, but quite the contrary: it simply requires us to combine the two in verifying the conformity of the first with the second. 50. The Tribunal must in this respect make two observations in order to clarify the scope of the internationalization of the contracts in dispute: –

in the first place, the national law (that is: the principles of Libyan law) can be raised to the level of the international legal order: in other words, the national law is incorporated into the international legal order as a body of substantive law (“règles matérielles”), by reason of its normative content which becomes a set of rules to be applied by the International Tribunal. The grounds of its applicability does not result from the automatic operation of the sovereignty of the contracting State, but from the common will of the parties: the national law of the contracting State is therefore regarded as lex contractus by incorporation. This is what Professor Weil expressed in the following terms (“Les Clauses de Stabilisation ou d'Intangibilité Insérées dans les Accords de Développement Economique,” in Mélanges Offerts à Charles Rousseau 301 (1975), at 319-320): “ … Municipal law does not therefore apply in itself but as a law of renvoi. The presence in the contract of a provision referring to the municipal law of the host State does not therefore necessarily mean that internationalization must be ruled out: if such internationalization results from the other characteristics of the contract – and this is the case with most economic development agreements – the contract will nonetheless be internationalized, and national law will therefore be applicable as a law of renvoi on the basis of the choice of the parties as authorized by the international law applicable in the field of contracts…”

–

in the second place, the municipal law of the contracting State itself includes principles of international law: every municipal law is a vehicle for the general principles of law as provided for under Article 38 of the Statute of the International Court of Justice. Under this generic name of general principles of law, reference is made in fact to certain principles common to the legal systems of the various States of the world. They constitute a source of international law which originates in the various municipal laws: therefore, the application of municipal law does not exclude the application of the general principles of law which themselves are part and parcel of the principles of international law.

51. Applying the principles stated above, the Arbitral Tribunal will refer: (1)

On the one hand, as regards the principles of Libyan law: regardless of the source of Libyan law taken into consideration, whether we refer to the Sharia, the Sacred Law of Islam (a special reference should be made to Surah 5 of the Koran which begins with the verse: “0 ye believers, perform your contracts!”) or to the Libyan Civil Code which includes on this point two basic articles illustrating the value which Libyan law attaches to the principle of the respect of the word given: – –

Article 147, under which “The contract makes the law of the parties. It can be revoked or altered only by mutual consent of the parties or for reasons provided by the law”; Article 148, under which “A contract must be performed in accordance with its contents and in compliance with the requirements of good faith”, one is led to the same conclusion, that is: that Libyan law recognizes and sanctions the

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(2)

principle of the binding force of contracts. On the other hand, as regards the principles of international law: from this second point of view, it is unquestionable, as written by Professor Jessup in concluding his opinion (p. 71) that the maxim “‘pacta sunt servanda’ is a general principle of law; it is an essential foundation of international law”.

No international jurisdiction whatsoever has ever had the least doubt as to the existence, in international law, of the rule pacta sunt servanda: it has been affirmed vigorously both in the Aramco award in 1958 and in the Sapphire award in 1963. On can read, indeed, in the Sapphire award, that “it is a fundamental principle of law, which is constantly being proclaimed by international Courts, that contractual undertakings must be respected. The rule ‘pacta sunt servanda’ is the basis of every contractual relationship” (35 Int'l L.R. 136 (1963), at 181). This Tribunal cannot but reaffirm this in its turn by stating that the maxim pacta sunt servanda should be viewed as a fundamental principle of international law. 52. The conformity, on this essential point, of the principles of Libyan law with the principles of international law relieves the Tribunal from discussing the matter further – in particular from going to the second part provided for subsidiarily in Clause 28 of the Deeds of Concession – and enables it to conclude that the Deeds of Concession in dispute have a binding force. [4] Comments and Questions Do we need a full-scale theory of internationalization to explain the decision in this case? [5] Italian Enterprise v. Syrian Enterprise (ICC Case No. 3380), Award of 29 November 1980, 108 Journal du Droit International (Clunet, No. 4) 928, 928-930 (1981) [On 13 February 1974, an Italian enterprise and a Syrian enterprise concluded a contract in Damascus which contained the following arbitral clauses: Article 19.6: “Arbitration shall be held at Geneva (Switzerland) and shall judge according to the general principles of law and justice.” Article 25: “This Agreement shall be subject to and constructed [sic] in accordance with the Laws in Syria”. The italicised words in Article 19.6 were handwritten, replacing the original text which stated that the arbitrators were to decide “ex aequo et bono”.] “By stipulating clauses 19.6 and 25 of the contract at the same time, the parties have intended, or should be considered to have intended to solve the question of the applicable law in a harmonious way. And it is hardly necessary to add that the principle of the autonomy of the arbitral clause does not impede this; detached from disputes on the competence of arbitrators, or even on the law applicable to the arbitration, this principle appears to be without relevance here, where the law applicable to the substance has to be decided, by using the sparse elements in the various contractual clauses, among which the arbitral clause. “Article 25 provides that ‘this Agreement shall be subject to and constructed in accordance with the Laws of Syria’. In itself, this hardly lends itself to interpretation. This is not the case for article 19.6 which has given rise to detailed analyses on an elevated legal, even philosophical, level, touching on the notions of Law, Justice, and Equity, as well as on that of the ‘general legal principles'. In its endeavors to stick to the essentials, the tribunal takes the point of view that by inserting in art. 19.6 a reference to ‘the general principles of law and justice’, the parties have intended to produce legal effects. The contrary could not be assumed, in particular, from experienced negotiators… “On the basis of general experience and international commercial practice in the field of contracts between private companies and governments or government controlled institutions, the arbitral tribunal holds that the essential aim of the clause in discussion was the protection of the private cocontracting party against a double risk: on the one hand that of future modifications of Syrian law which would affect the contractual balance to his disadvantage (in this sense article 19.6 contains an element of guarantee or of stabilization), on the other hand the risk that the contents of Syrian law, by possible ‘exorbitant legal provisions', would only work to his disadvantage – a risk which is obviously totally unreal but exists in the mind of the merchant who often has only a vague concept of foreign legal systems. “The contract having been performed to the satisfaction of both the parties (apart from the present request for a supplement to the price), the question raised in the first contention neither would nor could be posed. As for the second contention, this remains equally abstract, at least for the moment, as long as it has not been established that the provisions of Syrian law applicable to the contract would, on one point or the other, be in contradiction with the ‘general principles of law and justice’. “The presently somewhat abstract character of the question, however, should not exempt the arbitrators from answering it, in view of the question posed under no. 2 of point IV in the Terms of Reference; the more so, where this answer will obviously guide them in their

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manner of resolving the principal question, posed under no. 3 of the Terms of Reference, concerning the merits of the claim. “In brief, the arbitral tribunal considers it as its duty to take into account both articles 25 and 19.6 of the contract, and to accept that the contract is governed by and should be interpreted in accordance with Syrian law in its entirety without any restrictions (e.g., only its mandatory or public policy provisions, as has been alleged), under reservation of the ‘general principles of law and justice’, according to which the arbitrators have to decide under article 19.6. These general principles prima facie include those which are derived from the Syrian legal system, as well as those which are developed in international arbitral case-law. It is not excluded that these general principles are, partly, the same as the ‘trade usages', which arbitrators have to take into account anyway, according to article 13, para. 5 of the ICC Arbitration Rules. This interpretation does not really seem to contradict the positions taken by the parties, especially during the hearings, wherein they both referred to the international arbitration practice and to certain general principles.” [6] Comments and Questions In what respects, if at all, does this approach differ from that adopted by ICSID Tribunals under Article 42 of the ICSID Convention? In the absence of a positive provision such as Article 42, where does the legal authority come from which empowers the Tribunal to override national law? [7] Government of Kuwait v. American Independent Oil Co. (AMINOIL), Award of 24 March 1982, 66 Int’l L. Rep. 518, 559-562 (1982) (17) [Paul Reuter (pres.), Hamed Sultan, Gerald Fitzmaurice] The facts of the case are set out below, p. 1022. On the applicable law the Tribunal said: Section III – The Applicable Law 1. The Parties have approached the question of “the applicable law” by distinguishing the procedural law of the arbitration – or law governing the arbitration as a whole – and the law governing the substantive issues in the case. 2. On these topics they have furnished rival analyses and concepts which, on the scientific and academic levels, possess very great interest; but the Tribunal, in carrying out the function entrusted to it, has not experienced any difficulty as to the determination of the applicable law. The essential reason for this is twofold: the Parties themselves, by their mutual arbitral commitments, have defined with adequate clarity what the applicable law is; and the legal systems that either do, or may, call for consideration in this connection have characteristics such that, for this case, the solution of the problem becomes easy. 3. With regard to the law governing the arbitral procedure in the broadest sense, it is not open to doubt that the Parties have chosen the French legal system for everything that is implied in the statement in Article IV, 1 of the Arbitration Agreement to the effect that the proceedings are subject to “any mandatory provisions of the procedural law of the place where the arbitration is held” (namely Paris); and both Parties “expressly waive all rights of recourse to any Court, except such rights as cannot be waived by the law of the place of arbitration” (Article V). 4. But this does not in the least entail of itself a general submission to the law of the tribunal's seat which was designated as Paris. In actual fact the Parties themselves, in the Arbitration Agreement, provided the means of settling the essential procedural rules, when they conferred on the Tribunal the power to “prescribe the procedure applicable to the arbitration on the basis of natural justice and of such principles of transnational arbitration procedure as it may find applicable” (Article IV, 1), which was done by the Rules adopted on 16 July 1980. 5. Having regard to the way in which the Tribunal has been constituted, its international or rather, transnational character is apparent. It must also be stressed that French law has always been very liberal concerning the procedural law of arbitral tribunals, and has left this to the free choice of the Parties who, often, have not had recourse to any one given national system. French law has thus befriended arbitrations the transnational character of which has been well in evidence. This tendency has been enhanced for the future by recent French legislation (Decree No. 81-500 of 12 May 1981) which, even more specifically than before, affords recognition to transnational arbitration. 6. Respecting the law applicable to the substantive issues in the dispute, which is what is really at stake between the Parties regarding the applicable law, the question is equally simple in the present case. It can hardly be contested but that the law of Kuwait applies to many matters over which it is the law most directly involved. But this conclusion, based on good sense as well as law, does not carry any all-embracing consequences with it,- and this for two reasons. The first is that Kuwait law is a highly evolved system as to which the Government has been at pains to stress that “established public international law is necessarily a part of the law of Kuwait” (GCM paragraph 3.97(5)). In their turn the general principles of law are part of public international law (Article 38, 1(c) of the Statute of the International Court of Justice), and that this specifically applies to Kuwait oil

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concessions, duly results from the clauses included in these. For instance, in the 1973 Agreement between the Parties, First Annex, Second Part, XII (GM App. I.9) the following provision is to be found (punctuation of second sentence added): The parties base their relations with regard to the agreements between them on the principle of goodwill and good faith. Taking account of the different nationalities of the parties, the agreements between them shall be given effect, and must be interpreted and applied, in conformity with principles common to the laws of Kuwait and of the State of New York, United States of America, and in the absence of such common principles, then in conformity with the principles of law normally recognized by civilized States in general, including those which have been applied by international tribunals. Although the Parties did not, in the course of the present arbitral proceedings, make any reference to this particular text, it is of all the more interest to note that the ideas it embodies are no isolated features of Kuwait practice. 7. Equally, the Offshore Concession Agreement of the Arabian Oil Company (AOC) (AR Vol. VI, Exh. 39), contains the same provision, except that reference is made to the principles common to Kuwait and to Japanese law (Article 39). The Oil Concession Agreement with the Kuwait National Petroleum Company and Hispanica de Petroleos, concluded in 1967… refers to the principles common to Kuwait and to Spanish law. Yet it would be quite unrealistic to suppose that these three Concessions were governed by three different régimes. Clearly, it must have been the general principles of law that were chiefly present to the minds of the Government of Kuwait and its associates. 8. But there is a second consideration which has greatly eased the task of the Tribunal, namely that the Parties have themselves, in effect, indicated in the Arbitration Agreement what the applicable law is. Article III.2 of the Agreement provides that The law governing the substantive issues between the Parties shall be determined by the Tribunal, having regard to the quality of the Parties, the transnational character of their relations and the principles of law and practice prevailing in the modern world. Although it may in theory be possible for a litigation to be governed by an assemblage of rules different from that which, before the Arbitration, governed the situations and matters that are the object of the litigation, there must be a presumption that this is not the case. Thus, to the extent that Article III.2 of the Arbitration Agreement calls for interpretation, such an interpretation ought to be based on that provision which not only was freely chosen by the Parties in 1973… but also reflects the spirit which has underlain the carrying on of the oil concessions in Kuwait. 9. Article III.2, with good reason, makes it clear that Kuwait is a sovereign State entrusted with the interests of a national community, the law of which constitutes an essential part of intra-community relations within the State. At the same time, by referring to the transnational character of relations with the concessionaire, and to the general principles of law, this Article brings out the wealth and fertility of the set of legal rules that the Tribunal is called upon to apply. 10. The different sources of the law thus to be applied are not – at least in the present case – in contradiction with one another. Indeed, if, as recalled above, international law constitutes an integral part of the law of Kuwait, the general principles of law correspondingly recognize the rights of the State in its capacity of supreme protector of the general interest. If the different legal elements involved do not always and everywhere blend as successfully as in the present case, it is nevertheless on taking advantage of their resources, and encouraging their trend towards unification, that the future of a truly international economic order in the investment field will depend. [8] Comments and Questions If international law is part of the law of Kuwait, did the Tribunal need to say that the applicable law included elements potentially contradicted by the law of Kuwait? [9] United States v. Iran (IUSCT Case No. B36), Award of 23 March 1997 (18) [Krzysztof Skubiszewski (pres.), George H. Aldrich, Koorosh H. Ameli] [This dispute arose out of two contracts (the 1945 Contract and the 1948 Contract) for the purchase by Iran of US surplus military property after the Second World War. Iran denied its obligation to pay amounts due under the contracts, asserting that they were odious debts and were time barred. The US filed a claim on 19 January 1982 seeking the contract amounts totalling US$23,297,059.45 from Iran.] 70. Since the 1948 Contract does not specify either a time limitation on claims or any applicable law, the issue whether there has been a sufficient lapse of time to bar Claim No. 2 is to be determined by the Tribunal's choice of the applicable law. Article V of the Claims Settlement Declaration grants the Tribunal a wide discretion in determining the applicable law. In the absence of a choice of law specified by contract, the Tribunal must decide what is the applicable law by taking into consideration all the circumstances that

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it deems relevant. See Anaconda-Iran, Inc. v. Islamic Republic of Iran, et al., Award No. ITL 65-167-3, para. 130 (10 Dec. 1986), reprinted in 13 Iran-U.S. C.T.R. 199, 232; and Mobil Oil Iran Inc., et al. V. Islamic Republic of Iran, et al., [180] Award No. 311-74/76/81/150-3, para. 81 (14 July 1987), reprinted in 16 Iran-U.S. C.T.R. 3, 27-8. 71. In the Tribunal's view, several factors in the present Case give strong support to the conclusion that the 1948 Contract was of an intergovernmental character, the governing law of which should be international law. The Contract was concluded between two sovereign States. It concerned the sale of military equipment belonging to the United States government. The terms of the Contract took effect on approval by the Majlis (the Iranian parliament), and the U.S. Congress approved a special appropriation to cover PHT costs. When the debts became due, the United States pursued the matter at the highest diplomatic levels and did not take the matter before any municipal forum. The foregoing points, in the absence of a choice of law provision, compel the Tribunal to determine that the applicable law of the 1948 Contract is international law. [10] James R. Crawford, Treaty and Contract in Investment Arbitration, 24 Arb. Int’l 351, 352-353, 360-361, 367-370, 373-374 (2008) (19) (Citations selectively omitted) … In the modern period, investment contracts have always coexisted with international law standard for the protection of investments, so this tension is not novel – as students of the old mixed arbitral tribunal decisions will not need reminding. International law resolved that tension in two ways, thereby underpinning the dominant dualist theory about the relation between international and national law. The first was by strictly applying the exhaustion of local remedies rule: national law issues had to be resolved first before the competent national courts. The second was by way of the rule that for an international tribunal, national law is a pure question of fact, a fact for the most part determined by the very resort to local remedies which international law mandated in the field of diplomatic protection. Thus there was a conceptual separation secured by a temporal separation; international law covered the distinct field of interstate claims premised upon the failure to resolve the underlying individual dispute first through national courts and national law. But in the field of investment arbitration, neither of these rules applies. First, there is no requirement of exhaustion of local remedies prior to commencing investment arbitration – unless, exceptionally, that requirement has been expressly maintained. (This does not mean that the existence of an adequate local remedy may not be relevant to the merits of a treaty claim – but that is another matter.) Secondly, the standard applicable law clause in BITs – however it may be formulated – mandates and may even require the tribunal to apply the law of the host State alongside international law. Faced with article 42 of the ICSID Convention or some equivalent provision in a BIT, it cannot be argued that the law of the host State is a mere matter of fact. It is true that tribunals have to be informed, by expert evidence or otherwise, of the content of host State law with which they may not be familiar. (Expert evidence of international law is also tendered before such tribunals: whether or not this is desirable, the evidence is not inadmissible.) It is also true that a treaty provision which mandates the application of the law of a State is presumed to do so subject to the international law conflicts rule, that international law prevails over national law in case of inconsistency. But that is a rule of conflict of laws – it doesn't treat national law as a mere matter of fact. And in the large majority of cases where there is no inconsistency between international law and the law of the host State, the two laws have to be applied in parallel. *** 3. Contractual Claims and Counterclaims under BITs If treaties and contracts were “clean different things”, one would expect them to inhabit different worlds. As between sovereigns there could be promises to submit investment disputes to arbitration but those promises would be interstate ones only: they would not sound in contract as against their intended beneficiaries – or at least they would not do so without domestic implementation. It should be noted that BITs are virtually never relied on as part of the internal law of the host State, and they will almost by definition not be part of the law of the seat of the arbitration. Lacking status as internal law, they are relied on exclusively as treaties. But even in legal systems which give no legal effect to treaties as such, a dualistic construction does not prevail. The established understanding is that an offer to arbitrate is contained in the BIT and is accepted by the investor's notice of arbitration or by such other consent as the treaty may require. At that point, and not before, there is a perfected agreement to arbitrate between a qualified investor and the host State.… … Thus the separate agreement to arbitrate an investment claim under a BIT is a contract and not a treaty.… … … The investor has neither international legal personality nor treatymaking capacity, and it does not acquire either merely by accepting an offer to arbitrate made in a treaty. If the agreement to arbitrate was a treaty, the resulting award would not be enforceable under the New York Convention of 1958, which has no application to international law arbitrations, e.g. between States or other international legal persons.

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But there is a distinction between a treaty the parties to which are international legal persons and a contract the proper law of which is international law. In the Occidental case the Court of Appeal held that the proper law of the agreement to arbitrate is international law. It could not be the law of the seat of the arbitration since the seat will often not be identified at the time the agreement to arbitrate was concluded, and English law cannot abide a floating proper law any more than nature a vacuum. Nor is it likely that the parties could have agreed on the law of the host State as the proper law of the arbitration agreement. That left international law as the only option. It was a credible option since the content of the agreement to arbitrate is determined largely by reference to the BIT, itself undoubtedly governed by international law. Thus the BIT brings forth a binding commitment to arbitrate enforceable through national courts under national law, specifically under the Arbitration Act 1996. In short, a treaty breeds a contract. *** 4. Contractual Claims and the Umbrella Clause *** There is neither the time nor would it be productive to go into the details of the 20 or so cases in which umbrella clauses have been discussed. It is sufficient to identify four schools of thought, if you like, four camps – though some of the dwellers in particular camps may be thought to have a nomadic attitude and to move from camp to camp as the feeling takes them. The first camp adopts an extremely narrow interpretation of umbrella clauses, holding that they are operative only where it is possible to discern a shared intent of the parties that any breach of contract is a breach of the BIT (SGS v Pakistan; Joy Mining v Egypt). The second camp seeks to limit umbrella clauses to breaches of contract committed by the host State in the exercise of sovereign authority (Pan American Energy v Argentina; El Paso Energy v Argentina). A third view goes to the other extreme: the effect of umbrella clauses is to internationalise investment contracts, thereby transforming contractual claims into treaty claims directly subject to treaty rules (Fedax v Venezuela; Eureko v Republic of Poland; Noble Ventures v Romania). Finally there is the view that that an umbrella clause is operative and may form the basis for a substantive treaty claim, but that it does not convert a contractual claim into a treaty claim. On the one hand it provides, or at least may provide, a basis for a treaty claim even if the BIT in question contains no generic claims clause (SGS v Philippines, CMS v Argentina (Annulment)); on the other hand, the umbrella clause does not change the proper law of the contract or its legal incidents, including its provisions for dispute settlement. In accordance with the general principles articulated above, there are major difficulties with the first three positions. The first effectively deprives the umbrella clause of any content, contrary to the principle of effet utile and to the apparent intent of the drafters. The second imposes a characterisation test at the level of breach for which there is no textual warrant and which is capable of producing arbitrary results.… … No doubt there are genuine concerns driving the restrictive view, which is to a significant extent a reaction against the equal and opposite defects of the third view. These need to be addressed. First there is the problem of scope: “the ‘commitments' subject matter of Article 11 may, without imposing excessive violence on the text itself, be commitments of the State itself as a legal person, or of any office, entity or subdivision (local government units) or legal representative thereof whose acts are, under the law on state responsibility, attributable to the State itself “. But as we have seen, the question of the scope of a commitment to arbitrate made by the State is a matter of interpretation and has nothing to do with attribution. International law does not treat separate entities with their own legal personality as part of the State for all purposes. Then there is the possibility that an umbrella clause might enable an investor to evade agreed-upon exclusive jurisdiction arrangements in the investment contract, whether these provide for domestic courts or local or international arbitration.… … I agree entirely with this concern – but it implies that the obligations of a host State under a general BIT are to be applied without regard to the conduct, including the contractual obligations, of the investor. That is not – and ought not to be – the case, as SGS v Philippines showed. Then there is a concern about flooding ICSID with minor contractual claims, a classic floodgates argument to which standard floodgates responses may be made. BIT arbitration is expensive and even to a successful claimant costs are usually not awarded. The characterization of a claim as contractual or otherwise is essentially a matter of technique and bears no relation to the frequency or otherwise

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with which investment disputes arise and are submitted to arbitration. Fourth and most significant, there is the concern that the umbrella clause leads to a freezing of host State sovereignty, a sort of closet stabilization. And there is reason for the concern.… … … But it is a confusion to equate a State law or regulation with an obligation entered into by the State, or to regard an umbrella clause as implicitly freezing the laws of the State as at the date of admission of an investment. The enactment of a law by a State, whether it is specific or general, is not the entry by the State into an obligation distinct from the law itself. No doubt a State is obliged by its own laws, but only for so long as they are in force. In the absence of express stabilization, investors take the risk that the obligations of the host State under its own law may change, and the umbrella clause makes no difference to this basic proposition. In short, under the integrationist view as applied to standard umbrella clauses the claims are still contractual and they are still governed by their own applicable law. The distinction between treaty and contract is maintained. The purpose of the umbrella clause is to allow enforcement without internationalization and without transforming the character and content of the underlying obligation. This can be seen from the decision of the ad hoc Committee in CMS v Argentina (Annulment), where the Tribunal's conclusion on the umbrella clause was annulled. The relevant paragraph of the decision reads as follows: “95. Moreover there are major difficulties with this broad interpretation of Article II(2)(c). (a)

(b) (c)

(d)

(e) (f)

In speaking of “any obligations it may have entered into with regard to investments”, it seems clear that Article II(2)(c) is concerned with consensual obligations arising independently of the BIT itself (i.e. under the law of the host State or possibly under international law). Further they must be specific obligations concerning the investment. They do not cover general requirements imposed by the law of the host State. Consensual obligations are not entered into erga omnes but with regard to particular persons. Similarly the performance of such obligations or requirements occurs with regard to, and as between, obligor and obligee. The effect of the umbrella clause is not to transform the obligation which is relied on into something else; the content of the obligation is unaffected, as is its proper law. If this is so, it would appear that the parties to the obligation (i.e., the persons bound by it and entitled to rely on it) are likewise not changed by reason of the umbrella clause. The obligation of the State covered by Article II(2)(c) will often be a bilateral obligation, or will be intrinsically linked to obligations of the investment company. Yet a shareholder, though apparently entitled to enforce the company's rights in its own interest, will not be bound by the company's obligations, e.g. as to dispute settlement. If the Tribunal's implicit interpretation is right, then the mechanism in Article 25(2)(b) of the ICSID Convention in unnecessary wherever there is an umbrella clause. There is no discussion in the award of the travaux of the BIT on this point, or of the prior understandings of the proponents of the umbrella clause as to its function.”

The decision on this point was annulled for failure to state reasons, leaving open the question whether a broad interpretation of the umbrella clause would have involved a manifest excess of power, even if it had been properly motivated. For these reasons, the better view is the integrationist one: the umbrella clause is an extra mechanism for the enforcement of claims, but the basis of the transaction remains the same. 6. Conclusions To conclude, treaties and contracts are different things. But they are not clean different things, in the sense of inhabiting different worlds: between them there is no great gulf fixed. No doubt distinctions between legal systems should be observed – but not at the expense of appropriate connections between them. There is a distinction between treaty and contract, but they are part of the same one world with many legal systems that international arbitrators have long inhabited. Applied to international arbitration this insight produces consequences both for jurisdiction and merits. The core point is that a covered investment is a transaction involving a qualified investor and the host State. Contractual or other commitments by each to the other go to define the investment: as Mihaly v Sri Lanka held, if there is no intention to enter into legal relations then there is no investment. What a BIT does is to provide an additional layer of protection for the one transaction: the investment is protected by the BIT, but the BIT should not be used as a vehicle to rewrite the investment arrangement. At the level of jurisdiction – and subject always to the caveat that what matters is the actual language of the BIT – there is no reason to interpret a BIT

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as not covering contractual claims or counterclaims concerning the investment. There may be – as with appropriately-worded umbrella clauses – an international obligation to observe the investment contract, though this does not convert the contract into a treaty or change its applicable law. At the level of the merits it must be borne in mind that the investment contract is itself an allocation of risks and opportunities, and that that allocation is relevant in determining, in particular, whether there has been fair and equitable treatment under the BIT. In particular the doctrine of legitimate expectations should not be used as a substitute for the actual arrangements agreed between the parties, or as a supervening and overriding source of the applicable law. [11] Wintershall A.G., et al. v. Government of Qatar, Partial Award on Liability of 5 February 1988, 28 I.L.M. 795, 802 (1989) [ John R. Stevenson (pres.), Ian Brownlie, Bernardo M. Cremades] [The Claimants and the Respondent entered the thirty-year Exploration and Production Sharing Agreement – Qatar Offshore (EPSA) on 10 April 1976, effective from the date of the the prior Concession Agreement of 18 June 1973. Under the EPSA, the Government of Qatar granted the Claimants the exclusive right to explore for, drill for and produce petroleum in a defined offshore area. The EPSA provided for progressive relinquishment of the contract area at specified intervals. It further provided that non-associated natural gas may be produced subject to the EPSA or to further negotiated contractual arrangements. Due to a boundary dispute with Bahrain, the Claimants were not permitted to drill in the area which they considered most likely to contain crude oil (Structure A). They did not discover commercial quantities of crude oil, but did discover commercial quantities of non-associated natural gas. At the request of the Respondent, the Claimants handed over materials relating to the economic feasibility of exploiting the gas and the proposed method of so doing. The subsequent negotiations were unsuccessful. The Claimants referred the dispute to arbitration, alleging the Respondent breached the EPSA in violation of Qatari and public international law by denying Claimants permission to explore Structure A, and by failing to agree further contractual arrangements for exploitation of the natural gas.] V. Substantive Governing Law By paragraph 2 of its Order of March 18, 1987, the Tribunal provided that “In the absence of a controlling choice of substantive governing law clause and in consideration of the close links of… … … the EPSA… … … to Qatar, the governing substantive law shall be the law of Qatar and, in case the Tribunal should determine that it is relevant to an issue, public international law.” The Tribunal, after reviewing the deposited authorities on public international law, has determined that public international law is not independently relevant to the issues before the Tribunal in this Partial Award on Liability, and that the governing substantive law on those issues is the law of Qatar. [12] Comments and Questions Does the decision support the thesis of internationalisation in decline?

[D] Direct Claims under Treaties A further option, with immediate consequences for the applicable law, may be for the investor to bring proceedings before an international tribunal established by a treaty, relying on rights conferred by the treaty, or on its contractual rights, or on some combination of the two. Although not in principle a new phenomenon, treaty arbitration has assumed increasing importance because of the proliferation of bilateral and regional investment treaties (e.g., NAFTA). Where the investor relies on rights conferred directly by treaty (e.g., the right to full protection and security or non-discrimination or the right not to have its property expropriated without compensation), it will be relying on an international law standard beyond the terms of any investment contract: indeed the investment contract may be with some third party, or with a separate State entity with separate contractual liability. In such a case the investor will have to show that the respondent State (including any entity whose conduct is attributable to the State under international law) committed a breach of the treaty standard. In effect, international law is the governing law of the investment relationship, subject always to the terms of the applicable treaty. Invoking treaty rights in an international arbitration shifts the frame of reference from contractual liability under the applicable law to State responsibility under international law, even if contractual and domestic law issues generally may remain relevant. Such arbitrations are sometimes referred to as “direct recourse arbitrations”, because the investor seeks direct recourse against the State in respect of its own allegedly wrongful conduct affecting the investment – or “arbitration without privity”, because there is no necessary contractual relation between the respondent State and the investor. [1] Jan Paulsson, Arbitration Without Privity, 10(2) ICSID Rev. – Foreign Inv. L.J. 232, 232-234, 254-257 (1995) (20) (Citations selectively omitted)

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1. Introduction It is commonplace to say of arbitration that it is consensual. A claimant initiates arbitration because it has agreed with the defendant that any dispute between them will be thus resolved. Either party can commence proceedings as a claimant; once an arbitration has started, the defendant may raise a counterclaim. This is the arbitration world as we know it today. Hundreds of thousands of international contracts adhere to this basic framework, more or less dependable in individual cases. But explorers have set out to discover a new territory for international arbitration. They have already landed on a few islands, and they have prepared maps showing a vast continent beyond. This new world of arbitration is one where the claimant need not have a contractual relationship with the defendant and where the tables could not be turned: the defendant could not have initiated the arbitration, nor is it certain of being able even to bring a counterclaim. The first island of discovery was the SPP v. Republic of Egypt (Pyramids Oasis) case… … … where an aggrieved investor successfully initiated International Centre for Settlement of Investment Disputes (ICSID) arbitration on the basis of a unilateral promise contained in an investment promotion law. The maps that suggest the emergence of a new continent are to be found in other such investment laws, and in bilateral investment treaties. Although legal experts predicted many years ago that such texts would prove reliable, some of them are in fact tentative and ambiguous, suffering from explicit limitations in scope as well as from doubts as to their interpretation. In 1993 and 1994, however, two extraordinary multilateral treaties were finalized, namely the North American Free Trade Agreement (NAFTA) and the Energy Charter Treaty, which are both explicit in terms and vast in scope. They seek to establish a comprehensive regime for all aspects of investments. Their provisions range from the right of non-discriminatory treatment and the prohibition of export-related import quotas to the principle of non-interference with contractual relations and the entitlement to repatriate income in convertible currency. By allowing direct recourse by private complainants with respect to such a wide range of issues, these treaties create a dramatic extension of arbitral jurisdiction in the international realm. They will provide focal points of this article, because they may presage a new era of confidence in the drafting, interpretation, and application not only of other such treaties, but also of national laws and bilateral investment treaties (BITs). This new approach to the resolution of international disputes offers the hope of sanctioning legal rights in individual cases brought directly by the aggrieved party. It grants innumerable present and future investors the right to arbitrate a wide range of grievances arising from the actions of a large number of public authorities, whether or not any specific agreement has been concluded with the particular complainant, and so impels us to reconsider fundamental assumptions about the international legal process as it affects investors abroad. The new approach is obviously of a different nature from methods of dealing with aggregate complaints brought by governments on behalf of their nationals before preconstituted public bodies such as the World Trade Organization (WTO). Thus a large empty space begins to be filled in the embryonic structures of the international legal process… … *** VII. Conclusions We are witnessing an explosive proliferation of texts seeking to provide legal security for investments across borders. A recent survey noted that of 891 BITs “on record,” 533 were signed or entered into force after January 1990. Some 45 developing and former socialist countries have in the same period enacted new investment laws or codes. NAFTA or the Energy Charter Treaty are unique new multilateral treaties that cover a vast range of transactions. This proliferation coincides with a fundamental convergence of views as to the need for legal security. As Antonio Parra writes in a recent essay: “The new investment laws, bilateral treaties and multilateral instruments reflect a remarkable consensus on questions that not long ago were controversial.” One of the manifestations of this development is nothing less than a new dimension for international arbitration, requiring a new understanding of the process. American lawyers will recall how intensely the issue of privity was debated in the early 1960s with respect to a seller's liability for defective products causing harm to users or consumers who have had no dealings with the seller. Professor William Prosser was inspired to write two of the most often cited articles in American Jurisprudence, entitled “The Assault Upon the Citadel” and “The Fall of the Citadel.” His metaphorical citadel was precisely that of privity. Its “fall” gave the buyer a right of direct action against unknown upstream sellers. The rule of privity would no longer restrict him to seeking relief against his immediate retailer. In the modern marketplace, this result was indispensable, because most retailers have no part in making or assembling the product, and are in no position to inspect great varieties of pre-packaged products. Furthermore, to restrict the plaintiff to an action against his immediate retailer would often deprive him of any

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effective remedy due to the latter's inability to meet an award of damages while the true party at fault, the manufacturer, is often a large and profitable enterprise. Another citadel of privity is now proving pregnable, this time in the realm of international arbitration. Aggrieved foreign investors often cannot point to any breach of a contract to which they are a party. Even if they can, their local contracting party may often avoid responsibility for the breach by reason of an act of force majeure or the like. The injury is caused by a third party, often a governmental authority. To examine the legitimacy of its action, international law has traditionally required the intervention of yet another third party, namely the investor's own government, exercising the right of diplomatic protection. Whatever may have been its value in securing the physical safety of individuals, this mechanism has proved itself unworkable as a way of protecting business interests in the context of contemporary international economic life. Defendant States are irritated when another State requires them to defend the legitimacy of their acts. At the same time, foreign ministries have often been embarrassed and notoriously reluctant to shoulder the burden of presenting complaints raised by their nationals. And the complainant would typically at any rate prefer to be the master of his own initiative, both because he is convinced that he is better equipped to marshal evidence and develop arguments with relation to what may be a very complex problem, and because he understands that wider countervailing diplomatic objectives may cause the officials of his government to pull punches. The possibility of direct action international arbitration without privity allows the true complainant to face the true defendant. This has the immense merit of clarity and realism; these virtues, and not eloquent proclamations, are the prerequisites of confidence in the legal process. It is of course too early to tell whether this new field of international arbitration will fundamentally alter practice or remain a marginal feature. What is already clear however is that this is not a subgenre of an existing discipline. It is dramatically different from anything previously known in the international sphere. It could presage an epochal extension of compulsory arbitral jurisdiction over States, at the behest of private litigants who wish to rely on governmental undertakings even though they have not contracted for a forum. The aim here is not to take anything away from States, but to help ensure that foreigners have faith in their promises. The objective is not arbitration that favors the foreigner, but one that simply favors neutrality. This is what the Guidelines, submitted to the Fall 1992 meeting of the Development Committee of the Board of Governors of the International Monetary Fund (IMF) and the World Bank, refer to as independent arbitration, further defined in SectionV(2) as a process where “the majority of the arbitrators are not solely appointed by one party to the dispute.” As final revisions were being made to this article, the report from the April 1995 workshop in Wellington on the Organization for Economic Cooperation and Development (OECD) Multilateral Agreement on Investment became available. The Investment Agreement has since 1991 been under the joint consideration of the Committee on International Investment and Multinational Enterprises and the Committee on Capital Movements and Invisible Transac[257]tions. This may be the next great advance. The fundamental idea is to create a new multilateral treaty with “1egally binding obligations and enforcement proceedings;” its framework is described as possibly encompassing “1iberalization, investment protection and dispute settlement;” it is intended for OECD member States and non-member States alike. Such a document would then supplant BITs, which are threatening to create confusion by their variety of formulations. In other words, what is envisaged is a global charter for a legal regime applicable to all types of investments, overarching both regional and sectorial treaties such as NAFTA and the Energy Charter Treaty. One of five Working Groups is concentrating solely on “dispute settlement.” While specific mechanisms are still under study, the Working Group has referred to the “ample precedents in BITs and other investment agreements.” Future prospects for this development in international arbitration may depend on whether national governments many of whom may not have appreciated the full implications of the new treaty obligations discussed in this article take fright and reverse their tracks. That may in turn depend on the degree of sophistication shown by arbitrators when called upon to pass judgment on governmental actions. Arbitration without privity is a delicate mechanism. A single incident of an adventurist arbitrator going beyond the proper scope of his jurisdiction in a sensitive case may be sufficient to generate a backlash. But if the mechanism is applied judiciously, it will help fill a void that now exists in the absence of compulsory jurisdiction, and thus contribute to enhancing the legal security of international economic life. [2] Comments and Questions 1.

2.

Establishing a “mixed” international arbitral tibunal to hear contractual or other claims is not at all new or unusual. Many mixed tribunals were established after World War I and (to a lesser extent) World War II. More recently the Iran-United States Claims Tribunal has been a pemanent international tribunal with jurisdiction over individual claims; larger claims (over $250,000) have been presented directly by the individual claimants. So what is new about BIT arbitration? Given that, by definition, investments are made by way of contracts and that foreign

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3.

investors usually define their relationship with the host state in advance through contracts and associated arrangements (e.g. letters of comfort), what in principle ought to be the relation between contractual liability and international liability under a BIT? Are we avoiding privity only to be forced to return to it? In some respects the situation is analogous to that of “direct recourse” actions by individuals against the State before international human rights tribunals. In such cases the human rights treaty (e.g. the European Convention on Human Rights), establishes both an international forum and a basis of claim. At the same time the conduct complained of will always have occurred within the legal system of the respondent State, and international human rights tribunals have always paid careful attention to the applicable domestic law, both in assessing the factual situation and in terms of such doctrines as the “margin of appreciation”. A crucial difference however is that in BIT arbitration, although the BIT like human rights treaties provides both an independent forum and a basis of claim, unlike human rights treaties there is no requirement of exhaustion of local remedies. In many cases the investment tribunal will face the dispute for the first time, unassisted (and unimpeded) by prior decisions of the courts of the host State. What difference is this likely to make?

[3] Asian Agricultural Products Limited v. Republic of Sri Lanka (ICSID Case No. ARB/87/3), Award of 27 June 1990, 4 ICSID Rep. 250, 256-257 (1997) [Ahmed Sadek El-Kosheri (pres.), Samuel K.B. Asante, Berthold Goldman] [In 1983, Asian Agricultural Products Limited (AAPL) entered a joint venture agreement with a number of Sri Lankan Government Agencies and private individuals to establish Serendib Seafoods Ltd (SSL) to cultivate and export shrimps to Japan. In January 1987, during counter insurgency operations conducted by Sri Lankan Security Forces, SSL's farm was destroyed. In July 1987, AAPL filed a request for arbitration with ICSID in accordance with the United Kingdom/Sri Lanka Agreement for the Promotion and Protection of Investments 1980 (the BIT), claiming compensation for the destruction of the farm. The Tribunal held that AAPL was entitled to compensation for the value of its equity interest in SSL. In so doing, it held that the applicable law was the BIT, supplemented by international and Sri Lankan law. Dr Asante dissented, holding that the Tribunal should have applied Sri Lankan law, and that the BIT was relevant only through its incorporation into Sri Lankan law. (21) ] I. Concerning the Applicable Law 18. The present case is the first instance in which the Centre has been seized by an arbitration request exclusively based on a treaty provision and not in implementation of a freely negotiated arbitration agreement directly concluded between the Parties among whom the dispute has arisen. 19. Consequently, the Parties in dispute have had no opportunity to exercise their right to choose in advance the applicable law determining the rules governing the various aspects of their eventual disputes. In more concrete terms, the prior choice-of-law referred to in the first part of Article 42 of the ICSID Convention could hardly be envisaged in the context of an arbitration case directly instituted in implementation of an international obligation undertaken between two States in favour of their respective nationals investing within the territory of the other Contracting State. 20. Under these special circumstances, the choice-of-law process would normally materialize after the emergence of the dispute, by observing and construing the conduct of the Parties throughout the arbitration proceedings. Effectively, in the present case, both Parties acted in a manner that demonstrates their mutual agreement to consider the provisions of the Sri Lanka/UK Bilateral Investment Treaty as being the primary source of the applicable legal rules. This basic premise relied upon heavily by the Claimant acquired full acceptance from the Respondent, who, not only based his main arguments on the provisions of the Treaty in question, but also invoked Article 157 of the Constitution of Sri Lanka emphasizing that the Treaty became applicable as part of the Sri Lankan Law. 21. Furthermore, it should be noted that the Bilateral Investment Treaty is not a selfcontained closed legal system limited to provide for substantive material rules of direct applicability, but it has to be envisaged within a wider juridical context in which rules from other sources are integrated through implied incorporation methods, or by direct reference to certain supplementary rules, whether of international law character or of domestic law nature. Such extension of the applicable legal system resorts clearly from Article 3(1), Article 3(2) and Article 4 of the Sri Lanka/UK Bilateral Investment Treaty. 22. In fact, the submissions of both Parties… … … clearly demonstrate that they are in agreement about admitting the supplementary role of the recourse – regarding certain issues – to general customary international law, other specific international rules rendered applicable in implementation of the most-favoured-nation clause, as well as to Sri Lankan domestic legal rules.

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23. In spite of the Claimant's hostility to the general applicability of customary international law rules and his reluctance to submit Sri Lankan domestic law as the basic governing law under the last part of Article 42 of the ICSID Convention covering the absence of choice of law by the Parties, AAPL arrived from a practical point of view to a position similar to that adopted by the Respondent throughout the arbitral proceedings. This is particularly seen from what has been quoted in Section 7, iii and Section 9 hereinafter above. 24. Accordingly, the Tribunal is of the opinion that the “false problem” related to the preliminary determination in principle of the applicable law has no relevance within the context of the present arbitration, since both Parties agreed during their respective pleading to invoke primarily the Sri Lanka/UK Bilateral Investment Treaty as lex specialis, and to apply, within the limits required, the international or domestic legal relevant rules referred to as a supplementary source by virtue of Articles 3 and 4 of the Treaty itself. [4] Comments and Questions For examples of BIT provisions see below, at IV.B. In what respects, if at all, is it accurate to describe a BIT as a lex specialis? [5] Compañia de Aguas del Aconquija S.A. and Vivendi Universal v. Argentine Republic (ICSID Case No. ARB/97/3), Decision on Annulment of 3 July 2002, 19(1) ICSID Rev. – Foreign Inv. L.J. 89, 117, 127-131 (2004) [L. Yves Fortier (pres.), James R. Crawford, José Carlos Fernández Rozas] [In May 1995, Compagnie Générale des Eaux (CGE), a French company, and its Argentinian affiliate, Compañia de Aguas del Aconquija S.A. (CAA), entered a Concession Contract with Tucumán, a province of Argentina. Disputes arose over the Concession Contract and the resulting investment in Tucumán following alleged interference by the Tucumán authorities, culminating in the termination of the Concession Contract by both parties. The Argentine French BIT provided that: “The ruling of the arbitral body shall be based on the provisions of this Agreement, the legislation of the Contracting Party which is a party to the dispute, including rules governing conflict of laws, the terms of any private agreements concluded on the subject of the investment, and the relevant principles of international law.” Article 16.4 of the Concession Contract provided for exclusive jurisdiction of the Tucumán administrative courts over disputes as to the interpretation and application of the contract. CGE and CAA (the Claimants) filed a request for ICSID arbitration on 26 December 1996 based on two categories of claim: firstly, claims based on the conduct of the Tucumán authorities allegely in breach of the BIT and brought against the Argentine Republic relying on the principle of attribution (the Tucumán claims); and secondly, claims brought directly against the Argentine Republic for failing to respond to the actions of the Tucumán authorities (the federal claims). The core issue for the Tribunal was the effect of the Concession Contract's forum-selection provision in the light of the remedial provisions of the BIT and ICSID Convention. In its Award of 21 November 2000, (22) it dismissed the federal claims on the basis that there was no action of the Province of Tucumán that “so obviously violated the BIT as to require the Argentine government to seek a legal remedy against the Province in the Argentine courts”. (23) It dismissed the Tucumán claims, concluding that “because of the crucial connection in this case between the terms of the Concession Contract and these alleged violations of the BIT”, the Argentina cannot be held liable unless and until Claimants have first brought proceedings before the administrative courts of Tucumán and have been denied their rights. (24) On 20 March 2001, the Claimants requested partial annulment of this Award, alleging, among other things, that the Tribunal committed a manifest excess of powers under Article 52(1)(b) of the ICSID Convention in failing to consider the Claimants' claims concerning breach of the BIT on the basis that this would have required consideration of issues which fell within the exclusive jurisdiction of the Tucumán courts. The ad hoc Committee rejected the Claimants' request in respect of the Tribunal's determination of the federal claims, but concluded that the Tribunal manifestly exceeded its in that “the Tribunal, having jurisdiction over the Tucumán claims, failed to decide those claims”. (25) In reaching this decision, the Committee made the following comments with respect to the applicable law.] (Citations selectively omitted) 60. … [I]t is evident that a particular investment dispute may at the same time involve issues of the interpretation and application of the BIT's standards and questions of contract. Article 8 (4), by expressly empowering the Tribunal to base its ruling on the provisions of the BIT as well as on the terms of any private agreements concluded on the subject of the investment, clearly acknowledges that possibility. So too does Article 8 (2), which contemplates that the very same dispute may be submitted either to the domestic courts of the Contracting Party (to be determined in accordance with the domestic law of that State), or to international arbitration (to be determined in accordance with the applicable law identified in Article 8 (4)).

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*** 95. As to the relation between breach of contract and breach of treaty in the present case, it must be stressed that Articles 3 and 5 of the BIT do not relate directly to breach of a municipal contract. Rather they set an independent standard. A state may breach a treaty without breaching a contract, and vice versa, and this is certainly true of these provisions of the BIT. The point is made clear in Article 3 of the ILC Articles, which is entitled “Characterization of an act of a State as internationally wrongful”: The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law. 96. In accordance with this general principle (which is undoubtedly declaratory of general international law), whether there has been a breach of the BIT and whether there has been a breach of contract are different questions. Each of these claims will be determined by reference to its own proper or applicable law – in the case of the BIT, by international law; in the case of the Concession Contract, by the proper law of the contract, in other words, the law of Tucumán. For example, in the case of a claim based on a treaty, international law rules of attribution apply, with the result that the state of Argentina is internationally responsible for the acts of its provincial authorities. By contrast, the state of Argentina is not liable for the performance of contracts entered into by Tucumán, which possesses separate legal personality under its own law and is responsible for the performance of its own contracts. 97. The distinction between the role of international and municipal law in matters of international responsibility is stressed in the commentary to Article 3 of the ILC Articles, which reads in relevant part as follows: *** (7)

The rule that the characterization of conduct as unlawful in international law cannot be affected by the characterization of the same act as lawful in internal law makes no exception for cases where rules of international law require a State to conform to the provisions of its internal law, for instance by applying to aliens the same legal treatment as to nationals. It is true that in such a case, compliance with internal law is relevant to the question of international responsibility. But this is because the rule of international law makes it relevant, e.g. by incorporating the standard of compliance with internal law as the applicable international standard or as an aspect of it. Especially in the fields of injury to aliens and their property and of human rights, the content and application of internal law will often be relevant to the question of international responsibility. In every case it will be seen on analysis that either the provisions of internal law are relevant as facts in applying the applicable international standard, or else that they are actually incorporated in some form, conditionally or unconditionally, into that standard.

98. In a case where the essential basis of a claim brought before an international tribunal is a breach of contract, the tribunal will give effect to any valid choice of forum clause in the contract. For example in the Woodruff case, a decision of an American-Venezuelan Mixed Commission in 1903, a claim was brought for breach of a contract which contained the following clause: Doubts and controversies which at any time might occur in virtue of the present agreement shall be decided by the common laws and ordinary tribunals of Venezuela, and they shall never be, as well as neither the decision which shall be pronounced upon them, nor anything relating to the agreement, the subject of international reclamation. 99. The Commission in that case held that Woodruff was bound by this clause not to refer his contractual claim to any other tribunal. At the same time, the exclusive jurisdiction clause did not and could not preclude a claim by his government in the event that the treatment accorded him amounted to a breach of international law: [W]hereas certainly a contract between a sovereign and a citizen of a foreign country can never impede the right of the Government of that citizen to make international reclamation, wherever according to international law it has the right or even the duty to do so, as its rights and obligations can not be affected by any precedent agreement to which it is not a party; But whereas this does not interfere with the right of a citizen to pledge to any other party that he, the contractor, in disputes upon certain matters will never appeal to other judges than to those designated by the agreement, nor with his obligation to keep this promise when pledged, leaving untouched the rights of his Government, to make his case an object of international claim whenever it thinks proper to do so and not impeaching his own right to look to his Government for protection of his rights in case of denial or unjust delay of justice by the contractually designated judges;… 100. The Commission accordingly dismissed the claim “without prejudice on its merits, when presented to the proper judges”, on the ground that “by the very agreement that is

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the fundamental basis of the claim, it was withdrawn from the jurisdiction of this Commission”. 101. On the other hand, where “the fundamental basis of the claim” is a treaty laying down an independent standard by which the conduct of the parties is to be judged, the existence of an exclusive jurisdiction clause in a contract between the claimant and the respondent state or one of its subdivisions cannot operate as a bar to the application of the treaty standard. At most, it might be relevant – as municipal law will often be relevant – in assessing whether there has been a breach of the treaty. 102. In the Committee's view, it is not open to an ICSID tribunal having jurisdiction under a BIT in respect of a claim based upon a substantive provision of that BIT, to dismiss the claim on the ground that it could or should have been dealt with by a national court. In such a case, the inquiry which the ICSID tribunal is required to undertake is one governed by the ICSID Convention, by the BIT and by applicable international law. Such an inquiry is neither in principle determined, nor precluded, by any issue of municipal law, including any municipal law agreement of the parties. [6] Comments and Questions 1.

2.

3. 4.

Because both France and Argentina are parties to the ICSID Convention, this arbitration occurred under the Convention. ICSID arbitration is immune under the Convention from review by national courts; hence the Convention provides its own form of review of decisions in the form of annulment. For other annulment cases see above, at III.B.2-3 and III.B.5-6. In light of demands for accountability and democratic transparency of international institutions, do you think that the powers of reviewing courts (or ICSID annulment committees) are adequate? Highly relevant in this case was the provision in the BIT, Art. 8 (2), which gave the Claimant an either/or choice – either to pursue its claims before the national courts, or to pursue international arbitration under the BIT. This so-called “fork in the road” provision in effect required an early election by the Claimant whether to rely on its contractual or its treaty rights. Compare Article 1121 of NAFTA, which allows a claimant to exhaust local remedies if it so choses, and requires only that, before commencing Chapter 11 arbitration, the Claimant waive any remaining local remedies. What are the implications for treaty arbitration of the fork in the road clause as compared with Article 1121? The US baseball star, Yogi Berra, is said to have said “If you see a fork in the road, take it.” Did CAA take the fork in the road when it commenced ICSID arbitration? Under classical theory of diplomatic protection, the rights in question are those of the State, not the private party – in this context, France, not CAA or CGE (Vivendi). See Mavrommatis Palestine Concessions, PCIJ Ser A No. 2 (1924) p. 12. What is the position in BIT arbitration? What difference should it make in situations such as that faced by the Tribunal in the CAA case?

[7] ADC Affiliate Limited and ADC & ADMC Management Limited v. The Republic of Hungary (ICSID Case No. ARB/03/16), Award of 2 October 2006 (26) [Charles N. Brower (pres.), Albert Jan van den Berg, Neil Kaplan] [In 1995, the Claimants, ADC Affiliate and ADC & ADMC Management (Cypriot companies ultimately owned by Canadian investors), entered into a Contract with a Hungarian state agency, ATAA, to renovate, construct and operate two terminals of Budapest-Ferihegy International Airport in Hungary. In 1998 the Claimants finished the construction and continued operating the terminals until the end of 2001, when a Decree issued by the Minister of Transport of Hungary resulted in the take over of all operation activities of the Airport from the Claimants. In 2003, the Claimants initiated arbitration proceedings against Hungary under the Cyprus-Hungary BIT (1989) claiming that their investments had been expropriated. The Tribunal found that an unlawful expropriation had indeed occurred. In reaching this decision, the Tribunal made the following comments about applicable law.] A. Applicable Law 288. The Parties have engaged in a traditional discussion about the applicable law in investor- State arbitration. In essence, Claimants contend that the BIT is a lex specialis governed by international law, while Respondent argues that Hungarian law applies. 289. Article 42(1) of the ICSID Convention provides: “The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.” 290. In the Tribunal's view, by consenting to arbitration under Article 7 of the BIT with respect to “Any dispute between a Contracting Party and the investor of another Contracting Party concerning expropriation of an investment… … …” the Parties also consented to the applicability of the provisions of the Treaty, and in particular those set

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forth in Article 4 (see, MTD Equity Sdn. Bhd. and MTD Chile S.A. v. Republic of Chile, Award, 25 May 2004, ICSID Case No. ARB/01/7, at ¶ 87). Those provisions are Treaty provisions pertaining to international law. That consent falls under the first sentence of Article 42(1) of the ICSID Convention (“The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties”). The consent must also be deemed to comprise a choice for general international law, including customary international law, if and to the extent that it comes into play for interpreting and applying the provisions of the Treaty. This is so since the generally accepted presumption in conflict of laws is that parties choose one coherent set of legal rules governing their relationship (which is the case here as it will be seen below), rather than various sets of legal rules, unless the contrary is clearly expressed. Indeed, the State Parties to the BIT clearly expressed themselves to this effect in Article 6(5) of the BIT which Article pertains to disputes between the Contracting Parties concerning the interpretation and application of the BIT, as follows: “Article 6 *** 5. The arbitral tribunal shall decide on the basis of respect for the law, including particularly the present Agreement and other relevant agreements existing between the two Contracting Parties and the universally acknowledged rules and principles of international law.” For example, where a term is ambiguous, or where further interpretation of a Treaty provision is required, the Tribunal will turn to Articles 31 and 32 of the Vienna Convention on the Law of Treaties of 1969. 291. That analysis also comports with the primary conflict of laws provisions in the various instruments listed in Article 7(2) of the BIT. Those appear to be similar by referring to party autonomy in the choice of law. In contrast, the subsidiary conflict of laws rules in those instruments differ, at least textually. For example, Article 42(1) of the ICSID Convention requires a tribunal to “apply the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable,” while Article 17(1) of the ICC Arbitration Rules (another option under Article 7(2) of the BIT) requires a tribunal to “apply the rules of law which it determines to be appropriate.” The application of those subsidiary conflict rules may give differing results, which in turn may affect the manner in which the Treaty provisions, in particular the substantive ones, are to be interpreted and applied. It cannot be deemed to have been the intent of the States Parties to the BIT to have agreed to such a potential disparity. 292. The sole exception to the foregoing is Article 4(3) of the BIT which provides: “The amount of this compensation may be estimated according to the laws and regulations of the country where the expropriation is made.” In the present case, that law is Hungarian law. As the reference to domestic law is used for one isolated subject matter only, it must be presumed that all other matters are governed by the provisions of the Treaty itself which in turn is governed by international law.

§6.04 APPLICABLE INTERNATIONAL LAW In a BIT arbitration, or indeed in other international arbitrations where international law is or is part of the applicable law, the tribunal will have to “find” or ascertain what international law is so far as relevant to the dispute.

[A] The Sources of International Law [1] Statute of the International Court of Justice (1945), (27) Article 38 Article 38 1. The Court, whose function is to decide in accordance with international law such disputes as are submitted to it, shall apply: (a) (b) (c) (d)

international conventions, whether general or particular, establishing rules expressly recognized by the contesting States; international custom, as evidence of a general practice accepted as law; the general principles of law recognized by civilised nations; subject to the provisions of Article 59, judicial decisions and the teachings of the most highly qualified publicists of the various nations, as subsidiary means for the determination of rules of law.

2. This provision shall not prejudice the power of the Court to decide a case ex aequo et bono, if the parties agree thereto. [2] Comments and Questions 1.

Article 59 provides that decisions of the International Court are binding only on the parties and only in respect of the particular case. Basically the same rule applies to all other international courts and arbitral tribunals. What are the implications of

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2.

this in respect of any international doctrine of precedent? What are its implications in terms of establishing a systematic process of investment protection in international law? Why should judicial decisions be only “subsidiary means” for the determination of rules of international law?

[B] Applicable Treaty Standards [1] North American Free Trade Agreement (1994), 32 I.L.M 289 (1993), Chapter 11: Investment Article 1101: Scope and Coverage 1. This Chapter applies to measures adopted or maintained by a Party relating to: (a) (b) (c)

investors of another Party; investments of investors of another Party in the territory of the Party; and with respect to Articles 1106 and 1114, all investments in the territory of the Party.

2. A Party has the right to perform exclusively the economic activities set out in Annex III and to refuse to permit the establishment of investment in such activities. 3. This Chapter does not apply to measures adopted or maintained by a Party to the extent that they are covered by Chapter Fourteen (Financial Services). 4. Nothing in this Chapter shall be construed to prevent a Party from providing a service or performing a function such as law enforcement, correctional services, income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care, in a manner that is not inconsistent with this Chapter. Article 1102: National Treatment 1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 3. The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a state or province, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that state or province to investors, and to investments of investors, of the Party of which it forms a part. 4. For greater certainty, no Party may: (a) (b)

impose on an investor of another Party a requirement that a minimum level of equity in an enterprise in the territory of the Party be held by its nationals, other than nominal qualifying shares for directors or incorporators of corporations; or require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment in the territory of the Party.

Article 1103: Most-Favored-Nation Treatment 1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of investors of any other Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. Article 1104: Standard of Treatment Each Party shall accord to investors of another Party and to investments of investors of another Party the better of the treatment required by Articles 1102 and 1103. Article 1105: Minimum Standard of Treatment 1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. 2. Without prejudice to paragraph 1 and notwithstanding Article 1108(7)(b), each Party shall accord to investors of another Party, and to investments of investors of another Party, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil

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strife. 3. Paragraph 2 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 1102 but for Article 1108(7)(b). *** Article 1109: Transfers 1. Each Party shall permit all transfers relating to an investment of an investor of another Party in the territory of the Party to be made freely and without delay. Such transfers include: (a) (b) (c) (d) (e)

profits, dividends, interest, capital gains, royalty payments, management fees, technical assistance and other fees, returns in kind and other amounts derived from the investment; proceeds from the sale of all or any part of the investment or from the partial or complete liquidation of the investment; payments made under a contract entered into by the investor, or its investment, including payments made pursuant to a loan agreement; payments made pursuant to Article 1110; and payments arising under Section B.

2. Each Party shall permit transfers to be made in a freely usable currency at the market rate of exchange prevailing on the date of transfer with respect to spot transactions in the currency to be transferred. 3. No Party may require its investors to transfer, or penalize its investors that fail to transfer, the income, earnings, profits or other amounts derived from, or attributable to, investments in the territory of another Party. 4. Notwithstanding paragraphs 1 and 2, a Party may prevent a transfer through the equitable, non-discriminatory and good faith application of its laws relating to: (a) (b) (c) (d) (e)

bankruptcy, insolvency or the protection of the rights of creditors; issuing, trading or dealing in securities; criminal or penal offenses; reports of transfers of currency or other monetary instruments; or ensuring the satisfaction of judgments in adjudicatory proceedings.

5. Paragraph 3 shall not be construed to prevent a Party from imposing any measure through the equitable, non-discriminatory and good faith application of its laws relating to the matters set out in subparagraphs (a) through (e) of paragraph 4. 6. Notwithstanding paragraph 1, a Party may restrict transfers of returns in kind in circumstances where it could otherwise restrict such transfers under this Agreement, including as set out in paragraph 4. Article 1110: Expropriation and Compensation 1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment, except: (a) (b) (c) (d)

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

2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place, and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value. 3. Compensation shall be paid without delay and be fully realizable. 4. If payment is made in a G7 currency, compensation shall include interest at a commercially reasonable rate for that currency from the date of expropriation until the date of actual payment. 5. If a Party elects to pay in a currency other than a G7 currency, the amount paid on the date of payment, if converted into a G7 currency at the market rate of exchange prevailing on that date, shall be no less than if the amount of compensation owed on the date of expropriation had been converted into that G7 currency at the market rate of exchange prevailing on that date, and interest had accrued at a commercially reasonable rate for that G7 currency from the date of expropriation until the date of payment. 6. On payment, compensation shall be freely transferable as provided in Article 1109.

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7. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with Chapter Seventeen (Intellectual Property). For purposes of this Article and for greater certainty, a non-discriminatory measure of general application shall not be considered a measure tantamount to an expropriation of a debt security or loan covered by this Chapter solely on the ground that the measure imposes costs on the debtor that cause it to default on the debt. [2] France – Argentina, Treaty Concerning the Treatment and Protection of Investments (1991), 1728 U.N.T.S. 298 [There are now hundreds of Bilateral Investment Treaties in existence. This BIT has been extracted here as it is generally indicative of the framework adopted by States. It is also the BIT which was in issue in the case of Compañia de Aguas del Aconquija S.A. and Vivendi Universal ( formerly Compagnie Générale des Eaux) v. Argentine Republic (Case No. ARB/97/3), the Annulment Decision in which is extracted above, at III.D.5. The BIT entered into force 3 March 1993. The French text may be found at 1728 U.N.T.S. 282.] Article 2 Each Contracting Party shall permit and promote, in accordance with its legislation and with the provisions of this Agreement, investments made in its territory and maritime zone by investors of the other Party. Article 3 Each Contracting Party shall undertake to accord in its territory and maritime zone just and equitable treatment, in accordance with the principles of international law, to the investments of investors of the other Party and to ensure that the exercise of the right so granted is not impeded either de jure or de facto. Article 4 Each Contracting Party shall accord in its territory and maritime zone to investors of the other Party, in respect of their investments and activities in connection with such investments, treatment that is no less favourable than that accorded to its own investors or the treatment accorded to investors of the most-favoured nation, if the latter is more advantageous. For this purpose, nationals of either Contracting Party who are authorized to work in the territory and maritime zone of the other Contracting Party shall be entitled to enjoy the appropriate facilities for the exercise of their professional activities. Such treatment shall not include privileges which may be extended by a Contracting Party to investors of a third State by virtue of its participation in or association with a free trade area, customs union, common market or any other form of regional economic organization. Moreover, such treatment shall not extend to privileges accorded by a Con-tracting Party to investors of a third State by virtue of a convention for the avoidance of double taxation or any other convention on taxation. Article 5 1. Investments made by investors of one Contracting Party shall be fully and completely protected and safeguarded in the territory and maritime zone of the other Contracting Party, in accordance with the principle of just and equitable treatment mentioned in article 3 of this Agreement. 2. The Contracting Parties shall not take, directly or indirectly, any expropriation or nationalization measures or any other equivalent measures having a similar effect of dispossession, except for reasons of public necessity and on condition that the measures are not discriminatory or contrary to a specific undertaking. Any such dispossession measures taken shall give rise to the payment of prompt and adequate compensation the amount of which, calculated in accordance with the real value of the investments in question, shall be assessed on the basis of a normal economic situation prior to any threat of dispossession. The amount and methods of payment of such compensation shall be determined not later than the date of dispossession. The compensation shall be readily convertible, paid without delay and freely transferable. It shall yield, up to the date of payment, interest calculated at the appropriate rate. 3. Investors of either Contracting Party whose investments have suffered losses as a result of war or any other armed conflict, revolution, state of national emergency or uprising in the territory or maritime zone of the other Contracting Party shall be accorded by the latter Party treatment which is no less favourable than that accorded to its own investors or to investors of the most-favoured nation. Article 6

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1. A Contracting Party in whose territory or maritime zone investments have been made by investors of the other Contracting Party shall accord to the said investors freedom of transfer of their assets, including: (a) (b) (c) (d) (e)

Profits, dividends and other current income; Amounts required to repay duly contracted loans which are directly associated with the realization or development of the investment and the related interest; Proceeds of the transfer or complete or partial liquidation of the investment, including appreciation of the invested capital; Compensation paid pursuant to article 5 above; Royalties deriving from the intangible property listed in article 1, paragraph 1, subparagraphs (d) and (e);

Nationals of each Contracting Party who have been authorized to work in the territory or maritime zone of the other Contracting Party in connection with an approved investment shall also be authorized to transfer to their country of origin an appropriate portion of their remuneration. 2. The transfers referred to in the preceding paragraphs shall be carried out without delay at the regular rate of exchange applicable on the date of transfer, in accordance with the procedures established by the legislation of the country concerned, provided that such legislation does not deny, suspend or impede the freedom of transfer. Article 7 In so far as the regulations of one Contracting Party provide for guaranteeing external investments, a guarantee may be granted, on the basis of a case-by-case review, for investments made by investors of that Party in the territory or maritime zone of the other Party. The guarantee referred to in the preceding paragraph shall not be available for investments made by investors of one Contracting Party in the territory or maritime zone of the other Party unless the investments have been granted prior approval by the latter Party. Article 8 1. Any dispute relating to investments made under this Agreement between one Contracting Party and an investor of the other Contracting Party shall, as far as possible, be settled amicably between the two parties concerned. 2. If any such dispute cannot be so settled within six months of the time when a claim is made by one of the parties to the dispute, the dispute shall, at the request of the investor, be submitted: – –

Either to the domestic courts of the Contracting Party involved in the dispute; Or to international arbitration under the conditions described in paragraph 3 below.

Once an investor has submitted the dispute to the courts of the Contracting Party concerned or to international arbitration, the choice of one or the other of these procedures is final. 3. Where recourse is had to international arbitration, the investor may choose to bring the dispute before one of the following arbitration bodies: –

– –

The International Centre for Settlement of Investment Disputes (ICSID), established by the Convention on the Settlement of Investment Disputes between States and Nationals of other States opened for signature in Washington on 18 March 1965,1 if both States Parties to this Agreement have already acceded to the Convention. Until such time as this requirement is met, the two Contracting Parties shall agree to submit the dispute to arbitration, in accordance with the rules of procedure of the Additional Facility of ICSID; An ad hoc arbitral tribunal established in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).

4. The ruling of the arbitral body shall be based on the provisions of this Agreement, the legislation of the Contracting Party which is a party to the dispute, including rules governing conflict of laws, the terms of any private agreements concluded on the subject of the investment, and the relevant principles of international law. 5. Arbitral decisions shall be final and binding on the parties to the dispute. Article 9 When one Contracting Party, by virtue of a guarantee issued in respect of an investment in the territory or maritime zone of the other Party, makes payments to one of its investors, it shall thereby assume the rights and claims of the said national or company, in particular those described in article 8 of this Agreement.

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Article 10 Investments which have been the subject of a specific undertaking by one Contracting Party vis-à-vis investors of the other Contracting Party shall be governed, without prejudice to the provisions of this Agreement, by the terms of that undertaking, in so far as its provisions are more favourable than those laid down by this Agreement. Article 11 1. Disputes concerning the interpretation or application of this Agreement shall, as far as possible, be settled through the diplomatic channel. 2. If a dispute cannot be settled within six months of the time when a claim is made by one of the Contracting Parties, it shall be submitted, at the request of either Contracting Party, to an arbitral tribunal. 3. The said tribunal shall, in each separate case, be constituted as follows: Each Contracting Party shall designate one member, and the two said members shall, by agreement, designate a national of a third State, who shall be appointed Chairman by the two Contracting Parties. All the members shall be appointed within two months of the date on which one Contracting Party notifies the other Contracting Party of its intention to submit the dispute to arbitration. 4. If the time-limits established in paragraph 3 above are not observed, one Contracting Party shall, in the absence of any applicable agreement, invite the Secretary-General of the United Nations to make the necessary appointments. If the Secretary-General is a national of either Contracting Party or if, for any other reason, he is prevented from exercising that function, the most senior Under-Secretary-General shall, provided that he is not a national of either Contracting Party, make the necessary appointments. 5. The arbitral tribunal shall take its decisions by majority vote. Such decisions shall be final and automatically binding on the Contracting Parties. The tribunal shall adopt its own rules of procedure. It shall interpret the award at the request of either Contracting Party. Unless the tribunal decides otherwise, taking particular circumstances into consideration, the cost of the arbitral proceedings, including leave for the arbitrators, shall be divided equally between the Parties. Article 12 This Agreement shall not apply to differences or disputes whose origin predates the signing of this Agreement.

[C] Other Sources of International Law In addition to any specific treaty (e.g. the terms of a BIT under which a claim is brought), international arbitral tribunals may have to apply other general rules of international law, as expressed, for example, in UN General Assembly resolutions or other texts. Note, however, that there is no international legislature, and that questions of international law are not determined for individual states by non-binding resolutions or general declarations. These may well be relevant and authoritative, but there is always a process of assessment and evaluation. [1] Texaco Overseas Petroleum Company and Californian Asiatic Oil Company v. The Government of the Libyan Arab Republic, Award on the Merits of 19 January 1977, 53 I.L.R. 420, 484-485, 490-495 (1979) [René-Jean Dupuy (sole arbitrator)] 80. This Tribunal has stated that it intends to rule on the basis of positive law, but now it is necessary to determine precisely the content of positive law and to ascertain the place which resolutions by the General Assembly of the United Nations could occupy therein. In its Preliminary Award of 27 November 1975, this Tribunal postponed the examination of the objection raised by the Libyan Government in its Memorandum of 26 July 1974 according to which: “Nationalization is an act related to the sovereignty of the State. This fact has been recognized by the consecutive Resolutions of the United Nations on the sovereignty of States over their natural resources, the last being Resolution No. 3171 of the United Nations General Assembly adopted on December 13, 1973, as well as paragraph (4/E) of Resolution No. 3201 (S. VI) adopted on 1 May, 1974. The said Resolutions confirm that every State maintains complete right to exercise full sovereignty over its natural resources and recognize Nationalization as being a legitimate and internationally recognized method to ensure the sovereignty of the State upon such resources. Nationalization, being related to the sovereignty of the State, is not subject to foreign jurisdiction. Provisions of the International Law do not permit a dispute with a State to be referred to any Jurisdiction other than its national Jurisdiction. In affirmance of this principle, Resolutions of the General Assembly provide that any dispute related to Nationalization or its consequences should be settled

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in accordance with provisions of domestic law of the State.” 81. At the stage of the Preliminary Award, it was premature to go into these arguments, since they were related to the merits of the case. Now, this Tribunal must examine the relevancy and the scope of these arguments to the instant case.… … *** The form of resolution adopted did not provide for the binding application of the text to those to which it applied, but the problem of the legal validity to be attached to the Charter is not thereby solved. In fact, while it is now possible to recognize that resolutions of the United Nations have a certain legal value, this legal value differs considerably, depending on the type of resolution and the conditions attached to its adoption and its provisions. Even under the assumption that they are resolutions of a declaratory nature, which is the case of the Charter of Economic Rights and Duties of States, the legal value is variable. Ambassador Castañeda, who was Chairman of the Working Group entrusted with the task of preparing this Charter, admitted that “it is extremely difficult to determine with certainty the legal force of declaratory resolutions”, that it is “impossible to lay down a general rule in this respect”, and that “the legal value of the declaratory resolutions therefore includes an immense gamut of nuances” (“La Valeur Juridique des Résolutions des Nation., Unies”, 129 R.C.A.D.I. 204 (1970), at 319-320). As this Tribunal has already indicated, the legal value of the resolutions which are relevant to the present case can be determined on the basis of circumstances under which they were adopted and by analysis of the principles which they state: With respect to the first point, the absence of any binding force of the resolutions of the General Assembly of the United Nations implies that such resolutions must be accepted by the members of the United Nations in order to be legally binding. In this respect, the Tribunal notes that only Resolution 1803 (XVII) of 14 December 1962 was supported by a majority of Member States representing all of the various groups. By contrast, the other Resolutions mentioned above, and in particular those referred to in the Libyan Memorandum, were supported by a majority of States but not by any of the developed countries with market economies which carry on the largest part of international trade. 87. (2) With respect to the second point, to wit the appraisal of the legal value on the basis of the principles stated, it appears essential to this Tribunal to distinguish between those provisions stating the existence of a right on which the generality of the States has expressed agreement and those provisions introducing new principles which were rejected by certain representative groups of States and having nothing more than a de lege ferenda value only in the eyes of the States which have adopted them, as far as the others are concerned, the rejection of these same principles implies that they consider them as being contra. legem. With respect to the former, which proclaim rules recognized by the community of nations, they do not create a custom but confirm one by formulating it and specifying its scope, thereby making it possible to determine whether or not one is confronted with a legal rule. As has been noted by Ambassador Castañeda, “[such resolutions] do not create the law; they have a declaratory nature of noting what does exist” (129 R.C.A.D.I. 204 (1970), at 315). On the basis of the circumstances of adoption mentioned above and by expressing an opinio juris communis, Resolution 1803 (XVII) seems to this Tribunal to reflect the state of customary law existing in this field. Indeed, on the occasion of the vote on a resolution finding the existence of a customary rule, the States concerned clearly express their views. The consensus by a majority of States belonging to the various representative groups indicates without the slightest doubt universal recognition of the rules therein incorporated, i.e., with respect to nationalization and compensation the use of the rules in force in the nationalizing State, but all this in conformity with international law. 88. While Resolution 1803 (XVII) appears to a large extent as the expression of a real general will, this is not at all the case with respect to the other Resolutions mentioned above, which has been demonstrated previously by analysis of the circumstances of adoption. In particular, as regards the Charter of Economic Rights and Duties of States, several factors contribute to denying legal value to those provisions of the document which are of interest in the instant case. – –

In the first place, Article 2 of this Charter must be analyzed as a political rather than as a legal declaration concerned with the ideological strategy of development and, as such, supported only by non-industrialized States. In the second place, this Tribunal notes that in the draft submitted by the Group of 77 to the Second Commission (U.N. Doc A./C.2/L. 1386 (1974), at 2), the General Assembly was invited to adopt the Charter “as a first measure of codification and progressive development” within the field of the international law of development. However, because of the opposition of several States, this description was deleted from the text submitted to the vote of the Assembly.… …

The absence of any connection between the procedure of compensation and international law and the subjection of this procedure solely to municipal law cannot be

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regarded by this Tribunal except as a de lege ferenda formulation, which even appears contra legem in the eyes of many developed countries. Similarly, several developing countries, although having voted favorably on the Charter of Economic Rights and Duties of States as a whole, in explaining their votes regretted the absence of any reference to international law. 89. Such an attitude is further reinforced by an examination of the general practice of relations between States with respect to investments. This practice is in conformity, not with the provisions of Article 2 (c) of the above-mentioned Charter conferring exclusive jurisdiction on domestic legislation and courts, but with the exception stated at the end of this paragraph. Thus a great many investment agreements entered into between industrial States or their nationals, on the one hand, and developing countries, on the other, state, in an objective way, the standards of compensation and further provide, in case of dispute regarding the level of such compensation, the possibility of resorting to an international tribunal. In this respect, it is particularly significant in the eyes of this Tribunal that no fewer than 65 States, as of 31 October 1974, had ratified the Convention on the Settlement of Investment Disputes between States and Nationals of other States, dated March 18, 1965. 90. The argument of the Libyan Government, based on the relevant resolutions enacted by the General Assembly of the United Nations, that any dispute relating to nationalization or its consequences should be decided in conformity with the provisions of the municipal law of the nationalizing State and only in its courts, is also negated by a complete analysis of the whole text of the Charter of Economic Rights and Duties of States. From this point of view, even though Article 2 of the Charter does not explicitly refer to international law, this Tribunal concludes that the provisions referred to in this Article do not escape all norms of international law. Article 33, paragraph 2, of this Resolution states as follows: “2. In their interpretation and application, the provisions of the present Charter are interrelated and each provision should be construed in the context of the other provisions”. Now, among the fundamental elements of international economic relations quoted in the Charter, principle (j) is headed as follows: “Fulfillment in good faith of international obligations”. Analyzing the scope of these various provisions, Ambassador Castañeda, who chaired the Working Group charged with drawing up the Charter of Economic Rights and Duties of States, formally stated that the principle of performance in good faith of international obligations laid down in Chapter I(j) of the Charter applies to all matters governed by it, including, in particular, matters referred to in Article 2. Following his analysis, this particularly competent and eminent scholar concluded as follows: “The Charter accepts that international law may operate as a factor limiting the freedom of the State should foreign interests be affected, even though Article 2 does not state this explicitly. This stems legally from the provisions included in other Articles of the Charter which should be interpreted and applied jointly with those of Article 2.” (“La Charte des Droits et Devoirs Economiques des Etats. Note sur son Processus d'Elaboration”, 20 A.F.D.I. 31 (1974), at 54.) 91. Therefore, one should note that the principle of good faith, which had already been mentioned in Resolution 1803 (XVII), has an important place even in Resolution 3281 (XXIX) called “The Charter of Economic Rights and Duties of States”. One should conclude that a sovereign State which nationalizes cannot disregard the commitments undertaken by the contracting State: to decide otherwise would in fact recognize that all contractual commitments undertaken by a State have been undertaken under a purely permissive condition on its part and are therefore lacking of any legal force and any binding effect. From the point of view of its advisability, such a solution would gravely harm the credibility of States since it would mean that contracts signed by them did not bind them; it would introduce in such contracts a fundamental imbalance because in these contracts only one party – the party contracting with the State – would be bound. In law, such an outcome would go directly against the most elementary principle of good faith and for this reason it cannot be accepted. [2] Comments and Questions Precisely what rule of international law does the arbitrator purport to apply here? On what basis? [3] Libyan American Oil Company (LIAMCO) v. Government of the Libyan Arab Republic, Award of 12 April 1977, 62 I.L.R. 140, 187-189 (1982) [Sobhi Mahmassani (sole arbitrator)] [For the facts of this case see above, chapter 3 p. 263.] 3. United Nations Resolutions on Nationalization The frequency of the above mentioned general measures of nationalization has evoked international attention. Since 1952, The United Nations General Assembly has delivered a series of successive resolutions, in which the sovereign right of States to nationalize and

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to control their natural resources, as being the property of the Community, has been confirmed and reaffirmed. Hereunder are recalled the provisions of the principal resolutions relevant to the points at issue. (I)Resolution No. 626 (VII) of 21 December 1952: which reads as follows: The General Assembly, Bearing in mind the need for encouraging the under-developed countries in the proper use and exploitation of their natural wealth and resources, Considering that the economic development of the under-developed countries is one of the fundamental requisites for the strengthening of universal peace, Remembering that the right of people freely to use and exploit their natural wealth and resources is inherent in their sovereignty and in accordance with the Purposes and Principles of the Charter of the United Nations, 1. Recommends all Member States, in the exercise of their right freely to use and exploit their natural wealth and resources wherever deemed desirable by them for their own progress and economic development, to have due regard, consistently with their sovereignty, to the need for maintaining the flow of capital in conditions of security, mutual confidence and economic co-operation among nations; 2. Further recommends all Member States to refrain from acts, direct or indirect, designed to impede the exercise of the sovereignty of any State over its natural resources. (II)Resolution No. 1803 (XVII) of 14 December 1962: which, while reiterating the said Resolution No. 626 and taking into consideration a similar Resolution No. 1515 (XV) of 15 December 1960 which recommended the respect of the sovereign right of every State to dispose of its wealth and natural resources, – confirms that right in the following terms: 1. The right of peoples and nations to permanent sovereignty over their wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the State concerned. 2. The exploration, development and disposition of such resources, as well as the im-port of the foreign apital required for these purposes, should be in conformity with the rules and conditions which the peoples and nations freely consider to be necessary or desirable with regard to the authorization, restriction or prohibition of such activities.” (III)Resolution of 25 November 1966: which recommends increased participation of developing nations in the operation of projects exploited by foreign companies. (IV)Resolution No. 3281 (XXIX) of 12 December 1974: in which it was provided, in its Chapter II, Article 2, as follows: Every State has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities. 2. Each State has the right: (a)

(b)

(c)

To regulate and exercise authority over foreign investment within its national juris diction in accordance with its laws and regulations and in conformity with its national objectives and priorities. No State shall be compelled to grant preferential treatment to foreign investment; To regulate and supervise the activities of transnational corporations within its national jurisdiction and take measures to ensure that such activities comply with its laws, rules and regulations and conform with its economic and social policies. Transnational corporations shall not intervene in the internal affairs of a host State. Every State should, with full regard to its sovereign rights, co-operate with other States in the exercise of the right set forth in this subparagraph; To nationalize, expropriate or transfer ownership of foreign property in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State con-siders pertinent. In any case where the question of compensation gives rise to a con-troversy, it shall be settled under the domestic law of the nationalizing State and by its tribunals, unless it is freely and mutually agreed by all States concerned that other peaceful means be sought on the basis of the sovereign equality of States and in ac-cordance with the principle of free choice of means.

In response to the invitation proferred by the Arbitral Tribunal, the Claimant commented on the resolutions of the U.N. General Assembly bearing on the subject matter in a Memorial which it submitted to the Tribunal at its meeting of 11 January 1977. Referring to Resolution No. 1803 of 1962, the Memorial concluded that it specifically provided for the respect of foreign investment agreements, and was in contemplation of the Parties when they entered into their Agreements of 1965. As to the Economic Charter contained in Resolution No. 3281 of 1974, it does not represent a consensus of nations and cannot be invoked as a source of international law. In this connection, the Arbitral Tribunal has reached the conclusion that the said Resolutions, if not a unanimous source of law, are evidence of the recent dominant trend

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of international opinion concerning the sovereign right of States over their natural resources, and that the said right is always subject to the respect for contractual agreements and to the obligation of compensation, as will be explained in a later section. [4] SEDCO Inc v. National Iranian Oil Company and Islamic Republic of Iran (IUSCT Case No. 129), Interlocutory Award of 27 March 1986 (28) [Nils Mangard (pres.), Charles N. Brower, Parviz Ansari Moin] [Sedco, Inc., a US drilling contractor, claimed an expropriation of six drilling rigs owned by its subsidiary, Sedco International, S.A. (SISA). It also claimed in respect of its interest in Sedco Iran Limited (Sediran), which it argued was effectively transferred to the Government of Iran contrary to the Iran-United States Treaty of Amity, Economic Relations and Consular Rights 1955 (Treaty of Amity). In the first Interlocutory Award of 24 October 1985, (29) the Tribunal held, inter alia, that Sedco's shareholder interest in Sediran was expropriated on 22 November 1979. Thereafter, Sedco made submissions regarding the valuation of Sediran, claiming that compensation for nationalized property was to be determined in accordance with the Treaty of Amity, or under customary international law. The Tribunal held that Sedco was entitled to compensation for the full value of its equity interest in Sediran by reference to both the Treaty of Amity and customary international law. Judge Brower, in his separate concurring opinion, made the following comments on the contribution of United Nations General Assembly resolutions to customary international law.] (Citations selectively omitted) The Respondents argue nonetheless that customary international law has evolved substantially since 1955 and in this regard point to resolutions and declarations of the U.N. General Assembly as elucidated by writings of learned publicists. Respondents refer in particular to the 1973 Resolution on Permanent Sovereignty over Natural Resources, the Declaration on the Establishment of a New Economic Order, and the Charter of Economic Rights and Duties of States (“Resolution 3281" or “Charter”). The latter states, inter alia, in Article 2(2) (c) that every State has the right to: nationalize, expropriate or transfer ownership of foreign property in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent. In any case where the question of compensation gives rise to a controversy, it shall be settled under the domestic law of the nationalizing State and by its tribunals… … This line of argumentation has been a key aspect of the recent challenge to the international law of expropriation: has forced an intensive fundamental examination of the sources of international law, and it has been rejected by international arbitral panels. Legal significance is attributable to U.N. General Assembly resolutions only to the extent that they are regarded as evidence of the practice of States generally accepted as law, that is, customary international law. In ascertaining state practice, what States do is more important than what they say. Schwebel, “Confrontation, Consensus and Codification in International Law”, Proceed., Am. Br., Int’l L. Assoc. 197980 14 (1980). Although “expectations may rest not only on actual conduct, but also on other forms of communication, including the verbal”,23 special care must be taken not to base norms merely on the statements of States in circumstances where it is difficult, if not impossible, to distinguish between belief and rhetoric. See generally ArangioRuiz, “The Normative Role of the General Assembly of the United Nations and the Declaration of Principles of Friendly Relations”, 137 Recueil des Cours 418 (1972). Recognizing such difficulties, the International Court of Justice and scholars have suggested various factors to consider in weighing the evidentiary value of a particular resolution: whether the pattern of voting shows consensus generally and amongst the groups of most interested states; whether the language is of a normgenerating character; concurrent statements made; citation to the resolution in subsequent resolutions; and the subsequent conduct of States. The value of resolutions “depends upon the extent to which they can be regarded as expressions of the ‘judicial conscience’ of humanity as a whole rather than of an incongruous or ephemeral political majority”. Johnson, “The Effect of Resolutions of the General Assembly of the United Nations”, 32 Brit. Y.B. Int’l L. 97, 122 (195556). Before applying such analysis to the resolutions at hand, I note that the three resolutions particularly cited by Respondents were preceded by Resolution 1803, entitled “Permanent Sovereignty over Natural Resources”, adopted by the General Assembly on 14 December 1962. The relevant portion of Resolution 1803 provides: Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both [540] domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the

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exercise of its sovereignty and in accordance with international law. (Emphasis added.) René-Jean Dupuy, sole arbitrator in Texaco Overseas Petroleum vs. Libya (Award of 19 January 1977), reprinted in 17 Int’l Legal Mat’ls 1 (1978) (“TOPCO”), considered in detail the legal significance of General Assembly Resolution 1803 and its successors, including the Charter. Resolution 1803 had been adopted by a nearly unanimous vote “representing not only all geographical areas but also all economic systems”. TOPCO, para. 40, 17 Int’l Legal Mat’ls at 28. In addition, statements of States concurrent with the adoption of Resolution 1803 indicate that they believed “appropriate compensation… … … in accordance with international law” to equal the full compensation traditionally required by international law.In contrast, Resolution 3281, the Charter, “was supported by a majority of States but not by any of the developed countries with market economies which carry on the largest part of international trade”. TOPCO, para. 86, 17 Int’l Legal Mat’ls at 30. Originally the Group of 77 had drafted the Charter “as a first measure of codification and progressive development”. Significantly, however, this description was purposefully deleted from the final text voted upon by the General Assembly. See Virally, “La Charte de Droits et Devoirs Economiques des Etats”, 20 A.F.D.I. 57, 59 (1974) (“It is therefore clear that the Charter is not a first step to codification and progressive development… … …”). Dupuy thus concluded that while Resolution 1803 expresses opinio juris communis and reflects “the state of customary law existing in this field”,28 the Charter “must be analyzed as a political rather than as a legal declaration concerned with the ideological strategy of development and, as such, supported only by non-industrialized States”. TOPCO, paras. 8788, 17 Int’l Legal Mat’ls at 30. [5] Comments and Questions 1. 2.

How would you assess the outcome of the debate over these General Assembly resolutions? What were the real points at issue in the debate? With the conclusion of more than 1500 bilateral and multilateral investment treaties, where now is the debate on the New International Economi Order? And if it did concern real issues (e.g., local control over natural resources), what is the framework within which those issues must now be resolved?

§6.05 SOURCES OF “NON-NATIONAL” LAW: THE LEX MERCATORIA An alternative route to the application of non-naitonal law in investment protection is the adoption of some version of substantive private law on a transnational basis – something which is not international law but which, like international law, escapes from the sovereign control of the host state. This phenomenon, espoused as much by private P 501 and comparative lawyers, often goes under the label “lex mercatoria”.

[A] Michael J. Mustill, The New Lex Mercatoria: The First Twenty-five Years, in Maarten Bos and Ian Brownlie, Liber Amicorum for the Rt. Hon. Lord Wilberforce, 149, 162-166 (Clarendon Press, 1987) (30) (Citations selectively omitted) Given the weight of analysis to which the lex mercatoria has been subjected, it is surprising how little has been done to identify the criteria which distinguish those transactions which are governed by it from those which are not. One matter is treated by commentators as axiomatic: namely, that an express agreement to apply the lex mercatoria will and must be honoured by the tribunal, as well as the parties, and that such an agreement may take the form of a reference to, say, the general principles of law recognized by civilized nations or to the usages of international commerce. In the absence of express consent, it is generally held that the arbitrator should proceed by three stages, asking himself first whether the application of any national system is appropriate; then, if not, whether he should proceed by amiable composition or by the application of anational rules; and finally, if the latter, what anational rules exist and are relevant to the dispute. Various groups of factors have been regarded as relevant to this process. The first group concerns the parties themselves. Clearly, the fact of their having different nationalities is important, and perhaps indispensable. Their character is also material, since it is easier to hold that the lex mercatoria, or that variant of it known as ‘the general principles of law’, is relevant if one of the parties is a sovereign State or an entity under immediate State control, especially in those cases where the proper law of the contract, according to the orthodox conflicts rules, would be the law of that State. It is also said to be significant if one of the parties has a ‘transnational’ character, apparently because such parties are to be regarded as existing in free space, detached from national allegiances, and hence especially apt for subjection to a system of law which is similarly detached. Other indicators relate to the nature of the transaction. It is said to be significant, and perhaps conclusive, if the transaction has an ‘international character’. Apart from the

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obvious case where the parties are of different nationalities, it is not clear what this expression implies.… … The subject-matter of the transaction may also be relevant. It is plain that many authors instinctively picture international arbitration as concerned with disputes under complex contracts, negotiated ad hoc, for the execution of major engineering or similar projects over a substantial period of time.… … Another group of indicators relates to the terms of a contract. This is certainly understandable in so far as the application of the lex mercatoria is taken to rest on express or implied consent; but it is less easy to comprehend when the law is said to apply because the transaction is effected within the matrix of the legal order constituted by international commerce, for the transaction either is, or is not, of a type falling into this category, and its terms as to jurisdiction and so on should be immaterial. Be that as it may, the presence of a clause of amiable composition is material, for reasons which will be mentioned below; it has also been suggested in the literature that the inclusion of an arbitration clause or the choice of an international tribunal or of a clause referring P 502 disputes to an international arbitration centre are pointers towards the lex mercatoria. If this is right, then international arbitrators have been mistaking their functions, day in, day out, for many years. Again, it has been suggested that the absence of a choice of law clause is an indication that the parties wish to apply an anational system, apparently because it shows that the parties could not agree about which systems should govern. This striking proposition ignores the possibility that the choice of a national law was so obvious as not to be worth mentioning, or that the parties never thought about the matter at all. Moreover, even if the parties had in fact disagreed, there seems no warrant for inferring unanimity in favour of ruling out all potentially relevant national systems and substituting an anational system of which only the smallest minority of businessmen can ever have heard. These are the factors which are said to be material to an arbitrator's decision to set aside national law, to direct himself towards a system of law rather than a free equity, and to find that system in the lex mercatoria. Unfortunately, it is not explained in the literature how he is to perform this operation, and in particular, how much weight is to be attached to the individual factors. The mercatorists can fairly respond that there is no mechanical process for arriving, by way of the conventional conflicts of laws, at a choice of the governing law; and that indubitably a decision on this issue may be finely balanced and susceptible to differing conclusions. Nevertheless, the general nature of the exercise to be performed is comprehended well enough. Looking for the ‘closest connection’, or some local variant, may be difficult to perform; but it is not difficult to understand. By contrast, the process for deciding when and when not to apply the lex mercatoria seems never to have been clearly spelt out. Two more points are important. The first concerns the application of the lex mercatoria in cases where there is no arbitration clause and the dispute necessarily falls to be decided by a national court. It appears to be taken for granted that an express choice of the lex mercatoria would be effective in such a case. This may be over-optimistic, for it cannot be assumed that a national judge will be permitted by local law to enforce such a choice, or will even know how to do so. There appears to be little trace in the literature of attempts to apply the lex in national courts. Of much greater theoretical importance is the question whether the national judge ought to apply the lex mercatoria to the exclusion of whatever national law would otherwise be regarded as the proper law, even in the absence of an express choice, in those instances where it would have been applicable if the contract had contained an arbitration clause. … … … If application of the lex to the individual contract is seen as a matter of implied consent, then the relative importance of the arbitration clause becomes crucial, for if it is conslusive or near conclusive evidence of a wish to apply the lex, then it might be said that its absence is equally significant; so that instances in which a national court should give effect to the lex must be non-existent or at best rare. Again, if the lex applies independently of consent to all transactions falling within its purview, one must ask whether a contract without an arbitration clause is within its purview. This in turn raises the question whether the lex is generated by, and is an integral and necessary part of, the societas mercatorium; or whether it is generated by, and is an integral and necessary part of, international commercial arbitration: two entirely different matters. These uncertainties will have to be resolved before the lex can present itself convincingly to the business community, which can hardly be expected to accept it as a substitute for the P 503 existing regime in the absence of an explicit formulation of precisely what it is. Finally, it must be noted that the lex mercatoria has not yet laid claim to the whole territory of potential disputes arising from international commerce. Thus: (i) there appears to be no instance in which the lex has been invoked in a case of pure delict; (ii) the lex has rarely been applied where the issues are those of consent, fraud in the making of a contract, and so on; (iii) the lex has not, as far as the present author is aware, ever been credited in the literature with a power to create rights in rem, valid as against third parties – for example, by way of a transfer of title of corporeal assets, or pledge, or the creation of a monopoly such as patent or copyright. This is explicable, and indeed inevitable, if the lex is regarded as applicable only by express or implied consent, but is

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harder to understand if it is merely a reflection of the international commercial organism. Moreover, once it is accepted that the lex may on occasion have to be applied to some aspects of a dispute, whereas national law is applied to others, the practical attractions seem less apparent.

[B] State party (State X) v. Private contractor (United Kingdom) (ICC Case No. 7110), First Partial Award of June 1995, 10(2) ICC Bulletin 39, 39-40 (1999) [A United Kingdom private contractor entered into a number of contracts with State X for supply, operation and maintenance of equipment. Events in State X led to termination of the contracts. Thereafter, State X filed a request for arbitration for amounts owing under the contracts. The first partial award dealt with the matter of the governing law.] [T]he Tribunal concludes that the reasonable intention of the parties regarding the, substantive law applicable to the Contracts was to have all of them governed by legal rules and principles in matter of international contractual obligations such as those arising out of the Contracts, which, though not necessarily enshrined in any specific national legal system, are specially adapted to the needs of international transactions the Contracts and enjoy wide international consensus. In addition, this Tribunal estimates that its mandate… … … requires that, to the extent possible at this stage, some precisions be given as to the substance of such legal rules and principles. It should be noted that both Claimant and Defendant, at different stages of their successive argumentations, have expressed their concern either about the vagueness of general principles of law or the possibility (at least with respect to English courts) that an award rendered on the basis of such principles might not be enforceable before national courts. Taking into account such circumstances, the discussions held in such connection with the parties… … … and also the requirement that arbitrators … …”… should do no less than is required to exercise their authority completely… … …” (Institute of International Law, Santiago de Compostela Resolution cited above, art. 1, 63-II International Law, Institute Yearbook 326 (1990)), this Tribunal finds that general legal rules and principles enjoying wide international consensus, applicable to international contractual obligations and relevant to the Contracts, are primarily reflected by the Principles of International Commercial Contracts adopted by Unidroit (the “Unidroit Principles”) in 1994… … … In consequence, without prejudice to taking into account the provisions of the Contracts and relevant trade usages, this Tribunal finds that the Contracts are governed by, and shall be interpreted in accordance [with], the Unidroit Principles with respect to all matters falling within the scope of such Principles, and for all other matters, by such other general legal rules and principles applicable to international contractual obligations enjoying wide international consensus,which would be found relevant for deciding controverted P 504 issues falling under the present arbitration. The reasons why this Tribunal considers the Unidroit Principles to be the central component of the general rules and principles regarding international contractual obligations and enjoying wide international consensus, which constitute the proper law of the Contracts, are manifold: (1) the Unidroit Principles are a restatement of international legal principles applicable to international commercial contracts made by a distinguished group of international experts coming from all prevailing legal systems of the world, without the intervention of states or governments, both circumstances redounding to the high quality and neutrality of the product and its ability to reflect the present stage of consensus on international legal rules and principles governing international contractual obligations in the world, primarily on the basis of their fairness and appropriateness for international commercial transactions falling within their purview; (2) at the same time, the Unidroit Principles are largely inspired [by] an international uniform-law text already enjoying wide international recognition and generally considered as reflecting international trade usages and practices in the field of the international sales of goods, which has already been ratified by almost 40 countries, namely, the 1980 Vienna Convention on the International Sale of Goods; (3) the Unidroit Principles are speciallyadapted to the Contracts being the subject of this arbitration, since they cover both the international sale of goods and supply of services; (4) the Unidroit Principles (see their Preamble) have been specifically conceived to apply to international contracts in instances in which, as it is the case in these proceedings, it has been found that the partics have agreed that their transactions shall be governed by general legal rules and principles; and (5) rather than vague principles or general guidelines, the Unidroit Principles are mostly constituted by clearly enunciated and specific rules coherently organized in a systematic way… … The precisions given by this Tribunal in preceding paragraph… … … should suffice to dispel any concerns as to the enforceability of an award made in these proceedings on the basis of the general legal rules and principles applicable to international obligations on account of the vagueness or lack of precision of such principles… … … [L]earned opinions… … … indicate that the present trend in England points towards the admissibility and enforceability in that jurisdiction of arbitral awards based on lex mercatoria or general principles of law, particularly when the award has not been rendered in England or is not subject to English law and the laws of the national jurisdiction in which the award is made do not render invalid an award made on such

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terms… …

[C] Watkins-Johnson Company and Watkins-Johnson Limited v. Islamic Republic of Iran and Bank Saderat Iran (IUSCT Case No. 370), Award of 28 July 1989 (31) [KarlHeinz Bockstiegel (pres.), Assadollah Noori] [Watkins-Johnson Limited entered a contract with Iran pursuant to which it was to manufacture and supply electronic communications equipment (Contract 108). Disputes arose as to payment arrangements. After frequent unsuccessful requests for payment for completed equipment, Watkins-Johnson notified Iran of its intention to sell the equipment by private sale. Watkins- Johnson filed a request for arbitration, claiming that Iran had terminated Contract 108 and was obliged to pay for the equipment manufactured and work in progress, as well as various other costs incurred pursuant to the contract. Watkins-Johnson argued that it was obligated to sell unshipped equipment P 505 in mitigation of damages. The Tribunal made the following comments on governing law, referring to the “recognized international law of commercial contracts” to reinforce its findings. Note the dissenting opinion of Judge Noori on this point. In his view, Iranian law alone was applicable. (32) ] (Citations selectively omitted) 93. The Tribunal notes Iran's position that Iranian law, which it argues is the applicable law pursuant to Article 11 of Contract 108, does not recognize a doctrine of mitigation of damages, which provides for the right to dispose of another party's property. As a preliminary matter, the Tribunal observes that Article 11 does not exclusively refer to Iranian law. It states: Law Governing Contract The Government law of this contract is the Iranian Law. This contract is subject to the Laws of the Imperial Government of Iran and United States in every respect if any difference between these two laws the Iranian will govern. 94. In the circumstances of this Case, the Tribunal is unable to discern a conflict between Iranian and United States law on the issue of mitigation. Under United States law, the Claimant was justified in selling the equipment in mitigation of its damages. See Uniform Commercial Code §§ 2-703, 2-706. The Tribunal is not convinced that Iranian law is inconsistent with the principles of mitigation or requires a different result in this Case. Iran cites Article 247 of the Civil Code of Iran to argue that Watkins-Johnson had no right to sell Iranian property. But title to the equipment had not passed to Iran. The Statement of Work (p. 30) to Contract No. 108 provides: “Delivered equipment and spares become IIAF [Imperial Iranian Air Force] property at time of delivery (F.O.B. destination)”. Such delivery did not take place with respect to the equipment at issue here. 95. Moreover, Watkins-Johnson's right to sell undelivered equipment in mitigation of its damages is consistent with recognized international law of commercial contracts. The conditions of Article 88 of the United Nations Convention on Contracts for the International Sale of Goods (1980) are all satisfied in this Case: there was unreasonable delay by the buyer in paying the price and the seller gave reasonable notice of its intention to sell… …

[D] Seller v. Buyer (ICC Case No. 5713), Final Award of 1989, 15 Y.B. Comm’l Arb. 70, 70-73 (1990) (Citations selectively omitted) Applicable Law [1] “The contract contains no provisions regarding the substantive law. Accordingly that law has to be determined by the Arbitrators in accordance with Art. 13(3) of the ICC rules. Under that article, the Arbitrators will ‘apply the law designated as the proper law by the P 506 rule of conflicts which they deem appropriate.’ [2] “The contract is between a Seller and Buyer [of different nationalities] for delivery [in a third country]. The sale was f.o.b. so that the transfer of risks to the Buyer took place in [the country of the Seller]. [The country of the Seller] accordingly appears as being the jurisdiction to which the sale is most closely related. [3] “The Hague Convention on the law applicable to international sales of goods dated 15 June 1955 (Art. 3) regarding sales contracts, refers as governing law to the law of the Seller's current residence… … … [The country of the Buyer] has adhered to the Hague Convention, not [the country of the Seller]. However, the general trend in conflicts of law is to apply the domestic law of the current residence of the debtor of the essential undertaking arising under the contract. That debtor in a sales contract is the Seller. Based on those combined findings, [the law of the country of the Seller] appears to be the proper law governing the Contract between the Seller and the Buyer. [4] “As regards the applicable rules of [the law of the country of the Seller], the Arbitrators have relied on the Parties' respective statements on the subject and on the information obtained by the Arbitrators from an independent consultant… … … The Arbitrators, in

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accordance with the last paragraph of Art. 13 of the ICC rules, will also take into account the ‘relevant trade usages'.” Admissibility of the Counterclaim Under [the law of the country of the Seller] *** Under the international trade usages prevailing in the international sale of goods. [5] “The Tribunal finds that there is no better source to determine the prevailing trade usages than the terms of the United Nations Convention on the International Sale of Goods of 11 April 1980, usually called ‘the Vienna Convention’. This is so even though neither [the country of the Buyer] nor [the country of the Seller] are parties to that Convention. If they were, the Convention might be applicable to this case as a matter of law and not only as reflecting the trade usages. [6] “The Vienna Convention, which has been given effect to in 17 countries, may be fairly taken to reflect the generally recognized usages regarding the matter of the nonconformity of goods in international sales… … …”

[E] Comments and Questions How can a Convention ratified by 17 countries be said to give effect to “generally

P 507 recognized usages”?

[F] James Crawford and Anthony Sinclair, The UNIDROIT Principles of International Commercial Contracts and their Application to State Contracts, ICC Bulletin – Special Supplement 57, 57-75 (2002) (33) (Citations selectively omitted) II. Choice of the UNIDROIT Principles in State Contract Arbitration The past 20 years have seen the enactment of more flexible conflict rules especially designed for arbitrators, rules which diverge more or less from the applicable conflict rules for courts. For instance, article 28(1) of the UNCITRAL Model Law allows disputes to be decided ‘in accordance with such rules of law as are chosen by the parties as applicable to the substance of the dispute’. The term ‘rules of law’ implies that the parties need not choose a system of national law or indeed any system at all. A number of countries have adopted this wording, including France, Germany, Italy, the Netherlands and Switzerland. The Arbitration Act 1996 (UK) contains a differently worded provision to similar effect. These arbitration laws would allow the parties to chose the Principles as a body of rules of law applicable to their contract, although there seem so far to have been no published awards involving contracts containing such an explicit choice. On the other hand, article 28(2) of the UNCITRAL Model Law directs that, in the absence of a choice of applicable law by the parties, the arbitral tribunal shall apply the law determined by the conflict rules which it considers applicable. Set against the use of the term ‘rules of law’, the latter wording implies a narrower approach that would exclude direct recourse to the Principles as the governing law. Some national arbitration laws follow the mould of the UNCITRAL Model Law, while others deviate from it in this respect to allow arbitrators to fill the gap caused by the lack of choice by applying non-systemic rules of law. In the absence of party choice, ICC arbitrators are free to apply the rules of law they determine to be appropriate. Within that framework, they may refer to the Principles to supplement their conclusions, or even to find that they are the ‘applicable law’. The leading published decision is perhaps ICC arbitration 7110. It has been suggested that this award ‘may be regarded as the official entrée of the Principles into international arbitration’. A series of contracts between an English supplier and a Middle Eastern governmental agency were for the most part silent as to the applicable law, although a number of the contracts said that disputes arising would be referred to ICC arbitration and resolved ‘according to natural justice’. The supplier asserted that ‘natural justice’ was an English concept and that therefore the parties had made an implied choice that their disputes would be resolved in accordance with English law. The ministry countered, arguing that ‘natural justice’ was an ancient idea recognised in its religious laws; moreover, in English law natural justice was an essentially procedural concept developed in administrative law which was not applicable to contractual relations as such. Finding that the parties had clearly excluded the application of the national law of either of them and that there was no basis upon which to identify the law of any particular third state as applicable, the arbitral tribunal by a majority concluded that by agreeing to P 508 international commercial arbitration, the parties intended the application of general legal rules and principles to govern the contracts. In finding that contracts were governed by and should be interpreted in accordance with the Principles, the tribunal observed that they primarily embodied those general legal rules and principles applicable to international contractual obligations and enjoying wide international consensus. One of the arbitrators dissented: in his view the parties could not have contemplated

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reference to any set of rules as vague and uncertain as ‘general principles'. Moreover, reference to the Principles could not remedy the defect since they had not been conceived, let alone promulgated, at the time the contracts were concluded. In this case, reference to the Principles derived from an implied choice of general principles of law, rather than a so-called ‘negative choice of law’. By contrast, ICC arbitration 7375 was a clear case of negative choice. It concerned a contract for supply of goods between a United States seller and a Middle Eastern buyer. The Middle Eastern party, a government agency, claimed damages with interest in connection with delayed delivery of the goods. The contract contained no choice-of-law clause. The respondent, invoking the law of Maryland as the legal system of the place where the most significant contractual obligations (i.e. the manufacture of the goods) had been performed, pleaded that the claim was out of time under the law of Maryland. The claimant invoked its own law as the proper law; it submitted that, under this law, the claim was not out of time. If the tribunal did not accept that such law was applicable, claimant subsidiarily invoked general principles of law. Referring to the first partial award in ICC case 7110, the tribunal considered that the parties had impliedly made a negative choice of law. Although one should not too readily construe silence as a negative choice, the tribunal found that the absence of a choice-oflaw provision in the contract, together with the fact that one party was a ministry of state, should be interpreted as implying a mutual intent to avoid the other party's national law. Moreover, there was no basis for choosing any third national law: given the absence of any significant connection of the transaction with any third country, such a choice would only be arbitrary. To maintain that equilibrium between the parties, the tribunal applied general principles and rules applicable to international contractual obligations that qualified as rules of law and were widely accepted and agreed upon in the international business community, including concepts belonging to lex mercatoria and taking into account relevant trade usages and the UNIDROIT Principles, to the extent that they reflect generally accepted principles and rules. In contrast to the concept of ‘general principles of law’ referred to in article 38(1)(c) of the Statute of the International Court of Justice, the tribunal considered the UNIDROIT Principles to have a concrete and workable content. On the other hand, while asserting that the Principles ‘contain in essence a restatement of those “principes directeurs” that have enjoyed universal acceptance and, moreover, are at the heart of those most fundamental notions which have consistently been applied in arbitral practice’, the tribunal admitted that they had not undergone detailed scrutiny in all their aspects and that some provisions may not reflect any international consensus. Again, the Principles were not the proper law as such but rather provided a guide to its content. As a final example, in ICC case 9474, the parties had agreed that the disputes should be decided ‘fairly’. The arbitral tribunal determined that it would apply ‘the general standards and rules of international contracts', their content being drawn from a range of international P 509 commercial instruments including, inter alia, the UNIDROIT Principles. It may be concluded that arbitral tribunals will apply the Principles where they are expressly made applicable, where they are relevant or useful to supplement and support the chosen applicable law, or in cases of negative choice…

[G] Joseph C. Lemire v. Ukraine (ICSID Case No. ARB/06/18), Decision on Jurisdiction and Liability of 21 January 2010 (34) [ Juan Fernández-Armesto (pres.), Jan Paulsson, Jürgen Voss] [The Claimant, Joseph C. Lemire, was a US businessman and majority shareholder in a radio station in Ukraine. Mr Lemire sought damages in ICSID to correct interferences with the station's radio frequency and to allocate radio frequencies to the radio station. He made two claims. The first arose out of a settlement agreed between the parties concluding a previous ICSID case filed by Mr Lemire against Ukraine (Lemire v. Ukraine (ICSID Case No ARB(AF)/98/1)). The settlement contained an ICSID arbitration clause and was recorded as an ICSID award on agreed terms. The second claim was for breach of the BIT. The Claimant was partly successful on the merits. The Tribunal found that the process of awarding broadcasting frequencies by Ukraine was arbitrary and discriminatory and therefore violated the fair and equitable treatment standard in the BIT. The Tribunal found no breach of the settlement agreement.] VI.1. Applicable Law 106. Clause 30 of the Settlement Agreement provides that the applicable law shall be that determined by “Article 55 of the ICSID Additional Facility Arbitration Rules”. The relevant article in the Additional Facility Rules is in fact Article 54. The mistake is an obvious typographical error, and the Tribunal has no doubt that the common intent of the parties was to refer to Article 54. In accordance with this rule the Tribunal shall apply “(a) the law determined by the conflict of laws rules which it considers applicable and (b) such rules of international law as the Tribunal considers applicable”. 107. Should the Tribunal make use of this authorization to apply not only a municipal law, determined through conflict of laws rules, but also the “rules of international law… the Tribunal considers applicable”?

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108. The Settlement Agreement contains an extensive chapter called “Principles of Interpretation and Implementation of the Agreement”, which includes Clauses 20 through 26. These Clauses were reproduced, with very light linguistic adjustments, from the 1994 UNIDROIT Principles. 109. It is impossible to place the UNIDROIT Principles – a private codification of civil law, approved by an intergovernmental institution – within the traditional sources of law. The UNIDROIT Principles are neither treaty, nor compilation of usages, nor standard terms of contract. They are in fact a manifestation of transnational law. 110. As the Preamble to the Principles states, they “shall be applied when the parties have agreed that their contract be governed by them” and they “may be applied when P 510 the parties have agreed that their contract be governed by ‘general principles of law’, the ‘lex mercatoria’ or the like”. 111. When negotiating the Settlement Agreement, the parties evidently gave thought to the issue of applicable law, and were apparently unable to reach an agreement to apply either Ukrainian or US law. In this situation, what the parties did was to incorporate extensive parts of the UNIDROIT Principles into their agreement, and to include a clause which authorises the Tribunal either to select a municipal legal system, or to apply the rules of law the Tribunal considers appropriate. Given the parties' implied negative choice of any municipal legal system, the Tribunal finds that the most appropriate decision is to submit the Settlement Agreement to the rules of international law, and within these, to have particular regard to the UNIDROIT Principles.

[H] Comments and Questions P 510 In the end, then, what is the lex mercatoria?

References 1) Reprinted with permission of Oxford University Press. All rights reserved. 2) But see FA Mann, “Lex facit arbitrum”, in P. Sanders (ed.), International Arbitration:

Liber Amicorum Martin Domke (The Hague, Martinus Nijhoff, 1967).

3) See Section 6 of this Chapter. 4) See, for example, New York Convention on the Recognition and Enforcement of

Foreign Arbitral Awards (New York, 10 June 1958), UNTS, vol. 330 (1959), p. 39, Articles III, V; Convention on the Settlement of Investment Disputes between States and Nationals of other States (Washington, 18 March 1965), UNTS, vol. 575 (1966), p. 160, Articles 53, 54; UNCITRAL Model Law on International Commercial Arbitration (21 June 1985), Articles 35, 36; European Convention on International Commercial Arbitration (Geneva, 21 April 1961), UNTS, vol. 484 (1963-64), p. 364, Articles VI, IX; Inter-American Convention on International Commercial Arbitration (Panama, 30 January 1975), UNTS, vol. 1438 (1986), p. 248, Articles 4, 5.

5) Cf. Whitworth Street Estates (Manchester) Ltd v James Miller & Partners Ltd [1970] AC

583.

6) Cf Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334, 357-8

7) 8) 9) 10) 11) 12)

13)

(Lord Mustill). On the choice of the seat and the relation between it and the places where hearing and deliberation occurs see ICC Rules, Arts 14, 25 (3); UNCITRAL Model Law, Arts 1(2), 20; UNCITRAL Rules, Art 16. Available at http://www.iccwbo.org/Products-and-Services/Arbitration-andADR/Arbitration/ICC-Rules- of-Arbitration/ (accessed 1 September 2013). Available at http://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/0786998_Ebook.pdf (accessed 1 September 2013). Available at http://www.uncitral.org/pdf/english/texts/arbitration/arb-rulesrevised/arb-rules-revised-2010-e. pdf (accessed 1 September 2013). Award on the Merits of 21 October 1983, 2 ICSID Reports 9 (Dr Eduardo Jiménez de Aréchaga, President, Mr William Rogers and Professor Dominique Schmidt, Members). The dispute was subsequently re-submitted and an Award was rendered on 26 January 1988. An annulment application was commenced and rejected by the ad hoc Committee on 17 May 1990. The decisions are not publicly available. Decision on Jurisdiction of 25 September 1983, Decision on Provisional Measures of 9 December 1983, and Award on the Merits of 20 November 1984, 1 ICSID Reports, pp. 389, 410 and 413 respectively (Professor Berthold Goldman, President, Professor Isi Foighel and Mr Edward Rubin, Members). Decision on Jurisdiction of 10 May 1988, Award on the Merits of 31 May 1990, and Rectification of 10 October 1990, 1 ICSID Reports, pp. 543, 569, and 638 respectively (Professor Rosalyn Higgins, President, Mr Marc Lalonde and Mr Per Magid, Members). A second annulment challenge was subsequently made and decided by a different panel: Decision rejecting the parties' applications for annulment of the Award and annulling the Decision on Supplemental Decisions and Rectification rendered on December 17, 1992, 9 ICSID Reports (forthcoming) (Sompong Sucharitkul, President; Arghyrios A. Fatouros, Dietrich Schindler, Members).

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14) Reprinted with permission of Oxford University Press. All rights reserved. 15) Available at http://www.italaw.com/sites/default/files/case-documents/ita0903.pdf

(accessed 1 September 2013).

16) Available at http://italaw.com/sites/default/files/case-documents/ita0065.pdf 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34)

(accessed 1 September 2013). © 1984 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. Available at http://www.iusct.net/Default.aspx. Reprinted with permission of Kluwer Law International. All rights reserved. Reprinted with permission of Oxford University Press. All rights reserved. 4 ICSID Reports 245, at pp. 297-299. 40 ILM 426 (2001). Ibid., at p. 445. Ibid., at p. 443. Decision on Annulment, para. 115. Available at http://italaw.com/sites/default/files/case-documents/ita0006.pdf (accessed 1 September 2013). Available at http://untreaty.un.org/cod/avl/pdf/ha/sicj/icj_statute_e.pdf (accessed 1 September 2013). Available at http://www.iusct.net/Default.aspx. 84 ILR 489. Reprinted with permission of Oxford University Press. All rights reserved. Available at http://www.iusct.net/Default.aspx. 22 Iran-US CTR (1989-II) 257, at pp. 286-289. Copyright 2002 by the International Chamber of Commerce (ICC). Reprinted with permission. All rights reserved. See further the ICC Dispute Resolution Library (http://www.iccdrl.com). Available at http://italaw.com/sites/default/files/case-documents/ita0453.pdf (accessed 1 September 2013).

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Chapter 7: International Responsibility: General Principles

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Publication

§7.01 DEVELOPMENT OF THE LAW OF STATE RESPONSIBILITY

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

As seen in Chapter 6, the applicable law in an investment dispute may be the law of the state on whose territory the investment is made, international law, or a combination of the two, depending on the structure of the transaction, the terms of the investment agreement and any relevant treaties. The parties to an investment agreement may also adopt a foreign law as the governing law. Traditionally international law provided only a second-tier standard for assessing the treatment of foreign investment under the law of the receiving state. The vehicle for applying this standard was diplomatic protection, i.e., the espousal by the state of nationality of its national's claim that it has been wrongfully treated. The doctrine of exhaustion of local remedies was integral to the system of diplomatic protection; it was only when available local remedies had been exhausted that there was any possibility of an international claim, and the claim was conceived as that of the state, not the investor.

Topics

Investment Arbitration

Bibliographic reference

'Chapter 7: International Responsibility: General Principles', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 511 582

[A] The Concept of Diplomatic Protection [1] Mavrommatis Palestine Concessions (Greece v. United Kingdom), Decision on Jurisdiction of 30 August 1924, [1924] P.C.I.J. Series A – No. 2, 5, 12 (1924) [Since 1921, the Governments of Palestine and the United Kingdom allegedly failed to recognise to their full extent rights acquired by M. Mavrommatis, a Greek national, under certain contracts and agreements with the Ottoman authorities. Consequently, the Greek Government brought an action against the United Kingdom before the Permanent Court of International Justice seeking reparations for the losses incurred by Mavrommatis.] In the case of the Mavrommatis concessions it is true that the dispute was at first between a private person and a State – i.e. between M. Mavrommatis and Great Britain. Subsequently, the Greek Government took up the case. The dispute then entered upon a new phase; it entered the domain of international law, and became a dispute between two States. Henceforward therefore it is a dispute which may or may not fall under the jurisdiction of the Permanent Court of International justice. … It is an elementary principle of international law that a State is entitled to protect its subjects, when injured by acts contrary to international law committed by another State, from whom they have been unable to obtain satisfaction through the ordinary channels. By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights – its right to ensure, in the person of its subjects, respect for the rules of P 512 international law. The question, therefore, whether the present dispute originates in an injury to a private interest, which in point of fact is the case in many international disputes, is irrelevant from this standpoint. Once a State has taken up a case on behalf of one of its subjects before an international tribunal, in the eyes of the latter the State is sole claimant. [2] Panevezys-Saldutiskis Railway (Estonia v. Lithuania), Judgment of 28 February 1939, [1939] P.C.I.J. Series A/B – No. 76, 5, 6, 16 (1939) [The Estonian Government brought an action against the Lithuanian Government before the Permanent Court of International Justice. The application sought compensation for the failure of the Lithuanian Government to recognise proprietary and concessionary rights claimed by the company Esimene Juurdeveo Raudteede Selts Venemaal in the Panevezys-Saldutiskis railway which had been seized and operated by the Lithuanian Government.] *** The objections raised by the Lithuanian Government to the claims of the Estonian Government were two in number, the first being based on “the non-observance by the Estonian Government of the rule of international law to the effect that a claim must be a national claim not only at the time of its presentation but also at the time when the injury was suffered… *** In the opinion of the Court, the rule of international law on which the first Lithuanian objection is based is that in taking up the case of one of its nationals, by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own right, the right to ensure in the person of its nationals respect for the rules of international law. This right is necessarily limited to intervention on behalf of its own nationals because, in the absence of a special agreement, it is the bond of nationality between the State and the individual which alone confers upon the State the right of diplomatic protection, and it is as a part of the function of diplomatic protection that the right to take up a claim and to ensure respect for the rules of international law

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must be envisaged. Where the injury was done to the national of some other State, no claim to which such injury may give rise falls within the scope of the diplomatic protection which a State is entitled to afford nor can it give rise to a claim which that State is entitled to espouse. [3] Nottebohm (Liechtenstein v. Guatemala), Second Phase, Judgment of 6 April 1955, [1955] I.C.J. Rep. 4, 16-17, 20-24, 26 (1955) [By application of 17 December 1951, the Government of Liechtenstein brought proceedings before the International Court of Justice claiming restitution and compensation on the basis that the Government of Guatemala had “acted towards the person and property of Mr. Friedrich Nottebohm, a citizen of Liechtenstein, in a manner contrary to international law”. Nottebohm was born in Germany in 1881. From 1905 to 1943, he resided and conducted business activities in Guatemala, making occasional visits to Germany and Liechtenstein where his brother lived from 1931. He applied for naturalization in Liechtenstein and was naturalized in 1939. The relevant Liechtenstein law made naturalization conditional upon at least three years' residence except in P 513 special circumstances. Nottebohm sought (and was apparently granted) waiver of this condition without indicating any special circumstances. Having received a Liechtenstein passport in 1939, he returned to Guatemala early in 1940.] *** In order to decide upon the admissibility of the Application, the Court must ascertain whether the nationality conferred on Nottebohm by Liechtenstein by means of a naturalization which took place in the circumstances which have been described, can be validly invoked as against Guatemala, whether it bestows upon Liechtenstein a sufficient title to the exercise of protection in respect of Nottebohm as against Guatemala and therefore entitles it to seise the Court of a claim relating to him. In this connection, Counsel for Liechtenstein said: “the essential question is whether Mr Nottebohm, having acquired the nationality of Liechtenstein, that acquisition of nationality is one which must be recognized by other States”. This formulation is accurate, subject to the twofold reservation that, in the first place, what is involved is not recognition for all purposes but merely for the purposes of the admissibility of the Application, and, secondly, that what is involved is not recognition by all States but only by Guatemala. *** It is for Liechtenstein, as it is for every sovereign State, to settle by its own legislation the rules relating to the acquisition of its nationality, and to confer that nationality by naturalization granted by its own organs in accordance with that legislation. It is not necessary to determine whether international law imposes any limitations on its freedom of decision in this domain. Furthermore, nationality has its most immediate, its most farreaching and, for most people, its only effects within the legal system of the State conferring it. Nationality serves above all to determine that the person upon whom it is conferred enjoys the rights and is bound by the obligations which the law of the State in question grants to or imposes on its nationals. This is implied in the wider concept that nationality is within the domestic jurisdiction of the State. But the issue which the Court must decide is not one which pertains to the legal system of Liechtenstein. It does not depend on the law or on the decision of Liechtenstein whether that State is entitled to exercise its protection, in the case under consideration. To exercise protection, to apply to the Court, is to place one-self on the plane of international law. It is international law which determines whether a State is entitled to exercise protection and to seise the Court. The naturalization of Nottebohm was an act performed by Liechtenstein in the exercise of its domestic jurisdiction. The question to be decided is whether that act has the international effect here under consideration. *** When one State has conferred its nationality upon an individual and another State has conferred its own nationality on the same person, it may occur that each of these States, considering itself to have acted in the exercise of its domestic jurisdiction, adheres to its own view and bases itself thereon in so far as its own actions are concerned. In so doing, each State remains within the limits of its domestic jurisdiction. This situation may arise on the international plane and fall to be considered by international arbitrators or by the courts of a third State. If the arbitrators or the courts of such a State should confine themselves to the view that nationality is exclusively within P 514 the domestic jurisdiction of the State, it would be necessary for them to find that they were confronted by two contradictory assertions made by two sovereign States, assertions which they would consequently have to regard as of equal weight, which would oblige them to allow the contradiction to subsist and thus fail to resolve the conflict submitted to them. … International arbitrators have decided in the same way numerous cases of dual nationality, where the question arose with regard to the exercise of protection. They have given their preference to the real and effective nationality, that which accorded with the

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facts, that based on stronger factual ties between the person concerned and one of the States whose nationality is involved. Different factors are taken into consideration, and their importance will vary from one case to the next: the habitual residence of the individual concerned is an important factor, but there are other factors such as the centre of his interests, his family ties, his participation in public life, attachment shown by him for a given country and inculcated in his children, etc. *** The character thus recognized on the international level as pertaining to nationality is in no way inconsistent with the fact that international law leaves it to each State to lay down the rules governing the grant of its own nationality. The reason for this is that the diversity of demographic conditions has thus far made it impossible for any general agreement to be reached on the rules relating to nationality, although the latter by its very nature affects international relations. It has been considered that the best way of making such rules accord with the varying demographic conditions in different countries is to leave the fixing of such rules to the competence of each State. On the other hand, a State cannot claim that the rules it has thus laid down are entitled to recognition by another State unless it has acted in conformity with this general aim of making the legal bond of nationality accord with the individual's genuine connection with the State which assumes the defence of its citizens by means of protection as against other States. … According to the practice of States, to arbitral and judicial decisions and to the opinions of writers, nationality is a legal bond having as its basis a social fact of attachment, a genuine connection of existence, interests and sentiments, together with the existence of reciprocal rights and duties. It may be said to constitute the juridical expression of the fact that the individual upon whom it is conferred, either directly by the law or as the result of an act of the authorities, is in fact more closely connected with the population of the State conferring nationality than with that of any other State. Conferred by a State, it only entitles that State to exercise protection vis-à-vis another State, if it constitutes a translation into juridical terms of the individual's connection with the State which has made him its national. … Since this is the character which nationality must present when it is invoked to furnish the State which has granted it with a title to the exercise of protection and to the institution of international judicial proceedings, the Court must ascertain whether the nationality granted to Nottebohm by means of naturalization is of this character or, in other words, whether the factual connection between Nottebohm and Liechtenstein in the period preceding, contemporaneous with and following his naturalization appears to be sufficiently close, so preponderant in relation to any connection which may have existed between him and any other State, that it is possible to regard the nationality conferred upon him as real and effective, as the exact juridical expression of a social fact of a connection which existed previously or came into existence thereafter. Naturalization is not a matter to be taken lightly. To seek and to obtain it is not something that happens frequently in the life of a human being. It involves his breaking P 515 of a bond of allegiance and his establishment of a new bond of allegiance. It may have far-reaching consequences and involve profound changes in the destiny of the individual who obtains it. It concerns him personally, and to consider it only from the point of view of its repercussions with regard to his property would be to misunderstand its profound significance. In order to appraise its international effect, it is impossible to disregard the circumstances in which it was conferred, the serious character which attaches to it, the real and effective, and not merely the verbal preference of the individual seeking it for the country which grants it to him. At the time of his naturalization does Nottebohm appear to have been more closely attached by his tradition, his establishment, his interests, his activities, his family ties, his intentions for the near future to Liechtenstein than to any other State? The essential facts appear with sufficient clarity from the record… [The Court reviewed the factual position and continued:] These facts clearly establish, on the one hand, the absence of any bond of attachment between Nottebohm and Liechtenstein and, on the other hand, the existence of a longstanding and close connection between him and Guatemala, a link which his naturalization in no way weakened. That naturalization was not based on any real prior connection with Liechtenstein, nor did it in any way alter the manner of life of the person upon whom it was conferred in exceptional circumstances of speed and accommodation. In both respects, it was lacking in the genuineness requisite to an act of such importance, if it is to be entitled to be respected by a State in the position of Guatemala. It was granted without regard to the concept of nationality adopted in international relations. Naturalization was asked for not so much for the purpose of obtaining a legal recognition of Nottebohm's membership in fact in the population of Liechtenstein, as it was to enable him to substitute for his status as a national of a belligerent State that of a national of a neutral State, with the sole aim of thus coming within the protection of Liechtenstein but not of becoming wedded to its traditions, its interests, its way of life or of assuming the obligations – other than fiscal obligations – and exercising the rights pertaining to the status thus acquired.

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Guatemala is under no obligation to recognize a nationality granted in such circumstances. Liechtenstein consequently is not entitled to extend its protection to Nottebohm vis-à-vis Guatemala and its claim must, for this reason, be held to be inadmissible. The Court is not therefore called upon to deal with the other pleas in bar put forward by Guatemala or the Conclusions of the Parties other than those on which it is adjudicating in accordance with the reasons indicated above. For these reasons, THE COURT, by eleven votes to three, Holds that the claim submitted by the Government of the Principality of Liechtenstein is

P 575 inadmissible.

[4] Comments and Questions 1. 2. 3.

What is the ratio of the decision? Is it that Nottebohm was not a Liechtenstein national at the relevant time? What is the relevant time? After his expulsion from Guatemala Nottebohm went to Liechtenstein to live, and his family still lives there. Should this have made a difference? Was it relevant that Nottebohm's previous nationality was German?

[5] Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) (New Application: 1962), Second Phase, Judgment of 5 February 1970, [1970] I.C.J. Rep. 3, 41-51 (1970) [The Barcelona Traction, Light and Power Company Limited was incorporated under Canadian law and had its head office in Toronto. For the purposes of developing electricity supplies in Spain, it established several subsidiaries, some of which were incorporated under Canadian law, and others under Spanish law. The company suffered injury as a result of various decisions by Spanish authorities. The Canadian Government intervened initially on behalf of the company, but later withdrew. Belgium claimed that the majority of the shares in the company were owned by Belgian nationals and accordingly brought an action before the ICJ in respect of injury to its nationals resulting from injury to the company. Spain objected that Belgium lacked locus standi to bring the claim as the injury was to the company rather than to the shareholders. The Court joined that preliminary objection to the merits and made the following comments on nationality of corporations.] 69. The Court will now turn to the… possibility… of the lack of capacity of the company's national State to act on its behalf. The first question which must be asked here is whether Canada – the third apex of the triangular relationship – is, in law, the national State of Barcelona Traction. 70. In allocating corporate entities to States for purposes of diplomatic protection, international law is based, but only to a limited extent, on an analogy with the rules governing the nationality of individuals. The traditional rule attributes the right of diplomatic protection of a corporate entity to the State under the laws of which it is incorporated and in whose territory it has its registered office. These two criteria have been confirmed by long practice and by numerous international instruments. This notwithstanding, further or different links are at times said to be required in order that a right of diplomatic protection should exist. Indeed, it has been the practice of some States to give a company incorporated under their law diplomatic protection solely when it has its seat (siège social) or management or centre of control in their territory, or when a majority or a substantial proportion of the shares has been owned by nationals of the State concerned. Only then, it has been held, does there exist between the corporation and the State in question a genuine connection of the kind familiar from other branches of international law. However, in the particular field of the diplomatic protection of corporate entities, no absolute test of the “genuine connection” has found general acceptance. Such tests as have been applied are of a relative nature, and sometimes links with one State have had to be weighed against those with another. In this connection reference has been made to the Nottebohm case. In fact the Parties made frequent reference to it in the course of the proceedings. However, given both the legal and factual aspects of protection in the present case the Court is of the opinion that there can be no analogy with the issues raised or the decision given in that case. 71. In the present case, it is not disputed that the company was incorporated in Canada and has its registered office in that country. The incorporation of the company under the law of Canada was an act of free choice. Not only did the founders of the company seek its incorporation under Canadian law but it has remained under that law for a period of over 50 years. It has maintained in Canada its registered office, its accounts and its share registers. Board meetings were held there for many years; it has been listed in the records of the Canadian tax authorities. Thus a close and permanent connection has been established, fortified by the passage of over half a century. This connection is in no way weakened by the fact that the company engaged from the very outset in commercial

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activities outside Canada, for that was its declared object. Barcelona Traction's links with Canada are thus manifold. *** 76. In sum, the record shows that from 1948 onwards the Canadian Government made to the Spanish Government numerous representations which cannot be viewed otherwise than as the exercise of diplomatic protection in respect of the Barcelona Traction company. Therefore this was not a case where diplomatic protection was refused or remained in the sphere of fiction. It is also clear that over the whole period of its diplomatic activity the Canadian Government proceeded in full knowledge of the Belgian attitude and activity. 77. It is true that at a certain point the Canadian Government ceased to act on behalf of Barcelona Traction, for reasons which have not been fully revealed, though a statement made in a letter of 19 July 1955 by the Canadian Secretary of State for External Affairs suggests that it felt the matter should be settled by means of private negotiations. The Canadian Government has nonetheless retained its capacity to exercise diplomatic protection; no legal impediment has prevented it from doing so: no fact has arisen to render this protection impossible. It has discontinued its action of its own free will. 78. The Court would here observe that, within the limits prescribed by international law, a State may exercise diplomatic protection by whatever means and to whatever extent it thinks fit, for it is its own right that the State is asserting. Should the natural or legal persons on whose behalf it is acting consider that their rights are not adequately protected, they have no remedy in international law. All they can do is to resort to municipal law, if means are available, with a view to furthering their cause or obtaining redress. The municipal legislator may lay upon the State an obligation to protect its citizens abroad, and may also confer upon the national a right to demand the performance of that obligation, and clothe the right with corresponding sanctions. However, all these questions remain within the province of municipal law and do not affect the position internationally. 79. The State must be viewed as the sole judge to decide whether its protection will be granted, to what extent it is granted, and when it will cease. It retains in this respect a discretionary power the exercise of which may be determined by considerations of a political or other nature, unrelated to the particular case. Since the claim of the State is not identical with that of the individual or corporate person whose cause is espoused, the State enjoys complete freedom of action. Whatever the reasons for any change of attitude, the fact cannot in itself constitute a justification for the exercise of diplomatic protection by another government, unless there is some independent and otherwise valid ground for that. 80. This cannot be regarded as amounting to a situation where a violation of law remains without remedy: in short, a legal vacuum.… There is no obligation upon the possessors of rights to exercise them. Sometimes no remedy is sought, though rights are infringed. To equate this with the creation of a vacuum would be to equate a right with an obligation. 81. The cessation by the Canadian Government of the diplomatic protection of Barcelona Traction cannot, then, be interpreted to mean that there is no remedy against the Spanish Government for the damage done by the allegedly unlawful acts of the Spanish authorities. It is not a hypothetical right which was vested in Canada, for there is no legal impediment preventing the Canadian Government from protecting Barcelona Traction. Therefore there is no substance in the argument that for the Belgian Government to bring a claim before the Court represented the only possibility of obtaining redress for the damage suffered by Barcelona Traction and, through it, by its shareholders. *** 88. It follows from what has already been stated above that, where it is a question of an unlawful act committed against a company representing foreign capital, the general rule of international law authorizes the national State of the company alone to make a claim. 89. Considering the important developments of the last half-century, the growth of foreign investments and the expansion of the international activities of corporations, in particular of holding companies, which are often multinational, and considering the way in which the economic interests of States have proliferated, it may at first sight appear surprising that the evolution of law has not gone further and that no generally accepted rules in the matter have crystallized on the international plane. Nevertheless, a more thorough examination of the facts shows that the law on the subject has been formed in a period characterized by an intense conflict of systems and interests. It is essentially bilateral relations which have been concerned, relations in which the rights of both the State exercising diplomatic protection and the State in respect of which protection is sought have had to be safeguarded. Here as elsewhere, a body of rules could only have developed with the consent of those concerned. The difficulties encountered have been reflected in the evolution of the law on the subject. 90. Thus, in the present state of the law, the protection of shareholders requires that recourse be had to treaty stipulations or special agreements directly concluded between the private investor and the State in which the investment is placed. States ever more

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frequently provide for such protection, in both bilateral and multilateral relations, either by means of special instruments or within the framework of wider economic arrangements. Indeed, whether in the form of multilateral or bilateral treaties between States, or in that of agreements between States and companies, there has since the Second World War been considerable development in the protection of foreign investments. The instruments in question contain provisions as to jurisdiction and procedure in case of disputes concerning the treatment of investing companies by the States in which they invest capital. Sometimes companies are themselves vested with a direct right to defend their interests against States through prescribed procedures. No such instrument is in force between the Parties to the present case. *** 92. Since the general rule on the subject does not entitle the Belgian Government to put forward a claim in this case, the question remains to be considered whether nonetheless, as the Belgian Government has contended during the proceedings, considerations of equity do not require that it be held to possess a right of protection.… 94. In view, however, of the discretionary nature of diplomatic protection, considerations of equity cannot require more than the possibility for some protector State to intervene, whether it be the national State of the company, by virtue of the general rule mentioned above, or, in a secondary capacity, the national State of the shareholders who claim protection. In this connection, account should also be taken of the practical effects of deducing from considerations of equity any broader right of protection for the national State of the shareholders. It must first of all be observed that it would be difficult on an equitable basis to make distinctions according to any quantitative test: it would seem that the owner of 1 per cent. and the owner of 90 per cent. of the share-capital should have the same possibility of enjoying the benefit of diplomatic protection. The protector State may, of course, be disinclined to take up the case of the single small shareholder, but it could scarcely be denied the right to do so in the name of equitable considerations. In that field, protection by the national State of the shareholders can hardly be graduated according to the absolute or relative size of the shareholding involved. *** 96. The Court considers that the adoption of the theory of diplomatic protection of shareholders as such, by opening the door to competing diplomatic claims, could create an atmosphere of confusion and insecurity in international economic relations. The danger would be all the greater inasmuch as the shares of companies whose activity is international are widely scattered and frequently change hands. It might perhaps be claimed that, if the right of protection belonging to the national States of the shareholders were considered as only secondary to that of the national State of the company, there would be less danger of difficulties of the kind contemplated. However, the Court must state that the essence of a secondary right is that it only comes into existence at the time when the original right ceases to exist. As the right of protection vested in the national State of the company cannot be regarded as extinguished because it is not exercised, it is not possible to accept the proposition that in case of its nonexercise the national States of the shareholders have a right of protection secondary to that of the national State of the company. Furthermore, study of factual situations in which this theory might possibly be applied gives rise to the following observations. 97. The situations in which foreign shareholders in a company wish to have recourse to diplomatic protection by their own national State may vary. It may happen that the national State of the company simply refuses to grant it its diplomatic protection, or that it begins to exercise it (as in the present case) but does not pursue its action to the end. It may also happen that the national State of the company and the State which has committed a violation of international law with regard to the company arrive at a settlement of the matter, by agreeing on compensation for the company, but that the foreign shareholders find the compensation insufficient. Now, as a matter of principle, it would be difficult to draw a distinction between these three cases so far as the protection of foreign shareholders by their national State is concerned, since in each case they may have suffered real damage. Furthermore, the national State of the company is perfectly free to decide how far it is appropriate for it to protect the company, and is not bound to make public the reasons for its decision. To reconcile this discretionary power of the company's national State with a right of protection falling to the shareholders' national State would be particularly difficult when the former State has concluded, with the State which has contravened international law with regard to the company, an agreement granting the company compensation which the foreign shareholders find inadequate. If, after such a settlement, the national State of the foreign shareholders could in its turn put forward a claim based on the same facts, this would be likely to introduce into the negotiation of this kind of agreement a lack of security which would he contrary to the stability which it is the object of international law to establish in international relations. 98. It is quite true, as recalled in paragraph 53, that international law recognizes parallel rights of protection in the case of a person in the service of an international organization. Nor is the possibility excluded of concurrent claims being made on behalf of persons

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having dual nationality, although in that case lack of a genuine link with one of the two States may be set up against the exercise by that State of the right of protection. It must be observed, however, that in these two types of situation the number of possible protectors is necessarily very small, and their identity normally not difficult to determine. In this respect such cases of dual protection are markedly different from the claims to which recognition of a general right of protection of foreign shareholders by their various national States might give rise. 99. It should also be observed that the promoters of a company whose operations will be international must take into account the fact that States have, with regard to their nationals, a discretionary power to grant diplomatic protection or to refuse it. When establishing a company in a foreign country, its promoters are normally impelled by particular considerations; it is often a question of tax or other advantages offered by the host State. It does not seem to be in any way inequitable that the advantages thus obtained should be balanced by the risks arising from the fact that the protection of the company and hence of its shareholders is thus entrusted to a State other than the national State of the shareholders. 100. In the present case, it is clear from what has been said above that Barcelona Traction was never reduced to a position of impotence such that it could not have approached its national State, Canada, to ask for its diplomatic protection, and that, as far as appeared to the Court, there was nothing to prevent Canada from continuing to grant its diplomatic protection to Barcelona Traction if it had considered that it should do so. 101. For the above reasons, the Court is not of the opinion that, in the particular circumstances of the present case, jus standi is conferred on the Belgian Government by considerations of equity. *** 103. Accordingly, THE COURT rejects the Belgian Government's claim by fifteen votes to one, twelve votes of the majority being based on the reasons set out in the present Judgment. [6] Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), Judgment of 20 July 1989, [1989] I.C.J. Rep. 15, 89-93 (1989) [The United States of America initiated action before the International Court of Justice against the Republic of Italy for compensation for violation of its international legal obligations under a Treaty of Friendship, Commerce and Navigation of 2 February 1948. The Government of Italy had requisitioned the plant and related assets of Raytheon-Elsi S.p.A., previously known as Elettronica Sicula S.p.A. (ELSI), an Italian company whollyowned by two United States corporations, Raytheon and Machlett.] Separate Opinion of Judge Oda *** The real issue in the present case relates to ELSI as an Italian corporation controlled by United States corporations (Raytheon and Machlett) or as an enterprise in Italy in which those United States corporations had a substantial interest. If the FCN Treaty is to afford protection to the investments of nationals of one State party in the territory of another State party, this cannot be done by means of the provisions listed above. There are, however, certain provisions in the FCN Treaty which are specifically designed to protect the interests of United States corporations possessing stock or a substantial interest in an Italian corporation or enterprise or, more concretely, the interests of Raytheon and Machlett (United States corporations) as shareholders of ELSI (an Italian company)… Such provisions are not unique to this FCN Treaty but are also found in others (cf. DenmarkUnited Slates, Arts. VI (5), VIII (2); Japan-United States, Arts. VI (4), VII (1), (4); Fed. Rep. of Germany- United States, Arts. V (5), VII (1), (4); Netherlands-United States, Arts. VI (5), VII (1), (4); etc.). Article III (1) provides in casu that the Italian company (ELSI) that was “organized or participated in” and “controlled” by United States corporations (Raytheon and Machlett) was to be permitted to exercise the functions for which it was created or organized upon terms no less favourable than those accorded to corporations that were “organized or participated in” and “controlled” by corporations of any third country. Article III (2) provides in casu that the Italian company (ELSI) that was “controlled” by United States corporations (Raytheon and Machlett) was to be permitted to engage in commercial, manufacturing or other activities in Italy in conformity with the applicable laws and regulations upon terms no less favourable than those accorded to Italian corporations controlled by Italians. Article V (3) provides that in all matters relating to the taking of privately owned enterprises into public ownership and the placing of such enterprises under public control, an enterprise in Italy (ELSI), in which United States corporations (Raytheon and Machlett) had a substantial interest, was to be accorded treatment no less favourable

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than that accorded to those enterprises in which Italian corporations or any third country's corporations had a substantial interest. These three provisions are extraordinary provisions, intended to ensure that a firm such as ELSI can still be protected in Italy by the Treaty, despite the fact that it is an Italian company operating in that country. Yet they were ignored by both Parties in the proceedings and the Judgment contains scarcely any reference to them. It is a great privilege to be able to engage in business in a country other than one's own. By being permitted to undertake commercial or manufacturing activities or transactions through businesses incorporated in another country, nationals of a foreign country will obtain further benefits. Yet these local companies, as legal entities of that country, are subject to local laws and regulations; so that foreigners may have to accept a number of restrictions in return for the advantages of doing business through such local companies. The Italy-United States FCN Treaty, like some other FCN treaties as mentioned above, nonetheless guarantees security to local companies in which nationals of the other State party have invested, inasmuch as it provides that they must, by virtue of Article III (1) (second sentence), be given treatment no less favourable than that afforded to local companies “organized or participated in” and “controlled” by third-country companies while, by virtue of Article III (2) (second sentence), they are to be given treatment no less favourable than that afforded to local companies “controlled” by local nationals. Moreover, in matters relating to the “taking of… enterprises into public ownership and the placing of… [them] under public control” (Art. V (3), second sentence), that Treaty also guarantees special protection to enterprises in which the corporations of the other State party have a substantial interest. In this respect I would like to point out, as a supplementary explanation, that the verb “take”, as expressed by “espropriare” in the Italian text, is rendered in the 1956 FCN Treaty between the Federal Republic of Germany and the United States by the German verb “enteignen”, which militates against the acceptance of an interpretation of the requisition order of the Mayor of Palermo as amounting to a “taking” of property. Such local companies or enterprises have dual characteristics in that they are both local corporations or enterprises and, at the same time, corporations specifically controlled by nationals (corporations) of the other State party to the FCN Treaty or enterprises in which those nationals (corporations) have a substantial interest. In view of these characteristics, the State party under whose law the company in question is incorporated is responsible to the other State party for guaranteeing that company's right to exercise the functions for which it was created, on the basis of the most-favoured-nation treatment, or to engage in its business transactions, on the basis of the national treatment; and the State party on whose territory the enterprise is located is responsible to the other State party for affording special protection to that enterprise in the event of its being placed under public control. One could well be led to wonder whether a foreign country (the United States) whose nationals practically controlled the corporation (ELSI) of the host country (Italy) or had a substantial interest in the enterprise (ELSI) in that host country could in fact espouse the cause of that company in a dispute with the latter country. This question brings one up against a paradox. However, I believe that, by availing itself of Article III (1) (second sentence), Article III (2) (second sentence) and Article V (3) (second sentence) of the 1948 FCN Treaty (which provisions, as I repeat, are not unique to this Treaty), the United States could properly have espoused the cause of ELSI, an Italian company, against the Italian Government. This is why I have referred to these provisions of the FCN Treaty as “extraordinary” and why I believe that the complaint against Italy should have been presented to the Court only in reliance on those provisions which alone protect the interests of United States nationals (Raytheon and Machlett), as shareholders, albeit in an indirect way. The United States failed, however, to frame its Application along those lines, while non-relevant provisions were repeatedly invoked. To recapitulate, ELSI (an Italian company) and, later, its trustee in bankruptcy, brought municipal legal proceedings to challenge the requisition order of the Mayor of Palermo. It took its case to the highest court in Italy and is accordingly considered to have exhausted all available municipal remedies. Thus the United States could have espoused the cause of ELSI on the grounds of “denial of justice” if the judgment of the domestic court of Italy at the highest level had been found to be “manifestly unjust” in its application of the FCN Treaty. Neither ELSI, nor its trustee in bankruptcy acting on its behalf, so much as invoked the FCN Treaty in those municipal proceedings. (The assertion that the FCN Treaty is non-selfexecuting could not have been used by ELSI as an excuse for failure to invoke it before the municipal courts of Italy, since enabling legislation had been enacted in that country.) Nor has evidence been brought by the Applicant to show that, as a consequence of the requisition order of 1 April 1968, ELSI received less favourable treatment than any other Italian corporation controlled by nationals of any third country in exercising its functions, or less favourable treatment than that afforded any Italian corporation controlled by Italians; again, supposing that the present case relates to an enterprise

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placed under public control, no evidence has been brought to show that ELSI was accorded less favourable treatment than any other enterprise. *** Even if the present proceedings had been brought in an espousal of ELSI's cause, by applying the proper provisions which guaranteed ELSI the most-favoured-nation treatment or national treatment, the Applicant would have had to provide sufficient evidence to show that ELSI had been denied justice in the Italian courts. It has failed to do so. [7] LaGrand (Germany v. United States of America), Judgment of 27 June 2001, [2001] I.C.J. Rep. 466, 480-483, 492-494 (2001) [Karl and Walter LaGrand were German nationals who had resided permanently in the United States since 1967. In 1982, they were arrested on suspicion of having been involved in an armed bank robbery in Arizona during which the bank manager was murdered and another bank employee seriously injured. On 14 December 1984, each was sentenced to death for first degree murder by the Superior Court of Pima County, Arizona. Article 36(1) (b) of the Vienna Convention on Consular Relations, to which both Germany and the United States were parties, required the competent authorities of the receiving State to inform “without delay” an arrested person of his or her rights to contact the consular post of the sending State. At the time the LaGrands were convicted and sentenced, United States authorities failed to provide them with the information required by the Convention, and did not inform the German consular post of their arrest. The LaGrands were formally notified by the United States of their right to consular access on 21 December 1998. On 15 January 1999, the Supreme Court of Arizona set Karl's and Walter's execution dates as 24 February 1999 and 3 March 1999 respectively. In January and February 1999, Germany made various interventions seeking to prevent the execution of the LaGrands. The LaGrands initiated various unsuccessful domestic appeals. On 24 February 1999, Karl LaGrand was executed. At 7:30pm on 2 March 1999, Germany filed the Application instituting these proceedings accompanied by a request for provisional measures seeking the postponement of Walter LaGrand's execution pending the final decision. On 3 March 1999 the Court indicated as a matter of greatest urgency provisional measures in the terms requested. The United States Supreme Court refused to enforce compliance with this order and Walter LaGrand was executed later that day. Germany's first submission was as follows: (1) that the United States, by not informing Karl and Walter LaGrand without delay following their arrest of their rights under Article 36 subparagraph 1 (b) of the Vienna Convention on Consular Relations, and by depriving Germany of the possibility of rendering consular assistance, which ultimately resulted in the execution of Karl and Walter LaGrand, violated its international legal obligations to Germany, in its own right and in its right of diplomatic protection of its nationals, under Articles 5 and 36 paragraph 1 of the said Convention;] 37. The Court will first examine the question of its jurisdiction with respect to the first submission of Germany. Germany relies on paragraph 1 of Article 36 of the Vienna Convention, which provides: “With a view to facilitating the exercise of consular functions relating to nationals of the sending State: (a)

(b)

(c)

consular officers shall be free to communicate with nationals of the sending State and to have access to them. Nationals of the sending State shall have the same freedom with respect to communication with and access to consular officers of the sending State; if he so requests, the competent authorities of the receiving State shall, without delay, inform the consular post of the sending State if, within its consular district, a national of that State is arrested or committed to prison or to custody pending trial or is detained in any other manner. Any communication addressed to the consular post by the person arrested, in prison, custody or detention shall be forwarded by the said authorities without delay. The said authorities shall inform the person concerned without delay of his rights under this subparagraph; consular officers shall have the right to visit a national of the sending State who is in prison, custody or detention, to converse and correspond with him and to arrange for his legal representation. They shall also have the right to visit any national of the sending State who is in prison, custody or detention in their district in pursuance of a judgement. Nevertheless, consular officers shall refrain from taking action on behalf of a national who is in prison, custody or detention if he expressly opposes such action.”

38. Germany alleges that the failure of the United States to inform the LaGrand brothers of their right to contact the German authorities “prevented Germany from exercising its rights under Art. 36 (1) (a) and (c) of the Convention” and violated “the various rights

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conferred upon the sending State vis-à-vis its nationals in prison, custody or detention as provided for in Art. 36 (1) (b) of the Convention”. Germany further alleges that by breaching its obligations to inform, the United States also violated individual rights conferred on the detainees by Article 36, paragraph 1 (a), second sentence, and by Article 36, paragraph 1 (b). Germany accordingly claims that it “was injured in the person of its two nationals”, a claim which Germany raises “as a matter of diplomatic protection on behalf of Walter and Karl LaGrand”. 39. The United States acknowledges that “there was a breach of the U.S. obligation… to inform the LaGrand brothers that they could ask that a German consular post be notified of their arrest and detention”. It does not deny that this violation of Article 36, paragraph 1 (b), has given rise to a dispute between the two States and recognizes that the Court has jurisdiction under the Optional Protocol to hear this dispute in so far as it concerns Germany's own rights. 40. Concerning Germany's claims of violation of Article 36, paragraph 1 (a) and (c), the United States however calls these claims “particularly misplaced” on the grounds that the “underlying conduct complained of is the same” as the claim of the violation of Article 36, paragraph 1 (b). It contends, moreover, that “to the extent that this claim by Germany is based on the general law of diplomatic protection, it is not within the Court's jurisdiction” under the Optional Protocol because it “does not concern the interpretation or application of the Vienna Convention”. The United States points to the distinction between jurisdiction over treaties and jurisdiction over customary law and observes that “[e]ven if a treaty norm and a customary norm were to have exactly the same content,” each would have its “separate applicability”. It contests the German assertion that diplomatic protection “enters through the intermediary of the Vienna Convention” and submits: “the Vienna Convention deals with consular assistance… it does not deal with diplomatic protection. Legally, a world of difference exists between the right of the consul to assist an incarcerated national of his country, and the wholly different question whether the State can espouse the claims of its national through diplomatic protection. The former is within the jurisdiction of the Court under the Optional Protocol; the latter is not… Germany based its right of diplomatic protection on customary law… [T]his case comes before this Court not under Article 36, paragraph 2 of its Statute, but under Article 36, paragraph 1. Is it not obvious… that whatever rights Germany has under customary law, they do not fall within the jurisdiction of this Court under the Optional Protocol?” 41. Germany responds that the breach of paragraph 1 (a) and (c) of Article 36 must be distinguished from that of paragraph 1 (b), and that as a result, the Court should not only rule on the latter breach, but also on the violation of paragraph 1 (a) and (c). Germany further asserts “that ‘application of the Convention’ in the sense of the Optional Protocol very well encompasses the consequences of a violation of individual rights under the Convention, including the espousal of respective claims by the State of nationality”. 42. The Court cannot accept the United States objections. The dispute between the Parties as to whether Article 36, paragraph 1 (a) and (c), of the Vienna Convention have been violated in this case in consequence of the breach of paragraph 1 (b) does relate to the interpretation and application of the Convention. This is also true of the dispute as to whether paragraph 1 (b) creates individual rights and whether Germany has standing to assert those rights on behalf of its nationals. These are consequently disputes within the meaning of Article I of the Optional Protocol. Moreover, the Court cannot accept the contention of the United States that Germany's claim based on the individual rights of the LaGrand brothers is beyond the Court's jurisdiction because diplomatic protection is a concept of customary international law. This fact does not prevent a State party to a treaty, which creates individual rights, from taking up the case of one of its nationals and instituting international judicial proceedings on behalf of that national, on the basis of a general jurisdictional clause in such a treaty. Therefore the Court concludes that it has jurisdiction with respect to the whole of Germany's first submission. [The Court then moved to consider the merits] 75. Germany further contends that “the breach of Article 36 by the United States did not only infringe upon the rights of Germany as a State party to the [Vienna] Convention but also entailed a violation of the individual rights of the LaGrand brothers”. Invoking its right of diplomatic protection, Germany also seeks relief against the United States on this ground. Germany maintains that the right to be informed of the rights under Article 36, paragraph 1 (b), of the Vienna Convention, is an individual right of every national of a State party to the Convention who enters the territory of another State party. It submits that this view is supported by the ordinary meaning of the terms of Article 36, paragraph 1 (b), of the Vienna Convention, since the last sentence of that provision speaks of the “rights” under this subparagraph of “the person concerned”, i.e., of the foreign national arrested or detained. Germany adds that the provision in Article 36, paragraph 1 (b), according to which it is for the arrested person to decide whether consular notification is to be

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provided, has the effect of conferring an individual right upon the foreign national concerned. In its view, the context of Article 36 supports this conclusion since it relates to both the concerns of the sending and receiving States and to those of individuals. According to Germany, the travaux préparatoires of the Vienna Convention lend further support to this interpretation. In addition, Germany submits that the “United Nations Declaration on the human rights of individuals who are not nationals of the country in which they live,” adopted by General Assembly resolution 40/144 on 13 December 1985, confirms the view that the right of access to the consulate of the home State, as well as the information on this right, constitute individual rights of foreign nationals and are to be regarded as human rights of aliens. 76. The United States questions what this additional claim of diplomatic protection contributes to the case and argues that there are no parallels between the present case and cases of diplomatic protection involving the espousal by a State of economic claims of its nationals. The United States maintains that the right of a State to provide consular assistance to nationals detained in another country, and the right of a State to espouse the claims of its nationals through diplomatic protection, are legally different concepts. The United States contends, furthermore, that rights of consular notification and access under the Vienna Convention are rights of States, and not of individuals, even though these rights may benefit individuals by permitting States to offer them consular assistance. It maintains that the treatment due to individuals under the Convention is inextricably linked to and derived from the right of the State, acting through its consular officer, to communicate with its nationals, and does not constitute a fundamental right or a human right. The United States argues that the fact that Article 36 by its terms recognizes the rights of individuals does not determine the nature of those rights or the remedies required under the Vienna Convention for breaches of that Article. It points out that Article 36 begins with the words “[w]ith a view to facilitating the exercise of consular functions relating to nationals of the sending State,” and that this wording gives no support to the notion that the rights and obligations enumerated in paragraph 1 of that Article are intended to ensure that nationals of the sending State have any particular rights or treatment in the context of a criminal prosecution. The travaux préparatoires of the Vienna Convention according to the United States, do not reflect a consensus that Article 36 was addressing immutable individual rights, as opposed to individual rights derivative of the rights of States. 77. The Court notes that Article 36, paragraph 1 (b), spells out the obligations the receiving State has towards the detained person and the sending State. It provides that, at the request of the detained person, the receiving State must inform the consular post of the sending State of the individual's detention “without delay”. It provides further that any communication by the detained person addressed to the consular post of the sending State must be forwarded to it by authorities of the receiving State “without delay”. Significantly, this subparagraph ends with the following language: “The said authorities shall inform the person concerned without delay of his rights under this subparagraph” (emphasis added). Moreover, under Article 36, paragraph 1 (c), the sending State's right to provide consular assistance to the detained person may not be exercised “if he expressly opposes such action”. The clarity of these provisions, viewed in their context, admits of no doubt. It follows, as has been held on a number of occasions, that the Court must apply these as they stand… Based on the text of these provisions, the Court concludes that Article 36, paragraph 1, creates individual rights, which, by virtue of Article I of the Optional Protocol, may be invoked in this Court by the national State of the detained person. These rights were violated in the present case. 78. At the hearings, Germany further contended that the right of the individual to be informed without delay under Article 36, paragraph 1, of the Vienna Convention was not only an individual right, but has today assumed the character of a human right. In consequence, Germany added, “the character of the right under Article 36 as a human right renders the effectiveness of this provision even more imperative”. The Court having found that the United States violated the rights accorded by Article 36, paragraph 1, to the LaGrand brothers, it does not appear necessary to it to consider the additional argument developed by Germany in this regard. [8] Comments and Questions 1. 2. 3.

Does LaGrand mark a departure from the traditional view that in espousing a claim of its national, a state is in law asserting its own rights? Is that view any longer tenable? Although they had German nationality from birth (and were not United States nationals), in fact their substantial connections were with the United States, not Germany. That being so, how is their case to be distinguished from Nottebohm's? Would it have made a difference in that case if either LaGrand brother had subsequently acquired US nationality?

[9] The Loewen Group Inc. and Raymond L. Loewen v. United States of America (ICSID Case No. ARB(AF)/98/3), Award of 26 June 2003, 7 ICSID Rep. 442, 484-490 (2005) [Anthony Mason (pres.), Abner J. Mikva, Michael Mustill] [The Loewen Group Inc, and Raymond L. Loewen (“Loewen”) were involved in a legal

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dispute with a competitor in the funeral business. The dispute was referred to the Mississippi State Court and judgment was entered against Loewen. Subsequently, Loewen filed claims against the United States alleging that the conduct of the Mississippi State Court violated three provisions of NAFTA – the anti-discrimination principles in Article 1102, the minimum standard of treatment required by Article 1105 and the prohibition on uncompensated expropriation in Article 1110. Loewen alleged that these breaches were committed by the Mississippi State Court for which the United States was responsible under Article 105 of NAFTA. Subsequent to the hearing on the merits, events occurred which raised questions about the capacity of the Loewen Group Inc (“TGLI”) to pursue its NAFTA claims. TGLI had filed for bankruptcy and assigned its right, title and interest in its NAFTA claim to a newly created Canadian corporation. The newly created corporation, Nafcanco, was wholly owned and controlled by a United States corporation. The United States objected to the jurisdiction of the NAFTA Tribunal on a number of grounds including an absence of continuous nationality from the date of the events giving rise to the claim through to the date of the claim's resolution.] Respondent’s Additional Objection to Competence and Jurisdiction 220. Subsequent to the October 2001 hearings on the merits, events occurred which raised questions about TLGI's capacity to pursue its NAFTA claims and gave rise to Respondent filing a further objection to competence and jurisdiction on January 25, 2002. TLGI had filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code, and a reorganization plan was approved by the bankruptcy courts of the United States and Canada. Under that plan, TLGI ceased to exist as a business entity. All of its business operations were reorganized as a United States corporation. In apparent recognition of the obvious problem that would be caused by a United States entity pursuing a claim against the United States under NAFTA, TLGI, immediately prior to its going out of business, assigned all of its right, title and interest to the NAFTA claim to a newly created corporation (discreetly called Nafcanco – a play on the words NAFTA and Canada). It would appear that the NAFTA claim is the only asset of Nafcanco, and the pursuit of the claim its only business. 221. Following the filing of Respondent's objection, appropriate pleadings were filed by both sides and on June 6, 2002, the Tribunal held a hearing on the objection. Canada and Mexico again submitted their views on the issues that were raised at the hearing. 222. NAFTA is a treaty intending to promote trade and investment between Canada, Mexico and the United States. Since most international investment occurs in the private sector, investment treaties frequently seek to provide some kind of protection for persons engaging in such investment. Until fairly recently, such protection was implemented and pursued by the States themselves. When Mexico expropriated the investment of some American oil companies many years ago, the claims of the American companies were pursued by American diplomatic authorities. When the United States seized the assets of Iranian nationals during the hostage crisis of the 1970s, Iran and the United States worked out a settlement as sovereign nations. 223. Chapter Eleven of NAFTA represents a progressive development in international law whereby the individual investor may make a claim on its own behalf and submit the claim to international arbitration, as TLGI has done in the instant case. The format of NAFTA is clearly intended to protect the investors of one Contracting Party against unfair practices occurring in one of the other Contracting Parties. It was not intended to and could not affect the rights of American investors in relation to practices of the United States that adversely affect such American investors. Claims of that nature can only be pursued under domestic law and it is inconceivable that sovereign nations would negotiate treaties to supplement or modify domestic law as it applies to their own residents. Such a collateral effect on the domestic laws of the NAFTA Parties was clearly not within their contemplation when the treaty was negotiated. 224. If NAFTA could be used to assert the rights of an American investor in the instant case, it would in effect create a collateral appeal from the decision of the Mississippi courts, by definition a unit of the United States government. As was pointed out earlier, the object of NAFTA is to protect outsiders who do not have access to the political or other avenues by which to seek relief from nefarious practices of governmental units. 225. Claimant TLGI urges that since it had the requisite nationality at the time the claim arose, and, antedate the time that the claim was submitted, it is of no consequence that the present real party in interest – the beneficiary of the claim – is an American citizen. Both as a matter of historical and current international precedent, this argument must fail. In international law parlance, there must be continuous national identity from the date of the events giving rise to the claim, which date is known as the dies a quo, through the date of the resolution of the claim, which date is known as the dies ad quem. *** 228. In sum, neither the language of the Treaty, nor any of the cases decided under it answers the question as to whether continuous nationality is required until the resolution of the claim. Respondent correctly contends that Article 1131 requires the Tribunal to decide the issues in dispute in accordance with “applicable rules of international law”.

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229. There is only limited dispute as to the history of the requirement of continuous nationality to the end of any international proceeding. When investment claims were negotiated and resolved only at a governmental level, any change in nationality of the claimant defeated the only reason for the negotiations to continue. The claiming government no longer had a citizen to protect. This history has changed as the nature of the claim process has changed. As claimants have been allowed to prosecute claims in their own right more often, provision has been made for amelioration of the strict requirement of continuous nationality. But those provisions have been specifically spelled out in the various treaties that TLGI cites as proof that international law has changed. Thus, in the claims settlement agreement between Iran and the United States arising out of the hostage crisis, the requirement of continuous nationality was specifically altered in the agreement. Many of the bilateral investment treaties, the socalled “BITs”, contain specific modifications of the requirement. But such specific provisions in other treaties and agreements only hinder TLGI's contentions, since NAFTA has no such specific provision. 230. As with most hoary international rules of law, the requirement of continuous nationality was grounded in comity. It was not normally the business of one nation to be interfering into the manner in which another nation handled its internal commerce. Such interference would be justified only to protect the interests of one of its own nationals. If that tie were ended, so was the justification. As international law relaxed to allow aggrieved parties to pursue remedies directly, rather than through diplomatic channels, the need for a rigid rule of dies ad quem also was relaxed. But as was previously noted, such relaxations came about specifically in the language of the treaties. There is no such language in the NAFTA document and there are substantial reasons why the Tribunal should not stretch the existing language to affect such a change. *** 233. … Rights of action under private law arise from personal obligations (albeit they may be owed by or to a State) brought into existence by domestic law and enforceable through domestic tribunals and courts. NAFTA claims have a quite different character, stemming from a corner of public international law in which, by treaty, the power of States under that law to take international measures for the correction of wrongs done to its nationals has been replaced by an ad hoc definition of certain kinds of wrong, coupled with specialist means of compensation. These means are both distinct from and exclusive of the remedies for wrongful acts under private law: see Articles 1121, 1131, 2021 and 2022. It is true that some aspects of the resolution of disputes arising in relation to private international commerce are imported into the NAFTA system via Article 1120.1(c), and that the handling of disputes within that system by professionals experienced in the handling of major international arbitrations has tended in practice to make a NAFTA arbitration look like the more familiar kind of process. But this apparent resemblance is misleading. The two forms of process, and the rights which they enforce, have nothing in common. There is no warrant for transferring rules derived from private law into a field of international law where claimants are permitted for convenience to enforce what are in origin the rights of Party states. If the effects of a change of ownership are to be ascertained we must do so, not by inapt analogies with private law rules, but from the words of Chapter Eleven, read in the context of the Treaty as a whole, and of the purpose which it sets out to achieve. 234. TLGI urges some equitable consideration be given because it was the underlying Mississippi litigation which brought about the need for it to file bankruptcy in the first place. We have already rehearsed our view of the inequities that befell TLGI in that litigation, and a chancery court would certainly take such claims into account in assessing damages. But this is an international tribunal whose jurisdiction stems from and is limited to the words of the NAFTA treaty. Whatever the reasons for TLGI's decision to follow the bankruptcy route it chose, the consequences broke the chain of nationality that the Treaty requires. *** 237. Article 1109 fully authorizes transfers of property by an investor. TLGI contends that such provision for free assignment somehow strengthens its position. The assignment from TLGI to Nafcanco is not being challenged, except as to what is being assigned. By the terms of the assignment, the only item being assigned was this NAFTA claim. All of the assets and business of TLGI have been reorganized under the mantle of an American corporation. All of the benefits of any award would clearly inure to the American corporation. Such a naked entity as Nafcanco, even with its catchy name, cannot qualify as a continuing national for the purposes of this proceeding. Claimants also urge that TLGI remains in existence, since its charter remains in existence. The Tribunal is being asked to look at form rather than substance to resolve a complicated claim under an international treaty. Even if TLGI has some kind of ethereal existence, it sought to place any remaining NAFTA marbles in the Nafcanco ring. Claimants insist that Respondent is asking the Tribunal to “pierce” the corporate veil of Nafcanco and point out the legal complications involved in such a piercing. The Tribunal sees no need to enter into that thicket. The question is whether there is any remaining Canadian entity capable of pursuing the NAFTA claim.

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238. Claimants state that there were good and sufficient business reasons for reorganizing under an American corporate character including pressure from TLGI's creditors. The Tribunal has no reasons to doubt the legitimacy of those reasons but the choices made clearly had consequences under the Treaty. There might have been equally compelling reasons for the Loewen interests to choose a United States mantle when it first commenced doing business. NAFTA does not recognize such business choices as a substitute for its jurisdictional requirements under its provisions and under international law. 239. Raymond Loewen argues that his claims under NAFTA survive the reorganization. Respondent originally objected to Raymond Loewen's claims on the ground that he no longer had control over his stock at the commencement of the proceeding. The Tribunal allowed Raymond Loewen to continue in the proceeding to determine whether he in fact continued any stock holding in the company. No evidence was adduced to establish his interest and he certainly was not a party in interest at the time of the reorganization of TLGI. *** Orders For the foregoing reasons the Tribunal unanimously decides – (1)

(2)

That it lacks jurisdiction to determine TLGI's claims under NAFTA concerning the decisions of United States courts in consequence of TLGI's assignment of those claims to a Canadian corporation owned and controlled by a United States corporation. That it lacks jurisdiction to determine Raymond L. Loewen's claims under NAFTA concerning decisions of the United States courts on the ground that it was not shown that he owned or controlled directly or indirectly TLGI when the claims were submitted to arbitration or after TLGI was reorganized under Chapter 11 of the United States Bankruptcy Code.

[10] Comments and Questions 1.

2. 3.

As a general matter, international tribunals determine their jurisdiction as at the time the claim is brought (subject to the proviso that, if there is a purely formal and remedial defect at that time which is subsequently remedied jurisdiction will not be denied (1) ). Is this decision consistent with this principle? Where in NAFTA is it said or implied that Chapter 11 is a form of delegated diplomatic protection? Faced with what the Tribunal itself recognised to be a manifest denial of justice in the local courts and with an evident choice of alternative interpretations of NAFTA and of the scope of the local remedies rule in international law, (2) why do you think the Tribunal denied Loewen a remedy?

[11] International Law Commission, Articles on Diplomatic Protection, Official Records of the General Assembly, Sixty-first Session, Supplement No. 10 (UN Doc. A/61/10) Article 5 – Continuous nationality of a natural person 1. A State is entitled to exercise diplomatic protection in respect of a person who was a national of that State continuously from the date of injury to the date of the official presentation of the claim. Continuity is presumed if that nationality existed at both these dates. 2. Notwithstanding paragraph 1, a State may exercise diplomatic protection in respect of a person who is its national at the date of the official presentation of the claim but was not a national at the date of injury, provided that the person had the nationality of a predecessor State or lost his or her previous nationality and acquired, for a reason unrelated to the bringing of the claim, the nationality of the former State in a manner not inconsistent with international law. 3. Diplomatic protection shall not be exercised by the present State of nationality in respect of a person against a former State of nationality of that person for an injury caused when that person was a national of the former State of nationality and not of the present State of nationality. 4. A State is no longer entitled to exercise diplomatic protection in respect of a person who acquires the nationality of the State against which the claim is brought after the date of the official presentation of the claim. Article 7 – Multiple nationality and claim against a State of nationality A State of nationality may not exercise diplomatic protection in respect of a person against a State of which that person is also a national unless the nationality of the former State is predominant, both at the date of injury and at the date of the official presentation of the claim. Article 10 – Continuous nationality of a corporation

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1. A State is entitled to exercise diplomatic protection in respect of a corporation that was a national of that State, or its predecessor State, continuously from the date of injury to the date of the official presentation of the claim. Continuity is presumed if that nationality existed at both these dates. 2. A State is no longer entitled to exercise diplomatic protection in respect of a corporation that acquires the nationality of the State against which the claim is brought after the presentation of the claim. 3. Notwithstanding paragraph 1, a State continues to be entitled to exercise diplomatic protection in respect of a corporation which was its national at the date of injury and which, as the result of the injury, has ceased to exist according to the law of the State of incorporation. Article 11 A State of nationality of shareholders in a corporation shall not be entitled to exercise diplomatic protection in respect of such shareholders in the case of an injury to the corporation unless:The corporation has ceased to exist according to the law of the State of incorporation for a reason unrelated to the injury; or The corporation had, at the date of injury, the nationality of the State alleged to be responsible for causing the injury, and incorporation in that State was required by it as a precondition for doing business there. Article 12 To the extent that an internationally wrongful act of a State causes direct injury to the rights of shareholders as such, as distinct from those of the corporation itself, the State of nationality of any such shareholders is entitled to exercise diplomatic protection in respect of its nationals. [12] Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Preliminary Objections, Judgment of 24 May 2007, [2007] I.C.J. Rep. 582, 601602, 605-606, 610, 614-616 (2001) [Mr. Ahmadou Sadio Diallo, a Guinean citizen, settled in the DRC in 1964, when it was still known as the Congo. The Congo was renamed “Zaire” in 1971. In 1974, Diallo founded an import-export company, Africom-Zaire, as a société privée à responsibilité limitée, or a private limited liability company (“SPRL”), incorporated under Zairean law, and became its gérant (manager). In 1979 Diallo expanded his activities, taking part, asgérant of Africom-Zaire and with backing from two private partners, in the founding of another SPRL company, Africontainers-Zaire, specializing in the containerized transport of goods. In 1980 Africom-Zaire's two partners in Africontainers-Zaire withdrew, Diallo took over their parts socials and became the gérant of the company. Towards the end of the 1980s, Africom-Zaire's and Africontainers-Zaire's relationships with their business partners deteriorated and Diallo initiated a number of court actions seeking to recover alleged debts from these partners, which included Zaire Fina, Zaire Shell and Zaire Mobil Oil, and tried to recover debts from certain instruments of the Zairean state. On 31 October 1995, the Prime Minister of Zaire issued an expulsion Order against Diallo. Diallo was deported from Zaire and returned to Guinea in January 1996. However, throughout the proceedings Guinea maintained that Diallo's arrest, detention and expulsion were the culmination of a DRC policy to prevent him from recovering the debts owed to his companies. The DRC rejected that allegation and argued that his expulsion was justified by the fact that his presence and conduct breached public order in Zaire.] 49. The Court now turns to the question of the admissibility of Guinea's Application in so far as it concerns protection of Mr. Diallo's rights as associé of the two companies AfricomZaire and Africontainers-Zaire. The DRC raises two objections to admissibility regarding this aspect of the Application: it contests Guinea's standing, and it suggests that Mr. Diallo has not exhausted the local remedies that were available to him in the DRC to assert his rights. The Court will deal with these objections in turn, beginning with that relating to Guinea's standing. *** 61. As the Court recalled in the Barcelona Traction case, “[t]here is… no need to investigate the many different forms of legal entity provided for by the municipal laws of States” (I.C.J. Reports 1970, p. 34, para. 40). What matters, from the point of view of international law, is to determine whether or not these have a legal personality independent of their members. Conferring independent corporate personality on a company implies granting it rights over its own property, rights which it alone is capable of protecting. As a result, only the State of nationality may exercise diplomatic protection on behalf of the company when its rights are injured by a wrongful act of another State. In determining whether a company possesses independent and distinct legal personality, international law looks to the rules of the relevant domestic law. ***

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63. Congolese law accords an SPRL independent legal personality distinct from that of its associés, particularly in that the property of the associés is completely separate from that of the company, and in that the associésare responsible for the debts of the company only to the extent of the resources they have subscribed. Consequently, the company's debts receivable from and owing to third parties relate to its respective rights and obligations. As the Court pointed out in the Barcelona Traction case: “So long as the company is in existence the shareholder has no right to the corporate assets.” (I.C.J. Reports 1970, p. 34, para. 41.) This remains the fundamental rule in this respect, whether for a SPRL or for a public limited company. 64. The exercise by a State of diplomatic protection on behalf of a natural or legal person, who is associé or shareholder, having its nationality, seeks to engage the responsibility of another State for an injury caused to that person by an internationally wrongful act committed by that State. Ultimately, this is no more than the diplomatic protection of a natural or legal person as defined by Article 1 of the ILC draft Articles; what amounts to the internationally wrongful act, in the case of associés or shareholders, is the violation by the respondent State of their direct rights in relation to a legal person, direct rights that are defined by the domestic law of that State, as accepted by both Parties, moreover. On this basis, diplomatic protection of the direct rights of associés of a SPRL or shareholders of a public limited company is not to be regarded as an exception to the general legal régime of diplomatic protection for natural or legal persons, as derived from customary international law. 65. Having considered all of the arguments advanced by the Parties, the Court finds that Guinea does indeed have standing in this case in so far as its action involves a person of its nationality, Mr. Diallo, and is directed against the allegedly unlawful acts of the DRC which are said to have infringed his rights, particularly his direct rights as associé of the two companies Africom-Zaire and Africontainers-Zaire. *** 76. The Court will now consider the question of the admissibility of Guinea's Application as it relates to the exercise of diplomatic protection with respect to Mr. Diallo “by substitution” for Africom-Zaire and Africontainers-Zaire and in defence of their rights. Here too the DRC raises two objections to the admissibility of Guinea's Application, derived respectively from Guinea's lack of standing and the failure to exhaust local remedies. The Court will again address these issues in turn, beginning with Guinea's standing. *** 87. Since its dictum in the Barcelona Traction case (ibid., p. 48, para. 93) (see paragraph 82 above), the Court has not had occasion to rule on whether, in international law, there is indeed an exception to the general rule “that the right of diplomatic protection of a company belongs to its national State” (ibid., p. 48, para. 93), which allows for protection of the shareholders by their own national State “by substitution”, and on the reach of any such exception. It is true that in the case concerning Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), the Chamber of the Court allowed a claim by the United States of America on behalf of two United States corporations (who held 100 per cent of the shares in an Italian company), in relation to alleged acts by the Italian authorities injuring the rights of the latter company. However, in doing so, the Chamber based itself not on customary international law but on a Treaty of Friendship, Commerce and Navigation between the two countries directly granting to their nationals, corporations and associations certain rights in relation to their participation in corporations and associations having the nationality of the other State. The Court will now examine whether the exception invoked by Guinea is part of customary international law, as claimed by the latter. 88. The Court is bound to note that, in contemporary international law, the protection of the rights of companies and the rights of their shareholders, and the settlement of the associated disputes, are essentially governed by bilateral or multilateral agreements for the protection of foreign investments, such as the treaties for the promotion and protection of foreign investments, and the Washington Convention of 18 March 1965 on the Settlement of Investment Disputes between States and Nationals of Other States, which created an International Centre for Settlement of Investment Disputes (ICSID), and also by contracts between States and foreign investors. In that context, the role of diplomatic protection somewhat faded, as in practice recourse is only made to it in rare cases where treaty régimes do not exist or have proved inoperative. It is in this particular and relatively limited context that the question of protection by substitution might be raised. The theory of protection by substitution seeks indeed to offer protection to the foreign shareholders of a company who could not rely on the benefit of an international treaty and to whom no other remedy is available, the allegedly unlawful acts having been committed against the company by the State of its nationality. Protection by “substitution” would therefore appear to constitute the very last resort for the protection of foreign investments. 89. The Court, having carefully examined State practice and decisions of international courts and tribunals in respect of diplomatic protection of associés and shareholders, is of the opinion that these do not reveal – at least at the present time – an exception in

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customary international law allowing for protection by substitution, such as is relied on by Guinea. 90. The fact invoked by Guinea that various international agreements, such as agreements for the promotion and protection of foreign investments and the Washington Convention, have established special legal régimes governing investment protection, or that provisions in this regard are commonly included in contracts entered into directly between States and foreign investors, is not sufficient to show that there has been a change in the customary rules of diplomatic protection; it could equally show the contrary. The arbitrations relied on by Guinea are also special cases, whether based on specific international agreements between two or more States, including the one responsible for the allegedly unlawful acts regarding the companies concerned (see, for example, the special agreement concluded between the American, British and Portuguese Governments in theDelagoa case or the one concluded between El Salvador and the United States of America in the Salvador Commercial Company case) or based on agreements concluded directly between a company and the State allegedly responsible for the prejudice to it (see the Biloune v. Ghana Investments Centre case). 91. It is a separate question whether customary international law contains a more limited rule of protection by substitution, such as that set out by the ILC in its draft Articles on Diplomatic Protection, which would apply only where a company's incorporation in the State having committed the alleged violation of international law “was required by it as a precondition for doing business there” (Art. 11, para. (b)). 92. However, this very special case does not seem to correspond to the one the Court is dealing with here. It is a fact that Mr. Diallo, a Guinean citizen, settled in Zaire in 1964, when he was 17 years of age, and that he did not set up his first company, Africom-Zaire, until ten years later, in 1974. In addition, when, in 1979, Mr. Diallo took part in the creation of Africontainers-Zaire, it was in fact only as manager (gérant) of Africom-Zaire, a company under Congolese law. When Africontainers-Zaire was set up, 70 per cent of its capital was held by associés of Congolese nationality, and only in 1980, one year later, did Mr. Diallo become an associé in his own name of that company, holding 40 per cent of the capital, following the withdrawal of the other two associés, the company Africom-Zaire holding the remaining parts sociales. It appears natural, against this background, that Africom-Zaire and Africontainers-Zaire were created in Zaire and entered in the Trade Register of the city of Kinshasa by Mr. Diallo, who was already engaged in commercial activities. Furthermore, and above all it has not satisfactorily been established before the Court that their incorporation in that country, as legal entities of Congolese nationality, would have been required of their founders to enable the founders to operate in the economic sectors concerned. 93. The Court concludes on the facts before it that the companies, Africom-Zaire and Africontainers-Zaire, were not incorporated in such a way that they would fall within the scope of protection by substitution in the sense of Article 11, paragraph (b), of the ILC draft Articles on Diplomatic Protection referred to by Guinea. Therefore, the question of whether or not this paragraph of Article 11 reflects customary international law does not arise in this case. 94. In view of the foregoing, the Court cannot accept Guinea's claim to exercise diplomatic protection by substitution. It is therefore the normal rule of the nationality of the claims which governs the question of the diplomatic protection of Africom-Zaire and Africontainers-Zaire. The companies in question have Congolese nationality. The objection as to inadmissibility raised by the DRC owing to Guinea's lack of standing to offer Mr. Diallo diplomatic protection as regards the alleged unlawful acts of the DRC against the rights of the two companies Africom-Zaire and Africontainers-Zaire is consequently well founded and must be upheld.

[B] The General Character of State Responsibility Principles Questions of state responsibility have never been confined to the context of diplomatic protection; they arise also for “direct” injuries committed by one state against another state, and also to wrongs committed vis-à-vis other persons when obligations are owed directly to those persons. Indeed they can arise vis-à-vis that amorphous concept “the international community as a whole”. The specific obligations states have towards other states can vary widely, depending on their treaty and other obligations, but the ILC has discerned an underlying general structure of the law of obligations and has embodied it in the Articles on Responsibility of States for Internationally Wrongful Acts, which were adopted in 2001. The General Assembly welcomed the adoption of the Articles and took note of them with its Resolution A/RES/56/83 of 12 December 2001. The content and authority of the Articles have not subsequently been called into question; instead they have been referred to in more than 150 cases. The ILC Articles apply to all kinds of international obligations of states; they cover the field of so-called secondary obligations that arise for the responsible state upon a breach of international law. This is explained in the detailed commentaries prepared by the ILC to accompany the Articles. [1] International Law Commission, Articles on Responsibility of States for Internationally

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Wrongful Acts, General Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 31-32 (2001) Commentary 1. These 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. The emphasis is on the secondary rules of State responsibility: that is to say, the general conditions under international law for the State to be considered responsible for wrongful actions or omissions, and the legal consequences which flow therefrom. The articles do not attempt to define the content of the international obligations breach of which gives rise to responsibility. This is the function of the primary rules, whose codification would involve restating most of substantive international law, customary and conventional. *** 3. Given the existence of a primary rule establishing an obligation under international law for a State, and assuming that a question has arisen as to whether that State has complied with the obligation, a number of further issues of a general character arise. These include: (a) (b) (c) (d) (e) (f) (g) (h)

the role of international law as distinct from the internal law of the State concerned in characterising conduct as unlawful; determining in what circumstances conduct is to be attributed to the State as a subject of international law; specifying when and for what period of time there is or has been a breach of an international obligation by a State; determining in what circumstances a State may he responsible for the conduct of another State which is incompatible with an international obligation of the latter; defining the circumstances in which the wrongfulness of conduct under international law may be precluded; specifying the content of State responsibility, i.e. the new legal relations that arise from the commission by a State of an internationally wrongful act, in terms of cessation of the wrongful act, and reparation for any injury done; determining any procedural or substantive preconditions for one State to invoke the responsibility of another State, and the circumstances in which the right to invoke responsibility may be lost; laying down the conditions under which a State may be entitled to respond to a breach of an international obligation by taking countermeasures designed to ensure the fulfilment of the obligations of the responsible State under these articles.

This is the province of the secondary rules of State responsibility. *** 5. On the other hand the present articles are concerned with the whole field of State responsibility. Thus they are not limited to breaches of obligations of a bilateral character, e.g. under a bilateral treaty with another State. They apply to the whole field of the international obligations of States, whether the obligation is owed to one or several States, to an individual or group, or to the international community as a whole. Being general in character, they are also for the most part residual. In principle States are free, when establishing or agreeing to be bound by a rule, to specify that its breach shall entail only particular consequences and thereby to exclude the ordinary rules of responsibility. This is made clear by article 55. 6. The present articles are divided into four Parts. Part One is entitled “The Internationally Wrongful Act of a State”. It deals with the requirements for the international responsibility of a State to arise. Part Two, “Content of the International Responsibility of a State”, deals with the legal consequences for the responsible State of its internationally wrongful act, in particular as they concern cessation and reparation. Part Three is entitled “The Implementation of the International Responsibility of a State”. It identifies the State or States which may react to an internationally wrongful act and specifies the modalities by which this may be done, including, in certain circumstances, by the taking of countermeasures as necessary to ensure cessation of the wrongful act and reparation for its consequences. Part Four contains certain general provisions applicable to the articles as a whole. [2] Mohammad Ammar Al-Bahloul v. Tajikistan (SCC Case No. V 064/2008), Partial Award on Jurisdiction and Liability of 2 September 2009 (3) [Jeffrey M. Hertzfeld (pres.), Richard Happ, Ivan S. Zykin] [An Austrian investor, Mohammad Ammar Al-Bahloul brought a case concerning energyexploration licenses against Tajikistan in the Stockholm Chamber of Commerce. The Claimant entered into gas and oil exploration discussions with the Tajikistani government in 1998. Although the permits were not secured, energy exploration commenced. The Claimant argued that the non-issuance of licenses, required under Tajikistani law for the conduct of oil and gas activities and promised by government officials, frustrated the projects in which the Claimant had invested and had contracted to invest and deprived

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him of his investment and of his reasonable profit expectation therefrom. The tribunal rejected the claims, despite finding that the Tajikistani government had breached the Energy Charter Treaty.] 165. An effort was made by the International Law Commission of the United Nations to codify the applicable legal principles. In 2001, the Commission finalized a set of draft articles on the “Responsibility of States for Internationally Wrongful Act[s] (hereafter “the Draft Articles”) which, although without legal force, is widely viewed as the most authoritative statement of the law in this area that exists today.

[C] Delictual and Treaty Responsibility Many national legal systems distinguish between public and private law, and within the latter, between the law concerning contractual obligations and delictual obligations – even if, increasingly, these categories are seen to overlap. International law, as an essentially “horizontal” system without a formal hierarchy of sources, does not necessarily make the same distinctions. For present purposes the key distinction is between the scope and content of the “primary” obligation breached and the scope and content of the secondary consequences of a breach. In a sense, both are aspects of the law of responsibility – but the ILC Articles cover only the latter. [1] Rainbow Warrior (New Zealand v. France), Award of 30 April 1990, 20 R.I.A.A. 215, 251 (1990) [Eduardo Jimenez de Aréchaga (pres.), Kenneth Keith, Eduardo Jimenez de Aréchaga] [On 10 July 1985, the Rainbow Warrior was sunk in Auckland Harbour, New Zealand, as a result of high-explosive devices. A Netherlands citizen drowned. Two agents of the French Directorate General of External Security pleaded guilty to charges of manslaughter and wilful damage and were sentenced by the Chief Justice of New Zealand to 10 years imprisonment. On 22 September 1985, the Prime Minister of France confirmed that the Rainbow Warrior had been sunk under orders, offered reparations, and set in motion a series of bilateral negotiations. On 6 July 1986, after a formal approach by the two Governments, the Secretary-General of the United Nations issued a binding Ruling pursuant to which the Governments concluded three Agreements. The Agreements provided, inter alia, for the return of the two agents to a French military facility on the island of Hao for a period of not less than three years. The agents were transferred to Hao on 23 July 1986, but both were moved to Paris within the agreed three years, and without the consent of New Zealand as required by the Agreements. New Zealand initiated this arbitration, claiming that France had violated its international obligations under the Agreements.] 75. … [F]or the decision of the present case, both the customary Law of Treaties and the customary Law of State Responsibility are relevant and applicable. The customary Law of Treaties, as codified in the Vienna Convention, proclaimed in Article 26, under the title “Pacta sunt servanda” that Every treaty in force is binding upon the parties to it and must be performed by them in good faith. This fundamental provision is applicable to the determination whether there have been violations of that principle, and in particular, whether material breaches of treaty obligations have been committed. Moreover, certain specific provisions of customary law in the Vienna Convention are relevant in this case, such as Article 60, which gives a precise definition of the concept of a material breach of a treaty, and Article 70, which deals with the legal consequences of the expiry of a treaty. On the other hand, the legal consequences of a breach of a treaty, including the determination of the circumstances that may exclude wrongfulness (and render the breach only apparent) and the appropriate remedies for breach, are subjects that belong to the customary Law of State Responsibility. The reason is that the general principles of International Law concerning State responsibility are equally applicable in the case of breach of treaty obligation, since in the international law field there is no distinction between contractual and tortious responsibility, so that any violation by a State of any obligation, of whatever origin, gives rise to State responsibility and consequently, to the duty of reparation. The particular treaty itself might of course limit or extend the general Law of State Responsibility, for instance by establishing a system of remedies for it. [2] Comments and Questions 1.

2.

The Rainbow Warrior award stands for the proposition that there is no difference in character between treaty responsibility and delictual responsibility under international law. At the level of State responsibility, why do you think this might be so? See also ILC Articles on Responsibility of States for Internationally Wrongful Acts, Article 12 and commentary (set out below). What about a contract between a foreign private party and the State? Should different principles apply? Should it make a difference if the contract is expressed to be governed by “international law” or by “general principles of law”? (See also

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Chapter 6 above.) [3] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 12 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 54-55 (2001) (Citations selectively omitted) Article 12 – Existence of a Breach of an International Obligation There is a breach of an international obligation by a State when an act of that State is not in conformity with what is required of it by that obligation, regardless of its origin or character. Commentary *** (3) Article 12 states that there is a breach of an international obligation when the act in question is not in conformity with what is required by that obligation “regardless of its origin”. As this phrase indicates, the articles are of general application. They apply to all international obligations of States, whatever their origin may be. International obligations may be established by a customary rule of international law, by a treaty or by a general principle applicable within the international legal order. States may assume international obligations by a unilateral act. An international obligation may arise from provisions stipulated in a treaty (a decision of an organ of an international organization competent in the matter, a judgment given between two States by the International Court of Justice or another tribunal, etc.). It is unnecessary to spell out these possibilities in article 12, since the responsibility of a State is engaged by the breach of an international obligation whatever the particular origin of the obligation concerned. The formula “regardless of its origin” refers to all possible sources of international obligations, that is to say, to all processes for creating legal obligations recognized by international law. The word “source” is sometimes used in this context, as in the preamble to the Charter of the United Nations which stresses the need to respect “the obligations arising from treaties and other sources of international law”. The word “origin”,which has the same meaning, is not attended by the doubts and doctrinal debates the term “source” has provoked. (4) According to article 12, the origin or provenance of an obligation does not, as such, alter the conclusion that responsibility will be entailed if it is breached by a State, nor does it, as such, affect the regime of State responsibility thereby arising. Obligations may arise for a State by a treaty and by a rule of customary international law or by a treaty and a unilateral act. Moreover these various grounds of obligation interact with each other, as practice clearly shows. Treaties, especially multilateral treaties, can contribute to the formation of general international law; customary law may assist in the interpretation of treaties; an obligation contained in a treaty may be applicable to a State by reason of its unilateral act, and so on. Thus international courts and tribunals have treated responsibility as arising for a State by reason of any “violation of a duty imposed by an international juridical standard”. In the Rainbow Warrior arbitration, the Tribunal said that “any violation by a State of any obligation, of whatever origin, gives rise to State responsibility and consequently, to the duty of reparation”. In the Gabčíkovo-Nagymaros Project case, the International Court of Justice referred to the relevant draft article provisionally adopted by the Commission in 1976 in support of the proposition that it is “well established that, when a State has committed an internationally wrongful act. its international responsibility is likely to be involved whatever the nature of the obligation it has failed to respect”. (5) Thus there is no room in international law for a distinction, such as is drawn by some legal systems, between the regime of responsibility for breach of a treaty and for breach of some other rule, i.e. for responsibility arising ex contractu or ex delicto. In the Rainbow Warrior arbitration, the Tribunal affirmed that “in the international law field there is no distinction between contractual and tortious responsibility”. As far as the origin of the obligation breached is concerned, there is a single general régime of State responsibility. Nor does any distinction exist between “civil” and “criminal” responsibility as is the case in internal legal systems.

[D] Responsibility under International and Internal Law Even if both national and international law are relevant in a particular case (as is invariably true with foreign investment disputes), international responsibility is by definition attracted exclusively for a breach of international law. In that respect, national law is treated as a question of fact; it may be relevant in assessing whether some breach of international law has or has not occurred, but it neither excludes nor enlarges the scope of the international obligation itself. [1] Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), Judgment of 20 July 1989, [1989] I.C.J. Rep. 15, 51, 74 (1989) [The United States of America initiated action before the International Court of Justice against the Republic of Italy for compensation for violation of its international legal obligations under a Treaty of Friendship, Commerce and Navigation of 2 February 1948.

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The Government of Italy had requisitioned the plant and related assets of Raytheon-Elsi S.p.A., previously known as Elettronica Sicula S.p.A. (ELSI), an Italian company whollyowned by two United States corporations.] 73. The question still remains, therefore, whether the requisition was or was not a violation of [the FCN Treaty]. This question arises irrespective of the position in municipal law. Compliance with municipal law and compliance with the provisions of a treaty are different questions. What is a breach of treaty may be lawful in the municipal law and what is unlawful in the municipal law may be wholly innocent of violation of a treaty provision. Even had the Prefect held the requisition to be entirely justified in Italian law, this would not exclude the possibility that it was a violation of the FCN Treaty. *** 124. Yet it must be borne in mind that the fact that an act of a public authority may have been unlawful in municipal law does not necessarily mean that that act was unlawful in international law, as a breach of treaty or otherwise. A finding of the local courts that an act was unlawful may well be relevant to an argument that it was also arbitrary; but by itself, and without more, unlawfulness cannot be said to amount to arbitrariness. It would be absurd if measures later quashed by higher authority or a superior court could, for that reason, be said to have been arbitrary in the sense of international law. To identify arbitrariness with mere unlawfulness would be to deprive it of any useful meaning in its own right. Nor does it follow from a finding by a municipal court that an act was unjustified, or unreasonable, or arbitrary, that that act is necessarily to be classed as arbitrary in international law, though the qualification given to the impugned act by a municipal authority may be a valuable indication. [2] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 3 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 36-38 (2001) (Citations selectively omitted) Article 3. Characterization of an act of a State as internationally wrongful The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law. Commentary (1) Article 3 makes explicit a principle already implicit in article 2, namely that the characterization of a given act as internationally wrongful is independent of its characterization as lawful under the internal law of the State concerned. There are two elements to this. First, an act of a State cannot be characterized as internationally wrongful unless it constitutes a breach of an international obligation, even if it violates a provision of the State's own law. Secondly and most importantly, a State cannot, by pleading that its conduct conforms to the provisions of its internal law, escape the characterization of that conduct as wrongful by international law. An act of a State must be characterized as internationally wrongful if it constitutes a breach of an international 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. (2) As to the first of these elements, perhaps the clearestjudicial decision is that of PCIJ in the Treatment of Polish Nationals case. The Court denied the Polish Government the right to submit to organs of the League of Nations questions concerning the application to Polish nationals of certain provisions of the Constitution of the Free City of Danzig, on the ground that: according to generally accepted principles, a State cannot rely, as against another State, on the provisions of the latter's Constitution, but only on international law and international obligations duly accepted… [C]onversely, a State cannot adduce as against another State its own Constitution with a view to evading obligations incumbent upon it under international law or treaties in force… The application of the Danzig Constitution may… result in the violation of an international obligation incumbent on Danzig towards Poland, whether under treaty stipulations or under general international law… However, in cases of such a nature, it is not the Constitution and other laws, as such, but the international obligation that gives rise to the responsibility of the Free City. (3) That conformity with the provisions of internal law in no way precludes conduct being characterized as internationally wrongful is equally well settled. International judicial decisions leave no doubt on that subject. In particular, PCIJ expressly recognized the principle in its first judgment, in the S.S. “Wimbledon” case. The Court rejected the argument of the German Government that the passage of the ship through the Kiel Canal would have constituted a violation of the German neutrality orders, observing that: a neutrality order, issued by an individual State, could not prevail over the provisions of the Treaty of Peace.… under Article 380 of the Treaty of

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Versailles, it was [Germany's] definite duty to allow [the passage of the Wimbledon through the Kiel Canal]. She could not advance her neutrality orders against the obligations which she had accepted under this Article. The principle was reaffirmed many times: it is a generally accepted principle of international law that in the relations between Powers who are contracting Parties to a treaty, the provisions of municipal law cannot prevail over those of the treaty; … it is certain that France cannot rely on her own legislation to limit the scope of her international obligations; … a State cannot adduce as against another State its own Constitution with a view to evading obligations incumbent upon it under international law or treaties in force. A different facet of the same principle was also affirmed in the advisory opinions on Exchange of Greek and Turkish Populations and Jurisdiction of the Courts of Danzig. (4) ICJ has often referred to and applied the principle.83 For example, in the Reparation for Injuries case, it noted that “[a]s the claim is based on the breach of an international obligation on the part of the Member held responsible… the Member cannot contend that this obligation is governed by municipal law”. In the ELSI case, a Chamber of the Court emphasized this rule, stating that: Compliance with municipal law and compliance with the provisions of a treaty are different questions. What is a breach of treaty may be lawful in the municipal law and what is unlawful in the municipal law may be wholly innocent of violation of a treaty provision. Even had the Prefect held the requisition to be entirely justified in Italian law, this would not exclude the possibility that it was a violation of the FCN Treaty. Conversely, as the Chamber explained: the fact that an act of a public authority may have been unlawful in municipal law does not necessarily mean that that act was unlawful in international law, as a breach of treaty or otherwise. A finding of the local courts that an act was unlawful may well be relevant to an argument that it was also arbitrary; but by itself, and without more, unlawfulness cannot be said to amount to arbitrariness… Nor does it follow from a finding by a municipal court that an act was unjustified, or unreasonable, or arbitrary, that that act is necessarily to be classed as arbitrary in international law, though the qualification given to the impugned act by a municipal authority may be a valuable indication. The principle has also been applied by numerous arbitral tribunals. (5) The principle was expressly endorsed in the work undertaken under the auspices of the League of Nations on the codification of State responsibility, as well as in the work undertaken under the auspices of the United Nations on the codification of the rights and duties of States and the law of treaties. The Commission's draft Declaration on Rights and Duties of States, article 13, provided that: Every State has the duty to carry out in good faith its obligations arising from treaties and other sources of international law, and it may not invoke provisions in its constitution or its laws as an excuse for failure to perform this duty. (6) Similarly this principle was endorsed in the 1969 Vienna Convention, article 27 of which provides that: A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. This rule is without prejudice to article 46. (7) The rule that the characterization of conduct as unlawful in international law cannot be affected by the characterization of the same act as lawful in internal law makes no exception for cases where rules of international law require a State to conform to the provisions of its internal law, for instance by applying to aliens the same legal treatment as to nationals. It is true that in such a case, compliance with internal law is relevant to the question of international responsibility. But this is because the rule of international law makes it relevant, e.g. by incorporating the standard of compliance with internal law as the applicable international standard or as an aspect of it. Especially in the fields of injury to aliens and their property and of human rights, the content and application of internal law will often be relevant to the question of international responsibility. In every case it will be seen on analysis that either the provisions of internal law are relevant as facts in applying the applicable international standard, or else that they are actually incorporated in some form, conditionally or unconditionally, into that standard. (8) As regards the wording of the rule, the formulation “The municipal law of a State cannot be invoked to prevent an act of that State from being characterized as wrongful in international law”, which is similar to article 5 of the draft adopted on first reading at the

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1930 Hague Conference and also to article 27 of the 1969 Vienna Convention, has the merit of making it clear that States cannot use their internal law as a means of escaping international responsibility. On the other hand, such a formulation sounds like a rule of procedure and is inappropriate for a statement of principle. Issues of the invocation of responsibility belong to Part Three, whereas this principle addresses the underlying question of the origin of responsibility. In addition, there are many cases where issues of internal law are relevant to the existence or otherwise of responsibility. As already noted, in such cases it is international law which determines the scope and limits of any reference to internal law. This element is best reflected by saying, first, that the characterization of State conduct as internationally wrongful is governed by international law, and secondly by affirming that conduct which is characterized as wrongful under international law cannot be excused by reference to the legality of that conduct under internal law.

[E] The Lex Specialis Issue The ILC Articles are, as explained above, general in their scope; they are also in a sense parasitic upon the specific obligations of the state which are in issue. Thus were a specific obligation deals with framework issues (e.g. with the scope of reparation to be made for a breach), it excludes the general framework rule. The secondary law of state responsibility is thus a residual law, a law of the gaps. In certain cases the exclusion may be virtually complete, creating the so-called self-contained regime – e.g. the law of the European Union, or (subject to certain qualifications) that of the WTO. [1] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 55 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 54-55 (2001) (Citations selectively omitted) Article 55 – Lex Specialis These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law. Commentary (1) When defining the primary obligations that apply between them, States often make special provision for the legal consequences of breaches of those obligations, and even for determining whether there has been such a breach. The question then is whether those provisions are exclusive, i.e. whether the consequences which would otherwise apply under general international law, or the rules that might otherwise have applied for determining a breach, are thereby excluded. A treaty may expressly provide for its relationship with other rules. Often, however, it will not do so and the question will then arise whether the specific provision is to coexist with or exclude the general rule that would otherwise apply. (2) Article 55 provides that the articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or its legal consequences are determined by special rules of international law. It reflects the maxim lex specialis derogat legi generali. Although it may provide an important indication, this is only one of a number of possible approaches towards determining which of several rules potentially applicable is to prevail or whether the rules simply coexist. Another gives priority, as between the parties, to the rule which is later in time. In certain cases the consequences that follow from a breach of some overriding rule may themselves have a peremptory character. For example States cannot, even as between themselves, provide for legal consequences of a breach of their mutual obligations which would authorize acts contrary, to peremptory norms of general international law. Thus the assumption of article 55 is that the special rules in question have at least the same legal rank as those expressed in the articles. On that basis, article 55 makes it clear that the present articles operate in a residual way. (3) It will depend on the special rule to establish the extent to which the more general rules on State responsibility set out in the present articles are displaced by that rule. In some cases it will be clear from the language of a treaty or other text that only the consequences specified are to flow. Where that is so, the consequence will be “determined” by the special rule and the principle embodied in article 56 will apply. In other cases, one aspect of the general law may be modified, leaving other aspects still applicable. An example of the former is the World Trade Organization Dispute Settlement Understanding as it relates to certain remedies. An example of the latter is article 41 of the European Convention on Human Rights. Both concern matters dealt with in Part Two of the articles. The same considerations apply to Part One. Thus a particular treaty might impose obligations on a State but define the “State” for that purpose in a way which produces different consequences than would otherwise flow from the rules of attribution in Chapter 11. Or a treaty might exclude a State from relying on force majeure or necessity. (4) For the lex specialis principle to apply it is not enough that the same subject matter is dealt with by two provisions; there must be some actual inconsistency between them, or

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else a discernible intention that one provision is to exclude the other. Thus the question is essentially one of interpretation. For example in the Neumeister case, the European Court of Human Rights held that the specific obligation in article 5 (5) of the European Convention for compensation for unlawful arrest or detention did not prevail over the more general provision for compensation in article 50. In the Court's view, to have applied the lex specialis principle to article 5 (5) would have led to “consequences incompatible with the aim and object of the treaty”. It was sufficient, in applying article 50, to take account of the specific provision. (5) Article 55 is designed to cover both “strong” forms of lex specialis, including what are often referred to as self-contained regimes, as well as “weaker” forms such as specific treaty provisions on a single point, for example, a specific treaty provision excluding restitution. The Permanent Court of International Justice referred to the notion of a selfcontained regime in The S.S. Wimbledon with respect to the transit provisions concerning the Kiel Canal in the Treaty of Versailles, as did the International Court of Justice in the Diplomatic and Consular Staff case with respect to remedies for abuse of diplomatic and consular privileges. (6) The principle stated in article 55 applies to the articles as a whole. This point is made clear by the use of language (“the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State”) which reflects the content of each of Parts One, Two and Three. [2] International Law Commission, Conclusions of the work of the Study Group on the Fragmentation of International Law: Difficulties arising from the Diversification and Expansion of International Law, [2006] 2(2) Y.B. Int’l L. Comm’n 175, 178-179 (2006) (Citations selectively omitted) (b) The maxim lex specialis derogat legi generali (5) General principle. The maxim lex specialis derogat legi generali is a generally accepted technique of interpretation and conflict resolution in international law. It suggests that whenever two or more norms deal with the same subject matter, priority should be given to the norm that is more specific. The principle may be applicable in several contexts: between provisions within a single treaty, between provisions within two or more treaties, between a treaty and a non-treaty standard, as well as between two non-treaty standards. The source of the norm (whether treaty, custom or general principle of law) is not decisive for the determination of the more specific standard. However, in practice treaties often act as lex specialis by reference to the relevant customary law and general principles. (6) Contextual appreciation. The relationship between the lex specialis maxim and other norms of interpretation or conflict solution cannot be determined in a general way. Which consideration should be predominant – i.e. whether it is the speciality or the time of emergence of the norm – should be decided contextually. (7) Rationale of the principle. That special law has priority over general law is justified by the fact that such special law, being more concrete, often takes better account of the particular features of the context in which it is to be applied than any applicable general law. Its application may also often create a more equitable result and it may often better reflect the intent of the legal subjects. (8) Functions of lex specialis. Most of international law is dispositive. This means that special law may be used to apply, clarify, update or modify as well as set aside general law. (9) The effect of lex specialis on general law. The application of the special law does not normally extinguish the relevant general law. That general law will remain valid and applicable and will, in accordance with the principle of harmonization under conclusion (4) above, continue to give direction for the interpretation and application of the relevant special law and will become fully applicable in situations not provided for by the latter. (10) Particular types of general law. Certain types of general law may not, however, be derogated from by special law. Jus cogens is expressly non-derogable as set out in conclusions (32), (33), (40) and (41), below. Moreover, there are other considerations that may provide a reason for concluding that a general law would prevail in which case the lex specialis presumption may not apply. These include the following: – – – –

Whether such prevalence may be inferred from the form or the nature of the general law or intent of the parties, wherever applicable; Whether the application of the special law might frustrate the purpose of the general law; Whether third party beneficiaries may be negatively affected by the special law; and Whether the balance of rights and obligations, established in the general law would be negatively affected by the special law.

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§7.02 ATTRIBUTION OF CONDUCT TO THE STATE For state responsibility to arise, there must be conduct of the state in breach of an international obligation of that state: ILC Articles 1, 2. For this purpose the notion of the state is a specialised one: the state is generally speaking responsible only for acts of its organs and officials, not private parties.

[A] Organs of the State or of Political Subdivisions [1] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 4 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 40-42 (2001) (Citations selectively omitted) Article 4 – Conduct of organs of a State 1. The conduct of any State organ shall be considered an act of that State under international law, whether the organ exercises legislative, executive, judicial or any other functions, whatever position it holds in the organization of the State, and whatever its character as an organ of the central government or of a territorial unit of the State. 2. An organ includes any person or entity which has that status in accordance with the internal law of the State. Commentary (1) Paragraph 1 of article 4 states the first principle of attribution for the purposes of State responsibility in international law – that the conduct of an organ of the State is attributable to that State. The reference to a “State organ” covers all the individual or collective entities which make up the organization of the State and act on its behalf. It includes an organ of any territorial governmental entity within the State on the same basis as the central governmental organs of that State: this is made clear by the final phrase. (2) Certain acts of individuals or entities which do not have the status of organs of the State may be attributed to the State in international law, and these cases are dealt with in later articles of this Chapter. But the rule is nonetheless a point of departure. It defines the core cases of attribution, and it is a starting point for other cases. For example, under article 8 conduct which is authorized by the State, so as to be attributable to it, must have been authorized by an organ of the State, either directly or indirectly. (3) That the State is responsible for the conduct of its own organs, acting in that capacity, has long been recognized in international judicial decisions. In the Moses case, for example, a decision of a Mexico-United States Mixed Claims Commission, Umpire Lieber said: “An officer or person in authority represents pro tanto his government, which in an international sense is the aggregate of all officers and men in authority”. There have been many statements of the principle since then. (4) The replies by Governments to the Preparatory Committee for the 1930 Conference for the Codification of International Law were unanimously of the view that the actions or omissions of organs of the State must be attributed to it. The Third Committee of the Conference adopted unanimously on first reading an article 1, which provided that international responsibility shall be incurred by a State as a consequence of “any failure on the part of its organs to carry out the international obligations of the State… ” (5) The principle of the unity of the State entails that the acts or omissions of all its organs should be regarded as acts or omissions of the State for the purposes of international responsibility. It goes without saying that there is no category of organs specially designated for the commission of internationally wrongful acts, and virtually any State organ may be the author of such an act. The diversity of international obligations does not permit any general distinction between organs which can commit internationally wrongful acts and those which cannot. This is reflected in the closing words of paragraph 1, which clearly reflect the rule of international law in the matter. (6) Thus the reference to a State organ in article 4 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. Thus, in the Salvador Commercial Company case, the Tribunal said that: ”… a State is responsible for the acts of its rulers, whether they belong to the legislative, executive, or judicial department of the Government, so far as the acts are done in their official capacity.” The International Court has also confirmed the rule in categorical terms. In Difference Relating to Immunity from Legal Process of a Special Rapporteur of the Commission on Human Rights, it said:

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“According to a well-established rule of international law, the conduct of any organ of a State must be regarded as an act of that State. This rule… is of a customary character …” In that case the Court was principally concerned with decisions of State courts, but the same principle applies to legislative and executive acts. As the Permanent Court said in Certain German Interests in Polish Upper Silesia (Merits)… “From the standpoint of International Law and of the Court which is its organ, municipal laws… express the will and constitute the activities of States in the same manner as do legal decisions or administrative measures.” Thus article 4 covers organs, whether they exercise “legislative, executive, judicial or any other functions”. This language allows for the fact that the principle of the separation of powers is not followed in any uniform way, and that many organs exercise some combination of public powers of a legislative, executive or judicial character. Moreover the term is one of extension, not limitation, as is made clear by the words “or any other functions”. It is irrelevant for the purposes of attribution that the conduct of a State organ may be classified as “commercial” or as “acta iure gestionis”. Of course the breach by a State of a contract does not as such entail a breach of international law. Something further is required before international law becomes relevant, such as a denial of justice by the courts of the State in proceedings brought by the other contracting party. But the entry into or breach of a contract by a State organ is nonetheless an act of the State for the purposes of article 4, and it might in certain circumstances amount to an internationally wrongful act. (7) Nor is any distinction made at the level of principle between the acts of “superior” and “subordinate” officials, provided they are acting in their official capacity. This is expressed in the phrase “whatever position it holds in the organization of the State” in article 4. No doubt lower level officials may have a more restricted scope of activity and they may not be able to make final decisions. But conduct carried out by them in their official capacity is nonetheless attributable to the State for the purposes of article 4. Mixed commissions after the Second World War often had to consider the conduct of minor organs of the State, such as administrators of enemy property, mayors and police officers, and consistently treated the acts of such persons as attributable to the State. (8) Likewise, the principle in article 4 applies equally to organs of the central government and to those of regional or local units. This principle has long been recognized. For example the Franco-Italian Conciliation Commission in the Heirs of the Duc de Guise case said: “For the purposes of reaching a decision in the present case it matters little that the decree of 29 August 1947 was not enacted by the Italian State but by the region of Sicily. For the Italian State is responsible for implementing the Peace Treaty, even for Sicily, notwithstanding the autonomy granted to Sicily in internal relations under the public law of the Italian Republic.” This principle was strongly supported during the preparatory work for the Conference for the Codification of International Law of 1930. Governments were expressly asked whether the State became responsible as a result of “[a]cts or omissions of bodies exercising public functions of a legislative or executive character (communes, provinces, etc.)”. All answered in the affirmative. (9) It does not matter for this purpose whether the territorial unit in question is a component unit of a federal State or a specific autonomous area, and it is equally irrelevant whether the internal law of the State in question gives the federal parliament power to compel the component unit to abide by the State's international obligations. The award in the “Montijo” case is the starting point for a consistent series of decisions to this effect. The France/Mexico Claims Commission in the Pellat case reaffirmed the principle of the international responsibility… of a federal State for all the acts of its separate States which give rise to claims by foreign States” and noted specially that such responsibility ”… cannot be denied, not even in cases where the federal Constitution denies the central Government the right of control over the separate States or the right to require them to comply, in their conduct, with the rules of international law”. That rule has since been consistently applied. Thus for example in the LaGrand case, the International Court said: “Whereas the international responsibility of a State is engaged by the action of the competent organs and authorities acting in that State, whatever they may be; whereas the United States should take all measures at its disposal to ensure that Walter LaGrand is not executed pending the final decision in these proceedings; whereas, according to the information available to the Court, implementation of the measures indicated in the present Order falls within the jurisdiction of the Governor of Arizona; whereas the Government of the United States is consequently under the obligation to transmit the present Order to the said Governor; whereas the Governor of Arizona is under the obligation to act in conformity with the international undertakings of the

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United States …” (10) The reasons for this position are reinforced by the fact that federal States vary widely in their structure and distribution of powers, and that in most cases the constituent units have no separate international legal personality of their own (however limited), nor any treaty-making power. In those cases where the constituent unit of a federation is able to enter into international agreements on its own account, the other party may well have agreed to limit itself to recourse against the constituent unit in the event of a breach. In that case the matter will not involve the responsibility of the federal State and will fall outside the scope of the present articles. Another possibility is that the responsibility of the federal State under a treaty may be limited by the terms of a federal clause in the treaty. This is clearly an exception to the general rule, applicable solely in relations between the States parties to the treaty and in the matters which the treaty covers. It has effect by virtue of the lex specialis principle, dealt with in article 55. (11) Paragraph 2 explains the relevance of internal law in determining the status of a State organ. Where the law of a State characterizes an entity as an organ, no difficulty will arise. On the other hand, it is not sufficient to refer to internal law for the status of State organs. In some systems the status and functions of various entities are determined not only by law but also by practice, and reference exclusively to internal law would be misleading. 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. Even if it does so, the term “organ” used in internal law may have a special meaning, and not the very broad meaning it has under article 4. For example, under some legal systems the term “government” refers only to bodies at the highest level such as the head of State and the cabinet of ministers. In others, the police have a special status, independent of the executive; this cannot mean that for international law purposes they are not organs of the State. Accordingly, a State cannot avoid responsibility for the conduct of a body which does in truth act as one of its organs merely by denying it that status under its own law. This result is achieved by the use of the word “includes” in paragraph 2. (12) The term “person or entity” is used in article 4, paragraph 2, as well as in articles 5 and 7. It is used to include in a broad sense to include any natural or legal person, including an individual office holder, a department, commission or other body exercising public authority, etc. The term “entity” is used in a similar sense in the draft articles on Jurisdictional Immunities of States and their Property, adopted in 1991. (13) Although the principle stated in article 4 is clear and undoubted, difficulties can arise in its application. A particular problem is to determine whether a person who is a State organ acts in that capacity. It is irrelevant for this purpose that the person concerned may have had ulterior or improper motives or may be abusing public power. Where such a person acts in an apparently official capacity, or under colour of authority, the actions in question will be attributable to the State. The distinction between unauthorized conduct of a State organ and purely private conduct has been clearly drawn in international arbitral decisions. For example, the award of the United States/Mexico General Claims Commission in the Mallén case (1927) involved, first, the act of an official acting in a private capacity, and secondly, another act committed by the same official in his official capacity, although in an abusive way. The latter action was, and the former was not, held attributable to the State. The French-Mexican Claims Commission in the Caire case excluded responsibility only in cases where “the act had no connexion with the official function and was, in fact, merely the act of a private individual”. The case of purely private conduct should not be confused with that of an organ functioning as such but acting ultra vires or in breach of the rules governing its operation. In this latter case, the organ is nevertheless acting in the name of the State: this principle is affirmed in article 7. In applying this test, of course, each case will have to be dealt with on the basis of its own facts and circumstances. [2] Restatement (Third) Foreign Relations Law of the United States, § 207, 96-98 (American Law Institute 1987) (4) §207 Attribution of Conduct to States A state is responsible for any violation of its obligations under international law resulting from action or inaction by (a) (b) (c)

the government of the state, the government or authorities of any political subdivision of the state, or any organ, agency, official, employee, or other agent of a government or of any political subdivision, acting within the scope of authority or under color of such authority.

Comment a. State responsibility and governmental organization. A state acts through its government, but the state is responsible for carrying out its obligations under international law regardless of the manner in which its constitution and laws allocate the responsibilities

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and functions of government, or of any constitutional or other internal rules or limitations. See § 115, Comment b, and § 311(3). A federal state is bound to carry out its obligations regardless of the degree of autonomy which its constituent states, provinces, Laender, or other subdivisions enjoy under its constitutional system, except as it has limited its responsibility in respect of a particular international agreement by a “federalstate” clause to that effect. See § 302, Reporters' Note 4. States often act not through officials or governmental agencies, but through other instrumentalities of varying degrees of autonomy. Under clause (c), the acts of such instrumentalities are generally attributable to the state. b. Responsibility for conduct of unrecognized government or revolutionary regime. A state is responsible for the conduct of its effective government, whether or not that government was recognized by other states. It is responsible for the conduct of any revolutionary regime that becomes the effective government. It is responsible as well for the conduct of any revolutionary regime that has control over part of the state's territory as regards ordinary domestic legislation, administrative acts, or judicial decisions, but not for acts having as their principal objective furthering or maintaining that regime's control. c. Requirement of “state action.” In general, a state is responsible under international law only for official acts, or for official inaction where there was a duty to act. Such responsibility extends also to action or inaction by local officials or officials of political subdivisions. Ordinarily, a state is not responsible for acts by individuals or other private entities. Thus, as regards injury to aliens, a state is responsible for injuries caused by official acts, or by some official failures, such as failure to provide aliens reasonable police protection; the state is not responsible for injuries caused by private persons that result despite such police protection. See § 713. d. Scope and color of authority. A state is responsible for acts of officials and official bodies, national or local, even if the acts were not authorized by or known to the responsible national authorities, indeed even if expressly forbidden by law, decree, or instruction. In determining whether an act was within the authority of an official or an official body, or was done under color of such authority (clause (c)), one must consider all the circumstances, including whether the affected parties reasonably considered the action to be official, whether the action was for public purpose or for private gain, and whether the persons acting wore official uniforms or used official equipment. e. Causation. A state is responsible for violations attributable to it under this section and is accountable for injuries caused by such violations. There is no well-developed jurisprudence of causation in international law, but international law generally applies concepts of causation, including proximate cause, not unlike those in the law of the United States and other developed states. In international law, however, less significance may be given to whether, hypothetically, the injury was a foreseeable consequence of the violation. When a state is responsible for a violation under the principles of this section, there is generally a willingness to adopt a liberal view of causation and to enlarge the category of injuries resulting from that violation for which the state is to be held accountable and for which it is required to make reparation. See § 901. [3] Compañia de Aguas del Aconquija, S.A. and Compagnie Générale des Eaux v. Argentine Republic (ICSID Case No. ARB/97/3), Award of 21 November 2000, 16 ICSID Rev. – Foreign Inv. L.J. 641 (2001) [Francisco Rezek (pres.), Thomas Buergenthal, Peter D. Trooboff] [On 18 May 1995, Compagnie Générale des Eaux (CGE), a French company, and its Argentinian affiliate, Compañia de Aguas del Aconquija S.A. (CAA), entered a Concession Contract with Tucumán, a province of Argentina. Disputes arose over the Concession Contract and the resulting investment in Tucumán following alleged interference by the Tucumán authorities, culminating in the termination of the Concession Contract by both parties. The Argentine Republic and France were parties to both a bilateral investment treaty and the ICSID Convention. Article 16.4 of the Concession Contract provided for exclusive jurisdiction of the Tucumán administrative courts over disputes as to the interpretation and application of the contract. CGE and CAA (the Claimants) filed a request for ICSID arbitration on 26 December 1996 based on two categories of claim: firstly, claims based on the conduct of the Tucumán authorities allegedly in breach of the BIT and brought against the Argentine Republic relying on the principle of attribution (the Tucumán claims); and secondly, claims brought directly against the Argentine Republic for failing to respond to the actions of the Tucumán authorities (the federal claims). In the course of its Award the Tribunal discussed the concept of attribution in this context.] 48. The Argentine Republic relies on its federal system under its 1994 Constitution in arguing that the acts of officials of the Province of Tucumán cannot be attributed to the federal government and, accordingly, the Tribunal has no jurisdiction for the claims of CGE in this case. The Argentine Republic concedes, however, that even though the Concession Contract is between the Province of Tucumán and CGE, it could incur liability for actions or failure to act on the part of federal officials in relation to the CGE investment in Tucumán. The Argentine Republic thus denies as a matter of international law the attribution of liability for actions of Tucumán but at the same time acknowledges that the BIT places independent duties on the Argentine government vis-à-vis the

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Concession Contract. Specifically, the Argentine Republic concedes that it could be liable under Articles 3 or 5 of the BIT relating to the treatment to which foreign investors are entitled and the prohibition against expropriatory governmental action. Respondent contends, however, that since it was not a party to the Concession Contract, these obligations are in this case limited to maintaining an open environment for investment, avoiding discrimination, ensuring security and affording a forum for adjudication of disputes. Further, the Argentine Republic takes the position that the facts presented do not support any finding of inaccessibility for investment, discrimination or absence of security and, accordingly, this Tribunal should ask only whether Respondent has engaged in a denial of justice to the investor. The Argentine Republic maintains that since there is no evidence of a denial of justice on its part in this case, nor even an allegation to that effect, the Tribunal lacks jurisdiction. 49. Under international law, and for purposes of jurisdiction of this Tribunal, it is well established that actions of a political subdivision of federal state, such as the Province of Tucumán in the federal state of the Argentine Republic, are attributable to the central government. It is equally clear that the internal constitutional structure of a country can not alter these obligations. Finally, the Special Rapporteur of the International Law Commission, in discussing the proposed Commentary that confirms the attribution of conduct of political subdivisions to the federal State, has referred to the “established principle” that a federal state “cannot rely on the federal or decentralized character of its constitution to limit the scope of its international responsibilities.” 50. In this case CGE contends that the Argentine Republic itself violated its obligations under the BIT by virtue of the attribution to that central government of the acts of the Province of Tucumán. Claimants' request for relief is thus not based on a breach of the terms of the Concession Contract. For this reason, the Tribunal finds that its jurisdiction under the ICSID Convention is not, as the Argentine Republic argues, precluded by the requirement of Article 8 of the BIT that the dispute be between the French investor and the Argentine Republic. The Tribunal also concludes that it has jurisdiction over those claims of CGE that are based directly on alleged actions or failures to act of the Argentine Republic itself and that do not rely in any respect upon the principle of attribution. 51. Moreover, the Tribunal cannot accept the position of Respondent that its failure to designate or consent to the application of the ICSID Convention to the Province of Tucumán under Article 25 of that treaty deprives the Tribunal of jurisdiction to hear the claims of CGE against the Argentine Republic. The designation and consent provisions of paragraphs (1) and (3) of Article 25 stipulate that a subdivision or agency of a Contracting State may, with the permission of that State, submit itself to the jurisdiction of ICSID for purposes of resolving a legal dispute arising out of an investment dispute between that subdivision or agency and a national of another Contracting State. Those optional provisions do not apply to disputes between the Contracting State itself (in this instance the Argentine Republic) and a national of another Contracting State that may be related to an investment contract between a subdivision or agency of that State and the national. In other words, Article 25(3) does not restrict the subject matter jurisdiction of the Tribunal; rather, it creates potential efficiencies in operations of ICSID by establishing, with approval of the central government, the right of such agencies or subdivisions to be parties in their own right to an ICSID proceeding. 52. The foregoing reading of Articles 25(1) and (3) is confirmed by the negotiating history of the ICSID Convention. It shows that these provisions were designed to permit the expansion of the scope of ICSID arbitration ratione personae to include subdivisions and agencies of a Contracting State. This enlargement of the Centre's jurisdiction occurred without in any respect restricting ICSID jurisdiction ratione materiae over claims against a Contracting State arising from actions of such subdivisions or agencies that are alleged to be attributable to the Contracting State. Article 25(1) and (3) responded to the concerns that many states carried out their investment functions through distinct legal entities, including state-owned agencies and subdivisions. Article 25 consequently provided a method for giving these entities standing for purposes of ICSID arbitration as long as their Contracting State had given its consent thereto. The Tribunal also notes that the Argentine Republic did not notify its intention under Article 25(4) of the ICSID Convention to exclude ratione materiae claims based generally on actions of political subdivisions, or, more specifically, on actions of political subdivisions in relation to concession contracts. Nor has the Argentine Republic argued in these proceedings that any such express ratione materiae restriction appears in its consent to jurisdiction under the BIT or the ICSID Convention. [4] Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Serbia and Montenegro), Judgment of 26 February 2007, [2007] I.C.J. Rep. 43, 203, 205-206 (2007) [On 20 March 1993, the Republic of Bosnia and Herzegovina (“Bosnia and Herzegovina”) filed an Application instituting proceedings against the Federal Republic of Yugoslavia (Serbia and Montenegro) (“Yugoslavia”) in which it accused Yugoslavia of violations of the Genocide Convention and other international agreements. Bosnia and Herzegovina

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maintained that Yugoslavia had been involved in the hostilities in Bosnia and Herzegovina and was responsible for acts of genocide which it maintained had been committed against the people of Bosnia and Herzegovina.] 388. The Court notes first that no evidence has been presented that either General Mladić or any of the other officers whose affairs were handled by the 30th Personnel Centre were, according to the internal law of the Respondent, officers of the army of the Respondent – a de jure organ of the Respondent. Nor has it been conclusively established that General Mladić was one of those officers; and even on the basis that he might have been, the Court does not consider that he would, for that reason alone, have to be treated as an organ of the FRY for the purposes of the application of the rules of State responsibility. There is no doubt that the FRY was providing substantial support, inter alia, financial support, to the Republika Srpska (cf. paragraph 241 above), and that one of the forms that support took was payment of salaries and other benefits to some officers of the VRS, but this did not automatically make them organs of the FRY. Those officers were appointed to their commands by the President of the Republika Srpska, and were subordinated to the political leadership of the Republika Srpska. In the absence of evidence to the contrary, those officers must be taken to have received their orders from the Republika Srpska or the VRS, not from the FRY. The expression “State organ”, as used in customary international law and in Article 4 of the ILC Articles, applies to one or other of the individual or collective entities which make up the organization of the State and act on its behalf (cf. ILC Commentary to Art. 4, para. (1)). The functions of the VRS officers, including General Mladić, were however to act on behalf of the Bosnian Serb authorities, in particular the Republika Srpska, not on behalf of the FRY; they exercised elements of the public authority of the Republika Srpska. The particular situation of General Mladić, or of any other VRS officer present at Srebrenica who may have been being “administered” from Belgrade, is not therefore such as to lead the Court to modify the conclusion reached in the previous paragraph. *** 392. The passages quoted show that, according to the Court's jurisprudence, persons, groups of persons or entities may, for purposes of international responsibility, be equated with State organs even if that status does not follow from internal law, provided that in fact the persons, groups or entities act in “complete dependence” on the State, of which they are ultimately merely the instrument. In such a case, it is appropriate to look beyond legal status alone, in order to grasp the reality of the relationship between the person taking action, and the State to which he is so closely attached as to appear to be nothing more than its agent: any other solution would allow States to escape their international responsibility by choosing to act through persons or entities whose supposed independence would be purely fictitious. 393. However, so to equate persons or entities with State organs when they do not have that status under internal law must be exceptional, for it requires proof of a particularly great degree of State control over them, a relationship which the Court's Judgment quoted above expressly described as “complete dependence”. It remains to be determined in the present case whether, at the time in question, the persons or entities that committed the acts of genocide at Srebrenica had such ties with the FRY that they can be deemed to have been completely dependent on it; it is only if this condition is met that they can be equated with organs of the Respondent for the purposes of its international responsibility. *** 395. … The Court therefore finds that the acts of genocide at Srebrenica cannot be attributed to the Respondent as having been committed by its organs or by persons or entities wholly dependent upon it, and thus do not on this basis entail the Respondent's international responsibility. [5] Jan de Nul NV and Dredging International NV v. Egypt (ICSID Case No. ARB/04/13), Award of 6 November 2008 (5) [Gabrielle Kaufmann-Kohler (pres.), Pierre Mayer, Brigitte Stern] [The case concerned treaty claims arising out of a contract that the Claimants had concluded with the Suez Canal Authority (“SCA”), a public agency established under Egyptian law for the widening and deepening of certain southern stretches of the Suez Canal. The Claimants argued that the SCA deliberately deceived them by intentionally misrepresenting the conditions under which their contract with the SCA was to be performed. The Claimants alleged that the conduct of the SCA, as attributed to the Respondent, amounted in substance to violations of the duties of fair and equitable treatment, continuous protection and security, and promoting investments, set out in two successive BITs between the Belgo-Luxembourg Economic Union and Egypt.] a) Are the acts of SCA attributable to Egypt because the SCA is an organ of the State (Article 4 ILC Articles)? 158. The Tribunal will assess whether the SCA is an organ of the State, as contended by the Claimants, pursuant to Article 4 of the ILC Articles… 159. In the 2001 Commentary to Article 4 of the ILC Articles it was specified:

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(1) Paragraph 1 of article 4 states the first principle of attribution for the purpose of State responsibility in international law – that the conduct of an organ of the State is attributable to that State. The reference to a “State organ” covers all the individual or collective entities which make up the organization of the State and act on its behalf. It includes an organ of any territorial governmental entity within the State on the same basis as the central governmental organs of that State: this is made clear by the final phrase. (p. 40) 160. An organ is part of the central or decentralized structure of the State, which means that it is a person or entity which is part of the legislative, executive, or judicial powers. To determine whether an entity is a State organ, one must first look to domestic law. The SCA was created by Law No. 30/1975. It appears that the SCA is not classified as a State organ under Egyptian law. Article 2 of Law No. 30/1975, embodying the Suez Canal Authority Statutes (Exh. C-9), states that “Suez Canal Authority is a Public Authority” and that SCA “enjoys an independent juristic personality.” 161. Indeed, the SCA was created to take over the management and utilization of a nationalized activity. There is no doubt that from a functional point of view, the SCA can be said to generally carry out public activities, as acknowledged by the Respondent itself. However, structurally, it is clear that the SCA is not part of the Egyptian State, as results from Articles 4, 5 and 10 of the Law No. 30/1975. Indeed, these provisions insist on the commercial nature of the SCA activities and its autonomous budget. They read respectively as follows: Article 4 The SCA shall follow the appropriate methods of management and exploitation in accordance with what is being followed in the business enterprises without any commitment by the governmental systems and conditions. Article 5 The SCA shall have an independent budget that shall be in accordance with the rules adopted in the business enterprises without prejudice to the supervisory of the Central auditing Department on the final account of the SCA. Article 10 The SCA's funds are considered private funds. 162. For these reasons, the Tribunal concludes that the SCA is not an organ of the State, and that, as a consequence, its acts cannot be attributed to Egypt. [6] Comments and Questions The decision of the ICSID Tribunal in Compañia de Aguas del Aconquija, S.A. and Compagnie Générale des Eaux v. Argentine Republic (2000) was partially annulled on other grounds (see above). But the ad hoc Committee expressly agreed with the Tribunal on the question of attribution. The effect is that a treaty claim against a component state or province within a federation does not require designation under Article 25 (1) and (3) of the ICSID Convention, but a contract claim does. This is because under international law the State is responsible for internationally wrongful acts of subordinate bodies, whereas this is not true for domestic law contracts. Do you agree with this reasoning? Do you think it accords with the expectations underlying Article 25?

[B] State Enterprises [1] Wintershall A.G., et al. v. Government of Qatar, Partial Award on Liability of 5 February 1988, 28 I.L.M. 795, 811-812 (1989) [John R. Stevenson (pres.), Ian Brownlie, Bernardo M. Cremades] [The Claimants and the Respondent entered the thirty-year Exploration and Production Sharing Agreement – Qatar Offshore (EPSA) on 10 April 1976, effective from the date of the prior Concession Agreement of 18 June 1973. Under the EPSA, the Government of Qatar granted the Claimants the exclusive right to explore for, drill for and produce petroleum in a defined offshore area. The EPSA provided for progressive relinquishment of the contract area at specified intervals. It further provided that non-associated natural gas may be produced subject to the EPSA or to further negotiated contractual arrangements. Due to a boundary dispute with Bahrain, the Claimants were not permitted to drill in the area which they considered most likely to contain crude oil (Structure A). They did not discover commercial quantities of crude oil, but did discover commercial quantities of non-associated natural gas. At the request of the Respondent, the Claimants handed over materials relating to the economic feasibility of exploiting the gas and the proposed method of so doing. The Claimants and the Respondent entered negotiations relating to the utilization of non-associated natural gas in the contract area or an adjacent area where petroleum rights were held by the Qatar General Petroleum Corporation (QGPC), a corporation wholly-owned by the Respondent. The negotiations were unsuccessful. The Claimants referred the dispute to arbitration, alleging the Respondent breached the

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EPSA in violation of Qatari and public international law by denying Claimants permission to explore Structure A, and by failing to agree on further contractual arrangements for exploitation of the natural gas.] 2. Relationship of Government and QGPC The Tribunal is also of the view that in this case QGPC was acting as an agent of the Government of Qatar and, therefore, all actions attributed to QGPC in this case must be attributed to the Government. The Tribunal does not in any respect deny that QGPC was created as a separate independent legal personality under Qatari law, as set forth in Annex 2, C.1 of Respondent's Concluding Brief. Article (1) of Decree Law No. 10 of Year 1974 provides (in English translation) that “A Public corporation of independent legal personality shall be established to be called ‘Qatar General Petroleum Corporation’” (ASS). However, in the events at issue in this arbitration, QGPC acted as the agent of the Government in all proceedings relevant to the Tribunal's jurisdiction. Perhaps the most striking facts supporting the identity of QGPC and the Government in the events at issue in this arbitration, are summarised at paragraph 10 of Chapter XI of the Claimants' Final Brief where it is pointed out that “The Board of Directors of QGPC is appointed by the Emir and consists of 7 to 11 members, the majority of whom are officials of the Department of Petroleum Affairs of the Government. They can be removed by the Emir at will. The Minister of Finance and Petroleum is the Chairman of the Board”. The Tribunal is in agreement with the statement by the Claimants at paragraph 13 of Chapter XI of their Final Brief that “As a matter of Qatari law it is clear that QGPC operates as an arm or agent of the Government in respect of the concession areas held by it.” [2] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 5 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 42-43 (2001) Article 5 – Conduct of Persons or Entities Exercising Elements of Governmental Authority The conduct of a person or entity which is not an organ of the State under article 4 but which is empowered by the law of that State to exercise elements of the governmental authority shall be considered an act of the State under international law, provided the person or entity is acting in that capacity in the particular instance. Commentary (1) Article 5 deals with the attribution to the State of conduct of bodies which are not State organs in the sense of article 4, but which are nonetheless authorized to exercise governmental authority. The article is intended to take account of the increasingly common phenomenon of para-statal entities, which exercise elements of governmental authority in place of State organs, as well as situations where former State corporations have been privatized but retain certain public or regulatory functions. (2) The generic term “entity” reflects the wide variety of bodies which, though not organs, may be empowered by the law of a State to exercise elements of governmental authority. They may include public corporations, semi-public entities, public agencies of various kinds and even, in special cases, private companies, provided that in each case the entity is empowered by the law of the State to exercise functions of a public character normally exercised by State organs, and the conduct of the entity relates to the exercise of the governmental authority concerned. For example in some countries private security firms may be contracted to act as prison guards and in that capacity may exercise public powers such as powers of detention and discipline pursuant to a judicial sentence or to prison regulations. Private or State-owned airlines may have delegated to them certain powers in relation to immigration control or quarantine. In one case before the IranUnited States Claims Tribunal, an autonomous foundation established by the State held property for charitable purposes under close governmental control; its powers included the identification of property for seizure. It was held that it was a public and not a private entity, and therefore within the Tribunal's jurisdiction; with respect to its administration of allegedly expropriated property, it would in any event have been covered by article 5. (3) The fact that an entity can be classified as public or private according to the criteria of a given legal system, the existence of a greater or lesser State participation in its capital, or, more generally, in the ownership of its assets, the fact that it is not subject to executive control these are not decisive criteria for the purpose of attribution of the entity's conduct to the State. Instead, article 5 refers to the true common feature, namely that these entities are empowered, if only to a limited extent or in a specific context, to exercise specified elements of governmental authority. (4) Para-statal entities may be considered a relatively modern phenomenon, but the principle embodied in article 5 has been recognized for some time. For example the replies to the request for information made by the Preparatory Committee for the 1930 Codification Conference indicated strong support from some governments for the attribution to the State of the conduct of autonomous bodies exercising public functions of an administrative or legislative character. The German Government, for example,

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asserted that: “when, by delegation of powers, bodies act in a public capacity, e.g., police an area… the principles governing the responsibility of the State for its organs apply with equal force. From the point of view of international law, it does not matter whether a State polices a given area with its own police or entrusts this duty, to a greater or less extent, to autonomous bodies”. The Preparatory Committee accordingly prepared the following Basis of Discussion, though the Third Committee of the Conference was unable in the time available to examine it: “A State is responsible for damage suffered by a foreigner as the result of acts or omissions of such… autonomous institutions as exercise public functions of a legislative or administrative character, if such acts or omissions contravene the international obligations of the State”. (5) The justification for attributing to the State under international law the conduct of “para-statal” entities lies in the fact that the internal law of the State has conferred on the entity in question the exercise of certain elements of the governmental authority. If it is to be regarded as an act of the State for purposes of international responsibility, the conduct of an entity must accordingly concern governmental activity and not other private or commercial activity in which the entity may engage. Thus, for example, the conduct of a railway company to which certain police powers have been granted will be regarded as an act of the State under international law if it concerns the exercise of those powers, but not if it concerns other activities (e.g. the sale of tickets or the purchase of rolling-stock). (6) Article 5 does not attempt to identify precisely the scope of “governmental authority” for the purpose of attribution of the conduct of an entity to the State. Beyond a certain limit, what is regarded as “governmental” depends on the particular society, its history and traditions. Of particular importance will be not just the content of the powers, but the way they are conferred on an entity, the purposes for which they are to be exercised and the extent to which the entity is accountable to government for their exercise. These are essentially questions of the application of a general standard to varied circumstances. (7) The formulation of article 5 clearly limits it to entities which are empowered by internal law to exercise governmental authority. This is to be distinguished from situations where an entity acts under the direction or control of the State, which are covered by article 8, and those where an entity or group seizes power in the absence of State organs but in situations where the exercise of governmental authority is called for: these are dealt with in article 9. For the purpose of article 5, an entity is covered even if its exercise of authority involves an independent discretion or power to act; there is no need to show that the conduct was in fact carried out under the control of the State. On the other hand article 5 does not extend to cover, for example, situations where internal law authorizes or justifies certain conducts by way of self-help or self-defence; i.e. where it confers powers upon or authorizes conducts by citizens or residents generally. The internal law in question must specifically authorize the conduct as involving the exercise of public authority; it is not enough that it permits activity as a part of the general regulation of the affairs of the community. It is accordingly a narrow category. [3] Jan de Nul NV and Dredging International NV v. Egypt (ICSID Case No. ARB/04/13), Award of 6 November 2008 (6) [Gabrielle Kaufmann-Kohler (pres.), Pierre Mayer, Brigitte Stern] b) Are the acts of SCA attributable to Egypt because the SCA is a public entity having exercised governmental authority functions (Article 5 ILC Articles)? 163. … In other words, for an act to be attributed to a State under Article 5, two cumulative conditions have to be fulfilled: – –

first, the act must be performed by an entity empowered to exercise elements of governmental authority (i); second, the act itself must be performed in the exercise of governmental authority (ii).

164. The issues before the Tribunal are therefore whether the SCA (i) is empowered to exercise elements of governmental authority under Egyptian law and, if so, (ii) if it has exercised such authority vis à vis the Claimants at the time of the tender, i.e., at the time of the alleged fraud (dol), as well as during the performance of the Contract. The Tribunal will examine these two questions in turn. (i) Is the SCA empowered to exercise elements of governmental authority? 165. The test to determine if an entity falls within the scope of application of this provision is limited to the exercise of governmental authority.… 166. There is no doubt that the SCA was and still is empowered to exercise elements of governmental authority. This is clearly acknowledged by the Respondent (CMem., ¶ 286).

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The SCA is in particular empowered “to issue the decrees related to the navigation in the canal” (Article 6 of the Law No. 30/1975) or to “impose and collect charges for the navigation and passing through the canal” (Article 8). The Tribunal therefore concludes that the SCA is an entity under Article 5 of the ILC Articles. (ii) Did the SCA exercise governmental authority in its dealings with the SCA? 167. It is common ground that for an act of an independent entity exercising elements of governmental authority to be attributed to the State it must be shown that the act in question was an exercise of such governmental authority. 168. Relying on the functional test adopted by the Maffezini tribunal, this Tribunal “must establish whether specific acts or omissions are essentially commercial rather than governmental in nature or, conversely, whether their nature is essentially governmental rather than commercial. Commercial acts cannot be attributed to the State, while governmental acts should be so attributed”[Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000, para. 52]. 169. Consequently, the fact that the subject matter of the Contract related to the core functions of the SCA, i.e., the maintenance and improvement of the Suez Canal, is irrelevant. The Tribunal must look to the actual acts complained of. In its dealing with the Claimants during the tender process, the SCA acted like any contractor trying to achieve the best price for the services it was seeking. It did not act as a State entity. The same applies to the SCA's conduct in the course of the performance of the Contract. 170. It is true though that the Contract was awarded through a bidding process governed by the laws on public procurement. This is not a sufficient element, however, to establish that governmental authority was exercised in the SCA's relation to the Claimants and more particularly in relation to the acts and omissions complained of. What matters is not the “service public” element, but the use of “prérogatives de puissance publique” or governmental authority. In this sense, the refusal to grant an extension of time at the time of the tender does not show either that governmental authority was used, irrespective of the reasons for such refusal. Any private contract partner could have acted in a similar manner. 171. On such basis, the Tribunal concludes that, although the SCA is a public entity empowered to exercise elements of governmental authority, the acts of the SCA vis à vis the Claimants are not attributable to the Respondent in this arbitration on the basis of Article 5 of the ILC Articles, as they were not performed pursuant to the exercise of governmental authority. [4] Toto Construzioni Generali S.p.A. v. Lebanon (ICSID Case No. ARB/07/12), Decision on Jurisdiction of 11 September 2009 (7) [Hans van Houtte (pres.), Alberto Feliciani, Alberto Feliciani] [This is a dispute between Toto Costruzioni Generali S.p.A. (Toto), an Italian construction company that had contracted with a state-run agency to build a highway in Lebanon, and the Republic of Lebanon, submitted to ICSID pursuant to the Agreement between Italy and Lebanon on the Promotion and Reciprocal Protection of Investments. Toto alleged that the Lebanese Government created numerous problems for Toto or refused to adopt adequate corrective measures or both. These actions and omissions, according to Toto, caused material damage to the construction of the Highway, jeopardized Toto's investment in Lebanon, had a direct negative impact on the reputation of the Toto group, and constituted various breaches of the Agreement. Lebanon challenged the tribunal's jurisdiction, arguing, among other things, that it was not a party to the Contract, which was signed by the Conseil Executif des Grands Projets (“CEGP”) and assumed by the Council for Development and Reconstruction (“CDR”), two independent entities that are distinct from the state.] 54. By Law no. 295 of April 5, 2001, the CEGP was absorbed by the CDR, which assumed all the rights and obligations of the CEPG (Article 1, amending Article 15 of Law no. 247 of August 7, 2000). Following the absorption, all the projects entrusted to the CEPG were transferred to the CDR including the Contract at hand, made between the CEPG and Toto in 1997. The CDR therefore became the universal successor (ayant cause universe!) to the CEPG. The Contract made by the CEPG with Toto thus has been transferred to the CDR. In this way the CDR equally exercised elements of governmental authority of the Republic of Lebanon. 55. Moreover, as to its instituteonal status, the CDR is a public entity (in the form of an etablissement public administratif) established by Decree-Law no. 5 of January 31, 1977. It has a legal personality and enjoys administrative and financial autonomy. It is directly attached to the Council of Ministers. 56. The CDR has two types of prerogatives. It acts autonomously, notably for the tasks of the Ministry of Planning that were transferred to the CDR when the CDR replaced the Ministry pursuant to Decree-Law no. 5 of January 31, 1977. Moreover, the CDR acts as an agent of the State. 57. The CDR acts autonomously when, as the Council of Ministers' consultant, it plans and programs development and reconstruction and elaborates the economic, social, and

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financial policy to attain the set objectives. The CDR prepares the budget relating to the implementation of the general plan that it lays down, and it ensures consistency between the State budget and the general plan by giving its opinion regarding the draft of the State budget law. It also acts as a consulting authority for the drafting of legislation falling within the scope of development and reconstruction. However, all the plans and projects entrusted to the CDR must finally be approved by the Council of Ministers. 58. The CDR, however, mainly acts as the agent and implementing authority of the Lebanese Government. Pursuant to Article 5 of Decree-Law no. 5, it is in charge of studying and implementing development and reconstruction projects. It elaborates and implements the projects included in the general plan and the successive plans as well as any development and reconstruction projects assigned to it by the Council of Ministers. 59. The CDR implements all the projects entrusted to it by the Council of Ministers in the field of reconstruction and development, in areas stricken by war or natural disasters, and areas posing a threat to public health and safety. Through adjudication, solicitation of proposals or mutual agreement, it designates the public authority, public entity, municipality, mixed company, or private company which will perform the project. It represents all the public authorities and municipalities in their expropriation prerogatives: it carries out expropriations on behalf of all public authorities and municipalities. It controls all the projects included in the general plan, the projects established by it and the projects entrusted to it by the Council of Ministers. The funds allocated to the performance of the projects included in the plans approved by the Council of Ministers are provided for in the State budget. 60. Based on the foregoing, the Tribunal's view is that the CEGP and thereafter the CDR are exercising in the context of the Contract the governmental authority of the Republic of Lebanon, Therefore their acts are acts of the State of Lebanon, as also confirmed by Article 5 of the ILC Draft. Lebanon may be internationally liable for the acts of the CEGP and thereafter the CDR. This means that the Tribunal has jurisdiction ratione personae pursuant to Article 7 of the Treaty for acts committed by the CEGP and the CDR.

[C] Conduct of Private Parties [1] Tradex Hellas S.A. (Greece) v. Republic of Albania (ICSID Case No. ARB 94/2), Award of 29 April 1999, 14 ICSID Rev. – Foreign Inv. L.J. 197, 233, 235-240, 244-245 (1999) [Karl-Heinz Bockstiegel (pres.), Fred F. Fielding, Andrea Giardina] [Tradex Hellas S.A. (Tradex), a company incorporated in Greece, and an Albanian stateowned agricultural company, T.B. Torovitsa, entered an engineering, industrial, and agricultural joint venture pursuant to negotiations between Tradex and Albania. Within six months, the villagers allegedly took over part of the land, making it impossible for Tradex's employees to enter. After requests for government intervention were ignored, Tradex by agreement with Torovitsa dissolved the Joint Venture. Tradex subsequently requested ICSID arbitration, claiming compensation on the basis that a particular series of measures amounted to expropriation. Albania argued,inter alia, that no act of expropriation occurred or was attributable to Albania.] … It is uncontested between the Parties that attributability to the State is, in principle, a condition of expropriation, but they disagree as to whether certain incidents of interference, in fact, can be attributed to the Albanian State. 137. Thus, the Tribunal now has to examine each of the incidents alleged by Tradex as expropriations with regard to two questions: 1) 2)

Is there a taking of rights acquired by Tradex as part of its investment? If so, is that taking attributable to the Republic of Albania?

*** d) Alleged Invasion August/September 1992 *** 147. In any case, no evidence has been provided to prove the second condition for an expropriation, namely the attributability to the Government. Tradex alleges “that the incident of the Mali Kolaj villagers has been provoked by a state act”. But the Tribunal sees no evidence in the text of Decision 364 authorizing such an invasion and no evidence has been provided that other behaviour of the Albanian authorities encouraged villagers to invade the land. Tradex has also not shown that it contacted the authorities after these alleged invasions so that a failure to act by the authorities could be considered under the aspect of attributability to the State. 148. Therefore, the Tribunal concludes that no expropriation has been proved in connection with the alleged invasions in August/September 1992. *** g) Alleged Occupation October/November 1992 ***

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164. Taking into account the above considerations, the Tribunal concludes that Tradex has not fulfilled its burden of proof regarding these alleged occupations in October and November 1992. 165. Subsidiarily, even if the villagers felt encouraged to such occupations by Decision 452 and the Berisha speech, that would not be a sufficient basis to attribute such occupations to the State of Albania, and no other evidence has been provided as a basis for such an attributability. (See e.g. the ICSID Decision in the Amco Asia Case in which the Tribunal considered a much more direct and active involvement by the state in a private taking by army and police still not as sufficient for an attribution to the state; ICSID Reports 1, p. 377, at 455.) *** h) Alleged Occupation and Destruction of Crops by Animals on 4 December 1992 166. The only alleged occupation confirmed by a contemporaneous document is the one of 4 December 1992… 167. The Tribunal interprets this document, though it expressly only mentions “animals”, to the effect that villagers either came on the land with their animals or at least let the animals on the land and then gave the cited explanation “today the land is ours because it was given to us by the Prefecture and the Commune of Balldren”. 168. Tradex claims that these Minutes refer to damage done by the alleged invasions either in “August/September” or in “November/December” 1992. The Minutes clearly say that “today”, i.e. on 4 December 1992 the animals were caught. Even if the Minutes – and the uncontested English translation – are made in unprecise language, the meaning of “today” is clear and it is highly unprobable that minutes expressly “prepared…to demand indemnity” (last phrase of the Minutes) would have chosen “today”, if they intended to refer to an occupation that started much earlier in November. *** 169. But, as these Minutes are a contemporaneous document, the Tribunal is inclined to accept these Minutes as proof for the occupation on 4 December. But even if it also accepted that, indeed, the villagers said what is cited in the Minutes, attribution to the Albanian State would still have to be shown and proved. The cited explanation of the villagers may show what they believed, perhaps on the basis of Decision 452 and the Berisha speech, but it does not show that, in fact the Albanian State authorized the occupation. As seen above, neither Decision 452 nor the Berisha speech actually transfer property in or the right to use the land to the villagers. And Tradex has neither provided any evidence that any state authorities permitted the occupation, nor at least, that after being called by the Joint Venture or Tradex for protection, refused to grant protection. 170. Therefore, the Tribunal concludes that, in any case, the incident of 4 December 1992 cannot be considered as an expropriation due to lack of attributability to the Republic of Albania. *** m) Combined Evaluation of the Decisions and Events as Expropriation *** As the International Court of Justice pointed out in the ELSI Case, it must be proved “that the ultimate result was the consequence of the acts or omissions” of the state authorities (I.C.J. Reports 1989, section 119). Or, as the Iran-US Claims Tribunal found in the Otis Case, “a multiplicity of factors affected Claimant's enjoyment of its property rights… However, the Tribunal is not convinced that the Claimant has established that the infringement of these rights was caused by conduct attributable to the Government of Iran. The acts of interference determined by the Tribunal as being attributable to Iran are not sufficient in the circumstances of this Case, either individually or collectively, to warrant a finding that a deprivation or taking of the Claimant's participation in Iran Elevator had occurred.” (I.L.R. 84, section 47). Taking these standards into account, the Tribunal in this Case finds that Tradex has not proved that the failure of the Joint Venture was due to expropriation measures by the State of Albania. [2] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 9 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 49 (2001) (Citations selectively omitted) Article 9 – Conduct Carried Out in the Absence or Default of the Official Authorities The conduct of a person or group of persons shall be considered an act of a State under international law if the person or group of persons is in fact exercising elements of the governmental authority in the absence or default of the official authorities and in circumstances such as to call for the exercise of those elements of authority. Commentary

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(1) Article 9 deals with the exceptional case of conduct in the exercise of elements of the governmental authority by a person or group of persons acting in the absence of the official authorities and without any actual authority to do so. The exceptional nature of the circumstances envisaged in the article is indicated by the phrase “in circumstances such as to call for”. Such cases occur only rarely, such as during revolution, armed conflict or foreign occupation, where the regular authorities dissolve, are disintegrating, have been suppressed or are for the time being inoperative. They may also cover cases where lawful authority is being gradually restored, e.g., after foreign occupation. (2) The principle underlying article 9 owes something to the old idea of the levée en masse, the self-defence of the citizenry in the absence of regular forces: in effect it is a form of agency of necessity. Instances continue to occur from time to time in the field of State responsibility. Thus the position of the Revolutionary Guards or “Komitehs” immediately after the revolution in the Islamic Republic of Iran was treated by the IranUnited States Claims Tribunal as covered by the principle expressed in article 9. Yeager v. Islamic Republic of Iran concerned, inter alia, the action of performing immigration, customs and similar functions at Tehran airport in the immediate aftermath of the revolution. The Tribunal held the conduct attributable to the Islamic Republic of Iran, on the basis that, if it was not actually authorized by the Government, then the Guards… “at least exercised elements of the governmental authority in the absence of official authorities, in operations of which the new Government must have had knowledge and to which it did not specifically object.” (3) Article 9 establishes three conditions which must be met in order for conduct to be attributable to the State: first, the conduct must effectively relate to the exercise of elements of the governmental authority, secondly, the conduct must have been carried out in the absence or default of the official authorities, and thirdly, the circumstances must have been such as to call for the exercise of those elements of authority. (4) As regards the first condition, the person or group acting must be performing governmental functions, though they are doing so on their own initiative. In this respect, the nature of the activity performed is given more weight than the existence of a formal link between the actors and the organization of the State. It must be stressed that the private persons covered by article 9 are not equivalent to a general de facto government. The cases envisaged by article 9 presuppose the existence of a government in office and of State machinery whose place is taken by irregulars or whose action is supplemented in certain cases. This may happen on part of the territory of a State which is for the time being out of control, or in other specific circumstances. A general de facto government, on the other hand, is itself an apparatus of the State, replacing that which existed previously. The conduct of the organs of such a government is covered by article 4 rather than article 9. (5) In respect of the second condition, the phrase “in the absence or default of” is intended to cover both the situation of a total collapse of the State apparatus as well as cases where the official authorities are not exercising their functions in some specific respect, for instance, in the case of a partial collapse of the State or its loss of control over a certain locality. The phrase “absence or default” seeks to capture both situations. (6) The third condition for attribution under article 9 requires that the circumstances must have been such as to call for the exercise of elements of the governmental authority by private persons. The term “called for” conveys the idea that some exercise of governmental functions was called for, though not necessarily the conduct in question. In other words, the circumstances surrounding the exercise of elements of the governmental authority by private persons must have justified the attempt to exercise police or other functions in the absence of any constituted authority. There is thus a normative element in the form of agency entailed by article 9, and this distinguishes these situations from the normal principle that conduct of private parties, including insurrectionary forces, is not attributable to the State. [3] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 10 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 50 (2001) (Citations selectively omitted) Article 10 – Conduct of an Insurrectional or Other Movement 1. The conduct of an insurrectional movement which becomes the new government of a State shall be considered an act of that State under international law. 2. The conduct of a movement, insurrectional or other, which succeeds in establishing a new State in part of the territory of a pre-existing State or in a territory under its administration shall be considered an act of the new State under international law. 3. This article is without prejudice to the attribution to a State of any conduct, however related to that of the movement concerned, which is to be considered an act of that State by virtue of articles 4 to 9. Commentary

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(1) Article 10 deals with the special case of attribution to a State of conduct of an insurrectional or other movement which subsequently becomes the new government of the State or succeeds in establishing a new State. (2) At the outset, the conduct of the members of the movement presents itself purely as the conduct of private individuals. It can be placed on the same footing as that of persons or groups who participate in a riot or mass demonstration and it is likewise not attributable to the State. Once an organized movement comes into existence as a matter of fact, it will be even less possible to attribute its conduct to the State, which will not be in a position to exert effective control over its activities. The general principle in respect of the conduct of such movements, committed during the continuing struggle with the constituted authority, is that it is not attributable to the State under international law. In other words, the acts of unsuccessful insurrectional movements are not attributable to the State, unless under some other article of Chapter II, for example in the special circumstances envisaged by article 9. (3) Ample support for this general principle is found in arbitral jurisprudence. International arbitral bodies, including mixed claims commissions and arbitral tribunals have uniformly affirmed what Commissioner Nielsen in the Solis case described as a “well established principle of international law”, that no government can be held responsible for the conduct of rebellious groups committed in violation of its authority, where it is itself guilty of no breach of good faith, or of no negligence in suppressing insurrection. Diplomatic practice is remarkably consistent in recognizing that the conduct of an insurrectional movement cannot be attributed to the State. This can be seen, for example, from the preparatory work for the 1930 Codification Conference. Replies of governments to point IX of the request for information addressed to them by the Preparatory Committee indicated substantial agreement that: (a) the conduct of organs of an insurrectional movement could not be attributed as such to the State or entail its international responsibility; and (b) only conduct engaged in by organs of the State in connection with the injurious acts of the insurgents could be attributed to the State and entail its international responsibility, and then only if such conduct constituted a breach of an international obligation of that State. [4] Comments and Questions 1. 2.

Compare the situation in Colombia, where guerrillas have been controlling a large but fluctuating portion of the country for years. How would Article 10 apply in such a case? The Coalition forces in Iraq under US leadership following the fall of the Iraqi Government constitute an occupying force. Is the United States Government responsible as a matter of international law for security in Iraq? For the continued payment of public debts? For the performance of public contracts?

[D] Succession to Responsibility Responsibility under international law is that of the person or entity to which the act is attributed. This can be a state, an international organization, or some other international legal person subject to the obligation in question. Responsibility is considered as, in effect, personal to that entity. Thus on the one hand successive governments may be called on to comply with the responsibility (because it is that of the state they represent, and changes in government do not affect the continuity of the state); on the other hand, where one state is replaced by another, the successor state may be able to claim it is not responsible for earlier wrongful conduct. [1] Tinoco Case (Great Britain v. Costa Rica), Award of 18 October 1923, 1 R.I.A.A. 375, 381384 (1923) [William H. Taft (sole arbitrator)] [In January 1917, the Government of Costa Rica was overthrown by Frederico Tinoco who assumed power, called an election and established a new constitution. In August 1919, Tinoco retired and left the country. His government fell on 2 September 1919, after which the old constitution was restored and elections held. The restored government passed the “Law of Nullities No. 41", nullifying contracts between the executive power and private persons during the period of the Tinoco government, and also nullifying legislative decrees of the Tinoco government authorising the issue of fifteen million colones and the circulation of notes of the nomination of 1,000 colones. Great Britain initiated claims on behalf of two British corporations whose shares were owned by British subjects. Firstly, it claimed on behalf of the Royal Bank of Canada that the Banco Internacional of Costa Rica and the Government of Costa Rica owed the Royal Bank 998,000 colones, evidenced by 998 one thousand colone bills held by the Royal Bank. Secondly, it claimed on behalf of the Central Costa Rica Petroleum Company that a 1918 concession authorising exploration for and exploitation of oil deposits be recognised by the restored government.] The non-recognition by other nations of a government claiming to be a national personality, is usually appropriate evidence that it has not attained the independence and control entitling it by international law to be classed as such. But when recognition vel non of a government is by such nations determined by inquiry, not into its de facto sovereignty and complete governmental control, but into its illegitimacy or irregularity of

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origin, their non-recognition loses something of evidential weight on the issue with which those applying the rules of international law are alone concerned. What is true of the non-recognition of the United States in its bearing upon the existence of a de facto government under Tinoco for thirty months is probably in a measure true of the nonrecognition by her Allies in the European War. Such non-recognition for any reason, however, cannot outweigh the evidence disclosed by this record before me as to the de facto character of Tinoco government, according to the standard set by international law. Second. It is ably and earnestly argued on behalf of Costa Rica that the Tinoco government cannot be considered a de facto government, because it was not established and maintained in accord with the constitution of Costa Rica of 1871. To hold that a Government which establishes itself and maintains a peaceful administration, with the acquiescence of the people for a substantial period of time, does not become a de facto Government unless it conforms to a previous constitution would be to hold that within the rules of international law a revolution contrary to the fundamental law of the existing government cannot establish a new government. This cannot be, and is not, true. The change by revolution upsets the rule of the authorities in power under the then existing fundamental law, and sets aside the fundamental law in so far as the change of rule makes it necessary. To speak of a revolution creating a de facto government, which conforms to the limitations of the old constitution is to use a contradiction in terms. The same government continues internationally, but not the internal law of its being. The issue is not whether the new government assumes power or conducts its administration under constitutional limitations established by the people during the incumbency of the government it has overthrown. The question is, has it really established itself in such a way that all within its influence recognize its control, and that there is no opposing force assuming to be a government in its place? Is it discharging its functions as a government usually does, respected within its own jurisdiction? Reference is further made, on behalf of Costa Rica, to the Treaty of Washington, December 20, 1907, entered into by the Republics of Central America, in which it was agreed that The governments of the contracting parties will not recognize any one who rises to power in any of the five republics in consequence of a coup d’état or by a revolution against a recognized government until the representatives of the people by free elections have reorganized the country in constitutional form. Such a treaty could not affect the rights of subjects of a government not a signatory thereto, or amend or change the rules of international law in the matter of de facto governments. Their action under the treaty could not be of more weight in determining the existence of a de facto government under Tinoco, than the policy of the United States, already considered. Moreover, it should be noted that all the signatories to the treaty but Nicaragua manifested their conviction that the treaty requirement had been met in the case of the Tinoco government, by recognizing it after the adoption of the constitution of 1917 and the election of Tinoco. Third. It is further objected by Costa Rica that Great Britain by her failure to recognize the Tinoco government is estopped now to urge claims of her subjects dependent upon the acts and contracts of the Tinoco, government. The evidential weight of such nonrecognition against the claim of its de facto character I have already considered and admitted. The contention here goes further and precludes a government which did not recognize a de facto government from appearing in an international tribunal in behalf of its nationals to claim any rights based on the acts of such government. To sustain this view a great number of decisions in English and American courts are cited to the point that a municipal court cannot, in litigation before it, recognize or assume the de facto character of a foreign government which the executive department of foreign affairs of the government of which the court is a branch has not recognized. This is clearly true. It is for the executive to decide questions of foreign policy and not courts. It would be most unseemly to have a conflict of opinion in respect to foreign relations of a nation between its department charged with the conduct of its foreign affairs and its judicial branch. But such cases have no bearing on the point before us. Here the executive of Great Britain takes the position that the Tinoco government which it did not recognize, was nevertheless a de facto government that could create rights in British subjects which it now seeks to protect. Of course, as already emphasized, its failure to recognize the de facto government can be used against it as evidence to disprove the character it now attributes to that government, but this does not bar it from changing its position. Should a case arise in one of its own courts after it has changed its position, doubtless that court would feel it incumbent upon it to note the change in its further rulings. *** I do not understand the arguments on which an equitable estoppel in such case can rest. The failure to recognize the de facto government did not lead the succeeding government to change its position in any way upon the faith of it. Non-recognition may have aided the succeeding government to come into power; but subsequent presentation of claims based on the de facto existence of the previous government and its dealings does not

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work an injury to the succeeding government in the nature of a fraud or breach of faith. An equitable estoppel to prove the truth must rest on previous conduct of the person to be estopped, which has led the person claiming the estoppel into a position in which the truth will injure him. There is no such case here. *** It is urged that the subjects of Great Britain knew of the policy of their home government in refusing to recognize the Tinoco regime and cannot now rely on protection by Great Britain. This is a question solely between the home government and its subjects. That government may take the course which the United States has done and refuse to use any diplomatic offices to promote such claims and thus to leave its nationals to depend upon the sense of justice of the existing Costa Rican Government, as they were warned in advance would be its policy, or it may change its conclusion as to the de facto existence of the Tinoco government and offer its subjects the protection of its diplomatic intervention. It is entirely a question between the claimants and their own government. It should be noted that Great Britain issued no such warning to its subjects as did the United States to its citizens in this matter. [2] Arbitration of Lighthouses (France v. Greece), Claims No. 11 and 4 (PCA), Award of 24 July 1956, 23 I.L.R. 81, 88-93 (1956) [Jan Hendrik Willem Verzijl (pres.), Achille Mestre, Georges Charbouris] (Citations selectively omitted) [On 15 July 1931, France and Greece concluded an agreement to arbitrate at the PCIJ on whether a concession contract concluded in 1913 between a French firm Collas & Michel and the Ottoman Government is valid with regard to Greece as the contract concerned lighthouses situated in territories assigned to it after the Balkan wars. They agreed that following the PCIJ judgment, all pecuniary claims of Collas & Michel against the Greek Government and of the Greek Government against the firm would be settled between the firm and Greece. Failing agreement within one year, the issue would be submitted to an arbitral tribunal consisting of three members. In accordance with this agreement, the PCIJ decided that the contract was duly entered into and was accordingly operative as regards the Greek Government. (8) Thereafter, Collas & Michel entered negotiations with the Greek Government pursuant to the arbitration agreement. However, the negotiations were not a success and the French and Greek Governments subsequently commenced arbitration. In the following section of the arbitral award, the Tribunal deals with issues relating to succession to responsibility.] Claim No. 11.–The Tribunal must first enquire on whom fell the financial responsibility for the Cretan order and countermanding order concerning the construction of lighthouses at Spada and Elaphonissi. When, in December 1903, a representative of the autonomous Government of Crete asked the firm of Collas & Michel to construct two new lighthouses on the island, the firm did not wish to comply with this request without first informing the competent authorities of the Ottoman Empire about it, evidently with the principal object of ensuring that the expenses which would be involved in the construction would be repaid to them. In fact, since 1899 the firm had no longer been under an obligation to build new lighthouses at its own expense. At that time, the Ottoman Government still regarded itself as the only authority competent to take decisions on the subject of the lighting of the Cretan coast and it finally opened a credit in favour of the firm to enable it to proceed to the construction of the two lighthouses at the expense not of the Cretan budget but of the Ottoman budget. To set off this opening of a credit, the Ottoman Government regarded itself as being entitled to that part of the dues received by the firm's Cretan agencies which belonged to the State granting the concession – a claim which had at an earlier stage been recognized by the Great Powers as being in order. But it was on this point that [the project for] the construction of the two new lighthouses failed: in effect, the Cretan Government ended by making its permission to build them subject to the condition that in future the firm would pay the State's part of the receipts from the lighthouses on the island of Crete not to the Ottoman but to the Cretan Treasury – evidently considering that the setting up of the Island of Crete as an autonomous State had brought about, in accordance with international public law, its succession to the rights formerly accruing to the Ottoman Empire as the State granting the concession on March 5/17, 1897. It is conceivable that the firm, quite naturally sharing the way of thinking of the Ottoman Government – which it had already anticipated in applying to that Government in regard to the request of the Cretan Government – did not feel that it ought to accept the latter's conditions. That being so, on whom falls the prime responsibility for the abortive initial expenses incurred by the firm before the final refusal of the Cretan Government? One part of the responsibility falls on Collas & Michel. themselves; they undertook somewhat rashly preparatory work which was not necessary without first assuring themselves as to the eventual financial consequences. Another part of the responsibility falls on the Cretan Government of that time; its final refusal was in manifest contradiction with its original demand – it had not in any way

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disclosed the condition which it would eventually impose on the firm and that condition was itself unwarranted. A third part of the responsibility falls on the Ottoman Government of the day: recognizing, on the insistence of the Great Powers, the necessity for the construction of the two new lighthouses in the general interest of navigation and regarding itself as the sole authority competent to decide on that construction, it ought to have taken the necessary measures – possibly with the assistance of the Great Powers – to assure it. In view of this division between the three parties concerned of the responsibility for the events of 1903 to 1908, the Tribunal sees no real reason to saddle, after the event, Greece, who had absolutely nothing to do with the dealings between those parties, with this responsibility, in whole or in part. Not even the part of the general responsibility for the events of 1903 to 1908 to be imputed to the autonomous State of Crete can be regarded as having devolved upon Greece. Such a transmission of responsibility is not justified in the present case either from the particular point of view of the final succession of Greece to the rights and obligations of the concession in 1923/I924 – if only for the reason that the said events took place outside the scope of the concession – or from the more general point of view of its succession in 1913 to the territorial sovereignty over Crete. The connection between this territorial succession, on the one hand, and the order and cancellation by the Cretan Government in 1903 and 1908 respectively, on the other hand, are too remote to justify a decision which would fix Greece and Greece alone with the general responsibility for the acts and omissions of others who were complete strangers to her. Moreover, we are here dealing with a claim which was neither recognized as well founded by the Ottoman Empire or by Crete nor determined by a competent tribunal nor liquidated or easily liquidable on the basis of the facts giving rise to it. Claim No. 11 must therefore be rejected. Claim No. 4.–In the case of claim No. 4, the situation is presented in a totally different fashion. In this case, three aggravating circumstances which do not in any way, apply to claim No. 11 have to be taken into consideration. In the first place, the attitude of Crete, which consisted of exempting a private company from the payment of dues, was diametrically opposed to the terms of the concession contract which was binding on her either as an autonomous State, successor to the concession for Cretan territory, or as a territorial subdivision of the Ottoman Empire; and she was clearly conscious of that fact, as witness her explicit promise to indemnify the navigation company, to whom she had granted a concession for coastal trade around the island of Crete, against unpleasant consequences which might result to the latter from the patent violation of the concession [to Collas & Michel]. Secondly, the concession for the coastal service around Crete, which included one clause and certain consequences which were incompatible with the lighthouse concession for the whole of the coasts of the Ottoman Empire, was given to a Greek shipping company registered at Piraeus, under the very eyes, that is, of the Greek Government which, in view of its close relationship with the autonomous State of Crete, must have been aware of what was going on in that island. Finally, far from doing anything to check or prevent its shipping company from lending itself to these illegal transactions, Greece, on the contrary, kept in force and thus sanctioned the illegal practice under its own direct responsibility after the acquisition of territorial sovereignty and until 1914. It cannot be doubted that in acting in this way Greece undertook a responsibility of its own for the period subsequent to the acquisition of sovereignty at the end of May 1913. Are the considerations set out above equally conclusive to make Greece responsible for the violation of the concession prior to the said date from which one of her shipping companies has wrongly profited? For the reasons indicated under A above, with regard to Claim No. 12(a), no such responsibility can be placed on the succession of Greece to the concession in virtue of the special clause contained in Article 9 of Protocol XII annexed to the Treaty of Peace of Lausanne. It could result only from a transmission of responsibility in accordance with the rules of customary law or the general principles of law regulating the succession of States in general. The fact that the special provision of Protocol XII defined the extent and the starting point of the succession of Greece to the dues and concessional charges of Turkey does not in itself prevent Greece from being regarded as having succeeded similarly, but on other grounds, to the corresponding dues and charges of the autonomous State of Crete. Seen from this point of view, the question of the transmission of responsibility in the event of a territorial change presents all the difficulties of a matter which has not yet sufficiently developed to permit solutions which are both certain and applicable equally in all possible cases. It is no less unjustifiable to admit the principle of transmission as a general rule than to deny it. It is rather and essentially a question of a kind the answer to which depends on a multitude of concrete factors. … The variety of possible hypotheses of territorial succession, the political considerations which often govern the solution of juridical problems relative thereto, and the rarity of

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arbitral or judicial decisions resolving the problem in a really clear and unequivocal manner after convincing argument heard, explain both the vagaries of international practice and the chaotic state of authoritative writings. In the present case, we are concerned with the violation of a term of a contract by the legislative power of an autonomous island State the population of which had for decades passionately aspired to be united by force of arms if necessary, with Greece, which was regarded as the mother country – a violation which was recognized by the State itself as constituting a breach of the concession contract, which was effected in favour of a shipping company belonging to that same mother-country, which was endorsed by the latter as if it had been a regular transaction and which was eventually continued by her, even after the acquisition of territorial sovereignty over the island in question. In these circumstances, the Tribunal can only come to the conclusion that Greece, having adopted the illegal conduct of Crete in its recent past as autonomous State, is bound, as successor State, to take upon its charge the financial consequences of the breach of the concession contract. Otherwise, the avowed violation of a contract committed by one of the two States, linked by a common past and a common destiny, with the assent of the other, would, in the event of their merger, have the thoroughly unjust consequence of cancelling a definite financial responsibility and of sacrificing the undoubted rights of a private firm holding a concession to a so-called general principle of non-transmission of debts in cases of territorial succession, which in reality does not exist as a general and absolute principle. In this case the Greek Government with good reason commenced by recognizing its own responsibility. In the foregoing exposition, the Tribunal started with the premise that the acts of the Cretan authorities of 1908 constitute the breach of a contractual provision. The Tribunal is anxious to add to that exposition argumenti causa that even if the debt thus created by the breach of a contractual provision is regarded as a delictual or quasi-delictual obligation because it originated in an illegal act of the State, the conclusions arrived at would not be different. The thesis, one of theory rather than of practice, that there can never be a question of transmission – or more accurately, of transfer, since it is not here a matter of the effects of acts of human will, but rather of the automatic and lawful consequences of territorial changes – of delictual obligations to the successor State is not, in general, well founded. Here again, the solution must depend on the particular circumstances of each case. An obligation created by an international delict properly socalled, committed in direct violation of the law of nations, such as the invasion of a P 576 neutral territory or the arbitrary destruction of a vessel exempt from capture, is something quite different from an obligation which has an origin in private law or in administrative law and which gives rise to an international claim only in consequence of a denial of justice. The hypothesis of the voluntary union of two independent States in one unitary or federal State differs essentially from that brought about by the annexation of one State by the annexation of one State by another by force of arms. The dismemberment of a unitary State into two or more new States presents certain characteristic features which differ from those inherent in the secession of a colony from the mother country as a new independent State. All these differences cannot but exercise a decisive influence on the solution of the problem of State succession even in cases of delictual obligation. What justice, or even what juridical logic, would there be, for example, in the hypothesis of an international wrong committed against another Power by a State which subsequently splits up into two new Independent States, in regarding the later as being free from an international obligation to make compensation which would without any doubt have lain on the former, predecessor, State which had committed the wrong? Certain tendencies among writers clearly necessitate reconsideration by reason of the different kinds of possible delictual obligations and the diversity of possible hypotheses of territorial succession. The doctrinal argument which is sometimes invoked by certain German writers in support of the theory of the non-transmission of delictual or quasi-delictual obligations, that such debts present a character ‘in the highest degree personal’ (hochstpersönlich) is unconvincing. If that argument did in truth set out a general principle of law, it ought to be equally valid in civil law, but that is far from being the case. On the contrary, delictual obligations of private individuals, which appear to present the same ‘highly personal’ nature, normally pass to the heirs. That is not to say that the principles of private law are applicable as such in cases of State succession, but only that the one argument which is sometimes invoked against the transmission of delictual obligations is without force. The Tribunal is consequently of the opinion that unlike Claim No. 11, Claim No. 4, which, moreover, involves no discredit to Greece and the amount of which is easily ascertainable, must succeed. [3] Comments and Questions Is this decision based on any principle of succession to debts or liabilities?

§7.03 BREACH OF AN INTERNATIONAL OBLIGATION Assuming conduct is attributable to the state, the question whether it constitutes a breach of an obligation depends primarily on the content and interpretation of the particular obligation – whether it is contained in a treaty or arises under customary

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international law or as a result of some other source of international obligation. Although international responsibility is sometimes said to be based on the principle of “objective responsibility”, there is no general rule in the matter: some obligations are obligations of P 577 due diligence, others may entail a stricter standard.

[A] The Concept of Due Diligence and the Role of Fault [1] Alabama Arbitration, Award of 14 September 1872, in J.B. Moore, History and Digest of the International Arbitrations to which the United States has been a Party, Vol. 1, 495, 550, 572-573 (US Government Printing Office 1898) [Charles Francis Adams, Alexander James Edmund Cockburn, Frederick Sclopis, James Stämpfli, Marcos Antonio d’Araujó] [The Alabama Arbitration arose out of United States claims for compensation against Great Britain in the wake of the American Civil War of 1861-1865. The parties agreed to settle the dispute by arbitration and formulated rules that the Tribunal was to follow in the Treaty of Washington (1871). Article 6 provided the three so-called “Washington Rules” which dealt with the responsibility of a neutral State for damage caused by acts of private persons within its jurisdiction. They imposed on neutral States the obligation:] “First: To use due diligence to prevent the fitting out, arming or equipping, within its jurisdiction, of any vessel which it has reasonable ground to believe is intended to cruise or to carry on war against a Power with which it is at peace; and also to use like diligence to prevent the departure from its jurisdiction of any vessel intended to cruise or to carry on war as above, such vessel having been specially adapted, in whole or in part, within such jurisdiction; to warlike use… Thirdly: To exercise due diligence in its own ports and waters, and, as to all persons within its jurisdiction, to prevent any violation of the foregoing obligations and duties.” [The Tribunal accepted the definition of “due diligence” advanced by the United States, as follows:] The rules of the treaty, said the Case of the United States, impose upon neutrals the obligation to use due diligence to prevent certain acts. These words were not regarded by the United States as changing in any respect the obligations imposed by international law. “The United States” said the Case, (9) “understand that the diligence which is called for by the rules of the Treaty of Washington is a due diligence – that is a diligence proportioned to the magnitude of the subject and to the dignity and strength of the power which is to exercise it; a diligence which shall, by the use of active vigilance, and of all the other means in the power of the neutral, through all stages of the transaction, prevent its soil from being violated; a diligence that shall in like manner deter designing men from committing acts of war upon the soil of the neutral against its will, and thus possibly dragging it into a war which it would avoid; a diligence which prompts the neutral to the most energetic measures to discover any purpose of doing the acts forbidden by its good faith as a neutral, and imposes upon it the obligation, when it receives the knowledge of the intention to commit such acts, to use all the means in its power to prevent it. No diligence short of this would be “due”; that is commensurate with the emergency or with the magnitude of the results of negligence. Understanding the words in this sense, the United States finds them identical with the measure of duty which Great P 578 Britain had previously admitted. [2] James R. Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries, 13-14 (Cambridge University Press 2002) (10) (Citations selectively omitted) It has been said that, whereas issues such as the role of fault have been formally excluded in the text, they return interstitially; their influence is felt even if they are not spoken of. But the essential point is surely this, that different primary rules of international law impose different standards ranging from “due diligence” to strict liability, and that breach of the correlative obligations gives rise to responsibility without any additional requirements. There does not appear to be any general principle or presumption about the role of fault in relation to any given primary rule, since it depends on the interpretation of that rule in the light of its object or purpose. Nor should there be, since the functions of different areas of the law, all underpinned by State responsibility, vary so widely. But it is an error to think that it is possible to eliminate the significance of fault from the Articles, and not only in relation to former article [19]. Thus too much should not be read into this conceptual shift. It was sometimes suggested that the absence of any reference in Part One to damage, or to any form of fault (intention, lack of due diligence, etc.) implied that international law did not treat these as prerequisites for responsibility. In the sense that it did not require these in every case this was true; but it might require them in some or many cases. By referring these issues to the interpretation and application of the primary rule, the Draft Articles took an essentially neutral position, neither requiring nor excluding these elements in any given case. This was a more subtle approach, more appropriate to a general set of articles dealing with all international obligations and no longer focusing on the specific field of diplomatic protection. It corresponded to the wider range of possibilities, but it did not

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go further than that.

[B] Obligations of Conduct and Result A distinction quite frequently referred to in terms of the standard of responsibility is that between obligations of conduct and obligations of result. In some cases a state is required to do some particular act (e.g., to build a dam, to extradite a suspect); in other cases it is required to achieve a particular result (e.g., the inviolability of a mission). Obligations of result are more likely to involve due diligence rather than absolute liability – but the distinction is a relative one; everything depends on the precise language of the obligation and the relevant factual situation. What may be, generically, an obligation of result may turn into something like an obligation of specific conduct if the prohibited result is threatened in some specific way. Thus an obligation to secure the inviolability of a diplomatic mission appears to be an obligation of result – but if the P 579 mission is invaded by radical students, the situation changes! [1] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Commentary to Article 12, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 56 (2001) (Citations selectively omitted) Commentary (11) Article 12 also states that there is a breach of an international obligation when the act in question is not in conformity with what is required by that obligation, “regardless of its… character”. In practice, various classifications of international obligations have been adopted. For example a distinction is commonly drawn between obligations of conduct and obligations of result. That distinction may assist in ascertaining when a breach has occurred. But it is not exclusive, and it does not seem to bear specific or direct consequences as far as the present articles are concerned. In the Colozza case, for example, the European Court of Human Rights was concerned with the trial in absentia of a person who, without actual notice of his trial, was sentenced to six years' imprisonment and was not allowed subsequently to contest his conviction. He claimed that he had not had a fair hearing, contrary to article 6 (1) of the European Convention. The Court noted that: “The Contracting States enjoy a wide discretion as regards the choice of the means calculated to ensure that their legal systems are in compliance with the requirements of article 6 (1) in this field. The Court's task is not to indicate those means to the States, but to determine whether the result called for by the Convention has been achieved… For this to be so, the resources available under domestic law must be shown to be effective and a person ‘charged with a criminal offence’… must not be left with the burden of proving that he was not seeking to evade justice or that his absence was due toforce majeure.” The Court thus considered that article 6 (1) imposed an obligation of result. But, in order to decide whether there had been a breach of the Convention in the circumstances of the case, it did not simply compare the result required (the opportunity for a trial in the accused's presence) with the result practically achieved (the lack of that opportunity in the particular case). Rather it examined what more Italy could have done to make the applicant's right “effective”. The distinction between obligations of conduct and result was not determinative of the actual decision that there had been a breach of article 6 (1). [2] James R. Crawford, State Responsibility: The General Part, 220-223 (Cambridge University Press 2013) (11) (Citations selectively omitted) Draft Articles 20 and 21 [two of the forerunners for Article 12 of the Articles on State Responsibility for Internationally Wrongful Acts], adopted on first reading, drew a distinction between obligations of conduct and obligations of result. They provided as P 580 follows: Article 20 – Breach of an international obligation requiring the adoption of a particular course of conduct There is a breach by a State of an international obligation requiring it to adopt a particular course of conduct when the conduct of that State is not in conformity with that required of it by that obligation. Article 21 – Breach of an international obligation requiring the achievement of a specified result 1. There is a breach by a State of an international obligation requiring it to achieve, by means of its own choice, a specified result if, by the conduct adopted, the State does not achieve the result required of it by that obligation. 2. When the conduct of the State has created a situation not in conformity with the result required of it by an international obligation, but the obligation

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allows that this or an equivalent result may nevertheless be achieved by subsequent conduct of the State, there is a breach of the obligation only if the State also fails by its subsequent conduct to achieve the result required of it by that obligation. The distinction was seen as being ‘of fundamental importance in determining how the breach of an international obligation is committed in any particular instance’. The essential basis of the distinction is that obligations of conduct, while they will have some purpose or result in mind, determine with precision the means to be adopted; hence they are sometimes called obligations of means. By contrast, obligations of result do not do so, leaving it to the state party to determine the means to be used. The commentary argues that which type of obligation should be imposed in any case was not a matter for the Articles but for the authors of the primary rule. But some generalizations can be attempted. Obligations of conduct (involving either acts or omissions) are more likely to be imposed in the context of direct state-to-state relations, whereas obligations of result predominate in the treatment of persons within the internal legal order of each state. Obligations in the field of human rights, for example, involve obligations of result, since they do not prescribe precisely how the relevant rights are to be respected, and they are consistent with a diversity of laws and institutions. In this sense the distinction is implicated with a view of the state and of sovereignty: a choice of means is more likely to exist in internal than in international matters. But this is not a hard and fast rule. For example, a uniform law treaty is conceived as imposing an obligation of conduct, requiring immediate action to make the provisions of the uniform law a part of the law of the state concerned (and perhaps nothing more than that). The distinction between obligations of conduct and result is unfamiliar to the common law tradition. It derives from civil law systems, especially French law, which treats obligations of conduct as being in the nature of ‘best efforts' obligations, and obligations of result as being tantamount to guarantees of outcome. However, the distinction as framed in the Draft Articles effectively – and for no apparent reason – reversed the consequences that would attach to it, with obligations of conduct treated as the more stringent, due to their determinacy. According to the commentary, the principal consequence for the purposes of Draft Articles 20 and 21 was that

P 581

[t]he existence of a breach of an obligation of [result] is… determined in international law in a completely different way from that followed in the case of an obligation ‘of conduct’ or ‘of means' where… the decisive criterion for concluding that the obligation has been fulfilled or breached is a comparison between the particular course of conduct required by the obligation and the conduct actually adopted by the State. Governments and commentators were largely sceptical about the value of retaining the distinction in the Draft Articles. Draft Articles 20 and 21 were seen as overly complex, as a source of confusion in their obscure relationship to the traditional domestic law concepts, and as relating to the content and meaning of the primary rules, rather than secondary rules of responsibility. Evidence that international courts and tribunals find the distinction useful in deciding questions of state responsibility is also limited, and suggests that even where it is used as a means of classifying obligations, the distinction is not applied consistently. The question is usually one of interpretation of the relevant obligation, and the value of the distinction lies in its relevance to the measure of discretion left to the respondent state in carrying out the obligation. That discretion is necessarily constrained by the primary rule, and the crucial issue of appreciation is, to what extent? The distinction may help in some cases in expressing conclusions on this issue; whether it helps in arriving at them is another matter.

[C] Irrelevance of Sovereign/Commercial Act Distinction It might be thought that, because international law is concerned with the public international responsibilities of states as governmental entities, an act in breach of international law must be one characterised as a public or governmental act. But again it depends on the content of the obligation in question. If a state is obliged not to discriminate on grounds of race or religion, it may not do so in its capacity as an employer or a procurer of services – and this whether or not the employment or procurement contract might be classified for other purposes as a commercial transaction. [1] Swedish Engine Drivers’ Union v. Sweden (Application No. 5614/72), 6 February 1976, [1976] ECHR Rep., Series A – No. 20 (1976) [This case originated with an application against the Kingdom of Sweden lodged with the European Commission of Human Rights by the Swedish Engine Drivers' Union on 6 July 1972, and was subsequently referred to the European Court of Human Rights. The issue was whether the Kingdom of Sweden had failed to comply with the obligations binding on it under Articles 11, 13 and 14 of the Convention for the Protection of Human Rights and

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Fundamental Freedoms. In particular, the Swedish Engine Drivers' Union, an independent trade union, claimed that the Swedish National Collective Bargaining Office concluded collective agreements on terms of employment and conditions of work only with the three principal federations of Swedish State employees, with a consequent drop in its own membership. The Office had refused to conclude a collective agreement with the applicant Union and after its proceedings against the State before the Labour Court were P 582 unsuccessful, the Union entered this application.] I. As to the Alleged Violation of Article 11 (art. 11) 35. Article 11 para. 1 (art. 11-1) of the Convention reads: “Everyone has the right to freedom of peaceful assembly and to freedom of association with others, including the right to form and to join trade unions for the protection of his interests.” 36. In its main submission, the Government maintained that, generally speaking, the primary purpose of the Convention is to protect the individual against the State as holder of public power, but that the Convention does not oblige the State to ensure compliance with its provisions in private law relations between individuals. Article 11 (art. 11), it was contended, provides no departure from this rule. Furthermore, the applicant union was attacking not the Swedish legislative, executive or judicial authorities, but rather the National Collective Bargaining Office and thus the “State as employer”. In the sphere of work and employment conditions, the Convention cannot impose upon the State obligations that are not incumbent upon private employers. According to the Commission, on the other hand, the disputed policy pursued by the Office may in principle be challenged under Article 11 (art. 11), even if the Office fulfils typical employer functions. 37. The Convention nowhere makes an express distinction between the functions of a Contracting State as holder of public power and its responsibilities as employer. In this respect, Article 11 (art. 11) is no exception. What is more, paragraph 2 (art. 11-2) in fine of this provision clearly indicates that the State is bound to respect the freedom of assembly and association of its employees, subject to the possible imposition of “lawfull restrictions” in the case of members of its armed forces, police or administration. Article 11 (art. 11) is accordingly binding upon the “State as employer”, whether the latter's relations with its employees are governed by public or private law. Consequently, the Court does not feel constrained to take into account the circumstance that in any event certain of the applicant's complaints appear to be directed against both the Office and the Swedish State as holder of public power. Neither does the Court consider that it has to rule on the applicability, whether direct or indirect, of Article 11 (art. 11) to relations between individuals stricto sensu. [2] Comments and Questions 1. 2. P 582

Is this decision consistent with the principle of the separation of the public and private sectors which is implicit in the ILC Articles on attribution? What about contracts entered into by a governmental subdivision or agency? Does it matter if the contract is governed by domestic or international law? Does it matter if it is a contract for the purchase of pencils vs. a contract to build a power plant and supply the state?

References 1) Application of the Convention on the Prevention and Punishment of the Crime of 2)

3) 4) 5) 6) 7) 8) 9)

Genocide (Bosnia and Herzegovina v. Yugoslavia), Preliminary Objections of 11 July 1996 [1996] I.C.J. Rep. 595 (1996). In its work on diplomatic protection the ILC has not adopted the continuous nationality rule to the date of the claim: see Report of the International Law Commission on the Work of its 55th Session, Official Records of the General Assembly, Fifty-eighth Session, Supplement No. 10 (UN Doc A/58/10) paras 114-123. Available at http://italaw.com/sites/default/files/case-documents/ita0023_0.pdf (accessed 1 September 2013). Copyright 1987 by the American Law Institute. Reprinted with permission. All rights reserved. Available at http://italaw.com/sites/default/files/case-documents/ita0440.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0440.pdf (accessed 1 September 2013). Available athttp://www.italaw.com/sites/default/files/case-documents/ita0869.pdf (accessed 1 September 2013). See Lighthouses (France v. Greece), PCIJ, Series A/B, No. 62; Lighthouses in Crete and Samos, PCIJ, Series A/B, No. 71. Citing Vinnius, Comment. Ad Inst. Lib. 3, tit. 15: Ayliffe, Pandects, B. 2, tit. 13, pp. 108110; Wood's Institutes, 106; Halifax Civil Law, 78; etc. etc.

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10) Copyright 2002 by James Crawford. Reprinted with permission of Cambridge

University Press. All rights reserved.

11) Copyright 2013 by James Crawford. Reprinted with permission of Cambridge

University Press. All rights reserved.

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Chapter 8: Violations of Investor Rights Under Customary International Law

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Publication

Customary international law has long provided for the protection of aliens, including the protection of their investments in the territory of other states. Indeed, Max Huber, in Island of Palmas, suggested that the converse consideration in return for the recognition by other states of the sovereignty of a state over its territory was its obligation to ensure the customary international law rights of nationals of other states. In this chapter, we review the key forms of violations under customary international law of investor rights. The reader will appreciate from the review of bilateral investment treaties, earlier in this book, that BITs may play some role in the formation of customary international law. Hence, there may be certain overlaps, insofar as a pattern of treaty practice indicates that the practice concerned is accompanied by an opinio juris sive necessitas and has become customary.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Topics

Investment Arbitration

Bibliographic reference

§8.01 RELATIONSHIP BETWEEN CUSTOMARY INTERNATIONAL LAW AND THE INTERNATIONAL INVESTMENT LAW REGIME

'Chapter 8: Violations of Investor Rights Under Customary International Law', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 583 - 752

[A] José E. Alvarez, The Public International Law Regime Governing International Investment, 94, 105-108, 114-117 (Hague Academy of International Law 2011) (1) (Citations selectively omitted) The investment regime… is a creature of treaty and as will be addressed in subsequent chapters, is deeply intertwined with other traditional sources of international law, particularly custom. The regime was nurtured and established during and partly as a reaction to the process of decolonization that has structured so much of contemporary public international law and its institutions, including those of the UN system. *** The United States, like its European allies that had established BIT programmes decades before, sought BITs with LDCs and not developed countries because these were the States that had caused the most problems to their investors for decades. As Vandevelde suggests was true for the United States, developed States also sought to conclude such treaties in order to affirm traditional rules of customary international law that protected P 584 aliens from ill treatment. Today's norms for the protection of international investment as affirmed in BITs stem from customary rules of State responsibility towards aliens formulated during the colonial era, such as the “international minimum standard” that was viewed as reflecting the rule of law among civilized nations. Conflicts over the legitimacy and content of the standards that should govern the conduct of States in relation to foreign investors emerged at least by the late nineteenth and early twentieth centuries. Between 1829 and 1910 the United States alone entered into some 40 arbitrations with Latin American countries resulting from diplomatic “espousal” efforts on behalf of US investors. These efforts generated predictable resistance from the periphery vis-à-vis the metropole, most famously in the form of the Calvo and Drago Doctrines espoused by Latin American jurists. The response by the United States – that it was permissible to use force to collect its nationals' debts in the Western Hemisphere – suggests the vehemence of positions on both sides. North/South disputes over the applicable legal rules only grew in intensity as decolonization progressed after World War II, when many newly independent States reexamined the merits of investment contracts concluded under prior regimes, while others opted for socialist models for development that eschewed the market altogether, encouraged massive expropriations of the private sector, or sought to close their economies to foreign influences. Some developing States came to adhere to import substitution models that often proved to be nearly as hostile to the entry of foreign investors. This was the “larger context of world social events and processes” that culminated in the actions of the UN General Assembly in 1973, where over 100 nations proclaimed that all States have “full permanent sovereignty” over their natural resources and economic activities, including the right to nationalize or transfer ownership of assets to their nationals, without mention of an international legal obligation to pay compensation; and led to the adoption, with the support of 120 nations, in 1974, of a Charter of Economic Rights and Duties of States.… … The United States, which was a relative latecomer to signing BITs, developed its BIT model in reaction to the challenge at the United Nations to traditional norms of State responsibility to aliens. *** The United States' view that the BIT's requirements were but minimal intrusions on a Government's ability to regulate in the public interest was also based on the belief that much of what the US BIT provided was already contained in the traditional principles of international law regarding the treatment of aliens, drawn from principles of State

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responsibility. These included the rule proclaimed by US Secretary of State Cordell Hull against Mexico on behalf of prompt, adequate, and effective compensation upon expropriation (the “Hull Rule”), the international minimum standard of treatment, and the requirement to ensure “full protection and security” to aliens and avoid “denials of justice.” US BITs entrenched these customary rights by providing an arbitral forum for their enforcement, thereby also entrenching the underlying private law regimes necessary to support market transactions. As this suggests, the US BIT uses international law to dismantle public law regulations inimical to the market. The US Model BIT of 1987 explicitly or implicitly relies on general international law in a number of provisions. Thus, the US Model provides in Article II (2) that “[i]nvestment shall at times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by P 585 international law”. Secondly, it provides that in cases of expropriation, investors have the right to be treated “in accordance with due process of law and the general principles of treatment provided for in Article II (2)”. Thirdly, it states that investors subject to expropriation have the right to prompt review by the appropriate judicial or administrative authorities of the host State… … … Finally, it asserts that the treaty does not derogate from any better treatment accorded under, among other things, “international legal obligations… …”… As these clauses demonstrate, the US Model BIT of 1987, like many other BITs, is, at least in part, an explicit effort to provide investors with the traditional protections of customary law, including the international minimum standard and protections against denials of justice and assurances of full protection and security. Clauses such as those enumerated above are not efforts to exclude these ordinarily applicable general legal rules, as does lex specialis, but on the contrary to affirm them. This is certainly what the US BIT negotiators have confirmed was their intent. Of course, as noted, the incorporation of customary legal protections into BITs was not a useless or superfluous act. By including these clauses in a BIT and making these the basis of an investor-State claim – alongside other BIT rights that are not customary but based only on the treaty, such as the right to national treatment and most favourable treatment – rights that would otherwise depend, for enforcement, on the political intercession of Governments (and once led to gunboat diplomacy) would now also be subject to ostensibly “apolitical” dispute settlement. To this end, these treaties defined “investment disputes” that could be brought to international arbitration as including breaches of any right “conferred” by the treaty (that is where merely the forum is supplied by the treaty but that forum is applying preexisting rights under CIL or an investment contract) and not merely those “created” by the treaty.

[B] Stephen M. Schwebel, Investor-State Disputes and the Development of International Law: The Influence of Bilateral Investment Treaties on Customary International Law, 98 Am. Soc’y Int’l L. Proc. 27, 27-30 (2004) (2) (Citations selectively omitted) … Customary international law governing the treatment of foreign investment has been reshaped to embody the principles of law found in more than two thousand concordant bilateral investment treaties. With the conclusion of such a cascade of parallel treaties, the international community has vaulted over the traditional divide between capitalexporting and capital-importing states and fashioned an essentially unified law of foreign investment. For some two hundred years, the international community was divided over what law governed the treatment of foreign investment and over the content of that law. In large and loose terms, capital-exporting countries maintained that international law, which indisputably related to the treatment of aliens, related to the treatment and taking of their property as well. The standard of that treatment could not lawfully fall below the minimum standard of international law. If the property of a foreigner was expropriated by a state, the expropriation was lawful only if it was for a public purpose, not discriminatory, and accompanied by the payment of prompt, adequate, and effective P 586 compensation. Capital-importing countries tended to have another perspective. The foreign investor was governed by the law of the host state and the remedies afforded by that law alone; he was entitled to no more than national treatment, the treatment accorded by the host state to the investments of its own nationals. This fundamental doctrinal division, illustrated by the Calvo Clause, the Russian Revolution, and the famous exchanges between Cordell Hull and the Mexican Foreign Minister over Mexican oil expropriations, was carried into the post-World War II world – so much so that when the Supreme Court of the United States in the Sabbatino case in 1964 invoked the act of state doctrine to decline to pass upon Cuban expropriation of American property, it stated that: There are few if any issues in international law today on which opinion seems to be so divided as the limitations on a state's power to expropriate the property of aliens…. The disagreement as to relevant international law

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standards reflects an even more basic divergence between the national interests of capital importing and capital exporting nations and between the social ideologies of those countries that favor state control of a considerable portion of the means of production and those that adhere to a free enterprise system. (3) Attempts to restate or rework the law for the most part correspondingly divided the United Nations. While Resolution 1803 (XVII) of the General Assembly on Permanent Sovereignty over Natural Resources in 1962 brought together a large majority of the organization in recognition of the place of international law in the treatment of foreign investment, subsequent resolutions asserted the dominance, indeed the exclusivity, of national law. So did General Assembly resolutions on the New International Economic Order and the Charter of Economic Rights and Duties of States… *** Thus that charter excluded international law and directed that national law be taken into account. Major capital-exporting states voted against it. As a General Assembly resolution not adopted as declaratory of international law, which plainly was not declaratory of international law, and terms of which were vigorously contested, the charter could neither make nor reflect international law. Nevertheless, it demonstrated that the majority of the states of the international community were not, collectively, then prepared to sustain the more traditional rules of international law respecting the treatment and taking of foreign property. The numerical majority did not equate with economic power. It evidenced bloc voting rather than sovereign decision making. But it was sufficient to raise a question: If the UN General Assembly cannot make international law, can it unmake it? The Charter of Economic Rights and Duties was the high water mark of disregard, if not denigration, of the international law relating to foreign investment. At the time, much was made of it and of the so-called New International Economic Order; for years, the latter was invoked unendingly in UN resolution after resolution. But today one hardly hears of either; relatively little of them seems to be said in the rhetoric of United Nations debate, P 587 and my impression is that virtually nothing is said in exchanges between states, in the negotiation of treaties of related subject matter, and in judgments of international courts and arbitral tribunals. For not long after 1974, the tide turned. Universal, multilateral agreement, expressed in a single international instrument, on which law governs foreign investment and on the content of that law remained unachievable, not only in the United Nations, but through the Organisation for Economic Cooperation and Development. What is remarkable is that, in the last quarter century, more than 2000 bilateral investment treaties (BITs) have been concluded. BITs specify in terms more explicit, detailed, * * * and far-reaching than was ever advanced under what was customary international law in the time of Cordell Hull what may be described as an ideal law of international investment. They reflect the fact that states round the world seek to attract rather than to repel foreign investment. By the terms of these treaties, foreign investment is assured of fair and equitable treatment and full security and protection, as well as no less than national and mostfavored-nation treatment. Foreign investment is assured of management authority and control. The terms of contracts governing the investment are to be respected. If there is a taking by the state of foreign investment, direct or indirect, it must pay prompt, adequate, and effective compensation reflecting the full market value of the investment before the taking. If there is a dispute, the investor is authorized to pursue a direct, binding international arbitral remedy against the host government. Diplomatic interposition is not debarred by the Calvo Clause; it is displaced by affording the foreign investor standing to invoke an international arbitral remedy without the uncertain and sometimes politicized espousal of his own government. A few multilateral treaties of regional reach, like the European Energy Charter and the North American Free Trade Agreement, contain comparable provisions. As it was articulated in an international arbitral award of March 13, 2003: The requirement of compensation to be “just” and representative of the “genuine value of the investment affected” evokes the famous Hull Formula, which provided for the payment of prompt, adequate and effective compensation for the taking of foreign owned property. That formula was controversial. Capital exporting countries viewed it as an expression of customary international law. Developing countries and the Communist States maintained that the foreign investor was entitled to no more compensation than provided by the law of the host government however and whenever amended and applied. The controversy came to a head with the adoption by the General Assembly of the United Nations of the “Charter of Economic Rights and Duties of States.” The major capital exporting States voted against the Charter. But in the end, the international community put aside this controversy, surmounting it by the conclusion of more than 2,200 bilateral (and a few multilateral) investment treaties. Today these treaties are truly

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universal in their reach and essential provisions. They concordantly provide for payment of “just compensation,” representing the “genuine” or “fair market” value of the property taken… … The possibility of payment of compensation determined by the law of the host State or by the circumstances of the host State has disappeared from contemporary international law as it is expressed in investment treaties in such extraordinary numbers, and with such concordant provisions, as to have reshaped the body of customary international law itself. (4)

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This award went on to quote the NAFTA Award of October 11, 2002, in Mondev International v. United States of America: [T]he vast number of bilateral and regional investment treaties (more than 2000) almost uniformly provide for fair and equitable treatment of foreign investments, and largely provide for full security and protection of investments. Investment treaties run between North and South, and East and West, and between States in these spheres inter se. On a remarkably widespread basis, States have repeatedly obliged themselves to accord foreign investment such treatment. In the Tribunal's view, such a body of concordant practice will necessarily have influenced the content of rules governing the treatment of foreign investment in current international law. (5) The process by which provisions of treaties binding only the parties to those treaties may seep into general international law and thus bind the international community as a whole is subtle and elusive. It is nevertheless a real process known to international law. As the UN International Law Commission put it: An international convention admittedly establishes rules binding the contracting States only, and based on reciprocity; but it must be remembered that these rules become generalized through the conclusion of other similar conventions containing identical or similar provisions. It is submitted that this is a process of which more than 2,000 BITs are the contemporary exemplar. The result is that, when BITs prescribe treating the foreign investor in accordance with customary international law, they should be understood to mean the standard of international law embodied in the terms of some two thousand concordant BITs. The minimum standard of international law is the contemporary standard.

[C] Patrick Dumberry, Are BITs Representing the “New” Customary International Law in International Investment Law?, 28 Penn St. Int’l L. Rev. 675, 701 (2010) (6) The conclusions of this paper can be summarized as follows. 1.

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2. 3.

4.

5.

The question of the treatment to be accorded to foreign investors under customary international law has long been contentious between developed and developing states. As a result, no broad international consensus emerged as to the existing basic legal protections for foreign investors. Consequently, States have entered into BITs, containing comprehensive protection for foreign investors, precisely because of the lack of development of relevant custom rules in the field of the international investment law. What is the impact of these 2,500 BITs on the development of customary international law in this area? Some authors argue that these BITs represent the “new” customary international law and that their content is basically the same. This paper rejects this proposition. The main reason for rejecting it is based on the fact that BITs are missing the two necessary elements of customary international law. First, these BITs do not represent any consistent State practice. For instance, the inconsistency of State practice is undeniable with respect to the definition of corporate nationality under these BITs. Second, BITs also lack any opinio juris. States sign BITs clearly not out of a sense of legal obligation, but for economic motive, i.e. to attract foreign investments and to offer protection to their investors doing business abroad. It nevertheless remains that BITs will necessarily influence customary international law. Thus, BITs will contribute to the consolidation of already existing custom rules. BITs will also contribute to the crystallisation of new rules of customary international law in the future. In this age of BITs proliferation, the determination of the content of customary rules of international investment law remains of fundamental importance. Thus, custom is the applicable legal regime between a foreign investor and the host State in the absence of any BIT. The content of custom remains also essential in cases where BITs make explicit reference to custom. Finally, custom has a gap-filling role whenever a BIT is silent on a particular legal issue.

§8.02 EXPROPRIATION 383 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

[A] Introduction One of the more significant risks that foreign investors take into account in making investment decisions is the risk of investments being expropriated, whether directly or indirectly, by the States in which they are situated. In customary international law, States are permitted to exercise sovereign powers to expropriate investments, subject to some limits – namely, that any expropriation must be for a public purpose, be pursued on a non-discriminatory basis, be in accordance with the due process of law, and with just compensation. Before the proliferation of bilateral investment treaties, foreign investors seeking relief were limited to two comparatively unattractive options: trying to lobby their own States to take diplomatic actions against the States hosting their investments or pursuing compensation through the local courts of the States hosting their investments. [1] Responsibility of the State for Injuries Caused in Its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights: Fourth Report by F. V. García Amador, [1959] 2 Y.B. Int’l L. Comm’n 1, 11-12, 14-16, U.N. Doc. A/ CN.4/119 (Citations selectively omitted) P 590

41. The right of “expropriation”, even in its widest sense, is recognized in international law, irrespective of “the patrimonial rights involved or of the nationality of the person in whom they are vested”. This international recognition has been confirmed on innumerable occasions in diplomatic practice and in the decisions of courts and arbitral commissions, and, more recently, in the declarations of international organizations and conferences. Traditionally this right has been regarded as a discretionary power inherent in the sovereignty and jurisdiction which the State exercises over all persons and things in its territory, or in the so-called right of “self-preservation”, which allows it, inter alia, to further the welfare and economic progress of its population. In its resolution 626 (VII) of 21 December 1952 relating to the under-developed countries, the General Assembly has stated that “the right of peoples freely to use and exploit their natural wealth and resources is inherent in their sovereignty and is in accordance with the Purposes and Principles of the Charter of the United Nations”. *** 44. Even though it has been contended that international law places limits on the State's power to impose taxes, rates and other charges on the property, rights or other interests of aliens, particularly when the measures taken discriminate against the latter, the fundamental lawfulness of this class of measures in the international context, regardless of their nature or scope, has very seldom been disputed. The possibility of the State incurring international responsibility can only arise if the measure is of a discriminatory nature, and practical experience has shown this eventuality to be highly unlikely. The same rule can be said to apply to rights of importers and exporters and to prohibition on the import or export of specified merchandise: the State can only be held internationally responsible if the measure is not general but personal and arbitrary. Nor are there any restrictions of an international character on the State's right to control the rate of exchange of its currency and to devaluate it, although the contrary view has been advanced also on this point. In a case which arose after the Second World War, it was held that creditors who had made bank deposits before the devaluation of the legal currency were not entitled to claim the original value. *** 46. There is no doubt that some of the measures to which reference has been made result in a direct economic benefit to the State at the expense of the owners of the property concerned. But this does not occur in every instance and such benefit is not always the purpose which affords the legal grounds and justification for the measure. In the case of expropriation stricto sensu, the situation is, however, perfectly well defined. Within the definition, formulated at the beginning of this chapter, of the State's right to “affect” private property generally, this specific measure can be characterized and distinguished from others as the act whereby the State appropriates patrimonial rights vested in private individuals in order to put them to a public use or to provide a public service. It should be noted that this definition, which is complementary to the earlier one, concentrates solely on the two essential component elements of expropriation: the “appropriation” of private patrimonial rights and the purpose to which the expropriated property is to be put. A more explicit definition, mentioning not only the content and purpose of the State's action but also the grounds on which it may be based, the methods or procedures through which it may be effected, the individual or general and impersonal character which may be attributed to it, the direct or indirect form which it may assume P 591 and the scope of the obligation to compensate for the expropriated property, besides being difficult in the present context, might provoke unnecessary complications from the point of view of international law. Moreover, the distinction between a State's acts of expropriation founded on the right of “eminent domain” and those which fall within the exercise of its police power-a distinction which originally stems from differences in grounds and purposes and also has a bearing on the question of compensation-is daily becoming more difficult to make, because of the evolution which the conception of the

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State's social functions has undergone in both those areas. *** 52. There is a tendency, of relatively recent origin but shared by some authoritative writers, to extend the notion of “unlawful” expropriation to cases in which the State and the alien individual are bound by a contractual relationship. Where such a relationship exists, one of two things may occur in practice: the expropriation may simply affect (annul, rescind or modify) the contract or concession agreement under which the expropriated property or undertaking was acquired, or there may be non-observance of a specific obligation not to expropriate or otherwise to affect the stipulations contained in such an instrument. The tendency referred to above is based on the idea that, by analogy with treaties, the non-observance by the State of the obligations which it has assumed in those contracts or concession agreements constitutes a “wrongful” act, which gives rise to direct and immediate international responsibility. In brief, the premise is that the principle pacta sunt servanda applies equally to treaties and to contractual relationships between States and alien private persons. *** 57. In distinguishing between expropriation stricto sensu and the other forms in which the State's right to “affect” the property of private individuals may be exercised, it was shown that the “destination” which the expropriated property is given, in other words, the motives and purposes of the action taken by the State, is one of the essential component elements of expropriation. The question that must now be considered is the extent to which international law regulates this aspect of expropriation. *** 59. It is undeniable that, in principle at least, the test of “arbitrariness” is applicable to the motives and purposes of expropriation, for plainly, if international law recognizes the undoubtedly very wide power of the State to appropriate the property of aliens on the ground that, as under municipal law, the interests of the individual must yield to the general interest and public welfare, the least that can be required of the State is that it should exercise that power only when the measure is clearly justified by the public interest. Any other view would condone and even facilitate the abusive exercise of the power to expropriate and give legal sanction to manifestly arbitrary acts of expropriation. In certain circumstances it may, as will be shown below, be thought proper to exempt the State from the fulfilment of requirements which are in appearance as essential as this one, but in such cases the exception will be based on good grounds. In no circumstances, however, could a measure of this kind taken by the State capriciously or for reasons other than public utility, be regarded as valid at international law. This statement is not at variance with the view correctly advanced by various writers that the discretionary powers of the State in the matter are in practice unlimited, provided that P 745 the latter view is understood to mean only that it is for municipal law, and not for international law, to define in each case the “public interest” or other motive or purpose of the like character which justifies expropriation. Particularly at the present time, when regimes of private property vary widely, it would be idle to attempt to “internationalize” any one of them, however generally accepted it might seem to be, and to impose it upon States which have adopted another system in their own constitutional law. It is accordingly sufficient to require that all States should comply with the condition or requirement which is common to all; namely, that the power to expropriate should be exercised only when expropriation is necessary and is justified by a genuinely public purpose or reason. If this raison d’etre is plainly absent, the measure of expropriation is “arbitrary” and therefore involves the international responsibility of the State. 60. International law allows States greater freedom of action with regard to the method of expropriation than with regard to the motives and purposes of expropriation. For example, the system of expropriation resulting from the constitutional law of the State concerned or, as is usual in cases of “nationalization”, from special acts of the legislature, is totally irrelevant from the point of view of international law. Nevertheless, as is recognized even by the authors who most strongly maintain the primacy of municipal law in matters of expropriation, an expropriatory act “must, in this respect, exhibit the same characteristics as acts habitually falling within the exercise of governmental power. It must be the normal result of the working of the machinery of political life, that is to say, of a smooth and regular functioning of the governmental machine. Failing this it would amount to an unlawful act”. 61. … … … If an act of expropriation is contrary to the minimum standard, its illegality is not affected even by the payment of an adequate compensation. Provisions of this kind are embodied in certain treaties… 62. It would therefore seem clear that the test of “arbitrariness” can also be applied to the methods and procedures employed in expropriating alien property. Like any other measure affecting the patrimonial rights of aliens taken by the State, expropriation may in the course of the procedure by which it is effected result in a “denial of justice” and, in such case, the international responsibility of the State is undoubtedly involved. The most obvious example is, of course, that of procedures which unjustifiably discriminate between nationals and aliens to the detriment of the latter. Apart, however, from this

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eventuality, which is highly unlikely in the case of measures of individual expropriations, a “denial of justice” may result from grave procedural irregularities or, in its broadest sense, may be established on many other grounds. Subject to these reservations, which seem inescapable in the light of the general but none the less fundamental principles governing the international responsibility of States, it may be said that a State is under no obligation to adopt a method or procedure other than those provided for in the relevant provisions of municipal law. A State may even, where special circumstances require and justify such a course, depart from the usual methods and procedures, provided that in so doing it does not discriminate against aliens or commit any other act or omission which is manifestly “arbitrary”. In short, the State's freedom of action in regard to methods and procedures is in a sense wider than that it enjoys in regard to the grounds and purposes of expropriation.

[B] General Distinction Expropriation may be both direct and indirect. Direct expropriation would involve measures that result in a State gaining control over an investment or obtaining the economic benefit of an investment. Indirect expropriation, which today is the common form of expropriation, is a more nebulous concept. Examples would include measures that result in an investor effectively losing control over an investment or losing the economic benefit of an investment even if management and control are retained – this being, in some instances, gradual or “creeping” over a period of time. The Tribunal in Metalclad v. United Mexican States (ICSID Case No. ARB AF/97/1) summarized the differences between these types of expropriation as follows: “Expropriation can take various forms. Direct expropriation involves the seizure of the investor's property. But expropriation may also be indirect, as where, without the taking of property, the measures of which complaint is made substantially deprive the investment of economic value. Moreover, it is not necessary to show a single act or group of acts committed at one time… [T]here may be ‘creeping’ expropriation involving a series of acts over a period of time none of which is itself of sufficient gravity to constitute an expropriatory act but all of which taken together produce the effects of expropriation.” [1] Direct – De Jure [a] Compañía del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica (ICSID Case No. ARB/96/1), Final Award of 17 February 2000 (7) [L. Yves Fortier (pres.), Elihu Lauterpacht, Prosper Weil] [Compañía del Desarrollo de Santa Elena (“CDSE”) was formed in 1970 for the purpose of purchasing property in Santa Elena and developing it into a tourist resort and residential community. A majority of CDSE's shareholders were U.S. citizens. In May 1978, Costa Rica issued an expropriation decree for Santa Elena and proposed to pay CDSE $1.9 million as compensation, in accordance with an appraisal conducted one month earlier by one of its agencies. While CDSE did not object to the expropriation, it contested the compensation price and claimed that it should be paid $6.5 million according to an appraisal of the property conducted three months earlier by the Chief Appraiser of the Banco de Costa Rica. The dispute in the case arose over the compensation price.] 76. As is well known, there is a wide spectrum of measures that a state may take in asserting control over property, extending from limited regulation of its use to a complete and formal deprivation of the owner's legal title. Likewise, the period of time involved in the process may vary – from an immediate and comprehensive taking to one that only gradually and by small steps reaches a condition in which it can be said that the owner has truly lost all the attributes of ownership. It is clear, however, that a measure or series of measures can still eventually amount to a taking, though the individual steps in the process do not formally purport to amount to a taking or to a transfer of title. What has to be identified is the extent to which the measures taken have deprived the owner of the normal control of his property. A decree which heralds a process of administrative and judicial consideration of the issue in a manner that effectively freezes or blights the possibility for the owner reasonably to exploit the economic potential of the property, can, if the process thus triggered is not carried out within a reasonable time, properly be identified as the actual act of taking. [b] Martin Domke, Foreign Nationalizations: Some Aspects of Contemporary International Law, 55 Am. J. Int’l L. 585, 587-590 (1961) (Citations selectively omitted) Although a clear-cut definition cannot easily be formulated, it was tentatively adopted by the Institut de Droit International in 1952: Nationalization is the transfer to the State, by a legislative act and in the public interest, of property or private rights of a designated character, with a view to their exploitation or control by the State, or to their direction to a new objective by the State. (Trans.) “Nationalization differs in its scope and extent rather than in its juridical nature from other types of expropriation.” The term “expropriation,” though usually applied to

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measures taken in individual cases, is sometimes used in instances where the word “nationalization” as a measure of general change in the state's economic and social life would be more appropriate. The doctrinal viewpoint of distinguishing “nationalization” from “expropriation” may indeed have little practical effect in the reality of international legal relations. It might be preferable to use the more general term of “taking of property,” including, as stated in Article 10, paragraph 3 (a) of Harvard Draft No. 12, of February 18, 1961: not only an outright taking of property but also any such unreasonable interference with the use, enjoyment, or disposal of property as to justify an inference that the owner thereof will not be able to use, enjoy, or dispose of the property within a reasonable period of time after the inception of such interference. Thus, a recent agreement between the United States and Poland, dealing with claims “on account of the nationalization or other taking by Poland of property and of rights and interests in and with respect to property,” encompasses also in Article II (b) claims for the appropriation or the loss of use or enjoyment of property under Polish laws, decrees or other measures limiting or restricting rights and interests in and with respect to property. Although from a conceptual viewpoint, there will be numerous borderline cases where “taking” will signify a peculiar form of preventing the exercise of rights to property, including intangibles such as patents and trademarks, and also of contractual rights, the proper characterization of factual situations will not be too difficult. “Interventions” are often the forerunner of a formal and retroactive nationalization. An outright transfer of title may no longer constitute the foremost type of “taking” property in the technique of modern nationalization. There are various other means of “creeping” or “disguised” nationalization through regulations of foreign governments. Some of them were considered by the Foreign Claims Settlement Commission of the United States in cases of arbitrary and excessive taxation in Yugoslavia and Bulgaria. Confiscatory taxation, imposed by the Cuban Mining Law No. 617 of October 27, 1959, also caused the suspension of the operation of the U.S. Government-owned Nicaro Nickel Plant, after Cuba offered a purchase price which the State Department termed “so ridiculously low as to bring into question the good faith of the government of Cuba in making it.” Among the many measures which ultimately deprive the owner of his property rights is the appointment of custodians, especially for absentee owners, as recently threatened in the Congo against Belgian business interests. Nationalization of property of absentee owners has indeed played a role as retaliation against émigrés hostile to new regimes, such as in Eastern European countries and more recently also in Cuba. Whether nationalization took place effectively may become a question to be determined by foreign courts. Section 977(b) of the New York Civil Practice Act provides for the appointment of a receiver to liquidate New York assets of a foreign corporation which has been “dissolved, liquidated or nationalized… … … or has ceased to do business… … … by revocation or annulment of its organic law or by dissolution or otherwise.” This statutory provision has been applied to nationalization measures in Czechoslovakia, and, more recently, to Cuban nationalizations… [c] The Oxford Handbook of International Investment Law, 408-409 (Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), Oxford University Press 2008) (8) (Citations selectively omitted) In recent times, there have been few cases of direct expropriation in the sense of an outright taking of property. Of course there is the important exception of the 1979 Iranian nationalization of banks and insurance companies which gave rise to a number of cases brought before the Iran-US Claims Tribunal. In the course of the new wave of investment arbitration since the mid-1990s, the Sedelmayer case, in which an arbitral tribunal found that a Russian presidential decree constituted an act of direct expropriation, appears to be the exception proving the rule. Recent developments in Bolivia and Venezuela concerning governmental plans to expropriate foreign investors in the energy sector may illustrate a move back to direct expropriations. [2] Indirect – de facto – Creeping [a] Errol P. Mendes, The Canadian National Energy Program: An Example of Assertion of Economic Sovereignty or Creeping Expropriation in International Law, 14 Vand. J. Trans. L. 475, 498-501 (1981) (9) (Citations selectively omitted) If expropriation is governmental activity resulting in the deprivation of the wealth of an alien investor, new terminology such as “de facto expropriation,” “disguised expropriation,” or “creeping expropriation” must be introduced. Such indirect expropriation generally is achieved through restrictions and infringements upon: (1) the entry of foreign wealth into the country; (2) the use of foreign wealth; and (3) the revenues produced from the investment of that wealth. Within the first category are situations in

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which the host country prohibits the entry of foreign capital into certain sectors of industry, or the expansion of foreign capital from one sector of industry to another or within one’ particular sector of the industry. In the National Energy Program, the Government stated: [T]he Foreign Investment Review Act (FIRA) would also continue to play a key role in ensuring the Government's Canadianization goals. Firms that are foreign-controlled will continue to be noneligible firms for FIRA purposes. Moreover, the Foreign Investment Review Agency will vigorously enforce its investment criteria in the energy sector. The Government does not want to see the oil companies use their cash flow to expand into the non-energy part of the economy. Nor does it want foreign-controlled firms to buy alreadydiscovered oil and gas reserves. The second category involves situations in which the host state decreases the use of foreign wealth by increasing public sector ownership in a particular industry. Through taxation and exclusive rights and concessions, the host state gives the public sector an overwhelming and arguably unfair competitive edge in the marketplace. The host government may also provide the same advantage to its nationals. The National Energy Program is replete with these governmental actions. Petro-Canada, the state oil company, already had tremendous competitive advantages and will also benefit from the twenty-five percent carried interest in the federal lands and the requirement of Canadian participation in fifty percent of all oil and gas production in these areas… Under the last category of methods for achieving indirect expropriation of foreign wealth, the host government can use exorbitant taxation policies or retroactive reevaluation of existing rights and contracts. In response, the foreign-controlled firms could allege that the National Energy Program constitutes creeping expropriation. Through taxation, administrative policies, and other governmental programs that do not require the absolute transfer of foreign wealth to the state or its nationals, a host country can make operating unprofitable by imposing severe burdens and inferior competitive status on foreign corporations, thus creating de facto expropriation. Such governmental regulations could be designed to depress the trading shares of foreign-controlled firms so that a voluntary takeover by the public sector becomes more attractive. There is a lack of global consensus as to whether the use of creeping expropriation breaches the minimum international legal standard and gives rise to a requirement for compensation. Since most of the firms affected by the National Energy Program are controlled by the United States, definitions of expropriation formulated by United States entities are particularly salient. The Overseas Private Investment Corporation (OPIC), which administers the American Foreign Investment Guarantee Program, defines expropriatory action as follows: The term ‘Expropriatory Action’ means any action which is taken, authorized, ratified or condoned by the Government of the Project Country commencing during the Insurance Period, with or without compensation therefore, and for a period of one year directly results in preventing: *** (b)

(c)

the investor from effectively exercising its fundamental rights with respect to the Foreign Enterprise either as a shareholder or as a creditor, as the case may be, acquired as a result of the investment, provided, however, that rights acquired solely as a result of any undertaking by or agreement with the government of the project country, shall not be considered fundamental rights merely because they are acquired from such undertaking or agreement; or the Foreign Enterprise from exercising effective control over the use of disposition of a substantial portion of its property or from constructing their Project or operating the same.

The general terms and conditions of OPIC go on to list exceptions to the above definition of expropriatory action: Notwithstanding the foregoing, no such action shall be deemed an expropriatory action, if it occurs or continues in effect, during the aforesaid period, as the result of: 1) any law, degree, regulation or administrative action of the Government of the Project Country which is not by its express terms for the purpose of nationalization, confiscation or expropriation (including but not limited to intervention, condemnation or other taking), is reasonably related to constitutionally sanctioned governmental objectives, is not arbitrary, is based upon a reasonable classification of entities to which it applies and does not violate generally accepted principles of international law… Under OPIC's definition, an investor is a multinational parent company or an individual who makes a guaranteed investment in the host country in the form of a subsidiary company organized under the host country's laws. The subsidiary company is referred to as the foreign enterprise in OPIC's general terms. Some of the National Energy Program

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policies may constitute expropriatory actions as defined by OPIC, especially the twentyfive percent carried interest. Additionally, a retroactive interest in oil and gas production in the Canada lands could constitute an infringement of the foreign enterprise's fundamental rights. The federal government could argue, however, that the National Energy Program falls within exceptions to the definition of expropriatory action. Ensuring Canadian participation in the development of the oil and gas industry may be viewed as a constitutionally sanctioned government objective that conforms with international law. Richard Baxter and Louis Sohn have established guidelines for creeping expropriation in international law. In the Draft Harvard Convention on the International Responsibility of States for Injuries to Aliens, they provide a definition of “the taking of property”: 3(a) ‘A taking of property’ includes not only an, outright taking of property, but also any such unreasonable interference with the use, enjoyment or the disposal of property as to justify an inference that the owner thereof will not be able to use, enjoy or dispose of the property within a reasonable period of time after the inception of such interference. *** 5. An uncompensated taking of property of an alien which results from the execution of the tax laws; from a general change in the value of currency; from the action of the competent authorities of the State in the maintenance of public order, health, or morality; or from the valid exercise of their belligerent rights; or is otherwise incidental to the normal operation of the laws of the State shall not be considered wrongful, provided: (a) (c) (d)

It is not a clear and discriminatory violation of the law of the State concerned; * * * It is not an unreasonable departure from the principles of justice recognized by the principle legal systems of the world; and It is not an abuse of the powers specified in this paragraph for the purpose of depriving an alien of his property.

[b] Waste Management, Inc. v. United Mexican States (ICSID Case No. ARB(AF)/98/2), Arbitral Award of 2 June 2000 – Dissenting Opinion of Keith Highet of 8 May 2000 (10) [Bernardo M. Cremades (pres.), Keith Highet, Eduardo Siqueiros T.] [In 1998, Waste Management, Inc. initiated proceedings at ICSID against Mexico for alleged expropriation and other violations of its concession rights with respect to public waste management services. The majority of the Tribunal declined jurisdiction on the grounds that the claimant did not fulfill the waiver requirement set forth in NAFTA Article 1121. Even though Waste Management subsequently expressed its waiver in writing, satisfying the formal requirements of waiver, the Tribunal held that the material requirements of waiver were not fulfilled because the claimant had also brought the same claim which it was seeking in ICSID in a Mexican court. Mr. Keith Highet, in his dissent, provided the following definition of “creeping expropriation.”] 17. … … … [A] “creeping expropriation” is comprised of a number of elements, none of which can – separately – constitute the international wrong. These constituent elements include non-payment, non-reimbursement, cancellation, denial of judicial access, actual practice to exclude, non-conforming treatment, inconsistent legal blocks, and so forth. The “measure” at issue is the expropriation itself; it is not merely a sub-component part of expropriation. 18. A nationalization or expropriation – in particular a “creeping expropriation” comprised of numerous components – must logically be more than the mere sum of its parts. [c] Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Republic of Kazakhstan (ICSID Case No. ARB/05/16), Award of 29 July 2008 (11) [Bernard Hanotiau (pres.), Marc Lalonde, Stewart Boyd] [In 1998, Rumeli Telekom A.S. (Rumeli) and Telsim Mobil Telekomunikasyon Hizmetleri A.S. (Telsim) won a bid to hold a license to operate the second mobile telephone network in Kazakhstan through their 60% shareholding in the Kazakh company KaR-Tel. Later that year, KaR-Tel and the Kazakh State Committee on Investment concluded an investment contract, which was to expire on July 31, 2009, granting KaR-Tel investment incentives. But in 2001, various differences arose between the parties to the agreement. These disputes culminated in the unilateral termination of the investment contract by the Kazakh investment committee. Rumeli and Telsim commenced arbitral proceedings, alleging that the Republic of Kazakhstan devised a scheme to expel them from KaR-Tel in a definitive manner once the company's success was assured, and that Kazakhstan had therefore breached obligations it owed to foreign investors under international law and the Kazakhstan-Turkey BIT. An ICSID tribunal unanimously decided for the Turkish claimants. Although the Republic of Kazakhstan applied for annulment of the award, the ad hoc Committee dismissed the application in its entirety. The excerpt below is from the Tribunal's discussion of creeping expropriation.]

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(Citations selectively omitted) 683. [I]t is generally accepted that a State can expropriate an investment in a number of ways, including through acts of harassment. One of the methods is when a State forces an alien to dispose of his property at a price representing only a fraction of what it would have been had not the alien's use of its property been subjected to interference by the State. 684. An expropriation may also be ‘creeping’, i.e. a form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts which are attributable to the State over a period of time culminate in the expropriatory taking of such property. (12) 685. A distinction is indeed made in public international law between two types of expropriation: either a direct and deliberate formal act of taking, such as an outright nationalization, or an indirect taking that substantially deprives the investor of the use or enjoyment of its investment, including deprivation of the whole or a significant part of the economic benefit of property. *** 708. In summary, the conclusion of the Tribunal is that this was a case of ‘creeping’ expropriation, instigated by the decision of the Investment Committee which was then collusively and improperly communicated to Telcom Invest and its shareholders before Claimants were made aware of it, and which proceeded via a series of court decisions, culminating in the final decision of the Presidium of the Supreme Court. The decision of the Investment Committee was moreover unfair and inequitable in itself, as the Tribunal has found. *** 737. In case of creeping expropriation such as this one, the precise date of expropriation is difficult to ascertain since various events can be deemed expropriatory in nature. Arbitral tribunals have considered that, in cases of creeping expropriation, the date of expropriation is not necessarily the date of the first or of the last expropriatory event, but can be any point in time within that range when the owner has been irreversibly deprived of its property. The exact date on which this moment is deemed to have occurred is left to the discretion of the Arbitral Tribunal. [d] Walter Bau AG v. Thailand (ad hoc arbitration under the 1976 UNCITRAL Rules), Award of 1 July 2009, IIC 429 (2009) (13) [Ian Barker (pres.), Marc Lalonde, Jayavadh Bunnag] [The German constructon firm Walter Bau initiated arbitration against Thailand under the German-Thai BIT, claiming that Thailand had unlawfully interfered with investments made by its predecessor in interest in a tollway project in Thailand. By agreement of the parties, the arbitration was conducted under UNCITRAL Rules. The tribunal found that the government's treatment of the Claimant failed to protect the Claimant's reasonable and legitimate expectations relating to the assurances given, resulting in a breach of the BIT. Walter Bau was awarded €21.9 million in damages; the U.S. Court of Appeals for the Second Circuit rejected the application for annulment of the award in August 2012. (14) The following is the arbitral tribunal's assessment of Walter Bau's “creeping expropriation” claim.] (Citations selectively omitted) 10.1 The Claimant's pre-hearing submissions were extensive as to whether the conduct of the Respondent, viewed cumulatively over the years, amounted to “creeping” expropriation of its rights as an investor. Professor Crawford referred to this topic in oral submissions. However, in its post-hearing submissions, the Claimant focussed on establishing that the Respondent had breached the “fair and equitable treatment” (“FET”) requirements of the 2002 Treaty, whilst not abandoning the expropriation argument. 10.2 The 1961 Treaty in Article 3(2) offered protection against expropriation. The 2002 Treaty did likewise, but more expansively, in Article 4(2). Article 2(3) of the 2002 Treaty promised investments by investors and their returns “FET” and “full protection”. The 1961 Treaty did not have any equivalent provision obliging it to accord FET to investors and/or investments. 10.3 Given the Tribunal's decision that there is no jurisdiction ratione temporis in respect of disputes prior to October 2004, the Tribunal concentrates on examining alleged breaches under the 2002 Treaty – particularly, the alleged situations when a series of actions pre-Treaty is said to have crystallised into a dispute on a date after the Treaty had come into force. The Tribunal considers it necessary, nevertheless, first to consider the legal concepts involved in the concept of “creeping” or “indirect” expropriation. 10.4 Counsel cited various formulations of indirect expropriation, which are all dependent on the circumstances of the particular case. In Metalclad Corp. v Mexico, it was said that an expropriation occurs where the state's actions have … …”… the effect of depriving the owner in whole or in significant part of the use or reasonably to be expected economic benefit of property, even if not necessarily to the obvious benefit of the host state”.

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10.5 In Vivendi v Argentina, the Tribunal said: “The weight of authority… appears to draw a distinction between only a partial deprivation of value (not an expropriation) and a complete or near complete deprivation (expropriation)”. 10.6 In Vivendi, the purpose of a State's interference was noted by the tribunal thus: “A state’s purpose in implementing measures alleged to amount to indirect expropriation is irrelevant to a finding of whether expropriation has occurred”. 10.7 In LG & E Energy Corp. v Argentine Republic, the tribunal stated that interference with an investor's capacity to carry on business is not sufficient to establish expropriation where the investment continues to operate, even if profits are diminished. 10.8 Professor Crawford for the Claimant in oral submissions acknowledged that an indirect expropriation requires a substantial deprivation to have taken place, although such deprivation does not need to be complete. He likened what happened to the Claimant here to “death by a thousand cuts”. 10.9 In Generation Ukraine v Ukraine, the tribunal described “creeping” expropriation as: “A form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates a situation whereby a series of acts attributable to the state over a period of time culminates in the expropriatory taking of such property.” There does not have to be a formal taking of property or rights (see CME Czech Republic DV v Czech Republic). 10.10 “Creeping” expropriation was described in Parkerings v Lithuania as “The negative effect of government measures on the investors’ property rights which does not involve transfer of property but a deprivation of the enjoyment of the property”. 10.11 Taking all the above formulations into account – and they all say much the same thing – the Tribunal finds difficulty in categorising the conduct of the Respondent postOctober 2004 – and its conduct leading up to that date – “creeping expropriation” of the Claimant's investment. 10.12 Indirect or “creeping” expropriation against the Respondent has not been proved for the following reasons. 10.13 There was no expropriation of the Claimant's contractual rights as a shareholder in DMT. The Tollway is still operating and will continue to operate for many years to come with DMT as the concessionaire. As in the LG & E Energy case, the investment continued to operate, even though profits may have been diminished by the actions or inaction of the Respondent. 10.14 The Respondent did try (maybe not all that effectively) by means of MoA2, to redress some of the alleged wrongs done to the Claimant, as it had acknowledged in the Preamble to that document. It later conducted – albeit painfully slowly – negotiations which culminated in MoA3 – which, again, contained in its provisions acknowledgment by the Respondent's Council of Ministers of an agreement on a solution to the loss problem of DMT. 10.15 Even at the time of the Toll Plaza incident or “Opera” in December 2004, the then Prime Minister told the Claimant's representatives that DMT's problems would be “solved”. Although Messrs Trapp and Kramer treated this statement with scepticism, eventually, MoA3 contained the statement noted earlier. MoA3 attempted to remedy the negative effects on DMT's financial position by means of toll adjustments and an extension of the concession period. Toll adjustments no longer needed the Respondent's approval obtained through the rather tortuous and uncertain medium of Clause 25 of the Concession Agreement. By the time the Claimant sold its shares in DMT, the negotiations which culminated in MoA3 were on foot. 10.16 Nor was there the deprivation of the investor's control of the investment to the degree stated in PSEG Global v Turkey (ICSID ARB/02/5, 19 January 2007), viz. “There must be some form of deprivation of the investor in the control of the investment, the management of day-to-day-operations of the company, interfering in the administration, impeding the distribution of dividends, interfering in the appointment of officials and managers, or depriving the company of its property or control in total or in part.” (Emphasis added) 10.17 None of the actions of the Respondent reaches the level described in PSEG Global above. More than “many things wrongly handled” is required to justify a finding of expropriation. A strong interference with contractual rights needs to be shown – see Sempra Energy International v Argentina. Many of the alleged misdeeds of the Respondent were inaction rather than affirmative action. 10.18 Accordingly, the Tribunal cannot find “creeping” expropriation proved and proceeds to consider alleged breaches of the FET standard. [e] UNCTAD, Bilateral Investments Treaties in the Mid-1990s, 65-66 (United Nations 1998) (Citations selectively omitted) There have been efforts to draw distinction between expropriation and nationalization as these terms are used in customary international law. In one view, for example,

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“nationalization” refers to the seizure of an entire industry of an economy as part of a change in economic policy, while “expropriation” refers to seizure of a particular property by a country. While the terms “expropriation” and “nationalization” are generally left undefined in BITs, these treaties do not appear to have been drafted with such a distinction in mind. Rather, BIT provisions on expropriation typically apply to actions by a country that substantially impair the value of an investment, regardless of whether they amount to an isolated event or whether they are part of a major structural change in the economy. Many BITs make this clear by expressly stating that expriopriation includes measures “tantamount” or “equivalent” to expropriation… . As a result of this broad language, most BITs also apply the expropriation provisions to “indirect expropriations”. In fact, some treaties make explicit reference to indirect expropriation… Indirect expropriation occurs when the country takes an action that substantially impairs the value of an investment without necessarily assuming ownership of the investment. Accordingly, indirect expropriation may occur even though the host country disavows any intent to expropriate the investment and characterizes its actions as something other than expropriation. Where the action is equivalent to expropriation, however, the conditions imposed by the expropriation provision apply… Certain countries are more explicit about the meaning of indirect expropriation. Thus, while the model treaty prepared by Germany mentions “any other measure the effects of which would be tantamount to expropriation ro nationalization” (article 4 (2)), the protocols of many treaties concluded by Germany add the following definition of expropriation: Expropriation shall mean any taking away or restricting tantamount to the taking away of any property right which in itself or in conjunction with other rights constitutes an investment. In addition, the protocols specify that any government measure severely impairing the economic situation of an investment gives rise to an obligation to pay compensation. Some BITs concluded by the United States specify that such measures include, in particular, but are not limited to, “the levying of taxation, the compulsory sale of all or part of the investment, or impairments of the management, control or economic value of a company… …”… Most BITs are also understood to apply the expropriation provision to “creeping expropriations”. This term refers to an expropriation carried out by a series of acts over a priod of time. Any of these acts taken in isolation may appear to be a legitimate regulatory action, but ultimately their cumulative effect is to destroy substantially the value of an investment. In that situation, BITs generally regard an investment as having been expropriated. [f] Comments and Questions 1.

2.

3.

Other investment arbitration decisions discussing “creeping expropriations” include Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt (ICSID Case No. ARB/99/6), IIC 169 (2002); Generation Ukraine, Inc. v. Ukraine (ICSID Case No. ARB/00/9), Award of 16 September 2003, 44 I.L.M. 404 (2003); Siemens A.G. v. The Argentine Republic Award(ICSID Case No. ARB/02/8), IIC 227 (2007); Glamis Gold Ltd. v. United States, IIC 380 (2009); and Roussalis v. Romania (ICSID Case No. ARB/06/1), IIC 517 (2011). See generally Burns H. Weston, “Constructive Takings” under International Law: A Modest Foray Into the Problem of Creeping Expropriation, 16 Va. J. Int'l L. 103, 106 (1975); George H. Aldrich, What Constitutes a Compensable Taking of Property? The Decisions of the Iran-United States Claims Tribunal, 88 A.J.I.L. 585 (1994); Rosalyn Higgins, The Taking of Property by the State: Recent Developments in International Law in III Recueil des Cours 259 (1983); Restatement (Third) of Foreign Relations Law Section 712 CMT(g) (1989). For a comprehensive discussion on “creeping expropriations,” see W. Michael Reisman and Robert D. Sloane, Indirect Expropriation and Its Valuation in the BIT Generation, 74 Brit. Y.B. Int'l L. 115 (2004).

[C] Initial Precepts – Government is not a Guarantor or Insurer of the Investment There is no general principle of law that a State hosting an investment should be a guarantor or insurer of the profitability of that investment, without more. [a] United Kingdom v. Belgium (The Oscar Chinn case), Judgment of 12 December 1934, 3 World Court Reports 416, 436, 439 (1932-1935) (Manley O. Hudson (ed.) with the collaboration of Ruth E. Bacon, By the Carnegie Endowment for International Peace, Rumford Press, 1938) (Citations selectively omitted) The Government of the United Kingdom maintains that the reduction in transport rates

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together with the Belgian Government's promise temporarily to make good losses enabled Unatra to exercise a de factomonopoly inconsistent with freedom of trade. The Court must therefore consider whether the alleged concentrations of transport business in the hands of Unatra, of which the Government of the United Kingdom complains, and the fact that, because of this concentration, it was commercially impossible for Mr. Chinn to carry on his business, are inconsistent with the conception of freedom of trade… *** … In what the Government of the United Kingdom describes in this case as a “de facto monopoly”, the Court, however, sees only a natural consequence of the situation of the services under State supervision as compared with private concerns. The Court also sees therein, in some respects, a possible effect of commercial competition; but it cannot be argued from this that the freedom of trade and the freedom of nagivation, provided by the Convention of Saint-Germain, imply an obligation incumbent on the Belgian Government to guarantee the success of each individual concern… *** No enterprise – least of all a commercial or transport enterprise, the success of which is dependent on the fluctuating level of prices and rates – can escape from the chances and hazards resulting from general economic conditions. Some industries may be able to make large profits during a period of general prosperity, or else by taking advantage of a treaty of commerce or of an alteration in customs duties; but they are also exposed to the danger of ruin or extinction if circumstances change. Where this is the case, no vested rights are violated by the State. [b] Wena Hotels Limited v. Arab Republic of Egypt (ICSID Case No. ARB/98/4), Award of 8 December 2000 (15) [Monroe Leigh (pres.), Ibrahim Fadlallah, Don. Wallace, Jr.] [For summary of the facts, see p. 454] 84. … … … In interpreting a similar [fair and equitable treatment] provision from the bilateral investment treaty between Zaire and the United States, another ICSID panel has recently held that “the obligation incumbent on [the host state] is an obligation of vigilance, in the sense that [the host state] shall take all measures necessary to ensure the full enjoyment of protection and security of its [sic] investments and should not be permitted to invoke its own legislation to detract from any such obligation.” (16) Of course, as still another ICSID panel has observed, a host state's promise to accord foreign investment such protection is not an “absolute obligation which guarantees that no damages will be suffered, in the sense that any violation thereof creates automatically a ‘strict liability’ on behalf of the host State.” (17) A host state “is not an insurer or guarantor… …. [i]t does not, and could hardly be asked to, accept an absolute responsibility for all injuries to foreigners.” (18) … …

[D] Property Expropriated Expropriation is determined on a case-by-case basis. Measures affecting tangible property, real property, stock and shares, bank accounts, dividends, bonds, management of business, contractual rights, intangible property, shares and use of property have, for instance, been the subject of expropriation claims. [1] Tangible Property [a] Sedco, Inc. v. National Iranian Oil Company and The Islamic Republic of Iran (IUSCT Case No. 129), Award No. 309-129-3 of 2 July 1987 (19) [Nils Mangård (chairman), Charles N. Brower, Parviz Ansari Moin] [This dispute, as will be recalled, arose over six oil drilling rigs which Sedco, International, S.A. (“SISA”) operated for the Oil Service Company of Iran (“OSCO”). During the period of unrest preceeding the Iranian revolution, all of SISA's expatriate personnel left Iran, and SISA suspended operation of the rigs in question. While SISA attempted to arrange for the export of the rigs, the National Iranian Oil Company (“NIOC”) began operating them, alleging that SISA had breached its contractual duties. The Tribunal held that NIOC appropriated the rigs and owed Sedco compensation for them. Consequently, the Tribunal did not need to determine whether Iran's policy of nationalizing the oil drilling industry amounted to expropriation of the rigs.] [b] Oil Field of Texas, Inc. v. The Government of the Islamic Republic of Iran, National Iranian Oil Company (Iran-United States Claims Tribunal Case No. 43), Award No. 258-43-1 of 8 October 1986 (20) [Karl-Heinz Böckstiegel (chairman), Richard M. Mosk, Mohsen Mostafavi] [In 1975, the claimant, Oil Field of Texas, leased four systems of blowout preventers to Oil Services Company of Iran (“OSCO”). The lease required OSCO to pay Claimant a daily rate for the use of the devices, and made OSCO liable for any loss or damage to the equipment.]

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(Citations selectively omitted) 41. NIOC has retained possession of the three existing blowout preventers leased pursuant to the Lease Agreement, despite the fact that the Claimant demanded their return if rent was not paid on them. NIOC asserts it can retain possession of the equipment as long as its claims against the Claimant are not settled, and it has not made any rental payments for the period beginning January 1979 and thereafter. In a telex dated 12 July 1979, Iranian Oil Services Limited quoted to Oil Field the contents of a telex dated 3 July 1979 from OSCO to it, in which OSCO stated “that the Islamic Court of Ahwaz has instructed NIOC to stop any payment to [Oil Field] until further instructions. It will be helpful if you nominate a lawyer to pursue and resolve outstanding matters here.” In answer to questions at the Hearing, NIOC confirmed that this Court order prohibited NIOC not only from making payments, but also from returning the equipment to Oil Field… 42. It is well established in international law that the decision of a court in fact depriving an owner of the use and benefit of his property may amount to an expropriation of such property that is attributable to the state of that court.… … 43. The interference with the use of the three blowout preventers as caused by the Ahwaz Court order amounts to a taking of this equipment. NIOC's representative stated unequivocally that it was prohibited by the order of the Ahwaz Court to make further payments or to return the equipment. The Government's representative did not object to this statement. The Court order did not only have temporary effect, but, as evidenced by NIOC's continued retention of the equipment, amounted to a permanent deprivation of its use. In these circumstances, and taking into account the Claimant's impossibility to challenge the Court order in Iran, there was a taking of the three blowout preventers for which the Government is responsible. It is concluded that the date of the taking was not later than the beginning of July 1979, as reflected in the telex from Iranian Oil Services Limited to the Claimant. Consequently, the Claimant must be compensated for this expropriation in an amount equivalent to the full value of the equipment. The Claimant asserts that it is entitled to the replacement value of the three blowout preventers. The Tribunal finds that the replacement value, in the circumstances of this Case, is an appropriate measure of the value of the equipment. 44. The question whether the equipment at issue was used or new is not as such determinative as to its value. Rather, as the Claimant seeks and is entitled to its replacement value, what has to be determined is the amount it would have cost to replace the three blowout preventers that had been leased to and were retained by NIOC, based on the market conditions for such equipment at the time.… …. [2] Real Property [a] Metalclad Corporation v. The United Mexican States (ICSID Case No. ARB/ (AF)/97/1), Award of 30 August 2000 (21) [Elihu Lauterpacht (pres.), Benjamin R. Civiletti, José Luis Siqueiros] [Metalclad, a U.S. corporation, purchased a Mexican corporation which had acquired federal and state permits to build a landfill, but had been denied a municipal permit to do so. The landfill was to be located in Guadalcazar, in the Mexican state of San Luis Potosi. Shortly after Metalclad began work on the landfill, the city ordered the construction stopped because Metalclad had not obtained a municipal construction permit. While the approval of its permit application was still pending, Metalclad completed construction, but was prevented from operating the landfill due to intense local opposition. Thirteen months after the application was filed – and nine months after the landfill was completed – the city denied the municipal construction permit. Metalclad was never able to operate the landfill. Nineteen months later, the Governor of San Luis Potosi issued an Ecological Decree declaring an area including the landfill site to be a Natural Area for the preservation of a rare cactus.] (Citations selectively omitted) C. NAFTA, Article 1110: Expropriation 102. NAFTA Article 1110 provides that “[n]o party shall directly or indirectly… … … expropriate an investment… … … or take a measure tantamount to… … … expropriation… … … except: (a) for a public purpose; (b) on a nondiscriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation… … …” “A measure” is defined in Article 201(1) as including “any law, regulation, procedure, requirement or practice”. 103. Thus, expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favour of the host State, but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property even if not necessarily to the obvious benefit of the host State. 104. By permitting or tolerating the conduct of Guadalcazar in relation to Metalclad which the Tribunal has already held amounts to unfair and inequitable treatment breaching Article 1105 and by thus participating or acquiescing in the denial to Metalclad of the

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right to operate the landfill, notwithstanding the fact that the project was fully approved and endorsed by the federal government, Mexico must be held to have taken a measure tantamount to expropriation in violation of NAFTA Article 1110(1). 105. The Tribunal holds that the exclusive authority for siting and permitting a hazardous waste landfill resides with the Mexican federal government.… …. 106. As determined earlier, the Municipality denied the local construction permit in part because of the Municipality's perception of the adverse environmental effects of the hazardous waste landfill and the geological unsuitability of the landfill site. In so doing, the Municipality acted outside its authority. As stated above, the Municipality's denial of the construction permit without any basis in the proposed physical construction or any defect in the site, and extended by its subsequent administrative and judicial actions regarding the Convenio, effectively and unlawfully prevented the Claimant's operation of the landfill. 107. These measures, taken together with the representations of the Mexican federal government, on which Metalclad relied, and the absence of a timely, orderly or substantive basis for the denial by the Municipality of the local construction permit, amount to an indirect expropriation. *** 109. Although not strictly necessary for its conclusion, the Tribunal also identifies as a further ground for a finding of expropriation the Ecological Decree issued by the Governor of SLP on September 20, 1997. This Decree covers an area of 188,758 hectares within the “Real de Guadalcazar” that includes the landfill site, and created therein an ecological preserve. This Decree had the effect of barring forever the operation of the landfill. 110. The Tribunal is not persuaded by Mexico's representation to the contrary. The Ninth Article, for instance, forbids any work inconsistent with the Ecological Decree's management program. The management program is defined by the Fifth Article as one of diagnosing the ecological problems of the cacti reserve and of ensuring its ecological preservation. In addition, the Fourteenth Article of the Decree forbids any conduct that might involve the discharge of polluting agents on the reserve soil, subsoil, running water or water deposits and prohibits the undertaking of any potentially polluting activities. The Fifteenth Article of the Ecological Decree also forbids any activity requiring permits or licenses unless such activity is related to the exploration, extraction or utilization of natural resources. 111. The Tribunal need not decide or consider the motivation or intent of the adoption of the Ecological Decree. Indeed, a finding of expropriation on the basis of the Ecological Decree is not essential to the Tribunal's finding of a violation of NAFTA Article 1110. However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, constitute an act tantamount to expropriation. 112. In conclusion, the Tribunal holds that Mexico has indirectly expropriated Metalclad's investment without providing compensation to Metalclad for the expropriation. Mexico has violated Article 1110 of the NAFTA. [b] Compañia del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica (ICSID Case No. ARB/96/1), Final Award of 17 February 2000 (22) [L. Yves Fortier (pres.), Elihu Lauterpacht, Prosper Weil] [As will be recalled (p. 593 supra), claimant Compañia del Desarrollo de Santa Elena (“CDSE”) is a company formed in 1970 primarily for the purpose of purchasing and developing the region. A majority of its shareholders are citizens of the United States. CDSE purchased the property for U.S. $395,000 and began to plan its development program. In 1978, Costa Rica issued a decree expressing intent to expropriate the Santa Elena property. While both parties agreed that there was an expropriation, they disagreed on the date as of which the property must be valued and on the value as of that date. The Tribunal held that the expropriation occurred on the day of the 1978 Decree, even though it was only the first step of the expropriation process. It also held that the value of the property will be assessed as the fair market value based on all of the relevant factors that occurred up to that date.] [c] Burlington Resources Inc. v. Republic of Ecuador (ICSID Case No. ARB/08/5), Decision on Liability of 14 December 2012 (23) 111-113 [Gabrielle Kaufmann-Kohler (pres.), Brigitte Stern, Francisco Orrego Vicuña] [After Ecuador imposed a 99% windfall profits tax on its production sharing agreement, Burlington created a foreign escrow account into which it paid the tax. When Ecuador began attachment procedures against Burlington's oil fields and facilities to satisfy the unpaid tax, Burlington suspended production, at which point Ecuador enacted a Caducidad decree and entered the fields and took them over.] 529. For these reasons, the Tribunal deems that Ecuador's entry and taking of possession of the Blocks was not justified under the police powers doctrine because (i) At the time of the taking of possession of the Blocks, Burlington's decision to suspend operations was

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legally justified as a matter of Ecuadorian law and (ii) the evidence does not show that Ecuador's immediate intervention in the Blocks was necessary to prevent serious and significant damage to the Blocks… *** 537. For the foregoing reasons, the Tribunal concludes that Ecuador's physical occupation of Blocks 7 and 21 expropriated Burlington's investment as of 30 August 2009. This being so, the next question that arises is whether this expropriation was unlawful… *** 543. It is undisputed that Ecuador has neither paid nor offered compensation to Burlington. Many tribunals have held that the lack of payment is sufficient for the expropriation to be deemed unlawful. Ecuador asserts that it offered no compensation to Burlington because it was disputed whether there was expropriation at all. While this may have been true at the time of Law 42 and the coactiva, there can be no legitimate dispute that Ecuador appropriated for itself the benefits of Burlington's investment from the time of the physical takeover. There can be no dispute either that Ecuador was aware that compensation was due, for it offered to pay compensation to other oil companies when it took over their operations. 544. In spite of these considerations, Ecuador made no offer of compensation. The fact thus remains that Ecuador made no “prompt, adequate and effective” payment to compensate for the expropriation of Burlington's investment. Ecuador's reliance on Goetz v. Burundi, 906 in which the Tribunal gave the State the option between paying compensation or withdrawing the expropriatory measure, does not change this fact. At any rate, nothing prevents Ecuador from making an offer after this decision, and possibly reaching a settlement with Burlington which would put an end to this arbitration. 545. Accordingly, the Tribunal cannot but conclude that Ecuador's expropriation was unlawful. [3] Stocks and Shares [a] Dr. Horst Reineccius, First Eagle SoGen Funds, Inc., Mr. Pierre Mathieu and la Société de Concours Hippique de la Châtre v. Bank of International Settlements, Arbitral Tribunal of the Bank of International Settlements (Permanent Court of Arbitration), Partial Award of 22 November 2002 on the Lawfulness of the Recall of the Privately Held Shares on 8 January 2001 and the Applicable Standards for Valuation of Those Shares, 74-75, 77-81 [W. Michael Reisman (pres.), Jochen A. Frowein, Mathias Krafft, Paul Lagarde, Albert Jan van den Berg] (24) [Although shares in the Bank of International Settlements (“BIS” or “Bank”) are held primarily by governments, as of 2000 13.73% of these shares were held by private investors. In early 2001, the Board of Governors of the BIS amended the BIS Statutes to require the recall of all privately-held shares with compensation determined by the Bank. Private investors who had owned BIS shares challenged this decision.] (Citations selectively omitted) 161. In situations of expropriation of the shares of foreign investors, the practice of international law rather consistently has valued the shares by reference to their market value, in circumstances in which an efficient market operated. 162. In American Int’l Group, Inc., the claimant sought compensation for its minority shareholding in an Iranian insurance company that was nationalized by the Government of Iran. The claimant requested the “full value” of its interest as of the date of nationalization and the tribunal concluded that the compensation due was the claimant's share of the fair market value of the property nationalized. In calculating the fair market value, the tribunal ascertained the “higher and lower limits of the range within which the value of the company could reasonably be assumed to lie,” and then arrived at a compensation value by way of an “approximation of that value, taking into account all relevant circumstances of that case.” 163. In the case of James Saghi, the claimants were the majority shareholders of two Iranian companies that were put under management of the Iranian Government. The claimants alleged deprivation of ownership rights in the companies even though there was no formal expropriation. The tribunal observed that fair market value would be the applicable standard of compensation and summarized the state of customary international law with respect to fair market value as follows: Fair market value may be defined as “the amount which a willing buyer would have paid a willing seller for the shares of a going concern, disregarding any diminution of value due to the nationalization itself or the anticipation thereof, and excluding consideration of events thereafter that might have increased or decreased the value of the shares.” On the other hand, while any diminution of value caused by the deprivation of property itself should be regarded, “prior changes in the general political, social and economic conditions which might have affected the enterprise's business prospects as of the date the enterprise was taken should be considered.”

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The tribunal applied a method of “reasonable approximation” in arriving at the fair market value, taking into account the impact of the Iranian Revolution and currency inflation. 164. International jurisprudence supports finding fair market value by reference to a share trading price when available.… …. 168. Furthermore, the Tribunal is not persuaded by the Bank's conception of the international legal standard of compensation as one of “appropriate” compensation. While it is true that the jurisprudence of the European Court of Human Rights has adopted a flexible standard, described as one of “appropriate” compensation for takings by a state of the property of its nationals, the analogy of the Bank to a state taking the property of the shareholders, who are to be deemed its “nationals” is unpersuasive. The issue of the general relevance of regional Human Rights law aside, the mainstream of general international law, were it to apply to this case, has required full compensation. While that standard may have been qualified during the Cold War and may have been adjusted in some cases in which certain developing countries, particularly with respect to petroleum, nationalized their single or primary resource, it is clear that it has been reestablished in the recent jurisprudence. *** 172. The Tribunal has found that the Bank is an international organization. While the Bank is, thus, subject to international law, all Parties agree that the rights of shareholders are, in the first instance, determined by the Constituent Instruments.… … 173. Thus the Parties agree that the issue that falls to be decided here must be resolved by reference to the Bank's Constituent Instruments and only by international law should the Constituent Instruments fail to provide an answer. Because the Parties agree that the questions posed to the Tribunal should be resolved in the first instance by reference to the Constituent Instruments of the Bank, the relationship of the Statutes to international law must be clarified. The Constituent Instruments of the Bank constitute a lex specialis as between the Parties. Insofar as the lex specialis in this case – the 1930 Agreement, the Charter and the Statutes – provides an answer to the questions arising in this case, the Tribunal would not be permitted to turn to international law – unless the lex specialis purported to incorporate an explicitrenvoi to general international law or would have violated a fundamental principle of international law. 174. In fact, neither the applicable law clause of the 1907 Convention for the Pacific Settlement of International Disputes nor the 1930 Hague Agreement incorporate a renvoi to international law, as such… In sum, the lex specialis of this case – the 1930 Agreement, the Charter and the Statutes – was conceived as self-contained and not incorporating general international law, except insofar as the lex specialisfailed to provide an answer to a question that might arise or violated a fundamental principle of international law. In that eventuality, a Tribunal seised of the case was to turn to general international law. 175. The right to compensation is part of both general international law and the specific area of Human Rights law and it is quite possible that an action purporting to abrogate such a right might be held to be invalid for violation of international law. If the Statutes had purported to deny shareholders compensation, a general international law problem could have arisen. But in the instant case, the Statutes did require compensation and the fact that the lex specialis, because of the specific provisions of the Statutes establishing the equal rights of the shares, might prescribe a higher amount than would general international law cannot be considered a breach of international law. Hence there is no ground for the Tribunal to depart from the lex specialis applicable to the Parties and to use the international law standard which would apply market value for the shares. [4] Bank Accounts [a] American Bell International, Inc. v. The Islamic Republic of Iran, The Ministry of Defense of the Islamic Republic of Iran, the Ministry of Post, Telegraph and Telephone of the Islamic Republic of Iran, and The Telecommunications Company of Iran (IUSCT Case No. 48), Award No. 255-48-3 of 19 September 1986 (25) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [In 1975, American Bell International, Inc. (“ABII”) won a contract to assist the Iranian government in a program for the modernization of its military and civilian telecommunications system. During the period of political unrest proceeding the revolution the government stopped paying ABII's invoices, and ABII stopped its work on the program soon afterward. ABII quickly removed its personnel from Iran. The excerpt below concerns the smallest of ABII's five categories of claims.] (Citations selectively omitted) E. Expropriation of Bank Account 147. ABII's final claim is for $283,964, the value of funds held in a bank account in Iran which were allegedly expropriated by the Government of Iran. The ABII funds in question were held in a joint ABII/TCI account established at Bank Melli by virtue of an arrangement of 19 March 1979 to which ABII apparently only reluctantly agreed. The funds

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in this account, originally 61,000,000 rials, were used to satisfy ABII's outstanding affairs with creditors subsequent to its departure. Transactions on the account were to be made subject to the joint signature of TCI and ABII's representatives at Price Waterhouse. Proceeds of sales of ABII's assets were to be deposited into this account and then reapplied to the satisfaction of any outstanding obligations. 148. It appears that by June 1979 a substantial amount of the outstanding obligations of ABII had been settled. In that month ABII's representative telexed the Minister of Post, Telephone and Telegraph, Dr. Islami, objecting to the fact that, despite contrary assurances, the balance of the funds, about 20,000,000 rials had not been released to ABII. This request for the release was subsequently repeated at least in letters addressed to Dr. Islami in October and November 1979, when almost all of the obligations had been satisfied. These requests were not complied with. Instead, on 10 August 1980 the Minister, in a letter personally forwarded by a TCI representative to ABII's Iranian representative at Price Waterhouse with the authority to sign on behalf of ABII, requested that Price Waterhouse transfer the funds to a TCI account at Bank Melli. In a letter dated 19 August 1980 to ABII the representative reported that he was informed that “non-compliance with the payment request would have serious personal consequences for [him] and would in any case not stop TCI obtaining access to ABII's funds.” The representative then authorized the transfer of the 19,976,850 rials which was effected on 11 August 1980. Since then ABII has not had any access to the funds. 149. Claimant contends that the above actions constitute expropriation under international law for which Iran is responsible. Respondents do not deny the appropriation of the funds, but contend that the acts in question do not amount to expropriation or usurpation under Iranian law, the governing law of the contracts. 150. The Tribunal notes that in the circumstances of the present case there is no need to discuss the applicable law at length. Where, as here, both the purpose and effect of the acts are totally to deprive one of funds without one's voluntarily given consent, the finding of a compensable taking or appropriation under any applicable law – international or domestic – is inevitable, unless there is clear justification for the seizure. The only conceivable justification for the taking of the funds would have been the settlement of outstanding accounts with landlords and creditors of ABII. Although ABII's letters from as late as October and November 1979 indicate that at that time some minor portion of such accounts remained unsettled, there is no evidence provided by Respondents that any outstanding obligation remained unsettled in the following August. 151. In view of the above, the Tribunal concludes that Claimant was wrongfully deprived of its bank account of 19,976,850 Rials. Therefore ABII is entitled to an award of U.S.$283,964, i.e, the value of the property as of the date of the taking. [5] Dividends [a] Foremost Tehran, Inc., et al. v. The Government of the Islamic Republic of Iran, et al. (IUSCT Case Nos. 37 and 231), Award No. 220-37/231-1 of 11 April 1986 (26) [Gunnar Lagergren (pres.), Koorosh-Hossein Ameli, Howard M. Holtzmann] [Foremost, a family of U.S. companies, owned between 30 and 31 percent of Pak Dairy, an Iranian dairy company. For a period of time, Foremost held a majority interest in Pak Dairy. Even after that interest was reduced in 1976 to a minority holding, one of Foremost's representatives continued to serve as managing director of the company until his resignation in November 1979. By mid-1979, entities controlled by the Iranian government had come to control a majority interest in Pak Dairy, but representatives of Foremost continued to exercise their right to serve on Pak Dairy's board of directors. The major issue in the excerpt below is whether the Pak Dairy board's decision not to pay Foremost its share of the cash dividend in 1979 and 1980, and not to deliver Foremost its stock dividend in 1980, deprived Foremost of a sufficient amount of its ownership rights to amount to an expropriation.] (Citations selectively omitted) … After Mr. Fisher resigned from that office in November 1979, Mr. Asghari, a colleague of long standing, was appointed to succeed him as managing director at a board meeting held on 15 November 1979, when the board accepted Mr. Fisher's resignation “after thanking him for his efforts during several years in office”. Foremost maintained its two places on the board in the person of Mr. Fisher, who appointed a proxy, and Mr. Neil Dinaut, who represented Foremost Shir. The minutes of that meeting record that Dr. Ameli appended a note urging that all “foreign contracts” entered into by Pak Dairy should be “reconsidered” and that no further payments should be made in respect of them. There followed a board meeting on 17 February 1980, held at the offices of the Financial Organisation and chaired by Mr. Haghshenas of IMDBI. The object of the meeting was to discuss the year's accounts and decide on the distribution of the company's profits. On behalf of the Financial Organisation, Dr. Ameli proposed that “the minimum amount of the legal dividend be paid to the shareholders and the balance be appropriated for the purpose of creating a reserve fund for severance pay” for the company's workers. The proposal as to severance pay was based on the recommendation of Pak Dairy's auditor, and it was extensively debated at the meeting. Mr. Vahdati, who by now was serving as

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proxy for both Foremost directors, was absent from the meeting. He was, however, present when the discussion was resumed at the next meeting, held at Dr. Ameli's office on 10 March 1980, again under the chairmanship of Mr. Haghshenas. A decision was taken at that meeting to set up the severance pay reserve fund. In the ensuing discussion about dividends, the minutes state that the representatives of the Financial Organization… … … expressed their opinion that the minimum dividend should be divided among the shareholders; that the balance [of the profit] be credited to the company's reserve fund and that no stock dividend be issued. Their reason for this action was the presence of foreign shareholders in the company. By this action, they wanted to hold the amount paid to the foreigners to the minimum. One of the factors taken into consideration in arriving at the dividend was that the profits made by the company under current laws and regulations belong to the company and, the shareholders have a right thereto in proportion to their capital investment, therefore, whether there is a distribution in cash, or a stock dividend, or a reservation of a portion as undivided profit, it will not in principle change the rights of the shareholders to the profits earned; especially because due to the existing dispute between the governments of Iran and the United States, the payment of profits to the foreign shareholders has been suspended for the time being… … A dividend of eighteen percent of the profit in cash and ten percent in stock was declared on 15 April 1980. The next development of significance occurred when Foremost wrote a letter to Mr. Asghari on 21 May 1980 requesting that the amount of the dividend payable to the Foremost companies, 29,864,280 Rials, be placed in a separate bank account to be opened in the name of Foremost-McKesson. Mr. Asghari replied by telex dated 27 May 1980 in the following terms: I have to inform you that due to decision and instruction of the board of directors, Pak Dairy can not pay any sums of money for any reason to foreign share holders. So I cannot take any action regarding your request. Foremost's request for written confirmation of this decision met with no response. Despite Pak Dairy's assertion in its pleadings that the telex was unauthorised, it was in fact never specifically retracted. *** Having examined the totality of the evidence in the present Cases, the Tribunal reaches the conclusion, on balance, that the interference with the substance of Foremost's rights did not, by 19 January 1981, and still less by 27 May 1980, amount to an expropriation. The above conclusion is not altered by consideration of the effect of the departure of Foremost's personnel from Iran. While this contributed to the diminution of the enjoyment of Foremost's rights, it did not affect their fundamental nature. In this context, it is significant that after Foremost withdrew its two directors in October 1981, Pak Dairy replied with a telex of 11 November 1981 suggesting that the resignation be withdrawn and new directors designated. It should also be noted that Foremost has not proved the existence of any statutory restriction on its right to sell or otherwise dispose of its shares, and the report of Standard Research Consultants does not indicate any such restrictions. The report instead concludes that “the going- concern fair market value” of Foremost's 31% interest in Pak Dairy was $11 million on 27 May 1980. The legal characterisation of the interference suffered by Foremost appears rather to be on the same footing as that suffered by the Claimants in the Case of Sporrong and Lonnroth, European Court of Human Rights, Judgment of 23 September 1982, Series A no. 52. There, the grant of long-term expropriation permits (twenty-three and eight years respectively), accompanied by prohibitions on construction (twenty-five and twelve years respectively), over two pieces of real property in Stockholm, resulted in a serious impairment of the enjoyment and disposition of the Claimants' property which, however, fell short of affecting the legal title. The measures were held not to be expropriatory. *** It is open to the Tribunal to make a similar finding in the present Cases to the extent that the level of interference established here constitutes “other measures affecting property rights” as contemplated by Article II, paragraph 1, of the Claims Settlement Declaration, though it may not have risen to the level of an actual taking. Such interference, attributable to the Iranian Government or other state organs of Iran, while not amounting to an expropriation, gives rise to a right to compensation for the loss of enjoyment of the property in question. The Tribunal is also satisfied that Foremost's claim for expropriation must be taken to include a claim for a lesser degree of interference with its rights.

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Pak Dairy was, and is, obliged to pay declared dividends to all its shareholders. Faced with a clear breach of this duty in the form of the withholding by Pak Dairy of the cash dividends declared in 1979 and 1980 and due to Foremost, the Tribunal determines that an interference of the type described above exists, and that the amount of these dividends represents the correct level of compensation payable by the Government. *** Foremost's enjoyment of its shareholding was further infringed by Pak Dairy's failure to deliver the certificate representing the stock dividend declared in 1980. The certificate representing the stock dividend declared in 1979 had been collected by Mr. Fisher in person. In the light of Pak Dairy's repeated assurances that Foremost's rights of ownership subsist, the Tribunal assumes that Pak Dairy will promptly deliver to Foremost the stock certificates for the stock dividend declared in 1980. [6] Bonds Historically, bondholders suffering expropriation organized in private committees or relied on their own governments, causing costly politicization of disputes. [a] Edwin Borchard, State Insolvency and Foreign Bondholders, Vol. I, General Principles, 193, 200-202 (Yale University Press 1951) (Citations selectively omitted) The Foreign Bondholders Protective Council, Inc… was inititated by the Department of State. The exchange and bank crash of 1929-31, followed by the great drop in the price level and the resulting depression, brought about an avalanche of defaults, both in Europe and in Latin America… The absence of a central protective agency had stimulated a mushroom growth of private committees, either self-constituted or organized by issuing houses, which were not always as responsible or disinterested in personal gain as might have been wished. This had concerned the Department, for it was often in doubt whether and when to make representations on behalf of or lend support to a particular committee. *** The advantages of a centralized, experienced, permanent Council over the ephemeral, ad hoc protective committee are overwhelming. It is for that reason that the Securities and Exchange Commission unhesitatingly endorsed the Council as the most appropriate organ for the negotiation of bond adjustments, not only in saving money for the bondholders but in prompt attention to a case of prospective default… *** Since bond defaults usually have political repercussions and are likely to affect diplomatic relations, it is a great advantage to the Department of State to be able to escape responsibility for the adjustment while having the assurance that the interests of the bondholders have been safeguarded by a council in which it has confidence, a condition hardly likely to prevail when only self-appointed private protective committees are in operation and making demands for diplomatic support… The Department has little control over the actions of private committees, including charges exacted for their services, whereas it has some control over the Foreign Bondholders Protective Council, a control made more definite by the fact that the Council submits an accounting of its activities during the year to a board of visitors made up of State Department and SEC officials… The Council constitutes an excellent coordinator of the interests of the bondholders and of the United States Government, protecting the bondholders while relieving the Government of responsibility. [b] Abaclat and Others v. Argentine Republic (formerly Giovanna A. Beccara and Others v. The Argentine Republic) (ICSID Case No. ARB/07/5), Decision on Jurisdiction and Admissibility of 4 August 2011 (27) [Pierre Tercier (pres.), Georges Abi-Saab, Albert Jan van den Berg] [In a mass claim of Italian purchasers of Argentine bonds, the tribunal, by majority, addressed the question of whether bonds constituted “Investments” within the meaning of the relevant BIT.] 352. According to the Tribunal's own English translation of Article 1(1) BIT, the term “investment includes, without limitation”: – – – –

lit. (a): “movable and immovable goods, as well as any other right in rem, including – to the extent usable as investment – security rights on property of third parties;” lit. (b): “shares, company participations and any other form of participation, even if representing a minority or indirectly held, in companies established in the territory of a Contracting State;” lit. (c): “obligations, private or public titles or any other right to performances or services having economic value, including capitalized revenues;” lit. (d): “credits which are directly linked to an investment, which is constituted and documented in accordance with the provisions in force in the State where the

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investment is made;” lit. (e): “copyrights, intellectual or industrial property rights – such as invention patents, licenses, registered trademarks, secrets, industrial models and designs – as well as technical processes, transfer of technology, registered trade names and goodwill;” lit. (f): “any right of economic nature conferred under law or contract, as well as any license and concession granted in compliance with the applicable provisions applicable to the concerned economic activities, including the prospection, cultivation, extraction and exploitation of natural resources.”

353. Analysing the structure of the various subsections of Article 1(1), it appears that they reflect a categorization of various types of investments from the perspective of rights and values that they generate: lit. (a) refers to property rights on movable and immovables, lit. (b) relates to participations into companies, lit. (c) refers to financial instruments, lit. (d) refers to credits, lit. (e) to rights on immaterial property and technology transfer, and lit. (f) to all kinds of further rights of economic value. 354. Firstly, this list covers an extremely wide range of investments, using a broad wording and referring to formulas such as “independent of the legal form adopted,” or “any other” kind of similar investment. It even contains a residual clause in lit. (f), encompassing “any right of economic nature conferred under law or contract.” In other words, the definition provided for in Article 1(1) is not drafted in a restrictive way. Based on its wording, as well as on the broader aim of the BIT as described in the Preamble, Article 1(1) cannot be seen to have intended to adopt a restrictive approach with regard to what kind of activity or dealing was meant to qualify as an investment. 355. Secondly, lit. (c) specifically addresses financial instruments. It is true that the term “obligations” is a broad term and can refer to any kind of contractual obligation, i.e., debt, and it is also true that the term “title” is also very broad. However, put in the context of the further terms listed in lit. (c) such as “economic value” or “capitalized revenue,” as well as considering that lit. (f) already deals with the more general concept of “any right of economic nature,” lit. (c) is to be read as referring to the financial meaning of these terms. Thus, the term “obligation” may be understood as referring to an economic value incorporated into a credit title representing a loan. This kind of obligations would in the English language more commonly be called “bond,” rather than “obligation.” Similarly, the term “title” in Spanish and Italian would be more accurately translated into the English term of “security,” which means nothing more than a fungible, negotiable instrument representing financial value. 356. Thus, the Tribunal finds that the bonds, as defined above in § 11, constitute “obligations” and/or at least “public securities” in the sense of Article 1(1) lit. (c) of the BIT. 357. With regard to the security entitlements that Claimants hold in these bonds, they also represent “securities” in the sense of Article 1(1) lit. (c), since they constitute an instrument representing a financial value held by the holder of the security entitlement in the bond issued by Argentina. 358. The question now is whether the connection between the security entitlements and the bonds could be seen as so remote as to consider that the dispute is not “directly” related to an investment, since the dispute related primarily to the rights arising from Claimants' security entitlements. The Tribunal sees no valid reason that would support such conclusion: –

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The bonds at stake were always meant to be divided into smaller negotiable economic values, i.e., securities. It has been sufficiently demonstrated by Claimants that the underwriters would not have subscribed to any of the bonds, without having previously ensured that the bonds were re-sellable to the Intermediaries and their end customers; The security entitlements are the result of the distribution process of the bonds through their division into a multitude of smaller securities representing each a part of the value of the relevant bond. The security entitlements have no value per se, i.e., independently of the bond; The fact that the distribution process happens electronically, without the physical transfer of any title, does not change anything to the fact that rights effectively passed on to acquirers of security entitlements in the bonds.

359. In other words, whatever the technical nuances between bonds and security entitlements may be, they are part of one and the same economic operation and they make only sense together. [7] Management of Business [a] Sedco, Inc. for itself and on behalf of Sedco International, S.A., and Sediran Drilling Company v. National Iranian Oil Company and The Islamic Republic of Iran (IUSCT Case No. 129), Award No. ITL 55-129-3 of 28 October 1985 (28) [Nils Mangård (pres.), Charles N. Brower, Parviz Ansari Moin]

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[For summary of facts, see supra p. 498. One of the issues in the dispute was the date at which Iran expropriated SEDIRAN. While Iran claimed that the appropriate date was the enactment of the Act Concerning the Protection and Expansion of Industries, SEDCO dated the actual taking earlier, when Iran appointed “temporary directors” to control and manage SEDIRAN and prevented SEDCO accessing the firm's funds or participating in its control and management. The Tribunal held that the expropriation occurred at the earlier date, as SEDCO claimed, since there was no reasonable prospect of return of control to SEDCO. With this finding, the Tribunal did not preclude the possibility that, during the valuation of SEDIRAN, it may find that the assets of SEDIRAN were taken at the earlier date.] [b] Starrett Housing Corporation, Starrett Systems, Inc., Starrett Housing International, Inc., v. The Government of the Islamic Republic of Iran, Bank Omran, Bank Mellat, Bank Markazi(IUSCT Case No. 24), Interlocutory Award No. ITL 32-24-1 of 19 December 1983 (29) [Gunnar Lagergren (pres.), Mahmoud M. Kashani, Howard M. Holtzmann] [Starrett Housing Corporation agreed to participate in a project to develop a residential community on an area of unimproved land northwest of Tehran. The first phase of this project for which claimants were responsible was construction of a 1600 unit apartment complex consisting of eight, 26-story buildings (the “Zomorod Project”). In order to secure necessary permits, Starrett assigned the basic project agreement to an Iranian subsidiary, Shah Goli Apartment Company.] (Citations selectively omitted) It is undisputed in this case that the Government of Iran did not issue any law or decree according to which the Zomorod Project or Shah Goli expressly was nationalized or expropriated. However, it is recognized in international law that measures taken by a State can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the State does not purport to have expropriated them and the legal title to the property formally remains with the original owner. In one respect the situation in this case is comparatively simple. There can be little doubt that at least at the end of January 1980 the Claimants had been deprived of the effective use, control and benefits of their property rights in Shah Goli. *** It has, however, to be borne in mind that assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law. In this case it cannot be disregarded that Starrett has been requested to resume the Project. The Government of Iran argues that it would have been possible for Starrett to appoint managers from any country other than the United States, but the evidence does not in other respects indicate on what conditions Starrett has been afforded any possibility to resume the Project. The completion of the Project was dependent upon a large number of American construction supervisors and subcontractors whom it would have been necessary to replace and the right freely to select management, supervisors and subcontractors is an essential element of the right to manage a project. Further, given the contents of the Construction Completion Bill it must be taken for granted that Starrett can only resume the Project subject to the provisions of that Bill, which entail far-reaching restrictions in the right of former owners to manage housing projects. Indeed, the language of that Bill seems to indicate that the right to manage such projects ultimately rests with the Ministry of Housing and Bank Maskan. Lastly, nothing in the evidence submitted in the case gives reason to believe that Starrett would be offered compensation for any reduction in the value of its shareholding and contractual rights caused by the managers appointed by the Government. It has therefore been proved in the case that at least by the end of January 1980 the Government of Iran had interfered with the Claimants' property rights in the Project to an extent that rendered these rights so useless that they must be deemed to have been taken. There is an allegation that Starrett abandoned the Project for economic reasons. The Tribunal does not go into this issue because it is notorious that at least after 4 November 1979, the date when the hostage crisis began, all American companies with projects in Iran were forced to leave their projects and had to evacuate their personnel.… … However, in this case the Claimants assert that the effects of what is referred to as “virulent anti-American and other policies and actions of the Revolutionary Group and the Islamic Republic” – both before and after the establishment of the new Government – rendered it impossible for Starrett to continue operations at the Project and that this amounted to an unlawful expropriation under general principles of international law and under the Treaty of Amity, Economic Relations and Consular Rights between the United States of America and Iran of 15 August 1955. Thus the Claimants' argument is that they were deprived of the effective use, control and benefits of its property rights in the Project much earlier than by the end of January 1980.

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There is no reason to doubt that the events in Iran prior to January 1980 to which the Claimants refer, seriously hampered their possibilities to proceed with the construction work and eventually paralysed the Project. But investors in Iran, like investors in all other countries, have to assume a risk that the country might experience strikes, lock-outs, disturbances, changes of the economic and political system and even revolution. That any of these risks materialized does not necessarily mean that property rights affected by such events can be deemed to have been taken. A revolution as such does not entitle investors to compensation under international law. Therefore, when considering the events prior to January 1980 to which the Claimants have referred, the Tribunal does not find that any of these events individually or taken together can be said to amount to a taking of the Claimants' contractual rights and shares. The Tribunal therefore concludes that 30 January 1980 must be considered as the date of the taking. However, for ease of accounting the Tribunal decides that 31 January 1980 shall be considered as the date of the taking. The next question for the Tribunal is to determine the exact nature of the property rights that were taken. The Claimants contend that it was neither the land and the buildings only nor their shares in Shah Goli that were taken. The Claimants assert that the expropriated rights comprised the assets and contractual rights and the other property of, in the first instance, Shah Goli as a controlled subsidiary of Starrett Housing. The Claimants define the principal assets of Shah Goli as the buildings and the principle contractual rights as including the rights to complete the Project and to earn reasonable profits which Starrett anticipated, and to recover the funds which it loaned and which were used to build the Project. There is nothing unique in the Claimants' position in this regard. They rely on precedents in international law in which cases measures of expropriation or taking, primarily aimed at physical property, have been deemed to comprise also rights of a contractual nature closely related to the physical property. In this case it appears from the very nature of the measures taken by the Government of Iran in January 1980 that these measures were aimed at the taking of Shah Goli. The Tribunal holds that the property interest taken by the Government of Iran must be deemed to comprise the physical property as well as the right to manage the Project and to complete the construction in accordance with the Basic Project Agreement and related agreements, and to deliver the apartments and collect the proceeds of the sales as provided in the Apartment Purchase Agreements. [8] Contractual Rights [a] Phillips Petroleum Company Iran v. The Islamic Republic of Iran and The National Iranian Oil Company (IUSCT Case No. 39), Award No. 425-39-2 of 29 June 1989 (30) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich] [In 1964, Phillips Petroleum Company, AGIP (an Italian company) and the Oil and Natural Gas Commission of India (Commission) entered into a Joint Structure Agreement (JSA) with the National Iranian Oil Company (NIOC) covering four blocks in the Persian Gulf. Together, the three foreign entities and NIOC created a non-profit joint-stock company, the Iranian Marine International Oil Company (IMINOCO), to carry out all operations under the JSA. Claimant Phillips Petroleum Company of Iran is a wholly-owned subsidiary of Phillips Petroleum Company. For further factual details, see p. 904.] (Citations selectively omitted) 75. The Claimant's principal contention is that the Respondents are liable for the expropriation of contract rights stemming from the JSA, and that, alternatively, they are liable for breach and repudiation of that contract. The Tribunal considers that the acts complained of appear more closely suited to assessment of liability for the taking of foreign-owned property under international law than to assessment of the contractual aspects of the relationship, and so decides to consider the claim in this light. 76. As the Tribunal has held in a number of cases, expropriation by or attributable to a State of the property of an alien gives rise under international law to liability for compensation, and this is so whether the expropriation is formal or de facto and whether the property is tangible, such as real estate or a factory, or intangible, such as the contract rights involved in the present Case. *** 105. That contract rights, such as those taken by the Respondents in the present Case, are “interests in property” protected by the Treaty of Amity is clear from the above-quoted text and from the negotiating history of the provision, which indicates that the reference to “interests in property” was included at the insistence of the United States for the stated purpose of ensuring that contract rights in the petroleum industry would be protected by the Treaty in the same way as would the older type of property represented by a petroleum concession. 106. Thus, the Claimant is entitled by the Treaty to “just compensation”, representing the “full equivalent of the property taken”. [b] Amoco International Finance Corporation. v. The Government of the Islamic Republic of Iran, et al. (IUSCT Case No. 56), Award No. 310-56-3 of 14 July 1987 (31) [Michel Virally

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(pres.), Charles N. Brower, Parviz Ansari Moin] [In 1966, Amoco and the National Petroleum Company (“NPC”) of Iran agreed to form a joint-venture company Kharg Chemical Company Limited (“Khemco”) to build and operate a plant for the production and marketing of substances derived from natural gas. During 1978, strikes by workers in the oil industry disrupted production and hampered operation of oil processing facilities, including those of Khemco. By November 1978 there were total stoppages of oil exports. The Claimant contended that by the end of December 1978 the increasing levels of anti-American sentiment caused Amoco to propose to Khemco that the Amoco personnel working for Khemco should be temporarily permitted to evacuate Iran. According to the Respondents, the withdrawal of Amoco's personnel was made without NPC's approval or consent and was the cause for the reduced production at the Khemco plant to “negligible levels” during the first quarter of 1979. See also supra p. 260.] (Citations selectively omitted) 174. From the previous finding of the Tribunal that Iran was not party to the Khemco Agreement it is apparent that only NPC or Khemco could be held responsible for breach of contract. The facts of this Case demonstrate, however, that although NPC acted only for itself when it concluded the Khemco Agreement, it acted as an instrument of the Iranian Government when it took, together with NIOC [National Iranian Oil Company], the measures characterized by the Claimant as breach and repudiation of the Khemco Agreement.… … 175. For the reasons just set forth, NPC (or Khemco) cannot be held liable for breach of contract for taking measures attributable to NIOC and, through NIOC, in the final analysis, to the Iranian Government. Such a conclusion is fully consistent with the previous finding of the Tribunal that these measures constituted the first steps of a process which, after the failure of the attempt to purchase Amoco's shares in Khemco, became a process of nationalization. It is, therefore, in this context that they have to be considered. *** 176. Article V of the CSD obliges the Tribunal to “decide all cases on the basis of respect for law.” According to Article II of the CSD, the Tribunal's jurisdiction extends to claims of nationals of the United States or Iran which arise, inter alia, out of contracts. To decide such cases “on the basis of respect for law” means to decide them on the basis of respect for the contracts validly entered into and binding the parties at the time the claims arose. Such has been the consistent approach of the Tribunal in all the cases decided up to now. 177. It is worthwhile to emphasize that the CSD, concluded in dramatic circumstances between two States with very different political and judicial beliefs and traditions, thus contributed, to a greater extent than any other international compact, to the consolidation of the rule of international law that a State has the duty to respect contracts freely entered into with a foreign party. As is well known, this rule was spelled out by the United Nations General Assembly in 1962 in G.A. Res. 1803 (XVII) on Permanent Sovereignty Over Natural Resources, reprinted in Basic Documents in International Law 141 (I. Brownlie 2d ed. 1972). While the rule has been questioned since then, the CSD constitutes an implied but unequivocal recognition of this rule, which has been constantly confirmed by the abundant case law of the Tribunal and is not disputed by the Parties in this Case. 178. The quoted rule, however, must not be equated with the principle pacta sunt servanda, often invoked by claimants in international arbitrations. To do so would suggest that sovereign States are bound by contracts with private parties exactly as they are bound by treaties with other sovereign States. This would be completely devoid of any foundation in law or equity and would go much further than any State has ever permitted in its own domestic law. In no system of law are private interests permitted to prevail over duly established public interest, making impossible actions required for the public good. Rather private parties who contract with a government are only entitled to fair compensation when measures of public policy are implemented at the expense of their contract rights… To insist on complete immunity from the requirements of economic policy of the government concerned would be the most certain way to cause the repudiation of the quoted rule. 179. In international practice, and notably in the cases submitted to international arbitration, the dispute has focused on the question of the so-called “stabilization clauses.” For the reasons set forth in the preceding paragraph, it is not seriously questioned that, in the absence of such a stabilization clause, a contract does not constitute a bar to nationalization. That is one aspect of the evolution of international law in this area and of the general recognition of the right of States to nationalize. As a fundamental attribute of state sovereignty, this right, commonly used as an important tool of economic policy by many countries, both developed and developing, cannot easily be considered as surrendered. The award in the AMINOIL case, rightly in the view of the Tribunal, held that while contractual limitations on a State's right to nationalize are undoubtedly possible, “what that would involve would be a particularly serious undertaking which would have to be expressly stipulated for and be within the

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regulations governing the conclusion of State contracts; and it is to be expected that it should cover only a relatively limited period.” In the present Case, the Khemco Agreement was concluded for a shorter period (35 years) than the concession in the AMINOIL case (60 years), but in economic and legal terms 35 years cannot be considered a “relatively limited period.” Neither the Law concerning the Attraction and Protection of Foreign Investment in Iran of 28 November 1955 nor the Act concerning the Development of Petrochemical Industries of 15 July 1965, referred to in Article 2 of the Agreement, exclude nationalization. Furthermore, it would be particularly adventurous to construe any provision of a contract to which the State is not named as a party as forbidding nationalization. 180. To sum up, the Tribunal finds that the expropriation in this Case cannot be characterized as unlawful as a breach of a contract, since Iran, the expropriating State, was not a party to the Khemco Agreement and, therefore, not bound by any stabilization clause allegedly contained herein. Moreover, even if Article 21, paragraph 2 could be considered as binding upon the government, that clause does not expressly prohibit nationalization of the contract. *** 182. For the reasons set forth above, the Tribunal finds that Amoco's rights and interests under the Khemco Agreement, including its shares in Khemco, were lawfully expropriated by Iran, through a process starting in April 1979 and completed by the decision of the Special Commission, notified by telex on 24 December 1980. [c] Mobil Oil Iran Inc., et al. v. Government of the Islamic Republic of Iran and National Iranian Oil Company (IUSCT Case Nos. 74, 76, 81, 150), Award No. 31174/76/81/150-3 of 14 July 1987 (32) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [In 1954, following the overthrow of the Mossadegh government and the return of the Shah to Iran, a group of major oil companies (Consortium) reached an agreement with the new Iranian government whereby Iran would retain ownership of its oil reserves but the Consortium would have the right to purchase Iranian oil at favorable rates until 1979. The agreement required the consortium to operate the oil industry in Iran, on behalf of the National Iranian Oil Company (NIOC), and required each member of the consortium to establish a “Trading Company” for the purchase of oil products in Iran. By 1973, changes in the oil industry had allowed Iran to negotiate a more favorable Sales and Purchase Agreement (SPA) to replace the Consortium Agreement. Pursuant to this agreement, the Consortium companies established a non-profit, private joint-stock company knon as the Oil Service Company of Iran (OSCO) to carry out certain activities in Iran. Additional, rapid changes in the oil industry followed the conclusion of the agreement, leading to a series of unilateral acts by both the Consortium and NIOC which prevented the SPA from being implemented according to its original terms. In 1975, the Consortium and NIOC began negotiating toward a revised agreement, but these negotiations had not resulted in an agreement by the time of the Iranian Revolution.] (Citations selectively omitted) 110. In sum, the Tribunal notes that, by the end of 1975, the terms of the Agreement no longer governed essential aspects of the relationship between the parties. Many fundamental changes had been added to this framework through various devices, either in conformity with, or in violation of, the procedures set forth in the Agreement. In no case, however, did either party choose to treat the Agreement as terminated, but rather confined itself, in some instances, to registering its objections and to entering into negotiations with the other one. These negotiations were conducted in order to resolve specific disputes, but also in view of drafting a complete revision of the Agreement or a new agreement designed to replace it. *** 126. A close scrutiny of the exchange of letters of 10 and 23 March 1979, as well as of the conduct of the Parties prior to and after this exchange, demonstrates that the Parties agreed at this time not to revive the Agreement, then suspended by force majeure. This agreement, however, was not unconditional. Both parties recognized that a reconciliation of interest was to take place between them, and that this reconciliation, as well as the other issues arising from the termination of the Agreement, was to be the object of subsequent negotiations, as spelled out in the 23 March letter. Such negotiations eventually took place and, undoubtedly, would have resulted in compensation for the loss sustained by the Consortium alluded to in the same letter. Any other outcome of the negotiation, in the absence of other counterparts acceptable to the Companies, would have amounted to an unjust enrichment of Iran and NIOC and an unjust loss for the Companies. 127. The fact that the negotiations did not succeed before November 1979 and were interrupted by the events which took place during that month does not relieve the Respondents from their obligation to compensate the loss sustained by the Consortium. This holds true irrespective of the legal characterization of these events: force majeure, as

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the Respondents contend, or acts of the Iranian Government entailing the international responsibility of Iran, as alleged by the Claimants. In the present context the Tribunal, therefore, neither must pronounce itself on this issue nor need it consider the Single Article Act, which entered into force at a time when the Agreement was already dead. In any event, such an Act has been characterized by Iran as an expropriation and must be analyzed in this context. *** CONCURRING OPINION OF JUDGE BROWER 1. The Award proceeds from an erroneous premise by mistaking Claimants' practical acceptance of the political realities in Iran in March 1979 for a conditional surrender of their legal rights under the 1973 Sale and Purchase Agreement (“SPA”). The Award nonetheless appears to reach the right concrete result and thus enjoys my concurrence. An elaboration of the route by which I have arrived at these conclusions may be instructive and in any event is compelled by my professional conscience. I. 2. To say that the Parties in their exchange of correspondence of 10 and 23 March 1979 mutually “agreed… … … not to revive the” SPA is to suppose that a condemned man who spurns the ritual proffer of a blindfold when marched before the firing squad thereby consents to his execution. An unwanted but inevitable fate is no less unilaterally imposed by virtue of its being gracefully accepted than if it had been less decorously confronted. Style never has been a matter of legal consequence. *** 4. It simply defies common sense to suppose that the Claimants' diplomatically stated willingness “to meet NIOC to reach an agreement in respect to the termination of the” SPA, while “[p]ending agreement” they “reserve all their rights and cannot accept” NIOC's contention that material breaches of the SPA by them had rendered it “inoperative” years before, constituted an abandonment of any of their rights under that agreement. (33) As is implicit in the Award's contrary conclusion, the absence of such a voluntary act renders Respondents liable, for the 10 March letter unequivocally puts an end to the SPA. (34) In my view the reasonable reading of events is that Respondents as of that date subjected Claimants to an actionable deprivation of rights. 5. The Award's conclusion that the Parties in March 1979 made a legally binding “agreement to agree” on a completely new arrangement elevates the concept of an obligatory “renegotiation clause” to improbable heights. It is one thing for parties to enter into an agreement providing that certain of its terms remain to be established, or must be renegotiated upon the occurrence of described events'’. It strains credulity, however, to suggest that such commercially sophisticated enterprises as major international oil companies would trade established legal rights for an “agreement” consisting entirely of an undertaking to negotiate in good faith towards a future agreement whose basic financial terms are far from precise. [d] Waste Management, Inc. v. United Mexican States (ICSID Case No. ARB(AF)/00/3), Award of 30 April 2004 (35) [James Crawford (pres.), Benjamin R.Civiletti, Eduardo Magallón Gómez] (Citations selectively omitted) (iii) Was there conduct tantamount to an expropriation of Acaverde’s contractual rights? *** 168. In the Tribunal's view, the outright refusal by a State to honour a money order or similar instrument payable under its own law may well constitute either an actual expropriation or at least a measure tantamount to an expropriation of the value of the order. There was no suggestion that Cook as the beneficiary of the money order was not entitled to be paid. Like other instruments of similar character the money order was not just an ordinary contract; it was an instrument representing a certain value which the State was ex facie committed to pay under its own law. *** 171. Subsequent authorities have sought to make a distinction between mere failure or refusal to comply with a contract, on the one hand, and conduct which crosses the threshold of taking or expropriation, on the other hand. The Tribunal is sympathetic to the view expressed in Azinian that such a distinction is not adequately made by the addition of adjectives (“egregious”, “gross”, “flagrant” or whatever). But some distinction must be made: if certain cases of contractual non-performance may amount to expropriation, it must be possible to say, in principle, which ones, otherwise the distinction between contractual and treaty claims disappears. 172. On analysis it appears that the cases fall into a number of groups. First and perhaps best known are the cases where a whole enterprise is terminated or frustrated because its functioning is simply halted by decree or executive act, usually accompanied by other conduct. (36) This was so in many of the oil cases; (37) and in many cases before the Iran-

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United States Claims Tribunal. (38) 173. Secondly, there are cases where there has been an acknowledged taking of property, and associated contractual rights are affected in consequence. In such cases the bundle of rights requiring to be compensated includes all the associated contractual and other incorporeal rights, (39) unless these are severable and retain their value in the hands of the claimant notwithstanding the seizure of the related property. 174. Thirdly, there is the much smaller group of cases where the only right affected is incorporeal; these come closest to the present claim of contractual non-performance.… … … In such cases, simply to assert that “property rights are created under and by virtue of a contract” is not sufficient. (40) The mere non-performance of a contractual obligation is not to be equated with a taking of property, nor (unless accompanied by other elements) is it tantamount to expropriation. Any private party can fail to perform its contracts, whereas nationalization and expropriation are inherently governmental acts, as is envisaged by the use of the term “measure” in Article 1110(1). It is true that, having regard to the inclusive definition of “measure”, (41) one could envisage conduct tantamount to an expropriation which consisted of acts and omissions not specifically or exclusively governmental. All the same, the normal response by an investor faced with a breach of contract by its governmental counter-party (the breach not taking the form of an exercise of governmental prerogative, such as a legislative decree) is to sue in the appropriate court to remedy the breach. It is only where such access is legally or practically foreclosed that the breach could amount to an definitive denial of the right (i.e., the effective taking of the chose in action) and the protection of Article 1110 be called into play. 175. The Tribunal concludes that it is one thing to expropriate a right under a contract and another to fail to comply with the contract. Non-compliance by a government with contractual obligations is not the same thing as, or equivalent or tantamount to, an expropriation. In the present case the Claimant did not lose its contractual rights, which it was free to pursue before the contractually chosen forum. The law of breach of contract is not secreted in the interstices of Article 1110 of NAFTA. Rather it is necessary to show an effective repudiation of the right, unredressed by any remedies available to the Claimant, which has the effect of preventing its exercise entirely or to a substantial extent. 176. In the present case, in the Tribunal's view, this has not been shown. The question here is not one of final refusal to pay (combined with effective obstruction and denial of legal remedies); it is one of neglect and failure at the contractual level in the context of a marginal enterprise. That does not pass the test for an expropriatory taking of contractual rights as it emerges from the decisions analysed above. [e] Saipem S.p.A. v. The People’s Republic of Bangladesh (ICSID Case No. ARB/05/7), Award of 30 June 2009 (42) [Gabrielle Kaufmann-Kohler (pres.), Christoph H. Schreuer, Philip Otton] [The claimant, an Italian company operating in the oil and gas industry, complained of a violation of the Italo-Bangladeshi BIT as a consequence of an allegedly unlawful interference with the investment contract by the combined action of Petrobangla, a Bangladeshi public instrumentality, and Bangladeshi courts. The contract concerned the construction of a natural gas pipeline, which was significantly delayed because of strong opposition by the local population. A dispute had arisen over contract performance. Saipem initiated arbitration proceedings under the rules of the International Chamber of Commerce (ICC). Petrobangla responded by filing an application before the court of Dacha seeking revocation of the ICC's authority to deal with the case, as well as an injunction to stay all further arbitration proceedings. The Supreme Court of Bangladesh granted Petrobangla's requests. The ICC tribunal proceeded with the arbitration regardless of the orders issued by the Supreme Court of Bangladesh and awarded damages to Saipem. Petrobangla subsequently filed an action before the High Court division of the Supreme Court of Bangladesh seeking the annulment of the award. The Court held that there was no award to annul because the ICC arbitration had proceeded in violation of the Bangladeshi restraining order, and thus the award had to be considered null and void. Saipem then filed an ICSID claim invoking the bilateral investment treaty between Italy and Bangladesh and claiming that Bangladesh had violated its obligations towards the foreign investor under Article 5 of the BIT.] (Citations selectively omitted) 126. … … … Hence, the question that the Tribunal must answer is whether the disputed actions constitute an expropriation within the meaning of Article 5 of the BIT. This presupposes that “property” has been “taken” by the State. 127. It is Saipem's position that “an illegal action of the judiciary which has the effect of depriving an investor of its contractual or vested rights constitutes an expropriation which engages the State's international responsibility”. This position relies on the presently prevailing view pursuant to which any interference with the exercise of property (or “expropriable” rights), however defined, can amount to an expropriation, including indirect and de facto expropriation, provided that the deprivation is

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irreversible. 128. Turning first to the identification of the property at stake, the Tribunal considers that the allegedly expropriated property is Saipem's residual contractual rights under the investment as crystallised in the ICC Award. Bangladesh has not put forward convincing arguments that such rights should not be considered expropriable rights. 129. In respect of the taking, the actions of the Bangladeshi courts do not constitute an instance of direct expropriation, but rather of “measures having similar effects” within the meaning of Article 5(2) of the BIT. Such actions resulted in substantially depriving Saipem of the benefit of the ICC Award. This is plain in light of the decision of the Bangladeshi Supreme Court that the ICC Award is “a nullity”. Such a ruling is tantamount to a taking of the residual contractual rights arising from the investments as crystallised in the ICC Award. As such, it amounts to an expropriation within the meaning of Article 5 of the BIT. 130. It is true that one could object – Bangladesh did not – that in theory Saipem can still benefit from the ICC Award (or from the ICC arbitration agreement). Yet, Bangladesh itself acknowledges that Petrobangla has “no assets outside Bangladesh”. Hence, the perspective that the ICC Award could possibly be enforced under the New York Convention outside Bangladesh despite having been declared “a nullity” by the Bangladeshi courts has no realistic basis. Because, by the Respondent's own admission, the ICC Award could not be enforced outside Bangladesh, the intervention of the Bangladeshi courts culminating in the declaration of the Supreme Court that the ICC Award was “non-existent” substantially deprived Saipem of its rights and thus qualifies as a taking. 131. In contrast to the actions of the courts, the conduct of Petrobangla does not qualify as a “taking”. Indeed, it is generally accepted that an act must be governmental in nature to constitute an expropriation… In the present case, it is undisputable that Petrobangla did not act in a governmental capacity in connection with the ICC proceedings. Therefore, Petrobangla's actions in the course of the ICC proceedings, whether justified or not, cannot amount to an expropriation. [f] Comments and Questions 1.

2.

* 4.

5.

A number of cases confirm these principles of law. The fountainhead of the law of expropriation is set forth in the Case Concerning the Factory at Chorzów (Claim for Indemnity) (The Merits) on Sept. 13, 1928. See discussion infra p. 967. The Permanent Court of International Justice observed that the reparation of a wrong may consist in an indemnity corresponding to the damage which the nationals of the injured State have suffered as a result of the act which is contrary to international law. It also held that the damage is assessed on the basis of the value of property, rights and interests which have been affected, excluding damages inflicted on a third party but not excluding debts and other obligations for which the injured party is responsible. In the interwar case of Norwegian Claims (1922), the Permanent Court of Arbitration (PCA) considered a dispute between the United States and Norway. After the declaration of war by the U.S. against Germany in August 1917, the U.S. Shipping Board Emergency Fleet Corporation, established pursuant to the Shipping Act, sent orders to nearly all shipyards around the U.S. requisitioning all ships, related material, and building contracts. Among the requisitioned property were 15 shipbuilding contracts of several Norwegian citizens. Because the Fleet Corporation did not take any steps until 1919 to pay just compensation to the shipbuilders, the Norwegian government submitted a claim against the U.S. The PCA held that although the U.S. was entitled to requisition foreign property within American jurisdiction, it had to ensure that just compensation was duly assessed and paid without undue delay. It also held that the U.S. did not have sufficient reason for withholding payment after the signing of the Treaty of Versailles in November 1918. ** In Biloune v. Ghana Investments Centre, Award on Jurisdiction and Liability, (October 27, 1989), 95 Int'l L. Rep. 183, an UNCITRAL Tribunal viewed an investor's contractual rights as constituting a potential object of indirect expropriation by the government's actions and inactions. The Tribunal stated, “such prevention of [the investor] from pursuing its approved project would constitute constructive expropriation of [the investor's] contractual rights in the project… … … unless the respondents can establish by persuasive evidence sufficient for these events.” More recently, the UNCITRAL Tribunal in CME Czech Republic B.V. (The Netherlands) v. The Czech Republic (2001), similarly held that the contractual rights of an investor had been expropriated by the host state, stating, “[t]he Respondent's view that the Media Council's actions did not deprive the Claimant of its worth, as there has been no physical taking of the property by the State… …, is irrelevant.” 22 U.S.C. § 2198 (b) provides the following definition of expropriation. “[T]he term ‘expropriation’ includes, but is not limited to, any abrogation, repudiation, or impairment by a foreign government, a political subdivision of a foreign government, or a corporation owned or controlled by a foreign government, of its own contract with an investor with respect to a project, where such abrogation,

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repudiation, or impairment is not caused by the investor's own fault or misconduct, and materially adversely affects the continued operation of the project.” [9] Intangible Property (e.g., Intellectual Property, Goodwill) [a] Case Concerning the Factory at Chorzów (Claim for Indemnity) (The Merits), P.C.I.J. Judgment No. 13 of 13 September 1928, P.C.I.J. Series A – Nos. 10-17 Recueil Des Arrêts (Chorzów Series A-No. 17 at p. 51) [For summary of facts, see infra p. 967. With respect to the issue of goodwill, the Court indicated that it could be valued.] (Citations selectively omitted) … [I]n order to obtain further enlightenment in the matter, the Court, before giving any decision as to the compensation to be paid by the Polish Government to the German Government, will arrange for the holding of an expert enquiry, in conformity with Article 50 of its Statute and actually with the suggestions of the Applicant. This expert enquiry, directions for which are given in an Order of Court of to-day's date, will refer to the following questions: I. A. What was the value, on July 3rd, 1922, expressed in Reichsmarks current at the present time, of the undertaking for the manufacture of nitrate products of which the factory was situated at Chorzów in Polish Upper Silesia, in the state in which that undertaking (including the lands, buildings, equipment, stocks and processes at its disposal, supply and delivery contracts, goodwill and future prospects) was, on the date indicated, in the hands of the Bayerische and Oberschlesische Stickstoffwerke? [b] Amoco International Finance Corporation v. The Government of the Islamic Republic of Iran, et al. (IUSCT Case No. 56), Award No. 310-56-3 of 14 July 1987 (43) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [For summary of facts, see supra p. 260.] (Citations selectively omitted) 201. Of paramount interest is the list of the components enumerated by the Court as included in the value of the undertaking. They appertain to three categories: corporeal properties (lands, buildings, equipment, stocks), contractual rights (supply and delivery contracts) and other intangible valuables (processes, goodwill and “future prospects”). Using today's vocabulary, this would mean “going concern value”, which is not a new concept after all. Only one component relates to the future: “future prospects.” Since, for the reasons set forth in the preceding paragraph, future prospects does not mean lost profits, we safely can say, using the traditional vocabulary of international arbitration, that all these components pertain to damnum emergens. *** 228. As used by the Claimant in the present Case, however, the DCF method goes even further: it amounts to a complete departure from, and a reversal of, the approach traditionally adopted in international practice, notably, by international tribunals. Under the traditional approach, in case of expropriation of an enterprise the compensation to be paid is calculated according to the net value of the transferred – that is, expropriated – assets. As we have seen this can extend to physical properties, movable and immovable, as well as to intangibles, including profitability in the case of an ongoing enterprise: the “going concern” value. To this element of damnum emergens, a complementary one is added where the expropriation is unlawful: the value of the revenues that the owner would have earned if the expropriation had not occurred, i.e., lucrum cessans. *** 255. More generally, the theory that net book value is the appropriate standard of compensation in all cases of lawful expropriation overlooks the fact that a nationalized asset is not only a collection of discrete tangible goods (equipments, stocks and, possibly, grounds and buildings). It can include intangible items as well, such as contractual rights and other valuable assets, such as patents, know-how, goodwill and commercial prospects. To the extent that these various components exist and have an economic value, they normally must be compensated, just as tangible goods, even if they are not listed in the books. Furthermore, nationalization does not take place in order to disperse, by auction, the assets of the expropriated undertaking, or to use them for other purposes. On the contrary, the undertaking is nationalized as a going concern to be placed as such under State control, with a view to developing its activity and allowing the community to benefit fully from its returns. Therefore, the fact that the expropriated assets form a going concern can certainly not be disregarded at the time of the valuation of the compensation to be paid. [c] Comments and Questions 1.

Since goodwill may be a projection based upon certain market assumptions, some tribunals have awarded compensation for lost goodwill in circumstances in which

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the prospective market is very uncertain. See in this regard Sola Tiles, Inc. v. Government of the Islamic Republic of Iran, 14 Iran-US CTR 223, excerpted infra p. 654. [10] Use of Property [a] Thomas Waelde and Abba Kolo, Environmental Regulation, Investment Protection and ‘Regulatory Taking’ in International Law, 50 Int’l & Comp. L.Q. 811, 839-840, 846-847 (2001) (44) (Citations selectively omitted) To require compensation for every diminution in the value of property caused by regulation will render public governance almost impossible as governments will be economically crippled by claims for compensation. This is particularly so to the extent regulation responds to changes in evolving technology and public expectations. A doctrine of compensation for expropriation cannot impose on the community the normal commercial risk which is associated with every business. On the other hand, to allow the State very extensive regulatory powers without any attention to compensation would result in over-regulation uninhibited by the economic costs of the State's actions. Hence the need to strike a balance between the two competing rights. The lran-US claims tribunals have taken the position that in commercial undertakings, a regulation or interference becomes a compensable taking when it denies the owner of the property ‘fundamental rights of ownership, use, enjoyment or management of the business' (e.g. the right to take part in management decisions or to derive profits from the investment) even though title might still remain with the investor. While the jurisprudence of the IranUS claims tribunal is of general precedential value, it is of less use to our specific discussion of environmental regulation. Hence, guidance should be sought from the jurisprudence of national courts and the European Court of Human Rights. A look at the relevant cases suggests that most courts have been reluctant to award compensation where the regulation did not render the property totally valueless and where the regulated property still had some economic value even though it might not be the kind of value preferred by the owner. But they have found a ‘regulatory taking’ when the economic value was reduced to zero: in the Pennsylvania Coal case, the US Supreme Court held a state law which prohibited the mining of coal in a manner that could cause subsidence of residence on the surface, amounted to a taking because it rendered the underlying mineral rights economically valueless. That position was reiterated by the court in the leading case of Lucas v South Carolina Coastal Council, in which the majority held that a regulation which deprived the owner of ‘all economically beneficial uses' of the property amounted to a taking except if the activity constituted a noxious or nuisance-like use of the property under the state's common law rules. In this case, Lucas sought to challenge the constitutionality of legislation which had the effect of barring him from constructing houses on his lots close to a beach, and which he acquired prior to the legislation coming into force. One should note that in the Lucas case there had been a legitimate expectation that housing would be permitted and this expectation had led to substantial prior investment. *** The codification of customary international law on investor protection in modern MITs is no unreasonable fetter on governmental policies. It places international law controls over the tendency of governments to discriminate against and squeeze foreign investors to the benefit of domestic competitors or special interest groups which are able to capture the regulatory power of national governments – often to the detriment of the people at large. Such controls can be seen as a desirable constraint over the domestic political process to maintain the benefits that a country and its people gain from their integration with the wealth-generating global economy. It is also wrong to infer from the recent cases of direct investor-State litigation (primarily under NAFTA) that foreign investors can keep governments from pursuing legitimate policies. In these cases, as in all litigation, one need not to look at exaggerated claims made in adversarial proceedings or investor-State bargaining, but at the ultimate award. What the litigation rights now available to foreign investors against host States do is to erect a warning sign to governments that uncontrolled submission to domestic competitor and special interest group pressure can lead to undesirable international sanctions-thus in fact support governments to stand firm against domestic pressure for discrimination and protectionism. These modern treaty-rules support the national forces of ‘good governance’ in their conflict and bargaining with special interest groups. The direct investor State litigation rights are a step towards good governance in international economic relations. Modern multinational economic treaties provide protoconstitutional elements of governance for the global economy. It is hard to see how the trend towards international regulation of the global economy should not be conducive to a global environmental agenda: creating a well functioning global economy will create the resources for environmental protection which are not available in closed economies. [i] Protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, as amended by Protocol No. 11, Paris, 20 March 1952. Article 1– Protection of Property (Council of Europe, European Treaty Series – No. 009, page 3) (45)

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Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law. The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties. [aa] Legitimate Aims In Reineccius, First Eagle et al. v. Bank of International Settlements (see supra p. 610), the Tribunal observed that the public interest requirement in expropriation is to be understood, whether in reference to a state or another international actor, as “an action rationally, proportionately and necessarily related to the performance of one of the legitimate international purposes of the actor undertaking it.” [bb] Control is Proportionate to the Aims [See Pine Valley Developments Ltd. Ors v. Ireland, 14 Eur. H.R. Rep. 319 (1992) ¶ 79.] [b] Katte Klitsche de la Grange v. Italy (Development ban on private land), before the European Court of Human Rights, Series A, No. 293-B, Application No. 12539/86, Judgment of 27 October 1994, 19 Eur. H.R. Rep. 368 (1995) [The owner of a large area of park land in Rome received permission from the district council for development. Subsequently, however, the council adopted a land-use plan imposing a development ban on part of the land. The owner filed an application with the Commission, which declared admissible his complaints of violations of Article 1 of Protocol No. 1 and Article 6(1) of the Convention on the basis of the lack of compensation for the damage. The European Court of Human Rights dismissed the claims, and held that there was no de facto expropriation and that a fair balance was struck between the interests of the community and the requirements of the protection of the individual's P 746 fundamental rights.] [c] Trustees of the Late Duke of Westminster’s Estate v. United Kingdom (The Leasehold Reform Acts case), before the European Commission of Human Rights, Application No. 8793/79, Decision as to Admissibility of 28 January 1983, 5 Eur. H.R. Rep. 440, 441, 463-464 (1983) (Citations selectively omitted) The applicants complained that the operation of the Leasehold Reform Acts had forced them to sell certain freehold interests against their will and for inadequate compensation. They alleged violations of Article 1 of Protocol No. 1 and of Articles 13 and 14 of the Convention. *** The applicants are trustees acting under the Will of the Second Duke of Westminster. The applicants, as trustees, are owners of residential property in London. Their application relates to property transactions under the Leasehold Reform Act 1967, as amended, under which a number of their properties have been purchased by tenants. *** The applicants complain that they have been deprived of certain property which has been compulsorily acquired by tenants exercising rights of enfranchisement under the Leasehold Reform legislation. They allege the breach of Article 1 of Protocol No. 1 to the Convention alone and in conjunction with Article 14 of the Convention. They also complain that no remedy is available to them in respect of their complaints and invoke Article 13 of the Convention. The respondent Government deny that the relevant legislation gives rise to any breach of the Convention. They maintain that the application is inadmissible under Article 27(2) of the Convention on the ground that it is incompatible with the Convention since it misconceives the role of the convention organs and delves into matters which are properly the province of the domestic legislation. *** It is not in dispute that the transactions complained of by the applicants have involved interferences with their property rights under this provision. Nor is it in dispute that the respondent Government is responsible for the interferences in question, since they are authorised by legislation. In principle therefore the subject matter of the complaint is within the scope of the Commission's competence ratione materiae and ratione personae. The questions which arise are therefore whether the interferences with the applicants' property rights were justified under Article 1 of the Protocol itself and whether they were discriminatory in breach of Article 14 of the Convention. Having made a preliminary examination of the parties' submissions on these questions the Commission finds that the case raises important issues concerning the interpretation and application of the relevant provisions of the Convention and protocol.

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In particular it is necessary in the first place to consider, in the light of the Commission's decision in the case of Bramelin and Malmström whether the rule concerning deprivation of possessions set out in the second sentence of Art. 1 of the Protocol is applicable to the interferences in question here, which arose from legislation governing private rights and obligations. If that provision is applicable it will be necessary for the Commission to consider whether the interferences in question were compatible with it. If not it is still necessary to consider whether there has been an infringement of the applicants' right to peaceful enjoyment of their possessions guaranteed by the first sentence of Article 1. Issues of substance also arise under Article 14 of the Convention in conjunction with Article 1. In particular in so far as the legislation distinguishes between different classes of property, both in relation to the applicability of the legislation and in relation to the terms of compensation, an issue arises as to whether such distinctions amount to differential treatment as between different property owners on grounds of ‘property… … … or other status' for the purposes of Article 14. If so it will be necessary for the Commission to consider whether there was an objective and reasonable justification for the distinction in question. The Commission finds no ground on which it could hold the present application to be incompatible with the Convention for the purposes of Article 27(2). It concerns interferences with the applicants' property rights, protected by Article 1 of the Protocol, for which the respondent Government is admittedly responsible as legislator. The applicants' criticisms of the legislation go beyond mere expressions of dislike of or disagreement with the legislation, and include substantial argument to the effect that it is contrary to the Convention. In particular the applicants maintain that the legislation exceeds any margin of appreciation relative to the concept of ‘public interest’ under Article 1 of the Protocol and that it fails to draw a ‘fair balance’ between their property rights and the general interest. Having regard to the nature of the issues which arise under Article 1 of the first Protocol and Article 14 of the Convention, and the close connection between those issues and the applicants' complaint under Article 13, the Commission does not find that any part of the application can be considered manifestly ill-founded. No other ground of inadmissibility has been established and the case must therefore be declared admissible.

[E] Expropriatory Intent In general, there is no requirement for a government to have explicitly fashioned measures with the intention to expropriate for an expropriation claim to be upheld. Rather, the effects of measures have been deemed to be more important. [1] Question of the Necessity of Expropriatory Intent [a] Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, et al. (IUSCT Case No. 7), Award No. 141-7-2 of 29 June 1984 (46) [Willem Riphagen (pres.), Shafie Shafeiei, George H. Aldrich] (Citations selectively omitted) While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of fundamental rights of ownership and it appears that this deprivation is not merely ephemeral. The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact. [b] Phillips Petroleum Company Iran v. The Islamic Republic of Iran, The National Iranian Oil Company (IUSCT Case No. 39), Award No. 425-39-2 of 29 June 1989 (47) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich] [For summary of facts, see supra p. 621.] (Citations selectively omitted) 98. Although a government's liability to compensate for expropriation of alien property does not depend on proof that the expropriation was intentional, there seems little doubt in this Case that the new Islamic Republic intended to bring the JSA to an end and to place NIOC [National Iranian Oil Company] fully in charge of all oil production and sales. Even though it can readily be observed that NIOC made unequivocal statements during 1979 regarding the timing and the terms for termination of the JSA, the refusal to permit the Claimant to exercise any rights under the JSA is more relevant to such a finding than any of these pronouncements. Notwithstanding the ambiguity of some of these statements and the Claimant's continued efforts to arrive at an agreed solution of the problems with the JSA, there is in this Case no evidence of any such agreed termination of the JSA nor of a waiver by the Claimant of its rights under that Agreement (as the Tribunal found in the Consortium Cases based on the evidence there). [c] Comments and Questions

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1.

2.

The formula “measures tantamount to expropriation” which is found in Chapter 11 of NAFTA and in the BITs (see Chapter 2 and Chapter 4 supra) largely discards any requirement of intention, replacing it with a criterion of consequentiality, i.e., that it is the effect of the measures (without regard to whether such an effect was intended by the state) that determines the existence of an expropriation. The Iran-U.S. Claims Tribunal has repeatedly held that “[t]he intent of the government [concerning expropriation] is less important than the effects of the measures on the owner and the form of the measures of control or interference is less important than the reality of their impact.” (48) For further discussion on expropriatory intent, see W. Michael Reisman and Robert D. Sloane Indirect Expropriation and Its Valuation in the BIT Generation, 74 Brit. Y.B. Int'l L. 115 (2004) (“What matters is the effect of governmental conduct – whether malfeasance, misfeasance, or nonfeasance, or some combination of the three – on foreign property rights or control over an investment, not whether the state promulgates a formal decree or otherwise expressly proclaims its intent to expropriate.”).

[2] Effect of Act on Interests [a] Tippetts, Abbett, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran, et al. (IUSCT Case No. 7), Award No. 141-7-2 of 29 June 1984 (49) [Willem Riphagen (pres.), Shafie Shafeiei, George H. Aldrich] (Citations selectively omitted) In light of these facts, the Tribunal concludes that the Claimant has been subjected to “measures affecting property rights” by being deprived of its property interests in TAMSAFFA since at least 1 March 1980 and that the Government of Iran is responsible, by virtue of its acts and omissions, for that deprivation. The Claimant is entitled under international law and general principles of law to compensation for the full value of the property of which it was deprived…

[F] Standards [1] Direct Expropriation: the Government Acquires Title and Benefits from It [a] Eudoro Armando Olguín v. Republic of Paraguay (ICSID Case No. ARB/98/5), Decision on Objections to Jursdiction of 8 August 2000 (50) [Rodrigo Oreamuno (pres.), Eduardo Mayora Alvarado, Francisco Rezek] [b] CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, UNCITRAL Arbitration Proceedings, Partial Award of 13 September 2001 (UNCITRAL Ad Hoc Trib. 2001) [Wolfgang Kühn (pres.), Stephen M. Schwebel, Jaroslav Hándl] (51) [For summary of facts, see infra p. 1029.] (Citations selectively omitted) (i) The obligation not to deprive the Claimant of its investment (Treaty Article 5) 591. The Claimant's expropriation claim under Article 5 of the Treaty is justified. The Respondent, represented by the Media Council, breached its obligation not to deprive the Claimant of its investment. The Media Council's actions and omissions, as described above, caused the destruction of CNTs' operations, leaving CNTS as a company with assets, but without business. The Respondent's view that the Media Council's actions did not deprive the Claimant of its worth, as there has been no physical taking of the property by the State or because the original Licence granted to CET 21 always has been held by the original Licensee and kept untouched, is irrelevant. What was touched and indeed destroyed was the Claimant's and its predecessor's investment as protected by the Treaty. What was destroyed was the commercial value of the investment in CNTS by reason of coercion exerted by the Media Council against CNTS in 1996 and its collusion with Dr. Żelezný in 1999. *** 601. The basic breach by the Council of the Respondent's obligation not to deprive the Claimant of its investment was the coerced amendment of the MOA in 1996. The Council's actions and omissions in 1999 compounded and completed the Council's part in the destruction of CME's investment. 602. The Media Council, by its actions and omissions in 1996 and 1999, caused the damage suffered by the Claimant. Causation arises because the Media Council intentionally required CNTS to give up the right of the exclusive use of the Licence under the MOA. The Media Council's possible motivation for such action – to obtain regulatory control again over the broadcasting operation of CET 21 after the new Media Law came into force in 1996 – is irrelevant. A change of the legal environment does not authorize a host State to deprive a foreign investor of its investment, unless proper compensation is granted. This was and is not the case. Furthermore, it must be noted that the change of the 1993 legal arrangement in 1996 as required by the Media Council, for whatever reasons, does not justify the Council's collaboration in the assault on CME's investment by supporting CET

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21's breach of the Service Agreement in 1999. The Respondent, therefore, is obligated to remedy the damages which occurred as a consequence of the destruction of Claimant's investment. 603. Of course, deprivation of property and/or rights must be distinguished from ordinary measures of the State and its agencies in proper execution of the law. Regulatory measures are common in all types of legal and economic systems in order to avoid use of private property contrary to the general welfare of the (host) State. The Council's actions and inactions, however, cannot be characterized as normal broadcasting regulator's regulations in compliance with and in execution of the law, in particular the Media Law. Neither the Council's actions in 1996 nor the Council's interference in 1999 were part of proper administrative proceedings. They must be characterized as actions designed to force the foreign investor to contractually agree to the elimination of basic rights for the protection of its investment (in 1996) and as actions (in 1999) supporting the foreign investor's contractual partner in destroying the legal basis for the foreign investor's business in the Czech Republic. The actions and inactions affected the value of CME's shares in CNTS, such shares being clearly a “foreign investment” in accordance with the Treaty, as already dealt with above (see also the TRADEX case as cited above). 604. The expropriation claim is sustained despite the fact that the Media Council did not expropriate CME by express measures of expropriation. De facto expropriations or indirect expropriations, i.e. measures that do not involve an overt taking but that effectively neutralize the benefit of the property of the foreign owner, are subject to expropriation claims. This is undisputed under international law… 605. Furthermore, it makes no difference whether the deprivation was caused by actions or by inactions.… … *** 607. Expropriation of CME's investment is found as a consequence of the Media Council's actions and inactions as there is no immediate prospect at hand that CNTS will be reinstated in a position to enjoy an exclusive use of the licence as had been granted under the 1993 split structure (even if the Czech Supreme Court would re-instate the Regional Commercial Court decision). There is no immediate prospect at hand that CNTS can resume its broadcasting operations, as they were in 1996 before the legal protection of the use of the licence was eliminated. [2] Indirect Expropriation [a] G.C. Christie, What Constitutes a Taking of Property Under International Law?, 38 Brit. Y.B. Int’l L. 307, 322-324, 330-333, 336-338 (1962) (52) (Citations selectively omitted) It has already been noted that a seizure which, owing to its original temporary nature, is not considered a sufficient taking to justify a claim for full compensation, may, nevertheless, in course of time be deemed to ripen into an expropriation. In one case, that of Sabine G. Helbig, the question before the United States Foreign Claims Settlement Commission was whether the claimant's property had been taken before she became a United States national; for if this were in fact the case, she was not entitled, under the applicable statute, to the allowance of her claim. It appeared that in 1939 the claimant had stored certain items of personal property with a storage concern in Hungary and she claimed that the Hungarian authorities seized the property subsequent to the date of her naturalization as an American citizen in April 1946. The record showed, however, that the Hungarian Government seized the claimant's property in February 1946 and that the claimant had immediately appealed to the Hungarian authorities for the return of her property. On 7 February 1947 the Hungarian authorities ordered that a portion of the property be returned. No action was taken with respect to the other portion of the property, and in fact none of the property was ever returned to the claimant. The Commission found that the property had been taken prior to the claimant's naturalization as an American citizen on 15 April 1946. It held that the claimant was permanently deprived of possession, control and dominion over her property at the time of the seizure by the Office of the Commissioner for Abandoned Property. The fact that the authorities subsequently ordered that a portion of the property be returned to the claimant, which order was never executed, did not constitute a change in the date when the property was actually taken (from the claimant). This case suggests that, if property is seized under circumstances in which it is unclear whether expropriation is intended, the eventual ripening of the taking into an expropriation will make the initial seizure the act of expropriation. This will be so even if during the intervening period the offending Government expressly recognizes the alien's title. This issue was also considered by the Commission in subsequent Panel Opinions issued to provide general guidance to its staff and to future claimants. In one such Opinion the Commission considered a situation where, although the claimant could not establish transfer of title, the proofs showed that land in Czechoslovakia was turned over to a farm co-operative. As has already been indicated, the Commission declared such claims to be compensatable on the ground that under such circumstances the claimant's property must be considered to have been permanently taken from him. With respect to the

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question of the date of the expropriation, the Commission was of the opinion that the date of physical transfer to the farm cooperative should be used as the date of taking. A somewhat different tack, however, was pursued by the Commission in its Opinion dealing with claims based on the placing of property under ‘national administration’. The Commission was asked by its staff to furnish a ruling as to what was the date of `taking’ in cases where the restitution of property under ‘national administration’ was denied, or where restitution proceedings were still pending, or where restitution was not even applied for. In a partial response to this request, the Commission replied that where restitution had been denied, or where restitution proceedings had been suspended, the property should be considered ‘taken’ at the date of the order denying restitution or suspending the proceedings. This Opinion of the Commission would seem somewhat inconsistent with its decision in the Helbig case in which it was indicated that where restitution is denied the taking should be retroactively regarded as having occurred on the date of the initial seizure. The Commission's Opinion, however, would not necessarily be inconsistent with the views it had expressed in its Collective Farm Opinion where the taking was also deemed to have occurred at the time of the initial transfer of possession to a farm co-operative. For, in this latter situation, it could be argued that it was readily apparent Czechoslovakian agricultural policy being what it was-that the land transferred was actually being expropriated and would never be returned. But, where it is doubtful what effect is intended, it seems sensible to date the expropriation from the time the offending Government refuses to return the property or to set a date for its return, and not to refer the date of expropriation back to the date of initial seizure. In so far as the Helbig case suggests a contrary rule, it seems to have been wrongly decided. In several recent decisions dealing with property which had been placed under ‘national administration’, the Commission followed the rule enunciated in its Panel Opinion. *** Both the importance and the extreme difficulty of deciding what constitutes a sufficient taking so as to warrant a demand for full compensation for the property taken have been recognized. In hearings before the Committee on Foreign Relations of the United States Senate, the Committee on Foreign Law of the Association of the Bar of the City of New York proposed that definitions of the word ‘taken’ might be included in future bilateral treaties of trade and navigation in the provisions dealing with the expropriation or other taking of property. This was an admirable suggestion. Unfortunately, the Committee did not go further than to suggest that this definition should be such as to make it clear that ‘taking’ would include… …’… measures which, though falling just short of the seizure of the full title to the property, effectively deprive its owner of the use and enjoyment thereof, for example, the appointment of a custodian’. The recent Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens also shows an awareness of the difficult nature of the problem, as does the American Law Institute's Draft Restatement of the Foreign Relations Law of the United States, which, in its provisions dealing with State responsibility for economic injury to aliens, greatly relied on the Harvard Draft. In Article l0, paragraphs 1 and 2, of the Harvard Draft, the taking under the authority of the State of an alien's property is, with certain exceptions, made wrongful. A ‘taking of property’ is defined in paragraph 3 (a) as follows A “taking of property” includes not only an outright taking of property but also any such unreasonable interference with the use, enjoyment, or disposal of property as to justify an inference that the owner thereof will not be able to use, enjoy, or dispose of the property within a reasonable period of time after the inception of such interference. In the comments accompanying this article, Professors Sohn and Baxter state that they recognize that there are a variety of methods by which a State may interfere with an alien's right to use and enjoy his property and that this interference may even go to the extent of the ‘State's forcing the alien to dispose of his property at a price representing only a fraction of what its value would have been had not the alien's use of it been subjected to interference by the State… …’… In the opinion of the draftsmen the crucial consideration in determining what constitutes a taking will be the duration of the interference. They conclude that ‘considerable latitude has been left to the adjudicator of the claim to determine what period of interference is unreasonable and when the taking therefore ceases to be temporary’. The unreasonableness of an interference must be determined ‘in conformity with the general principles of law recognized by the principal legal systems of the world’. No attempt was made to particularize on the expression because the matter seemed one ‘best worked out by international tribunals'. *** All this having been said, there is still a long way to go before one can come to any reasonably concrete conclusions on the subject. General rent control, for example, is normally not considered to amount to expropriation. But what if that control is long continued and the general inflationary trend to which all modern States seem to be subject makes the return on property woefully inadequate? Such situations have, of course, arisen in the industrially advanced States of the West, i.e. the States whose usual

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role is as plaintiff in expropriation cases. How does this situation differ, other than in the period of time it took to develop, from the conditions in Czechoslovakia which, as noted above, were considered by the Foreign Claims Settlement Commission and seemingly rightly found, according to the general principles enunciated by most of the commentators, to amount to a complete taking of the property in question for which full compensation was appropriate? It will be recalled that the facts underlying the Commission's Opinion were that in addition to requiring owners of real property to lease to whomsoever the State directed, the total gross income of property bringing in over a certain annual amount had to be deposited into a special account from which about 80 per cent was deducted for real estate taxes and contributions to a building repair fund. This would seem a very difficult case. *** Granting, then, that what is considered a reasonable restriction on the use of property will depend to a very large extent on the social and economic views prevailing at any given time, one may hazard the following general conclusions. (1) Although most interference with property, particularly if it is at all general in nature, can be clothed under the rubric of some recognized social purpose, the cases have clearly indicated that a State's mere declaration that expropriation is not intended is not determinative of the issue. Even when these protestations are made in good faith the cases have shown that expropriation can be an unintended result of a State's action. For example, when the use of certain property is so intimately connected with the control of other property which has been expropriated as to be useless without it, then the former property may itself be said to have been ‘taken’ or expropriated. (2) Almost any outright seizure of property, if not initially an expropriation, will eventually ripen into an expropriation. An initial statement that the taking is only ‘temporary’, provisions prescribing the maximum length of State control, detailed provisions calling for judicial or administrative determination of whether the property should be returned to its original owners, provisions calling for the payment of compensation for the use of the property seized, will all serve to postpone a conclusion that the property in question has been expropriated. Moreover, while no one can ordinarily claim exemption from even substantial regulation in the public interest, an alien property owner cannot indefinitely be deprived of virtually all beneficial enjoyment of his property. This conclusion is not altered by the fact that the alien is permitted to remain nominally in possession of his property. The alien cannot indefinitely be reduced merely to a managing and collecting agent for the State. When a seizure which is not originally deemed to be an expropriation ripens into one, the date of `taking’ should not be held to go back to the time when the property was initially seized, but the `taking’ should, rather, date from the time at which it is determined that there was no reasonable prospect that the property would ever be returned. (3) There are certain types of State interference which, from the outset, will be considered as expropriation even though not labelled as such. Among these are the appointment of a receiver to liquidate the business or other property. This conclusion, as well as the previous one, is founded upon the premiss that the most fundamental right that an owner of property has is the right to participate in its control and management. (4) The refusal to give permission in advance for the transfer abroad of operating profits, or other funds, does not by itself amount to expropriation. When coupled with other interferences with the use of property, however, the refusal to permit transfer of funds abroad is a relevant factor in determining whether expropriation has occurred from the combined effect of all the interference imposed on an alien's use of his property. (5) The refusal to permit the alienation of real property, or of personal property not easily removable from the State issuing the prohibition, would seem, under some circumstances, to amount to an expropriation for which, accordingly, compensation is payable. If, however, such prohibition can be justified as being reasonably necessary to the performance by a State of its recognized obligations to protect the public health, safety, morals or welfare, then it would normally seem that there has been no `taking’ of property. (6) Despite the Oscar Chinn case, and the reliance placed by some commentators thereon, it is not at all clear that the prohibition of the sale of certain items (as noted in the fifth conclusion above) or the grant of a monopoly may not amount to the expropriation of the property of alien competitors. In monopoly situations the existence of generally recognized considerations of the public health, safety, morals or welfare will normally lead to a conclusion that there has been no ‘taking’. Whether compensation may be obtained solely for the loss of good-will involved in the grant of a monopoly or in the prohibition of a certain line of trade is a more difficult question, and one to which a negative answer would appear to be indicated. (7) A State's declaration that a particular interference with an alien's enjoyment of his property is justified by the so-called ‘police power’ does not preclude an international tribunal from making an independent determination of this issue. But, if the reasons given are valid and bear some plausible relationship to the action taken, no attempt may be made to search deeper to see whether the State was activated by some illicit motive.

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(8) Where a State compels an alien to sell his property for less than its true value either to the State or to a third party, a compensatable claim arises. Where an alien sells his property for less than its true value because of a fear of possible expropriation, the serious practical considerations already discussed would seem to require that no claim for additional compensation should be permitted unless the State has clearly indicated that it will not pay any compensation to those whose property it may expropriate or unless the alien property holder is actually placed in physical jeopardy. (9) It is evident that the question of what kind of interference short of outright expropriation constitutes a ‘taking’ under international law presents a situation where the common law method of case by case development is pre-eminently the best method, in fact probably the only method, of legal development. This article has attempted primarily to lay out the cases in this area and then to give some general indication of the stage of legal development which has been reached, and the lines along which further development may be expected. [b] Antoine Biloune and Marine Drive complex Ltd v. Ghana Investments Centre and the Government of Ghana, Award on Jurisdiction and Liability of 27 October 1989, 95 Int’l L. Rep. 183, 209-210 (1994) (53) [Stephen M. Schwebel (pres.), Don Wallace, Jr., Monroe Leigh] [Antoine Biloune, a Syrian national, managed and owned a substantial interest in Marine Drive Complet Ltd. (“MDCL”). MDCL entered into a de facto joint venture agreement with the Ghana Tourist Development Company (“GTDC”), a government entity, to develop a restaurant/resort complex. In August 1987, prior to completion of the project, a stop work order was issued on the grounds that the joint venture had not obtained the necessary building permits. In December 1987, Mr. Biloune was arrested and deported, ostensibly for involvement in illegal financial transactions and failure to submit an assets declaration form on time.] (Citations selectively omitted) This Tribunal must determine whether the above facts constitute, as the Claimants charge, a constructive expropriation of MDCL's assets and Mr Biloune's interest in MDCL. The motivations for the actions and omissions of Ghanaian governmental authorities are not clear. But the Tribunal need not establish those motivations to come to a conclusion in the case. What is clear is that the conjunction of the stop work order, the demolition, the summons, the arrest, the detention, the requirement of filing assets declaration forms, and the deportation of Mr Biloune without possibility of re-entry had the effect of causing the irreparable cessation of work on the project. Given the central role of Mr Biloune in promoting, financing, and managing MDCL, his expulsion from the country effectively prevented MDCL from further pursuing the project. In the view of the Tribunal, such prevention of MDCL from pursuing its approved project would constitute constructive expropriation of MDCL's contractual rights in the project and, accordingly, the expropriation of the value of Mr Biloune's interest in MDCL, unless the Respondents can establish by persuasive evidence sufficient justification for these events. The Respondents' defenses on this point are that the various events described above are independent and unrelated, and that their conjunction is coincidental. The Respondents maintain that the independent and unrelated reasons for Mr Biloune's detention and deportation essentially were that in 1985 he was found guilty of selling kerosene stoves above the price-regulated price, that he had been accused by a private Ghanaian party of involvement in a bank fraud scheme; and that the sources of his investment in MDCL had not been shown to the satisfaction of the National Investigations Commission to be in accordance with the currency regulations of Ghana. The evidence submitted in support of these alternative explanations is not convincing for the following reasons. *** The Tribunal therefore holds that the Government of Ghana, by its actions and omissions culminating with Mr Biloune's deportation, constructively expropriated MDCL's assets, and Mr Biloune's interest therein, not later than December 24, 1987. The Claimants are therefore entitled to compensation. [c] Wena Hotels Limited v. Arab Republic of Egypt (ICSID Case No. ARB/98/4), Award of 8 December 2000 (54) [Monroe Leigh (pres.), Ibrahim Fadlallah, Don. Wallace, Jr.] [For summary of facts, see p. 454.] (Citations selectively omitted) 15. This dispute arose out of long-term agreements to lease and develop two hotels located in Luxor and Cairo, Egypt… 16. On June 11, 1975, the United Kingdom and the Arab Republic of Egypt entered into an Agreement for the Promotion and Protection of Investments (“IPPA”)… 17. On August 8, 1989, Wena and the Egyptian Hotels Company (“EHC”), “a company of the Egyptian Public Sector affiliated to the General Public Sector Authority for Tourism” entered into a 21 year, 6 month “Lease and Development Agreement” for the Luxor Hotel in Luxor, Egypt…

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18. On January 28, 1990, Wena and EHC entered into an almost identical, 25-year agreement for the El Nile Hotel in Cairo, Egypt… [Disputes between the parties began shortly after the agreements were signed, when Wena withheld a portion of its rent because of the poor condition in which it found the hotels. EHC responded by liquidating Wena's performance security. Wena then commenced arbitration against EHC, but was unhappy with the result and apparently sought to have the decision annulled. On April 1, 1991, EHC seized the Nile and Luxor Hotels by force. The hotels were not returned to Wena until over a year later.] *** 82. … … … There is substantial evidence that, even if Egyptian officials other than officials of EHC did not participate in the seizures of the hotels on April 1, 1991, 1) Egypt was aware of EHC's intentions to seize the hotels and did nothing to prevent those seizures, 2) the police, although responding to the seizures, did nothing to protect Wena's investments; 3) for almost one year, Egypt (despite its control over EHC both before and after April 1, 1991) did nothing to restore the hotels to Wena; 4) Egypt failed to prevent damage to the hotels before their return to Wena; 5) Egypt failed to impose any substantial sanctions on EHC (or its senior officials responsible for the seizures), suggesting its approval of EHC's actions; and 6) Egypt refused to compensate Wena for the losses it suffered. *** 96. The Tribunal also agrees with Wena that Egypt's actions constitute an expropriation and one without “prompt, adequate and effective compensation,” in violation of Article 5 of the IPPA. That article provides in relevant part that: (1) Investments of nationals or companies of either Contracting Party shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation (hereinafter referred to as ‘expropriation’) in the territory of the other Contracting Party except for a public purpose related to the internal needs of the Party and against prompt, adequate and effective compensation. Such compensation shall amount to the market value of the investment expropriated immediately before the expropriation itself or before there was an official Government announcement that expropriation would be effected in the future, whichever is the earlier, shall be made without delay, be effectively realizable and be freely transferable. The national or company affected shall have a right under the law of the Contracting Party making the expropriation, to prompt review, by a judicial or other independent authority of that Party, of whether the expropriation is in conformity with domestic law and of the valuation of his or its investment in accordance with the principles set out in this paragraph. 97. Although, as Professor Ian Brownlie has commented, “the terminology of the subject is by no means settled,” the fundamental principles of what constitutes an expropriation are well established under international law. For example, as the ICSID tribunal in Amco Asia v. Indonesia noted, “it is generally accepted in International Law, that a case of expropriation exists not only when a state takes over private property, but also when the expropriating state transfers ownership to another legal or natural person. The tribunal continued by observing that an expropriation “also exists merely by the state withdrawing the protection of its courts form the owner expropriated, and tacitly allowing a de facto possessor to remain in possession of the thing seized …” 98. It is also well established that an expropriation is not limited to tangible property rights. As the panel in SPP v. Egypt explained, “there is considerable authority for the proposition that Contract rights are entitled to the protection of international law and that the taking of such rights involves an obligation to make compensation therefore.” Similarly, Chamber Two of the Iran-U.S. Claims Tribunal observed in the Tippets case that “[a] deprivation or taking of property may occur under international law through interference by a state in the use of that property or with the enjoyment of its benefits, even where legal title to the property is not affected.” The chamber continued by noting: [w]hile assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law, such a conclusion is warranted whenever events demonstrate that the owner has been deprived of fundamental rights of ownership and it appears that this deprivation is not merely ephemeral. 99. Here, the Tribunal has no difficulty finding that the actions previously described constitute such an expropriation. Whether or not it authorized or participated in the actual seizures of the hotels, Egypt deprived Wena of its “fundamental rights of ownership” by allowing EHC forcibly to seize the hotels, to possess them illegally for nearly a year, and to return the hotels stripped of much of their furniture and fixtures. Egypt has suggested that this deprivation was merely “ephemeral” and therefore did not constitute an expropriation. The Tribunal disagrees. Putting aside various other improper actions, allowing an entity (over which Egypt could exert effective control) to seize and illegally possess the hotels for nearly a year is more than an ephemeral interference “in

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the use of that property or with the enjoyment of its benefits.” [d] Generation Ukraine, Inc v. Ukraine (ICSID Case No. ARB/00/9), Award of 16 September 2003 (55) [Jan Paulsson (pres.), Eugen Salpius, Jürgen Voss] (Citations selectively omitted) 1. Overview 1.1 The Claimant, a U.S. corporate vehicle wholly-owned by a U.S. national, Eugene J. Laka, seeks damages, at one time quantified in excess of USD 9.4 billion, for the spoliation of its alleged investment in commercial property in Kyiv. 1.2 The Claimant contends that it was strongly encouraged by the Government in late 1992 to invest in Ukraine; that it established a local investment vehicle in February 1993 (called Heneratsiya Ltd.); and that, after it duly identified and achieved approval of a specific project, local authorities obstructed and interfered with the realisation of that project over the course of the ensuing six years in a manner which was tantamount to expropriation and therefore proscribed under the Ukraine–U.S. Bilateral Investment Treaty. It asserts that it is therefore entitled to remedies in ICSID arbitration. 1.3 Ukraine denies that its conduct toward the Claimant was violative of the Bilateral Investment Treaty and argues that, at any rate, the Claimant has proven no damages. Even without considering those issues, however, Ukraine contends that the case must be dismissed for lack of jurisdiction. *** 20.19 In order to analyse the Respondent's international obligations under the BIT, the Tribunal will put this controversy to one side and accept the facts as pleaded by the Claimant in order to test the Respondent's conduct against the standard of investment protection encapsulated in Article III of the BIT. *** 20.20 The formulation in the first sentence of Article III(1) is somewhat circular by prohibiting an expropriation by measures tantamount to expropriation. Nevertheless, it is perfectly clear that the State Parties to the BIT envisaged that both direct and indirect forms of expropriation are to be covered by Article III. 20.21 The alleged final expropriatory act or measure, as previously mentioned, is said to be the failure by the Kyiv City State Administration to issue amended lease agreements. The disputed measure cannot possibly constitute a direct expropriation of the Claimant's investment because the Kyiv City State Administration never purported to transfer Heneratsiya's proprietary rights in its investment to the State or to a third party. Quite properly, the Claimant has never sought to characterise the disputed measure as a direct expropriation. Instead, the Claimant has, in its written and oral pleadings, contended that this disputed measure was the culmination of a series of other prejudicial acts that ultimately deprived the Claimant of its rights to its investment, due to the level of resulting interference. The various measures of the Respondent thus, according to the Claimant, amounted to a “creeping expropriation”. 20.22 Creeping expropriation is a form of indirect expropriation with a distinctive temporal quality in the sense that it encapsulates the situation whereby a series of acts attributable to the State over a period of time culminate in the expropriatory taking of such property. The case of German Interests in Polish Upper Silesia is one of many examples of an indirect expropriation without a “creeping” element – the seizure of a factory and its machinery by the Polish Government was held by the PCIJ to constitute an indirect taking of the patents and contracts belonging to the management company of the factory because they were so closely interrelated with the factory itself. But although international precedents on indirect expropriation are plentiful, it is difficult to find many cases that fall squarely into the more specific paradigm of creeping expropriation. 20.23 The Tippetts, Abbett, McCarthy, Stratton v. TAMS–AFFA Consulting Engineers of Iran, et al. case before the Iran/US Claims Tribunal might be said to demonstrate the possibility of a taking through the combined effect of several acts. The Iranian Government appointed a temporary manager of the joint venture investment company in which the claimant had a fifty percent stakehold with the other fifty percent owned by an Iranian entity. The temporary manager commenced his duties in August 1979 and immediately breached the partnership agreement that regulated the joint venture by signing cheques on the partnership's accounts by himself and making other decisions without consulting the claimant. The claimant managed to rectify these violations of the partnership agreement. Thus, for instance, the practice of two signatures on cheques was restored. The hostage crisis at the U.S. Embassy in Tehran then intervened in November 1979 and the working relationship that had developed between the temporary manager and the claimant came to an end. The claimant's representatives left Iran in December 1979 and thereafter the management of the joint venture ceased all communication with the claimant with respect to its business operations. The Iran/US Claims Tribunal reflected upon the nature of the indirect taking in light of these facts in the following oft-cited passage:

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“A deprivation or taking of property may occur under international law through interference by a state in the use of that property or with the enjoyment of its benefits, even where legal title to the property is not affected. While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of the fundamental rights of ownership and it appears that this deprivation is not merely ephemeral. The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.” 20.24 The Tribunal held that the taking of the claimant's property was consummated not when the temporary manager was first appointed in August 1979, but in March 1980 by which time the tentative cooperation between the claimant and the temporary manager had come to an end. 20.25 The Tippetts case was cited with approval in a recent ICSID arbitration in Compañia del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica. The following statement of principle provides useful guidance in the analysis of the Claimant's plea of creeping expropriation in the circumstances of the present case: “As is well known, there is a wide spectrum of measures that a state may take in asserting control over property, extending from limited regulation of its use to a complete and formal deprivation of the owner's legal title. Likewise, the period of time involved in the process may vary – from an immediate and comprehensive taking to one that only gradually and by small steps reaches a condition in which it can be said that the owner has truly lost all the attributes of ownership. It is clear, however, that a measure or series of measures can still eventually amount to a taking, though the individual steps in the process do not formally purport to amount to a taking or to a transfer of title… There is ample authority for the proposition that a property has been expropriated when the effect of the measures taken by the state has been to deprive the owner of title, possession or access to the benefit and economic use of his property …” 20.26 The Claimant's submissions on its plea of creeping expropriation have been seriously flawed due to the absence of a coherent analysis of the timing and the nature of its investments in Ukraine and how the acts and omissions of the Kyiv City State Administration have affected the Claimant's investment in the form it existed at the time of those acts and omissions. A plea of creeping expropriation must proceed on the basis that the investment existed at a particular point in time and that subsequent acts attributable to the State have eroded the investor's rights to its investment to an extent that is violative of the relevant international standard of protection against expropriation. It is conceptually possible to envisage a case of creeping expropriation where the investor's interests in its investment develop in parallel with the commission of the acts complained of. But such a plea, in order to be successful, would demand a high level of analytical rigorousness and precision that is absent from the submissions before this Tribunal. *** 20.38 For these reasons, the Tribunal rejects the Claimant's submission that an “indirect… … … global expropriation of the company's rights and property” occurred on 31 October 1997 “by virtue of the [Kyiv City State Administration]’s failure to produce revised land lease agreements with valid site drawings”. [e] Comments and Questions 1.

2.

Consider the following ruling on indirect expropriation in the case Benvenuti et Bonfant v. Congo, 21 I.L.M. 740, 757 (1980). Benevenuti et Bonfant (“B & B”) was an Italian company commissioned by the government of Congo to study the possibility of establishing and operating a plastic-bottle manufacturing company. Through a joint venture with the Congolese government, the PLASCO Company, it signed a contract for the construction of both a plastic-bottle manufacturing plant and a mineral-water bottling plant. Through a decree, the Congolese government established certain prices that were lower than those chosen during Board of Directors meetings before and after the decree. According to B & B, these prices were also lower than its cost; the government claimed that the cost estimates were inflated. The Tribunal held that such price fixing by the government inflicted a loss on PLASCO and that the government must assume responsibility for it. It also held that the government's treatment of the company – not inviting B & B to meetings of the Board of Directors or of Shareholders – amounted to de facto expropriation of B & B's share in the company. The Tribunal assessed damages ex aequo et bono. For other examples of cases on indirect expropriation, see Metalclad v. Mexico, 16

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3.

ICSID Rev. – Foreign Investment L. J. 168, 195-97 (2001); Compania del Desarrollo de Santa Elena, S.A. v. Republic of Costa Rica, 39 I.L.M. 1317 (2000); Katte v. Italy, 19 Eur. H.R. Rep. 368 (1995); Starrett Housing Corp v. Iran, Award No. 314-24-1 (August 14, 1987), 6 Iran-U.S. Cl. Trib. Rep. 122; Foremost Tehran, Inc. v. Iran, 10 Iran-U.S. Cl. Trib. Rep. 228 (11 April 1986); TAMS v. Iran, 6 Iran-U.S. Cl. Trib. Rep. 219. See also the analysis in Thomas Waelde and Abba Kolo, Environmental Regulation, Investment Protection and ‘Regulatory Taking’ in International Law, 50 Int'l & Comp. L.Q. 811 (2001). Two recents studies review current jurisprudence on indirect expropriation: Paulsson & Douglas, Indirect Expropriation in Investment Treaty Arbitrations, in Arbitrating Foreign Investment Disputes(N. Horn, ed.) 145 (2004); and L. Yves Fortier, Indirect Expropriation in the Law of International Investment: I Know it when I See it or Caveat Investor, 12th Annual Goff Arbitration Lecture (Hong Kong, 9 December 2004).

[3] Legitimate Expectations of Investor [a] Opel Austria GmbH v. Council of the European Union (Case T-115/94), Judgment the Court of First Instance (Fourth Chamber) of 22 January 1997, European Court Reports (1997), II00039 [K. Lenaerts (pres.), P. Lindh, J. D. Cooke] (56) [After a series of discussions in 1991 with the Austrian government and the European Commission, Opel Austria GmbH (“Opel”), a company incorporated under Austrian law and a wholly-owned subsidiary of General Motors Corp., received financial aid from Austria as an incentive to increase its investment in the country. Although Opel expanded its investment throughout 1992, in December 1992 the European Commission sent a letter to the Austrian Ambassador in Brussels informing him that Opel's investment was not in conformity with provisions of the Free Trade Agreement between Austria and the European Economic Community, and that the Commission would submit the matter to an FTA Joint Committee. On December 20, 1993, seven days after the Community approved the Agreement on the European Economic Area (EEA), the Council of the European Union adopted a regulation imposing a duty on imports of gearboxes produced in Austria by Opel, which subsequently initiated proceedings at the European Court of Justice. The Court annulled the regulation because it infringed the principle of protection of legitimate expectations of Opel under the EEA Agreement. The Court also found that the regulation had infringed the principle of protection of legal certainty.] (Citations selectively omitted) 78. … … … Article 18 of the First Vienna Convention and Article 18 of the Second Vienna Convention constitute an expression of the general principle of protection of legitimate expectations in public international law, according to which a subject of international law may, under certain conditions, be bound by the expectations created by its acts in other subjects of international law. 79. The applicant rejects the Council's argument that Article 18 of the First Vienna Convention is not capable of conferring on individuals rights which they may invoke before the Court. First, the argument based on lack of direct effect is not relevant in proceedings brought under Article 173 of the EC Treaty. International agreements are an integral part of the Community legal order and it is the task of the Community institutions, including the Court of First Instance and the Court of Justice, to ensure that they are observed. The fact that certain international agreements are not directly applicable does not in any way affect the Community's obligation to ensure that they are observed… Secondly, Article 18 of the First Vienna Convention contains an unambiguous, unconditional prohibition of acts that are incompatible with the aims and objects of international agreements. *** 83. In addition, referring to Italian, German, Belgian, Spanish and English law, the Republic of Austria argues that there is also a general principle of law common to the legal systems of the Member States to the effect that a party to a binding agreement must act in good faith to safeguard the interests of other parties to or beneficiaries of the agreement during a period in which the operation of the agreement is suspended. That principle is the corollary of the principle of protection of legitimate expectations. The Court should therefore recognize it as a general principle of Community law. That principle too was infringed by the adoption of the contested regulation. The Republic of Austria considers that the applicant, as a beneficiary of the EEA Agreement, must be entitled to rely on that principle. 84. The Council does not take issue with the applicant's statement that Article 18 of the First Vienna Convention and Article 18 of the Second Vienna Convention codify rules of customary international law which are binding on the Community. *** 93. … … … [T]he principle of good faith is the corollary in public international law of the principle of protection of legitimate expectations which, according to the case-law, forms part of the Community legal order… Any economic operator to whom an institution has given justified hopes may rely on the principle of protection of legitimate expectations…

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94. In a situation where the Communities have deposited their instruments of approval of an international agreement and the date of entry into force of that agreement is known, traders may rely on the principle of protection of legitimate expectations in order to challenge the adoption by the institutions, during the period preceding the entry into force of that agreement, of any measure contrary to the provisions of that agreement which will have direct effect on them after it has entered into force. [b] Comments and Questions In International Thunderbird Gaming Corporation v. Mexico (ad hoc arbitration under the 1976 UNCITRAL Rules), Award, IIC 136 (2006), para. 147, the Tribunal, “[h]aving considered recent investment case law and the good faith principle of international customary law,” asserted that “the concept of ‘legitimate expectations' relates, within the context of the NAFTA framework, to a situation where a Contracting Party's conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the NAFTA Party to honour those expectations could cause the investor (or investment) to suffer damages.” For a recent discussion on the notion of legitimate expectations for foreign investors, see Total SA v. Argentina, Decision on Liability, ICSID Case No ARB/04/1; IIC 484 (2010), para. 113-34.

[G] Governmental Acts [1] Laws and Decrees Explicitly Expropriating [a] Anglo-Iranian Oil Co. Case, 1952 I.C.J. 103, 103-114 (July 22) (Jurisdiction denied) [b] Bolivia: Supreme Decree No. 28701, 1 May 2006, 45 ILM 1020, 1021 (2006) (57) Evo Morales Ayma Constitutional President of the Republic In the Council of Ministers, * * * Decrees: Article 1. – In exercise of national sovereignty, obeying the mandate of the Bolivian people expressed in the binding Referéndum of 18 July 2005 and in strict application of constitutional precepts, the natural hydrocarbons resources of the country are hereby nationalized. The State recuperates the property, possession and total and absolute control of those resources. Article 2. – I. As of 1 May 2006, the petroleum enterprises that currently carry out oil and gas production activities in the national territory are bound to deliver title to property to Yacimientos Petrolíferos Fiscales Bolivianos [The Bolivian National Petroleum Company] – YPFB, over the entire production of hydrocarbons. II. YPFB, on behalf of and in representation of the State, in the full exercise of its property over all the hydrocarbons produced in the country, assumes their commercialization, defining the conditions, volume and price both for the internal market as well as for export and industrialization. Article 3. – I. Only the companies that immediately comply with the provisions of this Supreme Decree may continue operating in the country, until within a time period of no more than 180 days from its promulgation their activities are regularized by means of contracts that comply with the legal and constitutional conditions and requirements. At the end of this time period, the companies that have not signed contracts may not continue to operate in the country.… … [2] Appointment of Managers [a] Anglo-Iranian Oil Co. Case, 1952 I.C.J. 103, 103-114 (July 22) (Jurisdiction denied) [3] Seizure of Premises and Impoundment of Property [See supra p. 640.] [4] Announcement of Intended Expropriation without Further Acts [a] Sola Tiles, Inc. v. The Government of the Islamic Republic of Iran (IUSCT Case No. 317), Award No. 298-317-1 of 22 April 1987 (58) [Karl-Heinz Böckstiegel (pres.), Mohsen Mostafavi, Howard M. Holtzmann] [In 1979, the managing director of Simat Middle East (Iran) Ltd. (“Simat”) conveyed all the company's assets to Claimant Sola Tiles, Inc.] (Citations selectively omitted) 30. The Claimant alleges that the expropriation of Simat took place over a period between June and November 1979. It claims to have been deprived of the company's assets and goodwill, and of the control and management of the business. Evidence was

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presented to the Tribunal in the form of affidavits and oral clarifications from Mr. Hachamoff; affidavits from two Simat employees, Ms. Shanaz Eliassi and Mr. Manuchehr Pour-Ebrahimi; and certain contemporaneous documents. 31. According to the Claimant, after Mr. Hachamoff's departure from Iran and the invalidation of the power of attorney executed in favour of Ms. Eliassi, she continued to collect outstanding debts from Simat's customers and deposit them with the bank, and to pay wages to the other employees and miscellaneous operating expenses of the company, until approximately June 1979. In her affidavit Ms. Eliassi relates that on 26 June 1979, she was asked to go to the office of the Revolutionary Committee. There she was informed that the Committee had decided to impound and take over control of Simat's warehouse. Ms. Eliassi further states that some 738,500 Rials, part of the proceeds of a recent sale of tiles, was taken from her on that occasion. She reported these events to Mr. Hachamoff, who was in regular contact by telephone with Simat's office. 32. Two documents support Ms. Eliassi's recollection of events. The first is a notice of impoundment issued by the “Provisional Committee of the Islamic Revolution of the Imam Khomeyni”, dated 14 June 1979, which states, in translation, that in compliance with an order of the Committee of 13 June, “the warehouses of the Cement Company (ceramics), containing the Italita tiles, has no right whatsoever to take any tiles out, and it is strictly forbidden unless a written order issued by the Imam Committee of the Third District is obtained, and Mr. Manouchehr and Ms. Shahnaz [Eliassi], the sellers of the tiles, must report themselves as soon as possible to the District.” The notice of impoundment then lists the Committee's representatives and their addresses. 33. The second document is a receipt for the sum of 738,500 Rials in cash, stated to have been received from Ms. Eliassi by the Committee on 26 June 1979. *** 40. Although there was never any specific expropriatory decree or similar instrument, the Tribunal finds that the impoundment notice issued as an official document by the Committee on 14 June 1979 stands as a clear statement of that body's intentions with regard to the property of Simat – intentions which it proceeded to implement during the course of the next five months. Further, it is well settled that the Revolutionary Committees are among those organs whose acts are attributable to the Government of Iran, which is responsible for them as a matter of law. Basing its conclusion on the available documents and the evidence of two of Simat's former employees, the Tribunal therefore finds that there was a progressive taking of Simat's business operations which was completed, at the latest, by November 1979. [b] Comments and Questions 1. 2.

As the preceding cases indicate, the modality by which an expropriation has been accomplished is not the critical factor for determination in international law. Rather it is the consequence. In circumstances in which a high official of a government indicates an intention to expropriate, but does not follow through, there will, presumably, not be an expropriation, unless the value of the property held by an alien is reduced and there is a demonstrable causal relation between that depreciation and the statement of the government official.

[c] Agrotexim and Others v. Greece (Town planning measures taken by a municipality with a view to expropriating company property), before the European Court of Human Rights, Series A, No. 330, Application No. 14807/89, Judgment of 24 October 1995, 21 Eur. H.R. Rep. 250 (1995) [d] Compañía del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica (ICSID Case No. ARB/96/1), Final Award of 17 February 2000 (59) [L. Yves Fortier (pres.), Elihu Lauterpacht, Prosper Weil] [See supra p. 593.] [5] Unilateral Reduction of Concession Area [a] Liberian Eastern Timber Corporation (“LETCO”) v. The Government of the Republic of Liberia (ICSID Case No. ARB/83/2), Award of 31 March 1986, 2 ICSID Rep. 346 (1994) (60) [Bernardo M. Cremades (pres.), Jorge Gonçalves Pereira, Alan Redfern] [In 1983, the Liberian Eastern Timber Corporation (“LETCO”) filed a claim against the Government of Liberia seeking recovery of damages derived from an alleged breach of a concession agreement signed between the two parties under the title “Forest Products Utilization Contract.” Under the agreement, LETCO had the exclusive right to harvest, process, transport and market forest products within a designated exploitation area. Prior to exploitation, the agreement required LETCO to make a survey of the area, which was duly carried out by the firm. After the agreement was signed in 1970, Liberia withdrew parts of the land concessions in 1970, 1971, and 1977. Although relations between the two parties were briefly normalized, in 1980, the Forest Development Authority of Liberia (“FDA”) accused LETCO of breaching its agreement and determined that the firm was

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incapable of properly exploiting the concession are. Unable to persuade the Government of Liberia to reverse FDA's decision, LETCO initiated the arbitration proceedings.] (Citations selectively omitted) 1) Nationalization. As part of its consideration of this case, the Tribunal considered whether the action taken by the Liberian Government in depriving LETCO of its concession might be considered as an act of nationalization, which might be justifiable both under the law of Liberia and under international law, if accompanied by payment of appropriate compensation. It should be emphasized that the Government of Liberia has not sought to justify its action on this basis; rather, it has consistently claimed that its action was taken because of failure on the part of the claimant to properly carry out Its obligations under the Concession Agreement – an argument which the Tribunal has rejected on the facts. However, even if the Government had sought to justify its action as an act of nationalization, it would have had to first point to some legislative enactment, embodying the act of nationalization. It would then have had to show that its action was taken for a bona fide public purpose; that it was non-discriminatory; and that it was accompanied by payment (or at least the offer of payment) of appropriate compensation… None of these conditions is satisfied in the present case. There was no legislative enactment by the Government of Liberia. There was no evidence of any stated policy on the part of the Liberian Government to take concessions of this kind into public ownership for the public good. On the contrary, evidence was given to the Tribunal that areas of the concession taken away from LETCO were granted to other foreign-owned companies; according to Mr. Alain de Marti, who was LETCO's general manager in Liberia for the entire period of the concession, these foreign companies were run by people who were “good friends” of the Liberian authorities (transcript, Paris hearing, 9 December 1985 (especially at p. 3, 48, 49, 50 and 51)). Finally, no offer of compensation has been made to LETCO for the loss of its concession; to the extent that the Liberian Government has attempted any justification of its action, it has been on the basis of alleged breaches of the Concession Agreement by LETCO. Accordingly, it is the opinion of this Tribunal that even if the argument as to nationalization had been raised, it would have failed. Leaving aside the lack of any legislative enactment, the taking of LETCO's properly was not for a bona fide public purpose, was discriminatory and was not accompanied by an offer of appropriate compensation. 2) Breach of Contract and Right to Damages According to Liberian Law. The Tribunal has obtained statements from experts in Liberian law, relevant articles of the Liberian Code of Laws of 1956 and reported decisions of the Liberian Courts. *** It is clear that under the law of Liberia (as under most, if not all, developed systems of law) the binding force of contracts is recognized, so long as the contracts in question are validly made and do not offend public policy (l'ordre publique). No doubt has been raised as to the validity of the original grant of the concession to LETCO; nor was this grant contrary to Liberian public policy. On the contrary, the State appears to encourage the grant of concessions to foreign persons and corporations (see Berlowitz, “Concessions and Incentives in Liberia”). Although the Tribunal has found no indication that the laws of Liberia have been changed so as to affect the Concession Agreement, it should be pointed out that Article X of the Agreement, under the title “Warranty of Concessionaire's Rights” states: “Except as otherwise provided in this Agreement, no amendment or repeal of any law or regulation governing this Agreement or any part thereof shall affect the rights and duties of the CONCESSIONAIRE without its consent.” This clause, commonly referred to as a “Stabilization Clause”, is commonly found in longterm development contracts and, as is the case with notification procedures of the Concession Agreement, is meant to avoid the arbitrary actions of the contracting government. This clause must be respected, especially in this type of agreement. Otherwise, the contracting state may easily avoid its contractual obligations by legislation. Such legislative action could only be justified by nationalization which meets the criteria described above. In the opinion of the Tribunal, the particular concession which was granted to LETCO was a contract binding on both parties. Moreover, it contained its own provisions for what was to happen if there were any breaches of the contract by LETCO. As described earlier, Article VII. 4. of the Concession Agreement sets out the Government's power to revoke the Agreement for cause and contains a list of events which might give rise to a revocation of the Concession Agreement. Again, revocation is not an automatic remedy, even if one or more of the events set out in

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Article VII comes to pass. LETCO has to be given notice of the particular breach or nonobservance complained of and allowed a period of three months in which to put it right or to compensate the Government. Even then LETCO is given the option of arbitration if it does not agree with the alleged breach or remedy. This contractual mechanism is confirmed in the Investment Incentive Code of the Republic of Liberia, both in its original edition of 15 April 1966 and in the revised text of 6 March 1973. On the one hand, Section 10 (subsequently Section 12) grants the Sponsor a period of 90 days in which to remedy the breach which would entitle the Government to cancel the Investment Incentive Contract. At the same time, Section 11 (subsequently Section 13) confirms the binding nature of the arbitral agreement as well as of the arbitral award handed down pursuant to such agreement. By its failure to follow the procedure laid down in the Concession Agreement, as well as by its subsequent actions, the Government of Liberia has acted in plain breach of the terms of the Concession Agreement. Its breach of the Agreement entitles LETCO to the recovery of damages. [6] Use Restrictions [See G.C. Christie, supra p. 640 and Thomas Waelde et al., supra p. 632.] [7] Forced Sales [a] G.C. Christie, What Constitutes a Taking of Property Under International Law?, 38 Brit. Y.B. Int’l L. 307, 324-326, 328-329 (1962) (61) (Citations selectively omitted) Forced Sales A type of taking that is not expressly called an expropriation, and which, indeed, is normally accompanied by an explicit disclaimer of any such intention, is illustrated by a group of situations commonly included under the classification of ‘forced sales'. In some cases there may be an elaborate legal procedure for accomplishing the ‘forced sale’; it is obvious, however, that an apparently voluntary transfer made under the threat of an impending expropriation is, none the less, forced. Here again the commentators recognize the right to compensation of an alien who has been subjected to such treatment. But it would be helpful to have something more than abstract principles. Accordingly, while this is not the place for an elaborate treatment of this complex problem, it may, nevertheless, repay the effort to examine briefly, for whatever general guidance they may give, some of the attempts to handle the compensation of victims of so-called ‘forced sales' during the Nazi regime. During the military occupation of Germany laws were promulgated recognizing the right of victims of the Nazi tyranny to compensation for injuries to their interests in property. United States Military Government Law No. 59 is typical of the laws adopted by the three Western occupying Powers.’ When the occupation was terminated the German Federal Republic agreed to keep these provisions in effect until all claims were dealt with. Military Government Law No. 59 applied generally to aliens as well as German nationals. Among the categories of injuries for which restitution might be claimed were those arising as a result of ‘a transaction contra bonos mores, threats or duress… … … or any other tort’. In lieu of restitution, a claimant, upon relinquishing all other claims, could demand from the person first acquiring his property the difference between whatever the claimant had received for the property and the fair purchase price. The framers of the law showed great practical awareness of the nature of the problems that would be presented in actual cases. A rebuttable presumption was created that any transfer of property during the Nazi regime (30 January 1933 to 8 May 1945) by a person who was directly exposed to persecutory measures, or who belonged to a class of persons who were to be eliminated entirely from the cultural and economic life of Germany, was an act of confiscation. The presumption of confiscation could be avoided by a showing that the transferor was paid a fair purchase price, and furthermore that he was not denied the free disposal of the moneys received, for reasons of race, religion, nationality, ideology or political opposition to National Socialism. Claimants coming from a class of persons who were marked for elimination from the cultural and economic life of Germany were given a right to avoid any transactions involving a transfer or relinquishment of property entered into during the period between the first Nuremburg laws (15 September 1935) and the end of the Nazi regime. This additional right could only be defeated by a showing that the transaction as such would have taken place even in the absence of National Socialism, or that the transferee successfully protected the claimant's property interests. The fairness of the purchase price was not a relevant consideration.’ Finally, a rebuttable presumption was established that any gratuitous transfer made by a person subject to persecution, as defined in the act, between 30 January 1933 and 8 May 1945, constituted a bailment or the creation of a fiduciary relationship rather than a donation.

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*** But even leaving aside, for the moment, the question of proof, there are still other serious problems which must be considered; and the less the situation resembles the extraordinary cases during the Nazi regime, the more difficult these problems become. It might be asked, for example, whether, unless the respondent State has actually declared that it will not pay compensation, an alien ought to be entitled to sell out for what he can get and then come around with a bill for the excess? Perhaps he should be compelled to take his chances one way or the other? Or, perhaps, the question should depend on whether at the time of a sale in anticipation of expropriation reasonably ‘adequate’ compensation has been expressly promised? Regardless, however, of what is promised, suppose no compensation is in fact paid within a reasonable time? Will this justify the conduct of those who sold out for what they could get, and entitle them now to present a claim for the balance? The whole question could, of course, be complicated even further if the price the alien received for his property were subjected to some sort of monetary restrictions. In the Nazi situation this, when added to other factors, was considered to make a transfer of property a confiscation. An extreme case of such monetary restrictions taken from a situation of outright expropriation is Dr. Castro's offer to compensate Americans, whose property had been nationalized, with thirty-year bonds, the interest and principal to be paid out of a fund into which would be paid 25 per cent. of the amounts received from the sale to the United States, at a support price of 5-75 cents per pound, of all sugar in excess of 3,000,000 tons annually.’ It is evident that some such similar scheme could also be applied to the proceeds foreigners received from so-called ‘forced sales'. In this respect, moreover, it has been suggested that currency regulations such as those imposed by Great Britain in 1947 and 1949 might have been subject to attack.? Something more will be said about currency regulations later.3The point is, however, that the mere recognition in general terms of a right to compensation on the part of an alien who has been involved in what might be called a ‘forced sale’ or other form of duress does not get one very far; this is, in fact, only another type of situation, albeit a rather different type, in which the question arises as to what is a sufficient taking so as to amount to an expropriation. The factual situations in this kind of problem can be very intricate and, unfortunately, there does not seem to be much authority. Future cases will have to decide how far a panicky alien property holder can question the good faith of the State in which he is operating, and how far he will be compelled to rely either on promises of future compensation or even on a presumption that adequate compensation will be paid by the State. The difficulty and inconvenience of claims based on forced sales would seem to require that the alien must in most cases take his chance of ultimately obtaining compensation from the State involved. If he prefers the bird in hand and sells out for what he can get, then he should normally be prepared to sacrifice any future claims based on the inadequacy of his receipts from the sale. If, however, the threats to an alien's property are accompanied by threats to his physical security, the rule should be otherwise; similarly, if the State in question flatly declares that it will not pay any compensation for the alien-owned property whose seizure is threatened. But even in such situations, unless the alien can show that he received an obviously inadequate price for his property, he should be denied the right to assert a claim based on the insufficiency of the price he has received. [b] Comments and Questions 1. For an examination of the Canadian National Energy Program compulsory repurchase program, see Errol P. Mendes, The Canadian National Energy Program: An Example of Assertion of Economic Sovereignty or Creeping Expropriation in International Law, 14 Vand. J. Trans. L. 475 (1981). The author noted: Even when achieved with public funds, the voluntary takeover of foreigncontrolled enterprises does not constitute expropriation in international law. The marketplace must determine the price of such acquisition, however, without government interference. Since a takeover price predetermined by a government would amount to outright confiscation under international law, and would be unacceptable to the home countries of the foreign investors concerned, the observance by governments of such principles could help develop a utilitarian formula whereby economic sovereignty becomes compatible with foreign investment in the strategic natural resources sector of a nation's economy. 2. A more current example of a forced sale can be found in Reineccius, First Eagle et al. v. Bank of International Settlements, supra p. 610, n. 84. The Tribunal noted: The Bank also referred to cognate national practice. The Bank adduced a rather extensive state practice with respect to the special phenomenon of central banks recalling, in a compulsory program, the shares of private shareholders. The Bank argued that national practice seems particularly apposite to the case at bar, as the central banks, like the Bank for International Settlements, concluded that the earlier practice of permitting private shareholders in banks that were public institutions had become anachronistic and incompatible with the public functions of the national

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central banks. Hence the central banks adopted recall programs, not unlike that of the BIS in its decision of 8 January 2001. In virtually all of these compulsory recall programs, the valuation of the shares was based upon an averaging of the market value of the shares prior to the announcement of the recall. There is, however, no indication whether the stock market price approximated net asset value. As the Bank described in its Counter-Memorial, the Bank of Canada was nationalized in 1938 by the Bank of Canada Act Amendment Act (Bank's LA-119). The Bank of Canada was organized as a stock corporation with a capitalization of CAD 5,000,000, with each share carrying a nominal value of CAD 50. Pursuant to the Act, new stock, owned by the Canadian Government, was issued in the amount of CAD 5,100,000, giving the government a sufficient majority to buy out the private shareholders. Each former private shareholder received CAD 59.20 per share, the market price pertaining at the time (Bank of Canada Act Amendment Act, 1938, Art. 9 (Bank's LA-119)). Similarly the French Government nationalized the Banque de France in 1945 (Loi 45-14 (Bank's LA-115)). At the time the Banque de France had 46,809 shareholders. The price for each share was set at 28,029 francs, an amount equal to the average trading price of the Banque de France shares over a prior twelve-month reference period (Arrêté du juillet 1946, J.O., 21 juillet 1946, at p. 6538 (Bank's LA-115)). Counter-Memorial, at paras. 153-159. In 1949, the Norwegian Government nationalized the Norges Bank. Norway assumed the shares previously owned by private shareholders against the payment of compensation fixed at 180% of the nominal value of the shares (20 Norges Bank Bulletin, No. 4-5, 21 November 1949, at pp. 57, 59 (Bank's LA-121)). This 180% figure was just higher than the market price of 178% of nominal value pertaining at the time… [The Tribunal proceeds to describe the nationalizations of Banco de España in Spain, the Reserve Bank of New Zealand in New Zealand, the Banco de Portugal and the Banco Nacional Ultramarino in Portugal, and the Banco Central de Venezuela in Venezuela.] [8] Cessation of Project Work Due to Governmental Interference [a] Antoine Biloune and Marine Drive complex Ltd v. Ghana Investments Centre and the Government of Ghana, Award on Jurisdiction and Liability of 27 October 1989, 95 Int’l L. Rep. 183, 209-210 (1994) (62) [Stephen M. Schwebel (pres.), Don Wallace, Jr., Monroe Leigh] [See supra p. 644.] [9] Setting Product Price at Loss by Governmental Decree [a] S.A.R.L. Benvenuti and Bonfant v. People’s Republic of the Congo (ICSID Case No. ARB/77/2), Award of 8 August 1980, 1 ICSID Rep. 330 (1993) [Jørgen Trolle (pres.), Rudolf Bystricky, Edilbert Razafindralambo] [See supra p. 1181.] [b] Pope & Talbott Inc. v. The Government of Canada (ad hoc arbitration under the 1976 UNCITRAL Rules), Award on the Merits of Phase 2 by Arbitral Tribunal of 10 April 2001 (63) [Lord Dervaird (pres.), Benjamin J. Greenberg, Murray J. Belman] [In Canada, each province has charges, known as stumpage fees, for timber cut on Crown lands. The rates were fixed by the provincial governments and varied considerably. British Columbia changed its fee regime whereby stumpage fees were reduced and a new fee, known as the Super Fee, was introduced on exports in excess of quota, amounting to approximately 1% of total British Columbia exports. Pope & Talbott claimed that this change amounted to a denial of fair and equitable treatment of its investment. The Tribunal held that, although British Columbia could have chosen a different regime that distributed the fee burden more equitably among the producers, the new fee regime did not constitute a denial of fair and equitable treatment.]

[H] Legality Under customary international law, an expropriation will be legal if it is accomplished in accordance with the due process of law, for a public purpose, pursued on a nondiscriminatory basis, and with just compensation. [1] Form of Expropriation (e.g., Due Process) [a] Responsibility of the State for Injuries Caused in Its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights: Fourth Report by F. V. García Amador, [1959] 2 Y.B. Int’l L. Comm’n 1, U.N. Doc. A/CN.4/119 [See supra p. 589.] [b] Sedco, Inc. v. National Iranian Oil Company and The Islamic Republic of Iran (IUSCT Case No. 129), Award No. ITL 59-129-3 of 27 March 1986 (64) [Nils Mangård (pres.), Charles N. Brower, Parviz Ansari Moin] [For summary of facts, see supra p. 498.]

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(Citations selectively omitted) SEPARATE OPINION OF JUDGE BROWER *** Claimant has argued further that the taking in the instant case was unlawful. Although full compensation would appear to be the maximum compensation available in such case, I believe it is important to note that Claimant's remedies, in contrast to its rights, are not limited by Article IV(2) of the Treaty of Amity. A taking is unlawful under customary international law when it occurs in a discriminatory context, is not for a public purpose, or constitutes a breach of a specific obligation undertaken by the nationalizing State in relation to the property in question, e.g., violates the terms of an agreement between that State and an alien. *** I consider it unlikely that denial of justice in the customary sense constitutes a basis separate from those recognized above. For example, when the alleged denial of justice is lack of notice of the taking or the lack of an opportunity to challenge judicially the propriety of the taking, the taking itself is not a damage resulting from the denial of justice. To the degree that the alien has a customary right to due process, the denial of justice does not render the previous taking unlawful, but rather is a wrong itself for which proximately caused damages may be sought. Although judicial review might have revealed discrimination or the lack of a public purpose, it is those aspects and not the lack of opportunity for municipal judicial review that render the taking unlawful. [In footnote 39] In some instances, the property protection provision of a bilateral investment treaty expressly requires, for example, prior notice of the proposed taking. In such situations, depending upon the wording of the provision, the lack of notice may render the taking itself unlawful or it may, as a breach of the treaty, constitute a separate unlawful act. [In footnote 39] Likewise I must express doubt as to whether, under customary international law, a State's mere failure, in the end, actually to have compensated in accordance with the international law standard set forth herein necessarily renders the underlying taking ipso facto wrongful. If, for example, contemporaneously with the taking the expropriating State provides a means for the determination of compensation which on its face appears calculated to result in the required compensation, but which ultimately does not, or if compensation is immediately paid which, though later found by a tribunal to fall short of the standard, was not on its face unreasonable, it would appear appropriate not to find that the taking itself was unlawful but rather only to conclude that the independent obligation to compensate has not been satisfied. If, on the other hand, no provision for compensation is made contemporaneously with the taking, or one is made which clearly cannot produce the required compensation, or unreasonably insufficient compensation is paid at the time of taking, it would seem appropriate to deem the taking itself wrongful. It is in such cases that restitutio in integrum may be appropriate as a remedy and that, in addition to that, or to a monetary award of damages, should that alternative be selected, a tribunal might consider an award of punitive damages… [In footnote 39] *** The practical consequence of unlawfulness is in the remedies available. The remedy for a lawful taking is full compensation; the remedy for an unlawful taking is restitution or, where restitution is not practical, full compensation. Even in cases of unlawful takings, particularly where restitution is not possible, a difference in remedies potentially still could remain insofar as punitive or exemplary damages might be sought. [2] Purpose [a] Not for a Public Purpose [i] Amoco International Finance Corporation. v. The Government of the Islamic Republic of Iran, et al. (IUSCT Case No. 56), Award No. 310-56-3 of 14 July 1987 (65) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [See supra p. 260.] [b] Discrimination [i] Sociedad Minera el Teniente S.A. v. The Aktiengesellschaft Norddeutsche Attinerie (Chilean Copper case), Superior Court of Hamburg Docket No. 80 0 4/73, Decision of 22 January 1973, 12 I.L.M. 251, 276-278 (1973) (66) [In 1971, the Chilean government nationalized all large copper mining companies, including Sociedad Minera el Teniente S.A. (“SMETSA”), a subsidiary of Braden Copper Comp., a U.S. corporation. The nationalization law provided for compensation to be paid to foreign companies for the expropriation of their mine equipment, but not for the expropriation of their mineral rights. Furthermore, compensation would only be paid for mine equipment acquired on or prior to December 31, 1964, and this compensation was

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subject to deductions for equipment classified as being in “defective condition” and an “excess profit compensation levy.” A “Special Copper Court” was established to hear all appeals from the initial determination of the amount of compensation. In regard to the SMETSA claim, it imposed a stamp tax of approximately $4000 on sheet of paper filed in the appeal.] (Citations selectively omitted) As has furthermore not been denied by the defendant or the intervening party, the expropriation was intended primarily for nationalization. A nationalization which is directed specifically against foreigners is to be considered, however, discriminatory and thus an act which is not to be approved in accordance with the principles of public policy. Even though it may be understandable for a State to wish to free itself of the position of economic power of foreign companies which control particularly important portions of its economy, on the other hand the principle of contractual loyalty which governs every legal system should not be violated. As the petitioner has credibly shown, the formation of SMETSA with the cooperation and approval of the former President of Chile, Fr. Frei, was effected specifically in view of the special economic conditions of Chile. Under these circumstances, the petitioner had to be able to rely on the fact that a few years later it would not be expropriated at short notice by the Chilean Government, since a majority participation had already been granted to the State of Chile. Here it was to have been expected that Chile would either grant the petitioner an effective indemnification reasonable with respect to the consequences of the sudden loss of property, or else grant the company a reasonable period of transition, as. has recently become customary in the case of investment contracts with developing countries by a promise not to expropriate investment goods before the expiration of a stipulated period of time, and as furthermore would also be in accord with the sense of a Decision of the Chilean Supreme Court handed down in 1964 on the obligation of the Government to comply with a long-term tax promise despite the introduction of a new, more cumbersome tax law. Since none of this has been taken into account, we are confronted with substantial discrimination, in which connection it is unnecessary to take up the question whether the amount of the stamp tax stipulated by the Special Copper Court is to be considered a further act of discrimination. The Court in this connection imparts particular weight to the following: The petitioner has credibly shown that the continuation of the profit adjustment tax which is in an insoluble relationship to the expropriation proceedings is effected by the President of the country at his own free discretion. This act of discretion which is not subject to any restriction is not subject to review by the courts, as the Copper Court itself stated in the grounds of its Decision. This means that legal channels are closed and the party concerned is denied a legal hearing. In this way, however, a fundamental principle of German law is violated, which – even though in this case a German citizen is not involved – is so severe that it must be found to be a violation of German public policy. In any event, this conglomeration or acts of violation appears so serious as to be entirely unbearable under our view of legality and morality… [ii] Liberian Eastern Timber Corporation (“LETCO”) v. The Government of the Republic of Liberia (ICSID Case No. ARB/83/2), Award of 31 March 1986, 2 ICSID Rep. 346 (1994) (67) [Bernardo M. Cremades (pres.), Jorge Gonçalves Pereira, Alan Redfern] [For summary of facts, see supra p. 655.] [c] Violation of stabilization clause [i] AGIP Spa v. The Government of the Popular Republic of the Congo (ICSID Case No. ARB/77/1), Award of 30 November 1979, 67 Int’l L. Rep. 318 (1984) [Jørgen Trolle (pres.), René-Jean Dupuy, Fuad Rouhani] [AGIP and the Congolese government entered into a concession agreement, which provided that the government would not apply certain ordinances and decrees as well as all other ordinances and subsequent decrees the object of which is to change the private joint-stock company character of the Company. Some time afterwards, the government decreed that all assets and shares of the company be transferred to a state-owned company. The Tribunal held that this decree violated Congolese law and international law, and that the government was obliged to compensate AGIP for the damage suffered by it as a result of the nationalization.] [ii] Government of Kuwait v. American Independent Oil Company (AMINOIL), Award of 24 March 1982, 66 Int’l L. Rep. 518, 585-591 (1982) (68) [Paul Reuter (pres.), Hamed Sultan, Gerald Fitzmaurice] [For summary of facts, see infra p. 1022.] (Citations selectively omitted)

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88. … … … [T]he Tribunal sees nothing in the conclusions to be drawn from an examination of the above-mentioned circumstances that would prima facie prevent recognition of the validity of the nationalization effected by Decree Law No. 124. Nevertheless, Aminoil's concessionary contract contained specific provisions in the light of which it may be queried whether the nationalization was in truth lawful. The provisions concerned are Articles 1 and 17 of the Concession Agreement of 1948, and Article 7(g) of the 1961 Supplemental Agreement which introduced a new version of Article 11 of 1948. The relevant part of Article 1 of 1948 provided that The period of this Agreement shall be sixty (60) years from the date of signature. Article 17 of 1948 provided as follows The Shaikh shall not by general or special legislation or by administrative measures or by any other act whatever annul this Agreement except as provided in Article 11. No alteration shall be made in the terms of this Agreement by either the Shaikh or the Company except in the event of the Shaikh and the Company jointly agreeing that it is desirable in the interest of both parties to make certain alterations, deletions or additions to this Agreement. Finally, Article 7(g) of the Supplemental Agreement of 1961 provided for the deletion of Article 11 of 1948 and the substitution for it of a new Article 11. This new version, after indicating in a first paragraph (A) certain events (not here relevant) in which the Ruler of Kuwait would be entitled to terminate the Concession, went on in a second paragraph (B) to state (B) Save as aforesaid this Agreement shall not be terminated before the expiration of the period specified in Article 1 thereof except by surrender as provided in Article 12 or if the Company shall be in default under the arbitration provisions of Article 18. These clauses combined, but especially Article 17, constituted what are sometimes called the “stabilization” clauses of the contract. A straightforward and direct reading of them can lead to the conclusion that they prohibit any nationalization. Such is the view maintained by the Company. The Government of Kuwait on the other hand, in a series of arguments the merits of which the Tribunal must now consider, maintained that, on the contrary, these clauses did not prevent a nationalization. 89. The Tribunal will begin by discarding two arguments which it does not consider reliable. Firstly, the more radical one consists in affirming that these clauses do no more than embody general principles of contract law, and that in consequence the legal regime of the Concession is the same as that of any contract, and that these clauses add nothing to what would in any event be the legal position. This argument cannot be accepted, for it is a well-known principle of the interpretation of contracitual undertakings (and indeed of all juridical instruments) that the interpretation to be adopted must be such as will give each clause a worthwhile meaning or object… Secondly, according to an initial Government contention, these provisions had a “colonial” character and were imposed upon Kuwait at a time when that State was still under British protectorate, and not in possession of its full sovereign powers. On this basis the stabilization clauses were devoid of value. However, quite apart from any attempt to enquire into the factual circumstances in which these clauses were adopted, this contention cannot be upheld, for they were expressly confirmed on the occasion of the 1961 revision of the Concession after the attainment of complete independence by Kuwait, and again in 1973 when the text of the “1973 Agreement” was put into operation. 90. Other Government arguments were as follows: (1) It was contended that the stabilization clauses-initially valid and effective-were annulled by the emergence of a subsequent factor in the shape either of the Kuwait Constitution of 1962, or of a public international law rule of ius cogens forming part of the law of Kuwait. The relevant provisions of the Kuwait Constitution were those registering the permanent sovereignty of the State over its natural resources, and in particular Articles 21 and 152… … However, it does not appear from these provisions that they in any way prevented the State from granting stabilization guarantees by contract. Even if they should be interpreted as doing so, it was the State's duty towards its co-contractant to notify the latter of the putting into force of the resulting constitutional modifications to current contracts. This was not done; nor was it done either at the time of the revision of 1961, or of that of 1973. (2) Equally on the public international law plane it has been claimed that permanent sovereignty over natural resources has become an imperative rule of ius cogens prohibiting States from affording, by contract or by treaty, guarantees of any kind against the exercise of the public authority in regard to all matters relating to natural riches. This contention lacks all foundation. Even if Assembly Resolution 1803 (XVII) adopted in 1962, is to be regarded, by reason of the circumstance of its adoption, as reflecting the then

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state of international law, such is not the case with subsequent resolutions which have not had the same degree of authority… (3) Another argument advanced by the Government of Kuwait requires consideration. According to this, Aminoil's Concession belonged to the general category of “administrative contracts” in respect of which-as much by Kuwait law as on the basis of general legal principles-special faculties were reserved to the State, of which account must be taken in the interpretation of the stabilization clauses. 91. The “administrative contract”, as it was originally developed in French law, and subsequently in other legal systems such as those of Egypt and Kuwait, is based on the idea that certain contracts concluded by the State, or by public entities, are governed by special rules, the two principal ones being as follows (i)

(ii)

The public Authority can require a variation in the extent of the other party's liabilities (services, payments) under the contract. This must not however go so far as to distort (unbalance) the contract; and the State can never modify the financial clauses of the contract,-nor, in particular, disturb the general equilibrium of the rights and obligations of the parties that constitute what is sometimes known as the contract's “financial equation… …”… The public authority may proceed to a more radical step in regard to the contract namely to put an end to it when essential necessities concerning the functioning of the State (operation of public services) are involved. It is with this second aspect of the notion of an administrative contract that the present case could in theory be concerned. Yet even if Aminoil's Concession belonged to this category of contract, it would still be necessary that exigencies connected with essential State functioning should be such as to justify Decree Law No. 124.

92. In order to find an answer to this question, in connection with that of the effect of the stabilization clauses of the Concession, the matter has to be seen in its historical perspective. 93. It seems fair to say that what the Parties had in mind in drafting the stabilization clauses in 1948 and 1961, was anything which, by reason of its confiscatory character, might cause serious financial prejudice to the interests of the Company. Thus, as mentioned earlier, Article 7(g) of 1961, instituting a new revised Article 11 of 1948, enumerated and strictly limited all the instances in which the Concession can terminate through a forfeiture of the concessionaire's rights (for failure in its obligations), but is silent as to all acts that would lead to the ending of the Concession without having a confiscatory character. It can be held that the case of nationalization is precisely one of those acts, since as a matter of international law it is subject inter alia to the payment of appropriate compensation. 94. The case of nationalization is certainly not expressly provided against by the stabilization clauses of the Concession. But it is contended by Aminoil that notwithstanding this lacuna, the stabilization clauses of the Concession (Articles 17 and revised 11) are cast in such absolute and all-embracing terms as to suffice in themselves – unconditionally and in all circumstances – for prohibiting nationalization. That is a possible interpretation on the purely formal plane; but, for the following reasons, it is not the one adopted by the Tribunal. 95. No doubt contractual limitations on the State's right to nationalize are juridically possible, but what that would involve would be a particularly serious undertaking which would have to be expressly stipulated for, and be within the regulations governing the conclusion of State contracts; and it is to be expected that it should cover only a relatively limited period. In the present case however, the existence of such a stipulation would have to be presumed as being covered by the general language of the stabilization clauses, and over the whole period of an especially long concession since it extended to 60 years. A limitation on the sovereign rights of the State is all the less to be presumed where the concessionaire is in any event in possession of important guarantees regarding its essential interests in the shape of a legal right to eventual compensation. 96. Such is the case here, for if the Tribunal thus holds that it cannot interpret Articles 17 and 7(g) – revised 11 – as absolutely forbidding nationalization, it is nevertheless the fact that these provisions are far from having lost all their value and efficacity on that account since, by impliedly requiring that nationalization shall not have any confiscatory character, they re-inforce the necessity for a proper indemnification as a condition of it. 97. There is another aspect of the matter which has weighed with the Tribunal. While attributing its full value to the fundamental principle of pacta sunt servanda, the Tribunal has felt obliged to recognize that the contract of Concession has undergone great changes since 1948: changes conceded-often unwillingly, but conceded nevertheless-by the Company. These changes have not been the consequence of accidental or special factors, but rather of a profound and general transformation in the terms of oil concessions that occurred in the Middle-East, and later throughout the world… These changes must not simply be viewed piece-meal, but on the basis of their total effect, and they brought about a metamorphosis in the whole character of the Concession. 98. This Concession – in its origin a mining concession granted by a State whose institutions were still incomplete and directed to narrow patrimonial ends – became one

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of the essential instruments in the economic and social progress of a national community in full process of development. This transformation, progressively achieved, took place at first by means of successive increases in the financial levies going to the State, and then through the growing influence of the State in the economic and technical management of the undertaking, particularly as to the control of pricing policy, taken over in 1973, and the regulation of works and investment programmes. The contract of Concession thus changed its character and became one of those contracts in regard to which, in most legal systems, the State, while remaining bound to respect the contractual equilibrium, enjoys special advantages. 99. In relation to Aminoil's undertaking therefore, the State thus became, in fact if not in law, an associate whose interests had become predominant. Moreover, in spite of its unfinished, and in certain ways improvised character, the text of the projected Agreement of July 1973, made applicable by the 22 December 1973 Letter, bears witness to this evolution. 100. The faculty of nationalizing the Concession could not thenceforward be excluded in relation to the regime of the undertaking as it resulted from the sum total of the considerations relevant to its functioning. This conclusion concerning the interpretation of the stabilization clauses, as being no longer possessed of their former absolute character, which the Tribunal has thus reached, is in harmony with that regime as it stood in 1977 – and a contrary interpretation would, in addition, disregard its other contractual components. 101. The Tribunal wishes however to stress here that the case is not one of a fundamental change of circumstances (rebus sic stantibus) within the meaning of Article 62 of the Vienna Convention on the Law of Treaties. It is not a case of a change involving a departure from a contract, but of a change in the nature of the contract itself, brought about by time, and the acquiescence or conduct of the Parties. 102. The Tribunal thus arrives at the conclusion that the “takeover” of Aminoil's enterprise was not, in 1977, inconsistent with the contract of concession, provided always that the nationalization did not possess any confiscatory character. [iii] Mobil Oil Iran Inc., et al. v. Government of the Islamic Republic of Iran and National Iranian Oil Company (IUSCT Case Nos. 74, 76, 81, 150), Award No. 31174/76/81/150-3 of 14 July 1987 (69) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [For summary of facts, see supra p. 624.] [d] Comments and Questions For an analysis of the case law on violations of stabilization clauses, see Taida Begic, Applicable Law in International Investment Disputes 84-98 (2005). Begic concludes: The position of the arbitral tribunals… … … is clear: under international law the foreign investor must be compensated for the losses suffered by such actions. But the positions appear divergent as to whether the incompatibility of the nationalization with the stabilization clause will be sufficient reason to demonstrate the unlawful character of the nationalization. In TOPCO and AGIP, the tribunals were clear in holding that the nationalization as an act that terminated the parties' argreement was in violation of a stabilization clause contained therein and this violation was sufficient to demonstrate the unlawful character of nationalization. In AMINOIL and Amoco, the tribunals refused to accept the position that the nationalization was unlawful in light of these clauses. In their opinion, only an express prohibition of nationalization provided by the contract may have the effect of making such an act inconsistent with the stabilization clauses and, consequently, unlawful under international law. 97.

[I] Date of Expropriation The date of expropriation may affect the amount of compensation awarded. For direct expropriation, the date of expropriation is often easily determinable, as a discrete act or series of acts have been taken over a relatively short period of time. Difficulties arise with respect to indirect “creeping” expropriation where a series of acts over a long period of time have given rise to expropriation. [1] Vance R. Koven, Expropriation and the “Jurisprudence” of OPIC, 22 Harv. J. Int’l L. 269, 277, 311-314 (1981) (70) (Citations selectively omitted) Section 1.10 defines the “date of expropriation” as the first day of the period in which an action, through duration of time, became expropriatory action. Along with the definition of “expropriatory action” itself, this unfortunately simple definition is one of the greatest problems under the Contract. In the event of an expropriation in the form of a simple decree of eminent domain, the definition would apply clearly; but in all other cases, thus far, interpretive problems have abounded. For “creeping” expropriation, where a slow accretion of interferences with the investors management or control of the foreign

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enterprise results in the inability of the project to continue, determining the date on which “an action” created that result is an absurd exercise, but one of extreme importance because of the principles of compensation at work in the Contract. Since it is the value of the foreign enterprise at the date of expropriation that is compensable, the more stoically the foreign enterprise hangs on in the face of host government interference, the more it hurts its chances of recovering the full value of its business. This is particularly true when those interferences have resulted in lower profits which would be added to retained earnings, or indeed in losses which under the accounting procedures of the Contract must be subtracted from retained earnings. *** Next to the question of expropriation vel non, the determination of the date of expropriation is the most keenly contested issue arising from a claim under the Contract. Businesses are dynamic. Although a balance sheet for a business may be constructed at any given date, the value, it reflects will vary from day to day. Moreover, with a “creeping” expropriation it is difficult to determine both what business activities have been precluded by the government action and what actions of governments, suppliers, customers, employees, creditors and debtors have been affected by the plan of expropriation. Date of expropriation issues in the decided claims may be classified by how explicit and complex the government action is which constitutes the expropriatory action. At one end of the spectrum are the cases where a specific law or decree effected an expropriatory alteration in the management or control of the foreign enterprise. At the other end are cases where, without a formal decree or official communication, government conduct caused the foreign enterprise to cease operations on its own initiative. Within the first category of cases fall the claims stemming from the cancellation of concession agreements. In such situations, the effective date of cancellation usually determines the date of expropriation. In Agricola, for example, the host government notified the foreign enterprise of the cancellation of a concession agreement, and the parties then undertook negotiations concerning recapitalizing the foreign enterprise, revising the market territory and other matters. When these negotiations failed, however, OPIC found the date of the event triggering them, rather than the date of breakdown of the talks, to be the date of the expropriatory action. The arbitrators in Valentine made a similar determination, although they held the date of expropriation to be the issue date of the decree which revoked the concession, rather than the date on which Valentine became aware of the decree. Likewise, in Chile Copper Company, a companion claim to Anaconda, OPIC found that the appropriate date was the effective date of the expropriating law. Even where a government decree has been issued, OPIC's determinations of date of expropriation have not been entirely consistent. In the Chilean copper cases, the enactment and effectiveness of the decree itself was the crucial date. In other Chilean cases, where intervenors were also appointed, the official date of expropriation was the date of appointment (despite previous interference by the Chilean government). As it happened, this date coincided with that on which the intervenor appeared at company headquarters to take control. In First National City Bank, a claim involving various formal decrees as well as harassment, OPIC passed over such actions and chose the closing date of the sale of its assets to the Chilean government. A similar category of claims, arising from investments in Vietnam, concerned the host government's actual or constructive interference with the investor's operation. In Chase Manhattan Bank, OPIC determined that the date of the fall of Saigon, rather than the date of the military decree nationalizing all foreign (except French) property, should serve as the date of expropriation. OPIC was apparently following the reasonable principle that actual interference in operations is more important in determining the date of expropriation than the technicalities of official pronouncements. Similarly, in International Dairy Engineering Company of Asia, Inc., OPIC used the date when fighting cut off communication between the plant outside Saigon and its management, which had set up headquarters in Thailand. InCaltex (Asia) Ltd., on the other hand, for no apparent reason OPIC chose the date of the military decree, thereby honoring its principle in the breach. Another Vietnam case to fall outside the pattern was Singer Sewing Machine Company, where the investment had been reduced to a ten per cent equity holding, the rest having been sold to a French company. The enterprise was thus exempt from nationalization from 1975 until a 1977 decree, which granted compensation only to French companies. OPIC had no difficulty in finding the date of this decree to be the date of expropriation. At the other end of the spectrum are instances where no decree or executive action has emanated from the governing authority. In these cases OPIC's method of analysis appears to be to find a date “by which” a chain of events became expropriatory in effect. This has led to what might be viewed as an arbitrary assignment of a date of expropriation. In Revere, for example, the arbitrators looked at the long chain of government actions giving rise to the claim – the announced polity of nationalization, the passage of the Bauxite Levy in June 1974, the negotiations with the investor, and finally the shutting down of the

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RJA plant – and concluded that the passage of the Bauxite Levy was the act which implemented the stated position of Prime Minister Manley that the bauxite contracts had been “abrogated by history” and that “the Government of Jamaica cannot be bound by them any longer.” Revere had contended that the policy statement itself showed Jamaica had repudiated the agreement with the aluminum companies; the panel, although critical of OPIC's attempt to find some physical action which would have been more like a traditional taking, looked for some action in furtherance of the stated policy. Thus, the arbitrators' conclusion that the repudiation of the development agreement occurred “in June” is somewhat misleading by its imprecision. Rather, to be consistent with their method of determination, the arbitrators should have established the date of expropriation as the exact date the measure was enacted, a date of which they were clearly aware. OPIC's preference for physical acts which identify expropriatory action was apparent in and Indian Head. In the former case, the expropriatory date was the date the foreign enterprise's plant was shut down; in the latter it was the date that plant was reopened against the investors will. The resolution of Fearn, hough apparently consented to by the investor, seems at odds with the resolution of First National City Bank and with the reality of the situation, in which many acts of harassment made the shutting down of the foreign enterprise a long overdue acknowledgment of an untenable position. In Cabot, on the other hand, OPIC's solution appears consistent with Fearn’s methodology of picking a date “by which” the cumulative effects of interference with (in this case) the fundamental shareholder rights of the investor had unquestionably been denied. The same may be said of Walsh, where the denial of Walsh's claim before the Ministry of justice was held to be the single event indicating that the construction agreement had been repudiated. [2] W. Michael Reisman and Robert D. Sloane, Indirect Expropriation and Its Valuation in the BIT Generation, 74 Brit. Y.B. Int’l L. 115, 148, 150 (2004) (71) (Citations selectively omitted) … BITs and comparable multilateral investment treaties should, as a matter of both the intent of their drafters and the policies that animate them, be construed to deter, not reward, unlawful expropriations of all kinds. If application of the Iran-U.S. Claims Tribunal's standard in practice reduces the amount of compensation due to victims of creeping expropriations or consequential expropriations, then, we suggest, the “moment of expropriation” should be distinguished from “moment of valuation” for these purposes. And again, it is in this regard that the determination in the first instance of the investor may merit some deference. In any event, and whatever the method adopted by a tribunal to determine the proper “moment of expropriation” in circumstances of creeping and consequential expropriations, that determination must enable the tribunal to give full effect to Chorzow Factory’s imperative “that reputation must, so far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.” *** To calculate compensation for consequential and creeping expropriations carried out within the legal universe of a BIT, tribunals can no longer be content to evaluate the fair market value of an expropriated investment as of the date when an accretion of governmental acts and omissions has so dramatically devalued that investment as to render it “practically useless” or its value “irretrievably lost.” Because these principles may, in practice, threaten the stable and mutually beneficial normative framework for reciprocal foreign investment that states design BITs to create and maintain, international tribunals seeking to award compensation for investment expropriated consequentially or by a creeping series of measures “tantamount to” expropriation may benefit from an alternative principle. Above all, any standard adopted to determine the appropriate date from which to calculate compensation should effectively deter, not reward, consequential and creeping expropriations. In this regard tribunals seized with cases raiding these issues may find it both useful and appropriate to disaggregate the moment of expropriation and the moment of valuation – to distinguish the “moment of expropriation,” which goes to the question of liability (i.e., whether an accretion of measures has ripened into a compensable expropriation), from the “moment of valuation,” which goes to the question of damages. Because creeping and consequential expropriations frequently demand highly fact-sensitive inquiries, it is neither possible nor prudent to suggest monolithic or bright-line rule for calculating compensation in these circumstances. But as a general principle, the moment of valuation should be the date on which assessing the fair market value of a foreign investment for purposes of calculating compensation will enable tribunal to give full effect to Chorzów Factory’s imperative. Adoption of this principle, in our view, would contribute in the long term to fortifying the stable and predictable legal regime for reciprocal foreign investment upon which both foreign investors and developing states depend in the BIT generation. [3] Cases

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[a] Amoco International Finance Corporation. v. The Government of the Islamic Republic of Iran, et al. (IUSCT Case No. 56), Award No. 310-56-3 of 14 July 1987 (72) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [For summary of facts, see supra p. 260.] (Citations selectively omitted) 125. The Tribunal agrees that the expropriation which took place in this Case was the outcome of a lengthy process, but it finds that the precise character of this process was, at the beginning and for a rather long period of time, ambiguous. The starting point of this process, according to the Claimant, is a declaration by the managing director of NPC that Iran sought to purchase all foreign interests in its petrochemical industry. The documents produced by the Claimant evidence that this intention of purchasing Amoco's interests in Khemco was announced at an early stage to Amoco and that both parties agreed to start negotiations to this end. Express reference to these negotiations is made in the minutes of the meeting of 11 July 1979, at which it was decided that the sales of Khemco products would be handled by NIOC and NPC. In a telex dated 6 August 1979, that is, after the date on which the Claimant believes the expropriation to be complete, Amoco expressly mentions the discussions pending between the parties on the purchase of Amoco's interests in Khemco and invokes them in support of its protest against the measures taken for the marketing of Khemco products, which, Amoco said, “amounts to nationalization.” 126. In view of these facts, the Tribunal finds it difficult to accept the theory that an expropriation had taken place on 1 August 1979. It is well established that at this time, and already from April 1979 onwards at least, Iran had decided to acquire Amoco's share in the capital stock of Khemco. It seems equally clear that Amoco arrived at the conclusion that, in the circumstances then prevailing in the country, it had no future in the petrochemical industry in Iran. Both parties were substantially in agreement to terminate the participation of Amoco in Khemco. The way contemplated by the parties at the time, in order to arrive at such a result, was a purchase of Amoco's rights by NIOC, but according to their declarations before the Tribunal, serious differences concerning the price to be paid necessitated negotiations in order to try to solve this problem. 127. It was apparent that the negotiations to be conducted would be difficult and lengthy, but the final transfer of Amoco's rights could not be doubted by either party. Pending their outcome, NIOC and NPC decided to take a certain number of decisions relating to the management of Khemco… 128. The Tribunal is not aware of the way in which the purported negotiations were pursued during the following months or even whether such negotiations actually took place. The Claimant contends that, after the measures taken in the matter of marketing, it could no longer pursue negotiations. The events of November 1979, in any case, dramatically changed the whole situation and made it impossible for both parties to conduct any discussions. Eventually a new stance was taken by the Iranian authorities, which decided to include the Khemco Agreement on the list of contracts nullified pursuant to the Single Article Act. The decision by the Special Commission, notified on 24 December 1980, declaring the Khemco Agreement “null and void,” was the final act of the process started in April 1979. It was also the first decision taken directly by a governmental authority. 129. The Claimant contends that “the Act did not nationalize Claimant's property or even purport to ratify the prior taking; it merely authorized the Special Commission to declare contracts ‘null and void.’” It adds that the nullification was unlawful, since it “violated due process and because no adequate legal basis for a declaration of nullity was offered or could be offered.” This last objection cannot be sustained since the decision of the Special Commission was taken pursuant to the Single Article Act, which is of a legislative nature. This fact suffices to give it a legal basis. 130. Formally, it is true that the Khemco Agreement was declared “null and void” by the Special Commission, pursuant to the terms of the Single Article Act. The real issue, however, is to determine how such a decision must be characterized in international law, which is the applicable law. In view of the tremendous political importance of the Single Article Act in the attainment of the objectives of the Islamic Revolution in Iran, the international legal meaning of this Single Article Act can certainly not be ascertained without placing it in the context of the events which took place at this time in Iran, and without taking into account the political and legal position of the Islamic Government towards the previous regime. 131. The Single Article Act relates to the oil industry, which is not only Iran's major industry and source of revenue, but which has played a major role in the politics of Iran since the time of Mossadegh's national government. It is generally recognized that the strikes in the oil industry were decisive in the upheaval which led to the overthrow of the Shah and the establishment of a revolutionary government and that the exclusion of all foreign interests in the oil industry was one of the main objectives of the revolutionary movements. Since such interests were based on contracts executed after the Shah's return in 1953, numerous declarations of the new authorities tended to affirm that all such contracts were in violation of the 1951 Nationalization of the Iranian Oil Industry Act,

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and, therefore, null and void. The Single Article Act was framed in order to comply with this political, rather than legal, aim. It does not carry all the consequences of the theory of the nullity of the contracts, however, since it provides that compensation might be paid in case of nullification. As a matter of fact, its effect was a complete renationalization of the oil industry and, for all practical purposes, it amounted to a nationalization of the rights of the foreign parties to the nullified contracts. Such a construction of the Single Article Act as a measure of expropriation is, furthermore, expressly conceded by the Respondents. The Tribunal finds that it correctly defines the real meaning in international law of the Single Article Act and of the decision of the Special Commission. 132. The analysis of all the relevant facts known to the Tribunal thus reveals that the process which led to the expropriation of Amoco's rights and interests in Khemco was complete only on 24 December 1980, with the notification of the decision of the Special Commission. This process, which started more than twenty months before, was exceptionally lengthy, due to the extraordinary events which took place during this period. It also changed orientation over time, since, even if its original purpose was the transfer of Amoco's rights and duties to NPC, such a transfer was initially not contemplated to be accomplished by way of expropriation. Such a purpose was eventually realized by a decision taken under a procedure decided by a legislative act, the legality of which, under Iranian law, cannot be doubted by this Tribunal. The Claimant's argument that the expropriation was made in violation of Iranian law, therefore, is rejected. [b] Phillips Petroleum Company Iran v. The Islamic Republic of Iran and The National Iranian Oil Company (IUSCT Case No. 39), Award No. 425-39-2 of 29 June 1989 (73) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich] [See supra p. 621.] [c] Compañía del Desarrollo de Santa Elena, S.A. v. The Republic of Costa Rica (ICSID Case No. ARB/96/1), Final Award of 17 February 2000 (74) [L. Yves Fortier (pres.), Elihu Lauterpacht, Prosper Weil] [For summary of facts, see supra p. 593.] (Citations selectively omitted) 78. Stated differently, international law does not lay down any precise or automatic criterion, such as the date of the transfer of ownership or the date on which the expropriation has been “consummated” by agreed or judicial determination of the amount of compensation or by payment of compensation. The expropriated property is to be evaluated as of the date on which the governmental “interference” has deprived the owner of his rights or has made those rights practically useless. This is a matter of fact for the Tribunal to assess in the light of the circumstances of the case. 79. Claimant does not really contest this approach. The determination of the relevant date, so Claimant writes, ”… may vary under different circumstances, thereby affecting the determination of the actual date of expropriation.” 80. Although the expropriation by the decree of 5 May 1978 was only the first step in a process of transferring the Property to the Government, it cannot reasonably be maintained, as Claimant seeks to do, that this Decree expressed no more than an “intention” to expropriate or that, in 1978, the Government merely “sought to expropriate”. In the circumstances of this case, the taking of the Property occurred as of 5 May 1978, the date of the 1978 Decree. 81. As of that date, the practical and economic use of the Property by the Claimant was irretrievably lost, notwithstanding that CDSE remained in possession of the Property. As of 5 May 1978, Claimant's ownership of Santa Elena was effectively blighted or sterilised because the Property could not, thereafter, be used for the development purposes for which it was originally acquired (and which, at that time, were not excluded) nor did it possess any significant resale value. 82. As noted in the U.S. Senate Staff Report entitled “Confiscated Property of American Citizens Overseas: Cases in Honduras, Costa Rica and Nicaragua”: “This odd situation has caused the owners of the land to lose a great deal of money because they are not allowed to develop the property as a profitmaking, eco-tourism project, yet they are required to pay for the maintenance of the property…” 83. Since the Tribunal is of the view that the taking of the Property occurred on 5 May 1978, it is as of that date that the Property must be valued. There is no evidence that its value at that date was adversely affected by any prior belief or knowledge that it was about to be expropriated. Consequently, for the purpose of retrospectively attributing a value to the Property in 1978, the Tribunal has not had to consider later appraisals, such as the Government's 1993 Appraisal or those submitted by the parties in these proceedings.

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84. The significance of identifying the date of taking lies in its bearing on the factors that may properly be taken into account in assessing the “fair market value” of the Property – a value which, as noted, both sides are agreed must be the basis of the present Award. If the relevant date were the date of this Award, then the Tribunal would have to pay regard to the factors that would today be present to the mind of a potential purchaser. Of these, the most important would no doubt be the knowledge that the Government has adopted an environmental policy which would very likely exclude the kind of tourist, hotel and commercial development that the Claimant contemplated when it first acquired the Property. If, on the other hand, the relevant date is 5 May 1978, factors that arose thereafter – though not necessarily subsequent statements regarding facts that existed as of that date – must be disregarded. [d] Comments and Questions 1.

2. 3.

In Indirect Expropriation and Its Valuation in the BIT Generation, Reisman & Sloane propose separating the question of whether there was a taking and when it occurred from the question of valuation. Does this proposal give too much discretion to the tribunal seised with the matter? Even assuming that Reisman & Sloane's proposal is sound, does the moment of taking continue to be of sufficient importance to warrant determination? Why? For an analysis of the date of valuation for an unlawful expropriation, see Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan (ICSID Case No. ARB/05/16), Award of 29 July 2008, ¶¶ 737-44, 785-96.

[J] Defenses Argued by Governments [1] U.N. Resolutions [a] Permanent Sovereignty over Natural Resources, General Assembly Resolution 1803 (XVII) of 14 December 1962 Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law. In any case where the question of compensation gives rise to a controversy, the national jurisdiction of the State taking such measures shall be exhausted. However, upon agreement by sovereign States and other parties concerned, settlement of the dispute should be made through arbitration or international adjudication. [b] Declaration on the Establishment of a New International Economic Order (1 May 1974), A/RES/3201 (S-VI) 4. The new international economic order should be founded on full respect for the following principles: *** (e)

(g)

(h)

Full permanent sovereignty of every State over its natural resources and all economic activities. In order to safeguard these resources, each State is entitled to exercise effective control over them and their exploitation with means suitable to its own situation, including the right to nationalization or transfer of ownership to its nationals, this right being an expression of the full permanent sovereignty of the State. No State may be subjected to economic, political or any other type of coercion to prevent the free an full exercise of this inalienable right; ** * Regulation and supervision of the activities of transnational corporations by taking measures in the interest of the national economies of the countries where such transnational corporations operate on the basis of the full sovereignty of those countries; The right of the developing countries and the peoples of territories under colonial and racial domination and foreign occupation to achieve their liberation and to regain effective control over their natural resources and economic activities […].

[c] Charter of Economic Rights and Duties of States (12 December 1974), A/ RES/3281 (XXIX) Article 2 1. 2.

Every State has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities. Each State has the right: (a)

To regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and regulation sand in conformity with national objectives and priorities. No State shall be obliged to grant

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(b)

(c)

preferential treatment to foreign investment; To regulate and supervise the activities of transnational corporations within its national jurisdiction and take measures to ensure that such activities comply with tis laws, rules and regulations and conform with its economic and social policies. Transnational corporations shall not intervene in the internal affairs of a host state. Every State should, with full regard for its sovereign rights, co-operate with other States in the exercise of the right set forth in this subparagraph; To nationalize, expropriate, or transfer ownership of foreign property, in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent. In any case where the question of compensation gives rise to a controversy, it shall be settled under the domestic law of the nationalizing State and by its tribunals, unless it is freely and mutually agreed by all States concerned that other peaceful means be sought on the basis of the sovereign equality of States and in accordance with the principle of free choice of means.

[2] Cases [a] Texaco Overseas Petroleum Company/California Asiatic Oil Company (TOPCO) v. The Government of the Libyan Arab Republic, Award on the Merits of 19 January 1977, 17 I.L.M. 3, 27-31 (1978) (75) [René-Jean Dupuy (sole arbitrator)] [For summary of facts, see supra p. 461.] (Citations selectively omitted) 80. This Tribunal has stated that it intends to rule on the basis of positive law, but now it is necessary to determine precisely the content of positive law and to ascertain the place which resolutions by the General Assembly of the United Nations could occupy therein. In its Preliminary Award of 27 November 1975, this Tribunal postponed the examination of the objection raised by the Libyan Government in its Memorandum of 26 July 1974 according to which: Nationalization is not related to the sovereignty of the State. This fact has been recognized by the consecutive Resolutions of the United Nations on the sovereignty of States over their natural resources, the last being Resolution No. 3171 of the United Nations General Assembly adopted on December 13, 1973, as well as paragraph (4/E) of Resolution No. 3201 (S. VI) adopted on 1 May, 1974. The said Resolutions confirm that every State maintains complete right to exercise full sovereignty over its natural resources and recognize Nationalization as being a legitimate and internationally recognized method to ensure the sovereignty of the State upon such resources. Nationalization, being related to the sovereignty of the State, is not subject to foreign jurisdiction. Provisions of the International Law do not permit a dispute with a State to be referred to any Jurisdiction other than its national Jurisdiction. In affirmance of this principle, Resolutions of the General Assembly provide that any dispute related to-Nationalization or its consequences should be settled in accordance with provisions of domestic law of the State. 81. At the stage of the Preliminary Award, it was premature to go into these arguments, since they were related to the merits of the case. Now, this Tribunal must examine the relevancy and the scope of these arguments to the instant case. The practice of the United Nations, referred to in the Libyan Government's Memorandum, does not contradict in any way the status of international law as indicated above. This Tribunal wishes first to recall the relevant passages for this ease of Resolution 1803 (XVII) entitled “Permanent Sovereignty over Natural Resources”, as adopted by the General Assembly on 14 December 1962: 3. In cases where authorization is granted, the capital imported and the earnings on that capital shall be governed by the terms thereof, by the national legislation in force, and by international law… 4. Nationalization, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognized as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law… 82. The Memorandum of the Libyan Government which has just been quoted relies, however, on more recent Resolutions of the General Assembly (3171 and 3201 (S-VI), in particular) which, according to this Government would as a practical matter rule out any recourse to international law and would confer an exclusive and unlimited competence upon the legislation and courts of the host country.

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Although not quoted in the Libyan Memorandum, since subsequent to the date of 26 July 1974, Resolution 3281 (XXIX), proclaimed under the title “Charter of Economic Rights and Duties of the States” and adopted by the General Assembly on 12 December 1974, should also be mentioned with the two Resolutions in support of the contention made by the Libyan Government. Two portions of such Resolutions are of particular interest in the present case: –

Resolution 3201 (S-VI) adopted by the General Assembly on 1 May 1974 under the title “Declaration on the Establishment of a Now International Economic Order”, Article 4, paragraph (e): Full permanent sovereignty of every State over its natural resources and all economic activities. In order to safeguard these resources, each State is entitled to exercise effective control over them and their exploitation with means suitable to its own situation, including the right to nationalization or transfer of ownership to its nationals, this right being an expression of the full permanent sovereignty of the State. No State may be subjected to economic, political or any other type of coercion to prevent the free and full exercise of this inalienable right.

–

Article 2 of Resolution 3281 (XXIX) 1. 2. c)

Every State has and shall freely exercise full permanent sovereignty, including possession, use and disposal, over all its wealth, natural resources and economic activities. Each State has the right… To nationalize, expropriate or transfer ownership of foreign property, in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent. In any case where the question of compensation gives rise to a controversy, it shall be settled under the domestic law of the nationalizing State and by its tribunals, unless it is freely and mutually agreed by all States concerned that other peaceful means be sought on the basis of the sovereign equality of States and in accordance with the principal of free choice of means.

Substantial differences thus exist between Resolution 1803 (XVII) and the subsequent Resolutions its regards the role of international law in the exercise of permanent sovereignty over natural resources. This aspect of the matter is directly related to the instant case under consideration; this Tribunal is obligated to consider the legal validity of the above-mentioned Resolutions and the possible existence of a custom resulting therefrom. 83. The general question of the legal validity of the Resolutions of the United Nations has been widely discussed by the writers. This Tribunal will recall first that, under Article 10 of the U.N. Charter, the General Assembly only issues “recommendations”, which have long appeared to be texts having no binding force and carrying no obligations for the Member States… Refusal to recognize any legal validity of United Nations Resolutions must, however, be qualified according to the various texts enacted by the United Nations. These are very different and have varying legal value, but it is impossible to deny that the United Nations activities have had a significant influence on the content of contemporary international law. In appraising the legal validity of the above-mentioned Resolutions, this Tribunal will take account of the criteria usually taken into consideration, i.e., the examination of voting conditions and the analysis of the provisions concerned. 84. (1) With respect to the first point, Resolution 1803 (XVII) of 14 December 1962 was passed by the General Assembly by 87 votes to 2, with 12 abstentions. It is particularly important to note that the majority voted for this text, including many States of the Third World, but also several Western developed countries with market economies, including the most important one, the United States. The principles stated in this Resolution were therefore assented to by a great many States representing not only all geographical areas but also all economic systems. From this point of view, this Tribunal notes that the affirmative vote of several developed countries with a market economy was made possible in particular by the inclusion in the Resolution of two references to international law, and one passage relating to the importance of international cooperation for economic development. According to the representative of Tunisia: ”… the result of the debate on this question was that the balance of the original draft resolution was improved – a balance between, on the one hand, the unequivocal affirmation of the inalienable right of States to exercise sovereignty over their natural resources and, on the other band, the reconciliation or adaptation of this sovereignty to international law, equity and tho principles of international cooperation.” (17 U.N. GAOR 1122, U.N. Doc. A/PV. 1193 (1962).)

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The reference to international law, in particular in the field of nationalization, was therefore an essential factor in the support given by several Western countries to Resolution 1803 (XVII). 85. On the contrary, it appears to this Tribunal that the conditions under which Resolutions 3171 (XXVII), 3201 (S-VI) and 3281 (XXIX) (Charter of the Economic Rights and Duties of States) were notably different: –

Resolution 3171 (XXVII) was adopted by a recorded vote of 108 votes to 1, with 16 abstentions, but this Tribunal notes that a separate vote was requested with respect to the paragraph in the operative part mentioned in the Libyan Government's Memorandum whereby the General Assembly stated that the application of the principle according to which nationalizations effected by States as the expression of their sovereignty implied that it is within the right of each State to determine the amount of possible compensation and the means of their payment, and that any dispute which might arise should be settled in conformity with the national law of each State instituting measures of this kind. As a consequence of a roll-call, this paragraph was adopted by 86 votes to 11…

This specific paragraph concerning nationalizations, disregarding the role of international law, not only was not consented to by the most important Western countries, but caused a number of the developing countries to abstain. –

–

Resolution 3201 (S-VI) was adopted without a vote by the General Assembly, but the statements made by 38 delegates showed clearly and explicitly what was the position of each main group of countries. The Tribunal should therefore note that the most important Western countries were opposed to abandoning the compromise solution contained in Resolution 1803 (XVII). The conditions under which Resolution 3281 (XXIX), proclaiming the Charter of Economic Rights and Duties of States, was adopted also show unambiguously that there was no general consensus of the States with respect to the most important provisions and in particular those concerning nationalization. Having been the subject matter of a roll-call vote, the Charter was adopted by 118 votes to 6, with 10 abstentions.

The analysis of votes on specific sections of the Charter is most significant insofar as the present case is concerned. From this point of view, paragraph 2 (c) of Article 2 of the Charter, which limits consideration of the characteristics of compensation to the State and does not refer to international law, was voted by 104 to 16, with 6 abstentions, all of the industrialized countries with market economies having abstained or having voted against it. 86. Taking into account the various circumstances of the votes with respect to these Resolutions, this Tribunal must specify the legal scope of the provisions of each of these Resolutions for the instant case. A first general indication of the intent of the drafters of the Charter of Economic Rights and Duties of States is afforded by the discussions which took place within the Working Group concerning the mandatory force of the future text. As early as the first session of the Working Group, differences of opinion as to the nature of the Charter envisaged gave rise to a very clear division between developed and developing countries. Thus, representatives of Iraq, Sri Lanka, Egypt, Kenya, Morocco, Nigeria, Zaire, Brazil, Chile, Guatemala, Jamaica, Mexico, Peru and Rumania held the view that the draft Charter should be a legal instrument of a binding nature and not merely a declaration of intention. On the contrary, representatives of developed countries, such as Australia, France, Federal Republic of Germany, Italy, Japan, United Kingdom and United States expressed doubt that it was advisable, possible or even realistic to make the rights and duties set forth in a draft Charter binding upon States (Report of the Working Party on its 1st Session, U.N. Doc. TD/B/AC.- 12/1 (1973), at 6). The form of resolution adopted did not provide for the binding application of the text to those to which it applied, but the problem of the legal validity to be attached to the Charter is not thereby solved. In fact, while it is now possible to recognize that resolutions of the United Nations have a certain legal value, this legal value differs considerably, depending on the type of resolution and the conditions attached to its adoption and its provisions. Even under the assumption that they are resolutions of a declaratory nature, which is the case of the Charter of Economic Rights and Duties of States, the legal value is variable… As this Tribunal has already indicated, the legal value of the resolutions which are relevant to the present ease can be determined on the basis of circumstances under which they were adopted and by analysis of the principles which they state: –

With respect to the first point, the absence of any binding force of the resolutions of the General Assembly of the United Nations implies that such resolutions must be accepted by the members of the United Nations in order to be legally binding. In this respect, the Tribunal notes that only Resolution 1803 (XVII) of 14 December 1962 was supported by a majority of Member States representing all of the various

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groups. By contrast, the other Resolutions mentioned above, and in particular those referred to in the Libyan Memorandum, were supported by a majority of States but not by any of the developed countries with market economics which carry on the largest part of international trade. 87. (2) With respect to the second point, to wit the appraisal of the legal value on the basis of the principles stated, it appears essential to this Tribunal to distinguish between those provisions stating flip, existence of a right on which the generality of the States has expressed agreement and those provisions introducing new principles which were rejected by certain representative groups of States and having nothing more than a de lege ferenda value only in the eyes of the States which have adopted them; as far as the others are concerned, the rejection of these same principles implies that they consider diem as being contra legem. With respect to the former, which proclaim rules recognized by the community of nations, they do not create a custom but confirm one by formulating it and specifying its scope, thereby making it possible to determine whether or not one is confronted with a legal rule. As has been noted by Ambassador Castaneda, “[such resolutions] do not create the law; they have a declaratory nature of noting what does exist” (129 R.C.A.D.I. 204 (1970), at 315). On the basis of the circumstances of adoption mentioned above and by expressing an opinio juris comnunis, Resolution 1803 (XVII) seems to this Tribunal to reflect the state of customary law existing in this field. Indeed, on the occasion of the vote on a resolution finding the existence of a customary rule, the States concerned clearly express their views. The consensus by a majority of States belonging to the various representative groups indicates without the slightest doubt universal recognition of the rules therein incorporated, i.e., with respect to nationalization and compensation the use of the rules in force in the nationalizing State, but all this in conformity with international law. 88. While Resolution 1803 (XVII) appears to a large extent as the expression of a real general will, this is not at all the case with respect to the other Resolutions mentioned above, which has been demonstrated previously by analysis of the circumstances of adoption. In particular, as regards the Charter of Economic Rights and Duties of States, several factors contribute to denying legal value to those provisions of the document which are of interest in the instant case. – –

In the first place, Article 2 of this Charter must be analyzed as a political rather than as a legal declaration concerned with the ideological strategy of development and, as such, supported only by non-industrialized States. In the second place, this Tribunal notes that in the draft submitted by the Group of 77 to the Second Commission (U.N. Doc A/C.2/L. 1386 (1974), at 2), the General Assembly was invited to adopt the Charter “as a first measure of codification and progressive development” within the field of the international law of development. However, because of the opposition of several States, this description was deleted from the text submitted to the vote of the Assembly. This important modification led Professor Virally to declare: “It is therefore clear that the Charter is not a first step to codification and progressive development of international law, within the meaning of Article 13, para. 1 (a) of the Charter of the United Nations, that is to say an instrument purporting to formulate in writing the rules of customary law and intended to better adjust its content to the requirements of international relations. The persisting difference of opinions in respect to some of its articles prevented reaching this goal and it is healthy that people have become aware of this. ” (“La Charte des Droits et Devoirs Economiques des Etats. Notes de Lecture ”, 20 A.F.D.I. 57 (1974), at 59.)

The absence of any connection between the procedure of compensation and international law and the subjection of this procedure solely to municipal law cannot be regarded by this Tribunal except as a de lege ferenda formulation, which even appears contra legem in the eyes of many developed countries. Similarly, several developing countries, although having voted favorably on the Charter of Economic Rights and Duties of States as a whole, in explaining their votes regretted the absence of any reference to international law. 89. Such an attitude is further reinforced by an examination of the general practice of relations between States with respect to investments. This practice is in conformity, not with the provisions of Article 2(c) of the above-mentioned Charter conferring exclusive jurisdiction on domestic legislation and courts, but with the exception stated at the end of this paragraph: Thus a great many investment agreements entered into between industrial States or their nationals, on the one hand, and developing countries, on the other, state, in an objective way, the standards of compensation and further provide, in case of dispute regarding the level of such compensation, the possibility of resorting to an international tribunal. In this respect, it is particularly significant in the eyes of this Tribunal that no fewer than 65 States, as of 31 October 1974, had ratified the Convention on the Settlement of Investment Disputes between States and Nationals of other States, dated March 18, 1965. 90. The argument of the Libyan Government, based on the relevant resolutions enacted

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by the General Assembly of the United Nations, that any dispute relating to nationalization or its consequences should be decided in conformity with the provisions of the municipal law of the nationalizing State and only in its courts, is also negated by a complete analysis of the whole text of the Charter of Economic Rights and Duties of States. From this point of view, even though Article 2 of the Charter does not explicitly refer to international law, this Tribunal concludes that the provisions referred to in this Article do not escape all norms of international law. Article 33, paragraph 2, of this Resolution states as follows: “2. In their interpretation and application, the provisions of the present Charter are interrelated and each provision should be construed in the context of the other provisions”. Now, among the fundamental elements of international economic relations quoted in the Charter, principle (j) is headed its follows: “Fulfillment in good faith of international obligations”. Analyzing the scope of these various provisions, Ambassador Castaneda, who chaired the Working Group charged with drawing up the Charter of Economic Rights and Duties of States, formally stated that the principle of performance in good faith of international obligations laid down in Chapter I(j) of the Charter applies to all matters governed by it, including, in particular, matters referred to in Article 2. Following his analysis, this particularly competent and eminent scholar concluded as follows: “The Charter accepts that international law may operate as a factor limiting the freedom of the State should foreign interests be affected, even though Article 2 does not state this explicitly. This stems legally from the provisions included in other Articles of the Charter which should be interpreted and applied jointly with those of Article 2.” (“La Charte des Droits et Devoirs Economiques des Etats. Note sur son Processus d ‘Elaboration”, 20 A.F.D.I. 31 (1974), at 54.) 91. Therefore, one should note that the principle of good faith, which had already been mentioned in Resolution 1803 (XVII), has an important place even in Resolution 3281 (XXIX) called “The Charter of Economic Rights and Duties of States”. One should conclude that a sovereign State which nationalizes cannot disregard the commitments undertaken by the contracting State: to decide otherwise would in fact recognize that all contractual commitments undertaken by a State have been undertaken under a purely permissive condition on its part and are therefore lacking of any legal force and any binding effect. From the point of view of its advisability, such a solution would gravely harm the credibility of States since it would mean that contracts signed by them did not bind them; it would introduce in such contracts a fundamental imbalance because in these contracts only one party – the party contracting with the State – would be bound. In law, such an outcome would go directly against the most elementary principle of good faith and for this reason it cannot be accepted. [b] Comments and Questions 1.

2.

3.

An entirely different perspective is provided by M. Sornarajah The International Law of Foreign Investment (2nd ed., Cambridge University Press 2004). Sornarajah argues that the law of foreign investment was premised on Western neo-classical economic models, which are no longer valid. He further claims that this position has been replaced by a view that foreign investments are affected by numerous economic and non-economic factors. Finally, he proposes that investment contracts between a foreign investor and a host state do not necessarily define the terms of the investment. Rather, because of the long time frame of investments, contracts merely provide the preliminary framework within which the relationship between the investor and state is to operate. Another “new international economic order” point of view is set forth by Judge Moham-med Bedjaoui in International Law: Achievements and Prospects (1991). Judge Bedjaoui asserts a right to development on the part of “proletarian nations” and a corresponding obligation on the advanced countries to aid in the development within a framework of a “new international social law.” In this regard, see also Rahmatullah Khan, Law of International Trade Transactions (1973).

[c] Government of Kuwait v. American Independent Oil Company (AMINOIL), Award of 24 March 1982, 66 Int’l L. Rep. 518 (1982) (76) [Paul Reuter (pres.), Hamed Sultan, Gerald Fitzmaurice] [For summary of facts, see infra p. 1022.] (Citations selectively omitted) (2) Equally on the public international law plane it has been claimed that permanent sovereignty over natural resources has become an imperative rule of jus cogens prohibiting States from affording, by contract or by treaty, guarantees of any kind against the exercise of the public authority in regard to all matters relating to natural riches. This contention lacks all foundation. Even if Assembly Resolution 1803 (XVII) adopted in 1962, is to be [95] regarded, by reason of the circumstance of its adoption, as reflecting the

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then state of international law, such is not the case with subsequent resolutions which have not had the same degree of authority. Even if some of their provisions can be regarded as codifying rules that reflect international practice, it would not be possible from this to deduce the existence of a rule of international law prohibiting a State from undertaking not to proceed to a nationalization during a limited period of time. It may indeed well be eminently useful that “host” States should, if they so desire, be able to pledge themselves not to nationalize given foreign undertakings within a limited period; and no rule of public international law prevents them from doing so. [3] Administrative Contracts [a] The Government of the State of Kuwait v. The American Independent Oil Company (AMINOIL), Award of 24 March 1982, 66 Int’l L. Rep. 518, 588-589 (para. 90(3), 91(i)(ii)) (1982) (77) [Paul Reuter (pres.), Hamed Sultan, Gerald Fitzmaurice] [For summary of facts, see infra p. 1022.] (Citations selectively omitted) (3) Another argument advanced by the Government of Kuwait requires consideration. According to this, Aminoil's Concession belonged to the general category of “administrative contracts” in respect of which – as much by Kuwait law as on the basis of general legal principles – special faculties were reserved to the State, of which account must be taken in the interpretation of the stabilization clauses. 91. The “administrative contract”, as it was originally developed in French law, and subsequently in other legal systems such as those of Egypt and Kuwait, is based on the idea that certain contracts concluded by the State, or by public entities, are governed by special rules, the two principal ones being as follows (i)

(ii)

The public Authority can require a variation in the extent of the other party's liabilities (services, payments) under the contract. This must not however go so far as to distort (unbalance) the contract; and the State can never modify the financial clauses of the contract, – nor, in particular, disturb the general equilibrium of the rights and obligations of the parties that constitute what is sometimes known as the contract's “financial equation”. This characteristic is also to be found in certain ordinary private law contracts, and respect for the equilibrium of reciprocal undertakings is a fundamental principle of the law of contracts. But in the present case it has to be realized that the main difficulties that arise are not about respect for the financial equation that reflects the contractual equilibrium, but about the method of applying Article 9, that is to say not over respect for the original equilibrium, but over the search for a new, equitable, equilibrium. The public authority may proceed to a more radical step in regard to the contract namely to put an end to it when essential necessities concerning the functioning of the State (operation of public services) are involved. It is with this second aspect of the notion of an administrative contract that the present case could in theory be concerned. Yet even if Aminoil's Concession belonged to this category of contract, it would still be necessary that exigencies connected with essential State functioning should be such as to justify Decree Law No. 124.

[4] Force Majeure/Impossibility/Frustration [a] Mobil Oil Iran Inc., et al. v. Government of the Islamic Republic of Iran, et al. (IUSCT Case Nos. 74, 76, 81, 150), Award No. 311-74/76/81/150-3 of 14 July 1987 (78) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [For summary of facts, see supra p. 624.] (Citations selectively omitted) 112. It is not disputed that the Claimants withdrew OSCO's expatriate personnel in late December 1978 and early January 1979 because of the civil disturbances associated with the revolutionary movements. It is also common ground that oil production as well as oil exports were severely disturbed during this time and for some time were completely terminated. 113. Although the Claimants contend that “neither of the events identified by the Respondents created a situation of force majeure,” they recognize that “events in Iran may have interfered temporarily with the producing and export of oil from Iran,” and that “export of oil was suspended for a period.” Furthermore, in letters dated 6 and 13 January 1979, explaining the withdrawal of the OSCO expatriate staff, they stated “that events in Iran had made impossible for them at present to continue to carry out their duties, and that their personnel safety was substantially at risk.” This is an implicit, but clear, admission of a situation of force majeure. 114. The Tribunal has already held that the revolutionary events which occurred at the end of 1978 and the beginning of 1979 created conditions of force majeure. See, e.g., Sylvania Technical Systems, Inc. and Islamic Republic of Iran, Award No. 180-64-1 (27 June 1985); Starrett Housing Corp. and Islamic Republic of Iran, Award No. ITL 32-24-1 (19 Dec. 1983). The dispute between the Parties, however, is concerned less with the occurrence of

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such conditions, which is affirmed by the Respondents and not really denied by the Claimants, than with the duration of such conditions and their effects on the SPA. 115. The Claimants contend that conditions of force majeure ended in March 1979 because exports of Iranian oil resumed at that time. “Thus, performance of the Agreement, which was for sale of oil to the Claimants could have resumed”… All this is strongly denied by the Respondents, who assert that the conditions of force majeure persisted much later and that they completely frustrated the Agreement. They emphasize that the oil exports resumed only on a limited scale and that for months production remained well below the level attained in the preceding years. 116. Article 27 of the SPA envisioned force majeure only as an excuse for failure by a party to comply with the terms of the Agreement. In other words, in this Article…, force majeure conditions were regarded only as causing a suspension of certain provisions of the Agreement. This is in line with the most common practice in contract law. Usually, force majeure conditions will have the effect of terminating a contract only if they make performance definitively impossible or impossible for a long period of time. 117. It also is admitted generally that force majeure, as a cause of full or partial suspension or termination of a contract, is a general principle of law which applies even when the contract is silent. Therefore, although Article 27 does not so provide, that absence is no obstacle to a finding that the Agreement was terminated by force majeure if the circumstances warrant such a finding. In the circumstances of these Cases, however, the Tribunal does not find that on 10 March 1979 the situation was such that the Agreement could be considered as frustrated or terminated for cause of force majeure. A new revolutionary Islamic Government had already been established. The conditions therefore could be expected to progressively return to normal and, in fact, oil exports were resumed. In addition, it is noteworthy that NIOC's letter of 10 March 1979 made no mention at all of force majeure and spelled out the conditions of resumption of oil sales to the Consortium. At the same time, it would be erroneous to pretend that the conditions in Iran already had returned to normal by this date. It is not disputed that the quantities of oil available for export were considerably less than during the preceding years and did not reach a comparable level for months. The conditions for a return of OSCO's expatriate staff, furthermore, were not yet met. 118. The same finding applies to the Respondents' argument that the Agreement was frustrated by changed circumstances. In support of this argument the Respondents heavily rely on the use of this phrase in Article V of the CSD. The Tribunal, however, observes that, in this Article, “changed circumstances” only denotes one of the elements that the Tribunal is invited to take into account when determining the choice of law to be applied in any given case. This has no direct bearing on the merits of a claim. [b] CMS Gas Transmission Company v. The Argentine Republic (ICSID Case No. ARB/01/8), Award of 12 May 2005 (79) [Francisco Orrego Vicuña (pres.), Marc Lalonde, Francisco Rezek] [For summary of facts, see infra p. 1056.] (Citations selectively omitted) 53. [T]he Argentine Republic embarked in 1989 on economic reforms, which included the privatization of important industries and public utilities as well as the participation of foreign investment. Gas transportation was one of the significant sectors to be included under this reform program. The basic instruments governing these economic reforms were Law No. 23.696 on the Reform of the State of 1989, Law No. 23.928 on Currency Convertibility of 19915 and Decree No. 2128/91 fixing the Argentine peso at par with the United States dollar. 54. Within this broad framework specific instruments were enacted to govern the privatization of the main industries. As far as the Gas sector was concerned, Law No. 24.076 of 1992, or Gas Law, established the basic rules for the transportation and distribution of natural gas. This instrument was implemented the same year by Decree No. 1738/92 or Gas Decree. 55. As a consequence of the new legislation, Gas del Estado, a State-owned entity, was divided into two transportation companies and eight distribution companies. Transportadora de Gas del Norte (TGN) was one of the companies created for gas transportation. The privatization of the new company was opened to investors by means of a public tender offer and a related Information Memorandum was prepared by consultant and investment firms in 1992 at the request of the Government. 56. A Model License approved by Decree No. 2255/92 established the basic terms and conditions for the licenses that each new company would be granted by the Argentine Government. TGN's license was granted by Decree No. 2457/92 for a period of thirty-five years, subject to extension for another ten years on the fulfillment of certain conditions. 57. In the Claimant's view, the legislation and regulations enacted, as well as the license, resulted in a legal regime under which tariffs were to be calculated in dollars, conversion to pesos was to be effected at the time of billing and tariffs would be adjusted every six months in accordance with the United States Producer Price Index (US PPI). As will be examined further below, the Respondent has a different understanding of the nature and

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legal effects of these various instruments. 58. CMs's participation in TGN began in 1995 under a 1995 Offering Memorandum leading to the purchase of the shares still held by the government. CMs's acquisition represented 25% of the company, later supplemented by the purchase of an additional 4.42%, thus totaling 29.42% of TGN's shares. This new Offering Memorandum was modeled on the 1992 Information Memorandum and the license. 4. Argentina’s Measures in the Period 1999–2002 and the Emergence of the Dispute 59. Towards the end of the 1990's a serious economic crisis began to unfold in Argentina, which eventually had profound political and social ramifications. The nature and extent of this crisis will be discussed below. 60. Against this background, the Argentine Government called in late 1999 for a meeting with representatives of the gas companies in order to discuss a temporary suspension of the US PPI adjustment of the gas tariffs. The companies agreed to a temporary suspension deferring the adjustment due for a period of six months (January 1– June 30, 2000)… This agreement was approved by ENARGAS, the public regulatory agency of the gas industry, by Resolution No. 1471 on January 10, 2000. 61. Soon thereafter it became apparent that the agreement would not be implemented and requests by TGN for an adjustment of tariffs in accordance with the License were not acted upon; in fact ENARGAS directed the company to refrain from introducing any such adjustment. On July 17, 2000, a further meeting was held with representatives of the gas companies, at which the companies were asked to agree on a new deferral of the tariff adjustment. Another agreement to this effect was entered into on that date, freezing US PPI adjustments of tariffs for a two year period while allowing for some increases relating to the earlier deferral and lost income. Income lost as a result of the new deferral was to be gradually recovered and US PPI adjustments were to be reintroduced as from June 30, 2002. Decree No. 669/2000 embodied the new arrangements while recognizing that the US PPI adjustment constituted “a legitimately acquired right” and was a basic premise and condition of the tender and the offers. 62. In a proceeding commenced by the Argentine “Defensor del Pueblo de la Nación,” a federal judge issued on August 18, 2000 an injunction for the suspension of both the agreement and Decree No. 669/2000 pending a decision on the challenged legality of the US PPI adjustment… In due course, the companies, the Government and ENARGAS appealed the above decision of the federal judge, however, the appeal was rejected. A final appeal of the companies to the Argentine Supreme Court is still pending. 63. Based on these developments, ENARGAS repeatedly confirmed the continuing freeze of the US PPI adjustment of tariffs, resulting in no adjustments being made in accordance with this mechanism as from January 1, 2000, that is since the first deferral. The parties disagree on the nature and extent of the decisions adopted by ENARGAS, as will be discussed below. Against these developments, CMS notified its consent to arbitration under ICSID on July 12, 2001, following the required notification of the dispute to the Argentine Government. The dispute at this stage concerned only the issue of the application of the US PPI adjustment. 64. In late 2001 the crisis deepened as the corrective measures that Minister Domingo Cavallo had set in train did not succeed. Significant capital flight from Argentina followed. In the wake of these further developments, the Government introduced the “corralito” by Decree No. 1570/2001, drastically limiting the right to withdraw deposits from bank accounts. Default was declared and several Presidents succeeded one another in office within a matter of days. Emergency Law No. 25.561 was enacted on January 6, 2002, declaring a public emergency until December 10, 2003 and introducing a reform of the foreign exchange system. Extensions of this period were later introduced, as will be discussed below. 65. The Emergency Law introduced the second type of measures that underlie the dispute in the present case. Thus, the currency board which had pegged the peso to the dollar under the 1991 Convertibility Law was abolished, the peso was devalued and different exchange rates were introduced for different transactions. The right of licensees of public utilities to adjust tariffs according to the US PPI was terminated, as was the calculation of tariffs in dollars… 66. The Emergency Law envisaged a process of renegotiation of licenses to be conducted by a Renegotiation Commission… Renegotiations were to be completed by December 31, 2004. Renegotiation was completed by this date in respect of some public utilities and related companies, but this was not the case in the gas transportation and distribution sector. A witness introduced by the Respondent explained that this was attributable to the inherent difficulty in renegotiating 64 public utility contracts and numerous subcontracts. 67. On February 13, 2002 CMS notified an ancillary dispute concerning the measures enacted under the Emergency Law and related decisions. In its Decision on Jurisdiction, the Tribunal considered that the disputes arising from the one as well as the other types of measures were sufficiently closely related and thus proceeded to the merits phase in respect of both.

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*** 316. Article 25 reads as follows: “1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a) (b)

is the only way for the State to safeguard an essential interest against a grave and imminent peril; and does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole;

2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) (b)

the international obligation in question excludes the possibility of invoking necessity; or the State has contributed to the situation of necessity.”

317. While the existence of necessity as a ground for precluding wrongfulness under international law is no longer disputed, there is also consensus to the effect that this ground is an exceptional one and has to be addressed in a prudent manner to avoid abuse. The very opening of the Article to the effect that necessity “may not be invoked” unless strict conditions are met, is indicative of this restrictive approach of international law. Case law, state practice and scholarly writings amply support this restrictive approach to the operation of necessity. The reason is not difficult to understand. If strict and demanding conditions are not required or are loosely applied, any State could invoke necessity to elude its international obligations. This would certainly be contrary to the stability and predictability of the law. 318. The Tribunal must now undertake the very difficult task of finding whether the Argentine crisis meets the requirements of Article 25, a task not rendered easier by the wide variety of views expressed on the matter and their heavy politicization. Again here the Tribunal is not called upon to pass judgment on the measures adopted in that connection but simply to establish whether the breach of the Treaty provisions discussed is devoid of legal consequences by the preclusion of wrongfulness. 319. A first question the Tribunal must address is whether an essential interest of the State was involved in the matter. Again here the issue is to determine the gravity of the crisis. The need to prevent a major breakdown, with all its social and political implications, might have entailed an essential interest of the State in which case the operation of the state of necessity might have been triggered. In addition, the plea must under the specific circumstances of each case meet the legal requirements set out by customary international law. 320. In the instant case, the Respondent and leading economists are of the view that the crisis was of catastrophic proportions; other equally distinguished views, however, tend to qualify this statement. The Tribunal is convinced that the crisis was indeed severe and the argument that nothing important happened is not tenable. However, neither could it be held that wrongfulness should be precluded as a matter of course under the circumstances. As is many times the case in international affairs and international law, situations of this kind are not given in black and white but in many shades of grey. 321. It follows that the relative effect that can be reasonably attributed to the crisis does not allow for a finding on preclusion of wrongfulness. The Respondent's perception of extreme adverse effects, however, is understandable, and in that light the plea of necessity or emergency cannot be considered as an abuse of rights as the Claimant has argued. 322. The Tribunal turns next to the question whether there was in this case a grave and imminent peril. Here again the Tribunal is persuaded that the situation was difficult enough to justify the government taking action to prevent a worsening of the situation and the danger of total economic collapse. But neither does the relative effect of the crisis allow here for a finding in terms of preclusion of wrongfulness. 323. A different issue, however, is whether the measures adopted were the “only way” for the State to safeguard its interests. This is indeed debatable. The views of the parties and distinguished economists are wide apart on this matter, ranging from the support of those measures to the discussion of a variety of alternatives, including dollarization of the economy, granting of direct subsidies to the affected population or industries and many others. Which of these policy alternatives would have been better is a decision beyond the scope of the Tribunal's task, which is to establish whether there was only one way or various ways and thus whether the requirements for the preclusion of wrongfulness have or have not been met. 324. The International Law Commission's comment to the effect that the plea of necessity is “excluded if there are other (otherwise lawful) means available, even if they may be more costly or less convenient,” is persuasive in assisting this Tribunal in concluding that

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the measures adopted were not the only steps available. 325. A different condition for the admission of necessity relates to the requirement that the measures adopted do not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole. As the specific obligations towards another State are embodied in the Treaty, this question will be examined in the context of the applicable treaty provisions. It does not appear, however, that the essential interest of the international community as a whole was affected in any relevant way, nor that a peremptory norm of international law might have been compromised, a situation governed by Article 26 of the Articles. 326. In addition to the basic conditions set out under paragraph 1 of Article 25, there are two other limits to the operation of necessity arising from paragraph 2. As noted in the Commentary, the use of the expression “in any case” in the opening of the text means that each of these limits must be considered over and above the conditions of paragraph 1. 327. The first such limit arises when the international obligation excludes necessity, a matter which again will be considered in the context of the Treaty. 328. The second limit is the requirement for the State not to have contributed to the situation of necessity. The Commentary clarifies that this contribution must be “sufficiently substantial and not merely incidental or peripheral”. In spite of the view of the parties claiming that all factors contributing to the crisis were either endogenous or exogenous, the Tribunal is again persuaded that similar to what is the case in most crises of this kind the roots extend both ways and include a number of domestic as well as international dimensions. This is the unavoidable consequence of the operation of a global economy where domestic and international factors interact. 329. The issue, however, is whether the contribution to the crisis by Argentina has or has not been sufficiently substantial. The Tribunal, when reviewing the circumstances of the present dispute, must conclude that this was the case. The crisis was not of the making of one particular administration and found its roots in the earlier crisis of the 1980s and evolving governmental policies of the 1990s that reached a zenith in 2002 and thereafter. Therefore, the Tribunal observes that government policies and their shortcomings significantly contributed to the crisis and the emergency and while exogenous factors did fuel additional difficulties they do not exempt the Respondent from its responsibility in the matter. 330. There is yet another important element which the Tribunal must take into account. The International Court of Justice has in the Gabcíkovo–Nagymaros case convincingly referred to the International Law Commission's view that all the conditions governing necessity must be “cumulatively” satisfied. 331. In the present case there are, as concluded, elements of necessity partially present here and there but when the various elements, conditions and limits are examined as a whole it cannot be concluded that all such elements meet the cumulative test. This in itself leads to the inevitable conclusion that the requirements of necessity under customary international law have not been fully met so as to preclude the wrongfulness of the acts. [c] Sempra Energy International v. Argentine Republic (ICSID Case No. ARB/02/16), Award of 28 September 2007, 102-105 [Francisco Orrego Vicuña (pres.), Marc Lalonde, Sandra Morelli Rico] (80) [Sempra Energy International (“Sempra”) invested in two natural gas companies in Argentina. Argentina subsequently suspended the companies' tariff adjustments based on the United States producer price index and introduced other regulatory measures. These changes led Sempra to claim that Argentina had modified its regulatory framework in violation of the specific commitments Argentina had made to investors, both by contractual obligations given to Sempra in form of the distribution licenses and by the BIT. Sempra claimed that Argentina had wrongfully expropriated Sempra's investment both directly and indirectly (so-called creeping) expropriation. Sempra also claimed that Argentina had breached Article IV of the BIT referring to violations of the fair and equitable treatment standard and the protection of legitimate expectations; that the measures adopted by Argentina were arbitrary and discriminatory; that full protection and security were not provided to Sempra; and that the BIT's ‘umbrella clause’ was breached. Sempra claimed damages in the amount of US$209.3 million. Argentina defended its actions, inter alia, on the grounds of necessity under Articles IV(3) and XI of the BIT.] (Citations selectively omitted) 344. The Tribunal shares the parties' understanding of Article 25 of the Articles on State Responsibility as reflecting the state of customary international law on the matter. This is not to say that the Articles are a treaty or even themselves a part of customary law. They are simply the learned and systematic expression of the law on state of necessity developed by courts, tribunals and other sources over a long period of time. Article 25 states… [See supra p. 691 for text of Article 25.]

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345. There is no disagreement either about the fact that a state of necessity is a most exceptional remedy that is subject to very strict conditions because otherwise it would open the door to States to elude compliance with any international obligation. Article 25 accordingly begins by cautioning that the state of necessity “may not be invoked” unless such conditions are met. Whether in fact the Respondent's invocation of a state of necessity meets those conditions is the difficult task that the Tribunal must now undertake. 346. The Tribunal has examined with particular attention the recent decision on liability and subsequent award on damages in the LG&E case as they have dealt with mostly identical questions concerning emergency and state of necessity. The decision on liability has been contrasted with the finding of the Tribunal in CMS. While two arbitrators sitting in the present case were also members of the tribunal in theCMS case the matter has been examined anew. This Tribunal must note, first, that in addition to differences in the legal interpretation of the Treaty in this context, an important question that distinguishes theLG&E decision on liability from CMS, and for that matter also from the recent award in Enron, lies in the assessment of the facts. While the CMS and Enron tribunals have not been persuaded by the severity of the Argentine crisis as a factor capable of triggering the state of necessity, LG&E has considered the situation in a different light and justified the invocation of emergency and necessity, albeit for a limited period of time. This Tribunal, however, is not any more persuaded than the CMS and Enron tribunals about the crisis justifying the operation of emergency and necessity, although it also readily accepts that the changed economic conditions have an influence on the questions of valuation and compensation, as will be examined further below. 347. The first condition which Article 25 sets out is that the act in question must be the only way for the State to safeguard an essential interest against a grave and imminent peril. The Tribunal must accordingly establish whether the Argentine crisis qualified as one affecting an essential interest of the State. The opinions of experts are sharply divided on this issue. They range from those that consider the crisis as having had gargantuan and catastrophic proportions, to those that believe that it was no different from many other contemporary crisis situations around the world. 348. The Tribunal has no doubt that there was a severe crisis, and that in such a context it was unlikely that business could have continued as usual. Yet, the argument that such a situation compromised the very existence of the State and its independence, and thereby qualified as one involving an essential State interest, is not convincing. Questions of public order and social unrest could have been handled, as in fact they were, just as questions of political stabilization were handled under the constitutional arrangements in force. 349. This issue is in turn connected with the alleged existence of a grave and imminent peril that could threaten the essential interest. While the Government had a duty to prevent a worsening of the situation, and could not simply leave events to follow their own course, there is no convincing evidence that events were actually out of control or had become unmanageable. 350. It is thus quite evident that measures had to be adopted to offset the unfolding crisis, but whether the measures taken under the Emergency Law were the “only way” to achieve this result, and whether no other alternative was available, are questions on which the parties and their experts are profoundly divided, as noted above. A rather sad global comparison of experiences in the handling of economic crises shows that there are always many approaches to addressing and resolving such critical events. It is therefore difficult to justify the position that only one of them was available in the Argentine case. 351. While one or the other party would like the Tribunal to point out which alternative was recommendable, it is not the task of the Tribunal to substitute its view for the Government's choice between economic options. It is instead the Tribunal's duty only to determine whether the choice made was the only one available, and this does not appear to have been the case. 352. Article 25 next requires that the measures in question do not seriously impair the interests of a State or States toward which the obligations exist, or of the international community as a whole. The interest of the international community does not appear to be in any way impaired in this context, as it is an interest of a general kind. That of other States will be discussed below in connection with the Treaty obligations. At that point, it will also be discussed whether the Treaty excludes necessity, this being another condition peremptorily laid down by the Article. 353. A further condition that Article 25 imposes is that the State cannot invoke necessity if it has contributed to the situation giving rise to a state of necessity. This is of course the expression of a general principle of law devised to prevent a party from taking legal advantage of its own fault. In spite of the parties' respective claims that the factors precipitating the crisis were either endogenous or exogenous, the truth seems to be somewhere in the middle, with both kinds of factors having intervened. This mix has in fact come to be generally recognized by experts, officials and international agencies. 354. This means that there has to some extent been a substantial contribution of the State to the situation giving rise to the state of necessity, and that it therefore cannot be

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claimed that the burden falls entirely on exogenous factors. This state of affairs has not been the making of a particular administration, given that it was a problem which had been compounding its effects for a decade. Still, the State must answer for it as a whole. 355. The Tribunal must note in addition that, as held in the Gabcíkovo-Nagymaros decision with reference to the work of the International Law Commission, the various conditions discussed above must be cumulatively met. This brings the standard governing the invocation of necessity to a still higher echelon. In the light of the various elements examined above, the Tribunal concludes that the requirements for a state of necessity under customary international law have not been fully met in this case. [d] 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 of 3 October 2006, (81) 61-62, 64, 67-68, 70-80 [Tatiana B. de Maekelt (pres.), Francisco Rezek, Albert Jan van den Berg] [The three claimants, United States corporations LG&E Energy Corp, LG&E Capital Corp, and LG&E International Inc (cumulatively ‘LG&E’), held shares in three Argentine gas distribution companies, which had been granted licenses for the transport and distribution of natural gas in Argentina during the privatization of the Argentine gas monopoly. The legal and regulatory framework applicable to LG&E's investment established fixed maximum tariffs for gas transport and distribution that were to be reviewed every five years. The regulations also provided for semi-annual tariff adjustments in accordance with the United States Producer Price Index (‘US PPI’), as well as the calculation of tariffs in US dollars and conversion to pesos at the time of billing. According to the regulations, the licenses could not be rescinded or modified without the consent of the licensees. Furthermore, the Argentine peso was pegged to the US dollar by the Convertibility Law of 1991. Within the context of the Argentine financial and economic crisis, the Argentine government and the licensees agreed in 2000 to postpone the semi-annual tariff adjustments for a limited period. On January 6, 2002, Argentina adopted the Public Emergency and Currency Exchange Law, 6 January 2002, which abrogated the Convertibility Law, switched most of the existing debts into Argentine pesos, and provided for the renegotiation of private and public agreements to adapt them to the new exchange system. All tariff adjustment clauses were abolished and the Argentine government proceeded with the mandatory renegotiation of all gas transport and distribution licenses under threat of rescission of contract. LG&E filed a request for ICSID arbitration on December 21, 2001, contending that Argentina failed to abide by its obligations under the Argentina-U.S. BIT. Specifically, LG&E alleged that Argentina did not accord foreign investors fair and equitable treatment, and that its investment had been subject to discriminatory and arbitrary treatment because the measures adopted by Argentina particularly affected the gas distribution sector as compared to other public utilities suppliers. In the view of LG&E, Argentina also violated the umbrella clause contained in the Argentina/US BIT by not abiding by the obligations that resulted from the legal and regulatory framework applicable to investments in the gas distribution sector. Finally, LG&E argued that Argentina had indirectly expropriated its investment without compensation by substantially impairing the value of LG&E's holdings in the licensees. Accordingly, LG&E sought full compensation in addition to pre- and post-award compound interest. Argentina objected to all of these claims. As will be discussed in the excerpt below, Argentina also argued that the circumstances of the case warranted application of the ‘state of necessity’ defence, thus exempting it from liability for any possible treaty violation.] (Citations selectively omitted) E. STATE OF NECESSITY 1. Parties’ Positions 201. Respondent contends… that, if Argentina would have breached its Treaty obligations, the state of political, economic and social crisis that befell Argentina allowed it to take action contrary to the obligations it had assumed with respect to the gas-distribution licensees. Thus, even if the measures adopted by the State in order to overcome the economic crisis suffered during the years 1998 through 2003, resulted in a violation of the rights guaranteed under the Treaty to foreign investments, such measures were implemented under a state of necessity and therefore, Argentina is excused from liability during this period. 202. Respondent pleads its defense as a “state of necessity” defense, available under Argentine law, Treaty in Articles XI and IV(3), as well as customary international law. 203. Claimants reject Respondent's contentions regarding the alleged state of necessity defense. Claimants contend that Article XI is not applicable in the case of an economic crisis because the public order and essential security interests elements are intentionally narrow in scope, limited to security threats of a physical nature.

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2. General Comments on Article XI (i) Preliminary Considerations 204. Article XI of the Bilateral Treaty provides: “This Treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.” 205. The Tribunal's analysis to determine the applicability of Article XI of the Bilateral Treaty is twofold. First, the Tribunal must decide whether the conditions that existed in Argentina during the relevant period were such that the State was entitled to invoke the protections included in Article XI of the Treaty. Second, the Tribunal must determine whether the measures implemented by Argentina were necessary to maintain public order or to protect its essential security interests, albeit in violation of the Treaty. 206. The Tribunal reiterates that to carry out the two-fold analysis already mentioned, it shall apply first, the Treaty, second, the general international law to the extent that is necessary and third, the Argentine domestic law. The Tribunal underscores that the claims and defenses mentioned derive from the Treaty and that, to the extent required for the interpretation and application of its provisions, the general international law shall be applied (See section V. B supra). *** (iii) Necessary Nature of the Measures Adopted *** b. Tribunal’s Analysis 226. In the judgment of the Tribunal, from 1 December 2001 until 26 April 2003, Argentina was in a period of crisis during which it was necessary to enact measures to maintain public order and protect its essential security interests. 227. The Tribunal does not consider that the initial date for the state of necessity is the effective date of the Emergency Law, 6 January 2002, because, in the first place, the emergency had already started when the law was enacted. Second, should the Tribunal take as the initial date the day when the Emergency Law became effective, it might be reasonable to take as its closing date the day when the state of emergency is lifted by the Argentine State, a fact that has not yet taken place since the law has been extended several times. 228. It is to be pointed out that there is a factual emergency that began on 1 December 2001 and ended on 26 April 2003, on account of the reasons detailed below, as well as a legislative emergency, that begins and ends with the enactment and abrogation of the Emergency Law, respectively. It should be borne in mind that Argentina declared its state of necessity and has extended such state until the present. Indeed, the country has issued a record number of decrees since 1901, accounting for the fact that the emergency periods in Argentina have been longer than the non-emergency periods. Emergency periods should be only strictly exceptional and should be applied exclusively when faced with extraordinary circumstances. Hence, in order to allege state of necessity as a State defense, it will be necessary to prove the existence of serious public disorders. Based on the evidence available, the Tribunal has determined that the situation ended at the time President Kirchner was elected. 229. Thus, Argentina is excused under Article XI from liability for any breaches of the Treaty between 1 December 2001 and 26 April 2003. The reasons are the following: 230. These dates coincide, on the one hand, with the Government's announcement of the measure freezing funds, which prohibited bank account owners from withdrawing more than one thousand pesos monthly and, on the other hand, with the election of President Kirchner. The Tribunal marks these dates as the beginning and end of the period of extreme crisis in view of the notorious events that occurred during this period. 231. Evidence has been put before the Tribunal that the conditions as of December 2001 constituted the highest degree of public disorder and threatened Argentina's essential security interests. This was not merely a period of “economic problems” or “business cycle fluctuation” as Claimants described (Claimants' Post-Hearing Brief, ¶ 14). Extremely severe crises in the economic, political and social sectors reached their apex and converged in December 2001, threatening total collapse of the Government and the Argentine State. *** 237. All of these devastating conditions – economic, political, social – in the aggregate triggered the protections afforded under Article XI of the Treaty to maintain order and control the civil unrest. 238. The Tribunal rejects the notion that Article XI is only applicable in circumstances

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amounting to military action and war. Certainly, the conditions in Argentina in December 2001 called for immediate, decisive action to restore civil order and stop the economic decline. To conclude that such a severe economic crisis could not constitute an essential security interest is to diminish the havoc that the economy can wreak on the lives of an entire population and the ability of the Government to lead. When a State's economic foundation is under siege, the severity of the problem can equal that of any military invasion. 239. Claimants contend that the necessity defense should not be applied here because the measures implemented by Argentina were not the only means available to respond to the crisis. The Tribunal rejects this assertion. Article XI refers to situations in which a State has no choice but to act. A State may have several responses at its disposal to maintain public order or protect its essential security interests. In this sense, it is recognized that Argentina's suspension of the calculation of tariffs in U.S. dollars and the PPI adjustment of tariffs was a legitimate way of protecting its social and economic system. 240. The Tribunal has determined that Argentina's enactment of the Emergency Law was a necessary and legitimate measure on the part of the Argentine Government. Under the conditions the Government faced in December 2001, time was of the essence in crafting a response. Drafted in just six days, the Emergency Law took the swift, unilateral action against the economic crisis that was necessary at the time (Hearing on the Merits, 25 January 2005, Ratti, Spanish Transcript, pp. 415–419). 241. In drafting the Emergency Law, the Government considered the interests of the foreign investors, and concluded that it “could not leave sectors of the economy operating with the brutally dollarized economy – [the] system was in crisis, so we had to cut off that process, and we had to establish a new set of rules for everybody.” (Hearing on the Merits, 25 January 2005, Ratti, Spanish Transcript, p. 417). Argentina's strategy to deal with the thousands of public utility contracts that could not be individually assessed during the period of crisis was to implement “across-the-board solutions” and then renegotiate the contracts (Hearing on the Merits, 26 January 2005, Roubini, Spanish Transcript, p. 635). The Tribunal accepts the necessity of approaching enactment of a stop-gap measure in this manner and therefore rejects Claimants' objection that Argentina's unilateral response was not necessary. 242. The Tribunal accepts that the provisions of the Emergency Law that abrogated calculation of the tariffs in U.S. dollars and PPI adjustments, as well as freezing tariffs were necessary measures to deal with the extremely serious economic crisis… 243. The Tribunal will now turn to Article IV(3) of the Treaty, which provides: “Nationals or companies of either Party whose investments suffer losses in the territory of the other Party owing to war or other armed conflict, revolution, state of national emergency, insurrection, civil disturbance or other similar events shall be accorded treatment by such other Party no less favorable than that accorded to its own nationals or companies or to nationals or companies of any third country, whichever is the more favorable treatment, as regards any measures it adopts in relation to such losses.” (Emphasis added) 244. Article IV(3) of the Treaty confirms that the States Party to the Bilateral Treaty contemplated the state of national emergency as a separate category of exceptional circumstances. That is in line with the Tribunal's interpretation of Article XI of the Treaty. Furthermore, the Tribunal has determined, as a factual matter that the grave crisis in Argentina lasted from 1 December 2001 until 26 April 2003. It has not been shown convincingly to the Tribunal that during that period the provisions of Article IV(3) of the Treaty have been violated by Argentina. On the contrary, during that period, the measures taken by Argentina were “across the board.” 245. In the previous analysis, the Tribunal has determined that the conditions in Argentina from 1 December 2001 until 26 April 2003 were such that Argentina is excused from liability for the alleged violation of its Treaty obligations due to the responsive measures it enacted. The concept of excusing a State for the responsibility for violation of its international obligations during what is called a “state of necessity” or “state of emergency” also exists in international law. While the Tribunal considers that the protections afforded by Article XI have been triggered in this case, and are sufficient to excuse Argentina's liability, the Tribunal recognizes that satisfaction of the state of necessity standard as it exists in international law (reflected in Article 25 of the ILC's Draft Articles on State Responsibility) supports the Tribunal's conclusion. 246. In international law, a state of necessity is marked by certain characteristics that must be present in order for a State to invoke this defense. As articulated by Roberto Ago, one of the mentors of the Draft Articles on State Responsibility, a state of necessity is identified by those conditions in which a State is threatened by a serious danger to its existence, to its political or economic survival, to the possibility of maintaining its essential services in operation, to the preservation of its internal peace, or to the survival of part of its territory. In other words, the State must be dealing with interests that are essential or particularly important.

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247. The United Nations Organization has understood that the invocation of a state of necessity depends on the concurrent existence of three circumstances, namely: a danger to the survival of the State, and not for its interests, is necessary; that danger must not have been created by the acting State; finally, the danger should be serious and imminent, so that there are no other means of avoiding it. 248. The concept of state of necessity and the requirements for its admissibility lead to the idea of prevention: the State covers itself against the risk of suffering certain damages. Hence, the possibility of alleging the state of necessity is closely bound by the requirement that there should be a serious and imminent threat and no means to avoid it. Such circumstances, in principle, have been left to the State's subjective appreciation, a conclusion accepted by the International Law Commission. Nevertheless, the Commission was well aware of the fact that this exception, requiring admissibility, has been frequently abused by States, thus opening up a very easy opportunity to violate the international law with impunity. The Commission has set in its Draft Articles on State Responsibility very restrictive conditions to account for its admissibility, reducing such subjectivity. 249. James Crawford, who was rapporteur of the Draft Articles approved in 2001, noted that when a State invokes the state of necessity, it has full knowledge of the fact that it deliberately chooses a procedure that does not abide an international obligation. This deliberate action on the part of the State is therefore subject to the requirements of Article 25 of the Draft Articles, which must concur jointly and without which it is not possible to exclude under international law the wrongfulness of a State's act that violates an international obligation. 250. Taking each element in turn, Article 25 requires first that the act must be the only means available to the State in order to protect an interest. According to S.P. Jagota, a member of the Commission, such requirement implies that it has not been possible for the State to “avoid by any other means, even a much more onerous one that could have been adopted and maintained the respect of international obligations. The State must have exhausted all possible legal means before being forced to act as it does.”… 251. The interest subject to protection also must be essential for the State. What qualifies as an “essential” interest is not limited to those interests referring to the State's existence. As evidence demonstrates, economic, financial or those interests related to the protection of the State against any danger seriously compromising its internal or external situation, are also considered essential interests. Roberto Ago has stated that essential interests include those related to “different matters such as the economy, ecology or other.”… 252. James Crawford has stated that no opinion may be offered a priori of “essential interest,” but one should understand that it is not the case of the State's “existence”, since the “purpose of the positive law of self-defense is to safeguard that existence.” Thus, an interest's greater or lesser essential, must be determined as a function of the set of conditions in which the State finds itself under specific situations. The requirement is to appreciate the conditions of each specific case where an interest is in play, since what is essential cannot be predetermined in the abstract. 253. The interest must be threatened by a serious and imminent danger. The threat, according to Roberto Ago, “must be ‘extremely grave’ and ‘imminent.’” In this respect, James Crawford has opined that the danger must be established objectively and not only deemed possible. It must be imminent in the sense that it will soon occur. 254. The action taken by the State may not seriously impair another State's interest. In this respect, the Commission has observed that the interest sacrificed for the sake of necessity must be, evidently, less important than the interest sought to be preserved through the action. The idea is to prevent against the possibility of invoking the state of necessity only for the safeguard of a non-essential interest. 255. The international obligation at issue must allow invocation of the state of necessity. The inclusion of an article authorizing the state of necessity in a Bilateral Investment Treaty constitutes the acceptance, in the relations between States, of the possibility that one of them may invoke the state of necessity. 256. The State must not have contributed to the production of the state of necessity… The Tribunal considers that, in the first place, Claimants have not proved that Argentina has contributed to cause the severe crisis faced by the country; secondly, the attitude adopted by the Argentine Government has shown a desire to slow down by all the means available the severity of the crisis. 257. The essential interests of the Argentine State were threatened in December 2001. It faced an extremely serious threat to its existence, its political and economic survival, to the possibility of maintaining its essential services in operation, and to the preservation of its internal peace. There is no serious evidence in the record that Argentina contributed to the crisis resulting in the state of necessity. In this circumstances, an economic recovery package was the only means to respond to the crisis. Although there may have been a number of ways to draft the economic recovery plan, the evidence before the Tribunal demonstrates that an across-the-board response was necessary, and the tariffs on public utilities had to be addressed. It cannot be said that any other State's

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rights were seriously impaired by the measures taken by Argentina during the crisis. Finally, as addressed above, Article XI of the Treaty exempts Argentina of responsibility for measures enacted during the state of necessity. 258. While this analysis concerning Article 25 of the Draft Articles on State Responsibility alone does not establish Argentina's defense, it supports the Tribunal's analysis with regard to the meaning of Article XI's requirement that the measures implemented by Argentina had to have been necessary either for the maintenance of public order or the protection of its own essential security interests. *** 261. Following this interpretation the Tribunal considers that Article XI establishes the state of necessity as a ground for exclusion from wrongfulness of an act of the State, and therefore, the State is exempted from liability. This exception is appropriate only in emergency situations; and once the situation has been overcome, i.e. certain degree of stability has been recovered; the State is no longer exempted from responsibility for any violation of its obligations under the international law and shall reassume them immediately. (iv) Consequences of the State of Necessity 262. Three relevant issues arise with respect to the Tribunal's finding Argentina is entitled to invoke the state of necessity as contemplated by Article XI, and general international law. 263. The first issue deals with the determination of the period during which the state of necessity occurred. As previously indicated, in the view of the Tribunal, the state of necessity in this case began on 1 December 2001 and ended on 26 April 2003, when President Kirchner was elected (see the Tribunal's Analysis). All measures adopted by Argentina in breach of the Treaty before and after the period during which the state of necessity prevailed, shall have all their effects and shall be taken into account by the Tribunal to estimate the damages. 264. The second issue related to the effects of the state of necessity is to determine the subject upon which the consequences of the measures adopted by the host State during the state of necessity shall fall. As established in the Tribunal's Analysis, Article 27 of ILC's Draft Articles, as well as Article XI of the Treaty, does not specify if any compensation is payable to the party affected by losses during the state of necessity. Nevertheless, and in accordance with that expressed under paragraphs 260 and 261 supra, this Tribunal has decided that the damages suffered during the state of necessity should be borne by the investor. 265. The third issue is related to what Argentina should have done, once the state of necessity was over on 26 April 2003. The very following day (27 April), Argentina's obligations were once again effective. Therefore, Respondent should have reestablished the tariff scheme offered to LG&E or, at least, it should have compensated Claimants for the losses incurred on account of the measures adopted before and after the state of necessity. (v) Conclusions of the Tribunal 266. Based on the analysis of the state of necessity, the Tribunal concludes that, first, said state started on 1 December 2001 and ended on 26 April 2003; second, during that period Argentina is exempt of responsibility, and accordingly, the Claimants should bear the consequences of the measures taken by the host State; and finally, the Respondent should have restored the tariff regime on 27 April 2003, or should have compensated the Claimants, which did not occur. As a result, Argentina is liable as from that date to Claimants for damages. [5] Implied Termination or Waiver [a] Mobil Oil Iran Inc., et al. v. Government of the Islamic Republic of Iran, et al. (IUSCT Case Nos. 74, 76, 81, 150), Award No. 311-74/76/81/150-3 of 14 July 1987 (82) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [See supra p. 624.] [6] Changed Circumstances One common reason for arguments based on internationalization of contracts is to seek to avoid governmental action by the state party, constitutional or lawful under its own law, which abrogate or vary the contract. In this context, reliance is often placed on doctrines such as fundamental change of circumstances or frustration to justify such changes; alternatively it is argued that the narrow limits placed on these doctrines (e.g. the rule against self-induced frustration) operate to invalidate the state action complained of. [a] Mobil Oil Iran Inc., et al. v. Government of the Islamic Republic of Iran, et al. (IUSCT Case Nos. 74, 76, 81, 150), Award No. 311-74/76/81/150-3 of 14 July 1987 (83) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin]

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[For summary of facts, see supra p. 624.] 119. In the instant Cases, the concept of “changed circumstances,” in so far as it can be distinguished from force majeure, can refer only to the dramatic political changes brought about in Iran by the success of the Islamic Revolution and the decision of the Islamic Government to follow a policy radically different from that of the previous Government in the oil industry. Changes of such a character and magnitude could not be without consequences to the contractual relationship between Iran and the Consortium. By themselves, however, they could not have had any effect on the validity of the Agreement before materializing in specific measures. As a matter of fact, the 10 March 1979 letter was the first expression of such a new policy in relation to the Agreement. [b] Phillips Petroleum Company Iran v. The Islamic Republic of Iran and The National Iranian Oil Company (IUSCT Case No. 39), Award No. 425-39-2 of 29 June 1989 (84) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich] [See supra p. 621.]

§8.03 DISCRIMINATORY CONDUCT: WHAT IS THE CUSTOMARY INTERNATIONAL LAW STANDARD? Despite the characteristic of generality of law, governmental measures frequently differentiate between different actors. The challenge for international investment tribunals is determining when lawful differential treatment constitutes unlawful discrimination.

[A] BP Exploration Company (Libya) Limited v. The Government of the Libyan Arab Republic, Award of 10 October 1973 and 1 August 1974, 53 Int’l L. Rep. 297, 329, 346348, 353-354 (1979) (85) [Gunnar Lagergren (sole arbitrator)] [In December 1957, the Government of Libya granted a concession for oil exploration to Mr. Hunt, who subsequently sold 50% of it to British Petroleum Exploration Company (Libya) Limited. On December 7, 1971, the Government passed a law nationalizing rights to the concession. It said that the nationalization was in retaliation for Iranian occupation of three islands, which were regarded as Arab. This event was blamed by several Arab states, including Libya, on Great Britain as the islands were still technically under British protection and the British Government did not react to the occupation. On December 11, the company initiated arbitration proceedings against Libya, contending that the nationalization amount to a unilateral and unacceptable repudiation of the concession. The Tribunal held that the nationalization law was a breach of the concession, for which the company was entitled to damages, but not to restoration of its rights under the concession. The excerpt below addresses remedies for breach of contract available under public international law.] (Citations selectively omitted) … The BP Nationalisation Law, and the actions taken thereunder by the Respondent, do constitute a fundamental breach of the BP Concession as they amount to a total repudiation of the agreement and the obligations of the Respondent thereunder, and, on the basis of rules of applicable systems of law too elementary and voluminous to require or permit citation, the Tribunal so holds. Further, the taking by the Respondent of the property, rights, and interests of the Claimant clearly violates public international law as it was made for purely extraneous political reasons and was arbitrary and discriminatory in character. Nearly two years have now passed since the nationalisation, and the fact that no offer of compensation has been made indicates that the taking was also confiscatory. The Tribunal concludes, on the basis of the material considered in paragraphs (ii) and (iii) above, that it is arguable that when an international contractual obligation is unlawfully abrogated by one party, the other party may regard the agreement as still existing until it elects, within a reasonable time, to terminate it, and that such innocent party further, during the intervening period, may suspend its performance thereunder. However, the stated principle of the continuing validity of the agreement rests only on a basis of extreme generality and has never been fully considered in the context of facts such as those which are at issue here where one party is a sovereign State. The important question is what remedies would be available to the party claiming the continuance of the agreement. In considering this question, it is appropriate to refer initially to the following cautious statement in Oppenheim-Lauterpacht: The principle legal consequences of an international delinquency are reparation of the moral and material wrong done. The merits and the conditions of the special cases are, however, so different that it is impossible for the Law of Nations to prescribe once and for all what legal consequences an international delinquency should have. The only rule which is unanimously recognised by theory and practice is that out of an international delinquency arises a right for the wronged State to request from the delinquent State the

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performance of such acts as are necessary for reparation of the wrong done. What kind of acts these are depends upon the merits of the case. (OppenheimLauterpacht, International Law, Vol. I, Eighth Edition, 1963, § 156.) The survey of cases and other relevant materials presented above demonstrates that there is no explicit support for the proposition that specific performance, and even less so restitutio in integrum, are remedies of public international law available at the option of a party suffering a wrongful breach by a co-contracting party. An analysis of the cases shows instead that while declaratory awards have often been made in terms of defining the rights and obligations of parties to a concession contract, these cases never involved the total expropriation or taking by the State of the property, rights and interests of the concessionaire; and indeed in the most important of the cases the validity and continued existence of the contract has not been questioned. The case analysis also demonstrates that the responsibility incurred by the defaulting party for breach of an obligation to perform a contractual undertaking is a duty to pay damages, and that the concept of restitutio in integrum has been employed merely as a vehicle for establishing the amount of damages. This becomes nowhere more apparent than in certain remarks on the concept made in 1927 by the late Sir Hersch Lauterpacht: A problem of a similar kind is involved in the question as to how far the general principles of private law, that in awarding damages restitutio in integrum should, as a rule, be aimed at, applies in cases when damages are to be awarded under international law. That principle means that the injured person is placed in the position he occupied before the occurrence of the injurious act or omission; it means that, to use the Roman law terminology, not only the damnum emergens, but also lucrum cessans is taken into consideration. (Lauterpacht, Private Law Sources and Analogies of International Law, 1929, p. 147.) Hence restitutio in integrum is not to be understood in its literal sense of being a remedy for physical reinstatement of a concessionaire party into a position from which it has been effectively and definitively removed by the other, sovereign party. *** The real issues of substance which require a resolution by the Tribunal are novel in character and scope in that they have not previously been scrutinised judicially. While certain trends in the law are discernible, there are no precise and clear rules that provide an obvious answer to any of the issues. The facts must be appraised and the law interpreted and applied in a balanced consideration of the intrinsic merits of the case and the de facto position of the Parties. An expropriation, nationalisation or taking, if and when implemented in full, is an act of finality where a State has exercised its sovereign territorial power to expel a foreign enterprise and appropriate its property and other rights. No State has ever reversed such an action by granting restitutio in integrum, and it is unlikely that any State exercising diplomatic protection of its nationals will demand such a reversal without offering or eventually accepting the alternative remedy, exercisable at the option of the defaulting State, of reparation in the form of monetary compensation. It has rarely been suggested that the subject-matter in dispute is not property, rights and interests of a purely economic nature on which, thus, a financial value can be put. It has only been argued doctrinally that, where damages are not an adequate remedy (meaning where the State demonstrably is insolvent or incapable of discharging its proper obligations), restitutio in integrum should be considered. *** A rule of reason therefore dictates a result which conforms…to international law, as evidenced by State practice and the law of treaties. This is that, when by the exercise of sovereign power a State has committed a fundamental breach of a concession agreement by repudiating it through a nationalisation of the enterprise and its assets in a manner which implies finality, the concessionaire is not entitled to call for specific performance by the Government of the agreement and reinstatement of his contractual rights, but his sole remedy is an action for damages.

[B] A.F.M. Maniruzzaman, Expropriation of Alien Property and the Principle of NonDiscrimination in International Law of Foreign Investment: An Overview, 8 J. Transnat’l L. & Pol’y 57-59, 67-70 (1998) (86) (Citations selectively omitted) The principle of non-discrimination is recognized in international customary practice, as part of general international law, judicial decisions, and treaty law. Furthermore, a great majority of jurists have supported the principle as a yardstick of the legality of various state actions. Thus, no one doubts that in customary international law the principle is now firmly established. This explains the principle's relevance and application in the context of General Assembly Resolution 1803 on Permanent Sovereignty over Natural Resources and the 1974 Declaration on Economic Rights and Duties of States, even though

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neither mentions the principle. The principle of nondiscrimination is not only relevant in the field of foreign investment, which is the main concern of the present article, but also in various other areas such as human rights and international trade. Although a plethora of writings on the subject concern those matters, there is surprisingly little focus on it in the context of foreign investment, except cursory views in the concerned literature. The gravity of the principle in the corpus of international law cannot simply be ignored. Professor Brownlie notes that “the relevance of the principle is considerable.” Some jurists have not even hesitated to consider it a matter of jus cogens. But a controversy arises as to the meaning and scope of the principle. Different meanings are often attributed to it as a result of the different angles from which one can consider the matter; thus the issue is a contentious one. The principal arguments surround the rationalization of the principle of nondiscrimination, i.e. non-violation of the principle. A clear understanding of the concept is very important in the context of both customary and conventional international law. Non-discrimination has been employed in most recent multilateral instruments such as the North American Free Trade Agreement (NAFTA), the Energy Charter Treaty, and the Organization for Economic Co-operation and Development (OECD) Draft Multilateral Agreement on Investment, and there is no doubt that the principle of alien non-discrimination will be subject to interpretation in various contexts. Thus, the concept itself merits clarification in the context of both general and conventional international law. The purpose of this brief study is to explore the meaning of the concept in international law of foreign investment in the light of juristic views, arbitral and judicial interpretations, and state practice. In international law the principle of equality (or equality of treatment) is often expressed in the negative form as one of nondiscrimination. The simple meaning of the concept as ‘absence of discrimination’ is quite elusive in both international and municipal. The concept of discrimination entails two elements: first, the measures directed against a particular party must be for reasons unrelated to the substance of the matter, for example, the company's nationality. Second, discrimination entails like persons being treated in an inequivalent manner. In its literal or formal sense, the principle of nondiscrimination may be described, according to Foighel, that: “the rules of international law against discrimination can be considered to be satisfied when foreigners are given formal equality with the nationals of the country in question in respect of protection in similar situations.” *** Recent developments suggest that the presence of discrimination should be determined by evaluating the individual factual circumstances of each particular case. Thus, the legal notion of discrimination is more contextual than hypothetical. Professor Brownlie has suggested that the concept “calls for more sophisticated treatment in order to identify unreasonable (or material) discrimination as distinct from the different treatment of noncomparable situations.” In the Third Restatement of the Foreign Relations Law of the United States, the American Law Institute has neatly summarized the position thus: Discrimination implies unreasonable distinction. Takings that invidiously single out property of persons of a particular nationality, would be unreasonable; classifications, even if based on nationality, that are rationally related to the State's security or economic policies might not be unreasonable… It must be acknowledged that in all the above cases, the crucial test is whether the concerned State acts in good faith. This good faith criterion is implicit in one writer's objective formulation that “[d]istinctions are reasonable if they pursue a legitimate aim and have an objective justification, and a reasonable relationship of proportionality exists between the aim sought to be realised and the means employed”. *** Thus, it seems as appropriate to apply the international law principles of good faith and abuse of rights in determining the legality of discrimination in the matter of expropriation of alien property as in any other field. Although both the principles are subjective, their objective application to concrete factual circumstances may prove simple in determining the reasonableness or unreasonableness of discrimination and hence the legality or illegality of it. Discrimination purely based on racial hatred is unjustifiable. However, discrimination on the basis of race or ethnic origin may sometimes be tolerable on justifiable grounds. It is crucial that discriminatory acts be actionable, both those that are intentionally discriminatory and those discriminatory in effect… Unreasonable, arbitrary, or invidious distinctions are undoubtedly prohibited by international law, and are actionable. The State's exercise of sovereign authority is subject to the restrictions imposed by international law such as the principle of nondiscrimination… As indicated earlier, the principle of permanent sovereignty over natural resources cannot shield a State's wrongful acts. Having thus examined the principle of non-discrimination in customary international law, it is necessary to address it in the context of conventional international law, where the concept has a wider connotation. One writer has coined the phrase ‘non-discrimination lato sensu’ to refer to the “lack of discrimination both among aliens and foreign countries

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and products, and between aliens and nationals (and corresponding products).” Thus the concept in its wider sense encompasses “most-favoured-nation (MFN) treatment” as well as “national treatment.” However, both standards are treaty-made and neither is recognized as part of customary international law… The contents and scope of both are determined by treaties and by their Contracting Parties' reservations and exceptions applicable in their respective cases.… In various nonbinding Declarations and Guidelines the modalities of the applications of these standards are also prescribed. The common basic feature of both these concepts is equality of treatment or, in another word, nondiscrimination. As opposed to customary international law, these treaty-made standards provide the contour of the principle of non-discrimination or equality of treatment in specific cases concerned. In this sense the treaty-made standards are more concrete than abstract; the reverse is often true in customary international law. However, in the context of such treaty-made standards various issues may still arise…

[C] Comments and Questions 1.

2.

Recent ICSID cases have held that there is no general obligation under customary international law to treat all aliens equally or as favorably as nationals. In Genin and ors v. Estonia, ICSID Case No. ARB 99/2, IIC 10 (2001), the Tribunal noted that “international law generally requires that a state should refrain from ‘discriminatory’ treatment of aliens and alien property.” But it also asserted that “[c]ustomary international law does not… require that a state treat all aliens (and alien property) equally, or that it treat aliens as favourably as nationals;” “even unjustifiable differentiation may not be actionable.” In C. Grand River Enterprises Six Nations Ltd and ors v. United States (ICSID Case No. ARB/10/5), IIC 481 (2011), the Tribunal asserted, “The language of [NAFTA] Article 1105 does not state or suggest a blanket prohibition on discrimination against alien investors' investments, and one cannot assert such a rule under customary international law. States discriminate against foreign investments, often and in many ways, without being called to account for violating the customary minimum standard of protection.” Although not all types of differential and discriminatory treatment are actionable under customary international law, most BITs offer specific standards of nondiscrimination. In determining whether discriminatory treatment has occurred, tribunals tend to “favor an objective approach that looks at the discriminatory consequences of a particular measure” over “an intention to discriminate.” Christoph H. Schreuer, Protection against Arbitrary or Discriminatory Measures, in The Future of Investment Arbitration 183, 196-98 (C. A. Rogers & R.P. Alford eds, 2009); see Eastern Sugar v. Czech Republic (SCC Case No. 088/2004), IIC 310 (2007); Siemens A.G. v. The Argentine Republic Award (ICSID Case No. ARB/02/8), IIC 227 (2007). But see LG&E v. Argentina (ICSID ARB/02/1), Decision on Liability (3 October 2006), 46 ILM 36 (2007) (holding that “a measure is considered discriminatory if the intent of the measure is to discriminate or if the measure has a discriminatory effect”).

§8.04 ARBITRARY CONDUCT Arbitrary conduct, which has been described by the ICJ in Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy) at para 128 as “a willful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety”, may give rise to a violation of customary intentional law.

[A] Responsibility of the State for Injuries Caused in Its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights: Fourth Report by F. V. García Amador, [1959] 2 Y.B. Int’l L. Comm’n 1, 7-9, U.N. Doc. A/CN.4/119 (Citations selectively omitted) 23. “Wrongful” acts or omissions are those which result from the non-performance by the State of any conventional obligation undertaken by it with respect the patrimonial rights of aliens. The origin or source of this obligation, which imposes a specific standard of conduct, may be a treaty with the State of which the alien is a national or a contractual relation with the alien himself, provided in the latter case that the obligation is genuinely “international” in character. The juridical consequences of non-performance of such an obligation are obvious: as the wrong is “intrinsically” contrary to international law, it not only directly and immediately involves the responsibility of the State but also imposes on the State the “duty to make reparation” stricto sensu, that is to say, the reparation must take the form of restitution in kind or, if restitution is impossible or would not constitute adequate reparation for the injury, of pecuniary damages… 24. “Arbitrary” acts or omissions, on the other hand, although they also involve conduct on the part of the State that is contrary to international law, occur in connexion with acts that are intrinsically “legal”. In the various cases of international responsibility examined in this report, the State is in fact exercising a right – the right to “affect” the patrimonial rights of individuals for various reasons and purposes and in various ways – and responsibility will therefore be incurred only if the right is exercised in conditions or circumstances which involve an act or omission contrary to international law. The

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position is not the same as in the case of “wrongful” acts or omissions, for simple “violation” of the principle of respect for acquired rights does not involve the international responsibility of the State. International responsibility exists and is imputable only if the State's conduct in the exercise of the right in question can be shown to have been “arbitrary”. Consequently, in view of the intrinsic legitimacy of the measure “affecting” the alien's rights, any “arbitrary” acts or omissions imputable to the State cannot be regarded as having the same juridical consequences as acts that are merely “wrongful”. It will be seen later that international responsibility in such cases cannot and should not imply a “duty to make reparation” stricto sensu. 25. The distinction between “wrongful” and “arbitrary” acts or omissions was explicitly recognized by the Permanent Court of International Justice in connexion with expropriations… and it has also been generally recognized in diplomatic practice, international case-law and the writings of publicists concerning State responsibility for the non-performance of obligations stipulated in contracts with aliens. It should be noted that the notion of “arbitrariness” is fully in conformity with the essential idea animating the present system for the international protection of “human rights and fundamental freedoms”. The Universal Declaration of Human Rights (article 17, para. 2) states that “No one shall be arbitrarily deprived of his property”. The use of the word “arbitrarily” is not accidental but reflects an intention to subordinate to specific conditions the exercise of the State's rights with regard to private property. As the legislative history of article 17 of the Declaration shows, the discussion centred on the problem of determining these conditions or of defining the scope of the word “arbitrarily”. In this connexion, reference may appropriately be made to article 1 of the Protocol to the European Convention on Human Rights and Fundamental Freedoms, signed in Paris on 20 March 1952, which reads: … …”… No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.” Although not completely precise, this article is much more explicit with regard to the conditions governing the exercise of the State's competence. 26. What are the component elements of the notion of “arbitrariness”? In other words, on the basis of what rule or rules is it possible to decide when an act or omission is “arbitrary”? It is necessary first to distinguish between those criteria which are generally applicable and those applicable only to specific acts or omissions. It is, of course, impossible to discuss the latter in this context; and attention will therefore be directed to the criteria which are grosso modo applicable to any situation that may arise. The first of these criteria relates to the motives and purposes of the State's action… In principle at least, the question is of interest to international law and it is, therefore, within the province of international law to determine the motives or purposes that may justify the State's action or, in any event, to prescribe those which cannot justify it. Another generally applicable criterion relates to the method and procedure followed by the State authorities. Although the State's freedom of action is much greater in this respect than it is with regard to the grounds and purposes of the measure taken, this question also undeniably falls within the province of international law. The question that must be answered is whether an act or omission constituting a “denial of justice” is imputable to the State. In such case, as in the case of a measure which cannot be justified on grounds of genuine public interest, the “arbitrary” nature of the act or omission would be evident. 27. The third and last of the generally applicable criteria, and in a sense the most important, relates to discrimination between nationals and aliens. The traditional view in this matter has been that, as in the case of other acts or omissions injuring aliens, the State is responsible if its conduct is not in conformity with the “international standard of justice”, even if it has applied the same measure to its nationals. In effect, it was argued that in this matter also aliens should receive preferential treatment. Apart from the fact that this view has much less justification in the matter of patrimonial rights than in the case of rights inherent in the human person, the problem can no longer be posed in terms of the “minimum standard”. As has more than once been pointed out in the Special Rapporteur's earlier reports, in giving recognition to human rights and fundamental freedoms contemporary international law makes no distinction between nationals and aliens and necessarily implies a regime of “equality” in the use and enjoyment of such rights and freedoms. Thus, in so far as concerns the notion of “arbitrariness”, the alien is entitled only to claim that the State should not discriminate against him in taking or applying the measure in question, and that the measure should not have been taken solely by reason of his status as an alien. 28. The foregoing considerations emphasize the importance of the “doctrine of abuse of rights” in this area of international responsibility. As was pointed out in the Special Rapporteur's earlier reports, international responsibility is generally regarded as a consequence of “non-fulfilment or non-performance of an international obligation”. Nevertheless, both in the writings of publicists and in diplomatic and legal practice it has been recognized that international responsibility may also be incurred if a State causes injury through the “abusive” exercise of a right; that is to say, if it ignores the limitations to which State competence is necessarily subject and which are not always formulated in exactly defined and specific international obligations. It is not difficult to understand why it was recently said that “the arbitrary exercise of State competences and the use of juridical institutions for purposes alien to them are in fact abuses of rights”.

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29. The notion of “arbitrary action” is in fact so closely linked to the doctrine of “abuse of rights” as to be largely coterminous in practice. The acts or omissions in which international responsibility may originate in the cases with which the present report is concerned occur in connexion with the exercise of rights of the State. It is for this reason that it is necessary to invoke the limitations placed by international law on the exercise of State competence in this matter. This is not the case if there exist international obligations the non-performance or non-fulfilment of which result in “wrongful” acts giving rise to direct and immediate responsibility on the part of the State. It is, however, necessary in all other cases, since the act or omission imputable to the State is related to an intrinsically lawful action. It is recognized that this view diverges from the traditional approach in that it chars as merely “arbitrary” acts and omissions – like the denial of justice – have always been considered to be “wrongful” and as such to give rise the “duty to make reparation”. Nevertheless, no other course would seem possible if it is desired to work out a system consistent with the special character of the cases of international responsibility with which this report is concerned.

[B] Glamis Gold, Ltd. v. United States of America (ad hoc arbitration under the 1976 UNCITRAL Rules), Award of 8 June 2009 (87) [Michael K. Young, (pres.), David D. Caron, Kenneth D. Hubbard] [Glamis Gold Ltd., a publicly-held Canadian corporation engaged in the mining of precious metals, claimed that the United States wrongfully delayed approval of its openpit gold mining project in California. It also alleged that when federal approval seemed likely, the state of California rendered the project economically unfeasible by introducing a mandatory backfilling requirement to protect sacred Native American sites in the area. Glamis submitted a claim to arbitration under the UNCITRAL Arbitration Rules, arguing that the federal and state governments' actions denied its investments the minimum standard of treatment under international law in violation of NAFTA Article 1105 and resulted in the expropriation of its investments in violation of Article 1110. The Tribunal ultimately dismissed Glamis' claims in their entirety. The excerpt below is the Tribunal's analysis of the Claimant's argument that a host state has an obligation under Article 1105 to provide protection from arbitrary measures.] (Citations selectively omitted) 623. With respect to the asserted duty to protect investors from arbitrariness, the Tribunal notes Claimant's citations to several NAFTA arbitrations that have found a violation of Article 1105 in arbitrary state action. Claimant cites to S.D. Myers for its holding that “a breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust and arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective.” Similarly, it quotes International Thunderbird’s holding that “manifest arbitrariness falling below acceptable international standards” is prohibited under Article 1105. 624. The Tribunal also notes, however, Respondent's argument that no Chapter 11 tribunal has found that decision-making that appears arbitrary to some parties is sufficient to constitute an Article 1105 violation. In Mondev, for instance, the tribunal held: “The test is not whether a particular result is surprising, but whether the shock or surprise occasioned to an impartial tribunal leads, on reflection, to justified concerns as to the judicial propriety of the outcome… ….” Respondent understands this to be the case because tribunals consistently afford administrative decision-making a high level of deference. Respondent quotes S.D. Myers to illustrate this deference: “determination [that Article 1105 has been breached] must be made in light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders.” This, Respondent argues, leads to the result that merely imperfect legislation or regulation does not give rise to State responsibility under customary international law. 625. The Tribunal finds that, in this situation, both Parties are correct. Previous tribunals have indeed found a certain level of arbitrariness to violate the obligations of a State under the fair and equitable treatment standard. Indeed, arbitrariness that contravenes the rule of law, rather than a rule of law, would occasion surprise not only from investors, but also from tribunals. This is not a mere appearance of arbitrariness, however – a tribunal's determination that an agency acted in a way with which the tribunal disagrees or that a state passed legislation that the tribunal does not find curative of all of the ills presented; rather, this is a level of arbitrariness that, as International Thunderbird put it, amounts to a “gross denial of justice or manifest arbitrariness falling below acceptable international standards.” 626. The Tribunal therefore holds that there is an obligation of each of the NAFTA State Parties inherent in the fair and equitable treatment standard of Article 1105 that they do not treat investors of another State in a manifestly arbitrary manner. The Tribunal thus determines that Claimant has sufficiently substantiated its arguments that a duty to protect investors from arbitrary measures exists in the customary international law minimum standard of treatment of aliens; though Claimant has not sufficiently rebutted Respondent's assertions that a finding of arbitrariness requires a determination of some act far beyond the measure's mere illegality, an act so manifestly arbitrary, so unjust and

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surprising as to be unacceptable from the international perspective. *** 627. The Tribunal holds that Claimant has not met its burden of proving that something other than the fundamentals of the Neer standard apply today. The Tribunal therefore holds that a violation of the customary international law minimum standard of treatment, as codified in Article 1105 of the NAFTA, requires an act that is sufficiently egregious and shocking – a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons – so as to fall below accepted international standards and constitute a breach of Article 1105. Such a breach may be exhibited by a “gross denial of justice or manifest arbitrariness falling below acceptable international standards;” or the creation by the State of objective expectations in order to induce investment and the subsequent repudiation of those expectations. The Tribunal emphasizes that, although bad faith may often be present in such a determination and its presence certainly will be determinative of a violation, a finding of bad faith is not a requirement for a breach of Article 1105(1). *** 828. Thus addressing the record as a whole, the Tribunal holds that Claimant has not established that the acts complained of fall short of the customary international law minimum standard of treatment. The complained-of acts were not egregious and shocking – a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons. There was no specific inducement of Claimant's expectations. There was no causal focus on the nationality of the investor. There was no corruption exhibited at any level of government. The Imperial Project, although certainly highlighted as a triggering event for some of the measures, was not the subject of discriminatory targeting. 829. There is simply not the egregiousness necessary to breach the fair and equitable treatment standard of Article 1105 as it currently stands. The State Parties to the NAFTA can always choose to negotiate a higher standard against which their behavior will be judged. It is very clear, however, that they have not yet done so and therefore a breach of Article 1105 still requires acts that exhibit a high level of shock, arbitrariness, unfairness or discrimination.

[C] Comments and Questions 1.

2.

For further discussion on the relationship between unreasonable/arbitrary measures and customary international law, see Christoph H. Schreuer, Protection Against Arbitrary or Discriminatory Measures, in The Future of Investment Arbitration 183, 188-89 (C. A. Rogers & R.P. Alford eds, 2009). See also “‘Case Specific Mandates' versus ‘Systemic Implications': How Should Investment Tribunals Decide?: The Freshfields Arbitration Lecture,” in 29:2 Arbitration International, p. 131-152 (2013).

§8.05 DENIAL OF JUSTICE Under customary international law, states may be held liable for failing to provide foreign investors with due process and recourse to fair and reasonably efficient trials.

[A] The Loewen Group, Inc. and Raymond L. Loewen v. United States of America (ICSID Case No. ARB/(AF)/98/3), Award of 26 June 2003 (88) [Anthony Mason (pres.), Abner J. Mikva, Michael Mustill] [This dispute arose of litigation brought against the Loewen Group and its American subsidiary, Loewen Group International, in a Mississippi state court by Jeremiah O'Keefe Sr. and his family who owned a number of companies. Both parties were competitors in the funeral home and funeral insurance business in Mississippi. O'Keefe sued Loewen on various charges relating to three contracts between the parties valued by O'Keefe at around $980,000 and an exchange of two O'Keefe funeral homes, valued at $2.5 million, for a Loewen insurance company, valued at $4 million. The jury awarded O'Keefe $500 million damages, including $75 million for emotional distress and $400 million punitive damages. To appeal the verdict, Loewen was required to post bond for 125% of the judgment in order, as the court refused to reduce the bond for “good cause.” Loewen initiated arbitration proceedings under NAFTA. One of its claims, which the tribunal discussed in the excerpt below, was a denial of justice under NAFTA Article 1105. The tribunal eventually dismissed the case for lack of jurisdiction, since there was no longer diversity of citizenship and since Loewen had not exhausted local remedies.] (Citations selectively omitted) 123. … [W]e take it to be the responsibility of the State under international law and, consequently, of the courts of a State, to provide a fair trial of a case to which a foreign investor is a party. It is the responsibility of the courts of a State to ensure that litigation is free from discrimination against a foreign litigant and that the foreign litigant should not become the victim of sectional or local prejudice. In the United States and in other

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jurisdictions, advocacy which tends to create an atmosphere of hostility to a party because it appeals to sectional or local prejudice, has been consistently condemned and is a ground for holding that there has been a mistrial, at least where the conduct amounts to an irreparable injustice (New York Central R.R. Co. v Johnson 279 US 310, 319 (1929); Le Blanc v American Honda Motor Co. Inc. 688 A 2d 556, 559). In Walt Disney World Co. v Blalock 640 So 2d 1156,1158, a new trial was ordered where closing argument was pervaded with inflammatory comment and personal opinion of counsel, although the offensive comments were not objected to… In such circumstances the trial judge comes under an affirmative duty to prevent improper tactics which will result in an unfair trial (Pappas v Middle Earth Condominium Association 963 F 2d 534 539, 540; Koufakis v Carvel 425 F 2d 892, 900). *** 124. Article 1105 which is headed “Minimum Standard of Treatment” provides: “1. Each party shall accord to investments of investors of another party treatment in accordance with international law, including fair and equitable treatment and full protection and security.” The precise content of this provision, particularly the meaning of the reference to “international law” and the effect of the inclusory clause has been the subject of controversy. 125. On July 31, 2001, the Free Trade Commission adopted an interpretation of Article 1105(1). The Commission's interpretation is in these terms: “Minimum Standard of Treatment in Accordance with International Law (1) Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. (2) The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. (3) A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1).” 126. An interpretation issued by the Commission is binding on the Tribunal by virtue of Article 1131(2). 127. Although Claimants, in their written materials, submitted that the Commission's interpretation adopted on July 31, 2001 went beyond interpretation and amounted to an unauthorized amendment to NAFTA, Claimants did not maintain that submission at the oral hearing. The oral argument presented by Mr Cowper QC on behalf of Claimants was consistent with the Commission's interpretation of Article 1105(1). Mr Cowper QC submitted that, accepting that Article 1105(1) prescribes the customary international law standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of an investor of another Party, the treatment of Loewen by the Mississippi courts violated that minimum standard. 128. The effect of the Commission's interpretation is that “fair and equitable treatment” and “full protection and security” are not free-standing obligations. They constitute obligations only to the extent that they are recognized by customary international law. Likewise, a breach of Article 1105(1) is not established by a breach of another provision of NAFTA. To the extent, if at all, that NAFTA Tribunals in Metalclad Corp v United Mexican States ICSID Case No. ARB(AF)/97/1 (Aug 30, 2000), S.D. Myers, Inc. v Government of Canada (Nov 13, 2000) and Pope & Talbot, Inc. v Canada, Award on the Merits, Phase 2, (Apr 10, 2001) may have expressed contrary views, those views must be disregarded. 129. It is not in dispute between the parties that customary international law is concerned with denials of justice in litigation between private parties. Indeed, Respondent's expert, Professor Greenwood QC, acknowledges that customary international law imposes on States an obligation “to maintain and make available to aliens, a fair and effective system of justice” (Second Opinion, para. 79). 130. Respondent submits that, in conformity with the accepted standards of customary international law, it is for Loewen to establish that the decisions of the Mississippi courts constituted a manifest injustice. Professor Greenwood states in his Second Opinion: “the awards and texts make clear that error on the part of the national court is not enough, what is required is “manifest injustice” or “gross unfairness” (Garner, “International Responsibility of States for Judgments of Courts and Verdicts of Juries amounting to Denial of Justice”, 10 BYIL (1929), p 181 at p 183), “flagrant and inexcusable violation” (Arechaga, [“International Law in the Past Third of a Century”, 159 “Recueil des Cours” (1978) at p 282]) or “palpable violation” in which “bad faith not judicial error seems to be the heart of the

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matter” (O'Connell, International Law, 2nd ed, 1970) p 498). As Baxter and Sohn put it (in the Commentary to their Draft Convention on the Responsibility of States for Injuries to Aliens) “the alien must sustain a heavy burden of proving that there was an undoubted mistake of substantive or procedural law operating to his prejudice”. 131. In Pope & Talbot Inc. v Canada, Award in respect of damages, May 31, 2002 a NAFTA Tribunal considered the effect of the Interpretation of July 31, 2001. The Tribunal concluded (para. 62 of its Award) that the content of custom in international law is now represented by more than 1800 bilateral investment treaties which have been negotiated. Nevertheless the Tribunal did not find it necessary to go beyond the formulation by the International Court of Justice in Elettronica Sicula SpA (ELSI) United States v Italy (1989) ICJ 15 at 76: “Arbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law… It is wilful disregard of due process of law, an act which shocks, or at least surprises a sense of judicial propriety.” 132. Neither State practice, the decisions of international tribunals nor the opinion of commentators support the view that bad faith or malicious intention is an essential element of unfair and inequitable treatment or denial of justice amounting to a breach of international justice. Manifest injustice in the sense of a lack of due process leading to an outcome which offends a sense of judicial propriety is enough, even if one applies the Interpretation according to its terms. 133. In the words of the NAFTA Tribunal in Mondev International Ltd v United States of America ICSID Case No. ARB (AF)/99/2, Award dated October 11, 2002, “the question is whether, at an international level and having regard to generally accepted standards of the administration of justice, a tribunal can conclude in the light of all the facts that the impugned decision was clearly improper and discreditable, with the result that the investment has been subjected to ‘unfair and inequitable treatment’.” 134. If that question be answered in the affirmative, then a breach of Article 1105 is established. Whether the conduct of the trial amounted to a breach of municipal law as well as international law is not for us to determine. A NAFTA claim cannot be converted into an appeal against the decisions of municipal courts. 135. International law does, however, attach special importance to discriminatory violations of municipal law (Harvard Law School, Research in International Law, Draft Convention on the Law of Responsibility of States for Damage Done in Their Territory to the Persons or Property of Foreigners (“1929 Draft Convention”) 23 American Journal of International Law 133, 174 (Special Supp. 1929) (“a judgment [which] is manifestly unjust, especially if it has been inspired by ill-will towards foreigners as such or as citizens of a particular states”); Adede, A Fresh Look at the Meaning of Denial of Justice under International Law, XIV Can YB International Law 91 (“a… decision which is clearly at variance with the law and discriminatory cannot be allowed to establish legal obligations for the alien litigant”). A decision which is in breach of municipal law and is discriminatory against the foreign litigant amounts to manifest injustice according to international law. 136. In the present case, the trial court permitted the jury to be influenced by persistent appeals to local favouritism as against a foreign litigant. 137. In the light of the conclusions reached in paras. 119-123 (inclusive) and 136, the whole trial and its resultant verdict were clearly improper and discreditable and cannot be squared with minimum standards of international law and fair and equitable treatment. However, because the trial court proceedings are only part of the judicial process that is available to the parties, the rest of the process, and its availability to Loewen, must be examined before a violation of Article 1105 is established. We address this question in paras. 142-157 (inclusive), 165-171 (inclusive) and 207-217 (inclusive). *** 241. We think it right to add one final word. A reader following our account of the injustices which were suffered by Loewen and Mr. Raymond Loewen in the Courts of Mississippi could well be troubled to find that they emerge from the present long and costly proceedings with no remedy at all. After all, we have held that judicial wrongs may in principle be brought home to the State Party under Chapter Eleven, and have criticised the Mississippi proceedings in the strongest terms. There was unfairness here towards the foreign investor. Why not use the weapons at hand to put it right? What clearer case than the present could there be for the ideals of NAFTA to be given some teeth? 242. This human reaction has been present in our minds throughout but we must be on guard against allowing it to control our decision. Far from fulfilling the purposes of NAFTA, an intervention on our part would compromise them by obscuring the crucial separation between the international obligations of the State under NAFTA, of which the fair

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treatment of foreign investors in the judicial sphere is but one aspect, and the much broader domestic responsibilities of every nation towards litigants of whatever origin who appear before its national courts. Subject to explicit international agreement permitting external control or review, these latter responsibilities are for each individual state to regulate according to its own chosen appreciation of the ends of justice. As we have sought to make clear, we find nothing in NAFTA to justify the exercise by this Tribunal of an appellate function parallel to that which belongs to the courts of the host nation. In the last resort, a failure by that nation to provide adequate means of remedy may amount to an international wrong but only in the last resort…

[B] Mondev International Ltd. v. United States of America (ICSID Case No. ARB(AF)/99/2), Award of 11 October 2002 (89) [Ninian Stephen (pres.), James Crawford, Stephen M. Schwebel] (Citations selectively omitted) 1. This dispute arises out of a commercial real estate development contract concluded in December 1978 between the City of Boston (“the City”), the Boston Redevelopment Authority (“BRA”) and Lafayette Place Associates (“LPA”), a Massachusetts limited partnership owned by Mondev International Ltd., a company incorporated under the laws of Canada (“Mondev” or “the Claimant”). In 1992, LPA filed a suit in the Massachusetts Superior Court against the City and BRA. The trial was held in 1994 and culminated in a jury verdict in favour of LPA against both defendants. The trial judge upheld the jury's verdict for breach of the Tripartite Agreement against the City, but rendered a judgment notwithstanding the verdict in respect of BRA, holding BRA immune from liability for interference with contractual relations by reason of a Massachusetts statute giving BRA immunity from suit for intentional torts. Both the City and LPA appealed. The Massachusetts Supreme Judicial Court (“SJC”) affirmed the trial judge's decision in respect of BRA but upheld the City's appeal in respect of the contract claim. LPA petitioned for rehearing before the SJC on both claims, and sought certiorari to the United States Supreme Court in respect of its contract claim against the City. Each of these petitions was denied. In the event, therefore, LPA eventually lost both its claims. 2. Mondev subsequently brought a claim pursuant to Article 1116 of the North American Free Trade Agreement (“NAFTA”) and the Additional Facility Rules of the International Centre for Settlement of Investment Disputes (“ICSID” or “the Centre”) on its own behalf for loss and damage caused to its interests in LPA. Mondev claims that due to the SJC's decision and the acts of the City and BRA, the United States breached its obligations under Chapter Eleven, Section A of NAFTA. In particular, the Claimant alleges violations of NAFTA Articles 1102 (National Treatment), 1105 (Minimum Standard of Treatment), and 1110 (Expropriation and Compensation) and seeks compensation from the United States of no less than US$50 million, plus interest and costs. *** 125. … [I]n [the Tribunal's] view, there can be no doubt that, by interpreting Article 1105(1) to prescribe the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party under NAFTA, the term “customary international law” refers to customary international law as it stood no earlier than the time at which NAFTA came into force. It is not limited to the international law of the 19th century or even of the first half of the 20th century, although decisions from that period remain relevant. In holding that Article 1105(1) refers to customary international law, the FTC interpretations incorporate current international law, whose content is shaped by the conclusion of more than two thousand bilateral investment treaties and many treaties of friendship and commerce. Those treaties largely and concordantly provide for “fair and equitable” treatment of, and for “full protection and security” for, the foreign investor and his investments. Correspondingly the investments of investors under NAFTA are entitled, under the customary international law which NAFTA Parties interpret Article 1105(1) to comprehend, to fair and equitable treatment and to full protection and security. *** 126. Enough has been said to show the importance of the specific context in which an Article 1105(1) claim is made. As noted already, in applying the international minimum standard, it is vital to distinguish the different factual and legal contexts presented for decision. It is one thing to deal with unremedied acts of the local constabulary and another to second-guess the reasoned decisions of the highest courts of a State. Under NAFTA, parties have the option to seek local remedies. If they do so and lose on the merits, it is not the function of NAFTA tribunals to act as courts of appeal. As a NAFTA tribunal pointed out in Azinian v. United Mexican States: “The possibility of holding a State internationally liable for judicial decisions does not, however, entitle a claimant to seek international review of the national court decisions as though the international jurisdiction seised has plenary appellate jurisdiction. This is not true generally, and it is not true for NAFTA.”

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The Tribunal went on to hold: “A denial of justice could be pleaded if the relevant courts refuse to entertain a suit, if they subject it to undue delay, or if they administer justice in a seriously inadequate way… There is a fourth type of denial of justice, namely the clear and malicious misapplication of the law. This type of wrong doubtless overlaps with the notion of ‘pretence of form’ to mask a violation of international law. In the present case, not only has no such wrongdoing been pleaded, but the Arbitral Tribunal wishes to record that it views the evidence as sufficient to dispel any shadow over the bona fides of the Mexican judgments. Their findings cannot possibly be said to have been arbitrary, let alone malicious.” 127. In the ELSI case, a Chamber of the Court described as arbitrary conduct that which displays “a wilful disregard of due process of law,… which shocks, or at least surprises, a sense of judicial propriety”. It is true that the question there was whether certain administrative conduct was “arbitrary”, contrary to the provisions of an FCN treaty. Nonetheless (and without otherwise commenting on the soundness of the decision itself) the Tribunal regards the Chamber's criterion as useful also in the context of denial of justice, and it has been applied in that context, as the Claimant pointed out. The Tribunal would stress that the word “surprises” does not occur in isolation. The test is not whether a particular result is surprising, but whether the shock or surprise occasioned to an impartial tribunal leads, on reflection, to justified concerns as to the judicial propriety of the outcome, bearing in mind on the one hand that international tribunals are not courts of appeal, and on the other hand that Chapter 11 of NAFTA (like other treaties for the protection of investments) is intended to provide a real measure of protection. In the end the question is whether, at an international level and having regard to generally accepted standards of the administration of justice, a tribunal can conclude in the light of all the available facts that the impugned decision was clearly improper and discreditable, with the result that the investment has been subjected to unfair and inequitable treatment. This is admittedly a somewhat open-ended standard, but it may be that in practice no more precise formula can be offered to cover the range of possibilities. *** 128. Mondev questioned the decisions of the United States courts essentially on four grounds. The Tribunal will take these in turn. Because the United States Supreme Court denied certiorari without giving any reasons, it is necessary in each case to focus on the unanimous decision of the SJC, delivered by Judge Fried… [In an omitted portion, the tribunal considered and rejected the first three of the claimant's four claims.] 139. The Tribunal turns to the question of BRA's statutory immunity for intentional torts under the Massachusetts Tort Claims Act (PL 258). Under § 10(c) of that Act, a public employer which is not an “independent body politic and corporate” is immune from “any claim arising out of an intentional tort, including assault, battery, false imprisonment, false arrest, intentional mental distress, malicious prosecution, malicious abuse of process, libel, slander, misrepresentation, deceit, invasion of privacy, interference with advantageous relations or interference with contractual relations”. As recalled above, the trial judge declined to enter the jury's verdict against BRA, holding that it was entitled to immunity as a “public employer” under the Massachusetts Tort Claims Act. That decision was affirmed by the SJC, which emphasised “the desirability of making the [Massachusetts Tort Claims Act] regime as comprehensive as possible”. That decision was not challenged on certiorari to the United States Supreme Court, no doubt on the basis that the matter involved the interpretation of a Massachusetts statute and presented no federal claim or issue. 140. In the present proceedings, Mondev did not challenge the correctness of this decision as a matter of Massachusetts law. Rather, it argued that for a NAFTA Party to confer on one of its public authorities immunity from suit in respect of wrongful conduct affecting an investment was in itself a failure to provide full protection and security to the investment, and contravened Article 1105(1). For its part the United States argued that Article 1105(1) did not preclude limited grants of immunity from suit in respect of tortious conduct. It noted that there is no consensus in international practice on whether statutory authorities should be subject to the same rules of tortious liability as private parties. In the absence of any authority under customary international law requiring statutory authorities to be generally liable for their torts, or any consistent international practice, it could not be said that the immunity of BRA infringed Article 1105(1). *** 154. After considering carefully the evidence and argument adduced and the authorities cited by the parties, the Tribunal is not persuaded that the extension to a statutory authority of a limited immunity from suit for interference with contractual relations amounts in this case to a breach of Article 1105(1). Of course such an immunity could not protect a NAFTA State Party from a claim for conduct which was substantively in breach of NAFTA standards – but for this NAFTA provides its own remedy, since it gives an investor

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the right to go directly to international arbitration in respect of conduct occurring after NAFTA's entry into force. In a Chapter 11 arbitration, no local statutory immunity would apply. On the other hand, within broad limits, the extent to which a State decides to immunize regulatory authorities from suit for interference with contractual relations is a matter for the competent organs of the State to decide. 155. In the same context Mondev complained that the Massachusetts Act dealing with unfair or deceptive practices in trade and commerce (G.L. Chapter 93A) was held by the trial judge to be inapplicable to BRA notwithstanding that it engaged in the regulation of commercial activity or acted for commercial motives. But if what has been said above as to the partial immunity of BRA from suit is correct, then a fortiori there could be no breach of Article 1105(1) in holding Chapter 93A inapplicable to BRA. NAFTA does not require a State to apply its trade practices legislation to statutory authorities. 156. In reaching these conclusions, the Tribunal has been prepared to assume that the decision to allow BRA's statutory immunity could have involved conduct of the Respondent State in breach of Article 1105(1) after NAFTA's entry into force on 1 January 1994. That assumption may be questioned. The United States' courts, operating in accordance with the rule of law, had no choice but to give effect to a statutory immunity existing at the time the acts in question were performed and not subsequently repealed, once they had concluded that the statute in question did apply. It is not disputed by the Claimant that this decision was in accordance with Massachusetts law, and it did not involve on its face anything arbitrary or discriminatory or unjust, i.e., any new act which might be characterised as in itself a breach of Article 1105(1). In other words, if it was not in December 1993 a breach of NAFTA for BRA to enjoy immunity from suit for tortious interference (and, because NAFTA was not then in force, it could not have been such a breach), it is far from clear how the (ex hypothesi correct) decision of the United States courts as to the scope of that immunity, after 1 January 1994, could have been in itself unfair or inequitable. On this ground alone, it may well be that Mondev's Article 1105(1) claim was bound to fail, and to fail whether or not one classifies BRA's statutory immunity as “procedural” or “substantive”.

[C] Amco Asia Corporation and others v. Republic of Indonesia (ICSID Case No. ARB/81/1), Award of 5 June 1990, 1 ICSID Rep. 569, 602-605 (1993) (90) [Rosalyn Higgins (pres.), Marc Lalonde, Per Magid] [AMCO agreed to participate in a joint venture to build and manage a hotel in Jakarta, Indonesia. As part of this agreement, AMCO promised to invest at least $3 million in foreign currency in return for a package of concessions. After completion of the hotel, the Indonesian joint venture partner had numerous complaints, and the Indonesian government alleged that AMCO had not lived up to its foreign currency commitment. Indonesian police and military personnel seized the hotel on March 30, 1980. An ICSID tribunal found against Indonesia in 1983, but the award was annulled by the ad hoc Committee in 1986. A second tribunal then handed down the decision excerpted below. The Tribunal explored the arguments set forth by the parties. It concluded that that Indonesian law does not clearly stipulate whether a procedurally unlawful act per se generates compensation or whether a decision tainted by bad faith is necessarily unlawful. It also observed that cases under the European Convention on Human Rights, which were cited by Indonesia, deal with compensation not as a matter of general international law, but by reference to the specific treaty requirements of Article 50 of the Convention, which requires “just satisfaction” to be given by the Court if the local law allows of only partial reparation.] (Citations selectively omitted) 130. Three further cases cited by Amco remain for consideration. The first of these is the Idler case U.S. v. Venezuela, 1898 (New Legal Exhibits to Claimants' Memorial, tab. 112). Idler was a United States citizen, who contracted with agents acting for Venezuela, for the provision of military equipment. Certain invoices for very large sums remained substantially unpaid. After the union of Venezuela and New Grenada in 1819-21, arguments occurred as to whether it was the new Republic of Colombia that was liable for the debt, or the “Department of Venezuela”. Without here entering into the very complicated history of Idler's attempts to recover the sums owed, we note that judgment was eventually entered for Idler, but the Treasury refused to pay, contesting the jurisdiction of the court concerned. This question, too, was decided by the Venezuela Supreme Court in favour of Idler. Still unable to secure payment, Idler returned to the United States where he sought diplomatic support for his claim. In 1836 the Venezuelan Government applied to the Supreme Court for an order to annul the judgment. This followed two years of written submissions by the Government to the Supreme Court, of which Idler was never notified. Idler was instructed by the Court to appear before it, but learned of this only twelve days before the commencement of proceedings, when it was impossible to get to Venezuela in time. The Supreme Court found it had no jurisdiction to annul the earlier judgments in favour of Idler, and that the action should have been brought in front of the same judge who had given the original judgment. The matter then reverted to the Superior Court of Caracas, which did set aside the judgment in favour of Idler, and indeed condemned him to pay “judicial tax” and a portion of the costs. This

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was in turn affirmed by the Supreme Court. 131. In the international arbitral proceedings brought by the United States against Venezuela, the arbitral commission stated that one of the key questions was whether the general effect of the proceedings of 1836-39 constituted a denial of justice. Idler received no notification of the proceedings in the lower court, but rather, a notification to appear in the Supreme Court in a suit instituted there; and the Commission took the view that, as it was the lower court that alone had jurisdiction, to summon him before one tribunal, when the business affecting his interests was to be done in another, was misleading. Further, the Commission stated that, even if no notification had been required, a notification of the sort given would be misleading. … …”… [W]e are inclined to think the act, from the standpoint of justice, would vitiate the whole proceedings”. The Commission, emphasising that a foreign citizen before the courts of a sovereign was entitled only to “ordinary justice”, found that Idler did not get it and that therefore the proceedings against him were “a nullity”. The Commission did not consider whether, on substantive grounds, the decisions annulling the earlier judgments might not have been correct. Rather, it found that the denial of justice rendered them a nullity. 132. The second remaining case relied on by Amco was the Chattin case, 1927 (Legal Exhibits to Claimants' Memorial, tab. 119; Legal App. to the Counter-Memorial, tab. KK). This arbitration between the United States and Mexico also concerned irregularities in judicial proceedings in criminal proceedings. Acts of the judiciary, in the view of presiding Commissioner Van Vollenhoven, alone could constitute a denial of justice, executive and legislative wrongs always being subject to judicial redress. Such judicial acts would only amount to a denial of justice if they constituted “an outrage, bad faith, wilful neglect of duty, or insufficiency of action apparent to any unbiased man” (Legal Exh. to Claimant's memorial, tab. 119, Internal p. 287). Commissioner Van Vollenhoven found, on the facts of the case, that “the whole of the proceedings discloses a most astonishing lack of seriousness on the part of the Court” (ibid., p. 292) and that the proceedings were unjust. It matters not that in his powerful dissent Commissioner MacGregor found that local law had not been violated, and doubted too, on his analysis of the facts, that international law had been violated, for in the present case the finding of the First Tribunal that there had been procedural unlawfulness stands as res judicata. 133. It is relevant, too, that the Commission makes no supposition about the guilt or otherwise of Chattin – indeed, it was not prepared to make a finding of illegality of his arrest. Against the background of a denial of justice, damages were nonetheless awarded. 134. Finally, in the Walter Fletcher Smith case, 1929,… an expropriation of a US citizen's property was found to be neither consistent with the constitutional requirements of Cuba nor with international law. Whereas the property could lawfully have been nationalised for a public purpose, it was found that the purpose was “amusement and private profit”. The emphasis was not so much on the requirement of public international law that a taking of property be for “public utility” purposes, as on the good faith aspect: From a careful examination of the testimony and of the records, the Arbitrator is impressed that the attempted expropriation of the claimant's property was not in compliance with the constitution, nor with the laws of the Republic; that the expropriation proceedings were not, in good faith, for the purpose of public utility. They do not present the features of an orderly attempt by officers of the law to carry out a formal order of condemnation. The destruction of the claimant's property was wanton, riotous, oppressive. It was effected by about one hundred and fifty men whose action appears to have been of a most violent character. There is some evidence that, before the expropriation proceedings, certain persons, being unable to purchase the property from the claimant, threatened to destroy it… (ibid., Internal p. 387). 135. The arbitration concluded that the property should be restored to the claimant… An award of damages was made “if the land is not to be restored” (ibid.). 136. One can see from these international cases that the question in international law is not whether procedural irregularities generate damages per se. Rather, the international law test is whether there has been a denial of justice. They show equally that not every procedural irregularity constitutes a denial of justice. To this effect, see also Opinion of Professor Bowett (Legal App. to the Counter-Memorial, vol. VIII, tab. TTT, at p. 10). At the same time, as Commissioner Nielson reminded in the McCurdy case, (op. cit., supra, para. 124, at Internal page 150) even if no single act constitutes a denial of justice, such denial of justice can result from “a combination of improper acts”. In the recent case of Elettronica Sicula SpA (ELSI) (USA v. Italy), ICJ Reports, 1989, the International Court of Justice drew a distinction between unlawfulness in municipal law and arbitrariness under international law. The distinction it drew is, in the view of the Tribunal, equally germane to the distinction between procedural unlawfulness and a denial of justice. The Court stated that arbitrariness “is not so much something opposed to a rule of law, as something opposed to the rule of law” (ibid., para. 128). The test, said the Court, was “a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety” (ibid.). 137. It thus is necessary to decide whether the procedural irregularities and other

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background factors in this case amounted to a denial of justice, that would taint the decision of BKPM, regardless of whether BKPM might have had substantive grounds for its action against Amco. The first question is whether it is correct, as Commissioner Van Vollenhoven contended in the Chattin case, that acts of the judiciary alone can constitute a denial of justice. Most arbitral awards do not make this distinction in the context of denial of justice. While all those cases cited above happened to concern, at some phase, judicial decisions, the Tribunal sees no provision of international law that makes impossible a denial of justice by an administrative body. BKPM was an administrative, rather than a strictly judicial, body. It has not been argued to us by Indonesia that the acts of BKPM, taken in context, could not themselves constitute a wrong in international law, if unlawful, but that only a failure of the courts to rectify them could constitute such a wrong. And if one applies the test of the ELSI case “a wilful disregard of due process of law”; or in the Idler case (the need for “ordinary justice”); or in the Chattin case (“bad faith, wilful neglect of duty, or insufficiency of action apparent to any unbiased man”) it can be seen that the BKPM handling of PT Wisma's complaint, which led in turn to the approval of the President of the Republic to the proposal for revocation, constituted a denial of justice. 138. There are thus indications, both as a matter of Indonesian and international law, that the circumstances surrounding BKPM's decision tainted the proceedings irrevocably. 139. The Tribunal therefore finds that, although certain substantive grounds might have existed for the revocation of the licence, the circumstances surrounding BKPM's decision make it unlawful.

[D] Athanassoglou and Others v. Switzerland, Judgment of European Court of Human Rights of 6 April 2000, Application No. 27644/95, ECHR 2000-IV (91) [In this case, residents of nearby villages challenged a decision to renew the operating license of a nuclear power plant.] (Citations selectively omitted) 35. The applicants complained that they were denied effective access to a court in breach of Article 6(1) of the Convention, the relevant part of which provides: In the determination of his civil rights and obligations… …, everyone is entitled to a fair… hearing…by [a]… tribunal… The applicants complained in particular that it had not been open to them under Swiss law to seek judicial review contesting the lawfulness of the decision of the Federal Council of 12 December 1994 granting the Nordostschweizerische Kraftwerke AG (“NOK”) a limited operation licence for the Beznau II nuclear power plant. *** 51. Having regard to the foregoing, the Court considers that the facts of the present case provide an insufficient basis for distinguishing it from the Balmer-Schafroth case. In particular, it does not perceive any material difference between the present case and the Balmer-Schafroth case as regards the personal circumstances of the applicants. In neither case had the applicants at any stage of the proceedings claimed to have suffered any loss, economic or other, for which they intended to seek compensation… The Court consequently cannot but arrive in the present case at the same conclusion on the facts as in theBalmer-Schafroth case, namely that the connection between the Federal Council's decision and the domestic law rights invoked by the applicants was too tenuous and remote. 52. Indeed, the applicants in their pleadings before the Court appear to accept that they were alleging not so much a specific and imminent danger in their personal regard as a general danger in relation to all nuclear power plants; and many of the grounds they relied on related to safety, environmental and technical features inherent in the use of nuclear energy. Thus, in their reply to the questions put by the Court, the applicants linked the danger to their physical integrity to the alleged fact that “every atomic power station releases radiation during normal operation… and thus puts the health of human beings at risk”, and they concluded: To summarise, it needs to be said that, from the medical point of view, the operation of an atomic power plant involves a specific and direct risk to health both when the plant is working normally and when minor malfunctions occur.… [I]t is necessary to take a decision of principle in respect of nuclear energy. The operation of atomic power plants involves high risks and it may – and with a considerable degree of probability will – damage the property and physical integrity of those living in the vicinity. 53. To this extent, the applicants are seeking to derive from Article 6(1) of the Convention a remedy to contest the very principle of the use of nuclear energy, or at the least a means for transferring from the Government to the courts the responsibility for taking, on the basis of the technical evidence, the ultimate decision on the operation of individual nuclear power stations. As the applicants put it in their memorial, “if the authority

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responsible is to take proper account of such risks” – namely “a high residual risk of unforeseen scenarios and of an unforeseen sequence of events leading to serious damage” – “and assess whether the relevant back-up systems are acceptable, then it is required to be particularly independent, and only courts usually possess this independence… …”… 54. The Court considers, however, that how best to regulate the use of nuclear power is a policy decision for each Contracting State to take according to its democratic processes. Article 6(1) cannot be read as dictating any one scheme rather than another. What Article 6(1) requires is that individuals be granted access to a court whenever they have an arguable claim that there has been an unlawful interference with the exercise of one of their (civil) rights recognised under domestic law. In this respect, Swiss law empowered the applicants to object to the extension of the operating licence of the power station on the grounds specified in section 5 of the Federal Nuclear Act. It did not, however, give them any rights as regards the subsequent extension of the licence and operation of the station beyond those under the ordinary Civil Code for nuisance and de facto expropriation of property. It is not for the Court to examine the hypothetical question whether, if the applicants had been able to demonstrate a serious, specific and imminent danger in their personal regard as a result of the operation of the Beznau II power plant, the Civil Code remedies would have been sufficient to satisfy these requirements of Article 6(1), as the Government contended in the context of its preliminary objection. *** 55. In sum, the outcome of the procedure before the Federal Council was decisive for the general question whether the operating licence of the power plant should be extended, but not for the “determination” of any “civil right”, such as the rights to life, to physical integrity and of property, which Swiss law conferred on the applicants in their individual capacity. Article 6 §1 is consequently not applicable in the present case. *** 56. Before the Commission, the applicants also alleged a violation of Article 13 of the Convention on the ground that, in relation to the decision to renew the operating licence of the Beznau II nuclear power plant, no effective remedy was available to them under domestic law enabling them to complain of a violation either of their right to life under Article 2 or of their right to respect for physical integrity as safeguarded under Article 8. Article 13 provides: Everyone whose rights and freedoms as set forth in [the] Convention are violated shall have an effective remedy before a national authority notwithstanding that the violation has been committed by persons acting in an official capacity. 57. The Commission and the Government considered Article 13 to be inapplicable for the same reasons as for Article 6 § 1… 58. Article 13 has been consistently interpreted by the Court as requiring a remedy only in respect of grievances which can be regarded as “arguable” in terms of the Convention. 59. As pleaded, the applicants' complaint under Article 13, like that under Article 6(1), was directed against the denial under Swiss law of a judicial remedy to challenge the Federal Council's decision. The Court has found that the connection between that decision and the domestic law rights to protection of life, physical integrity and property invoked by the applicants was too tenuous and remote to attract the application of Article 6(1). The reasons for that finding likewise lead to the conclusion, on grounds of remoteness, that in relation to the Federal Council's decision as such no arguable claim of violation of Article 2 or Article 8 of the Convention and, consequently, no entitlement to a remedy under Article 13 have been made out by the applicants. In sum, as in the Balmer-Schafroth case the Court finds Article 13 to be inapplicable.

[E] Robert Azinian, Kenneth Davitian and Ellen Baca v. The United Mexican States (ICSID Case No. ARB(AF)/97/2), Award of 1 November 1999 (92) [Jan Paulsson (pres.), Benjamin R. Civiletti, Claus von Wobeser] [In October 1992, Mr. Azinian, writing as the President of Global Waste Industries, sent a letter to the Ayuntamiento, the Naucalpan city council, proposing his firm's services to address to the city's solid waste problem. Pursuant to Mexican law, whereby the state legislature has to approve such projects, the offer was presented to a legislative committee and eventually approved. In November 1993, a 15-year concession agreement was signed with DESONA, a new firm constructed for the purposes of the agreement. In January 1994, a new administration took over the Ayuntamiento. It observed that that there were some procedural irregularities relating to the conclusion and performance of the agreement. DESONA initiated proceedings before the State Administrative Tribunal. The claim was dismissed by a judgment upheld by subsequent appellate courts. In May 1997, DESONA initiated arbitration proceedings against the Government of Mexico under

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Chapter 11 of NAFTA.] (Citations selectively omitted) 101. The Arbitral Tribunal does not, however, wish to create the impression that the Claimants fail on account of an improperly pleaded case. The Arbitral Tribunal thus deems it appropriate, ex abundante cautela, to demonstrate that the Claimants were well advised not to seek to have the Mexican court decisions characterised as violations of NAFTA. 102. A denial of justice could be pleaded if the relevant courts refuse to entertain a suit, if they subject it to undue delay, or if they administer justice in a seriously inadequate way. There is no evidence, or even argument, that any such defects can be ascribed to the Mexican proceedings in this case. 103. There is a fourth type of denial of justice, namely the clear and malicious misapplication of the law. This type of wrong doubtless overlaps with the notion of “pretence of form” to mask a violation of international law. In the present case, not only has no such wrongdoing been pleaded, but the Arbitral Tribunal wishes to record that it views the evidence as sufficient to dispel any shadow over the bona fidesof the Mexican judgments. Their findings cannot possibly be said to have been arbitrary, let alone malicious. 104. To reach this conclusion it is sufficient to recall the significant evidence of misrepresentation brought before this Arbitral Tribunal. For this purpose, one need to do no more than to examine the twelfth of the 27 irregularities, upheld by the Mexican courts as a cause of nullity: that the Ayuntamiento was misled as to DESONA's capacity to perform the concession. 105. If the Claimants cannot convince the Arbitral Tribunal that the evidence for this finding was so insubstantial, or so bereft of a basis in law, that the judgments were in effect arbitrary or malicious, they simply cannot prevail. The Claimants have not even attempted to rebut the Respondent's evidence on the relevant standards for annulment of concessions under Mexican law. They did not challenge the Respondent's evidence that under Mexican law a public service concession issued by municipal authorities based on error or misrepresentation is invalid. As for factual evidence, they have vigorously combated the inferences made by the Ayuntamiento and the Mexican courts, but they have not denied that evidence exists that the Ayunamiento was misled as to DESONA's capacity to perform the concession. 106. At the presentation of the project to the Ayuntamiento in November 1992, where Mr Goldenstein “of Global Waste” explained that his company would employ some 200 people and invest approximately US$ 20 million, Mr Ted Guth of Sunlaw Energy – identified as a company to be associated in the creation of DESONA – also appeared and articulated some “essential elements” of the project… … 107. As indicated above (see paragraph 32), this prospect – apparently devoid of any feasibility study worth the name – strikes the Arbitral Tribunal as unrealistic. This was the grandiose plan presented to the Ayuntamiento, which was told at the same meeting that the city of Naucalpan would be given a carried interest of 10% in DESONA “without having to invest one single cent and that after 15 years it would be theirs.” One can well understand how members of the Ayuntamiento would be impressed by ostensibly experienced professionals explaining how a costly headache could be transformed into a brilliant and profitable operation. 108. The Claimants obviously cannot legitimately defend themselves by saying that the Ayuntamiento should not have believed statements that were so unreasonably optimistic as to be fraudulent. 109. So when the moment came, one year later, for the Concession Contract to be signed, an absolutely fundamental fact had changed: the Claimants had fallen out with Sunlaw Energy, who had disappeared from the project, as best as the Arbitral Tribunal can determine, by October 1993. 110. For the Claimants to have gone ahead without alerting the Ayuntamiento to this factor was unconscionable. The Arbitral Tribunal cannot believe that the matter was adequately covered by alleged oral disclosures; Article 11 of the Concession Contract states flatly that “[t]he Concessionaire is obligated to install an electricity generating plant which will utilize biogas out of Rincon Verde, Corral del Indio, or other.” (Claimants' Translation, Claimants' Memorial, Section 3, p. 22.) 111. It is more than a permissible inference that the original text of the Concession Contract had been prepared on the basis, from the Claimants' perspective, that they would be able to form an operating consortium, that they had envisaged a programme dependent on the contributions of such third parties, and that once the text had been approved by the legislature they did not wish to endanger what they had achieved by disclosing that key partners had defected. 112. The testimony of Mr Ronald Proctor, although he was proffered by the Claimants, was unfavourable to them. His written statement explains that during late October and early November 1993, he attended meetings with Naucalpan officials, including the Mayor,

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during which he explained that his company, BFI, was assisting DESONA and “would commit the necessary start-up effort, capital and operational expertise to DESONA in order to ensure the performance of the Concession Contract.” 113. There is no doubt about BFI's capacity; it is a billion-dollar company with unquestioned credibility in the industry. The point is rather that this testimony flatly contradicts an ostensible foundation of the Concession Contract with DESONA. There is not a shred of written evidence that Mexican officials were content to rely on DESONA because BFI was there, in effect, to do everything: start-up, funding, and operations. Quite to the contrary, the contemporaneous written evidence relating to the period prior to signature shows reliance on the representations of the Claimants as to their own capabilities. The Concession Contract itself does not contemplate assignments, subcontracts, or surrogates – let alone any suggestion that DESONA could ensure performance of the Concession Contract only if it found an able joint venture partner. 114. In a phrase, Mr Proctor's testimony, perhaps unintentionally, supports the conclusion that the Claimants' main effort was focussed on getting the Concession Contract signed, after which they intended to offer bits and pieces of valuable contract rights to more capable partners. 115. The Ayuntamiento was entitled to expect much more. 116. The Concession Contract says nothing about assignability. The Respondent has proffered evidence of Mexican law to the effect that public service concessions are granted intuitu personae to a physical person or legal entity on the basis of particular qualities. The Claimants have not contradicted this evidence. 117. The Claimants also sought to rely on an unsigned letter said to have been written by the previous Mayor of Naucalpan in March 1994. The substance of the letter is in support of the Claimants, who of course at that point in time were in imminent danger of losing DESONA's concession. The Respondent does not accept this document as genuine. But taking it as proffered by the Claimants, it is highly damaging to their case in connection with the alleged misrepresentations,… … 119. The only evidence the Claimants have to support their contention that they made adequate disclosures before signature of the Concession Contract – as is clear from their post-hearing “Closing Memorial” – is the self-serving oral assertion of Mr Goldenstein that he fully informed city officials in various unrecorded conversations. This evidence is not consistent with the record. It is rejected. 120. To resume: the Claimants have not even attempted to demonstrate that the Mexican court decisions constituted a fundamental departure from established principles of Mexican law. The Respondent's evidence as to the relevant legal standards for annulment of public service contracts stands unrebutted. Nor do the Claimants contend that these legal standards breach NAFTA Article 1110. The Arbitral Tribunal finds nothing in the application of these standards with respect to the issue of invalidity that appears arbitrary or unsustainable in light of the evidentiary record. To the contrary, the evidence positively supports the conclusions of the Mexican courts. 121. By way of a final observation, it must be said that the Claimants' credibility suffered as a result of a number of incidents that were revealed in the course of these arbitral proceedings, and which, although neither the Ayuntamiento nor the Mexican courts would have been aware of them before this arbitration commenced, reinforce the conclusion that the Ayuntamiento was led to sign the Concession Contract on false pretences. It is hard to ignore the consistency with which the Claimants' various partners or would-be partners became disaffected with them. A Mexican businessman, Dr Palacios, appears to have contributed US$ 225,000, as well as equipment, in the mistaken belief that he was making a capital contribution which would lead to his becoming a DESONA shareholder. On 5 June 1994 he brought a criminal action for fraud against Mr Goldenstein, requesting that the police be requested to arrest him on sight. Mr Proctor of BFI, although called as a witness by the Claimants, apparently recommended legal action against the Claimants when he found out that the two vehicles purchased with the proceeds of a loan from BFI were sold by DESONA without repaying the loan… 122. The list of demonstrably unreliable representations made before the Arbitral Tribunal is unfortunately long. The arbitrators are reluctant to dwell on it in this Award, because they believe that the Claimants' counsel are competent and honourable professionals to whom a number of these revelations came as a surprise… 123. The credibility gap lies squarely at the feet of Mr Goldenstein, who without the slightest inhibition appeared to embrace the view that what one is allowed to say is only limited by what one can get away with. Whether the issue was how non-U.S. nationals could de facto operate a Subchapter S corporation, how the importer of vehicles might identify the ostensible seller and the ostensible price to the customs authorities, or how a cheque made out to an official – as reimbursement of a luncheon – but endorsed back to the payer might still be presented as evidence of payment under a lease, Mr Goldenstein seemed to believe that such conduct is not only acceptable in business, but a sign of worldly competence.

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124. The Arbitral Tribunal obviously disapproves of this attitude, and observes that it comforts the conclusion that the annulment of the Concession Contract did not violate the Government of Mexico's obligations under NAFTA.

[F] Comments and Questions 1.

In The International Responsibility of States for Denial of Justice (1938), Alwyn Freeman explored the meaning of the term “denial of justice” in international law. Having noted that there is much uncertainty regarding the meaning, he described six categories that have evolved within the literature on international law: (1) For one school of thought it is considered as the equivalent of every international wrong committed to the prejudice of foreigners by any organ of the State. This is what is frequently referred to as the “broad” view. (2) According to a second, more usual definition of the term, it is limited to certain unlawful acts or omissions on the part of judicial authorities. Here, however, we encounter a variety of different conceptions as to the extent of the State's responsibility for judicial organs: (3) A minority group – composed principally of publicists in LatinAmerica – maintain that denial of justice must be understood in the procedural sense of a refusal of access to court, and that only in the contingency of such a refusal, (or its equivalent), can a diplomatic claim arise. (4) Still another group of writers, to whom reference has already been made, retain the meaning of denial of justice in municipal law but admit that inter-national responsibility is engaged by various other acts of judicial misconduct, including wrongful judgments. In this latter hypothesis, however, the expression “denial of justice” is considered by them as improper. (5) A few authorities contend that the proper sense of the term according to international practice is that of a failure on the part of an alien plaintiff to obtain redress for an earlier wrongful act committed either by a private person or by a State agent. (6) But the view which has come more and more into favor within recent years is that under which a denial of justice includes any failure on the part of organs charged with administering justice to aliens to conform to their international duties.

2.

Garcia-Amador's Rapporteur's Report observed that, although measures such as confiscation of property or other measures of a penal character can amount to a “denial of justice,” the possibility of a State incurring international responsibility is remote. A State can also be exempt from international responsibility on the basis of its “police power.” It also noted that the test of “arbitrariness” can be applied to methods and procedures to determine whether they result in a “denial of justice.” However, it observed, obvious examples such as discrimination against aliens or grave procedural irregularities are unlikely. Thus, it concluded: [I]t may be said that a State is under no obligation to adopt a method or procedure other than those provided for in the relevant provisions of municipal law. A State may even, where special circumstances require and justify such a course, depart from the usual methods and procedures, provided that in so doing it does not discriminate against aliens or commit any other act or omission which is manifestly “arbitrary”. In short, the State's freedom of action in regard to methods and procedures is in a sense wider than that it enjoys in regard to the grounds and purposes of expropriation.

3.

4.

For further discussion on the concept of denial of justice, see Glamis Gold Ltd v. United States, (ad hoc arbitration under the 1976 UNCITRAL Rules), Award of 8 June 2009, IIC 380, signed 14 May 2009 despatched 8 June 2009, supra p. 712; Neer v. Mexico (U.S.-Mexico Claims Commission, Oct. 15, 1926), 21 Am. J. Int'l L. 555 (1927) infra p. 795; International Law Commission, Articles on State Responsibility (2001) supra Part III.C; Jan Paulsson, Denial of Justice in International Law (2005). Is a denial of justice limited to procedural acts? Is there a concept of substantive denial of justice? If so, under what circumstances should it be engaged?

§8.06 ABUSE OF RIGHTS States that abuse their lawmaking powers as a means of avoiding contractual obligations are acting contrary to international law.

[A] Responsibility of the State for Injuries Caused in Its Territory to the Person or Property of Aliens – Measures Affecting Acquired Rights: Fourth Report by F.V. García Amador, [1959] 2 Y.B. Int’l L. Comm’n 1, U.N. Doc. A/CN.4/119 [See supra p. 589.]

[B] Karl-Heinz Böckstiegel, Arbitration and State Enterprises: A Survey on the 471 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

National and Internatioanl State of Law and Practice, 45-46 (Kluwer Law International 1984) (Citations selectively omitted) It is a generally accepted principle in both national and international law, already recognized by the Permanent Court of International Justice, that a state may not abuse legal forms and rights to evade obligation(abus de droit, Rechtsmißbrauch). This principle has also been applied in national laws with the effect that the corporate veil was lifted. It may in appropriate cases be applied by international arbitrators. Whether it is applicable will, as before national courts, always depend on the specific circumstances of the arbitration case. Though the principle of applicability is beyond doubt, it seems difficult to describe appropriate cases in the abstract. There is, however, a further and more specific application of that principle which may also be considered in international arbitration with state enterprises. When a state makes use of its powers of control and legislation to change the legal form of a state enterprise in order to evade the obligations of that state enterprise in a contract and an arbitration clause, this must be considered an abuse of rights. An example is the case Société des Grands Travaux de Marseille v. (East Pakistan Industrial Development Corporation), Bangladesh Industrial Development Corporation and the Republic of Bangladesh… It is only in international arbitrations in which public international law is the applicable law, or at least part of the applicable law, that the corporate veil between the state enterprise and the state itself may have to be lifted if a state has tried to evade its own obligations in public international law by letting one of its state enterprises perform functions which for the state itself would be a breach of public international law. This is a consequence of the well-known principle that a state may not excuse itself for breaches of obligations in public international law by reference to its own national law and therefore also not by reference to legal forms for state enterprises available in its own national law. An example is cited by Seidl-Hohenveldern: a state that has accepted an obligation in public international law to open an airport to foreign aircraft without discrimination may not fix excessive landing fees, even if they also apply to his own national airline, because the legal separation between that national airline and the state has to be disregarded, since the fees paid by that national airline are again income for the respective state and therefore an economic burden is placed only on foreign aircraft. Similar situations may arise in international arbitration in connection with those many investment protection treaties concluded between western industrialized states and third world states and also in connection with contracts concluded between states and foreign private investors if those states fulfil the requirements mentioned above in section 4.3.3 for the applicability of public international law.

[C] International Law Commission (ILC) Articles on State Responsibility (2001) [See supra p. 579 ff.]

§8.07 UNJUST ENRICHMENT The doctrine of unjust enrichment holds that when a party has been unjustly enriched at the expense of another party, the former must make restitution to the latter. A number of international tribunals have applied the doctrine of unjust enrichment as a general principle of international law.

[A] Christoph H. Schreuer, Unjustified Enrichment in International Law, 22 Am. J. Comp. L. 281, 281, 284-285, 289, 300-301(1974) A comparative examination of remedies for situations commonly referred to as unjustified enrichment in domestic legal systems, reveals a confusing variety of declarations of the highest degree of abstraction and of prescriptions of the most technical kind. Statements like: “A person who has been unjustly enriched at the expense of another is required to make restitution to the other,” will on account of their generality hardly afford a useful guideline for the everyday decision-maker. Taken as a broad equitable concept, such a principle could be claimed to underlie almost all provisions concerning wealth-transactions in any legal system, whether they be categorized under the headings of “property,” “contracts,” “trusts” or “torts”. At such a level of generality, it will have to be regarded as nothing more than an expression of noble sentiments inspiring the creators of the law. Undeniably a large portion of everyday commercial transactions aims at the enrichment of one person at the cost of another, under circumstances which are regarded as perfectly legitimate and within boundaries of acceptable business risks. *** How hopelessly open to manipulation a general concept of unjustified enrichment is, detached from specific prescriptions determining its application, is aptly illustrated by its use in the controversy over compensation for expropriated foreign property. Advocates of a duty to grant “adequate, prompt, and effective” compensation

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occasionally seek to bolster their case by contending that [t]he juridical justification for the obligation to pay compensation is to be found in the concept of unjust enrichment, which lies at the basis of the doctrine of acquired rights… *** On the other hand, lawyers less well disposed towards the idea of compensation have contended that it was chiefly the foreign investors against whom the principle should be applied. The conditions of exploitation of the host countries' resources, often based on “unequal treaties”, and the degree of the profits extracted, are seen as a basis for claims which have to be set off against the investors' demands, or will give an independent right to restitution. *** There are, however, certain specific international situations in which judicial practice has granted remedies to reverse accretions of wealth under circumstances in which contractual or delictual principles would have been unable to reach this result. These situations frequently involved, or were caused by, disruptions of normal international intercourse. Under such conditions of crisis or national distress, international law has traditionally tolerated considerable encroachments upon the rights and resources of third persons. In the absence of a claim for damages resulting from an illegal act, the persons affected were often left without a remedy to recover their losses. In cases of a clearly demonstrable benefit to the interfering party, calculable in terms of wealth, decisions have repeatedly granted indemnity to the extent of the actual profit gained. *** Remedies for the restitution of unjustified enrichment can serve as corrective measures in cases where a drastic rupture in an anticipated course of events has led to a lopsided control over assets which seems unacceptable to the international decision-maker. These conditions calling for relief may be brought about by a general crisis situation, an unexpected breakdown or disturbance of an agreed relationship or a fundamental change of social circumstances surrounding a still existing relationship. Where no specific blame giving rise to a responsibility for full reparation can be laid on either party, the usual solution is that each side must bear the losses sustained. However, where one party has demonstrably profited in terms of control over wealth, this solution can be suspended in favor of a different technique. Here the restoration of an economic equilibrium is not achieved, as with delictual remedies, by establishing the status quo ante of the deprived person at the cost of a wrongdoer, no matter what his profit, if any, has been. Rather, the previous economic position of the enriched party is re-established regardless of the extent of the deprivation suffered by the other side. In many cases this method of balancing the economic interests of litigants will produce useful and satisfactory results. However, it must be borne in mind that, with international law in its present state of development, restitution for unjustified enrichment can be considered hardly more than a decision-technique to be applied once the basic policy decisions have been made, and not a normative principle or general rule from which specific “correct” decisions can be logically derived. Most of the task of specifying its precise range of application by determining the types of situation in which restitution is to take place, is yet awaiting international practice. Only after these essential details have been elaborated and clarified, will it be possible to regard it as a coherent precept capable of guiding an international decision-maker.

[B] International Law Commission (ILC) Articles on State Responsibility (2001) [See supra p. 579 ff.]

[C] Factory at Chorzow (Germany v. Poland), Claim No. 13 (PCA), Judgment on the Merits of 13 September 1928, [1928] P.C.I.J. Series A – No. 17, 47 (1928) [See infra p. 967.]

[D] Arthur Nussbaum, The Arbitration Between the Lena Goldfields, Ltd. and the Soviet Government, 36 Cornell L. Q. 31, 50-51 (1950-1951) (93) [The following is an excerpt from the Lena tribunal's decision, reprinted in the article above.] (Citations selectively omitted) 22. Before drawing final conclusions upon the above-mentioned facts it is desirable to state the legal form in which Lena's claim was presented to the Court. It was admitted by Dr. Idelson, counsel for Lena, that on all domestic matters in the U.S.S.R. the laws of Soviet Russia applied except in so far as they were excluded by the contract, and accordingly that in regard to performances of the contract by both parties inside the U.S.S.R. Russian law was “the proper law of the contract,” i.e., the law by reference to which the contract should be interpreted. But it was submitted by him that for other purposes the general principles of law such as

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those recognized by Article 38. of the Statute of the Permanent Court of International justice at The Hague should be regarded as “the proper law of the contract” and in support of this submission counsel for Lena pointed out that both the Concession Agreement itself and also the agreement of June, 1927, whereby the coal mines were handed over, were signed not only on behalf of the Executive Government of Russia generally but by the Acting Commissary for Foreign Affairs, and that many of the terms of the contract contemplated the application of international rather than merely national principles of law. In so far as any difference of interpretation might result the Court holds that this contention is correct. 23. The company's claim was put thus. Lena made no claim for damages for any breaches of contract down to the time of the final claim, although it relied on them as part of the history of the case and as an answer to various claims of the Government. Its main claim it put in two alternative ways, preferably the second. The first was for damages for breach of contract – viz., the present value of the future profits lost by reason of the Government's acts and defaults. The second was for restitution to the company of the full present value of the company's properties, by which in the result, the Government had become “unjustly enriched.” This second formulation of the case, rested upon the principle of Continental law; including that of Soviet Russia, which gives a right of action for what in French’ law is called “Enrichissement sans cause”; it arises where the defendant has in his possession money or money's worth of the plaintiff's to which he has no just right. This right is recognized and enforced in Germany under Article 812 of the Civil Code. It is also recognized in Scottish law, but not fully in English law; although the English right of action “for money had and received” on “total failure of consideration” often leads to the same result. The principle was discussed and approved in, the British House of Lords in the Scotch case of Cantiare San Rocco S.A. v. Clyde Shipbuilding Company, Limited, 1924 Appeal Cases, p. 226. Counsel for Lena contended that the Government was, in fact, in possession, present and future, throughout the remainder of the Concession (25 years for Lenskoi and 45 years for the rest) of Lena's valuable properties, into which Lena had put £3,500,000 sterling, and from which Lena was entitled, if the Government had performed its contract, to great profits; and that, as the Government had wrongfully turned the company out of Russia, it obviously could show no “just cause for its enrichment.” 24. It follows that, as the question of “just cause” is in issue, it is material to consider the character of the Government's conduct in doing what the Court decides that it did. On that question the following facts are relevant: (a)

(b)

(c)

In the raid on December 15, 1929, a large number of documents throwing light on the best methods of working the difficult metallurgical processes and ore dressing, upon a knowledge of which the successful exploitation of the company's enterprises by anyone else would depend, were taken away by the Government. It is immaterial whether the documents were permanently retained or returned after a certain delay. At this time the company's greatest schemes of development of mines, flotation plants, metal extraction, furnaces, &c. covering vast areas of ground – at Sverdlovsk alone 21 acres – were nearly completed, and everything practically in working order – except for the final ascertainment of the best method of dealing with the zinc concentrates in the Altai. As Lena's counsel pointed out, these steps so taken by the Government were such as to promote the Five-Year Plan.

25. The Court finds as a fact that this state of affairs in which Lena found itself in February, 1930, brought about (in the words of Lena's telegram demanding arbitration) a “total impossibility for Lena of either performing the Concession Agreement or enjoying its benefits.” The Court further decides that the conduct of the Government was a breach of the contract going to the root of it. In consequence Lena is entitled to be relieved from the burden of further obligations thereunder and to be compensated money for the value of the benefits of which it had been wrongfully deprived. On ordinary legal principles this constitutes a right of action for damages, but the Court prefers to base its award on the principle of “unjust enrichment,” although in its opinion the money result is the same.

[E] Sea-Land Service, Inc. v. The Islamic Republic of Iran and Ports and Shipping Organization of Iran (IUSCT Case No. 33), Award No. 135-33-1 of 22 June 1984 (94) [Gunnar Lagergren (pres.), Mahmoud M. Kashani, Howard M. Holtzmann] (Citations selectively omitted) The Claimant in this case, Sea-Land Service Inc. (“Sea-Land”) is a corporation registered under the laws of Delaware in the United States engaged in the international transportation by water of containerised cargo. The Respondent Ports and Shipping Organization (“PSO”) is the governmental instrumentality in Iran charged with the administration and control of Iranian port facilities, and was throughout the period

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material to this claim under the direction of the Ministry of Roads and Transportation. The essence of Sea-Land's claim, filed on 16 November 1981, is that it was deprived by PSO of the right to continued use of a containerised cargo facility constructed and operated by it at the port of Bandar Abbas, and that it suffered losses as a result. *** (v) The prohibition of unjust enrichment A further alternative argument advanced by Sea-Land is that PSO or the Government was unjustly enriched at the expense of Sea-Land, and that Sea-Land should be compensated accordingly. The concept of unjust enrichment had its origins in Roman Law, where it emerged as an equitable device “to cover those cases in which a general action for damages was not available”. It is codified or judicially recognised in the great majority of the municipal legal systems of the world, and is widely accepted as having been assimilated into the catalogue of general principles of law available to be applied by international tribunals. The rule against unjust enrichment is inherently flexible as its underlying rationale is “to re-establish a balance between two individuals, one of whom has enriched himself, with no cause, at the other's expense.” Its equitable foundation “makes it necessary to take into account all the circumstances of each specific situation.” It involves a duty to compensate which is entirely reconcilable with the absence of any inherent unlawfulness of the acts in question. Thus the principle finds an obvious field of application in cases where a foreign investor has sustained a loss whereby another party has been enriched, but which does not arise out of an internationally unlawful act which would found a claim for damages. There are several instances of recourse to the principle of unjust enrichment before international tribunals. There must have been an enrichment of one party to the detriment of the other, and both must arise as a consequence of the same act or event. There must be no justification for the enrichment, and no contractual or other remedy available to the injured party whereby he might seek compensation from the party enriched. In the Landreau claim, the Arbitral Commission set up between the U.S.A. and Peru held that the Peruvian Government was bound to account to the Claimant on a quantum meruit basis for guano deposits worked by the Government as the result of discoveries he had communicated to it, even though the pre-existing contract was held to have been repudiated. B. The enrichment Opinions differ as to the basis of computation of damages. The predominant view seems to be that damages should be assessed to reflect the extent by which the state has been enriched. Judge Jimenez de Arechaga considers that where the “enriched” state has obtained no benefit, no compensation should be payable at all. Equity clearly requires that cognisance be taken of the de facto situation, and this explains why there is no discernible uniformity in the practice of international tribunals in this respect. Important factual circumstances to be taken into account are the level of investment; the period during which the foreign investor has been able to make a profit; and the benefit actually derived by the host country from its acquisition. It must not be overlooked that PSO had a long-term interest in the project: at the end of the six-year term of the Facility Agreement, on 28 November 1982, the facility, developed and improved by Sea-Land at its own expense, was to revert to PSO. Sea-Land stated at the Hearing that it was only on the understanding that a satisfactory level of profitability could be achieved, with PSO's co-operation, in those six years that Sea-Land was prepared to invest some three million dollars in setting up the container terminal. The efficiency and success with which Sea-Land and PSO operated it for some eighteen months is evident from the figures laid before the Tribunal in the Affidavit of Mr. Bos. SeaLand was thereafter able to continue its operations at a reduced level until August 1979. Thus from the beginning of August 1979 the container terminal was, in effect, at PSO's disposal – three years and four months before Sea-Land anticipated that the facility would revert to PSO. i) The use of the facility Sea-Land expresses its claim for damages in terms of restitutio in integrum. Sea-Land calculates that it would have achieved an average $6.4 million annual net revenue for the period until 31 December 1982. It seeks to recover, inter alia, future net revenues, representing the profit it could reasonably have been expected to make from its operation of the container facility had it continued in possession for the intended duration of the Facility Agreement. Compensation for unjust enrichment cannot encompass damages for loss of future profits. The Tribunal must aim instead to place a monetary value on the extent to which PSO was enriched by its premature acquisition of the facility.

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*** ii) Damages claimed by Sea-Land in respect of moveable property An application of the theory of unjust enrichment requires that Sea-Land be compensated for those items and assets left in Iran of which PSO or the Government obtained the use and benefit. It does not permit the Tribunal to compensate Sea-Land for the loss of unpaid debts, freight charges, and termination expenses, none of which resulted in the enrichment of PSO or the Government.

[F] Flexi-Van Leasing, Inc. v. The Government of the Islamic Republic of Iran (IUSCT Case No. 36), Award No. 259-36-1 of 13 October 1986 (95) [Gunnar Lagergren (pres.), Koorosh-Hossein Ameli, Howard M. Holtzmann] [The case arose out of lease agreements involving marine transport equipment allegedly entered into by Flexi-Van Leasing, Inc. and two companies, Star Line, Co. and Iran Express Lines, Co., allegedly controlled by the Iranian government. Flex-Van raised claims of expropriation, breach of contract, and unjust enrichment, all of which were dismissed by the tribunal. The following is the tribunal's discussion of the unjust enrichment claim.] (Citations selectively omitted) e) Unjust enrichment Finally, the Claimant bases its claim on the further alternative ground of unjust enrichment. The Claimant contends that the Government has been unjustly enriched through the retention and use of Flexi-Van's equipment. In this connection, it asserts that Government organizations took away containers, and that they were used by them and by private individuals for official and private purposes. The Claimant seeks compensation in an amount to be measured according to the terms of the lease agreements and that would thus equal the sum of the accounts receivable, the unpaid rentals and the replacement costs. The Government denies that it has been enriched by the containers that the Claimant left in Iran. The concept of unjust enrichment appears in various forms in the different legal systems of the world, including Iran and the United States. The Tribunal has confirmed that “[i]t is codified or judicially recognized in the great majority of the municipal legal systems of the world, and is widely accepted as having been assimilated into the catalogue of general principles of law available to be applied by international tribunals”. The Tribunal has observed that, “[t]his concept represents a principle based on justice and equity”. “The rule against unjust enrichment is inherently flexible as its underlying rationale is ‘to re-establish a balance between two individuals, one of whom has enriched himself, with no cause, at the other's expense’. Its equitable foundation makes it necessary to take into account all the circumstances of each specific situation”. Before the principle of unjust enrichment can be applied to this claim, the effect of the lease agreements on this cause of action must be considered. The Tribunal has ruled earlier that a substitute right of action based on unjust enrichment does not arise where a contract binding on both parties exists. In that circumstance “the issue of whether a performance of the contract results in any ‘enrichment’ of a party and whether such enrichment is ‘unjust’ in relation to the other party, cannot be decided without specifically determining the contractual rights and obligations of the parties.” The sole Respondent in the present Case, the Government of Iran, was not a party to any of the lease agreements, which were concluded between the Claimant and Star Line and Iran Express respectively. Thus, the existence of those agreements does not form an obstacle to the Claimant's bringing a claim for unjust enrichment against the Respondent Government. It is inherent in the principle of unjust enrichment that there must have been an enrichment of one party to the detriment of the other. Where there is no “beneficial gain” to the party allegedly enriched, the remedy of unjust enrichment is not available. When this theory is relied on to engage a state's international responsibility, the predominant view seems to be that damages for unjust enrichment should be measured in terms of the extent to which that State has been enriched. The benefit obtained by the enriched party is an indispensable element of the remedy of unjust enrichment. The Claimant is in accord with this when it states that the “Respondent, to avoid unjust enrichment at Flexi-Van's expense, must pay Flexi-Van the value of the benefits received by Iran and its controlled entities through their retention of the equipment”. While the Claimant argues that benefit in this sense “is the retention of property regardless of what the wrongdoer does with the property”, the Tribunal has held that compensation may be granted only if the Government – either itself or through its organs or departments – had the benefit and made actual use of the property left in Iran. To support the assertion of retention of the containers by the Government, the Claimant relies on the affidavit of Mr. Maass. Mr. Maass stated that late in 1980 and in 1981 “it became apparent that the containers were either being taken away by various government organizations from terminals and warehouse sites or even leased by the terminal operators to the Ministry of Agriculture, as I learned from Mr. Siyapoosh at Star

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Line Iran Company”. Mr. Maass went on to state that when travelling in the countryside he saw Flexi-Van containers “used by Iranians for storage purposes”, that he saw containers converted into housing for people, and that in one place he saw military units housed in containers. Finally, he stated that “I know that the Iranian army also took Flexi-Van… containers for military use”. The Government denies that it was enriched by containers that the Claimant left in Iran. It asserts that the Claimant, through its agent, segregated new and valuable containers from old and dilapidated equipment and exported only the former while leaving the latter behind in Iran. The Government sees this confirmed by the statement of Mr. Maass that he “took note of the condition of each container and recommended to Flexi-Van which pieces of equipment to try to recover”. Further, the Government has proposed that the Claimant may recover 149 containers from Star Line provided that the Claimant indemnifies the Government against any third party claims, bears the removal costs and reimburses Star Line for the costs incurred in safeguarding the containers. With respect to Iran Express, the Government contends that all the assets of Iran Express were destroyed in attacks by the Iraqi troops on the port of Khorramshahr that began in September 1980. Mr. Maass, on whose affidavit the Claimant relies in this respect, has given no figures as to the number of containers he observed or knew were in the possession of the Government. As to those containers that Mr. Maass stated he saw being used by private persons or companies, the Government cannot be deemed to have derived any benefit therefrom. With regard to the containers that Star Line is alleged to have leased to the Ministry of Agriculture – which Mr. Maass stated he learned from a representative of Star Line's Worker's Council – the use of such containers would not constitute an unjust enrichment of the Government, for if there were such a lease the Ministry would have paid rental to Star Line. Only the instance where Mr. Maass stated he saw military units housed in containers could constitute actual use of Flexi-Van equipment by the Government. To similar effect is Mr. Maass' statement that “it became apparent that the containers were… being taken away by various government organizations”. The record also includes a telex, dated 21 February 1980, in which Uiterwyk Corporation, acting on behalf of “Iran Express Lines” and “Iran Express Terminal Corp.” as well as various unnamed “container lessors”, demanded the return of certain containers said to be in the possession and use of the Ports and Shipping Organization at Port Khorramshahr. That telex, however, does not specify whether these containers were owned by the Claimant or by some other company, and, therefore, does not evidence that the Government had the use and benefit of the Claimant's equipment. Thus, the only evidence on this point is the above-described affidavit of Mr. Maass, the Claimant's agent during the relevant period. In weighing that affidavit, the Tribunal observes that his statements about the whereabouts, identity, and quantity of the containers are so general and imprecise as to be incapable of supporting a fair assessment of the amount of enrichment, if any. The Claimant did not present Mr. Maass at the Hearing as a witness, so it was impossible to question him and thereby, perhaps, clarify the matter. In these circumstances, the Tribunal could not, in justice, base a monetary award on such a vague affidavit, unexplained by oral testimony. To do so would be arbitrary and improper. Accordingly, the Tribunal finds that the claim for unjust enrichment must be dismissed. Although the Claimant has not expressly made this argument, it may be inferred from the amounts claimed that it considers the Government also to have been unjustly enriched to the extent that Star Line's and Iran Express' debts were not paid. However, in the absence of further clarification, the Tribunal is not prepared to interpret the unjust enrichment claim as formulated, based on the fact “that the Government has been unjustly enriched through the retention and use of Flexi-Van's equipment”, as encompassing a claim for unpaid debts.

[G] Schlegel Corporation on behalf of Schlegal Linign Technology GmbH v. National Iranian Copper Industries Company (IUSCT Case No. 834), Award No. 295834-2 of 27 March 1987 (96) [Robert Briner (pres.), George H. Aldrich, Hamid BahramiAhmadi] [Claimant Schlegal Corporation agreed, as a subcontractor, to construct a Terminal Resevoir for a project to supply water for the Sar Cheshmeh copper mine and processing plant. The project was managed by the National Iranian Copper Company (“Copper Company”) and its engineers Binnie and Partners (“Binnie).] (Citations selectively omitted) 5. … Both the Sub-Contract Specification and the Main Contract represented that Schlegel was a “nominated Sub-Contractor” to whom, according to the Main Contract, the Copper Company was entitled to pay directly should the Contractor Fassan fail to pay. Were the Copper Company to effect such a direct payment it was entitled to deduct any amount so paid from any amounts due to be paid by it to Fassan. Schlegel asserts that these provisions induced it to enter into the contract with Fassan because they acted as an assurance that the Copper Company stood behind Fassan's obligations. 6. By the end of June 1976, Schlegel had substantially completed the installation of the reservoir lining. In October of 1976, however, wind damage to the lining occurred,

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resulting in a dispute over who should bear the costs for the necessary remedial work. This dispute was resolved in a meeting of the representatives of Fassan, Binnie, and Schlegel on 4 and 5 May 1977 at which Schlegel agreed to undertake the remedial work. It also undertook to meet the costs related to a portion of the remedial work. This agreement was telexed to the Copper Company. 7. On 16 November 1977, Binnie issued its Maintenance Certificate signifying that all of Schlegel's work had been satisfactorily completed and that Fassan's obligations to the Copper Company under the Main Contract in that regard had ceased. Schlegel received from Binnie, at the same time, the Engineers' measurement of Schlegel's work and the resulting financial calculations of the gross value of Schlegel's work. On 8 February 1978, Fassan, at Schlegel's request, provided Schlegel with a statement of the total balance due to Schlegel. (97) Basing its own calculations on Binnie's measurements, Fassan's statement showed a balance due of 12,934,124 rials, or 497,466 Deutschmarks at the contractually agreed rate of exchange. 8. Schlegel made numerous attempts to secure payment of the balance. In December 1980, when the Claimant discovered that Fassan had filed for bankruptcy, the Claimant registered a bankruptcy claim in Iran. In March 1981, the bankruptcy proceedings were lifted, and the Claimant resumed its attempts to collect from Fassan and the Copper Company. These attempts culminated in a telex on 23 September 1981 from the Claimant to the International Legal and Financial Claims Committee of Bank Markazi in Iran, asking for assistance in expediting payment. Evidently informed of that telex, Fassan wrote to Bank Markazi on 11 October 1981, explaining that it did owe the sum claimed by Schlegel and would pay Schlegel when it received from the Copper Company the outstanding amount due on the water supply project, of which the money owed to Schlegel was a portion. Neither the Copper Company nor Fassan ever paid Schlegel nor did the Copper Company ever pay Fassan the amount due to Schlegel. *** 10. Of the alternative grounds on which the Claimant has based its claim, the ground of unjust enrichment is the only one in which the Tribunal finds merit in this Case. The Claimant alleges that Schlegel had, pursuant to its contractual obligations, carried out the lining on the reservoir belonging to the Copper Company, including the subsequent repair works on it. The Claimant has alleged further that Schlegel had not been completely reimbursed either by the Copper Company or Fassan for the material provided and work performed. It, therefore, argues that by retention and enjoyment of the lining, the Copper Company was unjustly enriched to the extent of sums still owed to Schlegel. 11. As the Tribunal has confirmed on numerous occasions, the concept of unjust enrichment appears in various forms in the different legal systems of the world and “is widely accepted as having been assimilated into the catalogue of general principles of law available to be applied by international tribunals.” 12. The Copper Company, however, argues as a threshold issue that such a claim based on unjust enrichment cannot be asserted in this situation where both, Schlegel and the Copper Company, had separate contracts with Fassan. The existence of the contract with Fassan, according to the Respondent, limits Schlegel's recourse to its remedies under that contract and eliminates the subsidiary or alternative basis for recovery of unjust enrichment against the Respondent. 13. The Tribunal has indeed ruled earlier that a substitute right of action based on unjust enrichment does not arise where a Contract binding on both parties exists, because in that situation, “the issue of whether a performance of the Contract results in any ‘enrichment’ of a party and whether such enrichment is ‘unjust’ in relation to the other party, cannot be decided without specifically determining the contractual rights and obligations of the parties.” In the same vein, the Tribunal, in setting out guidelines to the availability of principles of unjust enrichment, has stated that “[t]here must be… no contractual or other remedy available to the injured party whereby it might seek compensation from the party enriched.” In this Case, however, the Parties have no contractual rights or obligations to each other and Schlegel has no contractual or other remedy against the Copper Company, the party enriched. Moreover, in an earlier case, the Tribunal allowed a claim based on unjust enrichment to be made in a situation where the claimant and the respondent, contractually unrelated, both had contracts with a third party against whom the claimant had a direct contractual remedy. See Benjamin R. Isaiah and Bank Mellat, Award No. 35-219-2 (30 March 1983). The Tribunal recognizes, however, that the absence of a binding contract between the party enriched and the party impoverished does not necessarily make available remedies based on unjust enrichment, particularly in construction sub-contract cases. In a situation somewhat similar to the present case, the Tribunal held that “[t]he circumstances of the instant case have not been shown to be such as to justify any exception from the established principle that generally a subcontractor has no direct right as against the party with whom the contractor has a Contract.” 14. The Tribunal has observed, furthermore, that the rule against unjust enrichment “represents a principle based on justice and equity and therefore ‘makes it necessary to take into account all the circumstances of each specific situation.”’ Whether or not the

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relationship among Fassan, Schlegel, and the Copper Company may give rise to a claim based on unjust enrichment can only be determined through examination of the particular circumstances of the Case. 15. It is inherent in the principle of unjust enrichment that there must have been an enrichment of one party to the detriment of the other. In this Case there is no dispute that the Copper Company was enriched by Schlegel's provision and installation of the reservoir liner, an integral part of the project and specified expressly by the Copper Company itself. The Copper Company was also clearly enriched by the remedial work performed by Schlegel as a result of dispute resolution requested by the Copper Company, the outcome of which was reported to it. Finally, the Tribunal notes that the Copper Company obtained the benefit of a 10-year warranty on the liner provided for in the Sub-Contract Specification. That document states that, at the completion of the SubContract performance, the warranty was to be transferred to the benefit of the Copper Company. 16. The Tribunal has observed that for a claim of unjust enrichment to succeed, the enrichment must be sufficiently direct. As the Tribunal stated it, the enrichment of one party and the detriment of the other “both must arise as a consequence of the same act or event.” The Tribunal finds such a direct enrichment here. The Copper Company had itself provided for the reservoir liner specifications in the Main Contract's Specification and Bill of Quantities. The Copper Company's consulting engineers Binnie had ordered Fassan to make Schlegel a “nominated sub-contractor” as defined in the Main Contract. Binnie exercised supervisory authority over Schlegel. When Schlegel had performed its work, the result was that the Copper Company had acquired a reservoir lining to its specifications provided by a company it had effectively nominated to do work supervised and approved by its own engineers. 17. The Tribunal finds that the enrichment was and remains unjust. The evidence is clear that the Copper Company has never paid the balance due for Schlegel's work. Nor is there any doubt, given Binnie's issuance of the Maintenance Certificate, that Schlegel's work had been satisfactorily completed… The Tribunal holds, consequently, that the Copper Company has been unjustly enriched and must therefore pay Schlegel the balance due of 12,934,124 rials. 18. In reaching this conclusion, the Tribunal notes that Schlegel made reasonable efforts under difficult circumstances to attempt to recover the sums owed to it. Taking into account the relations of the parties and the other circumstances of this Case, and in the absence of any evidence that the Copper Company had good cause for non-payment to Fassan or directly to Schlegel (which it was entitled to do without risk of double liability), the Tribunal cannot conclude that the Copper Company met the requirements of good faith in meeting its contractual obligations.

[H] Lockheed Corporation v. The Government of Iran, The Ministry of War & The Iranian Air Force (IUSCT Case No. 829), Award No. 367-829-2 of 9 June 1988 (98) [Robert Briner (pres.), George H. Aldrich, Seyed K. Khalilian] (Citations selectively omitted) 1. This claim was filed by LOCKHEED CORPORATION (“Lockheed”) to recover losses allegedly sustained by three of its corporate divisions in the course of their business activities with the Respondents. Lockheed is a California corporation primarily engaged in the production, sale, and maintenance of aircraft and aerospace equipment. *** 7. Claim Two(D) involves the services of two Lockheed personnel hired by the United States Navy through a Foreign Military Sales (“FMS”) contract with Iran to support the IAF's P-3F program. Lockheed alleges that after the expiration of the FMS contract, and at IAFrequest, these two personnel continued to perform their duties for seven months. Based on a theory of quantum meruit, Lockheed seeks to recover U.S. $101,602.60 as the reasonable value of the services rendered during the seven months. The IAF defends its non-payment by alleging that there is no contractual basis to the claim, that it did not request the continued performance of these personnel, and that they in fact did not perform any services for the IAF after the expiration of the FMS contract. *** Claim Two (D) *** 2. The Merits 63. Whether the principle of unjust enrichment justifies recovery under the circumstances presented requires consideration of several issues. First, as the Tribunal has held in other Cases, the Claimant must establish that there is no valid and enforceable contract on which an action for damages could be based. See, Dames & Moore and The Islamic Republic of Iran, Award No. 97-54- 3 (20 December 1983). In the present Case, this is not in dispute. Second, the Claimant must establish that the Respondent has been enriched at the Claimant's expense, the extent of such enrichment and that it would be unfair for the

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Respondent not to pay for the benefits it has received. Without deciding whether the Respondent has been enriched, the Tribunal finds that any benefits which may have been received by the IAF were conferred by Lockheed at its own peril. By unilaterally deciding to continue the service without first arranging alternative payment arrangements with the IAF, Lockheed accepted the risk that it might encounter difficulty in recovering payment. Although such continued performance may have represented a sensible commercial decision, it is nonetheless clear that, while Lockheed was aware of the risks during the months its performance continued, it took no action to resolve the matter with the IAF until after its performance ceased. It may not now avoid the adverse consequences of the risk it voluntarily undertook by claiming it was unjust for the IAF to have received the benefit of the service, which there is no evidence the IAF requested. Accordingly, the claim is rejected.

[I] Beyeler v. Italy, Judgment of the European Court of Human Rights of 5 January 2000, Application No. 33202/96, ECHR 2000-I 57 [In 1977, Mr. Beyeler, a Swiss national, purchased a Vincent Van Gogh painting called “Portrait of a Young Peasant” for nearly 310,000 euros, through an intermediary without, however, disclosing to the vendor that the painting was being purchased on his behalf. Consequently, the sale agreement filed by the vendor with the Italian Ministry of Cultural Heritage in accordance with the requirements of Italian law did not mention Mr. Beyeler. In 1983, the Italian Ministry learned that Mr. Beyeler was the real purchaser of the painting. In May 1988, Mr. Beyeler sold the painting for $8,500,000 to an American corporation. In November 1988, Italy exercised its right of pre-emption and purchased the painting at the 1977 sale price, arguing that Mr. Beyeler had omitted to inform the ministry of the fact that in 1977 the painting had been purchased on his behalf. Consequently, Mr. Beyeler initiated proceedings against the Government of Italy before the European Commission of Human Rights. Having declared that there was no violation of Article 1 of Protocol No. 1 of the European Convention on Human Rights, the Commission referred the case to the European Court of Human Rights.] (Citations selectively omitted) 85. The applicant submitted lastly that the Italian State had indisputably made a financial gain at his expense. The compensation paid to him bore no reasonable relation to the value of the work, as it was required to do under the Court's case-law, and that evident dispropor-tionateness was also contrary to general principles of international law laid down by, inter alia, well-established international case-law. Thus, any expropriation of a non-national's property should not, among other things, be discriminatory and adequate compensation should be paid for it. The principle of unjust enrichment, applied by international case-law on many occasions, had also been undermined. *** [In paragraphs 107-119, the Court discusses whether there was compliance with Article 1 of Protocol No. 1 by assessing the following: 1) whether the measure complained of amounted to an interference with the applicant's right to the peaceful enjoyment of his possessions; 2) whether the interference was lawful; 3) whether the interference pursued a legitimate aim; and 4) whether a “fair balance” existed between the demands of the general interest of the community and the requirements of the protection of the individual's fundamental rights.] 5. Conclusion 120. The Court considers that the Government have failed to give a convincing explanation as to why the Italian authorities had not acted at the beginning of 1984 in the same manner as they acted in 1988, regard being had in particular to the fact that, under section 61(2) of Law no. 1089 of 1939 (see paragraph 69 above), they could have intervened at any time from the end of 1983 onwards and in respect of anyone “in possession” of the property (and thus without needing first to determine who the owner of the painting was). That is, moreover, apparent from the judgment of the Court of Cassation of 16 November 1995 (see paragraph 63 above). Thus, taking punitive action in 1988 on the ground that the applicant had made an incomplete declaration, a fact of which the authorities had become aware almost five years earlier, hardly seems justified. In that connection it should be stressed that where an issue in the general interest is at stake it is incumbent on the public authorities to act in good time, in an appropriate manner and with utmost consistency. 121. That state of affairs allowed the Ministry of Cultural Heritage to acquire the painting in 1988 at well below its market value. Having regard to the conduct of the authorities between December 1983 and November 1988, the Court considers that they derived an unjust enrichment from the uncertainty that existed during that period and to which they had largely contributed. Irrespective of the applicant's nationality, such enrichment is incompatible with the requirement of a “fair balance”. 122. Having regard to all the foregoing factors and to the conditions in which the right of pre-emption was exercised in 1988, the Court concludes that the applicant had to bear a disproportionate and excessive burden. There has therefore been a violation of Article 1

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of Protocol No. 1.

[J] Mobil Oil Iran Inc., et al. v. Government of the Islamic Republic of Iran & National Iranian Oil Company (IUSCT Case Nos. 74, 76, 81, 150), Award No. 31174/76/81/150-3 of 14 July 1987 (99) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [See supra p. 624.]

[K] Amco Asia Corporation and others v. Republic of Indonesia (ICSID Case No. ARB/81/1), Award of 5 June 1990, 1 ICSID Rep. 569, 607-608 (1993) (100) [Rosalyn Higgins (pres.), Marc Lalonde, Per Magid] [For summary of facts, see supra p. 722.] (Citations selectively omitted) 154. Amco advanced as its third cause of action the claim that Indonesia would be unjustly enriched if permitted to retain both the benefits of Amco's investment and the earnings which Amco could have obtained from such investment. Amco contended that P 747 the concept of unjust enrichment was recognised in the law of Indonesia and also in international law (Memorial, pp. 58-62). 155. Indonesia denied the applicability of the concept to the facts of the case as any beneficiary would have been PT Wisma. Indonesia further offered a legal opinion of Professor S. Gautama (Indonesia, Legal App. vol. II, tab. P) that there was no recognised right of unjust enrichment in Indonesian law. It was further argued, by reference to diverse authorities, that the concept of unjust enrichment was not a sufficiently specific principle of international law to sustain a claim by Amco (see Counter-Memorial, pp. 1803); and, by reference to a legal opinion of Professor C. Schreuer, that no international law tribunal had ever allowed a claim of unjust enrichment where the applicant was in breach of its obligations under the contract in issue (Indonesia, Legal App. vol. VIII, tab. XXX). For its part, Amco contended that international authority acknowledged the principle of unjust enrichment even if the investor's loss did not arise out of an internationally unlawful act (Reply, pp. 28-30). 156. The Tribunal notes that the beneficiary of any unjust enrichment (whether or not caused by illegal acts and whether or not Amco was itself in default) would have been PT Wisma and not Indonesia. It was PT Wisma that secured the benefit of the termination of PT Amco's entitlement to the share of the profits, once the hotel had been built and was operational. Any advantage to the Indonesian government was too indeterminate to be identified as an unjust enrichment to the State without pronouncing upon whether the factual circumstances for the application of the concept existed, the existence of the concept in Indonesian law or its scope in international law. The Tribunal finds that on this ground Amco's third cause of action fails.

[L] Charles N. Brower and Jason D. Brueschke, The Iran-United States Claims Tribunal 427-430 (Martinus Nijhoff Publishers 1998) (101) (Citations selectively omitted) The Tribunal also has awarded compensation when, having found all other theories of recovery to be unavailable, it has concluded that not to award compensation to the claimant would unjustly enrich the respondent… This theory is accordingly one of last resort, and the Tribunal correctly has noted that “such a claim may not be maintained when a valid and enforceable contract exists.” The rationale for this requirement was provided in T.C.S.B., Inc. and The Islamic Republic of Iran: Where a valid contract exists, unjust enrichment is a derivative, or at best a secondary alternative, legal theory to an action on the contract. While there are some precedents, particularly in the United States, for permitting a claimant, if he so chooses, to sue on the basis of unjust enrichment, rather than on the contract, the preponderance of authority is to the contrary. The Tribunal in that case noted in dictum, however, that

P 748

[t]his is not to say that the existence of a valid contract necessarily prevents recovery in other contexts. Thus, a claim may arise from performance going beyond the contract, or from a situation in which the parties to a contract have, by agreement between them, liquidated their original contractual relationship. Furthermore, the assets and liabilities of each party in connection with a contract, may be relevant for claims arising from measures affecting property rights. The Tribunal's views on unjust enrichment were set out initially in the award in Sea-Land Service, Inc. and The Islamic Republic of Iran. The Tribunal described the rule against unjust enrichment as being “inherently flexible,” which “‘makes it necessary to take into account all the circumstances of each specific situation’” because “its underlying

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rationale is ‘to reestablish a balance between two individuals, one of whom has enriched himself, with no cause, at the other's expense’.” Furthermore, unjust enrichment involves a duty to compensate which is entirely reconcilable with the absence of any inherent unlawfulness of the acts in question. Thus the principle finds an obvious field of application in cases where a foreign investor has sustained a loss whereby another party has been enriched, but which does not arise out of an internationally unlawful act which would found a claim for damages. As applied by international tribunals, the Tribunal found that the rule against unjust enrichment will be applied only when (i) there has been an enrichment of one party to the detriment of the other; (ii) both arise as a consequence of the same act or event; (iii) there is no justification for the enrichment; and (iv) no contractual or other remedy is available to the injured party whereby it might seek compensation from the party enriched. In Sea-Land the Tribunal denied claimant's contention that the Government of Iran expropriated its container terminal at Bandar Abbas by interfering with its operation, finding the interference to be due to the general civil unrest at the time… Despite this finding, the Tribunal awarded the claimant $750,000 as an approximate but “fair assessment” of compensation for the Ports and Shipping Organization's actual use and benefit from Sea Lands's facility on a theory of preventing unjust enrichment.

[M] Comments and Questions For further analysis of unjust enrichment as a principle of customary international law, see Ana Vohryzek, Unjust Enrichment Unjustly Ignored: Opportunities and Pitfalls in Bringing Unjust Enrichment Claims Under ICSID, 31 Loy. L.A. Int'l & Comp. L. Rev. 501 (2009).

§8.08 UNLAWFUL INTERFERENCE In some cases, interference with property not amounting to an expropriation has been

P 749 held to be prohibited under international law.

[A] Eastman Kodak Company and others v. The Government of Iran and others (IUSCT Case No. 227) and Eastman Kodak International Capital Company, Incorporated, a claim of less than U.S. $250,000 presented by the Government of the United States of America v. The Islamic Republic of Iran (IUSCT Case No. 12384), Award No. 329-227/12384-3 of 11 November 1987 (102) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [Rangiron was an Iranian subsidiary of Eastman Kodak company. It was established to distribute Kodak products in Iran and to operate a photo finishing lab.] (Citations selectively omitted) 9. On 4 November 1979 the United States Embassy in Tehran and its personnel were seized. On 10 November 1979 the two remaining expatriate officers of Rangiran, the General Manager, Mr. Joseph E. Murphy, and the Operations Manager, Mr. Patrick O'Gorman, both U.S. citizens, left Iran. Before leaving they appointed a management committee consisting of three of the four Rangiran employees who had managed Rangiran during the earlier evacuation. Mr. Murphy has stated that even after his departure he had as his “fulltime responsibility to try to work out the best solutions to the various problems that arose. In furtherance of that end [he] was in constant contact by telephone with Messrs. Paknejad and Chassebi, and to a lesser degree, Mr. Eftekhar. [He] received frequent reports from them on the status and activities of Rangiran.” 10. Rangiran held checking accounts at Bank Melli and Bank Sepah and an overdraft account, in effect a loan facility, at the Irano-British Bank (now Bank Tejarat). Sometime after 17 November 1979 Rangiran officials sought to withdraw money from one of Rangiran's bank accounts but were refused. Rangiran addressed an inquiry both to Bank Melli and Bank Sepah, to which the banks replied in late December 1979, advising Rangiran that all its bank accounts had been frozen by order of the “General Public Prosecutor of Islamic Revolutionary Republic of Iran” on 17 November 1979. The freeze was to be effective “till next instruction” from the General Public Prosecutor. 11. The Respondent Rangiran explained to the Tribunal that following the appointment of local Iranian management by the departing U.S. officials certain “devoted personnel” of the company were “doubtful about the performance of the said directors.” Accordingly, they “notified to the Follow-Up and Evaluation Board of the Revolutionary Council, Bonyad Mostazafan (Foundation for the Oppressed) and Revolutionary Public Prosecutor of their opinion.” According to Rangiran, the Revolutionary Council and the Bonyad Mostazafan sent representatives to the company but apparently initially took no action. Thereafter the following occurred, in Rangiran's words: Having noticed no change in the method of management, the personnel applied again to the Revolutionary Public Prosecutor, who, by an order blocked the Bank Account of Rangiran and required the key personnel to make

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P 750

available to the Revolutionary Public Prosecutor's office of all the vouchers for due examination before any payment was made. This order aimed at preventing any embezzlement and misappropriation of the public property and of the company's assets. From October to March, even the salary and allowances of the staff and certain expenditures were paid under the supervision of the Revolutionary Public Prosecutor. 12. Ten days after the freeze of Rangiran's bank accounts, on 27 November 1979, Rangiran's Workers' Council, an organization of Rangiran's employees, received a notice from the Investigation Department of the Attorney General's Office which provided that: Prior to final decision in respect of foreign companies especially American companies, we hereby inform the Council that you should temporarily supervise the importation, delivering and sale of the company's products. And, the company's official are bound to get the employees' council approval for the running of the company's affairs. In the case of observation of anything wrong, it should be reported to this office. 13. Mr. Murphy has further stated that the Workers' Council thereafter exercised virtually all management functions of the company including establishing prices, determining where remaining inventory should be sold, reviewing and approving all payments and expenditures, and setting the salary of management and employees. The Claimants allege that the shareholder-appointed managers were threatened with bodily harm if they refused to cooperate… 14. On 24 December 1979 the Revolutionary Council of the Islamic Republic of Iran appointed Mr. Akbar Khodakhah to supervise Rangiran's affairs. According to the letter of appointment, Mr. Khodakhah was “assigned, until further notice, to have complete supervision on the manner of operation of the workers council, the management, the financial affairs and good performance of Rangiran Photographic Company and to keep this [Revolutionary] Council informed of the manner of operations.” 15. The Respondents contend that Mr. Khodakhah remained as manager of Rangiran only “for a short period of time (less than two months).” The Claimants argue, however, that “although Mr. Khodakhah was physically present at Rangiran's offices only over a limited period, he exercised complete control, during that period and his authority was never revoked. [He] called meetings with all company supervisors and demanded reports and lists concerning sales, inventory and market demand.” In addition the Claimants allege that under Mr. Khodakhah's supervision a meeting was held and a vote taken as to whether the managers chosen by the shareholders should be retained or fired. The employees voted to retain the managers, but Mr. Murphy stated that “it was clear that they remained only at the pleasure of the Workers' Council and Mr. Khodakhah.” 16. On 10 March 1980 the shareholders of Rangiran held an Extraordinary General Meeting in the United States. At this meeting it was decided that Rangiran be placed in liquidation, and a Board of Liquidators was appointed. Rangiran's former outside accountant, Mr. Nezam Motabar, and his partner, Mr. Abbas Hoshi, were appointed by the Board of Liquidators to oversee the liquidation and, specifically, to negotiate termination agreements with the employees and arrange for the payment of liabilities out of realizable assets.

17. The Board of Liquidators decided to cease operations and delivered termination notices to all employees. These notices were initially rejected by the Workers' Council. In P 751 Rangiran's words, “the personnel decided to continue the company's business until the disposition of service pay of the employees as well as the future of the company was established.” Faced with this decision Rangiran's shareholders authorized Mr. Motabar to negotiate with the Workers' Council to resolve the question of termination pay. 18. It appears that ultimately negotiations between Mr. Davoud Beheshti, the head of the Workers' Council, (a) 103and Mr. Motabar were successful, and with the cooperation of the Workers' Council the liquidation proceeded. On 25 June 1980 Mr. Beheshti telexed Mr. Murphy notifying him that: We have agreed with all the employees to submit our final proposal for termination payment as follows: [listing conditions]. Your urgent response will be appreciated. 19. Two days later, on 27 June 1980, Eastman Kodak responded by telex to Mr. Beheshti “C/o Nezam Motabar, Price Waterhouse, Intercontinental Hotel, Tehran” rendering its “final proposal” for termination pay to the Rangiran employees. In all essential aspects this proposal corresponded to Mr. Beheshti's proposal. In late 1980 termination checks were issued to Rangiran's ex-employees. According to Mr. Murphy, despite the agreement termination payment was withheld by the Revolutionary Prosecutor from employees of the Bahai faith and certain higher-paid employees. 20. In mid-September 1980, according to Rangiran, “the company's office building was sealed up and the personnel were prevented from working at the order of the officials of the Public Prosecutor's office.” Rangiran adds that it was thereafter decided, apparently

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by the Government, that the representatives of the shareholders “be empowered with full authority for dissolution of the company” so long as the company appoint as a liquidator “one of the members of the company's Staff [i.e., Workers'] Council acceptable to the Public Prosecutor.” In fact, on 10 December 1980 the Board of Liquidators appointed by the shareholders of Rangiran addressed a telex to Mr. Hoshi. This telex stated, as follows: Communication to the office of the Attorney-General, Revolutionary Republic of Iran, from the Board of Liquidators of Rangiran… … 1. The Board of Liquidators of Rangiran… hereby appoints either Nezam Motabar or Abbas Hoshi acting jointly or severally with full power to act on behalf of the Board, provided that Davoud Beheshti, by virtue of his having been appointed by one of the offices of the Attorney General as its representative and having been responsible for the custody of the assets of the company since the departure of management, agrees to act jointly with either Nezam Motabar or Abbas Hoshi and to accept responsibility to implement the following instructions, namely to carry out the existing obligations of the Board of Liquidators to make payment of termination payments to the former employees of Rangiran… in accordance with the schedule of payments prepared by the Employee Council of Rangiran… and already submitted to approved and accepted by the said Board of Liquidators.

P 752

7. Such foregoing is an official decision of the Board of Liquidators of Rangiran… Any party in Iran asked to act upon the matters covered shall be entitled to rely upon this cable as authority for such action. *** 57. Based on the facts outlined above (see paragraphs 9-20, supra) Eastman Kodak, as the majority shareholder of Rangiran, alleges that Iran's actions with respect to Rangiran amounted to an expropriation of its shares in Rangiran and that Iran on that ground is liable to compensate Eastman Kodak for the value of those shares. Iran's defense to this claim is the same as the defense raised against the alleged control over Rangiran by Iran. 58. The question whether, for jurisdictional purposes, a company is controlled by Iran is distinct from that of whether a company has been expropriated. The Tribunal's determination that Rangiran was not an entity controlled by Iran as of 19 January 1981, however, precludes a finding that Iran's interference in Rangiran's affairs amounted to an expropriation of the Claimant's shareholders' rights in Rangiran as of that date. The Tribunal further finds that the facts in this Case do not warrant a finding that Eastman Kodak was deprived of its ownership rights. It is undisputed that the legal title to the shares was unaffected by Iran's interference… In reaching this decision the Tribunal has attached particular importance to the fact that the Claimant, as majority shareholder, was able effectively to decide to liquidate and to declare Rangiran bankrupt at points in time significantly later than the occurrence of the events which the Claimant contends caused the loss of its shareholding interest. 59. The fact that Iran's interference did not rise to the level of an expropriation or of a deprivation of ownership rights does not, however, preclude the Tribunal from considering whether the interference established here was such as to constitute “other measures affecting property rights” as contemplated by Article II, paragraph 1, of the CSD. See Foremost, supra, at 32. Such measures, while not amounting to an expropriation or deprivation, may give rise to liability in so far as they give rise to damage to the Claimant's ownership interests. 60. The Tribunal is satisfied that the Claimant's claim for expropriation must be taken to include a claim for a lesser degree of interference with its property rights. 61. The Tribunal determines that an interference of the type described above exists in the present Case, and that this interference is attributable to Iran. The remaining issue for the Tribunal is therefore to determine whether such an interference has caused damage to Eastman Kodak and what compensation, if any, consequently is due to the latter.

[B] Comments and Questions 1.

2. P 752

The conclusion of this chapter's examination of unlawful interference as a mode of expropriation underlines the fact that it is not the modality of taking but rather the interference with the property of an alien that sounds as an expropriation in international law. Can interference by non-state actors in a system with the consequence that it reduces significantly the economic value of an enterprise by a foreign investor be attributed to the state as an expropriation? If so, under what circumstances?

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1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16)

17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) 29) 30) 31) 32) 33) 34) 35) 36) 37) 38) 39) 40) 41) 42)

Reproduced with the permission of Koninklijke Brill NV. Reproduced with the permission of the American Society of International Law via the Copyright Clearance Center. Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 428-30 (1964). CME Czech Republic B.V. v. Czech Republic, Final Award of March 14, 2003, paras. 49798. Mondev International Ltd. v. United States of America, ICSID Case No. ARB(AF) 99/2, para. 117 (Oct. 11, 2002). Reproduced with the permission of the Penn St. Int'l L. Rev. Available at http://italaw.com/documents/santaelena_award.pdf (accessed 1 September 2013). By permission of Oxford University Press. All rights reserved. Reproduced with the permission of the Vanderbilt Journal of Transnational Law, who is the copyright holder. Available at http://italaw.com/cases/documents/1156 (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0728.pdf (accessed 1 September 2013). Generation Ukraine, Inc. v. Ukraine (ICSID Case No. ARB/00/9), Award of September 16, 2003, para. 20.22. By permission of Oxford University Press. All rights reserved. Schneider v. Kingdom of Thailand, 688 F.3d 68 (2d Cir. 2012). Available at http://www.italaw.com/sites/default/files/casedocuments/ita0902.pdf (accessed 1 September 2013). American Manufacturing and Trading, Inc. v. Republic of Zaire, ICSID Case No. ARB/93/I, at 28 (1997) [Annex W1l5). Article 11(4) of the Za'ire-United States bilateral investment treaty, much like Article 2(2) of the IPPA, provides that “[i]nvestment of nationals and companies of either Party shall at all times be accorded fair and equitable treatment and shall enjoy protection and security in the territory of the other party.” Id., at 28 [Annex WI [5]. AAPL v. Sri Lanka, lCSID Case No. ARB/87/3, at 545 (1990) [Annex W117; a digested version of the decision has also been provided at Annex E-M35]. AAPL v. Sri Lanka, at 546 (quoting Alwyn V. Freeman, Responsibility of States for Unlawful Acts of Their Armed Forces, 14 (1957)) [Annex WI 17; also Annex E-M35]. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.italaw.com/sites/default/files/casedocuments/ita0510.pdf (accessed 1 September 2013). Available at http://italaw.com/documents/santaelena_award.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/casedocuments/italaw1094_0.pdf (accessed 1 September 2013). © Permanent Court of Arbitration. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.italaw.com/sites/default/files/casedocuments/ita0236.pdf (accessed 1 September 2013). Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. The fact that years later (on 5 September 1981) the SPA was “nullified” by Iran pursuant to the Single Article Act of 8 January 1980 suggests that Respondents themselves also perceived no such abandonment had taken place. The Award correctly concludes that the SPA was not “frustrated or terminated at this time” (para. 111) by any cause including force majeure (para. 117). Available at http://www.italaw.com/sites/default/files/casedocuments/ita0900.pdf (accessed 1 September 2013). Thus in the Rudloff case, the council unilaterally terminated the contract and destroyed the building the Claimant was constructing on the land in question: (1905) 9 RIAA 255, 259. E.g., Libyan American Oil Company v. Government of the Libyan Arab Republic, (1977) 62 ILR 141, 189-90. See also Revere Copper & Brass, Inc. v. Overseas Private Investment Corporation (1978) 56 ILR 258. See the cases reviewed by GH Aldrich, The Jurisprudence of the Iran-United States Claims Tribunal (Oxford, Clarendon Press, 1996) ch. 5. See, e.g., Starrett Housing Corporation v. Government of the Islamic Republic of Iran (1987) 16 Iran-US CTR 112, 230-1 (paras. 361-2). See Shufeldt Claim, (1930) 2 RIAA 1083, 1097. This was a case of legislative invalidation of a concession agreement 6 years after its inception. Article 201 defines “measure” as including “any law, regulation, procedure, requirement or practice”. Available at http://www.italaw.com/sites/default/files/casedocuments/ita0734.pdf (accessed 1 September 2013).

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43) Available at http://www.iusct.net/Default.aspx. 44) © British Institute of International and Comparative Law. Reprinted with the

permission of Cambridge University Press.

45) Available at http://conventions.coe.int/Treaty/Commun/QueVoulezVous.asp?

NT=009&CL=ENG (accessed 19 December 2013).

46) Available at http://www.iusct.net/Default.aspx. 47) Available at http://www.iusct.net/Default.aspx. 48) Tippets v. Tams-Affa Consulting Eng’rs, (1984) 6 Iran-US CTR 219, 225-6; accord Int’l

49) 50) 51) 52) 53) 54) 55) 56) 57)

Sys. & Control Operations v. Indus. Dev. and Renovation Org., (1986) 12 Iran-US CTR 239, para. 97; Payne v. Iran, (1986) 12 Iran-US CTR 3, para. 22; Phelps Dodge Corp. v. Iran, (1986) 10 US CTR 121, para. 22. Available at http://www.iusct.net/Default.aspx. Available at http://www.italaw.com/sites/default/files/casedocuments/ita0584.pdf (accessed 1 September 2013). Available at http://italaw.com/cases/documents/282 (accessed 19 December 2013). Reprinted with permission of Professor Christie; published by Oxford Univesity Press for the Royal Institute of International Affairs, London. © 1994 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. Available at http://www.italaw.com/sites/default/files/casedocuments/ita0902.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/casedocuments/ita0358.pdf (accessed 1 September 2013). Available at http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:61994TJ0115 (accessed 1 September 2013). © European Union, http://eur-lex.europa.edu. Reproduced with the permission of the American Society of International Law via the Copyright Clearance Center.

58) Available at http://www.iusct.net/Default.aspx. 59) Available at http://italaw.com/documents/santaelena_award.pdf (accessed 1

September 2013).

60) © 1994 Cambridge University Press. Reprinted with the permission of Cambridge

University Press.

61) Reprinted with permission of Professor Christie; published by Oxford University

Press for the Royal Institute of International Affairs, London.

62) © 1994 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. 63) Available at http://www.italaw.com/sites/default/files/case-

documents/ita0678.pdf (accessed 1 September 2013).

64) Available at http://www.iusct.net/Default.aspx. 65) Available at http://www.iusct.net/Default.aspx. 66) International Legal Materials by American Society of International Law. Reproduced 67) 68) 69) 70) 71) 72) 73) 74) 75) 76) 77) 78) 79) 80) 81) 82) 83) 84) 85) 86) 87) 88)

with permission of American Society of International Law, in the format Republish in a book via Copyright Clearance Center. © 1994 Cambridge University Press. Reprinted with the permission of Cambridge University Press. © 1984 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. Available at http://www.iusct.net/Default.aspx. Please note that the copyright in the International Law Journal is held by the President and Fellows of Harvard College, and that the copyright in the article is held by the author. Reprinted by permission of Oxford University Press. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://italaw.com/documents/santaelena_award.pdf (accessed 1 September 2013). International Legal Materials by American Society of International Law. Reproduced with permission of American Society of International Law, in the format Republish in a book via Copyright Clearance Center. © 1984 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. © 1984 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. Available at http://www.iusct.net/Default.aspx. Available at http://www.italaw.com/sites/default/files/casedocuments/ita0184.pdf (accessed 1 September 2013). Available at http://italaw.com (accessed 19 December 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0460.pdf (accessed 1 September 2013). Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. © 1979 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. Reproduced with the permission of the Journal of Transnational Law and Policy, who is the copyright holder. Available at http://italaw.com/sites/default/files/case-documents/ita0378.pdf (accessed 1 September 2013). Available at http://www.state.gov/documents/organization/22094.pdf (accessed 1 September 2013).

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89) Available at http://www.state.gov/documents/organization/14442.pdf (accessed 1

September 2013).

90) © 1993 Grotius Publications Limited. Reprinted with the permission of Cambridge

University Press.

91) Available at http://hudoc.echr.coe.int/sites/eng/pages/search.aspx?i=001-58560

(accessed 1 September 2013).

92) Available at http://www.italaw.com/sites/default/files/case93) 94) 95) 96) 97) 98) 99) 100) 101) 102) a)

documents/ita0057.pdf (accessed 1 September 2013). Reproduced with the permission of the Cornell Law Quarterly. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Out of a total of 51,096,412 rials due, Schlegel had already been paid 38,162,288 rials by Fassan. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. © 1993 Grotius Publications Limited. Reprinted with the permission of Cambridge University Press. Reproduced with the permission of Koninklijke Brill NV. Available at http://www.iusct.net/Default.aspx. The liquidation report later referred to Mr. Beheshti as “the Trustee of the Attorney General Office.”

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Chapter 9: Violation of Investor Rights under Investment Treaties

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Publication

§9.01 INTRODUCTION

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

This Chapter explores the rights obtained by foreign investors and the obligations assumed by governments under investment treaties. While there are a few multilateral investment treaties of significance such as the NAFTA and the ECT, investors will more often find their investments protected by the almost 3000 BITs that have been signed in the past 40 years, with the number accelerating in the past decade.

Topics

Investment Arbitration

Bibliographic reference

'Chapter 9: Violation of Investor Rights under Investment Treaties', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 753 - 896

The BITs, as explained in Chapter 2, are remarkable documents that provide “a real measure of protection” to investors. Provisions that are lex specialis supersede any inconsistent customary international law and may embrace or exclude any incipient norms. Many BITs contain five parts: (1) definitions, which often include a broad definition of “investment”, (2) general obligations of the governments, (3) standards for expropriation and compensation, (4) standards for currency transfers, and (5) dispute resolution provisions. Certain miscellaneous provisions are also included. This structure varies in the BITs of different countries. The general obligations undertaken by the governments often require them to provide investments with (1) fair and equitable treatment, (2) full protection and security, (3) treatment no less favorable than that required by international law, (4) national treatment (i.e., treatment as favorable as that provided to nationals of the host country), and (5) most favored nation treatment (i.e., treatment as favorable as that given to nationals of other countries). In addition, governments agree in many BITs not to engage in conduct that restricts by arbitrary or discriminatory measures the operation, maintenance, expansion, or disposition of investments, and to provide effective means of asserting claims and enforcing rights in order to resolve any disputes arising out of the investments. Instead of the word “arbitrary”, some BITs use the words “unreasonable” or “unjustified”. Some BITs also mandate that governments observe all obligations undertaken toward investors, a clause that is often referred to as an “umbrella clause.” The most striking of these obligations is the requirement to provide fair and equitable treatment to investments. The NAFTA Free Trade Commission has taken the position in an Interpretive Declaration that this requirement in NAFTA Article 1105(1) is limited to the so-called “minimum standard of international law.” Many, if not most, BITs are worded differently than NAFTA in this respect, however, and Article 31 of the Vienna Convention on the Law of Treaties provides that treaty language is to be given its ordinary meaning in its context and in accord with the object and purpose of the treaty. The application of this standard is dependent on the individual circumstances of each case. In the investment arbitrations that have addressed this standard to date, tribunals have predominantly adopted legitimate expectations as providing content for this standard. A number of other tribunals have identified fair and equitable treatment with the stability P 754 of the legal and business framework. Still other tribunals have found that this standard requires transparency and consistency in a state's conduct toward investment. The provision for full protection and security protects, at a minimum, against physical damage caused by armed forces, police, insurgent movements, and civil commotion, but the standard does not provide a guarantee or insurance against damage. Governments are not liable on the basis of strict liability. The government is only required to use vigilance or due diligence to prevent injury to aliens, and it may be liable for negligence in failing to protect an investor's property. The standard may be broader than mere physical security, but its contours in this respect are not yet clearly defined. The provision for “treatment no less favorable than that required by international law” may act as a choice-of-law provision for actions under BITs, importing customary international law, and also provide a floor for treatment of investments. Investments must be treated in accordance with the standards set by a BIT, as a lex specialis, but such treatment cannot be less than that required by customary international law. This language might be equated to the so-called “minimum standard of international law”, a standard whose existence and content have been subjects of some controversy in international law. Although the term “arbitrary” is not defined in investment treaties, a high standard has been created for a finding of arbitrary measures by the ICJ. The ICJ defined the term “arbitrary” in a treaty of Friendship, Commerce and Navigation as the willful disregard of due process – an act that shocks or surprises a sense of judicial propriety. A violation by the government of its own laws was not deemed by the Court necessarily to be arbitrary within the meaning of the treaty. The umbrella clause requirement for governments to observe all obligations undertaken towards investments is not found in all BITs. Typically, a mere breach of contract by a state is not necessarily an international law claim, but it has been argued that this treaty provision may elevate a breach of at least some contracts to the level of a treaty violation, thus transforming a mere municipal law contract breach into an international law claim. Few BIT provisions have proved more controversial than the umbrella clause,

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and the precise meaning of this provision is not yet clear. The provisions for national treatment, most favored nation treatment and nondiscrimination have the effect of prohibiting any discriminatory treatment against foreign investors. Investors must be treated as favorably as domestic investors and investors from third countries. National treatment encompasses both measures that are discriminatory on the face of the legislation or regulatory decree, which are referred to as de jure discrimination, and those that are de factodiscriminatory as applied. Measures that are de jure discriminatory are prohibited by the national treatment standard. Those that are arguably de facto discriminatory must be further examined. For the latter category, the treatment afforded the foreign investor must be compared to that of domestic investors in the same economic or business sector. Canada has argued that the national treatment standard in NAFTA requires a test to determine if nationals have been disproportionately benefited. This may involve an averaging of the treatment afforded all domestic investors in the same sector as a benchmark for comparison of the treatment afforded foreign investors. Only if foreign investors are treated worse than the average treatment afforded nationals would the national treatment standard be violated. One NAFTA case has apparently accepted this disproportionate benefit test, while another rejected it. If de facto discrimination is found, then the panel must still look further to determine if P 755 circumstances require different treatment to protect the public interest or if the measures tend to undermine the trade-liberalizing policies of NAFTA. The most favored nation treatment (MFN) standard is applied by reference to the subject matter of the “basic treaty”. The basic treaty is the one that contains the MFN clause upon which reliance is placed. If a third-party treaty entered into by the party against whom the MFN clause is invoked relates to the same subject matter as the basic treaty and provides more favorable treatment as to a particular subject, then the more favorable treatment may be imported into the basic treaty by the MFN clause. One ICSID case held that an MFN clause may encompass procedural as well as substantive issues, and extended the MFN clause to include more favorable dispute settlement procedures found in a third-party treaty. There are limits, however, on importing different dispute resolution procedures from one treaty into another. BITs also typically define the conditions under which property may be expropriated. One BIT formulation provides that property may only be expropriated for a public purpose, in a non-discriminatory manner, according to due process of law, and upon payment of prompt, adequate and effective compensation. Compensation is required not only for an outright expropriation or nationalization (de jure expropriation) but also for measures tantamount or equivalent to expropriation (de facto or creeping expropriation). Typically, a standard for compensation is also provided. Compensation is sometimes defined as equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known. Some BITs provide that the compensation must be payable in a freely usable currency at the market exchange rate, be paid without delay, and include interest at a reasonable market rate. The legality of the expropriation is important because an illegal expropriation may result in enhanced damages for expropriation such as lost profits. Standards for transfers of funds are also established in many BITs. In these BITs, transfers may be allowed freely and without delay into and out of the host country's territory in a freely usable currency at the prevailing exchange rate. Reports of such transfers may be required by the local authorities. Very importantly, BITs also provide dispute settlement procedures. Some BITs require that a case be submitted in the first instance to the host government's local courts, but if the case has not been resolved within 18 months, then the investor may pursue an international arbitration. Other BITs allow the investor to file an international arbitration after a specified consultation period has elapsed, generally, three, six or 12 months. The investor may choose to submit its case to an ICSID arbitration, to the ICSID Additional Facility (which does not require that ICSID's jurisdictional requirements be satisfied) or to an ad hoc arbitration using the UNCITRAL Arbitration Rules. Many US BITs allow the investor to take the dispute either to international arbitration, on the one hand, or to local administrative tribunals or courts or to a previously-agreed dispute settlement procedure, on the other hand, but not both. This provision is referred to as the “fork-inthe-road” provision because it requires the investor irrevocably to choose its dispute settlement procedure. The Energy Charter Treaty (ECT) is an ambitious multilateral treaty designed to cover both international investment and international trade in the energy sector. More than 30 countries from Western and Eastern Europe and various countries carved out of the old Soviet Union are parties to the ECT. The ECT includes various provisions similar to BITs. Contracting governments commit to provide to foreign investments fair and equitable treatment, the most constant P 756 protection and security, national treatment, most favored nation treatment, and treatment no less favorable than that required by international law. Each country also agrees to observe any obligations it entered into with regard to foreign investments. Unreasonable or discriminatory measures are prohibited. Standards are also set for

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expropriations and transfers of fund. Unlike BITs, the ECT goes beyond investments and also encompasses issues relating to international trade and intellectual property to the extent they concern the energy industry. As with BITs, the ECT provides governmental consent to international arbitration of disputes relating to the government's obligations under the ECT. Specifically, an investor may choose arbitration before ICSID, the ICSID Additional Facility or under the UNCITRAL Arbitration Rules provided three months have elapsed since either party requested amicable settlement and the investor has not submitted the dispute for resolution to the courts or administrative tribunals of the host government or to a previously-agreed dispute settlement procedure. NAFTA Chapter 11 deals with investment disputes among the three North American parties – Canada, Mexico and the United States. It is part of a much larger treaty that deals with trade and other issues, as well as investment. Although NAFTA Chapter 11 contains the same basic protections for investors as BITs and the ECT, there are differences. For example, Article 1105(1) provides a different wording formula for fair and equitable treatment than many BITs. It is listed in NAFTA as being included within international law. Unlike the ECT, NAFTA does not include an umbrella clause. NAFTA Chapter 11 also includes a dispute resolution procedure that allows investors to take disputes to international arbitration either using the UNCITRAL Arbitration Rules or to the ICSID Additional Facility. Since Mexico and Canada are not presently parties to the ICSID Convention, the ICSID self-contained arbitral procedure does not apply. Thus, NAFTA awards are enforceable under the New York or Panama Conventions, and local courts are allowed to review the awards pursuant to the defenses in Article V of the Conventions. At least one NAFTA award – Metalclad Corp. v. Mexico – has been partially set aside by a court in Canada. With this background, the reader should find ample material in this Chapter to be able to analyze and understand the rights of investors and the obligations of governments that are derived from investment treaties.

§9.02 ABSOLUTE STANDARDS [A] Fair & Equitable Treatment [1] US Model Bilateral Investment Treaty (2012), (1) Article 2(2)(a) See Chapter 2, supra. [2] North American Free Trade Agreement (1993), (2) Article 1105(1) P 757 See Chapter 2, supra.

[3] Energy Charter Treaty (1994), (3) Article 10(1) See Chapter 2, supra. [4] Rudolf Dolzer and Christoph H. Schreuer, Principles of International Investment Law, 132, 134, 136-17, 139-140 (2nd ed., Oxford University Press 2012) (Citations selectively omitted) Fair and equitable treatment (FET) (B) Heterogeneity of treaty language Generalizations about the standard of fair and equitable treatment should be treated with caution. As with other standard clauses in investment treaties, no single frozen version exists. Indeed, the variations in this area are quite significant. Every type of clause has to be interpreted in accordance with Article 31 of the Vienna Convention on the Law of Treaties (VCLT), duly taking into account its context, and, as appropriate, its history. *** (d) Fair and equitable treatment and customary international law Considerable debate has surrounded the question of whether the FET standard merely reflects the international minimum standard, as contained in customary international law, or offers an autonomous standard that is additional to general international law. As a matter of textual interpretation, it seems implausible that a treaty would refer to a wellknown concept such as the ‘minimum standard of treatment in customary international law’ by using the expression ‘fair and equitable treatment’. If the parties to a treaty want to refer to customary international law, one would assume that they would refer to it as such rather than using a different expression. *** By far the most intensive discussion on the relationship of the FET standard to customary international law took place in the context of Article 1105(1) of the NAFTA. That provision,

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including its title, reads as follows: Article 1105: Minimum Standard of Treatment 1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security. This provision has been the subject of an official interpretation by the NAFTA Free Trade Commission (FTC), a body composed of representatives of the three states parties with the power to adopt binding interpretations. The FTC interpretation states that Article 1105(1) reflects the customary international law minimum standard and does not require treatment in addition to or beyond that which is required by customary international law. NAFTA tribunals have accepted the FTC interpretation. In addition, subsequent BIT P 890 practice of the United States and of Canada has followed the FTC interpretation. The US Model BITs of 2004 and of 2012, in their respective Articles 5(2), state that FET prescribes the customary international law minimum standard of treatment and that it does not require treatment in addition to or beyond that required by that standard. The authority of this practice, developed in the NAFTA context, is of limited relevance for the interpretation of other treaties because the NAFTA has feautes not shared by other treaties: Article 1105 refers to the ‘Minimum Standard of Treatment’ in its title. It also refers to ‘international law, including fair and equitable treatment’. In addition, it was the object of a binding interpretation by an authorized treaty body for the purposes of that treaty. In contrast to the NAFTA practice, arbitral tribunals applying other treaties not containing statements about the relationship of FET to customary international law have tended to interpret the relevant provisions autonomously on the basis of their respective wording. Some of these tribunals have, however, insisted that FET is nto different from the international minimum standard required by international law. *** (e) The evolution of the fiar and equitable treatment standard Obviously, the standard of FET is a broad one, and its meaning will depend on the specific circumstances of the case at issue. The Tribunal in Mondev v. United States pointed out that ‘[a] judgment of what is fair and equitable cannot be reached in the abstract; it must depend on the facts of the particular case’. Similarly, the Tribunal in Waste Management v. Mexico noted that ‘the standard is to some extent a flexible one which must be adapted to the circumstances of each case’. … The historical starting point for a discussion on the standard of treatment for foreigners is often seen in the Neer case of 1926. The case did not concern an investment but the murder of a US citizen in Mexico. The charge was that the Mexican authorities had shown a lack of diligence in investigating and prosecuting the crime. The Commission said: the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency. The Commission found that the facts did not show such a lack of diligence as would render Mexico liable and dismissed the claim. *** Subsequent tribunals have specifically distanced themselves from the very high threshold for a violation of international law formulated in Neer. They have repeatedly embraced the less stringent standard of theELSI case and have emphasized that they were dealing with an evolving concept. [5] BIT Cases [a] Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States (ICSID Case No. ARB (AF)/00/2), Award of 29 May 2003, (4) ¶¶ 153-157, 165-167, 172-174 [Horacio A. Grigera Naon (pres.), José Carlos Fernandez Rozas, Carlos Bernal Verea] [TECMED S.A., a Spanish company, claimed that the refusal by the Instituto Nacional de Ecología of Mexico (National Ecology Institute or “INE”) to renew TECMED's license to operate a waste confinement facility resulted in an act tantamount to expropriation in violation of the bilateral investment treaty entered into between Mexico and Spain (“BIT”). Mexico argued that the exercise of INE's regulatory power to grant and revoke licenses could not constitute a measure tantamount to expropriation and was not subject to the legal review of an international tribunal. In addition, Mexico claimed that TECMED had not fulfilled certain requirements for maintaining its license and had paid fines for improperly transporting toxic waste from a plant in Baja California. The Tribunal concluded that INE's revocation of the license was not actually based on concerns over a

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serious threat to public health or to the environment caused by TECMED's actions, but rather was a measure taken pursuant to political and social pressure from the residents of Hermosillo, Sonora, who did not want a toxic waste plant located in their city. The Tribunal stated that the consultations between INE and the governor of Sonora were centered around the location of a plant and the social and political concerns of INE, rather than in public health and environmental reasons. The Tribunal also pointed out that TECMED had agreed to re-locate its plant as long as it could continue to operate it until the location was finally chosen. The Tribunal found that the revocation of the license was an arbitrary measure that deprived TECMED of the value of its investment. The Tribunal granted damages of US$5,533,017.23, with interest.] (Citations selectively omitted) II. Fair and Equitable Treatment *** 153. This Arbitral Tribunal finds that the commitment of fair and equitable treatment included in Article 4(1) of the Agreement is an expression and part of the bona fide principle recognized by international law, (5) although bad faith from the State is not required for its violation … *** 154. The 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. 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. Any and all State actions conforming to such criteria should relate not only to the guidelines, directives or requirements issued, or the resolutions approved thereunder, but also to the goals underlying such regulations. The foreign investor also expects the host State to act consistently, i.e. without arbitrarily revoking any preexisting decisions or permits issued by the State that were relied upon by the investor to assume its commitments as well as to plan and launch its commercial and business activities. The investor also expects the State to use the legal instruments that govern the actions of the investor or the investment in conformity with the function usually assigned to such instruments, and not to deprive the investor of its investment without the required compensation. In fact, failure by the host State to comply with such pattern of conduct with respect to the foreign investor or its investments affects the investor's ability to measure the treatment and protection awarded by the host State and to determine whether the actions of the host State conform to the fair and equitable treatment principle. Therefore, compliance by the host State with such pattern of conduct is closely related to the above-mentioned principle, to the actual chances of enforcing such principle, and to excluding the possibility that state action be characterized as arbitrary; i.e. as presenting insufficiencies that would be recognized “… by any reasonable and impartial man,” or, although not in violation of specific regulations, as being contrary to the law because: …(it) shocks, or at least surprises, a sense of juridical propriety. (6) 155. The Arbitral Tribunal understands that the scope of the undertaking of fair and equitable treatment under Article 4(1) of the Agreement described above is that resulting from an autonomous interpretation, taking into account the text of Article 4(1) of the Agreement according to its ordinary meaning (Article 31(1) of the Vienna Convention), or from international law and the good faith principle, on the basis of which the scope of the obligation assumed under the Agreement and the actions related to compliance therewith are to be assessed. 156. If the above were not its intended scope, Article 4(1) of the Agreement would be deprived of any semantic content or practical utility of its own, which would surely be against the intention of the Contracting Parties upon executing and ratifying the Agreement since, by including this provision in the Agreement, the parties intended to strengthen and increase the security and trust of foreign investors that invest in the member States, thus maximizing the use of the economic resources of each Contracting Party by facilitating the economic contributions of their economic operators. This is the goal of such undertaking in light of the Agreement's preambular paragraphs which express the will and intention of the member States to “… intensify economic cooperation for the benefit of both countries …” and the resolve of the member States, within such framework, “… to create favorable conditions for investments made by each of the Contracting Parties in the territory of the other …”. 157. Upon making its investment, the fair expectations of the Claimant were that the Mexican laws applicable to such investment, as well as the supervision, control, prevention and punitive powers granted to the authorities in charge of managing such system, would be used for the purpose of assuring compliance with environmental

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protection, human health and ecological balance goals underlying such laws. *** 165. The Arbitral Tribunal considers that INE's behavior … with respect to Cytrar, which had a material adverse effect on Cytrar's ability to get to know clearly the real circumstances on which the maintenance or validity of the Permit depended – it must be recalled that Cytrar could not operate without this Permit – is not an unprecedented action. INE's denial to renew the Permit belongs to the wider framework of the general conduct taken by INE towards Cytrar, Tecmed and, ultimately, the Claimant's investment. 166. The Arbitral Tribunal finds that INE's behavior … conflicts with what a reasonable and unbiased observer would consider fair and equitable, and that this amounts to a violation of Article 4(1) of the Agreement. The Arbitral Tribunal also finds that such a behavior can be related, in terms of its prejudicial consequences, to the consequences of the Resolution; and that only after the Resolution was issued could the Claimant fully realize the breach of the Agreement incurred by such behavior and the resulting damage… 167. … This conduct should also be analyzed in light of the fact that throughout a relationship of such nature, necessarily prolonged in time, the Claimant was entitled to expect that the government's actions would be free from any ambiguity that might affect the early assessment made by the foreign investor of its real legal situation or the situation affecting its investment and the actions the investor should take to act accordingly. *** 172. The contradiction and uncertainty inherent in INE's actions as to Cytrar and Tecmed is evidenced, then, both in the initial stage of the processing of the necessary permits to operate the Landfill and when INE decided to put an end to such operation by means of the Resolution. Such actions belong to one and the same course of conduct characterized by its ambiguity and uncertainty which are prejudicial to the investor in terms of its advance assessment of the legal situation surrounding its investment and the planning of its business activity and its adjustment to preserve its rights. Such ambiguity and uncertainty are also present in the last stage of the relationship … which led to the Resolution, and added their harmful effects to the damage resulting from the denial to grant the Permit. Although INE's initial behavior was before the effective date of the Agreement and the Arbitral Tribunal will not pass judgment on whether at that stage such conduct, considered in isolation, amounted to a breach of the provisions thereof before its entry into force, it cannot be ignored, in light of the good faith principle (Articles 18 and 26 of the Vienna Convention), that the conduct of the Respondent between the date of execution of the Agreement (in view of the Respondent's determination to ratify it subsequently) and the effective date thereof, is incompatible with the imperative rules deriving from Article 4(1) of the Agreement as to fair and equitable treatment. This is particularly so since, according to Article 2(2) of the Agreement, it is applicable to investments made before its entry into force, a circumstance to be certainly considered when analyzing the conduct attributable to the Respondent that took place before that time but after the Respondent having executed the Agreement. INE's contradictory and ambiguous conduct at the beginning of the relationship between INE, Cytrar and Tecmed before the entry into force of the Agreement has the same deficiencies as those encountered in such conduct during the last stage of the relationship, immediately preceding the Resolution. Thus, INE's conduct during such time is added to the prejudicial effects of its conduct during the last stage, which breached Article 4(1) of the Agreement. 173. Briefly, INE's described behavior frustrated Cytrar's fair expectations upon which Cytrar's actions were based and upon the basis of which the Claimant's investment was made, or negatively affected the generation of clear guidelines that would allow the Claimant or Cytrar to direct its actions or behavior to prevent the non-renewal of the Permit, or weakened its position to enforce rights or explore ways to maintain the Permit. During the term immediately preceding the Resolution, INE did not enter into any form of dialogue through which Cytrar or Tecmed would become aware of INE's position with regard to the possible non-renewal of the Permit and the deficiencies attributed to Cytrar's behavior – including those attributed in the process of relocation of operations – which would be the grounds for such a drastic measure and, thus, Cytrar or Tecmed did not have the opportunity, prior to the Resolution, to inform of, in turn, their position or provide an explanation with respect to such deficiencies, or the way to solve such deficiencies to avoid the denial of renewal and, ultimately, the deprivation of the Claimant's investment. Despite Cytrar's good faith expectation that the Permit's total or partial renewal would be granted to maintain Cytrar's operation of the Landfill effective until the relocation to a new site had been completed, INE did not consider Cytrar's proposals in that regard and not only did it deny the renewal of the Permit although the relocation had not yet taken place, but it also did so in the understanding that this would lead Cytrar to relocate. 174. Such behavior on the part of INE, which is attributable to the Respondent, results in losses and damage (7) for the investor and the investment … The Respondent's behavior in such stages amounts, in itself, to a violation of the duty to accord fair and equitable

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treatment to the Claimant's investment as set forth in Article 4(1) of the Agreement and such behavior constitutes sufficient basis for the Claimant's claims founded on such violation to be admissible, given the time at which the damage occurred and the time when the damage and the violation of the Agreement were necessarily perceived by the Claimant (on the date of issuance of the Resolution)… [b] Saluka Investments B.V. v. The Czech Republic (ad hoc arbitration under the 1976 UNCITRAL Rules), (8) Partial Award of 17 March 2006, ¶¶ 297-309 [Arthur Watts (pres.), L. Yves Fortier, Peter Behrens] [The case arose from the privatization and reorganization process of the Czech banking sector following the fall of the Communist regime in 1990. Nomura, a large Japanese bank and Saluka's parent, acquired a stake in IPB, one of the four major Czech banks. In 2000, the Czech Government undertook a series of adverse actions against IPB which culminated in IPB being placed in forced administration, the Czech police physically searching IPB's headquarters and seizing documents and expelling management from the premises, and IPB's transfer to CSOB, another Czech bank. A subsequent Czech investigatory commission held that these actions were irregular but the transfer process was not interrupted. Saluka commenced UNCITRAL arbitration proceedings under the Netherlands-Czech Republic BIT, claiming that the Czech Republic had unlawfully expropriated its investment and breached the fair and equitable treatment standard.] (Citations selectively omitted) i) The Ordinary Meaning 297. The “ordinary meaning” of the “fair and equitable treatment” standard can only be defined by terms of almost equal vagueness. In MTD, the tribunal stated that: In their ordinary meaning, the terms “fair” and “equitable” … mean “just,” “even-handed,” “unbiased,” “legitimate.” On the basis of such and similar definitions, one cannot say much more than the tribunal did in S.D. Myers by stating that an infringement of the standard requires treatment in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. That is probably as far as one can get by looking at the “ordinary meaning” of the terms of Article 3.1 of the Treaty. ii) The Context 298. The immediate “context” in which the “fair and equitable” language of Article 3.1 is used relates to the level of treatment to be accorded by each of the Contracting Parties to the investments of investors of the other Contracting Party. The broader “context” in which the terms of Article 3.1 must be seen includes the other provisions of the Treaty. In the preamble of the Treaty, the Contracting Parties recognize[d] that agreement upon the treatment to be accorded to such investments will stimulate the flow of capital and technology and the economic development of the Contracting Parties and that fair and equitable treatment is desirable. The preamble thus links the “fair and equitable treatment” standard directly to the stimulation of foreign investments and to the economic development of both Contracting Parties. iii) The Object and Purpose of the Treaty 299. The “object and purpose” of the treaty may be discerned from its title and preamble… 300. This is a more subtle and balanced statement of the Treaty's aims than is sometimes appreciated. The protection of foreign investments is not the sole aim of the Treaty, but rather a necessary element alongside the overall aim of encouraging foreign investment and extending and intensifying the parties' economic relations. That in turn calls for a balanced approach to the interpretation of the Treaty's substantive provisions for the protection of investments, since an interpretation which exaggerates the protection to be accorded to foreign investments may serve to dissuade host States from admitting foreign investments and so undermine the overall aim of extending and intensifying the parties' mutual economic relations. 301. Seen in this light, the “fair and equitable treatment” standard prescribed in the Treaty should therefore be understood to be treatment which, if not proactively stimulating the inflow of foreign investment capital, does at least not deter foreign capital by providing disincentives to foreign investors. An investor's decision to make an investment is based on an assessment of the state of the law and the totality of the business environment at the time of the investment as well as on the investor's expectation that the conduct of the host State subsequent to the investment will be fair

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and equitable. 302. The standard of “fair and equitable treatment” is therefore closely tied to the notion of legitimate expectations which is the dominant element of that standard. By virtue of the “fair and equitable treatment” standard included in Article 3.1, the Czech Republic must therefore be regarded as having assumed an obligation to treat foreign investors so as to avoid the frustration of investors' legitimate and reasonable expectations. As the tribunal in Tecmed stated, the obligation to provide “fair and equitable treatment” means: 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. Also, in CME, the tribunal concluded that the Czech authority breached its obligation and equitable treatment by evisceration of the arrangements in reliance upon which the foreign investor was induced to invest. The tribunal in Waste Management equally stated that: In applying [the “fair and equitable treatment”] standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant. 303. The expectations of foreign investors certainly include the observation by the host State of such well-established fundamental standards as good faith, due process, and non-discrimination. And the tribunal in OEPC went even as far as stating that [t]he stability of the legal and business framework is thus an essential element of fair and equitable treatment. 304. This Tribunal would observe, however, that while it subscribes to the general thrust of these and similar statements, it may be that, if their terms were to be taken too literally, they would impose upon host States' obligations which would be inappropriate and unrealistic. Moreover, the scope of the Treaty's protection of foreign investment against unfair and inequitable treatment cannot exclusively be determined by foreign investors' subjective motivations and consideration. Their expectations, in order for them to be protected, must rise to the level of legitimacy and reasonableness in light of the circumstances. 305. No investor may reasonably expect that the circumstances prevailing at the time the investment is made remain totally unchanged. In order to determine whether frustration of the foreign investor's expectations was justified and reasonable, the host State's legitimate right subsequently to regulate domestic matters in the public interest must be taken into consideration as well. As the S.D. Myers tribunal has stated, the determination of a breach of the obligation of “fair and equitable treatment” by the host State: must be made in the light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders. 306. The determination of a breach of Article 3.1 by the Czech Republic therefore requires a weighing of the Claimant's legitimate and reasonable expectations on the one hand and the Respondent's legitimate regulatory interests on the other. 307. A foreign investor protected by the Treaty may in any case properly expect that the Czech Republic 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, evenhandedness and non-discrimination. In particular, any differential treatment of a foreign investor must not be based on unreasonable distinctions and demands, and must be justified by showing that it bears a reasonable relationship to rational policies not motivated by a preference for other investments over the foreign-owned investment. 308. Finally, it transpires from arbitral practice that, according to the “fair and equitable treatment” standard, the host State must never disregard the principles of procedural propriety and due process and must grant the investor freedom from coercion or harassment by its own regulatory authorities. iv) Conclusion 309. The “fair and equitable treatment” standard in Article 3.1 of the Treaty is an autonomous Treaty standard and must be interpreted, in light of the object and purpose of the Treaty, so as to avoid conduct of the Czech Republic that clearly provides disincentives to foreign investors. The Czech Republic, without undermining its legitimate right to take measures for the protection of the public interest, has therefore assumed an obligation to treat a foreign investors' investment in a way that does not frustrate the

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investor's underlying legitimate and reasonable expectations. A foreign investor whose interests are protected under the Treaty is entitled to expect that the Czech Republic will not act in a way that is manifestly inconsistent, non-transparent, unreasonable (i.e., unrelated to some rational policy), or discriminatory (i.e.,based on unjustifiable distinctions). In applying this standard, the Tribunal will have due regard to all relevant circumstances. [c] El Paso Energy International Company v. The Argentine Republic (ICSID Case No. ARB/03/15), Award of 31 October 2011, (9) ¶¶ 355, 364-377, 512-519 [Lucius Caflisch (pres.), Brigitte Stern, Piero Bernardini] [This case arose from the series of regulatory measures Argentina enacted in the aftermath of the 2001 economic crisis. El Paso, an American energy company, held participations in several local companies involved in the Argentine energy sector. El Paso initiated ICSID arbitration proceedings under the US-Argentina BIT and argued that a series of measures adopted by the Argentine Government amounted to the expropriation of El Paso's investment. These measures included the re-denomination of the contractual US dollars payment obligations in Argentine pesos; the freezing of all natural gas and electricity prices and indexation mechanisms and their conversion into pesos at an exchange rate of one-to-one; export quotas and duties, and the prohibition for energy distribution companies from suspending the performance of their obligations.] (Citations selectively omitted) 355. The Tribunal, for its part, is inclined to accept the overwhelming jurisdictional trend … which considers that the concept of fair and equitable treatment must be analysed with due consideration of the legitimate expectations of the Parties, but it will elaborate on the interpretation to be given to such a statement. If legitimate expectations of the foreign investors are to be taken into account at all, it has to be stressed that of course all the elements that the investors would like to rely on in order to maximise their benefits, if they are indeed expectations, cannot be considered legitimate and reasonable. The Tribunal will thus endeavour to specify what it thinks can be viewed as legitimate and reasonable expectations. *** 364. In sum, the Tribunal considers that FET is linked to the objective reasonable legitimate expectations of the investors and that these have to be evaluated considering all circumstances. As a consequence,the legitimate expectations of a foreign investor can only be examined by having due regard to the general proposition that the State should not unreasonably modify the legal framework or modify it in contradiction with a specific commitment not to do so … *** 366. Firstly, economic stability cannot be a legitimate expectation of any economic actor, as stated quite clearly at the beginning of the last century by the Permanent Court of International Justice (PCIJ), whose dictum still rings true today: “No enterprise – least of all a commercial or transport enterprise, the success of which is dependent on the fluctuating level of prices and rates – can escape from the changes and hazards resulting from general economic conditions. Some industries may be able to make large profits during a period of general prosperity, or else by taking advantage of a treaty of commerce or of an alteration in customs duties; but they are also exposed to the danger of ruin or extinction if circumstances change.” 367. Secondly, it is inconceivable that any State would accept that, because it has entered into BITs, it can no longer modify pieces of legislation which might have a negative impact on foreign investors, in order to deal with modified economic conditions and must guarantee absolute legal stability. 368. In the Tribunal's understanding, FET cannot be designed to ensure the immutability of the legal order, the economic world and the social universe and play the role assumed by stabilisation clauses specifically granted to foreign investors with whom the State has signed investment agreements. The same approach was followed recently by the ICSID tribunal in Parkerings: “It 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.” 369. It will be noted, that in the two cases mentioned earlier … the reference to the Preamble said that its object and purpose was to maintain “a stable framework for investment and maximum effective use of economic resources;” however, in determining what these purposes implied for the interpretation of FET, the tribunals in these two cases only retained the first purpose, in order to conclude that a stable legal and

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business environment is an essential element of fair and equitable treatment, without taking into account the goal that any State has to pursue as well, which is to guarantee to its population maximum effective use of its economic resources. 370. The idea that the foreign investor is not protected against reasonable changes was also put forward by the tribunal in the Argentinian case Continental, where it was stated that “the fair and equitable standard is aimed at assuring that the normal law-abiding conduct of the business activity by the foreign investor is not hampered without good reasons by the host government and other authorities.” 371. The State has to be able to make the reasonable changes called for by the circumstances and cannot be considered to have accepted a freeze on the evolution of its legal system. This has indeed been acknowledged by the tribunal in CMS, but mainly as a general statement of principle with no legal practical consequences on the settlement of the case: “It 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.” The same point concerning a State's regulatory power was made in Enron, where the tribunal noted “that the stabilisation requirement does not mean the freezing of the legal system or the disappearance of the regulatory power of the State.” 372. Under a FET clause, a foreign investor can expect that the rules will not be changed without justification of an economic, social or other nature. Conversely, it is unthinkable that a State could make a general commitment to all foreign investors never to change its legislation whatever the circumstances, and it would be unreasonable for an investor to rely on such a freeze. This point was also made by the tribunal in Continental: “… 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. Such an implication as to stability in the BIT's Preamble would be contrary to an effective interpretation of the Treaty; reliance on such an implication by a foreign investor would be misplaced and, indeed, unreasonable.” 373. In other words, fair and equitable treatment is a standard entailing reasonableness and proportionality. It ensures basically that the foreign investor is not unjustly treated, with due regard to all surrounding circumstances. FET is a means to guarantee justice to foreign investors. 374. There can be no legitimate expectation for anyone that the legal framework will remain unchanged in the face of an extremely severe economic crisis. 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. (b) Fair and Equitable Treatment Implies that there is no Modification of the Legal Framework when Contrary Specific Commitments Have Been Made towards the Investor 375. A reasonable general regulation can be considered a violation of the FET standard if it violates a specific commitment towards the investor. The Tribunal considers that a special commitment by the State towards an investor provides the latter with a certain protection against changes in the legislation, but it needs to discuss more thoroughly the concept of “specific commitments.” In the Tribunal's view, no general definition of what constitutes a specific commitment can be given, as all depends on the circumstances. However, it seems that two types of commitments might be considered “specific”: those specific as to their addressee and those specific regarding their object and purpose. 376. First, in order to prevent a change in regulations being applied to an investor or certain behaviour of the State, there can indeed exist specific commitments directly made to the investor – for example in a contract or in a letter of intent, or even through a specific promise in a person-to-person business meeting – and not simply general statements in treaties or legislation which, because of their nature of general regulations, can evolve. The important aspect of the commitment is not so much that it is legally binding – which usually gives rise to some sort of responsibility if it is violated without a need to refer to FET – but that it contains a specific commitment directly made to the investor, on which the latter has relied. 377. Second, a commitment can be considered specific if its precise object was to give a real guarantee of stability to the investor. Usually general texts cannot contain such commitments, as there is no guarantee that they will not be modified in due course. However, a reiteration of the same type of commitment in different types of general statements could, considering the circumstances, amount to a specific behaviour of the State, the object and purpose of which is to give the investor a guarantee on which it can justifiably rely.

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*** 512. The problem, therefore, was not so much whether the capacity payment should be at 4, 5 or 10 dollars; it was the calculation in US dollars that mattered to the foreign investor. But the GOA disregarded the very reason for which capacity payments were created, which was to attract investment to expand capacity by allowing generators to recover their capital expenditures in US dollars, in destroying the link between capacity payments and computation in dollars. 513. In the same manner, based on the assurances generally contained in the Electricity Regulatory Framework, investors such as El Paso could reasonably expect that a devaluation of the peso would not substantially alter the dollar value of Spot Prices. 514. The fact that the contracts were in US dollars could also be viewed as a special commitment towards the companies in which El Paso invested, and the pesification as entailing a violation of freely agreed terms and conditions. 515. Although they may be seen in isolation as reasonable measures to cope with a difficult economic situation, the measures examined can be viewed as cumulative steps which individually do not qualify as violations of FET … but which amount to a violation if their cumulative effect is considered. It is quite possible to hold that Argentina could pesify, put a cap on the Spot Price, etc., but that a combination of all these measures completely altered the overall framework. 516. According to the Tribunal, this series of measures amounts to a composite act, as suggested by the International Law Commission in its Articles on State Responsibility (Article 15). Such an analysis is not without precedent. The tribunal in Société Générale, for example, referred to the concept of composite act and stated clearly that acts that are not illegal can become such by accumulation: “While normally acts will take place at a given point in time independently of their continuing effects, and they might at that point be wrongful or not, it is conceivable also that there might be situations in which each act considered in isolation will not result in a breach of a treaty obligation, but if considered as a part of a series of acts leading in the same direction they could result in a breach at the end of the process of aggregation …” 517. It cannot be denied that in the matter before this Tribunal the cumulative effect of the measures was a total alteration of the entire legal setup for foreign investments, and that all the different elements and guarantees just mentioned can be analysed as a special commitment of Argentina that such a total alteration would not take place. As stated by the tribunal in LG&E, when evaluating the same events, “here, the Tribunal is of the opinion that Argentina went too far by completely dismantling the very legal framework constructed to attract investors.” 518. The Tribunal considers that, in the same way as one can speak of creeping expropriation, there can also be creeping violations of the FET 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. 519. The Tribunal, taking an all-encompassing view of consequences of the measures complained of by El Paso, including the contribution of these measures to its decision to sell its investments in Argentina, concludes that, by their cumulative effect, they amount to a breach of the fair and equitable treatment standard. [d] Parkerings-Compagniet AS v. Republic of Lithuania (ICSID Case No. ARB/05/8), Award of 11 September 2007, (10) ¶¶ 330-338 [Laurent Lévy (pres.), Julian Lew, Marc Lalonde] [Parkerings, a Norwegian investor, took part in a consortium which was awarded a concession for the construction and operation of multi-story parking garages by the municipality of Vilnius, the capital of Lithuania. In the following years, the municipality undertook a series of regulatory actions, including the abandonment of a particular parking garage project and the prohibition of clamping for illegally parked vehicles, which adversely affected the consortium's operation and profitability. Parkerings subsequently initiated ICSID arbitration proceedings pursuant to the Norway-Lithuania BIT. ] (Citations selectively omitted) 330. … In other words, the Fair and Equitable Treatment standard is violated when the investor is deprived of its legitimate expectation that the conditions existing at the time of the Agreement would remain unchanged. 331. The expectation is legitimate if the investor received an explicit promise or guaranty from the host-State, or if implicitly, the host-State made assurances or representation that the investor took into account in making the investment. Finally, in the situation

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where the host-State made no assurance or representation, the circumstances surrounding the conclusion of the agreement are decisive to determine if the expectation of the investor was legitimate. In order to determine the legitimate expectation of an investor, it is also necessary to analyse the conduct of the State at the time of the investment. 332. It 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. 333. In principle, an investor has a right to a certain stability and predictability of the legal environment of the investment The investor will have a right of protection of its legitimate expectations provided it exercised due diligence and that its legitimate expectations were reasonable in light of the circumstances. Consequently, an investor must anticipate that the circumstances could change, and thus structure its investment in order to adapt it to the potential changes of legal environment. 334. In the present case, various modifications of laws occurred in Lithuania. It is not contested that these amendments had an impact on the investment expectations of the Claimant, as it was deprived of its right to receive part of its expected income. Neither is it contested that the Republic of Lithuania gave no specific assurance or guarantee to Parkerings that no modification of law, with possible incidence on the investment, would occur. The legitimate expectations of the Claimant that the legal regime would remain unchanged are not based on or reinforced by a particular behaviour of the Respondent. In other words, the Republic of Lithuania did not give any explicit or implicit promise that the legal framework of the Agreement would remain unchanged. 335. In 1998, at the time of the Agreement, the political environment in Lithuania was characteristic of a country in transition from its past being part of the Soviet Union to candidate for the European Union membership. Thus, legislative changes, far from being unpredictable, were in fact to be regarded as likely. As any businessman would, the Claimant was aware of the risk that changes of laws would probably occur after the conclusion of the Agreement. The circumstances surrounding the decision to invest in Lithuania were certainly not an indication of stability of the legal environment. Therefore, in such a situation, no expectation that the laws would remain unchanged was legitimate. 336. By deciding to invest notwithstanding this possible instability, the Claimant took the business risk to be faced with changes of laws possibly or even likely to be detrimental to its investment. The Claimant could (and with hindsight should) have sought to protect its legitimate expectations by introducing into the investment agreement a stabilisation clause or some other provision protecting it against unexpected and unwelcome changes. 337. The record does not show that the State acted unfairly, unreasonably or inequitably in the exercise of its legislative power. The Claimant has failed to demonstrate that the modifications of laws were made specifically to prejudice its investment. 338. Consequently, in the case at hand, the Tribunal is not persuaded that the Claimant had any legitimate expectation that the Government of the Republic of Lithuania would not pass legislation and regulatory measures which could harm its investment. In that respect, the Tribunal considers that the Respondent did not violate Article III of the BIT. [6] NAFTA Cases [a] NAFTA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, 2 (2001) (11) B. Minimum Standard of Treatment in Accordance with International Law. 1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party. 2. The concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. 3. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1). [b] Waste Management, Inc. v. United Mexican States (‘Number 2') (ICSID Case No. ARB(AF)/00/3), Award of 25 June 2003, (12) ¶¶ 91-93, 98-99 [James R. Crawford (pres.), Benjamin R. Civilette, Eduardo Magallón Gómez] [Acaverde was a Mexican company created in 1994 and was a wholly-owned subsidiary of a U.S. corporation, Waste Management, Inc. Acaverde was the contracting party and

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provider of services under a Concession Agreement to exclusively provide municipal waste disposal and street cleaning services in a specified area of Acapulco and to build and operate a permanent solid waste landfill for the City as a whole. The Concession Agreement provided that the City would not grant to any other company or person any rights or concessions that would be inconsistent with the rights of the concessionaire under the Concession Agreement. The City subsequently promulgated a regulation, Cleaning Services Ordinance, establishing exclusivity of waste collection services, prohibited dumping of rubbish and provided for enforcement by way of fines. The City was to provide a site for the landfill as a “gratuitous loan for the term of the concession.” Pending the construction of the permanent landfill, Acaverde would be given, free of charge, access to one of the existing sites. The Concession Agreement was to be for 15 years from the date of commencement of services. Acaverde began providing services under the Agreement on 15 August 1995. This dispute arises from the City's alleged breach of the Concession Agreement by (1) failing to maintain the exclusivity of the Concession by not revoking existing permits and continuing to issue new permits for waste disposal by other parties; (2) failing to provide premises for Acaverde's operations for solid waste disposal and the failure to enter into a loan agreement for the landfill; and (3) failure to pay for services rendered to the City, exacerbating Acaverde's financial difficulties. Acaverde brought two sets of proceedings before the Mexican Federal courts against the bank, Banobras, for non-performance of the Line of Credit Agreement intended for the payment of the City's invoices. The proceedings were dismissed as were Acaverde's appeals. Acaverde also commenced arbitration proceedings under Clause 17 of the Concession Agreement against the City, which was discontinued. On 29 September 1998, while the Mexican proceedings were still pending, Waste Management commenced the first ICSID arbitration. Due to the pending proceedings and the possibility of further proceedings, the claim was dismissed by the first tribunal. This ICSID proceeding was registered on 27 September 2000, by which time Acaverde's claims in the Mexican courts had been dismissed and the previous arbitration was discontinued without any decision being reached.] (Citations selectively omitted) 91. The FTC's interpretation has been extensively discussed in subsequent decisions, in particular the Mondev and ADF cases. The Mondev tribunal found that the FTC Interpretation: – – – – –

resolves any dispute about whether there was such a thing as a minimum standard of treatment of investment in the international law in the affirmative; makes clear that the standard of treatment is to be found by reference to international law; clarifies that Article 1105 refers to a standard existing under customary law, not standards under other treaties of the NAFTA Parties or other provisions within NAFTA; clarifies that the terms “fair and equitable treatment” and “full protection and security” are references to existing elements of customary international law and are not “additive”, that is, they do not add novel elements to that standard; and incorporates current international customary law, at least as it stood at the time that NAFTA came into force in 1994, rather than any earlier version of the standard treatment.

92. This last point was expanded by the tribunal in ADF: it recorded the view of the United States, accepted by Canada and Mexico, that the customary international law in Article 1105(1) is not static and that the minimum standard of treatment does evolve, going on to say that “both customary international law and the minimum standard of treatment of aliens it incorporates, are constantly in a process of development.” 93. Both the Mondev and ADF tribunals rejected any suggestion that the standard of treatment of a foreign investment set by NAFTA is confined to the kind of outrageous treatment referred to in the Neer case, i.e., to treatment amounting to an “outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.” *** 98. The search here is for the Article 1105 standard of review, and it is not necessary to consider the specific results reached in the cases discussed above. But as this survey shows, despite certain differences of emphasis a general standard for Article 1105 is emerging. Taken together, the S.D. Myers, Mondev, ADF and Loewen cases suggest that a minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candor in an administrative process. In applying this standard it is relevant that the treatment is in breach of

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representations made by the host State which were reasonably relied on by the claimant. 99. Evidently the standard is to some extent a flexible one which must be adapted to the circumstances of each case. Accordingly, it is to the facts of the present case that the Tribunal turns. [c] Glamis Gold, Ltd. v. United States of America (ICSID Administered Case), Award of 8 June 2009, (13) ¶¶ 598-609, 611-615, 617-621, 625-627 [Michael K. Young, David D. Caron, Kenneth D. Hubbard] [Glamis Gold., a Canadian investor active in the mining of precious metals, claimed that the US Federal Government and the California State Government enacted a series of regulatory measures – requiring environmental remediation efforts for open pit mining in a protected area – which effectively expropriated its investment in a proposed gold mine in California. Glamis initiated UNCITRAL arbitration proceedings under NAFTA Chapter 11, claiming for US$50 million in damages.] (Citations selectively omitted) 598. … Article 1105(1) of the NAFTA provides that “[e]ach party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.” 599. There is no disagreement among the State Parties to the NAFTA, nor the Parties to this arbitration, that the requirement of fair and equitable treatment in Article 1105 is to be understood by reference to the customary international law minimum standard of treatment of aliens. Indeed, the Free Trade Commission (“FTC”) clearly states, in its binding Notes of Interpretation on July 31, 2001, that “Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.” 600. The question thus becomes: what does this customary international law minimum standard of treatment require of a State Party vis-à-vis investors of another State Party? Is it the same as that established in 1926 in Neer v. Mexico? Or has Claimant proven that the standard has “evolved”? If it has evolved, what evidence of custom has Claimant provided to the Tribunal to determine its current scope? 601. As a threshold issue, the Tribunal notes that it is Claimant's burden to sufficiently answer each of these questions. The State Parties to the NAFTA (at least Canada and Mexico) agree that “the test inNeer does continue to apply,” though Mexico “also agrees that the standard is relative and that conduct which may not have violated international law [in] the 1920's might very well be seen to offend internationally accepted principles today. If, as Claimant argues, the customary international law minimum standard of treatment has indeed moved to require something less than the “egregious,” “outrageous,” or “shocking” standard as elucidated in Neer, then the burden of establishing what the standard now requires is upon Claimant. 602. The Tribunal acknowledges that it is difficult to establish a change in customary international law. As Respondent explains, establishment of a rule of customary international law requires: (1) “a concordant practice of a number of States acquiesced in by others,” and (2) “a conception that the practice is required by or consistent with the prevailing law (opinio juris).” 603. The evidence of such “concordant practice” undertaken out of a sense of legal obligation is exhibited in very few authoritative sources: treaty ratification language, statements of governments, treaty practice (e.g., Model BITs), and sometimes pleadings. Although one can readily identify the practice of States, it is usually very difficult to determine the intent behind those actions… 604. The Tribunal notes that, although an examination of custom is indeed necessary to determine the scope and bounds of current customary international law, this requirement … because of the difficulty in proving a change in custom, effectively freezes the protections provided for in this provision at the 1926 conception of egregiousness. 605. Claimant did provide numerous arbitral decisions in support of its conclusion that fair and equitable treatment encompasses a universe of “fundamental” principles common throughout the world that include “the duty to act in good faith, due process, transparency and candor, and fairness and protection from arbitrariness.” Arbitral awards, Respondent rightly notes, do not constitute State practice and thus cannot create or prove customary international law. They can, however, serve as illustrations of customary international law if they involve an examination of customary international law, as opposed to a treaty-based, or autonomous, interpretation. 606. This brings the Tribunal to its first task: ascertaining which of the sources argued by Claimant are properly available to instruct the Tribunal on the bounds of “fair and equitable treatment.” … the Tribunal notes that it finds two categories of arbitral awards that examine a fair and equitable treatment standard: those that look to define customary international law and those that examine the autonomous language and nuances of the underlying treaty language. Fundamental to this divide is the treaty underlying the dispute: those treaties and free trade agreements, like the NAFTA, that are to be understood by reference to the customary international law minimum standard of treatment necessarily lead their tribunals to analyze custom; while those treaties with

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fair and equitable treatment clauses that expand upon, or move beyond, customary international law, lead their reviewing tribunals into an analysis of the treaty language and its meaning, as guided by Article 31(1) of the Vienna Convention. 607. Ascertaining custom is necessarily a factual inquiry, looking to the actions of States and the motives for and consistency of these actions. By applying an autonomous standard, on the other hand, a tribunal may focus solely on the language and nuances of the treaty language itself and, applying the rules of treaty interpretation, require no party proof of State action or opinio juris. This latter practice fails to assist in the ascertainment of custom. 608. As Article 1105's fair and equitable treatment standard is, as Respondent phrases it, simply “a shorthand reference to customary international law,” the Tribunal finds that arbitral decisions that apply an autonomous standard provide no guidance inasmuch as the entire method of reasoning does not bear on an inquiry into custom… 609. Claimant … argues that, with respect to this particular standard, BIT jurisprudence has “converged with customary international law in this area.” The Tribunal finds this to be an overstatement. Certainly, it is possible that some BITs converge with the requirements established by customary international law; there are, however, numerous BITs that have been interpreted as going beyond customary international law, and thereby requiring more than that to which the NAFTA State Parties have agreed. It is thus necessary to look to the underlying fair and equitable treatment clause of each treaty, and the reviewing tribunal's analysis of that treaty, to determine whether or not they are drafted with an intent to refer to customary international law. *** 611. The Tribunal therefore holds that it may look solely to arbitral awards – including BIT awards – that seek to be understood by reference to the customary international law minimum standard of treatment, as opposed to any autonomous standard. The Tribunal thus turns to its second task: determining the scope of the current customary international law minimum standard of treatment, as proven by Claimant. 612. It appears to this Tribunal that the NAFTA State Parties agree that, at a minimum, the fair and equitable treatment standard is that as articulated in Neer: “the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.” Whether this standard has evolved since 1926, however, has not been definitively agreed upon. The Tribunal considers two possible types of evolution: (1) that what the international community views as “outrageous” may change over time; and (2) that the minimum standard of treatment has moved beyond what it was in 1926. 613. The Tribunal finds apparent agreement that the fair and equitable treatment standard is subject to the first type of evolution: a change in the international view of what is shocking and outrageous … Similarly, this Tribunal holds that the Neer standard, when applied with current sentiments and to modern situations, may find shocking and egregious events not considered to reach this level in the past. 614. As regards the second form of evolution – the proposition that customary international law has moved beyond the minimum standard of treatment of aliens as defined in Neer – the Tribunal finds that the evidence provided by Claimant does not establish such evolution… 615. The customary international law minimum standard of treatment is just that, a minimum standard. It is meant to serve as a floor, an absolute bottom, below which conduct is not accepted by the international community. Although the circumstances of the case are of course relevant, the standard is not meant to vary from state to state or investor to investor … The fair and equitable treatment promised by Article 1105 is not dynamic; it cannot vary between nations as thus the protection afforded would have no minimum. *** 617. Respondent argues … that, in reviewing State agency or departmental decisions and actions, international tribunals as well as domestic judiciaries favor deference to the agency so as not to second guess the primary decision-makers or become “science courts.” The Tribunal disagrees that domestic deference in national court systems is necessarily applicable to international tribunals. In the present case, the Tribunal finds the standard of deference to already be present in the standard as stated, rather than being additive to that standard. The idea of deference is found in the modifiers “manifest” and “gross” that make this standard a stringent one; it is found in the idea that a breach requires something greater than mere arbitrariness, something that is surprising, shocking, or exhibits a manifest lack of reasoning. 618. With this thought in mind, the Tribunal turns to the duties that Claimant argues are part of the requirements of a host State per Article 1105: (1) an obligation to protect legitimate expectations through establishment of a transparent and predictable business and legal framework, and (2) an obligation to provide protection from arbitrary

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measures. As the United States explained in its 1128 submission in Pope & Talbot, and as Mexico adopted in its 1128 submission to the ADF tribunal: “‘fair and equitable treatment’ and ‘full protection and security’ are provided as examples of the customary international law standards incorporated into Article 1105(1)… The international law minimum standard [of treatment] is an umbrella concept incorporating a set of rules that has crystallized over the centuries into customary international law in specific contexts.” The Tribunal therefore finds it appropriate to address, in turn, each of the State obligations Claimant asserts are potential parts of the protection afforded by fair and equitable treatment. 619. … To maintain fair and equitable treatment as an absolute floor, a breach must be based upon objective criteria that apply equally among States and between investors. 620. The Tribunal notes Respondent's argument that even those expectations that manifest in a contract are insufficient to provide a basis for a breach of the minimum standard of treatment. The Tribunal agrees that mere contract breach, without something further such as denial of justice or discrimination, normally will not suffice to establish a breach of Article 1105. Merely not living up to expectations cannot be sufficient to find a breach of Article 1105 of the NAFTA. Instead, Article 1105(1) requires the evaluation of whether the State made any specific assurance or commitment to the investor so as to induce its expectations. 621. The Tribunal therefore agrees with International Thunderbird that legitimate expectations relate to an examination under Article 1105(1) in such situations “where a Contracting Party's conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct …” In this way, a State may be tied to the objective expectations that it creates in order to induce investment. *** 625. … Previous tribunals have indeed found a certain level of arbitrariness to violate the obligations of a State under the fair and equitable treatment standard. Indeed, arbitrariness that contravenes the rule of law, rather than a rule of law, would occasion surprise not only from investors, but also from tribunals. This is not a mere appearance of arbitrariness, however, a tribunal's determination that an agency acted in a way with which the tribunal disagrees or that a state passed legislation that the tribunal does not find curative of all of the ills presented; rather, this is a level of arbitrariness, that as International Thunderbirdput it, amounts to a gross denial of justice or manifest arbitrariness falling below acceptable international standards. 626. The Tribunal therefore holds that there is an obligation of each of the NAFTA State parties inherent in the fair and equitable treatment standard of Article 1105 that they do not treat investors of another State of a manifestly arbitrary manner. The Tribunal thus determines that Claimant has sufficiently substantiated its arguments that a duty to protect investors from arbitrary measures exists in the customary international law minimum standard of treatment of aliens; though Claimant has not sufficiently rebutted Respondent's assertions that a finding of arbitrariness requires a determination for some act far beyond the measure's mere illegality, an act so manifestly arbitrary, so unjust and surprising as to be unacceptable from the international perspective. 627. The Tribunal holds that the Claimant has not met its burden of proving that something other than the fundamentals of the Neer standard apply today. The Tribunal therefore holds that a violation of the customary international law minimum standard of treatment, as codified in Article 1105 of the NAFTA, requires an act that is sufficiently egregious and shocking – a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons – so as to fall below accepted international standards and constitute a breach of Article 1105. Such a breach may be exhibited by a “gross denial of justice or manifest arbitrariness falling below acceptable international standards;” or the creation by the State of objective expectations in order to induce investment and the subsequent repudiation of those expectations. The Tribunal emphasizes that, although bad faith may often be present in such a determination and its presence certainly will be determinative of a violation, a finding of bad faith is not a requirement for a breach of Article 1105(1). [d] Merrill & Ring Forestry L.P. v. Canada (ICSID Administered Case), Award of 31 March 2010, (14) ¶¶ 190-197, 201, 204-207, 209-213 [Francisco Orrego Vicuña (pres.), Kenneth W. Dam, J. William Rowley] [Merrill & Ring, an American investor active in the forestry and land management sectors, owned and operated forest land in Canadian province of British Columbia. Merrill & Ring claimed that measures imposed by the Canadian federal and provincial government for the export of wood logs violated its rights as an investor protected under NAFTA Chapter 11. Specifically, the measures complained about required that logs from both private and public land must be deemed surplus to provincial needs before they can be exported. Merill & Ring subsequently initiated arbitration proceedings before the ICSID Additional Facility.] (Citations selectively omitted)

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190. While NAFTA tribunals have thereafter followed the FTC Interpretation in the light of its binding character, as provided for in Article 1131(2), the first major question as to the meaning of customary international law in this matter, is whether the customary international law minimum standard of treatment of aliens has been frozen in time since the 1920's or has evolved accordingly with current international law. Mondev and ADF, while accepting that fair and equitable treatment had to be understood within customary international law, favored a dynamic interpretation of the content of this source, the first in conjunction with the role of investment treaties and the second, it appears, more generally on state practice, judicial and arbitral case law or other sources of customary or general international law. This evolutionary approach was also endorsed by Waste Management II and Gami. 191. The second major question which the Tribunal requires to address is the meaning of customary international law regarding fair and equitable treatment and full protection and security. And as to this, the Tribunal is mindful of the FTC Interpretation referred to above, as well as Canada's Statement of Implementation, which understood Article 1105 as a minimum standard of treatment under customary law. 192. However, the binding character of the FTC Interpretation does not mean that that interpretation necessarily reflects the present state of customary and international law. As the Investor has argued, the FTC Interpretation seems in some respect to be closer to an amendment of the treaty, than a strict interpretation. In any event, the Tribunal is mindful of the evolutionary nature of customary international law, as discussed below, which provides scope for the interpretation of Article 1105(1), even in the light of the Free Trade Commission's 2001 interpretation. 193. In spite of arguments to the contrary, there appears to be a shared view that customary international law has not been frozen in time and that it continues to evolve in accordance with the realities of the international community. No legal system could endure in stagnation. The issue is then to establish in which direction customary law has evolved. State practice and opinio juris will be the guiding beacons of this evolution. 194. Canada has maintained that, to the extent that an evolution might have taken place, it must be proven that it has occurred since 2001, when the FTC Interpretation was issued, and this almost certainly has not happened. Such a view is unconvincing. The FTC Interpretation itself does not refer to the specific content of customary law at a given moment and it is not an interpretative note of such content. Accordingly, the matter needs to be examined in the light of the evolution of customary law over time. 195. The concept of a minimum standard of treatment of aliens was born over a century ago. After 1840, about sixty claims tribunals were established to resolve claims by foreign citizens. The concept became paramount in the context of the work of international claims commissions, particularly as a result of the work of the Mexico-United States Claims Commission. This is how it came to be identified with the oft-cited Neer case, which has been paramount in Canada's pleadings in other NAFTA cases. The Tribunal notes, however, that that decision has not been invoked by Canada in the instant case, perhaps because of its contention that arbitral awards do not form part of customary international law. 196. The Commission in the Neer case referred to a breach of the minimum standard of treatment of aliens as requiring treatment that amounts “to bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency”. A few other historical cases applied that or a similarly worded standard in connection with treatment to aliens. 197. The Tribunal notes, however, that all such cases were dealing with situations concerning due process of law, denial of justice and physical mistreatment, and only marginally with matters relating to business, trade or investments. This was also the case of the International Court of Justice decision in ELSI. This oft-cited decision also set a high threshold requiring “willful disregard of due process of law, an act which shocks, or at least surprises, a sense of judicial propriety”. *** 201. The approach of the Neer Commission and of other tribunals which dealt with due process may best be described as the first track of the evolution of the so called minimum standard of treatment. In fact, as international law matured and began to focus on the rights of individuals, the minimum standard became a part of the international law of human rights, applicable to aliens and nationals alike. This evolution led to major international conventions on human rights as well as to the development of rules of customary law in this field. A second track, which shall be discussed below, is also discernable in so far it concerns business, trade and investment. *** 204. This development was indicative of the fact that state practice was increasingly seen as being inconsistent with the first track concept of an “international minimum standard”. State practice was even less supportive of the standard referred to in the Neer case. And in the absence of a widespread and consistent state practice in support of a rule of

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customary international law there is no opinio juris either. No general rule of customary international law can thus be found which applies the Neer standard, beyond the strict confines of personal safety, denial of justice and due process. 205. As foreshadowed above, just as there was a first track concerning the evolution of the minimum standard of treatment of aliens in the limited context indicated, there was also a second track that concerned specifically the treatment of aliens in relation to business, trade and investments. This other standard, which was much more liberal, is evidenced by the tendency of states to support the claims of their citizens in the ambit of diplomatic protection with an open mind, and without requiring a showing of “outrageous” treatment before doing so. Parallel to the development of this second track, diplomatic protection gradually gave way to specialized regimes for the protection of foreign investments and other matters. 206. The digest of cases concerning state responsibility in respect of acts of legislative, administrative and other state organs, published by the United Nations Secretariat in 1964 unequivocally illustrates a new liberal approach. Indeed, a host of successful claims were made without conceptual restrictions dealing with interference with and annulment of private rights, the breach of concession contracts by the state, acquired rights under the law in force at the time of the investment, the entitlement to money wrongfully withheld, the entitlement to the value of money orders, and the refusal to grant an export permit. In many instances, it was the commissions, courts or tribunals that had to make a determination on the applicable legal principles. This is another good reason why judicial decisions, as a subsidiary means for the determination of the rules of law, are not lightly to be dismissed. 207. The trend towards liberalization of the standard applicable to the treatment of business, trade and investments continued unabated over several decades and has yet not stopped. The examination of claims brought by many governments for settlement by agreement is also illustrative of such open-minded standard, including all kinds of property, rights and interests. The Iran-United States Claims Tribunal has also significantly contributed to this trend. *** 209. State practice with respect to the standard for the treatment of aliens in relation to business, trade and investments, while varied and sometimes erratic, has shown greater consistency than in respect of the first track, as it has generally endorsed an open and non-restricted approach to the applicable standard to the treatment of aliens under international law. At the same time it shows that the restrictive Neerstandard has not been endorsed or has been much qualified. The parties have extensively discussed whether the customary law standard might have converged with the fair and equitable treatment standard, but convergence is not really the issue. The situation is rather one in which the customary law standard has led to and resulted in establishing the fair and equitable treatment standard as different stages of the same evolutionary process. 210. A requirement that aliens be treated fairly and equitably in relation to business, trade and investment is the outcome of this changing reality and as such it has become sufficiently part of widespread and consistent practice so as to demonstrate that it is reflected today in customary international law as opinio juris. In the end, the name assigned to the standard does not really matter. What matters is that the standard protects against all such acts or behavior that might infringe a sense of fairness, equity and reasonableness. Of course, the concepts of fairness, equitableness and reasonableness cannot be defined precisely: they require to be applied to the facts of each case. In fact, the concept of fair and equitable treatment has emerged to make possible the consideration of inappropriate behavior of a sort, which while difficult to define, may still be regarded as unfair, inequitable or unreasonable. 211. In the context of the FTC Interpretation, the Tribunal accepts that it cannot be said that fair and equitable treatment is a free-standing obligation under international law and, as concluded in Loewen, its application will be related to a finding that the obligation is part of customary law. As to this latter point, Canada has argued that the existence of the rule must be proven. But against the backdrop of the evolution of the minimum standard of treatment discussed above, the Tribunal is satisfied that fair and equitable treatment has become a part of customary law. 212. The Tribunal also notes that if the FTC Interpretation was construed so as to narrow the protection against unfair and inequitable treatment to an international minimum standard requiring outrageous conduct of some kind, then consistency would demand that the same standard be followed in respect of such claims made by the NAFTA States in respect of the conduct of other countries affecting business, trade or investments interests of their citizens abroad. Yet, this is not the case under current international practice. Customary international law cannot be tailor made to fit different claimants in different ways. To do so would be to countenance an unacceptable double standard. 213. In conclusion, the Tribunal finds that the applicable minimum standard of treatment of investors is found in customary international law and that, except for cases of safety and due process, today's minimum standard is broader than that defined in the Neer case and its progeny. Specifically this standard provides for the fair and equitable

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treatment of alien investors within the confines of reasonableness. The protection does not go beyond that required by customary law, as the FTC has emphasized. Nor, however, should protected treatment fall short of the customary law standard. [7] Comments and Questions 1. 2.

3.

4.

5.

6.

7.

Are the fair and equitable treatment and full protection and security standards tied to, or additive of, customary international law? Under NAFTA? Under the 1992 U.S. Model BIT? Reacting to the early decisions in the cases of Metalclad, S.D. Meyers and Pope & Tabot, the NAFTA Free Trade Commission (FTC) issued its Notes of Interpretation concerning the scope of Article 1105 on 31 July 2001. The Notes interpret the fair and equitable treatment standard in Article 1105 as not requiring treatment beyond the minimum standard of customary international law. In theMethanex and Loewen cases, the claimants submitted an affidavit from one of Mexico's NAFTA negotiators claiming that the Notes of Interpretation were inconsistent with the negotiating history of the NAFTA, and thus, constituted an amendment of NAFTA, and not a mere interpretation. However, the FTC's Notes of Interpretation have been generally relied upon by tribunals. Canada has argued that the minimum standard of customary international law is set out in the case of Neer v. Mexico in 1928 and requires egregious conduct or bad faith. Later decisions in Pope & Talbot,Mondev and Loewen rejected the Neer standard and Canada's interpretation of it as the minimum standard of international law. Instead, the cases point out that the minimum standard has evolved since 1928 with the general evolution in customary international law, and that it has been influenced by more than 2200 (now almost 3000) BITs, most of which require fair and equitable treatment. In ADF International, Inc. v. United States, 18 ICSID Rev. – FILJ 195 ( Judge Florentino Feliciano, President; Prof. Armand de Mestral and Carolyn Lamm), a NAFTA tribunal held that it did not have sufficient evidence either to verify or refute the proposition that the fair and equitable treatment standard had become the minimum standard of international law. In the Tecmed case, which is a BIT case not arising under NAFTA, the Tribunal said clearly that the standard it adopted would be the same under either the plain meaning of the words “fair and equitable” as used in the BIT or under international law generally. In light of this evolution of the law, it has been suggested that the NAFTA Article 1105 standard, even under the Notes of Interpretation, equate to the ordinary meaning of the terms fair and equitable treatment as generally used in BITs throughout the world. See Mondev v. USA ¶¶ 117, 123, 125; Merrill & Ring v. Canada, ¶¶ 209, 213. Is this the proper interpretation of the NAFTA standard? In the case of Middle East Cement Shipping and Handling Co. S.A. v. Arab Republic of Egypt, ICSID Case No. ARB/99/6, Award of 12 April 2002, available at www.worldbank.org/ICSID.htm,(Professor Dr. Karl-Heinz Böckstiegel, President; Professor Piero Bernardini and Professor Don Wallace, Jr.) an ICSID tribunal found that the fair and equitable treatment provision of the Greece-Egypt BIT was violated by the failure to give a direct communication by registered mail as provided by law for a matter as important as the seizure and auctioning of claimant's ship, regardless of whether there was a legal duty or practice to do so. In Wena Hotels Ltd. v. Arab Republic of Egypt, ICSID Case No. ARB/98/4, 41 I.L.M. 896 (2002) (Monroe Leigh, President; Prof. Ibrahim Fadlallah and Prof. Don Wallace, Jr.), the Egyptian Hotels Corporation (EHC) wrongfully seized two hotels operated in Egypt by Wena with the prior knowledge of the Egyptian government. The police and the Ministry of Tourism took no immediate action to restore the hotels to Wena. In addition, Egypt never imposed substantial sanctions on EHC or its senior officials. In these circumstances, the ICSID Tribunal found that Egypt had violated the fair and equitable treatment provision of the BIT between Egypt and the United Kingdom. A claim that certain conduct by the government of Estonia violated the fair and equitable treatment provision of that country's BIT with the United States was rejected by an ICSID Panel in the case of Alex Genin v. Republic of Estonia, 17 ICSID – Rev. FILJ 395 (Yves Fortier, President; Prof. Meir Heth and Albert Jan van den Berg) ¶¶ 343-47. For primarily factual reasons, the Tribunal rejected claims that the Bank of Estonia violated the BIT's fair and equitable treatment provision by refusing to compensate Genin's bank for losses arising from alleged misrepresentations, the alleged breach of a tentative settlement agreement, and the Bank of Estonia's alleged reversal of a previous agreement to allow the gradual amortization of losses. Of the standard itself, the Tribunal said: “While the exact content of this standard is not clear, the Tribunal understands it to require an ‘international minimum standard’ that is separate from domestic law, but that is, indeed, a minimum standard. Acts that would violate this minimum standard would include acts showing a willful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith.” Genin ¶ 367. CME Czech Republic B.V., and its owner Ronald Lauder, initiated two investment arbitrations against the Czech Republic. Both cases were decided at about the same time in September 2001, but they reached opposite results. In the Lauder case, the Tribunal did not find any inconsistent conduct on the part of the Media

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8. 9. 10.

11.

12. 13. 14.

15.

16.

Council sufficient to amount to unfair and inequitable treatment. While finding the Media Council letter of 15 March 1999 “in some way in contradiction with the previously approved” Memorandum of Understanding, the Tribunal held it was only an opinion without legal effect and was not the direct cause of Lauder's damages. What differences in approach to fair and equitable treatment can be identified in the awards of the tribunals in the Lauder and CME cases based on the same facts? What was the basis for finding a violation of fair and equitable treatment in the CME case? What is the standard by which arbitrators are to judge a violation of fair and equitable treatment? Under NAFTA? Under the 1992 US Model BIT? Is the standard the same? What is the minimum standard of international law? Is fair and equitable treatment equivalent to the minimum standard of international law? What is its content? Fair and equitable treatment is often referenced in the preamble of many investment treaties as well as being included in the text. Is fair and equitable treatment an “overriding standard”? Is it an interpretative standard for investment treaties that include it? Does it provide a method for filling gaps in investment treaties? What is the ordinary meaning of the language of “fair and equitable treatment”? Is the meaning to be found in the dictionary definitions of the words? Does the ordinary meaning of those terms provide a standard? Is fair and equitable treatment a unitary standard or two separate standards? Would a government whose conduct is in question under a BIT be legitimately concerned that fair and equitable treatment be defined in a manner that is objective and predictable? Why or why not? What standard or definition for fair and equitable treatment would make the phrase objective and predictable? Does the concept of legitimate expectations of the parties have any relevance to fair and equitable treatment? What position did the Tribunal take in the case of Tecnicas Medioambientales S.A. v. Mexico? What expectations would the foreign investor legitimately have as to the conduct of a government? Do the legitimacy of expectations change with the context? Must expectations be objective in order to be protected? Does the concept of what is normative play a role in shaping our view of what expectations are legitimate? See Opel Austria GmbH v. Council of the European Union (1997) ECR II-39, ¶ 78 (noting “the general principle of legitimate expectations in public international law, according to which a subject of international law may, under certain conditions, be bound by the expectations created by its acts …”); Embassy Limousines & Services v. European Parliament, [1998] ECR II-4239, ¶ 8. See also J. Paulsson, Investment Protection Provisions in Treaties, International Chamber of Commerce, Investment Protection 19, 22 (2000) (suggesting that to determine a violation of the fair and equitable treatment provision, tribunals should examine “the impact of the measure on the reasonable investment-backed expectations of the investor; and whether the state is attempting to avoid investment-backed expectations that the state created or reinforced through its own acts …”); Stephen Vascianne, The Fair and Equitable Treatment Standard in International Investment Law and Practice, 70 Brit. Y.B. Int'l L. 99 (1999) (fair and equitable treatment includes “treatment compatible with some of the many expectations of foreign investors.”). The following investment awards have found that fair and equitable treatment includes the legitimate expectations of investors: Tecnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of 29 May 2003, ¶ 154; Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award of 14 July 2006, ¶ 372; CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8, Award of 22 May 2005, ¶¶ 274-276; LG&E Energy Corp., LG&E Captial Corp.& LG&E International v. The Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability of 3 Oct. 2006, ¶¶ 124-125; Enron Corp. and Ponderosa Assets v. Argentina, ICSID Case No. ARB/01/3, Award of 22 May 2007, ¶¶ 259-260; MTD Equity Sdn. Bhd. v. Chile, ICSID Case No. ARB/01/7, Award of 25 May 2004, ¶¶ 113-115; Occidental Exploration and Production Company v. Ecuador, LCIA Case No. 3467, Award of 1 July 2004, ¶¶ 183-187; CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award of 13 September 2001, ¶ 611; Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award of 17 March 2006, ¶ 302; Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction of 15 November 15, 2005, ¶¶ 237-239; PSEG Global Inc. and Konya Ilgin Elektrik Uretim Ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Award of 19 January 2007, ¶ 240; Eureko B.V. v. Republic of Poland, Ad Hoc, Partial Award of 19 August 2005, ¶ 235; Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award of 30 April 2004, ¶ 98; Sempra Energy Int’l v. Argentina, ICSID Case No. ARB/02/16, Award of 28 September 2007, ¶¶ 298300; Ioannis Kardassopoulos and Ron Fuchs v. The Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award of 3 March 2010, ¶¶ 428-441. The following investment awards have held that fair and equitable treatment protects the stability of the legal and business framework: Tecnicas

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17.

Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of 29 May 2003, ¶ 154; Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12, Award of 14 July 2006, ¶ 372; CMS Gas Transmission Co. v. The Argentine Republic, ICSID Case No. ARB/01/8, Award of 22 May 2005, ¶¶ 274-276; LG&E Energy Corp., LG&E Captial Corp.& LG&E International v. The Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability of 3 Oct. 2006, ¶¶ 124-125; Enron Corp. and Ponderosa Assets v. Argentina, ICSID Case No. ARB/01/3, Award of 22 May 2007, ¶¶ 259-260; MTD Equity Sdn. Bhd. v. Chile, ICSID Case No. ARB/01/7, Award of 25 May 2004, ¶¶ 113-115; Occidental Exploration and Production Company v. Ecuador, LCIA Case No. 3467, Award of 1 July 2004, ¶¶ 183-187; CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award of 13 September 2001, ¶ 611; Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award of 17 March 2006, ¶ 302; Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction of 15 November 15, 2005, ¶¶ 237-239; PSEG Global Inc. and Konya Ilgin Elektrik Uretim Ve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Award of 19 January 2007, ¶ 240; Eureko B.V. v. Republic of Poland, Ad Hoc, Partial Award of 19 August 2005, ¶ 235; Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3, Award of 30 April 2004, ¶ 98; Sempra Energy Int’l v. Argentina, ICSID Case No. ARB/02/16, Award of 28 September 2007, ¶¶ 298300; Ioannis Kardassopoulos and Ron Fuchs v. The Republic of Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15, Award of 3 March 2010, ¶¶ 428-441. Does this mean that the fair and equitable treatment provision should be construed similarly to a contractual stabilization clause, freezing the laws or regulations as applied to the investment? Why or why not? What damages are recoverable by an investor for a government's violation of the fair and equitable treatment provision? See Pope & Talbot, Inc. v. Government of Canada, Award in Respect of Damages of 31 May 2002, ¶¶ 70-73, 81-90; CMS v. Argentina, ICSID Case No. ARB/01/8, Award of 12 May 2005, ¶¶ 409-410, 418-469; and the Annulment Committee Decision in Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12 1 September 2009, ¶¶ 328-329.

[B] Full Protection & Security [1] Rudolf Dolzer and Christoph H. Schreuer, Principles of International Investment Law, 160-162 (2nd ed., Oxford University Press 2012) (Citations selectively omitted) At first sight, the traditional notion of ‘full protection and security’ is amorphous and not readily amenable to operational applicability. However, as is the case for other standards contained in BITs, arbitral jurisprudence has gradually refined the understanding of the term… Treaty practice has relied on different formulations and patterns. Whereas the traditional version … relies on the classical version of a guarantee which provides for ‘full protection and security’, other treaties have deleted the word ‘full’. Another variation ensures ‘protection in accordance with fair and equitable treatment’. A simple approach is restricted to the granting of ‘protection’ (and not ‘security’), and yet another wording relies on the promise of ‘legal security’… These different wordings have to be applied chiefly to three different settings… [M]ore recent cases have addressed governmental regulatory acts which disturb the legal stability surrounding the investor's business. The breadth of the clause raises issues of delimitation in relation to the scope of other treaty clauses, for instance fair and equitable treatment or the umbrella clause. Especially when it comes to the protection against the application of laws affecting the security and protection of the investment, the standard may acquire special importance if the treaty does not contain other clauses with a broad scope. Some tribunals have equated the standards of full protection and security with fair and equitable treatment. Other tribunals have found that the two standards were separate. *** There is broad consensus that the standard does not provide absolute protection against physical or legal infringement. In terms of the law of state responsibility, the host state is not placed under an obligation of strict liability to prevent such violations. Rather, it is generally accepted that the host state will have to exercise ‘due diligence’ and will have to take such measures to protect the foreign investment as are reasonable under the circumstances. … Lack of resources to take appropriate action will not serve as an excuse for the host state. Whenever state organs themselves act in violation of the standard, or significantly contribute to such action, no issues of attribution or due diligence will arise because the state will then be held directly responsible. [2] Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), Judgment of 20 July 1989, [1989] I.C.J. Rep. 15, 89-93 (1989), ¶¶ 104-105, 107-108

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[This claim, brought by the United States against Italy before the International Court of Justice, arose out of the requisition by the Government of Italy of the plant and related assets of Elettronica Sicula S.p.A. (“ELSI”), an Italian corporation wholly owned by two United States corporations, the Raytheon Company and the Machlett Laboratories Incorporated. Since 1964, ELSI had owned a plant in Italy for the production of electronic components. In February 1967, ELSI was not profitable and Machlett began to plan to close and liquidate ELSI to minimize their losses. On 1 April 1968, and after ELSI dismissed its workforce, the Mayor of Palermo requisitioned ELSI's plant and related assets. ELSI brought an administrative appeal against the requisition to the Prefect of Palermo and filed a bankruptcy petition. A decree of bankruptcy was issued by the Tribunale di Palermo on 16 May 1968, and Raytheon received nothing from its equity investment in ELSI and had to repay bank loans that Raytheon had guaranteed. The United States alleged that the requisition violated the Treaty of Friendship, Commerce and Navigation between the United States and Italy (“the FCN Treaty”) and a Supplementary Agreement concluded on 26 September 1951.] (Citations selectively omitted) 104. Paragraph 1 thus provides for “the most constant protection and security” for nationals of each High Contracting Party, both “for their persons and property”; and also that, in relation to property, the term “nationals” shall be construed to “include corporations and associations”; and in defining the nature of the protection, the required standard is established by a reference to “the full protection and security required by international law”. Paragraph 3 elaborates this notion of protection and security further, by requiring no less than the standard accorded to the nationals, corporations and associations of the other High Contracting Party; and no less than that accorded to the nationals, corporations and associations of any third country. There are, accordingly, three different standards of protection, all of which have to be satisfied. 105. A breach of these provisions is seen by the Applicant to have been committed when the Respondent “allowed ELSI workers to occupy the plant” (see paragraph 65 above). It is the contention of the United States that once the plant had been requisitioned, ELSI's employees began an occupation of the premises which continued, so far as the United States was aware, up to the re-opening of the plant by ELTEL; and that this occupation had the tacit approval of local authorities, who made no effort to prevent or to end it, or otherwise to protect the premises. To this occupation the United States attributes as injurious consequences, first a deterioration of the plant and related material and equipment, and secondly that it impeded the efforts of the trustee in bankruptcy to dispose of the plant. *** 107. That there was some occupation of the plant by the workers after the requisition is something that Italy has not sought to deny, and the Court of Appeal of Palermo referred in passing to the circumstance of the requisitioning authority having tolerated the “unlawful” act of occupation of the plant by the workers (“a autoritá requirente avesse tollarato l’illecito penale di una occupazione dei reparti di lavorazione da parte delle maestranze”). It appears, nevertheless, to have been a peaceful occupation, as may be learned from ELSI's own administrative appeal of 19 April 1968 to the Prefect against the requisition, and the affidavits of the Mayor of Palermo and one of his officials (see paragraph 33 above). It is difficult to accept that the occupation seriously harmed the interests of ELSI in view of the evidence produced by Italy that measures taken by the Mayor of Palermo for the temporary management of the plant permitted the continuation and completion of work in progress in the months following the requisition. The United States has asserted that the continued production was very limited, and cannot be equated with resumption of full production in the plant, and continues to contend that the plant and machinery fell into disuse following the requisition and deteriorated rapidly in value. The Court of Palermo however found itself unable to establish that any damage to the plant had been caused by the occupying workers. 108. The reference in Article V to the provision of “constant protection and security” cannot be construed as the giving of a warranty that property shall never in any circumstances be occupied or disturbed. The dismissal of some 800 workers could not reasonably be expected to pass without some protest. Indeed, the management of ELSI seems to have been very much aware that the closure of the plant and dismissal of the workforce could not be expected to pass without disturbance; as is apparent from the removal of the company's books and “quite a lot of inventory” to Milan … In any event, considering that it is not established that any deterioration in the plant and machinery was due to the presence of the workers, and the authorities were able not merely to protect the plant but even in some measure to continue production, the protection provided by the authorities could not be regarded as falling below “the full protection and security required by international law”; or indeed as less than the national or thirdState standards. The mere fact that the occupation was referred to by the Court of Appeal of Palermo as unlawful does not, in the Chamber's view, necessarily mean that the protection afforded fell short of the national standard to which the FCN Treaty refers. The essential question is whether the local law, either in its terms or its application has treated United States nationals less well than Italian nationals. This, in the opinion of the Chamber, has not been shown. The Chamber must, therefore, reject the charge of any

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violation of Article V, paragraphs 1 and 3. [3] Asian Agricultural Products Ltd. v. Republic of Sri Lanka (ICSID Case No. ARB/87/3), Final Award of 27 June 1990, 4 ICSID Rep. 246 (1997), ¶¶ 45-49, 53, 72-73, 75-77, 85-86 [Ahmed Sadek El-Kosheri (pres.), Berthold Goldman, Samuel K.B. Asante] [Asian Agricultural Products Ltd. (AAPL), a Hong Kong corporation, owned 48% of the shares of Serendib Seafood Ltd., a Sri Lankan company that ran a shrimp farm. Serendib's farm was destroyed on January 28, 1987, during a military operation conducted by Sri Lanka's security forces against installations in the area used by local rebel forces. The arbitral tribunal held that Sri Lanka violated its obligation to provide full protection and security pursuant to the Bilateral Investment Treaty between Sri Lanka and the United Kingdom.] (Citations selectively omitted) 45. The Claimant's primary submission … is based on the assumption that the “full protection and security” provision of Article 2(2) created a “strict liability” which renders the Sri Lankan Government liable for any destruction of the investment even if caused by persons whose acts are not attributable to the Government and under circumstances beyond the State's control. For sustaining said construction introducing a new type of objective absolute responsibility called “without fault”, the Claimant's main argument relies on the existence in the text of the Treaty of two terms: “enjoy” and “full”, a combination which sustains, according to the Claimant, that the Parties intended to provide the investor with a “guarantee” against all losses suffered due to the destruction of the investment for whatever reason and without any need to establish who was the person that caused said damage. In other words, the Parties substituted the “due diligence” standard of general international law by a new obligation creating an obligation to achieve a result (“obligation de resultat”) providing the foreign investor with a sort of “insurance” against the risk of having his investment destroyed under whatever circumstances. 46. The Tribunal is of the opinion that the Claimant's construction of Article 2.(2) … cannot be justified under any of the canons of interpretation previously stated … 47. … the words “shall enjoy full protection and security” have to be construed according to the “common use which custom has affixed” to them, their “usus loquendi”, “natural and obvious sense”, and “fair meaning”. In fact, similar expressions, or even stronger wordings like the “most constant protection”, were utilized since last century in a number of bilateral treaties concluded to encourage the flow of international economic exchanges and to provide the citizens and national companies established on the territory of the other contracting Party with adequate treatment for them as well as to their property … 48. The Arbitral Tribunal is not aware of any case in which the obligation assumed by the host State to provide the nationals of the other Contracting State with “full protection and security” was construed as an absolute obligation which guarantees that no damages will be suffered, in the sense that any violation thereof creates automatically a “strict liability” on behalf of the host State. *** 49. In the recent case concerning Elettronica Sicula S.P.A. (ELSI) between the U.S.A. and Italy adjudicated by a Chamber of the International Court of Justice, …[t]he ICJ Chamber clearly stated that: “The reference in Article V to the provision of “constant protection and security” cannot be construed as the giving of a warranty that property shall never in any circumstances be occupied or disturbed”. Consequently, both the oldest reported arbitral precedent and the latest I.C.J. ruling confirms that the language imposing on the host State an obligation to provide “protection and security” or “full protection and security required by international law” (the other expression included in the same Article V) could not be construed according to the natural and ordinary sense of the words as creating a “strict liability”. The rule remains that: “The State into which an alien has entered … is not an insurer or a guarantor of his security… It does not, and could hardly be asked to, accept an absolute responsibility for all injuries to foreigners” (Alwyn V. Freeman, Responsibility of States for Unlawful Acts of Their Armed Forces, Sijthoff, Leiden, 1957, p. 14). This conclusion, arrived at more than three decades ago, still reflects – in the Tribunal's opinion -the present status of International Law Investment Standards as reflected in “the worldwide BIT network”. In the opinion of the present Arbitral Tribunal, the addition of words like “constant” or “full” to strengthen the required standard of “protection and security” could justifiably indicate the Parties' intention to require within their treaty relationship a standard of “due diligence” higher than the “minimum standard” of general international law. But, the nature of both the obligation and ensuing responsibility

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remain unchanged, since the added words “constant” or “full” are by themselves not sufficient to establish that the Parties intended to transform their mutual obligation into a “strict liability”. *** 53. Therefore, … the Tribunal declares unfounded the Claimant's main plea aiming to consider the Government of Sri Lanka assuming strict liability under Article 2.(2) of the Bilateral Investment Treaty, without any need to prove that the damages suffered were attributable to the State or its agents, and to establish the State's responsibility for not acting with “due diligence”… * * * III – The Legal and Factual Considerations on which the Respondent’s Responsibility is Established 72. It is a generally accepted rule of International Law, clearly stated in international arbitral awards and in the writings of the doctrinal authorities, that: (i)

(ii)

A State on whose territory an insurrection occurs is not responsible for loss or damage sustained by foreign investors unless it can be shown that the Government of that state failed to provide the standard of protection required, either by treaty, or under general customary law, as the case may be; and Failure to provide the standard of protection required entails the state's international responsibility for losses suffered, regardless of whether the damages occurred during an insurgents' offensive act or resulting from governmental counterinsurgency activities.

73. The long established arbitral case-law was adequately expressed by Max Huber, the Rapporteur in the Spanish Zone of Morocco claims (1923), in the following terms: “The principle of non-responsibility in no way excludes the duty to exercise a certain degree of’ vigilance. If a state is not responsible for the revolutionary events themselves, it may nevertheless be responsible, for what its authorities do or not do toward the consequence, within the limits of possibility” … Furthermore, the famous arbitrator indicated that the “degree of vigilance” required in providing the necessary protection and security would differ according to the circumstances. In the absence of any higher standard provided for by Treaty, the general international law standard was stated to reflect the “degree of security reasonably expected”… *** 75. On various other occasions, the State Responsibility had been admitted for failure to provide the required protection, as witnessed by the following examples: In the 1903 Kummerow case, the Germany/Venezuela Mixed Claims Commission declared: “substantially all the authorities on international law agree that a nation is responsible for acts of revolutionists under certain conditions such as lack of diligence, or negligence in failing to prevent such acts, when possible, or as far as possible to punish the wrongdoer and make reparation for the injuring” … *** In the 1926 Home Insurance Company case, the Mexico/USA General Claim Commission emphasized the importance of “the duty to protect”, which required undertaking all “means reasonably necessary to accomplish that end”… *** 76. In the light of all the above-mentioned arbitral precedents, it would be appropriate to consider that adequate protection afforded by the host State authorities constitutes a primary obligation, the failure to comply with which creates international responsibility. Furthermore, “there is an extensive and consistent state practice supporting the duty to exercise due diligence” (Brownlie, System of the Law of Nations, State Responsibility-Part I, Oxford, 1986, p. 162)… After reviewing all categories of precedents, including more recent international judicial caselaw, the learned Oxford University Professor arrived, not only to confirm that international responsibility arises from the mere “failure to exercise due diligence” in providing the required protection, but also to note “a sliding scale of liability related to the standard of due diligence” (State Responsibility, op. cit. p. 162 and p. 168). In addition, special attention has to be given to the following passages of Brownlie's writings which seem to be of particular relevance to the present case: – –

“Unreasonable acts of violence by police officers … also give rise to responsibility” (Principles, op. cit., p. 447); “Substantial negligence to take reasonable precautionary and preventive action” is deemed sufficient ground to create “responsibility for damage to foreign public and private property in the area”(Ibid., p. 452);

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–

–

In commenting the ICJ Judgment rendered in the Corfu case (1949), the fact that “nothing was attempted to prevent the disaster” was qualified as “grave omission” which involved the international responsibility of Albania (State Responsibility, op. cit., p. 154); With regard to the ICJ Judgment rendered in the Hostages case (1980), Professor Brownlie emphasizes Iran's failure “to take appropriate steps to ensure the protection” required under the “full protection and security” provision of the Iran/U.S. A. Amity, Navigation and Commerce Treaty (Ibid., p. 157).

77. A number of other contemporary international law authorities noticed the “sliding scale”, from the old “subjective” criteria that takes into consideration the relatively limited existing possibilities of local authorities in a given context, towards an “objective” standard of vigilance in assessing the required degree of protection and security with regard to what should be legitimately expected to be secured for foreign investors by a reasonably well organized modern State. As expressed by Professor Freeman, in his 1957 Lectures at the Hague Academy of International Law: “The ‘due diligence’ is nothing more nor less than the reasonable measures of prevention which a well-administered government could be expected to exercise under similar circumstances” … According to modern doctrine, the violation of international law entailing the State's responsibility has to be considered constituted by “the mere lack or want of diligence”, without any need to establish malice or negligence … *** 85. … the Arbitral Tribunal came to the following conclusions: (A)

(B)

“

Both Parties are in agreement about one fact; that the infiltration by the rebels of the area in which Serendib's farm was located took such magnitude that the entire district had been for several months before January 1987 practically out of the Government's control. Though such admitted situation would have raised logically the question of whether there was during that period failure from the Government's part to provide “full protection and security” according to the objective standard suggested to be applicable, said question remains theoretical since there were no claimed “losses suffered” due to the lack of governmental protection throughout that period. The Respondent never contested the evidence given by Mr. Samtiapillia, neither during the written phase of the proceedings, nor when he gave his testimony at the Oral Hearing, about what he expressed in his letter of February 2, 1987, addressed to the Sri Lankan President of the Republic by stating: we maintained very cordial relationship with the senior officers of the security forces in Batticaloa, repeatedly told them that, if they had the slightest reservation about any of our Batticaloa staff they should let us know quietly and we would take action directly to get such persons out of the company”.

*** He added, that during that visit to Mr. Sumith de Silva on January 17,1987, the latter: “assured me … that he had no such reservation”. In his Affidavit prepared and sworn in October 1988; i.e. after Mr. Santiapilla's letter was produced as evidence by the Claimant in the present case, the same Mr. Sumith de Silva did not contest that the meeting in question took place at the indicated date (just 10 days before the January 28, 1987 operation), he did not contradict the substance of the reported discussion, and he did not deny the existence of “cordial relationship” as manifested by making “enquiries from government officials” before recruiting staff and readiness to dismiss whoever the authorities have “the slightest reservation” about him. In the light of said uncontested evidence, the Tribunal is of the opinion that reasonably the Government should have at least tried to use such peaceful available high level channel of communication in order to get any suspect elements excluded from the farm's staff. This would have been essential to minimize the risks of killings and destruction when planning to undertake a vast military counter-insurgency operation in that area for regaining lost control. The Tribunal notes in this respect that the failure to resort to such precautionary measures acquires more significance when taking into consideration that such measures fall within the normal exercise of governmental inherent powers – as a public authority – entitled to order undesirable persons out from security sensitive areas. The failure became particularity serious when the highest executive officer of the Company reconfirmed just ten days before his willingness to comply with any governmental requests in this respect. Accordingly, the Tribunal considers that the Respondent through said inaction and omission violated its due diligence obligation which requires undertaking all possible measures that could be reasonably expected to prevent the eventual occurrence of

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killings and property destructions. *** (d) – Neither Party succeeded in providing the Tribunal with convincing evidence about: (i)-the circumstances under which the destruction of the premises took place after they came under the control of the governmental forces; (ii)-who are the persons responsible for the effective destruction of the farm premises; (iii)-how was the destruction committed; and (iv)-how the subsequent acts causing the loss of the prawns in ponds took place. The Respondent could have at least provided the results of investigations conducted in this respect by the competent Sri Lankan authorities, particularly since all the events in question took place during the two weeks period when the farm was under the exclusive control of the security forces. In final analysis, no conclusive evidence exists sustaining the Claimant's allegation that the special security forces were themselves the actors of said destruction causing the losses suffered. At the same time no conclusive evidence sustains the Respondent's allegation that the destruction were “caused directly by the terrorist action”. Hence, the adjudication of the State's responsibility has to be undertaken by determining whether the governmental forces were capable, under the prevailing circumstance, to provide adequate protection that could have prevented the destructions from taking place totally or partially. In this respect, it has been already indicated that the governmental authorities should have undertaken important precautionary measures to get peacefully all suspected persons out of Serendib's farm before launching the attack, either through voluntary cooperation with the Management of the company or by ordering the Company to expel the suspected persons… If this had been effectively the case, in the opinion of the Tribunal, the legitimate expected course of action against those suspected persons would have been either to institute judicial investigations against them to prove their culpability or innocence, or to undertake the necessary measures in order to get them off the Company's farm. But, as previously explained, nothing of the sort took place. On the contrary, only ten days before the January 28, 1987, operation no complaints were voiced against any of them, including the newly appointed farm manager Mr. Karunargy, during the meeting of Mr. Santiapillai with the Area Coordinating Officer Mr. Sumith de Silva… Therefore, and faced with the impossibility of obtaining conclusive evidence about what effectively caused the destruction of the farm premises during the period in which the entire area was out of bounds under the exclusive control of the governmental security force, the Tribunal considers the State's responsibility established in conformity with the previously stated international law rules of evidence… 86. For all the legal and factual considerations contained in the present section of the award, the Tribunal came to the conclusion that the Respondent's responsibility is established under international law. [4] Azurix Corp. v. Argentine Republic (ICSID Case No. ARB/01/12), Award of 14 July 2006, (15) ¶¶ 406-408 [Andrés Rigo Sureda (pres.), Marc Lalonde, Daniel Hugo Martins] [In 1996, the Province of Buenos Aires started the privatization of the services of AGOSBA, the Province owned and operated company which provided potable water and sewerage services in the Province. Azurix, a US investor engaged in the water and sewage management industry, won that bid was granted a 30-year concession for the distribution of potable water, and the treatment and disposal of sewerage in the Province. A few years in the life of the concession, a series of politically-motivated decisions prevented the application of the contractually-agreed tariff regime, precluding the concessionaire from operating profitably and obtaining the necessary financing for the overhaul and operation of the concession. Azurix subsequently initiated ICSID arbitration proceeding under the US-Argentina BIT.] (Citations selectively omitted) 406. While the cases of APPL and AMT refer to physical security, there are other cases in which tribunals have found that full protection and security has been breached because the investment was subject to unfair and inequitable treatment – Occidental v. Ecuador – or, conversely, they have held that the obligation of fair and equitable treatment was breached because there was a failure to provide full protection and security – Wena Hotels v. Egypt. The inter-relationship of the two standards indicates that full protection and security may be breached even if no physical violence or damage occurs as it was the case in Occidental v. Ecuador. 407. In some bilateral investment treaties, fair and equitable treatment and full protection and security appear as a single standard, in others as separate protections. The BIT falls in the last category; the two phrases describing the protection of investments appear sequentially as different obligations in Article 11.2(a): “Investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and …” The tribunal in Occidental based its decision on a clause worded exactly like in the BIT, and nonetheless considered that, after it had found that the fair

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and equitable standard had been breached, “the question of whether in addition there has been a breach of full protection and security under this Article becomes moot as a treatment that is not fair and equitable automatically entails an absence of full protection and security.” 408. The Tribunal is persuaded of the interrelationship of fair and equitable treatment and the obligation to afford the investor full protection and security. The cases referred to above show that full protection and security was understood to go beyond protection and security ensured by the police. It is not only a matter of physical security; the stability afforded by a secure investment environment is as important from an investor's point of view. The Tribunal is aware that in recent free trade agreements signed by the United States, for instance, with Uruguay, full protection and security is understood to be limited to the level of police protection required under customary international law. However, when the terms “protection and security” are qualified by “full” and no other adjective or explanation, they extend, in their ordinary meaning, the content of this standard beyond physical security. To conclude, the Tribunal, having held that the Respondent failed to provide fair and equitable treatment to the investment, finds that the Respondent also breached the standard of full protection and security under the BIT. [5] Comments and Questions 1.

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

Investment treaties have used different words to describe this standard such as “full protection and security”, “the most constant protection and security” and other similar language. Is the standard the same despite the different wording or may the different words create different outcomes? What is the standard for determining a violation of full protection and security under the 1992 US Model BIT? Does full protection and security create an absolute liability standard for governments? Is the full protection and security standard equivalent to negligence? What must a claimant prove to establish a violation? Is the full protection and security standard limited to issues of the physical security of the investment? If this standard encompasses legal security, what would this require of a State? Does the full protection and security standard require a government to take action to protect an investment against the conduct of private parties? In what circumstances? If so, how far must a State go to protect investment? Is this provision a statement of customary international law or is it lex specialis? Is it the same in all investment treaties?

[C] Treatment No Less Favorable than that Required by International Law [1] Kenneth J. Vandevelde, United States Investment Treaties: Policy and Practice, 77-78 (Kluwer Law International 1992) The clause serves several useful purposes. To begin with, it makes clear that no BIT provision authorizes treatment which is less than that required by international law … Perhaps more importantly, the clause serves simply to incorporate international law by reference into a BIT. By converting all violations of international law affecting investment into treaty violations, this clause enables investors or their states to enforce customary international law using the investor-to-state or state-to-state disputes resolution mechanisms established by the BITs … Finally, the clause serves in effect as an explicit choice of law provisions for all dispute settlement mechanisms. Because treatment of investment must never be less than that required by international law, international law provides the governing rules of decision, except where national law is more favorable. [2] L. F. H. Neer and Pauline E. Neer v. Mexico (General Claims Commission – United States and Mexico), Opinion Rendered 15 October 1926, 21 Am. J. Int’l L. 555, 556, 559-560 (1927) [General Claims Commission; Concurring Opinion by Fred K. Nielsen] [The United States presented a claim against Mexico on behalf of Mr. Neer's widow and daughter. Mr. Neer worked in a mine in Mexico, and was killed by a number of armed men, who engaged Mr. Neer in a conversation while he and his family were on the way home. The Tribunal disallowed the claims of the United States because it could not prove the Mexican authorities' lack of diligence in apprehending and punishing the culprits that killed Mr. Neer.] (Citations selectively omitted) … Without attempting to announce a precise formula, it is in the opinion of the Commission possible to … hold, (first) that the propriety of governmental acts should be put to the test of international standards, and (second) that the treatment of an alien, in order to constitute an international delinquency, should amount to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily

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recognize its insufficiency. Whether the insufficiency proceeds from deficient execution of an intelligent law, or from the fact that the laws of the country do not empower the authorities to measure up to international standards, is immaterial. *** Separate Opinion of Fred K. Nielsen Although there is this clear recognition in international law of the scope of sovereign rights relating to matters that are subject of domestic regulations, it is also clear that the domestic law and the measures employed to execute it must conform to the requirements of the supreme law of members of the family of nations which is international law, and that any failure to meet those requirements is a failure to perform a legal duty, and as such, an international delinquency. Hence a strict conformity by authorities of a government with its domestic law is not necessarily conclusive evidence of the observance of legal duties imposed by international law, although it may be important evidence on that point. *** It may perhaps be said with a reasonable degree of precision that the propriety of governmental acts should be determined according to ordinary standards of civilization, even though standards differ considerably among members of the family of nations, equal under the law. And it seems to be possible to indicate with still further precision the broad, general ground upon which a demand for redress based on a denial of justice may be made by one nation upon another. It has been said that such a demand is justified when the treatment of an alien reveals an obvious error in the administration of justice, or fraud, or a clear outrage. [3] Mondev International Ltd. v. United States of America (ICSID Case No. ARB (AF)/99/2), Award of 11 October 2002, (16) ¶¶ 110-117, 119-125 [Ninian Stephen (pres.), James R. Crawford, Stephen M. Schwebel] [A dispute arose out of a 1978 commercial real estate development contract between a subsidiary of Mondev International Ltd, a Canadian company, and the City of Boston and the Boston Redevelopment Authority. In 1994, the subsidiary won a jury verdict against the other parties for breach of contract, but the trial judge set aside the verdict regarding the Authority on the basis of immunity from suit for intentional torts. The Massachusetts Supreme Court upheld the ruling regarding the immunity of the Authority and also reversed the verdict regarding the City. Mondev then brought the matter to arbitration, claiming that the US failed to meet its Chapter 11 obligations.] (Citations selectively omitted) 110. … all three NAFTA Parties challenged holdings of the Tribunal in Pope & Talbot which find that the content of contemporary international law reflects the concordant provisions of many hundreds of bilateral investment treaties. In particular, attention was drawn to what those three States saw as a failure of the Pope & Talbot Tribunal to consider a necessary element of the establishment of a rule of customary international law, namely opinio juris. These States appear to question whether the parties to the very large numbers of bilateral investment treaties have acted out of a sense of legal obligation when they include provisions in those treaties such as that for “fair and equitable” treatment of foreign investment. 111. The question is entirely legitimate. It is often difficult in international practice to establish at what point obligations accepted in treaties, multilateral or bilateral, come to condition the content of a rule of customary international law binding on States not party to those treaties. Yet the United States itself provides an answer to this question, in contending that, when adopting provisions for fair and equitable treatment and full protection and security in NAFTA (as well as in other BITs), the intention was to incorporate principles of customary international law. Whether or not explanations given by a signatory government to its own legislature in the course of ratification or implementation of a treaty can constitute part of the travaux preparatoires of the treaty for the purposes of its interpretation, [footnote omitted] they can certainly shed light on the purposes and approaches taken to the treaty, and thus can evidence opinio juris. For example the Canadian Statement on Implementation of NAFTA states that Article 1105(l) “provides for a minimum absolute standard of treatment, based on longstanding principles of customary international law”. The numerous transmittal statements by the United States of BITs containing language similar to that of NAFTA show the same general approach. For example, the transmittal statement with respect to the United StatesEcuador BIT of 1993 states that the guarantee of fair and equitable treatment “sets out a minimum standard of treatment based on customary international law”. It is to be noted that these official statements repeatedly refer not to “the” but to “a” minimum standard of treatment. 112. More recent transmittal statements are even more explicit. For example transmittal statement for the United States-Albania BIT of 1995 states in relevant part: “Paragraph 3 sets out a minimum standard of treatment based on standards found in customary international law. The obligations to accord ‘fair and

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equitable treatment’ and ‘full protection and security’ are explicitly cited, as is the Parties ‘obligation not to impair through unreasonable and discriminatory means, the management, conduct, operation, and sale or other disposition of covered investments. The general reference to international law also implicitly incorporates other fundamental rules of international law: for example, that sovereignty may not be grounds for unilateral revocation or amendment of a Party's obligations to investors and investments (especially contracts), and that an investor is entitled to have any expropriation done in accordance with previous undertakings of a Party.” *** 113. Thus the question is not that of a failure to show opinio juris or to amass sufficient evidence demonstrating it. The question rather is: what is the content of customary international law providing for fair and equitable treatment and full protection and security in investment treaties? 114. It has been suggested, particularly by Canada, that the meaning of those provisions in customary international law is that laid down by the Claims Commissions of the interwar years, notably that of the Mexican Claims Commission in the Neer case… 115. The Tribunal would observe … that the Neer case, and other similar cases which were cited, concerned not the treatment of foreign investment as such but the physical security of the alien. Moreover the specific issue in Neer was that of Mexico's responsibility for failure to carry out an effective police investigation into the killing of a United States citizen by a number of armed men who were not even alleged to be acting under the control or at the instigation of Mexico. In general, the State is not responsible for the acts of private parties, and only in special circumstances will it become internationally responsible for a failure in the conduct of the subsequent investigation. Thus there is insufficient cause for assuming that provisions of bilateral investment treaties, and of NAFTA, while incorporating the Neer principle in respect of the duty of protection against acts of private parties affecting the physical security of aliens present on the territory of the State, are confined to the Neer standard of outrageous treatment where the issue is the treatment of foreign investment by the State itself. 116. Secondly, Neer and like arbitral awards were decided in the 1920s, when the status of the individual in international law, and the international protection of foreign investments, were far less developed than they have since come to be. In particular, both the substantive and procedural rights of the individual in international law have undergone considerable development. In the light of these developments it is unconvincing to confine the meaning of “fair and equitable treatment” and “full protection and security” of foreign investments to what those terms – had they been current at the time – might have meant in the 1920s when applied to the physical security of an alien. To the modern eye, what is unfair or inequitable need not equate with the outrageous or the egregious. In particular, a State may treat foreign investment unfairly and inequitably without necessarily acting in bad faith. 117. Thirdly, the vast number of bilateral and regional investment treaties (more than 2000 {footnote omitted]) almost uniformly provide for fair and equitable treatment of foreign investments, and largely provide for full security and protection of investments. Investment treaties run between North and South, and East and West, and between States in these spheres inter se. On a remarkably widespread basis, States have repeatedly obliged themselves to accord foreign investment such treatment. In the Tribunal's view, such a body of concordant practice will necessarily have influenced the content of rules governing the treatment of foreign investment in current international law. It would be surprising if this practice and the vast number of provisions it reflects were to be interpreted as meaning no more than the NeerTribunal (in a very different context) meant in 1927. *** 119. … The United States itself accepted that article 1105(1) is intended to provide a real measure of protection of investments, and that having regard to its general language and to the evolutionary character of international law, it has evolutionary potential. At the same time, Article 1105(1) did not give a NAFTA tribunal an unfettered discretion to decide for itself, on a subjective basis, what was “fair” or “equitable” in the circumstances of each particular case. While possessing a power of appreciation, the United States stressed, the Tribunal is bound by the minimum standard as established in State practice and in the jurisprudence of arbitral tribunals. It may not simply adopt its own idiosyncratic standard of what is “fair” or “equitable”, without reference to established sources of law. 120. The Tribunal has no difficulty in accepting that an arbitral tribunal may not apply its own idiosyncratic standard in lieu of the standard laid down in Article 1105 (1). In light of the FTC's interpretation, and in any event, it is clear that Article 1105 was intended to put at rest for NAFTA purposes a long-standing and divisive debate about whether any such thing as a minimum standard of treatment of investment in international law actually exists. Article 1105 resolves this issue in the affirmative for NAFTA Parties. It also makes it clear that the standard of treatment, including fair and equitable treatment and full

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protection and security, is to be found by reference to international law, i.e., by reference to the normal sources of international law determining the minimum standard of treatment of foreign investors. 121. To this the FTC has added two clarifications which are relevant for present purposes. First, it makes it clear that Article 1105(1) refers to a standard existing under customary international law, and not to standards established by other treaties of the three NAFTA Parties. There is no difficulty in accepting this as an interpretation of the phrase “in accordance with international law”. Other treaties potentially concerned have their own systems of implementation. Chapter 11 arbitration does not even extend to claims concerning all breaches of NAFTA itself, being limited to breaches of Section A of Chapter 11 and Articles 1503(2) and 1502(3) (a). If there had been an intention to incorporate by reference extraneous treaty standards in Article 1105 and to make Chapter 11 arbitration applicable to them, some clear indication of this would have been expected. Moreover the phrase “minimum standard of treatment” has historically been understood as a reference to a minimum standard under customary international law, whatever controversies there may have been over the content of that standard. 122. Secondly, the FTC interpretation makes it clear that in Article 1105(l) the terms “fair and equitable treatment” and “full protection and security” are, in the view of the NAFTA Parties, references to existing elements of the customary international law standard and are not intended to add novel elements to that standard. The word “including” in paragraph (1) supports that conclusion. To say that these elements are included in the standard of treatment under international law suggests that Article 1105 does not intend to supplement or add to that standard. But it does not follow that the phrase “including fair and equitable treatment and full protection and security” adds nothing to the meaning of Article 1105(l), nor did the FTC seek to read those words out of the article, a process which would have involved amendment rather than interpretation. The minimum standard of treatment as applied by tribunals and in State practice in the period prior to 1994 did precisely focus on elements calculated to ensure the treatment described in Article 1105(1). 123. A reasonable evolutionary interpretation of Article 1105(l) is consistent both with the travaux, with normal principles of interpretation and with the fact that, as the Respondent accepted in argument, the terms “fair and equitable treatment” and “full protection and security” had their origin in bilateral treaties in the post-war period. In these circumstances the content of the minimum standard today cannot be limited to the content of customary international law as recognised in arbitral decisions in the 1920s. 124. The Respondent noted that there was some common ground between the parties to the present arbitration in respect of the FTC's interpretations, namely, “that the standard adopted in Article 1105 was that as it existed in 1994, the international standard of treatment, as it had developed to that time … [L]ike all customary international law, the international minimum standard has evolved and can evolve … [T]he sets of standards which make up the international law minimum standard, including principles of full protection and security, apply to investments.” Moreover in their written submissions … both Canada and Mexico expressly accepted this point. 125. The Tribunal agrees. For the purposes of this Award, the Tribunal need not pass upon all the issues debated before it as to the FTC's interpretations of 31 July 2001. But in its view, there can be no doubt that, by interpreting Article 1105(l) to prescribe the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party under NAFTA, the term “customary international law” refers to customary international law as it stood no earlier than the time at which NAFTA came into force. It is not limited to the international law of the 19th century or even of the first half of the 20th century, although decisions from that period remain relevant. In holding that Article 1105(1) refers to customary international law, the FTC interpretations incorporate current international law, whose content is shaped by the conclusion of more than two thousand bilateral investment treaties and many treaties of friendship and commerce. Those treaties largely and concordantly provide for “fair and equitable” treatment of, and for “full protection and security” for, the foreign investor and his investments. Correspondingly the investments of investors under NAFTA are entitled, under the customary international law which NAFTA Parties interpret Article 1105(l) to comprehend, to fair and equitable treatment and to full protection and security.

[4] Comments and Questions 1. 2. 3. 4.

Does a minimum standard of treatment of aliens exist under international law? If so, what is its content? Is there a single minimum standard that applies to all investment cases? Is the meaning and scope of the phrase “treatment no less than that required by international law” limited to the international law minimum standard? Does this provision act as a choice-of-law for the parties? Does this provision make customary international law relevant to a violation of an investment treaty?

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5. 6. 8. 9.

Is this provision relevant in interpreting any other provisions of an investment treaty? Why or why not? Which provisons? Is this provision limited to customary international law? What else might it encompass? What conduct might violate this provision, but not other provisions of the 1992 U.S. Model BIT? Of NAFTA? Does this provision create a floor for the treatment of investments?

[D] Arbitrary Treatment [1] US Model Bilateral Investment Treaty (2012), (17) Article 2(2)(b) (b) Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. For purposes of dispute resolution under Articles VI and VII, a measure may be arbitrary or discriminatory notwithstanding the fact that a party has had or has exercised the opportunity to review such measure in the courts or administrative tribunals of a Party. [2] Elettronica Sicula S.p.A. (ELSI) (United States of America v. Italy), Judgment of 20 July 1989, [1989] I.C.J. Rep. 15, 89-93 (1989), ¶¶ 120-121, 123-124, 127-130 [Case summary included in Chapter 9.] (Citations selectively omitted) 120. Article I of the Supplementary Agreement to the FCN Treaty, which confers rights not qualified by national or most-favoured-nation standards, provides as follows: “The nationals, corporations and associations of either High Contracting Party shall not be subjected to arbitrary or discriminatory measures within the territories of the other High Contracting Party resulting particularly in: (a) preventing their effective control and management of enterprises which they have been permitted to establish or acquire therein; or (b) impairing their other legally acquired rights and interests in such enterprises or in the investments which they have made, whether in the form of funds (loans, shares or otherwise), materials, equipment, services, processes, patents, techniques or otherwise. Each High Contracting Party undertakes not to discriminate against nationals, corporations and associations of the other High Contracting Party as to their obtaining under normal terms the capital, manufacturing processes, skills and technology which may be needed for economic development.” The United States bases its claims upon allegations that measures were taken which were both “arbitrary” and “discriminatory” in the sense of this text. 121. The Applicant pressed strongly the claim that the requisition was an arbitrary or discriminatory act which violated both the “(a)” and the “(b)” clauses of the Article. The requisition, it is said, clearly prevented Raytheon and Machlett from exercising their control and management of ELSI and also resulted in an impairment of their legally acquired rights and interests in ELSI, inasmuch as it prevented the voluntary liquidation of ELSI and caused it to file for bankruptcy. To the claim as it is presented in those terms, however, the Chamber has already given its answer: the absence of a sufficiently palpable connection between the effects of the requisition and the failure of ELSI to carry out its planned orderly liquidation (paragraph 101 above). Accordingly, it cannot be said that it was the requisition per se which either prevented Raytheon's effective control and management of ELSI, or which resulted in impairing legally acquired rights, in the sense of the clauses called “(a)” and “(b)” in Article I of the Supplementary Agreement. Yet, although this is an answer to the claim as it is presented in terms of those clauses of Article I, it is not the end of the matter. The effect of the word “particularly”, introducing the clauses “(a)” and “(b)”, suggests that the prohibition of arbitrary (and discriminatory) acts is not confined to those resulting in the situations described in “(a)” and “(b)”, but is in the effect a prohibition of such acts whether or not they produce such results. It is necessary, therefore, to examine whether the requisition was, or was not, an arbitrary or discriminatory act of itself. *** 123. In order to show that the requisition order was an “arbitrary” act in the sense of the Supplementary Agreement to the FCN Treaty, the Applicant has relied (inter alia) upon the status of that order in Italian law. It contends that the requisition “was precisely the sort of arbitrary action which was prohibited” by Article I of the Supplementary Agreement, in that “under both the Treaty and Italian law, the requisition was unreasonable and improperly motivated”; it was “found to be illegal under Italian domestic law for precisely this reason”. Relying on its own English translation of the decision of the Prefect of Palermo of 22 August 1969, the Applicant concludes that the Prefect found that the order was “destitute of any juridical cause which may justify it or make it enforceable”. Italy first contended that the word “or” in the translation of this

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passage should be replaced by “and”, and subsequently put forward the alternative translation that “the order, generically speaking, lacks the proper motivation that could justify it and make it effective”… *** 124. Yet it must be borne in mind that the fact that an act of a public authority may have been unlawful in municipal law does not necessarily mean that that act was unlawful in international law, as a breach of treaty or otherwise. A finding of the local courts that an act was unlawful may well be relevant to an argument that it was also arbitrary; but by itself, and without more, unlawfulness cannot be said to amount to arbitrariness. It would be absurd if measures later quashed by higher authority or a superior court could, for that reason, be said to have been arbitrary in the sense of international law. To identify arbitrariness with mere unlawfulness would be to deprive it of any useful meaning in its own right. Nor does it follow from a finding by a municipal court that an act was unjustified, or unreasonable, or arbitrary, that the act is necessarily to be classed as arbitrary in international law, though the qualification given to the impugned act by a municipal authority may be a valuable indication. *** 127. In the action brought by the trustee in bankruptcy for damages on account of the requisition, the Court of Palermo and subsequently the Court of Appeal of Palermo had to consider the legal significance of the decision of the Prefect. The Court of Palermo accepted the argument of the respondent administration that … “the Prefect's order is in substance a revocation of the act in question, the objectives which were contemplated by it having been adjudged to have been impossible to achieve”. When the matter came before the Court of Appeal, it observed that this argument was contrary to the argument of the trustee in bankruptcy … “who regarded the [Prefect's] decree as a declaration of the unlawfulness of the requisition order”. The Court of Appeal understood the lower court as meaning simply that … “the defects found by the Prefect in the requisition order were defects in respect of the merits and not defects in respect of lawfulness”; it found that this finding was incorrect because the reasoning of the Prefect was, in its view, a clear finding of … “a typical case of excess of power, which is of course a defect in respect of lawfulness of an administrative act”. Having reached this conclusion, the Court of Appeal refers later in its judgment to the requisition as having been “unlawful” (“illectio”). The analysis of the Prefect's decision as a finding of excess of power, with the result that the order was subject to a defect of lawfulness does not, in the Chamber's view, necessarily and in itself signify any view by the Prefect, or by the Court of Appeal of Palermo, that the Mayor's act was unreasonable or arbitrary. 128. Arbitrariness is not so much something opposed to a rule of law, as something opposed to the rule of law. This idea was expressed by the Court in the Asylum case, when it spoke of “arbitrary action” being “substituted for the rule of law” (Asylum, Judgment, I.C.J. Reports 1950, p 284). It is a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety. Nothing in the decision of the Prefect, or in the judgment of the Court of Appeal of Palermo, conveys any indication that the requisition order of the Mayor was to be regarded in that light. 129. The United States argument is not of course based solely on the findings of the Prefect or of the local courts. United States counsel felt able to describe the requisition generally as being an “unreasonable or capricious exercise of authority”. Yet one must remember the situation in Palermo at the moment of the requisition, with the threatened sudden unemployment of some 800 workers at one factory. It cannot be said to have been unreasonable or merely capricious for the Mayor to seek to use the powers conferred on him by the law in an attempt to do something about a difficult and distressing situation. Moreover, if one looks at the requisition order itself, one finds an instrument which in its terms recites not only the reasons for its being made but also the provisions of the law on which it is based: one finds that, although later annulled by the Prefect because “the intended purpose of the requisition could not in practice be achieved by the order itself” (paragraph 125 above), it was nonetheless within the competence of the Mayor of Palermo, according to the very provisions of the law cited in it; one finds the Court of Appeal of Palermo, which did not differ from the conclusion that the requisition was intra vires, ruling that it was unlawful as falling into the recognized category of administrative law of acts of “eccesso di potere”. Furthermore, here was an act belonging to a category of public acts from which appeal on juridical grounds was provided in law (and indeed in the event used, not without success). Thus, the Mayor's order was consciously made in the context of an operating system of law and of appropriate remedies of appeal, and treated as such by the superior administrative authority and the local courts. These are not at all the marks of an “arbitrary” act. 130. The Chamber does not, therefore, see in the requisition a measure which could reasonably be said to earn the qualification “arbitrary”, as it is employed in Article I of the Supplementary Agreement. Accordingly, there was no violation of that Article. [3] Ronald S. Lauder v. The Czech Republic (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 3 September 2001, (18) ¶¶ 214, 219, 221-222, 225-228, 229-230, 232 [Robert Briner (pres.), Lloyd Cutler, Bohuslav Klein]

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[In 1993, US investor Ronald Lauder invested into Czech private television broadcaster TV nova. A business dispute erupted between Mr. Lauder and his Czech partner, Vladimír Železný, which effectively resulted in Mr. Lauder loosing his investment in TV Nova. Mr. Lauder argued that Czech Media Council, a government entity granting broadcasting licences, interfered with Mssrs. Lauder and Železný’s dealings, eventually contributing to the loss he sustained. Mr. Lauder initiated UNCITRAL arbitration proceedings under the US-Czec Republic BIT. ] (Citations selectively omitted) 5.4.2 The prohibition against arbitrary and discriminatory measures 214. The Claimant alleges that the Respondent took arbitrary and discriminatory measures when the Media Council insisted in 1993 on CEDC not becoming a direct shareholder of CET 21. The Claimant argues that the prohibition against arbitrary and discriminatory measures must be inferred from the circumstances. It is not necessary that a measure be founded on a violation of domestic law for such a measure to be arbitrary and/or discriminatory. Arbitrary action may actually include regulatory actions without goodfaith governmental purpose … *** 219. The Arbitral Tribunal considers that a violation of Article II(2)(b) of the Treaty requires both an arbitrary and a discriminatory measure by the State. It first results from the plain wording of the provision, which uses the word, “and” instead of the word “or”. It then results from the existence of Article II(l) of the Treaty, which sets forth the prohibition of any discriminatory treatment of investment, except in the sectors or matters expressly listed in the Annex to the Treaty. If Article II(2)(b) prohibited only arbitrary or discriminatory measures, it would be partially redundant to the prohibition of discriminatory measure set forth in Article II(l). *** 221. The Treaty does not define an arbitrary measure. According to Black ‘s Law Dictionary, arbitrary means “depending on individual discretion; (…) founded on prejudice or preference rather than on reason or fact” (Black's Law Dictionary 100 (7th ed. 1999)). 5.4.2.1 CEDC not becoming a shareholder in CET 21 222. The Arbitral Tribunal holds that the Czech Republic took a discriminatory and arbitrary measure against Mr. Lauder in violation of Article II(2)(b) of the Treaty when the Media Council, after having accepted the idea of a direct investment in CET 21 by CEDC, a company which Mr. Lauder controlled, eventually did not allow such investment, and required that a third company, CNTS, be created. *** 225. … the Media Council had accepted, and even was satisfied with, the fact that CEDC would be a shareholder of CET 21. As a result, this Tribunal Arbitral considers that there can be no doubt that when the Media Council informed CET 21 in its letter of 30 January 1993 … and the public in its press release of the same day … that the License had been granted to CET 21 and that “[a] direct participant in the application is the international corporation CEDC”, the Media Council agreed and approved meant that CEDC would be a shareholder of CET 21. 226. Even assuming that the Media Council thought of another form of participation of CEDC at the time it made the decision to award the License to CET 21, CEDC could reasonably believe that its project of becoming a shareholder in CET 21 had been properly understood and accepted by the Media Council. At no time until the decision was made did the Media Council express any misunderstanding or dissatisfaction with such project. 227. The various statements of the members and staff of the Media Council in the beginning of 1993 submitted in the present proceedings, the immediate rising of strong political opposition to the Media Council's choice in favor of CET 21, and the overall circumstances of the case show that the Media Council realized immediately after the decision on the award of the License had been made that it had to bring some modifications to the project of CET 21 and CEDC. In particular, the Media Council could no longer accept CEDC as a shareholder of CET 21, as it became clear from the political reactions to the recent decision to award the License to CET 21 that even stronger political opposition would arise, opening the way for an attack on the entire selection process. The Media Council therefore gave CET 21 and CEDC the task of proposing an acceptable structure … *** 229. The 1997 Report of the Media Council to the Czech Parliament actually provides a good summary of the actions and their motivations which took place between 30 January and 9 February 1993: “When granting the license to the Company CET 21 for fear that a majority share of foreign capital in the license holder’s Company might impact the

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independence of full-format broadcasts, the Council assumed a configuration that separates the investor from the license holder himself. That is how an agreement came into existence (upon a series of remarks from the Council) by which the Company CNTS was established the majority owner of which is CEDC/CME”. 230. The Arbitral Tribunal holds that the Media Council decision to move from a direct participation by CEDC, a German company controlled by Mr. Lauder, an American citizen, to a contractual relationship providing for the question of a third company amounted to an arbitrary and discriminatory measure. *** 232. The measure was arbitrary because it was not founded on reason or fact, nor on the law which expressly accepted “applications from companies with foreign equity participation”… but on mere fear reflecting national preference. [4] Azurix Corp. v. Argentine Republic (ICSID Case No. ARB/01/12), Award of 14 July 2006, (19) ¶¶ 390-393 [Andrés Rigo Sureda (pres.), Marc Lalonde, Daniel Hugo Martins] [Case summary Chapter 9] (Citations selectively omitted) 390. Article 11.2(b) provides: “Neither Party shall in any way impair by arbitrary or discriminatory measures the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal of investments. For the purposes of dispute resolution under Articles VII and VIII, a measure may be arbitrary or discriminatory notwithstanding the opportunity to review such measure in the courts or administrative tribunals of a Party.” 391. The Tribunal agrees with the interpretation of the Claimant that a measure needs only to be arbitrary to constitute a breach of the BIT. This interpretation has not been contested by the Respondent and it follows from the alternative way in which the term “measures” is qualified by the adjectives “arbitrary or discriminatory”. The parties disagree on whether the meaning of arbitrary should be the ordinary meaning of “arbitrary” or the meaning of arbitrary given by the ICJ in ELSI. The parties also disagree on the relevance of Pope & Talbot to this case and Argentina has pointed out the description of arbitrary given in Genin. The Tribunal is required to consider the ordinary meaning of the terms used in the BIT under Article 31 of the Vienna Convention. The findings of other tribunals, and in particular of the ICJ, should be helpful to the Tribunal in its interpretative task. 392. In its ordinary meaning, “arbitrary” means “derived from mere opinion”, “capricious”, “unrestrained”, “despotic.” Black's Law Dictionary defines the term, inter alia, as “done capriciously or at pleasure”, “not done or acting according to reason or judgment”, “depending on the will alone.” Pope & Talbot did not define arbitrary as it stood today. It only commented on the fact that the ICJ itself had moved from the standard advocated by Canada based on Neer to a less demanding standard. Genin does not seem to take notice of the change that has taken place when it adds the requirement of bad faith. The Tribunal finds that the definition in ELSI is close to the ordinary meaning of arbitrary since it emphasizes the element of willful disregard of the law. 393. The question for the Tribunal is whether the measures taken by the Province can be considered to be arbitrary and have impaired “the management, operation, maintenance, use, enjoyment, acquisition, expansion, or disposal” of the investment of Azurix in Argentina. The Tribunal finds that the actions of the provincial authorities calling for non-payment of bills even before the regulatory authority had made a decision, threatening the members of the ORAB [the regulatory agency] because it had allowed ABA to resume billing, requiring ABA not to apply the new tariff resulting from the review of the construction variations and affirming that zone coefficients apply in contradiction with the information provided to the bidders at the time of bidding for the Concession, restraining ABA from collecting payment from its customers for services rendered before March 15, 2002, and denying to ABA access to the documentation on the basis of which ABA was sanctioned are arbitrary actions without basis in the Law or the Concession Agreement and impaired the operation of Azurix's investment. [5] Comments and Questions 1.

2. 3. 4.

What is the standard for arbitrary treatment under international law? Is the standard for arbitrariness adopted by the International Court of Justice (“ICJ”) in the ELSI case the same as the test adopted by national courts for judging the propriety of regulatory acts? Why did the ICJ define arbitrariness as it did? What is the legal significance of an ICJ decision for investment arbitral tribunals? Should the term “arbitrary” as used in an investment treaty be given its ordinary meaning as provided by Article 31 of the Vienna Convention? What is the ordinary meaning of the term “arbitrary”? Is a regulatory act that is unlawful under national law necessarily arbitrary under international law? Why or why not? Is there a danger of an investment arbitral tribunal using the test of arbitrariness to

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5.

act as a court of appeals for the actions of national authorities? Is such a role appropriate for an investment arbitral tribunal? In the Asylum Case (Republic of Colombia v. Republic of Peru), 1950 I.C.J. 266 (Award of 20 November 1950), the International Court of Justice referred to arbitrary action in these words: In principle, therefore, asylum cannot be opposed to the operation of justice. An exception to this rule can occur only if, in the guise of justice, arbitrary action is substituted for the rule of law. Such would be the case if the administration of justice were corrupted by measures clearly prompted by political aims. Asylum protects the political offender against any measures of a manifestly extra-legal character which a government might take or attempt to take against its political opponents. The word ‘safety’, which in Article 2, paragraph 2, determines the specific effect of asylum granted to political offenders, means that the refugee is protected against arbitrary action by the government, and that he enjoys the benefits of the law.

6.

7.

The following cases have adopted a test for “arbitrary” similar to the ordinary meaning given it in the Lauder case: Occidental Exploration & Prod. Co. v. Ecuador (LCIA Case No. UN 3467), Award, 1 July 2004, ¶ 162, available at http://italaw.com/documents/Oxy-EcuadorFinalAward_001.pdf, Azurix v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, ¶ 391-392, available athttp://italaw.com/documents/AzurixAwardJuly2006.pdf, and LG&E v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006, ¶ 157, available athttp://italaw.com/documents/ARB021_LGE-Decision-on-Liability-en.pdf, Siemens, A.G., v. Argentina, ICSID Case NO. ARB/02/8, Award, 6 February, 2007, ¶ 318-319, available athttp://italaw.com/documents/Siemens-Argentina-Award.pdf, National Grid P.L.C. v. Argentina, UNCITRAL Award of 3 November, 2008, ¶ 197, available athttp://italaw.com/documents/NGvArgentina.pdf. In some BITs, the word “unreasonable” is used instead of “arbitrary.” Should this make a difference in the interpretation of the provision?

[E] Discrimination [1] North American Free Trade Agreement (1993), (20) Article 1104 Article 1104: Non-discriminatory Treatment Each Party shall accord to investors of another Party and to investments of investors of another Party the better of the treatment required by Articles 1102 and 1103 (“nondiscriminatory treatment”). [2] A.F.M. Maniruzzaman, Expropriation of Alien Property and the Principle of NonDiscrimination in International Law of Foreign Investment: An Overview, 8 J. Transnat’l L. & Pol’y 57, 58-59, 61-65, 67-70, 72, 77 (1998) (Citations selectively omitted) In international law the principle of equality (or equality of treatment) is often expressed in the negative form as one of non-discrimination. The simple meaning of the concept as ‘absence of discrimination’ is quite elusive in both international and municipal law. The concept of discrimination entails two elements: first, the measures directed against a particular party must be for reasons unrelated to the substance of the matter, for example, the company's nationality. Second, discrimination entails like persons being treated in an inequivalent manner. In its literal or formal sense, the principle of nondiscrimination may be described … that: “the rules of international law against discrimination can be considered to be satisfied when foreigners are given formal equality with the nationals of the country in question in respect of protection in similar situations.” *** There cannot be any absolute principle of alien non-discrimination; it is neither supported in municipal law nor in international law. But sometimes partisan views are put forward. As White wrote about four decades ago: (1) (2)

Measures which are aimed exclusively at alien-owned property in a field where there are also national interests constitute illegal discrimination. Measures which are general in scope but which single out alien property … for unfavourable treatment (usually in the matter of payment of compensation) constitute a breach of the (alien non-discrimination) rule unless there is justification for such treatment in treaty provisions.

*** Besides such theory, common sense dictates and altruistic philosophy underpins the notion that differential treatment on justifiable or reasonable grounds is permissible. Professor Schachter notes that “since the time of Plato, it has been suggested that

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‘equality among unequals' may be inequitable and that differential treatment may be essential for ‘real equality’.” It has been echoed in certain quarters that the principle of affirmative action based on compensatory or distributive justice available in domestic legal systems should also be adopted in international law. The affirmative action is thus to redress the inequality. Some jurists also support the view that the equality of treatment “forbids discriminatory distinctions but permits and sometimes requires the provision of affirmative action.” The European Court of Human Rights once pronounced that “certain legal inequalities tend only to correct factual inequalities.” In the Advisory Opinion Concerning German Settlers in Poland, the Permanent Court of International Justice (PCIJ) maintained that “[t]here must be equality in fact as well as ostensible legal equality.” The same court also confirmed in the Advisory Opinion concerning the Treatment of Polish Nationals in the Danzig Territory that “[t]he prohibition against discrimination, in order to be effective, must ensure the absence of discrimination in fact as well as in law.” Though mindful of the difficulty in clearly differentiating between these two notions, the PCIJ said in its Advisory Opinion on the Minority Schools in Albania: “Equality in law precludes discrimination of any kind; whereas equality in fact may involve the necessity of different treatment in order to obtain a result which establishes an equilibrium between different situations.” The former notion signifies formal equality. However, the Court has contended that formal equality (i.e., provisions for equality contained in the Convention or treaty) may not be affected even though actual discrimination takes place, in fact, on justified grounds. The Court also expressed a preference against the automatic application of the principle of equality of treatment in blanket disregard of factual circumstances. The Oscar Chinn case is instructive on this point. Although there was actual discrimination by the Belgian authority between Belgian Company Union Nationale des Transports Fluviaux (Unatra) under State supervision, on the one hand, and other Belgian and non-Belgian companies not under State supervision, on the other, and despite that the principle of equal treatment was the characteristic feature of the legal regime established in the Congo Basin, the Court found no discrimination existed under the applicable Convention of Saint-Germain. In the Court's literal interpretation of the relevant provisions of the Convention, “the form of discrimination which is forbidden [by the Convention] is … discrimination based upon nationality and involving differential treatment by reason of their nationality as between persons belonging to different national groups.” *** In its strict literal interpretation of the Convention, the Court thus leaned towards the view that equal treatment is required only between entities in like situations. *** Perhaps the Belgian action was further justified because it was intended to address one aspect of the prevailing economic depression and was aimed at the welfare of the country in difficult circumstances. Sir Hirsch Lauterpacht, in his comment on the case, seemed sympathetic to “the action of the State, apparently of a discriminatory nature, … taken with the view to meeting an economic emergency of some gravity.” He observed that “it is conceivable that a claim to equality of treatment, if pushed to the logical extreme of its apparent meaning, may operate in a way calculated to defeat considerations of justice and the intention of the parties.” Thus in both international and national case law there is support for the view that the principle of non-discrimination does not necessarily prevent a State from justifiably treating like persons differently in some situations. The jurisprudence of the European Court of Justice follows the above discussion. Thus in Italian Government v. E.E.C. Commission the Court held that [t]he different treatment of non-comparable situations does not lead automatically to the conclusion that there is discrimination. An appearance of formal discrimination may therefore correspond in fact to an absence of material discrimination. Material discrimination would consist in treating either similar situations differently or different situations identically. In today's world of heterogeneous situations no absolute concept of non-discrimination can thus garner any warm support… One may reasonably think that instead of applying the traditional principle of non-discrimination in its rigid form, application of the principle should depend on a reasonable, just and equitable basis in the particular situation concerned. The standard has been reflected in the American Law Institute's Restatement that “[c]onduct discriminates against an alien … if it involves treating the alien differently from nationals or from aliens of a different nationality without a reasonable basis for the difference.” McDougal, Lasswell, and Chen have rightly advised that “whether a particular differentiation of aliens and nationals has a reasonable basis in the common interest of the larger community must … depend not only upon the value primarily at stake in the differentiation but also upon many particular, and varying features of the context in which the differentiation is made.”

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*** Recent developments suggest that the presence of discrimination should be determined by evaluating the individual factual circumstances of each particular case. Thus, the legal notion of discrimination is more contextual than hypothetical. Professor Brownlie has suggested that the concept “calls for more sophisticated treatment in order to identify unreasonable (or material) discrimination as distinct from the different treatment of noncomparable situations.” In the Third Restatement of the Foreign Relations Law of the United States, the American Law Institute has neatly summarized the position thus: Discrimination implies unreasonable distinction. Takings that invidiously single out property of persons of a particular nationality, would be unreasonable; classifications, even if based on nationality, that are rationally related to the State's security or economic policies might not be unreasonable. Discrimination may be difficult to determine where there is no comparable enterprise owned by local nationals or by nationals of other countries, or where nationals of the taking State are treated equally but discrete actions separated in time. It must be acknowledged that in all the above cases, the crucial test is whether the concerned State acts in good faith. *** It is crucial that discriminatory acts be actionable, both those that are intentionally discriminatory and those discriminatory in effect. *** Having thus examined the principle of non-discrimination in customary international law, it is necessary to address it in the context of conventional international law, where the concept has a wider connotation. One writer has coined the phrase ‘non-discrimination lato sensu’ to refer to the “lack of discrimination both among aliens and foreign countries and products, and between aliens and nationals (and corresponding products).” Thus the concept in its wider sense encompasses “most-favoured-nation (MFN) treatment” as well as “national treatment.” However, both standards are treaty-made and neither is recognized as part of customary international law. *** As opposed to customary international law, these treaty-made standards provide the contour of the principle of non-discrimination or equality of treatment in specific cases concerned. In this sense the treaty-made standards are more concrete than abstract; the reverse is often true in customary international law. *** It is noticeable that all the formulations require treatment not identical to that accorded to the investment of nationals or companies of the host State but that which is no less favorable. This may mean that foreign investors may be treated more favorably than their host country's domestic counterparts. This is clear when foreign investors are offered incentives or other special treatment by the host country or state. Such incentives are evidently discriminatory in favor of foreign investors. Thus, the national treatment standard is not opposed to discriminatory treatment if it is in the form of investment incentives to foreign investors. This is arguably justified upon the assertion that foreign investors and the host country's domestic investors are not “in like situations.” Therefore the meaning of the terms “in like situations,” “in similar circumstances,” and “in the same circumstances” is highly relevant, and problematic unless clearly defined in the relevant documents. *** Thus, the principle of non-discrimination in both customary and conventional international law must be understood in the context to which it is applied. The principle has no blanket application in disregard of the factual circumstances concerned; in applying it, the judge or arbitrator must weigh cautiously all the relevant circumstances. [3] Amoco International Finance Corporation v. The Government of the Islamic Republic of Iran (IUSCT Case No. 56), Partial Award of 14 July 1987 (21) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [Case summary is included in Chapter 3.] (Citations selectively omitted) Discrimination 139. In support of its contention that the expropriation was discriminatory, the Claimant relies on the fact that, in another of NPC's joint ventures, the Japanese share of a consortium, the Iran-Japan Petrochemical Company (“IJPC”), was not expropriated. In contrast, all American interests in petrochemical joint ventures with NPC were expropriated. The Claimant thus argues that the expropriation of Amoco's interest in

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Khemco was based on discrimination against American interests and was unlawful for this reason. 140. Discrimination is widely held as prohibited by customary international law in the field of expropriation. Although Article IV, paragraph 2 does not expressly prohibit a discriminatory expropriation, paragraph 1 of the same article obliges each party to “refrain from applying unreasonable or discriminatory measures that would impair [the] legally acquired rights and interests” of the nationals and companies of the other party. This wording is so broad that it certainly applies to expropriations. In any event, the Respondents recognize that a discriminatory expropriation is wrongful, but deny that the expropriation was discriminatory in the instant Case. 141. The Respondents assert that the Single Article Act applied to the entire oil industry, irrespective of the nationality of the foreign companies involved in this industry. In the event, it was applied to non-United States corporations as well as United States corporations. Therefore, it can not be held to be discriminatory. That the Special Commission did not include the contract with IJPC among those which were nullified, the Respondents submit, was an exception due to specific circumstances. They mention specifically the fact that the operation of the IJPC joint venture was not closely linked with other contracts relating to the exploitation of oil fields, whereas the operation of the Khemco plant was linked to the supply of gas from the oil fields operated jointly by Amoco and NIOC pursuant to the JSA. Furthermore, the Respondents emphasize that IJPC was not yet an operational concern at the relevant time, a point that was confirmed by the Claimant. 142. The Tribunal finds it difficult, in the absence of any other evidence, to draw the conclusion that the expropriation of a concern was discriminatory only from the fact that another concern in the same economic branch was not expropriated. Reasons specific to the non-expropriated enterprise, or to the expropriated one, or to both, may justify such a difference of treatment. Furthermore, as observed by the arbitral tribunal in Kuwait and American Independent Oil Company (AMINOIL), (Reuter, Sultan & Fitzmaurice arbs, Award of 24 March 1982), reprinted in 21 Int'l Legal Mat'ls 976, 1019, a coherent policy of nationalization can reasonably be operated gradually in successive stages. In the present Case, the peculiarities discussed by the Parties can explain why IJPC was not treated in the same manner as Khemco. The Tribunal declines to find that Khemco's expropriation was discriminatory. [4] Nykomb Synergetics Technology Holding AB v. The Republic of Latvia (SCC Case No. 118/2001), Award of 16 December 2003, [2003] IIC 182, § 4.3.2(1) at 34 (2003) [Nykomb, a Swedish investor, and its local subsidiary entered into a contract with a Latvian State-owned electricity company for the construction and operation of an power plant. The contract provided for a guaranteed tariff multiplier for the first eight years of operation. A disagreement arose as to the value of that multiplier and a protracted price dispute ensued between Nykomb's local subsidiary and the Latvian State-owned electricity company. With no resolution in sight, Nykomb initiated arbitration proceedings before the Stockholm Chamber of Commerce pursuant to the Energy Charter Treaty.] (Citations selectively omitted) 4.3.2 a) Unreasonable or discriminatory measures Article 10 (1) provides inter alia that “… no Contracting Party shall in any way impair by …unreasonable or discriminatory measures their [the Investor's Investments] …use, enjoyment or disposal”. The Claimant contends that Windau has been subject to discriminatory measures by Latvenergo's refusal to pay the double tariff. Latvenergo has been, and still is, paying SIA “Latelektro-Gulbene” and Joint Stock Company “Liepãjas Siltums” the double tariff for its surplus electric power. There is no legitimate reason to treat Windau differently from the two aforementioned enterprises. The Respondent does not deny the fact of the double tariff being paid to the two companies mentioned, but contends that the situations are not comparable. The Respondent has provided lists and some details concerning the 28 cogeneration power plants existing in Latvia, and asserted that they are in many respects different and therefore have been awarded different multipliers. An evaluation must take place in each case. No discrimination is demonstrated by the fact that the two above-mentioned plants have been granted the double tariff, whereas Bauska has not. The Arbitral Tribunal accepts that in evaluating whether there is discrimination in the sense of the Treaty one should only “compare like with like”. However, little if anything has been documented by the Respondent to show the criteria or methodology used in fixing the multiplier, or to what extent Latvenergo is authorized to apply multipliers other than those documented in this arbitration. On the other hand, all of the information available to the Tribunal suggests that the three companies are comparable, and subject

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to the same laws and regulations. In particular, this appears to be the situation with respect to Latelektro-Gulbene and Windau. In such a situation, and in accordance with established international law, the burden of proof lies with the Respondent to prove that no discrimination has taken or is taking place. The Arbitral Tribunal finds that such burden of proof has not been satisfied, and therefore concludes that Windau has been subject to a discriminatory measure in violation of Article 10 (1). [5] Comments and Questions 1.

2. 3. 4.

5. 6.

7. 8. 9. 10. 11.

A claim of discriminatory treatment under a BIT was addressed and rejected by an ICSID Tribunal in Alex Genin v. Republic of Estonia, ICSID Case No. ARB/99/2, Award 25 June 2001) (Fortier, Heth, van den Berg), at p. 92, ¶ 369, available at http://italaw.com/documents/Genin-Award.pdf. In that case, the Tribunal found no indication that the Bank of Estonia specifically targeted Genin's bank in a discriminatory way, intended to treat it in a discriminatory way or to harm it, or treated it less favorably than banks owned by Estonian nationals. A claim of discrimination was upheld in the context of a violation of a BIT's fair and equitable treatment provision in Saluka Investments BV v. Czech Republic, UNCITRAL, Partial Award 17 March 2006, ¶ 347. Must a measure violate the domestic law of the host government to constitute discrimination under a BIT? Why or why not? Must the discrimination be based on the nationality of the foreign investor in order to violate the discriminatory treatment provision of an investment treaty? Does racial or religious discrimination violate this BIT provision? Is discrimination between companies across economic sectors violative of this provision? Why or why not? Does any discriminatory treatment violate this provision or is some unequal treatment justified? If so, what must be shown to justify unequal treatment? Is there a relationship between the non-discrimination provision of investment treaties and the national and most favored nation treatment provisions? What is it? How are they alike? How are they different? What scope exists for the nondiscrimination provision beyond that already provided by the national treatment and most favored nations provisions? Does the non-discrimination provision prohibit only inequality in law? Is it necessary that the government have a discriminatory intent? Is it necessary that the government intend to harm the foreign investor for a finding of discriminatory treatment? What are the elements that must be proved for a finding of discriminatory treatment? What are the defenses to such a claim? May discrimination be based on differential treatment given to a state-owned company? Why or why not? May different tax rates be discriminatory? In what circumstances?

[F] Umbrella Clause [1] US Model Bilateral Investment Treaty (2012), (22) Article 2(2)(c) (c) Each Party shall observe any obligation it may have entered into with regard to investments. [2] Anthony C. Sinclair, The Origins of the Umbrella Clause in the International Law of Investment Protection, 20(4) Arb. Int’l 411, 411-434 (2004) (Citations selectively omitted) The origins of the notion that a treaty can be used effectively to elevate a contract between an investor and a host state to the level of an inter-state obligation between the host state and the national state of the investor, can be traced to advice provided by Mr Elihu Lauterpacht (as he then was) in late 1953 and early 1954 to the Anglo-Iranian Oil Company [AIOC] in connection with the settlement of the Iranian oil nationalization dispute. The so-called ‘umbrella’ or ‘parallel protection’ treaty was again proposed in Lauterpacht's advice given in 1956-57 to a group of oil companies contemplating a trunk pipeline from Iraq in the Persian Gulf through Syria and Turkey to the Eastern Mediterranean. The clause can then be traced to the Abs–Shawcross draft Convention on Foreign Investment of 1959 in which Lauterpacht was closely involved and the subsequent OECD draft Conventions on the Protection of Foreign Property of 1962 and 1967, all of which contained umbrella clauses. *** With the 1954 AIOC settlement, Lauterpacht’ s intention was to avoid any possibility that the Consortium Agreement might be exclusively subject to Iranian law and therefore open to unilateral change by the Iranian government. This would be done by supplementing contractual protection with the protection of a treaty that would internationalize the contract, no matter what its proper law:

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The effect of the ‘umbrella treaty’ would … be to give the terms of the Consortium Agreement a stability guaranteed by treaty between the States most directly concerned. The second and more important objective would have been to add an inter-state remedy for breach of the settlement agreement to a process of internationalization already underway in the choice of governing law and the watertight arbitration clause contained in the Consortium Agreement… *** The text of Article II refers to ‘any undertakings'. There can be no doubt that it was the authors' intention to protect, inter alia, contractual undertakings entered into between states and foreign private investors, and commentators at the time agreed on this. Thus, Schwarzenberger explained that Article II ‘covers undertakings by contracting parties both to subjects and objects of international law’ while Fatouros noted that the provision was ‘meant to cover the cases of contractual commitments of states to aliens'. The manner in which a state may give an undertaking is not limited to contracts and can vary from case to case, from the express and direct to the implied and indirect such as the case of general promises in legislative form on the basis of which a foreign investor makes an investment. Article II therefore arguably extended to unilateral undertakings in a manner akin to operation of the doctrine of estoppel in international law. Schwarzenberger agreed that the provision had the effect of rendering even unilateral undertakings ‘as binding as other consensual undertakings'. *** In addition to encompassing contracts, Lauterpacht considered the word ‘undertakings' to have a wider meaning still: ‘undertakings' appears to be a concept wider than that of ‘contract’ in the technical sense of the word. An ‘undertaking’ can, for example, describe the situation arising out of a general promise made by a State to accord to foreign investors a particular standard of treatment, followed by an actual investment made in reliance on that promise. There might in these circumstances be no specific contract, but the situation would constitute an undertaking given by the State to the investor. The Notes and Comments indeed confirm that undertakings may include ‘consensual’ bargains as well as ‘unilateral engagements' by the host state. *** There is no suggestion in the preparatory work for the OECD Draft (or the Abs–Shawcross Draft) or the commentaries thereon, that the undertakings referred to in the umbrella clause should be limited only to other international obligations. To limit the scope of the umbrella clause only to a host state's other obligations arising in international law would add nothing to the existing state of international law. The consistent understanding of commentators and drafters alike is that while the umbrella clause probably did cover international obligations, the focus of the umbrella clause was contractual obligations and unilateral commitments accepted by the host state with regard to foreign property. *** Both texts [the 1959 Abs–Shawcross Draft Convention and the 1962 and 1967 OECD Draft Conventions] contained umbrella clauses that were intended to stabilize state undertakings made in relation to investments by conferring upon them the protection of international law and creating an international remedy for their breach. The Abs– Shawcross Draft provided a template for the OECD Draft, which in turn was a benchmark for some of the most important provisions on the treatment and protection of investments included in today's BITs. Contemporary opinion on the intended scope and purpose of the umbrella clause when it emerged in international law continues to be relevant as an aid to interpretation for arbitration tribunals called upon to apply umbrella clauses to foreign investment disputes in the modern context. This is especially true where there is manifest continuity of language and no different intentions have been clearly expressed by the Contracting States, so it is timely now to be reminded of the origins of the umbrella clause. [3] OECD, Working Paper No. 2006/3: Interpretation of the Umbrella Clause in Investment Agreements, 7-9 (OECD, 2006) (23) (Citations selectively omitted) I. B. Literature The understanding of commentators and drafters on the umbrella clause provision at the time of the draft OECD Convention was that while the clause probably did cover international obligations, its focus was contractual obligations accepted by the host state with regard to foreign property. Commenting on the same provision, Brower, raised the possibility that the article's scope

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rationae materiae may have been limited so as only “to apply specifically to large-scale investment and concession contracts – in the making of which the state is deliberately ‘exercising its sovereignty’ – and thus it might be argued that the ordinary commercial contracts are an implied exception to the general rule set forth in Article 2". Today, it seems that a more consistent view emerges among commentators on the scope of the umbrella clause. In his Hague lecture, Prosper Weil presented the idea that an investment treaty would transform a mere contractual obligation between state and investor into an international law obligation, in particular if the treaty included a clause obliging the state to respect such contract. F. Mann also was of the view that the umbrella clause in the BITS protects the investor against a mere breach of contract: “this is a provision of particular importance in that it protects the investor against any interference with his contractual rights, whether it results from a mere breach of contract or a legislative or administrative act, and independently of the question whether or not such interference amounts to expropriation. The variation of the terms of a contract or license by legislative measures, the termination of the contract or the failure to perform any of its terms, for instance, by non-payment, the dissolution of the local company with which the investor may have contracted and the transfer of its assets (with or without the liabilities) – these and similar acts the treaties render wrongful”. I. Shihata, former Secretary General of ICSID, also recognised that “treaties may furthermore elevate contractual undertakings into international law obligations, by stipulating that breach by one State of a contract with a private party from the other State will also constitute a breach of the treaty between the two States”. Dolzer and Stevens along the same lines state that: “these provisions seek to ensure that each Party to the treaty will respect specific undertakings towards nationals of the other Party. The provision is of particular importance because it protects the investor's contractual rights against any interference which might be caused by either a simple breach of contract or by administrative or legislative acts and because it is not entirely clear under general international law whether such measures constitute breaches of an international obligation”. E. Gaillard notes that an historical examination of the origins of observance of undertakings clauses – “clauses with a mirror effect” – shows “in the clearest manner” that the intention of States negotiating and drafting such clauses is to permit a breach of contract to be effectively characterized as the breach of an international treaty obligation by the host state. The effect of the clause is to reflect at the level of international law what is analyzed at the level of applicable private law a simple contractual violation. C. Schreuer states that “umbrella clauses have been added to some BITs to provide additional protection to investors beyond the traditional international standards. They are often referred to as “umbrella clauses” because they put contractual commitments under the BIT's protective umbrella. They add the compliance with investment contracts, or other undertakings of the host State, to the BIT's substantive standards. In this way, a violation of such a contract becomes a violation of the BIT”. UNCTAD’s analysis of the provision is less categorical. It notes that “the language of the provision is so broad that it could be interpreted to cover all kinds of obligations, explicit or implied, contractual or non-contractual, undertaken with respect to investment generally. A provision of this kind might possibly alter the legal regime and make the agreement subject to the rules of international law”. A middle approach is expressed by T. Wälde. He believes that the principle of international law would only protect breaches and interference with contracts made with government or subject to government powers, if the government exercised its particular sovereign prerogatives to escape from its contractual commitments or to interfere in a substantial way with such commitments. This would apply as well to contracts concluded only with private parties in the host state if such contracts are destroyed by government powers. “… If the core or centre of gravity of a dispute is not about the exercise of governmental powers … but about ‘normal’ contract disputes, then the BIT and the umbrella clause has no role”. A different view is expressed by P. Mayer, who maintains that the nature of the inter pares relationship remains unchanged and is subject to the lex contractus and that only the interstate relationship is subject to international law”. [4] James R. Crawford, Treaty and Contract in Investment Arbitration: The 22nd Freshfields Lecture on International Arbitration, London (29 November 2007), 6(1) Transnational Dispute Management 18-21 (2009) (Citations selectively omitted) There is neither the time nor would it be productive to go into the details of the 20 or so cases in which umbrella clauses have been discussed. It is sufficient to identify four schools of thought, if you like, four camps – though some of the dwellers in particular camps may be thought to have a nomadic attitude and to move from camp to camp as

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the feeling takes them. The first camp adopts an extremely narrow interpretation of umbrella clauses, holding that they are operative only where it is possible to discern a shared intent of the parties that any breach of contract is a breach of the BIT (SGS v. Pakistan; Joy Mining v. Egypt). The second camp seeks to limit umbrella clauses to breaches of contract committed by the host State in the exercise of sovereign authority (Pan American Energy v. Argentina; El Paso Energy v. Argentina). A third view goes to the other extreme: the effect of umbrella clauses is to internationalise investment contracts, thereby transforming contractual claims into treaty claims directly subject to treaty rules (Fedax v. Venezuela; Eureko v. Republic of Poland; Noble Ventures v. Romania). Finally there is the view that an umbrella clause is operative and may form the basis for a substantive treaty claim, but that it does not convert a contractual claim into a treaty claim. On the one hand it provides, or at least may provide, a basis for a treaty claim even if the BIT in question contains no generic claims clause (SGS v. Philippines, CMS v. Argentina (Annulment)); on the other hand, the umbrella clause does not change the proper law of the contract or its legal incidents, including its provisions for dispute settlement. In accordance with the general principles articulated above, there are major difficulties with the first three positions. The first effectively deprives the umbrella clause of any content, contrary to the principle of effet utile and to the apparent intent of the drafters. The second imposes a characterization test at the level of breach for which there is no textual warrant and which is capable of producing arbitrary results. *** But it is a confusion to equate a State law or regulation with an obligation entered into by the State, or to regard an umbrella clause as implicitly freezing the laws of the State as at the date of admission of an investment. The enactment of a law by a State, whether it is specific or general, is not the entry by the State into an obligation distinct from the law itself. No doubt a State is obliged by its own laws, but only for so long as they are in force. In the absence of express stabilization, investors take the risk that the obligations of the host State under its own law may change, and the umbrella clause makes no difference to this basic proposition. In short, under the integrationist view as applied to standard umbrella clauses the claims are still contractual and they are still governed by their own applicable law. The distinction between treaty and contract is maintained. The purpose of the umbrella clause is to allow enforcement without internationalization and without transforming the character and content of the underlying obligation. *** For these reasons, the better view is the integrationist one: the umbrella clause is an extra mechanism for the enforcement of claims, but the basis of the transaction remains the same. [5] Eureko B.V. v. Republic of Poland (ad hoc arbitration under the 1976 UNCITRAL Rules), Partial Award of 19 August 2005, (24) ¶¶ 246 [L. Yves Fortier (pres.), Stephen M. Schwebel, Jerzy Rajski] [Eureko, a Dutch insurance company, held a minority stake in PZU, a Polish insurance company majoritarily owned by the Polish government. A dispute arose in 2001when Poland retracted from an earlier agreement to privatize PZU, which would have allowed Eureko to take a majority stake in the company through an initial public offering. Eureko argued that the Polish government had been delaying/preventing that initial public offering specifically to prevent Eureko from obtaining a majority interest in PZU. Eureko initiated ad hoc arbitration proceedings under the Netherland-Poland BIT.] (Citations selectively omitted) 246. The plain meaning – the “ordinary meaning” – of a provision prescribing that a State “shall observe any obligations it may have entered into” with regard to certain foreign investments is not obscure. The phrase. “shall observe” is imperative and categorical. “Any” obligations is capacious; it means not only obligations of a certain type, but “any” – that is to say, all – obligations entered into with regard to investments of investors of the other Contracting Party. [6] SGS Société Générale de Surveillance v. Republic of the Philippines (ICSID Case No. ARB/02/6), Decision of the Tribunal on Objections to Jurisdiction of 29 January 2004, (25) ¶¶ 113, 115-128, 130-131, 134-135, 137-138, 141, 143, 154 [Ahmed S. El-Kosheri (pres.), James R. Crawford, Antonio Crivellaro] [In August 1991, SGS, a Swiss Company, concluded an agreement, the “CISS Agreement” with the Republic of the Philippines (“the Philippines”) concerning the provision of services in order to improve customs clearance and processing in the Philippines. A dispute arose between the parties concerning alleged nonpayment of invoices by the

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Philippine Bureau of Customs. Among the issues were (1) whether a contract for the provision of services performed in significant part outside the territory of a host State (the Philippines) may nonetheless constitute an investment in its territory in terms of the BIT, (2) whether the “umbrella clause” of the BIT gives the Tribunal jurisdiction over essentially contractual claims and (3) whether the Tribunal should exercise jurisdiction in the present case notwithstanding the exclusive jurisdiction clause in the contract between SGS and the Philippines Bureau of Customs.] (Citations selectively omitted) (b) Jurisdiction under the “Umbrella Clause”: Article X(2) 113. On the footing that it had made an investment in the territory of the Philippines, the principal jurisdictional submission of SGS is that, having failed to pay for services due under the CISS Agreement, the Philippines is in breach of Article X(2) of the BIT, and that the Tribunal's jurisdiction is attracted by Article VIII(2) in respect of such breaches. The Philippines for its part denies that Article X(2) has such an effect, relying inter alia on the decision of the SGS v. Pakistan Tribunal on the equivalent BIT provision in that case. *** 115. Article X(2) is different. It reads: “Each Contracting Party shall observe any obligation it has assumed with regard to specific investments in its territory by investors of the other Contracting Party.” This is not expressed as a without prejudice clause, unlike Article X(1). It uses the mandatory term “shall”, in the same way as substantive Articles III-VI. The term “any obligation” is capable of applying to obligations arising under national law, e.g. those arising from a contract; indeed, it would normally be under its own law that a host State would assume obligations “with regard to specific investments in its territory by investors of the other Contracting Party”. Interpreting the actual text of Article X(2), it would appear to say, and to say clearly, that each Contracting Party shall observe any legal obligation it has assumed, or will in the future assume, with regard to specific investments covered by the BIT. Article X(2) was adopted within the framework of the BIT, and has to be construed as intended to be effective within that framework. 116. The object and purpose of the BIT supports an effective interpretations of Article X(2). The BIT is a treaty for the promotion and reciprocal protection of investments. According to the preamble it is intended “to create and maintain favourable conditions for investments by investors of one Contracting Party in the territory of the other”. It is legitimate to resolve uncertainties in its interpretation so as to favour the protection of covered investments. 117. Moreover it will often be the case that a host State assumes obligations with regard to specific investments at the time of entry, including investments entered into on the basis of contracts with separate entities. Whether collateral guarantees, warranties or letters of comfort given by a host State to induce the entry of foreign investments are binding or not, i.e. whether they constitute genuine obligations or mere advertisements, will be a matter for determination under the applicable law, normally the law of the host State. But if commitments made by the State towards specific investments do involve binding obligations or commitments under the applicable law, it seems entirely consistent with the object and purpose of the BIT to hold that they are incorporated and brought within the framework of the BIT by Article X(2). 118. The Respondent argued that, if Article X(2) does have substantive effect, it should be interpreted as being limited to obligations under other international law instruments. But such a limitation could readily have been expressed. The argument accepted that Article X(2) may have operative effect, but read into that provision words of limitation which are simply not there. 119. This provisional conclusion – that Article X(2) means what is says – is however contradicted by the decision of the Tribunal in SGS v. Pakistan, the only ICSID case which has so far directly ruled on the question. It should be noted that the “umbrella clause” in the Swiss-Pakistan BIT was formulated in different and rather vaguer terms than Article X(2) of the Swiss Philippines BIT. Article 11 of the Swiss-Pakistan BIT provides that: “Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party.” Apart from the phrase “shall constantly guarantee” (what could an inconstant guarantee amount to?), the phrase “the commitments it has entered into with respect to the investments” is likewise less clear and categorical than the phrase “any obligation it has assumed with regard to specific investments in its territory” in Article X(2) of the SwissPhilippines BIT. 120. Nonetheless it is relevant to consider the reasons given by the Tribunal in SGS v. Pakistan for giving a highly restrictive interpretation to the “umbrella clause”, in the

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context of the more specific language of Article X(2), the provision the present Tribunal has to apply. Essentially there were four such reasons. 121. The first reason was textual. As the Tribunal noted, Article 11 could cover a wide range of commitments including legislative commitments; it went on to say that the interpretation favoured by SGS was “susceptible of almost indefinite expansion.” It is true that Article X(2) of the Swiss-Philippines BIT likewise is not limited to contractual obligations. But it is limited to “obligations … assumed with regard to specific investments”. For Article X(2) to be applicable, the host State must have assumed a legal obligation, and it must have been assumed vis-à-vis the specific investment – not as a matter of the application of some legal obligation of a general character. This is very far from elevating to the international level all “the municipal legislative or administrative or other unilateral measures of a Contracting Party.” 122. Secondly, the Tribunal applied general principles of international law to generate a presumption against the broad interpretation of Article 11. The principle relied on was that “a violation of a contract entered into by a State with an investor of another State, is not, by itself, a violation of international law.” This principle is well established. It was affirmed by the ad hoc Committee in the Vivendi case, cited by the Tribunal. But the Franco-Argentine BIT considered in the Vivendi case did not contain any equivalent to Article 11 of the Swiss-Pakistan BIT, and the ad hoc Committee therefore did not need to consider whether a clause in a treaty requiring a State to observe specific domestic commitments has effect in international law. Certainly it might do so, as the International Law Commission observed in its commentary to Article 3 of the ILC Articles on Responsibility of States for Internationally Wrongful Acts. The question is essentially one of interpretation, and does not seem to be determined by any presumption. 123. Thirdly, the Tribunal was concerned that the effect of a broad interpretation would be, inter alia, to override dispute settlement clauses negotiated in particular contracts. {Footnote omitted] The present Tribunal agrees with this concern, but – as will be seen – it does not accept that this follows from the broad interpretation of Article X(2). 124. Fourthly and subsidiarily, the Tribunal in SGS v. Pakistan found support for its conclusion in the fact that Article 11 is located at the end of the BIT, after the basic jurisdictional clauses, whereas if it had been intended to impose substantive international obligations it would more naturally have appeared earlier. This factor is entitled to some weight, and it is the case that where it appears (as it does in only a minority of BITs) the “umbrella” clause is usually located earlier in the text. But the Tribunal does not regard the location of the provision as decisive, having regard to the other considerations recited above. In particular, it is difficult to accept that the same language in other Philippines BITs is legally operative, but that it is legally inoperative in the Swiss-Philippines BIT merely because of its location. 125. Not only are the reasons given by the Tribunal in SGS v. Pakistan unconvincing: the Tribunal failed to give any clear meaning to the “umbrella clause”. It treated Article 11 as signalling … “an implied affirmative commitment to enact implementing rules and regulations necessary or appropriate to give effect to a contractual or statutory undertaking in favor of investors of another Contracting Party that would otherwise be a dead letter. Secondly, we do not preclude the possibility that under exceptional circumstances, a violation of certain provisions of a Sate contract with an investor of another State might constitute violation of a treaty provision … enjoining a Contracting Party constantly to guarantee the observance of contracts with investors of another Contracting Party.” But Article 11 if it has any effect at all, confers jurisdiction on an international tribunal, and needs to do so with adequate certainty. Jurisdiction is not conferred by way of “an implied affirmative commitment” or through the characterisation of circumstances as “exceptional”. 126. Moreover the SGS v. Pakistan Tribunal appears to have thought that the broad interpretation which it rejected would involve a full-scale internationalisation of domestic contracts – in effect, that it would convert investment contracts into treaties by way of what the Tribunal termed “instant transubstantiation”. But this is not what Article X(2) of the Swiss-Philippines Treaty says. It does not convert non-binding domestic blandishments into binding international obligations. It does not convert questions of contract law into questions of treaty law. In particular it does not change the proper law of the CISS Agreement from the law of the Philippines to international law. Article X(2) addresses not the scope of the commitments entered into with regard to specific investments but the performance of these obligations, once they are ascertained. It is a conceivable function of a provision such as Article X(2) of the Swiss-Philippines BIT to provide assurances to foreign investors with regard to the performance of obligations assumed by the host State under its own law with regard to specific investments – in effect, to help secure the rule of law in relation to investment protection. In the Tribunal's view, this is the proper interpretation of Article X(2). 127. To summarize, for present purposes Article X(2) includes commitments or obligations

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arising under contracts entered into by the host State. The basic obligation on the State in this case is the obligation to pay what is due under the contract, which is an obligation assumed with regard to the specific investment (the performance of services under the CISS Agreement). But this obligation does not mean that the determination of how much money the Philippines is obligated to pay becomes a treaty matter. The extent of the obligation is still governed by the contract, and it can only be determined by reference to the terms of the contract. 128. To summarize the Tribunal's conclusions on this point, Article X(2) makes it a breach of the BIT for the host State to fail to observe binding commitments, including contractual commitments, which it has assumed with regard to specific investments. But it does not convert the issue of the extent or content of such obligations into an issue of international law. That issue (in the present case, the issue of how much is payable for services provided under the CISS Agreement) is still governed by the investment agreement. In the absence of other factors it could be decided by a tribunal constituted pursuant to article VIII(2). The proper law of the CISS Agreement is the law of the Philippines, which in any event this Tribunal is directed to apply by Article 42(1) of the ICSID Convention. On the other hand, if some other court or tribunal has exclusive jurisdiction over the Agreement, the position may be different. *** (c) Jurisdiction over contractual claims: Article VIII(2) 130. Article VIII of the BIT provides for settlement of “disputes with respect to investments between a Contracting Party and an investor of the other Contracting Party”. If a dispute is not resolved by consultations between the parties pursuant to Article VIII(1), the investor may submit the dispute “either to the national jurisdiction of the Contracting Party in whose territory the investment has been made or to international arbitration”, and in the latter case, at the investor's option, to ICSID or UNCITRAL arbitration. 131. Prima facie, Article VIII is an entirely general provision, allowing for submission of all investment disputes by the investor against the host State. [Footnote omitted] The term “disputes with respect to investments” (“différents relatifs àdes investissements” in the French text) is not limited by reference to the legal classification of the claim that is made. A dispute about an alleged expropriation contrary to Article VI of the BIT would be a “dispute with respect to investments”; so too would a dispute arising from an investment contract such as the CISS Agreement. *** 134. The present Tribunal agrees with the concern that the general provisions of BITs should not, unless clearly expressed to do so, override specific and exclusive dispute settlement arrangements made in the investment contract itself. On the view put forward by SGS it will have become impossible for investors validly to agree to an exclusive jurisdiction clause in their contracts; they will always have the hidden capacity to bring contractual claims to BIT arbitration, even in breach of the contract and it is hard to believe that this result was contemplated by States in concluding generic investment protection agreements. But there are two different questions here: the interpretation of the general phrase “disputes with respect to investments” in BITs, and the impact on the jurisdiction of BIT tribunals over contract claims (or, more precisely, the admissibility of those claims) when there is an exclusive jurisdiction clause in the contract. It is not plausible to suggest that general language in BITs dealing with all investment disputes should be limited because in some investment contracts the parties stipulate exclusively for different dispute settlement arrangements. As will be seen, it is possible for BIT tribunals to give effect to the parties' contracts while respecting the general language of BIT dispute settlement provisions. 135. Interpreting the text of Article VIII in its context and in the light of its object and purpose, the Tribunal accordingly concludes that in principle (and apart from the exclusive jurisdiction clause in the CISS Agreement) it was open to SGS to refer the present dispute, as a contractual dispute, to ICSID arbitration under Article VIII (2) of the BIT. [Footnote omitted] *** (d) The exclusive choice of forum clause *** 137. As noted already, Article 12 of the CISS Agreement provides that: “All actions concerning disputes in connection with the obligations of either party to this Agreement shall be filed at the Regional Trial Courts of Makati or Manila.” Prima facie Article 12 is a binding obligation, incumbent on both parties, to resort exclusively to one of the named Regional Trial Courts in order to resolve any dispute “in connection with the obligations of either party to this Agreement.” It is clear that the substance of SGs's claim, viz., a claim to payment for services supplied under the

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Agreement, falls within the scope of Article 12. 138. … In accordance with general principle, courts or tribunals should respect such a stipulation in proceedings between those parties, unless they are bound ab exteriore, i.e., by some other law, not to do so. Moreover it should not matter whether the contractually, agreed forum is a municipal court (as here) or domestic arbitration (as in SGS v. Pakistan) or some other form of arbitration, e.g. pursuant to the UNCITRAL or ICC Rules. The basic principle in each case is that a binding exclusive jurisdiction clause in a contract should be respected, unless overridden by another valid provision. (i) Is the exclusive jurisdiction clause overridden by the BIT or the ICSID Convention? *** 141. … The first consideration involves the maxim generalia specialibus non derogant. Article VIII is a general provision, applicable to investment arrangements whether concluded “prior to or after the entry into force of the Agreement” (Article II). The BIT itself was not concluded with any specific investment or contract in view. It is not to be presumed that such a general provision has the effect of overriding specific provisions of particular contracts, freely negotiated between the parties. As Schreuer says, “[a] document containing a dispute settlement clause which is more specific in relation to the parties and to the dispute should be given precedence over a document of more general application.” The second consideration derives from the character of an investment protection agreement as a framework treaty, intended by the States Parties to support and supplement, not to override or replace, the actually negotiated investment arrangements made between the investor and the host State. *** 143. For these reasons, in the Tribunal's view, the BIT did not purport to override the exclusive jurisdiction clause in the CISS Agreement, or to give SGS an alternative route for the resolution of contractual claims which it was bound to submit to the Philippine courts under that Agreement. *** (iii) Distinction between jurisdiction and admissibility 154. In the Tribunal's view, this principle is one concerning the admissibility of the claim, not jurisdiction in the strict sense. The jurisdiction of the Tribunal is determined by the combination of the BIT and the ICSID Convention. It is, to say the least, doubtful that a private party can by contract waive rights or dispense with the performance of obligations imposed on the States parties to those treaties under international law. Although under modern international law, treaties may confer rights, substantive and procedural, on individuals, [footnote omitted] they will normally do so in order to achieve some public interest. Thus the question is not whether the Tribunal has jurisdiction: unless otherwise expressly provided, treaty jurisdiction is not abrogated by contract. The question is whether a party should be allowed to rely on a contract as the basis of its claim when the contract itself refers that claim exclusively to another forum. In the Tribunal's view the answer is that it should not be allowed to do so, unless there are good reasons, such as force majeure, preventing the claimant from complying with its contract. This impediment, based as it is on the principle that a party to a contract cannot claim on that contract without itself complying with it, is more naturally considered as a matter of admissibility than jurisdiction. [footnote omitted] [7] 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 of 3 October 2006, (26) ¶¶ 171-172, 174175 [Tatiana B. de Maekelt (pres.), Francisco Rezek, Albert Jan van den Berg] [LG&E and its affiliates, three US investors, held minority equity interest in three Argentine local gas distribution companies that had been privatized in the early 1990s. The relevant regulatory and contractual framework provided for the tariffs to be calculated in US dollars, a series of tariffs adjustments and revisions, the commitment that tariffs were to provide an income sufficient to cover all costs and a reasonable rate of return, and that there would be no price freeze applicable to the tariff system without compensation. In the aftermath of the 2001 economic crisis, the Argentine government dismantled and refused to reinstate these guarantees. LG&E subsequently initiated ICSID arbitral proceedings under the Argentina-US BIT.] (Citations selectively omitted) 171. In many cases it has been considered that the umbrella clause is activated not by obligations set forth in municipal law, but in contracts between the State and the investor. Several of those tribunals have concluded that the breach of a contractual obligation in a contract between the State and the investor gives rise to a claim under the umbrella clause. 172. The issue for the Tribunal's consideration is whether the provisions of the Gas Law and its implementing regulations constitute (i) “obligations” (ii) “with regard to” LG&E's capacity as a foreign investor (iii) with respect to its “investment,” such that abrogation of the guarantees set forth in the Gas Law and its implementing regulations give rise to a

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violation of the Treaty. *** 174. In order to determine the applicability of the umbrella clause, the Tribunal should establish if by virtue of the provisions of the Gas Law and its regulations, the Argentine State has assumed international obligations with respect to LG&E and its investment. To this end, it is necessary to remember that the provisions of the Gas Law and its regulation fixed and regulated the tariff scheme ensuring the value of Claimants' investment; that the purpose of Claimants' investment was to increase the value of its shares in the Licensees through a fragile balanced management of profits and costs, represented by the tariffs fixed by Argentina in light of the already mentioned Gas Law and its regulation. In view of the statements above, the Tribunal concludes that these provisions were not legal obligations of a general nature. On the contrary, they were very specific in relation to LG&E's investment in Argentina, so that their abrogation would be a violation of the umbrella clause. *** 175. As such, Argentina's abrogation of the guarantees under the statutory framework – calculation of the tariffs in dollars before conversion to pesos, semi-annual tariff adjustments by the PPI and no price controls without indemnification – violated its obligations to Claimants' investments. Argentina made these specific obligations to foreign investors, such as LG&E, by enacting the Gas Law and other regulations, and then advertising these guarantees in the Offering Memorandum to induce the entry of foreign capital to fund the privatization program in its public service sector. These laws and regulations became obligations within the meaning of Article II(2)(c), by virtue of targeting foreign investors and applying specifically to their investments, that gave rise to liability under the umbrella clause. [8] El Paso Energy International Company v. Argentine Republic (ICSID Case No. ARB/03/15), Decision on Jurisdiction of 27 April 2006, (27) ¶¶ 70, 79, 81-82, 84 [Lucius Caflisch (pres.), Brigitte Stern, Piero Bernardini] [Case Summary Chapter 9] (Citations selectively omitted) 70. This Tribunal considers that a balanced interpretation is needed, taking into account both State sovereignty and the State's responsibility to create an adapted and evolutionary framework for the development of economic activities, and the necessity to protect foreign investment and its continuing flow. It is bearing this in mind that the Tribunal will deal with the controversial question of the so-called “umbrella clause”, which is still not moot: as stated recently by Emmanuel Gaillard, “[t]his question has divided practitioners and legal commentators and remains unsettled in the international arbitral case law”,(New York Law Journal, Thursday, 6 October 2005). The question is whether, through an “umbrella clause”, sometimes also called an “observance-ofundertakings clause”, in a BIT, contractual claims of an investor having a contract either with the State or with an autonomous entity are automatically and ipso jure “transformed” into treaty claims benefiting from the dispute settlement mechanism provided for in the BIT. There is an ongoing debate on that question, as divergent positions have been adopted by different ICSID tribunals. Umbrella clauses are not always drafted in the same manner, and some decisions insist on the variations in the drafting to explain different analyses. This Tribunal is not convinced that the clauses analysed so far really should receive different interpretations… *** 79. In this Tribunal's view, it is necessary to distinguish the State as a merchant from the State as a sovereign. *** 81. In view of the necessity to distinguish the State as a merchant, especially when it acts through instrumentalities, from the State as a sovereign, the Tribunal considers that the “umbrella clause” in the Argentine-US BIT, which prescribes that “[e]ach Party shall observe any obligation it may have entered into with regard to investments”, can be interpreted in the light of Article VII (1), which clearly includes among the investment disputes under the Treaty all disputes resulting from a violation of a commitment given by the State as a sovereign State, either through an agreement, an authorisation, or the BIT: “an investment dispute is a dispute between a Party and a national or company of the other Party arising out of or relating to (a) an investment agreement between that Party and such national or company; (b) an investment authorization granted by that Parties foreign investment authority (if any such authorization exists); or, (c) an alleged breach of any right conferred and created by this Treaty with respect to an investment”. Interpreted in this way, the umbrella clause in Article II of the BIT, read in conjunction with Article VII, will not extend the Treaty protection to breaches of an ordinary

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commercial contract entered into by the State or a State-owned entity, but will cover additional investment protections contractually agreed by the State as a sovereign – such as a stabilization clause – inserted in an investment agreement. 82. In conclusion, in this Tribunal's view, following the important precedents set by Tribunals presided over by Judge Feliciano, Judge Guillaume and Professor Orrego Vicuña, an umbrella clause cannot transform any contract claim into a treaty claim, as this would necessarily imply that any commitments of the State in respect to investments, even the most minor ones, would be transformed into treaty claims. These far-reaching consequences of a broad interpretation of the so-called umbrella clauses, quite destructive of the distinction between national legal orders and the international legal order, have been well understood and clearly explained by the first Tribunal which dealt with the issue of the so-called “umbrella clause” in the SGS v. Pakistan case and which insisted on the theoretical problems faced. It would be strange indeed if the acceptance of a BIT entailed an international liability of the State going far beyond the obligation to respect the standards of protection of foreign investments embodied in the Treaty and rendered it liable for any violation of any commitment in national or international law “with regard to investments”. *** 84. … However, there is no doubt that if the State interferes with contractual rights by a unilateral act, whether these rights stem from a contract entered into by a foreign investor with a private party, a State autonomous entity or the State itself, in such a way that the State's action can be analysed as a violation of the standards of protection embodied in a BIT, the treaty-based arbitration tribunal has jurisdiction over all the claims of the foreign investor, including the claims arising from a violation of its contractual rights. Moreover, Article II, read in conjunction with Article VII(1), also considers as treaty claims the breaches of an investment agreement between Argentina and a national or company of the United States. [9] Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5 (formerly Burlington Resources Inc. and others v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador)) (ICSID Case No. ARB/08/5), Decision on Liability of 14 December 2012, (28) ¶¶ 211, 214-218, 220 [Gabrielle Kaufmann-Kohler (pres.), Brigitte Stern, Francisco Orrego Vicuña] [Case Summary Chapter 3.] (Citations selectively omitted) 211. The Treaty's umbrella clause reads as follows: “Each Party shall observe any obligation it may have entered into with regard to investments.” *** 214. The word “obligation” is thus the operative term of the umbrella clause. The Treaty does not define “obligation”. The Parties agree – and rightly so – that the clause refers to legal obligations. This is of little assistance, however, to resolve the question of privity. To answer this question, the Tribunal relies primarily on two elements which in its view inform the ordinary meaning of “obligation.” First, in its ordinary meaning, the obligation of one subject is generally seen in correlation with the right of another. Or, differently worded, someone's breach of an obligation corresponds to the breach of another's right. An obligation entails a party bound by it and another one benefiting from it, in other words, entails an obligor and an obligee. Second, an obligation does not exist in a vacuum. It is subject to a governing law. Although the notion of obligation is used in an international treaty, the court or tribunal interpreting the treaty may have to look to municipal law to give it content. This is not peculiar to “obligation”; it applies to other notions found in investment treaties, e.g. nationality, property, exhaustion of local remedies to name just these. In this case, the PSCs are governed by Ecuadorian law. It is that law that defines the content of the obligation including the scope of and the parties to the undertaking, i.e. the obligor and the obligee. 215. Applying these two elements to this case, one cannot but conclude that the umbrella clause does not protect obligations arising from the PSCs. Whose right is correlated to the obligation? The answer is found in the law governing the obligation, here Ecuadorian law. Burlington has not alleged, not to speak of established, that under Ecuadorian law the non-signatory parent of a contract party may directly enforce its subsidiary's rights. 216. The context of the term “obligation” confirms this conclusion. Although not conclusive in and of themselves, the words “entered into” can be regarded as reinforcing the idea of privity. As to the terms “with regard to investments” also employed by the relevant treaty provision, they denote a “link between the obligation and the investment” as Burlington argued at the hearing. This is certainly in keeping with the object and purpose of the Treaty, which are to encourage and protect investments. However, as Ecuador pleaded, this link “does not replace but qualifies” the notion of obligation. 217. If there is no obligation in the first place, there is nothing to qualify. Nor can these

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qualifications create an “obligation” where there is none to begin with. Burlington argues that, because the definition of investment in Article I of the Treaty covers both direct and indirect investment, it is a co-obligee of Ecuador's obligations under the PSCs. Broad as the definition of investment in the Treaty may be, it cannot compensate for the absence of an “obligation.” 218. The object and purpose of the Treaty lead to no different conclusion. Burlington claims that reading a privity component into the umbrella clause would be “contrary to the spirit of the Treaty” which, by virtue of the definition of investment in Article I, seeks to protect both direct and indirect investments. The Tribunal cannot agree. The umbrella clause is only one of the various substantive protections that the Treaty bestows upon investors, with the scope of protection depending on the terms of each specific provision. Other Treaty provisions unquestionably protect both direct and indirect investments, such as for instance the expropriation clause. The object and purpose of the Treaty do not impose that all standards of protection have the same scope. *** 220. As a result, the Tribunal holds that, Burlington may not rely on the Treaty's umbrella clause to enforce against Ecuador its subsidiary's contract rights under the PSCs for Blocks 7 and 21. This conclusion is supported by ICSID case law, the import and meaning of which has been heavily debated by the Parties… [10] Comments and Questions 1.

2.

In the ICSID case 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 of 6 August 2003 (Florentino P. Feliciano, President; Andre Faurés and J. Christopher Thomas, arbitrators), an arbitral tribunal was confronted for the first time with the issue of whether an Umbrella Clause in a BIT “elevates” a domestic law breach of contract claim against a government into a violation of the BIT. The Umbrella Clause found in Article 11 of the Swiss-Pakistan BIT read as follows: “Either Contracting Party shall constantly guarantee the observance of the commitments it has entered into with respect to the investments of the investors of the other Contracting Party.” The Tribunal held that this clause did not transform purely contractual claims into BIT claims: “We conclude that the Tribunal has no jurisdiction with respect to claims submitted by SGS and based on alleged breaches of the PSI Agreement which do not also constitute or amount to breaches of the substantive standards of the BIT.” The Tribunal reasoned, first, that the language of Article 11 does not clearly “elevate” a contract breach into a treaty violation. The Tribunal pointed out that this would create “a new international law obligation” and that “the legal consequences … are so far reaching in scope, and so automatic and unqualified and sweeping in their operation, so burdensome in their potential impact upon a Contracting party, we believe that clear and convincing evidence must be adduced by the Claimant … that such was indeed the shared intent of the Contracting Parties …” The Tribunal also relied upon the fact that Article 11 was not placed together with the other substantive obligations of the BIT in Articles 3 to 7, but was separated from those “first order” obligations, indicating to the Tribunal that it was not meant to be a substantive obligation. The context of the case was a Pre-Shipment Inspection Agreement (PSI Agreement) between the Claimant and Respondent, under which SGS agreed to inspect goods to be exported to Pakistan and which contained an arbitration clause calling for arbitration in Islamabad, Pakistan, under the Pakistani Arbitration Act. Upon Pakistan's termination of the PSI Agreement, SGS filed a court action in Switzerland, which was ultimately dismissed because of the arbitration clause in the contract. Pakistan filed an arbitration pursuant to the arbitration clause and 11 months later, after the parties had gone forward in the arbitration proceeding, SGS informed Pakistan that it was initiating an ICSID arbitration pursuant to Article 9 of the BIT. A Pakistani court refused SGs's request to enjoin the arbitration filed by Pakistan pursuant to the contractual arbitration clause, but the sole arbitrator stayed the contractual arbitration until the ICSID Tribunal ruled on its jurisdiction. The Tribunal emphasized the procedural history of the parties' dispute as well as its perception of the extravagance of SGs's assertions as to the scope of the Umbrella Clause, noting that SGS argued it transformed every contract entered into by the government or its agencies into a treaty violation, even a contract for the purchase of pencils. The Tribunal suggested two possible meanings for the Umbrella Clause. First, it could signal a commitment to enact implementing rules or regulations to give effect to a contractual or statutory undertaking in favor of investors. Second, if a state agreed to international arbitration and took steps materially to impede an investor from prosecuting its claims before an international arbitral tribunal or refused to submit to arbitration, then it would violate this provision. Is the SGS v. Pakistan Tribunal's interpretation of the Swiss-Pakistan BIT consistent with Article 31 of the Vienna Convention on the Law of Treaties? Did the Tribunal effectively create a new rule of treaty interpretation requiring the private party to

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

prove the intent of both governments by clear and convincing evidence, independent of the language of the treaty? Is this practical? What is the effect of the respondent government denying that this was its intent? It has been reported that the Swiss government sent a note to ICSID effectively protesting the Tribunal's interpretation of the Umbrella Clause. Is a contract to sell pencils to a government an investment? Under what circumstances might it involve an investment? Compare the SGS v. Philippines case with the decision in SGS v. Pakistan. What is the fundamental difference in approach? What significance did each Tribunal give to the Umbrella Clause? In the SGS v. Philippines case, would a different outcome have been mandated if the BIT had provided that an investor may choose between a previously-agreed dispute settlement procedure or international arbitration? What was the historical purpose and function of the Umbrella Clause? Is a breach of a contract by a government a violation of customary international law? Under what circumstances may it violate customary international law? Does the provision in the 1992 U.S. Model BIT requiring governments to comply with all obligations undertaken towards investments convert a breach of contract into a violation of international law? If so, how? What is the integrationist view of the Umbrella Clause? Is this provision limited to breaches of contract? What other obligations of a government might come within the ambit of this provision? How should the word “obligations” be interpreted? What does it imply? What does the phrase “obligations undertaken towards investments” mean? Does it encompass indirect investors such as shareholders of the company that enters into the contract? Why or why not? The following additional cases have interpreted the Umbrella Clause as elevating contractual breaches to treaty violations: Siemens v. Argentina, ICSID case No. ARB/02/8, Duke Energy v. Ecuador, ICSID Case No. ARB/04/19, Burlington Resources v. Ecuador, ICSID Case No. ARB/08/5. Noble Ventures v. Romania, ICSID Case No. ARB/01/11, Award of 12, October 2005, available at http://italaw.com/documents/Noble.pdf, and Eureko v. Poland, Ad Hoc Arbitration Award of 19 August 2005. But these tribunals have limited the Umbrella Clauses to actions taken by a government in its soverieign capacity: Pan American Energy v. Argentina, ICSID Case No. ARB/03/13, BP v. Argentina, ICSID Case No. ARB/04/08, Impregilo v. Pakistan, ICSID Case No. ARB/03/3,and Joy Mining v. Egypt, ICSID Case No. ARB/03/11. The tribunal in Enron v. Argentina, ICSID Case No. ARB/01/3, Award of 22 May 2007, adopted an interpretation of the Umbrella Clause that is similar to that employed by the LG&E tribunal, finding that it may encompass legislative or regulatory obligations undertaken by a government. The specific context of both cases involved obligations, including legal and contractual stability, incorporated in a bilateral license for natural gas transportation and distribution. The license was part of the legal and regulatory framework for natural gas transportation and distribution and may have had the legal effect of a bilateral contract.

[G] Expropriation [1] US Model Bilateral Investment Treaty (2012), (29) Article 3 (Citations selectively omitted) Article 6: Expropriation and Compensation 1. Neither Party may expropriate or nationalize a covered investment either directly or indirectly through measures equivalent to expropriation or nationalization (“expropriation”), except: (a) (b) (c) (d)

for a public purpose; in a non-discriminatory manner; on payment of prompt, adequate, and effective compensation; and in accordance with due process of law and Article 5 [Minimum Standard of Treatment] (1) through (3).

*** Annex B Expropriation The Parties confirm their shared understanding that: 1. 2.

Article 6 [Expropriation and Compensation](1) is intended to reflect customary international law concerning the obligation of States with respect to expropriation. An action or a series of actions by a Party cannot constitute an expropriation unless it interferes with a tangible or intangible property right or property interest in an investment.

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3. 4.

Article 6 [Expropriation and Compensation] (1) addresses two situations. The first is direct expropriation, where an investment is nationalized or otherwise directly expropriated through formal transfer of title or outright seizure. The second situation addressed by Article 6 [Expropriation and Compensation] (1) is indirect expropriation, where an action or series of actions by a Party has an effect equivalent to direct expropriation without formal transfer of title or outright seizure. (a)

The determination of whether an action or series of actions by a Party, in a specific fact situation, constitutes an indirect expropriation, requires a caseby-case, fact-based inquiry that considers, among other factors: (i)

(b)

the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action. Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.

[2] North American Free Trade Agreement (1993), (30) Article 1110 Article 1110: Expropriation and Compensation 1. No party shall directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except: (a) (b) (c) (d)

for a public purpose; on a non-discriminatory basis; in accordance with due process of law and the general principles of treatment provided in Article 1105; and upon payment of compensation in accordance with paragraphs 2 to 6.

2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“date of expropriation”), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value (including declared tax value of tangible property) and other criteria, as appropriate to determine fair market value. 3. Compensation shall be paid without delay and be fully realizable. 4. If payment is made in a G7 currency, compensation shall include interest at a commercially reasonable rate for that currency from the date of expropriation until the date of actual payment thereof. 5. If a Party elects to pay in a currency other than a G7 currency, the amount paid on the date of payment, if converted into a G7 currency at the market rate of exchange prevailing on that date, shall be no less than if the amount of compensation owed on the date of expropriation had been converted into that G7 currency at the market rate of exchange prevailing on that date, and interest had accrued at a commercially reasonable rate for that G7 currency from the date of expropriation until the date of payment. 6. Upon payment, compensation shall be freely transferable as provided in Article 1109. 7. This Article does not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or the revocation, limitation or creation of intellectual property rights to the extent that such issuance, revocation, limitation or creation is consistent with Chapter Seventeen (Intellectual Property). 8. For purposes of this Article and for greater clarity, a non-discriminatory measure of general application shall not be considered a measure tantamount to an expropriation of a debt security or loan covered by this Chapter solely on the ground that the measure imposes costs on the debtor that cause it to default on the debt. [3] Energy Charter Treaty (1994), (31) Article 13 Article 13 Expropriation (1) Investments of Investors of a Contracting Party in the Area of any other Contracting Party shall not be nationalized, expropriated or subjected to a measure or measures having effect equivalent to nationalization or expropriation (hereinafter referred to as “Expropriation”) except where such Expropriation is:

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(a) (b) (c) (d)

for a purpose which is in the public interest; not discriminatory; carried out under due process of law; and accompanied by the payment of prompt, adequate and effective compensation.

Such compensation shall amount to the fair market value of the Investment expropriated at the time immediately before the Expropriation or impending Expropriation became known in such a way as to affect the value of the investment (hereinafter referred to as the “Valuation Date”). Such fair market value shall at the request of the Investor be expressed in a Freely Convertible Currency on the basis of the market rate of exchange existing for that currency on the Valuation Date. Compensation shall also include interest at a commercial rate established on a market basis from the date of Expropriation until the date of payment. (2) The Investor affected shall have a right to prompt review, under the law of the Contracting Party making the Expropriation, by a judicial or other competent and independent authority of that Contracting Party, of its case, of the valuation of its Investment, and of the payment of compensation, in accordance with the principles set out in paragraph (1). (3) For the avoidance of doubt, Expropriation shall include a situation where a Contracting Party expropriates the assets of a company or enterprise in its Area in which an Investor of any other Contracting Party has an Investment, including through the ownership of shares. [4] OECD, Working Paper No. 2004/4: ‘Indirect Expropriation’ and the ‘Right to Regulate’ in International Investment Law, 3-5, 22 (OECD 2004) (32) (Citations selectively omitted) Expropriation or deprivation of property could also occur through interference by a state in the use of that property or with the enjoyment of the benefits even where the property is not seized and the legal title to the property is not affected. The measures taken by the State have a similar effect to expropriation or nationalisation and are generally termed “indirect”, “creeping”, or “de facto” expropriation, or measures “tantamount” to expropriation. However, under international law, not all state measures interfering with property are expropriation. As Brownlie has stated, “state measures, prima facie a lawful exercise of powers of governments, may affect foreign interests considerably without amounting to expropriation. Thus, foreign assets and their use may be subjected to taxation, trade restrictions involving licenses and quotas, or measures of devaluation. While special facts may alter cases, in principle such measures are not unlawful and do not constitute expropriation”. Similarly, according to Sornarajah, non-discriminatory measures related to anti-trust, consumer protection, securities, environmental protection, land planning are non-compensable takings since they are regarded as essential to the efficient functioning of the state. As mentioned above, there is no generally accepted and clear definition of the concept of indirect expropriation and what distinguishes it from non-compensable regulation, although this question is of great significance to both investors and governments. *** –

–

* –

The line between the concept of indirect expropriation and non-compensable regulatory governmental measures has not been systematically articulated. However, a close examination of the relevant jurisprudence reveals that, in broad terms, there are some criteria that tribunals have used to distinguish these concepts: i) the degree of interference with the property rights, ii) the character of governmental measures, i.e. the purpose and the context of the governmental measure, and iii) the interference of the measure with reasonable and investmentbacked expectations. Tribunals, instead of focusing exclusively on the “sole effect” on the owner, have also often taken into account the purpose and proportionality of the governmental measures to determine whether compensation was due. Thus a number of cases were determined on the basis of recognition that governments have the right to protect, through non-discriminatory actions, inter alia, the environment, human health and safety, market integrity and social policies without providing compensation for any incidental deprivation of foreign owned property. ** At the same time, prudence requires to recognise that the list of criteria which can be identified today from state practice and existing jurisprudence is not necessarily exhaustive and may evolve… Case-by-case consideration which may shed additional light will continue to be called for.

[5] Ursula Kriebaum, Partial Expropriation, 8(1) J. of World Inv. and Trade 69, 83-84 (2007)

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It is widely accepted that an interference with property, in order to amount to an expropriation, must lead to a total or at least substantial deprivation. Measures that affect an investment without amounting to a “taking” in this sense but merely reduce its value or profitability are usually not seen as expropriatory. For an expropriation to exist, the investment must have been essentially destroyed. At first sight, this doctrine would rule out the notion of a partial expropriation: if the investment has been affected only in part, there is no expropriation. But this line of reasoning can lead to results that are obviously absurd or unreasonable. If the investment consists of five fields and only one field is taken, does this mean that there is no expropriation because the major part of the investment has remained untouched? Similarly, if an investor were to acquire a concession, it would own a protected investment under the property protection clauses of most investment treaties. A withdrawal of the concession may amount to an expropriation. If the same investor were to expand its investment by acquiring additional concessions in the same host State, the taking of one of the concessions would only affect part of the investment and might hence not be seen as an expropriation. Does this mean that the protection of the original concession will depend on whether the host State takes all concessions? Put differently, does the protection of one particular right depend on the destruction of (all) other related rights? In other words, does the acquisition of additional concessions endanger the protection of the original concession which can no longer be expropriated in isolation? *** No one will question that an expropriation has occurred if someone is deprived of five of ten hectares of land. There seems to be no good reason for a different approach in a situation where an investment can be disassembled into various specified rights. An expropriation of part of an investment should be recognized, provided the right affected qualifies as an investment under the definition of the applicable investment protection treaty and that right, standing alone, is capable of an independent economic exploitation. Therefore, under this proposed solution, a partial expropriation should be accepted if the following requirements are fulfilled: – the overall investment project can be disassembled into a number of discrete rights; – –

the State has deprived the investor of a right which is covered by one of the items in the definition of “investment” in the applicable investment protection treaty; and this right is capable of economic exploitation independently of the remainder of the investment.

To give an example: if an investor has licences to export alcoholic beverages, frozen food and cigarettes, the overall investment can be disassembled into three lines of business. Each licence will fall under the definition of “investment” in the applicable treaty. Also, each of these licences will be capable of being exploited separately from the rest of the investment. Therefore, each licence is protected independently against expropriation. Any other solution would lead to the illogical result that an investor who has three licences is worse off than an investor who only has one of these licences and it is taken. *** Such a solution to the problem of partial expropriation is certainly of value to investors: they will be protected not only if they are substantially deprived of their entire investment activities but also if they are deprived of a specified right explicitly mentioned in the investment protection treaty that has independent economic value. In terms of the example given in the introduction to this article, this approach would lead to the following answers: if the same investor were to acquire additional concessions in the same host State, the protection of the original concession would not depend on whether the host State takes all concessions. Each concession, if it can exist economically on its own, will be protected. The protection of one particular right would not depend on the destruction of (all) other related rights if the right would be capable of economic exploitation on its own. Therefore, the acquisition of additional concessions would not endanger the protection of the original concession. By contrast, if an investor has acquired several permits which are closely interrelated since they are all required for one overall project and cannot be exploited independently, the individual permits do not enjoy separate protection from expropriation. If the withdrawal of one permit effectively brings to an end the overall project, a substantial deprivation of the overall investment will have occurred and the issue of a partial expropriation does not arise. If the investment project is capable of continued existence, albeit in reduced form, no partial expropriation will have occurred, either. If a permit to operate a hazardous waste landfill is subsequently reduced to exclude radioactive waste, for example, there would be no partial expropriation. [6] Phillips Petroleum Company Iran v. The Islamic Republic of Iran & The National Iranian Oil Company (IUSCT Case No. 39), Award of 29 June 1989 (33) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich]

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[At the time of the Iranian Revolution in 1979, the United States and Iran were parties to the Treaty of Amity, which among other things defined the standard of compensation for an expropriation. The National Iranian Oil Company (NIOC) sent a letter to the Consortium of which Phillips Petroleum was a party on 10 March 1979, repudiating the Consortium agreement. Following the letter, NIOC unilaterally set production rates substantially below those of pre-Revolution levels. A law adopted on 5 July 1979 stated that the petroleum industry had been nationalized. An internal NIOC memorandum of 11 July 1979 referred to the government's policy that all hydrocarbon sales must be made by NIOC. A notice of 13 September 1979 in the Official Gazette stated that all oil contracts shall be signed by NIOC on behalf of the Government. Negotiations also began in the spring of 1979 for a sale/purchase agreement, which was linked by NIOC to the termination of the Joint Structure Agreement (JSA). One of the Consortium parties was informed on 29 September 1979 that the JSA was terminated. In January 1980, the Single Article Act was promulgated by the Iranian Government, and a written notification of the nullification of the JSA was sent in August 1980. On these facts, the tribunal held that an expropriation had occurred.] (Citations selectively omitted) IV. The Merits of the Claim A. Liability 75. The Claimant's principal contention is that the Respondents are liable for the expropriation of contract rights stemming from the JSA, and that, alternatively, they are liable for breach and repudiation of that contract. The Tribunal considers that the acts complained of appear more closely suited to assessment of liability for the taking of foreign-owned property under international law than to assessment of the contractual aspects of the relationship, and so decides to consider the claim in this light. 76. As the Tribunal has held in a number of cases, expropriation by or attributable to a State of the property of an alien gives rise under international law to liability for compensation, and this is so whether the expropriation is formal or de facto and whether the property is tangible, such as real estate or a factory, or intangible, such as the contract rights involved in the present Case. [Citations omitted] *** 89. The principal events which the Claimant associates with the taking of its property interests occurred during 1979. The Claimant asserts that the alleged expropriation did not result from any public government decrees, but rather from concerted actions of the Government of Iran, often operating through NIOC [National Iranian Oil Company], (34) which effectively deprived the Claimant of its property. 90. The record shows that termination of the JSA [Joint Structure Agreement] relationship was heralded during the days immediately preceding and following the return of Imam Khomeini to Iran on 1 February 1979. Leading members of the Revolutionary movement announced that the first step of the new Government would be the revocation of oil contracts and the taking back of oil from the hands of the multinationals in order to realize a true nationalization of oil and in order to make the oil industry an integral part of the Iranian economy. The announcements of the intentions of the new leadership were repeated following the installation of the Revolutionary Government in mid-February 1979. On 14 February, Abdolhasan Bani Sadr, who later became President, declared that the nationalization of the oil industry would be Iran's first step to transforming the economy and that oil would be fully “integrated with the Iranian economy.” On 28 February, the New York Times quoted a spokesman for NIOC as saying that Iran would probably nationalize all joint production ventures with foreign companies and that the number of foreign experts in the oil industry would be limited to one-fifth of the number prior to the Revolution. 91. The first concrete nationalization action was taken against the Consortium, which was by far the largest Iranian oil producer. On 10 March, NIOC sent the Consortium members a letter repudiating the Consortium agreement and stating that, in the future, the members of the Consortium could obtain oil from Iran only by purchase from NIOC. [Footnote omitted] If there was any doubt that such action represented the policy of the new Government, that was dispelled in early April when public statements by the Minister of Economic Affairs and Finance and by the Governor of the Central Bank referred to Iran's being “free from obligations to the Consortium” and to the export of “the first consignment of our now entirely nationalized oil”. 92. The first concrete actions concerning the Claimant's JSA rights were taken with respect to the oil itself following resumption of production in March 1979. NIOC unilaterally set the production rates at levels significantly below those prevailing prior to the Revolution. Despite oral requests by the Claimant during April and May to be permitted to lift petroleum, all petroleum produced by the fields was lifted by NIOC. While the Claimant apparently did not make any formal “nominations” to lift oil, the evidence is convincing that it was informally requesting from its NIOC partner permission to do so. No compensatory payment was made for the Claimant's share, even though this was contemplated in such circumstances by the JSA and suggested by the Claimant in the Second Party's letter of 26 June 1979 to NIOC. [Footnote omitted] Indeed, NIOC only

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provided petroleum on the basis of a separate sales contract, which it concluded with the Claimant's parent corporation on 19 June 1979, despite the JSA provision that petroleum produced was “owned at the well head” 50 percent by the First Party and 50 percent by the Second Party. That the Government of Iran had decided soon after assuming power that all sales of oil produced in the country must be made by NIOC notwithstanding existing arrangements seems clear in retrospect from the events, and confirming evidence was presented in this Case in the form of an internal memorandum dated 11 July 1979 of decisions made with respect to an unrelated project by the National Petrochemical Company. That memorandum referred to the “Government's policy that all sales of hydrocarbons produced in the country must be made by NIOC”. 93. Confirmation of this governmental policy is found in the Official Gazette No. 10066, dated 13 September 1979 which published Notice No. 52866, dated 18 August 1979, relating to the budget for the year 1358 (21 March 1979-20 March 1980). Note 38 states, in part: “Oil sale contracts shall be signed by the National Iranian Oil Company on behalf of the Government. The sale proceeds of crude oil, in any form, and that of exported oil products, shall be directly deposited in the account of the General Treasury in the Bank Markazi.” On 23 May, Imam Khomeini received certain NIOC staff members and was quoted in the Tehran press as saying that the foes of Islam had had their hands cut off Iranian oil resources which “are in your own hands”. Furthermore, at the end of 1979, the Minister of Petroleum was quoted in the press as stating that “After the Revolution, practically we have not delivered a drop of oil to the second party.” In this context, it is also noted that the Law for the Protection and Expansion of Industries adopted by the Iranian Revolutionary Council on 5 July 1979 stated that the petroleum industry had already been nationalized, and that on 9 July, Prime Minister Bazargan was quoted in the Tehran press as saying the same thing. 94. Other actions affecting the Claimant's rights in IMINOCO began in May 1979. On 29 May 1979, the Managing Director of NIOC appointed a committee of seven persons to “supervise and execute the affairs of the affiliated companies until the situation of their contracts are clarified …” NIOC later dismissed the Managing Director appointed by the Second Party, a right reserved to the Second Party by the JSA, and vested executive authority in its own appointee. Information regarding operations of IMINOCO, principally production reports, ultimately ceased being sent to the Claimant in September. 95. A third set of actions, aimed at termination of the JSA arrangement as a whole, also commenced in the Spring of 1979. Several meetings were held in connection with the negotiations of the sale/purchase agreement noted above. These discussions were linked by NIOC to termination of the JSA and settlement of any issues arising therefrom. Ultimately, NIOC appointed in August 1979 a sub-commission of its Board of Directors, headed by Mr. Khalili, to terminate all of the JSAs and to negotiate new arrangements with each of the former partners. This sub-commission met with the IMINOCO Second Party on 29 September 1979 and notified them at that time that their JSA was terminated. Settlement terms remained linked by NIOC to the opportunity to purchase oil from NIOC in the future. 96. The state of affairs thus reached over the course of 1979 was confirmed during 1980 and thereafter, particularly by promulgation of the Single Article Act in January 1980 and the written notification of the “nullification” of the JSA made in August 1980. This written notification, which emanated from the Ministry of Petroleum and NIOC and not from the Special Commission, explicitly confirmed the oral notice of termination given by NIOC during 1979, i.e. before the Special Commission was formed. It thus served as little more than ratification of the actions taken during 1979. 97. The effects of these events on the Claimant's property are not in dispute. The Tribunal has earlier observed that: While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of fundamental rights of ownership and it appears that this deprivation is not merely ephemeral. The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact. Tippetts, Abbott, McCarthy, Stratton, … at p. 11. Therefore, the Tribunal need not determine the intent of the Government of Iran; however, where the effects of actions are consistent with a policy to nationalize a whole industry and to that end expropriate particular alien property interests, and are not merely the incidental consequences of an action or policy designed for an unrelated purpose, the conclusion that a taking has occurred is all the more evident. 98. Although a government's liability to compensate for expropriation of alien property does not depend on proof that the expropriation was intentional, there seems little doubt in this Case that the new Islamic Republic intended to bring the JSA to an end and to place NIOC fully in charge of all oil production and sales. Even though it can readily be

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observed that NIOC made equivocal statements during 1979 regarding the timing and the terms for termination of the JSA, the refusal to permit the Claimant to exercise any rights under the JSA is more relevant to such a finding than any of these pronouncements. Notwithstanding the ambiguity of some of these statements and the Claimant's continued efforts to arrive at an agreed solution of the problems with the JSA, there is in this Case no evidence of any such agreed termination of the JSA nor of a waiver by the Claimant of its rights under that Agreement (as the Tribunal found in the Consortium Cases based on the evidence there). 99. The effects of Iran's actions on the Claimant's JSA rights can be summarized succinctly. Whereas the First and Second Parties jointly operated the offshore petroleum fields involved in this Case and shared 50-50 the crude petroleum produced by the fields prior to the events of 1979, thereafter the Claimant and the other Second Party companies no longer participated in joint operation of the fields, no longer received their share of the petroleum being produced, and were told by Iran that their agreement had been terminated and nullified. These changes resulted from the actions of Iran summarized above, which totally excluded the Second Party from any of its functions under the JSA. 100. The conclusion that the Claimant was deprived of its property by conduct attributable to the Government of Iran, including NIOC, rests on a series of concrete actions rather than any particular formal decree, as the formal acts merely ratified and legitimized the existing state of affairs. The Claimant suggests that the taking was complete by 29 September 1979, the date of the meeting when it was informed of the termination of the JSA. The Respondents contend that 11 August 1980, the date of the written notification informing the Claimant that the Special Committee had declared the JSA null and void, is the only date when the taking could be said to have been complete. 101. The Tribunal is not bound by the suggestions of the Parties in determining the date of taking for purposes of liability, but rather must determine such date on its own, based on the facts of the case. The Tribunal has previously held that in circumstances where the taking is through a chain of events, the taking will not necessarily be found to have occurred at the time of either the first or the last such event, but rather when the interference has deprived the Claimant of fundamental rights of ownership and such deprivation is “not merely ephemeral,” [footnote omitted] or when it becomes an “irreversible deprivation.” [Footnote omitted] Similarly, where the appointment of temporary managers ripened into a taking of title at a later date, the Tribunal found that the earlier date should be used when “there is no reasonable prospect of return of control.” Sedco, Inc. and National Iranian Oil Company, Interlocutory Award No. ITL 55129-3 (28 October 1985), at p. 42. The Tribunal has observed that an important objective of the Revolutionary movement – and a first order of business of the new Government – was the assumption of complete control over all aspects of the oil industry, notwithstanding existing joint ventures with foreign oil companies. The first and most immediate action against the property rights at issue, the refusal, in line with this policy, to permit the Claimant to take its liftings under the JSA, started after production from the JSA fields had resumed in March 1979. The final formal “nullification” in August 1980 of the JSA only confirmed the then existing state of affairs. Between these two dates, the Tribunal considers that an early date is appropriate. *** 102. The Tribunal notes that the Claimant's loss was felt from the time of the first refusals to permit it to lift petroleum in April 1979. At that time the Claimant was still uncertain whether that situation was to be permanent, and NIOC first indicated that it would at some later time be willing to discuss the Claimant's request concerning its 1979 liftings. When no such discussions ensued, the Claimant's parent company felt compelled to enter, on 19 June 1979, into a separate sales/purchase agreement for crude oil with NIOC. But the Claimant still proposed, together with the other Second Party companies in their letter of 26 June, a provisional arrangement for liftings through the rest of that year which was based on the JSA and the rights under that agreement, and which they were waiting to discuss in the separate meeting envisioned by NIOC in the April general meeting. On 30 June, cash calls to the Claimant ceased. While the cessation of cash calls showed that IMINOCO did in fact no longer operate as provided for in the JSA, the Second Party companies still based their disagreement to the dismissal on 1 August of the Second Party's Managing Director on “the existing contractual arrangement,” viz., the JSA, when AGIP requested an early meeting of the Board of Directors on the matter. It became clear, however, in the meeting which the IMINOCO Second Party companies had with the Khalili sub-commission on 29 September 1979 that there was no reasonable prospect of return to an arrangement with NIOC on the basis of the JSA. For it was in this meeting that the Second Party companies were told not only that they should regard the JSA as terminated, but also that their letter of 26 June did not deserve an answer. Consequently, the Tribunal finds that the Claimant's JSA rights were taken by 29 September 1979, and that the Respondents are liable to compensate the Claimant for its loss as of that date. [7] Pope & Talbot Inc. v. The Government of Canada (ad hoc arbitration under the 1976 UNCITRAL Rules), Interim Award of 26 June 2000, (35) ¶¶ 96-105 [Lord Dervaird (pres.), Benjamin J. Greenberg, Murray J. Belman] [Pope & Talbot Inc., a US company that controls a Canadian company which operates

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sawmills in British Columbia and exports its production to the US, brought this NAFTA claim against Canada based on Canada's implementation of the Canada-US Softwood Lumber Agreement. The Agreement set limits for the amount of lumber exports from Canada and was based on a system of quotas determined by Canadian officials. Pope & Talbot felt that the quotas were distributed in a discriminatory manner and filed a claim for violations of NAFTA Chapter 11. The Tribunal ruled that Canada had not violated the guarantee against expropriation found in NAFTA Article 1110 because the measure was not restrictive enough to constitute a taking. The Tribunal did rule, however, that Canada had violated its Minimum Standard of Treatment obligation under NAFTA Article 1115.] (Citations selectively omitted) 96. Based upon these submissions, as well as the testimony and evidence submitted by the Parties, the Tribunal concludes that the Investment's access to the U.S. market is a property interest subject to protection under Article 1110 and that the scope of that article does cover nondiscriminatory regulation that might be said to fall within an exercise of a state's so-called police powers. However, the Tibunal does not believe that those regulatory measures constitute an interference with the Investment's business activities substantial enough to be characterized as an expropriation under international law. Finally, the Tribunal does not believe that the phrase “measure tantamount to nationalization or expropriation” in Article 1110 broadens the ordinary concept of expropriation under international law to require compensation for measures affecting property interests without regard to the magnitude or severity of that effect. 97. As noted, Article 1110 sets requirements that must be met by Parties expropriating “an investment of an investor of another Party.” The Investor is acknowledged to be an “investor of another Party,” but Canada claims that the ability to sell lumber to the U.S. market is not an investment within the meaning of NAFTA, Article 1139(g) defines investment to include, among other things, “property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes.” 98. While Canada suggests that the ability to sell softwood lumber from British Columbia to the U.S. is an abstraction, it is, in fact a very important part of the “business” of the Investment. Interference with that business would necessarily have an adverse effect on the property that the Investor has acquired in Canada, which, of course, constitutes the Investment. While Canada's focus on the “access to the U.S. market” may reflect only the Investor's own terminology, that terminology should not mask the fact that the true interests at stake are the Investment's asset base, the value of which is largely dependent on its export business. The Tribunal concludes that the Investor properly asserts that Canada has taken measures affecting its “investment,” as the term is defined in Article 1139 and used in Article 1110. 99. Canada appears to claim that, because the measures under consideration are cast in the form of regulations, they constitute an exercise of “police powers,” which, if nondiscriminatory, are supposedly beyond the reach of the NAFTA rules regarding expropriations. While the exercise of police powers must be analyzed with special care, the Tribunal believes that Canada's formulation goes too far. Regulations can indeed be exercised in a way that would constitute creeping expropriation: Subsection (1) [relating to responsibility for injury from improper takings] applies not only to avowed expropriations in which the government formally takes title to property, but also to other actions of the government that have the effect of “taking” the property in whole or in large part, outright or in stages (“creeping expropriation”). A state is responsible as for an expropriation of property under Subsection (1) when it subjects alien property to taxation, regulation, or other action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien's property or its removal from the state's territory. Indeed, much creeping expropriation could be conducted by regulation, and a blanket exception for regulatory measures would create a gaping loophole in international protections against expropriation. For these reasons, the Tribunal rejects the argument of Canada that the Export Control Regime, as a regulatory measure, is beyond the overage of Article 1110. 100. The next question is whether the Export Control Regime has caused an expropriation of the Investor's investment, creeping or otherwise. Using the ordinary meaning of those terms under international law, the answer must be negative. First of all, there is no allegation that the Investment has been nationalized or that the Regime is confiscatory. The Investor's (and the Investment's) Operations Controller testified at the hearing that the Investor remains in control of the Investment, it directs the day-to-day operations of the Investment, and no officers or employees of the Investment have been detained by virtue of the Regime. Canada does not supervise the work of the officers or employees of the Investment, does not take any of the proceeds of company sales (apart from taxation), does not interfere with management or shareholders' activities, does not prevent the Investment from paying dividends to its shareholders, does not interfere with the appointment of directors or management and does not take any other actions ousting the Investor from full ownership and control of the Investment.

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101. The sole “taking” that the Investor has identified is interference with the Investment's ability to carry on its business of exporting softwood lumber to the U.S. While this interference has, according to the Investor, resulted in reduced profits for the Investment, it continues to export substantial quantities of softwood lumber to the U.S. and to earn substantial profits on those sales. 102. Even accepting (for the purpose of this analysis) the allegations of the Investor concerning diminished profits, the Tribunal concludes that the degree of interference with the Investment's operations due to the Export Control Regime does not rise to an expropriation (creeping or otherwise) within the meaning of Article 1110. While it may sometimes be uncertain whether a particular interference with business activities amounts to an expropriation, the test is whether that interference is sufficiently restrictive to support a conclusion that the property has been “taken” from the owner. Thus, the Harvard Draft defines – the standard as requiring interference that would “justify an interference that the owner … will not be able to use, enjoy, or dispose of the property …” The Restatement, in addressing the question whether regulation may be considered expropriation, speaks of “action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien's property.” Indeed, at the hearing, the Investor's Counsel conceded, correctly, that under international law, expropriation requires a “substantial deprivation.” The Export Control Regime has not restricted the Investment in ways that meet these standards. 103. As noted, the Investor expressly agreed that “the Export Control Regime is a measure not covered by customary international law definitions or interpretations of the term expropriation.” It contends that NAFTA goes beyond those customary definitions and interpretations to adopt broader requirements that include under the purview of Article 1110 “measures of general application which have the effect of substantially interfering with the investments of investors of NAFTA Parties. The Investor discerns this additional requirement because of the use of the phrase “measure tantamount to … expropriation” in Article 1110. 104. The Tribunal is unable to accept the Investor's reading of Article 1110. “Tantamount” means nothing more than equivalent. Something that is equivalent to something else cannot logically encompass more. No authority cited by the Investor supports a contrary conclusion. References to the decisions of the Iran-U.S. Claims Tribunal ignore the fact that that tribunal's mandate expressly extends beyond expropriation to include “other measures affecting property rights.” And, to the extent the investor is correct in urging that the comments of Dolzer and Stevens suggest that measures “tantamount” to expropriation can encompass restraints less severe than expropriation itself (creeping or otherwise), those comments would not be well-founded under a reasonable interpretation of the treaties that the authors analyze. 105. Based upon the foregoing, the Tribunal reject its the Investor's claim under Article 1110. [8] Waste Management, Inc. v. United Mexican States (‘Number 2') (ICSID Case No. ARB(AF)/00/3), Award of 25 June 2003, (36) ¶¶ 143-145, 159-162, 177 [James R. Crawford (pres.), Benjamin R. Civilette, Eduardo Magallón Gómez] [Case summary included in Chapter 9.] (Citations selectively omitted) (i) The Article 1110 standard *** 143. It may be noted that Article 1110(1) distinguishes between direct or indirect expropriation on the one hand and measures tantamount to an expropriation on the other. An indirect expropriation is still a taking of property. By contrast where a measure tantamount to an expropriation is alleged, there may have been no actual transfer, taking or loss or property by any person or entity, but rather an effect on property which makes formal distinctions of ownership irrelevant. This is of particular significance in the present case, at least as concerns the enterprise of Acaverde as a whole. 144. Evidently the phrase “take a measure tantamount to nationalization or expropriation of such an investment” in Article 1110(1) was intended to add to the meaning of the prohibition, over and above the reference to indirect expropriation. Indeed there is some indication that it was intended to have a broad meaning, otherwise it is difficult to see why Article 1110(8) was necessary. As a matter of international law a “non-discriminatory measure of general application” in relation to a debt security or loan which imposed costs on the debtor causing it to default would not be considered expropriatory or even potentially so. It is true that paragraph (8) is stated to be “for greater certainty”, but if it was necessary even for certainty's sake to deal with such a case this suggests that the drafters entertained a broad view of what might be “tantamount to an expropriation”. 145. Thus there is some textual basis for the Claimant's submission that “the modern definition of ‘expropriation’ must be broad enough to encompass every course of sovereign conduct that unfairly destroys a foreign investor's contractual rights as an asset”.

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*** 159. … Acaverde at all times had the control and use of its property. It was able to service its customers and earn collection fees from them. It is true that the City failed to make available the promised land for the disposal site – but a failure by a State to provide its own land to an enterprise for some purpose is not converted into an expropriation of the enterprise just because the failure involves a breach of contract. It is also true that the City's breaches (not remedied by Guerrero and remedied only to a limited extent by Banobras) had the effect of depriving Acaverde of “the reasonably-to-be-expected economic benefit” of the project so far as the monthly fees due from the City were concerned. But that will be true of any serious breach of contract: the loss of benefits or expectations is not a sufficient criterion for an expropriation, even if it is a necessary one. 160. In the Tribunal's view, an enterprise is not expropriated just because its debts are not paid or other contractual obligations towards it are breached. There was no outright repudiation of the transaction in the present case, and if the City entered into the Concession Agreement on the basis of an over-optimistic assessment of the possibilities, so did Acaverde. It is not the function of Article 1110 to compensate for failed business ventures, absent arbitrary intervention by the State amounting to a virtual taking or sterilising of the enterprise. 161. The nearest the Claimant came to showing an outright repudiation of the enterprise by Mexico was the Mayor's statement, shortly after the Concession Agreement came into force, to the effect that “the obligation to contract Acaverde's services will be eliminated in order to remove what was previously interpreted as an imposition”. This of course related only to one aspect of the concession arrangements, although an important aspect. But even if a unilateral and unjustified change in the exclusivity obligation could have amounted to an expropriation, no legislative change was in fact made. The Claimant argued that this statement “effectively repealed the law” but the Tribunal does not agree. The Mayor was not purporting to exercise legislative authority or unilaterally to vary the contract. He was not intervening by taking some extra-legal action, as the Mayor of Palermo did when he intervened in the ELSI case. He was saying what ought to be done, in his view, to allay pubic concerns, concerns which did in fact exist at the time. Individual statements of this kind made by local political figures in the heat of public debate may or may not be wise or appropriate, but they are not tantamount to expropriation unless they are acted on in such a way as to negate the rights concerned without any remedy. In fact no action was taken of the kind threatened at the time or later. Even if it had been taken, the Claimant had remedies available to it, under the Concession Agreement and otherwise. 162. For these reasons the Tribunal does not accept that there was an expropriation of Acaverde in this case, or any measure tantamount to the expropriation of Acaverde as an enterprise. *** (iv) Conclusion as to Article 1110 177. In the Tribunal's view, it is not the function of the international law of expropriation as reflected in Article 1110 to eliminate the normal commercial risks of a foreign investor, or to place on Mexico the burden of compensating for the failure of a business plan which was, in the circumstances, founded on too narrow a client base and dependent for its success on unsustainable assumptions about customer uptake and contractual performance. A failing enterprise is not expropriated just because debts are not paid or other contractual obligations are not fulfilled. The position may be different if the available legal avenues for redress are blocked or are evidently futile in the face of governmental intransigence. But this was not the case here. The Claimant's decision not to proceed with the CANACO arbitration may have been understandable, but taking into account all the circumstances it did not implicate Mexico in a breach of Article 1110 any more than of Article 1105. [9] GAMI Investments, Inc. v. The Government of the United Mexican States (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 12 November 2004, (37) ¶¶ 116, 123, 126-133 [W. Michael Reisman, Julio Lacarte Muró, Jan Paulsson] [GAMI, a U.S. corporation, owned approximately a 16% interest in GAM, a Mexican company. The Mexican government expressly expropriated all five of GAM's sugar mills in Mexico. GAMI brought a NAFTA claim against Mexico for expropriation under Article 1110 of NAFTA and for violation of Article 1105. GAM brought an action in Mexican court against the government of Mexico. Prior to the NAFTA hearing, the Mexican court found the expropriation to be unlawful under Mexican law. The Mexican government announced that it would restore three of the mills to the ownership and control of GAM. The other two mills were unprofitable, and GAM did not seek their return. At the NAFTA hearing, GAMI did not introduce any evidence of damages suffered by it. Mexico challenged jurisdiction of the NAFTA Tribunal, but in its final award the Tribunal upheld its jurisdiction but denied GAMI's claims on the merits.] (Citations selectively omitted)

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7. Expropriation 116. … A state cannot avoid international responsibility by arguing that the foreigner must content himself with whatever compensation has been decreed by national authorities. *** 123. GAMI's shares in GAM have not been expropriated. GAMI must therefore say that its investment in GAM has suffered something tantamount to expropriation. This question arises prior to any analysis of quantum. It relates to the substantive determination of a breach… *** 126. Should Pope & Talbot be understood to mean that property is taken only if it is so affected in its entirety? That question cannot be answered properly before asking: what property? The taking of 50 acres of a farm is equally expropriatory whether that is the whole farm or just a fraction. The notion must be understood as this: the affected property must be impaired to such an extent that it must be seen as “taken.” 127. GAM's own case would thus not have been affected in principle if only one mill had been expropriated. GAM's property rights in that single mill would have been “taken” because GAM was formally dispossessed of those rights. (Indeed GAM's success in the Sentencia was not impaired by its decision to abandon the complaint with respect to two of the five mills.) 128. But this Tribunal is not seised by GAM. GAMI's case is more difficult. The notions developed by Pope & Talbot may suggest that the “impairment” of the value of its property (i.e. GAMI's shares of GAM) would not be equivalent to a “taking” of that property if only one of five equally valuable GAM mills had been expropriated without compensation. The impairment might on the other hand have been total if that single mill was the only one having a positive value. (GAMI may thus be right in dismissing as irrelevant GAM's decision not to challenge the expropriation of the San Francisco and San Pedro mills.) 129. The position then is this: GAMI is entitled to invoke the protection of Article 1110 if its property rights (the value of its shares in GAM) were taken by conduct in breach of NAFTA. GAMI argues that such conduct was manifest in the Expropriation Decree. This Tribunal finds it likely that the Expropriation Decree was inconsistent with the norms of NAFTA. But Mexican conduct inconsistent with the norms of NAFTA is only a breach of NAFTA if it affects interests protected by NAFTA. GAMI's investment in GAM is protected by Article 1110 only if its shareholding was “taken.” 130. It would in the first of these two hypotheses be disturbing to conclude that GAMI could recover only if it had taken a 14.18% participation in each of the five separate subsidiaries which owned the mills. That would be formalistic to a degree which could not easily be reconciled with the objectives of NAFTA… 131. Other NAFTA awards have given support for the proposition that partial destruction of the value may be tantamount to expropriation… *** 132. But this Tribunal need not decide whether partial destruction of shareholding interests may be tantamount to expropriation. It would in any case be necessary to assess the value of shareholding in GAM at the time of the Expropriation Decree. GAM was and remains in the hands of its owners. Its principal assets had been taken. But Mexican law gave it substantial protections. GAM could sue for the reversal of the taking. Or it could accept the taking and claim for compensation. (GAM has of course successfully obtained the return of three mills and is awaiting compensation for the other two. It would seem difficult to suggest that GAM has been unduly passive in protecting its rights. Such a case could naturally be imagined. The minority shareholder might then have no effective means of initiating remedial action on behalf of the company. But that would have to be proved.) GAMI may have had subjective apprehensions that Mexican judicial remedies would be insufficient. But this Tribunal can only act on the basis of objective findings justified by evidence that GAM's value as an enterprise had been destroyed or impaired. 133. With knowledge of the magnitude of diminution one might be in a position to consider whether a line is to be drawn beyond which the loss is so great as to constitute a taking. But GAMI has staked its case on the proposition that the wrong done to it did in fact destroy the whole value of its investment. GAMI seeks to lend credibility to its posture by agreeing to relinquish its shares in GAM as a condition of the award it seeks. It suggests that any residual value is therefore of no moment. This posture is untenable. The Tribunal cannot be indifferent to the true effect on the value of the investment of the allegedly wrongful act. GAMI has neglected to give any weight to the remedies available to GAM. Assessment of their effect on the value of GAMI's investment is a precondition to a finding that it was taken. GAMI has not proved that its investment was expropriated for the purposes of Article 1110. [10] Compañia de Aguas del Aconquija S.A. and Vivendi Universal (formerly Compagnie Générale Des Eaux) v. Argentine Republic (ICSID Case No. ARB/97/3), Award of 20 August

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2007, (38) ¶¶ 7.5.3-7.5.4, 7.5.8, 7.5.10-7.5.11, 7.5.17-7.5.21, 7.5.247.5.30, 7.5.31, 7.5.33-7.5.34 [J. William Rowley (pres.), Gabrielle Kaufmann-Kohler, Carlos Bernal Verea] [This dispute arose out of actions of the Argentine Republic and the Province of Tucuman (an Argentine local administrative subdivision whose actions are attributable to the Argentine Republic under international law) adversely affecting a water distribution concession owned and operated by Vivendi – a French company – and resulting in the anticipated termination of the thirty-year concession contract. Vivendi commenced ICSID arbitration proceedings under the Argentina-France BIT.] (Citations selectively omitted) 7.5 .3. Respondent appears to contend that an act or measure that breaches a contract cannot give rise to an expropriation because contract breaches could be addressed and must in law be addressed in other fora, without recourse to the Treaty. 7.5 .4. This proposition is incorrect. There can be no doubt that contractual rights are capable of being expropriated, and a number of treaty cases have arisen out of contractual disputes. The same act that may violate a treaty may also violate a contract, or both the treaty and the contract. The fact that there is overlap does not prevent a tribunal from considering the act as a possible treaty breach… *** 7.5 .8. However, the measures identified at 7.4 herein, which constituted the Province's destructive campaign against CAA and CGE / Vivendi cannot in any circumstance be cast as simple commercial acts of or relating to non-performance by a contracting counterparty. Here we have illegitimate sovereign acts, taken by the Province in its official capacity, backed by the force of law and with all the authoritative powers of public office. *** 7.5 .10. Thus, even if one were to accept Respondent's arguments requiring some extra element in order to find a Treaty violation in acts of a contractual nature, an abundance of such elements are present in this case. In any event, the Article 5(2) requirement, that state measures not be contrary to a particular commitment, suggests that the breach of a commitment by a state is an appropriate factor for consideration in determining whether the state action is expropriatory in nature. 7.5 .11. As to Respondent's position that it is novel and far-reaching for Claimants to suggest that the value of their investment has been expropriated, it is not infrequent in cases of indirect expropriation that the investor suffers a substantial deprivation of value of its investment. Numerous tribunals have looked at the diminution of the value of the investment to determine whether the contested measure is expropriatory. The weight of authority (further discussed below) appears to draw a distinction between only a partial deprivation of value (not an expropriation) and a complete or near complete deprivation of value (expropriation). *** 7.5 .17. UNCTAD'S 2000 study on taking of property, which summarises existing jurisprudence, confirms this view. It observes that measures short of physical takings may amount to takings in that they result in the effective loss of management, use or control, or a significant depreciation of the value of the asset of a foreign investor; that takings tantamount to expropriation are those that result in a substantial loss of control or value of a foreign investment; that creeping expropriation may be defined as the slow and incremental encroachment on one or more of the ownership rights of a foreign investor that diminishes the value of its investment. This is so even though the legal title to the property remains vested in the foreign investors but the investors' rights of use of the property are diminished as a result of the interference by the state. 7.5 .18. At several points in its submission, Respondent appears to press for a return to a regime in which liability for expropriation is limited to physical or formal expropriations. Put another way, so long as Claimants remain in physical and managerial control of the water and sewage treatment assets of the concession, including during the alleged “hostage period”, they were not deprived of their ownership rights in the concession. However, it has been clear since at least 1903, in the Rudolff case, that the taking away or destruction of rights acquired, transmitted and defined by contract is as much a wrong entitling the sufferer to redress as the taking away or destruction of a tangible property. 7.5 .19. Respondent fails to appreciate that in the context of Claimants' case for expropriation of the Concession Agreement, the ownership rights which are subject to deprivation are Claimants' contractual rights themselves, ie the right to the use, enjoyment and benefit of those rights. And here, CAA's principal contractual right was to invoice its customers and pursue payment for the water and sewage services it provided in accordance with the tariff and terms provided for in the Concession Agreement. The fact that CAA remained, and during the alleged “hostage period” may have been “forced” to remain in control of the physical operation of the water treatment plants and the water and sewage network has no bearing whatever on whether CAA was effectively deprived of the right to operate the concession and to be compensated in accordance

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with the Concession Agreement, as originally negotiated. 7.5 .20. Turning to Respondent's proposition that an act of state must be presumed to be regulatory, absent proof of bad faith, this is incorrect. There is extensive authority for the proposition that the state's intent, or its subjective motives are at most a secondary consideration. While intent will weigh in favour of showing a measure to be expropriatory, it is not a requirement, because the effect of the measure on the investor, not the state's intent, is the critical factor… 7.5 .21. Also, the structure of Article 5(2) of the Treaty directs the Tribunal first to consider whether the challenged measures are expropriatory, and only then to ask whether they can comply with certain conditions, ie public purpose, non-discriminatory, specific commitments, et cetera. If we conclude that the challenged measures are expropriatory, there will be violation of Article 5(2) of the Treaty, even if the measures might be for a public purpose and non-discriminatory, because no compensation has been paid. Respondent's public purpose arguments suggest that state acts causing loss of property cannot be classified as expropriatory. If public purpose automatically immunises the measure from being found to be expropriatory, then there would never be a compensable taking for a public purpose… *** 7.5 .24. Where, as here, there has been no taking or dispossession, as such, and the question turns on whether there have been measures equivalent to expropriation which have had an effect similar to the dispossession of Claimants' rights and expectations, it is necessary to consider whether the challenged measures have or will (i) radically deprive Claimants of the economic use and enjoyment of its investment – Tecmed, (ii) effectively neutralise the benefit of Claimants' property – CME, (iii) deprive the owner of the benefit and economic use of its contractual rights – Santa Elena, (iv) render Claimants' property rights useless – Starrett Housing, or have a similar dispossessory effect. 7.5 .25. As to this, we find that the Province's unfair and inequitable measures, identified at 7.4 above, which ultimately led to CAA's notice of rescission of the Concession Agreement on 27 August 1997, struck at the economic heart of, and crippled, Claimants' investment. 7.5 .26. The actions taken by the provincial authorities against the concession and its “foreign” investors had a devastating effect on the economic viability of the concession. CAA's recovery rate declined dramatically over the life of the concession, as illustrated in the graph below. The recovery rate continued to fall even after the tariffs were lowered as part of the interim agreement reached during the attempted renegotiations and, by the time CAA notified the authorities that the Concession Agreement was rescinded, it hovered around 20%; a stark contrast with the rate of 89-90% upon which the Concession Agreement was premised. 7.5 .27. We have already indicated that it would not have been reasonable for Claimants to expect they would achieve the recovery rates or internal rates of return upon which they had modelled their investment … However, they had every right to expect their privatisation partner, the Province, would not mount a wrongful and damaging campaign to force them, on threat of rescission, to abandon their contractual rights and renegotiate the concession based on lower tariffs. 7.5 .28. The provincial measures earlier identified, taken cumulatively, rendered the concession valueless and forced CAA and Vivendi to incur unsustainable losses. As former Legislator Nougués said, the provincial authorities, including the Executive, told the citizens of Tucumán not to pay and they did not. By August 1997, they had also so undermined CAA and the legitimacy of the Concession Agreement that it is utterly unrealistic to suggest that CAA (and its investors) should simply have stayed put, continuing to provide services for which it was not being paid and accepting ever increasing losses. 7.5 .29. This is not a case where the value of a claimant's investment had simply been diminished. Here, as in Tecmed, Claimants were radically deprived of the economic use and enjoyment of their concessionary rights. The ad hoc Committee well understood the potential for such a finding when it stressed that: “… the conduct complained of here was not more or less peripheral to a continuing successful enterprise. The Tucumán conduct (in conjunction with the acts and decisions of Claimants) had the effect of putting an end to the investment.” *** 7.5 .31. It is well-established under international law that even if a single act or omission by a government may not constitute a violation of an international obligation, several acts taken together can warrant finding that such obligation has been breached. The ad hoc Committee recognised this when it noted that “[i]t was open to Claimants to claim, and they did claim, that these acts taken together, or some of them, amounted to a breach of Articles 3 and/or 5 of the BIT.” … ***

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7.5 .33. Here, the Province's actions – from the very opening months of the concession, continuing through its wrongful regulatory action and culminating in the unilateral amendments to the 8 April Agreement – had the necessary consequence of forcing CAA to terminate the Concession Agreement. The provincial government was simply not prepared to countenance and support CAA's operation of the concession on the terms of the Concession Agreement as originally agreed. Ultimately, the Province simply left CAA with no choice. It could not continue in the face of mounting losses, under significantly reduced tariffs and with no reasonable prospect of improved collection rates. CAA's contractual rights under the Concession Agreement were rendered worthless by the Province's actions while its losses would only continue to mount. Vivendi suffered direct harm in its capacity as CAA's principal shareholder, with the value of its shareholding being eradicated. 7.5 .34. Paraphrasing the words of the Tecmed, CME, Santa Elena, and Starrett Housing tribunals, Claimants were radically deprived of the economic use and enjoyment of their investment, the benefits of which (ie the right to be paid for services provided) had been effectively neutralised and rendered useless. Under these circumstances, rescission of the Concession Agreement represented the only rational alternative for Claimants. By leaving Claimants with no other rational choice, we conclude that the Province thus expropriated Claimants' right of use and enjoyment of their investment under the Concession Agreement. [11] Burlington Resources Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5 (formerly Burlington Resources Inc. and others v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador)) (ICSID Case No. ARB/08/5), Decision on Liability of 14 December 2012, (39) ¶¶ 344-345, 391-404, 429-430, 448-449, 454-456, 537-540 [Gabrielle Kaufmann-Kohler (pres.), Brigitte Stern, Francisco Orrego Vicuña] [Case Summary Chapter 3.] (Citations selectively omitted) 344. The Tribunal will now turn its attention to the two competing analytic approaches according to which it is possible to examine Burlington's expropriation claims. Under the individualized approach, the evidence of an expropriation is examined measure-bymeasure while under a collective approach all measures are considered together. 345. In the view of the Tribunal, when the investor puts forward both an individualized and a collective case of expropriation, one should begin the analysis with the measureby-measure approach; the reason being that a collective or creeping approach is typically employed only when no single measure is in itself expropriatory. This proposition finds supports both in literature and in previous cases. Michael Reisman and Robert Sloane, for instance, approvingly refer to an arbitrator's view to the effect that “a creeping expropriation is comprised of a number of elements, none of which can – separately – constitute the international wrong” (emphasis added). By contrast, these authors note that “if one or two events in [a] series [of measures] can readily be identified as those that destroyed the investment's value, then to speak of a creeping expropriation may be misleading.” *** 391. Taxation is an essential prerogative of State sovereignty. By virtue of this sovereign prerogative, States may tax not only their own nationals but also aliens, including foreign investors, if they effectuate investments in those States. A tax is by definition an appropriation of assets by the State. It is also by definition non-compensable. In the well-known phrase of Judge Oliver Wendell Holmes, taxes are “the price we pay for civilized society.” In other words, general taxation is the result of a State's permissible exercise of regulatory powers. It is not an expropriation. 392. There are, however, limits to the State's power to tax. There are limits that arise from customary international law on taxation and limits that arise from the protections granted under international law to foreign investments, the only relevant one for present purposes being the protection against expropriation under the Treaty… 393. Customary international law imposes two limitations on the power to tax. Taxes may not be discriminatory and they may not be confiscatory. Confiscatory taxation essentially “takes too much from the taxpayer.” The determination of how much is too much constitutes a fact specific inquiry. Among the factors to be considered one counts first and foremost the tax rate and the amount of payment required. If the amount required is so high that taxpayers are forced to abandon the property or sell it at a distress price, the tax is confiscatory. 394. The concept of confiscatory taxation appears to correspond to that of expropriatory taxation. The US Restatement Third of the Law of Foreign Relations provides that states are responsible for “expropriation … when it subjects alien property to taxation … that is confiscatory …” Under the Harvard Draft Convention, the execution of tax laws is not wrongful provided that the tax “is not an abuse of … powers … for the purpose of depriving an alien of his property.” Similarly, in an article on the interface between investment protection and fiscal powers, Thomas Wälde and Abba Kolo, for instance, refer to the concepts of “confiscatory taxation” and “expropriatory taxation”

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interchangeably. Consequently, the notion of confiscatory taxation under customary international law may inform the Tribunal's understanding of unlawful expropriation by way of taxes under the Treaty. 395. The most important factor to distinguish permissible from confiscatory taxation is the effect of the tax. The effects required for a tax to be deemed confiscatory do not appear to be different from those required to assess the existence of an indirect expropriation. In other words, confiscatory taxation constitutes an expropriation without compensation and is unlawful. The Parties have also attached importance to the effects of the tax. Burlington alleged that Law 42 was a measure tantamount to expropriation because it “resulted in a substantial deprivation.” Ecuador has in turn submitted that a tax measure may be tantamount to expropriation only if it causes “the effects required for any indirect expropriation.” 396. When assessing the evidence of an expropriation, international tribunals have generally applied the sole effects test and focused on substantial deprivation… 397. When a measure affects the environment or conditions under which the investor carries on its business, what appears to be decisive, in assessing whether there is a substantial deprivation, is the loss of the economic value or economic viability of the investment. In this sense, some tribunals have focused on the use and enjoyment of property. The loss of viability does not necessarily imply a loss of management or control. What matters is the capacity to earn a commercial return. After all, investors make investments to earn a return. If they lose this possibility as a result of a State measure, then they have lost the economic use of their investment. 398. Most tribunals apply the test of expropriation, however it is phrased, to the investment as a whole. Applied to the investment as a whole, the criterion of loss of the economic use or viability of the investment implies that the investment as a whole has become unviable. The measure is expropriatory, whether it affects the entire investment or only part of it, as long as the operation of the investment cannot generate a commercial return. 399. The inquiry under the test of loss of economic use or viability goes beyond the issue of whether the challenged measure caused a reduction or loss of profits… While losses in one year may indicate that the investment has become unviable and will not return to profitability, this is not necessarily so and a finding of expropriation would need to assess the future prospects of earning a commercial return. It must be shown that the investment's continuing capacity to generate a return has been virtually extinguished. 400. Having circumscribed the test applicable to expropriation by way of taxation, additional questions arise in respect of the role of the State's intent, the discriminatory character of the tax and the weight of contractual stabilization clauses. 401. In addition to the impact of the tax, the State's intent is another factor that tribunals sometimes consider to draw the line between permissible and confiscatory taxation. Therefore, a finding that a State measure is designed to “depriv[e]” the investor of its property or to cause it to “abandon … or sell it at a distress price” would tend to support a finding of expropriation. However, it is clear that the intent plays a secondary role relative to the effects test… 402. Under general international law, a tax is illegal not only if it is confiscatory but also if it is discriminatory. This does not mean, however, that a discriminatory tax amounts per se to an expropriation. To reach the level of an expropriation, the discriminatory tax must still meet the test of substantial deprivation discussed above. 403. Relying on Revere Copper, Burlington has also argued that a tax that is contrary to a tax stabilization or similar clause amounts to expropriatory. According to Burlington, such a tax would “make the leap from a bona fide government regulation to an expropriatory measure.” It is unquestionable that such a tax would amount to a breach of contract. However, to determine whether it constitutes an expropriation, the question remains whether the tax causes a substantial deprivation of the investment as a whole. 404. A final comment is in place in this context in connection with the nature of the tax at issue. The Law 42 tax is a so-called windfall profits tax, i.e. a tax applying to oil revenues exceeding the ones prevailing at the time the PSCs were executed. By definition, such a tax would appear not to have an impact upon the investment as a whole, but only on a portion of the profits. On the assumption that its effects are in line with its name, a windfall profits tax is thus unlikely to result in the expropriation of an investment. A definitive conclusion, however, may only be reached after taking into account the specific circumstances of the case, which the Tribunal will do in the subsequent sections. *** 429. In relative terms, Law 42 at 50% reduced Burlington's take on the total oil revenues (after taxes and including operating costs) produced by the Blocks from 48.9% to 34.6% in Block 7 (a 29.2% reduction), and from 57.4% to 38.6% in Block 21 (a 32.8% reduction). If Burlington's operating costs are subtracted from its revenues, Law 42 at 50% reduced Burlington's take on total oil revenues from 38.3% to 24% in Block 7 (a 37.3% reduction), and from 48.6% to 29.9% (a 38.5% reduction) in Block 21.

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430. On the basis of these figures, the Tribunal is of the opinion that the effects of Law 42 at 50 % do not amount to a substantial deprivation of the value of Burlington's investment… *** 448. On the other hand, the effects of Law 42 at 99% on Burlington's investment may also be evaluated by focusing on how the proceeds of a barrel of oil allocated to Burlington Oriente pursuant to the PSCs would have been distributed. For Block 7, the proceeds of a barrel of Oriente crude oil priced at USD 83.20 in November 2007, at which time the reference price adjusted for inflation was of USD 30.85, would have been allocated as follows: USD 31.37 per barrel to Burlington (USD 30.85 plus one percent of USD 52.35), and USD 51.83 per barrel to Ecuador. Hence, Law 42 at 99% deprived Burlington of 62.3% of the value of each barrel of Oriente crude oil allocated to its subsidiary under the PSCs. 449. For Block 21, the original reference price as of March 1995 was USD 15.36. There does not appear to be evidence on record of the statutory reference price of a barrel of Napo crude oil, adjusted for inflation, in November 2007. Assuming that the reference price was USD 19 at the time, the proceeds of a barrel of Napo oil priced at USD 79.09 in November 2007 would have been apportioned as follows: USD 20.6 per barrel for Burlington (USD 20 plus one percent of USD 59.09) and USD 58.5 per barrel for Ecuador. Consequently, Law 42 at 99% deprived Burlington of approximately 73.9% of the value of each barrel of Napo crude oil allocated to its subsidiary under the PSCs. *** 454. Ecuador further claims that it passed Law 42 to achieve a fair allocation of the petroleum rent. The record indeed supports the proposition that Ecuador perceived the significant increase in oil prices as having created an inequitable situation where oil companies obtained undeserved windfall profits to the detriment of the State. The Tribunal acknowledges that a fair sharing of the rent may well have been Ecuador's general and indeed legitimate goal. However, under the specific facts of this case, Ecuador had an obligation to respect the tax absorption clauses included in the PSCs. 455. Finally, Ecuador argues that Law 42 was intended to prompt oil companies to negotiate with the State. While this goal may have been related to Ecuador's view that the allocation of oil revenues under the PSCs was unfair, it provides no ground to disregard Burlington's rights under the PSCs. Ecuador appears to have passed Law 42 without intending to apply the correction factor required by the tax absorption clauses of the PSCs. This course of action lends credence to Burlington's allegation that Law 42 was intended to force Burlington to abdicate its rights under the PSCs. At any rate, as the tribunal in Tippetts stated, “the intent of the government is less important than the effects of the measures …” In particular, the State's intent alone cannot make up for the lack of effects amounting to a substantial deprivation of the investment. 456. Having considered all the evidence, the Tribunal is not persuaded that Law 42 at 99% substantially deprived Burlington of the value of its investment. While Law 42 at 99% diminished Burlington's profits considerably, Burlington's allegations that its investment was rendered worthless and unviable have not been substantiated. Rather, the evidence shows that, notwithstanding the enactment of Law 42 at 99%, the investment preserved its capacity to generate a commercial return. Finally, although the evidence shows that Ecuador passed Law 42 without intending to comply with the tax absorption clauses, there can be no expropriation in the absence of substantial deprivation. *** 537. … the Tribunal concludes that Ecuador's physical occupation of Blocks 7 and 21 expropriated Burlington's investment as of 30 August 2009… 538. In light of the conclusion that the physical occupation effected an expropriation, the Tribunal does not believe that Ecuador's measures taken together constituted a creeping expropriation. As previously noted, creeping expropriation only exists when “none” of the challenged measures separately constitutes expropriation. In this case, the physical takeover of the Blocks does constitute expropriation in and of itself… 539. Burlington has relied on Revere Copper to suggest that finding expropriation at the time of the physical takeover was too late, since the expropriation had commenced at an earlier stage. In Revere Copper, the tribunal held that it would be too “narrow” an interpretation to require physical impact to make a finding of expropriation. On the basis of this precedent, counsel for Burlington argued at the hearing that: “What is significant for our purposes is the Tribunal's recognition that the cumulative impact of the inability to make rational decisions related to an investment can be as harmful to an investor as a physical, outright, troops-in weapons-out expropriation. An investor should not have to operate under conditions that substantially deprive it of the benefit of its investment before crying foul.” 540. The Tribunal takes no issue with this general statement, but considers that it has no application to this case. As was previously concluded, Burlington was not operating under conditions of substantial deprivation before Ecuador physically occupied the Blocks. Nor

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is it possible to conclude that before that point Burlington had lost its ability to “make rational decisions.” By way of example, Burlington's decision to place the contested Law 42 payments into a segregated account while continuing to negotiate with Ecuador is but one token that such ability had not been annihilated. Accordingly, the Tribunal does not believe that this is a case of creeping expropriation. [12] Comments and Questions 1. 2. 3. 4. 5. 6. 7.

8. 9. 10.

11.

What is a nationalization? Does the standard for finding an expropriation under the 2012 U.S. Model BIT differ from that under customary international law? What is the meaning of the phrase “measures tantamount to expropriation”? What does the term “creeping expropriation” mean? Give an example of a creeping expropriation. Is an expropriation legal under international law? Are there conditions for an expropriation to be considered legal? What is the legal effect of an expropriation that does not meet the conditions of an investment treaty? Are there consequences? Does a regulatory act that causes a reduction in the value of an investment constitute an expropriation? For example, does a land use regulation that restricts or prohibits certain uses of land constitute an expropriation? When would it be expropriatory? Does it matter whether the restricted use is temporary or permanent? Does the effect on the value matter? What is the standard for a partial expropriation? Does a governmental measure that reduces the value of an investment by 40% constitute an expropriation? Why or why not? Can a tax constitute an expropriation? Under what circumstances? A few of the other investment awards that have decided issues of expropriation include the following: Impregilo v. Argentina, ICSID Case No. ARB/07/17, Award of 21 June 2011, available athttp://italaw.com/alphabetical_list.htm, Enron v. Argentina, ICSID Case No. ARB/01/3, Award of 22 May 2007, available at http://italaw.com/alphabeti-cal_list.htm, Sempra v. Argentina, ICSID Case No. ARB/02/16, Award of 28 September 2007, available at http://italaw.com/documents/SempraAward.pdf, Azurix v. Argentina, ICSID Case No. ARB/01/12, Award of 14 July 2006, and ADC v. Hungary, ICSID Case No. ARB/03/16, Award of 2 October 2006, available at http://italaw.com/documents/ADCvHungaryAward.pdf. Hypotheticals: (a)

(b)

(c) (d)

(e) (f)

(g)

Assume a government seizes an oilfield operated by a foreign oil company under a concession. This is the company's entire business in the country. Is this an expropriation? Does it matter if the contractual rights are not formally terminated? Does it matter whether or not a formal decree of expropriation is issued? Assume a government takes only one of the three oilfields that a foreign oil company operates in the country. Each of the oilfields is equal in oil reserves and value. Is this an expropriation? Assume the government justifies the taking by claiming that the field was not adequately or appropriately operated, and that oilfields in a neighboring country were draining it. What effect, if any, should this have on an expropriation claim? Assume that a government takes one of ten trademarks held by a company within the country. A trademark is encompassed within the definition of “investment” by the country's BITs. Is this an expropriation? Assume a local municipality's zoning agency zones existing property so that it may not be used for “industrial” purposes, but it may be used for any other purpose by the owner. The foreign owner had bought the land four years earlier, specifically with the intent to build such a factory, and he had made public for the three previous years his plans to build such a factory on the land, and prior zoning had permitted such use. Is this expropriatory? What if the owner had no plans to build a factory on the land prior to the new zoning requirements? Does this fact make a difference? Assume a local government designates a foreign owner's coastal landholdings as a nature preserve, with no other use permitted, but does not seize the property, legally or physically. Is this expropriatory? Assume new regulations imposed on a public utility reduce its tariffs such that the rate of return on its investment decreases from 12% to 5%. Is this expropriatory? Assume the utility argues that this alters its risk profile for the capital markets, so that it cannot raise capital at inexpensive rates with these tariffs, and that it cannot maintain its investment program. What effect, if any, should this have on the expropriation claim? What if the rate of return is reduced to 2%? Assume that new safety and environmental regulations reduce the value of an

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(h)

(i)

existing foreign-owned company by 35%. Are these measures expropriatory? Assume a new government regime issues a decree that its 100% state-owned company shall renegotiate its contracts with mining companies, all of which are foreign-owned, so that it will have a minimum 51% stake in each project, and the government imposes a new 20% royalty on such companies. The companies' profits are already taxed at a 50% rate. The companies claim these measures are expropriatory. What should the result be? Why? Assume a government expropriates land of a foreign investor for the stated purpose that it be provided to a different investor whose use will result in higher tax revenues? Does this meet the standard for a legal expropriation?

[H] Effective Means of Enforcing Rights [1] Chevron Corporation (USA) and Texaco Petroleum Company (USA) v. The Republic of Ecuador (PCA Case No. 34877), Partial Award on the Merits of 30 March 2010, (40) ¶¶ 241248, 250-257, 262-264, 268-270 [Karl-Heinz Böckstiegel (pres.), Charles N. Brower, Albert Jan van den Berg] [Case summary Chapter 3.] (Citations selectively omitted) 241. The Tribunal recalls the text of Article II(7) of the BIT: Each Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations. BIT provisions such as this one are relatively rare. They appear only in U.S. BITs, the Energy Charter Treaty, and a handful of other BITs. Only three cases considering such provisions have been brought to the attention of this Tribunal, those of Petrobart v. Kyrgyz Republic, Amto v. Ukraine, Duke Energy v. Ecuador. 242. The obligations created by Article II (7) overlap significantly with the prohibition of denial of justice under customary international law. The provision appears to be directed at many of the same potential wrongs as denial of justice. The Tribunal thus agrees with the idea, expressed in Duke Energy v. Ecuador, that Article II(7), to some extent, “seeks to implement and form part of the more general guarantee against denial of justice.” Article II(7), however, appears in the BIT as an independent, specific treaty obligation and does not make any explicit reference to denial of justice or customary international law. The Tribunal thus finds that Article II(7), setting out an “effective means” standard, constitutes a lex specialis and not a mere restatement of the law on denial of justice. Indeed, the latter intent could have been easily expressed through the inclusion of explicit language to that effect or by using language corresponding to the prevailing standard for denial of justice at the time of drafting… 243. The lex specialis nature of Article II(7) is also confirmed by its origin and purpose. According to Vandevelde, such “judicial access” provisions arose in U.S. treaty practice at a time when disagreement existed among publicists about the content of the right of access to the courts of the host state, “thus making treaty protection desirable.” Article II(7) was thus created as an independent treaty standard to address a lack of clarity in the customary international law regarding denial of justice. Vandevelde further notes that this provision was later deleted from the U.S. Model BIT when U.S. drafters deemed that other BIT provisions and customary international law provided adequate protection and that a separate treaty obligation was no longer necessary, as is shown by the reference to “effective means” in the preamble and the express reference to denial of justice in the formulation of the fair and equitable treatment standard. 244. In view of the above considerations and the language of Article II(7), the Tribunal agrees with the Claimants that a distinct and potentially less-demanding test is applicable under this provision as compared to denial of justice under customary international law. The test for establishing a denial of justice sets, as the Respondent has argued, a high threshold. While the standard is objective and does not require an overt showing of bad faith, it nevertheless requires the demonstration of “a particularly serious shortcoming” and egregious conduct that “shocks, or a least surprises, a sense of judicial propriety” (R V, ¶¶ 32-44). By contrast, under Article II(7), a failure of domestic courts to enforce rights “effectively” will constitute a violation of Article II(7), which may not always be sufficient to find a denial of justice under customary international law. Given the related genesis of the two standards, the interpretation and application of Article II(7) is informed by the law on denial of justice… 245. The Respondent asserts that Article II(7) only concerns “system attributes” and does not allow review of investor treatment in individual cases. The Respondent relies in particular on the holding in Amto v. Ukraine: [T]he State must provide an effective framework or system for the enforcement of rights, but does not offer guarantees in individual cases. Individual failures might be evidence of systematic inadequacies, but are not themselves a

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breach of Article 10(12). 246. While such a dichotomy can theoretically be made, one cannot fully divorce the formal existence of the system from its operation in individual cases. The Amto v. Ukraine tribunal appears to acknowledge this in the second sentence of the passage above. This Tribunal further notes that the statement in the Amto case was made in the context of considering specific complaints against the legislative framework governing bankruptcy in the Ukraine and not while considering potential injustices arising in a particular case. 247. In any event, the Tribunal does not share the Respondent's view. While Article II(7) clearly requires that a proper system of laws and institutions be put in place, the system's effects on individual cases may also be reviewed. This idea is reflected in the language of the provision. The article specifies “asserting claims,” so some system must be provided to the investor for bringing claims, as well as “enforcing rights,” so the BIT also focuses on the effective enforcement of the rights that are at issue in particular cases. The Tribunal thus finds that it may directly examine individual cases under Article II(7), while keeping in mind that the threshold of “effectiveness” stipulated by the provision requires that a measure of deference be afforded to the domestic justice system; the Tribunal is not empowered by this provision to act as a court of appeal reviewing every individual alleged failure of the local judicial system de novo. 248. Additionally, within the lex specialis of Article II(7), the Tribunal finds no requirement that evidence be shown “of the host State's extreme interference in the judicial proceedings” in order to breach the BIT as had been initially argued by the Respondent… The Tribunal reiterates that the standard under Article II(7) is one of “effectiveness” which applies to a variety of State conduct that has an effect on the ability of an investor to assert claims or enforce rights. Furthermore, the obligation in Article II(7) is stated as a positive obligation of the host State to provide effective means, as opposed to a negative obligation not to interfere in the functioning of those means. The Tribunal therefore finds that, while instances of governmental interference may be relevant to the analysis under Article II(7), the provision is applicable to the Claimants' claims for undue delay and manifestly unjust decisions even if no such interference is shown. *** 250. For any “means” of asserting claims or enforcing rights to be effective, it must not be subject to indefinite or undue delay. Undue delay in effect amounts to a denial of access to those means. The Tribunal therefore finds that Article II(7) applies to the Claimants' claims for undue delay in their seven cases in the Ecuadorian courts. The Ecuadorian legal system must thus, according to Article II(7), provide foreign investors with means of enforcing legitimate rights within a reasonable amount of time. The limit of reasonableness is dependent on the circumstances of the case. As with denial of justice under customary international law, some of the factors that may be considered are the complexity of the case, the behavior of the litigants involved, the significance of the interests at stake in the case, and the behavior of the courts themselves. The Tribunal must thus come to a conclusion about if and when the delay exceeded the allowable threshold under Article II(7) in light of all such circumstances. 251. Neither side alleges and the Tribunal does not find that the delay had reached the threshold of unreasonable delay before the entry into force of the BIT on May 11, 1997. Such a conclusion would take the consequent BIT breach out of the bounds of the Tribunal's jurisdiction according to the Tribunal's Interim Award. The Tribunal recalls from its Interim Award, however, that acts and circumstances pre-dating the entry into force of the BIT may be taken into account in determining whether a BIT breach was later completed (Interim Award, ¶¶ 282-284, 298-301). For the reasons that follow, the Tribunal finds that delay with respect to each of the seven court cases had become unreasonable, and a breach of Article II(7) was completed, at the date of the Claimants' Notice of Arbitration. 252. The Claimants' Notice of Arbitration was dated December 21, 2006 and the most recent of the seven court cases were commenced in December 1993 (Case 152-93 commenced December 10, 1993; Case 153-93 commenced December 14, 1993; Case 154-93 commenced December 14, 1993). 253. Therefore, all cases had been pending for a least 13 years at the time of commencement of the present arbitration. Thirteen years is a significant period, but the tribunal does not find that a specific amount of delay alone results in an automatic breach of Article II(7) of the BIT. The Tribunal must also consider evidence regarding the reasons for the 13 or more years of delay in each of the seven court cases to ascertain whether the delay was undue. 254. The Tribunal considers that neither the complexity of the cases, nor the Claimants' behavior justify this delay. These cases involve very significant sums of money, but are in essence straightforward contractual disputes… 255. As for the Claimants' behavior, subject to the Tribunal's considerations below regarding resort to local remedies for delay, the Tribunal finds that the Claimants pursued their cases to the point of being ready for a decision and sent numerous and continuous requests for a judgment. There is also no evidence that any action by the

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Claimants has actively and significantly contributed to the delays… 256. Instead, the facts demonstrate that the Ecuadorian courts have failed to act with reasonable dispatch. In each of the seven cases, the Tribunal finds prolonged periods of complete inactivity on the part of the Ecuadorian courts. In particular, in all of the cases except the first Amazonas claim (Case 7-92), the Tribunal notes that the evidentiary phase was closed by mid-1997 or earlier and the Ecuadoran courts had over nine years between the closing of the record and the Notice of Arbitration to render a first instance judgment. In the first Amazonas claim (Case 7-92), the court simply did not set a date for judicial inspection to take place for over thirteen years prior to the Notice of Arbitration. 257. The Ecuadorian courts further officially acknowledged the closure of the cases and their responsibility to render a judgment promptly through the various autos para sentencia they issued… *** 262. Accordingly, it is the nature of the delay, and the apparent unwillingness of the Ecuadorian courts to allow the cases to proceed that makes the delay in the seven cases undue and amounts to a breach of the BIT by the Respondent for failure to provide “effective means” in the sense of Article II(7). In particular, the Tribunal finds the existence of long delays, even after official acknowledgements by the courts that they were ready to decide the cases, to be a decisive factor demonstrating that the delays experienced by TexPet are sufficient to breach the BIT. The Tribunal ultimately concludes that the Ecuadorian courts have had ample time to render a judgment in each of the seven cases and have failed to do so. 263. The Respondent contends that a generalized backlog in the Ecuadorian courts explains and excuses the delays. Court congestion and backlogs are relevant factors to be considered in determining the period of delay that is reasonable in the circumstances. Court congestion, however, cannot be an absolute defense. The question of whether effective means have been provided to the Claimants for the assertion of their claims and enforcement of their rights is ultimately to be measured against an objective, international standard. To the extent that generalized court congestion could alone produce the persistent and long delays of the kind observed here, it would evidence a systemic problem with the design and operation of the Ecuadorian judicial system and would breach Article II(7) according to the systemic standard advocated by the Respondent itself. 264. The Tribunal finds that court congestion must be temporary and must be promptly and effectively addressed by the host state if it is to act as a defense to an otherwise valid claim for breach of Article II(7). That is to say, the State must have previously been in compliance with and must return to compliance with the international standard within a short amount of time from when the backlogs arise… *** 268. … the Tribunal also does not accept the Respondent's contention that the Claimants must prove a strict exhaustion of local remedies in order for the Tribunal to find a breach of Article II(7) through undue delay in the Claimants'’ seven court claims. The Claimants must, however, have adequately utilized the means made available to them to assert claims and enforce rights in Ecuador in order provide a breach of the BIT. 269. In the present case, the Tribunal is persuaded that the Claimants have indeed adequately utilized the means available to assert claims in a manner that attracts the protection of Article II(7) of the BIT. The Tribunal is not convinced that any further actions on the part of the Claimants were required to trigger the application of Article II(7) or would have made any of their seven cases proceed more rapidly… the Respondent has not demonstrated that its proposed remedies of oral and written closing arguments or disciplinary or monetary sanctions could have been effective in reducing delay. The Claimants were also not required to bring actions for the recusal of judges in the seven cases. Judges changed regularly in the Claimants' court cases even without recusal and therefore recusals would also not have had any effect. 270. Taking into account the totality of the circumstances that the Tribunal deems relevant, the Tribunal ultimately concludes that a breach of Article II(7) of the BIT was completed by reason of undue delay at the date of the Claimants' Notice of Arbitration, December 21, 2006. At that time, the Claimants' cases have been pending in the Ecuadorian courts for 13 to 15 years. Six of these cases have never seen any decision. The last of the cases, Case 8-92, had recently been dismissed for abandonment, but that decision would soon be overturned and leave the case again pending at first instance. At that time, the political turmoil of 2004-2005 had passed and a re-constituted Supreme Court had been in place for over a year since November 2005. More than four years had also passed since the close of the Aguinda litigation. As such, the Tribunal concludes that this date constitutes the critical date upon which the breach of Article II(7) was completed. [2] Questions and Comments 1.

In addition to the Chevron case, three other tribunals have interpreted the effective

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2. 3. 4.

means provision of investment treaties: (1) Duke Energy Electroquil Partners et al. v. Republic of Ecuador, ICSID Case No. ARB/04/19, Award of August 18, 2008 (KaufmannKohler, Gómez-Pinzón, van den Berg), available at http://italaw.com/documents/DukeEcuadorAward_003.pdf, (2) Petrobart v. Kyrgyz Republic, (SCC Arbitration No 126/2003) March 29, 2005, 3 Stockholm Int'l Arb Rev 45 ECT (Justice Hans Danelius, Profesor Ove Bring and Mr. Joeren Smets), also available athttp://italaw.com/documents/petrobart_kyrgyz.pdf, and (3) Limited Liability Company Amto v. Ukraine, SCC Arbitration No. 080/2005, ECT, Final Award, March 26, 2008 (Bernardo M. Cremades, Chairman, Per Reuneland and Christer Soderlund), available at http://italaw.com/documents/AmtoAward.pdf. The Duke Energy case involved the same US-Ecuador BIT that was involved in the Chevron case. Both the Petrobart and Amto cases involved the ECT. What does the effective means provision require of a state? Does it merely require that a system of justice be established and maintained? What does it require of that system? What meaning should be given to the term “effective” in this provision? Is this provision coextensive with the customary international law standard for denial of justice or is it lex specialis? How should it be interpreted? The Ecuadorian government publicly announced in July 2011 that it was instituting an arbitration against the US government under the state-to-state (or inter-state) arbitration clause of the US-Ecuador BIT to obtain an interpretation of Article II(7) of the BIT. Would such an arbitral interpretation of a substantive provision of the BIT involving investor protection in the context of a state-to-state arbitration under a BIT bind the two states? Investors? Future investment tribunals? For each, why and how? What effect can it have on existing final awards? The tribunal in the state-tostate arbitration decided it had no jurisdiction because there was no dispute between the parties.

§9.03 RELATIVE STANDARDS [A] National Treatment [1] US Model Bilateral Investment Treaty (2012), (41) Article 3 Article 3: National Treatment 1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 3. The treatment to be accorded by a Party under paragraphs 1 and 2 means, with respect to a regional level of government, treatment no less favorable than the treatment accorded, in like circumstances, by that regional level of government to natural persons resident in and enterprises constituted under the laws of other regional levels of government of the Party of which it forms a part, and to their respective investments. [2] North American Free Trade Agreement (1993), (42) Article 1102 Article 1102: National Treatment 1. Each party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. 3. The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a state or province, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by such state or province to investors, and to investments of investors, of the Party of which it forms a part. 4. For greater certainty, no Party shall: (a) (b)

impose on an investor of another Party a requirement that a minimum level of equity in an enterprise in the territory of the Party be held by its nationals, other than nominal qualifying shares for directors or incorporators of corporations; or require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment in the territory of the Party.

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[3] Energy Charter Treaty (1994), (43) Articles 10(2), 10(3), 10(7) and 10(10) Article 10 – Promotion, Protection and Treatment of Investments *** (2) Each Contracting Party shall endeavor to accord to Investors of other Contracting Parties, as regards the Making of Investments in its Area, the Treatment described in paragraph (3). (3) For the purposes of this Article, “Treatment’ means treatment accorded by a Contracting Party which is no less favorable than that which it accords to its own Investors or to Investors of any other Contracting Party or any third state, whichever is the most favorable. *** (7) Each Contracting Party shall accord to Investments in its Area of Investors of other Contracting Parties, and their related activities including management, maintenance, use, enjoyment or disposal, treatment no less favourable than that which it accords to Investments of its own Investors or of the Investors of any other Contracting Party or any third state and their related activities including management, maintenance, use, enjoyment or disposal, whichever is the most favorable. *** (10) Notwithstanding any other provision of this Article, the treatment described in paragraphs (3) and (7) shall not apply to the protection of Intellectual Property; instead, the treatment shall be as specified in the corresponding provisions of the applicable international agreements for the protection of Intellectual Property rights to which the respective Contracting Parties are parties. [4] UNCTAD, National Treatment, UNCTAD Series on Issues in International Investment Agreements, 1-2, 12, 25-26, 33 (United Nations Publications 1999) (Citations selectively omitted) Executive Summary The national treatment standard is perhaps the single most important standard of treatment enshrined in international investment agreements (IIAs). At the same time, it is perhaps the most difficult standard to achieve, as it touches upon economically (and politically) sensitive issues. In fact, no single country has so far seen itself in a position to grant national treatment without qualifications, especially when it comes to the establishment of an investment. *** National treatment typically extends to the post-entry treatment of foreign investors. However, some bilateral investment treaties (BITs) and other IIAs also extend the standard to pre-entry situations. *** National treatment raises some of the most significant development issues in the field of foreign direct investment (FDI). It stipulates formal equality between foreign and national investors. However, in practice national investors, especially those that could be identified as “infant industries” or “infant entrepreneurs”, may be in an economically disadvantageous position by comparison with foreign investors, who may be economically powerful transnational corporations (TNCs). Such “economic asymmetry” may require a degree of flexibility in the treatment of national investors, especially in developing countries, for instance through the granting of exceptions to national treatment. *** 4. “De jure” and “de facto” treatment A question that arises is whether national treatment covers not only de jure treatment, that is, treatment of foreign investors provided for in national laws and regulations, but also de facto treatment, as where a measure in fact works against national treatment. One example may be licensing requirements for the conduct of a certain business activity which depend on the possession of qualifications by skilled personnel that can only be obtained in the host country. Although this measure may be justifiable on policy grounds, as where health and safety issues are involved, it would require a foreign investor to ensure that its own personnel have the relevant national qualifications, requiring additional time and cost to be incurred before the investor can begin to operate. *** b. The meaning of national treatment in relation to subnational authorities It is clear that national treatment obligations apply to the host country Government and

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governmental bodies. Also, as a matter of the law of treaties, a treaty applies to the entire territory of a party unless a different intention appears from the treaty or is otherwise established. However, it is not always so clear in practice what national treatment means in relation to the political subdivisions of a State. This problem (which is also relevant to other clauses in IIAs) can become significant where a subnational authority has a constitutional power to make investment policy. Such power may be used to grant preferential treatment to local, as opposed to out-of-sub-division investors, as, for example, where a host subnational authority is seeking to encourage the growth of local small and medium-sized firms. A question that arises is whether a subnational authority has to extend such preferential treatment to foreign inward investors on the basis of the national treatment standard, regardless of how it treats national investors from outside the sub-division. The question has been answered in the provisions of some IIAs, such as United States BITs which, following the United States model BIT (article XV) (UNCTAD, 1996, vol. III, p. 204) state that the obligations of the treaty will apply to the political sub-divisions of the parties. The United States model BIT specifies further that, in the case of a United States state, territory or possession national treatment means “treatment no less favorable than the treatment accorded thereby, in like situations, to investments from nationals of the United States of America resident in, and companies legally constituted under the laws and regulations of, other States, Territories or possessions of the United States of America” (article XV, (1) (b)). According to this provision, it appears that a foreign investor is to be treated by a United States subnational authority as if it were an investor from another United States subnational authority for the purpose of compliance with national treatment disciplines. Thus, if the host subnational state offers preferential treatment to local investors, the foreign investor cannot invoke national treatment to obtain similar preferences. All that the foreign investor can do is require treatment no less favourable than that accorded to out-of-state Untied States investors. Although the United States model is ambiguous on the issue, it may be presumed that the comparable treatment should be with the best treated out-of-state United States investor, otherwise the treatment would be “less favourable”. This issue is made clearer in NAFTA article 1102(3) which states that the treatment involved should be “no less favorable than the most favourable treatment accorded, in like circumstances, by the state or province to investors, and to investments of investors, of the Party of which it forms a part.” This formulation can allow for differential treatment as between different out-of-sub-division investors of the host country. What it would not allow, however, is for the foreign investor to receive the worst treatment offered to out-ofsub-division investors. In the light of the words, “the most favourable treatment accorded” the foreign investor must be given the best available treatment offered to such local investors. *** (iii) “Like situations”, “similar situations” or “like circumstances” Qualifications such as “like situations”, “similar situations” and “like circumstances” may be seen as synonymous and therefore can be discussed together. They may be less restrictive of national treatment in that they may apply to any activity or sector that is not subject to exceptions. What is a “like” situation or circumstance is a matter that needs to be determined in the light of the facts of the case. This assumes that clear comparisons of business situations are possible, and that agreement can be reached on what is a “like” circumstance. This may not be easy in practice, as the experience of GATT/WTO Dispute Panels has shown… It is implicit in the use of this term that the host country will assess cases in good faith and in full consideration of all relevant facts. According to an OECD report, among the most important matters to be considered are “whether the two enterprises are in the same sector; the impact of policy objectives of the host country in particular fields; and the motivation behind the measure involved”… A key issue in such cases is to “ascertain whether the discrimination is motivated, at least in part, by the fact that the enterprises concerned are under foreign control”… [5] S.D. Myers, Inc. v. Government of Canada (ad hoc arbitration under the 1976 UNCITRAL Rules), Partial Award of 13 November 2000, (44) ¶¶ 238, 240-256 [Bryan P. Schwartz, Edward C. Chiasson, J. Martin Hunter] [This NAFTA claim was brought by S.D. Myers, Inc., a US corporation dealing in PCB waste processing and disposal, against Canada after the country placed a temporary ban on the export of PCB wastes from Canada to the US. The ban interfered with waste deliveries from Canada that were destined for treatment or destruction at an S.D. Myers facility in the US. S.D. Myers claimed that this measure violated NAFTA Articles 1102, 1105, 1106 and 1110.] (Citations selectively omitted) 238. SDMI claims that Canada denied it “national treatment”, contrary to Article 1102. *** 240. Article 1102(3) addresses the obligations of “sub-national” authorities – local states or provinces – and states that in that context the relevant comparison is between the

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treatment accorded to an investment or an investor and the best treatment accorded to investments or investors within the jurisdiction of the sub-national authority … *** 241. Canada argues that the Interim Order merely established a uniform regulatory regime under which all were treated equally. No one was permitted to export PCBs, so there was no discrimination. SDMI contends that Article 1102 was breached by a ban on the export of PCBs that was not justified by bona fide health or environmental concerns, but which had the aim and effect of protecting and promoting the market share of producers who were Canadians and who would perform the work in Canada. 242. Canada's submission is one dimensional and does not take into account the basis on which the different interests in the industry were organized to undertake their business. “Like Circumstances” 243. Articles 1102(1) and 1102(2) refer to treatment that is accorded to a Party's own nationals “in like circumstances”. The phrase “like circumstances” is open to a wide variety of interpretations in the abstract and in the context of a particular dispute. 244. WTO dispute resolution panels, and its appellate body, frequently have been required to apply the concept of “like products”. The case law has emphasized that the interpretation of “like” must depend on all the circumstances of each case. The case law also suggests that close attention must be paid to the legal context in which the word “like” appears; the same word “like” may have different meanings in different provisions of the GATT. In Japan – Alcoholic Beverages, WT/DS38/AB/R, the Appellate Body stated at paragraphs 8.5 and 8.6: [the interpretation and application of “like”] is a discretionary decision that must be made in considering the various characteristics of products in individual cases. No one approach to exercising judgment will be appropriate for all cases. The criteria in [an earlier case], Border Tax Adjustments should be examined, but there can be no one precise and absolute definition of what is “like”. The concept of “likeness” is a relative one that evokes the image of an accordion. The accordion of “likeness” stretches and squeezes in different places as different provisions of the WTO Agreement are applied. The width of the accordion in any one of those places must be determined by the particular provision in which the term “like” is encountered as well as by the context and the circumstances that prevail in any given case to which the provisions may apply. 245. In considering the meaning of “like circumstances” under Article 1102 of the NAFTA, it is similarly necessary to keep in mind the overall legal context in which the phrase appears. 246. In the GATT context, a prima facie finding of discrimination in “like” cases often takes place within the overall GATT framework, which includes Article XX (General Exceptions). A finding of “likeness” does not dispose of the case. It may set the stage for an inquiry into whether the different treatment of situations found to be “like” is justified by legitimate public policy measures that are pursued in a reasonable manner. 247. The Tribunal considers that the legal context of Article 1102 includes the various provisions of the NAFTA, its companion agreement the NAAEC and principles that are affirmed by the NAAEC (including those of the Rio declaration). The principles that emerge from that context, to repeat, are as follows: – – –

states have the right to establish high levels of environmental protection. They are not obliged to compromise their standards merely to satisfy the political or economic interests of other states; states should avoid creating distortions to trade; environmental protection and economic development can and should be mutually supportive.

248. As SDMJ noted in its Memorial, all three NAFTA partners belong to the OECD. OECD practice suggests that an evaluation of “like situations” in the investment context should take into account policy objectives in determining whether enterprises are in like circumstances. The OECD Declaration on International and Multinational Enterprises, issued on June 21, 1976, states that investors and investments should receive treatment that is … no less favorable than that accorded in like situations to domestic enterprises. In 1993 the OECD reviewed the “like situation” test in the following terms: As regards the expression ‘in like situations', the comparison between foreigncontrolled enterprises is only valid if it is made between firms operating in the same sector. More general considerations, such as the policy objectives of Member countries could be taken into account to define the circumstances in which comparison between foreign-controlled and domestic enterprises is permissible inasmuch as those objectives are not contrary to the principle of national treatment.

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249. The Supreme Court of Canada has explored the complexity of making comparisons as it has developed its line of decisions on discrimination against individuals. In the Andrews case, the Court stated that the question of whether or not discrimination exists cannot be determined by applying a purely mechanical test whether similarly situated individuals are treated in the same manner. Whether individuals are “similarly situated”, and have been treated in a substantively equal manner, depends on an examination of the context in which a measure is established and applied and the specific circumstances of each case. 250. The Tribunal considers that the interpretation of the phrase “like circumstances” in Article 1102 must take into account the general principles that emerge from the legal context of the NAFTA, including both its concern with the environment and the need to avoid trade distortions that are not justified by environmental concerns. The assessment of “like circumstances” must also take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest. The concept of “like circumstances” invites an examination of whether a nonnational investor complaining of less favourable treatment is in the same “sector” as the national investor. The Tribunal takes the view that the word “sector” has a wide connotation that includes the concepts of “economic sector” and “business sector”. 251. From the business perspective, it is clear that SDMI and Myers Canada were in “like circumstances” with Canadian operators such as Chem-Security and Cintec. They all were engaged in providing PCB waste remediation services. SDMI was in a position to attract customers that might otherwise have gone to the Canadian operators because it could offer more favourable prices and because it had extensive experience and credibility. It was precisely because SDMJ was in a position to take business away from its Canadian competitors that Chem-Security and Cintec lobbied the Minister of the Environment to ban exports when the U.S. authorities opened the border. National treatment and protectionist motive or intent. 252. The Tribunal takes the view that, in assessing whether a measure is contrary to a national treatment norm, the following factors should be taken into account: – –

whether the practical effect of the measure is to create a disproportionate benefit for nationals over non nationals; whether the measure, on its face, appears to favour its nationals over non-nationals who are protected by the relevant treaty.

253. Each of these factors must be explored in the context of all the facts to determine whether there actually has been a denial of national treatment. 254. Intent is important, but protectionist intent is not necessarily decisive on its own. The existence of an intent to favour nationals over non-nationals would not give rise to a breach of Chapter 1102 of the NAFTA if the measure in question were to produce no adverse effect on the non-national complainant. The word “treatment” suggests that practical impact is required to produce a breach of Article 1102, not merely a motive or intent that is in violation of Chapter 11. 255. Canada was concerned to ensure the economic strength of the Canadian industry, in part, because it wanted to maintain the ability to process PCBs within Canada in the future. This was a legitimate goal, consistent with the policy objectives of the Basel Convention. There were a number of legitimate ways by which Canada could have achieved it, but preventing SDMI from exporting PCBs for processing in the USA by the use of the Interim Order and the Final Order was not one of them. The indirect motive was understandable, but the method contravened Canada's international commitments under the NAFTA. Canada's right to source all government requirements and to grant subsidies to the Canadian industry are but two examples of legitimate alternative measures. The fact that the matter was addressed subsequently and the border re-opened also shows that Canada was not constrained in its ability to deal effectively with the situation. 256. The Tribunal concludes that the issuance of the Interim Order and the Final Order was a breach of Article 1102 of the NAFTA. [6] Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. The United Mexican States (ICSID Case No. ARB(AF)/04/05), Award of 21 November 2007, (45) ¶¶ 197-213 [Bernardo M. Cremades (pres.), Arthur W. Rovine, Eduardo Siqueiros T.] [ADM and Staley (succeeded by Tate & Lyle), two US investors leaders in the agribusiness industry, owned a joint venture in Mexico producing high fructose corn syrup. In 2002, Mexico adopted a tax on beverages containing high fructose corn syrup, which adversely impacted ADM and Tate & Lyle investment in Mexico. ADM and Tate & Lyle claimed that the tax is aimed at protecting Mexico's domestic sugar producers and excluding high fructose corn syrup from the soft drink sweetener market, and subsequently initiated arbitration proceedings under the ICSID Additional Facility Rules pursuant to NAFTA Chapter 11.] (Citations selectively omitted) (I) Like Circumstances

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197. In order to determine the meaning of the expression “in like circumstances” in Article 1102, paragraphs 1 and 2, we examine these words in their ordinary meaning, in their context and in light of the object and purpose of Article 1102 (Article 31.1 of the Vienna Convention on Law of Treaties). The ordinary meaning of the word “circumstances” under Article 1102 requires an examination of the surrounding situation in its entirety … Accordingly, the application of the national treatment standard involves a comparative measure; and all “circumstances” in which the treatment was accorded are to be taken into account in order to identify the appropriate comparator. The dictionary meaning of the word “circumstance” refers to a condition, fact, or event accompanying, conditioning, or determining another, or the logical surroundings of an action. 198. As regards the Mexican argument that they are not in like circumstances because of the situation sugar producers faced concerning access to the U.S. market, this is not a relevant factor in determining whether two companies are in like circumstances. As confirmed in S.D. Myers v. The Government of Canada [UNCITRAL, NAFTA Final Award on the Merits (November 13, 2000) para. 251] the domestic entities “in like circumstances” whose treatment should be compared are those firms operating in the same sector, which should be interpreted broadly to include the concepts of “economic sector” and “business sector.” Also in Pope & Talbot v. The Government of Canada [UNCITRAL, NAFTA Interim Award (June 26, 2000)] the Arbitral Tribunal focused on the relevant business and economic sector as the appropriate comparator, holding that the investor had established differential treatment of entities in like circumstances. 199. Considering the object of Article 1102 – to ensure that a national measure does not upset the competitive relationship between domestic and foreign investors – other tribunals convened under Chapter Eleven have focused mainly on the competitive relationship between investors in the marketplace. 200. In Feldman, the Tribunal's view was that “… the ‘universe’ of firms in like circumstances are those foreign-owned and domestic-owned firms that are in the same business …” (Feldman, supra page 55, Award at para. 171). Mr. Feldman initiated arbitration proceedings on behalf of Corporación de Exportaciones Mexicanas, S.A. de C.V. (CEMSA), a Mexican company which Mr. Feldman owned and controlled. The dispute arose out of the Mexican tax authorities' refusal to rebate excise taxes applied to tobacco products exported from Mexico by CEMSA and the refusal of such authorities to recognize CEMSA's right to a rebate of such taxes regarding prospective exports. Feldman alleged that the Mexican Government's measures discriminated against exporters of cigarettes by permitting only exporters who produced the exported cigarettes to claim tax rebates, while exporters who were only resellers of exported cigarettes could not claim the same treatment. The Tribunal found that the companies in like circumstances were trading companies, those in the business of purchasing Mexican cigarettes for export. 201. ALMEX and the Mexican sugar industry are in like circumstances. Both are part of the same sector, competing face to face in supplying sweeteners to the soft drink and processed food markets. The competitive relationship between them was confirmed by Mexico's administrative and judicial authorities, when the Government initiated antidumping investigations in 1997 on HFCS, based on a petition filed by the Sugar Chamber. In addition, Mexico's Federal Competition Commission has confirmed that HFCS is a substitute of sugar and that both products compete in the same market (Comisión Federal de Competencia, Informe Anual 1993-94). 202. Notwithstanding the fact that fructose and cane sugar producers are not identical comparators, even though they compete face-to-face in the same market, it is the Tribunal's view that when no identical comparators exist, the foreign investor may be compared with less like comparators, if the overall circumstances of the case suggest that they are in like circumstances. This was the specific situation in Methanex, where the State of California issued an order that banned the use of the gasoline additive methyl tertiary-butyl ether (MTBE). Methanex does not manufacture MTBE, but it is one of world's largest producers and marketers of methanol, the principal ingredient of MTBE. The gist of Methanex's Article 1102 claim was that California intended to favor domestic producers of ethanol by discriminating against foreign producers of methanol; and that the two products should be considered “like” because they both compete in the oxygenate market. After considering the arguments of both Parties, the Arbitral Tribunal determined that Methanex was not in like circumstances as domestic producers of ethanol, because there were also identical comparators in the United States (other producers of methanol) which were subject to the same treatment as Methanex. Furthermore, looking at the “circumstances” of competition between methanol and ethanol in the market for fuel additives, the tribunal found the circumstances of methanol and ethanol to be different because unlike ethanol, methanol itself is not usable as a gasoline additive. 203. The Claimants argue that the facts in the present case differ from the Methonex case because there is no Mexican-owned HFCS industry … The evidence on the record does not show that there were identical Mexican-owned HFCS producers when the Tax was adopted. Only U.S. investors -including ALMEX and CPI- manufactured and distributed HFCS in Mexico. Therefore, the firms they can be compared with are the domestic sugar

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producers with which, at the time the Tax was in force, shared the market, competing directly in supplying sweeteners to soft drink bottlers and processed food firms in Mexico. 204. Accordingly, the appropriate subjects for comparison in the present case are the Mexican cane sugar producers, as they compete face-to-face with the Claimants in supplying sweeteners to the industry producing beverages and syrups subject to the Tax. (2) Discriminatory Treatment 205. Article 1102 prohibits treatment which discriminates on the basis of the foreign investor's nationality. Nationality discrimination is established by showing that a foreign investor has unreasonably been treated less favorably than domestic investors in like circumstances. Accordingly, Claimants and their investment are entitled to the best level of treatment available to any other domestic investor or investment operating in like circumstances, including the domestic cane sugar producers. 206. In the present case, the Tax was indirectly imposed on non-cane sugar sweeteners, as it subjects the distribution of a certain group of soft drinks – including those containing fructose, but not cane sugar, to the payment of a 20 percent ad valorem tax. Therefore, HFCS was taxed in excess of like domestic products (cane sugar). Cane sugar was the only sweetener exempted from the Tax. 207. The Tax clearly established a different regime for two groups of soft drinks and syrups. One group of soft drinks and syrups is subject to the payment of a 20 percent excise tax, while the other group is exempted from the Tax. The criterion established by the Mexican legislation for the division of soft drinks and syrups into these two groups is whether the soft drinks and syrups are sweetened with cane sugar or with non-cane sugar sweeteners, such as beet sugar. Therefore, the Tax created a situation in which HFCS was liable to higher taxes than those applied to cane sugar, discriminating between one and the other. 208. The Tax did not distinguish between foreign or Mexican cane sugar; it simply exempted from the Tax products sweetened exclusively with cane sugar, and with the aim of protecting the Mexican cane sugar industry. The Tax was designed from the outset to afford protection to the Mexican cane sugar industry, as discussed above regarding Mexico's countermeasures defense, and affected the production and distribution of HFCS as opposed to domestic investors in like circumstances (cane sugar producers). Mexican production of sweeteners for soft drinks and syrups is concentrated on cane sugar, whereas the HFCS industry in Mexico is controlled by U.S. investors, including ALMEX and the Claimants. 209. In establishing whether the Tax affords “less favorable treatment” to the Claimants, previous Tribunals have relied on the measure's adverse effects on the relevant investors and their investments rather than on the intent of the Respondent State (S.D. Myers, First Partial Award, para. 254). In the present case, both the intent and effects of the Tax show the discriminatory nature of the measure. 210. The Tribunal has reviewed the underlying intent of the Tax its consideration of Respondent's countermeasures defense, reaching the conclusion that the Tax was enacted for the purpose of protecting the domestic Mexican sugar industry from foreign competitors who produce HFCS. 211. The effect of the Tax was that U.S. producers and distributors of HFCS in Mexico received treatment less favorable than that accorded to Mexican sugar producers. The imposition of a 20 percent tax on the transfer and distribution of soft drinks and other beverages containing HFCS favors the domestic sugar market because it exempts from that tax any beverages sweetened “exclusively with cane sugar.” Producers of HFCS and cane sugar compete in the Mexican sweeteners market, but the former do not receive the best treatment which was accorded to cane sugar producers. 212. The evidence on the record shows the Tax discriminated between sugar and HFCS; designed to afford protection to the production of cane sugar, which is in line with the measures taken by Mexico before the imposition of the Tax. The WTO Panel and Appellate Body Report held that: Dissimilar taxation imposed on directly competitive or substitutable imports (HFCS) and domestic products (cane sugar) is applied in a way that affords protection to domestic production, and that the tax measures are therefore inconsistent with Article 1102, second sentence, of the GATT 1994 (WTO Panel Report, p. 132, para. 8.96). In the present case, the Tribunal also finds that the IEPS Amendment imposed dissimilar taxation on directly competitive products (HFCS and cane sugar) which is discriminatory and contrary to the national treatment principle under Article 1102. The Tax was applied in a way that afforded protection to the domestic cane sugar industry, targeting the HFCS industry, which is largely owned by foreign U.S. investors, including the Claimants. 213. For the reasons stated above, the Arbitral Tribunal concludes that the Tax denied national treatment to the Claimants and their investment in violation of Article 1102 of

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the NAFTA. [7] Merrill & Ring Forestry L.P. v. Canada (ICSID Administered Case), Award of 31 March 2010, (46) ¶¶ 86-94 [Francisco Orrego Vicuña (pres.), Kenneth W. Dam, J. William Rowley] [Case summary Chapter 9.] (Citations selectively omitted) 86. The Tribunal is mindful of the need not to make expressions used in different contexts and treaties interchangeable in spite of their similarity, as is the case of “like products” under GATT Article III:4. WTO panels and other tribunals have been extremely careful not to interpret expressions or concepts used in specific provisions in the light of the use of those or similar expressions in other contexts. This care is also appropriate in respect of the Investor's argument of identifying the meaning of “in like circumstances” of Article 1102 with that under Articles 1405 or 1505. 87. In the strict context of a trade treaty, such as the GATT or a number of NAFTA Chapters, the Tribunal might be inclined to understand “in like circumstances” as relating to the need to ensure equality of treatment in respect of competitive opportunities and other trade objectives. But, it must also note that NAFTA, and some other free trade agreements, includes matters that go beyond trade so as to provide for broader mechanisms of economic integration and coordination of economic policies. This is the case of NAFTA Chapter Eleven in respect of investments. It would thus be limiting to relate the concept exclusively to trade objectives and it is thus necessary to understand it in a broader sense that will allow for the comparison of other relevant elements, not excluding trade where appropriate. 88. This explains why NAFTA tribunals have, on a number of occasions, considered various factors in assessing whether investors are “in like circumstances”, as evidenced by the references noted above to S.D. Myers, UPS and Pope & Talbot. The environment, trade, the nature of services and functions, and public policy considerations are found among such factors. This also explains why it is not enough on occasions to undertake the comparison solely in the same sector of economic activity and it might be necessary, as in Occidental, to consider whole sectors of the economy and business. 89. Having decided that the proper comparison is between investors which are subject to the same regulatory measures under the same jurisdictional authority, which in the instant case is the comparison between foreign and domestic investors subject to Notice 102 and the national jurisdiction of the Canadian government, the Tribunal must now determine which is the appropriate comparator for the purposes of the treatment accorded to investors “in like circumstances” under Article 1102. 90. To the extent there are investors in identical circumstances to be compared, this makes it unnecessary to resort to the Methanex alternative choice noted above of finding investors in the most like circumstances. Such identically situated investors are those log producers operating on lands under federal jurisdiction in British Columbia and subject of course to the same requirements under Notice 102. As was also noted, jurisdictional overlaps might occur in certain respects, but these appear to arise mostly in the case of lands that have been reclassified and log producers that are accordingly subject to some transitional regime, such as in the case of one of the Investor's competitors which was granted standing exemptions under federal regulation notwithstanding that these exemptions are only available under provincial jurisdiction. 91. Canada has persuasively argued that the Investor must be compared to other log producers subject to Notice 102 and not to producers in other provinces, notably Alberta, or to producers that are operating under the provincial regulations. As some of the Investor's operations are located in provincially regulated lands, these ought to be compared with those operations of similarly located log producers, whether in respect of the surplus test or of harvesting and sorting requirements. Some sub-categories of provincially regulated operations, such as producers in remote areas of British Columbia, which is also the case of some of the Investor's operations, ought to be compared within that sub-category. 92. Referring to a similar discussion that entailed differential treatment of staff in the employment of the World Bank, the Administrative Tribunal of that organization clarified the question of the proper comparator in the following terms: “The Tribunal must note that this is not the meaning of discrimination, because staff members in different situations will normally be governed by different rules or provisions… Rather, discrimination takes place where staff who are in basically similar situations are treated differently”. 93. That same conclusion is appropriate in the instant case. In all the comparisons that are made within the appropriate category, the treatment the Investor is accorded is identical to that accorded to domestic investors in the same category. Here, there is no issue as to which is the best treatment available to an investor, such as was discussed in Pope & Talbot, since the treatment here is the same in each category of comparison. Accordingly, we conclude that no standard of national treatment can be or was breached in these circumstances.

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94. The Tribunal turns lastly to the issue of whether the purpose of Article 1102 is to prevent nationality-based discrimination as discussed in Feldman. In that case, the Tribunal concluded that the concept of national treatment in Article 1102 “is designed to prevent discrimination on the basis of nationality, or by ‘reasons of nationality’”. While nationality-based discrimination would make a finding of breach of national treatment unavoidable, some argue that this is not the only aim of the concept of national treatment under Article 1102. They would say that, even in the absence of discrimination, a differentiated treatment which is arbitrary and unjustified might qualify as a breach of national treatment. Thus discrimination might entail considerations other than nationality. However, in the instant case there is not the slightest evidence that any of the measures discussed might be based on considerations of the nationality of the Investor. As concluded above, nor is there any differentiated treatment on other grounds among the appropriate categories of comparison. Accordingly the Investor's Article 1102 case must fail. [8] Comments and Questions 1.

2. 3. 4.

5. 6. 7. 8. 9.

10. 11. 12. 13. 14.

In the NAFTA case of ADF Group, Inc. v. United States, ICSID Case No. ARB (AF)/00/1, Award of 9 January 2003, a Canadian company brought a claim for violation of Article 1102 of NAFTA. At the heart of the case was a State of Virginia highway construction project that received approval from the federal government of the USA as well as federal funding assistance. The main contract with the contractor as well as sub-contracts contained “Buy America” clauses. ADF was the lowest bidder to provide the steel for the project under a sub-contract with the contractor, but it proposed to use US-produced steel while carrying out certain fabrication work at its facilities in Canada. Virginia determined that this did not comply with the “Buy America” clause and explained that the US federal government would not reimburse the project costs unless this clause was applied. Virginia denied a request for a waiver of the clause. The Tribunal rejected ADF's claim that the “Buy America” Program violated NAFTA Article 1102 because there was no evidence that US domestic investors in like circumstances were treated any differently or more favorably than Canadian investors – they all had to use steel that was 100% produced and fabricated in the USA. The Tribunal also considered whether there was de facto discrimination since foreign steel suppliers necessarily would have their facilities located outside the USA, but it ruled that a de facto claim required evidence of comparative economics: relative costs of fabrication in Canada and the USA, transportation costs between Canada and the USA, and the available fabrication capacity in the USA at the time. Given the paucity of such evidence, the Tribunal ruled against the Canadian investor. In the ADF case, was there a basis for arguing that the “Buy America” Program is a per se violation of national treatment merely by requiring that steel be 100% fabricated in the USA? What defenses might be available under the NAFTA? What is the significance to a de facto discrimination claim of evidence of comparative economics? Under the national treatment standard, is a government required to treat foreign investors exactly the same as it treats its domestic investors? May it treat foreign investors better than it treats domestic investors? What rationale might justify treating foreign investors better than a country's own investors? To what treatment is the treatment of a foreign investor to be compared in determining whether it has received national treatment? What is the meaning of “in like circumstances” as used in NAFTA Article 1102? Must a government have a protectionist motive in order to find a violation of the national treatment standard? What is the origin of the national treatment standard? Must a measure discriminate against a foreign investor on its face for the national treatment standard to be violated? If a measure does not facially discriminate against a foreign investor, what must exist in order to find a violation of national treatment? What was Canada's argument in S. D. Myers as to the meaning of disproportionate advantage? What facts would have to be found to meet that test? What showing may justify differential treatment between foreign and domestic investors? How should an investor go about proving a violation of the national treatment standard? What evidence does it need to prove a violation? How can it gather such information? Are there any restraints on doing so? Which party has the burden of proof on a national treatment claim? Is the burden the same on all elements of the claim? To what extent, if any, is WTO jurispruduence relevant to the national treatment standard of investment treaties?

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[1] US Model Bilateral Investment Treaty (2012), (47) Article 4 Article 4: Most-Favored-Nation Treatment 1. Each Party shall accord to investors of the other Party treatment no less favorable than that it accords, in like circumstances, to investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments in its territory. 2. Each Party shall accord to covered investments treatment no less favorable than that it accords, in like circumstances, to investments in its territory of investors of any non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. [2] North American Free Trade Agreement (1993), (48) Article 1103 Article 1103: Most-Favored-Nation Treatment 1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to investors of another Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of investors of another Party or of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments. [3] UNCTAD, Bilateral Investment Treaties in the Mid-1990s, 58, 61-62 (United Nations Publications 1998) … It also means that if one of the parties gives any special advantage or privilege to investment from a third country, it must grant that same advantage or privilege to investment from its treaty partners… The MFN treatment is a treaty-made standard that has its origins in trade agreements, where it was originally formulated and applied on the basis of reciprocity… More recently, however, the unconditional application of the standard has prevailed… *** In essence, the effect of an MFN provision is to raise the level of protection guaranteed by each BIT concluded by a country to a level guaranteed by that country's most protective BIT… *** The wording of an MFN or national treatment provision, therefore, is of special importance. In particular, it is important to ascertain which entities or activities are entitled to MFN or national treatment. In many BITs, it is the investment that is entitled to MFN or national treatment. Other BITs guarantee MFN or national treatment to investment and returns, while still others confer the right of MFN or national treatment on investment and investment-related activities or on investment and associated activities. *** A further question arises as to whether it is the investment, the investor, or both that are to receive MFN treatment. Thus, a provision that refers to “enterprises and the activities of enterprises” would seem to exclude investors in the enterprise from MFN treatment in such matters as, for example, taxes… Arguably, however, in some contexts the term “investment” could be interpreted to cover “investors” because of the inextricable linkage between the investment and the investor. Interpretation of the MFN and national treatment provision also requires determining which entities or activities serve as the reference point for ascertaining the type of treatment to be provided. For example, in the case of national treatment, the question may arise as to whether an investment is entitled to treatment as favourable as that provided to an investment by State enterprises of a treaty partner. This question is often answered by the definition of the term “company”. If the term is defined to include public as well as private entities, then a provision requiring each contracting party to provide national treatment would require that investment covered should receive treatment as favorable as that accorded to an investment by State enterprises of the host country. On the other hand, a BIT may expressly provide that national treatment shall not include treatment afforded to the host country's State enterprises … Very often the MFN or national treatment provisions are limited to investments that are “in the same circumstances” [footnote omitted] or “in like situations” [footnote omitted] or that are made by a similar enterprise”, [footnote omitted] thus mitigating some of the most sweeping effects of the application of the MFN and national treatment clauses. Such provisions, however, do not identify the criteria by which similarity or likeness is to be established. The determination might depend, for example, on whether the two investments are in competition with each other. In OECD practice, for example, the

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specific criteria to be taken into account include whether the two enterprises are in the same industry, the impact of policy objectives of the host country in particular fields and the motivation behind the measure involved. In any case, unless the standards of MFN and national treatment are being applied to two identical companies in the same industry at the same time, comparisons for this purpose are highly problematic … Another question that arises is whether the MFN or national treatment obligation applies to special treatment granted to certain individual investors or to all investors of a particular nationality. Some BITs may be interpreted as requiring the most favourable treatment if it is accorded to any investor, even if it is not accorded to all investors or a particular nationality. (49) Other BITs, however, may apply the treatment of investors of a particular nationality as MFN treatment only if all investors of that nationality receive the treatment. [4] Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties, 66 (Kluwer Law International 1995) B.1.d (ii) Most-Favored-Nation Treatment *** As in the case of the national treatment standard, the interpretation and application of the MFN principle pose a number of problems which explain why this clause is made subject to a range of qualifications. It is generally agreed that the scope of an MFN treatment clause is limited ratione materiae to the subject-matter of the treaty. MFN clauses can therefore not have the effect of extending to beneficiary States such rights which may derive from treaties or instruments dealing with a different subject-matter and the standard is assumed not to extend to individual investment agreements between the host State and private foreign investors. On the other hand, it is generally assumed that where a party to a BIT containing an MFN clause extends national treatment to a third party, it is under an obligation to accord such treatment to investors of the other Contracting Party insofar as such treatment is more favorable. This is because the host country, by extending national treatment to a third party, has voluntarily incorporated it into its MFN standard of treatment. [5] Emilio Agustín Maffezini v. The Kingdom of Spain (ICSID Case No. ARB/97/7), Decision on Jurisdiction of 25 January 2000, 16 ICSID Rev. – Foreign Int’l L.J. 212, 225-236 (2001) [Francisco Orrego Vicuña (pres.), Thomas Buergenthal, Maurice Wolf] [In 1989, Emilio Maffezini, an Argentine, created a chemical production company in Spain named EAMSA. A Spanish entity, SODIGA, was a minority shareholder that granted a large loan to the company at a preferential interest rate. EAMSA suffered financial difficulties during its developmental stages, leading the company to seek additional loans, including one for 30 million Spanish Pesetas from Maffezini's personal account in a Spanish bank. Eventually, Maffezini stopped all construction, dismissed all employees, and offered to sell all of EAMSA's assets to SODIGA if SODIGA would cancel all of the company's debts. SODIGA rejected the offer and Meffezini instituted ICSID proceedings claiming that Spain, though the acts of SODIGA, violated the Argentina-Spain BIT because it's acts caused EAMSA's demise. In a jurisdictional ruling, the Tribunal rejected Spain's contention that Maffezini failed to exhaust a BIT requirement that all disputes be first submitted to local courts. The Tribunal ruled that the most favored nation clause of the Argentine-Spain BIT allowed Maffezini to rely on more favorable arrangements from the Chile-Spain BIT which did not mandate that claims be first submitted to the local courts. In its ruling on the merits, the Tribunal rejected Maffezini's claim regarding Spain's responsibility for EAMSA's downfall, ruling that EAMSA's demise was due solely to Mafezzini's poor business judgment and that BITs are not insurance policies against poor business decisions. The Tribunal did, however, rule that Spain had breached its BIT obligations because its allowance of the improper transfer of funds from Maffezini's personal account breached the obligation to protect the investment and to provide fair and equitable treatment.] (Citations selectively omitted) Most Favored Nation Clause 38. The argument based on the most favored nation clause raises a number of legal issues with which international tribunals are confronted from time to time. As is true of many treaties of this kind, Article IV of the BIT between Argentina and Spain, after guaranteeing a fair and equitable treatment for investors, provides the following in paragraph 2: “In all matters subject to this Agreement, this treatment shall not be less favorable than that extended by each Party to the investments made in its territory by investors of a third country.” 39. … the Argentine-Spain BIT provides domestic courts with the opportunity to deal with a dispute for a period of eighteen months before it may be submitted to arbitration. However, Article l0(2) of the Chile-Spain Bilateral Investment Treaty imposes no such condition. It provides merely that the investor can opt for arbitration after the six-month period allowed for negotiations has expired.

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40. Claimant contends, consequently, that Chilean investors in Spain are treated more favorably than Argentine investors in Spain. He argues, accordingly, that the most favored nation clause in the Argentine-Spain BIT gives him the option to submit the dispute to arbitration without prior referral to domestic courts… 41. The Kingdom of Spain rejects these contentions. In its view, the treaties made by Spain with third countries are in respect of Argentina res inter alios acta and, consequently, cannot be invoked by the Claimant. Respondent further argues that under the principle ejusdem generis the most favored nation clause can only operate in respect of the same matter and cannot be extended to matters different from those envisaged by the basic treaty. In Spain's view, this means that the reference in the most favored nation clause of the Argentine-Spain BIT to “matters” can only be understood to refer to substantive matters or material aspects of the treatment granted to investors and not to procedural or jurisdictional questions. 42. In this respect, Spain has also argued that since it is the purpose of the most favored nation clause to avoid discrimination, such discrimination can only take place in connection with material economic treatment and not with regard to procedural matters. Only if it could be established that resort to domestic tribunals would produce objective disadvantages for the investor would it be possible to argue material effects on the treatment owed. It follows, in the same line of argument, that it would have to be proved that the submission of the dispute to Spanish jurisdiction is less advantageous to the investor than its submission to ICSID arbitration. 43. The arguments outlined above are familiar to international lawyers and scholars. Indeed, many of the issues mentioned have been addressed in the Anglo-Iranian Oil Company Case (Jurisdiction), in theCase concerning the rights of nationals of the United States of America in Morocco and in the Ambatielos Case (merits: obligation to arbitrate), as well as in the proceedings of the Ambatielos case before a Commission of Arbitration. 44. In addressing these issues, it must first be determined which is the basic treaty that governs the rights of the beneficiary of the most favored nation clause. This question was extensively discussed in theAnglo-Iranian Oil Company Case, where the International Court of Justice determined that the basic treaty upon which the Claimant could rely was that “containing the most-favored-nation clause”… 45. This discussion has practical consequences for the application of the most favored nation clause. For if, as the Tribunal believes, the right approach is to consider that the subject matter to which the clause applies is indeed established by the basic treaty, it follows that if these matters are more favorably treated in a third-party treaty then, by operation of the clause, that treatment is extended to the beneficiary under the basic treaty. If the third-party treaty refers to a matter not dealt with in the basic treaty, that matter is res inter alios acta in respect of the beneficiary of the clause. 46. The second major issue concerns the question whether the provisions on dispute settlement contained in a third-party treaty can be considered to be reasonably related to the fair and equitable treatment to which the most favored nation clause applies under basic treaties on commerce, navigation or investments and, hence, whether they can be regarded as a subject matter covered by the clause. This is the issue directly related to the ejusdem generis rule. *** 48. The issue came into sharp focus in the Ambatielos case. Greece contended before the International Court of Justice that her subject – Ambatielos – had not been treated in the English courts according to the standards applied to British subjects and foreigners who enjoyed a most favored nation treatment under treaties in force. Such most favored nation treatment was relied upon as the basis of the claim and the request that the dispute be submitted to arbitration. The Court did not deal with the matter of the most favored nation clause, but this task would be undertaken by the Commission of Arbitration. 49. The Commission of Arbitration, to which the dispute was eventually submitted, subsequently confirmed the relevance of the ejusdem generis rule. It affirmed that “the most-favored-nation clause can only attract matters belonging to the same category of subject as that to which the clause itself relates”. However, the scope of the rule was defined in broad terms: “It is true that the ‘administration of justice’, when viewed in isolation, is a subject-matter other than ‘commerce and navigation’, but this is not necessarily so when it is viewed in connection with the protection of the rights of traders. Protection of the rights of traders naturally finds a place among the matters dealt with by treaties of commerce and navigation. Therefore it cannot be said that the administration of justice, in so far as it is concerned with the protection of these rights, must necessarily be excluded from the field of application of the most-favored-nation clause, when the latter includes ‘all matters relating to commerce and navigation’. The question can only be determined in accordance with the intention of the Contracting Parties as deduced from a reasonable interpretation of the Treaty”.

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50. The Commission accepted the extension of the clause to questions concerning the administration of justice and found it to be compatible with the ejusdem generis rule. It concluded that the protection of the rights of persons engaged in commerce and navigation by means of dispute settlement provisions embraces the overall treatment of traders covered by the clause. On the merits of the question, the Commission determined, however, that the third-party treaties relied upon by Greece did not provide for any “privileges, favours or immunities” more extensive than those resulting from the basic treaty and that “accordingly the most-favored-nation clause contained in Article X has no bearing on the present dispute …”. 51. It is in the light of this background that the operation of the most favored nation clause in bilateral investment treaties must now be considered by this Tribunal… 52. A number of bilateral investment treaties have provided expressly that the most favored nation treatment extends to the provisions on settlement of disputes. This is particularly the case of investment treaties concluded by the United Kingdom. Thus, Article 3(3) of the Agreement between the United Kingdom and Albania, stipulates: “For the avoidance of doubt it is confirmed that the treatment provided for in paragraphs (1) and (2) above shall apply to the provisions of Articles 1 to 11 of this Agreement”. Among the enumerated provisions are the clauses on dispute settlement and the consent to submit to conciliation or arbitration under ICSID. Here it is beyond doubt that the parties intended the most favored nation clause to include dispute settlement in its scope, thereby meeting the test proposed by theAmbatielos Commission of Arbitration. Furthermore, the parties included this model clause in the Agreement with the express purpose of “the avoidance of doubt”. 53. In other treaties the most favored nation clause speaks of “all rights contained in the present Agreement” or, as the basic Argentine-Spain BIT does, “all matters subject to this Agreement”. These treaties do not provide expressly that dispute settlement as such is covered by the clause. Hence, like in the Ambatielos Commission of Arbitration it must be established whether the omission was intended by the parties or can reasonably be inferred from the practice followed by the parties in their treatment of foreign investors and their own investors. 54. Notwithstanding the fact that the basic treaty containing the clause does not refer expressly to dispute settlement as covered by the most favored nation clause, the Tribunal considers that there are good reasons to conclude that today dispute settlement arrangements are inextricably related to the protection of foreign investors, as they are also related to the protection of rights of traders under treaties of commerce. Consular jurisdiction in the past, like other forms of extraterritorial jurisdiction, were considered essential for the protection of rights of traders and, hence, were regarded not merely as procedural devices but as arrangements designed to better protect the rights of such persons abroad. It follows that such arrangements, even if not strictly a part of the material aspect of the trade and investment policy pursued by treaties of commerce and navigation, were essential for the adequate protection of the rights they sought to guarantee. 55. International arbitration and other dispute settlement arrangements have replaced these older and frequently abusive practices of the past. These modern developments are essential, however, to the protection of the rights envisaged under the pertinent treaties; they are also closely linked to the material aspects of the treatment accorded. Traders and investors, like their States of nationality, have traditionally felt that their rights and interests are better protected by recourse to international arbitration than by submission of disputes to domestic courts, while the host governments have traditionally felt that the protection of domestic courts is to be preferred. The drafting history of the ICSID Convention provides ample evidence of the conflicting views of those favoring arbitration and those supporting policies akin to different versions of the Calvo Clause. 56. From the above considerations it can be concluded that if a third-party treaty contains provisions for the settlement of disputes that are more favorable to the protection of the investor's rights and interests than those in the basic treaty, such provisions may be extended to the beneficiary of the most favored nation clause as they are fully compatible with the ejusdem generis principle. Of course, the third-party treaty has to relate to the same subject matter as the basic treaty, be it the protection of foreign investments or the promotion of trade, since the dispute settlement provisions will operate in the context of these matters; otherwise there would be a contravention of that principle. This operation of the most favored nation clause does, however, have some important limits arising from public policy considerations that will be discussed further below. 57. The negotiations leading to the Argentine-Spain BIT evidence similar policy conflicts between the capital exporting country and the host country, that is, Spain and Argentina respectively, except that in the present case the roles were later reversed, with Argentina becoming the capital exporter and Spain the host country. The Claimant has convincingly explained that at the time of the negotiations of the Agreement, Argentina still sought to require some form of prior exhaustion of local remedies, while Spain supported the policy of a direct right of submission to arbitration, which was reflected in the numerous agreements it negotiated with other countries at that time. The eventual role the treaty

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envisaged for domestic courts, involving the submission of the dispute to these courts for a period of time, not amounting to the traditional exhaustion of local remedies requirement as explained above, coupled with ICSID arbitration, was an obvious compromise reached by the parties. Argentina later abandoned its prior policy, and like Spain and Chile, accepted treaty clauses providing for the direct submission of disputes to arbitration following a period of negotiations. 58. The Tribunal has also examined in detail the practice followed by Spain in respect of bilateral investment treaties with other countries. These treaties indicate that Spain's preferred practice is to allow for arbitration, following a six-months effort to reach a friendly settlement, which is what the Chile-Spain BIT provides. In most cases there is a choice of arbitration under ICSID, but other options are available as well… 59. Spain's treaty practice also shows that in a few cases a six-month or nine-month effort at a direct settlement is followed by arbitration between the Contracting Parties, but not involving the choice of the investor… 60. The Tribunal also notes that of all the Spanish treaties it has been able to examine, the only one that speaks of “all matters subject to this Agreement” in its most favored nation clause, is the one with Argentina. All other treaties, including those with Uruguay and Chile, omit this reference and merely provide that “this treatment” shall be subject to the clause, which is of course a narrower formulation. 61. The Spanish treaty practice is also relevant in connection with another aspect of the clause. Most treaties concluded by Spain have a model clause to the effect that “… Each Party shall guarantee in its territory fair and equitable treatment for the investments made by investors of the other Party… This treatment shall not be less favourable than that extended by each Party to the investments made in its territory by its own investors …”. While this clause applies to national treatment of foreign investors, it may also be understood to embrace the treatment required by a Government for its investors abroad, as evidenced by the treaties made to ensure their protection. Hence, if a Government seeks to obtain a dispute settlement method for its investors abroad, which is more favorable than that granted under the basic treaty to foreign investors in its territory, the clause may be construed so as to require a similar treatment of the latter. 62. Notwithstanding the fact that the application of the most favored nation clause to dispute settlement arrangements in the context of investment treaties might result in the harmonization and enlargement of the scope of such arrangements, there are some important limits that ought to be kept in mind. As a matter of principle, the beneficiary of the clause should not be able to override public policy considerations that the contracting parties might have envisaged as fundamental conditions for their acceptance of the agreement in question, particularly if the beneficiary is a private investor, as will often be the case. The scope of the clause might thus be narrower than it appears at first sight. 63. Here it is possible to envisage a number of situations not present in the instant case. First, if one contracting party has conditioned its consent to arbitration on the exhaustion of local remedies, which the ICSID Convention allows, this requirement could not be bypassed by invoking the most favored nation clause in relation to a third-party agreement that does not contain this element since the stipulated condition reflects a fundamental rule of international law. Second, if the parties have agreed to a dispute settlement arrangement which includes the so-called fork in the road, that is, a choice between submission to domestic courts or to international arbitration, and where the choice once made becomes final and irreversible, this stipulation cannot be bypassed by invoking the clause. This conclusion is compelled by the consideration that it would upset the finality of arrangements that many countries deem important as a matter of public policy. Third, if the agreement provides for a particular arbitration forum, such as ICSID, for example, this option cannot be changed by invoking the clause, in order to refer the dispute to a different system of arbitration. Finally, if the parties have agreed to a highly institutionalized system of arbitration that incorporates precise rules of procedure, which is the case, for example, with regard to the North America Free Trade Agreement and similar arrangements, it is clear that neither of these mechanisms could be altered by the operation of the clause because these very specific provisions reflect the precise will of the contracting parties. Other elements of public policy limiting the operation of the clause will no doubt be identified by the parties or tribunals. It is clear, in any event, that a distinction has to be made between the legitimate extension of rights and benefits by means of the operation of the clause, on the one hand, and disruptive treaty-shopping that would play havoc with the policy objectives of underlying specific treaty provisions, on the other hand. 64. In light of the above considerations, the Tribunal is satisfied that the Claimant has convincingly demonstrated that the most favored nation clause included in the Argentine-Spain BIT embraces the dispute settlement provisions of this treaty. Therefore, relying on the more favorable arrangements contained in the Chile-Spain BIT and the legal policy adopted by Spain with regard to the treatment of its own investors abroad, the Tribunal concludes that Claimant had the right to submit the instant dispute to arbitration without first accessing the Spanish courts. In the Tribunal's view, the requirement for the prior resort to domestic courts spelled out in the Argentine-Spain BIT

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does not reflect a fundamental question of public policy considered in the context of the treaty, the negotiations relating to it, the other legal arrangements or the subsequent practice of the parties. Accordingly, the Tribunal affirms the jurisdiction of the Centre and its own competence in this case in respect of this aspect of the challenge made by the Kingdom of Spain. [6] Plama Consortium Limited v. Republic of Bulgaria (ICSID Case No. ARB/03/24), Decision on Jurisdiction of 8 February 2005, (50) ¶¶ 184, 186-187, 189-192, 198200, 203-210, 212, 218-219, 222-224, 227 [Carl F. Salans (pres.), Albert Jan van den Berg, V.V. Veeder] [Plama, a Cypriot investor, acquired a majority interest in an oil refinery in Bulgaria when the Bulgarian government privatized it. Plama argued that Burlgarian government and local authorities deliberately created numerous obstacles to the privatization, operation, and bankruptcy of the refinery, which ultimately resulted in depriving Plama from its investment. Plama subsequently initiated ICSID arbitration proceedings pursuant to the Cyprus-Bulgaria BIT and the Energy Charter Treaty.] (Citations selectively omitted) 184. The Tribunal concludes that the MFN provision of the Bulgaria-Cyprus BIT cannot be interpreted as providing consent to submit a dispute under the Bulgaria-Cyprus BIT to ICSID arbitration for the reasons set forth hereafter. *** 186. The Claimant's position appears to be prompted by the limited dispute settlement provisions in the Bulgaria-Cyprus BIT … Said provisions are concerned only with disputes relating to expropriation, the legality of which “shall be checked at the request of the concerned investor through the regular administrative and legal procedures of the Contracting Party that had taken the appropriate steps.” (Article 4.1). A dispute “with regard to the amount of compensation … shall be checked either in a legal regular procedure of the Contracting Party which has taken the measure on expropriation or by an international ‘Ad Hoc’ Arbitration Court” (id.), which is detailed in Articles 4.2 – 4.5 (basically, UNCITRAL arbitration, the “Chairman of the Court of Arbitration to the Chamber of Commerce in Stockholm” being the Appointing Authority). The Claimant does not invoke these dispute settlement provisions in the present case. 187. The MFN provision set forth in Article 3 of the Bulgaria-Cyprus BIT reads as follows: 1. Each Contracting Party shall apply to the investments in its territory by investors of the other Contracting Party a treatment which is not less favourable than that accorded to investments by investors of third states. 2. This treatment shall not be applied to the privileges which either Contracting Party accords to investors from third countries in virtue of their participation in economic communities and unions, a customs union or a free trade area. *** 189. It is not clear whether the ordinary meaning of the term “treatment” in the MFN provision of the BIT includes or excludes dispute settlement provisions contained in other BITs to which Bulgaria is a Contracting Party… *** 191. The second paragraph of Article 3 of the Bulgaria-Cyprus BIT contains an exception to MFN treatment relating to economic communities and unions, a customs union or a free trade area. This may be considered as supporting the view that all other matters, including dispute settlement, fall under the MFN provision of the first paragraph of Article 3 (on the basis of the principle expressio unius est exclusio alterius). However, the fact that the second paragraph refers to “privileges” may be viewed as indicating that MFN treatment should be understood as relating to substantive protection. Hence, it can be argued with equal force that the second paragraph demonstrates that the first paragraph is solely concerned with provisions relating to substantive protection to the exclusion of the procedural provisions relating to dispute settlement. 192. The “context” may support the Claimant's interpretation since the MFN provision is set forth amongst the Treaty's provisions relating to substantive investment protection. However, the context alone, in light of the other elements of interpretation considered herein, does not persuade the Tribunal that the parties intended such an interpretation. And the Tribunal has no evidence before it of the negotiating history of the BIT to convince it otherwise. *** 198. … With the advent of bilateral and multilateral investment treaties since the 1980s (today estimated to be more than 1,500), the traditional diplomatic protection mechanism by home states for their nationals investing abroad has been largely replaced by direct access by investors to arbitration against host states. Nowadays, arbitration is the generally accepted avenue for resolving disputes between investors and states. Yet, that phenomenon does not take away the basic prerequisite for

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arbitration: an agreement of the parties to arbitrate. It is a well-established principle, both in domestic and international law, that such an agreement should be clear and unambiguous. In the framework of a BIT, the agreement to arbitrate is arrived at by the consent to arbitration that a state gives in advance in respect of investment disputes falling under the BIT, and the acceptance thereof by an investor if the latter so desires. 199. Doubts as to the parties' clear and unambiguous intention can arise if the agreement to arbitrate is to be reached by incorporation by reference. The Claimant argues that the MFN provision produces such effect, stating that in contractual relationships the incorporation by reference of an arbitration agreement is commonplace… 200. … the reference must be such that the parties' intention to import the arbitration provision of the other agreement is clear and unambiguous. A clause reading “a treatment which is not less favourable than that accorded to investments by investors of third states” as appears in Article 3(1) of the Bulgaria-Cyprus BIT, cannot be said to be a typical incorporation by reference clause as appearing in ordinary contracts. It creates doubt whether the reference to the other document (in this case the other BITs concluded by Bulgaria) clearly and unambiguously includes a reference to the dispute settlement provisions contained in those BITs. *** 203. … The specific exclusion in the draft FTAA is the result of a reaction by States to the expansive interpretation made in the Maffezini case. That interpretation went beyond what State Parties to BITs generally intended to achieve by an MFN provision in a bilateral or multilateral investment treaty. The Tribunal will examine the Maffezini decision in more detail below. 204. Rather, the intention to incorporate dispute settlement provisions must be clearly and unambiguously expressed… 205. The expression “with respect to all matters” as appearing in MFN provisions in a number of other BITs (but not the Bulgaria-Cyprus BIT) does not alleviate the doubt as pointed out in Siemens v. The Argentine Republic. 206. Doubt may be further created by the scope of the dispute settlement provisions in the other BITs. A number of them refer to disputes arising out of the particular BIT. It appears to be difficult to interpret the MFN clause as importing into the particular BIT such specific language from other BITs. 207. Conversely, dispute resolution provisions in a specific treaty have been negotiated with a view to resolving disputes under that treaty. Contracting States cannot be presumed to have agreed that those provisions can be enlarged by incorporating dispute resolution provisions from other treaties negotiated in an entirely different context. 208. Moreover, the doubt as to the relevance of the MFN clause in one BIT to the incorporation of dispute resolution provisions in other agreements is compounded by the difficulty of applying an objective test to the issue of what is more favorable. The Claimant argues that it is obviously more favorable for the investor to have a choice among different dispute resolution mechanisms, and to have the entire dispute resolved by arbitration as provided in the Bulgaria-Finland BIT, than to be confined to ad hoc arbitration limited to the quantum of compensation for expropriation. The Tribunal is inclined to agree with the Claimant that in this particular case, a choice is better than no choice. But what if one BIT provides for UNCITRAL arbitration and another provides for ICSID? Which is more favorable? 209. It is also not evident that when parties have agreed in a particular BIT on a specific dispute resolution mechanism, as is the case with the Bulgaria-Cyprus BIT (ad hoc arbitration), their agreement to most-favored nation treatment means that they intended that, by operation of the MFN clause, their specific agreement on such a dispute settlement mechanism could be replaced by a totally different dispute resolution mechanism (ICSID arbitration). It is one thing to add to the treatment provided in one treaty more favorable treatment provided elsewhere. It is quite another thing to replace a procedure specifically negotiated by parties with an entirely different mechanism. 210. The Claimant has relied on a number of cases that it believes support its interpretation. It is to be noted, however, that in none of these cases was it held that the dispute settlement provisions in the basic treaty are replaced in toto by the dispute settlement provisions contained in the other treaty through operation of the MFN provision in the basic treaty. Indeed, the Respondent contended that no tribunal has ever done what the Claimant is requesting this Tribunal to do in the present case. *** 212. In the Tribunal's view, the lack of precedent is not surprising. When concluding a multilateral or bilateral investment treaty with specific dispute resolution provisions, states cannot be expected to leave those provisions to future (partial) replacement by different dispute resolution provisions through the operation of an MFN provision, unless the States have explicitly agreed thereto (as in the case of BITs based on the UK Model BIT). This matter can also be viewed as forming part of the nowadays generally accepted principle of the separability (autonomy) of the arbitration clause. Dispute resolution provisions constitute an agreement on their own, usually with interrelated provisions.

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*** 218. The tribunal in Maffezini also noted that in other treaties the MFN provision mentions “all rights contained in the present Agreement” or “all matters subject to this Agreement,” in which case, according to the tribunal, “it must be established whether the omission [in the Argentina-Spain BIT] was intended by the parties [i.e., Contracting Parties] or can reasonably be inferred from the practice followed by the parties in their treatment of foreign investors and their own investors” (Decision, paragraph 53). The present Tribunal considers such a basis for analysis in principle to be inappropriate for the question whether dispute resolution provisions in the basic treaty can be replaced by dispute resolution provisions in another treaty. As explained above, an arbitration clause must be clear and unambiguous and the reference to an arbitration clause must be such as to make the clause part of the contract (treaty). 219. The tribunal in Maffezini further referred to “the fact that the application of the most favoured nation clause to dispute settlement arrangements in the context of investment treaties might result in the harmonization and enlargement of the scope of such arrangements” (Decision at paragraph 62). The present Tribunal fails to see how harmonization of dispute settlement provisions can be achieved by reliance on the MFN provision. Rather, the “basket of treatment” and “self-adaptation of an MFN provision” in relation to dispute settlement provisions (as alleged by the Claimant) has as effect that an investor has the option to pick and choose provisions from the various BITs. If that were true, a host state which has not specifically agreed thereto can be confronted with a large number of permutations of dispute settlement provisions from the various BITs which it has concluded. Such a chaotic situation – actually counterproductive to harmonization – cannot be the presumed intent of Contracting Parties. *** 222. In Maffezini the tribunal pointed out: It is clear, in any event, that a distinction has to be made between the legitimate extension of rights and benefits by means of the operation of the clause, on the one hand, and disruptive treaty-shopping that would play havoc with the policy objectives of underlying specific treaty provisions, on the other hand. (Id.) 223. The present Tribunal agrees with that observation, albeit that the principle with multiple exceptions as stated by the tribunal in the Maffezini case should instead be a different principle with one, single exception: an MFN provision in a basic treaty does not incorporate by reference dispute settlement provisions in whole or in part set forth in another treaty, unless the MFN provision in the basic treaty leaves no doubt that the Contracting Parties intended to incorporate them. 224. The decision in Maffezini is perhaps understandable. The case concerned a curious requirement that during the first 18 months the dispute be tried in the local courts. The present Tribunal sympathizes with a tribunal that attempts to neutralize such a provision that is nonsensical from a practical point of view. However, such exceptional circumstances should not be treated as a statement of general principle guiding future tribunals in other cases where exceptional circumstances are not present. *** 227. For the foregoing reasons, the Tribunal concludes that the MFN provision of the Bulgaria-Cyprus BIT cannot be interpreted as providing consent to submit a dispute under the Bulgaria-Cyprus BIT to ICSID arbitration and that the Claimant cannot rely on dispute settlement provisions in other BITs to which Bulgaria is a Contracting Party in the present case. [7] Impregilo S.p.A. v. Argentine Republic (ICSID Case No. ARB/07/17), Final Award of 21 June 2011 – Prof. Bridgette Stern’s Concurring and Dissenting Opinion, (51) ¶¶ 16-17, 45, 47-53, 57-58, 61, 67, 70, 78-80 [Hans Danelius (pres.), Charles N. Brower, Brigette Stern] [Impregilo, an Italian company, formed a consortium to invest in the water utility company for the province of Buenos Aires in Argentina. In 1999, the consortium obtained the exclusive concession for the distribution and treatment of water in the area for a period of thirty years. A few years after the beginning of that period, however, and in the aftermath of the Argentina economic crisis, the provincial and federal governments enacted as series of measures (including the redenomination of the water tariff from US dollars to Argentine pesos and the prohibition for the concessionaire to suspend service for delinquent customers) which adversely affected the concessionaire, and consequently, the value of Impregilo's investment in Argentina. Impregilo subsequently initiated arbitration proceedings under the Italy-Argentina BIT.] (Citations selectively omitted) 16. The purpose of this separate opinion is to try to explain why, in principle, an MFN clause cannot import, in part or in toto, a dispute settlement mechanism from a third party BIT into the BIT which is the basic treaty applicable to the dispute. Ultimately, as will be explained in more details below, the core reason why an MFN clause cannot apply

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to dispute settlement is intimately linked with the essence of international law. 17. Naturally, an important caveat has to be presented here. The interpretation of the MFN clause is only necessary when the intention of the parties concerning its applicability or inapplicability to the dispute settlement mechanism is not expressly stated or clearly ascertained. It is quite evident that if there is an MFN clause expressly including the dispute settlement procedures or expressly excluding them, there is no need for an interpretation. *** 45. It is my submission that, even if access to arbitration can broadly speaking be considered part of the treatment, as already explained, the investor does not have access to the two aspects of the overall treatment to which it is entitled under a BIT under the same conditions, and that this is the ultimate justification for not assimilating the two. This is because of a profound difference between the national legal orders and the international legal order. On the national level, when there exists a substantive right, there is always automatically a means to protect such a right through the jurisdictional system. In other words, on the national level, jurisdictional treatment is inherent in substantive treatment. In contrast, on the international level, most rights cannot be enforced through a jurisdictional process, it is only when, exceptionally, the State has given its consent – consent to other States for accepting the jurisdiction of the ICJ or consent to foreign investors for accepting international arbitration – that such a “jurisdictional treatment” complements the substantive treatment granted by the international rules. Contrary to the situation existing in the national legal orders, the jurisdictional treatment is never inherent in the substantive treatment on the international level. In other words, there is a substantial [substantive] treatment and there is a jurisdictional treatment which are quite distinct and must be distinguished, and the ejusdem generis principle requires that the two are not assimilated: it is not because per se one treatment is substantial [substantive] and the other procedural that they should be treated differently, (some procedural requirements or procedural rights in the basic treaty might well be treated in the same manner as the substantive rules) it is because the jurisdictional treatment requires a supplementary condition in order to be granted to the investor, as will now be explained. *** 47… in my view, there are two basically different types of provisions in BITs that need to be distinguished in this broad category of “all matters”, as will now be discussed. There are rights and there are fundamental conditions for access to the rights. In other words, there are rules conferring substantive and jurisdictional rights to the foreign investors for their investments, and there are rules dealing with the access of the foreign investor to P 891 the substantive and jurisdictional rights granted by the basic treaty. I contend that an MFN clause can only concern the rights that an investor can enjoy, it cannot modify the fundamental conditions for the enjoyment of such rights, in other words, the insuperable conditions of access to the rights granted in the BIT. 48. This distinction has been clearly expressed, more than 50 years ago, by Ustor, who was the Special Rapporteur of the International Law Commission on the MFN clause, who stated the following: The beneficiary State can only claim rights which belong to the subject-matter of the clause, which are within the time-limits and other conditions and restrictions set by the agreement, and which are in respect of persons or things specified in the clause or implied from its subject-matter. 49. This statement should not be overlooked and is in fact of crucial importance, being capable of fully explaining the way an MFN clause has to be implemented. 50. As an MFN clause cannot change the conditions of access to the rights, this has far reaching consequences on a necessary differential approach to the substantive rights and the jurisdictional rights, whose qualifying conditions are distinct, although partly overlapping. 51. In order to benefit from the substantial [substantive] rights granted in a BIT, certain conditions being “matters regulated by the BIT” have to be fulfilled: these are the well known conditions ratione personae, ratione materiae, ratione temporis. 52. In order to benefit from the jurisdictional protection granted by an arbitration mechanism, these same conditions have to be fulfilled, but in addition there is a condition ratione voluntatis: the State must have given its consent to such a procedure which allows a foreign investor to sue the State directly on the international level. This consent is expressed broadly or restrictively, with conditions of exhaustion of local remedies or waiting periods, as allowing all claims or only certain claims: in other words, the consent is given under certain conditions. Just as the conditions of nationality for example must be fulfilled before an investor can have access to all the rights granted by the BIT, the conditions shaping the State's consent to arbitration must be fulfilled before a right to arbitration can arise. 53. It has to be clarified here that the consent to arbitration is a different consent than

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the one given by the State to another State when it ratifies the treaty, and that the necessity of this supplementary consent is explained by the structure of international law. It is indeed not because a State has given its consent to another State to grant some substantive rights to the investors of that State that it automatically flows from such a consent that the State also gives its consent to the foreign investors to allow the latter to sue the State directly in an international arbitration. For such a right to come into existence, a specific consent has to be given inside the treaty, and the State can shape this consent as it sees fit, in providing for the basic conditions under which such a consent is given, in other words, the conditions under which such an “offer to arbitrate” is made to the foreign investors. It is of utmost importance not to forget that no participant in the international community, be it a State, an international organization, a physical or a legal person, has an inherent right of access to a jurisdictional recourse. Just as a State cannot sue another State, unless there is a specific consent to that effect, for example P 892 through a declaration recognizing as compulsory the jurisdiction of the International Court of Justice, in the same manner, in the framework of BITs, investors are not capable of intervening on the international level against States for the recognition of their rights, unless States grant them such a right under conditions that they determine. An arbitral tribunal – just as the ICJ or any international court – does not have a general jurisdiction, it only has a “compétence d’attribution”, which has to respect the limits provided for by the States. *** 57. I will now show that there are many cases in which the conditions for access to a substantive right, although included in all the matters regulated by the BIT, have not been considered as being capable to be expanded by an MFN clause. In fact, I suggest that the mainly non-controversial decisions applying MFN clauses to substantive rights can indeed be explained by such an analytical framework, based on a distinction between the access to the right and the right itself. In other words, it is my submission that a reference in an MFN clause to all matters never means that it is indeed applicable to all matters, as the conditions of access to the rights granted by the BIT are not included in that expression. 58. It is not contested that all the substantive rights granted under an investment protection treaty can only be granted if the conditions ratione personae, ratione materiae, and ratione temporis provided for in the treaty are satisfied. These conditions are clearly matters regulated by the treaty, but it has never been suggested that they could be modified by the MFN clause. *** 61. The same is true for the procedural/jurisdictional rights concerning access to ICSID jurisdiction, which are also granted only to the investor when the same conditions ratione personae, ratione materiae, and ratione temporis plus a condition ratione voluntatis is fulfilled. If the conditions posed by the State for giving its consent to international arbitration in the basic treaty are not fulfilled, the investor cannot benefit from the jurisdictional right granted by the treaty. *** 67. Also, it is not contested that an MFN clause cannot change the condition ratione materiae, which is a condition for the enjoyment of all treaty rights, whether substantive or jurisdictional. For example, if the basic treaty applies only to investment in agriculture, an MFN clause cannot be used to introduce a provision according to which the treaty should also apply to investments in industry. *** 70. It is also more than evident that an MFN clause cannot change the condition ratione temporis, which is a condition for the enjoyment of all treaty rights, whether substantial or jurisdictional. If the basic treaty applies only to investments made after its entry into force, an MFN clause cannot be used to introduce a provision according to which investments made before the entry into force of the BIT should also be protected. *** 78. Just as an MFN clause cannot change the conditions ratione personae, ratione materiae, that an MFN clause cannot change the condition ratione voluntatis, which is a qualifying condition for the enjoyment of the jurisdictional rights open for the protection of substantial rights.

P 893 and ratione temporis, as has just been demonstrated, it must be equally true

79. In other words, before a provision relating to the dispute settlement mechanism can be imported into the basic treaty, the right to international arbitration – here ICSID arbitration – has to be capable of coming into existence for the foreign investor under the basic treaty, in other words the existence of this right is conditioned on the fulfillment of all the necessary conditions for such jurisdiction, the conditions ratione personae, ratione materiae, and ratione temporis as well as a supplementary condition relating to the scope of the State's consent to such jurisdiction, the condition ratione voluntatis. 80. As long as the qualifying conditions expressed by the State in order to give its consent

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are not fulfilled, there is no consent, in other words no access of the foreign investor to the jurisdictional treatment granted by ICSID arbitration. An MFN clause cannot enlarge the scope of the basic treaty's right to international arbitration, it cannot be used to grant access to international arbitration when this is not possible under the conditions provided for in the basic treaty. [8] UNCTAD, Most-Favoured-Nation Treatment, UNCTAD Series on Issues in International Investment Agreements II, 66-67, 82-85 (United Nations Publications 2010) The applicability of the MFN treatment clause to ISDS [investor-State dispute settlement] provisions in IIAs [international investment agreements] has generated numerous arbitral decisions, where jurisdiction of the arbitral tribunal has been challenged by the respondent State. Two categories of cases can be distinguished. In a first set of cases, claimants have invoked the MFN treatment clause to override a procedural requirement that constitutes a condition for the submission of a claim to international arbitration. This has led to a series of cases against Argentina because a number of BITs concluded by Argentina contain a mandatory 18-months waiting period during which claims should be brought before domestic courts (local remedies) before they can be brought to international arbitration. A first significant case was Maffezini v. Spain, but all the subsequent cases have involved Argentina as the respondent State. The MFN clause has been invoked to sidestep or circumvent the 18 months local remedies requirement on the ground that third party BITs concluded by the host State (Argentina) do not contain it. The defendant State has argued that the mandatory waiting period was a condition that had to be met for a claim to be brought before an arbitral tribunal and that said arbitral tribunal would not have jurisdiction of the case, lest this condition had been exhausted. The arguments invoked by both parties to these cases will be called “admissibility” requirements. Under the second category of cases, claimants have attempted to extend via MFN the jurisdictional threshold, i.e. the scope of the mandate of the arbitral tribunal beyond that specifically set forth in the basic treaty. This use of the MFN clause would give the arbitral tribunal jurisdiction to hear issues or disputes that the basic treaty does not contemplate or expressly excludes. Cases here have involved a request to bring contractual claims before a treaty based arbitration panel and a number of requests to extend jurisdiction of arbitral tribunals beyond assessing the amount of compensation subsequent to expropriation. This second category of cases will be looked at under the heading of P 894 “scope of jurisdiction” requirements. *** Table 1. Summary of MFN claims Effect Sought

Cases

Result

Override an 18- months waiting period before local courts

Maffezini v. Spain, Siemens, Gas Allowed, Natural, Camuzzi, Suez, National except for Grid, Wintershall v. Argentina Wintershall

Submit disputes beyond the jurisdictional threshold

Plama v. Bulgaria, Salini v. Denied, Jordan, Tel- enor Mobile v. except for Hungary, RosInvestCo v. Russia, RosInvestCo Berschader v. Russia, Renta 4S v. Russia, Tza Yap Shum v. Peru

Benefit from additional substantive content

Bayindir v. Pakistan, MTD Equity v. Chile

Allowed

Benefit from like provisions perceived as AAPL v. Sri Lanka, ADF v. United “more favourable” States

Denied

Alter the BIT's scope of application (ratione temporis orratione materiae)

Denied

Tecmed v. Mexico, MCI v. Ecuador, Société Générale v. Dominican Republic

Override a general emergency exception CMS v. Argentina clause

Denied

Change the standard of compensation for expropriation

Allowed

CME v. Czech Republic

Compare treatment amongst two foreign Bayindir v. Pakistan, Parkerings investors v. Lithuania

No breach found

Various messages and words of caution can be taken from the two tables: –

–

A majority of arbitral tribunals has held that an MFN treatment clause can be used to incorporate into the basic treaty a shorter waiting period, such as for example circumventing an 18- months waiting period or applying less stringent admissibility conditions. A majority of arbitral tribunals has held that an MFN treatment clause cannot, however, be used to incorporate less stringent or broader jurisdictional requirements, such as broadening the scope of an ISDS provision beyond a dispute

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– P 895

relating to the amount of compensation in the case of an expropriation. In most of the cases, however, the arbitral tribunal paid particular attention to the wording of the MFN treatment clause in the underlying treaty in order to support their reasoning.

[9] Comments and Questions 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

11. 12. 13.

14.

P 895

Why are “investors” and “investments” covered by different subsections of Article 1103 of NAFTA? What is the significance of the “basic treaty” for purposes of applying the mostfavored nations clause? What is the “basic treaty”? What is the ejusdem generis rule? What is its significance for applying a most favored nations clause? What rationale did the Maffezini Tribunal use to determine that the most favored nations clause applied to dispute settlement procedures? Why did the Maffezini Tribunal look to the general practice of Spain in other BITs with respect to dispute settlement procedures? What are the limits in applying most favored nations clauses to dispute settlement procedures? Are there any public policy issues that limit the application of the most favored nations provision? What are they? If the most favorable treatment is provided by the host government only to an individual investor of a third country, and not to all investors of that nationality, does the most favored nations clause apply to that treatment? Does the most favored nations clause of an investment treaty extend to an investment agreement between a host government and an individual foreign investor? What limits exist on selecting provisions of other treaties by virtue of a most favored nation provision? May particular sentences, words or phrases be imported in this manner? Must the entirety of the relevant provision or section that is selected be imported? Does it completely replace the counterpart provision in the basic treaty? What was the fundamental reason why the Plama Tribunal disagreed with the Maffezini Tribunal? Which tribunal had the better of the argument? Why or why not? Can the decisions of the Maffezini and Plama tribunals be harmonized? How? Investment awards that have followed the Maffezini Tribunal's decision include the following: Siemens v. Argentina, National Grid v. Argentina, AWG Group v. Argentina, Camuzzi v. Argentina,Gas Natural v. Argentina, Suez v. Argentina, and Impregilo v. Argentina, ICISD Case No. ARB/07/17, Award of 21 June 2011, available at http://italaw.com/alphabetical_list.htm. Investment awards that have followed the Plama Tribunal's reasoning include the following: Wintershall v. Argentina, ICSID Case No. ARB/04/14, Award of 8 December 2008 and ICS Inspection and Control Services Ltd. (U.K.) v. Argentina, UNCITRAL, PCA Case No. 2010-9, Award on Jurisdiciton (10 February 2012), available athttp:/italaw.com/documents/ICS_v._Argentina_AwardJurisdiciton_10Feb2012_en.pdf. See the dissenting opinion of Professor Bridgette Stern in Impregilo v. Argentina, ICSID Case No. ARB/07/17, Award of 21 June 2011.

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documents/italaw1094_0.pdf (accessed 1 September 2013).

29) Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September 30) 31) 32) 33) 34)

2013). Available at http://www.nafta-sec-alena.org/ (accessed 1 September 2013). Available at http://www.encharter.org/ (accessed 1 September 2013). Available at http://www.oecd.org/investment/ (accessed 1 September 2013). Available at http://www.iusct.net/Default.aspx. The Full Tribunal observed in the Oil Field of Texas case that it is “clear that NIOC is one of the instruments by which the Government of Iran conducted and currently conducts the country's national oil policy.” Oil Field of Texas, Inc. and The Government of the Islamic Republic of Iran, Interlocutory Award No. ITL 10-43-FT (9 December 1982) at p. 14, reprinted in 1 Iran-U.S. C.T.R. 347,356. See also, Mobil Oil Iran, supra, at p, 38. International law recognizes that a State may act through organs or entities not part of its formal structure. The conduct of such entities is considered as an act of the State when undertaken in the governmental capacity granted to it under the internal law. See Article 7(2) of the Draft Articles on State Responsibility adopted by the International Law Commission, Yearbook International Law Commission 2 (1975), at p. 60. The 1974 Petroleum Law of Iran explicitly vests in NIOC “the exercise and ownership right of the Iranian nation on the Iranian Petroleum Resources.” NIOC was later integrated into the newly-formed Ministry of Petroleum in October 1979.

35) Available at http://italaw.com/sites/default/files/case-documents/ita0674.pdf

(accessed 1 September 2013). 36) Available at http://italaw.com/sites/default/files/case-documents/ita0900.pdf

(accessed 1 September 2013).

37) Available athttp://italaw.com/sites/default/files/case-documents/ita0353_0.pdf

(accessed 1 September 2013).

38) Available at http://www.italaw.com/sites/default/files/case-documents/ita0206.pdf

(accessed 1 September 2013).

39) Available at http://italaw.com/sites/default/files/case-

documents/italaw1094_0.pdf (accessed 1 September 2013).

40) Available at http://italaw.com/documents/ChevronTexacoEcuadorPartialAward.PDF

(accessed 1 September 2013).

41) Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September

2013).

42) Available at http://www.nafta-sec-alena.org/ (accessed 1 September 2013). 43) Available at http://www.encharter.org/ (accessed 1 September 2013).

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44) Available at http://www.italaw.com/sites/default/files/case-documents/ita0747.pdf

(accessed 1 September 2013). 45) Available at http://italaw.com/sites/default/files/case-documents/ita0037_0.pdf

(accessed 1 September 2013).

46) Available at http://italaw.com/sites/default/files/case-documents/ita0504.pdf

(accessed 1 September 2013).

47) Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September

2013).

48) Available at http://www.nafta-sec-alena.org/ (accessed 1 September 2013). 49) For example, Vandevelde (1992), suggests that the general intent of BITs concluded

by the Untied States is that MFN or national treatment requires treatment afforded to the most favoured enterprise. 50) Available at http://italaw.com/sites/default/files/case-documents/ita0669.pdf (accessed 1 September 2013). 51) Available at http://italaw.com/sites/default/files/case-documents/ita0420.pdf (accessed 1 September 2013).

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Chapter 10: Defenses

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§10.01 INTRODUCTION

Publication

The general “defenses” to a claim for breach of an international obligation are dealt with in the law of state responsibility under the title of “circumstances precluding wrongfulness”: see Chapter 7. On the other hand if a claim is brought for breach of contract, the law relating to defenses and excuses is to be found in the applicable law, i.e. in the proper law of the contract or in the law on which the claim is based. In the case of an “internationalized contract”, it may be that defenses will be derived by analogy from circumstances precluding wrongfulness under general international law.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Topics

Investment Arbitration

Bibliographic reference

'Chapter 10: Defenses', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 897 - 964

At the outset it is necessary to distinguish between grounds for challenging the continued existence of an investment contract (e.g., fundamental change of circumstances or frustration) and those constituting defenses to a claim (e.g., force majeure or necessity). In practice, no doubt, the two overlap: the factual situation may be the same. Thus a government export ban may constitute both a fundamental change of circumstances in relation to the underlying contract and an excuse for non-performance for the time being by way of force majeure. However, the two issues are distinct: a temporary export ban would not constitute a fundamental change of circumstances terminating a long-term supply contract, but it could be a basis for a defense to a claim for non-delivery during the period of the ban, on grounds of force majeure. In this chapter we discuss a number of grounds which are sometimes used by way of defense to claims in international arbitration. These are force majeure, coercion or duress, necessity, corruption or bribery and fundamental change of circumstances. It must be stressed that in each case it is necessary to ask (a) whether the defense is one concerning the initial or continued validity of the obligation or its non-performance at a particular time or times, and (b) whether the applicable law recognizes it as a ground for invalidating the obligation or excusing non-performance. Reference to “general principles of law” does not exempt a tribunal from asking these questions. In the ILC's work on state responsibility, there was some discussion of the typology of defenses or excuses. In particular the point was made that some defenses (e.g. consent) may operate as part of the constituent elements of the cause of action. But others (e.g., force majeure) are more in the nature of excuses which may defeat a claim only for a certain period of time, or may nonetheless require the party relying on them to pay compensation for actual loss suffered. The ILC eventually decided to cover both kinds of “defense” under the general rubric of “circumstances precluding wrongfulness”. In the P 898 necessarily selective account given in this chapter the term “defense” will be used.

§10.02 FORCE MAJEURE It does not seem unreasonable for a party to an investment contract to be able to defend itself by the claim that the conduct in question, even if prima facie in breach of the contract, was coerced or compelled by external action, and that the respondent should therefore not be treated as having acted wrongfully. On the other hand, it depends on the view taken within the relevant legal system about both the sanctity of contracts and the relative assumption of risk. Force majeure is recognised by general international law in relation to the non-performance of international obligations (ILC Article 23), and it is also recognised as a defense in relation to contractual non-performance in many legal systems. But the Anglo-American common law traditionally did not recognise force majeure or duress as a defense to a breach of contract, though it was a defense to certain torts. The reason was that contracts were seen as unconditional commitments to perform, absent an express exclusion. Thus it became common to insert force majeure clauses in contracts, and many force majeure cases in common law courts involve the interpretation of such clauses: e.g., the House of Lords decision in C Czarnikow v. Rolimpex [1979] AC 351, where it was held that a Polish state-owned sugar exporter could plead force majeure in relation to an export ban imposed by the Polish state.

[A] National Oil Corporation (Libya) v. Libyan Sun Oil Company (USA) (ICC Case No. 4462/A5), First Award of 31 May 1985, 29 I.L.M. 565, 584-588 (1990) [Edmund Muskie, Hein Kotz, Robert Schmelck] [This arbitration arose from a twenty-year Exploration and Production Sharing Agreement (EPSA) between the National Oil Corporation (NOC), a state-owned Libyan corporation, and the Libyan Sun Oil Company (SUN-OIL), a company incorporated in the United States of America. Exploration operations proceeded normally for approximately one year. However, as a result of political tension between the United States and Libya, the US Secretary of State issued an order invalidating US passports for travel to, in or through Libya, and invited American companies in Libya to repatriate personnel. SUN-OIL then ceased its operations and notified NOC pursuant to the force majeure clause in the EPSA. NOC disputed that circumstances of force majeure existed and negotiations between the two companies began. The US government next issued regulations which required SUNOIL to obtain an export licence to resume operations under the EPSA. SUN-OIL's licence application was denied and SUN-OIL again invoked the force majeure clause for the

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duration that the regulations remained in force. NOC then requested this arbitration.] The Issue of Force Majeure Section I – Legal concept of force majeure 1.1 It is admitted by both Parties that the expression “force majeure” covers, under general Libyan law, a legal notion which is reflected in Article 360 of the Libyan Civil Code. According to said article and to the interpretation given thereof by the Supreme Court of Libya, the effect of force majeure is to release the obligor from his obligation under: the agreement and force majeure is established when an event, meeting the three following conditions occurs: (i) being beyond the control of the parties, (ii) being unforeseeable at the time the agreement is entered into and (iii) rendering the P 899 performance of the obligation absolutely impossible … 1.2 The Parties also acknowledge that Article 360 of the Libyan Civil Code is not a public order provision and that it is therefore possible to contractually waive its provisions. It is admitted that contracting parties are entirely free either to exclude force majeure or, on the contrary, to make Its conditions more flexible. This is the mere application of the principle according to which the contract constitutes the law between the parties which principle is contained in Article 147 of the Libyan Civil Code. 1.3 As a consequence, both Parties first refer to the force majeure clause set forth in the EPSA (Article 22) in order to find out the common intent of the parties. While they agree on this approach, NOC and SUN-OIL fully disagree on the meaning and the consequences entailed by such clause. *** 1.6 … The fact that the parties felt it necessary to include in the EPSA a force majeure clause, demonstrates that they were not satisfied with the mere application of the rules of the Libyan Civil Code relating thereto… The first Sentence of Article 22.1 merely indicates the situations in which force majeure may be invoked (“any failure or delay on the part of a party in the performance of its obligations or duties”) and the effects of force majeure when it is established (“failure or delay… shall be excused to the extent attributable to force majeure). As to the second sentence of Article 22.1., it only lists – while specifying that such enumeration is made without limitation – a certain number of events which are expressed only as falling within the scope of applicability of force majeure and not as constituting per se events of force majeure (“Force majeure shall include …”). Article 22.2 entitled “Extension of Term; Termination”, merely specifies the consequences of the situation created by force majeure once it has been established (“If operations are delayed, curtailed or prevented by force majeure …”) and the time limit for performing the agreement has been thereby affected (“… and the time for carrying out obligations … is thereby affected …”. Among the events which may constitute force majeure are “any unforeseen circumstances and acts beyond the control of the party”. This definition is extensive. It proves without any doubt the intent of the parties to extend the scope of force majeure beyond the cases traditionally deemed to constitute an irresistible occurrence (war, natural disasters, etc …). In this respect, it reflects a certain trend, which is displayed to a greater or lesser extent in long term international contracts, to define force majeure less strictly than under most domestic contracts … 1.7 The Tribunal does not exclude the possibility that in selecting the adjective “unforeseen” instead of “unforeseeable”, SUN-OIL and NOC expressed their intention to exclude the requirement of unforeseeability or at least, not to give to such requirement a strict meaning. However, what of the other condition required under general Libyan law, namely the impossibility to perform? Article 22 does not make any reference thereto. Does this mean that any circumstance beyond the control of the Parties would excuse the non-performance of the obligation or the delay in performing subject to the sole condition that such circumstance was not foreseen? Such approach would be difficult to be admitted because it would result in allowing the enforceability of contractual obligations to be challenged upon the occurrence of the P 900 slightest difficulty and neither party makes such an argument… It is true that more and more international long term agreements contain provisions according to which is considered as an event of force majeure any event beyond the control of the parties which renders the performance of the agreement very difficult and/or more expensive than anticipated or any event which cannot be overcome by the use of reasonable means at reasonable costs. Such provisions, when agreed upon, leave no doubt as to the intent of the parties. They clearly reflect that the parties intended to avoid that the impossibility to perform be considered as the sine qua non requirement for force majeure. However, in order to be accepted, such exceptions to the common law of force majeure must be expressly provided for; they should not be presumed or implied.

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1.8 … All this leads to the conclusion that it would be unjustified, in the absence of any specific provision to such effect in Article 22, to construe such article as revealing an intent of the parties to waive an essential rule of Libyan common law according to which force majeure is only established when the event invoked by the defaulting party created an impossibility to perform whether on a temporary or a permanent basis… 1.9 To summarize, the Tribunal considers that Article 22 expresses the intent of the Parties not to strictly apply the usual criteria of force majeure, in particular with respect to the unforeseeability requirement, but that it does not exclude the fundamental requirement that the event must have rendered definitively or temporarily impossible the performance of the contractual obligations. The Arbitral Tribunal is satisfied that in entering into the EPSA, the Parties, whether inadvertently or on purpose, adopted a force majeure provision under which a Party's nonperformance or delay In performance is excused only if it has become impossible for that Party to perform the Agreement according to its terms … Under this approach, one is led to believe that, under the meaning of Article 22, nonperformance by a party or delay in performing contractual obligations is excused when an unforeseen circumstance, beyond the control of the parties occurs, which circumstance constitutes an obstacle such that an obligor, normally diligent, having the same obligations and placed in the same situation, could not have overcome it. ***

[B] Comments and Questions 1. Enforcement proceedings were subsequently brought by Libyan National Oil Corporation before the United States District Court (District of Delaware) and leave for enforcement of the award was granted by a decision of 15 March 1990: see 94 ILR 209. 2. What is the role performed by Libyan law vis-à-vis general principles of law in the Award on this point? 3. Why do you think the Tribunal emphasized the need for impossibility under Article 22

P 901 (at the expense of foreseeability)?

[C] Gould Marketing, Inc. v. Ministry of National Defense of Iran (IUSCT Case No. 49), Interlocutory Award of 27 July 1983 (1) [Pierre Bellet (pres.), George H. Aldrich, Shafie Shafeiei] [This claim arose from a contract entered in 1975 between Gould, Inc. (through its subsidiary Hoffman Export, Inc.) and the Iranian Ministry of National Defense. Under the contract, Gould was required to provide radios, test equipment and services, including a field service representative (FSR) whose role included repairs and maintenance training for a period of ten years. Civil disturbances surrounding the establishment of the Islamic Republic of Iran caused Hoffman's remaining FSR to depart Iran in December 1978, six months prior to completing his contract. Thereafter the Ministry failed to make scheduled milestone and field service payments. Hoffman brought this claim seeking the value of the unpaid milestone payments. The Ministry counterclaimed for alleged excess contract payments on the basis that Hoffman had failed to deliver equipment and perform services promised under the contract. The Tribunal held that the contract was terminated in mid-1979.] III. Reasons for Award Neither Hoffman nor the Ministry contended that it terminated the contract. Hoffman explained that it withdrew its FSR in December 1978 due to the existence of unsafe conditions. While Hoffman acknowledged stopping factory repair services in 1979 because of the Ministry's failure to meet the June 1979 milestone payment, it denied that it was so acting in order to terminate the contract. Instead, Hoffman maintained that the contract was in “suspension”. Hoffman further denied the existence of force majeure, on the theory that the unsafe conditions which resulted in the FSR's departure and the disruption in U.S.-Iran relations which followed were not due to events beyond the control of either party, but were acts of the Government of Iran. The Ministry alleged that Hoffman breached the contract by removing the FSR. The Ministry as well denied terminating the contract; it further denied the existence of force majeure excusing Hoffman's nonperformance. It remains the Tribunal's task to determine from the facts what was the legal situation between the parties at the time performance ceased. By December 1978, strikes, riots and other civil strife in the course of the Islamic Revolution had created classic force majeure conditions at least in Iran's major cities. By “force majeure” we mean social and economic forces beyond the power of the state to control through the exercise of due diligence. Injuries caused by the operation at such forces are therefore not attributable to the state for purposes of its responding for damages. Similarly, as between private parties, one party cannot claim against the other for injuries suffered as a result of delays in or cessation of performance during the time force majeure conditions prevail, unless the existence of these conditions is attributable to the fault of the Respondent party.

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With respect to the conditions prevailing in Iran which led to the FSRs' withdrawal, there was sufficient evidence of the threats they faced to justify their withdrawal, but Hoffman did not prove that those conditions were attributable to acts for which the government of Iran was responsible. Hoffman was therefore excused from maintaining its FSR in Iran, but it also follows that the Ministry's failure to pay the June 1979 milestone must similarly be P 960 excused. The Ministry, having contracted for the availability of a local technician to assure continuous functioning of the radios, was justifiably concerned whether Hoffman could continue to supply that need. Its suspension of its performance obligations as to the payment schedule in June 1979 must therefore be considered a result of the same force majeure conditions which led to the FSRs' departure, in the absence of proof that the Government itself was responsible for the continuation of these conditions until that date. During the months February through June 1979, the Islamic Republic was to some extent in control of the direction of the revolution, but very little evidence was presented in this case concerning its responsibility for the continuation of conditions that made return of the FSRS impossible. Such evidence was inadequate to show that the force majeure conditions had been transformed during those few months into conditions sufficiently attributable to that Government to make its non-payment in June 1979 a breach of contract. By the time the revolution occurred, the major portion of the physical items contracted for had been delivered. Since there remained in great part the field and spare parts services to supply, Hoffman's inability to do so due to the social upheaval in Iran justified non-performance by both parties. Continuing presence of the FSRS had clearly become impossible, at least temporarily, and their absence adversely affected the whole repair operation. In those circumstances, the Respondent cannot be held to have been required to continue payments. A suspension of both Hoffman's and the Ministry's performance obligations could not continue indefinitely without having some effect on the viability of the contract. By the summer of 1979 Hoffman might reasonably have questioned whether conditions would change in Iran in the near future so as to allow its FSRS to return. Accordingly, Hoffman ceased its factory repair services as well by September 1979 when it had by then become clear that further payments were not forthcoming. The Ministry, for its part, must have realized, at least by receipt of Hoffman's 10 July 1979 telex, that Hoffman was unlikely to continue performance without payment, nor was the Ministry likely to pay when services were not continuing to be rendered. Although little evidence was presented on this question, the Ministry, presumably, foresaw no realistic hope for resumption of those services in the near future, and therefore saw no need to resume payment. The Tribunal concludes therefore that the continued existence of force majeure conditions had by mid1979 ripened into a termination of the Hoffman-Ministry contract. Performance had become essentially impossible.

[D] Amoco International Finance Corporation v. The Government of the Islamic Republic of Iran (IUSCT Case No. 56), Partial Award of 14 July 1987 (2) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [The facts of this case are summarized supra, p. 260.] 2. Frustration by Force Majeure 80. According to the Respondents, the dramatic events which took place in Iran in 1978 and 1979 had a direct bearing on the life of the Khemco Agreement. As a consequence of strikes and civil disturbances production at the Khemco plant completely stopped and remained negligible for the first quarter of 1979. Production started again in the spring of 1979, but remained “continually hampered by sporadic strikes and difficulties in obtaining required materials and technical assistance from abroad”. In addition, the revolutionary events provoked the withdrawal by Amoco of all its United States personnel in the first days of December 1978. The Respondents assert that Amoco made no serious efforts to return its personnel to Iran and it is a fact that the United States personnel did not return to Iran. The Respondents insist that Amoco's experts and technical skills were needed for the project and that “[w]ithout the Claimant's participation NPC and Khemco ceased being able to fulfil their specific obligations in conjunction with the Claimant”. They conclude that because of these difficulties, and the fact that the JSA was also allegedly rendered inoperable, the Khemco Agreement was “totally frustrated”. 81. It cannot seriously be questioned that the conditions in Iran in late 1978 and early 1979 amounted to a state of force majeure. Both Parties admit that the departure of Khemco's expatriate personnel in December 1978 was justified by force majeure. The consequences on the Khemco Agreement of such a situation depends on the terms of the Khemco Agreement. Article 19 of the Khemco Agreement deals with the question of force majeure. The two relevant paragraphs of this Article read as follows: 1.

Where any force majeure occurrence, beyond the reasonable control of either of the parties hereto or the Company [Khemcol, renders impossible or hinders or delays the performance of any obligation or the exercise of any right under this Agreement, then this failure or omission of either Party of the Company shall not be treated as a failure or omission to comply with this Agreement…

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3.

If the performance of any obligation or the exercise of any right is rendered impossible, hindered or delayed by a force majeure cause for a period exceeding twelve (12) consecutive months, the parties shall, if practicable, consult together as to the best means of overcoming the applicable event of force majeure, but if they shall fail to achieve a solution or if consultation shall be impracticable then either Party may refer the situation to arbitration under Article 26 for solution.

82. It is clear from this Article that force majeure, per se, does not terminate the Khemco Agreement. Its effect is solely to suspend the performance of obligations and exercise of rights under the Khemco Agreement. Even if the situation of force majeure extends over a period exceeding twelve consecutive months, there is no automatic termination of the Khemco Agreement. Rather the parties have in such a case the obligation to consult; if they fail to find a solution, they have the right to resort to arbitration. 83. It is undisputed that, long before the expiry of the initial period of twelve months, contacts were made between the parties, meetings of Khemco's board of directors and of its shareholders were held, and decisions relating to the production and marketing of Khemco's products were taken. The record shows, therefore, that, according to its own terms, the Khemco Agreement could not be considered as terminated at the time of the events invoked by the Claimant as constituting a breach of contract or expropriation. It is true that in the event the parties did not find “the best means of overcoming” the situation, and that the Khemco Agreement did not subsequently revive. The parties' negotiations concerning the possible sale of Amoco's shares in Khemco do not suggest that at the relevant time the Khemco Agreement was terminated by force majeure, but rather demonstrate that the parties recognized that Amoco retained an interest in the enterprise which could be sold. The Tribunal therefore concludes that the Khemco Agreement survived the force majeure conditions. ***

[E] Comments and Questions Is the decision in Gould (above) on this point consistent with that in Amoco?

[F] Phillips Petroleum Company Iran v. The Islamic Republic of Iran & The National Iranian Oil Company (IUSCT Case No. 39), Award of 29 June 1989 (3) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich] [In 1965, Phillips Petroleum Company (Phillips) (the parent company of the Claimant, incorporated in Delaware), AGIP (an Italian company), and the Oil and Natural Gas Commission of India (the Commission), entered a contract or “Joint Structure Agreement” (JSA) with the Respondent National Iranian Oil Company (NIOC) for the exploration and exploitation of petroleum resources in the Persian Gulf. The JSA's preamble labeled NIOC the “First Party” and Phillips, AGIP and the Commission collectively the “Second Party”. Phillips and the Commission later assigned their rights and obligations under the JSA to their subsidiaries, Phillips Petroleum Company Iran (the Claimant) and Hydrocarbons India Private Ltd (HIL) respectively, which then became, along with AGIP, the Second Party under the JSA. For the purposes of the JSA, the parties established an operating company, the Iranian Marine International Oil Company (IMINOCO). The Claimant brought this claim for the alleged taking of its rights under the JSA by the Islamic Republic of Iran in 1979, and alternatively, for the alleged breach and repudiation of the JSA. The Respondents presented seven counterclaims for bad oil field practices, breaches of contract by the Claimant, moneys owed by Phillips to NIOC for crude oil purchases, moneys owed by the Claimant to IMINOCO for the provision of services, etc.] 77. The principal defense of the Respondents is that the revolutionary changes which took place in Iran totally frustrated the JSA due to conditions of force majeure, that is, conditions created by forces outside the control of the Government which made performance of the JSA impossible, thereby discharging the Parties' respective obligations under that agreement and relieving the Respondents of any liability for the acts complained of. This defense, while generally associated with the contractual aspects of a relationship, is relevant to the expropriation claim insofar as it relates to whether any contract rights remained to be taken following the Revolution. As the defense is preemptive in nature, the Tribunal considers it appropriate to address it first. 78. The record clearly indicates that force majeure conditions during late 1978 and early 1979 affected the oil industry in Iran in general and the JSA facilities on Lavan Island in particular. Strikes in the oil industry during the Revolution, including strikes and work stoppages by the employees of IMINOCO, interrupted crude oil production from the JSA fields. Strikes by LAPCO personnel who performed IMINOCO's oil loading operations led to full storage of IMINOCO's oil on Lavan Island and prevented liftings by NIOC and the Second Party companies. During this period, the expatriate personnel of IMINOCO left Iran for their personal safety. The Respondents argue that the attitudes of the oil workers prevented the delivery of oil to the Second Party companies upon resumption of oil production in early 1979. From this state of affairs, the Respondents conclude that continuing force majeure conditions “totally frustrated” the JSA. 79. As the Tribunal observed in the Consortium Cases in relation to the same argument:

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“Usually, force majeure conditions will have the effect of terminating a contract only if they make performance definitively impossible or impossible for a long period of time.” Mobil 0i1 Iran, Inc. v. The Government of the Islamic Republic of Iran, Award No. 31174/76/81/150-3 (14 July 1987) at para. 116,reprinted in 16 IRAN-U.S. C.T.R. 3, 38-39 (concluding in the circumstances that on 10 March 1979 the Consortium Agreement was not frustrated or terminated for cause of force majeure). See also Amoco International Finance Corporation v. The Government of the Islamic Republic of Iran, Award No. 310-56-3 (14 July 1987) at para. 83, reprinted in 15 IRAN-U.S. C.T.R. 189, 213 (concluding that the Khemco Agreement survived the force majeure conditions). 80. Moreover, in this Case the Parties agreed in advance on the effect which any sustained force majeure conditions would have on the JSA, and in particular on the rights and obligations of the Second Party companies and IMINOCO. It is clear from Article 36 of the JSA, set forth above, that the Parties intended that force majeure conditions which prevented performance by the Second Party or by the operating company would not terminate their agreement. Rather, obligations were suspended during any period of force majeure conditions. If such a period exceeded twelve months, the term of the JSA automatically would be extended by a corresponding period of time. 81. The Tribunal notes that the force majeure conditions which prevented oil production during the Revolution were temporary, and in any event did not exceed twelve months. They commenced in late 1978 when Imam Khomeini called on the oil workers to strike and they ended a few months later when the Revolution resulted in the creation of the Islamic Republic and the new Government directed resumption of production. Pursuant to the JSA, it was agreed that the failure by the Second Party or the operating company to perform any obligation due to conditions of force majeure would not be treated as a failure to comply with the agreement. Although the JSA did not contain provisions which NIOC might invoke in the event of force majeure conditions, under general principles of force majeure, the same would be true in respect of NIOC's obligations. 82. After the force majeure conditions which prevented oil production ended, the Second Party demonstrated its willingness to resume liftings and to perform its obligations. The Second Party companies continued to meet cash calls from the operating company both during the period of shut-down and thereafter until IMINOCO stopped making cash calls at the end of June 1979. They participated in management of IMINOCO until prevented by NIOC from any further involvement. Operations could and did proceed without the presence in Iran of expatriate personnel whose reduction and replacement by Iranian personnel was in any case required by the JSA. In any event, some of those personnel returned to Iran following the resumption of production until they were replaced by persons appointed by NIOC. Despite the willingness of the Claimant to perform, however, NIOC did not allow it to resume the exercise of its rights under the JSA. *** 84. The evidence shows that the oil workers played a crucial role in the bringing down of the Shah's regime and were sought and heralded by the Revolutionary leaders. The oil workers' opposition to the foreign companies was also in accord with the Revolution's, and later the new Government's, goal of “nationalization” of the Iranian oil industry, and the vast majority of the workers did not oppose the Government's resumption of production within that framework. Beginning in November 1978, the oil workers followed Imam Khomeini's calls for strikes. In a declaration of 23 November 1978, for instance, he specifically stated, inter alia, that “it is the duty of all oil company officials and workers to prevent the export of oil”.24 Upon his arrival in Tehran, on 1 February 1979, he thanked, among others, the workers who had “triumphed because of your extraordinary efforts and unity of purpose”.25 On the other hand, enough of the striking oil workers went back to work to permit production of oil for domestic use when Imam Khomeini so requested on 30 December 1978. When, a week after the victory of the Revolution, he called on strikers to return to work, about 90 percent of the oil workers did so. With regard to IMINOCO operations, the Claimant was informed on 27 February 1979 by its Second Party partner AGIP that IMINOCO's Iranian personnel were “back at work at the fields carrying out maintenance work and waiting”. Oi1 exports resumed on 5 March 1979, and by mid-March production had increased to about 2.5 million barrels per day. Dr. Nazih, NIOC's Managing Director, stated on 26 April 1979 that “with the efforts of the workers and employees of the oil industry… we could, within a short period, increase our production to 5,500,000 barrels of crude oil per day …”. On 28 February 1979, Dr. Nazih declared during a workers' meeting: “The companies that have been imposed upon us would do better to withdraw, otherwise they will be made to withdraw with help from you, the company workers.” And on 7 August 1979, he gave the following comment in an interview: “Thank God, with the massive unity on the part of the workers and the staff, [NIOC] is being run very well. I never thought we would be so successful.” 85. While there is evidence that the workers did not always trust officials of NIOC to follow the strict nationalistic and anti-Second Party policies pressed by the workers – and by the highest authorities of the new Islamic Regime – there is no evidence for the proposition that they did not ultimately follow the directives of those highest authorities. As the oil workers acted in accord with the policies of the new Government, it cannot be concluded that their “attitudes” constituted an independent and effective force creating force majeure conditions. The Tribunal notes that NIOC did not rely on this argument prior

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to these proceedings, and in at least one case involving Japanese construction of a petrochemical facility, the project proceeded after the Revolution when the Government wanted it to proceed. On the evidence, the Tribunal concludes that the Respondents have failed to prove that “force majeure conditions” made resumed performance of the JSA impossible. Accordingly, continued performance of the JSA was not frustrated.

[G] Comments and Questions 1. 2. 3.

How then would you formulate the force majeure test as developed in these cases? Do you think that an international tribunal can really make satisfactory judgments at a micro-level about force majeure in a situation of social revolution? For a review of the US-Iran Claims Tribunal's decisions on force majeure see further G. Aldrich, The Jurisprudence of the Iran-United States Claims Tribunal (Oxford 1996) 306-320.

[H] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, November 2001, Article 23 and Commentary, [2001] 2(2) Y. B. Int’l L. Comm’n 30, 76–78 (Citations selectively omitted) Article 23 – Force Majeure 1. The wrongfulness of an act of a State not in conformity with an international obligation of that State is precluded if the act is due to force majeure, that is the occurrence of an irresistible force or of an unforeseen event, beyond the control of the State, making it materially impossible in the circumstances to perform the obligation. 2. Paragraph 1 does not apply if: (a) (b)

the situation of force majeure is due, either alone or in combination with other factors, to the conduct of the State invoking it; or the State has assumed the risk of that situation occurring.

Commentary (1) Force majeure is quite often invoked as a ground for precluding the wrongfulness of an act of a State. It involves a situation where the State in question is in effect compelled to act in a manner not in conformity with the requirements of an international obligation incumbent upon it. Force majeure differs from a situation of distress (article 24) or necessity (article 25) because the conduct of the State which would otherwise be internationally wrongful is involuntary or at least involves no element of free choice. (2) A situation of force majeure precluding wrongfulness only arises where three elements are met: (a) the act in question must be brought about by an irresistible force or an unforeseen event, (b) which is beyond the control of the State concerned, and (c) which makes it materially impossible in the circumstances to perform the obligation. The adjective “irresistible” qualifying the word “force” emphasizes that there must be a constraint which the State was unable to avoid or oppose by its own means. To have been “unforeseen” the event must have been neither foreseen nor of an easily foreseeable kind. Further the “irresistible force” or “unforeseen event” must be causally linked to the situation of material impossibility, as indicated by the words “due to force majeure… making it materially impossible”. Subject to paragraph 2, where these elements are met the wrongfulness of the State's conduct is precluded for so long as the situation of force majeure subsists. (3) Material impossibility of performance giving rise to force majeure may be due to a natural or physical event (e.g., stress of weather which may divert State aircraft into the territory of another State, earthquakes, floods or drought) or to human intervention (e.g., loss of control over a portion of the State's territory as a result of an insurrection or devastation of an area by military operations carried out by a third State), or some combination of the two. Certain situations of duress or coercion involving force imposed on the State may also amount to force majeure if they meet the various requirements of article 23. In particular the situation must be irresistible, so that the State concerned has no real possibility of escaping its effects. Force majeure does not include circumstances in which performance of an obligation has become more difficult, for example due to some political or economic crisis. Nor does it cover situations brought about by the neglect or default of the State concerned, even if the resulting injury itself was accidental and unintended. (4) In drafting what became article 61 of the Vienna Convention on the Law of Treaties, the International Law Commission took the view that force majeure was a circumstance precluding wrongfulness in relation to treaty performance, just as supervening impossibility of performance was a ground for termination of a treaty. The same view was taken at the Vienna Conference. But in the interests of the stability of treaties, the Conference insisted on a narrow formulation of article 61 so far as treaty termination is concerned. The degree of difficulty associated with force majeure as a circumstance

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precluding wrongfulness, though considerable, is less than is required by article 61 for termination of a treaty on grounds of supervening impossibility, as the International Court pointed out in the Gabčíkovo-Nagymaros Project case: “Article 61, paragraph 1, requires the ‘permanent disappearance or destruction of an object indispensable for the execution’ of the treaty to justify the termination of a treaty on grounds of impossibility of performance. During the conference, a proposal was made to extend the scope of the article by including in it cases such as the impossibility to make certain payments because of serious financial difficulties … Although it was recognized that such situations could lead to a preclusion of the wrongfulness of non-performance by a party of its treaty obligations, the participating States were not prepared to consider such situations to be a ground for terminating or suspending a treaty, and preferred to limit themselves to a narrower concept.” (5) In practice, many of the cases where “impossibility” has been relied upon have not involved actual impossibility as distinct from increased difficulty of performance and the plea of force majeure has accordingly failed. But cases of material impossibility have occurred, e.g. where a State aircraft is forced, due to damage or loss of control of the aircraft due to weather, into the airspace of another State without the latter's authorization. In such cases the principle that wrongfulness is precluded has been accepted. (6) Apart from aerial incidents, the principle in article 23 is also recognized in relation to ships in innocent passage by article 14 (3) of the 1958 Convention on the Territorial Sea and the Contiguous Zone (article 18 (2) of the 1982 United Nations Convention on the Law of the Sea), as well as in article 7 (1) of the Convention on Transit Trade of Land-locked States of 8 July 1965. In these provisions, force majeure is incorporated as a constituent element of the relevant primary rule; nonetheless its acceptance in these cases helps to confirm the existence of a general principle of international law to similar effect. (7) The principle has also been accepted by international tribunals. Mixed claims commissions have frequently cited the unforeseeability of attacks by rebels in denying the responsibility of the territorial State for resulting damage suffered by foreigners. In the Lighthouses arbitration, a lighthouse owned by a French company had been requisitioned by the Greek Government in 1915 and was subsequently destroyed by enemy action. The arbitral tribunal denied the French claim for restoration of the lighthouse on grounds of force majeure. In the Russian Indemnity case, the principle was accepted but the plea of force majeure failed because the payment of the debt was not materially impossible. Force majeure was acknowledged as a general principle of law (though again the plea was rejected on the facts of the case) by the Permanent Court of International Justice in the Serbian Loans and Brazilian Loans cases. More recently, in the Rainbow Warrior arbitration, France relied on force majeure as a circumstance precluding the wrongfulness of its conduct in removing the officers from Hao and not returning them following medical treatment. The Tribunal dealt with the point briefly: “New Zealand is right in asserting that the excuse of force majeure is not of relevance in this case because the test of its applicability is of absolute and material impossibility, and because a circumstance rendering performance more difficult or burdensome does not constitute a case of force majeure.” (8) In addition to its application in inter-State cases as a matter of public international law, force majeure has substantial currency in the field of international commercial arbitration, and may qualify as a general principle of law. (9) A State may not invoke force majeure if it has caused or produced the situation in question. In Libyan Arab Foreign Investment Company v. Republic of Burundi, the Arbitral Tribunal rejected a plea of force majeure because “the alleged impossibility [was] not the result of an irresistible force or an unforeseen external event beyond the control of Burundi. In fact, the impossibility is the result of a unilateral decision of that State …”. Under the equivalent ground for termination of a treaty in article 61 of the Vienna Convention on the Law of Treaties, material impossibility cannot be invoked “if the impossibility is the result of a breach by that party either of an obligation under the treaty or of any other international obligation owed to any other party to the treaty”. By analogy with this provision, paragraph (2) (a)excludes the plea in circumstances where force majeure is due, either alone or in combination with other factors, to the conduct of the State invoking it. For paragraph 2 (a) to apply it is not enough that the State invoking force majeure has contributed to the situation of material impossibility; the situation of force majeure must be “due” to the conduct of the State invoking it. This allows for force majeure to be invoked in situations in which a State may have unwittingly contributed to the occurrence of material impossibility by something which, in hindsight, might have been done differently but which was done in good faith and did not itself make the event any less unforeseen. Paragraph 2 (a) requires that the State's role in the occurrence of force majeure must be substantial. (10) Paragraph 2 (b) deals with situations in which the State has already accepted the risk of the occurrence of force majeure, whether it has done so in terms of the obligation itself or by its conduct or by virtue of some unilateral act. This reflects the principle that force

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majeure should not excuse performance if the State has undertaken to prevent the particular situation arising or has otherwise assumed that risk. Once a State accepts the responsibility for a particular risk it cannot then claim force majeure to avoid responsibility. But the assumption of risk must be unequivocal and directed towards those to whom the obligation is owed.

[I] Comments and Questions 1. 2.

Do you think force majeure in the context of interstate or international obligations should be (a) more readily available, (b) more stringently regulated or (c) equally available, as it is in contractual relations involving at least one private party? What differences are there between the position under Article 23 and that emerging from the US-Iran Claims Tribunal jurisprudence?

[J] UNIDROIT Principles of International Commercial Contracts (2010), (4) Article 7.1.7 (5) Chapter 7 – Non-Performance Section 1: Non-Performance in General Article 7.1.7. Force majeure (1) Non-performance by a party is excused if that party proves that the non-performance was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. (2) When the impediment is only temporary, the excuse shall have effect for such period as is reasonable having regard to the effect of the impediment on the performance of the contract. (3) The party who fails to perform must give notice to the other party of the impediment and its effect on its ability to perform. If the notice is not received by the other party within a reasonable time after the party who fails to perform knew or ought to have known of the impediment, it is liable for damages resulting from such non-receipt. (4) Nothing in this article prevents a party from exercising a right to terminate the contract or to withhold performance or request interest on money due.

[K] James R. Crawford and Anthony Sinclair, The UNIDROIT Principles of International Commercial Contracts and their Application to State Contracts, ICC Bulletin – Special Supplement 57, 57-75 (2002) (6) (Citations selectively omitted) B. Termination and variation of contracts in the purported exercise of public power All legal systems to varying degrees provide for the discharge or suspension of a party's obligations when they become impossible to perform. This section considers whether supervening impossibility caused by the state may be relied upon as force majeure by a separate state entity and on how the solutions set out in the Principles fare in this regard. The problem is, of course, that in some circumstances contracts between a state entity and a foreign national may be subjected to concerted manipulation and interference by the state. Such interference may come in a great many forms. In extreme cases, the state party may be prohibited by its state from fulfilling its contractual obligations. In ICC case 4600, a French company owned by the French government was expressly prohibited, by confidential ministerial direction, from performing its contractual obligations. Corporations might be prohibited from trading with the enemy in time of war, or by economic sanctions. The underlying tension revealed by a brief survey of state contract arbitrations is the clash of public and private interests: the contracting state's need to govern and regulate in the national interest and the other party's desire for commercial certainty. … In more recent cases, state regulation is commonly motivated by environmental, health and safety concerns. In the Southern Pacific Properties (Middle East) ICSID arbitration, one justification asserted by the government of Egypt was that cancellation of the tourism project had been required both under Egyptian and international law, especially the 1972 UNESCO Convention for the Protection of the World Cultural and Natural Heritage. In a number of recent NAFTA chapter 11 arbitrations, foreign investors have brought claims against the state alleging that environmental measures breach their rights under the North American Free Trade Agreement. … Other international concerns may lead the state to act in a manner that interferes with a contract with a foreign investor. The Wintershall A.G. v. Government of Qatar case is a further example of a subsequent alteration of investment terms and conditions by a state. Here, Qatar prevented the foreign investors from enjoying the full scope of their contractual rights in an exploration and production sharing agreement to which they

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were party with a Qatari state-owned corporation, by denying them the right to drill in an area which was vulnerable to a boundary dispute with Bahrain. In such circumstances it has been common for the state contracting party to seek to rely on the legislative or executive acts of its government as an excuse for non-performance, for example by invoking a force majeure clause in the contract. Of course, the term force majeure has different meanings in different legal systems: it will be used here to denote a contractual attempt to make express provisions either for specific obstacles to performance, or for such obstacles in general, so as to prevent application of the doctrine of frustration. These clauses apply when contractual performance becomes illegal, impossible, or radically different from the contractually stipulated performance. They typically entitle one or both of the parties to be discharged, or at least temporarily excused, in whole or in part, from performance of the contract, and may provide for the financial consequences flowing therefrom. If the contract terms allocate strict areas of responsibility for undertakings, these terms will prevail. Generally, the changes should be extraordinary, and have caused an uncontemplated extraordinary shift of the balance of obligations, making further performance objectively unacceptable. In addition, the change of circumstances relied upon for a plea of force majeure should not have been foreseeable, nor have actually been foreseen by the party seeking to rely on it. Of course, the alleged impossibility or frustrating situation must also amount to force majeure upon proper construction of the contract terms and the proper law of the contract. The state entity must show that the governmental act involved an event of force majeure within the terms of the contract in question and that there exists an appropriate causal link with the impossibility of performance. Whether force majeure arises is complicated when the party seeking to excuse its nonperformance is a state entity having separate legal personality under the law applicable to it. By contrast, the problem does not arise where the state entity is identified with the state as an organ, arm or alter ego, as it is established that the change should not be due to the fault of the obligated party. If the state entity is a separate legal person the question arises as to whether a state entity can rely on its separate personality to plead that an act of state constitutes force majeure, thereby excusing the state entity from its contractual obligations. The separation of legal personality under the state party's applicable law is generally accepted and, therefore, so will be its plea of force majeure. By contrast, if the state acts can be imputed to the state enterprise, reference to piercing the veil is superfluous as the state entity must be taken to have itself caused the relevant acts. For instance, if it can be shown that a state enterprise has used its influence in order to obtain a state order, or could have prevented without difficulty a state order which interferes with a contract, the issue of piercing the corporate veil does not arise. In such cases, according to general principles, the enterprise is liable for the consequences of the order it caused. Of course, governmental orders and acts of state may amount to force majeure. Indeed, in private contracts they are standard examples of an event beyond the control of the contracting parties which may render performance of the contract impossible. The position when one of the parties is a state entity is however a distinct one, and not all executive, legislative or judicial acts should be recognized as force majeure excusing a state party with separate legal personality from performance. If all acts of state interference were accepted as such, the state could then always provide a supervening act causing force majeure if the fulfilment of the contract was no longer considered in the state's interests. Thus, in circumstances which are not always clearly explained in the awards, arbitrators sometimes decline to apply even mandatory laws of the host state. … The first point to make is that courts and arbitrators should be slow to disapply any applicable mandatory law, including one properly characterized as concerning the capacity or status of a state entity party to a contract. Thus, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards provides that recognition or enforcement may be refused if the parties to the arbitration agreement ‘were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it …’ An aspect of the task of the arbitrator may be to render an effective award capable of enforcement: article 35 of the 1998 ICC Rules of Arbitration states that arbitrators ‘shall make every effort to make sure that the Award is enforceable at law’. … On the other hand, and despite these cautions, where the issue arises it may be necessary to characterize the law in question and, in doing so, considerations of motive and objective cannot be disregarded. As Böckstiegel argues, force majeure should be presumed not to exist where the state act is an individual one which affects a specific contract or specific contracts. Where the state act is of a general character and is based on general considerations which would affect private enterprises in the same manner as a state enterprise, the plea of force majeure may be available. Thus, for instance, in an unpublished ICC arbitration between Western European companies and two Iranian state agencies, the tribunal declared that for a plea of force majeure to be accepted the act of state must be a political decision involving the exercise of national sovereignty; it must not have been taken to favour the personal interests of the state or contracting party; and it must have been such that its effects

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would have been the same for private enterprises. *** By contrast, if the claimant can show that the particular interest of the state in the affected state entity, or some purely economic or financial interest, motivated the interference, reliance on force majeure is excluded. So, in a 1983 interim award concerning a dispute between a German seller and a Polish state purchaser, the need to relieve the Polish national financial burden which motivated the interruption of the industrial projects at issue did not preclude the tribunal from denying the state entity's plea of force majeure. The state character of the enterprise concerned was a decisive factor: the government would have had no reason to prevent private enterprises, acting on their own account, from completing the projects. In the award in ICC case 4600, a French company was acquired by a French state entity shortly after signing an international contract with an Asian developing state. The company was forbidden by confidential ministerial instructions to perform its contract and also to disclose the existence of those instructions. The company could not rely on the force majeure clause in the contract, having failed to prove the existence, contents and legality of the prohibition to perform. The domination exercised over the company by the French government also precluded the plea. Likewise, in the Air France case, it was held that Air France could not rely on force majeure when the state had sought to prevent it from carrying out its obligations without any objective and independent basis. Differentiating between executive and legislative acts, Böckstiegel proposes that for executive acts there should be a presumption that the government would not act to the detriment of its own legal entity, and correspondingly that executive acts are to be imputed to the state entity regardless of its separate legal personality. The burden of proof shifts back again from the state party to the foreign party, if prima facie or on the basis of evidence submitted by the state the measure is one of a general nature, executed for other reasons. The foreign party may rebut this presumption by proving that the measure did not have ‘general’ consequences in similar cases or that in the particular case it could not have been the reason for the executive act. As for legislative acts, no force majeure should be available in respect of specific targeted laws as distinct from laws that are prima facie of general application. To rebut this presumption the foreign party would have to show that the particular interest that the state has in its interposed legal entity played a significant role in the decision to enact the legislation. *** How do the Principles approach the problem? The starting point is that where applicable, mandatory rules of the state will prevail over the Principles where they are chosen by the parties to govern their contract or are incorporated as terms of the contract. Bonell admits that ‘given their particular nature the Principles themselves will as a rule be replaced by such external mandatory considerations'. Article 1.4 is to that effect: Nothing in these Principles shall restrict the application of mandatory rules, whether of national, international or supranational origin, which are applicable in accordance with the relevant rules of private international law. Thus, the application of the Principles, whether these are incorporated by reference or applied by analogy, may be constrained by mandatory rules of the applicable law. In other words, the Principles can be applied only to the extent that they do not affect rules of the applicable law from which no derogation is permitted. Even where the Principles are applied as the law governing the contract, they cannot prejudice the application of those mandatory rules which claim application irrespective of which law is applicable (lois d’application nécessaire). The Principles say nothing on the applicability of foreign mandatory laws and, again, they cannot replace the careful use of general conflict techniques. General principles of good faith and fair dealing inform article 7.1.7 (‘Force majeure’) … A party which has not received performance retains the right to terminate the contract if the non-performance is fundamental, even if the non-performing party is excused from liability in damages. Temporary impossibility of performance may only excuse nonperformance for a limited period; performance must be restored as soon as it becomes possible again. International commercial contracts often contain much more precise and elaborate provisions on force majeure. The parties may choose to adapt the content of this article so as to take account of the particular features of the specific transaction. In discussing force majeure, the commentary to the Principles contemplates state interference amounting to force majeure for a contracting party which is subject to the laws of that state. But the Principles do not refer to the possible unity of interest between a state and a state contracting party. Similarly, in addressing requirements to obtain state permission and the consequences flowing from lack of permission, the Principles do not take account of the possible identity of state contracting parties and the state itself. Thus they contribute little to resolving the special problems posed by the separate legal personality of state entities. If a state's supervening act does not give rise to force majeure, non-performance is ‘unexcused non-performance’, to which specified remedies attach. The state party will

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not be able to rely on the foreign party's non-performance if that default was caused by its own act, omission, or other event for which it bears the risk. If the foreign party is unable to perform, either wholly or in part, because the state party has done something which makes performance in whole or in part impossible, the foreign party's conduct does not become excused non-performance but loses the quality of non-performance altogether. As far as remedies are concerned, in respect of non-performance on non-monetary obligations, article 7.2.2 (‘Performance of non-monetary obligation’) provides: Where a party who owes an obligation other than one to pay money does not perform, the other party may require performance, unless: (a) (b) (c) (d) (e)

performance is impossible in law or in fact; performance or, where relevant, enforcement is unreasonably burdensome or expensive; the party entitled to performance may reasonably obtain performance from another source; performance is of an exclusively personal character; or the party entitled to performance does not require performance within a reasonable time after it has, or ought to have, become aware of the nonperformance.

Article 7.2.2 is founded on the belief that a party to a contract should be entitled to require actual performance not only of monetary but also of non-monetary obligations: in other words, whatever the ultimate remedial situation may be, as a matter of law a contractual obligation does not give an option to perform or pay damages. That idea is particularly important with respect to state contracts, especially those of a long-term character. In a state contract the specific obligations can often be performed only by the state contracting party itself. While specific performance is less controversial in civil law countries, common law systems allow enforcement of non-monetary obligations only in special circumstances. Where the Principles apply, specific performance is not a discretionary remedy, that is, an arbitrator must order performance unless one of the exceptions laid out in article 7.2.2 applies. The exceptions raise several interrelated problems. In the first instance, whether performance is impossible in law itself raises potential issues of legal appreciation. Secondly, where the subject matter of a state contract involves, for instance, a licence to extract natural resources, measures of enforcement may interfere with the state's regulatory and policy freedom. Whether or when, as a matter of international law, an order in the nature of specific performance or restitutio in integrum may be made against a state, in the interest of a private party, is an unresolved question: the principle of permanent sovereignty over natural resources, taken literally, might suggest the answer, never. The Principles arguably favour claimants in two further respects. In the first case, if the lex arbitri allows, article 7.2.4 (‘Judicial penalty’) permits an arbitral tribunal to order the party in breach to pay a penalty in addition to an order for specific performance. This rule, that finds no counterpart in the common law, regards payment of the penalty as compensating the aggrieved party for those disadvantages which cannot be taken into account under the ordinary rules for the recovery of damages. Secondly, where the claimant has required performance of a non-monetary obligation, or where a tribunal has issued a partial award ordering performance but that order is not complied with or cannot be enforced, the claimant may, if within time, invoke another remedy. This may be a useful option for the claimant. For instance, where the state party is not in a position to meet its obligations for non-performance, or monetary compensation is not the preferred remedy, the claimant may wish to keep the contract on a binding footing for a period of time, to assist as a bargaining chip in achieving a negotiated settlement. In these respects, the Principles arguably extend the range of remedies available to claimants in state contract disputes. On the other hand, the failure of the Principles specifically to address such cases raises doubts as to the availability of enhanced remedies such as judicial penalties. ***

[L] Comments and Questions 1. 2.

Faced with these difficulties, would it not be simpler to exclude a State entity from relying on force majeure in respect of the acts of its parent State entirely? The adoption of a narrow concept of force majeure in international law is reaffirmed in Sempra v. Argentina and in Enron v. Argentina, where the Tribunals held that force majeure does not extend to situations of political or economic crisis if their effects do not render the performance of the obligation in question impossible but merely more difficult (Sempra Energy International v. Argentine Republic, ICSID Case No ARB/02/16, Award of 28 September 2007, para 246; Enron Corporation and Ponderosa Assets LP v. Argentine Republic, ICSID Case No ARB/01/3, Award of 22 May 2007, para 217).

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§10.03 COERCION AND DURESS Virtually all legal systems excuse conduct (an act or omission) which is the subject of genuine coercion or duress, but there are grave difficulties of degree in dealing with claims of coercion falling short of conduct performed at gunpoint.

[A] Detlev F. Vagts, Coercion and Foreign Investment Rearrangements, 72 Am. J. Int’l. L. 17, 17-19, 33-36 (1978) (7) (Citations selectively omitted) Expropriations in the later 1970's often proceed more suavely than in the past. Straightforward seizure, to be sure, still has devotees. However, an increasingly favored approach is to induce the foreign investor to convey his property (or an interest therein) by an instrument that on its face represents an ordinary sale. That sale may be accompanied by a revision of the terms of some underlying contract between the investor and the government. The purpose of this article is to explore whether any body of rules now exists setting limits to the means that a government can use to obtain the investor's consent. It then asks whether that law could be further developed so as to improve the quality of such negotiations and to cause them to produce more equitable results. Thereby it would indirectly improve the security and efficiency of the whole process of foreign direct investment … I. Context A. Some Actual Cases It is not easy to identify and describe episodes of the type we are analyzing. Characteristically, the parties are reluctant to go to the public with their problems. The investor's managers are apt to put the best possible face on the situation, partly out of a desire to look well in the eyes of their stockholders and of the business community as a whole. The government acquiring the property has an interest in not alarming other investors and describes its sale price as “fair” (to say that it was “generous” would alarm its radical opposition). The investor's home government, which may have been hovering in the wings, does not want to set a bad precedent for other negotiations by conceding that the price was inadequate. The generosity of the arrangement may be further obscured by the inclusion of a service agreement that adds to the attractiveness of the settlement in ways that resist valuation. Consider one situation of which there is some public record. The Anaconda Company had owned copper mines in Chile for a great many years when in 1969 the Government of Chile under President Frei took the stance that all copper mines must be “Chileanized.” Negotiations resulted in an elaborate purchase-by-stages with the price being payable, via securities to be issued by agencies of the Chilean Government, essentially from the proceeds of the mining operations themselves. Anaconda was to retain operational control of the mines until its last 49% ownership had passed to Chile. Was this a voluntary sale? The issue was raised but not decided in the arbitration between Anaconda and the Overseas Private Investment Corporation. It is clear that Anaconda did not seek this sale; it was working comfortably with a setup hammered out with the government only two years before. After the fact, Anaconda proclaimed itself satisfied with what the parties termed a “nationalization by agreement.” The negotiations were conducted in an atmosphere of tension and haste, but did not represent an ultimatum situation. The final agreement contained adjustments of taxes and other problems that were requested by Anaconda and in some measure offset the financial impact of the buyout itself. Both parties were aware that expropriation was the likely result of a breakdown of negotiations but it was unclear what the terms of such expropriation would be. Chile at that time was acting within a set of legal and political constraints that gave some assurances that a reasonable amount of compensation would be forthcoming if compulsory action followed. It also felt that the international consequences of an unamicable outcome would be disruptive of Chile's economic program. Events, of course, rapidly overtook this arrangement and the next government cancelled it as overly favorable to Anaconda; the government after that worked out a new settlement. This then is a model case for considering the problem. It is a model even in that various crucial facts about it are not known and probably never will be – such as the genuine market value of the property and the disparity between that and the worth of the package of securities given in exchange in 1969. Other episodes of some prominence may fit into this pattern, although less is known about them publicly. The Brazilian state of Rio Grande do Sul in 1962 seized the property of ITT after abortive attempts to form a joint enterprise. It deposited $400,000 in compensation, though ITT set a value of $7 to $8 million on its property. Negotiations followed which resulted in a sale of all ITT facilities in Brazil for about $12 million, half of it being earmarked for reinvestment in manufacturing facilities in Brazil. ITT described the settlement as “equitable and fair.” A similar arrangement was worked out with two electric power companies. In 1975 Venezuela enacted legislation nationalizing the oil industry; prolonged talks eventuated in the acceptance by most of the oil companies of payments calculated with

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reference to the book value of their tangible assets. The question of adequacy was blurred by the presence of various ancillary arrangements which may have materially enhanced the attractiveness of the deal to some owners while obscuring the amount of the compensation. These “side” arrangements were more beneficial to the major oil firms than to smaller ones less able to take advantage of them – to say nothing of the royalty holders who were entirely frozen out. *** V. Conclusions A review of the authorities indicates that there is no very solid or wide consensus on coercion outside of the cases dealing with physical force. Yet, there is a general, inchoate sense that such dealings ought in some way to be “fair” on both sides. While some spokesmen have singled out pressures by or on behalf of investors, others have been concerned with government tactics. The precedents from municipal law counsel restraints upon extreme tactics by either side but do not point conclusively to any particular criterion. Still, one can expect that claims that sales of investments had been obtained by coercion will be made more frequently and will find some responsiveness on the part of governments and even of international tribunals in these rare cases where one can be seized of jurisdiction. Significant practical difficulties concerning such claims made after the event make foreign ministries reluctant to press them. The government that now has the property will be enraged both at the challenge to what it deemed to be secure possession and at the insult to its good faith in claiming that the property was regularly purchased. The officials of the espousing state may have an uneasy suspicion that the claimant has been playing a too clever game, first taking what he could get from the deal with the foreign government and then coming for a second bite to his home country. They may fear that, if some claimant of this category succeeds in getting diplomatic support, all sorts of sleeping claims will be revived to plague them. The undoing of sales in Europe after World War II did, after all, occur in the context of a very general overturning of all sorts of past legal arrangements. Indeed, the governments that had supposedly exercised the duress had been replaced by regimes that repudiated most of what they had done. The postwar cases also tended to involve undoing transfers made not to sovereign governments but to private parties. Thus it would be misleading to project those precedents into the less developed country situations that the future is likely to present. There are limits on the extent to which coercion claims are likely to be pressed or to achieve success in obtaining additional compensation in connection with completed transactions. A more practical focus for a consensus seems to be a group of rules on tactics, debarring those that seem too calculated to produce economically irrelevant and unsound results and to project lingering insecurities on other investors. The elements of a code of unfair bargaining practices during investor-government negotiations might include: As to the investor, prohibitions on the following: – – – –

Bribery; Misrepresentation or omission of material facts; Withholding of royalties and other sums not subject to dispute; and Collective agreements with other firms to boycott the nation with whom negotiations are in progress.

As to the Government, prohibitions on the following: – – – – – –

Threats to the personal well-being of the investor's negotiators or other officers; Takeovers of the property before agreement is reached, except in case of genuine crisis of a health or defense nature; Refusals to listen to reasonable counteroffers by the investors; Taking positions as to the terms of sale so publicly as to destroy the government's freedom to bargain in good faith; Cancellation of the franchise, permit, or authorization to do business in which the investor relies, except in accordance with its terms; and Regulatory action without bona fide governmental purpose (or without bona fide timing) designed to make the investor's business unprofitable.

Such guidelines might be given effect in one of several different ways. Unilaterally, the United States might incorporate them into its policy for dealing with expropriations or transactions resembling them. After announcing the adoption of these guidelines, the Department of State would then follow them in its diplomatic démarches on behalf of U.S. investors whose property had been transferred to foreign governments and who claimed duress. Necessarily, it would also be using the standards when it made representations to foreign governments after being advised that coercive negotiations

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were in progress. Indeed, it would ordinarily encounter less resistance if it advanced these standards before the foreign government had committed itself to defend particular terms of sale against a claim of coercion, rather than afterward. However, the proper timing and style of that intervention would require careful coordination between the diplomatic arm and the investor, whereas many an investor feels that he can do better without government interference. Still, there have already been cases of diplomatic good offices being offered and accepted fairly early in the negotiating process. Bilateral or multilateral acceptance is also a possibility. A number of investment guarantee agreements have been concluded on a bilateral basis which spell out the prompt, adequate, and effective standard and could be extended to include a treatment of negotiating tactics. Guidelines for multinational enterprises have been adopted by the Organisation for Economic Co-operation and Development and are in the process of consideration by the UN Commission on Transnational Corporations. Rules regulating the conduct of bargaining between nations and multinationals would fit well into the format adopted by the OECD; it is now not clear whether the product of the UN Commission will be such as to restrict the behavior only of corporations and not of governments. The achievement, through one medium or another, of a better regulated process for the disinvestment of foreign enterprises seems a highly useful objective in a period where rapidly shifting political and economic conditions make such rearrangements inevitable but mutual distrust and antagonism all too often make the changes unnecessarily painful and disruptive.

[B] Comments and Questions 1. 2.

Would a set of guidelines have any effect in resource conflict situations? Surely a government prepared to engage in indirectly coercive conduct will not be constrained by “soft non-law”? Why cannot such situations be dealt with by normal rules about expropriation and compensation for expropriation?

[C] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 18 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 69-70 (2001) Article 18 – Coercion of another State A State which coerces another State to commit an act is internationally responsible for that act if: (a) (b)

the act would, but for the coercion, be an internationally wrongful act of the coerced State; and the coercing State does so with knowledge of the circumstances of the act.

Commentary (1) The third case of derived responsibility dealt with by Chapter IV is that of coercion of one State by another. Article 18 is concerned with the specific problem of coercion deliberately exercised in order to procure the breach of one State's obligation to a third State. In such cases the responsibility of the coercing State with respect to the third State derives not from its act of coercion, but rather from the wrongful conduct resulting from the action of the coerced State. Responsibility for the coercion itself is that of the coercing State vis-à-vis the coerced State, whereas responsibility under article 18 is the responsibility of the coercing State vis-à-vis a victim of the coerced act, in particular a third State which is injured as a result. (2) Coercion for the purpose of article 18 has the same essential character as force majeure under article 23. Nothing less than conduct which forces the will of the coerced State will suffice, giving it no effective choice but to comply with the wishes of the coercing State. It is not sufficient that compliance with the obligation is made more difficult or onerous, or that the acting State is assisted or directed in its conduct: such questions are covered by the preceding articles. Moreover, the coercing State must coerce the very act which is internationally wrongful. It is not enough that the consequences of the coerced act merely make it more difficult for the coerced State to comply with the obligation. (3) Though coercion for the purpose of article 18 is narrowly defined, it is not limited to unlawful coercion. As a practical matter, most cases of coercion meeting the requirements of the article will be unlawful, e.g., because they involve a threat or use of force contrary to the Charter of the United Nations, or because they involve intervention, i.e. coercive interference, in the affairs of another State. Such is also the case with countermeasures. They may have a coercive character, but as is made clear in article 49, their function is to induce a wrongdoing State to comply with obligations of cessation and reparation towards the State taking the countermeasures, not to coerce that State to violate obligations to third States. However, coercion could possibly take other forms, e.g. serious economic pressure, provided that it is such as to deprive the coerced State of

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any possibility of conforming with the obligation breached. (4) The equation of coercion with force majeure means that in most cases where article 18 is applicable, the responsibility of the coerced State will be precluded vis-à-vis the injured third State. This is reflected in the phrase “but for the coercion” in paragraph (a) of article 18. Coercion amounting to force majeure may be the reason why the wrongfulness of an act is precluded vis-à-vis the coerced State. Therefore the act is not described as an internationally wrongful act in the opening clause of the article, as is done in articles 16 and 17, where no comparable circumstance would preclude the wrongfulness of the act of the assisted or controlled State. But there is no reason why the wrongfulness of that act should be precluded vis-à-vis the coercing State. On the contrary, if the coercing State cannot be held responsible for the act in question, the injured State may have no redress at all. (5) It is a further requirement for responsibility under article 18 that the coercing State must be aware of the circumstances which would, but for the coercion, have entailed the wrongfulness of the coerced State's conduct. The reference to “circumstances” in paragraph (b) is understood as reference to the factual situation rather than to the coercing State's judgement of the legality of the act. This point is clarified by the phrase “circumstances of the act”. Hence, while ignorance of the law is no excuse, ignorance of the facts is material in determining the responsibility of the coercing State. (6) A State which sets out to procure by coercion a breach of another State's obligations to a third State will be held responsible to the third State for the consequences, regardless of whether the coercing State is also bound by the obligation in question. Otherwise, the injured State would potentially be deprived of any redress, because the acting State may be able to rely on force majeure as a circumstance precluding wrongfulness. Article 18 thus differs from articles 16 and 17 in that it does not allow for an exemption from responsibility for the act of the coerced State in circumstances where the coercing State is not itself bound by the obligation in question. (7) State practice lends support to the principle that a State bears responsibility for the internationally wrongful conduct of another State which it coerces. In the RomanoAmericana case, the claim of the United States Government in respect of the destruction of certain oil storage and other facilities owned by an American company on the orders of the Romanian Government during the First World War was originally addressed to the British Government. At the time the facilities were destroyed, Romania was at war with Germany, which was preparing to invade the country, and the United States claimed that the Romanian authorities had been “compelled” by Great Britain to take the measures in question. In support of its claim, the United States Government argued that the circumstances of the case revealed “a situation where a strong belligerent for a purpose primarily its own arising from its defensive requirements at sea, compelled a weaker Ally to acquiesce in an operation which it carried out in the territory of that Ally.” The British Government denied responsibility, asserting that its influence over the conduct of the Romanian authorities “did not in any way go beyond the limits of persuasion and good counsel as between governments associated in a common cause.” The point of disagreement between the governments of the United States and of Great Britain was not as to the responsibility of a State for the conduct of another State which it has coerced, but rather the existence of “compulsion” in the particular circumstances of the case.

[D] Comments and Questions Compare the role of coercion in the validity of treaties (Vienna Convention on the Law of Treaties, 1969, Articles 51, 52) which distinguish between physical coercion of a representative and coercion of the State itself; in the latter case Article 52 is limited to the “threat or use of force in violation of the principles of international law embodied in the Charter of the United Nations”. In other words, coercion for the purposes of the law of State responsibility appears to be a broader concept. Is this defensible?

[E] UNIDROIT Principles of International Commercial Contracts (2004), (8) Article 3.9 (9) Article 3.9 – Threat A party may avoid the contract when it has been led to conclude the contract by the other party's unjustified threat which, having regard to the circumstances, is so imminent and serious as to leave the first party no reasonable alternative. In particular, a threat is unjustified if the act or omission with which a party has been threatened is wrongful in itself, or it is wrongful to use it as a means to obtain the conclusion of the contract.

[F] Government of Kuwait v. American Independent Oil Company (AMINOIL), Award of 24 March 1982, 66 Int’l L. Rep. 518, 569-571, 615-616 (1982) (10) [Paul Reuter (pres.), Hamed Sultan, Gerald Fitzmaurice] [In 1948, the Government of Kuwait granted to the American Independent Oil Company (Aminoil) an oil concession in respect of an area then known as the Kuwait-Saudi Arabia Neutral Zone. A Supplemental Agreement was made between the parties which altered the terms of the 1948 Concession after Kuwait became fully independent in 1961.

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Subsequently in 1973, the parties drew up a Draft Agreement to make further alterations to the terms of the 1948 Concession. The Draft Agreement was never ratified, although by a letter of December 1973, Aminoil agreed at the Government's request, to treat the Draft Agreement as though it was in force. In the ensuing arbitration proceedings, Aminoil claimed that its consent to be bound by the Draft Agreement was not valid as it had been procured by duress.] (b) The complaint of duress 40. With regard both to the lengthy negotiations which preceded the July 1973 Agreement, and to the changes that immediately preceded and followed the December 1973 Letter, Aminoil has claimed that its consent was vitiated because its undertaking was threatened with “shut-down” or, what comes to the same thing, that all exportation would be prohibited, if it did not agree to give its consent to certain demands. These threats had been tendered both on the occasion of the conclusion of the interim agreement and on that of certain measures taken before or after it. 41. The object of this complaint was as follows. For Aminoil it was a question of destroying the obligatory force of the Letter of 22 December; and what is involved therefore is the nullification of that agreement. If however, as will be demonstrated, the nullity of the consents given by Aminoil is not established, it will not in any way follow from this that those consents were not forthcoming under all the conditions that could be wished for in respect of a consent. These consents were evidently given in circumstances which, for the Company, constituted strong economic pressure, and this can result in depriving such consents of certain supplementary or side effects. In particular their application should not be enlarged by means of extensive interpretations. To take a concrete example, in October 1973 the Government of Kuwait, contrary to the terms of the Concession then in force (Article 4 of 1948), prescribed of its own motion the level of posted prices. By conforming to this behest in the circumstances of the moment, and without making any protest, the Company surrendered the right to claim the nullity of the acquiescence. But although, even in the absence of duress, it then laboured under constraints, it did not therefore forfeit the right on another occasion to withhold its consent in analogous conditions, though in point of fact it did not do so. 42. Next, as the Tribunal will again be led to say, consents that are legally valid as regards the abandonment of a specific individual right, but which have been given under economic constraint, cannot serve as precedents for establishing a customary rule of general validity. 43. That reservation having been made, it is necessary to stress that it is not just pressure of any kind that will suffice to bring about a nullification. There must be a constraint invested with particular characteristics, which the legal systems of all countries have been at pains to define in terms either of the absence of any other possible course than that to which the consent was given, or of the illegal nature of the object in view, or of the means employed. But the illicit character of the threats directed against Aminoil has not been fully proved. 44. Supposing however that there were such threats, Aminoil gave way without even making the qualification that the Company was conscious that something illicit was being imposed upon it. It is understandable that it avoided resort to arbitration because of the delays, risks and costs of arbitral proceedings – but Aminoil entered neither reservations of position nor protests. In truth, the Company made a choice; disagreeable as certain demands might be, it considered that it was better to accede to them because it was still possible to live with them. The whole conduct of the Company shows that the pressure it was under was not of a kind to inhibit its freedom of choice. The absence of protests during the years following upon 1973 confirms the non-existence, or else the abandonment, of this ground of complaint. 45. This outcome does not involve any denial of the fact that since 1971 the balance of advantage in the Gulf region has titled in favour of Governments, and that Aminoil had been subjected to strong pressure to accept the repeated demands of the Kuwait Government. But – and this is the only point the Tribunal has to decide – it has not been shown that these constraints were of such a nature as to cause the nullification of the interim Agreement of 1973, or of certain other consents… Separate Opinion of Sir G. Fitzmaurice The issue of Duress 5. The ground, and sole ground, for contending that Aminoil's consent was never a truly genuine consent, was that it was obtained under duress. The nature of the allegation is described in paragraphs 40 et seq of the Award, and I agree with the reasons there given for not admitting it. In the case of an entity having transnational interests, and the resources in money, expertise, and legal and technical advice available to Aminoil, the plea of having acted under duress – as that concept is to be understood in strict law – is not an easy one to sustain, – at least the presumption is contra. That the Company was under constraint – strong economic constraint – is not open to doubt. But the essence of this constraint – so it seems to me – was not so much as any direct Government threat of a “shut-down”(though a latent threat of it unquestionably existed), as Aminoil's own natural

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desire – and hence long-term policy – of wanting to continue to operate in Kuwait, if it was at all possible to do so on reasonable terms. In consequence, however unwillingly, and even if they felt that their hand was being forced, they were prepared in the last resort to accept demands they regarded as unjustified, provided these would still leave them with the possibility of going on operating at a worthwhile, even if relatively exiguous, profit. The picture is not an agreeable one, – all the cards were in the Government's hands which – as was of course its legal right – took full advantage of that. But such was the situation, and in my view it cannot be said to have amounted to a situation of duress in law. This is not the place to enter into a dissertation on the technicalities of what constitutes legal (that is it say illicit) duress; but there is one other point that needs to be noticed. 6. However onerous the terms of the 1973 Agreement and Letter may have seemed at the time, the explosion in oil prices consequent upon the increases decreed by OPEC in the autumn of 1973 led, before long, to such greatly increased profits for the oil Companies (Aminoil amongst them) as entirely to change the de facto situation. Government demands, conformity with which had entailed a sacrifice, now became, financially, relatively easy to comply with. This could not of course affect matters de iure if the original consent had indeed been given under duress. But it could not implausibly be said that the continuing acceptance sub-silentio of markedly greater profits, though it did not act as a sort of exculpation or condonation of Government pressure, did take a good deal of the force out of the complaint. This consideration, while not being the ground of my view that the plea of duress cannot be sustained, does come as a reinforcement of it.

[G] Comments and Questions 1. 2.

How can an act void for duress be held subsequently valid because the act which is the subject of duress turns out not to be so bad after all? Or is this merely arbitrator's equity? In Tecmed v. Mexico the Mexican authorities pressured a company operating a landfill and forced it to assume a similar operation in another site, bearing the costs and risks of a new business, mainly because by adopting such course of action, the National Ecology Institute of Mexico expected to overcome the social and political difficulties directly related to the landfill's relocation. The Tribunal held that under these circumstances “such pressure involves forms of coercion that may be considered inconsistent with the fair and equitable treatment to be given to international investments under Article 4(1) of the Agreement and objectionable from the perspective of international law” (Tecnicas Medioambientales Tecmed S.A. v. the United Mexican States, ICSID Case No. ARB (AF)/00/2, Award of 29 May 2003, para 163).

§10.04 NECESSITY [A] Case Concerning the Gabčíkovo-Nagymaros Project (Hungary v. Slovakia), Judgment of 25 September 1997, [1997] ICJ Rep. 7, 39-46, 58, 63 (1997) [In 1977, Hungary and Czechoslovakia entered a treaty relating to the construction and operation of two series of locks on the Danube River, one upstream at Gabčíkovo in Czechoslovak territory, and the other downstream at Nagymaros in Hungarian territory. Work began in 1978, and in 1989, the Hungarian government decided to suspend, and later abandon, the works at Nagymaros. Czechoslovakia protested this action and the parties entered negotiations which were unsuccessful. Accordingly, in 1991 Czechoslovakia commenced construction of a “provisional solution” known as “Variant C”. Hungary contended that Variant C was a violation of the 1977 Treaty, and in 1992, purported to terminate the Treaty. In 1993, Hungary and the successor State of Slovakia entered a special agreement for submission of the dispute to the International Court of Justice, asking the Court to determine, inter alia, whether Hungary was entitled to suspend and subsequently abandon works for which it had responsibility, and what were the legal effects of Hungary's notification of termination of the 1977 Treaty. Hungary argued a state of necessity in support of both actions.] 49. The Court will now consider the question of whether there was, in 1989, a state of necessity which would have permitted Hungary, without incurring international responsibility, to suspend and abandon works that it was committed to perform in accordance with the 1977 Treaty and related instruments. 50. In the present case, the Parties are in agreement in considering that the existence of a state of necessity must be evaluated in the light of the criteria laid down by the International Law Commission in Article 33 of the Draft Articles on the International Responsibility of States that it adopted on first reading. That provision is worded as follows: “Article 33. State of necessity 1.

A state of necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act of that State not in conformity with an international obligation of the State unless:

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(a)

2.

the act was the only means of safeguarding an essential interest of the State against a grave and imminent peril; and (b) the act did not seriously impair an essential interest of the State towards which the obligation existed. In any case, a state of necessity may not be invoked by a State as a ground for precluding wrongfulness: (a) (b)

(c)

if the international obligation with which the act of the State is not in conformity arises out of a peremptory norm of general international law; or if the international obligation with which the act of the State is not in conformity is laid down by a treaty which, explicitly or implicitly, excludes the possibility of invoking the state of necessity with respect to that obligation; or if the State in question has contributed to the occurrence of the state of necessity.”

(Yearbook of the International Law Commission, 1980, Vol. II, Part 2, p. 34.) In its Commentary, the Commission defined the “state of necessity” as being “the situation of a State whose sole means of safeguarding an essential interest threatened by a grave and imminent peril is to adopt conduct not in conformity with what is required of it by an international obligation to another State” (ibid., para. 1). It concluded that “the notion of state of necessity is … deeply rooted in general legal thinking” (ibid., p. 49, para. 31). 51. The Court considers, first of all, that the state of necessity is a ground recognized by customary international law for precluding the wrongfulness of an act not in conformity with an international obligation. It observes moreover that such ground for precluding wrongfulness can only be accepted on an exceptional basis. The International Law Commission was of the same opinion when it explained that it had opted for a negative form of words in Article 33 of its Draft “in order to show, by this formal means also, that the case of invocation of a state of necessity as a justification must be considered as really constituting an exception – and one even more rarely admissible than is the case with the other circumstances precluding wrongfulness …” (ibid., p. 51, para. 40). Thus, according to the Commission, the state of necessity can only be invoked under certain strictly defined conditions which must be cumulatively satisfied; and the State concerned is not the sole judge of whether those conditions have been met. 52. In the present case, the following basic conditions set forth in Draft Article 33 are relevant: it must have been occasioned by an “essential interest” of the State which is the author of the act conflicting with one of its international obligations; that interest must have been threatened by a “grave and imminent peril”; the act being challenged must have been the “only means” of safeguarding that interest; that act must not have “seriously impair[ed] an essential interest” of the State towards which the obligation existed; and the State which is the author of that act must not have “contributed to the occurrence of the state of necessity”. Those conditions reflect customary international law. The Court will now endeavour to ascertain whether those conditions had been met at the time of the suspension and abandonment, by Hungary, of the works that it was to carry out in accordance with the 1977 Treaty. 53. The Court has no difficulty in acknowledging that the concerns expressed by Hungary for its natural environment in the region affected by the Gabčíkovo-Nagymaros Project related to an “essential interest” of that State, within the meaning given to that expression in Article 33 of the Draft of the International Law Commission. The Commission, in its Commentary, indicated that one should not, in that context, reduce an “essential interest” to a matter only of the “existence” of the State, and that the whole question was, ultimately, to be judged in the light of the particular case (see Yearbook of the International Law Commission, 1980, Vol. II, Part 2, p. 49, para. 32); at the same time, it included among the situations that could occasion a state of necessity, “a grave danger to … the ecological preservation of all or some of [the] territory [of a State]” (ibid., p. 35, para. 3); and specified, with reference to State practice, that “It is primarily in the last two decades that safeguarding the ecological balance has come to be considered an ‘essential interest’ of all States.” (Ibid., p. 39, para. 14.) *** 54. The verification of the existence, in 1989, of the “peril” invoked by Hungary, of its “grave and imminent” nature, as well as of the absence of any “means” to respond to it, other than the measures taken by Hungary to suspend and abandon the works, are all complex processes.

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As the Court has already indicated… Hungary on several occasions expressed, in 1989, its “uncertainties” as to the ecological impact of putting in place the Gabčíkovo-Nagymaros barrage system, which is why it asked insistently for new scientific studies to be carried out. The Court considers, however, that, serious though these uncertainties might have been they could not, alone, establish the objective existence of a “peril” in the sense of a component element of a state of necessity. The word “peril” certainly evokes the idea of “risk”; that is precisely what distinguishes “peril” from material damage. But a state of necessity could not exist without a “peril” duly established at the relevant point in time; the mere apprehension of a possible “peril” could not suffice in that respect. It could moreover hardly be otherwise, when the “peril” constituting the state of necessity has at the same time to be “grave” and “imminent”. “Imminence” is synonymous with “immediacy” or “proximity” and goes far beyond the concept of “possibility”. As the International Law Commission emphasized in its commentary, the “extremely grave and imminent” peril must “have been a threat to the interest at the actual time” (Yearbook of the International Law Commission, 1980, Vol. II, Part 2, p. 49, para. 33). That does not exclude, in the view of the Court, that a “peril” appearing in the long term might be held to be “imminent” as soon as it is established, at the relevant point in time, that the realization of that peril, however far off it might be, is not thereby any less certain and inevitable. The Hungarian argument on the state of necessity could not convince the Court unless it was at least proven that a real, “grave” and “imminent” “peril” existed in 1989 and that the measures taken by Hungary were the only possible response to it. *** 55. The Court will begin by considering the situation at Nagymaros. As has already been mentioned… Hungary maintained that, if the works at Nagymaros had been carried out as planned, the environment – and in particular the drinking water resources – in the area would have been exposed to serious dangers on account of problems linked to the upstream reservoir on the one hand and, on the other, the risks of erosion of the riverbed downstream. The Court notes that the dangers ascribed to the upstream reservoir were mostly of a longterm nature and, above all, that they remained uncertain. Even though the Joint Contractual Plan envisaged that the Gabčíkovo power plant would “mainly operate in peak-load time and continuously during high water”, the final rules of operation had not yet been determined (see paragraph 19 above); however, any dangers associated with the putting into service of the Nagymaros portion of the Project would have been closely linked to the extent to which it was operated in peak mode and to the modalities of such operation. It follows that, even if it could have been established – which, in the Court's appreciation of the evidence before it, was not the case – that the reservoir would ultimately have constituted a “grave peril” for the environment in the area, one would be bound to conclude that the peril was not “imminent” at the time at which Hungary suspended and then abandoned the works relating to the dam. With regard to the lowering of the riverbed downstream of the Nagymaros dam, the danger could have appeared at once more serious and more pressing, in so far as it was the supply of drinking water to the city of Budapest which would have been affected. The Court would however point out that the bed of the Danube in the vicinity of Szentendre had already been deepened prior to 1980 in order to extract building materials, and that the river had from that time attained, in that sector, the depth required by the 1977 Treaty. The peril invoked by Hungary had thus already materialized to a large extent for a number of years, so that it could not, in 1989, represent a peril arising entirely out of the project. The Court would stress, however, that, even supposing, as Hungary maintained, that the construction and operation of the dam would have created serious risks, Hungary had means available to it, other than the suspension and abandonment of the works, of responding to that situation. … 56. The Court now comes to the Gabčíkovo sector. It will recall that Hungary's concerns in this sector related on the one hand to the quality of the surface water in the Dunakiliti reservoir, with its effects on the quality of the groundwater in the region, and on the other hand, more generally, to the level, movement and quality of both the surface water and the groundwater in the whole of the Szigetköz, with their effects on the fauna and flora in the alluvial plain of the Danube… Whether in relation to the Dunakiliti site or to the whole of the Szigetköz, the Court finds here again, that the peril claimed by Hungary was to be considered in the long term, and, more importantly, remained uncertain. As Hungary itself acknowledges, the damage that it apprehended had primarily to be the result of some relatively slow natural processes, the effects of which could not easily be assessed. *** The Court also notes that, in these proceedings, Hungary acknowledged that, as a general rule, the quality of the Danube waters had improved over the past 20 years, even if those waters remained subject to hypertrophic conditions.

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However “grave” it might have been, it would accordingly have been difficult, in the light of what is said above, to see the alleged peril as sufficiently certain and therefore “imminent” in 1989. The Court moreover considers that Hungary could, in this context also, have resorted to other means in order to respond to the dangers that it apprehended. In particular, within the framework of the original Project, Hungary seemed to be in a position to control at least partially the distribution of the water between the bypass canal, the old bed of the Danube and the side-arms. … 57. The Court concludes from the foregoing that, with respect to both Nagymaros and Gabčíkovo, the perils invoked by Hungary, without prejudging their possible gravity, were not sufficiently established in 1989, nor were they “imminent”; and that Hungary had available to it at that time means of responding to these perceived perils other than the suspension and abandonment of works with which it had been entrusted. What is more, negotiations were under way which might have led to a review of the Project and the extension of some of its time-limits, without there being need to abandon it. The Court infers from this that the respect by Hungary, in 1989, of its obligations under the terms of the 1977 Treaty would not have resulted in a situation “characterized so aptly by the maxim summum jus summa injuria” (Yearbook of the International Law Commission, 1980, Vol. II, Part 2, p. 49, para. 31). Moreover, the Court notes that Hungary decided to conclude the 1977 Treaty, a Treaty which – whatever the political circumstances prevailing at the time of its conclusion – was treated by Hungary as valid and in force until the date declared for its termination in May 1992. As can be seen from the material before the Court, a great many studies of a scientific and technical nature had been conducted at an earlier time, both by Hungary and by Czechoslovakia. Hungary was, then, presumably aware of the situation as then known, when it assumed its obligations under the Treaty. … What is more, the Court cannot fail to note the positions taken by Hungary after the entry into force of the 1977 Treaty. In 1983, Hungary asked that the works under the Treaty should go forward more slowly, for reasons that were essentially economic but also, subsidiarily, related to ecological concerns. In 1989, when, according to Hungary itself, the state of scientific knowledge had undergone a significant development, it asked for the works to be speeded up, and then decided, three months later, to suspend them and subsequently to abandon them. The Court is not however unaware that profound changes were taking place in Hungary in 1989, and that, during that transitory phase, it might have been more than usually difficult to co-ordinate the different points of view prevailing from time to time. The Court infers from all these elements that, in the present case, even if it had been established that there was, in 1989, a state of necessity linked to the performance of the 1977 Treaty, Hungary would not have been permitted to rely upon that state of necessity in order to justify its failure to comply with its treaty obligations, as it had helped, by act or omission to bring it about. *** 92. During the proceedings, Hungary presented five arguments in support of the lawfulness, and thus the effectiveness, of its notification of termination. These were the existence of a state of necessity; the impossibility of performance of the Treaty; the occurrence of a fundamental change of circumstances; the material breach of the Treaty by Czechoslovakia; and, finally, the development of new norms of international environmental law. Slovakia contested each of these grounds. *** 101. The Court will now turn to the first ground advanced by Hungary, that of the state of necessity. In this respect, the Court will merely observe that, even if a state of necessity is found to exist, it is not a ground for the termination of a treaty. It may only be invoked to exonerate from its responsibility a State which has failed to implement a treaty. Even if found justified, it does not terminate a Treaty; the Treaty may be ineffective as long as the condition of necessity continues to exist; it may in fact be dormant, but – unless the parties by mutual agreement terminate the Treaty – it continues to exist. As soon as the state of necessity ceases to exist, the duty to comply with treaty obligations revives.

[B] International Law Commission, Articles on Responsibility of States for Internationally Wrongful Acts, Article 25 and Commentary, [2001] 2(2) Y.B. Int’l L. Comm’n 30, 80-84 (2001) (Citations selectively omitted) Article 25 – Necessity 1. Necessity may not be invoked by a State as a ground for precluding the wrongfulness of an act not in conformity with an international obligation of that State unless the act: (a)

is the only means for the State to safeguard an essential interest against a grave and imminent peril; and

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(b)

does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole.

2. In any case, necessity may not be invoked by a State as a ground for precluding wrongfulness if: (a) (b)

the international obligation in question excludes the possibility of invoking necessity; or the State has contributed to the situation of necessity.

Commentary (1) The term “necessity” (“état de necessité”) is used to denote those exceptional cases where the only way a State can safeguard an essential interest threatened by a grave and imminent peril is, for the time being, not to perform some other international obligation of lesser weight or urgency. Under conditions narrowly defined in article 25, such a plea is recognised as a circumstance precluding wrongfulness. (2) The plea of necessity is exceptional in a number of respects. Unlike consent (article 20), self-defence (article 21) or countermeasures (article 22), it is not dependent on the prior conduct of the injured State. Unlike force majeure (article 23), it does not involve conduct which is involuntary or coerced. Unlike distress (article 24), necessity consists not in danger to the lives of individuals in the charge of a State official but in a grave danger either to the essential interests of the State or of the international community as a whole. It arises where there is an irreconcilable conflict, between an essential interest on the one hand and an obligation of the State invoking necessity on the other. These special features mean that necessity will only rarely be available to excuse nonperformance of an obligation and that it is subject to strict limitations to safeguard against possible abuse. (3) There is substantial authority in support of the existence of necessity as a circumstance precluding wrongfulness. It has been invoked by States and has been dealt with by a number of international tribunals. In these cases the plea of necessity has been accepted in principle, or at least not rejected. *** (14) On balance, State practice and judicial decisions support the view that necessity may constitute a circumstance precluding wrongfulness under certain very limited conditions, and this view is embodied in article 25. The cases show that necessity has been invoked to preclude the wrongfulness of acts contrary to a broad range of obligations, whether customary or conventional in origin. It has been invoked to protect a wide variety of interests, including safeguarding the environment, preserving the very existence of the State and its people in time of public emergency, or ensuring the safety of a civilian population. But stringent conditions are imposed before any such plea is allowed. This is reflected in article 25. In particular, to emphasise the exceptional nature of necessity and concerns about its possible abuse, article 25 is cast in negative language (“Necessity may not be invoked… unless”). In this respect it mirrors the language of article 62 of the Vienna Convention on the Law of Treaties dealing with fundamental change of circumstances. It also mirrors that language in establishing, in paragraph (1), two conditions without which necessity may not be invoked and excluding, in paragraph (2), two situations entirely from the scope of the excuse of necessity. (15) The first condition, set out in paragraph (1) (a), is that necessity may only be invoked to safeguard an essential interest from a grave and imminent peril. The extent to which a given interest is “essential” depends on all the circumstances, and cannot be prejudged. It extends to particular interests of the State and its people, as well as of the international community as a whole. Whatever the interest may be, however, it is only when it is threatened by a grave and imminent peril that this condition is satisfied. The peril has to be objectively established and not merely apprehended as possible. In addition to being grave, the peril has to be imminent in the sense of proximate. However, as the Court said in the Gabčíkovo-Nagymaros Project case: “That does not exclude… that a ‘peril’ appearing in the long term might be held to be ‘imminent’ as soon as it is established, at the relevant point in time, that the realization of that peril, however far off it might be, is not thereby any less certain and inevitable.” Moreover the course of action taken must be the “only way” available to safeguard that interest. The plea is excluded if there are other (otherwise lawful) means available, even if they may be more costly or less convenient. Thus in the Gabčíkovo-Nagymaros Project case, the Court was not convinced that the unilateral suspension and abandonment of the Project was the only course open in the circumstances, having regard in particular to the amount of work already done and the money expended on it, and the possibility of remedying any problems by other means. The word “way” in paragraph (1) (a) is not limited to unilateral action but may also comprise other forms of conduct available through cooperative action with other States or through international organizations (for example, conservation measures for a fishery taken through the competent regional fisheries agency). Moreover the requirement of necessity is inherent in the plea: any

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conduct going beyond what is strictly necessary for the purpose will not be covered. (16) It is not sufficient for the purposes of paragraph (1) (a) that the peril is merely apprehended or contingent. It is true that in questions relating, for example, to conservation and the environment or to the safety of large structures, there will often be issues of scientific uncertainty and different views may be taken by informed experts on whether there is a peril, how grave or imminent it is and whether the means proposed are the only ones available in the circumstances. By definition, in cases of necessity the peril will not yet have occurred. In the Gabčíkovo-Nagymaros Project case the Court noted that the invoking State could not be the sole judge of the necessity, but a measure of uncertainty about the future does not necessarily disqualify a State from invoking necessity, if the peril is clearly established on the basis of the evidence reasonably available at the time. (17) The second condition for invoking necessity, set out in paragraph (1) (b), is that the conduct in question must not seriously impair an essential interest of the other State or States concerned, or of the international community as a whole. In other words, the interest relied on must outweigh all other considerations, not merely from the point of view of the acting State but on a reasonable assessment of the competing interests, whether these are individual or collective. (18) As a matter of terminology, it is sufficient to use the phrase “international community as a whole” rather than “international community of States as a whole”, which is used in the specific context of article 53 of the Vienna Convention on the Law of Treaties. The insertion of the words “of States” in article 53 of the Vienna Convention was intended to stress the paramountcy that States have over the making of international law, including especially the establishment of norms of a peremptory character. On the other hand the International Court used the phrase “international community as a whole” in the Barcelona Traction case, and it is frequently used in treaties and other international instruments in the same sense as in article 25 (1) (b). (19) Over and above the conditions in article 25 (1), article 25 (2) lays down two general limits to any invocation of necessity. This is made clear by the use of the words “in any case”. Paragraph (2) (a)concerns cases where the international obligation in question explicitly or implicitly excludes reliance on necessity. Thus certain humanitarian conventions applicable to armed conflict expressly exclude reliance on military necessity. Others while not explicitly excluding necessity are intended to apply in abnormal situations of peril for the responsible State and plainly engage its essential interests. In such a case the non-availability of the plea of necessity emerges clearly from the object and the purpose of the rule. (20) According to paragraph (2) (b), necessity may not be relied on if the responsible State has contributed to the situation of necessity. Thus in the Gabčíkovo-Nagymaros Project case, the Court considered that because Hungary had “helped, by act or omission to bring” about the situation of alleged necessity, it could not now rely on that situation as a circumstance precluding wrongfulness. For a plea of necessity to be precluded under paragraph (2) (b), the contribution to the situation of necessity must be sufficiently substantial and not merely incidental or peripheral. Paragraph (2) (b) is phrased in more categorical terms than articles 23 (2) (a) and 24 (2) (a), because necessity needs to be more narrowly confined. (21) As embodied in article 25, the plea of necessity is not intended to cover conduct which is in principle regulated by the primary obligations. This has a particular importance in relation to the rules relating to the use of force in international relations and to the question of “military necessity”. It is true that in a few cases, the plea of necessity has been invoked to excuse military action abroad, in particular in the context of claims to humanitarian intervention. The question whether measures of forcible humanitarian intervention, not sanctioned pursuant to Chapters VII or VIII of the Charter of the United Nations, may be lawful under modern international law is not covered by article 25. The same thing is true of the doctrine of “military necessity” which is, in the first place, the underlying criterion for a series of substantive rules of the law of war and neutrality, as well as being included in terms in a number of treaty provisions in the field of international humanitarian law. In both respects, while considerations akin to those underlying article 25 may have a role, they are taken into account in the context of the formulation and interpretation of the primary obligations.

[C] Comments and Questions 1.

2.

Draft Article 33 quoted by the Court in the Gabčíkovo case was finally adopted, with minor amendments, as Article 25 of the Articles of 2001. A number of Governments (e.g. the United Kingdom) argued that to recognise a defense of necessity would amount to a form of exemption from law which was unprincipled and undesirable. The International Law Commission relied on the ICJ's treatment of Draft Article 33 in rejecting this position. Do you think that the Court was anticipating the law-maker in this case? In any event, do you find the UK position on the substance of the defense of necessity justified by the outcome of the decision? Do you think Article 25 strikes an appropriate balance, or is it so strict that in practice necessity will never excuse?

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[D] LG&E Energy Corp., LG&E Capital Corp. & LG&E International, Inc. v. Argentine Republic (ICSID Case No. ARB/02/1), Decision on Liability of 3 October 2006, 21 ICSID Rev. – Foreign Int’l L.J. 269 (2006) [Tatiana B. de Maekelt (pres.), Francisco Rezek, Albert Jan van den Berg] [Three U.S. investors – LG&E Energy Corp, LG&E Capital Corp and LG&E International Inc (collectively “LG&E”) – had a shareholding interest in three privatized gas distributing companies in Argentina, created during the privatization in early 1990s and granted Licenses until 2027. As a consequence of the economic crisis that developed in Argentina in the late 1990s and early 2000s, the Government abrogated the guarantees provided at the time of privatization, which resulted in a great reduction in the profitability of the gas distribution business and, accordingly, returns on LG&E's investment. Consequently, LG&E sought relief before an ICSID tribunal for Argentina's breaches of the US-Argentina BIT. Argentina invoked, inter alia, the state of necessity defense.] 245. In the previous analysis, the Tribunal has determined that the conditions in Argentina from 1 December 2001 until 26 April 2003 were such that Argentina is excused from liability for the alleged violation of its Treaty obligations due to the responsive measures it enacted. The concept of excusing a State for the responsibility for violation of its international obligations during what is called a “state of necessity” or “state of emergency” also exists in international law. While the Tribunal considers that the protections afforded by Article XI have been triggered in this case, and are sufficient to excuse Argentina's liability, the Tribunal recognizes that satisfaction of the state of necessity standard as it exists in international law (reflected in Article 25 of the ILC's Draft Articles on State Responsibility) supports the Tribunal's conclusion. *** 247. The United Nations Organization has understood that the invocation of a state of necessity depends on the concurrent existence of three circumstances, namely: a danger to the survival of the State, and not for its interests, is necessary; that danger must not have been created by the acting State; finally, the danger should be serious and imminent, so that there are no other means of avoiding it. *** 250. Taking each element in turn, Article 25 requires first that the act must be the only means available to the State in order to protect an interest. According to S.P. Jagota, a member of the Commission, such requirement implies that it has not been possible for the State to “avoid by any other means, even a much more onerous one that could have been adopted and maintained the respect of international obligations. The State must have exhausted all possible legal means before being forced to act as it does.” Any act that goes beyond the limits of what is strictly necessary “may not be considered as no longer being, as such, a wrongful act, even if justification of the necessity may have been admitted.” 251. The interest subject to protection also must be essential for the State. What qualifies as an “essential” interest is not limited to those interests referring to the State's existence. As evidence demonstrates, economic, financial or those interests related to the protection of the State against any danger seriously compromising its internal or external situation, are also considered essential interests. Roberto Ago has stated that essential interests include those related to “different matters such as the economy, ecology or other.” Julio Barboza affirmed that the threat to an essential interest would be identified by considering, among other things, “a serious threat against the existence of the State, against its political or economic survival, against the maintenance of its essential services and operational possibilities, or against the conservation of internal peace or its territory's ecology.” *** 253. The interest must be threatened by a serious and imminent danger. The threat, according to Roberto Ago, “must be ‘extremely grave’ and ‘imminent.’” In this respect, James Crawford has opined that the danger must be established objectively and not only deemed possible. It must be imminent in the sense that it will soon occur. 254. The action taken by the State may not seriously impair another State's interest. In this respect, the Commission has observed that the interest sacrificed for the sake of necessity must be, evidently, less important than the interest sought to be preserved through the action. The idea is to prevent against the possibility of invoking the state of necessity only for the safeguard of a non-essential interest. 255. The international obligation at issue must allow invocation of the state of necessity. The inclusion of an article authorizing the state of necessity in a Bilateral Investment Treaty constitutes the acceptance, in the relations between States, of the possibility that one of them may invoke the state of necessity. 256. The State must not have contributed to the production of the state of necessity. It seems logical that if the State has contributed to cause the emergency, it should be prevented from invoking the state of necessity. If there is fault by the State, the exception disappears, since in such case the causal relationship between the State's act

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and the damage caused is produced. The Tribunal considers that, in the first place, Claimants have not proved that Argentina has contributed to cause the severe crisis faced by the country; secondly, the attitude adopted by the Argentine Government has shown a desire to slow down by all the means available the severity of the crisis. 257. The essential interests of the Argentine State were threatened in December 2001. It faced an extremely serious threat to its existence, its political and economic survival, to the possibility of maintaining its essential services in operation, and to the preservation of its internal peace. There is no serious evidence in the record that Argentina contributed to the crisis resulting in the state of necessity. In this circumstances, an economic recovery package was the only means to respond to the crisis. Although there may have been a number of ways to draft the economic recovery plan, the evidence before the Tribunal demonstrates that an across-the-board response was necessary, and the tariffs on public utilities had to be addressed. It cannot be said that any other State's rights were seriously impaired by the measures taken by Argentina during the crisis. Finally, as addressed above, Article XI of the Treaty exempts Argentina of responsibility for measures enacted during the state of necessity. 258. While this analysis concerning Article 25 of the Draft Articles on State Responsibility alone does not establish Argentina's defense, it supports the Tribunal's analysis with regard to the meaning of Article XI's requirement that the measures implemented by Argentina had to have been necessary either for the maintenance of public order or the protection of its own essential security interests. 259. Having found that the requirements for invoking the state of necessity were satisfied, the Tribunal considers that it is the factor excluding the State from its liability vis-à-vis the damage caused as a result of the measures adopted by Argentina in response to the severe crisis suffered by the country. *** 261. Following this interpretation the Tribunal considers that Article XI establishes the state of necessity as a ground for exclusion from wrongfulness of an act of the State, and therefore, the State is exempted from liability. This exception is appropriate only in emergency situations; and once the situation has been overcome, i.e. certain degree of stability has been recovered; the State is no longer exempted from responsibility for any violation of its obligations under the international law and shall reassume them immediately.

[E] CMS Gas Transmission Company v. Argentine Republic (ICSID Case No. ARB/01/8), Decision on Annulment of 25 September 2007, 14 ICSID Rep. 251, 270-271, 274-277 (2009) [Gilbert Guillaume (pres.), Nabil Elaraby, James R. Crawford] [CMS, a US corporation, owned a 30% share of TGN, an Argentinean gas transportation company. As a consequence of the economic crisis, the Argentinean Government abrogated the guarantees provided at the time of privatization, which resulted in an adverse impact on CMs's business and breached the guarantees which protected its investment in TGN. CMS sought relief before an ICSID tribunal for Argentina's breaches of the US-Argentina BIT. Argentina invoked state of necessity under both customary international law and Article XI of the BIT, which the Tribunal rejected. In September 2005, Argentina applied for an annulment of the Award arguing that the Tribunal: (a) failed to state reasons for its rejection of Argentina's defense of necessity; and (b) exceeded its powers by failing to distinguish between treaty and customary claims.] (Citations selectively omitted) 103. The Tribunal then undertook the task of finding whether the Argentine crisis met the various requirements of Article 25. It expressed doubts as to whether “an essential interest” of the State was involved in the matter and whether there was in this case a “grave and imminent peril”. It added that the measures taken by Argentina “were not the only steps available” to safeguard its interest and concluded that the conditions set out under paragraph 1(a) of Article 25 were not met. *** 105. Passing to paragraph 2 of that Article, the Tribunal examined whether the object and purpose of the BIT excluded necessity. It arrived to the conclusion that “the Argentine crisis was severe but did not result in total economic and social collapse” and that in such a situation the “Treaty will prevail over any plea of necessity.” 106. The Tribunal further observed that Argentina's “government policies and their shortcomings significantly contributed to the crisis” and that consequently state of necessity was precluded by paragraph 2(b) of Article 25. *** 108. Then the Tribunal noted that “[t]he discussion on necessity and emergency is not confined to customary international law as there are also specific provisions of the Treaty dealing with this matter.” In this respect it first recalled that Article XI of the BIT provides:

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“This treaty shall not preclude the application by either Party of measures necessary for the maintenance of public order, the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.” 109. In this respect the Tribunal first determined that “there is nothing in the context of customary international law or the object and purpose of the Treaty that could on its own exclude major economic crises from the scope of Article XI.” It added that “[a]gain, the issue is then to establish how grave an economic crisis must be so as to qualify as an essential security interest, a matter discussed above.” 110. Then the Tribunal, in the light of a lengthy discussion of the question by the Parties and their experts, expressed the view that “the clause of Article XI of the Treaty is not a self-judging clause”. Accordingly it decided that the judicial review it had to perform under that clause was a “substantive review”. *** (d) The Committee’s view *** (ii) Manifest excess of powers 128. As indicated above the Tribunal, as likewise the parties, assimilated the conditions necessary for the implementation of Article XI of the BIT to those concerning the existence of the state of necessity under customary international law. Moreover, following Argentina's presentation, the Tribunal dealt with the defense based on customary law before dealing with the defense drawn from Article XI. Argentina submits before the Committee that in doing so, the Tribunal on both points manifestly exceeded its powers. 129. The Committee observes first that there is some analogy in the language used in Article XI of the BIT and in Article 25 of the ILC's Articles on State Responsibility. The first text mentions “necessary” measures and the second relates to the “state of necessity”. However Article XI specifies the conditions under which the Treaty may be applied, whereas Article 25 is drafted in a negative way: it excludes the application of the state of necessity on the merits, unless certain stringent conditions are met. Moreover, Article XI is a threshold requirement: if it applies, the substantive obligations under the Treaty do not apply. By contrast, Article 25 is an excuse which is only relevant once it has been decided that there has otherwise been a breach of those substantive obligations. 130. Furthermore Article XI and Article 25 are substantively different. The first covers measures necessary for the maintenance of public order or the protection of each Party's own essential security interests, without qualifying such measures. The second subordinates the state of necessity to four conditions. It requires for instance that the action taken “does not seriously impair an essential interest of the State or States towards which the obligation exists, or of the international community as a whole”, a condition which is foreign to Article XI. In other terms the requirements under Article XI are not the same as those under customary international law as codified by Article 25, as the Parties in fact recognized during the hearing before the Committee. On that point, the Tribunal made a manifest error of law. 131. Those two texts having a different operation and content, it was necessary for the Tribunal to take a position on their relationship and to decide whether they were both applicable in the present case. The Tribunal did not enter into such an analysis, simply assuming that Article XI and Article 25 are on the same footing. 132. In doing so the Tribunal made another error of law. One could wonder whether state of necessity in customary international law goes to the issue of wrongfulness or that of responsibility. But in any case, the excuse based on customary international law could only be subsidiary to the exclusion based on Article XI. 133. If state of necessity means that there has not been even a prima facie breach of the BIT, it would be, to use the terminology of the ILC, a primary rule of international law. But this is also the case with Article XI. In other terms, and to take the words of the International Court of Justice in a comparable case, if the Tribunal was satisfied by the arguments based on Article XI, it should have held that there had been “no breach” of the BIT. Article XI and Article 25 thus construed would cover the same field and the Tribunal should have applied Article XI as the lex specialis governing the matter and not Article 25. 134. If, on the contrary, state of necessity in customary international law goes to the issue of responsibility, it would be a secondary rule of international law – and this was the position taken by the ILC. In this case, the Tribunal would have been under an obligation to consider first whether there had been any breach of the BIT and whether such a breach was excluded by Article XI. Only if it concluded that there was conduct not in conformity with the Treaty would it have had to consider whether Argentina's responsibility could be precluded in whole or in part under customary international law. 135. These two errors made by the Tribunal could have had a decisive impact on the operative part of the Award. As admitted by CMS, the Tribunal gave an erroneous interpretation to Article XI. In fact, it did not examine whether the conditions laid down

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by Article XI were fulfilled and whether, as a consequence, the measures taken by Argentina were capable of constituting, even prima facie, a breach of the BIT. If the Committee was acting as a court of appeal, it would have to reconsider the Award on this ground. 136. The Committee recalls, once more, that it has only a limited jurisdiction under Article 52 of the ICSID Convention. In the circumstances, the Committee cannot simply substitute its own view of the law and its own appreciation of the facts for those of the Tribunal. Notwithstanding the identified errors and lacunas in the Award, it is the case in the end that the Tribunal applied Article XI of the Treaty. Although applying it cryptically and defectively, it applied it. There is accordingly no manifest excess of powers.

[F] National Grid PLC v. Argentine Republic, Award of 3 November 2008 (11) [Alejandro Miguel Garro (pres.), Judd L. Kessler, Andrés Rigo Sureda] [National Grid PLC made investments in the Argentinean electrical power industry, following privatization measures introduced by Argentina in 1989 and 1991. The British company subsequently brought a claim alleging that the measures taken by Argentina in 2002 as a result of the economic crisis had resulted in various breaches of the BIT between the United Kingdom and Argentina, including the expropriation of the company's investment, the breach of the standard of “fair and equitable treatment”, and the breach of the duty to provide “protection and constant security” to foreign investment. Among other arguments, Argentina invoked the state of necessity defense under customary international law.] (Citations selectively omitted) 254. Next, the Tribunal must address the significance of the absence in the Treaty of an equivalent provision to Article XI of the US-Argentina BIT. The issue for the Tribunal is whether, as argued by the Respondent, the fact that the Argentine Republic entered into the Treaty detracts from its capacity to handle emergencies and other similar powers. 255. The Tribunal considers that, by concluding the Treaty with the United Kingdom, the Respondent did not limit its powers that as a sovereign it would have under international law except to the extent provided in the Treaty. What these powers are in the context of the state of necessity defense argued by the Respondent are best analyzed by turning to the conditions under which such defense is recognized under Article 25 of the Draft Articles, which both Parties agree reflect the current status of customary international law. … *** 257. The Tribunal will now proceed to examine whether the conditions of Article 25 of the Draft Articles have been met by the Respondent bearing in mind that, while the state of necessity has been accepted by tribunals as an admissible defense in theory, it has rarely been found to exist in practice because of its exceptional nature. In the words of the Commentary to the Draft Articles, “necessity will only rarely be available to excuse non-performance of an obligation and … it is subject to strict limitations to safeguard against possible abuse.” 258. The Tribunal will consider first the threshold question of whether the Respondent contributed to the situation of necessity which it now raises in its defense. In the Commentary to the Draft Articles, it is stated that such contribution “must be sufficiently substantial and not merely incidental or peripheral.” The Claimant has pointed out that the ICJ rejected Hungary's necessity defense in the Gabcikovo-Nagymaros Project case because it had “helped” to bring about the situation in question, and has interpreted “helped” to mean that mere help in the development of the crisis would make the necessity defense inadmissible. … *** 260. The evidence before the Tribunal shows that the crisis was caused by internal and external factors and that these factors were substantive and direct. As noted in the evaluation of the crisis by the IMF, both types of factors played a role and their importance varied over time but they all had a significant part in contributing to its seriousness. Internal factors such as external indebtedness, fiscal policies or labor market rigidity were under the control of the Respondent and created a fertile ground for the crisis to develop when in the late nineties the external factors adduced by the Respondent came to play. The Respondent's response to the crisis further contributed to it. In the words of the IMF study, the crisis was “exacerbated by a series of policy mistakes…notably the capital controls, the corralito and corralón, and the asymmetrical pesoization and indexation.” Mindful of the categorical terms of paragraph 2(b) of Article 25 of the Draft Articles, the Tribunal concludes that the Respondent has failed to show that it did not contribute to the situation of necessity on which it based its defense. 261. This conclusion is shared by the tribunals in CMS and Enron. On the other hand, the LG&E tribunal determined otherwise. In this respect, the Tribunal observes that in that case, the tribunal had previously reached the conclusion that a situation existed under Article XI of the US-Argentina BIT which provides that said treaty does not preclude “the application by either Party of measures necessary for the maintenance of public order,

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the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.” After determining that the protections under Article XI applied in the LG & E case, the tribunal notes that “satisfaction of the state of necessity standard as it exists in international law (reflected in Article 25 of the ILC's Draft Articles on State Responsibility) supports the Tribunal's conclusion.” Then as it proceeds to analyze the requirements under this article and, as regards the State's contribution to the crisis, the LG&E Tribunal considered that the “Claimants have not proved that the Respondent has contributed to cause the severe crisis faced by the country.” Thus, that tribunal placed on the claimants the burden of proof of an allegation made by the Respondent. The lack of an article in the Treaty equivalent to Article XI and the fact that the Tribunal considers it to be the burden of the Respondent to sustain its allegations may explain the different conclusion reached by the Tribunal. 262. Having found that the Respondent's own evidence shows that its contribution to the crisis was substantial, the Tribunal does not need to address whether the state of necessity alleged by the Respondent meets the other conditions set forth in Article 25 of the Draft Articles for its admissibility since these are listed as cumulative conditions: failure to meet any of them is sufficient ground to reject the necessity defense.

§10.05 CORRUPTION A problem that frequently arises in arbitral practice is that of the transaction which one party alleges (with or without supporting evidence) to have been obtained by bribery of some official or participant in the negotiations. Under many legal systems, an agreement obtained by corruption is void ab initio: this is also true in international law (see Vienna Convention on the Law of Treaties, 1969, Article 50). Moreover, it can be argued, if bribery in fact induced the transaction, any arbitration clause in the contract is likewise void; where in such a case is there a basis for la compètence de la compètence? But allegations of bribery or corruption raise difficult problems. From one point of view they are easy to make and difficult to prove; from another, a party may stand to lose substantial investments on the basis of asserted conduct which was merely incidental to the transaction, or was carried out by a local intermediary without authorization, or occurred at a much earlier date, since which both parties have acted in reliance on the transaction. The work of such bodies as Transparency International (see http:// www.transparency.org/) has demonstrated the extent of the general problem of corruption in a significant number of states, but it is still necessary to deal with specific allegations in a way that is fair to the parties.

[A] OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (1997), 37 I.L.M. 1 (1998) Preamble The Parties, Considering that bribery is a widespread phenomenon in international business transactions, including trade and investment, which raises serious moral and political concerns, undermines good governance and economic development, and distorts international competitive conditions; Considering that all countries share a responsibility to combat bribery in international business transactions; Having regard to the Revised Recommendation on Combating Bribery in International Business Transactions, adopted by the Council of the Organisation for Economic Cooperation and Development (OECD) on 23 May 1997, C(97)123/FINAL, which, inter alia, called for effective measures to deter, prevent and combat the bribery of foreign public officials in connection with international business transactions, in particular, the prompt criminalisation of such bribery in an effective and coordinated manner and in conformity with the agreed common elements set out in that Recommendation and with the jurisdictional and other basic legal principles of each country; Welcoming other recent developments which further advance international understanding and co-operation in combating bribery of public officials, including actions of the United Nations, the World Bank, the International Monetary Fund, the World Trade Organisation, the Organisation of American States, the Council of Europe and the European Union; Welcoming the efforts of companies, business organisations, trade unions as well as other non-governmental organisations to combat bribery; Recognising the role of governments in the prevention of solicitation of bribes from individuals and enterprises in international business transactions; Recognising that achieving progress in this field requires not only efforts on a national level but also multilateral co-operation, monitoring and follow-up; Recognising that achieving equivalence among the measures to be taken by the Parties is an essential object and purpose of the Convention, which requires that the Convention be

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ratified without derogations affecting this equivalence; Have agreed as follows: Article 1– The Offence of Bribery of Foreign Public Officials 1. Each Party shall take such measures as may be necessary to establish that it is a criminal offence under its law for any person intentionally to offer, promise or give any undue pecuniary or other advantage, whether directly or through intermediaries, to a foreign public official, for that official or for a third party, in order that the official act or refrain from acting in relation to the performance of official duties, in order to obtain or retain business or other improper advantage in the conduct of international business. 2. Each Party shall take any measures necessary to establish that complicity in, including incitement, aiding and abetting, or authorisation of an act of bribery of a foreign public official shall be a criminal offence. Attempt and conspiracy to bribe a foreign public official shall be criminal offences to the same extent as attempt and conspiracy to bribe a public official of that Party. 3. The offences set out in paragraphs 1 and 2 above are hereinafter referred to as “bribery of a foreign public official”. 4. For the purpose of this Convention: –

– –

“foreign public official” means any person holding a legislative, administrative or judicial office of a foreign country, whether appointed or elected; any person exercising a public function for a foreign country, including for a public agency or public enterprise; and any official or agent of a public international organisation; “foreign country” includes all levels and subdivisions of government, from national to local; “act or refrain from acting in relation to the performance of official duties” includes any use of the public official's position, whether or not within the official's authorised competence.

Article 2 – Responsibility of Legal Persons Each party shall take such measures as may be necessary, in accordance with its legal principles, to establish the liability of legal persons for the bribery of a foreign public official. Article 3 – Sanctions 1. The bribery of a foreign public official shall be punishable by effective, proportionate and dissuasive criminal penalties. The range of penalties shall be comparable to those applicable to the bribery of the Party's own public officials and shall, in the case of natural persons, include deprivation of liberty sufficient to enable effective mutual legal assistance and extradition. 2. In the event that, under the legal system of a Party, criminal responsibility is not applicable to legal persons, that Party shall ensure that legal persons shall be subject to effective, proportionate and dissuasive non-criminal sanctions, including monetary sanctions, for bribery of foreign public officials. 3. Each Party shall take such measures as may be necessary to provide that the bribe and the proceeds of the bribery of a foreign public official, or property the value of which corresponds to that of such proceeds, are subject to seizure and confiscation or that monetary sanctions of comparable effect are applicable. 4. Each Party shall consider the imposition of additional civil or administrative sanctions upon a person subject to sanctions for the bribery of a foreign public official. Article 4 – Jurisdiction 1. Each Party shall take such measures as may be necessary to establish its jurisdiction over the bribery of a foreign public official when the offence is committed in whole or in part in its territory. 2. Each Party which has jurisdiction to prosecute its nationals for offences committed abroad shall take such measures as may be necessary to establish its jurisdiction to do so in respect of the bribery of a foreign public official, according to the same principles. 3. When more than one Party has jurisdiction over an alleged offence described in this Convention, the Parties involved shall, at the request of one of them, consult with a view to determining the most appropriate jurisdiction for prosecution. 4. Each Party shall review whether its current basis for jurisdiction is effective in the fight against the bribery of foreign public officials and, if it is not, shall take remedial steps. Article 5 – Enforcement Investigation and prosecution of the bribery of a foreign public official shall be subject to the applicable rules and principles of each Party. They shall not be influenced by considerations of national economic interest, the potential effect upon relations with

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another State or the identity of the natural persons or legal entities involved. Article 6 – Statute of Limitations Any statute of limitations applicable to the offence of bribery of a foreign public official shall allow an adequate period of time for the investigation and prosecution of this offence. Article 7 – Money Laundering Each Party which has made bribery of its own public official a predicate offence for the purpose of the application of its money laundering legislation shall do so on the same terms for the bribery of a foreign public official, without regard to the place where the bribery occurred. Article 8 – Accounting 1. In order to combat bribery of foreign public officials effectively, each Party shall take such measures as may be necessary, within the framework of its laws and regulations regarding the maintenance of books and records, financial statement disclosures, and accounting and auditing standards, to prohibit the establishment of off-the-books accounts, the making of off-the-books or inadequately identified transactions, the recording of non-existent expenditures, the entry of liabilities with incorrect identification of their object, as well as the use of false documents, by companies subject to those laws and regulations, for the purpose of bribing foreign public officials or of hiding such bribery. 2. Each Party shall provide effective, proportionate and dissuasive civil, administrative or criminal penalties for such omissions and falsifications in respect of the books, records, accounts and financial statements of such companies. Article 9 – Mutual Legal Assistance 1. Each Party shall, to the fullest extent possible under its laws and relevant treaties and arrangements, provide prompt and effective legal assistance to another Party for the purpose of criminal investigations and proceedings brought by a Party concerning offences within the scope of this Convention and for non-criminal proceedings within the scope of this Convention brought by a Party against a legal person. The requested Party shall inform the requesting Party, without delay, of any additional information or documents needed to support the request for assistance and, where requested, of the status and outcome of the request for assistance. 2. Where a Party makes mutual legal assistance conditional upon the existence of dual criminality, dual criminality shall be deemed to exist if the offence for which the assistance is sought is within the scope of this Convention. 3. A Party shall not decline to render mutual legal assistance for criminal matters within the scope of this Convention on the ground of bank secrecy. Article 10 – Extradition 1. Bribery of a foreign public official shall be deemed to be included as an extraditable offence under the laws of the Parties and the extradition treaties between them. 2. If a Party which makes extradition conditional on the existence of an extradition treaty receives a request for extradition from another Party with which it has no extradition treaty, it may consider this Convention to be the legal basis for extradition in respect of the offence of bribery of a foreign public official. 3. Each Party shall take any measures necessary to assure either that it can extradite its nationals or that it can prosecute its nationals for the offence of bribery of a foreign public official. A Party which declines a request to extradite a person for bribery of a foreign public official solely on the ground that the person is its national shall submit the case to its competent authorities for the purpose of prosecution. 4. Extradition for bribery of a foreign public official is subject to the conditions set out in the domestic law and applicable treaties and arrangements of each Party. Where a Party makes extradition conditional upon the existence of dual criminality, that condition shall be deemed to be fulfilled if the offence for which extradition is sought is within the scope of Article 1of this Convention.

[B] Argentine Engineer v. British Company (ICC Case No. 1110), Award of 1963, 21 Y.B. Comm’l Arb. 47, 50-51 (1996) [Gunnar Lagergren (sole arbitrator)] (Citations selectively omitted) [16] Finally, it cannot be contested that 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. This principle is especially apt for use before international arbitration tribunals that lack a ‘law of the forum’ in the ordinary sense of the term.

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[17] Now, reverting to the facts in this case. – As might be expected the documents drawn up seem on their face to be legal and bear the semblance of ordinary commercial documents. However, it is, in my judgment, plainly established from the evidence taken by me that the agreement between the parties contemplated the bribing of Argentine officials for the purpose of obtaining the hoped-for business. [18] In saying this I do not mean to imply that claimant had no more to do than to hand over a commission to his respective collaborators; on the contrary, I am convinced that he had to perform other, important, and quite irreproachable functions. This has to be taken into consideration, but does not obscure the general image that the major part of the commissions to be paid to him were to be used for bribes. [19] Even so, however, there are other circumstances which should be taken into account before it could be established that the action brought before me seriously affects bonos mores. I have to accept (witness 3's) statement that during the Peron regime everyone wishing to do business in the Argentine was faced with the question of bribes, and that the practice of giving commissions to persons in a position to influence or decide upon public awards of contracts seems to have been more or less accepted or at least tolerated in the Argentine at that time. On the other hand it must be remembered that we have to do here not with a mere favour which could be overlooked, or even with the ‘little bit of money’ which (witness 1) with some understatement referred to. Huge amounts are involved … [20] Although these commissions were not to be used exclusively for bribes, a very substantial part of them must have been intended for such use. Whether one is taking the point of view of good government or that of commercial ethics it is impossible to close one's eyes to the probable destination of amounts of this magnitude, and to the destructive effect thereof on the business pattern with consequent impairment of industrial progress. Such corruption is an international evil; it is contrary to good morals and to an international public policy common to the community of nations. [21] However, before invoking good morals and public policy as barring parties from recourse to judicial or arbitral instances in settling their disputes care must be taken to see that one party is not thereby enabled to reap the fruits of his own dishonest conduct by enriching himself at the expense of the other. [22] This, however, cannot happen in the case before me. Claimant has not even alleged that he personally has been or will be obliged to pay to anyone any part of the commission notes, nor has he asked for payment of expenses incurred for the benefit of the respondent. [23] After weighing all the evidence I am convinced that a case such as this, involving such gross violations of good morals and international public policy, can have no countenance in any court either in the Argentine or in France or, for that matter, in any other civilised country, nor in any arbitral tribunal. Thus, jurisdiction must be declined in this case. It follows from the foregoing, that in concluding that I have no Jurisdiction, guidance has been sought from general principles denying arbitrators to entertain disputes of this nature rather than from any national rules on arbitrability. Parties who ally themselves in an enterprise of the present nature must realise that they have forfeited any right to ask for the assistance of the machinery of justice (national courts or arbitral tribunals) in settling their disputes.

[C] J. Gillis Wetter, Issues of Corruption before International Arbitral Tribunals: The Authentic Text and True Meaning of Judge Gunnar Lagergren’s 1963 Award in ICC Case No. 1110, 10 Arb. Int’l 277, 277-281 (1994) (Citations selectively omitted) Few international commercial arbitral awards have been cited with such frequency as the Award rendered by Judge Gunnar Lagergren in 1963 in ICC Case No. 1110. Again, few awards have been subjected to equally uniform criticism; as recently as on 2 September 1993 the Swiss Federal Tribunal dismissed Judge Lagergren's opinion as ‘dépassée’… At a seminar in Stockholm in April 1994 on the subject of arbitration and unlawful transactions arranged by the Swedish National Committee of the ICC it was revealed that the Award in ICC Case No. 1110 has been inaccurately reported and that most subsequent comments on it by scholars, arbitrators and judges have been misdirected, being based on false assumptions as to the manner in which the proceedings were conducted and what was pronounced in the Award. With the permission of the Secretariat of the International Court of Arbitration of the ICC and of Judge Lagergren the Award is therefore reproduced in its entirety as an annex to this article, transcribed from Judge Lagergren's copy. The sole editorial amendments introduced in the text are such caused by the deletion of all names of companies and individuals, as well as some specific geographical locations, involved in the dispute. In addition, the word ‘Opinion’ has been inserted at the end of the initial descriptive part of the Award, and the paragraphs thereafter have been numbered to facilitate references. *** Judge Lagergren's Award was referred to in an award rendered by another sole arbitrator,

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the Austrian jurist Hon. Professor Dr Roland Loewe in ICC Case No. 3916 rendered in 1982… In that Award, Professor Loewe reportedly stated that he could not agree with Judge Lagergren's decision to decline jurisdiction on the ground that the case related to the payment of bribes under a contract which seriously violated bonos mores or international public policy. The reasons prompting Professor Loewe to take this position are not referred to in the summary case report appearing in Clunet but are recorded in a statement in the Award … That pronouncement reads as follows: Pourtant, la présente sentence … ne peut non plus suivre l'arbitre Lagergren lorsqu'il arrive à la conclusion qu'une prétention tirée d'un accord violant les bonnes moeurs et/ ou l'ordre public ne peut pas être jugée ni par un tribunal étatique ni par un tribunal arbitral. La clause arbitrale doit être considérée indépendamment du contrat dont elle fait partie (cf. L'article V § 3 de la Convention européenne du 21 avril 1961 sur l'arbitrage commercial international dont la France fait partie). Elle n'est pas affectée par une nullité frappant les autres stipulations entre les parties. In subsequent arbitral awards, court judgments and scholarly comments the view advocated by Professor Loewe … has been accepted almost without exception for the same reason, i.e. that Judge Lagergren committed a mistake in not recognising and implementing the Kompetenz-Kompetenz and separability doctrines. In 1991, the issue was addressed in the large, ongoing arbitration in ICC Case No. 6401, Westinghouse International Projects Company et al. v. National Power Corporation, in which the eminent tribunal (Professor Claude Reymond, Mr Robert B. von Mehren and Mr Serge Lazareff) found occasion to pronounce in their Preliminary Award on Issues of Jurisdiction and Contract Validity dated 19 December 1991: The parties, however, differ on the effect on the arbitration clause of the nullity or invalidity of the main contract resulting from bribery. The Claimants contend that in all events the doctrine applies; the Defendants argue to the contrary that it would not apply if they establish that the main contracts were obtained by bribery. As a matter of principle, the Tribunal would have been ready to accept that the doctrine of separability is not an absolute to be applied in all cases, as contended by the Claimants. There may be instances where a defect going to the root of an agreement between parties affects both the main contract and the arbitration clause. An obvious example is a contract obtained by threat. With regard to the impact of bribery, it would remain to be seen whether bribery, if proved, affects both the main contract and the arbitration clause and renders both null and invalid. However, the Tribunal does not have to solve this delicate issue since it has found on the facts presented to it that the Defendants have failed to prove their allegations of bribery. Their contention of the invalidity of the main contracts having been rejected, see infra Section IV, there is no need to examine whether the arbitration clauses would have survived if the Tribunal had reached a contrary result.5 The Tribunal presumably intended the sixth sentence in the paragraph quoted above to convey the opinion that the Tribunal recognised the impact of the separability doctrine to be that the arbitration agreement should not be held to be null and void unless it could be proved that that agreement as such was obtained by corruption. It is evidently conceivable that an arbitration clause per se is obtained by corruption even though the primary contract in which it appears is not so tainted. An arbitration agreement can have a considerable commercial value vis-à-vis, e.g., a State-owned company which is adverse to international commercial arbitration. Therefore, it may be said that application of the separability doctrine in the manner seemingly envisaged by the Tribunal in ICC Case No. 6401 is more tangible and partakes much less of a fictional nature than in other cases. This notwithstanding, two observations are pertinent. Firstly, the separability doctrine historically has been inspired by the need to preserve and protect the arbitral remedy in situations where the primary contract has been lawfully or unlawfully terminated or rescinded, or where the defence against a claim for breach of contract has been fraud in the inducement, duress or other similar grounds of invalidity. The idea to extend the doctrine to embrace corruption cases in the sense suggested by the Tribunal in ICC Case No. 6401 (or, to mention an analogous problem, to assignment and other legal succession issues) is not a proposition which is self-evident enough not to warrant serious analysis and discussion. Secondly, an arbitral tribunal which, having determined that acceptance of the arbitration agreement was not secured through bribery, proceeds to examine whether the primary contract was so obtained still cannot avoid deciding the issue whether the claim on the merits is arbitrable under the applicable law. Arbitrability, thus, has two dimensions which are most likely to become visible in corruption cases and constitutes a threshold issue which should not be treated in the somewhat simplistic manner suggested in many recent legal writings. The Preliminary Award on Issues of jurisdiction and Contract Validity in ICC Case No. 6401 was appealed to the Swiss Federal Tribunal which confirmed it on 2 September 1993. In its Judgment, the Court significantly pronounced: Dans une sentence de l'année 1963 … qui a donné lieu à de nombreux commentaires, une autorité arbitrale a estimé que les contrats entachés de corruption ne peuvent être examinés par aucune juridiction, même arbitrale.

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Cette opinion a fait l'object de critiques virulentes … en raison de son incompatibilité avec le principe de l'autonomie de la clause compromissoire. On doit actuellement la considérer comme dépassée; par ailleurs, elle se révèle inconciliable, de prime abord, avec les dispositions de l'art. 178 al. 3 LDIP. As seen from Judge Lagergren's Award in ICC Case No. 1110 …, the arbitration in that case was based on a specially negotiated arbitration agreement dated 6 July 1959 and subsequently of course elaborated in Terms of Reference signed by the Sole Arbitrator and the parties. It is said in the English Consultation Paper referred to above that ‘the law and practice of English arbitration does not require an express doctrine of KompetenzKompetenz’. Judge Lagergren initially studied the pleadings filed by the parties. At an oral hearing in Paris on 17, 18, 19 and 22 September 1962 three persons testified and written witness statements by four additional persons were considered. Judge Lagergren brought up the issue of his own jurisdiction of his own motion, ex officio (see para. 2 of the Opinion), and counsel for both parties argued their respective cases. Without using the term Kompetenz-Kompetenz, Judge Lagergren clearly implemented the doctrine by inquiring into his own jurisdiction in the light of the parties' submissions. The important aspect which has been entirely overlooked in all subsequent writings on the subject is, however, that Judge Lagergren had no reason to refer to the separability doctrine. This is so for the very simple reason that the arbitration agreement in ICC Case No. 1110 in fact truly constituted a wholly separate and independent agreement drawn up for the purpose of the reference after the dispute had arisen. Indeed, Judge Lagergren expressly said in para. 5 of his Opinion that the compromis and the Terms of Reference were separate and distinct from the contractual relationship of the parties on the merits and governed by French procedural law. For 30 years, therefore, reports and comments have been based on a misconception caused by reliance on inaccurate, secondary sources. As will be seen, the ratio decidendi of Judge Lagergren's Award was his finding that the dispute was not arbitrable in the strict doctrinal sense. The present writer would be inclined to say that the question whether or not a dispute is arbitrable is one which must be examined by an international arbitral tribunal of its own motion, ex officio, because a tribunal must satisfy itself that it does have jurisdiction legally conferred upon it by the parties, and that in logic the choice of the law with reference to which this question is to be decided is restricted to four conceivable options, viz.: (i) the lex loci arbitri, (ii) the proper law of the contract, (iii) the law of the jurisdiction of enforcement or (iv) the loi de police of the jurisdiction in which the primary contract was intended to be executed. It will be seen from the annexed Award that Judge Lagergren took the precaution of considering all of these options except (iv), expressing a certain preference for choosing (ii). What he did in addition was to go further in paras. 16, 20 and 23 of his Opinion. Paras. 20 and 23 are those most often quoted. There Judge Lagergren enunciated a general principle of law and gave preference to it over any national rules on arbitrability. In making his pronouncements Judge Lagergren may have gone too far at the time; if the OECD, as the organisation is in the course of doing, makes a recommendation to its 24 Member Governments to support an effort to unify and strengthen national penal and tax laws on corruption it may become more apt to speak of the nascent emergence of a general principle of law to the same effect. This is not the place to discuss which of the theoretically conceivable laws should be applied by an international arbitrator to determine the question whether the dispute before him is or is not arbitrable, in whole or in part… Be that as it may, the basic legal method which Judge Lagergren used in analysing the questions before him was sound in theory. He implemented his Kompetenz-Kompetenz. He rightly raised the issue of his jurisdiction ex officio. He understood that the compromis and the Terms of Reference were separate agreements. And he inquired into the whole spectrum of relevant laws under which the issue of arbitrability could in theory be determined. It is submitted, in conclusion, that Judge Lagergren's approach represents the sole proper way in which issues of arbitrability of this nature should be analysed.

[D] Comments and Questions 1. 2.

In the light of this discussion how would you assess Judge Lagergren's award? Evidently one problem in assessing arbitral jurisprudence is that of confidentiality and even the secrecy of awards. Should this be modified in order to aid in the fight against corruption, and if so how?

[E] Establishment of Middle East Country X v. South Asian Construction Company (ICC Case No. 4145), Award of 1984, 12 Y.B. Comm’l Arb 97, 102-103 (1987) 20. With respect to the issue of bribery, the arbitrators reasoned: The defendant has insisted that the Agreement was an agreement for bribery or was abused by the claimant for bribery. The claimant denied such allegation, stating that the Agreement was a consultancy agreement.

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21. This question has to be solved by trying to interpret the real intention of the parties, according to Art. 18 of the Swiss Code des Obligations (CO) which says: ‘(1) As regards both the form and content of a contract, the real intent which is mutually agreed upon shall be considered, and not an incorrect statement or method of expression used by the parties, whether due to error, or with the intention of concealing the true nature of the contract.’ 22. According to this provision, interpretation means trying to find the real intention of the parties, beyond the words used in their agreement. 23. Circumstances prior and contemporary to the agreement as well as posterior to the agreement – especially the way parties have fulfilled their obligations – have to be taken into consideration (Becker,Berner Kommentar VI, Obligationenrecht. Allgemeine Bestimmungen (Art. 1-183 OR) 2 (1941/45), ad Art. 18 CO, p. 70 et seq.; Engel, Traité des obligations en droit suisse. Dispositions générales du CO (1973), p. 165 et seq., especially p. 169; Jäggy-Gauch, Zürcher Kommentar. Obligationenrecht (1980), ad Art. 18 CO, no. 308, p. 79; ATF 95, 1969 II p. 320, 326). 24. It is obvious that if the said Agreement were an agreement for bribery, it would be null and void, according to Art. 20 CO, which states: ‘(1) A contract providing for an impossibility, having illegal contents, or violating bonos mores, is null and void.’ 25. Bribery is considered as immoral (contra bonos mores) in Swiss law (Heritier, ‘Les pots de vin’, p. 104 et seq., especially p. 106 and 111; Engel, op. cit., p. 202 ad c). 26. It must be stressed that nullity implies that both parties agree on the immoral purpose to be achieved or on the immoral means to be used in order to achieve a certain result (Von Tuhr, Partie générale du Code Fédéral des Obligations, 2 (1933/34), pp. 224-225; Engel, op. cit., p. 205; various decisions of the Federal Court quoted ad Art. 20 – footnote c, p. 12 of the Swiss Code des Obligations annoté par Scyboz et Gilliéron, 1983). 27. The defendant's accusation is not supported by direct evidence or even circumstantial evidence to be retained as convincing. 28. In this respect, it must be stressed that, following general principles of interpretation (also recognized in Swiss Law; see ad Art. 8 Code Civil Suisse; ATF 105 III 43; ATF 74, p.202; 90 p. 227; 104 p. 68, 216) a fact can be considered as proven even by the way of circumstantial evidence. However, such circumstantial evidence must lead to a very high probability. 29. This is not the case in the present litigation: – –

–

The Agreement obviously does not mention any bribery; Mr. A – the own defendant's principal witness – who was the man who signed the Agreement on behalf of defendant and with whom it was essentially discussed, categorically denied that any bribery was ever intended (three times: ‘No’). His declaration is of the utmost importance if one considers that Mr. A's declarations had been carefully prepared in advance (see his Affidavit drafted in defendant's counsel office in Paris) and that it was decisive for the defendant's thesis that the answer to such a question would be: ‘Yes'. The way the relations between defendant and the Ministry developed does not really support the idea of a bribery.

30. The final price of the contract was certainly higher than the original price of defendant's bid, but it has been shown (both parties' declarations match on this point) that there has been a constant upgrading of the initial project, so that the final price for which the contract was awarded to defendant, was not at all due to a sheer increase in the price, without counterpart – which would certainly have been suspect – but to a considerable increase in quantity and quality of the work offered by defendant in its first bid. 31. Moreover, the file shows that the final price mentioned by defendant after constant upgrading of the Project, was [equivalent to US$415 million] and that the Ministry cut it down to [equivalent of US$374 million], which is a considerable reduction, hardly understandable under the assumption that the Ministry would be bribed on money obtained by the claimants from the difference between the basic price and the ‘increased price’. 32. The Project was from the beginning (and the claimant knew it: see confidential correspondence from Mr. B's correspondence file) under the constant supervision of the World Bank team and of the committee of the Ministry. It would have been a very hazardous enterprise to start bribing all these people or to bribe only part of them. The granting of the Agreement on abnormal conditions would certainly have raised the suspicion of the unbribed. … 33. The fact that the claimant has obviously not rendered the considerable amount of work it claims to have performed is also not a sufficient ground to conclude that the

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Agreement was in reality an agreement for bribery. 34. The implication of this fact will be examined underneath, as well as the implication of Art. 10(3) of the Agreement which is certainly not quite compatible with a consultancy agreement but which certainly does not reflect any idea of bribery. 35. The arbitrators are convinced that various circumstances lead to the conclusion that the Agreement, is not only a consultancy agreement – as they will explain underneath – but do not find sufficient reasons to arrive at the conclusion it was an agreement for bribery. 36. In this respect, it must be once more pointed out that, according to Swiss Law, an agreement is null and void only if both parties agree on bribery, which has been clearly denied by defendant's own principal witness, Mr. A.

[F] Comments and Questions 1. 2.

Evidently it is difficult to prove bribery. How should tribunals take this difficulty into account? Do you detect any differences in Judge Lagergren's approach as compared with that in this award?

[G] Broker v. Contractor (ICC Case No 5622), Final Award of 1988, 19 Y.B. Comm’l Arb. 105, 110-115 (1994) (Citations selectively omitted) E. Do Claimant’s Activities Violate Swiss Public Policy? [16] With the exception of the Federal Law on unfair competition of 19 December 1986 (=LCD; Recueil Officiel des Lois Fédérales 1988 I 223), which sanctions competition abuses resulting from fraud or other violations of good faith, there exists in Switzerland no special law concerning the issues connected to the traffic in influence. The LCD is inapplicable to the case at issue, since the means of action provided for in this Law concern disputes which may arise between physical or legal persons engaged in similar commercial activities, as well as disputes which may arise between consumers and retailers. In the present case, defendant alleges that claimant developed activities consisting of using its contacts with people in Algeria who could grant defendant the contract… possibly paid bribes and in any case violated Algerian Law No. 78-02 of 11 February 1978 on the State Monopoly on Foreign Trade, thereby violating either Swiss or international public policy.” 1. Claimant’s use of its contacts in Algeria [17] The Arbitral Tribunal holds that the activities developed by claimant essentially resembled the supply of more or less confidential and discreet commercial information, together with the use of claimant's influence on the Algerian authorities. Hence, we can ask ourselves whether claimant's activities were contrary to fair trading (loyauté commerciale) and, therefore, to bonos mores. *** [19] It is difficult, on the basis of the few cases examined by the Supreme Court, to indicate the objective criteria to be used to determine with certainty whether a contractual practice does or does not violate fair trading. We must note, however, that the Supreme Court has not yet examined, to our knowledge, a case of trading in influence. The existing jurisprudence highlights two aspects: 1. 2.

In all cases a group of people had a common interest (awarding a contract, inheritance, exchange of goods between members); Some of these persons had, on the strength of hidden agreements, interfered with the rights of other members of the group.

In the present case, claimant did not conclude a secret agreement with the Algerian authorities, with the aim of altering the allocation rules. Claimant did try to use its influence on the Algerian authorities, but this attempt is not per se a violation of fair trading, at least as interpreted by the Supreme Court.” 2. The payment of bribes [20] All enterprises seek new outlets allowing them to increase their growth rate or at least to maintain a satisfactory competition level. In order to attain this goal, enterprises endeavour to hire qualified personnel and to have an effective production instrument at their disposal, so that they can offer products which can compete with those offered by their competitors. Now it happens that nowadays, especially in certain fields (armaments, sale of know-how, aviation, etc.), the products or services offered do not differ significantly in quality, or are equivalent. Hence, the manager of an enterprise or the board of a company is tempted to use various means, and particularly bribes, that is, ‘any offer (or request) concerning the granting of a hidden and not-owed material advantage to the employee of a third party with the aim of influencing this third party in

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favour of the donor’… Many enterprises, in fact, establish reserves for bribes, either by creating a ‘bribery fund’ or by including this practice in the budget. For instance, bribes may be deducted from taxes in the Federal Republic of Germany. [21] Now, we may ask ourselves whether the conclusion of the contract between defendant and the Algerian authorities depended on bribes paid by claimant. It is important to give an answer to this question, because if this were the case the contract would be null and void. The Supreme Court has affirmed this principle on several occasions. [22] The issue of bribery has been discussed at the hearings; … one of claimant's witnesses, B, maintained that the Algerian authorities were not bribed. On the other hand, at the same hearing, B also said that when [the representatives of Algeria] were in France, ‘they were taken care of’. Also, the correspondence between the former General Manager of defendant and claimant ambiguously mentions payments ‘which would have been made by defendant directly to local representatives', payments which were to be deducted from claimant's fee. Further, the high commission fee could indicate that there has been bribery … [23] In the present case, bribery has not been proved beyond doubt. It is true that it is possible to prove something through indirect evidence and that Art. 8 of the Swiss CC does not exclude indirect evidence. However, it is necessary that a sufficient ensemble of indirect evidence be collected to allow the judge to base his decision on something more than likely facts, i.e., facts which have not been proven… Thus, evidence of bribery has not been given and the indirect evidence is not sufficiently relevant.” F. Violation of the Law of Algeria and Its Consequence under Swiss Law [24] I shall not list the activities prohibited by Algerian Law No. 78-02 of 11 February 1978 on the State Monopoly on Foreign Trade, but it is important to emphasize that the Law aims at prohibiting all trading in influence and especially all interventions which can affect real or supposed relationships within Algeria and its bodies. Of course, assistance is still possible on the conditions indicated by Art. 21 of the same Law. The Law aims at ‘moralising’ somewhat the trading in influence. The issue is whether claimant's activities in Algeria violated Algerian Law No. 78-02 of 11 February 1978 and the effect of this violation under Swiss law. [25] Evidence submitted makes it possible for the Arbitral Tribunal to hold that claimant essentially gathered confidential information, surveyed, observed and also used its influence on the Algerian authorities. If we consider claimant's activities we can reasonably hold that the Law of Algeria has been violated. [26] In fact, claimant's Administrator, when describing the coordination work which was provided for in the Protocol of Agreement, said that claimant's collaborator checked how defendant's offer was proceeding through the various departments of [the Ministry], in order to make sure that defendant's offer would be preferred to the offers made by its competitors. Furthermore, claimant affirms that its task was, through its contacts in Algeria, to obtain the granting of the contract. It also says that claimant's representatives sustained important relations with persons from Algeria whom they had met at receptions and various meetings. [27] Claimant's activity reminds us of the so-called ‘lobbying’, by which an individual, company, committee, association or corporation – against payment – uses his or its influence on members of Congress to promote or prevent the passage of legislation. For this activity to be legal, the lobbyist must be registered with the Clerk of the House of Representatives of the United States and must give a regular account of all its expenses… This is a perfectly legal activity which contains no illegal elements and does not violate morality (moeurs).” G. What Are the Consequences of the Violation of the Law of Algeria under Swiss Law? [28] First of all, illegality in the sense of Art. 20(1) CO requires that provisions of Swiss law be violated. Hence, violation of foreign law provisions must be examined from the point of view of a possible affront to morality. *** [31] In this case, the Law of Algeria aims at prohibiting all trading in influence and particularly all interventions affecting real or supposed relationships within the State or the State's bodies. Hence, the Law has two aims: first, to guarantee fairness in the allocation of contracts by the Algerian authorities, by avoiding all trading in influence; second, to make sure that the bodies of Algeria choose their contractual partners on the basis of objective criteria. [32] The fight against the trading in influence is not an exclusive concern of Algeria. In fact, on the national level, most European States have adopted special corruption legislation … [33] It is unanimously recognized that trading in influence is a practice which must be sanctioned and does not deserve any juridical protection … [34] It ensues from these considerations that the Law of Algeria does not have the sole

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aim of serving the interest of Algeria … but that it aims at guaranteeing healthy and fair commercial practices and at fighting against corruption in general. In fact, the Law of Algeria lays down a general principle which must be respected by all legal systems wishing to fight corruption. This is why the violation of this Law, which concerns international public policy, is contrary to the notion of morality based on Art. 20(1) CO, which is part of Swiss public policy. [35] Hence, the brokerage contract is null and void in its entirety since, according to claimant's collaborator, 85% of claimant's activities aimed at obtaining the contract with the Algerian authorities for defendant, collecting information and legal and fiscal advice being only a marginal activity.

[H] Comments and Questions What is the role of international public policy in this decision?

[I] Partner v. 4 Partners (ICC Case No. 6286), Partial Award of 28 August 1991, 19 Y.B. Comm’l Arb. 141, 149-150 (1994) [20] The parties have entirely diverging opinions concerning the real purpose of these agreements. The claimant affirms that the illegal nature of these agreements ensues from the fact that according to the laws of the Middle Eastern Country it is forbidden to an official to do commercial business of the kind which is in question. But at that time Mr. K was a member of the diplomatic corps in a European country. One of the experts commissioned by the claimant has confirmed this opinion, whereas the expert commissioned by the defendants has declared that this type of rules could not be applied at present with all apparent strictness. [21] Without intending to discuss the practical application of the provision, the Arbitral Tribunal considers that it is difficult to accept that such a prohibition has the absolute character which the claimant attributes to it. First, it is doubtful that the prohibition also relates to a person who – if formally attached to the diplomatic corps – has a marginal position, as shown by a title the signification of which remains sibylline. Mr. K was not gainfully employed, which would practically mean that in those conditions it would be impossible for him to earn his living since any business was forbidden to him. What is more, provided that the agreements do not pursue other illegal goals, it is questionable whether this prohibition affects the validity of the agreements which third parties may have concluded with the official in question; any person infringing this rule may be subject to sanctions but this does not mean that the act concluded with a third party is void from the onset. [22] For the claimant, the illegal nature of the agreements also stems from the fact that they amount to corruption or to trading of favours. The Arbitral Tribunal does not question the rule according to which agreements with such subject-matter would be void, in pursuance of the laws of the Middle Eastern Country as well as those of Switzerland or Germany. Such a conclusion may however be adopted only if it is established that the amounts paid were intended to bribe officials or trade on their influence to obtain favours. The realization of operations such as the one in question requires the use of consultants. This is evidenced by the fact that agreements of a comparable type – although for smaller amounts – had been concluded previously with one of Mr. A's companies. Besides, it has not been established that this was an act of corruption or trading of favours. It has not been established in the procedure that the beneficiaries of these amounts have effectively played a part in respect of the concessions. On the contrary, the concessions have not been granted yet, as the Government continues the negotiation only as a result of a decision of arbitral nature. What is more, the amounts pertaining to these agreements were never paid and never will be.

[J] Comments and Questions Does this decision indicate a more relaxed approach or simply a special factual situation?

[K] Tanzania Electric Supply Company Limited v. Independent Power Tanzania Limited (ICSID Case No. ARB/98/8), Decision on Tariff and Other Remaining Issues of 9 February 2001, 8 ICSID Rep. 272, 282-283 (2005) [Kenneth Rokison (pres.), Charles Brower, Andrew Rogers] (12) [This arbitration involved a dispute over a Power Purchase Agreement (PPA) entered into by Independent Power Tanzania Limited (IPTL) and the Tanzania Electric Supply Company Limited (TANESCO). Under the Power Purchase Agreement IPTL agreed to design, construct, own, operate and maintain an electricity generating facility in Tanzania. As the Facility was being constructed various disputes arose between the parties resulting in TANESCO serving a Notice of Default under the Agreement and subsequently commencing arbitration proceedings. During those proceedings, TANESCO requested an order for discovery concerning allegations of bribery by IPTL agents to officials of the Government of Tanzania or TANESCO. TANESCO's request included the provision of Answers to Interrogatories and a Request for Admissions in relation to

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payments or gifts by IPTL. Allegations of bribery had been raised previously in the proceedings, but never formally pleaded by TANESCO. The Tribunal refused to make the orders requested for this reason. Subsequently, TANESCO filed a Reply on the Merits in which it pleaded by way of an ancillary claim under Rule 40 of the ICSID Arbitration Rules, that it was entitled to rescind the PPA on the basis of bribery. Although IPTL objected to the inclusion of the ancillary claim on a number of grounds, the Tribunal decided to permit the ancillary claim to be raised. The following extracts of the Tribunal's Decision on Tariff and Other Remaining Issues examined the bribery claim.] 3. The Issue of Bribery: 52. In the light of TANESCO's having pleaded this issue in its Reply on the Merits, and in the light of TANESCO's having declined the invitation of the Tribunal to withdraw the allegation, we must consider it on its merits and on the basis of the material before us. 53. The Tribunal concludes that the allegation fails and must be dismissed. Even if the evidence presented on behalf of TANESCO were to be accepted (and we emphasise that it was very much disputed on behalf of IPTL and had at all times been vigorously denied by Mr Rugemalira), we conclude that it would have been insufficient to establish the plea. 54. In its Reply on the Merits of 26 May 2000, TANESCO invoked Sections 19, 23 and 24 of the Tanzanian Law of Contract Ordinance. It is first of all contented that part of the “consideration” for the PPA (said to be “bribes given by IPTL's agents… to induce the PPA's execution” was unlawful, and the PPA is therefore void. Alternatively, it is contended that the PPA is voidable on the ground that consent was “procured by coercion”. 55. The Tribunal notes that it has not been suggested that any unlawful payment was made to TANESCO, being the party with whom IPTL concluded the PPA. Further, as we read the evidence, the only sum said to have been paid by Mr Rugemalira and not rejected was the sum of 100,000 Tanzanian shillings (the then equivalent of less than US$200) said to have been contained in a “holiday gift package” given to Mrs Masunzu during the Christmas season of 1994. According to the notes of her interview before those investigating the allegations in Tanzania, which she adopted for the purposes of her evidence, she was twice offered $20,000 – in 1994 and again in 1996- but refused on both occasions. Although Mrs Masunzu is said to have admitted that, by taking the 100,000 Tanzanian shillings, “Mr Rugemalira succeeded in getting her assistance in direct support of the IPTL project”, there is no evidence to suggest either (i) that, but for the alleged bribe, she would have cast any vote or used any influence against the IPTL project, or (ii) that her support was crucial or indeed made any difference. 56. The evidence of Mr Rutabanzibwa and Mr Victus only alleges attempts at bribery, which were rejected. There is no suggestion that these alleged attempts caused either Mr Rutabanzibwa or Mr Victus to favour IPTL's cause. Indeed, one might have thought that, as men of honour, as they purport to be, the attempted bribes would have had the opposite effect. 57. In these circumstances, the Tribunal repeats its conclusion stated in paragraph 119(1) of its Decision of 22 May 2000 to the effect that the PPA was an effective contract between the parties.

[L] Comments and Questions What special considerations apply to bribery allegations? Are they just like any other defenses, and if not, why not?

[M] World Duty Free Company Limited v. Kenya (ICSID Case No. ARB/00/7), Award of 4 October 2006, 46 I.L.M. 339, 366-368, 369-370, 370-371 (2007) [World Duty Free, an Isle of Man company, had concluded with the Government of Kenya an agreement for the construction, maintenance, and operation of duty-free complexes at Nairobi and Mombasa International Airports in 1989. World Duty Free had made a 2 million US dollar “personal donation” to Mr. Daniel arap Moi, then President of the Republic of Kenya, in order to be able to do business with the Government of Kenya. Representatives of Mr. arap Moi went on to finance the President's reelection campaign through a fraud in which World Duty Free was involved by way of false documentation. The Kenyan government placed World Duty Free into forced administration and prevented it from taking recourse through the courts. World Duty Free contended that Kenya breached the 1989 Agreement (which designated both English and Kenyan law as the applicable law) in several respects, notably by illegally expropriating its properties and destroying its rights under the agreement. World Duty Free contended that the donation was part of the consideration paid to obtain the contract, whereas Kenya asserted that the payment constituted a bribe.] 167. … Mr. Ali paid a substantial bribe in cash, in Kenyan schillings, to the Kenyan head of state in March 1989. The bribe was made covertly; and it was not included in the contractual consideration set out in Articles 1(iii) and 3(A) of the Agreement of 27 April 1989, despite the “entire agreement” clause in Article 7(A) of the Agreement. This bribe was nonetheless an intrinsic part of the overall transaction, without which no contract would have been concluded between the parties: Mr. Ali himself regarded the payment

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as part of the contractual consideration paid by his principal, as did the Claimant in its written submissions in support of its claims (pleading the payment as a recoverable “investment cost” and “investment facilitation fee”: the Claimant's Reply of 15 May 2003, at p. 6; and the Claimant's Memorial of December 2003, Statement of Facts at paragraph 28). Mr. Ali made the payment to the Kenyan President intending to induce the President to act in his principal's favour; and he also intended that bribe to remain confidential as between his side and the President, as it did from March 1989 until December 2002, more than thirteen years later. The payment of the bribe was made by Mr. Ali as agent for his principal and with its authority; and the bribe is legally to be imputed to the Claimant. *** 169. Mr. Ali's payment was received corruptly by the Kenyan head of state; it was a covert bribe; and accordingly its receipt is not legally to be imputed to Kenya itself. If it were otherwise, the payment would not be a bribe. It is also important to recall that the Respondent in this proceeding is not the former President of Kenya, but the Republic of Kenya. It is the latter which is the contracting party to the ICSID Convention; and although the Agreement of 27 April 1989 describes the Government of Kenya as the Claimant's cocontracting party, the Claimant has treated that Agreement as having been made with the Republic of Kenya throughout this proceeding, for obvious reasons. 170. No English or Kenyan statute or other law rendered legal any part of the Claimant's conduct; and as already found by the Tribunal it cannot legally be justified by reference to the Harambee system in Kenya. Indeed, by Sections 3 and 4 of the Kenyan Prevention of Corruption Act 1956, (being in force at the time of the bribe in March 1989), it was a felony for any person or agent corruptly to give or to receive any gift, fee, reward, consideration or advantage whatever, as an inducement to, or reward for, any member, officer or servant of a public body doing, or forbearing to do, or having done or forborne to do, anything in respect of any matter or transaction whatsoever, actual or proposed or likely to take place, in which the public body is concerned …”. … *** 173. In the Tribunal's view, it is significant that in England, historically, the common law has traditionally abhorred the corruption by bribery of officers of state, ranking its offence next to high treason. Such corruption is more odious than theft; but it does not depend upon any financial loss and it requires no immediate victim. Corruption of a state officer by bribery is synonymous with the most heinous crimes because it can cause huge economic damage; and its long-term victims can be legion. The offence lies in bribing a person to exercise his public duty corruptly and not in accordance with what is right and proper for the state and its citizens. Like any other contract, a state contract procured by bribing a state officer is legally unenforceable, as an affront to the public conscience. The fact that the transaction is performed outside England or is subject to a law other than English law is immaterial. … 174. The Tribunal dismisses the Claimant's submissions that the bribe was an independent collateral transaction or at least severable from the Parties' Agreement of 27th April 1989. On the facts found in this case, the bribe was no separate agreement or otherwise severable from the Agreement. As to separateness, it is no answer for the Claimant to assert that the fact that the bribe was covert and kept confidential (with no mention of any such payment in the Agreement) is proof that it was a distinct transaction from the Agreement itself. Its secrecy was because it was a bribe; and as such, it therefore cannot be invoked by the Claimant to establish its separateness from the Agreement. This was one overall transaction and not two unrelated bargains. Moreover, the Claimant's submission proves too much: every bribe is intended to be secret by payer and payee; and accordingly the submission of a separate or collateral bribe based on such secrecy would save every illegal transaction tainted by bribery - if the Claimant was right. The Tribunal considers the Claimant's submission to be wrong both in principle and on the facts of the present case. 175. As to severability, Mr Partasides for Kenya submitted at the hearing in January 2006 that the doctrine of severance has no application under English law to any contract procured by bribery. He contended, inter alia, that severing a bribe from a contract procured by bribery leaves behind no contract at all, because it is the bribe that brought about the contract. He may be right as regards the traditional approach under English law, but the Tribunal notes that, in the recent Kuwait Case (supra), the House of Lords was prepared to consider the issue of severance in a non-contractual setting, albeit ultimately rejecting it on the facts of that case. This Tribunal would likewise reject the Claimant's submission on the facts of this case: there can here be no severance when the bribe, as known and intended by Mr. Ali, formed an intrinsic part of the overall transaction without which no contract would have been agreed by the parties. *** 178. Secondly, even if there were, the Tribunal would not be minded to make that exercise in favour of the Claimant because this case, on its facts, does not remotely fall within the class of cases where reform of the strict rule is advocated. This is not a case where an innocent party has been unwittingly caught up in an incidental or peripheral illegality. This is a case where the Claimant (by Mr. Ali) was steeped in illegal conduct in

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paying the bribe to the Kenyan President. Albeit that the balance of illegality may not be factually identical between Mr. Ali and the Kenyan President, this remains a case, legally, of par delictum. The bribe was not procured by coercion or oppression or force by the Kenyan President nor by “undue influence”; and as regards any investment, there was at the material time no “hostage factor” because there was then no investment or other commitment in Kenya by Mr. Ali or his principal. Prior to paying the bribe, Mr. Ali retained a free choice whether or not to invest in Kenya and whether or not to conclude the Agreement; but Mr. Ali chose, freely, to pay the bribe. In the words of Kerr LJ in Euro-Diam (supra) it would be “an affront to public conscience” to grant to the Claimant the relief which it seeks because this Tribunal “would thereby appear to assist and encourage the plaintiff in his illegal conduct”. Further, the Tribunal does not identify the Kenyan President with Kenya; and in any balancing exercise between Kenya and the Claimant, the balance against the Claimant would remain one-sided. Accordingly, the Tribunal rejects the Claimant's submission. 179. In conclusion, as regards public policy both under English law and Kenyan law (being materially identical) and on the specific facts of this case, the Tribunal concludes that the Claimant is not legally entitled to maintain any of its pleaded claims in these proceedings on the ground of ex turpi causa non oritur actio. These claims all sound or depend upon the Agreement of 27 April 1989 (as amended); and no other claim is pleaded, including any non-contractual proprietary or restitutionary claim. 180. It remains nonetheless a highly disturbing feature in this case that the corrupt recipient of the Claimant's bribe was more than an officer of state but its most senior officer, the Kenyan President; and that it is Kenya which is here advancing as a complete defence to the Claimant's claims the illegalities of its own former President. Moreover, on the evidence before this Tribunal, the bribe was apparently solicited by the Kenyan President and not wholly initiated by the Claimant. Although the Kenyan President has now left office and is no longer immune from suit under the Kenyan Constitution, it appears that no attempt has been made by Kenya to prosecute him for corruption or to recover the bribe in civil proceedings. It is not therefore surprising that Mr. Ali feels strongly the unfairness of the legal case now advanced by Kenya, as eloquently expressed at the hearing in January 2006 in his own evidence, together with Mr Muite's cogent submissions on the Claimant's behalf. 181. The answer, as regards public policy, is that the law protects not the litigating parties but the public; or in this case, the mass of tax-payers and other citizens making up one of the poorest countries in the world. Mr. Ali's complaint of unfairness was voiced centuries ago by earlier English litigants; and it was fully answered, as recorded in Chitty (see above), by Lord Mansfield in Holman v Johnson (1775) 1 Cow p. 341, 343. It merits citing in full: “… the objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, but accidentally, if I may say so. The principle of public policy is this: ex dolo malo non oritur actio. No court will lend its aid to a man who founds his cause of action upon an immoral or illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally at fault, potior est condition defendentis”. In other words, if Kenya were guilty of bribery and the claimant in this proceeding, it would likewise fall at the same procedural hurdle, to the benefit of the Claimant as respondent. 182. Avoidance – The Facts: As regards the private legal remedy of avoidance under English and Kenyan law, the relevant additional facts can be stated simply. The Claimant asserted for the first time in its Memorial of 1 December 2002 (received by Kenya after 5 December 2002) that Mr. Ali procured the Parties' Agreement by making a covert payment to the Kenyan President; this fact was not previously known to Kenya; Kenya made an application on 19 March 2003 to dismiss the Claimant's pleaded claims on the basis that the Agreement was tainted with illegality and thus unenforceable; and on 18 April 2003, by its Counter-Memorial, Kenya formally avoided the Agreement for bribery by the Claimant. 183. In the Tribunal's view, the avoidance of the Agreement by Kenya was made unequivocally and timeously; and accordingly Lord Mustill's statement of general principle is here satisfied on the facts: “Where a contract is voidable, the injured party must take positive action to set it aside.” (supra). It is no legal bar to avoidance of the contract that the innocent party may previously have committed a breach of that contract. Subject to the Claimant's several submissions based on waiver or affirmation,

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the Tribunal decides that Kenya validly avoided the Agreement under both English and Kenyan law. The Tribunal dismisses the Claimant's lesser argument in “estoppel”. *** 186. Two minor points remain for consideration. First, there may be legal consequences following the avoidance of the Agreement, although restitutio in integrum cannot include the return of the bribe to the Claimant: see LogicRose v. Southend United (1988; ibid.), per Mr Justice Millett, at pp. 1263-1264. These legal consequences are not pleaded claims by the Claimant in this proceeding and they do not form part of this Award. 187. Lastly, the Tribunal notes that no evidence was adduced or argument submitted by either of the Parties to the effect that the bribe specifically procured Article 9 of the Agreement, containing the Parties' agreement to arbitration under the ICSID Convention. Accordingly, in accordance with well-established legal principles under English and Kenyan law, the Tribunal operates on the assumption that the Parties' arbitration agreement remains subsisting valid and effective for the purpose of this proceeding and Award. 188. In conclusion: 1)

2) 3)

The Respondent, Kenya, was legally entitled to avoid and did avoid legally by its Counter-Memorial dated 18 April 2003 the “House of Perfume Contract”, namely the Agreement of 27 April 1989 as amended on 11 May 1990, under its applicable laws, the laws of England and Kenya; The Respondent, Kenya, did not lose its right to avoid the said contract by affirmation or otherwise before 18 April 2003 under these applicable laws; and The Claimant is not legally entitled to maintain any of its pleaded claims in these proceedings as a matter of ordre public international and public policy under the contract's applicable laws.

[N] Comments and Questions 1. 2.

3.

What in your view should be the respective role of arbitral tribunals and national courts in the state where the bribery is alleged to have occurred? You are advising a company which after substantial expenses has won a tender bid for a substantial investment on Country X. A week before the deal is to be closed, an aide of the President of Country X approaches the company and says that a $10 million payment to the President's political party is a prerequisite to conclusion of the agreement. You are advised that such payments by foreign companies are illegal under local electoral laws. Should the company (a) make the payment? (b) offer to make an alternative (lawful) payment to a charity of the President's choice? (c) give up the transaction? Would your advice be different if the company was a state party to the OECD Convention? Assume that you are representing a foreign investor in an ICSID arbitration involving a foreign investor in a utility bringing a claim against the host state. One of the regulators suggests that he can make regulatory action against the local company, including a local court case seeking substantial damages, go away and can provide information helpful to the investor's case in exchange for a percentage of the investor's recovery. What do you advise the company to do?

§10.06 FUNDAMENTAL CHANGE OF CIRCUMSTANCES (REBUS SIC STANTIBUS/IMPRÉVISION) One common reason for arguments based on internationalization of contracts is to seek to avoid governmental action by the state party, constitutional or lawful under its own law, which abrogates or varies the contract. In this context, reliance is often placed on doctrines such as fundamental change of circumstances or frustration to justify such changes; alternatively it is argued that the narrow limits placed on these doctrines (e.g. the rule against self-induced frustration) operate to invalidate the state action P 961 complained of.

[A] UNIDROIT Principles of International Commercial Contracts (2004), (13) Articles 6.2.1., 6.2.2. and 6.2.3 (14) Article 6.2.1 – Contract to be Observed Where the performance of a contract becomes more onerous for one of the parties, that party is nevertheless bound to perform its obligations subject to the following provisions on hardship. Article 6.2.2 – Definition of Hardship There is hardship where the occurrence of events fundamentally alters the equilibrium of the contract either because the cost of a party's performance has increased or because the value of the performance a party receives has diminished, and (a)

the events occur or become known to the disadvantaged party after the conclusion

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(b) (c) (d)

of the contract; the events could not reasonably have been taken into account by the disadvantaged party at the time of the conclusion of the contract; the events are beyond the control of the disadvantaged party; and the risk of the events was not assumed by the disadvantaged party.

Article 6.2.3 – Effects of Hardship (1) In case of hardship the disadvantaged party is entitled to request renegotiations. The request shall be made without undue delay and shall indicate the grounds on which it is based. (2) The request for renegotiation does not in itself entitle the disadvantaged party to withhold performance. (3) Upon failure to reach agreement within a reasonable time either party may resort to the court. (4) If the court finds hardship it may, if reasonable, (a) (b)

terminate the contract at a date and on terms to be fixed, or adapt the contract with a view to restoring its equilibrium.

[B] CMS Gas Transmission Company v. Argentine Republic (ICSID Case No. ARB/01/8), Award of 12 May 2005, 14 ICSID Rep. 152, 194-195 (2009) [Francisco Orrego Vicuña (pres.), Marc Lalonde, Francisco Rezek] (15) (Citations selectively omitted) 221. This Tribunal wishes to add a further observation. In 1968 another mechanism for the adjustment of contracts was introduced in the Argentine Civil Code with the inclusion of P 962 Article 1198. Under the terms of this Article, contracts must be done, interpreted and enforced in good faith in accordance with what the parties should have reasonably understood. If the burden of one party were to become excessively onerous as a result of extraordinary and unforeseeable events, it could request the termination of the contract, except if that party was liable and remiss; the other party could then offer more equitable terms as a means to forestall termination. This mechanism has also given rise to important scholarly writings and court decisions. 222. The theory “imprévision” was thus expressly introduced into the Argentine Civil Code. The Respondent has relied on this theory in explaining the meaning of the Emergency Law and its reference to this particular Article. The purpose of this law, in the Respondent's argument, is to rebalance the benefits of the parties against the backdrop of changing realities. 223. The Federal judge issuing the 2000 injunction had this mechanism in mind as well when she explained that “it could be that the balance of interests between the licensees and the consumers that was sought by the law broke down as a result of emerging economic situations … It would seem possible to argue that the economic and financial equation of the contract would break when the consumer must pay more for the same service even if the economy is evidencing negative figures …” 224. The legal extent of this concept both in civil and administrative law was laid down by the French Conseil d'Etat in the landmark case “Gaz de Bordeax”, which, interestingly, also dealt with the gas industry. The general principles on the application of this theory in administrative contracts, particularly those concerning concessions, were first identified in this decision, pointing out that the event in question had to be unforeseeable and external to the parties, exceed all reasonable expectations, and result in a profound unbalancing of the contract. The redress also had to be temporary as otherwise the long-term life of the contract would become unviable. 225. The provisions of the Emergency Law, however, fail to meet certain essential conditions for the operation of the theory of “imprévision.” First, if the imbalance were foreseeable, the theory is not applicable. As explained above, in arguing that the tariff included both the devaluation as well as the country risks, the Respondent is simultaneously admitting that this risk was foreseeable and actually foreseen. In this respect the Claimant believes the risk of devaluation was indeed foreseen as it argues that express guarantees were offered to offset such risk. Second, the concept requires the aggrieved party to request the termination of the contract before a competent court, while in the present dispute the measure was unilaterally decided by one party. In addition, the views of the courts have been rather critical of the measures adopted as noted above. In essence, the pesification was imposed and the target of rebalancing and compensating differences in 180 days was not met. 226. The approach taken by the French Conseil d'Etat, however, as will be explained, is most pertinent for the attribution of liability in the present case. 227. The Tribunal must note that other traditional legal excuses, such as force majeure,

P 963 are not available in this case as the events discussed were foreseeable and foreseen.

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***

[C] Comments and Questions Are the UNIDROIT Principles in accord with the civil law principle of imprévision? Why P 963 might they be different?

References 1) 2) 3) 4)

Available athttp://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.iusct.net/Default.aspx. Available at http://www.unidroit.org/english/principles/contracts/principles2010/integralversion principles2010-e.pdf (accessed 1 September 2013).

5) The reader is reminded that the complete version of the UNIDROIT Principles

6) 7) 8) 9) 10) 11) 12) 13) 14)

15)

contains not only the black-letter rules reproduced hereunder, but also detailed comments on each article and, where appropriate, illustrations. The volume may be ordered from UNIDROIT at http://www.unidroit.org. For an update of international case law and bibliography relating ot the Principles see http://www.unilex.info. Copyright 2002 by the International Chamber of Commerce (ICC). Reprinted with permission. All rights reserved. See further the ICC Dispute Resolution Library (http://www.iccdrl.com). Copyright 1978 by American Society for International Law. Reprinted with permission. All rights reserved. Available at http://www.unidroit.org/english/principles/contracts/principles2004/integralversio nprinci-ples2004-e.pdf (accessed 1 September 2013). The reader is reminded that the complete version of the UNIDROIT Principles contains not only the black-letter rules reproduced hereunder, but also detailed comments on each article and, where appropriate, illustrations. © 1984 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. Available at http://www.italaw.com/sites/default/files/case-documents/ita0555.pdf (accessed 1 September 2013). The Decision appears at Appendix C to the Final Award of 12 July 2001. Available at http://www.unidroit.org/english/principles/contracts/principles2004/integralversio nprinci-ples2004-e.pdf (accessed 1 September 2013). The reader is reminded that the complete version of the UNIDROIT Principles contains not only the black-letter rules reproduced hereunder, but also detailed comments on each article and, where appropriate, illustrations. The volume may be ordered from UNIDROIT at http://www.unidroit.org. For an update of international case law and bibliography relating ot the Principles see http://www.unilex.info. The facts of the case are summarized above at Section 4(E).

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Chapter 11: Reparations Recoverable by Foreign Investors in International Law

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Publication

§11.01 INTRODUCTION

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Although words such as “compensation”, “damages” and “remedies” have been used by various writers, “reparations” is the term generally applied to the full panoply of relief that may be obtained from a government. That is the term chosen by the United Nations International Law Commission (ILC) in its Articles on State Responsibility, and that term will be employed here as the overarching nomenclature for all types of remedies that are recoverable by a foreign investor from a State.

Topics

The ILC's Articles on State Responsibility divide the subject of reparations into three categories: (1) restitution, (2) compensation, and (3) satisfaction. This chapter will focus on the first two classifications, but will not concern itself much with the third category, which provides a remedy only for non-material injury, and is not generally relevant to investor-state arbitrations.

Investment Arbitration

Bibliographic reference

'Chapter 11: Reparations Recoverable by Foreign Investors in International Law', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 965 - 1084

The subject is generally organized in this chapter according to the reparations due for the type of liability involved – breach of contract, expropriation, and unlawful, wrongful, tortious, or delictual conduct, which includes violations of investment treaties. The latter category is referred to by the ILC as internationally wrongful conduct. While an expropriation may properly overlap either of the other two classifications, it is treated separately because it is a conceptually distinct form of liability, and much has been written in international investment decisions attempting to determine the appropriate standard for the reparations to be awarded to an expropriated foreign investor. The more contentious issues of reparations for expropriation are treated in detail here. Those issues include the historical standard of compensation for an expropriation, the difference in the compensation due for lawful and unlawful expropriations, the recoverability of future lost profits (lucrum cessans), the methodology of valuing losses (especially for a going concern), the availability of specific performance (restitutio in integrum) as a remedy, and the effect of the date of the expropriation on valuation issues. This chapter also addresses the standard of compensation for non-expropriation investment treaty violations, such as breach of the fair and equitable treatment provision, which has become the primary violation found by investment tribunals. In addition, the availability of declaratory, injunctive and interim relief is treated, along with the subject of limits on reparations. Finally, supplementary damages are the focus of the remaining sections – compensatory, moratory and compound interest – and the P 966 topics of currency and exchange rate, costs and taxes.

§11.02 REPARATIONS GENERALLY [A] General Types of Reparations [1] UN International Law Commission (ILC) Articles on State Responsibility (2001), Articles 31 and 34 Article 31 – Reparation 1. The responsible State is under an obligation to make full reparation of the injury caused by the internationally wrongful act. 2. Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State. Article 34 – Forms of reparation Full reparation for the injury caused by the internationally wrongful act shall take the form of restitution, compensation and satisfaction, either singly or in combination, in accordance with the provisions of this chapter. [2] Harvard Draft Convention on State Responsibility, 55 Am. J. Int’l L. 545, 581 (1961) Article 27 – Form and Purpose of Reparation 1. The reparation which a State is required to make for a wrongful act or omission for which it is responsible may take the form of: (a) (b) (c)

measures designed to re-establish the situation which would have existed if the wrongful act or omission attributable to the State had not taken place; damages; or a combination thereof.

2. Measures designed to re-establish the situation which would have existed if the act of omission attributable to the State had not taken place may include:

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(a) (b) (c) (d)

revocation of the act; restitution in kind of property wrongfully taken; performance of an obligation which the State wrongfully failed to discharge; or abstention from further wrongful conduct.

3. Damages are awarded in order to: (a) (b) (c) P 967

place the injured alien or an alien claiming through him in as good a position, in financial terms, as that in which the alien would have been if the act or omission for which the State is responsible had not taken place; restore to the injured alien or an alien claiming through him any benefit which the State responsible for the injury obtained as the result of its act or omission; and afford appropriate satisfaction to the injured alien or an alien aiming through him for an injury suffered by the injured alien as the result of an act or omission occasioned by malice, reckless indifference to the rights of the injured alien, any category of aliens, or aliens in general, or a calculated policy of oppression directed against the injured alien, any category of aliens, or aliens in general.

[B] General Principle of Reparations [1] Factory at Chorzow (Germany v. Poland), Claim No. 13 (PCA), Judgment on the Merits of 13 September 1928, [1928] P.C.I.J. Series A – No. 17, 47 (1928) [In 1915, the German government signed a contract with the Bayerische Stickstoffwerke A.G. (“Bayerische”) to construct and manage a nitrate factory at Chorzow in Upper Silesia, which was then German territory. After World War I, in 1919, the German government sold the factory to a new company, the Oberschlesische Stickstoffwerke A.G. (“Oberschlesische”) with the Bayerische retaining the right to manage the factory. On May 13, 1922, Germany and Poland concluded a Convention concerning Upper Silesia at Geneva (“Geneva Convention”), which among other things restricted the power of Poland to expropriate certain German assets in Upper Silesia. In July 1922, based upon Ministerial decrees and a Polish court judgment, which cited Poland's rights under the Treaty of Versailles that ended World War I, Poland took possession of the nitrate factory at Chorzow and appointed a manager. The Bayerische and Oberschlesische instituted various proceedings before the German-Polish Mixed Arbitral Tribunal in Paris in 1922 and 1925, and the German government instituted this case against Poland before the Permanent Court of International Justice in 1927. In earlier judgments, the PCIJ found that Poland violated the Geneva Convention by seizing the factory.] (Citations selectively omitted) The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it – such are the principles which should serve to determine the amount of compensation due for an act contrary to international law.

[C] Limits on Reparations [1] UN International Law Commission (ILC) Articles on State Responsibility (2001), Article 39 Article 39 – Contribution to the injury In the determination of reparation, account shall be taken of the contribution to the injury by willful or negligent action or omission of the injured State or any person or P 968 entity in relation to whom reparation is sought. [2] Harvard Draft Convention on State Responsibility, 55 Am. J. Int’l L. 545, 581 (1961) Article 37 – Subtraction of Damages Obtained through Other Remedies Damages which a State is required to pay on account of an act or omission for which it is responsible shall be diminished by the amount of any recovery which has been obtained through local and international remedies … [3] James R. Crawford, State Responsibility: Third Report by the Special Rapporteur in International Responsibility, UN Doc. A/CN.4/507, ¶¶ 161-163 (Citations selectively omitted) (c) Limitations on compensation 161. One question that does need consideration, … is that of limiting compensation. Legal

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systems are generally concerned to avoid creating liabilities in an indeterminate amount in respect of an indeterminate class, and the special context of inter-State relations if anything aggravates such concerns. There are no general equivalents in international law to the limitation of actions or the limitation of liability which are used in national law for this purpose. The State is not a limited liability corporation, and there is no formal mechanism for dealing with issues of State insolvency. Given the capacity of States to interfere in the life of peoples and in economic relations, and the growth of substantive international law affecting both, the potential for indeterminate liability undoubtedly exists – even if it has usually not arisen in practice. *** 163. A robust answer to these concerns is that they are exaggerated, that compensation is only payable where loss has actually been suffered as a result (direct, proximate, not too remote) of the internationally wrongful act of a State, and that in such cases there is no justification for requiring the victim(s) to bear the loss. Moreover if States wish to establish limitation of liability regimes in particular fields of ultra-hazardous activity (e.g., oil pollution, nuclear accidents) they can always do so. In particular, the consistent outcome of orderly claims procedures (whether they involve lump sum agreements or mixed claims commissions or tribunals) has been a significant overall reduction of compensation payable compared with amounts claimed. [4] F.V. García Amador, The Changing Law of International Claims, Vol. II, 599-601 (Oceana Publications 1984) (1) (Citations selectively omitted) h) Limitation on reparation and extenuating circumstances From a study of international jurisprudence, it is possible to discern a number of principles which limit the scope or the amount of reparation. One of such principles is the exclusion of damage not linked by a real and evident chain of causation to the P 969 imputable act or omission. When an arbitral commission or tribunal refuses to award additional amounts for interest, expenses or costs, the amount of the compensation awarded for the damage is automatically reduced thereby, even though, as is sometimes the case, claims for some of these items are disallowed on grounds of principle. There are, however, other factors which limit the reparation awarded. One of such factors is the rule against double damages – i. e., the award of reparation more than once in respect of the same injury – the object of the rule being to ensure that the amount of the reparation does not exceed the damage in fact sustained by the claimant. In its decision in the Chorzow Factory (Merits) case (1928), the World Court stated that if it were dealing with damage affecting persons or bodies corporate independent of one another, the natural method to be applied would be a separate assessment of the damage sustained by each of them, but that the interests possessed by the two companies in the undertaking being interdependent and complementary, those interests could not “simply be added together without running the risk of the same damage being compensated twice over.” In the decision in the Alabama Arbitrations, it was held that “in order to arrive at an equitable compensation for the damages which have been sustained, it is necessary to set aside all double claims for the same losses and all claims for ‘gross freights' so far as they exceed ‘net freights.’” The problem has also arisen in connection with claims by insurers for sums paid by them in respect of losses to individuals caused by acts involving the international responsibility of the State. The decisions in such cases do not, however, appear to follow any consistent rule. A second limiting factor is the principle that reparation should not result in the unjust enrichment of the claimant. In the Cook case (1927), the United States-Mexican General Claims Commission held that reparation should not cause the claimant an unjust enrichment, but recognized that unjust enrichment would not result in the case before the Commission. In the F. J. Acosta case (1928), the Commission converted money orders into dollars at the rate of exchange prevailing at the date of their purchase in order to avoid unjust enrichment of the claimant. In the Fabiani case (1906), the tribunal stated that damages ought not to be a source of profit for the persons who obtain them. In this connection, the World Court held that “This principle, which is accepted in the jurisprudence of arbitral tribunals, has the effect, on the one hand, of excluding from the damage to be estimated, injury resulting for third parties from the unlawful act and, on the other hand, of not excluding from the damage the amount of debts and other obligations for which the injured party is responsible.” Let us now turn to the circumstances which may extenuate the reparation of the injuries sustained by the alien … The typical circumstance in those cases is a fault on the part of the injured individual … In his decision on the Dolan claim, the Umpire, Sir Edward Thornton, considered that the claimant's absence of prudence and the fact that, unlike other claimants, he had not ascertained the character of the Zerman expedition were circumstances which should be taken into account in assessing the compensation to be awarded. In the case of the whaling vessel Canada (1870) the damages claimed as prospective profit were not allowed, partly because the master had failed to act with the skill that was to be

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expected in the circumstances in which the accident occurred. In its decision in the Wimbledon case, the World Court also took this circumstance into account and indirectly recognized it as a factor that would limit the duty to make reparation when it examined P 970 the conduct of the captain and found that it had been legally unexceptionable. Finally, in the Macedonian case (1841), although the fault was imputable not to the individual but to the State of nationality, a similar position was taken. In disallowing the claim for interest, the Arbitrator drew attention to the fact that “the Government of the United States had done nothing to hasten a settlement” for twenty years after the date of the incident. [5] Bridas S.A.P.I.C., Bridas Energy International, Ltd., Intercontinental Oil & Gas Ventures, Ltd. and Bridas Corporation v. Government of Turkmenistan, Concern Balkannebitgazsenagat and State Concern Turkmenneft (ICC Case No. 9058/FMS/ KGA), Third Partial Award of 2 September 2000, (2) 12-13 [Edward C. Chiasson, (pres.), Griffin B. Bell, Hans Smit] [As a result of an international tendering process, the Government of Turkmenistan and the Claimants negotiated and reached an agreement for the formation of a joint venture (“JV Keimir”), for the exploration and production of oil and gas in an area of Turkmenistan known as the Keimir Block. On February 10, 1993, a “Turkmenian party,” currently Concern Balkannebitgazsenagat (one of the Respondents), and the Claimants signed a Joint Venture Agreement (“JV Agreement”) to conduct hydrocarbon operations in that area. Claimants contend that the Respondents performed various acts that interfered with the operations of JV Keimir and caused it to sustain losses. Such acts included placing limitations on the ability of JV Keimir to export its oil and gas. Claimants further alleged that the Respondents had applied pressure to the Claimants to agree to certain amendments to the JV Agreement against the best interests of the Claimants, and retaliated against the Claimants for refusing to enter into such amendments by restricting the Joint Venture's ability to export oil and gas and to dispose of foreign currency, charging discriminatory rates or conditions for services, goods, permits or licenses, threatening to take over the JV Keimir, and harassing the expatriate employees of JV Keimir. The Tribunal in its partial award of 25 June 1999 found that the conduct of the Respondents and the Government was repudiatory, and was not justified legally. This award considers the damages advanced by the parties.] (Citations selectively omitted) Mitigation The arbitrators previously concluded that the Claimants had an obligation to mitigate their damages. The Claimants correctly point to the law of mitigation to state that the respondents have the burden of showing that the Claimants did not meet their obligation and they refer to the circumstances that existed as of and following the autumn of 1997. In the context of those times, they say that they acted reasonably and that there was no realistic prospect that the export ban would have been lifted. The situation in this case is not usual. The arbitrators endeavoured to work with the parties to assist them in limiting the economic consequences of their dispute. There was great reluctance on both sides to take any steps that might give or be perceived as giving an advantage to the other side. The Respondents were not prepared to have the operation continue under the control of P 1075 the Claimants. The Claimants did not want to relinquish any of their contractual rights. Stalemate was inevitable if there were rigid adherence to these positions. A seminal requirement was the lifting of the export ban and the Claimants point out that there is no evidence that this would have occurred. They note that previously there was a statement that exports would be allowed, but they were not and that the Respondents consistently maintained that the Claimants would not be allowed to resume operations. These facts, while true, do not address the situation that was envisioned by the arbitrators' initiative subsequent to the July, 1997 hearing. It then was suggested that the parties jointly operate the field and that the revenues be placed in an escrow account. Counsel for the Respondents and the Government was prepared to recommend an arrangement to his clients. Of necessity, this would have involved a lifting of the export ban. As a result of the position taken by the Claimants, the initiative did not get to that stage. For the next approximately year and one-half – until July 5, 1999 – the Claimants kept alive the joint venture agreement and spent money to maintain the field. Their income stream was protected by a factor of at least 10% and they say 10.446%. That is, they made a return on that income stream of that percentage. In the result, the Claimants benefited from the performance hiatus and have been given credit for that. During the hiatus, they incurred costs which they seek to recover and for which they have been given credit. No serious attempt was made to mitigate their damages, that is, to eliminate or obtain revenue to off-set the costs. The Claimants did not meet their duty to mitigate their damages. The extent to which a party is obliged to mitigate and the economic consequences of failing to do so, are

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matters of judgement based on the evidence and the circumstances applicable to the dispute. The arbitrators deduct from the present value of the lost oil and gas income stream the sum of $50,000,000 as a consequence of the Claimants' failure to mitigate. This leaves a net value of $445,000,000 payable by the Government and the Respondents to the Claimants. [6] Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador (ICSID Case No. ARB/06/11), Award of 5 October 2012, (3) ¶¶ 662-666, 669, 678-680, 683-685, 687 [L. Yves Fortier (pres.), David A.R. Williams, Brigitte Stern] [Occidental, a US investor, entered into a participation contract with Petroecuador, a Ecuador's State-owned oil company, to explore and produce oil in Ecuador. After a few years, the Ecuadorian tax office started to deny Occidental's and other oil companies' applications for VAT refunds and required return of the amounts previously reimbursed because it considered that VAT reimbursement was already accounted for in the contracts' participation formula. Occidental filed four lawsuits in Ecuadorian tax courts objecting to these determinations and instituted arbitral proceedings against Ecuador under the Ecuador–US BIT.] (Citations selectively omitted) 662. As the Tribunal commences its analysis of this last threshold question, it is important to recall that, earlier in the present Award, the Tribunal has already found the following: – – – – – –

–

–

by virtue of the Farmout Agreement, executed on 1 October 2000, OEPC purported to transfer rights under the Participation Contract to AEC; this transfer of rights required prior ministerial authorization which was neither requested nor obtained by OEPC; the Claimants failed to give a copy of the Farmout Agreement to the Respondent in the fall of 2000; it was only in the spring of 2004 that the true nature of the Farmout Agreement became known to Ecuador …; failure by OEPC to disclose the true nature of the Farmout Agreement to Ecuador and to obtain ministerial authorization in 2000 was a “grave mistake”; OEPC, while not acting in bad faith, was negligent; OEPC thus breached Clause 16.1 of the Participation Contract and was guilty of an actionable violation of Article 74.11 of the HCL [Hydrocarbons Law] which, as one option, allowed the Minister to declare the caducidad [termination] of the Participation Contract; the Caducidad Decree, issued, according to its terms, because of the breach of Clause 16.1 of the Participation Contract and the violation by OEPC of Article 74 of the HCL, was a disproportionate sanction by the Respondent in the particular circumstances of this case; and the Caducidad Decree was issued in breach of Ecuadorian law, and in violation of the Treaty and customary international law.

663. The Tribunal now has to determine whether the damages caused to the Claimants by the wrongful act of the Respondent should be reduced because, as the Respondent argues, “the Claimants' own wrongful conduct directly contributed to caducidad.” 664. In support of its submission, the Respondent invokes the legal principle of “contributory negligence” on the part of the Claimants. 665. The Tribunal's analysis commences with a reference to Article 39 of the International Law Commission's Articles on Responsibility of States for Internationally Wrongful Acts which is invoked by both parties. It provides: Article 39. Contribution to the injury In the determination of reparation, account shall be taken of the contribution to the injury by willful or negligent action or omission of the injured State or any person or entity in relation to whom reparation is sought. (Emphasis added) 666. Extracts in the International Law Commission's Commentary to Article 39 are pertinent, including the following: Article 39 deals with the situation where damage has been caused by an internationally wrongful act of a State, which is accordingly responsible for the damage in accordance with Articles 1 and 28, but where the injured State, or the individual victim of the breach, has materially contributed to the damage by some willful or negligent act or omission. (Emphasis added) *** 669. The Tribunal must therefore decide, on the basis of the totality of the evidence before it, whether there is a causal link between the negligent failure of OEPC in October

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2000 to disclose the true nature of the Farmout Agreement to Ecuador and to request and obtain prior ministerial authorization from the Minister for the transfer of certain rights in the Participation Contract to AEC and the declaration ofcaducidad by the Respondent on 15 May 2006 and, through the latter, with the damages resulting from caducidad. 670. The Tribunal notes that it is not any contribution by the injured party to the damage which it has suffered which will trigger a finding of contributory negligence. The contribution must be material and significant. In this regard, the Tribunal has a wide margin of discretion in apportioning fault. *** 678. The Tribunal agrees that an award of damages may be reduced if the claiming party also committed a fault which contributed to the prejudice it suffered and for which the trier of facts, in the exercise of its discretion, considers the claiming party should bear some responsibility. 679. In the present case, as noted earlier, OEPC had agreed in the Participation Contract that, if it failed to obtain prior ministerial authorization to transfer rights under the Participation Contract to AEC, it ran the risk that the Respondent would declare the caducity of the Participation Contract. Since it did not seek nor obtain the required authorization, the Tribunal has found that it acted negligently and committed an unlawful act. The Claimants' fault prevented the Respondent from exercising, in a formal way, its sovereign right to vet and approve AEC as the transferee of those rights and, even more importantly on the facts of the present case, to vet any other unknown investor to which AEC could eventually transfer its rights. 680. In the view of the Tribunal, the Claimants should pay a price for having committed an unlawful act which contributed in a material way to the prejudice which they subsequently suffered when the Caducidad Decree was issued. *** 683. If OEPC had sought the Minister's consent in October 2000, in all likelihood it would have obtained it and it is probable that the Respondent would not have declared “Caducidad” in 2006. In other words, without the violation of the law by OEPC, Caducidad may not have happened. In this connection, the Tribunal recalls that the violation of the law by OEPC was invoked by Ecuador as the principal legal basis for the Decree. 684. On the other hand, as noted earlier in the present Award, the publication of the VAT Award in favour of the Claimants and the social unrest directed against OEPC which ensued were also causes which, in the view of the Tribunal, contributed in a material and significant way to the declaration of Caducidad. 685. In other words, it is a conjunction of different factors which, taken together, in a complementary manner, were the causes of the decision of the Respondent to declare Caducidad. The difficult task of the Tribunal in this case is to weight the relative causal link of this series of causes on the Caducidad Decree and, as a consequence, on the damages caused to the Claimants. *** 687. Having considered and weighed all the arguments which the parties have presented to the Tribunal in respect of this issue, in particular the evidence and the authorities traversed in the present chapter, the Tribunal, in the exercise of its wide discretion, finds that, as a result of their material and significant wrongful act, the Claimants have contributed to the extent of 25% to the prejudice which they suffered when the Respondent issued the Caducidad Decree. The resulting apportionment of responsibility as between the Claimants and the Respondent, to wit 25% and 75%, is fair and reasonable in the circumstances of the present case. [7] Comments and Questions 1. 2. 3. 4. 5. 6.

What is the preferred method of reparations in international law? Is it used regularly in investment arbitrations? Why or why not? What other types of reparations exist under international law? Are they all appropriate for investment cases? What is the general principle for reparations in international law? What is the standard in international law for the casual connection between an act and damage claimed? Does only one standard exist for all types of international claims or may the standard vary for different causes of action? Do the foregoing materials discuss all appropriate limitations on the reparations that may be awarded against a government? What other limitations exist or are appropriate? Should an award of compensation against a government be limited by the amount of any insurance or indemnity benefits recovered by the claimant? What if the insurer or indemnitor is subrogated to the interests of the named claimant and is the real party in interest? Note the provisions of the 1992 U.S. Model BIT on this point (Art. 6(7)), along with the U.S. governments' treaties with other nations relating to the OPIC political risk insurance program.

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7.

8.

Should a multilateral convention on State insolvency be negotiated that would limit or deal with claims against a State that is insolvent? Give examples of States that have become practically insolvent? What are the possible historical causes of a practical insolvency of a State? How have States dealt with this problem in the past? Have investment treaties altered the historical situation? How? In reviewing the international case law on reparations and the methodologies chosen by tribunals for compensating claimants in investment disputes, one is struck by the generally conservative nature of the awards on actual damages, with the tribunals at times adjusting for this conservatism with their treatment of ancillary issues like interest and inflationary adjustments.

§11.03 DECLARATORY, INJUNCTIVE AND INTERIM RELIEF [A] UN International Law Commission (ILC) Articles on State Responsibility (2001), Articles 29 and 30 Article 29 – Continued duty of performance The legal consequences of an internationally wrongful act under this Part do not affect the continued duty of the responsible State to perform the obligation breached. Article 30 – Cessation and non-repetition The State responsible for the internationally wrongful act is under an obligation: (a) (b)

To cease that act, if it is continuing; To offer appropriate assurances and guarantees of non-repetition, if circumstances so require.

[B] US Model Bilateral Investment Treaty (2012), (4) Articles 26 and 28 Article 26 – Conditions and Limitations on Consent of Each Party *** 3. Notwithstanding paragraph 2(b), the claimant (for claims brought under Article 24(1) (a)) and the claimant or the enterprise (for claims brought under Article 24(1)(b)) may initiate or continue an action that seeks interim injunctive relief and does not involve the payment of monetary damages before a judicial or administrative tribunal of the respondent, provided that the action is brought for the sole purpose of preserving the claimant's or the enterprise's rights and interests during the pendency of the arbitration. *** Article 28 – Conduct of the Arbitration 8. A tribunal may order an interim measure of protection to preserve the rights of a disputing party, or to ensure that the tribunal's jurisdiction is made fully effective, including an order to preserve evidence in the possession or control of a disputing party or to protect the tribunal's jurisdiction. A tribunal may not order attachment or enjoin the application of a measure alleged to constitute a breach referred to in Article 24 [a breach of the Treaty or of an investment agreement or authorization]. For purposes of this paragraph, an order includes a recommendation.

[C] James R. Crawford, State Responsibility: Third Report by the Special Rapporteur in International Responsibility, UN Doc. A/CN.4/507, 184 (Citations selectively omitted) 184. This position has been followed in many subsequent cases including the Rainbow Warrior arbitration, to such extent that declaratory relief can be said to have become the normal, and certainly the first, form of satisfaction in the case of non-material injury to a State. In saying that it is the first, the Special Rapporteur does not imply that it is primary, or that it excludes more stringent forms of satisfaction where these are justified. Declaratory relief, however, comes first in two senses: (a) that in some cases it may be a sufficient form of satisfaction (as it was in relation to Operation Retail in Corfu Channel); (b) that even where it is not sufficient, it is a necessary basis for other forms of satisfaction which may be called for in particular cases.

[D] F.V. García Amador, The Changing Law of International Claims, Vol. II, 576-578, 581-583 (Oceana Publications 1984) (Citations selectively omitted) Turning to the so-called “declaratory judgments,” not all of them can be rightly deemed as a special form of reparation. In effect, some of them positively are not. That is the case where, while it is recognized that no material or objective injury has been suffered, or that it has not been possible to prove such injury, the act or omission imputed to the defendant State is declared to be unlawful. As will be recalled, the Judgement of the

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Permanent Court in the Mavrommatis Concessions case (1925) contains a declaration of this kind. In the Case Concerning Certain German Interests in Polish Upper Silesia (1925), the same Court held that Articles 56 and 63 of its statute provided for “the possibility of judgement having a purely declaratory effect.” In some cases a declaratory-judgement, instead of merely declaring that the act or omission imputable to the State is unlawful, assumes the character of a “sanction” or measure of “satisfaction,” In contrast with the cases just referred to, this occurs when a State alleges a “political and moral” ‘injury caused by the unlawful act or omission. The decision of the Permanent Court of Arbitration in theCarthage and the Manouba cases (1913) is a declaratory judgement of this kind. In refusing to award the damages sought by France “as reparation for the moral and political injury resulting from the failure to observe general international law and conventions binding on both Italy and France”, the Court stated that the “establishment” of this fact, especially in an arbitral award, constitutes in itself a serious penalty and that “this penalty is made heavier in such case by the payment of damages for material losses.” *** The special features of restitution in international law are most often in evidence in the case of legal restitution – i.e., where the reparation consists in abrogating or modifying a specified provision of an international agreement or in rescinding a legislative, executive or judicial measure. An example of the first type is the judgment of the Central American Court of Justice requiring Nicaragua to use all available means, in conformity with international law, to re-establish and maintain the legal situation existing between the litigant States prior to the conclusion of the treaty in which Nicaragua had granted the United States the right to build a canal across its territory joining the Atlantic and the Pacific, as well as certain rights in the Gulf of Fonseca. *** In international jurisprudence, legal restitution does not as a rule go so far as to involve the repeal or recission of the legislative, executive or juridical measure in question. In fact, one should perhaps mention, as the only exception to the rule, the Martini case (1930), which was decided by the Italian-Venezuelan Commission. In one passage, the award stated that “These obligations [imposed by a judicial decision described as ‘manifestly unjust’] must be annulled by way of reparation.” In ordering them annulled, the Commission noted that an unlawful act had been committed and it proceeded on the principle that the “consequences of the said act must be wiped out.” As regards the nature or, rather, the effects of legal restitution in cases like this one where injury was not actually suffered, it must be said that, strictly speaking, the reparation consists solely in ordering the unlawful act to be annulled or rendered ineffective and not in “wiping out” consequences which have not come to pass … As a mode of reparation, restitution presents serious practical difficulties. In the pronouncement by the Permanent Court quoted at the beginning of this subsection, restitution in kind is explicitly made contingent on whether it is “possible” to carry it out. In actual fact, restitution is rarely practicable. Sometimes it is not possible for purely material reasons, as in cases where the property of which the alien in question was unlawfully deprived has been destroyed. At other times, it is not possible for legal reasons, since … it is no simple matter from the point of view of domestic law to contemplate compelling a State to rescind a legislative measure or to set aside a decision pronounced by its courts. It is at this point where the question of damages is raised.

[E] Christoph H. Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary, 1136-1139 (2nd ed., Cambridge University Press 2009) (5) (Citations selectively omitted) 2. Pecuniary Obligations 72. The obligation to enforce [awards set forth in ICSID Convention Art. 54] extends only to the pecuniary obligations imposed by the award. It does not extend to any other obligation under the award such as restitution or other forms of specific performance or an injunction to desist from a certain course of action. By contrast, the obligation to recognize [“abide by and comply with the award” in ICSID Convention Art. 53] extends to the entire award … *** 75. There is a wide range of possibilities for non-pecuniary obligations that awards might impose. They include the employment of local personnel or the reinstatement of wrongfully discharged personnel. Other examples might be compliance with performance requirements like the use of local components. Possible obligations imposed upon the host State would include the restitution of seized property, the return of an investment license that has been withdrawn, the granting of permission to transfer currency, discontinuance of harassment of the investor's personnel or desistance from imposing unreasonable taxes.

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76. In the cases so far published, most ICSID tribunals have framed the obligations imposed by their awards in pecuniary terms. This is not due to a belief that they lack the power to proceed otherwise. Rather, the cases involved situations in which the investment relationship had broken down and the claimants had defined their demands in pecuniary terms. *** 79. It is likely that in the future more cases will arise, involving disputes stemming from ongoing relationships, in which awards providing for specific performance or injunctions become relevant. Tribunals imposing such non-pecuniary obligations should keep the impossibility to enforce them in mind. Such awards should follow the example of the Goetz v. Burundi Tribunal and provide for a pecuniary alternative in case of nonperformance such as liquidated damages, penalties or another obligation to pay a certain amount of money. 80. There is no doubt that an obligation imposed by an award that is expressed not in monetary terms but in terms of an obligation to perform a particular act or to refrain from a certain course of action is equally binding and gives rise to the effect of res judicata. The Convention merely exempts such an obligation from the simplified and automatic enforcement procedure of Art. 54. It is conceivable, though not likely, that a non-pecuniary obligation imposed by an ICSID award may be enforced on a different legal basis. The 1958 [New York] Convention on the Recognition and Enforcement of Foreign Arbitral Awards does not contain a comparable limitation to pecuniary obligations. Despite the other limitations of the New York Convention … a party to an ICSID arbitration may find it useful to rely on the New York Convention where Art. 54 of the ICSID Convention is of no avail because the award imposes a non-pecuniary obligation.

[F] Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic (ICSID Case No. ARB/01/3), Decision on Jurisdiction of 14 January 2004, (6) ¶¶ 76-81 [Francisco Orrego Vicuña (pres.), Héctor Gros Espiel, Pierre-Yves Tschanz] [Enron indirectly owned approximately 35% of a local Argentine natural gas transportation utility, TGS. Upon privatization of TGS in 1992, the Argentine federal government agreed to indemnify TGS for any stamp taxes on the transfer and privatization agreements. Starting in 1997, certain Argentine provinces reinterpreted their stamp tax laws and assessed stamp taxes on the privatization agreements and on transactions between TGS and natural gas shippers that, at least arguably, did not fall within the definition of a taxable event sufficient to trigger the assessment of stamp taxes. Although the stamp tax was set at a modest 1-3%, the provinces collectively assessed stamp taxes for the period of the past five years and imposed penalties and interest in an amount of several hundred million pesos, at the time of most assessments, the pesos was pegged to the US dollar on a 1-to-1 parity. TGS brought an injunction claim before the Argentine Supreme Court and Enron filed an ICSID claim seeking declaratory relief, an injunction and damages in the event the taxes were collected. The ICSID case claimed violations of the US-Argentina BIT, including an expropriation by the assessment of illegal taxes under Argentine law and confiscatory because of the huge amounts involved, which were more than the net worth of the local company. The government of Argentina argued that an ICSID tribunal does not have jurisdiction to award injunctive relief, especially to enjoin an expropriation.] (Citations selectively omitted) 76. The second objection to jurisdiction made under this heading is more complex. It concerns the power of the Tribunal to order injunctive relief. In the Respondent's view the Tribunal lacks such a power under the Convention and the Treaty, and it could only either issue a declaratory statement that might satisfy the investor or else determine the payment of compensation based on a finding that a certain measure is wrongful. In particular it is argued that an ICSID tribunal cannot impede an expropriation that falls exclusively within the ambit of State sovereignty; that tribunal could only establish whether there has been an expropriation, its legality or illegality and the corresponding compensation. 77. The Claimants agree on the point that a tribunal has the power to issue a declaratory statement, but in addition they believe that it can order injunctive relief concerning the performance or non-performance of certain acts. To this end, an award can deal both with pecuniary and non-pecuniary determinations, including specific performance and an injunction. In the present case the Claimants have indeed requested that the taxes assessed be declared expropriatory and in breach of the Treaty and unlawful, and that they be annulled and their collection permanently enjoined. 78. The parties have discussed in this context the decisions of ICSID Tribunals and other courts and tribunals. For the Claimants, the ICSID case of Goetz v. Burundi, like the cases decided by other tribunals in Martini (Italy v. Venezuela), the Trail Smelter (United States v. Canada), the La Grand (Germany v. United States) and the Arrest Warrant (Democratic Republic of Congo v. Belgium), amply support their view about tribunals having a broad power to order injunctive relief and other non-pecuniary measures. The Respondent

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argues that these various cases are not relevant here, either because they involve interState disputes or because they are based on the agreement of the parties, concern contractual relations or the tribunals have been specifically empowered to adopt measures of the kind requested. Neither is the subject matter of this case, the Respondent further argues, in any way related to recent decisions of the International Court of Justice. 79. An examination of the powers of international courts and tribunals to order measures concerning performance or injunction and of the ample practice that is available in this respect, leave this Tribunal in no doubt about the fact that these powers are indeed available. The Claimants have convincingly invoked the authority of the Rainbow Warrior, where it was held: “The authority to issue an order for the cessation or discontinuance of a wrongful act or omission results from the inherent powers of a competent tribunal which is confronted with the continuous breach of an international obligation which is in force and continues to be in force. The delivery of such an order requires, therefore, two essential conditions intimately linked, namely that the wrongful act has a continuing character and that the violated rule is still in force at the time in which the order is issued”. 80. The same holds true under the ICSID Convention. In Goetz v. Burundi such a power was indeed resorted to by the Tribunal, and the fact that it was based on a settlement agreement between the parties does not deprive the decision of the Tribunal of its own legal force and standing. A scholarly opinion invoked by the claimants is also relevant in this context, having an author concluding that it is “… entirely possible that future cases will involve disputes arising from ongoing relationships in which awards providing for specific performance or injunctions become relevant”. (7) 81. The Tribunal accordingly concludes that, in addition to declaratory powers, it has the power to order measures involving performance or injunction of certain acts. Jurisdiction is therefore also affirmed on this ground. What kind of measures might or might not be justified, whether the acts complained of meet the standards set out in the Rainbow Warrior, and how the issue of implementation that the parties have also discussed would be handled, if appropriate, are all matters that belong to the merits.

[G] Sergei Paushok, CJSC Golden East Company and CJSCVostokneftegaz Company v. The Government of Mongolia (ad hoc arbitration under the 1976 UNCITRAL Rules), Order on Interim Measures of 2 September 2008, (8) ¶¶ 36-37, 39, 45-46, 55, 68-71, 79-85 [Marc Lalonde (pres.), Brigitte Stern, Horacio A. Grigera Naón] [This case arises from a series of measures regulating and taxing the Mongolian gold mining sector, particularly a 68% windfall profit tax on gold sales at prices exceeding USD500 per ounce as well as severe restrictions affecting the employment of foreign workers in Mongolia. Two Mongolian gold mining companies owned by Mr. Paushok, a Russian national, were particularly affected by those measures, leading in a tax dispute with the Mongolian authorities, which resulted in the seizure of the companies' gold reserves deposited at the Central Bank of Mongolia. Mr. Paushok initiated UNCITRAL arbitration proceedings pursuant to the Mongolia-Russia BIT.] (Citations selectively omitted) 36. The Tribunal notes that the wording of Article 26(1) of the UNCITRAL Rules is not the same as under the ICSID Convention; it leaves wider discretion to the Tribunal in the awarding of provisional measures (“any interim measures it deems necessary in respect of the subject-matter of the dispute”) than under Article 47 of the ICSID Rules (“provisional measures for the preservation of its rights”). *** 37. The subject-matter of the dispute is the validity under the Treaty of the Windfall Profit Tax and of the levying of a fee for the import of foreign workers imposed by Respondent. In their Notice of Arbitration of November 30, 2007, Claimants request declaratory relief based on Articles 3(1) and 4 of the Treaty as well as damages, interest and costs … *** 39. It is not contested that interim measures are extraordinary measures not to be granted lightly, as stated in a number of arbitral awards rendered under various arbitration rules. Even under the discretion granted to the Tribunal under the UNCITRAL Rules, the Tribunal still has to deem those measures urgent and necessary to avoid ‘irreparable” harm and not only convenient or appropriate. *** III. The Criteria Guiding the Tribunal 45. It is internationally recognized that five standards have to be met before a tribunal

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will issue an order in support of interim measures. They are (1) prima facie jurisdiction, (2) prima facie establishment of the case, (3) urgency, (4) imminent danger of serious prejudice (necessity,) and (5) proportionality. 46. In addressing the first two criteria, the Tribunal wishes to make it clear that it does not in any way prejudge the issues of fact or law which may be raised by the parties during the course of this case concerning the jurisdiction or competence of the Tribunal or the merits of the case. *** 2. Prima facie establishment of the case 55. At this stage, the Tribunal need not go beyond whether a reasonable case has been made which, if the facts alleged are proven, might possibly lead the Tribunal to the conclusion that an award could be made in favor of Claimants. Essentially, the Tribunal needs to decide only that the claims made are not, on their face, frivolous or obviously outside the competence of the Tribunal. To do otherwise would require the Tribunal to proceed to a determination of the facts and, in practice, to a hearing on the merits of case, a lengthy and complicated process which would defeat the very purpose of interim measures. *** 68. The Tribunal does not agree with Respondent that Claimants are merely requesting damages, as is clearly demonstrated by the text of their request for relief. Moreover, the possibility of monetary compensation does not necessarily eliminate the possible need for interim measures. The Tribunal relies on the opinion of the Iran-U.S. Claims Tribunal in the Behring case to the effect that, in international law, the concept of “irreparable prejudice” does not necessarily require that the inquiry complained of be not remediable by an award of damage. To quote K.P. Berger who refers specifically to Article 26 of the UNCITRAL Rules. “To preserve the legitimate rights of the requesting party, the measures must be “necessary”. This requirement is satisfied if the delay in the adjudication of the main claim caused by the arbitral proceedings would lead to a “substantial” (but not necessarily “irreparable” as known in common law doctrine) prejudice for the requesting party.” 69. The Tribunal shares that view and considers that the “irreparable harm” in international law has a flexible meaning. It is noteworthy in that respect that the UNCITRAL Model Law in its Article 17A does not require the requesting party to demonstrate irreparable harm but merely that “(h)arm not adequately reparable by an award of damages is likely to result if the measure is not ordered, and such harm substantially outweighs the harm that is likely to result to the party against whom the measure is directed if the measure is granted”. 70. Whatever the situation under the ICSID Convention, the Tribunal does not support the contention that such measures can only be issued, under the UNCITRAL Rules, when specific performance is requested in connection with a contractual relationship. No such restriction is implied under the broad language of Article 26(1) of the UNCITRAL Rules. The specific examples mentioned in that Article on the contrary, point to a wide discretion in the hands of the Tribunal. 71. Finally, the Tribunal does not find that the Treaty limits the rights of Claimants to requests for monetary compensation. Respondent bases its argument on Articles 4 and 6 of the Treaty. *** 5. Proportionality 79. Under proportionality, the Tribunal is called upon to weigh the balance of inconvenience in the imposition of interim measures upon the parties. 80. The Tribunal has just discussed the issue of the burden of immediate payment upon Claimants. 81. In its consideration of this criterion with regard to Respondent, the Tribunal does not question in any way the sovereign right of a State to enact whatever tax measures it deems appropriate at any particular time … 82. However, in the present instance, the Government itself has recognized that the WPT Law as not achieving the objectives it had in mind when it was adopted in 2006. This is quite apparent in its attempts, both in 2007 and 2008, to repeal that Law and to replace it with a much more modest taxation regime; similarly with the more recent undertaking made by Respondent not to seize or put a lien upon GEM's assets until a final award has been rendered in this case. 83. Clearly, and quite understandably so, Respondent sees that it is in its own interest that its second largest gold producer should continue its operations. A sudden collapse of GEM would put Respondent in a situation where it would, most likely, be unable to realize

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a large share of the amount owing to it under the WPT Law and some considerable time could elapse before it could find another investor willing to restart gold production on the relevant properties, unless a new fiscal regime would have been legislated – an eventuality which, considering the 2007 experience, cannot be guaranteed. 84. If Respondent were to prevail, it would be in a position to obtain payment of the full amount owing to it, specially taking into account the security in favor of Respondent to be provided by Claimants according to directions further issued under this Order. If, on the other hand, Claimants were to prevail, Respondent would probably face a claim for lower damages than if GEM's activities had been terminated; this is not an insignificant factor, considering Respondent's tight budgetary constraints. 85. On balance, the Tribunal concludes that there is considerable advantage for both parties in the issuance of interim measures of protection.

[H] Quiborax S.A., Non Metallic Minerals S.A. and Allan Fosk Kaplún v. Plurinational State of Bolivia (ICSID Case No. ARB/06/2), Decision on Provisional Measures of 26 February 2010, (9) ¶¶ 113-114, 116-124, § V [Gabrielle Kaufmann-Kohler (pres.), Marc Lalonde, Brigitte Stern] [Quiborax, a Chilean investor, held a mining concession in Bolivia, which the Bolivian government rescinded in 2004. Quiborax argues that its license was unfairly rescinded in response to anti-Chilean sentiments in Bolivia at the time, and that it was accompanied by the harassment of the company and its employees. Quiborax initiated ICSID arbitration proceedings under the Chile-Bolivia BIT.] (Citations selectively omitted) 3. Requirements for provisional measures 113. There is no disagreement between the Parties, and rightly so, that provisional measures can only be granted under the relevant rules and standards, if rights to be protected do exist … and the measures are urgent … and necessary …, this last requirement implying an assessment of the risk of harm to be avoided by the measures … B. Existence of Rights Requiring Preservation 114. Claimants allege that the following three rights need preservation by way of provisional measures: (i) the right to preservation of the status quo and non-aggravation of the dispute; (ii) the right to the procedural integrity of the arbitration proceedings, and (iii) the right to exclusivity of the ICSID proceedings in accordance with Art. 26 of the ICSID Convention. *** 1. Rights that may be protected by provisional measures 116. Bolivia contends that provisional measures may not be granted in this case because the criminal proceedings do not affect any of Claimants' rights “in dispute”, understood as the rights that are the subject matter of the ICSID arbitration. In contrast, Claimants argue that identity between the object of the coercive measures from which protection is sought and the rights in dispute is not required. 117. The Tribunal agrees with Claimants' position. In the Tribunal's view, the rights to be preserved by provisional measures are not limited to those which form the subject matter of the dispute, but may extend to procedural rights, including the general right to the preservation of the status quo and to the non-aggravation of the dispute. As stated by the Tribunal in Burlington v. Ecuador, these latter rights are self-standing rights. The Tribunal in Biwater Gauff v. Tanzania reached a similar conclusion. 118. In the Tribunal's view, the applicable criterion is that the right to be preserved bears a relation with the dispute … *** 119. It is evident from the record that the criminal proceedings are related to, and may even be motivated by, the ICSID arbitration. Most of the documents in the criminal proceedings refer expressly to the ICSID arbitration … 120. Although the subject matter of the criminal proceedings is the prosecution of crimes of forgery, use of forged documents, fraud, destruction of personal property to defraud and dereliction of duties, the factual accusation underlying these proceedings is that the minutes of 13 September 2001 of NMM were forged to support Claimants' contention that they were shareholders of NMM at the time the dispute brought before this Tribunal arose, thus allowing them to gain access to ICSID arbitration under the Chile-Bolivia BIT. This access to ICSID arbitration is expressly deemed to constitute the harm caused to Bolivia that is required as one of the constituent elements of the crimes prosecuted. Thus, the criminal proceedings are related to this arbitration because both the conduct alleged and the harm allegedly caused relate closely to Claimants' standing as investors in the ICSID proceeding.

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121. In addition, although the Tribunal has every respect for Bolivia's sovereign right to prosecute crimes committed within its territory, the evidence in the record suggests that the criminal proceedings were initiated as a result of a corporate audit that targeted Claimants because they had initiated this arbitration … 122. The Tribunal cannot fail to note that these actions were taken after an interministerial committee specifically recommended in the 2004 Memo that Bolivia should try to find flaws in Claimants' mining concessions as a defense strategy for the ICSID arbitration. Seen jointly with the 2004 Memo, the corporate audit and the criminal proceedings appear to be part of a defense strategy adopted by Bolivia with respect to the ICSID arbitration. 123. Whether such defense strategy amounts to harassment, as Claimants allege, is not clear to the Tribunal. Bolivia has the sovereign power to prosecute conduct that may constitute a crime on its own territory, if it has sufficient elements justifying prosecution. Bolivia also has the power to investigate whether Claimants have made their investments in Bolivia in accordance with Bolivian law and to present evidence in that respect. But such powers must be exercised in good faith and respecting Claimants' rights, including their prima facie right to pursue this arbitration. 124. What is clear to the Tribunal is that there is a direct relationship between the criminal proceedings and this ICSID arbitration that may merit the preservation of Claimants' rights in the ICSID proceeding … V. Decision On this basis, the Arbitral Tribunal makes the following decision: 1.

2.

Respondent shall take all appropriate measures to suspend the criminal proceedings identified as Case Nº 9394/08, … and any other criminal proceedings directly related to the present arbitration, until this arbitration is completed or until reconsideration of this decision, whether at the request of a Party or of the Tribunal's own motion. Respondent shall also refrain from initiating any other criminal proceedings directly related to the present arbitration, or engaging in any other course of action which may jeopardize the procedural integrity of this arbitration.

[I] Comments and Questions 1. 2. 3. 4. 5. 6.

Is declaratory relief a proper remedy under customary international law for an investment dispute? Under an investment treaty? What forms might declaratory relief take? Is restitution a form of declaratory relief? Is an injunction a proper remedy for an investment dispute? In what situations might an injunction be proper? What limits or precautions should be observed in deciding whether to grant declaratory or injunctive relief? In the case of Mavrommatis Palestine Concessions, (1925) PCIJ, Ser. A. Judgment No. 5 pp. 45, 51, the Permanent Court of International Justice (“PCIJ”) awarded declaratory relief to a Greek national asserting rights under a concession agreement. In 1914, M. Mavrom-matis obtained from the City of Jerusalem, then under Ottoman control, two agreements for electricity and water concessions. The agreements described Mr. Mavrommatis as an Ottoman subject residing at Constantinople. After World War I, Britain obtained a Mandate from the League of Nations to rule Palestine. The government of Palestine, under British control, entered into agreements conveying the same concessions held by Mr. Mavrommatis to M. Rutenberg. The various treaties ending World War I protected the rights of non-Ottoman nationals who held concessions in Palestine, but not those of Ottoman nationals. The government of Greece brought a claim before the PCIJ to obtain recognition by the Palestinian and British governments of the rights of Mr. Mavrommatis. One of the issues was whether Mr. Mavrommatis was a Greek or Ottoman national, and thus, whether his rights were protected by treaty. In ruling in favor of Mr. Mavrammotis, the PCIJ specifically awarded declaratory rather than pecuniary relief because Mavrommatis had not yet suffered any monetary loss: The Court therefore considers that even if the clause in Article 29 of the conditions of M. Rutenberg's concession is to be regarded as contrary to the Mandatory's international obligations, in so far as it gave M. Rutenberg the right to require the expropriation of concessions conflicting with his own, this clause has not in fact either led to the expropriation or annulment of M. Mavrommatis' concessions, or caused him any loss which might justify a claim on his behalf for compensation in the present proceedings. For these reasons the Court has come * * * to the conclusion that the reference to M. Mavrommatis as an Ottoman subject in the agreements concerning the Jerusalem concessions, is not intended to represent a

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condition on which the grant of the concession is dependent and that, therefore, the fact that M. Mavrommatis is not an Ottoman subject cannot involve the invalidity of the concession. The concessions must therefore be regarded as valid and definitively acquired. The Court therefore is of opinion * that * * the concessions granted to M. Mavrom-matis at Jerusalem come within the scope of Article 4 of Protocol XII and that the beneficiary is entitled to claim that they should be brought into conformity with the new economic conditions by means of re-adaptation. 7.

An ad hoc arbitral tribunal in Saudi Arabia v. Arabian-American Oil Company (ARAMCO), Award of August 23, 1958, 27 I.L.R. 117 (1963), awarded declaratory relief to resolve conflicting claims over concessions from the Saudi government. In that case, the Saudi government had granted an exclusive oil exploration concession over eastern Saudi Arabia to Standard Oil Company of California (SOCAL) in 1933. SOCAL in turn formed the California-Arabian Standard Oil Company (CASOC) and assigned its right in the concession to it. In 1944, CASOC became ARAMCO. Article 1 of the 1933 concession granted the Company “the exclusive right, for a period of sixty years …, to explore, prospect, drill for, extract, treat, manufacture, transport, deal with, carry away and export petroleum … and the derivatives …” Id. at 144. On 20 January 1954, Saudi Arabia concluded a contract with Aristotle Onassis, giving Onassis' Saudi company, Saudi Arabian Maritime Tankers Co., Ltd., a right of priority for the transport of Saudi oil for 30 years. ARAMCO objected to the Onassis agreement on the grounds that ARAMCO had the exclusive right to transport Saudi oil and the Onassis agreement conflicted with ARAMCO's contract. In the ensuing arbitration, the tribunal awarded declaratory relief to ARAMCO. As in Mavrammotis, the arbitral tribunal expressly found that declaratory relief was the appropriate remedy given the lack of monetary damage suffered by ARAMCO: The Parties have discussed at great length the possible repercussions of the Onassis Agreement on the economic and financial results of Aramco's enterprise. They did not present any submission, however, about the reparation of injuries; nor did they ask the Tribunal for a finding as regards a possible injury. Since the Onassis Agreement has not been implemented, owing to Aramco's objections, neither its detrimental effects nor its harmlessness can be demonstrated. In these circumstances, the Arbitration Tribunal feels that it need not investigate this aspect of the relationship between the Government and the Company – an aspect which is obviously outside its terms of reference. The Tribunal contents itself with stating that implementation of the Onassis Agreement would undoubtedly involve a serious dislocation of Aramco's system of sales and international transport of oil and oil products, but that it does not have to pronounce upon possible injuries resulting therefrom. For these reasons, *** The Arbitration Tribunal decides to answer the questions submitted to it by the State of Saudi Arabia (the Government) and the Arabian American Oil Company (Aramco) as follows: A. Questions submitted by the Government. *** 3. In view of the exclusive right conferred upon Aramco, which has the character of an acquired right, Saudi Arabia may not compel Aramco to recognize a right of priority or preference to tankers flying any flag whatsoever, irrespective of any consideration of the economic consequences of this right or of whether, in particular, the cost of transportation is going to be less or more than the current freight, or equal to it. Therefore, the ‘Clarification Agreement’ concluded between the Government and Mr. Onassis and communicated to Aramco by letter of the Minister of Finance dated 5 June 1955, corresponding to 14 Shawal 1374, can be invoked neither against Aramco nor against its offtakers or buyers, since neither the one nor the other are parties to that Agreement. B. Question submitted by Aramco. Article IV of the Agreement of 20 January 1954 … concluded between the Government of Saudi Arabia and Mr. A. S. Onassis, as amended on 7 April 1954 … and as “clarified” on 5 June 1955, … which grants rights of priority or preference to the Saudi Arabian Tankers Company Limited (Satco) for a period of thirty years, is in conflict with the Aramco Concession Agreement and is not effective as against Aramco. Id. at 144-46.

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8.

9.

10.

11.

12.

In Goetz v. Burundi, ICSID Case No. ARB/95/3, Award of Feb. 10, 1999, 26 Y.B. Com. Arb. 24, 35 & n. 24 (ICCA 2001), embodying the parties' settlement agreement, an ICSID tribunal rendered an award that contemplated equitable remedies similar to an injunction. In 1992, the Republic of Burundi established a free trade zone (“FTZ”) providing custom exemptions to certain enterprises engaging in non-traditional activities. Through the issuance of Ministerial Order 750/415, Burundi specified the types of industries that would qualify for the exemption. The order specified that mineral production would qualify for an exemption if production was undertaken in accordance with the mandates of the Burundi Ministry of Mining. The order provided further that the list of exempted activities could be modified by decree of the Ministry of Foreign Trade. In December of that same year, Goetz incorporated a local subsidiary called AFFIMET for the purpose of producing, processing and marketing precious metals. Upon its creation, AFFIMET applied and was granted a license to operate within and obtain the benefits of the FTZ. In 1995, after years of political opposition to the inclusion of mineral production as part of the FTZ, by Ministerial Order 750/184, the Government of Burundi issued an identical order to Ministerial Order 750/415 with one minor exception; it specifically provided that mineral production was not an exempt activity under the FTZ. Moreover, by letter dated on the same day as Ministerial Order 750/184, the Government of Burundi terminated AFFIMET's license to operate in the FTZ. Based on these actions, Goetz commenced arbitration proceedings against Burundi based on violations of the Belgium-Burundi bilateral investment treaty. In issuing its award, the tribunal offered Burundi two options. First, the tribunal gave Burundi the option of paying fair and adequate compensation for the termination of the FTZ license. Second, the tribunal gave Burundi the option of abrogating Ministerial Order 750/184 and reinstating the FTZ license. The tribunal expressly noted that the ultimate decision among the options given was a matter left to the sovereign discretion of Burundi; however, the government must select one of the options in order to comply with its obligations under international law. The tribunal imposed a deadline of four months for Burundi to make its decision or be financially liable under international law. Based on the parameters established by the tribunal, the parties reached an agreed award upon which Burundi agreed to pay Goetz partial compensation for rights and taxes previously paid by AFFIMET and reinstate its license under the FTZ going forward. Injunctive relief has been awarded in state-to-state cases such as the Trail Smelter Case (United States v. Canada), 3 U.N. R.I.A.A. 1905 (1941). In that case, the International Joint Commission of the United States and Canada addressed whether Canada was liable under international law for causing sulfur dioxide emissions to be released from a smelting factory in British Columbia across the border into the State of Washington. In ruling that Canada was liable, the Commission enjoined Canada from causing any further fumes to enter the U.S. and mandated a control regime to ensure compliance with its injunction. In the Arrest Warrant Case (Democratic Republic of Congo v. Belgium), 2002 I.C.J. No. 121 (Feb. 14), the ICJ ruled that Belgium had violated international law by allowing a Belgian judge to issue and circulate an arrest warrant against the then-Foreign Minister of the Congo. No actual arrest ever took place. The Court did not accept the distinction between actual arrest and the circulation of a document that may lead to an arrest. It found that the mere issuance of the warrant violated the immunity that the Foreign Minister enjoyed. Accordingly, the Court ordered Belgium to cancel the warrant by means of its own choosing. Similarly, in the La Grand Case (Germany v. United States), 2001 I.C.J. No. 104 (June 27), the ICJ determined that the United States had breached the Vienna Convention on Consular Relations by trying, sentencing and executing two German nationals without advising them of their right under the Convention to be put in contact with the local German consul. The Court took note of the commitment by the United States to ensure that such violations do not recur, but the Court found “that should nationals of the Federal Republic of Germany nonetheless be sentenced to severe penalties without their rights under [the Convention] having been respected, the United States of America, by means of its own choosing, shall allow the review and reconsideration of the conviction and sentence by taking account of the violation of the rights set forth in that Convention.” This might be construed as an injunction precluding the United States from again penalizing German nationals without allowing a review and reconsideration of the conviction and sentence in light of the Convention's protections. Three general requirements for issuing interim measures can be identified in international law: (1) prima facie jurisdiction of the investment arbitral tribunal, (2) a threat of either substantial or irreparable harm to property or to a right capable of being protected by the tribunal, and (3) urgency in the sense that the risk of harm or prejudice is imminent (i.e., it will occur before the tribunal can issue its final award). Did the Paushok v. Mongolia tribunal add other requirements? What were they? What are the arguments in favor of and against these additional requirements?

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13.

14.

15.

16.

In City Oriente v. Ecuador, ICSID Case No. ARB/06/21 (Professor Juan FernándezArmesto, President; Dr. Horacio A. Grigera Naón and Professor J. Christopher Thomas, Q.C.), the tribunal issued interim measures requiring Ecuador to suspend criminal proceedings filed against four executives of the Claimant by a prosecutor upon the instigation of a third-party. In Perenco v. Ecuador, ICSID Case No. ARB/08/6 (Judge Peter Tomka, President; Neil Kaplan, C.B.E., Q.C., S.B.S. and J. Christopher Thomas, Q.C.), the tribunal issued a Decision on Provisional Measures restraining Ecuador from demanding any amounts from Perenco pursuant to a windfall profits tax law, from filing any judicial action relating to the same, from instituting any actions against Perenco or its employees relating to its contracts, or from terminating its contracts. See also Burlington Resources, Inc. v. Ecuador, ICSID Case No. ARB/08/5 (Professor Gabrielle KaufmannKohler, President; Professor Brigitte Stern and Professor Francisco Orrego Vicuña), Procedural Order No. 1. May an investment arbitral tribunal order a government to dismiss or suspend criminal proceedings? What is its jurisdiction for doing so? Under what circumstances might it be able to do so? What are the factors and limits that should be considered by a tribunal? Although there are situations in which injunctive relief may be proper – even necessary – in devising adequate reparations, tribunals should generally approach this type of relief cautiously because of the sovereign nature of governments and their need for flexibility in dealing with changing situations.

§11.04 COMPENSATION FOR BREACH OF CONTRACT [A] Harvard Draft Convention on State Responsibility, 55 Am. J. Int’l L. 545, 581 (1961) Article 34 – Damages for Violation, Annulment, or Modification of a Contract or Concession 1. Damages for the violation, annulment, or modification of a contract or concession … shall include compensation for losses caused and gains denied as the result of such wrongful act or omission or compensation which will restore the claimant to the same position in which the injured alien was immediately preceding such act or omission.

[B] UNIDROIT Principles of International Commercial Contracts (2010), (10) Articles 7.4.2–7.7.4.4, 7.4.7–7.4.8, 7.4.11, 7.4.13 Article 7.4.2 – Full compensation (1) The aggrieved party is entitled to full compensation for harm sustained as a result of the non-performance. Such harm includes both any loss which it suffered and any gain of which it was deprived, taking into account any gain to the aggrieved party resulting from its avoidance of cost or harm. (2) Such harm may be non-pecuniary and includes, for instance, physical suffering or emotional distress. Article 7.4.3 – Certainty of harm (1) Compensation is due only for harm, including future harm, that is established with a reasonable degree of certainty. (2) Compensation may be due for the loss of a chance in proportion to the probability of its occurrence. (3) Where the amount of damages cannot be established with a sufficient degree of certainty, the assessment is at the discretion of the court. Article 7.4.4 – Foreseeability of harm The non-performing party is liable only for harm which it foresaw or could reasonably have foreseen at the time of the conclusion of the contract as being likely to result from its nonperformance. *** Article 7.4.7 – Harm due in part to aggrieved party Where the harm is due in part to an act or omission of the aggrieved party or to another event as to which that party bears the risk, the amount of damages shall be reduced to the extent that these factors have contributed to the harm, having regard to the conduct of each of the parties. Article 7.4.8 – Mitigation of harm (1) The non-performing party is not liable for harm suffered by the aggrieved party to the extent that the harm could have been reduced by the latter party's taking reasonable steps. (2) The aggrieved party is entitled to recover any expenses reasonably incurred in

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attempting to reduce the harm. *** Article 7.4.11 – Manner of monetary redress (1) Damages are to be paid in a lump sum. However, they may be payable in installments where the nature of the harm makes this appropriate. (2) Damages to be paid in installments may be indexed. *** Article 7.4.13 – Agreed payment for non-performance (1) Where the contract provides that a party who does not perform is to pay a specified sum to the aggrieved party for such non-performance, the aggrieved party is entitled to that sum irrespective of its actual harm. (2) However, notwithstanding any agreement to the contrary the specified sum may be reduced to a reasonable amount where it is grossly excessive in relation to the harm resulting from the non-performance and to the other circumstances.

[C] Bridas S.A.P.I.C., Bridas Energy International, Ltd., Intercontinental Oil & Gas Ventures, Ltd. and Bridas Corporation v. Government of Turkmenistan, Concern Balkannebitgazsenagat and State Concern Turkmenneft (ICC Case No. 9058/FMS/ KGA), Partial Award of 25 June 1999, (11) 23-29 [Edward C. Chaisson (pres.), Hans Smit, Griffin B. Bell] (Citations selectively omitted) Repudiation The Claimants seek a declaration that the conduct of the Respondents and the Government is repudiatory. The Respondents have stated repeatedly that the Claimants will not be allowed to continue with the project. The Government banned exports of JV Keimir's products and although ostensibly the ban was lifted, in fact, no exports have been allowed to occur. This state of affairs has persisted since November, 1995. After discussions with the parties and a consideration of their submissions, in Order Number Two as an interim measure of protection, the arbitrators ordered that operations resume and that exports take place with a direction as to the use of the proceeds of sale including deposits to an escrow account. The Respondents refused to obey the Order. In the summer of 1997, the arbitrators again sought to work with the parties in an effort to have operations resume. The Claimants were not prepared to accede to the then suggested regime. No alternative arrangement was acceptable to the Respondents or to the Government. Again, at the hearing in July, 1998, the Respondents made it clear on their behalf and as reflective of Government policy that the Claimants would not be allowed to continue with performance of the JV Agreement. On the facts, it is clear that the conduct of the Respondents and the Government is repudiatory and we so conclude. They have no intention of performing their part of the bargain … *** The Consequences of Repudiation Damages for Accepted Repudiation It is clear that the Claimants have not accepted the repudiation of the Respondents and the Government … *** Specific performance was not pursued by the Claimants. The Respondents and the Government have made it clear that they do not intend “… to abide by the provisions of the JV Agreement.[“] *** … We conclude that the proper basis for calculating the value of the Claimants' damages if they were to accept a repudiation by the Government and the Respondents is loss-ofbargain and not fair market value … We note also that the Claimants have an obligation to mitigate any damages they many sustain … *** Fair market value measures the price that a willing purchaser would pay to a willing vendor in an open market with both sides having reasonable knowledge of the facts

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relevant to the transaction … It is used in appraisals for lending purposes, accounting records where current as opposed to historical data are required, to assist in the evaluation of an investment opportunity and in disputes involving expropriation. It is not the appropriate measure for damages for breach of contract. Contract damages reflect the contractual context of parties. This may, or may not, mirror the market value when a bargain – the contractual asset – is lost, because the terms of the contract may give to a party more or less than the market will pay. In addition, a party may decide for its own reasons to persist in a contract which directly does not maximize the available return on its investment, a crucial component of fair market value. The cornerstone of damages for breach of contract is foreseeability at the time the contract was made. That foreseeability is defined by the specific terms of the agreement which is made and does not relate to the market value of the contract opportunity at some time in the future based on the factual context that then exists. Both parties adduced evidence and made submissions concerning the appropriate discount rate to be used to assess the present value of the future income stream. The Claimants' position was that a rate of 7.5% is appropriate. The Respondents contended for 19.1%. Its analysis was based on a fair market value approach which we reject, but in our opinion the Claimants' rate is too low and does not adequately reflect risk and the provisions of the contract. The arbitrators conclude that a rate of 10.446% which is the rate charged by the Claimants to the Respondents on the Claimants' FPC account, in the circumstances of this case reflects the reality of the factual context as of June 30, 1997, the notional date for the receipt of money, and the terms of the JV Agreement. The contract term is 25 years with an extension of 10 years on the mutual agreement of the parties. The Respondents and the Government cannot unreasonably refuse to agree to extend. The Respondents' experts proceeded on the basis of a 25 year term and counsel for the Respondents argued why this was appropriate. The Claimants relied on the extension provision in the JV Agreement and contended that 35 years was the correct duration. It is obvious that as matters now stand, the Turkmenian side would not agree. Based on the conduct of the Claimants both before and in the arbitration, it is the opinion of the arbitrators that a refusal by the Government and the Respondents would be reasonable and the term would not have been extended beyond 25 years. Both sides delivered expert reports and adduced evidence concerning the volume of oil and gas – “Barrels Oil Equivalent (“BOE”) – to be realized over the life of the contract. The arbitrators prefer the evidence of the Respondents' experts on this point and on the appropriate net-back price per barrel to be used in the damage calculation … Summary Based on the evidence, the submissions of the parties, our conclusions as stated and the provisions of the JV Agreement, damages for the Respondents' improper repudiation of the JV Agreement would be calculated as a loss of bargain and based inter alia on the following: 25 year term; net-back price $10.50; total barrels 218,560,935; discount rate 10.446%. A calculation of damage for loss of bargain would have to adjust the Claimants' FPC account as required by changes, if any, subsequent to June 30, 1997. The Claimants' obligation to mitigate its damages and particularly its refusal to accede to the suggested process for the resumption of production in September, 1997, would have to be considered. Revenues received by JV Keimir would have to be taken into account as would its own costs of production insofar as they are not reflected in the net-back price per barrel. There also are a number of contract provisions that would have to be considered. These include: – – – –

–

the payment of royalties: the funds required to be established by article 8 of the Charter and article 16 of the JV Agreement; they are to be deducted before calculating any tax liability of JV Keimir; the provisions of the JV Agreement dealing with the payment of tax by JV Keimir through to January 19, 1995 a 35% and thereafter at 25%; the provisions of the JV Agreement that deal with payment to the parties of “Distributable Profits” (JVA article 10), including those concerning the repayment to the Claimants of the “Cost Recoverable” portion of their Statutory Capital (JVA article 9); the implications, if any [.] of the parties' initial Statutory Capital contribution and the $30,000,000 “Bid Bonus”;

*** Repudiatory Conduct – Damages In addition to an entitlement to damages for loss of bargain if it were to accept a repudiation, the Claimants are entitled to recover any damages sustained by them as a

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result of the breach of contract of the Respondents and the Government by the imposition of the export ban.

[D] Karaha Bodas Company L.L.C. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (‘Pertamina’) and Pt. PLN (Persero) (‘PLN’) (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 18 December 2000), 16(3) Mealey’s Int’l Arb. Rep. C-2, C-15 to C-16, ¶¶ 121-122, 124-127, 134-136 (2001) [Yves Derains (pres.), Piero Bernardini, Ahmed Sadek El Kosheri] [Case Summary included in Chapter 3.] (Citations selectively omitted) (b) Lost profits **** 3. The Arbitral Tribunal’s Decision 121. Indonesia Law, like numerous other legal systems, provides for the recovery of lost profits (“lucrum cessans”) as a component of the damages to which the innocent party is entitled in case of inexcusable breach of contract, in addition to the other damages component, the “damnum emergens”. As in other legal systems, recovery is limited to damages that were foreseeable when the contract was made and that are the immediate and direct result of the breach. 122. There is no doubt in the Arbitral Tribunal's opinion that the Claimant is entitled to obtain the benefit of its bargain in addition to recovering the expenditures it has incurred. As stated by the award in theHimpurna California Energy Ltd. v. P.T. (Persero) Perusahaan Listruik Negara, filed by The Claimant in these proceedings, “To limit the recovery of the victim of a breach to its actual expenditures is to transform it into a lender, which is commercially intolerable when the party was at full risk for the amount of investments made on the strength of the contract” … The loss of a business opportunity (“perte de chance”) is a widely recognized basis for the lost profits damages component. *** 124. The issue confronting the Arbitral Tribunal in the present case is that it is requested to assess with a reasonable degree of confidence the level of profits which the Claimant might have legitimately expected to earn out of a project which had not yet reached the stage of full development and which would have been subject to the vagaries of a number of risks typical of this kind of project in a country such as Indonesia. Few considerations, however, appear relevant as guidelines for reaching the required level of confidence regarding the determination of the issue in question. 125. The most important of such considerations is represented by the contractual arrangements agreed between the parties. The JOC and the ESC, taken together, represent for the Claimant the guarantee that once electricity would have been ready for sale out of its plant (or plants) a customer would have been available, namely PLN, contractually bound for thirty years to purchase the entire production at a price based on a pre-agreed formula, to be paid in US dollars. The Respondents' obligations would have been secured by a supporting letter from either the Minister of Finance or the Minister of Mining and Energy of Indonesia, a condition required by the banking system to lend the financing necessary for the project implementation. Moreover, any intervention by the Government affecting the contractual performance would have constituted a force majeure event excusing only the Claimant, not the Respondents. 126. Thus, the most significant risks for the foreign investor normally associated with a project of this nature, including the commercial risks of market availability and price fluctuations, the currency and inflation risks and the risk of governmental interference would have been eliminated under the parties' contractual arrangements. 127. Quite rightly, the Respondents have underlined that other risks might have affected the economic results of the project during its development stage, such as – to mention the most significant ones – possible delays in the plant's construction and operation, actual availability of reserves in the quantities estimated by the Claimant, availability of the financing necessary for the project implementation at an acceptable cost. These risks, although to be taken into account, appear to the Arbitral Tribunal less troublesome than the ones against which the JOC and the ESC afforded to the Claimant the necessary protection. *** 134. As already mentioned … a number of risks against which no protection was afforded by the JOC and the ESC have to be taken into account, including a cost of capital higher than estimated in the Claimant's cash flow projections, delays in plant(s) construction and operation and reserves exploitable in quantities lower than expected and/or

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entailing investments and operating costs for an amount higher than the amount assumed for purposes of such cash flow projections. 135. One way of assessing the impact of these various risks over the lost profits amount claimed by the Claimant would be to apply a discount rate in the latter's cash flow projections higher than the one proposed by the Claimant by appropriately increasing the “risk premium” component of such rate. This would imply, however, that it would be possible to evaluate with a sufficient degree of certainty the cumulative effect of such various risks and to translate it into such a higher percentage. 136. The too many variables involved by such evaluation process suggests that a different approach should be taken which, after duly considering these various factors, would entail a significant reduction of the Claimant's lost profits claim. The Arbitral Tribunal, after careful consideration of all elements involved in this analysis as enumerated above, and in the exercise of its inherent power to assess the quantum of damages on the basis of the evidence submitted by both parties, fixes at US $ 150 million (one hundred and fifty million US dollars), the amount of lost profits to which the Claimant is entitled.

[E] Comments and Questions 1. 2.

3.

4.

5.

6.

Does international law provide a standard of compensation for breaches of contract? Justify your answer. In Sapphire International Petroleum Ltd. v. National Iranian Oil Co., Award of 15 March 1963, 35 Int'l Law Rep. 136 (1967), 13 Int'l & Comp. L. Q. 1011 (1963), the claimant was awarded $2 million in lost profits on its claim of $5 million because of the risks of oil exploration over a long duration in a desolate area with a hostile climate, but it was awarded virtually all of its claimed expenses. What is the standard that must be proved before imposing liability for a lost opportunity? If there is a 33% chance of finding oil in a concession area lost because of breach of contract, may an investor recover 33% of the lost total damages? 100%? Why? See Chevron v. Ecuador, UNCITRAL Partial Award on the Merits of 30 March, 2010, ¶ 381 (Professor Karl-Heinz Böckstiegel, Chairman, The Honorable Charles N. Brower and Professor Albert Jan van den Berg). In the Chevron case, the underlying seven cases against the Ecuadorian government were brought in Ecuadorian courts for breach of contract. The tribunal found that the Ecuadorian courts had unduly delayed decisions in those cases, violating Art. II(7) of the BIT (the effective means provision). The tribunal then took up the underlying cases and decided them as it considered an honest and competent Ecuadorian court would have done under Ecuadorian law. In the case of P.W. Shufeldt v. Guatemala, Award of 24 July 1930, 2 R. Int'l Arb. Awards at 1080, the claimant's concession contract with the Minister of Agriculture to extract chicle from Guatemalan public lands was performed by the parties for six years. In 1928, however, the legislature disapproved the contract by decree. The arbitral tribunal awarded the claimant both the damages suffered (damnum emergens) and lost profits (lucrum cessans). In doing so, the tribunal noted that “The damnum emergens is always recoverable, but the lucrum cessans must be the direct fruit of the contract and not too remote or speculative.” In May v. Guatemala, which is mentioned in the Shufeldt case, Robert H. May signed a contract in 1898 with the government of Guatemala for managing the Northern Railroad of Guatemala. Mr. May was to be paid $35,000 per month in legal silver currency for managing the railroad in addition to certain amounts for other services. For approximately six months, the government had no complaints with Mr. May, although he had trouble paying the expenses of the railroad because of the failure of the government to pay him the monthly sum due. At that point, a strike by certain railroad workers occurred because they had not been paid for three months, and the operations of the railroad were suspended. Mr. May and the President of Guatemala agreed to rescind the contract on the condition that immediate payment be made sufficient to cover the wages due for the workers. This payment was not made, but Mr. May was forced by the Commandant of Arms of Zacapa to leave the railroad. Mr. May entered a formal protest. The arbitrator held that no rescission of the contract occurred because its terms were not honored since Mr. May was ejected from his position. The tribunal held that Mr. May was entitled to recover future lost profits from the date of his ejectment until the date the government could have terminated the contract by its terms. The profits were based on the average monthly profit earned during the six months of the contract. Are lost profits generally recoverable against governments for expropriation? For a breach of contract?

§11.05 RESTITUTION AND COMPENSATION FOR TREATY VIOLATIONS AND UNLAWFUL CONDUCT [A] UN International Law Commission (ILC) Articles on State Responsibility (2001), Articles 35 and 36 642 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

Article 35 – Restitution A State responsible for an internationally wrongful act is under an obligation to make restitution, that is, to re-establish the situation which existed before the wrongful act was committed, provided and to the extent that restitution: (a) (b)

Is not materially impossible; Does not involve a burden out of all proportion to the benefit deriving from restitution instead of compensation.

Article 36 – Compensation 1. The State responsible for an internationally wrongful act is under an obligation to compensate for the damage caused thereby, insofar as such damage is not made good by restitution. 2. The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.

[B] Harvard Draft Convention on State Responsibility, 55 Am. J. Int’l L. 545, 581 (1961) Article 30 – Damages for Wrongful Acts of Tribunals and Administrative Authorities 1. If … in any civil proceeding an alien has been denied access to a tribunal or an administrative authority or an adverse decision or judgment has been rendered against an alien or an inadequate recovery obtained by an alien, damages shall include compensation for the amount wrongfully assessed against or denied such alien and any other losses resulting directly from such proceeding or denial of access. 2. If in any criminal proceeding an alien has been arrested or detained … or an adverse decision or judgment has been rendered against an alien … damages shall in addition to damages otherwise payable under this Section, include compensation for the costs of defense, litigation, and judgment, and any other losses resulting directly from such proceeding. Article 31 – Damages for Destruction of and Damage to Property 1. Damages for destruction of property under … shall include: (a) (b)

an amount equal to the fair market value of the property prior to the destruction or, if no fair market value exists, the fair value of such property; and payment, if appropriate, for the loss of use of the property.

2. Damage to property … shall include: (a) (b)

the difference between the value of the property before the damage and the value of the property in its damaged condition; and payment, if appropriate, or the loss of use of the property.

Article 35 – Damages for Failure to Exercise Due Diligence Damages for any injury sustained as the result of the failure of a State under Article 13 to exercise due diligence to afford protection to an alien or to apprehend or to hold a person who has committed a criminal act shall be computed as if the State had originally caused such injury directly.

[C] R. Doak Bishop, Theories of State Responsibility in International Law: Expropriation and Fair and Equitable Treatment, 58 Proceedings of the Annual Institute on Oil and Gas Law, 203, 286-287 (2007) (Citations selectively omitted) 4. Compensation for Failing to Provide Fair and Equitable Treatment Unlike expropriation, investment treaties provide no express guidance on the methodology for determining compensation for a violation of the fair and equitable treatment provision. Tribunals have used differing standards depending on the facts of the case. For example in Pope & Talbot v. Canada, the NAFTA Tribunal awarded the investor its outof-pocket costs for the government's violation of fair and equitable treatment in an amount in excess of $400,000. These costs included out-of-pocket costs for legal and accountant's fees during the regulatory proceedings, lobbying fees relating to the regulatory proceedings, and the costs of the NAFTA case. In the case of S.D. Myers v. Canada, the NAFTA Tribunal found violations of both the fair and equitable treatment and national treatment provisions of NAFTA and awarded the claimant damages based on its lost net income stream. By contrast, the ICSID Tribunal in CMS v. Argentina adopted fair market value as the standard for compensation for violation of the fair and equitable treatment and umbrella clause provisions of the BIT, using the Discounted Cash Flow methodology. On

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this basis, the Tribunal awarded US $133.2 million to the claimant. Similarly, the ICSID Tribunal in Azurix v. Argentina decided to use fair market value based on the actual investment method, and adding the additional investments made by Azurix after it acquired the concession, as the basis for determining compensation for violations of the fair and equitable treatment, arbitrary treatment and full protection and security provisions of the BIT. On this basis, the Tribunal awarded US $165.2 million, plus interest of approximately US $20 million based on US 6-month certificates of deposit. Although there exist other decisions, these few cases have been selected because they illustrate that international tribunals have used widely differing approaches to determining damages for violation of fair and equitable treatment. As noted by the Azurix Tribunal, in the absence of a treaty standard, the tribunals in S.D. Myers, Pope & Talbot and Feldman v. Mexico “exercised considerable discretion in fashioning what they believed to be reasonable approaches to damages consistent with the requirements of NAFTA.” The same is true for tribunals fashioning damage remedies under BIT's.

[D] Factory at Chorzow (Germany v. Poland), Claim No. 13 (PCA), Judgment on the Merits of 13 September 1928, [1928] P.C.I.J. Series A – No. 17, 27-29, 31, 46-54 (1928) (Citations selectively omitted) It is a principle of international law that the reparation of a wrong may consist in an indemnity corresponding to the damage which the nationals of the injured State have suffered as a result of the act which is contrary to international law. This is even the most usual form of reparation; it is the form selected by Germany in this case and the admissibility of it has not been disputed. The reparation due by one State to another does not however change its character by reason of the fact that it takes the form of an indemnity for the calculation of which the damage suffered by a private person is taken as the measure. The rules of law governing the reparation are the rules of international law in force between the two States concerned, and not the law governing relations between the State which has committed a wrongful act and the individual who has suffered damage. Rights or interests of an individual the violation of which rights cause damage are always in a different plane to rights belonging to a State, which rights may also be infringed by the same act. The damage suffered by an individual is never therefore identical in kind with that which will be suffered by a State; it can only afford a convenient scale for the calculation of the reparation due to the State. *** As regards the first point, the Court observes that it is a principle of international law, and even a general conception of law, that any breach of an engagement involves an obligation to make reparation. In Judgment No. 8, when deciding on the jurisdiction derived by it from Article 23 of the Geneva Convention, the Court has already said that reparation is the indispensable complement of a failure to apply a convention, and there is no necessity for this to be stated in the convention itself. The existence of the principle establishing the obligation to make reparation, as an element of positive international law, has moreover never been disputed in the course of the proceedings in the various cases, concerning the Chorzow factory. *** On approaching this question, it should first be observed that, in estimating the damage caused by an unlawful act, only the value of property, rights and interests which have been affected and the owner of which is the person on whose behalf compensation is claimed, or the damage done to whom is to serve as a means of gauging the reparation claimed, must be taken into account. This principle, which is accepted in the jurisprudence of arbitral tribunals, has the effect, on the one hand, of excluding from the damage to be estimated, injury resulting for third parties from the unlawful act and, on the other hand, of not excluding from the damage the amount of debts and other obligations for which the injured party is responsible. The damage suffered by the Oberschlesische in respect of the Chorzow undertaking is therefore equivalent to the total value – but to that total only – of the property, rights and interests of this Company in that undertaking, without deducting liabilities. *** III. The existence of a damage to be made good being recognized by the respondent Party as regards the Bayerische, and the objections raised by the same Party against the existence of any damage that would justify compensation to the Oberschlesische being set aside, the Court must now lay down the guiding principles according to which the amount of compensation due may be determined. The action of Poland which the Court has judged to be contrary to the Geneva Convention is not an expropriation – to render which lawful only the payment of fair compensation would have been wanting; it is a seizure of property, rights and interests which could not be expropriated even against compensation, save under the exceptional conditions fixed by Article 7 of the said Convention. As the Court has expressly declared in Judgment No. 8,

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reparation is in this case the consequence not of the application of Articles 6 to 22 of the Geneva Convention, but of acts contrary to those articles. It follows that the compensation due to the German Government is not necessarily limited to the value of the undertaking at the moment of dispossession, plus interest to the day of payment. This limitation would only be admissible if the Polish Government had had the right to expropriate, and if its wrongful act consisted merely in not having paid to the two Companies the just price of what was expropriated; in the present case, such a limitation might result in placing Germany and the interests protected by the Geneva Convention, on behalf of which interests the German Government is acting, in a situation more unfavourable than that in which Germany and these interests would have been if Poland had respected the said Convention. Such a consequence would not only be unjust, but also and above all incompatible with the aim of Article 6 and following articles of the Convention – that is to say, the prohibition, in principle, of the liquidation of the property, rights and interests of German nationals and of companies controlled by German nationals in Upper Silesia – since it would be tantamount to rendering lawful liquidation and unlawful dispossession indistinguishable in so far as their financial results are concerned. The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipeout all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it – such are the principles which should serve to determine the amount of compensation due for an act contrary to international law. This conclusion particularly applies as regards the Geneva Convention, the object of which is to provide for the maintenance of economic life in Upper Silesia on the basis of respect for the status quo. The dispossession of an industrial undertaking – the expropriation of which is prohibited by the Geneva Convention – then involves the obligation to restore the undertaking and, if this be not possible, to pay its value at the time of the indemnification, which value is designed to take the place of restitution which has become impossible. To this obligation, in virtue of the general principles of international law, must be added that of compensating loss sustained as the result of the seizure. The impossibility, on which the Parties are agreed, of restoring the Chorzow factory could therefore have no other effect but that of substituting payment of the value of the undertaking for restitution; it would not be in conformity either with the principles of law or with the wish of the Parties to infer from that agreement that, the question of compensation must henceforth be dealt with as though an expropriation properly so called was involved. Such being the principles to be followed in fixing the compensation due, the Court may now consider whether the damage to be made good is to be estimated separately for each of the two Companies, as the Applicant has claimed, or whether it is preferable to fix a lump sum. If the Court were dealing with damage which, though caused by a single act, had affected persons independent the one of the other, the natural method to be applied would be a separate assessment of the damage sustained by each of them; the total amount of compensation thus assessed would then constitute the amount of reparation due to the State. In the present case, the situation is different. The economic unity of the Chorzow undertaking, pointed out by the Court in its Judgment No. 6, is shown above all in that fact that the interests possessed by the two Companies in the said undertaking are interdependent and complementary; it follows that they cannot simply be added together without running the risk of the same damage being compensated twice over; for all that the Bayerische would have obtained from its participation in the undertaking (sums due and shares in the profits) would have been payable by the Oberschlesische. The value of the Bayerische's option on the factory depended also on the value of the undertaking. The whole damage suffered by the one or the other Company as the result of dispossession, in so far as concerns the cessation of the working and the loss of profit which would have accrued, is determined by the value of the undertaking as such; and, therefore, compensation under this head must remain within these limits. On the other hand, it is clear that the legal relationship between the two Companies in no way concerns the international proceedings and cannot hinder the Court from adopting the system of a lump sum corresponding to the value of the undertaking, if, as is the Court's opinion, such a calculation is simpler and gives greater guarantees that it will arrive at a just appreciation of the amount, and avoid awarding double damages. One reservation must, however, be made. The calculation of a lump sum referred to above concerns only the Chorzow undertaking, and does not exclude the possibility of taking into account other damage which the Companies may have sustained owing to dispossession but which is outside the undertaking itself. No damage of such a nature has

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been alleged as regards the Oberschlesische, and it seems hardly conceivable that such damage should exist, for the whole activity of the Oberschlesische was concentrated in the undertaking. On the other hand, it is possible that damage of such a nature may be shown to exist as regards the Bayerische, which possesses or works other factories of the same nature as Chorzow; the Court will consider later whether such damage must be taken into account in fixing the amount of compensation. Faced with the task of determining what the sum must be awarded to the German Government in order to enable it to place the dispossessed Companies as far as possible in the economic situation in which they would probably have been if the seizure had not taken place, the Court considers that it cannot be satisfied with the data for assessment supplied by the Parties. The cost of construction of the Chorzow factory, which the Applicant has taken as a basis for his calculation as regards compensation to the Oberschlesische, gave rise to objections and criticisms by the Respondent which are perhaps not without some foundation. Without entering into this discussion and without denying the importance which the question of cost of construction may have in determining the value of the undertaking, the Court merely observes that it is by no means impossible that the cost of construction of a factory may not correspond to the value which that factory will have when built. This possibility must more particularly be considered when, as in the present case, the factory was built by the State in order to meet the imperious demands of public necessity and under exceptional circumstances such as those created by the war. Nor yet can the Court, on the other hand, be satisfied with the price stipulated in the contract of December 24th, 1919, between the Reich, the Oberschlesische and the Treuhand, or with the offer of sale of the shares of the Oberschlesische to the Geneva Compagnie d’azote et de fertilisants made on May 26th, 1922. It has already been pointed out above that the value of the undertaking at the moment of dispossession does not necessarily indicate the criterion for the fixing of compensation. Now it is certain that the moment of the contract of sale and that of the negotiations with the Genevese Company belong to a period of serious economic and monetary crisis; the difference between the value which the undertaking then had and that which it would have had at present may therefore be very considerable. And further, it must be considered that the price stipulated in the contract of 1919 was determined by circumstances and accompanied by clauses which in reality seem hardly to admit of its being considered as a true indication of the value which the Parties placed on the factory; and that the offer to the Genevese Company is probably to be explained by the fear of measures such as those which the Polish Government in fact adopted afterwards against the Chorzow undertaking, and which the Court has judged not to be in conformity with the Geneva Convention. And finally as regards the sum agreed on at one moment by the two Governments during the negotiations which followed Judgment No. 7–which sum, moreover, neither Party thought fit to rely on during the present proceedings it may again be pointed out that the Court cannot take into account declarations, admissions or proposals which the Parties may have made during direct negotiations between themselves, when such negotiations have not led to a complete agreement. *** This being the case, and in order to obtain further enlightenment in the matter, the Court, before giving any decision as to the compensation to be paid by the Polish Government to the German Government, will arrange for the holding of an expert enquiry, in conformity with Article 50 of its Statute and actually with the suggestions of the Applicant. This expert enquiry, directions for which are given in an Order of Court of today's date, will refer to the following questions: I.

II.

A. What was the value, on July 3rd, 1922, expressed in Reichsmarks current at the present time, of the undertaking for the manufacture of nitrate products of which the factory was situated at Chorzow in Polish Upper Silesia, in the state in which that undertaking (including the lands, buildings, equipment, stocks and processes at its disposal, supply and delivery contracts, goodwill and future prospects) was, on the date indicated, in the hands of the Bayerische and Oberschlesische Stickstoffwerke? B. What would have been the financial results, expressed in Reichsmarks current at the present time (profits or losses), which would probably have been given by the undertaking thus constituted from July 3rd, 1922, to the date of the present judgment, if it had been in the hands of the said Companies? What would be the value at the date of the present judgment, expressed in Reichsmarks current at the present time, of the same undertaking (Chorzow) if that undertaking (Including lands, buildings, equipment, stocks, available processes, supply and delivery contracts, goodwill and future prospects) had remained in the hands of the Bayerische and Oberschlesische Stickstoffwerke, and had either remained substantially as it was in 1922 or had been developed proportionately on lines similar to those applied in the case of other undertakings of the same kind, controlled by the Bayerische, for instance, the undertaking of which the factory is situated at Piesteritz?

The purpose of question I is to determine the monetary value, both of the object which should have been restored in kind and of the additional damage, on the basis of the

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estimated value of the undertaking including stocks at the moment of taking possession by the Polish Government, together with any probable profit that would have accrued to the undertaking between the date of taking possession and that of the expert opinion. On the other hand, question II is directed to the ascertainment of the present value on the basis of the situation at the moment of the expert enquiry and leaving aside the situation presumed to exist in 1922. This question contemplates the present value of the undertaking from two points of view: firstly, it is supposed that the factory had remained essentially in the state in which it was on July 3rd, 1922, and secondly, the factory is to be considered in the state in which it would (hypothetically but probably) have been in – the hands of the Oberschlesische and Bayerische, if, instead of being taken in 1922 by Poland, it had been able to continue its supposedly normal development from that time onwards. The hypothetical nature of this question is considerably diminished by the possibility of comparison with other undertakings of the same nature directed by the Bayerische, and, in particular, with the Piesteritz factory, the analogy of which with Chorzow, as well as certain differences between the two, have been many times pointed out during the present proceedings. *** As regards the lucrum cessans, in relation to question II, it may be remarked that the cost of upkeep of the corporeal objects forming part of the undertaking and even the cost of improvement and normal development of the installation and of the industrial property incorporated therein, are bound to absorb in a large measure the profits, real or supposed, of the undertaking. Up to a certain point, therefore, any profit may be left out of account, for it will be included in the real or supposed value of the undertaking at the present moment. If, however, the reply given by the experts to question I B should show that after making good the deficits for the years during which the factory was working at a loss, and after due provision for the cost of upkeep and normal improvement during the following years, there remains a margin of profit, the amount of such profit should be added to the compensation to be awarded. On the other hand, if the normal development presupposed by question II represented an enlargement of the undertaking and an investment of fresh capital, the amount of such sums must be deducted from the value sought for. The Court does not fail to appreciate the difficulties presented by these two questions, difficulties which are however inherent in the special case under consideration, and closely connected with the time that elapsed between the dispossession and the demand for compensation, and with the transformations of the factory and the progress made in the industry with which the factory is concerned. In view of these difficulties, the Court considers it preferable to endeavour to ascertain the value to be estimated by several methods, in order to permit of a comparison and if necessary of completing the results of the one by those of the others. The Court, therefore, reserves every right to review the valuations referred to in the different formulae; basing itself on the results of the said valuations and of facts and documents submitted to it, it will then proceed to determine the sum to be awarded to the German Government, in conformity with the legal principles set out above.

[E] BG Group Plc. v. The Republic of Argentina (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 24 December 2007, (12) ¶¶ 419, 422, 426-429, 444 [Guillermo Aguilar Alvarez (pres.), Alejandro M. Garro, Albert Jan van den Berg] [BG, a British investor, held an equity interest in an Argentine local gas distribution company. The relevant regulatory and contractual framework provided for the tariffs to be calculated in US dollars, a series of tariffs adjustments and revisions, the commitment that tariffs were to provide an income sufficient to cover all costs and a reasonable rate of return, and that there would be no price freeze applicable to the tariff system without compensation. In the aftermath of the 2001 economic crisis, the Argentine government dismantled and refused to reinstate these guarantees. BG subsequently initiated UNCITRAL arbitration proceedings under the Argentina-UK BIT. ] (Citations selectively omitted) 419. Unlike Article 5 (Expropriation), Article 2 of the Argentina-U.K. BIT [Fair and Equitable Treatment] does not provide a standard for compensation. Claimant relied on international law and the awards of prior tribunals in support for its position that it is entitled to the fair market value of its investment in MetroGAS. *** 422. … “fair market value” can be relied upon as a standard to measure damages for breach of the obligation to accord investors treatment in accordance with Article 2.2 of the BIT [fair and equitable treatment]. While the Tribunal is disinclined to automatically import such standard from Article 5 of the BIT, this standard of compensation is nonetheless available by reference to customary international law. *** 426. As stated above, Factory at Chorzów is also about expropriation. However, its vitality

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was energized and its scope broadened beyond the law of takings by Article 31 of the ILC Draft Articles: 1. 2.

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

427. Under this rule, which seeks to codify customary international law, the obligation of the responsible State to make full reparation relates to the “… injury caused by the internationally wrongful act.” The injury, as stated by paragraph 2 of Article 31, includes any material damage caused by the wrongful act. Material damage here “… refers to damage to property … which is assessable in financial terms.” 428. The damage, nonetheless, must be the consequence or proximate cause of the wrongful act. Damages that are “too indirect, remote, and uncertain to be appraised” are to be excluded. In line with this principle, the Tribunal would add that an award for damages which are speculative would equally run afoul of “full reparation” under the ILC Draft Articles. 429. The Tribunal will be guided by these principles. Provided that the damage is not speculative, indirect, remote or uncertain, the Arbitral Tribunal may have recourse to such methodology as it deems appropriate in order to achieve the full reparation for the injury caused to BG by Respondent's breach of Article 2.2 of the Argentina-U.K. BIT. *** 444. Argentina shall thus pay BG damages in the sum of US$185,285,485.85.

[F] Azurix Corp. v. The Argentine Republic (ICSID Case No. ARB/01/12), Decision on the Application for Annulment of 1 September 2009, (13) ¶¶ 316-328 [Gavan Griffith (pres.), Bola Ajbola, Michael Hwang] [Case summary included in Chapter 9] (Citations selectively omitted) 316. In considering how to assess damages, the Tribunal began by noting that the only BIT provision providing for the measure of compensation was the expropriation clause in Article IV(1). The Tribunal then proceeded to consider how damages were assessed for non-expropriatory treaty breaches in the CMS Award (which involved the same BIT as the present case), and in certain arbitrations under NAFTA and a BIT between Malaysia and Chile (both of which, analogously to the BIT in the present case, provide an express standard of compensation only in cases of expropriation). The Tribunal noted that in the NAFTA cases, it was found that in cases of non-expropriatory breaches of the treaty “the tribunals exercised considerable discretion in fashioning what they believed to be reasonable approaches to damages consistent with the requirements of NAFTA”, and that … the lack of a measure of compensation in NAFTA for breaches other than a finding of expropriation reflected the intention of the parties to leave it open to the tribunals to determine it in light of the circumstances of the case taking into account the principles of both international law and the provisions of NAFTA. 317. The Committee considers that it is implicit from this discussion that the Tribunal considered that the law that it was to apply in determining the quantum of damages was the BIT itself, and that failing any express provision in the BIT, the matter was governed by general principles of international law. The Committee finds no fault with the Tribunal's identification of the applicable law for purposes of determining the quantum of damages, which is in fact consistent with Argentina's position. 318. The Committee finds that it is also implicit from the Tribunal's discussion of these cases that the Tribunal considered that under such general principles of international law, in the absence of any express provision in the BIT dealing with assessment of damages for breach of a particular provision of the BIT, the tribunal will have a discretion to determine what it considers to be a reasonable approach to damages. 319. Even if the Tribunal were wrong in its conclusion that under general principles of international law it has such a discretion, the Committee considers that this would be a case of incorrect application of the applicable law (which is not a ground of annulment), rather than a case of non-application of the applicable law. Whether the Tribunal applied the applicable law rightly or wrongly, the Tribunal did in the Committee's view apply the correct applicable law, namely the BIT itself and general principles of international law. 320. The Committee therefore cannot accept Argentina's argument that the Tribunal determined the standard as a matter of discretion rather than applying principles of customary international law. The Tribunal decided to exercise a discretion pursuant to customary international law, and not to exercise a discretion instead of customary international law. 321. The Tribunal proceeded to determine how it would exercise its discretion in this particular case, and concluded that “[i]n the present case, … a compensation based on the

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fair market value of the Concession would be appropriate” particularly since the Province had taken the investment over. 322. Argentina argues that the Tribunal did not have the discretion to apply the “fair market value” standard of compensation because under the BIT, this is the standard of compensation for expropriation, and the Tribunal expressly found in this case that there had been no expropriation. However, the Committee finds nothing in the BIT that reserves this standard of compensation solely to cases of expropriation. If the Tribunal had, as it found, a discretion in the approach that it adopted to the assessment of damages, there is no reason in logic why it might not, in the exercise of that discretion, in any case where it considered it appropriate to do so, also apply the “fair market value” standard to cases of non-expropriatory breaches of the treaty. 323. Argentina suggests that this conclusion would make “expropriation as a cause of action redundant” as there would be no reason for a claimant to seek to establish the “higher” threshold of liability for expropriation. The Committee is not persuaded by this argument. Indeed, the Committee does not accept Argentina's premise that the BIT provides for the “fair market value” standard in cases of breaches of the BIT amounting to expropriation. 324. Article IV(1) of the BIT provides that investments shall not be expropriated or nationalised, except where certain conditions are satisfied, one of these being the payment of compensation “equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken”. Thus, where all requirements of Article IV(1) are met, including the payment of the fair market value, there will be no breach of the BIT. On the other hand, in cases where an expropriation does constitute a breach of the BIT, either because the requisite compensation has not been paid, or because one of the other requirements are not met, the BIT does not state what the applicable standard for the assessment of damages will be. It thus appears that the BIT does not provide the standard of compensation for any type of breach of the BIT, in which case, on the Tribunal's reasoning the determination of the standard of compensation will always be in the tribunal's discretion. 325. In any event, even if it were the case that the “fair market value” standard is applicable to all breaches of the BIT involving expropriation, it would not make the expropriation provision of the BIT redundant for that standard of compensation also to be applied where the tribunal considers it appropriate to cases involving breaches of other provisions of the BIT. Contrary to what Argentina seems to suggest, the Tribunal did not find that the “fair market value” standard was the applicable standard for all breaches of all provisions of the BIT. 326. Argentina argues that, in cases of breaches of the BIT other than the expropriation clause, the standard of compensation is “the amount of loss or damage that is adequately connected to the breach” or the “amount of the loss or damage actually incurred”, rather than the “fair market value” standard. The Committee considers that, by this argument, Argentina requests the Committee to find that the Tribunal incorrectly applied the applicable law (by applying an incorrect standard) rather than find that the Tribunal failed to apply the applicable law (the BIT and general principles of international law). The Committee reiterates that incorrect application of the applicable law is not a ground of annulment. 327. In any event, the Committee is not persuaded that the Tribunal failed to adopt an approach of ascertaining the “amount of the loss or damage actually incurred”. The Tribunal referred to the standard of compensation identified in the Chorzów Factory case, namely that which would “wipe-out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if the act had not been committed.” Furthermore, the Tribunal, in rejecting Azurix's proposal that damages be assessed on the theory of unjust enrichment, stated that: … damages and unjust enrichment are conceptually distinct in terms of the principles of liability and the measure of restitution. In the case of damages, liability rests on an unlawful act, which is not necessarily the case in unjust enrichment. As to compensation on account of an unlawful act, it is based on the loss suffered, while, in the case of unjust enrichment, it is based on restitution … 328. It is apparent to the Committee that the Tribunal considered in the present case that the “fair market value of the investment” would be appropriate in the circumstances of this particular case to achieve the result of compensating Azurix for the actual loss suffered by it.

[G] Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador (ICSID Case No. ARB/06/11), Award of 5 October 2012, (14) ¶¶ 707-709, 790-797, 824-825 [L. Yves Fortier (pres.), David A.R. Williams, Brigitte Stern] [Case summary included in Chapter 11] (Citations selectively omitted)

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707. … Having found earlier in this Award that the Claimants' investment in Ecuador has not been accorded fair and equitable treatment by the Respondent and has been expropriated by the issuance of theCaducidad Decree, the Tribunal will now determine, as mandated by Article III of the Treaty, the fair market value of this investment. The Tribunal agrees with and adopts the definition of FMV which Professor Kalt has explained as follows: Measurement of fair market value in a context such as at hand here properly entails consideration of market outcomes. Specifically, the fair market value today of a stream of net revenues (i.e., gross revenues minus attendant costs) that can be earned from operation of a multi-year project such as OEPC's development of Block 15 entails assessment of the amount that a willing buyer would reasonably be expected to have to pay a willing seller to induce the seller to give up its rights to those net revenues. Here, Occidental is in the position of a seller in the sense that we seek measurement of the amount Occidental would reasonably have been willing to accept to be voluntarily bought out of the instant contract and associated income-generating opportunities, as opposed to having had that contract and those opportunities involuntarily terminated by Ecuador. (Emphasis in original) 3. The Discounted Cash Flow (“DCF”) Method 708. The Tribunal is of the view that, in this case, the standard economic approach to measuring the fair market value today of a stream of net revenues (i.e., gross revenues minus attendant costs) that can be earned from the operation of a multi-year project such as OEPC's development of Block 15 is the calculation of the present value, as of 16 May 2006, of the net benefits, or “discounted cash flows”. These net cash flows are appropriately determined by calculating the flow of benefits (“cash flows”) that the Claimants would have reasonably been expected to earn in the “but for” state of the world in which the termination of the Participation Contract hypothetically did not occur relative to the actual cash flow that the Claimants will derive subsequent to the termination. The difference between these two cash flow streams (the “but for” state of the world with no termination less the actual state of the world with contract termination), discounted to the date of the actual contract termination, is the economically appropriate and reliable measure of the cumulative economic harm suffered by the Claimants as a consequence of the contract termination. 709. Using a DCF model as the starting point for measuring FMV, the Tribunal further observes that the analytical framework for determining FMV in the present circumstances requires several steps. These steps are clearly summarized by the Respondent. The Claimants agree. They are: (a) (b) (c) (d) (e)

Determination of the size of the reservoir (project the number of barrels that are in the field); Creation of a production profile (establish the number of barrels that can be produced each year economically); Assignment of risk adjustment factors (“RAFs”) to the reserves (to reflect the risk that certain reserves categories will not produce the amount of oil projected); Application of a price forecast (multiplication [of] the number of barrels in the production profile by a projected price of oil, subtraction of the costs to produce those barrels); and Application of a discount rate (to reflect, among other things, the time-value of money and business and country risks).

*** 790. There are two preliminary issues with respect to the Claimants' claims for consequential damages. The Respondent maintains that such claims are not recoverable under international law or Ecuadorian law. The Claimants disagree. They argue firstly that the remedies for any violation of the Treaty is “by necessity” governed by international law because every treaty breach is a breach of international law. 791. The Tribunal agrees with the Claimants. Numerous tribunals have so held. 792. The availability of consequential loss in international law is uncontroversial. The starting point is the principle of “full reparation”, expressed by the Permanent Court of International Justice in the Chorzów Factory case as follows: [R]eparation must, so far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed. 793. This principle is now also embodied in Article 31 of the International Law Commission's Articles on Responsibility of States for Internationally Wrongful Acts … *** 794. Marboe states simply:

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According to the principle of full reparation … consequential damage must … be taken into account. 795. As to the standard of causation, Marboe concludes that the “direct/indirect” dichotomy is now seen as unhelpful in international law, and instead “[i]nternational practice seems so far to have relied on two main criteria: ‘causality’ and ‘provability’”. 796. Marboe categorizes “liability to subcontractors,” for instance, as an “accepted” head of consequential loss in international law, subject to the caveat that the quantum of such liability must be proved with sufficient certainty. In this connection, Marboe notably refers to the previously-cited ICSID case of Siemens A.G. v. The Argentine Republic, in which the “potential liability” of the plaintiff to subcontractors (that is, liability under claims that might be made in the future) was the subject of an award. 797. Therefore, the Tribunal accepts the submission of the Claimants that, in principle, consequential damage is a valid head of loss in international law … *** 824. Using the economic model agreed by Professor Kalt and Mr. Johnston, the Tribunal, informed by all the findings that it has made in the present Section of its Award and assisted by Professor Kalt and Mr. Johnston's agreed calculations, determines that the Net Present Value of the discounted cash flows generated by the Block 15 OEPC production as of 16 May 2006 is US$ 2,359,500,000 (US Two billion, three hundred fifty nine millions and five hundred thousand dollars). 825. Having determined earlier that the Claimants' damages should be reduced by a factor of 25% because of their own wrongful act which contributed in a material way to the damages which they subsequently suffered when the Caducidad Decree was issued on 15 May 2006, the Claimants' damages for the expropriation by Ecuador of their interest in the Participation Contract amount to US$ 1,769,625,000 (US One billion, seven hundred sixty nine millions, six hundred twenty five thousand dollars) which the Tribunal orders the Respondent to pay.

[H] Comments and Questions 1. 2.

3. 4. 5. 6.

7.

How would you describe the standard of compensation adopted by the PCIJ in the Chorzow Factory case? What is the standard for compensating a foreign investor for unlawful, wrongful, tortious, or delictual conduct by a government? For violation of an investment treaty? Is the method for compensating an investor necessarily the same for violation of each provision of an investment treaty? For example, should a violation of the discrimination or national treatment provisions of a BIT necessarily be compensated the same as an expropriation? Should either be compensated on the same basis as a violation of the BIT provision requiring full protection and security? Why or why not? What is the standard of compensation of a foreign investor for damage or destruction of its property by third persons if the government has not used due diligence to protect the property from harm? Is the standard of compensation always the same for the same BIT provision (e.g., for fair and equitable treatment)? What is the significance of the two questions posed by the Permanent Court of International Justice to the experts in the Chorzow Factory case? In the Kuwait v. American Independent Oil Company (AMINOIL) case, AMINOIL was awarded $83 million for the 1977 expropriation of its interest in the Kuwaiti Neutral Zone. With inflation and compound interest, that figure rose to a total award of approximately $170 million. Many tribunals have cited the Chorzow Factory case as providing the customary international standard for compensation for violation of BITs. Several tribunals have used fair market value as the standard for determining compensation for violation of BITs' fair and equitable treatment provision. What is the generallyaccepted standard in international law for compensating an investor for an internationally wrongful measure?

§11.06 RESTITUTION AND COMPENSATION FOR EXPROPRIATION [A] Introduction The standard of compensation for an expropriation became a controversial issue in customary international law in the 1960's and 1970's with efforts by developing countries to establish what was called the New International Economic Order. A series of resolutions passed the General Assembly of the United Nations proclaiming this new order and recognizing the right of developing nations to nationalize their natural resources. While generally acknowledging the obligation to compensate the victims of such nationalizations, the standard for such compensation (full, partial or nothing), the law applicable to the compensation issue (municipal law, international law or both) and

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the forum to determine the amount of compensation (local courts and special purpose tribunals or international arbitral tribunals and courts) were matters of substantial debate and disagreement. Two questions should be kept in mind as you read the case law on the proper compensation to be paid for an expropriation: (1) (2)

Is there a different standard of compensation for large-scale nationalizations of natural resources or entire industries than for discrete property or businesses? Are the nationalization cases of the 1970's and 1980's reflective of the present state of customary international law or are they aberrations because they arose in an explosive post-Colonial period?

Another factor in the expropriation jurisprudence that may relate to compensation decisions is the availability of a fund to pay an award. In the Iran-United States Claims Tribunal, a multi-billion dollar fund was set aside from Iranian assets frozen by the United States in order to pay awards emanating from the Tribunal. Similarly, the United Nations negotiated a formula for withholding from Iraqi oil exports certain funds to pay awards issued by the United Nations Claims Commission. Many lump sum settlements have been negotiated by the United States government on behalf of its citizens, which amounts were then subject to allocation from awards rendered by the United States Foreign Claims Settlement Commission. As you read the cases, consider to what degree, if at all, tribunals have been influenced by the ready availability of a fund to pay any resulting awards or by the absence of such a fund.

[B] Restitutio in Integrum and Specific Performance [1] J. Gillis Wetter and Stephen M. Schwebel, Some Little-Known Cases on Concessions, [1964] Brit. Y.B. Int’l L. 183, 220-22 (1966) (15) Greek Telephone Company v. Government of Greece (3 January 1935) (Prof. George S. Streit, President, Kyriakos Anagnostopoulos and Anastasios P. Papaligouras, arbitrators) [In 1930, the Greek government executed two contracts with Siemens & Halske A.G., which were confirmed by a special law. The contracts provided that the company was to construct, maintain and operate (for the account of the government) a modern telephone system. The company's Greek subsidiary obtained an exclusive right to operate the system for 38 years subject to the government's option to takeover the system at the end of the thirteenth year. After the company built the system, it requested that the whole long-distance network in Greece be transferred to it as provided by contract, but the government refused.] (Citations selectively omitted) The conclusion of the Tribunal was that it did not seem practicable, in the light of these difficulties, to order that the whole long-distance telephone network be transferred to the Company for maintenance and operation, but rather only those parts which formed the main communication lines of the country and which could be operated independently of other parts of the network. It decided that one such independent line was the line between Corinth, Athens and Thessaloniki with its appurtenant stations, which was said to be the most important line in Greece and the one generating the greatest revenue. It stated that the Company ought to be materially and morally satisfied with this solution and that, in fact, the transfer to the Company of a number of other longdistance lines would constitute an actual burden for it, since such isolated lines could not be profitably operated. The Tribunal further held that the Company had a right to have transferred to it all lines which had been rebuilt or newly constructed by it, but since, as already held, a transfer of these lines would be difficult, it was entitled to obtain full compensation for the failure of the Government to transfer those lines. Although it was not clear whether the Company had a right to have transferred to it those parts of the network which, contrary to original arrangements, had in fact been built by the Government, the Tribunal decided that the Company was entitled to reasonable compensation for not obtaining operational use of those lines in view of the reservations made by the Company when permitting the Government to reconstruct them. The Tribunal adduced the following reasons in support of its decision that the Government had a right to decline to transfer to the Company all the parts of the network which the latter under the supplemental Agreement had a right to operate: ‘The arbitrators are of the unanimous opinion that the State has the right to refuse a transfer of the maintenance and operation to the Company by virtue by the general principle of public law that under contracts concluded between a State and third parties, the State, in spite of being contractually bound, retains its superiority vis-á-vis the other party and is always entitled, when important State interests so demand, to renounce the contract, on the condition that it pay due compensation to the contracting party… ‘In case of such a refusal by the State, it is liable in damages to the Company and must compensate it for what it would have obtained, had the operation

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been transferred to it. ‘The whole spirit and structure of the Agreement indicate that the damages shall be assessed on the basis of the provisions of article II of the Supplemental Agreement, i.e. by calculating the share to which the Company would be entitled, after deduction of the expenses for the maintenance and operation; this formula will thus govern not only the calculation of the precise revenue to which the Company would be entitled but also the assessment of an equitable amount of damages due.’ In the oral hearings the Company had renounced its claim that the compensation payable to it should be fixed by the Tribunal, stating that it would be satisfied with a declaration in principle of its right to obtain damages. The Tribunal accordingly ordered the transfer to the Company of the Corinth-Athens-Thessaloniki line with its stations. It declared, at the same time, that the Government had a right to refuse, when important State interests so demanded, to transfer the maintenance and operation of the whole of the long-distance network to the Company, provided that, in that case, the Company would be entitled to obtain full compensation, to be duly agreed between the parties and to be calculated as from 27 June 1934 until the end of the thirteenth year after the ratification of the Agreement. [2] Texaco Overseas Petroleum Company and California Asiatic Oil Company v. The Government of the Libyan Arab Republic, Award of 19 January 1977, 17 I.L.M. 3, 31-37 (1978) [René-Jean Dupuy, sole arbitrator] [By decrees in 1973 and 1974, Libya nationalized all interests of Texaco and California Asiatic Oil Company in 14 Deeds of Concession. The sole arbitrator found that Libya was responsible for complying with its contracts under both Libyan and international law. The question arose as to whether the law of Libya and international law allowed the arbitrator to order specific performance of the contracts, referred to as restitutio in integrum.] (Citations selectively omitted) Section III – Is the Libyan Government required to perform and give full effect to the Deeds of Concession? 92. It being admitted, as has previously been established, that the defendant Government, by adopting the nationalization measures promulgated in 1973 and 1974, has failed to perform its obligations under the Deeds of Concession entered into with plaintiffs, the question submitted by the plaintiffs leads this Tribunal to consider whether or not the defendant is under the obligation to perform such contracts and to give them full effect. The question is whether, having disregarded its obligations, the Libyan Government should be held to restitutio in integrum or restitutio in pristinum. This question will be examined by applying the principles of Libyan law and international law and taking into account the specific factors of this case. A. The principles of Libyan law with respect to restitutio in integrum There is no doubt that the principles of Libyan law permit one to conclude, and even force one to conclude, that restitutio in integrum is the appropriate remedy in favor of one contracting party when the other party has breached its obligations. *** B. The principles of international law with respect to restitutio in integrum The principles of international law relating to restitutio in integrum should be determined by reference to: – international case law and practice, and to – writings of scholars. 97. (a) International case law and practice This Tribunal should, first and foremost, recall the often cited principle laid down by the Permanent Court of International Justice in one of its judgments delivered in the Chorzow Factory case ([1928] P.C.I.J., Ser. A, No. 17, p 47): “The essential principle contained in the actual notion of an illegal act – a principle which seems to be established by international practice and in particular by the decisions of arbitral tribunals – is that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if the act had not been committed. Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear …” 98. It could be claimed that, in the case where the above-mentioned principle was laid down, the principle had only the value of an obiter dictum and not of a true ratio decidendi since restitution in kind was not formally requested and the impossibility of

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restitution in kind had been established by agreement between the parties. But the fact remains that the principle was expressed in such general terms that it is difficult not to view it as a principle of reasoning having the value of a precedent: the very numerous quotations of this part of the opinion in doctrinal writings confirm, if this were necessary, that all authors see in it a declaration of principle … *** 99. … The principle of restitutio in integrum was applied again by the International Court of Justice, in the judgment relating to the Temple of Preha-Vihear case: the Court in fact ordered restitution to Cambodia of all the objects (sculptures, steles, fragments of monuments, ancient potteries, etc.) removed from the temple and its surroundings by the Thai Authorities from the time when they first occupied this site in 1954 ([1962] I.C.J. 6, at 36-37); similarly, the Central American Court of Justice, in a judgment relating to a claim by Nicaragua against San Salvador, stated: “… that the Government of Nicaragua is under the obligation – availing itself of all possible means provided by international law – to reestablish and maintain the legal status that existed prior to the Bryan-Chamorro Treaty …” (11 Amer. J. Int'l L. 674 (1917), at 730.) 100. Instances of restitutio in integrum are also to be found in arbitration case law: this is true of the Martini case (25 Amer. J. Int'l L. 554 (1931), at 585) where the arbitral tribunal ruled that the obligations imposed on Maison Martini & Cie., by a judicial decision of a striking injustice, “must be annulled under the heading of reparation”, the award stating that “[i]n pronouncing their annulment, the Arbitral Tribunal emphasizes that an illegal act has been committed and applies the principle that the consequences of the illegal act must be effaced”… *** 101. Also evidencing the state of international practice in this field are the requests formulated in the course of proceedings before the International Court of Justice, even though for one reason or another (lack of competence or lack of standing (jus standi) on the part of the claimant) this High Jurisdiction did not have the occasion to decide on the merits. This was particularly true in the Anglo-Iranian andBarcelona Traction cases … *** (b) Writings of scholars in international law As regards writings of scholars in international law relating to restitutio in integrum, two series of observations should be made: 102. (1) The highest doctrinal authorities favor restitutio in integrum and make it the basis of reparation, thus giving to it primacy among the various forms of reparation … *** 103. (2) While the authors are unanimous, except one, in recognizing that restitutio in integrum expresses, in international law, as a matter of principle the proper remedy to repair injuries by an unlawful act, there are in fact many of them who declare that in practice restitutio in integrum would only be ordered in or be suitable to exceptional cases. *** 109. Thus, for the general reasons mentioned above, this Tribunal must hold that restitutio in integrum is, both under the principles of Libyan law and under the principles of international law, the normal sanction for non-performance of contractual obligations and that it is inapplicable only to the extent that restoration of the status quo ante is impossible… *** C. The particular characteristics of this case 110. Beyond the fact that restitutio in integrum was formally claimed by the concessionaires, which obliges this Tribunal to decide this point, there are specific reasons derived from the language of the Deeds of Concession in dispute, which support this remedy in the instant case. In fact, Clause 28(5) of the Deeds of Concession provides that “In giving a decision, the Arbitrators, the Umpire or the Sole Arbitrator, as the case may be, shall specify an adequate period of time during which the party to the difference or the dispute against whom the decision is given shall conform to the decisions, and such party shall not be in default if that party has conformed to the decision prior to the expiry of the period.” 111. This is the stipulation of a true period of grace the result of which is to postpone the moment when, in law, nonperformance would be finally effective. In other words, as long as the time limit, which the Tribunal will have to fix, has not expired, breach or disregard

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of its obligations by the defendant will be a mere fact and cannot produce anything except factual consequences: in law – and this is the only point that the Tribunal has to consider because it is called upon to rule in law – the situation is stabilized. *** Section V– Operative part For These Reasons, The undersigned Sole Arbitrator *** 3. 4.

5.

pronounces and decides that the Libyan Government, the defendant, is legally bound to perform these contracts and to give them full effect; grants to the Libyan Government, the defendant, a time period of five months running from 1 February 1977 to 30 June 1977 at midnight (GMT) in order that it may bring to the notice of the Arbitral Tribunal the measures taken by it with a view to complying with and implementing the present arbitral award; decides that, if the present award were not to be implemented within the time period fixed, the matter of further proceedings is reserved and that the costs and expenses of the arbitration shall be borne, for the present, wholly by the plaintiffs; …

[3] Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of Ecuador (ICSID Case No. ARB/06/11), Decision on Provisional Measures of 17 August 2007, (16) ¶¶ 67-69, 72-76, 79, 82, 84-86 [L. Yves Fortier (pres.), David A.R. Williams, Brigitte Stern] [Case summary included in Chapter 11] (Citations selectively omitted) 67. The totality of the provisional measures initially requested by the Claimants were predicated on the assumption that the Claimants possess a right to specific performance of their Block 15 contracts, given that the requested provisional measures were all intended to protect such a right … 68. At this juncture, the Tribunal further notes that while the Claimants have repeatedly expressed their fear that the Ecuadorian Government may enter into a contract for the exploration and exploitation of Block 15 with another company, the provisional relief they seek in this regard has evolved over time … In their Application, the Claimants requested an order from the Tribunal directing the Respondent “to refrain from entering into or approving any agreements with third parties for the operation of Block 15 pending the outcome of this arbitration” … It is only during the hearing that this requested measure was modified and became a request that the Tribunal order the Respondent to give the Tribunal and the Claimants advance notice of no less than sixty days before entering into any contractual arrangement with a third party for the operation of Block 15. But regardless of its evolution, the Claimants' Application proceeds on the basis that a right to specific performance exists. The Tribunal must therefore determine whether in this respect the Application is well founded. In other words, have the Claimants established that they have a strongly arguable right to the specific performance which they seek. 1. Linguistic clarification 69. At the outset, the Tribunal feels compelled to clarify an issue of vocabulary. To date, in their pleadings and during the hearing, the parties have played and interplayed with, and sometimes confused, the words and expressions “restitution”, “restitutio in integrum”, “restitution in kind” and “specific performance” … *** 72. In the Tribunal's view, it is not very helpful to use the specific expression of “restitution”, whether it is distinguished from restitutio in integrum or assimilated to it, given the confusion it creates … the expression “restitutio in integrum” does not have an unequivocal utilisation in the international sphere: indeed, the two different meanings used by the Respondent … are but one example of the dual use of this expression in international doctrine and jurisprudence. Restitutio in integrum is in fact sometimes used as meaning full reparation, and sometimes used as meaning restitution in kind. 73. Accordingly, the Tribunal prefers to proceed on the basis of the principle that a party injured by an illegal act must be made whole, and that the relief is full reparation, rather than “restitution”, or “restitutio in integrum”, even if full reparation is sometimes labelled restitutio in integrum. Full reparation can be achieved through restitution in kind – synonymous with specific performance – but if restitution in kind is not possible, then it can be achieved through monetary compensation corresponding to the value which restitution in kind would carry. Although it is the Tribunal's view that the expression “restitutio in integrum” should, strictly speaking, be reserved to making an injured party whole, and that the expressions “restitution in kind” and “specific performance” should be used solely to designate one of the modalities of reparation (compensation being the other), this is not the manner in which these expressions are uniformly used, and this is a

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source of difficulty. As will be seen later, the Claimants' position rests precisely on a confusion between restitutio in integrum, which is an obligation of result – to which they could indeed be entitled, and restitution in kind, which is an obligation of means – to which they are not entitled. 74. In conclusion, since restitutio in integrum is used sometimes synonymously with full reparation and sometimes – and in fact more frequently – with restitution in kind, the Tribunal, in the circumstances, will use the expression “specific performance” in relation to the Claimants' request for the reinstatement of their acquired rights in Block 15, … 75. … Specific performance is, of course, a conditional right, as it is precisely conditioned on the possibility of performance, and consequently hindered by its impossibility. Restitution in kind is never guaranteed to an injured claimant. 76. Therefore, what the Tribunal must ascertain is whether the specific performance requested by the Claimants is possible or impossible in the circumstances of this case. *** 79. It is well established that where a State has, in the exercise of its sovereign powers, put an end to a contract or a license, or any other foreign investor's entitlement, specific performance must be deemed legally impossible … *** 82. But specific performance must not only be possible in order to be granted to a claimant. Specific performance, even if possible, will nevertheless be refused if it imposes too heavy a burden on the party against whom it is directed … *** 84. The second requirement can be summarized as follows. In order to decide whether specific performance is possible, the Tribunal must consider both the Claimants' and the Respondent's rights. To impose on a sovereign State reinstatement of a foreign investor in its concession, after a nationalization or termination of a concession license or contract by the State, would constitute a reparation disproportional to its interference with the sovereignty of the State when compared to monetary compensation. 85. … The adequate remedy where an internationally illegal act has been committed is compensation deemed to be equivalent with restitution in kind. Such a solution strikes the required balance between the need to protect the foreign investor's rights and the right of the host State to claim control over its natural resources. 86. In conclusion, it is the Tribunal's view that the Claimants have not established a strongly arguable case that there exists a right to specific performance where a natural resources concession agreement has been terminated or cancelled by a sovereign State. The view of the Tribunal at this stage of the proceedings is that no such right exists. As a result, the Claimants have failed to establish that it would be appropriate for the Tribunal to grant a provisional measure such as the one sought by the Claimants pursuant to their “third-party notice” request. [4] Comments and Questions 1. 2. 3. 4. 5.

6.

What are the precise meanings and contours of the terms “restitution,” “restitutio in integrum,” and “specific performance”? Is specific performance an acceptable remedy for an expropriation? If so, when and under what conditions? When is it not an acceptable remedy? Is there a hierarchy of remedies available for an expropriation? If so, where in the hierarchy does specific performance fit, if at all? Why did the tribunal in the Texaco case award specific performance? Why did the tribunal in the Occidental case reject it? Compare and contrast the approaches taken in the Texaco and Occidentalcases? Several months after the Texaco award was rendered, Libya and the Claimants settled the case with Libya agreeing to provide the companies with $152 million of crude oil over a 15-month period. See 17. I.L.M. 3, 4 (1978). What was the practical effect of the award of restitutio in integrum in the Texaco case? One possible method for breathing life into the concept of specific performance is that used in the Texaco v. Libya case. In that case, the tribunal determined liability, stated that specific performance is the preferred method of reparations, and provided the government with a specified period of time in which to comply or declare that it will comply, failing which the tribunal would proceed to award monetary damages. See also Antoine Goetz v. Republic of Burundi, 15 ICSID Rev. – FILJ 457 (Fall 2000). In this situation the government's sovereignty is not threatened because it is given thechoice whether to specifically perform the obligation or to pay a damage award in lieu of performance.

[C] What is the Standard of Compensation for an Expropriation? [1] US Model Bilateral Investment Treaty (2012), (17) Article 6

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2. The compensation referred to in paragraph 1(c) shall: (a) (b) (c) (d)

be paid without delay; be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“the date of expropriation”); not reflect any change in value occurring because the intended expropriation had become known earlier; and be fully realizable and freely transferable.

3. If the fair market value is denominated in a freely usable currency, the compensation referred to in paragraph 1(c) shall be no less than the fair market value on the date of expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment. 4. If the fair market value is denominated in a currency that is not freely usable, the compensation referred to in paragraph 1(c) – converted into the currency of payment at the market rate of exchange prevailing on the date of payment – shall be no less than: (a) (b)

the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date, plus interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment.

[2] Brice M. Clagett, Just Compensation in International Law: The Issues Before the IranUnited States Claims Tribunal, in The Valuation of Nationalized Property in International Law, Vol. IV, 31-33, 96-97 (Richard B. Lillich (ed.), University Press of Virginia 1987) (Citations selectively omitted) 1. Introduction ONE OF THE MOST HOTLY DEBATED ISSUES of public international law in recent years has been whether that law requires the payment of compensation when a nation expropriates the property of an alien investor, and, if so, what the standard is for determining the amount of that compensation. The traditional position of the United States and other capital-exporting countries has been – and remains – that international law does require the payment of compensation for expropriated alien property, and that such compensation must be “prompt, adequate and effective,” or, more succinctly, “just.” These terms mean that compensation must make the expropriated owner whole for the value he has lost. If payment is not made simultaneously with the taking, interest must be added at a realistic rate to compensate for the delay. Payment must be made in hard currency or its equivalent. And, most importantly, the measure of compensation is fair market value. Where the property taken is an ongoing business whose value is not readily ascertainable from an active market, the standard is going-concern value, including, of course, the present value of reasonably anticipated future profits. That value is normally best determined by a well-established technique of economic analysis known as a discounted cash flow (DCF) study. These principles were reflected before World War II in many awards by international arbitral tribunals and in a decision by the Permanent Court of International Justice. In the postwar period, however, they were sharply attacked by Communist and some Third World States, working largely through the vehicle of resolutions by the General Assembly of the United Nations. The last General Assembly resolution to achieve consensus, in 1962, declared that “appropriate” compensation should be paid in accordance with international law. The United States made it clear in voting for the resolution that it regarded “appropriate” as incorporating the traditional standard of “prompt, adequate and effective.” In the early 1970s however, the General Assembly adopted several resolutions that omitted all reference to international law, stressed the unfettered right of nations to expropriate, and appeared to suggest that compensation could be whatever the appropriate bodies of the expropriating State should determine. This was a clear departure from the traditional rule, and the United States and other capital-exporting countries voted against it or abstained. Some claim today that, even if international law does set a minimum standard for compensation, that standard is not full value but something less than that – a “partial” compensation based on net book value or the like. *** Those defending the traditional rule retort that ad hoc settlements do not make law. They also point to a large number of postwar treaties that have incorporated the “just compensation” requirement or similar formulations. (One such agreement was the “Treaty of Amity” of 1955 between Iran and the United States.) Such treaties, as well as guarantees in contracts and domestic legislation, suggest that many capital-importing countries recognize that they cannot get the foreign investment they need without assurances against uncompensated or inadequately compensated expropriation. ***

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V. Conclusion The principle of just compensation for expropriated alien property is firmly grounded in justice and equity, and is an important rule of public international law. In recent decades that principle has been under sharp political attack from some governments and commentators, but even many in that constituency have realized that the assault is contrary to their own best interests and are receding from it. Decisions of international tribunals have not reflected any erosion of the just compensation principle, and none is called for. The developing jurisprudence of the Iran-United States Claims Tribunal represents a significant vindication of that principle. [3] World Bank Guidelines on the Treatment of Foreign Direct Investment, 31 I.L.M. 1363, 1379, 1382-84 (1992) IV. Expropriation and Unilateral Alterations or Termination of Contracts *** 2. Compensation for a specific investment taken by the State will, according to the details provided below, be deemed “appropriate” if it is adequate, effective and prompt. 3. Compensation will be deemed “adequate” if it is based on the fair market value of the taken asset as such value is determined immediately before the time at which the taking occurred or the decision to take the asset became publicly known. 4. Determination of the “fair market value” will be acceptable if conducted according to a method agreed by the State and the foreign investor (hereinafter referred to as the parties) or by a tribunal or another body designated by the parties. 5. In the absence of a determination agreed by, or based on the agreement of, the parties, the fair market value will be acceptable if determined by the State according to reasonable criteria related to the market value of the investment, i.e., in an amount that a willing buyer would normally pay to a willing seller after taking into account the nature of the investment, the circumstances in which it would operate in the future and its specific characteristics, including the period in which it has been in existence, the proportion of tangible assets in the total investment and other relevant factors pertinent to the specific circumstances of each case. 6. Without implying the exclusive validity of a single standard for the fairness by which compensation is to be determined and as an illustration of the reasonable determination by a State of the market value of the investment under Section 5 above, such determination will be deemed reasonable if conducted as follows: (i)

for a going concern with a proven record of profitability, on the basis of the discounted cash flow value; (ii) for an enterprise which, not being a proven going concern, demonstrates lack of profitability, on the basis of the liquidation value; (iii) for other assets, on the basis of (a) the replacement value or (b) the book value in case such value has been recently assessed or has been determined as of the date of the taking and can therefore be deemed to represent reasonable replacement value. For the purpose of this provision: –

–

a “going concern” means an enterprise consisting of income-producing assets which has been in operation for a sufficient period of time to generate the data required for the calculation of future income and which could have been expected with reasonable certainty, if the taking had not occurred, to continue producing legitimate income over the course of its economic life in the general circumstances following the taking by the State; “discounted cash flow value” means the cash receipts realistically expected from the enterprise in each future year of its economic life as reasonably projected minus that year's expected cash expenditure, after discounting this net cash flow for each year by a factor which reflects the time value of money, expected inflation, and the risk associated with such cash flow under realistic circumstances. Such discount rate may be measured by examining the rate of return available in the same market on alternative investments of comparable risk on the basis of their present value;

*** 7. Compensation will be deemed “effective” if it is paid in the currency brought in by the investor where it remains convertible, in another currency designated as freely usable by the International Monetary Fund or in any other currency accepted by the investor. 8. Compensation will be deemed to be “prompt” in normal circumstances if paid without delay. In cases where the State faces exceptional circumstances, as reflected in an arrangement for the use of the resources of the International Monetary Fund or under similar objective circumstances of established foreign exchange stringencies, compensation in the currency designated under Section 7 above may be paid in

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installments within a period which will be as short as possible and which will not in any case exceed five years from the time of the taking, provided that reasonable, marketrelated interest applies to the deferred payments in the same currency. 9. Compensation according to the above criteria will not be due, or will be reduced in case the investment is taken by the State as a sanction against an investor who has violated the State's law and regulations which have been in force prior to the taking, as such violation is determined by a court of law … 10. In case of comprehensive non-discriminatory nationalizations effected in the process of large scale social reforms under exceptional circumstances of revolution, war and similar exigencies, the compensation may be determined through negotiations between the host State and the investors' home State and failing this, through international arbitration. 11. The provisions of Section 1 of this Guideline will apply with respect to the conditions under which a State may unilaterally terminate, amend or otherwise disclaim liability under a contract with a foreign private investor for other than commercial reasons, i.e., where the State acts as a sovereign and not as a contracting party. Compensation due to the investor in such cases will be determined in the light of the provisions of Sections 2 to 9 of this Guideline. Liability for repudiation of contract for commercial reasons, i.e., where the State acts as a contracting party, will be determined under the applicable law of the contract. [4] Government of Kuwait v. American Independent Oil Co. (AMINOIL), Final Award of 24 March 1982, 66 Int’l L. Rep. 518 (1982) (18) [Paul Reuter (pres.), Hamed Sultan, Gerald Fitzmaurice] [AMINOIL entered into a Concession Agreement with the government of Kuwait in 1948 covering a portion of the Kuwait – Saudi Arabia Neutral Zone. The concession allowed AMINOIL to explore for petroleum and exploit any discoveries. A Supplemental Agreement was signed in 1961 and a letter agreement was reached in 1973 increasing the royalties and taxes payable to the government. The company attacked the 1973 agreement as the result of duress, claiming that it entered the 1973 government only because Kuwait threatened to prohibit all exports of oil. The tribunal rejected this claim. When further agreements could not be reached for additional royalties and taxes to the government, Kuwait nationalized AMINOIL's assets and interests in 1977. In 1979, the parties agreed to international arbitration to resolve their disputes. Despite a stabilization clause, the tribunal held the expropriation to be lawful. The clause was considered relevant to the legitimate expectations of the parties as to the compensation to be paid.] (Citations selectively omitted) 138. The determination of an indemnification has always presented technical difficulties. This has been the case in regard to indemnifications due in consequence of illicit acts, where it is as the equivalent of arestitutio in integrum that the calculation is in principle effected. But it has been so especially for indemnities due in consequence of acts of expropriation or of legitimate nationalisations. Indeed, in this last case, the difficulties are added to by controversial questions of foreign investments, and operations involving an important economic complex. Since the end of the 19th century, every kind of economic, moral and ideological consideration has been put forward by “host” countries in the endeavour to keep in their own hands the evaluation of the indemnifications due, and to reduce them to the minimum or nothing. When the international political outlook was favourable, the investing States espoused more or less energetically the claims of their nationals and, at least on the level of principle, upheld the rule of equivalence in monetary terms to the value of what had been taken. 139. Since the end of the second World War, nationalisations have multiplied, and have given rise to much regulation by Convention, but to few arbitrations. Through decolonisation and the development of older countries that were never colonised, or became independent much earlier, a “Third World” has emerged, dominating the debates in the United Nations. This has led to the adoption of numerous General Assembly Resolutions which, with few exceptions, have more often than not been the occasion of confrontations between the older investing countries, reduced to a small numerical minority, and large majorities of newer countries wanting to render nationalisations as easy as possible. 140. Many regulations agreed upon by Convention have also been arrived at during this period, particularly in the field of nationalisations in the petroleum industry; and it has been sought to maintain that these furnish a body of precedent from which it is possible to deduce rules of customary international law. This important matter will be reverted to later. *** A. The applicable general rules 143. The most general formulation of the rules applicable, for a lawful nationalisation was contained in the United Nations General Assembly Resolution no. 1803 (XVII) of 14

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December, 1962, on Permanent Sovereignty over Natural Resources, Article 4 of which provides that “Nationalisation, expropriation or requisitioning shall be based on grounds or reasons of public utility, security or the national interest which are recognised as overriding purely individual or private interests, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with the rules in force in the State taking such measures in the exercise of its sovereignty and in accordance with international law.” This text which obtained a unanimous vote in the General Assembly, codifies positive principles, recognised by the Constitution and Law of Kuwait, that have not been contested in the present proceedings. It calls for a concrete interpretation of the term “appropriate compensation”. Other disputes have long since turned upon different terms such as “fair”, “just”, “equitable”, not to speak of “adequate”, “effective”, “prompt”, etc. There are indeed, several tendencies, all appealing to the same principle, one of which however reduces compensation almost to the status of a symbol, and the other of which assimilates the compensation due for a legitimate take-over to that due in respect of an illegitimate one. These tendencies were in mutual opposition in the United Nations when the Resolutions following no. 1803 were voted, none of which obtained unanimous acceptance, and some of which, such as the Charter of the Economic Rights and Duties of States, have been the subject of divergent interpretations. 144. The Tribunal considers that the determination of the amount of an award of “appropriate” compensation is better carried out by means of an enquiry into all the circumstances relevant to the particular concrete case, than through abstract theoretical discussion. Moreover the Charter of the Economic Rights and Duties of States, even in its most disputed clause (Article 2, paragraph 2c) – and the one that occasioned reservations on the part of the industrialized States – recommended taking account of “all circumstances” in order to determine the amount of compensation – which does not in any way exclude a substantial indemnity. 145. Careful consideration of the circumstances proper to each case sometimes enables certain difficulties to be set aside. Thus the opposition manifested by some States to any but the most incomplete compensation may be explicable on the basis that their object is to do away with foreign investments entirely, because they do not welcome foreign capital and are even less favourable to investing abroad themselves. What they want is to break loose from the round of foreign investment; and it can be concluded that in their own mutual relations inter se such States apply very restrictive rules in the matter of compensation. 146. But as regards States which welcome foreign investment, and which even engage in it themselves, it could be expected that their attitude towards compensation should not be such as to render foreign investment useless, economically. In this respect it is not disputed that Kuwait is a country favouring foreign investment, and itself an important investor abroad. The Tribunal does not intend either to examine, or resolve the complex of juridical problems created by the fact that there are some States that are motivated by very different sets of conceptions about foreign investment, possibly involving within the framework of the international community what the International Court of Justice has called an “intense conflict of systems and interests” (Barcelona Traction, etc., case, I.C.J. Reports 1970, p. 48, paragraph 49). The Tribunal will therefore confine itself to registering that in the case of the present dispute there is no room for rules of compensation that would make nonsense of foreign investment. 147. This is a fundamental precept. It is pertinent during the life-time of a concession; it is equally pertinent when a concession comes to an end. Compensation then, must be calculated on a basis such as to warrant the upkeep of a flow of investment in the future. 148. Both Parties to the present litigation have invoked the notion of “legitimate expectations” for deciding on compensation. That formula is well-advised, and justifiably brings to mind the fact that, with reference to every long-term contract, especially such as involve an important investment, there must necessarily be economic calculations, and the weighing-up of rights and obligations, of chances and risks, constituting the contractual equilibrium cannot be neglected – neither when it is a question of proceeding to necessary adaptations during the course of the contract, nor when it is a question of awarding compensation. It is in this fundamental equilibrium that the very essence of the contract consists. 149. For assessment of that equilibrium itself, and of the legitimate expectations to which it gives rise, it is above all the text of the contract that signifies, and it is of moment that this text should be precise and exhaustive. But it is not only a question of the original text; there are also the amendments, the interpretations, and the behaviour manifested along the course of its existence, that indicate (often fortuitously) how the legitimate expectations of the Parties are to be seen, and sometimes seen as becoming modified according to the circumstances. 150. It is on the footing of these general principles that the Tribunal will now enquire into the circumstances specific to the case of Aminoil.

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*** 158. The Tribunal now comes to the basis on which the evaluation of the legitimate expectations of Aminoil must proceed. There exist, as well in the contract of Concession as in the attitude of Aminoil, indications concerning this, which it is right to recall and describe. 159. To start with, as was mentioned earlier in connexion with Aminoil's nationalisation, whereas the contract of concession did not forbid nationalisation, the stabilisation clauses inserted in it (and equally – by 1977 – not forbidding that) were nevertheless not devoid of all consequence, for they prohibited any measures that would have had a confiscatory character. These clauses created for the concessionaire a legitimate expectation that must be taken into account. In this context they dissipate all doubts as to the strength of the respect due to the contractual equilibrium. 160. But above all, account must be taken of the position of Aminoil in its relations with the Government of Kuwait. From the time when its rate of production reached a satisfactory level, Aminoil was in the position of an undertaking whose aim was to obtain a “reasonable rate of return” and not speculative profits which, in practice, it never did realise. As stated earlier it was threatened with two dangers. One was not to be able to dispose of products the high net cost of which made their sale on the market difficult; and the other was to have to agree to payments to the Government of Kuwait that did not allow the Company to ensure the viability of the enterprise. The persistent desideratum of its representatives was to see the prospect of retaining for it a reasonable rate of return. It was on this note that it opened the negotiations of 1976-77, and in the light of this expectation that appropriate compensation has now to be assessed. 161. It is correct to say that the attitudes taken up by a party over the long course of a negotiation that eventually breaks down cannot be made the basis of an arbitral or judicial decision. But there is no question here of facing Aminoil with the latest proposals it made in 1977 in a final effort to come to terms. The point is simply to register the fact that, over the years, Aminoil had come to accept the principle of a moderate estimate of profits, and that it was this that constituted its legitimate expectation. 162. There are not wanting indications given by Aminoil as to what could be a reasonable rate of return. They appear in particular in a letter of 28 July, 1972 … and in the opening proposals for the 1976 negotiation … Moreover, in the Second Part of the First Annex to the July 1973 Agreement, Section V, it was stated that: “Any future discussions between the Government and the Company regarding concession provisions will take into consideration that the Company should not be denied a reasonable opportunity of earning a reasonable rate of return (having regard to the risks involved) on the total capital employed in its business attributable to Kuwait.” 163. Here three points need to be brought out (i)

Assuming that a normal level of profits has been determined having regard to the total capital invested, it would be ordinary business practice in the case of a concession intended to last, to add a reasonable profit margin that would preserve incentives, and allow for risks whether commercial or technological. But this necessity disappears when it is a question of deciding on the amount of compensation due for a concession that has already been terminated, – for in that event the risk (for the concessionaire) has ex hypothesi vanished. (ii) As regards a Concession which provides that, ultimately, all the installations and assets are to be handed over to the concessionary Authority “free of cost”, it would be normal that at least a part of necessary current investment should be effected out of profits. Such was the position – fair in principle – of Aminoil at the start of the 1976 negotiations, and that was why, for the Company, the reasonable return of which it was claiming the benefit had to include an amount for operations that would ordinarily prove indispensable. But again, this point has not much relevance when the Concession has come to an end. (iii) A third point is that in the present case the reasonable rate of return has to be determined for two distinct purposes. First, in connection with the Abu Dhabi Formula, over the period stretching from 1 January, 1975 to 19 September, 1977 – this is a period for which the profits of Aminoil's undertaking are known, and in respect of which, it is not necessary to provide for the financing of works that were never carried out, or for what would constitute an incentive for further development. Secondly, the reasonable rate of return, assessed on a somewhat more liberal scale, constitutes one of the elements of compensation. 164. … As the Tribunal has stated earlier, it considers it to be just and reasonable to take some measure of account of all the elements of an undertaking. This leads to a separate appraisal of the value, on the one hand of the undertaking itself, as a source of profit, and on the other of the totality of the assets, and adding together the results obtained. [5] Phillips Petroleum Company Iran v. The Islamic Republic of Iran & The National Iranian Oil Company (IUSCT Case No. 39), Award of 29 June 1989 (19) [Robert Briner (pres.), Seyed

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K. Khalilian, George H. Aldrich] [Case summary included in Chapter 9.] (Citations selectively omitted) Compensation and Valuation B. Standard of Compensation 103. The Tribunal has consistently held that the applicable law for the purpose of determining the compensation owed by the Islamic Republic of Iran for deprivations or takings of property of United States nationals during the years immediately prior to the Algiers Accords is the 1955 Treaty of Amity. The Tribunal has recognized that the Treaty of Amity, whether or not it remains in force today between the two States, was in force in 1979 and 1980 and clearly was applicable to the investments at issue in these Cases at the times the claims arose. Therefore, the Treaty of Amity is the relevant source of law on which the Tribunal is justified in drawing in reaching its decision. 104. The relevant provision is found in Article IV, paragraph 2, of the Treaty of Amity, which provides: Property of nationals and companies of either High Contracting Party, including interests in property, shall receive the most constant protection and security within the territories of the other High Contracting Party, in no case less than that required by international law. Such property shall not be taken except for a public purpose, nor shall it be taken without the prompt payment of just compensation. Such compensation shall be in an effectively realizable form and shall represent the full equivalent of the property taken; and adequate provision shall have been made at or prior to the time of taking for the determination and payment thereof. *** 106. Thus, the Claimant is entitled by the Treaty to “just compensation”, representing the “full equivalent of the property taken”. As the Tribunal has previously held, where the property taken was a “going concern”, compensation that meets the Treaty standard is compensation that makes the Claimant whole for the “fair market value” of the property at the date of taking. *** 107. As far as the standard of compensation is concerned, the Respondents have argued that the Treaty of Amity must be interpreted in the light of changes in customary international law which, they assert, have taken place since the Treaty was signed in 1955. They point to the reference in the above-quoted Treaty provision to “international law”, and to a general international law principle of “dynamic” interpretation of treaties. They assert that customary international law as it exists today does not require compensation for expropriated property that is the “full equivalent” of the property, and that this is especially so in cases of large-scale nationalizations involving a State's natural resources. In that context they point to the statement in INA Corporation and The Government of the Islamic Republic of Iran, Award No. 184-161-1 (13 August 1985) at p. 8, reprinted in 8 IranU.S. C.T.R. 373, 378, that “In the event of such large – scale nationalizations of a lawful character, international law has undergone a gradual reappraisal, the effect of which may be to undermine the doctrinal value of any ‘full’ or ‘adequate’ (when used as identical to ‘full’) compensation standard as proposed in this case”, and more particularly to Judge Lagergren's discussion of that reappraisal in his Separate Opinion in that case. (20) However, the Tribunal need not express any view as to the asserted changes in customary international law, or the relevance of such law to a 1979 taking of property. First, the text of the Treaty provision does not support the Respondents' argument. The reference to international law is found in the first sentence of Article IV, paragraph 2, and its meaning is evident. It provides that the protection and security to be received by the property of nationals of one State within the other must be “most constant … and in no case less than that required by international law.” This reference to international law clearly relates to the standard of “most constant protection and security” set forth in the same sentence and cannot be understood as modifying the taking and compensation requirements of the second and third sentences of that paragraph, which contain no reference to international law and which clearly and completely describe the requirements for takings and compensation. Concerning the argument that treaties generally should be interpreted in the light of customary international law as it may evolve, the Tribunal has already found in the INA award that the Treaty of Amity as a lex specialis prevails in principle over general rules. This is certainly the case for the Treaty's compensation provisions the purpose of which would otherwise be difficult to ascertain. 108. The Respondents also assert that compensation should be based on the net book value of the property taken and point in support of that assertion to a series of settlements in the global petroleum industry in recent decades which, they assert, demonstrate that both nations with petroleum reserves and companies engaged in finding and extracting those reserves accept net book value as an appropriate basis for

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compensation. The Tribunal notes, however, that such settlements are usually confidential and appear frequently to involve additional considerations, such as continued access to petroleum resources, so that the true compensation may be difficult to identify. As observed by the distinguished tribunal in Kuwait and American Independent Oil Company (AMINOIL), (Reuter, Sultan, and Fitzmaurice Arbitrators, Award of 24 March 1982) at paragraph 157, reprinted in 66 International Law Reports (1984) at p. 606, such settlements do not constitute an opinio juris. In any event, such settlements are irrelevant to the applicable law in the present Case, that is the standard of compensation set forth in the Treaty of Amity. 109. The Respondents further argue that the taking of property in the present Case was a lawful taking, and that for such a taking, a lesser standard of compensation is required. The Claimants deny that the taking was lawful and further deny that a lesser standard of compensation is applicable to lawful takings. However, the Tribunal need not decide in the present Case whether the taking was unlawful, for instance, as violative of stabilization clauses or for any other reason, because, whatever the relevance of that question as a matter of customary international law, it is irrelevant under the Treaty of Amity. Article IV, paragraph 2, quoted above, provides a single standard, “just compensation” representing the “full equivalent of the property taken”, which applies to all property taken, regardless of whether that taking was lawful or unlawful. Clearly, as the Amoco International Finance Award … recognizes, that standard applies to takings that are “lawful” under the Treaty, but the Treaty does not say that any different standard of compensation would be applicable to an “unlawful” taking. The Treaty states two requirements for any taking, that it be for a public purpose and that “just compensation”, as defined therein, be paid promptly. In the present Case, there is no allegation that the taking, which extended to all petroleum production in Iran, was not for a public purpose, and the Claimant requests no more than “just compensation” based on the single standard of the Treaty. 110. The Tribunal believes that the lawful/unlawful taking distinction, which in customary international law flows largely from the Case Concerning the Factory at Chorzow (Claim for Indemnity) (Merits), P.C.I.J. Judgment No. 13, Ser. A., No. 17 (28 September 1928), is relevant only to two possible issues: whether restitution of the property can be awarded and whether compensation can be awarded for any increase in the value of the property between the date of taking and the date of the judicial or arbitral decision awarding compensation. [6] CME Czech Republic B.V. v. The Czech Republic (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 14 March 2003, (21) ¶¶ 496-498, 500-502 [Wolfgang Kühn (pres.), Stephen M. Schwebel, Ian Brownlie] [CME argued that an indirect expropriation had occurred under the BIT between the Netherlands and the Czech Republic when the Czech media regulatory agency (the Media Council) took actions that required the foreign investor to restructure its arrangements with the license holder. The Media Council had previously approved an arrangement in which CNTS, a company owned by a foreign investor, would have the right to use the television license of CET 21, a Czech company. A Memorandum of Association granted CNTS certain protections related to both its use of the license and its exclusive service agreement with CET 21. A few years later, however, the Media Council launched administrative and criminal investigations that forced CME to surrender some of the protections it had been granted in the Memorandum of Association. Three years later, in response to a request by CET 21, the Council issued a letter stating that service agreements could only be undertaken on a non-exclusive basis. Pursuant to the Council's letter, CET 21 terminated the agreement and commenced operation of the TV station.] (Citations selectively omitted) (2) Treaty wording covers fair market value compensation 496. The assessment of compensation on the basis of the “fair market value” is sustained by the terms of the Treaty and its interpretation in accordance with Art. 31 of the Vienna Convention of the Law of Treaties. The Treaty at issue in these proceedings provides in Art. 5: “Neither contracting Party shall take any measure depriving, directly or indirectly, investors of the other contracting Party of their investments unless the following conditions are complied with: … c. The measures are accompanied by provision for the payment of just compensation. Such compensation shall represent the genuine value of the investment affected …” 497. The requirement of compensation to be “just” and representative of the “genuine value of the investment affected” evokes the famous Hull Formula, which provided for the payment of prompt, adequate and effective compensation for the taking of foreign owned property. That formula was controversial … But in the end, the international community put aside this controversy, surmounting it by the conclusion of more than 2200 bilateral (and a few multilateral) investment treaties. Today these treaties are truly universal in their reach and essential provisions. They concordantly provide for payment

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of “just compensation”, representing the “genuine” or “fair market” value of the property taken. Some treaties provide for prompt, adequate and effective compensation amounting to the market value of the investment expropriated immediately before the expropriation or before the intention to embark thereon became public knowledge. Others provide that compensation shall represent the equivalent of the investment affected. These concordant provisions are variations on an agreed, essential theme, namely, that when a State takes foreign property, full compensation must be paid. 498. The possibility of payment of compensation determined by the law of the host State or by the circumstances of the host State has disappeared from contemporary international law as it is expressed in investment treaties in such extraordinary numbers, and with such concordant provisions, as to have reshaped the body of customary international law itself … *** 500. The determination of compensation under the Treaty between the Netherlands and the Czech Republic on the basis of the “fair market value” finds further support in “the most favored nation” provision of Art. 3 (5) of the Treaty … The bilateral investment treaty between the United States of America and the Czech Republic provides that compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken … The Czech Republic therefore is obligated to provide no less than “fair market value” to Claimant in respect of its investment should (in contrast to this Tribunal's opinion) “just compensation” representing the “genuine value” be interpreted to be less than “fair market value”. (3) “Just” Compensation under International Law Standards 501. International Law requires that compensation eliminates the consequences of the wrongful act. The Articles adopted by the United Nations International Law Commission on the Responsibility of States for Internationally Wrongful Acts provide for the “obligation to compensate for the damage caused”, and specify that that compensation “shall cover any financially assessable damage including loss of profits …” (Art. 36). Paragraph 22 of the Commission's Commentary on its Articles states that: “Compensation reflecting the capital value of property taken or destroyed as the result of an internationally wrongful act is generally assessed on the basis of the ‘fair market value’ of the property lost.” … The World Bank Guidelines on the Treatment of Foreign Direct Investment specify that compensation will generally be deemed “appropriate” if it is adequate, effective and paid without undue delay and provide that (op. cit., p. 407): “Compensation will be deemed ‘adequate’ if it is based on the fair market value of the taken asset.” (Emphasis supplied.) 502. The determination of the compensation on the basis of the “fair market value” – to eliminate the consequences of the wrongful act for which the State is responsible – is acknowledged in international arbitration … [7] Comments and Questions 1. 2. 3. 4.

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

What is the standard of compensation for a lawful expropriation under customary international law today? What is the basis for your answer? What are the standards that have historically been used by tribunals? What rationale has been articulated for each standard? What are the differences in the meaning of these standards? Is the standard of compensation different for a discrete expropriation of a single business than for the wholesale nationalization of natural resources or entire industries in a country? Why or why not? Is there any legal basis for making such a distinction? If so, what is it? What extraneous factors have affected the development of customary international law of compensation for a lawful expropriation? Was the standard of compensation used during the period of the 1960's, 1970's and 1980's different than the one used in the early Twentieth Century? If so, how was it different? Is the standard of compensation discussed in the trilogy of Libyan nationalization cases still applicable today? Why or why not? What did the AMINOIL Tribunal mean when it said it would not make nonsense of foreign investment? What is the standard of compensation for an expropriation provided by the 2012 U.S. Model Bilateral Investment Treaty? Is that standard the same as the standard in the NAFTA Chapter 11 and the Energy Charter Treaty? The standard of “prompt, adequate and effective compensation” derives from a diplomatic note sent by U.S. Secretary of State Cordell Hull to the Mexican government in the 1930's concerning the Mexican nationalization of the petroleum industry. What is the meaning of each of the adjectives “prompt, adequate and effective” that modify “compensation”?

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11. 12.

How does the term “just compensation” differ from the standard of “prompt, adequate and effective compensation”? In a 1975 article, Professor Francisco Orrego Vicuna argued that international law had not evolved universally accepted principles and standards of valuation for nationalization of foreign property, but there was a growing international consensus that took into account the views of developing countries, which should lead developing countries to embrace the international regulation of valuation standards within this new international order rather than insisting on their own point of view. See Francisco Orrego Vicuna, The International Regulation of Valuation Standards and Processes: A Reexamination of Third World Perspectives, in The Valuation of Nationalized Property in International Law, Vol. III (Lillich, ed., U. Virginia Press 1975). Is there an international consensus today on principles and standards of valuation? Why or why not?

[D] Restitution and Compensation for Unlawful Expropriations [1] Amoco International Finance Corp. v. Government of the Islamic Republic of Iran (IUSCT Case No. 56), Partial Award No. 310-56-3 of 14 July 1987 (22) [Michel Virally (pres.), Charles N. Brower, Parviz Ansari Moin] [Case summary included in Chapter 3.] (Citations selectively omitted) The Effects of Lawfulness or Unlawfulness of Expropriation on the Standard of Compensation 189. Both Parties consider that this issue must be decided by reference to customary international law. The Tribunal agrees. Article IV, paragraph 2 of the Treaty determines the conditions that an expropriation should meet in order to be in conformity with its terms and therefore defines the standard of compensation only in case of a lawful expropriation. A nationalization in breach of the Treaty, on the other hand, would render applicable the rules relating to State responsibility, which are to be found not in the Treaty but in customary law. 190. The Claimant asserts that in case of unlawful expropriation compensation would be more than the “full equivalent” standard which applies to lawful expropriation. The Respondents argue that in case of lawful expropriation the measure of compensation must be substantially less than for a wrongful expropriation and assert that in such a case compensation is limited to the unjustified enrichment realized by the nationalizing State, with no compensation for lost profit. 191. By and large, both Parties refer to the same authorities in the discussion of their respective theses, but give them opposite interpretations. They agree that the leading case in this context is Case Concerning the Factory at Chorzow (Germany v. Poland), 1928 P.C.I.J., Ser. A. No. 17 (Judgment of 13 September 1928) (“Chorzow Factory”), decided by the Permanent Court of International Justice in 1928. The Tribunal shares this view. In spite of the fact that it is nearly sixty years old, this judgment is widely regarded as the most authoritative exposition of the principles applicable in this field, and is still valid today. It must be recognized, however, that its treatment of compensation is fairly complex and must be carefully analyzed. 192. Undoubtedly, the first principle established by the Court is that a clear distinction must be made between lawful and unlawful expropriations, since the rules applicable to the compensation to be paid by the expropriating State differ according to the legal characterization of the taking. Such a principle has been recently and expressly confirmed by the celebrated AMINOIL case, also invoked by both Parties. 193. According to the Court in Chorzow Factory, an obligation of reparation of all the damages sustained by the owner of expropriated property arises from an unlawful expropriation. The rules of international law relating to international responsibility of States apply in such a case. They provide for restitutio in integrum: restitution in kind or, if impossible, its monetary equivalent. If need be, “damages for loss sustained which would not be covered by restitution” should also be awarded. On the other hand, a lawful expropriation must give rise to “the payment of fair compensation,” or of “the just price of what was expropriated.” Such an obligation is imposed by a specific rule of the international law of expropriation. 194. The difficulty, obviously, is in determining the practical consequences of the distinction between reparation of the damage caused by a wrongful expropriation and payment of compensation in case of lawful expropriation. The legal bases of the two concepts are totally different and, logically, the practical methods to be used in order to derive the amount due should also differ. On this question, the principles enunciated by the Chorzow Factory case are equally important and have not lost their validity. 195. In Chorzow Factory the Court dealt with the question of reparation of the damages resulting from an unlawful expropriation. The analysis of the Court was so thorough, however, and its comparisonswith the reverse hypothesis so systematic, that the judgment is also illuminating in analyzing the lawful expropriation before us. 196. Restitutio is well defined by the Court. It means the restitution in kind or, if that is

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impossible, the payment of the monetary equivalent. In both cases the principle on which it lies is the same: “that reparation must, as far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if this act had not been committed.” One essential consequence of this principle is that the compensation “is not necessarily limited to the value of the undertaking at the moment of dispossession” (plus interest to the day of payment). According to the Court, “this limitation would be admissible only if the Polish Government [the expropriating State] has had the right to expropriate, and if its wrongful act consisted merely in not having paid … the just price of what was expropriated.” Id. This last statement is of paramount importance: It means that the compensation to be paid in case of a lawful expropriation (or of a taking which lacks only the payment of a fair compensation to be lawful) is limited to the value of the undertaking at the moment of the dispossession, i. e., “the just price of what was expropriated.” 197. Obviously the value of an expropriated enterprise does not vary according to the lawfulness or the unlawfulness of the taking. This value can not depend on the legal characterization of a fact totally foreign to the economic constituents of the undertaking, namely the conduct of the expropriating State. In the traditional language of international law it equates the damnum emergens, which must be compensated in any case … The difference is that if the taking is lawful the value of the undertaking at the time of the dispossession is the measure and the limit of the compensation, while if it is unlawful, this value is, or may be, only a part of the reparation to be paid. In any event, even in case of unlawful expropriation the damage actually sustained is the measure of the reparation, and there is no indication that “punitive damages” could be considered. 198. What can be added to the value of the enterprise in order to meet the requirements of restitutio? An answer to this question can be found in the formulation of the questions on which an expert inquiry was arranged by the Court. These questions are an integral part of the judgment, with the same authority as all the other parts, and have the advantage, with the benefit of explanations which the Court added to their terms, of being much more precise and concrete than the general principles previously enunciated. 199. The Court “considers it preferable to endeavor to ascertain the value to be estimated by several methods, in order to permit of a comparison and if necessary of completing the results of the one by those of the others.” Consequently, it contemplated essentially two methods, corresponding to two different questions … 200. The first method corresponds to Question I. The experts were asked to, as far as possible, separately determine: (A) the value of the enterprise on 3 July 1922, i.e. the date of the expropriation, and (B) the financial results (profits or losses) “which would probably have been given by the undertaking” from this date to the date of the judgment “if it had been in the hands” of the expropriated owners. The clear implication is that, with this method, the compensation would include the two elements: the value of the undertaking at the date of the expropriation, plus the profits which would have been earned after this date, had the taking not occurred, until the date of the judgment. Equally clear is the consequence to be drawn from this finding: that this lost profit was not included in the valuation of the enterprise as of the date of the taking. Otherwise, there would be double recovery. 201. Of paramount interest is the list of the components enumerated by the Court as included in the value of the undertaking. They appertain to three categories: corporeal properties (lands, buildings, equipment, stocks), contractual rights (supply and delivery contracts) and other intangible valuables (processes, goodwill and “future prospects”). Using today's vocabulary, this would mean “going concern value”, which is not a new concept after all. Only one component relates to the future: “future prospects.” Since, for the reasons set forth in the preceding paragraph, future prospects does not mean lost profits, we safely can say, using the traditional vocabulary of international arbitration, that all these components pertain to damnum emergens. 202. On the other hand, part (B) of Question I indisputably relates only to “lucrum cessans,” according to the same vocabulary, systematically calculated for a fixed period of time. The financial results (profit or losses) to be assessed are hypothetical, but their valuation implies no projection into the future, since they would have been earned before the date of the expert enquiry. 203. The comparison of the two subquestions (A) and (B) permits of only one conclusion: The lucrum cessans to be determined under subquestion (B) is something different from the “future prospects” mentioned in subquestion (A). The reasoning of the Court on this point is perfectly clear and was expressed without any ambiguity: The purpose of question I is to determine the monetary value, both of the object which should have been restored in kind and of the additional damage, on the basis of the estimated value of the undertaking, including stocks, at the moment of [the] taking … together with any probable profit that would have accrued to the undertaking between the date of taking possessions and that of the expert opinion. This statement confirms the previous finding that, for the Court, lost profit (lucrum

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cessans) is not incorporated in the value of the undertaking, although this value includes “future prospects.” In other words, according to the Court, “future prospects” does not equal lost profit (lucrum cessans). Those are two different concepts. The first one clearly refers to the fact that the undertaking was a “going concern” which had demonstrated a certain ability to earn revenues and was, therefore, to be considered as keeping such ability for the future: this is an element of its value at the time of the taking. The second relates to the amount of the earnings hypothetically accrued from the date of the taking to the date of the expert opinion, had the enterprise remained in the hands of its former owner. 204. The other method used by the Court in order “to wipe out” the consequences of a wrongful taking consists of an estimation of the value of the undertaking at the time of the judgment. It is the object of Question II. The valuation of the undertaking is exactly the same, with the same components. Only the date changes. Furthermore, the valuation is hypothetical, since it refers to the undertaking as it would have been if it had remained in the hands of the expropriated owners. The Court deems that, in this second hypothesis, the profits, real or supposed, accrued between the taking and the judgment would be for the most part incorporated in the supposed value of the undertaking at the time of the judgment, since they would have been absorbed by the costs of upkeep of the corporeal properties and of improvement and normal development of the installation. If, however, there remains “a margin of profit,” it “should be added to the compensation to be awarded.” On the contrary, if an investment of fresh capital would have been required for the normal development of the undertaking, the amount of such sums should be deducted. Accordingly, if the expert study was well performed, the results yielded by the two methods should have been identical and confirm each other. If, on the contrary, these results had been different, the Court would have had to combine them and to make the necessary adjustments. To this effect, it expressly and fully reserved its right to review the expert's valuations and to determine the sum to be awarded in conformity with the legal principles set out in the judgment. Obviously, had the second method yielded a value of the undertaking at the time of the expert opinion which was lower than the value at the time of the taking, the higher value would have prevailed. 205. It is relevant to note that, even for the purpose of restitutio, the Court takes into consideration lucrum cessans (in the meaning previously defined) only for a limited and rather short period of time. Furthermore, the quantification of lucrum cessans implies no projection into the future, since it finds its dies ad quem at the date of the judgment. 206. The case law developed since the judgment of the Court has generally followed the principles set forth in this judgment, at least on the distinction between lawful and unlawful expropriation. It is particularly remarkable that all the awards which adopted the standard of restitutio relate to expropriation found unlawful. The LIAMCO award could at first glance be considered as an exception, since it awards the Claimant a certain amount of lost profit after having found that the expropriation of LIAMCO by Libya was lawful. It is clear, however, that this part of the compensation, awarded on the basis of “equity,” does not conform to the concept or the standard of restitutio in integrum. As already noted, the AMINOIL case clearly recognizes that it is only in cases relating to indemnifications due in consequence of illicit acts that the calculation is effected as the equivalent of a restitutio in integrum. In that case limited lost profit was awarded only on the basis of the concept, specifically agreed upon by the parties, of “legitimate expectations” and in implementation of such an agreement. [2] ADC Affiliate Limited and ADC & ADMC Management Ltd. v. The Republic of Hungary (ICSID Case No. ARB/03/16), Award of 2 October 2006, (23) ¶¶ 480-486, 494497, 499 [Charles N. Brower (pres.), Albert Jan van den Berg, Neil Kaplan QC] [ADC, a Cyprus investor, won the tender for the renovation, expansion and participation in the operation of the Budapest international airport for a term of twelve years with a possible extension for another six years. Before the initial term expired but after ADC had finished construction and renovation of the airport terminals, the Hungarian Minister of Transport issued Decree terminated the agreement and took over all operations related to the airport. ADC subsequently initiated arbitration proceedings against Hungary under the Cyprus-Hungary BIT claiming that its investments in Hungary had been expropriated as a result of the Ministry of Transport actions.] (Citations selectively omitted) 480. The principal issue is whether the BIT standard is to be applied or the standard of customary international law. The Claimants argue that the Respondent's deprivation of its investments was a breach of the BIT and as an internationally wrongful act is subject to the customary international law standard as set out in Chorzów Factory (Claim for Indemnity) (Merits), Germany v. Poland, P.C.I.J. Series A., No. 17 (1928). The Respondent contends that the BIT standard is a lex specialis which comes in lieu of the customary international law standard. 481. There is general authority for the view that a BIT can be considered as a lex specialis whose provisions will prevail over rules of customary international law (see, e.g., Phillips Petroleum Co. Iran v. Iran, 21 Iran-U.S. Cl. Trib. Rep. at 121). But in the present case the BIT does not stipulate any rules relating to damages payable in the case of an unlawful expropriation. The BIT only stipulates the standard of compensation that is payable in

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the case of a lawful expropriation, and these cannot be used to determine the issue of damages payable in the case of an unlawful expropriation since this would be to conflate compensation for a lawful expropriation with damages for an unlawful expropriation. This would have been possible if the BIT expressly provided for such a position, but this does not exist in the present case. 482. The standard set forth in Article 4(1)(a) of the BIT refers to “just compensation.” Article 4 further provides: “2. The amount of compensation must correspond to the market value of the expropriated investments at the moment of the expropriation. 3. The amount of this compensation may be estimated according to the laws and regulations of the country where the expropriation is made.” The latter refers to Hungarian law in the present case. Section 132 of the Hungarian Constitution provides that expropriation of ownership must be accompanied by “full, unconditional and prompt compensation” (Respondent's Counter-Memorial at para. 584). 483. Since the BIT does not contain any lex specialis rules that govern the issue of the standard for assessing damages in the case of an unlawful expropriation, the Tribunal is required to apply the default standard contained in customary international law in the present case. 484. The customary international law standard for the assessment of damages resulting from an unlawful act is set out in the decision of the PCIJ in the Chorzów Factory case … which reads: “reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability, have existed if that act had not been committed.” In the same case …, the PCIJ also pointed out that “reparation therefore is the indispensable complement of a failure to apply a convention.” 485. Moreover, the PCIJ considered that the principles to determine the amount of compensation for an act contrary to international law are: “Restitution in kind, or, if this is not possible, payment of a sum corresponding to the value which a restitution in kind would bear; the award, if need be, of damages for loss sustained which would not be covered by restitution in kind or payment in place of it.” (Page 47 of the Judgment.) 486. This statement of the customary international law standard has subsequently been affirmed and applied in a number of international arbitrations relating to the expropriation of foreign owned property. *** Thus there can be no doubt about the present vitality of the Chorzów Factory principle, its full current vigor having been repeatedly attested to by the International Court of Justice. 494. It may also be noted that the International Law Commission's Draft Articles on Responsibility of States for Internationally Wrongful Acts, concluded in 2001, expressly rely on and closely followChorzów Factory. Article 31(1) provides: “The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act.” The Commission's Commentary (at (2)) on this Article states that “The general principle of the consequences of the commission of an internationally wrongful act was stated by the Permanent Court in the Factory at Chorzów case” and then quotes the identical passage quoted by the International Court of Justice in all of the cases cited above (and set forth in paragraph 484 above). The Commission continues in Article 35 of the Draft Articles to conclude that restitution in kind is the preferred remedy for an internationally wrongful act, providing in Article 36 that only where restitution cannot be achieved can equivalent compensation be awarded. 495. The remaining issue is what consequence does application of this customary international law standard have for the present case. It is clear that actual restitution cannot take place and so it is, in the words of the Chorzów Factory decision, “payment of a sum corresponding to the value which a restitution in kind would bear”, which is the matter to be decided. 496. The present case is almost unique among decided cases concerning the expropriation by States of foreign owned property, since the value of the investment after the date of expropriation (1 January 2002) has risen very considerably while other arbitrations that apply the Chorzów Factory standard all invariably involve scenarios where there has been a decline in the value of the investment after regulatory interference. It is for this reason that application of the restitution standard by various arbitration tribunals has led to use of the date of the expropriation as the date for the

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valuation of damages. 497. However, in the present, sui generis, type of case the application of the Chorzów Factory standard requires that the date of valuation should be the date of the Award and not the date of expropriation, since this is what is necessary to put the Claimants in the same position as if the expropriation had not been committed. This kind of approach is not without support. The PCIJ in the Chorzów Factory case stated that damages are “not necessarily limited to the value of the undertaking at the moment of dispossession” *** 499. Based on the foregoing reasons, the Tribunal concludes that it must assess the compensation to be paid by the Respondent to the Claimants in accordance with the Chorzów Factory standard, i.e., the Claimants should be compensated the market value of the expropriated investments as at the date of this Award, which the Tribunal takes as of September 30, 2006. [3] Questions and Comments 1. 2. 3. 4. 5. 6.

7. 8.

9.

Do investment treaties provide a standard of compensation for a wrongful expropriation? What is the standard of compensation for an unlawful expropriation? What is the source of that standard? Should the compensation for an unlawful expropriation be different than that for a lawful expropriation? Why or why not? Are enhanced damages available for an unlawful expropriation as compared to the compensation recoverable for a lawful expropriation? If so, what elements may be included in the enhanced damages? Is specific performance available as a remedy for an unlawful expropriation? Are future lost profits recoverable for an unlawful expropriation? If so, for what period of time? Is future profitability a relevant factor in providing compensation for an unlawful expropriation? To what extent and how is it taken into account, if at all? What differences exist, if any, in the standards for compensation for breach of contract and for an unlawful expropriation? The tribunal in Compania de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Award (20 August 2007) (J. William Rowley, President; Professor Gabrielle Kaufmann-Kohler and Professor Carlos Bernal Verea), available at http://italaw.com/sites/default/files/case-documents/ita0215.pdf (paragraphs 8.2.38.2.7) agreed that the standard for compensation for legal and wrongful expropriations differ, but it found no need to apply the wrongful expropriation standard in that case since it found that the investment was never profitable. In the case of Ioannis Kardassapoulos and Ron Fuchs v. Georgia, ICSID Case No. ARB/05/18 and ARB/07/15, Award (3 March 2010) (L. Yves Fortier, President; Professor Francisco Orrego Vicuña), available at http://italaw.com/sites/default/files/casedocuments/ita0445.pdf (paragraphs 507-517), the tribunal accepted the proposition that a higher recovery may be appropriate for an unlawful expropriation when the claimant would have retained its investment, but it found the rule inapplicable when the investor would have sold its investment. Does the date on which it would have sold its investment matter for purposes of compensation in this context?

[E] Date of Valuation for Expropriation [1] W. Michael Reisman and Robert D. Sloane, Indirect Expropriation and Its Valuation in the BIT Generation, 74 Brit. Y.B. Int’l L., 36-37, 38-39, 41, 46-47, 50-51 (2003) (24) (Citations selectively omitted) C. Alternatives: Delinking Expropriation and Valuation In a series of awards rendered in the 1980s, the Iran-United States Claims Tribunal proposed that “where the alleged expropriation is carried out by way of a series of interferences in the enjoyment of the property, the breach forming the cause of action is deemed to take place on the day when the interference has ripened into a more or less irreversible deprivation of the property rather than on the beginning date of the events.” That date, according to the Tribunal, must be ascertained by reference to the factspecific “circumstances of each case.” The Tribunal enunciated this proposition, however, in a series of decisions that, while arising from diverse factual scenarios, nonetheless shared a common political context, the 1979 Islamic Revolution in Iran. That meant, in practice, that in most cases involving indirect or creeping expropriations, the events culminating in a compensable expropriation tended to be similar, for example, the Iranian government's gradual assumption of managerial control or appointment of governmental “supervisors” who tended over time to interfere with foreign property rights in increasingly more intrusive ways. ***

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The proliferation of bilateral and multilateral investment treaties over the past decade, coupled with the tendency of governments now to eschew formal expropriation, forces the phenomena of creeping and consequential expropriations into sharper focus. More recent arbitrations, principally conducted under the auspices of ICSID, indicate the extent to which the relevant “moment of expropriation” in cases of creeping expropriations can prove slippery and elusive. But because “[v]irtually no BITs make reference to [the] different valuation methods in their expropriation clause,” BITs deliberately invite or perhaps even require decision-makers to exercise discretion in determining the appropriate method under the circumstances, including, where necessary, to ascertain the appropriate “moment” from which to calculate compensation pursuant to the method elected. BITs establish the moment of expropriation by reference to “the fair market value of the expropriated investment immediately before the expropriatory action was taken or became known, whichever is earlier.” The pertinent moments under the BIT therefore occur either on the date of the expropriation or when the expropriation “becomes known.” In the case of a direct, formal expropriation, both of these moments will almost invariably be vivid and clearly demarcated, for example, the date on which the government promulgates an executive or legislative decree proclaiming its intent to expropriate. A creeping expropriation, by contrast, involves an accretion of acts and omissions of often nebulous legality that accrue over a longer time period, culminating in an aggregate effect tantamount to an outright expropriation. A consequential expropriation involves a state's interference with or failure to create or maintain the normative legal, administrative, and regulatory framework contemplated by a BIT, as a consequence of which managerial control, profitability, and ultimately viability, erode. Thus, the events comprising a creeping or consequential expropriation far less frequently reveal a dramatic moment that demarcates the act of expropriation. *** … Because of the nature of creeping and consequential expropriations, that is, it will be the foreign investor's initial allegation of when the expropriation “became known” that frames the dispute. The paramount policy objectives of BITs support this conclusion. States conclude BITs principally to encourage reciprocal foreign investment, and, as a means to that end, to provide a stable and predictable framework for investment by each party's nationals in the territory of the other. That goal obviously would be ill-served by any policy that rewards creeping or consequential expropriations … *** [T]o calculate fair market value on the date of the last “measure tantamount to expropriation” that “ripened” into a manifest expropriation would be, according to most other methods of valuation (e.g., book value, liquidation value, and replacement value), to assess an investment's value at the very “moment” when the accretion of unlawful acts of the host state has so dramatically devalued the investment as to render it de facto expropriated – its “practical and economic use” having been, by that time, “irretrievably lost.” That theory of valuation could encourage states to accomplish expropriations furtively and indirectly, by regulatory malfeasance, misfeasance or non-feasance, or by a “creeping” progression of deleterious actions or inactions, no one of which, however, may be readily identified by an objective decision-maker as the critical “moment.” That said, the crucial point is not that the proposition enunciated by the Iran-U.S. Claims Tribunal is necessarily “wrong.” It may well provide the appropriate standard for discerning the proper moment of expropriation in many cases of indirect expropriations, where it makes sense to identify the act of expropriation more closely with one or two discrete events, e.g., the fixing of a price or the appointment of a governmental “supervisor.” It should, however, be applied with caution when invoked to assess the fair market value of an investment expropriated consequentially or by a creeping accretion of measures. BITs and comparable multilateral investment treaties should, as a matter of both the intent of their drafters and the policies that animate them, be construed to deter, not reward, unlawful expropriations of all kinds. If application of the Iran-U.S. Claims Tribunal's standard in practice reduces the amount of compensation due to victims of creeping or consequential expropriations, then, we suggest, the “moment of expropriation” should be distinguished from the “moment of valuation” for these purposes. And again, it is in this regard that the determination in the first instance of the investor may merit some deference. In any event, and whatever the method adopted by a tribunal to determine the proper “moment of expropriation” in circumstances of creeping and consequential expropriations, that determination must enable the tribunal to give full effect to Chorzów Factory’s imperative “that reparation must, so far as possible, wipe out all the consequences of the illegal act and reestablish the situation which would, in all probability, have existed if that act had not been committed.” *** To calculate compensation for consequential and creeping expropriations carried out within the legal universe of a BIT, tribunals can no longer be content to evaluate the fair market value of an expropriated investment as of the date when an accretion of

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governmental acts and omissions has so dramatically devalued the investment as to render it “practically useless” or its value “irretrievably lost.” Because these principles may, in practice, threaten the stable and mutually beneficial normative framework for reciprocal foreign investment that states design BITs to create and maintain, international tribunals seeking to award compensation for investments expropriated consequentially or by a creeping series of measures “tantamount to” expropriation may benefit from an alternative principle. Above all, any standard adopted to determine the appropriate date from which to calculate compensation should effectively deter, not reward, consequential and creeping expropriations. In this regard tribunals seized with cases raising these issues may find it both useful and appropriate to disaggregate the moment of expropriation and the moment of valuation – to distinguish the “moment of expropriation,” which goes to the question of liability (i.e., whether an accretion of measures has ripened into a compensable expropriation), from the “moment of valuation,” which goes to the question of damages. Because creeping and consequential expropriations frequently demand highly fact-sensitive inquiries, it is neither possible nor prudent to suggest a monolithic or bright-line rule for calculating compensation in these circumstances. But as a general principle, the moment of valuation should be the date on which assessing the fair market value of a foreign investment for purposes of calculating compensation will enable a tribunal to give full effect to Chorzów Factory’s imperative. Adoption of this principle, in our view, would contribute in the long term to fortifying the stable and predictable legal regime for reciprocal foreign investment upon which both foreign investors and developing states depend in the BIT generation. [2] Phillips Petroleum Company Iran v. The Islamic Republic of Iran & The National Iranian Oil Company (IUSCT Case No. 39), Award of 29 June 1989 (25) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich] [Case summary included in Chapter 9.] (Citations selectively omitted) 100. The conclusion that the Claimant was deprived of its property by conduct attributable to the Government of Iran, including NIOC, rests on a series of concrete actions rather than any particular formal decree, as the formal acts merely ratified and legitimized the existing state of affairs. The Claimant suggests that the taking was complete by 29 September 1979, the date of the meeting when it was informed of the termination of the JSA. The Respondents contend that 11 August 1980, the date of the written notification informing the Claimant that the Special Committee had declared the JSA null and void, is the only date when the taking could be said to have been complete. 101. The Tribunal is not bound by the suggestions of the Parties in determining the date of taking for purposes of liability, but rather must determine such date on its own, based on the facts of the case. The Tribunal has previously held that in circumstances where the taking is through a chain of events, the taking will not necessarily be found to have occurred at the time of either the first or the last such event, but rather when the interference has deprived the Claimant of fundamental rights of ownership and such deprivation is “not merely ephemeral,” or when it becomes an “irreversible deprivation.” Similarly, where the appointment of temporary managers ripened into a taking of title at a later date, the Tribunal found that the earlier date should be used when “there is no reasonable prospect of return of control.” The Tribunal has observed that an important objective of the Revolutionary movement – and a first order of business of the new Government – was the assumption of complete control over all aspects of the oil industry, notwithstanding existing joint ventures with foreign oil companies. The first and most immediate action against the property rights at issue, the refusal, in line with this policy, to permit the Claimant to take its liftings under the JSA, started after production from the JSA fields had resumed in March 1979. The final formal “nullification” in August 1980 of the JSA only confirmed the then existing state of affairs. Between these two dates, the Tribunal considers that an early date is appropriate. *** 102. The Tribunal notes that the Claimant's loss was felt from the time of the first refusals to permit it to lift petroleum in April 1979. At that time the Claimant was still uncertain whether that situation was to be permanent, and NIOC first indicated that it would at some later time be willing to discuss the Claimant's request concerning its 1979 liftings. When no such discussions ensued, the Claimant's parent company felt compelled to enter, on 19 June 1979, into a separate sales/purchase agreement for crude oil with NIOC. But the Claimant still proposed, together with the other Second Party companies in their letter of 26 June, a provisional arrangement for liftings through the rest of that year which was based on the JSA and the rights under that agreement, and which they were waiting to discuss in the separate meeting envisioned by NIOC in the April general meeting. On 30 June, cash calls to the Claimant ceased. While the cessation of cash calls showed that IMINOCO did in fact no longer operate as provided for in the JSA, the Second Party companies still based their disagreement to the dismissal on 1 August of the Second Party's Managing Director on “the existing contractual arrangement,” viz., the JSA, when AGIP requested an early meeting of the Board of Directors on the matter. It became clear, however, in the meeting which the IMINOCO Second Party companies had with the Khalili

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sub-commission on 29 September 1979 that there was no reasonable prospect of return to an arrangement with NIOC on the basis of the JSA. For it was in this meeting that the Second Party companies were told not only that they should regard the JSA as terminated, but also that their letter of 26 June did not deserve an answer. Consequently, the Tribunal finds that the Claimant's JSA rights were taken by 29 September 1979, and that the Respondents are liable to compensate the Claimant for its loss as of that date. [3] Compañia del Desarrollo de Santa Elena S.A. v. Costa Rica (ICSID Case No. ARB/96/1), Final Award of 17 February 2000, 39 I.L.M 1317, 1329-1332 (2000), 73-74, 76-78, 80-81, 83-84, 90, 93-95 [L. Yves Fortier (pres.), Elihu Lauterpacht, Prosper Weil] [Compañia del Desarrollo de Santa Elena S.A. (CDSE) was formed in 1970 by U.S. citizens for the purpose of buying 30 kilometers of shoreline on Costa Rica's Pacific coastline known as the Santa Elena property and developing it as a tourist resort and residential community. CDSE bought the property for U.S. $395,000. In 1978, Costa Rica issued an expropriation decree for the property. The company consented to the expropriation, but disagreed with the government's valuation. Only intermittent activity occurred over the next 17 years, although CDSE did initiate certain judicial proceedings in Costa Rica. In 1995, after the United States government declined foreign assistance based on the Helms Act, Costa Rica agreed to arbitrate the dispute and CDSE filed an ICSID arbitration proceeding.] (Citations selectively omitted) 73. … there is no dispute between the parties as to the applicability of the principle of full compensation for the fair market value of the Property, i.e., what a willing buyer would pay to a willing seller. 74. There is, however, a dispute as to the value of the Property derived by applying that principle. Specifically, the parties differ with respect to the date on which the Property was expropriated and as of which its fair market value is to be assessed, and as to the value of the Property on that date. This difference of views lies at the heart of the case, and will be explored in the following section of our Award, dealing with the crucial issue of valuation. *** 1) The Date as at Which the Property Must be Valued 76. As is well known, there is a wide spectrum of measures that a state may take in asserting control over property, extending from limited regulation of its use to a complete and formal deprivation of the owner's legal title. Likewise, the period of time involved in the process may vary – from an immediate and comprehensive taking to one that only gradually and by small steps reaches a condition in which it can be said that the owner has truly lost all the attributes of ownership. It is clear, however, that a measure or series of measures can still eventually amount to a taking, though the individual steps in the process do not formally purport to amount to a taking or to a transfer of title. What has to be identified is the extent to which the measures taken have deprived the owner of the normal control of his property. A decree which heralds a process of administrative and judicial consideration of the issue in a manner that effectively freezes or blights the possibility for the owner reasonably to exploit the economic potential of the property, can, if the process thus triggered is not carried out within a reasonable time, properly be identified as the actual act of taking. 77. There is ample authority for the proposition that a property has been expropriated when the effect of the measures taken by the state has been to deprive the owner of title, possession or access to the benefit and economic use of his property: “A deprivation or taking of property may occur under international law through interference by a state in the use of that property or with the enjoyment of its benefits, even where legal title to the property is not affected. While assumption of control over property by a government does not automatically and immediately justify a conclusion that the property has been taken by the government, thus requiring compensation under international law, such a conclusion is warranted whenever events demonstrate that the owner was deprived of fundamental rights of ownership and it appears that this deprivation is not merely ephemeral. The intent of the government is less important than the effects of the measures on the owner, and the form of the measures of control or interference is less important than the reality of their impact.” 78. Stated differently, international law does not lay down any precise or automatic criterion, such as the date of the transfer of ownership or the date on which the expropriation has been “consummated” by agreed or judicial determination of the amount of compensation or by payment of compensation. The expropriated property is to be evaluated as of the date on which the governmental “interference” has deprived the owner of his rights or has made those rights practically useless. This is a matter of fact for the Tribunal to assess in the light of the circumstances of the case.

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*** 80. Although the expropriation by the decree of 5 May 1978 was only the first step in a process of transferring the Property to the Government, it cannot reasonably be maintained, as Claimant seeks to do, that this Decree expressed no more than an “intention” to expropriate or that, in 1978, the Government merely “sought to expropriate”. In the circumstances of this case, the taking of the Property occurred as of 5 May 1978, the date of the 1978 Decree. 81. As of that date, the practical and economic use of the Property by the Claimant was irretrievably lost, notwithstanding that CDSE remained in possession of the Property. As of 5 May 1978, Claimant's ownership of Santa Elena was effectively blighted or sterilised because the Property could not, thereafter, be used for the development purposes for which it was originally acquired (and which, at that time, were not excluded) nor did it possess any significant resale value. *** 83. Since the Tribunal is of the view that the taking of the Property occurred on 5 May 1978, it is as of that date that the Property must be valued. There is no evidence that its value at that date was adversely affected by any prior belief or knowledge that it was about to be expropriated. Consequently, for the purpose of retrospectively attributing a value to the Property in 1978, the Tribunal has not had to consider later appraisals, such as the Government's 1993 Appraisal or those submitted by the parties in these proceedings. 84. The significance of identifying the date of taking lies in its bearing on the factors that may properly be taken into account in assessing the “fair market value” of the Property – a value which, as noted, both sides are agreed must be the basis of the present Award. If the relevant date were the date of this Award, then the Tribunal would have to pay regard to the factors that would today be present to the mind of a potential purchaser. Of these, the most important would no doubt be the knowledge that the Government has adopted an environmental policy which would very likely exclude the kind of tourist, hotel and commercial development that the Claimant contemplated when it first acquired the Property. If, on the other hand, the relevant date is 5 May 1978, factors that arose thereafter – though not necessarily subsequent statements regarding facts that existed as of that date – must be disregarded. *** 90. In determining the fair market value of the Property as of the date of expropriation, 5 May 1978, the Tribunal has proceeded by means of a process of approximation based on the appraisals effected by the parties in 1978 and submitted to the Tribunal in the context of these proceedings, as has been done in several international arbitrations, … *** 93. … Costa Rica's valuation of Santa Elena in 1978 was approximately U.S. $1,900,000. Claimant's 1978 valuation was approximately U.S. $6,400,000. 94. The Tribunal will, consequently, take as a starting point these appraisals. It can safely be assumed that the actual and true fair market value of the Property was not higher than the price asked by the owners and not lower than the sum offered by the Government, i.e., that it was somewhere between these two figures. It can also safely be assumed that both of these appraisals took account of, and included, the “potential for tourism development” of the Property, discussed above. 95. In the circumstances of this case, making the assessment that we have been invited to make and having considered the evidence submitted by the parties and the factors relevant to the value of the Santa Elena Property in 1978, the Tribunal has determined that the sum of U.S. $4,150,000 constitutes a reasonable and fair approximation of the value of the Property at the date of its taking. [4] Comments and Questions 1. 2. 3. 4.

5.

What is the date of valuation for a creeping expropriation? In a creeping expropriation, should a tribunal adopt a standard of valuing the property at an earlier or a later date in the factual timeline? Justify your answer. Is the date selected for valuation of any real significance? Why? Give examples. In the 1992 U.S. Model BIT, the date for valuing property for an expropriation is stated to be the date “immediately before the expropriatory action was taken or became known, whichever is earlier.” What is the significance of this standard for a creeping expropriation? In the Chorzow Factory case, the Polish government gave notice of an expropriation of the property of certain German companies, but only later seized it. The PCIJ held that “[o]nce notice [of expropriation] is given, the owner cannot … alienate … the estate … so the giving of notice places serious restrictions on the rights of ownership.” 1928 P.C.I.J., Ser. A, No. 17, at 4. In this fact situation, which date should be used for valuation? Why?

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6. 7.

8.

In Sedco, Inc. v. Iran, 25 I.L.M. 629, 631-32 (1986), the Iran-U.S. Claims Tribunal held that when the appointment of temporary managers ripened into a taking of title at a later time, an earlier date should be employed to value the expropriation. In a creeping expropriation situation with a series of actions that collectively constitute the expropriation, good reason may exist to divorce the date of valuation from the date of expropriation. The rationale lies in the prevention of a devaluation of the investment by the earlier series of acts of the government, which would exacerbate the harm to the investor. In this situation, it may be appropriate to give some deference to the claimant's choice of a date for valuation in order not to encourage internationally wrongful acts. Provide examples of situations in which the investor would prefer an earlier or a later date of valuation for a creeping expropriation.

§11.07 COMPENSATION FOR DENIAL OF JUSTICE [A] Chevron Corp (USA) and Texaco Petroleum Co (USA) v. Republic of Ecuador (PCA Case No. 34877), Partial Award on the Merits of 30 March 2010, (26) ¶¶ 374-379, 381-382, 384, 546 [Karl-Heinz Böckstiegel (pres.), Charles N. Brower, Albert Jan van den Berg] [Case Summary included in Chapter 3] (Citations selectively omitted) 374. The Tribunal initially notes that both sides refer to the Chorzów Factory case as authoritative and agree that the loss due to an international wrong is to be measured by the comparison of the victim's actual situation to that which would have prevailed had the illegal acts not been committed … Both sides further agree that, according to the “but for” analysis demanded by Chorzów, the Tribunal may only award compensation to the Claimants if the Claimants are able to prove that they would more likely than not have prevailed on the merits in their cases before the Ecuadorian courts, that is if the Tribunal believes that the underlying claims have merit and should have been accepted by the Ecuadorian courts … In essence, the Claimants must prove the element of causation – i.e., that they would have received judgments in their favor as they allege “but for” the breach by the Respondent. 375. Applying the above principle, and in keeping with the fact that the Claimants' alleged primary “loss” in this case is the chance for a judgment by the Ecuadorian courts, the Tribunal must ask itself how a competent, fair, and impartial Ecuadorian court would have resolved TexPet's claims. The Tribunal must step into the shoes and mindset of an Ecuadorian judge and come to a conclusion about what the proper outcome of the cases should have been; that is, the Tribunal must determine what an Ecuadorian court, applying Ecuadorian law, would have done in these cases, rather than directly apply its own interpretation of the agreements. 376. The Tribunal notes that this is a different test of causation from that which would apply to the evaluation of other substantive bases for State responsibility on the basis of a domestic court's actions. One must be careful not to confuse the two. The more deferential standard of what is “juridically possible” within the Ecuadorian legal system may be the applicable standard if what was being evaluated was whether Ecuador breached Article II(7) (or committed a denial of justice) through a court's rendering of a manifestly unjust decision. There appears to be some agreement between the Parties and the sources they cite on this point … In light of its finding that, prior to the issuance of any relevant decision by the Ecuadorian courts, Article II(7) had already been breached by reason of undue delay, the Tribunal need not express a view on what the exact standard of review would be if the question before it concerned compensation for the consequences of a manifestly unjust decision. It is not relevant whether any decision rendered after the completion of that breach was manifestly unjust or not. As mentioned above …, once delay has become unreasonable and a breach of the BIT has been completed, a decision issued after that date cannot affect the liability of the State for the undue delay. The decisions issued by the Ecuadorian courts after the completion of the breach of Article II(7) can only impact the questions of causation and damages that flow from that breach. 377. The Tribunal's task, given a completed breach for undue delay, is to evaluate the merits of the underlying cases and decide upon them as it believes an honest, independent, and impartial Ecuadorian court should have. In doing so, the Tribunal may take into account a judgment issued after the critical date as evidence of how a hypothetical honest, independent, and impartial Ecuadorian court would have decided. However, the Tribunal owes that judgment no deference. The Tribunal must weigh it against other evidence before the Tribunal as to how the court should have decided and come to its own conclusions on the matter. 378. The above considerations also lead the Tribunal to reject the Respondent's “loss of chance” argument. Given that the Parties agree with Paulsson's assertion that “[t]he goal of reparations in international law is to restore the victim of a breach to the position it would have enjoyed if the infraction had not occurred,” the Tribunal must determine what TexPet should have received in judgments issued by the Ecuadorian courts. No matter

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what their estimation of the merits of the claims, it is clear that the Ecuadorian courts would not have applied a discount factor based on the doctrine of “loss of chance” when issuing a judgment. 379. Furthermore, the uncertainty involved in the litigation process that is noted by the Respondent is taken into account in determining the standard of review. As noted above, if the alleged breach were based on a manifestly unjust judgment rendered by the Ecuadorian court, the Tribunal might apply deference to the court's decision and evaluate it in terms of what is “juridically possible” in the Ecuadorian legal system. However, in the context of other standards such as undue delay under Article II(7), no such deference is owed. As Paulsson's opinion in this arbitration has stated, the Ecuadorian courts have “already had their chance [to decide the cases] and have failed to do so.” It thus falls to the Tribunal to step into the shoes of the Ecuadorian courts and decide the merits of the cases as it determines a fair and impartial judge in Ecuador would have decided the matter. *** 381. Moreover, the Respondent cannot simultaneously maintain both (1) that a claimant be required to prove that it would more likely than not have prevailed in the domestic courts and (2) that a claim be discounted to reflect the probability of success. To apply both propositions would lead to an approach that would necessarily and systematically under compensate claimants in cases that allege misconduct by a State's judiciary. Indeed, the inconsistency of these two arguments is highlighted when the Respondent asks the Tribunal to apply 14% as the appropriate discount factor … To accept 14% as the probability of Claimants' success in their cases would logically mean that the Claimants have not sustained their burden to show that they would more likely than not have prevailed in the Ecuadorian courts. 382. Finally, the “loss of chance” principle does not have wide acceptance across legal systems such that it can be considered a “general principle of law recognized by civilized nations.” At most it can be said that the “loss of chance” principle is applied in exceptional situations where there exists a “harm whose existence cannot be disputed but which it is difficult to quantify,” as noted in the commentary to the UNIDROIT Principles cited by the Respondent. In this case, the Tribunal finds no exceptional difficulties in coming to a conclusion as to what should have occurred but for the breach of the BIT and what damages result therefrom. The Tribunal therefore declines to apply the “loss of chance” principle. *** 384. In light of the decisions above regarding the breach of Article II(7) of the BIT (“effective means of asserting claims and enforcing rights”) and the measure of damages, the Tribunal must, as a matter of causation, now decide on the merits of the underlying seven Ecuadorian court cases. *** 546. When conceiving of the wrong as the failure of the Ecuadorian courts to adjudge TexPet's claims as presented to them, the starting point for the Tribunal's analysis must be TexPet's damages claims as they were presented before these courts. The Tribunal notes the Respondent's contention that, under Ecuadorian law, the Ecuadorian courts retained discretion to independently examine and assess the probative value of expert evidence and could have rejected or revised the calculations made by TexPet's expert … or the court-appointed expert. However, the Parties do not appear to have significantly disagreed in the Ecuadorian court proceedings on the number of barrels of crude oil in question or amount of compensation due if TexPet were to succeed on the merits of its claims. Indeed, the Claimants have pointed out that [Claimant's] calculations were further confirmed in many cases by Ecuador's expert and the court-appointed expert. Therefore, in light of the Tribunal's findings in favor of the Claimants on liability with respect to the underlying cases, the original direct damages assessed after judicial inspection in the Ecuadorian courts are thus taken as the appropriate starting point for the Tribunal's assessment of the quantum of damages. These are accepted as the principal amounts on which interest is calculated except to the extent that [Claimant's expert] has revised these claims downwards.

[B] Comments and Questions 1. 2. 3. 4. 5.

What type of denial of justice was at issue in the Chevron v. Ecuador case? Did this make a difference in the causation or compensation standards applied in the case? What was the causation standard applied in Chevron v. Ecuador? What is the “loss-of-a-chance” theory of compensation? Why did the tribunal reject Ecuador's loss-of-a-chance theory? What were the steps taken by the Chevron tribunal in determining the compensation due to the claimants?

§11.08 METHODOLOGIES FOR VALUING LOSSES 675 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

[A] Generally [1] Paul D. Friedland and Eleanor Wong, Measuring Damages for the Deprivation of Income-Producing Assets: ICSID Case Studies, 6 ICSID Rev. – Foreign Inv. L.J. 400, 405-407 (1991) (Citations selectively omitted) *** Four primary methods have been advocated for valuing income-producing assets. They are (i) the Book Value Method, (ii) the Replacement Value Method, (iii) the Liquidation Value Method, and (iv) the Discounted Cash Flow Method (hereinafter referred to as the DCF Method). Although these four methods have been put forward as separate and alternative ways of valuing an asset, the Liquidation Value Method may be viewed as a specific application of the philosophy underlying the Discounted Cash Flow Method … *** 1. Book Value Method As used in the context of valuing assets, book value means the difference between a company's assets and liabilities as recorded on its financial statements, or the amount at which the expropriated tangible asset appears on the balance sheet in accordance with generally accepted accounting principles. Book value has been viewed as a means of returning to the former owner of expropriated property his investment in the property. It is the amount that remains after deducting the liabilities from the assets of a company in the amounts that such items appear on the company's book of accounts and is usually referred to in accounting terms as owner's equity. The Book Value Method has usually been advanced as an appropriate method of valuing an asset when the asset is an enterprise or tangible asset of such enterprise. Where the asset “taken” is a contract right, such as when the state revokes or repudiates an agreement or license, the Book Value Method is less obviously applicable and is generally not used. Commentators have criticized the use of the Book Value Method to value expropriated enterprises. Balance sheets do not measure the ability of a firm's assets to generate cash. They therefore do not measure the assets' economic value. More particularly, the Book Value Method, based on balance sheet figures, fails to reflect the economic value of the firm or assets for the following reasons. First, assets are recorded on the balance sheet at their historical cost, which may diverge considerably from their current cost. The longer the lapse between the time the asset was purchased and the date of the balance sheet, the less realistic is the historical cost of the asset as a measure of such asset's current value. Furthermore, identical assets may have entirely different book values because they were purchased at different prices. Second, assets may be depreciated for accounting purposes at rates which may bear little relationship to the reduction in their economic productivity, and their book value is their depreciated historical cost. Third, the balance sheet fails to reflect certain intangible assets and other important elements of an enterprise, such as contractual rights, management skills, technical expertise, and relationships with customers and suppliers, sometimes called “goodwill,” which may contribute importantly to its success. Fourth, assets and other elements of an enterprise are economically productive principally when used as part of an integrated whole. It is often inappropriate to attempt to determine a business's value by deriving a value for each asset or element separately, and then adding them together. The whole may be of greater value than the sum of its parts. 2. Replacement Value Method The Replacement Value Method measures the value of an expropriated going concern enterprise, based on the amount of cash that would be required to purchase the individual assets that have been expropriated as of the date of the expropriation. The method therefore implicitly assumes that the asset taken is replaceable in its entirety. To the extent that the investor is able to purchase an asset identical to the one taken and, by re-employing the new asset, use it to generate the cash flows which he would have received from the asset taken, the Replacement Value Method would yield a figure which accurately values the asset taken. However, if the assumption of replaceability is false, use of the Replacement Value Method would fail to return to an investor the value of his asset. In the context of the taking of long-term contracts or investments in local enterprises, the assumption of replaceability breaks down in several respects. First, there may be unique features to the investor's asset which cannot be reproduced. Thus, for example, even if the investor received a sum of money sufficient to re-establish a mining operation of which it was deprived, money that may not fully reflect the value of his loss if there are no comparable mining opportunities in which the investor could re-invest the money received. Second, it will seldom be the case that individual discrete assets are taken by the State. Thus, although the Replacement Value Method avoids some of the problems raised by the use of historical cost figures in the Book Value Method, it does not reflect the greater value which the individual assets may have together in an enterprise.

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3. Liquidation Value Method As its name implies, the Liquidation Method Value is most appropriately applied when the enterprise to be valued demonstrates lack of profitability. The Liquidation Value Method values such an enterprise as the sum of the amounts at which the individual assets comprising the enterprise could be sold less any liabilities which the enterprise might have to meet. In fact, the Liquidation Value Method may be viewed as a specific application of the DCF Method. If an owner of an unprofitable enterprise could realize a greater sum from the sale of the individual assets comprising the enterprise than its continued operation, assuming rational economic behavior, such owner would liquidate rather than continue to operate the enterprise. The cash flow which such an enterprise could be expected to generate would therefore simply be the price of each asset comprising the enterprise when sold off. No discount rate would need to be applied to the cash flow since one would assume that the sale of assets would take place in the immed-iate future. The significant difference between the Liquidation Value Method and the Book Value Method is that the former uses the sales price of individual assets at the date of the taking while the latter uses historical acquisition cost figures. 4. DCF Method The DCF method values an income-producing asset by estimating the cash flow which the asset would be expected to generate over the course of its life, and then discounting that cash flow by a factor which reflects the time value of money and the risk associated with such cash flow. It involves first calculating the cash receipts expected in each future year, then subtracting that year's expected cash expenditure. The result is the net cash flow for the year. Because cash to be received in the future is worth less than the same amount of cash received today, the net cash flow for each future year is then discounted to determine its value on the valuation date, which is usually referred to as its “present value” as of that date. This discounting is accomplished through the application of a discount rate which reflects the time value of money, expected inflation and any risk attached to the cash flows. The discount rate is usually measured by examining the rate of return available in the market on alternative investments having risk comparable to that of the asset or enterprise being valued. The sum of the present values of the net cash flows for each of the future years is the value of the asset or enterprise as determined by the DCF method. In the business and academic communities, the DCF Method is frequently regarded as the most appropriate method of valuing an income-producing asset because it recognizes that the economic value of the asset to its owner is a function of the cash which such asset can be expected to produce in the future. The DCF method is also a useful and flexible tool. It can be adapted to value different kinds of income producing assets with different abilities to generate cash at different times and different lives. Through the risk factor in the discount rate, the DCF Method also explicitly recognizes the uncertainty which is inherent in valuing an income-producing asset. While opponents of the DCF Method have charged that it is speculative, the DCF Method in fact has the advantage of forcing the parties to articulate the various factors which enter into their calculations and, where some individual items are too speculative to properly constitute damages, they may be excluded on an item by item basis. The DCF Method is merely a valuation tool. The final determination of damages obtained by its use it will naturally depend on the figures which are plugged into the DCF formula. [2] Brice M. Clagett, Just Compensation in International Law: The Issues Before the IranUnited States Claims Tribunal, in The Valuation of Nationalized Property in International Law, Vol. IV, 48-51 (Richard B. Lillich (ed.), University Press of Virginia 1987) (Citations selectively omitted) III. The Measure of Compensation Whenever foreign-owned property is expropriated, the foreign investor is entitled to receive just compensation that is the full equivalent of the property or rights expropriated; that is, compensation that will place the investor in as good an economic position as he was before the expropriation occurred. When the rights involve an ongoing business activity with demonstrable future earning power, then just compensation is the value – or going-concern value – of the foreign investor's rights as of the date on which those rights were expropriated. The foreign investor's rights must be valued without regard to any reduction in value that would have resulted from apprehension that the rights might be expropriated without full compensation or, where a State contract is involved, that the State party might otherwise breach the agreement. Going-concern value is the full value of the property, business or rights in question as an income-producing asset. Where an efficient market exists for identical assets (such as publicly traded shares of stock of the same entity), the value established by that market – that is, the market price on the valuation date – will normally be determinative of going-concern value, unless that value has been depressed by apprehensions concerning expropriation or breach. In the absence of such a market, going-concern value is established by well-recognized methods. Indeed, as will be shown, it is these methods of valuation, as applied by buyers and sellers, that determine market value even where an

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efficient market exists, because the buyers and sellers who establish that market determine the prices they offer and accept on the basis of such methods of valuation. Thus, in the case of an ongoing business with future earning power, going-concern value and market value are the same. Value is a forward-looking concept. At any given time, the value of an income-producing asset will depend primarily upon the net cash flows it is expected to generate in the future, “discounted” (reduced) to a “present value” (value as of the valuation date) at a percentage rate that fully accounts both for the time value of money and for all relevant risks. Because the value of an asset does not depend upon such historical factors as cost or past usefulness, measures of value that look backward – such as book value and capitalization of historic income – are inappropriate and inadequate, as applied to ongoing businesses with future earning power, to determine the just compensation required by international law. All relevant sources of customary international law confirm that – even absent the express compensation standard stated in the Treaty of Amity – going-concern value is the proper measure of compensation in the expropriation cases before the Iran-United States Claims Tribunal. A long line of international judicial and arbitral precedents supports awards of compensation or damages based upon going-concern value in international expropriation cases involving ongoing businesses or contract rights. Finally, going-concern value as the customary international law measure of compensation has found support in State practice regarding the treatment of alien property, as well as in the writings of international publicists. *** For the purpose of measuring damages under customary international law, it has mattered little whether a taking of rights has been characterized as a breach of contract or as an unlawful expropriation. The goal of contract damages has been to restore the injured party to the financial position he would have enjoyed absent the breach. The goal of compensation for expropriation has been to restore to the expropriated investor the value of his lost property rights … Thus, in the case of an economic-development agreement, the two measures of liability – contract damages and compensation for expropriation – converge and become equivalent. The value in such an agreement involving a natural resource is the investor's right – if the resource is discovered – to produce and to sell the discovered resource and thereby to obtain a stream of future revenues. The value of the investor's expropriated undertaking inheres in the value of his lost expectations. Accordingly, whether one thinks of an investor's loss as resulting from the breach and repudiation of its contract or from the expropriation of its production rights, just compensation for that loss must necessarily be based on the present value of expected future earnings over the remaining term of the agreement – that is, the expected future cash flow discounted to account for the time value of money and for relevant risks.

[B] Valuation Methods [1] Discounted Cash Flow (DCF) Method [a] Mark Kantor, Valuation for Arbitration: Compensation Standards, Valuation Methods and Expert Evidence, 131-134, 139 (Kluwer Law International 2008) (Citations selectively omitted) Chapter 4 – Important Components of DCF Valuations Let us now turn from methods within the Market-Based Approach to valuation methods within the Income-Based Approach; first, Discounted Cash Flow (DCF) projections. As we have noted above, the DCF method is one of the most well accepted methods used for business valuations. The importance of the DCF valuation method is recognized by the issuance of a specific Guidance Note by the International Valuation Standards Committee, Guidance Note No. 9. The IVSC's DCF Guidance Note states: DCF analysis has gained widespread application due in part to the advancement of computer technology. DCF analysis is applied in valuations of real property, businesses and intangible assets; in investment analyses; and as an accounting procedure to estimate value in use. The use of DCF has increased substantially in institutional, investment property and business valuation sectors and is frequently required by clients, underwriters, financial advisers and administrators, and portfolio managers. The AICPA, the ASA, the Canadian appraisal profession and several other valuation organizations have agreed on a common definition of Discounted Cash Flow: “[A] method within the income approach whereby the present value of future expected net cash flows is calculated using a discount rate.” Another way to describe the DCF method is that it measures the present value of the future cash flows available to equity. The cash flow available to equity is “Net income after taxes, plus depreciation and other non-cash charges, less increases in working

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capital, less capital expenditures, less decreases in invested debt capital principal, plus increases in invested capital debt principal.” *** DCF valuations are not, of course, always appropriate. The International Private Equity Valuation Guidelines express skepticism about relying on DCF projections when other valuation methods are available. The Discounted Cash Flow (DCF) technique is flexible in the sense that it can be applied to any stream of cash flows (or earnings). In the context of private equity valuations, this flexibility enables the methodology to be applied in situations that other methodologies may be incapable of addressing. While this methodology may be applied to businesses going through a period of great change, such as a rescue refinancing, turnaround, strategic repositioning, loss making or is in its start-up phase, there is significant risk in utilizing this methodology. When presented with a DCF forecast, arbitrators will focus on the key assumptions and inputs in the calculations. Arbitrators will also focus on the extent to which the financial calculations are sensitive to changes in those assumptions or inputs. For example, what does an X% change in a price assumption produce in the final amount? What happens if the discount rate increases (or decreases) by Y%? What if interest rates go up (or down) by Z%? From an expert's perspective, the main work, in developing a DCF projection will be to identify all of the important variables, confirm that the core assumptions are reasonable and then construct a financial model to perform the required computations. Each of those tasks must be done in a manner that persuades the arbitrator the resulting discounted cash flows are credible. To achieve that objective, the underlying evidence must be sound and the model must be reliable. *** DCF computations for a company can vary widely, depending on differing assumptions employed in the forecasts about future revenues and expenses, additional capital requirements, interest and inflation rates, currency fluctuations, the starting and ending dates for the DCF forecast period and other matters. Significantly, DCF forecasts are highly sensitive to the choice of the overall discount rate used in the formula to discount the gross income amount back to a present-value amount. DCF forecasts are also highly sensitive to the terminal value projecting the residual value to the end of the investment's life, especially if the period for the detailed projections is short (e.g., five years) *** [Quoting from Patuha Power Ltd. (Bermuda) v. PT. (Persero) PLN (Indonesia), Final Award (1999):] 487. There is no reason to apologize for the fact that this approach involves approximations; they are inherent and inevitable. Nor can it be criticized as unrealistic or unbusinesslike; it is precisely how business executives must, and do, proceed when they evaluate a going concern. The fact that they use ranges and estimates does not imply abandonment of the discipline of economic analysis; nor, when adopted by the arbitrators, does this method imply abandonment of the discipline of assessing the evidence before them. [b] Phillips Petroleum Company Iran v. The Islamic Republic of Iran & The National Iranian Oil Company (IUSCT Case No. 39), Award of 29 June 1989 (27) [Robert Briner (pres.), Seyed K. Khalilian, George H. Aldrich] [Case summary included in Chapter 9.] (Citations selectively omitted) Compensation and Valuation C. Valuation 1. Valuation methods 111. The Tribunal recognizes that the determination of the fair market value of any asset inevitably requires the consideration of all relevant factors and the exercise of judgment. In the absence of an active and free market for comparable assets at the date of taking, a tribunal must, of necessity, resort to various analytical methods to assist it in deciding the price a reasonable buyer could be expected to have been willing to pay for the asset in a free market transaction, had such a transaction been possible at the date the property was taken. Any such analysis of a revenue-producing asset, such as the contract rights involved in the present Case, must involve a careful and realistic appraisal of the revenue-producing potential of the asset over the duration of its term, which requires appraisal of the level of production that reasonably may be expected, the costs of operation, including taxes and other liabilities, and the revenue such production would be expected to yield, which, in turn, requires a determination of the price estimates for

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sales of the future production that a reasonable buyer would use in deciding upon the price it would be willing to pay to acquire the asset. Moreover, any such analysis must also involve an evaluation of the effect on the price of any other risks likely to be perceived by a reasonable buyer at the date in question, excluding only reductions in the price that could be expected to result from threats of expropriation or from other actions by the Respondents related thereto. 112. One such method of analysis, and the method used by the Claimant, is the Discounted Cash Flow (“DCF”) analysis, which calculates the Claimant's prospective net earnings over the term of the JSA and discounts them to give their value at the date of taking, using a discount rate that takes into account the perceived risks. In that connection, the Tribunal does not understand the Claimant's calculations of anticipated revenues from the JSA as a request to be awarded lost future profits, but rather as a relevant factor to be considered in the determination of the fair market value of its property interest at the date of taking. The Tribunal recognizes that a prospective buyer of the asset would almost certainly undertake such DCF analysis to help it determine the price it would be willing to pay and that DCF calculations are, therefore, evidence the Tribunal is justified in considering in reaching its decision on value. In Starrett, … the Tribunal based its Award on an expert's report that utilized the DCF method, but the Tribunal made various adjustments to the conclusions and the resulting amounts. The need for some adjustments is understandable, as the determination of value by a tribunal must take into account all relevant circumstances, including equitable considerations. While a DCF analysis can, and often should be, an essential and even central component in that determination of value, it must not exclude other relevant considerations. In this connection, the Tribunal notes that in Amoco International Finance, … Chamber Three considered the DCF method inadequate and distinguished between the assets of a going concern, including good will and commercial prospects, which it noted are closely linked to the profitability of the concern, and what it described as the “financial capitalization of the revenues which might be generated by such a concern …” 113. In the present Case, the property taken is not a manufacturing or processing enterprise, but rather contract rights to continue to exploit natural resources previously discovered pursuant to the contract, and the Tribunal considers the use of the DCF method by the Claimant a relevant contribution to the evidence of the value of the Claimant's contract rights which have been taken by the Respondents. However, the Tribunal agrees that it is not an exclusive method of analysis and that all relevant considerations must be taken into account. As used by the Claimant, with its production and price estimates and a very low discount rate (four and one-half percent), the Tribunal cannot agree that the method has resulted in a proper estimate of market value. There are, for example, risks, such as the risk of reduced future production as a result of national policy changes flowing from the Iranian Revolution, that should be taken into account, even if such risks cannot be quantified with any certainty in the anticipated production or as part of a discount rate. The Tribunal therefore proceeds to its determination of the value of the Claimant's property interest on the date of taking by means of consideration of all relevant circumstances as revealed by the evidence presented in the Case. 114. In this connection, the Tribunal does not intend to make its own DCF analysis with revised components, but rather to determine and identify the extent to which it agrees or disagrees with the estimates of both Parties and their experts concerning all of these elements of valuation. [c] CMS Gas Transmission Company v. Argentina Republic (ICSID Case No. ARB/01/8), Award of 12 May 2005, (28) ¶¶ 411-417 [Francisco Orrego Vicuña (pres.), Marc Lalonde, Francisco Rezek] [CMS, a US investor, held equity interests in Argentine local gas distribution companies. The relevant regulatory and contractual framework provided for the tariffs to be calculated in US dollars, a series of tariffs adjustments and revisions, the commitment that tariffs were to provide an income sufficient to cover all costs and a reasonable rate of return, and that there would be no price freeze applicable to the tariff system without compensation. In the aftermath of the 2001 economic crisis, the Argentine government dismantled and refused to reinstate these guarantees. CMS subsequently initiated ICSID arbitration proceedings under the Argentina-US BIT.] (Citations selectively omitted) 42. The Valuation Method to be Used 411. The Tribunal has concluded that the discounted cash flow method is the one [valuation methodology] that should be retained in the present instance. 412. First of all, the shares of TGN are not publicly traded on a stock exchange or any other public market. The Respondent has argued that, in order to estimate the value of TGN, reference should have been made to TGS, another natural gas transporter, and three other natural gas distributors which were listed on the Argentine stock exchange. However, as noted by Mr. Bello, “(…) market capitalization in illiquid markets as Argentina is not the most adequate method to value companies (…)”. Moreover, as noted

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also by Mr. Bello, there were significant differences between TGN and those companies regarding asset levels, business segments, financing policy, and other issues. In the circumstances, the Tribunal has come to the conclusion that this approach would not be appropriate. 413. As to the asset value approach, it would be inappropriate in the present circumstances. CMS is a minority shareholder in TGN which is an ongoing company with a record showing profits. 414. As to the comparable transaction approach, the Tribunal has not been provided with any significant evidence of such transactions and it would be a most speculative enterprise to try and determine the compensation due to CMS on that basis. 415. As to the option valuation method, it does not appear to be of any help in this case. TGN is a gas transportation company and it is very difficult to imagine what uses or options there could be for gas transmission lines other than to transport gas. 416. This leaves the Tribunal with the DCF method and it has no hesitation in endorsing it as the one which is the most appropriate in this case. TGN was and is a going concern; DCF techniques have been universally adopted, including by numerous arbitral tribunals, as an appropriate method for valuing business assets; as a matter of fact, it was used by ENARGAS [the government regulator] in its 1996/7 tariff review. Finally, there is adequate data to make a rational DCF valuation of TGN. 417. The Tribunal also notes that in spite of the disagreement between the parties as to the appropriate application of the valuation method, experts from both sides have shared the view that DCF was the proper method in this case for determining losses that extend through a prolonged period of time. [d] Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon HizmetleriA.S. v. Republic of Kazakhstan (ICSID Case No. ARB/05/16), Award of 29 July 2008, (29) ¶¶ 793, 801, 804, 810811, 813-814 [Bernard Hanotiau (pres.), Steward Boyd, Marc Lalonde] [Rumeli Telekom and Telsim Mobil, two Turkish investors, entered into a joint venture agreement with a local Kazakh partner for the provision of mobile telecommunications services on the territory of Kazakhstan. Shortly thereafter, the joint venture won the tender for a GSM license auctioned by the Kazakh government. Rumeli Telekom and Telsim Mobil allege that, shortly after they undertook significant investments in the joint venture, the Kazakh government colluded with their local partner in a fraudulent scheme devised to allow their local partner and various Kazakh officials to exclude them from the joint venture and appropriate their investment. Rumeli Telekom and Telsim Mobil subsequently initiated ICSID arbitration proceedings under the Kazakhstan-Turkey BIT. ] (Citations selectively omitted) 793. In the present case, the loss which Claimants maintain that they have suffered is in fact the expropriation of their shares in Kar-Tel, whether or not this is characterised as an expropriation calling for compensation under the BIT, or merely as the consequence of some other internationally wrongful act, such as a breach of the obligation of fair and equitable treatment. In either case, the Tribunal considers that the correct approach is to award such compensation as will give back to Claimants the value to them of their shares at the time when the expropriation took place. This requires the Tribunal to take account only of the value which the shares would probably have had in the hands of Claimants if the shares had not been expropriated, and therefore to leave out of account any increase (or decrease) in the value of the shares which Claimants would probably not have enjoyed (or suffered) if the shares had remained in their hands. B. The calculation of the compensation and its amount *** 801. The Tribunal has considered in this connection the World Bank Guidelines on the Treatment of Foreign Direct Investment, 1992 … *** 804. The Tribunal adopts these provisions of Guideline IV as a valuable starting point for assessing compensation in the present case, while reminding itself (a) that they do not imply the exclusive validity of a single standard, (b) that the guidelines are described as “an illustration” and (c) that the overriding object is to ascertain the “fair market value” as defined in section 5 … *** 810. In the opinion of the Tribunal a DCF valuation would likely have formed one of the measures which would have informed a discussion between a willing seller and a willing buyer in October 2003, and it would have been equally appropriate to use the DCF method as a basis for discussion, whether the transaction was to involve a sale of the shares or a sale of the licence and other assets on their own. But the discussion would certainly not have ended there. It is well known that DCF values are to a greater or lesser extent sensitive to the validity of the data on which they are based, such as the inflation rate, the discount rate, the assumptions underlying the predicted cash flows. Claimants'

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expert's report contains a number of sensitivity analyses which demonstrate that quite small changes in input can materially affect the outcome. For example, the expert's original value of USD 567 million could, depending on various alternative assumptions which might reasonably have been made, have been as much as USD 753 million or as little as USD 451 million. The Tribunal is aware that the sensitivity analyses are used as a cross check on the figure adopted by the expert, and not to invalidate the figure. Nevertheless, they demonstrate that the method must be understood as an approximation which is dependent on the validity of the assumptions, and not as a mechanical calculation which will yield a value whose validity is not open to question. 811. This is particularly relevant in a case such as this, where even in October 2003 the enterprise had not been in existence for long enough to have generated the data required for the calculation of future income. This would mean that the enterprise would not be treated as a going concern under the World Bank Guidelines, and would therefore be more suitable for the ‘liquidation value’ rather than the DCF method of valuation. KarTel would in October 2003 still have been in a relatively immature stage of development, with no established and stable track record of past income from which to predict future income. This would have given rise to considerable doubt about the reliability of the DCF method. Despite this, the application of the ‘liquidation value’ still makes it necessary to ascribe a value to Kar-Tel's only asset of real value, namely its licence to operate the mobile telecommunication network. On any view that clearly had a value in October 2003 far in excess of its book value. Since the value of that asset was directly linked to its potential to produce future income, there is no realistic alternative to using the DCF method to ascribe a value to it. It is however necessary to recognise the limitations of the DCF method, including the limited reliability of the method without adequate historical data … *** 813. In the absence of any more reliable method of valuation, the Tribunal takes as its starting point the base case DCF valuation by Claimants' expert as at October 30, 2003 of USD 227 million for Claimants' 60% stake in Kar-Tel, after repaying the Motorola Loan … 814. Taking into account all the circumstances described above, the Tribunal concludes that an award of USD 125 million will adequately compensate Claimants for the expropriation of their shares and will give them full reparation for the injury caused by the internationally wrongful acts which the Tribunal has found to have been committed by Respondent. The Tribunal therefore orders Respondent to pay this amount of USD 125 million to Claimants. [e] Comments and Questions 1. 2. 3. 4. 5. 6. 7.

For more information on the details of the discounted cash flow methodology, see Tom Copeland, Tim Koller & Jack Murrin, Valuation: Measuring and Managing the Value of Companies (John Wiley & Sons, Inc. 2000). What is a “going concern”? What are the elements of going concern value? When and under what circumstances is it appropriate to use the DCF method? When is its use not appropriate? What are the limitations of the DCF methodology? What are the advantages and disadvantages of the DCF method? What are the elements of the DCF method? How is the Discounted Cash Flow method calculated? The tribunals in the following cases, among others, have used the DCF methodology for compensating investors: CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Final Award of 14 March 2003 (Dr. Wolfgang Kühn, Chairman, Judge Stephen M. Schwebel and Ian Brownlie, C.B.E., Q.C.); Sempra v. Argentina, ICSID Case No. ARB/02/16, Award of 28 September 2007 (Professor Francisco Orrego Vicuña, President, The Honorable Marc Lalonde P.C., O.C., Q.C. and Dr. Sandra Morelli Rico); Enron v. Argentina, ICSID Case No. ARB/01/3, Award of 22 May 2007 (Professor Francisco Orrego-Vicuña, President, Professor Albert Jan van den Berg and PierreYves Tschanz); and ADC v. Hungary, ICSID Case No. ARB/03/16, Award of the Tribunal of 2 October 2006 (Neil Kaplan CBE QC, President, The Honorable Charles Brower and Professor Albert Jan van den Berg). Has the DCF methodology gained acceptance among international investment tribunals in the past 40 years? Justify your answer.

[2] Comparable Sales or Transactions [a] Ioannis Kardassopoulos and Ron Fuchs v. Republic of Georgia (ICSID Case Nos. ARB/05/18 and ARB/07/15), Award of 3 March 2010, (30) ¶¶ 594-595, 598-600, 603 [L. Yves Fortier (pres.), Francisco Orrego Vicuña, Vaughan Lowe] [Messrs. Kardassopoulos (a Greek national) and Fuchs (an Israeli national) invested in a joint-venture with the Georgian national oil company to build and operate pipelines and refineries in Georgia and to export oil for 25 years. The parties and the State subsequently entered into a 30-year concession agreement for certain existing Georgian pipelines. A few years later, the Georgian government terminated and cancelled the joint-venture's right and transferred them to a separate consortium of international oil

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companies. After a decade-long negotiation process where the Georgian Government accepted then rejected the principle of a compensation payable to Messrs. Kardassopoulos and Fuchs, both investors initiated arbitration proceedings under the Georgia-Greece BIT and Energy Charter Treaty (for Mr. Kardassopoulos) and the Israel Georgia BIT (for Mr. Fuchs) arising out of that same factual background. The parties to those two arbitrations sought and obtained the consolidation of the proceedings.] (Citations selectively omitted) 594. The Tribunal recalls that the customary international law standard of compensation requires that reparation must, as far as possible, wipe out all the consequences of the illegal act and re-establish the situation which would, in all probability have existed if that act had not been committed. As stated above, this standard is intended to eliminate the consequences of the wrongful act for which the State is responsible. It does not, however, prescribe the method for arriving at an appropriate value. The Tribunal's duty is to make the best estimate that it can of the amount of the loss, on the basis of the available evidence. That must be done even if there is no absolute documentary proof of the precise amount lost. (1) The Appropriate Valuation Method 595. The Tribunal finds the Claimants' approach to valuing the Claimants' 50% interest in GTI's rights, based on the income and market approaches, to be compelling in this case … *** 598. It is not common in investment treaty arbitrations that a Tribunal has available to it three arm's-length, contemporaneous transactions (or potential transactions) to assist in valuing an investment, much less three that converge in a narrow range of value, i.e. US$ 28.1 million to US$ 30.6 million. The Tribunal is not persuaded by the Respondent's argument that the Brown & Root offer may not be considered an arm's-length offer because Brown & Root had a “special interest” in securing certain construction contracts in the region. As the Tribunal indicated during the Hearing, it sees no reason why, among the category of hypothetical willing buyers in an FMV analysis, there may not be a range of different ways in which such buyers would seek to exploit GTI's rights … The Tribunal agrees with the Claimants that it matters not to a hypothetical willing seller how the buyer proposes to extract profit from an asset, but only what the hypothetical buyer is willing to pay for the investment. The Tribunal also agrees that, in any event, Brown & Root's offer appears to have been based on the strategic value that it attached to GTI's rights, … 599. The Tribunal is similarly not persuaded on the evidence before it by any of the grounds raised by the Respondent for rejecting the GIOC-AIOC leasing scenario as a valid comparable. Rather, the Tribunal agrees with the Claimants and their expert … that it is difficult to conceive of clearer evidence of the likely value of an expropriated asset (and related rights) than a sale transaction involving the same asset (and rights) 16 days after the expropriation … 600. Additionally, whilst the Tribunal agrees that an offer or transaction which is close to completion has greater credence than an offer or transaction that has yet to mature, the Tribunal finds that the Claimants have properly taken into account the relative maturity of each transaction or offer by weighting the comparables … *** 603. Accordingly, the Tribunal finds it appropriate in the circumstances of this case to rely on the three comparables, weighted as proposed by the Claimants, to arrive at the FMV of the Claimants' 50% interest in GTI as at 10 November 1995, which is the value that should have formed the starting point for the work of the compensation commission … [3] Comments and Questions 1. 2. 3. 4. 5. 6. 7. 8.

What methodologies exist for valuing assets and businesses for purposes of determining compensation in investment cases? Under what circumstances should each be applied? Under what circumstances should the actual amount invested be used as the method to value compensation for an expropriation? Under what circumstances should the Net Book Value, Liquidation or Replacement Value methods be used? What elements are included in Net Book Value? How is the Replacement Value calculated? When should each of these methods of compensation not be applied? Of what relevance is the World Bank Guidelines on the Treatment of Foreign Direct Investment to the issue of compensation in investment arbitrations? Both the Impregilo v. Argentina, ICSID Case No. ARB/07/17, Award (21 June 2011) (Judge Hans Danelius, President; Judge Charles N. Brower and Professor Brigitte Stern), available athttp://italaw.com/sites/default/files/casedocuments/ita0418.pdf, at ¶¶ 380-381 and Vivendi v. Argentina, ICSID Case No.

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9.

10.

11.

ARB/97/3, Award (20 August 2007), (Professor Gabrielle Kaufmann-Kohler; Professor Carlos Bernal Verea and J. Willaim Rowley), available at http://italaw.com/sites/default/files/case-documents/ita0215.pdf,at ¶¶ 8.3.38.3.5, 8.3.13, tribunals used the amount of the actual investments made by the investors as the basis of compensation for violation of the BIT in situations in which they found the water utility investments were not profitable. In Rumeli Telekom A.S., et al. v. Kazakhstan, ICSID Case No. ARB/05/16, Award (29 July 2009), (Bernard Hanotiau, President; Steward Boyd and Marc Lalonde), available athttp://italaw.com/sites/default/files/case-documents/ita0728.pdf, at ¶ 811, the tribunal indicated that the liquidation value of the enterprise was a suitable method of valuation since the enterprise was not a going concern. The tribunal in Waguih Elie George Siag, et al. v. Egypt, ICSID Case No. ARB/05/15, Award (1 June 2009), (David A R Williams, President; Professor Michael Pryles and Professor Francisco Orrego Vicuña), available at http://italaw.com/sites/default/files/case-documents/ita0786_0.pdf, ¶¶ 566-576 rejected the DCF method of valuation offered by the claimant because the investment did not have a track record of proven profitability. Instead, the tribunal accepted claimant's alternative method of valuation based on comparable sales, but adjusted claimant's calculations by adopting a 20% margin of error. In CME Czech Republic B.V. v. The Czech Republic, UNCITRAL Arbitration Proceedings, Final Award (14 March 2003) (Dr. Wolfgang Kuhn, Chairman; Judge Stephen M. Schwebel and Ian Brownlie), available at http://italaw.com/sites/default/files/case-documents/ita0180.pdf, ¶¶ 514-534, the tribunal adopted the comparable sales approach as its primary valuation method, and confirmed the validity of the damage figure by looking at other evidence.

[C] Using Alternative Valuation Methods [1] Charles N. Brower and Jason D. Brueschke, The Iran-United States Claims Tribunal, 588589 (Kluwer Law International 1998) (31) (Citations selectively omitted) D. The Benefit to Claimants of Presenting Confirming Valuation Methods The Tribunal's awards valuing going concerns illustrate the benefit to arbitrating parties of supplying alternative valuation approaches, methods and techniques in support of their claimed valuation … [I]nPhillips Petroleum the Tribunal felt compelled to confirm the DCF analysis by application of an “underlying assets valuation technique” even though the parties had not discussed such a possibility … [I]n two earlier Tribunal awards, American International Group and Thomas Earl Payne, however, the Tribunal rejected the claimant's valuation technique but did not have sufficient information to make an alternative valuation. As a result, the Tribunal simply “approximated” the value of the company, resulting in awards much lower than the amounts claimed. *** These cases illustrate the benefit to parties of supporting their valuation by alternative techniques, even if those techniques might result in slightly different valuations. This is especially true where the claimant's primary valuation technique is premised upon the past profitability of the entity. These cases demonstrate further that the failure to present such evidence can have devastating effects on the compensation awarded by a tribunal, … [2] Compañia de Aguas del Aconquija S.A. and Vivendi Universal (formerly Compagnie Générale Des Eaux) v. Argentine Republic (ICSID Case No. ARB/97/3), Award of 20 August 2007, (32) ¶¶ 8.1.3-8.1.5, 8.3.3-8.3.5, 8.3.12-8.3.13 [J. William Rowley (pres.), Gabrielle Kaufmann-Kohler, Carlos Bernal Verea] [Case summary included in Chapter 9.] (Citations selectively omitted) 8.1 .3. In its comprehensive challenge to Claimants' damages, Respondent put squarely in issue the appropriateness and availability, on the facts of this case, of a damages claim that includes future lost profits calculated using the DCF methodology. Claimants' methodology and underlying assumptions were also contested. Respondent also noted that Claimants' damage claim was formulated entirely upon CAA's alleged losses and that no attempt had been made to identify or claim for any alleged losses of CGE/Vivendi as shareholder. 8.1 .4. Despite these challenges, Claimants elected not to offer the Tribunal in their further pre-hearing pleadings any alternative approaches to their claim for or calculation of damages. 8.1 .5. During the course of the oral hearing, the Tribunal noted the absence in Claimants' submission of an alternative to the lost profits claim and the apparent reliance on only CAA's alleged losses. It also invited Claimants to direct it to the portions of the existing

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record that were relevant to possible alternative approaches to calculating damages (eg liquidation value, book value, replacement value or amounts invested) that had been noted by Respondent … *** 8.3 .3. At international law, depending on the circumstances arising in a particular case, there are a number of ways of approximating fair market value. The Tribunal accepts, in principle, that fair market value may be determined with reference to future lost profits in an appropriate case. Indeed, theoretically, it may even be the preferred method of calculating damages in cases involving the appropriation of or fundamental impairment of going concerns. However, the net present value provided by a DCF analysis is not always appropriate and becomes less so as the assumptions and projections become increasingly speculative. And, as Respondent points out, many international tribunals have stated that an award based on future profits is not appropriate unless the relevant enterprise is profitable and has operated for a sufficient period to establish its performance record. The Tribunal notes that even in the authorities relied on by Claimants, compensation for lost profits is generally awarded only where future profitability can be established (the fact of profitability as opposed to the amount) with some level of certainty. 8.3 .4. In the Tribunal's view, the likelihood of lost profits must be sufficiently established by Claimants in order to be the basis of compensable damages. The Tribunal also recognises that in an appropriate case, a claimant might be able to establish the likelihood of lost profits with sufficient certainty even in the absence of a genuine going concern. For example, a claimant might be able to establish clearly that an investment, such as a concession, would have been profitable by presenting sufficient evidence of its expertise and proven record of profitability of concessions it (or indeed others) had operated in similar circumstances. 8.3 .5. In the present case, as noted below, Claimants faced significant challenges and we conclude that they have failed to establish with a sufficient degree of certainty that the Tucumán concession would have been profitable. *** 8.3 .12. As already noted, Claimants initially elected to rest their valuation case on lost profits. Until their closing argument and Post-Hearing Brief, Claimants did not advance or rely upon generally accepted alternative means of calculating fair market value, such as “book value” – the net value of an enterprise's assets, “investment value” – the amount actually invested prior to the injurious acts, “replacement value” – the amount necessary to replace the investment prior to the injurious acts, or “liquidation value” – the amount a willing buyer would pay a willing seller for the investment in a liquidation process. These alternative approaches were addressed at Days 10 and 11 of the hearing on the merits. In their Post-Hearing Brief, Claimants examined the alternative methods and pointed to the parts of the evidentiary record relevant to the determination of amounts invested. 8.3 .13. Of these alternatives, the “investment value” of the concession appears to offer the closest proxy, if only partial, for compensation sufficient to eliminate the consequences of the Province's actions. [3] Comments and Questions 1. 2. 3. 4. 5.

What advantages exist for a claimant by providing alternative methodologies for compensation? Why might a claimant wish to rely only on a single compensation method? Why did the claimant in the Vivendi case present only one compensation method to the tribunal? What risks are inherent in this approach? Why might a tribunal want to see alternative compensation methodologies? What are the practical effects of presenting or not presenting alternative compensation calculations?

§11.09 COMPENSATION OF SHAREHOLDERS’ INTERESTS [A] Sergey Ripinsky with Kevin Williams, Damages in International Investment Law, 161 (BIICL 2008) (Citations selectively omitted) 5.4 .8 In summary, the issue of flow-though of damage arises where the shares themselves, rather than the underlying business unit (or a part thereof), constitute the protected investment. In these instances, as current practice suggests, the principle of separate corporate existence is respected, and the damage suffered by the immediate owner of the business (usually a company incorporated in the host State) cannot automatically be assumed to have been suffered by the claimant-shareholder. Instead, an arbitrator's task is to assess what impact the measures had on the financial position of the claimant itself.

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The principal ways of compensating shareholders' losses are (a) (b)

by assessing the amount of dividends lost by the claimant; and by computing the loss in the value of shares.

The former has been preferred in cases of partial impairment to the underlying business, whereas the latter has prevailed in cases involving the total (or very substantial) and permanent damage to the business. Both methods take account of interests of third parties with claims against the subsidiary company by deducting, when calculating share value or the amounts of dividends, the company's liabilities. Cases involving the flowthrough of damage tend to require intricate economic analysis.

[B] Asian Agricultural Products Ltd. v. Republic of Sri Lanka (ICSID Case No. ARB/87/3), Final Award of 27 June 1990, (33) ¶¶ 87-88, 95-101, 103-104, 106-108 [Ahmed Sadek El-Kosheri (pres.), Berthold Goldman, R. Samuel K.B. Asante] [Asian Agricultural Products Ltd. (AAPL), a Hong Kong corporation, obtained 48% of the shares of Serendib Seafood Ltd., a Sri Lankan company that ran a shrimp farm. Serendib's farm was destroyed on January 28, 1987, during a military operation conducted by Sri Lanka's security forces against installations in the area used by local rebel forces. The arbitral tribunal held that Sri Lanka violated its obligation to provide full protection and security pursuant to the Bilateral Investment Treaty between Sri Lanka and the United Kingdom.] (Citations selectively omitted) IV – The Legal Consequences of the Respondent’s International Responsibility (A) Quantum of the compensation 87. Both Parties are in agreement that whenever the State's responsibility is established, due to the failure of its authorities to provide foreign investors with the full protection and security required under the relevant international law rules and standards, the interested party becomes entitled to claim the type of remedy deemed appropriate, which takes in the present case the form of monetary compensation … 88. Both Parties are equally in agreement about the principle, according to which, in case of property destruction, the amount of the compensation due has to be calculated in a manner that adequately reflects the full value of the investment lost as a result of said destruction and the damages incurred as a result thereof. *** Thus, the task of the Tribunal in the present case has to focus on the determination of the “value” of the Claimant's right which suffered losses due to the destruction that took place on January 28, 1987, and throughout the following days during which Serendib's farm remained under governmental temporary occupation (unjustifiably characterized by the Claimant as de facto “requisition”, since it has not been proven that the Government used the farm to promote its own military interests and to benefit thereof). *** 95. In deciding on the issues under consideration which are subject to disagreement among the Parties, the Tribunal has primarily to indicate that AAPL is entitled in the present arbitration case to claim compensation under the Sri Lanka/U.K. Bilateral Investment Treaty, … due to the fact that the Claimant's “investments” in Sri Lanka “suffered losses” owing to events falling under one or more of the circumstances enumerated by Article 4.(1) of the Treaty (“revolution, state of national emergence, revolt, insurrection”, etc …). The undisputed “investments” effected since 1985 by AAPL in Sri Lanka are in the form of acquiring shares in Serendib Company, which has been incorporated in Sri Lanka under the domestic Companies Law. Accordingly, the Treaty protection provides no direct coverage with regard to Serendib's physical assets as such (“farm structures and equipment”, “shrimp stock in ponds”, cost of “training the technical staff”, etc.), or to the intangible assets of Serendib if any (“good will”, “future profitability”, etc …). The scope of the international law protection granted to the foreign investor in the present case is limited to a single item: the value of his share-holding in the joint venture entity (Serendib Company). 96. In the absence of a stock market at which the price for Serendib's shares were quoted on January 27, 1987 (the day preceding the events which led to the destruction of the value of AAPL's investment in Serendib's capital), the evaluation of the shares owned by AAPL in Serendib has to be established by the alternative method of determining what was the reasonable price a willing purchaser would have offered to AAPL to acquire its share holding in Serendib. 97. Certainly, all the physical assets of Serendib, as well as its intangible assets, have to be taken into consideration in establishing the reasonable value of what the potential purchaser could have been willing to offer on January 27, 1987 for acquiring AAPL's shares

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in Serendib. But the reasonable price should have reflected also Serendib's global liability at that date; i.e. the aggregate amount of the current debts, loans, interests, etc … due to Serendib's creditors. 98. Consequently, the Tribunal is of the opinion that the determination of the percentage of AAPL's share-holding in Serendib's capital is a false problem, since the relevant factor is to establish a comprehensive balance sheet which reflects the result of assessing the global assets of Serendib in comparison with all the outstanding indebtedness thereof at the relevant time. For the purpose of evaluating the market price of AAPL's shares on January 27, 1987, the result would be ultimately the same whether or not the “preference shares” of Sri Lanka's Export Development Board technically qualify under the domestic companies law as part of Serendib's capital. Assuming that the correct legal interpretation of the Sri Lankan Law would lead to include among Serendib's capital assets the value of the “preference shares” issued in favour of the Export Development Board as a security for the cash money funds already supplied to the Company, Serendib ‘s capital assets would have on one hand, to be considered increased. But on the other hand, the global amount of the Development Board's disbursements together with the accruing interests due on January 27, 1987, should be taken into consideration in reflecting Serendib ‘s global indebtedness. In other words, in case the “preference shares” of Export Development Board decrease AAPL ‘s percentage of share-holding in Serendib's equity capital, this would not ultimately affect the value of AAPL's share-holding. In the language of figures, a 48% ordinary share-holding in an equity capital amounting to 21,464,241 Sri Lankan Rupees (S-L. Rs) equals 37% shareholding in an entity having a total capital of S-L. Rs. 28,184,241 (i e. by adding the value of the preferences shares). At the other side of the equation, assuming 48% of loan liabilities totalling S-L. Rs. 70,024,000, is the same as acquiring 37% of the global indebtedness amounting to S-L. Rs 76,744,000. 99. Taking into consideration the above-stated preliminary remarks of general character, the Tribunal is faced with no legal objections in allocating to the Claimant compensation for the damages which were effectively incurred due to the destruction of a substantial part of Serendib's physical assets, thus rendering the legal entity in which AAPL invested out of business since January 28, 1987. In essence, Serendib ceased as of that date to be a “going concern” capable of realizing profits, thus causing AAPL's investment therein to become a total loss. 100. … the Tribunal considers that the fair evaluation exclusively based on Serendib's tangible assets leads to value AAPL's investment in that company at a total amount of 460,000 U.S. Dollars. 101. Nevertheless, the major part of the Claimant's pleas were directed towards obtaining 5,703,667 U.S. dollars as compensation for a variety of other claimed damages, which include intangible assets, mainly “goodwill”, and loss of future profits. *** 103. In this respect, it would be appropriate to ascertain that “goodwill” requires the prior presence on the market for at least two or three years, which is the minimum period needed in order to establish continuing business connections, and during that period substantial expenses are incurred in supporting the management efforts devoted to create and develop the marketing network of the company's products, particularly in cases like the present one where the Company relies exclusively on one product (shrimps) exportable to a single market (Japan). The possible existence of a valuable “goodwill” becomes even more difficult to sustain with regard to a company, not only newly formed and with no records of profits, but also incurring losses and under-capitalized. A reasonable prospective purchaser would, under these circumstances, be at least doubtful about the ability of the Company's balance sheet to cease being in the red, in the sense that the future earnings become effectively sufficient to off-set the past losses as well as to service the loans which exceed in their magnitude the Company's capital assets. 104. Furthermore, according to a well established rule of international law, the assessment of prospective profits requires the proof that: “they were reasonably anticipated; and that the profits anticipated were probable and not merely, possible” … *** 106. In the light of the above-stated considerations, and taking into account all the evidence introduced by both Parties with regard to the existence or non-existence of “intangible assets” capable of being evaluated for the purpose of establishing the total appropriate value of Serendib on January 27, 1987, the Tribunal comes to the conclusion that neither the “goodwill” nor the “future profitability” of Serendib could be reasonably

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established with a sufficient degree of certainty. 107. Without putting into doubt the binding force of the rules requiring that the intangible assets including “goodwill” and “future profitability” of an enterprise have to be reflected in the evaluation of a “going concern”, the Tribunal's opinion is established on considering the assumptions upon which the Claimant's projection were based in the present case insufficient in evidencing that Serendib was effectively by January 27, 1987, a “going concern” that acquired a valuable “goodwill” and enjoying a proven “future profitability”, particularly in the light of the fact that Serendib had no previous record in conducting business for even one year of production. 108. Therefore, all the amounts of claimed compensation for “intangible assets”, as well as for “future earnings” are rejected.

[C] Comments and Questions 1.

2. 3.

4. 5.

6.

The 1992 U.S. Model BIT defines the term “investment” to include indirect investments and does not require that the foreign investor “control” the investment. The Iran-United States Claims Tribunal and certain ICSID cases have allowed recovery of compensation by foreign investors who hold a minority interest in a local company. What difficulties arise in compensating indirect or minority shareholders of an injured company that is incorporated in the host state? What amount should a foreign investor that holds a minority interest be allowed to recover for a partial expropriation of its local company's property or interests? What amount can it recover for a total expropriation of the local company? If the BIT requires a governmental party to comply with all obligations it has undertaken to foreign investors and a government breaches a contract with the locally-incorporated company, what compensation may be recovered by a foreign investor that holds a minority interest? Does it depend upon whether the breach effectively destroys the contract or merely results in discrete damages? Is compensation required at all in this scenario? If the controlling foreign investor brings an ICSID arbitration in the name of the locally-incorporated company, may it recover all damages suffered by the local company, including those corresponding to the share of local investors? Consider these questions in light of the discussion of damages in Asian Agricultural Products Ltd. v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/87/3, Final Award (27 June 1990), (Dr. Ahmed Sadek El-Kosheri, President; Professor Berthold Goldman and Dr. Samuel K.B. Asante), available at http://italaw.com/sites/default/files/case-documents/ita1034.pdf. Several tribunals have faced the issue of compensating indirect or minority shareholders. See Enron v. Argentina, ICSID Case No. ARB/01/3, Award (22 May 2007) (Professor Francisco Orrego-Vicuña, President, Professor Albert Jan van den Berg and Pierre-Yves Tschanz), available at http://italaw.com/sites/default/files/casedocuments/ita0293.pdf; Sempra v. Argentina, ICSID Case No. ARB/02/16, Award (28 September 2007) (Professor Francisco Orrego Vicuña, President, The Honorable Marc Lalonde P.C., O.C., Q.C. and Dr. Sandra Morelli Rico), available athttp://italaw.com/sites/default/files/case-documents/ita0770.pdf; and CMS Gas Transmission Co. vs. Argentina, ICSID Case No. ARB/01/8 Award (12 May 2005) (Professor Francisco Orrego Vicuña, President; The Honorable Marc Lalonde P.C., O.C., Q.C., and H.E. Judge Francisco Rezek), available at http://italaw.com/sites/default/files/case-documents/ita0184.pdf.

§11.10 MORAL OR PUNITIVE DAMAGES [A] Desert Line Projects LLC v. The Republic of Yemen (ICSID Case No. ARB/05/17), Award of 2 February 2008, (34) ¶¶ 289, 291 [Pierre Tercier (pres.), Jan Paulsson, Ahmed S. El-Kosheri] [Desert Line, an Omani company, engaged into a series of road construction projects in Yemen. A contractual dispute arose between Desert Line and Yemen in connection with the payments due to Desert Line. The dispute rapidly escalated, with Desert Line and its personnel complaining from harassment, intimidation, and the incarceration of some of its personnel. Yemen failed to pay a commercial arbitral award rendered in favor of Desert Line and coerced Desert Line into a settlement agreement in December 2004 under which Desert Line relinquished nearly half of the amounts awarded. Desert Line subsequently commenced ICSID arbitration proceedings under the Yemen-Oman BIT.] (Citations selectively omitted) 289. The Respondent has not questioned the possibility for the Claimant to obtain moral damages in the context of the ICSID procedure. Even if investment treaties primarily aim at protecting property and economic values, they do not exclude, as such, that a party may, in exceptional circumstances, ask for compensation for moral damages. It is generally accepted in most legal systems that moral damages may also be recovered besides pure economic damages. There are indeed no reasons to exclude them. The Arbitral Tribunal knows that it is difficult, if not impossible, to substantiate a

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prejudice of the kind ascertained in the present award. Still, as it was held in the Lusitania cases, non-material damages may be “very real, and the mere fact that they are difficult to measure or estimate by monetary standards makes them none the less real and affords no reason why the injured person should not be compensated,” U.S. v. GERMANY, NOVEMBER 1923, VII RIAA 32, AT P. 42, QUOTED WITH APPROVAL IN JAMES CRAWFORD, ILC ARTICLES ON STATE RESPONSIBILITY at p. 223et seq. It is also generally recognized that a legal person (as opposed to a natural one) may be awarded moral damages, including loss of reputation, in specific circumstances only. 290. The Arbitral Tribunal finds that the violation of the BIT by the Respondent, in particular the physical duress exerted on the executives of the Claimant, was malicious and is therefore constitutive of a fault-based liability. Therefore, the Respondent shall be liable to reparation for the injury suffered by the Claimant, whether it be bodily, moral or material in nature. The Arbitral Tribunal agrees with the Claimant that its prejudice was substantial since it affected the physical health of the Claimant's executives and the Claimant's credit and reputation. Nevertheless, the amount asked by the Claimant is exaggerated and cannot be allocated in its entirety. The Arbitral Tribunal considers that, based on the information at hand and the general principles, an amount of USD 1,000,000 should be granted for moral damages, including loss of reputation. This amount is indeed more than symbolic yet modest in proportion to the vastness of the project. 291. Therefore the Arbitral Tribunal grants the Claimant's Claim for moral damages, including loss of reputation, in the amount of USD 1,000,000 without interest. This amount shall be paid within 30 days from the notification of the award. 9. The Claimant's claim based on moral * * damages, * including loss of reputation, is granted in the amount of USD 1,000,000; this amount shall be paid within 30 days from the notification of the award;

[B] Waguih Elie George Siag and Clorinda Vecchi v. Egypt (ICSID Case No. ARB/05/15), Award of 1 June 2009, (35) ¶¶ 544-545 [David A.R. Williams (pres.), Michael Pryles, Francisco Orrego Vicuña] [Waguih Siag and Clorinda Vecchi, two Italian investors, had acquired a large parcel of oceanfront land on the Red Sea's Gulf of Aqaba from the Egyptian Ministry of Tourism for the purpose of developing a tourist resort. Claimants argued that Egypt unlawfully took over their investment, consisting of the property and the resort which was under development, and subsequently initiated ICSID arbitration proceedings on the basis of the Italy-Egypt BIT.] (Citations selectively omitted) 544. The Tribunal rejects the Claimants' request for punitive damages, whether that would be by way of a discrete sum (although noting that the Claimants expressly disavow an entitlement to such a discrete sum) or whether, as submitted by the Claimants in their post-hearing submissions, a punitive element should be introduced into the overall compensation by “erring in favour of the Claimants.” There is no provision in the BIT which could be said to give rise to a right for punitive damages or for a treatment of compensation which introduces a punitive element. 545. The question whether punitive damages are available is logically distinct from the question whether recovery for an unlawful expropriation should proceed on a different (more generous) basis from recovery for a lawful expropriation. The latter issue almost always concerns an argument over whether certain measures of compensation provided for in the applicable BIT should or should not act as a ceiling to recovery. Punitive damages, by their very nature, are not compensatory. It is worth observing that in the oftcited Chorzów Factory case, the principle derived from that case is that even in the case of an unlawful taking, the relief to be given to the claimant is still purely compensatory. The potential availability of punitive damages, or a punitive “enhancement” of compensatory damages, is a matter of some controversy in international law, as indeed the Claimants acknowledged. The Tribunal notes that the prevailing view of the IranUnited States Claims Tribunal appears to have been that punitive damages are not available and it appears that the recovery of punitive or moral damages is reserved for extreme cases of egregious behaviour.

§11.11 CURRENCY AND EXCHANGE RATE [A] US Model Bilateral Investment Treaty (2012), (36) Article 6 Article 6 – Expropriation and Compensation *** 2. The compensation referred to in paragraph 1(c) shall: *** (d) be fully realizable and freely transferable

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3. If the fair market value is denominated in a freely usable currency, the compensation referred to in paragraph 1(c) shall be no less than the fair market value on the date of the expropriation, plus interest at a commercially reasonable rate for that currency, accrued from the date of expropriation until the date of payment. 4. If the fair market value is denominated in a currency that is not freely usable, the compensation referred to in paragraph 1(c) – converted into the currency of payment at the market rate of exchange prevailing on the date of payment – shall be no less than: (a) (b)

the fair market value on the date of expropriation, converted into a freely usable currency at the market rate of exchange prevailing on that date, plus interest, at a commercially reasonable rate for that freely usable currency, accrued from the date of expropriation until the date of payment.

[B] Arbitration of Lighthouses (France v. Greece), Claims No. 11 and 4 (PCA), Award of 24 July 1956, 23 I.L.R. 81, 299 (1956) [Jan Hendrik Willem Verzijl (pres.), Achille Mestre, Georges Charbouris] (37) [Collas & Michel, a French national, obtained from the Ottoman government a concession in 1860 to operate a lighthouse service. The concession was extended three times. The concession allowed the government to takeover the lighthouse administration subject to the payment of compensation. The Greek government succeeded to the rights of the Ottoman government following World War I. In 1929, the Greek government seized the lighthouse administration without paying compensation. The arbitral tribunal held the company was entitled to be paid compensation as if the lighthouse service had been taken over under the terms of the concession contract.] (Citations selectively omitted) Moreover, there is a difficulty of quite another kind in the assessment of the compensation which should be awarded to the concessionaire: the intrinsic value of the currency in which the net profit for the years 1923-1928 is to be calculated is quite different from that in which the Tribunal ought to assess the amount of the compensation for redemption … [t]he Tribunal is of the opinion that it can only assess the damage suffered by the firm under this head in the currency adopted in the present award. The arguments put forward on behalf of Greece, to the effect that that compensation should be assessed either in drachmae or in francs current at the date of dispossession, would have the result of making the firm bear the effects of the devaluation which those two currencies have undergone since 1929, which would bring about the reduction of the claim to nothing (if in drachmas) or to one-tenth (if in francs). Such arguments cannot be accepted, because the injured party has the right to receive the equivalent at the date of the award of the loss suffered as the result of an illegal act and ought not to be prejudiced by the effects of a devaluation which took place between the date at which the wrongful act occurred and the determination of the amounts of compensation. To this end, the Tribunal must as far as possible use as intermedium a stable currency and as such it accepts that which has been put forward by the French agent, namely, the United States dollar. That currency, which remained relatively stable during the critical period, presents nevertheless in relation to gold a certain devaluation favorable to the debtor. The Tribunal does not believe that it can employ a stricter method than that which has been asked for. By this method, the net annual profits will be converted into American dollars at the average rate for each year, …

[C] Siemens A.G. v. The Argentine Republic (ICSID Case No. ARB/02/8), Award of 6 February 2007, (38) ¶ 361 [Andrés Rigo Sureda (pres.), Charles N. Brower, Domingo Bello Janeiro] [Siemens, a German conglomerate, won a tender for provision of services related to immigration control, personal identification and electoral information technology systems initiated by the Argentine government. A series of political and technological difficulties plagued the early years of the contract, ultimately leading to its suspension. The parties' attempts to renegotiate the contract failed when the Argentine government refused to move forward with the renegotiations. Siemens subsequently initiated ICSID arbitration proceedings under the Argentina-Germany BIT.] (Citations selectively omitted) 361. Argentina has argued that the Contract is denominated in pesos and that it had not guaranteed to Siemens the parity of the peso in effect at the time it entered into the Contract. This assertion is correct but it has to be considered in the context of the requirement that the consequences of the illegal act be wiped out. It would be hardly so if the parity of the currency would be added as yet another risk to be taken by the investor after it has been expropriated. In the instant case, the Claimant has pleaded that the Tribunal accept May 18, 2001 as the date of expropriation. The Tribunal has considered that the issuance of Decree 669/01 was determinant for purposes of its finding of expropriation and it is also the date that would be in consonance with Article 15 of the Draft Articles on the date of occurrence of a composite act. On May 18, 2001, the peso was at par with the dollar. If such obligation would have been met, the Claimant would have been compensated in pesos convertible at that rate. Therefore, the Tribunal

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concludes that compensation shall be paid in dollars.

§11.12 COMPOUND INTEREST [A] James R. Crawford, State Responsibility: Third Report by the Special Rapporteur in International Responsibility, UN Doc. A/CN.4/507, ¶¶ 207-208, 211 (Citations selectively omitted) The question of compound interest 207. An aspect of the question of interest is the possible award of compound interest. At least as a matter of progressive development, Mr. Arangio Ruiz favored the award of compound interest “whenever it is indispensable to ensure full compensation for the damage suffered by the injured State”. The commission did not, however, retain his proposal to that effect, and the commentary says only that questions of compound interest are “to be solved on a case-by-case basis”. 208. In fact the general view of courts and tribunals has been against the award of compound interest, and this is true even of those tribunals which hold claimants to be normally entitled to compensatory interest. For example the Iran-United States Claims Tribunal has consistently denied claims for compound interest, including in cases where the claimant suffered losses through compound interest charges on indebtedness associated with the claim. *** 211. To summarize, although compound interest is not generally awarded under international law or by international tribunals, special circumstances may arise which justify some element of compounding as an aspect of full reparation. Care is however needed since allowing compound interest could result in an inflated and disproportionate award, with the amount of interest greatly exceeding the principal amount owed.

[B] Frederick Alexander Mann, Compound Interest as an Item of Damage in International Law, in Further Studies in International Law, 377-378, 383-385 (Frederick Alexander Mann (ed.), Clarendon Press 1990) (39) (Citations selectively omitted) … it should be recognized that, as an item of damage, the problem of compound interest apparently has never been fully analysed. Most learned writers ignore it or fail to give any reason for their conclusions that compound interest is or is not payable. Jean-Luc Subilia is the only author who has dealt with the problem of compound interest a little more carefully. Subilia discusses all the relevant cases and concludes: As far as compound interest is concerned, it seems that one cannot go further than to state that such recovery generally is not granted by international tribunals. Beyond that, the few precedents favorable to compound interest, … do not support the existence of a case law rule which would preclude them as a matter of international law. *** It should be clear that ‘direct loss and/or expense’ is, independently of a contractual provision, also the prerequisite of a claim for damages flowing from a breach of contract or tort. It follows that even in the absence of a clause indemnifying a contracting party against ‘direct loss and/or expense’, compound interest reasonably incurred by the injured party should be recoverable as an item of damage. This, it is submitted, should not only be English law, but should be accepted wherever damages are allowed and should, therefore, be treated as a general principle of law. III The present uncertain state of international law … and the unsettled practice of municipal courts … render it necessary to base a decision applying international law on legal principle, that is, on reasoning derived from a rational appreciation of legal rules, and (in the words of the savant to whom these lines are dedicated in memory of more than sixty years of friendship) thus to inaugurate ‘a new conception of justice in accord with the highest knowledge and truest insight perceptible to the human mind’. In this spirit it is necessary first to take account of modern economic conditions. It is a fact of universal experience that those who have a surplus of funds normally invest them to earn compound interest. This applies, in particular, to bank deposits or savings accounts. On the other hand, many are compelled to borrow from banks and therefore must pay compound interest. This applies, in particular, to business people whose own funds are frequently invested in brick and mortar, machinery and equipment, and whose working capital is obtained by way of loans or overdrafts from banks … If, in accordance with the usual formula, damages are intended to afford restitutio in

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integrum (complete compensation for the wrong suffered) such items of damage should not be excluded … Finally, it is completely wrong to attach any significance to the fact that the award of interest or compound interest may lead to the payment of a sum exceeding the capital due from the wrongdoer. This may happen in many cases as a result of the wrongdoer's delaying tactics or the court's work load. But during that period the wrongdoer has enjoyed the fruits of the money withheld. *** … In conclusion, it is submitted that, on the basis of compelling evidence, compound interest may be and, in the absence of special circumstances, should be awarded to the claimant as damages by international tribunals.

[C] Compañia del Desarrollo de Santa Elena S.A. v. Costa Rica (ICSID Case No. ARB/96/1), Final Award of 17 February 2000, 39 I.L.M 1317, 1332-1334 (2000), 96-107 [L. Yves Fortier (pres.), Elihu Lauterpacht, Prosper Weil] (Citations selectively omitted) L. Interest 96. As indicated above, Claimant claims that it is entitled to an award of compound interest on the value of the Property in 1978, calculated from the date of the expropriation. Respondent argues that no interest is due or, if interest is due, then Claimant is entitled to simple Interest only at a nominal rate. 97. Even though there is a tendency in international jurisprudence to award only simple interest, this is manifested principally in relation to cases of injury or simple breach of contract. The same considerations do not apply to cases relating to the valuation of property or property rights. In cases such as the present, compound interest is not excluded where it is warranted by the circumstances of the case. 98. First, there are international arbitral decisions where compound interest has been expressly allowed. 99. Secondly, there are decisions where the possibility of compound interest appears to have been acknowledged, but the circumstances were not thought to be appropriate for its award. P 1076

100. Thirdly, there is the decision of Chamber I of the Iran-US Claims Tribunal in the Sylvania Technical Services case in which, although it was stated that “the Tribunal has never awarded compound interest”, the Tribunal specifically declared its intention to “derive a rate of interest based approximately on the amount that the successful claimant would have been in a position to have earned if he had been paid in time and thus had the funds available to invest in a form of commercial investment in common use in its own country. Six-month certificates of deposit in the United States are such a form of investment for which average interest rates are available from an authoritative official source”. The late Dr. F.A. Mann has made the following telling comment on this passage: “It is not certain whether the Tribunal realized that investment in six-month certificates of deposit involves earning compound interest”. 101. Fourthly, there are the views of writers of high authority. Dr. Mann concluded the article just cited as follows: “… it is submitted that, on the basis of compelling evidence, compound interest may be and, in the absence of special circumstances, should be awarded to the claimant as damages by international tribunals”. The Tribunal does not consider that the expression by Dr. Mann of his conclusion in terms of “damages” renders it inapplicable in the present case. While it is true that the taking by Costa Rica of the Claimant's Property was not initially unlawful, so that no question of damages then arose, the fact remains that there is no substantive distinction to be drawn, so far as the Claimant is concerned, between an entitlement to damages and his entitlement to compensation. CDSE is entitled to the full present value of the compensation that it should have received at the time of the taking. Conversely, the taking state is not entitled unjustly to enrich itself by reason of the fact that the payment of compensation has been long delayed. 102. Finally, reference may be made to the scholarly treatment of the subject by Professor Gaetano Arangio-Ruiz, Special Rapporteur of the UN International Law Commission on State Responsibility. After close consideration of the authorities he concluded as follows: “The Special Rapporteur is therefore inclined to conclude that compound interest should be awarded whenever it is proved that it is indispensable in order to ensure full compensation for the damage suffered by the injured State”. 103. In other words, while simple interest tends to be awarded more frequently than compound, compoundiInterest certainly is not unknown or excluded in international law. No uniform rule of law has emerged from the practice in international arbitration as regards the determination of whether compound or simple interest is appropriate in any given case. Rather, the determination of interest is a product of the exercise of judgment,

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taking into account all of the circumstances of the case at hand and especially consideration of fairness which must form part of the law to be applied by this Tribunal. 104. In particular, where an owner of property has at some earlier time lost the value of his asset but has not received the monetary equivalent that then became due to him, the amount of compensation should reflect, at least in part, the additional sum that his money would have earned, had it, and the income generated by it, been reinvested each year at generally prevailing rates of interest. It is not the purpose of compound interest to attribute blame to, or to punish, anybody for the delay in the payment made to the expropriated owner; it is a mechanism to ensure that the compensation awarded the Claimant is appropriate in the circumstances. P 1077

105. In the instant case, an award of simple interest would not be justified, given that since May 1978, i.e., for almost twenty-two years, CDSE has been unable either to use the Property for the tourism development it had in mind when it bought Santa Elena or to sell the Property. On the other hand, full compound interest would not do justice to the facts of the case, since CDSE, while bearing the burden of maintaining the property, has remained in possession of it and has been able to use and exploit it to a limited extent. 106. Consequently, Claimant is entitled to an award of compound interest adjusted to take account of all the relevant factors. 107. On the basis of the circumstances of the case, the Tribunal determines that the compensation payable to Claimant, comprising principal and interest to the date of the Award, shall be U.S. $16,000,000.

[D] Compañia de Aguas del Aconquija S.A. and Vivendi Universal (formerly Compagnie Générale Des Eaux) v. Argentine Republic (ICSID Case No. ARB/97/3), Award of 20 August 2007, (40) ¶¶ 9.2.1, 9.2.3-9.2.6, 9.2.8 [J. William Rowley (pres.), Gabrielle Kaufmann-Kohler, Carlos Bernal Verea] [Case summary included in Chapter 9] (Citations selectively omitted) 9.2 .1. Absent treaty terms or provisions in the governing law to the contrary, it is generally accepted that international tribunals may award interest to an injured claimant; indeed the liability to pay interest is now an accepted legal principle. *** 9.2 .3. The object of an award of interest is to compensate the damage resulting from the fact that, during the period of non-payment by the debtor, the creditor is deprived of the use and disposition of that sum he was supposed to receive. 9.2 .4. To the extent there has been a tendency of international tribunals to award only simple interest, this is changing, and the award of compound interest is no longer the exception to the rule. 9.2 .5. This development is not surprising once it is recognised that compound interest is not punitive in nature … 9.2 .6. Reflecting this rationale, a number of international tribunals have recently expressed the view that compound interest should be available as a matter of course if economic reality requires such an award to place the claimant in the position it would have been in had it never been injured (ie had the wrongful act not taken place). *** P 1078

9.2 .8. Having regard to Claimants' business of investing in and operating water concessions, to the anticipated 11.7 % rate of return on investment reflected in the Concession Agreement (which the parties had agreed to be appropriate having regard to the nature of the business, the term and the risk involved) and the generally prevailing rates of interest since September 1997, the Tribunal concludes that a 6% interest rate represents a reasonable proxy for the return Claimants could otherwise have earned on the amounts invested and lost in the Tucumán concession. The Tribunal is also satisfied on the factual record that it is appropriate in this case to provide for compounding of such interest in order adequately to compensate Claimants for the loss of use of their investment over most of the last decade.

[E] Comments and Questions 1. 2.

Is it appropriate to award compound interest against a government? Why or why not? What arguments can be articulated for and against this practice? Compound interest has been awarded by NAFTA tribunals in Metalclad v. Mexico, 40 I.L.M. 36, ¶ 128 (Aug. 30, 2000), and Pope & Talbot v. Canada, Damages Award at ¶¶ 89-90 (May 31, 2002) (interest compounded quarterly), and by the Iran-U.S. Claims Tribunal in Sola Tiles, Inc. v. Iran, Award No. 298-317-1 (April 22, 1987), 83 Int'l L.R.

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3.

460, 481 (1990) (interest compounded semi-annually). An ICSID tribunal awarded compound interest in Wena Hotels v. Egypt, 41 I.L.M. 896, 919 (2002). The Wena Panel said: “This Tribunal believes that an award of compound (as opposed to simple) interest is generally appropriate in most, modern commercial arbitrations. As Professor Gotanda has observed “almost all financing and investment vehicles involve compound interest … If the claimant could have received compound interest merely by placing its money in a readily available and commonly used investment vehicle, it is neither logical nor equitable to award the claimant only simple interest.”

4.

5.

6.

The Wena Panel awarded 9% interest compounded quarterly. See also Maffezini v. Spain, pp. 30-31. ¶ 96-97 (interest awarded at the LIBOR rate compounded annually up to the date of the award, but if the award is not paid within 60 days, then postaward interest at 6% compounded monthly). In Middle East Cement Shipping & Handling Co. v. Egypt, an ICSID tribunal awarded compound interest for an expropriation despite the fact that it conflicted with Egyptian law. The tribunal held that the Egyptian law did not apply “to claims based on the BIT, i.e., public international law.” The tribunal also said “that compound (as opposed to simple) interest is at present deemed appropriate as the standard of international law in such expropriation cases.” The tribunal awarded 6% interest compounded annually. In Siag and Vecchi v. Egypt, the tribunal noted that “it is certain that in recent times compound interest has indeed been awarded more often than not, and is becoming widely accepted as an appropriate and necessary component of compensation for expropriation.” The tribunal in Bernardus Henricus Funnekotter and ors v. Zimbabwe noted that “‘[i]t is not the purpose of compound interest to attribute blame to, or to punish, anybody for the delay in the payment made to the expropriated owner; it is a mechanism to ensure that compensation awarded to the Claimant is appropriate in the circumstances.’ This explains why, in many ICSID cases, such compound interests have been granted.”

P 1079

7.

8.

In El Paso Energy International v. Argentina, the tribunal held as follows: “Compound interest is generally recognized by arbitral tribunals in the field of investment protection, including all awards in the Argentine cases. The Tribunal shares the view expressed by these awards that compound interest reflects economic reality and will therefore better ensure full reparation of the Claimant's damage. Interest shall be compounded semi-annually, for the same reason.” In the early investment arbitrations, compound interest seems to have been awarded by tribunals in four situations: (1) the tribunal views the government's conduct as egregious, (2) the tribunal has been conservative in determining actual damages, (3) the claimant has obtained loans for the project in the host country that require it to pay compound interest, or (4) the government-investor contract calls for compound interest. Recent cases indicate a clear trend toward awarding compound interest more generally.

§11.13 COSTS [A] Susan D. Franck, Rationalizing Costs in Investment Treaty Arbitration, 88 Wash. U.L. Rev. 769 (2011) (Citations selectively omitted) A. Normative Baselines of Cost Shifting Norms in international dispute resolution come from various places, such as international conventions, national laws, institutional rules, and international practices. International arbitration costs trace their roots to norms from Roman, U.S., and Swedish law. The first normative approach traces its roots to Roman law. The “loser-pays” rule – also known as “costs follow the event”–requires losers to compensate winners for their costs. Various civil law jurisdictions use this principle in court litigation and arbitration. In England, although costs were initially not available at common law, this changed and courts of equity permitted judges and arbitrators to shift costs. Jurisdictions following this approach strive to (1) indemnify successful parties; (2) discourage frivolous actions, defenses, or motions; and (3) put parties who have been wronged in the position that they would have been in if the wrong had not been committed. A second norm reflects a “pay-your-own-way” approach. Under the so-called “American rule,” parties bear their own costs for adjudication irrespective of the outcome. Although there may be supplementary, non-preempted state law, U.S. law generally presumes there is no cost shifting unless expressly permitted by contract, statute, or arbitration

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rules. Even the “pay-your-own-way” approach has exceptions and gives courts discretion, in extreme circumstances, to shift costs where there is bad faith during the adjudication. The policy choice helps provide access to justice given three key concerns. First, where litigation is uncertain, it is unfair to penalize the loser if there was a good-faith basis for bringing or defending a lawsuit. Second, there is a desire to not unjustly discourage the poor from vindicating their rights and defending their conduct. Third, seeking administrative convenience, detailed proceedings related to cost would create an unnecessary burden on adjudicative administration. P 1080

Lars Welamson, a Swedish academic who later became a judge on the Swedish Supreme Court, championed the third normative approach, where parties pay for costs on the basis of relative success and conduct. This approach allocates costs on a sliding scale proportionate to the assessment by the court of claims made by the parties; the introduction of such a rule would provide both parties with an incentive to make the claims/offers as realistic as possible and thus would be the best conceivable method by which to promote settlement on reasonable terms. In an effort to allocate costs on the basis of certain factors (i.e., “factor-dependent”), the more in parity the amounts claimed and awarded are, the more likely that the claimant will receive full compensation for its costs. This gives parties incentives to make precise damage arguments, while opening the doors to meritorious claims, preventing inflation of damages, and providing compensation where dispute resolution strategies were efficacious. These different approaches are grounded in rules, tradition, and policy. Despite suggestions that the Roman (i.e., “loser-pays”) approach is universal or “axiomatic,” this claim is disputed; or it is at least worthy of empirical verification. The reality is that there are multiple acceptable methodologies for addressing costs. As existing scholarship has not empirically confirmed whether a particular practice is uniform, the possibility of variance must be acknowledged … B. Shared Policy Considerations for Cost Shifting Despite these different doctrinal approaches, it is critical to remember that there is nevertheless a commonality both in approach and policy. The “loser-pays,” “pay-as-yougo,” and “factor-dependent” paradigms tend to follow a standard approach by establishing presumptive rules with exceptions and room for discretion to foster policy objectives. What they also have in common is the objective of creating incentives for appropriate party behavior while incorporating systematic concerns of justice. Although the balance weighs differently in different doctrinal approaches, the goal is to promote party welfare in light of the overall public benefit …

[B] Libananco Holdings Co. Limited v. Republic of Turkey (ICSID Case No. ARB/06/08), Award of 2 September 2011, (41) ¶¶ 560, 562-568 [Michael Hwang (pres.), Henri C. Alvarez, Franklin Berman] [The Uzans, a family of prominent Turkish businessmen, acquired two electricity utility companies in Turkey in 1993, and subsequently entered into two concession agreements allowing them to operate these utilities until 2058. However, in June 2003, the Turkish Ministry of Energy cancelled the concession agreements, alleging various breaches on the part of the utility companies. After a series of unsuccessful domestic challenges, Libanaco, a Cypriot company controlled by the Uzan family, filed a request for arbitration against Turkey challenging the cancellation of the concession agreements as breaches of the Energy Charter Treaty. Libanaco alleged that it had acquired the Uzan family's shares in the two utilities by May 2003 and constituted therefore a protected investor under the ECT.] P 1081 560. Under Article 61(2) of the ICSID Convention:

“the Tribunal shall, except as the parties otherwise agree, assess the expenses incurred by the parties in connection with the proceedings, and shall decide how and by whom those expenses, the fees and expenses of the members of the Tribunal and charges for the use of the facilities of the Centre shall be paid”. The Tribunal considers that Article 61(2) of the ICSID Convention gives it the power to award costs (defined to include legal fees, out of pocket expenses as well as costs of the arbitration) and the discretion to decide at what level to do so. This view has also been expressed by other ICSID tribunals. *** 562. The Tribunal begins by noting that the amounts claimed by each Party as its own costs and expenses are very substantial indeed. This applies to both the claims for legal fees and to those for other expenses. The Tribunal acknowledges of course that a multiplicity of issues of both fact and law has been raised before it, that a significant

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amount of technical forensic evidence has been deployed by each Party, and that experts in various disciplines have been commissioned on both sides to present written reports to the Tribunal and to testify orally in these proceedings. The Tribunal is nevertheless constrained to observe that what it is presently adjudging in this Award, close to five years after these arbitral proceedings commenced, remains, all the same, no more than a selection of four among the set of Preliminary Objections raised by the Respondent. An explanation of why each Party has incurred its costs and expenses is not the same thing as a justification of their necessity. Many national jurisdictions that follow a practice of awarding costs to the successful party also make a distinction between the costs actually incurred by a litigating party and those which are assessed by the court as having been reasonably and necessarily incurred for the purposes of the litigation, and base their award of costs on the latter not the former. Without being in any way bound by national practice of this kind, the Tribunal regards the underlying approach as suitable for international arbitration, and intends to follow it in the present case. In this regard, the Tribunal has considered, among other things, the following factors …: (a)

(b) (c) (d)

the importance of the matter to the Parties and the value of money or property involved, namely the sum of some US$ 10.1 billion claimed by the Claimant (which the Tribunal understands to be the largest claim in ICSID arbitration at the time the Request for Arbitration was filed); the amount and extent of factual and expert evidence adduced in these proceedings in relation to the issue of whether Libananco acquired ownership of the share certificates in question by 12 June 2003; the conduct of the Parties during the proceedings; and the circumstances in which the work or parts of it were done (which the Tribunal understands to have taken place across multiple jurisdictions and involving extensive arrangements for travel, translation and investigation made by both Parties).

563. Although many ICSID tribunals have ruled that each party should bear its own costs, others have applied the principle that “costs follow the event”, or else have proceeded to an allocation pro rata, i.e. an allocation proportionate to the tribunal's assessment of the relative merits of all claims made by the parties. The present Tribunal is of the view that a rule under which costs follow the event serves the purposes of compensating the P 1082 successful party for its necessary legal fees and expenses, of discouraging unmeritorious actions and also of providing a disincentive to over-litigation. It also allows a tribunal sufficient leeway to take due account of specific issues on which the overall losing party has nevertheless succeeded, and to take account as well of the costs implications of procedural motions raised by one or another party. The Tribunal accordingly considers that it is appropriate to apply here the principle that “costs follow the event” and that a costs order should be made in favour of the Respondent, on the basis that the Claimant has not been able to prove its ownership of the investment that forms the essential foundation for these lengthy and hard fought proceedings. 564. However, the Tribunal has also to take into account those issues where it is not appropriate for costs to be awarded in favour of the ultimate prevailing Party, because it was not the winner on that particular issue or “event” or indeed because there was no decision as to who won or lost … *** 565. Further, the Tribunal is inclined to exercise some restraint in assessing the reasonable amount of costs and expenses that should be awarded to the Respondent … While the Respondent's wish to assemble a powerful battery of legal and other resources is well understood, given the magnitude of the claim against it, other underlying aspects of the tensions between the Parties (reflected in the way the case was argued on both sides), lend themselves less well to being reflected in a costs order by an ICSID tribunal. Specifically, although the Tribunal is conscious that the claim was for a sum in excess of US$ 10 billion, the Tribunal is mindful that: (a) (b) (c)

the claim for costs and expenses is significantly larger than any claim for costs previously made in an ICSID arbitration, as well as significantly larger than any previous award for costs and expenses made by any previous ICSID tribunal; the Award in this case is on a jurisdictional issue (albeit hotly contested as to facts and law) and a selection of other preliminary issues; and there needs to be some proportionality in the award (as opposed to the expenditure) of legal costs and expenses. A party with a deep pocket may have its own justification for heavy spending, but it cannot expect to be reimbursed for all its expenditure as a matter of course simply because it is ultimately the prevailing party.

566. The Tribunal is also not in the position of a national court which can undertake a detailed assessment on an item by item basis of a party's claim for legal costs and expenses. Following contemporary international arbitration practice, the Tribunal takes a “broad-brush” approach to the task of determining a reasonable figure to award for such legal costs and expenses. 567. For these reasons, the Tribunal considers that it is appropriate to order the Claimant

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to pay the Respondent the sum of US$ 15,000,000 in respect of legal fees and out of pocket expenses, representing what in the Tribunal's view amounts to an appropriate figure to award, having regard to the principles and reasons set out above, and to all the circumstances of this case. 568. The above excludes the question of the costs of the arbitration (i.e. the fees and expenses of the Members of the Tribunal and of the ICSID Secretariat), which amount to approximately US$ 1,205,000. As a result, each Party's share of the costs of arbitration P 1083 amounts to approximately US$ 602,500. The decision of the Tribunal is that such costs should follow the ultimate event, and must be paid in full by the Claimant.

[C] Comments and Questions 1. 2. 3. P 1083 4.

What are the possible approaches to awarding costs in investment arbitrations? What is the prevailing approach by tribunals for awarding costs in investment cases? What reasons might tribunals give to refuse to award costs in investment cases? What is the rationale in favor of awarding costs?

References 1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) 13) 14) 15) 16) 17) 18) 19) 20)

21) 22)

Reprinted with permission of Oxford University Press. All rights reserved. Available at http://italaw.com/documents/BridasICC9058FirstPartial.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/italaw1094.pdf (accessed 1 September 2013). Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September 2013). Copyright 2009 by Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair. Reprinted with permission of Cambridge University Press. All rights reserved. Available at http://www.italaw.com/sites/default/files/case-documents/ita0290.pdf (accessed 1 September 2013). Schreuer, [the ICSID Convention: A Commentary], at 1126, paragraph 73. Available at http://italaw.com/sites/default/files/case-documents/ita0621.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0698.pdf (accessed 1 September 2013). Available at http://www.unidroit.org/english/principles/contracts/principles2010/integralversio nprinciples2010-e.pdf (accessed 1 September 2013). Available at http://italaw.com/documents/BridasICC9058FirstPartial.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0081.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0065.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/casedocuments/italaw1094.pdf (accessed 1 September 2013). Published by Oxford University Press for the Royal Institute of International Affairs, London. Available at http://www.italaw.com/sites/default/files/case-documents/ita0576.pdf (accessed 1 September 2013). Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September 2013). © 1984 E. Lauterpacht. Reprinted with the permission of Cambridge University Press. Available at http://www.iusct.net/Default.aspx. Judge Lagergren's evaluation of the aforementioned reappraisal led him to the conclusion “that an application of current principles of international law, as encapsulated in the ‘appropriate compensation’ formula, would in a case of lawful large-scale nationalizations in a state undergoing a process of radical economic restructuring normally require the ‘fair market value’ standard to be discounted in taking account of ‘all circumstances'.” INA, Lagergren, Separate Opinion at p. 8, reprinted in 8 Iran-U.S. C.T.R. at 390. But see Judge Holtzmann's Separate Opinion where he pointed out that the statement in the Award was obiter dictum as the case was decided under the Treaty of Amity, not customary law, and explained why he considered the statement an erroneous characterization of the current state of customary international law. Available at http://www.italaw.com/sites/default/files/case-documents/ita0180.pdf (accessed 1 September 2013). Available at http://www.iusct.net/Default.aspx.

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23) Available at http://italaw.com/sites/default/files/case-documents/ita0006.pdf

(accessed 1 September 2013).

24) By permission of Oxford University Press. 25) Available at http://www.iusct.net/Default.aspx. 26) Available at http://www.italaw.com/sites/default/files/case-documents/ita0151.pdf

(accessed 1 September 2013).

27) Available at http://www.iusct.net/Default.aspx. 28) Available at http://www.italaw.com/sites/default/files/case-documents/ita0184.pdf

(accessed 1 September 2013).

29) Available at http://italaw.com/sites/default/files/case-documents/ita0728.pdf

(accessed 1 September 2013).

30) Available at http://italaw.com/sites/default/files/case-documents/ita0445.pdf

(accessed 1 September 2013).

31) Reproduced with the permission of Koninklijke Brill NV. 32) Available at http://www.italaw.com/sites/default/files/case-documents/ita0215.pdf

(accessed 1 September 2013).

33) Available at http://www.italaw.com/sites/default/files/case-documents/ita1034.pdf

(accessed 1 September 2013).

34) Available at http://www.italaw.com/sites/default/files/case-

documents/ita0248_0.pdf (accessed 1 September 2013).

35) Available at http://www.italaw.com/sites/default/files/case-

documents/ita0786_0.pdf (accessed 1 September 2013).

36) Available at http://www.state.gov/e/eb/ifd/bit/index.htm (accessed 1 September

2013).

37) Reprinted with permission of Cambridge University Press. All rights reserved. 38) Available at http://www.italaw.com/sites/default/files/case-documents/ita0790.pdf

(accessed 1 September 2013).

39) Reprinted by permission of Oxford University Press. 40) Available at http://www.italaw.com/sites/default/files/case-documents/ita0215.pdf

(accessed 1 September 2013).

41) Available at http://www.italaw.com/sites/default/files/case-documents/ita0466.pdf

(accessed 1 September 2013).

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Chapter 12: Procedure and Proof: Developing the Case

Document information

§12.01 INTRODUCTION

Publication

Procedure has sometimes been referred to in national legal systems as the handmaiden of justice. It is the set of procedural rules that govern the conduct of dispute resolution in a predictable and orderly manner. In contrast to the relatively mechanical rules found in some national legal systems, arbitral rules are more flexible – and also incomplete – providing discretion to the arbitrators to tailor the procedure to the needs of the case. But this flexibility may come at the expense of predictability, sometimes surprising the expectations of parties and their advocates.

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

Topics

Investment Arbitration

Bibliographic reference

'Chapter 12: Procedure and Proof: Developing the Case', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 1085 - 1176

In international arbitration, the procedure is typically governed by any relevant contractual provisions, any applicable treaty provisions, a brief and general set of arbitration rules, and any applicable arbitration law, usually that of the situs of the arbitration. Increasingly, organizations that focus at least in part on international arbitration, such as the International Bar Association, have been publishing guidelines that can be used to supplement the arbitral rules. These are sometimes categorized as “soft law.” Unless such guidelines are expressly adopted by the parties, arbitral procedure contains only the most general evidentiary principles, leaving the acceptance and assessment of the evidence to the arbitrators' judgment. Thus, the most concrete procedural and evidentiary rules are often set in the procedural orders of the arbitral tribunal, in which some level of specificity may be added to the preexisting general arbitral rules, and tailored to the needs of the parties. The two most significant standing institutions of the past 40 years for handling foreign investment disputes are ICSID and the Iran-United States Claims Tribunal, although investment disputes are also often handled in ad hoc arbitrations conducted under the UNCITRAL Arbitration Rules. The typical pattern of dispute settlement procedure found in many investment treaties is to provide the investor with a choice of resolving any disputes in one of three fora: before the courts or administrative tribunals of the host country, any forum chosen by the parties in a previously-agreed dispute settlement procedure (such as a contractual arbitration clause or forum selection clause), or international arbitration through ICSID, the ICSID Additional Facility or an ad hoc proceeding using the UNCITRAL Arbitration Rules. This pattern is found, for example, in the U.S. Model BIT, in NAFTA Chapter 11 and in the ECT. The ICSID Additional Facility is usually referenced in bilateral investment treaties when one of the countries is not a party to the ICSID Convention. Occasionally, BITs may allow a choice of International Chamber of Commerce (“ICC”) or Stockholm Chamber of Commerce (“SCC”) arbitration. When handling a case before ICSID, counsel must review a variety of sources to determine the applicable rules – the ICSID Convention (also known as the Washington Convention), the ICSID Arbitration Rules, the ICSID Institution Rules, and the ICSID Administrative and P 1086 Financial Regulations. All of these sources contain procedural rules that are important for the conduct of an ICSID arbitration. These rules are contained in ICSID's booklet entitled, “ICSID Convention, Regulations and Rules”, which is published in each of ICSID's official languages – English, French and Spanish. The Iran-U.S. Claims Tribunal is founded on the Algiers Accords, and more specifically the Claims Settlement Declaration, which is the treaty between the governments of Iran and the United States that created the Tribunal. The procedure of the tribunal is promulgated in a set of arbitral rules that are based on the 1976 UNCITRAL Arbitration Rules. Thus, the original UNCITRAL Arbitration Rules provide the procedural foundation for this Tribunal. While there are no formal rules of evidence in arbitral proceedings, the International Bar Association (IBA) has developed an optional set of Rules on the Taking of Evidence in International Arbitration (“IBA Rules”) that touch upon these subjects. While these rules were originally developed for commercial arbitration, they have been used, at least as general guidelines, in many investment disputes. Although there is no formal set of evidentiary rules for investment arbitrations, there are evidentiary principles that have been consistently applied in investor-state arbitrations. These principles are largely derived from the practice before inter-state arbitrations and mixed claims commissions. There are other guidelines and principles to which investment tribunals may refer. For example, the 2004 ALI / UNIDROIT Principles of Transnational Civil Justice was prepared as a set of principles that could be adopted by national courts for the handling of transnational civil cases. Although these were not prepared for arbitral proceedings, and certainly not for investment cases, they have on occasion been referred to as indicating an international consensus on certain procedural and evidentiary issues. The Chartered Institute of Arbitrators has issued separate protocols for the use of party-appointed experts and for the disclosure of electronic documents in international arbitration. Other institutions such as the Center for Public Resources (“CPR”) and the International Center for Dispute Resolution (“ICDR”) have issued similar protocols and guidelines. None of these are specifically addressed to investment disputes, but they may provide some guidance on specific issues. Clearly, the supplementary principles most-often used in investment disputes are the IBA Rules.

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The fundamental principle underlying procedural and evidentiary decisions in international arbitration is that tribunals must treat the parties fairly and equally. This principle is enshrined in the rules of many arbitral institutions. It has been suggested that if there is any tension between treating the parties fairly and equally (such as may occur in applying time limits in hearings) then fairness must be considered the dominant principle. Thus, tribunals have an obligation to provide a fair procedure to the parties. Part of this obligation consists in maintaining the “equality of arms,” so that parties may contend on relatively equal terms and fully present their cases. The corollary of the tribunal's obligation is the duty on the part of the parties to arbitrate in good faith. To enforce this duty, tribunals have held that they possess certain inherent powers. Although these powers have occasionally been questioned because arbitral tribunals derive their authority and jurisdiction from the consent of the parties as established in their agreement or instrument of consent, it is generally accepted that such tribunals must be able to exercise sufficient implied powers as are necessary to provide and maintain a fair procedure. This theme echoes through the various issues discussed in this Chapter. This chapter will focus on the procedural and evidentiary principles for handling foreign

P 1087 investment disputes under the auspices of these various institutions and rules.

§12.02 THE DUTY TO ARBITRATE IN GOOD FAITH AND THE EQUALITY OF ARMS [A] Thomas W. Wälde, Procedural Challenges in Investment Arbitration Under the Shadow of the Dual Role of the State: Asymmetries and Tribunals’ Duty to Ensure, Pro-actively, the Equality of Arms, 26(1) Arb. Int’l 3, 11-12, 38-42 (2010) (Citations selectively omitted) The most recent and authoritative case is Tadic v. Prosecutor. (1) The appellant in this case raised the equality of arms principle, asserting that the court did not manage, in spite of its efforts, to help him to identify material and witnesses necessary for his defence; the witnesses, and thus his defence, were intimidated. The prosecution suggested that the court's role was limited to providing, itself, only ‘procedural equality’, while the defence argued that the court had the responsibility to create conditions of ‘substantive equality.’ The Appeals Chamber relied on established ECtHR [European Court of Human Rights] jurisprudence according to which ‘each party must be afforded a reasonable opportunity to present his case – including his evidence – under conditions that do not place him at a substantial disadvantage vis-à-vis his opponent. It concluded that the ‘equality of arms obligates a judicial body to ensure that neither party is put at a disadvantage when presenting its case.’ The Tadic case clarifies and possibly further develops the ECtHR jurisprudence on the role of courts and tribunals in a significant way. An earlier understanding of the ‘equality of arms' principle, as expressed by the prosecution in the Tadic case, was confined to the duty of the court to administer its own procedures in a way that gave equal opportunity to both sides: the traditional ‘audiatur et altera pars’ principle. But ECtHR jurisprudence already implicitly went beyond such a passive, essentially procedural umpire role: it posited a pro-active duty (‘ensure that neither party is put at a disadvantage’) to create a situation of material equality. That pro-active duty was re-affirmed more clearly in the Tadic case. The question then is: How far does a court's duty go when it is faced with a ‘substantial disadvantage’ by one party? *** We have, first of all, established ‘equality of arms' as a foundational principle of investment arbitration procedure and the tribunal's duty, if necessary pro-actively, to restore the equality of arms, in particular if affected by the abuse of a state respondent of its dual role as both equal party to an arbitration and, simultaneously, sovereign state with the ability to unleash its police powers to penalize the claimant and reduce its chances of prevailing in a fair arbitration. That duty of the tribunal, which goes beyond the mere ordering of the proceeding before it, can if breached lead to annulment under Article 52 of the ICSID Convention as a ‘serious departure from a fundamental rule of procedure’ or the equivalent conditions for challenges of arbitral awards before domestic courts. *** P 1088

There is no doubt that evidence of serious misconduct can ‘pollute the whole case’. Tribunals will be influenced in their perception of facts by serious misconduct by one party; but also the application of the law (including the assessment of damages and costs) allows explicit sanctions for a party that arbitrated in bad faith. Moreover, it is recognized in authorities on advocacy that serious misconduct by a party can, consciously or subconsciously, affect the way the merits of its case are considered. Such leverage allows tribunals, for example, to negotiate (often under the shadow of possible procedural orders) precautionary measures to prevent or remedy the consequences of threatening government conduct, e.g. hearing of witnesses in camera, by video or even just on the basis of a written testimony; safe conduct passes for counsel, witnesses, experts and party representatives; appointment of tribunal experts to review sensitive or

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secret documents. The key concept that provides substance to fulfil the tribunal's duty to restore, proactively, the equality of arms is that of ‘inherent powers.’ International courts and tribunals have exercised their functions, going beyond their technical rules of procedure, on the foundation of ‘inherent’ or ‘implicit’ powers; that means powers that are necessary to ‘conserve the respective rights of the parties and to ensure [the] tribunal's jurisdiction and authority are made fully effective.’ … The sanctions include: exclusion of the misbehaving party from the process; holding the party in contempt of court; issuing cease and desist orders; non-admission of evidence procured by improper means; adverse inference and cost sanctions. Depending on the seriousness of the misbehaviour, these sanctions may be imposed singularly or in combination of each other. *** Breaches of these obligations after a claim has been raised and during the arbitration can lead to distinct remedies, e.g. orders by the tribunal for specific performance (i.e. cease and desist), for financial compensation and, possibly, other remedies such as a public apology. That interaction between the substantive obligations under an investment treaty and the procedural duty of the state (arguably also of both parties) has not as yet been properly identified or explored in detail, but it is foreshadowed in several awards.

[B] Methanex Corporation v. United States (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 3 August 2005, (2) ¶¶ 4, 6, 8, 53-55, 57-58 [V. V. Veeder (pres.), William F. Rowley, W. Michael Reisman] [Methanex Corp., a Canadian corporation, brought a claim under Chapter 11 of NAFTA against the United States after California announced it was phasing out MTBE (methyl tertiary butyl ether), a gasoline additive that Methanex manufactured, because of concerns that leaking storage facilities could contaminate groundwater. During the arbitration, several third parties sought permission to file amici curiae briefs. The third parties sought to file amicus briefs, make oral submissions, and have observer status at the oral hearings. The basis for their submission was the immense public importance of the case and the critical impact that the Tribunal's decision could have on the P 1089 environmental policies and other public welfare and law-making in the NAFTA region.] (Citations selectively omitted) 4. … Mr Vind there testified that the Vind Documents were copies of documents contained in the files of his company, Regent International, including personal notes, private correspondence, materials expressly subject to legal professional privilege and a private address-book. Mr Vind was at the time the CEO of Regent International, with offices at Brea, California. (For ease of reference, the Tribunal does not distinguish between Mr Vind and his company). Mr Vind stated that he realised that someone had broken into his offices three or four years ago (i.e. in 1999-2000). He suspected that certain persons unknown to him had induced the office-building's cleaning company to grant them access to his company's offices, or that the persons who broke in were aware that security was lax over the weekend. He suspected that persons aligned with MTBE interests were behind the break-in to his offices. He said that he reported the break-in and the illegal copying of documents to the FBI and to the Attorney General of California. *** 6. The Tribunal eventually decided this issue against Methanex at the main hearing, by excluding the Vind Documents from the evidence … *** 8. In that declaration, Mr Puglisi described the origin of the Vind Documents as follows: “The Vind Documents were found discarded on public property behind Regent International’s offices at 910 E Birch Street in Brea, California, 92821. I supervised a licensed California private investigator who collected the discarded materials. The documents were forwarded to me via express mail, overnight delivery in a sealed box. I made copies of those documents and forwarded these copies to counsel for Methanex during the course of my investigation. A subset of these materials are the Vind Documents”. As events unfolded at the main hearing, it soon became apparent that the first sentence was wrong; and that the remainder was materially incomplete. *** 53. On 15th June 2004, having read the Vind Documents de bene esse, heard the relevant witnesses and considered the submissions of the Disputing Parties, the Tribunal decided to uphold the USA's challenge to the admissibility of the Vind Documents and ordered that they would form no part of the evidential record in the arbitration proceedings. The reasons for the Tribunal's order are set out below.

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54. In the Tribunal's view, the Disputing Parties each owed in this arbitration a general legal duty to the other and to the Tribunal to conduct themselves in good faith during these arbitration proceedings and to respect the equality of arms between them, the principles of “equal treatment” and procedural fairness being also required by Article 15(1) of the UNCITRAL Rules. As a general principle, therefore, just as it would be wrong for the USA ex hypothesi to misuse its intelligence assets to spy on Methanex (and its witnesses) and to introduce into evidence the resulting materials into this arbitration, so too would it be wrong for Methanex to introduce evidential materials obtained by P 1090 Methanex unlawfully. 55. The first issue here is whether Methanex obtained the Vind Documents unlawfully by deliberately trespassing onto private property and rummaging through dumpsters inside the office-building for other persons' documentation. Whilst certain of Methanex's agents may have held an honest belief that no criminal violation was committed under the City of Brea's Ordinance, given the legal advice allegedly proffered by the un-named DC law firm, the evidence demonstrates at least a reckless indifference by Methanex as to whether civil trespass was committed by its collection-agents in procuring the Vind Documents from Mr Vind's office-building in Brea. Once the USA demonstrated prima facie that the evidence which Methanex was proffering had been secured unlawfully, if not criminally, the burden of proof with respect to its admissibility shifted to Methanex, yet Methanex elected not to call the relevant partners of the unnamed law firm, whose testimony might have clarified the issue. The Tribunal is unable to see why these partners could not have testified before it. On the materials before the Tribunal, the evidence shows beyond any reasonable doubt that Methanex unlawfully committed multiple acts of trespass over many months in surreptitiously procuring the Vind Documents. Such unlawful conduct is not mitigated by the fact that the doors to the trash-area were not always closed but sometimes ajar: the entry into this area behind the doors remained unlawful; and Methanex made no attempt to distinguish between documents obtained when the doors were ajar and when they were closed. *** 57. The third issue is the exercise of the Tribunal's general discretion under Article 25(6) of the UNCITRAL Rules to determine, in all the circumstances of this case, the admissibility of the evidence offered by Methanex … 58. … Methanex adduced no satisfactory evidence as to the lawfulness of the means it employed to obtain these documents from Mr Vind and his company. The relevant person, Mr Dunne, was not called by Methanex as a witness; and although Mr Dunne was made aware of these proceedings and could have testified (by video-link, if not in person), Methanex provided no satisfactory explanation for his absence as a material witness. As already noted above, no partner from the un-named DC law firm was called by Methanex. Moreover, Methanex's changing, incomplete and inconsistent explanations for its conduct left grave suspicions as to precisely what its agent or agents did to obtain these documents during this first period. In all the circumstances, the Tribunal decided that this documentation was procured by Methanex unlawfully; and that it would be wrong to allow Methanex to introduce this documentation into these proceedings in violation of a general duty of good faith imposed by the UNCITRAL Rules and, indeed, incumbent on all who participate in international arbitration, without which it cannot operate.

[C] Libananco Holdings Co. Limited v. Republic of Turkey (ICSID Case No. ARB/06/8), Decision on Preliminary Issues of 23 June 2008, (3) 72, 74-80, 82 [Michael Hwang (pres.), Henri C. Alvarez, Franklin Berman] P 1170 [Case summary included in Chapter 11]

(Citations selectively omitted) 72. … By the time of its First Request for Production of Documents, on 1 August 2007, this war of words had matured into a specific allegation brought to the Tribunal by Libananco that the Turkish authorities were holding Libananco's legal representatives and potential witnesses under surveillance and Claimant's counsel had informed the Tribunal that the surveillance had led to the Claimant's Turkish legal expert (who had worked with Claimant's counsel for many months) refusing to testify owing to fear of Government reprisal and harassment. In a written submission to the Tribunal in September 2007, Turkey responded with a formal denial of these allegations, while drawing attention to criminal investigations in train in Turkey into financial crime on a massive scale, in which investigations of certain persons connected with the claims before the Tribunal were or might be implicated … On 29 February 2008, Libananco seized the Tribunal with a more precise and pointed set of allegations, backed up by documentary evidence in the form of Orders sealed by a Turkish Court, to the effect that there had been (notwithstanding the formal denial just mentioned) a sustained campaign of interception of the e-mail communications of Libananco's counsel in this arbitration. As a result, it was alleged, the Respondent had had access to literally hundreds, or even thousands, of counsel's communications with their clients, contacts and potential witnesses in Turkey; this would have included access to documentary attachments covering the preparation and development of Libananco's case as Claimant, with irrevocable prejudice to its position

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in this arbitration. Libananco's counsel told the Tribunal that up to 2,000 of the communications that might have been intercepted were privileged and/or confidential. *** 74. These are allegations which, supported as they were (as indicated above) by prima facie documentary evidence, the Tribunal was bound to treat with the utmost seriousness. It called upon Turkey to state without delay whether it acknowledged the authenticity of the Court orders produced by Libananco and, if so, on what basis Claimant's counsel had been included in the request put to the Court by the Public Prosecutor to grant the interception orders … 75. Respondent's answer, received by the Tribunal in writing and reiterated in oral argument at the hearing, was essentially in four parts: (a) that there had never been any intention to conduct surveillance, covert or overt, of Claimant's preparations for this arbitration, nor had that in fact been done; (b) that Turkey, as a sovereign State, had an undeniable entitlement to conduct investigation into crime, particularly serious crime, within its jurisdiction, which could neither be affected, nor brought to a halt, by the existence in parallel of an ICSID arbitration; (c) that the earlier assurances by the Public Prosecutor were given in good faith, and reflected the situation at the time they were given; and (d) that the e-mail addresses to be intercepted represented a comprehensive list of those thought to have been used for communication with a particular suspect, but that the appearance pro tempore of counsels' addresses on that list did not imply that actual communications to or from those addresses would be read, still less passed to those responsible for the conduct of Turkey's case in this arbitration. In reinforcement of that last point, counsel for Turkey gave what the Tribunal took to be formal personal assurances that they had neither been offered nor seen any such material. These assurances were qualified at the hearing when counsel disclosed that, in a meeting with the Public Prosecutor, a number of English language documents were reviewed to assist the Prosecutor in determining which documents were privileged and should be destroyed. A number of these, including a draft of the Claimant's Memorial in this case, bore headings that indicated they were privileged. Counsel did not read the documents in question and advised the Prosecutor that they were privileged and should be destroyed. 76. In sum, Turkey denies that, given these explanations, any actual prejudice could have been caused to Libananco in the arbitration. In response to this, Libananco makes the obvious retort that, once interception is admitted, the way in which intercepted material was handled becomes a matter of pure conjecture, and that none of Respondent's assurances touches the possibility that privileged material might have been seen by Turkish officials and might then have played an unspoken part in the instructions given by them to the in-house or outside lawyers conducting Turkey's case. The Tribunal might add that some of the documents attached to the reports from the Public Prosecutor and included in Respondent's submissions to the Tribunal clearly and without any doubt were capable of causing prejudice of the kind Libananco alleges, and that some other such documents were included in a redacted form (presumably designed to counter any supposition of prejudice) though it remained unclear even at the end of the hearing by whom or on what basis the redaction had been undertaken. 77. Libananco's counsel then add the further point that the references in Respondent's written and oral submissions to unauthorized receipt and onward transmission of the interception orders of the Turkish Court being in itself a serious criminal offence which was under investigation, coupled with repeated polemical references over an extended period to Claimant's counsel in person, look very much like a standing threat to intimidate them from representing their client freely. Respondent's counsel had no real answer to this, other than that some of the Respondent's submissions might have been incautiously phrased. 78. These allegations and counter-allegations strike at principles which lie at the very heart of the ICSID arbitral process, and the Tribunal is bound to approach them accordingly. Among the principles affected are: basic procedural fairness, respect for confidentiality and legal privilege (and indeed for the immunities accorded to parties, their counsel, and witnesses under Articles 21 and 22 of the ICSID Convention); the right of parties both to seek advice and to advance their respective cases freely and without interference; and no doubt others as well. For its own part, the Tribunal would add to the list respect for the Tribunal itself, as the organ freely chosen by the Parties for the binding settlement of their dispute in accordance with the ICSID Convention. It requires no further recital by the Tribunal to establish either that these are indeed fundamental principles, or why they are. Nor does the Tribunal doubt for a moment that, like any other international tribunal, it must be regarded as endowed with the inherent powers required to preserve the integrity of its own process – even if the remedies open to it are necessarily different from those that might be available to a domestic court of law in an ICSID Member State. The Tribunal would express the principle as being that parties have an obligation to arbitrate fairly and in good faith and that an arbitral tribunal has the inherent jurisdiction to ensure that this obligation is complied with; this principle applies in all arbitration, including investment arbitration, and to all parties, including States (even in the exercise of their sovereign powers).

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79. … The Tribunal takes it as a given, for example, that a sovereign State does indeed have a right and duty to pursue the commission of serious crime, and that that right and duty cannot be affected by the existence of an ICSID arbitration against it, or put into commission by the fact that an ICSID arbitration is begun against it. That proposition is expressly reflected in the Orders below. The question is, however, whether that basic proposition, on its own, is enough. The Tribunal recalls the well-known saying, very frequently repeated in legal discussion, that it is not enough that justice should be done, it must also manifestly be seen to be done. From that it must follow that, even if Turkey can be excused for not previously having taken steps to ensure the strict separation of its criminal investigations, on the one hand, from the prosecution of this arbitration, on the other, that will not be sufficient for the future. The right and duty to investigate crime, accepted by the Tribunal above, cannot mean that the investigative power may be exercised without regard to other rights and duties, or that, by starting a criminal investigation, a State may baulk an ICSID arbitration … 80. … irrespective of whether the Tribunal is or is not endowed with powers as farreaching as Libananco wishes it to assert [barring Respondent from parts of the proceedings or a grant of summary judgment], Libananco's entitlement to future protection for its agents, counsel and witnesses is clearly not conditional on proof that it has actually been prejudiced in the conduct of its case … If, as the arbitration progresses, it turns out that the Respondent has used, in any way, privileged or confidential information obtained during the surveillance, the Claimant will be at liberty to bring an appropriate application to the Tribunal. The Tribunal attributes great importance to privilege and confidentiality, and if instructions have been given with the benefit of improperly obtained privileged or confidential information, severe prejudice may result. If that event arises, the Tribunal may consider other remedies available apart from the exclusion of improperly obtained evidence or information. *** 82. … “1. Orders on Claimant's Application of February 29, 2008 1.1.1) Subject to paragraph 1.2 below, the Respondent must not intercept or record communications between legal counsel for the Claimant on the one hand and representatives of the Claimant and other persons in Turkey on the other hand. 1.1.2) The Respondent must permit legal counsel for the Claimant to have access, free from surveillance, to any person within Turkey for the purposes of preparing or conducting Claimant's case in this arbitration. 1.1.3) The Respondent must within 30 days of this order obtain a statement from the Public Prosecutor of Sisli that (subject to paragraph 1.2 below) all emails (including attachments) and communications intercepted by or under the direction of the Public Prosecutor which in any way relate to this arbitration have been or will within a period of 30 days be destroyed. 1.1.4) The Respondent must take steps to ensure that its criminal investigators and others having access to or knowledge of intercepted emails and other communications falling within paragraph 1.1.1 above do not provide copies or communicate the contents of (or information deriving from) such documents to any persons having any role in the defence of this arbitration. * ** 1.1.6) All privileged documents and information which have been tendered or disclosed to the Tribunal in connection with the Claimant's application of February, 29, 2008 will be excluded from the evidence to be received in this arbitration. 1.1.7) Any privileged documents or information which may be introduced into evidence in future proceedings of this arbitration will be excluded as well as any evidence derived from possession of privileged documents or information. 1.2 The Tribunal recognizes that the Respondent may in the legitimate exercise of its sovereign powers conduct investigations into suspected criminal activities in Turkey. The Respondent must, however, ensure that no information or documents coming to the knowledge or into the possession of its criminal investigation authorities shall be made available to any person having any role in the defence of this arbitration.

[D] Comments and Questions 1. 2. 3. 4. 5. 6. 7.

What is the principle of the “equality of arms”? How far does the equality of arms principle extend? What, if anything, must a government do to assist a claimant investor in order to ensure the equality of arms? May a claimant-investor violate the equality of arms principle, or may only a government do so? Why or why not? What specific conduct may be circumscribed by a duty to arbitrate in good faith? How should a tribunal treat a claim of a violation of the equality of arms? List all remedies that may be ordered by an arbitral tribunal for a failure to arbitrate in good faith or to provide equality of arms. In Enron v. Argentina and Sempra v. Argentina, the government procured an

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8.

9.

injunction from an Argentine court prohibiting a witness from appearing and giving evidence at ICSID hearings. The witness had already provided written witness statements that the claimants had submitted to the tribunals. The witness had chaired a commission to privatize certain state-owned companies, and his testimony dealt with the events, statements and interpretation of certain key documents in the privatization process. The government claimed that the witness was bound by a confidentiality clause in his contract with the government and could not give evidence. Under the circumstances, the tribunals rejected Argentina's objections to the admissibility of the written witness statements, and considered them in its final awards. In doing so, the tribunals noted the immunities of witnesses under Articles 21-22 of the ICSID Convention. See Enron Corp. v. Argentina, ICSID Case No. ARB/01/3, Award (22 May, 2007), ¶¶ 141-142, available at http:// italaw.com/sites/default/files/case-documents/ita0293.pdf; Sempra v. Argentina, ICSID Case No. ARB/02/16, Award (28 September 2007), available at http://italaw.com/sites/default/files/case-documents/ita0770.pdf. In the investment cases of City Oriente Limited v. Ecuador, ICSID Case No. ARB/06/21 (Juan Fernández Armesto, President; J. Christopher Thomas and Horacio A. Grigera Naón) and Quiborax S.A. v. Bolivia, ICSID Case No. ARB/06/2 (Prof. Gabrielle Kaufmann-Kohler, President; Hon. Marc Lalonde and Prof. Brigitte Stern) investorclaimants sought and obtained provisional measures to restrain respondent governments from using criminal prosecutions against claimants and their executives. In City Oriente, the criminal prosecutions were allegedly brought to compel the Claimant to pay the additional participations or taxes that were in dispute in the investment arbitration. In Quiborax, the criminal prosecutions were allegedly designed to pressure the Claimants to dismiss the investment arbitration. In a different context, in the investment case of Ioannis Kardassopoulos and Ron Fuchs v. Georgia, ICSID Case Nos. ARB/05/18 and ARB/07/15 (L. Yves Fortier, President; Prof. Francisco Orrego Vicuña and Prof. Vaughan Lowe) a claimant obtained an arbitral award against the government, but on the eve of the annulment hearing, he was arrested for allegedly paying a bribe in order to arrange a settlement of the case. L. Peterson, Georgia Authorities Arrest Foreign Investor on Eve of ICSID Hearing and Charge Him With Corruption,http://www.lareporter.com (15 October 2010). In EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13 (Piero Bernardini, President; Arthur W. Rovine and Yves Derains), Procedural Order No. 3 (29 August 2008), ¶¶ 37-38, an investment tribunal refused to admit into evidence an audio recording obtained without the consent of one of the persons involved in the conversation. The tribunal held that the recording violated the right of privacy of the person and was “contrary to the principles of good faith and fair dealing required in international arbitration.”

§12.03 ARBITRAL PROCEDURE [A] ICSID Arbitration Rules (2006), Rules 29–36 Rule 29 – Normal Procedures Except if the parties otherwise agree, the proceeding shall comprise two distinct phases: a written procedure followed by an oral one. *** Rule 31 – The Written Procedure (1) In addition to the request for arbitration, the written procedure shall consist of the following pleadings, filed within time limits set by the Tribunal: (a) (b) (c) (d)

memorial by the requesting party; a counter-memorial by the other party; and, if the parties so agree or the Tribunal deems it necessary: a reply by the requesting party; and a rejoinder by the other party.

*** (3) A memorial shall contain: a statement of the relevant facts; a statement of law; and the submissions. A counter-memorial, reply or rejoinder shall contain an admission or denial of the facts stated in the last previous pleading; any additional facts, if necessary; observations concerning the statement of law in the last previous pleading; a statement of law in answer thereto; and the submissions. Rule 32 – The Oral Procedure (1) The oral procedure shall consist of the hearing by the Tribunal of the parties, their agents, counsel and advocates, and of witnesses and experts. (2) Unless either party objects, the Tribunal, after consultation with the SecretaryGeneral, may allow other persons, besides the parties, their agents, counsel and

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advocates, witnesses and experts during their testimony, and officers of the Tribunal, to attend or observe all or part of the hearings, subject to appropriate logistical arrangements. The Tribunal shall for such cases establish procedures for the protection of proprietary or privileged information. (3) The members of the Tribunal may, during the hearings, put questions to the parties, their agents, counsel and advocates, and ask them for explanations. Rule 33 – Marshalling of Evidence Without prejudice to the rules concerning the production of documents, each party shall, within time limits fixed by the Tribunal, communicate to the Secretary-General, for transmission to the Tribunal and the other party, precise information regarding the evidence which it intends to produce and that which it intends to request the Tribunal to call for, together with an indication of the points to which such evidence will be directed. Rule 34 – Evidence: General Principles (1) The Tribunal shall be the judge of the admissibility of any evidence adduced and of its probative value. (2) The Tribunal may, if it deems it necessary at any stage of the proceeding: (a) (b)

call upon the parties to produce documents, witnesses and experts; and visit any place connected with the dispute or conduct inquiries there.

(3) The parties shall cooperate with the Tribunal in the production of the evidence and in the other measures provided for in paragraph (2). The Tribunal shall take formal note of the failure of a party to comply with its obligations under this paragraph and of any reasons given for such failure. *** Rule 35 – Examination of Witnesses and Experts (1) Witnesses and experts shall be examined before the Tribunal by the parties under the control of its President. Questions may also be put to them by any member of the Tribunal. (2) Each witness shall make the following declaration before giving his evidence: “I solemnly declare upon my honour and conscience that I shall speak the truth, the whole truth and nothing but the truth.” (3) Each expert shall make the following declaration before making his statement: “I solemnly declare upon my honour and conscience that my statement will be in accordance with my sincere belief.” Rule 36 – Witnesses and Experts: Special Rules Notwithstanding Rule 35 the Tribunal may: (a) (b)

admit evidence given by a witness or expert in a written deposition; and with the consent of both parties, arrange for the examination of a witness or expert otherwise than before the Tribunal itself. The Tribunal shall define the subject of the examination, the time limit, the procedure to be followed and other particulars. The parties may participate in the examination.

[B] UNCITRAL Arbitration Rules (2010), Articles 17, 27 and 28 General Provisions – Article 17 1. Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting his case. The arbitral tribunal, in exercising its discretion, shall conduct the proceedings so as to avoid unnecessary delay and expense and to provide a fair and efficient process for resolving the parties' dispute. 2. As soon as practicable after its constitution and after inviting the parties to express their views, the arbitral tribunal shall establish the provisional timetable of the arbitration. The arbitral tribunal may, at any time, after inviting the parties to express their views, extend or abridge any period of time prescribed under these Rules or agreed by the parties. 3. If at an appropriate stage of the proceedings any party so requests, the arbitral tribunal shall hold hearings for the presentation of evidence by witnesses, including expert witnesses, or for oral argument. In the absence of such a request, the arbitral tribunal shall decide whether to hold such hearings or whether the proceedings shall be conducted on the basis of documents and other materials. ***

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Evidence – Article 27 1. Each party shall have the burden of proving the facts relied on to support his claim or defence. 2. Witnesses, including expert witnesses, who are presented by the parties to testify to the arbitral tribunal on any issue of fact or expertise may be any individual, notwithstanding that the individual is a party to the arbitration or in any way related to a party. Unless otherwise directed by the arbitral tribunal, statements by witnesses, including expert witnesses, may be presented in writing and signed by them. 3. At any time during the arbitral proceedings the arbitral tribunal may require the parties to produce documents, exhibits or other evidence within such a period of time as the tribunal shall determine. 4. The arbitral tribunal shall determine the admissibility, relevance, materiality and weight of the evidence offered. Hearings – Article 28 1. In the event of an oral hearing, the arbitral tribunal shall give the parties adequate advance notice of the date, time and place thereof. 2. Witnesses, including expert witnesses, may be heard under the conditions and examined in the manner set by the arbitral tribunal. 3. Hearings shall be held in camera unless the parties agree otherwise. The arbitral tribunal may require the retirement of any witness or witnesses, including expert witnesses, during the testimony of such other witnesses, except that a witness, including an expert witness, who is a party to the arbitration shall not, in principle, be asked to retire. 4. The arbitral tribunal may direct that witnesses, including expert witnesses, be examined through means of telecommunication that do not require their physical presence at the hearing (such as videoconference).

[C] IBA Rules on the Taking of Evidence in International Arbitration (2010), Articles 4 and 8 (4) Article 4 – Witnesses of Fact 1. Within the time ordered by the Arbitral Tribunal, each Party shall identify the witnesses on whose testimony it intends to rely and the subject matter of that testimony. 2. Any person may present evidence as a witness, including a Party or a Party's officer, employee or other representative. 3. It shall not be improper for a Party, its officers, employees, legal advisors or other representatives to interview its witnesses or potential witnesses and to discuss their prospective testimony with them. 4. The Arbitral Tribunal may order each Party to submit within a specified time to the Arbitral Tribunal and to the other Parties Witness Statements by each witness on whose testimony it intends to rely, except for those witnesses whose testimony is sought pursuant to Articles 4.9 or 4.10. If Evidentiary Hearings are organised into separate issues or phases (such as jurisdiction, preliminary determinations, liability or damages), the Arbitral Tribunal or the Parties by agreement may schedule the submission of Witness Statements separately for each issue or phase. 5. Each Witness Statement shall contain: (a)

(b)

(c) (d) (e)

the full name and address of the witness, a statement regarding his or her present and past relationship (if any) with any of the Parties, and a description of his or her background, qualifications, training and experience, if such a description may be relevant to the dispute or to the contents of the statement; a full and detailed description of the facts, and the source of the witness's information as to those facts, sufficient to serve as that witness's evidence in the matter in dispute. Documents on which the witness relies that have not already been submitted shall be provided; a statement as to the language in which the Witness Statement was originally prepared and the language in which the witness anticipates giving testimony at the Evidentiary Hearing; an affirmation of the truth of the Witness Statement; and the signature of the witness and its date and place.

6. If Witness Statements are submitted, any Party may, within the time ordered by the Arbitral Tribunal, submit to the Arbitral Tribunal and to the other parties revised or additional Witness Statements, including statements from persons not previously named as witnesses, so long as any such revisions or additions respond only to matters contained in another Party's Witness Statements, Expert Reports or other submissions that have not been previously presented in the arbitration.

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7. If a witness whose appearance has been requested pursuant to Article 8.1 fails without a valid reason to appear for testimony at an Evidentiary Hearing, the Arbitral Tribunal shall disregard any Witness Statement related to that Evidentiary Hearing by that witness unless, in exceptional circumstances, the Arbitral Tribunal decides otherwise. 8. If the appearance of a witness has not been requested pursuant to Article 8.1, none of the other Parties shall be deemed to have agreed to the correctness of the content of the Witness Statement. 9. If a Party wishes to present evidence from a person who will not appear voluntarily at its request, the Party may, within the time ordered by the Arbitral Tribunal, ask it to take whatever steps are legally available to obtain the testimony of that person, or seek leave from the Arbitral Tribunal to take such steps itself. In the case of a request to the Arbitral Tribunal, the Party shall identify the intended witness, shall describe the subjects on which the witness's testimony is sought and shall state why such subjects are relevant to the case and material to its outcome. The Arbitral Tribunal shall decide on this request and shall take, authorize the requesting Party to take or order any other Party to take, such steps as the Arbitral Tribunal considers appropriate if, in its discretion, it determines that the testimony of that witness would be relevant to the case and material to its outcome. 10. At any time before the arbitration is concluded, the Arbitral Tribunal may order any Party to provide for, or to use its best efforts to provide for, the appearance for testimony at an Evidentiary Hearing of any person, including one whose testimony has not yet been offered. A Party to whom such a request is addressed may object for any of the reasons set forth in Article 9.2. Article 8 – Evidentiary Hearing *** 1. Within the time ordered by the Arbitral Tribunal, each Party shall inform the Arbitral Tribunal and the other Parties of the witnesses whose appearance it requests. Each witness (which term includes, for the purposes of this Article, witnesses of fact and any experts) shall, subject to Article 8.2, appear for testimony at the Evidentiary Hearing if such person's appearance has been requested by any Party or by the Arbitral Tribunal. Each witness shall appear in person unless the Arbitral Tribunal allows the use of videoconference or similar technology with respect to a particular witness. 2. The Arbitral Tribunal shall at all times have complete control over the Evidentiary Hearing. The Arbitral Tribunal may limit or exclude any question to, answer by or appearance of a witness, if it considers such question, answer or appearance to be irrelevant, immaterial, unreasonably burdensome, duplicative or otherwise covered by a reason for objection set forth in Article 9.2. Questions to a witness during direct and redirect testimony may not be unreasonably leading. 3. With respect to oral testimony at an Evidentiary Hearing: (a) (b)

(c)

(d)

(e)

(f)

(g)

the Claimant shall ordinarily first present the testimony of its witnesses, followed by the Respondent presenting the testimony of its witnesses; following direct testimony, any other Party may question such witness, in an order to be determined by the Arbitral Tribunal. The Party who initially presented the witness shall subsequently have the opportunity to ask additional questions on the matters raised in the other Parties' questioning; thereafter, the Claimant shall ordinarily first present the testimony of its PartyAppointed Experts, followed by the Respondent presenting the testimony of its Party-Appointed Experts. The Party who initially presented the Party-Appointed Expert shall subsequently have the opportunity to ask additional questions on the matters raised in the other Parties' questioning; the Arbitral Tribunal may question a Tribunal-Appointed Expert, and he or she may be questioned by the Parties or by any Party-Appointed Expert, on issues raised in the Tribunal-Appointed Expert Report, in the Parties' submissions or in the Expert Reports made by the Party-Appointed Experts; if the arbitration is organised into separate issues or phases (such as jurisdiction, preliminary determinations, liability and damages), the Parties may agree or the Arbitral Tribunal may order the scheduling of testimony separately for each issue or phase; the Arbitral Tribunal, upon request of a Party or on its own motion, may vary this order of proceeding, including the arrangement of testimony by particular issues or in such a manner that witnesses be questioned at the same time and in confrontation with each other (witness conferencing); the Arbitral Tribunal may ask questions to a witness at any time.

4. A witness of fact providing testimony shall first affirm, in a manner determined appropriate by the Arbitral Tribunal, that he or she commits to tell the truth or, in the case of an expert witness, his or her genuine belief in the opinions to be expressed at the Evidentiary Hearing. If the witness has submitted a Witness Statement or an Expert Report, the witness shall confirm it. The Parties may agree or the Arbitral Tribunal may

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order that the Witness Statement or Expert Report shall serve as that witness's direct testimony. 5. Subject to the provisions of Article 9.2, the Arbitral Tribunal may request any person to give oral or written evidence on any issue that the Arbitral Tribunal considers to be relevant to the case and material to its outcome. Any witness called and questioned by the Arbitral Tribunal may also be questioned by the Parties.

[D] The Preliminary Hearing – Howard M. Holtzmann, (5) Streamlining Arbitral Proceedings: Some Techniques of the Iran-United States Claim Tribunal, 11(1) Arb. Int’l 39, 40-46 (1995) (6) (Citations selectively omitted) I. Indicating in Advance the Evidence Needed to Establish Prima Facie Proof of Complex Facts The opportunity for an arbitral tribunal to indicate in advance the evidence needed to establish prima facie proof of complex facts arises because arbitrators often become aware from the initial or later written submissions of the parties that they will have to decide complex issues of fact that may involve the presentation of a very large volume of evidence. In such cases, it is foreseeable that the parties will expend substantial effort, money and time unless steps are taken to streamline the proceedings. Should the arbitrators sit back and wait while the parties attempt to amass truckloads of evidence, or should they take the initiative to manage the case by indicating in advance to the parties the evidence that the arbitral tribunal considers necessary to establish prima facie proof of certain facts at issue? That was the question faced by the Iran-United States Claims Tribunal with respect to proof of the nationality of certain corporate claimants. Chamber One of the Tribunal decided to take the initiative to simplify and expedite the presentation of evidence in the Flexi-Van Case, and expanded that approach a month later in the General Motors Case … The decisions of Chamber One in Flexi-Van and General Motors established evidentiary principles that were followed by it and by the two other Chambers of the Tribunal in hundreds of cases, and were relatively early examples of its activism to streamline proceedings … *** The decisions of the Iran-United States Claims Tribunal in the Flexi-Van and General Motors cases that I have mentioned were made under rules that empowered the Tribunal to conduct the arbitration in such manner as it considers appropriate’, a provision that you will recognize as being identical to Article 15(1) of the UNCITRAL Arbitration Rules and similar to the provision in the LCIA Rules that grants arbitrators ‘widest discretion’ in conducting cases. Critical factual issues arose in the Flexi-Van and General Motors cases because the arrangements establishing the Tribunal provide that it has jurisdiction over a claim by an American corporation only if the claimant was incorporated in the United States, and if, collectively, natural persons who were citizens of the United States held 50 per cent or more of its stock continuously from the date the claim arose until 19 January 1981, the date the Claims Settlement Declaration came into force. These provisions posed difficult evidentiary problems in cases involving publicly owned corporations because such corporations typically have large numbers of shareholders. *** In opposition, the Iranian respondent argued that Flexi-Van could only meet its burden of proof by submitting ‘detailed evidence such as either passports, birth certificates or certified copies of naturalization documents for each of the thousands of individuals who collectively own, directly or indirectly, more than 50 per cent of the capital stock of FlexiVan’. Moreover, the Iranian position was that, because the Claims Settlement Declaration requires that claims must have been owned ‘continuously’ from the date the claim arose until 19 January 1981, claimants should be required to produce evidence concerning the nationality of their shareholders on every day of this multiyear period in order to take account of the changing composition of the body of shareholders as shares were traded and retraded on stock exchanges … … [T]he Tribunal … took the initiative to tell the parties in advance what evidence it would consider sufficient to support inferences of continuous ownership of the claim by a corporation that was a United States national. Thus, in the Flexi-Van Order, the Tribunal stated: With respect to evidence of continuous ownership of stock, it must be recognized that there are changes in the stockholders of a publicly-traded corporation each trading day … Therefore, it is necessary to measure ownership on a periodic rather than a daily basis. The most practical point to find authoritative evidence with respect to ownership is the Annual Meeting of the stockholders.

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Accordingly, the Tribunal stated that evidence as to stock ownership would be ‘sufficient prima facie, if submitted by the claimant with respect to the Annual Meeting closest to the date on which the claim arose and also the Annual Meeting closest to January 19, 1981'. In other words, the Tribunal was prepared to receive evidence as of a practical date near – but not exactly on – the date the claim arose and also near but – not exactly on – 19 January 1981. If the necessary factual conditions existed on those two dates, the Tribunal indicated that it was prepared to draw the rebuttable inference that those conditions had existed continuously for the entire period between those two dates. To streamline presentation of proof of incorporation, the Tribunal indicated that it would accept certificates routinely issued by governmental authorities certifying when the corporation was formed and that it was still in existence. Thus corporate parties were informed in advance that they did not have to submit copies of lengthy certificates of incorporation, corporate minutes and other records to prove their formation. Further, the Tribunal stated that if a corporation had been formed on a date prior to the time its claim arose and was in existence after 19 January 1981, the rebuttable inference would be drawn that the corporation had been existing continuously between those two dates although it was theoretically possible that during the relevant period the claimant's corporate life might have been terminated and later restored by reincorporation. The Tribunal's action thus told the claimant in advance that it could make a prima facie case without submitting voluminous documentary evidence that might otherwise have been necessary to constitute strict proof of continuous existence as an entity incorporated in the United States. As to the proof of citizenship of individual shareholders, the Tribunal informed the parties that it would not require the submission of thousands of birth certificates, passports and naturalization certificates, but would draw inferences from information in reports that publicly traded corporations are regularly required by law to file with the United States government identifying persons holding more than 5 per cent of the corporation's stock. These reports would then be weighed in the light of information from general statistical reports regularly compiled by governmental agencies in the United States concerning foreign stock ownership. *** The evidence described [in the Order] will prima facie be considered sufficient as to corporate nationality … Respondent will be free to offer rebuttal evidence. From the totality of such evidence the Chamber will draw reasonable inferences and reach conclusions as to whether the Claimant was, or was not, a national of the United States, as defined in the [Claims Settlement] Declaration during the necessary period. It would be easy, but in my view incorrect, to dismiss the techniques used in the Flexi-Van and General Motors Orders by saying that they were devised in relation to proof of unique jurisdictional requirements arising under an international treaty, and are inapplicable to the kinds of factual problems that typically arise in commercial arbitration. As I have said elsewhere, ‘The fact is that a fact is a fact. Procedures for establishing a jurisdictional fact are equally applicable to establishing a fact to prove liability or damages'. Indeed, the Tribunal has in several cases taken the initiative to order the submission of documentary evidence that it considered would facilitate deciding the merits of cases involving commercial contractual issues, even when no party requested discovery of that evidence. For example, the Tribunal has ordered, sua sponte, the filing of copies of various documents not presented by either party such as (i) full texts of contracts, (ii) financial records, (iii) tax returns, (iv) promotional plans, and (v) regulations or decrees. *** If tribunals are to take such initiatives, at what stage of the proceedings should they do so? Obviously, a tribunal cannot manage a case until it has sufficient insight into the factual issues that are posed. This insight may be provided by the initial pleadings, or may not be able to be perceived until later written submissions have been made by the parties. Discussion at a preparatory pre-hearing conference may be useful in this regard. As soon as the parameters and dimensions of the factual issues become apparent, the arbitral tribunal is in a position to consider what, if any steps, can be taken to streamline presentation of the evidence … *** Lest my comments appear theoretical, let me suggest a few relatively innovative means that arbitrators might consider in order to ‘manage’ presentation of evidence in commercial cases. Statistical sampling is accepted as a reliable basis for drawing inferences in a variety of contexts in modern life, as it was in Flexi-Van. Why not use it more often in commercial arbitration? I have called this an ‘innovative technique’. But is it really so innovative? For a long time, generally accepted accounting principles have permitted independent auditors to determine the amount and condition of inventories – or ‘stock’, if you will – based on sampling, and have not required counting and inspecting each item in every warehouse. Why is that methodology not also reliable in commercial arbitration? Tribunals have the power to appoint experts. Why not, for example, appoint

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experts to sample thousands of invoices or production records, and to report the results of their findings? Why not apply computer technology to summarize voluminous documentary material, a technique that I understand is being used by the UN Compensation Commission in Geneva that is considering claims against Iraq? That new Commission has looked to the computer models and programs used by the insurance industry in determining masses of casualty claims arising from natural disasters. If a hurricane strikes, the insurance inspectors do not necessarily look at every damaged home in a neighbourhood, but pay claims based on extrapolations, often made by computers, after physical inspection of only a few buildings. Such methodology has proven useful in a number of fields; it is available for imaginative arbitral tribunals to adopt or adapt.

[E] Witness Statements and Testimony – Michael Bühler and Carroll Dorgan, Witness Testimony Pursuant to the 1999 IBA Rules of Evidence in International Commercial Arbitration: Novel or Tested Standards?, 17(1) J. Int’l Arb. 3, 13-16, 2021, 24-25, 28-29 (2000) (Citations selectively omitted) *** … The arbitral tribunal, normally in consultation with the parties, determines the timetable and procedure for the submission of witness statements, whether they should be simultaneous or consecutive, whether there shall be one or two rounds of exchange of such statements, whether new documents can be submitted as annexes to the witness statement and, if so, under what circumstances, etc. Article 4(5) of the IBA Rules of Evidence provides a general framework of rules regarding the form and content of a witness' written statement that will help to avoid various errors and omissions in the drafting of such statements. Other points to consider when preparing written witness statements include the following: –

–

–

– –

The rule does not require the witness statement to be sworn as an affidavit. Instead, pursuant to Article 4(5)(c) [new Article 4(5) (d)], the statement shall contain an “affirmation of the truth of the statement”. The witness who provides a written statement in an arbitration will normally appear at a hearing, where he will confirm the statement. The statement does not stand alone as evidence unless accepted as such by the parties. Thus, one of the principal reasons for swearing an affidavit is not present. The text of the witness statement may be in narrative form. Depending upon the nature of the information contained in the statement, it may be more convenient to present it in some other form, such as a listing of relevant events by way of “bullet points” drafted in “telegraphic” style. It is helpful where each paragraph in a witness statement is limited, as far as possible, to a distinct portion of the subject, and then numbered separately. It facilitates references to specific passages in the witness statement, which assists the tribunal and the parties, in particular at the hearing. Excessive length of the witness statement should be avoided, as well as needless repetition. A witness statement should not simply repeat a party's pleadings, which sometimes occurs when counsel, rather than the witness, does the drafting. Counsel can legitimately assist the witness in the preparation of the statement to avoid lack of clarity, repetition and irrelevance; but the substance of the statement must come from the witness. A “lawyer's statement” will have little or no credibility. The witness statement is essentially a description of certain facts known to the witness. A witness' lengthy speculations as to certain events are generally pointless. The witness should identify the documents that he has been given when preparing the statement. The reference may be done in a general fashion; it may also be appropriate to state when the witness saw a document for the first time. Where the witness refers to documents on record in the arbitration, it is convenient to include the appropriate exhibit references. Counsel for the parties generally supply the references.

The relationship of written witness statements to oral testimony at a hearing raises several important issues, including the following: – – – –

whether a witness who gives a written statement should be required to testify at the hearing; whether a witness' written statement should be admitted as direct testimony; whether a written statement should be admitted in evidence if the person who gave that statement fails to appear at the hearing (and, if so, what weight to give to the statement); and whether the prior submission of a written statement is a prerequisite to the appearance of the witness at the hearing.

The IBA Rules of Evidence address most of these issues. Three inter-related provisions of the IBA Rules of Evidence, Articles 4(7)-(9), concern the attendance of witnesses at the

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hearing: generally, a witness who has submitted a witness statement must appear for testimony at a hearing, unless the parties have agreed otherwise (Article 4(7)). If a witness who has submitted a statement does not appear without a valid reason at the hearing, “the Arbitral Tribunal shall disregard that Witness Statement unless, in exceptional circumstances, the Arbitral Tribunal determines otherwise” (Article 4(8)) [new Article 4(7)]. An agreement by the parties that a witness need not appear at the hearing “shall not be considered to reflect an agreement as to the correctness of the content of the Witness Statement” (Article 4(9)) [new Article 4(8)]. Article 8(3) [new Article 8(4)] of the IBA Rules of Evidence provides that the parties may agree, or the arbitral tribunal may order, that a witness statement serve as that witness' direct testimony. In such a case, the witness normally appears at the hearing and confirms the accuracy of the statement, before responding to questions from the opposing party and the arbitrators. A witness will in general be entitled to supplement a written statement in order to respond to submissions that have been made in the arbitration after the preparation of the statement. These provisions reflect common practice in international commercial arbitration. Arbitrators and counsel appreciate the savings in time that result from treating witnesses' written statements as their direct testimony. It must, of course, be made clear at the beginning of the arbitration that written statements will serve as direct testimony so that they address their subject-matter in sufficient detail. In some cases, however, a party and its counsel may consider it important that witnesses provide evidence orally. The oral testimony of witnesses can give life to the facts of the case. While a witness' written statement may be accepted as direct testimony, the witness will generally appear at a hearing for cross-examination and to respond to questions from the arbitrators, unless the parties have agreed otherwise (and the arbitral tribunal has not expressed a wish to hear the witness). Pursuant to Article 4(5) [new Article 4(7)] of the IBA Rules of Evidence, the written statement of a witness who does not appear without a valid reason will be considered by the arbitral tribunal only in “exceptional circumstances”. Indeed, even if there is a perfectly valid reason for the witness' absence, the opposing party may nonetheless argue that the written statement should be accorded no weight at all, for whatever reasons relating to the facts of the matter that counsel may find proper to advance. The absence of the witness will have deprived the opposing party of its opportunity to cross-examine the witness. Hearings can thus occupy a central place in international commercial arbitration, and witnesses play the primary roles. This does not mean, however, that every witness who has given a written statement should automatically appear at a hearing. The issues, as they have evolved in the parties' pleadings, may make the evidence of a particular witness irrelevant or superfluous. The importance of the witness' evidence may not be commensurate with the cost of presenting that witness at the hearing. Parties do, on occasion, agree that one or more witnesses who have submitted written statements need not attend a hearing. Such an agreement may provide that the written statements may stand as they are, without constituting admissions by the opposing party. A provision such as Article 4(9) [new Article 4(8)] of the IBA Rules of Evidence is therefore useful, because it may facilitate agreement between the parties that certain witnesses need not attend the hearing. The possibility of concluding such agreements promotes the efficient and economic resolution of disputes, without denying parties the opportunity to present the witnesses whom they consider necessary for the presentation of their respective cases. *** In the common law tradition, where oral witness testimony occupies a central place in the adjudicatory process, the “preparation” of witnesses for their appearance at trial is an important activity. However, the preparation of witnesses in a system where even civil or commercial matters may be tried before a jury (as is the case in the United States) will differ from witness preparation in international commercial arbitration, where the witness will normally appear before a panel of experienced and sophisticated lawyers who know the case and, where witness statements have been submitted in advance of the hearing, even the testimony of the witness. As witness testimony, including crossexamination, has become established in international arbitration, lawyers from the civil law family have become more familiar with the importance of witness preparation. Witness preparation should not become witness manipulation or the fabrication of evidence. The starting point for all witness preparation is to remind the witness to tell the truth. The credibility of a witness is as vital as the information that he may present. One of the principal reasons for the appearance of witnesses to give oral testimony at a hearing is to test credibility. A witness who has been “over-prepared” may quickly lose credibility in the eyes of the arbitrators. Nonetheless, insufficient preparation can undermine a witness' credibility at least as much as excessive preparation. The witness must be familiar with the facts upon which his testimony is based, as will normally be the case when a written statement has been submitted. The witness should review the relevant documents in order to refresh his recollection of the facts. A witness who casually appears at the hearing without having reviewed his files for the last three years may appear candid in his affirmation that he

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does not know or recollect certain events and that he is unable to put them in a contractual context. However, such a witness is unlikely to impress the tribunal, or to assist it in clarifying the facts and in approaching the truth. It would be frustrating, and a sheer waste of time, for arbitrators to discover that the witness who was called by a party to testify about the meaning of some particularly ambiguous contract clause has not even taken the time to read the contract prior to taking the witness stand. The party or lawyer who assists and guides the preparation of a witness should ensure that the witness reviews the documents thoroughly and considers the points that may arise in questions at the hearing. The witness should be in a position to identify the documents that he has reviewed in preparation for his testimony. *** Normally, the time allotted for questioning witnesses at the hearing will be divided equally between the parties, or between the two sides: claimant(s) and respondent(s). This arrangement appears consistent with the rule that the parties must be treated equally, and it may be the division of time that is easiest for the parties to agree upon. However, an equal division of time is not necessarily appropriate for every case. There may be circumstances where one party legitimately needs more time than the other to present its case or has a larger number of witnesses than the other party. The arbitral tribunal should therefore keep an open mind on the issue and be prepared to tailor the schedule of the hearing to the nature of the case. Most arbitration rules are silent regarding the oath or affirmation that a witness might give prior to testifying. These lacunae may reflect differing views regarding the power of arbitrators: In common law countries, an arbitrator generally has the power to administer an oath or affirmation, while this may not be the case in civil law countries. Article 8(3) of the IBA Rules of Evidence may thus serve a useful purpose in stipulating that any witness providing testimony “shall first affirm, in a manner determined appropriate by the Arbitral Tribunal, that he or she is telling the truth”. This provision leaves sufficient flexibility to accommodate different practices in different jurisdictions, but it requires the tribunal to verify what is permissible under the lex arbitri. The manner in which witnesses are questioned is perhaps one of the best-known areas where common law and civil law procedures diverge. The common law leaves the stage to the lawyers, and incisive cross-examination is highly valued. In contrast, the civil law entrusts questioning principally, if not exclusively, to the judge, who will only refer to facts he considers relevant and requires to be proven. In international commercial arbitration, it is widely accepted that the parties should be allowed to question all witnesses. The arbitrators themselves are, of course, free to question the witnesses. While some arbitrators limit themselves to questions on specific points that require clarification, during or, more often, after questioning by parties' counsel, others will take a somewhat more active role in the hope of reaching the dispositive issues more quickly. It would be wrong to assume that there is only one way. The nature of the case, the type of witnesses, and the experience of both counsel and the arbitrators will necessarily influence the conduct of the evidentiary hearing. *** Most of the grounds for the exclusion of evidence stipulated by Article 9(2) are, in fact, narrow exceptions to admissibility (such as privilege and confidentiality). The general practice in international commercial arbitration is to admit evidence freely, leaving it to the arbitrators to assess its weight. The technical rules of evidence known to common law counsel are largely absent from international arbitration, which perhaps epitomizes best the differences between national court and international arbitration proceedings. Arbitrators are much more likely to admit evidence that does not appear to be material and then give it no weight in their deliberations, than to exclude such evidence under Article 9(2)(a). These considerations apply to witness evidence; but because witness testimony at a hearing can be time-consuming, international arbitrators may be more inclined to exercise their power to exclude testimony if a witness' evidence is manifestly irrelevant, immaterial, or repetitious. The discretion that the arbitral tribunal exercises in its assessment of the witness testimony is thus very broad. The most persuasive oral testimony is generally that which is supported by contemporaneous documentation. While any person may be entitled to give evidence as a witness, the fact that a witness has an interest in the outcome of the case may lead the arbitrators to discount his testimony. Similarly, a witness may generally present evidence that would be classified (and perhaps excluded) as hearsay in some state jurisdictions. However, while hearsay evidence is admissible in international arbitration, such evidence may be “weightless”: the arbitrators may find that the evidence is unreliable, for reasons similar to those that underlie common law exclusionary rules, and disregard it.

[F] Fundamental Rules of Procedure and ICSID Annulment [1] R. Doak Bishop and Silvia M. Marchili, Annulment Under the ICSID Convention, 129, 134135 (Oxford University Press 2012) (7)

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(Citations selectively omitted) 8.01 [ICSID Convention] Article 52(1)(d) provides that an [ICSID] award may be annulled due to a ‘serious departure from a fundamental rule of procedure’. 8.02 Because one of the principal purposes of a control mechanism like ICSID annulment is preserving the integrity of the process, ensuring that the tribunal did not seriously depart from a fundamental rule of procedure is a matter of real significance. *** 8.19 With respect to which rules are fundamental, the MINE [v. Guinea] committee held that a clear example of a fundamental rule is Article 18 of the UNCITRAL Model Law on International Commercial Arbitration, which provides that the parties must be treated with equality and be given full opportunity for presenting their case. Moreover, the committee added that the ‘fundamental rule of procedure’ wording ‘is not to be understood as necessarily including all of the Arbitration Rules adopted by the Centre’. 8.20 Perhaps the most useful definition of the rules of procedure that can be qualified as ‘fundamental’ was that given by the committee in Wena [Hotels v. Egypt], which held that Article 52(1)(d) ‘refers to a set of minimal standards of procedure to be respected under international law’. In illustrating that concept, the Wena committee noted that one of the fundamental features of proper procedure is that each party is given the right to be heard before an independent and impartial tribunal, which includes the right to state its claim or its defence and to produce all arguments in support of it. It concluded: This fundamental right has to be ensured on an equal level, in a way that allows each party to respond adequately to the argument and evidence presented by the other … 8.21 Another example of a fundamental rule is the tribunal's impartiality, which the Klöckner [v. Cameroon] I committee considered to constitute a ‘fundamental and essential requirement’. The committee held that: [a]ny shortcoming in this regard, that is any sign of partiality, must be considered to constitute, within the meaning of Article 52(1)(d), a ‘serious departure from a fundamental rule of procedure’ in the broad sense of the term ‘procedure’, i.e., a serious departure from a fundamental rule of arbitration in general, and of ICSID arbitration in particular. *** 8.24 Applicants have invoked Article 52(1)(d) as a ground for annulment based on disparate factual patterns, such as an alleged lack of impartiality or equal treatment of the parties, a failure to observe a party's right to be heard, absence of deliberations among the members of the tribunal, as well as issues of standing and the quality and probative value of the evidence. The only factual basis that has actually resulted in annulments, however, has been a breach of a party's right to be heard.

[2] Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines (ICSID Case No. ARB/03/25), Decision on the Application for Annulment of 23 December 2010, (8) ¶¶ 180, 185-187, 197, 200, 202-203, 218-228, 230-231 [Peter Tomka (pres.), Dominique Hascher, Campbell McLachlan] [In 1999, Fraport, a German company, acquired direct and indirect participation in PIATCO, a Philippine company that had previously entered into a concession agreement with the Government of the Philippines for the construction and operation of a new terminal at the Manila airport. Fraport also entered into a series of confidential shareholder agreements in order for Fraport to effectively manage PIATCO. After a series of political and legal challenges against the new terminal concession contracts, the Philippine Supreme Court held in 2003 that these contracts were null and void because they seriously violated Philippine law and public policy. Fraport subsequently initiated ICSID arbitration proceedings, alleging that the Philippines had violated its obligations under the Germany-Philippines BIT.] (Citations selectively omitted) (i) Construction of Article 52(1)(d) of the ICSID Convention 180. The object and purpose of the power to annul an award for “a serious departure from a fundamental rule of procedure” is to control the integrity of the arbitral procedure, a formulation accepted in the present case by both parties. With this object in mind, Article 52(1)(d) contains the twin requirements that the rule of procedure must be fundamental and that the departure from it must be serious. *** 185. The Commentary further confirms that ‘[t]he right to be heard, including due opportunity to present proofs and arguments' is one such fundamental rule of procedure. 186. The travaux of the ICSID Convention show a consensus that not all rules of procedure

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contained in the ICSID Arbitration Rules would fall under this concept. Rather, the concept was restricted to the principles of natural justice, including the principles that both parties must be heard and that there must be adequate opportunity for rebuttal. This view was also taken by the ad hoc Committee in MINE v. Guinea. 187. This context to the formulation in Article 52(1)(d) demonstrates that a “fundamental rule of procedure” is intended to denote procedural rules which may properly be said to constitute “general principles of law”, insofar as such rules concern international arbitral procedure. *** (iii) The content of the right to be heard 197. The requirement that the parties be heard is undoubtedly accepted as a fundamental rule of procedure, a serious failure of which could merit annulment. It was expressly referred to as an example of such a rule by the framers of the ICSID Convention and was accepted as such by both parties to the present annulment proceeding. *** 200. The right to present one's case, or “principe de la contradiction,” in arbitral proceedings includes the right of each party to make submissions on evidence presented by its opponent. If an arbitral tribunal fails to accord such a right, then its award will be subject to annulment. One example of this principle being applied in the international commercial arbitration context is where the arbitral tribunal has permitted one of the parties to adduce additional documentary evidence after the oral hearing, without giving the other party the opportunity to comment on it. *** 202. The right to present one's case is also accepted as an essential element of the requirement to afford a fair hearing accorded in the principal human rights instruments. This principle requires both equality of arms and the proper participation of the contending parties in the procedure, these being separate but related fundamental elements of a fair trial. The principle will require the tribunal to afford both parties the opportunity to make submissions where new evidence is received and considered by the tribunal to be relevant to its final deliberations. It is no answer to a failure to accord such a right that both parties were equally disadvantaged. 203. The right to be heard has found specific application in the only ICSID annulment decision so far to annul an Award under Article 52(1)(d) [Amco v. Indonesia II]. In that case, the ICSID Arbitration Rules expressly required that the decision of the Tribunal in question, a request for rectification, be taken only after an opportunity had been given to the other party to file observations on the request: ICSID Arbitration Rule 49(3). But the ad hoc Committee was in no doubt that such a requirement was in any event a fundamental rule, the breach of which was serious. *** e) Conclusions on the Right to Be Heard Before the Arbitral Tribunal 218. In the Committee's view, the Tribunal's treatment of the parties following receipt of the Prosecutor's Resolution did constitute a serious departure from the fundamental rule of procedure entitling the parties to be heard. This was so in respect of the Tribunal's consideration of both (i) the factual record before the Philippine Prosecutor; and (ii) the implications of the Prosecutor's Resolution for the issue of Philippine law before the Arbitral Tribunal as to the construction of Section 2-A of the ADL [An Act to Punish Acts of Evasion of the Laws on the Nationalization of Certain Rights, Franchises or Privileges – the so-called Anti-Dummy Law]. It is necessary to explain the Committee's reasons on each of these points in turn. (i) As to the factual record before the Philippine Prosecutor 219. The first respect in which the Tribunal failed to accord the parties the right to be heard was as to the factual record of material produced to the Prosecutor. The Tribunal justified its decision not to apply the Prosecutor's Resolution on the ground that there was no evidence to suggest that the Prosecutor had had available to him the Pooling Agreement, which the Tribunal regarded as the critical piece of evidence establishing breach of the ADL. Quite apart from the fact that this evidence would only be relevant to the extent that, as a matter of Philippine law, control exercised in this manner could constitute a breach, the Committee is bound to regard the Tribunal's approach to the determination of this question of fact as a serious departure from the right to be heard. 220. Three dates are important regarding Fraport's denial of an opportunity to address this new material, since they provide for the progressive closure of the proceedings. First, on 25 October 2006, the Tribunal declared the proceedings closed in accordance with Article 38 of the ICSID Rules, however reserving the possibility to the Philippines to inform Fraport and the Tribunal of the status of the expropriation proceedings in the Philippines. Paragraph 9 of Procedural Order No. 24 of 18 July 2006, which ordered the Respondent to update the Tribunal and the Claimant on all developments in the

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expropriation action, thus remained in effect notwithstanding the closing of the proceedings. Second, on 23 April 2007, the Tribunal directed the parties not to send any further letter to the Tribunal. It added: “This also applies to any further update by the Respondent in respect of the ongoing expropriation proceedings in the Philippines.” Third, the Tribunal finally on 13 June 2007 informed the parties that it “is of the view that the presentation of their case by both parties is completed and accordingly, pursuant to Arbitration Rule 38, the proceeding is now closed in its entirety.” 221. It was the Philippines that took the initiative to inform the Tribunal on 5 January 2007 about the Prosecutor's Resolution of 27 December 2006, dismissing the ADL Criminal Complaint against PIATCO [Philippine International Air Terminals Co., a Philippine company in which Fraport invested] and Fraport officials, an issue which was otherwise covered by the closing order of 25 October 2006. Fraport immediately replied on 8 January 2007 to stress the Philippines had misrepresented the factual record available to the DOJ in rendering its dismissal and contended that the dismissal was not based on two documents only, i.e., Fraport's request for ICSID arbitration and the Philippine Senate Blue Ribbon Committee's Report on the Terminal 3 Project, as claimed by the Philippines. 222. Without reopening the proceedings, the Tribunal then decided to complete the evidentiary record of material produced to the Prosecutor (i) by asking Fraport on 9 January to submit the documents referred to in its letter of 8 January; (ii) by directing the Philippines to produce the entire evidentiary record before the Philippine Prosecutor on 14 February; and (iii) by inviting Fraport to produce copies of additional documents referred to in its letter of 26 March 2007. 223. This further production of documents added over 1900 pages of documents to the file in the arbitration. But it did not result (as the Tribunal had stated in its letter of 14 February was its objective) in any final assurance as to the completeness of the evidentiary record before the Prosecutor … 224. Despite its indication that it was only seeking to complete the evidentiary record, the Tribunal proceeded to make extensive use in its Award of the documents which had been produced in the Prosecutor's investigation. This included drawing an inference from a statement given before the Prosecutor as to the credibility of a witness (Dr. Stiller, Fraport's transaction counsel). 225. The Tribunal also found that the secret shareholder agreements were not in the Prosecutor's file. In so doing, it relied upon the Philippines' assertion in its letter of 11 January 2007 that “[t]hese critical documents were unavailable to the DOJ” and on the failure of Fraport to be able to point specifically to disclosure of the relevant document in its letter of 16 March 2007. But Fraport had consistently pointed out it did not have a full record of the documents disclosed to the Prosecutor, and thus cannot be taken to have conceded this point … 226. The Tribunal then proceeded to draw the negative inference that the Prosecutor's decision may well have been different had he been in possession of the Pooling Agreement. 227. In view of the fact that the information as to what documents were in the possession of the Prosecutor had been shown to be unreliable, the Tribunal could not properly, in the Committee's view, have made such a determination, without hearing both parties on the adequacy and effect of the record before the Prosecutor and considering such further evidentiary enquiries or proceedings as may have been necessary in light of those submissions. 228. Despite this, the Tribunal had pre-emptively, and before it had even received the additional factual material, directed by letter dated 14 February 2007 that “the Tribunal does not wish to receive any submissions with respect to this material from either party.” *** 230. In the Committee's view, the Tribunal's direction of 14 February was incompatible with the fundamental obligation on the Tribunal to permit both parties to present their case in relation to the new material. Given the central importance which the proper construction of the ADL came to play in the Tribunal's analysis, the Prosecutor's Resolution on the evidence before him had a particular significance. The Tribunal ought not to have proceeded to analyse and consider this evidence itself in its deliberations without having afforded the parties the opportunity to make submissions on it, and availed itself of the benefit of those submissions. 231. In such a confused situation, where a factual investigation was conducted on an issue which proved determinative in the outcome of the case, while the deliberative process had already been underway for some months, the Committee considers that the Tribunal ought not to have continued its deliberations. Rather, it ought to have re-opened the proceedings, pursuant to its powers under ICSID Rule 38(2) …

[G] Challenges to Arbitrators – Suez, Sociedad General de Aguas de Barcelona, S.A. and Vivendi Universal, S.A. v. Argentine Republic (formerly Aguas Argentinas, S.A., Suez, Sociedad General de Aguas de Barcelona, S.A.and Vivendi Universal, S.A. v. 716 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

Argentine Republic) (ICSID Case No. ARB/03/19) and Suez, Sociedad General de Aguas de Barcelona S.A., and InterAguas Servicios Integrales del Agua S.A. v. The Argentine Republic (formerly Aguas Provinciales de Santa Fe S.A, Suez, Sociedad General de Aguas de Barcelona, S.A., and InterAguas Servicios Integrales del Agua, S.A.) (ICSID Case No. ARB/03/17) and AWG Group Limited v. Argentine Republic (ad hoc arbitration under the 1976 UNCITRAL Rules), Decision on a Second Proposal for the Disqualification of a Member of the Arbitral Tribunal of 12 May 2008, (9) ¶¶ 9-12, 21-22, 24-33, 35, 39-40, 45-48 [Jeswald W. Salacuse (pres.), Pedro Nikken] (Citations selectively omitted) 9. On November 29, 2007, before the time for the filing of the parties' post-hearing submissions in Case No. ARB/03/19 and the UNCITRAL Arbitration Proceeding had passed, the Respondent filed with the Tribunal a second proposal to disqualify Professor Kaufmann-Kohler (hereinafter “Respondent's Second Proposal”) under Article 57 of the Convention and Rule 9 of the ICSID Arbitration Rules “… on the basis that Mrs. KaufmannKohler does not meet the conditions required to be an arbitrator in the above mentioned proceedings, pursuant to the provisions set forth in Article 14(1) of the ICSID Convention.” Specifically, the Respondent alleged that “… Mrs. Kaufmann-Kohler cannot be ‘relied upon to exercise independent judgment,’ … since [she] holds the position of Director of the UBS group.” Moreover, the Respondent asserted that Professor Kaufmann-Kohler failed to disclose this fact to the parties and to ICSID as is required by the ICSID Rules … 10. The UBS Group, with headquarters in Switzerland, is among the world's largest financial services companies … 11. On April 19, 2006, some two years after the Tribunal in the above-entitled cases was constituted, the annual meeting of the shareholders of UBS elected Professor Gabrielle Kaufmann-Kohler a member of the corporation's board of directors for a three-year-term … 12. The Respondent alleges that Professor Kaufmann-Kohler's impartiality and independence of judgment are negatively affected because of the activities of UBS with respect to the parties in this case. In particular, UBS is a shareholder in two of the Claimants, Suez and Vivendi. According to the Vivendi web site, UBS was a “main investor” in the corporation, holding 2.38% of its registered voting stock as of March 31, 2007. UBS also held some 2.1% of the voting shares of Suez as of March 7, 2007. In addition to share ownership, the Respondent points to other UBS activities that affect the parties: UBS does research on and makes recommendations with respect to investments in the water sector, a sector in which the Claimants operate, and UBS has developed financial products that it sells to investors to permit them to invest in the water sector on a global basis. Moreover, pursuant to corporate policy, UBS pays Professor Kaufmann-Kohler a portion of her director's compensation in UBS stock. She is therefore a shareholder in UBS, which in turn owns stock in two of the Claimants in these cases … *** 21. The Respondent has made a single proposal requesting the disqualification of Professor Kaufmann-Kohler in all three of the cases that the Tribunal was constituted to hear. In deciding on the proposal to disqualify Professor Kaufmann-Kohler, it is necessary to treat the case of AWG Group Limited v. The Argentine Republic separately from the other two cases. Such separate treatment is justified for two reasons. First, the AWG Case is governed by the UNCITRAL Arbitration Rules, while the other two cases are governed by the ICSID Convention and Arbitration Rules. Second, the facts alleged with respect to Professor Kaufmann-Kohler's independence and impartiality differ from those alleged in the other two cases in that UBS is not a shareholder in the Claimant AWG Group Limited … III. The Challenge in the Case of AWG Group Limited v. The Argentine Republic 22. Under Article 10(1) of the UNCITRAL Arbitration Rules: “An arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator's impartiality or independence.” The words “justifiable doubt” clearly indicate that Article 10(1) establishes an objective, rather than a subjective standard for determining the existence of a circumstance that creates justifiable doubts as to an arbitrator's impartiality and independence. Thus, as we stated in our previous Decision in Response to a Proposal to Disqualify a Member of the Arbitral Tribunal, it is not sufficient that such doubt exist in the mind of a party. Such doubt must be justifiable from an objective point of view. The application of such standard in the particular case requires an answer to the following question: Would a reasonable, informed person viewing the facts be led to conclude that there is a justifiable doubt as to the challenged arbitrator's independence and impartiality? Moreover, the party challenging the arbitrator has the burden of proving that such justifiable doubt exists. *** 24. Thus the only connection, if one may call it that, between Professor Kaufmann-Kohler and the Claimant AWG Group Limited is the fact that she is a director of UBS and that UBS, among its many other activities and interests throughout the world, conducts

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research and develops financial products related to the water sector. The existence of such purported connection is not enough to establish a “circumstance” giving rise to justifiable doubts as to an arbitrator's independence and impartiality. Such a connection must be significant and direct, such as an economic relationship causing an arbitrator to be dependent in some way on a party. Such connection between Professor KaufmannKohler and AWG Group Limited, as suggested though not specifically alleged by the Respondent, is too remote and tenuous as to hardly be called a connection or relationship at all. An objective analysis of the facts as alleged by the Respondent does not establish a circumstance that would lead a reasonable, informed person to conclude that a justifiable doubt exists as to Professor Kaufmann-Kohler's impartiality or independence in the case of AWG Group Limited v. The Argentine Republic. 25. The Respondent also alleges that Professor Kaufmann-Kohler had a duty to disclose to the parties in the AWG Case that she was a director of UBS and that UBS carried out certain activities relating to the international water sector … 26. … Having decided that Professor Kaufmann-Kohler's appointment as a director of UBS did not create a circumstance giving rise to justifiable doubts as to her impartiality or independence in the AWG Case, because of the lack of any business relationship between UBS or Professor Kaufmann-Kohler on the one hand and AWG Group Limited on the other, we also conclude that she had no obligation under Article 9 of the UNCITRAL Arbitration Rules to disclose the fact of her directorship in UBS to the parties in the AWG Case … *** 27. With respect to the two ICSID cases, the applicable rules and standards governing the independence and impartiality of arbitrators are to be found in the ICSID Convention and Arbitration Rules. Article 57 of the ICSID Convention provides that a party may “propose … the disqualification of any arbitrator on account of any fact indicating a manifest lack of the qualities required by paragraph (1) of Article 14.” Article 14 of the ICSID Convention requires as a quality of an arbitrator that he or she be a person “who may be relied upon to exercise independent judgment.” Thus, the English version of the ICSID Convention makes no specific reference to the requirement of impartiality: however, the Spanishlanguage version of ICSID Convention Article 14(1) does embody the concept of impartiality, for it refers to a person who “… inspira[r] plena confianza en su imparcialidad de juicio. (i.e. who inspires full confidence in his impartiality of judgment.) Since the treaty by its terms makes both language versions equally authentic, in deciding on this challenge as in the previous challenge, we will apply the two standards of independence and impartiality of judgment in making our decisions. Such an approach accords with that found in many arbitration rules which require arbitrators to be both independent and impartial. 28. The concepts of independence and impartiality, though related, are often seen as distinct, although the precise nature of the distinction is not always easy to grasp. Generally speaking, independence relates to the lack of relations with a party that might influence an arbitrator's decision. Impartiality, on the other hand, concerns the absence of a bias or predisposition toward one of the parties … 29. The Respondent has the burden of proof to establish the existence of the required fact or facts and to prove that such fact or facts indicate a “manifest lack” of the quality required of an arbitrator, that is, that such arbitrator lacks the quality of being a person who can be relied upon to exercise independent judgment and impartiality of judgment. The term “manifest” means “obvious” or evident. Christoph Schreuer, in his Commentary on the ICSID Convention observes that the word manifest imposes “… a relatively heavy burden on the party making the proposal …” to disqualify an arbitrator. In our Decision on the Respondent's First Proposal to Disqualify Professor Kaufmann-Kohler, we stated …: Implicit in Article 56 and its requirement for a challenger to allege a fact indicating a manifest lack of the qualities required of an arbitrator by Article 14 is the requirement that such lack be proven by objective evidence and that the mere belief by the challenger of the contested arbitrator's lack of independence or impartiality is not sufficient to disqualify the contested arbitrator … [T]he party challenging an arbitrator must establish facts, of a kind or character as reasonably to give rise to the inference that the person challenged clearly may not be relied upon to exercise independent judgment in the particular case where the challenge is made.” … Thus, in this Second Proposal to Disqualify Professor Kaufmann-Kohler, the Respondent to succeed must prove such facts that would lead an informed reasonable person to conclude that Professor Kaufmann-Kohler clearly or obviously lacks the quality of being able to exercise independent judgment and impartiality in the two above entitled ICSID cases. It is important to emphasize that the language of Article 57 places a heavy burden of proof on the Respondent to establish facts that make it obvious and highly probable, not just possible, that Professor Kaufmann-Kohler is a person who may not be relied upon to exercise independent and impartial judgment. ***

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31. Professor Kaufmann-Kohler is a member of the board of directors of UBS, but that fact, in and of itself, would not raise concerns about her impartiality or independence as an arbitrator. The essence of the problem, according to Respondent's Second Proposal, is the connection between Professor Kaufman-Kohler and the Claimants by reason of the fact that she is a UBS director and that UBS is a shareholder in the Claimants Suez and Vivendi and engages in certain other activities in the water sector, including, … recommending the purchase of Claimant Vivendi's shares to its clients. It is that connection, according to the Respondent, that raises doubts about her impartiality or independence. 32. But the fact of an alleged connection between a party and an arbitrator in and of itself is not sufficient to establish a fact that would establish a manifest lack of that arbitrator's impartiality and independence. Arbitrators are not disembodied spirits dwelling on Mars, who descend to earth to arbitrate a case and then immediately return to their Martian retreat to await inertly the call to arbitrate another. Like other professionals living and working in the world, arbitrators have a variety of complex connections with all sorts of persons and institutions. It has been asserted by some scholars that there are only “six degrees of separation” between one person and any other person on earth. The theory of six degrees of separation holds that if a person is one step or “degree” away from each person he or she knows and two steps or two degrees away from each person known by one of the people he or she knows, then everyone is an average of six steps or six degrees away from each person on the globe. While the validity of this theory certainly remains to be proven, its application does demonstrate how easily one may make connections between one person and another through the process of identifying real or alleged links … 33. Such connections are increasingly easy to make as globalization of modern life rapidly advances and countless institutions engage in activities that are global in scope. At the same time, it is perfectly possible for a person to be unaware of the links that connect him or her to others or at least to be unaware of their full implications. For example, arbitrators in this case might unknowingly have a connection to UBS by virtue of the fact that their law firms have bank accounts with a UBS foreign branch, that their university pension fund is managed by UBS, or that they or their family members own shares in mutual funds which in turn hold UBS securities. In each of these situations, a resourceful party might challenge an arbitrator on the grounds that such arbitrator had a connection to UBS and therefore to the Claimants Vivendi and Suez since in theory the financial fortunes of UBS would have some consequence on the financial standing of the arbitrator; however, none of these facts would reasonably lead to the conclusion that such arbitrator is unable to exercise independent and impartial judgment. Thus, the fact of an alleged connection between Professor Kaufmann-Kohler and two of the Claimants is not sufficient, in and of itself, to establish a fact that manifestly impairs her ability to act independently and impartially. That alleged connection must be evaluated qualitatively in order to decide whether it constitutes a fact indicating a manifest lack of the quality of independence of judgment and impartiality required of an ICSID arbitrator. *** 35. In seeking criteria for the evaluation of such alleged connection between a party and an arbitrator and its effect on that arbitrator's independence and impartiality, we identify four that we think are particularly important. They are as follows: Proximity: How closely connected is the challenged arbitrator to one of the parties by reason of the alleged connection? The closer the connection between an arbitrator and a party, the more likely that the relationship may influence an arbitrator's independence of judgment and impartiality; Intensity: How intense and frequent are the interactions between challenged arbitrator and one of the parties as a result of the alleged connection? The more frequent and intense the interaction by virtue of the relationship between an arbitrator and a party the more probable that such relationship will affect the arbitrator's independence of judgment and impartiality; Dependence: To what extent is the challenged arbitrator dependent on one of the parties for benefits as a result of the connection? The more an arbitrator is dependent on a relationship for benefits or advantages the more likely that the relationship may influence the arbitrator's independence of judgment and impartiality; and Materiality: To what extent are any benefits accruing to the challenged arbitrator as a result of the alleged connection significant and therefore likely to influence in some way the arbitrator's judgment? Obviously significant benefits derived from a relationship will be more likely to influence an arbitrator's judgment and impartiality than negligible or insignificant benefits. *** 39. Thus pursuant to Swiss law and UBS Articles of Association, UBS has a Board of Directors consisting of independent directors – that is, persons who are not part of UBS corporate management, and a Group Executive Board consisting of full-time managers. The directors are not full-time employees of the corporation, are not in continuous session, and exercise largely a supervisory function over the activities of the corporation.

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As a result, Professor Kaufmann-Kohler is not involved in the day-to-day management of the corporation, such as selecting investments or preparing research reports, does not have responsibilities over the investment and management of corporate or client assets, and in fact was unaware until reading the Respondent's Second Proposal for her disqualification that UBS owned shares in Vivendi or Suez. Professor Kaufmann-Kohler does not participate in the selection and monitoring of individual UBS investments, nor was she kept informed of individual UBS securities holdings. Respondent offered no evidence to the contrary with regard to Professor Kaufmann-Kohler's specific duties and responsibilities as a member of the UBS board of directors. 40. With the above understanding of the facts, we now proceed to evaluate the alleged connection between Professor Kaufmann-Kohler and the Claimants by applying the four criteria suggested above: proximity, intensity, dependence, and materiality. First, with regard to proximity, the facts as discussed above indicate that any connection between Professor Kaufmann-Kohler and the Claimants Vivendi and Suez is remote and certainly not direct. Professor Kaufmann-Kohler has no direct relationship with the claimants by reason of her directorship. She was unaware of the shareholdings and did not participate in their selection and monitoring. Second, the alleged connection does not demonstrate or represent any frequency of interaction or contact between Professor Kaufmann-Kohler and the Claimants. Indeed, there is no interaction at all between Professor KaufmannKohler and the Claimants by virtue of her UBS directorship. Third, Professor KaufmannKohler derives no benefits or advantages from and is in no way dependent on the Claimants as a result of the alleged connection. Fourth, UBS shareholdings in Claimant s Vivendi and Suez are not material to UBS financial performance, profitability, or share price and in no way affect the compensation that Professor Kaufmann-Kohler earns as a director of UBS. Professor Kaufmann-Kohler derives no economic benefit from the alleged connection between her and the Claimants. We therefore conclude that the alleged connection asserted by Respondent between Professor Kaufmann-Kohler and the Claimants does not create a fact indicating a manifest lack of the quality of being a person of independent judgment and impartiality of judgment. *** 45. Did Professor Kaufmann-Kohler have a duty to disclose to the parties and the Tribunal her election as director of UBS at the time she accepted that position? We do not accept the Claimants' contention that the fact of her directorship was “notorious,” by which the Claimants mean that the Respondent knew or should have known of this fact. While the identity of directors of a publicly traded company, such as UBS, is a matter of public record, the knowledge of the fact that Professor Kaufmann-Kohler was a UBS director is not so public and wide-spread that one can reasonably assume that the Respondent actually knew or should have known of that fact. 46. A reasonable interpretation of ICSID Arbitration Rule 6 is that an arbitrator is required to disclose a fact only if he or she reasonably believes that such fact would reasonably cause his or her reliability for independent judgment to be questioned by a reasonable person. The ground of the Respondent's challenge is not Professor KaufmannKohler's directorship, but the fact that UBS is a shareholder in Suez and in Vivendi. If UBS did not have shareholdings in the Claimants, Professor Kaufmann-Kohler would not have been required to disclose her appointment as director since the mere fact of her directorship in UBS would be irrelevant as to her independence. It is the fact that UBS holds shares in the Claimants that causes the Respondent to challenge her. But Professor Kaufmann-Kohler states that she did not know that UBS held shares in the Claimants. Can she be required to disclose a fact that she does not know? The answer to that question is plainly “no.” But one may ask a further question: Even though Professor Kaufmann-Kohler may not have actually known of UBS shareholdings, should she have known about them? Or at least did she have an obligation to inquire as to whether UBS had shareholdings in or relationships with the Claimants at the time she became a director? Did she make sufficient efforts to determine the existence of possible compromising relationships between UBS on the one hand and Suez and Vivendi on the other? 47. On this question, the ICSID Arbitration Rules offer little guidance. They require only the making of a declaration. They contain no specific requirement that an arbitrator is to make an investigation of possible compromising circumstances and they prescribe no standards as to the extent and nature of such investigation. However, if an arbitrator has no reasons to conjecture that a possible compromising situation exists, it would not be reasonable to impose on him or her the duty to disclose. Moreover, in this case, Professor Kaufmann Kohler informed UBS, as part of the process of determining her status as a potentially independent director, of the arbitrations in which she was engaged to determine whether any of such arbitrations conflicted with her future responsibilities as a UBS director. After reviewing this information, UBS informed her that only her position as an arbitrator for the America Cup races presented a problem. As a result, she resigned her position as an America Cup arbitrator. That resignation was reasonable as was her abstention from any other action related to potential incompatibilities of which she was not aware. 48. We believe that she had reason to rely on the UBS examination of this question since UBS, under Swiss banking law and the corporate and stock exchange rules to which it is subject, had a strong incentive to ascertain her independence because the company

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would have encountered legal and regulatory difficulties should it represent her as an independent director and later find that a court, regulatory agency, or stock exchange had determined her to be non-independent director of the UBS board of directors. It was therefore reasonable to rely on the investigation by UBS that no conflict existed between Professor Kaufmann-Kohler and the parties in any of her arbitrations … Moreover, even if it were established that she did have such an obligation (which we do not believe is the case), her failure to do was in our opinion the result of an honest exercise of judgment and was not part of a pattern of circumstances raising doubts about impartiality. We therefore conclude that Professor-Kaufmann-Kohler did not violate ICSID Arbitration Rule 6 with respect of her obligations of disclosure to the parties in these cases.

[H] Control of Dilatory Tactics – L. Yves Fortier, The Minimum Requirements of Due Process in Taking Measures Against Dilatory Tactics: Arbitral Discretion in International Commercial Arbitration: ‘A Few Plain Rules and a Few Strong Instincts’, in Improving the Efficiency of Arbitration Agreements and Awards: 40 Years of Application of the New York Convention, ICCA Congress Series No. 9, 396, 403, 405-407 (Albert Jan van den Berg (ed.), Kluwer Law International 1999) (Citations selectively omitted) VI. The Duty of Diligence and the Control of Dilatory Tactics I mentioned at the outset that with freedom comes responsibility; with discretion, obligation. Arbitrators clearly have the power, within certain limits, to speed the arbitral process along – but they have more than that. They have a duty to do so. It is a generally accepted, though occasionally forgotten, principle that in accepting this task the arbitrator undertakes to fulfill it with due diligence. In addition to the obligation to treat the parties equally and ensure that they are given every opportunity to present their cases, the obligation of due diligence is seen as one of the arbitrator's fundamental duties toward the parties. *** The arbitrator's obligation to act diligently, which implies a duty to control the parties' various dilatory tactics, is also frequently manifested in specific rules of various institutions which either impose or permit the imposition of time limits for the rendering of an award or the performance of specific procedural steps such as the rendering of an award, the signing of terms of reference, or the service of pleadings. It must however be acknowledged that another, at least equally important, rule of practice in international arbitrations is that time limits such as those referred to above may be, and very commonly are, extended for valid reasons. The issue, however, is not whether time limits are rigidly enforced – they are not. The point is that such rules exist and constitute practical, though flexible, guidelines regarding the concept of due diligence and the obligations of the parties and the arbitrator in that regard. Their existence, combined with their mode of application, also supports the contention that inflexible rules blindly applied are the every antithesis of what international arbitration is all about. Arbitrators have wide discretion to direct and expedite the conduct of proceedings. That discretion is buttressed by various rules. However, there are limits to the measures an arbitrator may take to speed the arbitral process. In short, such rules demonstrate and serve to remind practitioners that arbitrators have certain interrelated duties to ensure that the fundamental principles of both efficiency and fairness are respected. *** VII. Conclusion *** … [S]peed remains one of the main objectives of arbitration – not to mention one of the parties' (generally, the claimant's) principal preoccupations. Most laws and rules governing arbitrations impose upon the arbitrator a duty to conduct the proceedings expeditiously. Arbitrators have the right, the duty and the power to avoid unnecessary delays. Their scope of action in limiting dilatory procedures, however, is both bounded and balanced by the duty to ensure due process. As many authorities have remarked, there is a potential conflict between speed and fairness in the conduct of arbitrations. Yet no one would contradict the maxim that justice delayed is justice denied. Speed is of the essence of justice. Where to draw the line between efficiency and fairness, how to determine the point at which reasonable delay becomes unduly dilatory, and how to strike a balance appropriate to the circumstances at hand, are matters which are generally left to the arbitrator.

[I] Comments and Questions 1.

There is no single arbitral procedure that a tribunal must adopt or apply. The tribunal has a certain flexibility to tailor the procedure to the needs of a particular case. The tension between the predictability that detailed rules provide and the flexibility that derives from the arbitrators' discretion is well described in the chapter, The Value of Rules and the Risks of Discretion: Arbitration’s Protean Nature,

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2.

3.

4. 5. 6. 7. 8.

9.

10.

11.

in William W. Park, Arbitration of International Business Disputes (Oxford Univ. Press 2d ed. 2012). The procedure for an arbitration is typically defined in the applicable arbitration rules, by any applicable or mandatory rules provided in the arbitration law of the arbitral situs, in any supplementary rules agreed by the parties, and in the procedural orders issued by the arbitral tribunal. By contrast to an UNCITRAL arbitration, an ICSID proceeding is self-contained – that is, the arbitration law of the country in which the arbitral hearing takes place does not apply. ICSID procedure will be defined by the ICSID Convention, the ICSID Arbitration Rules, the ICSID Institution Rules, the ICSID Administrative and Financial Regulations, any agreements by the parties, and the arbitrators' orders. The procedure consists of the arbitrators' orders with the milestone steps set for developing the case: (a) the number and nature of the pleadings; (b) the jurisdictional procedure, if any, including the timing and filing of jurisdictional pleadings; (c) orders concerning the production and exchange of documents; (d) the development of the evidence through witness statements, documents and oral testimony; (e) the development of any necessary expert evidence, including expert reports, oral testimony and the appointment of any independent experts, if appropriate; and (f) the details of the oral hearing, including the order of the parties' presentations, direct examination of witnesses, cross examination, opening statements, and closing comments. These steps inform the parties what pleadings will be accepted, the form that the evidence may take and the deadlines for presenting the pleadings and evidence. Describe the written procedure under the ICSID Arbitration Rules. The procedural aspects of the case provide fertile ground for strategic and tactical planning by counsel for the parties. What tactics might be employed by counsel for each of the parties with respect to the procedure of the case? What issues should be considered and addressed by counsel and the arbitrators in the preliminary hearing? What are the fundamental principles that apply to a tribunal's treatment of the parties in conducting an investment arbitration? Challenges to arbitrators have increased significantly in investment arbitrations over the past decade. In the 1990s, there was only one challenge to an arbitrator in ICSID proceedings. From 2000-2012, there were approximately 34 such challenges in ICSID cases. What is the standard for challenging an arbitrator in an ICSID arbitration? Is the standard different in an UNCITRAL proceeding? See the IBA Guidelines on Conflicts of Interest in International Arbitration (2004). For a discussion of the case law on arbitrator challenges in investment arbitrations, see Audley Sheppard, Arbitrator Independence in ICSID Arbitration, in International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer, Ch. 10 at 131 (Christina Binder, ed., Oxford Univ. Press 2009). Challenges to arbitrators in investment arbitrations have been sustained, or the arbitrators have resigned in the face of such challenges, when the arbitrators have made public comments about the case in which they are sitting, when they have made comments that might reasonably be considered as prejudging issues in the case, and when an arbitrator became a director of a company that was a party or controlling shareholder of a party to the case. Arbitrator challenges have been rejected, however, when the basis of the challenge concerned previous generic writings of an arbitrator that focused on recurring jurisdictional issues involved in investment arbitrations, the arbitrator had previously had office-sharing arrangements with counsel or they had previously been co-counsel in other cases, the arbitrator had participated in the rendering of an arbitral award against a party in another case, the arbitrator's law firm had represented (or was representing) a party in unrelated matters in which the arbitrator was not personally involved, or the arbitrator had participated in other arbitrations in which the tribunals had issued allegedly conflicting decisions on a particular issue in dispute. So-called “guerilla tactics,” which may include dilatory tactics, have become an increasing concern in international arbitration. On what legal basis may a tribunal address such concern? What measures may a tribunal take to control such tactics? What limits must a tribunal observe in doing so? For discussion of this topic, see Loretta Malintoppi, How May Investment Tribunals Cope With and Sanction Guerilla Tactics of the Parties /their Counsel?, Transnational Dispute Management, Vol. 7, Issue 2 (Nov. 2010), http://www.transnational-dispute-management.com. In Liberian Eastern Timber Corporation (LETCO) v. Liberia, ICSID Case No. ARB/83/2, Award, Mar. 31, 1986, 26 I.L.M. 647 (1987) (Bernardo M. Cremades, President; Jorge Concalves Pereirs and Alan Redfern), the government refused to participate in the arbitration, and instead, filed a case in its own courts. The tribunal awarded the full costs of the proceedings, including counsel fees, against the government. In Victor Pey Casado y Fundacion Presidente Allende v. Chile, ICSID Case No. ARB/98/02, Award (8 May 2008) (Prof. Pierre Lalive, President; Mohammed Chemloul and Prof. Emmanuel Gaillard), the tribunal noted that Chile's strategy had increased the length and cost of the arbitration, and took this into account in its cost award.

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12.

What is a fundamental rule of procedure for purposes of an ICSID proceeding? Are all of the ICSID arbitration rules considered “fundamental” for purposes of annulment?

§12.04 CONFIDENTIALITY [A] Metalclad Corp. v. United Mexican States (ICSID Case No. ARB(AF)/97/1), Award of 30 August 2000, (10) ¶ 13 [Elihu Lauterpacht (pres.), Benjamin R. Civiletti, José Luis Siqueiros] [The Metalclad Corporation, a U.S. waste disposal company, instituted arbitration proceedings against Mexico under the ICSID Additional Facility Rules. Metalclad alleged breaches of NAFTA Articles 1102, 1103, 1104, 1105, 1106(1)(f), 1110 and 1111. It asserted that Mexico had wrongfully refused to permit Metalclad's subsidiary to open and operate a hazardous waste facility that Metalclad had built in La Pedrera, San Luis Potosi, despite the fact that the project was allegedly built in response to the invitation of certain Mexican officials and allegedly met all Mexican legal requirements. It sought damages of US$43,125,000 “plus damages for the value of the enterprise taken.” On August 30, 2000, the Tribunal issued an award in Metalclad's favor in the amount of $16.7 million. It ruled that Mexico violated the obligation to treat Investors “in accordance with international law, including fair and equitable treatment and full protection and security”. More significantly, the tribunal ruled that the Mexican government had deprived the owner of its reasonably expected economic benefit of the property by permitting the local governor to deny Metalclad the right to operate the landfill notwithstanding its prior approval. Thus, Mexico had “taken a measure tantamount to expropriation” without providing compensation equivalent to fair market value as required by the standards of international law. Normally, the fair market value of a business which has a history of profitable operation may be based on an estimate of future profits subject to a discounted cash flow analysis. However, the Tribunal's award compensated Metalclad for only part of its investment in Mexico, and denied its claim for lost future profits, stating that “the landfill was never operative and any award based on future profits would be wholly speculative.] (Citations selectively omitted) 13. On September 10, 1997, pursuant to NAFTA, Article 1134 providing for interim measures of protection and Article 28 of the Rules providing for Procedural Orders, Mexico filed a Request for a Confidentiality Order seeking a formal order that the proceedings be confidential. Metalclad filed its response on October 9, 1997. On October 27, 1997, the Tribunal issued a determination, which in its material part reads as follows: “There remains nonetheless a question as to whether there exists any general principle of confidentiality that would operate to prohibit public discussion of the arbitration proceedings by either party. Neither the NAFTA nor the ICSID (Additional Facility) Rules contain any express restriction on the freedom of the parties in this respect. Though it is frequently said that one of the reasons for recourse to arbitration is to avoid publicity, unless the agreement between the parties incorporates such a limitation, each of them is still free to speak publicly of the arbitration. It may be observed that no such limitation is written into such major arbitral texts as the UNCITRAL Rules or the draft Articles on Arbitration adopted by the International Law Commission. Indeed, as has been pointed out by the Claimant in its comments, under United States security laws, the Claimant, as a public company traded on a public stock exchange in the United States, is under a positive duty to provide certain information about its activities to its shareholders, especially regarding its involvement in a process the outcome of which could perhaps significantly affect its share value. “The above having been said, it still appears to the Arbitral Tribunal that it would be of advantage to the orderly unfolding of the arbitral process and conducive to the maintenance of working relations between the Parties if during the proceedings they were both to limit public discussion of the case to a minimum, subject only to any externally imposed obligation of disclosure by which either of them may be legally bound”.

[B] Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania (ICSID Case No. ARB/05/22), Procedural Order No. 3 of 29 September 2006, (11) ¶¶ 112, 114-116, 121, 125, 133-136, 145-147, 163 [Bernard Hanotiau (pres.), Gary B. Born, Toby Landau] [The dispute opposed a British investor and the Republic of Tanzania over a concession to operate the water and sewerage services of Dar es Salaam, Tanzania's capital. Tanzanian authorities had canceled the contract and regained possession of assets previously leased to Biwater Gauff after concluding that the investor failed to meet its contractual obligations and mismanaged the concession. Biwater Gauff initiated ICSID arbitration proceedings under the UK-Tanzania BIT, claiming that Tanzania breached its obligation to afford fair and equitable treatment to its investment, to provide full

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protection and security, not to take unreasonable and discriminatory measures, and to guarantee the unrestricted transfer of funds.] (Citations selectively omitted) (a) Two Competing Interests 112. The determination of this application for provisional measures entails a careful balancing between two competing interests: (i) the need for transparency in treaty proceedings such as these, and (ii) the need to protect the procedural integrity of the arbitration. *** i. Transparency 114. Considerations of confidentiality and privacy have not played the same role in the field of investment arbitration, as they have in international commercial arbitration. Without doubt, there is now a marked tendency towards transparency in treaty arbitration. 115. Agreement of the Parties: Parties are free, of course, to conclude any agreements they choose concerning confidentiality. Any such agreements would give rise to rights that are susceptible of protection by way of provisional measures or other appropriate relief. 116. There has been no general agreement in this regard in this case, and there is no provision on confidentiality in the UK-Tanzania bilateral investment treaty pursuant to which these proceedings have been brought. *** 121. No General Per Se Rule: In the absence of any agreement between the parties on this issue, there is no provision imposing a general duty of confidentiality in ICSID arbitration, whether in the ICSID Convention, any of the applicable Rules or otherwise. Equally, however, there is no provision imposing a general rule of transparency or nonconfidentiality in any of these sources. *** 125. There is no provision in the ICSID Arbitration Rules which expressly provides for the confidentiality of pleadings, documents or other information submitted by the parties during the arbitration. On the contrary, the official annotations accompanying the original version of the ICSID Arbitration Rules (which are not binding, and do not form part of the Rules) state that the parties are not prohibited from publishing their pleadings, but that they may agree not to do so “if they feel that publication may exacerbate the dispute” … *** 133. These considerations, and the accepted need for greater transparency in this field, generally militate against the type of provisional measures for which the Claimant now contends. 134. However, there exist other specific, and analytically distinct, interests that may militate in favour of restrictions. These are addressed below. ii. Procedural Integrity and “Non-Aggravation / Non-Exacerbation” of the Dispute 135. It is now settled in both treaty and international commercial arbitration that an arbitral tribunal is entitled to direct the parties not to take any step that might (1) harm or prejudice the integrity of the proceedings, or (2) aggravate or exacerbate the dispute. Both may be seen as a particular type of provisional measure (as, for example, in Article 17 of the newly revised UNCITRAL Model Law on International Commercial Arbitration, which refers to the prevention of “current or imminent harm or prejudice to the arbitral process itself”), or simply as a facet of the tribunal's overall procedural powers and its responsibility for its own process. Both concerns have a number of aspects, which can be articulated in various ways, such as the need to: – – – – – –

preserve the Tribunal's mission and mandate to determine finally the issues between the parties; preserve the proper functioning of the dispute settlement procedure; preserve and promote a relationship of trust and confidence between the parties; – ensure the orderly unfolding of the arbitration process; ensure a level playing field; minimise the scope for any external pressure on any party, witness, expert or other participant in the process; avoid “trial by media”.

136. It is self-evident that the prosecution of a dispute in the media or in other public fora, or the uneven reporting and disclosure of documents or other parts of the record in parallel with a pending arbitration, may aggravate or exacerbate the dispute and may impact upon the integrity of the procedure. This is all the more so in very public cases,

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such as this one, where issues of wider interest are raised, and where there is already substantial media coverage, some of which already being the subject of complaint by the parties. *** 145. The Tribunal disagrees, however, with the suggestion that actual harm must be manifested before any measures may be taken. Its mandate and responsibility includes ensuring that the proceedings will be conducted in the future in a regular, fair and orderly manner (including by issuing and enforcing procedural directions to that effect). Among other things, its mandate extends to ensuring that potential inhibitions and unfairness do not arise; equally, its mandate extends to attempting to reduce the risk of future aggravation and exacerbation of the dispute, which necessarily involves probabilities, not certainties. 146. Given the media campaign that has already been fought on both sides of this case (by many entities beyond the parties to this arbitration), and the general media interest that already exists, the Tribunal is satisfied that there exists a sufficient risk of harm or prejudice, as well as aggravation, in this case to warrant some form of control. 147. Equally, however, given the public nature of this dispute and the range of interests that are potentially affected, including interests in transparency and public information, the Tribunal is also of the view that, as far as possible, any restrictions must be carefully and narrowly delimited. *** 163. … Consequently, the Arbitral Tribunal Recommends That: for the duration of these arbitration proceedings, and in the absence of any agreement between the parties: (a)

all parties refrain from disclosing to third parties: i. ii.

(b) (c) (d)

the minutes or record of any hearings; any of the documents produced in the arbitral proceedings by the opposing party, whether pursuant to a disclosure exercise or otherwise; iii. any of the Pleadings or Written Memorials (and any attached witness statements or expert reports); and iv. any correspondence between the parties and / or the Arbitral Tribunal exchanged in respect of the arbitral proceedings. All parties are at liberty to apply to the Arbitral Tribunal in justified cases for the lifting or variation of these restrictions on a case-by-case basis. Any disclosure to third parties of decisions, orders or directions of the Arbitral Tribunal (other than awards) shall be subject to prior permission by the Arbitral Tribunal. For the avoidance of doubt, the parties may engage in general discussion about the case in public, provided that any such public discussion is restricted to what is necessary, and is not used as an instrument to antagonise the parties, exacerbate their differences, unduly pressure one of them, or render the resolution of the dispute potentially more difficult, or circumvent the terms of this Procedural Order.

Further it is Recommended that: (e)

all parties refrain from taking any steps which might undermine the procedural integrity, or the orderly working, of the arbitral process and / or which might aggravate or exacerbate the dispute.

[C] Comments and Questions 1. 2. 3. 4. 5.

Are international arbitral proceedings in general confidential? Why or why not? Would the answer differ if the situs of the arbitration was in different countries? Do parties to an ICSID arbitration have an obligation to maintain the confidentiality of the proceeding? Is the answer different for an UNCITRAL proceeding? What reasons may exist for transparency in investment arbitrations? Do any limits exist on either confidentiality or transparency in investment arbitrations? What? What power does a tribunal have to restrict either the confidentiality or transparency of investment proceedings? What is the legal basis of such power?

§12.05 THE ROLE OF AMICUS CURIAE IN INVESTMENT DISPUTES [A] ICSID Arbitration Rules (2006), Rule 37(2) Rule 37 – Visits and Inquiries; Submissions of Non-disputing Parties ***

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(2) After consulting both parties, the Tribunal may allow a person or entity that is not a party to the dispute (in this Rule called the “non-disputing party”) to file a written submission with the Tribunal regarding a matter within the scope of the dispute. In determining whether to allow such a filing, the Tribunal shall consider, among other things, the extent to which: (a) (b) (c)

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

The Tribunal shall ensure that the non-disputing party submission does not disrupt the proceeding or unduly burden or unfairly prejudice either party, and that both parties are given an opportunity to present their observations on the non-disputing party submission.

[B] NAFTA Free Trade Commission, Statement on Non-Disputing Party Participation (2003) (12) A. Non-disputing party participation 1. No provision of the North American Free Trade Agreement (“NAFTA) limits a Tribunal's discretion to accept written submissions from a person or entity that is not a disputing party (a “non-disputing party”). 2. Nothing in this statement by the Free Trade Commission (“the FTC”) prejudices the rights of NAFTA Parties under Article 1128 of the NAFTA. 3. Considering that written submissions by non-disputing parties in arbitrations under Section B of Chapter 11 of NAFTA may affect the operation of the Chapter, and in the interests of fairness and the orderly conduct of arbitrations under Chapter 11, the FTC recommends that Chapter 11 Tribunals adopt the following procedures with respect to such submissions. B. Procedures 1. Any non-disputing party that is a person of a Party, or that has a significant presence in the territory of a Party, that wishes to file a written submission with the Tribunal (the “applicant”) will apply for leave from the Tribunal to file such a submission. The applicant will attach the submission to the application. 2. The application for leave to file a non-disputing party submission will: (a) (b) (c)

(d) (e) (f) (g) (h) (i)

be made in writing, dated and signed by the person filing the application, and include the address and other contact details of the applicant; be no longer than 5 typed pages; describe the applicant, including, where relevant, its membership and legal status (e.g., company, trade association or other non-governmental organization), its general objectives, the nature of its activities, and any parent organization (including any organization that directly or indirectly controls the applicant): disclose whether or not the applicant has any affiliation, direct or indirect, with any disputing party; identify any government, person or organization that has provided any financial or other assistance in preparing the submission; specify the nature of the interest that the applicant has in the arbitration; identify the specific issues of fact or law in the arbitration that the applicant has addressed in its written submission; explain, by reference to the factors specified in paragraph 6, why the Tribunal should accept the submission; and be made in a language of the arbitration.

3. The submission filed by a non-disputing party will: (a) (b) (c) (d)

be dated and signed by the person filing the submission; be concise, and in no case longer than 20 typed pages, including any appendices; set out a precise statement supporting the applicant's position on the issues; and only address matters within the scope of the dispute.

4. The application for leave to file a non-disputing party submission and the submission will be served on all disputing parties and the Tribunal. 5. The Tribunal will set an appropriate date for the disputing parties to comment on the application for leave to file a non-disputing party submission. 6. In determining whether to grant leave to file a non-disputing party submission, the Tribunal will consider, among other things, the extent to which:

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(a) (b) (c) (d)

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

7. The Tribunal will ensure that: (a) (b)

any non-disputing party submission avoids disrupting proceedings; and neither disputing party is unduly burdened or unfairly prejudiced by such submissions.

8. The Tribunal will render a decision on whether to grant leave to file a non-disputing party submission. If leave to file a non-disputing party submission is granted, the Tribunal will set an appropriate date for the disputing parties to respond in writing to the non-disputing party submission. By that date, non-disputing Parties may, pursuant to Article 1128, address any issues of interpretation of the Agreement presented in the nondisputing party submission. 9. The granting of leave to file a non-disputing party submission does not require the Tribunal to address that submission at any point in the arbitration. The granting of leave to file a non-disputing party submission does not entitle the non-disputing party that files the submission to make further submissions in the arbitration. 10. Access to documents by non-disputing parties that file applications under these procedures will be governed by the FTC's Note of July 31, 2001.

[C] Methanex Corporation v. United States (ad hoc arbitration under the 1976 UNCITRAL Rules), Decision of the Tribunal on Petitions from Third Persons to Intervene as ‘Amici Curiae’ of 15 January 2001, (13) ¶¶ 24-31, 35-37, 40-42, 47-51, 53 [V.V. Veeder (pres.), William F. Rowley, Warren Christopher] (Citations selectively omitted) V. The Tribunal’s Reasons and Decision 24. … In the Tribunal's view, there is nothing in either the UNCITRAL Arbitration Rules or [NAFTA] Chapter 11, Section B, that either expressly confers upon the Tribunal the power to accept amicus submissions or expressly provides that the Tribunal shall have no such power. 25. It follows that the Tribunal's powers in this respect must be inferred, if at all, from its more general procedural powers. In the Tribunal's view, the Petitioners' requests must be considered against Article 15(l) of the UNCITRAL Arbitration Rules; and it is not possible or appropriate to look elsewhere for any broader power or jurisdiction. 26. Article 15(l) of the UNCITRAL Arbitration Rules grants to the Tribunal a broad discretion as to the conduct of this arbitration, subject always to the requirements of procedural equality and fairness towards the Disputing Parties. It provides, broken down into numbered sub-paragraphs for ease of reference below, as follows: “[l] Subject to these Rules, [2] the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, [3] provided that the parties are treated with equality and that at any stage in the proceedings each party is given a full opportunity of presenting its case.” This provision constitutes one of the essential “hallmarks” of an international arbitration under the UNCITRAL Arbitration Rules, according to the travaux préparatoires. Article 15 has also been described as the “heart” of the UNCITRAL Arbitration Rules; and its terms have since been adopted in Articles 18 and 19(2) of the UNCITRAL Model Law on International Commercial Arbitration, where these provisions were considered as the procedural “Magna Carta” of international commercial arbitration. Article l5(1) is plainly a very important provision. 27. Article 15(1) is intended to provide the broadest procedural flexibility within fundamental safeguards, to be applied by the arbitration tribunal to fit the particular needs of the particular arbitration. As a procedural provision, however, it cannot grant the Tribunal any power to add further disputing parties to the arbitration, nor to accord to persons who are non-parties the substantive status, rights or privileges of a Disputing Party. Likewise, the Tribunal can have no power to accord to any third person the substantive rights of NAFTA Parties under Article 1128 of NAFTA. The issue is whether Article 15(l) grants the Tribunal any lesser procedural power in regard to non-party third persons, such as the Petitioners here. 28. In addressing this issue, there are four principal matters to be considered; (i)

whether the Tribunal's acceptance of amicus submissions fall within the general scope of the sub-paragraph numbered [2] of Article 15(1);

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(ii)

if so, whether the acceptance of amicus submissions could affect the equal treatment of the Disputing Parties and the opportunity of each fully to present its case, under the sub-paragraph numbered [3] of Article 15(l); (iii) whether there are any provisions in Chapter 11, Section B, of NAFTA that modify the application of Article 15(1) for present purposes; and (iv) whether other provisions of the UNCITRAL Arbitration Rules likewise modify the application of Article 15(1) in regard to this particular case, given the introductory words of the sub-paragraph numbered [l] of Article 15(1). It is convenient to consider each matter in turn. (i) The General Scope of Article 15(1) of the UNCITRAL Arbitration Rules 29. The Tribunal is required to decide a substantive dispute between the Claimant and the Respondent. The Tribunal has no mandate to decide any other substantive dispute or any dispute determining the legal rights of third persons. The legal boundaries of the arbitration are set by this essential legal fact. It is thus self-evident that if the Tribunal cannot directly, without consent, add another person as a party to this dispute or treat a third person as a party to the arbitration or NAFTA, it is equally precluded from achieving this result indirectly by exercising a power over the conduct of the arbitration. Accordingly, in the Tribunal's view, the power under Article 15(1) must be confined to procedural matters. Treating non-parties as Disputing Parties or NAFTA Parties cannot be matters of mere procedure; and such matters cannot fall within Article 15(1) of the UNCITRAL Arbitration Rules. 30. However, in the Tribunal's view, its receipt of written submissions from a person other than the Disputing Parties is not equivalent to adding that person as a party to the arbitration. The rights of the Disputing Parties in the arbitration and the limited rights of a Non-Disputing Party under Article 1128 of NAFTA are not thereby acquired by such a third person. Their rights, both procedural and substantive, remain juridically exactly the same before and after receipt of such submissions; and the third person acquires no rights at all. The legal nature of the arbitration remains wholly unchanged. 31. The Tribunal considers that allowing a third person to make an amicus submission could fall within its procedural powers over the conduct of the arbitration, within the general scope of Article 15(1) of the UNCITRAL Arbitration Rules. The wording of the subparagraph numbered [2] of Article 15(1) suffices, in the Tribunal's view, to support its conclusion but its approach is supported by the practice of the Iran-US Claims Tribunal and the World Trade Organisation. *** (ii) Safeguarding Equal Treatment 35. The Tribunal notes the argument raised by the Claimant to the effect that a burden will be added if amicus submissions are presented to the Tribunal and the Disputing Parties seek to make submissions in response. That burden is indeed a potential risk. It is inherent in any adversarial procedure which admits representations by a non-party third person. 36. However, at least initially, the burden in meeting the Petitioners' written submissions would be shared by both Disputing Parties; and moreover, that burden cannot be regarded as inevitably excessive for either Disputing Party. As envisaged by the Tribunal, the Petitioners would make their submissions in writing, in a form and subject to limitations decided by the Tribunal. The Petitioners could not adduce the evidence of any factual or expert witness; and it would not therefore be necessary for either Disputing Party to cross-examine a witness proffered by the Petitioners: there could be no such witness. As to the contents of the Petitioners' written submissions; it would always be for the Tribunal to decide what weight (if any) to attribute to those submissions. Even if any part of those submissions were arguably to constitute written “evidence”, the Tribunal would still retain a complete discretion under Article 25.6 of the UNCITRAL Arbitration Rules to determine its admissibility, relevance, materiality and weight. Of course, if either Disputing Party adopted a Petitioner's written submissions, the other Disputing Party could not then complain at that burden: it was always required to meet its opponent's case; and that case, however supplemented, can form no extra unfair burden or unequal treatment. 37. It would always be the Tribunal's task, assisted by the Disputing Parties, to adopt procedures whereby any burden in meeting written submissions from a Petitioner was mitigated or extinguished. In theory, a difficulty could remain if a point was advanced by a Petitioner to which both Disputing Parties were opposed; but in practice, that risk appears small in this arbitration. In any case, it is not a risk the size or nature of which should swallow the general principle permitting written submissions from third persons. Accordingly, whilst there is a possible risk of unfair treatment as raised by the Claimant, the Tribunal is aware of that risk and considers that it must be addressed as and when it may arise. There is no immediate risk of unfair or unequal treatment for any Disputing Party or Party. ***

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(iv) Other UNCITRAL Arbitration Rules 40. The Claimant's reliance on Article 25(4) of the UNCITRAL Arbitration Rules to the effect that hearings are to be held in camera is not relevant to the Petitioners' request to serve written submissions to the Tribunal. In the Tribunal's view, there are no further provisions under the UNCITRAL Arbitration Rules that modify the application of its general power under Article 15(1) to allow the Petitioners to make such submissions in this arbitration. 41. However, the Claimant's reliance on Article 25(4) is relevant to the Petitioners' request to attend hearings and to receive copies of all submissions and materials adduced before the Tribunal. Article 25(4) provides that: “[Oral] Hearings shall be held in camera unless the parties agree otherwise …” The phrase “in camera” is clearly intended to exclude members of the public, i.e. non-party third persons such as the Petitioners. As the travaux préparatoires disclose, the UNCITRAL drafting committee deleted a different provision in an earlier draft which could have allowed the arbitration tribunal to admit into an oral hearing persons other than the parties. However, as discussed further below, Article (4) relates to the privacy of the oral hearings of the arbitration; and it does not in like terms address the confidentiality of the arbitration. 42. As to privacy, the Respondent has accepted that, as a result of Article 25(4), hearings are to be held in camera unless both Disputing Parties consent otherwise. The Respondent has given such consent. The Claimant has given no such consent. The Tribunal must therefore apply Article 25(4); and it has no power (or inclination) to undermine the effect of its terms. It follows that the Tribunal must reject the Petitioners' requests to attend oral hearings of the arbitration *** (v) The Tribunal’s Conclusion 47. Power: The Tribunal concludes that by Article 15(l) of the UNCITRAL Arbitration Rules it has the power to accept amicus submissions (in writing) from each of the Petitioners, to be copied simultaneously to the legal representatives of the Disputing Parties, Canada and Mexico. In coming to this conclusion, the Tribunal has not relied on the fact that amicus submissions feature in the domestic procedures of the courts in two, but not three, NAFTA Parties. The Tribunal also concludes that it has no power to accept the Petitioners' requests to receive materials generated within the arbitration or to attend oral hearings of the arbitration. Such materials may however be derived from the public domain or disclosed into the public domain within the terms of the Consent Order regarding Disclosure and Confidentiality, or otherwise lawfully; but that is a quite separate matter outwith the scope of this decision 48. Discretion: The next issue is whether, in the particular circumstances of this arbitration, the Tribunal should decide that it is “appropriate” to accept amicus submissions from the Petitioners in the exercise of the discretion under Article 15(l) of the UNCITRAL Arbitration Rules. At this early stage, the Tribunal cannot decide definitively that it would be assisted by these submissions on the Disputing Parties' substantive dispute. The Petitions set out the credentials of the Petitioners, which are impressive; but for now, the Tribunal must assume that the Disputing Parties will provide all the necessary assistance and materials required by the Tribunal to decide their dispute. At the least, however, the Tribunal must also assume that the Petitioners' submissions could assist the Tribunal. The Tribunal must look to other factors for the exercise of its discretion. 49. There is an undoubtedly public interest in this arbitration. The substantive issues extend far beyond those raised by the usual transnational arbitration between commercial parties. This is not merely because one of the Disputing Parties is a State: there are of course disputes involving States which are of no greater general public importance than a dispute between private persons. The public interest in this arbitration arises from its subject matter, as powerfully suggested in the Petitions. There is also a broader argument, as suggested by the Respondent and Canada: the Chapter 11 arbitral process could benefit from being perceived as more open or transparent; or conversely be harmed if seen as unduly secretive. In this regard, the Tribunal's willingness to receive amicus submissions might support the process in general and this arbitration in particular, whereas a blanket refusal could do positive harm. 50. There are other competing factors to consider: the acceptance of amicus submissions might add significantly to the overall cost of the arbitration and, as considered above, there is a possible risk of imposing an extra burden on one or both the Disputing Parties. In this regard, as appears from the Petitions, any amicus submissions from these Petitioners are more likely to run counter to the Claimant's position and eventually to support the Respondent's case. The factor has weighed heavily with the Tribunal; and it is concerned that the Claimant should receive whatever procedural protection might be necessary. 51. These are all relevant circumstances under Article 15(1) of the UNCITRAL Arbitration Rules. Less important is the factor raised by the Claimant as to the danger of setting a precedent. This Tribunal can set no legal precedent, in general or at all. It has no power to determine for other arbitration tribunals how to interpret Article 15(1); and in a later

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arbitration, there may be other circumstances leading that tribunal to exercise its discretion differently. For each arbitration, the decision must be made by its tribunal in the particular circumstances of that arbitration only. *** 53. For the reasons set out above, pursuant to Article 15(1) of the UNCITRAL Arbitration Rules, the Tribunal declares that it has the power to accept amicus written submissions from the Petitioners; whilst it is at present minded to receive such submissions subject to procedural limitations still to be determined by the Tribunal (to be considered with the Disputing Parties), it will make a final decision whether or not to receive them at a later stage of these arbitration proceedings; and accordingly the Petitions are accepted by the Tribunal to this extent, but otherwise rejected.

[D] Comments and Questions 1.

2.

3.

4. 5.

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

A ruling similar to that in the Methanex case was made by another NAFTA Tribunal in United Parcel Service of America Inc. v. Government of Canada, Award on the Merits (24 May 2007), available at http://italaw.com/sites/default/files/casedocuments/ita0885.pdf. In both the Methanex and UPS cases, the governments of Canada and the United States took positions favoring the filing of amicus curiae (i.e., “friend of the court”) briefs or memorials by non-governmental organizations (NGO's), while the government of Mexico opposed such filings. All NAFTA governments subsequently agreed to a policy of transparency with respect to NAFTA proceedings and regularly post NAFTA arbitration filings on the NAFTA website. See www.state.gov/s/l/c3439.htm andhttp://www.naftaclaims.com/. In Glamis Gold Ltd. v. United States, UNCITRAL, Award (8 June 2009), available at http://italaw.com/sites/default/files/case-documents/ita0378.pdf, a NAFTA tribunal permitted the Quechan Indian Nation and the National Mining Association to make amicus submissions. The ICSID tribunals in Biwater Gauff (Tanzania) Ltd. v. Tanzania, ICSID Case ARB/95/22, Award (24 July 2008), available at http://italaw.com/sites/default/files/case-documents/ita0095.pdf, and Suez, Sociedad General de Aguas de Barcelona, S.A. v. Argentina, ICSID Case No. ARB/03/17, Decision on Liability (30 July 2010), available at http://italaw.com/sites/default/files/case-documents/ita0813.pdf, have also allowed non-governmental organizations (“NGOs”) to participate in investment arbitrations as amicus curiae. However, in 2005 an ICSID tribunal refused to allow NGOs to participate as amici in Aguas del Tunari v. Bolivia, ICSID Case No. ARB/02/3, Decision on Jurisdiction, available at http://italaw.com/sites/default/files/casedocuments/ita0020_0.pdf, finding that party consent was necessary, and in that case the parties did not consent. The European Commission has also been granted amicus curiae status in the ICSID case of AES Summit Generation Ltd. v. Hungary, ICSID Case No. ARB/07/22, Award (23 September 2010), available at http://italaw.com/sites/default/files/casedocuments/ita0378.pdf. The United States and Canada's Model BITs, and the provisions of the Central American Free Trade Agreement (“CAFTA”), authorize tribunals to consider allowing third parties to submit amicus briefs in investment arbitrations. Should NGOs be allowed to fully participate in NAFTA arbitrations? Why or why not? Should this rule apply to all NGOs or just certain NGOs? Which ones? Should this apply to all NAFTA arbitrations or just select cases? Which cases? Should NGOs be allowed to participate in non-NAFTA investment disputes? Why or why not? Do NGOs tend to align themselves with one particular side of investment cases? Should this create any concerns for investment tribunals? Why or why not? Can NGOs provide any assistance to tribunals that the parties cannot? Why or why not? What rationale did the Methanex tribunal provide for limiting the participation of NGOs? Do the participation of NGOs add burdens to the parties? What burdens? How can the rights of investors be protected when NGOs participate in investment disputes? Do governments also need protections when NGOs participate? Why or why not?

§12.06 DOCUMENT EXCHANGES AND SANCTIONS [A] IBA Rules on the Taking of Evidence in International Commercial Arbitration (2010), Article 3 Article 3. Documents 1. Within the time ordered by the Arbitral Tribunal, each Party shall submit to the Arbitral Tribunal and to the other Parties all Documents available to it on which it relies, including public Documents and those in the public domain, except for any Documents

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that have already been submitted by another Party. 2. Within the time ordered by the Arbitral Tribunal, any Party may submit to the Arbitral Tribunal and to the other Parties a Request to Produce. 3. A Request to Produce shall contain: (a)

(b) (c)

(i) a description of each requested Document sufficient to identify it, or (ii) a description in sufficient detail (including subject matter) of a narrow and specific requested category of Documents that are reasonably believed to exist; in the case of Documents maintained in electronic form, the requesting Party may, or the Arbitral Tribunal may order that it shall be required to, identify specific files, search terms, individuals or other means of searching for such Documents in an efficient and economical manner; a statement as to how the Documents requested are relevant to the case and material to its outcome; and (i) a statement that the Documents requested are not in the possession, custody or control of the requesting Party or a statement of the reasons why it would be unreasonably burdensome for the requesting Party to produce such Documents, and (ii) a statement of the reasons why the requesting Party assumes the Documents requested are in the possession, custody or control of another Party.

4. Within the time ordered by the Arbitral Tribunal, the Party to whom the Request to Produce is addressed shall produce to the other Parties and, if the Arbitral Tribunal so orders, to it, all the Documents requested in its possession, custody or control as to which it makes no objection. 5. If the Party to whom the Request to Produce is addressed has an objection to some or all of the Documents requested, it shall state the objection in writing to the Arbitral Tribunal and the other Parties within the time ordered by the Arbitral Tribunal. The reasons for such objection shall be any of those set forth in Article 9.2 or a failure to satisfy any of the requirements of Article 3.3. 6. Upon receipt of any such objection, the Arbitral Tribunal may invite the relevant Parties to consult with each other with a view to resolving the objection. 7. Either Party may, within the time ordered by the Arbitral Tribunal, request the Arbitral Tribunal to rule on the objection. The Arbitral Tribunal shall then, in consultation with the Parties and in timely fashion, consider the Request to Produce and the objection. The Arbitral Tribunal may order the Party to whom such Request is addressed to produce any requested Document in its possession, custody or control as to which the Arbitral Tribunal determines that (i) the issues that the requesting Party wishes to prove are relevant to the case and material to its outcome; (ii) none of the reasons for objection set forth in Article 9.2 applies; and (iii) the requirements of Article 3.3 have been satisfied. Any such Document shall be produced to the other Parties and, if the Arbitral Tribunal so orders, to it. 8. In exceptional circumstances, if the propriety of an objection can be determined only by review of the Document, the Arbitral Tribunal may determine that it should not review the Document. In that event, the Arbitral Tribunal may, after consultation with the Parties, appoint an independent and impartial expert, bound to confidentiality, to review any such Document and to report on the objection. To the extent that the objection is upheld by the Arbitral Tribunal, the expert shall not disclose to the Arbitral Tribunal and to the other Parties the contents of the Document reviewed. 9. If a Party wishes to obtain the production of Documents from a person or organisation who is not a Party to the arbitration and from whom the Party cannot obtain the Documents on its own, the Party may, within the time ordered by the Arbitral Tribunal, ask it to take whatever steps are legally available to obtain the requested Documents, or seek leave from the Arbitral Tribunal to take such steps itself. The Party shall submit such request to the Arbitral Tribunal and to the other Parties in writing, and the request shall contain the particulars set forth in Article 3.3, as applicable. The Arbitral Tribunal shall decide on this request and shall take, authorize the requesting Party to take, or order any other Party to take, such steps as the Arbitral Tribunal considers appropriate if, in its discretion, it determines that (i) the Documents would be relevant to the case and material to its outcome, (ii) the requirements of Article 3.3, as applicable, have been satisfied and (iii) none of the reasons for objection set forth in Article 9.2 applies. 10. At any time before the arbitration is concluded, the Arbitral Tribunal may (i) request any Party to produce Documents, (ii) request any Party to use its best efforts to take or (iii) itself take, any step that it considers appropriate to obtain Documents from any person or organisation. A Party to whom such a request for Documents is addressed may object to the request for any of the reasons set forth in Article 9.2. In such cases, Article 3.4 to Article 3.8 shall apply correspondingly. 11. Within the time ordered by the Arbitral Tribunal, the Parties may submit to the Arbitral Tribunal and to the other Parties any additional Documents on which they intend to rely or which they believe have become relevant to the case and material to its outcome as a consequence of the issues raised in Documents, Witness Statements or Expert Reports submitted or produced, or in other submissions of the Parties.

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12. With respect to the form of submission or production of Documents: (a) (b)

(c) (d)

copies of Documents shall conform to the originals and, at the request of the Arbitral Tribunal, any original shall be presented for inspection; Documents that a Party maintains in electronic form shall be submitted or produced in the form most convenient or economical to it that is reasonably usable by the recipients, unless the Parties agree otherwise or, in the absence of such agreement, the Arbitral Tribunal decides otherwise; a Party is not obligated to produce multiple copies of Documents which are essentially identical unless the Arbitral Tribunal decides otherwise; and translations of Documents shall be submitted together with the originals and marked as translations with the original language identified.

13. Any Document submitted or produced by a Party or non-Party in the arbitration and not otherwise in the public domain shall be kept confidential by the Arbitral Tribunal and the other Parties, and shall be used only in connection with the arbitration. This requirement shall apply except and to the extent that disclosure may be required of a Party to fulfill a legal duty, protect or pursue a legal right, or enforce or challenge an award in bona fide legal proceedings before a state court or other judicial authority. The Arbitral Tribunal may issue orders to set forth the terms of this confidentiality. This requirement shall be without prejudice to all other obligations of confidentiality in the arbitration. 14. If the arbitration is organised into separate issues or phases (such as jurisdiction, preliminary determinations, liability or damages), the Arbitral Tribunal may, after consultation with the Parties, schedule the submission of Documents and Requests to Produce separately for each issue or phase. [See also IBA Rules (2010) Article 9 – Admissibility and Assessment of Evidence]

[B] Use of the IBA Rules – CME Czech Republic B.V. (The Netherlands) v. The Czech Republic (ad hoc arbitration under the 1976 UNCITRAL Rules), Partial Award of 13 September 2001, (14) ¶¶ 46-47, 52-53 [Wolfgang Kühn (pres.), Stephen M. Schwebel, Jaroslav Hándl] (Citations selectively omitted) 46. In accordance with Art. 15.1 of the UNCITRAL Arbitration Rules, the Tribunal decided to conduct the arbitration in the manner it considers appropriate. For this purpose, the Tribunal decided, to the extent appropriate, to apply the IBA Rules. 47. In respect to the production of documents the Tribunal decided that the Claimant's Request for the Production of Documents dated November 14, 2000 was not in accordance with the IBA Rules. The Tribunal, by Order No. 5, instructed the Claimant and the Respondent to submit detailed requests for the production of documents, such documents to be produced in their original language and to be accompanied by an English translation. *** (3) The Parties’ Request for Production of Documents 52. The Claimant submitted its Request for Production of December 1, 2000 invoking the Tribunal's procedural Order No. 5 and Art. 3 (3) of the IBA Rules. The Claimant requested the production of documents related to specific Media Council files related to the Licence, comprising 18 specifically described documents. The Claimant further requested the production of six further categories of documents related inter alia to CET 21. These categories of documents were all defined either by dates or by specific file numbers of the Media Council. Further, the Claimant asked for the production of eleven specific documents identified by date and a further description. The Claimant gave reasons in respect to relevance and materiality and also in respect to the possession of the documents. 53. By Order No. 6 dated December 22, 2000, the Tribunal by majority-decision instructed the Respondent to produce the documents requested by the Claimant, however deleting certain documents from the list which were already in the possession of the Claimant, and further deleting a statement of the chief of the legal department of the Media Council dated July 22, 1996, which statement might have a status of privilege or confidentiality.

[C] Requests for Production of Electronic Documents – Richard Hill, The New Reality of Electronic Document Production in International Arbitration: A Catalyst for Convergence?, 25(1) Arb. Int’l 87, 91-92 (2009) (Citations selectively omitted) The foundation of much thinking on electronic production in litigation and arbitration in the United States and the United Kingdom is the Sedona Principles: Best Practices Recommendations and Principles for Addressing Electronic Document Production. The

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Sedona Principles have been followed by the Cresswell Committee Report, leading in turn to the Practice Direction to Part 31 of the English Civil Procedural Rules, and to the recent amendment of the US Federal Rules of Civil Procedure. The Sedona Principles also form the basis for protocols being produced to address electronic production in international arbitration by institutions such as the AAA, the Chartered Institute and the CPR. A number of important common features are seen in the Sedona Principles, the English Practice Direction and the revisions to the US Federal Rules of Civil Procedure, all of which are consistent with the application of the IBA Rules. First, they accept that a party need not necessarily conduct a human review of every available and potentially relevant document, but may rely upon electronic search and sampling techniques to narrow down the documents to be manually reviewed. Secondly, they expect a measure of early cooperation between the parties to agree [to] a common approach to issues of electronic production. Thirdly, and perhaps most importantly, they envisage a balancing exercise to be undertaken in considering the potential importance of the requested documents, the value and importance of the dispute, and the level of difficulty involved in locating and producing the relevant electronic documents, i.e. proportionality. All three of these expectations should be readily absorbed into international arbitration practice. They should all be seen as merely the latest practical applications of the common-sense approach that good arbitrators have demonstrated for many years.

[D] The Use of 28 U.S.C. § 1782 for Obtaining Evidence in the United States [1] Methanex Corporation v. United States (ad hoc arbitration under the 1976 UNCITRAL Rules), Final Award of 3 August 2005, (15) ¶¶ 1-3, 5, 26 [V. V. Veeder (pres.), William F. Rowley, W. Michael Reisman] [Case summary included in Chapter 12] (Citations selectively omitted) 1. On 4th October 2002, Methanex served its “First Request for Additional Evidence”. The relevant evidence, listed in an Annex to the Request, consisted of two types: (i) witness testimony of certain specified individuals and generic persons likely to have personal knowledge or information relating to issues before the Tribunal, and (ii) documents in the possession of (a) California or certain of its officials, (b) ADM, (c) Regent International and (d) certain other individuals, all in the USA. Methanex submitted that the evidence sought was relevant and material to the dispute; and that it was necessary to the full and fair presentation of Methanex's case to the Tribunal. Methanex's Request was made by reference to (i) the IBA Rules and (ii) 28 U.S.C. § 1782. 2. (i) The IBA Rules: So far as concerns obtaining documentary and witness evidence under the IBA Rules, Methanex relied on Articles 3.8 and 4.10 of the IBA Rules (see above, Annex 2 to Chapter II B of this Award). It is to be noted that it is a precondition to an application for Documents under Article 3.8 of the IBA Rules that “the Party cannot obtain the documents on its own”, that it is for the requesting party to identify the documents sought “in sufficient detail”, and that the power of the arbitral tribunal is to “take the necessary steps if in its discretion it determines that the documents would be relevant and material”. Similar requirements are contained in Article 4.10 of the IBA Rules in relation to Witnesses of Fact. 3. (ii) § 1782: Methanex also relied on 28 U.S.C. § 1782. It provides: “The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal … The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the application of an interested person and may direct that testimony or statement be given, or the document or other thing produced, before a person appointed by the court.” This legislation allows Methanex (as “an interested person”) to apply to one or more relevant US District Courts in the USA for an order, subject to the Court's jurisdiction and the exercise of its judicial discretion, directing a third person to give testimony or to produce documentation for use in a proceeding before a “foreign or international tribunal”. *** 5. Methanex's submission that it needed no supportive order was, in the Tribunal's view, supported by the wording of the legislation. Further, following the main hearing, it appears to be justified by the judgment of the US Supreme Court of 21st June 2004 in Intel Corp. v. Advanced Micro Devices, Inc. (16) The Supreme Court there decided (inter alia) that an application may be made at any time by an interested person, including a time when there is no tribunal to give its consent to the application; and that a US District Court has jurisdiction to make an order even where the tribunal opposed the application.

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*** Again, the overall position had not changed for Methanex: whilst the Tribunal had not blessed Methanex's applications under 28 U.S.C. § 1782, it had not opposed such applications (even assuming, as a legal matter, that such a hypothetical opposition would have had any effect on Methanex's rights under the Statute); Methanex remained at liberty to make any such applications at any time; and Methanex had not met to the Tribunal's satisfaction the requirements under Articles 3.8 and 4.10 of the IBA Rules. Methanex did not respond to the Tribunal's observations before making its applications under 28 U.S.C. § 1782 … *** 26. As regards 28 U.S.C. § 1782, the Tribunal does not consider that its position requires any change. As the Tribunal made known to Methanex repeatedly, Methanex was at all times free to make any application to any US District Court. While recognising that a tribunal's consent is not required for an application under § 1782, this Tribunal did and does not wish to consent to Methanex's application. In any event, the fate of an application under § 1782 falls to be decided by the relevant US court and not by an international tribunal, as Methanex accepted at the procedural meeting of 31st March 2003. The Tribunal cannot itself grant any order under § 1782, even it were minded to so … [2] In re Application of Chevron Corp. for an Order Pursuant to 28 U.S.C. Section 1782 to Conduct Discovery for Use in Foreign Proceedings, 633 F.3d 153, 158-159, 161162, 163 (3d Cir. 2011) (Citations selectively omitted) Chevron's responses to what it plainly regarded as unpalatable proceedings in Ecuador did not stop with it taking steps in that country, as it obviously, and ironically in view of its contentions on its forum non conveniens application that resulted in the dismissal of the Southern District of New York litigation, had lost faith in the Ecuadorian courts. Thus, in an out-of-Ecuador response, Chevron filed a notice of arbitration under the United Nations Commission on International Trade Law (UNCITRAL) pursuant to the United States–Ecuador Bilateral Investment Treaty (BIT) on November 23, 2009, challenging the Ecuadorian proceedings in an attempt to obtain an award that would preclude international recognition of the judgment that the Lago Agrio Court will enter in the Lago Agrio litigation. (17) The parties to the arbitration proceeding are Chevron and the Republic of Ecuador, but not the Ecuadorian plaintiffs even though they have an interest in the outcome of the arbitration. Chevron asserts that it is entitled to the relief it seeks because it believes that the Ecuadorian government has conspired with the Ecuadorian plaintiffs to influence the outcome of the Lago Agrio litigation. *** In addition to having instituted the BIT arbitration in reaction to the Ecuadorian proceedings, Chevron has brought an extraordinary series of at least 25 requests to obtain discovery from at least 30 different parties pursuant to section 1782 in United States District Courts throughout the United States. These requests, which include the proceedings before us now, seek evidence to support Chevron's claim that the Ecuadorian plaintiffs committed fraud in the prosecution of the Lago Agrio litigation. Chevron's overarching contention in seeking the section 1782 discovery is that the judicial process in Ecuador is corrupt and that the Ecuadorian plaintiffs and their associates have fraudulently conspired with [Ricardo] Cabrera [who was appointed by the Ecuadorian court as the sole court-appointed independent expert] to produce a skewed damages report that the Ecuadorian plaintiffs ghost-wrote. Chevron seeks to use the discovery it obtains pursuant to its section 1782 requests in the Lago Agrio litigation and the BIT arbitration to support this contention. *** Appellants first claim that Chevron's discovery request was not proper under section 1782 because Chevron sought discovery not intended “for use in a proceeding in a foreign or international tribunal.” See 28 U.S.C. § 1782(a). Appellants argue that as a matter of statutory interpretation “[d]iscovery is not ‘for use in a proceeding before a foreign tribunal’ where its purpose is to attack the tribunal itself.” The initial problem with appellants' contention is that Chevron intends to use the evidence that it uncovers in an attempt to show the Lago Agrio Court that the Ecuadorian plaintiffs have engaged in fraud in the proceedings before that court. Furthermore, use of the evidence uncovered in a section 1782 application in the BIT arbitration to “attack” the Lago Agrio Court unquestionably would be “for a use in a proceeding in a foreign or international tribunal.” The possibility that the evidence may be utilized to cast doubts on the impartiality of the Lago Agrio Court does not mean that Chevron's request for the evidence runs afoul of section 1782 and that Chevron therefore may not obtain the evidence. … The seminal case exploring the parameters of section 1782 is Intel Corp. v. Advanced Micro Devices, Inc., 542 U.S. 241, 124 S.Ct. 2466, 159 L.Ed.2d 355 (2004), in which the Supreme Court explained that section 1782 “is the product of congressional efforts, over the span of nearly 150 years, to provide federal-court assistance in gathering evidence for use in foreign tribunals.” In Intel, the Court rejected the “suggestion that a § 1782(a)

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applicant must show that United States law would allow discovery in domestic litigation analogous to the foreign proceeding.” The Court also held that section 1782 does not contain a “threshold requirement that evidence sought from a federal district court would be discoverable under the law governing the foreign proceeding.” The Court reasoned that “[b]eyond shielding material safeguarded by an applicable privilege … nothing in the text of § 1782 limits a district court's production-order authority …” The Supreme Court cautioned, however, that “comity and parity concerns may be important as touchstones for a district court's exercise of discretion in particular cases[.]” To that end, the Court discussed factors that a district court should consider when ruling on a section 1782(a) request: First, when a person from whom discovery is sought is a participant in the foreign proceeding …, the need for § 1782(a) aid generally is not as apparent as it ordinarily is when evidence is sought from a nonparticipant in the matter arising abroad. A foreign tribunal has jurisdiction over those appearing before it, and can itself order them to produce the evidence … *** Second, as the 1964 Senate Report suggests, a court presented with a § 1782(a) request may take into account the nature of the foreign tribunal, the character of the proceedings underway abroad, and the receptivity of the foreign government or the court or agency abroad to U.S. federal-court judicial assistance … Specifically, a district court could consider whether the § 1782(a) request conceals an attempt to circumvent foreign proof-gathering restrictions or other policies of a foreign country or the United States … Also, unduly intrusive or burdensome requests may be rejected or trimmed. *** The first Intel factor favors allowing Chevron to obtain the discovery it seeks because UBR is not a participant in the Lago Agrio litigation and, so far as we can determine from the record before us, is not subject to the jurisdiction of the Lago Agrio Court. Moreover, though we are aware that appellants argue that the documents transmitted to Cabrera are within the jurisdictional reach of the Lago Agrio Court, we have no basis to question the District Court's observation or its conclusion that followed at the hearing on Chevron's application that “Cabrera has apparently indicated that he has not been in receipt of any documents from UBR,” and for that reason “directing Mr. Cabrera to produce documents which he says he did not have would be pointless and fruitless as an exercise by the Ecuadorian court.” Additionally, though we cannot come to a conclusive determination on the issue, it is questionable whether the jurisdictional reach of the BIT arbitral panel embraces either UBR or Cabrera, which, after all, are not parties to the arbitration proceeding, so that the panel may compel them to produce documents. In this regard, we note that, according to the District Court, the arbitration panel “does not have the authority to order such a production,” and so those documents “would not be obtainable for use in the [BIT] arbitration absent discovery under Section 1782(a).” *** … Furthermore, appellants' argument overlooks the circumstance that Chevron seeks the section 1782 discovery for use in both the Lago Agrio litigation and the BIT arbitration. In this regard, we point out that while appellants suggest that the BIT arbitral panel would not be receptive to the evidence, so far as we can ascertain they base this suggestion on pure speculation. In these circumstances, appellants' argument is insufficient given that they bear the burden of proof on the receptiveness issue as they are the parties opposing discovery under section 1782. *** We also point out that, as the Court made clear in Intel, there is no requirement that the material be discoverable in the foreign country for it to be discoverable pursuant to a section 1782 request in the United States. Moreover, appellants' argument once again minimizes the fact that Chevron's section 1782 discovery request seeks the documents for use in the BIT arbitration. Furthermore, we have no basis on which we could hold that the section 1782 request is an attempt to circumvent proof-gathering restrictions or other policies of the BIT arbitral panel. Overall, we are satisfied that none of the first three Intelfactors caution against discovery.

[E] Legal Privileges to Resist Document Production [1] Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania (ICSID Case No. ARB/05/22), Procedural Order No. 2 of 24 May 2006 (18) [Bernard Hanotiau (pres.), Gary B. Born, Toby Landau] [Case summary included in Chapter 12.] (Citations selectively omitted) The Arbitral Tribunal notes that the Respondent's identification of, and articulation of, “public interest immunity” as a doctrine rests upon the national law of Tanzania, and in

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particular (a) article 54(5) of the Tanzanian Constitution (which prohibits disclosure of any information relating to any advice that the President has received or may receive from the Cabinet) and (b) section 132 of the Tanzanian Evidence Act 1967 (which codifies what was formally known in England as “Crown privilege” and applies to unpublished official records and communications received by a public officer whose disclosure would be prejudicial to the public interest). The Respondent notes that similar doctrines are accepted in other national legal systems. However, and importantly, no equivalent doctrine has been identified as a matter of public international law, or as part of the ICSID regime. As far as article 54(5) is concerned, the Arbitral Tribunal notes that strictly interpreted, this article does not cover all Cabinet papers but only those which specifically relate to advice for the President. Moreover, article 54(5) prohibits inquiries by “any court”, a term which is defined in the Tanzanian Constitution as any court having jurisdiction in the Republic of Tanzania. It may therefore be argued that this particular prohibition, by its own terms, does not apply to an ICSID Arbitral Tribunal. More fundamentally, however, the nature of this dispute resolution process is entirely different from a national court process. This is an international tribunal, governed by an international convention, which is mandated to enquire into the conduct and responsibility of a State in light of its international treaty and customary international law obligations. It is hardly conceivable that, in this setting, a State might invoke domestic notions of public interest and policy relating to the operations of its own Government as a basis to object to the production of documents which are relevant to determine whether the State has violated its international obligations and whether, therefore, its international responsibility is engaged. This is certainly not the context in which the doctrine of “public interest immunity” was developed. The doctrine is not a general principle of law as understood for the purposes of article 38 (1)(c) of the Statute of the International Court of Justice. Neither is it provided for in the ICSID Convention or the ICSID Arbitration Rules (which endow ICSID Tribunals with broad powers to order the production of documents). Further, if a State were permitted to deploy its own national law in this way, it would, in effect, be avoiding its obligation to produce documents in so far as called upon to do so by this Tribunal. This, in itself, is an international legal obligation arising from the State's consent by way of the BIT to ICSID arbitration. It may also thereby stifle the evaluation of its own conduct and responsibility. As such, this would be to undermine the well established rule that no State may have recourse to its own internal law as a means of avoiding its international responsibilities. This principle finds expression in Article 27 of the Vienna Convention on the Law of Treaties 1969, as well as numerous other international decisions and commentaries … Moreover, accepting Respondent's theory would create an imbalance between the parties, which the Tribunal considers unacceptable. It is indeed one of the most fundamental principles of international arbitration that the parties should be treated with equality. The Arbitral Tribunal considers that the only ground which might justify a refusal by the Republic to produce documents to this Tribunal is the protection of privileged or politically sensitive information, including State secrets, as pointed out by the Arbitral Tribunal in Pope and Talbot, Inc. v. Government of Canada, Ruling on Claim of Crown Privilege dated 6 September 2000 (2005) 7 ICSID Rep. 99, para. 1.4, and restated in article 9(2)(f) of the IBA Rules of Evidence (“The Arbitral Tribunal shall … exclude from evidence or production any document … for any of the following reasons: … (f) grounds of special political or institutional sensitivity (including evidence that has been classified as secret by a Government or a public international institution) that the Arbitral Tribunal determines to be compelling …”). In conclusion, the Arbitral Tribunal decides that the public interest immunity exception invoked by the Respondent is not a valid objection to the production of documents requested by the Claimant. However, to the extent that some of the documents whose production will be ordered might be considered politically sensitive, as for example containing State secrets, the Respondent should immediately refer the matter to the Arbitral Tribunal. More precisely, the Respondent should identify the relevant document(s) and indicate the reasons why in conformity with the above mentioned principles the document concerned should be withheld, or disclosed subject to specific restrictions in order to preserve confidentiality. Any dispute will be finally decided by the Arbitral Tribunal. The Tribunal emphasizes in this respect that the fact that a document could be adverse to the position of the Respondent in this arbitration is not sufficient to qualify the document as politically sensitive. [2] Glamis Gold, Ltd. v. United States (ad hoc arbitration under the 1976 UNCITRAL Rules), Decision on Parties’ Requests for Production of Documents Withheld on Grounds of Privilege of 17 November 2005, (19) 31-32, 34-37 [Michael K. Young (pres.), David D. Caron, Donald L. Morgan] [Case summary included in Chapter 9] (Citations selectively omitted)

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Decision as to Claimant's Request for Production of Documents Withheld by Respondent on Grounds of the Work Product Privilege *** 31. Most courts recognize that the test for when a document is prepared “in anticipation of litigation” turns on the function of the documents rather than merely the timing of their creation. Thus, the content of the documents must relate to preparation for litigation; this includes “[s]ubject matter that relates to the preparation, strategy, and appraisal of the strengths and weaknesses of an action, or to the activities of the attorneys involved, rather than to the underlying evidence …” Based on this understanding of the subject matter, work product usually encompasses “interviews, statements, memoranda, correspondence, [and] briefs” of lawyers. With these themes within domestic case law in mind and recognizing how litigious society currently is and that there is therefore often the possibility that many actions could lead to litigation, the Tribunal observes that it is important, when claiming the work product privilege, that the withholding Party explain how the subject matter of the document relates to a likely lawsuit by an identifiable adversary in respect of a specific dispute. 32. With respect to the Parties' arguments regarding the threshold of need and unavailability that must be crossed in order to override a claim of work product privilege, the Tribunal observes that the Parties are actually not wholly in disagreement. Both Parties recognize that there is “core” work product, including litigation strategies and attorney mental impressions, among other things, that will not be released without a showing of extraordinary justification. The Parties appear to disagree therefore only on documents, or portions of documents, that do not constitute “core” work product. The Tribunal holds that, with respect to documents not rising to the level of attorney personal thought and strategy, the privilege is qualified and can be overruled by a sufficient showing of need and unavailability and a weighing of the importance of the claimed privilege versus the importance of production. *** Decision as to Claimant’s Request for Production of Documents Withheld by Respondent on Grounds of the Deliberative Process Privilege 34. Claimant recognizes that the deliberative process privilege “exempts from disclosure” opinions, recommendations or advice offered in the course of the executive's decision making processes.’” It protects those documents … that reflect “the give and take of the consultative process.” … 35. Again, the Parties are not wholly in disagreement regarding the definition and scope of the deliberative process privilege. Respondent agrees that the deliberative process privilege protects “documents reflecting advisory opinions, recommendations, and deliberations comprising part of a process by which governmental decisions and policies are formulated.” In addition, Respondent agrees that the privilege protects only those documents that are both pre-decisional and deliberative … 36. As the Parties do not disagree on the general definition of the scope of the privilege or the requirement that documents withheld under it be both pre-decisional and deliberative, the Tribunal adopts these interpretations. To elaborate on these definitions, and possibly to clear any disagreements between the parties, the Tribunal finds that the privilege shall encompass documents generated before the adoption of an agency policy or decision that contain opinions, recommendations or analyses of specific policies or decisions. The Tribunal agrees that factual information should generally be segregated and produced, but also recognizes that there may be situations in which the factual information is either so inextricably intertwined with policy information that it cannot be appropriately segregated or the factual information itself would reveal too much of the deliberative process to be disclosed. The opposite situation could also occur where deliberative materials are so benign as to reveal nothing of the deliberative process and should be produced. As there is thus no black line on which to require production, the Parties and the Tribunal must evaluate the assertions of the officials who request the privilege. 37. With respect to the burden of assertion and the formal requirements cited by Claimant for proper assertion, the Tribunal recognizes a general consensus in the case law that the head of the agency controlling the information must assert the privilege after review and analysis of the document. Recognizing the conflicting goals of this burden – that a sufficiently senior official perform the analysis and weighing of the assertion of the privilege, but that such official must devote substantial time and effort to gain personal knowledge of each document – and given that the formalities of U.S. practice are neither directly applicable or necessarily appropriate to arbitration, the Tribunal, absent extraordinary circumstances, will accept an assertion of the privilege from an official, at the assistant secretary or deputy secretary level, controlling the information if he/she is equally or more familiar with the information, rather than an agency head.

[3] William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v. Government of Canada (PCA Case No. 200904), Procedural Order No. 12 of 2 May 2012, (20) ¶¶ 17-19, 21, 25-26, 29, and 737 © 2021 Kluwer Law International, a Wolters Kluwer Company. All rights reserved.

Procedural Order No. 13 of 11 July 2012, (21) ¶¶ 22, 24-30, 34-35 [Bruno Simma (pres.), Donald McRae, Bryan Schwartz] [The dispute opposed US investors to the government of Canada over the regulatory measures applied to their investment in a basalt quarry and maritime terminal development project in Nova Scotia. In particular, the investors claimed that a discriminatory, arbitrary, and unfair environmental assessment process imposed on them did not comply with Canada's' international law obligations under NAFTA. The investors initiated international arbitration proceedings under NAFTA Chapter 11.] (Citations selectively omitted) Procedural Order 12 (2 May 2012) 1. Applicable Law 17. In accordance with NAFTA Articles 1131(1) and 1120(2), the Tribunal will apply any relevant provisions of NAFTA, international law, and the UNCITRAL Rules in resolving the Disputing Parties' disagreement regarding their privilege claims. As the Disputing Parties note, the Tribunal has previously decided that the IBA Rules on the Taking of Evidence in International Commercial Arbitration of 1999 (“IBA Rules”) serve as guidelines in this arbitration. The Tribunal further observes that other NAFTA tribunals have considered national law, as well, for guidance on matters of privilege. 18. While NAFTA and the UNCITRAL Rules are silent on the specific issue of privilege, Article 15 of the UNCITRAL Rules provides that “the arbitral tribunal may conduct the arbitration in such a manner as it considers appropriate, provided that the parties are treated with equality and that at any stage of the proceedings each party is given a full opportunity of presenting his case.” Likewise, Article 9.2(b) of the IBA Rules leaves it to the Tribunal to determine the legal rules applicable to solicitor-client privilege and work product privilege. 19. While the applicable law thus vests the Tribunal with considerable discretion in determining the standard for adjudging privilege claims, the Tribunal benefits from case law taking up similar questions of privilege. As set out in more detail below, the Disputing Parties agree that previous NAFTA Chapter Eleven tribunals have developed standards pertinent to the privilege issues in this case. The Tribunal notes that the Disputing Parties readily apply these standards and principally ask that the Tribunal elaborate on particular nuances germane to their claims. *** 21. The Disputing Parties share the view that the standard set forth by the NAFTA tribunal in Vito Gallo v. Canada is appropriate for evaluating solicitor-client privilege claims in this case. The Gallo tribunal determined that a document is protected by solicitor-client privilege if: “ – – –

– The document has to be drafted by a lawyer acting in his or her capacity as lawyer; A solicitor-client relationship based on trust must exist as between the lawyer (inhouse or external legal advisor) and the client; The document has to be elaborated for the purpose of obtaining or giving legal advice; The lawyer and the client, when giving and obtaining legal advice, must have acted with the expectation that the advice would be kept confidential in a contentious situation.”

*** 25. In light of the NAFTA and national court cases cited by the Disputing Parties, the Tribunal agrees with the Respondent's interpretation that the scope of the privilege is broader than the Investors suggest. As the NAFTA tribunal in Glamis Gold, Ltd. v. United States of America concluded, in the government context such that “the client is by nature a group, [solicitor-client] privilege is not defeated by circulation beyond the attorney and the person within the group requesting or providing the information” where a document relates to a request for or receipt of legal advice to or from legal counsel. In the present case, the circle of clients includes members of the same federal or provincial department. 26. To construe the standard differently would risk frustrating the purpose of the privilege by inhibiting communications containing legal advice among individuals legally charged with making decisions on the basis of that advice. Thus, the Tribunal further decides, as the Glamis tribunal concluded, that privileged communications between different departments remain privileged if “there is a ‘substantial identity of legal interests' within the different [departments] in the particular subject matter of the communication.” *** 29. Without taking up any specific question of Canadian law, it appears to the Tribunal that the privilege's purpose of avoiding a chilling effect among decision makers who seek

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and receive legal advice would be defeated were the circle of qualifying lawyers restricted to the Department of Justice as the Investors appear to propose. Communications containing legal advice may equally be exchanged between decision makers and legal counsel in government who are not within the Department of Justice. Accordingly, the Tribunal decides that solicitor-client privilege attaches to communications containing legal advice from any government lawyer if and to the extent that the lawyer acts as legal counsel in the manner intended under the Gallo standard. *** Procedural Order 13 (11 July 2012) 22. The Disputing Parties agree that a party in arbitration proceedings may refer to Article 9.2(f) of the IBA Rules as a basis for withholding documents where such documents are politically or institutionally sensitive. The Disputing Parties are also in agreement, in view of an evolving jurisprudence constante by prior NAFTA tribunals, that any refusal to produce documents based on their political or institutional sensitivity requires a balancing process, weighing, on the one hand, the compelling nature of the requested party's asserted sensitivities and, on the other, the extent to which disclosure would advance the requesting party's case. This balancing requirement distinguishes absolute privileges from qualified privileges, such as the one at issue here. *** 24. Having reviewed the jurisprudence upon which the Disputing Parties rely, the Tribunal considers that, for a party to assert privilege on grounds of political and institutional sensitivity in the context of NAFTA Chapter Eleven proceedings, it must first demonstrate that it carried out the requisite balancing exercise in the course of its review of requested documents, on a document-by-document basis, supervised by sufficiently senior legal or regulatory counsel, and that where such review is not carried out by legal counsel familiar with the arbitration, the balancing exercise must be guided by instructions from counsel familiar with the case. Along with a description of the contents of the document and an explanation of grounds for claiming the privilege, a satisfactory account of whether and how the party claiming privilege carried out the appropriate balancing process may be necessary to present the privilege claim to the tribunal. 25. To be clear, a party's own conclusion after carrying out a balancing of interests is not binding on the Tribunal. The burden of establishing the validity of a claim is on the party asserting it, and the Tribunal will make the final decision with respect to determining a party's privilege claims within the framework of the legal issues particular to the case, the evidence otherwise available, and in light of the applicable law. A demonstration of good faith and diligence in applying the appropriate legal standard, however, is a factor that may be considered by the Tribunal in arriving at its determination. A party claiming privilege is expected to make a diligent and skillful effort to describe the contents of a contested document, although the institutional sensitivity that underpins a meritorious claim may limit the level of descriptive detail that the asserting party can provide (see Section 2 below). In a close case, the credibility of a party's consideration of the issue may be significant in concluding that the privilege claim should be sustained. 26. The specific considerations that are relevant in the balancing process will depend to some extent on the nature of the privilege claimed and the circumstances of each case. In the present proceedings, with respect to claims of sensitivity of government deliberations, the Tribunal has generally found the following considerations to be of particular importance: – – – – – –

The Investors' interest in production of the requested document to advance the Investors' case as it is set, in particular, in their Memorial; The Respondent's interest in non-disclosure of the requested document and the extent to which such interests are protected or recognized as legitimate in its domestic legislation; Availability of alternative means of safeguarding confidentiality while allowing production, including disclosure of non-sensitive parts of documents; Publicity/transparency surrounding the sensitive documents and their subject matter, including whether any related final work product (decision/report) is publicly available; Insight into reasoning underlying relevant decisions contained in an available final work product; Disclosure or availability of non-privileged sources with related content; and, – Length of time since the creation of the document or transmittal of the communication.

2. The Tribunal’s Review of Assertions of Privilege on Grounds of Sensitivity 27. … the Tribunal wishes to address a particular challenge that the Tribunal faced in its review of the Respondent's balancing process: the delicate task of probing the Respondent's claims of sensitivity without jeopardizing the confidentiality of sensitive information.

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28. It is clear, and both Disputing Parties agree, that a mere assertion of sensitivity is not enough to sustain a privilege claim. The party that claims protection must adduce additional information to demonstrate that its special political or institutional sensitivity grounds are compelling. Such information should be sufficiently detailed to allow a tribunal and the opposing party to see that relevant documents are withheld only through a controlled review process and on the basis of appropriate legal criteria, as required under NAFTA. 29. As the Tribunal explained in its Procedural Order No. 12: It is in the nature of legal privilege that the description of documents for which privilege is asserted must remain broad as a high degree of detail would risk defeating the purpose of the privilege, namely to protect the content of the communication. Accordingly, in the Tribunal's view, a privilege log is not intended to enable the opposing party to take cognizance of the content of listed documents, such as the precise subject matter on which legal advice was sought or provided. Rather, the requirement to keep a log of all documents over which privilege is asserted is to ensure that relevant documents are withheld only through a controlled and transparent process. As such, the party asserting a legal privilege is required to represent that it has reviewed all the substantive conditions for the privilege and to provide some further detail to substantiate its representation. 30. In contrast to solicitor-client privilege, the assertion of privilege on the ground of sensitivity presents an added layer of complexity, as it involves a document-bydocument balancing of the parties' interests. In the course of carrying out such a weighing exercise involving sensitive information, it may not be possible to reveal the precise considerations that tilt the balance in favor of non-disclosure without divulging (some of the) sensitive information itself. Accordingly, the Tribunal relies on evidence that the process put in place by the party-in-possession was adequate to ensure that, with regard to each document, the requesting party's interests are fully taken into consideration. *** 34. … the Tribunal has taken note of a number of important factors that weigh in favor of accepting the Respondent's claims. These include: identification of the issues in this case by the pleadings and exchange of memorials; the fact that the Respondent has made extensive disclosures of internal government documents, even at the senior level, all the way up to the stage at which submissions to Cabinet were prepared; and, the decision by the Respondent to release, in redacted form, a briefing document to Cabinet that presents the background for the rejection of the project by the federal government and a list of factors for and against the competing outcomes. 35. Given that the federal Cabinet is the most senior level of decision-making in Canada, NAFTA tribunals have recognized, under international law, the sensitivity of Cabinet deliberations, while not always upholding privilege claims in respect of all documents associated with those deliberations. Each claim of privilege must be assessed in its legal and factual context, and the Tribunal finds that with respect to the contested Cabinet related documents in this case, the Respondent has satisfied the onus upon it to show that its claim of privilege should be sustained.

[F] Adverse Inferences [1] Durward V. Sandifer, Evidence Before International Tribunals, 150, 153 (2nd ed., University of Virginia Press 1975) Section 32. Adverse Inference from Nonproduction of Evidence. *** Scelle, in his Report on Arbitral Procedure for the United Nations International Law Commission … [i]n his proposed text on evidence he included this provision: “The parties shall cooperate with one another and with the tribunal in the production of evidence and shall obey the orders made for this purpose. Refusal to cooperate shall constitute an unfavorable presumption against the party so refusing.” (22) Ad hoc tribunals have frequently asserted the existence of a rule empowering them to draw adverse inferences from the failure of a party to produce evidence known or presumed to be in its possession and have given judgment based upon the application of such a rule … *** The obligation of a party to produce evidence in its possession, and not accessible to the opposing party is thus generally recognized. In the absence of a specific limitation in the arbitral agreement, tribunals have assumed that they possess power to draw an adverse inference from the failure or refusal of a party to produce such evidence. Unless a party can show a very convincing reason for not producing essential evidence in his possession or control he withholds it on peril of an adverse decision. The obligation holds even with reference to evidence that may be adverse to a party's own interest. (23)

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[2] Charles N. Brower, Evidence Before International Tribunals: The Need for Some Standard Rules, 28 Int’l Law. 47, 57 (1994) (Citations selectively omitted) The potential that adverse inferences may be drawn by the Tribunal is an effective tool in compelling the parties to produce evidence. In INA Corp. v. Iran, for example, the IranUnited States Claims Tribunal ordered the respondent to produce the data and underlying documents used to prepare an audit report. (24) The respondent disobeyed the order on the basis that the material requested was “too voluminous to be conveniently assembled.” The Tribunal accepted the audit report, but noted “the lack of supporting documentation” when it assessed the evidentiary weight of the report. In another case the Tribunal found for the claimant on an evidentiary point when it learned that the respondent had falsely claimed not to have a document that it had been ordered to produce. (25) [3] Howard M. Holtzmann, (26) Fact-Finding by the Iran-United States Claims Tribunal, in Fact-Finding Before International Tribunals [eleventh Sokol Colloquium], 101, 127-128 (Richard B. Lillich (ed.), Transnational Publishers 1992) (Citations selectively omitted) F. Drawing Adverse Inferences from Failure to Submit Evidence The Tribunal is prepared to draw adverse inferences from the unexplained failure of a party to submit certain evidence, regardless of whether there was an order requiring the evidence to be produced. The basic rule has been stated as follows: “[w]hen a party … has access to relevant evidence, the Tribunal is authorized to draw adverse inferences from the failure of that party to produce such evidence.” The unspoken premise that justifies drawing such an inference is that a party in possession of evidence that supports its claim or defense, or which cast doubts or disproves its opponent's position, will submit that evidence to the Tribunal, or provide some reasonable explanation for its failure to supply it. This unassailable presumption supports the particular, highly case-specific inference the Tribunal may draw. The necessary predicate for the inference is the Tribunal's reasonable certainty that the party against whom the inference is to be drawn has possession of, or access to, the missing evidence. Often the Tribunal has reached this conclusion in granting a request for discovery, and draws the inference after the failure to comply with a discovery order. In other cases, the conclusion is drawn from consideration of usual business practices or local regulations, from other evidence submitted in the case, or from simple common sense. So, for example, the failure of a respondent bank to produce evidence that it had sought the approval of Iran's central bank for certain foreign exchange transactions, as required by regulations, justified the Tribunal's inference that it had not. In several other cases, the Tribunal has allowed what would otherwise have been inadequate proof by a claimant to carry the day because the respondent failed to submit evidence on the point. Thus, for example, the failure of a respondent in possession of certain equipment to submit evidence as to its condition led the Tribunal to accept the affidavit of an employee of the claimant, who had not seen the equipment for some years, as to current valuation. Although there has been no shortage of disagreement as to the Tribunal's failure to draw inferences in particular cases, the Tribunal's use of adverse inferences generally has been appropriately flexible. [4] Vera Van Houtte, Adverse Inferences in International Arbitration, Chapter 5 in Written Evidence and Discovery in International Arbitration, 201-205, 214 (Teresa Giovannini and Alexis Mourre (eds), International Chamber of Commerce 2009) (27) Articles 9.4 and 9.5 of the IBA Rules, which provide the adverse inference as a sanction, under certain conditions, for a failure to comply with a request to make evidence available in accordance with Articles 3.3 and 4.10, imply that a certain number of formal requirements, stemming from these latter articles, have to be satisfied in order for an arbitral tribunal to draw adverse inferences from the non-production of a document. Firstly, the party against which the adverse inference may be drawn must have been requested or ordered to produce the evidence. Under the IBA Rules, the formal and prior request or order to produce a document is an essential prior condition for an adverse inference. *** Secondly, the evidence requested must be specific, relevant and material. As the IBA Rules require that the document or the witness testimony requested by a party be specific, relevant and material (Art. 3.3(a) and (b), Art. 4.10), it follows that the possible adverse inference itself will bear on an issue that is itself specific, relevant and material. This emphasizes the importance of drawing adverse inferences: they may (in combination with other elements of proof) have a determining impact on the decision … Thirdly, the party requested to submit such documentary or witness evidence must have been given an opportunity to object to the request and explain its failure to make the evidence available. This condition is a mere application of the rights of defence. Since

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the adverse inference is based on a reversal of the burden to produce, fairness requires that this burden be imposed exclusively on a party that can actually discharge it. *** More precautions may be required, however. They can be distilled from published awards (mainly of the Iran-US Claims Tribunal) and court decisions on challenges of awards that relied on an adverse inference … i.

* ii. * iii. iv. * v.

The document exists or should exist and requested party has or should have access to the evidence sought: “adverse inferences properly may be drawn only if it has been sufficiently shown that the defendant held the documents of evidential value which it refused to submit.” ** The requested party is responsible for the fact that the document does not exist any more or that it cannot be produced. ** There are no good reasons justifying the non-production. * * * There is relative certainty on the general content of the document. ** The potential details of the document are not essential.

*** 11. Conclusions 1. An adverse inference, being an indirect form of evidence, has limited evidential weight on its own and needs to fit in – and be assessed together with – the totality of evidence that brings the tribunal to itsintime conviction. 2. An adverse inference is not the result of a shifted burden of proof (the “beneficiary” of the adverse inference must at least show a prima facie case), but can be a sanction for a party's failure to discharge a specific burden to produce imposed by the tribunal, either on its own initiative or at the request of the other party. 3. Before drawing an adverse inference, the tribunal should ascertain that due process is respected. 4. Drawing an adverse inference is a balancing act, combining the exercise of the discretion the arbitrator has when assessing the evidence submitted to him with the concern for due process. [5] IBA Rules on the Taking of Evidence in International Commercial Arbitration (2010), Article 9(5) and 9(6)

[G] Comments and Questions 1.

2. 3. 4. 5.

6. 7.

8.

Typically, U.S.-style “discovery,” including the taking of oral depositions, is not allowed in international arbitration. Instead, obtaining evidence from the opposing party is usually limited to the production or exchange of specific documents or defined categories of documents. Are the IBA Rules of Evidence binding on an international arbitral tribunal? How are they used by tribunals? What is necessary for a request for production of documents to meet the criteria of the IBA Rules? What expectations may exist with respect to orders for the production of electronic documents? What protocols and guidelines exist in international arbitration for the production of electronic documents? Must a party obtain permission from the investment tribunal in order to seek discovery in the United States from a third party under 28 USC § 1782? What control may be exercised by an investment tribunal over discovery of evidence in the United States under 28 USC § 1782? What legal privileges exist in investment arbitrations to resist the production of documents? What is the source of these privileges? When may an adverse inference be drawn against a party? If a party refuses to produce documents requested by the tribunal, what inference is the tribunal justified in drawing? How does the tribunal determine what inference to draw? What effect may it have on the outcome of the case? When the parties are from different legal systems that recognize different evidentiary privileges, how should a tribunal balance the obligation to treat the parties fairly and equally with the parties' expectations as to the privileged or confidential nature of their documents and communications?

§12.07 EVIDENCE

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[A] IBA Rules on the Taking of Evidence in International Commercial Arbitration (2010), Article 9 Article 9 – Admissibility and Assessment of Evidence 1. The Arbitral Tribunal shall determine the admissibility, relevance, materiality and weight of evidence. 2. The Arbitral Tribunal shall, at the request of a Party or on its own motion, exclude from evidence or production any Document, statement, oral testimony or inspection for any of the following reasons: (a) (b) (c) (d) (e) (f) (g)

lack of sufficient relevance to the case or materiality to its outcome; legal impediment or privilege under the legal or ethical rules determined by the Arbitral Tribunal to be applicable; unreasonable burden to produce the requested evidence; loss or destruction of the Document that has been shown with reasonable likelihood to have occurred; grounds of commercial or technical confidentiality that the Arbitral Tribunal determines to be compelling; grounds of special political or institutional sensitivity (including evidence that has been classified as secret by a government or a public international institution) that the Arbitral Tribunal determines to be compelling; or considerations of procedural economy, proportionality, fairness or equality of the Parties that the Arbitral Tribunal determines to be compelling.

3. In considering issues of legal impediment or privilege under Article 9.2(b), and insofar as permitted by any mandatory legal or ethical rules that are determined by it to be applicable, the Arbitral Tribunal may take into account: (a) (b) (c) (d) (e)

any need to protect the confidentiality of a Document created or statement or oral communication made in connection with and for the purpose of providing or obtaining legal advice; any need to protect the confidentiality of a Document created or statement or oral communication made in connection with and for the purpose of settlement negotiations; the expectations of the Parties and their advisors at the time the legal impediment or privilege is said to have arisen; any possible waiver of any applicable legal impediment or privilege by virtue of consent, earlier disclosure, affirmative use of the Document, statement, oral communication or advice contained therein, or otherwise; and the need to maintain fairness and equality as between the Parties, particularly if they are subject to different legal or ethical rules.

4. The Arbitral Tribunal may, where appropriate, make necessary arrangements to permit evidence to be presented or considered subject to suitable confidentiality protection. 5. If a Party fails without satisfactory explanation to produce any Document requested in a Request to Produce to which it has not objected in due time or fails to produce any Document ordered to be produced by the Arbitral Tribunal, the Arbitral Tribunal may infer that such document would be adverse to the interests of that Party. 6. If a Party fails without satisfactory explanation to make available any other relevant evidence, including testimony, sought by one Party to which the Party to whom the request was addressed has not objected in due time or fails to make available any evidence, including testimony, ordered by the Arbitral Tribunal to be produced, the Arbitral Tribunal may infer that such evidence would be adverse to the interests of that Party. 7. If the Arbitral Tribunal determines that a Party has failed to conduct itself in good faith in the taking of evidence, the Arbitral Tribunal may, in addition to any other measures available under these Rules, take such failure into account in its assignment of the costs of the arbitration, including costs arising out of or in connection with the taking of evidence.

[B] Charles N. Brower, Evidence Before International Tribunals: The Need for Some Standard Rules, 28 Int’l Law. 47, 47-48, 51-52, 54-55 (1994) (Citations selectively omitted) International tribunals inherently are poorly equipped for the fact-finding task. For a variety of reasons, not the least of which is the lack of standard rules of evidence to govern the submission and evaluation of evidence in international proceedings, international tribunals frequently find it extremely difficult to establish facts. I. The Lack of Standardized Rules of Evidence International law has no hard and fast rules governing the character or weight of evidence

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in international arbitrations. Further, proceedings before arbitral tribunals are subject to no “international rules of evidence” that in any manner resemble the technical rules often followed in proceedings before domestic courts – in particular, courts of the AngloAmerican tradition. Indeed, in the view of one commentator the ad hoc character of most international tribunals has contributed to the slow development of a definite body of rules relating to evidence, to the extent that “[e]ach tribunal tends to be a law unto itself, the rules adopted and applied for the occasion being to a considerable degree determined by the legal background of the members of the tribunal.” Arbitral tribunals essentially refrain from adopting specific rules of evidence, particularly rules that restrict the form, submission, and admissibility of evidence. As a general proposition, therefore, “rules” of evidence followed by arbitral tribunals tend to be more liberal than those followed by domestic courts. The traditional practice of international tribunals is thus to admit virtually any evidence, subject to evaluation of its relevance, credibility, and weight. The liberal practice of international tribunals to admit almost anything results from such factors as the absence of appeal, the unavailability of the “best” evidence, and the inadequacies associated with deciding cases on the basis of mere technical rules. II. The Rules of Evidence That Guide Proceedings Nevertheless, arbitral tribunals can and do draw on certain principles of evidence production and evaluation in determining substantive questions submitted to them for decision. For example, members of the Iran-United States Claims Tribunal are guided by the Rules of the United Nations Commission on International Trade Law (UNCITRAL), “in accordance with” which they must “conduct [the Tribunal's] business” except to the extent modified by the governments of Iran and the United States or by the Tribunal “to ensure that this [Claims Settlement Declaration] can be carried out.” The UNCITRAL Rules provide a framework for the presentation and evaluation of evidence that guides the parties and gives ample discretion to the arbitrators. Article 24(1) of the UNCITRAL Rules provides that “[e]ach party shall have the burden of proving the facts relied on to support his claim or defence.” Once a party offers its evidence to prove the facts it relies on, article 25(6) requires the Tribunal to “determine the admissibility, relevance, materiality, and weight of the evidence offered.” The combined effect of these two provisions of the UNCITRAL Rules is nonetheless to offer parties to proceedings before the Iran-United States Claims Tribunal little guidance in meeting their burden of proof. *** IV. The Presentation of Evidence *** C. Oral Testimony Due to the abbreviated nature of most hearings, the absence of transcripts, and the civil law tendency to consider documentary evidence more reliable than oral testimony, live testimony by witnesses at a hearing generally has less significance at the Iran-United States Claims Tribunal than it might in a similar case before municipal courts. Typically, oral testimony is offered only to support affidavit evidence already submitted. Consequently, the Iran-United States Claims Tribunal rarely relies on oral testimony as the sole basis for finding facts. The arbitrators receive oral testimony in an inquisitional fashion not unlike the usual practice in civil law courts. The Iran-United States Claims Tribunal Rules give the arbitrators wide latitude to examine witnesses. Direct and cross-examination, as understood in the common law sense, is unusual and generally ill-advised, although the Rules permit it. D. Documentary Evidence Underscoring the issues raised by interested party testimony, affidavit evidence, and oral testimony is the Iran-United States Claims Tribunal's decided preference for contemporaneous documentary evidence. Reflecting to some degree the civil law tradition, the awards of the Iran-United States Claims Tribunal exhibit a tendency to regard documentary evidence as being more reliable than verbal testimony. As a result the claimants must meet a higher burden of proof. V. The Evaluation of Evidence *** The Iran-United States Claims Tribunal takes full advantage of its discretion to evaluate the evidence proffered by parties. Hearsay evidence, generally not admissible in the common law tradition, is customarily accepted. In most instances the Tribunal accepts documents without establishing the foundation customarily required in the common law system. ***

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Recognizing the evidentiary problems faced by parties and the problems inherent in a liberal evidentiary regime used in international arbitral proceedings, the Iran-United States Claims Tribunal takes certain common-sense approaches to the evaluation of evidence. For example, the Tribunal routinely applies the following principles: 1. 2. 3. 4. 5.

Contemporaneous written exchanges of the parties antedating the dispute are the most reliable source of evidence; The actual course of conduct between the parties prior to the dispute arising constitutes the best evidence of the proper interpretation of their contract; The failure of a party to object in writing to a writing (e.g., an invoice) it has received at or shortly after the time of receipt is strong evidence of its acceptance; Statements of a party contradicting the position it has taken in the proceedings are strong evidence against that position; and When it reasonably should be expected that certain evidence exists and that it is in the control of a party, the failure of that party to produce such evidence gives rise to a justifiable inference that such evidence, if produced, would be adverse to that party.

Although arbitrators of different nationalities may agree on these and other principles for evaluation of evidence, the lack of a standardized body of rules or principles to be applied by international tribunals in evaluating evidence continues to puzzle parties as to the appropriate evidence to submit and leads to evidentiary decisions that are sometimes inconsistent. VI. The Preference for Contemporaneous Evidence Whatever the modes of proof to which parties may resort for substantiation of their respective claims, international tribunals, generally speaking, give greater probative significance to evidence contemporaneous to the events involved in the case. An analysis of the Iran-United States Claims Tribunal's decisions readily reveals its preference for contemporaneous documentation over secondary means of proving the facts of a case … *** Most typically, the Iran-United States Claims Tribunal relies heavily on documents prepared in the ordinary course of business and not in contemplation of litigation. Contemporaneous documentation has proven difficult to find for many parties in cases brought before the Tribunal. As a result of the Iranian revolution and the ensuing chaos, many American individuals and companies left Iran quickly without an opportunity to take with them the documentation that would be vital to their eventual claims. Likewise, many Iranian litigants have asserted that they were incapable of providing documents because they had been either lost or destroyed during the revolution. The Tribunal has rendered opinions on the basis of “convincing, though uncorroborated” evidence where circumstances arising from the revolution made it difficult to “obtain[] corroborative evidence from those who might have witnessed the events described.” … *** Where a party fails to maintain contemporaneous records that subsequently prove vital in litigation, or access to such records is obstructed, the party must find other ways to establish the facts upon which it bases its claim. In such circumstances, it is important that parties need to be able to anticipate to what extent they may rely on affidavit testimony to establish a prima facie case.

[C] Burden of Proof [1] Durward V. Sandifer, Evidence Before International Tribunals, 123-124, 127, 129-131 (2nd ed., University of Virginia Press 1975) (Citations selectively omitted) Section 29. Burden of Proof Burden of proof, in the strict technical sense of the term, is a concomitant of a maturely developed system of pleadings and of a well-defined body of rules of evidence allocating the duty of bringing forward the evidence to substantiate the contentions developed by the pleadings and prescribing the character and quantum of evidence required to fulfill his duty, both during the pleadings and upon the submission of the case to the court for decision. As international judicial procedure has not developed a technically complete system of either of these features, it is natural that detailed rules have not been developed specifically determining the location of the burden of proof in given situations … Witenberg rejects the argument that this prevents the application of a rule of burden of proof: “For if the burden of proof falls on the plaintiff, it is not because he is the plaintiff, but it is in the last analysis because he alleges a fact … [I]t is not as plaintiff as such that the burden of proof falls on him. It falls to him who alleges a fact, as the Roman law says.” *** The broad basic rule of burden of proof adopted, in general, by international tribunals resembles the civil law rule and may be simply stated: that the burden of proof rests

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upon him who asserts the affirmative of a proposition that if not substantiated will result in a decision adverse to his contention. This burden may rest on the defendant, if there be a defendant, equally with the plaintiff, as the former may incur the burden of substantiating any proposition he asserts in answer to the allegations of the plaintiff. (28) *** … In the Parker Case the United States-Mexican General Claims Commission declared categorically: “As an international tribunal the Commission denies the existence in international procedure of rules governing the burden of proof borrowed from municipal procedure.” In dismissing the claim in the Archuleta Case for want of evidence that Mexico had failed to take adequate steps to punish the slayers of the father of the claimant, the same Commission observed that while the records produced by Mexico contained “very scant information” and were “not such as to create a definite impression that effective measures were taken by the authorities,” the United States had “produced practically nothing bearing on the question of negligence.” It concluded that it was “not called upon to give effect to any rule of evidence with regard to the burden of proof “but that “it must decide the case on the strength of the evidence produced by both parties.” Apparently the French-Mexican Commission was the only other one to give explicit approval to the rule, quoting the Parker Case with approval, but the British-Mexican and the German-Mexican Commissions “took into account the failure of the respondent Government to introduce evidence rebutting that offered by the claimant.” The decisions in these cases do not represent as great divergence from the rule stated in the earlier cases as the language of the opinions seems to indicate. In the Parker Case the Commission held, in effect, that Mexico, by not bringing forward easily obtainable official records, had failed to sustain its denial of the validity of the American case. On the other hand, the United States was penalized in the Archuleta Case for failing to produce evidence to substantiate its allegation of the failure of Mexico to take adequate steps to punish the murderer of the father of the claimant. What the Commission actually did in both cases was to accept something short of the best evidence because the other party had failed to carry out the burden resting on it to make good its contentions by producing evidence in support. It is to be noted that in one case the losing party was claimant and in the other respondent. In its actual effect, the Commission's action resembled an application of the Anglo-American rule of the “burden of proceeding.” As the opposing party in each case failed to carry forward its case by producing adequate evidence, award was made in favor of the other on the basis of prima facie evidence entitling it to judgment. In the earlier cases cited the burden envisaged by the tribunals was what might be called the “burden of ultimate proof,” the constant burden of establishing by evidence any essential affirmative proposition put in issue by either party. The two groups of cases are virtually in accord at this point. Judgment in both the principal Mexican cases went against the losing parties because of their failure to meet this “burden of ultimate proof,” … However, in stressing the obligation of both parties to produce evidence in their possession, these cases represent a sound conclusion. They go too far only in suggesting that there is no rule of burden of proof in international proceedings. While there are no technical rules such as those found in Anglo-American law, there is a primary burden on him who asserts to prove his assertion, and that rule should be maintained, especially in claims commissions. This primary burden is seldom strictly enforced in the municipal law sense, as tribunals will accept less satisfactory evidence than would be required in municipal procedure if the opposing party fails to produce evidence in his possession or if in the face of some proof he fails to substantiate his own claim by any acceptable evidence. In other words, a party cannot simply assert or deny a proposition and then rest his case upon a technical rule, throwing the burden of proof on the other party, without running a risk of adverse inference being drawn from his failure to produce evidence. (29) In stressing this secondary burden, the Mexican Commission cases serve to clarify the true nature of the rule of burden of proof applied in international procedure. It should be observed, however, that international tribunals are generally not content to rest a decision simply upon the ground of a failure by a party to maintain the burden of proof resting upon him. If a party fails to bring forward satisfactory proof, tribunals in practice customarily exercise the discretion usually vested in them by requiring a further production of evidence by one or both parties or by appointing experts to make appropriate inquiries or making researches on their own initiative. [2] Charles N. Brower, Evidence Before International Tribunals: The Need for Some Standard Rules, 28 Int’l Law. 47, 49 (1994) (Citations selectively omitted) III. The Burden of Proof Burden of proof in international procedure is grounded on the general obligation of the parties to present evidence before the adjudicating tribunal that the parties deem sufficient to prove their claims. The lack of standard “international rules of evidence,” and the fact that international tribunals are liberal in their approach to the admission of evidence in no way goes “as far as to waive the burden resting upon a claimant to prove his case.” In international arbitral proceedings a party making an allegation of fact has an

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obligation to demonstrate that fact with sufficient evidence. This principle derives from the Roman law rule of burden of proof expressed through certain maxims such as ei qui affirmat non ei qui negat incumbit probatio (onus of proof is on he who affirms, and not on he who denies) and actori incumbit probatio (the claimant carries the burden of proof). Since each party is left to decide what it must offer as evidence to prove its allegations, the level of proof is not capable of precise definition and may be safely assumed to be close to what has been called the “balance of probability” … [3] Karl-Heinz Böckstiegel, Presenting Evidence in International Arbitration, 16(1) Foreign Int’l L.J. 1, 2-3 (2001) II. Burden of Proof The burden of proof is the logical starting point for the presentation of evidence, because – at least in theory – a party presenting a claim needs only to present those facts, and in case they are disputed, that evidence, for which that party has the burden of proof in order to have all factual elements of the claim established. While this strictly logical approach has still a bearing in national court proceedings and in many legal systems, as far as I see, the practice of international arbitration has reversed that order and often moves the question of burden of proof to the end of the procedure: The parties provide a wide range of facts to the arbitrators more or less irrespective of who has the burden of proof. Insofar as these facts are disputed, the parties will present and the tribunal will take evidence. And only if a clear and convincing answer to a factual question cannot be found, the tribunal will turn to the burden of proof to decide to whose disadvantage this non liquet situation has to be resolved. Be that as it may, the burden of proof remains highly relevant in deciding cases in international arbitration. [4] Marion Unglaube and Reinhard Unglaube v. Republic of Costa Rica (ICSID Case Nos. ARB/08/1 and ARB/09/20), Award of 16 May 2012, (30) ¶¶ 33-36 [Judd Kessler (pres.), Franklin Berman, Bernardo M. Cremades] [German investors Marion and Reinhard Unglaube owned an eco-tourist hotel complex in Playa Grande, Costa Rica, which make up the main Pacific nesting site of the leatherback turtle, a mine species currently in critical danger of extinction. The Costa Rican parliament created a marine park on 75-meter strip beyond the maritime zone at Playa Grande. The Unglaubes subsequently sought to expand their hotel complex but the Costa Rican authorities refused to issue the necessary permits, citing the project's encroachment within the protected 75-meter strip. The Unglaubes subsequently filed for ICSID arbitration, alleging breaches of the expropriation, fair and equitable treatment, full protection and security, and most-favored nation provisions contained in the Costa Rica-Germany BIT.] (Citations selectively omitted) 33. ICSID Arbitration Rule 34(1) states that the Tribunal shall be the judge of the admissibility as well as the probative value of any evidence. However, neither the Convention nor the Rules provide formal rules of evidence. They also do not specify which Party carries the burden of proof in disputes brought before an ICSID tribunal. However, there is a nearly universal practice among international arbitration tribunals to require each party to prove the facts which it advances in support of its own case. Exceptions to his general rule only apply to obvious or notorious facts. 34. The degree or standard of proof is not as precisely defined. Whichever party bears the burden of proof on a particular issue and presents supporting evidence “must also convince the Tribunal of [its] truth, lest it be disregarded for want, or insufficiency, of proof.” The degree to which evidence must be proven can generally be summarized as a “balance of probability,” “reasonable degree of probability” or a preponderance of the evidence. Because no single precise standard has been articulated, tribunals ultimately exercise discretion in this area. 35. A claimant ultimately cannot prevail without meeting these minimum thresholds of proving his or her claim. Similarly, a claim that the international responsibility of a State is engaged requires proof. 36. Therefore, Claimants must present evidence sufficient to demonstrate that Respondent's conduct towards Claimants' investment has breached the Treaty. The burden may then shift to the Respondent to establish that its conduct was permitted under the Treaty or international law. [5] Marvin Roy Feldman Karpa v. United Mexican States (also known as Marvin Feldman v. Mexico) (ICSID Case No.ARB(AF)/99/1), Award of 16 December 2002, (31) ¶¶ 177-178 [Konstantinos D. Kerameus (pres.), Jorge Covarrubias Bravo, David A. Gantz] [On April 30, 1999, Marvin Feldman Karpa, a U.S. citizen, submitted a claim on behalf of Corporación de Exportaciones Mexicanas S.A. (‘CEMSA’) against Mexico under the ICSID Additional Facility Rules. CEMSA, a registered foreign trading company in Mexico and exporter of cigarettes from Mexico since 1990, was denied certain tax refunds available to exporters. Feldman alleged that Mexico refused to implement a 1993 Mexican Supreme

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Court decision in CEMSA's favor ordering a refund of taxes paid. Feldman alleged that those actions breach Mexico's obligations under Chapter 11 relating to the minimum standard of treatment, the free transfer of funds related to the transfer of its investment, and constituted an expropriation. Although sufficient evidence was not available to conclusively demonstrate discrimination by Mexico, the Tribunal nevertheless found a violation of national treatment on the basis that Mexico had failed to provide sufficient evidence to rebut the investor's prima facie case against it.] (Citations selectively omitted) 177. On the question of burden of proof, the majority finds the following statement of the international law standard helpful, as stated by the Appellate Body of the WTO: … various international tribunals, including the International Court of Justice, have generally and consistently accepted and applied the rule that the party who asserts a fact, whether the claimant or respondent, is responsible for providing proof thereof. Also, it is a generally accepted canon of evidence in civil law, common law and, in fact most jurisdictions, that the burden of proof rests upon the party, whether complaining or defending, who asserts the affirmative of a claim or defence. If that party adduces evidence sufficient to raise a presumption that what is claimed is true, the burden then shifts to the other party, who will fail unless it adduces sufficient evidence to rebut the presumption. (Emphasis supplied.) Here, the Claimant in our view has established a presumption and a prima facie case that the Claimant has been treated in a different and less favorable manner than several Mexican owned cigarette resellers, and the Respondent has failed to introduce any credible evidence into the record to rebut that presumption. 178. In weighing the evidence, including the record of the five day hearing, the majority is also affected by the Respondent's approach to the issue of discrimination. If the Respondent had had available to it evidence showing that the Poblano Group companies had not been treated in a more favorable fashion than CEMSA with regard to receiving IEPS rebates, it has never been explained why it was not introduced. Instead, the Respondent spent a substantial amount of its time during the hearing and in its memorials seeking (unsuccessfully in the Tribunal's view) to demonstrate that CEMSA and the Poblano Group were related companies (as there could be no discrimination, presumably within a single company group). Yet, if the Poblano Group firms had not received the rebates, that evidence of relationship would have been totally irrelevant. Why would any rational party have taken this approach at the hearing and in the briefs if it had information in its possession that would have shown that the Mexican owned cigarette exporters were being treated in the same manner as the Claimant, that is, denied IEPS rebates for cigarette exports where proper invoices were not available? Thus, it is entirely reasonable for the majority of this Tribunal to make an inference based on the Respondent's failure to present evidence on the discrimination issue … [6] Waguih Elie George Siag and Clorinda Vecchi v. The Arab Republic of Egypt (ICSID Case No. ARB/05/15), Award of 1 June 2009, (32) ¶¶ 325-326 [David A.R. Williams (pres.), Michael Pryles, Francisco Orrego Vicuna] [Case summary included in Chapter 11.] (Citations selectively omitted) The Standard of Proof 325. For reasons summarised above, the Claimants have submitted that Egypt must prove its Lebanese nationality objection to a heightened standard of proof. Chief among the reasons cited by Claimants is that Egypt's Lebanese nationality application rests upon allegations of fraud, and that claims of such nature are typically held to a heavy standard of proof. The standard suggested by the Claimants was the American standard of “clear and convincing evidence,” that being somewhere between the traditional civil standard of “preponderance of the evidence” (otherwise known as the “balance of probabilities”), and the criminal standard of “beyond reasonable doubt.” 326. The Tribunal accepts the Claimants' submission. It is common in most legal systems for serious allegations such as fraud to be held to a high standard of proof. The same is the case in international proceedings, as can be seen in the cases cited by Claimants, among them the Award of the ICSID Tribunal in Wena Hotels. Egypt's principal submission was that the burden of proof was on Mr Siag, a submission which the Tribunal has rejected so far as the proof of fraud or other serious misconduct is concerned. Egypt did not submit that, if it were required to prove fraud, it should be held to a lesser standard than that argued by the Claimants. The Tribunal accepts that the applicable standard of proof is greater that the balance of probabilities but less than beyond reasonable doubt. The term favoured by Claimants is “clear and convincing evidence.” The Tribunal agrees with that test. [7] EDF (Services) Limited v. Romania (ICSID Case No. ARB/05/13), Award of 8 October 2009, (33) ¶ 221 [Piero Bernardini (pres.), Arthur W. Rovine, Yves Derains]

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[EDF, an investor from Jersey, entered into two joint-venture agreements with two Romanian state-owned companies in order to provide duty-free and other retail services at Romanian airports and on-board a Romanian airline. After its Romanian partners declined to renew the joint-venture agreements and amidst allegations of bribery, EDF initiated ICSID arbitration proceedings against Romania pursuant to the United KingdomRomania BIT. EDF claimed that its investment had been expropriated and that it had been treated unfairly, inequitably, arbitrarily and discriminatorily and sought over US$132 million in compensation.] (Citations selectively omitted) 221. The Tribunal shares the Claimant's view that a request for a bribe by a State agency is a violation of the fair and equitable treatment obligation owed to the Claimant pursuant to the BIT, as well as a violation of international public policy, and that “exercising a State's discretion on the basis of corruption is a … fundamental breach of transparency and legitimate expectations.” The heart of Claimant's case is that the contractual arrangements at the Otopeni airport were not extended beyond their tenyears term because Mr. Weil refused to pay a USD2.5 million bribe to secure the extension, that the request for a bribe was obvious bad faith by Respondent in negotiating an extension, and was clearly impossible to reconcile with the legitimate and reasonable expectation of Claimant. Respondent flatly denies that such a request for a corrupt payment was made. In any case, however, corruption must be proven and is notoriously difficult to prove since, typically, there is little or no physical evidence. The seriousness of the accusation of corruption in the present case, considering that it involves officials at the highest level of the Romanian Government at the time, demands clear and convincing evidence. There is general consensus among international tribunals and commentators regarding the need for a high standard of proof of corruption. The evidence before the Tribunal in the instant case concerning the alleged solicitation of a bribe is far from being clear and convincing.

[D] Presumptions and Inferences [1] Durward V. Sandifer, Evidence Before International Tribunals, 141-142, 144-146 (2nd ed., University of Virginia Press 1975) (Citations selectively omitted) Section 31. Presumptions and the Burden of Proof. International tribunals may recognize certain legal presumptions as affecting the primary burden of proof, but the presumptions are so variously stated, and there is such a lack of uniformity in the circumstances of their application, that no general rules in the matter can be stated. By its very nature the law of presumptions belongs to the realm of municipal law, rather than to international law. It is dependent upon a superior authority with power to define the presumptions and the inferences to be drawn from them and to prescribe the consequences for the burden of proof upon the parties. This legal concept involves a superior authority and a precision not yet present in international law. Presumptions cannot, therefore, in the present stage of the development of international law, occupy a role comparable to that which they play in municipal law … *** Presumptions in favor of the validity of acts of various Government authorities are often invoked. Ralston cites as legal presumptions that have received the sanction of commissions “the uniform presumption of the regularity and validity of all acts of public officials;” “the legal presumption … of the regularity and necessity of governmental acts”; the “presumption in favor of the government that it will be reasonable and will not be reckless and careless;” and “the general presumption … that public officers perform their official duties …” He adds, however, that “the presumption relative to the rightfulness of governmental acts is not conclusive, and in some cases where the rule was recognized evidence counter to it was given preponderating weight.” Hackworth, in summarizing the law on denial of justice, says with respect to the presumption of the correctness of judgments of national courts of last resort: “Nations are considered to be equal and with but few exceptions judgments of their courts of last resort are considered to be and are accepted as just and proper. There is, therefore, a strong presumption in favor of their correctness, and a complainant who bases his grievance on an alleged denial of justice by the courts assumes the obligation of establishing by clear evidence that the presumption does not apply to his case.” Presumptions often have been invoked in relation to the proof of citizenship. In the absence of countervailing evidence effect has been given to the presumptions that complying with the rules of the commission raises a presumption of citizenship; that residence in a territory before its annexation and for a long period thereafter raises a presumption of citizenship; “that testimony of birth in Mexico raised presumption of citizenship; that a person who is a citizen under the law of one party will be presumed not to be a citizen of the other in the absence of proof of the law of the other party; (34) and that a naturalization certificate constitutes prima facie evidence of citizenship but is subject to rebuttal.”

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*** In the Corfu Channel Case, involving claims by the United Kingdom against Albania for damages suffered by its naval vessels, passing through the Corfu Channel, Judge Ecer, in his Dissenting Opinion, noting that “no direct evidence had been produced that Albania knew about the minefield,” said that “we are in the sphere of indirect evidence, indications and presumptions.” He concluded: I consider, therefore, that in international law there is a presumption in favour of every State, corresponding very nearly to the presumption in favour of the innocence of every individual in municipal law. There is a presumptio juris that a State behaves in conformity with international law. Therefore a State which alleges a violation of international law by another State must prove that this presumption is not applicable in some special case; but it is not possible to combat a presumption of legal conduct by another presumption. It would seem clear that such presumptions are not conclusive but open to challenge by relevant evidence of State behavior to the contrary. [2] Charles N. Brower, Evidence Before International Tribunals: The Need for Some Standard Rules, 28 Int’l Law. 47, 56 (1994) (Citations selectively omitted) VII. The Inferences That May Be Drawn With the power to evaluate evidence however it sees fit, the Iran-United States Claims Tribunal, as is the case with other international arbitral tribunals, is free to make presumptions or inferences based on what the parties offer or fail to offer. An example would be the presumption of the Tribunal in PepsiCo v. Iran that cola-concentrate arrived in port in Iran in the average time it took goods to travel from the United States to Iran notwithstanding the absence of any evidence actually establishing the date of arrival of the cola-concentrate. In many such situations the Iran-United States Claims Tribunal has been willing to infer a fact despite the lack of conclusive evidence … *** While the Iran-United States Claims Tribunal has drawn inferences in certain circumstances based on the unavailability of contemporaneous documentation, as a whole it has been hesitant to draw inferences or shift burdens of proof even when contemporaneous documentation was available but the party used other contemporaneous documentary evidence to fill in the gaps. [3] Howard M. Holtzmann, Fact-Finding by the Iran-United States Claims Tribunal, in FactFinding Before International Tribunals [eleventh Sokol Colloquium], 101, 126-27 (Richard B. Lillich (ed.), Transnational Publishers 1992) (Citations selectively omitted) E. Drawing Inferences from Silence The failure of a party promptly to voice displeasure with a given course of events in a business transaction has been significant in the Tribunal's decision making. For example, in determining whether a contract has been breached, generally great emphasis has been placed on whether a party has made a contemporaneous written complaint. Silence in the face of apparent nonperformance often leads the Tribunal to draw an adverse inference. I appreciate that American businessmen often forego making written complaints, in the belief that such protests might jeopardize already fragile business relationships. While I cannot criticize this business approach, it is clear, based on Tribunal Awards, that failing to object can be expensive if disputes wind up in arbitration. Similarly, failure to mention a point clearly in a contract, or in correspondence, has led to inferences as to the intent of the party, based on the familiar logic that a party could have mentioned an item specifically if that is what it had intended. In some cases this approach has, in my view, been applied inappropriately, leading me to criticize an award on the ground that “[s]ilence cannot cry so loudly.” [4] George C. Christie, What Constitutes a Taking of Property Under International Law?, 38 Brit. Y.B. Int’l L. 307, 324-326 (1962) (35) (Citations selectively omitted) Forced Sales A type of taking that is not expressly called an expropriation, and which, indeed, is normally accompanied by an explicit disclaimer of any such intention, is illustrated by a group of situations commonly included under the classification of ‘forced sales'. In some case there may be an elaborate legal procedure for accomplishing the ‘forced sale’; it is obvious, however, that an apparently voluntary transfer made under the threat of an impending expropriation is, none the less, forced. Here again the commentators recognize the right to compensation of an alien who has been subjected to such

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treatment. But it would be helpful to have something more than abstract principles … During the military occupation of Germany laws were promulgated recognizing the right of victims of the Nazi tyranny to compensation for injuries to their interest in property. United States Military Government Law No. 59 is typical of the laws adopted by the three Western occupying Powers. When the occupation was terminated the German Federal Republic agreed to keep these provisions in effect until all claims were dealt with. Military Government Law No. 59 applied generally to aliens as well as German nationals. Among the categories of injuries for which restitution might be claimed were those arising as a result of ‘a transaction contra bonos mores, threats or duress … or any other tort’. In lieu of restitution, a claimant, upon relinquishing all other claims, could demand from the person first acquiring his property the difference between whatever the claimant had received for the property and the fair purchase price. The framers of the law showed great practical awareness of the nature of the problems that would be presented in actual cases. A rebuttable presumption was created that any transfer of property during the Nazi regime (30 January 1933 to 8 May 1945) by a person who was directly exposed to persecutory measures, or who belonged to a class of persons who were to be eliminated entirely from the cultural and economic life of Germany, was an act of confiscation. The presumption of confiscation could be avoided by a showing that the transferor was paid a fair purchase price, and furthermore that he was not denied the free disposal of the moneys received, for reasons of race, religion, nationality, ideology or political opposition to National Socialism. Claimants coming from a class of persons who were marked for elimination from the cultural and economic life of Germany were given a right to avoid any transaction involving a transfer or relinquishment of property entered into during the period between the first Nuremburg laws (15 September 1935) and the end of the Nazi regime. This additional right could only be defeated by a showing that the transaction as such would have taken place even in the absence of National Socialism, or that the transferee successfully protected the claimant's property interests. The fairness of the purchase price was not a relevant consideration. Finally, a rebuttable presumption was established that any gratuitous transfer made by a person subject to persecution, as defined in the act, between 30 January 1933 and 8 May 1945, constituted a bailment …

[E] Interested Witnesses – Michael Straus, The Practice of the Iran-U.S. Claims Tribunal in Receiving Evidence from Parties and from Experts, 3(3) J. Int’l Arb. 57, 58-60, 61-63 (1986) (Citations selectively omitted) The Tribunal’s Approach to Party Testimony There is no uniform practice among legal systems whether to receive the testimony of parties as witnesses, or whether to accept the testimony of individuals so closely-related to the parties as to be said to have a financial interest in the outcome of the dispute… Modern arbitral practice, however, seems to be that where an individual party or, in the case of juridical persons, as party officers and employees, have knowledge of the facts in issue, it would be unreasonable for an arbitral tribunal to refuse their testimony, since all testimony is ultimately subject to the arbitrators' judgment as to its probative value based on such factors as credibility and relevance. Thus, as concluded by Professor Sandifer: “A rule denying any weight to the testimony of interested parties or; excluding it altogether may have some justification in municipal procedure, where other evidence will usually be available… In international procedure, where the claimant through no fault of his own so frequently has no evidence except his own or that of parties intimately interested in the case upon which to base a claim for redress, such a rule is surely inequitable and unsound”. *** The Tribunal's actual use of the testimony of parties to a dispute (so-called “interested” witnesses) has essentially followed Sandifer's observations, but within a procedural framework of greater or lesser complexity depending on the Chamber involved. For example, Chamber Two at an early stage in its hearings apparently allowed individual claimants to testify as fact witnesses on central elements of their claims, without regard to their interest in the outcome … *** Chamber Three, however, developed a somewhat more involved procedural approach, allowing individual parties or parties' “representatives” to give “information” about the party's contentions, but not formally as witnesses. Under these guidelines, parties or current employees of corporate parties – regardless of their level of authority in the company – are regarded as “interested” in the outcome of the claim, and may therefore only give “statements.” At times such individuals are referred to by the Tribunal as “party witnesses” – perhaps a rather hybrid term, but an accurate description of the practical operation of the guidelines. Non-employees or former employees with no continuing ties

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to the company may, however, give testimony. Following these guidelines, Chamber Three heard a claimant engineer's statement at a hearing regarding the extent of his performance of engineering services, the reasons he was forced to leave Iran before completing his contract, and his efforts to mitigate damages caused by the early termination of the contract. Those statements, together with written evidence, then became the basis for an award in the claimant's favor. Chamber One of the tribunal apparently follows the same approach as Chamber Three. Thus, in Economy Forms Corporation v. Islamic Republic of Iran, 3 Iran-U.S. C.T.R. 42 (June 13, 1983), Chamber One rejected a request by the Chairman of the Board of Economy Forms for permission to appear as a “witness”, (36) but then received his “statements” as to the U.S. character of the ownership interests in the company, the circumstances surrounding the formation of the contract for the manufacture and shipment of goods in issue, the reasons for the company's inability to ship to Iran all of the goods it manufactured under the contract, and the company's subsequent efforts to sell such of those goods as it could in mitigation of damages. The Chamber, moreover, expressly relied on certain of the Chairman's information in its award in Economy Forms' favor … In a similar fashion, Chamber Two has more recently refined the distinctions it makes so that while senior company officials are generally regarded as party representatives who may give information but not as witnesses, lower-level employees may be heard in the latter capacity … Despite this reluctance, it has become clear through the Tribunal's practice that the Tribunal will accept all evidence presented to it, whether styled as witness “testimony” or as party “information”, and will weight it for probative value taking into consideration factors such as the evidence-provider's truthfulness, the likelihood that he had personal knowledge of the facts, and of course his interest in the outcome of the dispute … There are, nevertheless, two practical differences between evidence received as “testimony” and evidence received as “information” which derive from the provisions of P 1171 the UNCITRAL Rules, and are therefore of importance not only in connection with the Tribunal's use of those Rules, but also that of any other arbitral body operating within the same procedural framework. First, under Article 25(2) of the UNCITRAL Rules, it is only necessary for parties to give adversaries advance notice of the identity of any witnesses who will testify at the hearing of the claim, not of any individuals or representatives who will provide “information” … Second, the Tribunal, under the discretion permitted to it in Article 25(4) of the UNCITRAL Rules, allows only persons identified as a party or a party's representative to remain in the hearing room throughout the hearing, while witnesses may only attend to testify. Given the tribunal's practice of accepting all evidence presented to it, this Rule as applied seems of little benefit … A third difference exists by virtue of a note to Article 25, of the UNCITRAL Rules added by the tribunal, which provides that witnesses – but not party representatives – are required to “make the following declaration: ‘I solemnly declare upon my honour and conscience that I will speak the truth, the whole truth and nothing but the truth.’” Because the Tribunal in either case weighs both witness testimony and party information for truthfulness, there seems little to be gained by requiring – or dispensing with – the declaration in one or the other instance.

[F] Asian Agricultural Products Ltd. v. Republic of Sri Lanka (ICSID Case No. ARB/87/3), Final Award of 27 June 1990, (37) ¶ 56 [Ahmed S. El-Kosheri (pres.), Berthold Goldman, Samuel K.B. Asante] [Case summary included in Chapter 9] (Citations selectively omitted) 56. … Nevertheless, in order to handle the legal issues related to evidence, the abovestated canons [Rules A-F on treaty interpretation] have to be complemented by taking into consideration the following established international law rules: Rule (G)

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“There exists a general principle of law placing the burden of proof upon the claimant” …

Rule (H)

“The term actor in the principle onus probandi actori incumbit is not to be taken to mean the plaintiff from the procedural standpoint, but the real claimant in view of the issues involved” … Hence, with regard to “proof of individual allegations advanced by the parties in the course of proceedings, the burden of proof rests upon the party alleging the fact”…

Rule (I)

“A Party having the burden of proof must not only bring evidence in support of his allegations, but must also convince the Tribunal of their truth, lest they be disregarded for want, or insufficiency, of proof” (CHENG, op. cit., p. 329-331, with quotations from the supporting authorities).

Rule (J)

“The international responsibility of the State is not to be presumed. The party alleging a violation of international law giving rise to international responsibility has the burden of proving the assertion” …

Rule (K)

“International tribunals are “not bound to adhere to strict judicial rules of evidence”. As a general principle “the probative force of the evidence presented is for the Tribunal to determine” …

P 1172

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Rule (L)

In exercizing the “free evaluation of evidence” provided for under the previous Rule, the international tribunals “decided the case on the strength of the evidence produced by both parties”, and in case a party “adduces some evidence which prima facie supports his allegation, the burden of proof shifts to his opponent …

Rule (M)

Finally, “In cases where proof of a fact presents extreme difficulty, a tribunal may thus be satisfied with less conclusive proof, i.e. prima facie evidence” …

[G] Tradex Hellas S.A. v. Republic of Albania (ICSID Case No. ARB/94/2), Award of 29 April 1999, (38) ¶¶ 77-83 [Karl-Heinz Böckstiegel (pres.), Fred F. Fielding, Andrea Giardian] [On 10 January 1992, Tradex and T.B. Torovitsa signed a joint-venture agreement (“the Agreement”). T.B. Torovitsa owned 1170 ha farmland in T.B. Torovitsa, Lezha, Albania, which the joint-venture parties intended to develop for commercial purposes over a period of 10 years, renewable by common agreement for another period of 10 years. The Albanian Ministry of Foreign Economic Affairs approved the Agreement on January 21. Pursuant to schedules contained in the Agreement, Tradex invested USD 786,343 in order to use the farm during the first crop-raising period in the spring and summer of 1992. T.B. Torovitsa invested additional capital to finance cattle production, field cultivation, and payment of 700 personnel. Tradex claimed that several events amounted to expropriation and rendered the joint venture valueless: first, on August 22, 1992, 140 ha of the land (its most fertile area) was formally expropriated and transferred to villagers by Albania; second, crop production, cattle, and seed supplies were stolen by the villagers at an almost steady rate of 15% between March and October 1992 and the management's work was often impossible because of threats and acts of violence; and third, as of December 1992, entry of Tradex's personnel to the farm was made impossible due to the seizure and occupation of the farm by villagers. As a result, the two parties were compelled to dissolve their joint venture, effective as of April 30, 1993. Tradex estimated its investment at USD 2.2 million, less USD 176,093 of machinery which was returned to it, and requested that Albania be ordered to pay the net market value of the investment, amounting to USD 2,023,907, plus interest on this amount and legal fees. Albania objected to the Tribunal's jurisdiction, but the Tribunal decided on December 24, 1996, that it had jurisdiction subject to the reservation that the issue whether an expropriation had been shown was joined to the merits. Albania argued that the facts presented by Tradex were insufficient to support its case, as the land in question was not owned by the jointventure, but by T.B. Torovitsa; that the Agreement provided for settlement of disputes between the joint-venture parties by the International Chamber of Commerce; that the governmental authorization for the joint-venture expressly provided that the jointventure should conform with Albanian legislation concerning land; and that Tradex did not reserve its rights against T.B. Torovitsa or Albania when it agreed to the liquidation of P 1173 the joint-venture's assets.] (Citations selectively omitted) 77. Primarily, the rules on evidence in this Case are established by Rules 33 to 37 of the ICSID Arbitration Rules. Particularly relevant is Rule 34 (1): “The Tribunal shall be the judge of the admissibility and of any evidence adduced and of its probative value.”

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78. In this context, the Tribunal must deal with some objections raised by a Party to evidence provided by the other Party in this Case: 79. Tradex … has objected to the evidential value of witness statements submitted by Albania, because none of them are produced as sworn affidavits. In this regard, the tribunal notes that, according to ICSID Rule 36 (2) it may “admit evidence given by a witness or expert in a written deposition.” 80. As this provision does not call for a sworn affidavit, and as in many national jurisdictions non-sworn written witness statements are admissible and customary, the Tribunal is not prevented from giving evidentiary value to non-sworn written witness statements. 81. Regarding oral testimony, the Tribunal notes that ICSID Rule 35 expressly provides the wording of declarations that witnesses and experts have to make before giving their evidence. Each of the witnesses and experts heard in the Oral hearing in this Case was asked by the President of the Tribunal to make, and then, indeed, made such a declaration. In view of the express declarations provided in Rule 35 without the requirement of an oath, the Tribunal has no hesitation to accept the evidentiary value of oral testimony given in this case. 82. Both parties have pleaded further reasons against the value of evidence submitted by the other Party … Both have claimed that witnesses lacked independence from the Party presenting them. Tradex particularly alleged interference by Albania on Albanian witnesses proposed by Tradex, testimony of Albania's witnesses “against their own signature”, forgery of documents, “the loan”, the “Ujka-letters”, and other reasons against the credibility of witnesses presented by Albania. Albania particularly objected, because Tradex did not bring certain witnesses and an expert to the Hearing for crossexamination, Tradex did not cross-examine Albania's witnesses Ujka and Ndoci, and that certain testimony of witnesses presented by Tradex contained contradictions to their own earlier testimony and to the testimony of other witnesses. 83. The Tribunal finds that none of these objections makes the respective evidence inadmissible. But, in making use of its authority under ICSID Rule 34 (1) to “be the judge … of its probative value”, the Tribunal, in evaluating the respective evidence, shall take into account the objections raised by the Parties insofar as the Tribunal considers that the evidence objected to is relevant for the award on the merits. On the other hand, the Tribunal sees no need to deal with and decide on objections regarding evidence which, in P 1174 the Tribunal's judgment, is not relevant for it in deciding on the claim before it.

[H] William A. Parker v. United Mexican States (General Claims Commission – United States and Mexico), 31 March 1926, 4 R.I.A.A. 35, ¶¶ 5-7 (1926) [General Claims Commission] [The United States espoused the claim of William A. Parker against Mexico, claiming a monetary sum that remained unpaid after Parker rendered certain services to the Government of Mexico. The Mexican Government challenged the nationality of the claim on the account of insufficiency of proof offered in support of the US nationality of Parker. Mexico argued that the claimant's nationality was supported only by the affidavits of three witnesses, one being the claimant and the other two being his brother and a friend, there was no proof of a birth certificate, and the affidavits were not taken by an authorized person according to Mexican law.] (Citations selectively omitted) 5. For the future guidance of the respective Agents, the Commission announces that, however appropriate may be the technical rules of evidence obtaining in the jurisdiction of either the United States or Mexico as applied to the conduct of trials in their municipal courts, they have no place in regulating the admissibility of and in the weighing of evidence before this international tribunal. There are many reasons why such technical rules have no application here, among them being that this Commission is without power to summon witnesses or issue processes for the taking of depositions with which municipal tribunals are usually clothed. The Commission expressly decides that municipal restrictive rules of adjective law or of evidence cannot be here introduced and given effect by clothing them in such phrases as “universal principles of law, “or “the general theory of law,” and the like. On the contrary, the greatest liberality will obtain in the admission of evidence before this Commission with the view of discovering the whole truth with respect to each claim submitted. 6. As an international tribunal, the Commission denies the existence in international procedure of rules governing the burden of proof borrowed from municipal procedure. On the contrary, it holds that it is the duty of the respective Agencies to cooperate in searching out and presenting to this tribunal all facts throwing any light on the merits of the claim presented. The Commission denies the “right” of the respondent merely to wait in silence in cases where it is reasonable that it should speak. To illustrate, in this case the Mexican Agency could much more readily than the American Agency ascertain who among the men ordering typewriting materials from Parker and signing the receipts of delivery held official positions at the time they so ordered and signed, and who did not.

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On the other hand, the Commission rejects the contention that evidence put forward by the claimant and not rebutted by the respondent must necessarily be considered as conclusive. But, when the claimant has established a prima facie case and the respondent has offered no evidence in rebuttal the latter may not insist that the former pile up evidence to establish its allegations beyond a reasonable doubt without pointing out some reason for doubting. While ordinarily it is incumbent upon the party who alleges a fact to introduce evidence to establish it, yet before this Commission this rule does not relieve the respondent from its obligation to lay before the Commission all evidence within its possession to establish the truth, whatever it may be. 7. For the future guidance of the Agents of both Governments, it is proper to here point out that the parties before this Commission are sovereign Nations who are in honor P 1175 bound to make full disclosures of the facts in each case so far as such facts are within their knowledge, or can reasonably be ascertained by them. The Commission, therefore, will confidently rely upon each Agent to lay before it all of the facts that can reasonably be ascertained by him concerning each case no matter what their effect may be. In any case where evidence which would probably influence its decision is peculiarly within the knowledge of the claimant or of the respondent Government, the failure to produce it, unexplained, may be taken into account by the Commission in reaching a decision. The absence of international rules relative to a division of the burden of proof between the parties is especially obvious in international arbitrations between Governments in their own right, as in those cases the distinction between a plaintiff and a respondent often is unknown, and both parties often have to file their pleadings at the same time. Neither the Hague convention of 1907 for the pacific settlement of international disputes, to which the United States and Mexico are both parties, nor the statute and rules of the Permanent Court of International Justice at The Hague contain any provision as to a burden of proof. On the contrary, article 75 of the said Hague convention of 1907 affirms the tenet adopted by providing that “The parties undertake to supply the tribunal as fully as they consider possible, with all the information required for deciding the case.”

[I] Comments and Questions 1.

2. 3. 4. 5. 6. 7. P 1176 8.

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

In preparing an investment case, counsel may investigate and research sources of information not always used in commercial arbitration. For example, counsel for an investor may review World Bank and Inter-American Development Bank reports and papers on, inter alia, the privatization of certain industries in a region, the renegotiation of privatized utility concessions or the issues involving the judiciary of a given country. In addition, legislative committee reports, transcripts or summaries of legislative debates, regulatory agency decrees and reports, public files of regulatory agencies, government websites on the Internet, and news articles reporting interviews with public officials may provide valuable information and evidence. On the other hand, government counsel may find a host of information about an investor on the Internet, including a website, press releases and reports filed with the investor's own government, such as the Securities Exchange Commission in the United States, or similar institutions in other countries. May municipal rules of evidence be applied in an international arbitration proceeding? Why or why not? Are they binding? Are there any generally-accepted rules of evidence in investment arbitration? What? What is the legal standard, if any, for an investment tribunal to assess the evidence and make fact findings? May written statements of witnesses be relied upon by the tribunal in deciding a case? Under what circumstances? Must cross examination of witnesses be allowed? Why or why not? What is an “interested witness”? Should interested witnesses be allowed to give evidence? Why or why not? What procedures can be employed to harmonize the different rules on interested witnesses in the common and civil law systems? What role does the oral hearing play in an international arbitration? Must an oral hearing be provided by a tribunal in an investment arbitration? Why or why not? What is the burden of proof in an investment arbitration? Which party has the burden of proof in an investment arbitration? What is the rationale for the application of a burden of proof? What purpose does it serve? 11 Does the burden of proof ever shift in an international arbitration? In what circumstances? In litigation in the United States, there is a concept of the burden of going forward with the evidence that is distinct from the burden of persuasion. Does such a distinction exist in investment arbitration? Should a different burden of proof exist for particularly serious allegations such as fraud or corruption? Why or why not? How strictly is the burden of proof applied in investment arbitrations? Is any obligation placed on the party that does not have the burden of proof to produce evidence?

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16. 17. 18. 19. 20. 21. 22. P 1176

What is a presumption? How are presumptions applied? What types of presumptions exist? What is the rationale for recognizing and applying presumptions? Under what circumstances should they be applied? What specific presumptions have been employed by international tribunals? Are they relevant to an investment dispute? What is the effect of a rebuttable presumption? May an investment tribunal create new presumptions? Under what circumstances? What is the difference between a presumption and an inference? Under what circumstances may an inference be drawn?

References 1) 2) 3) 4) 5) 6)

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

17)

18) 19) 20) 21) 22)

Appeals Chamber of the International Tribunal for Human Rights Violations in the Former Yugoslavia, Judgment of 15 July 1999, in particular at para. 30 et seq., with, in note 54, an extensive reference to ECtHR cases. Available at http://italaw.com/sites/default/files/case-documents/ita0529.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0465.pdf (accessed 1 September 2013). Rule on the Taking of Evidence in International Arbitration (May 2010) is reproduced by kind permission of the International Bar Association, London, UK, copyright International Bar Association. Judge, Iran-United States Claims Tribunal. Article appeared in Volume 11, Issue 1 of Arbitration International and reproduced (with the kind permission of Arbitration International, Freshfields and Queen Mary and Westfield College, London) the author's 1994 Freshfields Arbitration Lecture, delivered at the School of International Arbitration, Centre of Commercial Studies, Queen Mary and Westfield College, University of London, 12 October 1994. Reprinted with permission of Oxford University Press. All rights reserved. Available at http://italaw.com/sites/default/files/case-documents/ita0341.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0812.pdf (accessed 1 September 2013). Available athttp://italaw.com/sites/default/files/case-documents/ita0510.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0089.pdf (accessed 1 September 2013). Available athttp://www.state.gov/documents/organization/38791.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0517_0.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0178.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0529.pdf (accessed 1 September 2013). Intel Corp v Advanced Micro Devices, 542 U.S. 241 (2004), holding that US District Courts have a discretion under 28 U.S.C. § 1782(a) to order discovery to a private party for use in an anti-trust investigation by the EU Commission to which that party had filed a complaint. The EU Commission was treated as a “foreign tribunal”; and the Supreme Court rejected the Commission's argument (as amicus) that such an order should only be made at the request of the Commission and not at the behest of a private complainant only. According to appellants, Chevron has asked the BIT arbitration panel to tell the Ecuadorian government to direct the judge in the Lago Agrio litigation to dismiss the case but Chevron denies that it has asked for such relief and asserts, as we have pointed out, that it seeks an outcome precluding enforcement of a judgment entered in the Lago Agrio Court outside of Ecuador. Available at http://italaw.com/sites/default/files/case-documents/ita0088.pdf (accessed 1 September 2013). Available at http://italaw.com/sites/default/files/case-documents/ita0370.pdf (accessed 1 September 2013). Available athttp://www.italaw.com/sites/default/files/casedocuments/italaw1163.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/casedocuments/italaw1164.pdf (accessed 1 September 2013). [1950] 2 Y.B. Int'l L. Comm'n 135; U.N. Doc. A/CN. 4/18 (1950) (translation).

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23) [E]ven where the nature of the property and circumstances surrounding a particular

24) 25) 26) 27)

28)

29)

30) 31) 32) 33) 34) 35) 36)

claim have placed a very severe limitation on the claimant's means of proof, the claimant is not relieved of the obligation to submit the best available evidence in support of his claim and to make a full and complete disclosure of all the pertinent facts; where this has not been done, the Commission will be justified in drawing reasonable inferences from the non-production of evidence which it would appear could have been furnished by the claimant, or from lack of a satisfactory explanation of the claimant's failure to provide such evidence.” Amabile Case, Italian-United States Conciliation Commission (Peace Treaty, Feb. 10, 1947, art. 83), Dec. No. 11, June 25, 1952, 14 U.N.R.I.A.A. 115, 128 (1965). INA Corp. v. The Gov’t of the Islamic Republic of Iran, 8 Iran-U.S. Cl. Trib. Rep. 373, 37677 (1985). Hidetomo Shinto v. The Islamic Republic of Iran, 19 Iran-U.S. Cl. Trib. Rep. 321, 325-29 (1988). Judge, Iran-United States Claims Tribunal. Text published by arrangement with ICC through ICC Services – publications from: Written Evidence and Discovery in International Arbitration, ICC Publican No. 698 – ISBN 978-92-842-0062-7, Copyright © 2009 – International Chamber of Commerce (ICC), available on www.iccwbo.org. “Proof … constitutes a burden non-compliance with which may be automatically penalized by the loss of the suit. The adage actori incumbit probatio means that the burden of proof rests not only on the claimant but also on the party adducing a fact of any kind. The burden is distributed between the two parties.” Scelle, Report on Arbitral Procedure, 2 Y.B. Intl. L. Comm'n 133 (1958); U.N. Doc. A/CN.4/18. March 21, 1950, at 51. Accord: G. White, The Use of Experts by International Tribunals 8 (1965) … “Taking into consideration that the actor, whether termed claimant or plaintiff, is to be determined according to the issues involved rather than the incidents of the procedure, what has been said above shows that there is no disagreement in substance among international tribunals on the general legal principle that the burden of proof falls upon the claimant, i.e. ‘the plaintiff must prove his contention under penalty of having his case refused.’” [Cite omitted]. Cheng also says: “Burden of proof, however closely related to the duty to produce evidence, therefore implies something more. It means that a party having the burden of proof must also convince the tribunal of their truth, lest they be disregarded for want, or insufficiency of proof.” … Available at http://italaw.com/sites/default/files/case-documents/ita1053.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0319.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/casedocuments/ita0786_0.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita0267.pdf (accessed 1 September 2013). Lebret Case (United States v. France), 1880, Boutwell's Report 180, 183 (1884). Reprinted with permission of Professor Christie; published by Oxford Univesity Press for the Royal Institute of International Affairs, London. The Chamber's reasoning was curt: “It was so decided that Mr. Jennings would not be heard as a witness, because he is the chairman of the board of directors of the Company and is therefore considered to be an interested party.” Quoted in id., 5 Iran-U.S. C.T.R., 1, 23 (December 3, 1985) (Kashani, dissenting opinion).

37) Available at http://www.italaw.com/sites/default/files/case-documents/ita1034.pdf

(accessed 1 September 2013).

38) Available at http://italaw.com/sites/default/files/case-documents/ita0871.pdf

(accessed 1 September 2013).

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Chapter 13: Recognition and Enforcement of International Arbitral Proceedings and Awards

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§13.01 INTRODUCTION

Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition)

The defining purpose of arbitration in contrast with other forms of alternative dispute resolution is to arrive at a binding and enforceable decision on the dispute between the parties. While there is of course scope for a dissatisfied party to challenge an award (see below, at § 13.03.A-B) it is implied that parties to an arbitration agreement will comply with an award. In the event that the losing party fails to carry out the award, the issue will arise as to how the award is to be enforced. Enforcement may take the form of exerting some form of commercial pressure (e.g. suspension of a continuing trade relationship), but it may also involve seeking enforcement of the award through court proceedings. This chapter will focus on the latter option.

Topics

Investment Arbitration

Bibliographic reference

'Chapter 13: Recognition and Enforcement of International Arbitral Proceedings and Awards', in W Michael Reisman , James Richard Crawford , et al. (eds), Foreign Investment Disputes: Cases, Materials and Commentary (Second Edition), 2nd edition (© Kluwer Law International; Kluwer Law International 2014) pp. 1177 - 1276

Recognition and enforcement of arbitral awards, whether “international” or domestic, is relatively unproblematic when sought in the courts of the state where the arbitration took place. In such cases, national arbitration laws govern recognition and enforcement: see, e.g., Arbitration Act 1996 (UK) section 66. This Chapter is largely concerned with recognition and enforcement of “foreign” arbitral awards – i.e. awards made outside the state in which recognition and enforcement is sought – in which case various treaty obligations come into play.

§13.02 RECOGNITION AND ENFORCEMENT MECHANISMS [A] The Special Regime of the ICSID Convention [1] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States [ICSID or Washington Convention] (1965), 575 U.N.T.S. 160, Articles 53, 54 and 55 Chapter IV – Arbitration *** Section 6 – Recognition and Enforcement of the Award Article 53 (1) The award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention. Each party shall abide by P 1178 and comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention. (2) For the purposes of this Section, “award” shall include any decision interpreting, revising or annulling such award pursuant to Articles 50, 51 or 52. Article 54 (1) Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. A Contracting State with a federal constitution may enforce such an award in or through its federal courts and may provide that such courts shall treat the award as if it were a final judgment of the courts of a constituent state. (2) A party seeking recognition or enforcement in the territories of a Contracting State shall furnish to a competent court or other authority which such State shall have designated for this purpose a copy of the award certified by the Secretary-General. Each Contracting State shall notify the Secretary-General of the designation of the competent court or other authority for this purpose and of any subsequent change in such designation. (3) Execution of the award shall be governed by the laws concerning the execution of judgments in force in the State in whose territories such execution is sought. Article 55 Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution. *** [2] Christoph H. Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary, Article 54, 1117-1120, 1128-1130 (2nd ed., Cambridge University Press 2009) (1) 1. Introduction

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A. General *** 3. This enforcement provision is a distinctive feature of the ICSID Convention. Most other instruments governing international adjudication do not cover enforcement but leave this issue to domestic laws or applicable treaties. These domestic laws and treaties typically provide for some review of arbitral awards at the enforcement stage. 4. The most important treaty in this context is the 1958 [New York] Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Art. V of that Convention lists a P 1179 number of grounds on which recognition and enforcement may be refused… … … At an early stage in the ICSID Convention's drafting, reliance on the provisions of the New York Convention was still planned… … … But Mr. Broches argued successfully in favour of limiting or eliminating grounds for review contained in the New York Convention, especially in view of the internal review system provided by the ICSID Convention… … … Therefore, the ICSID Convention provides a system enforcement that is independent of the New York Convention and other international and domestic rules dealing with enforcement of foreign arbitral awards. 5. Since enforcement under the ICSID Convention is easier to obtain than under the New York Convention, the question of applicability of the New York Convention to ICSID awards is not likely to arise. But this issue may become relevant in exceptional circumstances like the enforcement of an ICSID award in a State that is a party to the New York Convention but not to the ICSID Convention. Another possibility would be enforcement of a non-pecuniary obligation, which is not possible under Art. 54 … It is submitted that in such a situation the question should be dealt with by analogy to Additional Facility awards… … *** 7. Art. 54 does not distinguish between the recognition and enforcement of awards against investors on the one side, and against host States, on the other. Therefore, it can be used by either party to the arbitration proceedings. But the travaux préparatoires to the Convention show clearly that the original motive for the inclusion of a provision on enforcement was to give recourse against a defaulting investor. It was considered highly unlikely that a State party to the Convention would carry out its treaty obligation under the Convention to comply with an award. This obligation would be backed up by concern for a State's reputation as a place of investment and by the revival of the right to diplomatic protection by the investor's State of nationality (see Art. 27, paras. 33-38). A provision on enforcement was seen as necessary to balance the situation in favour of the host State, should the investor not comply with an award … (see also Art. 53, para. 32). But the drafts leading to the Convention refer to recognition and enforcement against the parties in equal terms, without distinguishing between investors and host States, and it is clear that this was also the intention of the drafters… … *** 9. The obligation to recognize and enforce an award applies quite generally and is not subject to exclusion or variation by agreement of the parties. It is unnecessary to provide for recognition and enforcement in any agreement containing consent to jurisdiction. No clause to this effect is contained in the Model Clauses (see Art. 25…) offered by the Centre. 10. The otherwise self-contained nature of the Convention does not apply at the stage of recognition and enforcement of awards. Art. 54, in requiring the intervention of domestic courts and other authorities, constitutes an exception to the exclusive remedy rule of Art. 26. Therefore, Art. 26 may not be used to defeat the obligation under Art. 54. Art. 54 may be used concurrently with diplomatic protection in accordance with the last part of Art. 27(1) (see Art. 27…). Both remedies are available, in principle, to investors to secure compliance with awards. There is no indication of any relationship of priority or mutual exclusivity between the two remedies. Enforcement and diplomatic protection may be used simultaneously. It is clear that as soon as one of these remedies has succeeded, the P 1180 other must be discontinued. *** 2. Recognition of Awards 42. Recognition of an award is the formal confirmation that the award is authentic and that it has the legal consequences provided by the law. Recognition of awards is often subject to specific procedures sometimes called exequatur. Depending on the law of the country where recognition is sought, including any applicable treaties, recognition of non-ICSID awards may be subject to certain conditions or may be an opportunity for the award's review. ICSID awards must not be made subject to conditions for recognition not provided for by the Convention. Nor is it permissible to subject them to review at the stage of recognition. The domestic court's or other authority's task is limited to verifying the authenticity of the ICSID award… … 43. Recognition has two possible effects. One is confirmation of the award as binding or res judicata. The other is a step preliminary to enforcement. In a particular case, both effects may arise simultaneously.

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44. The obligation to recognize an award as binding has the effect of rendering the award res judicata in each Contracting State… This means that the claim on which the award has decided must not be the subject of another proceeding before a domestic court or arbitral tribunal. A victorious respondent in ICSID proceedings may wish to have an award dismissing the claim on the merits recognized in order to protect itself against action before domestic courts arising from the same dispute. 45. A party to ICSID proceedings that have resulted in an award will have to undergo the formal procedure for the award's recognition by the competent court or other authority before it can successfully plead res judicata. Art. 54(2) provides that the formal procedure of furnishing a copy of the award certified by the Secretary-General to the specially designated court or other authority shall apply to recognition as well as to enforcement. A court before which the same dispute is brought is unlikely to accept the plea of res judicata unless the award has been formally recognized. Even an award holding that there is no jurisdiction may be formally recognized in order to pave the way for non-ICSID proceedings… … 46. The restriction to pecuniary obligations relates to the enforcement of awards… but not to their recognition. Therefore, an obligation of specific performance, like restitution or an obligation to desist from a certain course of action, that is spelt out in an award, is subject to recognition and will enjoy the effect of res judicata even though it is not subject to enforcement. Similarly, a finding in an award that a certain course of action was legal or illegal is res judicata even though it has no immediate consequence in terms of enforcement. Such a finding in an award may determine a preliminary issue in different proceedings. 47. In most cases recognition will be seen as a first step leading to enforcement or execution. As a consequence of recognition, the award becomes a valid title which can form the basis for execution. Recognition is subject only to the requirements of the Convention and may not be refused for reasons of domestic law. By contrast, Art. 54(3) subjects execution to the modalities of the local law of the country where execution is sought… … 48. The provision on sovereign immunity from execution in Art. 55 does not apply at the

P 1181 stage of recognition. Submission to arbitration may be seen as a waiver of immunity in

proceedings to have the award recognized. Therefore, the effect of the award as res judicata will apply irrespective of any immunity from execution.

49. Recognition as a preliminary step to execution may be meaningful even if there are no immediate prospects of an execution because there are no assets that are subject to execution in the State where recognition is sought. Once recognition has been obtained, execution will be quicker and easier should assets become available at a later stage. In addition, recognition will put the award debtor on notice that execution will be sought as soon as assets become available. Since this will create obstacles to economic transactions in the country concerned, such a prospect may turn out to be an inducement to comply with the award. *** [3] Benvenuti et Bonfant S.R.L. v. People’s Republic of the Congo (ICSID Case No. ARB/77/2), Judgment of the Cour d’Appel de Paris of 26 June 1981, 1 ICSID Rep. 368, 369372 (1993) [The investor, Benvenuti and Bonfant SRL, obtained an arbitral award in its favour. (2) It subsequently sought to enforce the award, and was granted an exequatur by the Tribunal de grande instance of Paris on 23 December 1980, subject to the condition that it would obtain prior authorisation of all measures of execution or conservatory measures, thereby ensuring the immunity of sovereign assets. The investor objected to this condition, but the Tribunal de grande instance confirmed its decision by order of 13 January 1981, (3) refusing to remove the limiting condition on the basis that it was impossible at that stage to distinguish between assets to be used in sovereign activities from those of a commercial nature. The investor appealed to the Cour d’appel which ruled in its favour. The text of the judgment follows.] On 16 April 1973 an Agreement was executed by the Government of the People's Republic of Congo and the Italian company Benvenuti and Bonfant relating to the creation of a semi-public company for the manufacturing of plastic bottles. This agreement included, under Article 12, the following arbitration clause:

P 1182

Any dispute which may arise between the parties in the execution of this agreement, which cannot be settled amicably, shall be decided by arbitration within the framework of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States of 18 March 1965, established by the International Bank for Reconstruction and Development. The proceedings shall be conducted in the French language. The parties agree as of now to submit themselves to the decision of the arbitrator, to ensure its execution, and to waive any right of appeal or other power (sic) against any such decision. The costs of arbitration shall be divided equally between the parties.

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Following the creation of the PLASCO company and the execution of a contract dated 21 April 1973 between that company and the SODISCA company for the delivery on a turn-key basis of a plant for the manufacture of thermo-plastic bottles, capable of producing about 8 million units, and of a plant for the bottling of mineral waters, disputes arose between the parties to the Agreement of 16 April 1973. On 15 December 1977 the Benvenuti and Bonfant Company addressed a request for arbitration, dated 12 December 1977, to the International Centre for the Settlement of Investment Disputes. The arbitral Tribunal rendered its award on 8 August 1980. At the request of the Benvenuti and Bonfant Company, the President of the Tribunal de grande instance of Paris, by order of 23 December 1980, declared the award enforceable subject, however, to the following reservation: No measure of execution, or even conservatory measure, shall be taken pursuant to the said award, on any assets located in France without the prior authorization of this Court. The Benvenuti and Bonfant Company, in accordance with the rules of French procedure in non-contentious matters, lodged an appeal against that part of the order of exequatur which contained the reservation quoted above. The President of the Tribunal de grande instance of Paris was asked, pursuant to Article 952, para. 1 of the New Code of Civil Procedure, whether he would consider amending or deleting that part of his order which was objected to. By order dated 13 January 1981 he answered in the negative. The appellant Company contends that the part of the order under appeal makes it in effect impossible to enforce the award. The Company argues that under Article 54, para. 2, of the Convention of Washington of 1965, the judge at first instance could only ascertain the authenticity of the award and that he has confused two different stages, that relating to the obtaining of an exequatur and that relating to actual execution. The Company contends that the judge at first instance should not have become involved in this second stage, to which the question of the immunity from execution of foreign States relates. Accordingly the Benvenuti and Bonfant Company requests the deletion of that part of the order to which it objects. The Court rules as follows: According to Article 54 of the Convention of Washington of 18 March 1965 on the Settlement of Investment Disputes between States and Nationals of Other States, to which have acceded, amongst other countries, the People's Republic of the Congo on 27 December 1965, Italy on 18 November 1965, and France on 22 December 1965: (1) Each contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State. A Contracting State with a federal constitution may enforce such an award in or through its federal courts and may provide that such courts shall treat the award as if it were a final judgment of the courts of a constituent state.

P 1183

(2) A party seeking recognition or enforcement in the territories of a Contracting State shall furnish to a competent court or other authority which such State shall have designated for this purpose a copy of the award certified by the Secretary-General. Each Contracting State shall notify the Secretary-General of the designation of the competent court or other authority for this purpose and of any subsequent change in such designation. (3) Execution of the award shall be governed by the law concerning the execution of judgments in force in the State in whose territories such execution is sought. These provisions lay down a simplified procedure for obtaining an exequatur and restrict the function of the court designated for the purposes of the Convention by each Contracting State to ascertaining the authenticity of the award certified by the SecretaryGeneral of the International Centre for Settlement of Investment Disputes. According to Article 55 of the Convention of Washington: Nothing in Article 54 shall be construed as derogating from the law in force in any Contracting State relating to immunity of that State or of any foreign State from execution.

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The order granting an exequatur for an arbitral award does not, however, constitute a measure of execution but simply a preliminary measure prior to measures of execution. The judge at first instance, acting on a request pursuant to Article 54 of the Convention of Washington could not therefore, without exceeding his competence, become involved in the second stage, that of execution, to which the question of the immunity from execution of foreign States relates. Consequently that part of the order of 23 December 1980 of the President of the Tribunal de grande instance of Paris which is the object of this appeal must be deleted. For these reasons this Court amends, to the extent requested in the appeal, the order made on 23 December 1980 by the President of the Tribunal de grande instance of Paris. The following provision is deleted from that order: No measure of execution, or even a conservatory measure shall be taken pursuant to the said award, on any assets located in France, without the prior authorization of this Court. [Note that a subsequent attempt to enforce the award in France before the Cour de Cassation failed as the investor sought to attach funds owned by Banque Commerciale Congolaise which the Court held was distinct from the State of the Congo and was not an emanation of the State. (4) ] P 1184 * * *

[4] Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic (ICSID Case No. ARB/01/3), Decision on the Argentine Republic’s Request for a Continued Stay of Enforcement of the Award of 7 October 2008 (5) [Gavan Griffith (pres.), Patrick L. Robinson, Per Tresselt] [The dispute concerns the claims of two US investors with indirect equity participation in TGS, an Argentinean gas transportation company created during the Argentine privatization in the early 1990s that was granted a gas transportation License for 35 years, till 2027. During the privatization period, as part of incentives to attract foreign investment, Argentina established a regulatory framework that included the right to calculate tariffs for gas transportation in US dollars, as well semi-annual adjustment of tariffs by reference to the US Producer Price Index (PPI). In 2000, in view of public opposition and the impending economic crisis, tariffs were at first temporarily frozen and then de facto permanently suspended. Further, in January 2002, Argentina enacted the “Emergency Law”, which abolished the calculation of tariffs in US dollars, converting tariffs to pesos at the rate of one dollar to one peso (“pesification”), and eliminated PPI adjustments. Devaluation of peso followed, greatly diminishing TGs' earnings and the value of the company. The Claimants initiated ICSID proceedings claiming multiple violations of the 1991 Argentina-US BIT and requesting damages. In the 2007 Award the Tribunal found violations of the BIT's fair and equitable treatment obligation and the “umbrella clause”. On 21 February 2008, Argentina filed an Application requesting the annulment of the Award on the following grounds set forth in Article 52(1) of the ICSID Convention: (a) the Tribunal manifestly exceeded its powers; (b) there was a serious departure from a fundamental rule of procedure; and (c) the Award failed to state the reasons on which it was based. The Application also contained a request for a stay of enforcement of the Award until the Application for Annulment is decided. The Claimants subsequently filed a request to lift the provisional stay of enforcement of the Award, or alternatively, to condition a continuation of the stay on Argentina's posting adequate security. In deciding on Argentina's Request for a Continued Stay of Enforcement of the Award, the ad hoc Committee considered the interrelationship between Articles 53 and 54 of the ICSID Convention.] (Citations selectively omitted) The effect of Articles 53 and 54 of the ICSID Convention 61. The second sentence of Article 53(1) of the ICSID Convention states that “Each party shall abide by and comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention”. The first sentence of Article 54(1) of the ICSID Convention states that “Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its territories as if it were a final judgment of a court in that State”. The Committee notes that nothing in the language of these provisions suggests that these two obligations are related, and in particular, that there is nothing in the language to suggest that the P 1185 obligation in the second sentence of Article 53(1) must be read as being subject to an award creditor invoking enforcement mechanisms established pursuant to the obligation in the first sentence of Article 54(1). 62. The Committee further notes that these two obligations are addressed to different subjects. It is clear from its context that the word “party” in the second sentence of Article 53(1) refers to a party to an award, who will be, on the one hand, a Contracting State or a constituent subdivision or agency of a Contracting State, and, on the other hand, a

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national of another Contracting State. That provision therefore expressly requires each party to an award to “comply with the terms of the award except to the extent that enforcement shall have been stayed pursuant to the relevant provisions of this Convention”. On the other hand, the first sentence of Article 54(1) is addressed to “each Contracting State” to the ICSID Convention, whether or not that Contracting State is a party to the award in question, and is not addressed to any party to an award other than a Contracting State. The effect of the obligation imposed on Contracting States by this provision is to ensure that any ICSID award can be enforced by either party to the award in the territory of any ICSID Contracting State. In other words, if an award is given against an investor in favour of a Contracting State or a constituent subdivision or agency of a Contracting State, Article 54(1) ensures that the Contracting State or constituent subdivision or agency can enforce the award in the territory of any Contracting State, including but not limited to its own territory or the territory of the investor's national State. Conversely, if an award is given against a Contracting State or a constituent subdivision or agency of a Contracting State in favour of an investor, Article 54(1) ensures that the investor can enforce the award in the territory of any Contracting State, including but not limited to the territory of the State that is, or the State of, the award debtor. However, Article 54(1) does not state that a party to an award must use the enforcement machinery established pursuant to this provision as a condition of the award being complied with. Nor does it state that a Contracting State or a constituent subdivision or agency that is an award debtor is entitled to decline to comply with the terms of the award until the enforcement machinery that exists under that Contracting State's own national law is used by the award creditor. 63. The wording of Article 53(1) must also be considered in the light of the wording of the ICSID Convention as a whole. Of particular significance is the wording of Article 27(1) of the ICSID Convention, which states. No Contracting State shall give diplomatic protection, or bring an international claim, in respect of a dispute which one of its nationals and another Contracting State shall have consented to submit or shall have submitted to arbitration under this Convention, unless such other Contracting State shall have failed to abide by and comply with the award rendered in such dispute. 64. The purpose of Article 27(1) is explained in paragraph 33 of the Report of the Executive Directors on the Convention as follows:

P 1186

When a host State consents to the submission of a dispute with an investor to the Centre, thereby giving the investor direct access to an international jurisdiction, the investor should not be in a position to ask his State to espouse his case and that State should not be permitted to do so. Accordingly, Article 27 expressly prohibits a Contracting State from giving diplomatic protection, or bringing an international claim, in respect of a dispute which one of its nationals and another Contracting State have consented to submit, or have submitted, to arbitration under the Convention, unless the State party to the dispute fails to honor the award rendered in that dispute. [Emphasis added.] 65. The words “to abide by and comply with the award rendered in such dispute” in Article 27(1) mirror the wording of the second sentence of Article 53(1). The Committee considers that it is clear when these two provisions are examined together that the failure of a State to abide by and comply with an award, as required by Article 53(1), is a breach of the ICSID Convention, entitling the national State of the award creditor to give diplomatic protection or bring an international claim. If a Contracting State was entitled to require an award creditor to use enforcement mechanisms established under Article 54(1) as a precondition to compliance with the award, the Committee considers that the final words of Article 27(1) would have reflected the language of Article 54(1), rather than that of Article 53(1). The Committee accepts the argument of the Claimants that to sustain that the recognition and enforcement process in Article 54 must precede compliance with an award would be as unreasonable as asserting that compliance is dependent on a previous exercise of diplomatic protection under Article 27. 66. The Committee further notes that the first sentence of Article 54(1) of the ICSID Convention is expressed to require Contracting States to enforce only the pecuniary obligations imposed by an award. If the interpretation were accepted that there is no obligation to comply with an award unless and until the judgment creditor avails itself of enforcement mechanisms established pursuant to Article 54, the result could be that there would never be an obligation to comply with non-pecuniary obligations in an award. 67. The Committee further takes into account that in legal systems generally, judgment debtors and award debtors are under a legal obligation to pay judgments and awards given against them. It is not generally the case that judgment debtors and award debtors have a legal entitlement to decline to comply with a judgment or award unless and until enforcement proceedings are taken against them; on the contrary, enforcement procedures exist to deal with the case of judgment debtors and award debtors who are in

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default of their legal obligation to comply with the judgment or award. 68. The Committee further considers that it would be inconsistent with the purpose of the ICSID Convention if an award creditor had to bring proceedings pursuant to national law enforcement mechanisms established under Article 54(1) as a prerequisite for compliance with the award by the award debtor. The ICSID dispute settlement mechanism was intended to be an international method of settlement, and it would run counter to this intention for compliance with a final award to be subject, ultimately, to the provisions and mechanisms of national law. The Committee considers that it would inherently undermine confidence in the ICSID system if a State against which an award has been given could make its own compliance with the award subject to the award creditor availing itself of the mechanisms under that State's national law for enforcement of final judgments of courts. 69. The Committee therefore concludes that under a good faith interpretation of Article 53(1) of the ICSID Convention in accordance with the ordinary meaning to be given to its terms in their context and in the light of its object and purpose, that provision imposes P 1187 on Argentina, in the event that the Award is not annulled, an obligation under international law vis-à-vis the United States to abide by and comply with the terms of the Award, without the need for action on the part of the Claimants pursuant to the enforcement machinery under Argentine law to which Article 54 of the ICSID Convention refers. ***

[B] Enforcement of Arbitral Awards (Other than ICSID) [1] The New York Convention [a] In General – Convention on the Recognition and Enforcement of Foreign Arbitral Awards [New York Convention] (1959), 330 U.N.T.S. 38, Articles I through VII Article I 1. This Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than the State where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in the State where their recognition and enforcement are sought. 2. The term “arbitral awards” shall include not only awards made by arbitrators appointed for each case but also those made by permanent arbitral bodies to which the parties have submitted. 3. When signing, ratifying or acceding to this Convention, or notifying extension under article X hereof, any State may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State. It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration. Article II 1. Each Contracting State shall recognize an agreement in writing under which the parties undertake to submit to arbitration all or any differences which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration. 2. The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams. 3. The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, at the request of one of the parties, refer the parties to arbitration, unless it finds that the said P 1188 agreement is null and void, inoperative or incapable of being performed. Article III Each Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in the following articles. There shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards to which this Convention applies than are imposed on the recognition or enforcement of domestic arbitral awards Article IV 1. To obtain the recognition and enforcement mentioned in the preceding article, the party applying for recognition and enforcement shall, at the time of the application, supply:

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(a) (b)

The duly authenticated original award or a duly certified copy thereof; The original agreement referred to in article II or a duly certified copy thereof.

2. If the said award or agreement is not made in an official language of the country in which the award is relied upon, the party applying for recognition and enforcement of the award shall produce a translation of these documents into such language. The translation shall be certified by an official or sworn translator or by a diplomatic or consular agent. Article V 1. Recognition and enforcement of the award may be refused, at the request of the party against whom it is invoked, only if that party furnishes to the competent authority where the recognition and enforcement is sought, proof that: (a)

(b) (c)

(d) (e)

The parties to the agreement referred to in article II were, under the law applicable to them, under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made; or The party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or The award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration may be recognized and enforced; or The composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or, failing such agreement, was not in accordance with the law of the country where the arbitration took place; or The award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.

2. Recognition and enforcement of an arbitral award may also be refused if the competent authority in the country where recognition and enforcement is sought finds P 1189 that: (a) (b)

The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or The recognition or enforcement of the award would be contrary to the public policy of that country.

Article VI If an application for the setting aside or suspension of the award has been made to a competent authority referred to in article V (1) (e), the authority before which the award is sought to be relied upon may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security. Article VII 1. The provisions of the present Convention shall not affect the validity of multilateral or bilateral agreements concerning the recognition and enforcement of arbitral awards entered into by the Contracting States nor deprive any interested party of any right he may have to avail himself of an arbitral award in the manner and to the extent allowed by the law or the treaties of the country where such award is sought to be relied upon. 2. The Geneva Protocol on Arbitration Clauses of 1923 and the Geneva Convention on the Execution of Foreign Arbitral Awards of 1927 shall cease to have effect between Contracting States on their becoming bound and to the extent that they become bound, by this Convention. [b] Direct Effect of International Arbitral Awards Made under Treaties – Dallal v. Bank Mellat, Judgment of the Queen’s Bench Division of the High Court of England and Wales of 26 July 1985, 75 I.L.R. 151, 165-168 (1987) [Dallal, a United States citizen, referred a claim against Bank Mellat in respect of two cheques which Dallal claimed had been dishonoured. The claim was heard by the IranUnited States Claims Tribunal, established in the Netherlands pursuant to the Algiers Declarations 1981, which the parties conceded amounted to a treaty between the United States and Iran. The claim was dismissed by the Tribunal. Dallal subsequently commenced an action in the English courts against Bank Mellat. The Bank had assets and a place of business in England. Bank Mellat moved to have the action struck out. It argued that Dallal's claim was substantially identical to the claim dismissed by the Iran-United States Claims Tribunal; that the award should be recognised by the English courts; and that Dallal's action was prohibited by United States law. Dallal argued that the award did

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not satisfy the requirements for recognition as a private arbitration award. He also maintained that the English courts should decline to recognise any extraterritorial effect of United States legislation suspending proceedings by United States nationals against Iran to the extent that it might prohibit an action in the English courts. Extracts of the judgment follow.] As regards Dutch law it is clear on the evidence before me that there is at the very least a triable issue whether the arbitral proceedings at The Hague were under Dutch law anything other than a nullity by reason of the non-compliance with article 623 of the P 1190 Dutch code of civil procedure. If it were necessary for me to decide the question at this stage, I would decide that the proceedings were a nullity in Dutch law. It was argued before me by the defendants that the conduct of the parties in the arbitration and, in particular, their written pleadings, which included the demand of the plaintiff that the dispute be referred to the arbitration of the tribunal, amounted to an agreement that the dispute should be arbitrated before and determined by the tribunal. If such arbitration agreement was governed by English law, there would be no difficulty about this submission, but it cannot be contended, and it was not, that any such arbitration agreement between these parties was governed by English law. On the material before me it appears to me inescapable that the proper law of any such agreement would have been the law of the Netherlands. If I were wrong about this there would at the least be a triable issue as to what was the proper law of any such agreement. If, as I consider, the proper law of the agreement was Dutch law, then the agreement was a nullity because it did not comply with the requirements of the Dutch code. It follows that if the award of the tribunal at The Hague is to be recognised in England as an arbitral award, it cannot satisfy the requirements of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (Cmnd. 6419), or English conflict of laws rules. Both the New York Convention and the English rules that would apply independently of that convention require that the arbitrators shall have acquired their jurisdiction pursuant to an arbitration agreement which is valid according to its proper law. The defendants here cannot point to any such agreement. The defendants sought to argue further that the proper law of the arbitration agreement might be public international law. But what I am concerned with here at this point of the argument is not an agreement between states but an agreement between private law individuals who are nationals of those states. If private law rights are to exist, they must exist as part of some municipal legal system, and public international law is not such a system. If public international law is to play a ro1e in providing the governing law which gives an agreement between private law individuals legal force, it has to do so by having been absorbed into some system of municipal law. Therefore, the defendants' argument did not provide them with an escape from the necessity to identify the municipal legal system which was the proper law of the agreement to arbitrate. It follows that, if the sole justification for the recognition of the proceedings and award of the tribunal at The Hague has to be derived from the application of the ordinary principles applicable to consensual arbitration, then the foundation of the defendants' case based upon those proceedings is effectively destroyed. The plaintiff's first proposition before me was “The proceedings in The Hague between the plaintiff and the defendants constituted a private law arbitration.” In support of this the plaintiff's counsel referred to the rules under which the tribunal operated. These, as I have already commented, follow a scheme which is consistent with that of a private law arbitration. For example, the amended rule 13 (which was not yet in force at the time that the plaintiff lodged his claim) says:

P 1191

“The claim settlement declaration constitutes an agreement in writing by Iran and United States [the two governments], on their own behalfs and on behalf of their nationals submitting to arbitration within the framework of the Algiers declarations and in accordance with the tribunal rules.” Article 32(7) provides: “If the arbitration law of the country where the award is made requires that the award be filed or registered by the arbitral tribunal, the tribunal shall comply with this requirement within the period of time required by law.” It is submitted by the plaintiff that these rules read together with the use of the word “arbitration” in the Algiers declarations show that, anyway as far as private individuals were concerned, what was set up was a scheme for consensual private law arbitration. By way of example of another such scheme, I was referred to the Arbitration (International Investment Disputes) Act 1966 which, pursuant to an international convention, sets up an arbitral tribunal of such a character. I do not find the plaintiff's argument persuasive. Merely because one route of founding a tribunal's jurisdiction cannot be made good, it does not follow that there may not be another route by which the same result may be achieved. It would have been convenient and advantageous if the awards of The Hague tribunal had satisfied the requirements for recognition under the New York Convention. It would have avoided arguments of the type which I am now having to consider. Enforcement in other countries, if necessary, would have been simplified. However, tribunals can achieve their competence in a number of

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ways. In origin the arbitration bore a closer resemblance to what in municipal law would be described as a statutory arbitration. The arbitral tribunal and its jurisdiction is defined not by any choice or agreement of the parties but by the statute itself. The element of choice is simply the choice of the claimant who chooses to make a claim before the arbitral tribunal. Such a situation is, therefore, more accurately described as one where the claimant invokes the jurisdiction of the tribunal and the respondent submits to it. That is in fact what happened before the tribunal at The Hague in the present matter. If then the proceedings at The Hague are to be regarded as proceedings in a “statutory” arbitration, the question arises: what is the “statute?” The plaintiff submits that such an arbitration can still only validly exist under the law of the jurisdiction within which it takes place; that is to say, the law of the seat of the arbitration, in this case the law of the Netherlands. If this is right, it must follow that the invalidity of these arbitration proceedings under Dutch law closes this door as well. Whether or not some principle of Dutch law could be invoked to give a validity to these arbitration proceedings as analogous to a “statutory” arbitration is at the best an open question. I am not presently satisfied that there is any such principle of Dutch law. It is beyond argument that there is no legislative or other authority under Dutch municipal law for these arbitration proceedings. The plaintiff then says that the statutory authority, or authority analogous to statute, cannot be looked for elsewhere, and certainly cannot be looked for in international law. I do not accept this argument. The jurisdiction and authority of the tribunal at The Hague was created by an international treaty between the United States and the Republic of Iran, and was within the treaty-making powers of the governments of each of those two countries. Each of the parties was respectively within the jurisdiction and subject to the law-making power of one of the parties to the treaty. Further, the situs of all the relevant choses in action are within the jurisdiction of one or other of the two states which are parties to the treaty. Again, the municipal legal systems of each of the relevant states recognise the competence of the tribunal at The Hague to decide the relevant disputes. Accordingly, the arbitration proceedings at The Hague are recognised as competent not only by competent international agreement between the relevant states, but also by the P 1192 municipal laws of those states. It would be a surprising result if the courts of this country felt constrained to hold that the proceedings were nevertheless incompetent. I do not consider that one is forced to that conclusion. [c] Grounds for Refusal of Recognition and Enforcement – Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt, Judgment of the District Court of Amsterdam of 12 July 1984, 86 I.L.R. 492, 493-495 (1991) [An agreement was made between a Hong Kong company, Southern Pacific Properties Ltd (“SPP”), the Government of the Arab Republic of Egypt (“ARE”) and the Egyptian General Organisation for Tourism and Hotels (“EGOTH”. The agreement provided for the establishment of a joint venture company to develop two international tourist complexes in Egypt. Later, a further agreement (dated 12 December 1974) was made between EGOTH and SPP and signed by the ARE. The second agreement provided for ICC arbitration of disputes. The joint venture company, ETDC, was established and SPP created a subsidiary, SPP (ME), to hold SPP's shares in ETDC. The project continued until a report was released by a committee appointed by the ARE which fuelled opposition to the project. The ARE moved to cancel the project by a series of measures including placing ETDC in judicial receivership. SPP and SPP (ME) commenced arbitration proceedings in the ICC's Court of Arbitration against the ARE and EGOTH. The claimants sought US $42.5 million, comprising loss of profits and the value of SPP (ME)’s shareholding in ETDC prior to the cancellation of the project. Both the ARE and EGOTH disputed the claimants' standing to sue, denied they had breached the contract. The ARE also denied that it was a party to an arbitration agreement, and claimed that its acts were acts of State. EGOTH counterclaimed in respect of alleged breaches by the claimants. The ICC Court found a prima facie agreement to arbitrate and ruled that the ARE, while choosing to participate in the arbitration, reserved its position on the question of jurisdiction. The ICC Court awarded on 11 March 1983 in favour of the claimants and ordered the defendants to pay damages of US $12.5 million plus interest. On 28 March 1983, the ARE commenced proceedings in the French courts seeking annulment of the ICC award. On 21 March 1984, SPP (ME) sought enforcement of the ICC award before the Netherlands Courts. On 12 July 1984, the Cour d’appel in Paris set the award aside on the basis that the Egyptian State was not bound by any arbitration agreement. On the same day, the District Court of Amsterdam granted leave to enforce the award. SPP and SPP (ME) appealed against the decision of the French Cour d’appel to the Cour de cassation. Meanwhile the ARE appealed to the Court of Appeal of Amsterdam. The Cour de cassation upheld the decision of the Cour d’appel, which deprived the proceedings in the Netherlands of any meaning. On 28 August 1984, SPP and SPP (ME) commenced ICSID arbitration proceedings against the ARE. Extracts of the District Court of Amsterdam's judgment follow.] 1. The petitioner has submitted duly certified copies of the arbitral award and the

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arbitration agreement. The aforementioned award and agreement are drawn up in the English language, which we have mastered sufficiently to have taken full cognizance of the contents of those documents. We therefore consider that the provisions of Article IV(2) of the applicable Convention on the Recognition and Enforcement of Foreign Arbitral Awards, concluded in New York on 10 June 1958 (hereafter “the Convention”), have been P 1193 complied with. 2. The defendant has, in brief, requested first that leave for enforcement should be refused. In the alternative he asks for an adjournment of the decision on enforcement and, in the further alternative, in case enforcement is granted, he asks for an order for the petitioner to provide security. 3. In the present proceedings the merits of the case will not be considered. It will be examined only whether the defendant is justified in invoking the grounds for refusal of enforcement mentioned in Article V(1) of the Convention and whether the decision on enforcement should be adjourned by virtue of Article VI of the Convention. 4. With reference to Article V(1)(a) of the Convention, the defendant contends firstly that no valid arbitration agreement exists because it was not a party to the agreement of 12 December 1974 which includes an arbitration clause. 5. The defendant made the same contention in the arbitral proceedings. This issue is dealt with extensively in the arbitral award. We hold that this contention of the defendant is not proven, having regard to the conclusions of the arbitrators concerning this contention and in particular to the fact that the following words are appended at the bottom of the agreement of 12 December 1974: Approved, agreed and ratified by the Minister of Tourism, His Excellency Mr Ibrahim Naguib, on 12 December 1974 which is accompanied by the stamp and signature of the Minister. 6. The defendant contends secondly that the arbitral award is not yet binding casu quo and that its enforcement is suspended within the meaning of Article V(1)(e) of the Convention because an action for setting aside the award (recours en annulation) was initiated on 28 March 1983 pursuant to Article 1504 taken in conjunction with Article 1502 of the New French Code of Civil Procedure. The defendant argues that the institution of those proceedings has suspensive effect, pursuant to Article 1506 of the Code, which continues in force because the Court of Appeal of Paris has not yet rendered its decision. 7. It results from both the legislative history of the Convention and the text of Articles V(1) (e) and VI that the mere institution of proceedings for setting aside an award does not have the consequence that the arbitral award must be considered as not yet binding. An arbitral award is not binding if it is open to appeal on the merits before a judge or an appellate arbitral tribunal. If the situation were otherwise, the words “has been set aside or suspended” contained in Article V(1)(e), to which reference is made in Article VI, would have no meaning. The drafters of the Convention chose the word “binding” in order to abolish the requirement of the double-exequatur which was the result of the word “final” in the Geneva Convention of 1927. Having regard to the system introduced by Articles 1504 and 1490 of the New Code of Civil Procedure, the view expounded by the defendant would result in a re-introduction of the double-exequatur. 8. The second part of the ground for refusal of enforcement contained in Article V(1)(e) provides: P 1194

the award… has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made. The suspensive effect by operation of law, which is granted by Article 1506 of the New Code of Civil Procedure to an action for the setting aside of an award, cannot be applied under this provision. The text of the convention is clear on this point. A judicial authority must have had the opportunity to consider the question of whether a request for suspension is made for good cause. A broader interpretation, deviating from the text of the grounds for refusal of enforcement which are listed exhaustively, would be in violation of the system of the Convention. 9. The foregoing considerations lead to the conclusion that the defendant has not succeeded in proving the existence of the grounds for refusal of enforcement mentioned in Article V(1)(e) of the Convention. 10. Having regard to the purpose of the Convention to enhance the recognition and enforcement of foreign arbitral awards by subjecting recognition and enforcement to a minimum number of conditions, the action for the setting aside of the award initiated by the defendant does not provide a reason for this Court to adjourn the decision on enforcement. This is especially so since the defendant has not shown any readiness to give suitable security. 11. There is also no reason for the petitioner to be required to give security in the case of the granting of leave for enforcement, notwithstanding the fact that the Convention provides no basis for such security to be required.

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12. The grounds for refusal of enforcement mentioned in the second paragraph of Article V of the Convention are consequently not applicable. The requested leave for enforcement must therefore be granted. The defendant, as the losing party, shall pay the costs of these proceedings. [2] Regional Conventions [a] Inter-American Convention on International Commercial Arbitration [Panama Convention] (1975), 1438 U.N.T.S. 248 The Governments of the Member States of the Organization of American States desirous of concluding a convention on international commercial arbitration, have agreed as follows: Article 1 An agreement in which the parties undertake to submit to arbitral decision any differences that may arise or have arisen between them with respect to a commercial transaction is valid. The agreement shall be set forth in an instrument signed by the parties, or in the form of an exchange of letters, telegrams, or telex communications. Article 2 Arbitrators shall be appointed in the manner agreed upon by the parties. Their appointment may be delegated to a third party, whether a natural or juridical person. P 1195 Arbitrators may be nationals or foreigners.

Article 3

In the absence of an express agreement between the parties, the arbitration shall be conducted in accordance with the rules of procedure of the Inter-American Commercial Arbitration Commission. Article 4 An arbitral decision or award that is not appealable under the applicable law or procedural rules shall have the force of a final judicial judgment. Its execution or recognition may be ordered in the same manner as that of decisions handed down by national or foreign ordinary courts, in accordance with the procedural laws of the country where it is to be executed and the provisions of international treaties. Article 5 1. The recognition and execution of the decision may be refused, at the request of the party against which it is made, only if such party is able to prove to the competent authority of the State in which recognition and execution are requested: a.

b. c.

d.

e.

That the parties to the agreement were subject to some incapacity under the applicable law or that the agreement is not valid under the law to which the parties have submitted it, or, if such law is not specified, under the law of the State in which the decision was made; or That the party against which the arbitral decision has been made was not duly notified of the appointment of the arbitrator or of the arbitration procedure to be followed, or was unable, for any other reason, to present his defense; or That the decision concerns a dispute not envisaged in the agreement between the parties to submit to arbitration; nevertheless, if the provisions of the decision that refer to issues submitted to arbitration can be separated from those not submitted to arbitration, the former may be recognized and executed; or That the constitution of the arbitral tribunal or the arbitration procedure has not been carried out in accordance with the terms of the agreement signed by the parties or, in the absence of such agreement, that the constitution of the arbitral tribunal or the arbitration procedure has not been carried out in accordance with the law of the State where the arbitration took place; or That the decision is not yet binding on the parties or has been annulled or suspended by a competent authority of the State in which, or according to the law of which, the decision has been made.

2. The recognition and execution of an arbitral decision may also be refused if the competent authority of the State in which the recognition and execution is requested finds: a. b. P 1196

That the subject of the dispute cannot be settled by arbitration under the law of that State; or That the recognition or execution of the decision would be contrary to the public policy (“ordre public”) of that State.

Article 6 If the competent authority mentioned in Article 5. 1. e has been requested to annul or suspend the arbitral decision, the authority before which such decision is invoked may, if it deems it appropriate, postpone a decision on the execution of the arbitral decision and, at the request of the party requesting execution, may also instruct the other party to

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provide appropriate guaranties. Article 7 This Convention shall be open for signature by the Member States of the Organization of American States. Article 8 This Convention is subject to ratification. The instruments of ratification shall be deposited with the General Secretariat of the Organization of American States. Article 9 This Convention shall remain open for accession by any other State. The instruments of accession shall be deposited with the General Secretariat of the Organization of American States. Article 10 This Convention shall enter into force on the thirtieth day following the date of deposit of the second instrument of ratification. For each State ratifying or acceding to the Convention after the deposit of the second instrument of ratification, the Convention shall enter into force on the thirtieth day after deposit by such State of its instrument of ratification or accession. Article 11 If a State Party has two or more territorial units in which different systems of law apply in relation to the matters dealt with in this Convention, it may, at the time of signature, ratification or accession, declare that this Convention shall extend to all its territorial units or only to one or more of them. Such declaration may be modified by subsequent declarations, which shall expressly indicate the territorial unit or units to which the Convention applies. Such subsequent declarations shall be transmitted to the General Secretariat of the Organization of American States, and shall become effective thirty days after the date of their receipt. Article 12 This Convention shall remain in force indefinitely, but any of the States Parties may denounce it. The instrument of denunciation shall be deposited with the General Secretariat of the Organization of American States. After one year from the date of deposit of the instrument of denunciation, the Convention shall no longer be in effect for P 1197 the denouncing State, but shall remain in effect for the other States Parties. Article 13 The original instrument of this Convention, the English, French, Portuguese and Spanish texts of which are equally authentic, shall be deposited with the General Secretariat of the Organization of American States. The Secretariat shall notify the lumber States of the Organization of American States and the States that have acceded to the Convention of the signatures, deposits of instruments of ratification, accession, and denunciation as well as of reservations, if any. It shall also transmit the declarations referred to in Article 11 of this Convention. IN WITNESS WHEREOF the undersigned Plenipotentiaries, being duly authorized thereto by their respective Governments, have signed this Convention. DONE AT PANAMA CITY, Republic of Panama, this thirtieth day of January one thousand nine hundred and seventy-five. [b] European Convention on International Commercial Arbitration (1961), 484 U.N.T.S. 349 Article I – Scope of the Convention 1. This Convention shall apply: (a)

(b)

to arbitration agreements concluded for the purpose of settling disputes arising from international trade between physical or legal persons having, when concluding the agreement, their habitual place of residence or their seat in different Contracting States; to arbitral procedures and awards based on agreements referred to in paragraph 1(a) above.

*** Article IV – Organization of the arbitration 1. The parties to an arbitration agreement shall be free to submit their disputes: (a)

to a permanent arbitral institution; in this case, the arbitration proceedings shall be held in conformity with the rules of the said institution;

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(b)

to an ad hoc arbitral procedure; in this case, they shall be free inter alia: (i)

to appoint arbitrators or to establish means for their appointment in the event of an actual dispute; (ii) to determine the place of arbitration; and (iii) to lay down the procedure to be followed by the arbitrators. 2. Where the parties have agreed to submit any disputes to an ad hoc arbitration, and where within thirty days of the notification of the request for arbitration to the respondent one of the parties fails to appoint his arbitrator, the latter shall, unless otherwise provided, be appointed at the request of the other party by the President of the competent Chamber of Commerce of the country of the defaulting party's habitual place of residence or seat at the time of the introduction of the request for arbitration. This paragraph shall also apply to the replacement of the arbitrator(s) appointed by one P 1198 of the parties or by the President of the Chamber of Commerce above referred to. 3. Where the parties have agreed to submit any disputes to an ad hoc arbitration by one or more arbitrators and the arbitration agreement contains no indication regarding the organization of the arbitration, as mentioned in paragraph 1 of this article, the necessary steps shall be taken by the arbitrator(s) already appointed, unless the parties are able to agree thereon and without prejudice to the case referred to in paragraph 2 above. Where the parties cannot agree on the appointment of the sole arbitrator or where the arbitrators appointed cannot agree on the measures to be taken, the claimant shall apply for the necessary action, where the place of arbitration has been agreed upon by the parties, at his option to the President of the Chamber of Commerce of the place of arbitration agreed upon or to the President of the competent Chamber of Commerce of the respondent's habitual place of residence or seat at the time of the introduction of the request for arbitration. Where such a place has not been agreed upon, the claimant shall be entitled at his option to apply for the necessary action either to the President of the competent Chamber of Commerce of the country of the respondent's habitual place of residence or seat at the time of the introduction of the request for arbitration, or to the Special Committee whose composition and procedure are specified in the Annex to this Convention. Where the claimant fails to exercise the rights given to him under this paragraph the respondent or the arbitrator(s) shall be entitled to do so. 4. When seized of a request the President or the Special Committee shall be entitled as need be: (a) (b) (c) (d)

to appoint the sole arbitrator, presiding arbitrator, umpire, or referee; to replace the arbitrator(s) appointed under any procedure other than that referred to in paragraph 2 above; to determine the place of arbitration, provided that the arbitrator(s) may fix another place of arbitration; to establish directly or by reference to the rules and statutes of a permanent arbitral institution the rules of procedure to be followed by the arbitrator(s), provided that the arbitrators have not established these rules themselves in the absence of any agreement thereon between the parties.

5. Where the parties have agreed to submit their disputes to a permanent arbitral institution without determining the institution in question and cannot agree thereon, the claimant may request the determination of such institution in conformity with the procedure referred to in paragraph 3 above. 6. Where the arbitration agreement does not specify the mode of arbitration (arbitration by a permanent arbitral institution or an ad hoc arbitration) to which the parties have agreed to submit their dispute, and where the parties cannot agree thereon, the claimant shall be entitled to have recourse in this case to the procedure referred to in paragraph 3 above to determine the question. The President of the competent Chamber of Commerce or the Special Committee, shall be entitled either to refer the parties to a permanent arbitral institution or to request the parties to appoint their arbitrators within such timelimits as the President of the competent Chamber of Commerce or the Special Committee may have fixed and to agree within such time-limits on the necessary measures for the functioning of the arbitration. In the latter case, the provisions of P 1199 paragraphs 2, 3 and 4 of this Article shall apply. 7. Where within a period of sixty days from the moment when he was requested to fulfil one of the functions set out in paragraphs 2, 3, 4, 5 and 6 of this Article, the President of the Chamber of Commerce designated by virtue of these paragraphs has not fulfilled one of these functions, the party requesting shall be entitled to ask the Special Committee to do so. Article V– Plea as to arbitral jurisdiction 1. The party which intends to raise a plea as to the arbitrator's jurisdiction based on the fact that the arbitration agreement was either non-existent or null and void or had lapsed shall do so during the arbitration proceedings, not later than the delivery of its statement of claim or defence relating to the substance of the dispute; those based on the fact that an arbitrator has exceeded his terms of reference shall be raised during the

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arbitration proceedings as soon as the question on which the arbitrator is alleged to have no jurisdiction is raised during the arbitral procedure. Where the delay in raising the plea is due to a cause which the arbitrator deems justified, the arbitrator shall declare the plea admissible. 2. Pleas to the jurisdiction referred to in paragraph 1 above that have not been raised during the time-limits there referred to, may not be entered either during a subsequent stage of the arbitral proceedings where they are pleas left to the sole discretion of the parties under the law applicable by the arbitrator, or during subsequent court proceedings concerning the substance or the enforcement of the award where such pleas are left to the discretion of the parties under the rule of conflict of the court seized of the substance of the dispute or the enforcement of the award. The arbitrator's decision on the delay in raising the plea, will, however, be subject to judicial control. 3. Subject to any subsequent judicial control provided for under the lex fori, the arbitrator whose jurisdiction is called in question shall be entitled to proceed with the arbitration, to rule on his own jurisdiction and to decide upon the existence or the validity of the arbitration agreement or of the contract of which the agreement forms part. Article VI – Jurisdiction of courts of law 1. A plea as to the jurisdiction of the court made before the court seized by either party to the arbitration agreement, on the basis of the fact that an arbitration agreement exists shall, under penalty of estoppel, be presented by the respondent before or at the same time as the presentation of his substantial defence, depending upon whether the law of the court seized regards this plea as one of procedure or of substance. 2. In taking a decision concerning the existence or the validity of an arbitration agreement, courts of Contracting States shall examine the validity of such agreement with reference to the capacity of the parties, under the law applicable to them, and with reference to other questions: (a) (b) (c) P 1200

under the law to which the parties have subjected their arbitration agreement; failing any indication thereon, under the law of the country in which the award is to be made; failing any indication as to the law to which the parties have subjected the agreement, and where at the time when the question is raised in court the country in which the award is to be made cannot be determined, under the competent law by virtue of the rules of conflict of the court seized of the dispute.

The courts may also refuse recognition of the arbitration agreement if under the law of their country the dispute is not capable of settlement by arbitration. 3. Where either party to an arbitration agreement has initiated arbitration proceedings before any resort is had to a court, courts of Contracting States subsequently asked to deal with the same subject-matter between the same parties or with the question whether the arbitration agreement was non-existent or null and void or had lapsed, shall stay their ruling on the arbitrator's jurisdiction until the arbitral award is made, unless they have good and substantial reasons to the contrary. 4. A request for interim measures or measures of conservation addressed to a judicial authority shall not be deemed incompatible with the arbitration agreement, or regarded as a submission of the substance of the case to the court. Article VII – Applicable law 1. The parties shall be free to determine, by agreement, the law to be applied by the arbitrators to the substance of the dispute. Failing any indication by the parties as to the applicable law, the arbitrators shall apply the proper law under the rule of conflict that the arbitrators deem applicable. In both cases the arbitrators shall take account of the terms of the contract and trade usages. 2. The arbitrators shall act as amiables compositeurs if the parties so decide and if they may do so under the law applicable to the arbitration. Article VIII – Reasons for the award The parties shall be presumed to have agreed that reasons shall be given for the award unless they: (a) (b)

either expressly declare that reasons shall not be given; or have assented to an arbitral procedure under which it is not customary to give reasons for awards, provided that in this case neither party requests before the end of the hearing, or if there has not been a hearing then before the making of the award, that reasons be given.

Article IX – Setting aside of the arbitral award 1. The setting aside in a Contracting State of an arbitral award covered by this Convention shall only constitute a ground for the refusal of recognition or enforcement in another

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Contracting State where such setting aside took place in a State in which, or under the law of which, the award has been made and for one of the following reasons: (a)

(b) (c) P 1201

(d)

the parties to the arbitration agreement were under the law applicable to them, under some incapacity or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made, or the party requesting the setting aside of the award was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case; or the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, that part of the award which contains decisions on matters submitted to arbitration need not be set aside; the composition of the arbitral authority or the arbitral procedure was not in accordance with the agreement of the parties, or failing such agreement, with the provisions of Article IV of this Convention.

2. In relations between Contracting States that are also parties to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10th June 1958, paragraph 1 of this Article limits the application of Article V(1)(e) of the New York Convention solely to the cases of setting aside set out under paragraph 1 above.

§13.03 CHALLENGE TO ARBITRAL AWARDS [A] Challenge to Awards under the ICSID Convention [1] Interpretation, Revision and Annulment of an ICSID Award ICSID awards may not be challenged before national courts (ICSID Convention, art. 53, set out above, at II.A.1.). As a self-contained legal system, independent of laws of the forum of the proceedings, the ICSID Convention provides for four procedures for questioning an award: a request to the tribunal to decide any question it had omitted or to rectify minor errors in the text (art. 49(2)), interpretation where parties disagree on the meaning (art. 50), revision where new facts are discovered (art. 51) and applications for annulment (art. 52, which contains an exhaustive list of grounds). As the cases dealing with these provisions make clear, none of these requests may give rise to appellate review. [a] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States [ICSID or Washington Convention] (1965), 575 U.N.T.S. 160, Articles 50, 51 and 52 CHAPTER IV – Arbitration *** Section 5 – Interpretation, Revision and Annulment of the Award Article 50 (1) If any dispute shall arise between the parties as to the meaning or scope of an award, either party may request interpretation of the award by an application in writing addressed to the Secretary-General. (2) The request shall, if possible, be submitted to the Tribunal which rendered the award. If this shall not be possible, a new Tribunal shall be constituted in accordance with Section 2 of this Chapter. The Tribunal may, if it considers that the circumstances so P 1202 require, stay enforcement of the award pending its decision. Article 51 (1) Either party may request revision of the award by an application in writing addressed to the Secretary-General on the ground of discovery of some fact of such a nature as decisively to affect the award, provided that when the award was rendered that fact was unknown to the Tribunal and to the applicant and that the applicant's ignorance of that fact was not due to negligence. (2) The application shall be made within 90 days after the discovery of such fact and in any event within three years after the date on which the award was rendered. (3) The request shall, if possible, be submitted to the Tribunal which rendered the award. If this shall not be possible, a new Tribunal shall be constituted in accordance with Section 2 of this Chapter. (4) The Tribunal may, if it considers that the circumstances so require, stay enforcement of the award pending its decision. If the applicant requests a stay of enforcement of the award in his application, enforcement shall be stayed provisionally until the Tribunal rules on such request.

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Article 52 (1) Either party may request annulment of the award by an application in writing addressed to the Secretary-General on one or more of the following grounds: (a) (b) (c) (d) (e)

that the Tribunal was not properly constituted; that the Tribunal has manifestly exceeded its powers; that there was corruption on the part of a member of the Tribunal; that there has been a serious departure from a fundamental rule of procedure; or that the award has failed to state the reasons on which it is based.

(2) The application shall be made within 120 days after the date on which the award was rendered except that when annulment is requested on the ground of corruption such application shall be made within 120 days after discovery of the corruption and in any event within three years after the date on which the award was rendered. (3) On receipt of the request the Chairman shall forthwith appoint from the Panel of Arbitrators an ad hoc Committee of three persons. None of the members of the Committee shall have been a member of the Tribunal which rendered the award, shall be of the same nationality as any such member, shall be a national of the State party to the dispute or of the State whose national is a party to the dispute, shall have been designated to the Panel of Arbitrators by either of those States, or shall have acted as a conciliator in the same dispute. The Committee shall have the authority to annul the award or any part thereof on any of the grounds set forth in paragraph (1). (4) The provisions of Articles 41-45, 48, 49, 53 and 54, and of Chapters VI and VII shall apply mutatis mutandis to proceedings before the Committee. (5) The Committee may, if it considers that the circumstances so require, stay enforcement of the award pending its decision. If the applicant requests a stay of P 1203 enforcement of the award in his application, enforcement shall be stayed provisionally until the Committee rules on such request. (6) If the award is annulled the dispute shall, at the request of either party, be submitted to a new Tribunal constituted in accordance with Section 2 of this Chapter. [b] Compañia de Aguas del Aconquija S.A. and Vivendi Universal (formerly Compagnie Générale Des Eaux) v. Argentine Republic, Decision on Annulment of 3 July 2002, 6 ICSID Rep. 340, 358-360, 362-371 (2004) [L. Yves Fortier (pres.), James R. Crawford, José Carlos Fernández Rozas] [The facts of this case are summarized above, at Chapter 6, § 6.03.D.5] (Citations selectively omitted) (2) The Role of Annulment Under the ICSID Convention *** 63. No doubt the Committee must take great care to ensure that the reasoning of an arbitral tribunal is clearly understood, and must guard against the annulment of awards for trivial cause. But where a tribunal has “manifestly exceeded its powers” or has committed “a serious departure from a fundamental rule of procedure” – both grounds for annulment under Article 52 of the ICSID Convention and both relied on by Claimants in this proceeding – the matter is by definition not trivial. 64. A greater source of concern is perhaps the ground of “failure to state reasons”, which is not qualified by any such phrase as “manifestly” or “serious”. However, it is well accepted both in the cases and the literature that Article 52 (1) (e) concerns a failure to state any reasons with respect to all or part of an award, not the failure to state correct or convincing reasons. It bears reiterating that an ad hoc committee is not a court of appeal. Provided that the reasons given by a tribunal can be followed and relate to the issues that were before the tribunal, their correctness is beside the point in terms of Article 52 (1) (e). Moreover, reasons may be stated succinctly or at length, and different legal traditions differ in their modes of expressing reasons. Tribunals must be allowed a degree of discretion as to the way in which they express their reasoning. 65. In the Committee's view, annulment under Article 52 (1) (e) should only occur in a clear case. This entails two conditions: first, the failure to state reasons must leave the decision on a particular point essentially lacking in any expressed rationale; and second, that point must itself be necessary to the tribunal's decision. It is frequently said that contradictory reasons cancel each other out, and indeed, if reasons are genuinely contradictory so they might. However, tribunals must often struggle to balance conflicting considerations, and an ad hoc committee should be careful not to discern contradiction when what is actually expressed in a tribunal's reasons could more truly be said to be but a reflection of such conflicting considerations. 66. Finally, it appears to be established that an ad hoc committee has a certain measure of discretion as to whether to annul an award, even if an annullable error is found. Article 52 (3) provides that a committee “shall have the authority to annul the award or any part P 1204 thereof”, and this has been interpreted as giving committees some flexibility in

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determining whether annulment is appropriate in the circumstances. Among other things, it is necessary for an ad hoc committee to consider the significance of the error relative to the legal rights of the parties. This question, as it applies in the circumstances of the present case, is addressed below. 67. Another question, which was debated between the parties in this case, is whether an ad hoc committee is limited to the grounds for annulment relied on by a Claimant, or whether the Respondent may itself raise additional grounds for annulment.… … 68. The Committee agrees with Claimants that a counterclaim for annulment, that is, a claim which is not raised by the party concerned as a separate request in accordance with Article 52 (1) of the Convention, is inadmissible.… … 69. Thus where a ground for annulment is established, it is for the ad hoc committee, and not the requesting party, to determine the extent of the annulment. In making this determination, the committee is not bound by the applicant's characterisation of its request, whether in the original application or otherwise, as requiring either complete or partial annulment of the award. This is reflected in the difference in language between Articles 52 (1) and 52 (3), and it is further supported by the travaux of the ICSID Convention. Indeed, Claimants in the present case eventually accepted this view. *** (3) The Grounds of Annulment *** (b) The Tribunal’s Findings on the Merits *** (ii) Manifest excess of powers: Article 52 (1) (b) 86. It is settled, and neither party disputes, that an ICSID tribunal commits an excess of powers not only if it exercises a jurisdiction which it does not have under the relevant agreement or treaty and the ICSID Convention, read together, but also if it fails to exercise a jurisdiction which it possesses under those instruments. One might qualify this by saying that it is only where the failure to exercise a jurisdiction is clearly capable of making a difference to the result that it can be considered a manifest excess of power. Subject to that qualification, however, the failure by a tribunal to exercise a jurisdiction given it by the ICSID Convention and a BIT, in circumstances where the outcome of the inquiry is affected as a result, amounts in the Committee's view to a manifest excess of powers within the meaning of Article 52 (1) (b). 87. No doubt an ICSID tribunal is not required to address in its award every argument made by the parties, provided of course that the arguments which it actually does consider are themselves capable of leading to the conclusion reached by the tribunal and that all questions submitted to a tribunal are expressly or implicitly dealt with. In the present case, Claimants contend that, far from considering their claims concerning breach of the BIT prior to purportedly dismissing them, the Tribunal actually declined to P 1265 decide Claimants' allegations since it considered that, in order to do so, it would have had to address issues which, according to the Concession Contract, fell within the exclusive jurisdiction of the Tucumán courts. Claimants argue that if the Tribunal was wrong as regards this approach – that is, if the Tribunal erred in finding that it could not consider the BIT claims, in the circumstances – it failed to exercise its treaty jurisdiction, a jurisdiction which it had itself upheld. On that assumption, its failure to do so could also be said to be manifest. [Turning to the substance of the Claimants' request for partial annulment of the Award on the ground of manifest excess of powers, the Tribunal dismissed the request in relation to the Tribunal's determination of the federal claims.] The Tucumán claims 93. The second question in relation to Article 52(1)(b) is whether the Tribunal, having validly held that it had jurisdiction over the Tucumán claims, was entitled nonetheless to dismiss them as it did. Claimants, for their part, submit that the Tribunal did not so much dismiss the Tucumán claims as decline to address them. They argue that the only reason those claims were dismissed was that they were held to be substantially identical with claims against Tucumán under the Concession Contract, which the Tribunal found it could not determine, and that the Tribunal's refusal to decide the Tucumán claims on this basis was a manifest excess of powers. The Respondent argues that, assuming the Tribunal had jurisdiction over these claims, it acted correctly in dismissed them on the basis of Article 16(4) of the Concession Contract, but that in any event this was not the only reason for dismissal since the Tribunal did consider the Tucumán claims on their merits. 94. In dealing with these issues, it is necessary first to consider the relationship between the responsibility of Argentina under the BIT and the rights and obligations of the parties to the Concession Contract (especially those arising from Article 16(4), the exclusive jurisdiction clause); and secondly, to consider precisely what the Tribunal decided with respect to the Tucumán claims.

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95. As to the relation between breach of contract and breach of treaty in the present case, it must be stressed that Articles 3 and 5 of the BIT do not relate directly to breach of a municipal contract. Rather they set an independent standard. A state may breach a treaty without breaching a contract, and vice versa, and this is certainly true of these provisions of the BIT. The point is made clear in Article 3 of the ILC Articles, which is entitled “Characterization of an act of a State is internationally wrongful”: The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law. 96. In accordance with this general principle (which is undoubtedly declaratory of general international law), whether there has been a breach of the BIT and whether there has been a breach of contract are different questions. Each of these claims will be determined by reference to its own proper or applicable law – in the case of the BIT, by international law; in the case of the Concession Contract, by the proper law of the contract, in other words, the law of Tucumán. For example, in the case of a claim based on a treaty, international law rules of attribution apply, with the result that the state of Argentina is internationally responsible for the acts of its provincial authorities. By contrast, the state of Argentina is not liable for the performance of contracts entered into by Tucumán, which possesses separate legal personality under its own law and is responsible for the performance of its own contracts. *** 98. In a case where the essential basis of a claim brought before an international tribunal is a breach of contract, the tribunal will give effect to any valid choice of forum clause in the contract.… … *** 101. On the other hand, where “the fundamental basis of the claim” is a treaty laying down an independent standard by which the conduct of the parties is to be judged, the existence of an exclusive jurisdiction clause in a contract between the claimant and the respondent state or one of its subdivisions cannot operate as a bar to the application of the treaty standard. At most, it might be relevant – as municipal law will often be relevant – in assessing whether there has been a breach of the treaty. 102. In the Committee's view, it is not open to an ICSID tribunal having jurisdiction under a BIT in respect of a claim based upon a substantive provision of that BIT, to dismiss the claim on the ground that it could or should have been dealt with by a national court. In such a case, the inquiry which the ICSID tribunal is required to undertake is one governed by the ICSID Convention, by the BIT and by applicable international law. Such an inquiry is neither in principle determined, nor precluded, by any issue of municipal law, including any municipal law agreement of the parties. 103. Moreover the Committee does not understand how, if there had been a breach of the BIT in the present case (a question of international law), the existence of Article 16 (4) of the Concession Contract could have prevented its characterisation as such. A state cannot rely on an exclusive jurisdiction clause in a contract to avoid the characterisation of its conduct as internationally unlawful under a treaty. 104. The Respondent argues that, even if the Tribunal had jurisdiction, and even if it could not decline to exercise that jurisdiction by reference to the exclusive jurisdiction clause in the Concession Contract, this was not what the Tribunal did. According to the Respondent, it emerges clearly from the Award that the Claimants had no arguable case for a breach of Articles 3 or 5 of the BIT and that, at best, their claim was one for breach of contract: the issue of a treaty claim could only arise in the event that the contentious administrative tribunals of Tucumán denied Claimants justice, substantively or procedurally. 105. The question thus becomes how to characterize the Tribunal's decision. In considering that question, the Committee does not believe that it is material either that CGE was not a party to the Concession Contract or that the parties to the Concession Contract were CAA and the Province of Tucumán, as opposed to CAA and the federal government. If the Tribunal was right in saying that it could not consider any allegation of breach of treaty which required it to interpret or apply the Concession Contract, then it is arguable that CGE could be in no better position than CAA. It is also arguable that this conclusion should apply even though CAA's contractual commitment was to a province, since the acts of that province form the nub of the claim. But it is one thing to exercise contractual jurisdiction (arguably exclusively vested in the administrative tribunals of Tucumán by virtue of the Concession Contract) and another to take into account the terms of a contract in determining whether there has been a breach of a distinct standard of international law, such as that reflected in Article 3 of the BIT. 106. Claimants made a series of allegations as to the conduct of Tucumán, much of which, they claim, involved measures taken in bad faith.… … 107. The Tribunal expressed views on some of these allegations, but by no means all.… … 108. But however this may be, it is clear from the core discussion of the Tucumán claims,

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at paragraphs 77-81 of the Award, that the Tribunal declined to decide key aspects of the Claimants' BIT claims on the ground that they involved issues of contractual performance or non-performance. The Tribunal itself characterised these passages, in paragraph 81, as embodying its “decision” with respect to the Tucumán claims. 109. A key passage in this regard is found in paragraph 79, where the Tribunal said: [G]iven the nature of the dispute between Claimants and the Province of Tucumán, it is not possible for this Tribunal to determine which actions of the Province were taken in exercise of its sovereign authority and which in the exercise of its rights as a party to the Concession Contract considering, in particular, that much of the evidence presented in this case has involved detailed issues of performance and rates under the Concession Contract. 110. This passage calls for two remarks. First, it is couched in terms not of decision but of the impossibility of decision, the impossibility being founded on the need to interpret and apply the Concession Contract. Yet under Article 8 (4) of the BIT the Tribunal had jurisdiction to base its decision upon the Concession Contract, at least so far as necessary in order to determine whether there had been a breach of the substantive standards of the BIT. Second, the passage appears to imply that conduct of Tucumán carried out in the purported exercise of its rights as a party to the Concession Contract could not, a priori, have breached the BIT. However, there is no basis for such an assumption: whether particular conduct involves a breach of a treaty is not determined by asking whether the conduct purportedly involves an exercise of contractual rights. 111. For these reasons, and despite certain passages of the Award in which the Tribunal seems to go further into the merits, the Committee can only conclude that the Tribunal, in dismissing the Tucumán claims as it did, actually failed to decide whether or not the conduct in question amounted to a breach of the BIT. In particular, the Tribunal repeatedly referred to allegations and issues which, it held, it could not decide given the terms of Article 16 (4) of the Concession Contract, even though these were adduced by Claimants specifically in support of their BIT claim. Moreover, it offered no interpretation whatsoever either of Article 3 or of Article 5 of the BIT, something which was called for if the claims were to be dismissed on their merits. 112. It is not the Committee's function to form even a provisional view as to whether or not the Tucumán conduct involved a breach of the BIT, and it is important to state clearly that the Committee has not done so. But it is nonetheless the case that the conduct alleged by Claimants, if established, could have breached the BIT. The claim was not simply reducible to so many civil or administrative law claims concerning so many individual acts alleged to violate the Concession Contract or the administrative law of Argentina. It was open to Claimants to claim, and they did claim, that these acts taken together, or some of them, amounted to a breach of Articles 3 and/or 5 of the BIT. In the Committee's view, the Tribunal, faced with such a claim and having validly held that it had jurisdiction, was obliged to consider and to decide it. Although the Tribunal expressed conclusions on certain aspects of the claim, it never expressed a conclusion as to the claim as a whole, still less did it assess Claimants' case against the requirements of Article 3 or 5 of the BIT. 113. In the light of Article 8 of the BIT, the situation carried risks for Claimants. Having declined to challenge the various factual components of its treaty cause of action before the administrative courts of Tucumán, instead choosing to commence ICSID arbitration – and having thereby, in the Committee's view, taken the “fork in the road” under Article 8 (4) – CAA took the risk of a tribunal holding that the acts complained of neither individually nor collectively rose to the level of a breach of the BIT. In that event, it would have lost both its treaty claim and its contract claim. But on the other hand it was entitled to take that risk, with its associated burden of proof. A treaty cause of action is not the same as a contractual cause of action; it requires a clear showing of conduct which is in the circumstances contrary to the relevant treaty standard. The availability of local courts ready and able to resolve specific issues independently may be a relevant circumstance in determining whether there has been a breach of international law (especially in relation to a standard such as that contained in Article 3). But it is not dispositive, and it does not preclude an international tribunal from considering the merits of the dispute. 114. It should be stressed that the conduct complained of here was not more or less peripheral to a continuing successful enterprise. The Tucumán conduct (in conjunction with the acts and decisions of Claimants) had the effect of putting an end to the investment. In the Committee's view, the BIT gave Claimants the right to assert that the Tucumán conduct failed to comply with the treaty standard for the protection of investments. Having availed itself of that option, Claimants should not have been deprived of a decision, one way or the other, merely on the strength of the observation that the local courts could conceivably have provided them with a remedy, in whole or in part. Under the BIT they had a choice of remedies. 115. For all of these reasons, the Committee concludes that the Tribunal exceeded its powers in the sense of Article 52 (1) (b), in that the Tribunal, having jurisdiction over the Tucumán claims, failed to decide those claims. Given the clear and serious implications

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of that decision for Claimants in terms of Article 8 (2) of the BIT, and the surrounding circumstances, the Committee can only conclude that that excess of powers was manifest. It accordingly annuls the decision of the Tribunal so far as concerns the entirety of the Tucumán claims. *** [c] Comments and Questions 1. 2.

Can one infer from the decision to annul the award that the claimants should have succeeded, notwithstanding the ad hoc Committee's protestations (see para 112)? Or was the ad hoc Committee making a merely formal point? And as to that formal point, since investments occur by way of contracts, is it not the case by definition that every investment dispute involves, directly or indirectly, a contract claim?

*** [d] AES Summit Generation Limited and AES-Tisza Erömü Kft. v. Hungary (ICSID Case No. ARB/07/22), Decision on Annulment of 29 June 2012 (6) [Bernard Hanotiau (pres.), Rolf Knieper, Abdulqawi Ahmed Yusuf] [The British energy company AES invested US$130 million in Tisza II and other Hungarian power stations in 1996, when Hungary was privatising parts of its energy sector. AES concluded a Power Purchase Agreement (PPA) with Hungary, which established a pricing formula to be applied once Hungary ceased to administer energy generation prices. As a response to public outrage over the allegedly high profits of public utility companies, Hungary enacted price decrees in 2006 and 2007, which restored the administrative pricing regime. As this caused AES significant losses, the company initiated ICSID arbitration under the Energy Charter Treaty (ECT), claiming several violations of the Treaty. In its 23 September 2010 award, the Tribunal dismissed all of AEs's claims on their merits, finding no evidence of a specific, binding commitment by Hungary to never re-introduce price-capping during the lifetime of the power purchase arrangement. Hungary's acts were deemed a valid, reasonable and proportionate exercise of regulatory power – a legitimate public policy response. On 19 January 2011, the Applicant filed an Application for Annulment, requesting annulment of the Award in its entirety, under the grounds contained in Article 52(1)(b) (manifest excess of powers) and Article 52(1)(e) (failure to state reasons) of the ICSID Convention.] (Citations selectively omitted) II. Preliminary Remarks 15. As a preliminary matter, the Committee notes that the scope of its present task is limited to determining whether to annul either all or part of the Award, or to let the Award stand. As unambiguously expressed in Article 53 of the Convention, an award is not subject to an appeal. Annulment must therefore be different from appeal. It is well settled in international investment arbitration that an ad hoc committee may not substitute its own judgment on the merits for that of a tribunal. As such, the Committee has no competence to express any view on the substantive correctness of the Tribunal's reasoning. 16. The grounds upon which annulment may be based are listed exhaustively in Article 52(1) of the ICSID Convention. In the present case, Applicants invoke two of these grounds, namely: (b) (e)

that the Tribunal has manifestly exceeded its powers; and that the award has failed to state the reasons on which it is based.

17. The Committee is bound to interpret these terms of the Convention “in good faith in accordance with the ordinary meaning to be given to the terms… …in their context and in the light of its object and purpose”, as required by Article 31 of the Vienna Convention on the Law of Treaties of 1969. The text of the ICSID Convention is the result of long and profound debates. With respect to Articles 52 and 53 the drafters have taken great care to use terms which clearly express that annulment is an exhaustive, exceptional and narrowly circumscribed remedy and not an appeal. The interpretation of the terms must take this object and purpose into consideration and avoid an approach which would result in the qualification of a tribunal's reasoning as deficient, superficial, sub-standard, wrong, bad or otherwise faulty, in other words, a re-assessment of the merits which is typical for an appeal. In this perspective, the ordinary meaning of a manifest excess of power is either an obvious transgression of a tribunal's mandate or its obvious nonexecution; and the ordinary meaning of a failure to state the reasons on which the decision is based is the absence of reasons or a presentation which is unintelligible in relation to the decision thus equating a lack of reasons. *** III. The Relevant Legal Standards

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A. Article 52(1)(b): Manifest Excess of Powers *** (b) The ad hoc Committee’s Analysis 30. The Committee shares the view… that a tribunal may exceed its power by failing to exercise the jurisdiction which it possesses. As also noted by Hungary and Professor Schreuer, however, this notion “relates to a deviation from the arbitration agreement and not to a quantitative concept of jurisdiction”. Whilst the precise boundaries of such a distinction may be difficult to discern, it is uncontroversial that such a non-exercise must be “manifest” in the sense of being somehow significant or consequential. Indeed, the Parties in the present case are in agreement that such a non-exercise must be “resultdeterminative”.… … 31. Concerning the meaning of “manifest”,… the term relates to the ease with which an excess of powers is perceived, rather than its gravity, and that such an excess must be able to “be discerned with little effort and without deeper analysis”. Such an approach is consistent with a manifest excess being one which is at once “textually obvious and substantively serious”. 32. The Committee notes, however, that the practice of ad hoc committees is mixed as regards how to apply such a test. On the one hand, some committees have adopted a two-step approach: determining first whether there has been an excess of powers before going on to determine whether such excess was manifest. Others, on the other hand, have adopted a prima facie approach under which a summary examination is undertaken in order to ascertain if any alleged excess of powers was so egregious as to be manifest. To the extent these tests are not explicitly referred to, the Committee's findings below should be understood in light of the application of both tests. As will be shown below, the Committee's conclusions are in any case not dependent on such a distinction. 33. Further, the Committee notes that there is “widespread agreement that a failure to apply the proper law may amount to an excess of powers by the tribunal”, the underlying basis being that the issues put to a tribunal are circumscribed by the parties' consent. The Committee takes note of the sparse yet well-known jurisprudence confirming this. However, the Committee again notes the importance of the distinction between nonapplication and mere misapplication of the applicable law. Whilst the precise boundaries of these concepts can be difficult to gauge, the Committee is mindful of the criticism that has been levelled against certain ad hoc committees for overstepping the line between annulment and appeal. The prevailing, and correct, view in modern investment jurisprudence must be understood as setting a very high threshold. As put by the Soufraki annulment committee: Misinterpretation or misapplication of the proper law may, in particular cases, be so gross or egregious as substantially to amount to failure to apply the proper law. Such gross and consequential misinterpretation or misapplication of the proper law which no reasonable person (“bon père de famille”) could accept needs to be distinguished from a simple error – or even a serious error – in the interpretation of the law which in many national jurisdictions may be the subject of ordinary appeal as distinguished from, e.g., an extraordinary writ of certiorari. 34. The Committee therefore notes that in order to annul the Award under Article 52(1) (b) for a manifest excess of the Tribunal's powers consisting of a failure to apply the applicable law, at the very least something more than a “serious error” is required. *** B. Article 52(1)(e): Failure to State Reasons *** (b) The ad hoc Committee’s Analysis 46. As a preliminary remark, the Committee notes that arbitral tribunals are under a fundamental obligation to provide a reasoned award.… … 47. Of all the grounds of annulment listed in Article 52(1) of the ICSID Convention, it is the failure to state reasons that holds the greatest danger of overlapping with an inadmissible review of the merits.… … 48. In light of the above, the Committee recognises that application of this ground of annulment must be made within parameters which characterise a failure to state reasons as opposed to a failure to state convincing or good reasons. Indeed, as submitted by Hungary and explained by Professor Schreuer: The duty to state reasons refers only to a minimum requirement. It does not call for tribunals to strain every sinew in an attempt to convince the losing party that the decision was the right one. 49. Nevertheless, there are certain circumstances in which annulment on these grounds

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will be permissible. The clearest example is where there is a total absence of reasons for the award. This, however, is “extremely unlikely”. As put by the Soufraki annulment committee, “there will probably never be a case where there is a total absence of reasons for the award”. 50. In Klöckner I, the ad hoc committee found the tribunal's reasoning to be sufficiently defective to warrant annulment of the award, stating that: … …”… [t]he Award in no way allows the ad hoc Committee or for that matter the parties to reconstitute the arbitrators' reasoning in reaching a conclusion that is perhaps ultimately perfectly justified and equitable (and the Committee has no opinion on this point) but is simply asserted or postulated instead of being reasoned. The complaint must therefore be regarded as well founded, to the extent that it is based on Article 52(1)(e).” 51. The Committee is mindful that even in Klöckner I, the threshold for annulment was set very high since there had to be “no way” that the committee could reconstitute the tribunal's reasoning. Moreover, this decision has consistently come in for strong criticism. …… 52. In view of the settled doctrine on this issue, the Committee again emphasises that it will not enter into an assessment of the merits of the dispute, either directly or indirectly. 53. However, as the Parties agree, annulment may be permitted in the exceptional circumstance that a tribunal's reasons are so contradictory that they effectively amount to no reasons at all. As stated by the ad hoc Committee in Vivendi I: It is frequently said that contradictory reasons cancel each other out, and indeed, if reasons are genuinely contradictory so they might. However, tribunals must often struggle to balance conflicting considerations, and an ad hoc committee should be careful not to discern contradiction when what is actually expressed in a tribunal's reasons could be more truly said to be but a reflection of such conflicting considerations. 54. Finally, for the reasons discussed above, the Committee also takes the view that the giving of frivolous reasons will almost never amount to a failure to state reasons within the meaning of Article 52(1)(e), since this would impermissibly encroach into appellate territory. The better approach is to recognise that reasons which are sufficiently frivolous or absurd in nature would in effect amount to no reasons at all. *** [2] Supplementation and Rectification of an ICSID Award Interpretation, revision and annulment of an Award is to be distinguished from supplementation and rectification. After the decision of the ad hoc Committee in Vivendi [see III.A.1.b. above], a request was submitted to the Committee by the Argentine Republic, the losing party, on the basis of Article 49(2) of the ICSID Convention. It claimed that the Committee had omitted to address and decide a point it had raised in its submissions. The claimant also sought rectification of errors in the Committee's decision. The Committee allowed the rectification of clerical errors but disapproved of what it perceived to be Argentina's attempt to re-open substantive elements of the Committee's decision. A costs order was made in light of the Committee's criticisms. The Committee noted its scepticism of requests for supplementation or rectification of annulment proceedings where such requests were in fact targeted at the arbitral award. [a] Convention on the Settlement of Investment Disputes Between States and Nationals of Other States [ICSID or Washington Convention] (1965), 575 U.N.T.S. 160, Article 49 Article 49 *** (2) The Tribunal upon the request of a party made within 45 days after the date on which the award was rendered may after notice to the other party decide any question which it had omitted to decide in the award, and shall rectify any clerical, arithmetical or similar error in the award. Its decision shall become part of the award and shall be notified to the parties in the same manner as the award. The periods of time provided for under paragraph (2) of Article 51 and paragraph (2) of Article 52 shall run from the date on which the decision was rendered. [b] Compañia de Aguas del Aconquija S.A. and Vivendi Universal (formerly Compagnie Générale Des Eaux) v. Argentine Republic (ICSID Case No. ARB/97/3), Decision on Supplementation and Rectification of 28 May 2003, 8 ICSID Rep. 489, 492-495 (2005) [L. Yves Fortier (pres.), James R. Crawford, José Carlos Fernández Rozas] (Citations selectively omitted) 11. [In commenting on the nature and purpose of the procedure by which ICSID awards

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and decisions may be supplemented and rectified], it is important to state that that procedure, and any supplementary decision or rectification as may result, in no way consists of a means of appealing or otherwise revising the merits of the decision subject to supplementation and rectification. Those sorts of proceedings are simply not provided for in the ICSID system. Still less may a request for supplementation or rectification of a decision on annulment be employed as a vehicle by which to examine the correctness, not of the decision of the ad hoc committee, but of the underling arbitral award. *** 19. [On the Request for Supplementary Decision] In no way can it be said that the Committee omitted to address Argentina's arguments. Rather, it appears that Respondent is seeking to reopen a substantive debate that occurred and was resolved during the earlier, merits phase of the annulment proceeding, with a view to having the Committee reconsider its findings concerning CAA's status as an investor subject to the jurisdiction of the Tribunal and the manner in which the issue was address by the Tribunal. This is something that, in this exceptional phase of the annulment proceeding, the Committee cannot and will not do. *** 25. [On the Requests for Rectification] A review of pertinent arbitral awards illustrates that the availability of the rectification remedy afforded by Article 49(2) depends upon the existence of two factual conditions. First, a clerical, arithmetical or similar error in an award or decision must be found to exist. Second, the requested rectification must concern an aspect of the impugned award or decision that is purely accessory to its merits. Simply stated (and contrary to the Respondent's assertion [in its Request]), Article 49(2) does not permit the “rectification” of substantive findings made by a tribunal or committee or of the weight or credence accorded by the tribunal or committee to the claims, arguments and evidence presented by the parties. The sole purpose of a rectification is to correct clerical, arithmetical or similar errors, not to reconsider the merits of issues already decided.… [M]any of the Respondent's requests derive from a misunderstanding of this fundamental principle. ***

[B] Challenge of Awards of Non-ICSID Tribunals [1] UNCITRAL Model Law on International Commercial Arbitration (1985, amended 2006), Article 34 Chapter VII – Recourse Against Award Article 34. Application for setting aside as exclusive recourse against arbitral award (1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3) of this article. (2) An arbitral award may be set aside by the court specified in article 6 only if: (a)

the party making the application furnishes proof that: (i)

(b)

a party to the arbitration agreement referred to in article 7 was under some incapacity; or the said agreement is not valid under the law to which the parties have subjected it or, failing any indication thereon, under the law of this State; or (ii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case; or (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside; or (iv) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Law from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Law; or the court finds that: (i) (ii)

the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State; or the award is in conflict with the public policy of this State.

(3) An application for setting aside may not be made after three months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal.

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(4) The court, when asked to set aside an award, may, where appropriate and so requested by a party, suspend the setting aside proceedings for a period of time determined by it in order to give the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such other action as in the arbitral tribunal's opinion will eliminate the grounds for setting aside. *** [2] Explanatory Note by the UNCITRAL Secretariat on the 1985 Model Law on International Commercial Arbitration as amended in 2006, (7) Section 7 7. Recourse Against Award 40. National laws on arbitration, often equating awards with court decisions, provide a variety of means of recourse against arbitral awards, with varying and often long timeperiods and with extensive lists of grounds that differ widely in the various legal systems. The Model Law attempts to ameliorate this situation, which is of considerable concern to those involved in international commercial arbitration. a. Application for setting aside as exclusive recourse 41. The first measure of improvement is to allow only one type of recourse, to the exclusion of any other means of recourse regulated in another procedural law of the State in question. An application for setting aside under article 34 must be made within three months of receipt of the award. It should be noted that “recourse” means actively “attacking” the award; a party is, of course, not precluded from seeking court control by way of defence in enforcement proceedings (article 36). Furthermore, “recourse” means resort to a court, i.e. an organ of the judicial system of a State; a party is not precluded from resorting to an arbitral tribunal of second instance if such a possibility has been agreed upon by the parties (as is common in certain commodity trades). b. Grounds for setting aside 42. As a further measure of improvement, the Model Law contains an exclusive list of limited grounds on which an award may be set aside. This list is essentially the same as the one in article 36(1), taken from article V of the 1958 New York Convention: lack of capacity of parties to conclude arbitration agreement or lack of valid arbitration agreement; lack of notice of appointment of an arbitrator or of the arbitral proceedings or inability of a party to present his case; award deals with matters not covered by submission to arbitration; composition of arbitral tribunal or conduct of arbitral proceedings contrary to effective agreement of parties or, failing agreement, to the Model Law; non-arbitrability of subject-matter of dispute and violation of public policy, which would include serious departures from fundamental notions of procedural justice. 43. Such a parallelism of the grounds for setting aside with those provided in article V of the 1958 New York Convention for refusal of recognition and enforcement was already adopted in the European Convention on International Commercial Arbitration (Geneva, 1961). Under its article IX, the decision of a foreign court setting aside an award for a reason other than the ones listed in article V of the 1958 New York Convention does not constitute a ground for refusing enforcement. The Model Law takes this philosophy one step further by directly limiting the reasons for setting aside. 44. Although the grounds for setting aside are almost identical to those for refusing recognition or enforcement, two practical differences should be noted. Firstly, the grounds relating to public policy, including non-arbitrability, may be different in substance, depending on the State in question (i.e. State of setting aside or State of enforcement). Secondly, and more importantly, the grounds for refusal of recognition or enforcement are valid and effective only in the State (or States) where the winning party seeks recognition and enforcement, while the grounds for setting aside have a different impact: The setting aside of an award at the place of origin prevents enforcement of that award in all other countries by virtue of article V(1)(e) of the 1958 New York Convention and article 36(1)(a)(v) of the Model Law. [3] Czech Republic v. CME Czech Republic B.V., Judicial Review by the Svea Court of Appeal of 15 May 2003, 9 ICSID Rep. 439, 493-494, 497-499, 502-507 (2006) [After the Czech Council for Radio and Television Broadcasts (“Media Council”) granted a broadcasting licence to a Czech company, Central European Television (“CET 21"), a proposal was subsequently made for the formation of a new company to run TV Nova called Ceská nezavista televizni spolecnost, spol.s.r.o (“CNTS”). A Memorandum of Association and Investment Agreement was entered into by CET 21, the Central European Development Corporation GmbH (“CEDC”) and a Czech savings bank. CEDC was a German company, ultimately controlled by a US citizen, Ronald Lauder. According to the Memorandum of Association, CET 21 was to transfer the broadcasting licence in exchange for shares in CNTS. CME alleged that in 1993 the Media Council refused to accept CEDC as a foreign shareholder of CET 21 and insisted on a split structure in which CEDC was to participate in CET21 by holding shares in CNTS. In August 1994, CME Media Enterprises B.V. (“CME Media”), a Dutch company also controlled by Lauder, acquired CEDC's shareholding in CNTS. One of the conditions on the licence granted to CET 21 was that it may not be

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transferred. However, after an amendment was made to the Media Act allowing broadcasting licences to be assigned, CET 21 successfully applied for the revocation of the non-transfer condition on the licence. The Memorandum of Association was subsequently amended in the following ways: CET 21's contribution of ‘the use of the licence’ was replaced with ‘the use of the know-how of the licence’; a provision was incorporated which would prevent any other party apart from CET 21 from using the licence. In 1996 the Media Council allegedly coerced CNTS to relinquish its exclusive right of use to the licence in order to obtain an exclusive right to the use of the know-how of the licence. In 1997, CME Media, now holding 93.2 per cent of the shares in CNTS, transferred its interest in CNTS to a wholly owned subsidiary, CME Czech Republic B.V (“CME”), also a Dutch company. CET 21 and CNTS entered into a service agreement which governed CET 21's responsibility for programming and CNTs's rights and obligations, as an exclusive service company, regarding the operation of TV Nova. In 1999, CET 21 terminated its service agreements with CNTS on the ground that CNTS had failed to deliver daily broadcast reports. CME commenced arbitration against the Czech Republic in February 2000 on the basis of a BIT between the Netherlands and the Czech Republic. In an Award from 13 September 2001 the majority of the three-person tribunal found that the Czech Republic had violated the treaty through acts and omissions of the Media Council in 1996 and 1999 but not by any acts and omissions of the Media Council in 1993 (“Stockholm award”). Arbitration proceedings were also commenced by Lauder against the Czech Republic in London. The proceedings were brought under a BIT between the United States and the Czech Republic. The alleged violations were the same as the acts and omissions asserted by CME in the Stockholm proceedings. The arbitral tribunal unanimously agreed that only the 1993 events constituted a violation of the investment treaty however no damages were awarded. The Czech Republic issued proceedings in the Court of Appeal in Sweden seeking a declaration that the Stockholm award was invalid. Extracts of the judgment follow.] Generally regarding challenges and enforcement of international awards In line with what might be deemed to be an expression of the legal situation in many other countries, by virtue of the Arbitration Act the Swedish legislature has adopted a restrictive approach towards to the possibilities to successfully have an arbitration award declared invalid or set aside based on a challenge (see Government Bill, pp. 142, 148, and 234). The same approach characterizes the rules in the aforementioned Recognition and Enforcement of Foreign Arbitration Awards Act and the underlying reasons given therefor. This has also been expressed in decisions of the Supreme Court when applying corresponding older provisions (see the cases reported in NJA 1979, p. 527 and 1992, p. 733). On the international plane, this restrictive approach has been expressed in the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and in UNCITRAL's Model Law. In this context, it may be noted that, in a judgment cited in this case, the European Court of Justice stated that … …”… it is in the interest of efficient arbitration proceedings that review of arbitration awards should be limited in scope and that annulment of or refusal to recognize an award should be possible only in exceptional circumstances”. *** Failure to take into consideration applicable law The Republic has alleged that the arbitral tribunal failed to apply the law that the arbitrators were obligated to apply in accordance with the Treaty, namely Czech law and international law. The arbitral tribunal has, instead, based the award on general assessments of reasonableness. According to the Republic, the arbitral tribunal has thereby exceeded its mandate and, in any event, committed gross procedural errors, each of which individually, and in any event taken together, affected the outcome of the arbitration proceedings. As distinct from UNCITRAL's Model Law, the Arbitration Act does not contain any rules as to the legal premises on which arbitrators should determine a dispute.… In Sweden, there is probably a unanimous view that arbitrators should base their awards primarily on governing law, unless the parties may be deemed to have decided differently.… … A general conclusion which may be drawn from that which is stated in the legislative history is that the legislature has sought to reduce the possibilities to challenge an arbitration award on the ground that the arbitrators have applied the wrong law. The arbitrators may be deemed to have exceeded their mandate only where they have applied the law of a different country in violation of an express provision that the law of a particular country shall govern the dispute; in the opinion of the Court of Appeal, an almost deliberate disregard of the designated law must be involved. There is no excess of mandate where the arbitrators have applied the designated law incorrectly. Nor can there hardly be any question of excess of mandate where the arbitrators have been required to interpret the parties' designation of applicable law and, in so doing, have interpreted the designation incorrectly. In accordance with Articles 8.2 and 8.5 of the Treaty, the arbitration proceedings have

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taken place within the scope of the UNCITRAL rules. Articles 33.1 and 33.2 of the UNCITRAL rules provide, inter alia, that the arbitral tribunal shall apply the law which the parties stated to be applicable to the dispute and that the tribunal shall base its decision on assessments of reasonableness (shall decide as amiable compositeur or aequo et bono) only where the parties have expressly authorized the tribunal to do so. The relevant choice of law clause is found in Article 8.6 of the Treaty. It is worded as follows: “The arbitral tribunal shall decide on the basis of the law, taking into account in particular though not exclusively: – – –

the law in force of the Contracting Party concerned; the provisions of this Agreement, and other relevant Agreements between the Contracting Parties; the provisions of special agreements relating to the investment; – the general principles of international law”.

*** The first part of the provision whereby the arbitrators “shall decide on the basis of the law” is clear, while the following parts leave room for interpretation, as shown by the arbitrators' differing opinions regarding the correct legal purport of the provision. The arbitrators have been obliged to comply with the choice of law provision and, accordingly, their mandate has also included interpretation of the provision insofar as it is not clear or not unambiguous. In the opinion of the Court of Appeal, an excess of mandate may be involved only where the arbitrators' interpretation of the choice of law clause proves to be baseless such that their assessment may be equated with the arbitrators almost having ignored a provision regarding applicable law. *** The wording that the arbitral tribunal shall “take into account in particular although not exclusively” must be interpreted such that the arbitrators may also use sources of law other than those listed. The four sources of law are not numbered, nor are they otherwise marked in such a manner that governing law in the relevant contracting state should primarily be applied and general principles of international law applied thereafter. The un-numbered list almost gives the impression that the contracting states have left to the arbitrators the determination, on a case by case basis, as to which source or sources of law shall be applied. If the case concerns an alleged violation of the Investment Treaty, it might be relevant first of all to apply international law, in light of the Investment Treaty's purpose of affording protection to foreign investors by prescribing norms in accordance with international law. *** The Court of Appeal does not believe that the various sections in the arbitral award are to be reviewed in order to ascertain which of the sources of law listed in Article 8.6 of the Treaty have been applied by the arbitral tribunal. In the Court of Appeal's opinion, when assessing whether the arbitrators have exceeded their mandate, it is sufficient to clarify whether the arbitral tribunal applied any of the sources of law listed in the choice of law clause or whether the tribunal has not based its decision on any law at all but, rather, judged in accordance with general reasonableness. The various sections in the arbitration award which the parties have invoked in the case in support of their respective opinions as to which source or sources of law were or were not applied and as to the extent to which such has occurred leads to no conclusion other than that the arbitral tribunal has complied with the provisions of the choice of law clause as such must be interpreted, i.e. applied relevant sources of law, primarily international law, and thus has not based its decision that the Republic violated the Treaty on a general assessment of reasonableness devoid of any basis in law. The fact that each legal statement in the award is not directly derived citing a rule of law cannot be deemed to mean that the tribunal conducted a general assessment of reasonableness. Accordingly, taking into consideration the aforesaid, the Court of Appeal finds that the arbitral tribunal did not exceed its mandate by failing to apply applicable law. *** Excess of mandate – joint tortfeasors The Republic has argued that the arbitral tribunal exceeded its mandate by basing the arbitration award on an application of the concept of joint tortfeasors, which is a ground that CME did not invoke in the arbitration proceedings and which had not been mentioned as a circumstance, nor was it the subject of legal argument by any of the parties in the arbitration proceedings. *** The Court of Appeal’s assessment The expression “joint tortfeasors” is found in paragraph. 581 of the award in the section

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headed “Causation of damage by Council's actions and omissions”. The section addresses, inter alia, whether the Media Council's actions and omissions have caused damage. In the opinion of the Court of Appeal, it cannot be inferred from the award other than that the arbitral tribunal, in accordance with international law principles as found by the tribunal, held that there existed a link between the Media Council's actions and omissions and CME's damage which, in accordance with the arbitral tribunal's assessment of international law, meant that it was reasonable to impute CME's damage to the Media Council's actions and omissions, see, e.g., paragraphs 575 and 584-585 of the award. Thus, the arbitral tribunal found that there existed a causal link between the Media Council's actions and omissions and CME's damage. The arbitral tribunal further found that the Media Council's actions and omissions constituted a violation of the Treaty and that, as a consequence of violation of the Treaty, the Republic was obligated to make good the damage caused by the Media Council's unlawful actions or omissions. In the Court of Appeal's opinion, it follows from the aforesaid that the Republic's liability for damages is not based on the Republic and Železný being joint tortfeasors. Nor can it be inferred from the award other than that the Tribunal – following an objection from the Republic that no damage would have been caused to CME's investment but for Železný’s actions and that the Media Council and the Republic bore no liability for what happened to CME's investment – made the assessment that a state may be held fully liable for damage suffered by a foreign investment company, notwithstanding that the state is not alone in having caused the damage. It is further evident from the award that the tribunal applied this assessment as a basis for its conclusion that the Republic was fully liable in the instant case, irrespective of Železný’s actions which contributed in causing the damage. Taking into consideration the aforesaid, the Court of Appeal does not find it established that the arbitral tribunal exceeded its mandate in basing the award on the existence of joint tortfeasors and, therefore, the Republic's claim cannot be accepted on the aforesaid ground. In light of this assessment, there is no reason to decide whether the ground of challenge might be barred. Excess of mandate – decision concerning determination of the damages The Republic has argued that the arbitral tribunal exceeded its mandate by determining questions concerning the amount of the damages, in violation of the parties' instructions… …; the amount of the damages was to be determined in a second phase of the arbitration proceedings. *** The Court of Appeal’s assessment It has not been established that the Republic – based on allegations of violation of the bifurcation agreement – raised any objections against the claim for compensation in accordance with fair market value that CME presented in writing during the final hearing in the arbitration proceedings. If the Republic believed that the claim was to be regarded as a new claim in excess of that agreed upon by the parties and, thereby, in the Republic's opinion constituted an impermissible amendment to the claim, the Republic should have objected thereto. Section 34, second paragraph of the Arbitration Act provides, as stated previously, that a party is not entitled to invoke a circumstance which, by participating in the arbitration proceedings without objection or otherwise, it may be deemed to have waived. The Court of Appeal finds that the Republic's failure to raise the objection against CME's claim in conjunction with the submission of the written document at the final hearing has the result that the Republic is now barred from arguing that the arbitral tribunal exceeded its mandate in this respect. Thus, the Republic's claim based on the aforesaid ground cannot be accepted. *** Excess of mandate – previous investors and prior violations The Republic has argued that the arbitral tribunal exceeded its mandate by applying provisions in the Treaty with respect to alleged violations which took place when the investment was held by a different investor than the one that brought the claim in the arbitration proceedings. To be precise, according to the Republic, the Treaty provides protection only when an investment is made; it does not protect an investment against events which occurred before the investor made his investment. CME has objected to the assertion that all of CME's allegations regarding violations of the Treaty are covered by the arbitration agreement and that the arbitrators thus enjoyed jurisdiction to determine the issue. In any event, they gained jurisdiction through the issue being introduced into the arbitration proceedings without the Republic arguing that the issue was not covered by the arbitration agreement. In any event, in CME's opinion, the Republic has waived the right to claim that the issue was not covered by the arbitration agreement or that an assessment thereof was in excess of the arbitrators' jurisdiction. In fact, in its Statement of Defense, the Republic raised no objection that the

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arbitration agreement did not cover the dispute, which the Republic was obligated to do in accordance with Article 8.5 of the Treaty and Article 21 (3) of the UNCITRAL rules. The ground for challenge is barred in accordance with section 34, second paragraph of the Arbitration Act, since the Republic participated in the proceedings without raising the objection that the issue was not covered by the arbitration agreement. The Court of Appeal’s assessment It is apparent from the evidence that the Republic questioned whether CME was entitled to bring the action based on the Treaty. However, the Republic never expressly stated, in its Statement of Defense or in a later pleading (Sur Reply), that CME's claim fell outside the scope of the Treaty and thereby the arbitrators' mandate on the ground that the alleged events occurred before CME became the investor and the claim was not assigned to CME. It has further transpired that, during the final hearing, the Republic argued that CME raised claims based on events that occurred before CME made its investment. After CME questioned whether the Republic was thereby raising an objection to jurisdiction, the Republic replied that no such objection was involved but, rather, only a substantive objection. Following the final hearing, the Republic asserted in writing that CME had only been entitled to bring claims which were based on events that occurred after May 1997 and stated that claims based on circumstances that occurred before May 1997 were not covered by the arbitration agreement. At the same time, the Republic argued that this did not constitute an objection to the arbitral tribunal's jurisdiction but, rather, was related to the Republic's substantive defense. In light of the aforesaid, the Court of Appeal holds that the Republic, as its statements during the arbitration proceedings must be understood, expressly refrained from raising objections to jurisdiction. Thus, the issue is whether the ground for challenge is barred. The Republic has argued that, since the Treaty did not cover claims related to the time before a person became an investor, it was not possible for the parties, in the arbitration proceedings, to waive this type of objection to jurisdiction. The Treaty has, in fact, been entered into between two sovereign States and, accordingly, the parties do not have any possibility to expand the scope of the arbitration agreement through a waiver of the type in question. The Treaty refers to the UNCITRAL rules which, including the limitation clause in Article 21 (3), are thus covered by the intention of the contracting States. In the Court of Appeal's opinion, taking the aforesaid into consideration, it is hardly incompatible with the aspect of sovereignty that a party should be able to expressly refrain from raising objections to jurisdiction. Thus, the Court of Appeal finds that the Republic has not shown ample reason for the claim that a waiver cannot be taken into consideration. In light of the above and in accordance with that which has been stated in connection with other grounds for challenge, in this context the Republic is deemed to have refrained from arguing that the arbitral tribunal exceeded its mandate by applying the Treaty with respect to alleged violations which took place at a time when the investment was held by an investor other than CME. This assessment leads to the conclusion that the ground for challenge based on section 34, second paragraph of the Arbitration Act is barred. Thus, the Republic's claim based on the aforesaid ground cannot be accepted. *** The judgment of the Court of Appeal may not be appealed In accordance with section 43, second paragraph of the Arbitration Act, the Court of Appeal's decision regarding a claim against an arbitration award pursuant to sections 33 and 34 of the same Act may not be appealed. However, in accordance with the same paragraph, the Court of Appeal may allow an appeal of the decision where it is of importance for the development of case law that the appeal be reviewed by the Supreme Court. Based on the assessment described by the Court of Appeal in this judgment, the Court of Appeal finds that no grounds exist for allowing an appeal of the judgment. *** [4] Comments and Questions On identical facts, the claim by the majority shareholder of CME, brought under the USCzech BIT, failed. How can a situation be tolerated where two different panels appreciate the facts in such a different way? In such cases, do not tribunals have an obligation to intervene? *** [5] Arbitration Act 1999, S.F.S. 1999:116 (Sweden), Sections 43 and 44 Invalidity of Awards and Setting Aside Awards Section 33

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An award is invalid: 1. 2. 3.

if it includes determination of an issue which, in accordance with Swedish law, may not be decided by arbitrators; if the award, or the manner in which the award arose, is clearly incompatible with the basic principles of the Swedish legal system; or if the award does not fulfil the requirements with regard to the written form and signature in accordance with section 31, first paragraph.

The invalidity may apply to a certain part of the award. Section 34 An award which may not be challenged in accordance with section 36 shall, following an application, be wholly or partially set aside upon motion of a party: 1. 2. 3. 4. 5. 6.

if it is not covered by a valid arbitration agreement between the parties; if the arbitrators have made the award after the expiration of the period decided on by the parties, or where the arbitrators have otherwise exceeded their mandate; if arbitral proceedings, according to section 47, should not have taken place in Sweden; if an arbitrator has been appointed contrary to the agreement between the parties or this Act; if an arbitrator was unauthorized due to any circumstance set forth in sections 7 or 8; or if, without fault of the party, there otherwise occurred an irregularity in the course of the proceedings which probably influenced the outcome of the case.

A party shall not be entitled to rely upon a circumstance which, through participation in the proceedings without objection, or in any other manner, he may be deemed to have waived. A party shall not be regarded as having accepted the arbitrators' jurisdiction to determine the issue referred to arbitration solely by having appointed an arbitrator. Pursuant to sections 10 and11, a party may lose the right in accordance with the first paragraph, sub-section 5 to rely upon a circumstance as set forth in section 8. An action must be brought within three months from the date upon which the party received the award or, where correction, supplementation, or interpretation has taken place pursuant to section 32, within a period of three months from the date when the party received the award in its final wording. Following the expiration of the time limit, a party may not invoke a new ground of objection in support of his claim. *** [6] Arbitration Act 1996, c. 23 (UK), Sections 67 through 71 Challenging the award: substantive jurisdiction 67. (1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court – (a) (b)

challenging any award of the arbitral tribunal as to its substantive jurisdiction; or for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction.

A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3). (2) The arbitral tribunal may continue the arbitral proceedings and make a further award while an application to the court under this section is pending in relation to an award as to jurisdiction. (3) On an application under this section challenging an award of the arbitral tribunal as to its substantive jurisdiction, the court may by order – (a) (b) (c)

confirm the award, vary the award, or set aside the award in whole or in part.

(4) The leave of the court is required for any appeal from a decision of the court under this section. Challenging the award: serious irregularity 68. (1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court challenging an award in the proceedings on the ground of serious irregularity affecting the tribunal, the proceedings or the award. A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).

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(2) Serious irregularity means an irregularity of one or more of the following kinds which the court considers has caused or will cause substantial injustice to the applicant – (a) (b) (c) (d) (e) (f) (g) (h) (i)

failure by the tribunal to comply with section 33 (general duty of tribunal); the tribunal exceeding its powers (otherwise than by exceeding its substantive jurisdiction: see section 67); failure by the tribunal to conduct the proceedings in accordance with the procedure agreed by the parties; failure by the tribunal to deal with all the issues that were put to it; any arbitral or other institution or person vested by the parties with powers in relation to the proceedings or the award exceeding its powers; uncertainty or ambiguity as to the effect of the award; the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy; failure to comply with the requirements as to the form of the award; or any irregularity in the conduct of the proceedings or in the award which is admitted by the tribunal or by any arbitral or other institution or person vested by the parties with powers in relation to the proceedings or the award.

(3) If there is shown to be serious irregularity affecting the tribunal, the proceedings or the award, the court may – (a) (b) (c)

remit the award to the tribunal, in whole or in part, for reconsideration, set the award aside in whole or in part, or declare the award to be of no effect, in whole or in part.

The court shall not exercise its power to set aside or to declare an award to be of no effect, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration. (4) The leave of the court is required for any appeal from a decision of the court under this section. Appeal on point of law 69. (1) Unless otherwise agreed by the parties, a party to arbitral proceedings may (upon notice to the other parties and to the tribunal) appeal to the court on a question of law arising out of an award made in the proceedings. An agreement to dispense with reasons for the tribunal's award shall be considered an agreement to exclude the court's jurisdiction under this section. (2) An appeal shall not be brought under this section except – (a) (b)

with the agreement of all the other parties to the proceedings, or with the leave of the court.

The right to appeal is also subject to the restrictions in section 70(2) and (3). (3) Leave to appeal shall be given only if the court is satisfied – (a) (b)

that the determination of the question will substantially affect the rights of one or more of the parties, that the question is one which the tribunal was asked to determine, (c) that, on the basis of the findings of fact in the award – (i) (ii)

(d)

the decision of the tribunal on the question is obviously wrong, or the question is one of general public importance and the decision of the tribunal is at least open to serious doubt, and that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the court to determine the question.

(4) An application for leave to appeal under this section shall identify the question of law to be determined and state the grounds on which it is alleged that leave to appeal should be granted. (5) The court shall determine an application for leave to appeal under this section without a hearing unless it appears to the court that a hearing is required. (6) The leave of the court is required for any appeal from a decision of the court under this section to grant or refuse leave to appeal. (7) On an appeal under this section the court may by order – (a) (b) (c) (d)

confirm the award, vary the award, remit the award to the tribunal, in whole or in part, for reconsideration in the light of the court's determination, or set aside the award in whole or in part.

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The court shall not exercise its power to set aside an award, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the tribunal for reconsideration. (8) The decision of the court on an appeal under this section shall be treated as a judgment of the court for the purposes of a further appeal. But no such appeal lies without the leave of the court which shall not be given unless the court considers that the question is one of general importance or is one which for some other special reason should be considered by the Court of Appeal. Challenge or appeal: supplementary provisions 70. (1) The following provisions apply to an application or appeal under section 67, 68 or 69. (2) An application or appeal may not be brought if the applicant or appellant has not first exhausted – (a) (b)

any available arbitral process of appeal or review, and any available recourse under section 57 (correction of award or additional award).

(3) Any application or appeal must be brought within 28 days of the date of the award or, if there has been any arbitral process of appeal or review, of the date when the applicant or appellant was notified of the result of that process. (4) If on an application or appeal it appears to the court that the award – (a) (b)

does not contain the tribunal's reasons, or does not set out the tribunal's reasons in sufficient detail to enable the court properly to consider the application or appeal,

the court may order the tribunal to state the reasons for its award in sufficient detail for that purpose. (5) Where the court makes an order under subsection (4), it may make such further order as it thinks fit with respect to any additional costs of the arbitration resulting from its order. (6) The court may order the applicant or appellant to provide security for the costs of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with. The power to order security for costs shall not be exercised on the ground that the applicant or appellant is – (a) (b)

an individual ordinarily resident outside the United Kingdom, or a corporation or association incorporated or formed under the law of a country outside the United Kingdom, or whose central management and control is exercised outside the United Kingdom.

(7) The court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with. (8) The court may grant leave to appeal subject to conditions to the same or similar effect as an order under subsection (6) or (7). This does not affect the general discretion of the court to grant leave subject to conditions. Challenge or appeal: effect of order of court 71. (1) The following provisions have effect where the court makes an order under section 67, 68 or 69 with respect to an award. (2) Where the award is varied, the variation has effect as part of the tribunal's award. (3) Where the award is remitted to the tribunal, in whole or in part, for reconsideration, the tribunal shall make a fresh award in respect of the matters remitted within three months of the date of the order for remission or such longer or shorter period as the court may direct. (4) Where the award is set aside or declared to be of no effect, in whole or in part, the court may also order that any provision that an award is a condition precedent to the bringing of legal proceedings in respect of a matter to which the arbitration agreement applies, is of no effect as regards the subject matter of the award or, as the case may be, the relevant part of the award. [7] Republic of Ecuador v. Occidental Exploration & Production Company, Judgment of the Court of Appeal (Civil Division) of England and Wales of 4 July 2007, [2007] E.W.C.A. Civ. 656 [Occidental Exploration and Production Company (“OEPC”), a US company, was engaged in the exploration and production of oil in Ecuador, under a 1999 contract between OEPC,

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Ecuador and Empresa Estatal Petroleos de Ecuador (“Petroecuador”), an Ecuadorian state-owned corporation. In 2000-2001 OEPC was regularly reimbursed VAT payments on purchases of goods and services (both made locally and imported) in connection with the production of oil. However, in mid-2001 the Ecuadorian authorities issued resolutions denying all further applications for VAT refunds by OEPC and requiring the return of the amounts previously reimbursed claiming that VAT reimbursement was already accounted for in the contract. In 2002, OEPC instituted arbitral proceedings against Ecuador under the Ecuador-US BIT claiming multiple violations of BIT provisions. The claim was heard by an arbitration tribunal operating under the UNCITRAL Rules, with its seat in London. The Tribunal rendered a Final Award on 1 July 2004 in which it held that it had jurisdiction and found that Ecuador had breached its obligation to accord OEPC treatment no less favourable than that accorded to nationals or other companies in Article II(1) of the BIT and its obligation concerning fair and equitable treatment in Article II(3)(a) of the BIT. Ecuador brought proceedings in the English courts challenging the Award under Sections 67 and 68 of the Arbitration Act 1996 (“the Act”), on the ground that the arbitrators had exceeded their jurisdiction, because the substance of the dispute concerned matters of taxation, which it alleged were excluded from the jurisdiction of an Article VI tribunal by the terms of Article X of the BIT. Ecuador also argued, under Section 68 of the Act, that there had been serious procedural irregularities in the conduct of the arbitration. The judge rejected both challenges and upheld the award. Ecuador appealed the rejection of its challenge to the jurisdiction of the arbitrators under Section 67 of the 1996 Act (as there no appeal is possible under Section 68).] Discussion 25. The correct approach to the construction of a provision of the BIT is not significantly in dispute. The BIT is governed by public international law and, as a treaty, its construction is governed by the rules on treaty interpretation which are set out in the Vienna Convention on the Law of Treaties 1969. It is agreed between the parties that these rules represent customary international law and that we must apply them. *** 28. We accept Mr Greenwood's submission that the object and purpose of a BIT (including this BIT) is to provide effective protection for investors of one state (here OEPC) in the territory of another state (here Ecuador) and that an important feature of that protection is the availability of recourse to international arbitration as a safeguard for the investor. In these circumstances it is permissible to resolve uncertainties in its interpretation in favour of the investor… … 29. It is common ground that the expression “observance and enforcement” should be construed disjunctively. (8) Ecuador suggests that because of the reference in Article X(2) (c) to “the observation and enforcement of terms” of the Contract (our emphasis) the exclusion only applies where OEPC would have a claim for damages for breach of a term of the contract. However, in our judgment, that is to construe Article X(2)(c) too narrowly. Some assistance is to be gleaned in this regard from the Spanish text, which uses the term “observancia y el complimiento” for “observance and enforcement”. As Mr Greenwood submits, “complimiento” would more naturally translate into English as “performance” or “fulfilment”.… … 30. We do not think that the reference to “terms” should be given too narrow a meaning. It does not mean express or implied terms in the sense those expressions are used in common law jurisdictions. We accept Mr Greenwood's submission that the question is whether OEPC's claim for reimbursement of VAT entails a departure from its bargain as set out in the Contract. This was what the judge essentially held at [100] and [101]. We agree with his conclusion at the end of [101], where he said: “In short, I think that, on its proper interpretation the phrase “terms of the investment agreement” means “the contractual bargain embracing all the parties' obligations pursuant to the investment agreement”. 31. Earlier at [98] and [99] the judge had considered what was meant by “with respect to” in the expression “with respect to… the observance and enforcement of terms of an investment agreement”. He held that it was an expression which was broad in effect and that it simply meant that there must be a link between the matters of taxation and the observance and enforcement of the terms of the Contract. Here there was such a link because Ecuador, through the SRI, claimed reimbursement or payment of the VAT on the basis that such reimbursement was contemplated by the contract because the contract price included VAT through Factor X. Unfortunately for Ecuador, the arbitrators held that Factor X did not include VAT but that the contract was made on the footing that any VAT paid would be refunded to OEPC. 32. The judge spelled that out in detail at [103] to [108]. We agree with the judge's conclusions in those paragraphs. It is sufficient for us to quote only [107] and [108] with which we agree:

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“107. The dispute between Ecuador and OEPC that was before the Tribunal was whether, in the circumstances, Ecuador's decision that OEPC was not entitled to have a refund of VAT was a breach of Ecuador's obligations under Articles II and III of the BIT. That dispute involved a matter of taxation, ie the VAT payments. But in my view, the dispute also involved a matter of taxation that “had reference to” the “performance” of the “obligations of the Contract”. 108. I have reached this conclusion for three particular reasons. First, the matter of the right to a VAT refund or not had reference to the obligations of OEPC to do all that was necessary to exploit the oil in Block 15, including the obligation to build all systems needed for that exploitation, because the VAT was paid in respect of purchases made in pursuance of that obligation of OEPC. Secondly, the question of a VAT refund had reference to the performance of OEPC's contractual obligation to pay all taxes according to Ecuador's laws. The dispute was whether that contractual obligation was concluded on the assumption or understanding that there would be a refund of VAT paid. Thirdly, the VAT refund question had reference to the underlying assumptions of the parties as to the “economy” of the Contract which formed the basis of the bargain contained in the Contract's terms: was the assumption that VAT would be repaid or not? The underlying assumptions of the parties as to the “economy” of the contract [were] fundamental to how the Contract terms were to be observed and enforced.” *** 36. In all the circumstances, like the judge, we conclude that OEPC's claim falls within the exception to “matters of taxation” in Article X(2)(c). We answer the first question accordingly and turn to the second question, which has been called the gateway question. 37. The question is whether, assuming that the judge was correct to hold that OEPC's claim falls within the exception to “matters of taxation” in Article X(2)(c), all the rules set out in the BIT, including those in Articles II and III, applied to it. The judge held that it did. He accepted Mr Greenwood's submission that, once it was held that the claim did not involve an excluded matter of taxation, the gateway to the other relevant provisions of the BIT was opened. As we understand it, his reasons, which are to be found at [96] and [97] of his judgment can be summarised in this way: i)

ii) iii)

iv)

The opening words of Article X(2) show that Articles VI and VII of the BIT apply to the matters of taxation which are not excluded because they provide that “the provisions of this Treaty, and in particular Articles VI and VII, shall apply to matters of taxation only with respect to” those matters which are included in paragraphs (a), (b) or (c). Article VI contains the dispute resolution provisions as between the investor (OEPC) and the state (Ecuador), which include arbitration in accordance with UNCITRAL Rules. Article X(2) does not limit the provisions of the BIT to disputes between the state and the investor which are expressly applied or (put another way) not expressly excluded by Article X. On the contrary, it simply provides that “the provisions of this Treaty” apply. As the judge expressed it at [96], “those words are clear and so must be given their ordinary meaning”. This interpretation accords with the object and purpose of the BIT. The treaty sets out how the contracting parties will treat investors and their investments. The judge concluded: “Article X(2) accepts that, within a limited and defined scope. “matters of taxation” will affect both investors and investments and so need to be within the BIT provisions. Therefore it is logical that, to the extent of the scope defined in Article X(2), the Contracting Parties should agree that all the rules set out in the BIT, including those in Articles II and III, should apply to such “matters of taxation” as are covered by Article X(2)(a), (b) and (c).”

v)

In these circumstances the judge held at [97] that it was unnecessary to rewrite the opening words of Article X(2) and that, once a claim comes within (say) Article X(2) (c), that means that “the provisions of this Treaty, and in particle Articles VI and VII, shall apply”. Those provisions include Articles II and III.

38. We agree with the judge for the reasons he gave. Mr Cran submits that not all the provisions of the BIT will be relevant in this context and there are good reasons why the parties would not have wished to include Articles II and III. We agree that there are some provisions which would not be capable of applying but that is not true of Articles II and III. The parties could have agreed to exclude Articles II and III from the scope of Article X. They did not do so. Indeed, they expressly included a reference to Article III in paragraph (a). They chose which matters of taxation were to be excluded and which were not. In our judgment, once it is held that they did not exclude the matters of taxation relevant in this situation, there is no reason in principle not to apply Articles II and III to them as

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well as Articles VI and VII. Of course, whether, for example, Article II would apply on the facts of any particular case will depend upon the circumstances of that case. Here it has been held to apply. As we see it, the answer to this second question follows from the answer given to the first question. Conclusions 39. It follows that, in our opinion, the judge answered both questions correctly and that he was right to dismiss Ecuador's challenge to the jurisdiction of the arbitrators under section 67 of the 1996 Act. In essence, we see no reason why the parties should not have agreed that Article II of the BIT was applicable to the facts of this case. The rights and obligations in Article II (and indeed III) of the BIT are expressed in different terms from the way in which the rights and obligations of the parties to the Contract are expressed in the Contract. They are nevertheless binding on Ecuador and OEPC under the BIT. The arbitrators were entitled, as they did in the passage quoted by the judge at [34] and set out at [17] above, to hold that … …”… (1) the VAT refund was not within Factor X as calculated in accordance with the Participation Contract. (2) Accordingly, Occidental was entitled to have the VAT refunded under both Ecuadorian law and also Andean Community Law. (3) Because the VAT refunds had not been made, Ecuador was in breach of its obligation (under Article II.1 of the BIT) to accord Occidental a treatment no less favourable than that accorded to nationals or other companies. (4) Ecuador had also breached its obligations concerning fair and equitable treatment as required by Article II.3(a) of the BIT.… … …” 40. For the reasons we have given, which are essentially those given by the judge, we conclude that the arbitrators had jurisdiction to determine whether Ecuador was in breach of the terms of the BIT. We therefore dismiss the appeal.

[C] Interpretation and Supplementary Decisions of Awards under the ICSID Additional Facility [1] Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat of the International Centre for Settlement of Investment Disputes [Additional Facility Rules] (2006), (9) Articles 55, 56 and 57 Schedule C– Arbitration (Additional Facility) Rules Chapter IX – The Award *** Article 55 – Interpretation of the Award (1) Within 45 days after the date of the award either party, with notice to the other party, may request that the Secretary-General obtain from the Tribunal an interpretation of the award. (2) The Tribunal shall determine the procedure to be followed. (3) The interpretation shall form part of the award, and the provisions of Articles 53 and 54 of these Rules shall apply. Article 56 – Correction of the Award (1) Within 45 days after the date of the award either party, with notice to the other party, may request the Secretary-General to obtain from the Tribunal a correction in the award of any clerical, arithmetical or similar errors. The Tribunal may within the same period make such corrections on its own initiative. (2) The provisions of Articles 53 and 54 of these Rules shall apply to such corrections. Article 57 – Supplementary Decisions (1) Within 45 days after the date of the award either party, with notice to the other party may request the Tribunal, through the Secretary-General, to decide any question which it had omitted to decide in the award. (2) The Tribunal shall determine the procedure to be followed. (3) The decision of the Tribunal shall become part of the award and the provisions of Articles 53 and 54 of these Rules shall apply thereto. [2] United Mexican States v. Metalclad Corporation, Judgment of the Supreme Court of British Columbia of 2 May 2001, 119 I.L.R. 646, 659-661, 664-666, 668-681 (2002) [A Mexican company, Confinamiento Tecnico de Residous Industriales, SA de CV (“Coterin), commenced operating a hazardous waste transfer station in 1990 under an authority granted by the Government of Mexico (“Mexico”). The site was ordered to be closed by Mexico from September 1991 to February 1996 when waste was deposited at the site without treatment or transfer. In 1991, Coterin applied to the local Municipality for a

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municipal permit to allow for the construction of a hazardous waste landfill at the site. The application was refused. Coterin was later granted environmental impact authorisations by an agency of Mexico's federal Secretariat of the Environment and a land use permit by the State of San Luis Potosi. In April 1993, Metalclad Corporation, an American company established under the laws of Delaware, entered into an option agreement to purchase Coterin. The option agreement provided that the payment of the purchase price was subject to two conditions: the municipality issuing a municipal permit to Coterin for the construction of the landfill, or, a definitive judgment of the Mexican courts that a municipal permit was not required. Metaclad completed the purchase of Coterin without either condition being satisfied and commenced construction of the landfill without a municipal permit. Although the company remained by the name of Coterin, after 1993, the operation mind and decision maker of Coterin was Metalclad. In 1994, the Municipality issued a stop work order due to the absence of a municipal permit. An application was made for a construction permit and denied. Construction of the landfill facility continued until its completion in March 1995. Before the landfill commenced operations, Metalclad entered into negotiations with agencies of the federal Secretariat of the Environment regarding the operation of the landfill facility. An agreement was made between Metalclad and two sub-agencies of the federal Secretariat of the Environment (“Convenio”) in which Metalclad was permitted to operate the landfill for five years and must remediate the previous contamination during the first three years of this period. A further permit was issued to Coterin by the Secretariat of the Environment. Shortly after, Coterin's application for a construction permit was formally denied by the Municipality. The Municipality proceeded to commence court proceedings against Coterin challenging the Convenio. The Municipality was granted an injunction against Coterin, however the proceedings were ultimately dismissed on the basis that a municipal body could not challenge the decision of another level of government. After further negotiations and proceedings, Metalclad submitted a notice to Mexico of its intention to submit the dispute to arbitration under Article 1119 of the North American Free Trade Agreement (“NAFTA”). It was agreed by the parties that the place of arbitration would be Vancouver B.C. An Award was rendered by the tribunal on 30 August 2000. Damages of US $16,685,000 against Mexico were granted in favour of Metaclad. Mexico commenced proceedings in the Supreme Court of British Columbia seeking to have the Award set aside.] Standard of Review [50] The extent to which this Court may interfere with an international commercial arbitral award is limited by the provisions of International CAA. Section 5 of the Act reads as follows: In matters governed by this Act, (a) (b)

a court must not intervene unless so provided in this Act, and an arbitral proceeding of an arbitral tribunal or an order, ruling or arbitral award made by an arbitral tribunal must not be questioned, reviewed or restrained by a proceeding under the Judicial Review Procedure Act or otherwise except to the extent provided in this Act.

Subsection 34(1) of the Act states that recourse to a court against an arbitral award may only be made in accordance with subsections (2) and (3). Subsection (3) contains a limitation period which is not relevant to this matter. The pertinent portions of subsection (2) read as follows: An arbitral award may be set aside by the Supreme Court only if (a) *

the party making the application furnishes proof that **

(b)

(iv) the arbitral award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration… …, or (v) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties… …, or the court finds that

*** (ii) the arbitral award is in conflict with the public policy in British Columbia. [51] The leading British Columbia authority on s. 34 is Quintette Coal Limited v. Nippon Steel Corporation, [1991] 1 W.W.R. 219 (B.C.C.A.), a decision which has been followed by several other courts in Canada. In that case, the B.C. Court of Appeal refused to interfere with an arbitration award setting prices to be paid for the supply of coal. After referring to numerous authorities, Gibbs J.A., on behalf of the majority of the Court, commented on the standard of review in the following terms: It is important to parties to future such arbitrations and to the integrity of the process itself that the court express its views on the degree of deference to be

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accorded the decision of the arbitrators. The reasons advanced in the cases discussed above for restraint in the exercise of judicial review are highly persuasive. The “concerns of international comity, respect for the capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for predictability in the resolution of disputes” spoken of by Blackmun J. [inMitsubishi Motors Corp. v. Soler ChryslerPlymouth Inc., 473 U.S. 614 (1985)] are as compelling in this jurisdiction as they are in the United States or elsewhere. It is meet therefore, as a matter of policy, to adopt a standard which seeks to preserve the autonomy of the forum selected by the parties and to minimize judicial intervention when reviewing international commercial arbitral awards in British Columbia. (p. 229) Gibbs J.A. also stated that unless the arbitral award contained decisions beyond the scope of the submission to arbitration, the court has no jurisdiction to set the award aside under s. 34(2)(a) (iv) even if it could be shown that the arbitration tribunal had erred in interpreting the contract. [52] In concluding that the arbitrators in that case did not decide on matters beyond the scope of the submission to arbitration, Gibbs J.A. said the following: They were called upon to construe cls. 7 and 9 of the contract within their context and they did so. Even applying the domestic test (Shalansky v. Regina Pasqua Hosp. Bd. of Gov.(1983), 83 C.L.L.C.14,026, 145 D.L.R. (3d) 413, 22 Sask. R. 153, 47 N.R. 76 (S.C.C.)), their interpretation is one which the words of the contract can reasonably bear. (pp. 229-30) Counsel for Mexico submits that in making reference to the domestic test, Gibbs J.A. left open the question of review under s. 34(2)(a)(iv) on the basis of the domestic standard for patently unreasonable error. I do not agree. What Gibbs J.A. meant was that even if the domestic test applied (which it did not), it was still not shown that the award should be set aside because the arbitrators' interpretation of the contract was not unreasonable. [53] Counsel for Mexico and counsel for the Intervenor, Attorney General of Canada urge this Court to utilize the “pragmatic and functional approach” to determine the appropriate standard of review under the CAA and the International CAA. This approach has been developed by the Supreme Court to Canada to apply to the review of decisions of domestic administrative tribunals in place of the previous approach which involved a somewhat artificially applied test of jurisdictional error. The new approach began with the decision in U.E.S., Local 298 v. Bibeault, [1988] 2 S.C.R. 1048 and has been developed by the Supreme Court of Canada in a number of cases over the past dozen years. [54] I need not decide whether it is appropriate to use the “pragmatic and functional approach” to determine the standard of review under the CAA. With respect to the International CAA, it is my view that the standard of review is set out in ss. 5 and 34 of that Act and that it would be an error for me to import into that Act an approach which has been developed as a branch of statutory interpretation in respect of domestic tribunals created by statute. It may be that some of the principles discussed by the Supreme Court of Canada in this line of authorities will be of assistance in applying ss. 5 and 34 but the “pragmatic and functional approach” cannot be used to create a standard of review not provided for in the International CAA. I note that since the “pragmatic and functional approach” was fully articulated by the Supreme Court of Canada in Pushpanathan v. Canada, [1998] 1 S.C.R. 982, the approach has not been utilized in Canadian cases involving international commercial arbitrations (e.g., Corporacion Transnacional de Inversiones, S.A. de C.V. v. STET International, S.p.A. (1999), 45 O.R. (3d) 183 (Ont. S.C.J.); affirmed (2000), 49 O.R. (3d) 414 and D.L.T Holdings Inc. v. Grow Biz International, Inc. (2000), 194 Nfld. & P.E.I.R. 206 (P.E.I.S.C.T.D.)). [55] During the course of their submissions, counsel made reference in general terms to the issue of whether the Tribunal exceeded its jurisdiction. The concept of “excess of jurisdiction” is the standard which was previously applied to decisions of administrative tribunals and arbitral bodies. The International CAA does not utilize the term “excess of jurisdiction” or the like but, instead, sets out with particularity the grounds on which the court may set aside an arbitral award. Rather than making reference to terms like “excess of jurisdiction” and “jurisdictional errors”, I prefer to utilize the wording contained in theInternational CAA (although I will use such terms when reciting submissions of counsel). [56] As the scope of the submission to arbitration is critical to a consideration of s. 34(2) (a) (iv), it is appropriate to set out the question put to the Tribunal. Article 1122 of the NAFTA provides that each Party (in this case, Mexico) consents to the submission of a claim to arbitration under the NAFTA. The question which Metalclad posed was whether Mexico had breached its obligations under Chapter 11 of the NAFTA “guaranteeing national treatment; most favoured nation treatment; minimum treatment in accord with international law, fair and equitable treatment, and full protection and security, prohibiting performance requirements; and, depriving [Metalclad] of its investment through [Mexico's] actions that directly and indirectly resulted in, and were tantamount

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to, expropriation of that investment without due process and full compensation”. Metalclad relied on the events which had occurred up to the time of the commencement of the arbitration proceeding and, as noted above, it also relied on the Ecological Decree which was announced after the arbitration process had been initiated by Metalclad. Article 1105 – Minimum Standard *** [66] Counsel for Mexico maintains that the Tribunal committed two acts in excess of jurisdiction in connection with Article 1105. First, counsel says that the Tribunal used the NAFTA's transparency provisions as a basis for finding a breach of Article 1105. Second, counsel maintains that the Tribunal went beyond the transparency provisions contained in the NAFTA and created new transparency obligations. Further, counsel submits that these excesses of jurisdiction were compounded by the Tribunal improperly making decisions of Mexican domestic law and mistakenly interpreting Mexico to concede during the arbitration that Metalclad was not required to exhaust its local remedies before commencing the NAFTA arbitration. Counsel for Metalclad responds that the Tribunal did not exceed its jurisdiction and that it simply interpreted Article 1105 to include a minimum standard of transparency. [67] In the framework of the International CAA, the issue is whether the Tribunal made decisions on matters beyond the scope of the submission to arbitration by deciding upon matters outside Chapter 11. In my opinion, the Tribunal did make decisions on matters beyond the scope of Chapter 11. *** [70] In the present case, however, the Tribunal did not simply interpret the wording of Article 1105. Rather, it misstated the applicable law to include transparency obligations and it then made its decision on the basis of the concept of transparency. [71] In addition to specifically quoting from Article 1802 in the section of the Award outlining the applicable law, the Tribunal incorrectly stated that transparency was one of the objectives of the NAFTA. In that regard, the Tribunal was referring to Article 102(1), which sets out the objectives of the NAFTA in clauses (a) through (f). Transparency is mentioned in Article 102(1) but it is listed as one of the principles and rules contained in the NAFTA through which the objectives are elaborated. The other two principles and rules mentioned in Article 102, national treatment and mostfavored nation treatment, are contained in Chapter 11. The principle of transparency is implemented through the provisions of Chapter 18, not Chapter 11. Article 102(2) provides that the NAFTA is to be interpreted and applied in light of the objectives set out in Article 102(1), but it does not require that all of the provisions of the NAFTA are to be interpreted in light of the principles and rules mentioned in Article 102(1). [72] In its reasoning, the Tribunal discussed the concept of transparency after quoting Article 1105 and making reference to Article 102. It set out its understanding of transparency and it then reviewed the relevant facts. After discussing the facts and concluding that the Municipality's denial of the construction permit was improper, the Tribunal stated its conclusion which formed the basis of its finding of a breach of Article 1105; namely, Mexico had failed to ensure a transparent and predictable framework for Metalclad's business planning and investment. Hence, the Tribunal made its decision on the basis of transparency. This was a matter beyond the scope of the submission to arbitration because there are no transparency obligations contained in Chapter 11. [73] The Tribunal went on to state that the acts of the State of SLIP and the Municipality, for which Mexico was responsible, also failed to comply with the requirements of Article 1105 but it did not state any reasons for this conclusion. Based on the preceding discussion, the Tribunal must have been referring to the acts of the State of SLP and the Municipality which contributed to the perceived failure to provide a transparent and predictable framework for Metalclad's business planning and investment. *** [76] As I have concluded that the Tribunal decided a matter beyond the scope of the submission to arbitration in connection with its finding that there was a failure of transparency, it is not necessary to decide whether the Tribunal went beyond the scope of the submission to arbitration by creating obligations beyond the NAFTA's transparency provisions.… … *** [85] In view of my conclusion that the Tribunal did find that the Ecological Decree amounted to an expropriation of the Site, it is necessary to decide the following issues; (a) (b)

was the Tribunal correct in its conclusion that it could consider the Ecological Decree? did the Tribunal decide a matter beyond the scope of the submission to arbitration when it concluded that the announcement of the Ecological Decree constituted an act tantamount to expropriation?

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(c)

if a patently unreasonable error is a basis under the International CAA for setting aside an arbitral award, was it patently unreasonable for the Tribunal to conclude that the announcement of the Ecological Decree constituted an act tantamount to expropriation?

(a) Consideration of the Ecological Decree [86] This issue can lead to a setting aside of the Award under s. 34(2)(a)(v) of the International CAA if the arbitral procedure was not in accordance with the agreement of the parties. [87] In considering the Ecological Decree, the Tribunal relied on Article 48 of the ICSID Additional Facility Rules, which are the arbitration rules selected by Metalclad pursuant to Article 1120 of the NAFTA. Article 48 reads as follows: (1) (2)

Except as the parties otherwise agree, a party may present an incidental or additional claim or counter-claim, provided that such ancillary claim is within the scope of the arbitration agreement of the parties. An incidental or additional claim shall be presented not later than in the reply and a counter-claim no later than in the counter-memorial, unless the Tribunal, upon justification by the party presenting the ancillary claim and upon considering any objection of the other party, authorizes the presentation of the claim at a later stage in the proceeding.

[88] Counsel for Mexico submits that the claim based on the Ecological Decree was a separate claim and does not qualify as an ancillary claim. Although the term “ancillary claim” is used in both paragraphs of Article 48, the operative language is the phrase “incidental or additional claim”. The use of the term “ancillary claim” was a shorthand method to refer back to the earlier-used phrase “incidental or additional claim”. In my view, Metalclad's claim based on the Ecological Decree was an additional claim which, as required by Article 48, fell within the scope of the agreement to arbitrate (as contained in Section B of Chapter 11 of the NAFTA). [89] Article 48 allows for additional claims if they are presented not later than in the reply. Metalclad complied with this requirement because it asserted the claim based on the Ecological Decree in its memorial, which was the first written submission in the arbitration. The Tribunal was of the view that Mexico had ample notice and opportunity to address issues relating to the Decree. There is no requirement in Article 48 that the event giving rise to an additional claim must have occurred prior to the initiation of the arbitration process. *** [91] I conclude that no error has been demonstrated in the arbitral procedure as a result of the Tribunal considering the claim based on the Ecological Decree. (b) Beyond the Scope of the Submission *** [93] I have held that the Tribunal did decide a matter beyond the scope of the submission to arbitration when it concluded that the acts preceding the announcement of the Ecological Decree amounted to an expropriation within the meaning of Article 1110 because it based its conclusion, at least in part, on a lack of transparency. The issue now is whether the conclusion that the announcement of the Ecological Decree amounted to an expropriation similarly involved a decision on a matter beyond the scope of the submission to arbitration. [94] In my opinion, the Tribunal's conclusion with respect to the Ecological Decree stands on its own and is not based on a lack of transparency or on the Tribunal's finding of a breach of Article 1105. The Tribunal considered the Decree in isolation of its other findings of breaches of the NAFTA. It specifically identified the issuance of the Decree as a further ground for a finding of expropriation. *** (c) Patently Unreasonable Error *** [97] As I similarly do not believe in this case that the Tribunal made a patently unreasonable error with respect to the Ecological Decree, I need not decide whether a patently unreasonable decision is a ground for setting aside an arbitral award pursuant to the International CAA.… … [98] Counsel for Mexico identifies 19 areas in respect of which it is asserted that the Tribunal failed to have regard to relevant evidence and thereby made patently unreasonable findings. Only one of these areas relates to the Ecological Decree.… … [99] The Tribunal gave an extremely broad definition of expropriation for the purposes of Article 1110. In addition to the more conventional notion of expropriation involving a taking of property, the Tribunal held that expropriation under the NAFTA includes covert

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or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property. This definition is sufficiently broad to include a legitimate rezoning of property by a municipality or other zoning authority. However, the definition of expropriation is a question of law with which this Court is not entitled to interfere under the International CAA. [100] The Tribunal reviewed the terms of the Ecological Decree and concluded that it had the effect of barring forever the operation of Metalclad's landfill and constituted an act tantamount to expropriation. It made reference to the Ninth Article of the Decree, which requires that all activities in the area are subject to guidelines established by the management plan for ensuring ecological preservation of the cacti reserve. The Tribunal also made reference to the Fourteenth Article of the Decree, which forbids the spillage or discharge of polluting agents on the soil, subsoil or water of the reserve area. In my view, the Tribunal's conclusion that the issuance of the Decree was an act tantamount to expropriation is not patently unreasonable. *** (d) Conclusion [105] There is no ground under s. 34 of the International CAA to set aside the Award as it relates to the conclusion of the Tribunal that the issuance of the Ecological Decree amounted to an expropriation of the Site without compensation. Metalclad’s Improper Acts [106] Counsel for Mexico submits that there were two categories of improper acts on the part of Metalclad which were not explicitly addressed by the Tribunal. Counsel says that these improper acts render the Award in conflict with the public policy in British Columbia and that the Award should be set aside pursuant to s. 34(2)(b)(ii) of the International CAA. *** [109] Both of these matters were canvassed extensively during the arbitration. The Tribunal did not deal directly with the allegations involving Mr. Rodarte but it effectively held that Metalclad had proceeded in good faith when it relied upon representations of federal officials and constructed the landfill facility.… … (a) Corruption [110] I have reviewed the evidence from the arbitration relating to the alleged corruption of Mr. Rodarte, including the alleged bribes to his wife, and I am not persuaded that Mexico proved any corruption in which Metalclad participated. The Tribunal presumably carne to the same conclusion because it found that federal officials had made the representations asserted by Metalclad and that Metalclad relied on the representations. *** (b) Excess Damage Claim *** … In the present case, the excessive claim was not accepted by the Tribunal and it is my view that the Award is not in conflict with the public policy in British Columbia. *** [117] In addition, I am not satisfied that the overstatement of the expenses was a deliberate attempt to deceive the Tribunal. The total amount of Metalclad's expenses for its unsuccessful projects in Mexico was $20.5 million and it is debatable from an accounting point of view whether the capital costs of various related projects may be allocated to one of the projects. There was an arguable basis for claiming the full $20.5 million expended by Metalclad in Mexico. On my review of the relevant evidence, I am not persuaded that Metalclad claimed expenses which it knew it had no legal justification to receive. While Metalclad was aggressive in its claim for damages, I am not satisfied that it was fraudulent. (c) Conclusion [118] It has not been established that there were any improper acts on behalf of Metalclad which put the Award in conflict with the public policy in British Columbia. Failure to Address All Questions [119] The final basis on which Mexico seeks to set aside the Award (other than errors in the interpretation of Articles 1105 and 1110 which are questions of law that are not reviewable under the International CAA) is that the Tribunal failed to answer all questions raised by it which could have affected the result.… [120] Counsel for Mexico relies for this ground on three decisions of ad hoc annulment committees reviewing arbitral awards made pursuant to the ICSID Convention, Klockner v.

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Cameroon (3 May 1985), 2 ICSID Reports 95, Amco v. Indonesia (16 May 1986), 1 ICSID Reports 508, and MINE v. Guinea (22 December 1989) 4 ICSID Reports 79. These decisions are said to stand for the proposition that an arbitral award should be set aside if it does not address all arguments made by the parties which would have changed the outcome of the award if the arguments had been accepted. Article 53(1) of the ICSID Additional Facility Rules reads as follows: The award shall be made in writing, shall deal with every question submitted to the Tribunal and shall state the reasons upon which it is based. Counsel points out that Article 53(9) is equivalent to the relevant Article in the ICSID Convention (Article 48) and submits that, as a result, these decisions are applicable to this case. [121] To the extent that these three decisions of the annulment committees have interpreted the phrase “every question submitted to the Tribunal” to mean “every argument made to the Tribunal which could have changed the outcome of the award, it is my opinion that the interpretation is overly broad.… [122] The tribunal must answer the questions that have been submitted to it and give its reasons for its answers. In other words, the tribunal must deal fully with the dispute between the parties and give reasons for its decision. It is not reasonable to require the tribunal to answer each and every argument which is made in connection with the questions which the tribunal must decide. In the present case, the questions submitted to the Tribunal were essentially whether Article 1105 or Article 1110 had been breached and, if so, what measure of damages would compensate Metalclad for the breach or breaches. The Tribunal answered these questions and gave reasons for its answers in the Award. In answering the questions, the Tribunal explicitly or implicitly dealt with each argument that had been made. *** [125] Although Article 53(1) of the Additional Facility Rules is essentially identical to the corresponding Article of the ICSID Convention (Article 48(3)), there is a significant difference between the two sets of rules. The normal method of challenging an award arising from an arbitration which is not governed by the ICSID Convention is through the national courts and the grounds for setting aside the award are typically set out in legislation (in the present case, the International CAA). By contrast, the ISCID Convention contains a mechanism for review of arbitral awards by ad hoc annulment committees. The grounds for annulling awards are set out in Article 52(1) of the ISCID Convention, two of which are as follows: (d) (e)

that there has been a serious departure from a fundamental rule of procedure; or that the award has failed to state the reasons on which it is based. The annulment committee in K1ockner stated that reference must be made to both of clauses (d) and (e) of Article 52(1) when addressing a failure to deal with questions submitted to the tribunal. In MINE, the annulment committee pointed out that while clause (e) of Article 52(1) only deals with the requirement of Article 48(3) to state reasons, a failure to deal with every question submitted to the tribunal may also constitute a failure to state reasons.

[126] Hence, there is a specific provision in the ICSID Convention for j annulling an arbitral award when a failure to deal with every question submitted to the tribunal constitutes a failure to state reasons. On the other hand, the only potential basis for setting aside an arbitral award under the International CAA for failure to deal with all questions is s. 34(2) (a)(v) (“the arbitral procedure was not in accordance with the agreement of the parties”). *** [130]… In my view, the Tribunal adequately dealt with the principal issues before it and the failure of the Tribunal to explicitly deal with all of Mexico's arguments is not sufficiently serious to justify the exercise of this Court's discretion to set aside the Award. *** Conclusion [133] In order to have this Court set aside the Award in its entirety, Mexico was required to successfully establish that all three of the Tribunal's findings of breaches of Articles 1105 and 1110 of the NAFTA involved decisions beyond the scope of the submission to arbitration or that the Award should be set aside in view of Metalclad's allegedly improper acts or the Tribunal's alleged failure to answer all questions submitted to it. Although Mexico succeeded in challenging the first two of the Tribunal's findings of breaches of Articles 1105 and 1110, it was not successful on the remaining points. Accordingly, the Award should not be set aside in its entirety. [134] Nevertheless, the Award should be partially set aside.… [135] The result is that the amount of compensation ordered to be paid by Mexico to Metalclad includes interest from December 5, 1995 to September 20, 1997 (plus the compounding effects thereafter. As I would have set aside the Award in its entirety if it

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had been based solely on the first two of the Tribunal's findings of breaches of the NAFTA, the Award should be set aside insofar as it includes interest which flows only from those two findings. Therefore, I set the Award aside to the extent that it includes interest prior to September 20, 1997 (and any consequential compounding effects). If the parties are unable to agree on the interest recalculation, the matter is remitted back to the Tribunal. *** [Note also the Supplementary Reasons for Judgment of Tysoe J in the Supreme Court of British Columbia of 31 October 2001 (United Mexican States v. Metalclad Corporation, 2001 BCSC 1529), arising out of a dispute in relation to interest.] *** [3] Raymond L. Loewen v. United States of America, Judgment of the District Court of the District of Columbia of 31 October 2005, 10 ICSID Rep. 448, 450-452 (2006) [The Loewen Group Inc. (“TLGI”), a Canadian corporation, and Mr Raymond Loewen, a Canadian citizen and the principal shareholder in and chief executive of TLGI (together referred to as “Loewen”), filed claims under the ICSID Additional Facility Rules against the US alleging violations of NAFTA Chapter 11. The request for arbitration arose out of a dispute between Loewen and O'Keefe, a Mississippi competitor of Loewen in the funeral home business. The dispute was tried by judge and jury in a Mississippi State court. The jury awarded O'Keefe US $500 million, of which US $400 million was described as punitive damages. Loewen sought to appeal to the Supreme Court of Mississippi but had to provide a bond in the sum of 125 per cent of the amount of damages awarded to be permitted a stay of execution pending appeal. The Mississippi Supreme Court declined to waive this requirement. Loewen therefore decided to settle out of court with O'Keefe rather than face execution of the damages judgment against its properties in the US. TLGI subsequently went into bankruptcy. Loewen claimed several violations of NAFTA such as discrimination and expropriation and asserted that the Mississippi courts had effectively made it impossible for Loewen to appeal and compelled it to enter into the settlement. By its Award of 26 June 2003, the Tribunal dismissed the claims of Loewen in their entirety on jurisdictional grounds. On 11 August 2003, the US filed a Request for a Supplementary Decision under Article 58(1) of the ICSID (Additional Facility) Rules, which was subsequently denied. Shortly afterwards, on 13 December 2004, Mr Raymond Loewen petitioned the US District Court for the District of Columbia to vacate and remand the Tribunal's Award of 26 June 2003, arguing that the Tribunal had failed to take relevant evidence into account and that the judgment could thus be vacated under the Federal Arbitration Act (“FAA”). The US argued that Loewen's petition should be denied because he had failed to fulfil the procedural requirement of serving notice of the motion within three months of the filing or deliverance of the Award.] Discussion The FAA requires a petitioner to serve “[n]otice of a motion to vacate… within three months after the award is filed or delivered”. 9 USC § 12. “There is no statutory exception to this time limitation.”Thyssen Carbometal Co. v. FAI Energy, Ltd, Civil Action No 89–1695 (JHG), 1990 US Dist. Lexis 427, *6 (Jan. 16, 1990 DDC). There is also no common law exception to this time limitation. SeeFlorasynth, Inc. v. Pickholz, 750 F.2d 171, 175 (2d Cir. 1984). Failure to move to vacate the award within the three-month time period provided by the statute precludes a party from later seeking that relief. See id. Petitioner served his notice of motion to vacate the award on December 13, 2004, some eighteen months after the tribunal delivered its award on June 26, 2003. Petitioner does not dispute that 9 USC § 12 requires him to act within three months of the date of a final award. Instead, he argues that the June 26, 2003 award was not complete, i.e., not final for purposes of moving to vacate it, until the tribunal responded to the respondent's request for a supplementary decision. (See Pet.’s Reply at 5–7.) Petitioner asserts that “the US request… precluded Mr Loewen from seeking to vacate the Award at that time”. (Pet.’s Mot. at 9 (emphasis added)). Petitioner's position is inconsistent with the plain language of the ICSID Rules, the FAA, and case law in this district and elsewhere. The relevant ICSID Rule provides that an award “shall contain… the decision of the Tribunal on every question submitted to it, together with the reasons upon which the decision is based”, and “[t]he award shall be final and binding on the parties”. See ICSID AF Rules (appended as Ex. 2 to Pet.’s Reply), Art. 52. The ICSID AF Rule on supplementary decisions permits a party, within certain time limits, to “request the Tribunal… to decide any question which it had omitted to decide in the award”, and provides that any supplementary decision of the tribunal “shall become part of the award”. See ICSID AF Rules, Art. 57 (previously Art. 58). Thus, the ICSID AF Rules contemplate the possibility that a submitted question is not answered by an award and provide a corrective procedure. If there is a supplementary decision – which is not the case here – that decision supplements the award, that is, “become[s] part of the award”. Id. The Rules do not expressly provide, as they could have, that an award is final and binding unless a party seeks a supplementary decision. The ICSID AF Rules, whether viewed individually or as a whole, neither state nor imply that an already-filed award is

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rendered not final by virtue of the fact that a party makes a request for a supplementary decision. Rather, the plain language of the Rules states that an award is final and binding on the parties when it issues. See ICSID AF Rules, Art. 42. Case law on the finality of awards is consonant with this interpretation of the ICSID Rules. “Normally, an arbitral award is deemed ‘final’ provided it evidences the arbitrators' intention to resolve all claims submitted in the demand for arbitration… …”. Fradella v. Petricca, 183 F.3d 17, 19 (1st Cir. 1999); accord Am. Fed’n of Gov’t Employees AFL-CIO Local 3090 v. Fed. Labor Relations Auth., 777 F2d 751, 755 (DC Cir. 1985) (noting that private sector labor arbitral awards are deemed final “if they purport to resolve all aspects of the dispute being arbitrated”). Here, there can be no doubt that the arbitrators intended the award to dispose of all claims. The award stated without qualification that “TLGI's claims and Raymond L. Loewen's are dismissed in their entirety.” Award at 70. Petitioner's argument recasting the operative date of an award to a later date has been considered and rejected already in this district. In Thyssen Carbometal, respondent argued that for purposes of the time limits imposed on a notice of motion to vacate an arbitral award, an award should be “deemed issued… [as of] the day that the arbitrators reaffirmed their award pursuant to… [respondent's] motion for clarification, reconsideration, and modification” rather than the date on which the award was first delivered. 1990 US Dist. Lexis 427, * 6. The respondent argued that “its filing of the application to modify or correct means that the decision of the arbitrators was not final for the purposes of the 90-day limits”. Id. at *7. The court found that the argument lacked merit and denied respondent's motion to vacate as untimely. Id. at *7, 10. Petitioner's position, if accepted, would establish a rule permitting any party to render an award incomplete or non-final by the mere act of requesting a supplementary decision or a clarification “in one minor respect”. Resp.’s Req. at 1. Petitioner cites no case law to support his position and the court is aware of none. Other courts have reached the opposite conclusion. “[A] party moving for reconsideration of an arbitration award [does not] toll the running of the limitations period.” Int’l Ass’n of Bridge Structural & Ornamental Iron Workers Shopmen’s Local Union 501 v. Burtman Iron Works, Inc., 928 F. Supp. 83, 86-7 (D. Mass. 1986) (citing Dreis & Kemp Mfg. Co. v. Int’l Ass’n of Machinists & Aerospace Workers, 802 F.2d 247, 250 (7th Cir. 1986)). This must be so, because if the limitations period prescribed in [9 USC] § 12 were subject to suspension simply because an arbitral award contained an error, even though the arbitrators had intended to resolve all submitted “claims”, an unsuccessful party could preclude the commencement – or suspend the running – of the limitations period simply by alleging subsidiary errors in their [9 USC] § 10 motions to vacate an adverse arbitral award. Thus, the contention that mere error – whether ministerial, procedural, or substantive – renders an arbitral award non-“final” is fatally flawed. Fradella, 183 F.3d at 20 (emphasis in the original). Nor does “an application to modify or clarify an arbitral award toll[ ] the FAA § 12 limitations period”. Id. Conclusion The ICSID AF Rules specify that an award is final and binding on the parties when it is dispatched and the award dispatched on June 26, 2003 evidenced the arbitrators' intention that the award was final. The FAA allows a party only three months after an award is delivered to file a notice of motion to vacate. Because the petitioner did not serve a notice of motion to vacate by September 26, 2003, petitioner's motion is now time-barred. Accordingly, petitioner's motion will be denied and the petition dismissed. A final order accompanies this Memorandum Opinion.

§13.04 ISSUES OF STATE OR SOVEREIGN IMMUNITY [A] Basic Distinctions [1] ‘Sovereign’ and ‘Commercial’ Activity [a] United Nations Convention on Jurisdictional Immunities of States and Their Property (2004), UN Doc. A/RES/59/38, (10) Articles 1, 2, 5 and 10 PART I – INTRODUCTION Article 1– Scope of the present Convention The present Convention applies to the immunity of a State and its property from the jurisdiction of the courts of another State. Article 2 – Use of terms 1. For the purpose of the present Convention: (a)

“court” means any organ of a State, however named, entitled to exercise judicial

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(b)

functions; “State” means: (i) (ii)

(c)

the State and its various organs of government; constituent units of a federal State or political subdivisions of the State, which are entitled to perform acts in the exercise of the sovereign authority, and are actually acting in that capacity; (iii) agencies or instrumentalities of the State or other entities, to the extent that they are entitled to perform and are actually performing acts in the exercise of sovereign authority of the State; (iv) Representatives of the State acting in that capacity; “commercial transaction” means: (i)

any commercial contract or transaction for the sale of goods or supply of services; (ii) any contract for a loan or other transaction of a financial nature, including any obligation of guarantee or of indemnity in respect of any such loan or transaction; (iii) any other contract or transaction of a commercial, industrial, trading or professional nature, but not including a contract of employment of persons. 2. In determining whether a contract or transaction is a “commercial transaction” under paragraph I (c), reference should be made primarily to the nature of the contract or transaction, but its purpose should also be taken into account if the parties to the contract or transaction have so agreed, or if, in the practice of the State of the forum, that purpose is relevant to determining the non-commercial character of the contract or transaction. 3. The provisions of paragraphs 1 and 2 regarding the use of terms in the present Convention are without prejudice to the use of those terms or to the meanings which may be given to them in other international instruments or in the internal law of any State. *** PART II – GENERAL PRINCIPLES Article 5 – State immunity A State enjoys immunity, in respect of itself and its property, from the jurisdiction of the courts of another State subject to the provisions of the present Convention. PART III – PROCEEDINGS IN WHICH STATE IMMUNITY CANNOT BE INVOKED Article 10 – Commercial transactions 1. If a State engages in a commercial transaction with a foreign natural or juridical person and, by virtue of the applicable rules of private international law, differences relating to the commercial transaction fall within the jurisdiction of a court of another State, the State cannot invoke immunity from that jurisdiction in a proceeding arising out of that commercial transaction. 2. Paragraph 1 does not apply: (a) (b)

in the case of a commercial transaction between States; or if the parties to the commercial transaction have expressly agreed otherwise.

3. Where a State enterprise or other entity established by a State which has an independent legal personality and is capable of: (a) (b)

suing or being sued; and acquiring, owning or possessing and disposing of property, including property which that State has authorized it to operate or manage,

is involved in a proceeding which relates to a commercial transaction in which that entity is engaged, the immunity from jurisdiction enjoyed by that State shall not be affected. [b] Jurisdictional Immunities of the State (Germany v. Italy; Greece intervening), ICJ, Judgment of 3 February 2012, paragraphs 59-61 (11) 59. The Parties also differ as to the scope and extent of the rule of State immunity. In that context, the Court notes that many States (including both Germany and Italy) now distinguish between acta jure gestionis, in respect of which they have limited the immunity which they claim for themselves and which they accord to others, and acta jure imperii. That approach has also been followed in the United Nations Convention and the European Convention (see also the draft Inter-American Convention on Jurisdictional Immunity of States drawn up by the Inter-American Juridical Committee of the Organization of American States in 1983 (ILM, Vol. 22, p. 292)). 60. The Court is not called upon to address the question of how international law treats the issue of State immunity in respect of acta jure gestionis. The acts of the German armed forces and other State organs which were the subject of the proceedings in the

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Italian courts clearly constituted acta jure imperii. The Court notes that Italy, in response to a question posed by a member of the Court, recognized that those acts had to be characterized as acta jure imperii, notwithstanding that they were unlawful. The Court considers that the terms “jure imperii” and “jure gestionis” do not imply that the acts in question are lawful but refer rather to whether the acts in question fall to be assessed by reference to the law governing the exercise of sovereign power (jus imperii) or the law concerning non-sovereign activities of a State, especially private and commercial activities (jus gestionis). To the extent that this distinction is significant for determining whether or not a State is entitled to immunity from the jurisdiction of another State's courts in respect of a particular act, it has to be applied before that jurisdiction can be exercised, whereas the legality or illegality of the act is something which can be determined only in the exercise of that jurisdiction. Although the present case is unusual in that the illegality of the acts at issue has been admitted by Germany at all stages of the proceedings, the Court considers that this fact does not alter the characterization of those acts as acta jure imperii. 61. Both Parties agree that States are generally entitled to immunity in respect of acta jure imperii. That is the approach taken in the United Nations, European and draft InterAmerican Conventions, the national legislation in those States which have adopted statutes on the subject and the jurisprudence of national courts. [2] Immunity from Jurisdiction and Immunity from Enforcement [a] Restatement (Third) Foreign Relations Law of the United States, § 451, 396-398 (American Law Institute 1987) (12) §451. Immunity of Foreign State from jurisdiction to Adjudicate: The Basic Rule Under international law, a state or state instrumentality is immune from the jurisdiction of the courts of another state, except with respect to claims arising out of activities of the kind that may be carried on by private persons. Comment: a. Restrictive theory of immunity. The basic rule stated in this section reflects the restrictive theory of immunity, now accepted by nearly all non-Communist states, though they differ as to detail in its application. Under the restrictive theory, a state is immune from any exercise of, judicial jurisdiction by another state in respect of claims arising out of governmental activities (de jure imperii); it is not immune from the exercise of such jurisdiction in respect of claims arising out of activities of a kind carried on by private persons (de jure gestionis), notably commercial activities. See § 453. Under the restrictive theory, suits on claims arising out of nongovernmental activities are, not precluded even if the activities took place outside the forum state. Under United States law, however, courts in the United States may exercise jurisdiction of claims arising out of such activities outside the United States only if they had effect in the United States. See § 453. For territorial limitations applicable to claims in tort, see § 454; as to claims to property, see § 455. b. Substantive law applicable to claims against foreign state. This Subchapter addresses the immunity of a state from judicial jurisdiction of another state. (For the amenability of a state to the laws of another state, see §§ 461-62.) The law of sovereign immunity from adjudication does not establish causes of action or create or destroy legal obligations. Where there is no immunity, or where immunity has been waived, the substantive law that will be applied to claims against foreign states or their instrumentalities is the law applicable generally in the forum state to suits of the same character, including, as appropriate, principles of conflict of laws and international law. In some circumstances, some states apply different substantive rules to a foreign activity when a foreign state rather than a private person carries on the activity. See § 461, Comment g. c. Discovery. Neither the Foreign Sovereign Immunities Act of the United States nor corresponding legislation in other states addresses the issue of discovery against foreign states. When a state is party to an action in a court of another state-whether as plaintiff or as defendant-all the normal procedures associated with adjudication in that court, including discovery and requirements for posting security, are applicable, except as expressly excluded. A state subject to suit under the restrictive theory, then, is subject to discovery in connection with such suit. For discussion of default judgment as a sanction for noncompliance by a state with a discovery order under United States law, see § 459, Comment d. Discovery from a foreign state that is not a party to a proceeding has apparently not been attempted in international practice and is not provided for in either the FSIA or the corresponding laws of other states. Since sovereign immunity is the rule, and amenability to judicial process an exception to that rule, such discovery would seem to be precluded. d. Res judicata and sovereign immunity. A final determination by a court that a defendant state or state instrumentality is immune from jurisdiction has preclusive effect-i.e., is res judicata-only as to questions involved in the determination of immunity. It does not affect the underlying rights and obligations of the parties.

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e. Jurisdiction to adjudicate claims between states. This Subchapter is concerned with jurisdiction to adjudicate civil actions brought by private persons. National courts have not normally adjudicated claims of one state against another, but where instrumentalities of two states have commercial relations with each other, there is no reason why controversies arising out of such relations could not be submitted to national courts. *** [b] Restatement (Third) Foreign Relations Law of the United States, § 460, 434-436 (American Law Institute 1987) (13) §460. Execution or Other Enforcement of Judgment Against Foreign State: Law of the United States (1) The property in the United States of a foreign state is immune from execution and from attachment in aid of execution of a judgment, except as set forth in Subsection (2). (2) The property in the United States of a foreign state is subject to execution or to attachment in aid of execution of a judgment if it is used for commercial activity in the United States, and (a) (b) (c) (d) (e) (f)

the state has waived its immunity from execution; or the property is or was used for the commercial activity on which the judgment was based; or the property was taken in violation of international law or constitutes the proceeds of property so taken, and the judgment is based on a claim to rights in that property; or the property was acquired by succession or gift and the judgment relates to that property; or the property is immovable property not used for a diplomatic or consular mission or for the residence of the chief of such mission, and the judgment relates to that property; or the property consists of obligations owed to the state under a policy of liability or casualty insurance and the judgment relates to claims covered by the policy.

(3) The property in the United States of a state instrumentality engaged in commercial activity in the United States is riot immune from execution. or attachment in aid of execution of judgments (a) (b) (c)

if the instrumentality has waived its immunity from execution; if the property ‘would not be immune under Subsection (2) if it were owned directly by the ‘state; or if the judgment relates to claims brought against the instrumentality in accordance with §§ 453, 454, and 465(3) and (4), whether or not the property is related to the claim on which the judgment is based.

(4) Execution, or attachment in aid of execution, against the property of a state or of an instrumentality of a state may be ordered only by the court, and only upon determination that a reasonable period of time has elapsed following the entry of judgment, or, in the case of a default judgment, following notice thereof to the state or instrumentality. Source Note: Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1610 and 1611. Comment: a. Change from prior law. Before the Foreign Sovereign Immunities Act, attachment of foreign state property was permitted for acquiring jurisdiction, but not for purposes of execution. The FSIA eliminates all forms of prejudgment attachment (except upon waiver), but in specified cases permits attachment and execution following entry of judgment. The rationale for the new rule is that attachment is no longer needed for jurisdictional purposes (see § 457) and may lead to diplomatic friction if effected before a claim has been established. On the other hand, when a state has had the opportunity, to defend an action, including an opportunity to raise the defense of sovereign immunity, and a judgment of liability has been entered, it is not unfair to subject it to enforcement if the judgment is not paid. Execution, however, may be had only if specifically ordered by the court, after it is satisfied that appropriate notice has been given and that the judgment will not be satisfied without an order of execution. b. Execution on property of states and state instrumentalities distinguished. For purposes of post-judgment attachment and execution, the Foreign Sovereign Immunities Act draws a sharp distinction between the property of states and the property of state instrumentalities: (i) The property of states may be attached only if it is or was used in commercial activity; the property of state instrumentalities may be attached without any such limitation, so long as the instrumentality itself is engaged in commercial activity in the United States; and (ii) the property of states may be attached only when it is related to the claim which gave rise to the judgment; no such limitation applies to a judgment

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against a state instrumentality based on claims under §§ 453, 455(3), and 454 (Section 1605(a) (2), (3), and (5) of the Act). These distinctions reflect the premise that state instrumentalities engaged in commercial activities are akin to commercial enterprises, so that immunity is exceptional and limited, whereas the primary function of states is government and, absent waiver, their liability should be limited to particular claims and their amenability to post-judgment attachment should be limited to particular property. c. Waiver of immunity from attachment. In general, the criteria for post judgment attachment in Section 1610 of the Act parallel the criteria for jurisdiction to adjudicate claims under Section 1605 (see §§ 453-55 of this Restatement), including waiver. For the conditions and requirements of an effective waiver, see § 456 and Comment a thereto. Two types of property are absolutely immune from attachment, and the immunity is not subject to waiver: (i) assets of foreign states held in certain international organizations such as the International Monetary Fund or the World Bank (FSIA Section 1611(a)), and (ii) property of a military character that is used or intended to be used in connection with a military activity or is under the control of a military authority or defense agency (FSIA Section 1611(b)(2)). Property of a foreign central bank or monetary authority held for its own account is also absolutely immune from attachment unless explicitly waived (FSIA Section 1611(b)(1)). d. Prejudgment attachment: Property of states or of state instrumentalities is immune from Prejudgment attachment for purposes of acquiring jurisdiction, and that immunity cannot be waived. See § 456, Comment e. Prejudgment attachment for purposes of security is also precluded, but that immunity may be waived when the property is used for commercial activity. (FSIA Section 1610(d)). [c] United Nations Convention on Jurisdictional Immunities of States and Their Property (2004), UN Doc. A/RES/59/38, (14) Articles 18, 19, 20 and 21 PART IV – STATE IMMUNITY FROM MEASURES OF CONSTRAINT IN CONNECTION WITH PROCEEDINGS BEFORE A COURT. Article 18 – State immunity from pre-judgement measures of constraint No pre-judgement measures of constraint, such as attachment or arrest, against property of a State may be taken in connection with a proceeding before a court of another State unless and except to the extent that: (a)

(b)

the State has expressly consented to the taking of such measures as indicated: (i) by international agreement; (ii) by an arbitration agreement or in a written contract; or (iii) by a declaration before the court or by a written communication after a dispute between the parties has arisen; or The State has allocated or earmarked property for the satisfaction of the claim which is the object of that proceeding.

Article 19 – State immunity from post-judgement measures of constraint No post-judgement measures of constraint, such as attachment, arrest or execution, against property of a State may be taken in connection with a proceeding before a court of another State unless and except to the extent that: (a)

(b) (c)

the State has expressly consented to the taking of such measures as indicated: (i) by international agreement; (ii) by an arbitration agreement or in a written contract; or (iii) by a declaration before the court or by a written communication after a dispute between the parties has arisen; or the State has allocated or earmarked property for the satisfaction of the claim which is the object of that proceeding; or it has been established that the property is specifically in use or intended for use by the State for other than government non-commercial purposes and is in the territory of the State of the forum, provided that post-judgement measures of constraint may only be taken against property that has a connection with the entity against which the proceeding was directed.

Article 20 – Effect of consent to jurisdiction to measures of constraint Where consent to the measures of constraint is required under articles 18 and 19, consent to the exercise of jurisdiction under article 7 shall not imply consent to the taking of measures of constraint. Article 21 – Specific categories of property 1. The following categories, in particular, of property of a State shall not be considered as property specifically in use or intended for use by the State for other than government non-commercial purposes under article 19, paragraph (c):

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(a)

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

property, including any bank account, which is used or intended for use in the performance of the functions of the diplomatic mission of the State or its consular posts, special missions, missions to international organizations, or delegations to organs of international orgaizations or to international conferences; property of a military character or used or intended for use in the performance of military functions; property of the central bank or other monetary authority of the State; property forming part of the cultural heritage of the State or part of its archives and not placed or intended to be placed on sale; property forming part of an exhibition of objects of scientific, cultural or historical interest and not placed or intended to be placed on sale.

2. Paragraph 1 is without prejudice to article 18 and article 19, subparagraphs (a) and (b). [d] United Nations Convention on Jurisdictional Immunities of States and Their Property (2004), UN Doc. A/RES/59/38, Article 17 PART III – PROCEEDINGS IN WHICH STATE IMMUNITY CANNOT BE INVOKED * * * Article 17 – Effect of an arbitration agreement If a State enters into an agreement in writing with a foreign natural or juridical person to submit to arbitration differences relating to a commercial transaction, that State cannot invoke immunity from jurisdiction before a court of another State which is otherwise competent in a proceeding which relates to (a) (b) (c)

the validity, interpretation or application of the arbitration agreement; the arbitration procedure; or the confirmation or the setting aside of the award,

unless the arbitration agreement otherwise provides. ***

[B] Differing National Approaches [1] The US Approach [a] Foreign Sovereign Immunities Act 1976, 28 U.S.C. Chapter 97 (US), Sections 1604 through 1611 United States Code, Title 28 (Judiciary and Judicial Procedure), Part IV (Jurisdiction and Venue), Chapter 97 (Jurisdictional Immunities of Foreign States) Sec. 1604 – Immunity of a foreign state from jurisdiction Subject to existing international agreements to which the United States is a party at the time of enactment of this Act a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter. Sec. 1605 – General exceptions to the jurisdictional immunity of a foreign state (a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case – (1) (2)

(3)

(4) (5)

in which the foreign state has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the waiver; in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States; in which rights in property taken in violation of international law are in issue and that property or any property exchanged for such property is present in the United States in connection with a commercial activity carried on in the United States by the foreign state; or that property or any property exchanged for such property is owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States; in which rights in property in the United States acquired by succession or gift or rights in immovable property situated in the United States are in issue; not otherwise encompassed in paragraph (2) above, in which money damages are sought against a foreign state for personal injury or death, or damage to or loss of property, occurring in the United States and caused by the tortious act or omission of that foreign state or of any official or employee of that foreign state while acting within the scope of his office or employment; except this paragraph shall not apply

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to – (a)

(6)

any claim based upon the exercise or performance or the failure to exercise or perform a discretionary function regardless of whether the discretion be abused, or (b) any claim arising out of malicious prosecution, abuse of process, libel, slander, misrepresentation, deceit, or interference with contract rights; in which the action is brought, either to enforce an agreement made by the foreign state with or for the benefit of a private party to submit to arbitration all or any differences which have arisen or which may arise between the parties with respect to a defined legal relationship, whether contractual or not, concerning a subject matter capable of settlement by arbitration under the laws of the United States, or to confirm an award made pursuant to such an agreement to arbitrate, if (a) (b)

(7)

the arbitration takes place or is intended to take place in the United States, the agreement or award is or may be governed by a treaty or other international agreement in force for the United States calling for the recognition and enforcement of arbitral awards, (c) the underlying claim, save for the agreement to arbitrate, could have been brought in a United States court under this section or section 1607, or (D) paragraph (1) of this subsection is otherwise applicable; or not otherwise covered by paragraph (2), in which money damages are sought against a foreign state for personal injury or death that was caused by an act of torture, extrajudicial killing, aircraft sabotage, hostage taking, or the provision of material support or resources (as defined in section 2339A of title 18) for such an act if such act or provision of material support is engaged in by an official, employee, or agent of such foreign state while acting within the scope of his or her office, employment, or agency, except that the court shall decline to hear a claim under this paragraph – (a)

(b)

if the foreign state was not designated as a state sponsor of terrorism under section 6(j) of the Export Administration Act of 1979 (50 U.S.C. App. 2405(j)) or section 620A of the Foreign Assistance Act of 1961 (22 U.S.C. 2371) at the time the act occurred, unless later so designated as a result of such act; and even if the foreign state is or was so designated, if – (i)

(ii)

the act occurred in the foreign state against which the claim has been brought and the claimant has not afforded the foreign state a reasonable opportunity to arbitrate the claim in accordance with accepted international rules of arbitration; or neither the claimant nor the victim was a national of the United States (as that term is defined in section 101(a)(22) of the Immigration and Nationality Act) when the act upon which the claim is based occurred.

(b) A foreign state shall not be immune from the jurisdiction of the courts of the United States in any case in which a suit in admiralty is brought to enforce a maritime lien against a vessel or cargo of the foreign state, which maritime lien is based upon a commercial activity of the foreign state: Provided that – (1)

(2)

notice of the suit is given by delivery of a copy of the summons and of the complaint to the person, or his agent, having possession of the vessel or cargo against which the maritime lien is asserted; and if the vessel or cargo is arrested pursuant to process obtained on behalf of the party bringing the suit, the service of process of arrest shall be deemed to constitute valid delivery of such notice, but the party bringing the suit shall be liable for any damages sustained by the foreign state as a result of the arrest if the party bringing the suit had actual or constructive knowledge that the vessel or cargo of a foreign state was involved; and notice to the foreign state of the commencement of suit as provided in section 1608 of this title is initiated within ten days either of the delivery of notice as provided in paragraph (1) of this subsection or, in the case of a party who was unaware that the vessel or cargo of a foreign state was involved, of the date such party determined the existence of the foreign state's interest.

(c) Whenever notice is delivered under subsection (b)(1), the suit to enforce a maritime lien shall thereafter proceed and shall be heard and determined according to the principles of law and rules of practice of suits in rem whenever it appears that, had the vessel been privately owned and possessed, a suit in rem might have been maintained. A decree against the foreign state may include costs of the suit and, if the decree is for a money judgment, interest as ordered by the court, except that the court may not award judgment against the foreign state in an amount greater than the value of the vessel or cargo upon which the maritime lien arose. Such value shall be determined as of the time notice is served under subsection (b)(1). Decrees shall be subject to appeal and revision as provided in other cases of admiralty and maritime jurisdiction. Nothing shall preclude the plaintiff in any proper case from seeking relief in personam in the same action brought to enforce a maritime lien as provided in this section. (d) A foreign state shall not be immune from the jurisdiction of the courts of the United States in any action brought to foreclose a preferred mortgage, as defined in the Ship

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Mortgage Act, 1920 (46 U.S.C. 911 and following). Such action shall be brought, heard, and determined in accordance with the provisions of that Act and in accordance with the principles of law and rules of practice of suits in rem, whenever it appears that had the vessel been privately owned and possessed a suit in rem might have been maintained. (e) For purposes of paragraph (7) of subsection (a) – (1) (2) (3)

the terms ‘‘torture’’ and ‘‘extrajudicial killing’’ have the meaning given those terms in section 3 of the Torture Victim Protection Act of 1991; the term ‘‘hostage taking’’ has the meaning given that term in Article 1 of the International Convention Against the Taking of Hostages; and the term ‘‘aircraft sabotage’’ has the meaning given that term in Article 1 of the Convention for the Suppression of Unlawful Acts Against the Safety of Civil Aviation.

(f) No action shall be maintained under subsection (a)(7) unless the action is commenced not later than 10 years after the date on which the cause of action arose. All principles of equitable tolling, including the period during which the foreign state was immune from suit, shall apply in calculating this limitation period. *** Sec. 1607 – Counterclaims In any action brought by a foreign state, or in which a foreign state intervenes, in a court of the United States or of a State, the foreign state shall not be accorded immunity with respect to any counterclaim – (a) (b) (c)

for which a foreign state would not be entitled to immunity under section 1605 of this chapter had such claim been brought in a separate action against the foreign state; or arising out of the transaction or occurrence that is the subject matter of the claim of the foreign state; or to the extent that the counterclaim does not seek relief exceeding in amount or differing in kind from that sought by the foreign state.

*** Sec. 1609 – Immunity from attachment and execution of property of a foreign state Subject to existing international agreements to which the United States is a party at the time of enactment of this Act the property in the United States of a foreign state shall be immune from attachment arrest and execution except as provided in sections 1610 and 1611 of this chapter. Sec. 1610 – Exceptions to the immunity from attachment or execution (a) The property in the United States of a foreign state, as defined in section 1603(a) of this chapter, used for a commercial activity in the United States, shall not be immune from attachment in aid of execution, or from execution, upon a judgment entered by a court of the United States or of a State after the effective date of this Act, if – (1)

(2) (3) (4)

(5)

(6) (7)

the foreign state has waived its immunity from attachment in aid of execution or from execution either explicitly or by implication, notwithstanding any withdrawal of the waiver the foreign state may purport to effect except in accordance with the terms of the waiver, or the property is or was used for the commercial activity upon which the claim is based, or the execution relates to a judgment establishing rights in property which has been taken in violation of international law or which has been exchanged for property taken in violation of international law, or the execution relates to a judgment establishing rights in property – (a) which is acquired by succession or gift, or (b) which is immovable and situated in the United States: Provided, that such property is not used for purposes of maintaining a diplomatic or consular mission or the residence of the Chief of such mission, or the property consists of any contractual obligation or any proceeds from such a contractual obligation to indemnify or hold harmless the foreign state or its employees under a policy of automobile or other liability or casualty insurance covering the claim which merged into the judgment, or the judgment is based on an order confirming an arbitral award rendered against the foreign state, provided that attachment in aid of execution, or execution, would not be inconsistent with any provision in the arbitral agreement, or the judgment relates to a claim for which the foreign state is not immune under section 1605(a)(7), regardless of whether the property is or was involved with the act upon which the claim is based.

(b) In addition to subsection (a), any property in the United States of an agency or

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instrumentality of a foreign state engaged in commercial activity in the United States shall not be immune from attachment in aid of execution, or from execution, upon a judgment entered by a court of the United States or of a State after the effective date of this Act, if – (1)

(2)

the agency or instrumentality has waived its immunity from attachment in aid of execution or from execution either explicitly or implicitly, notwithstanding any withdrawal of the waiver the agency or instrumentality may purport to effect except in accordance with the terms of the waiver, or the judgment relates to a claim for which the agency or instrumentality is not immune by virtue of section 1605(a)(2), (3), (5), or (7), or 1605(b) of this chapter, regardless of whether the property is or was involved in the act upon which the claim is based.

(c) No attachment or execution referred to in subsections (a) and (b) of this section shall be permitted until the court has ordered such attachment and execution after having determined that a reasonable period of time has elapsed following the entry of judgment and the giving of any notice required under section 1608(e) of this chapter. (d) The property of a foreign state, as defined in section 1603(a) of this chapter, used for a commercial activity in the United States, shall not be immune from attachment prior to the entry of judgment in any action brought in a court of the United States or of a State, or prior to the elapse of the period of time provided in subsection (c) of this section, if – (1) (2)

the foreign state has explicitly waived its immunity from attachment prior to judgment, notwithstanding any withdrawal of the waiver the foreign state may purport to effect except in accordance with the terms of the waiver, and the purpose of the attachment is to secure satisfaction of a judgment that has been or may ultimately be entered against the foreign state, and not to obtain jurisdiction.

(e) The vessels of a foreign state shall not be immune from arrest in rem, interlocutory sale, and execution in actions brought to foreclose a preferred mortgage as provided in section 1605(d). (f) (1) (a)

(b)

Notwithstanding any other provision of law, including but not limited to section 208(f) of the Foreign Missions Act (22 U.S.C. 4308(f)), and except as provided in subparagraph (B), any property with respect to which financial transactions are prohibited or regulated pursuant to section 5(b) of the Trading with the Enemy Act (50 U.S.C. App. 5(b)), section 620(a) of the Foreign Assistance Act of 1961 (22 U.S.C. 2370(a)), sections 202 and 203 of the International Emergency Economic Powers Act (50 U.S.C. 1701-1702), or any other proclamation, order, regulation, or license issued pursuant thereto, shall be subject to execution or attachment in aid of execution of any judgment relating to a claim for which a foreign state (including any agency or instrumentality or such state) claiming such property is not immune under section 1605(a)(7). Subparagraph (A) shall not apply if, at the time the property is expropriated or seized by the foreign state, the property has been held in title by a natural person or, if held in trust, has been held for the benefit of a natural person or persons.

(2) (a)

(b)

At the request of any party in whose favor a judgment has been issued with respect to a claim for which the foreign state is not immune under section 1605(a)(7), the Secretary of the Treasury and the Secretary of State should make every effort to fully, promptly, and effectively assist any judgment creditor or any court that has issued any such judgment in identifying, locating, and executing against the property of that foreign state or any agency or instrumentality of such state. In providing such assistance, the Secretaries – (i) (ii)

(3)

may provide such information to the court under seal; and should make every effort to provide the information in a manner sufficient to allow the court to direct the United States Marshall's office to promptly and effectively execute against that property.

Waiver – The President may waive any provision of paragraph (1) in the interest of national security.

Sec. 1611 – Certain types of property immune from execution (a) Notwithstanding the provisions of section 1610 of this chapter, the property of those organizations designated by the President as being entitled to enjoy the privileges,

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exemptions, and immunities provided by the International Organizations Immunities Act shall not be subject to attachment or any other judicial process impeding the disbursement of funds to, or on the order of, a foreign state as the result of an action brought in the courts of the United States or of the States. (b) Notwithstanding the provisions of section 1610 of this chapter, the property of a foreign state shall be immune from attachment and from execution, if – (1)

(2)

the property is that of a foreign central bank or monetary authority held for its own account, unless such bank or authority, or its parent foreign government, has explicitly waived its immunity from attachment in aid of execution, or from execution, notwithstanding any withdrawal of the waiver which the bank, authority or government may purport to effect except in accordance with the terms of the waiver; or the property is, or is intended to be, used in connection with a military activity and (a) (b) (c)

is of a military character, or is under the control of a military authority or defense agency. Notwithstanding the provisions of section 1610 of this chapter, the property of a foreign state shall be immune from attachment and from execution in an action brought under section 302 of the Cuban Liberty and Democratic Solidarity (LIBERTAD) Act of 1996 to the extent that the property is a facility or installation used by an accredited diplomatic mission for official purposes

[b] Frontera Res. Azer. Corp. v. State Oil Co. of the Azerbaijan Republic, Judgment of the Court of Appeals for the Second Circuit of 28 September 2009, 582 F.3d 393, 395-402 (2d Cir. 2009) [Frontera Resources Azerbaijan Corporation (“Frontera”), a Cayman Islands company, and State Oil Corporation of the Azerbaijan Republic (“SOCAR”), based in and owned by Azerbaijan, are two companies in the oil industry. In November 1998, the parties entered into a written agreement under which Frontera developed and managed oil deposits in Azerbaijan and delivered oil to SOCAR. In 2000, a dispute arose when SOCAR declined to pay for some of this oil, and in response, Frontera allegedly sought to sell oil that was supposed to be sold to SOCAR to parties outside of Azerbaijan. In November 2000, after instructing local customs authorities to block Frontera's oil exports, SOCAR seized the oil. In March 2002, the bank that had financed Frontera's involvement in Azerbaijan foreclosed on its loan, forcing Frontera to assign its rights in the project to the bank. In July 2002, the bank settled its claims with SOCAR. Frontera, however, continued to seek payment for both previously delivered and seized oil. Based on its settlement with the bank, SOCAR denied liability to Frontera. After failing to reach an amicable resolution, Frontera requested that the parties proceed to arbitration, as specified by their initial agreement. The arbitration took place in Sweden, and the tribunal awarded Frontera approximately $1.24 million plus interest. In 2006 Frontera brought the award for confirmation and execution in the Southern District of New York, which dismissed the action on the basis of deficient personal jurisdiction over SOCAR, on the basis that SOCAR had insufficient contacts with the United States to meet the Due Process Clause's requirements for the assertion of personal jurisdiction. Frontera appealed.] Frontera contends (1) that a court does not need personal jurisdiction over a party in order to confirm a foreign arbitral award against that party, and (2) that Texas Trading should be overruled, because the Due Process Clause's protections should not apply to foreign states or their instrumentalities.… I. Personal Jurisdiction over SOCAR When considering a district court's dismissal for lack of personal jurisdiction, we review its factual findings for clear error and its legal conclusions de novo. See Sunward Elecs., Inc. v. McDonald, 362 F.3d 17, 22 (2d Cir.2004). *** The district court dismissed Frontera's petition because it concluded that SOCAR's contacts with the United States were insufficient to meet the Due Process Clause's demands for personal jurisdiction. Frontera contends that this was in error both because personal jurisdiction is not necessary for the requested relief, and because SOCAR is not entitled to the Due Process Clause's protections. We address each argument in turn. A. The Need for Jurisdiction Frontera argues that a district court does not need personal jurisdiction over a respondent to confirm a foreign arbitral award against that party. Yet, Frontera contends, the district court's dismissal of its petition “necessarily rest[ed] upon an assumption” that personal jurisdiction over SOCAR was indispensable. (Appellant's Br. at 38.) We read the district court's decision differently. Although the district court considered whether it could assert personal jurisdiction over SOCAR, it did not make that question dispositive. Instead, after finding SOCAR's contacts with the United States insufficient to

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establish personal jurisdiction, the district court examined whether it had jurisdiction over any of SOCAR's assets, because “in the absence of minimum contacts, quasi in rem jurisdiction may be exercised to attach property to collect a debt.” Frontera, 479 F.Supp.2d at 387. Thus, by suggesting that the district court required personal jurisdiction, Frontera misunderstands the framework of the court's analysis. And to the extent that Frontera's challenge is to the district court's requirement of either personal or quasi in rem jurisdiction, it is without merit. We have previously avoided deciding whether personal or quasi in rem jurisdiction is required to confirm foreign arbitral awards pursuant to the New York Convention.… Frontera contends that none of these courts addressed the precise argument it advances here: that there is no “positive statutory or treaty basis” for such a jurisdictional requirement. (Appellant's Reply Br. at 11.) The federal statute that implements the New York Convention requires a court to confirm an award “unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” 9 U.S.C. § 207. Article V of the New York Convention “provides the exclusive grounds for refusing confirmation,” Yusuf Ahmed Alghanim & Sons, W.L.L. v. Toys “R” Us, Inc., 126 F.3d 15, 20 (2d Cir.1997), and specifies seven grounds for refusing to enforce an arbitral award, none of which include a lack of jurisdiction over the respondent or the respondent's property, see New York Convention at art. 5, 21 U.S.T. at 2517. Frontera accordingly argues that we cannot impose a jurisdictional requirement if the Convention does not already have one. We disagree. Unlike “state courts[,] [which] are courts of general jurisdiction[,] federal courts are courts of limited jurisdiction which thus require a specific grant of jurisdiction.”… While the requirement of subject matter jurisdiction “functions as a restriction on federal power,” id. at 702, the need for personal jurisdiction is fundamental to “the court's power to exercise control over the parties,” Leroy v. Great W. United Corp., 443 U.S. 173, 180, 99 S.Ct. 2710, 61 L.Ed.2d 464 (1979). “Some basis must be shown, whether arising from the respondent's residence, his conduct, his consent, the location of his property or otherwise, to justify his being subject to the court's power.” Glencore Grain, 284 F.3d at 1122 (quoting Transatl. Bulk Shipping, 622 F.Supp. at 27). Because of the primacy of jurisdiction, “jurisdictional questions ordinarily must precede merits determinations in dispositional order.” Sinochem Int'l Co. v. Malay. Int'l Shipping Corp., 549 U.S. 422, 431, 127 S.Ct. 1184, 167 L.Ed.2d 15 (2007). “[T]he items listed in Article V as the exclusive defenses, pertain to substantive matters rather than to procedure.” Monegasque de Reassurances S.A.M. v. Nak Naftogaz of Ukr., 311 F.3d 488, 496 (2d Cir.2002) (emphasis added). Article V's exclusivity limits the ways in which one can challenge a request for confirmation, but it does nothing to alter the fundamental requirement of jurisdiction over the party against whom enforcement is being sought. *** We therefore hold that the district court did not err by treating jurisdiction over either SOCAR or SOCAR's property as a prerequisite to the enforcement of Frontera's petition. The district court may, however, have given the Constitution's Due Process Clause an unwarranted place in its analysis, which we discuss next. B. SOCAR’s Rights Under the Due Process Clause The district court recognized that our precedent Texas Trading compelled it to hold that SOCAR possessed rights under the Due Process Clause, thus requiring that jurisdiction over SOCAR meet the minimum contacts requirements of International Shoe. The district court, however, questioned Texas Trading's soundness. These doubts were well-founded. The Due Process Clause famously states that “no person shall be deprived of life, liberty or property without due process of law.” U.S. Const. amend. V (emphasis added). In Texas Trading, we held that a foreign state was a “person” within the meaning of the Due Process Clause, and that a court asserting personal jurisdiction over a foreign state must-in addition to complying with the FSIA-therefore engage in “a due process scrutiny of the court's power to exercise its authority” over the state. 647 F.2d at 308, 313… The FSIA had been enacted only five years earlier, and pre-FSIA suits against foreign states were generally supported by quasi in rem jurisdiction. Id. Subsequently, we applied Texas Trading not only to foreign states but also to their agencies and instrumentalities. See, e.g., Seetransport Wiking Trader Schiffarhtsgesellschaft MBH & Co. v. Navimpex Centrala Navala, 989 F.2d 572, 579-80 (2d Cir.1993) (applying Texas Trading to a foreign trading company wholly owned by Romania that “promoted ship sales through its governmental office in Manhattan”). Since Texas Trading, however, the case law has marched in a different direction. In Republic of Argentina v. Weltover, Inc., the Supreme Court “assum[ed], without deciding, that a foreign state is a ‘person’ for purposes of the Due Process Clause,” 504 U.S. 607, 619, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992), but then cited South Carolina v. Katzenbach, 383 U.S. 301, 323-24, 86 S.Ct. 803, 15 L.Ed.2d 769 (1966), which held that “States of the Union are not ‘persons' for purposes of the Due Process Clause,” 504 U.S. at 619. Weltover did not require deciding the issue because Argentina's contacts satisfied the due process requirements, see id. at 619 & n. 2, but the Court's implication was plain: If the “States of

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the Union” have no rights under the Due Process Clause, why should foreign states? *** In Price v. Socialist People's Libyan Arab Jamahiriya, 294 F.3d 82 (D.C.Cir.2002), the D.C. Circuit reasoned that because “the word ‘person’ in the context of the Due Process Clause of the Fifth Amendment cannot, by any reasonable mode of interpretation, be expanded to encompass the States of the Union,” Katzenbach, 383 U.S. at 323, “absent some compelling reason to treat foreign sovereigns more favorably than ‘States of the Union,’ it would make no sense to view foreign states as ‘persons' under the Due Process Clause,” 294 F.3d at 96. The Price court found no such reason, see id. at 95-100, and we find that case's analysis persuasive. As the Price court noted, the States of the Union “both derive important benefits [from the Constitution] and must abide by significant limitations as a consequence of their participation [in the Union],” id. at 96, yet a “‘foreign State lies outside the structure of the Union,’” id. (quoting Principality of Monaco v. Mississippi, 292 U.S. 313, 330, 54 S.Ct. 745, 78 L.Ed. 1282 (1934)). If the States, as sovereigns that are part of the Union, cannot “avail themselves of the fundamental safeguards of the Due Process Clause,” Price, 294 F.3d at 97, we do not see why foreign states, as sovereigns wholly outside the Union, should be in a more favored position. This is particularly so when the Supreme Court has “[n]ever suggested that foreign nations enjoy rights derived from the Constitution,” and when courts have instead “relied on principles of comity and international law to protect foreign governments in the American legal system.” Id. For the reasons discussed by the Price court in its thorough opinion, we “are unwilling to interpret the Due Process Clause as conferring rights on foreign nations that States of the Union do not possess.” Id. at 99. Thus, we hold that the district court erred, albeit understandably in light of Texas Trading, by holding that foreign states and their instrumentalities are entitled to the jurisdictional protections of the Due Process Clause. *** Simply overruling Texas Trading, however, and holding that a sovereign state does not enjoy due process protections does not decide the precise question in this case, because SOCAR is not a sovereign state, but rather an instrumentality or agency of one. Frontera contends that, because the FSIA treats foreign states and their agencies and instrumentalities identically, see Kensington Int'l Ltd. v. Itoua, 505 F.3d 147, 153 (2d Cir.2007) (citing 28 U.S.C. § 1603(a)), we should treat SOCAR just as we would treat Azerbaijan for constitutional purposes. The simple fact that SOCAR is deemed a foreign state as a statutory matter, however, does not answer the constitutional question of SOCAR's due process rights. SOCAR may indeed lack due process rights like a foreign state, but similar statutory treatment will not be the reason. However, if the Azerbaijani government “exerted sufficient control over” SOCAR “to make it an agent of the State, then there is no reason to extend to [SOCAR] a constitutional right that is denied to the sovereign itself.” TMR Energy Ltd. v. State Prop. Fund of Ukr., 411 F.3d 296, 301 (D.C.Cir.2005). Although “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such,” this presumption can be overcome if the state so “extensively control[s]” the instrumentality “that a relationship of principal and agent is created,” or if “adher[ing] blindly to the corporate form would cause injustice.”… Accordingly, if SOCAR is an agent of the Azerbaijani state, as recognized in Bancec and subsequent cases, then, like Azerbaijan, SOCAR lacks due process rights. The district court did not decide whether SOCAR is an agent of the state because Texas Trading rendered the question unnecessary and, unsurprisingly, there was scant briefing on the issue. SOCAR suggests that the parties' lack of focus on the question should be fatal to Frontera's position, because Frontera “bears the burden of proving that the corporate entity should not be presumed distinct from a sovereign or sovereign entity.” Zappia, 215 F.3d at 252. But the Bancec analysis and Frontera's related burden were not relevant until our decision today, nor did Frontera argue that Bancec should apply. Cf. Brooklyn Legal Servs. Corp. v. Legal Servs. Corp., 462 F.3d 219, 232 (2d Cir.2006) (“It is our role to ensure that in making factual findings, the district court applies the proper legal test and applies it correctly.”). Moreover, using the parties' inattention to SOCAR's relationship with Azerbaijan to decide that SOCAR is not an agent of the state would still not resolve this appeal. We would then have to determine whether SOCAR, as a corporation owned by a foreign state but not the state's agent, was entitled to the Due Process Clause's protections. … The Supreme Court has gone so far as to accord due process protections to privately owned foreign corporations.… Whether, and to what extent, it would do so for stateowned foreign corporations has not been decided. And, given the present posture of this litigation, it would be premature for us to address this question without hearing first from the court below. See Farricielli v. Holbrook, 215 F.3d 241, 246 (2d Cir.2000) (per curiam) (“It is our settled practice to allow the district court to address arguments in the first instance.”). Accordingly, we choose to remand so that in the first instance the district court can determine, in light of Texas Trading's demise and Bancec's new relevance to this context, (1) whether SOCAR is an agent of Azerbaijan, and if not, (2) whether SOCAR is entitled to the protections of the Due Process Clause.

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*** Conclusion For the foregoing reasons, we VACATE the district court's dismissal of Frontera's petition and REMAND for further proceedings. [c] Restatement (Third) Foreign Relations Law of the United States, § 456, 415-419 (American Law Institute 1987) (15) §456. Waiver of Immunity. (1) Under international law: (a) (b)

a state may waive its immunity from the jurisdiction of the courts of other states either expressly or by implication, either before or after a dispute arises; a state may waive its immunity from attachment of its property or from execution against its property, but a waiver of immunity from suit does not imply a waiver of immunity from attachment of property, and a waiver of immunity from attachment of property does not imply a waiver of immunity. from suit.

(2) Under the law of the United States: (a)

initiation by a state of an action in a court in the United States is a waiver of immunity from jurisdiction to adjudicate (i)

(b)

any counterclaim arising out of the transaction or occurrence that is the subject matter of the action, without limit as to the amount of recovery on the counterclaim; and (ii) any counterclaim not arising out of the transaction or occurrence which is the subject matter of the action, but any recovery on such counterclaim is limited to the amount of the recovery in the principal action; an agreement to arbitrate is a waiver of immunity from jurisdiction in (i)

(c)

an action or other proceeding to compel arbitration pursuant to the agreement; and (ii) an action to enforce an arbitral award rendered pursuant to the agreement; an appearance on behalf of the state in an action, without challenge to the jurisdiction of the court, is a waiver of immunity from jurisdiction to adjudicate that action.

(3) Under the law of the United States, a waiver of immunity, whether from jurisdiction to adjudicate, from attachment of property, or from execution, may not be withdrawn, except by consent of all parties to whom (or for whose benefit or protection) the waiver was made. Source Note: Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1604, 1605(a) (1), 1607, 1609, 1610(a)(1), 1610(b)(1), 1610(d)(1). Comment: a. Waiver and jurisdiction of courts: Ordinarily, a consent to jurisdiction or a waiver of immunity refers to a particular court or place of adjudication. If a waiver of immunity does not refer to, any particular court or place of adjudication, it is treated as, applicable to all appropriate courts. In the United States, appropriate courts have jurisdiction to adjudicate claims against a foreign state covered by a waiver; if the state has consented to jurisdiction of a court of a State of the United States, the action may go forward in that court, or may be removed to a federal court sitting in the district where the State court is located, in accordance with Section 1441(d). b. Form of waiver. A waiver may be general, or may be limited to particular transactions, claims or property. An express waiver may take the form of a contract, a provision in a contract, or a declaration by a responsible official of the state. A waiver may also be contained in an international agreement to which the foreign state and the forum state are parties. A waiver may be implied from conduct of the state, including the activities described in Subsection (2). An appearance by a state or a state instrumentality without raising the defense of immunity would normally be considered a waiver of immunity, but waiver does not result from failure to appear or from procedural steps such as removal to federal court or motions for additional time to answer. As to default judgments, see § 459 and Reporters' Note 1 thereto. The party relying on the waiver has the burden of establishing that the person giving the waiver had authority to bind the state. When a person has authority to sign an agreement on behalf of a state, it is assumed that the authority extends to a waiver of immunity contained in the agreement. c. Waiver by international agreement. The Foreign Sovereign Immunities Act provides that international agreements of the United States concerning immunity that were in effect when the FSIA was adopted are not modified by the Act. See FSIA Sections 1604, 1609. Many United States treaties of friendship, commerce, and navigation contain a clause waiving immunity for state-owned agencies or instrumentalities engaged in specified

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activities in the United States, and for their property. Such a clause does not affect the immunity of the state itself and of state property not owned by such state-owned agencies or instrumentalities. Immunity clauses in pre1976 FCN treaties accomplished what the Foreign Sovereign Immunities Act achieved by statute. The Act, however, applies to agencies or instrumentalities that carry on commercial activities outside as well as within the United States. See § 453 and Reporters' Note 1 thereto. A claim not entitled to be adjudicated in the United States under § 453 (Section 1605(a)(2) of the Act) could not be adjudicated under the waiver provision (Section 1605(a)(1) of the Act) solely on the basis of the waiver contained in a typical FCN treaty. d. Waiver implied from agreement to arbitrate. Subsection (2)(b) is stated as a rule of United States law, but with some differences in detail appears to be the emerging international law as well. A question still open under international law is whether an agreement to arbitrate waives immunity from the jurisdiction of the courts only at the place chosen as the arbitration site, or is world wide. e. Waiver of immunity from attachment. As the law of sovereign immunity developed, there were two categories of judicial immunity-immunity from suit and immunity from attachment. The Foreign Sovereign Immunities Act deals with them in two separate sections, Section 1604 and Section 1609, and makes separate provisions for waiver of immunity from. jurisdiction-Section 1605(a)(1)and from attachment-Section 1610(a)(1). Subsection (1)(b) of this section accordingly provides that a waiver of immunity from suit is not itself a waiver of immunity from attachment, and a waiver of immunity from attachment is not a waiver of immunity from suit. Attachment for purposes of commencing litigation is precluded by the Foreign Sovereign Immunities Act, since Section 1608 sets forth the exclusive method of commencing an action and serving process. See also Section 1605(b)(1). Accordingly, jurisdiction may not be acquired by attachment even if immunity from attachment has been waived. The Foreign Sovereign Immunities Act authorizes attachment of property of a state in aid of execution after judgment in certain circumstances, even without a waiver of immunity. See § 460 and Comments a and c thereto. f. Counterclaims and setoffs. The Foreign Sovereign Immunities Act, in Section 1607(b) and (c), draws the same distinction between related and unrelated counterclaims as is drawn in Rule 13(a) and (b) of the Federal Rules of Civil Procedure. Related counterclaims may be brought without limit on recovery, and under Rule 13(a) must be brought in the same action or be forever barred: Claims not arising out of the same transaction or occurrence may be brought in the same proceeding, but if the state would be immune from jurisdiction with respect to a claim if it were brought in a separate action, recovery on that claim when raised as a counterclaim is limited to a setoff against any recovery in the initial action by the foreign state. Since the phrase “transaction or occurrence that is the subject matter of the claim” is the same in Section 1605(b) as in Rule 13(a), decisions construing that phrase as used in Rule 13(a) may serve as guidance in construing section 1605(b). The rationale supporting unlimited recovery for related counterclaims against foreign states, even when the counterclaim could not have been brought in the United States as an original action, is that a state that resorts to the courts of the United States to resolve a dispute consents to resolution by those courts of all aspects of the dispute. If a given transaction results in obligations by both sides, it would be unfair to allow only one party's obligation to be adjudicated. Thus, when a state initiates an action, it subjects itself to the jurisdiction of the court with respect to all claims related to that controversy. As to unrelated claims, jurisdiction based on the consent of the state is implausible, but it seems unfair for the state to recover a judgment from another party and deprive that party of the opportunity to have its own claim heard. The compromise made in National City Bank v. Republic of China, 348 U.S. 356, 75 S.Ct. 423, 99 L.Ed. 389 (1955), and adopted in the Foreign Sovereign Immunities Act, permits recovery on unrelated counterclaims up to the amount awarded to the state on its claim. Although Section 1607(c) of the Act denies “relief exceeding in amount or differing in kind from that sought by the foreign state,” it is clear from the legislative history and from the Republic of China case that the limit of recovery on counterclaims is not the amount claimed, but the amount awarded. Allowing a setoff against an award to a state is analogous to treating the claimant and the counterclaimant as both having interests in the same fund to be distributed by the court. To permit affirmative recovery by a counterclaimant on an unrelated counterclaim not otherwise adjudicable in the United States would impose an excessive risk on a foreign state that sought access to United States courts as a plaintiff. g. Withdrawal of waiver. The Foreign Sovereign Immunities Act (Section 1605(a)(1)) makes clear, contrary to some decisions prior to its adoption, that a waiver of immunity once given may not be withdrawn except in accordance with the terms of the waiver. [2] The UK Approach [a] State Immunity Act 1978, c. 33 (UK), Sections 18 and 19 Part II – Judgments against United Kingdom in Convention States

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18 Recognition of judgments against United Kingdom (1) This section applies to any judgment given against the United Kingdom by a court in another State party to the European Convention on State Immunity, being a judgment – (a) (b)

given in proceedings in which the United Kingdom was not entitled to immunity by virtue of provisions corresponding to those of sections 2 to 11 above; and which is final, that is to say, which is not or is no longer subject to appeal or, if given in default of appearance, liable to be set aside.

(2) Subject to section 19 below, a judgment to which this section applies shall be recognised in any court in the United Kingdom as conclusive between the parties thereto in all proceedings founded on the same cause of action and may be relied on by way of defence or counter-claim in such proceedings. (3) Subsection (2) above (but not section 19 below) shall have effect also in relation to any settlement entered into by the United Kingdom before a court in another State party to the Convention which under the law of that State is treated as equivalent to a judgment. (4) In this section references to a court in a State party to the Convention include references to a court in any territory in respect of which it is a party. 19 Exceptions to recognition (1) A court need not give effect to section 18 above in the case of a judgment – (a) (b)

if to do so would be manifestly contrary to public policy or if any party to the proceedings in which the judgment was given had no adequate opportunity to present his case; or if the judgment was given without provisions corresponding to those of section 12 above having been complied with and the United Kingdom has not entered an appearance or applied to have the judgment set aside.

(2) A court need not give effect to section 18 above in the case of a judgment – (a)

if proceedings between the same parties, based on the same facts and having the same purpose – (i)

(b)

are pending before a court in the United Kingdom and were the first to be instituted; or (ii) are pending before a court in another State party to the Convention, were the first to be instituted and may result in a judgment to which that section will apply; or if the result of the judgment is inconsistent with the result of another judgment given in proceedings between the same parties and – (i)

(ii)

the other judgment is by a court in the United Kingdom and either those proceedings were the first to be instituted or the judgment of that court was given before the first-mentioned judgment became final within the meaning of subsection (1)(b) of section 18 above; or the other judgment is by a court in another State party to the Convention and that section has already become applicable to it.

(3) Where the judgment was given against the United Kingdom in proceedings in respect of which the United Kingdom was not entitled to immunity by virtue of a provision corresponding to section 6(2) above, a court need not give effect to section 18 above in respect of the judgment if the court that gave the judgment – (a) (b)

would not have had jurisdiction in the matter if it had applied rules of jurisdiction corresponding to those applicable to such matters in the United Kingdom; or applied a law other than that indicated by the United Kingdom rules of private international law and would have reached a different conclusion if it had applied the law so indicated.

(4) In subsection (2) above references to a court in the United Kingdom include references to a court in any [British overseas territory] in respect of which the United Kingdom is a party to the Convention, and references to a court in another State party to the Convention include references to a court in any territory in respect of which it is a party. [b] AIG Capital Partners v. Kazakhstan, Judgment of the Queen’s Bench Division of the High Court of England and Wales of 20 October 2005, [2005] E.W.H.C. Comm. 2239, 129 I.L.R. 589, 605-607, 610, 612-616, 623-626, 628 (2007) [The case arose following the seizure of the property of a construction joint venture owned by AIG Capital Partners Inc. (“AIG”) and the Republic of Kazakhstan. The city of Almaty transferred all project property to itself without providing compensation. AIG and another claimant brought an arbitration claim before ICSID pursuant to the USP 1266 Kazakhstan BIT, alleging violations of the BIT. In October 2003 the tribunal held that Kazakhstan had breached the BIT and required Kazakhstan to pay AIG US $9,951,709 plus interest.

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AIG obtained leave to register the award in England under Section 1 of the Arbitration (International Investment Disputes) Act 1966. AIG sought to enforce the award against cash and securities (“the London assets”) held in the United Kingdom by third parties (“AAMGS”) in the name of the National Bank of Kazakhstan (“NBK”). The cash and securities represented part of the assets of the National Fund of the Republic of Kazakhstan, a fund established by Kazakhstan from the proceeds of oil sales and used to accumulate savings and stabilize the budget of Kazakhstan in the face of changes in commodity prices. AIG maintained that the cash accounts and the securities were the assets of Kazakhstan and could accordingly be attached in order to enforce the award. AIG was granted interim third party debt orders in respect of the accounts. Kazakhstan and the NBK claimed that they were entitled to state immunity in respect of the accounts.] E. The Issues to be Determined 29. In my view, given the arguments set out above, the following issues have to be determined. (2)

(5)

The construction of section 14(4) * of * the * State Immunity Act 1978: using common law principles of construction. There are two questions to be decided. First, what is the scope of the word “property” in that section? In particular, what is the position if one entity has legal ownership or some other interest in assets and another entity has a beneficial interest or some other interest? Secondly, do the words “property of a state's central bank or other monetary authority” mean any property that is allocated to or held in the name of a central bank, irrespective of the capacity in which or the purpose for which that property is held (as Kazakhstan and NBK contend); or is the scope of the words restricted to property held by a central bank (or other monetary authority) as such, as the claimants contend? What are the characteristics of the * cash * * accounts and the security accounts held in London by AAMGS for NBK? In particular are they: (a) “property of a state's central bank” within section 14(4) of the 1978 Act; (b) if not, are they “properly [of a state] which is for the time being in use or intended for use for commercial purposes” within section 13(4) of the 1978 Act? The second of these questions will only arise if the claimants are correct in respect of either the first or second question that arises on the construction of section 14(4) of the 1978 Act and I conclude, on the facts, that the London assets do not constitute property held by NBK (as the central bank of Kazakhstan) in its capacity as a central bank.

*** G. Second Issue: What is the Proper Construction of Section 14(4) of the State Immunity Act 1978 using Common Law Principles of Construction? 33. The clause of the State Immunity Bill which became section 14(4) of the 1978 Act was introduced by amendment in the House of Commons. The somewhat laconic explanation P 1267 of the provision and its scope, given by the Parliamentary Secretary to the Law Officers on behalf of the government, was: it ensures that a central bank or other monetary authority shall have the same immunity with regard to execution or in respect of relief by way of an injunction or order for specific performance…as a state shall have, irrespective of whether the central bank is a separate entity or is acting in the exercise of sovereign authority: Hansard HC Debates, 13 June 1978, Standing Committee D, vol. 951, col. 844. 34. The argument of the claimants is, basically, that if the wording of section 14(4) is read literally, or even “naturally” then that provision appears to grant a greater immunity to the assets of a central bank than is granted to those of a state, which do not have immunity if they are used for commercial purposes. Such a wider immunity cannot have been the intention of Parliament, they say, so that a narrower reading has to be given to the words, as proposed by the claimants. *** Discussion on the “common law construction” point 42. In order to determine the scope of section 14(4), I must look at it in its context in the 1978 Act as a whole. Section 1(1) sets out the general rule that a state is immune from the jurisdiction of the UK courts, unless the circumstances in which it is sued falls into one of the categories specified in Part I of the Act.… [O]ne of the most important exceptions from immunity of suit against a state is in respect of proceedings relating to “commercial transaction entered into by the state”: section 3(l)(a). “Commercial transactions” are defined in section 3(3). “Commercial purposes” are defined in section 17(1) as being purposes of such transactions and activities as are mentioned in section 3(3). 43. The jurisdiction of the UK courts as to enforcement of a judgment against a state is dealt with by section 13, which is in Part I of the Act but comes under the general heading “Procedure” and the particular heading of “Other procedural privileges”. Subject to exceptions, the property of a state shall not be subject to any process for the enforcement of a judgment or arbitration award: section 13(2)(b). But this rule is subject

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to the all-important exception in section 13(4), which says that section 13(2)(b) “does not prevent the issue of any process in respect of property which is for the time being in use or intended for use for commercial purposes”. *** 50. In my view the scheme of the Act in relation to the immunity of a central bank (or other monetary authority) from suit and the immunity of its property from the enforcement processes of UK courts [is] as follows. First, if the central bank (etc.) is a department of the government of the state, but is not a “separate entity” as defined by section 14(1), then the central bank is immune from the adjudicative process unless it falls within one of the exceptions in the Act, including the “commercial transaction” P 1268 exception set out in section 3. That is the effect of section 14(1). 51. Secondly, any process for the enforcement of a judgment or arbitration award may only be issued as against a state's property if, “for the time being, [it is] in use or intended for use for commercial purposes”. That is the effect of sections 13(2)(b) and 13(4). As I have already stated, in my view what constitutes “property” must be given a broad interpretation and “property” must mean the same in sections 13(2)(b), 13(4) and 14(4). Of course, whether a particular enforcement provision can be used against a state's property by the UK court will depend on three matters: (a) proof that the state concerned does have an interest in the particular asset; (b) proof that the state's property comes within the exception expressed in section 13(4); and (c) the nature of the property to be the subject of enforcement and the scope of the particular enforcement process under English law. For example, compare the scope of a third party debt order in CPR r 72.2 and the property against which a charging order can be made under section 2 of the Charging Orders Act 1979. 52. Thirdly, because section 14(1) defines what is covered by the words “a state”, it must mean that the property of any department of the government of the state will constitute “state property”, for the purposes of sections 13(2)(b) and (4), unless the department or other emanation of the state is a “separate entity” as defined in section 14(1). This must follow from the wording of the opening sentence of section 14(1). 53. Therefore, if section 14(4) did not exist, then, because central banks and other monetary authorities are not excluded from the scope of section 14(1), a central bank (etc.) that is a department of the government of a state and is not a “separate entity” (as defined) and its property could be the subject of an enforcement process in respect of a judgment obtained against the relevant state. But to be so the property of the central bank (etc.) would have to fall within the scope of section 13(4). 54. Fourthly, as to the immunity of “separate entities”, which is dealt with in section 14(2), the same rules as to immunity of a state apply (for both the adjudicative and enforcement jurisdictions), if the two preconditions set out are fulfilled. If section 14(4) did not exist, then it seems to me that section 14(2) would be applicable to a central bank (etc.) that fell within the definition of a “separate entity” as set out in section 14(1). This means that, but for the existence of section 14(4), the property of a central bank that is a “separate entity” could be the subject of the enforcement jurisdiction of UK courts in respect of a judgment against the central bank (etc.), provided the property came within the scope of section 13(4) – i.e. that the relevant property is in use or intended for use for commercial purposes at the relevant time. 55. Fifthly, if a “separate entity” (which is not a central bank etc.) is entitled to immunity, but it submits to the jurisdiction of the UK courts, then its property can be the subject of process to enforce a judgment against it. If the exclusion of central banks (etc.) from the scope of section 14(3) was not present, then that subsection would have dealt with the situation when a central bank (etc.) was indeed a “separate entity” as defined in section 14(1) and the central bank (etc.) had submitted to the jurisdiction in circumstances when it could have asserted immunity. In that case, there could be enforcement of a judgment obtained against a central bank (etc.) as against “the property” of the central bank (etc.) that is a “separate entity”, but only if that property of the central bank (etc.) as a P 1269 “separate entity” was in use or intended for use for commercial purposes: section 13(4). 56. But, sixthly, section 14(4) does exist and effect must be given to its wording. It is specifically directed to the question of enforcement processes against “Property of a state's central bank or other monetary authority”. In my view it is clear that Parliament intended that the position of a central bank or other monetary authority should be dealt with distinctly from either any other department of the government of a state, or any “separate entity” as defined in section 14(1). As I have attempted to show, it would have been possible to deal with the position of central banks (etc.) using sections 14(1), (2) and (3) without the need for a separate subsection. But section 14(4) was specifically introduced as an amendment. To my mind that makes it clear that Parliament intended this separate subsection to have a different effect from the preceding subsections of section 14 so far as they concern the ability to use enforcement processes against states and “emanations of the state”. 57. In my view the wording of section 14(4) is clear and imperative; hence the wording “[the] property of a state's central bank…shall not be regarded”. The words are, in their natural meaning, not capable of qualification. When they are set in their context, as I

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have tried to do, it is clear that they should not be qualified. This has the following consequences. (1)

(2)

(3) (4)

All “property” of a state's central bank or other monetary authority is covered by section 14(4). The only question is whether the central bank (etc.) has one of the types of interests in the property concerned, as I have described the interests above, so that the assets concerned can be described as the “property” of the central bank concerned. It does not matter whether the central bank is a department of the state or a separate entity. In all cases the central bank's property “shall not be” regarded as in use or intended for use for commercial purposes “for the purposes of” section 13(4). Given the wording of section 14(4), then the property of a state's central bank (or other monetary authority) must enjoy complete immunity from the enforcement process in the UK courts. If the central bank (etc.) has an interest in the property concerned, but the state of the central bank has another interest in the same property, then in my view the effect of section 14(4) is that the relevant property is immune from enforcement in respect of a judgment against that state, whether the property concerned is in use or intended for use for commercial purposes or not.

58. One can only speculate on why a separate subsection was introduced by amendment to deal with the position of property of central banks and other monetary authorities with regard to the enforcement process in UK courts. But one can note, first, that generally speaking, when a central bank or a state's monetary authority is performing its key functions of acting as guardian and regulator of the state’ s monetary system, it will be exercising governmental or sovereign authority; it will not be acting for commercial purposes. Secondly, it is likely that the most obvious “property” of a central bank, a state's reserves, will be held and used for governmental or sovereign purposes and not for commercial purposes. It may be that it was recognised by the draftsmen of the Act that it would be difficult, if not impossible, to determine whether a particular asset of a central bank or monetary authority was, at a relevant time, being used or intended for use for sovereign purposes or for commercial purposes. The assets of a state's central bank (or monetary authority) would be an obvious target for the enforcement process in P 1270 relation to judgments against the state or its central bank (etc.). This might lead to unwelcome and perhaps embarrassing litigation in UK courts. Therefore this possibility was pre-empted by the all-embracing and imperative immunity granted by section 14(4). 59. Contrary to the submissions of Mr Salter, the wording of section 14(4) will work in relation to “property” of the central bank whether the central bank is a department of a state or a separate entity. Take first the case where the central bank is a department of the state. If the central bank handles “property”, then it will do so as a part of the state. But, as a department of state, it might have the capacity to sue and be sued and it could have the right to enter contracts. That capacity will all depend on the law of the particular state concerned. If the central bank has no interest in the relevant property, then section 14(4) does not apply. But if it is established that the central bank has “property” in the asset in the sense I have described above, then this asset is immune from any enforcement process, whether the judgment is against the state as such, or it is the central bank that has been sued. 60. In the case of a central bank that is a separate entity from a department of the state, there can be no problem (in English law at least) about it having “property” in assets. Thus in the present case it is clear that NBK has “property” of some form in the London assets, viz a contractual right to the payment of debts in the case of the cash accounts held by AAMGS, and a beneficial interest in the securities held by AAMGS: see clauses I6(j) and 5(b) of the global custody agreement. At the same time the state could also have an interest in the same property; it may be some kind of beneficial interest, as it is agreed to be in this case. But in all cases, whatever the nature of the “property” right of the central bank, the assets concerned are immune from the enforcement process. 61. Therefore I conclude that the words “Property of a state's central bank or other monetary authority” in section 14(4), when construed using common law principles of construction, mean any asset in which the central bank has some kind of “property” interest as I have described, which asset is allocated to or held in the name of a central bank, irrespective of the capacity in which the central bank holds it, or the purpose for which the property is held. It follows that I also agree with the conclusion of Stanley Burnton J in the AIC case [2003] EWHC 1357 (QB) at para. 47, although I fear I have expressed my reasons at greater length. *** I. Fifth Issue: what are the characteristics of the cash accounts and the securities accounts held in London by AAMGS for NBK; in particular, are they (a) “property of a state’s central bank” within section 14(4) of the 1978 Act; (b) if not, are they “property [of a state] which is for the time being in use or intended for use for commercial purposes” within section 13 (4) of the 1978 Act? 89. Given the conclusions I have reached on issues one to four, I can deal with this issue

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briefly. AAMGS holds the cash and securities that constitute the London assets to the order of NBK. NBK has the contractual right to payment of the debt that is constituted by the cash accounts: clause 16(j) of the global custody agreement. AAMGS records NBK as being the owner of the securities it holds in the securities accounts: clause 5(b) of the global custody agreement. On my construction of section 14(4) of the 1978 Act, in particular the word “property”, that makes the London assets the “property” of NBK, which, everyone agrees, is the central bank of Kazakhstan. Therefore all the London assets are within section 14(4) and so cannot be the subject of enforcement processes by the UK P 1271 courts at all. 90. In my view that conclusion is not affected by the fact that, as the experts on Kazakhstan law agree, NBK holds those assets as part of the national fund of Kazakhstan under the Trust Management Agreement with Kazakhstan, by which the government of Kazakhstan is the beneficiary: clause 7.1.… Therefore, as a matter of Kazakhstan law, Kazakhstan remains the owner, but gives the trust manager the power to deal with the relevant property. That is enough, in my view, to bring the London assets within section 14(4). 91. The conclusion that the London assets are within section 14(4) means that they are immune from enforcement proceedings in the UK courts. So I think I do not need to decide whether, for the purposes of section 13(4) of the 1978 Act, the London assets were, at the time the enforcement processes were started, (a) also the property of Kazakhstan and, if so, (b) “in use or intended for use for commercial purposes”. However, on the first of these points it is agreed that Kazakhstan is the beneficial owner of the London assets. Therefore they must, on my reading of the word “property”, constitute “the property of a state” within section 13(2)(b) and section 13(4). 92. On the second point, my firm view is that the London assets were not in use or intended for use for commercial purposes at any stage. My reasons, briefly, are as follows. (1)

(2)

(3)

(4)

P 1272

The London assets formed part of the national fund. That fund was, in my opinion, created to assist in the management of the economy and government revenues of Kazakhstan, both in the short and long term. Management of a state's economy and revenue must constitute a sovereign activity. The national fund had to be managed by NBK in accordance with the law set out in the Budget Code, in particular article 24. That demanded that the national fund be invested: article 24, para. 2.1 accept that this required that investment to be placed in authorised financial assets in order to secure, amongst other things, “high profitability levels of the [national fund] in the long term outlook at reasonable risk levels”. I also accept the uncontroverted evidence that the securities accounts held by AAMGS on behalf of NBK were actively traded at all times and that NBK obtained from Kazakhstan a commission on good results and paid a penalty for poor ones. But I cannot accept that this activity is inconsistent with the Stability and Savings Funds of the national fund being used or intended for use for sovereign purposes. The aim of the exercise, at all times, was and is to enhance the national fund. To do that the assets have to be put to use to obtain returns which are reinvested in the national fund, i.e. to assist the sovereign actions. … The dealings of the securities accounts must, in my view, be set against the background of the purpose of the global custody agreement. That was established to assist in running the national fund. The securities accounts contain assets which are part of the national fund. In my view the dealings are all part of the overall exercise of sovereign authority by Kazakhstan. Last, but not least, there is the certificate of the ambassador. That is clear and unambiguous. I have seen no evidence to contradict it other than the fact that the securities accounts are traded. For the reasons I have given, the trading of those accounts does not mean they were being used or were intended for use for commercial purposes.

Conclusion on fifth issue 93. My conclusion is that all the London assets were, at all times, in use for sovereign purposes and pursuant to the exercise of sovereign authority of Kazakhstan, acting through NBK and AAMGS as the global custodian of the national fund. Therefore even if I had concluded that section 14(4) should be construed more narrowly and in the claimants' favour, I could not have avoided a conclusion that the London assets constituted property held by NBK in its capacity as such and it does not matter that it held them simply as trust manager for Kazakhstan and had only a limited interest in those assets. 94. Further, even if I were wrong about the construction of the word “property” in section 14(4), and I should conclude (on the facts of this case) that the London assets cannot be regarded as property of NBK at all, my conclusion would be that the London assets were at all times the “property” of Kazakhstan, within section 13(2)(b), and were the subject of transactions that were (through NBK and AAMGS) the exercise of sovereign authority. Accordingly, the London assets do not fall within section 13(4), so are immune from the enforcement process of the UK courts. ***

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96. Therefore I must discharge both interim orders.

[C] Assets Subject to Attachment and Execution [Note § 460 of the Restatement of the Law (Third): Foreign Relations Law of the United States, extracted above, at § 13.04.A.2.b.] [1] Helms Amendment to the Foreign Assistance Act 1973, 22 U.S.C. § 2151b(f)(1), Section 2370a United States Code, Title 22 (Foreign Relations and Intercourse), Chapter 32 (Foreign Assistance), Subchapter III (General and Administrative Provisions), Part I (General Provisions) Sec. 2370a – Expropriation of United States property (a) Prohibition None of the funds made available to carry out this Act, the Foreign Assistance Act of 1961 (22 U.S.C. 2151 et seq.), or the Arms Export Control Act (22 U.S.C. 2751 et seq.) may be provided to a government or any agency or instrumentality thereof, if the government of such country (other than a country described if [1] subsection (d) of this section) – (1)

has on or after January 1, 1956 – (a) (b) (c)

(2)

nationalized or expropriated the property of any United States person, repudiated or nullified any contract with any United States person, or taken any other action (such as the imposition of discriminatory taxes or other exactions) which has the effect of seizing ownership or control of the property of any United States person, and has not, within the period specified in subsection (c) of this section, either – (a) (b)

P 1273

(c) (d)

returned the property, provided adequate and effective compensation for such property in convertible foreign exchange or other mutually acceptable compensation equivalent to the full value thereof, as required by international law, offered a domestic procedure providing prompt, adequate and effective compensation in accordance with international law, or submitted the dispute to arbitration under the rules of the Convention for the Settlement of Investment Disputes or other mutually agreeable binding international arbitration procedure.

(b) Other actions The President shall instruct the United States Executive Directors of each multilateral development bank and international financial institution to vote against any loan or other utilization of the funds of such bank or institution for the benefit of any country to which assistance is prohibited under subsection (a) of this section, unless such assistance is directed specifically to programs which serve the basic human needs of the citizens of that country. (c) Period for settlement of claims The period of time described in subsection (a)(2) of this section is the latest of the following – (1) (2) (3)

3 years after the date on which a claim was filed, in the case of a country that has a totalitarian or authoritarian government at the time of the action described in subsection (a)(1) of this section, 3 years after the date of installation of a democratically elected government, or 90 days after April 30, 1994.

(d) Excepted countries and territories This section shall not apply to any country established by international mandate through the United Nations or to any territory recognized by the United States Government to be in dispute. (e) Resumption of assistance A prohibition or termination of assistance under subsection (a) of this section and an instruction to vote against loans under subsection (b) of this section shall cease to be effective when the President certifies in writing to the Speaker of the House of Representatives and to the Committee on Foreign Relations of the Senate that such government has taken one of the steps described in subsection (a)(2) of this section. (f) Reporting requirement Not later than 90 days after April 30, 1994, and at the beginning of each fiscal year thereafter, the Secretary of State shall transmit to the Speaker of the House of

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Representatives and the Committee on Foreign Relations of the Senate, a report containing the following: (1) (2) P 1274 (3)

(4) (5)

A list of every country in which the United States Government is aware that a United States person has an outstanding expropriation claim. The total number of such outstanding expropriation claims made by United States persons against each such country. The period of time in which each such claim has been outstanding. The status of each case and efforts made by the United States Government and the government of the country in which such claim has been made, to take one or more of the steps described in subsection (a)(2) of this section. Each project a United States Executive Director voted against as a result of the action described in subsection (b) of this section.

(g) Waiver The President may waive the prohibitions in subsections (a) and (b) of this section for a country, on an annual basis, if the President determines and so notifies Congress that it is in the national interest to do so. (h) ‘‘United States person’’ defined For the purpose of this section, the term ‘‘United States person’’ means a United States citizen or corporation, partnership, or association at least 50 percent beneficially owned by United States citizens. *** [Note Articles 19 and 21 of the United Nations Convention on Jurisdictional Immunities of States and Their Property, extracted above, at IV.A.2.c.] *** [2] Foreign States Immunities Act 1985 as amended (Australia), Sections 30 through 35 Part IV – Enforcement 30. Immunity from execution Except as provided by this Part, the property of a foreign State is not subject to any process or order (whether interim or final) of the courts of Australia for the satisfaction or enforcement of a judgment, order or arbitration award or, in Admiralty proceedings, for the arrest, detention or sale of the property. 31. Waiver of immunity from execution (1) (2) (3) (4) (5) P 1275

A foreign State may at any time by agreement waive the application of section 30 in relation to property, but it shall not be taken to have done so by reason only that it has submitted to the jurisdiction. The waiver may be subject to specified limitations. An agreement by a foreign State to waive its immunity under section 30 has effect to waive that immunity and the waiver may not be withdrawn except in accordance with the terms of the agreement. A waiver does not apply in relation to property that is diplomatic property or military property unless a provision in the agreement expressly designates the property as property to which the waiver applies. In addition to any other person who has authority to waive the application of section 30 on behalf of a foreign State or a separate entity of the foreign State, the person for the time being performing the functions of the head of the State's diplomatic mission in Australia has that authority.

32. Execution against commercial property (1) (2)

Subject to the operation of any submission that is effective by reason of section 10, section 30 does not apply in relation to commercial property. Where a foreign State is not immune in a proceeding against or in connection with a ship or cargo, section 30 does not prevent the arrest, detention or sale of the ship or cargo if, at the time of the arrest or detention: (a) (b)

(3)

the ship or cargo was commercial property; and in the case of a cargo that was then being carried by a ship belonging to the same or to some other foreign State – the ship was commercial property. For the purposes of this section: (a) (b)

commercial property is property, other than diplomatic property or military property, that is in use by the foreign State concerned substantially for commercial purposes; and property that is apparently vacant or apparently not in use shall be taken to

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be being used for commercial purposes unless the court is satisfied that it has been set aside otherwise than for commercial purposes. 33. Execution against immovable property etc. Where: (a)

(b)

property: (i) has been acquired by succession or gift; or (ii) is immovable property; and a right in respect of the property has been established as against a foreign State by a judgment or order in a proceeding as mentioned in section 14;

then, for the purpose of enforcing that judgment or order, section 30 does not apply to the property. 34. Restrictions on certain other relief A penalty by way of fine or committal shall not be imposed in relation to a failure by a foreign State or by a person on behalf of a foreign State to comply with an order made against the foreign State by a court. 35. Application of Part to separate entities (1) (2)

This Part applies in relation to a separate entity of a foreign State that is the central bank or monetary authority of the foreign State as it applies in relation to the foreign State. Subject to subsection (1), this Part applies in relation to a separate entity of the foreign State as it applies in relation to the foreign State if, in the proceeding concerned: (a) (b)

P 1275

the separate entity would, apart from the operation of section 10, have been immune from the jurisdiction; and it has submitted to the jurisdiction.

References 1) Copyright 2009 by Christoph Schreuer, Loretta Malintoppi, August Reinisch and 2) 3) 4) 5) 6) 7) 8)

9) 10) 11) 12) 13)

Anthony Sinclair. Reprinted with permission of Cambridge University Press. All rights reserved. Benvenuti and Bonfant SRL v. The Government of the People’s Republic of the Congo, Award of 15 August 1980, 1 ICSID Reports 330. Benvenuti et Bonfant SRL v. The Government of the People’s Republic of the Congo, Judgment of 13 January 1981, Tribunal de grande instance, Paris, 1 ICSID Reports 369. Benvenuti and Bonfant SRL v. Banque Commerciale Congolaise and Others, Judgment of 21 July 1987, Cour de Cassation, Paris, 1 ICSID Reports 373. Available at http://www.italaw.com/sites/default/files/case-documents/ita0294.pdf (accessed 1 September 2013). Available at http://www.italaw.com/sites/default/files/case-documents/ita1072.pdf (accessed 1 September 2013). Available at http://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/0786998_Ebook.pdf (accessed 1 September 2013). BIT Article X(2) provides, so far as relevant: … …”… the provisions of this Treaty, and in particular Article VI and VII, shall apply to matters of taxation only with respect to the following: (a) expropriation, pursuant to Article III; (b) transfers, pursuant to Article IV; or (c) the observation and enforcement of terms of an investment agreement or authorization as referred to in Article VI(1)(a) or (b), to the extent that they are not subject to the dispute settlement provisions of a Convention for the avoidance of double taxation between the two Parties, or have been raised under such settlement provisions and are not resolved within a reasonable period of time.” [emphasis added]. Available at https://icsid.worldbank.org/ICSID/ICSID/AdditionalFacilityRules.jsp (accessed 1 September 2013). Available at http://untreaty.un.org/ilc/texts/instruments/english/conventions/4_1_2004.pdf (accessed 1 September 2013). Available at http://www.icj-cij.org/docket/files/143/16883.pdf (accessed 12 November 2013). Copyright 1987 by the American Law Institute. Reprinted with permission. All rights reserved. Copyright 1987 by the American Law Institute. Reprinted with permission. All rights reserved.

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14) Available at

http://untreaty.un.org/ilc/texts/instruments/english/conventions/4_1_2004.pdf (accessed 1 September 2013). 15) Copyright 1987 by the American Law Institute. Reprinted with permission. All rights reserved.

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