General Principles of Law and International Investment Arbitration [1 ed.] 9789004368385, 9789004368378

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General Principles of Law and International Investment Arbitration

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

volume 12

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

General Principles of Law and International Investment Arbitration Edited by

Andrea Gattini Attila Tanzi Filippo Fontanelli

leiden | boston

Library of Congress Cataloging-in-Publication Data Names: Gattini, Andrea, editor. | Tanzi, Attila, editor. | Fontanelli, Filippo, editor. Title: General principles of law and international investment arbitration / edited by Andrea Gattini, Attila Tanzi, Filippo Fontanelli. Description: Leiden ; Boston : Brill Nijhoff, 2018. | Series: Nijhoff international investment law series ; volume 12 Identifiers: lccn 2018012762 (print) | lccn 2018013258 (ebook) | isbn 9789004368385 (E-book) | isbn 9789004368378 (hardback : alk. paper) Subjects: lcsh: International commercial arbitration. | Investments, Foreign--Law and legislation. Classification: lcc k2400 (ebook) | lcc k2400 .g463 2018 (print) | ddc 346/.092--dc23 lc record available at https://lccn.loc.gov/2018012762

Typeface for the Latin, Greek, and Cyrillic scripts: “Brill”. See and download: brill.com/brill-typeface. issn 2351-9542 isbn 978-90-04-36837-8 (hardback) isbn 978-90-04-36838-5 (e-book) Copyright 2018 by Koninklijke Brill nv, Leiden, The Netherlands. Koninklijke Brill nv incorporates the imprints Brill, Brill Hes & De Graaf, Brill Nijhoff, Brill Rodopi, Brill Sense and Hotei Publishing. All rights reserved. No part of this publication may be reproduced, translated, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission from the publisher. Authorization to photocopy items for internal or personal use is granted by Koninklijke Brill nv provided that the appropriate fees are paid directly to The Copyright Clearance Center, 222 Rosewood Drive, Suite 910, Danvers, ma 01923, usa. Fees are subject to change. This book is printed on acid-free paper and produced in a sustainable manner.

Contents Notes on Contributors viii 1 Under the Hood of Investment Arbitration: General Principles of Law 1 Andrea Gattini, Attila Tanzi and Filippo Fontanelli

Part A The Arbitration Process and General Principles Section i General Principles of Law and Arbitral Procedure 2 General Principles of Law on the Legal Force of Provisional Measures in International Investment Arbitration 25 Federico Lenci 3 Transparency in the Arbitral Procedure 45 Maria Beatrice Deli 4 General Rules and Principles on State Responsibility and Damages in Investment Arbitration: Some Critical Issues 58 Zeno Crespi Reghizzi 5 Investment Arbitration and eu General Principles of Law: Current Developments 74 Francesco Munari and Chiara Cellerino

Section ii Selected Procedural Principles of Investment Arbitration 6 Jurisdiction ratione temporis in International Investment Arbitration 111 Andrea Gattini 7 Jurisdiction and Admissibility in International Investment Law 130 August Reinisch

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Contents

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Multiple Proceedings 152 Christoph Schreuer

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Annulment of Awards 168 Piero Bernardini

Part B General Principles and Substantive Standards of Investment Law Section iii General Principles of Law and Substantive Issues 10

The Relevance of the Foreign Investor’s Good Faith 193 Attila Tanzi

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Human Rights Law in International Investment Arbitration 221 Vivian Kube and E.U. Petersmann

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Unjust Enrichment as a General Principle of Law in Investment Arbitration 269 Christina Binder

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Sustainable Development and Investment: Trends in Law-Making and Arbitration 290 Pia Acconci

Section iv Selected Principles of Investment Law 14

Police Powers Doctrine and International Investment Law 323 Catharine Titi

15

An Exercise in Equivocation: A Critique of Legitimate Expectations as a General Principle of Law under the Fair and Equitable Treatment Standard 344 Josef Ostřanský

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The National Treatment Obligation 378 Matteo Sarzo

Contents

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Most-Favoured-Nation Clauses and the Centrality and Limits of General Principles 398 N. Jansen Calamita and Ewa Zelazna

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Indirect Expropriation: A Comparative Approach 429 Ursula Kriebaum

Index 455

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Notes on Contributors Pia Acconci (Ph.D. in International Economic Law at the Università of Bergamo, Università of Turin and Università Commerciale L. Bocconi, Milan, 1997) has been a researcher and a professor of European Union Law and International Law for more than fifteen years at Università degli studi di Teramo, Italy. She has taught at several other universities and took part in many conferences both in Italy and abroad. She has also taken part in several Italian and international research and study groups and contributed to the coordination of a few of them as a supervisor. Her research activities relate to investment law, multinational enterprises, the protection of human rights, particularly of the right to health, from the perspectives of international and eu laws. She has written many articles and two books, and edited three books. Piero Bernardini is Of Counsel at Ughi e Nunziante, Rome. He is a member of the icca Advisory Board and was appointed by Italy to the icsid panel of conciliators and arbitrators. He has served as party-appointed arbitrator and president of arbitral tribunals, member of icsid annulment committees and counsel in more than 300 commercial and investment treaty cases, under the rules of icsid, icc, lcia, nai, Cairo Centre, uncitral, cam, aia, viac, scc. He was formerly President of the Italian Arbitration Association and chair of international arbitration at luiss University, Rome. He regularly serves as speaker, moderator or chairman in national and international congresses and seminars; he has written books and articles in the field of State contracts, investment protection, commercial contracts, arbitration. Christina Binder holds the Chair for International Law and International Human Rights Law at the Bundeswehr University Munich. Before, she was University Professor of ­International Law at the Department of European, International and Comparative Law at the University of Vienna and Deputy Director of the interdisciplinary Research Centre “Human Rights.” She is member of the ila Committees on the Implementation of the Rights of Indigenous Peoples, on Human Rights in Times of Emergency and on Feminism in International Law. Christina is member of the Executive Board of the European Society of International Law (esil)

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as well as of the European Inter-University Center for Human Rights and Democratization (eiuc). N. Jansen Calamita is Head of Investment Law & Policy, Centre for International Law, and Research Associate Professor (cil), Faculty of Law, National University of Singapore. Professor Calamita has held posts on the law faculties of the University of Oxford and the University of Birmingham. He previously served in the Office of the Legal Adviser in the us Department of State and began his career in practice in New York. He is on the board of editors of the Yearbook of International Investment Law & Policy (oup) and is series co-editor (with L Malintoppi) of International Litigation in Practice (Brill). He advises governments and international organizations on matters relating to international investment law and dispute resolution. Chiara Cellerino is lecturer in eu Law at the University of Genoa and at lumsa University (Rome). She holds a Ph.D. in eu Law from the University of Udine (2011) and a Master in Laws (ll.m.) from Columbia University (New York, 2010). From 2006 to 2012, she worked as attorney at law in Genoa. She has also gained professional experience in International organizations such as the European ­Parliament (Bruxelles) and the Organization for Security and Cooperation in Europe (­Vienna). She is part of the editing staff of the online journal “­European ­Papers” and was student editor of the “Columbia Journal of European Law.” Her research focuses on the constitutional aspects of eu external relations and eu common commercial policy, in particular the eu investment policy. She wrote a monograph on eu external action and of several comments and articles on external relations and internal market law, state aid and European private international law. Zeno Crespi Reghizzi is Associate Professor of Public and Private International Law at the State ­University of Milan, where he graduated in 2000 and obtained a Ph.D. in 2005. His research interests cover investment law, international dispute resolution, private international law and international commercial arbitration. He has published several articles, book chapters, and two monographs in Italian entitled “Lex rei sitae and the law applicable to securities on movable assets in private international law” (Giuffrè, 2007) and “Non-party intervention in p­ roceedings

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b­ efore the International Court of Justice” (Giuffrè, 2017). He is member of the icc Italy Commission on International Arbitration and adr. Maria Beatrice Deli is Professor of International Law at the University of Molise and Professor of International Arbitration at the Department of Law, Roma Tre University in Rome. She is Secretary General of the Italian Association for Arbitration (aia) and of icc Italy and member of the Council of the cam. She has practiced for over fifteen years in a law firm, and has extensive experience in international commercial and investment arbitration. She sits on the editorial board of the Rivista dell’Arbitrato and Diritto del Commercio Internazionale. She wrote several articles and publications. Member of the icca Publications Committee and of the icc Institute of World Business Law. Filippo Fontanelli is Senior Lecturer in International Economic Law at the University of Edinburgh. He previously worked in private practice and at the International Court of Justice. He serves as expert for the Council of Europe and the Scottish Parliament and is co-rapporteur of an ila Committee on the Procedure of International Courts and Tribunals. Andrea Gattini is Professor of International Law at the Law School of the University of Padua. He is an associated member of the International Law Association, Institut des Hautes Études Internationales (Paris) and of several international academic institutions. Formerly, he was counsel of the Federal Republic of Germany before the International Court of Justice. Ursula Kriebaum is Professor for Public International Law at the University of Vienna, Department of European, International and Comparative Law. She received her Dr. jur. in 1999, and her Dr. jur. habil. in 2008 (both University Vienna). She is a Member of the Permanent Court of Arbitration, Alternate Member of the Court of Conciliation and Arbitration within the osce, Expert for the Human Dimension Mechanism of the osce appointed by Austria, Member of the Arbitration panel for the Protocol on Cultural Cooperation to the Free Trade Agreement between the European Union and its Member States and the Republic of Korea. She teaches International Law, investment law and human rights law at the University of Vienna, acts as legal expert in international i­nvestment

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law and human rights law cases and as consultant for law firms and advisor to governments on investment law and arbitration issues. Vivian Kube wrote her PhD at the European University Institute, Florence, about eu investment law and human rights. She studied law in Hamburg, Germany, and Leiden, the Netherlands, and holds a ll.m. in Comparative, European and International Laws (eui). She has taught, presented and published several articles and chapters in the fields of international economic law, eu law and human rights. She is now preparing for the second state exam in Germany and continues to work as an academic collaborator for Professor Marise Cremona, Academy of eu Law, and Professor Hans Micklitz. Federico Lenci (Ph.D. in International Law, University of Milan, Former Visiting Researcher at Sciences Po Law School, Paris) is a practitioner and lecturer in international dispute settlement, international business law and corporate law. He works principally as counsel and assistant to arbitrators in treaty-based investorState arbitrations and international commercial arbitrations. Dr. Lenci is the author of a Ph.D. thesis entitled “Provisional Measures in International Investment Arbitration.” He is fluent in Italian (native), English, French, Spanish and Portuguese. He is qualified lawyer at the Milan bar. Francesco Munari is Professor of eu law at the University of Genoa, formerly Jean Monnet Professor of eu environmental law. PhD in international law, University of Milan. Formerly visiting scholar at Yale University, visiting professor at the University of Hamburg and at the Leghorn Academy of the Italian Navy; visiting research fellow at Max-Planck-Institut of Hamburg. He is adjunct professor at luiss, Libera Università degli studi sociali – Guido Carli, Rome. His interests focus on eu law, maritime and transportation law, law of the sea, antitrust and regulated markets, environmental law. He is co-director of Diritto del commercio internazionale and member of the editorial boards of Diritto dell’Unione europea and of Diritto marittimo. Josef Ostřanský is a lecturer at the Geneva ll.m. in International Dispute Settlement (mids), where he teaches international commercial and investment arbitration, and carries out academic research under the auspices of the Geneva Center for

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International Dispute Settlement (cids). He has delivered lectures and presentations on international investment law (e.g. unctad, Geneva; University of Padua, Italy; Tehran University, Iran; elsa Summer School, Athens) and his work has been published in various international law journals. Ernst-Ulrich Petersmann is emeritus professor of international law and European law and former head of the Law Department of the European University Institute (eui) at Florence, Italy. He taught at numerous Universities in Europe, the usa, Africa, Asia, at the Hague Academy of International Law, the eui Academy of European Law and the Xiamen Academy of International Law. He worked as legal adviser for the German Ministry of Economic Affairs (1978–1980), gatt and the wto (1981–2017), and was a secretary, member or chairman of gatt and wto dispute settlement panels. August Reinisch has been a professor of international and European law at the University of Vienna since 1998. He currently serves as Head of the Section of International Law and International Relations and as Director of the ll.m. Program in International Legal Studies. He is a Member of the International Law Commission, a membre associé of the Institut de droit international, President of the ­Austrian Branch of the ila and President of the German Society of International Law. He has served as arbitrator in investment cases mostly under icsid and u ­ ncitral Rules. Matteo Sarzo holds a PhD in International Law from the Universities of Padova (Italy) and Paris i – Panthéon Sorbonne. He is currently a postdoctoral research fellow at the School of Law of the University of Padova. Its main research topics and publications focus on the international adjudication as well as the relationship between international law and domestic legal systems. Christoph Schreuer is a graduate of the Universities of Vienna, Cambridge and Yale. He authored numerous articles and books in the field of international law, among which a 1500-page commentary on the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. He has written expert opinions in many investment cases and has served as arbitrator in icsid and uncitral cases. From October 2000 to September 2009 he was Professor of International Law at the University of Vienna, Austria. Since March 2015 he is

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Of Counsel with the law firm zeiler.partners in Vienna. He is currently working as an independent expert and arbitrator in investment cases. Attila Tanzi holds the chair of international law at the University of Bologna. His other current and previous appointments include: visiting professor at Queen Mary University, professor at the University of Verona, director of studies at The Hague Academy of International Law, member of the Permanent Court of Arbitration, conciliator at the Court of Conciliation and Arbitration of osce, chairman of the Implementation Committee of the unece Water Convention and legal consultant to Italy’s Ministry of Foreign Affairs. He acts as counsel and arbitrator in inter-state cases and as arbitrator investment treaty cases. He has also acted as an expert on public international law in various proceedings. His main fields of interest are public international law, international investment law, international water law and international environmental law. His areas of research and practice include natural resources law, investment law, environmental law, dispute settlement, State responsibility and liability, jurisdictional immunities, law of international organizations. Catharine Titi is a Research Scientist (tenured) at the French National Centre for Scientific Research (cnrs) and Member of the credimi, Law Faculty of the University of Burgundy. She is Co-Chair of the esil Interest Group on International Economic Law and Member of the ila Committee on ‘Rule of Law and International Investment Law’. She co-directs a research project on investment law funded by the French Ministry of Justice. Catharine holds a PhD from the University of Siegen, Germany (Dr. iur., Summa cum laude) and she has previously worked at the United Nations Conference on Trade and Development (unctad). In 2016, Catharine received the prestigious Smit-Lowenfeld Prize of the International Arbitration Club of New York for the best article published in the field of international arbitration. Ewa Zelazna is a Lecturer at the University of Leicester, uk. Ms Zelazna completed ba in Law and Economics and ll.m in International Commercial Law. She has recently submitted her PhD in which she evaluated the development of the eu’s international investment policy. Ms Zelazna previously worked as a trainee at the Court of Justice of the European Union and as an intern at the Investment Treaty Forum, British Institute of International and Comparative Law. She contributed to projects for the Council of Europe and the European Commission.

Chapter 1

Under the Hood of Investment Arbitration: General Principles of Law Andrea Gattini*, Attila Tanzi** and Filippo Fontanelli*** This opening chapter addresses the function of general principles of law in investment arbitration. It sets the scene for the volume’s investigation, and draws from the subsequent chapters to provide an overview. It is possible, in this light, to offer some general remarks. General principles are hardly ever used as primary norms of conduct, and mostly operate to make formal rules viable (complementing the procedural set of arbitration, or steering the interpretation of treaty norms). Principles operate ad hoc, their application depending on specific instances of normative ambiguity or unusual factual patterns. They are more than gap-fillers, but they cannot attain the front stage; in a sense, systematic recourse to general principles would call into question the viability of the treaty régime that fuels and sustains investment arbitration.

A Introduction In recent years, international law literature has shown a renewed interest in tracing the relationship between general international law and the law and arbitration of investment protection.1 This trend did not come as a surprise. At first, there was an almost euphoric phase in the nineties of the twentieth century, in which investment arbitration was described as straying away

* University of Padova. ** University of Bologna. *** University of Edinburgh, corresponding author. 1 See, for instance, the special issue of icsid Review for the 50th Anniversary of the icsid Convention: Laurence Boisson de Chazournes, Campbell McLachlan (eds), ‘The Intersection Between Investment Arbitration and Public International Law’ (2016) 31 icsid Review 256 ff.; Bruno Simma, Dirk Pulkowski, ‘Two Worlds, but Not Apart: International Investment Law and General International Law’ in Marc Bungenberg, Jörn Griebel, Stephan Hobe, August Reinisch (eds.), International Investment Law (Nomos 2015) 361; Campbell McLachlan, ‘Investment Treaties and General International Law’ (2008) 57 International & Comparative Law Quarterly 361.

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_002

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from general international law. The scholarship, in the wake of, and in parallel with, a growing jurisprudence of arbitral tribunals, set out to outline the contours of international investment law as a novel ‘system,’ or at least, as an autonomous subsystem of international law. Thereafter, the sense that investment law is part and parcel of international law quickly recovered lost ground. The scope of the present volume is to investigate the relation between international law and investment law and arbitration from a specific perspective, that one of the general principles of law.2 In the first icsid award, Amco Asia Co. v. Republic of Indonesia of 1984, the Tribunal held that the full compensation of prejudice is ‘a general principle of law which may be considered as a source of international law.’3 The express reference to general principles of law may be relatively rare in the following arbitral case-law. Yet, there is a general consensus in international arbitral practice that investment law ‘cannot be read and interpreted in isolation from public international law and its general principles,’4 and that general principles of law are able ‘to guide and discipline the evaluation of state conduct under investment treaty standards.’5 The value of these statements is of course independent of whether the tribunals assessed correctly these general principles in the cases in point.6 As is well known, the notion of general principles of law is an irksome issue in international law. The question whether that label indicates only general principles of law arisen in foro domestico or also principles directly arising in the sphere of international law is a sort of cause célèbre in the theory of 2 For some previous studies see Tarcisio Gazzini, ‘General Principles of Law in the Field of Foreign Investment’ (2009) 10 Journal of World Investment & Trade 103; Stephan W Schill, ‘General Principles of lnternational Law and International Investment Law’ in Tarcisio Gazzini, Eric De Brabandere (eds), International Investment Law. The Sources of Rights and Obligations (Brill 2012) 133. 3 See Amco Asia Co. v. Republic of Indonesia, Award of 20 November 1984, para. 267. 4 See Phoenix v. Czech Republic, icsid ARB/06/5, Award 15 April 2009, para. 78. 5 See Enron Corp. Ponderosa Assets l.p. v. Argentina, icsid ARB/01/3, Award 22 May 2007, para. 257. 6 In the Phoenix case, the principle of bona fides led the Tribunal to conclude that the investment failed the legality requirement, entailing in turn an abuse of the icsid system of protection (para. 143). This conclusion was remarkable because the Czech-Israel bit did not mention the legality requirement as such. In the Enron case, dealing with the fet clause, the Tribunal stressed that previous arbitral tribunals had evoked different general principles to construe the standard. It thus identified the principle of securing a ‘legal stable framework’ for the investment (at para. 260) as one contributing to the construction of the fet clause in the case at hand.

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international law.7 To this uncertainty, a further one is added; that is, whether some general principles exist that emerged in the field of international investment law and only apply within its régime.8 In light of these difficulties, the task of this volume may appear overambitious. Nevertheless, we found it appropriate to gather a number of outstanding experts in the field, who could shine some more light on the ongoing debate about the so-called ‘hybrid’ nature of international investment law and arbitration.9 Dissatisfaction with the prevailing theoretical assessment of contemporary international investment law has accompanied the discipline since its inception.10 B

General Principles

General principles of law can shape the arbitral procedure and, occasionally, fill its gaps.11 They also steer the interpretation of treaty norms, including substantive ones. Treaty norms can contract out of general principles and

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See Giorgio Gaja, ‘General Principles of Law’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia Public International Law, May 2013. See also Oscar Schachter, International Law in Theory and Practice (Martinus Nijhoff 1991) 50–54. This possibility has been evoked with regard to other bodies of international law. For instance, the Appellate Body of the World Trade Organization, while contemplating that the precautionary principle might operate ‘in environmental law,’ it was not ready to confirm its existence outside that field, see Appellate Body, European Communities – Hormones, WT/DS26/AB/R, report of 16 January 1998, para. 123. The inquiry into the existence of general principles of law specific to investment law must not be confused with the study of the common normative standards found in investment protection treaties, see Rudolph Dolzer, Christoph Schreuer, Principles of International Investment Law (oup 2012). For a caveat against a tendency of ‘deriving principles from heterogeneous casematerial in support of investor interests’ see Martti Koskenniemi, ‘It’s not the Cases, It’s the System’ (2017) 18 Journal of World Investment & Trade 343, 346. For the characterization of international investment law and arbitration as hybrid see famously Zachary Douglas, The International Law of Investment Claims (cup 2009) 9. See Alfred Verdross, ‘Die Sicherung von auslaendischen Privatrechten aus Abkommen zur wirtschaftlichen Entwicklung mit Schiedsklauseln’ (1957–1958) 18 Zeitschrift fuer auslaendisches oeffentliches Recht und Voelkerrecht 1957–1958, 635. On the viability of assuming a general set of principles of procedural fairness in international litigation, see Filippo Fontanelli and Paolo Busco, ‘The Function of Procedural Justice in International Adjudication’ (2016) 15(1) The Law & Practice of International Courts and Tribunals 1.

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customs, and investment treaties are deemed to do exactly that.12 However, in the absence of clear derogation, general principles stand to apply as default. The standard ‘fall back’ function of principles must be presumed: ‘[t]oute convention internationale doit être reputé s‘en référer tacitement au droit international commun, pour toutes les questions qu‘elle ne résout pas elle-même en termes exprès et d‘une façon differente.’13 Even when general principles are used only as hermeneutic benchmarks – i.e., to interpret treaty norms – they are effectively applied.14 It is important, therefore, to ascertain that the application of general principles, in investment arbitration, is not precluded. To the contrary, general principles are certainly part of the applicable law armory from which tribunals can draw. For instance, with regard to the identification of the applicable law, Article 42, para. 1 of the 1965 icsid Convention bears testimony to the complex relation between different sources of law: 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. In a nutshell, party-indicated sources (including contracts and possibly lex mercatoria), conflict of laws rules, domestic statutes, and international law: all potentially flow into the set of applicable rules.15 Tribunals’ jurisdiction is anchored to the arbitration clause that encapsulates States’ consent to arbitration, and only extends to the disputes specified therein. Depending on the wording of the arbitration clause16 and the application of external constraints (like the icsid Convention), tribunals can hear treaty-based claims, or any 12

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International Court of Justice, Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Preliminary Objections, Judgment, i.c.j. Reports 2007, p. 582, para. 90. Permanent Court of Arbitration, Georges Pinson (France/United Mexican States) Award of 13 April 1928, unriaa, vol. v, p. 422. Anastasios Gourgourinis, ‘The distinction between interpretation and application of norms in international adjudication’ (2011) 2(1) Journal of International Dispute Settlement 31. Christoph Schreuer, ‘Jurisdiction and Applicable Law in Investment Treaty Arbitration’ (2014) 1 McGill J. Disp. Resol. 1. August Reinisch, ‘How Narrow are Narrow Dispute Settlement Clauses in Investment Treaties?’ (2011) 2(1) Journal of International Dispute Settlement 115.

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investment-related claim. The path-breaking 2002 decision of the ad hoc Committee in the Vivendi i case clarified that, in certain circumstances, contractbased claims can be brought to arbitration as such.17 Moreover, and besides the sources on which the claims are based, other sources apply – in particular general principles and customary norms – en route to the tribunals’ decision on the primary claim.18 With regard to procedural rules of investment arbitration, the debate over their nature partakes in the more general and lively debate on the nature of procedural rules in international arbitration and adjudication at large. Most arbitral tribunals follow the icsid or the uncitral Rules, and the question remains whether, besides and beyond these rules, general principles of procedural law can inform the tribunals decisions and complement their procedural powers and duties, for instance to curb the risk of excessive discretion or to ensure the fairness of the adversarial setting.19 This collection aims to contribute to these debates by offering an overview of the state of art of a selected number of issues of procedural and substantive law. The topics have been chosen having regard to their enduring importance, both in legal theory and in arbitral practice, their novelty, or their disputed nature. Not all general principles of law are featured. For instance, whilst there is no autonomous treatment of the principle of bona fides in general, there are chapters addressing its various expressions, such as the good faith of the investor 17

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icsid Case No. ARB/97/3, Compañia de Aguas del Aconquija s.a. and Vivendi Universal s.a. v. The Argentine Republic, Decision on Annulment, 3 July 2002, par. 60. For an insightful overview, see Christoph Schreuer, ‘Investment Treaty Arbitration and Jurisdiction over Contract Claims – the Vivendi i Case Considered’ in Todd Weiler, International Investment Law and Arbitration: Leading Cases from the icsid, nafta, Bilateral Treaties and Customary International Law (Cameron May 2005) 281. On the different notions of applicable law and jurisdiction, and on the different functions on the respective provisions, see Lorand Bartels, ‘Jurisdiction and Applicable Law Clauses: Where does a Tribunal Find the Principal Norms Applicable to the Case Before It’ in Yuval Shany and Tomer Broude, Multisourced Equivalent Norms in International Law (oup 2011) 115. On the different views on the use of general principles of law as applied by international courts and tribunals see, in favour, Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (cup 1952) (with regard especially to procedural principles; a sceptical account is Angelo P Sereni, Principi generali del diritto e processo internazionale (Giuffré 1955). For a recent positive assessment see Robert Kolb, ‘General Principles of Procedural Law’ ‘General principles of procedural law’ in Andreas Zimmermann, Christian Tomuschat, Karin OellersFrahm, Christian (eds), The Statute of the International Court of Justice (oup 2012) 1669.

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(see Chapter 10), unjust enrichment (see Chapter 12), legitimate expectations (see Chapter 15). C

General Principles and Arbitration Proceedings

On procedural issues, what strikes the eye is the tribunals’ systematic adherence to the norms and principles of good administration of justice applied in other international judicial settings. This provides powerful evidence of investment tribunals seeing themselves as international dispute-resolution bodies, participating in a shared notion of judicial powers and duties.20 A pertinent example is the issue of provisional measures. Article 47 icsid Convention limits itself to sanction the Tribunal’s power to ‘recommend any provisional measures which should be taken.’ Starting with the Maffezini case of 1999, however, arbitral jurisprudence is decisively keen to consider such measures binding.21 The contribution by Federico Lenci (see Chapter 2) shows how such trend was influenced by the contemporaneous jurisprudence of the icj (and, one may add, of human rights jurisdictions22), bearing evidence of how international investment arbitration is affected by, and partakes in, the development of public international law. In the opinion of the Author, the ultimate rationale of recognizing provisional measures’ binding force, for icsid Tribunals as well as for other international courts and tribunals, is to guarantee ‘the integrity of proceedings’ and ‘the very adjudicatory function’ of the arbitral tribunal. In other words, the power of indicating binding measures is an inherent one, flowing from the jurisdiction that is essential to the task of the administration of justice, as a general principle of law. 20

For the argument that arbitration is not ontologically different from adjudication see C ­ arlo Santulli, Droit du Contentieux International (lgdj 2015). Nevertheless, not all f­eatures of adjudication apply to arbitration. For instance, it is still difficult to identify a unitary view regarding whether tribunals should care to ensure consistency in the case-law or rather focus exclusively on the resolution of each dispute. See, for instance, Saipem S.p.A. v. People’s Republic of Bangladesh, icsid Case No. ARB/05/07, Decision on Jurisdiction and Recommendations on Provisional Measures of 21 March 2007, para. 67, as o­ pposed to Burlington Resources Inc. v. Republic of Ecuador, icsid Case No. ARB/08/5, Decision on Reconsideration and Award of 7 February 2017, para. 46 (with dissent by arbitrator Stern). 21 See Emilio Agustin Maffezini v. The Kingdom of Spain, icsid Case No. ARB/97/7, Decision on Request for Provisional Measures of 28 October 1999, at para. 9. 22 Jo M Pasqualucci, ‘Interim Measures in International Human Rights: Evolution and Harmonization’ (2005) 38 Vanderbilt Journal of Transnational Law 1.

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Also with regard to jurisdictional issues arbitral practice does not seem to diverge from general international law. A point in case is the theoretically irksome and practically most relevant issue of temporal jurisdiction. As the contribution of Andrea Gattini (see Chapter 6) demonstrates, most arbitral tribunals start from the assumption that jurisdiction is not retroactive. This solution may be different from domestic law,23 but is perfectly in line with the international customary rule of treaty law codified in Article 28 vclt. The Author’s point is that the diversity of arbitral jurisprudence is partially due to the intrinsic flexibility of non-retroactivity in jurisdictional matters. Three situations should be distinguished: whether the dispute arose prior to the entry into force of the instrument grounding the jurisdiction of the arbitral tribunal; whether it relates to facts or situations that took place before that date; whether the existence of a so-called cooling off period could temporarily limit the jurisdiction of the arbitral tribunal. In the first two scenarios, the relevant guidance must be sought in the exact formulation of the applicable jurisdictional clause. With regard to the third question, instead, the jurisprudence on the point seems to be hopelessly divided along a line influenced by discretion and ideology. This aspect is addressed also in the contributions of Reinisch (see Chapter 7) and of Calamita and Zelazna (see Chapter 17). When coming to the distinction between jurisdiction and admissibility, international investment arbitral practice seems to lose focus and coherence. Recourse to general principles seems of doubtful relevance. As it was authoritatively expressed in the Hochtief v. Argentina decision on jurisdiction in 2011, ‘jurisdiction is an attribute of a tribunal and not of a claim, whereas admissibility is an attribute of a claim but not of a tribunal.’24 Even accepting this distinction as satisfactory, less obvious are the practical implications and consequences of a procedural jurisdictional impediment, as opposed to claim’s inadmissibility. On the one hand, it has been argued that these different scenarios entail several different effects, ranging from the duty of arbitral tribunals to raise the issue of jurisdiction proprio motu, to the curability of a ground of inadmissibility while the proceedings are pending, to the limited reviewability and lack of res judicata of admissibility determinations.25 On the 23

24 25

See for instance Article 8 of the Italian Law on Private and Procedural International Law (no. 218 of 1995), which affirms the jurisdiction of Italian civil courts even if the facts or situation giving rise to their jurisdiction took place after the saisine. Hochtief Aktiengesellschaft v. Argentine Republic, icsid Case No. ARB/07/31, decision on Jurisdiction 24 October 2011, para. 90. See Michael Waibel, ‘Investment Arbitration: Jurisdiction and Admissibility’ in Bungenberg et al. above (n 1) 1212, 1274 ff., who lists not fewer than seven consequences of the distinction between jurisdiction and admissibility.

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other hand, the relevance of the distinction has been put in doubt, in light of the diverse approaches, ultimately steeped in the tribunals’ discretion, regarding the gateway issue: whether a certain issue goes to the jurisdiction of the tribunal or the admissibility of the claim. Furthermore, it has been observed that the putative consequences of the distinction are porous. Under Article 52 icsid, both a mistaken finding on jurisdiction and an erroneous determination on admissibility might constitute cause for annulment, if they rise to the level of ‘a serious departure from a fundamental rule of procedure.’ There is no suggestion that the annullability of an award or decision depends on the characterization of its content as jurisdictional or relating to admissibility. The icsid Convention, which does not contemplate that distinction, is the only applicable instrument,26 and its Article 41 does not distinguish between jurisdiction and admissibility, but between jurisdiction (of the Center) and competence (of the Tribunal). August Renisch’s contribution (see Chapter 7) highlights at least five issues in which the divide between jurisdiction and admissibility has been considered relevant in practice: cooling off clauses, most favorite nation clauses, the requirement that investments be made in accordance with the law of the host state, mass claims, and corruption defences. In each scenario, tribunals have reckoned with the characterization of the procedural objections raised, and with the implications of upholding them. Attempts to extract abstract guidelines27 are bound to fail, as long as disagreements on the initial characterization persist. As Reinisch clearly shows, the real root of uncertainty lies in the different legal tradition of civil law and common law. For lawyers trained in a civil law system the distinction between juridiction and competence (in the meaning of admissibility) is a fundamental and clear-cut one. The same does not hold true in common law jurisdictions, where the question is focused on whether, all things considered, the court may or may not decide on the merits. Shifting the attention away from the jurisdiction/admissibility divide and focusing on different general principles applicable to each case may hold more promise. Calamita and Zelazna (see Chapter 17) adopt this method with 26

27

See Filippo Fontanelli, Attila Tanzi, ‘Jurisdiction and Admissibility in Investment Arbitration. A View from the Bridge at the Practice’ (2017) 16(1) The Law and Practice of International Courts and Tribunals 3, 8–14. For instance, the idea that mfn clauses might be used to bypass admissibility requirements, but cannot extend the tribunal’s jurisdiction, see Most Favoured-Nation Treatment, unctad Series on International Investment Agreements ii, UNCTAD/DIAE/IA/2010/1, 24 January 2011, 66–67.

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regard to the possibility of using mfn clauses for jurisdictional purposes. Their contribution insists on the rigorous application of the ejusdem generis principle, which is essential to the functioning of mfn provisions. With regard to the corruption defense or in case of contracts which are otherwise tainted by illegal practices (or with regard to the infringement of the host state laws in general), Christina Binder (see Chapter 12) proposes recourse to the principle of unjust enrichment. However, it is quite common that the different principles relied upon, even when their existence is accepted, are subject to some doubts about their exact content and scope of application, as is precisely the case with the principle of unjust enrichment.28 Sometimes, it is not difficult to characterize properly certain procedural issues, but it might be to reconcile them with one another. This is particularly the case with certain principles peculiar to arbitration, which are in tension with broader general principles applying across the board of dispute settlement. Two such instances are the interplay between confidentiality and transparency, and that between finality of decisions and integrity of both the process and the resulting award. The chapters by Maria Beatrice Deli and Piero Bernardini (respectively, Chapters 3 and 9) aptly highlight the underlying tension in each couplet of principles, and indicate reasonable and pragmatic solutions in order to find an appropriate balance. Having regard to transparency, the lesson drawn from international commercial arbitration is helpful in framing its import in the field of investment arbitration. One of the rationales of choosing arbitration instead of adjudication is exactly that of preserving the confidentiality of the proceedings, and allowing the parties to agree upon procedural arrangements that, at least to a certain extent, take into account their mutual or particular exigency of secrecy. However, investment arbitration often regards public interests, and this public law quality of investment litigation makes openness and transparency of the proceedings an increasingly felt priority. The 2006 reform of the icsid proceedings and the un Mauritius Convention of 2014 on Transparency in Treaty-based Investor-State Arbitration29 show this much conspicuously. Deli comments on the prospect of success of the Convention, which translates and develops transparency’s core value into a detailed conventional regime, turning a principle into treaty-law. Moreover, Deli’s chapter analyses also some existing instruments, in particular, the new Article 37, para. 2, of the icsid

28 See Binder’s conclusion at 289. 29 Text available in https://www.uncitral.org/pdf/english/texts/arbitration/transparency -convention/Transparency-Convention-e.pdf.

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Rules, which envisages the reception of amicus curiae briefs. Increased transparency of investment arbitration, ultimately, is an ongoing exercise in balance and fine-tuning, that proceeds from existing principles, black letter provisions, future reforms and prevailing practice, against the backdrop of society’s evolving awareness about the stakes of investment arbitration. As to finality and efficiency, international arbitration has gone a long way from the time in which the arbitrators, or umpires, were not expected to give reasons for their decisions.30 The icsid tribunals and ad hoc Committees have until now shown some degree of self-restraint in partially, or fully, annulling an award, adhering to the view that annulment should be an exceptional remedy, available in narrowly defined circumstances.31 Nevertheless, the specific wording of Article 52 of the icsid Convention32 clearly emphasizes the centrality of procedural and substantial justice in arbitration proceedings. In this respect, Piero Bernardini suggests that the current icsid system appears wanting with regard to the general principle of predictability. In this context, he addresses the proposal to create a permanent or semi-permanent ad hoc Committee to ensure a better consistency of annulment decisions.33 The quest for general principles and for ‘reasonable’ solutions, however, cannot be pursued too far. In particular, general principles that presuppose the existence of an integrated judicial system are incapable of operating in the field of international arbitration. Christoph Schreuer’s essay (see Chapter 8) 30

31

32 33

See Jan Paulsson, The Idea of Arbitration (oup 2013); Justice Bingham, ‘Reasons and Reasons for Reasons: Differences Between a Court Judgment and an Arbitration Award’ (1988) 4(2) Arbitration International 141. Up to December 2017, there have been only 17 cases of annulment, of which 11 cases of partial annulment. All in all the practice of ad hoc committees seems to have adhered to the view of the late Ibrahim Shihata, former Secretary-General of icsid from 1983 to 2000, according to whom the draftsmen of the Convention clearly intended to ‘construe narrowly the ground for annulment, so that this procedure remained exceptional,’ cited in icsid, Background Paper on Annulment for the Administrative Council of the icsid, 10 August 2012, 74, available at http://icsid.worldbank.org. For a critical appraisal of this mindset see Hamid G Gharavi, ‘icsid and Its Monarch’ in Mohamed Abdel Raouf, Philippe Leboulanger, Nassib G Ziadé (eds), Festschrift Ahmed Sadek El-Kosheri (Wolters Kluwer 2015) 325. On the contrary, for a caveat against the risk of confusing an annulment proceedings for an appeal see Christoph Schreuer, ‘From icsid Annulment to Appeal: Halfway Down the Slippery Slope’ (2011) 10 Law and Practice of International Courts and Tribunals 221. As well as Article 34 of the uncitral Model Law. John Gaffney, ‘State Courts and the Proposed New Investment First Instance and Appellate Decisions’ (2017) 5 Yearbook on International Arbitration 143.

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shows conspicuously that principles such as res judicata, lis pendens, ne bis in idem, and stare decisis – which are a staple of domestic and international jurisdictions – are difficult, if not impossible, to apply in international investment arbitration. This impossibility occurs inescapably in a scenario where arbitral tribunals may rely on different bases of jurisdiction and applicable laws. Under the heading of ‘multiple proceedings,’ the Author contextualises the aforementioned principles, and explores three issues, which often arise in arbitral practice. These are (i) how to determine the authority of previous decisions dealing with similar or identical legal issues; (ii) how to handle parallel proceedings involving the same respondent and often arising from the same set of facts; (iii) how (and whether) to coordinate successive arbitration proceedings. To these three typical scenarios, a fourth one is added, that of related proceedings before international tribunals and domestic courts. On the first point, Schreuer pointedly issues a few warnings and indicates some solutions to alleviate the infamous contradictions in the arbitral caselaw. The enthusiasm for the creation of a Court of Appeal for investment disputes, advocated by the European Commission, is depicted as premature and excessive. A more workable solution is suggested to be the creation of a system of preliminary rulings rendered by a permanent arbitral Court. With regard to the second scenario, the Author suggests a broader use of consolidation of proceedings. Whether this practice could be warranted by the tribunal’s inherent ­powers is not a clear-cut issue: inevitably, the question falls to be answered in each case in keeping with the general principles of sound administration of justice and procedural fairness. As to the third scenario – subsequent proceedings – the underlying reasons are too diverse to formulate guidelines inspired by general principles; res judicata, ne bis in idem or stare decisis appear unable to ­apply as such. Lastly, with regard to the fourth question, Schreuer shows how it is practically impossible to insulate domestic proceedings from arbitral ones, irrespective of any fork-in-the-road clauses in the relevant bit. As long as a claimant is careful to shape a contractual claim into a plausible treaty-based claim, a tribunal will uphold jurisdiction, regardless of whether the corresponding contractual dispute has been brought or must be brought to domestic judges. The general principle at hand, Kompetenz-Kompetenz, far from avoiding the risk of parallel proceedings, rather confirms the likelihood of their occurrence. General principles of law derived from domestic legal orders are sometimes difficult to transplant to the field of investment arbitration without modification. In this respect, the cautionary tale of Judge McNair comes to mind: not every rule of private law can operate ‘lock, stock and barrel’ as a principle

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of international law.34 A process of adaptation and translation is necessary to take into account the features of the receiving system, but, of course, it is difficult to tell how far adaptation can go. Prosper Weil provided the countervailing cautionary tale to McNair’s warning: ‘[d]’une certaine manière, le processus d’abstraction-généralisation est autodestructeur.’35 In the field of remedies, the difficulty to derive balanced rules proceeding from principles is apparent. Whenever a tribunal upholds the investor’s claim and determines the host State’s responsibility, the issue of reparation arises. For obvious practical reasons, tribunals almost invariably order compensation instead of restitution.36 The investigation of the general principles of damage assessment in investment arbitration reveals many a critical issue. The contribution of Zeno Crespi Reghizzi (see Chapter 4) highlights some of them. The Author makes a preliminary observation, which is both uncommon and acute. The rules on reparation applicable in inter-state disputes derive from private law concepts regarding disputes between individuals. The transplant is possible because the two scenarios share a decisive feature, namely the equal standing of the parties.37 Conversely, a mere transposition of the same concepts to mixed disputes, which engage the public law relationship between individuals and sovereign entities, cannot be satisfactory; a theoretical reframing is required. Furthermore, the tendency to equate the quantum of compensation in cases of lawful expropriation with that granted for unlawful takings needs some justification that has proved hitherto elusive.38 In this respect, the so-called Hull formula might not be a good yardstick to calculate reparation; it pertains to a primary rule (listing the preconditions for expropriation to be lawful) rather than a secondary rule indicating the guidelines on compensation for a wrongful act. Moreover, different methods of calculating the damage suggested to be used, depending on whether at stake are temporary or permanent losses, and 34

35 36

37 38

International Status of South-West Africa, Advisory Opinion, icj Reports 1950, 128, 148 (Judge McNair, dissenting). On the possibility to shape general international law on the basis of private law analogies, Hersch Lauterpacht, Private Law Sources and Analogies of International Law (Longmans, Green & Co, Ltd 1927) 81. Prosper Weil, Cours General (1992/VI) 237 Hague Recueil 9, 146. See also Schachter above (n 7) 54. The main reason being Article 54, para. 1 icsid Convention which imposes on each Contracting State the obligation to enforce only ‘the pecuniary obligations’ of the award. See Christoph Schreuer et al. (eds), The icsid Convention. A Commentary (cup 2009) 1137. See Crespi Reghizzi, 60–61. Ronald EM Goodman and Yuri Parkhomenko, ‘Does the Chorzów Factory Standard Apply in Investment Arbitration? A Contextual Reappraisal’ (2017) 32(2) icsid Review 304.

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which standard of protection is breached. Especially in cases of breaches of the standard of Fair and Equitable Treatment (fet),39 the Author argues that the arbitrators should exercise utmost restraint in assessing the damage. In the Author’s view, a broader concept of ‘just satisfaction’ might be a better fit than the stricter concept of ‘full reparation.’ Once again, Crespi Reghizzi’s contribution shows how general principles of law, even those universally accepted like the principle of full compensation, should be handled with care in investment arbitration. Unsurprisingly, the study of general principles acquires an additional layer of complexity when the eu law angle is added to the analysis. Francesco Munari and Chiara Cellerino (see Chapter 5) assess the position of the European Union with regard to international investment law and arbitration. They highlight a paradox: general principles whose existence is not controversial (such as pacta sunt servanda and legal certainty) may acquire different content in the eu and the international legal orders. The unresolved saga of whether intra-eu bits should be terminated and the uncertain destiny of extra-eu bits in the wake of Opinion 2/1540 support the authors’ dispassionate view that investment arbitration and eu law still have to go a long way to exit the current ‘age of turmoil.’41 Another general principle, native to the eu legal order, is the principle of sincere cooperation between eu institutions and member states. The systems of eu law and investment arbitration should coordinate pursuant to this principle, which requires ms and eu bodies to work together and refrain from taking irreconcilable positions with one another. However, this principle cannot help outside the eu legal system, and cannot serve to regulate the relationship with third States. Without going as far as to speak of ‘repellent forces,’42 investment arbitration truly is an extraneous instrument in the eu toolkit; the tension between the current isds mechanisms and the eu legal order proves this with clarity. In order to bypass this normative lack of coordination, the eu is currently exploring new and creative (if not radical) paths, as the recent 39 40

41 42

The content of which gives rise to further questions relating to general principles, see below. While the regulation of investments fall under the new (exclusive) competence under Article 207 tfeu for the most part, certain components lie outside the common commercial policy and, therefore, engage the Member States’ responsibility. Agreements that regulate these matters (in particular investor-State dispute settlement) are therefore mixed agreements, and require the agreement of all ms. See Munari, Cellerino, 106–107. See Steffen Hindelang, ‘Repellent Forces: The cjeu and Investor-State Dispute Settlement’ (2015) 53(1) Archiv des Völkerrechts 68.

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eu Commission’s recommendation to the Council to launch negotiations for a Convention establishing a Multilateral Investment Court.43 D

General Principles and Substantive Protection

The substance of investment protection flows primarily from the standards codified in the treaty rules. Their interpretation and application, in turn, is often influenced by general principles of law. Attila Tanzi’s contribution dissects the function of the investor’s good faith (see Chapter 10). This chapter lies at the intersection of procedure and substance, and showcases many of the ways in which general principles matter. If the investor’s conduct is tainted by lack of good faith or plain illegality, the arbitral practice and the investment treaties have worked out a range of possible responses. The Author shows how the assessed investor’s lack of good faith conduct can result in the tribunal’s lack of jurisdiction, especially in the case of illegality under domestic law, with special regard to corruption, fraud and misrepresentation. Conduct of lesser gravity can still be sanctioned with inadmissibility, if it amounts to an abuse of right, or if the illegality arises after the investment is made. Alternatively, the investor’s conduct will be weighed at the stage of the merits, against that of the host State, to determine the latter’s responsibility for a breach and, ultimately, the magnitude of the wrongdoing and the quantum of compensation. In all stages of arbitration, the investor’s good faith is relevant irrespective of the presence of treaty norms that address it.44 The good faith principle and all its corollaries are the quintessential gapfilling ever-adaptive norms: they thrive and develop in the crevices left open by incomplete special rules, novel legal arguments and new factual patterns. The principle of national treatment, a staple of investment law, is given a fresh look by Matteo Sarzo (see Chapter 16). According to some, this nondiscrimination principle is the only substantive protection that is not objectionable on policy grounds.45 The Author shows that, in fact, national treatment 43

44

45

See European Commission, ‘Recommendation for a Council Decision authorizing the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes’ and Annex , 8 September 2017, com (2017) 493 final. Gustaf F.W. Hamester GmbH & Co kg v. Republic of Ghana, icsid ARB/07/24, Award of 18 June 2010, para. 124: ‘[t]hese are general principles that exist independently of specific language to this effect in the Treaty.’ Rob Howse, ‘International Investment Law and Arbitration: A Conceptual Framework’ (2017) iilj Paper 2017/1, available at http://www.iilj.org/wp-content/uploads/2017/04/ Howse_IILJ_2017_1-MegaReg.pdf.

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plays in the practice of investment arbitration a much lesser role than it does in international trade law. The chapter throws an interesting light on the ­specific ‘philosophies’ or strategies peculiar to the various fields of international economic law. In a nutshell, national treatment, a contingent standard, is critical to the operation of wto law because there is no equivalent standard to the fet, which is a non-contingent standard. Whilst wto law largely operates on a negative-integration basis, investment treaties impose a minimum normative baseline. The minimum standard of treatment of aliens and their property, in its fet reincarnation, applies unconditionally and can be breached even in the absence of discrimination. In the arbitration practice, the Author underlines the lack of uniformity, mainly due to the different wordings of the national treatment clauses in the applicable treaties. The standard, therefore, can differ in its application, both with regard to its temporal scope – i.e., whether it covers also the pre-investment phase – and material scope – i.e., whether it covers only investments ‘in like circumstances,’ as sanctioned by Article 1102 nafta, or it also extends to investments in different sectors. The vagaries emerging in the case-law, which are largely determined by treaty language, make it hard to consider national treatment as a proper general principle, even in the narrow ambit of international economic law. At most, it is possible to identify a minimum core component of national treatment, limited to ‘like’ businesses and the post-establishment phase; such component is uncontroversial and could qualify as a general principle. The editors chose not to include a single chapter on the standard of fair and equitable treatment. The standard, as such, is one of treaty law, and does not qualify immediately as a general principle. There are, instead, a range of contributions, each of which highlights a different facet of the fet concept from a different angle. We deem this approach apt to address this somehow elusive standard, breaking it down to its various components and tracing its multiple normative models and principles. After all, the commonplace remark that fet findings can be made only ad hoc, taking into account all relevant circumstances of each case,46 is testimony to the standard’s flexible nature. fet, in essence, results from the combined application of several principles of fairness, whose interaction cannot be meaningfully analysed in the abstract. Christina Binder’s study of unjust enrichment (see Chapter 12) shows the potentials of relying on general principles when dealing with compensation for expropriation, but also its limits. The Author concludes that the principle 46

See, e.g., Waste Management Inc. v. Mexico, icsid arb (AF)/00/3, Award of 30 April 2004, para. 99.

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could be helpful in the complex calculation of compensation in specific circumstances, like in the case of measures taken in time of crisis, succession of States and lawful expropriation.47 However, the general principle as such is frequently unable to point to the adequate and predictable solution in specific cases; in this field, investment arbitration has developed a set of norms that normally crowd out general principles of law. The chapter of Josef Ostřanský (see Chapter 15) investigates another facet of the fet, the notion of the investor’s legitimate expectations. The Author questions its relevance as an interpretative tool to construe fet clauses, noting that the combination of the two indeterminate standards would result in a tautology. Legitimate expectations are also ill fitted to serve as a self-standing legal standard if their content is under-determined. Rather, the origin of the concept traces back to other well-known principles of domestic legal systems, substantive or procedural, broader or more specific. These include bona fides, fairness, protection of trust, abuse of rights, legal certainty and estoppel. Ostřanský makes a compelling point: even if the concept exists in several legal systems, it does not mean that it is construed in the same way in all of them. Its use in international investment arbitration is therefore problematic, to some extent. What is more, in domestic jurisdictions the protection of legitimate expectations is counter-balanced by other principles of administrative law, such as the requirement of non-fettering of administrative discretion, the consideration of overriding public interests, the principle of legality. Investment tribunals, however, generally downplay or plainly ignore such principles. The Author suggests limiting the scope of protection to legitimate expectations created by the host State through specific and unambiguous quasi-contractual commitments. It might appear a restrictive approach, but it could isolate the core normative value of an otherwise protean ‘rhetorical frame.’ Protection against uncompensated expropriation, too, might theoretically qualify as a general principle of law. However, its content is hard to derive from national laws – which vary considerably and sometimes do not contain specific safeguards. Protection against regulatory takings, moreover, needs to reckon with the difficulty of defining what counts as indirect expropriation and what counts as legitimate exercise of the State’s police powers. With regard to indirect expropriation, Ursula Kriebaum (see Chapter 18) notes that the express mention of indirect expropriation is a peculiarity of investment protection agreements. Other international and domestic instruments 47 The liamco arbitration in 1977 is a pertinent application of this approach, see Libyan American Oil Company (liamco) v. The Libyan Arab Republic, Award of 12 April 1977, 62 ilr 1982, 141, at 175–176.

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of human rights protection cover any kind of unjustified interference with property rights, which can trigger a duty of compensation; in those systems, there is no need to point out whether the taking is direct or indirect. The tendency to define indirect expropriation narrowly has led to only a few findings of indirect expropriation in the practice, and the trend seems in decline. Strikingly, none of these cases finding indirect expropriation concerned general regulation by the host State. It seems therefore that arbitral tribunals are particularly cautious when they perform the delicate task of drawing the line between the legitimate exercise of regulatory powers of the host state and regulatory takings. The complex interplay between regulatory takings and regulatory (or ‘police’) powers is further investigated in the contribution of Catharine Titi (see Chapter 14). Without taking a stance on whether the prohibition of indirect takings is part of customary international law or a general principle of law, the Author proceeds from the assumption that at least some regulatory powers of the state, for instance those necessary to ensure public health and safety, belong to the ‘essential attribute’ of a government. Their exercise, therefore, is lawful and cannot constitute compensable expropriation in the first place. Confronted with a multiform and partly contradictory practice, the Author concludes that ‘not much predisposes the innocent bystander to view [the police powers doctrine] as a general principle of international law,’48 thus leaving some doubts as to whether it may be still seen a ‘general principle of law’ limited to domestic jurisdictions. Even admitting that the doctrine applies as an international norm of general international law, it would be unclear whether it would give rise to a primary rule (entitling States to take action) or a secondary rule (precluding the wrongfulness of prima facie breaches). Unsurprisingly, the Author recalls the dictum of the Saluka Tribunal, which stated that it ‘inevitably falls to the adjudicator to determine whether a particular conduct by a state crosses the line that separates valid regulatory activity from expropriation.’49 The tribunals’ task to solve this and other delicate issues raises the question of whether arbitrators have the sufficient legitimacy for the job, not to mention the expertise. Are they suited to solve the potential conflict between global collective interests and investor protection? Without addressing directly this critical but over-debated issues,50 two chapters observe whether and how general 48 49 50

See Titi, at 340. Saluka Investments bv v. Czech Republic, uncitral, Partial Award of 17 March 2006, ­paras. 263–264. For a scathing critique of the system of investment arbitration, see Muthucumaraswamy Sornarajah, Resistance and Change in the International Law on Foreign Investment (cup

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principles can accommodate the public concerns of the host States in investment arbitration. Again, the editorial choice was to focus on salient specific issues, such as the protection of human rights (see Chapter 11) and sustainable development (see Chapter 13). Petersmann and Kube, in their contribution on the role of human rights in investment arbitration, take as starting points the fragmentation of international law and the different ‘rationalities’ of the various sub-systems. They demonstrate that human rights cannot be constrained within the limits of their dedicated régimes, but they unfold their influence onto investment arbitration. Human rights considerations can shape the investor’s claims, the host State’s defense, and trigger third parties’ attempt to intervene. Arbitrators can also, with or without prompting, use human rights principles as an interpretative tool to solve the tension between investor rights and public interests, most notably through proportionality balancing. The Authors point out that, given the sporadic reference to human rights law in the practice, each instance ‘runs the risk of being perceived as selective, if not biased.’51 The Authors then proceed to investigate systematically procedural and substantive ‘entry points’ through which human rights arguments could enter into the picture of investment arbitration. First, principles such as bona fides and clean hands can be key to determine the jurisdictional requirement of the investment’s legality, and they fall to matter when investors’ conduct affects public concerns, including human rights protection. Second, human rights arguments can facilitate the application of inherently elusive concepts such as legitimate expectations. The challenge, the chapter argues, is to consider human rights principles less as a convenient argumentative tool and more as the ‘constitutional’ ground of international investment law. In the same vein, but enlarging the view further, Pia Acconci’s contribution examines the connection between investment law and sustainable development (see Chapter 13). Her study demonstrates how the principle of sustainable development – which must accommodate the three connected elements of economic growth, human rights and environmental protection – enters international investment law from different but converging paths. First, certain international organizations, both universal (unctad) and regional (oecd, eu), have endorsed the notion that foreign direct investment should not contradict

51

2015). For less radical but not less incisive critique, see Anthea Roberts, ‘Power and Persuasion in Investment Treaty Interpretation: The Dual Role of States’ (2010) 104 American Journal of International Law 179; Jason Webb Yackee, ‘Controlling the International Investment Law Agency’ (2012) 53 Harvard International Law Journal 391. See Kube and Petersmann, at 254.

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the principle of sustainable development. Second, recent Model bits include so-called ‘non-relaxation’ commitments with regard to sustainable development and other non-investment concerns. The trend of considering investment protection duties ‘entrenched’ in the sustainable development framework is now surfacing in the arbitral practice too. The Author’s wish that multilateral rules emerge, or that at least some model guidelines are established might be optimistic for the time being. Conversely, it is true that, among the general principles which arbitrators could or should consider, some already exist that descend from the notion of sustainable development, like the precautionary principle and that of common, but differentiated responsibilities. E Conclusion This volume offers unsurprisingly mixed findings. On the one hand, procedural and substantive general principles, whether stemming from domestic systems or native to international law, play an important role in investment arbitration. On the other hand, their relevance varies considerably and depends very much on the context of each case and on the mindset of the arbitrators. With regard to procedural issues, resort to general principles is supported by the arbitrators’ belief that they possess a range of inherent powers and that their mandate partakes to the function of international dispute settlement at large. With regard to substantive issues, the opportunity or even the need to use general principles is dictated by the rules of treaty interpretation, and by the choices of judicial policy of the arbitrators. At the same time, the duties to avoid manifest excess of powers and to state reasons should serve as powerful deterrent; tribunals must tread warily and avoid, excuse the pun, unprincipled recourse to general principles. Unwarranted application of general international law might expose to annulment risks.52 Ultimately, some skeptical remarks echoed in the more insightful scholarship ring true. In the past, Judge Gaja, pointed out the limited practical ­usefulness of general principles of law. General principles of law derived from d­ omestic systems would have little relevance: extracting the core of what is t­ ruly common to a majority of legal orders would inevitably lead to very vague notions. Conversely, reference to a general principle of international law is ‘rarely accompanied by an adequate demonstration of its existence in international law.’ 52 See Venezuela Holdings, b.v., et al (case formerly known as Mobil Corporation, Venezuela Holdings, b.v., et al.) v. Bolivarian Republic of Venezuela, icsid Case No. ARB/07/27, Decision on Annulment of 9 March 2017.

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As a result, use of general principles of either kind implies necessarily considerable discretion.53 Systematic use of discretion by third-party adjudicators, of course, would not contribute to strengthen the legitimacy of investment arbitration. General principles operate ad hoc, their application depending on specific instances of normative ambiguity or unusual factual patterns. They are more than gap-fillers, but they cannot attain the front stage; in a sense, systematic recourse to general principles would call into question the viability of the treaty régime that fuels and sustains investment arbitration. Pierre-Marie Dupuy, drawing from his practice before international courts, and as an investment arbitrator, issued a reasonable warning.54 If a legal argument relies extensively on general principles, observers and adjudicators would instinctively assume its weakness under ‘formal’ sources.55 Do general principles serve as foundations and lintels of legal argumentation, or as padding and cushioning? Arguably, they serve both functions, but in a mature normative régime like investment arbitration they stand to operate in the background, affect law-making, and apply autonomously only on occasion.

53 54

55

Gaja above (n 7). See Pierre-Marie Dupuy, ‘La pratique de l’article 38 du statut de la Cour internationale de Justice dans le cadre des plaidoiries écrites et orales,’ in United Nations, Office of Legal Affairs (ed), Collection of essays by legal advisers of states, legal advisers of international organizations and practitioners in the field of international law (un 1999) 377, 394 (referring to general principles): ‘l’invocation de l’un d’entre eux équivaut bien souvent à l’aveu que celui qui l’emploie n’a pas été capable d’en trouver un équivalent dans le droit international lui-même.’ On the distinction between formal and material sources (general principles belonging to the latter) see Wolfgang Friedmann ‘The Uses of “General Principles” in the Development of International Law’ (1963) 57(2) American Journal of International Law 279.

Part A The Arbitration Process and General Principles

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Section 1 General Principles of Law and Arbitral Procedure

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Chapter 2

General Principles of Law on the Legal Force of Provisional Measures in International Investment Arbitration Federico Lenci General principles of law are often presented as a quite recent source in public international law. However, since the 19th century international arbitral tribunals applied certain principles which were considered to be the expression of general principles. Such source fulfils an important function in the investment regime as well. Indeed, general principles of law fulfil a ‘gate-keeping’ function by way of a legitimacy control on arbitral rule-making power, meaning that the evolution and/or consolidation of the arbitral case law shall not be incompatible with the principles which are the expression of the main legal systems of the world. An example of such role is given with regard to the issue of provisional measures, in particular their legal force. In the present chapter it is argued that, despite the departure in icsid case law from the ordinary meaning of Art. 47 of the icsid Convention providing for the tribunal’s power to issue merely hortatory provisional measures, such departure is legitimised by icsid member States’ acquiescence thereto amounting to an informal modification of the treaty – as Prof. Gazzini and Prof. Kolb convincingly argue – and by the fact that it is not incompatible with the principles which are the expression of the main legal systems of the world. If arbitration is a ‘mechanism with teeth,’ provisional measures are its front teeth.

1

Some Remarks on General Principles of Law and Their Role in the Debate on the Sources of Law in the Investment Regime

General principles of law are often presented as a quite recent source in public international law, having been introduced for the first time in the early 1920s, in particular in the pcij Statute. However, this proposition does not seem to be ­entirely accurate. Indeed, throughout the 19th century international arbitral tribunals derived the applicable rules also from the principles which such tribunals

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_003

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considered to be the expression of general principles.1 Moreover, as indicated by Balladore Pallieri, no State had ever objected nor even hesitated about the appropriateness of its inclusion in the pcij Statute.2 Said inclusion is considered to be a victory of natural law theorists against the positivists. Since it was established by a positive norm, namely treaty law, it obliged many positivists to either reconsider their theories on this point or to deem Art. 38, para. 1, lett. c of the pcij Statute as an exceptional norm, being the principles of law excluded in their views from the true sources of international law.3 Actually, the origins of this source were identified in the widespread conceptions which existed in the majority of national legislations.4 However, the impact of said ‘victory’ of natural law theorists should by no means be overestimated, since the preponderant role of treaty and custom has not been seriously questioned since the early period of codification of the general principles,5 1 Albert de La Pradelle, La Justice Internationale. Cours pour le doctorat en droit des gens de la Faculté de droit de Paris (19e leçon, Paris 1933) 3–5: ‘Est-il donc exact qu’une disposition nouvelle ait été ici introduite? Peut-on admettre que, dans la période antérieure au statut de la Cour, les tribunaux arbitraux n’avaient pas à connaître des principes généraux du droit pour en faire application? Raisonner ainsi, c’est manifestement une erreur. En effet, l’histoire de la jurisprudence internationale montre d’une manière tout à fait nette que, pendant tout le XIXe siècle, il a été fait application de principes que la jurisprudence considérait comme étant l’expression des principes généraux. […] Car ce texte a été élaboré par le Comité des Dix, dans des conditions dont j’ai déjà eu l’occasion de vous parler, et il n’est jamais entré dans la pensée des jurisconsultes qui le composaient, qu’ils pouvaient, par une semblable disposition, introduire une innovation quelconque. Leur pensée – et, puisque j’en ai été le témoin, je crois être bien qualifié pour l’apprécier – était simplement de recueillir le droit international déjà existant.’ See also the declaration made by the President of the Committee of Jurists: ‘The application in practice of the rules mentioned by the President, is moreover constant in international jurisdictions’ (Cour permanente de justice internationale, Comité consultatif des juristes, Procés-Verbaux des séances du Comité, 310, available at the icj institutional website: http:// www.icj-cij.org/files/permanent-court-of-international-justice/serie_D/D_proceedings_of_ committee_annexes_16june_24july_1920.pdf – last accessed 9 March 2018). 2 Giorgio Balladore Pallieri, I principi generali del diritto riconosciuti dalle nazioni civili nell’art. 38 dello Statuto della Corte permanente di giustizia internazionale (Torino, Istituto giuridico della Regia Università 1931) 65. 3 For some critical remarks of this approach, see Mario Scerni, I principi generali di diritto riconosciuti dalle nazioni civili nella giurisprudenza della Corte permanente di giustizia internazionale (Padova, Cedam 1932) 31 ff. 4 Giorgio Balladore Pallieri, quoted supra footnote 2, 14. 5 Hersch Lauterpacht, Private Law Sources and Analogies of International Law (with Special Reference to International Arbitration) (London, Longmans, Green and Co. Ltd. 1927) 67; Mario Scerni, quoted supra footnote 3, 40 f.: ‘Se il caso concreto da risolvere è tale, che il sistema

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although according to some authors they constituted the very essence of international law.6 Such an inclusion entailed a significant consequence on the representation of international law: indeed, instead of constituting a mosaic of merely voluntary norms establishing rights and duties between States and thus a plurality of international legal orders,7 international law had to be conceived as a social system aiming at the achievement of the superior goals of humanity. This quality of international law had already been suggested by some authors, in particular by Bluntschli. In his Le Droit international codifié, Bluntschli gave a definition of international law as not being limited to govern the relations between States, but rather as aiming at the protection of general rights of individuals: Le droit international est l’ensemble des faits et des principes reconnus qui réunissent les divers États en association juridique et humanitaire, et qui assurent en outre aux citoyens des divers États une protection commune pour les droits généraux résultant de leur qualité d’homme.8 Bluntschli’s conception of international law embodies this fundamental function towards individuals which has to be performed by States, in particular by civilised nations,9 which ‘sont plus particulièrement appelées à développer le risultante dalle convenzioni e dagli usi, comunque interpretato ed elaborato, non dà modo di trovare la norma apposita, allora e soltanto [italics in the original text, A/N] allora la Corte potrà invocare il n. 3 dell’art. 38 e giudicare secondo “i principi generali di diritto riconosciuti dalle nazioni civili.”’ 6 See, inter alios, Albert de La Pradelle, quoted supra footnote 1, 10 f.: ‘En réalité, les principes généraux de droit ne sont pas une source supplémentaire, mais bien la source même du droit international.’ 7 Giorgio Balladore Pallieri, quoted supra footnote 2, 6 and references cited therein. 8 Johann Caspar Bluntschli, Le droit international codifié (Paris, Guillaumin 1886) 55. 9 In that period, the distinction between ‘civilised’ and ‘uncivilised’ nations still existed. However, in Bluntschli’s conception, far from constituting a privileged group of nations, the ‘civilised’ nations on the contrary had a particular duty to contribute to the human advancement of international society, for the benefit of the individuals. This conception was far from evident: some authors suggested that International Law was a favourable body of law which only applied to the relations between ‘civilised’ nations. As Carlos Calvo (Derecho internacional teórico y práctico de Europa y América (Tomo primero, Paris, D’Amyot 1868, 70) reminds: ‘Muchos autores han calificado el derecho internacional como público européo, ó han limitado su significación á los pueblos cristianos ó que marchan á la cabeza de la civilización’ [footnotes omitted]. The shift from right/privilege to duty is quite striking.

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sentiment des droits communs à l’humanité.’10 From these passages it is easy to recognise the intellectual basis of what would become, a few decades later, Art. 38, para. 1, lett. c of the pcij Statute. Some 19th century international lawyers, in particular those of English nationality11 and those of the German Historical School of Jurisprudence, identified a source which bore a certain resemblance with the general principles of law as to foundation and method of ascertainment, namely Roman Law. Indeed, said source had found widespread application in different national legal systems of the world and therefore it was considered as deriving from the intellect.12 The rationale for the inclusion of the general principles of law in the list of Art. 38 of the pcij Statute is well known: in particular, Baron Descamps, President of the Committee of Jurists who drafted the pcij Statute, had insisted on the necessity to avoid the potential risk of non liquet13 and finally had managed to put his colleagues within the Committee on his side. Therefore, the function of this source is that of filling gaps between international law rules, completing – together with conventional and customary norms – the system of the main sources in the international legal order.14 This chapter focuses on the function fulfilled by general principles of law concerning provisional measures in international investment arbitration, with particular regard to a specific issue within this topic, namely their legal force. The purpose consists in an attempt at clarification of the relationship between the role of the case law of international tribunals and the contribution of the general principles of law in the investment regime concerning provisional measures. The theoretical legal framework of the present study is that international investment arbitration is inscribed within public international law. The analysis of the sources of this rapidly developing area of international law is of utmost relevance: indeed, the sources have a direct impact on the framework of the investment regime and on shape and content of the norms 10 11 12 13

14

Johann Caspar Bluntschli, quoted supra footnote 8, 57. Robert Phillimore, Commentaries Upon International Law (2nd edition, London, Butterworths 1879) 34; John Westlake, International Law (Vol. i, Cambridge, cup 1904) 15. Carlos Calvo, quoted supra footnote 9, 80. Cour permanente de justice internationale, Comité consultatif des juristes, Procés-Verbaux des séances du Comité, 318 and annex ‘Speech of Baron Descamps on the Rules of Law to be applied,’ 322–325 (available at the icj institutional website quoted supra footnote 1). Indeed, the list in said Art. 38 also contains, in para. 1, lett. d ‘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’. Furthermore, such list is by no means complete: as an example, it does not contain unilateral acts.

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which stakeholders will interpret and apply.15 In this connection, it is submitted that general principles of law play a fundamental role in increasing the overall legitimacy of investor-State arbitration, in the form of control on arbitral rule-making power. 2

Application of the Method Set Forth by Art. 38, Para. 1, Lett. c of the icj Statute to Provisional Measures in International Investment Arbitration

It is common knowledge that the institution of provisional measures does not constitute a novel phenomenon within the mechanisms of international dispute settlement. As a matter of fact, this type of incidental proceedings derives its origin from the common – though differentiated – practice in national legal orders. To analyse the evolution from national to international fora in this respect and distinguish every characteristic and consequent peculiarities is not the purpose of the present study: indeed, while the domestic/international divide between legal orders may play a role as a descriptive tool, the exercise of drawing analogies16 thereupon shall be conducted with caution in this field17 and may lead to limited results as to the type of provisional measure, as the ‘compulsory/voluntary’ jurisdiction binomial would impair the capability to grasp the peculiar features of the institution in international proceedings.18 15

16 17

18

On the relevance of general principles of law to the substance of the investment regime, see Stephan Schill, ‘General Principles of Law and International Investment Law’ in Tarcisio Gazzini and Eric De Brabandere (eds), International Investment Law. The Sources of Rights and Obligations (Martinus Nijhoff Publishers 2012) 136–138. Hersch Lauterpacht, quoted supra footnote 5. In this sense, see Shabtai Rosenne, Provisional Measures in International Law. The International Court of Justice and the International Tribunal for the Law of the Sea (Oxford, oup 2005) 4. As noted by Jerzy Sztucky, Interim Measures in The Hague Court (Kluwer 1983) 15 f.: ‘In other words, for all practical purposes, national courts are never confronted with the need to pronounce on interim protection in uncertainty as to whether there will be any instance competent to adjudicate upon the merits […] On the international level the situation is different. First of all, the competence of international tribunals is always more or less narrowly defined ratione materiae. Even in the exceptional case of the Court whose jurisdiction potentially extends to the whole area of international law, it is considerably limited in practice by the scope of consent of the prospective litigants’ and at p. 3: ‘Indeed, beyond the most general propositions as to the purpose of interim measures, such as those quoted earlier [in particular, to prevent any development from rendering the judgment nugatory, A/N], there is no universal common pattern of provisional measures

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In cases where specific provisions on provisional measures as to conditions, purposes and types of measures are lacking in the applicable treaty text, it is argued that a two-steps approach is warranted as to their proper application in international investment arbitration. The first step shall consist in the analysis of the case law of investor-State arbitral tribunals concerning provisional measures, coupled19 with that of the analogies and differences emerging from public international law courts and tribunals. As a second step, general principles enter into play. Indeed, they fulfil a function which may be considered from the negative perspective, meaning that the evolution and/or consolidation of the arbitral case law shall not be incompatible with the principles which are the expression of the main legal systems of the world. Such a threshold is undoubtedly lower than the one which could hypothetically be applied in this regard, namely that issuing or denying a given provisional measure in a specific case should be consistent with the general principles of law. I shall give an example of the practical application of such second step. A worldwide Mareva injunction consists in an interlocutory order, restraining the addressee from disposing of assets held in any part of the world. It is a very

19

in domestic legislation, which might be borrowed for general application on the international level. Even if there were such a pattern, one would have to be very cautious in drawing municipal law analogies in international law, since the conditions for exercising judicial power on the international level are quite different from those existing in domestic legal systems’ [footnotes omitted]. On the arbitrariness to which the misapplication of this source may lead, see Angelo Piero Sereni, Principi generali di diritto e processo internazionale (Milano, Giuffrè 1955) 8: ‘È da notare, in alcuni di tali studi, la tendenza ad affermare l’esistenza di “principi” che in realtà non sussistono o ad ampliarne arbitrariamente il contenuto e la portata, cadendosi così in una forma di giusnaturalismo dottrinale che è, a mio sommesso avviso, non soltanto errata ma anche contraria ad una sana e realistica valutazione ed allo sviluppo del diritto internazionale.’ Sereni demonstrated and concluded in this monograph (pp. 16–93) that there are no general principles of law under Art. 38, para. 1, lett. c icj Statute in the whole field of procedure and evidence. Indeed, this is a valuable source of materials from where general principles of law can be derived, through the intermediation of the analysis drawn by international courts and tribunals. See, in this sense, Bin Cheng, General Principles of Law as Applied by International Courts and Tribunals (Cambridge, cup 1953) 1 and Jerome Elkind, Interim Protection. A Functional Approach (Martinus Nijhoff Publishers 1981) 15; see also the recent monograph Charles T. Kotuby, Jr., Luke A. Sobota, General Principles of Law and International Due Process (oup 2017).

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powerful tool, indeed.20 However, should an investment tribunal be confronted with the question whether it has the power to issue such a provisional measure an inescapable step would be to assess whether the latter is part of the general principles of law according to Art. 38, para. 1, lett. c of the icj Statute. In other words, before issuing said measure, the investment tribunal should assess whether the main legal systems of the world recognise it. Then, is it so? According to a survey conducted by the eu Commission in the context of judicial cooperation and provisional measures – thus, within the limited scope of eu jurisdictions – while worldwide Mareva injunctions are generally recognised in common law countries (plus France and Germany), they are not available in many civil law countries, namely Austria, Belgium, Finland, Greece, Italy, Luxembourg, The Netherlands, Portugal, Spain and Sweden.21 As a ­consequence, in the current state of national legislations as indicated above, the issuance of worldwide Mareva injunctions by an investment tribunal would be contrary to the general principles of law. Said role as a ‘gate-keeper’ of the rule-making power of the international adjudicatory organ is a key factor in increasing the legitimacy of the process and fulfilling the function of law as an instrument of social ordering. 3

General Principles of Law on Provisional Measures before the Adjudicator: The Legal Force of Provisional Measures

Before addressing the issue of the legal force of provisional measures, reference to the consolidation of arbitral precedents in investment arbitration is deemed appropriate. Starting from the beginning of the new millennium, we are witnessing a true ‘baby-boom’22 of international investment arbitration. Said phenomenon is due to a combination of factors, among which – as a temporal sequence – the following general steps: fall of the communist 20

21

22

On the potentially prejudicial effect on third parties and the jurisprudence of English Courts see Lawrence Collins, Provisional and Protective Measures in International Litigation (Recueil des cours de l’Académie de La Haye, Vol. 234, No. 3, Martinus Nijhoff Publishers 1992) 117 ff. eu Commission, Provisional Measures: Classification and the Trans-border Context, 04, available online: http://ec.europa.eu/civiljustice/publications/docs/prov_measures_1_ en.pdf (last accessed 9 March 2018). The expression has been introduced by Stanimir Alexandrov in a leading article on the theme: ‘The “Baby Boom” of Treaty-Based Arbitrations and the Jurisdiction of icsid Tribunals. Shareholders as “Investors” and Jurisdiction Ratione Temporis’ [2005] 4 The Law and Practice of International Courts and Tribunals 19.

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ideology and, consequently, generalised endorsement of the Washington consensus;23 worldwide proliferation of a web of bits, generally providing for international arbitration under the auspices of icsid or ad hoc arbitration under the u ­ ncitral rules as main dispute settlement mechanisms in addition to recourse to local courts; in such an investment-friendly climate – or, at least, apparently so – the flow of outward investments increases significantly,24 bringing with it the related increased ratio of disputes, for the main reason that these systems proved to be effective and relatively less costly in terms of legal certainty, time and expenses. Arbitrators in the investment framework constantly refer to previous decisions either in support of their interpretation and application of the law, or in order to oppose their solutions, or thirdly to harmonise and propose new paths: in each of these three approaches, arbitrators contribute to the development of international investment arbitration through consolidation of the adjudication process. As a matter of fact, investment tribunals tend to follow previous decisions even if they do not deem to be compelled to do so.25 It should also be kept in mind that arbitrators are inclined to refer to previous decisions due to the submissions of the parties, which try to substantiate their case through an abundant – sometimes excessive26 – reference to previous decisions. It is argued that – with some exceptions, particularly in the ranks of commercial arbitrators – they consider their role as being not limited to the arbitral settlement of the dispute27 before them: they deem that their role is also that of setting the general investment framework, a task which is beneficial not only 23

24

25

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For an in-depth analysis from the special perspective of the eminent negotiator of us bits in the 1980s and 1990s, Kenneth Vandevelde, Bilateral Investment Treaties: History, Policy and Interpretation (Oxford, oup 2010). A detailed account thereof is provided for by José Alvarez, The Public International Law Regime Governing International Investment (Recueil des cours de l’Académie de La Haye, Vol. 344, Martinus Nijhoff Publishers 2009, also published in pocketbook form, ail, 2011) 17. Diego Fernández Arroyo, ‘Los precedentes y la formación de una jurisprudencia arbitral’ in Emmanuel Gaillard and, Diego Fernández Arroyo (eds), Cuestiones claves del arbitraje internacional (Bogotá and d.c. 2013) 236: ‘Sin embargo, ni los autores ni los árbitros parecen convencidos de la obligación de seguir la jurisprudencia. Los árbitros la siguen, como veremos, pero en general lo hacen sin creer que estén obligados a ello.’ Emmanuel Gaillard, ‘Foreword’ in Emmanuel Gaillard and Yas Banifatemi (eds), Precedent in International Arbitration (New York 2008) 3. By ‘arbitral settlement of the dispute’ reference is made to the first, fundamental but not final, step towards the real settlement of the dispute, i.e. the moment in which either the claimant manages to enforce the award declaring in its favour, or the award denying compensation or – less frequently – restitutio in integrum to it acquires its res iudicata state and the respondent manages to cover its expenses and legal fees.

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to the parties of that specific dispute, but to the whole international investment community (investors and host States alike). Such element sets a significant divide between international investment arbitration on the one side, international commercial arbitration on the other: indeed, it has been demonstrated that, as far as the latter is concerned, arbitrators refer significantly less often to previous decisions.28 Paraphrasing Professor Gaillard, who aptly says that ‘arbitration is a mechanism with teeth,’29 I submit that provisional measures are arbitration’s front teeth. In order to address the issue of the legal force of provisional measures in international investment arbitration, i.e. whether they have a binding or hortatory force, and whether the general principles of law play a role therein it is deemed appropriate to start from icsid arbitration. The relevant provision is embodied in Art. 47 of the icsid Convention,30 which reads as follows: 28

Gabrielle Kaufmann-Kohler, ‘Arbitral Precedent: Dream, Necessity or Excuse?’ [2006] Arbitration International 362 f.; in the same sense and referring to the author abovementioned see also Diego Fernández Arroyo, quoted supra footnote 25, 241: ‘Los resultados de la investigación dirigida por una profesional de dilatada experiencia – que es además una de las personas que más se ha ocupado de este tema – al menos, reflejan que si en general la autoridad reconocida al precedente jurisprudencial depende de las materias y de las cuestiones específicas tratadas, en el arbitraje comercial internacional lato sensu los árbitros hacen lo que quieren o, según las circonstancias, lo que pueden, siendo la proporción de casos en los que se citan laudos anteriores relativamente pequeña’ [footnotes omitted]. 29 Economist, Now Try Collecting, article on the $50bln-award in the Yukos case, published on 2 August 2014, whose first lines read as follows: ‘Russia breached its obligations under an energy treaty when it seized the assets of Yukos in 2006; so it must pay the former oil giant’s majority shareholders $50 billion. The award, made on July 28th by an international arbitration court in The Hague, was 20 times the previous record for such a case. The investors’ lead lawyer, Emmanuel Gaillard of Shearman & Sterling, says it shows that arbitration is “a mechanism with teeth.”’ 30 In the literature see, in particular, Sam Luttrell, ‘icsid Provisional Measures ‘In the Round’ [2015] Arbitration International 393; Dan Sarooshi, ‘Provisional Measures and Investment Treaty Arbitration’ [2013] Arbitration International 361; Gabrielle KaufmannKohler, Aurélia Antonietti, ‘Interim Relief in International Investments Agreements,’ in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements: An analysis of the Key Procedural, Jurisdictional and Substantive Issues (Oxford, oup 2010) 767 ff.; Loretta Malintoppi, ‘Provisional Measures in Recent icsid Proceedings: What Parties Request and What Tribunals Order,’ in Cristina Binder, Ursula Kriebaum, August Reinisch, Stephan Wittich (eds), International Investment Law for the 21st Century. Essays in Honour of Christoph Schreuer (Oxford, oup 2009) 157; Rodrigo Gil, ‘icsid Provisional Measures to Enjoin Parallel Domestic Litigation’ [2009] World Arbitration & Mediation Review 535 ff.;

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Except as the parties otherwise agree, the Tribunal may, if it considers that the circumstances so require, recommend any provisional measures which should be taken to preserve the respective rights of either party [emphasis added, A/N]. Following the objective interpretation of the ordinary meaning of the treaty text pursuant to Art. 31, para. 1 of the vclt, one may be inclined to dismiss in limine the issue, concluding that icsid tribunals are not empowered to issue binding provisional measures. Additionally, may I refer to the travaux préparatoires of the Convention:31 indeed, the Working Paper, the Preliminary Draft and the First Draft provided for the arbitrators’ authority to prescribe32 provisional measures.33 As noted in Prof. Schreuer’s Commentary, the delegate from China opposed such an extended power, due to the concern that the State party to the dispute might be unable to abide by the provisional measures prescribed for reasons of ‘necessity on national policy.’34 Following a vote thereupon, the term ‘recommend’ substituted the term ‘prescribe’ by a large majority.35 Under these circumstances, le débat serait clos. Indeed, one may fail to understand a departure from such a clear meaning of the treaty text and its drafting history.36 However, in the last eighteen years icsid tribunals have developed a very interesting case law in this regard. The first case in the icsid framework where the word ‘recommend’ was explicitly deemed to be of equivalent value to the word ‘order’ was Maffezini v. Spain.37

31

32 33 34 35 36

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Régis Bismuth, ‘Anatomy of the Law and Practice of Interim Protective Measures in International Investment Arbitration’ [2009] Journal of International Arbitration 773 ff.; Paul Friedland, ‘Provisional Measures and icsid Arbitration’ [1986] Arbitration International 335 ff. For a thorough analysis of the drafting history of the Convention in relation with provisional measures, see Charles Brower and Ronald Goodman, ‘Provisional Measures and the Protection of icsid Jurisdictional Exclusivity against Municipal Proceedings’ [1991] icsid Review 440 ff. The term ‘prescribe’ is contained in Art. 290 of the unclos. World Bank Publication, History of the icsid Convention (Vol. No. 1, d.c. 1970) 206. Christoph Schreuer et al., The icsid Convention. A Commentary (2nd edition, Oxford, oup 2009) 764 (referring to the History quoted supra footnote 33 (Vol. No. 2) 515, 518, 655, 813. History of the icsid Convention, quoted supra footnote 33 (Vol. No. 2) 814 ff. In this sense, see Tarcisio Gazzini and Robert Kolb, ‘Provisional Measures in icsid Arbitration from “Wonderland Jurisprudence” to Informal Modification of Treaties’ [2017] The Law and Practice of International Courts and Tribunals 177–180. Emilio Agustín Maffezini v. Kingdom of Spain, icsid case No. ARB/97/7, Decision on Provisional Measures dated 28 October 1999, para. 9 (reported in Spanish, the only official version): ‘9. Si bien existe una diferencia semántica entre la expresión “recomendar” empleada en la Regla 39 [i.e., the ancillary provision on provisional measures which is

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This decision was harshly criticised: by way of example, one of its most delicate comments was that the Maffezini case evidenced that ‘this concern of the drafters of the Convention [i.e. to avoid attributing the power to issue binding provisional measures to icsid tribunals, A/N] was set aside by less respectful icsid tribunals.’38 Such decision has to be inserted in a broader context, in which dates and the temporal succession of events play a significant role. One year before said decision, the icj had made an important step forward as to the binding force of provisional measures, explicitly referring to its power to order provisional measures – whose teleological legal argument was later developed in the judgment in the LaGrand case – while issuing an indication of provisional measures whereby the United States should halt the procedure which were to lead to the execution of a Paraguayan citizen named Breard.39 It is noted that the Court was induced to refer to an increased power40 (although the Court refrained from adopting it fully) due to obvious humanitarian

38 39

40

contained in Art. 39 of the icsid Arbitration Rules, A/N] y la expresión “dictar” utilizada en otras partes de las Reglas para describir la facultad del Tribunal para exigir a una parte que realice una acción determinada, dicha diferencia es más aparente que real. Incluso debe observarse que el texto de esa Regla en castellano utiliza, además, la expresión “dictación.” El Tribunal no considera que las partes en el Convenio hayan querido establecer una diferencia substancial en el efecto de estas dos palabras. La autoridad del Tribunal para decidir sobre la adopción de medidas provisionales no es menos obligatoria que la de un laudo arbitral definitivo. Por consiguiente, para los efectos de la presente Resolución Procesal, el Tribunal estima que la palabra “recomendar” tiene un valor equivalente al de la palabra “dictar.”’ In its most relevant part, the unofficial English version reads: ‘ […] the Tribunal deems the word “recommend” to be of equivalent value as the word “order.”’ All references to the text of the icsid cases are available at the icsid institutional website. Yves Fortier, ‘Interim Measures: An Arbitrator’s Provisional Views’ [2008] fl 6. Vienna Convention on Consular Relations (Paraguay v. United States of America), Provisional Measures, Order of 9 April 1998, icj Reports 1998, 248 ff., (see in particular paras. 36 and 41). See also LaGrand case (Germany v. United States), Provisional Measures, Order of 3 March 1999, icj Reports 1999, 15 f., (in particular paras. 23 and 29). According to art. 41, para.1 icj Statute (Art. 41, para. 1 pcij Statute was integrally reproduced in the icj Statute): “‘The Court shall have the power to indicate, if it considers that the circumstances so require, any provisional measures which ought to be taken to preserve the respective rights of either party’ [‘La Cour a le pouvoir d’indiquer, si elle estime que les circonstances l’exigent, quelles mesures conservatoires du droit de chacun doivent être prises à titre provisoire’].” It has been noted that there is a slight difference in terms of force of provisional measures (Shabtai Rosenne, quoted supra footnote 17, 29). Indeed, the term ‘ought to be taken’ seems to be less compulsory than ‘doivent être prises’; in addition, a clearer indication of the fact that the English version was drafted in a more deferential fashion in this sense is

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reasons, since in that case – followed within a period of less than five years by the LaGrand41 and Avena42 cases – human life was at stake. The Maffezini case

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given by the second paragraph of the article at issue, wherein reference is made to measures which are ‘suggested,’ whereas in the French version there is no such soft expression. The icj stated in the LaGrand case that the two texts were not in ‘total harmony’ (LaGrand case (Germany v. United States), Judgment of 27 June 2001, icj Reports 2001, 466, 501, para. 101). The text of this article historically derives from art. 4 of the Bryan treaties with China, France and Sweden (Shabtai Rosenne, quoted supra footnote 17, 24): “‘The Court shall have the power to indicate, if it considers that the circumstances so require, any provisional measures which ought to be taken to preserve the respective rights of either party. Pending the final decision, notice of the measures suggested shall forthwith be given to the parties and the Council’ [‘In case the cause of the dispute should consist of certain acts already committed or about to be committed, the Commission shall, as soon as possible, indicate what measures to preserve the rights of each party ought in its opinion to be taken provisionally and pending the delivery of its report’].” However, the first part of the two articles differs: in art. 41 of the pcij Statute reference to the temporal framework in which these measures can be issued is lacking. The Bryantreaty version was manifestly linked to the main concern for which provisional measures were provided for, namely the risk of the use of force pendente lite. Actually, on the occasion of the Drafting Committee’s twenty-eight meeting on 20 July 1920, Raul Fernandes, one of its members, had successfully proposed to reproduce the provision contained in the Bryan treaties in its integrality. However, later on Professor Ricci-Busatti, italian representative thereto, finally managed to persuade the majority that the temporal limitation at issue should be removed, in order to extend the breadth of provisional measures (pcij, Advisory Committee of Jurists, Documents Presented to the Committee Relating to Existing Plans for the Establishment of a Permanent Court of International Justice, 1920, final text as approved by the Sub-Committee, 169). LaGrand case (Germany v. United States), Judgment of 27 June 2001, icj Reports 2001, 466, 501, para. 101. See also paras. 103 and 109, in which the Court referred to ‘the existence of a principle which has already been recognized by the Permanent Court of International Justice when it spoke of “the principle universally accepted by international tribunals and likewise laid down in many conventions … to the effect that the parties to a case must abstain from any measure capable of exercising a prejudicial effect in regard to the execution of the decision to be given, and, in general, not allow any step of any kind to be taken which might aggravate or extend the dispute” (Electricity Company of Sofia and Bulgaria, Order of 5 December 1939, p.c.i.j., Series A/B, No. 79, p. 199). […] 109. Thus, the Court has reached the conclusion that orders on provisional measures under Article 41 have binding effect.’ Avena and Other Mexican Nationals (Mexico v. United States of America), Provisional Measures, Order of 5 February 2003, icj Reports 2003, 77 ff., para. 59.

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is a clear example of the extent to which icsid tribunals are influenced (at an increasing pace) by the construction of public international law as interpreted and applied by the icj. Such a cross-fertilisation,43 so far unilateral,44 is one of the manifestations of the fact that the investment framework is inscribed within public international law. In addition, the precise meaning of the travaux préparatoires has to be explained in more detail. Indeed, the debate about the legal force of provisional measures was determined by the opportunity to incorporate decisions granting provisional measures in the form of an interim award, for the purpose of enforcement. Eventually, such option was rejected and the legal force of said decisions reduced.45 It is quite easy to understand the intersection between the plan of the legal force of provisional measures and that of their enforcement. Curiously indeed, the same dynamic occurred in the debate upon the establishment of the pcij, where eventually the term ‘indicate’ substituted the term ‘order.’46 Therefore, the drafting history of the recommend/order binomial is to be read as favouring the interpretation of the binding legal force of provisional measures, to which nobody within the Drafting Committee had objected. Other references are contained in its ancillary instrument, namely the Arbitration Rules, adopted by the Administrative Council of the Centre according to Art. 6, para. 1 lett. c of the icsid Convention: Art. 39 provides that (1) At any time after the institution of the proceeding, a party may request that provisional measures for the preservation of its rights be recommended by the Tribunal. The request shall specify the rights to be preserved, the measures the recommendation of which is requested, and the circumstances that require such measures. (2) The Tribunal shall give priority to the consideration of a request made pursuant to paragraph (1). 43

On the issue of cross-fertilisation in relation to the perspective of the theory of inherent powers, see Chester Brown, ‘The Inherent Powers of International Courts and Tribunals’ [2005] bybil 195 ff; see, more generally from the same author, A Common Law of International Adjudication (Oxford, oup 2007). 44 On the issue of one-way reference by icsid tribunals to the jurisprudence of the icj, see Alain Pellet, ‘The Case Law of the icj in Investment Arbitration’ [2013] icsid Review 223 ff. 45 History of the icsid Convention, quoted supra footnote 33 (Vol. No. 2) 338 ff. See also Paul Friedland, ‘icsid and Court-Ordered Provisional Remedies: An Update’ [1988] Arbitration International 163; Christoph Schreuer et al., quoted supra footnote 34, 765 f. 46 See Cour permanente de justice internationale, Comité consultatif des juristes, ProcésVerbaux des séances du Comité, quoted supra footnote 1, 278.

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(3) The Tribunal may also recommend provisional measures on its own initiative or recommend measures other than those specified in a request. It may at any time modify or revoke its recommendations. (4) The Tribunal shall only recommend provisional measures, or modify or revoke its recommendations, after giving each party an opportunity of presenting its observations. (5) If a party makes a request pursuant to paragraph (1) before the constitution of the Tribunal, the Secretary-General shall, on the application of either party, fix time limits for the parties to present observations on the request, so that the request and observations may be considered by the Tribunal promptly upon its constitution. (6) Nothing in this Rule shall prevent the parties, provided that they have so stipulated in the agreement recording their consent, from requesting any judicial or other authority to order provisional measures, prior to or after the institution of the proceeding, for the preservation of their respective rights and interests. In this regard, it has to be noted that the term recommend is contained in paragraphs 1, 3 and 4, i.e. in the early provisions; instead, in the other two paragraphs (paragraph 5, included in 2006; paragraph 6, included in 1985) such reference is lacking. On the contrary, paragraph 6 adopts the term order in relation to domestic courts, to which the parties may have recourse with requests for provisional measures (provided the existence of a written agreement to that effect). I consider such inclusions as a further indication of the binding force of icsid provisional measures: the different character of imperium may otherwise produce a harmful effect to the general framework of this dispute settlement mechanism. Such difference of imperium would mean that in the context of concurrent jurisdiction there would be a threat to the integrity of proceedings and to the very adjudicatory function of the arbitral tribunal, since the arbitral tribunal would be subordinated to the authority of domestic courts in relation to fundamental aspects of fair administration of justice. This would run contrary to one of the main features of icsid tribunals, namely their autonomy from external, potentially politically-biased, interference. Art. 47 of the icsid Additional Facility (af) Arbitration Rules47 provides for both orders and recommendations: 47

On 27 September 1978, the Administrative Council of the Centre authorized the Secretariat to administer at the request of the parties concerned certain proceedings between States and nationals of other States falling outside the scope of the icsid Convention. It concerns three groups of proceedings: 1 – conciliation or arbitration proceedings for the

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(1) Unless the arbitration agreement otherwise provides, either party may at any time during the proceeding request that provisional measures for the preservation of its rights be ordered by the Tribunal. The Tribunal shall give priority to the consideration of such a request. (2) The Tribunal may also recommend provisional measures on its own initiative or recommend measures other than those specified in a request. It may at any time modify or revoke its recommendations. (3) The Tribunal shall order or recommend provisional measures, or any modification or revocation thereof, only after giving each party an opportunity of presenting its observations. (4) The parties may apply to any competent judicial authority for interim or conservatory measures. By doing so they shall not be held to infringe the agreement to arbitrate or to affect the powers of the Tribunal. The origin of these Rules prevents an automatically analogic reading of its text in combination with the icsid Convention and the Arbitration Rules; however, it constitutes a relevant element in the appropriate construction of the evolving nature of arbitrators’ interim powers. These indications shall be inserted in the broader context of public international law adjudication, comprising the law and practice of the icj, itlos, ECtHR and Iran-us Claims tribunals. In this regard, it has been submitted that a general principle of international law has emerged from such evolutions.48 Arbitral tribunals in some cases do not even feel the necessity to refer in detail to previous decisions in order to establish their binding power: for example, the icsid tribunal in Tethyan Copper v. Pakistan, immediately after quoting Art. 47 of the icsid Convention, affirmed in the same paragraph that ‘thus, there is no question that the Tribunal has the authority to order provisional measures to preserve a party’s right’;49 it is also worth mentioning that the tribunal in Perenco v. Ecuador referred to icsid tribunals’ inherent

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settlement of investment disputes arising between parties one of which is not a Contracting State or a national of a Contracting State; 2 – conciliation or arbitration proceedings between parties at least one of which is a Contracting State or a national of a Contracting State for the settlement of disputes that do not directly arise out of an investment; 3 – fact-finding proceedings. Antonios Tzanakopoulos, ‘Provisional Measures Indicated by International Courts: Emergence of a General Principle of International Law’ [2004] Revue Hellénique de Droit international 53. Tethyan Copper v. Pakistan, icsid case no. ARB/12/1, Decision on Claimant’s request for provisional measures dated 13 December 2012, para. 114 (see also para. 120, on the fact that the power to order provisional measures is generally recognized); see also Tokios Tokelés,

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power, coupled with a vast collection of precedents in public international law adjudication.50 It is also noted that so far parties to icsid arbitration have not raised the issue of manifest excess of powers on this aspect as a ground for annulment pursuant to Art. 52 (1) (b) of the icsid Convention, which may be considered as a further element of acceptance of arbitrators’ binding power. As to the attitude of icsid member States with regard to such departure from the ordinary meaning of the treaty text of Art. 47 of the icsid Convention in arbitral case law, Prof. Gazzini and Prof. Kolb convincingly argue that the lack of reaction to or the acquiescence in such case law has led to an informal modification of Art. 47 in the sense of allowing the issuance of binding provisional measures.51 In this regard, the fact that an adjudicatory organ has the power to issue binding provisional measures constitutes a general principle of law, as the large majority of the legal systems of the world indicate. Therefore, despite the departure in icsid case law from the ordinary meaning of Art. 47 of the icsid Convention providing for the tribunal’s power to issue merely hortatory provisional measures, such departure is legitimised by icsid member States’ acquiescence thereto amounting to an informal modification of the treaty and by the fact that it is not incompatible with the principles which are the expression of the main legal systems of the world. Turning to ad hoc international investment arbitration, Art. 26 of the 2010 uncitral Arbitration Rules provides for interim measures, an expression analogous to that of provisional measures in the icsid framework. This version has been significantly expanded in comparison to the corresponding article in the 1976 uncitral Arbitration Rules. Mr. Castello, who actively participated in both working groups that carried out the reform of the uncitral Arbitration Rules and the Model Law,52 explains that the main reason consisted in the necessity to seek cooperation from domestic courts where said measures had to be decided upon and/or enforced and to their idiosyncrasy to do so if the scope of the arbitrator’s power was broad (since they read it as unclear).53

50 51 52 53

icsid case no. ARB/02/18, Order no. 1 on Claimant’s request for provisional measures dated 1 July 2003, para. 4. Perenco v. Ecuador, icsid case no. ARB/08/6, Decision on provisional measures dated 8 May 2009, paras. 67–77. Tarcisio Gazzini and Robert Kolb, quoted supra footnote 36, 180–183. Art. 17 of the Model Law deals with interim measures. James Castello, ‘Generalizing about the Virtues of Specificity: The Surprising Evolution of the Longest Article in the uncitral Model Law’ [2012] World Arbitration and Mediation

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Conditions, purposes and atypicalness of provisional measures are contained, respectively, in paragraph 3,54 paragraph 2 letters (a)-(b)-(c)-(d)55 and paragraph 2, alinea 1.56 The binding force of interim measures is not expressly affirmed in the first paragraph in a clear form: indeed, the arbitral tribunal may grant interim measures; however, paragraph 2 contains a description of the content of interim measures, specifying that the tribunal orders said measures. The form in which the measure is granted – be it an award or an order – may have an impact on its enforceability, not on its binding force, which appears to be more clearly expressed than its counterpart in the icsid framework.57 The form containing a decision on interim measures is not provided for in Art. 26. Undoubtedly, interim measures issued in the form of awards are more likely to be enforceable than orders, since the 1958 New York Convention on the recognition and enforcement of foreign arbitral awards only refers to ‘awards.’58 A reason for such a reticence with regard to the form of the decision on interim measures was due to the fact that, since awards are final, this

54

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Review 7; Ibid., ‘Unveiling the 2010 uncitral Arbitration Rules’ [2010] Dispute Resolution Journal 21. ‘The party requesting an interim measure under paragraphs 2 (a) to (c) sh: (a) Harm 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; and (b) There is a reasonable possibility that the requesting party will succeed on the merits of the claim. The determination on this possibility shall not affect the discretion of the arbitral tribunal in making any subsequent determination.’ ‘(a) Maintain or restore the status quo pending determination of the dispute; (b) Take action that would prevent, or refrain from taking action that is likely to cause, (i) current or imminent harm or (ii) prejudice to the arbitral process itself; (c) Provide a means of preserving assets out of which a subsequent award may be satisfied; or (d) Preserve evidence that may be relevant and material to the resolution of the dispute.’ ‘2. An interim measure is any temporary measure by which, at any time prior to the issuance of the award by which the dispute is finally decided, the arbitral tribunal orders a party, for example and without limitation, to: […]’ [italics added, A/N]. Robert Volterra, ‘Provisional Measures (Interim Measures) and Investment Treaty Arbitration under icsid and uncitral: Developments and Trends’ in Andrea Bjorklund, Ian Laird and Sergey Ripinsky (eds), Investment Treaty Law. Current Issues iii (London 2009) 23 f. See David Caron and Lee Caplan, The uncitral Arbitration Rules. A Commentary (2nd edition, Oxford, oup 2013) 524.

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element would run contrary to the typical provisional and modifiable character of interim measures, able to lead to some confusion in connection with Art. 26, para. 5.59 According to Prof. Caron and Mr. Caplan, such a view is ‘overly formalistic,’ since there is no discussion on the fact that interim measures can be granted in the form of an award.60 In some cases, the text of the applicable treaty can shed some light on the point of the binding force: it constitutes one of the manifestations of the phenomenon called treatification of provisional measures, where the treaty plays the role of lex specialis in relation to the relevant arbitration rules (mainly, icsid and uncitral); said phenomenon will arguably become i­ncreasingly relevant in future treaty negotiations and, consequently, arbitrations. An ­example in this sense has been given by the EnCana Corp. v. Government of Ecuador case.61 Claimant sought interim measures to prevent freezing of assets of EnCana subsidiaries and its legal representative pending arbitration. Two different provisions dealt with interim measures: the uncitral Arbitration Rules (in particular, the 1976 version) and Art. xiii(8) of the applicable bit, namely the one between Canada and Ecuador. Art. xiii(8) provides: 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 the measure alleged to constitute a breach of this Agreement. For purposes of this paragraph, an order includes a recommendation. The arbitral tribunal found that, since the treaty provision was specifically applicable to investments by Canadian corporations in Ecuador (and vice versa), it prevailed over the general power contained in Art. 26 of the uncitral Arbitration Rules.62 The clear meaning of the bit provision indicated that it had the authority to issue binding interim measures. 59

60 61 62

Art. 26, para. 5, reads: ‘The arbitral tribunal may modify, suspend or terminate an interim measure it has granted, upon application of any party or, in exceptional circumstances and upon prior notice to the parties, on the arbitral tribunal’s own initiative.’ See uncitral, 47th Session, un Doc. A/CN.9/614, no. 2, 11, para. 51. David Caron and Lee Caplan, quoted supra footnote 58, 525. EnCana Corp. v. Government of Ecuador, Interim award dated 31 January 2004, lcia administered, uncitral Arbitration Rules. Award, para. 10.

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In Chevron Corp. v. Republic of Ecuador, the arbitral tribunal, after denying a different degree of normativity of its decision according to the form adopted,63 declared that ‘this order shall be immediately final and binding upon all Parties, subject only to any subsequent variation made by the Tribunal (upon either its own initiative or any Party’s request).’64 The practice of the Iran-us Claims Tribunal has confirmed the binding power of interim measures under the uncitral Rules, generally relying upon the theory of inherent powers:65 the theory plays the dual role of establishing jurisdiction to issue such measures and at the same time affirming binding force. In Rockwell v. Iran, the arbitral tribunal extended the scope of the precedent E-Systems v. Iran66 – which had affirmed the theory for the first time in the case law of this tribunal – stating that this inherent power is in no way restricted by the terms of Art. 26 of the uncitral Arbitration Rules.67 Such practice is consolidated in the Iran-us Claims Tribunal.68 63

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Chevron Corp. v. Republic of Ecuador, Order for interim measures dated 9 February 2011, pca administered, 1976 uncitral Arbitration Rules, us-Ecuador bit, lett. (C): ‘As to form, the Tribunal records that, whilst this decision under Article 26 of the uncitral Rules is made in the form of an order and not an interim award, given the urgency required for such decision, the Tribunal may decide (upon its own initiative or any Party’s request) to confirm such order at a later date in the form of an interim award under Articles 26 and 32 of the uncitral Rules, without the Tribunal hereby intending conclusively to determine the status of this decision, one way or the other, as an award under the 1958 New York Convention.’ Ibid., lett. (I). Andrea Carlevaris, La tutela cautelare nell’arbitrato internazionale (Padova 2006) 237: ‘Per evitare le difficoltà derivanti dall’esatta determinazione dei propri poteri sulla base dell’art. 26, il Tribunale non si è generalmente limitato a giustificare la propria competenza in materia cautelare con riferimento alla norma in esame, e ha frequentemente fatto ricorso ad argomenti diversi, primo tra i quali – come già altrove osservato – quello fondato sulla nozione di “inherent powers.”’ E-Systems, Inc. v. The Government of the Islamic Republic of Iran, case no. 388, Award no. itm 13-388-FT. This case, as well as the following ones concerning the activity of the Iran-us Claims tribunal, are drawn and re-elaborated starting from extracts contained in ­David Caron and Lee Caplan, quoted supra footnote 58, 533 ff. Rockwell Intl. Systems, Inc. v. The Islamic Republic of Iran, Ministry of Defence, Award no. itm 20 dated 6 June 1983, 430 f., reprinted in 2 Iran-us ctr 369, 371. See also rca Global Communications, Inc. v. Islamic Republic of Iran, Award no. itm 30160-1 dated 31 October 1983, 5, reprinted in 4 Iran-us ctr 9, 11 f.; Islamic Republic of Iran v. United States of America, cases nos. A/4 and A/15, Award no. itl 33-A-4/A-15(iii)-2 dated 1 February 1984, 5, reprinted in 5 Iran-us ctr 131–133 (1984–1).

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4 Conclusion General principles of law fulfil an important function in increasing the overall legitimacy of investor-State arbitration, in the form of control on arbitral rulemaking power. Their role may be considered from the negative perspective, meaning that the evolution and/or consolidation of arbitral case law may be subject to a scrutiny of non-incompatibility with the principles which are the expression of the main legal systems of the world. With regard to the legal force of provisional measures issued by icsid tribunals, despite the departure in icsid case law from the ordinary meaning of Art. 47 of the icsid Convention providing for the tribunal’s power to issue merely hortatory provisional measures, such departure is legitimised by icsid member States’ acquiescence thereto amounting to an informal modification of the treaty69 and by the fact that it is not incompatible with the principles which are the expression of the main legal systems of the world. The evolution in icsid arbitration’s case law towards the binding force of provisional measures is an example of the function as a ‘gate-keeper’ fulfilled by the general principles of law in the investment framework.

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Tarcisio Gazzini and Robert Kolb, quoted supra footnote 36, 180–183.

Chapter 3

Transparency in the Arbitral Procedure Maria Beatrice Deli* As general standards in international arbitration have been developing during recent years, the issue of transparency has gained a relevant position among arbitral practitioners and scholars, particularly in investment arbitration. The need for transparency of arbitral procedures has been opposed to the request for confidentiality, a ­fundamental parameter of international arbitration. This opposition is mirrored in a number of ­cases. Moreover the issue of transparency has been frequently invoked as a ground for the intervention of amici curiae – i.e. non disputing parties – in investment procedures. In this context the Mauritius Convention on Transparency, recently entered into force, is expected to offer a significant landmark to investment arbitration users.

I

Introduction

A trend towards transparency in international arbitration characterized the most recent years in the arbitral practice and among scholars, who widely studied the issue (under a strictly legal perspective but even from a statistical point of view examining the impact of disclosure or confidentiality on arbitration results), and gained a remarkable relevance.1 This increased importance of transparency made urgent to find a correct balance between the demand for transparency and the need for confidentiality, which represents a major hallmark of arbitration, although mainly in commercial arbitration. Large and medium size international corporations involved in arbitration do appreciate confidentiality basically for three reasons: * Maria Beatrice Deli, Associate Professor of International Law, University of Molise, Secretary General of the Italian Association for Arbitration. 1 Luigi Crema, ‘Testing Amici Curiae in International Law: Rules and Practice,’ (2012) 22 Italian Yearbook of International Law, 91, 132; Andrea Bianchi and Anne Peters (eds), Transparency in International Law (cup 2013); Christina Knahr and August Reinisch, ‘Transparency Versus Confidentiality in International Investment Arbitration – The Biwater Gauff Compromise,’ (2007) 6 1 The Law and Practice of International Courts and Tribunals; Loretta Malintoppi & Nicoletta ‘Limbasan, Living in Glass Houses? The Debate on Transparency in International Investment Arbitration’ [2015] 1 bcdr International Arbitration Review 2, 2015 Kluwer Law International bv, 33.

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_004

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(a) to protect business privacy (and secrets), (b) to protect the reputation of the company involved in a dispute (when the mere idea of a litigating company may cause harm to its image), and (c) because confidentiality might reduce tension between the parties and in some cases it could also favour an amicable solution (or a mutually agreed solution) at least on a limited number of issues. These considerations do apply also to investment arbitration, where the peculiar nature of the parties involved (the States) could benefit from a confidential management of the dispute. We could imagine, for instance, the case of a State, party to an investment arbitration, whose public-governmental secrets or other measures of public policy need to be protected by confidentiality, in an effort to maintain the dispute not or at least less-political. Moreover, similarly to what happens in commercial arbitration, also for investment arbitration, the possibility to move towards a settlement between the claimant-investor and the respondent State, at least on some points if not on the whole dispute, could maybe be better achieved when the proceeding remains confidential. A general assumption is that long-term investments might presumably require higher standards of secrecy. On the other hand, disputes arising out of an investment treaty with the respondent State who is without doubt exercising its public power call into question the need for transparency in the decision making process, and the participation of public in proceedings before investment tribunals might become indispensable. Therefore flexibility in adopting a different levels of transparency might be necessary. This contribution aims at investigating the most recent developments ­occurred in the transparency field, with a view to clarifying the meaning of transparency amid the General Principles of Law in Investment Arbitration. Particular attention will be given to both international and European novelties. In so doing, this paper will shed light on the impact these changes may have on arbitral proceedings, assessing whether they might tip the scale ­towards the creation of a general principle of transparency and third-party intervention, at the same time avoiding the negative consequences that a too expanded participation might raise. II

A Definition of Transparency

A preliminary question should be whether transparency can be considered among those general principles applicable in international investment arbitration. If this is the case, opposing to the existence of a duty of confidentiality,

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a duty of transparency might be invoked on arbitral tribunals, on the parties involved and/or on the arbitral institutions. If it is not the case, it might considered as remaining within the limits of an international best practice. It is well known that there is general acceptance to increase transparency in certain countries – and therefore some transparency provisions are already included in their bilateral investment treaties. On the contrary some other countries are extensively less open to transparency – mostly given to the nature of their political regimes. Consequently their treaties remain generally silent as to the various provisions supporting transparency. Although there is so much interest and so many implications, there is no exact definition of transparency. Traditionally in international investment (economic) law, transparency was referred to the duty of the State hosting the investment to grant accessibility and clarity as to its policy and regulation in the investment sector. In the icsid case Metalclad v. Mexico,2 the Tribunal stated that transparency was needed so that all relevant legal requirements for initiating, completing and operating the investment should be readily known to all affected investors. Conversely, the Biwater v. Tanzania tribunal argued that within the icsid system ‘there is no provision imposing a general rule of transparency or non-confidentiality.’3 In the light of a more recent jurisprudence in investor-State arbitration, the need for transparency belongs to a completely different sphere and is seen under a different perspective which applies to some specific aspects of the arbitral procedure. In particular transparency may pertain to: 1) 2) 3) 4)

The knowledge that a dispute involving certain parties has arisen and information on the proceedings, with sometimes publication of the notice of arbitration or subsequent pleadings; Granting public access to the arbitral proceedings by non-disputing parties (Amici curiae) with possible active participation in the proceeding with submissions of documents and briefs; Granting public access to hearings by non-disputing parties; Obtaining publication of decisions, procedural orders and eventually the award of the arbitral tribunal.

2 Metalclad Corporation v. The United Mexican States, icsid Case No. ARB(AF)/97/1 Award, 30 August 2000. 3 Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, icsid Case No. ARB/05/22 (24 July 2008) para 21.

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International Instruments

A very important step in the path towards transparency in international investment arbitration is represented by the uncitral Rules on Transparency. The Rules were adopted by uncitral in 2013 after three years of work during which the importance to ensure transparency in investor-State arbitration was made clear.4 The Rules provide for a prompt and mandatory disclosure of the commencement of the arbitration, names of the disputing parties, economic sectors involved and legal framework. Then all documents exchanged between the parties will be made available to the public, encountering the limit of strict confidentiality. The Rules also provide for the intervention and deposit of written ­submissions from non-parties to the dispute (and non-parties to the treaty), (Article 4).5 In determining whether to allow such submissions, tribunals will 4 For an extensive analysis see: Dimitrij Euler, Markus Gehering and Maxi Scherer, ­Transparency in International Investment Arbitration, A Guide to the uncitral Rules on Transparency in Treaty-Based Investor-State Arbitration (cup 2015). Also see considerations on t­ ransparency in Campbell McLachlan, Laurence Shore, Matthew Weiniger, International Investment ­Arbitration, 2nd edition, Oxford, 2017, expecially 3.77–3.97. 5 uncitral Rules on Transparency in Treaty-based Investor-State Arbitration (2013), . Article 4, as to the submission by a third person, provides that: ‘1. After consultation with the disputing parties, the arbitral tribunal may allow a person that is not a disputing party, and not a non-disputing Party to the treaty (“third person(s)”), to file a written submission with the arbitral tribunal regarding a matter within the scope of the dispute. 2. A third person wishing to make a submission shall apply to the arbitral tribunal, and shall, in a concise written statement, which is in a language of the arbitration and complies with any page limits set by the arbitral tribunal: (a) Describe the third person, including, where relevant, its membership and legal status (e.g., 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 third person); (b) Disclose any connection, direct or indirect, which the third person has with any disputing party; (c) Provide information on any government, person or organization that has provided to the third person (i) any financial or other assistance in preparing the submission; or (ii) substantial assistance in either of the two years preceding the application by the third person under this article (e.g. funding around 20 per cent of its overall operations annually); (d) Describe the nature of the interest that the third person has in the arbitration; and

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take into consideration, among other factors, ‘whether the third person has a significant interest in the arbitral proceedings … and the extent to which the submission will assist the arbitrators in the determination of factual or legal issues.’ The Rules also include the case of submissions from non-disputing States parties to the treaty at stake. Hearings are open to public, provided that the ‘integrity of the process’ is granted. The very question as to the effectiveness of the Rules on Transparency is that they apply on a default basis only to uncitral arbitrations conducted under treaties which have been concluded after 1 April 2014. Therefore the most relevant progress towards an improved transparency is expected to be gained by the recently entered into force Mauritius Convention on Transparency.6 Some scholars considered the 11-Article Convention so important to represent a sort of milestone towards a constitutional reform of the international investment regime. As a matter of fact, as already mentioned in the beginning, the Mauritius Convention extends the application of the uncitral Rules on Transparency to all treaty-based investor-State arbitrations (thus including icsid arbitrations, icc arbitrations or other arbitral institutions) and conducted on the basis of treaties concluded even before 1 April 2014 (the application of uncitral Rules on Transparency is limited to uncitral investor-State arbitrations for treaties concluded on or after 1 April 2014). Although the Convention has a very narrow focus and cannot be deemed a revolutionary reform, given its retroactive effect it can be considered a fundamental step ahead towards a new system of international investment law. It is without doubt that the positive effect of the Convention will depend on a growing general acceptance and therefore on the number of States and regional economic integration organizations that will ratify it (and hopefully

(e) Identify the specific issues of fact or law in the arbitration that the third person wishes to address in its written submission. 3. In determining whether to allow such a submission, the arbitral tribunal shall take into consideration, among other factors it determines to be relevant: (a) Whether the third person has a significant interest in the arbitral proceedings; and (b) The extent to which the submission would assist the arbitral tribunal in the determination of a factual or legal issue related to the arbitral proceedings by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties.’ 6 United Nation Convention on Transparency Treaty-based Investor-State Arbitration (2014), .

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with a limited number of reservations). At the moment, the Convention counts 22 signatories States and has been ratified by 3 States.7 In this context is worth recalling the Tokyo Resolution approved in 2013 by the Institut of International Law and referring to ‘Legal Aspects of Recourse to Arbitration by an Investor Against the Authorities of the Host State under Inter-State Treaties’ (with Professor Andrea Giardina Rapporteur)8 contained a specific provision referring to transparency in investment arbitration, trying to find a balance between demands for transparency and need of confidentiality on the basis of the will and the interest of the disputing parties as well as in conformity of the applicable arbitration rules. Article 6 states in particular that ‘Transparency in investment arbitration and in particular intervention of Amici curiae shall be accommodated according to the will of the parties and in conformity with applicable arbitration rules, as well as in light of the confidentiality requirements of each particular case.’ The elements to be considered in the admission of non-disputing parties (the crucial issues) seem clearly synthesised in the wording of Article 37(2) of the icsid Rules: (1) the matter addressed in the submission should be inherent to the scope of the dispute; (2) the third party should have a significant legal interest to the outcome of the arbitration; (3) the purpose of the written intervention of the third party should be to bring a better knowledge or insight different from that of the disputing parties, so to assist the tribunal in its determinations (factual or legal). Two procedural orders issued in early 2015 in relation to the icsid case Philip Morris v. Uruguay,9 have dealt with the request of filing a submission by two different and separate Amici curiae. The two Petitions were ‘parallel’ and received consistent answers by the Tribunal.

7 See at: http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2014Transparency_ Convention_status.html. The signatories States are (in order of signature): Mauritius, Canada, Finland, France, Germany, Sweden, uk, usa, Syrian Arab Republic, Switzerland, Italy, ­Belgium, Luxembourg, Gabon, Congo and Madagascar. The Convention entered into force on 18 October 2017, in accordance with its article 9(1), that is six months after the date of deposit of the third instrument of ratification by Switzerland. The other parties are Mauritius and Canada. 8 Justitia et Pace, Institut de Droit International, Session de Tokyo 2013, 18th Commission, 13 Septembre 2013. 9 Philip Morris Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Oriental Republic of Uruguay, icsid Case No. ARB/10/7. The award was rendered by the Tribunal on 8 July 2016, http://icsidfiles.worldbank.org/icsid/ICSIDBLOBS/OnlineAwards/C1000/ DC3592_En.pdf.

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In both cases the request was filed in order to assist the Tribunal, not either of the parties in dispute, but the Tribunal ‘in the determination of a factual or legal issues related to the proceeding’ [the request was submitted pursuant to Rule 37(2)(a)]. In the consideration of the Tribunal, in relation to the first Petition, the first Amicus Curiae Brief was filed by the who – World Health Organization (who) – and the Secretariat of the who Framework Convention on Tobacco Control (fctc). The Tribunal’s opinion was that the conditions under Rule 37(2) for allowing the filing by non-disputing parties of a written submission with the Tribunal were satisfied. In detail the Tribunal observed that who, due to its knowledge of tobacco control and regulation had to be considered particularly authoritative and did bring a peculiar perspective, particular knowledge or insight on the issues in dispute. This perspective was clearly diverging from that of the disputing parties. In addition the Tribunal observed that the Submission appeared to address a matter within the scope of the dispute, particularly because it was addressing whether the tobacco control regulations in this case were reasonably connected to the protection of public health. Last, in the opinion of the Tribunal both Petitioners appeared to have a significant interest in the proceeding, considering that who is the world authority on public health matters and fctc Secretariat is the designated global authority concerning the implementation of the Framework Convention on Tobacco Control. The second Petition was filed one month later by the Pan American Health Organization. paho is the oldest public health agency in the world, founded by American countries in beginning xx century (1902) with the purpose of ­addressing devastating epidemics of some deadly diseases in the region and presently focused also on non-communicable diseases such as cancer and ­respiratory diseases, which share tobacco use as a common risk factor. The peculiarity of the submission by paho is – according to the request – to offer technical information and evidence regarding distinct trends in marketing and tobacco consumption in Uruguay and the Region, and how the trends can and are effectively being addressed through well-crafted tobacco control legislation, regulation and policies, like the ones here in dispute. The purpose was to address details on tobacco control strategies and a perspective on how Uruguay’s regulations answered to these mandates. Claimant in the arbitration tried to oppose to the submission, claiming that the requirements of Article 37(2) were not met.

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The Tribunal, strictly keeping its reasoning on the same line of the first procedural order, allowed the submission of the Amici curiae Brief from paho.10 IV

The European Approach towards Greater Transparency

It seems clear that confidentiality and transparency are – at a preliminary c­ onsideration – conflicting principles and the balance between them could be particularly difficult, especially when they are considered as serving ­competing interests. Actually, probably due to the growing interest towards transparency and thanks to new provisions and some very significant arbitral decisions it seems that the two principles might have found a better balance. Focusing on transparency, nowadays general opinion seems to consider transparency the new ‘panacea’11 for most of the criticism raised against arbitration and particularly against investment arbitration. In a document circulated at the beginning of May 2015, transparency was listed among the core issues of the arbitral proceeding in the so-called ‘Path for reforms’ of the European Commission.12 In the Concept Paper which referred to the highly controversial ttip, the European Commission included among the results achieved so far the introduction of ‘full, mandatory transparency of the arbitration process.’ In particular Commissioner Malstrom recalled that ceta (eu-Canada Economic Agreement) incorporates the uncitral rules on transparency which will mean that all documents (submissions by the disputing parties, decisions of the tribunal) will be made publicly available. All hearings will be open to the public. Interested parties (ngos, trade unions) will be able to make submissions. In a further paragraph, where the task of ‘Improving the establishment and functioning of arbitral tribunals in order to increase legitimacy of the isds 10 11

12

On September 2015 the Tribunal had again to decide on a third non-disputing party’s submission. The decision has not been published. Julie A. Maupin, ‘Transparency in International Investment Law: The Good, the Bad and the Murky’ in Andrea Bianchi and Anne Peters (eds), Transparency in International Law (cup 2013). European Commission Concept Paper, Investment in ttip and beyond – the path for reform Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court, (2015) .

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system is enhanced’, the Commission noted that ‘currently ceta and the eu/ Singapore fta’ contain provisions ‘in line with recently agreed uncitral Rules on Transparency.’ Still it is observed that the system should be further improved in order to obtain a greater transparency. In an earlier Communication in 2010, the European Commission had already stated that one of the challenges of the investor-State dispute settlement mechanism is that the arbitral procedure has to be conducted in a transparent way, expressly referring to requests for arbitration, submissions, hearings open to public, amicus curiae briefs and publication of decisions and awards. The goal seems to be reached, given that in 2013 the new uncitral Arbitration Rules on Transparency were adopted and, in mid December of 2014, the General Assembly of the un approved a new resolution, opening for the signature of the un Convention on Transparency in Treaty-based Investor-State Arbitration. V

The eu Agreements Provisions on Transparency

All eu agreements negotiated so far – namely the 2016 ceta;13 the euSingapore Free Trade Agreement;14 the eu-Vietnam Free Trade ­Agreement15 – incorporated the 2013 uncitral Rules. The way the eu provisions on ­transparency are drafted is often even more comprehensive of those included in the Rules. A case point in this regard is the ceta agreement, that include ‘the request for consultations, the notice requesting a determination of the respondent, the notice of determination of the respondent, the agreement to mediate, the notice of intent to challenge a Member of the Tribunal, the decision on challenge to a Member of the Tribunal and the request for consolidation’16 among the list of documents to be made available to the public

13

Commission, ‘Revised ceta text’ (29 February 2016) . 14 Free Trade Agreement Between The European Union and The Republic Of Singapore, (European Commission-Trade Department, 29 January 2015) . 15 Commission, ‘eu-Vietnam Free Trade Agreement Agreed Text’ (January 2016) . 16 Revised ceta, Article 8.36 Transparency of proceedings.

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under Article 3(1) of the uncitral Transparency Rules.17 The eusfta specified that the Tribunal is entitled, upon parties’ agreement, to make available other documents.18 Confidential information is sheltered by the Tribunal, which is in charge of determining whether there is a need to label certain information as protected. This aspect has been particularly emphasized in the Vietnam fta, which states:19 ‘Subject to any decision by the Tribunal on an objection regarding the designation of information claimed to be confidential or protected information, 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 as such’ [emphasis added].20 As regards the openness of the hearing this should apply as the default norm in case of proceedings rising out of the eu-Canada Agreement, according to which ‘hearings shall be open to the public,’21 unless the Tribunal determines 17

uncitral Rules on Transparency in Treaty-based Investor-State Arbitration (2013), ­Article 3(1) Publication of documents: 1. Subject to article 7, the following documents shall be made available to the public: the notice of arbitration, the response to the notice of arbitration, the statement of claim, the statement of defence and any further written statements or written submissions by any disputing party; a table listing all exhibits to the aforesaid documents and to expert reports and witness statements, if such table has been prepared for the proceedings, but not the exhibits themselves; any written submissions by the non-disputing Party (or Parties) to the treaty and by third persons, transcripts of hearings, where available; and orders, decisions and awards of the arbitral tribunal. 18 Free Trade Agreement Between The European Union and The Republic Of Singapore, Annex 9-G article 1 (2): Subject to the exceptions set out in Article 4 of this Annex, the tribunal may decide, on its own initiative or upon request from any person, and after consultation with the disputing parties, whether and how to make available any other documents provided to, or issued by, the tribunal not falling within paragraph 1. This may include, for example, making such documents available at a specified site or through the repository referred to in Article 5 of this Annex. 19 Commission, ‘eu-Vietnam Free Trade Agreement Agreed Text’ (January 2016), Article 20 Transparency of proceedings. 20 For greater certainty, where a disputing party that submitted the information decides to withdraw all or parts of its submission containing such information in accordance with Article 7(4) of the uncitral Transparency Rules, the other disputing party shall, whenever necessary, resubmit complete and redacted documents which either remove the information withdrawn by the disputing party that first submitted the information or re-designate the information consistent with the designation of the disputing party that first submitted the information. 21 ‘Revised ceta text’ (29 February 2016) Article 8.36 Transparency of proceedings.

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that ‘there is a need to protect confidential or protected information’ and ‘it shall make the appropriate arrangements to hold in private that part of the hearing requiring such protection.’22 Similarly, the eu-Singapore fta follows this trend.23 The fta with Vietnam and the ttip draft chapter on investment are silent on that aspect. Interestingly enough, however, ttip provides a different approach: if the application to intervene is granted, the intervener obtains a right to request a copy of every procedural document, minutes included;24 thus ‘gaining the opportunity to be fully aware of how the proceeding has been conducted.’25 Another salient provision all eu agreements consider is the participation of third-party (or non-disputing party) to the arbitral procedure, ensuring the disputing parties are given a reasonable opportunity to present their observations on a submission by non-disputing Party.26 The eu approach on that regard is to grant third parties the right to intervene on the proceeding under the general condition that ‘written submission’ should fall within ‘the scope of the dispute.’ Further detailed requirements are listed in the eu-Singapore fta (article 3(3)).27 22 ‘Revised ceta text’ (29 February 2016), Article 8.36 (5) Transparency of proceedings. 23 Free Trade Agreement Between The European Union and The Republic Of Singapore, Annex 9-G Rules On Public Access To Documents, Hearings And The Possibility Of Third Persons To Make Submissions, Article 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 this information from disclosure. 24 Maria Laura Marceddu ‘The eu agenda towards greater transparency: a model to be followed?’ in Transparency v. Confidentility in International Economic Law: Looking for an Appropriate Balance; E. Baroncini, M. Trunk-Fedorova and P. Stoll (eds.); Elgar; (2016 forthcoming). 25 Commission, ttip Trade in Service, investment and e-commerce Chapter ii-Investment draft (16 September 2015); Article 22(1)b. 26 ‘Revised ceta text’ (29 February 2016) Article 8.38 (4) Non-disputing Party. 27 Free Trade Agreement Between The European Union and The Republic Of Singapore, Article 3: 3. In determining whether to allow such a submission, the tribunal shall take into consideration, among other things: (a) whether the third person has a significant interest in the arbitral proceedings; and

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Concluding Remarks

These changes occurred in the middle of a very heated debate, amid which the economist Joseph Stieglitz, attacked investment arbitration claiming that ‘if there ever was a one-sided dispute-resolution mechanism that violates basic principles, this is it’ accusing the system of the new agreements of applying a private, non-transparent, and very expensive method of solving disputes. Although all the mentioned procedural aspects might raise difficulties in being adopted in arbitration, it is mainly the participation of Amici curiae in investment arbitration proceedings that presented major problems. As ­often ­asserted by arbitral tribunals, ‘the need to safeguard the integrity of the arbitral process requires in fact that no procedural rights or privileges of any kind be granted to the non-disputing parties.’ Still Amici curiae were originally well known in the common law systems and they derive from the traditional role of supporting the decision-maker (here the arbitral tribunal) in the adjudication by providing arguments, perspectives and expertise that the litigating parties may not provide or provide in part. We all witnessed a remarkable increase in participation in arbitrations by international organizations or ngos or other institutions, or even States as Amici curiae. The nafta case Methanex in 2001 is of particular significance in this context. The tribunal observed that in that case there was an undoubtedly public interest ‘…not merely because one of the Disputing Parties is a State… The public interest in this arbitration arises from its subject-matter … the 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…, whereas a blanket refusal could do positive harm.’ However the legitimacy of such interventions was widely disputed among scholars and arbitrators. With the revision operated in 2006 on the icsid (Arbitration) Rules ­tribunals were provided with the discretion to allow interested third parties (b) the extent to which the submission would assist the tribunal in the determination of a factual or legal issue related to the arbitral proceedings by bringing a perspective, particular knowledge or insight that is different from that of the disputing parties. 4. The submission filed by the third person shall: (a) be dated and signed by the person filing the submission on behalf of the third person; (b) be concise, and in no case longer than as authorised by the tribunal; (c) set out a precise statement of the third person’s position on issues; and (d) only address matters within the scope of the dispute.

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(‘non-disputing parties’) to file written submissions in the proceedings provided that certain conditions are fulfilled. As to the publication of awards, the Rules state that Centre is not allowed to publish the award without the parties’ consent, but it is required (so it is not an option, is not only discretionarily) to publish excerpts of the legal reasoning of the tribunals. The same treatment was extended by the Centre to other decisions of the tribunals, like recommendations of provisional measures, decisions on jurisdiction or procedural orders. It resulted that a great increase in transparency was obtained and the participation of non-disputing parties as Amici curiae became less problematic. All this considered, it seems necessary to verify whether these recent ­provisions might tip the scale towards the creation of a general principle of transparency (and third-party intervention), at the same time avoiding the negative consequences that a too expanded participation might raise. It cannot be denied that the loss of privacy and confidentiality might have n ­ egative side effects both on the respondent States and investors. As some scholars ­observed ‘if badly used amicus intervention could undermine the very arbitration regime it is supposed to strengthen. Whereas amicus intervention may help legitimize the overall arbitration system, such intervention my also erode the traditional basis of arbitral proceedings, namely the consent of the parties’ (Vinuales).

Chapter 4

General Rules and Principles on State Responsibility and Damages in Investment Arbitration: Some Critical Issues Zeno Crespi Reghizzi Investment treaties contain the ‘primary rules’ setting the standards of treatment due to foreign investors by the host State, but they do not contain specific provisions concerning the determination of damages in case of breach of such primary obligations. For this reason, in the absence of a lex specialis on reparation, arbitral tribunals usually refer to the principles of customary international law as codified by the International Law Commission in 2001. This chapter examines critically the theoretical foundations of such approach and analyses its application in cases of unlawful expropriation and breach of fair and equitable treatment.

1

The Difficulty in Identifying the Sources of ‘Secondary Rules’ in Investment Disputes

Investment treaties contain the ‘primary rules’ setting the standards of treatment due to foreign investors by the host State, but they do not contain specific provisions concerning the determination of damages1 in case of breach of such primary obligations.2 1 On damages in investment disputes, see I. Marboe, ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ (2006) 7 Journal of World Investment and Trade, 723 ff.; Ibid., Calculation of Compensation and Damages in International Investment Law (2nd ed., oup, 2017); C. Mc Lachlan, L. Shore, M. Weiniger, International Investment Arbitration. Substantive Principles (oup, 2007) 315 ff.; T. Wälde, B. Sabahi, ‘Compensation, Damages and Valuation’ in P. Muchlinsky, F. Ortino, C. Schreuer (eds), The Oxford Handbook of International Investment Law (oup 2008) 1049 ff.; B. Sabahi, ‘The Calculation of Damages in International Investment Law,’ in P. Kahn, T. Wälde (eds), New Aspects of International Investment Law (Brill 2007) 553 ff.; Ibid., Compensation and Restitution in Investor-State Arbitration. Principles and Practice (oup 2011); C. Brower, M. Ottolenghi, ‘Damages in Investor-State ­Arbitration’ (2007) 6 Transnational Dispute Management 1 ff.; S. Ripinsky, K. Williams, Damages in International Investment Law (biicl 2008); S. Ripinsky, ‘Assessing Damages in Investment Disputes: Practice in Search of Perfect,’ in (2009) 10 Journal of World Investment and Trade

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_005

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For this reason, in the absence of a lex specialis on reparation,3 arbitral tribunals usually refer to the principles of customary international law as codified by the International Law Commission in 2001.4 Most arbitral awards, in particular, cite Article 31 of the Draft Articles on Responsibility of States for Internationally Wrongful Acts, pursuant to which: ‘The responsible State is under an obligation to make full reparation for the injury caused by the internationally wrongful act’ and ‘Injury includes any damage, whether material or moral, caused by the internationally wrongful act of a State.’ Many decisions also quote two well-known passages from the judgments of the Permanent Court of International Justice in the case of the Factory at Chorzów (respectively on jurisdiction and on the merits), which have inspired the drafters of Article 31.5 5 ff.; M. Kinnear, ‘Damages in Investment Treaty Arbitration,’ in K. Yannaca-Small (ed.), ­Arbitration Under International Investment Agreements. A Guide to the Key Issues (oup 2010) 551 ff.; K. Khamsi, ‘Compensation for Non-Expropriatory Investment Treaty Breaches in the Argentine Gas Sector Cases: Issues and Implications,’ in M. Waibel, A. Kaushal, K.L. Chung, C. Balchin (eds), The Backlash against Investment Arbitration. Perceptions and Reality (Kluwer Law International 2010) 165 ff.; J. Simmons, ‘Valuation in Investor-State Arbitration: Towards a More Exact Science’ (2012) 30 Berkeley Journal of International Law, 196 ff.; Z. Crespi Reghizzi, ‘Economic Crises and the Determination of Damages in Investment Disputes,’ (2014) 28 Diritto del commercio internazionale, 437 ff.; M.D. Garcia Dominguez, ‘Calculating Damages in Investment Arbitration: Should Tribunals Take Country Risk into Account?’ (2016) 34 Arizona Journal of International & Comparative Law 95 ff. 2 Most investment treaties contain a provision about the indemnity due to the investor in case of expropriation. However, as we will see below, the possibility to rely on such provision as a ‘secondary rule’ is questionable. 3 In this respect, investment arbitration can be opposed to other judicial systems of protection of the individuals governed by international treaties, such as the echr. Article 41 of the echr provides that ‘If the Court finds that there has been a violation of the Convention or the Protocols thereto, and if the internal law of the High Contracting Party concerned allows only partial reparation to be made, the Court shall, if necessary, afford just satisfaction to the injured party.’ 4 See the text of the Draft articles on Responsibility of States for Internationally Wrongful Acts, adopted by the International Law Commission at its fifty-third session (2001), in Yearbook of the International Law Commission, 2001, vol. ii, Part Two, at 91 ff. 5 As the Court then stated, ‘it is a principle of international law that the breach of an engagement involves an obligation to make reparation in an adequate form. Reparation, therefore is the indispensable complement of a failure to apply a convention and there is no necessity for this to be stated in the convention itself’ (Factory of Chorzow, Jurisdiction, Judgment of 26 July 1927, p.c.i.j., Series A, No 9, 21) and ‘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

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Reference is also made to Article 36 of the ilc Draft Articles, which specifies that ‘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’ and ‘The compensation shall cover any financially assessable damage including loss of profits insofar as it is established.’ However, the theoretical foundation of such reference to the rules of customary international law on inter-State responsibility as the ‘secondary rules’ also for State-investor disputes may be open to criticism. The rules codified in the Draft Articles on Responsibility of States, indeed, concern the responsibility between States considered as entities relating to each other on an equal footing.6 Many rules on inter-State responsibility (including the principle of full reparation stated by the pcij in Factory at Chorzów and codified in the Draft Articles) are private law concepts, ultimately derived from Roman law. From an historical perspective, the recourse to general principles of private law in order to fill-in gaps in international law of state responsibility was

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’ (Factory of Chorzow, Merits, Judgment of 13 September 1928, p.c.i.j., Series A, No 17, 47). The validity of this standard of compensation in inter-State disputes has been confirmed in the subsequent case law of the International Court of Justice: see in particular Gabčikovo-Nagymaros Project (Hungary/Slovakia), Judgment of 25 September 1997, i.c.j. Reports 1997, 7 ff., para 148 ff.; Legal Consequences of the Construction of a Wall in the Occupied Palestinian Territory, Advisory Opinion of 9 July 2004, i.c.j. Reports 2004, 136 ff., para 152; Case concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Merits, Judgment of 30 November 2010, i.c.j. Reports 2010, 639 ff., para 161. 6 As noted by prof. Crawford, Factory at Chorzów concerned the responsibility of a State (­ Poland) towards another State (Germany) for the expropriation of the assets of German nationals in breach of an express provision of the treaty of Versailles. In that case, the Court clarified that it was referring to inter-State responsibility, as opposed to the responsibility of Poland towards the German nationals (Chorzów, Series A, No 17, para 27–28): J. Crawford, ‘Similarity of Issues in Disputes Arising under the Same or Similarly Drafted Investment Treaties,’ in E. Gaillard, Y. Banifatemi (eds), Precedent in International Arbitration (Juris Publishing 2008) 97 ff., 99. This distinction is presently reflected in Article 33 of the Draft Articles, which provides that the rules contained therein concern the duty of the responsible State towards other States or the international community as a whole, ‘without prejudice to any right, arising from the international responsibility of a State, which may accrue directly to any person or entity other than a State.’ See also G. Van Harten, Investment Treaty Arbitration and Public Law (oup 2007) 101 ff.; A. Giardina, Legal Aspects of Recourse to Arbitration by an Investor Against the Authorities of the Host State under Inter-State Treaties, Institut de droit international, 2013, 28 ff.

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possible – between the second half of 19th century and the first half of 20th century – in view of the fact that inter-individual and inter-State relationships share a common feature, namely the equal position of the parties.7 But it seems less justified when the dispute concerns a public law relationship between a private party and a sovereign entity, as is the responsibility of the host State towards foreign investors for the breach of treaty standards. Such responsibility concerns a relationship with a different structure, in which the foreign investor is ‘exposed to the sovereignty, the regulatory, administrative and other governmental powers of a state.’ 8 Therefore, the rules of inter-State responsibility – which assume the structural equality of the two parties – are not necessarily applicable to investment disputes, which by their very nature involve a situation of structural submission of a private party to a sovereign State.9 If one accepts the view that the rules of customary international law on inter-State responsibility are not directly applicable to State-investor claims, compensation due by the State to the investor should be assessed in light, firstly, of the object and purpose of the applicable investment treaty containing the primary rules and, secondly, of the general principles of law,10 ­including the principles of domestic administrative law governing compensation due by the State to individuals for its administrative action and the standards developed by the European Court of Human Rights and the Inter-American Court of Human Rights. From the first point of view, it has been noted that the object and purpose of investment treaties is not the protection of the foreign property as such, 7 8

9

10

See G. Van Harten, Investment Treaty Arbitration cit., 104–105; B. Sabahi, Compensation and Restitution cit., 7 ff. T. Wälde, Thunderbird International Thunderbird Gaming Corporation v. The United Mexican States, uncitral, Separate Opinion, 1st December 2005, para 12. See also G. Van Harten, Investment Treaty Arbitration cit.; S. Schill, ‘International Investment Law and Comparative Public Law – an Introduction,’ in S. Schill (ed.), International Investment Law and Comparative Public Law (oup 2010) 3 ff.; W. Burke-White, A. von Staden, ‘Private Litigation in a Public Law Sphere: The Standard of Review in Investor-State Arbitrations,’ (2010) 35 Yale Journal of International Law 283 ff. See G. Van Harten, Investment Treaty Arbitration cit., 101–109; T. Wälde, B. Sabahi, ‘Compensation, Damages and Valuation’ cit., 1054. For further references, see also I. Marboe, ‘State Responsibility and Comparative State Liability for Administrative and Legislative Harm to Economic Interests,’ in S. Schill (ed.), International Investment Law and Comparative Public Law cit., 377 ff. On the role of general principles in investment disputes, see S. Schill, ‘General Principles of Law in International Investment Law,’ in T. Gazzini, E. De Brabandere, International Investment Law. The Sources of Rights and Obligations (Nijhoff 2012) 133 ff.

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but the encouragement and reciprocal protection of investments as a means of stimulating economic development.11 Therefore, what should be granted by reparation is the investor’s right to a reasonable rate of return based on his legitimate expectations of the investor.12 From the second standpoint, a comparative analysis shows that in the domestic systems of administrative law as in the European and Inter-American systems of protection of human rights, compensation is generally lower than damages calculated according to the principle of full reparation set by customary international law.13 Thirdly, this approach should also emphasise the need to quantify damages differently depending on the kind of obligation breached by the State. While in case of unlawful expropriation, compensation should be determined based on the value of the investment (in analogy with the treaty provision on lawful expropriation), such criterion seems less appropriate in case of breach of a relative standard, such as fair and equitable treatment, which implies a deeper and more extensive judicial review of the State’s sovereign conduct. As we will see, however, this distinction has been frequently overlooked by tribunals. 11

12

13

Such goal, which is frequently emphasised in the recitals of investment treaties, has recently been stressed by the Institut de Droit International in the recitals of the Resolution on the Legal Aspects of Recourse to Arbitration by an Investor Against the Authorities of the Host State under Inter-State Treaties adopted at the Tokio session of September 2013, which emphasised ‘the importance of international investment for economic and social development, both in period of expansion and in periods of crisis, and the need to ensure a balanced protection of the interests of the involved parties, guaranteeing due protection of the rights of investors and the rights of states to pursue, in a non-discriminatory way, their public and regulatory purposes.’ See also Article 10, para 2 of the Resolution, pursuant to which ‘given the fact that investment arbitration can be initiated by investors solely on the basis of a treaty, special weight must be given to the requirement that the investment contribute to the development of the host State, as may appear in the relevant instrument.’ See in particular I. Brownlie, cme v. Czech Republic, Separate Opinion on the issues at the quantum phases of cme v. Czech Republic, 14 March 2003, para 73, criticizing a ‘nontreaty commercial approach’ for calculating the quantum of compensation, stressing that the ‘Respondent is a sovereign State, which is responsible for the well-being of its people,’ as opposed to ‘a commercial entity.’ For a comparison between the standards of reparation applied respectively in investment treaty arbitration and in the domestic systems of administrative law as in the regional systems on the protection of human rights, see I. Marboe, ‘State Responsibility and Comparative State Liability for Administrative and Legislative Harm to Economic Interests’ cit., 377 ff; G. van Harten, Investment Treaty Arbitration cit., 103.

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Fourthly, whatever are the applicable rules or principles, the assessment of damages is not an exact science, as acknowledged by many tribunals.14 These legal standards always leave a certain degree of discretion to arbitrators.15 In exercising such discretion, they can be guided by equitable considerations without thereby assuming the role of aritrators ex aequo et bono.16 The possibility to resort to equity could enable the arbitrators to adjust the quantum of equity in light of the peculiar features of the case, such as the intensity of the State’s violation,17 or the fact that it acted in good faith or bad faith,18 or 14 See Compañiá de Aguas del Aconquija s.a. and Vivendi Universal s.a. v. Argentine Republic, icsid Case No. ARB/97/3, award of 20 August 2007, para 8.3.16; Azurix Corp. v. The Argentine Republic, icsid Case No. ARB/01/12, decision of the ad hoc committee of 1st September 2009, paras 351 and 318; Copper Mesa Mining Corporation v. The Republic of Equador, pca Case No . 2012–2, award of 15 March 2016, para 7.26. 15 See, among others, cms Gas Transmission Company v. The Republic of Argentina, icsid Case No. ARB/01/8, award of 12 May 2005, para 409; lg&e Energy Corp., lg&e Capital Corp., and lg&e International, Inc .v. Argentine Republic, icsid Case No. ARB/02/1, award of 25 July 2007, paras 36 and 40; El Paso Energy International Company v. The Argentine Republic, icsid Case No. ARB/03/15, award of 31 October 2011, para 701; Azurix (ad hoc committee: cited above, fn. 14, paras 351 and 318, where the committee approved this approach specifying that discretion derives from the application of ‘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’); Yukos Universal Limited v. The Russian Federation, pca Case No. AA 227, award of 18 July 2014, para 675. 16 Outside the cases in which arbitrators have been authorised to decide a case ex aequo et bono, equity can be applied ‘within the boundaries of judicial discretion left by the legal rules’: see S. Ripinski, K Williams, Damages cit., 127–128. See also B. Shabai, Compensation and Restitution cit., 186 ff. Among the cases having expressly resorted to equitable considerations in assessing compensation, without thereby assuming the role of arbitrators ex aequo et bono, see Kuwait v. Aminoil (1982), in International Legal Materials, 1982, 976 ff, para 78; Técnicas Medioambientales Tecmed, s.a. v. The United Mexican States, icsid Case No. ARB (AF)/00/2, award of 29 May 2003, para 190; American Manufacturing & Trading, Inc. v. Republic of Zaire, icsid Case No. ARB/93/1, award of 21 February 1997, para 7.16; Compañia del Desarrollo de Santa Helena v. Costa Rica, icsid Case No ARB/96/1, award of 17 February 2000, paras 92 and 103. For a recent resort to equity by the International Court of Justice in determining compensation for an unlawful act, see Case concerning Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of the Congo), Compensation owed by the Democratic Republic of the Congo to the Republic of Guinea, Judgment of 19th June 2012, in i.c.j. Reports 2012, 337 f., paras 33 and 36. 17 See T. Wälde, B. Sabahi, ‘Compensation, Damages and Valuation’ cit., 1056. 18 For a recent consideration of this aspect in the process of determining damages, see Les Laboratoires Servier, s.a.a., Biofarma, s.a.s., Arts et Techniques du Progrès s.a.s. v. Republic of Poland, uncitral, award of 14 February 2012. On the solution adopted in this award, see below, at the end of paragraph 2.

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the fact that the State has been enriched by it,19 or the conditions of the host State’s economy.20 In the case law, the absence of secondary rules in investment treaties and the uncertainty about the applicability of the principles and rules governing inter-State responsibility to investor-State disputes has resulted in several practical problems. In the following paragraphs, two of them will be examined, namely the identification of the proper standards of compensation for unlawful expropriation and for breaches of fair and equitable treatment. 2

Compensation in Cases of Expropriation: Are the Treaty Clauses Fit to Govern Compensation in Case of Unlawful Taking?

As mentioned above, most investment treaties contain a rule setting out the requirement of compensation for a lawful expropriation. These rules, which are derived from the ‘Hull formula,’ 21 include, among the conditions set for an expropriation to be lawful, the payment of prompt, adequate and effective compensation, which ‘shall be equivalent to the fair market value of the expropriated investment immediately before the expropriatory action was taken.’ 22 However, according to their wording, these provisions appear to be rather primary rules (setting out compensation as one of the requirements for an expropriation to be lawful compensation) than secondary rules on the quantum of reparation. The question has then arisen whether these rules may applied, directly or by analogy, also to cases of unlawful expropriation. Until 2006, these rules were applied for the purpose of determining compensation not only in case of lawful, but also in case of unlawful expropriation.23 A distinction between these two situations was clearly drawn for the first time in investment disputes in adc v. Hungary of 2006.24 According to this 19

On the relevance of unjust enrichment in the process of determining compensation in international practice, see C. Schreuer, ‘Unjust Enrichment in International Law’ (1974) 22 American Journal of Comparative Law 281 ff., at 289 ff. 20 Z. Crespi Reghizzi, ‘Economic Crises and the Determination of Damages in Investment Disputes’ cit., 444. 21 See B. Sabahi, Compensation and Restitution cit., 92–93. 22 See, for instance, Article iv of the us-Argentina bit of 14 November 1991. 23 See Metalclad Corporation v. The United Mexican States, icsid Case No. ARB(AF)/97/1, award of 30 August 2000, para 113 ff.; cme Czech Republic b.v. v. The Czech Republic, uncitral, partial award of 13 September 2001, para 618; Tecmed v. Mexico (cited above, fn 16), para 183 ff. 24 adc Affiliate Limited and adc & admc Management Limited v. The Republic of Hungary, icsid Case No. ARB/03/16, award of 2 October 2006, para 479 ff. In this respect, the

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award, the treaty provisions on expropriation only apply to compensation due to the investor for a lawful expropriation:25 while in case of unlawful taking, compensation has a wider scope, since its function is to provide ‘full reparation’ for an internationally wrongul act, and in particular a substitute for restitution. In these cases, the reference to the concept of the fair market value has been derived by investment tribunals directly from the customary principle of ‘full reparation’ (as stated in Chorzów) rather than from an application of the treaty provision. Such distinction may have a significant impact on the date of reference for the quantum of compensation, when the value of the investment has increased after the breach. While bits provide that ‘compensation’ for lawful expropriation should be determined on the basis of the value of the investment at the time of the taking,26 in case of unlawful expropriation damages are calculated on the basis of the fair market value of the investment at the time of the breach or, if higher, at the time of the award.27 In adc v.

25

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decision relied on a distinction already accepted by the pcij in Factory at Chorzów, followed by other international courts and tribunals, such as the Iran-us Claims Tribunal, the European Court of Human Rights (see below for further references). See B. Sabahi, Compensation and Restitution cit., 95 ff., for an analysis of the historical development of the distinction in investment arbitration case law. See also B. Sabahi, N. Birch, ‘Comparative Compensation for Expropriation,’ in S. Schill (ed.), International Investment Law and Comparative Public Law cit., 755 ff.; I. Marboe, ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ cit., 723 ff. For some examples of application of this rule to cases of lawful taking, see Kuwait v. Aminoil (cited above, fn. 16), para 178; Santa Helena v. Costa Rica (cited above, fn. 16), para 78. For further references, see B. Sabahi, Compensation and Restitution cit., 96–97. This solution has been justified on the basis that, in case of unlawful expropriation, compensation works as a substitute for restitution. As the pcij then stated in Chorzów, ‘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’ (Factory at Chorzów, Merits, Judgment of 13 September 1928, p.c.i.j., Series A, No 17, 47, 51). The rationale for this solution is that, despite the fact that restitution was practically impossible, through a full reparation Germany

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Hungary, a case of indirect unlawful expropriation of contractual rights to operate two airport terminals, compensation was calculated on the basis of the fair market value of the business at the time of the award, thus reflecting the increased value of the investment since the taking. In this award, the value of the investment at the time of the award was adopted since it was higher than the value at the date of the breach. But, as noted by the tribunal in adc, that situation is almost unique among decided cases concerning the expropriation by States of foreign owned property, since ‘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.’ 28 More recently, the distinction between lawful and unlawful expropriation was applied in Yukos Universal Limited v. The Russian Federation (2014) and accepted, at least in principle, in some other awards.29

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should be put in the same condition as if the factories had been restituted to the former German shareholders. For this reason, the Court asked the experts to determine the value of the undertaking at the time of the taking and at a later date of its judgment, including the financial results up to the latter date. Among the decisions quoting approvingly the Chorzów Factory judgment on this aspect and cited in adc v. Hungary (see above, fn. 24), see iran–u.s. Claims Tribunal, Amoco International Finance Corporation v. Iran, award of 14 July 1987, in Int. Leg. Mat., 1988, 1314 ff., para.196; echr, Papamichalopoulos and Others v. Greece, judgment of 31 October 1995, where the Court stated that ‘The unlawfulness of such a dispossession inevitably affects the criteria to be used for determining the reparation owed by the respondent State, since the pecuniary consequences of a lawful expropriation cannot be assimilated to those of an unlawful dispossession.’ Among investment disputes see also, for an admission of the possibility to take into account post breach events in case of unlawful expropriation, Amco Asia Corporation and others v. Republic of Indonesia (icsid Case No. ARB/81/1), award of 5 June 1990, in which the take-over by the Indonesian police and army was considered as an unlawful expropriation and denial of justice. The tribunal rejected Indonesia’s argument that post breach events should not be taken into account for the purpose of valuation, stating that: ‘if the purpose of compensation is to put Amco in the position it would have been in had it received the benefits of the [agreements], then there is no reason of logic that requires that to be done by reference only to data that would have been known to a prudent businessman in 1980 … The only subsequent known factors relevant to value which are not to be relied on are those attributable to the illegality itself’ (para 96). This explains why ‘application of the restitution standard by various arbitration tribunals has led to use of the date of the expropriation as the date for the valuation of damages’: adc v. Hungary (cited above, fn. 24) para 496. Cited above, fn. 15, para 1763 ff. In other decisions, this distinction was accepted only in principle, since the value of the investment had decreased after the taking: Siemens a.g. v. Argentina, icsid Case No. ARB/02/8, award of 17 January 2007, para 352; Vivendi v. Argentina, (cited above, fn. 14), para 8.2.3; Ron Fuchs v. The Republic of Georgia, icsid Case No. ARB/07/15, award of 3 March 2010, par. 514.

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However, the same distinction has been put in question in other recent awards. In Les Laboratoires Servier et al. v. Poland (2012), for instance, the tribunal held that ‘given the Tribunal’s finding that Poland has not engaged in bad faith behaviour in a way that would require damages beyond the Treaty standard, the Tribunal must simply apply the standard of compensation for the divestment of’ any ‘investment under bit Article 5(2).’ In support of this conclusion, the tribunal noted that, ‘although no single interpretation may prove entirely satisfactory under all circumstances, the reading of the Treaty that comports with common sense would provide a floor of’ real value ‘compensation for all divestments (not just legitimate takings), allowing tribunals discretion to impose additional sanctions to punish Treaty violations of particular seriousness, such as discrimination or breach of specific undertakings.’ 30 This decision, which explicitly acknowledged the possibility to resort to equitable considerations in determining the amount of damages, evidences that, even in case of unlawful expropriation, compensation can be determined on the basis of the applicable treaty provisions (even if they result in a lower amount than the principle of full reparation), in the absence of a particularly serious breach. Also in Guaracachi America, Inc. and Rurelec plc v. Bolivia (2014), the tribunal refused to give effect to the distinction between lawful and unlawful expropriation invoked by the claimant. Irrespective of the claimant’s contention about the unlawfulness of expropriation, it determined compensation pursuant the provision on expropriation contained in the uk-Bolivia bit, noting that ‘The bit makes no distinction between the compensation to be provided in respect of an unlawful expropriation as opposed to a lawful one, and the Tribunal does not find any reason to believe that the illegality of the expropriation renders what the bit deems to be “just and effective compensation” suddenly inadequate.’31 These awards prove that the applicability of the treaty standard of compensation for expropriation to unlawful expropriation still forms an unsettled issue.32 30 Les Laboratoires Servier et al. v. Poland (cited above, fn. 18), paras 642–645. 31 See Guaracachi America, Inc. and Rurelec plc v. Bolivia, pca Case No. 2011–17, award of 31 January 2014, para 613: ‘On the first question, the Tribunal has concluded that it should continue to apply the terms of Article 5 of the uk-Bolivia bit. The bit makes no distinction between the compensation to be provided in respect of an unlawful expropriation as opposed to a lawful one, and the Tribunal does not find any reason to believe that the illegality of the expropriation renders what the bit deems to be “just and effective compensation” suddenly inadequate.’ 32 In Mobil Corporation, Venezuela Holdings, b.v., Mobil Cerro Negro Holding, Ltd., Mobil Venezolana de Petróleos Holdings, Inc., Mobil Cerro Negro, Ltd., and Mobil Venezolana

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3

Determining the Proper Standard of Compensation for Breaches of Fair and Equitable Treatment

A further difficulty concerns the identification of the proper standard of compensation in case of breach by the host State to provide the investor with fair and equitable treatment (fet). In such case, it is impossible to apply the treaty provision on expropriation, unless the claimant has been deprived of its investment.33 For this reason, Article 13, para 3 of the resolution adopted in Tokio in September 2013 by the ­Institut de Droit International provides that ‘compensation due to an investor for violation of the fet standard shall be assessed without regard to compensation



33

de Petróleos, Inc. v. Bolivarian Republic of Venezuela, icsid Case No. ARB/07, award of 9 October 2014, par. 306, the tribunal avoided to examine such critical issue, having found that the claimant had not succeeded in demonstrating the unlawful character of expropriation. For instance where the State’s breach of fair and equitable treatment has de facto destroyed the investment, as in was found in Azurix v. Argentina, where the revocation of a licence to operate was considered equivalent to expropriation for valuation purposes. In the annulment proceedings in Azurix, Argentina challenged the validity of the fair market value approach followed by the tribunal, arguing that such approach should apply only in case of lawful expropriation pursuant to the bit. The ad hoc committee rejected this critique, approving the reference to the fair market value (irrespective of the provision of the bit, which only concerned lawful takings) for determining the amount of full reparation according to customary international law (Azurix, ad hoc committee, cited above, fn. 14, para 328). In Anatolie Stati, Gabriel Stati, Ascom Group sa and Terra Raf Trans Traiding Ltd v. Kazakhstan, award of 19 December 2013, para 1460 f., the Tribunal stated: ‘Though the Tribunal found above that Respondent’s primary breach of the ect is that of Art. 10(1) to provide fet, since that breach resulted finally in a taking of Claimants’ investment, some guidance can be provided by Art. 13 on expropriation regarding the date and measure for the calculation of damages.’ The Tribunal, after recalling the provision of the ect dealing with compensation for a lawful expropriation, noted: ‘From this provision, the Tribunal takes guidance to the effect that the damages to be awarded for what it has found above to be not a lawful expropriation, but rather a breach of the ect, shall not be lower than what the ect prescribes for a lawful expropriation.’ Also in Gold Reserve Inc. v. Bolivarian Republic of Venezuela, icsid Case No. ARB(AF)/09/1, award of 29 September 2014, para 681, the Tribunal justified the adoption of the fair value methodology in light of the fact that the breach of fet deprived ‘the investor totally of its investment.’ A similar approach was followed in Lahoud v. Congo, icsid case n. ARB/10/4, award of 29 January 2014, para 557, where the tribunal applied the provision of the Investments Code of Congo on expropriation, after finding that the breach of the fet provision of the Code derived from the same facts which qualified as an indirect expropriation.

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that could be allocated in case of an expropriation, in accordance with the damage suffered by the investor.’ In this situation, most tribunals have determined compensation according to the so called ‘differential method,’34 the basis of which is found – once again – in customary international law, as reflected by the judgment of the pcij in Factory at Chorzów and codified in the Draft Articles on State Responibility. In order to ‘wipe out all the consequences of the illegal act,’ such method requires a comparison between the actual financial situation of the investor (the ‘actual scenario’) and ‘the situation which would, in all probability, have existed’ if the State had not breached its treaty obligations (the ‘but for scenario’).35 The  determination of the ‘but for scenario’ implies a highly hypothetical ­exercise, requiring to go back to the time immediately prior to the State breach and figure out how things would have evolved in the absence of such breach. This is especially true when the host State’s economy is in a situation of crisis, where the ‘but for scenario’ must consider not only the inherent negative effects on the investment of the economic downturn, but also the negative effects of the measures which the State could have lawfully adopted to overcome the recession.36 In this respect, the discretion vested on arbitrators appears to be significantly higher in determining damages for breach of fet than in case of expropriation. In particular, a critical distinction can be drawn depending on whether the State’s breach has caused a permanent or temporary injury to the investor. A good illustration of such distinction can be found in some cases brought against Argentina, where the investment was formed by shares in local companies operating in public utility industries (gas, electricity or water distribution, sewage services) under a licence granted by the government and governed by special law provisions. The foreign claimants contended that the measures adopted by Argentina – which led to the abrogation of the pre-existing tarification regime37 at the time of the crisis – had caused severe losses to such companies, which in turn resulted in a permanent diminution of the value of their investments (i.e., the shares they owned in the companies). 34

35 36 37

For an analysis of these awards, see K. Hobér, ‘Compensation: A Closer Look at Cases Awarding Compensation for Violation of the Fair and Equitable Treatment Standard,’ in K. Yannaca-Small (ed.), Arbitration Under International Investment Agreements cit., 573 ff. Factory at Chorzów, Merits, 1928, p.c.i.j., Series A, No 17, 47 cited above, fn. 5. See T. Wälde, B. Sabahi, op. cit., 1057–1058. In particular the adjustment of the tariffs to the us ppi index and the parity regime between peso and dollar.

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However, a claimant is entitled to compensation calculated according to the loss of value only if such loss has a permanent character. Since a recession is by its very nature temporary, the issue arose whether the damage suffered by the claimant amounted to a permanent – as opposed to a temporary loss. Among the awards issued against Argentina, this issue was analysed with different results in lg&e,38 on one side, and in cms,39 Enron40 and Sempra Energy,41 on the other side, despite the strong similarities among the facts underlying them, which all concerned local companies operating in the gas distribution sector. In lg&e, while the investors claimed to have suffered a permanent loss of value of their shareholding (93% of the value between August 2000 and ­October 2002), the tribunal rejected this approach. It noted that the ‘value of lg&e’s investment has “rebounded” since the economic crisis and … the effect of the measures has not been permanent on the value of the Claimants’ shares. In fact, the loss of the capital value has not crystallized. Had lg&e sold its investment, as did other foreign investors, for a depressed value resulting from the measures, capital value would become a practicable basis for determining compensation. The Tribunal believes that the claim for the loss in capital value is, as noted by respondent, premature and therefore rejects it as basis for compensation’ (para 47).42 For this reason, the tribunal identified the loss as a decrease in dividends distributed to shareholders (among which were the claimants), in the period between 2000 and 2005 (excluding the period where Argentina succeeded in invoking the necessity defence, between January 2001 and April 2003).43 38 39

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lg&e v. Argentina, cited above, fn. 15. cms v. Argentina, cited above, fn. 15. On 25 September 2007, the ad hoc Committee annulled the part of the award concerning the breach by Argentina of the umbrella clause, but confirmed the other parts, despite criticizing the reasoning of the tribunal concerning the necessity exception. Enron v. Argentina, Enron Corporation and Ponderosa Assets, l.p. v. Argentine Republic, icsid Case No. ARB/01/3, award of 22 May 2007, para 407. On 30 July 2010, the ad hoc Committee annulled the whole award owing to the failure of the tribunal to uphold the necessity exception raised by Argentina. Sempra Energy International v. Argentina, icsid Case No. ARB/02/16, award of 28 September 2007. On 29 June 2010, the ad hoc Committee annulled the whole award owing to the failure of the tribunal to apply the emergency clause contained in the us-Argentina bit. The tribunal also noted that, differently from cms, ‘important long-term losses’ in the circumstances of this case ‘are too uncertain and have not been adequately proven’ (lg&e, para 39). Outside the Argentina cases, a similar approach has been followed in other situations, where the State’s breach did not result in a permanent harm, but rather in a temporary interference with the investor’s rights. This happened, for instance, in sd Myers v. Canada uncitral, second partial award of 21 October 2002, with a temporary ban to the export

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Moreover, in lg&e, lost profits were compensated only with respect to the dividends that the claimants would have earned up to the delivery of the award, namely in the period 2000–2005. While the claimants were seeking compensation also for the lost dividends which would have accrued after the award, for all the duration of the concession, the tribunal rejected such request, since it was ‘not convinced of the certainty of the lost future dividends’. According to the tribunal, ‘the uncertainty concerning lost future profits in the form of lost dividends results from the fact, noted above, that Claimants have retained title to their investments and are therefore entitled to any profit that the investment generates and could generate in the future. Any attempt to calculate the amount of the lost dividends in both the actual and “but for” scenarios is a highly speculative exercise. If the Tribunal were to compensate lg&e for lost future dividends while it continues to receive dividends distributed by the Licensees at a hypothetical low amount, a situation of double recovery would arise, unduly enriching the Claimants.’ 44 The tribunal also rejected the claimants’ argument that this result would compel them to ‘bear the risk and uncertainty resulting from Argentina’s conduct and the burden to seek periodic additional relief at great cost’ for the losses of dividends which would accrue in the future as the consequence of Argentina’s continuing breach: ‘the Claimants,’ the tribunal noted, ‘have chosen to maintain their investments in Argentina regardless of its reluctance to re-establish the gas regulatory framework following the end of the state of necessity period. The decision to maintain their investments in Argentina has its consequences: (i) the impact of Argentina’s conduct on the value of investments has not crystallized and is subject to the changing regulatory environment and fluctuations of the stock market; (ii) lost future profits are uncertain and their calculation is speculative; and (iii) compensation could only be awarded for damages actually suffered and sufficiently proven’ (para 96). The rationale of this conclusion seems to be that, to the extent that an investor has voluntarily chosen to maintain its investment in a State’s economic and regulatory environment (being aware of its new features), it cannot subsequently complain about the adverse financial consequences of such decision. An opposite solution was adopted in cms, Enron and Sempra Energy. In cms, the tribunal noted ‘that more than five years have lapsed since the

44

of hazardous substances, interfering with the investor’s operations, or in Pope & Talbot v. Canada, uncitral, award of 31 May 2002, with a temporary closure of the investor’s factory. In both cases, the State’s conduct did not amount to an indirect expropriation, but to a violation of national treatment and minimum standard of treatment under the nafta, comparable fair and equitable treatment. lg&e (cited above, fn.15), para 88 ff., with references to the ilc Commentary.

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adoption of the first measures in 2000. Delays can be explained with reference [to] the above mentioned crisis. However, if delays exceed a reasonable period of time the assumption that they might become permanent features of the governing regime gains in likelihood.’45 Accordingly, the tribunal awarded compensation as the difference between the fair market value with or without breach.46 In this case, the reference to such value is in fact an application of the differentual method.47 These examples show how the application of the differential method gives rise to deep uncertainties, due to the difficulty of assessing which would have been the position of the investor in an hypothetical scenario without the State breach complained about. As the figures of the lg&e award evidence, the precise identification of the damage can have a greater weight in the calculation of damages than the necessity exception itself.48 In cases of breach of fet, a cautious approach in awarding compensation for the full value of the investment seems justified in light of the undefined structure of the fet standard. A State which is found to have violated such duty is not liable for the breach of a specific obligation, as in case of expropriation. Due to its open character, fet forms a more intrusive standard of judicial review of the exercise by the host State of its sovereign power compared to expropriation. These features make it similar to other means of protection of the rights of individuals against violations committed by States, at both a domestic and international level. In particular, in the system of the European convention of human rights, reparation for violations of the convention is essentially 45

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cms (cited above, fn. 15), para 107. In Sempra Energy (cited above, ibid.), the tribunal applied the standard for reparation set for expropriation relying on the ‘difficulty to distinguish the breach of fet from indirect expropriation or other forms of taking,’ which would make it reasonable ‘that the standards of reparation might be the same’ (para 403). In order to avoid the risk of enrichment of the claimant after the award, the arbitrators granted Argentina a one-year option to purchase the investment upon payment of its residual value. See I. Marboe, ‘Compensation and Damages in International Law. The Limits of “Fair Market Value”’ cit., 757; K. Khamsi, ‘Compensation for Non-Expropriatory Investment Treaty Breaches in the Argentine Gas Sector Cases: Issues and Implications’ cit., 179. As a result of the different solution followed by the tribunal in lg&e (dismissing the fair market value approach), the claimants were awarded usd 51 million plus interest, instead of the original claim of usd 248 or 284 million. Compared to this reduction, the discount attributable to the loss of dividends for the period in which Argentina could invoke the state of necessity (usd 29 million) played a more limited role: K. Khamsi, ‘Compensation for Non-Expropriatory Investment Treaty Breaches in the Argentine Gas Sector Cases: ­Issues and Implications’ cit., 176.

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carried out on an equitable basis, through the concept of ‘just satisfaction,’49 which is lower than ‘full reparation.’ Even if investment disputes lack a special secondary rule as is Article 41 of the echr, a comparison with the solution adopted within this system could be of guidance – as a possible mitigating factor – in determining compensation for the breach of fet, in order to avoid compensation for the inherent risks which the investor has voluntarily assumed in chosing to invest in a specific State. 49

Pursuant to Article 41 of the echr quoted above, fn. 3.

Chapter 5

Investment Arbitration and eu General Principles of Law: Current Developments Francesco Munari and Chiara Cellerino* The new competence of the eu in the field of international investments, gained with the Lisbon reform has determined a phase of turmoil in the existing system of international governance of foreign investments both at eu and international level. In the view of the Authors, the eu impetus in seeking innovative solutions is connected to, if not compelled by, the inherently complex relationship between eu law, on one side, and international investment and arbitration law, on the other side. The paper aims to provide an overview of the most controversial issues arising out of the interplay between eu law and investment arbitration, with the view to assessing whether the current developments taking place at eu level are capable of solving or at least mitigating them. Some general principles of law are used as a toolbox of the analysis i.e. pacta sunt servanda, the principle of legal certainty, the principle of sincere cooperation and that of autonomy of eu legal order. The first and second principles are common to both eu law and international (investment and arbitration) law, whereas the third and fourth ones are inherent only to the eu legal order; however, all of them serve the goal to show the difficulties the eu has in trying to build a coherent system between the two subject matters.

1

eu Law and International Investment Dispute Settlement: The Complex Interplay between Different Legal Orders

The new competence of the eu in the field of international investments, gained with the Lisbon reform as a ‘by-product’ of the common commercial

* Francesco Munari is Professor of eu law at the University of Genoa, legal practitioner and arbitrator. Chiara Cellerino is research fellow in international and eu law at the University of Genoa. While this paper represents a common view by the authors of the topics hereinafter dealt with, Section 1, 2, 3 and 8 can be in particular attributed to Francesco Munari, while Section 4, 5, 6 and 7 to Chiara Cellerino.

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_006

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policy  under article 207 tfeu,1 has determined a phase of turmoil in the ­existing – and rather consolidated – system of governance of foreign investments both at eu and international level. Indeed, within the new generation of international commercial agreements with its trade partners, the eu is: (i) ­negotiating innovative foreign investments protection clauses, aiming at enhancing the regulatory space of States hosting the investments, and hence integrating its non-trade values in its commercial policy (ii) replacing the ­traditional system of investment dispute settlement – which is based on arbitrations established by relevant bilateral investment agreements (‘bits’) or, more generally, international investment treaties (‘iits’) – with a new Investment Court S­ ystem (‘ics’), this new solution being capable of undermining most of the assumptions on which the previous mechanism was founded. In addition, the European Commission is also actively engaged in exporting the ics at multilateral level, and has recently requested to the Council the authorization to launch multilateral negotiations for a convention establishing 1 For some references in the literature on the eu competence in the regulation of foreign investments, see Ramses A. Wessel, Tamara Takács, ‘Constitutional Aspects of the eu’s Global Actorness: Increased Exclusivity in Trade and Investment and the Role of the European Parliament’ [2017] European Business Law Review, 103; Federico Ortino, Piet Eeckhout, ‘­Towards an eu Policy on Foreign Direct Investments’ in Andrea Biondi and Others (eds.), eu Law After Lisbon (oup, 2012) 292; Markus Krajewski, ‘The Reform of Common Commercial Policy,’ ibidem, 292; Ibid., ‘External trade Law and the Constitutional Treaty: Towards a ­Federal and More Democratic Common Commercial Policy’ [2005] cmlr 91; N. Jansen Calamita, ‘The Making of Europe’s Investment Policy: Uncertain First Steps’ [2012] liei 301; Angelos Dimopoulos, ‘The Compatibility of eu Investment Agreements with eu Law’ [2012] liei 447; Jan Asmus Bischoff, ‘Just a Little bit of « Mixity »? The eu’s Role in the Field of International Investment Protection Law’ [2011] cmlr 1527; Ramon Vidal Puig, ‘The Scope of the New ­Exclusive Competence of the European Union with Regard to Foreign Direct ­Investment’ [2013] liei 133; Jan Ceyssens, ‘Towards a Common Foreign Investment Policy? ­Foreign ­Investment in the ­European Constitution’ [2005] liei 259; Thomas Eilmansberger, ‘Bilateral ­Investment Treaties and eu Law’ [2009] cmlr 383; Francesco Perfetti, ‘La tutela dei valori non commerciali nella politica dell’Unione europea in materia di investimenti?’ [2011] ­Comunità Internazionale 247; Fabrizio Marrella, ‘Unione europea e investimenti esteri’ in Sergio Maria Carbone (ed.), L’Unione europea a vent’anni da Maastricht, verso nuove regole, xvii Convegno sidi Genova 31 maggio-1 giugno 2012 (Editoriale Scientifica, 2013) 107; Maria Rosaria Mauro, ‘Accordi internazionali sugli investimenti e Unione europea’ [2010] Studi sull’integrazione ­europea 403; Alfredo Rizzo, ‘Alcuni profili problematici della competenza dell’Unione ­europea in materia di investimenti diretti esteri’ [2014] Comunità Internazionale 261; Julie A. Maupin, ‘Where Should Europe’s Investment Path Lead? Reflections on August Reinisch, ‘Quo Vadis Europe?’ [2014] Santa Clara J. Int’l L. 183.

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a multilateral court for the settlement of investment disputes.2 Whether the ­latter initiative is destined to find the necessary political support among the member States in the Council, but especially among other actors of the international community, is difficult to predict. Certainly, however, this activism of the eu in the field both of international investments and investment dispute settlement cast waves in the international investment community, and seems capable to trigger a process of (partial) reform of the existing system, with impact also in the intra-eu investment area (see below, Sections 2 and 7). In our view, such impetus in seeking innovative solutions is certainly connected to, if not compelled by, the inherently complex relationship between eu law, on one side, and international investment and arbitration law, on the other side. In fact, the foundations of, respectively, international investments (and arbitration) law and eu law are largely different, if not at odds with each-other: the former is organized horizontally at inter-State level, through bits or, more generally ‘iits.’ Moreover, the relevant dispute settlement mechanism, i.e. those covering investor-to-State disputes, is disciplined through arbitrations that are governed, to a great extent, by other international treaties, such as the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ‘icsid Convention’),3 whose article 54 obliges States to «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 latter is organized vertically (eu and Member States), through a complex allocation of powers characterized by the principles of conferral and of the supremacy (primauté) of eu law vis-à-vis national laws. Furthermore, a complicate legal relationship exists between international obligations undertaken by Member States and compliance with eu law, especially when

2 Commission recommendation for a Council Decision authorising the opening of negotiations for a Convention establishing a multilateral court for the settlement of investment disputes, 13.9.2017, COM(2017) 493 final. 3 The Convention was formulated by the Executive Directors of the World Bank (International Bank for Reconstruction and Development). On March 18, 1965, the Executive Directors submitted the Convention, with an accompanying Report, to member governments of the World Bank for their consideration of the Convention with a view to its signature and ratification. The Convention entered into force on October 14, 1966. As at today, the number of signatory and contracting States is 160. icsid stands for International Centre for the Settlement of Investment Disputes and is the institution administering the icsid Convention (for further references, see https://icsid.worldbank.org/apps/ICSIDWEB/Pages/default.aspx).

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i­ndividuals’ rights or obligations are at stake.4 Finally, an unresolved interrelation exists b­ etween eu law and international arbitration in general, not to mention investment arbitration, which makes, so far, this dispute settlement mechanism an ‘external’ tool vis-à-vis the eu legal order.5 In this already elaborated picture, an additional element should be added: all Member States but Poland are parties to the icsid Convention, whereas the eu is not and cannot become a party. In this chapter, an attempt shall be done to provide at least an overview of the most controversial issues arising out of the interplay between eu law and investment arbitration, with the view to assessing whether the current developments taking place at eu level are capable of solving or at least mitigating them. In this connection, we will concentrate on ‘bilateral’ treaties only6 and will therefore skip the analysis concerning the Energy Charter Treaty (‘ect’), even if it is a source of very complicate issues (and abundant arbitrations) for eu Member States:7 besides, tensions between eu law and obligations (and disputes) originating from ect are probably at the core of Italy’s decision to withdraw from the ect,8 and further withdrawals by eu Member States might indeed follow, for the inherent difficulties to keep together transnational, eu and domestic regimes concerning foreign investments and energy. Some general principles of law will represent a useful toolbox of our analysis. In particular, we shall try to go through four of them, i.e. pacta sunt s­ ervanda, 4 See e.g. infra, Section 3. 5 Since the entry into force of the Brussels Convention of 27 September 1968 on jurisdiction and the enforcement of judgments in civil and commercial matters ([1972] oj l 299/32), later transposed into the Brussels i Regulations (including Regulation (eu) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast), [2012] oj l 351/1), the eu legal regime concerning recognition of judgments in civil and commercial matters does not apply to arbitration (see now article 1.2(d) of Brussels i Regulation recast). This has always determined, as a consequence, that the validity and enforceability of arbitration clauses and arbitration awards remain a matter for Member States law to ascertain, or rather for the international conventions applying to this topic as introduced in national legal systems. 6 Including those treaties where one party is the eu and its Member States (see below, Section 5). 7 Anna De Luca ‘Renewable Energy in the eu, the Energy Charter Treaty, and Italy’s Withdrawal Therefrom’ [2015] Transnational Dispute Management, issue 3, 1, at 11, refers that «more than a half of the 67 cases listed by the ec Secretariat are intra-eu cases». A striking example of the complexities of investor-eu Member State litigations concerning the ect is offered by the award Charanne b.v. and Construction Investments s.a.r.l. v. Spain (ect case No. 062/2012, Final Award of January 21, 2016) [2016] Dir. Com. Int. 237. 8 Anna De Luca ‘Renewable Energy in the eu’ above note 7, 9 ff.

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the principle of legal certainty, the principle of sincere cooperation and that of autonomy of eu legal order. The first and second principles are common to both eu law and international (investment and arbitration) law, whereas the third and fourth ones are inherent only to the eu legal order;9 however, we believe that all of them serve the goal to show the difficulties the eu has in trying to build a coherent system between the two subject matters. 2

The Principle of pacta sunt servanda and Intra-eu bits: International Legal Issues…

Following the collapse of the Soviet Union, a significant number of (standard) bits were concluded between Central and Eastern European countries, formerly not party to the eu, and single eu Member States, aimed primarily at promoting investments and development in the former countries. The enlargement of the eu which occurred in 2004 and 2007 brought with it the superimposition of eu law onto some 190 bits that meanwhile had become intra-eu. This gave rise to several cases in which compliance with eu law required Member States to deviate from the obligations that had been established in relevant bits. The above deviations (and in some instances, adoption of positions incompatible with the bits) should be tested under the principle pacta sunt s­ ervanda: in particular, the test should be conducted with regard to possibly conflicting obligations undertaken by Member States in the context of eu integration, on one side, and their bit relationship, on the other side.10 A dispute has hence arisen on the applicability of intra-eu bits, in respect of eu investors: in particular, the Commission is against such an applicability, on grounds of several legal arguments based on the (supervening) incompatibility of these treaties with the eu legal order. In essence, the Commission deems that intra-eu bits: (i) breach the principle of non-discrimination between eu citizens, especially as regards the possibility to resort to investment tribunals that are not available to all eu citizens when the ‘normal’ application of eu fundamental freedoms is at stake; (ii) breach some basic features of eu legal order, with specific reference to the jurisdictional system based on the 9 10

On the general principles of eu law, see the comprehensive work by Takis Tridimas, General Principles of eu law (third edition, oup, forthcoming 2018), also for further references. This is true both for bits entered into between Member States (‘intra-eu bits’), and for bits existing between a Member State and a third State (‘extra-eu bits’). For the latter case see below Section 4.

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cjeu exclusive competence in the interpretation of eu law and its dialogue with national courts; (iii) are inconsistent with the principle of mutual trust between Member States courts; (iv) should be terminated under international treaty law at the moment in which interested States accede to the eu, under Articles 30 and 59 of the Vienna Convention on the Law of Treaties (‘vclt’). In fact, as regards this last argument doubts exist on the fulfillment of the conditions triggering the application of the above mentioned vclt provisions to intra-eu bits. For instance, some authors think it may be questionable that a bit and eu Treaties regulate «the same subject-matter» under article 59 vclt; moreover, it is maintained that under article 65 vclt termination is not automatic and requires some formal steps in order to operate; at last, it is also doubted that arbitration clauses contained in bits must be held ipso iure incompatible with eu law under article 30 vclt.11 No wonder, therefore, that the approach of the Commission has been challenged in most investment arbitration cases arisen under intra-eu bits, and that the arbitral tribunals tended to retain their jurisdiction, even in those cases in which the Commission participated as amicus curiae to claim their lack of jurisdiction based on the above mentioned arguments. 11

The debate is open in the literature: see for example Angelos Dimopoulos, ‘The validity and applicability of International Investment Agreements between Member States under eu and International Law,’ [2011] cmlr 63; Ibid., ‘The Compatibility of Future Investment Agreements with eu Law,’ above note 1; August Reinisch, ‘Articles 30 and 59 of the Vienna Convention on the Law of Treaties: the Decisions on Jurisdiction in Eastern Sugar and Eureko Investment Arbitration’ [2012] liei 171; Ibid., ‘The eu on the Investment Path – Quo Vadis Europe? The Future eu bits and other Investment Agreements’ [2014] 12 Santa Clara J. Int’l L. 111; Markus Burgstaller, ‘European Law Challenges to Investment Arbitration,’ in Claire Balchin and Others, The Backlash against Investment Arbitration (Kluwer, 2010); Roberto Baratta, ‘La politica commerciale comune dopo il Trattato di Lisbona’ [2012] Dir. Com. Int. 403; Steffen Hildelang, ‘Circumventing Primacy of eu Law and the cjeu’s Judicial Monopoly by resorting to Dispute Resolution Mechanisms Provided for Inter-se Treaties? The Case of intra-eu Investment Arbitration’ [2012] liei 180; Konstanze Von Papp, ‘Clash of Autonomous Legal Orders: Can eu Member State Courts Bridge the Jurisdictional Divide Between Investment Tribunals and the cjeu? A Plea for Direct Referral from Investment Tribunals to the cjeu’ [2013] cmlr 1039; Ibid., Solving Conflicts with International Investment Treaty Law from an eu Law Perspective: Article 351 tfeu Revisited? [2015] liei 325; Markus Burgstaller, ‘Investor-State Arbitration in eu International Investment Agreements with Third States’ [2012] liei 207; Nikos Lavranos, ‘Is an International Investor-to-State Arbitration System Under the Auspices of the cjeu Possible?’ [2011] www.papers.ssrn.com; Stephen W. Schill, ‘Luxembourg Limits: Conditions for Investor-State Dispute Settlement Under Future eu Investment Agreements’ in Marc Bungenberg and Others (eds.) EU and Investment Agreements (Nomos, 2013) 37.

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For instance, this happened in the Eastern Sugar case,12 where a Dutch investor claimed before an investment tribunal that the Czech Republic authorities violated their obligations of ‘fair and equitable treatment’ under the bit in force between the two eu member States. Such alleged violation of the investor’s rights derived from the enactment by the defendant State of a legislation that was mandated in order to comply with eu law and hence with the duty of sincere cooperation binding all eu Member States. However, on issues of jurisdiction, the Tribunal denied that articles 59 and 30 of the vclt applied, and therefore confirmed its own jurisdiction according to the bit invoked between the parties.13 In Eureko v. Slovak Republic,14 Dutch investors in the insurance sector resorted to investment arbitration for indirect expropriation allegedly arising from a change in the Slovakian legislation, which repealed the previously enacted reform liberalizing the insurance market. The defendant State invoked the so-called ‘intra-eu jurisdictional objection’ based inter alia on (i) the 12

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Eastern Sugar b.v. v. Czech Republic (uncitral, Stockholm Chamber of Commerce, Partial Award, March 27, 2007; scc No. 088/2004); on this award see, among others, Michele Potestà, ‘Il caso Eastern Sugar: accordi bilaterali sugli investimenti, Unione europea e diritto comunitario’ [2010] rdipp 1055. See also, in similar terms, Oostergetel and Teodora Laurentis v. Slovak Republic (uncitral ad hoc arbitration, Decision on jurisdiction, 30 April 2010). Needless to say, the affirmation of jurisdiction of arbitral tribunals stemming from intra-eu bits has nothing to do with the merits of the case and of the investor’s claims: on issues of substantive law, arbitral Tribunals confronted with potential conflicts between eu law and bit law tend to elaborate ‘accommodation techniques’ in order to dissipate such conflicts (see George Bermann, ‘Navigating eu Law and the Law of International Arbitration’ [2012] Arbitration International 397). Considering that, until 2014, the overall number of intraeu investment cases promoted was 99 (i.e. approximately 16% of all cases globally), such normative conflict is likely to have arisen most frequently (see unctad, Investor-State Dispute Settlement: Review of Developments in 2014, iia Issues Note n. 2/2015). For other such examples see Saluka Investment v. Czech Republic (uncitral, pca, Partial Award, 17 March 2006); adc Affiliate Ltd v. Republic of Hungary (icsid Case No. ARB/03/16, Award, 2 October 2006); aes Summit Generation Ltd and aes-Tisza Erömü Kft v. Republic of Hungary (icsid Case No ARB/07/22, Award, 23 September 2010); Electrabel s.a. (Belgium) v. Republic of Hungary (icsid Case No. ARB/07/19, Award, 30 November 2012). Further references on this topic may be found in the study conducted for the European Parliament, dg for Internal Policies, ‘Legal instruments and practice of arbitration in the eu’ (Bruxelles, 2014), available at http://www.europarl.europa.eu. Eureko v. Slovak Republic (uncitral, pca Case No. 2008-13, 26 October 2010), on which see Giulia Vallar, ‘L’arbitrabilità delle controversie tra un investitore di uno stato membro ed un altro stato membro. Alcune considerazioni a margine del caso Eureko/Achmea v. the Slovak Republic’ [2014] rdipp 849.

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­termination of the concerned bit under article 59 vclt, (ii) the invalidity of the bit ­arbitration clause under article 30 vclt because of the exclusive jurisdiction entrusted to the cjeu in respect of interpretation and application of eu law under article 344 tfeu as established by the cjeu in the Mox Plant judgment,15 (iii) the inapplicability of the bit as a matter of eu law, due to the direct effect and supremacy of eu law over both national law and international treaties. The arbitral tribunal rejected however Slovakian arguments on jurisdiction, holding in the first place that arbitration clauses in bit are different from interstate dispute settlement mechanisms, such as those challenged under art 344 tfeu in Mox Plant, and therefore no provision in eu law impeded the resort to arbitration by individuals.16 In the second place, after excluding the application of articles 30 and 59 vclt, the Tribunal denied also that the cjeu enjoys a ‘monopoly’ of ­interpretation of EU law, since this law is daily applied by national courts and arbitrators.17 This reasoning is consistent with the practice and is not per se problematic, provided that the control on the uniform application and interpretation of eu law under the scrutiny of the cjeu is ensured at the enforcement stage of the award.18 In this regard, the Slovak Republic brought an action to have the final award reversed before German courts (namely the regional court of Frankfurt 15

16 17

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Case C-459/03, Commission v. Ireland, [2006] ecr 4635. Art. 344 tfeu provides that «Member States undertake not to submit a dispute concerning the interpretation or application of the Treaties to any method of settlement other than those provided for therein.» On the interpretation of article 344 tfeu see below, Section 7. The same arguments have been more recently shared in the Charanne b.v. award (above, note 7), paras. 441 ff. «The argument that the cjeu has an ‘interpretative monopoly’ and that the Tribunal therefore cannot consider and apply eu law, is incorrect. The cjeu has no such monopoly. Courts and arbitration tribunals throughout the eu interpret and apply eu law daily. What the cjeu has is a monopoly on the final and authoritative interpretation of eu law: but that is quite different. Moreover, even final courts are not obliged to refer questions of the interpretation of eu law to the cjeu in all cases. The acte clair doctrine is ­well-established in eu law. The fact that, at the merits stage, the Tribunal might have to consider and apply provisions of eu law does not deprive the Tribunal of jurisdiction. The Tribunal can consider and apply eu law, if required, both as a matter of international law and as a matter of German law. This jurisdictional objection therefore is rejected» (paras. 282–283 of the award). See Gordon Blanke, ‘The Application of eu Law to Arbitration in the uk: A Study on Practice and Procedure’ [2014] eulr 1. See also, on arbitrability of eu antitrust commitments, Sergio Maria Carbone, ‘Antitrust Commitments and Arbitration in European Law’ [2013] Riv. Arb. 1, also for further references.

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am Main, where the seat of arbitration was located), maintaining that both the final award awarding damages to the claimants and the arbitration agreement that gave rise to the award were contrary to public policy, for breach of higherranking provisions of eu law, such as those on the free movement of capital, articles 267 and 344 tfeu, and the principle of non-discrimination set forth in article 18 tfeu. It is particularly relevant that, in the context of such domestic proceedings, for the first time, a preliminary ruling was referred to the cjeu on the above mentioned compatibility issues and indeed the CJEU confirmed the incompatibility of investments tribunals established by BITs among Member States with art. 344 and 267 tfeu.19 This judgment will determine the agenda for the governance of the intra-eu investment space in the next years. 3

… and eu Legal Constraints

Another recent saga highlights a further difficulty that may arise in case of icsid awards regarding the application of eu law. In Micula v. Romania20 two ‘Swedish’ investors21 claimed that Romania had breached relevant bit through the partial withdrawal to the investors’ companies of incentives (tax exemptions, custom refunds and subsidies), originally granted to them with a view to developing economically disfavored regions of the country. Romania 19

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Case C-284/16, Slowakische Republik (Slovak Republic) v. Achmea BV, Contra, ag Wathelet, Opinion of 19 September 2017, case C-284/16, Slovak Republic v. Achmea bv ( former Eureko), where the overall compatibility of the challenged bit was upheld by the Advocate General. Ioan Micula, Viorel Micula, s.c. European Food s.a, s.c. Starmill s.r.l. and s.c. Multipack s.r.l. v. Romania (icsid Case No. ARB/05/20, Final Award of 11 December 2013), on which see Davide Rovetta, Maurizio Gambardella, ‘Intra-eu bits and eu Law: What to Learn from the Micula Battle’ [2015] 10 Global Trade and Customs Journal 194. Indeed, the investors were of Rumanian nationality as well; they exploited the eu freedom of establishment in Sweden and thereafter became Swedish investors for the purposes of the applicable bit. One should therefore consider that, at eu legal plane, the existence of the fundamental freedoms and the movement of persons and capitals they allow is substantially at odds with the quest for protection as a foreign investor which is implied in an investor-State arbitration. This explains much better than other arguments the scepticism floating around intra-eu bits. The same situation occurred in the Charanne b.v. arbitration (above, note 7), where the arbitral tribunal expressly denied to ‘lift the corporate veil’ as requested by Spain, which claimed that the ultimate beneficial owners of claimants were of Spanish nationality, since no evidence of ‘fraud or abuse’ of claimants’ legal personality had been brought or even alleged by the defendant State (see paras. 266 ff. of the award).

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r­ esponded that such withdrawal was mandated because of its accession to the eu and to the need to comply with state aid rules. In the amicus curiae brief, the Commission anticipated that any award requiring Romania to re-establish investment schemes could not take place if contrary to eu rules on state aids. In the Commission view, if a court of a Member State was asked to enforce an icsid award that is contrary to eu law, enforcement proceedings would need to be stayed for a preliminary ruling to the cjeu, in order to decide on the applicability of Article 54 of the icsid Convention, concerning automatic recognition and enforcement of icsid awards. Together with the usual reference to article 30 vclt, the Commission further noted that the icsid Convention is not binding on the eu and is not part of the eu legal order. The Tribunal, however, rejected all arguments by Romania and the Commission and on the merits sided with the investors and awarded substantial damages in their favor. As a response, the Commission started a formal investigation procedure for illegal state aids in relation to the already initiated enforcement of the arbitral award at domestic level and issued injunction against Romania to suspend any payment according to article 108(3) tfeu, which is directly binding on domestic courts.22 The Commission findings confirmed that the payment of the compensation awarded by the arbitral tribunal constituted State aid within the meaning of Article 107(1) of the Treaty and was incompatible with the internal market. Hence, Romania was ordered not to pay out further money in execution of the arbitral award and to immediately recover any incompatible aid which was already paid out in partial implementation or execution of the same.23 The investors challenged both decisions of the Commission before the cjeu, and the judgment of the court regarding the latter is due in 2018.24 In the meanwhile, it is worth noting that the  enforcement (though not the registration) of the award in the uk has been stayed by uk courts, pending the solution of the cjeu case, pursuant to the principle of sincere cooperation enshrined in art. 4(3) teu, which precludes national courts of the Member States from taking decisions which conflict with a d­ ecision of 22 23

24

See Commission decision C6848 2014, of 1 October 2014, State aid sa.38517 (2014/C), oj c 393/27, 7.11.2014. Commission decision (eu) 2015/1470, of 30 March 2015 on state aid sa.38517 (2014/C) implemented by Romania – Arbitral award Micula v. Romania of 11 December 2013, in oj l 232/43, 4.9.2015. Case T-646/2014, Micula and Others v. Commission. See also Case T-624/15, European Food and Others v. Commission against the injunction decision was eventually discontinued, while Cases T-704/15, T-694/15 and T-624/15, brought respectively on 28 November, 30 ­November and 6 November 2015 Micula e.a. v. Commission, are pending at the time of this writing.

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the Commission.25 More precisely, despite art. 54 of the ­icsid Convention ­requires members states to equate an icsid award with a final judgment of their own courts, uk courts held that the Convention does not require them to undertake forced execution of awards in cases in which national final judgments could not be executed either, as it would happen in a case of conflict of a final judgement with a decision of the Commission on state aids. In other words, the conflict with a decision of the Commission on state aids would impede the enforcement of an arbitral award as well as of a final domestic judgment alike, pursuant to Lucchini and Deutsche Lufthansa case law,26 without a need to introduce a public policy exception at domestic level, that would be contrary to the self-contained regime on enforcement provided for by the icsid Convention. The above cases, and particularly the last one, allow us to draw some comments. From the viewpoint of eu law, the assessment of intra-eu bits in light of pacta sunt servanda requires at least the following remarks. In the first place, under existing eu law, intra-eu bits are not covered by article 351(1) tfeu: this provision enshrines the pacta sunt servanda principle within the eu legal order in respect to treaties concluded by Member States before their accession to the eu, but the safeguard clause applies to treaties entered by eu Member States with third States, and not between Member States.27 Secondly, the principle pacta sunt servanda is further constrained under eu law by the cjeu case-law regarding the effects of international commitments undertaken by the Member States in areas where the eu has shared or exclusive competence. According to Intertanko, Air Transport Association and ­Manzi, individuals should not rely on international treaty provisions e­ ntrusting 25

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High Court of Justice, Queen’s Bench Division, Commercial Court, 20 January 2017, Micula et al. v. Romania, [2017] ewhc 31 (Comm), on Romania’s request to set aside the ­registration of the icsid award. Enforcement proceedings by the claimants are seemingly ongoing in the United States, France, Belgium, Luxembourg and Sweden. Case C-119/05, Ministero dell’Industria del Commercio e dell’Artigianato v. Lucchini [2007] ECR-6199, see also Case C-505/14 Klausner Holz Niedersachsen v Land ­Nordrhein-­Westfalen, eu:C:2015:742; Case C-284/12 Deutsche Lufthansa, eu:C:2013:755. Against this view is Konstanze Von Papp, ‘Solving Conflicts with International Investment Treaty Law from an eu law perspective: Article 351 tfeu Revisited?’ above note 11, proposing to review the interpretation of article 351 tfeu, in order to include also intra-eu commitments in its scope of application. We believe this approach is untenable, given the clear wording of article 351(1) tfeu («The rights and obligations arising from agreements concluded before 1 January 1958 or, for acceding States, before the date of their accession, between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of the Treaties»).

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them with benefits, when these provisions are contrary to eu law adopted in the same areas covered by the international agreement and the eu is not party to the relevant treaty, unless the powers previously exercised by the Member States have been fully transferred to the eu and all the member States are party to the relevant treaty.28 As regards the icsid Convention, it might be argued that the eu has gained full powers to regulate execution and enforcement of investment arbitral awards, as a component of the new common commercial policy competence, extended to investment issues. However, such assumption would be insufficient, due consideration being taken of the principle of procedural autonomy entrusted to Member States. The cjeu has made it very clear in a recent judgment regarding commercial arbitration, where it was established that «proceedings for the recognition and enforcement of an arbitral award … are covered by the national and international law applicable in the Member State in which recognition and enforcement are sought».29 This vertical division of competence between eu and member States in procedural matters seems confirmed not only by the wording of the recently negotiated eu investment agreements,30 but also by the recent Opinion 2/15 on the Free Trade Agreement between eu and Singapore, where the Court clarified that the investor-State dispute settlement system (‘isds’) provided for by the mentioned agreement was not within the exclusive competence of the European Union, but within a 28

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Case C-308/06 Intertanko [2008] ecr I-4057, para. 48–49; Case C-366/10, Air Transport Association of America at al. v. Secretary of State for Energy and Climate Change (Clean Skies) [2011] I-13755, para. 63; Case C-537/11, Manzi e al. v. Capitaneria di Porto di Genova [2014], para. 40; see also Case C-301/08, Irène Bogiatzi v. Deutscher Luftpool et al. [2009] I10185; Case C-533/08, tnt Express Nederland bv v. A Versicherung [2010] ecr I-1. In the area governed by the gatt, for example, the European institutions fully replaced the member States by virtue of the exclusive competence in common commercial policy, see joined cases 21 to 24/72 International Fruit Company nv and others v. Produktschap voor Groenten en Fruit [1972] ecr 1219, para. 10–18. See recently Case C-536/13 Gazprom oao [2015] ecr, para. 41. The judgment is commented by Trevor C. Hartley, ‘Anti-Suit Injunctions in Support of Arbitration: West Tankers Still Afloat’ [2015] Int. & Comp. L. Quart. 965; A. Leandro, ‘Le Anti-Suit Injunctions a supporto dell’arbitrato: da West Tankers a Gazprom’ [2015] Riv. Dir. Int. 815. On the interference between investment arbitration and State jurisdiction, see also Antonio Barletta, ‘In tema di arbitrato degli investimenti e giurisdizione dello Stato’ [2015] Europa e diritto privato 545; Luca Radicati di Brozolo, ‘I rimedi contro le interferenze statali contro l’arbitrato internazionale’ [2015] Riv. Arb. 1. See for example article 9:30 of the eu-Singapore fta, providing that «[e]ach party shall ensure the recognition and enforcement of the award in accordance with its international obligations and relevant laws and regulations».

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competence shared between the European Union and the Member States. This was due in particular to the fact that such isds would allow to remove disputes from the jurisdiction of the courts of the Member States, and the consent of the interested State was needed to allow such a restriction on domestic jurisdiction.31 Moreover, surely the eu is not party to the icsid Convention and not even all member States are party to it (Poland is not). Hence, from the perspective of eu law, one can safely assess that icsid commitments undertaken by Member States (and especially between Member States) are not binding. In fact, in cases such as those recalled above, Member States’ domestic courts stand in the crossfire: they are requested to enforce an award pursuant to an international commitment undertaken by the State and in so doing breach eu law. This conundrum has been solved long since by the cjeu, at least as regards possible conflict of the award with mandatory eu law: in the Ecoswiss and Mostaza Claro judgments, the Court established that domestic courts are under an obligation to ensure the effet utile of mandatory eu law by challenging the enforcement of an arbitral award contrary to such rules, under the applicable domestic procedural rules. More precisely, the cjeu ruled that, where a national court is required by domestic rules of procedure to grant an application for annulment of an arbitration award «founded on failure to observe national rules of public policy, it must also grant such an application where it is founded on failure to comply with [eu] rules of this type».32 And yet, in case of icsid awards, the challenge of the award for public policy reasons remains a hard job for the Member States parties to the icsid Convention, by virtue of the limited possibility of annulment and the self-contained enforcement regime provided by the Convention.33 Some room might ­however be left for 31

32 33

Opinion 2/15 [2017] Digital Records, para. 285 ff.; for a comment on the Opinion, see Chiara Cellerino, ‘Il Parere 2/15 sull’accordo di libero scambio ue-Singapore: luci e ombre’ [2017] Eurojus, www.eurojus.it. See, to that effect, Case C-168/05 Mostaza Claro [2006] ecr I-10437, par. 35; Case C-126/97 Eco Swiss [1999] ecr I-3079, par. 37. See also Case C-102/81, Nordsee [1982] ecr 1095. See articles 50–55 of the icsid Convention and, in particular, on recognition, article 54, under which «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. 27 Convention (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

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member States courts to deny forced execution of an award which is contrary to a decision of the Commission on State aids. This said, we are persuaded that member States would be better off if their domestic courts refuse implementation of the icsid Convention even beyond cases involving the application state aid law; after all, an international liability for breach of such a convention is unlikely to be raised, since the claiming State would be another Member State and would be prevented from doing so under eu law. Likewise, the remedy of diplomatic protection between member States, that would revive in case of failure to abide by the award, pursuant to article 27(1) of the icsid Convention, is hardly effective for the same reasons. On the contrary, breach of eu law by a domestic court would entail a liability of the Member State vis-à-vis the eu under the Francovich/Brasserie du Pecheur doctrine, plus a risk of sanctions under article 260(2) tfeu. And this is a much more substantial a risk for a Member States than that of a potential international litigation between Member States for breach of a bilateral treaty containing provisions incompatible with eu law. We therefore tend to believe the Commission is right when stating that eventually, all intra-eu bits will have to be terminated, and this reading is confirmed by the recent cjeu judgment in Achmea.34 Apparently, some member States, including Italy, have done this since 2009 (the same year of entry into force of the Lisbon treaty); others have not.35 The Commission has requested Member States to take concrete steps, and failure to terminate by mutual consent such intra-eu bits, has opened the way to a series of infringement proceedings against the non-complying Member States.36

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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.» On this matter, and also for more ­bibliographic references see, Piero Bernardini, L’arbitrato nel commercio e negli investimenti internazionali (Giuffré, 2008) 287–290. Achmea v. Slovak Republic, above, note 19. See Anna De Luca ‘Renewable Energy in the eu’ above note 7, at 11–12. Ireland has terminated intra-eu bits as well, while France, Germany and the Netherlands (so far) have opposed termination. On 29 September 2016, the European Commission requested Austria, the Netherlands, Romania, Slovakia and Sweden, by way of reasoned opinion, to terminate their intra eu bits, see Hannes Lenk, Love Rönnelid, Joel Dahlquist,‘The Infringement Proceedings over Intra-eu Investment Treaties – An Analysis of the Case against Sweden’ 4epa (2016) Swedish Institute for European Policy Studies (sieps).

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This said, a few remarks ought to be made also in respect to the investor: if the defendant Member State concerned has assets in a third country, which is not member of the European Union, it seems feasible to consider the enforcement of the icsid award in such country, with a view to attacking these assets, subject to the applicable rules relating to immunity of foreign States.37 However, care should be used by eu based arbitral tribunals in granting anyway protection to the investor, for instance in those cases in which she has moved from its home Member State to another one by virtue of the freedom of establishment or the free movement of capital or services: if any of the fundamental freedoms have been used only to have someone qualified as a foreign investor for the purposes of a given bit, and then to claim protection under such bit, one may reasonably argue that an abuse of right under eu law has occurred, this depriving the investor of any legitimation to bring a claim.38 A negative side-effect of the envisaged scenario is that the uniformity of icsid regime would be breached within the eu investment area, also to the detriment of eu investors abroad. Furthermore, investors might be advised by their lawyers to select a seat for arbitration outside the eu, in order to limit the interference of eu law as lex loci arbitri. And even more, after obtaining an icsid award in favor of their claim, foreign investors are likely to be induced to move their assets outside the territory of eu member States, in order to defend themselves from seizures or confiscation measures for the recovery of a possible state aid by the defendant Member State. 4 Extra-eu bits and the General Principle of Legal Certainty The principle of legal certainty is connected with pacta sunt servanda, and provides a useful standard to assess the interplay between extra-eu bits and eu law, with particular reference to the compatibility of these agreements, with Chapter iv, Title iv, tfeu on movement of capital, and in particular with articles 64 or 66 or 75 tfeu, granting the eu institutions the right to restrict free movement of capital under certain conditions. In this regard, when these agreements are concluded by Member States before their accession to the eu, reference must be made to article 351(2) tfeu, and to the obligation established onto Member States to «take all appropriate steps to eliminate the 37 38

See article 27 icsid Convention. For a recent assessment on the abuse of right under eu law, please refer to Francesco ­Munari ‘Il divieto dell’abuso del diritto nell’ordinamento dell’Unione Europea’ [2015] Diritto e pratica tributaria 519, also for further bibliography.

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­incompatibilities» between eu law and treaties existing with third States before accession, or face a liability vis-à-vis the Union. The cjeu case-law on article 351(2) tfeu is abundant, and covers also bits. In Commission v. Sweden,39 the Court ruled that a Member State which does not take appropriate steps to eliminate incompatibilities concerning the provisions on transfer of capital contained in an investment agreement it has entered into with a third country, fails to fulfill its obligations under the second paragraph of Article 351 tfeu. More precisely, the provisions on free movement of capital provided for in Articles 64(2), 66 and 75(1) tfeu confer on the Council and the European Parliament the power to restrict, in certain specific circumstances, movements of capital and payments between Member States and third countries.40 In order to ensure the effectiveness of those provisions, such measures restricting the free movement of capital must be capable of being applied immediately to the member States, also in their relations with a third State. As a consequence, an earlier investment agreement concluded between a M ­ ember State and a third country regulating such aspects is incompatible with the tfeu if it does not contain a provision allowing the Member State concerned to fulfill its obligations as a member of the eu. In this regard, the cjeu held that (a) the period necessary to reopen negotiation of a bit would be incompatible with the immediate effectiveness of measures on r­ estriction of capitals, and (b) the possibility of relying on general remedies such as suspension of the agreement, or its denunciation, would be too u ­ ncertain to ­guarantee that the measures adopted by the Council and the E ­ uropean Parliament could be applied effectively. Therefore, Sweden was found in breach of its obligation stemming from article 351(2) tfeu. These conclusions met some critique,41 but have been restated also in Commission v. Austria42 and Commission v. Finland.43 On the contrary, a different 39 40

41

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Case C – 249/06, Commission v. Sweden (Grand Chamber) [2009] ecr I-01335. For instance, measures restricting the movement of capitals are adopted by the eu in case of implementation of so called ‘smart sanctions.’ See Maria Eugenia Bartoloni, ‘Incompatibilità tra accordi degli Stati membri e misure sanzionatorie dell’Unione’ [2010] Quaderni costituzionali 625. On the relationship between art. 75 tfeu (former art. 60 tce) and art. 215 tfeu, after the entry into force of the Lisbon Treaty, see case C-130/10, Parliament v. Council [2012] digital ecr. Elieen Denza, ‘Bilateral investment treaties and the eu rules on free transfer: Comment on Commission v. Austria, Commission v. Sweden and Commission v. Finland’ [2010] elr 262; see also Jan Asmus Bischoff, ‘Just a Little bit of « Mixity »? The eu’s Role in the Field of International Investment Protection Law,’ above note 1. Case C-205/06, Commission v. Austria [2009] ecr I-01301. Case C-118/07, Commission v. Finland [2009] ect I-10889.

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outcome enjoyed the case Commission v. Slovak Republic, where the cjeu confirmed the preferential access to Slovak energy production granted to a­ Swiss investor by a contract concluded with the Slovak Republic pursuant to the bit between the latter and Switzerland, even if in breach of the eu regime on energy markets.44 Yet, the Court carefully avoided to make any reference to the ­issue concerning compatibility of the bit with eu law and to article 351(2) tfeu. If we apply these rulings to an investor-to-State arbitration, some ­indications might be attempted, as follows: the obligation onto Member States stemming from article 351(2) tfeu is not capable of depriving the bit of its validity, this being excluded in particular by article 351(1) tfeu and the safeguard clause provided for therein. Therefore, the liability of a Member State vis-à-vis the eu cannot affect the validity of the extra-eu bit in respect of rights granted to foreign investors, even if such rights are inconsistent with eu law. National courts of the Member State concerned will hardly deny enforcement of an arbitral award applying the relevant bit, since the obligation to «take all appropriate steps to eliminate the incompatibilities» clearly does not refer to courts, which are bound to apply the rules on enforcement of arbitral award as established in the relevant international Conventions. Yet, a Member State might be held however liable vis-à-vis the eu for breach of article 351(2) tfeu, and hence, subject to article 207 tfeu, it would have a strong incentive to amend, renegotiate or denounce altogether the bit. This means that, also for extra-eu bits, an age of turmoil has in fact begun. Once again, the above scenario undergoes further complications after the transfer of exclusive competences to the eu in this field, since Member States are under the obligation to take all measures to eliminate incompatibilities; but this is not necessarily tantamount to the eu enjoying a full power to renegotiate a bit. And yet, no doubts that «[w]hen the Treaties confer on the Union exclusive competence in a specific area, only the Union may legislate and adopt legally binding acts, the Member States being able to do so themselves only if so empowered by the Union».45 44

45

Case C-264/09, Commission v. Slovak Republic [2011] ecr I-08065, where the Court held, that «the preferential access granted to atel (Swiss investor) may be regarded as an investment protected by the Investment Protection Agreement and that, under the first paragraph of article 307 ec, it cannot be affected by the provisions of the ec Treaty,» see para. 51. Art. 2(1) teu. The viability of an extensive construction of article 351 tfeu, as applicable to agreements concluded before the transfer of new competences to the eu, is discussed by Luca Pantaleo, ‘Member States Prior Agreements and Newly eu Attributed competence: What Lesson from Foreign Investments’ [2014] Eur. For. Aff. Rev. 307.

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The puzzle we have summarized is somehow handled by a piece of legislation adopted by the eu at the end of 2012, on the basis of the new competence conferred upon it by article 207(2) tfeu: reference is made to the ­regulation (eu) no. 1219/2012 establishing transitional arrangements for bilateral ­investment agreements between Member States and third countries. In essence, this regulation provides that existing extra-eu bits are maintained in force, with all consequences stemming therefrom, including investors’ rights. However, Member States are required to notify them to the Commission, in order to assess whether they are an obstacle to the development of eu investment policy. Furthermore, the regulation does not trump other obligations stemming from tfeu and, as a consequence, Member States continue to face the risk of infringement proceedings, should they fail to bring their existing treaties into compliance with other provisions of eu law, pursuant to article 351(2) tfeu. As regards future bits, under certain conditions, Member States are ‘empowered back’ by the Union with the competence to amend or conclude investment agreements: upon notification of their intention to do so, they can be authorized by the Commission to open new negotiations on relevant bits and possibly the Commission is involved in such negotiations.46 A similar authorization scheme has already been used by the eu in other cases involving the gain of new exclusive competences, previously shared with Member States.47 Whether all this is fully consistent with legal certainty is to be doubted. For sure, however, a strong ‘works ahead’ signal has been set for the future.

46

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Conditions for grant of authorization are set in art. 9 of the regulation. On such piece of eu legislation, see inter alia Lidia Sandrini, ‘Lo ‘status’ degli accordi internazionali stipulati dagli Stati membri dell’Unione europea, tra giurisprudenza recente e nuove soluzioni normative’ [2013] Dir. pubbl. comp. eur. 818. See, Regulation (ec) no 662/2009 of 13 July 2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries on particular matters concerning the law applicable to contractual and non-contractual ­obligations, oj l 200, 31.7.2009, p. 25; Regulation (ec) No 664/2009 of 7 July 2009 establishing a procedure for the negotiation and conclusion of agreements between Member States and third countries concerning jurisdiction, recognition and enforcement of ­judgments and decisions in matrimonial matters, matters of parental responsibility and matters relating to maintenance obligations, and the law applicable to matters relating to maintenance obligations, oj l 200, 31.7.2009, p. 46; and, even before, Regulation (ec) no 847/2004 of 29 April 2004 on the negotiation and implementation of air service agreements between member states and third countries, oj l 157, 30.4.2004, p. 7.

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The Allocation of Financial Responsibility among eu and Member States vis-à-vis Third Countries Investors: The Principle of Loyal Cooperation in Action

Since third party States and their investors cannot be bound, nor be affected by the Union peculiarities, as described in the previous paragraph, a solution was needed at least to administer the multi-faced characteristics of the European legal system vis-à-vis non eu investors. To this purpose, a third general principle of law comes into play, namely the duty of sincere and loyal cooperation. This principle pervades the regulation (eu) no. 912/2014 establishing a framework for managing financial responsibility linked to investor-to-State dispute settlement tribunals established by international agreements to which the eu is party. The need for this piece of legislation is a direct consequence of the extension of eu exclusive competence in common commercial policy to issues regarding foreign direct investments. Pursuant to article 207 tfeu as amended by the Lisbon treaty, the eu itself can be, and in fact already is, party to agreements covering provisions on protection of investments and related dispute settlement mechanisms. Regulation no. 912/2014 applies to investor-to-State disputes covered by an investment treaty to which the eu or the eu and Member States are parties, when the investor is a third country claimant. The responsibility for violation of investment protection standards, subject to the dispute settlement envisaged in the agreements, follows the division of competences between the Union and Member States. The regulation aims to establish the rules to allocate (i) the conduction of the dispute as a respondent, either to the Union or to the member State concerned (or to both of them) (ii) the financial responsibility to the entity responsible for the treatment found to be inconsistent with the relevant provisions of the agreement, irrespective of whether the treatment under scrutiny is afforded by the Union itself or by the Member State. In so doing, the new tool improves ideas already existing under the Energy Charter Treaty.48 48

See article 26.3 Energy Charter Treaty: «The Community and the Member States will, if necessary, determine among them who is respondent party to arbitration proceedings initiated by an investor of another contracting party. In such case, upon the request of the Investor, the Community and the Member States concerned will make such determination with a period of 30 days. This is without prejudice to the right of the investor to initiate proceedings against both the Communities and the member States». Similar provisions are contained in articles x.20 ceta and 9.18 fta with Singapore (see below).

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In essence, the regulation establishes the following regime: if the treatment has been afforded by eu «institutions, bodies or agencies,» the Union shall act as respondent in the relevant arbitral procedure. If the treatment has been afforded by a State, then the State is obliged to manage its defense together with the Commission, and the Commission may also decide to act as respondent in lieu of the State, if ultimately the financial responsibility may be borne totally or partially by the Union or if the claim also concerns treatments afforded by executives of the Union. Special criteria are set for allocating financial responsibility between the State and the Union, as well as for the recovery of any amount paid by the Union to the investor which should have been on the State’s account, in case both settlement before the award is rendered or after the award has been rendered, and the claimant is totally or partially successful. A comprehensive analysis of this regulation, in particular concerning the several issues it raises with regard to its coordination with the international law of responsibility of international organizations, and with the internal rules governing division of competences between eu and member States, is much beyond the scope of this chapter.49 Yet, the legal framework established by such regulation provides a clear example of the importance played by the ­principle of loyal and sincere cooperation between Member States and eu institutions referred to in article 4(3) tfeu: such principle, which in itself generally ­pervades the eu external action already, becomes a milestone in eu investment policy and especially in its making, when the eu and the Member States are required to defend and protect their respective – and common – interests within investment arbitration procedures, established under investment agreements concluded by the eu. The above is reflected also into free trade agreements concluded by the eu containing investment chapters and related isds mechanisms. Reference is made in particular to the Comprehensive Economic and Trade Agreement 49

See Angelos Dimopoulos, ‘The Involvement of eu in Investor-State Dispute Settlement: A Question of Responsibilities’ [2014] cmlr 1671; Albert Henke, ‘L’Unione europea e il contenzioso arbitrale in materia di investimenti: la proposta di Regolamento sull’allocazione della responsabilità finanziaria tra ue e Stati membri’ [2013] Riv. Arb. 787, Paolo Palchetti, ‘The allocation of international responsibility in the context of investor-state dispute settlement mechanisms established by eu international agreements,’ in Luca Pantaleo, Mads Andenas (eds.), The European Union as a Global Model for Trade and Investment (Oslo 2016) 61. Some hints on its interference with the autonomy of eu legal order are provided below, at Section 7.

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(‘ceta’) with Canada, the eu-Singapore Free Trade Agreement (‘Singapore fta’), and the eu-Vietnam Free Trade Agreement (‘Vietnam fta’).50 These agreements are not merely a ‘normal’ bits, since they include inter alia provisions on trade in goods, trade in services, ipr, sustainable development, and other connected issues, together with a regime on investments. The vertical division of competences between eu and Member States as regards the substantive regulation of such subject matters was recently clarified by the cjeu in the mentioned Opinion 2/15. For our purposes, suffice it to mention that, as regards investment provisions, an exclusive competence has been recognized to the eu in respect of the protection of foreign direct investments, whereas portfolio investments remain subject to a shared competence with the Member States. Furthermore, and as recalled above already, the dispute settlement mechanisms also encompasses a shared competence between the Union and the Member States, the consent of Member States being needed for the restriction of domestic jurisdiction in favor of isds mechanisms provided in the Agreements. This clearly might have a negative impact on the capability of the Union to lead effectively negotiation and conclusion on its own of such comprehensive agreements in the future. However, consistently with regulation no. 912/2014, in the mentioned agreements an option is set for the Union to name either itself or a Member State as respondent in the relevant dispute settlement procedures. Such choice is internal to the eu legal order, and has to be made in accordance with the criteria established in the above regulation. The insertion of such clause transposes the peculiarities of the eu legal order in the relationship with third States and their investors. Consequently, the latter are deprived of any power regarding the selection of the legitimate respondent of the dispute, and the same can be said about the arbitral tribunals, who are not entitled, at least within a certain time frame, to adjudicate on who is the actual defendant between the eu and any of its member States. This permits the ‘European party’ (and in fact the Commission) to remain the lord of such choice and retain the final decision on the vertical division of competences between the Union and the Member States in investment issues, with a positive impact also on the respect of the principle of autonomy of eu law (below Section 7). For eu scholars, however, this is nothing else than the mere implementation of article 207 tfeu as amended, as well as of the principle of sincere cooperation binding the Union and the Member States according to art. 4(3) teu. On  the other hand, for the third-country investor (and for the arbitral 50

For an overview, see Chiara Cellerino, ‘Common Commercial Policy in Context: Opportunities and Challenges of a Changing Landscape’ [2015] Dir. Com. Int. 783.

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tribunal), the vertical features characterizing the Union tend to be irrelevant, provided that in all cases the defendant party (be it the Union or the Member State) is bound to the treaty and to the outcome of any arbitral award. 6

From ‘Classical’ isds to ics: The Latter as a Reaction to the Critiques to the Former

Coming now to the respective isds clauses contained in the relevant agreements, it should be noted that, in the case of ceta, the version of the treaty originally signed in 2014, and containing a ‘classical’ system of investment arbitration, was renegotiated at the beginning of 2016. This renegotiation was meant to match the new approach to isds adopted by the Commission in the discussion concerning the possible ttip,51 as well as to uniform the standard to the one adopted in the more recent Vietnam fta in 2016: in particular, the idea is that of moving from traditional isds and create a permanent investment court system (‘ics’) where also an appeal mechanism is established. Likewise, the Commission is now apparently planning to renegotiate also the dispute settlement chapter originally contained in Singapore fta in order to improve it, and introduce the ics.52 In newly negotiated investment chapters, therefore, a permanent Tribunal for the settlement of investments disputes is established under the agreement, but an option is left to the claimant to subject the claim to the following, alternative, sets of rules: (a) the Convention on the Settlement of Investment ­Disputes between States and Nationals of Other States of 18 March 1965 (­i csid); (b) 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 conditions for proceedings pursuant to paragraph (a) do not apply; (c) the arbitration rules of the United Nations Commission on International Trade Law (uncitral); or, (d) any other rules on agreement of the disputing parties. 51

52

Commission Concept Paper: Investment in ttip and Beyond – the path for reform (May 2015); see also, ‘Commission draft text ttip – investment’ (16 September 2015), both available http://trade.ec.europa.eu. For an appraisal of the differences among the text of these agreements, see Daniele Gallo, ‘Portata, estensione e limiti del nuovo sistema di risoluzione delle controversie in materia di investimenti nei recenti accordi sul libero scambio dell’Unione europea’ [2016] Dir. com. int. 827.

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More precisely, the respondent is allowed 30 days of receipt of the proposal of the claimant to agree in writing on such rules. If respondent does not reply to the claimant within the mentioned deadline, the procedure can be initiated under rules proposed by the claimant. Aside of this, other provisions are generally common to investment chapters of the treaties mentioned above. For instance, (a) the principle of nonduplication of proceedings; (b) the contents of the final award, limited to the condemnation to «monetary damages and any applicable interest, or restitution of property, provided that the respondent may pay monetary damages … in lieu of restitution,» with the exclusion of punitive damages; (c) the binding and enforceable nature of the award, and its qualification as «arising out of a commercial relationship or transaction for the purpose of Article 1 of the New York Convention.»53 As we shall see in the following paragraph, some (but not all) of the rules mentioned above are justified in view of fundamental features of the eu legal order, and have therefore been negotiated by the Commission with a view to preserving it from undue interferences deriving from international tribunals, whose decisions bind the Union according to its international commitments. Furthermore, it should be kept in mind that the ‘classical’ investment dispute settlement system raised a lively debate in connection with the ttip, which became common also to all other agreements negotiated by the eu with its trading partners, to the extent that such agreements include investment protection provisions and related dispute resolution mechanisms. In particular, critiques of the ‘classic’ isds include procedural aspects, such as the lack of transparency of arbitral investment procedures, lack of consistency and predictability of arbitral case-law, lack of independence of arbitrators and p ­ ro-investor bias, cost of arbitrations. Furthermore, the point has been raised that such isds empower mnes to the detriment of sovereign States, and t­herefore of citizens, also in view of the ‘regulatory chill’ that the threat of expensive arbitrations may impose on national/eu legislators, as regards the setting of standards in the public interest (e.g. social or environmental standards) that might impact negatively on foreign investors. The academic and institutional debate on the

53

Other aspects touched upon by the agreements, in different ways, may be worth mentioning, such as (i) the preference for previous consultation and mediation and time-frames before initiation of proceedings; (ii) the guidance of governments on the interpretation of the agreement (through a binding interpretation of trade Committee and the participation of the non-disputing government).

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above issue is ongoing, and several answers to the above mentioned critiques are today reflected in the ics. In this context, one must appreciate, for example, the efforts made by the Commission to negotiate exceptions and carve-out clauses within the substantial provisions on investment protection agreements, aimed at preserving the regulatory space of the eu and Member States in certain strategic fields, such as inter alia the protection of environment, tax law, subsidies: they surely help reducing the risk of ‘contamination’ of legislative choices by investment awards.54 And yet, no doubt that these clauses shall have to be interpreted and applied by arbitral tribunals whose awareness of the complexity eu legal system may not always be appropriate. Similarly, and in the same vein, one should also read some of the most innovative procedural features of the ics: (i) the creation of a permanent tribunal and appellate mechanism aimed at avoiding inconsistency of case-law and improve predictability of decisions; (ii) the system of State appointed rotating judges/arbitrators, that should fight the alleged pro-investor bias of investment arbitrations and improve impartiality of procedure (with an inherent risk, if not correctly shaped, of boosting an equally non desirable pro-State bias); (iii) the safe-guards against frivolous claims and the possibility to impose a cap on arbitrators’ fees in the negotiations in order to fight excessive costs of ­arbitrations (iv) the rules on transparency of proceeding and the rules of conduct for arbitrations, including a discipline on situations of conflict of interest. If such procedural adjustment are probably capable to meet most of the critical aspects of the previous system, they do not seem to fully reply to the risk of incompatibility of such dispute settlement mechanisms with some 54

As regards the issue of ‘regulatory chill,’ in the fiamm judgment, for instance, the cjeu clearly stated that the «exercise of the legislative function must not be hindered by the prospect of actions for damages whenever the general interest of the [European Union] requires legislative measures to be adopted which may adversely affect individual interests» Joined Cases C-120/06 and C-121/06 Fabbrica italiana accumulatori motocarri Montecchio SpA (fiamm) and Others v. Council and Commission [2008] ecr I-6513, para 174. See also, recently, case T-79/13 Accorinti v. European Central Bank [2015], para. 69. However, for a critical opinion on this latter argument as a downside of investment arbitration, based on the analysis of the practice, Albert Henke, ‘La crisi del sistema isds e il progetto di una nuova corte internazionale permanente, ovvero della fine dell’arbitrato in materia di investimenti’ (2017) Diritto commercio internazionale 133. See also, for a general appraisal of these arguments, Robert W. Schwieder, ‘ttip and the Investment Court System: A New (and improved?) paradigm for Investor-State Adjudication’ [2016] Columbia J. Transn. Law 178.

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c­ onstitutional features of eu legal order, which are reflected in the principle of autonomy of eu law, as it will be discussed in the following paragraph.55 7

isds and ics vis-à-vis the Principle of Autonomy of eu Legal Order

The cjeu has been always keen in affirming the autonomy of eu legal order, and the need to preserve its funding characteristics from undue interference. The above is a direct consequence of the fact that the eu, besides being a legal person at international level, is also a (complex and relatively new) legal system endowed with its «own constitutional framework and founding ­principles, a particularly sophisticated institutional structure and a full set of legal rules to ensure its operation.»56 Hence, the conduct of its international relations is subject to special conditions, in order to ensure that the features of the eu system of rules is not jeopardized by international commitments undertaken by 55

56

The compatibility of isds with eu law is dealt with, inter alia, by Markus Burgstaller, ‘Legality of investor-state dispute settlement (isds) under eu Law,’ Legal Study (Client Earth, 2015); Steffen Hildelang, ‘Circumventing Primacy of eu Law and the cjeu’s Judicial Monopoly by resorting to Dispute Resolution Mechanisms Provided for Inter-se Treaties? The Case of intra-eu Investment Arbitration’ above note 11; Konstanze Von Papp, ‘Clash of Autonomous Legal Orders: Can eu Member State Courts Bridge the Jurisdictional ­Divide Between Investment Tribunals and the ecj? A Plea for Direct Referral From Investment Tribunals to the ecj’ above note 11; Marise Cremona, ‘Guest Editorial: Negotiating the Transatlantic Trade and Investment Partnership (ttip)’ [2015] 52 cmlr, 351, at 360; Hannes Lenk, ‘Investor-state arbitration under ttip: Resolving investment disputes in an (autonomous) eu legal order’ (Report for Swedish Institute for European Policy Studies (sieps)) (June 2015); Angelos Dimopoulos, ‘The Compatibility of Future eu Investment Agreements with eu Law,’ above note 1; Ibid., ‘The involvement of the eu in investor-state dispute settlement,’ above note 49; Andrea Carta, ‘Do investor-to-state dispute settlement mechanisms fit in the eu legal system? [2014] Environmental Law Network International 30; Jan Kleinheisterkamp, ‘Investment Protection and eu Law: The Intra – and Extra-eu Dimension of The Energy Charter Treaty’ [2012] 15 Journal of International Economic Law 85; Steffen Hindelang, ‘Repellent Forces: the cjeu and Investor-State Dispute Settlement’ [2015] 53 Archiv des Völkerrechts 68; Ingolf Pernice and Others, Investor-State Dispute Settlement (isds) Provisions in the eu’s International Investment Agreements, ­Volume 2 – Studies (European Parliament, 2014); Nikolaos Lavranos, ‘Designing an International ­Investor-to-State Arbitration System after Opinion 1/09’ in Marc Bungenberg and ­Cristoph Herrman (eds.), Common Commercial Policy After Lisbon (Springer 2013); Hannes Lenk, ‘Investment Arbitration under eu Investment Agreements: Is there a Role for an Autonomous eu Legal Order?’ [2017] European Business Law Review 135. Opinion 2/13 [2014] ecr, para 158; Opinion 1/09 [2011] ecr I-1137, para. 65; see also Case 26/62, Van Gend & Loos [1963] ecr 3; Case 6/64, Costa [1964] ecr 1129.

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the eu. In this perspective, the cjeu is also entrusted with the power to assess the compatibility of international treaties concluded by the eu with relevant eu primary law, under article 218(11) tfeu, and has been called several times to adjudicate on dispute settlement bodies established by such treaties. At the outset, one may recall that an agreement establishing a judicial body competent for the interpretation of its provisions, and whose decisions are binding on the institutions, including the cjeu, is not per se controversial, as the competence of the eu to conclude international agreements necessarily entails «the power to submit to the decisions of a court which is created by such agreement the interpretation and application of its provisions.»57 Indeed, this is the case for several international agreements containing dispute settlement bodies, to which the eu is a party, such as, for instance, the wto Agreement or the unclos. With respect to the latter Treaty, in Mox Plant the Court interpreted article 344 tfeu as meaning that Ireland was precluded from using the dispute settlement mechanism provided by unclos in a case against another member State, when the application of unclos provisions fell within the (then) Community competence and thus raised questions concerning the interpretation of eu law. The same violation of article 344 tfeu was found by the Court in Opinion 2/13 on the Draft Accession Agreement of the eu to the echr, due to the fact that such Draft Agreement did not prevent Member States to bring claims against one another or against the Union under art. 33 of the echr, on issues regarding the implementation of eu law.58 It is true that article 344 tfeu prohibits Member States – and not the Union – to submit disputes to extra eu bodies concerning the application of interpretation of eu law (­including international agreements concluded by the eu within its external competence), and might not relevant in cases of agreements involving solely the eu.59 However, in the case of investment agreements concluded by the eu, it should be considered that (i) according to the mentioned Opinion 2/15, investment chapters are subject to a shared competence with Member States, to the extent that they include also portfolio investments (ii) isds is also subject to a shared competence with Member States, and Member States can be directly involved in arbitration as respondents, as clarified above in Section 5. Such agreements might therefore have an impact on art. 344 tfeu, provided 57 See Opinion 2/13, above note 56, para. 182; Opinion 1/91 [1991] ecr I-6079, paras. 40 and 70, and Opinion 1/09, above note 56, para. 74. 58 Opinion 2/13, above note 56, para 207. 59 This provision was also invoked by the Commission with reference to intra-eu bits cases, see above Section 2, also for further references.

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that it is accepted that this provision covers also disputes among an individual (the foreign investor) and the Member States/eu. In this regard, it should be noted that ag Wathelet recently challenged this assumption in its opinion on the Achmea case, maintaining that art. 344 tfeu should only apply in cases of disputes among Member States or among them and the eu and not in the case of disputes involving investors. However, the CJEU disregarded this argument and confirmed that mechanisms for settling disputes between an investor and a Member State could prevent those disputes from being resolved in a manner that ensures the full effectiveness of EU law, and therefore run contrary to art. 344 and 267 TFEU, at least in cases of intra-eu BITs.60 Furthermore, according to settled case law, the autonomy of eu legal order can be altered by an agreement concluded by the eu in several other circumstances: for example, if the international dispute settlement mechanism provided for in the agreement binds the European institutions to a certain interpretation of eu law in the exercise of their internal competences, or is empowered to decide on issues regarding the division of competences between the eu and Member States.61 An international jurisdiction would also be incompatible with the eu legal order if the cjeu’s competence to review legality of eu acts is hampered62 or it deprives domestic courts of the dialogue with the cjeu in the application of eu law.63 Recently, in the Opinion 2/13 already mentioned, the cjeu took a strong stand against the compatibility of the draft accession agreement to the echr with the essential character of the eu legal system as conceived in the Treaties. Though not adding too much to existing case-law, this opinion provides a clear assessment of the core of cjeu reasoning on the autonomy of the eu legal order, while at the same time casting additional doubts on the supervened invalidity of intra-eu investment agreements with eu legal order.64 But what about investment arbitral tribunals and ics provided for in the eu negotiated investment agreements? Looking in particular to the Opinion 2/13, the risk of interference of such isds with the overall institutional balance of the eu is not immaterial, although some arrangements have already been found, or are being worked on, by the Commission, in order

60 61 62 63 64

Achmea, above, note 19 paras. 56 ff. Opinion 1/00 [2002] ecr I-3493, paras. 12, 13, 16; Opinion 2/13, above note 56, para. 184. Opinion 1/00, above note 61, para. 24. Opinion 1/09, above note 56, para. 89. See Stephen W. Schill, ‘Editorial: Opinion 2/13 – The end of Dispute Settlement in eu Trade and Investment Agreements?’ [2015] jwi&t 379. See also above, Section 3.

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to cope with such constitutional issues. The last say will in any case rest on the cjeu.65 In the first place, it should be underlined that important questions of possible interferences between an investment tribunal and the exclusive competence of the preservation of the system of vertical allocation of competences seem to find an answer in the mentioned arrangements regarding the power, reserved to eu, to decide who is to play the respondent role and bear the financial responsibility in each investment arbitration, in accordance with the ­internal division of competences, pursuant to the rules established in the regulation no. 912/2014 (above, Section 5). The existence of clauses in the agreement reserving such right to eu institutions allows to preserve the autonomy of eu legal order on issues of competence. However, a problem may still arise if, after the elapsing of the time limit for such determination by eu institutions, the arbitral tribunal can itself resolve the issue, as provided for, e.g., in paragraph 3 of Article 9.18 of fta with Singapore. Secondly, the contracting parties should avoid the risk that a tribunal may bind eu institutions on some other issues of interpretation of eu law, in the exercise of their internal competences. This risk seems partially eluded by the fact that the arbitral tribunal can only award damages, whilst the repeal of the measure by the Tribunal is not allowed under the investment c­ hapters of both the ceta and the Singapore fta.66 Care should however be used when ‘damages’ to be awarded are in fact the payment of State aids which have been declared illegal under eu law, as happened in the cases already analyzed in the context of intra-eu bits.67 It has been cast in doubt that an investment award would in any case constitute a violation of the exclusive competence of the cjeu in interpreting eu law, as the effects of the award only apply to the specific case and do not bind the cjeu.68 This reading seems to find some support in the cjeu reasoning in the Reynolds case, where it was established that «a decision by a United States court as to the Commission’s power to bring legal proceedings before it is not capable of binding the Community and its institutions to a particular i­ nterpretation of 65

66 67 68

Apparently, on 6 September 2017 the Belgian submitted a request from Belgium to the Court of Justice of the European Union for an opinion on the compatibility of the Investment Court System (ics) negotiated in ceta with the Treaties, see https://www.euractiv .com/section/ceta/news/belgium-seeks-eu-court-opinion-on-eu-canada-free-trade -deal/. Angelos Dimopoulos, ‘The Compatibility of Future Investment Agreements with eu Law,’ above note 1. See above Section 2. Angelos Dimopoulos, ‘The Compatibility of eu Investment Agreements with eu Law,’ above note 1, at 469.

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the rules of Community law in the exercise of their ­internal powers … such a decision would be binding only in relation to the specific  proceedings.»69 Therefore, the Commission decision to authorize such court proceedings in the United States was deemed compatible with the Treaties. If this approach is correct, no ‘spillover effects’ on the exercise of internal competences would be produced by the arbitration proceeding, and the ex post control of the award by domestic courts in the recognition and enforcement phase, according to Ecoswiss and Mostaza Claro case law, should ensure that the uniform interpretation and application of eu mandatory law, under the possible scrutiny of the cjeu, is respected within eu investment area (above, Section 2). A problem however still exists regarding the viability of such review procedures in the context of icsid awards, and the connected deprivation of eu national courts of their dialogue with the cjeu, that the Court considers essential to preserve the autonomy of eu law.70 National courts of the Member States can and will be probably seized in connection with the enforcement of such awards, while they have very limited tools to refuse their recognition due to the clear obligations onto contracting states to accept and execute the awards, established by the applicable international conventions on international arbitration. In case of icsid awards, it is virtually impossible for a domestic court to refuse execution for mistaken interpretation and application of eu law, save the specific case of conflict of the award with a decision of the Commission (above Section 3); hence, the cjeu is equally in principle precluded to activate the remedy under article 267 tfeu. Similarly, a problem arises when the interpretation of a piece of eu law which is not part of the ordre public communautaire is at stake, in view of the limited grounds of review allowed under applicable arbitration conventions.71 Some authors suggest that this obstacle might be overcome if the arbitral tribunal were entrusted by the bit with the power to ask the cjeu for a ­preliminary ruling.72 Although this argument is fascinating, and is constantly 69 Case C-131/03, Reynolds [2006] ecr I-07795, para. 102. 70 Opinion 1/09, above note 56, para. 75 ff. 71 The cjeu confirmed a strict interpretation of the so called ‘monopoly’ of the cjeu in the final interpretation of eu law, as a fundamental characteristic for the autonomy of eu legal order, in its recent Opinion 2/13, above note 56, paras. 246–248. On issues of application of eu law as law applicable to the investment dispute, see the conclusions below, Section 8. 72 Among others, Steffen Hildelang, ‘Circumventing Primacy of eu Law and the cjeu’s Judicial Monopoly by resorting to Dispute Resolution Mechanisms Provided for Interse Treaties? The Case of intra-eu Investment Arbitration’ above note 11; Konstanze Von Papp, ‘Clash of Autonomous Legal Orders: Can eu Member State Courts Bridge the ­Jurisdictional Divide Between Investment Tribunals and the cjeu? A Plea for Direct

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raised by scholars willing to upgrade the status of arbitration within the eu legal system, and trying to put it on an equal footing vis-à-vis the jurisdiction of domestic courts, it seems to encounter significant hurdles both for a problem with the third country to accept de facto the cjeu as review court (albeit in connection with eu legal issues that may be raised during the arbitration), and for the established cjeu case-law denying arbitrators the nature of ‘court or tribunal of a Member State’ under article 267 tfeu.73 Some recent cases decided by the cjeu seem to open some room for a different assessment of investment tribunals established under treaties concluded by the eu, as regards their qualification under article 267 tfeu.74 In line with these developments, both ag Wathelet in the Achmea case and authoritative literature75 advocated that preliminary rulings referrals to the cjeu by investment tribunals should be admitted by cjeu in view in particular of their different nature vis-à-vis commercial arbitral tribunals, as regards, inter alia, their legal origin (established by an international treaty), their permanent (though optional) nature and the compulsory jurisdiction they ensure. These features will probably be even strengthened, should a permanent ics be effectively implemented. And yet, the cjeu in Achmea clearly denied that (intra-EU) investment tribunals can be considered part of the EU judicial system. Finally, the nature of investment disputes seems capable to have a further impact on the balance between eu institutions, due consideration being taken of the overlapping jurisdiction to award damages between an investment tribunal established under an eu investment agreement and the cjeu as per articles 340 and 268 tfeu.76 Tellingly, the international responsibility of the eu concerning the correct implementation of its international commitments can be ascertained by international courts or tribunals whose jurisdiction the eu has decided to accept. And yet, in case of investment disputes, it is hardly deniable that this is capable to produce interferences with the cjeu competence to adjudicate

73 74 75

76

­ eferral from Investment Tribunals to the cjeu’ above note 11. See also, Ingolf Pernice and R Others, Investor-State Dispute Settlement (isds) Provisions in the eu’s International Investment Agreements, above note 55, 157 ff. See for example Case C-337/95 Dior [1997] ecr I-6013, para. 31; Case C-196/09 Miles [2011] ecr I-5105, paras. 39–41; Case C-102/81, Nodrsee [1982] ECR-1095. Case C-377/13 Acendi EU:C:2014:1754. Jurgen Basedow, ‘eu Law and International Arbitration: Referrals to the European Court of Justice’ (2015) Journal of International arbitration; ag Wathelet (above, note 19), para. 84 ff. In order to avoid duplication of proceedings, the draft texts of both ceta and Singapore fta provide for an exclusivity clause, as a precondition to recourse to isds (so called ‘no u-turn approach’), see article X.21 ceta and article 9.17 eu-Singapore fta.

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actions ­under art. 340 tfeu, and with relevant eu law standards. Apparently, the cjeu mandates a narrow interpretation of the rules on eu liability in the exercise of its legislative powers, which can be established exclusively when the institution concerned has manifestly and gravely disregarded the boundaries of such powers. It is at least uncertain that the liability standards applied by an investment tribunal would be as strict, this being an additional problem to be solved within isds concerning the eu. The numerous controversial issues surrounding isds and eu law have pushed some authors to revisit the idea to return the competence to interpret and apply investment agreements to domestic courts in the first place, especially in cases of investments between developed countries, but also as a tool to address the inequality of powers between different States in the management of investment disputes.77 However, such a policy choice does not seem at the horizon;78 rather, the eu institutions are clearly pursuing the opposite approach: the international nature of the investment agreements negotiated so far by the eu expressly deprives the individuals of a right to recourse to domestic courts.79 In order to ensure the effectiveness of their provisions, therefore, some dispute settlement mechanisms, or otherwise eu implementing legislation, would indeed be needed. 8

Concluding Remarks

We have tried to highlight above the main ‘constitutional’ hurdles faced by the eu legal system in ‘navigating’ the complex world of investment regulation 77

See Marco Bronckers, ‘Is Investor-State Dispute Settlement (isds) superior to litigation before National Courts? An eu view on Bilateral Trade Agreements’ [2015] Journal of ­International Economic Law 665; Mavluda Sattorova, ‘Return to Local Remedies Rule in European bits? Power (Inequalities), Settlement, and Change in Investment Treaty Law’ [2012] liei 223. 78 It is also criticised as such (see Luca Radicati di Brozolo, ‘Where is Investor-State Arbitration Heading?’ Reflections on the Debate over EU Investor Protection Agreements', in ­ Andrea Carlevaris, Laurent Lévy, Alexis Mourre, Eric A. Schwartz (eds.), International Arbitration Under Review, Essays in Honour of John Beechey (ICC Publishing, 2015) 319, at 336). 79 Both ceta and Singapore contain clauses excluding the creation of rights on private p ­ arties e.g., under article 14.14 ceta: «Nothing in this Agreement shall be construed as conferring rights or imposing obligations on persons other than those created between the Parties under public international law, nor as permitting this Agreement to be directly invoked in the domestic legal systems of the Parties. No Party may provide for a right of action under its domestic law against the other Party on the ground that a measure of the other Party is inconsistent with this Agreement.» See also art. 17.15 of the eu-Singapore fta.

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and disputes resolution. Some recent developments in the ttip negotiations, mostly reflected also in the Vietnam and ceta ics, offer an interesting laboratory case to attempt some preliminary conclusions. In particular, these negotiations seem to confirm the intention of the ­Commission to circumvent the above mentioned hurdles by a series of arrangements aimed at (apparently) reducing the interference between isds and the law. This is made, inter alia, by the exclusion of eu law as part of the applicable law to the dispute and by the rejection of any binding effect of the meaning given by the Tribunal to such law, to be considered as a mere matter of fact, upon courts and authorities of either party.80 The apparent goal sought with this approach is to ‘construe’ compatibility of relevant isds in light of the cjeu case-law establishing that international jurisdictions designed solely to solve disputes on the interpretation of an international agreement do not interfere with the application eu law by eu institutions or member States.81 However, such an approach is not persuasive, for it reminds theories advanced in the past by private international law scholars concerning the qualification of foreign law to be applied by the courts of the forum, that proved to be generally rejected by courts and legislators.82 In any event, when i­nterpreting the investment commitments undertaken by the eu (i.e. any treaty ­between the eu and a third country), the arbitral tribunal is indeed interpreting eu law, with substantial effects on eu institutions, Member States and, possibly, eu citizens.83 Hence, an ‘artificial’ exclusion of eu law from the law applicable to the dispute not only is conceptually questionable, but it does not even serve 80

Commission Concept Paper: Investment in ttip and Beyond – the path for reform (May 2015); see also, ‘Commission draft text ttip – investment’ (16 September 2015), both available http://trade.ec.europa.eu, art. 13(3). On the issue, also Francisco J. Pascual Vives, ‘Shaping the eu Investment Regime: Choice of Forum and Applicable Law in International Investment Agreements,’ [2014] Cuadernos de Derecho Transnacional 269. 81 See Opinion 1/09, above note 56, para. 77. 82 See, for example, Italian Law no. 218/1995 on the reform of the Italian private international law system, in gu no. 128 of 3.6.1995, article 14. For an account of the treatment of foreign law as a matter of law and not as matter of fact in most eu member States legal orders, see Carlos Esplugues Mota and Others, ‘General Report on the Application of Foreign Law by Judicial and Non-Judicial Authorities in Europe’ in Carlos Esplugues Mota, José Luis Iglesias Buhigues, Guillermo Palao Moreno (eds.) Application of Foreign Law (Sellier, 2011) 10. 83 According to settled case law, and to article 216(2) tfeu, agreements concluded by the eu become part of eu legal order and bind eu institutions; see ex multis Case 104/81 Kupferberg [1982] ecr 3641; Case C-12/86 Demirel [1987] ecr 3719. See also Achmea, above, note 19, paras. 41–42.

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the purpose to exclude such interference, which continues to exist in the practice, as clearly shown by the case law on intra-eu bits analyzed above.84 It is true that the icsid model advocates the tenet that investment dispute resolutions need continue to run independent from domestic judicial systems, in order to ensure speed and efficiency. Yet, this is exactly the main reason of skepticism between investment tribunals and the eu legal system. It further encroaches upon the autonomy of eu legal order, at least when and to the extent that the ex post control on the compatibility of arbitration awards with eu law by domestic courts is precluded. In a nutshell, our impression is that the icsid model, due to its ­self-contained nature, is hardly capable to respect the autonomy of eu legal order; and in this context, we fear that any effort to envisage pure ‘technical adjustments’ might be doomed by the cjeu. This does not mean that a different investment dispute resolution ­forum, which is better coordinated with the eu judicial and legal structure, is ­impossible to conceive. Such a forum can also benefit of the operation of other existing conventions and arbitration rules. For instance, some guidance seems to have been found, in the shaping of the new ics, in the solution that was envisaged, more than 20 years ago, in the eea context, with the creation of the eea court85 on the idea of establishing a sort of permanent court of arbitration composed by a roster of persons who may be appointed on a case-by-case basis.86 This allows a shift from an arbitral to a jurisdictional model, that would probably ease also the possibility for the cjeu to accept preliminary ruling referrals by such tribunals, in view of their permanent nature and incorporation in the judicial system of Member States through the relevant international treaties and implementing legislation. In this latter regard, because the application of eu law cannot be avoided by the Tribunal, an increased judicial deference of the ics to the cjeu case law would in any case help reduce normative conflicts. At the same time, room should be left for domestic courts to protect the application of eu law in the enforcement phase of the award, on the footprints of the Ecoswiss case law, under relevant international conventions. This ensures that the threat to the exclusive competence of the cjeu is off set ex post, through the possibility to recourse to preliminary ruling. It is true that, 84 See Section 2. 85 See Opinion 1/92, ecr [1992] I-2821, on which Barbara Brandtner, ‘The ‘Drama’ of the eea Comments on Opinions 1/91 and 1/92’ [1992] 3 ejil 300. 86 More cautious on this solution seems Luca Radicati di Brozolo, ‘Where is Investor-State Arbitration Heading?’ above note 78, at 337–338.

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should enforcement be sought in a third country, no such final say would be guaranteed to the cjeu. And yet, on one hand, after all, this is the way eu law and arbitration have coexisted so far, while the existing rules on immunity of ­foreign States and international organizations may provide reasonable protection from undue attempts to execute an arbitral award against Member States or the Union; on the other hand, and alternatively, this aspect would be improved by granting access ex ante to cjeu for preliminary reference questions under art. 267. Furthermore, it is here submitted that the efforts undertaken by the eu and the Member States in establishing an ics compatible with the constitutional features of eu law be somehow coordinated with the effort deployed by Member States to solve the complex relationship between intra eu-bits and eu law. Reference is made, in particular, to the ‘non-paper’ presented on April 2016 by the delegations of Austria, Finland, France, Germany and the ­Netherlands to  the eu Council’s Trade Policy Committee, proposing three innovative compromise solutions, to be possibly implemented after the progressive ­‘phasing-out’ of existing intra-eu bits: (i) to confer jurisdiction on investments disputes to the cjeu based on Article 273 tfeu; (ii) to model an intraeu investment dispute settlement system on the Unified Patent System; (iii) to rely on the Permanent Court of Arbitration (‘pca’) and agree on a ‘compromis’ within the meaning of the 1907 Hague Convention. While not all the above mentioned alternatives would probably be easily available in the negotiation with third countries, nor would be alone compatible with the principle of autonomy of eu legal order, it is clear that room for coordination and synergies exist and should indeed be exploited, also in order to ensure consistency between intra and extra eu investment policy.

Section 2 Selected Procedural Principles of Investment Arbitration

∵

Chapter 6

Jurisdiction ratione temporis in International Investment Arbitration Andrea Gattini* Issues concerning the temporal scope of jurisdiction of international investment ­arbitration tribunals are attracting an increased attention due to recent events such as the denunciation of the icsid Convention by some states, or of the bits from which the Tribunals draw their jurisdiction, or from the provisional application of other treaties concerning investment protection. The solutions offered by most arbitral tribunals are in line with international customary rules of the law of treaties, a point which deserves attention as a further proof of the cohesiveness of international investment law with public international law.

I

Introduction

In recent times, international investment arbitration tribunals have been increasingly confronted with irksome questions about the temporal scope of their jurisdiction, due to different events such as the denunciation of the ­i csid Convention by some Latin American states, or of the bit from which they draw their jurisdiction or the withdrawal from the provisional application of an investment protection treaty. The solutions provided by the arbitral tribunals show, if need be, how deeply international investment law is still embedded in the law of treaties. The customary rule from which to start is the one on the non retroactivity of international treaties, enshrined in Article 28 of the Vienna Convention on the Law of the Treaties: ‘Unless a different intention appears from the treaty or is otherwise established, its provisions do not bind a party in relation to any act or fact which took place or any situation which ceased to exist before the date of the entry into force of the treaty with respect to that party.’ Despite of its apparent clarity, the rule leaves a wealth of problems unanswered when applied to jurisdictional issues, as a short overview of icsid * University of Padova. This chapter is reprinted, with permission, from the original publication in The Law and Practice of International Courts and Tribunals (2017) 16(1) 139–158.

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_007

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j­urisprudence with regard to bilateral investments treaties easily shows. The aim of the present contribution is to throw some light on the to some extent confused and contradictory jurisprudence. The chapter is divided into three parts. In the first part we will show how the uncertainties are partially due to the intrinsic flexibility of the rule with regard to jurisdiction (ii). In the second part we will deal with jurisdiction before the entry into force of the bit (iii). In the third part we will deal with jurisdiction after the termination of the bit (iv). Conclusions follow. II

Flexibility of the Rule with Regard to Jurisdiction

In order to exemplify our assumption, we will deal in turn with jurisdictional issues related to disputes arisen after the entry into force of the bit but ­related to facts or situations which had previously taken place (II.1), with jurisdictional issues related to preexisting disputes (II.2) and with the question of so-called cooling off periods (II.3). II.1 Apparently, the rule according to which jurisdiction extends to all disputes arisen after the entry into force of the bit should not pose any interpretative problem. Yet, a deeper look discloses some uncertainties. Does this principle concern only disputes based on facts which took place after the entry into force of the treaty or also disputes based on facts which took place before that date? It seems that the general rule corresponds to the second option, unless the parties decide otherwise. This was made clear by the pcij in the Mavrommatis Palestina Concessions case of 1924, in which the Court affirmed that ‘in cases of doubt, jurisdiction based on an international agreement embraces all disputes referred to it after its establishment’ and further observed that ‘[t]he reservation made in many arbitration treaties regarding disputes arising out of events previous to the conclusion of the treaty seems to prove the necessity for an explicit limitation of jurisdiction and, consequently, the correctness of the rule of interpretation enunciated above’.1 The first option is known as the ‘double exclusion clause,’ and its application was at the center of some cases before the pcij, such the Phosphates in

1 The Mavrommatis Palestina Concessions (Greece v. United Kingdom), pcij Series A 2, Preliminary Objection, Judgment of 30 August 1924, at 35.

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M ­ orocco2 and The Electricity Company of Sofia and Bulgaria3 cases, as well as before the icj, such as the Right of Passage over Indian Territory case,4 the Certain Property case5 or the counterclaim in the Jurisdictional Immunities of the State case.6 It is interesting to note that, even in these apparently clear-cut cases, the two Courts maintained a certain margin of discretion, reserving for themselves the freedom to select the facts or situations which in their view constituted the ‘real source’ of the disputes. The question could be raised whether this solution is simply transferable to international investment treaties. Indeed in these treaties the dispute settlement clause is not self standing but is related to the substantial rights and obligations agreed upon in the treaty. As the Tribunal in the Salini v. Jordan case made abundantly clear: ‘One must distinguish carefully between jurisdiction ratione temporis of an icsid Tribunal (i.e., the existence of a dispute) and applicability ratione temporis of the substantive obligations contained in a bit.’7 Whereas the extension of the jurisdcition ratione temporis to facts and situations existing prior to the entry into force of the treaty does not cause 2 Phosphates in Morocco (Italy v. France), Preliminary Objections, Judgment of 14 June 1938, pcij Series A/B 74, where the Court gave some sympathetic explanation for the rationale of the double exclusion rule at 24: ‘in order both to avoid, in general, a revival of old disputes, and to preclude the possibility of the submission to the Court by means of an application of situations or facts dating from a period when the State whose action was impugned was not in a position to foresee the legal proceedings to which these facts and situations might give rise.’ 3 The Electricity Company of Sofia and Bulgaria (Belgium v. Bulgaria), Preliminary Objections, Judgment of 4 April 1939, pcij Series A/B No. 77, at 82, in which the Court made the distinction between facts and situations which may be the ‘presupposition’ of a dispute and those which are its ‘real cause.’ 4 Right of Passage over Indian Territory (Portugal v. India), Merits, Judgment 12 April 1960, icj Reports 1960, at 35. 5 Certain Property (Liechtenstein v. Germany), Preliminary Objections, Judgment of 10 February 2005, icj Reports 2005, at 26, par. 51 in which the Court found that the German judicial decisions in the 1990s were ‘inextricably linked’ to the interpretation of the Settlement Convention with regard to Germany of 1954 and with the Czechoslovakian Benes Decrees of 1945, i.e. the facts and situations which formed the ‘real cause’ of the dispute. 6 Jurisdictional Immunities of the State (Germany v. Italy), Counterclaim, Order of 6 July 2010, icj Reports 2010, 310, at 320, par. 28, in which the Court found that the alleged obligation of Germany to pay compensation for certain Italian nationals was ‘inextricably linked’ to the Italian waiver contained in Article 77, par. 4 of the 1947 Italian Peace Treaty. 7 Salini v. Jordan, icsid ARB/02/13, Decision on Jurisdiction 29 November 2004 (Guillaume Pres., Cremades, Sinclair), para. 176.

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any concern, the principle of non retroactivity of substantial norms suffers no exception unless the parties so agree. This, however, does not exclude that the jurisdiction may extend to claims based on the violation of international customary law rules, which evidently preexisted the entry into force of the bit.8 II.2 The question could be raised if the general rule also permits to exercise ­jurisdiction with regard to preexisting disputes. There is some controversy in jurisprudence and in legal literature, whether, in the absence of a clear ­expression in the treaty, the general rule allows or excludes jurisdiction over preexisting disputes. Again the solution indicated by the pcij in the ­Mavrommatis ­Palestine Concessions decision, in the previously quoted sentence, points to a positive answer. Also the ilc Commentary to Article 28 vclt moves towards that direction, when it says that ‘by using the word disputes without any qualification, the parties to a treaty are to be understood as accepting jurisdiction with respect to all disputes existing after the entry into force of the agreement,’9 which seems to imply also those preexisting. An author has made the argument that Article 25 icsid Convention would lead to this same conclusion to the extent that it speaks of ‘any legal dispute.’10 On the contrary, Schreuer convincingly argued that the Convention itself does not impose any jurisdictional requirements ratione temporis relating to the moment a quo of the insurgence of a dispute.11 The solution, therefore, is not to be found in the text of Article 25 icsid Convention but in the particular bit from which the Tribunal draws its jurisdiction. In that regard the bits present wide diverging solutions, which leave the Tribunals with a wide margin of interpretative discretion. So while one can readily agree with the negative conclusion reached by the Tribunal in Salini v. Jordan concerning already existing disputes, due to the fact that the relevant bit used the formula ‘any dispute which may arise,’12 more debatable was the negative conclusion reached by the Tribunal in the Impregilo v. Pakistan case, in which the relevant

8

9 10 11 12

On the interplay between treaty claims and claims founded on customary international law see K. Parlett, ‘Claims under Customary International Law in icsid Arbitration,’ in 31 icsid Review (2016), 434. ilc Commentary to Article 24 Draft Articles on the Law of the Treaties, Yearbook of the ilc 1966, Vol. ii, Part 1, at 212 (italics added). See M. Waibel, ‘Investment Arbitration: Jurisdiction and Admissibility,’ in M. Bungerberg et al. (eds.), International Investment Law (2015), 1212, at 1258. See Ch. Schreuer, The icsid Convention. A Commentary, (2nd ed. 2009), at 95, Rdn. 48. Salini v. Jordan, cit., at para. 170.

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bit used the more ambiguous formula ‘disputes arising between the parties.’13 Even more debatable was the decision of the Tribunal in Generation Ukraine v. Ukraine,14 in which the treaty text said ‘dispute arising out of or relating to …. an alleged breach of any right conferred or created by this Treaty.’ As it was convincingly maintained in legal literature, the word ‘relating to’ may be interpreted as enlarging the Tribunal’s jurisdiction to disputes arisen before the entry into force of the treaty, to the extent that they concern rights which prior to the entry into force of the treaty were already protected under customary international law.15 From the cases quoted, and other more recent ones,16 it seems that the prevailing trend in icsid and uncitral jurisprudence is not to extend jurisdiction to preexisting disputes, unless the bit text goes unmistakably in the opposite direction. In reality, the picture is more nuanced and complicated by the fact that the answer to the question whether jurisdiction extends to preexisting disputes much depends on the meaning of dispute itself. To a certain extent this question recalls the one presented in the previous paragraph, because it revolves around the qualification one gives to the facts giving origin to a dispute. It is, at least to some degree, a matter of perception whether one sees some facts as being the source of a dispute or as forming the dispute itself. As is well known, the pcij gave a very broad definition of dispute in the 1924 Mavrommatis Palestine Concessions: ‘dispute is a disagreement on a point of law or fact, a conflict of legal views or of interests between two persons.’17 13

Impregilo v. Pakistan, icsid ARB/03/3, Decision on Jurisdiction 22 April 2005 (Guillaume Pres., Cremades, Landau) para.300. The Tribunal, however, came to the conclusion that anyway the dispute had arisen after the entry into force of the Italian/Pakistan bit. 14 Generation Ukraine v. Ukraine, icsid ARB/00/9, Award 16 September 2003, (Paulsson Pres., Salpius, Voss) at para. 11.2. 15 N. Gallus, The Temporal Scope of Investment Protection Treaties (British Institute of Int’l & Comp. Law 2008), at 136. 16 See mci Power Group v. Ecuador (icsid ARB/03/6) Award 31 July 2007 (Vinuesa Pres., Greenberg, Irarrazabal )para. 61: lack of jurisdiction for preexisting disputes as a matter of principle, according to Art. 28 vclt; Decision on Annulment 29 October 2009 (Hascher Pres., Danelius, Tomka): no manifest excess of power under Art. 52, para. 1 (b); Societe Generale v. Dominican Republic, (uncitral Rules) lcia Case un 7927, Award on Preliminary Objections to Jurisdiction 19 September 2008 (Orrego Vicuna Pres., Cremades, Bishop), para. 78 et seq.: no jurisdiction over disputes related to facts or situations prior of the entry into force of the bit, notwithstanding the fact that Article 1 of the bit extended its protection to ‘assets invested after or before the entry into force of this Agreement’ and Article 7 granted jurisdiction ‘over any dispute relating to investment.’ On these and other cases see N. Gallus, ‘Article 28 of the Vienna Convention on the Law of Treaties and Investment Treaty Decisions,’ 31 icsid Review (2016), 290. 17 Mavrommatis Palestine Concessions, cit, at 11.

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­Unsurprisingly the icsid jurisprudence is far from clear on the point. In Maffezini v. Spain18 the Tribunal strived to make a difference between a ‘natural sequence of events that leads to a dispute’ and a ‘dispute in its technical and legal sense’ and came to the conclusion that the dispute arose well after the entry into force of the Spanish-Argentinian bit. However, such an apparently clear-cut distinction is not always easy to make and the facts of a case can be read in a way or in other as to leave a substantial margin of discretion to the Tribunal. For example, in the Lucchetti v. Peru case of 200519 the decisive question was whether the dispute arose in 2001, henceforth under the temporal protection of the Peruvian Chilean bit which had newly entered into force, or whether it was just a continuation of an older dispute which had arisen well before. One could have thought that the fact that the domestic judicial decisions of 1997 had been in a first time implemented by the local government had as a consequence that the old dispute had ceased and that a new had arisen later on, admittedly regarding the same subject matter. The Tribunal, however, found that ‘the facts or considerations that gave rise to the earlier dispute continued to be central to the later dispute,’ and reached the conclusion that there was no new dispute, and therefore no jurisdiction. On the contrary, in the Jan de Nul v. Egypt case of 2006,20 although the substantially same dispute had been previously brought by the Applicant before domestic courts, the Tribunal concluded that the dispute was not the same, the first being based on Egyptian law and the second on the bit, and therefore covered by the new bit which had replaced a previous one less favorable to the Applicant. Also the successive icsid jurisprudence is far from having reached a common approach as to the assessment of the existence and date a quo of a dispute.21 The question of the extension of jurisdiction to preexisting disputes is also complicated by specific and complex questions concerning renegotiated bits. The solutions of Article 30 vclt are of limited help. In general, renegotiated 18 19 20 21

Maffezzini v. Spain, icsid ARB/97/7, Decision on Jurisdiction 25 January 2000, (Orrego Vicuña Pres., Buergenthal, Wolf) at para. 96 et seq. Lucchetti v. Peru,’ icsid ARB/03/4, Award 7 February 2005, (Buergenthal Pres., Cremades, Paulsson) at paras. 48–59. Jan de Nul v. Egypt, icsid ARB/04/13, Decision on Jurisdiction 16 June 2006 (KaufmannKohler Pres., Mayer, Stern), at para. 117 et seq. See inter alia Helnan v. Egypt, icsid ARB/05/19, Decision on Jurisdiction 17 October 2006: new dispute; Sociedad Anonima Vieira v. Chile, icsid ARB/04/7, Decision on Jurisdiction 21 August 2007: continuation of a previous dispute; Victor Pey Casado v. Chile, icsid ARB/98/2, Award 8 May 2008: new dispute even if the facts went back to more than 30 years earlier.

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treaties on investment protection make clear that they shall not be applicable to disputes having arisen before the entry into force of the new bit, which shall continue to be ruled by the earlier treaty. This was e.g. the case of Jan de Nul v. Egypt, previously referred to, but, as we have seen, the Tribunal found the way to circumvent the obstacle. The interpretative dexterity of the Tribunal does not always necessarily favour the investor, and this even with regard to treaties which had been revised with the apparent intent to better protect the investor. This was for instance the recent case of Ping An Life Insurance v. Belgium,22 which concerned a dispute which had arisen and had been notified before the entry into force of the renegotiated bit, but which had not yet been made the subject of an arbitral process. Article 10, para. 1 of the 2009 renegotiated China-Belgium bit says that the new bit shall apply to all investment made by investors, whether before or after the entry into force of the bit, but that it does not apply to any dispute which was already under judicial or arbitral process before its entry into force. Contrary to its plain meaning, the Tribunal read extensively this paragraph as comprising also disputes already arisen and notified but not yet subject of a dispute-resolution process. II.3 Notoriously, the cooling-off clauses are among the most debated provisions, with a sharply and hopelessly divided jurisprudence. On the one side, there are Tribunals which consider them a non disposable jurisdictional requisite23 and, on the other side, those which consider them a disposable admissibility requisite. The latter solution leads to the further (and much debatable) consequence that its absence in a particular bit could be relied upon through the mfn clause in order to circumvent the obstacle, as notoriously happened in the Maffezini v. Spain case.24 The debate is reminiscent of the one regarding the diplomatic negotiation as a previous condition of the seisin of the icj. While it is true that customary international law does not require diplomatic negotiations as a precondition for the seisin of the icj,25 the condition, however, may well be provided for in 22

Ping An Life Insurance v. Belgium, icsid ARB/12/29, Award 30 April 2015 (Lord Collins of Mapesbury Pres., Sands, Williams ). See the critical comment by Q. Ren in 31 icsid Review (2016), 129. 23 See e.g. Murphy Exploration and Production Comp. Int’l v. Ecuador, icsid ARB/08/4, Award on Jurisdiction 15 December 2010 (Oreanumo Pres., Grigera Naon, Vinuesa), at para. 149. 24 Maffezini v. Spain, cit, at para. 56. 25 See Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria) , Preliminary Objections, Judgment of 11 June 1998, icj Reports 1998, 275, at 303, para. 56, in which the Court said in unmistakably terms: ‘Neither in the Charter nor otherwise in

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a treaty or in declaration of acceptance of the compulsory jurisdiction. In that case the condition assumes a particular significance, because it must be considered as a limit to the consent of the parties to the jurisdiction of the Court.26 All depends on the interpretation of its exact formulation, and the issue can not be decided in abstracto by the arbitrators for the sake of an ideological prejudice.27 Fifteen years after the contrasting decisions in Salini v. Morocco (cooling/ off period compulsory)28 and Lauder v. Czech Republic (cooling/off period disposable)29 rendered in 2001 within a few weeks from each other, the debate does not seem to have lost anything of its relevance if one just compares

26

27

28 29

international law is any general rule to be found to the effect that the exhaustion of diplomatic negotiations constitutes a precondition for a matter to be referred to the Court.’ See also Armed Activities on the Territory of the Congo (New Application: 2002) (Democratic Republic of the Congo v. Rwanda), Jurisdiction and Admissibility, Judgment of 3 February 2006, i.c.j. Reports 2006, 6, at 39, para. 88. See S. Torres Bernandez, ‘Are Prior Negotiations a general Condition for Judicial settlement by the International Court of Justice?’ in C.A. Armas Bareas et al. (eds.), Liber Amicorum in memoriam of Judge J.M. Ruda (2000), 507; K. Wellens, Negotiations in the Case Law of the International Court of Justice. A Functional Analysis (2014). Even so, the dispute between Georgia and the Russian Federation before the icj in 2008 shows how difficult this interpretation may be, and which margin of discretion the Court may exercise in that regard. In that case Georgia relied on the compromis clause contained in Art. 22 of the un Convention on the Elimination of All Forms of Racial Discrimination of 1965. The Russian Federation raised the preliminary objection, among others, that the condition of previous negotiations, provided for in the same Article 22 had not been complied with. The Court upheld this objection, coming to the conclusion that a dispute between Georgia and the Russian Federation related to the latter’s obligation under the Convention had indeed arisen between the 9th and the 12th August 2008, but that the Parties had not satisfied the conditions set out in Article 22 cerd. See Application of the Convention on the Elimination of All Forms of Racial Discrimination (Georgia v. Russian federation), Preliminary Objections, Judgment od 1 April 2011, icj Reports 2011, 70, at 129, para. 144. The decision of the majority was harshly criticized by a minority of five judges. In their joint dissenting opinion they lamented the fact that the Court had interpreted the bland notion contained in Art. 22 cerd, ‘dispute…which is not settled by negotiation,’ as equivalent to the stricter notion found in other compromis clauses of a ‘dispute…which cannot be settled by negotiation’ or even to much stricter clauses, which engage the parties to first ‘consult together with a view to the settlement of the dispute by negotiation.’ Furthermore they observed that the previous jurisprudence of the Court was much more flexible and uncertain on the point than it would have made believe in the present case. Salini v. Morocco, icsid ARB/00/4, Decision on Jurisdiction 31 July 2001 (Briner Pres., Cremades, Fadlallah), at para. 16. Lauder v. Czech Republic, uncitral, Final Award 3 Sept 2001 (Briner Pres., Cutler, Klein), at paras. 187 et seq.

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two cases of 2013, again rendered within the same month, Tulip Real Estate and Development Netherlands v. Turkey (non disposable pre-condition to the jurisdiction)30 and Al-Kharafi and Sons v. Lybia (disposable condition).31 Be as it may with the confused jurisprudence, it stands to reason that the cooling/off period responds to the deeply felt exigency not to precipitate a litigation, where alternative dispute settlement mechanisms are available and bear reasonable prospects of success. The case of Western nis v. Ukraine of 2006 is telling. Instead of lightly disposing of the cooling/off period, the Tribunal suspended the proceedings and ordered the parties to notify in 7 months whether they had still an interest in pursuing the case. The prudent attitude of the Tribunal surely contributed to make the investor think twice on the perspective of success of a lengthy and expensive litigation and the parties reached a friendly settlement in no more than three months.32 III

Jurisdiction before the Entry into Force of the Treaty

The vclt contains some rules which could have an impact on the topic of jurisdiction before the entry into force of a treaty on investment protection. The first such rule is that one enshrined in Article 18 vclt, namely the obligation not to defeat the object and scope of a treaty pending its entry into force. A very sweeping application was made in the Tecmed sa v. Mexico case, in which the Tribunal said that the obligation forbids ‘not only intentional acts of states, but also conduct (…) merely negligent or in disregard of the provisions of a treaty or its underlying principles, or contradictory or unreasonable in light of such provisions or principles.’33 The second such rule is that one enshrined in Article 25 vclt, providing for a provisional application of a treaty not yet in force, if the treaty so provides or the parties so intend. The article, however, is silent on the very central question of the legal effect of such a provisional application, and legal literature is divided on the point.34 As it is well known, a major debate occurred with regard 30

31 32 33 34

Tulip Real Estate and Development Netherlands v. Turkey , icsid ARB/11/28, Decision on bifurcated jurisdictional issues, 5 March 2013 (Griffith Pres., Jaffe, Knieper), para. 72: condition satisfied in the case at hand. Al-Kharafi and Sons v. Lybia, Award 22 March 2013, paras. 245–246. Western nis v. Ukraine, icsid ARB/04/2, Order of 16 March 20006 (Oreamuno Pres., Paulsson, Pryles). Tecmed sa v. Mexico, icsid arb (AF)/00/2, Award 29 May 2003 (Grigera Naon Pres., Fernandez Rozas, Bernal Verea), para. 71. See T. Ishikawa, ֲ‘Provisional Application of Treaties at the Crossroads between International and Domestic Law’, 31 icsid Review (2016), 270, at 274 et seq.

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to such a clause contained in Article 45 of the Energy Charter Treaty. Article 45.1 ect reads: ‘Each signatory agrees to apply the Treaty provisionally pending its entry into force for such signatory (…), to the extent that such provisional application is not inconsistent with its constitution, laws or regulations.’ Paragraph 2 of the same Article specifies that ‘Notwithstanding paragraph 1 any signatory may, when signing, deliver (…) a declaration that it is not able to accept provisional application. The obligation contained in paragraph 1 shall not apply to a signatory making such a declaration.’ In 2007 an icsid Tribunal had already had the opportunity to clarify the scope of Article 45 ect. In the Kardassopoulos v. Georgia case the Tribunal stated that the fact that a State had not opted out according to Article 45, para. 2, does not say anything on the consistency of the provisional application of any of its provision with the State’s domestic laws, a fact which must be objectively established.35 In the case at hand, the Tribunal reached the conclusion that neither Greek nor Georgian domestic law prevented the provisional application of treaties in general and of the ect in particular. In the Interim Award on Jurisdiction and Admissibility of 30 November 2009 in the Yukos Universal Ltd. v. The Russian Federation case, the Tribunal reaffirmed that the so-called domestic exception clause of Article 45, para. 1 does not require a prior notification, but it went on to say that it contains an ‘all or nothing’ proposition, excluding a partial provisional application.36 The Tribunal drew this consequence from the adjective ‘such’ as referred to the provisional application of the Treaty, without giving weight to the provision ‘to the extent that,’ which introduces the sentence. Besides the highly debatable choice of the Tribunal to base a whole decision on the interpretation of a single noun, this interpretation is in itself counterintuitive. If anything, the provision ‘to the extent that,’ as well as the reference to ‘regulations,’ alongside to the domestic constitution and laws, convey the clear intention of the parties to permit a partial application of the ect.37 If the parties had intended 35 36

37

Kardassopoulos v. Georgia, icsid ARB/05/18, Decision on jurisdiction 6.7.2007 (Fortier Pres., Orrego Vicuna, Watts), para. 227. Yukos Universal Ltd. v. The Russian Federation, pca aa 227, Interim Award on Jurisdcition and Admissibility, 30 November 2009 (Fortier Pres., Poncet, Schwebel), para. 308. See also the parallel proceedings in the cases and Hulley Enterprises Limited v. Russian Federation, pca aa 226 and Veteran Petroleum Limited v. Russian Federation, pca aa 228. See M. Arsanjani, M. Reisman, ‘Provisional Application of Treaties in International Law: The Energy Charter Treaty Awards,’ in E. Cannizzaro (ed.), The Law of Treaties beyond the Vienna Convention (2011), 86, at 92–93. For a different position see Y. Banifatemi, ‘Provisional Application of the Energy Charter Treaty: The Negotiating History of Article 45,’ in Coop (ed), Energy Dispute Resolution: Investment Protection, Transit and the ect (2011), 191.

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to exclude a partial application, they would have chosen a different wording such as ‘unless’ or ‘provided that.’38 For the sake of argument, the Tribunal examined in detail whether Article 26 ect on dispute settlement was consistent with the Russian Constitution, or with its laws and regulations and arrived at an affirmative conclusion, based on the 1991 and 1999 Law on Foreign Investment, which allows for international arbitration, as well as on the 1995 Federal Law on International Treaties, which allows for executive agreements (Articles 2 and 6). But again the Tribunal missed the point: the two statutes are in no way related one to the other, so that any inference from one to the other is totally unwarranted. Fact is that the Tribunal was simply unable to confute the Russian thesis that all investment protection treaties concluded by the executive Russian Federation are subjected to ratification inter alia exactly because of the provision of international arbitration. As it is well known, the Tribunal concluded on the merits on 18 July 2014 by according Yukos and the two other claimants the astounding sum of 50 billion us dollars in damages. The Hague District Court quashed the Awards on 20 April 2016 on the ground that the Tribunal lacked jurisdiction on the cases39 and a lengthy and complex litigation before many different domestic courts for the enforcement of the awards is to be expected in the years to come.40 IV

Jurisdiction after the Termination of the Treaty (Ultra Activity of the Treaty)

In this Part we will deal with some issues related to whether jurisdiction exists in the event of a denunciation of the icsid Convention (IV.1) or the denunciation or mutual termination of a bit (IV.2. and IV.3). IV.1 In legal literature there is a debate on the relationship between Article 25 para. 1 icsid on the requisite of mutual consent of the parties to arbitration, 38 39 40

See T. Gazzini, ‘Yukos Universal Limited (Isle of Man) v. The Russian Federation. Provisional Application of the ect in the Yukos Case,’ 30 icsid Review (2015), 293, at 298. Russian Federation v. Yukos United Limited, Case C/09/447162/HA za 15–2. Proceedings are underways in France, Belgium an the usa, see the available documents in www.italaw/cases/1175 (Yukos), www.italaw.com/cases/544 (Hulley), www.italaw.­cases/ 1151 (Veteran). See J. Fourier, P. Daureau, ‘Yukos Universal Limited (Isle of Man) v. The Russian Federation. Enforcement of the Yukos Awards: A Second Noga Saga or a New Sedelmayer Fight?’ 30 icsid Review (2015,) 336.

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Article 71 on the denunciation of the Convention, which shall have effect six months after notification, and the ‘no prejudice clause’ of Article 72 which makes safe ‘the rights or obligations under the Convention … arising out of consent to the jurisdiction of the Centre given by one of them (i.e the State, any of its subdivisions or agencies, any national of that State) before such ­notice was received by the depositary.’ Two diametrical opposite interpretations face each other. According to the first thesis, vigorously defended by Schreuer,41 Article 72 constitutes a special application of the principle of irrevocability of consent, expressed in more general terms in the last sentence of Article 25 par. 1 (‘When the parties have given their consent, no party may withdraw its consent unilaterally’). It can apply only to a perfected consent, i.e. consent expressed by both parties before the denunciation of the Convention. Many arguments seem to militate in favour of this thesis. In the first place, when referring to consent to jurisdiction, the Convention stresses the element of mutuality; secondly, according to Rule 2 of the Rules of procedure for the institution of conciliation and arbitration proceedings, the date of consent is the date in which the parties to the dispute consented in writing to submit it to the Centre; thirdly, there are no ‘rights or obligations under the Convention’ arising from an unilateral offer of consent, but possibly only rights and obligation arising from the bit; fourthly, consent ‘given by one of them’ does not refer to a unilateral act, but only specifies that the rights and obligations are preserved even if the consent was not expressed by the state but by one of its subdivisions or one of its nationals; finally the travaux preparatoires would confirm this thesis. Particularly the fact that also the nationals of the denouncing state are taken into consideration under A ­ rticle 72 would demonstrate that by the term ‘consent’ Article 72 means mutual or perfected consent, because otherwise there would make no sense to speak of unilateral consent to arbitration of an investor in lack of a corresponding consent by the host state. According to the second thesis,42 while it is true that the Convention use of the noun ‘consent’ is ambivalent, meaning both offer of consent and perfected consent, the distinction must be traced by interpreting each provision for its own sake as well as in context. This objection would therefore dispose 41

42

See C. Schreuer, ‘Denunciation of the icsid Convention an Consent to Arbitration’, in M. Waibel et al. (eds.), The Backlash against Investment Arbitration: Perceptions an Reality (2010), 353. See O. Garibaldi, ‘On the Denunciation of the icsid Convention, Consent to icsid Jurisdiction, and the Limits of the Contract Analogy,’ in C. Binder et al. (eds.), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (2009), 251.

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of the first two arguments presented above. In particular, there is nothing that would prevent from interpreting Article 72 just for what it says, namely that the consent to jurisdiction given by a state before the notification of the denunciation of the Convention does not impinge on its rights and obligations under the Convention and arising from that consent. To counter the third argument made by Schreuer, it could be opposed that the (main) right under the Convention is the right, based on Article 25, par. 1 of the Convention, to withdraw that consent at any time before the foreign investor has given its matching consent, and on the reverse the (main) obligation is that one to abide by the duties imposed on the parties by the Convention, as soon as the other party has consented to the dispute. As for the fourth argument, the reference to a consent ‘given by one of them’ reaffirms, if need be, that Article 72 deals with unilateral consent and not mutual consent. Finally, the travaux preparatoires are at best equivocal on the point. In the only relevant passage Broches mentioned as unproblematic a State’s withdrawal of an unilateral statement (in terms of general declaration) by denouncing the Convention, as long as no investor had yet accepted the icsid jurisdiction, which is a different matter than the repeal of a domestic statute or the withdrawal from a treaty. The conclusion is that as little as the icsid Convention defines the conditions of validity of consent (besides that it must be given in writing), so it does not define the conditions for the termination of that same consent either, which, by reference of Article 72, must necessarily be found outside of the Convention. It follows that, if the State’s consent under Article 25, para. 1 icsid was given by the way of a bit, that consent may not be validly withdrawn except as provided in that same treaty, i.e. according with its provisions, or as provided by general international law, i.e. according to Article 56 vclt, and an icsid Tribunal would be competent to decide on its jurisdiction by assessing the validity of the State’s eventual denunciation of that treaty. A fortiori an investor may bring a claim during the six months ­notification under Article 71,43 as it was the case of eti Euro Telecom International nv v. B ­ olivia, in which the request for arbitration was registered by the i­ csid Secretariat two days before the deadline of six months denunciation notice by ­Bolivia.44 In this regard, the interplay of Articles 71 and 72 does not ­substantially 43

44

See also T. Voon, A. Mitchell, ‘Denunciation, Termination and Survival,’ 31 icsid Review (2016), 413, at 418. Contra C. Schreuer, ‘Denunciation of the icsid Convention,’ cit, at 355, according to whom, in the case of the absence of a previous consent by the Claimant, the relevant date is that of the receipt of the notice of denunciation by the icsid Secretariat. e.t.i. Euro Telecom International nv v. Bolivia, icsid ARB/07/28, discontinued at the request of the Claimant, Order of the Tribunal 21 October 2009.

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differ, mutatis mutandis, from that of Article lvi, paras. 1 and 2 of the Pact of Bogota,’ on which the icj recently took position in two cases brought by Nicaragua against Colombia.45 While Article lvi, para. 1 provides for one year notice period of denunciation, Article lvi, para. 2 reads: ‘The denunciation shall have no effect with respect to pending procedures initiated prior to the transmission of the particular notification.’ In the judgment on preliminary objections rendered on 17 March 2016 the Court affirmed that ‘in seeking to determine the meaning of the second paragraph of Article lvi, it should not adopt an interpretation which renders the first paragraph of that Article devoid of purport or effect.’46 It followed that Nicaragua was in its right when it brought an application on the very last day before the expiration of the one year period. While no icsid Tribunal had the opportunity to deal with the legal effect of the withdrawals of Bolivia47 and of Ecuador,48 with regard to Venezuela, which denounced the icsid Convention on 24 January 2012, nine cases were brought to the icsid before 25 July 2012,49 and other six cases were brought after that date.50 To this date only three cases has been decided. The first award 45

46 47

48

49

50

Alleged violations of sovereign rights (Nicaragua v. Colombia); Delimitation of continental shelf beyond 200 nautical miles (Nicaragua v. Colombia), Preliminary Objections, Judgments of 17 March 2016. At para. 42. With regard to Bolivia, whose denunciation took effect on 3 November 2007, besides the eti Euro Telecom case quoted in note 41, see see also Pan American Energy v. Bolivia (icsid ARB/10/08), registered on 12 April 2010, on the basis of the 1998 US-Bolivia bit (in force from 2001 for ten years, and with 10 years of survival clause), which was discontinued on request of the Claimant, Order by the Tribunal 24 February 2015. With regard to Ecuador, whose denunciation took effect 7 January 2010, see Corporacion Quiport v. Ecuador (icsid ARB/09/23) registered 30 December 2009, and discontinued on request of the Claimant, Order by the Tribunal 11 November 2011. Saint-Gobain Performance Plastics Europe v. Venezuela, icsid ARB/12/13 (Sachs Pres., Brower, Bottini); Valle Verde S.Financiera s.l. v.Venezuela, icsid ARB/12/18 (Barros Bourrie Pres., Ferrari, Vinuesa); Rusoro Mining v. Venezuela, icsid AF/12/5 (Fernandez Armesto Pres., Orrego Vicuna, Simma); Blue Bank International and Trust v. Venezuela, icsid ARB/12/20 ( Soederlund Pres., Bermann, Malintoppi); Fabrica des Vidrios Los Andes, icsid ARB/12/21 ( Shin Pres., Fortier, Douglas); Venoklim Holding bv v. Venezuela, icsid ARB/12/22, Award 3 April 2015 (Derains Pres., Gomez-Pinzon, Oreamuno); Tenaris and Talta v. Venezuela, icsid ARB/12/23 (Fernandez Armesto Pres., Gomez-Pinzon, Stern); Transban Investment v. Venezuela, icsid ARB/12/24 (Tomka Pres., Caron, Torres Bernandez). The case Ternium s.a. v. Venezuela, icsid ARB/12/19, was discontinued on request of the Claimant before the constitution of the Tribunal. Valores Mundiales v. Venezuela (icsid arb 13/11) (Zuleta Pres., Grigera Naon, Derains); Anglo-American plc v. Venezuela, icsid arb af /14/1 (Derains Pres., Tawil, Vinuesa);

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was ­rendered on 3 April 2015 in the case Venoklim Holding v. Venezuela. The Tribunal found that it had no jurisdiction because Venoklim lacked the qualification of international investor under Article 22 of the Venezuelan Ley de inversiones. Interestingly, however, the Tribunal dismissed the Venezuelan objections to jurisdiction ratione temporis.51 Relying on the authoritative opinion of Schreuer, Venezuela had maintained that pending the six months notice period no new request for arbitration could be advanced. A subsidiary argument was that the Tribunal should consider as the relevant date not that of the request but that of the registration by the icsid Secretariat, which in the case at hand had occurred three weeks after the lapse of the six months. The second case is Rusoro Mining v. Venezuela decided on 22 August 2016. The jurisdictional issue presented by the case was a relatively easy one. Rusoro Mining is a ­Canadian national, and at the time of the request for arbitration Canada was not yet a party to icsid, so that only the icsid Additional Facility was available. In this case Venezuela raised only the objection that the request had been registered by the icsid Secretariat a week after the lapse of the six months period, but as the previous Venoklim Tribunal, also this Tribunal solved the question by ‘unhesitantingly’ (sic) siding with the Claimant.52 The most recent decision on jurisdiction is Tenaris and Talta v. Venezuela of 21 December 2016, again decided in favour of the Claimant. While it is by now clear that for all claims presented pending the six months period notice of denunciation the icsid Tribunals should not have any difficulty to affirm their jurisdiction, a similar solution can also be expected by all tribunals dealing with successive claims, to the extent that the respective bits provide for the availability of the icsid Additional Facility.53 A problem could possibly arise if Venezuela in the meanwhile should decide to denounce the bit, as it did with regard to the bit with the Netherlands in November 2008. However, it is interesting to note that in the Venoklim case Venezuela abstained to raise the issue of the denunciation of the bit, apparently holding the view

51 52 53

Highbury International v. Venezuela, icsid ARB/ 14/10 (Fernandez-Armesto Pres., Orrego Vicuna, Stern); Luis Garcia Armas v. Venezuela, icsid AF/16/01 (Nunes Pinto Pres., Gomez-Pinzon, Torres Bernardez); Afroinsumos Ibero-Americano v. Venezuela, icsid ARB/16/23 (Zuleta Pres., Grigera-Naon, Bottini); Saint Patrick Properties Corp. v. Venezuela, icsid ARB/16/40, Tribunal not yet constituted. Venoklim v. Venezuela, cit., para. 47 et seq. Rusoro Mining v. Venezuela, cit., para. 261. This is the case for 24 of the 26 bits concluded by Venezuela, the only exceptions being the bit with Germany and that one with Chile, see S. Ripinsky, ‘Venezuela’s Withdrawal from icsid: What It Does an Does Not Achieve’, Investment Treaty News (13 April 2012).

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that the sunset clause contained in that treaty was applicable. It is to this issue that we now turn our attention. IV.2 Coherently with the their purpose, most bits provide for the maintenance of the treaty’s legal effects for 5 to 20 years after its termination, or even for the whole time span of the investment. Nevertheless a question could arise ­whether the presence of a survival clause would also prevent denunciation with immediate effect when the unilateral termination is based on a rule of general international law, such as for example a fundamental change of circumstances.54 In all cases concerning infra-EU bits arbitral tribunals have consistently held the position that the accession to a treaty such as the eu Treaty does not extinguish the previous bit under Article 59 vclt (termination of a treaty implied by the conclusion of a later treaty related to the same subject matter). In the first such case, Eastern Sugar v. Czech Republic of 2007, the Tribunal went further and expressly affirmed that in any case a termination under Article 59 would not extinguish the sunset clause contained therein. It is remarkable that the Tribunal did not give any explanation, despite the fact that it apparently aimed at making a statement of principle. Actually the Tribunal could have easily solved the jurisdictional issue by simply pointing at the fact that the dispute had arisen before the accession of the Czech Republic to the eu and therefore it would have remained unaffected by the later termination of the bit.55 Neither did the subsequent Tribunals tackle the specific question of the sunset clauses, contenting themselves in holding that the accession to the eu had not terminated the previous bits.56 While it seems fair to assume 54

J. Harrison, ‘The Life and Death of the bits: Legal Issues Concerning Survival Clauses and the Termination of Investment Treaties,’ 13 Journal of World Investment and Trade (2012), 928, at 940. 55 See Eastern Sugar bv v. Czech Republic (uncitral, scc 088/2004), Partial Award 27 March 2007 (Karrer Pres., Volterra, Gaillard), in which the Tribunal, after having found that the Czech-Dutch bit and the eu Treaty were not incompatible and that the latter had not superseded the previous treaty, at para. 175 affirmed without any further reasoning: ‘The Arbitral Tribunal can only reject the Czech Republic’s argument that the implied termination of the bit through accession also terminated the continuing effect expressly guaranteed by Article 13, para. 3 of the Dutch-Czech bit.’ Only in the following paragraphs 176–177 the Tribunal noted the anteriority of the dispute. 56 See Binder v. Czech Republic (uncitral), Award on Jurisdiction 6 June 2007 (Danelius Pres, Creutzig, Gaillard) in which the Tribunal at para. 62 took notice of Article 13, para. 3 of the German-Czech bit. In the subsequent awards the issue of a possible survival of a sunset clause in case of termination of the bit according to Article 59 was not even

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that a unilateral withdrawal from a treaty under Article 56 vclt does not impinge on a sunset clause, more difficult to tackle is the hypothesis of Article 54 (b) vclt, that is in case of a mutual termination of the bit. IV.3 The question is whether survival clauses may survive even a mutual termination. Some Model bits could be interpreted as going in this direction, but much depends on the underlying general rule one presupposes as being existent.57 In reality Article 54 (b) vclt is silent on the point and Article 70, para. 1 vclt does not settle the matter either. The latter Article states that ‘unless the treaty otherwise provides or the parties otherwise agree, the termination of a treaty under its provisions or in accordance with the present Convention (a) releases the parties from any obligation further to perform the treaty; (b) does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination.’ For some authors an explicit reference by the parties of the treaty would be necessary for the purpose of abolishing the effects of a sunset clause.58 In my view the issue should rather focus on whether the provisions of the treaty have been executed or not.59 This is not to be intended as a generic reference

57 58 59

­mentioned, see Eureko b.v./Achmea b.v. v. Slovak Republic (uncitral, pca 2008–13), Decision on Jurisdiction, Arbitrability and Suspension 26 October 2010 (Lowe Pres., van den Berg, Veeder) at para 265 et seq.; Jan Oostergetel and Thedora Laurentius v. Slovak Republic (uncitral), Decision on Jurisdiction 30 April 2010, (Kaufmann-Kohler Pres., Wladimiroff, Trapl), at para. 72 et seq.; euram v. Slovak Republic (uncitral, pca 2010– 17), Award on Jurisdiction 22 October 2012 (Greenwood Pres., Stern, Petsche), at para. 155 et seq; Micula v. Romania, (icsid ARB705/20), Final Award 11 December 2013 (Levy Pres., Alexandrov, Abi-Saab), at para. 318 et seq. See C. Binder, ‘A Treaty Law Perspective on Intra-EU bits,’ in 17 Journal of World Investment and Trade (2016), 964 at 977 in note. See C. Binder, ‘A Treaty Law Perspective on Intra-EU bits,’ cit., at 978. A distinction between ‘executed provisions’ and ‘executory provisions’ was made by special rapporteur Fitzmaurice, see The Law and Procedure of the International Court of Justice (2003), Vol. i, at 403, taking up previous writings by Mc Nair, see A. McNair, ‘La terminaison et la dissolution des traités,’ 22 (ii) Recueil des Cours de l’ Académie de Droit International de la Haye 1928, 463, at 496–497. The distinction was not readily perspicuous and was not taken up by the ilc in Article 70, although the basic distinction between past instantaneous obligations and already executed continuing obligations on the one side and future obligations and not yet executed continuing obligations on the other side was retained in Article 70. For the first kind of obligations the termination of the treaty displays no retroactive effect, while the second kind of obligations are terminated with immediate effect. See H. Ascensio, Commentary to Article 70-Convention of 1969,’ in

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to ‘vested rights’ or ‘acquired rights’ of the individuals, but as rights actually exercised. As the ilc said in its Commentary of 1966: ‘by the words “any right, obligation or legal situation of the parties created through the execution of the treaty,” the Commission wished to make it clear that paragraph l(b) relates only to the right, obligation or legal situation of the States parties to the treaties created through the execution, and is not in any way concerned with the question of the “vested interests” of individuals.’60 Furthermore, while Article 70, para. 1 (b) vclt establishes a presumption that a State’s responsibility for a breach of a bit will continue after the termination of the treaty, nothing prevents the state parties from mutually terminating the bit with retroactive application, including absolving responsibility for past breaches.61 The only exception would be in the case that the individual had already accepted the offer of arbitration contained in the bit and consequently initiated an arbitration, in which case the Tribunal would be competent on the ground of perpetuatio jurisdictionis.62 The point is that while the direct applicability of the bits, at least as commonly interpreted by arbitral tribunals, has had as a consequence the recognition of the conferral of rights to the investors, these remain derivative in nature and can be disposed of at any time by the mutual consent of the state parties.63 Some authors have proposed an analogical application of Article 37, para. 2 vclt, which provides for irrevocable rights for a third state, if that was the intention of the parties,64 but the analogy is misplaced.

60 61 62

63

64

O. Corten, P. Klein (eds.), The Vienna Convention on the Law of Treaties – A Commentary (2011), 1585, at 1592, para. 13. Yearbook of the ilc 1966, Vol. ii, Part 1, at 265. See T. Voon, A. Mitchell, J. Munro, ‘Parting Ways: The Impact of Mutual Termination of Investement Treaties on Investor Rights’, 29 icsid Review (2014), 451, at 463. See however T. Voon, A. Mitchell, ‘Denunciation, Termination and Survival: The Interplay of Treaty Law an International Investment Law’, 31 icsid Review (2016), 413, at 433, who seem not to exclude the possibility that the parties, upon mutual termination of the treaty, may decide the fate of disputes that had already commenced. However, in a previous article, the same authors had excluded such option, wirth the argument that it would go counter the principles of bona fide an fairness, see T. Voon, A. Mitchell, J. Munro, ‘Parting Ways’, cit., at 465. See C. Binder, ‘A Treaty Law Perspective on Intra-EU bits,’ cit., at 981; T. Voon, A. Mitchell, ‘Denunciation, Termination and Survival’, cit., at 430. On the direct/derivative debate of investors rights see Z. Douglas ‘The Hybrid Foundations of Investment Treaty Arbitration,’ 74 British yb International Law (2003), 182; Z. Douglas, The international law of investment claims (2009), at 10 et seq. See J. Harrison, ‘The Life and Death of the bits,’ cit, at 943 et seq.

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In the first place it is highly doubtful that Article 37, para. 2 vclt could constitute a bar to the operation of Article 54 (b). The ilc never made such a link, and on the contrary in its commentary to Article 54 (b) it stressed the point that ‘it is always possible for all the parties to agree together to put an end to a treaty.’65 In the second place, an analogical extension of the scope of Article 37, para. 2 to individual rights is unwarranted not only as a matter of principle, but as a matter of practical logic.66 Individuals are not required to give their consent to the rights which are conferred to them, nor do they do so: they simply make use of such rights. The conceptual framework therefore is not that of third party rights, but that of acquired rights. Only to the extent that the individuals exercised the rights conferred to them and in particular that one of initiating an arbitration, the argument could be made that the parties will to terminate the treaty should remain without effect with regard to those rights.67 Rather than to third party rights, some authors have suggested to refer to such general principles as estoppel, abuse of rights or bona fide,68 but here too it is difficult to see which impact they could have in a case of mutual termination, unless in some extraordinary and case specific circumstances. V

Conclusions

The survey of the cases shows, with few notable exceptions, how closely arbitral tribunals follow the solutions dictated by an orthodox, sometimes even too restrictive, reading of the relevant rules of treaty law concerning jurisdictional issues. This cautious approach is to be greeted as a proof of the awareness of arbitrators not to lose sight of the sources of their competence, which finally repose on the continuing consent of states.

65 66

67

68

Yearbook of the ilc 1966, Vol. ii Part 1, at 249. The third party beneficiary approach is advanced also by M. Paparinskis, ‘Analogies and Other Regimes of International Law,’ in Z. Douglas et al. (eds.), The Foundations of International Investment Law (2014), at 81, but with many caveats, which greatly reduce the scope and the strength of the argument. See also F. Lavopa, L. Barreiros, M.V. Bruno, ‘How to Kill a bit and not Die Trying: Legal and Political Challenges of Denouncing or Renegotiating Bilateral Investment Treaties,’ 16 Journal of International Economic Law (2013), 869, at 888 et seq. On the limits of the impact of acquired rights on mutual termination see T. Voon, A. Mitchell, J. Munro ‘Parting Ways’, cit, at 468 et seq. with further bibliography; C. Binder, ‘A Treaty Law Perspective on Intra-EU bits,’ at 978 et seq. See T. Voon, A. Mitchell, ‘Denunciation, Termination and Survival’, cit., at 422.

Chapter 7

Jurisdiction and Admissibility in International Investment Law August Reinisch* The distinction between jurisdictional and admissibility issues in investment arbitration is becoming more and more relevant. This results from an emerging jurisprudence emphasizing that a tribunal that lacks jurisdiction will have to dismiss a case brought before it, while it has discretion whether to dismiss a claim for reasons of inadmissibility, in particular, because the latter defects may be curable. Conceptually this difference is rooted in the idea that ‘jurisdiction is an attribute of a tribunal and not of a claim, whereas admissibility is an attribute of a claim but not of a tribunal,’1 with the consequence that ‘[t]he concept of ‘admissibility’ refers to the varied reasons that a tribunal, although it has jurisdiction, may decline to hear a case or a claim.’2 This chapter will briefly outline a number of issues in regard to which investment tribunals have disagreed whether to qualify them as jurisdictional or admissibilityrelated. These range from so-called waiting periods, requiring investors to first seek amiable dispute settlement or to litigate before national courts, to express or implied ‘in accordance with host state law’-clauses. This chapter argues that the outcomes of many of these cases, which often appear to be inconsistent, may be explained on the basis of different conceptual qualifications as jurisdictional or admissibility-related issues.

I

Introduction

Apparently, not everyone shares the belief of the Pan American tribunal that ‘there is no need to go into the possible – and somewhat controversial –

* This chapter has been previously published in The Law and Practice of International Courts and Tribunals (2017) 16(1) 21–43. 1 Hochtief Aktiengesellschaft v. Argentine Republic, icsid Case No ARB/07/31, Decision on ­Jurisdiction, 24 October 2011, para. 90. 2 Erhas Dis Ticaret Ltd. Sti, et al. v. Republic of Turkmenistan, pca Case No. 2013–27, Separate Declaration of Stanimir A. Alexandrov dated 19 May 2015, para. 5.

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_008

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­distinction between jurisdiction and admissibility.’3 Rather, it seems that these are important distinctions in investment arbitration. The distinction has apparently also triggered a wave of academic interest and spurred quite some debate among scholars and practitioners.4 A rough consensus seems to emerge that if a particular arbitral forum is challenged it is likely to be jurisdictional, whereas if the claim itself is challenged it is likely to relate to admissibility. As Veijo Heiskanen put it: A typical way to explain this distinction is to say that, whereas jurisdiction is about the scope of the tribunal’s authority, based on the State’s consent to arbitrate, admissibility is about the particular claim raised by the claimant. Stated differently, while jurisdiction is about the scope of the State’s consent to arbitrate, admissibility is about whether the claim,

3 Pan American Energy llc and bp Argentina Exploration Company v. Argentine Republic, ­i csid Case No ARB/03/13, Decision on Preliminary Objections, 27 July 2006, para. 54. 4 See Zachary Douglas, The International Law of Investment Claims (2009), 134–150; Veijo Heiskanen, ‘Ménage à trois? Jurisdiction, Admissibility and Competence in Investment Treaty Arbitration,’ 29(1) icsid Review (2014), 231; Ian Laird, ‘A Distinction without a Difference? An Examination of the Concepts of Admissibility and Jurisdiction in Salini v. Jordan and Methanex v. usa,’ in T. Weiler (ed.), International Investment law and Arbitration: Leading Cases from icsid, nafta and Customary International Law (2005), 201; Lars Markert, Streitschlichtungsklauseln in Investitionsschutzabkommen: Zur Notwendigkeit der Differenzierung von jurisdiction und admissibility in Investitionsschiedsverfahren (2010); Jan Paulsson, ‘Jurisdiction and Admissibility,’ in G. Aksen, K.-H. Böckstiegel, P.M. Patocchi and A.M. Whitesell (eds.), Global Reflections on International Law, Commerce and Dispute Resolution, Liber Amicorum in honour of Robert Briner (2005), 601; Friedrich Rosenfeld, ‘Arbitral Praeliminaria – ­Reflections on the Distinction between Admissibility and Jurisdiction after bg v. Argentina,’ 29(1) Leiden Journal of International Law (2016), 137; Christoph Schreuer, ‘Consent to Arbitration,’ in P. Muchlinski, F. Ortino and C. Schreuer (eds.), The Oxford Handbook of International I­ nvestment Law (2008), 830; Yuval Shany, ‘Jurisdiction and Admissibility,’ in C.P. Romano, K.J. Alter and C. Avgerou, The Oxford Handbook of International Adjudication (2013), 779; Andrea Marco Steingruber, ‘Some remarks on Veijo Heiskanen’s Note – Ménage à trois? Jurisdiction, Admissibility and Competence in Investment Treaty Arbitration,’ 29(3) icsid Review (2014), 675; Michael Waibel, ‘Investment Arbitration: Jurisdiction and Admissibility,’ in M. Bungenberg, J. Griebel, S. Hobe and A. Reinisch (eds.), International Investment Law. A Handbook (2015), 1212; David A.R. Williams, ‘Jurisdiction and Admissibility,’ in P. Muchlinski, F. Ortino and C. Schreuer (eds.), The Oxford Handbook of International Investment Law (2008), 919; ­Gerold Zeiler, ‘Jurisdiction, Competence, and the Admissibility of Claims in icsid Arbitration Proceedings,’ in C. Binder, U. Kriebaum, A. Reinisch and S. Wittich (eds.), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (2009), 76.

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as presented, can or should be resolved by an international tribunal, which otherwise has found jurisdiction.5 II

The Distinction’s Relevance

In spite of some voices to the contrary,6 it is generally well established that jurisdiction and admissibility are distinct concepts,7 and that the distinction is an important one. As the tribunal in Abaclat v. Argentina confirmed, it is ‘not only appropriate but also necessary to distinguish issues relating to icsid’s ­jurisdiction stricto sensu and admissibility issues.’8 A broad consensus has formed that while jurisdiction goes to the power of an investment tribunal to decide a case, admissibility relates to the claims put forward in investment arbitration proceedings.9 Beyond the often-quoted view of Keith Highet in Waste Management that ‘lack of jurisdiction refers to the jurisdiction of the Tribunal and inadmissibility refers to the admissibility of the case,’10 it seems that investment tribunals concur with other international courts and tribunals that jurisdiction, the power to adjudicate, is fundamentally based on the consent of the parties, while admissibility relates to the quality of a claim.11 As the icsid tribunal in Hochtief v. Argentina put it: 5 Heiskanen, supra note 4, at 237. 6 Enron Creditors Recovery Corporation ( formerly Enron Corporation) and Ponderosa Assets, l.p. v. Argentine Republic, icsid Case No. ARB/01/3, Decision on Jurisdiction, 14 January 2004, para. 33 (‘[T]he distinction between admissibility and jurisdiction does not appear to be necessary in the context of the icsid Convention, which deals only with jurisdiction and competence.’). 7 Marion Unglaube and Reinhard Unglaube v. Republic of Costa Rica, icsid Case Nos. ARB/08/1 and ARB/09/20, Award, 16 May 2012, para. 293 (‘objections on the ground of admissibility are different in nature from objections to jurisdiction.’). 8 Abaclat and Others v. Argentine Republic, icsid Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, 4 August 2011, para. 248. 9 Waste Management, Inc. v. United Mexican States, icsid Case No. ARB(AF)/00/3, Decision on Jurisdiction, Dissenting Opinion of Keith Highet, 8 May 2000, para. 58 (‘Jurisdiction is the power of the tribunal to hear the case; admissibility is whether the case itself is defective – whether it is appropriate for the tribunal to hear it.’). 10 Ibid., para. 57. 11 See Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), Judgment, i.c.j. Reports 2008, p. 177, para. 48 (noting that ‘in determining the scope of the consent expressed by one of the parties, the Court pronounces on its jurisdiction, not on the admissibility of the application.’); See also the observation by Judge Fitzmaurice in Case concerning the Northern Cameroons (Cameroon v. United Kingdom), Preliminary Objections, Judgment of 2 December 1963, i.c.j. Reports 1963, p. 97, 101 (Separate Opinion

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Jurisdiction is an attribute of a tribunal and not of a claim, whereas admissibility is an attribute of a claim but not of a tribunal.12 Or as formulated by the tribunal in Micula v. Romania, […] an objection to jurisdiction goes to the ability of a tribunal to hear a case while an objection to admissibility aims at the claim itself and presupposes that the tribunal has jurisdiction.13 The Micula tribunal further emphasized the crucial distinction that any ­element qualifying the consent of the parties will relate to the jurisdiction, ­whereas admissibility objections are often of a temporal nature.14 In this sense jurisdiction is a primary issue which has to be affirmed first; and admissibility may be a secondary issue that only arises once a tribunal has affirmed its jurisdiction. This notion was also clearly expressed by one of the arbitrators in Erhas Dis Ticaret Ltd. Sti v. Turkmenistan saying that ‘[t]he concept of ‘admissibility’ refers to the varied reasons that a tribunal, although it has jurisdiction, may decline to hear a case or a claim.’15 Similarly, the tribunal in Bureau Veritas v. Paraguay referred to the ‘issue of admissibility’ as the question ‘whether in the event that the Tribunal does have jurisdiction, the claim is admissible.’16

12 13 14

15 16

of Judge Sir Gerald Fitzmaurice), that questions of jurisdiction ‘basically related to the competence of the Court to act at all,’ whereas questions of admissibility ‘relate to the nature of the claim, or to particular circumstances connected with it.’ Hochtief Aktiengesellschaft v. Argentina, supra note 1, para. 90. Micula v. Romania, icsid Case No. ARB/05/20, Decision on Jurisdiction and Admissibility, 24 September 2008, para. 63. Ibid., para. 64 (‘The Tribunal is of the opinion that when an objection relates to a requirement contained in the text on which consent is based, it remains a jurisdictional ­objection. If such a requirement is not satisfied, the Tribunal may not examine the case at all for lack of jurisdiction. By contrast, an objection relating to admissibility will not necessarily bar the Tribunal from examining the case if the reasons for the inadmissibility of the claim are capable of being removed and are indeed removed at a subsequent stage. In other words, consent is a prerequisite for the jurisdiction of the Tribunal.’). Erhas v. Turkmenistan, Separate Declaration of Stanimir A. Alexandrov, supra note 2, para. 5. Bureau Veritas, Inspection, Valuation, Assessment and Control, bivac b.v. v. Republic of Paraguay, icsid Case No. ARB/07/9, Decision on Objections to Jurisdiction, 29 May 2009, para. 132 (‘The issues that divide the parties [...] relate to two issues: the issue of jurisdiction, namely whether the Tribunal has jurisdiction over [Claimant’s] claims under [the relevant bit]; and the issue of admissibility, namely whether in the event that the ­Tribunal does have jurisdiction, the claim is admissible.’).

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In the end, an investment tribunal may dismiss a case because it finds that it lacks jurisdiction or because it considers that the claims are inadmissible. Thus, the valid question arises whether this distinction is not merely an artificial or, at best, academic, one that satisfies the observer’s predilection for categorizing phenomena that may indeed be distinguishable, but in the end irrelevant. Therefore, it is crucial to determine whether the distinction entails different consequences before pursuing the matter further. Some, like Jan Paulsson, have emphasized a crucial distinction, insofar as, in general, decisions on jurisdiction will be reviewable, whereas findings of admissibility will not.17 A tribunal’s determination whether it possesses jurisdiction or not can be regularly challenged before ad hoc committees in the case of icsid proceedings or before national courts in the case of non-ICSID arbitrations. A tribunal’s finding that a specific claim is admissible or inadmissible, however, will lead to a set-aside by domestic courts or to an annulment by an icsid ad hoc committee only if it can be shown that the decision openly failed to state sufficient reasons or was arrived at after a serious departure from a fundamental rule of procedure. Also for that reason, it seems important to determine whether an issue is one pertaining to jurisdiction or to admissibility, and it has also been argued that reviewing bodies should have the power to reclassify a tribunal’s categorization in order to avoid its attempted ‘immunization’ from review.18 With that in mind, it makes sense to embark further on the quest to identify the distinction between jurisdiction and admissibility in more detail. One further word of caution seems appropriate in view of additional complications that one may be faced in the context of icsid arbitration. Since the icsid Convention does not use the term ‘admissibility’ at all and employs the concept of the ‘competence’ of icsid tribunals in addition to that of the ­‘jurisdiction’ of the Centre,19 the distinction between jurisdiction and admissibility is even less clear in the case of icsid arbitration. In fact, the absence of such wording has led some tribunals to consider the distinction not relevant 17 Paulsson, supra note 4, at 601; Douglas, supra note 4, at 146. 18 In favour of such a power, Waibel, supra note 4, at 1277 (‘[A]nnulment committees have the option of reclassifying an issue that the tribunal considered concerned admissibility as one affecting the tribunal’s jurisdiction, and provided the requirements under the Convention for annulment are met, annul the award on that basis.’). 19 See Article 41 Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 18 March 1965, 575 unts 159 (‘(1) The Tribunal shall be the judge of its own competence. (2) Any objection by a party to the dispute that that dispute is not within the jurisdiction of the Centre, or for other reasons is not within the competence of the Tribunal, shall be considered by the Tribunal which shall determine whether to deal with it as a preliminary question or to join it to the merits of the dispute.’ [emphasis added]).

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for icsid arbitration,20 whereas others have considered the reference to ‘other reasons’ that may lead a tribunal to conclude that a dispute is not within its competence to include issues of admissibility.21 .

20

21

See, e.g., cms Gas Transmission Company v. The Argentine Republic, icsid Case No. ARB/01/8, Decision on Jurisdiction, 17 July 2003, para. 41 (‘The distinction between admissibility and jurisdiction does not appear quite appropriate in the context of icsid as the Convention deals only with jurisdiction and competence.’); see also Ambiente Ufficio S.p.A. and others v. Argentine Republic ( formerly Giordano Alpi and others v. Argentine Republic), icsid Case No. ARB/08/9, Decision on Jurisdiction and Admissibility, 8 February 2013, para. 572 (‘The present Tribunal is called to interpret and apply the Argentina-Italy bit which does not differentiate between ‘mandatory’ and ‘non-mandatory’ requirements as well as ‘jurisdictional,’ ‘admissibility’ or ‘procedural’ prerequisites. Nor is such distinction contained in the icsid Convention or the Arbitration Rules. Hence, as far as the applicable law is concerned, there is no a priori reason for the Tribunal to enter into the doctrinal intricacies of these distinctions and the related academic and judicial discourse.’). See, e.g., The Rompetrol Group n.v. v. Romania, icsid Case No. ARB/06/3, Decision on Respondent’s Preliminary Objections on Jurisdiction and Admissibility, 18 April 2008, para. 112 (‘[C]laimant and Respondent crossed swords in the course of the pleadings over whether an icsid tribunal has the power to entertain an ‘admissibility’ objection at all. For the Claimant, no such power is conferred by the Convention, nor is there any trace of its being introduced by the terms of the bit. Without going into the opposing arguments at greater length, the Tribunal observes merely that Rule 41(1) of the icsid Arbitration Rules, although headed ‘Objections to Jurisdiction,’ is so drafted as to cover (but without further definition or explanation), not merely objections that a dispute is not within the jurisdiction of the Centre, but also any objection that the dispute is ‘for other reasons, not within the competence of the Tribunal.’ […] In the circumstances – and in the absence of any indication of what the precise intention was behind the wording of Rule 41(1) – it seemed to the Tribunal only realistic to interpret the Rule with a degree of flexibility, one that would allow the respondent party some discretion over the formulation of reasoned objections, but on the basis that that party would bear the onus not merely of showing that its objection was well founded in substance, but also of demonstrating that, if the objection did not go to jurisdiction as such, it was nevertheless within the terms of the Convention and the Rules. In adopting this approach, the Tribunal drew on the Rules of the icj, which, in their current version, provide both for objections to jurisdiction and for any ‘other objection the decision upon which is requested before any further proceedings on the merits.’ With this in mind, the Minutes of the Tribunal’s First Session record that ‘It was understood that the scope of the preliminary phase will not be confined to a narrow interpretation of the term ‘jurisdiction’ on its own but will cover all of the objections of a preliminary character that have been included in the Respondent’s Answer, whether they go strictly to jurisdiction, or to questions of competence, or admissibility. The Tribunal expects the Claimant to respond to these objections and to address them in its subsequent written argument.’), cf. Zeiler, supra note 4, at 90–91.

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a) The Notion of Jurisdiction in icsid and Non-ICSID Proceedings Because the icsid Convention has an explicit provision on ‘jurisdiction’ a rather voluminous jurisprudence on its specific requirements has evolved. ­According to Article 25 of the Convention the subject-matter jurisdiction ­(ratione materiae) of the Centre is limited to ‘legal disputes’ arising ‘directly’ out of an ‘investment,’ whereas its personal jurisdiction (ratione personae) extends over ‘Contracting States (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State),’ on the one hand, and ‘nationals of another Contracting State,’ on the other.22 The additional requirement of Article 25 that the parties to a dispute must have given their ‘consent in writing’ has been broadly interpreted by icsid tribunals to include, in addition to icsid clauses in direct investor-host State agreements, ‘offers’ in national legislation or in bilateral investment treaties (bits) which can be ‘accepted’ by investors through instituting arbitral proceedings.23 Today in the vast majority of icsid cases jurisdiction is founded upon bits – without any direct contractual agreement between the parties, so-called ‘arbitration without privity.’24 Nevertheless, each of these jurisdictional elements has given rise to numerous facets of possible interpretation. The allegedly purposefully undefined25 term ‘investment’ has triggered an unending debate about the inherent elements of what might constitute an investment and whether this also required a contribution to the development of the host State, still characterized as a crucial jurisdictional requirement by the 2006 annulment committee decision 22

23

24 25

Article 25 icsid Convention, supra note 19 (‘The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.’). See with regard to bits: aapl v. Sri Lanka, icsid Case No. ARB/87/3, Award, 27 June 1990, 4 icsid Reports 246; Fedax v. Venezuela, icsid Case No. ARB/96/3, icsid Decision on Jurisdiction, 11 July 1997, 37 ilm 1378 (1998); with regard to national legislation: spp v. Egypt, icsid Decision on Jurisdiction i, 27 November 1985, 3 icsid Reports (1995), 101, 112 and icsid Decision on Jurisdiction ii, 14 April 1988, 3 icsid Reports (1995), 131, 140; Tradex v. Albania, icsid Decision on Jurisdiction, 24 December 1996, 14 icsid Review (1999), 161, 187. See Jan Paulsson, ‘Arbitration without Privity,’ 10 icsid Review (1995), 232. Report of the World Bank Executive Directors, para. 27, reprinted in: 1 icsid Reports (1993), 23, 28 (‘[…] no attempt was made to define the term ‘investment’ given the essential requirement of consent by the parties [...].’).

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in Mitchell v. Congo26 and by the 2007 icsid award in Malaysian Historical Salvors v. Malaysia,27 or whether under a re-interpreted Salini-light-test,28 only ‘the three objective criteria of (i) a contribution, (ii) a certain duration, and (iii) an element of risk are necessary elements of an investment.’29 As regards the ratione personae jurisdiction of icsid, the language of Article 25 clearly excludes dual nationals from instituting icsid proceedings against one of their home States, even if their other nationality is the effective one.30 The nationality of a legal person is determined by domestic law which often merely requires incorporation or a seat (siège social) of a company. The icsid Convention does not require any genuine economic link between a legal person and its country of incorporation or seat. This was stressed by the majority in the 2004 Tokios Tokelés case,31 which held that only the establishment under the laws of an icsid Contracting Party was determinative for the question of 26

Patrick Mitchell v. Democratic Republic of the Congo, icsid Case No. ARB/99/7, Decision on the Application for Annulment of the Award, 1 November 2006. 27 Malaysian Historical Salvors, sdn, bhd v. Malaysia, icsid Case No. ARB/05/10, Award on Jurisdiction, 17 May 2007. 28 In the aftermath of Salini Costruttori S.p.A. and Italstrade S.p.A. v. Kingdom of Morocco, icsid Case No. ARB/00/4, Decision on Jurisdiction, 23 July 2001, para. 52 (‘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 (cf. commentary by E. Gaillard, cited above, p. 292). 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.’), investment tribunals have focused on: a certain duration, a certain regularity of profit and return, the assumption of risk, a substantial commitment, and a significant contribution to the host State’s development. See Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The icsid Convention: A Commentary (2nd ed., 2009), 128 et seq. 29 Electrabel s.a. v. Republic of Hungary, icsid Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 5.43; Similar, Deutsche Bank ag v. Democratic Socialist Republic of Sri Lanka, icsid Case No. ARB/09/2, Award, 31 October 2012, para. 306; gea Group Aktiengesellschaft v. Ukraine, icsid Case No. ARB/08/16, Award, 31 March 2011, para. 151; kt Asia Investment Group b.v. v. Republic of Kazakhstan, icsid Case No. ARB/09/8, Award, 17 October 2013, para. 173; see already Saba Fakes v. Republic of Turkey, icsid Case No. ARB/07/20, Award, 14 July 2010, para. 110 (‘[…] that the criteria of (i) a contribution, (ii) a certain duration, and (iii) an element of risk, are both necessary and sufficient to define an investment within the framework of the icsid Convention.’). 30 See Champion Trading Company v. Arab Republic of Egypt, icsid Case No. ARB/02/9, ­Decision on Jurisdiction, 21 October 2003. 31 Tokios Tokelés v. Ukraine, icsid Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004.

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the claimant’s nationality even where the claimant company was owned and controlled by nationals of the Respondent State.32 But tribunals have tried to limit attempts of forum shopping whereby claimants seek to access dispute settlement options through favourable bits by disallowing corporate claimants to put forward investment claims on the basis of a nationality they have acquired after a dispute has arisen.33 They have not taken issue, however, with prudent ex ante nationality planning even for dispute settlement purposes.34 With regard to legal persons, though, Article 25(2)(b) of the icsid ­Convention appears less formalistic. It provides that ‘national of another ­Contracting  State’  means ‘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 purpose of this Convention.’35 The above discussed elements are those under Article 25 of the icsid Convention which in cases brought under the icsid Rules have to be fulfilled in addition to the jurisdictional requirements stemming from the applicable bit or iia in which the consent of the parties to the jurisdiction is expressed. Thus, icsid tribunals are referring to a so-called double-barrelled test,36 according 32

Ibid., para. 81 (‘The origin of the capital used to acquire these assets is not relevant to the question of jurisdiction under the Convention. In our view, the icsid Convention contains no inchoate requirement that the investment at issue in a dispute have an international character in which the origin of the capital is decisive.’). 33 See Phoenix Action, Ltd. v. Czech Republic, icsid Case No. ARB/06/5, Award , 15 April 2009, paras. 94–95; Mobil Corporation and others v. Bolivarian Republic of Venezuela, icsid Case No. ARB/07/27, Decision on Jurisdiction , 10 June 2010, paras. 204–205; Pac Rim Cayman llc v. Republic of El Salvador, icsid Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections, 1 June 2012, para. 2.52 et seq. 34 Aguas del Tunari s.a. v. Republic of Bolivia, icsid Case No. ARB/02/3, Decision on Jurisdiction, 21 October 2005, para. 330 (‘It is not uncommon in practice, and – absent a particular limitation – not illegal to locate one’s operations in a jurisdiction perceived to provide a beneficial regulatory and legal environment in terms, for example, of taxation or the substantive law of the jurisdiction, including the availability of a bit.’). 35 Article 25(2)(b) icsid Convention, supra note 19. 36 See Ceskoslovenska obchodni banka v. Slovak Republic, icsid Case No. ARB/97/4, Decision on Objections to Jurisdiction, 24 May 1999, para. 68 (‘A two-fold test must therefore be applied in determining whether this Tribunal has the competence to consider the merits of the claim: whether the dispute arises out of an investment within the meaning of the Convention and, if so, whether the dispute relates to an investment as defined in

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to which an investment has to fall both under the investment definition of the applicable bit or iia as well as under the jurisprudentially developed notion of ‘investment’ under the icsid Convention. The same is true for other jurisdictional requirements, such as those relating to ratione personae, etc. This, of course, implies that in each case a tribunal will also have to ensure that the parties have consented to its jurisdiction in the applicable instrument. In nonICSID cases this will be the exclusive jurisdictional test. More generally, the jurisdiction of non-ICSID tribunals over treaty claims primarily depends upon the consent laid down in iias. b) Admissibility The icsid Convention and most iias do not use the term ‘admissibility’ at all. Thus, no clear guidance stems from them. Instead, tribunals have resorted to the concept of ‘admissibility’ when declining to exercise their jurisdiction and refraining from deciding particular claims. This concept has been particularly relied upon when claims were considered not to be ‘ripe’ yet, such as when local remedies were not exhausted or when time limitations or negotiation periods before submitting a claim have not been respected. Similarly, admissibility arguments were used in cases of denial of benefits provisions, in the case of shareholder claims or an alleged lack of beneficial ownership of an investment claim. Further, ‘admissibility’ has played a role in situations where corruption or another illegality occurred in the making of an investment. These examples are not meant as an exhaustive list of admissibility issues. Instead of a comprehensive overview, the following discussion of cases where the relevance of the distinction between jurisdiction and admissibility has played a role will also shed light on the notion of admissibility. the Parties’ consent to icsid arbitration, in their reference to the bit and the pertinent definitions contained in Article 1 of the bit.’); Mytilineos Holdings sa v. 1. The State Union of Serbia & Montenegro, 2. Republic of Serbia, uncitral, Partial Award on Jurisdiction, 8 September 2006, para. 112 (‘It is the established practice of icsid tribunals to assess whether a specific transaction qualifies as an ‘investment’ under the icsid Convention, independently of the definition of investment in a bit or other applicable investment instrument, in order to fulfill the ratione materiae prerequisite of Article 25 of the Convention.’); Malaysian Historical Salvors v. Malaysia, supra note 27, para. 55 (‘Under the double-barrelled test, a finding that the Contract satisfied the definition of ‘investment’ under the bit would not be sufficient for this Tribunal to assume jurisdiction, if the Contract failed to satisfy the criterion of an ‘investment’ within the meaning of Article 25.’); Phoenix v. Czech Republic, supra note 33, at para. 74 (‘It is common ground between the parties that the jurisdiction of the Tribunal is contingent upon the fulfillment of the jurisdictional requirements of both the icsid Convention and the relevant bit. […].’).

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Examples Where the Distinction between Jurisdiction and Admissibility has been Relevant

Over the last couple of years, investment arbitration has provided a number of examples where the distinction between jurisdiction and admissibility has proven relevant; both icsid and non-ICSID tribunals have generally adhered to the distinction and relied on it, contributing to the investment law jurisprudence in this field. Most important in practice seem to have been issues concerning the temporal element of jurisdiction/admissibility, i.e. whether certain procedural steps before an investment arbitration can be instituted, are to be characterized as jurisdictional or as admissibility requirements. Waiting Periods in Dispute Settlement Clauses: A Jurisdictional or Admissibility Requirement? A classic example of disagreement about the jurisdictional or admissibility nature of an often invoked host-State defence is the question how so-called waiting periods should be qualified. They are by now a standard feature in many dispute settlement clauses of bits and other iias,37 and usually require investors to engage in consultations/negotiations before instituting investment ­arbitration. Respondent States regularly argue that non-compliance with such a requirement would deprive tribunals of their jurisdiction. In the past, however, most investment tribunals treated ‘consultation periods as directory and procedural rather than as mandatory and jurisdictional in nature,’38 i.e. they considered compliance with such provisions as questions of ‘admissibility’ or procedure and not of ‘jurisdiction.’39 a)

37

38 39

See also Christoph Schreuer, ‘Travelling the bit Route: Of Waiting Periods, Umbrella Clauses and Forks in the Road,’ 5 The Journal of World Investment and Trade (2004), 231; Christoph Schreuer, ‘Consent to Arbitration,’ in P. Muchlinski, F. Ortino and C. Schreuer (eds.), The Oxford Handbook of International Investment Law (2008), 830, 846. sgs Société Générale de Surveillance s.a. v. Islamic Republic of Pakistan, icsid Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, para. 184. Some of these tribunals even expressly found that non-compliance with a waiting period would not deprive them of their jurisdiction. For instance, in Ronald S. Lauder v. The Czech Republic, uncitral, Final Award, 3 September 2001, para. 190, the tribunal was of the opinion that insistence on their expiry before the commencement of arbitration proceedings would ‘amount to an unnecessary, overly formalistic approach which would not serve to protect any legitimate interests of the Parties.’ And in Bayindir Insaat Turizm Ticaret Ve Sanayi as v. Pakistan, icsid Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005, para. 100, the tribunal supplied the efficiency rationale by stating that it ‘would simply mean that [an investor] would have to file a new request for ­arbitration

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This initial jurisprudence gave way, however, to more restrictive approaches stressing the jurisdictional character of all conditions precedent to the possibility of investment arbitration, thus qualifying also waiting periods as ­jurisdictional in nature and not as mere issues of admissibility. This ­turn-around became evident in 2010, when two icsid cases departed from the hitherto established case-law. The tribunals in Burlington40 and Murphy41 found that non-compliance with a waiting period would not be merely a procedural or admissibility problem, but constituted a jurisdictional defect.42 and restart the whole proceeding, which would be to no-one’s advantage.’ This perspective was also shared by the icsid tribunal in Western nis Enterprise Fund v. Ukraine, icsid Case No ARB/04/2, Order, 16 March 2006, paras. 6–7, which – as a result of the non-­ compliance with a waiting period – suspended its proceedings in order to permit the parties to reach an amicable settlement. Additionally, the tribunal found that the fact that ‘[p]roper notice of the present claim was not given’ did not ‘in and of itself, affect the Tribunal’s jurisdiction.’ 40 Burlington Resources Inc. v. Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (PetroEcuador), icsid Case No. ARB/08/5, Decision on Jurisdiction, 2 June 2010. 41 Murphy Exploration and Prod. Co. Int’l v. Republic of Ecuador, icsid Case No. ARB/08/4, Award on Jurisdiction, 15 December 2010. 42 In Murphy v. Ecuador, the majority expressly disagreed with the previously accepted distinction between procedural consultation periods and mandatory jurisdictional requirements as identified in sgs v. Pakistan. The Murphy tribunal, supra note 41, at para. 149, found that ‘[…] the requirement that the parties should seek to resolve their dispute through consultation and negotiation for a six-month period does not constitute, as Claimant and some arbitral tribunals have stated, ‘a procedural rule’ or a ‘directory and procedural’ rule which can or cannot be satisfied by the concerned party. To the contrary, it constitutes a fundamental requirement that Claimant must comply with, compulsorily, before submitting a request for arbitration under the icsid rules.’ In 2011, the icsid tribunal in Impreglio S.p.A. v. Argentine Republic, icsid Case No. ARB/07/17, Award, 21 June 2011, at para. 90, followed this trend by holding that a waiting period was a jurisdictional requirement that had to be fulfilled before an icsid tribunal could assert jurisdiction. Similarly, the tribunal in Daimler Financial Services ag v. The Argentine Republic, icsid Case No. ARB/05/1, Decision on Jurisdiction, 22 August 2012, at para. 194, dismissed the claims of a German investor for lack of jurisdiction because they were brought without complying with a domestic litigation requirement (‘Since the 18-month domestic courts provision constitutes a treaty-based pre-condition to the Host State’s consent to arbitrate, it cannot be bypassed or otherwise waived by the Tribunal as a mere “procedural” or “admissibility-related” matter.’). Also in Kılıç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan, icsid Case No. ARB/10/1, Award, 2 July 2013, at para. 6.3.15, an icsid tribunal’s majority stressed the importance of local litigation requirements in order to access investment arbitration and concluded that they were ‘[…] to be treated as conditions, and that the

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More recently, this approach was reaffirmed in Dede v. Romania,43 in which an icsid tribunal dismissed a claim due to the investors’ failure to comply with a domestic litigation requirement in the applicable bit which led the tribunal to conclude that ‘[a]t the present time, the Tribunal does not possess jurisdiction to hear the claims presented by Claimants in these proceedings.’44 However, some tribunals still remain hesitant to adhere to a clear distinction between jurisdiction and admissibility when characterizing waiting p ­ eriods. For instance, the 2013 decision in Philip Morris v. Uruguay45 rejected the argument that Philip Morris had failed to await a 6-month period for amicable settlement and an 18-month domestic litigation requirement. The tribunal held that the waiting periods had in fact been complied with and that ‘the core objective of this requirement, to give local courts the opportunity to consider the disputed matters, has been met. To require Claimants to start over and refile this arbitration now that their 18 months have been met would be a waste of time and resources.’46 The Philip Morris tribunal, however, expressly avoided a precise characterization of the domestic litigation requirement as either one of admissibility or of jurisdiction.47 The Implications of the Jurisdiction/Admissibility Distinction on the mfn Debate The mfn debate triggered by the Maffezini48 decision continues to trouble investment tribunals.49 icsid (and non-icsid) panels remain split on whether

b)

43 44 45

46 47

48 49

failure to meet those conditions [went] to the existence of the Tribunal’s jurisdiction, and [were] not to be treated as issues of admissibility.’ Ömer Dede and Serdar Elhüseyni v. Romania, icsid Case No. ARB/10/22, Award, 5 September 2013. Ibid., para. 274. Philip Morris Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Oriental Republic of Uruguay, icsid Case No. ARB/10/7 (formerly ftr Holding sa, Philip Morris Products s.a. and Abal Hermanos s.a. v. Oriental Republic of Uruguay), Decision on Jurisdiction, 2 July 2013. Ibid., para. 135. Ibid., para. 142 (‘In the present case, the Tribunal does not consider it necessary to characterize the 18-month domestic litigation requirement as pertaining to jurisdiction or to admissibility. Even if that requirement were considered as pertaining to admissibility, its compulsory character would be evident. This conclusion is confirmed by the object and purpose of the requirement in question which is aimed at offering the host State the opportunity to redress the violations of the bit alleged by the investor. […]’). Emilio Agustín Maffezini v. Kingdom of Spain, icsid Case No. ARB/97/7, Decision on Jurisdiction, 25 January 2000. See Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties – Standards of Treatment (2009), 205–224; unctad, Most Favoured-Nation Treatment, unctad

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mfn clauses, regularly included in bits and other investment instruments, are limited to substantive treatment or whether they can be invoked to import ‘procedural’ benefits under other iias. In regard to these ‘procedural’ benefits, it appears crucial to determine whether they can be distinguished along the jurisdiction/admissibility dichotomy. The 2012 icsid decision on jurisdiction in Teinver v. Argentina50 nicely summarized the existing case law with reference to an unctad study51 along these lines: unctad identifies the following cases as fitting within the ‘admissibility’ category: Maffezini, Siemens, Gas Natural, National Grid, Suez InterAguas, awg Group and Wintershall. To these cases, the Tribunal would add Impregilo, Hochtief, Abaclat, ics, and Daimler. In each of these cases, the claimant was required under the respective terms of its bit’s dispute settlement provisions to seek a remedy before a local court of the host State for a period of time before bringing arbitration. Each of the claimants in these cases sought to use its bit’s mfn clause in order to ‘borrow’ a dispute settlement provision from another treaty that did not contain a local court requirement as a precondition of arbitration. With the exceptions of Wintershall, ics and Daimler the claimants’ arguments were successful. unctad identifies the following cases as fitting within the ‘scope of jurisdiction’ category: Salini, Plama, Telenor, Berschader, and Tza Yap Shum. In these cases, the claimants sought to use the mfn clause to expand the scope of jurisdiction under their applicable bit. In Salini, the claimant attempted to use the mfn clause to bring in contract claims before an icsid tribunal. In Plama, the claimant attempted to use the mfn clause to broaden the scope of jurisdiction beyond that of its applicable bit, which only provided jurisdiction to resolve issues of compensation in the case of an expropriation. Similarly, in Telenor and Berschader, the

50 51

Series on International Investment Agreements ii, UNCTAD/DIAE/IA/2010/1, 24 January 2011; ilc, Final report – Study Group on the Most-Favoured-Nation clause (4 May-5 June and 6 July-7 August 2015), un Doc A/CN.4/L.852; Zachary Douglas, ‘The mfn Clause in Investment Arbitration: Treaty Interpretation Off the Rails,’ 2(1) Journal of International Dispute Settlement (2011), 97; Pavel Sturma, ‘Goodbye, Maffezini?: On the Recent Developments of Most-Favoured-Nation Clause Interpretation in International Investment Law,’ 15 The Law and Practice of International Courts and Tribunals (2016), 81. Teinver s.a., Transportes de Cercanías s.a. and Autobuses Urbanos del Sur s.a. v. The Argentine Republic, icsid Case No. ARB/09/1, Decision on Jurisdiction, 21 December 2012. unctad, Most Favoured-Nation Treatment, unctad Series on International Investment Agreements ii, UNCTAD/DIAE/IA/2010/1, 24 January 2011.

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c­ laimants attempted to use the mfn clause to broaden jurisdiction beyond their bits, which only provided jurisdiction over expropriation claims. In each of these cases, the claimant’s attempts to rely on the mfn clause were rejected by the tribunals. unctad identified only one case within this category, RosInvestCo, that departed from this trend.52 The Teinver tribunal clearly endorsed the Maffezini approach by qualifying the waiting periods in the Argentina-Spain bit 1991 as mere ‘admissibility’ requirements which could be avoided through reliance on the bit’s mfn clause since the ‘broad “all matters” language of the Article iv(2) mfn clause [was] unambiguously inclusive.’53 The tribunal stressed that ‘[…] Claimants have not requested that the Tribunal apply the mfn clause in order to replace the Treaty’s provisions on the arbitral forum or rules. Nor have Claimants requested that the Tribunal apply the mfn clause in order to broaden the scope of legal issues that may be adjudicated through arbitration. Instead, they have argued that the procedural requirements of Article x, namely the negotiation and ­local court requirements, may be bypassed in favor of the more procedurally limited dispute settlement provisions of the Australia-Argentina bit.’54 That the Maffezini debate is still alive and controversial is aptly illustrated by the decision of the icsid tribunal in Daimler v. Argentina which clearly rejected the Teinver approach55 and specifically endorsed the Wintershall approach.56 It held that ‘[a]ll BIT-based dispute resolution provisions […] are 52 53 54 55

56

Teinver v. Argentina, supra note 50, paras. 170–171 (footnotes omitted). Ibid., para. 186. Ibid., para. 182. Daimler Financial Services ag v. The Argentine Republic, icsid Case No. ARB/05/1, Decision on Jurisdiction, 22 August 2012, para. 189 (‘What is in dispute is not a mere waiting period but a requirement that the dispute be submitted to the domestic Argentine courts for potential judicial resolution for a period of at least 18 months.’). The Daimler tribunal, ibid., at para. 193, found that the applicable bit ‘describes its dispute resolution process in mandatory and necessarily sequential language’ and that it sets forth ‘the conditions under which an investor-State tribunal may exercise jurisdiction with the contracting state parties’ consent, much in the same way in which legislative acts confer jurisdiction upon domestic courts.’ This finding is followed by approvingly citing the Wintershall tribunal which stated: ‘That an investor could choose at will to omit the second step [the 18-month domestic courts requirement] is simply not provided for nor even envisaged by the Argentina-Germany bit – because (Argentina’s) the Host State’s ‘consent’ (standing offer) is premised on there being first submitted to the courts of competent jurisdiction in the Host State the entire dispute for resolution in the local courts.’ Wintershall Aktiengesellschaft v. Argentine Republic, icsid Case No. ARB/04/14, Award, 8 December 2008, para. 160.

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by their very nature jurisdictional.’57 On this basis, it found that ‘[s]ince the 18-month d­ omestic courts provision constitutes a treaty-based pre-condition to the Host State’s consent to arbitrate, it cannot be bypassed or otherwise waived by the Tribunal as a mere “procedural” or “admissibility-related” matter.’58 These cases clearly demonstrate that the jurisdiction/admissibility distinction is of immediate relevance for the reach of an mfn clause. c) The Jurisdiction over or Admissibility of Mass Claims before icsid Also some of the recent bondholder cases, particularly those against Argentina, dealt with an interesting admissibility issue, i.e. the question whether investment arbitration could provide an adequate forum for a mass arbitration. In that sense, one of the most interesting and innovative aspects of the decision on jurisdiction in the Abaclat case59 was the question whether icsid arbitration should be available for bondholder claims against the defaulting Argentina. In Abaclat, the tribunal’s majority first found that the claimants’ economic interests in various Argentine bonds constituted an ‘investment’ for the purposes of Article 25 icsid Convention and thus upheld its jurisdiction.60 Then the tribunal also held that Argentina’s consent, as expressed in its bit with Italy, covered ‘mass claims’ and sovereign debt restructuring61 – two findings vigorously disputed by the dissenting arbitrator62 and cast in terms of admissibility and jurisdictional arguments. The majority rejected Argentina’s ‘jurisdictional’ argument that permitting an icsid tribunal to rule on sovereign debt restructuring would be counterproductive and go against current efforts to modernize the foreign debt ­restructuring process. Instead, the Abaclat tribunal found that icsid Contracting Parties had the possibility under Article 25(4) icsid Convention to notify icsid of the class or classes of disputes that it would want to exclude from the jurisdiction of the Centre. Since no such notification had been made by Argentina, the tribunal found no reason to exempt foreign debt restructuring situations from the scope of application of the bit.63 As to the adaptability of the icsid arbitration for mass claims, the tribunal distinguished the present case where the number and identity of ­claimants 57 58 59 60 61 62 63

Daimler Financial Services ag v. The Argentine Republic, supra note 55, para. 193. Ibid., para. 194. Abaclat v. Argentina, supra note 8. Ibid., para. 387. Ibid., para. 467. Ibid., Dissenting Opinion of Professor Georges Abi-Saab, 28 October 2011. Abaclat v. Argentina, supra note 8, para. 479.

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were established from us style class actions where a representative of an open class instituted proceedings. The tribunal saw no ‘jurisdictional’ impediment to conducting a mass arbitration involving roughly 60.000 bondholders. Since it regarded the issue ‘whether or not the present mass proceedings could be conducted in the form of collective proceedings’ as a question relating to the ­modalities and implementation of icsid proceedings it treated it as an issue of ‘admissibility and not of consent.’64 The ‘Salini light’-test used by the tribunal in Abaclat to assess the ‘investment’ requirement of bonds was also followed by the majority of the icsid tribunal in the second Argentinean bondholder case, in Ambiente Ufficio v. A ­ rgentina.65 The tribunal considered it unnecessary, though, to distinguish precisely between the concepts of jurisdiction and admissibility.66 In the most recent bondholders’ case, the award in Poštová banka v. Hellenic Republic67 the issue of admissibility of mass claims was not reached because the tribunal denied its jurisdiction over claims by a Cypriot holding company and a Slovak bank, which held Greek government bonds, finding that these assets were not protected under the two respective bits. The tribunal came to this conclusion, which departs from the earlier rulings in Abaclat v. Argentina68 and Ambiente Ufficio v. Argentina,69 as a result of a particularly narrow interpretation of the broad asset-based investment definition in the applicable bits.

64 65 66

67 68 69

Ibid., para. 515. Ambiente Ufficio v. Argentina, supra note 20. Ibid., para. 574 (‘The Tribunal would consider that the mission with which it has been entrusted by the Parties does not call it, in the first place, to give an answer as to whether the legal issues at stake are to be classified as questions of jurisdiction or admissibility. The Tribunal’s mandate – and it is to this mandate that the title of the present Decision refers – rather requires it to take note of and thoroughly examine all legal claims made by the Parties under the labels of both jurisdiction and admissibility and to decide whether these are justified in law or not.’). On the ‘admissibility’ of multiple claimants the tribunal held that ‘the absence of a specific mass claim regime in icsid does not at all prevent the Tribunal from dealing with the present dispute as what it is, i.e. a multi-party proceeding including 119 or 90 Claimants respectively, which is governed by the procedural provisions of the icsid Convention and Rules and other applicable norms of international law.’ ibid., para. 165. Poštová banka, a.s. and Istrokapital se v. The Hellenic Republic, icsid Case No. ARB/13/8, Award, 9 April 2015. Abaclat v. Argentina, supra note 8. Ambiente Ufficio v. Argentina, supra note 20.

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The Distinction Applied to ‘In accordance with host State law’-Clauses In a number of cases, the question has come up whether so-called ‘in accordance with host State law’-clauses stipulate jurisdictional requirements, issues of admissibility or relate to the merits of a case.70 Express ‘in accordance with host State law’-clauses are generally considered to constitute jurisdictional limitations imposed by the parties; whereas a potential implicit legality requirement is rather seen as an admissibility issue.71 For instance, in the Inceysa and the Fraport ii case, the tribunals’ findings of lack of ‘jurisdiction’ were based on violations of express ‘in accordance with host State law’-clauses. The tribunal in Inceysa v. El Salvador concluded that because the investment ‘was made in a manner that was clearly illegal […] the disputes arising from it are not subject to the jurisdiction of the Centre’ and declared itself ‘incompetent to hear the dispute before it.’72 In Fraport v. Philippines ii,73 the tribunal equally found that it lacked jurisdiction because the Claimant had violated an ‘in accordance with host State law’-clause which in the tribunal’s view shaped and conditioned the host State’s consent to arbitration.74

d)

70 See Inceysa Vallisoletana s.l. v. Republic of El Salvador, icsid Case No. ARB/03/26, Award, 2 August 2006, para. 190; Fraport ag Frankfurt Airport Services Worldwide v. Philippines, icsid Case No. ARB/03/25, Award, 16 August 2007, para. 401; Ioannis Kardassopoulus v. Georgia, icsid Case No. ARB/05/18, Decision on Jurisdiction, 6 July 2007, para. 182. 71 Rahim Moloo and Alex Khachaturian, ‘The Compliance with the Law Requirement in ­International Investment Law,’ 34(6) Fordham International Law Journal (2011), 1473, 1499–1501; Stephan Schill, ‘Illegal Investments in Investment Treaty Arbitration,’ 11(2) The Law & Practice of International Courts and Tribunals (2012), 281, 288–291; Thomas ­Obersteiner, ‘“In Accordance with Domestic Law” Clauses: How International Investment Tribunals Deal with Allegations of Unlawful Conduct of Investors,’ 31(2) Journal of International Arbitration (2014), 265, 274. 72 Inceysa Vallisoletana sl v. Republic of El Salvador, icsid Case No ARB/03/26, Award, 2 August 2006, para 257 (‘[…] because Inceysa’s investment was made in a manner that was clearly illegal, it is not included in the scope of consent expressed by Spain and the Republic of El Salvador in the bit and, consequently, the disputes arising from it are not subject to the jurisdiction of the Centre.’). 73 Fraport ag Frankfurt Airport Services Worldwide v. Republic of the Philippines (Fraport ii), icsid Case No. ARB/11/12, Award, 10 December 2014; Already in 2007, a majority in the earlier Fraport ag Frankfurt Airport Services Worldwide v. Philippines, icsid Case No. ARB/03/25, Award, 16 August 2007, dismissed the case for similar reasons. However, that award was annulled on 23 December 2010. 74 Fraport ii, supra note 73, at para. 467 (‘Based on the foregoing analysis and after due and thorough consideration of the Parties’ arguments and the evidence on the record, the

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In Plama v. Bulgaria,75 however, an icsid tribunal noted the absence of an express ‘in accordance with host State law’-clause.76 Already in its jurisdictional decision it had held that an alleged misrepresentation on the part of the Claimant that may have constituted a violation of host State law did not deprive it of its jurisdiction.77 Nevertheless, in its award it found ‘that the substantive protections of the ect cannot apply to investments that are made contrary to law.’78 This deprivation of substantive protection can be interpreted as an ‘inadmissibility’ of the claims. One should note, however, that sometimes also tribunals which regarded the legality requirement to be an implicit one considered it to form a jurisdictional issue. This is aptly illustrated by the decision in Phoenix v. Czech Republic.79 When discussing the elements of an investment in the sense of Article 25 icsid Convention, the Phoenix tribunal added that what had to be taken into account also comprised whether assets were ‘invested in accordance with the laws of the host State’ and ‘in good faith.’80 It ultimately dismissed the case for lack of jurisdiction because it considered that the specific investment had not been made in good faith.

75 76

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Tribunal finds that Fraport violated the adl when making its Initial Investment, the latter being consequently excluded as investment protected by the bit because of its illegality. The illegality of the investment at the time it is made goes to the root of the host State’s offer of arbitration under the treaty. As it has been held, ‘States cannot be deemed to offer access to the icsid dispute settlement mechanism to investments made in violation of their own law.’ Lack of jurisdiction is founded in this case on the absence of consent to arbitration by the State for failure to satisfy an essential condition of its offer of this method of dispute settlement.’ [footnote omitted]). Plama Consortium Limited v. Republic of Bulgaria, icsid Case No. ARB/03/24, Award, 27 August 2008. Ibid., para. 138 (‘Unlike a number of Bilateral Investment Treaties, the ect does not contain a provision requiring the conformity of the Investment with a particular law. This does not mean, however, that the protections provided for by the ect cover all kinds of investments, including those contrary to domestic or international law. [ ... ].’). Ibid., para. 112 (‘Contrary to Respondent’s argument, the matter of the alleged misrepresentation by Claimant does not pertain to the Tribunal’s j­urisdiction: that was already decided in the Decision on Jurisdiction (paras. 126–130 and 228–230). […].’). Ibid., para. 139. Phoenix v. Czech Republic, supra note 33. Ibid., para. 114 (‘1 – a contribution in money or other assets; 2 – a certain duration; 3 – an element of risk; 4 – an operation made in order to develop an economic activity in the host State; 5 – assets invested in accordance with the laws of the host State; 6 – assets invested bona fide.’).

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e) The Distinction Applied to the Corruption Defence The distinction between jurisdiction and admissibility may also be exemplified with a defence that is often raised, both as a jurisdictional one and as one of inadmissibility of a claim, the allegation that an investment had been procured by corruption. When one reviews the case-law so far, the corruption defence may be argued and lead to a lack of jurisdiction of a tribunal and it may lead to the inadmissibility as a result of the clean hands-doctrine or for other similar reasons. One very plausible rationalization of the difference seems to be that corruption entails a lack of jurisdiction where the legality of an investment was an express requirement of the parties’ consent to jurisdiction, as in the case of ‘in accordance with host State law’-clauses found in many bits; whereas corruption will lead to the inadmissibility of claims where there is no such jurisdictional limitation. Thus, in Metal-Tech81 the tribunal concluded that as a result of corruption it ‘lack[ed] jurisdiction over Metal-Tech’s treaty claims as well as over MetalTech’s claims based on Uzbek law.’82 Having explained that because of the Claimant’s violation of the bit’s ‘in accordance with host State law’-clause, ‘the dispute did not meet the consent requirement’ of the icsid Convention,83 the Metal-Tech tribunal continued to say that it could thus dispense with the admissibility objection based on international public policy.84 In World Duty Free, though, a contract claim where no ‘in accordance with host State law’-clause could affect the consent to the tribunal’s jurisdiction, the tribunal did not resort to lack of jurisdiction. Rather, it effectively dismissed the claims as inadmissible when it held that ‘claims based on contracts of

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Metal-Tech Ltd. v. Uzbekistan, icsid Case No. ARB/10/3, Award, 4 October 2013. Ibid., para. 389. Ibid., para. 373 (‘Uzbekistan’s consent to icsid arbitration, as expressed in Article 8(1) of the bit, is restricted to disputes ‘concerning an investment.’ Article 1(1) of the bit defines investments to mean only investments implemented in compliance with local law. ­Accordingly, the present dispute does not come within the reach of Article 8(1) and is not covered by Uzbekistan’s consent. This means that this dispute does not meet the consent requirement set in Article 25(1) of the icsid Convention. Accordingly, failing consent by the host state under the bit and the icsid Convention, this Tribunal lacks jurisdiction over this dispute.’). Ibid., para. 374 (‘Having reached the conclusion that it lacks jurisdiction over the treaty claims, the Tribunal can dispense with the analysis of the Respondent’s other objections to jurisdiction and admissibility in respect of these claims, including the objections based on the violation of international public policy and transnational principles as well as on fraud.’).

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c­ orruption or on contracts obtained by corruption cannot be upheld by this Arbitral Tribunal.’85 Although not express, it appears that also the Plama tribunal’s finding that ‘a contract obtained by wrongful means (fraudulent misrepresentation) should not be enforced by a tribunal’86 can best be explained as implying the inadmissibility of claims based on such unlawfully procured contracts. IV

Some Critical Concluding Remarks about Jurisdiction and Admissibility

There remains an underlying uneasiness with the elusive concepts of jurisdiction and admissibility. In particular, for lawyers trained under civil law ­traditions the uncertainty surrounding the concepts of jurisdiction and admissibility in the common law may contribute to this ‘reserved’ attitude. Even in the field of jurisdiction proper this may have to do with different legal cultures. For a civil law trained jurist, the jurisdiction of courts is usually an easily ascertainable task because the applicable codes of (civil) procedure will clearly identify the appropriate court. Many civil law countries follow the old Roman law maxim actor sequitur forum rei,87 that the plaintiff must follow the forum of the thing or defendant involved, nowadays also enshrined in the European Brussels Regulation (Brussels Ia).88 This contrasts with the much more complex approach to jurisdiction, for instance in the us, which allows the exercise of adjudicatory jurisdiction even over foreigners with few contacts to the forum State as long as some minimum contacts as defined in us Supreme Court

85

World Duty Free Company Limited v. Republic of Kenya, icsid Case No ARB/00/7, Award, 4 October 2006, para. 157. 86 Plama Consortium Limited v. Republic of Bulgaria, icsid Case No. ARB/03/24, Award, 27 August 2008, para. 143. 87 See Codex Justinianus 3.13.2 (Diocletianus, Maximianus) and 3.19.3 (Gratianus, Valentinianus, Theodosius) (‘Actor rei forum, sive in rem sive in personam sit actio, sequitur. sed et in locis, in quibus res propter quas contenditur constitutae sunt, iubemus in rem actionem adversus possidentem moveri.’); Arthur T. von Mehren, Adjudicatory Authority in Private International Law: A Comparative Study (2007), 153–158; Jochen Schröder, Internationale Zuständigkeit (1971), 229–232. 88 Article 4(1), Regulation (eu) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (oj L 351, 20.12.2012, p. 1) (‘[P]ersons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that Member State.’).

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jurisprudence developed in International Shoe89 are complied with. Similarly, the concept of forum non-conveniens,90 pursuant to which common law courts may refrain from exercising their jurisdiction if they consider other courts to be in a better position to adjudicate a specific case, is often hard to comprehend for civil lawyers who may think that the failure of a court to exercise its jurisdiction can amount to a denial of justice. Transposed to the investment arbitration field, it would seem that similar concerns could be raised with regard to the non-exercise of jurisdiction as a result of regarding specific claims ‘inadmissible.’ Would that not deprive claimants of their right to have access to justice in a situation where an investment tribunal has ‘jurisdiction’? Of course, asking such a question would touch on the preliminary issue whether not only domestic courts, but also international investment tribunals have to provide access to justice in the first place. But even if it were only a policy maxim that investment tribunals should dispense justice by adjudicating investment claims that fall under their jurisdiction, the difficult problems start if one accepts that there may be justifiable grounds in order to protect the integrity of the investment arbitration system which can require a tribunal to hold some claims inadmissible. What are the precise criteria for such admissibility decisions? How can one clearly define and predict the requirements and conditions necessary to make a claim admissible? It is the task of tribunals and scholars alike to contribute to more clarity in this field of the law, and it is hoped that the future will do so. 89 90

International Shoe Co. v. State of Washington, 326 u.s. 310 (1945). See Edward L. Barrett Jr., ‘The Doctrine of Forum Non Conveniens,’ 35 California Law Review (1947), 380; Gulf Oil Corp. v. Gilbert, 330 u.s. 501 (1947), at 507 (‘The principle of forum non conveniens is simply that a court may resist imposition upon its jurisdiction even when jurisdiction is authorized by the letter of a general venue statute.’); Sistem Muhendislik Insaat Sanayi ve Ticaret a.s. v. Kyrgyz Republic, 2012 on sc 4351, 25 July 2012, para. 43(i) (‘The doctrine of forum non conveniens is based on a recognition that a common law court retains a residual power to decline to exercise its jurisdiction in appropriate, but limited, circumstances in order to assure fairness to the parties and the efficient resolution of the dispute. The court can stay proceedings brought before it on the basis of the doctrine’).

Chapter 8

Multiple Proceedings Christoph Schreuer Investment arbitration proceedings are, by definition, unconnected to one another. The lack of coordination yields unfortunate results when proceedings hinge on closely connected (or even identical) claims, factual patterns, challenged measures, parties. To attenuate the risks of double recovery, contradictory findings and abusive tactics, some form of coordination would be in order. The chapter surveys the solutions, both ­procedural and treaty-based, to manage parallel or successive arbitration claims and to regulate the interplay between related disputes brought before investment tribunals and domestic judges. The resulting scenario is one in which fragmentation is largely bridled, but never completely prevented. Even using these streamlining devices, investment tribunals must inevitably reckon with the existence of competing fora and the inherent possibility that prior or parallel disputes have some bearing on the cases before them. Parties, in turn, must bear these ramifications in mind when they plan a litigation strategy.

Introduction The proliferation of proceedings is no peculiarity of investment arbitration. Other areas of international adjudication have also seen a steep increase of activities. The European Court of Human Rights, with over 100,000 pending cases is the most prominent example for this phenomenon. As set out below, investment arbitration carries its own problems and peculiarities also in this respect. Lawyers are accustomed to address related proceedings with the help of certain principles that are often expressed in Latin maxims such as ne bis in idem, lis pendens, res judicata and stare decisis. These general principles, however, are of limited usefulness when it comes to investment disputes. This is the consequence of the relatively uncoordinated nature of separate arbitration proceedings. There is no central authority to oversee and harmonize these proceedings. Tribunals apply a variety of legal sources, notably various treaties. In addition, there is a complex interaction between investment tribunals and domestic courts. This paper addresses four main themes: 1.

The authority of previous decisions dealing with similar or identical legal issues;

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Parallel proceedings involving the same respondent and often arising from the same set of facts; Successive arbitration proceedings; Related proceedings before arbitral tribunals and domestic courts. The Authority of Previous Decisions

One of the shortcomings of investment arbitration is the lack of consistency in arbitral practice.1 Not only are similar or identical treaty provisions in bits ­interpreted differently by different tribunals. Also, some questions of ­customary international law have not found a uniform answer. Examples for such discordant interpretations are the contradictory application of emergency clauses to the same set of facts,2 the meaning of umbrella clauses, whereby

1 See esp. G. Kaufmann-Kohler, Arbitral Precedent: Dream, Necessity or Excuse, 23 Arbitration International 357 (2007); A. Rigo Sureda, Precedent in Investment Treaty Arbitration, in: International Investment Law for the 21st Century 830 (C. Binder, U. Kriebaum, A. R ­ einisch, S. Wittich, eds., 2009); j.p. Commission, Precedent in Investment Treaty Arbitration, 24 ­Journal of ­International Arbitration 129 (2007); Tai-Heng Cheng, Precedent and Control in Investment Treaty Arbitration, 30 Fordham International Law Journal 1014 (2007); J. Paulsson, The Role of Precedent in Investment Arbitration, in: Arbitration under International Investment Agreements 699 (K. Yannaca-Small ed., 2010); V. König, Präzedenzwirkung internationaler Schiedssprüche (2013); w.m. Reisman, ‘Case Specific Mandates’ versus ‘Systemic Implications’: How Should Investment Tribunals Decide? 29 Arbitration International 131 (2013); A.  Bjorklund, Practical and legal avenues to make the substantive rules and disciplines of international investment agreements converge, in: Prospects in International Investment Law and Policy 175 (R. Echandi & P. Sauvé eds., 2013); Y. Banifatemi, Consistency in the interpretation of substantive investment rules: is it achievable?, loc. cit. p. 200; M. Ewing-Chow, ­Coherence, convergence and consistency in international investment law, loc. cit. p. 228; A. Reinisch, The challenge of fostering greater coherence in international investment law, loc. cit. p. 236; C. Schreuer, Coherence and consistency in international investment law, loc. cit. p. 391; R. ­Dolzer, Perspectives for investment arbitration: consistency as a policy goal?, loc. cit. p. 403. 2 cms v. Argentina, Award, 12 May 2005, paras. 332–378; cms v. Argentina, Decision on Annulment, 25 September 2007, paras. 101–150; LG&E v. Argentina, Decision on Liability, 3 October 2006, paras. 201–266; Enron v. Argentina, Award, 22 May 2007, paras. 322–342; Enron v. Argentina, Decision on Annulment, 30 July 2010, paras. 347–405; Sempra v. Argentina, Award, 28 September 2007, paras. 364–391; Sempra v. Argentina, Decision on Annulment, 29 June 2010, paras. 106–221; Continental Casualty v. Argentina, Award, 5 September 2008, paras. 160–236; Continental Casualty v. Argentina, Decision on Annulment, 16 September 2011, paras. 104–143.

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States promise to honour undertakings made by them3 as well as the applicability of mfn clauses to dispute settlement.4 Inconsistent interpretations are a consequence of the nature of arbitration. Each tribunal is constituted on an ad hoc basis. Just as individuals tend to disagree, it is inevitable that differently composed tribunals will disagree on some points. Even competent and impartial arbitrators may reach conflicting results. In addition, arbitration, more than other forms of litigation, is ­driven by the arguments presented by the parties which may differ from case to case. In commercial arbitration, diversity of outcomes does not constitute a m ­ ajor problem. Most awards remain unpublished and the settlement of the particular dispute is more important than the development of a consistent case law. By contrast, investment arbitration attracts much attention and discrepancies in the application of the law are widely discussed. Investment tribunals have emphasized on many occasions that previous decisions do not bind them.5 At the same time they have also stated that they will take due account of previous cases when making their own decisions. A frequently used formula puts the issue into the following terms: The Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration 3 sgs v. Philipines, Decision on Jurisdiction, 29 January 2004, 8 icsid Reports 518, paras. 125, 128; cms v. Argentina, Award, 12 May 2005, paras. 296–303; Eureko v. Poland, Partial Award, 19 August 2005, paras. 244–260; Noble Ventures v. Romania, Award, 12 October 2005, paras. 42–62; Siemens v. Argentina, Award, 6 February 2007, para. 206; sgs v. Pakistan, Decision on Jurisdiction, 6 August 2003, 8 icsid Reports 383 at paras. 163–173; Joy Mining v. Egypt, Award, 6 August 2004, para. 81; El Paso v. Argentina, Decision on Jurisdiction, 27 April 2006, paras. 66–86; Pan American Energy v. Argentina, Decision on Preliminary Objections, 27 July 2006, paras. 92–115. 4 Maffezini v. Spain, Decision on Jurisdiction, 25 January 2000, 5 icsid Reports 396, paras. 38– 64; Siemens v. Argentina, Decision on Jurisdiction, 3 August 2004, paras. 32–110; Gas Natural v. Argentina, Decision on Jurisdiction, 17 June 2005, paras. 24–31, 41–49; Suez, Sociedad General de Aguas de Barcelona s.a., and InterAguas Servicios Integrales del Agua s.a. v. Argentina, Decision on Jurisdiction, 16 May 2006, paras. 52–66; National Grid pcl v. Argentina, Decision on Jurisdiction, 20 June 2006, paras. 53–94; Suez, Sociedad General de Aguas de Barcelona s.a., and Vivendi Universal s.a. v. Argentina and awg Group Ltd. v. Argentina, ­Decision on ­Jurisdiction, 3 August 2006, paras. 52–68; Salini v. Jordan, Decision on Jurisdiction, 29 ­November 2004, para. 119; Plama v. Bulgaria, Decision on Jurisdiction, 8 February 2005, 44 ilm 721 (2005), paras. 183, 184, 223, 227; Telenor v. Hungary, Award, 13 September 2006, paras. 90–100. 5 For an extensive discussion see: aes Corp. v. Argentina, Decision on Jurisdiction, 26 April 2005 at paras. 17–33.

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to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.6 In practice, Tribunals frequently refer to and rely on earlier decisions but this has not always secured consistency. This has led to suggestions to establish institutionalised solutions designed to achieve uniformity. One such suggestion, made repeatedly, would be the creation of an appeals procedure.7 The idea has appeared in a number of documents,8 but has not, so far, been implemented in practice. In September 2015 the eu Commission presented a proposal for investor-State dispute settlement that bears all the hallmarks of an attempt to save investment arbitration in the face of an increasingly hostile atmosphere. That draft contains a detailed proposal for the creation of an appellate mechanism.9 6 Saipem v. Bangladesh, Decision on Jurisdiction, 21 March 2007, para. 67 footnotes omitted; Noble Energy v. Ecuador, Decision on Jurisdiction, 5 March 2008, para. 50; Duke Energy v. Ecuador, Award, 18 August 2008, para. 117; Bayindir v. Pakistan, Award, 27 August 2009, para. 145; Austrian Airlines v. Slovakia, Final Award, 9 October 2009, para. 84; Oostergetel v. Slovakia, Decision on Jurisdiction, 30 April 2010, para. 62; Fakes v. Turkey, Award, 14 July 2010, para. 96; Chemtura v. Canada, Award, 2 August 2010, para. 109; Bosh v. Ukraine, Award, 25 October 2012, para. 211; Burlington v. Ecuador, Decision on Liability, 14 December 2012, para. 187; Metal-Tech v. Uzbekistan, Award, 4 October 2013, para. 116; kt Asia v. Kazakhstan, Award, 17 October 2013, para. 83; Levy v. Peru, Award, 9 January 2015, para. 76. 7 See A. Reinisch, The Future of Investment Arbitration, in: International Investment Law for the 21st Century, p. 910 (C. Binder, U. Kriebaum, A. Reinisch, S. Wittich eds., 2009); A. Legum, Appellate mechanisms for Investment Arbitration: Worth a Second Look for the Trans-Pacific Partnership and the Proposed eu-us fta? in: Reshaping the Investor-State Dispute Settlement System, p. 437 (J.E. Kalicki, A. Joubin-Bret eds, 2015); E.Y. Park, Appellate Review in Investor-State Arbitration, loc. cit. p. 443; G. Bottini, Reform of the Investor-State Arbitration Regime: The Appeal Proposal, loc. cit. p. 455; J. Lee, Introduction of an Appellate Review Mechanism for International Investment Disputes: Expected Benefits and remaining Tasks, loc. cit. p. 474; K. Andelić, Why icsid Doesn’t Need an Appellate Procedure, and What to Do Instead, loc. cit., p. 496. 8 See, e.g. Article 28(10) of the United States Model bit of 2012. 9 The eu Commission’s draft text on investment protection for the ttip, of September 2015, in Article 10 provides for the establishment of an Appeal Tribunal. Under Article 29, the Appeal Tribunal would have the power to review an award for both errors of law and

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The establishment of an appeals procedure would not automatically lead to a more coherent case law. In particular, separate appeals mechanisms under different treaties are unlikely to have a unifying effect on the practice of tribunals and may actually lead to additional fragmentation. Any harmonizing effect would require an appeals body with wide competence that transcends individual treaties. An obvious obstacle to the establishment of an appeals procedure is ­Article 53(1) of the icsid Convention, which specifically excludes any form of appeal against an award.10 An amendment of the icsid Convention to allow for the introduction of an appeal is not a realistic option. Amendments r­ equire the acceptance by all States parties to the Convention, which is close to impossible.11 An alternative to an appeals procedure would be the introduction of a system of preliminary rulings.12 A mechanism to render preliminary rulings would not be in conflict with Article 53 of the icsid Convention. In addition, preliminary rulings are more economical than appeals. Rather than repair the damage after it has occurred, it is more sensible to address the problem of inconsistency through preventive action. The coherence of case law can be achieved more effectively through an interim procedure while the original proceedings are still pending. Under such a system a tribunal would suspend proceedings and request a ruling on a question of law from a body established for that purpose. 2

The Coordination of Closely Related Claims

Closely related claims typically relate to the same respondent State and concern identical or closely related facts. Duplicate or multiple proceedings may 10

11 12

errors of fact. In addition, it would have the power to apply the grounds for annulment listed in Article 52 of the icsid Convention. Article 53(1) of the icsid Convention provides in relevant part: ‘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.’ Article of the 66 icsid Convention. The idea has been put forward by G. Kaufmann-Kohler, Annulment of icsid Awards in Contract and Treaty Arbitrations: Are there Differences? in: Annulment of icsid Awards, p. 289 (E. Gaillard/Y. Banifatemi eds., 2004). See also G. Kaufmann-Kohler, In search of Transparency and Consistency: icsid Reform Proposal, tdm, vol. 2, No. 5, p.8 (2005). See also C. Schreuer, Preliminary Rulings in Investment Arbitration, in: Appeals Mechanism in International Investment Disputes, p. 207 (K.P. Sauvant ed., 2008).

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be the consequence of several factors. The most obvious situation involves parallel proceedings by otherwise unconnected investors who are affected by the same measure of the host State. A well-known example are the cases of Italian bondholders against Argentina. But smaller groups of affected investors are also not unheard of.13 Double or multiple proceedings may also arise from the standing of shareholders in investment arbitration.14 Shareholders, direct or indirect, may pursue claims under bits. Thus, different shareholders in the same investment may want to pursue claims. This includes, shareholders at different levels of the corporate chain. Both the investment’s immediate corporate owner and ­indirect investors who hold interests in the immediate owners may pursue their claims.15 This type of situation calls for coordination as well as the avoidance of double recovery. At times investors of different nationalities are affected making the streamlining of proceedings even more difficult.16 The undesirable consequences of a lack of coordination are well illustrated by the cme/Lauder cases against the Czech Republic. In these cases the immediate investor, a Netherlands registered company pursued arbitration under the bilateral investment treaty (bit) between the Netherlands and the Czech Republic.17 The ultimate owner Mr. Lauder pursued a parallel arbitration under the bit between the us and the Czech Republic.18 The outcome is wellknown: one tribunal found in favour of the investor while the other tribunal dismissed the claim. This pair of arbitrations is regarded as one of the more embarrassing episodes in the history of arbitration. Practice has developed a number of techniques to deal with parallel claims. The most spectacular example are the mass claims by multiple bondholders against Argentina. These claims by tens of thousands of claimants have been 13 14

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See e.g. Antoine Goetz and others v. Republic of Burundi, Award, 2 September 1998. S.A. Alexandrov, The ‘Baby Boom’ of Treaty-based Arbitrations and the Jurisdiction of icsid Tribunals: Shareholders as ‘Investors’ and Jurisdiction Ratione Temporis, 4 The Law and Practice of International Courts and Tribunals 19 (2005); C. Schreuer, Shareholder Protection in International Law, in: Common Values in International Law, Essays in Honour of Christian Tomuschat p. 601 (P.-M. Dupuy, B. Fassbender, M.N. Shaw, K.-P. Sommermann, eds., 2006). See e.g. Parkerings v. Lithuania, Award, 11 September 2007, paras. 250–254; Lemire v. Ukraine, Award, 28 March 2011, paras. 34–39; Paushok v. Mongolia, Award, 28 April 2011, paras. 201–204; Impregilo v. Argentina, Award, 21 June 2011, paras. 110–140, 238–246, 271. Suez et al. v. Argentina, Decision on Jurisdiction, 3 August 2006. cme v. The Czech Republic, Partial Award, 13 September 2001, Final Award, 14 March 2003. Lauder v. The Czech Republic, Award, 3 September 2001.

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bundled together into just three proceedings. All three proceedings were settled, but despite Argentina’s fierce resistance, the tribunals have determined, in principle, that mass proceedings of this kind are possible.19 Less spectacular are smaller groups of foreign investors such as Funnekotter et al. v. Zimbabwe,20 where 13 farmers of Netherlands nationality had lost their farms in Zimbabwe and sued jointly. At times, parallel claims are advanced by investors of different nationalities under different bits but in the same proceeding.21 For instance, in the Suez cases there were investors of French, Spanish and British nationalities who ­relied on the respective bits with Argentina to establish jurisdiction. To make things even more complex, one case proceeded under both the icsid Rules and under the uncitral Rules but administered by the icsid Secretariat.22 In Guaracachi & Rurelec v. Bolivia,23 the Claimants, uk and us nationals, brought their claims in one proceeding under the bit between Bolivia and the United Kingdom as well as the bit between Bolivia and the United States. The respondent objected arguing that joint proceedings of this type would have required special consent.24 The Tribunal rejected the objection25 and held: Thus, on the grounds that the consent to arbitration provided by the ­Respondent in the Treaties contains no limitation that would preclude the joint submission by two or more Claimants of identical claims under different bits, the Tribunal finds that the Respondent has given its consent to the jurisdiction of this Tribunal to hear the claims submitted jointly by gai and Rurelec in accordance with Article ix of the ­U S-Bolivia bit and Article 8 of the UK-Bolivia bit.26 19

20 21 22

23 24 25 26

Abaclat et al. v. Argentina, Decision on Jurisdiction and Admissibility, 4 August 2011; Ambiente Ufficio et al. v. Argentina, Decision on Jurisdiction and Admissibility, 8 February 2013; Alemanni et al. v. Argentina, Decision on Jurisdiction and Admissibility, 17 November 2014. Funnekotter et al. v. Zimbabwe, Award, 22 April 2009. Kardassopoulos & Fuchs v. Georgia, Award, 3 March 2010, para. 57. See also Anderson et al. v. Costa Rica, Award, 19 May 2010, para. 2. Suez, Sociedad General de Aguas de Barcelona s.a., and InterAguas Servicios Integrales del Agua s.a. v. Argentina, Decision on Jurisdiction, 16 May 2006, para. 2; Suez, Sociedad General de Aguas de Barcelona s.a., and Vivendi Universal s.a. v. Argentina and awg Group Ltd. v. Argentina, Decision on Jurisdiction, 3 August 2006, paras. 1, 2, 4. Guaracachi & Rurelec v. Bolivia, Award, 31 January 2014. See also Noble Energy v. Ecuador, Decision on Jurisdiction, 5 March 2008, paras. 186–207. At paras. 164–181. At paras. 334–347. At para. 346.

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Sometimes closely related proceedings take place separately although before identical tribunals. Tribunals have applied this technique in a number of cases,27 most prominently, in the three closely related Yukos cases against ­Russia.28 In these proceedings hearings are typically held back to back or ­jointly and decisions are released simultaneously with largely identical contents. The result is increased efficiency and consistency of the decisions. A more formal procedure to deal with related claims is consolidation. Consolidation is the joinder of separate proceedings on the basis of common ­questions of law or fact in the underlying disputes. It may be ordered either by a court, an arbitral tribunal or by the arbitral institution chosen by the parties. Consolidation is designed to promote procedural efficiency and consistency of decisions and to relieve the hardship to the respondent in having to defend separately against multiple claimants.29 Procedures for the consolidation of related proceedings are provided inter alia by Article 1126 of the nafta,30 and a number of international investment and free trade agreements. Under these provisions, consolidation may be 27

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See three early icsid cases against Jamaica: Alcoa Minerals v. Jamaica (Case No. ARB/74/2); Kaiser Bauxite v. Jamaica (Case ARB/74/3); Reynolds v. Jamaica (Case ARB/74/4). Similarly, two cases against Argentina were heard by identically composed tribunals: Camuzzi v. Argentina, Decision on Jurisdiction, 11 May 2005, para. 4; Sempra Energy Intl. v. Argentina, Decision on Jurisdiction, 11 May 2005, para. 5. Hulley Enterprises Limited (Cyprus) v. The Russian Federation, Final Award, 18 July 2014; Yukos Universal Limited (Isle of Man) v. The Russian Federation, Final Award, 18 July 2014; Veteran Petroleum Limited (Cyprus) v. The Russian Federation, Final Award, 18 July 2014. Generally see C. Yannaca-Small, Parallel Proceedings, in: The Oxford Handbook of International Investment Law, p. 1008 (P. Muchlinski, F. Ortino, C. Schreuer eds., 2008); G. Kaufmann-Kohler, L. Boisson de Chazournes, V. Bonnin, M.M. Mbengue, Consolidation of Proceedings in Investment Arbitration: How Can Multiple Proceedings Arising from the Same or Related Situations Be Handled Efficiently?, Colloquium, Geneva, April 22, 2006, in: 21 icsid Review-FILJ 59–149 (2006); W. Ben Hamida, La consolidation des procédures arbitrales, Les Cahiers de l’Arbitrage, N° 2006/3, 30–35; A. Crivellaro, Consolidation of Arbitral and Court Proceedings in Investment Disputes, 4 The Law and Practice of International Courts and Tribunals 371 (2005); M. Platte, When Should an Arbitrator Join Cases? 18 Arbitration International 67 (2002). Article 1126(2) of nafta provides: ‘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) ­assume ­jurisdiction over, and hear and determine together, all or part of the claims; or (b) ­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.’

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requested if two or more claims have been submitted separately that have a question of law or fact in common. In that case, a tribunal may be established to decide on the consolidation request. Consolidation is not foreseen under the icsid or uncitral Rules but may be agreed upon by the parties.31 Consolidation offers obvious advantages for respondents since it avoids the proliferation of parallel proceedings, which are likely to result in increased costs and may lead to conflicting results. Not surprisingly, the ­consolidation proceedings conducted under the nafta are usually initiated by the ­respondent State and opposed by the claimants.32 Misgivings of the claimants against consolidation in these cases concerned the protection of confidential information from competitors in consolidated proceedings, full participation of claimants in the composition of the consolidated tribunal and the opportunity of individual claimants to present their case fully.33 3

Successive Arbitration Proceedings

One of the aims of arbitration is to promote expediency by eliminating successive procedural steps such as appeals. But this form of expediency is not always achieved in practice. At times, a tribunal terminates proceedings prematurely finding that a requirement for its jurisdiction is missing and rendering a decision to that effect. If the claimant manages to meet this requirement subsequently, it may seek to resubmit its claim in fresh proceedings. In Waste Management v. Mexico34 a tribunal found that the claimant had failed to meet the requirement of a waiver of domestic proceedings under 31

See e.g. Pan American v. Argentina, Decision on Preliminary Objections, 27 July 2006, paras. 4, 7; Canadian Cattlemen for Fair Trade v. United States, Award on Jurisdiction, 28 January 2008, para. 6; Unglaube v. Costa Rica, Award, 16 May 2012, paras. 8, 10–13, 27–28; Churchill Mining v. Indonesia, Decision on Jurisdiction, 24 February 2014, paras. 6, 48, 57–60, 82–83; Planet Mining v. Indonesia, Decision on Jurisdiction, 24 February 2014, paras. 6, 50–61, 82–83. 32 See Canfor v. United States, Tembec et al. v. United States, Terminal Forest Products v. United States, Order of the Consolidation Tribunal, 7 September 2005; Corn Products v. Mexico, Archer Daniels Midland v. Mexico, Order of the Consolidation Tribunal, 20 May 2005. 33 In Corn Products v. Mexico, the Claimants were direct competitors and argued that accepting Mexico’s request for consolidation would not have been efficient or fair because the Claimants could not exchange details regarding their respective business. The Consolidation Tribunal agreed and concluded that the Claimants were unable to cooperate in a single claim. 34 Waste Management v. Mexico, Arbitral Award, 2 June 2000.

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1121(2)(b) of the nafta.35 Having amended its waiver, the claimant then started a second proceeding regarding the same claims. Interestingly, Mexico sought to rely on the principle of res judicata to fend off the second proceeding arguing that it met the triple identity test of parties, cause of action and claim. The Tribunal dismissed Mexico’s argument finding that res judicata did not apply to a decision on jurisdiction but only to a decision on the merits.36 Similarly, in ics Inspection v. Argentina, the Tribunal found that it lacked jurisdiction because the claimant had failed to comply with a requirement under the UK-Argentina bit first to pursue its claim before Argentina’s courts for 18 months.37 ics, undeterred by this setback, tried its luck before the courts of Argentina for the required period. Unsurprisingly, this was not successful. After the 18 months had expired, ics started a second arbitration. Another instance of consecutive proceedings arises with icsid annulment, sometimes followed by the resubmission of the claim to a second tribunal. This leads to proceedings in three stages before three different tribunals.38

35

36 37 38

Article 1121 of the nafta provides in relevant part: ‘2. A disputing investor may submit a claim under Article 1117 to arbitration only if both the investor and the enterprise: … (b) 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.’ Waste Management v. Mexico, Decision on Mexico’s Preliminary Objection concerning the Previous Proceedings, 26 June 2002, paras. 38–47. ics Inspection v. Argentina, Award on Jurisdiction, 10 February 2012. Amco v. Indonesia, Resubmitted Case: Decision on Jurisdiction, 10 May 1988; Amco v. I­ ndonesia, Resubmitted Case: Award, 5 June 1990; Klöckner v. Cameroon, Resubmitted Case: Award, 26 January 1988; mine v. Guinea, Resubmitted Case: Order taking note of the discontinuance, 20 November 1990; Vivendi v. Argentina, Resubmitted Case: Decision on Jurisdiction, 14 November 2005; Vivendi v. Argentina, Resubmitted Case: Award, 20 August 2007; Sempra v. Argentina, Resubmitted Case: Order taking note of the discontinuance, 3 April 2015; Enron v. Argentina, Resubmitted Case: suspended until 12 April 2016; Victor Pey Casado and President Allende Foundation v. Chile, Resubmitted Case: pending. The second proceeding in Fraport v. Philippines, Award, 10 December 2014, was technically not a resubmission but a newly registered case.

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Arbitration and Domestic Courts

The interaction of investment arbitration with domestic court proceedings can also lead to multiple proceedings. These interactions may lead to a proliferation of proceedings in a number of ways. Some treaty provisions are designed to prevent competition between investment arbitration and domestic court proceedings. Article 26 of the i­ csid Conventions excludes other remedies including domestic courts once consent has been given to icsid arbitration.39 Article 1121 of the nafta has a similar function. It provides, as a condition for the bringing of a claim before an ­international tribunal, that the investor must waive any right to initiate or continue any proceedings before domestic courts with respect to the alleged breach.40 It is well-established that, in investor-State arbitration, there is generally no need to exhaust local remedies,41 although States may insist on it in their consent to arbitration.42 Only few, mostly older bits, contain a requirement to exhaust local remedies.43 Nevertheless, in some situations investors are required to make prior use of domestic courts. Some bits require that an investor, before bringing a dispute before an international tribunal, must seek its resolution before the host State’s domestic courts for a certain period of time, often eighteen months.44 39

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. …’ 40 For cases applying this provision see Waste Management v. Mexico i, Award, 2 June 2000, para. 18; Waste Management v. Mexico ii, Decision on Jurisdiction, 26 June 2002; Loewen v. United States, Award, 26 June 2003, paras. 158–164 at 164; Thunderbird v. Mexico, Award, 26 January 2006, paras. 111–118. See also Article 10.18 cafta and the following cases: Railroad Development Corp. v. Guatemala, Decision on Objection to Jurisdiction, 17 November 2008; Pac Rim Cayman llc v. El Salvador, Decision on Preliminary Objections, 2 August 2010, paras. 173–188, 239–243, 250–253. 41 See e.g. Saipem v. Bangladesh, Award, 30 June 2009, paras. 174–184; Inmaris Perestroika v. Ukraine, Award, 1 March 2012, para. 302. 42 The second sentence of Article 26 of the icsid Convention provides to this effect: ‘A Contracting State may require the exhaustion of local administrative or judicial remedies as a condition of its consent to arbitration under this Convention.’ 43 See C. Schreuer, L. Malintoppi, A. Reinisch, A. Sinclair, The icsid Convention A Commentary, 2d ed., 2009, Article 26, paras. 192–207. 44 For more detail see C. Schreuer, Calvo’s Grandchildren: The Return of Local Remedies in Investment Arbitration, 4 The Law and Practice of International Courts and Tribunals 1, 3–5 (2005).

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The usefulness of such a requirement is questionable. It creates a considerable burden to the party seeking arbitration with little chance of advancing the settlement of the dispute. The most likely effect of a clause of this kind is delay and additional cost. One tribunal called a provision of this kind ‘nonsensical from a practical point of view.’45 Investors were often able to avoid the ­application of such a rule by invoking a most favoured nation (mfn) clause.46 But practice in this respect seems to be getting more restrictive.47 Some tribunals have required parties to resort to domestic courts before initiating international arbitration not as a matter of jurisdiction or admissibility but as a substantive requirement.48 The violation of the international standard of protection would not have occurred until at least an attempt had been made to obtain redress through domestic courts.49 ‘Fork in the road’ provisions are attached to the consent clauses of some bits. They offer the investor a choice between the host State’s domestic courts and international arbitration. The choice, once made, is final. If the investor 45 46

47

48

49

Plama v. Bulgaria, Decision on Jurisdiction, 8 February 2005, para. 224. Maffezini v. Spain, Decision on Jurisdiction, 25 January 2000, para. 64; Siemens v. ­Argentina, Decision on Jurisdiction, 3 August 2004, at paras. 94–110; Gas Natural sdg, s.a. v. Argentina, Decision on Jurisdiction, 17 June 2005, at paras. 24–31, 41–49; Suez, Sociedad General de Aguas de Barcelona s.a., and InterAguas Servicios Integrales del Agua s.a. v. ­Argentina, Decision on Jurisdiction, 16 May 2006, at paras. 52–66; Telefónica v. Argentina, Decision on Jurisdiction, 25 May 2006, paras. 91–114; National Grid pcl v. Argentina, ­Decision on Jurisdiction, 20 June 2006, at paras. 53–94; Suez, Sociedad General de Aguas de Barcelona s.a., and Vivendi Universal s.a. v. Argentina and awg Group Ltd. v. Argentina, Decision on Jurisdiction, 3 August 2006, at paras. 52–68; Impregilo v. Argentina, Award, 21 June 2011, paras. 51–109; Hochtief v. Argentina, Decision on Jurisdiction, 24 October 2011, paras. 56–99; Teinver v. Argentina, Decision on Jurisdiction, 12 December 2012, paras. 137–186. Wintershall v. Argentina, Award, 8 December 2008, paras. 158–197; Daimler v. Argentina, Award, 22 August 2012, paras. 160–281; ics Inspection v. Argentina, Award on Jurisdiction, 10 February 2012, paras. 243–327; Kilic v. Turkmenistan, Award, 2 July 2013, paras. 7.1.1.–7.9.1. For detailed discussion see: U. Kriebaum, Local Remedies and the Standards for the Protection of Foreign Investment, in: International Investment Law for the 21st Century (C. Binder, U. Kriebaum, A. Renisch & S. Wittich eds., 2009) 417–462; O. Spiermann, Premature Treaty Claims, loc. cit., 463–489. Feldman v. Mexico, Award, 16 December 2002, paras. 114 and 134; Loewen v. u.s.a., Award, 26 June 2003, para. 168; Generation Ukraine v. Ukraine, Award, 16 September 2003, paras. 20.30, 20.33; Jan de Nul v. Egypt, Decision on Jurisdiction, 16 June 2006, para. 121; Saipem v. Bangladesh, Decision on Jurisdiction, 21 March 2007, paras. 150–153; Parkerings v. Lithuania, Award, 11 September 2007, paras. 316–320, 344, 360, 361, 449, 453, 454; Metalpar v. Argentina, Award, 6 June 2008, paras. 144–146, 181, 214–217; Burlington v. Ecuador, Decision on Liability, 14 December 2012, paras. 251–253.

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resorts to the host State’s domestic courts to have the dispute settled it loses the right to international arbitration.50 But the practice on fork in the road clauses shows that they have had little practical impact on the jurisdiction of tribunals. Tribunals have held consistently that a ‘fork in the road’ clause will prevent access to international arbitration only if the same dispute involving the same parties and the same cause of action were before the courts of the host State. Typically, the cause of action before the domestic court will have its basis in the local law whereas before the international tribunal the investor usually relies on treaty rights.51 The most difficult problems in the relationship between investment tribunals and domestic courts arise from competing jurisdictional clauses in treaties and contracts. Contracts between investors and host States frequently contain forum selection clauses that refer disputes to the host State’s domestic courts. When disputes arise, investors will typically invoke provisions in treaties to 50

51

For more detailed treatment see C. Schreuer, Travelling the bit Route, Of Waiting Periods, Umbrella Clauses and Forks in the Road, 5 The Journal of World Investment & Trade 231, 239 (2004); J. Lew/G. Sacerdoti/P. Turner/ M. Kantor, The ‘Fork in the Road’ Revisited, in: Investment Treaty Law – Current Issues Vol. 1 (biicl ed.) 173–186 (2006); C. Liebscher, Monitoring of Domestic Courts in bit Arbitrations: A Brief Inventory of Some Issues, in: International Investment Law for the 21st Century (C. Binder, U. Kriebaum, A. Reinisch & S. Wittich eds., 2009) 105, 108–115. Olguín v. Paraguay, Decision on Jurisdiction, 8 August 2000, paras. 20–23, 30; Vivendi v. Argentina, Award, 21 November 2000, paras. 40, 42, 53–55, 81; Vivendi v. Argentina, ­Decision on Annulment, 3 July 2002, paras. 36, 38, 42, 55, 113; Genin v. Estonia, Award, 25 June 2001, paras. 47, 58, 321, 333; Middle East Cement v. Egypt, Award, 12 April 2002, paras. 71, 72; cms v. Argentina, Decision on Jurisdiction, 17 July 2003, paras. 77–82; Champion Trading v. Egypt, Decision on Jurisdiction, 21 October 2003, para. 3.4.3.; Azurix v. Argentina, Decision on Jurisdiction, 8 December 2003, paras. 37–41, 86–92; Enron v. Argentina, Decision on Jurisdiction, 14 January 2004, paras. 95–98; LG&E v. Argentina, Decision on Jurisdiction, 30 April 2004, paras. 75, 76; Sempra v. Argentina, Decision on Jurisdiction, 11 May 2005, paras. 116, 127; Continental Casualty v. Argentina, Decision on Jurisdiction, 22 F­ ebruary 2006, para. 5; Pan American v. Argentina, Decision on Preliminary Objections, 27 July 2006, paras. 155–157; ibm v. Ecuador, Decision on Jurisdiction, 22 December 2003, paras. 58 et seq., 82–84; Occidental v. Ecuador, Award, 1 July 2004, paras. 37 (a), 38–63; mci v. Ecuador, Award, 31 July 2007, paras. 36–38, 171–191; Desert Line Projects v. Yemen, Award, 6 February 2008, paras. 124–138; Chevron & Texaco v. Ecuador, Interim Award, 1 December 2008, paras. 198, 200, 207; Toto v. Lebanon, Decision on Jurisdiction, 11 September 2009, paras. 203–217; Victor Pey Casado v Chile, Award, 8 May 2008, paras 467–498; Decision on Annulment, 18 December 2012, paras. 44–43; Bogdanov v. Moldova, Final Award, 16 April 2013, paras. 96–109, 169–176; Yukos Universal v. Russian Federation, Interim Award on ­Jurisdiction and Admissibility, 30 November 2009, paras. 587–600; Final Award, 18 July 2014, paras. 1256–1272. But see: Pantechniki v. Albania, Award, 30 July 2009, paras. 53–67.

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gain access to international arbitration. The host States typically insist on the contractual forum selection arguing that by signing the contracts the investors had opted for domestic courts rather than international arbitration. In these situations, tribunals have generally upheld their jurisdiction ­despite the presence of contractual dispute settlement clauses pointing to domestic courts.52 But they have also recognized that the contractual forum selection clause applied to claims based on the contract. This has led to the d­ istinction between contract claims, which are subject to contractual forum selection clauses, and treaty claims, which are unaffected by such clauses.53 The distinction between contract claims and treaty claims has appeared in many investment arbitrations.54 The respondents’ objection that the cases only involved contract claims and the claimants’ insistence on their treaty 52 See O. Spiermann, Individual Rights, State Interests and the Power to Waive icsid ­Jurisdiction under Bilateral Investment Treaties, 20 Arbitration International 179 (2004); C. Schreuer, Investment Treaty Arbitration and Jurisdiction over Contract Claims – the Vivendi i Case Considered, in: International Investment Law and Arbitration: Leading Cases from the icsid, nafta, Bilateral Treaties and Customary International Law, p. 281 (T. Weiler, ed., 2005); A.K. Hoffmann, The Investor’s Right to Waive Access to Protection under a Bilateral Investment Treaty, 22 icsid Review-FILJ 69 (2007); B.L. Smit Duijsentkunst, Treaty Rights as Tradable Assets: Can Investors Waive Investment Treaty Protection? 25 icsid Review-FILJ 409 (2010); S.I. Strong, Contractual Waivers of Investment Arbitration, 29 icsid Review-FILJ 690 (2014). 53 Vivendi v. Argentina, Award, 21 November 2000, paras. 53, 54; Vivendi v. Argentina, Decision on Annulment, 3 July 2002, paras. 4160, 95, 96, 101–112; cms v. Argentina, Decision on Jurisdiction, 17 July 2003, 70–76; sgs v. Pakistan, Decision on Jurisdiction, 6 August 2003, 43, 44, 48–74, 147–173; Azurix v. Argentina, Decision on Jurisdiction, 8 December 2003, paras. 26, 79; Enron v. Argentina, Decision on Jurisdiction, 14 January 2004, para. 91; ibm v. Ecuador, Decision on Jurisdiction, 22 December 2003, paras. 50–70; LG&E v. Argentina, Decision on Jurisdiction, 30 April 2004, paras. 58–62; Siemens v. Argentina, Decision on Jurisdiction, 3 August 2004, paras. 174–183; Salini v. Jordan, Decision on Jurisdiction, 29 November 2004, paras. 92–96; Impregilo v. Pakistan, Decision on Jurisdiction, 22 April 2005, paras. 219, 258, 286–289; aes v. Argentina, Decision on Jurisdiction, 26 April 2005, paras. 90–99; Camuzzi v. Argentina i, Decision on Jurisdiction, 11 May 2005, paras. 105–119; Sempra v. Argentina, Decision on Jurisdiction, 11 May 2005, paras. 116–128; Aguas del Tunari v. Bolivia, ­Decision on Jurisdiction, 21 October 2005, paras. 94–123; Suez et al. v. Argentina, Decision on Jurisdiction, 16 May 2006, paras. 41–45; National Grid v. Argentina (uncitral), Decision on Jurisdiction, 20 June 2006, para. 167–170; Inceysa v. El Salvador, Award, 2 August 2006, paras. 43, 212–217; Fraport v. Philippines, Award, 16 August 2007, paras. ­388–391; Vivendi v. Argentina, Resubmitted Case: Award, 20 August 2007, paras. 7.3.1.–7.3.11. 54 See: S.A. Alexandrov, Breaches of Contract and Breaches of Treaty, 5 The Journal of World Investment & Trade 555 (2004); E. Gaillard, Investment Treaty Arbitration and Jurisdiction

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rights have become routine arguments in these cases.55 A clear-cut separation of treaty claims and contract claims is often difficult and hinges on the facts of each case. It is incorrect to assume that the jurisdiction of treaty-based tribunals is necessarily restricted to violations of the treaty’s substantive provisions. An investment tribunal may well have jurisdiction for contract claims. This may be a consequence of broadly worded jurisdiction clauses covering all types of investment disputes or due to an umbrella clause.56 The separate treatment of contract claims and treaty claims leads to situations where the claimant may be compelled to pursue part of its claim through national courts and another part through international arbitration. The need to dissect cases into contract claims and treaty claims leads to another undesirable proliferation of proceedings. It requires claim splitting and has the potential of leading to parallel proceedings and conflicting decisions. Another form of interaction of investment tribunals with domestic courts involves the enforcement of arbitral awards. Under Article 54 of the icsid Convention, awards are to be recognized as binding and their pecuniary obligations are to be enforced like final domestic judgments in all States parties to the Convention.57 Over Contract Claims – the sgs Cases considered, in T. Weiler (ed.) International Investment Law and Arbitration 325 (2005). 55 See e.g. El Paso v. Argentina, Decision on Jurisdiction, 27 April 2006, paras. 63–65; Jan de Nul v. Egypt, Decision on Jurisdiction, 16 June 2006, paras. 79–82; lesi & Astaldi v. Algeria, Decision on Jurisdiction, 12 July 2006, para. 84; Telenor v. Hungary, Award, 13 September 2006, paras. 32, 50, 47(1), 50; Saipem v. Bangladesh, Decision on Jurisdiction, 21 March 2007, paras. 139–142; Parkerings v. Lithuania, Award, 11 September 2007, paras. 257, 260– 266, 289, 317, 345; bg Group v. Argentina, Final Award, 24 December 2007, paras. 177–185; Helnan v. Egypt, Award, 3 July 2008, paras. 102, 107; Biwater Gauff v. Tanzania, Award, 24 July 2008, paras. 468–475; Rumeli v. Kazakhstan, Award, 29 July 2008, para. 330; Bayindir v. Pakistan, Award, 27 August 2009, paras. 133–139, 197, 367–375; Toto v. Lebanon, Decision on Jurisdiction, 11 September 2009, paras. 95–130; Burlington Resources v. Ecuador, Decision on Jurisdiction, 2 June 2010, paras. 76–81; Helnan v. Egypt, Decision on Annulment, 14 June 2010, paras. 58–66. 56 See C. Schreuer, Jurisdiction and Applicable Law in Investment Treaty Arbitration, 1 McGill Journal of Dispute Resolution 1, 6 (2014). 57 Article 54(1) of the icsid Convention provides in relevant part: ‘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.’

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In some cases respondents have sought to challenge the jurisdiction of international tribunals through action in domestic courts.58 Investment tribunals have resisted these attempts. The decision of a national court, especially a court of the host State, cannot determine the jurisdiction of an international tribunal.59 At the same time, it is beyond doubt that a State is responsible also for the acts of its judiciary60 and that a violation of investors’ rights may occur as a consequence of the actions of domestic courts.61 Therefore, it is clear that an investment tribunal may examine the legality of decisions of domestic courts and that it may hold the forum State responsible for any violations of international standards committed by its courts. Paradoxically, the opposite may also be true: the award of an investment tribunal may be subject to the scrutiny of a domestic court. icsid awards are immunized from the scrutiny of domestic courts (Art. 53). But non-ICSID awards are not insulated from national law and their review, recognition and enforcement is governed by the national law of the place of arbitration and by any applicable treaties including the 1958 [New York] Convention on the Recognition and Enforcement of Foreign Arbitral Awards. 5 Conclusion Investment arbitration is by no means the simple one stop shop that it is often made out to be both by its supporters and by its detractors. Rather, it is often part of a complex pattern of procedures and interacts with other modes of disputes settlement. 58 59

Generally see E. Gaillard (ed.), Anti-Suit Injunctions in International Arbitration (2005). Amco v. Indonesia, Award, 20 November 1984, para. 177; Inceysa v. El Salvador, Award, 2 August 2006, paras. 212, 213; sgs v. Pakistan, Procedural Order No. 2, 16 October 2002, 8 icsid Reports 388. 60 See ilc Articles on State Responsibility, Article 4. 61 See A. Bjorklund, Reconciling State Sovereignty and Investor Protection in Denial of Justice Claims, 45 Virginia Journal of International Law 809 (2005). Duke Energy v. Peru, Decision on Jurisdiction, 1 February 2006, paras. 160–162, 165.

Chapter 9

Annulment of Awards Piero Bernardini Review of investment arbitral awards is only possible within circumscribed limits. This chapter maps the precise extent of these limits and compares the prevailing practice within and without the ICSID circuit. Annulment of ICSID awards lies outside the reach of the domestic judiciary, while national courts can be seised by parties seeking the setting aside of non-ICSID awards. A survey of legislation and practice reveals that, net of certain local variations, domestic courts tend to operate with self-restraint. The grounds for annulment codified in municipal statutes and those derived from the ­U NCITRAL Model Law are typically construed narrowly. To a certain extent, it is possible to consider annulment proceedings of both kinds as expressions of an overarching procedural notion that, in spite of its dispersed use by unconnected courts and committees, is slowly acquiring coherence, privileging the finality of arbitral awards.

A

Introduction

The availability to investors of direct arbitration against the host State on the basis of advance consent by the State under bits or multilateral ­investment treaties (such as nafta or ect) is a standard feature and a basic element of the ‘protection’ accorded to foreign investments and investors. To a large extent, this feature is among the fundamental rationale for these treaties. ­Arbitration under investment treaties is regulated by the rules chosen by the investor among those offered by the State under the applicable treaty. These rules normally include two or more of the following: icsid Convention, i­ csid Additional Facility Rules, uncitral Arbitration Rules, the Arbitration Rules of the Stockholm Chamber of Commerce, the lcia Rules or the icc Rules. There is a fundamental difference between the icsid Convention and the other a­ rbitration rules just mentioned. While the icsid Convention is a self-­ contained, self-sufficient system totally independent from national legal systems and the jurisdiction of national courts, all other rules of arbitration find their regulation not in an international treaty but in the law of a national system, normally the one of the place of arbitration. By contrast with the effect of the choice of a place of arbitration under national regulations, such choice in an icsid ­arbitration (be it Paris, London, Geneva, New York or any other place) is a matter of the ­parties’ convenience but has no effect on the © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_010

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­ rocedural and substantive rules to be applied by the tribunal, icsid arbitrap tion being de-localized. Regarding annulment of investment treaty awards, therefore, a distinction must be made between awards under the icsid Convention (‘icsid Awards’) and awards rendered under all other rules of arbitration, including icsid Additional Facility Rules (‘non-icsid awards’). While the icsid Convention regulates independently both the grounds of annulment of the award and the composition and powers of the special committees competent to decide on annulment requests, non-ICSID awards are subject to annulment based on the grounds available under the law of the place of arbitration, the proceeding is governed by the law of this place and the annulment request decided by the competent national court. B

Non-ICSID Awards

Regarding non-ICSID awards, it must be noted at the outset the general trend by States to the harmonization of their laws on arbitration with the aim to facilitate arbitration of an international character taking place within their borders. Also interpretative criteria applied by courts of different States are remarkably homogeneous. Most modern arbitration legislations treat arbitral awards as presumptively valid in actions to annul (and to recognize) such awards while permitting annulment only on specified and limited grounds.1 The European Court of Justice has explained in the Eco Swiss v. Benetton decision of 1999 the policies underlying provisions of national laws as follows: 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.2 A good number of national laws follow the 1985 uncitral Model Law on International Commercial Arbitration, presently adopted by 67 States.3 States

1 Gary Born, International Commercial Arbitration (Wolters Kluwer, 2nd ed, Vol iii, 2014), para 25.03, p 3173. 2 Eco Swiss China Time Ltd v. Benetton Int’l nv, [1999] ecr. I-3055 (ecj), C-126/97. 3 Among States having adopted the uncitral Model Law are 8 States of the usa and the following European States: Austria, Belgium, Bulgaria, Denmark, Germany, Greece, Hungary, Norway and Poland.

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that have not adopted the Model Law and that frequently host investment arbitration proceedings regulate international arbitration more favorably as to certain aspects than the Model Law. The worldwide favour for international arbitration by national legislators and courts is reflected by decisions on the challenge of investment treaty awards. Review of courts’ decisions conducted in Sweden,4 Switzerland,5 the United States,6 France7 and England,8 all countries that have not adopted the Model Law, confirm that annulment of international awards is an exceptional occurrence, with the overwhelming majority of awards being upheld in the face of annulment challenges. In Sweden, challenge of an award may be either (i) a request for a declaration of invalidity for the grounds mentioned in Sect. 33 of the Arbitration Act of 1999 (the award includes determination of issues that may not be decided by arbitrators or is incompatible with basic principles of Swedish law or does not fulfil the requirements of written form and signature) or (ii) an application to set aside the award pursuant to Sect. 34 of the Act (award not covered by a valid arbitration agreement, made after expiration of the term or by arbitrators in excess of their mandate or by arbitrators appointed contrary to the parties’ agreement or if its outcome was influenced by irregularity during the proceeding). The Stockholm (Svea) Court of Appeal in the investment treaty case cme Lauder v. The Czech Republic in a judgment of 15 May 2003, rejecting the Republic’s challenge against the award, held as follows: 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 the possibilities to successfully have an arbitration award declared invalid or set aside based on a challenge. 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.9 4 Roland Halvorsen, The Review of International Arbitral Awards, Sweden, IAI series on International Arbitration, p. 145. 5 Felix Dasser, David Roth, Challenges of Swiss Arbitral Awards – Selected Statistical Data as of 2013 (32 asa Bull 460, 2014). 6 Stephen G Breyer, The United States, IAI series n 4, cit, p. 111. 7 Dominique Hascher, France, IAI series n 4,cit, p. 97. 8 Jonathan Mance, England, IAI series n 4, cit, p. 119. 9 cme/Lauder v The Czech Republic [2003] Svea Court of Appeal, uncitral case.

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According to a national report, during the period 2002–2007, out of 114 challenges brought before the Svea Court of Appeal only 33 resulted in a final ­decision and out of these only two arbitral awards were set aside.10 In England, under the Arbitration Act 1996 arbitration proceedings or awards may be reviewed on the ground of lack of jurisdiction, procedural impropriety or public policy. A party objecting to the substantive jurisdiction of a tribunal may choose to take no part in the relevant proceedings; in that case it can under Section 72(1) raise the question of substantive jurisdiction in court at once by seeking a declaration or injunction or can under Section 72(2) await any award and challenge it then in court under Section 67. In the latter case, the party must raise the objection with the tribunal at the earliest opportunity. Whatever course events is taken, no decision by the arbitral tribunal as to its own jurisdiction binds the court if and when the matter comes to the court. English law does not in this respect recognise a principle of Kompetenz-Kompetenz. Any arbitral decision of jurisdiction may be challenged in court under Sections 66 and 67. Under Section 66(3) [l]eave to enforce an award shall not be given where, or to the extent that, the person against whom it is sought to be enforced shows that the tribunal lacked substantive jurisdiction to make the award. And under Section 67, [a] party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court – (a) challenging any award of the arbitral tribunal as to its substantive jurisdiction; or (b) 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. Section 66 of the Arbitration Act 1996 was relied upon by the English court in 2007 in The Republic of Ecuador v. Occidental Exploration Production Co.,11 an arbitration commenced under the bilateral investment treaty between us and Ecuador. The Court treated the situation as one ‘where two States have deliberately agreed to confer rights intended to be enforceable domestically on private persons,’ and said that:

10 11

Roland Halvorsen, Sweden, IAI series, n 4, cit, p. 146. ewca Civ 1116, [2005], and also ewca Civ 656 [2007].

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Viewed in that context, we see no incongruity in a conclusion that the consensual arbitration intended under the Treaty carries with it the usual procedural and supervisory remedies provided under English law as the relevant procedural law. It is also to be noted that, under s.66, the English Court is given no option at all but to refuse enforcement, if ‘the person against whom it is sought to be enforced shows that the tribunal lacked jurisdiction to make the award. Sect. 68(2) of the English 1996 Act provides a catalogue of the principal grounds for serious procedural irregularity justifying setting an award aside. These include failing to deal with all the issues presented to the tribunal, f­ailing to conduct the arbitral proceedings in accordance with procedure agreed by the parties, failure to render an award free from ambiguity or to conduct the proceedings fairly and equitably giving each party a reasonable opportunity of putting his case and dealing with that of this opponent, or the tribunal exceeding its powers or the award being obtained by fraud or the award or the way in which it was procured being contrary to public policy. These procedural defects will only warrant setting an award aside if they caused ‘substantial injustice’ to the party challenging the award, as mentioned by sect. 68(2) of the Act. In England, only a limited number of annulment proceedings have been successful. This is due also to a remarkable aspect of English judicial system for arbitration which permits to save awards by the remedy of remission whereby if there is something wrong with the award or the arbitral process it may be corrected by the arbitrators in the light of the court’s determination under the procedure of Sect. 69(7)(c) of the 1996 Act. In summary, while on the one hand English courts will review any question as to the substantive jurisdiction of an arbitration tribunal and will determine factual and legal issues arising in that connection for themselves as necessary, on the other hand they intervene only cautiously and rarely on grounds of procedural injustice, public policy or error in relation to the merits of any issue submitted to arbitration and they will give considerable weight to the determination by the arbitral tribunal of any issues of fact or foreign law relevant to these latter regards.12 In the United States, in the landmark case on arbitration Scherk v. Alberto Culver Co., 417 u.s 506 (1974) the Supreme Court, referring to enforcement, so held:

12

Jonathan Mance, England, IAI series, n 4, cit, p. 143.

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[t]he record in u.s. courts is one of consistent enforcement of foreign awards based on a restrictive reading of the exceptions under the New York Convention. u.s. courts have consistently rejected the defence of ‘excess of authority’ with reference to the selection and application of legal principles based on a ‘narrow construction,’ stating in another landmark case, Parsons & Whittemore Overseas Co. Inc. (usa) v. Société Générale de l’industrie du Papier (rakta) (Egyptian) of 1974, that the New York Convention ‘does not sanction second-guessing the arbitrator’s construction of the parties’ agreement,’ a holding applicable also to annulment cases. Section 10(a)(4) of the Federal Arbitration Act (faa) permits vacatur ‘where the arbitrators exceeded their powers’ h ­ olding that a party has ‘a right to arbitration according to the terms for which it contracted,’ and arbitrators exceed their powers for purposes of Section 10(a)(4) of the faa when they ‘act outside the scope of the parties’ contractual agreement.’ The court rejected ‘the allegation that the arbitrators exceeded their authority by failing to base the award on the evidence presented and instead acting as ‘amiables compositeurs’.13 As one us court put it, using a language widely applicable in other jurisdictions, In reviewing an arbitration award courts do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts.14 The standards of review under the faa are extremely limited. The Supreme Court in its landmark 2008 Hall Street decision referred to the faa as substantiating a national policy favouring arbitration with just the limited review needed to maintain arbitration’s essential virtue of resolving disputes straightaway. Any other reading opens the door to the fullbore legal and evidentiary appeals that can render informal arbitration merely a prelude to a more cumbersome and time consuming judicial review process.15 13 14 15

508 F 2d 969, 975 (2d Circuit 1974), citing National Oil Corp v Libyan Sun Oil Co, [1990], 733 F Supp 800 (D Delaware). Major League Umpires Ass’n v Am League of Prof’l Baseball Clubs, [3d Cir 2004] 357 F3d 272, 280, quoting Tanoma Mining Co v Local Union [3d Cir 1990], No 1269, 896 F 2d 745, 747. Hall Street Associated v Mattel Inc, [2008], 552 us 576, Annex 10 to IAI series, cit (n 4), p. 451.

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In Switzerland, Article 190(2) pila of 1987 provides as grounds to challenge an award only: (a) if the arbitral tribunal was constituted irregularly (b) if the arbitral tribunal wrongly accepted or declined jurisdiction (c) if the arbitral tribunal ruled beyond the claims submitted to it, or failed to decide one of the claims submitted (d) if the parties’ rights of due process were violated (e) if the award violates public policy. Swiss case law holds that this list of grounds is exhaustive and that each ground must be interpreted narrowly. An application to challenge an international ­arbitral award must be brought directly before the Swiss Federal Tribunal, which is the highest court in Switzerland. Article 190(2)(b) of the pila provides for a general challenge on the issue of jurisdiction. The review includes the existence and validity of the arbitration agreement, including the issue of arbitrability, and the scope of the arbitration clause. The irregular composition of the tribunal is a distinct ground of invalidity (Art. 190(2)(a)). The Federal Tribunal will not review the facts of the case, nor the law applied by the arbitral tribunal. Broadly speaking, only serious procedural defects or ruling on substance that are contrary to international public policy will be considered. Specifically, it has been consistently held that an award will not be set aside on the grounds that it has been rendered on the basis of obviously wrong findings of fact – even if these findings are contradicted by clear evidence on record, or in clear violation of rules of law or equity. The reason for this very restrictive approach both by the Swiss legislator and the Federal Tribunal is that parties, having agreed to arbitration, should be held to that agreement and should not be afforded a second opportunity to re-argue the merits of the case in court.16 Swiss law does not sanction the non-respect of the agreed upon procedural rules but only the fundamental principles regarding due process under the mentioned Article 190(2)(d) pila. An arbitrator’s failure to apply the chosen substantive law is not a ground for an appeal either, as Article 190(2)(e) pila does not provide for any such ground. According to a Judgment of 14 November 1990,17 the Swiss Federal Tribunal held that a decision ex aequo et bono and not based on the law chosen by 16 17

Gabrielle Kaufman-Kohler, Blaise Stucki, International Arbitration in Switzerland (Kluwer 2004), p. 136. dft 116 ii 634.

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the parties does not violate public policy, at least as long as the result does not differ fundamentally from the one that would have been reached under the ­chosen law. This decision would suggest that a party may not challenge an ex equo et bono award on the basis of a jurisdictional defect, but only under ­Article 190(2)(e) of the pila, which relates to public policy. In France, another non-Model Law State, the concept of arbitration is based on the premise that there is an arbitral legal order which is distinct from the legal order of individual States, including that of the seat of the arbitration. It is this arbitral legal order – and no national legal order – that confers its juridicity to arbitration. The award is a decision of international justice and is res judicata. This res judicata, however, is not final: an application for the award to be set aside can be filed against the international award rendered in France. The type of review carried out on awards in France is predicated on this representation of arbitration. Awards are presumed to be valid. In order to rebut this presumption, a party seeking its setting aside has to prove that the award does not satisfy the requirements of Article 1520 of the Nouveau Code de Procedure Civile (following the reform of 13 January 2011) which alone provide grounds upon which to deny a request for recognition or enforcement or upon which to set aside the award: 1. The arbitral tribunal has wrongly declared to be competent or not to be competent; 2. The arbitral tribunal has been irregularly constituted (which includes the requirement of independence and impartiality of the arbitrators); 3. The arbitral tribunal has decided without conforming to the mission that had been given to it; 4. The principle of contradiction has not been respected; 5. Recognition or enforcement of the award is contrary to international public order. The review of the jurisdiction of the arbitral tribunal by French courts involves, in fact and in law, all the elements which determine the validity and the scope of the arbitration agreement. It is important to note that the party challenging the award must have objected during the arbitration procedure as soon as it became aware of the irregularity which it is contesting before the national judge. An international arbitral tribunal is not considered in France to be a court of first instance; the merits of the dispute are not to be examined again by the courts reviewing the award. There is therefore no substantive review, French courts being not supposed to determine whether the arbitrators’ decision was right or wrong.

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As the Paris Court of Appeal has repeatedly stated: the scrutiny of the court, which excludes… any power [of the court] to conduct a substantive review of the arbitral decision, should not bear upon the arbitrators’ assessment of each party’s rights with regard to the public policy provisions in question but rather on the solution given to the dispute, as the award can only be set aside if its enforcement is contrary to public policy.18 The Paris Court of Appeal in a decision of 15 March 1984 has upheld an award where arbitrators, granted amiable compositeur authority, applied Swedish law, on theory that the tribunal ‘had the option of referring to such rules insofar as it considered that they were apt to provide the most equitable outcome for the dispute’.19 A major innovation has been introduced in France by the 2011 reform giving the parties under Article 1522 the option to exclude by ‘special agreement’ all grounds of annulment of an award. The need of a special agreement (‘par convention speciale’) seems to exclude that a waiver of general nature as provided by some arbitration rules may be sufficient. If the waiver is validly raised, the only court control of the award shall be if one of the parties requests the recognition or enforcement in France of the award. Coming to the uncitral Model Law, Article 34 of the Model Law provides a detailed list of grounds, divided into two categories, for ‘recourse to a court against an arbitral award.’20 Under Article 34(2)(a) an award may be annulled if ‘the party making the application furnishes proof that (i) the arbitration agreement was invalid or a party thereto lacked capacity; or (ii) a party was unable to present its case, including for lack of due notice; or (iii) the award deals with matters outside the scope of the submission to arbitration; or (iv) the composition of the arbitral tribunal was not in accordance with the parties’ arbitration agreement.’ The award may be annulled under Article 34(2) 18 19

20

Courrèges Design v André Courrèges, Paris Cour d‘appel [1992(1)], (5 April 1990), Rev arb, 110 (note by Hervé Synvet); [1991(3)]; Rev crit dr int privé 580 (note by Catherine Kessedjian). Raoul Duval v General Cocoa, Paris Cour d’appel [Judgment of 29 October 1982], No i 12239, unpublished (described in Fouchard Gaillard Goldman International Commercial Arbitration (E Gaillard & J Savage eds 1999), 1635; Compagnie Financière Mocupie v Inveko France, Paris Cour d’appel [Judgment of 28 February 1980] Rev arb 538. Howard Holtzmann, John Neuhaus, A Guide to the uncitral Model Law on International Commercial Arbitration: Legislative History and Commentary (1989), p. 910.

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(b) if the court finds that (i) the dispute was non-arbitrable; or (ii) the award violates local public policy. If none of these specified grounds is present, then the award may not be annulled, Article 34(2) providing for the setting aside of the award ‘only if’ one of the listed grounds is accepted.21 The burden of proving that one of the grounds under Article 34(2) (a) applies is on the party seeking to set aside the award, as confirmed by decisions of national courts,22 National courts have further indicated that Article 34 grounds for annulment are to be narrowly construed.23 C

icsid Awards

Despite the several alternative methods of dispute settlement through arbitration provided by investment treaties, most of the generally known investment arbitrations have been and continue to be conducted under the i­ csid Convention. The drafting history of the Convention confirms the limited and exceptional nature of the annulment remedy, the finality of awards being a fundamental goal for the system.24 Annulment was designed purposefully to confer a limited scope of review which would safeguard against ‘violation of the fundamental principles of law governing the Tribunal’s proceedings.’ The remedy has thus been characterized as one concerning the legitimacy of the process rather than an inquiry into the substance of the award. Under Article 52(1) of the Convention, the grounds for annulment are as follows: (a) that the Tribunal was not properly constituted; (b) that the Tribunal has manifestly exceeded its powers; (c) that there was corruption on the part of a member of the Tribunal; 21

Article 34(2) provides that an award be set aside ‘only if’ one of the six specified statutory grounds is held applicable. See Hamid Gharavi, The International Effectiveness of the Annulment of An Arbitral Award (2002), 31. 22 See e.g., D H Blair & Co v Gottdiener, [2d Cir. 2006], 462 F 3d 95, 110; Trans Chem Ltd v China Nat’l Mach Imp and Exp Corp, [5th Cir. 1998], 161 F3d 314, 319; Beth Israel Med Crt v 1199/s.e.i.u. United Healthcare Workers [s.d.n.y. 2008]; E, 530 F Supp 2d 610, 614; Mav. First Nat’l Pawn Brokers, Ltd, 887 P2d 185, 189 (Mont 1994). 23 See eg, Corporacion Transnacional de Inversiones sa v stet int’l SpA, [1999], Ontario S Ct of Justice 45 or 3d 183; Quintette Coal Ltd v Nippon Steel Corp [1990], bct, 47 bclr 2d 201). 24 icsid, Background Paper on Annulment for the Administrative Council of icsid (10 August 2012), para 72 (‘icsid Background Paper’).

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(d) that there has been a serious departure from a fundamental rule of procedure; or (e) that the award has failed to state the reasons on which it is based. The circumstance that the excess of powers must be ‘manifest’ and the departure from a rule of procedure must be ‘serious’ and must concern a rule that is ‘fundamental’ is indicative of the object and purpose of the Convention to provide for a very high threshold for annulment. Out of these different grounds, the tribunal’s manifest excess of its powers, a serious departure from a fundamental rule of procedure and the failure to state the reasons on which the award is based have been invoked in practically all of cases by investors, with more than one of such grounds being relied upon in each case. There is no record of the grounds of improper constitution of the tribunal and of corruption of one of its members having been invoked until now. A disputing party may initiate an annulment proceeding by filing an application within 120 days from the date of the award (except in case of corruption of a tribunal member where filing should be made within 120 days from the discovery of corruption and in any case within three years after the date of the award). The application must state in detail the grounds on which it is based and must concern a final award, any decision rendered prior to the final disposition of all claims by the parties, such as a decision limited to upholding jurisdiction, having to wait for the conclusion of the proceeding to be challenged through the request for annulment of the award, which incorporates such prior decisions. The annulment application normally contains a request to stay the enforcement of the award which is automatically granted on a provisional basis, subject to the annulment Committee’s decision whether to confirm or terminate the stay after giving each party an opportunity to present its observations.25 Decisions on annulment are entrusted to a committee of three persons appointed by the Chairman of the Administrative Council for each individual case (ad hoc committee). Members of ad hoc committees have to be independent of the parties to the case and must have nationalities other than those of the parties and of the arbitrators who have rendered the award. The choice of the members of each committee is made out of icsid’s Panel of Arbitrators consisting of persons designated by Contracting States (plus ten designated by said Chairman) among ‘persons of high moral character and recognized competence in the field of law, commerce, industry or finance, who may be relied upon to exercise 25

icsid Convention, Arbitration Rule 54(1) and (4).

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­independent judgment.’26 Ad hoc committees are set up without the p ­ arties’ involvement. Nonetheless, before their members are appointed icsid informs the parties of the proposed appointees and circulate their curriculum vitae, thus giving the parties an opportunity to submit comments, for example that there is a conflict of interest of which the C ­ entre or the candidate was unaware of. Rules applicable to the procedure b­ efore the ­tribunal shall apply to the procedure for annulment, subject to limited exceptions.27 The filing of written pleadings (normally in a double exchange) is generally followed by an oral hearing of short duration, with the possible appearance of experts (to the exclusion normally of witnesses of fact since factual findings should in principle not be reexamined). The proceeding ends with the ad hoc committee’s decision on annulment. The committee may (i) reject all grounds for annulment, meaning that the award remains intact as res iudicata; (ii) uphold one or more grounds for annulment in respect of a part of the award, leading to a partial annulment, the rest of the award remaining res iudicata; (iii) uphold one or more grounds for annulment in respect of the entire award, meaning that the whole of the award is annulled; or (iv) exercise its discretion not to annul notwithstanding that a ground justifying annulment has been identified, giving reasons therefor. The proceeding may also be discontinued before the ad hoc committee issues a final decision because the parties have agreed on a settlement or a party does not object to the other party’s request for discontinuance or due to nonpayment of the advances requested by icsid to cover the costs of proceeding, or because the parties fail to take any steps in the proceeding during six ­consecutive months. The effect of annulment is that the award or a part thereof becomes a nullity, meaning that the binding force of the annulled portion of the award is terminated. However, the decision on annulment does not replace the award or substitute any of the reasoning in the award. A party is entitled under Article 52(6) to request resubmission of the dispute by a newly constituted tribunal to obtain a new award concerning the same dispute following annulment of the original award. Either party may start this process by filing a request for resubmission of the dispute, identifying the original award, and explaining in detail which aspects of the dispute are to be submitted to the new tribunal. The new tribunal is constituted by the same method as the original tribunal and is not bound by the reasoning of the ad hoc committee. It is, however, bound by the unannulled portions of the original award in cases of partial annulment. 26 27

icsid Convention, Article 14(1). icsid Convention, Article 52(4).

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Decisions on annulment have established that: (1) the grounds listed in Article 52(1) of the Convention are the only grounds on which an award may be annulled; (2) annulment is an exceptional and narrowly circumscribed remedy and the role of annulment committees is limited; (3) these committees are not courts of appeal, annulment is not a remedy against an incorrect decision, and annulment committees cannot substitute the tribunal’s determination on the merits for their own; (4) annulment committees should exercise their discretion not to defeat the object and purpose of the remedy or erode the binding force and finality of awards; (5) Article 52 should be interpreted in accordance with its object and purpose, neither narrowly nor broadly; and (6) committees’ authority to annul is circumscribed by the grounds specified in the request for annulment, but committees have discretion with respect to the extent of an annulment, which may be partial or full.28 An in-depth analysis of each ground as applied by the more than forty annulment decisions rendered until now would be beyond the scope of this ­paper. Suffice it to mention that the following has been progressively held: (a) the ‘excess of powers’ occurs where the tribunal has not ­respected the parties’ arbitration agreement by accepting jurisdiction where in fact jurisdiction is lacking, or in the inverse case by declining jurisdiction when it existed29 but also in case of failure by the tribunal to apply the proper law30 (as distinguished from ­errors in the 28 29

30

icsid Background Paper, para 75. Compañia de Aguas del Aconquija sa and Vivendi Universal v Argentine Republic, [3 July 2002], Decision on application for annulment, para 86 (‘Vivendi i’); Mitchell v dr Congo [1 November 2006] Decision on Annulment, paras 47–48 and 67 ( ‘Mitchell’); cms v Argentina [25 September 2007], Decision on Annulment, para 47 (‘cms’); Azurix v Argentina, [1 September 2009], Decision on the Application for Annulment, para 45 (‘Azurix’); mci v. Ecuador, [19 October 2009], Decision on Annulment, para 56 (‘mci’); Soufraki v uae [5 June 2007], Decision on Annulment, para 43 (‘Soufraki’); Lucchetti v Peru, [5 September 2007], Decision on Annulment, para 99 (‘Lucchetti’); Fraport ag Airport Worldwide v Republic of the Philippine, [23 December 2010], Decision on the Application for Annulment, para 36 (‘Fraport’). Amco Asia Corporation and others v Republic of Indonesia [16 May 1986], Decision annulling the award, para 23–28 (‘Amco i’); Klöckner Industrie-Anlagen GmbH and others v United Republic of Camerron and Société Camerounaise des Engrais [3 May 1985], Decision annulling the award, para 79 (‘Klőckner i’); Maritime International Nominees Establishment v Republic of Guinea [22 December 1989], Decision partially annulling the award, para 5.03 (‘mine’); Enron v Argentina [30 July 2010], Decision on Annulment, para 218 ­(‘Enron’); mtd v Chile [21 March 2007], Decision on Annulment, para 44 (‘mtd’); cms, para 49; S­ oufraki, para 85; Sempra v Argentina, [29 June 2010] Decision on Argentina

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­application of the law which in principle is no ground for annulment) or its acting ex aequo et bono without the required a­ greement of the parties or in case of failure to otherwise exercise its mandate in accordance with the parties’ arbitration agreement; the excess of powers must be ‘manifest,’ this being the case if it can be discerned without the need for an elaborate analysis of the award.31 (b) A ‘serious departure from a fundamental rule of procedure’ requires that the rule in question be ‘fundamental’ and the procedural violation be ‘serious.’ As held by annulment committees, fundamental rules of procedure include the equal treatment of the parties,32 the right to be heard,33 an independent and impartial tribunal,34 the treatment of evidence and burden of proof35 and deliberations among the tribunal’s members.36 Not every departure from a fundamental rule of procedure justifies annulment: the departure must be ‘serious,’ meaning that it must have had a material effect on the tribunal’s decision causing ‘the Tribunal to reach a result substantially different from what it would have awarded had such rule been observed.’37

31

32 33

34 35

36 37

­Application for Annulment, para 164 (‘Sempra’); Malaysian Historical Salvors v Malaysia [16 April 2009], Decision on the Application for Annulment, para 74 (‘mhs’). Wena Hotels Limited v Arab Republic of Egypt, [15 February 2002], Decision of on the Application for Annulment, para 25 (‘Wena’); Rumeli Telekom as and Telsim Mobil v Republic of Kazakhstan [25 March 2010], Decision of the ad hoc Committee, para 96 (‘Rumeli’); Helnan International Hotels v Republic of Egypt [14 June 2010], Decision of the ad hoc Committee, para 58 (‘Helnan’); Mitchell, para 20; Enron, para 69. Amco i, paras 87–88. Amco Asia Corporation and others v Republic of Indonesia [ 17 December 1992], Decision rejecting the parties’ applications for annulment of the Award and annulling the Decision on supplemental decisions and rectification (unpublished), paras 9.05–9.10 (‘Amco ii’); Klöckner i, paras 86–92; Wena, para 57; cdc Group plc v Republic of Seychelles, [29 June 2005], Decision of the ad hoc Committee on the Application for Annulment of the Republic of Seychelles, para 49 (‘cdc’); Lucchetti, para 71; Fraport, para 197. Klöckner i, para 95, Wena, para 57; cdc, paras 51–55. Amco i, paras 90–91; Klőkner v Cameroon, [17 May 1990], Decision on Annulment, para 6.80 (‘Klöckner ii’), Wena, paras 59–61; Impregilo v. Argentina [24 January 2014], Decision on Annulment, para 165 (‘Impregilo’). Klöckner i, para 84; cdc, para 58. Wena, para 58; see also Repsol v Petroecuador [17 May 1990], Decision on Annulment, para 81 (‘Repsol’); Azurix, para 234; Enron, para 71; Impregilo, para 164.

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(c) ‘Failure to state the reasons on which the award is based’ is a requirement ensuring that the parties can understand the facts and the law applied by the tribunal in reaching its conclusion. Such failure may occur in case of: • absence of reasons on a particular aspect of the award, almost always invoked;38 • insufficient or inadequate reasons, frequently invoked;39 • contradictory reasons;40 • failure to deal with a question which is material to the tribunal’s decision.41 ‘Failure to state reasons’ does not necessarily result in annulment in case the failure is remedied by the tribunal issuing a supplementary decision concerning the question not addressed upon request of the dissatisfied party.42

The complexity of the task assigned to ad hoc committees has been summarized by Aaron Broches, the World Bank’ General Counsel and the lead negotiator of the icsid Convention, as follows: Annulment is an essential but exceptional remedy. It is well understood that the grounds listed in Article 52(1) are the only grounds on which an award may be annulled. However, the application of that paragraph places a heavy responsibility on the ad hoc committees which must rule on requests for annulment. For example, in relation to a Tribunal’s alleged ‘excess of powers’ they may have to make fine distinctions between failure to apply the applicable law, which is a ground for annulment, and incorrect interpretation of that law, which is not. With respect to allegations that a tribunal’s failure to deal with questions submitted to it constitutes a serious departure from a fundamental rule of procedure, or failure to state the reasons on which the award is based, they will have to assess the relevance of those questions, that is to say, their nature and potential effect, had they been dealt with, on the tribunal’s award. They are also 38 39 40 41

42

cms. Mitchell, para 21; Soufraki, paras 122–126. Amco i, para 97; mine, para 5.09; Klöckner i, para 116; cdc, para 70; mci, para 84. Amco i, para 32; Klőckner i, para 115; mine, para 5.13; Soufraki, para. 126; Duke Energy International Peru Investments No. 1 Ltd. v. Republic of Peru [1 March 2011] Decision on the Application for Annulment, para 228 (‘Duke Energy’). icsid Convention, Article 49(2).

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likely to be called on to give specific meaning to such terms as ‘manifest,’ ‘serious departure’ and ‘fundamental rule of procedure’ in judging the admissibility of claims for annulment. After these determinations have been made on the basis of objective legal analysis, the ad hoc committees may be faced with the delicate final task of weighing the conflicting claims of finality of the award, on the one hand, and, on the other, of protection of parties against procedural injustice, as defined in the five sub-paragraphs of Article 52(1). This requires that an ad hoc committee be able to exercise a measure of discretion in ruling on applications for annulment.43 A summary review of annulment decisions since the first one in 1985 until the present shows the progressive compliance with the icsid Convention’s objective of finality of awards through the adherence to the limitations prescribed by Article 52. This result followed the criticism raised by the two initial decisions44 held to have reexamined the merits beyond ad hoc committees’ powers, leading commentators to doubt of the effectiveness of icsid system as a whole. The criticism subsided following the partial annulment in mine and the rejection of the requests for annulment in the resubmitted Klöckner ii in 1990 and Amco ii in 1992.45 mine has underlined that annulment is a limited remedy, any review of the merits of the award being excluded in view of Article 53(1) of the icsid Convention stating that the award ‘shall be binding on the parties and shall not be subject to any appeal….’46 mine has frequently been referred to by subsequent decisions when holding that the requirement to state reasons may be considered satisfied ‘as long as the award enables one to follow how the tribunal proceeded from Point A. to Point B. and e­ ventually to its conclusion, even if it made an error of fact or law. This minimum requirement is in particular not satisfied by either contradictory or frivolous reasons.’47 In mine, the ad hoc committee provided a detailed reasoning, based on party autonomy and the tribunal’s terms of reference, regarding the tribunal’s failure to apply the proper law as follows: 43 44

45 46 47

Aaron Broches, The Convention on the Settlement of Investment Disputes between States and Nationals of other States (Recueil des Cours, the Hague, 1973). Klöckner i and Amco i: ‘the first generation,’ according to Christoph Schreuer, Three Generations of icsid Annulment Proceedings, in Emmanuel Gaillard and Yas Banifatemi (eds), Annulment of icsid Awards (IAI series on International Arbitration n 1, 2004) p. 17. These three cases being referred to by Christoph Schreuer as ‘the second generation,’ op. cit, p. 18. mine, para 4.04. mine, paras 5.08–5.09.

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The parties’ agreement on applicable law forms part of their arbitration agreement. Thus, a tribunal’s disregard of the agreed rules of law would constitute a derogation from the terms of reference within which the tribunal has been authorized to function. Examples of such a derogation include the application of rules of law other than the ones agreed by parties, or a decision not based on any law unless  the parties had agreed on a decision ex aequo et bono. If the derogation is manifest, it entails a manifest excess of power. Disregard 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.48 The ad hoc Committee in Amco ii also held that non-application of the applicable law may constitute a manifest excess of powers which calls for annulment. But incorrect interpretation or misapplication of the law ‘normally’ would not, unless it is ‘of such a nature or degree as to constitute objectively (regardless of the Tribunal’s actual or presumed intentions) its effective non-application.’49 The two decisions rendered in 2002, respectively of rejection of the annulment request in Wena and of partial annulment in Vivendi i50 have contributed to the better definition of a certain number of questions. Wena has defined the role of international law in the context of Article 42(1) of the icsid Convention51 by placing international law on the same plane as domestic law. This contrasted with the previous Klockner i and Amco i decisions which had assigned to international law only a complementary role in case of lacunae of the domestic law or a corrective role in case the applicable law would not conform on all points to the principles of public international law.52 The contribution of these decisions has had regard, among other questions, to the scope of review of ad hoc committees. Referring to mine, the Wena decision has held that in order to be ‘serious’ the violation of a fundamental rule of procedure is met only if it has caused the Tribunal to reach a result substantially different from the one that would have 48 49 50 51

52

mine, paras 5.03–5.04. Amco ii, para 7.19. The ‘third generation,’ according to Christoph Schreuer, op. cit, p. 18. icsid Convention, Article 42(1): ‘The Tribunal shall decide a dispute in accordance with such rules of law as may be agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law of the Contracting State party to dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.’ Wena, paras 38–40.

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otherwise prevailed.53 Following mine, Vivendi i has held that ‘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 the second, that point must itself be necessary to the tribunal’s decision.’ Both Wena and Vivendi i decisions have established that a distinction is to be made between contract claims and treaty claims, each being governed by its own rules regarding applicable law and dispute settlement.54 mine and ­Vivendi i have also held that ad hoc committees have a level of discretion when deciding whether or not to annul an award and that annulment should only be rendered if the violation is material,55 a position followed by other ad hoc committees which have accepted to interpret their mission with more self-restraint than it had previously been done. Truly, Wena and Vivendi i, as well as mine, benefited of the critical remarks regarding the two initial annulment decisions seizing the opportunity to clarify a series of unexplored questions, thus restoring confidence in icsid review system. The balanced understanding of the scope of review has been upheld by decisions made in the following period until and including 2007.56 The annulment decision in Mitchell v. Democratic Republic of Congo in 2006 revived the debate regarding ad hoc committees’ power of review, although not all commentators have expressed criticism for that decision. The ad hoc Committee had censured the award’s reasoning as being inadequate to explain how the conduct in the country of a professional activity by a single person could be equated to a protected investment, an issue relevant to the tribunal’s jurisdiction. In cdc, the ad hoc Committee observed: [T]here has been an evolution in the icsid annulment case law and scholarship away from Klöckner i and Amco Asia i that has culminated, in our view currently, in ad hoc Committees reviewing arbitral proceedings only to the extent of ensuring their fundamental fairness, eschewing any temptation to ‘second guess’ their substantive result.57

53 54 55 56 57

Wena, para 58. Wena, para 31; Vivendi i, para 110. mine, para 4.10; Vivendi i, para 66. cdc, Repsol, mtd, Soufraki,, Lucchetti, cms. cdc, para 35.

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The ad hoc Committee in another decision of this period, mtd, noted that ‘­after an uncertain start’ ad hoc Committees have ‘established with reasonable clarity the extent and limits of the grounds for annulment under Article 52.’58 The ad hoc Committee in Soufraki v. uae, another decision of the period, observed that there is a general consensus that ‘annulment review, although obviously important, is a limited exercise.’ The Committee described the role of ad hoc committees as follows: In the view of the ad hoc Committee, the object and purpose of an ­i csid annulment proceeding may be described as the control of the fundamental integrity of the icsid arbitral process in all its facets. An ad hoc committee is empowered to verify (i) the integrity of the tribunal – its proper constitution (Article 52(1)(a)) and the absence of corruption on the part of any member thereof (Article 52(1)(c)); (ii) the integrity of the procedure – which means firstly that the tribunal must respect the boundaries fixed by the icsid Convention and the Parties’ consent, and not manifestly exceed the powers granted to it as far as its jurisdiction, the applicable law and the questions raised are concerned (Article 52(1) (b)), and secondly, that it should not commit a serious departure from a fundamental rule of procedure (Article 52(1)(d)); and (iii) the integrity of the award – meaning that the reasoning presented in the award should be coherent and not contradictory, so as to be understandable by the Parties and must reasonably support the solution adopted by the tribunal (Article 52(1)(e)).59 A step backward was marked by decisions that in the years 2009–2010 have annulled four awards.60 The manner by which the tribunal had interpreted and applied the proper law was among the reasons for the ad hoc committees’ holding that these decisions amounted to a manifest excess of powers or a failure to state reasons, a position considered by commentators to be beyond ad hoc Committees’ power of review. During the same period, applications for annulment were rejected in four cases.61

58 59 60 61

mtd, para 54. Soufraki, para 23. mhs, Helnan, Sempra, Enron. Azurix, mci,, Rumeli, Vivendi ii.

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84 annulment requests have been filed until 24 December 2015, 33 of which have been rejected, 14 accepted (7 with full annulment62 and 7 with partial annulment)63 and 19 discontinued for failure to pay advances or for settlement by the parties, while 18 are still pending. No considered opinion may be expressed regarding icsid annulment system as it has developed until the present in the absence of a detailed analysis of individual decisions. The experience gained from prior annulment cases and the many commentaries devoted to the subject have certainly ­assisted subsequent ad hoc committees in forming a better considered view and in reaching consistent and more reasoned decisions. The recent trend of rejection of annulment applications may favor users’ perception of the stability reached by icsid review system although it is clear that the Convention’s goal of assuring the finality of awards does not mean that awards should be left unannuled, infringements of icsid Convention’s basic tenets being in no case tolerable. There are reasons to view the award annulment as one of icsid challenges with respect to the annulment of non-ICSID awards. Prior annulment decisions, although offering useful guidance to subsequent ad hoc committees, do not have a precedential value, a stare decisis as meant for national jurisprudence. In contrast, annulment decisions of non-ICSID awards, entrusted as they are to a body of national judges of a higher level of jurisdiction, sometime with a specific knowledge and experience in the field of international arbitration (as is the case of the French Court of appeal), are expected to follow the precedents established by other courts of the same judiciary, thus ensuring a high level of consistency and predictability of the national jurisprudence. Improvements have been suggested regarding icsid annulment system to ensure better consistency of decisions. Thus, a prominent commentator has held many years ago that If the same jurists are appointed to each successive ad hoc committees, there is a greater likelihood of policy consistency in their successive decisions. It would appear that the Secretary-General of icsid has, in fact, tried to secure more consistency in the decisions of ad hoc

62 63

Amco i, Klöckner i, Mitchell, mhs, Sempra, Fraport, Tulip Real Estate and Development Netherlands b.v. v. Republic of Turkey (ARB/11/28) [not yet published]. mine, Vivendi i, cms, Helnan, Enron, Victor Pey Casado v. Chile [18 December 2012], Decision on Annulament (‘Pey Casado i’), Occidental v. Ecuador [2 November 2015], Decision on Annulment.

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Committees by creating a type of ‘super’ ad hoc Committee, which will be composed, insofar as possible, of the same members of each Article 52 action in ­every case.64 More recently, the present writer, after mentioning the lack of consistency as one of the problems of icsid annulment system, suggested the following along the same lines: One way for icsid to cope with the above-mentioned problems would be to select a group of qualified personalities having already gained an experience in the field of award annulment, to be appointed on a more stable basis as members of annulment committees. Among other requirements, the persons so selected should refrain from sitting in icsid tribunals so as to be perceived as a higher level of jurisdiction within the system. One advantage of this approach is that it requires no amendment of the ­i csid Convention, the Chairman of the Administrative Council having the power to appoint members of annulment Committees.65 Neither suggestion has been given sofar specific attention, the idea of renouncing to act as arbitrator in order to act more permanently as a member of ad hoc committees being likely felt to be rather unattractive. 64 65

Michael Reisman, The Breakdown of the Control Mechanism in icsid Arbitration (Yale Law School, 1990), pp. 804–805. Piero Bernardini, ‘icsid v Non-ICSID Investment Treaty Arbitration’ in Liber Amicorum Bernardo Cremades (Wolters Kluwer, 2010) para 85, p. 188.

Part B General Principles and Substantive Standards of Investment Law

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Section 3 General Principles of Law and Substantive Issues

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Chapter 10

The Relevance of the Foreign Investor’s Good Faith Attila Tanzi This chapter investigates the importance and function of the investor’s good faith in investment arbitration. Good faith, a bona fide general principle of law, operates at several stages of the proceedings and gives rise to different more specific doctrines. Ascertainment of the investor’s good faith and the investment’s legality informs the tribunal’s determinations regarding its own jurisdiction, the claim’s admissibility, the State’s liability and the quantum of compensation. The chapter illustrates the role of good faith and its proximate declensions (estoppel, clean hands), accounting for the tribunals’ preference for nuanced solutions. The chapter also addresses the principle’s new frontier, relating to the investor’s compliance with standards of international law (which transcends the simple requirement of domestic legality). Ultimately, good faith is portrayed also as an interpretive benchmark rather than an autonomous rule of conduct: the case law shows that ‘bad-faith defences’ raised by the host State may steer the tribunal’s use of the applicable law and weaken – if not altogether bar – the investor’s claim.

1 Introduction Good faith can be considered as a constitutional principle of international law, possibly on a par with any legal system. This assertion may be derived from the general practice of domestic systems, as well as from the fabric of international obligations.1 Its function is constitutional insofar as it serves as a ‘norm-source,’ assuring the adaptation of legal rules to constitutional necessities, basic values, societal developments.2 The notion of good faith infiltrates and informs connected legal principles, ‘notions juridiques voisines’3 that can be seen as applications or permutations of the overarching value. Some of 1 Nuclear Tests Case (Australia v France) (Merits) [1974] icj Rep 253; Michel Virally, ‘Review Essay: Good Faith in Public International Law’ (1983) 77 ajil 130. 2 Robert Kolb, ‘Principles as sources of international law: (with special reference to good faith)’ (2006) 53(1) Netherlands International Law Review 1–36, 9. See also Ibid., ‘La bonne foi en droit international public’ [1998] 2 Revue Belge de Droit International 661–730; Alfred ­Verdross, ‘La bonne foi comme fondement du droit international public’ [1952] 5 Revue hellénique de droit international 17–21. 3 Kolb 1998 above (n 2) 674. © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_011

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these permutations are discussed in this chapter, with special regard to the principle of clean hands. Good faith also pervades the sub-system of international legal protection of foreign investments, and the practice of investment arbitration. As the tribunal in Inceysa v El Salvador noted emphatically in its 2006 award, ‘[g]ood faith is a supreme principle, which governs legal relations in all of their aspects and content.’4 Indeed, good faith provides an important parameter in assessing the lawfulness of the State’s conduct, and, since recently, also in relation to that of the investor, even though for different adjudicative purposes. Sometimes, it is critical for a tribunal to resort to good faith:5 it is often perceived that ‘recurring to good faith [is] replete with legal insecurity or, in a worst case scenario, leads to a risk of arbitrariness.’6 Tribunals might be wary of basing their decisions on good faith alone, as the losing party might seek the setting aside of any award that carries the stigma of apparent arbitrariness, alleging a failure to adequately provide reasons for the outcome of the proceedings. Rather than an entry-point for arbitrariness, good faith should be considered as a framework of fairness, equity and reasonableness for the proper administration of justice. In fact, legal reasoning based on good faith may precisely help countering annulment actions. It is arguable that an explanation that uses good faith to apply existing legal obligations, far from being devoid of reasons, enhances argumentation to support it.7 Unquestionably, the specific applications of general principle in hand are multifarious and bear on a formidably wide range of aspects, procedural and substantive alike. Good faith affects legal obligations at each stage, from negotiation to enforcement. In arbitration, it informs the rules of procedure and the powers of the tribunal, which include the determination of its own competence; it also supplements the applicable law and influences its interpretation and application by the tribunal. In treaty-based investment arbitration, good faith concerns all the actors in the proceedings, both as characters of the underlying dispute and as 4 Inceysa Vallisoletana s.l. v. Republic of El Salvador, icsid Case No. ARB/03/26, Award of 2 August 2006, para. 230. 5 AFM Maniruzzaman, ‘The Concept of Good Faith in International Investment Disputes – The Arbitrator’s Dilemma’ (2012) 89 Amicus Curiae: Journal of the Society for Advanced Legal Studies 16–18. 6 Bernardo Cremades, ‘Good Faith in International Arbitration’ (2012) 27 American University International Law Review 761. 7 See, generally, on annulment of icsid awards Christoph Schreuer, ‘From icsid Annulment to Appeal Half Way Down the Slippery Slope’ (2011) 10(2) Law & Practice of International Courts and Tribunals 211–225.

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participants in the dispute settlement proceedings.8 Good faith must be observed by the defendant State in the performance of its obligations, particularly in relation to fair and equitable treatment, but also with regard to its conduct in the proceedings; the individual arbitrators must keep good faith, ensuring independence and impartiality;9 the tribunal as a whole must do the same, in relation to its mandate to administer the proceedings and solve the dispute;10 the investor must keep good faith, both as beneficiary of the treaty rights on which the claim is funded and as party to the proceedings.11 This study assesses the role of good faith as a legal yardstick for reviewing the investor’s conduct, and will specify the implications of its use. The consequences of the application of such a parameter is, at least, twofold: (a) it can condition the eligibility for legal protection of the alleged investment; (b) it matters for the assessment of the host State’s responsibility in the stage of the merits. If there is a finding of breach, a finding of bad faith can be relevant to the determination of the amount due in compensation. Whilst the present contribution is mainly concerned with the positive law as it is, the last section considers de lege ferenda issues pertaining to the possible application of emerging treaty language which aims to reflect the relevance of good faith in the interplay between business and human rights, including environmental rights, through the ancillary principles of due diligence, reciprocity and proportionality. This chapter will, first, address the encapsulation, in express or implicit terms, of good faith in the requirements of legality of the investment (Part 2). 8

9

10

11

See the taxonomy drawn by the tribunal in Abaclat and others (Case formerly known as Giovanna a Beccara and Others) v Argentine Republic, icsid Case No ARB/07/5, Decision on Jurisdiction and Admissibility of 4 August 2011, para. 647–649. See, amongst others, Loretta Malintoppi, ‘Independence, Impartiality, and Duty of Disclosure of Arbitrators,’ in Peter Muchlinski, Christoph Schreuer (eds), Oxford Handbook of International Investment Law (oup 2012) 792. Cremades, above (n 6) 787: ‘[A]rbitrators and arbitration institutions must fulfill their role in good faith, protecting the integrity of the proceeding. Dedication, diligence and celerity in the procedural phases as well as the sound management of the proceeding are obligations that derive from the good faith of the performance of arbitration commitments.’ With respect to the procedural duties of investors and States, see Cementownia ‘Nowa Huta’ s.a. v. Republic of Turkey, icsid Case No. ARB(AF)/06/2, Award of 17 September 2009, para. 153: ‘Parties to an arbitration proceeding must conduct themselves in good faith. This duty, as the Methanex tribunal found, is owed to both the other disputing party and to the Tribunal.’ The reference here is to Methanex Corporation v. United States of America, nafta Chapter Eleven case under the uncitral Arbitration Rules, Final Award, Part ii – Chapter i, para. 54, p. 56.

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Second, it considers the distinction between illegalities affecting the making of the investments and their operation (Part 3). Third, the cognate principle of clean hands is then analysed in Part 4. Part 5 accounts for the use of good faithbased reasoning in the stages of the merits and cost allocation, and tackles in general the nuanced use of the notion which reflects the interplay between good faith and principles like proportionality and reciprocity. Part 6 introduces two pending sets of proceedings in which the investor’s conduct is being challenged also with respect to corporate responsibility standards and international rights of the indigenous people. These cases illustrate the potential use of non-bit international obligations to assess the good faith of the investor who seeks to obtain protection for its investment. Part 7 concludes trying to draw together the threads of the analysis. 2

Good Faith and the Principle of Domestic Legality

One of the basic applications of the principle of good faith is the principle ex injuria jus non oritur: a right cannot arise from a wrongdoing. This principle is often codified in the treaty clauses of domestic legality, which specify that treaty protection extends only to investments made in accordance with ­domestic law.12 In other words, a wrongdoing relating to the investment which was committed at the time of establishment operates as a bar for the investor’s attempt to invoke its rights under an investment treaty. Since domestic legality clauses are evidentiary of a general principle, it is often argued that the principle would equally apply in the absence of an express provision. The tribunal in Plama v. Bulgaria held as much in 2008, confronted with the absence of a specific domestic legality clause in the applicable instrument (the Energy Charter Treaty): Unlike a number of Bilateral Investment Treaties, the [Energy Charter Treaty] does not contain a provision requiring the conformity of the Investment with a particular law. This does not mean, however, that the protections provided for by the ect cover all kinds of investments, including those contrary to domestic or international law. […] The Tribunal concludes that the substantive protections of the ect cannot apply to investments that are made contrary to law.13 12 13

Ursula Kriebaum, ‘Illegal Investments’ (2010) 4 Austrian Yearbook on International Arbitration 307–335. Plama Consortium Limited v. Republic of Bulgaria, icsid Case No ARB/03/24, Award of 27 August 2008, para. 138.

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While this approach calls into question the effet utile of domestic legality clauses, the 2016 award in Ampal v. Egypt14 clearly endorsed it, referring to it as an uncontroversial general principle of law: It is a well-established principle of international law that a tribunal constituted on the basis of an investment treaty has no jurisdiction over a claimant’s investment which was made illegally in violation of the laws and regulations of the Contracting State.15 It is noteworthy that the Plama tribunal referred to the illegality of the investment under ‘international law’ as a possible reason for the non-application of the treaty in question. This notion goes beyond the reach of domestic legality clauses and their corresponding principle endorsed in Ampal. Whereas tribunals mostly adopt the position of the Plama tribunal, others refuse to read a legality requirement in the definition of the protected investments and consider illegal investments to qualify as investments nonetheless.16 Under this approach, the adequate response to the illegality of the investment is the characterization of the treaty claims as procedurally abusive or unworthy of substantive protection.17 This alternative approach is discussed below. A clarification is called for here. Since domestic legality clauses are normally found in the treaty definition of investment, an investor’s wrongdoing might affect the jurisdiction of the tribunal ratione materiae. In other words, illegal investments were invalidly situated within the substantive reach of the treaty,18 hence any dispute relating to them would fall out of the competence 14 15 16 17

18

Ampal-American Israel Corporation and others v. Arab Republic of Egypt, icsid Case No. ARB/12/11, Award of 1 February 2016. Ibid., para. 301. Saba Fakes v. Republic of Turkey, icsid Case No. ARB/07/20, Award of 14 July 2010, para. 112–114. For an incisive critique of the majoritarian view, see Zachary Douglas, ‘The Plea of Illegality in Investment Treaty Arbitration’ (2014) 29(1) icsid Review 155, 172. Douglas doubts that the bit parties intended to provide for the possibility of pleas of illegality going to the jurisdiction of the tribunal simply through the formula ‘in accordance with domestic law.’ To list but a few awards that diverge from the Plama approach, see 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 Jurisdiction of 27 September 2012, para. 226; Metal-Tech Ltd. v. Republic of Uzbekistan, icsid Case No. ARB/10/3, Award of 4 October 2013, para. 127; Liman Caspian Oil bv and ncl Dutch Investment bv v. Republic of Kazakhstan, icsid Case No. ARB/07/14, Excerpts of Award of 22 June 2010, para. 187. Hulley Enterprises Limited (Cyprus) v. The Russian Federation, uncitral, pca Case No. AA 226, Final Award of 18 July 2014, para. 1352.

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of the tribunal. This reasoning, which is perhaps dubious, but prevailing in the relevant case law, preempts, or solves – at least in the particular scenario of a breach of a domestic legality clause – the otherwise difficult dilemma as to which legal sanction would be apposite in case of lack of good faith on the part of the investor.19 3

The Lack of Good Faith on the Part of the Investor

Investment protection treaties create obligations primarily for the host State with the aim of limiting ex ante the chance of arbitrariness in the actions of public authorities vis-à-vis foreign investors. This does not mean that the investors’ good faith, in turn, is irrelevant. As the Hulley tribunal noted in 2014, ‘[i]n imposing obligations on States to treat investors in a fair and transparent fashion, investment treaties seek to encourage legal and bona fide investments.’20 How the above allusion to reciprocity plays out in practice is hardly defined in investment treaties, if at all. On the basis of emerging case law, however, several potential consequences to the investor’s lack of good faith might be anticipated which could have multiple concurring effects.21 By way of anticipation of the following analysis, one may discern from the case law two main strands of possible consequences. First, is the lack of jurisdiction ratione materiae of the tribunal resorted to.22 This conclusion can be reached under a domestic legality clause in the 19

20 21

22

Unless specified otherwise, ‘bad faith’ is used as a formula encompassing several types of corporate misconduct, assessed under different obligations, or sources of soft law. Such conduct would certainly include misrepresentation, fraud or corruption under the domestic law of the host state, but might as well encompass infringements of standards for corporate conduct generally recognised at the international level. Hulley (n 18) para. 1352. For a seminal study on the use of bad faith claims, see Abby Cohen Smutny and Petr Polasek, ‘Unlawful or Bad Faith Conduct as a Bar to Claims in Investment Arbitration’ in Jacques Werner and Arif Hyder Ali (eds), A Liber Amicorum: Thomas Wälde (Cameron May 2009) 277–296. Fraport ag Frankfurt Airport Services Worldwide v. The Republic of the Philippines (Fraport i), icsid Case No. ARB/03/25, Award of 16 August 2007, para 396–404; Fraport ag Frankfurt Airport Services Worldwide v. Republic of the Philippines (Fraport ii), icsid Case No. ARB/11/12, Award of 10 December 2014, para. 467–468; Alasdair Ross Anderson and ors v. Costa Rica, icsid Case No. ARB(AF)/07/3, Award of 19 May 2010, para. 59; Inceysa (n 4) para. 207.

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­relevant treaty,23 but also in the absence of a similar clause, as a matter of general principle.24 Second, is the possible inadmissibility of the claim under the doctrines of ordre public international,25 clean hands,26 estoppel, abuse of rights/process27 or ex injuria jus non oritur. Even when the inadmissibility of the claim is not expressly mentioned, it is possible to read it into the language of those decisions that do not mention a lack of jurisdiction, but limit themselves to noting that the treaty protection does not apply to the investment. In such cases, the tribunal seems to admit to have jurisdiction but refuses to exercise it, hence, blurring the line dividing jurisdiction from admissibility of the claim. Third, the investor loses on the merits.28 Fourth, the calculation of damages is adjusted,29 or the allocation of legal costs is skewed unfavourably to the investor. The difficulty to found solid grounds for prediction of the effects of a finding of lack of good faith on the part of the claimant investor in the existing case law advises against generalisations. The next section explores the relevant case law with a view to inferring the main trends.

23

Metal-Tech (n 17). An accurate analysis of the possible effects of domestic legality clauses is found in Cameron A Miles, ‘Corruption, Jurisdiction and Admissibility in International Investment Claims’ (2012) 3(2) Journal of International Dispute Settlement 329, 343 ff. 24 Besides Plama and Ampal, cited above, see also Getma International and others v. Republic of Guinea, icsid Case No. ARB/11/29, Award of 16 August 2016, para. 174. 25 World Duty Free Company v Republic of Kenya, icsid Case No. ARB/00/7, Award of 4 October 2006, para. 157, 188. Andrew Newcombe, ‘Investor Misconduct: Jurisdiction, Admissibility or Merits?’ in Chester Brown and Kate Miles, Evolution in Investment Treaty Law and Arbitration (Cambridge University Press 2011) 187–200, 196–197. 26 Patrick Dumberry and Gabrielle Dumas-Aubin, ‘The Doctrine of “Clean Hands” and the Inadmissibility of Claims by Investors Breaching International Human Rights Law’ (2013) 10(1) Transnational Dispute Management. 27 Phoenix Action Ltd v. Czech Republic, icsid Case No. ARB/06/5, Award of 15 April 2009, para. 100. 28 Plama above (n 24) para. 112 and 135. It is however not too clear from this award whether the matter is one of merits or it is just joined to the merits phase. See also Mamidoil Jetoil Greek Petroleum Products Societe s.a. v. Republic of Albania, icsid Case No. ARB/11/24, Award of 30 March 2015, para. 672–675. For an analysis of how the investor’s conduct might matter to the analysis of the merits, see Peter Muchlinski, ‘“Caveat investor”? The relevance of the conduct of the investor under the fair and equitable treatment standard’ (2006) 55(3) International and Comparative Law Quarterly 527–558. 29 mtd Equity Sdn. Bhd. & mtd Chile sa v. Chile, icsid Case No. ARB/01/7, Award of 25 May 2004, para. 242–243.

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3.1 At the Time of the Initiation of the Investment In the most general terms, the tribunal in Phoenix v. Czech Republic declared in 2009 that ‘States cannot be deemed to offer access to the icsid dispute settlement mechanism to investments not made in good faith.’30 The following year, the tribunal in Hamester v. Ghana espoused this view and elaborated upon it, stating as follows: An investment will not be protected if it has been created in violation of national or international principles of good faith; by way of corruption, fraud, or deceitful conduct; or if its creation itself constitutes a misuse of the system of international investment protection under the icsid Convention. It will also not be protected if it is made in violation of the host State’s law.31 The list of categories of conduct that amount to permutations of lack of good faith considered in Hamester includes cases of abuse of rights/abuse of process, fraudulent conduct and a generic mention of good faith that might be specified by reference to the principles of clean hands and estoppel. The sentence which follows immediately this enumeration is also of particular significance: ‘These are general principles that exist independently of specific language to this effect in the Treaty.’32 Assuming the veracity of this statement, it is possible to conduct an analysis that does not depend on the applicable treaty and focuses on the listed general statements, which, as already alluded, are all tributary to the overarching ­notion of good faith. The award in hand is also helpful as it clearly states that a potential i­ llegality of the investment under domestic law, governed by a domestic legality clause, affects the jurisdiction of the tribunal, or the admissibility of the claim,33 only when it concerns ‘the initiation of the investment.’34 The same applies to the statement according to which also facts that pre-date the making of the in­ vestment may be considered by the tribunal to assess the good faith ­investor. 30 31

Phoenix above (n 27) [106], [123]. Gustaf F.W. Hamester GmbH & Co kg v. Republic of Ghana, icsid ARB/07/24, Award of 18 June 2010, para. 123. 32 Ibid., para. 124. 33 See Hulley (n 18) para. 1353, regarding the interchangeability of the two sanctions (a lack of jurisdiction and the deprivation of substantive protections under the treaty). 34 Hamester (n 31) para. 127.

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This would be the case when the elements of the conduct in q­ uestion ­partake of the process through which the investor makes or acquires the i­nvestment: all of these acts, no matter how far back in time they go, ‘must be legal and bona fide,’35 insofar as they belong to the set of transactions that led to the investment’s existence.36 Apparently, this approach played a role in the (undisclosed) award in Spentex v. Uzbekistan:37 evidence of the investor’s payment of bribes to secure participation in a tender process would result in the claim’s dismissal before reaching the merits.38 In light of the above, it can be inferred that an instance of illegality attached to conduct carried out by the investor after the initiation of the investment would not necessarily undermine the tribunal’s jurisdictional competence, but would be subject to a case by case assessment at the merits stage. Allegations of corruption are increasingly common. The case law provides indications that the finding of corruption relating to the making of the investment can seriously penalise the investor’s claim. In 2006, the tribunal found in World Duty Free v Kenya that the claimant had bribed some State officials to secure the investment. Consequently, the tribunal found that the investor resorted to arbitration with unclean hands and that he had lost the right to bring the State conduct complained of before the tribunal, regardless of whether the host State had facilitated or participated in the wrongdoing. The tribunal concluded, in a unanimous award, that […] as regards public policy both under English law and Kenyan law (being materially identical) and on the specific facts of this case, […] 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.39 35 See Hulley (n 19) para. 1369. 36 Ibid., the tribunal noted that alleged illegalities that are not ‘sufficiently connected’ with the final investment transaction. See also Alasdair Ross Anderson et al v. Republic of Costa Rica, icsid Case No. ARB(AF)/07/3, Award of 19 May 2010. 37 Spentex Netherlands, b.v. v. Republic of Uzbekistan, icsid Case No. ARB/13/26, Award of 27 December 2016. 38 Investment Arbitration Reporter, In newly unearthed Uzbekistan ruling, exorbitant fees promised to consultants on eve of tender process are viewed by tribunal as evidence of corruption, leading to dismissal of all claims under Dutch bit, June 22 2017. According to this report, the majority considered the existence of corruption to constitute a cause for inadmissibility, whilst a member of the tribunal characterized it as grounds for lack of jurisdiction. 39 World Duty Free (n 25) para. 179.

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The notion that a claim (actio) cannot arise from a wrongdoing (causa turpi) is a straightforward application of the principle of good faith. Likewise, it stands to reason that a right cannot arise from a wrongdoing,40 let alone from fraudulent behavior.41 Other corollaries of the general principles of good faith a­ pplicable to the consideration of the investor’s conduct were dug up by the tribunal in Inceysa, which listed a flurry of Latin adages to illustrate the point.42 Reference to good faith helps to overcome the problem as to whether any instance of domestic illegality would be sufficient to taint fatally the investment in view of the subsequent claim. As put by Zachary Douglas, this question presents itself in various scenarios: it is not clear whether, for instance, a minor irregularity unrelated to the core business of the investment would be sufficient, or whether a serious breach of international rules would go scotfree, if not accompanied by a breach of domestic law.43 Good faith appears as a hermeneutic tool which allows the tribunal to find justice in any specific case and identify the instances of wrongdoing that warrant a denial of protection. Good faith, for instance, underlies the distinction between breaches of procedural and substantive rules, which is gaining traction in the case law. On the one hand, a breach of the substantive law of the host State, for instance prohibiting certain kinds of investment, would determine a denial of protection. On the other hand, a breach of procedural requirements, instead, requires a case by case analysis. The tribunal in Mamidoil v. Albania, in 2015, approached this distinction as follows: 40 See Hulley (n 19) para. 1352. 41 Inceysa (n 4) para. 242: ‘the foreign investor cannot seek to benefit from an investment effectuated by means of one or several illegal acts and, consequently, enjoy the protection granted by the host State, such as access to international arbitration to resolve disputes, because it is evident that its act had a fraudulent origin and, as provided by the legal maxim “nobody can benefit from his own fraud.”’ 42 Ibid., para. 240: ‘In connection with this principle [Nemo Auditur Propriam Turpitudinem Allegans], there are various maxims that clearly apply to the present case: (a) “Ex dolo malo non oritur actio” (an action does not arise from fraud). (b) “Malitiis nos est indulgendum” (there must be no indulgence for malicious conduct). (c) “Dolos [sic, correct dolus] suus neminem relevat” (no one is exonerated from his own fraud). (d) “In universum autum [sic, correct autem] haec in ea re regula sequenda est, ut dolos [sic, correct dolus] omnimodo puniatur” (in general, the rule must be that fraud shall be always punished). (e) “Unusquique [sic, correct unusquisque] doli sui poenam sufferat” (each person must bear the penalty for his fraud). (f) “Nemini dolos [sic, correct dolus] suus prodesse debet” (nobody must profit from his own fraud)’. 43 Douglas (n 17) 173.

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[A]n investment can be illegal and as a consequence not protected by investment conventions when it contravenes substantive law, in other words when it does not comply with material norms regulating investments. …The investment may be legal in substance but still tainted by illegality when the investor violates procedural norms and regulations for setting up its investment. …In case [the necessary permits] were not applied for and/or not issued, [the Tribunal] has to determine whether the absence of any one of the permits is of a nature to qualify the investment as illegal. If that turns out to be the case, the Tribunal has still to determine whether Respondent is entitled to invoke illegality.44 The tribunal apparently cares to tone down ‘the general assumption that States do not consent to the arbitration of disputes relating to illegal investments.’45 The tribunal was clearly aiming for equitable results in positing the need for an ‘inner link between the illegal act and the investment itself’46 and requiring a de minimis threshold, whereby denial of protection could only follow serious or manifest illegalities.47 The latter threshold had been foreshadowed in previous case law. In the Rumeli v. Kazakhstan 2008 award, the tribunal held that [t]o defeat the Tribunal’s jurisdiction based on a bit’s requirement that the disputed investments be in conformity with the host State’s laws and regulations, a certain level of violation is required. As determined by the Arbitral Tribunal in the lesi case, such a provision will exclude the protection of investments only if they have been made in breach of fundamental legal principles of the host country (‘en violation des principes fondamentaux en vigueur’).48

44 45 46

47 48

Mamidoil (n 28) para. 372, 378, 379. Ibid., para. 480. Ibid., para. 481. See also the similar reasoning in Fraport i (n 22), para. 332: ‘there is an increasingly well-established international principle which makes international legal remedies unavailable with respect to illegal investments, at least when such illegality goes to the essence of the investment’ (emphasis added). Mamidoil (n 28) 482. 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, referring to lesi, S.p.A. and Astaldi S.p.A. v. People’s Democratic Republic of Algeria (icsid Case No. ARB/05/3), Decision on Jurisdiction of 12 July 2006.

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Likewise, good faith governs the definition of the de minimis threshold, preventing minor irregularities from relieving the State from its protection obligations. For instance, in Alpha Projektholding (2010) the tribunal refused to investigate the alleged bureaucratic defects of the investment’s registration paperwork,49 hence admitting that a minor administrative violation affecting the making of the investment would be insufficient to remove it from the application ratione materiae of the treaty and from the tribunal’s jurisdiction. Similarly, the tribunal in Malicorp was reluctant to resort to the all-or-nothing sanction of declining jurisdiction over an investment which allegedly relied on an invalid contract. Upon reflection, it noted that, in the particular case, […] in the jurisdictional phase, it is often difficult to determine whether the ground [for invalidity inferred from the breach of the principle of good faith] derives from an act contrary to good faith, in relation to the conclusion of a contract, for example, from a threat or misrepresentation, or another related cause not involving bad faith, for example mistake. In those circumstances, it seems more appropriate to defer the examination until the merits phase.50 Whereas the discussion has so far concerned the use of domestic law as a parameter of legality of the investor’s conduct, the possibility to use of international legal standards as benchmark requires a specific analysis (see below, Part 6). 3.2 After the Investment has been Made The investor’s alleged misconduct subsequent to the making of the investment appears to have received a different treatment. Indeed, differently from the circumstances of an unlawfully made investment, in this case it cannot be said that the investor managed to secure treaty protection through wrongful conduct. Therefore, the question here cannot be whether treaty protection ever applied to the investment – which it certainly did – but, rather, whether the investor might have lost the right to invoke it, or whether its claim is doomed

49

50

Alpha Projektholding GmbH v. Ukraine, icsid Case No. ARB/07/16, Award of 8 November 2010; see also Tokios Tokelés v. Ukraine, icsid Case No. ARB/02/18, Decision on Jurisdiction of 29 April 2004, para. 72. Malicorp Limited v. Arab Republic of Egypt, icsid Case No ARB/08/18, Award of 7 February 2011, para. 119.

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to fail on the merits. This approach was confirmed in V. Kim v. Kazhakistan.51 With reference to the allegations of corruption, the tribunal agreed to consider corruption in the making of the investment as a bar to the admissibility of the claim on grounds of international public policy.52 However, it added that ‘[a] ny matters as regards bribery or corruption that arose later are more appropriately addressed at the merits stage.’53 As seen above, the Hulley v. Russia tribunal considered this question to matter essentially for the merits of the case.54 Other tribunals have addressed issues of post-investment illegality as a matter bearing on the admissibility of the claim. In Copper Mesa (2016) the tribunal forcefully objected to the possibility of declining jurisdiction in response to illegalities allegedly occurred after the investment was made, as follows: [Such jurisdictional bar] would effectively deprive an investor from exercising any arbitral remedy under the Treaty if the investor (or its agents or employees) ever committed a breach of the host State’s laws during the life of its investment. That would be a stark and potentially harsh result, severely limiting the legal autonomy of the arbitration agreement between an investor and a host State.55 The tribunal, however, accepted to consider the connected allegations of unclean hands as a matter of admissibility,56 and subsequently joined their analysis to the merits of the case. A similar attitude was followed by in Awdi v. Romania (2015) in considering the host State’s allegations that the investor had mistreated the employees of its company and sought to loot its assets. Romania cited the existence of 51 52

53 54

55 56

Vladislav Kim et al. v. Republic of Uzbekistan, icsid Case No. ARB/13/6, Decision on Jurisdiction of 8 March 2017. Ibid., para. 593. Since the applicable bit contained a legality requirement, the tribunal was minded to consider the corruption allegations, insofar as they indicated breaches of local laws, also as objections to its jurisdiction. Ibid., para. 553. Above (n 18). See also Vannessa Ventures Ltd v. The Bolivarian Republic of Venezuela, icsid Case No. ARB(AF)/04/6, Award of 16 January 2013, para. 167; mnss b.v. and Recupero Credito Acciaio n.v. v. Montenegro, icsid Case No. ARB(AF)/12/8, Award of 4 May 2016, para. 214. Copper Mesa Mining Corporation v. Republic of Ecuador, pca No. 2012-2, Award of 15 March 2016, para. 5.55. Ibid., para. 5.62.

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criminal proceedings in support of its claims. The tribunal did not discard the possibility that the investor’s post-investment conduct could result in a finding of inadmissibility of its claim, but rejected the State’s argument on the evidence: There is no convincing evidence of what Respondent defines as a systematic looting of Rodipet’s business and assets and non-compliance by Claimants in relation to the rights of Rodipet’s employees, let alone evidence at a level required to meet the threshold of inadmissibility, be it on the ground of misrepresentation and/or the principle of good faith in an investment arbitration.57 The Hulley v. Russia tribunal made some important clarifications regarding the relevance of the timing and gravity of the investor’s misconduct. As for the timing, it confirmed the majoritarian view that ‘actions that were taken after the making of Claimants’ investment […] cannot have any impact on the ­availability of [treaty] protection for Claimants.’58 It reasoned that, once the investor has made the investment, the State can police and sanction appropriately any investor’s wrongdoing applying and enforcing domestic law.59 A similar remark was made by the Awdi tribunal in relation to the alleged contractual breaches of the investor, invoked by the host State as a ground for the inadmissibility of the claim. The tribunal noted that, since the alleged conduct was confined within the ambit of the contractual undertakings of the investor, the State should resort to use the contractual remedies.60 Once the State has reacted to any misconduct, either enforcing its domestic law (as Russia did with Yukos) or its contractual remedies (as Romania should have done with Awdi), it will be open to the investor to challenge the enforcement under the bit or other rules of international law. Significantly, in Hulley v. Russia the acts of the investor which were proved to be unlawful under Russian law were considered in the phase of the merits. At that stage, the tribunal addressed the issue of the contributory fault of the investor identifying a series of acts attributable to the claimant which caused an increase of the losses suffered, hence, lessening the degree of liability of the

57 58 59 60

Mr. Hassan Awdi, Enterprise Business Consultants, Inc. and Alfa El Corporation v. Romania, icsid Case No. ARB/10/13, Award of 2 March 2015, para. 267. Hulley (n 18) para. 1365, emphasis added. Ibid., para. 1355. Awdi (n 57) para. 213.

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Respondent for them.61 Ultimately, the tribunal resolved to attribute to the investor the responsibility for one fourth of the prejudice suffered, adjusting the order of compensation accordingly. In sum, the case law appears to be reasonably consistent on the matter in hand.62 Some uncertainty has emerged as to whether illegalities alleged to have been incurred after the establishment of the investment matter for the inadmissibility, or the merits, of the claim. In either case, however, the analysis of the allegations is normally carried out at the merits stage.63 4

Clean Hands

4.1 The State of the Doctrine in Investment Law The state of the clean hands doctrine in investment arbitration has been considered in a ‘state of confusion.’64 At the outset, it must be noted that the notion has not established itself with certainty as a general principle of international litigation. On the basis of significant inter-State case law, ever since the 1903 Jarvis case,65 Sir Gerald Fitzmaurice observed in 1957 that: He who comes to equity for relief must come with clean hands. Thus a State which is guilty of illegal conduct may be deprived of the necessary locus standi in judicio for complaining of corresponding illegalities on the part of other States, especially if these were consequential on or were embarked upon in order to counter its own illegality – in short were provoked by it.66 61 62

63

64 65 66

Hulley (n 18) para. 1633. See, among others, Hamster (n 31) para. 127; Quiborax (n 17) para. 266; Teinver s.a., Transportes de Cercanías s.a. and Autobuses Urbanos del Sur s.a. v. The Argentine Republic, icsid Case No. ARB/09/1, Decision on Jurisdiction of 21 December 2012, para. 328; Metal-Tech (n 17) para. 193; Vannessa Ventures (n 54)167. Perhaps, the permeability between matters of admissibility and matters on the merits is revealing of the conceptual blur between jurisdiction and admissibility, see Fontanelli’s chapter, in this book. Patrick Dumberry, ‘State of Confusion: The Doctrine of “Clean Hands” in Investment Arbitration after the Yukos Award’ (2016) 17(2) Journal of World Investment & Trade 229–259. Jarvis case, u.s.-Venezuela Mixed Claims Commission, Opinion of the Commissioner, unriaa, 1903–1905, Vol. 9, p. 208, at 214. Gerald Fitzmaurice, ‘The General Principles of International Law Considered from the Standpoint of the Rule of Law’ (1957) 92 Hague Recueil 1, 119.

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However, in the case Guyana v Suriname, the unclos Annex vii Tribunal argued that ‘use of the clean hands doctrine has been sparse, and its application in the instances in which it has been invoked has been inconsistent.’67 The Tribunal relied on the authoritative view of the then Special Rapporteur on State Responsibility, now icj Judge, James Crawford, who found that ‘it is not possible to consider the “clean hands” theory as an institution of general customary law.’68 The uncertain status of the doctrine in hand is visible juxtaposing the recent Hesham and the Hulley awards. On the one hand, in the 2014 award in Hesham the tribunal dismissed the investor’s claim invoking the clean hands principle69 based on the fact that the investor had committed fraud and openly breached local laws.70 In spite of the careful reconstruction of the clean hands doctrine offered by the Tribunal, the inadmissibility of the claim was ultimately founded on a specific clause contained in the investment protection treaty of the Organisation of the Islamic Conference. This provision – somewhat atypically, compared to those found in other investment protection agreements – refers to the obligations of the investor to comply with the domestic laws of the host State and to the prohibition of seeking illicit profits.71 In other words, the insistence of the tribunal on the notion of clean hands was a useful means to interpret a treaty rule and to identify the legal consequence of its breach, i.e., the inadmissibility of the claim. On the other hand, in Hulley v. Russia, the doctrine of clean hands was extensively perused by the Tribunal72 due to the host State’s allegations that the claimants participated in a criminal enterprise and committed several illegal or bad faith acts. Significantly, however, the tribunal conceded that a clean hands requirement could be read in the applicable treaty (the Energy Charter Treaty),73 but ruled out the possibility that it could constitute a separate applicable source, in the form of a general principle of law.74 67 68 69 70 71 72 73 74

Guyana v. Suriname (unclos Annex vii Tribunal), Award, pca Awards Series (2007), para. 418. James Crawford, ilc Ybk 1999 ii Part 2 p. 83. Hesham T.M. Al Warraq v. Republic of Indonesia, uncitral, Final Award of 15 December 2014. Ibid., para. 638–644. See The Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organisation of the Islamic Conference, Article 9. Hulley (n 18), para. 1343 ff. Ibid., para. 1364. Ibid., para. 1363.

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4.2 Clean Hands and Estoppel When States resort to the clean hands doctrine, claimants may counteract invoking the principle of estoppel. The principle of estoppel is another corollary of the principle of good faith encapsulated in the maxim nemo venire potest contra factum proprium. A State can be estopped from raising a certain defense owing to its previous acts or behavior with respect to the grounds invoked.75 For instance, if the State expressly acknowledges that the domestic criminal proceedings against the investor and the treaty arbitration proceedings are completely distinct, the investor might invoke this statement and object to  the subsequent attempt by the State to invoke the investor’s wrongdoing at the ­domestic law level to have the investment claim thrown out. In Awdi v. Romania, the investor’s invocation of estoppel along these lines failed,76 but the tribunal assured the claimant that it would not allow the undue spillover between the two sets of proceedings. In Niko v. Bangladesh, instead, the tribunal decided in 2013 to reject the respondent’s allegations of unclean hands against the claimant (bad faith and bribery) based on an argument reminiscent of the notion of estoppel: If and to the extent the Claimant or its parent company had unclean hands, the Respondents disregarded this situation. They may not now rely on these events to deny jurisdiction under an arbitration agreement which they then accepted.77 The case, however, is easily distinguished from the majority of investment arbitration cases, because access to icsid arbitration was not based on a treaty clause, but on a contract. In the tribunal’s view, since the State did not avoid the contract upon knowing of the investor’s misconduct,78 the arbitration clause

75

76 77

78

See Rahim Moloo and Alex Khachaturian, ‘The Compliance with the Law Requirement in International Investment Law’ (2011) 34 Fordham International Law Journal 1473, 1497 ff. For an instance (the State could not invoke the invalidity of agreements that had been executed for a long time), see adc Affiliate Ltd and adc & admc Management Ltd v. Republic of Hungary, icsid Case No. ARB/03/16, Award of 2 October 2006, para. 475. Awdi (n 57), Decision on the Admissibility of the Respondent’s Third Objection to Jurisdiction and Admissibility of Claimant’s Claims of 26 July 2013, para. 84. Niko Resources (Bangladesh) Ltd. v. Bangladesh Petroleum Exploration & Production Company Limited (‘Bapex’) and Bangladesh Oil Gas and Mineral Corporation (‘Petrobangla’), icsid Case No. ARB/10/18, Decision on Jurisdiction of 19 August 2013, para. 484. Unlike Kenya, who avoided the contract on which the arbitration was based in World Duty Free, above (n 25).

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therein remained applicable and the allegations of bad faith were considered as part of the merits of the case.79 An interesting scenario arose in Mamidoil v. Albania.80 There, the investor’s tank farm had failed to secure the necessary permits from the local authorities and, therefore, its operation was illegal ab initio. To counter the State’s plea of illegality, the investor argued that Albania, whose authorities had tolerated the illegality and failed to sanction it, was estopped from raising the issue before the investment tribunal. The latter rejected the claimant’s argument, noting that estoppel is granted only in exceptional circumstances, and the evidence provided by the investor fell short of proving the State’s conclusive acquiescence to the investment’s illegality.81 At the same time, the tribunal upheld the respondent’s allegations that the illegalities tainting the investment were not trivial.82 Nonetheless, the tribunal concluded that the collaborative approach of the host State, which hinted at the possible cure of the investment’s illegality, constituted a de facto consent to allow the tribunal to hear the merits of the case.83 Similar reasoning was apparently used by the tribunal in the 2016 award in getma v. Guinea,84 in response to the State’s allegations of corruption. The tribunal questioned whether the State had genuinely policed and prosecuted the alleged episodes of corruption, or was limiting itself to raise them as a defense in arbitration. It concluded that ‘[l]a Défenderesse a donné priorité au moyen de défense qui constitue la corruption, plutôt qu’à la poursuite des corrompus.’85 Thus, by failing to prosecute the investor, the State was considered to have lost its chance to prove corruption. In the absence of any specific justification, Guinea’s failure to spend any effort in collecting the evidence of corruption ‘the tribunal could only conclude from this failure that the State itself did not believe that such evidence existed.’86 79 80 81 82 83 84 85 86

Niko v Bangladesh (n 77) para. 471. See above (n 28). Ibid., para. 477. Ibid., para. 489. Ibid., para. 492–495. See above (n 24). Ibid., para. 221. Ibid., para. 226, unofficial translation. The full paragraph, in French, reads: ‘En l’absence de toute justification de la part de la Défenderesse pour son omission d’utiliser ses pouvoirs pour apporter la preuve, le cas échéant, de la corruption, le Tribunal arbitral ne voit pas d’autre conclusion possible à tirer de cette omission que celle que l’Etat ne croyait pas lui-même que la preuve existe.’

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Eschewing All-or-Nothings: Good Faith at the Stage of Merits or the Calculation of Costs

In his dissenting opinion in Fraport i (2007), Cremades made the point that [i]f the legality of the Claimant’s conduct is a jurisdictional issue, and the legality of the Respondent’s conduct a merits issue, then the Respondent Host State is placed in a powerful position. In the Biblical phrase, the Tribunal must first examine the speck in the eye of the investor and defer, and maybe never address, a beam in the eye of the Host State. Such an approach does not respect fundamental principles of procedure.87 This is not to say that the misconduct of the investor would have no impact on the finding as to the Respondent’s liability. In the context of a claim of expropriation, for instance, the invalidity of the agreement on which the investor’s claim is based – owing to the investor’s wrongdoing or misrepresentation – may determine a lack of protection of his property rights, being therefore fatal to the claim, hence, avoiding any assessment as to the Respondent’s liability.88 The result of the Plama case was ultimately similar to this scenery. There, the tribunal denied protection to the investor sanctioning the fraudulent representations used to obtain the investment.89 In such a case, whilst the finding is made at the merits stage, the reasoning to that effect is made at the outset of the proceedings, hence, absorbing all further questions.90 Generally, however, addressing the issues in hand at the merits stage allows the possibility of avoiding all-or-nothing outcome scenarios, especially in cases a lack of good faith rather than outright wrongdoing. An exemplary application of this approach is to be found in mtd v. Chile (2004).91 There, the tribunal found against the State but, at the stage of the calculation of damages, it held that some reckless business decisions by the investor had increased the 87 88 89

90

91

Fraport (n 22), Dissenting Opinion, para. 37. See also see World Duty Free (n 25) para. 162. See, for instance, Mr. Franck Charles Arif v. Republic of Moldova, icsid Case No. ARB/11/23, Award of 8 April 2013, para. 418. Namely, the investor did not disclose to be the only shareholder in the investment to the local authorities, effectively pretending that two large companies that had beforehand supported the project were still invested in it. More than half of the awards (from para. 147 onwards) is dedicated to questions on the merits that are discussed only ‘in acknowledgement of the Parties’ efforts, ex abundanti cautela. Above (n 29).

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investment risks therefore increasing the ensuing losses. The tribunal, reminiscent of Maffezini,92 confirmed that ‘[t]he bits are not an insurance against business risk’ adding that ‘the Claimants should bear the consequences of their own actions as experienced businessmen.’93 Accordingly, it awarded only half of the damages sought. This award showed the operation of good faith in combination with the principles of reciprocity and proportionality. The element of lack of good faith that tainted the investor’s case (trying to profit from its wrong business decisions) did not sink the claim, but received a calibrated judicial response by the tribunal. Most significantly, in 2007, the Committee rejected an attempt to have the award annulled emphasising that ‘the actual basis on which the Tribunal’s decision has been upheld [was the fact that] a foreign investor failed to complete due diligence on a point fundamental to the investment.’94 Similarly, in Methanex (2005), the tribunal noted that the investor knew well the features of the regulatory process governing the market of chemicals in the us95 in order to find that it had no title to complain about the regulatory changes that had affected its investments. For it should have anticipated the possibility. The success of the State’s defence based on the investor’s lack of good faith depends on the seriousness of the obligations in question and of their violation. There may be cases where the seriousness of the investor’s misconduct is such as to justify the subsequent reaction of the host State, defusing all claims of unfair or inequitable treatment.96 In Azinian v. Mexico (1999) the tribunal rejected the fet claim, relating to the annulment of a concession for wastecollection and disposal, because the investor had obtained the concession by misleading the State authorities as to its capacity to perform the work.97 92

93 94 95 96

97

‘[T]he Tribunal must emphasize that Bilateral Investment Treaties are not insurance policies against bad business judgments,’ Emilio Agustín Maffezini v. The Kingdom of Spain, icsid Case No. ARB/97/7, Award of 13 November 2000, para. 64. mtd (n 29) para. 178, see also para. 234. mtd (n 29), Decision on Annulment of 21 March 2007, para. 107. Methanex Corporation v. United States of America, uncitral, Final Award of 3 August 2005, Part iv, Chapter D, para. 9, p. 279. For an overview, see Sanja Đajić, ‘Mapping the Good Faith Principle in International Investment Arbitration: Assessment of Its Substantive and Procedural Value’ (2012) 46(3) Zbornik Radova 207–232, 228–230. Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States, icsid Case No. ARB(AF)/97/2, Award of 1 November 1999, para. 104. Likewise, in Alex Genin, Eastern Credit Limited, Inc. and a.s. Baltoil v. The Republic of Estonia, icsid Case No. ARB/99/2, Award of 25 June 2001, para. 380, the tribunal rejected the claim noting the investor’s concealment of his ownership in the company.

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In the 2009 Bayindir case, the investor’s claim that the State’s termination of the contract with the investor had discriminatory motives was rejected based on the investor’s poor contractual performance.98 Other case law ranges from cases bearing on investor’s most serious misconduct to more nuanced circumstances. In Cementownia (2009) the claimant was found guilty of serious bad faith. It had brought a claim without qualifying as an investor committing several procedural irregularities.99 The tribunal ordered that he should pay all tribunal’s costs, as well as the Respondent’s legal fees.100 The tribunal also decided to issue a declaration stressing that the Claimant had filed a fraudulent claim before icsid and that ‘such conduct, […] constitutes a manifest abuse of the international institutional arbitration system,’ adding that ‘[a] formal declaration in the present Award would therefore constitute a fully justified remedy in order to prevent the Claimant from filing this baseless claim before other international jurisdictions or even before icsid again.’101 Somewhat differently, in Metal-Tech v. Uzbekistan (2013) the tribunal also dismissed the case at the jurisdictional stage for corruption,102 but holding the Respondent responsible for part of the costs of the proceedings.103 In so doing, the tribunal showed awareness that the investor’s bad faith can be a matter of degree, also considering that the investor’s wrongdoing could be facilitated by the State’s attitude. 6

International Standards

The case law is still scarce with respect to alleged illegalities committed by investors under international law.104 Because investment treaties normally 98 99 100 101 102 103

104

Bayindir Insaat Turizm Ticaret Ve Sanayi a.s. v. Islamic Republic of Pakistan, icsid Case No. ARB/03/29, Award of 27 August 2009, para. 301 ff. Cementownia (n 11). Ibid., para. 158. Ibid., para. 162. Metal-Tech (n 17). Ibid., para. 422: ‘the State has [] participated in creating the situation that leads to the dismissal of the claims. Because of this participation, which is implicit in the very nature of corruption, it appears fair that the Parties share in the costs.’ There are, in many of the awards cited so far, references to the legality of the investor’s act under international law. However, they often consist of a mere characterization of good faith and the prohibition of corruption as general principles of international law, and in any case are generally made in obiter. See, for instance, Fraport ii (n 22) para. 332; saur

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create obligations only for the host State, it is difficult to identify with precision the duties of the investors under international law and, more importantly, the effect of any breach thereof on their claim. The assumption, here, is that the international obligations at stake are not mirrored in domestic law – in which case domestic legality requirements operate as described above, absorbing the effects of the international illegality. However, this assumption is rarely reflected in the case law: good faith is a general principle of domestic and international law alike, corruption is condemned across legal systems and so is any systematic breach of human rights. An interesting subject of analysis might be the investor’s compliance with the rights of indigenous people, which normally stem from international norms and create obligations primarily for States. For the purpose of the present discussion, the pending cases South American Silver v. Bolivia105 and Bear Creek v. Peru106 will be taken as a case study. In these disputes, the host States allege that the investors acted in lack of good faith, committed illegalities under national and international standards and, ultimately, went to arbitration with unclean hands in a bid to protect illegal investments. In each of the cases in question at stake is, inter alia, the investors’ relationship with the indigenous communities of the areas where their mining projects are situated. All the possible permutations of lack of good faith explored above in relation to serious breaches of domestic law appear to be relevant for the purposes of the present section. 6.1 South American Silver In South American Silver the investor claimed that Bolivia expropriated its mining project which was ‘at an advanced stage of exploration and predevelopment.’107 The government, following episodes of unrest among the local indigenous communities, had revoked the mining concessions. The host State argued that the bit obligations claimed to have been breached by it should be read in compliance with human rights obligations, deriving from domestic and international sources,108 and with such general

105 106 107 108

International s.a. v. Republic of Argentina, icsid case No. ARB/04/4, Decision on Jurisdiction and Responsibility of 6 June 2012, para. 308; Plama (n 13) para. 139; Phoenix (n 27) para. 101; Inceysa (n 4) para. 207; World Duty Free Company (n 25) para. 178. South American Silver Limited v. Bolivia, uncitral, pca Case No. 2013-15. Bear Creek Mining Corporation v. Republic of Peru, icsid Case No. ARB/14/2. South American Silver above (n 105), Notice of arbitration, para. 18. Ibid., Respondent’s Counter-Memorial of 31 March 2015, para. 217. Bolivia refers, in particular, to the Inter-American Convention on Human Rights, the Inter-American ­Convention

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principles as clean hands and good faith.109 To that end, the Respondent invoked the notion of systemic interpretation of international obligations, under Article 31(3)(c) of the Vienna Convention. Even if the host State’s invocation of these sources seemed to refer to the interpretation of its own treaty obligations – whereby its conduct would be lawful because required by non-bit sources – it also challenged the admissibility of the claim by reason of the lack of clean hands on the part of the investor110 or, more simply, by reason of the investor’s illegal acts.111 In essence, the host State’s preliminary objection to the claim hinged on the allegation that the investor’s development ‘infringed the Indigenous Communities’ fundamental right to selfdetermination and endangered [their] right to a healthy environment in their territories.’112 The investor objected to the existence of a clean-hands principle as a matter of international law, citing Hulley.113 Alternatively, the claimant argued that, anyhow, any alleged wrongdoing by the investor could have been punished under Bolivian law, while the punishment itself might be reviewed under the bit, whereas a jurisdictional bar on grounds of the wrongdoing in question would defeat the treaty’s object.114 The claimant argued that, accordingly, the illegalities allegedly occurred after the establishment investment cannot result in the non-application of treaty protection. Furthermore, it stressed that several sources of international law invoked by Bolivia were nonbinding;115 that the uk is not party to some of the human treaties invoked – hence Article 31(3)(c) would not operate;116 that indigenous peoples’ rights are normally ‘opposable against the relevant State’ rather than the claimant.117 The

109 110 111 112

113 114 115 116 117

on the Violence against Women, Convention no. 169 of the International Labour Organisation, and the un Declaration on the Rights of Indigenous People. Ibid., para. 218. Ibid., para. 268 ff. Ibid., para. 287 ff. Ibid., para. 296. A brief overview of the accusation is contained para. 309: ‘[claimant] attempted to fabricate [the necessary consent] by using several stratagems which included the use of force, intimidation, non authorized intromission in the Indigenous Communities’ territory, disregard of legit authorities, and in total disregard of the right to selfgovernment, the creation of fake authorities.’ Ibid., Claimant Reply to Respondent Counter-Memorial on the Merits and Objections to Jurisdiction and Admissibility of 30 November 2015, para. 201. Ibid., para. 218. Ibid., para. 247. Namely, the Inter-American Conventions and the ilo Convention no. 169. Claimant Rejoinder on Jurisdiction above (n 113), para. 253.

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investor also evoked the 2012 decision of the icsid tribunal in von Pezold v. Zimbabwe,118 which refused to accept an amicus curiae submission regarding the rights of indigenous people, noting that the matter fell outside its jurisdiction in the dispute. 6.2 Bear Creek In this dispute, the investor had established two major mining operations in Peru. After the local communities staged a massive protest which resulted in violent action, the public authorities revoked the investor’s concessions. The host State challenged the tribunal’s jurisdiction maintaining that the claimant had acquired the concession through an unlawful scheme.119 It also asserted that, after obtaining the concession, the claimant failed to engage meaningfully with most of the local communities affected by the project.120 On that score, the Respondent argued that, under ‘Peruvian law and international best practices – including those issued by [the home State],’121 the claimant bore the burden to build communal consensus over the mining project. A brief submitted by amici curiae, purporting to represent the interests of the indigenous peoples in the region, attributed to the claimant several breaches of international obligations. In particular, it claimed that the investor allegedly failed to engage meaningfully with the local communities before implementing the mining project. The applicable treaty (the Canada-Peru fta) only contains soft language to encourage the investors’ compliance with international standards of corporate social responsibility.122 Therefore, the obligations at issue would stem from sources other than the fta, including the

118 Bernhard von Pezold and Others v. Republic of Zimbabwe and Border Timbers Limited, Border Timbers International (Private) Limited, and Hangani Development Co. (Private) Limited v. Republic of Zimbabwe, icsid Case No. ARB/10/15, Procedural Order No. 2 of 26 June 2012, para. 60. 119 Namely, using Peruvian employees as a front to acquire the concession, circumventing the constitutional prohibition for foreigners to own certain mining rights without a government’s waiver. 120 Bear Creek above (n 106), Respondent’s Counter-Memorial on the Merits and Memorial on Jurisdiction, 6 October 2015, para. 6. 121 Ibid., para. 58. 122 Art. 810: ‘Each Party should encourage enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate internationally recognized standards of corporate social responsibility in their internal policies…’.

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un Guiding Principles,123 ilo Convention no. 169124 and the un Declaration on the Rights of Indigenous People.125 The claimant sought to rebut these allegations noting, inter alia, that the international obligations to ensure citizens’ participation and to consult indigenous communities had been incorporated in domestic law. Therefore, compliance with the implementing measures, and the approval of Peruvian authorities, entailed automatically compliance with the international standards.126 In general, the investor sought to refute the notion that bad faith or original illegalities could preclude access to the jurisdiction of icsid, especially since the applicable treaty did not contain a domestic legality clause.127 The investor quoted a series of awards converging over the notion that illegality under domestic law should be treated ‘as an issue of liability and not jurisdiction.’128 6.3 A Mixed Approach to Pleas of Lack of Good Faith It is to be noted that in Southern America Silver the investor dwelt on the arguments denying any breach of international law standards. Given the odious accusations, this strategy is understandable. The investor did not challenge outright the argument according to which compliance with international legal standards is as a prerequisite for treaty protection. Generally, the investors’ critique is comprehensive: they lament the lack of precision of the host States’ allegations – i.e., about which international rules were breached; they argue that States project upon the claimants their own failure to observe international obligations; they usually assert the insufficiency of the evidence submitted in support of this kind of allegations and, ultimately, they strongly maintain that any such allegation should be reviewed at the stage of the merits. 123 Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, u.n. Doc. A/HRC/17/31, 2011, Human Rights Council. 124 International Labour Organization Convention 169 Concerning Indigenous and Tribal Peoples in Independent Countries, June 27, 1989, 1650 u.n.t.s. 384. 125 United Nations General Assembly, United Nations Declaration on the Rights of Indigenous Peoples, adopted by the General Assembly on 13 September 2007. 126 Bear Creek above (n 106), Claimant’s observations on the non-disputing party written submission of dhuma and Dr. Carlos of 18 August 2016, para. 19. 127 Bear Creek above (n 106), Claimant’s Reply on the Merits and Counter-Memorial on Jurisdiction of 8 January 2016, para. 216. 128 Arif (n 88) para. 376.

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Claimants are reluctant to accept the relevance on the point at issue of international legal standards beyond the applicable bit. While it will be for tribunals to determine on a case-by-case basis the applicable law and the relevance of non-bit sources, one may note a trend of internalisation of corporate social responsibility standards on the part of investor companies. Whether this choice arises from a sense of obligation, voluntary practice or is just the result of an ex abundante cautela arbitration strategy, it is safe to say that investors increasingly care to show clean hands and a good international law record to arbitration tribunals. In Bear Creek, conversely, the investor made the point very clearly that good faith and legality requirements would only matter at the merits stage129 and went as far as challenging the common view that only legally made investments are investments at all. Finally, it is worth noting how investors appear to show awareness of the importance of good faith and do not shy away from tribunal’s review, while opposing the all-or-nothing fatal outcome that States, conveniently, attribute to any finding of lack of good faith. 7

Concluding Remarks

This chapter has presented a constellation of incidents in which good faith on the part of the investor has a claim to relevance in investment arbitration. The diversity of the effects of good faith-inspired notions on the proceedings – i.e. in terms jurisdiction, or admissibility – might cast doubts about the precise content and scope of application of this general principle. However, as it transpired from the galleries of cases commented, the function of good faith does not appear to be that of setting a precise rule of conduct ex ante, but to serve as an interpretative principle which would be essential in the interpretation and application of the applicable rules, both procedural and substantive. One may recall how this essential function of good faith as a general principle of international law in investment arbitration has been recognised in Malicorp: It is indisputable, and this Arbitral Tribunal can do no more than confirm it, that the safeguarding of good faith is one of the fundamental principles of international law and the law of investments. As in domestic law, the principle fulfils a complementary function; it allows for lacunae 129 Ibid., para. 217.

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in the applicable laws to be filled, and for that law to be clarified by the specific application of existing principles.130 Indeed, good faith incorporates its ancillary principles of equity infra legem, reciprocity and proportionality. To that end, one may think of its role on the determination de minimis illegalities threshold, on the distinction between procedural and substantive legal requirements, or on the influence of misconduct on the attribution of costs and legal fees. One may tentatively infer two main trends from the case law relevant to the issue under consideration. The first one consists of the evolution of the judicial responses to bad faith defences by respondent States from all-or-nothing scenarios – usually, at the preliminary objections stage – to more nuanced ones. While decisions of lack of jurisdiction, or of inadmissibility of the claim, bar the investor’s access to treaty protection, consideration of the alleged lack of good faith at the merits stage may equally lead to strict judicial responses, hence, resulting in a denial of protection when appropriate. They can also accommodate responses commensurate to the gravity, relevance and investmentspecificity of the individual cases of investors’ lack of good faith. Besides, the treatment of lack of good faith, or illegality pleas, as a preliminary matter is often not viable, because it requires an analysis of the disputed facts that can be more easily and comprehensively performed at the merits stage. Moreover, allegations that might fall short of determining a lapse of jurisdiction at the preliminary stage might be rehashed later, to claim the inadmissibility or the rejection of the claim on the merits.131 The second trend that may be detected from the above case law is the creeping relevance of legality standards drawn from international legal sources other than the relevant investment treaty. In particular, standards of corporate social responsibility – which are not formally binding on the investors, let alone a requirement per se to access treaty protection – are increasingly used as yardstick of the investor’s good faith. As noticed in the pending cases where 130 Malicorp (n 50) para. 116. 131 Getma (n 24) para. 180: ‘Même si tous les motifs d’incompétence doivent être soulevés in limine litis et si ce Tribunal arbitral s’est déjà déclaré compétent dans sa Décision sur la Compétence … il lui revient de vérifier maintenant sa compétence sous cet angle également. Quoi qu’il en soit, même si ce Tribunal arbitral estimait que le débat sur sa compétence a été définitivement clos par ladite Décision, les allégations de corruption et de fraude devraient être instruites, parce que la Défenderesse se base sur ces mêmes allégations pour demander en ordre subsidiaire que les demandes soient déclarées irrecevables pour cause de l’illégalité de l’investissement, ou, en ordre infiniment subsidiaire, rejetées pour la même cause.’

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the investor’s behaviour towards indigenous communities is questioned, the relevance of extra-bit sources, including soft law instruments, is acknowledged by all the actors of the proceedings. Both investment case law and treaties appear to be evolving to normalise reference to the investor’s good faith. Some recent bits include provisions encouraging, or even requiring, investors to abide by certain soft-law standards, hence, propelling practice that may evolve into hard normative standards binding on corporations.132 It follows that reference to the investor’s performance of these obligations would be a more tangible variable than the multifarious instances of alleged bad faith. Treaty-makers are moving towards a more precise set of conditions that encapsulate the reciprocal good faith relationship between investors and host States. To that end, one may recall Article 11 of the new Indian Model bit requiring investors’ compliance with ‘all laws, regulations, administrative guidelines and policies of a Party concerning the establishment, acquisition, management, operation and disposition of investments.’ This unusual clause may be taken to operate similarly to a reverse umbrella clause, transforming breaches of domestic law into treaty breaches. This represents but one indication within a still uncertain scenery. The codification of the treaty’s reciprocity would allow to shortcut much of the uncertainty described above. 132 In the Brasil/Angola and Brasil/Mozambique bits, investors are required to use their ‘best efforts’ to contribute to the sustainable development of the host State and adopt social responsibility standards. See, for a commentary, Nathalie Bernasconi-Osterwalder and Martin Dietrich Brauch, ‘Comparative Commentary to Brazil’s Cooperation and Investment Facilitation Agreements (cifas) with Mozambique, Angola, Mexico, and Malawi’ (2015) iisd, available at https://www.iisd.org/sites/default/files/publications/commentary -brazil-cifas-acfis-mozambique-angola-mexico-malawi.pdf. The new Indian Model bit of late 2015 (available at http://finmin.nic.in/the_ministry/dept_eco_affairs/investment _division/ModelBIT_Annex.pdf) includes a similar clause (Article 12).

Chapter 11

Human Rights Law in International Investment Arbitration Vivian Kube and E.U. Petersmann* This chapter discusses problems of legal fragmentation of international investment law and human rights law and related legal methodology questions regarding person-­ oriented principles of justice (such as human rights and ‘proportionality balancing’) in contrast to state-centered ‘principles of justice’ (like international state responsibility). The chapter builds on a comprehensive survey of publicly available investor-states disputes in which human rights were invoked by the parties to dispute (investor, host state and arbitrators ex officio) or third party interveners. The assessment of these awards in Part 2 of this chapter suggests that arbitral tribunals are more open towards human rights as due process rights and as principles of procedural fairness and balancing than towards integrating human rights as an authoritative legal regime consisting of legally enforceable entitlements. The only exception to this general trend remains the right to property. However, the assessment generally reveals a lack of systematic methodology as to how to respond to human rights argumentation. Part 3 traces the legal reasons behind these observations by looking into the entry points for human rights and obstacles for integration as they emerge from the texts of bits and iias. This part demonstrates the possibilities that already exist for arbitrators to take into account human rights, such as jurisdiction clauses, applicable law clauses, definitions of ‘investments,’ the customary rules of treaty interpretation, preambles of bits, relevant protection standards and rules on awarding damage compensation. The conclusion suggests that the shortcomings are not an inevitable result of textual limitations, as alternative outcomes of isds disputes are legally possible and justifiable. In the absence of any development of a clear methodology, textual adjustment might thus not counter fragmentation. Systemic reform might be necessary to ensure transparent, coherent and balanced approaches to human rights argumentation.

* Vivian Kube obtained her doctoral degree at the Law Department of the European University Institute in Florence. Ernst-Ulrich Petersmann is emeritus professor of international and ­European law at the European University Institute in Florence. The authors can be reached at [email protected] and [email protected].

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Introduction: From Fragmentation towards Integration of Human Rights and International Investment Law?

Most bilateral investment treaties (hereinafter ‘bits’) and most published investor-state dispute settlement (hereinafter ‘isds’) awards continue to be ­silent on human rights law (hereinafter ‘hrl’). The inclusion of isds into modern free trade agreements (hereinafter ‘ftas’) – like the Canada – ­European Union (hereinafter ‘eu.’) Comprehensive Economic and Trade Agreement (hereinafter ‘ceta’) and the Trans-Pacific-Partnership (hereinafter ‘tpp’) –, the revision of some model bits and the increasing number of third party interventions in isds are, however, prompting increasing references to hrl, e.g., in the Preamble of the 2014 ceta and in isds awards responding to human rights arguments by the complainant, the respondent or in third party interventions. There is also an increasing number of investment-related disputes in regional human rights organizations like the European Court of H ­ uman Rights (hereinafter ‘ECtHR’), the Inter-American Court of Human Rights (hereinafter ‘IACtHR’) or the African Human Rights Commission, as well as isds awards referring to the proportionality methods used by regional human rights courts. It remains to be seen to what extent the recent reforms promoted by the eu will lead to replacement of isds among the 28 eu member states by new multilevel legal rights and remedies under eu law – especially after the recent Opinion 2/15 on the fta eu–Singapore clarifying that isds is not part of eu exclusive competence.1 ‘Constitutionalization’ of isds among eu countries reflects the concerns of human rights advocates that isds provisions between capital-exporting developed countries and less-developed, capital-importing countries were not only designed to protect basic requirements of justice like non-discrimination, fair treatment or prohibition of expropriation without compensation. Since the first modern bit between Germany and Pakistan in 1959 (which still lacked isds provisions), many bits with isds were also concluded with authoritarian and corrupt governments that disregarded human rights and enriched themselves through collaboration with foreign investors (e.g. in the oil and minerals sector), as documented by civil society complaints to human rights bodies. The civil society perception of systemic bias of isds against hrl is one of the main reasons for the civil society opposition to including isds into transatlantic ftas among constitutional democracies with impartial and independent judiciaries committed to protecting constitutional and human rights in non-discriminatory ways without privileging powerful corporate interests and their constituencies (including the relatively small 1 Opinion 2/15 of the eu Court of Justice of 16 May 2017 ECLI:EU:C:2017:376 [292-293].

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number of arbitrators from big law firms advising transnational companies (hereinafter ‘tncs’) and accounting for a large part of isds arbitrators).2 This opening of isds to hrl and European constitutional law reflects the dialectic evolution of national and international legal systems through ‘fragmentation’ and ‘integration’ of legal sub-systems.3 It is increasingly understood that isds is not merely concerned with inter partes disputes; the outcome of many cases also impacts on the human rights situation of third party individuals, communities and entire populations. Apart from concrete conflicts within individual cases, studies reveal repercussions of the isds system on states’ willingness to adopt regulations for human rights advancement that could potentially reduce profits for foreign investors (i.e., the so-called regulatory chill).4 Arbitrators – as shapers of international investment law (hereinafter ‘iil’) and hence as part of a public law system – should be aware of these legal interrelationships. Is this reality reflected in investment arbitration? Or does refusal of human rights integration lead to a systematic bias perpetuating the institutionalized privilege of investors? How perceptive is investment arbitration of human rights argumentation? This paper seeks to present the current state of integration and acceptance of hrl by isds. In addition to an analysis of the role of the arbitrators in this integration process with which Part 2 is concerned, Part 3 will also briefly look into the role of the law and potential ‘entry points’ for human rights arguments in the provisions of conventional bits and International Investment Agreements (hereinafter ‘iias’). The aim of looking at human rights integration from these two angles is to understand whether the treaty texts already provide for sufficient tools and human rights integration and, if not, to reveal the main barriers for legal coherence. The chapter covers publicly available arbitration awards that are believed to be representative also for the many investor-state arbitration procedures that continue to remain confidential due to the requests of the parties concerned. Part 2 assesses arbitral awards in which at least one of the relevant actors (investor, host state, third party interveners and arbitrators ex officio) deployed human rights based argumentation. This part also analyses the possibility of 2 Cf. Ernst-Ulrich Petersmann, Transformative Transatlantic Free Trade Agreements Without Rights and Remedies of Citizens?, 18(3) J. Int’l Econ. L. 579, 579-608 (2015). 3 Cf. generally A Farewell to Fragmentation: Reassertion and Convergence in International Law (Mads Andenas & Eirik Bjorge eds., 2015). 4 See, e.g., High Commissioner for Human Rights, Human Rights, Trade and Investment, Report of the High Commissioner for Human Rights, at 21, u.n. Doc. E/CN.4/Sub.2/2003/9 (July 2, 2003).

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drawing general conclusions on the parameters of accepted and successful human rights argumentations. What kind of human rights are perceived as relevant? Under what circumstances? Whose human rights are protected and whose are ignored? The assessment of these awards seems to indicate the following: Arbitral tribunals are more open towards human rights as due process rights, as methodology and as principles of procedural fairness and balancing than towards a right-based approach – a ‘right-based approach’ meaning the integration of human rights as an authoritative legal regime consisting of legally enforceable entitlements. The only exception to this general trend remains the right to property. Other substantive human rights, e.g. indigenous rights or the right to water are hardly taken into consideration in substantive terms. This case law assessment seems to indicate that as long as the human rights arguments raised show some overlap with procedural rules of fairness or what has been described as the ‘shared content,’5 arbitral tribunals seem to be more willing to accept their significance. However, since hrl consists of more than these shared concepts and linkages to principles of fairness and procedural rights and the human rights’ premise of indivisibility excludes any hierarchy amongst the different human rights, such an approach would not fully prevent incompatibilities with hrl. Part 3 traces the legal reasons behind these observations by looking into the entry points for human rights and obstacles for integration as they emerge from the texts of bits and iias. This part demonstrates the possibilities (or even duties) that already exist for arbitrators to take into account human rights as well as the obstacles that human rights argumentation needs to overcome, i.e., the justifications for refusing human rights considerations. Such an analysis can be the starting point for revealing the sources of the perceived reluctance towards the integration of human rights and of the marginal role that hrl as a system of substantive rights plays in iil. If the shortcomings are the result of textual limitations, adjustment and redrafting by the state parties will be required. If one can argue that alternative outcomes of isds are already legally possible and textually justifiable, systemic reform might be necessary – assuming that a structural investor privilege at the expense of human rights compliance is not in the state parties’ interest. 5 Pierre Marie Dupuy and Jorge E. Viñuales have convincingly demonstrated that hrl and iil do share some fundamental concepts such as non-discrimination, due diligence, procedural fairness and proportionality, see Pierre-Marie Dupuy & Jorge E. Viñuales, Human Rights and Investment Disciplines: Integration in Progress, in International Investment Law 1739, 1739–67 (Marc Bungenberg et al. eds., 2015).

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The case-studies of arbitral jurisprudence in Part 2 – and of investment treaty provisions in Part 3 – are part of a broader, systemic problem of international law, i.e., the dialectic and often antagonistic development of fragmented treaty systems like hrl, monetary and financial law, trade law, investment law, environmental law, labour law, health law or migration law. Fragmented evolution of complex legal systems is often inevitable in view of the sovereignty of states, their legal and democratic diversity, and the often different ‘rationalities’ of legal sub-systems. For instance: • State sovereignty and freedom of contract protect strategic self-interests of powerful actors and their ‘national interests’ in exploiting their power through reciprocal international agreements like bits. • Human rights protect the diversity of individual and democratic conceptions of the values and hierarchies of legal systems (e.g., ‘monist’ vs ‘dualist’ ordering of the relationships between national and international law, need for balancing the often one-sided focus of bits on protecting investor rights with public interests as protected by the human rights obligations of all United Nation (hereinafter ‘u.n.’) member states). • The particular rationalities of social sub-systems often differ, as illustrated by utilitarian conceptions of iil and the deontological conceptions of hrl. Yet, national and international legal systems also require limiting legal fragmentation, for example due to • the integration principle requiring interpretation of international treaties taking into account ‘any relevant rules of international law applicable in the relations between the parties’ (Article 31 (3)(c) of the Vienna Convention on the Law of Treaties (hereinafter ‘vclt’)), including the human rights obligations of all u.n. member states under general international law and human rights treaties; • the inalienable and indivisible character of civil, political, economic, social and cultural human rights and related duties to respect, protect and fulfill human rights, which pursue similar goals as iil (e.g. the common goal of protection of the right to property and of rule of law); and also • other ‘principles of justice,’ justifying piecemeal reforms of iil through clarification (e.g., in new bits, ftas and isds) of sovereign rights and duties to protect public interests as defined by human rights and related ‘principles of justice,’ including:

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

principles of procedural justice (e.g., access to justice); distributive justice (e.g., human rights, sovereign equality of states); corrective justice (e.g., compensation); commutative justice (e.g., reciprocal bargains in concession contracts); and (e) equity (e.g., unforeseen emergency situations). The separate evolution of hrl and iil through fragmented treaty systems raises numerous methodological questions that remain to be clarified. For instance, the ‘consistent interpretation’ and ‘integration’ requirements cannot override bit provisions (except in case of jus cogens). Yet, as isds may take place in competing jurisdictions (for instance, national courts, investment arbitration, regional economic or human rights courts), there is need for ­promoting mutually consistent interpretations through judicial comity among diverse national, regional, worldwide courts and alternative dispute settlement proceedings (e.g., in the World Trade Organization (hereinafter ‘wto’) and investment arbitration). The frequent use of indeterminate legal concepts and of ‘incompletely theorized’ treaty provisions in investment law (for ­example, ‘fair and equitable treatment’) also raise questions of treaty interpretation, as illustrated by the customary law requirement of interpreting treaties and settling related disputes ‘in conformity with the principles of justice and international law,’ including ‘human rights and fundamental freedoms for all,’ as codified in the Preamble and Article 31 vclt. Do these ‘consistent ­interpretation’ requirements and the inherent judicial powers of ‘courts of ­justice’ enable judges to avoid conflicts between hrl and iil? What are the relationships between ‘principles of justice’ for relations among states (e.g., defining customary law exceptions on ‘necessity’ of emergency measures narrowly) and citizen-­centered ‘principles of justice’ like human rights and related treaty exceptions to take measures ‘necessary’ for protecting and reconciling civil, political, economic, social and cultural human rights? As further discussed in Part 2, investment tribunals increasingly acknowledge that human rights and iil ‘are not inconsistent, contradictory, or ­mutually exclusive’.6 The ‘causes of action’ in most isds procedures are limited 6 See respectively Suez et al. v. The Argentine Republic, icsid Case No. ARB/03/19, Decision on Liability, para. 262 (July 30, 2010) [hereinafter Suez/Vivendi v. Argentina]; Hulley Enterprises Ltd (Cyprus) v. The Russian Federation, pca Case No. AA 226, Final Award (July 18, 2014) [hereinafter Hulley v. Russia]; Yukos Universal Ltd (Isle of Man) v. Russian Federation, pca Case No. AA 227, Final Award, para. 765 (July 18, 2014) [hereinafter Yukos v. Russia]; Quasar de Valors sicav S.A. et al. v. Russian Federation, scc Case No. 24/2007, Award, para. 25 (July 20,

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to ­investor claims of violations of iil obligations; the applicable law, however, may include human rights. bits and isds tribunals rarely refer to human rights; yet, the increasing references to human rights in third party submissions (e.g., in case of investments related to public services like supply of water, health services and electricity) contribute to rendering investment arbitrators more aware that the human rights obligations of the host and home states of the investor may be relevant context for interpreting investment law and deciding investor-state disputes. The u.n. Guiding Principles on ‘business and human rights’ and the acceptance of ‘corporate social responsibility’ standards by thousands of transnational corporations clarify that – in addition to ‘state duties to protect human rights’ – there are ‘corporate responsibilities to respect human rights’ and to provide access to effective remedies which increasingly influence international commercial law and arbitration.7 II

The Role of Arbitrators: Approaches to Human Rights Argumentation in isds

This part gives an overview of the approaches adopted by arbitral tribunals when confronted with human rights argumentation. The role of human rights for the investment dispute and the kind of human rights referred vary depending on the actor who introduces them into the dispute. Potentially, these can be investors, home and host states, amici curiae and the arbitrators themselves. Investors as claimants have introduced human rights argumentation as either independent claims next to the violations of bit rights or in support of the alleged violation of a bit (e.g., to substantiate a certain interpretation of treaty terms such as expropriation). Host states have occasionally invoked human rights as respondents to justify state action that allegedly led to an investor right violation. The success of such defense hinges upon whether the objective of a measure plays a role in determining the existence of a breach or whether the severity and the impact on the investor are the decisive criteria. Furthermore, ‘counterclaims’ brought forward by the respondent state which address the investors’ conduct can also potentially be based on human rights

2012) [hereinafter Quasar v. Russia]; Veteran Petroleum Ltd (Cyprus) v. Russian Federation, pca Case No. AA 228, Final Award, para. 765 (July 18, 2014) [hereinafter Veteran v. Russia]. 7 Cf. generally J.G. Ruggie & J.F. Sherman, iii, Adding Human Rights Punch to the New Lex ­Mercatoria: The Impact of the un Guiding Principles on Business and Human Rights on Commercial Legal Practice, 6(3) J. Int’l Disp. Settlement 455 (2015).

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­argumentation.8 This could, for example, be the case, when the investor was either obliged to human rights compliance under a contract or the establishment and/or operation of an investment violated local and/or international laws that incorporates human rights duties for the private sector. Increasingly, civil society organizations, non-governmental organizations (hereinafter ‘ngos’) and public interest lawyers have sought to intervene as amici aiming for raising awareness to human rights concerns. In theory, if the procedural rules are formulated sufficiently broad, then home states could intervene as third parties and bring in human rights (possibly to comply with their own obligations to protect human rights). Finally, arbitrators have occasionally referred to human rights methodology ex officio in their reasoning. The following part will survey the isds jurisprudence categorized by the different actors in order to distill what kind of human rights are introduced, what kind of approaches are adopted, and what impact human rights based argumentation has on the decision making. The cases analyzed below are limited to the most prominent and most recent cases. Apart from offering an analysis of the most recent and less discussed cases, this contribution aims to also provide new perspectives on the ‘classic’ arbitral awards. A Human Rights as Investor Claims First, human rights arguments can be introduced into isds by the usual initiator of investment disputes: the investor as the complainant. In fact, investors have strategically engaged in human rights argumentation both by basing their claims directly on human rights violations in addition to breaches of iia provisions (independent assertion of human rights) and as support for establishing a Treaty breach by deriving favorable methodology or arguments from hrl and jurisprudence (supportive assertion of human rights). 1. Independent Assertion of Human Rights – Investment tribunals may seem as an inadequate forum for independent human rights claims since the tribunals constituted under an iia have a limited mandate and do not possess the same expertise and legitimacy as an official human rights body. If the jurisdictional and applicable law clauses of the respective iia are sufficiently broad to include human rights violations, adjudicating a pure human rights claim could be possible.

8 This may be true for both separate counterclaims seeking independent affirmative relief (e.g. as in the recent Urbaser v Argentina case discussed below) as well as for counter-arguments against the existence of a treaty breach. Whether investment tribunals have jurisdiction over proper counterclaims depends on the phrasing of the jurisdictional clause.

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In Biloune v. Ghana,9 a Syrian investor based his claim on violations of human rights (namely arbitrary detention and deportation) besides contractual breaches of an agreement between him and Ghana. The tribunal declared that it lacked jurisdiction to rule on human rights issues as an independent cause of action. This conclusion was based on the jurisdictional clause in the agreement, according to which arbitration only covers disputes arising ‘in respect of the enterprise.’10 Interestingly, the actions alleged to be human rights violations were nevertheless taken into consideration when deciding on expropriation. The relation was deemed sufficient for factoring it in when determining the severity of the intrusion that precisely for that reason was found to be tantamount to expropriation.11 This may indicate that although the tribunal was reluctant to directly adjudicate on human rights, the fact that the governmental action had severe consequences for the individual could not be ignored (and was thus brought to bear in the determination of expropriation). In Chevron v. Ecuador i, an independent assertion of denial of justice as a principle of customary law was accepted at the jurisdictional stage.12 The tribunal stressed that the only requirement for jurisdiction stipulated by the jurisdictional clause is sufficient relation to the investment; it found this requirement to be satisfied. Contrary to the Biloune assessment, this tribunal concluded that claims based on international customary law fall under the purview of the jurisdictional clause also as independent causes of action provided that the claims constitute an ‘investment dispute.’ As the definition of investment was interpreted broadly, such a relation was not difficult to establish. Adopting the Mondev approach, the tribunal declared that lawsuits fall within the definition of investment if they are part of the ‘overall investment project.’13 It argued that the non-exhaustive list of possible forms of an investment included in the definition in the treaty demonstrated that the provision’s purpose of closing any possible gaps of protection which may arise when the initial investment assumes different shapes over time.14 9

10 11 12 13 14

Biloune & Marine Drive Complex Ltd v. Ghana Investments Centre and the Government of Ghana, uncitral, Award on Jurisdiction and Liability (Oct. 27, 1989), 19 Y.B. Comm. Arb. 11 (1994). According to the arbitration clause in the Ghana Investment Centre (gic) Agreement, arbitration covers disputes arising ‘in respect of the enterprise.’ Ibid. at 11–13. Ibid. at 30. Chevron Corporation (u.s.) & Texaco Petroleum Corporation (u.s.) v. Republic of ­Ecuador, pca Case No. 34877, Interim Award, paras. 2, 3, 207 (Dec. 1, 2008). Ibid. para. 180. Ibid. para. 183.

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For both tribunals, jurisdiction over the claim depended on the relation between a violation of human rights (or the customary law prohibition of denial of justice) and the investment. Most jurisdictional clauses are phrased along similar lines. Nevertheless, considering these two different outcomes, it is difficult to derive any generally applicable standards regarding independent h ­ uman rights claims. In Chevron v. Ecuador i, the claimant referred to specific human rights obligations of Ecuador under the American Convention on ­Human Rights (hereinafter ‘achr’) in conjunction with a bit clause providing for no lesser treatment than required by international law;15 the claimant further referred to jurisprudence of the IACtHR and of the ECtHR in order to determine what constitutes an undue delay of proceedings. The tribunal declared the denial of justice provisions in the bit as lex specialis; there was thus no need for recourse to customary international law.16 According to the tribunal, due to their similar genesis, the interpretation of the bit provision should nevertheless be informed by the international law on denial of justice.17 This argumentation allowed the tribunal to legitimately seek guidance by international law while at the same time preserving its discretion as to the concrete application to the given case. The tribunal avoided explicit reference to international law in the subsequent analysis and to the human rights citations of the claimants. Hence, it is impossible to trace the precise impact of the human rights argumentation of the investor on the arbitral award. In Toto v. Lebanon,18 the claimant referred to specific human rights in relation to the right to fair trial.19 Since the bit clearly stated that the jurisdiction as well as applicable law covers principles of international law, the tribunal accepted and engaged with the human rights argumentation.20 Further, the tribunal explicitly discussed which human rights were applicable to Lebanon (i.e., Article 14 of the International Covenant on Civil and Political Rights (hereinafter ‘iccpr’) in conjunction with the interpretation of the iccpr Commission).21 It finally refused jurisdiction due to a lack of evidence presented 15 16 17 18 19 20

21

Chevron Corporation (u.s.) & Texaco Petroleum Corporation (u.s.) v. Republic of ­Ecuador, pca Case No. 34877, Partial Awards on the Merits, para. 166 (Mar. 30, 2010). Ibid. para. 242–244. Ibid. para. 244. Toto Costruzioni Generali S.p.A. v. Republic of Lebanon, icsid Case No. ARB/07/12, Decision on Jurisdiction, (Sept. 11, 2009) [hereinafter Toto v. Lebanon]. Ibid. para. 144. Ibid. para. 154; see also Agreement Between the Italia Republic and the Lebanese Republic on the Promotion and Reciprocal Protection of Investments art. 7.3, Nov. 7, 1997, http://­ investmentpolicyhub.unctad.org/Download/TreatyFile/1688 (entered into force Feb. 9, 2000). Toto v. Lebanon, supra note 18, paras. 157–160.

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by the claimant. Contrary to the ‘interpretative-guidance-approach’ in Chevron v. Ecuador, it seemed that human rights could have entered the merit stage as rights derived from an independent and relevant body of law. The Toto v. Lebanon tribunal appeared to be in principle open towards considering human rights as independent claims. In Roussalis v. Romania, the Claimant based the claim on the right to property of Article 1 of the First Additional Protocol to the European Convention on Human Right (hereinafter ‘echr’) in addition to bit breaches.22 The tribunal deemed a discussion of the echr rights unnecessary since it was convinced that the bit conferred more favorable rights. This line of reasoning is in line with the statement in Article 10 of the bit that international obligations shall only be taken into consideration when more favorable.23 Yet, it may result in a higher protection of foreign investor rights while disproportionately neglecting other, competing human rights. 2. Supportive Assertion of Human Rights – In the cases in which investors refer to human rights in order to support their treaty breach claim, the impact of human rights argumentation very often remains unclear since the need for an explicit decision at the jurisdictional stage often is unnecessary. In Micula v. Romania,24 the tribunal declared that it will be ‘mindful’ to Article 15 Universal Declaration of Human Rights (hereinafter ‘udhr’) when determining the legality of deprivation of nationality.25 Nevertheless, in its subsequent analysis the tribunal does not refer to this Article again. It is not clear how Article 15 udhr influenced the judicial reasoning. Additionally, the tribunal’s subsequent rejection of the Nottebohm test rather demonstrated a reserved approach towards international law. In Grand River Enterprise v. u.s., the major investors of Grand River ­Enterprise were indigenous people belonging to the First Nations. They argued that for the interpretation of the term investment, as well as the standard of protection under the fair and equitable treatment (hereinafter ‘fet’) provision, human rights – specifically those that are jus cogens, customary international law and indigenous peoples’ rights – had to be taken into account.26 They asserted that indigenous peoples’ rights amongst others include the obligation to promote 22 23 24 25 26

Spyridon Roussalis v. Romania, icsid Case No. ARB/06/1, Award, paras. 111–112. (Dec. 7, 2011). Ibid. para. 310. Ioan Micula et al. v. Romania, icsid Case No. ARB/05/20, Decision on Jurisdiction and Admissibility (Sept. 24, 2008). Ibid. para. 88. Grand River Enterprises Six Nations, Ltd et al. v. United States of America, uncitral, Award, paras. 66, 182 (Jan. 12, 2011) [hereinafter Grand River v. u.s.].

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commercial activities of First Nations Members.27 The tribunal found itself mandated to take public welfare issues into consideration since the preamble of North American Free Trade Agreement (hereinafter ‘nafta’) refers to ‘the need to preserve the nafta Parties’ flexibility to safeguard the public welfare.’ Further, the tribunal discussed the scope of international indigenous rights and the states’ duty to proactive consultation prior to enacting legislation that is affecting indigenous communities. It explicitly criticized the behavior of the United States of America (hereinafter ‘u.s.’) authorities for not being sensitive to the particular position of the claimants as indigenous people and thus not meeting international standards. However, the tribunal concluded that this failure did not constitute a beach of nafta as nafta does not confer a direct and privileged right of consultation to individual investors. Had such a duty to pro-actively consult existed, the Tribunal concluded, it would be a collective right and the claimants failed to sufficiently substantiate that they were the legitimate representatives. The tribunal found that it had no jurisdiction over legal issues concerning the investors’ individual statuses as members of the First Nations but only over protection standards accorded to investments as derived from nafta.28 In ups v. Canada, the claimants invoked labor rights, more precisely collective bargaining rights of the Canada postal workers.29 According to ups’ arguments, Canada was violating core labor rights of the International Labor Organization,30 the International Bill of Human Rights as well as customary international law by denying Canada postal workers in rural areas the right to collective bargaining. This constituted a breach of Canada’s nafta obligation to ensure minimum standard of treatment to foreign investors in accordance with international law because the prohibition of collective bargaining created unfairly low wages and distorted competition. The Canadian Union of Postal Workers and the Council of Canadians filed a petition for amicus submission 27 28 29 30

Ibid. para. 67. Ibid. para. 220. United Parcel Services of America Inc. v. Government of Canada, uncitral, Investor’s Memorial (Merits Phase), paras. 645–671 (Mar. 23, 2005). Freedom of association and the effective recognition of the right to collective bargaining are part of the ilo fundamental conventions. Convention (No. 98) Concerning the Application of the Principles of the Right to Organize and to Bargain Collectively, July 1,1949, 96 u.n.t.s. 257 (entered into force July 18, 1951); Convention (No. 87) Concerning Freedom of Association and Protection of the Right to Organize, July 9, 1948, 68 u.n.t.s 17 (entered into force July 4, 1950).

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in which they supported ups’ assessment of the core labor rights violations committed by Canada but at the same time highlighted the paradox of ups’ argumentation: ups is not the right holder of the workers’ right at stake and was not truly interested in their enforcement. The latter was demonstrated by ups’ rejection of the affected workers and their representatives as third party interveners. The amici stressed that such rejection was contradictory to the spirit of the very human rights instruments ups was invoking; for, the latter aimed at workers’ empowerment.31 It would thus not render Canada’s conduct compatible with human rights if the affected individuals remained excluded from the proceedings and negotiations and if only pecuniary damages were awarded to a third party instead of improving the situation for the victims. The tribunal responded neither to this paradox pointed out by the amici nor to other human rights arguments brought forward by the parties. The linkage of national treatment with the workers’ rights violations as argued by ups was rejected without any further explanation.32 This case demonstrates how investment arbitration can become the arena for diverse human rights argumentation by all parties. Investment tribunals need to be legally capable of reacting to such human rights arguments adequately. The investment arbitrations following Russia’s criminal proceedings against its biggest and most successful oil company Yukos and its management for tax evasion33 and the parallel human rights complaints before the ECtHR34 reveal the diverging concepts of property between human right law and iil. Since Russia as well as the claimants invoked the ECtHR jurisprudence each in support of their arguments, the tribunals were compelled to find ways to overcome this legal disparity. The tribunals in Quasar de Valors sicav S.A. v. Russia and Veteran Petroleum v. Russia denied any binding force of the E ­ CtHR’s jurisprudence on the tribunals, yet declared to take them into consideration when needed. In Quasar de Valors sicav S.A. v. Russia, for instance, the t­ribunal stressed the differences of the required assessment; unlawfulness or bona fide 31

32 33 34

United Parcel Services of America Inc. v. Government of Canada, uncitral, Application for Amicus Curiae Status by the Canadian Union of Postal Workers and the Council of Canadians, paras. 36, 58 (Oct. 20, 2005). United Parcel Services of America Inc. v. Government of Canada, uncitral, Awards on the Merits, paras. 185–187 (May 24, 2007) [hereinafter ups v. Canada]. Hulley v. Russia, supra note 6; Yukos v. Russia, supra note 6; Quasar v. Russia, supra note 6; Veteran v. Russia, supra note 6. oao Neftyanaya Kompaniya Yukos v. Russia Federation, App. no. 14902/04, http://hudoc .echr.coe.int/eng?i=001-145730.

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regulations did not play a role for determining the existence of an expropriation under investor protection law.35 The difference between human rights instruments and investor protection was explained by the fact that the latter was primarily aimed at inducing foreign investment and foreign investors may not benefit from national human rights regulation.36 Even though the assessments of the ECtHR did not have any legal force for the given proceedings, the tribunal was nevertheless entitled to discuss the arguments brought forward before the ECtHR.37 In Veteran Petroleum v. Russia, Russia invoked res judicata as a ground for lack of jurisdiction by pointing to the ECtHR proceeding.38 The tribunal responded by stating that it was not a human rights court; it would assess the alleged human rights violations of the individuals linked to Yukos as ‘part of the factual matrix of the claimants’ complaints that the Russian Federation violated its obligations under the Energy Charter Treaty (hereinafter ‘ECT’).’39 Again, no legal force was ascribed to ECtHR judgment for the arbitration proceedings; yet, the human rights violations played a role in the different assessment of violations of the ect. In Hesham Talaat M. Al-Warraq v. Indonesia, the claimant argued that the term ‘basic rights’ used in the investment agreement must include human rights; the claimant engaged in an in-depth analysis of the presumption of innocence as recognized in several human rights instruments and the corresponding jurisprudence.40 The tribunal, however, followed the respondent state by interpreting the term in the specific context of the treaty provision, which is concerned with ownership rights. It discussed the iccpr and its relevance to the claimant’s fet claim as a basic minimum standard; it also examined the scope of Indonesia’s obligations, in particular, the right to be present at trial, to defend oneself and the presumption of innocence. Although the alleged human rights violation could not have constituted a treaty breach in itself, the assessment of the fet principle was in fact mainly an examination of Indonesia’s human rights obligations. In Rompetrol. v. Romania, the investors invoked due process rights under international law as an independent claim and in support of breaches of the

35 36 37 38 39 40

Quasar v. Russia, supra note 6, paras. 21–25, 42–45. Ibid. paras. 22–23. Ibid. para. 24. Veteran v. Russia, supra note 6, para. 76. Ibid. para. 765. Hesham Talaat M. Al-Warraq v. Republic of Indonesia, uncitral, Final Award, ­paras. 178– 184 (Dec. 15, 2014) [hereinafter Hesham v. Indonesia].

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Dutch-Romanian bit and the ect.41 The claimants alleged that they had been subject to arbitrary criminal investigations and governmental control measures which amounted to orchestrated state harassment and pressure on the claimant’s company in violation of Article 6 of the echr. The parties to the dispute – Romania and Rompetrol – agreed that Article 6 of the echr played a role for the investment dispute; but they disagreed as to whether the echr standards constituted the floor or the ceiling for protection standards. Romania argued that denial of justice claims should be adjudicated according to the same standards that would apply in any international forum, i.e., higher standards of proof and only after exhaustion of local remedy;42 the ECtHR jurisprudence should be considered as the ultimate yardstick for lawful behavior of the investigation authorities.43 The arbitral tribunal stressed that it was established to decide upon legal disputes arising directly out of an investment; the alleged violations of the investors’ private lives were not sufficiently related to the investment dispute. Thus, it was not competent to decide on the correct application of the echr.44 However, it did not entirely close the door to resorting to human rights argumentation by stating that it would nevertheless take into account common standards of other international regimes if appropriate.45 Indeed, the tribunal referred back to the echr and international norms when assessing the authorities’ conduct. Ultimately, the human rights question related to the legality of the criminal proceedings against the individuals linked to Rompetrol, played a role in establishing a breach of the bit, namely the state’s failure to undertake all possible steps within a criminal proceeding to avoid any unnecessarily adverse effect on the investors’ interests.46 The overview of investor claims based on human rights – either independently or in support of investment law claims – indicates a lack of consistent methodology regarding the legal responses by arbitrators to such human rights claims. In some cases, however, the human rights issues were so severe or closely linked to the investment that the arbitrators could not ignore their legal relevance. The responses of the arbitrators to the alleged human rights infringements varied from taking them into account in determining a breach of investment law obligations, stating to be ‘mindful’ or aware of the human 41 42 43 44 45 46

The Rompetrol Group N.V. v. Romania, icsid Case No. ARB/06/3, Award, para. 47 (May 6, 2013). Ibid. para. 89. Ibid. para. 83. Ibid. para. 172. Ibid. Ibid. paras. 279–280.

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rights at stake, to denying the tribunals’ competence for examining human rights claims as such. With respect to all of these approaches, the language used remained vague, and the impact of the human rights argumentation is difficult to assess. This lack of judicial methodology in reconciling investor rights with human rights risks entailing biases favoring powerful foreign investors. The reasoning of the Rompetrol tribunal on the need to balance the right to privacy against the public right to information shows that the increased reliance of investors on human rights may compel the isds tribunals to discuss the judicial protection of legitimate public policy concerns and competing interests. B Human Rights as a Defense for the Host State The host state may rely on human rights argumentation as a respondent of an investor claim. Only very few bits allow for the host state to initiate proceedings; so far, such complaints do not seem to have taken place.47 Yet, human rights can also be invoked as a counterclaim in relation to investor’s misconduct, which could justify a denial of benefits. This is, for instance, the case when the investment was initially made in breach of human rights as enshrined in local law and thus does not fall under the purview of an investment definition if such includes an ‘in accordance with local law/international law’ clause. In the recent award in Urbaser v Argentina, an investment tribunal for the first time engaged in a lengthy discussion of a host state counterclaim based on human rights, while, however, denying the validity of the counterclaim in the given case. It is certainly progressive from a hrl point of view that the tribunal interpreted Article 46 of the International Centre for Settlement of Investment Disputes (hereinafter ‘ICSID’) Convention and the underlying bit as allowing for host state counterclaims48 and that it accepted international law including human rights as part of the applicable law;49 yet, the merits for increased integration of human rights appear to go not much beyond the mere acceptance and identification of certain human rights such as the right to water50 and the increased recognition of obligations of corporate actors under international law.51 47

48

49 50 51

Ursula Kriebaum suggests that Article 36 of the icsid Convention would allow for such a claim, see Ursula Kriebaum, Foreign Investments & Human Rights – The Actors and Their Different Roles, 1 Transnat’l Disp. Mgmt. 1, 9 (2013). As interpreted by the tribunal, Urbaser S.A. and Consorcio de Aguas Bilbao Bizkaia, Bilbao Biskaia Ur Partzuergoa v. The Argentine Republic, ICSID Case No. ARB/07/26, Award, 1144 (December 18, 2016) [hereinafter: Urbaser v Argentina]. Ibid. 1188–1192, 1200–1203. Ibid. 1197, 1205. Ibid. 1195.

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Ultimately, the tribunal’s considerations only prompted the tribunal to state that it would require a specific norm for imposing obligations linked to the human right to water on the investors, which was Argentina’s obligations to include in the bit or its domestic laws.52 While it is certainly true that this primary obligation rests with the host state, the rationale of autonomous and voluntary commitments to Corporate Social Responsibility (csr) standards by corporations is precisely to establish duties that are independent from domestic law. Next to the neglect of such independent human rights commitments of the investors which were existent,53 also other reasoning on the application of human rights and the conclusion that were drawn seems partly flawed. ­Especially the reference to Article 30 udhr and Article 5(1) icescr as the main legal anchor for substantiating the possibility of human rights obligations of private actors, has been sharply criticized as a misinterpretation.54 Nevertheless, the tribunal leaves the door open for possible direct application of human rights obligations on investors while distinguishing between obligations to abstain from human rights violations, which could be directly applicable and obligations to perform, which are not.55 This distinction lacks any further explanation; it appears to be not in line with the common understanding of obligations stemming from internationally recognized principles and guidelines for multinational corporations.56 Therefore, this case also demonstrates the existing uncertainties for finding the proper place for human rights in the absence of clear instructions in the underlying iias. Further and more often, human rights have played a role as a justification for state measures undertaken to comply with hrl, i.e., to respect, protect or fulfill human rights independent of whether potential violations are ­originating in 52 53

Ibid. 1209. The claimants had indeed joined the un Global Compact and declared to adhere to oecd Guidelines for Multinational Enterprises and that these commitments comprise a duty to integrate human rights including the right to water in its operations; for a detailed analysis on this, see Kevin Crow and Lina Lorenzoni-Escobar, ‘International Corporate Obligations, Human Rights, and the Urbaser Standard: Breaking New Ground?’ (Social Science Research Network 2017) ssrn Scholarly Paper id 2984987 16–17 accessed 16 September 2017. 54 See Edward Guntrip, ‘Urbaser v Argentina: The Origins of a Host State ­ Human Rights Counterclaim in icsid Arbitration?’ accessed 17 August 2017. 55 Urbaser v. Argentina, (supra note 48), 1210. 56 E.g. the un Guiding Principles, 13(b) foresees a duty to prevent or mitigate adverse impact on human rights, even of not having contributed to such impact.

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the investor’s behavior. For instance, the duty of the state to ensure just and favorable conditions of work may compel states to enact legislation that is to the detriment of the investors’ profit.57 However, host states often invoke their regulatory discretion without specifying their concrete human rights obligations in investment disputes. Tribunals have recurrently stressed that the objective behind a state measure does not play a role for their assessment of potential bit breaches.58 Even in cases in which a regulation’s objective was discussed, the examination tends to focus on general terms – such as ‘public/ social welfare’ or ‘public policy’59 – without engaging with concrete human rights obligations of the host state. One prominent exception is the right to water cases, which illustrates a wide spectrum of possible approaches to human rights justifications. The right to water is part of the International Covenant on Economic, Social and Cultural Rights;60 it is also recognized in many other human rights treaties and was confirmed in a 2010 u.n. General Assembly resolution as well as in a 2012 u.n.

57

58

59

60

Cf. International Covenant on Economic, Social and Cultural Rights, arts. 2, 7, Dec. 16, 1966, S. Treaty Doc. No. 95-19, 6 i.l.m. 360, 993 u.n.t.s. 3 (entered into force Jan. 3, 1976) [hereinafter icescr]. See, e.g., Compañia del Desarrollo de Santa Elena S.A. v. Republic of Costa Rica, icsid Case No. ARB/96/1, Final Award, para. 72 (Feb. 17, 2000) in which the tribunal noted that: ‘Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay compensation remains.’ See also Metalclad v. Mexico, icsid Case No. arb (AF)/97/1, Award on the Merits, para. 111 (Aug. 30, 2000); Técnicas Medioambientales Tecmed, S.A. v. The United Mexican States, icsid Case No arb (AF)/00/2, Award, para. 120 (May 29, 2003) [hereinafter Tecmed v. Mexico]. See, e.g., Methanex Corp. v. United States of America , uncitral, Final Award of the Tribunal on Jurisdiction and Merits, Part iv, Ch. D, 7 (Aug. 3, 2005). The Iran–u.s. Claims tribunal states that a state’s right to expropriate as a consequence of a public purpose regulation when in accordance with due process and non-discriminatory is a principle of international law, e.g., Sedco Inc. v. Iran, in Iran–us Claims Tribunal Reports No. 9 248, 275 (1985). According to General Comment 15 the right to water is part of the right to an adequate standard of living (art. 11), to adequate housing and adequate food (art. 11) and of the highest attainable standard of health (art. 12). Committee on Economic, Social and Cultural Rights [hereinafter cescr], General Comment 15, The right to water, para. 3, u.n. Doc. E/C.12/2002/11 (Jan. 20, 2003).

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Human Rights Council resolution as being part of hrl.61 The conflicts provoking the investment disputes mostly arose following the privatization of water supply and sewage systems and subsequent termination of concessions or tariff freezing by the states’ authorities in order to secure adequate access to water at affordable prices. Although the right to water played a role in the investment disputes as outlined in the following, it was not always the main argument invoked by the host states; it often only played a marginal role in the judicial reasoning. Especially the early investor claims brought against Argentina demonstrated Argentina’s preference for invoking justifications other than human rights. Investors challenged Argentina’s emergency measures, which were adopted to mitigate the repercussion of its economic and financial crisis that started in 1999. Many of the emergency measures adopted by Argentina were motivated by the economic and social situation of its population, in particular by the objective of providing affordable access to water and gas. Still, the core of Argentina’s argumentation and likewise of the tribunals’ assessment was the ‘necessity defense.’ In Azurix, the tribunal failed ‘to understand the incompatibility’ with human rights as the facts had not been sufficiently established.62 Especially in the earlier cases, one has to admit that also Argentina as a respondent did not focus on substantiating the connection between the measures ­adopted and the fulfilment of human rights obligations.63 In contrast to this outright refusal to consider Argentina’s human rights obligations with respect to the right to water, the tribunal was not reluctant to follow the T ­ ecmed tribunal and ‘seek guidance’ in the case-law of the ECtHR for interpreting the scope of property rights and the role that ‘public purpose’ ought to play for

61

62

63

See, e.g., Convention on the Elimination of All Forms of Discrimination Against Women art. 14, 2(h), Dec. 18, 1979, 1249 u.n.t.s. 13; Convention on the Rights of the Child art. 24, 2(c), Nov. 20, 1989, 1577 u.n.t.s. 3. For an analysis of the different aspects of the h ­ uman right to water as protected by the different human rights instruments, see generally also Pierre Thielbörger, The Right(s) to Water, The Multi-Level Governance of a Unique ­Human Right (2014). Azurix v. Argentina Republic, icsid Case No. ARB/01/12, Award, para. 261 (July 14, 2006) [hereinafter Azurix v. Argentina]. For a comprehensive analysis, see generally Tamar Meshel, Human Rights in Investor-State Arbitration: The Human Right to Water and Beyond, in 6(2) J. Int’l Disp. Settlement 277 (2015). Kriebaum describes the argumentation as ‘half-hearted’ in: Kriebaum, supra note 47, at 7; When alluding to the argumentation by Argentina in this regard, the award refers to the expert opinion of Dr Solomoni which is not public, Azurix v. Argentina, Award, para. 254 (July 14, 2006).

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­determining expropriation.64 With reference to the ECtHR case James and Others, the Tribunal came to the conclusion that the public purpose of a measure plays a less significant role when the affected individual is a non-national. Consequently, there was no discussion on the relation between protection of rights to water as a public purpose and expropriation of foreign investors. ­Similarly, in Siemens, the human rights relevance was rejected because Argentina failed to develop the argument that state measures to protect the human rights of domestic citizens may justify expropriation of foreign investors without full compensation.65 In Suez/Vivendi, the human rights argumentation was substantiated more convincingly. Five ngos as amici as well as Argentina stressed the importance and the potential risk for the right to water that Argentina aimed to protect by freezing the water tariffs.66 The tribunal did not discuss the human rights argumentation when interpreting the substance of investor rights as requested by Argentina and the amici. Only the exceptional circumstances of the crisis were considered relevant for the fet standard. In that context the tribunal acknowledged that safeguarding sufficient water supply ‘was vital for the health and well-being of 10 million people.’67 Nevertheless, it concluded that adopting measures in breach of investors’ rights were not the only means available. The tribunal stated that human rights obligations as well as bit obligations must be respected equally, which it found to be possible in the given case.68 Since the precise scope of Argentina’s human rights obligations were not discussed, it is hard to understand how the tribunal arrived at the conclusion that both obligations – under the bit as well as under human rights law – were not inconsistent. In the most recent dispute involving the right to water, saur International v. Argentina, Argentina explicitly argued that its ‘most basic human rights ­obligation’ – with constitutional hierarchy in the Argentinian legal system – made it indispensable for Argentina to intervene in the investors’ business; such ­human rights protection could not constitute an expropriation.69 When responding to the claimant’s reference to the well-known dogma that the ­motives of a state act are indifferent for determining an expropriation, 64 65 66 67 68 69

Azurix v. Argentina, Award, para. 311 (July 14, 2006). Siemens v. Argentina, icsid Case No. ARB/02/8, Award, paras. 79, 121 (Feb. 6, 2007) [hereinafter Siemens v. Argentina]. Suez/Vivendi v. Argentina, supra note 6, paras. 252, 256. Ibid. para. 260. Ibid. para. 262. saur International S.A. v. The Argentine Republic, icsid Case No. ARB/04/4, Decision on Jurisdiction and Liability, para. 328 (June 6, 2012) [hereinafter saur v. Argentina].

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the ­tribunal responded by emphasizing ‘that human rights in general, and the right to water in particular, are one of the various sources that the tribunal should take into account to resolve the dispute.’70 However, it went on in stating that both obligations are compatible, since Argentina has the possibility to comply with its human rights obligations while compensating the investor. The precise counterbalancing of these two obligations was postponed to the merits, but human rights were not explicitly mentioned again .71 In the other Argentina crisis cases, the defense claims were first and foremost based on the ‘necessity’-clause in the us–Argentina bit (which was interpreted in the light of customary international law72 or of General Agreement on Tariffs and Trade (hereinafter ‘gatt’) Article XX)73 or on the ‘exceptional circumstances,’ which should have influenced the ‘legitimate expectations’ of the investors.74 The precise criteria for preclusion of liability differed depending on the legal interpretation of the necessity exception, for example as being based on the customary law rules on state responsibility (e.g. excluding recognition of ‘necessity’ of emergency measures if the state could have prevented the emergency situation) or on more flexible treaty exceptions providing for ‘proportionality balancing’ between the competing rights and legal values concerned.75 As explained in the Continental Casualty award,76 interpreting bit exceptions similar to the wto jurisprudence on gatt Article XX enables arbitrators to ‘balance’ the competing rights and obligations more flexibly.77 Although the tribunals shied away from engaging a discussion of any direct conflict between human rights and the bit obligations at stake, the adoption

70 71 72

73 74 75

76 77

Ibid. para. 330. Ibid. paras. 330–331. cms Gas Transmission Company v. The Argentine Republic , icsid Case No. ARB/01/8, Award, paras. 315–317, (May 12, 2005); Sempra Energy International v. The Argentine Republic, icsid Case No. ARB/02/16, Award, 333–345 (Sept. 28, 2007); Enron Corporation and Ponderosa Assets, L.P. v. Argentine Republic, icsid Case No. ARB/01/3, Award, 294– 304 (May 22, 2007). Continental Casualty v. Argentine Republic, icsid Case No. ARB/03/9, Award, paras. 192– 195 (Sept. 5, 2008) [hereinafter Continental Casualty v. Argentina]. Total S.A. v. Argentine Republic , icsid Case No. ARB/04/01, Decision on Liability, 308–314 (Dec. 27, 2010) [hereinafter Total S.A. v. Argentina]. Cf. generally Alec Stone Sweet & Giacinto della Cananea, Proportionality, General Principles of Law, and Investor-State Arbitration: A Response to José Alvarez, 46 (3) N.Y.U. J. Int’l L. & Pol. 911 (2014). Continental Casualty v. Argentina, Award, para. 199 (Sept. 5, 2008). See Alec Stone Sweet, Investor-State Arbitration: Proportionality’s New Frontier, Yale Law School Faculty Scholarship Series Paper 69, 18 (2010).

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of balancing methods from right-based constitutional law systems could promote convergence of human rights and international investment law. So far, tribunals did not seem to pay specific attention to the states’ duty to mitigate and counteract threats for the human rights of populations suffering under an economic crisis. The jurisprudence by national Constitutional Courts in over-indebted eu member states limiting the national rights of governments to curtail human rights protection in exchange for international debt arrangements illustrates that the relationships between investor rights, human rights and ‘conditionality’ of international financial assistance remain similarly ­controversial among creditor and debtor countries as among host states and foreign investors protected by bits. Another right to water case is Aguas del Tunari, S.A. v. Republic of Bolivia. The investors withdrew the claim in view of the continuous public protests (referred to by the international press as ‘the water wars’) that began after the increase of water prices and accompanied the icsid proceedings.78 Only the decision on jurisdiction was published, which rejected the objection that Aguas del Tunari was not eligible to invoke the Netherlands-Bolivia bit as an allegedly de facto us-controlled corporation.79 A petition for amicus submission was rejected because the icsid rules at that time did not foresee third party participation.80 In Veolia v. Egypt,81 the dispute revolved around Egypt having enacted legislation to increase minimum wages following the Arab Spring revolution without adjusting the concessions for waste disposal services as contractually guaranteed.82 This case highlights common problems of many human rights violations in capital-importing, less-developed countries: First, host states very often tolerate or are complicit in human rights violations, for instance, by accepting low labour standards, promoting toxic products (e.g., tobacco 78

79

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Damon Vis-Dunbar & Luke Eric Peterson, Bolivian Water Dispute Settled, Bechtel Forgoes Compensation, Investment Treaty News (Jan. 20, 2006), http://www.iisd.org/pdf/2006/ itn_jan20_2006.pdf. Aguas del Tunari, S.A. v. Republic of Bolivia, icsid Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction, paras. 264–323 (Oct. 21, 2005) [hereinafter Aguas v. Bolivia]. Aguas v. Bolivia, Letter to ngo Regards Petition to Participate as Amici Curiae (Jan. 29, 2003). Veolia Propreté v. Arab Republic of Egypt, icsid Case No. ARB/12/15, Notice of Arbitration, (June 25, 2012) (not public). Luke Eric Peterson, French Company, Veolia, Launches Claim Against Egypt over Terminated Waste Contract and Labor Wage Stabilization Promises, Inv. Arb. R. (June 27, 2012), http://www.iareporter.com/articles/french-company-veolia-launches-claim-against -egypt-over-terminated-waste-contract-and-labor-wage-stabilization-promises/.

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consumption) and attracting foreign investors to benefit from such low protection standards. Second, especially developing states in transition may be compelled to initiate major legislative restructuring to limit adverse policy effects of previous authoritarian regimes. Biwater Gauff v. Tanzania is a further case in which a host state invoked human rights in connection with a crisis as a justification for terminating the contract with a water company. Tanzania argued that the investor ‘had created a real threat to public health and welfare.’83 However, with regards to its own human rights obligations, Tanzania seems to be more cautious when stating that ‘it has a moral and perhaps even a legal obligation to act.’84 The tribunal rejected the relevance of the right to water when assessing the legitimacy of the terminations of the contract; it mainly based its reasoning on the failures to meet the contractual requirements. The recent award in Philip Morris v Uruguay presents a progressive approach in human rights terms in that considerable weight was given to the protection of public health. The Philip Morris saga against Australia and Uruguay took place at several levels – i.e. before national courts, at the wto (through other Members), and at investment arbitration level – following the adoption of tobacco control measures adopted by states in order to implement the who Framework Convention on Tobacco Control (fctc).85 Both isds proceedings, in which the claimants argued that imposed restrictions on the packaging of cigarettes amount to an expropriation of their intellectual property rights, were decided in favour of the state.86 In the case against Australia, the tribunal denied jurisdiction on grounds of an abuse of rights by Philip Morris Asia, which acquired its shares of Philip Morris Australia only after becoming aware of the developments towards introducing the plain packaging legislation to make use of the Hong Kong-Australia bit.87

83 84 85

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Biwater Gauff (Tanzania) Ltd v. United Republic of Tanzania, icsid Case No. ARB/05/22, Award, paras. 436, 434 (July 24, 2008). Ibid. See, generally Ernst-Ulrich Petersmann, ‘How to Reconcile Health Law and Economic Law with Human Rights – Administration of Justice in Tobacco Control Disputes’ (2015) 10 Asian Journal of wto and International Health Law and Policy 27. Philip Morris Asia Ltd v The Commonwealth of Australia, Award on Jurisdiction and Admis UNCITRAL; PCA Case No. 2012–12 (December 17, 2015) [hereinafter Philip Morris v Australia]. Philip Morris Brands Sàrl, Philip Morris Products SA and Abal Hermanos SA v Oriental Republic of Uruguay, ICSID Case No. ARB/10/7, Award (July 8, 2016) [hereinafter Philip Morris v Uruguay]. Philip Morris Asia Ltd v The Commonwealth of Australia, UNCITRAL PCA Case No. 2012-12, Australia’s Response to the Notice of Arbitration, 29–31 (December 21, 2011).

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The Uruguay case opened many gates for human rights based argumentation. First, the tribunal upheld that public health is widely accepted as an expression of the state’s police power in accordance with international customary law. By applying the ECtHR’s doctrine of ‘margin of appreciation,’ the tribunal held that any state measure that is reasonable, not arbitrary, non-­ discriminatory, adopted in good faith and not wholly disproportionate, does not constitute a breach of expropriation.88 It particularly referred to a consistent trend in international investment law while referring to the ceta and the eu–Singapore fta.89 Specific weight was also given to the fact that public health is protected by Uruguay’s constitution and fctc and that Uruguay was therefore under a national and international obligation.90 However, it also made clear that such an obligation would not permit Uruguay to not fulfill its obligation under the bit.91 Further, the tribunal paid due attention to the ‘limited technical and economic resources’ of Uruguay as a relatively small country; it therefore allowed Uruguay to refer to the fctc and the international works produced under that framework, instead of requiring Uruguay to gather its own evidence or conduct prior research,92 which aptly accommodates the need for low-resource countries. In that regard, it is also important to note that the arguments and the evidence provided by the amicus submissions (by the who and the Pan-American Health Organization) were taken seriously and referred to several times.93 It also considerably curbed a generous understanding of legitimate expectations. In light of a global trend of controlling tobacco increasingly, the investors should have been prepared for more stringent legislation.94 However, it stressed that also unprecedented measures and ‘breaking new ground’ by individual action could be legitimate.95 This case may establish precedents for several entry points for human rights argumentation. However, it remains questionable whether the reading of the Uruguay tribunal will prevail in light of the consistent rejection of the ­margin 88 E.g. Philip Morris v. Uruguay, supra note 86, 305. 89 Ibid. 290, 295–300. 90 Ibid. 302, 304, 432. 91 Ibid. 401. 92 Ibid. 393, 396. 93 See, e.g. the reference to the arguments brought forward by the amicus submission, Ibid. 306, 391. 94 Ibid. 430. 95 Ibid.

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of appreciation doctrine by other tribunals and of the Uruguay tribunal’s failure to explicitly confront the arguments established by previous practice.96 Further, the adoption of the ECtHR’s doctrine of margin of appreciation was sharply criticized by one dissenting arbitrator; he argued that a direct application is not permitted under iil, because it is based on the specific language of the echr and its context.97 To sum up this review of awards, one may conclude that isds tribunals are in principle rather reluctant to accept human rights based arguments and have not developed a coherent methodology for evaluating the human rights dimensions of investment disputes. Host states seem reluctant to justify their measures in terms of their human rights obligations. The host state defenses discussed above were first and foremost grounded in contracts and arrangements underlying the investment (as in Biwater Gauff v. Tanzania) or in liability exceptions as informed by other international law sources (such as the customary rules on state responsibility) or by analogy to wto jurisprudence on treaty exceptions (as in some of the Argentina crisis cases). Whether a host state justifies its regulatory measures by invoking public interests (like health protection) or human rights (like health rights) may not even change the judicial ‘proportionality balancing’; for, the ‘constitutional weight’ of the governmental duty to protect public health depends on the human and constitutional rights of its citizens, just as the ‘weight’ of adversely affected investor rights may be influenced by human rights and corresponding ‘corporate social responsibilities’ of foreign investors. Paying more attention to the objective of a state measure and adjusting the proportionality test accordingly is an option already available for arbitrators for responding to human rights concerns raised by the disputing parties, as the Uruguay example has shown. However, human rights as a multilevel legal system protecting substantive entitlements continue to play only a marginal role in isds arbitration. It remains to be seen whether such ‘gate openers’ as those in the Urbaser v Argentina and P. Morris v Uruguay cases gain sufficient support to prevail over traditionally dominant approaches.

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Siemens v. Argentina, supra note 65, 354. Quasar v. Russia, supra note 6, 22. Bernhard von Pezold and Others v Republic of Zimbabwe, icsid Case No. ARB/10/15, Award, 465–466 (July 28, 2015) [hereinafter Pezold v Zimbabwe]. Philip Morris v. Uruguay, Concurring and Dissenting Opinion Co-Arbitrator Gary Born, 87, 138 (July 8, 2016).

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C Human Rights Introduced by Third Party Interveners Apart from human rights as investor rights, investment agreements and their enforcement by investment arbitration can have severe impacts on the human rights of the host state’s population. As host states tend to justify their regulatory action by reference to public policy concerns, the participation of third parties is an important avenue for bringing in concrete human rights interests that otherwise risk being ignored. The following part will assess the practice of tribunals when confronted with human rights argumentation introduced by third party intervention and the impact thereof on judicial decision-making. 1. Amicus Curiae Briefs – There is an increasing number of third party interventions by ngos and civil society groups as amici curiae. Such interveners often act as advocates for affected populations or communities in r­esponse to the reluctance of governments to introduce their own human rights duties into the investment dispute. The impact of the human rights argumentation by third party interveners can be assessed on two levels. First, the human rights argumentation may play an important role for the acceptance of an amicus submission when isds tribunals acknowledge that third parties’ and public interests are at stake. Second, amici submissions may indeed promote the examination of human rights issues as part of the investment dispute. This part briefly outlines the development of third party interventions and surveys the most recent cases on the basis of these two questions. Amicus curiae participation started with Methanex v. u.s. in 2001.98 The applicable nafta and United Nations Commission on International Trade Law (hereinafter ‘uncitral’) procedural rules did not include provisions on third party intervention. The tribunal nevertheless declared that it had the power to accept third party submissions in view of the public interests involved.99 Also the u.s. and Canada acknowledged the existence of considerable public interest. Meanwhile, in 2003, nafta’s Free Trade Commission issued a statement in which amicus submissions were accepted subject to the discretion of each tribunal.100 With Suez/Vivendi, it was the first time that an arbitration tribunal working under the icsid rules decided to accept participation of civil society 98

Methanex Corp. v. United States of America , uncitral, Decision of the Tribunal on Petitions from Third Persons to intervene as ‘Amici Curiae’ (Jan. 15, 2001) [hereinafter Methanex v. u.s. Decision]. 99 Ibid. para. 49. 100 Statement of the Free Trade Commission on Non-Disputing Party Participation, u.s. Dept. of the State (Oct. 7, 2003), http://www.state.gov/documents/organization/38791.pdf.

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organizations as amicus curiae even though the complaining companies had objected to it.101 It stated that the given case ‘involved matters of public interest of such a nature that have traditionally led courts and other tribunals to receive a­ micus submissions from suitable non-parties.’102 At the same time, the tribunal emphasized that public interest is not given in every isds case but only in this particular one since ‘the investment dispute centers around the  water distribution and sewage systems of a large metropolitan area.’103 In the decision on the merits, the tribunal explicitly responded to the human rights argumentation by Argentina and the amici; it made clear that it saw no incompatibility between the right to water and the bit obligations and examined Argentina’s plea of the defense of necessity against Article 25 of the Draft Articles on State Responsibility104 (codifying the customary rules on state responsibility) without giving any relevance to the human rights at stake.105 In ups v. Canada (2007) the tribunal made no reference to human rights in the acceptance of the amicus submission; it only referred to the submission when summarizing procedural history.106 The tribunals followed the argumentation of the amici by rejecting the parts of the claim that were based on labour rights.107 Nevertheless, there is no explicit reference to the amici nor to their arguments. Similarly, in Glamis Gold v. u.s. the tribunal did not make any reference to human rights in the decision accepting the amicus submission. In Aguas del Tunari v. Bolivia, the amicus submission was rejected; in Suez/Interaguas v. Argentina, the tribunal accepted the amicus submission on the ground that the operation of water and sanitary systems affects human rights.108 This connection also led the Biwater Gauff v. Tanzania tribunal to accept amicus participation. However, in the final award there is no reference made to the human rights raised in the submission. 101 Suez et al. v. The Argentine Republic, icsid Case No. ARB/03/19, Order in Response to a Petition for Transparency and Participation as Amicus Curiae (May 19, 2005) [hereinafter Suez/Vivendi v. Argentina Order]. 102 Ibid. para. 20. 103 Ibid. para. 19. 104 Cf. James Crawford, The International Law Commission’s Articles on State Responsibility. Introduction, Text and Commentaries 178 (2002). 105 Suez et al. v. The Argentine Republic, icsid Case No. ARB/03/17, Decision on Liability, para. 262 (July 30, 2010). 106 ups v. Canada, supra note 32, para. 3. 107 Cf. supra Part II.A.2. 108 Suez et al. v. The Argentine Republic, icsid Case No. ARB/03/17, Order in Response to a Petition for Participation as Amicus Curiae, para. 18 (Mar. 17, 2006).

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James Harrison has convincingly inferred from this case law certain factors that apparently matter for acceptance. First, the subject matter of the case has to be of public interest. Secondly, the expertise and perspective of the ­amici must be expected to assist the tribunal. Thirdly, the amici participation is likely to lead to increased transparency and enhance legitimacy for isds in ­general  and the case in particular.109 As Harrison further pointed out, the rationale behind accepting third party intervention is hence not primarily to ensure legal remedies for affected individuals or communities; third party intervention is rather meant to increase the functionality of the tribunal.110 Harrison’s appraisal is confirmed by subsequent case law. In Grand River v. u.s., the National Chief of the Assembly of First Nations submitted an amicus curiae in support of the claimants.111 Since the letter was subsequently included in the claimant’s reply, the tribunal did not have to decide upon a rejection of admission (e.g. due to an alleged lack of formality).112 Even though the letter was ‘read and considered,’ its precise impact remains unclear. In accepting an amicus submission, the Philip Morris v. Uruguay tribunal also referred to the fact that ‘granting the request would support the transparency of the proceeding and its acceptability by users at large.’113 In Piero Foresti et al. v. South Africa, the petition to submit an amicus brief by the International Commission of Jurists was accepted.114 The International Commission of Jurists’ petition mentions the broader public ­repercussions of this case: it concerned not only the legality and legitimacy of South-­Africa’s legislation countering ramifications of the Apartheid regime, but also ­concrete  international obligation of the home and the host state regarding  ­non-­discrimination, equality as well as the duty to international

109 James Harrison, Human Rights Arguments in Amicus Curiae Submissions: Promoting Social Justice?, in Human Rights in International Investment Law and Arbitration 396, 405–406 (Pierre-Marie Dupuy et al. eds., 2009). 110 Ibid. at 405. 111 See generally Grand River Enterprises Six Nations, Ltd et al. v. United States of America, uncitral, Amicus Curiae Submission of the Office of the National Chief of the Assembly of First Nations (Jan. 19, 2009). 112 Grand River v. u.s., supra note 26, para. 60. 113 Philip Morris v. Uruguay, supra note 86, para. 30. 114 International Commission of Jurists, Petition for Participation as a Non-Disputing Party Pursuant to Article 41(3) of the icsid Arbitration Rules, para. 34 (Aug. 19, 2009).

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­cooperation.115 It is  noteworthy that – in the accepting letter of the amicus brief submission – the tribunal explicitly asked for feedback on the fairness and effectiveness of the third party participation. The proceedings were suspended and finally discontinued before the scheduled amicus submission could be filed. Further, most of the documents are not made publically available, which makes it difficult to trace any impact of the amicus argumentation in the case. Still, the tribunal’s request for feedback and dialogue shows its interest in improving the system of third party intervention. In contrast to this trend of acknowledging the benefits that amicus submission can bring to isds, there also have been cases – such as Chevron v. Ecuador (2010)116 and Pezold v. Zimbabwe (2012)117 – in which the amicus participation was rejected, despite a considerable level of public debates regarding the human rights relevance and public protests. It is worth analysing the grounds for rejection as formulated by the Pezold tribunal to shed some light onto how the third party intervention rules (i.e. Rule 37) of the icsid Convention are interpreted. Firstly, it deserves attention that the tribunal considered the petition although both parties rejected it.118 Secondly, the tribunal rejected the petition on grounds of lack of independence of the petitioners.119 Thirdly, the tribunal stressed that it did not feel competent to interpret indigenous rights and did not find human rights to be applicable.120 Fourthly, the tribunal seems to indicate that the respondent state should raise the human rights issues at stake; it stated that ‘the respondent has not yet filed a substantive pleading in these proceedings.’ However, the tribunal went on, the respondent was afforded the opportunity to make observations on the application, including any observations as to the perspective the petitioners propose to bring to the factual and legal issues in these proceedings.121 This statement could imply that the tribunal saw the human rights relevance but was insecure how to engage specifically with arguments 115 Ibid. para. 24. 116 Chevron Corporation and Texaco Petroleum Corporation v. Republic of Ecuador, ­u ncitral, pca Case No. 2009-23, Procedural Order No. 8 (April 18, 2011); Chevron Corporation and Texaco Petroleum Corporation v. Republic of Ecuador, uncitral, pca Case No. 2009-23, Submission of Amici (Nov. 5, 2010). 117 Bernhard von Pezold and Others v. Republic of Zimbabwe, icsid Case No. ARB/10/15, Procedural Order No. 2, (June 26, 2012). 118 Ibid. para. 6. 119 Ibid. para. 56. 120 Ibid. para. 57. 121 Ibid. para. 59.

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raised only by third parties. The tribunal’s understanding of the independence requirement raises additional questions. To substantiate the need for this requirement, the tribunal cited Suez in which it was stated that The purpose of amicus submissions is to help the Tribunal arrive at a ­correct decision by providing it with arguments, and expertise and perspectives that the parties may not have provided. The Tribunal will therefore only accept amicus submissions from persons who establish to the Tribunal’s satisfaction that they have the expertise, experience, and ­independence to be of assistance in this case….122 In Pezold, the mere fact that the petitioners first tried to pursue their interests through domestic legislation and hence through government lobbying was held against them. The tribunal therefore seems to require that a government’s stance should diverge from articulated interests of its population and that there must not be any form of cooperation and negotiation between the ­government and civil society organizations prior to the arbitration. Such an u ­ nderstanding of amicus curiae – although it might be in line with the ­traditional concept – excludes local rights-holders who should ideally be represented by their host governments and therefore communicate with each other. In contrast, in Methanex the tribunal acknowledged, that third party interveners are to be seen as advocates trying to assert certain interests and not independent experts.123 As indicated above, the Uruguay tribunal extensively relied on the evidence provided by the amicus submissions.124 The analysis of the recent case law shows that there remain many uncertainties as to the conditions for acceptance of amici. There is no consistent practice and no clear guidance as to what role amici arguments should play in the judicial decision-making. Acceptance and impact of human rights arguments remain subject to the discretion of the arbitrators, which have so far failed to develop a consistent and transparent methodology. In most of the cases, the impact of the human rights arguments remains unclear. However, the review of the content of the amicus submission filed by ngos, civil society organizations and human rights experts shows that third party intervention is a promising 122 Suez/Vivendi v. Argentina Order, supra note 101, para. 24. 123 Methanex Corporation v United States of America, Decision of the Tribunal on Petitions from Third Persons to intervene as ‘Amici Curiae’ (nafta), 38. 124 See, e.g. the reference to the arguments brought forward by the amcius submission, Philip Morris v. Uruguay, supra note 86, 306, 391.

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avenue for raising human rights concerns, especially for those which were otherwise not represented in the proceedings but nevertheless considerably affected by the investment dispute. Reliance on the host state to bring in the relevant human rights issues may not be sufficient; for, human rights abuses are more likely to occur when tolerated by the state – either willingly or due to a lack of capacity. An increased acceptance of amicus curiae submissions and additional improvements of the system of third party intervention may be crucial for promoting a balanced human rights approach. A transparent and consistent methodology regarding the reasons for rejection, the role of the amici arguments in judicial decision-making as well as the procedures (such as access to information) is still missing. 2. Human Rights Introduced by the Home State – When the procedural rules on third party intervention are phrased broadly, home states could in theory also intervene as ‘third parties.’ However, the aim of isds (i.e. the ‘­de-politicization’ of commercial conflicts by excluding the investor’s home state and substitution of diplomatic protection) explains the fact that states left out the possibility for home state intervention when concluding bits. Article 1128 of the nafta remains an exception by allowing for home state intervention especially with respect to questions of interpretation. Under this provision, home states have argued in favour of sufficient regulatory scope of the host state and also for restrictive interpretations of investor rights.125 The increased number of critical voices against isds – first in Latin-American countries and since the mega regionals are being negotiated also within European, u.s. and Canadian ­societies – might arguably heighten the pressure for home states to get back into the driving seat by formally intervening in isds. Home states can also indirectly exert influence on arbitration proceedings. For example, the Italian Embassy in South Africa served as so-called aide memoire with regard to the Black Economic Empowerment legislation that led to the Foresti v. South Africa arbitration.126 Italy warned South Africa of the adverse effects this legislation will have on foreign investors and the likeliness of provoking a number of investment disputes. Italy was apparently not arguing in favour of promoting racial non-discrimination through South Africa’s legislation. In sum, the introduction of human rights arguments into isds by the home state is possible but 125 Patrick Dumberry & Gabrielle Dumas-Aubin, When and How Allegations of Human Rights Violations Can Be Raised in Investor-State Arbitration, 13(3) J. World Inv. & Trade 349, 368 (2012). 126 See generally Luke Eric Peterson, South Africa Mining Arbitration Sees Another Amicus Curiae Intervention, Investment Arbitration Report, Inv. Arb. R. (Sept. 2, 2009), http://www.iareporter .com/articles/south-africa-mining-arbitration-sees-another-amicus-curiae-intervention/.

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remains sporadic and cannot be relied on for promoting the human rights of the population inside the host state in a balanced and systemic way. D Human Rights Introduced by the Arbitrators Ex Officio Arbitrators have also referred to human rights ex officio, i.e., without having a dispute party referring to the specific argument. This was mainly the case in the context of determining the scope of property rights and the existence of an expropriation. In Azurix, the tribunal sought guidance in the echr and corresponding case law.127 The tribunal in Tecmed v. Mexico referred to the case law of the ECtHR and the IACtHR for determining the existence of an expropriation and for stressing the legitimacy of distinguishing between nationals and non-nationals in this context.128 The human rights jurisprudence seems to have influenced the finding of the tribunal in that the denial to renew a permit to run a hazardous industrial waste landfill in response to public protests is a political choice and less legitimate in the context of an interference with the property rights of a non-national. In Saipem v. Bangladesh,129 ECtHR case-law was cited to confirm the assertion that also immaterial rights can be property rights protected by iil and also judicial acts may amount to illegal interference with property rights. isds tribunal have occasionally resorted to hrl and jurisprudence to support the use of ‘proportionality balancing’ of investor rights with public interests as defined by human rights.130 In Mondev v. u.s., the prohibition of the retrospective applicability of a new regulation was discussed without deciding whether a general prohibition of retroactive interferences into property rights is part of the applicable law in the nafta country concerned.131 When assessing Mondev’s claim that the granting of a special governmental immunity for domestic tort law was in breach of nafta law, the tribunal turned to ECtHR case law by stating that it could provide guidance by analogy.132 In Phoenix, the tribunal famously acknowledged that ‘nobody would suggest that icsid ­protection should be granted to investments made in violation of the most fundamental rules of protection of human rights, like investments 127 Cf. supra Part II.B. 128 Tecmed v. Mexico, supra note 58, paras. 116, 122. 129 Saipem S.p.A. v. The People’s Republic of Bangladesh, icsid Case No ARB/05/07, Decision on Jurisdiction and Recommendation on Provisional Measures, paras. 130, 132 (Mar. 21, 2007). 130 See, e.g., Tecmed v. Mexico, supra note 58, para. 122, with reference to ECtHR case law. 131 Mondev International Ltd v. United States of America, icsid Case No ARB(AF)/99/2 (nafta), Award, para. 138, 141–144 (Oct. 11, 2002). 132 Ibid. para. 144.

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in pursuance of torture or genocide or in support of slavery or trafficking of human organs.’133 Also in cases in which human rights arguments were dismissed as not excluding liability, isds tribunals often referred back to human rights considerations when assessing compensation for damages.134 Yet, the occasional ­references by arbitrators to human rights for interpretative guidance – in particular to human rights jurisprudence on property rights – do not follow a transparent, legal methodology. In light of the numerous dismissals of human rights arguments brought forward by amici and host states, this practice of sporadically referencing hrl and jurisprudence runs the risk of being perceived as selective, if not biased. E Conclusions The isds practices discussed in Part 2 suggest that arbitrators prefer to leave it to the parties to decide on whether human rights arguments are raised either as independent claims or as ‘interpretative guidance’ for construing investment rules and principles (like fet). The discussion further indicates that arbitral tribunals are more open toward human rights arguments for clarifying principles of procedural fairness (e.g., access to justice, due process of law), legal methodology (e.g., ‘proportionality balancing’ of investor rights and other competing rights) and as a relevant factual context (e.g. in Veteran Petroleum Limited (Cyprus) v. Russia). Where hrl and iil reflect common principles, arbitral tribunals are more willing to accept the relevance of hrl. Property rights remain an exception to the risk of neglect of hrl in isds, for instance in view of the protection of property rights in regional hrl. A discussion of other substantive human rights (e.g. indigenous peoples’ rights or the right to water) is usually rejected on the grounds of lack of jurisdiction or the respective party’s failure to substantiate its claim. Other interests protected by hrl are often not even identified. isds risks, thereby, adopting and perpetuating an one-sided human rights concept that is biased towards property rights and mainly rests on principles of fairness and procedural rights. The ‘inalienable’ and ‘indivisible’ nature of human rights and the rejection of legal hierarchies between civil, political, economic, social and cultural human rights might thus be ignored in iil and isds. In addition to the protection of foreign investor 133 Phoenix Action, Ltd v. The Czech Republic, icsid Case No. ARB/06/5, Award, para. 78 (April 15, 2009) [hereinafter Phoenix v. Czech]. 134 Clara Reiner & Christoph Schreuer, Human Rights and International Investment Arbitration, in Human Rights in International Investment Law and Arbitration, supra note 109, 82, 88–94.

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rights as mandated by the underlying bit, the adoption of a selective human rights approach will not lead to an adequate recognition of government duties to protect and fulfil human rights; it rather illustrates a prioritization of foreign investors’ interests. The increasing civil society criticism of this structural bias of iil continues to prompt increasing changes in the drafting of investment agreements that are likely to also encourage isds practices to balance investor rights more comprehensively with other constitutional rights of citizens and with corresponding governmental duties and ‘corporate social responsibilities’ to protect human and constitutional rights in non-discriminatory ways without unduly privileging foreign investor interests.135 III

The Role of the Law: Methodology Questions Regarding the Human Rights Dimensions in isds

The preceding survey of current practice of isds tribunals in responding to human rights concerns in investment disputes suggests that – apart from references to procedural rights and property rights – references in isds to civil, political, economic, social and cultural human rights and collective ‘third ­generation rights’ (like a people’s right to self-determination, indigenous peoples’ rights) remain rare. This raises the question as to whether the reluctance towards ‘human rights integration’ is founded in the treaty texts, in the judicial discretion of arbitrators, or in the lack of incentives of investors and host states to invoke human rights in isds. Part 3 outlines the possibilities (or even duties) of human rights integration into the dispute as they emerge from bit texts and the customary rules of treaty interpretation. This section first looks into the legal admissibility and relevance of human rights arguments which depends on the phrasing of the clauses on jurisdiction and the applicable law. Against this background, it outlines the entry points in bits and general international law through which human rights can become legally relevant for the settlement of investment disputes. A Jurisdictional Clauses The jurisdictional clauses found in most investment agreements range from covering all disputes arising in connection with the investment or the investment agreement to specifically defined disputes. Jurisdictional clauses stating that ‘any dispute . . . in connection with the investment’ shall be covered, do 135 On recent reforms of iil, see generally Shifting Paradigms in International Investment Law (Steffen Hindelang & Markus Krajewsk eds., 2016).

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not rule out investor claims going beyond bit breaches.136 Nevertheless, as the comparative review of Biloune v. Ghana and Chevron v. Ecuador shows, much depends on the interpretation of the required relation between the human rights at stake and the investment, and on what kind of rights the tribunal sees as covered by the investment definition. Investment tribunals have been discussing whether their jurisdiction is only limited to lawful ‘good faith’ investments and investor claims.137 Following that line of reasoning, the jurisdictional clause can function as an entry point for human rights argumentation for the host state’s defense so that investments made in violation of applicable hrl fall outside the isds jurisdiction.138 ­However, the burden of proof rests with the host state. Even if the host state does not challenge the jurisdiction on human rights grounds, it is conceivable that the tribunal examines its jurisdiction ex officio or in response to human rights claims raised by adversely affected third parties. In Urbaser, the tribunal established that a factual link to the investment would be sufficient in order to hear a human rights-based counterclaim. ­Nevertheless, it also found a legal connection precisely in the fact that the fundamental right for access to water was the purpose for the investment agreed upon.139 The use of investment arbitration to enforce sovereign debt payments in the context of debt restructuring and its adverse impact on human rights have been criticized by human rights lawyers140 as well as by financial and investment lawyers.141 Since 2005, creditors (including also so-called ‘vulture funds’ purchasing outstanding sovereign debt at a considerable discount from distressed bondholders before trying to enforce the terms of the debt contracts to maximize their return) have repeatedly brought claims before investment 136 Compañía de Aguas del Aconquija S.A. & Vivendi Universal (formerly Compagnie ­Générale Des Eaux) v. The Argentine Republic , icsid Case No. ARB/97/3, Decision on Annulment, para. 55 (July 3, 2002). 137 On good faith requirements of an investor, see generally Abaclat and others (Case formerly known as Giovanna a Beccara and Others) v. Argentine Republic, icsid Case No ARB/07/5, Decision on Jurisdiction and Admissibility (Aug. 4, 2011); Malicorp Ltd v. Arab Republic of Egypt, icsid Case No ARB/08/18, Award (Feb. 7, 2011). 138 Cf. supra Part II.C.1. 139 Urbaser v. Argentina, supra note 48, 1151. 140 Cf. Report of the Independent Expert on the effects of foreign debts and other related financial obligations of States on the full enjoyment of all human rights, particularly economic, social and cultural rights. Note by the un Secretary-General, un A/72/153 of 17 July 2017. 141 Cf. International Investment Law and Global Financial Architecture (C.J. Tams et al., eds, 2017).

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arbitration tribunals so as to enforce the terms of sovereign bonds.142 Whether sovereign debt falls under asset-based definitions of investments in the bits concerned, and whether sovereign bonds purchased in ‘secondary markets’ have a sufficient territorial connection to the host state (due to the funds having been made available to the borrowing government), remains contested in isds.143 For the admissibility of human rights arguments brought forward by amici curiae, the jurisdictional clause does not constitute the major hurdle. ­Instead, the requirements for the acceptance of third party interventions – as stipulated in the applicable procedural rules and established by isds ­jurisprudence – need to be fulfilled. As discussed above, these requirements focus on whether (1) the human rights arguments reflect the public interests at stake in the investment dispute; (2) the expertise of the amicus curiae will assist the tribunal; (3) the admission of amicus curiae will help to increase transparency and ­legitimacy of isds; and (4) whether the amici curiae are independent representatives of public interests. The remaining uncertainties revolving around the jurisdictional clauses, and lack of invocation by investors of human rights as part of the investment dispute, may explain the reluctance of isds tribunals to engage in discussions about the concrete human rights obligations of the host state and to integrate hrl as a substantive, right-based, constitutional law regime. Considering ­human rights as facts, or using vague language (such as being ‘mindful’ of the human rights at stake), seems to be preferred by some tribunals in view of their limited jurisdiction and legal expertise in hrl. B Applicable Law The second requirement for a claim based on human rights to successfully pass the jurisdictional stage is that human rights law is part of the law ­applicable 142 For a discussion of four icsid cases (e.g. the contested questions of whether sovereign bonds should be treated differently from commercial bonds) and of their adverse impacts on sovereign debt restructurings (e.g. permitting minority creditors to challenge debt restructuring agreed by supermajorities of creditors) and on the fiscal capacity of debtor states to meet their human rights obligations towards their own populations, see the Report in n 140 above. 143 bits using the words ‘sovereign debt’ or ‘sovereign bonds’ remain rare. While several isds cases have admitted jurisdiction and admissibility (e.g. based on ‘umbrella clauses’), the award of 9 April 2015 in icsid case No. ARB/13/8 (Postovà Banka AS and Istrokapital SE v Hellenic Republic) held that the contested sovereign debt did not fall under the definition of investment in the bit concerned.

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to the investment dispute. Investment agreements commonly refer to international law in their applicable law clauses.144 In accordance with Article 38 of Statute of the International Court of Justice (hereinafter ‘i.c.j.’), such a reference should be understood as incorporating international treaties, customary international law and general principles of law. Depending on the human rights obligations of the home and host states, the scope of hrl as integral part of the domestic law of the host state and of the international law obligations of the home and host states involved are likely to vary, apart from generally applicable jus cogens norms and the most fundamental human rights. Furthermore, human rights may be applicable when concessions or contracts between the host state and the investor include human rights clauses (e.g. in terms of human rights conditionality or corporate social responsibilities of the investor). Occasionally, investment tribunals have relied on applicable law restrictions to refuse the relevance of human rights arguments deployed by the host state or third parties. In Pezold v Zimbabwe, for instance, the relevance of indigenous peoples rights – which were invoked in the amicus brief – was rejected on grounds of non-applicability: The arbitral tribunals agreed in this regard with the claimants that the reference in the bit to ‘such rules of general international law as may be applicable’ does ‘not incorporate the universe of international law into the bits or into disputes arising under the bits.’145 Such vague judicial reasoning entails considerable uncertainty as to the meaning of ‘international law’ in such applicable law clauses. The Urbaser tribunal made important progressive points in that regard. It i­nterpreted ‘general principles of international law’ as part of the applicable law as defined in the underlying bit and as including human rights.146 ­According to the tribunal, such a reference would be meaningless if a bit ‘is to be construed as an isolated set of rules of international law for the sole ­purpose of protecting investments through rights exclusively granted to investors’.147 In conjunction with Article 31(3)(c) vclt, the applicable law clause

144 Article 42 ICSID Convention, Article 1131 NAFTA; Article 26(6) ect]; Canada Model bit art. 40(1) (2004), http://www.italaw.com/documents/­Canadian2004-FIPA-model-en.pdf; Colombia Model bit art. xi (2007), http://investmentpolicyhub.unctad.org/Download/ TreatyFile/2821; Germany Model bit art. 7(1) (2008), http://investmentpolicyhub.unctad. org/Download/TreatyFile/2865. 145 Bernhard von Pezold v. Zimbabwe, supra note 101, para. 57. 146 Urbaser v. Argentina, supra note 48, 1188–1192, 1200–1203. 147 Ibid. 1189.

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r­equires  a harmonious interpretation in relation to human rights, whereas ius  cogens norms must certainly prevail.148 However, it has already been warned that this ­conclusion based on the broad reference to general principles of ­international law can easily be interpreted more restrictively by subsequent awards.149 C Entry Points for Human Rights Argumentation Even if the applicable jurisdiction clauses and applicable law clauses do not specifically refer to human rights, there are additional ‘entry points’ which complainants, respondents, third parties and arbitrators can use to introduce human rights arguments into the dispute. 1. Legality of the Investment – As mentioned above, the legality of the investment has been frequently challenged by the defending host state in order to exclude jurisdiction or to deny an investor of the bit’s benefits based on the rationale that only lawful investments deserve international protection (so called ‘clean hands’ doctrine).150 It has been argued that the requirement of lawfulness should comprise compliance with hrl or at least with the most fundamental human rights.151 Such an argumentation can be grounded directly on bit texts if they limit jurisdiction to investments ‘in accordance with local laws’ and hrl is part of the local law applicable to the private sector. It is contested whether such legality requirement is a continuous requirement or

148 Ibid. 1200–1203. 149 Rob Howse is reading the annulment decision in Exxon (Mobile) v Venezuela as understanding general principles of international law as only referring to Article 38(1)(c) icj statute and therefore closing the door for integrating international human rights conventions via that route, which are part of Article 38(1)(a) icj Statute, Robert Howse, ­‘Celebrating Venezuela’s Annulment Victory Over Exxon as a ‘Progressive’ ruling? Hold The Champagne and Read This First’ accessed 21 August 2017. 150 For instance, in Fraport AG v. Philippines the tribunal rejected jurisdiction as the investment was not made in accordance with the host state’s laws, Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines, icsid Case No. ARB/03/25, Award, ­paras. 401–404 (Aug. 16, 2007) [hereinafter Fraport AG v. Philippines]; in Inceysa Vallisoletana S.L. v. Republic of El Salvador, the investment was made fraudulently and hence in violation of the principle of good faith. Therefore, it did not deserve the protection of the respective bit, Inceysa Vallisoletana S.L. v. Republic of El Salvador, icsid Case No. ARB/03/26, Award, paras. 238–244 (Aug. 2, 2006). 151 Dumberry & Dumas-Aubin, supra note 125, at 365.

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only applies to the e­ stablishment of the investment.152 According to the latter interpretation, post establishment human rights violations would not affect the legality of an investment and the jurisdiction for isds. Some supporters of the ‘clean-hands doctrine’ acknowledge the requirement for an investment to be made in accordance with the law (including human rights law) even without the existence of a specific treaty provision. As stated above, in Phoenix Action v. Czech Republic, the tribunal concluded, that only investments made in accordance with local laws fall under the purview of bit protection, even in the absence of an explicit ‘in accordance with local law’clause in the bit.153 The tribunal cited several cases in which it was stated that only bona fide investments deserve protection; the tribunal inferred from this jurisprudence that the ‘clean-hands doctrine’ was justified as a general principle of law.154 Hence, the bona fide requirement can be understood as placing certain duties on the investor going beyond observing the applicable local law such as compliance of the investment with general principles of international law.155 Also the practice of ‘forum shopping’ without the intent to actually engage in economic activity in the host state was considered to exclude good faith.156 Such an understanding leaves room for accepting other conduct of a similarly abusive character as grounds for excluding good faith. It would be in line with such rationale to argue that also an investment that is deliberately not contributing to economic and social development of the host state – and is by doing so thwarting the objective of the investment t­ reaty – does not deserve its p ­ rotection. A  similar argumentation was successful in Hesham Talaat M. Al-Warraq v. Indonesia.157 The tribunal denied the benefits for the investor as he was breaching Indonesian laws and the respective bit included an ‘in accordance with local laws’ – clause. However, the tribunal additionally stressed the fact that the investor’s actions had also been to the detriment of the public interest which it found to ‘fall[s] within the scope of application of the “clean 152 In favour of applying the legality requirement only to the admission phase. Mr Saba Fakes v. Republic of Turkey, icsid Case No. ARB/07/20, para. 119 (July 14, 2010). 153 Phoenix v. Czech, supra note 133 para. 79, 100–113. 154 Ibid. para. 100, with reference to supporting case-law, see e.g., Plama Consortium Ltd v. Republic of Bulgaria, icsid Case No. ARB/03/24, Award, paras. 138–139 (Aug. 27, 2008); Fraport AG v. Philippines, supra note 150, , paras. 397, 402. 155 The protection of international investment arbitration cannot be granted if such protection would run contrary to the general principles of international law, Phoenix v. Czech, supra note 133, para. 106; This principle governs the relations between States, but also the legal rights and duties of those seeking to assert an international claim under a treaty, Ibid. para. 107. 156 Ibid. para. 142. 157 Hesham v. Indonesia, supra note 40, paras. 645–648.

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hands” doctrine.’158 In Hamester v. Republic of Ghana, the ‘clean hands’ doctrine was also acknowledged as a general principle that exists independently of any treaty text.159 In terms of scope, one can argue that the principle of good faith also requires a certain standard of due diligence that in turn may require some kind of human rights impact assessment; turning a blind eye on a high risk of contributing to human rights violations may not satisfy good faith requirements. Also external legal sources could inform the assessment of proper behaviour. Publicly committing to csr instruments,160 for example, legitimately raises the expectations of the host state that these are actually complied with.161 Apart from the recent award in Urbaser, isds tribunals have rarely substantively referred to csr initiatives.162 Even in Urbaser, the tribunal ultimately failed to draw any conclusions from the fact that the claimants had indeed committed to international csr standards that comprise the duty to integrate human rights including the right to water in its operations, which the claimants allegedly failed to do.163 Still, the status of the ‘clean-hands’ doctrine as a general principle of law applicable in an investment dispute regardless of an ‘in accordance with local/ international law clause,’ the ratione temporis and ratione materiae of such a principle, and its relationship to human rights obligations remain contested.164 An investors’ misconduct may also be taken into account in the calculation of damages. In the Yukos arbitration, the tax avoidance by the investor through establishment of sham companies in Russian tax havens was dismissed as an ‘unclean hands’ argument; but it led to a reduction of awarded damages.165 158 Ibid. para. 647. 159 ‘An investment will not be protected if it has been created in violation of national or international principles of good faith; by way of corruption, fraud, or deceitful conduct; or if its creation itself constitutes a misuse of the system of international investment protection under the icsid Convention . . . . These are general principles that exist independently of specific language to this effect in the Treaty.’ Gustav F W Hamester GmbH & Co. KG v. Republic of Ghana, icsid Case No. ARB/07/24, Award, para. 123–124 (June 18, 2010). 160 Such as the oecd Guidelines for Multinational Enterprises which include in para 4 an obligation to ‘[e]ncourage human capital formation, in particular by creating employment opportunities and facilitating training opportunities for employees.’ 161 Also, see Peter Muchlinski, ‘“Caveat Investor”? The Relevance of the Conduct of the ­Investor Under the Fair and Equitable Treatment Standard’ (2006) 55 International & Comparative Law Quarterly 527, 534. 162 Urbaser v. Argentina, supra note 48, 1195. 163 For a detailed analysis, see Crow and Lorenzoni-Escobar supra note 53, 18–20. 164 Dumberry & Dumas-Aubin, supra note 125, at 362–368, with further references; For a thorough analysis of the different aspects, see generally also Good Faith and International Economic Law (Andrew D. Mitchell et al. eds., 2015). 165 Yukos v. Russia, supra note 6, para. 1633.

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2. Treaty Interpretation – hrl can enter an investment dispute as a relevant legal context that should be taken into account when interpreting legal terms such as the definition of investment and the scope and effect of investment protection provisions such as the guarantees of fet. Article 31(3)(c) of the vclt requires investment tribunals to interpret treaties taking into account ‘any relevant rules of international law applicable in the relations between the parties’ (so-called ‘systemic integration method’).166 Disagreement exists as to which human rights can be considered relevant rules in this regard. Certainly, the textual requirements are fulfilled when both parties to the bit are parties to the same human rights convention, or both recognize relevant human rights as customary international law. In the case of multilateral treaties such as the ect, there is disagreement on whether all parties of the multilateral investment treaty have to be parties of the human rights treaty, or only the parties to the investment dispute. Even if there is agreement on human right as relevant context of treaty interpretation, the effects of systemic integration on the interpretation of particular investment rules may remain contested. bit commitments to human rights promotion or subsequent ratification and enforcement of human rights instruments may justify ‘dynamic interpretation.’167 In view of the human rights core of property rights, judicial balancing of investor rights with human rights and related public policy objectives tends to be more important than claims of legal hierarchy (e.g. based on Article 103 of the u.n. Charter, jus cogens norms and the relevant treaty interpretation rules codified in ­Articles 53 and 64 vclt). Governments increasingly renegotiate investment treaties or adopt interpretative statements so as to clarify the ­relevance of ­human rights for iil.168 One could argue that as all u.n. member states have human rights obligations, iil must be presumed to be in conformity with the relevant human rights obligations. The presumption of legal coherence and the customary law requirement of interpreting treaties in c­ onformity with ‘principles of justice,’ including ‘human rights and fundamental freedoms for

166 Cf. see generally Bruno Simma & Theodore Kill, Harmonizing Investment Protection and International Human Rights: First Steps Towards a Methodology, in International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer 678 (Christina Binder et al. eds., 2009). 167 On dynamic interpretation method as one possible relation between human rights law and international investment law, Bruno Simma, Foreign Investment Arbitration: A Place for Human Rights?, 60 Int’l & Comp. L. Q. 573, 583 (2011); the tribunal in Tecmed v. Mexico accepted dynamic interpretation, Tecmed v. Mexico, supra note 58, para. 116. 168 Clear reference to human rights can be found in the new generation of bits such as, Draft Norwegian Model bit Preamble, arts. 3, 8, 11, https://www.regjeringen.no/nb/ dokumenter/horing---modell-for-investeringsavtaler/id2411615/.

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all’ (as codified in the Preamble and Article 31 vclt), in turn requires a ‘human rights friendly interpretations.’ 3. Preamble – The wording of the preamble can enhance the acceptance and the relevance of human rights based argumentation. In Suez/Vivendi v Argentina, the tribunal acknowledged that the higher goal of the bit is ‘to further economic cooperation between them. The protection and promotion of foreign investment, while important for attaining that goal, are only a means to that end.’169 If the preamble recognizes increased economic prosperity and development or human rights promotion as the treaty’s objective, Article 31(1), (2) of the vclt requires the tribunals to interpret the treaty in that light. Uncertainties arise when the objective’s role for interpretation is not stated clearly or several, contradicting objectives are listed. In Grand River v u.s., the tribunal rejected drawing guidance from the preamble. It gave precedence to the ‘plain wording’ of the bit as it was convinced that other interpretations would amount to illegitimate alteration of the text. Additional uncertainties were caused by the fact that several diverse objectives were stipulated in the preamble of the given bit.170 4. Protection Provisions – Human rights can become relevant when applying and interpreting bit protection provisions, namely, non-expropriation, full protection and security, fet and non-discrimination – both as limiting the scope of investor protection as well as informing the meaning of property and expropriation under iil. As regards the former, host states have defended their measures allegedly infringing investor rights by pointing to their objective of protecting human rights and other public interests. As discussed above, isds tribunals have disagreed on the justificatory relevance of the objective of a state’s act. The assessment of the legitimate expectations of the investor – as a sub-­ element of fet171 and expropriation172 – has evolved into a prominent place for human rights consideration. The concept of the investors’ legitimate ­expectation has been formulated in Tecmed and still remains the main point of ­reference. According to the interpretation in Tecmed, ‘[t]he foreign investor can 169 Suez/Vivendi v. Argentina, supra note 6, para. 218. 170 Grand River v. u.s., supra note 26, paras. 69–71. 171 Iona Knoll-Tudor, The Fair and Equitable Treatment Standard and Human Rights Norms, in Human Rights in International Investment Law and Arbitration, supra note 109, 310, 339; see generally Annika Wythes, Investor – State Arbitrations: Can the ‘Fair and Equitable Treatment’ Clause Consider International Human Rights Obligations?, 23(1) Leiden J. Int’l L. 241 (2010). 172 See generally Anna De Luca, Indirect Expropriations and Regulatory Takings: What Role for the ‘Legitimate Expectations’ of Foreign Investors?, in General Interests of Host States in International Investment Law 58 (Giorgio Sacerdoti et al. eds., 2014).

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[legitimately] expect [from] the host State to act in a consistent manner, free from ambiguity and totally transparently . . . so that it may know beforehand any and all rules and regulations that will govern its investments.’173 It is beyond the scope of this chapter to review all the relevant aspects discussed in the case law and literature on this topic. It suffices to point out that there is considerable agreement that the concept of legitimate expectation ensures predictability and transparency, but not a standstill of legislation. In this respect, human rights consideration can become relevant in many ways. The concept of legitimate expectation enables the accommodation of the specific human rights situation of developing countries. In that regard, it has been argued that the investor should take into account the specific economic and social circumstances in developing countries,174 including a higher risk of changes of legislative environment, notably in a host country that is politically and socially fragile.175 As Veolia v. Egypt shows, it is difficult to uphold legitimate expectations in a host country with continuous human rights breaches.176 When regulatory measures are under scrutiny by an investment tribunal and are measured in terms of legitimate expectations, the starting point should be that public law is changing. In fact, especially in many developing countries it must change. In terms of economic, social and cultural (esc) rights, the duty of ‘progressive realization’ mandates states to constantly increase esc standards with all resources available and change legislation to that effect.177 Investors should be aware of this need for legal change especially in cases in which the host state does not even fulfil the ‘minimum core obligations.’178 This anticipation should comprise the possibility of new general legislation (in order to fulfil the duty to respect) or concrete measures directed at the investor (if required so by the duty to protect). To anticipate such changes and assess the risks for its investment appropriately, certain due diligence measures or human rights impact assessments are advisable. Failures to do so can thus lead to 173 Tecmed v. Mexico, supra note 58, para. 154. 174 See Ursula Kriebaum, Are Investment Treaty Standards Flexible Enough to Meet the Needs of Developing Countries?, in Investment Law within International Law: Integrationist Perspectives 330, 339 (Freya Baetens ed., 2013). 175 Discussing a modified applicability of the protection provisions depending on the capability of the host state and whether state failures occur under normal or exceptional conditions. Pantechniki S.A. Contractors & Engineers v. Republic of Albania, icsid Case No. ARB/07/21, para. 76–84 (July 30, 2009). 176 See Ursula Kriebaum, Human Rights of the Population of the Host State in International Investment Arbitration, 10 J. World Inv. & Trade 653, 669 (2009). 177 icescr, supra note 57, art. 2(1). 178 Cf. icescr, General Comment No. 3: The Nature of States Parties’ Obligations, para. 10, u.n. Doc. E/1991/23 (Dec. 14, 1990).

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the exclusion of investment protection. Furthermore, there is an abundance of international guidelines, codes of conducts and csr mechanism that investors can turn to for information and guidance.179 These international standards may serve as a framework for arbitration tribunals when determining appropriate due diligence obligations. Investors’ failures thus can play a role when assessing the legitimate expectation. In Biwater Gauff v Tanzania, a fet breach was rejected because of the investors’ poor performance in ensuring water supply for the host state’s population. However, this failure was mainly relevant because it was explicitly stipulated in a contract that was the basis for the investment. The tribunal did not assess the poor performance in the context of human rights as suggested by the amici. Similarly, in Total S.A. v Argentina, the investor’s commercial calculations – which failed to include a proper assessment of the host country’s legislation and the predictability of reforms – played a role in the assessment of a treaty breach.180 Further, isds tribunals have resorted to ‘proportionality balancing’ as developed in human rights jurisprudence.181 In Total S.A. v Argentina, the tribunal acknowledged the need to weigh the different interests at stake taking into consideration the broader context of the economic development of the host state. It imported the criteria for determining fairness from gats while stating that – since both state parties are members of the gats – it can legitimately serve as ‘guidance.’182 The need for balancing the reasonable, regulatory discretion of host states and investor rights is widely accepted. Proportionality as the appropriate weighing methodology has been both promoted183 and

179 Instead of many see Special Representative of the Secretary-General, , Report of the ­Special Representative of the Secretary General on the Issue of Human Rights and Transnational Corporations and Other Business Enterprises, John Ruggie: Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework, principle 17 with commentary, u.n. Doc. A/HRC/17/31 (Mar. 21, 2011) (so called ‘Ruggie principles’); For a compilation of the most relevant documents, see generally International Documents on Corporate Responsibility (Stephen Tully ed., 2008). 180 Total S.A. v. Argentina, supra note 74, para. 124, with further reference to Maffezini v. Spain, icsid Case No. ARB/97/7, Award, para. 64 (Nov. 13, 2000). 181 Dupuy & Viñuales, supra note 5, para. 29; N. Jansen Calamita, International Human Rights and the Interpretation of International Investment Treaties – Constitutional Considerations, in Investment Law within International Law: Integrationist Perspectives, supra note 175, 174–182; Stone Sweet & Cananea, supra note 75, at 924–940. 182 Total S.A. v. Argentina, supra note 74, para. 123. 183 Stone Sweet, supra note 77, at 25.

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contested.184 Even if the legitimate public interest has a higher weight than the individual interests of foreign investors, it remains contested whether – and to what extent – such ‘weighting’ can justify a reduction of compensation protected under bits. The ‘proportionality’ and ‘weighting methodologies’ applied in isds practices are often inadequately explained.185 The reasons for diverging applications of the proportionality method – when compared to rights-based constitutional law systems – are sometimes unclear. 5. Quantification of Damages – If an investment tribunal considered a human rights based argument to be either outside its competence or not sufficiently substantiated to fully exclude investor protection, these evaluations are, nevertheless, at times reconsidered in the quantification of damages.186 Indeed, all of the stages of assessment outlined above can again play a role for the decision on the damages (e.g., due diligence, proportionality, clean-hands doctrine, bona fide considerations). In RosInvestCo v Russia, the tribunal did not deem the investor to have failed its due diligence obligations. Yet, the highly speculative nature of the ­investment was taken into account in assessing the quantum of compensation.187 In Yukos, the unlawful conduct of the investor did not exclude it from investor protection and thus from the tribunal’s jurisdiction in the sense of the clean-hands doctrine; yet, it led to a reduction of the compensation.188 There are many ways of adjusting the valuation model for compensation, for instance by taking into account investment risks (e.g., the anticipation of necessary and thus foreseeable legislative reforms) in the calculation of the ‘fair market value’; in the absence of precise treaty regulations, much is left to the discretion of the arbitrators.189 Especially the determination of compensation for other breaches than expropriation should be informed by equity considerations as foreseen by Article 36 of the International Law Committee Articles on State Responsibility, which is an appropriate legal base in the absence of

184 José E. Alvarez & Kathryn Khamsi, The Argentina Crisis and Foreign Investors: A Glimpse into the Heart of the International Investment Regime, in The Yearbook on International Investment Law and Policy 379, 441 (Karl P. Sauvant ed., 2009). 185 For instance, in saur v. Argentina, the tribunal recognized its task to balance investor rights and fundamental rights, yet failed to explicitly engage in balancing; cf. saur v. A ­ rgentina, supra note 69, para. 332. 186 Reiner & Schreuer, supra note 134, at 88–94. 187 RosInvest Co. uk Ltd v. The Russian Federation, scc Arbitration v (079/2005), Final Award, paras. 635–668 (Sept. 12, 2010). 188 Yukos v. Russia, supra note 6, para. 1633. 189 Diane A. Desierto, Conflict of Treaties, Interpretation, and Decision-Making on Human Rights and Investment during Economic Crisis, 10(1) Transnat’l Disp. Mgmt 1, 57 (2013).

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more precise treaty provisions.190 However, also these assessments often lack transparency and legal predictability which remains problematic from a human rights perspective. IV

Conclusions

The Introduction discussed iil and hrl as examples of dialectic legal fragmentation and progressive re-integration in view of the fact that all local, national and international legal systems – since the ancient Greek and Roman city republics 2500 years ago with their legal privileges for male property owners – have evolved on the basis of protecting property rights, contractual freedoms and progressive, legal limitations of abuses of power politics (e.g., in terms of gender discrimination, slavery, ‘market failures’ and ‘governance failures’) through republican protection of public goods and constitutional rights. The fact that – in the, so far, more than 760 known isds cases – true conflicts between iil and hrl seem to have remained rare, may be seen as a success in this decentralized, imperfect and continuing process of coordinating the fragmented iil and hrl systems. Part 2 gave an empirical overview of the increasing references to human rights – by complainants, host states, third parties and arbitrators – in isds practices. Part 3 discussed the main iil provisions that can be used as ‘entry points’ for human rights arguments, notably jurisdiction clauses, applicable law clauses, definitions of protected ‘investments’ in terms of their legal conformity with local and international laws, the customary rules of treaty interpretation, bit Preamble references to human rights and other public interests, investment law protection standards (like full protection and security, fet, non-discrimination) and rules on awarding damages and quantification of compensation. Both Parts ii and iii revealed a lack of systematic methodology in the judicial interpretation and application, arguably depending on whether arbitrators perceive iil and isds primarily from a commercial and private law perspective, a public law perspective (e.g., recognizing hrl as integral part of the applicable domestic law of the host state), or from an international public law perspective (e.g., in icsid arbitration based on bilateral and multilateral international treaties). Similar legal, procedural and systematic problems exist in the controversial relations between hrl and international trade law and

190 Diane A. Desierto, Public Policy in International Economic Law: The icescr in Trade, Finance, and Investment 352 (2015).

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adjudication,191 in the limited number of investment disputes before the i.c.j. initiated at the request of home states exercising diplomatic protection for foreign investments by their nationals,192 and in commercial contract law and related commercial arbitration if the u.n. ‘principles for responsible contracts’ and ‘corporate social responsibilities’ are incorporated into long-term investment contracts, ‘supply chain contracts,’ merger and acquisition agreements, joint ventures, licensing and franchise agreements.193 The customary rules of treaty interpretation, most iil treaties and isds practices already offer many possibilities for interpreting iil ‘in conformity with the principles of justice and international law,’ including ‘human rights and fundamental freedoms for all,’ as explicitly required by the Preamble and Article 31 of the vclt. Yet, reconciling the diverse ‘principles of justice’ underlying the commercial and private law dimensions of iil (e.g. in uncitral arbitration and its enforcement through national courts), its transnational law dimensions (e.g. in concession contracts of foreign investors and host states), and in the public international law dimensions of iil and related isds remains a challenging task and ‘unfinished business.’ This contribution has argued that the different dimensions of hrl – e.g., as constitutional principles, cosmopolitan rights, judicial methodologies and corresponding governmental ‘duties to respect, protect and fulfill inalienable and indivisible rights’ and ‘corporate social responsibilities’ – can contribute to ‘constitutionalizing’ iil and isds practices for the benefit of all citizens. As neither the foreign investor nor the government of the host state (notably in authoritarian and non-democratic regimes) may have self-interests in invoking hrl as constitutional constraints, hrl is often invoked only through third party interventions or by arbitrators ex officio (e.g., in order to promote ‘due process of law’ and ‘access to justice’ for all interested and affected parties). The ‘structural biases’ of iil (e.g., in terms of ‘negative discrimination’ against domestic investors) and of isds arbitration (e.g., in terms of procedural and substantive legal privileges for powerful foreign investors) reflect ‘constitutional failures’ and inadequate protection of human rights in many host states; the less the historical justification of bits in terms of exporting ‘principles of justice’ compensating for inadequate legal and judicial ­protection of 191 Cf. Ernst-Ulrich Petersmann, International Trade Law, Human Rights and the Customary International Law Rules on Treaty Interpretation, in The World Trade Organization and Human Rights 69 (Sarah Joseph et al. eds., 2009). 192 Cf. see generally A. Vermeer-Künzli, Diallo: Between Diplomatic Protection and Human Rights, 4(3) J. Int’l Disp. Settlement 487 (2013). 193 Cf. Ruggie & Sherman, supra note 7, at 455–461.

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foreign investors inside less-developed, capital-importing host states continue to exist (e.g., in the context of transatlantic free trade and investment agreements between e.u. and nafta countries), the more important is the task of ‘merging’ hrl and iil through non-discriminatory, constitutional protection of domestic and foreign investors in domestic courts, with due respect for the legitimate reality of ‘constitutional pluralism’ and the diversity of national and international human rights regimes. This diversity of national and international hrl (e.g., in countries like the u.s. opposing regional and many u.n. human rights treaties) may also explain the reluctance of isds arbitrators to develop more systematic approaches to interpreting iil in conformity with hrl. If neither the investor nor the host state refer to human rights, arbitrators may also prioritize their dispute settlement mandate by avoiding human rights arguments (e.g., on indigenous peoples’ rights, the human right to water) that risk ­complicating voluntary compliance with the arbitral award and may trigger annulment proceedings criticizing judicial human right arguments. ­Ultimately, both isds and wto dispute settlement bodies are economic courts with limited mandates rather than ‘human rights courts’ or ‘constitutional courts’ mandated to protect the constitutional rights of all citizens in the polity concerned. However, such limited mandates do not justify inconsistent and non-transparent human rights approaches that take into consideration only some human rights (e.g., jurisprudence related to property rights and procedural fairness) and disregard others (such as human rights to water).

Chapter 12

Unjust Enrichment as a General Principle of Law in Investment Arbitration Christina Binder* The concept of unjust enrichment is usually referred to as a general principle of law. This is supported by comparative legal analysis. Remedies against unlawful shifts of assets exist in nearly all contemporary domestic legal systems. Also international ­arbitral tribunals accept unjust enrichment as a general principle of law in their case law; as did the Iran-us Claims Tribunal in its jurisprudence. Thus, there is undeniable support for the claim that unjust enrichment constitutes a general principle of law. Still, the e­ xact contours of the concept of unjust enrichment remain disputed. Unjust enrichment is not a unitary concept. This presentation argues accordingly that one has to look into each specific fact situation to see whether a claim based on unjust enrichment is admissible. This will be shown with particular focus on contracts/treaties tainted with illegality.

1 Introduction Unjust enrichment is often referred to as one of the examples of a general principle of (international) law.1 It is a concept which is relied upon where there has been an enrichment of one party to the detriment of the other as a consequence of the same act or event without justification for the enrichment and no other remedy available to the injured party to seek compensation from the * This contribution is largely based on the contribution of C. Binder, C. Schreuer, ‘Unjust Enrichment,’ in R. Wolfrum, Max Planck Encyclopedia of Public International Law, 2017. 1 See e.g. Lord McNair, ‘The Seizure of Property and Enterprises,’ 6 Netherlands International Law Review (1959) 218, 240; P. Guggenheim, Traité du Droit international public, vol. 1 (1967) 302; D.C. Dicke, Unjust Enrichment and Compensation, 2 Progress and Undercurrents in Public International Law (1987), 268; S. Schmitz, Allgemeine Rechtsgrundsätze in der Rechtsprechung des Iran-United States Claims Tribunal (1992), 228; for a more differentiated view see P. Gallo, ‘Unjust Enrichment. A Comparative Analysis,’ 40 American Journal of Comparative Law (1992) 431. As to the discussion of and distinction between general principles of law and general principles of international law see e.g. M. Shaw, International Law (5th ed., 2003) 94.

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party enriched.2 And indeed, a comparative analysis of domestic legal systems supports the idea of unjust enrichment as an example of a general principle of law.3 The concept of unjust enrichment is a recurrent phenomenon. Even though the terminology used in domestic systems is not uniform, regulations to address undesirable shifts of assets which are not covered by other areas of law can be found in nearly all legal systems. At first sight, there is thus considerable support for the proposition that unjust enrichment is a general principle of law; at least in the most abstract sense. Still, this broad statement/definition tells little about the concrete features of unjust enrichment and its application to case specific situations. Any scrutiny of unjust enrichment as a general principle of law in investment arbitration will have to go further and examine the concept’s exact features with respect to a particular fact situation. Under these premises, it seems of particular interest to ask: What is the relevance of unjust enrichment as a general principle of law in international investment arbitration? To examine this question, this contribution will start with a brief overview of the characteristics and foundations of unjust enrichment (Part 2). It will then deal with unjust enrichment as a general principle of law and engage in a comparative analysis of four domestic legal systems: Germany, France, the United Kingdom and the United States (Part 3). Against this background, Part 4 will examine the acceptance of unjust enrichment as a general principle by international arbitral tribunals and also deal with the situations where it has been applied. Finally, Part 5 will discuss the specific constellation of unjust enrichment and wrongful conduct to highlight the difficulties involved when one wants to apply unjust enrichment to a particular fact situation. 2

Generalities on Unjust Enrichment

Unjust enrichment has certain well-defined features which characterize the concept and determine its application. Also, numerous (legal) sources and explanations have been offered to explain the concept’s foundations. Both aspects are of relevance to circumscribe a possible reliance on unjust enrichment as a general principle of law in investment arbitration.

2 See infra, Section 2.1. for details. 3 General principles of (international) law are, in accordance with Art. 38(1.c) icj Statute, those principles which are ‘recognized by civilized nations.’ They are identified by means of a comparison of domestic legal systems (see infra, Section 3.1. for details).

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2.1 Characteristics of Unjust Enrichment The specific features of unjust enrichment may be derived from the concept’s definition.4 According to the authoritative statement by the Iran-us Claims Tribunal in Sea-Land it is a concept which is relied upon where there has ‘been an enrichment of one party to the detriment of the other 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.’5 In line with this, the following elements may be considered as characteristic for unjust enrichment. First, there has to be an enrichment of one party to the detriment of the other which is at variance with the final allocation of assets provided for by the law.6 Since there are numerous transactions aimed at the enrichment of one party at the cost of another which are perfectly legitimate, the crucial question is the existence or non-existence of a ‘just cause.’ Any rule against unjustified enrichment cannot be applied without reference to a set of legal principles which determine whether in fact there has been such a just cause. Therefore, the principle against unjustified enrichment is in the nature of a remedy rather than of a rule. In terms of the law of State responsibility, its character is not primary but at best secondary. Second, claims based on unjust enrichment are of subsidiary nature. They can be brought only if no claim based on contract or on an illegal – internationally wrongful – act may be brought.7 In fact, considerable international (arbitral) practice supports the subsidiarity with respect to contract claims. Hence, international arbitral tribunals have consistently rejected claims couched in terms of unjustified enrichment where they found a basis in a contract. For example, in Lighthouses Arbitration (Greece v. France),8 the Permanent Court of Arbitration dismissed a claim based on unjustified enrichment for the repair of a lighthouse since it was part of the normal obligations under a contract. 4 K. Zweigert, D. Müller-Gindullis, Quasi-Contracts, International Encyclopedia of Comparative Law (1974), Chapter 30, 4. 5 Sea-Land Service Inc. v. Iran et al., 6 Iran-us Claims Tribunal Reports, 149. See also the similar definition in Dickson Car Wheel Co. v. United Mexican States, July 1931, 4 riaa, 669, 676. See in this sense also G.H. Aldrich, The Jurisprudence of the Iran-United States Claims Tribunal (1996) 401. 6 See also Zweigert/Müller-Gindullis who defined unjustified enrichment as ‘adjusting shifts of assets from one person to another which are at variance with the final allocation of assets envisaged by the law.’ (Zweigert/Müller-Gindullis, supra n. 4, 4). 7 See in this sense e.g. G. Virgo, The Principles of the Law of Restitution (1999; 3rd ed., 2015), 50. 8 pca, Lighthouses Arbitration (Greece v. France), 24 July 1956, 12 riaa, 155.

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There was therefore a just cause.9 The Iran-us Claims Tribunal has also consistently adhered to the view that unjust enrichment may not be pleaded if a contract exists. The theory of unjust enrichment is one of last resort, and the Tribunal has correctly noted that ‘such a claim may not be maintained when a valid and enforceable contract exists.’10 In the same line, the cms Tribunal affirmed the subsidiarity of the concept of unjust enrichment vis-à-vis contractual rights.11 Likewise the rule of subsidiarity vis-à-vis claims for damages in case of internationally wrongful acts is well founded in theory and also supported by international practice. Not only are restitution in terms of the law of State responsibility and unjust enrichment conceptually different, the methods for achieving the result are also different. Where a remedy for unjust enrichment is granted, the starting point is the wealth accretion that remains in the hand of the respondent; under the law of State responsibility, it is the loss suffered by the claimant.12 In line with these considerations, international arbitral tribunals have rejected reliance on unjust enrichment as a method for the calculation of damages in cases of unlawful expropriations or other breaches of international standards such as fair and equitable treatment.13 Finally, the legal identity of the enriched entity and the respondent is crucial in unjust enrichment cases. Tribunals have rejected claims based on unjust enrichment because they considered the potentially enriched entity as legally different from the respondent. In Amco Asia Corp and others v. Indonesia,14 the icsid tribunal rejected a claim to unjust enrichment after the revocation of the contract because there had not been any enrichment on the part of the 9 10

Ibid., 209. The Consortium for International Development (‘cid’) v. Iran, 26 Iran-us Claims Tribunal Reports, 244, 251. See in this sense also C.N. Brower, J.D. Brueschke, The Iran-United States Claims Tribunal (1998), 427 et seq. 11 cms Gas Transmission Company v. the Argentine Republic, icsid Case No. ARB/01/8, Award, 12 May 2005, para. 218. 12 In Azurix v. the Argentine Republic, icsid Case No ARB/01/12, Award, 14 July 2006, para. 436, the icsid Tribunal referred to the ‘conceptually distinct’ nature of damages and unjust enrichment in terms of liability and the measure of restitution and declined reliance on unjust enrichment in case of a breach of treaty. 13 See e.g. adc Affiliate Ltd. v. Hungary, icsid Case No ARB/03/16, Award, 2 October 2006, para. 500; Enron Corporation and Ponderosa Assets, l.p. v. Argentine Republic, icsid Case No ARB/01/3, Award, 22 May 2007, para. 382; Azurix v. Argentina, supra n. 12, paras. 434– 438. A rare decision to the contrary is Lena Goldfields Arbitration, 3 September 1930, The Times 7 (1929–1930) 5 AnnDig 3) which treats damages for breach of contract and restitution for unjust enrichment as equivalent choices. The decision has been severely criticized and must be dismissed as not authoritative. 14 Amco Asia Corp and others v. Indonesia, Resubmitted case, icsid Case No ARB/81/1, Award, 5 June 1990, icsid Reports, vol 1 (1993), 569.

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Indonesian government. The tribunal held that the company which had received the benefits was to be considered different from the government.15 Also in the uncitral case Saluka Investments bv (The Netherlands) v. The Czech Republic,16 the Tribunal held that the enriched institution/bank (Ceskoslovenská obchodní banka a.s., csob) was a legal entity which was distinct from its shareholders – the Czech State being a minority shareholder – and anything acquired by csob was therefore not acquired by the respondent.17 On this basis, the Saluka tribunal denied reliance on unjust enrichment for lack of actual enrichment of the respondent. Thus, unjust enrichment claims will fail for lack of identity of the enriched entity and the respondent. These general characteristics – the enrichment of one party to the detriment of the other; the subsidiarity of unjust enrichment claims; as well as the necessary identity of the enriched entity and the respondent – pre-determine the possible reliance on unjust enrichment in international investment arbitration. 2.2 (Legal) Foundations of Unjust Enrichment Numerous (legal) foundations are cited as the basis for unjust enrichment claims. While the common view considers the concept of unjust enrichment as a general principle of law, also other foundations have been ­given. These to a certain extent elucidate the concept’s role in the international legal system and, more particularly, as regards investment arbitration. Especially in separate or dissenting opinions, judges and arbitrators have referred to the principle of unjust enrichment on the basis of the general notions of justice and equity.18,19 This has also been followed in some scholarly writings.20 15 16 17 18

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Ibid., para. 156. Saluka Investments bv (The Netherlands) v. the Czech Republic, Partial Award, 17 March 2006. Ibid., paras. 451–452. It has been maintained that the function of unjustified enrichment is ‘to mitigate the hardships which would result in certain cases from an application of strict law by applying principles of justice and equity’ (D.P. O’Connell, ‘Unjust Enrichment,’ 5 American Journal of Comparative Law (1956) 2, 16). See e.g. Shannon & Wilson Inc v aeoi, 9 Iran-us Claims Tribunal Reports 397, at 402. Concurring opinion Mosk to Chas. T. Main v. Mahab, 3 Iran-us Claims Tribunal Reports (1984), 270, 279: ‘Whether or not there are adequate legal authorities for such a remedy … if the Tribunal is to apply equitable considerations, this case is a compelling one for such application.’ See e.g. O’Connell, supra n. 18, 4: ‘a precept lying on the borderland of law and ethics … founded on the moral concord of Western peoples’; H.C. Gutteridge, R.J.A. David, ‘The Doctrine of Unjustified Enrichment,’ 5 Camb.l.j. (1933–35) 204, 211.

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Moreover, certain treaties draw on the concept of unjust enrichment. For example, several conventions dealing with the protection of cultural property contain provisions regarding the restitution of such property to the country of origin. Where this obligation to return does not arise out of wrongful conduct, such provisions may be considered as inspired by the concept of unjust enrichment.21 What is more, restitutionary remedies may also be applied to treaties in general. For instance, Articles 69 and 70 of the Vienna Convention on the Law of Treaties (vclt), when addressing restitution in case of the nullification or termination of a treaty which has already been partly fulfilled, do not contain answers as regards all aspects of their economic consequences. Some of these aspects may be classified in accordance with the concept of unjust enrichment.22 Sometimes, unjust enrichment has also been mentioned as a principle of customary international law. However, the different types of factual situations to which the concept of unjust enrichment has been applied in international practice23 seem to be too varied to form a meaningful basis for such a concept in customary international law. Overall, the most recurrent foundation is the one considering unjust enrichment as a typical example of a general principle of law.24 A scrutiny of the rule against unjust enrichment as an example of a general principle of law seems thus warranted and particularly attractive. 3

Unjust Enrichment as a General Principle of Law in Domestic Jurisdictions

The particularities of general principles of law pre-determine certain features of the concept of unjust enrichment, more particularly its abstractness and generality. That is why the delineation of the concept of unjust enrichment on the basis of a comparison of domestic legal systems will be preceded by a more general discussion of general principles of law.

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See e.g. Art. 1(3) and Art. 2(5) of the 1954 Protocol to the unesco Convention for the Protection of Cultural Property in the Event of Armed Conflict. 22 See C. Binder, C. Schreuer, ‘Unjust Enrichment,’ in R. Wolfrum, Max Planck Encyclopedia of Public International Law, August 2013, paras. 6–8 for details. 23 See infra Section 4.2 for details. 24 See infra, Section 4.

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3.1 Generalities on General Principles of Law General principles of law are usually considered to be ‘gap-fillers’ in international law.25 Given the lack of an international legislator and the comparative underdevelopment of international law, the reference to ‘general principles of law recognized by civilized nations’ was introduced in Article 38(1.c) icj Statute to avoid a non liquet.26 On this basis, general principles are accepted as a separate source of law. They are usually viewed as principles common to the various national legal systems of the world community and are thus, in terms of identification, derived from a comparative analysis of domestic legal systems.27 Such comparative analysis of domestic legal systems can however only yield most general and abstract results. General principles of law are necessarily termed broadly. As held by Gaja: ‘Often general principles are only vague and are of little use should one intend to apply what is common to a large number of legal systems.’28 This also proves true in case of unjust enrichment. Unjust Enrichment as a General Principle of Law as Derived from Domestic Jurisdictions From a general perspective, a comparative analysis of domestic legal systems supports the idea that there is a general principle of law against unjustified enrichment. Restitutionary remedies exist in all or most major legal systems although under widely differing labels. Since it is nearly impossible to make a comparative analysis of all national legal systems, it is usually said to suffice to compare the major ‘families’ of legal systems, such as the civil law system or the common law system. In line with this, in the following, two civil law (Germany and France) and two common law systems (United Kingdom and the United States) will be examined. All contain, in a broad sense, a rule against unjustified enrichment:

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26 27 28

See A. Aust, Handbook of International Law (2nd ed., 2010) 8: ‘Compared with domestic law, international law is relatively underdeveloped and patchy… International courts and tribunals have always borrowed concepts from domestic law if they can be applied to relations between States and by this means have developed international law by filling gaps and strengthening weak points.’ See Shaw, supra n. 1, 93. See G. Gaja, ‘General Principles of Law,’ in R. Wolfrum, Max Planck Encyclopedia of Public International Law, May 2013, paras. 7 et seq. Ibid., para. 16.

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In German law, the relevant provisions are in the bgb, the German Civil Code. German law thus proceeds from a general statutory provision on u ­ njust enrichment – Section 812 of the German Civil Code. It provides that anyone who through the performance of another person or in any other way has ­benefited at the cost of that other person without legal cause is under an obligation to make restitution. This obligation also exists if the legal cause disappears subsequently or if the result intended by the performance in accordance with the transaction is not forthcoming. This very general provision is substantiated and limited by a number of further provisions of the German Civil Code,29 by extensive case law and scholarly writings. Based on these sources, German practice has developed a limited number of typical situations in which a remedy for unjustified enrichment will lie.30 The French Civil Code does not contain a provision like the one in the German Code and does not provide for a general concept of unjustified enrichment. Rather, the French Civil Code contains several specific rules dealing with particular situations such as Articles 1372 et seq. on ‘gestion d’affaires’ or Articles 1376 et seq. on ‘répétition de l’indu.’31 The development of a general concept of unjustified enrichment was left to the courts. The starting point/ culmination was the Boudier case of 1892.32 In that case, the French Court of Cassation, drawing on general equitable considerations, recognized a general claim for unjustified enrichment under the name of ‘actio de in rem verso.’ Subsequent case law had to limit and to differentiate this very general concept which is now recognized under the name of ‘enrichissement sans cause’ in French practice.33 Also in the examined common law systems, in the United Kingdom and United States, restitutionary remedies are generally available, even though the recognition of a general principle against unjustified enrichment came relatively late.

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See e.g. Section 817 bgb (German Civil Code). See generally especially P. Westermann (ed.), Handkommentar zum bürgerlichen Gesetzbuch, vol. 2, (11th ed., 2004) 2952 and 2960 et seq; J. von Staudingers Kommentar zum Bürgerlichen Gesetzbuch mit Einführungsgesetz und Nebengesetzen (Neubearbeitung 2007 von Stephan Lorenz, Buch 2, Recht der Schuldverhältnisse), 91 et seq. See X. Henry, Méga Code Civil, Dalloz (7th ed., 2007), Sections 1372, 1376 (1887 et seq. and 1895 et seq.). French Court of Cassation, Boudier, 15 June 1892, D.P. 1892.1.596, S. 1893.1.281. K. Zweigert, H. Kötz, Einführung in die Rechtsvergleichung (3rd ed., 1996), 540, 548 et seq; M. Ferid, Das Französische Zivilrecht, vol. 2, Schuldrecht (1986), 428 et seq.; J. Beatson, E. Schrage, Cases, Materials and Texts on Unjustified Enrichment (2003), 423.

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In the United States, the breakthrough towards recognition of a general concept of unjustified enrichment came with the 1937 Restatement of the Law of Restitution published by the American Law Institute. Its influence was such that restitution and unjustified enrichment are now unquestionably accepted as general concepts in American law. As affirmed in the Restatement of the Law Third of the American Law Institute: ‘The identification of unjust enrichment as an independent basis of liability in common-law legal systems … was the central achievement of the 1937 Restatement of Restitution.’34 Accordingly, the Restatement of the Law Third establishes under Section 1, restitution and unjust enrichment: ‘A Person who is unjustly enriched at the expense of another is subject to liability in restitution.’35 This notwithstanding, several areas of the concept of unjust enrichment remain disputed. In the United Kingdom, the law on restitution is generally considered as ‘the law based on the principle of reversing a defendant’s unjust enrichment at the claimant’s expense.’36 As stated, likewise English law has been slow to recognise unjust enrichment as a distinct source of rights and obligations.37 It was generally left to private publications to develop the awareness for such a general concept, notably to the leading treatise by Goff/Jones.38 Also, numerous decisions of the House of Lords developed and clarified aspects of the law of restitution.39 A general principle to restitution in cases of unjust enrichment was thus recognized and upheld by English courts/the House of Lords. But even the more systematic treatment of this area of the law does not alter 34

The American Law Institute, Restatement of the Law Third. Restitution and Unjust Enrichment, vol. 1 (2011), Sections 1 to 39, 3. 35 Ibid., 4. 36 A. Burrows, The Law of Restitution (3rd ed., 2011), 4. 37 See E. Palmer, ‘History of Restitution in Anglo-American Law,’ in P. Schlechtriem (ed.), International Encyclopedia of Comparative Law, Restitution-Unjust Enrichment and Negotiorum Gestio, Vol. X/3, (1989), 15; C. Mitchell, P. Mitchell, S. Watterson (eds.), Goff & Jones. The Law of Unjust Enrichment (8th ed., 2011) 5. 38 Ibid. 39 For example, the following cases may be mentioned: Woolwich Equitable Building Society v Inland Revenue Commissioners ([1993 ac] 70) on taxes demanded ultra vires by public authorities; Westdeutsche Landesbank Girozentrale v Islington London Borough Council ([1996] 1 ac 153) on restitution of money paid under void contracts; Kleinwort Benson Ltd v Lincoln City Council ([1999] 1 ac 153) on restitution of payments made by mistake of law under a contract that was void; Deutsche Morgan Grenfell Group plc v Inland Revenue Commissioners ([2006] ukhl 49, [2007] 1 ac 558) on the restitution of advanced corporation tax paid by mistake of law or Cobbe v Yeman’s Row Management Ltd [2008] (ukhl 55, [2008] 1wlr 1752) on restitution for work done in anticipation of a contract. See Burrows, supra n. 36, 5 for further reference.

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the fact that in the United Kingdom, unjust enrichment is still very much characterized by the traditions of the various old actions and remedies. 3.3 Appreciation In sum, all four legal systems examined generally contain a rule on unjust enrichment, in one form or another. The regulations concerning unjust enrichment broadly have similar features. These features correspond to the general characteristics of unjust enrichment identified above.40 There has to be an enrichment of one party to the detriment of the other. Also an express or implied rule of subsidiarity for claims based on unjustified enrichment is generally accepted in these domestic legal systems;41 as is the necessary identity between the enriched entity and the respondent. Still, these features are very broad and abstract. The concrete content of the concept of unjust enrichment remains disputed. No real guidance can be found in the different domestic systems which represent a multitude of rules. Also, as will be shown below, a considerable number of fact situations fall outside.42 This makes it difficult to meaningfully rely on unjust enrichment in investment arbitration. Still, international practice has made use of unjust enrichment in certain cases and somehow elucidated its scope of application. 4

Unjust Enrichment as a General Principle of Law in International Practice

4.1 Overview Unjust enrichment is a generally accepted principle in international arbitration. What is more, some international arbitral awards explicitly refer to unjustified enrichment as one of the general principles of law in the sense of Article 38 (1.c) of the Statute of the icj. They include the dissenting opinion of Judge Spiropoulos to the Ambatielos Award43 and the liamco Award of 1977.44 Also 40 See supra Section 2.1. 41 See in this sense e.g. Zweigert/Kötz, supra n. 33, 552 et seq.; for a general comparative view see P. Virgo, ‘Failure of consideration: Myth and Meaning,’ in D. Johnston, R. Zimmermann (eds.), Unjustified Enrichment (2002), 103, 109; see furthermore E.J.H. Schrage, Unjust Enrichment. The Comparative Legal History of the Law of Restitution (2nd ed., 1999), 28 et seq. 42 See infra Section 5. 43 icj, Ambatielos (Greece v. United Kingdom), Preliminary Objections, 1 July 1952, Dissenting Opinion Spiropoulos, 12 riaa, 129. 44 Libyan American Oil Company (liamco) v. The Libyan Arab Republic, Award, 12 April 1977, 62 ilr (1982), 141, 175–176.

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in an uncitral arbitration (Saluka Investments bv v. Czech Republic), unjust enrichment was recognized as a general principle of law.45 This recognition was also afforded by many awards of the Iran us Claims Tribunal (e.g., Flexi Van Leasing v Iran; Schlegel Corp. v. nicic; Sea-Land; Shannon and Wilson Inc v. aeoi).46 In fact, it is in particular the popularity of unjust enrichment before the Iran-us Claims Tribunal that has given unjust enrichment an established place in international adjudication.47 Areas of Application of Unjust Enrichment in International Arbitration The concept of unjustified enrichment was applied in particular – well defined – areas. These may be regrouped in different types of constellations. For example, the concept has been applied in general crisis situations of a political kind in which States are permitted to take unusual measures interfering with individual rights without incurring State responsibility. Another category was mainly created by private law analogies, notably in the context of government contracts which were invalid or had been terminated. Likewise, the Iran-us Claims Tribunal has extensively relied on unjust enrichment. All constellations – as shown below – contribute to the further clarification of a possible reliance on unjust enrichment as a general principle of law in international investment arbitration. Unjust enrichment in crisis situations of a political kind. In general crisis situations, States are sometimes permitted to take exceptional measures interfering with individual rights without incurring State responsibility.48 Reliance on the concept of unjust enrichment at times contributed to the mitigation of arising injustices. For example, the concept of unjust enrichment was applied with respect to contracts dissolved by the outbreak of war that had only been partly performed. This partial performance had led to one-sided wealth

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Saluka, supra n. 16. Flexi-Van Leasing v. Iran, 12 Iran-us Claims Tribunal Reports, 335; Schlegel Corp. v. nicic, 14 Iran-us Claims Tribunal Reports, 176; Sea-Land, supra n. 5; Shannon and Wilson Inc. v aeoi, 9 Iran-us Claims Tribunal Reports, 397. An early case, RayGo Wagner Equipment Co. v. Iran Express Terminal Corp., 2 Iran-us Claims Tribunal Reports, 141, shows that the principle did not find immediate favour before the Tribunal. See especially also the Concurring and Dissenting Opinion by Mosk, ibid., 155. See e.g. Thomas C. Baker v. Mexico in J.B. Moore (ed.), History and Digest of the International Arbitrations to which the United States Has Been a Party […], vol. 4, (1998), 3669; Case of Putegnat’s Heirs in ibid., 3718; Compagnie des Chemins de Fer du Nord c. Etat Allemand, 9 tam (1929–30), 67, 75; Sucrérie de Roustchouk c Etat Hongrois, 5 tam (1926), 772; The Edna, 34 ajil (1940), 737, 747.

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transfers to the benefit of one party. The mixed arbitral tribunals, set up after World War i, repeatedly applied the principle against unjust enrichment in this context. They held that the contracts in question had been terminated by the peace treaties after World War i but nevertheless granted restitution based on unjust enrichment to remedy situations of this kind.49 Unjust enrichment and State succession. The doctrine of unjust enrichment has also been used in situations of State succession where the successor State had come into the possession of benefits at the cost of a party who had undertaken improvements on the territory in question without being able to pursue his claim against the original principal.50 Other references to unjust enrichment were made in the area of compensation for expropriation of foreign owned property. Still, in view of the diverse positions of developed and developing nations prevalent on the question of compensation for expropriation,51 it is doubtful whether the concept of unjust enrichment will contribute much to the general debate on the legal basis of a duty to compensate. At best, unjust enrichment might play a certain role in the complex task of determining the appropriate amount of compensation for an expropriation which is not otherwise illegal.52 Unjust enrichment as a defence. Sometimes respondents have relied on claimants’ alleged unjust enrichment as a defence to reduce the amount of compensation to be awarded.53 With the exception of amt v. Zaire, where the 49

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The tribunals compelled parties that had received part performance under such contracts to make restitution to the extent such part performance was not balanced by appropriate consideration (Delcroix v. Fritzsche et Cie., 3 tam (1924) 291; Burroughs Wellcome & Co. v. Chemische Fabrik auf Actien, 6 tam (1927) 13; The Dunderland Iron Ore Co. Ltd. v. Friedrich Krupp a.g., 6 tam (1927) 639; Leslie Caro v. Norddeutscher Lloyd, 7 tam (1927–28) 398; Direction Generale des Ports et Voies de Communication par Eau v A. Schwartz et Cie., 7 tam (1927–28) 738; Didier v Cohn et Pink, 8 tam (1928–29), 800; Iraq Petroleum Co. Ltd. v Deutsche Bank & Disconto Ges., 9 tam (1929–30) 478). See e.g. the decisions by the Austrian Supreme Court (German Railways in Austria, Oberster Gerichtshof Österreich [Austrian Supreme Court], sz (1948) 21/60) and by the Supreme Court of Poland (Zilberszpic v. [Polish] Treasury, 4 AnnDig (1927–28) 82). Note, however, that claims based on unjust enrichment in situations of State succession were denied where the benefits in question did not accrue directly to the State (Koranyi v. Etat Roumain, 8 tam (1928–29) 980) or where the successor State had made payment for the properties taken over (Niedzielskie v. [Polish] Treasury, 3 AnnDig (1925–26), 74). See Binder/Schreuer, supra n. 22, para. 16, for details. In fact, unjust enrichment may be useful as just one of several factors in balancing the past and future benefits and losses of each side within a particular context. See also liamco, supra n. 44, 144, 175176, 213. Relevant cases include cms v. Argentina, supra n. 11, paras. 218–220; lg&e Energy Corp., lg&e Capital Corp., and lg&e International, Inc, v. Argentine Republic, Award, 25 July

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tribunal used unjust enrichment as a mitigating factor that ‘should be taken into account in the event that any compensation is awarded in this case’54 and Zeevi Holdings, where the Tribunal considered respondent’s counterclaim in reliance on unjust enrichment as admissible in principle,55 reliance on unjust enrichment as a defence was generally rejected in these cases. Unjust enrichment has also been used occasionally by the administrative tribunals of international organizations in cases relating to the respective financial obligations of employees and the secretariat.56 Unjust enrichment and State contracts with individuals or corporations. At times, State contracts with individuals or corporations turned out to be unenforceable or invalid in circumstances where the international responsibility of the State concerned was not involved. Where a demonstrable benefit had accrued to the State, it has been held repeatedly that restitution to the extent of the actual enrichment should be made. This principle was applied to agreements found void because they had been concluded by State agents who lacked the necessary authority to contract.57 In a similar vein, a State which had validly terminated a contract was found liable to pay compensation on the basis of quantum meruit for the benefits gained thereunder.58 Also in Société d’Investigation de Recherche et d’Exploitation Minière (sirexm) v. Burkina Faso unjust enrichment was awarded to the company in light of a State contract nullified for fraud as compensation for the investments made thereunder.59 Unjust enrichment as applied by the Iran-us Claims Tribunal. The most extensive use of unjust enrichment has been made by the Iran-us Claims Tribunal. The relevant cases mostly involve private law transactions. The international dimension is provided by the fact that one of the parties is a State or a government enterprise and the other party a foreign national, that the

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2007, paras. 26 and 58; American Manufacturing & Trading, Inc. (amt) v. Republic of Zaire, Award, 21 February 1997; Southern Pacific Properties (Middle East) Limited (spp) v. Arab Republic of Egypt, Award, 20 May 1992, paras. 245–247; and Zeevi Holdings v. Bulgaria and the Privatization Agency of Bulgaria (Case No unc 39/DK), Final Award, 25 October 2006. amt v. Zaire, supra n. 53, para. 7.15. Zeevi Holdings, supra n. 53, para. 860. Schumann v Secretariat of the League of Nations 7 AnnDig (1933–34) 461; Wakley v. World Health Organization [who], 6 October 1961, 32 ilr 466. William A Parker [us] v. United Mexican States, 31 March 1926, 4 riaa 35. Landreau Claim (usa v. Peru), 26 October 1922, 1 riaa 347, 364. Société d’Investigation de Recherche et d’Exploitation Minière (sirexm) v. Burkina Faso, Award, 19 January 2000, icsid Case No ARB/97/1. However, tribunals have also rejected claims based on unjust enrichment; this in particular because they considered the potentially enriched entity as legally different from the respondent State (see e.g. Amco v. Indonesia, supra n. 14, 607–608).

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tribunal applied general principles of law, and by the international nature of the tribunal.60 Partly the Tribunal accepted unjust enrichment claims, partly it rejected them. i.

ii.

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Acceptance of unjust enrichment claims. In an early case before the Iran-us Claims Tribunal, Benjamin Isaiah v. Bank Mellat,61 the claim for unjust enrichment of the beneficial owner of a cheque drawn on the respondent bank’s predecessor but subsequently dishonoured for insufficient funds was admitted. Also in other tripartite or multi-party relationships – with the exception of those concerning subcontractors – the claimant was allowed to rely on unjust enrichment. Thus, in this context, though a general legal interest or also material loss was not considered sufficient to pursue a claim under a contract when the contract had been concluded between other parties, a claim for ­unjust enrichment was generally admitted when the respondent was enriched at the expense of the claimant.62 Likewise, the Iran-us Claims Tribunal admitted claims based on unjust enrichment in cases where goods were delivered, services rendered or assistance provided without a direct contractual bond between claimant and respondent but within a mutual understanding that the respondent needed and accepted these benefits. Accordingly, when work was performed without a contract, but in promise of a future contract, the tribunal awarded unjust enrichment.63 Also, when agreements were subsequently revoked, the Iranus Claims Tribunal at times allowed recovery on the grounds of unjust enrichment.64 Denial of unjust enrichment. In other constellations, the Iran-us Claims Tribunal has however declined claims based on unjust

For details on the Iran-us Claims Tribunal see C. Pinto, B. McAsey, ‘Iran-United States Claims Tribunal,’ in R. Wolfrum (ed.), Encyclopedia of Public International Law, March 2013. Benjamin Isaiah v Bank Mellat, 2 Iran-us Claims Tribunal Reports (1984) 232, 235–239. See for example Alfred Haber v. Iran, 23 Iran-us Claims Tribunal Reports (1991) 133, 146–147. W. Jack Buckamier v. Iran, 28 Iran-us Claims Tribunal Reports (1996) 53, 85–87; see furthermore Morrison-Knudsen Pacific Ltd. v. The Ministry of Roads and Transportation, 7 Iran-us Claims Tribunal Reports (1986) 54, 76; Futura Trading, Inc. v. Khuzestan Water and Power Authority, 9 Iran-us Claims Tribunal Reports (1987) 46, 56–58. See e.g. Mobil Oil Iran Inc. v. Iran, 16 Iran-us Claims Tribunal Reports (1988), 3, 19; see also Sea-Land, supra n. 5, 168–173, 177, 213–216.

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enrichment. For example, the Iran-us Claims Tribunal generally rejected claims to unjust enrichment by subcontractors against the party to the main contract inter alia with the arguments that the enrichment did not ‘ar[i]se as a consequence of the same act or event’ and that the enrichment had not been sufficiently direct.65 In other cases, the tribunal rejected claims for lack of actual enrichment.66 Furthermore, claims to unjust enrichment were denied on the ground that the services rendered were neither requested nor accepted by the respondent,67 or because the claimant had made no attempt to recover funds prior to the start of the proceedings.68 In Lockheed Corp. v. Iran, the Tribunal rejected a claim to unjust enrichment when services were delivered after the termination of the contract on the ground that any benefits which may have been received by the Iranian Air Force were conferred by Lockheed at its own peril.69 4.3 Appreciation International practice generally refers to the prohibition of unjust enrichment as a general principle of law. More particularly, the concept of unjust enrichment appears as an accepted principle in international arbitration.

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See e.g. SeaCo., Inc. v. Iran, 28 Iran-us Claims Tribunal Reports (1996) 198, 205–208; see also Chas T. Main v. Mahab 3 Iran-us Claims Tribunal Reports (1984) 270 and Concurring Opinion Judge Mosk, ibid., 278–279). See, however, Schlegel Corp. v. nicic where the tribunal pointed to the specific circumstances of the case and to the particularly close relationship between the subcontractor Schlegel and the respondent to justify the awarding of compensation based on unjust enrichment (Schlegel, supra n. 46, 180–182, 187–189). For instance, in Flexi-Van Leasing (supra n. 46, 352–356, 363–364, 375–380), the tribunal rejected an unjust enrichment claim on the ground that the enrichment had not been proved. In Shannon and Wilson (supra n. 46, 403), the tribunal rejected the claim of unjust enrichment for lack of proof either that the respondent had been enriched or that any such enrichment was unjust. Also in other cases the tribunal denied claims to unjust enrichment either because the equipment had never reached the respondent (Morgan Equipment Co. v. Iran, 4 Iran-us Claims Tribunal Reports (1985) 272, 278–279) or because it could not be identified how the respondent had been unjustly enriched (Electronic Systems International, Inc. v. The Ministry of Defence of the Islamic Republic of Iran, 22 Iran-us Claims Tribunal Reports (1990) 339, 354. Reliance Group v. Oil Services Company of Iran, 16 Iran-us Claims Tribunal Reports (1988) 257, 272. Phibro Corp. v. Ministry of War-etka Co. Ltd., 26 Iran-us Claims Tribunal (1992) 15, 26–27. Lockheed Corp. v Iran, 18 Iran-us Claims Tribunal Reports (1989), 292, 309–310; see, however Concurring Opinion Judge Aldrich, ibid., 323–324.

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However, also in international arbitral practice the contours of the concept remain somehow undefined. While roughly the same elements as above – enrichment of one party to the detriment of the other; subsidiarity of an unjust enrichment claim; identity between the enriched entity and the respondent – can be identified, the situations to which the principle of unjust enrichment has been applied in international arbitral practice vary considerably. What is more, reliance on unjust enrichment was also not accepted in a number of fact situations. This limits the concept’s importance for international investment arbitration. A particularly clear example for a situation where reliance on unjust enrichment is regularly rejected is the illegality or immorality defence against unjust enrichment claims which will be addressed next. 5

Unjust Enrichment as a General Principle of Law with Vague Contours: The Illegality/Immorality Defence to Unjust Enrichment Claims

The general concept of unjust enrichment has seen considerable restrictions on the basis of fact specific constellations. This reduces its scope of application in international investment arbitration. For example, a comparative analysis of domestic legal systems shows that the illegality/immorality defence may be brought against unjust enrichment claims. This is also confirmed in international arbitral practice. 5.1 The Illegality/Immorality Defence in Domestic Legal Systems In civil law systems (Germany, France) as well as in common law systems (United Kingdom, United States) illegality or immortality work as a defence to defeat a claim in unjust enrichment. In Germany, the pertinent provision is Section 817 of the German Civil Code (bgb). Section 817 limits the possibility to claim restitution in cases of immoral and illegal contracts. More particularly, Section 817 bgb provides that a performance (Leistung) which was rendered in the fulfilment of an illegal or immoral obligation cannot be claimed if both parties, i.e., the performing as well as the receiving party, acted unlawfully (Section 817, 2nd sentence), if they are so-called ‘in pari delicto.’70 Overall, and absent specific circumstances such as 70

Staudingers Kommentar, supra n. 30, Section 817, para. 3. See also Beatson/Schrage, supra n. 33, 501 et seq. The importance of Section 817, 1st sentence, has been stated to be inexistent.

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clandestine labour, German Courts have consistently admitted the illegality defence of Section 817 bgb and denied according restitutionary remedies.71 The French Civil Code does not contain a provision regulating the (denial of) restitution in cases of illegal or immoral contracts.72 French Courts have, however, consistently developed and applied the maxim ‘nemo auditur turpitudinem suam allegans’ taken from Ancien Droit.73 For example, French Courts regularly deny claims to restitution under contracts annulled for bribery/corruption. Inter alia, contracts whose purpose was the payment of ‘kick-backs’ were held illicit and immoral under French law and the parties were prevented from asserting any rights arising out of them.74 In English law, the illegality or immorality of a contract may usually be put forward as defence against a party claiming restitution.75 Restitution will be denied accordingly.76 The classical statement is Lord Mansfield’s in Holman v. Johnson: 71

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Regarding the possible injustice resulting from the denial of recovery, the German Federal Court (Bundesgerichtshof) initially took a positivist standpoint affirming that ‘Der Gesichtspunkt der Gerechtigkeit bleibt bewusst unberücksichtigt.’ [‘The perspective of justice is consciously ignored’] (bghz 8, 348, 373). Later, it argued with ‘Rechtsschutzverweigerung’ [denial of a legal remedy]. (bghz 9, 333, 336; 28, 164, 169; 35, 103, 107; 36, 395, 399; 44, 1, 6 etc.; see also Staudingers Kommentar, supra n. 30, at Section 817 para. 4). According to Art. 6 French Civil Code (On ne peut déroger, par des conventions particulières, aux lois qui intéressent l’ordre public et les bonnes mœurs.), an illegal or immoral contract (‘un contrat contraire à l’ordre public ou aux bonnes mœurs’) can be annulled. The consequences of the annulment are not explicitly stated, however. J. Ghestin, Traité de Droit Civil. Les Obligations. Le Contrat (2nd ed., 1988), 1075; see generally Principles of European Law, Unjustified Enrichment (prepared by C. von Bar, S. Swann)(2010), 513. icc Case No 3913 (1981), Journal du Droit International (1984) 920, 921. The icc applied French Law. See also European Gas Turbines v. Westman s.a. where the Paris Court of Appeal partially annulled the icc Award when new evidence concerning bribery emerged. The Court of Appeal held that the arbitration ruling was contrary to both French public order and international public order in that its enforcement in France would result in upholding a contract that was illicit in its motive and its object and which involved influence peddling or the payment of bribes. (Cour d’Appel de Paris; Paris, 30 Sept 1993; Rev. arb. (1994) 359; Rev. crit. (1994) 349). See also G. Virgo, ‘The Defence of Illegality in Unjust Enrichment,’ in Dyson/Goudkamp/ Wilmost-Smith (eds), Defences in Unjsut Enrichment (2016) 165. See in this sense Burrows, supra n. 36, 488 et seq.; Goff/Jones, supra n. 37, Chapter 21. Note that in English practice, no distinction between illegal and immoral contracts is made in regard to (denial of) restitution.

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The objection, that the 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, by accident, 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 an 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 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 not then have the advantage of it; for where both are equally in fault, potior est conditio defendentis [the position of the defendant is the stronger].77 Until today, in pari delicto potior est conditio defendentis, nemo suam turpitudinem allegans audiendus est (where both parties are equally wrongful the position of the defendant is the stronger) and ex turpi causa non oritur actio (no court will lend its aid to a man who founds his action upon an immoral or an illegal act) are rules firmly rooted in English law.78 Accordingly, claims to restitution will generally be unsuccessful in case of illegality/immorality. In a similar way as in England, recovery is mostly denied by us courts when a contract is declared null and void and unenforceable on grounds of illegality or immorality. According to one scholar: ‘The general attitude of the courts has not been favourable to restitution ….’79 These findings are confirmed by Restatement, Third, Restitution and Unjust Enrichment of 2011:80 Section 32(3) of the Restatement maintains as regards a possible restitution for performance rendered under an agreement that is illegal or otherwise unenforceable for reasons of public policy that ‘[r]estitution will be denied, notwithstanding the enrichment of the defendant at the claimant’s expense, if a claim … is 77 78

Holman v. Johnson, [1775] 1 Cowp. 341, 343. See for details Goff/Jones, supra n. 37, 597 et seq. See in this sense also Bar/Swann, supra n. 73, 516–518. 79 Palmer, supra n. 37, 171. See also Section 197 of the Restatement, Second, Contracts. Exceptions to the general denial of restitution in cases of contracts that are in contravention of public policy are stated in Sections 198 and 199 of the Restatement Second, Contracts. 80 Restatement of the Law Third, supra n. 34.

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foreclosed by the claimant’s inequitable conduct.’81 Accordingly, also in the United States, restitution to a party with ‘unclean hands’ will generally be declined. In sum, in the legal systems examined, illegality/immorality in principle works as a defence to defeat a claim in unjust enrichment.82 As stated by a scholar: As a defence, illegality implies that the plaintiff’s own illegal or immoral conduct can defeat a claim in unjust enrichment which would otherwise lie. … There is, interestingly, no divide between common law and civil law as regards the illegality defence. This has largely to do with the fact that this defence can be traced back to Roman law in all legal systems under consideration.83 5.2 The Illegality/Immorality Defence in International Arbitral Practice Also at the international plane it seems firmly established that the principle of good faith precludes the invocation of unjust enrichment in a situation that has been brought about by the claimant’s wrongdoing. In arbitral cases, when bribery was established, tribunals have held that parties could not require performance of the contract nor seek restitution under it. This practice is based on the principle ‘nemo auditur propriam turpitudinem suam allegans’ (‘no one will be heard relying on his own turpitude’). Arbitrators will either decline jurisdiction or deny a remedy such as restitution in cases of contracts tainted by fraud or corruption.84 Most importantly, in World Duty Free Company Limited v. The Republic of Kenya,85 the tribunal dismissed claims arising out of a contract

81 82

83 84

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Ibid., 505–506. An exception to this general denial of restitution was laid down in (former) Yugoslav Law which provided for a restoration of the former state of affairs in case of illegal and immoral contracts. This is demonstrated, for instance, by icc Case No 2930, 1982 where the Tribunal applied Yugoslav Law and ordered restitution in case of an export contract which was fictitious and violated exchange control regulations. (Yearbook Commercial Arbitration ix (1984) 105, 107 et seq.). G. Dannemann, ‘Illegality as defence against unjust enrichment claims,’ in D. Johnston, R. Zimmermann, Unjustified Enrichment: Key Issues in Comparative Perspective (2002) 310. See, for instance, International Chamber of Commerce Award No. 1110, xxi ybca (1963) 47; International Chamber of Commerce Award No. 3913, 111 Clunet (1981) 920; International Chamber of Commerce Award No. 6497, xxiv ybca (1994) 71. World Duty Free Company Limited v. The Republic of Kenya, icsid Case No. ARB/00/7, Award, 4 October 2006.

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obtained through corruption and declined jurisdiction, rejecting bribery as a matter of public policy.86 Also claims arising out of contracts which are tainted by illegal practices are generally dismissed on jurisdictional grounds with reference to the nemo auditur principle.87 For example, in Inceysa Vallisoletana s.l. v. Republic of El Salvador,88 it could be proved to the tribunal’s satisfaction that the investor had committed fraud in the bidding process for a state contract. Treating the fraud as going to its jurisdiction over the dispute, the Inceysa-tribunal dismissed the claim on jurisdictional grounds.89 Likewise in Plama Consortium Ltd. v. Republic of Bulgaria90 the tribunal relied on the principle ‘nemo auditur propriam turpitudinem allegans’ when it dealt with the Claimant’s alleged misrepresentations (in the merits stage) and rejected the claim.91 Accordingly, also international arbitral tribunals will decline claims in situations involving corruption or in case of contracts which are otherwise tainted by illegal practices. The only possible exception to this principle may be a situation where the fraud or corruption had obviously not influenced the conclusion and performance of the contract.92 Otherwise it seems safe to conclude that the principle ‘nemo auditur propriam turpitudinem suam allegans’ is firmly rooted in international practice and is applicable as a defence to a claim to unjust enrichment. 5.3 Appreciation A comparison of domestic legal systems as well as international arbitral practice shows that restitutionary remedies/reliance on unjust enrichment are generally denied in cases of contracts tainted by illegality or immorality. Illegality and immorality operate as defences against unjust enrichment claims. They are thus valuable examples to support this contribution’s initial statement that general principles of law can be identified comparatively easily, however only in the most abstract sense. Whenever one looks closer, a variety of fact situations may arise where such broad principles of law will not lend themselves to 86 87

Ibid., paras. 179 et seq. In addition to the cases mentioned below see also Philippine International Air Terminals Co., Inc. v. the Philippines, Partial Award, 22 July 2010, paras. 568–590. 88 See e.g. Inceysa Vallisoletana s.l. v. Republic of El Salvador, icsid Case No. ARB/02/26, Award, 2 August 2006. 89 Ibid., paras 338–339. 90 Plama Consortium Ltd. v. Republic of Bulgaria, icsid Case No. ARB/03/24, Award, 27 August 2008. 91 Ibid., para. 143. 92 See sirexm v. Burkina Faso, supra n. 59.

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application. Depending on the given circumstances, claims related to unjust enrichment might be rejected accordingly. 6 Conclusion Unjust enrichment in most general terms is undeniably a general principle of law. Remedies against unlawful shifts of assets exist in nearly all contemporary legal systems, inter alia in the two civil and two common law systems which were examined in this contribution: Germany, France, the United Kingdom and the United States. Also international arbitral tribunals have relied on the concept of unjust enrichment. An overview of international case law evidences that some tribunals have been favourable to claims concerning unjust enrichment as a general principle of law. In particular the Iran-us Claims Tribunal repeatedly has accepted claims of unjust enrichment when no remedy was available otherwise. As such, unjust enrichment is of certain relevance for investment arbitration. The obstacles to any further operationalization of the concept of unjust enrichment in investment arbitration are, however, the difficulties involved when it comes to define the contours of unjust enrichment as a general principle of law. Unjust enrichment simply is not a concept to be relied upon in general terms. When applied to a particular fact situation, reliance on unjust enrichment will frequently be denied. This was shown by taking the example of contracts tainted by illegality or immorality where restitution was generally declined. The lesson to be learned from the example of unjust enrichment for any application of general principles of law in investment arbitration is that it is not sufficient to rely on general principles of law in the abstract sense. Rather, the facts of each particular situation have to be carefully analysed to see whether a general principle of law is applicable. Frequently, a more detailed second look will reveal that a general principle of law does not lend itself to the application in a particular case. Also because of this arduous exercise, reliance on general principles promises to be restricted and will remain rare.

Chapter 13

Sustainable Development and Investment: Trends in Law-Making and Arbitration Pia Acconci* This chapter highlights the reasons why certain non-investment concerns at the root of sustainable development, such as the environment and public health, have become relevant within the international and eu regulatory and policy framework, as well as within investment treaty-based arbitration case-law. Specifically, the chapter illustrates how international and eu post-Lisbon international trade agreements have attributed a specific weight to such non-investment concerns, as exceptions and/or special safeguards. In addition, the chapter shows how some arbitral treaty-based tribunals have taken into account a few these concerns. The main reasons why a multilateral approach appears desirable for a better international legal climate for foreign investments and how such an approach might be designed are also illustrated. Besides, the chapter covers the attempts of the European Union to deal with criticism concerning its negotiations of the ttip with the United States, which led to the adoption of innovative proposals.

1 Introduction Until few years ago the relationship between international investment law and sustainable development was not a matter of discussion because of the typical diversification that characterised international investment law. International investment treaties did not to deal with ‘non-investment concerns,’ such as sustainable development. States tended to regulate the protection of foreign investments and of non-investment concerns in different international legal instruments. After the end of colonialism, the typical regulatory approach at the root of international investment law was designed to promote foreign investments from economic advanced States to developing and least-developed countries through the conclusion of international treaties, mainly bilateral, for * University of Teramo, Italy. The author may be contacted at [email protected].

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_014

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the f­ acilitation and protection of a foreign investor’s goals. Since the nineties, ‘­regional’ treaties including relevant provisions on the liberalization and/or protection of foreign investments have also been concluded for the purpose of establishing a common legal framework on trade and investment among the contracting States. The European Union (eu) has concluded and is negotiating international trade agreements that include rules on investment. Most of these treaties include provisions on investment liberalization, whereas a few provide for investment protection. Recently ‘mega-regional’ agreements on trade and investment have also been concluded by a few States1 and by the eu. The Comprehensive E ­ conomic and Trade Agreement (ceta) concluded between the eu and Canada, which has entered into force provisionally on 21 September 2017, and the Trans-­Atlantic Trade and Investment Partnership Agreement (ttip) under negotiation between the eu and the United States are examples of the trend ­towards the conclusion of such agreements. These are called ‘mega-regional’ agreements because of the magnitude of their field of application in terms of i­nvolved ­territories, peoples and flows of investment and trade. Over the last fifteen years, a few scholars and groups representing a critical share of civil society and local minorities have been requesting a change of this treaty-based international legal framework on investment. The aim of such requests has been that of attributing a weight to a number of non-investment concerns and rendering investment arbitration less controversial. Because of diversification at an international law level, the achievement of this aim has been uneasy. Diversification is the outcome of the propensity of States and international organizations to deal with the regulation of different concerns and conflict of interests – economic and non-economic – through different ­international legal instruments and procedural mechanisms. In light of diversification, investment arbitral tribunals have been experiencing ­difficulties when they have to identify the applicable law, the appropriate interpretative criteria and techniques. Discussions have been taking place on the legitimacy and consistency of international investment law, specifically on the alleged lack of openness and transparency of treaty-based arbitration proceedings. A few international organizations have been concerned for the safeguard of 1 Examples are the 2009 Free Trade Agreement among the asean, its Member States, Australia and New Zealand and the 2015 Trans-Pacific Trade Partnership (tpp) Agreement. The tpp was concluded among Australia, Brunei, Canada, Chile, Japan, Malaysia, New Zealand, Peru, Singapore, the United States and Vietnam on 5 October 2015. On 23 January 2017 the newly elected President of the United States, Mister Trump, announced the withdrawal of the United States from the tpp.

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certain general interests related to the quality of the development process promoted by the protection of foreign investments. Namely, it is felt that investment protection does not safeguard interests such as poverty reduction, multi-level governance, environmental protection, labour conditions and human rights. More generally, it is questioned whether the observance of widely accepted principles, such as democracy and rule of law, has been supported by the proliferation of investment protection treaties. A number of States have revised their regulatory attitude to international investment law. This transpires in particular from the revised Model bits adopted by the United States in 2012 and by India in 2015, from several investment treaties concluded by industrialized States, such as Canada and Australia, as well as from the active approach taken by the eu, specifically by the Commission and Parliament, as to the exercise of the eu new competence on foreign direct investment (fdi) within the common commercial policy provided in the eu Lisbon Treaty, which entered into force in 2009. The ttip draft text has become one of the most controversial issues within the eu investment treaty policy. Its leaked chapter on the p ­ rotection of i­ nvestment has appeared in line with the typical regulatory model of i­ nternational investment treaties, which is pro-investor oriented. The ­inclusion of a direct arbitration clause for the settlement of disputes between one of the Contracting Parties and the investor of another Contracting Party has been the main reason of criticism and has brought about an increase in the requests of a part of the public opinion for a revision of the typical balance of interests between foreign investors and host States. As a consequence, expectations of a revision of the typical regulatory approach at the root of the international legal framework on investment have been mounting. A number of these expectations end up underlining the ­importance of mainstreaming sustainable development into the international legal and policy frameworks on investment. Sustainable development refers to three aspects: economic growth, social/ human development and environmental protection. Its alignment with investment promotion is not direct, as its core elements might hamper certain kinds of investment. More specifically, as defined in the 1986 Bruntland Report, sustainable development is the development which meets the needs of the present without compromising the ability of future generations to meet their own needs.2 Important un international conferences on sustainable development, such as those held in Rio de Janeiro in 1992 and 2012, have contributed to 2 Report of the World Commission on Environment and Development, Our Common Future, Oxford University Press, Oxford, 1987.

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the identification of a number of principles for achieving such a development. The chief principles are: the sustainable use of natural resources, equity  – both inter-generational and intra-generational –, common but differentiated responsibilities, cooperation through a multilateral approach, prevention, precaution, public participation and access to information and justice, good ­governance, integration and the rule of law.3 This chapter will show how sustainable development has gained a specific relevance in international investment law from four different perspectives: the perspective of international organizations, the perspective of international investment treaties, the perspective of the European Union and the perspective of treaty-based investment arbitration. The main reasons why a multilateral approach appears desirable for a better international legal climate for foreign investments and how such an approach might be designed will also be illustrated. The chapter covers the attempts of the European Union to deal with criticism concerning its negotiations of the ttip with the United States, which led to the adoption of innovative proposals, such as the introduction of a clause on the ‘right to regulate’ of the host contracting State and the establishment of an international permanent investment court. Similar proposals appear to endorse the idea that a multilateral approach is desirable to facilitate the regulatory coordination of competing interests. 2

The Relationship between International Investment Law and Sustainable Development from the Perspective of International Organizations

A number of articles, non-binding acts and reports of international organizations have been published to promote the establishment of a regulatory link between investment and sustainable development. The assumption that there must be a connection between foreign investments and sustainable development, as well as a stable and predictable legal environment to facilitate such investments, derives from the market-based approach to sustainable development that States and international organizations have chosen as a regulatory reference point. The relevance of economic prosperity for the realization of social development has gained importance 3 According to the New Delhi Declaration of Principles of International Law Relating to Sustainable Development that was adopted by the International Law Association at its 70th Conference held in New Delhi, India, 2–6 April 2002, a number of the principles mentioned in the text are important for ‘the objective of sustainable development in an effective way.’

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as has the contribution of the technical and financial support by private parties to poverty reduction, sustainable and human development,4 as well as for the solution of ‘global’ problems due to the lack of the guarantee of certain ­human rights, such as the right to food and that to health.5 A different perspective, namely the ecological approach to the promotion of development, has not been widely-accepted by States and international organizations. This approach alignes with the spirit of the 1982 ‘World Charter for Nature,’ in favour of which a number of non-governmental organizations (ngos), ­indigenous ­minorities and other non-State actors have advocated. According to such an approach, the preservation of the eco-system, the satisfaction of the basic needs of people and the safeguard of their religious and cultural traditions should prevail, in the international political and legal frameworks, over the principles of a market economy. Transnational corporations, in this model, would not become the drivers of economic and social development. The market-based conceptualization of sustainable development transpires from the relevance of the ‘green economy’ in the ‘Future We Want,’ that is the Declaration adopted at the end of the ‘2012 Rio +20 Conference,’ and from the final acts of the un ‘Conference on Financing for Development’ held in Addis Ababa in 2015. This conceptualization also transpires from the actions, acts and initiatives of the international organizations operating within the un ­system, such as the Food and Agriculture Organization (fao), those belonging to the World Bank Group and the unctad. The unctad is important because during the sixties and seventies it was the un international organization most involved in designing international duties and standards of conduct for transnational corporations investing abroad within the framework of the requests of developing countries for a ‘New International Economic Order.’ The favourable approach to private foreign investments in developing countries taken by the unctad over the last twenty years therefore shows the relevant change that has occurred in the international political approach to the relationship between development and foreign investments. In recent years, 4 Cf. Pia Acconci, ‘La “green economy” e la realizzazione dei diritti dell’uomo alla base dello sviluppo sostenibile’ (2012) 6 Diritti Umani e Diritto Internazionale especially 599–602; Markus W. Gehring, Avidan Kent, ‘International Investment Agreements and the Emerging Green Economy: Rising to the Challenge,’ in Freya Baetens (ed.), Investment Law within International Law: Integrationist Perspectives (Cambridge University Press, Cambridge, 2013) 187 et seq.; Margot E. Salomon, ‘From nieo to Now and the Unfinishable Story of Economic Justice’ (2013 Issue 01) 62 International and Comparative Law Quarterly 31 et seq. 5 See ‘[t]he Outcome Document of the Third International Conference on Financing for Development: Addis Ababa Action Agenda,’ A/CONF.227/L.1, 15 July 2015, especially paras. 36–37, 45–47.

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the unctad had been referring to a market-based conceptualization of sustainable development, promoting the enhancement of the importance of corporations as the drivers of such a development and trying to find a fair balance between the interests of foreign investors and those of host developing countries.6 In 2012 the unctad published the ‘Investment Policy Framework for Sustainable Development’ that aims to influence both the domestic and external dimensions of a host State’s attitude towards the adoption of ‘new generation investment policies.’ At the domestic level, host States should deal with a number of ‘investment policy challenges,’ such as the integration of the investment policy framework into ‘an overall development strategy,’ the incorporation of ‘­sustainable development and inclusiveness objectives’ in the investment ­policy framework and the strengthening of ‘institutions to implement investment policy.’7 At the international level, host States should deal with three key ‘challenges’: the enhancement of the development dimension of the ­international investment regulatory and policy frameworks, the ‘adjustment’ of the ‘balance between the rights and obligations of States and investors’ and the management of ‘the increasing complexity of the international [investment] policy regime.’8 According to the unctad Policy Framework, there are eleven ‘Core Principles for Investment Policymaking for Sustainable Development.’ These ­Principles design an all-embracing approach that focuses on the ­integration of sustainable development into the international and domestic investment legal and policy frameworks, the coherence of the domestic investment policies, the participation of all stakeholders, the safeguard of a host State’s regulatory power, the stability and predictability of domestic investment policies, non-­discrimination of foreign investors and the promotion of corporate social responsibility.9 The unctad intends to act as a forum of discussion and ­facilitator to support developing and least-developed Member States to face key challenges and implement the ‘Core Principles.’ The market-based conceptualization of sustainable development is also taken into consideration outside the un system by the oecd and European 6 See Elisabeth Tuerk, Diana Rosert, ‘unctad’s Role in Addressing International Investment Trends and Challenges’ (2013) European Yearbook of International Economic Law 537 et seq. 7 At 6. 8 At 7. 9 See pp. 10–14. See also unctad, World Investment Report 2015. Reforming International Investment Governance, (New York, Geneva, 2015). Cf. Elisabeth Tuerk, Diana Rosert, ‘­u nctad’s Role’ (see footnote 6) especially 552–553; Faraz Rojid, Maria del Carmen Vasquez, ‘Investment Law and Poverty: Continuing the Debate through unctad’s ­Investment Policy Framework for Sustainable Development’ (2014) 15 Journal of World Investment & Trade 889 et seq.

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Union. As to the oecd, its ‘Investment Policy Framework’ adopted in 2015 is a relevant example of the trend towards an approach to sustainable development based on fairness and a balanced distribution of ‘rights’ and duties ­between foreign investors and host States within the market-based conceptualization of sustainable development. Such a Framework identifies a number of ‘key policy issues’ connected to investment that any State might need to manage through policy reforms, such as ‘the enablement of responsible business conduct,’ ‘the development of human resources for investment’ and the promotion of ‘green growth’ through investment.10 In effect, since the 1992 Rio Conference on sustainable development, many international organizations – operating inside and outside the un system – have been promoting ‘corporate social responsible behaviours.’ As discussed below, a few States, such as Canada, and the eu have also been including ­relevant provisions in this connection in their recent international investment treaties. 3

The Relationship between International Investment Law and Sustainable Development from the Treaty Practice Perspective: From Acknowledgement to Partial Integration, via the Exception Approach

As mentioned above, until the nineties bilateral and ‘regional’ treaties on trade and investment – the major source of international investment law – did not include safeguards for the protection of non-investment concerns. Things have changed since. Over the last twenty years, States have entrusted separate sources with the regulation of different matters, such as the protection of investments and that of non-investment concerns. However, a different regulatory approach has been used for the design of international legal instruments dealing with ­investment. A few States have acknowledged the importance of the goal of ­sustainable development and/or certain non-investment concerns, like the protection of the environment, at the root of the typical conceptualization of such a development. Usually this acknowledgment is in the preamble. ­Examples are the 1993 Treaty establishing the North America Free Trade Area (nafta) among the United States, Canada and Mexico, the 2004 Model bit of ­Canada, the 2009 Investment Agreement between the asean and China, 10

See also the oecd and Post-2015 Reflections, ‘Investment for Sustainable Development,’ Element 11, Paper 3; and the oecd Development Assistance Committee Statement, ‘Welcoming New Partnerships in International Development Co-operation,’ 6 April 2011.

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the  2015 Trans-Pacific  Partnership Agreement (tpp) the 2016 bit between ­Canada and Mongolia and the 2016 bit between Argentina and Qatar. Certain bits concluded by ­Canada include provisions that safeguard the ‘regulatory space’ of the Contracting States for environmental concerns.11 The inclusion of non-relaxation commitments with regard to sustainable development, and/or to certain non-investment concerns related to its realization, in treaty preambles and/or clauses has emerged as another useful method to discourage the ‘race to the bottom’ phenomenon. Many bits ­concluded by the United States recognize in their preambles that ‘the development of economic and business ties can promote respect for internationally recognized worker rights’ and underline that their economic objectives ‘can be achieved without relaxing health, safety and environmental measures of ­general application.’12 The same statement is contained in the nafta Treaty.13 The 2012 Model bit of the United States, like that of 2004, contains a similar ­general non-relaxation commitment which aims to reconcile the economic objectives of an investment treaty and the safeguard of the typical non-­ investment concerns taken into consideration in international investment treaties.14 A few treaties of other States include non-relaxation clauses.15 11 12

13 14

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See, among others, art. xvii (2), of the bits concluded by Canada respectively with Barbados and Egypt in 1996 and Armenia in 1997. In particular, see bilateral treaties concluded by the United States in 1995 with Nicaragua; in 1997 with Azerbaijan and Jordan; in 1998 with Bolivia. See also the 1991 United StatesArgentina bit and the 1992 United States-Russia bit which however refer only to ‘the well-being of workers’ and to the promotion of ‘respect for internationally recognized worker rights.’ See art. 1114 (2). See the preamble of the 2012 Model bit of the United States which runs as follows: ‘[d]esiring to achieve these objectives in a manner consistent with the protection of health, safety, and the environment, and the promotion of internationally recognized labor rights.’ See also, among others, the 1995 Switzerland – Mexico bit, Protocol to art. 3; the preambles of the 2002 Netherlands-Namibia bit, the 2002 Korea-Trinidad and Tobago bit and the 2003 Finland-Kyrgyzistan bit; the 2008 Canada-Colombia fta Agreement, art. 815; and the 2012 trilateral investment treaty among Japan, China and South Korea, art. 23 concerning environmental measures. In addition, see the investment chapter of the 2015 tpp Agreement, which runs as follows ‘[n]othing 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, health or other regulatory objectives’ (art. 9.15). An example is the preamble of the 2004 Model bit of Canada. See also art. 11 of the same Model bit. These clauses run as follows ‘[e]ach Contracting Party recognizes that it is inappropriate to encourage investment by investors of another Contracting Party by relaxing

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In addition, or sometimes as an alternative, a number of States refer to the protection of certain non-investment concerns as general exceptions to the treaty provisions on the protection of a foreign investor’s interests and/ or as exceptions to specific obligations included in their investment treaties.16 As to the first point certain bits and investment chapters of Free Trade Area (fta) Agreements, in line with art. xx of the General Agreement on Trade and Tariffs (gatt), list the protection of the environment and/or of ‘public health and/or national security’17 and/or ‘of national treasures of artistic, historic or archeological value’18 as goals capable of founding general exceptions to treaty obligations.19 These clauses are connected to the concept of necessity and provide for non-precluded measures that one of the Contracting States can adopt to the detriment of an investor of the other Contracting State.20

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17

18 19

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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.’ As to the increasing relevance of exceptions for the protection of the host State’s general interests, see Saïda El Boudouhi, ‘L’intérêt général et les règles substantielles de protection des investissements’ (2005) Annuaire français de droit international 542 et seq.; Amelia Keene, ‘The Incorporation and Interpretation of wto-Style Environmental Exceptions in International Investment Agreements’ (2017) 18 The Journal of World Investment & Trade 62 et seq. See, among others, the 1994 Bolivia-Mexico fta Agreement, arts. 3–13 (3); art. xvii, para. 3 of the bits concluded by Canada respectively with Barbados and Egypt in 1996, and ­Armenia in 1997; and the 1999 Argentina-New Zealand bit, art. 5 (3). See the 2003 Australia – Singapore fta Agreement, art. 21. For example, the 2012 Canada-China bit, at art. 33, reads as follows: ‘2. [p]rovided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in this Agreement shall be construed to prevent a Contracting Party from adopting or maintaining measures, including environmental measures: (a) necessary to ensure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement; (b) necessary to protect human, animal or plant life or health; or (c) relating to the conservation of living or non-living exhaustible natural resources if such measures are made effective in conjunction with restrictions on domestic production or consumption.’ Other examples are the 1997 Canada-Armenia bit, art. xvii; the 2004 Model bit of Canada, art. 10 (1); and the 1998 Switzerland-Mauritius bit, art. 11 (3). ‘The protection of the environment’ is mentioned in the 2007 Model bit of Colombia, art. vii. Several Indian bits are also relevant, such as the 1995 Germany-India bit (art. 12), the 1995 Italy-India bit (art. 12), the 1996 Czech Republic-India bit (art. 12), and the 1999 Australia-India bit (art. 15) that refer to ‘…measures necessary … for the prevention of diseases or pests.’ See Andrew D. Mitchell, Caroline Henckels, ‘Variations on a Theme: Comparing the Concept of “Necessity” in International Investment Law and wto Law’ (2013) 14 Chicago

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As to the second point, in a number of investment treaties, the protection of a few non-investment concerns usually related to the realization of sustainable development, such as land governance, is considered a specific exception to treaty obligations on the prohibition of performance requirements21 and/or on the calculation of compensation for expropriation.22 This latter instance of treaty practice shows the continuing importance of two crucial ­issues at the root of the debate on the establishment of a ‘New International Economic Order’ which began in the seventies. The first issue arose from the requests by newly independent States of rules on the safeguard of their permanent sovereignty over natural resources, whereas the second issue regarded the choice of one or more international methods for the determination of compensation for expropriation. The 2004 Canadian Model bit and Canadian investment treaties, including the 2014 Comprehensive Economic and Trade Agreement (ceta) with the ­European Union, contain an important provision that connects the obligation of the host State to compensate, in the case of a taking, and its ‘right to regulate.’ This provision reads: [f]or greater certainty, except in the rare circumstance where the impact of the measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, nondiscriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations.

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­Journal of International Law 93 et seq.; Lorenza Mola, ‘International Investment Arbitration and Serious Economic Crises: Lessons Learned in the Argentinean Crisis of 2000– 2001,’ in Attila Tanzi et al. (eds.), International Investment Law in Latin America. Problems and Prospects, (brill, Nijhoff, Leiden, Boston, 2016), p. 370 et seq. See the 2003 Australia – Singapore fta Agreement, art. 5 (3) (c); the 2012 Model bit of the United States, art. 8 (3) (c); and the 2015 draft investment chapter of the tpp, art. 9.9 (3) (d). See, for example, the 2009 Investment Agreement between the asean and China which, at art. 8 (4), runs as follows: ‘any measure of expropriation relating to land shall be as ­defined in the expropriating Party’s 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.’ See also the 2009 asean, Australia and New Zealand Association Agreement, art. 9 (6) and footnote 8; the 2015 Model bit of India, art. 5.1, footnote 3; and Annex 9-C of the 2015 tpp Agreement.

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Besides the acknowledgment of sustainable development and/or of a number of related non-investment concerns in preambles and/or the inclusion of non-relaxation clauses and/or non-precluded measures and/or of exceptions, in the last decade, a few States, in particular a few industrialized States, have ­adopted a regulatory approach that integrates the environment and/or ­worker’s rights into their investment treaties through specific provisions. These provisions ­establish direct relationships between the protection of investments of nationals of one of the Contracting Parties and the protection of such noninvestment concerns. These States have shown to be in favour of mitigating regulatory d­ iversification by going beyond the ‘exception approach’ through the inclusion of similar specific provisions in their investment treaties. As such provisions represent a starting point to deal with the lack of appropriate applicable rules for the reconciliation of social needs and liberalization, they may contribute to the prevention of conflicts of interests flowing into disputes ­before ‘international’ treaty-based arbitral tribunals or quasi-judicial bodies. Examples of this trend are the investment treaties concluded by the United States and Canada after the review of their Model bits in 2004. The most recent Model bit of the United States – that of 2012 – incorporates specific ­provisions related respectively to the relationship between investment and the environment and between investment and labour.23 Although these clauses show the importance of the commitments of the United States to its international obligations on the protection of the environment and labour, no specific international conventions on the protection of the environment and labour are named. This lack may aim to avoid treaty cross-fertilization in favour of the protection of those non-investment concerns within the international l­egal framework on investment. The revised Model bit of India reconceptualizes the typical balance of interests between foreign investors and host States by providing for a special chapter on ‘[i]nvestor obligations’ that includes two ­articles: one on ‘compliance with laws’ by a foreign investor and the other on ‘corporate social responsibility.’24 As pointed out below, a few recent international 23

24

See the 2012 us Model bit, art. 12, in particular paras. (3), (5) and (7), and art. 13. According to a few scholars, these ‘environmental provisions are capable of serving as interpretative tools and defences, but not as foundations of claims, in binding dispute settlement.’ See Makane Moïse Mbengue, Deepak Raju, ‘Energy, Environment and Foreign Investment,’ in Eric de Brabandere, Tarcisio Gazzini (eds.), Foreign Investment in the Energy Sector ­­ (brill, Nijhoff, Leiden, Boston, 2014) 184. See Ch. iii, Arts. 11–12, of the revised Indian Model bit that was published in December 2015. An earlier draft of such a new Model bit provided for a deeper reconceptualization, as it referred to ‘investor, investment and home State obligations’ in order to ‘ensure that the conduct, management and operations of investors and their investments [were]

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agreements on trade concluded by the European Union also attribute a special importance to corporate social responsibility. In addition, a reference to the importance of corporate social responsibility is included in the investment chapter of the tpp Agreement.25 The impression that transpires from these trends in investment treaty ­practice is the search for a connection between the safeguard of private ­interests, on the one hand, and the promotion of sustainable development in terms of environmental and social sustainability, on the other. However, these changes in investment treaty practice have not yet been tested. 4

The Approach of the European Union

Art. 207 of the Treaty on the Functioning of the European Union, as amended by the Treaty of Lisbon, provides for the new competence of the eu on fdi within the common commercial policy. Immediately after the entry into force of the Treaty of Lisbon in 2009, the eu Commission, Council and Parliament adopted several non-binding acts adopted which gave rise to the idea that, through a comprehensive European international investment policy, the eu political institutions would operate a change of the typical regulatory a­ pproach at the root of the international legal framework on investment.26 A number of scholars and representatives of civil society expressed expectations that the exercise of this new competence on investment would occur in accordance with the principles of sustainable development.27 Arts. 21 of the Treaty on the

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consistent with the law of the host State, and enhance the contribution of investments to inclusive growth and sustainable development of the host State.’ This was provided in Ch. iii, arts. 8–13, and art. 5.7, letters (h) and (i) of the draft published in March 2015. Art. 9.16 of the 2015 tpp Agreement provides that ‘[t]he Parties reaffirm the importance of each Party encouraging enterprises operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party.’ See Colin Brown and Maria Alcover Llubià, ‘The External Investment Policy of the ­European Union in the Light of the Entry into Force of the Treaty of Lisbon’ (2010–2011) ­Yearbook on International Investment Law & Policy 145 et seq., especially 161; August Reinisch, ‘Putting the Pieces Together … an eu Model bit?’ (2014) 15 Journal of World Investment & Trade 679 et seq. See, among others, Angelos Dimopoulos, ‘Shifting the Emphasis from Investment Protection to Liberalization and Development: The eu as a New Global Factor in the Field of Foreign Investment’ (2010) 11 Journal of World Investment & Trade 5 et seq.; Federico

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European Union and 205 of the Treaty on the Functioning of  the E­uropean Union have been considered relevant, as they provide for consistency between the eu external action and the principles and values at the basis of the eu integration process. These principles and values include sustainable development, the protection of human rights and of the environment. The eu has repeatedly made statements on the importance of sustainable development within the international legal and policy frameworks on investment by referring to such principles and values. The institutional commitment transpires from the first important non-binding act published by the Commission on 7 July 2010, the Communication named ‘[t]owards a comprehensive European international investment policy.’28 The ‘Conclusions on a comprehensive European international investment policy’ adopted by the Council on 25 October 2010 and the Report on the ‘Future European International Investment Policy’ adopted by the Committee on International Trade of the European Parliament on 22 March 2011 are also relevant. The former document ‘­recognizes the importance of the social and environmental dimension of foreign direct investment as well as the rights and the obligations of investors.’29 The latter in brief ‘calls on the Commission to include in all future agreements specific clauses laying down’ the protection of the ‘right to regulate,’30 the ­promotion of sustainable investments in terms of the protection of the ­environment31 and the protection of ‘the public intervention domain.’32 A ­reference to the ‘right to regulate’ is also included in the ‘Statement of the ­European Union and the United States on Shared Principles for International Investment’ published on 10 April 2012.33 The European Parliament has several

28 29 30 31 32 33

­Ortino, Piet Eeckout, ‘Towards an eu Policy on Foreign Direct Investment,’ in Andrea Biondi, Piet Eeckout, Stephanie Ripley (eds.), eu Law after Lisbon (Oxford University Press, Oxford, 2012) especially 324–326; José Gustavo Prieto Muñoz, ‘The eu as a Global Actor in the Post-Lisbon Era: Policy on International Investments and a Tale of Triple Fragmentation,’ in Katia Fach Gómez (ed.), La política de la unión europea en materia de derecho de las inversiones internacionales (Bosch Editor, Vallirana, 2017) 25 et seq. COM(2010)343 final, at 9. At para. 16 of the preamble. See also para. 17 on the relevance of ‘principles and objectives of the Union’s external action.’ At para. 25. At paras. 27–30. At 11–12. In the preamble of the ‘Shared Principles’ it is underlined that ‘[w]e believe that governments can fully implement these principles while still preserving the authority to adopt and maintain measures necessary to regulate in the public interest to pursue certain public policies.’ These ‘Principles’ were negotiated by the eu Trade Commissioner within the Framework of the Transatlantic Economic Council.

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times highlighted the need of reconciling the protection of investment and that of the ‘right to regulate.’34 Besides these non-binding acts, the eu has concluded and is negotiating ­international trade agreements that include rules on investment. These treaties do not reflect a unitary regulatory approach or a model. A few of them ­provide for rules on the safeguard of certain non-investment concerns related to sustainable development that are similar to rules typical of ­international treaties on investment, such as non-precluded measures clauses.35 The ceta and a few other eu international treaties on trade and investment include relevant provisions on ‘the safeguard of the right to regulate,’36 sustainable ­development and/or some of its key principles, such as the sustainable management of natural resources, and/or the importance of the accountable ­conduct of private foreign investors. However, these latter provisions tend to be ­included in chapters of the treaty other than the one on investments; as a ­result, these provisions tend not to be directly connected to those on the protection of investments.37 A number of the eu treaties also refer to corporate social responsibility. The 2010 Free Trade Area Agreement between the eu and South Korea,38 the 2012 Partnership and Cooperation Agreement between the eu and Vietnam39

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37 38 39

See, among others, European Parliament Resolutions 2010/2203, 6 April 2011, especially paras. 15, 17, 23, 26–30; 2013/2558(RSP), 23 May 2013, especially para. 16; and 2014/2228(INI), especially paras. xiii–xiv. See art. 9.3 (3) of the investment chapter of the 2013 fta Agreement between the eu and Singapore. The preamble of the ceta includes an express reference to the ‘right to regulate’ by ‘[r]ecognizing that the provisions of this Agreement preserve the right to regulate within their territories and resolving to preserve their flexibility to achieve legitimate policy ­objectives, such as public health, safety, environment, public morals and the promotion and protection of cultural diversity.’ Its Annex X.11 on ‘expropriation’ provides for the connection between the ‘right to regulate’ and indirect expropriation typical of Canadian investment treaties. See also, among others, the 2010 among the eu, its Member States and South Korea fta Agreement, in particular the preamble, arts. 7.1 (4) and 13.3; the 2008 Economic Partnership Agreement among the cariforum States, the European Communities and its Member States, in particular arts. 60 (4) and 184; and the 2012 trade ­Agreement among the eu, its Member States, Colombia and Peru, in particular arts. 107 (5) and 268. Cf. Pia Acconci, ‘Biofuels Production through Sustainable Investments’ (2017) Rivista di diritto internazionale especially 1053–1055. Art. 13.6 (2). Art. 44 (e).

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and the ceta40 are useful examples. Certain scholars underline the distinctive relevance that corporate social responsibility has gained in these eu treaties, compared to other international treaties on investment.41 At any rate, such eu treaties, like the relevant non-binding acts adopted by the institutions of the European Union after the entry into force of the Treaty of Lisbon, refer to the  market-based conceptualization of sustainable development. Therefore, these treaties and acts acknowledge and boost the importance of corporate actors as a catalyst for sustainable development. This view has particularly been criticized in relation to the leaked draft investment chapter of the ttip under negotiation because the combination between its various rules on liberalization and its inclusion of a direct arbitration clause typical of international investment treaties would expand the beneficial effects for foreign investors. In order to mitigate criticism, following public consultations on investment protection and investor-to-State dispute settlement in the ttip agreement,42 in 2015 the eu Commission published a ‘Concept Paper’ on 12 May named ‘[i]nvestment in ttip and beyond – the path for reform. Enhancing the right to regulate and moving from current ad hoc arbitration towards an Investment Court’ and an unofficial document on 16 September providing for an informal proposal to the United States as to a revision of the ttip draft investment chapter suggesting the establishment of a permanent investment court system. The idea of the eu Commission is also to facilitate, through such a proposal, improvements of the typical international investment legal framework. These improvements would transpire from the innovation of dispute settlement between a Contracting Party and an investor of another Contracting Party, that is the ‘Investment Court,’ and from the incorporation of special provisions on substantive issues aimed at the safeguard of certain non-economic concerns, as well as of the ‘right to regulate.’ These

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See the preamble of the ceta that mentions the oecd Guidelines for Multinational Enterprises. See Angelos Dimopoulos, ‘Shifting the Emphasis’ (see footnote 27) especially 22, who believes that the Economic and Partnership Agreement concluded by the eu with the cariforum States in 2008 ‘takes a step further than most international investment agreements by incorporating in a legally binding instrument certain principles of corporate social responsibility that until now were adopted by investors on a voluntary basis. Without imposing direct obligations on private individuals, which would be controversial under public international law.’ See European Commission, ‘Public Consultations on Modalities for Investment Protection and isds in ttip,’ Consultation Document (2014), available on the eu website.

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changes would be improvements because they would contribute to tackling possible normative conflicts and to mitigating the ‘pro-investor’ approach.43 Two issues appear as possible obstacles to the effective realization of this idea of the eu Commission. The first issue is whether the United States will maintain its engagement in the ttip negotiations and, if so, will accept the proposals of the eu Commission. The second issue is whether the eu will enjoy full exclusive competence to conclude, without its Member States, the ttip treaty, as many of these States still tend to consider the protection of investments through direct arbitration as a priority.44 5

The Relationship between International Investment Law and Sustainable Development from the Investment Treaty-Based Arbitration Case-Law Perspective

Sustainable development issues have been brought before a relevant number of investment treaty-based arbitration tribunals giving rise to different ­conclusions. These issues have been both substantial and procedural. Substantial issues have been brought in relation to water tariff regulation, waste ­management, the prohibition of harmful substances, such as pesticides, petrol and tobacco, or the protection of religious sites. In a number of these cases, one of the disputing parties has requested an extension of the applicable rules by referring to specific international non-investment obligations on the protection of the environment, human rights, indigenous people and cultural sites. Therefore, many of such cases have given rise to the issue of how to deal at an international law level with normative conflicts between international economic and non-economic sources. The chapter in this book by Petersmann and Kube focuses on the relationship between international investment law and human rights. Consequently, this chapter limits itself to touch upon a few investment treaty-based arbitration cases on these ­matters, taken as further examples of how the protection of these non-investment ­concerns – which relate to sustainable development – has become a controversial issue. Broadly speaking, for the purpose of this 43

44

For a general overview, see Kyle Dylan Dickson-Smith, ‘Does the European Union Have New Clothes?: Understanding the eu’s New Investment Treaty Model’ (2016) 17 The Journal of World Investment & Trade 773 et seq. See Catharine Titi, ‘International Investment Law and the European Union: Towards a New Generation of International Investment Agreements’ (2015) 26 European Journal of International Law especially 647–651.

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chapter, the investment treaty-based arbitration case-law concerning sustainable development issues can be grouped into five categories. The first category relates to arbitration cases where the application of a State’s international obligations on the protection of human rights was at stake. A few arbitral tribunals have accepted the request to refer to the jurisprudence of the European Court of Human Rights (ECtHR) on the safeguard of the right to property to ascertain whether or not the host State’s conduct had been ­tantamount to an indirect taking of the foreign investor’s property.45 Other arbitral tribunals have instead refused to import a State’s international obligations from one treaty system to another, to the detriment of the foreign investors as claimants. In particular, in the Spyridon Roussalis v. Romania case the claimant investor had argued for the application of the respondent host State’s international obligations contained in the European Convention on H­uman Rights concerning property protection. This claim was not successful.46 Likewise, the few claims hinging on the treatment of the foreign ­investors as human beings did not succeed.47 A number of cases against Argentina regarding water or energy concessions, which raised issues of access to water and electricity, must also be mentioned.

45

See, in particular, Tecmed v. Mexico, icsid Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 122; Azurix v. Argentina, icsid Case No ARB/01/12, Award, 14 July 2006, paras. 311–312; Saipem v. Bangladesh, icsid Case No. ARB/05/07, Decision on jurisdiction and recommendation on provisional measures, 21 March 2007, paras. 130–132; and Total s.a. v. Argentina, icsid Case No ARB/04/1, 27 December 2010, especially paras. 128 and 134. 46 Spyridon Roussalis v. Romania, icsid Case No. ARB/06/1, Award, 7 December 2011. The Tribunal admitted ‘…the possibility that the international obligations of the Contracting States mentioned at Article 10 of the bit could include obligations deriving from multilateral instruments to which those states are parties, including, possibly, the European Convention of Human Rights and its Additional Protocol No. 1. But the issue is moot in the present case and does not require decision by the Tribunal, given the higher and more specific level of protection offered by the bit to the investors compared to the more general protections offered to them by the human rights instruments referred above. Consequently Article 10 of the bit cannot, in its own terms and in the instant case, serve as a useful instrument for enlarging the protections available to the Claimant from the Romanian State under the bit’ (para. 312). 47 See Biloune and Marine Drive Complex Ltd. v. Ghana Investments Centre and the Government of Ghana where the Tribunal decided that it ‘lack[ed] jurisdiction to address, as an independent cause of action, a claim of violation of human rights,’ uncitral, Award on jurisdiction and liability, 27 October 1989, 95 International Law Reports 184, 203; Foresti v. South Africa (icsid No. ARB(AF)/07/1, Award, 4 August 2010); and Rompetrol Group n.v. v. Romania, icsid No. ARB/06/3, Award, 6 May 2013, especially para. 172.

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According to Argentina, certain international rules on human rights needed to be integrated into the applicable law, in order to justify the legitimacy of the change in its domestic law which affected the investor unfavourably. The Tribunal of the Azurix case dismissed this claim stating ‘[t]he matter has not been fully argued and the Tribunal fails to understand the incompatibility in the specifics of the instant case.’48 Other tribunals have either ignored or refused Argentina’s claims to apply international rules contained in the 1966 un Covenant on Economic, Social and Cultural Rights or in the Inter-American Convention on Human Rights. In effect, the investment treaties, contracts and other relevant applicable legal sources in those proceedings did not provide for such integration and the arbitrators limited themselves to the letter of the law.49 In the edf case the Tribunal denied that the conduct of Argentina could be justified in accordance with international jus cogens norms ­concerning ‘…­basic human rights such as life, health, personal integrity and education, which were directly threatened by the socio-economic crisis suffered by Argentina.’50 In the Urbaser case the tribunal upheld the counterclaim of Argentina which aimed at establishing human rights obligations of the claimant investor, in accordance with international legal instruments such as the 1948 Declaration of Human Rights and the 1966 un Covenant on Economic, Social and Cultural Rights.51 Thus, the tribunal recognized that the activity of private investors might bring about breaches of international obligations of the host respondent State on human rights. The second category of cases relates to the arbitral tribunals that have dealt with the requests of one of the disputing parties to consider international obligations on the protection of the environment. The Myers case can be used as an example of the protection of the environment before an uncitral arbitral tribunal established to hear a nafta-based claim. The Tribunal considered the Basel Convention on the Control of Transboundary Movements of Hazardous Waste and their Disposal to establish whether Canada’s decision to prohibit the export of a contaminated waste for processing in the United States was 48 See Azurix v. Argentina, Award (see footnote 45) paras. 254 and 261. 49 See, for example, Suez, Sociedad General de Aguas de Barcelona, s.a. and Vivendi Universal, s.a. v. Argentina, icsid Case No. ARB/03/19, Decision on Liability, 30 July 2010, para. 262; saur v. Argentina, icsid Case No. ARB/04/4, Decision on jurisdiction and liability, 6 June 2012, especially paras. 328–332. See also Sempra Energy International v. Argentina, icsid Case No. ARB/02/16, Award, 28 September 2007, especially paras. 331–332. 50 See edf v. Argentina, icsid Case No. ARB/03/23, Award, 11 June 2012, especially paras. 909–914. 51 Urbaser s.a. et al. v. Argentina, icsid Case No. ARB/07/26, Award, 8 December 2016, paras. 1193–1199.

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a legitimate measure under such a Convention, rather than a discriminatory treatment against American companies that wanted to operate in Canada.52 The Tribunal denied that the Convention might prevail over ‘Canada’s international commitments under the nafta’ and a breach of nafta art. 1102 on national treatment had been committed.53 The Tribunal, however, chose to apply a mutual supportive interpretative method to construe the relationship between the nafta Treaty and the protection of the environment.54 In the Maffezini case the icsid arbitral Tribunal referred to the Convention on Environmental Impact Assessment in a Transboundary Context to underline that an environmental impact assessment was required under different legal applicable instruments, that is Spanish and eu laws, as well as international law.55 In the Chemtura case the uncitral Tribunal admitted that the change of host State’s domestic law was justified by its obligations under the 1998 Aarhus Protocol on Persistent Organic Pollutants to the 1979 Convention Long-range Transboundary Air Pollution.56 In the Glamis case the uncitral Tribunal instead did not accept the host State’s request to justify the alleged detrimental change in its domestic law under a number of unesco Conventions and Declarations.57 The third category relates to the arbitral tribunals that have dealt with the relevance of international obligations related to the protection of cultural sites. In the spp case, the respondent State, Egypt, maintained its ­entitlement to cancel the claimant’s investment, the ‘Pyramids Oasis Project,’ b­ ecause of its implementation of the 1972 unesco Convention concerning the 52 53 54

55 56 57

Myers v. Canada, nafta/uncitral Arbitration, Partial Award, 13 November 2000, paras. 209–217. See the Partial Award, para. 255. See the Partial Award, para. 220 which runs as follows: ‘[t]he Preamble to the nafta, the naaec and the international agreements affirmed in the naaec suggest that specific provisions of the nafta should be interpreted in light of the following general principles: • Parties 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; • Parties should avoid creating distortions to trade; • environmental protection and economic development can and should be mutually supportive.’ Emilio Agustín Maffezini v. Spain, icsid Case No. ARB/97/7, Award, 13 November 2000, especially para. 67. Chemtura v. Canada, nafta/uncitral/pca Arbitration, Award, 2 August 2010, para. 131. Glamis Gold Ltd. v. the United States, nafta/uncitral Arbitration, Award, 8 June 2009. In particular, see the Counter-memorial of the Respondent United States, 19 September 2006, 33 et seq. For a general overview of investment arbitral cases related to the environment, see Jeff Sullivan, Valeriya Kirsey, ‘Environmental Policies: A Shield or a Sword in Investment Arbitration?’ (2017) 18 The Journal of World Investment & Trade 100 et seq.

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‘­Protection of the World Cultural and Natural Heritage.’ Egypt believed that the ­cancellation was not an act of expropriation and hence compensation was not due. The icsid Tribunal – established in accordance with an icsid clause in an Egypt’s domestic law – rejected this argument because the project had ­begun before the ‘pyramid field’ had been included ‘in the inventory of property to be protected in the unesco Convention.’58 However, the Tribunal took into consideration the respondent State’s obligations under the Convention to mitigate the calculation of compensation, by denying the application of the ‘discounted cash flow’ (dfc) method.59 In the more recent Parkerings case the ­Tribunal ­attributed a specific importance to the definition of a protected area by u ­ nesco in light of the archaeological concerns at stake.60 The fourth category relates to the arbitral tribunals established to settle the cases regarding a change in the domestic law of the host State which aimed to safeguard one specific non-investment concern related to sustainable development. The main issue for the tribunals has been to establish if such a change had amounted to a ‘regulatory taking’ and had therefore to be compensated. An example are the cases where Argentina attempted to justify the change in its domestic law as an implementation of international obligations upon such a State in relation to the protection of human rights. The cases on water tariff regulation that have already been mentioned are particularly important. Certain scholars show that these cases have arisen not only because of international normative conflicts, but also because of regulatory failures in the host State’s domestic law implementing its international obligations related to non-investment matters.61 A change in the host state’s domestic law directed to the safeguard of the access to water was also at stake in the cases Aguas

58 See icsid Case No. AF/84/3, Award on the merits, 20 May 1992, paras. 150–154. 59 See the Award on the merits, paras. 189–191, 246 and 251. 60 See Parkerings v. Lithuania, icsid Case No. ARB/05/8, Award, 11 September 2007, paras. 382–383. 61 See Alberto Alvarez-Jiménez, ‘Foreign Investment Protection and Regulatory Failures as State’s Contribution to the State of Necessity under Customary International Law’ (2010) 27 Journal of International Arbitration 141 et seq. By referring to the case Gami Investments Inc. v. Mexico (uncitral/nafta, Final Award, 15 November 2014, especially paras. 93–94), the author underlines that in certain cases the tribunals had to ascertain if a regulatory failure in the host State’s domestic law was acceptable on account of the reasonable diligence and absence of corruption of such a State, as well as on account of the assumption that regulatory mistakes might be acceptable in view of the complexity of the modern regulatory State, especially 147–149.

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del Tunari,62 Bayview Irrigation District,63 Biwater64 and Urbaser.65 These cases were related to foreign investments in water and/or sewage services. A few tribunals acknowledged the human rights implications of this kind of investments. Such implications derived from the fact that the satisfaction of a basic need, through the access to clean water sources, was at stake in these cases.66 However, it is important that the arbitral tribunal of the Urbaser case has pointed out that the respondent host State cannot ‘demonstrate’ that the alleged breach of this right ‘[…] entails a duty of reparation equally based on international law, with the effect that the individuals concerned by such an alleged harm obtain an appropriate compensation.’ This is due to regulatory diversification and also to ‘the lack of any legal ground based on international law that would entitle a group of individuals to raise a claim for performance for delivery of water and sewage services directed against a company or any other private party.’67 Other Tribunals had to ascertain whether a change in the domestic law of the host State, which aimed to safeguard one specific non-investment concern related to sustainable development, had amounted to a ‘regulatory taking’ and therefore warranted compensation. The Chemtura68 and Methanex69 cases are important examples, which concerned a change in the domestic law of the 62 See Aguas del Tunari v. Bolivia, icsid Case No. ARB/02/3. 63 See Bayview Irrigation District et al. v. Mexico, icsid Case No. ARB(AF)/05/1, Award, 19 June 2007. 64 See Biwater Gauff (Tanzania), Ltd. v. Tanzania, icsid Case No. ARB/05/22, Award, 24 July 2008. 65 See footnote 51. 66 See, for instance, the Biwater case (especially para. 379 of the Award, footnote 64). In the Urbaser case the tribunal concluded that the ‘[r]espondent does not state any legal ground for any individual’s right to claim damages as a consequence of an alleged violation of the human right to water’ (para. 1220 of the Award, footnote 51). Notwithstanding it, the tribunal accorded a mitigation of the determination of the legal fees and costs of the respondent host State, by establishing ‘in light of its discretionary power’ that ‘each Party shall bear its own legal fees and costs […] and its contribution to the costs of icsid incurred during the merit phase’ (para. 1233 of the Award, footnote 51). On the speciality of foreign investments in water resources, see Ana Maria Daza-Clark, International Investment Law and Water Resources Management (Brill, Nijhoff, Leiden New York, Boston, 2016) especially 17 et seq.; Julien Chaisse (ed.), The Regulation of the Global Water Services Market (Cambridge University Press, Cambridge, 2017). 67 See para. 1220 of the Award (footnote 51). 68 See footnote 56. 69 Methanex Corp. v. The United States, nafta/uncitral Arbitration, Final Award on jurisdiction and merits, 3 August 2005.

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host State consisting of the prohibition of harmful substances, respectively a pesticide and a particular component of gasoline. In these cases, the respondent States were successful in demonstrating that the change in the law was not a ‘regulatory taking’ because it was directed to the protection of the environment and health and no compensation was due. In addition, there have been two cases brought before arbitral investment treaty-based tribunals by Philip Morris because of a change in the host state’s domestic law directed to tobacco control for the protection of public health. The Framework Convention on Tobacco Control concluded in 2003 within the framework of the World Health Organization has been used by both Australia and Uruguay to justify their domestic laws providing for ‘Tobacco Plain Packaging’ to the detriment of the claimant’s trademarks.70 In both cases the claimants were not successful. The case against Australia failed on the jurisdiction,71 whereas the case against Uruguay went into the merits. This tribunal decided that the domestic antitobacco legislation, which Uruguay had enacted for the implementation of the Framework Convention on Tobacco Control when the claimants had already made their investment, was not ‘arbitrary and unnecessary’ but rather […] potentially ‘effective means to protecting public health,’ […], in accordance with statements by the World Health Organization and by the Pan American Health Organization (paho). In the case against Uruguay the tribunal also acknowledges the ‘police powers’ approach by establishing that the enactment of the domestic anti-tobacco legislation was ‘a valid exercise by Uruguay of its police powers for the protection of public health.’72 The Concurring and Dissident Opinion by Arbitrator Gary Born ‘makes clear that Uruguay possesses broad and unquestioned sovereign powers to protect the health of its population, both in the context of tobacco regulation and otherwise’ and that ‘[n]othing in the bit prevents Uruguay from exercising these powers.’73 The fifth category includes cases related to the consideration of the contribution of a foreign investment to the host State’s development to define the 70 See Philip Morris Brands Sarl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Uruguay, icsid Case No. ARB/10/7, Memorial on Jurisdiction, especially paras. 13–19, 130133, 149–152, 171; and Philip Morris Asia Ltd. v. Australia, uncitral/pca Case No. 2012 – 12, Australia’s response to the notice of arbitration, 21 December 2011, in particular paras. 16–17. Australia asserted that its ‘Plain Packaging’ law was a legitimate public health measure in accordance with its international obligations on human rights. 71 The Philip Morris Asia v. Australia uncitral (Award on Jurisdiction and Admissibility, dismissed, 17 December 2015). 72 See Award, 8 July 2016, paras. 306–307. 73 See the Concurring and Dissident Opinion by Arbitrator Gary Born, 28 June 2016, especially paras. 90 and 197.

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relevant concept of investment for the ascertainment of the jurisdiction of a treaty-based arbitration tribunal. A number of icsid tribunals referred to this element as essential,74 whereas others denied its relevance.75 Procedural issues related to sustainable development have been brought in relation to public participation in decision-making processes concerning the safeguard of public interests, such as the access to water and land management by indigenous peoples. The icsid Arbitration Rules were amended with the  inclusion of arts. 36 and 37 in 2006, in order to allow third parties ­participation and amici curiae submissions, as well as to improve the transparency and openness of icisd arbitration proceedings. icsid arbitral tribunals have however been cautious in admitting such a participation. A few tribunals have admitted amici curiae briefs or petitions by ngos or representatives of civil society, but not their requests of attending the hearings of the case.76 Other ­tribunals have denied third parties participation77 or have not taken

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See, in particular, Consortium r.f.c.c. v. Morocco, icsid Case No. ARB/00/6, Decision on Jurisdiction, 16 July 2001, para. 65; Malaysian Historical Salvors v. Malaysia, icsid Case No. ARB/05/10, Award on Jurisdiction, 17 May 2007, para. 111; and Mitchell v. Congo, icsid Case No. ARB/99/7, Decision on the Application for the Annulment of the Award, 1 November 2006, para. 33. See, in particular, l.e.s.i.-dipenta v. Algeria, icsid Case No. ARB/03/08, Award, 10 January 2005, para. 13(iv); Bayindir v. Pakistan, icsid Case No. ARB/03/29, Decision on Jurisdiction, 14 November 2005, paras. 131–137; l.e.s.i. & astaldi v. Algeria, icsid Case No.  ARB/05/3, Decision, 12 July 2006, para. 72(iv); and Víctor Pey Casado and President ­Allende Foundation v. Chile, icsid Case No. ARB/98/2, Award, 8 May 2008, para. 233. In the Suez, Sociedad General de Aguas de Barcelona, s.a. and Vivendi Universal, s.a. v. Argentina case (footnote 49) the Tribunal admitted an amici curiae submission by five non-governmental organizations that aimed to show the relevance of the international obligations on human rights of Argentina within the arbitral proceedings. In the Bernhard von Pezold and Others v. Zimbabwe and Border Timbers Ltd. and ­Others v. Zimbabwe cases (icsid Case No ARB/10/15) the icsid Tribunal found that the ­petitioners – a group of ngos – did not have a ‘significant interest in the proceeding.’ The Tribunal did not admit the request of the petitioners to make a submission as amici curiae because, in their opinions, the cases ‘…raise[d] critical questions of international human rights law, which engage[d] both the duty of the Zimbabwean state and the ­responsibility of the investor company, with regard to the affected indigenous peoples.’ See the Procedural Order No. 2, 26 June 2012, in particular para. 61. The petitioners also aimed to protect the capacity of local indigenous peoples to manage the land where they lived and the exploitation of local natural resources in accordance with the un D ­ eclaration on the Rights of Indigenous Peoples. The Tribunal denied the relevance of such a Declaration in the arbitral proceedings (see the Procedural Order No. 2, especially paras. 58–59).

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their briefs or p ­ etitions into consideration in order to decide the cases.78 International investment treaties would reflect a pro-sustainable development approach, if they include a clause on public participation, that is third parties participation and/or amici curiae submissions, when an investment arbitration case arises from a conflict of interests related to a non-investment ­concern. These procedural innovations would facilitate the realization of sustainable development in terms of good governance. 6 Conclusion Although inconsistency is still predominant, a number of inferences can be drawn from the attitude of relevant actors, such as competent international organizations and the eu, and from looking at international investment treaties and investment treaty-based arbitration case-law. First, there are new international investment treaties that promote sustainable development through the inclusion of special provisions and the safeguard of the host State’s regulatory space. Canada and the eu have concluded many of these treaties. Second, a relevant number of arbitral tribunals have dealt with the protection of certain non-investment concerns related to sustainable development. Third, transparency and openness in arbitral proceedings have increased. In addition, there is an on-going policy shift from the typical private-law dimension to a public-law dimension of arbitral proceedings. According to a few scholars, this is due to the popularity of investment treaty-based arbitration, in particular of icsid arbitration, arising from the practice of ‘arbitration without privity.’ This practice has increased the probability that an investment treaty-based arbitral tribunal end up dealing with public interests and political choices of host States, when non-investment concerns are raised in a dispute.79 Other scholars point out that conflicts of interests between a host State and a 78

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See, for example, the Glamis v. The United States case (at footnote 57). The Tribunal c­ onfined itself to the ‘letter of the law’ of the nafta Treaty that was at the base of its jurisdiction and did not refer to other international rules, as requested by a group of interested non-disputing parties (para. 8). For a general overview, see Katia Fach Gómez, ‘Rethinking the Role of Amicus Curiae in International Investment Arbitration: How to Draw the Line Favorably for the Public Interest’ (2011–2012) 35 Fordham International Law Journal especially 534 et seq. See Yannick Radi, ‘International Investment Law and Development: A History of Two Concepts,’ in Stephan W. Schill, Christian J. Tams, Rainer Hofmann (eds.), International Investment Law and Development (Edward Elgar Publishing, Cheltnam, 2015) 69 et seq.

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foreign investor arise because of ‘the enhanced effectiveness and considerably expanded scope of application of international investment law.’80 On-going regulatory changes have been occurring not only because of the outcomes of specific treaty-based investment arbitration proceedings, such as the Chemtura81 case (leading to the review of the Canadian Model bit in 2004) or the Methanex and Glamis Gold82 cases (paving the way for the us Model bits in 2004 and again in 2012). Other decisive factors are the rise of the eu as a new influential player in this field and the political shift in the approach of States and international organizations to international investment law. As the political consensus is no longer focusing only on the protection of a foreign investor’s interests, an open issue is to understand whether international investment law should still be framed as a protective regime. Conflicts of interests and of rules can arise in relation to the choice made by the arbitrators on the applicable rules and the interpretative criteria used in a specific case, because the legal diversification and the interplay of a variety of actors, interests and concerns still characterize international investment law. A ­revision of the international legal framework on the relation between development needs and investment protection, based on the mainstream of sustainable development into the international legal framework on investment would ­contribute to dealing with legal diversification. Such a revision would address most ­political risks that undermine the relationship between host States and foreign investors. These risks tend to emerge in arbitration proceedings and mainly concern the weight of certain non-investment concerns, as well as the alleged lack of transparency and participation of the proceedings. Scholars tend to differ in their proposals. Some tend to agree that the promotion of sustainable development within international investment law ­depends on the inclusion of policy flexibility and incentives through special clauses.83 Others underline that a respondent State might rely on its 80

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See Karsten Nowrot, ‘How to Include Environmental Protection, Human Rights and Sustainability in International Investment Law’ (2014) 15 Journal of World Investment & Trade 622. Chemtura v. Canada (at footnote 56). Glamis v. The United States (at footnote 57). See Markus W. Gehring, Andrew Newcombe, ‘An Introduction to Sustainable Development in World Investment Law,’ in Marie-Claire Cordonier Segger, Markus W. Gehring, Andrew Newcombe (eds.), Sustainable Development in World Investment Law (Wolters Kluwer, ah Alphen aan den Rijn, 2011) 6; Margot E. Salomon, ‘From nieo to Now’ (see footnote 4) 43; Anne van Aacken, ‘Smart Flexibility Clauses in International Investment Treaties and Sustainable Development’ (2014) 15 Journal of World Investment & Trade ­especially 858–861.

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international ­obligations related to non-investment matters as a justification for the alleged detrimental treatment of a foreign investor through counterclaims within a­ rbitration proceedings.84 Others propose to review the balance of ­interests between foreign investors and host States.85 In effect, as shown above, a ­relevant number of States and the eu are experimenting with a new approach to treaty design. These actors aim at adjusting the legal and policy frameworks, by coordinating international treaty obligations on the protection of foreign investments and on the safeguard of certain non-investment concerns. This approach would harmonize the relevance of some of such concerns for the application of a fair and equitable treatment standard clause in international investment treaties and of stabilization clauses in contracts between foreign investors and host States. Health, labour rights, the environment and the conservation, use and management of natural resources are emerging as public policy priorities relating to sustainable development. Their safeguard might become a prime concern in international investment law if the on-going political shift and the new drafting trends described above will lead to a reorientation in treaty practice directed to preserve adequate regulatory spaces for public policies. This would bring about less State exposure to investment litigation.86 To achieve the ultimate goal of reconciling economic interests and non-investment concerns through a revision of the balance of interests typical of international ­investment treaties, new proposals for negotiations of a multilateral treaty or 84 85

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See Alessandra Asteriti, ‘Environmental Law in Investment Arbitration: Procedural Means of Incorporation’ (2015) 16 Journal of World Investment & Trade especially 271–273. See Karsten Nowrot, ‘How to Include’ (at footnote 80), especially 644; and Faraz Rojid, Maria del Carmen Vasquez, ‘Investment Law and Poverty’ (at footnote 9), who underline that the enhancement of the promotional aspects of international investment agreements would enhance the social function of foreign direct investment as a tool for development (especially 907). Cf. Phillippe Sands, Jacqueline Peel with Adriana Fabra and Ruth MacKenzie, Principles of International Environmental Law (3rd edn., cup, Cambridge, 2012) especially 215–217; Francesco Francioni, ‘Revisiting Sustainable Development in Light of General Principles of International Environmental Law,’ in Marise Cremona, Peter Hilpold, Nikolaos ­Lavranos, Stefan Staiger Schneider, Andreas Ziegler (eds.), Reflections on the Constitutionalisation of International Economic Law. Liber Amicorum for Ernst-Ulrich Petersmann (­Martinus Nijhoff Publishers, Leiden, Boston, 2014) 475 et seq. As to the persistent prevalence of the economic and financial dimension of development, see Fabiano de Andrade Correa, ‘The Rio +20 Conference and International Law: towards a multi-layered multilateralism?’ (2012) 50 Archiv des Völkerrechts especially 502; Margot E. Salomon, ‘From nieo to Now’ (see footnote 4) especially 52–53; Catharine Titi, The Right to Regulate in International Investment Law (Nomos, Baden-Baden, 2014) especially p. 123 et seq.

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a ­coherent ­network of regional investment agreements would be desirable.87 That appears to be the idea of the eu Commission, which heralds a ‘new deal’ in international investment law through multilateralism and improvements of the current legal framework.88 These improvements would relate, on the one hand, to the ­settlement of investor-State disputes through the ­establishment of a permanent investment court and, on the other, to the protection of the ‘right to regulate’ and the definition of controversial typical treaty clauses, such as those on the relevant concept of investment and the fair and equitable treatment standard. Multilateral rules could harmonize relevant non-investment concerns, such as the access to basic services, the protection of health and of the environment, as exceptions in case of a political, social and economic turmoil.89 This would allow multilateral rules to settle potential norm conflicts which have arisen in some arbitral proceedings. Multilateral rules could also reduce the number of disputes arising from conflicts between diverse interests due to the interpretation and application of international treaties related to non-­ investment concerns or of different bits in force connected by treaty provisions referring to the most-favoured-nation (mfn) treatment standard. One of the questions to be answered is whether principles at the root of sustainable development already incorporated in a number of international treaties and acts of un international organizations related to non-investment 87

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Cf. Rafael Leal-Arcas, ‘Towards the Multilateralization of International Investment Law’ (2009) 10 Journal of World Investment & Trade 865 et seq.; Rafael Leal-Arcas, ‘Proliferation of Regional Trade Agreements: Complementing or Supplanting Multilateralism?’ (2010–2011) 11 Chicago Journal of International Law 597 et seq.; Chien-Huei Wu, ‘Foreign Direct Investment as Common Commercial Policy: eu External Economic Competence after Lisbon,’ in Paul James Cardwell (ed.), eu External Relations Law and Policy in the Post-Lisbon Era (Springer, The Hague, 2012) especially 392–393; Nicolette Butler, ‘Possible Improvements to the Framework of International Investment Arbitration’ (2013) 14 ­Journal of World Investment & Trade especially 624–631; Pia Acconci, ‘The Integration of Non-investment Concerns as an Opportunity for the Modernization of International ­Investment Law: Is a Multilateral Approach Desirable?’ in Giorgio Sacerdoti, Pia Acconci, Mara Valenti, Anna De Luca (eds.), General Interests of Host States in International I­ nvestment Law (cup, Cambridge, 2014) especially 185–187. In its 2010 Communication named ‘[t]owards a comprehensive European international investment policy,’ in relation to ‘further developments of the common investment ­policy,’ the Commission states that ‘…the feasibility of a multilateral initiative could be further considered in the long term’ (see footnote 28, at 7). See Barnali Choudury, ‘Exception Provisions as a Gateway to the Incorporation of Human Rights in International Investment Law’ (2011) 49 Columbia Journal of Transnational Law especially 677–678.

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issues might be included in specific provisions of a multilateral investment treaty and/or regional investment agreements. Some of these principles, such as that of common, but differentiated, responsibilities, or the precautionary principle, would widen the margin of appreciation of host States, as well as the discretionary powers of arbitrators. The resort to the integration principle through a regulatory approach might be one solution. The international investment treaty-based arbitration case-law shows that important, even if inconsistent, attempts have been made towards integration at the judicial level through the reference to certain general principles, such as good faith and proportionality,90 and/or the application, through importation from other legal regimes, of international obligations on the protection of certain noninvestment concerns. As an alternative to negotiations for a multilateral treaty, other multilateral approaches, such as State consultations for the adoption of general or specific model guidelines for recurring issues arisen in the practice, might be desirable.91 A number of international investment agreements, in particular many of those concluded by the eu, provide for the establishment of a joint committee with the competence of adopting interpretations of their provisions. These joint interpretations are binding upon any arbitral tribunal established in accordance with such agreements.92 The definition of investment appears one of the specific issues that may be taken into consideration in this connection. A new conceptualization of 90

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Cf. Tarcisio Gazzini, ‘General Principles of Law in the Field of Foreign Investment’ (2009) 10 Journal of World Investment & Trade 103 et seq. On the importance of general principles of law within the international legal framework on investment, see also the other contributions to this book, in particular those by Maria Beatrice Deli and Attila Tanzi. See Kelley Connolly, ‘Say What You Mean: Improved Drafting Resources as a Means for Increasing the Consistency of Interpretation of Bilateral Investment Treaties’ (2007) 40 Vanderbilt Journal of Transnational Law 1579 et seq., who believes that the unctad may constitute the appropriate international organization to promote consistency of interpretation by arbitrators through, for example, ‘a compilation of key terminology in ­international treaties’ (especially 1600–1609). As to the idea of ‘multilateralization through interpretation,’ see Stephan W. Schill, The Multilateralization of International I­ nvestment Law (cup, Cambridge, 2009) especially 278–361. See, among others, the 2007 asean Comprehensive Investment Agreement, art. 40.3; the 2010 fta between the eu, its Member States and South Korea, art. 15.1 (3); the 2012 trade agreement among the eu, its Member States, Colombia and Peru, art. 13.2(e); the 2013 fta between the eu and Singapore, art. 9.19 (3); the 2014 ceta, art. X.27; the Chapter on investment of the 2015 ttip draft text, art. 13.5¸and the 2015 fta between Australia and China, art. 9,7(3)(b).

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the issue of defining foreign investments could start from a developmentfriendly definition of investment, like a definition including a reference to the sustainable management of natural resources, such as land, and/or a definition ­excluding portfolio investments and short-term financial transactions, ­especially when the potential host State experiences financial instability, development problems and/or has taken a restrictive approach to foreign investments for the protection of the environment, public health or cultural heritage.93 A ­ nother recurring specific issue related to the realization of sustainable development that might be taken into consideration for the adoption of model guidelines is the participation of local communities and/or experts in the arbitral treaty-based proceedings when, for example, a dispute between a host State and a foreign investor affects the access to a public utility such as water, the management of land and/or a cultural/religious site.94 This has been shown to increase openness and transparency of such proceedings through the application of the principles of sustainable development on public participation and access to justice. When the relationship between a host State and a foreign investor concerns a sensitive issue, the same result might be achieved through the use of environmental and social impact assessment mechanisms during the pre-establishment phase.95 A multilateral approach might be useful to bring within the international legal framework pieces from the on-going debate on the typical pro-investor orientation of international investment law. This would be a step back to the spirit of the icsid Convention that aimed to depoliticize the international, legal and policy, climate on investment. At the time of its conclusion, the ­i csid Convention’s arbitration clauses were included in contracts. Today it is 93 94

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See Pia Acconci, ‘The Unexpected Development-friendly Definition of Investment in the 2013 idi Resolution’ (2013) The Italian Yearbook of International Law vol. xxiii, 69 et seq. See art. 9–26 of the investment chapter of the 2015 tpp Agreement. See also art. 1133 of the 1993 nafta Treaty and art. 25 of the 2015 revised Indian Model bit that admit the recourse to experts when a dispute between a Contracting State and an investor of another Contracting State concern ‘environmental, health, safety, technical or other scientific matters raised by a disputing party.’ See Ulrich Beyerlin, ‘Sustainable Use of Natural Resources. A Key to Combating ­Poverty’ (2003) 63 Zeitschrift für ausländisches öffentliches Recht und Völkerrecht 417 et  seq., especially 424. In favour of the introduction in international investment treaties of pre-­establishment environmental and social impact assessments, see J. Antony Van ­Duzer, Penelope Simons and Graham Mayeda, Integrating Sustainable Development into ­International Investment Agreements: A Guide for Developing Country Negotiators (­Commonwealth Secretariat, London, 2013) especially 268. Against see Alexandre de ­Gramont, ‘Book Review’ (2014) 15 Journal of World Investment & Trade 354.

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not common to base the jurisdiction of an investment arbitration tribunal on contracts. International treaties, in particular bilateral ones, are the common reference points. That is why a change in the usual treaty design through the attribution of more relevance to non-investment concerns at the root of sustainable development and a multilateral approach would make a difference in favour of depoliticization. A multilateral treaty would, in particular, mitigate the criticism to the alleged lack of legitimacy, transparency and democraticity of the international investment legal framework, because the entry into force of such a treaty would involve the ratifications by its Contracting Parties, as a rule by their Parliaments. The international investment legal framework would become more predictable and coherent. This would be a positive result. Another positive result might be the reduction of lengthy investment arbitrations due to the applicable law for arbitrators brought together in one legal instrument. Norm conflicts would be less likely.

Section 4 Selected Principles of Investment Law

∵

Chapter 14

Police Powers Doctrine and International Investment Law Catharine Titi Disagreement is endemic to the study of concepts so fluid and elusive as the state’s police powers. According to the so-called police powers doctrine, a measure that falls within the state’s police powers resulting in loss of property does not constitute an indirect expropriation, and, accordingly, does not give rise to an obligation to compensate. Despite the apparent propinquity of the state’s police power to its police force, the two are not coterminous. As Adam Smith pertinently remarked in his Lectures on Justice, Police, Revenue and Arms, the word ‘police’ ‘is originally derived from the Greek πολιτεία [politeia], which properly signified the policy of civil government’. The chapter explores the police powers doctrine in international investment law and inquires into its status as a general principle of law, as customary international law or as a concept displaying a different kind of timbre, ‘an eminently interpretative operation’ that belongs to the sphere of arbitral discretion.

A state is not responsible for loss of property or for other economic ­disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory. Restatement of the Law (Third) – Foreign Relations Law of the United States

I

Introduction: Setting the Scene

Disagreement is endemic to the study of concepts so fluid and elusive as the state’s police powers. According to the so-called police powers doctrine, a measure that falls within the state’s police powers resulting in loss of property does not constitute an indirect expropriation, and, accordingly, does not give rise to an obligation to compensate. Despite the apparent propinquity of the state’s police power to its police force, the two are not coterminous. As Adam Smith pertinently remarked in his 1763 Lectures on Justice, Police, Revenue and Arms, the word ‘police’ ‘is originally derived from the Greek πολιτεία [politeia], which © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_015

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properly signified the policy of civil government.’1 The state’s police powers then are emphatically not to be conflated with the state’s police force, nor should they be considered to appertain to the mere maintenance of public order. Rather, they are to be interpreted as pointing to a wider concept, i.e. the exercise of public policy. In principle, the state’s police powers include the ensemble of its sovereign powers relating to public policy, including the maintenance of public order, the protection of public health and the environment, and taxation.2 According to Black’s Law Dictionary, the state’s police power is the ‘power of the State to place restraints on the personal freedom and property rights of persons for the protection of the public safety, health, and morals or the promotion of the public convenience and general prosperity.’3 It is ‘the exercise of the sovereign right of a government to promote order, safety, security, health, morals and general welfare within constitutional limits and is an essential attribute of government.’4 Since Black’s Law Dictionary is a dictionary of ‘the Terms and Phrases of American and English Jurisprudence,’ it follows the common law jurisprudence on the police powers doctrine, with special regard to the us case law and practice.5 It may be recalled that a number of international investment agreements (iias) concluded by the United States expressly specify that exceptions for the maintenance of public order encompass measures taken in the pursuit of the host state’s police powers in order to ensure public health and safety.6 The exercise of the state’s police powers is clearly not unlimited.7 The doctrine is not a carte blanche for the state to act as it pleases. First, it is put about that its application is confined to some measures relating to the most serious issues of public policy. One may note that, while mention of public health and 1 Adam Smith, Lectures on Justice, Police, Revenue and Arms (Clarendon Press 1763, 1896) 154. 2 Catharine Titi, The Right to Regulate in International Investment Law (Nomos and Hart Publishing 2014) 281; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment T ­ reaties (Wolters Kluwer 2009) 358 et seq. 3 Black’s Law Dictionary (6th edn, West Publishing Co. 1990). Notice how this definition covers more than interferences with the right to property. 4 Ibid. 5 E.g. see Chicago & Alton R. Co. v. Tranbarger, 238 u.s. 67 (1915) 238 (‘The police power of the state […] embraces regulations designed to promote public convenience or general welfare as well as those in the interest of the public health, morals or safety’). 6 E.g. see letters of submittal of the us-Jamaica bit, us-Lithuania bit, and us-Mongolia bit. 7 Black’s Law Dictionary (n. 3). See further Marshall v. Kansas City, 355 S.W.2d 877 (Mo. 1962) 883 (‘In their very nature, neither the police power nor constitutional limitations can be absolute; they are necessarily relative and dependent’).

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safety is recurrent when referring to the state’s police powers, environmental protection is not so often mentioned. This does not prima facie allow for much predictability concerning the scope of police powers. Second, while some accept a strict application of the state’s police powers (every measure that falls within the identified policy areas is immune from a finding of indirect expropriation), a new tendency is developing towards a ‘mitigated’ police powers doctrine, whereby other elements, such as a balancing of interests, are combined with the traditional strict approach.8 Third, the doctrine covers only the ‘reasonable,’9 good faith and non-discriminatory exercise of police power. Recognition of the state’s police powers has a long pedigree.10 As early as 1915, the United States’ Supreme Court found that ‘[t]he police power of the state cannot be abdicated nor bargained away, is inalienable even by express grant, and all contract and property rights are held subject to its fair exercise.’11 At the international level, the police powers doctrine started to gain currency in the second half of the 20th century. Federico Garcia Amador’s Fourth ­Report on the law of State responsibility to the International Law Commission (ilc) in 1959 expressly acknowledged the concept at hand.12 So did the 1961 Harvard Draft Convention on the International Responsibility of States,13 the

8

9 10 11 12 13

See below text accompanying footnotes n. 57 and 78. The term ‘mitigated’ police powers doctrine is borrowed from Gebhard Bücheler, Proportionality in Investor-State Arbitration (oup 2015) 129–132. Bischoff Case, 1903, unriaa, VOLUME x, 420. E.g. Bischoff Case, 1903, unriaa, VOLUME x, 420; Chicago & Alton R. Co. v. Tranbarger, 238 u.s. 67 (1915), with citations of case law. Chicago & Alton R. Co. v. Tranbarger, 238 u.s. 67 (1915) 238. ilc Yearbook 1959, Vol. ii, published in 1960, State Responsibility, Fourth report by F.V. Garcia Amador, Special Rapporteur, A/CN.4/119, paras 43, 46, 133. Article 10(5) of the Draft Convention on the International Responsibility of States for Injuries to Aliens, prepared by the Harvard Law School, 1961 (‘An uncompensated taking of property of an alien or a deprivation of the use or enjoyment 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 belligerent rights; or is otherwise incidental to the normal operation of the laws of the State shall not be considered wrongful, provided: (a) it is not a clear and discriminatory violation of the law of the State concerned; (b) it is not the result of a violation of any provision of Articles 6 to 8 of this Convention; (c) it is not an unreasonable departure from the principles of justice recognized by the principal legal systems of the world; and (d) it is not an abuse of the powers specified in this paragraph for the purpose of depriving an alien of his property’).

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American Law Institute’s Restatement of the Law (Second) in 196514 and then its ­Restatement of the Law (Third), cited at the opening of this chapter.15 Soon the state’s police powers found recognition in investment case law, ­including by the Iran-us Claims Tribunal,16 in which some indications emerged that the doctrine applies as part of general international law. The authority usually invoked to that end is the Partial Award in Saluka v. Czech Republic. There, the tribunal found that: the principle that a State does not commit an expropriation and is thus not liable to pay compensation to a dispossessed alien investor when it adopts general regulations that are ‘commonly accepted as within the police power of States’ forms part of customary international law today.17 In order to determine whether a measure has a regulatory character and falls within the police powers, vel non, the tribunal must consider the state’s ­intention in adopting it. Like the Saluka tribunal, legal scholarship for the most part concedes the customary international law status of the state’s ­police ­powers.18 But does the Saluka tribunal’s ‘principle’ that ‘forms part of ­customary

14

15 16

17

18

Alain Pellet, ‘Police Powers or the State’s Right to Regulate’ in Meg Kinnear et al. (eds), Building International Investment Law – The First 50 Years of icsid (Kluwer Law International 2016) 451. The Restatement of the Law (Fourth) does not appear to touch upon Part vii of the ­Restatement (Third), which details the police powers doctrine. E.g. Emanuel Too v. Greater Modesto Insurance Associates and the United States of America, Case no. 880, Award, 29 December 1989, 23 Iran-us Claims Tribunal Reports 378 (1991), para. 26. Saluka Investments bv v Czech Republic, uncitral, Partial Award, 17 March 2006, para. 262. See also Veijo Heiskanen, ‘The Doctrine of Indirect Expropriation in Light of the Practice of the Iran-United States Claims Tribunal’ (2007) 8 jwit, 215, 218. E.g. Newcombe and Paradell (n. 2) 358; Jorge E. Viñuales, ‘Sovereignty in Foreign Investment Law,’ in Zachary Douglas et al. (eds), Foundations of International Investment Law (oup 2014) 329, 344; Pellet (n. 14) 449; Sabrina Robert-Cuendet, Droits de l’investisseur étranger et protection de l’environnement : Contribution à l’analyse de l’expropriation indirecte (Martinus Nijhoff 2010) 260. Contra: Matthew C. Porterfield, State Practice and the (Purported) Obligation under Customary International Law to Provide Compensation for Regulatory Expropriations, (2011) 37 North Carolina Journal of International Law and Commercial Regulation 159, 164–165 (‘There is also some support for the position that there is a police power exception to the compensation requirement. […] This appears, however, to be a minority view.’).

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international law today’ mean that investment tribunals recognise the police powers doctrine either as customary international law or as a general principle of law within the meaning of Article 38(1)(c) of the Statute of the International Court of Justice (icj)? The present chapter addresses the police powers doctrine in light of evolving arbitral case law and treaty-drafting with respect to the expropriation s­ tandard. It identifies how investment tribunals treat the doctrine, but it is b­ eyond its scope to ponder the question of whether the police powers ­doctrine actually constitutes customary international law or a general principle of law. This would require an enquiry into the presence of a general ­practice of states based on the perception of legal obligation (opinio iuris); ­alternatively, a comparative study of municipal legal systems or at the very least relevance under international law to establish its status as a general principle.19 Some such studies – not dealing directly with the police powers doctrine but with indirect takings – already exist and tend to underline the disparity of national approaches.20 The remainder of this chapter proceeds in three parts. The first part explicates competing concepts in the determination of an indirect ­expropriation, notably the Hull doctrine, the sole effect doctrine, and proportionality analysis. The second part turns to the police powers doctrine in a­ rbitral case law and its incorporation in new generation investment ­agreements. The third part summarises the argument and details further considerations, foregrounding a purported shift of the status of the police powers doctrine from an interpretive tool at the hands of the adjudicator to something arguably constituting customary international law.

19

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Giorgio Gaja, ‘General Principles of Law,’ (2013) Max Planck Encyclopedia of Public International Law, 2013 (online version), paras 17–19, 32; Hugh Thirlway, ‘The Sources of International Law’ in M. Evans (ed.), International Law (4th ed., oup 2014) 105. Cf. Attila Tanzi, Introduzione al diritto internazionale contemporaneo (5th ed., Wolters Kluwer and cedam 2016) 115; Anastasios Gourgourinis, ‘General/Particular International Law and ­Primary/Secondary Rules: Unitary Terminology of a Fragmented System’ (2011) 22 ejil 993, 1008–1009. E.g. see in general Rachelle Alterman, ‘Comparative Analysis: A Platform for Cross-­ National Learning,’ in Rachelle Alterman (ed.), Takings International: A Comparative Perspective on Land Use Regulations and Compensation Rights (American Bar Association 2010) (‘The laws and practices related to regulatory takings vary greatly around the world,’ p. 21); Porterfield (n. 18) passim.

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Competing Doctrines: Hull Formula, Sole Effect and Proportionality

Although the police powers doctrine claims the status of customary international law, three other doctrines are competing with it in toto (sole effect ­doctrine) or in part (Hull formula and proportionality). This begs the question: if the police powers doctrine is customary international law, what are the Hull formula, the sole effect doctrine and proportionality analysis, at least to the extent of their incompatibility with the police powers doctrine? This section enquires into the extent to which legal practice and investment tribunals have aligned themselves with these three competing approaches, which are now considered in chronological order. 1 The Hull Formula The Hull formula emerged in the context of Mexican agrarian expropriations which affected properties owned by us citizens in the first half of the last century. Cordell Hull, the United States Secretary of State, engaged in a series of diplomatic exchanges with Mexico expressing the us position. This eventually became known as the Hull formula, although Mexico never accepted the us position.21 According to Hull, ‘under every rule of law and equity, no government is entitled to expropriate private property, for whatever purpose, without provision for prompt, adequate, and effective payment therefor.’22 The significance of the specification ‘for whatever purpose’ lies in its affinity with the sole effect doctrine and its rejection of the police powers’ doctrine which ‘­excuses’ state conduct when taken to promote certain public policy objectives. Hull ­further suggested that ‘the principle of just compensation’ was ingrained in the constitutions of ‘almost all nations’ and qualified it as a ‘[universally accepted] rule of the law of nations.’23 He considered that no government can ‘nullify this universally accepted principle of international law, based as it is on reason, equity and justice.’24 In line with the Hull formula, un General ­Assembly Resolution 1803 (xvii) of 14 December 1962 (Permanent sovereignty over natural resources) affirmed that in cases of expropriation, ‘the owner shall be paid appropriate compensation, in accordance with the rules in force in the State

21 22 23 24

On the Hull formula, see Andreas F. Lowenfeld, International Economic Law (2nd edition, oup 2008) 475–476. Ibid., p. 478, emphasis added. Ibid. Ibid., p. 476.

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taking such measures in the exercise of its sovereignty and in accordance with international law.’25 Despite Mexico’s – and other developing countries’ – resistance, the Hull formula was broadly incorporated in later international investment treaties. It should be stressed that Mexico’s disagreement did not concern whether or not compensation was due for an expropriation but the standard applicable to the quantum.26 The general principle that compensation should follow expropriation became ‘a firmly established customary rule,’27 and a fulcrum of the protection of alien citizens and of their properties. The Hull formula’s requirement for payment of ‘prompt, adequate and effective’ compensation continues to be inserted in iias, including in the us model bilateral investment treaty (bit),28 the Trans-Pacific Partnership (tpp),29 and the eu-Canada Comprehensive Economic and Trade Agreement (ceta).30 More often than not, even when treaties do not expressly use the ‘prompt, adequate and effective’ proviso, such as in the case of the North American Free Trade Agreement (nafta), the presence of the Hull formula is indisputable.31 2 The Sole Effect Doctrine While the Hull formula focuses on the type of compensation due for an expropriation, the sole effect doctrine relates to the determination of an indirect expropriation and it is the direct antithesis of the police powers doctrine.32 ­According to the sole effect doctrine, the effect of the state measure is the litmus test that allows the tribunal to determine whether an indirect expropriation has taken place. The intent of the state in adopting the measure is 25 26 27

28 29 30 31

32

Paragraph 4 of un ga Resolution 1803 (xvii) of 14 December 1962. Newcombe and Paradell (n. 2) 18. Pellet (n. 14) 448. Contra: Francesco Francioni, ‘Equity in International Law,’ (2013) Max Planck Encyclopedia of International Law (online version), para. 24 (‘Equity has been a powerful consideration in the softening of the hard and fast rule requiring the payment of prompt, adequate and effective compensation […]’). It is possible that the author here in fact refers to the absolute obligation of compensating the investor, rather than the actual ‘prompt, adequate and effective’ manner of this compensation. Article 6(1) of the us model bit. Article 9.8(1) of tpp. Article 8.12(1) of ceta. E.g. see Article 1110, especially paragraphs 2 and 3, of the nafta; Article 10(2) and (3) of the Canadian model bit (updated version of 2012). Compare these provisions with Article 9.8(2) of tpp, which includes very similar language to ‘explain’ the Hull formula enounced in Article 9.8(1) of tpp. Titi (n. 2) 281. Cf. Heiskanen (n. 17) 217–218.

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irrelevant. In contrast with the professed customary international law foundations of the state’s police powers, the sole effect doctrine in its modern form appears to originate in the jurisprudence of the Iran-us Claims Tribunal.33 In Tippetts, the Iran-us Claims Tribunal held that ‘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.’34 However, the Iran-us Claims Tribunal has sometimes adopted the police powers doctrine.35 The sole effect doctrine has also been upheld in a number of other investment disputes. The Santa Elena v. Costa Rica case, an icsid dispute related to a direct expropriation for conservation purposes, is worth citing. The tribunal considered that: Expropriatory environmental measures – no matter how laudable and beneficial to society as a whole – are, in this respect, similar to any other expropriatory measures that a state may take in order to implement its policies: where property is expropriated, even for environmental purposes, whether domestic or international, the state’s obligation to pay ­compensation remains.36 In Metalclad v. Mexico, the tribunal decided that ‘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.’37 In Vivendi v. Argentina, the tribunal found ‘extensive authority for the proposition that the state’s intent, or its subjective motives are at most a secondary consideration,’ and added that ‘the effect of the measure on the investor, not the state’s intent, is the critical 33 34

35 36 37

Heiskanen (n. 17) 218. Tippetts, Abbett, McCarthy, Stratton v. tams-affa Consulting Engineers of Iran et al., Case no. 7, Award 141-7-2, 22 June 1984, 6 iran-us Claims Tribunal Reports 219 (1984) 225–226. See in general Heiskanen (n. 17). Compañia del Desarrollo de Santa Elena, s.a. v. Costa Rica, icsid Case No. ARB/96/1, Final Award, 17 February 2000, para. 72. Metalclad Corporation v. Mexico, icsid Case No. ARB(AF)/97/1, Award, 30 August 2000, para. 103, emphasis added.

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factor.’38 In Spyridon Roussalis v. Romania, the tribunal, which however found no relevant violation of the iia, concurred that ‘the key question’ to decide whether there has been an indirect expropriation is the effect of the measure, whereas the state’s intention is relevant but not decisive.39 In Pope & Talbot v. Canada, the tribunal reasoned that Article 1110 of the ­n afta ‘does cover nondiscriminatory regulation that might be said to fall within an exercise of a state’s so-called police powers.’40 However, in casu, the tribunal found that the regulatory measures did not constitute ‘an interference with the Investment’s business activities substantial enough to be ­characterized as an expropriation under international law.’41 Elsewhere, the tribunal noted that ‘a blanket exception for regulatory measures would create a gaping loophole in international protections against expropriation.’42 And there lies the rub; this observation coheres with a critique of the police powers doctrine in its absolute form,43 which has led to its softening in new iias and recent arbitral case law. In Azurix v. Argentina, the tribunal reasoned that the criterion that bona fide regulation within the police powers of the state does not give rise to liability for the investor’s economic injury is insufficient. It held that: [T]he issue is not so much whether the measure concerned is legitimate and serves a public purpose, but whether it is a measure that, being ­legitimate and serving a public purpose, should give rise to a compensation claim. In the exercise of their public policy function, governments take all sorts of measures that may affect the economic value of investments without such measures giving rise to a need to compensate. The tribunal in S.D. Myers found the purpose of a regulatory measure a helpful criterion to distinguish measures for which a State would not be l­iable: ‘­Parties [to the Bilateral Treaty] are not liable for economic injury that is the consequence of bona fide regulation within the accepted police ­powers of the State.’ This Tribunal finds the criterion insufficient and shares the concern expressed by Judge R. Higgins, who questioned 38 39 40 41 42 43

Compañía de Aguas del Aconquija s.a. and Vivendi Universal s.a. v. Argentina, icsid Case No. ARB/97/3, Award, 20 August 2007, para. 7.5.20, emphasis in the original. Spyridon Roussalis v. Romania, icsid Case No. ARB/06/1, Award, 7 December 2011, paras 328, 330. Pope & Talbot Inc v. Canada, Interim Award, 26 June 2000, para. 96. Ibid., 96 et seq. Ibid., para. 99. Pellet (n. 14) 458; Bücheler (n. 8) 128–129.

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whether the difference between expropriation and regulation based on public purpose was intellectually viable […].44 By the same token, the Azurix tribunal criticised the police powers doctrine for leading to ‘contradictory’ arguments. While according to the iia a lawful expropriation requires a public purpose and compensation, according to the police powers doctrine ‘regulatory measures that may be tantamount to ­expropriation would not give rise to a claim for compensation if taken for a public purpose.’45 This is another recurrent critique of the police powers d­ octrine in its absolute form,46 which seems to de facto confine the requirements for lawfulness of an expropriation and the Hull formula to direct forms of expropriation. The tribunal however did consider that elements drawn from the jurisprudence of the ECtHR, notably a proportionality test, could offer useful guidance to help it decide whether ‘regulatory’ measures amount to compensable expropriation.47 In this respect, its stance is tempered by this new element and bears testimony to the fact that, over the years, the sole effect doctrine has given way to the police powers doctrine and proportionality. In a similar vein, in Tecmed v. Mexico, the tribunal reasoned that: The principle that the State’s exercise of its sovereign powers within the framework of its police power may cause economic damage to those ­subject to its powers as administrator without entitling them to any compensation whatsoever is undisputable.48 But the tribunal found: no principle stating that regulatory administrative actions are per se ­excluded from the scope of the Agreement, even if they are beneficial to society as a whole – such as environmental protection –, particularly if the negative economic impact of such actions on the financial position of the investor is sufficient to neutralize in full the value, or economic or 44 45

46 47 48

Azurix Corp. v. Argentina, icsid Case No. ARB/01/12, Award, 14 July 2006, para. 310. Ibid., para. 311. This dilemma can be mitigated by drawing the distinction between direct and indirect expropriation, whereby the criteria for lawfulness only apply to direct expropriations. E.g. see Bücheler (n. 8) 128. Azurix Corp. v. Argentina, icsid Case No. ARB/01/12, Award, 14 July 2006, paras 311–312. See Técnicas Medioambientales Tecmed s.a. v. Mexico, icsid Case No. arb (AF)/00/2, Award, 29 May 2003, para. 119.

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commercial use of its investment without receiving any compensation whatsoever.49 3 Proportionality The Azurix and Tecmed awards, while broadly following the sole effect doctrine, are part of a relatively new trend towards introducing proportionality reasoning to determine the presence of a compensable expropriation. For i­nstance, in Tecmed v. Mexico, the tribunal held that in addition to the state measures’ negative financial effect on the investor, it should also take into account whether these measures were ‘proportional to the public interest presumably protected thereby and to the protection legally granted to investments.’50 It added that it was necessary for there to be ‘a reasonable relationship of ­proportionality between the charge or weight imposed to (sic) the foreign ­investor and the aim sought to be realized by any expropriatory measure.’51 References to proportionality are also found in Burlington Resources v. Ecuador,52 and in Philip Morris v. Uruguay.53 But recourse to proportionality analysis by investment tribunals should not be overrated. For example, the Tecmed tribunal remarked that to proceed to  the required balancing of interests ‘it is very important to measure the size of the ownership deprivation caused by the actions of the state and whether such deprivation was compensated or not,’ thus essentially relying on the ­effect of the measures.54 Nevertheless, to the extent that tribunals are ­applying a proportionality test, it means that they are not applying the police powers d­ octrine in its strict form. Consider the following case: in Fireman’s Fund v. Mexico, the state’s police powers figured as one among several criteria – ­including notably proportionality – that may be taken into account in order to determine if there had been an indirect expropriation.55 The abovementioned

49 50 51 52 53 54 55

Ibid., para. 121. Ibid., para. 122. Ibid. Burlington Resources Inc. v. Ecuador, icsid Case No. ARB/08/5, Decision on Liability, 14 December 2012, para. 504. Philip Morris Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Uruguay, icsid Case No. ARB/10/7, Award, 8 July 2016, passim. Técnicas Medioambientales Tecmed s.a. v. Mexico, icsid Case No. arb (AF)/00/2, Award, 29 May 2003, para. 122. Fireman’s Fund Insurance Company v. Mexico, icsid Case No. ARB(AF)/02/01, Award, 17 July 2006, para. 176.

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Philip ­Morris ­tribunal both referred to proportionality and considered that the police ­powers doctrine is part of customary international law.56 Proportionality analysis may be compatible with a ‘mitigated’ police powers doctrine (see below) but by no means should it be deemed to be synonymous with it.57 In reality, resort to proportionality raises several questions for the police powers calculus. For instance, is proportionality a general principle of law, and if it is – or if it is not – how does that affect the doctrine of police powers? Two doctrines or two general principles could apply simultaneously and moderate each other. The issue becomes more complex to the extent that some new iias, such as ceta and investment treaties concluded by Canada, include some elements of proportionality.58 III

The Police Powers Doctrine

While the tides of popularity of these competing doctrines have ebbed and flowed, since the early 2000s a tendency has started to develop that increasingly decouples an indirect expropriation from the exercise of the state’s police powers. This is obvious both in the deference shown by investment tribunals to the state’s police powers and in recent investment treaty practice. These will now be considered in turn. 1 Investment Arbitration Certainly, some tribunals have paid mere lip service to the doctrine, invoking but not upholding it.59 However, it has been argued that even this repetition, if negative, contributed to fleshing out its content and anchoring it in international law.60 Some tribunals have taken account of the purpose of the state measure, without expressly referring to the state’s police powers. In Methanex v. United States, the tribunal considered that: [A]s a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due 56 57 58

59 60

Philip Morris Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Uruguay, icsid Case No. ARB/10/7, Award, 8 July 2016, para. 295. In one case the two terms are used as synonymous, see Bücheler (n. 8) 129–132. Catharine Titi, ‘Refining the Expropriation Clause: What Role for Proportionality?’ in ­Julien Chaisse (ed.) China-European Union Investment Relationships: Towards a New ­Leadership in Global Investment Governance? (cup forthcoming). Titi (2) 281 et seq. Pellet (n. 14) 452.

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­ rocess and, which affects, inter alios, a foreign investor or investment p is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.61 Other tribunals have been more unequivocal in their endorsement of the ­police powers doctrine. In Myers v. Canada, the tribunal held that ‘[t]he general body of precedent usually does not treat regulatory action as amounting to expropriation. Regulatory conduct by public authorities is unlikely to be the subject of legitimate complaint under Article 1110 of the nafta [­Expropriation and Compensation].’62 In Feldman v. Mexico, the tribunal ­considered that ‘­governments must be free to act in the broader public interest’ and that ­reasonable regulation ‘cannot be achieved if any business that is ­adversely ­affected may seek compensation.’ The tribunal added that this is also ­recognised in customary international law.63 To bolster its argument, it drew directly from the comments on the Restatement of the Law (Third),64 adding from the Reporter’s Notes that whether a state action ‘constitutes a taking and requires compensation under international law, or is a police ­power regulation or tax that does not give rise to an obligation to compensate even though a foreign national suffers loss as a consequence’ must be decided taking into account all circumstances,65 thus allowing for a softening of the strict application of the police powers doctrine. The Feldman tribunal posited further: [N]ot all government regulatory activity that makes it difficult or impossible for an investor to carry out a particular business, change in the law or change in the application of existing laws that makes it uneconomical to continue a particular business, is an expropriation […]. G ­ overnments, in their exercise of regulatory power, frequently change their laws and regulations in response to changing economic circumstances or changing political, economic or social considerations. Those changes may 61 62 63 64 65

Methanex Corporation v. United States, uncitral, Final Award on Jurisdiction and ­ erits, 3 August 2005, Part iv – Chapter D, para. 7. M S.D. Myers, Inc. v. Canada, uncitral, Partial Award, 13 November 2000, para. 281. Marvin Feldman v. Mexico, icsid Case No. ARB(AF)/99/1, Award, 16 December 2002, para. 103. Ibid., para. 105, citing the Restatement of the Law Third, Section 712, Comment g, p. 201. Ibid., para. 106, citing the Restatement of the Law Third, Section 712, Reporter’s Note 6, p. 211.

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well make certain activities less profitable or even uneconomic to continue.66 More recently, in Chemtura v. Canada, the tribunal held that measures taken by Canada’s Pest Management Regulatory Agency, ‘motivated by the increasing awareness of the dangers presented by lindane for human health and the environment,’ were ‘a valid exercise of the State’s police powers and, as a result, [did] not constitute an expropriation.’67 In awg v. Argentina, the tribunal held that it is important to recognise that the state can ‘exercise its police power in the interests of public welfare and not to confuse measures of that nature with expropriation.’68 It argued that ‘given the nature of the severe crisis facing the country, those general measures were within the general police powers of  the Argentine State,’ but significantly it added that the measures ‘did not constitute a permanent and substantial deprivation of the Claimants’ investments’; they ‘did not take or reduce the property rights’ of the investment or the investors.69 In other words, although the tribunal referred to the state’s police powers, its decision was based not so much on the fact that the deprivation of the investment was a valid exercise of the state’s police power, but that there was no substantial deprivation in the first place. In Quiborax, another case to draw on the Restatement, the tribunal agreed with the respondent that if the state measure were a ‘legitimate exercise of its sovereign right to sanction violations of the law in its territory, it would not qualify as a compensable taking. International law has generally understood that regulatory activity exercised under the so-called “police powers” of the State is not compensable.’70 A number of further tribunals have resorted to the state’s police powers and have expressly considered the doctrine to be embedded in international law.71

66 67 68

Ibid., para. 112. Chemtura Corporation v. Canada, uncitral, Award, 2 August 2010, para. 266. Suez, Sociedad General de Aguas de Barcelona s.a., and Vivendi Universal s.a. v. ­Argentina, icsid Case No. ARB/03/19, and Anglian Water Group (awg) v. Argentina, uncitral, Decision on Liability of 30 July 2010, para. 139. 69 Ibid., para. 140, emphasis added. 70 Quiborax s.a. and Non Metallic Minerals s.a. v. Bolivia, icsid Case No. ARB/06/2, Award, 16 September 2015, para. 202. 71 Lauder v. Czech Republic, uncitral, Final Award, 3 September 2001, paras 198 et seq.; Les Laboratoires Servier, s.a.s. Biofarma, s.a.s., Arts et Techniques du Progrès s.a.s. v. Poland, pca (uncitral), Final Award, 14 February 2012, para. 276; Renée Rose Levy de Levi v. Peru, icsid Case No. ARB/10/17, Award, 26 February 2014, para. 476; Philip Morris

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However, the question remains open whether the body of arbitral precedent considers that normatively the police powers doctrine is part of the applicable law, either because it forms part of customary international law or because it is recognised as a general principle of law. Certainly, there is an increased tendency to resort to the police powers doctrine, but in the words of the very Saluka tribunal: international law has yet to identify in a comprehensive and definitive fashion precisely what regulations are considered ‘permissible’ and ‘commonly accepted’ as falling within the police or regulatory power of States and, thus, non-compensable. In other words, it has yet to draw a bright and easily distinguishable line between non-compensable regulations on the one hand and, on the other, measures that have the effect of ­depriving foreign investors of their investment and are thus unlawful and ­compensable in international law. It thus inevitably falls to the adjudicator to determine whether particular conduct by a state ‘crosses the line’ that separates valid regulatory ­activity from expropriation.72 In another case, the Patrick Mitchell annulment committee rejected the argument that the tribunal’s adoption of the sole effect doctrine constituted a ground for annulment. It remarked: In any event, regardless of the various positions adopted in legal doctrine and case law on the question of determining whether the effect should be the sole and unique criterion to be used in assessing an indirect ­expropriation or a measure tantamount to expropriation, or whether the purpose sought by the State is also to be taken into account, it cannot but be found in the case at hand that the Arbitral Tribunal, in apparently opting for the ‘sole effect’ doctrine, was merely exercising its freedom of judgment.73

72 73

Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Uruguay, icsid Case No. ARB/10/7, Award, 8 July 2016, para. 295. Saluka Investments bv v Czech Republic, uncitral, Partial Award, 17 March 2006, paras 263–264, emphasis added. Mr Patrick Mitchell v. Congo, icsid Case No. ARB/99/7, Decision on the Application for Annulment of the Award, 1 November 2006 (hereinafter Patrick Mitchell Annulment), para. 54, emphasis added.

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More than ten years separate us from the Saluka Partial Award and the ­Patrick Mitchell Decision on Annulment. Is it conceivable that in the time that has elapsed a substantive change has been playing out, whereby increasing recourse to the police powers doctrine by investment tribunals, in combination with formulations in new iias, are helping the doctrine mutate towards a norm of customary international law? This topic will be revisited in the conclusion. 2 New Generation International Investment Agreements As some investment tribunals acknowledged the state’s police powers while still interpreting old generation investment treaties, the police powers doctrine started to make inroads in new iias. First, there are those investment agreements that concretely name the police powers, such as the Investment Agreement for the Common Investment Area of the Common Market for Eastern and Southern Africa (comesa), which provides in Article 20, paragraph 8: Consistent with the right of states to regulate and the customary international law principles on police powers (sic), bona fide regulatory ­measures taken by a Member State that are designed and applied to protect or enhance legitimate public welfare objectives, such as public health, safety and the environment, shall not constitute an indirect expropriation under this Article. Most treaties do not expressly cite the state’s police powers. For example, the us Model bit establishes that: Except in rare circumstances, non-discriminatory regulatory actions by a Party that are designed and applied to protect legitimate public welfare objectives, such as public health, safety, and the environment, do not constitute indirect expropriations.74 A very similar provision has been adopted in tpp.75 The eu-Canada ceta provides: For greater certainty, except in the rare circumstance when the impact of a measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare 74 75

Annex B of the us Model bit (2012). Annex 9-B of tpp.

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objectives, such as health, safety and the environment, do not constitute ­indirect expropriations.76 These clauses enshrine the police powers doctrine in the treaty text, albeit with slightly differing formulations. They establish a presumption in favour of the doctrine which shall apply ‘except in rare circumstances.’ The paragraphs ­typically preceding these provisions offer complementary guidance to determine an indirect expropriation. They list factors that need to be taken into account, including the extent to which the measure interferes with ‘distinct, reasonable investment-backed expectations’ and its ‘character.’77 Notably, they stipulate that the economic impact of the measure must also be considered, although the sole fact that a measure ‘has an adverse effect on the economic value of an investment’ or that the measure’s ‘adverse effect on the ­economic value of an investment, standing alone’ does not establish that an indirect ­expropriation has occurred.78 In this manner, new generation iias tend to ­expressly reject the sole effect doctrine and espouse the police powers doctrine in mitigated form. The relationship between the list of elements that need to be taken into account and the police powers clause proper has yet to be interpreted, but in practice one of the possible ways in which the list may be used will be to argue for the presence or absence of the rare circumstances that would allow ­derogation from the doctrine. A final consideration is that if the police powers doctrine is a general ­principle of international law, introducing such provisions may have been ­otiose – as may have been other treaty exceptions, including exceptions for essential ­security interests, public order and taxation measures, at least to the ­extent that they apply to the expropriation standard. In Philip Morris v. U ­ ruguay, where the applicable treaty was an old generation bit, the tribunal considered that these provisions in new treaties may have been adopted ex abundanti cautela but they reflect no less general international law.79 And abundans cautela is indeed necessary because even a tendency to recognise the police powers doctrine as customary international law is not a certainty that the tribunal will do so and the pendulum of its ‘popularity’ can swing back. 76 77 78 79

Annex 8-A of ceta. Annex B.10 of the Canadian Model bit (version updated in 2012) and Annex B of the us Model bit (2012). Respectively Annex 8-A of ceta and Annex B of the us Model bit (2012), emphasis added. Philip Morris Brands Sàrl, Philip Morris Products s.a. and Abal Hermanos s.a. v. Uruguay, icsid Case No. ARB/10/7, Award, 8 July 2016, para. 301.

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Conclusion and Further Considerations

Notwithstanding the Saluka tribunal’s confident assertion that the police ­ owers doctrine reflects customary international law, or the privileged posip tion that the doctrine occupies in legal scholarship,80 not much predisposes the innocent bystander to view it as a general principle of international law:81 the term ‘doctrine’ rather than principle is a first giveaway that sounds a note of caution. In a number of cases, such as in Metalclad v. Mexico and in Vivendi v. Argentina,82 tribunals have had no compunction about ignoring the state’s police powers and focusing instead on the measure’s effect on the foreign ­investor. If the police powers doctrine is customary international law, or a general principle of law, did these tribunals fail to apply the applicable law? Or has the doctrine of police powers failed to ‘truly survive bit codification,’83 and do investment treaties constitute contrary lex specialis? Answers to these questions can vary, particularly if one takes into account the introduction of the police powers doctrine – sometimes combined with other ‘doctrines’ such as proportionality – in new iias. One way of looking for answers to such questions, may involve research of practice and case law pertaining to bodies of international law other than ­investment law. There, special regard may be had to the European Court of Human Rights (ECtHR), which hears cases concerning the protection of property under Article 1 of the First Protocol to the European Convention on Human Rights (echr). Although this provision is dissimilar to expropriation clauses in investment treaties, the ECtHR could well invoke the police powers doctrine; but it does not. It resorts to proportionality analysis instead. On a singular occasion, the European Commission of Human Rights, seised of the Gasus Dosier- und Fördertechnik GmbH v. the Netherlands case, used reasoning that indirectly points to the police powers doctrine. It held that in casu the deprivation of property, which related to a seizure for the settlement of tax debts, ‘cannot be compared to those measures of confiscation, nationalisation of ­expropriation in regard to which international law provides special protection 80 81

82 83

See above text accompanying n. 18. For the avoidance of doubt, the chapter retains the distinction between the terms ‘general principle of law’ and ‘general principle of international law,’ see James Crawford, Brownlie’s Principles of Public International Law, (8th ed., oup 2012) 37; Gourgourinis (n. 19) 1008–1009. See above text accompanying n. 37–39. Daniel Kalderimis, ‘Investment Treaties and Public Goods,’ (2010) 7 Transnational Dispute Management 1, 11.

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to foreign citizens and companies.’84 Scholars have questioned whether the Commission’s approach reflects international law.85 The ECtHR avoided tackling the issue head-on and instead examined the petitioner’s complaints under the rule in the second paragraph of Article 1 of the First Protocol to the echr which expressly reserves ‘the right of Contracting States to pass such laws as they may deem necessary to secure the payment of taxes.’86 These elements sit uncomfortably with the argument that the police powers doctrine is part of customary international law or a general principle of law. Are some interpretations agnostic about the police powers doctrine because, as alluded to above, the echr and bits derogated from such customary law and general principles? Or is the content of the police powers doctrine so malleable, a chameleon amongst legal rules, that it can allow sometimes the application of the sole effect doctrine and sometimes its combination with a proportionality analysis, and still remain whole? And if its content is so adaptable, what core of the doctrine actually is customary international law, or a general principle of law? Or is the police powers doctrine a different kind of animal, displaying a different timbre; ‘an eminently interpretative operation’87 that  ­belongs to the sphere of arbitral discretion? Can its acceptance – or ­rejection – be arrived at through mere interpretive legerdemain? The broad cast of existing arbitral interpretations does not allow the assumption that the police powers doctrine will be treated as reflective of ­customary international law, or as a general principle of law. Normatively, to the extent that states wish it to apply, it is then best included in iias. But customary ­international law is evolutionary and even what is contra legem at a ­given point in time can later become ‘consonant to the law.’88 If investment tribunals do not universally apply the police powers doctrine, they increasingly tend to a­ cknowledge it. This trend shows that the doctrine may have ­conceivably started to solidify into customary international law, or at least into a principle of international investment law, displacing earlier contradictory doctrines (e.g. sole effect). But even if one agrees that the police powers doctrine is customary international law, this is saying very little about its concrete 84 85 86 87 88

European Commission of Human Rights, Application No. 15375/89, Gasus Dosier- und Fördertechnik GmbH v. The Netherlands, Report adopted on 21 October 1993, para. 63. Davis Harris et al., Law of the European Convention of Human Rights (3rd ed., oup 2014) 888. Case of Gasus Dosier- und Fördertechnik GmbH v. The Netherlands, Judgment, 23 February 1995, para. 59. Phrase borrowed from Francioni (n. 27), para. 21. Francioni (n. 27), para. 17.

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content and how it is to be applied. For instance, if the police power of the state is customary international law, sometimes expressly embedded in material law, then must it be applied qua embedded in the law? With the police powers doctrine emerge several other issues that have not been examined here. One such issue is whether the doctrine is relevant to standards beyond expropriation. The opinion has been expressed that the ­police powers doctrine is independent of the type of interference with the investment and that if it did not extend to standards beyond expropriation then it could be neutralised by investors’ bringing claims for violations of other standards, such as fair and equitable treatment.89 This point is reinforced when one considers that fair and equitable treatment appears to ‘encompass’ indirect ­expropriation.90 The habitual mode of reference to the doctrine, such as in the Restatement of the Law (Third) and especially its inclusion in new generation iias, seems to limit its application to loss of property, to wit expropriation, or at least economic disadvantage (but to exclude for example application to the national treatment or the most-favoured-nation treatment). This opinion was also adopted in Suez v. Argentina91 and it is endorsed in legal scholarship.92 Another issue is whether the police powers doctrine is a primary or a secondary rule of international law. The taxonomy of primary and secondary rules comes from the ilc’s work on international responsibility; primary rules are those imposing obligations on states (e.g. treaties), and secondary are the rules ‘covering the field of responsibility,’ those ‘concerned with determining the consequences of failure to fulfil obligations established by the primary rules.’93 If the police powers doctrine is a primary rule (and it certainly is a primary rule when incorporated in the treaty text), so long as it applies there is no violation of the treaty. If it is a secondary rule, then the question emerges whether the doctrine functions as a preclusion of responsibility (excuse) or a ­preclusion of wrongfulness (justification). And this is where the plot thickens. For example, while the Restatement of the Law (Third) provides that the state ‘is not ­responsible’ for loss of property or for other disadvantage resulting from 89 90

91

92 93

Viñuales (n. 18) 332, 344. Shotaro Hamamoto, ‘Requiem for Indirect Expropriation: On the Theoretical and Practical Uselessness of a Contested Concept,’ (2007) pilagg e-series/IA/1, https://papers.ssrn .com/sol3/papers.cfm?abstract_id=2666836. Suez, Sociedad General de Aguas de Barcelona s.a., and InterAgua Servicios Integrales del Agua s.a., v. Argentina, icsid Case No. ARB/03/17, Decision on Liability, 30 July 2010, para. 148 (et seq.) (‘[…] the application of the police powers doctrine as an explicit, affirmative defense to treaty claims other than for expropriation is inappropriate […]’). Pellet (n. 14) 457. International Law Commission, Yearbook, 1970, Vol. ii, p. 179.

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actions that fall within the exercise of its police powers,94 the Harvard Draft Convention refers to behaviour that is not considered wrongful.95 Even the ilc did not establish a clear distinction between that which belongs to the sphere of ­responsibility and that which relates to wrongfulness.96 Another issue concerns whether, if the police powers doctrine is a secondary rule, by analogy, it may be without prejudice to the question of compensation, according to Article 27 of the ilc Articles on State Responsibility. Several things are changing with respect to the police powers doctrine and it may be yet too early for reliable appraisals. Uncertainty and clashes of ­legal opinions may be inherent to the topic under examination, but it is probably closer to the mark to say that complex legal questions and evolutions in arbitral case law have supplied international investment law with its fabric. The emergence of concrete clauses on the police powers doctrine in new iias is partially the outcome of such debate in light of arbitral case law, and it is ­already changing the way the doctrine is perceived in international investment law. The new ‘codification’ gives reason to expect that the police powers doctrine will continue to feed into arbitral reasoning, very probably mitigated by insistence on ‘balancing’ elements. 94

See also Bischoff Case, 1903, unriaa, VOLUME x, p. 420 (‘Certainly during an epidemic of an infectious disease there can be no liability for the reasonable exercise of police power […]’). 95 Article 10(5) of the Harvard Draft Convention, cited above (n. 13). 96 E.g. ilc, Draft Articles on Responsibility of States for Internationally Wrongful Acts, with Commentaries, Report adopted at the ilc’s fifty-third session, Yearbook, 2001, Vol. ii, Part Two, Chapter v, Commentary, paras 2, 4, 7, 8, Commentary on Article 24, para. 5, 6, Commentary on Article 25, paras 2, 12. See further Lowe, V. (1999), Precluding Wrongfulness or Responsibility: A Plea for Excuses, ejil 10 (2), in general and especially p. 406.

Chapter 15

An Exercise in Equivocation: A Critique of Legitimate Expectations as a General Principle of Law under the Fair and Equitable Treatment Standard Josef Ostřanský* The notion of legitimate expectations has become considered the bedrock of the ­obligation to provide fair and equitable treatment (‘fet’) both in arbitral practice and in international investment law scholarship. Claimants invoke it in virtually all investment cases, and tribunals frame their decisions around this notion. This is despite the fact that the concept has rather unclear sources and juridical origins. However, the more recent accounts seem to accept the notion of legitimate of legitimate expectations as a general principle of law. This chapter starts with an overview of different sources and justifications of the protection of legitimate expectations in international investment law offered in case law and doctrine, focusing primarily on legitimate ­expectations as a general principle of law. Next, in line with the methodology of ­deriving general principles of law, a limited comparative overview of national conceptions of legitimate expectations as well as international law conceptions in other than ­investment protection contexts is presented. In this section, the rationales for and limitations on the protection of legitimate expectations in these other legal systems and regimes will be highlighted. Finally, the concept is analysed in the investment treaty arbitration case law. The main thesis of this contribution is that there is a significant disconnection between the justifications, functions, and contents of the conceptions of legitimate expectations in other than investment contexts, on the one hand, and the practice and doctrine of iil, on the other. Investment treaty arbitration case law shows that legitimate expectations are often used in a much more relaxed calibration; not as a residual and limited remedy, but rather as a core principle under fet or as an overarching argumentative framework for fet. This poses exacting constraints on the regulatory powers of the host State, which may be viewed as problematic due to the not so solid juridical basis of the notion when treated as a general principle of law.

* Lecturer at the Geneva ll.m. in International Dispute Settlement (mids); Researcher at the Geneva Center of International Dispute Settlement (cids).

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_016

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Introduction

Over the last roughly two decades, fair and equitable treatment (‘fet’) has d­ eveloped from a seldom, if at all, negotiated provision1 into a standard with a breath-taking breadth. This is despite the fact that the treaty formulations have hardly changed. It has become a ubiquitous claim in investment arbitration. It is resorted to in virtually all investment cases. And it can be safely said that it is the most successful head of investment claims.2 Although fet’s precise contours and normative content are not entirely clear and are still debated, it seems that certain statements about its juridical nature can be taken for granted: • It is a non-contingent standard, connoting a minimum threshold standard; • It is not limited to a bad-faith conduct, hence it is an objective standard; • It is independent from the level protection accorded on the national level, ie it is an international standard. Clearly, these statements do not get us very far in ascertaining the true meaning of fet, let alone in the application of the standard to the facts of a case. There have been numerous scholarly attempts to define fet by a unified legal principle, such as good faith,3 the rule of law and good governance,4 or justice.5 All these are problematic and none of them is entirely coherent.6 Hence it is better to view the fet standard as composed of several elements of protection. 1 E.g. Prof Scheuer’s expert statement in Wintershall Aktiengesellschaft v. Argentine Republic, icsid Case No. ARB/04/14, Award, 8 Dec 2008, para 85. 2 unctad, Fair and Equitable Treatment: A Sequel, unctad Series on Issues in International Investment Agreements ii (New York, Geneva 2012) 1. 3 T Grierson-Weiler, I Liard, ‘Standards of Treatment’ (2008) in Muchlinski (et al.) eds., The Oxford Handbook of International Investment Law, 272; R Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ 39 (2005) International Lawyer 1, 87, 91. 4 K Vandevelde, ‘A Unified Theory of Fair and Equitable Treatment,’ 43 (2010) nyu Journal of International Law and Politics 43, 49; S Schill, ‘Fair and Equitable Treatment, the Rule of Law, and Comparative Public Law’ (2010) in Schill (ed) International Investment Law and Comparative Public Law, 151. 5 R Kläger, Fair and Equitable Treatment in International Investment Law (cup 2013) 153. 6 Bonnitcha argues that good faith fails to explain the fet as an objective standard not ­dependent on whether respondent acted in good faith; the rule of law, itself a contestable concept, fails to explain why a reasoned change in policy arrived at through lawful and reasoned procedures can violate the fet; and finally, justice, an inherently contestable concept, fails to explain many aspects of arbitral practice, such as the protection of expectations or why distributive social welfare objectives, a typical objectives of any theory of justice, do not

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Recent scholarly accounts also came to different conclusions about the j­uridical content of fet depending on what methodology they used. For ­instance, according to Dolzer and Schreuer, fet protects (1) stability and legitimate expectations, (2) transparency, (3) compliance with contrac­ tual o­ bligations, (4) procedural propriety and due process, (5) good faith, (6) ­freedom from coercion and harassment.7 Bonnitcha’s functional division ­includes (1) legitimate expectations, (2) procedural aspects, (3) examination of substantive justification, (4) discrimination.8 Paparinskis’s traditional inductive method leads him to dividing the content of fet into (1) administration of justice and (2) protection of property, which further includes arbitrariness, due process, transparency, discrimination, good faith, expectations.9 We see that in all cases, the protection of expectations is included in the list. This chapter starts with an overview of different sources and justifications of the protection of legitimate expectations (‘les’) in international investment law (‘iil’) offered in case law and doctrine, while focusing primarily on les as a general principle of law. Next, a comparative overview of national conceptions of les as well as international law conceptions in other than the investment protection context is presented. In this section, the rationales for and limitations on the protection of les in these other legal systems and regimes will be highlighted. Then, the concept is analysed in the investment treaty arbitration (‘ita’) case law. The main thesis of this contribution is that there is a significant disconnection between the justifications, functions, and contents of the conceptions of les in other than iil contexts, on the one hand, and the practice and doctrine of iil, on the other. Investment treaty arbitration case law shows that les are often used in a much more relaxed calibration; not as a residual and limited remedy, but rather as a core principle under fet or as an overarching ­argumentative framework for fet. This poses exacting constraints on the regulatory powers of the host State, which may be viewed as problematic due to the not so solid juridical basis of the notion of les. This contribution is first of two on the subject of les in international investment law. The second forthcoming paper will thoroughly examine the possible justifications which may be offered for this enhanced version of les used in play role in arbitral decision-making. See J Bonnitcha, Substantive Protection under Investment Treaties: A Legal and Economic Analysis (cup 2014) 164. 7 R Dolzer, Ch Schreuer, Principles of International Investment Law, 2nd Ed. (oup 2012) 145–160. 8 Bonnitcha (n 7) 2014, 166. 9 M Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (oup 2013) 181–259.

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the iil context. Based on such examination, the companion paper will also offer a restatement of the conception of les for iil, which is coherent with the common justificatory principles as well as with the architecture and purposes of iil.

Sources and Origins of Legitimate Expectations in International Investment Law

‘In order to ascertain what a thing is, it is sometimes very useful to begin by enquiring what it is not.’ Although Sir Gerald Fitzmaurice stated this in the context of discussing legal capacities of the newly formed United Nations, the negative approach to determining the nature of les in iil is perhaps the next best thing to do. Some authors have suggested that les have found their way into iil and fet as a general principle of law. Others have attempted to conceptualize them through an analogy with international obligations created by unilateral acts of States, yet others have accepted les as part and parcel of fet mostly through their use in arbitral practice. Finally, some authors take an issue with les as part of fet altogether. Thus, there have been four basic approaches in the commentary and practice of investment tribunals to justify les in iil.

Legitimate Expectations as Customary and Conventional International Law In comparison with other elements of fet, such as procedural propriety, due process, prohibition of arbitrariness, discrimination and sovereign interference into State contracts, the protection of les is not clearly rooted in the ­traditional State practice.10 It is true that certain states have recently accepted 10

See e.g. George W. Cook (u.s.a.) v. United Mexican States, (1930) Volume iv, riaa 593, the claim related to the collection of real estate tax, which were, Cook argued, exempted through a special statutory exemption. The Governor of the State of Jalisco offered to Cook that if he, Cook, built a modern building on his property, the Governor would ­recommend to the State Legislature that the said property be exempt from the corresponding real estate tax. After the claimant construed the building in 1906 and 1907, the State Congress enacted in 1909, legislation which exempted the property in question ‘from the payment of the corresponding real estate tax for a period of twenty years.’ In 1917, the State Legislature of Jalisco added to budget of Municipality of Jalisco a tax of 0.02% annually upon urban property. The Municipality went on to collect the tax, the payment of which Cook refused. The Commissioner held that as the exempting 1909 act was adopted after the construction of the edifice, hence it cannot be said that it served as

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les as part of fet in their submissions.11 One should not, however, make much of this acceptance by a few disparate states in the context of arbitration proceedings. Aside from this, the new generation of treaties that specify and detail the content of fet include reference to les.12 However, these treaties clearly state that a tribunal should merely: [T]ake into account whether a Party made a specific representation to an investor to induce an investment […], that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain that investment, but that Party subsequently frustrated.13 These treaties do not view les as a self-standing element of fet.14 They, nevertheless, show that the notion has certainly gained traction and acceptance in some quarters. But they still do not explain the emergence before and beyond these limited treaty iterations and it certainly does not support the ­prominence of les as a prevailing element of liability under fet. Legitimate Expectations as a Creation of Arbitral Practice Early investment arbitration cases seem to adopt the view that the source of the expectations as a protected object are the expectations per se.15 These ­cases a basis for construing the building. The mere promise of the Governor cannot have a force of exemption, neither can it be said that it has created any right in favour of the claimant. Importantly, the exempting act of the legislature of 1909 cannot invest a contractual right in the claimant. Such as exemption was ‘simply an act of liberality on the part of that branch of the State’; 594; See also Paparinskis, International Minimum Standard (n 10) 255; Ch Campbell, ‘House of Cards: The Relevance of Legitimate Expectations under Fair and Equitable Treatment Provisions in Investment Treaty Law,’ (2013) Journal of International Arbitration 4, 361; P Dumberry, The Fair and Equitable Treatment Standard: A Guide to nafta Case Law on Article 1105 (Wolters Kluwer 2013), 158–159. 11 Plama Consortium Limited v Bulgaria, icsid Case No ARB/03/24, Award, 27 Aug 2008, para 175; mtd Equity Sdn. Bhv. v Chile, icsid Case No ARB/01/07, Decision on Annulment, 21 Mar 2007, para 69; Frontier Petroleum Services Ltd v Czech Republic, uncitral, Final Award, 12 Nov 2010, para 279. 12 E.g. eu-Canada The Comprehensive Economic and Trade Agreement (ceta), August 2014 Version, Section 4, Art X.9; eu-Vietnam fta, Trade in Services, Investment and ECommerce, Chapter ii, Art 14(6). Both not yet in force. 13 eu-Vietnam fta, Art 14(6). 14 Compare with elements in ibid., Art 14(2). 15 Técnicas Medioambientales Tecmed, s.a. v. The United Mexican States, icsid Case No. arb (AF)/00/2, Award, 29 May 2003, para 154; mtd Equity Sdn. Bhd. and mtd Chile s.a. v. Republic of Chile, icsid Case No. ARB/01/7, Award, 25 May 2004, para 180; cms Gas

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did not cite any previous authority for their reference to les (apart from the general principle of good faith), and rather read it into the applicable treaty. Later cases picked up on their pronouncements and suddenly we are faced with ‘established jurisprudence on les.’16 To be sure, this practice also relates to other controversial concepts that have simply ‘appeared’ in arbitral decisions and then have been accepted by subsequent tribunals and authors.17 Such an approach works a self-fulfilling prophecy, and includes a certain degree of circularity. The fact that tribunals later in time refer to previous ones to uphold similar legal reasoning, often without the requisite analysis and  ­attention to the context and circumstances of those earlier cases may hold as an empirical observation. Yet, it does not explain the normative force of these pronouncements as a matter of law, as long as they are not explained in terms of the traditional theory of sources and interpretation or by reference to the first principles.18 This approach does not hold water as a matter of legal methodology for determining the normative and juridical status of a legal concept, let alone explaining its content.19 It goes against the basic scriptures of international law making. Unless one is willing to accept outright that investment tribunals’

16

17

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19

­Transmission Company v. The Republic of Argentina, icsid Case No. ARB/01/8, Award, 12 May 2005, para 279; Azurix Corp. v. The Argentine Republic, icsid Case No. ARB/01/12, Award, 14 July 2006, para 372. A recent tribunal went as far as stating that ‘the most important function of the fair and equitable treatment is the protection of the investor’s reasonable and legitimate expectations’; Electrabel s.a. v Republic of Hungary, icsid Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 Nov 2012, para 7.75, further Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, icsid Case No. ARB/05/22, 24 Jul 2008, para 602, lg&e Energy Corp., lg&e Capital Corp., and lg&e International, Inc .v. Argentine Republic, icsid Case No. ARB/02/1 127; Decision on Liability, 3 Oct 2006, para 102; mtd v. Chile, Award, para 114, Occidental Petroleum and Production Co. v The Republic of Ecuador, lcia Case No un 3467, Final Award, 1 Jul 2004, para 185, cms v. Argentina, Award, para 279. E.g. compound interest, damages for non-expropriatory breaches, admissibility of shareholders’ claims, see JE Viñuales, ‘The Sources of International Investment Law: Theoretical Foundations of Unruly Practices’ in Besson, d’Aspremont (eds), The Oxford Handbook on the Sources of International Law (oup forthcoming 2017), D Bentolila, Arbitrators as Lawmakers (Wolters Kluwer 2017). Viñuales states that many anomalies in the practice of investment arbitration are explicable through the prism of traditional theory of sources, thus the theory retains its ­ explanatory as well as normative traction. Viñuales, ‘Sources,’ vi. A Roberts, ‘The Power and Persuasion in International Investment Arbitration: The Dual Role of States,’ (2010) 104 ajil 179, 189–191; Campbell, ‘House of Cards’ (n 11).

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pronouncements are sources of law, this theory cannot explain the origin of les in iil.20 In all fairness, more recent cases provided more clarity as to the grounds and contours of the notion of les.21 They have attempted to provide a normative anchoring that the concept has theretofore been lacking. More importantly, the cases have attempted to provide juridical foundations to les as a general principle of law, not as a creation of arbitral practice. Legitimate Expectations as Unilateral Declarations This theory holds that certain representations of the State towards foreign investors can create international obligation through unilateral acts of the State.22 There are several problems with this proposition. It is problematic ­because the method of unilateral declarations creates an obligation on the inter-State level as a new obligation,23 while in the case of les, the conduct of the State is considered becoming part of the content of an existing obligation, that is, fet. Usually, under the typical isds provision which limits jurisdiction of the tribunal to the obligations under the treaty, such an obligation might not even be within the tribunal’s jurisdiction.24 Furthermore, even when assuming that the beneficiary of the obligation may be an individual,25 unilateral declarations in general international law create effects at the international level, thus they bind the State only when declared by officials having the capacity to bind the State internationally. This is not the case with situations in iil, where the effects in the absolute m ­ ajority are to 20

Some authors that adopt the view of international arbitration as an autonomous legal order argue that arbitrators function as law-makers in this legal order. Bentolila, Arbitrators as Lawmakers. 21 Notably International Thunderbird Gaming Corporation v. The United Mexican States, ­u ncitral, Separate Opinion of Prof Wälde, Dec 2005; or recently Total s.a. v. The Argentine Republic, icsid Case No. ARB/04/01, Decision on Liability, 27 Dec 2010. 22 WM Reisman, MH Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law in Investment Disputes’ in P-M Dupuy et al. (eds), Common Values in International Law: Essays in Honour of Christian Tomuschat (2006) 409; Nuclear Tests Case (New Zealand v. France), Judgment, i.c.j. Reports 1974, p. 457, para. 46. 23 ilc, ‘Guiding principles applicable to unilateral declarations of States capable of creating legal obligations,’ Adopted by the International Law Commission at its 58th session in 2006 together with commentaries thereto (ilc Report, A/61/10, 2006, Chapter ix), para 1, 4. 24 Paparinskis, International Minimum Standard, 252. 25 The commentary to the ilc ‘Guiding principles applicable to unilateral declarations,’ para 6, does not lend much support to this view; doubts where expressed also by Total v. Argentina, para 132.

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be within the host State jurisdiction, effects as to the legality of certain projects, permits, authorizations etc. The officials implicated are generally those that have as their competence the domestic regulatory area within which the investment is carried out, such as environmental or construction a­ uthorities. The fact that the addressee is a foreigner does not change anything. Hence, the analogy does not really fit. To be fair, Reisman and Arsanjani do not refer specifically to the type of situations typically resolved through the use of les in treaty arbitrations; as they refer to ‘campaigns […] conducted either at the national level or abroad through diplomatic or consular channels, or through agencies and lobbyists and even through promotions via the Internet.’26 This type of statement, as to its content, would probably only create expectations that the State is encouraging investment. However, this type of expectation will be irrelevant to the conduct of agencies charged with the approval of investment, its maintenance etc. In other words, it would be irrelevant to the assessment of the conduct that the investor is actually complaining of.27 Additionally, the unilateral declarations analogy would create a bizarre situation when a unilateral statement towards an investor may create a selfstanding international legal obligation. While an agreement embodied in a contract may not, except in the presence of an umbrella clause or a stabilization clause. This conceptualization lacks explanatory force, and practice of investment treaty arbitration virtually never explains the normative standing of les in terms of unilateral declarations.28 For the sake of completeness, one should also mention that international law dictates restrictive interpretation of unilateral declarations,29 which would also go against the grain of practice of investment treaty tribunals. Legitimate Expectations as a General Principle of Law A more persuasive view is that les form a general principle of law. There are two ways to conceptualize the notion as a general principle of law.

26 27

28 29

Reisman, Arsanjani, ‘The Question of Unilateral Governmental Statements as Applicable Law,’ 410. See the discussion in William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v. Government of Canada, uncitral, pca Case No. 2009-04, 17 Mar 2015, Dissenting Opinion of D McRae, para 33–34. One tribunal viewed considerations of unilateral declarations ‘relevant,’ yet did not apply them to the case of investor’s expectations; Total v. Argentina, para 131–134. ilc ‘Guiding principles applicable to unilateral declarations,’ para 7.

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Firstly, one can attempt to analogise the doctrine of les to other similar principles, such as estoppel. This analogy has been recognized as problematic because estoppel presupposes interaction between equal parties, i.e. it is a private law doctrine.30 The main reason for the inadequacy of estoppel as a doctrine of public law is that public authorities’ activities are based on specific grants of power and are subjected to the requirement of legality. The requirement of legality secures that important public interests embodied in the ­procedures and powers of the authorities are respected; applying estoppel against public bodies goes against the doctrine of legality, thus ultimately against the public interests enshrined in the legal prescriptions binding upon the authority. In domestic public law, this explains the move towards the functionally similar, but structurally different principle of les. Adding a layer of international law making enhances the problematic nature of the analogy with estoppel in the context of iil. Even if we assume that the investment obligations are owed directly to the investors,31 they would ­represent ‘the only relevant international law relationship between the State and the investor (human rights aside),’32 created through traditional t­reaty and customary law-making processes. In other words, the involvement of the ­investor’s home State is essential (in the sense of the other indispensable law-­maker). When using estoppel, it is hard to imagine it as an interpretative ­doctrine, because when solving an fet claim, the tribunal is concerned with the interpretation of an international treaty standard and its application to the facts. Either way, tribunals admitted the similarity with the doctrine of les but never conceptualised it as an incarnation of estoppel.33 The second strand sees les as a stand-alone general principle, as a separate source of law under Art. 38 of the icj Statute. les work here as a self-­standing element of fet, or they assist interpretation and application of the  rule.

30 31

See e.g. E Ventose, Commonwealth Caribbean Administrative Law (Routledge 2013) 196. The present author does not subscribe to the view that investment treaties create direct substantive rights in the investors, see J Ostřanský, ‘The Termination and Suspension of Bilateral Investment Treaties due to an Armed Conflict’ (2015) 6 (1) jids 136. 32 Paparinskis, International Minimum Standard, 253. 33 Duke Energy Electroquil Partners & Electroquil s.a. v. Republic of Ecuador, icsid Case No. ARB/04/19, Award 28 Aug 2008, para 241; Marvin Roy Feldman Karpa v. United Mexican States, icsid Case No. ARB(AF)/99/1, Award, 16 Dec 2002, para 63; in the context of domestic law see e.g. Lord Hoffman in, Regina v. East Sussex County Council, ex part Reprotech [hl] 128 Feb 2002: ‘It seems to me that in this area, public law has already absorbed whatever is useful from the moral values which underlie the private law concept of estoppel and the time has come for it to stand upon its own two feet.’

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This approach requires as a threshold question establishing of the existence of a principle. Many authorities have warned that generation of a general principle of law is a rather strict process, when one needs to ascertain its existence in most legal systems and be attentive to its variations.34 In this context, we are talking about principles that originate in foro domestico, as opposed to principles that are inherent in the very concept of law, such as the principle of good faith. Regrettably, this methodology is often used as a shortcut to posit an assumed conclusion.35 When applied to les in iil, this approach may be objected to as importing to the international level, notions particular to a limited number of developed, therefore capital exporting States. This may be challenged as influencing content of international law in a way that traditional law-making techniques do not support.36 For example, the fact that les operate as a principle of eu administrative law will offer little refuge. The eu is a territorially defined, economic and ­political integration organization; one that includes as one of the defining criteria for membership the similarity of legal cultures, and requires its prospective m ­ embers to adjust their legal systems.37 How then can the law developed within the eu be taken as a benchmark for a universal international minimum standard? Yet, many legal systems beyond the eu seem to operate with the concept of les as well; for example, some Latin American, African as well as Caribbean countries, or India.38 Moreover, international investment agreements (‘iias’) are said to promote the rule of law, therefore it may be apposite to apply a

34

G Gaja, ‘General Principles of Law,’ Max Planck Encyclopedia of Public International Law (2013), para 13; South West Africa Cases (Ethiopia v South Africa, Liberia v South Africa), icj Second phase, 18 July 1966, para 88. 35 Gaja, ‘General Principles,’ para 30. 36 Paparinskis, International Minimum Standard, 255. 37 See ‘Copenhagen Criteria,’ eu Presidency Conclusions, Copenhagen European Council, 21–22 June 1993, (last accessed 18 Aug 2016). 38 H Mairal, ‘Legitimate Expectations and Informal Administrative Representations’ in Schill (ed) International Investment Law and Comparative Public Law (oup 2010) 416–417; Ventose, Commonwealth Caribbean Administrative Law, 194; A Thapliyal, ‘India: Doctrine of Legitimate Expectation: Overview,’ Mondaq (16 Jun 2014) < http://www.mondaq.com/ india/x/320664/Constitutional+Administrative+Law/Doctrine+Of+Legitimate+Expectat ion+Overview> (last accessed 12 May 2017); G Quinot, ‘Substantive Legitimate Expectation in South African and European Administrative Law,’ (2004) 5 German Law Journal 65.

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principle that alleges to foster trust and confidence in the law and the public apparatus as its important element. A function of general principles of law (of national or international origin) is usually found in the elucidation of other rules of international law, and in their gap-filling role.39 Similarly as other principles derived from good faith, such as estoppel or the abuse of rights, these principles do not lead to the creation of a new obligation.40 General principles are to be used properly when a more specific rule of treaty or custom cannot ground the decision. In this regard, tribunals might find greater utility in the versatility of general principles, such as the principle of les, in the application of the fet standard. However, they cannot use the principle to extend or rewrite the applied norm.41 Nevertheless, certain cases have applied les precisely to that effect, while the less controversial elements of fet seemed perfectly capable and sufficient to ground the decision.42 39

Gaja, ‘General Principles,’ para 21. However, the idea of real legal gaps is only applicable when one adheres to a strict positivist voluntarist position that international law is a system of disparate rules, not a full system of law. 40 It should be noted that some scholars argue that the principles of le is a concrete incarnation of the general principle of good faith and as such a source of rights and obligations. See R Kolb, ‘Principles as Sources of International Law: with Special Reference to Good Faith,’ (2006) 53 (1) Netherlands International Law Review 23. However, this is a peculiar argument in the context of fet. les are used as a general principle that is put to work to interpret and apply the standard of fet, it seems superfluous to refer and reach out to another principle of yet a higher level of abstraction to justify another general principle to be applicable within the context of application of a specific treaty obligation. Legal principles apply directly as a formal source of law, but they do not create material source of rights and obligations, they operate to facilitate resolution of international disputes. Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria: Equatorial Guinea intervening), icj, Preliminary Objections, 11 Jun 1998, icj Rep 1998, 275, para 39; Border and Transborder Armed Activities (Nicaragua v Honduras), Jurisdiction and Admissibility, Judgment, icj Rep 1988, 69, para 94; I Brownlie, Principles of Public International Law, 6th Ed ( oup 2003), 616. 41 cms v. Argentina, Decision on Annulment, para 89: ‘Legitimate expectations are not, as such, legal obligations,’ similarly Cameroon v Nigeria; Nicaragua v Honduras, para 39; ­Saluka v. Czech Republic, para 304; Continental Casualty Company v. The Argentine Republic, icsid Case No. ARB/03/9, Award, 5 Sep 2008, para 258; Ulysseas, Inc. v. The Republic of Ecuador, uncitral, Final Award, 12 Jun 2012, para 256; cf see Kolb, ‘Principles as Sources.’ 42 E.g. Werner Schneider, acting in his capacity as insolvency administrator of Walter Bau Ag (In Liquidation) v. The Kingdom of Thailand ( formerly Walter Bau ag (in liquidation) v. The Kingdom of Thailand, uncitral, Award, 1 Jul 2009, para 12.1–13.31; Rumeli Telekom a.s. and Telsim Mobil Telekomunikasyon Hizmetleri a.s. v. Republic of Kazakhstan, icsid Case No. ARB/05/16, Award, 29 Jul 2008, para 615.

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If one is indeed to accept les as a general principle in iil, one may not r­ eject, although implicitly, limitations posed on it by national systems without an ­adequate explanation.43 Some authors have shown that les conceptions applied in iil cases, at least in some instances, go far beyond what many ­national systems would allow.44 This might strike as a disconnection with the idea of fet as a minimum standard of protection. An argument for augmenting or enhancing a general principle in the international law context is much more of a difficult exercise than a proof of its existence, already an exacting task. Yet, this does not mean that structural and institutional differences between international and domestic law should not be taken into account, quite to the contrary. When this operation is being conducted, that is to say, adaptation of a general principle of domestic legal systems in the international law context, one needs to take into account and compare the purposes of and rationales behind the principle in domestic systems, its institutional settings, as well as its scope and relation to surrounding norms. Lauterpacht’s classic work on the use of analogies in international law ­famously explained the operation of analogy by reference to factual circumstances that are identical or similar in the contexts of two legal systems (­international and domestic), that justify equal legal treatment by the legal system into which we transplant with the legal treatment received in the system we transplant from.45 Because the concept of les is a doctrine of public law, many other public law doctrines condition its application. For instance, the requirement of legality of the expectation-engendering representations must be ­assessed carefully when the principle is transplanted to international law. The main limiting principles are discussed below. The foregoing was to show that the concept of les, currently considered bedrock of fet, is standing on far less solid juridical foundations than is ­usually assumed. The intention is not to contest its relevance in the iil context altogether, as it seems already well entrenched. The objective of this chapter is 43

44

45

M Potestà, ‘Legitimate Expectations in Investment. Treaty Law: Understanding the Roots and the Limits of a Controversial Concept’ (2013) icsid Review 1; E Snodgrass, ‘Protecting Investors’ Legitimate Expectations: Recognizing and Delimiting a General Principle’ (2006) 21 icsid Review 1. L Johnson, O Volkov, 2013, ‘Investor-State Contracts, Host-State “Commitments” and the Myth of Stability in International Law,’ Columbia University Academic Commons, http:// dx.doi.org/10.7916/D8K0727X (last accessed 8 Oct 2015). H Lauterpacht, Private Law Sources and Analogies of International Law: with Special Reference to International Arbitration (Longman Greens 1927) 35; A Watson, Legal Transplants: an Approach to Comparative Law, 2nd Ed (University of Georgia Press 1993) 8–9.

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rather to point out some problematic aspects of its use in arbitral practice. The following section will sketch out a general principle of les that is derived from a comparative analysis of national administrative law; and also distinguish it from international law incarnations of the concept, such as its human rights conception. Then the link to its contours in iil will be drawn. This overview does not claim to be exhaustive by any means, as such a comparative study would make good for a couple of books.46 By pointing to the limited number of traditional comparators, it is merely intended to highlight different rationales behind and functions of the concept, and its varying ­calibration and content.

Legitimate Expectations as a General Principle of Law in a Comparative Perspective

In many national administrative and constitutional law systems, the concept has a very specific and narrow meaning. At the most general level, it connotes an interest that does not rise to the level of a right, which is nevertheless worth of legal protection. This object does not, however, stem from private dealings among individuals, but it is created by acts of the State administration. It ­relates to procedures which administrative bodies follow, and which, through their previous repetitive activity, create an expectation according to which an individual acted, or was entitled to act, or it relates to representations and promises to individuals which engendered trust or reliance. The protected interests generally do not relate to property or economic interests, as in iil, but rather to health care, fundamental freedoms, immigration etc.47 Through this doctrine, a legal system recognizes the fact that individuals have certain expectations as to how the legal system and the State apparatus should operate. In other words, it protects against inconsistent and arbitrary exercises of administrative discretion and abuse of power.48 46

47

48

For excellent accounts although analysing a limited number of legal systems and regimes see e.g. S Schonberg, Legitimate Expectations in Administrative Law (oup 2000); and M Sigron, Legitimate Expectations Under Article 1 of Protocol No. 1 to the European Convention on Human Rights (Intersentia 2014). Mairal, ‘Legitimate Expectations and Informal Administrative Representations’ 420; e.g. Commissioner of Police of the Metropolis ex. p P [1996] 8 Admin lr 6; R (Bibi) v Newham London Borough Council [2001] ewca Civ 607 [2002] wlr 2; Immigration and Naturalization Service v Hibi, 414 u.s. 5, 8 (1973). Note that the protection of legitimate expectations may thus be conceptualized within the broader notion of arbitrariness.

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As it is a concept that is not based on formal rights (one may even say it is, in fact, an exception to the formalism of public law), its scope is limited and its criteria for application are generally exacting. In all legal systems, the claim can be easily raised, but rarely succeeds on the merits.49 The protection of les is exceptional, since it goes against the otherwise default principles of public administration; such as the principle of legality, and the ability to alter a policy for the future. The following comparative overview exemplifies that the protection of les is based on various rationales, suggesting that a host of principles may justify the use of the concept, while it also shows that there is still a rather thin basis for the use of the principle to helpfully solve specific cases that arise in the iil context. England In England, the protection of les is justified by reference to fairness in public administration and by the concept of reliance.50 English law had historically protected only procedural les, that is to say, when addressees of ­administrative conduct, decisions, or regulations are entitled to certain procedural ­guarantees, such as the right to prior notice or to be heard and when the new conduct ­diverges from the previous without respecting these guarantees. In this situation, however, the claim can be settled by application of the p ­ rinciple of ­consistency in policy application and the requirement of a fair procedure.51 The resort to les may indeed be redundant in such cases.52 This is different from situations where authority makes representations that an individual will be treated in a manner consistent with the incumbent policy, while the policy or procedure changes later on. In this case, the authority is merely obliged to take into account the previous representation, but can effectively proceed as it sees fit within the bounds of reasonableness, which in English poses a very high threshold.53 49

Mairal ‘Legitimate Expectations and Informal Administrative Representations’; CF Forsyth ‘The Provenance and Protection of Legitimate Expectations’ (1988) 47 Cambridge Law Journal 238, CF Forsyth, ‘Legitimate Expectations Revisited’ (2011) 16 (4) Judicial ­Review 429; M Elliot, ‘Unlawful Representations, Legitimate Expectations and Estoppel in Public Law’ (2003) 8 (2) Judicial Review 77; W Wade, CF Forsyth, Administrative Law, 10th Edition (oup 2009) 446. 50 See e.g. R v Ministry of Agriculture, Fisheries and Food, ex p Hample (Offshore) Fisheries Ltd [1995] 2 All er 714. Schonberg, Legitimate Expectations in Administrative Law, 10; Forsyth ‘Legitimate Expectations Revisited’; Wade, Forsyth, Administrative Law, 446–447. 51 E.g. Commissioner of Police of the Metropolis ex. p P. 52 Forsyth, ‘Legitimate Expectations Revisited.’ 53 R v Secretary of the Home Department, ex p. Hargreaves [1997] 1 wlr 906; R v Secretary of State for Education and Employment ex p. Begbie [2001] 1 wlr 1115; R (Bibi) v Newham

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In the 1999 Coughlan decision, however, the Court of Appeals established in English Law also a concept of substantive les,54 that is, expectations to a certain material outcome. In Coughlan, The North and East Devon Health ­Authority expressly assured Ms Coughlan and other patients that they could live in the Mardon House nursing care hospital for as long as they chose. Later on, however, the health authority decided to shut down the Mardon House and transfer the general nursing care of Ms Coughlan to the local authority. The major difference is that in Coughlan, there was an express, specifically ­addressed, unqualified, repeated and confirmed promise that a certain situation would occur, addressed to an individual or a small group of people. To renege on the promise was deemed unfair and amounting to abuse of p ­ ower. In this particular type of cases, the expectation has a character of quasi-­ contract.55 It ­behoves to add that only in cases of substantive protection of expectations, as in Coughlan, the question of fettering statutory discretion ­really arises. ­Substantive protection is therefore only exceptionally accorded.56 As to the main underlying rationale, Cane argues that detrimental reliance is not relevant for les as a ground for imposing an obligation upon the ­authority. Otherwise, it would be the doctrine of detrimental reliance, not les, which would underpin this area of law.57 This last aspect shows that the ­notion of les is indeed distinct from functionally similar private law doctrines.

54 55

56 57

London Borough Council. By reasonableness in this context, we mean the so-called Wednesbury-reasonableness test (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 kb 223). This test means that the court will not intervene to overturn the decision of the public authority, simply because the court disagrees with it. In order to intervene, the court would have to conclude that (i) in making the decision, the public authority took into account factors that ought not to have been taken into account, or (ii)  the public authority failed to take into account factors that ought to have been taken into account, or (iii) the decision was so unreasonable that no reasonable authority would ever consider imposing it. The factors that ought to or ought not to be taken into account are generally gleaned from the statutory framework governing the activities of the public authority. Regina v. North and East Devon Health Authority, ex parte Coughlan [2000] 2 wlr 622. Ibid. In international investment arbitral practice, the Glamis Gold conceptualized protected expectations stemming from governmental representations as quasi-contractual, emphasising the need for specificity of the unilateral undertaking. Glamis Gold, Ltd. v. The United States of America, uncitral, Award, 8 Jun 2009, para 766. Forsyth, ‘Legitimate Expectations Revisited,’ 243. P Cane, Administrative Law, 5th Edition (Clarendon oup 2011) 165, also for rejection of the detrimental reliance as a basis for legitimate expectations in the Commonwealth Caribbean Law see Ventose, Commonwealth Caribbean Administrative Law, 197.

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According to the classic Schonberg’s treatise too, legal certainty and the rule of law are more appropriate justificatory principles for the doctrine of les, as they overcome the too narrow and inflexible justifications of the protection of les based on the theory of reliance. Schonberg explains that the reliance theory is too narrow because it should not be a precondition for protection of le, as it may lead to unjustified distinctions between similar cases. Whether a person relies on the representation (defined as actual harm caused as opposed to frustration of plans) or not, may be entirely fortuitous. The theory is inflexible, as it does not give adequate expression to the need of balancing between individual harm and broader public interest.58 This is an interesting point in comparison with the iil regime, which seems to require reliance on the part of the investor.59 This may be explained by the fact that in national systems of administrative law, the objective legality is the main goal of judicial review, while in ita, the protection of an individual ­investor’s interests is perhaps more important. It is not clear, however, whether in iil the reliance is considered as an element of liability or an element of calculation of damages. Germany, Switzerland Aside from English courts, which ground the protection of les in concepts of fairness and reliance, other European courts, as well as eu courts, recognize the principle as based on good faith, trust and legal certainty.60 As opposed to English courts, which by and large analyse the concept from the perspective of public administration, German courts put more emphasis on the perspective of the citizen.61 58 Schonberg, Legitimate Expectations in Administrative Law, 10–11. Cane argues similarly by stating that the doctrine should be based on objective characteristics of the conduct of administration rather than on subjective existence of reliance from a perspective of the addressee of the conduct. Cane, Administrative Law, 165. 59 See e.g. eu-Vietnam fta, Art 14(6). 60 See e.g. P Craig, eu Administrative Law (oup 2006), Chap. 16; Schonberg Legitimate ­Expectations in Administrative Law; J Schwarze, European Administrative Law (Sweet and Maxwell 1992) 946–952, Sigron (n 47) 47. Similar rationale is found in Spanish law, e.g. aca-Europe, ‘The Protection of Legitimate Expectations in Administrative Law and eu Law,’ Seminar, Vilnius 21–22 April 2016, Answers to Questionnaire: Spain, Q2 < http://www .aca-europe.eu/seminars/2016_Vilnius/Spain.pdf> (last accessed on 13 May 2017); Polish Law, aca-Europe, ‘The Protection of Legitimate Expectations in Administrative Law and eu Law,’ Seminar, Vilnius 21–22 April 2016, Answers to Questionnaire: Poland < http://www .aca-europe.eu/seminars/2016_Vilnius/Poland.pdf> (last accessed on 13 May 2017). 61 K Rennert, ‘The Protection of Legitimate Expectations under German ­Administrative Law,’ Paper delivered at Association of Councils of State and Supreme A ­ dministrative

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German administrative law recognizes and protects substantive expectations at least since 1957.62 Up to that point, administrative authorities could have retracted any administrative act which later proved unlawful without restriction. After the World War ii, many administrative acts granted benefits to citizens as a remedy for the burdens caused by war, and in many cases these benefits formed the main sources of their livelihood.63 Many of these acts have later been retracted for non-compliance with the law. One of such cases ­concerned a pension payment to a civil servant’s widow, which was retracted. The Berlin Federal Administrative Court held that the abatement must take the widow’s les in the continuous monthly payments into account: by contrast, a balance must be struck […] between the public interest – which fundamentally is to be conceded – in having a legal status guaranteed consistently that is compliant with the law (this means that it is actually desirable, and in fact necessary, for the administrative bodies to remediate the consequences of a mistaken application of the law), and the individual interests of the citizen enjoying the benefits of the administrative act, who rightly does not wish to be betrayed in his trust in the continued validity of a decision taken by a public authority.64 European countries that are inspired by German administrative law provide protection of les that is substantive as well as procedural, and which is usually justified by reference to the rule of law considerations and the concept of V ­ ertrauensschutz – protection of trust.65 This concept is distinct from the ­general principle of legal certainty (Rechtsicherheit).66 More specific ­Jurisdictions of the eu (aca-Europe), Vilnius (21 April 2016) (last accessed on 13 May 2017). 62 Oberverwaltungsgericht Berlin (1957) 72 dvbi 505–506; later confirmed by the Federal Constitutional Court in (1981) 59 BverGE 128, 164–167, both cited in G Nolte ‘General principles of German and European administrative law – a comparison in historical perspective’ 57 (1994) Modern Law Review 191, 203; and in Rennert, ‘The Protection of Legitimate Expectations under German Administrative Law’ 5. 63 Rennert, ‘The Protection of Legitimate Expectations under German Administrative Law’ 4. 64 Oberverwaltungsgericht Berlin (1957) 72 dvbi , cited in Rennert, ‘The Protection of Legitimate Expectations under German Administrative Law’ 5. 65 Craig eu Administrative Law, 613; Schonberg, Legitimate Expectations in Administrative Law, 12. 66 Although both principles of legal certainty and Vertrauensschutz are derived from the ­Basic Law, thus enjoying the status of constitutional principles, they are separate.

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c­ odification of the principle of Vertrauensschutz may be found in Article 38 of the German Administrative Procedure Act, which stresses the procedural protection and formal requirements of the assurance.67 In Switzerland, on the other hand, the protection of les is derived from the principle of legal certainty.68 The insistence on the principle of legality as a condition for protection of an expectation is weaker in German administrative law than it is in English law. German courts recognise administrative discretion only when expressly and formally granted, and are generally less accepting of considerations of non-­fettering. They more often review and duplicate the decision-making of administrative bodies, for under German law the idea of administrative discretion does not find support as a matter of formal theory.69 This approach leads to a more intrusive judicial review, which can also override statutes, as the idea of parliamentary sovereignty is not embraced under the Basic Law. In ­Germany, the principle aims to protect legitimate dispositions of individuals from changing assessments of the legal situation (administration) and changes in the legal framework (legislature).70 Other European courts that reach out to the German jurisprudence for inspiration, also adopt this approach to les that relates to situations when ­authority creates expectations through its acts, which an individual relies on, and that are later on frustrated.71 France In French law, the concept as such is not recognised. The only exception is application and implementation of the eu law, where the concept is treated

67

68 69 70

71

­Schwarze, European Administrative Law, 886–887; M Schroeder, ‘Administrative Law in Germany’ in Seerden, Stroink (eds) Adminitrative Law of the European Union (Intersentia 2005) 119; Nolte, ‘General principles of German and European administrative law,’ 195. ‘(1) The agreement by a competent authority to issue a certain administrative act at a later date or not to do so (assurance) must be in writing in order to be valid. If, before the administrative act in respect of which such assurance was given, participants have to be heard or the participation of another authority or of a committee is required by law, the assurance may only be given after the participants have been heard or after participation of such authority or committee.’ Verwaltungsverfahrensgesetz (VwVfG) of May 25th 1976. Sigron, (n 47) 46; Swiss Federal Tribunal, bge 72 i 75, E. 1, 80 et seq; bge 101 Ia 92, E. 3, 99. Nolte, ‘General principles of German and European administrative law,’ 196. aca-Europe, ‘The Protection of Legitimate Expectations in Administrative Law and eu Law,’ Seminar, Vilnius 21–22 April 2016, Answers to Questionnaire: Germany (last accessed on 13 May 2017). See e.g. Czech Constitutional Court, iv. ús 525/02, 11 Nov 2003; i. ús 605/06, 15 Jan 2008.

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as a general principle of the eu.72 French administrative law, however, applies neighbouring principles, such as the principle of legal certainty (sécurité juridique).73 Similar outcomes are also derived through the doctrine of abuse of powers and through widely defined protection of vested rights.74 One of the principal reasons French law resists the application of the doctrine is, perhaps ironically, the fear of destabilizing effects on the overall ­legal certainty.75 The principle of les is equally viewed as a manifestation of a ­subjective vision of law, which is in opposition to the conception of objective law deeply ingrained in the French legal tradition.76 United States To complete this limited overview of national laws, a brief discussion on us law follows. us law does not operate with the concept of les as such.77 American law extends, in limited circumstances, the doctrine of equitable estoppel to public authorities.78 These limited situations are based on an important 72

Conseil d’État admitted the limited application of les in the kpmg case but only in relation to the implementation of eu law, Sté kpmg et autres, 24 mars 2006, n° 288460; aca-Europe, ‘The Protection of Legitimate Expectations in Administrative Law and eu Law,’ Seminar, Vilnius 21–22 April 2016, Answers to Questionnaire: France, Q1 (last accessed on 13 May 2017): ‘Le principe de confiance légitime n’est pas, en tant que tel, un principe reconnu dans l’ordre juridique français. Séminaire organisé avec le soutien financier de la Commission européenne. Il y est exclusivement appliqué en tant que principe général du droit de l’Union européenne puisque d’une part les pgdue ont en droit français une valeur identique aux traités eux-mêmes (voir ce, 3 décembre 2001, Syndicat national de l’industrie pharmaceutique c/ Premier ministre, n°226514, Rec. p. 624) et, d’autre part, ils lient les autorités des Etats lorsqu’elles édictent une réglementation nationale qui « entre dans le champ d’application du droit communautaire » (selon la formulation initiale employée par cjce, 18 juin 1991, Elliniki Radiophonia Tiléorassi ae, aff. C-260/89, Rec. p. I-2925).’ 73 Ibid. 74 Schonberg, Legitimate Expectations in Administrative Law, 114–117; JP Puissochet, ‘Vous avez dit confiance legitime?’ in Mélanges Guy Braibant, (Dalloz, Paris, 1996) 584 . 75 Schwarze, European Administrative Law, 869, 874; P Reynolds, ‘Legitimate Expectations and the Protection of Trust in Public Officials’ (2011) Public Law, 330, 345. 76 aca-Europe, ‘The Protection of Legitimate Expectations in Administrative Law and eu Law,’ Seminar, Vilnius 21–22 April 2016, Answers to Questionnaire: France, Q2. 77 Although the notion of reasonable expectations operates in us takings law, see Penn Central Transportation Co. v. New York City, 438 u.s. 104 (1978), and by that inspired us Model bit’s expropriation clause. us Model bit (2012), Annex B ‘Expropriation.’ 78 MV Laitos, DV Smith, AE Mang, ‘Equitable Defences against the Government in the ­Natural Resources and Environmental Law Context’ (2000) 17 Pace Environmental Law ­Review 2, 273; Johnson, Volkov ‘Investor-State Contracts, Host-State “Commitments” and the Myth of Stability in International Law’ (2013) American Review of International Arbitration 361.

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d­ istinction between the government acting as a sovereign and the government acting in a proprietary function, the latter being an exception to the traditional view restricting actions against the government.79 us law bases the duty to protect representations on the notion of fairness and detrimental reliance.80 The reliance justification is the principal one because us law uses the private doctrine of estoppel, not a distinct public law doctrine of les. This makes us law similar to the early English case law, which drew on private law concepts instead of on general notions of substantive rule of law and Rechtstaat, more typical to the Germanic tradition. Duty to protect expectations is usually limited to situations where an individual was deprived of something they were entitled to by right.81 This ­approach effectively substitutes the requirement of legality, as illegal conferral of a benefit is not protected.82 This puts the us approach further apart from its continental and English counterparts, where LEs are not conceptually viewed as rights. us courts strictly construe the reasonableness of expectations and in certain circumstances put a duty to inquire on the individual.83 However, the lack of conceptual clarity for holding the government liable for misrepresentations or misinformation in the case law of us courts makes generalisations difficult.84 Yet, as the doctrine of equitable estoppel is only applicable to commercial dealings with the government, there is little what can be taken from us law for the principle of les. European Union In eu law, the principle of les is clearly connected with the notion of legal certainty and vested rights.85 Importantly, the principle is recognized as a general 79

Federal Crop Ins. Corp. v Merrill, 332 u.s. 280 (1947); JF Conway, ‘Equitable Estoppel of the Federal Government: An Application of the Proprietary Function Exception to the Traditional Rule’ (1987) 55 Fordham Law Review 707; For an overview of the case law on the proprietary function and State contracts and its comparison with investment arbitral practice see Johnson, Volkov, ‘Investor-State Contracts, Host-State “Commitments” and the Myth of Stability in International Law.’ 80 E.g. Santiago v Immigration Service (1975) 526 F 2d 488. 81 Laitos, Smith, Mang, ‘Equitable Defences against the Government’ 285. 82 E.g. Heckler v Community Health Serv. Of Crawford County, Inc., 467 u.s. 51 (1984). 83 E.g. United States Envtl Protection Agency v Environmental Waste Control Inc., 917 F.2d 327, 334 (7th Cir. 1990); United States v Menominee, Mich., 727 F.Supp. 110 (W.D. Mich 1989). 84 Some court decisions point to the direction that an additional requirement of affirmative misconduct applies to estoppel against government, which makes the meagre chances of success of a claim yet slimmer. See e.g. ins v Hibi. 85 Schwarze, European Administrative Law, Chapter 6; Craig eu Administrative Law; Sigron, Legitimate Expectations Under Article 1 of Protocol No. 1, 52.

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maxim, limited by other general principles.86 eu law has recognized the status of the principle as ‘one of the fundamental principles of the Community.’87 A conceptualization of les by connecting them to legal certainty as used by the cjeu has been, however, considered unfortunate, as the two concepts aim at different targets. While certainty is concerned with retroactivity of law and its general functioning, les are more coherently derived from the concept of Vertrauensschutz, which seeks to protect trust engendered by an act of an individual decisionmaker, and this can even go against legislation.88 It should be noted, however, that this holds in a country like Germany, while in the uk, for example, the notion cannot defeat a statutory rule, due to the principle of parliamentary sovereignty.89 It behoves to add that the cjeu never found the strict conditions of redress based on les against the exercise of legislative powers of the eu met in a case submitted to it.90 European Convention on Human Rights Aside from les stemming from administrative practice that do not necessarily relate to the protection of assets, which has been analysed heretofore, some European constitutional courts, provide protection to les as a particular ­incarnation of property.91 This type of protection has its roots in the jurisprudence of the European Court of Human Rights (‘ECtHR’), which uses les as an ­extensive interpretation of the term ‘possessions/biens’ in Art 1 in the Protocol 1 (‘P-1’).92 This understanding of les differs conceptually as well as in its justification from those analysed above. The important aspect of this conception is that it treats les as a property, a right protected as a human right. Under this conception the applicant must ­already have a ‘possession’ so that the doctrine of les can be applied. The ­ECtHR generally treats les as a component of or attachment to the property right at hand.93 86 87 88 89

Schwarze , European Administrative Law, 867. Case 112/80 Dürbeck v Hauptzollamt Frankfurt/Main-Flughafen [1981] ecr 1095, 1120. Forsyth ‘Legitimate Expectations Revisited.’ Ch Brown, ‘The Protection of Legitimate Expectations As a “General Principle of Law”: Some Preliminary Thoughts’ (2009) 6 tdm 1, 5. 90 Total v. Argentina, para 130. 91 See e.g. Czech Constitutional Court, Pl. ús 2/02, 9 Mar 2004; ii. ús 156/06, 6 Mar 2008. 92 Kopecky v Slovakia, App No. 44912/98, Judgement of 28 Sep 2004, para 74; Pine Valley Developments v Ireland, App No 12742/87, Judgement of 29 Nov 1991, para 51; Stretch v United Kingdom, App No. 44277/98, Judgement 24 Jun 2003. 93 E.g. Stretch v United Kingdom, para 35; Sigron, Legitimate Expectations Under Article 1 of Protocol No. 1, 85.

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Property is protected as a human right due to its impact on freedom, independence and the development of an individual.94 Although freedom, autonomy and independence are also the values at the heart of the rule of law, which foster the rationale for the protection of les in constitutional and administrative law, the concept rule of law and the human right to peaceful enjoyment of property cannot be viewed as conceptually identical. In the context of echr, it is evident that this conception of les has a useful role only in the first step of the analysis of claims under Art 1, P-1. That is, in deciding whether the le in the case at hand constitutes ‘possessions,’ an ­autonomous concept under the echr.95 In the next steps, the Court proceeds to determine whether there has been an interference sanctioned by the convention, using its established tests, thus looking at whether the national courts’ decisions are arbitrary or otherwise manifestly unreasonable. It behoves to add that the Convention protects only existing assets, not a right to acquire property.96 The fact that the ECtHR understands the concept as a specific incarnation of property derived from an extensive evolutionary interpretation of the term ‘possessions’ in the Protocol 1 to the echr should make one pause, before classifying this conception as a general principle of law in the sense of Article 38 of the icj Statute. This conception should be distinguished from the administrative law conceptions discussed above. Convergence or Divergence? It should be noted that grounding the protection of les in legal certainty does not succeed in explanation or guidance in application. Legal certainty demands predictability and regularity of the legal system overall, not ad hoc exceptions to statutory and other general legal prescriptions, which is precisely what protection of les requires in its application. As pointed out by Reynolds, ‘whilst it may be that application of the doctrine [of les] will gradually ­become less uncertain the fact that the doctrine can cause uncertainty means that the principle of legal certainty plainly cannot be offered as an explanation of the ­doctrine of legitimate expectations.’97 Thus, a more appropriate justificatory principle seems to be indeed the protection of trust as understood by the concept of Vertrauensschutz, not the general legal certainty as Rechtssicherheit.98 94 Sigron, Legitimate Expectations Under Article 1 of Protocol No. 1, 78. 95 Gasus Dosier und Fördertechnik GmbH v Netherlands, App No. 15375/89, Judgement of 23 Feb 1995, para 53. 96 Marckx v Belgium, App No. 6833/74, Judgement 19 jun 1979, para 50. 97 Reynolds (n 76) 346. 98 Ibid.

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The above cursory overview shows that emphasis on different abstract principles as justificatory basis of the notion of les yields different results in terms of the actual protection. English law with its stress on the principle of legality and administrative discretion limits the room for the protection of expectations; French law with its insistence on the principle of legal stability resists the use of the notion altogether; us law is similarly dismissive of the notion; while German law seems to be more generous in the protection afforded, as the legal system based on the substantive Rechtstaat is more concerned with the effects of public administration’s activities on the individual. ECtHR ­applies a conception of les that is yet different, although it is sometimes replicated by national courts. Legitimate Expectations and the Opposing Legal Principles As should be evident by now, in most legal systems that apply les, there are other legal principles that counter-balance the effects of the application of les.99 These principles are rarely considered when investment tribunals ­refer to les. Among these doctrines are e.g. the non-fettering doctrine (which ­require public agencies to retain the discretion they are bound to exercise by law), doctrine of legality (lawful administration), overriding public interest and also formal equality. These opposing and limiting doctrines and principles are important when one considers the transplanting of a concept onto the international level, as they provide a crucial context within which the principle of les has emerged and evolved; they condition and shape the principle of les in important respects. To illustrate the point, les are a balancing principle of an exceptional ­character, which protects an individual against misuse and abuse of ­public ­power.100 The principle of formal equality, on the other hand, may weigh against protection of the addressee of the representation; to grant an individual what they had been led to expect through informal representations is likely to result in an unequal treatment of other addressees of the formal rule or ­policy.101 The principle of legality is used precisely to protect the formal equality. 99 E.g. Schwarze, European Administrative Law, 867. 100 It should be noted that the very protection of legitimate expectations might at times serve a broader interest, through the protection of an individual interest. That is when the f­rustration of an individual expectation is considered capable of shaking the legal certainty and trust in the law, government and administration. This point is important because it allows us to see that legitimate expectations play a broader, systemic role, in the legal ­systems where they operate. See Schonberg, Legitimate Expectations in Administrative Law, 25. 101 Schonberg, Legitimate Expectations in Administrative Law, 14.

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These other doctrines and principles carry wider public interests that are eventually weighed against the harm caused to the individual and they add to an already limited scope of the principle.102 Prof Forsyth famously noted that to hold an agency bound to an undertaking that goes beyond its ­power would be to create ‘that legal horror: a body that can set limits to its own jurisdiction.’103 All this contributes to a view that protection of les is an action of an exceptional nature, and the success in its pleading lies in showing that the factual circumstances have been such, that the opposing macro-level principles must be set aside in favour of an individual’s interest. The principle of les works as a residual basis for State liability.104 In investment law, on the other hand, les have become a common and basic element of the fet claims.105 It is all the more surprising that, as the concept is derived from the general notion of legal certainty and trust in public administration, references to these notions are at best sporadic in investment case law. Investment tribunals should recognize the opposing doctrines, because they form the context from which the general principle emerges. Subsuming the function of the opposing principles under the general rubric of sovereignty is not enough, and will be rejected by a tribunal.106 By the same token, to reject these doctrines and their important function by reference to an argument that they play no role in interpretation of an international standard, or that the tribunal applying international law cannot be influenced by national law ­determination is not availing either; this is precisely because the principle is anchored and finds its legal justification in national legal systems and is formed 102 See e.g. Henry Boot Homes Ltd v Bassetlaw District Council [2002] ewca Civ 983 (2002); R (Hammerton) v London Underground [2002] ewhc 2307 (Admin), for holding that representations in contravention of statutory powers only rarely engender protected expectations; Elliot, ‘Unlawful Representations, Legitimate Expectations and Estoppel in Public Law’; although this requirement is never absolute, as otherwise the doctrine of legality may lead to undue unfairness in exceptional situations. More recently, some authors stress that the legality doctrine stands uncontroversial against protection of legitimate expectations against a statute; see Forsyth ‘Legitimate Expectations Revisited,’ Rowland v Environment Agency, [2003] ewca Civ 1885, para 102. Nevertheless, these considerations play much stronger role in England, as opposed to a country like Germany. 103 Forsyth, ‘The Provenance and Protection of Legitimate Expectations,’ 240. 104 Mairal, ‘Legitimate Expectations and Informal Administrative Representations,’ 424. 105 Ibid; unctad, Fair and Equitable Treatment: A Sequel. 106 See e.g. JE Viñuales, ‘Sovereignty in Foreign Investment Law’ in Viñuales, Pauwelyn and Douglas (eds), Foundations of International Investment Law (Cambridge University Press 2014), on the need of actionable legal concepts expressing the notion of sovereignty.

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by those limiting principles. Adequate review of municipal law applicable to the circumstances of the claim may serve as a useful filter of claims that may encroach too far into the domestic regulatory powers in comparison with what was intended under the fet. In iil, if one is to accept a pride of place of the concept, les would be perhaps more coherently viewed as an extension of the investment, as a proprietary interest protected by other rules of international law.107 However, this is not how investment arbitration practice treats them. Be that as it may, it is ­important that the expectation is created legally, similarly as the original acquisition of any investment must be in accordance with the law of the host State, or at least with an agency with ostensible authority.108 This legality c­ riterion is expressed in the requirement that expectations stem from representations made by authorities that have a power to make them, i.e. have the power to make such a substantive promise.109 The act of frustration is subsequent to the creation of expectation stemming from legal representations, and this is clearly an issue judged by the application of international investment standards. Some tribunals have been more receptive to the limiting effect of the doctrine of legality.110 Similarly, some investment tribunals have recognized that the essentially balancing nature of les calls for inclusion of the public interest considerations into the analysis.111 The fact that the principle is recognized by different legal systems does not mean that all those legal systems apply the principle in an identical way,112 as we have seen. One may add that in national legal systems, the notion of les is not used to solve contractual disputes, and only rarely it is used in disputes concerning property rights. In these instances, the concept of les does not have any additional value, because these disputes are simply disputes about 107 Z Douglas, ‘Property, Investment and the Scope of Investment Protection Obligations’ (2014) in Douglas, Pauwelyn, Viñuales (ed) The Foundations of International Investment Law: Bringing Theory into Practice (cup 2014); similarly the above analysed conception of le applied by ECtHR. 108 Thunderbird v. Mexico, Separate Opinion of T Wälde, para 93. 109 National courts sometimes distinguish promises based on actual and ostensible authority to soften the strictness of the legality principle, the latter being exception to the principle. See e.g. South Buckinghamshire District Council v Flanagan [ewca] Civ 690 [2002] wlr 2601; R (Boggs 61) v Secretary of State for the Home Department [2002] ewhc 1921 (Admin); Elliot, ‘Unlawful Representations, Legitimate Expectations and Estoppel in Public Law,’ 76. 110 Thunderbird v. Mexico, Separate Opinion of T Wälde, para 93. 111 Saluka Investments b.v. v. The Czech Republic, Partial Award. 17 Mar 2006, para 305–306. 112 Brown, ‘The Protection of Legitimate Expectations As a “General Principle of Law,”’ 5.

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who has a better right.113 After all, even the ECtHR uses the concept of les to peaceful enjoyment of possessions in situations where the underlying property or asset is not disputed.114 This should, at the very least, call for caution in application of such a controversial principle as a general principle of law. Some international law ­authorities suggest that for application of a general principle, it is not only necessary that this principle is adopted by most, if not all countries, but that ‘major legal systems of the world take the same approach to [the] notion.’115 That the notion is indeed used in its various incarnations in different legal systems and regimes may explain its indiscriminate use in investment treaty arbitration. Alternatively, however, this diversity of approaches should lead to questioning the very function and utility of les as a general principle of law in the context of foreign investment, a matter to which I now turn.

Legitimate Expectations in International Investment Law and Practice

In investment case law, we find that les assume many different guises. They sometimes make up an object of protection, at the same time they provide a rule that determines a violation of the fet related to that object, at other times they are used as an organizing intellectual framework used by a tribunal, or still, they are used as an interpretative principle for the fet. We too often encounter tautologies stating that an investor has les to be treated fairly and equitably.116 If we say that an investor has expectations that the State will comply with its international obligations, this argument is circular.117 If we, on 113 The forthcoming companion article will extensively discuss the problematic issue of les arising out of contracts in iil. 114 See Kopecky v Slovakia; Pine Valley v Ireland. 115 Prosecutor v Duško Tadic, icty, Case No. IT-94-1-A, Appeal Chamber icty, para 225. 116 lg&e v. Argentina, para 127; pseg Global, Inc., The North American Coal Corporation, and Konya Ingin Electrik Üretim ve Ticaret Limited Sirketi v. Republic of Turkey, icsid Case No. ARB/02/5, Award, 19 Jan 2007, para 253; Azurix Corp. v. The Argentine Republic, icsid Case No. ARB/01/12, Award, 14 Jul 2006, para 372; Toto Costruzioni Generali S.p.A. v. The Republic of Lebanon, icsid Case No. ARB/07/12, Award, 7 Jun 2012, para 224; Tecmed v. Mexico, para 154; Saluka (n 112) para 446; Charanne and Construction Investments v. Spain, scc Case No. v 062/2012 Award. 21 Jan 2016, para 514. 117 The circularity of the argument was recently recognized in Franck Charles Arif v. Republic of Moldova, icsid Case No. ARB/11/23, Award, 8 Apr 2013, para 533; and Crystallex v Venezuela, para 552.

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the other hand, refer to an investor’s subjective appreciations, we are depriving the investment standard of its objective regulatory and normative content. Equally, it cannot be the case that an investor has an independent internationally sanctioned expectation that the State will comply with its own laws. This expectation would exist regardless of the bit, and as long as there is no specific assurance or a proof of arbitrariness, the notion of les does not assist in the resolution of the claim.118 What should be said instead is that an investor’s investment shall be ­treated in a non-arbitrary manner; and that in some cases, the State conduct may evidence promises or assurances that are important factual elements in the assessment of arbitrariness.119 Or alternatively, the investment may extend to les which are created by the State’s conduct and are worth of protection. In addition, taking one step down the ladder of specificity, we may say that an investor’s les, as its protected interest, were defeated by the State’s arbitrary or abusive conduct. That is why we need to dissect those general statements in order to find a meaningful analytical and practical role for the legal concept in the context of iil. The following sections will review evolution of the concept’s application in investment treaty arbitration practice; from the first ventures, to a more ­sophisticated understanding and application of the concept. First Ventures Metalclad Metalclad is a well-known case where investment into a landfill was defeated by non-granting municipal permits, despite the federal assurances given. The tribunal in that case stated: [A]ll relevant requirements should be capable of being readily known to all affected investors… there should be no room for doubt or u ­ ncertainty… Once central authorities become aware of any scope of uncertainty in this connection, it is their duty to ensure that the correct position is properly determined. […] 118 Bilcon v. Canada, Dissenting Opinion of D McRae, para 33; Crystallex v. Venezuela, para 552. The latter tribunal added that in situations of expectations as to a material benefit or vested right based on laws and regulations, the investor will generally have difficulty to sustain its evidential burden that the framework has indeed undisputedly vested in it a right, due to the general and impersonal nature of laws allowing for a discretion to the law applying agencies. Similarly, also Blusun s.a., Jean-Pierre Lecorcier and Michael Stein v. Italian Republic, icsid Case No. ARB/14/3, Final Award, 27 Dec 2016, para 319, 367, 371. 119 E.g. mtd v. Chille, Decision on Annulment, para 69.

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Metalclad was entitled to rely on the representations of federal officials and to believe that it was entitled to continue its construction of the ­landfill. […] Metalclad was merely acting prudently and in the full expectation that the permit would be granted.120 The case stands for a proposition that les exist whenever a State official advice investor on the content of law, and even requires State officials to dispel possible uncertainties. One commentator mentioned that outside of the context when the body consulted is tasked with official authoritative interpretation, one can hardly think of a commercial relationship when one party has to act as a legal counsel of the other, let alone the other party having to rely on that advice.121 Although the relationship between an investor and public administration in the matter of issuing permits is probably better viewed as a typical administrative or public law relationship, rather than a commercial one, the sweeping scope of this dictum is evident. The decision was partly annulled on the grounds that the nafta Chapter 11 does not include a stand-alone obligation of transparency, which the tribunal read into Article 1105 via reference to Article 102(1).122 Despite the fact that the Tribunal did not apply the broad dictum on les to the claim, and one can explain the case in terms of arbitrary domestic illegality reaching the international threshold of liability, Metalclad has become a point of reference for investors’ pleadings and tribunals’ reasoning ever since. Tecmed Another leading case on the fet also dealt with revocation of a permit to operate a landfill. Tecmed tribunal divined a standard that has been criticised as an ideal governance programme; and that was not even applied in the case (because the tribunal found a violation of procedural propriety).123 The farreaching conception of fet unsupported by any authority apart from good faith is showed at its best in the famous quote: Good faith principle established by international law, requires the Contracting Parties to provide to international investments treatment that 120 Metalclad Corporation v. The United Mexican States, icsid Case No. ARB(AF)/97/1, Award, 30 Aug 2000, para 76, 89. 121 Campbell, ‘House of Cards,’ 366. 122 The United Mexican States v Metalclad Corp, Supreme Court of British Columbia Court of British Columbia, 2001 bcsc 664, 2 May 2001. 123 Z Douglas, ‘Nothing if Not Critical for Investment Treaty Arbitration: Occidental, Eureko and Methanex,’ 22 (2006) Arbitration International 1, 27, 28.

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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. We can see that from good faith the tribunal derived very onerous and distinct obligations that in effect require the State to report to investor any potential regulations that may be applicable, including the rationale for them. Moreover, one cannot help but to recognize the tautological reasoning to the effect that investor has expectations to be treated consistently, etc. If this is so, the controlling obligation would be the obligation of consistency of policy application, not a subjective expectation of the same. Metalclad and Tecmed’s sweeping dicta were then picked up by other cases, and referred to as authority supporting the principle of le, although these ­cases in fact had not applied the protection of le to the case at hand.124 Thunderbird It was not until the case of Thunderbird v Mexico when an investment tribunal decided the case based on the application of les, although rejecting the claim in casu. The case related to official advice as to the legality of a gambling project, which turned out to be incorrect. Dissenting arbitrator, the late Prof Wälde, already saw les as a ‘self-standing subcategory and independent basis for a claim.’125 Wälde’s comparative review of eu Law, national administrative law systems as well as wto jurisprudence lead him to the recognition of the doctrine of les, while he admitted that its exact contours are not yet clear. What is interesting is that Wälde claimed that international law has long applied a doctrine of les of the kind applied by modern investment tribunals, referring to such cases as Shufeldt,126 Aminoil v Kuwait,127 and Amoco v Iran.128 124 E.g. Bayindir Insaat Turizm Ticaret Ve Sanayi a.s. v. Islamic Republic of Pakistan, icsid Case No. ARB/03/29, Award, 27 Aug 2009, para 179–180; mtd v. Chile, Award, para 114–115; Occidental (n 17) para 185; Duke v Ecuador (n 34) 339; lg&e v Argentina (n 17) para 127; Saluka (n 112) para 302. 125 Thunderbird, Separate Opinion (n 22) para 37. 126 Shufeldt Claim (Guatemala, usa), 24 Jul 1930, unriaa 2 (1949) 1079. 127 Kuwait v. The American Independent Oil Company (aminoil), 21 ilm 976, para 149. 128 Amoco Int‘l Finance Corp. v. Iran, 15 iran-u.s. c.t.r. (1987), at 189.

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However, upon a closer look at these cases, they really do not have much in common with les as we know them from today’s iil. Firstly, all of these cases involved a State contract. Schufeldt case was not about an illegal contract later reneged on, this was merely a defence put forward by Guatemala. The arbitrator held the contract valid and the repudiation decree was held as an internationally unlawful sovereign interference into a contract.129 Alternatively, the circumstances of the Schufeldt case may be viewed as an example of estoppel precluding Guatemala’s defence of illegality.130 Similarly, Aminoil and Amoco tribunals referred to les only as a principle applied to the calculation of damages, in order to help them establish what could be a reasonably foreseeable profit. It may also be said that in Aminoil, the use of this concept to calculate damages was theretofore novel; and even in  the  subsequent Amoco decision, the Iran-u.s. Claims Tribunal explained that the meaning of the term in the context of Aminoil case was case specific.131 Although Wälde recognizes that previous awards have not explained the doctrinal background of the principle, they have contributed towards establishing the les as a sub-category of fet.132 It is interesting that, although currently investment law scholarship and practice refer to les as a general principle of law, in virtually all cases we find a reference to Tecmed’s assertion of unfettered protection of expectations as an authoritative statement.133 This shows how easily controversial and unprincipled legal solutions can come to hold sway in the area of investment arbitration. The cases that cite as authority for the use of les to previous awards, which do not explain the provenance of the concept, typically contain the mantra along the lines that ‘legitimate expectations are an important element of fet, while at the same time the protection has its limitations, for the ­expectations must be legitimate and reasonable, and the assessment must take account of all circumstances.’134 This type of verbiage is similarly circular and virtually content-less. As long as the limitations are not spelled out, it effectively gives a tribunal a free pass to judge the expectations at its whim. 129 Schufeldt Claim, 1088. 130 D Bowett, ‘Estoppel before International Tribunals and its Relation to Acquiscence’ (1957) 33 byil 176, 186. 131 Amoco v. Iran, para 265. 132 Thunderbird, Separate Opinion (n 22) para 31. 133 Toto Costruzioni Generali S.p.A. v. The Republic of Lebanon, icsid Case No. ARB/07/12, Award, 7 Jun 2012, para 152; Bayindir (n 125) para 179–180, Siemens a.g. v. The Argentine Republic, icsid Case No. ARB/02/8, Award, 17 Jan 2007, para 298–299; Duke v Ecuador (n 34) para 339–340; Thunderbird, Separate Opinion (n 22) para 32. 134 Similar lines can be found in Duke v Ecuador (n 34) para 340.

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The Increasing Sophistication in the Treatment of Legitimate Expectations? Starting with the Thunderbird award, a tendency to explain the function, ­nature and scope of the principle of les has become observable. The comparative analysis carried out by some recent decisions suggests that the p ­ rinciple may have much more limited scope than previously asserted in the cases d­ escribed above.135 The Total Tribunal, for instance, has based the principle on comparative analysis of les in domestic jurisdictions, and recognized that the principle is accepted with variations ‘within well-defined limits.’136 Similarly, the Gold R ­ eserve award refers to the principle of Vertrauensschutz, as the basic rationale of the protection of les, thus abandoning the circularity of the early awards.137 The annulment committee in cms v Argentina, notoriously comprised of ­highly reputed publicists, has also contributed to a more rigorous approach to the concept. The committee stated that ‘although legitimate expectations might arise by reason of a course of dealing between the investor and the host State, these are not, as such, legal obligations, though they may be relevant to the application of the fair and equitable treatment clause.’138 The mtd annulment committee, in a decision issued the same year, penned similar criticism of the lavish use of the concept, specifically aimed at the Tecmed award: The tecmed Tribunal’s apparent reliance on the foreign investor’s e­ xpectations as the source of the host State’s obligations (such as the obligation to compensate for expropriation) is questionable. The obligations of the host State towards foreign investors derive from the terms of the applicable investment treaty and not from any set of expectations investors may have or claim to have.139

135 Toto v. Lebanon, para 166, 193; Total v. Argentina, para 111, 128; Gold Reserve Inc. v. Bolivarian Republic of Venezuela, icsid Case No. ARB(AF)/09/1, Award, 22 Sep 2014, para 576. 136 Total v. Argentina, para 128. 137 Gold Reserve v. Venezuela, para 576. 138 cms v. Argentina, Decision on Annulment, para 89. A paragraph from Waste Management ii v. Mexico, often quoted as a re-statement of the normative content of the fet standard also mentions that ‘In applying this 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.’ Thus, the tribunal recognized importance of potential objectivized expectations, but only as a consideration in application of the standard. Waste Management v Mexico ii, icsid Case No. ARB(AF)/00/3, Award 30 Apr 2004, para 98. 139 mtd v. Chile, Decision on Annulment, para 67.

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If these decisions are to be taken as authority, it would mean that the protection of les is not an autonomous obligation incumbent upon the State. Yet, how this concept may be applied remains open. In Glamis, a case dealing with nafta Article 1105 claim, the claimant complained of a withdrawal of an initially approved request, which was based on a legal opinion issued in the interim and on a new legislation. The Tribunal rejected the claim, as there was absence of ‘active inducement of a quasi-­ contractual expectation’ that could be considered as a specific, definite, unambiguous and repeated basis for les.140 One may observe the similarity with the criteria applied in Coughlan. This assessment was for the tribunal a threshold question as to the existence of protected expectations. The inducement of a quasi-contractual nature was taken as a requirement for the creation of a duty to uphold the expectation.141 A similar approach was taken in Cargill.142 What is certainly a welcomed development is that recent tribunals explicitly distance themselves from the circularity of previous awards, and state there cannot be an internationally protected expectation to fet, to treatment that is reasonable and non-arbitrary, or, yet, an expectation to comply with domestic law writ large.143 Also, recent tribunals clarified that the notion of les cannot be used as a stabilization clause.144 It should be noted that nafta tribunals are generally more restrictive when assessing claims based on les, as opposed to non-nafta tribunals.145 ­Although this may be based on the alleged autonomous nature of the fet in the bits that do not link the standard with general international law, the position adopted here is that this distinction is not legally defensible.146 140 Glamis Gold v. us, para 766–767, 802. 141 Ibid, para 802. 142 Cargill, Incorporated v. United Mexican States, icsid Case No. ARB(AF)/05/2, Award, 18 Sep 2009, para 290. 143 Crystallex v. Venezuela, para 552; Bilcon v. Canada, Dissenting Opinion of D McRae, para 33; ece Projektmanagement v. The Czech Republic, uncitral, pca Case No. 2010-5, Award, 19 Sep 2013, para 4.764–766. 144 Charanne v. Spain, para 490; Impregilo v. Argentina, para 290, Total v. Argentina, para 101. 145 F Dupuy, PM Dupuy, ‘What to Expect from Legitimate Expectations?: A Critical ­Appraisal and Look into the Future of the “Legitimate Expectations” Doctrine in International ­Investment Law,’ in Raouf, Leboulanger, Ziadé (eds), Festschrift Ahmed Sadek El-Kosheri: From the Arab World to the Globalization of International Law (Kluwer 2015) 273, 278–289; P Dumberry, ‘The Protection of Investors’ Legitimate Expectations and the Fair and ­Equitable Treatment Standard Under nafta Article 1105’ (2014) 31 J Intl Arb 47. 146 See generally on fet and minimum standard Paparinskis, International Minimum Standard; and specifically in relation to les, Dupuy, Dupuy, ‘What to Expect from Legitimate

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There is indeed a scope for an argument that the conception of les used in iil may be enhanced as opposed to its domestic law counterparts due to the architecture and purposes of the iil regime. This argument may be based on the notion of inducement, as one of the purposes of iias is to promote foreign investments in the host State,147 or on the notion of stability of regulatory framework, mentioned in some treaties and highlighted by some tribunals.148 I will thoroughly analyse these arguments in the companion article.

Conclusion

Significant part of the iil practice and scholarship analysed above stands for a proposition that les in iil are divorced from their roots in comparative administrative law. They imply that les as a general principle should protect more in the iil context than in any other national law. This seems as a strange proposition when one speaks about applying a general principle of law; it is more akin to apply some sort of a General-Principle-Plus. The fact that expectations in one form or another are crucial consideration in many areas of international law149 does not mean that the notion of les, a specific and concrete legal ­principle, should be applied as an argumentative framework for solving all too various legal claims; particularly when other less controversial rules and principles may readily do the work. The principle needs to retain its limited and exceptional function, if it is to have meaningful role in solving investment disputes. In the words of one recent investment tribunal: Expectations?’ 282; cf T Weiler, The Interpretation of International Investment Law: Equality, Discrimination and Minimum Standards of Treatment in Historical Context (Brill 2013). 147 See e.g. Ch Schreuer, U Kriebaum, ‘At What Time Must Legitimate Expectations Exist?’ (2009) in J Werner, A Hyder Ali (eds) A Liber Amicorum Thomas Wälde: Law beyond Conventional Thought, 265, 273; mtd v. Chile Award, para 160–166; Tecmed (n 16) para 154; Waste Management, Inc. v. United Mexican States (‘Number 2’), icsid Case No. ARB(AF)/00/3, Award, 30 Apr 2004, para 98. 148 Most notably the first sentence of Art 10(1) of the Energy Charter Treaty. From the case law see e.g. Toto v. Lebanon, para 224; lg&e v. Argentina, para 125; Bayindir v. Pakistan, para 178, 240; Duke v. Ecuador, para 339; Occidental I v. Ecuador, para 183–186; lg&e v. Argentina, para 137; cms v. Argentina, Award, para 279; Saluka v. Czech Republic, para 302, and more recently Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, icsid Case No. ARB/13/36, Award, 4 May 2017, para 378–387; Blusun v. Italy, para 313–319. 149 G Schwarzenberger. The Fundamental Pricniples of International Law (1955) 290; M Byers, Custom, Power and the Power of Rules (cup 1999) ch 7.

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‘The multiplication of legitimate expectations may create a “moving target” for a respondent that in an extreme case might raise issues of due process.’150 les should not be diluted into a rhetorical frame that invites uncertainty and subjective judgement. In the context of English law, Forsyth recently wrote that ‘there is a real danger the concept will collapse into an inchoate justification for judicial ­intervention. [For it] often gives little guidance and plays at best a rhetorical role.’151 What I would warn against is a use of this amplified and indeterminate version of les. The same scholar once uttered about les in ­English administrative law ‘that it is much easier to establish ground upon which to deny [les] than grounds upon which to grant such protection.’152 For the time being, it may be said that in the domain of iil the exact opposite seems to be the prevailing practice.

150 Arif v Moldova (n 118) para 534. 151 Forsyth, 2012 (n 50) 429. 152 Forsyth, 1988 (n 50) 239.

Chapter 16

The National Treatment Obligation Matteo Sarzo Even if the national treatment obligation is generally enshrined in contemporary international investment agreements, its arbitral application does not unveil a coherent interpretative framework. As will be demonstrated by the analysis of the relevant case-law, every arbitral tribunal gives his personal reading of any single requirement of the clause (such as the ‘likeness,’ for instance). Moreover, contrary to other standards, such as fair and equitable treatment and full protection and security, claims made under ­national treatment obligation are often dismissed by arbitrators. Notwithstanding these aspects, the present contribution is aimed at investigating the reasons behind the prudent approach of the arbitral tribunals toward national treatment, and even through a comparison with the similar provisions couched in gatt and gats.

Introduction In the field of international economic law, the national treatment obligation is a key provision whereby States commit themselves to grant the foreigners the same treatment accorded to the nationals in like or similar ­circumstances ­under their laws and regulations. This rule is couched both in multilateral ­commercial treaties (namely, gatt, gats, trips and other wto covered agreements), in chapters or sections of regional free trade agreements (like nafta) and in bilateral investments treaties (bits).1 Supported by Latin American countries in the xix century as part of the Calvo doctrine, the national treatment clause was aimed at preventing the consolidation of an international minimum standard of treatment.2 ­However, 1 Some commentators have suggested the potential ‘universal’ application of the clause. See Pieter VerLoren van Theemat, The Changing Structure of International Economic Law (1981), 22. 2 See Leila Choukroune, ‘National treatment in international investment law and arbitration: A relative standard for autonomous public regulation and sovereign development,’ in A.  Kamperman Sanders (ed.) The Principle of National Treatment in International Economic Law: Trade, Investment and Intellectual Property (2014), 189–190. It has been suggested that ‘the argument of the international standard operated as ‘national-treatment-plus’ in those circumstances where the treatment of nationals could not serve as an appropriate ­benchmark © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_017

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in contemporary international investment agreements, it readily coexists with other standards, such as full protection and security or fair and equitable treatment.3 While the latter set of rules directly dictates substantive standards, the protection afforded by national treatment is relative and formal, because States confine themselves to according to the foreigners the same status of ­nationals with respect of any kind of treatment. Therefore, the obligation not to unreasonably discriminate foreigners against domestic actors on grounds of nationality secures the States a broad leeway in enacting and shaping their domestic public policies, irrespective of what an international minimum standard of protection would provide for. Notwithstanding the spread of this clause in modern international economic agreements, its nature of general principle appears controversial. It will be shown that, while the dsb has considered the national treatment obligation a ‘cornerstone’ within several wto covered agreements, the investment arbitral tribunals, called upon to apply the same rule laid down in nafta or others bits, have given a quite narrow interpretation thereof. To this end, in the first section of the present contribution, the national treatment obligation will be shortly dealt with in the ambit of gatt and gats.4 This reference is instructive in order to point out that, within the context of the trade liberalization r­egime, the national treatment obligation plays a ­major role because of the lack of ­other substantive standards, such as fair and equitable treatment. In the second section, the rule of national treatment will be addressed within investment protection agreements. It will be analyzed both from the point of view of its wording and arbitral application, as to whether some common trends or features are sufficiently consistent to deem it a general principle within international investment law.

because it was exceptionally outrageous.’ See Martins Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (2013), 42. 3 It is controversial whether the fair and equitable treatment, laid down in investment agreement, can always be intended as a reference to the customary rule of international minimum standard. The wording of the clause and the arbitral application thereof cannot lead to a clear conclusion, because they are both inconsistent and fragmented. See Paparinskis, Supra note 2, at 94–95, 160 ff. 4 See Jorge A. Huerta-Goldman, ‘Cross-cutting Observation on National Treatment,’ in J.A. Huerta-Goldman, A. Romanetti, F.X. Stinimann (eds.), wto Litigation, Investment Arbitration, and Commercial Arbitration (2013), 264–271. See also Nicolas Diebold, Non-­Discrimination in International Trade in Services: ‘Likeness’ in wto/gats (2010), 143–144.

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National Treatment Obligation under gatt and gats

In the context of trade liberalization, the national treatment obligation is set forth both in gatt Art. iii and in gats Art. xvii. In the field of trade in goods, national treatment covers a wide range of State measures. Under Art. III:2, imported goods must not be taxed in excess of like domestic products and must not be dissimilarly taxed in respect of directly competitive or substitutable national products, so as to afford protection to the domestic market. While this provision encompasses only taxation measures, Art. III:4 has a broader scope, according to which States are required to accord to imported goods a treatment no less favorable than the one reserved to like products of national origins with regards to all laws, regulations and requirements.5 The dsb has given an extensive reading of gatt Art. iii. For instance, even if competitive or substitutable products do not fall under the purview of Art. III:4, however the likeness requirement has been construed as covering any competitive relationship between and among products.6 Moreover, a domestic measure can be challenged even if it is neutral on its face (the so called de facto discrimination) if it grants to the imported products a formally identical treatment to the domestic ones, but its application actually results in a disadvantaged treatment of foreign goods.7 Although the case-law is not perfectly coherent as for all aspects of the national treatment standard,8 this obligation has always been construed within its main scope, namely to prevent the circumvention of the commitments undertaken by the Member States with regards to tariffs concessions.9 It is commonly acknowledged that the liberalization of trade in goods would be

5 See Holger Hestermeyer, ‘Article iii,’ in R. Wolfrüm, P.-T. Stoll and H. Hestermeyer (eds.), wto – Trade in Goods (2010), 121–165. 6 See Petros Mavroidis, Trade in Goods: The gatt and the Other wto Agreements Regulating Trade in Goods (2012), 280. 7 See Diebold, Supra note 4, at 35–44. 8 For instance, the application of ‘likeness’ varies according to the type of alleged discrimination (de jure or de facto), or whether the measure falls under the purview of Article III:2, first or second sentence. In case of de jure discrimination, the claimant is not required to prove the actual existence of a comparator within the domestic market. On the contrary, when the claimant asserts a de facto discrimination, the ‘likeness’ requirement is met when a competitive relationship between products in a given market is demonstrated. Accordingly, the dsb has set out several criteria to assess the competitive relationship between products. See Diebold, Supra note 4, at 67, 98–99, 116–117. 9 See Jürgen Kurtz, The wto and International Investment Law: Converging Systems (2016), 82.

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­ ndermined, if States set up barriers to trade other than the tariffs specifically u agreed upon. Thus, the national treatment obligation strictly limits the enactment of protectionist policies. As pointed out in Japan – Alcoholic Beverages ii (1996): The broad and fundamental purpose of Art. iii is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Art. iii ‘is to ensure that internal measures ‘not to be applied to imported or domestic products so as to afford protection to domestic production.’ Toward this end, Article iii obliges Members of the wto to provide equality of competitive condition for imported products in relation to domestic products.10 Unlike gatt, the national treatment obligation laid down in Article xvii gats is not an unconditional provision, because it only applies in the sectors of ­services and in the mode of supply for which each Member State has ­undertaken a precise commitment. Therefore, the intensity of protection given to foreign suppliers of services or services is extremely fragmented and ­relies upon the specific undertakings of every single member State of the wto. Without a specific engagement, States are generally free to enact and maintain measures which, de jure or de facto, discriminate foreign services or services suppliers in respect of domestic competitors.11 Therefore, the rationale behind this clause is slightly different from the purpose served by gatt Article iii. While the l­ atter is aimed at outlawing immediately non-tariff barriers to trade, the ­liberalization of services is to be achieved progressively under gats. This conclusion can be confirmed by the wording of the recitals of gats, which, despite gatt, underlines the wish of a progressive achievement of liberalization and, on the other hand, the freedom of each Member of enacting ‘new regulations on the supply of services within their territories in order to meet national policy objectives.’ Notwithstanding the different scope of application of the national treatment clause between trade in goods and services, some common trends can be nevertheless outlined. For instance, de facto discrimination is expressly prohibited under gats Article XVII:3.12 Moreover, as pointed out in 10 11 12

See Appellate Body Report, Japan – Taxes on Alcoholic Beverages, WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R, adopted 1 November 1996, dsr 1996: i, p. 16. See Nellie Munin, Legal Guide to gats (2010), 147–150. See Markus Krajewski, Engelke, ‘Article xvii gats,’ in R. Wolfrum, P.-T. Stoll and C. ­Feinäugle (eds.), wto – Trade in Services (2008), 411.

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China – E­ lectronic Payment Services (2012), the likeness requirement, in both trade in goods and services, serves to determine whether the products or ­services and service suppliers, respectively, are in a competitive relationship with each other.13 Finally, both in trade in goods and services Members States are not called upon to remove or compensate for any inherent competitive disadvantage which results from the foreign character of the service or good.14 ­Consequently, it can be readily suggested that the national treatment clause is construed coherently within the ambit of the two major wto covered agreements. 2

National Treatment in Investments Treaties

The national treatment obligation is often couched in bilateral investments treaties (bits) and in mixed multilateral or regional agreements addressing both trade and investments protection issues (rtas or ftas).15 The scope of application of the clause varies according to the single agreement in which it has been couched, since there is not a single definitive ‘model.’

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‘We consider that a likeness determination should be based on arguments and evidence that pertain to the competitive relationship of the services being compared. As in goods cases where a panel assesses whether a particular product is a ‘like product,’ the determination must be made on the basis of the evidence as a whole. If it is determined that the services in question in a particular case are essentially or generally the same in competitive terms, those services would, in our view, be ‘like’ for purposes of Article xvii.’ See ­Panel Report, China – Certain Measures Affecting Electronic Payment Services, WT/DS413/R and Add.1, adopted 31 August 2012, dsr 2012:X, p. 179, Section 7.702. This provision is laid down in footnote 10 attached to gats Article XVII:1. The same applies also to gatt: according to the ab in Dominican Republic – Import and Sale of Cigarettes as for gatt Article iii, ‘the existence of a detrimental effect on a given imported product resulting from a measure does not necessarily imply that this measure accords less favourable treatment to imports if the detrimental effect is explained by factors or circumstances unrelated to the foreign origin of the product, such as the market share of the importer in this case.’ See Appellate Body Report, Dominican Republic – Measures Affecting the Importation and Internal Sale of Cigarettes, WT/DS302/AB/R, adopted 19 May 2005, dsr 2005:XV, p. 38, Section 96. For an updated overview of the new generation of bits and ftas, see Magdalena SłokWódkowska, ‘Most-Favoured Nation and National Treatment in the eu and us ­Regional Trade Agreements – Tools for Equal or Discriminatory Treatment?’ in P. Pazartzis, M. ­Gavouneli (eds.), Reconceptualising the Rule of Law in Global Governance, Resources, Investment and Trade (2016), 448–453, 460–463.

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For instance, the requirement of likeness is not a common feature of the national treatment obligation embodied in several investment agreements or chapters. While nafta Article 1102 expressly stipulates that national treatment must be granted to foreign investors and i­nvestments ‘in like circumstances’ with domestic actors,16 many bits do not require the same. Therefore, the scope of application of the clause seems to be ­broader in the latter case.17 Other variations in the wording of national treatment clauses may ­concern the coverage and protection of the pre-­establishment phase of the investment. Typically, the obligations of national treatment couched in i­nvestment agreements stipulated by emerging States only encompass the post-­establishment phase of the investment in accordance with their wish of keeping control of the access of foreign investors into their jurisdiction.18 An additional caveat is that national treatment obligation must be read within the overall context of the single agreement, which may stipulate a list 16

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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 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) 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 (b) 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.’ For instance, the national treatment clause couched in Article 3, para. 1 of the Italy-Iran bit does not provide for the criterion of ‘like circumstances’. It reads as follow: ‘­Investments of natural and legal persons of either Contracting Party effected within the territory of the other Contracting Party shall receive the host Contracting Party’s full l­ egal protection and fair treatment not less favourable than that accorded to investments ­effected by its own investors or investors of any third state.’ It has been suggested that ‘the choice of wording of the standard of comparison between the subjects covered by the ­provision is pivotal to the scope of the treatment obligation.’ See Martín Molinuevo, ­Protecting Investment in Services – Investor-State Arbitration versus wto Dispute Settlement (2012), 104–105. See David Collins, ‘National treatment in emerging market investment treaties,’ in A. Kamperman Sanders (ed.) The Principle of National Treatment in International Economic Law: Trade, Investment and Intellectual Property (2014), 169–170.

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of exceptions or grant the States parties the right to append reservations. These provisions are aimed at safeguarding the measures enacted by the State parties in pursuance of legitimate public goals or at limiting ab initio the scope of application ratione materiae of the clause. For instance, Article 17 of the asean Comprehensive Investment Agreement, entered into force in 2012, explicitly set forth a list of exceptions to the substantive standards of protection ­granted to the investors.19 As for the right to make reservations, both the asean Comprehensive Investment Agreement (Article 9) and nafta use a ‘negative list’ approach, whereby States can exclude some economic sectors or business ­activities from the scope of application of national treatment clause.20 The variations on the wording of the clause and its construction in the light of the scope of each agreement make difficult to draw a common accepted reading of the national treatment obligation within investment agreements. At first glance, the arbitral interpretation of national treatment clause seems to confirm this conclusion, once compared to the well-established wto caselaw.21 However, a closer look at the prominent awards unveils a rather restrictive reading of the national treatment obligation. It is telling that, in the ­majority of disputes brought b­ efore arbitral tribunals, the claim for breach of n ­ ational treatment provision is usually dismissed. This trend will be i­nvestigated 19

20 21

Art 17 of the asean cia reads as follow: ‘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) necessary to protect public morals or to maintain public order; (b) necessary to protect human, animal or plant life or health; (c) necessary to secure compliance with laws or regulations which are not ­inconsistent with this Agreement, including those relating to: (i) 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; (d) aimed at ensuring the equitable or effective imposition or collection of direct taxes in respect of investments or investors of any Member State; (e) imposed for the protection of national treasures of artistic, historic or archaeological value; (f) relating to the conservation of exhaustible natural resources if such measures are made effective in ­conjunction with restrictions on domestic production or consumption. See Chong Yee Leong, N. Vivekananda, ‘Non-discrimination between Foreign and Domestic Investment in asean,’ 32 Journal of International Arbitration (2015), 398. See Federico Ortino, ‘Non-Discriminatory Treatment in Investment Disputes,’ in P.-M. ­Dupuy, F. Francioni, E.-U. Petersmann (eds.) Human Rights in International Investment Law and Arbitration (2009), 365.

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through the analysis of prominent awards rendered by arbitral tribunals applying, respectively, nafta Article 1102 and several bits, as will be detailed in Subsections 2.1 and 2.2 below. 2.1 National Treatment in nafta The violation of national treatment obligation, laid down in nafta Article 1102, is often alleged by the investors in arbitral proceedings, but the claim is generally unsuccessful. Arbitrators usually dismiss the ground of n ­ ational treatment, because of the lack of likeness between the foreign investor and the domestic comparators. This requirement places a high burden of proof on the investor, who has to show that the measure directly discriminates him beyond any reasonable doubt. For instance, in one of the first cases involving Article 1102, Myers v. Canada, a us company, specialized in the treatment of hazardous wastes, was banned by a Canadian measure from exporting equipment containing pcb wastes into its us facilities to be therein remediated. The arbitral tribunal did not only point out that ‘the concept of like circumstances invites an examination of whether a non-national investor complaining of less favorable treatment is in the same sector (be it economic or business),’ but also that the assessment thereof must ‘take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest.’22 After the assessment of a competitive relationship between Myers and its Canadian competitors, who processed the hazardous wastes in Canada and not abroad, the arbitral tribunal found that the challenged measure was discriminatory on grounds of nationality, because: it was precisely because sdmi 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.23 It was clear that the ban had the aim of impairing the foreign investor by reason of its nationality, and that evidence stemmed also from the protectionist purpose expressed by the Canadian Minister for the Environment.24 22 See S.D. Myers Inc. v. Canada, Partial Award, 13 November 2000, Section 250, p. 62. 23 See Ibid., Section 251. 24 See Kurtz, Supra note 9, at 127. It is controversial whether the protectionist intent is necessary to find a violation of the national treatment obligation in investment agreements. See Caroline Henckels, Proportionality and Deference in Investor-State Arbitration: Balancing Investment Protection and Regulatory Autonomy (2015), 156–159.

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Another instructive case is represented by Archer Daniels Midland v. ­Mexico. The challenged measure was an excise tax, which applied only to the ­producers of soft drinks that used sweeteners other than cane sugar. The us ­investor, being the only manufacture of fructose corn syrup in Mexico (a  product ­substitutable with cane sugar), was directly affected by the tax. The t­ribunal considered that both producers were in like circumstances,25 because the tax – albeit neutral on its face – was designed from the outset to afford protection to the Mexican cane sugar industry, […] 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.26 Even if a breach of the national treatment obligation was actually found in the above-mentioned disputes, nevertheless its assessment followed a close scrutiny of all the circumstances of the case. They unequivocally unveiled a discrimination by reason of nationality, because the measure had the target to impair a particular foreign investor (in Myers) or there was a ‘handful’ of foreign investors in the host country, specially affected by the measure as unique producer of the that product (in Archer Daniels). Similarly, in Feldman the tribunal assumed the discrimination prima facie not only because there was ‘a handful of relevant investors, one foreign (the Claimant) and one domestic (the Poblano-Guemes Group), each engaged in the business of purchasing Mexican cigarettes and marketing those cigarettes abroad,’ but also because ‘the evidence on the record’ demonstrated ‘that there [was] only one u.s. citizen/investor, the Claimant, that allege[d] a violation of national treatment under nafta Article 1102, and at least one domestic investor (Mr. Poblano) who ha[d] been treated more favorably.’27 Therefore, the discrimination stemmed

25 See Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. ­United Mexican States, Award, icsid Case No. ARB(AF)/04/5, 21 November 2007, Sections 203–204, p. 67. 26 See Ibid., Section 208, p. 68. It is noteworthy that this dispute had already been settled, through the recourse by the us to the dsb against Mexico within wto. In that proceedings, the panelists and the Appellate Body had yet found a violation of national treatment under gatt Article III:2 and III:4. 27 See Marvin Roy Feldman Karpa v. United Mexican States, supra, n. 28, Section 154, p. 63, Section 181, p. 76 [emphasis added].

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clearly from a ‘­pattern of official action (or inaction) over a number of years’28 and the claimant provided for an ‘uncontradicted evidence,’29 which was able to show a ‘nexus between the discrimination and the Claimant’s status as a foreign investor.’30 On the contrary, in many other cases, claims made under national treatment have been dismissed on the ground of a narrow interpretation of the likeness test.31 For instance, in Methanex v. usa, the arbitrators ruled out any kind of competition-based approach for the selection of the relevant comparator. In particular, they not only found that the Californian ban of mbne (a key component of which was methanol, produced by the Canadian-based company Methanex) affected in the same way domestic and foreign producers of methanol, but also that that us manufacturers of ethanol, a chemical ­element ­allegedly substitutable to methanol, could not been relevant comparators, as claimed by the foreign investor. In the view of the tribunal, the likeness test cannot be enlarged to the assessment of a competitive relationship among producers of substitutable products, when domestic identical producers are affected by the challenged measure in the same fashion as the foreign investors.32 The argument of the mere existence of domestic investors, affected by the measure in the same fashion of foreign investors, runs in many other awards, which ruled out the ‘likeness’ between the foreign investor and its domestic counterparts. For instance, in Merrill v. Canada, the arbitrators did not find a breach of Article 1102 nafta because: in all the comparisons that are made within the appropriate category, the treatment the Investor is accorded is identical to that accorded to 28 See Marvin Roy Feldman Karpa v. United Mexican States, Award, icsid Case No. ARB(AF)/99/1, 16 December 2000, Section 188, p. 564. 29 In Corn Products International, the tribunal hold that the ‘uncontradicted evidence […] was that production of hfcs in Mexico was wholly concentrated in foreign-owned enterprises (predominantly cpi, which had of the hfcs share of the market for soft drink sweeteners), whereas production of sugar was largely carried out by Mexican nationals (with the Mexican State itself owning a substantial part of sugar production). Thus, the effect of what was, in substance, a special tax on hfcs was the distortion of the market in favour of domestic suppliers and to the disadvantage of the foreign investors protected by Chapter xi of the nafta.’ See Corn Products International, Inc. v. United Mexican States, icsid Case No. arb (AF)/04/1, 15 January 2008, Section 132, p. 61. 30 See Marvin Roy Feldman Karpa v. United Mexican States, ibidem. 31 See Choukroune, Supra note 2, at 211. 32 See Methanex Corporation v. United States of America, Final Award, 3 August 2005, Section 17, Part iv – Chapter B – Page 8.

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d­ omestic 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.33 The adf v. usa case is paradigmatic of the restrictive reading of national treatment. The claimant, a Canadian company, was a sub-contractor for the supply and delivery of structural steel fabrication for bridges, concerning the construction of juncture in the us. adf undertook to purchase us-origin steel, to be transferred to and fabricated in its facility in Canada. However, this last operation was forbidden by the Buy America clause, applicable to the sub-­contract agreed upon with the main contractor. Under the terms of the us measure, every steel manufacturing process should have been performed within the usa territory in order to secure the main contractor the reimbursement of the costs of the project from the Federal Administration.34 The compliance with the ­provision thereof resulted in a grave loss for adf, which had to sub-contract the steel manufacturing process in the us with increasing costs. ­According to the claimant, the us legislation at stake was in breach of nafta Art. 1102, because it favoured us domestic steel manufacturers and fabricators to the detriment of non-us companies. The arbitral tribunal dismissed the claim by stating that the investor failed to identify any: u.s. steel manufacturer or fabricator which, by virtue of its nationality, had been exempted from the requirements of the ‘Buy America’ provisions and allowed to supply to the Springfield Interchange Project, or some other Federal-aid state construction project, structural steel materials that had been manufactured or fabricated in Canada or elsewhere outside the u.s.35 Moreover, because the measure applied in the same fashion to us-based companies and foreign investors, the tribunal pointed out that no discrimination could arise between them under the national treatment obligation. In other disputes, the likeness between the domestic comparator and the foreign investor has been interpreted broadly as ­covering also the regulatory 33 See Merrill and Ring Forestry L.P. v. Canada, Award, icsid Case No. UNCT/07/1, 31 March 2010, Sections 92–93, pp. 39–40. 34 See adf Group Inc. v. United States of America, Award, icsid Case No. ARB(AF)/00/1, 9 January 2003, Sections 49–52, pp. 217–219. 35 See Ibid., Section 156, p. 265.

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measure itself, its genesis and application. Pope & Talbot v. Canada is instructive on this point. Pope & Talbot was a us company which operated in Canada through a wholly-own subsidiary in British Columbia in the manufacturing of softwood lumber. The subject-matter of the dispute concerned the implementation, by Canada, of the Softwood Lumber A ­ greement agreed upon with the usa. Under the terms of the agreement, the us committed themselves to cease  to apply trade remedies rules against Canadian softwood lumber importations and, on the other hand, Canada undertook to regulate and restrain exports of softwood lumber into the us, by setting forth a regime of quotas, licenses and fees within some of its provinces. Therefore, all exporters located in these provinces, including British Columbia, received a less favorable treatment in terms of quotas and fees than the ones located in other provinces of Canada. According to the arbitrators, In evaluating the implications of the legal context, the Tribunal believes that, as a first step, the treatment accorded a foreign owned investment protected by Article 1102(2) should be compared with that accorded domestic investments in the same business or economic sector. […] ­Difference in treatment will presumptively violate [the principle] unless they have a reasonable nexus to rational government policies that (1) do not distinguish, on their face or de facto, between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing of nafta.36 Notwithstanding the presumption referred to in the passage quoted above, the tribunal found that Pope & Talbot was not in like circumstances in respect of the other softwood lumber manufacturers and exporters based in the ­provinces not covered by the Agreement, even if they carried out the same business and they were operating in the same economic sector of the claimant. The departure from the principle laid down was explained by the fact that: the approach proposed by the nafta Parties would tend to excuse discrimination that is not facially directed at foreign owned investments. A formulation focusing on the like circumstances question […] will require addressing any difference in treatment, demanding that it be justified by

36 See Pope & Talbot Inc. v. The Government of Canada, Award on the Merits of Phase 2, 10 April 2001, Section 78, pp. 35–36.

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showing that it bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investments.37 According to the arbitrators, the companies, located in the non-covered provinces, had never been affected by the threat of countervailing duties by the us, contrary to the Canadian corporations located in the covered provinces. This circumstance sufficed to dismiss any likeness between Pope & Talbot and the other firms based in the non-covered provinces.38 Instead of confining itself to a purely assessment of the type of economic activity performed by the competitors based in the provinces not covered by the Agreement or by the implementation measures thereof, the arbitral tribunal ruled out the likeness requirement by arguing that the measure at issue embodied a reasonable public policy not aimed at discriminating the investor on grounds of nationality. Similarly, in ups v. Canada, the arbitral tribunal found that the custom processing of goods imported by mail (and carried out by the Canada Post) was not a service operated in the like circumstances of custom processing of goods imported by courier, because of the different legal regime applicable to both services, including several international agreements. According to the tribunal, this evidence was ‘compelling.’39 The same view was taken in the recent Apotex v. usa case. According to the arbitrators, the likeness requirement between several us-based pharmaceutical companies and non-us based investors was not met due to the different legislation applicable to the foreign investor, which granted the fda the power to refuse the admission into the usa of foreign manufactured drugs. In the view of the tribunal, the us measures complied with nafta Article 1102 because they: protect the public health of us residents and patients, do not distinguish between companies or facilities on the basis of nationality and are consistent with the investment objectives of nafta’s Chapter Eleven.40 37 See Ibid., Section 79, p. 36. 38 See Ibid., Section 87–88, pp. 38–39. 39 See United Parcels Service of America Inc. v. Canada, Award, icsid Case No. UNCT/02/1, 11 June 2007, pp. 54–55, Sections 117–120. 40 See Apotex Holdings Inc. and Apotex Inc. v. United States of America, Award, icsid Case No. ARB(AF)/12/1, 25 August 2014, Part viii, p. 17, Section 8.56. According to the arbitrators, ‘the differences in the fda’s ability to deny access to the us market as between foreign and domestically manufactured drugs are substantial; and that these constitute a material distinction between the legal and regulatory regimes applicable to foreign and

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In all these cases, the arbitrators appraised the rationale behind the measure adopted. For instance, in Gami v. Mexico, the tribunal concluded by stating that: a reason exists for the measure which was not itself discriminatory. That measure was plausibly connected with a legitimate goal of policy (ensuring that the sugar industry was in the hands of solvent enterprises) and was applied neither in a discriminatory manner nor as a disguised barrier to equal opportunity.41 The abovementioned cases show a general restrictive application of national treatment through a well targeted application of the likeness requirement, while little room is left to a systematic interpretation of nafta Article 1102 within the objectives laid down in Article 102(1)(B) (the promotion of ‘conditions of fair competition in the free trade area’).42 One may conclude that any national measure, unless clearly aimed at discriminating the foreign investor because of its nationality (for instance, when the foreign investor is the only or major actor within a given sector of the market), would comply with the national treatment standard, even if it alters, de facto, the condition of competition to the detriment of foreign investors. It goes without saying that some commentators have suggested that this ‘light burden of persuasion placed now up now on the respondent State raises the danger of allowing a measure that should be declared illegal.’43 2.2 National Treatment in bits Unlike the case-law referred to above, the application by arbitral tribunals of the national treatment obligation, couched in bits, seems to be more sporadic. However, the majority of arbitral tribunals have followed a strict reading of the national treatment clause, as nafta’s interpretation of Article 1102.44 d­ omestic manufacturing facilities. These differences go to ‘like circumstances,’ rather than to ‘treatment’ and the Import Alert of 28 August 2009 itself.’ See Ibid., p. 16, Section 8.53. 41 See Gami Investments Inc. v. The Government of the United Mexican States, Award, 15 November 2004, Sections 114–115, p. 44. 42 For instance, according to Kurtz, in Methanex, ‘the tribunal’s chosen approach is the highly artificial (and out-come-orientated) manipulation of the likeness criterion.’ See Supra note 9, at 108. 43 See Kurtz, Supra note 9, at 132. 44 In only one case, albeit debatable, the arbitrators interpreted the likeness requirement broadly, as to encompass also any domestic comparator not belonging to the same economic sector or not being in the same business of the claimant. In Occidental, the

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Like in Pope & Talbot, also in Champion Trading Company v. Egypt the arbitrators took into account the applicable legal regime as a pattern of fact in order to ascertain and dismiss the likeness requirement. In that case, no likeness was found between the domestic companies and the foreign investors which, even if carrying out the same business activity, did not voluntarily participate to the cotton trading system set forth in the administrative legal regime. The tribunal stated that: although both kinds of companies operate in the same industry and are subject to same kind of rules, there is a significant difference between a company which opts to buy cotton from the Collection Centres at fixed prices and a company which opts to trade on the free market, whether or not the company is privately-owned or State-owned or whether the company is national or foreign.45 Also the Bayindir arbitration is illuminating on this trend. In that case, arbitrators ruled out the ‘likeness’ between the foreign investor and the domestic competitors, which were in the same business sector, by taking into account not only the regulatory framework applicable to both parties, but also every single circumstance of the case, which actually differed (namely: the different contractual relationship between them and the administration).46 The same outcome was reached in the Adel A Amadi award, according to which ‘to provide a relevant comparison for a national treatment claim, any comparator investor must still be in materially the same circumstances as the Claimant.’47 In ­claimant asserted that the denial of reimbursement of the vat paid to Ecuadorian authorities breached the national treatment obligation, because other export companies benefitted of the tax reimbursement, even if they were not involved in the same sector of oil production. Contrary to the holding in Methanex, the Tribunal found a breach of national treatment by stating that ‘in like situations cannot be interpreted in the narrow sense advanced by Ecuador as the purpose of national treatment is to protect investors as compared to local producers, and this cannot be done by addressing exclusively the sector in which that particular activity is undertaken.’ See Occidental Exploration and Production Company v. The Republic of Ecuador, Award, 1st July 2004, Section 173, p. 60. See also Choukroune, Supra note 2, at 209. 45 See Champion Trading Company and Ameritrade International, Inc. v. Arab Republic of Egypt, Award, icsid Case No. ARB/02/9, 27 October 2006, Section 154, p. 34. 46 See Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Islamic Republic of Pakistan, Award, icsid Case No. ARB/03/29, 27 August 2009, Sections 402, 411, p. 118, 120. 47 See Adel A Amadi Al Tamimi v. Sultanate of Oman, Award, icsid Case No. ARB/11/33, 3 November 2015, Section 463, p. 169. See also Parkerings-Compagniet as v. Republic of

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the Levy de Levi case the likeness requirement was read in such narrow fashion that the arbitrators could not actually find any effective comparator.48 Even if the non-nafta arbitrators seem to prefer a strict construction of the national treatment clause, the case-law still remains inconsistent on some ­other decisive issues.49 For instance, although many bits stipulate that discrimination of foreign investments or investors must be assessed between like or similar situations with their domestic counterparts, this is not just the case for all treaties.50 Therefore, it is controversial whether the likeness test has to be applied, even when it is not explicitly couched in the relevant national treatment obligation. For instance, in the rfcc v. Marocco case, the relevant bit provision did not dictate any « likeness » requirement: the arbitrators just supposed it, by stating that ‘le contenu de cette disposition qui se rencontre systématiquement dans les traités de protection des investissements ne pose pas de problème d’interprétation particulier,» and that « la principale difficulté réside […] dans la nécessité de déterminer si la situation de l’investisseur étranger était identique à celle de l’investisseur national ».51 Neither in ­Alpha Projektholding v. Ukraine did the arbitral tribunal take a stance on the point.52 On the contrary, in Total s.a. v. Argentine Republic, the arbitrators not only L­ ithuania, Award, icsid Case No. ARB/05/8, 11 September 2007, Section 427, p. 90; Railroad Develpoment Corporation (rdc) v. Republic of Guatemala, icsid Case No. ARB/07/23, 29 June 2012, Section 153, pp. 56–57. 48 See Renée Rose Levy de Levi v. The Republic of Peru, Award, icsid Case No. ARB/10/17, ­Section 401, p. 147. 49 Some commentators have pointed out the evident inconsistency of the arbitral scrutiny of national treatment obligations. See Choukroune, Supra note 2, at 199. See also See ­August. Reinisch, ‘National Treatment,’ in M. Burgenberg and alii (eds.), International I­ nvestment Law (2015), 852. 50 See supra, at 383. 51 See Consortium rfcc v. Royaume du Maroc, icsid Case No. ARB/00/6, Sentence arbitrale, 22 decembre 2003, Section 53, p. 35. However, in the case in hand the claimant and the domestic competitors were actually both in the same position as bidders to an international call for tender for the construction of a freeway and the investor contended that the award of part of the bid to the domestic counterparts was in breach of national treatment provision. See Ibid., Section 25, pp. 12–16. 52 ‘Unlike national treatment provisions in many other investment agreements, the uabit does not expressly state that discrimination must be between investors that are ‘like’ or otherwise similarly situated. The Tribunal need not resolve the question of whether Article 3(1) of the uabit should be interpreted to include such a limitation, as Claimant has not proven a national treatment violation of any sort, whether limited to investors in ‘like circumstances’ or not so limited.’ See Alpha Projektholding GmbH v. Ukraine, Award, icsid Case No. ARB/07/16, 8 November 2010, Section 428, p. 150.

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pointed out that the criterion of ‘like situation […] is inherent in the very definition of the term ‘discrimination’ under general international law,’53 and thus applicable even when the treaty is silent on this aspect (in the case in hand, art. 4 of the Argentine-France bit), but also that the claimant has to demonstrate a prima facie case of nationality-based discrimination, according to the following guidelines: (i) a claimant complaining of a breach by the host State of the bit’s national treatment clause has to identify the local subject for comparison; (ii) has to prove that the claimant-investor is in like circumstances with the identified preferred national comparator(s); and (iii) must demonstrate that it received less favourable treatment in respect of its investment, as compared to the treatment granted to the specific local investor or the specific class of national comparators.54 In the view of the tribunal, the likeness test should be considered a sort of ­condicio sine qua non, in order to assess whether there has been a breach of  ­national treatment, whose breadth, however, relies on the interpretation given in a case by case approach. Under Total, the threshold to be met in order to prove a prima facie discrimination is very high, similar to the one indicated in the case-law regarding nafta Article 1102 referred to above. Conclusions From the analysis of the arbitral awards concerning the application of the national treatment clauses, it transpires that domestic measures are generally held to be non-discriminatory, unless the claimant demonstrates that they are specifically targeted at discriminating him on grounds of nationality beyond any reasonable doubt. This presumption appears sound, when the treaty does not encompass any exception to the national treatment obligation. In this r­ egards, it has been persuasively suggested that the arbitral scrutiny of the challenged measures as part of the pattern of facts actually substitutes the lack of a set of exceptions in the relevant agreement.55 This circumstance ­explains why specific exceptions clauses, affecting the scope of application of national 53 See Total s.a. v. Argentine Republic, Decision on Liability, icsid Case No. ARB/04/1, 27 December 2010, Section 210, p. 97. 54 See Ibid., Section 212, at 97–98. 55 See Reinisch, Supra note 49, 852–853.

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treatment obligations, and reservations are being progressively embodied in the new generations of bits or ftas, based on the model dictated by gatt Article xx or by the gats’s schedule of commitments.56 However, one cannot ignore other arguments, which could effectively run counter a restrictive interpretation of the national treatment obligation. For instance, the lack of exceptions might have been construed by arbitrators as a leeway in giving a pervasive effect to the national treatment obligation. An additional argument in favour of a sweeping interpretation would be that the national treatment provision, enshrined in investment treaties, is much ‘broader in reach than their counterpart under gats’57 and, patently, under gatt, because it is not limited to trade in goods or services, but covers any kind of economic investment.58 Moreover, States are not obliged to amend or withdraw the measures, which have been found inconsistent with a national treatment obligation couched in an investment agreement, as they actually must do in case of a breach of a wto covered agreement. In this regard, the arbitrators might not be perceived as a major threat to the domestic policies’ margin of appreciation, when they simply confine themselves to awarding a monetary compensation to the claimant for the breach of that standard. ­Notwithstanding those relevant arguments, the assessment of a violation of the national treatment obligation still remains isolated. It would be indeed difficult to consider it a ‘cornerstone’ of investment treaties, as it is in gatt of 56 57 58

See Choukroune, supra note 2, at 197–199 and Collins, supra note 18, at 174–175. See Rudolf Adlung, ‘International Rules Governing Foreign Direct Investment in Services: Investment Treaties versus the gats,’ 17 Journal of World Investment & Trade (2016), 51–55. In general, investments treaties cover a wider range of possibilities than trade in goods or services, because the investor in the host State may have different commercial purposes, which can be achieved in different ways (for example, joint ventures, merger or acquisition of an existing host state company or the establishment of a new company registered under the laws of the host country). From this point of view, there can be a limited overlap with the regime of trade in services set forth in gats, whose Article xxviii (d) defines the commercial presence of a foreign supplier of service as necessarily targeted to the supply of a service. However, there can be convergence of the two systems, for example when dealing with the access to the domestic market. Unlike trade in goods, which is solely subjected to the tariffs agreed upon by the Members of wto, investments and supply of services through commercial presence may be subject to other ‘official’ barriers, namely domestic regulation limiting the access to the market or prescribing technical requirements. In this case, the investor wishing to establish its commercial presence under gats enjoys the provision of domestic treatment but only to the extent that the wto Members have undertaken a specific commitment on that sector of services. The same applies for those bits or a rtas (the majority) which do not provide for a pre-­establishment national treatment provision.

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gats, or ‘the single most important standard of treatment enshrined in international investment agreements.’59 The reasons why a breach of national treatment obligations is rarely found in arbitral proceedings concerning the protection of investments is that, in the majority of cases, the dispute is settled on other ‘substantive’ grounds, as, for instance, the fair and equitable treatment or full protection and security. These rules, whose vague content does not rely on any domestic comparator, usually secure the investors a higher protection pursuant to the aim and scope of the international agreements therein enshrined. Accordingly, the standard of proof is lower and the level of protection afforded can be determined in the course of arbitral proceedings. From this point of view, it is telling that vague investments’ protection rules, as fair and equitable treatment (which, according to the Secretariat of the wto, ‘has to be interpreted on a case-by-case basis in the light of the particular circumstances in which it is used’) have been dealt with suspiciously during the negotiations of the wto covered agreements.60 If they had been plainly set forth in these agreements, the aspect of ­unpredictability inherent in the fair and equitable treatment would have jeopardized the ­mission of clarity, which the dsb is called upon to secure, and its duty not to add to or diminish the rights and obligations provided in the covered agreements under Article 3:2 of the dsu. Therefore, even if not expressly couching the fair and equitable treatment standard in specific clauses identical to the ones enshrined in investments agreements, the relevant gats provisions confine themselves to provide for the obligation to administer measures of general application affecting trade in services ‘in a reasonable, objective and impartial manner’ (Art. VI:1), and to afford a due process to service suppliers affected by domestic measures, with the caveat of Art. VI:2 (b).61 Secondly, the narrow reading of national treatment within investment treaties, when compared to the wto trade liberalization agreements, is due to the lack of a true parallelism between the two regimes. Notably, under gatt and gats the main purpose of the national treatment obligation is to limit States 59 60 61

The same view is taken by Reinisch, supra note 49, 869. See Note by the Secretariat of the wto, ‘Non-discrimination, most-favoured nation treatment and national treatment,’ WT/ WGTI/W/118, 4 June 2002, Section 39, p. 10. The relationship between gats and fair and equitable treatment has been shortly addressed by Rudolf Adlung and Martın Molinuevo, ‘Bilateralism in Services Trade: Is there Fire behind the (bit-) Smoke?’ 11 Journal of International Economic Law (2008), 384–387. As for the similar gatt Art. X:3(a), see Anastasios Gougourinis, ‘Reviewing the administration of domestic regulation in wto and investment law: the international minimum standard as one standard to rule them all?’ in Freya Baetens (ed.), Investment Law within International Law (2013), 312–314.

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protectionist policies, which can alter or modify the condition of competition between national and foreign operators or goods, within the domestic market of each Member State.62 On the other hand, the protection afforded by investments agreements confines itself to securing individual rights, not linked to general State policies.63 Therefore, the ‘soft’ review of national treatment obligation by arbitral tribunals can be explained by the wish not to dig too deeply into domestic policies, when the claims of the investor can be successfully upheld on other grounds, sometimes more vague and undetermined as fair and equitable treatment,64 or when it is not clear, from the overall assessment of facts, whether the challenged measure is a ‘targeted attack’ by the host government. As a conclusion, given the fragmented picture stemming from the arbitral interpretation of the national treatment provisions and their quite narrow reading, it would be doubtful and too far-reaching to consider this rule as a general principle within international investment law.

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As persuasively suggested by commentators, in the context of wto covered agreements States ‘exchange trade opportunities […] not only, or even mainly, to benefit individual exporters, but rather to enable freer trade policies both at home and abroad in the nation’s overall interest.’ See Nicholas A. DiMascio, Joost Pauwelyn, ‘Nondiscrimination in Trade and Investment Treaties: Worlds apart or two Sides of the same Coin?’ 102 American Journal of International Law (2008), 54. See DiMascio, Pauwelyn, supra note 62, at 53–58. The overlap of investments with gatt stems clearly from the provision of Article iii (5), which bans domestic measures obliging operators in the domestic market to purchase in the host country a specified amount or proportion of a requirement. For example, according to a pre-wto Panel under ­article III(5) of gatt 1948, ‘The purpose of Article iii:4 is not to protect the interests of the foreign investor but to ensure that goods originating in any other contracting party benefit from treatment no less favorable than domestic (Canadian) goods, in respect of the requirements that affect their purchase (in Canada)’ After the negotiations carried out during the Uruguay Round, the obligation to grant and maintain equal opportunities between national and imported goods prevailed over the protection of investments, irrespective of their origin. This point has been definitively made clear by the adoption of the trims Agreement, which identifies some trade-related investment measure deemed ipso facto, ­inconsistent with national treatment. It has been suggested that the very existence of bits is to overcome national treatment itself, namely not to make it a ‘central legal principle’ and to offer new ‘substantive’ standards (such as fair and equitable treatment). See DiMascio, Pauwelyn, supra note 62, at 67. See also Sabina Sacco, Mónica C. Fernández-Fonseca, ‘National Treatment in Investment Arbitration,’ in J.A. Huerta-Goldman, A. Romanetti, F.X. Stinimann (eds.), wto ­Litigation, Investment Arbitration, and Commercial Arbitration (2013), 234–244.

Chapter 17

Most-Favoured-Nation Clauses and the Centrality and Limits of General Principles N. Jansen Calamita* and Ewa Zelazna** Unlike other guarantees of protection found in investment treaties, the obligation to provide most-favoured-nation (mfn) treatment derives exclusively through the act of concluding a treaty that contains an mfn clause. And yet, notwithstanding this textual pedigree, mfn clauses, unlike any other provision found in investment treaties, have twice been the subject of extended study by the International Law Commission (ilc) to examine whether and to what extent it might be possible to ascertain (and codify) rules or principles relevant to their interpretation and application. This chapter surveys and assesses the key rules, principles and presumptions put forward as applicable to the interpretation of mfn clauses in iias by the ilc and in the decisions of arbitral tribunals. In addition, it notes briefly one additional general principle applicable to mfn clauses which has not yet received significant attention in investor-state arbitral practice or the treaty-making practice of states, namely the temporal scope of mfn clauses. Finally, it highlights the ways in which general principles and the issues left unresolved by them have been addressed in a number of recent treaties.



Introduction



Most-Favoured-Nation Treatment and General Principles: Unlikely Bedfellows? The parties concerned should clearly express their intention; but it might happen, and indeed it would often happen, that they did not do so. Provision must be made in international law, as in municipal law, for cases in which there was no stipulation in the text, and for cases in which the text was not clear and precise.1

* Head Investment Treaty Law & Policy, Centre for International Law, National University of Singapore; Research Associate Professor (cil), Faculty of Laws, National University of Singapore. ** Lecturer at the University of Leicester. 1 Quincy Wright, ‘The Most-Favored-Nation Clause,’ 21 Am. J. Int’l L. 760, 762 (1927). © koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_018

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It may seem somewhat counterintuitive to write about most-favoured-nation treatment in a volume focused on international investment law and general principles. Unlike other guarantees of protection2 found in international investment agreements (iias),3 the obligation to provide most-favoured-nation (mfn) treatment derives exclusively through the act of concluding a treaty that contains an mfn treatment clause.4 mfn treatment has no basis in protections afforded under customary international law,5 nor is there evidence to suggest that an obligation to afford mfn treatment exists as a general principle of law in the sense used by Article 38(1)(c) of the Statute of the International Court of Justice. mfn treatment is the quintessence of a treaty-based guarantee. And yet, notwithstanding this textual pedigree, mfn clauses, unlike any other provision found in iias, have twice been the subject of extended study by the International Law Commission (ilc) to examine precisely whether and to what extent it might be possible to ascertain (and codify) rules or principles relevant to their interpretation and application. The achievements of those efforts have been modest,6 but the quest for principles capable of rationalizing the approach of courts and tribunals to mfn clauses is not without reason. Often in modern treaty practice, especially in investment treaty practice, the meaning of mfn obligations has been unclear. As a consequence, it has fallen to tribunals to interpret these commitments as best as they can, inevitably doing so with reference to principles and rules, some with particular application to mfn clauses, others of a more general character. This chapter surveys and assesses the key rules, principles and presumptions put forward as applicable to the interpretation of mfn clauses in iias by the ilc and in the decisions of arbitral tribunals. In addition, it notes briefly one additional general principle applicable to mfn clauses which has not yet received significant attention in investor-state arbitral practice or the

2 For example, the prohibition on uncompensated expropriation. 3 The term iia is used to refer to international treaties which establish investment disciplines on states admitting foreign investment, whether contained in bilateral investment treaties (bits), investment chapters in bilateral free trade agreements (ftas), or, regional treaties on investment and/or trade (e.g., North American Free Trade Agreement). 4 Anglo-Iranian Oil Co. (u.k. v. Iran), Judgment on Jurisdiction, 1952 i.c.j. 93, 110 (22 July). 5 See Report of the International Law Commission on the Work of its Thirty-third Session, Draft Articles on Most-Favoured-Nation Clauses, [1978] 2(2) y.b. Int’l L. Comm’n 16, 24–25, un Doc. A/33/10 (‘Although the grant of most-favoured-nation treatment is frequent in commercial treaties, there is no evidence that it has developed into a rule of customary international law. Hence it is widely held that only treaties are the foundation of most-favoured-nation treatment.’) (hereinafter ‘Draft Articles’). 6 See, infra, Part iii.

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t­ reaty-making practice of states, namely the temporal scope of mfn clauses. Finally, it highlights the ways in which general principles and the issues left unresolved by them have been addressed in a number of recent treaties. I

Most-Favoured Nation Clauses, the International Law Commission, and the Principle of Ejusdem Generis

A The International Law Commission’s Draft Articles on mfn Clauses In 1967, following the conclusion of the International Law Commission’s work on the law of treaties, it was unanimously decided by the Commission, and endorsed by the General Assembly,7 to place the ‘clarification of [the] legal aspects’ of mfn clauses on the Commission’s agenda.8 Although mfn clauses had appeared in commercial treaties between states for centuries,9 practice under mfn clauses was in many cases uncertain, as states struggled to coalesce around general principles for the interpretation and application of such clauses. Indeed, McNair, in the 1961 version of his treatise on the law of treaties, reserved a special chapter specifically for most-favoured-nations clauses, ­noting the numerous areas in which states, whether because of differences in approach to drafting or on pure principle took divergent positions as to the way in which mfn clauses should operate.10 It was, perhaps, as a result of this 7 8

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General Assembly, Resolution 2272 (xxii) (1 Dec. 1967). Report of the International Law Commission on the Work of its Nineteenth Session, [1967] 2 y.b. Int’l L. Comm’n 369, un Doc. A/6709/Rev.l and Rev.1/Corr.l. A proposal in 1964 to address mfn clauses in the context of the ilc’s work on the law of treaties had been rejected on the ground that the Commission ‘did not think it advisable to deal with [mfn clauses] in the present codification of the general law of treaties.’ Report of the International Law Commission Covering the Work of its Sixteenth Session, [1964] 2 y.b. Int’l L. Comm’n 176, un Doc. A/5809. See International Law Commission, 752nd meeting, [1964] 1 y.b. Int’l L. Comm’n 184–185 (proposal of Mr. Jiménez de Aréchaga). The general history of mfn clauses is recounted in various sources. See, e.g., International Law Commission, Special Rapporteur Endre Ustor, First Report on the Most-Favoured-­ Nation Clause, [1969] 2 y.b. Int’l L. Comm’n 159 et seq., un Doc. A/CN.4/213; Georg ­Schwarzenberger, ‘The Most-Favoured-Nation Standard in British State Practice,’ 22 Brit. y.b. Int’l L. 96 (1945). McNair identified seven heads under which questions of basic legal principle arose with respect to mfn clauses: (1) the unconditional and the conditional types of the clause; (2) whether the clause is brought into operation by the potential, or only by the actual, enjoyment by the third State of the most-favoured-nation treatment; (3) whether the clause comes into operation when the most-favoured nation treatment is enjoyed by the third State as the result of municipal enactment and not under a treaty; (4) whether the clause comes into operation when the most-favoured nation treatment is enjoyed by the third

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background of disharmony that the ilc, when approaching its study, took the view that while the long history of mfn clauses might serve as informative background to its work, the ‘real sedes materiae’11 lay in three recent cases related to proceedings in the International Court of Justice (icj),12 which had addressed for the first time issues of a general character related to mfn clauses and which the ilc believed might serve to elucidate some ‘existing rules regarding the most-favoured-nation clause.’13 In the end, it is fair to say, the principles derived from those three cases served to inform the sum of the ilc’s eleven years of work on the subject. In the first of the cases, Anglo-Iranian Oil Company, the icj elaborated definitively on the legal character of the relationships created pursuant to an mfn clause. As the Court explained in the case, the treaty containing an mfn clause is to be considered as the ‘basic treaty’ from which the right to most-favourednation treatment is derived.14 Thus, while the ‘third-party treaty,’ to which reference may subsequently be made by virtue of the mfn clause, ­constitutes an acte condition, it remains res inter alios acta for the mfn beneficiary.15 The mfn clause, in other words, does not constitute an exception to the rule (pacta tertiis nec nocent nec prosunt) that treaties produce effects only as between the contracting parties.16

State as a consequence of entering a Customs Union; (5) the scope of the clause’s application and the requirement that a right claimed under an mfn clause must relate to the same subject-matter as that dealt with by the treaty containing the clause; (6); the position of Colonies, Dependencies, and Trust Territories, and members of the Commonwealth of Nations; and (7) whether the enjoyment of most-favoured-nation treatment by a third State survives the expiry of the original treaty. Arnold McNair, The Law of Treaties 274 (1961). 11 International Law Commission, Special Rapporteur Endre Ustor, Second Report on the Most-Favoured-Nation Clause, [1970] 2 y.b. Int’l L. Comm’n 201–202, un Doc. A/CN.4/228 and Add. 1 (quoting Georg Schwarzenberger, International Law as applied by International Courts and Tribunals 240 (3rd ed. 1957)). 12 Anglo-Iranian Oil Co. (u.k. v. Iran), Judgment on Jurisdiction, 1952 i.c.j. 93 (22 July); Rights of Nationals of the United States of America in Morocco (u.s. v. France), Judgment, 1952 i.c.j. 176 (27 Aug.); Ambatielos Case (Greece v. u.k.), Jurisdiction, i.c.j. Rep. 28 (1 July); Ambatielos Case (Greece v. u.k.), Merits, 1953 i.c.j. 10 (19 May); Ambatielos Claim (Greece v. u.k.), 12 r.i.a.a. 83 (Comm’n Arb. 1956). 13 International Law Commission, Special Rapporteur Endre Ustor, Second Report on the Most-Favoured-Nation Clause, [1970] 2 y.b. Int’l L. Comm’n, un Doc. A/CN.4/228 and Add. 1. 14 Anglo-Iranian Oil Co. (u.k. v. Iran), Judgment on Jurisdiction, 1952 i.c.j. 93, 109 (22 July). 15 Ibid. 16 See Draft Articles, Art. 8, Comment (2).

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In the second of the cases, Rights of Nationals of the United States of America in Morocco, the icj again set to rest a question about the nature of mfn obligations and the relationship between the basic treaty and third-party treaties. There, the Court rejected arguments put forward by the United States which would have interpreted the mfn clause at issue as a means of perpetual ‘drafting by reference,’ such that treatment accrued under the mfn clause would become permanently incorporated into the basic treaty, regardless of the expiry of the third-party treaty from which the provision had been adopted.17 According to the Court, such an application of an mfn clause, in the absence of specific language in the basic treaty that would provide for this kind of operation, would be inconsistent with the general goal of mfn clauses to establish and to maintain equality of treatment among different states and across different treaties.18 Finally, the third of the cases, Ambatielos, addressed what may be seen as the central, general principle of law governing the interpretation and application of mfn clauses: the principle of ejusdem generis.19 As discussed further below, ejusdem generis is a general maxim of interpretation providing that a phrase in sequence should be read in context with the phrases preceding it.20 In the context of mfn clauses, however, it has taken on a more specific ­meaning, ­‘according to which no other rights can be claimed under a most-­favourednation clause than those falling within the limits of the subject matter of the 17

Rights of Nationals of the United States of America in Morocco (u.s. v. France), Judgment, 1952 i.c.j. 176 (27 Aug.). 18 Ibid. at 191–192. The Court’s decision thus laid to rest a question about the duration of mfn benefits that had been a point of international debate for decades. See League of Nations, Committee of Experts for the Progressive Codification of International Law, ­Rapporteur George Wickersham, ‘The Most-Favoured-Nation Clause’ (1927), reprinted in 22 Am. J. Int’l L. Spec. Sup. 133, 140 (1928). 19 The Ambatielos saga originated with a claim by Greece against the United Kingdom before the icj in 1951. The Greek claim related to alleged mistreatment of Ambatielos, a Greek ship-owner, by the u.k. Government, through its courts. In the icj’s initial Judgment of 1 July 1952, the Court held that while it had no jurisdiction to hear the merits of the claim, it did have jurisdiction to decide whether the United Kingdom was under an obligation to submit the dispute to arbitration pursuant to treaties between Greece and the United Kingdom of 1886 and 1926. Ambatielos Case (Greece v. u.k.), Jurisdiction, 1952 i.c.j. Rep. 28, 46 (1 July). In subsequent proceedings before the Court on that question, the icj held that the United Kingdom was obligated to arbitrate the Ambatielos dispute. Ambatielos Case (Greece v. u.k.), Merits: Obligation to Arbitrate, 1953 i.c.j. Rep. 10 (19 May). The Court’s decision was followed by an award by the Commission of Arbitration. Ambatielos Claim (Greece v. u.k.), 12 r.i.a.a. 83 (Comm’n Arb. 1956). 20 See, infra, II.C.

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clause.’21 As will become evident in the sections which follow, ejusdem generis is the general principle of law nonpareil with respect to mfn clauses. In ­Ambatielos the principle received definitive recognition and support,22 even if in so doing, the case hinted at the limits of the principle’s ability to assist in the reasoned prediction of how it might apply in individual, future cases.23 Ejusdem Generis and the Law of Treaties: A Discretionary Principle of Interpretation Notwithstanding the centrality of the ejusdem generis principle to the interpretation the mfn clause at issue in the Ambatielos claim, none of the decisions in that case, either of the icj or the Commission of Arbitration, addressed the ­legal basis for using the principle as an interpretive tool. As Ambatielos pre-dates the Vienna Convention on the Law of Treaties (vclt), of course, there is no surprise that the interpretive approach does not follow the process ­proscribed by Articles 31 and 32. Nevertheless, apart from an isolated passage by the British agent, Gerald Fitzmaurice, in the oral pleadings in the second phase of the Ambatielos case, neither the parties, nor the tribunals seem to have given much attention to the derivation of what Fitzmaurice described as the ‘well-known’ principle ‘that clauses conferring most-favoured-nation rights in respect of a certain matter, or class of matter, can only attract the rights conferred by other treaties in regard to the same matter or class of matter ….’24 Looking at the principle as a matter of the general law of treaties, ejusdem generis belongs to a group of interpretive ‘principles’ or ‘doctrines’ which historically have been invoked in diplomatic correspondence and by tribunals,25 B

21 22 23

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Draft Articles, Art. 4, Comment (17). Ambatielos Claim (Greece v. u.k.), 12 r.i.a.a. 83, 107 (Comm’n Arb. 1956). For a view that the icj’s judgment in Anglo-Iranian Oil also indicates a reliance on the principle of ejusdem generis, see Gerald Fitzmaurice, ‘The Law and Procedure of the International Court of Justice, 1951–1954,’ 32 Brit. y.b. Int’l L. 20, 85 (1955–1956). With respect to the language cited by Fitzmaurice, one of the British agents in the case, the Court’s meaning is cryptic at best, especially when viewed in context, and in any case it is quite evident that the basis of the Court’s decision was less that the claimed ‘treatment’ did not come within the scope of the mfn clauses, but that the Court lacked jurisdiction ratione temporis because of the sequence of the treaties. See Anglo-Iranian Oil Co. (u.k. v. Iran), Judgment on Jurisdiction, 1952 i.c.j. Rep. 93, 109–110 (22 July). See also Martins Paparinskis, ‘mfn Clauses and International Dispute Settlement: Moving beyond Maffezini and Plama?’ (2011) 26 icsid Rev.-For. Invest. l.j. 14, 26–27. i.c.j. Pleadings, Ambatielos Case (Greece v. u.k.), 402. McNair refers to ejusdem generis as a ‘doctrine’ or ‘presumption.’ See Arnold McNair, The Law of Treaties 393 (2d ed. 1961). Others refer to it as a ‘principle.’ See, e.g., Richard

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and in some cases trace their lineage back to principles of Roman law. In its preparatory work on the vclt, however, the ilc generally avoided reference to such so-called cannons or maxims of interpretation in its drafting.26 In its 1966 Commentary on then the draft articles, the Commission explained this reticence, noting that some jurists ‘express reservations as to the obligatory character of certain of the so-called canons of interpretation,’ and indicated that in approaching the draft convention the Commission intentionally had ‘confined itself to trying to isolate and codify the comparatively few general principles which appear to constitute general rules for the interpretation of treaties.’27 This was the position taken earlier in the drafting process by the ilc’s Special Rapporteur, Humphrey Waldock, who had drawn a distinction between discretionary ‘principles’ and ‘techniques’ of interpretation on the one hand and mandatory ‘rules’ of the interpretive process on the other. Referring to principles of interpretation, and their frequently used Latin forms, including ejusdem generis,28 Waldock acknowledged that ‘it would be possible to find sufficient evidence of recourse to these principles and maxims in international practice to justify their inclusion in codification of the law of treaties, if the question were simply one of their relevance on the international plane.’29 But, he continued, it would be wrong to characterise these principles as ‘rules’ of ­treaty ­Gardiner, Treaty Interpretation 357–358 (2nd ed. 2015). For a listing of other interpretive principles and techniques (often collectively referred to as ‘maxims’ commonly used in international law, see Anthony Aust, Modern Treaty Law and Practice 220–221 (3rd ed. 2012). 26 As Gardiner observes, one interpretive maxim which Special Rapporteur Humphrey Waldock did initially include in a draft of the ilc’s articles – albeit with ‘hesitation’ – was that of ut res magis valeat quam pereat, i.e., the principle of effective interpretation (literally, ‘It is better for a thing to have effect than to be made void.’). See International Law Commission, Special Rapporteur Humphrey Waldock, Third Report of the Law of Treaties, [1964] 2 y.b. Int’l L. Comm’n 60–61, un Doc. A/CN.4/167. Ultimately, however, the article was rejected by the Commission on grounds that ‘[i]n so far as it stated a logical rule, it was in any case implicit in the earlier provisions … of the draft and there was perhaps no need to state it explicitly.’ International Law Commission, Summary Records, 767th Meeting, [1964] 1 y.b. Int’l L. Comm’n 288–291, un Doc. A/CN.4/167/Add.3 (Summary comments of Chairman Robert Ago). 27 Reports of the International Law Commission on the Second Part of its Eighteenth ­Session, [1966] 2 y.b. Int’l L. Comm’n 218–219, un Doc. A/6309/Rev.l (emphasis added). 28 The ilc particularly referred to ‘ut res magis valeat quam pereat, contra proferentem, e­ jusdem generis, expressio unius est exclusio alterius, generalia specialibus non derogant.’ International Law Commission, Special Rapporteur Humphrey Waldock, Third Report of the Law of Treaties, [1964] 2 y.b. Int’l L. Comm’n 54, un Doc. A/CN.4/167. 29 Ibid. (emphasis added).

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interpretation, since ‘[t]heir suitability for use in any given case hinges on a variety of considerations which have first to be appreciated by the interpreter of the document: the particular arrangement of the words and sentences, their relation to each other and to other parts of the document, the general nature and subject-matter of the document, the circumstances in which it was drawn up, etc.’30 As a consequence, Waldock concluded, and the ilc agreed, that ‘[a]ny attempt to codify the conditions for the application of principles whose appropriateness in any given case depends so much on the particular context and on a subjective appreciation of varying circumstances would clearly be inadvisable.’31 Thus, principles like ejusdem generis were left for continued use by tribunals as a matter of appropriate interpretative discretion, but not as a matter of mandatory rule.32 The International Law Commission’s 1978 Draft Articles on mfn Clauses and the ‘Rule’ of Ejusdem Generis After eleven years of work, the ilc brought forward its Draft Articles on Most-Favoured-Nation Clauses in 1978. In the end, the scope of what the ilc was able to achieve was limited largely to the identification of a number of C

30

International Law Commission, Special Rapporteur Humphrey Waldock, Third Report of the Law of Treaties, [1964] 2 y.b. Int’l L. Comm’n 54, un Doc. A/CN.4/167. 31 Ibid. 32 Although there is a general consensus that the framework for interpretation provided in the vclt allows for reference to general principles of interpretation in appropriate cases, there is a lack of consensus on the proper legal route for their use. Compare, for example, Villiger and Aust, who take the general view that interpretive maxims should be considered as supplementary means of interpretation under Article 32 with the view of Gardiner who finds, with particular reference to ejusdem generis, that interpretive maxims do not easily fit within the phrase ‘means of interpretation’ and its connection to ‘preparatory work of the treaty and the circumstances of [the treaty’s] conclusion’ as used in Article 32. See Mark E. Villiger, ‘The Rules on Interpretation: Misgivings, Misunderstandings, Miscarriage? The ‘Crucible’ Intended by the International Law Commission,’ in Enzo Cannizzaro (ed.), The Law of Treaties Beyond the Vienna Convention, 111 (2011); Anthony Aust, Modern Treaty Law and Practice, 220–221 (3rd ed., 2012); Richard Gardiner, Treaty Interpretation 357–358 (2nd ed. 2015). For Gardiner, whose argument seems the more compelling, under the law of treaties a maxim like ejusdem generis falls more comfortably into the category of a general interpretative principle subsumed by the interpretive process set forth in Article 31. Gardiner, Treaty Interpretation, at 358. See also the alternative suggestion made by Villiger that to the extent that certain maxims might be considered to be general principles of law (within the meaning of Art. 38 of the icj Statute), ‘they would have to be considered as part of the General Rule in Article 31 and in particular its para. 3(c).’ Villiger, at n.45.

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­foundational, general principles and presumptions with respect to their interpretation and application, derived in significant part from the cases which had come before the icj in the decade prior to the commencement of its work. Of significance for present purposes was the ilc’s confirmation that mfn treatment is a treaty-based obligation;33 that the scope of the benefits granted by a particular mfn clause is dependent upon the text used in the clause;34 and its determination that in establishing the scope of an mfn clause in particular, one should rely not solely upon the vclt rules of treaty interpretation, but also on what the Draft Articles treat as the ‘ejusdem generis rule.’35 As explained by the ilc, the Draft Articles were designed to be ‘an autonomous set of legal rules relating to most-favoured-nation clauses; they are not intended to form an ‘annex’ to the Vienna Convention [on the Law of Treaties].’36 Thus, whereas the vclt had laid down the general rules pertaining to treaties, it was the ilc’s intention that the Draft Articles would ‘contain particular rules applicable to a certain type of treaty provisions, namely to mostfavoured-nation clauses.’37 Perhaps because the ilc was addressing only mfn 33 34 35

36 37

Draft Articles, Art. 7. Draft Articles, Art. 8. See Draft Articles, Art. 9–10. Aside from these matters the ilc’s thirty Draft Articles are largely devoted to addressing matters of historical interest, high-level generality, or specialized application. By way of overview, Articles 1–4 and Article 6 deal with basic matters of definition and scope of the Draft Articles. Articles 11–15 address conditional mfn clauses, mfn clauses made subject to compensation, and mfn clauses based upon reciprocity, formulations of mfn clauses which the Commission itself acknowledged in its length commentary were by 1978 ‘largely of historical significance.’ Draft Articles, Art. 11–13, Comment (34). (Ironically, the ilc’s articles would not have applied to these historical clauses; Article 28 made clear that they were only to apply to mfn clauses in treaties concluded after the articles were to have come into force.) Articles 16–19 provide clarity on the relationship between mfn clauses and national treatment guarantees and the types of ­third-party treaties which may serve as points of reference, although it is not clear that the issues addressed in these articles had been subject to much confusion prior to the ilc’s work. Articles 23–26 address carve-outs for treaties involving developing states in the field of trade, treaties to facilitate the extension of frontier traffic, and treaties covering the access of land-locked states to the sea. Finally, Articles 27 and 30 provide, respectively, that the Draft Articles are without prejudice either to any question which might arise in the event of a state succession or the outbreak of hostilities or with respect ‘to the establishment of new rules of international law in favour of developing countries.’ Report of the International Law Commission on the Work of its Thirty-third Session, [1978] 2(2) y.b. Int’l L. Comm’n 14, un Doc. A/33/10. Report of the International Law Commission on the Work of its Thirty-third Session, [1978] 2(2) y.b. Int’l L. Comm’n 14, un Doc. A/33/10.

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clauses, which it viewed as a discreetly identifiable type of clause38 – albeit one subject to great variation – the ilc did not look at ejusdem generis as a ‘principle’ of interpretation, as Waldock had done in the Commission’s work on the law of treaties, but treated it as an inherent ‘rule’ in the construction and application of the mfn obligation. As was explained by Special Rapporteur Endre Ustor in his fourth report, ‘[t]he ejusdem generis rule is generally recognized and affirmed by the jurisprudence of international tribunals and national courts and by diplomatic practice’39 and derives ‘from the very nature of the most-favoured-nation clause.’40 While other views were offered in the Commission’s debates, such as that ejusdem generis was ‘[a] basic principle, linked with the reference to performance by the parties ‘in good faith’ in the Vienna Convention on the Law of Treaties,’41 in the end it was Ustor’s view that prevailed and rather than a ‘principle’ of interpretation of debatable application under the vclt’s rules of interpretation,42 ejusdem generis emerged from the ilc’s process as a rule inherent in the treatment of mfn clauses.43 Even though the ilc reaffirmed that ejusdem generis provides interpretative

38 39

Draft Articles, Art. 4. International Law Commission, Special Rapporteur Endre Ustor, Fourth Report on the Most-Favoured-Nation Clause, [1973] 2 y.b. Int’l L. Comm’n 102, un Doc. A/CN.4/266. 40 International Law Commission, Special Rapporteur Endre Ustor, Fourth Report on the Most-Favoured-Nation Clause, [1973] 2 y.b. Int’l L. Comm’n 106, un Doc. A/CN.4/266. On Ustor’s view, limiting the application of an mfn clause to ‘the rights conferred by other treaties (or unilateral acts) in regard to the same matter or class of matter … follows clearly from the principle of sovereignty and independence of States. They cannot be regarded as being bound beyond the obligations they have expressly undertaken.’ International Law Commission, Special Rapporteur Endre Ustor, Fourth Report on the Most-FavouredNation Clause, [1973] 2 y.b. Int’l L. Comm’n 106, un Doc. A/CN.4/266 (emphasis added). Accord, Draft Articles, Art. 9 & 10, Comment (11) (‘the rule follows clearly from the general principles of treaty interpretation. States cannot be regarded as being bound beyond the obligations they have undertaken’). 41 International Law Commission, 1333rd meeting, 19 June 1975, ‘Most-favoured-nation clause (continued),’ [1975] 2 y.b. Int’l L. Comm’n, 148–149 (comments of Arnold J.P. Tammes). 42 See, supra, n. 30. 43 The commentaries to the Draft Articles, for example, refer to Articles 9 and 10 as addressing ‘[t]he rule which is sometimes referred to as the ejusdem generis rule ….’ Draft A ­ rticles 9 & 10, Comment (1). Given that ejusdem generis interpretation is inherent in mfn clauses, the Annex in the eu-Vietnam fta, requiring that the mfn clause shall be interpreted in accordance with ‘the principle of ejusdem generis’ is arguably unnecessary. See ­e u-Vietnam fta, Annex [] (Jan. 2016 draft), at 18.

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­framework for mfn clauses, it was quick to note that ‘[a]lthough the meaning of the rule is clear, its application is not always simple.’44 II

Most-Favoured Nation Clauses and the Problem of Dispute Settlement Provisions in iias: Looking beyond the Ejusdem Generis Rule

The emergence and growth of investor-state arbitration in the years since the release of the Draft Articles has confirmed the central, guiding role of the ejusdem generis rule in interpreting and applying mfn clauses. At the same time, however, the disputes raised in these cases have highlighted the d­ ifficulty of generalizing upon the meaning and effect of such clauses on the basis of such a general principle. At the heart of these developments has been a line of well-known disputes in which the issue has been whether an mfn treatment clause’s guarantee may be said to extend to the ‘treatment’ provided with respect to dispute resolution in another investment treaty. While the ejusdem generis rule has been at the centre of the analysis in these cases,45 many tribunals have looked beyond the rule, searching for other principles or presumptions to guide their decisions. These attempts have not always been persuasive, whether in light of the vclt, the Draft Articles, or other principles of public international law. Moreover, as a result of the frequent, direct disagreement among tribunals with respect to the analytical framework within which to consider the application of mfn clauses to dispute settlement matters, it is doubtful whether this jurisprudence has revealed any new general principles to guide

44

45

As is well known, the ilc’s efforts did not result in a convention on mfn clauses or even adoption by the General Assembly. In the end, although the ilc’s 1978 report recommended to the General Assembly that the Draft Articles serve as the basis for a convention on the subject, the General Assembly took no action upon the recommendation. Indeed, it was not until 1991 that the General Assembly decided to bring the Draft Articles to the attention of un Member States and intergovernmental organizations and then only ‘for their consideration in such cases and to such extent as they deem appropriate.’ See un General Assembly, ‘Provisional Verbatim Record of the 67th Meeting,’ un Doc. A/46/PV.67 (23 Dec. 1991); un General Assembly, ‘Consideration of the Draft Articles on Most-Favoured-Nation Clauses: Report of the Sixth Committee,’ un Doc. A/46/655 (15 Nov. 1991). awg Group Ltd. v. Argentina is not to the contrary. There, the tribunal did not disagree that the rule of ejusdem generis applied to the interpretation of the mfn clause in the basic treaty, only with the respondent state’s proposed application of the rule. See awg Group Ltd. v. Argentina, icsid Case No. ARB03/19 (3 Aug. 2006), para. 59.

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the resolution of disputes in this area. In this section we note the most significant of the principles to which tribunals have looked beyond ejusdem generis in the interpretation and application of mfn clauses, identifying briefly some of the chief criticisms which these approaches have engendered. Maffezini: Ejusdem Generis and a First Proposal for Additional General Principles The Maffezini case, as is well known, was the first in which an investor successfully argued that the mfn clause in an iia could be used to change the conditions of access to investor-state arbitration under the basic treaty.46 In that case, the mfn clause in the basic treaty was held to permit the claimant to avoid an 18-month waiting period as a precondition to accessing investor-state arbitration as a result of the arbitration mechanism found in a third-party treaty which contained no such requirement. In reaching its decision, the tribunal relied heavily upon the ejusdem generis rule and, particularly, on its reading of the arbitral commission’s decision in Ambatielos.47 Noting the breadth of the mfn clause in the basic treaty (‘all matters subject to this Agreement’),48 which it read to include dispute settlement matters, and its conclusion that the third-party treaty – another iia – dealt with the same subject matter more ­favourably, the tribunal determined that even though the mfn clause did not expressly indicate that dispute settlement matters came within its scope, ‘there were good reasons … to conclude that dispute settlement arrangements were inextricably related to the protection of foreign investors.’49 What is interesting about Maffezini in the present context is that the tribunal did not end its treatment of the mfn issue with its textual analysis of A

46

Maffezini v. Spain, icsid Case No. ARB/97/7, Decision of the Tribunal on the Objections of Jurisdiction (25 Jan. 2000). 47 The Maffezini tribunal assimilated the Ambatielos commission’s findings, which were concerned with access to domestic courts, with access to international arbitration pursuant to an iia. This approach has been criticized and defended by subsequent t­ ribunals. Salini Costruttori S.p.A. v. Jordan, icsid Case No. ARB/02/13; Paushok v. Mongolia, ­u ncitral Ad Hoc, para. 112; Vladimir Berschader and Moïse Berschader v. The Russian Federation, scc Case No. 080/2004 (21 April 2006), para. 175; Telenor Mobile Communications a.s. v. Hungary, icsid Case No. ARB/04/15 (13 September 2006), para. 92. 48 ‘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.’ Maffezini, para. 38. 49 Maffezini, para. 54. See Ibid., para. 56 (‘… it can be concluded that if a third-party treaty contains provisions for the settlement of disputes that are more favourable 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.’).

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the scope of the mfn clause and its application of the ejusdem generis rule. Rather, the tribunal went on to assert, inter alia, that because of the potentially significant changes that might be brought about to the basic treaty by an mfn clause, ‘important limits ought to be kept in mind’ when interpreting and applying mfn clauses in the future. Already in the comments to the ilc’s Draft Articles, the Commission itself had noted the importance of a making a careful determination as to the substantial identity between the clauses concerned when interpreting the class or idem genus of matter with the scope of the mfn obligation.50 In Maffezini, however, the tribunal moved beyond the ilc’s admonishment for interpretive rigour and instead asserted the need for a ‘distinction … 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.’51 Without clarifying the basis upon which one application might be deemed ‘legitimate’ and another ‘disruptive,’ the tribunal proceeded to identify a list of circumstances ‘important as a matter of public policy’ that the tribunal believed should be exempt, at least presumptively (if not entirely) from the operation of an mfn obligation: (1) an exhaustion of local remedies condition; (2) a fork in the road provision; (3) ‘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’; and (4) ‘if the parties have agreed to a highly institutionalized system of arbitration that incorporates precise rules of procedure.’52 As others have noted, the list of ‘public policy’ exceptions in Maffezini is not entirely persuasive in part because the tribunal’s approach finds little support in the law of treaties, the ilc’s work on the Draft Articles or public ­international law more generally.53 Indeed, particularly in the context of the mfn clause at 50

‘The effect of the most-favoured-nation process is, by means of the provisions of one treaty, to attract those of another. Unless this process is strictly confined to cases where there is a substantial identity between the subject-matter of the two sets of clauses concerned, the result in a number of cases may be to impose upon the granting State obligations it never contemplated. Thus the rule follows clearly from the general principles of treaty interpretation. States cannot be regarded as being bound beyond the obligations they have undertaken.’ Draft Articles, Art. 9–11, Comment (11). 51 Maffezini, para. 63. 52 Ibid. 53 See, e.g., Dana Freyer & David Herlihy, “Most-Favored-Nation Treatment and Dispute Settlement in Investment Arbitration: Just How ‘Favored’ is ‘Most-Favored’”? 20 icsid Rev.For. Invest. l.j. 58 (2005).

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issue in Maffezini, which was drafted expressly to cover ‘all m ­ atters subject to this Agreement,’ it is, as Paparinskis has put, ‘not immediately obvious how ‘all matters’ can be interpreted as ‘all matters, except fundamental considerations of public policy,’ particularly when the vclt does not permit any interpretative distinction between fundamental and non-fundamental rules, instead treating them in an identical manner.’54 To this, one might add that the ilc similarly made no distinction among the matters which might be affected by the application of mfn clauses in its work on the 1978 draft articles. Rather, with respect to the application of such clauses, the ilc placed the ejusdem generis rule at the centre of its approach, a rule which recognizes the autonomy and agency of the treaty-making parties to set the limits of mfn obligations as they see fit and to set those limits through the text they adopt in their treaties. Ideas of policy, particularly whether one form of mfn clause might serve certain interests better than another, played no role in the ilc’s consideration of the legal principles which ought to serve to guide the interpretation and application of such a clause once agreed.55 The Response in Plama: A Proposed Principle of Restrictive Interpretation In Plama Consortium Ltd. v. Bulgaria, the tribunal rejected the way in which the tribunal in Maffezini had applied the principle of ejusdem generis. Instead, the tribunal proposed as a general principle with respect to the use of an mfn clause to affect changes to provisions on dispute resolution that ‘[t]he intention to incorporate dispute settlement provisions must be clearly and unambiguously expressed.’56 The tribunal characterised the proposition as ‘a well established principle, both in domestic and international law, that such an agreement should be clear and unambiguous,’57 although it cited no support for its assertion, apart from a reference to the rules pertaining to the need for a

B

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Martins Paparinskis, ‘mfn Clauses and International Dispute Settlement: Moving beyond Maffezini and Plama?’ (2011) 26 icsid Rev.-For. Invest. l.j. 14, 32–33. For reasons discussed below, the ilc’s observation in the comments to Draft Article 9 & 10 are not to the contrary. Plama Consortium Ltd. v. Bulgaria, Decision on Jurisdiction, icsid Case No. ARB/03/24 (8 Feb. 2005), para. 204. See also Telenor Mobile Communications a.s. v. Hungary, ­i csid Case No. ARB/04/15 (13 Sept. 2006), para. 91 (requiring ‘clear language that this is the ­intention of the parties’); Wintershall Aktiengesellschaft v. Argentine Republic, Award, icsid Case No. ARB/04/14 (8 Dec. 2008), para. 167 (holding that procedural provisions could not be included within the scope of an mfn clause unless ‘the mfn Clause in the basic treaty clearly and unambiguously indicates that it should be so interpreted’). Plama, para. 198.

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written agreement to arbitrate in the uncitral Model Law on International Commercial Arbitration.58 Similar to the limitations proposed in Mafezzini, the Plama tribunal’s assertion of a principle of restrictive interpretation appears to have been driven by concerns about the impact that the application of broadly phrased mfn clauses might have on the stability of dispute settlement obligations as written in a wide-range of iias. As a number of tribunals have observed, however, Plama’s assertion of a ‘well established principle’ in international law of either the restrictive interpretation of mfn clauses or with respect to a heightened standard of proof for the application of mfn clauses to dispute settlement matters, is subject to challenge. In Suez, for example, the tribunal took the view that mfn clauses were to be interpreted in the same way as any other provision of a treaty, on the basis of the rules of interpretation set out in the vclt.59 Subsequently the view was put more forcefully by the members of the Austrian A ­ irlines tribunal, who observed that Plama’s assertion of a restrictive principle of interpretation ‘is not an accurate reflection of international law on this matter.… [T]here is no principle of either restrictive or extensive interpretation of an agreement to arbitrate in international law (it being specified that this may indeed be different under certain national arbitration laws).’60 Other ‘General Principles’ Mooted for the Interpretation and Application of mfn Clauses a Expressio Unius Exclusio Alterius The maxim of expressio unius exclusio alterius61 has been used by a number of arbitral tribunals in the interpretation and application of mfn clauses with respect to provisions on dispute settlement procedures. Like other t­ raditionally

C

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60

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Plama, para. 198–199 (citing uncitral Model Law on International Commercial Arbitration, Art. 7(2)). Suez, Sociedad General de Aguas de Barcelona s.a., and InterAguas Servicios Integrales del Agua s.a. v. Argentina, Decision on Jurisdiction, icsid Case No. ARB/03/17 (16 May 2006), para. 54. Further, the tribunal held that to the extent that the treatment under consideration concerned a mechanism for the resolution of disputes, ‘dispute resolution provisions are subject to interpretation like any other provisions of a treaty, neither more restrictive nor more liberal.’ Ibid., para. 64. Austrian Airlines v. Slovak Republic, uncitral Ad Hoc, Final Award (9 Oct. 2009), para. 119. See Separate Opinion of Charles N. Brower, Austrian Airlines v. Slovak Republic, ­u ncitral Ad Hoc (9 Oct. 2009), para. 2 (concurring in the majority's rejection of Plama). See also Oil Platforms (Islamic Republic of Iran v. United States of America), Preliminary Objections, Judgment of 12 December 1996, Separate Opinion by Judge Higgins, i.c.j. Reports 1996, p. 857, para. 35. ‘The expression of one thing is the exclusion of another.’

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used canons, its potential usefulness in interpretation was recognized in the work of the ilc on the law of treaties, but ultimately it was not considered to constitute a ‘rule’ of interpretation in customary international law.62 Rather, the ilc took the view, noted earlier, that the ‘suitability’ of maxims like expressio unius exclusio alterius will vary from case to case depending upon the text being interpreted.63 In the context of investor-state arbitrations, not all tribunals have heeded this concern about the variable suitability of the maxim, but rather some have advanced the principle as a general rule of interpretation with respect to mfn clauses. In National Grid v. Argentina, for example, the tribunal relied upon the principle of expressio unius exclusio alterius in part to conclude that because dispute settlement matters had not been included in a list of specific exceptions to the mfn clause in the basic treaty, dispute settlement matters should be interpreted as coming within the scope of the mfn clause: The Tribunal observes that the mfn clause does not expressly refer to dispute resolution or for that matter to any other standard of treatment provided for specifically in the Treaty. On the other hand, dispute resolution is not included among the exceptions to the application of the clause. As a matter of interpretation, specific mention of an item excludes others: expressio unius est exclusio alterius.64 A number of other tribunals have followed suit by applying the principle in support of interpretations to bring dispute settlement provisions within the scope of mfn clause operation.65 Indeed, in at least one case it has been suggested that where ‘the negotiating States Parties to the [basic] Treaty carefully defined limits to the otherwise open-ended mfn clause [by indicating a number of express exceptions] … [a]pplication of the principle expressio unius est exclusio alterius should have ended the matter, as clearly the “benefits” invoked

62 63 64 65

See, e.g., International Law Commission, Special Rapporteur Humphrey Waldock, Third Report of the Law of Treaties, [1964] 2 y.b. Int’l L. Comm’n 54, un Doc. A/CN.4/167. International Law Commission, Special Rapporteur Humphrey Waldock, Third Report of the Law of Treaties, [1964] 2 y.b. Int’l L. Comm’n 54, un Doc. A/CN.4/167. National Grid v. Argentine Republic, uncitral Ad Hoc, Decision on Jurisdiction, (20 June 2006), para. 82 (footnote omitted). See, e.g., RosInvest Co. uk Ltd. v. Russian Federation, Jurisdiction Award, scc Case No. V079/2005 (5 Oct. 2007), para. 135; Suez, Sociedad General de Aguas de Barcelona s.a., and InterAguas Servicios Integrales del Agua s.a. v. Argentina, Decision on Jurisdiction, icsid Case No. ARB/03/17 (16 May 2006), para. 56; Siemens ag v. Argentina, Decision on Jurisdiction, icsid Case No. ARB/02/08 (3 Aug. 2004), para. 83–86.

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by Claimant, i.e., arbitrating “any dispute” under the [basic treaty] against Respondent, do not fall under the mentioned exceptions.’66 Not all tribunals have found the principle to be a helpful tool for the interpretation of mfn clauses. The reason for this unwillingness is a concern about the accuracy of the assumptions required by the maxim, viz., that the ­indication of one or some exceptions or exclusions in a text equates to objective indicia of a subjective intent to treat those particular exceptions or exclusions as exclusive.67 As illustrated by the tribunal in ics Inspection & Control Services, even where the same treaty is being interpreted (by different tribunals), the application of the principle of expressio unius exclusio alterius may not lead to identical results.68 There, the tribunal, presented with an mfn clause with a number of specific exclusions, observed that the fact that dispute settlement matters had not been included in the listed exclusions could just as easily be read as meaning that the parties ‘never imagined that it was included in the first place.’69 According to the tribunal, nothing in the text or its structure made the application of the principle of expressio unius exclusio alterius a linguistic or logical necessity.70 b The Principle of ‘Contemporaneity’ Another interpretive maxim that has been invoked by some tribunals is the principle of contemporaneity, sometimes referred to by the maxim contemporanea expositio. According to the principle of contemporaneity, evidence of

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Separate Opinion of Charles N. Brower, Austrian Airlines v. Slovak Republic, uncitral Ad Hoc (9 Oct. 2009), para. 3. Cf. Aust, Modern Treaty Law and Practice, at 221 (noting that maxims such as expressio unius exclusio alterius ‘need to be used with special care. They are no more than aids to interpretation, and might well produce wrong results if followed slavishly.’). ics Inspection and Control Services Ltd. v. Argentina, Award on Jurisdiction, pca Case No. 2010-9 (10 Feb. 2012), para. 310–313. ics Inspection and Control Services Ltd. v. Argentina, Award on Jurisdiction, pca Case No. 2010-9 (10 Feb. 2012), para. 313. On this point the ilc 2015 Study Group agreed with the ics tribunal, taking the view that reference to the maxim should be seen, at most, as a potential factor for the tribunal to consider, ‘nothing more.’ See also Kiliç İnşaat İthalat İhracat Sanayi ve Ticaret Anonim Şirketi v. Turkmenistan, Award, icsid Case No. ARB/10/1 (3 July 2013), 85 (accepting the applicability of the expressio unius maxim, but finding that its application did not lead to the conclusion that a third-party treaty’s dispute settlement provisions were incorporated into the basic treaty).

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the meaning of a text at the time of its adoption is the best evidence of the meaning of vague, ambiguous, or disputed language.71 The principle of contemporaneity was relied upon by the ics tribunal in its rejection of an interpretation of an mfn clause which would have encompassed the dispute settlement provisions in a third-party treaty. Focusing on the meaning of ‘treatment’ at the time the term was adopted in the mfn clause of the basic treaty, the ics tribunal took the view that in the absence of direct evidence of ‘the particular understanding held by the Contracting Parties of the term “treatment” as at the time of the conclusion of the Treaty,’ it was appropriate to apply the principle of contemporaneity.72 Applying the principle to the mfn clause in the basic treaty, and reviewing a number of non-binding extrinsic sources which it considered to be relevant to establishing a contemporary meaning of ‘treatment’ at the time the basic treaty was concluded, the tribunal held that treatment ‘was most likely meant by the two Contracting Parties to refer only to the legal regime to be respected by the host State in conformity with its international obligations, conventional or customary. The settlement of disputes meanwhile remained an entirely distinct issue ….’73 The same approach was taken by the majority in Daimler Financial Services ag v. Argentina,74 a case presided over by the same arbitrator as in ics.75 The application of the principle of contemporaneity with respect to mfn clauses is open to question. While the principle of contemporanea expositio is a general one in international law,76 it has exceptions. It is particularly inapt where the treaty evidences an intention by the parties that the meaning of the 71

72

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75 76

See Aaron X. Fellmeth & Maurice Horwitz, Guide to Latin in International Law (2009), 64. See also Anthony D’Amato, ‘International Law, Intertemporal Problems’ in Rudolf Bernhardt and Rudolf L. Bindschedler (eds.), ii Encyclopedia of Public International Law 1234 (1992). ics Inspection and Control Services Ltd. v. Argentina, Award on Jurisdiction, pca Case No. 2010-9 (10 Feb. 2012), para. 289. The tribunal described the principle of contemporaneity are being ‘particularly pertinent in the case of bilateral treaties.’ Ibid. Ibid., para. 296. Daimler Financial Services ag v. Argentina, icsid Case No. ARB/05/1, Award (22 Aug. 2012), para. 220–224. While the dissenting arbitrator in Daimler disagreed forcefully with the majority’s interpretation of the mfn clause in the basic treaty and with its interpretative process, the dissent did not directly question the general applicability or relevance of the principle of contemporaneity. See Dissenting Opinion of Judge Charles N. Brower, Daimler Financial Services ag v. Argentina, icsid Case No. ARB/05/1 (15 Aug. 2012), para. 18–22. Pierre-Marie Dupuy. Compare ics, para. 289 with Daimler, para. 220. See Rights of Nationals of the United States of America in Morocco (u.s. v. France), Judgment, 1952 i.c.j. 176, 189 (27 Aug.) (when interpreting the meaning of the term ‘dispute’ as

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text is capable of evolving over time. Such intent may be shown by the use of open-textured language without fixed meaning at the time of treaty formation and by the context within which particular language is used. A promise of mfn treatment bears both of these hallmarks. A promise of mfn treatment is a promise in which the content of the obligation to provide mfn treatment is specifically designed to evolve over time. As observed by the tribunal in Renta 4 v. Russia, ‘[t]he extension of commitments is in the very nature of mfn clauses.’77 Moreover, while treaty parties might choose to give the term ‘treatment’ a firm or fixed meaning in their text, in the ordinary course they do not.78 Rather, ‘treatment’ – a term used generally in mfn clauses since well before the advent of iias – serves as an open-textured marker for the scope of the protection, carrying an evolving meaning over time by reference, inter alia, to the contracting parties’ third-party treaty commitments and domestic enactments.79 While it might, in principle, be possible to produce evidence that at the time of the basic treaty, a term like ‘treatment’ had a special meaning which the parties should be taken to have meant in their treaty,80 the effort in ics and Daimiler to fix the meaning of the term by reference to non-binding extrinsic materials, to which the contracting states were not parties, seems unconvincing, especially given the evolving content of mfn commitments and the mfn text used in those treaties. Finally, it is worth noting, as discussed further below, that the temporal scope of mfn clauses is not generally fixed.81 That is, unless otherwise agreed, an mfn clause serves in principle to incorporate both treatment conferred on third-parties subsequent to the entry into force of the basic treaty as well as treatment already being conferred to third-parties at the time the basic treaty used in 19th and 18th centuries treaties – but not in an mfn clause – it was appropriate to give the term the meaning it would have had at the time the treaties were concluded). 77 Renta 4 S.V.S.A. v. Russia, Award on Preliminary Objections, scc Arbitration (20 March 2009), para. 92 (addressing the scope of an mfn clause, and whether it might be read to include dispute settlement matters found in third-party treaties). 78 In ics and Daimler, for example, the tribunals found that there was no direct evidence of ‘the particular understanding held by the Contracting Parties of the term ‘treatment’ as at the time of the conclusion of the Treaty.’ ics Inspection and Control Services Ltd. v. Argentina, Award on Jurisdiction, pca Case No. 2010-9 (10 Feb. 2012), para. 289. 79 Cf. Rights of Nationals of the United States of America in Morocco (u.s. v. France), Judgment, 1952 i.c.j. 176, 191–192 (27 Aug.) (rejecting the u.s. argument that the content of the protection granted under an mfn clause should be treated as fixed at a particular point in time). 80 See generally vclt, Art. 31(4). 81 See, supra, Part IV.B.

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comes into force.82 This general principle does not, of course, displace the ejusdem generis rule – it must still be shown that the claimed treatment related to the same genus as covered by the basic treaty – but it does suggest further that the principle of contemporaneity may not be especially well-suited for application in the context of an MFN clause. c Effet Utile The interpretive principle of effet utile has also been invoked by arbitral tribunals and, like the principles above, has not provided tribunals with a uniformly helpful guide for interpreting and applying mfn clauses. Two cases reflect the division. In Garanti Koza llp v. Turkmenistan,83 the majority relied upon the principle of effet utile to conclude that the mfn clause in the basic treaty applied to dispute settlement matters and could be used to bring in a more favourable dispute settlement provision from a third-party treaty. ­Observing that ‘it is in the nature of an mfn clause to be used to displace a treaty provision deemed less favourable in favour of another clause, from another treaty, deemed more favourable,’ the majority noted that ‘[t]he mfn clause itself would be deprived of effet utile if it could never be used to override another provision of the treaty.’84 In the absence of language in the treaty which limited the application of the mfn clause beyond the rule of ejusdem generis, the tribunal concluded that the mfn clause could be used to replace the dispute settlement in the basic treaty (which required a specific agreement to commence icsid arbitration) with the dispute settlement clause found in a number of third-party treaties, which did not. In so doing, the majority quoted the tribunal’s decision in Renta 4 v. Russia that ‘It is not convincing for a State to argue in general terms that it accepted a particular ‘system of arbitration’ with respect to nationals of one country but did not so consent with respect to nationals of another. The extension of commitments is in the very nature of mfn clauses.’85 Conversely, in Ambiente Ufficio s.p.a. v. Argentina,86 the dissenting arbitrator, Santiago Torres Bernardez, invoked the principle of effet utile to justify his 82

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Draft Articles, Art. 20, Comment 2 (‘A most-favoured-nation clause, unless otherwise agreed, obviously attracts benefits extended to a third State both before and after the entry into force of the treaty containing the clause.’). Garanti Koza llp v. Turkmenistan, icsid Case No. ARB/11/20, Decision on the Objection to Jurisdiction for Lack of Consent (3 July 2013). Ibid., para. 54. Ibid., para. 77. Ambiente Ufficio s.p.a. and Others (Case formerly known as Giordano Alpi and Others) v. Argentine Republic, icsid Case No. ARB/08/9, Dissenting Opinion of Santiago Torres Bernardez, 2 May 2013.

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interpretation that the mfn in the basic treaty did not cover dispute settlement matters. Basing his analysis of an asserted ‘dichotomy’ in public international law between substantive (or material) rights and procedural rights aimed at protecting those substantive rights,87 Torres Bernardez concluded that it would be one thing ‘to accord the investor most-favoured-nation treatment in material rights, and another thing to use the mfn clause to avoid a condition or limitation contained in the dispute-resolution provisions of the same bit. To proceed otherwise would amount to deny not only the ‘effet utile’ of the dispute-resolution in the interpretation, but also and most fundamental the international law rule of a State’s consent to jurisdiction.’88 III

Most-Favoured Nation Clauses, Dispute Settlement Provisions, and the International Law Commission’s 2015 Study Group Report

Mafezzini and its progeny spurred calls within the ilc to revisit the topic of mfn clauses, beginning in 2006.89 The proposal was not met with universal support. Some states considered the issues inappropriate for further ilc attention in the light of the varied formulations of mfn protection found in existing treaties, the ability of states ‘to draft clauses that suit their needs,’ and the belief that interpretative issues related to the application of mfn clauses should be resolved on a case-by-case basis.90 Other states, although supportive of the production of guidance on the interpretation of mfn clauses in the area of investment, opposed any move to codify such work, or to revise the 1978 Draft Articles.91 As a result, in the absence of any particular consensus, the 87 88 89

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Ibid., para. 370. Ibid., para. 373. Report of the International Law Commission on the Work of its Fifty-ninth Session, ­Annex ii, ‘Most-Favoured-Nation Clause: Report of the Working Group,’ [2007] 2 y.b. Int’l L. Comm’n 164, para. 1, un Doc. A/CN.4/L.719. Ibid. at 168, para. 36. See Sixth Committee, Summary Record of the 26th Meeting [2010] un Doc. A/C.6/65/SR.25 at para. 75 (Portugal); Sixth Committee, Summary Record of the 27th Meeting [2011] un Doc. A/C.6/66/SR.27. Sixth Committee, Summary Record of the 23rd Meeting [2009] un Doc. A/C.6/64/SR.23, at para. 52 (United States of America); Sixth Committee, Summary Record of the 25th Meeting [2010] Un Doc. A/C.6/65/SR.25, at para. 82 (United Kingdom); Sixth Committee, Summary Record of the 26th Meeting [2010] un Doc. A/C.6/65/SR.26, at para. 17 (United States of America); Sixth Committee, Summary Record of the 26th Meeting [2009] un Doc. A/C.6/69/SR.25, at para. 115 (Austria); Sixth Committee, Summary Record of the 27th Meeting [2011] un Doc. A/C.6/69/SR.27, at para. 26 (United States of America). See

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Commission set for the Study Group on the Most-Favoured Nation Clause the modest goal of ‘identify[ing] trends in the interpretation of mfn clauses and provid[ing] guidance for treaty negotiators, policy makers and practitioners in the investment area.’92 The Study Group further stated that it would ‘not to attempt to decide between the conflicting views of investment tribunals over the application of mfn clauses to dispute settlement provisions.’93 The output of the Study Group’s work from 2008 and until the release of its final report in 2015 reflects the limited ambitions of its objectives. The focus of the Study Group’s 2015 Report was two-fold: it addressed the treaty-making practice of states and reviewed the decisions of investment treaty arbitral tribunals with respect to the application of mfn clauses to dispute settlement procedures. With respect to the former, the Study Group found, as had unctad and the oecd before it, that existing iias generally do not specify in certain terms the scope of application of mfn clauses, which in turn has led to interpretive challenges in investor-state disputes with respect to coverage of dispute settlement matters.94 Having made that observation, the Study Group noted further – as unctad had previously documented – that in more recent iias, a number of states had included text addressing the inclusion or exclusion of dispute settlement matters expressly.95 With respect to the interpretation of mfn clauses by arbitral tribunals, the Study Group focused almost exclusively on awards addressing the applicability of mfn clauses to dispute settlement matters. While the Study Group’s review

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generally, Report of the International Law Commission on the Work of its Fifty-ninth Session, Annex ii, ‘Most-Favoured-Nation Clause: Report of the Working Group,’ [2007] 2 y.b. Int’l L. Comm’n 168, para. 37–38, un Doc. A/CN.4/L.719. International Law Commission, Final Report of the Study Group on the Most-Favoured National Clause [2015] 2 y.b. Int’l Comm’n Annex, un Doc. A/CN.4/606 (hereinafter mfn Final Report 2015), para 7. In setting out these goals, the ilc was forced to admit that the work of its Study Group on the subject was largely duplicative of prior and ongoing work by both unctad and the oecd. See International Law Commission, Report of the Study Group on the Most-Favoured-Nation Clause, un Doc. A/CN.4/L.28, para 3 (16 July 2013) (describing the Study Group’s work as aimed ‘towards making a contribution in assuring greater certainty and stability in the field of investment law’). Ibid., para. 8. mfn Final Report 2015, para. 81. See unctad, Most-Favoured-Treatment: A Sequel (2010), 38–53; oecd, Most-Favoured-Nation Treatment in International Investment Law, oecd Working Papers on International Investment, 2004/02 (2004), 16. mfn Final Report 2015, para. 203–2011. See unctad, Most-Favoured-Treatment: A Sequel (2010), 102–103.

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is notable for its comprehensive organisation of these cases,96 in keeping with its limited ambitions, its review provides few new insights into the issues involved in the interpretation of mfn clauses and avoids normative prescription as to how arbitral tribunals should approach mfn clause interpretation beyond application of the 1978 Draft Articles. The Study Group did not see its role as producing an authoritative interpretation of mfn clauses in iias:97 not only did the Study Group doubt whether such an interpretation would be possible considering the variation in treaty texts, but it also took the view that such an approach would encroach upon the principle of party autonomy in conclusion of international treaties.98 Thus, while the Study Group’s report confirmed that as matter of general principle mfn clauses are capable of applying to dispute resolution matters99 – a point on which there did not seem to have been any disagreement in the arbitral jurisprudence100 – the Study Group did not go further.

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As a general conclusion, the Study Group found that where mfn clauses were capable of broader interpretation tribunals were more inclined to apply them to dispute settlement provisions. mfn Final Report 2015, para. 202. In relation to clauses which simply referred to ‘treatment,’ it found that tribunals generally refused to extend their scope to encompass dispute settlement. Ibid., para. 196. Where, however, the mfn clauses referred to ‘all treatment’ or ‘all matters governed by the treaty,’ the Study Group observed that tribunals generally held that they applied to dispute settlement matters. Ibid., para. 197. Similarly, the Study Group noted that tribunals also found mfn clauses applicable to dispute settlement provisions where the treatment was qualified by reference to ‘use,’ ‘management,’ ‘maintenance,’ ‘enjoyment,’ ‘disposal,’ and ‘utilisation.’ Ibid., para. 198. In two disputes arising out of treaties where the mfn clause was linked to the fair and equitable treatment standard, the Study Group noted that tribunals found that clauses did not cover dispute settlement. Ibid., para. 199. And in cases involving the interpretation of an mfn clause with a territorial limitation, the Study Group acknowledged variation in the jurisprudence, with some tribunals finding that it was an irrelevant factor for deciding if the clause applied to dispute resolution provisions and others finding that the territorial limitation precluded such application. Ibid., para. 200. 97 Ibid., para. 149. 98 Ibid., para. 163. 99 Ibid., para. 162. 100 While there have been numerous arbitral decisions which have concluded that particular mfn clauses do not encompass dispute settlement matters, even the most broadly circumscribed approaches to the interpretation of mfn clauses and the extension of mfn treatment to dispute settlement matters have accepted that mfn clauses might, in principle, extend to dispute settlement and jurisdictional matters. See, e.g., Concurring and Dissenting Opinion, Brigitte Stern, Impregilo S.p.A. v. Argentina, icsid Case No. ARB/07/17, para. 17.

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Instead, the ilc stressed that the ejusdem generis rule should be given application on a case-by-case basis with reference to the text of the basic treaty.101

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The unsurprising lesson of both the ilc’s work on mfn clauses and the arbitral case law of the past fifteen years is that, ultimately, whether an mfn clause covers dispute settlement matters hinges on the text of the mfn clause and how it is interpreted. As a result, to the extent that states wish to ensure that dispute settlement matters will come within the scope of mfn treatment, states may do so with appropriate treaty language.102 Similarly, to the extent that states wish to ensure that dispute settlement will not come within the coverage of an mfn clause, so too appropriate language is simple enough to draft.103 And yet, notwithstanding this cumulative international experience, many states continue to enter into iias in which the mfn clauses are silent one way or another, 101 mfn Final Report 2015, para. 216. 102 See, e.g., United Kingdom-Ethiopia (2009), Art. 3(3); Austria-Kazakhstan bit (2012), Art. 3(3) (‘Each Party shall accord to investors of the other Party and to their investments or returns treatment no less favourable than that it accords to its own investors and their investments or to investors of any third State and their investments or returns with respect to the management, operation, maintenance, use, enjoyment, sale and liquidation as well as dispute settlement of their investments or returns, whichever is more favourable to the investor.’); Belgium-Luxembourg-Kosovo bit (2010), Art. 4(2) (‘In respect of all matters covered by the provisions of this Agreement (including without limitation Article 12 [settlement of investment disputes]), each Contracting Party shall accord to investors of the other Contracting Party, treatment no less favourable than that which it accords to investors of any third State.’); Portugal-Senegal bit (signed in 2011, not yet in force), 6(2) (‘The most-favoured-nation clause also applies to the rules governing the settlement of disputes.’). 103 See, e.g., Japan-Iraq bit (2012), Art. 4(3); Israel-Myanmar (2014), Art. 3(3); SwitzerlandGeorgia (2012), Art. 4(5); Czech Republic-Azerbaijan (2012), Art. 4(6); Netherlands-uae bit (signed in 2013, not yet in force), Protocol Ad Article 9 (‘It is understood that the Most Favourite Nation (mfn) treatment shall not be applied to any procedural or judicial matter, which falls within the scope of this Agreement.’); Portugal-uae bit, Art. 4(4) (‘However, the mfn shall not apply to settlement of disputes.’). The negotiating history of the Dominican Republic-Central America-United States Free Trade Agreement (2004) (‘cafta-dr’), reflects how such ambiguities in the interpretation of mfn clauses can be avoided by way of careful drafting. The parties to the cafta-dr, referring explicitly to Maffezini, included a footnote in the negotiating history to reflect their shared interpretation that the mfn clause in the investment chapter does not encompass international dispute resolution mechanisms ‘and therefore could not reasonably lead to a conclusion similar to that of the Maffezini Case.’

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leaving their interpretation to the uncertain application of the ejusdem generis rule and such other principles of interpretation as the tribunal may determine appropriate in the circumstances of the case.104 IV

mfn Clauses and Two Additional General Principles

In addition to ejusdem generis there are two additional general principles which are of potential importance to the interpretation and drafting of mfn clauses, but have received little ­attention in the literature: (1) the meaning of ‘treatment’ and (2) the temporal scope of the clause’s application. A The Meaning of ‘Treatment’ As a general matter, unless otherwise stated in the mfn clause, treatment does not require that the beneficiary of the mfn treatment show that a thirdstate beneficiary has actually received the benefit to which the mfn beneficiary now claims. Rather, all that the mfn beneficiary needs to show is that a third-state beneficiary is entitled to the benefit. As a corollary to this rule is the general principle that the ‘treatment’ encompassed by an mfn clause includes treatment provided to the third-state beneficiary under other treaties as well as ­domestic enactments. Both principles were identified by McNair in his 1961 treatise and confirmed by the ilc in its work in the 1970s. In his treatise, ­McNair put the issue this way: Supposing that Great Britain is entitled to most-favoured nation treatment under a treaty with State A, and by reason of a treaty between State A and State B the latter is or becomes entitled to claim for itself or its nationals certain treatment from A, e.g. exemption from income tax or from some legislation affecting the occupation of houses, when is Great Britain entitled to claim from A the treatment due to B? At once or only when B has succeeded in asserting its treaty right to this treatment? In answer to this question two views are possible. The first is that Great Britain has no locus standi to claim the treatment until she can point to its actual exercise and enjoyment by B or B’s nationals. This view places Great Britain at the mercy of the degree of vigilance exerted by B or the degree of importance of the matter to B; for instance, B might have no 104 See, e.g., Mexico-Slovak Republic bit (2007), Art. 4; Czech Republic-Sri Lanka bit (signed in 2011, not yet in force), Art. 3; Estonia-Azerbaijan bit (signed in 2010, not yet in force) Art. 3.

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nationals residing in the territory of A and earning a taxable income. The second view is that the most-favoured-nation clause in the treaty with Great Britain, automatically and absolutely, invests her and her nationals with all rights in pari materia which may be possessed at any time when the treaty is in force by B and its nationals, irrespective of the question whether those rights are in fact being exercised and enjoyed or not, that is, irrespective of the question whether B has claimed them or neglected to claim them or had no occasion to claim them. The United Kingdom Government has been advised by its law officers that the second view is the right one, that is to say, that while the question ‘must depend upon the true construction of the most-favoured-nation clause upon which it may arise, … speaking generally … the right extends to the treatment which the most-favoured-nation is entitled to, whether actually claimed or exercised or not.’ The United Kingdom has asserted, and succeeded in maintaining, this second view.105 In its commentary to Article 5 of the Draft Articles, the ilc cited McNair’s comments with approval and made clear that this was the rule with respect to the operation of mfn clauses generally: If, as is the usual case, the clause itself does not provide otherwise, the clause begins to operate, i.e. a claim can be raised under the clause if the third State (or persons or things in the same relationship with the third State as are the persons or things mentioned in the clause with the beneficiary State) has actually been extended the favours that constitute the treatment. It is not necessary for the beginning of the operation of the clause that the treatment actually extended to the third State, with respect to itself or the persons or things concerned, be based on a formal treaty or agreement. The mere fact of favourable treatment is enough to set in motion the operation of the clause. However, the fact of favourable treatment may consist also in the conclusion or existence of an agreement between the granting State and the third State by which the latter is entitled to certain benefits. The beneficiary State, on the strength of the clause, may also demand the same benefits as were extended by the agreement in question to the third State. The mere fact that the third State has not availed itself of the benefits which are due to it under the agreement concluded

105 McNair, The Law of Treaties 278–279.

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with the granting State cannot absolve the granting State from its obligation under the clause.106 The recent decision in İçkale İnşaat Limited Şirketi v. Turkmenistan107 appears not to follow this general principle. There, the tribunal declined to endorse the claimant’s theory that Turkmenistan’s substantive commitments in other investment treaties were incorporated through the basic treaty’s mfn clause, which provided for ‘treatment no less favourable than that accorded in s­ imilar situations to investments of its investors or to investments of investors of any third country, whichever is the most favourable.’108 Pointing to the requirement in the mfn clause that the treatment be ‘accorded in similar situations,’ the tribunal held that it was not enough that standards of protection included in third-party investment treaties might create legal rights for investors under those treaties because mere differences between applicable legal standards could not be said to amount to ‘treatment accorded in similar situations.’ The claimant was required to demonstrate actual treatment, which, in the circumstances of the case, it could not.109 It is open to doubt whether, as the İçkale İnşaat tribunal found, the use of the phrase ‘in similar situations’ should be interpreted as having such a powerful narrowing effect. The tribunal’s interpretation finds no precedent in reported decisions and did not address either the ilc’s work on the Draft Articles or the reasoning of prior arbitral tribunals. Moreover, as a linguistic matter, it is not clear that the phrase ‘in similar situation’ acts to narrow the scope of an mfn clause from the meaning generally ascribed by the ilc in its commentary to the Draft Articles. Certainly, clearer language to such effect can be imagined and, indeed, the recent treaty practice of the European Union reflects an effort 106 Draft Articles, Art. 5, Comment (6) (emphasis added). 107 İçkale İnşaat Limited Şirketi v. Turkmenistan, Award, icsid Case No. ARB/10/24 (8 March 2016). 108 Ibid., para. 326. 109 Ibid., para. 329: ‘Investors cannot be said to be in a ‘similar situation’ merely because they have invested in a particular State; indeed, if the terms ‘in similar situations’ were to be read to coincide with the territorial scope of application of the treaty, they would not be given any meaning and would effectively become redundant as there would be no difference between the clause ‘treatment no less favourable than that accorded in similar situations […] to investments of investors of any third country’ and ‘treatment no less favourable than that accorded […] to investments of investors of any third country.’ Such a reading would not be consistent with the generally accepted rules of treaty interpretation, including the principle of effectiveness, or effet utile, which requires that each term of a treaty provision should be given a meaning and effect.’

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to draft language expressly to require the condition of ‘actual’ application in order for mfn treatment to attach. Under the eu’s new approach to iias, it is no longer sufficient for an investor seeking to benefit from the mfn clause to identify a provision in another treaty providing for better treatment than in the basic treaty. eu practice now requires that the state must have enacted measures ‘pursuant to’ the obligations in that treaty in order for it to trigger the mfn obligation in the basic treaty. The mfn provision in the ceta between Canada and the eu provides an example: Substantive obligations in other international investment treaties and other trade agreements do not in themselves constitute ‘treatment,’ and thus cannot give rise to a breach of this Article, absent measures adopted or maintained by a Party pursuant to those obligations.110 The eu’s drafting is noteworthy not only as a departure from the practice of eu Member States,111 but because of the way in which it departs from the historic drafting of mfn clauses more generally.112 Having said that, given the intention of the eu to limit the scope of mfn application, the new eu approach would appear to impose potentially significant limitations on the scope of mfn obligations, consistent with the basic principle that it is for the parties to establish the scope of those obligations through the language of their treaties. B The Temporal Scope of mfn Clauses As noted above in connection with the applicability of the principle of ‘contemporaneity,’ the general rule, recognised by the ilc in its work on the Draft Articles, is that, unless otherwise stated, mfn clauses apply not only to treatment provided in the future (i.e., subsequent to the conclusion of the basic treaty), but also to treatment provided under instruments in force prior to the conclusion of the basic treaty:

110 ceta (2016), Art. 8.7(4) (emphasis added). See also eu-Vietnam fta (2015 text), Art. 4(6). Both treaties also include express language indicating that the mfn clause is not intended to cover dispute settlement matters. 111 Indeed, some Member States’ treaties specifically identify that ‘treatment’ refers both domestic enactments and international obligations and that the mfn clause applies so long as the third-state beneficiary is ‘entitled to’ the treatment. See, e.g., Netherlands-uae bit (signed in 2013, not yet in force), Art. 3(5). 112 See generally, unctad, Most-Favoured-Treatment: A Sequel (2010).

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A most-favoured-nation clause, unless otherwise agreed, obviously attracts benefits extended to a third State both before and after the entry into force of the treaty containing the clause.113 Because of this broad temporal scope, an mfn clause can both ‘look back’ as well as ‘look forward’ to bring into the basic treaty treatment more favourable to the beneficiary of the clause. In numerous investment treaty arbitrations, investors have used mfn clauses to important treatment into the basic treaty from third-party treaties concluded prior to the basic treaty coming into force.114 As with other aspects of mfn clause, states can modify the application of this general principle through treaty drafting, although to date states largely have not done so. That said, there are examples of provisions in the treaty practice of a number of states, which restrict the temporal scope of the application of mfn treaties, requiring that the mfn clause only be given prospective application. Such drafting tends to ensure that foreign investors under the basic treaty cannot ‘look back’ to obtain protection afforded by previous treaties, thus preventing some degree of investor treaty-shopping and preserving the ability of states to make treaty policy changes for the future without concern that those changes will be undone by the resurrection of the provisions of older treaties. The first investment treaty which appears to have provided a temporal limitation on the application of an mfn clause is the North American Free Trade Agreement. In Annex iv of the treaty, all three nafta parties noted that the investment chapter’s mfn provision would not apply with respect to ‘treatment accorded under all bilateral or multilateral international agreements in force or signed prior to the date of entry into force of this Agreement.’115 113 Draft Articles, Art. 20, Comment 2. 114 See, e.g., l.e.s.i. S.p.A. and astaldi S.p.A. v. Algeria, icsid Case No. ARB/05/3, para. 150 (allowing incorporation of fet standard contained in treaty concluded prior to the basic treaty); Pope & Talbot Inc. v. Canada, uncitral Ad Hoc, para. 110–111 (allowing retrospective import of provisions found in us Model bit 1987) (annulled on other grounds); mtd v. Chile, icsid ARB/01/7, para. 104 (allowing the importation of more favourable provisions found in two earlier treaties); ata Construction, Industrial and Trading Co. v. Jordan, icsid Case No. ARB/08/2, para. 125 n. 16 (allowing the importation of more favourable provisions found in two earlier treaties); Paushok v. Mongolia, uncitral Ad Hoc, para. 254 (partially permitting the retrospective importation of provision found in two earlier treaties). 115 See nafta, Annex iv, Canada Schedule (‘Canada takes an exception to Article 1103 for treatment accorded under all bilateral or multilateral international agreements in force

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S­ ubsequently, some, but not many, other treaties have addressed this aspect of mfn clause drafting in a variety of ways. Recent examples include, the eu-Vietnam Free Trade Agreement (2015 text),116 the asean-South Korea and asean-­ China iias,117 and the Turkmenistan-Bahrain bit.118

Conclusion

The principle of ejusdem generis, identified by the ilc as the central rule for the interpretation of mfn clauses, remains the touchstone for interpretation of mfn clauses in the iia era. But, as scholars have noted for nearly a century, and as the ilc Study Group confirmed again in 2015, given the varieties of texts used by states in formulating mfn clauses, it remains the case that simple application of the ejusdem generis rule is often not so simple. While a or signed prior to the date of entry into force of this Agreement.’); Ibid., Mexico Schedule (‘Mexico takes an exception to Article 1103 for treatment accorded under all bilateral or multilateral international agreements in force or signed prior to the date of entry into force of this Agreement.’); Ibid., United States Schedule (‘The United States takes an exception to Article 1103 for treatment accorded under all bilateral or multilateral international agreements in force or signed prior to the date of entry into force of this Agreement.’). See also Canada Model bit (2004), Annex iii (providing that mfn treatment does not extend to treatment accorded under existing treaties); Canada-Jordan bit (2009), Annex III(1) (‘Article 4 shall not apply to treatment accorded under any bilateral or multilateral international agreement in force or signed prior to January 1, 1994.’) 116 eu-Vietnam (2015 text), Art. 4(4): ‘Paragraph 2 [i.e., the mfn guarantee] shall not be construed to oblige a Party to extend to the investors of the other Party or their investments the benefit of any treatment granted pursuant to any bilateral, regional and/or international agreements that entered into force before the entry into force of this Agreement.’ (Emphasis added.) 117 asean-Korea Agreement on Investment under the Framework Agreement on Comprehensive Economic Cooperation (2009), Art. 4(4): ‘Notwithstanding paragraphs 1 and 2, if a Party accords more favourable treatment to investors of any other Party or a non-Party or their investments by virtue of any future agreements or arrangements to which the Party is a party, it shall not be obliged to accord such treatment to investors of any other Party or their investments. However, upon request from any other Party, it shall accord adequate opportunity to negotiate the benefits granted therein.’ asean-China Agreement on Investment of the Framework Agreement on Comprehensive Economic Cooperation (2009), Art. 5(2) (same). 118 Turkmenistan-Bahrain Agreement Concerning the Reciprocal Promotion and Protection of Investment (2011), Art. 8.

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close ­reading of the ilc’s work on mfn clauses reveals a number of other important general principles with respect to mfn clauses, it is evident from the investment treaty case law that other principles and presumptions which have been put forward as applicable to the interpretation of mfn clauses lack the character of general applicability. As a result, as with so many areas of investment treaty practice, the only reliable means for resolving the ambiguity and disagreement which continues to surround the interpretation of mfn clauses in iias lies in closer and careful attention to the drafting of these treaties.

Chapter 18

Indirect Expropriation: A Comparative Approach Ursula Kriebaum* This chapter investigates – through a comparative analysis – the relationship between the notion of indirect expropriation and the legitimate exercise of State action that interferes with one’s property. Whilst the former is lawful only if the State pays compensation, the latter does not envisage compensation as a necessary element (nor as a subsequent remedy). The contribution surveys selected national and supranational systems of protection of property rights, and offers a comparative analysis of how courts and tribunals distinguish expropriation from non-compensable regulatory action in each of them. In spite of the different approaches adopted, it is possible to identify in the respective case laws recurring solutions, which justify abstracting an overarching – if minimal – notion of indirect expropriation transcending specific legal orders.

I Introduction A recurring topic in international law when dealing with expropriation is compensation. This is of no surprise, since expropriation itself has been considered legal if only fulfilling certain criteria, the most important one being compensation. Originally, the latter was considered a requirement under international law, at least insofar as foreign property was concerned. For nationals, human rights law brought a change. The Inter-American Convention on Human Rights explicitly provides for just compensation in case of a deprivation. And although the text of the European Convention on Human Rights is silent on the issue, the case law of the European Court of Human Rights has made it clear that expropriations are, except in very rare circumstances, only allowed against compensation. The fact that expropriations are in principle allowed, ensures that States are free to regulate in their societies’ interest, even if this implicates expropriation – provided that the owner of the property in question is compensated. * University of Vienna. Text current at the time of submission (January 2016).

© koninklijke brill nv, leiden, ���8 | doi 10.1163/9789004368385_019

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During the period of decolonization, it became hotly debated whether and to what extent foreigners should be compensated in case of nationalizations. This debate is largely over and has resulted in the current system of investment treaty protection, which contains express provisions on expropriation, including an obligation to compensate. Now, the discussion on compensation has shifted from whether expropriations have to be compensated to what expropriations are – or to put it ­differently, which interferences States must compensate and which must be tolerated, or are at least not actionable under expropriation provisions. None of the expropriation provisions in investment or human rights treaties refer to general principles of law. All the European Convention on Human Rights does, is refer to general principles of ‘international’ law, basically meaning the duty to compensate foreigners in case of an expropriation as a matter of customary international law. The question where to draw the line between an indirect expropriation1 requiring compensation and interferences with property rights which do not require compensation, is not only present in international investment and human rights law, but also a recurring topic in national legal systems. Therefore, 1 On indirect expropriation see, e.g.: V. Lowe, ‘Regulation or Expropriation?’ (2002) 55 Current Legal Problems pp. 447–466; R. Dolzer, ‘Indirect Expropriations: New Developments?’ (2003) 11 nyu Environmental Law Journal pp. 64–93; W.M. Reisman and R.D. Sloane, ‘Indirect Expropriation and its Valuation in the bit Generation’ (2003) 74 British Year Book of International Law pp. 115–150; G.H. Sampliner, ‘Arbitration of Expropriation Cases Under u.s. Investment Treaties – A Threat to Democracy or the Dog That Didn’t Bark?’ (2003) 18 icsid Review Foreign Investment Law Journal pp. 1–43; J. Paulsson and Z. Douglas, ‘Indirect Expropriation in Investment Treaty Arbitration’ in N. Horn and S. Kröll (eds), Arbitrating Foreign Investment Disputes: Procedural and Substantive Legal Aspects (Kluwer Law International 2004) pp. 145–158; L.Y. Fortier and S.L. Drymer, ‘Indirect Expropriation in the Law of International Investment: I Know It When I See It, or Caveat Investor’ (2004) 19 icsid Review Foreign ­Investment Law Journal pp. 293–327; D. Clough, ‘Regulatory Expropriations and ­Compensation under nafta’ (2005) 6 Journal of World Investment and Trade pp. 553–584; A. Newcombe, ‘The Boundaries of Regulatory Expropriation in International Law’ (2005) 20 icsid Review Foreign Investment Law Journal pp. 1–57; U. Kriebaum, ‘Regulatory Takings: Balancing the Interests of the Investor and the State’ (2007) 8 Journal of World Investment and Trade pp. 717–744; S. Ratner, ‘Regulatory Takings in Institutional Context: Beyond the Fear of Fragmented International Law’ (2008) 102 American Journal of International Law pp.  475–528; M. Paparinskis, ‘Regulatory Expropriation and Sustainable Development’ in M.-C. ­Cordonier Segger, M.W. Gehring, and A. Newcombe (eds), Sustainable Development in World Investment Law (Wolters Kluwer 2011) pp. 299–327; U. Kriebaum, ‘Expropriation’ in M. Bungenberg, J. Griebel, S. Hobe, and A. Reinisch (eds), International Investment Law (2015) pp. 959–1030.

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this chapter looks at a limited number of national constitutions and compares them to international investment law and human rights law to identify common patterns as well as differences. To do so, it first looks at provisions providing for protection of property before analysing important cases in different property protection systems. II

General Policies

1 The All-Inclusive vs. the Expropriation Only Approach If we compare the expropriation provisions of International Investment Agreements with provisions on the protection of property of the European Convention on Human Rights,2 the eu Charter of Fundamental Rights,3 the Inter-American Convention on Human Rights,4 the African Charter on Human Rights,5 German6 2 Article 1 Protocol 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms, 4 November 1950, ets No. 5, 213 unts 222, Protocol: 20 March 1952, ets No. 9. See, e.g.: M. Sigron, Legitimate Expectations Under Article 1 of Protocol No. 1 to the E­ uropean Convention on Human Rights (2014); U. Kriebaum, ‘Art. 1 1. zp zur emrk’ in K. Pabel, and S. Schmahl (eds), Internationaler Kommentar zur Europäischen Menschenrechtskonvention, (16  2013); U. Kriebaum, Eigentumsschutz im Völkerrecht, Eine vergleichende Untersuchung zum internationalen Investitionsrecht sowie zum Menschenrechtsschutz (Duncker & Humblot 2008); B.W. Wegener, ‘Economic Fundamental Rights’ in D. Ehlers (ed), European Fundamental Rights and Freedoms (2007) pp. 130–150; K. Gelinsky, Der Schutz des Eigentums gem. Art. 1 des Ersten Zusatzprotokolls zur Europäischen Menschenrechtskonvention (2006); E. Reininghaus, Eingriffe in das Eigentumsrecht nach Art. 1 des Zusatzprotokolls zur emrk (2002); Th. Von Danwitz, ‘Der Eigentumsschutz nach Art. 1 des Ersten Zusatzprotokolls zur emrk’ in Th. Von Danwitz, O. Depenheuer, and Ch. Engel (eds), Bericht zur Lage des Eigentums (2002) p. 219; M. Hartwig, ‘Der Eigentumsschutz nach Art. 1 des 1. Zusatzprotokolls zur emrk,’ 63 Rabels Zeitschrift für ausländisches und internationales Privatrecht (1999) p. 561; P. Bußjäger, ‘Schutz des Eigentums’ in G. Heißl (ed), Handbuch Menschenrechte (2009) pp. 382–406; W. Peukert, ‘Der Schutz des Eigentums nach Art. 1 des 1. Zusatzprotokolls zur Europäischen Menschenrechtskonvention,’ 8 Europäische Grundrechte-Zeitschrift (1981) p. 97. 3 Article 17 (1) Charter of Fundamental Rights of the European Union, 7 December 2000, available at: accessed 11 December 2015. See, e.g.: Commentary of the Charter of Fundamental Rights of the European Union, eui Network of Independent Experts on Fundamental Rights, 2006, pp. 163 et seq. 4 Article 21 American Convention on Human Rights, 22 November 1969, 1144 unts 123. 5 Article 14 African [Banjul] Charter on Human and Peoples’ Rights, 27 June 1981, oau De. CAB/LEG/67/3 rev.5, 21 ilm 58 (1982). 6 Article 14 Basic Law: See, e.g.: J. Berkemann, ‘Article 14’ in D. Umbach and Th. Clemens (eds), Grundgesetz (1, 2002) pp. 910–1060; H.-J. Papier, ‘Article 14’ in Th. Maunz and G. Dürig (eds), Kommentar zum Grundgesetz, (2, 2002); W. Sass, Article 14 und das Entschädigungserfordernis

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and Austrian7 constitutional law, as well as us takings law,8 we can observe an important difference. Some texts only protect against a single type of interference, others cover any interference in property rights. In the former case, the existence of an interference triggers an obligation to compensate, whereas in the latter case, compensation is not always a requirement. Investment Agreements and the Fifth Amendment of the us Constitution are examples of the first type, only protecting against a specific type of ­interference: The clause on expropriation in Investment Agreements only protects  against uncompensated expropriation. The Fifth Amendment only ­protects against takings and not against lesser interferences. The two expressions ‘taking’ and ‘expropriation’ do not have an identical scope. Both have in common that the qualification of an interference as ‘expropriation’ or ‘taking’ is essential to obtain compensation under this type of protection clause. In investment law, other provisions such as fair and equitable treatment might still be violated even if no expropriation has occurred. Under the us Constitution, interferences with the rule of law or due process can also lead to a compensation requirement under different provisions of the Constitution, even if no taking has occurred.

(1992); I. del Guayo, G. Kühne, and M.M. Roggenkamp, ‘Ownership Unbundling and Property Rights in the eu Energy Sector’ in A. McHarg et al. (eds), Property and the Law in Energy and Natural Resources (2010) pp. 326–359; R.A. Lorz, ‘Germany’ in W. Shan (ed), The legal protection of foreign investment – A comparative study (2012) pp. 359–393; B.W. Wegener, ‘Economic Fundamental Rights’ in D. Ehlers (ed), European Fundamental Rights and Freedoms (2007) pp. 130–150. 7 The European Convention on Human Rights is part of the Austrian Constitution, therefore see also note 2. Art 5 StGG: E. Loebenstein, ‘Der Gegenstand des verfassungsgesetzlichen Eigentumsschutzes im Blickwinkel des Art. 5 StGG und des Art 1 des 1. Zusatzprotokolls zur mrk’ in H. Schäffer et al. (eds), Im Dienst an Staat und Recht: internationale Festschrift Erwin Melichar zum 70. Geburtstag (1983) p. 79. 8 Fifth Amendment to the us Constitution: ‘nor shall private property be taken for public use, without just compensation.’ See, e.g.: W.A. Fischel, Regulatory Takings, Law, Economics, and Politics (1995); L.A. Fennell, ‘Picturing Takings’ (2012) 88 Notre Dame Law Review pp. 57–113; E.M. Peñalver and L.J. Strahilevitz, ‘Judicial Takings or Due Process’ (2012) 97 Cornell Law Review, p. 305; L.A. Fennell and E.M. Peñalver, ‘Exactions Creep,’ University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 665; R. Meltz, ‘Substantive Takings Law: A Primer,’ United States Court of Federal Claims, 27th Annual Judicial Conference, November 17, 2014 available at: accessed 9 January 2016.

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In other texts, expropriation provisions form part of a comprehensive right to the protection of property. The protection of property under Article 1 of the Additional Protocol (P1-1) to the echr is an obvious example for such a clause. Conditions for Legal Expropriations: Compensation Required Only for Foreigners? National and international norms protecting property have in common that expropriations are allowed in principle, but are subject to a number of conditions: Traditionally, in international law, an expropriation in order to be legal must meet four requirements:

2

1. Public purpose 2. Non-discrimination 3. Due process of law 4. Compensation This is generally accepted, and also reflected in nearly all investment treaties. The most important condition is compensation. Under the European Convention on Human Rights, expropriations also must be in the public interest. Furthermore, the Convention prohibits discrimination in Article 149 with regard to the rights covered by the Convention, thus also with regard to the protection of property guaranteed by Article 1 of the P1-1 to the echr. Moreover, interferences with property must be provided for by law. The Court has interpreted this provision as requiring the pertinent rules of domestic law to be sufficiently accessible, precise and foreseeable and the rule of law respected.10 Furthermore, a minimum of p ­ rocedural 9

10

See, e.g.: C. Grabenwarter, ‘Article 14 – Prohibition of discrimination’ in C. Grabenwarter (ed), European Convention on Human Rights (2014) pp. 340–363. Article 14 echr in combination with Article 1 of Additional Protocol 1 to the Convention for the Protection of Human Rights and Fundamental Freedoms; Article 2 Basic Law for the Federal Republic of Germany; Article 7 Austrian Constitution. See also on the prohibition of discrimination in the field of expropriation by customary international law: Amoco International Finance Corporation v Iran, Partial Award of 14 July 1987, 15 IUSCTR, 189-298, p. 231.: ‘[d]iscrimination is widely held as prohibited by customary international law in the field of expropriation’ p. 231. See, e.g.: echr, Iatridis v Greece [gc], Judgment of 25 March 1999, echr 1999-II, para 58; Carbonara and Ventura v Italy, Judgment of 30 May 2000, echr 2000-VI, para 64; Beyeler v Italy, Judgment of 5 January 2000, echr-i, para 109; Belvedere Alberghiera srl v Italy, Judgment of 30 May 2000, echr 2000-VI, para 57.

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guarantees such as adversarial proceedings and equality of arms must be respected.11 Unlike investment treaties and Article 17(1) of the Charter of Fundamental Rights of the European Union, Article 1 of the P1-1 to the echr does not explicitly require compensation in case of an expropriation. However, investment treaties only protect foreign property. Nationals can therefore not rely on them and investment treaties are silent on the issue of interferences with rights of nationals. Article 1 of the P1-1 to the echr does not contain any explicit requirement of compensation, but refers, with regard to foreigners, in case of an expropriation, to the conditions provided for by ‘the general principles of international law.’ The interpretation provided by the European Commission of Human Rights’ case-law is not very helpful for identifying the meaning of this clause. It simply states that the general principles of international law, referred to in Article i, are the principles which have been established in general international law concerning the confiscation of the property of foreigners.12 First, this statement is circular. Second, it is problematic, since confiscation is often used as an expression for an unlawful expropriation.13 In James and Others v United Kingdom, the Court did not take a position concerning the content of the clause. Rather, it simply repeated the assertion of the applicants as stated below:14

11 12

13

14

echr, Hentrich v France, Judgment of 22 September 1994, Series A, No. 296-A, para 42. ECommHR, Gudmundsson v Island, Decision of 20 December 1960, Application No. 511/59, 3 Yearbook of the European Convention on Human Rights (1969) pp. 394, 423 et seq; ECommHR, x v brd, Decision of 16 December 1965, Application No. 1870/63, 8 Yearbook of the European Convention on Human Rights (1965) pp. 218, 226. See, e.g.: I. Brownlie, Principles of Public International Law (2003) p. 509; G. White, Nationalisation of Foreign Property (1961) p. 41; M. Herdeggen, Internationales Wirtschaftsrecht (2002) p. 219; W. Peukert, ‘Der Schutz des Eigentums nach Art. 1 des Ersten Zusatzprotokolls zur Europäischen Menschenrechtskonvention,’ 8 Europäische Grundrechte-Zeitschrift (1981) pp. 97, 104; G. Dahm, Völkerrecht (Vol. I, 1958) p. 514. echr, James and Others v United Kingdom, Judgement of 21 February 1986, Series, A/98, para 58; Lithgow v United Kingdom, Judgement of 8 July 1986, Series A, No. 102, para 111.

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The applicants argued in the alternative that the reference in the second sentence of Article 1 (P1-1) to ‘the general principles of international law’ meant that the international law requirement of, so they asserted, prompt, adequate and effective compensation for the expropriation of property of foreigners also applied to nationals.15 Brownlie states that ‘the rubric may refer to rules of customary law, to general principles of law as in Article 38(1)(c), or to logical propositions resulting from judicial reasoning on the basis of existing international law and municipal analogies.’16 What apparently was meant by the reference to ‘the general principles of international law’ was the traditional customary international law rule that an expropriation of foreign property requires the payment of prompt, adequate and effective compensation.17 Both the European Commission of Human Rights18 and the European Court of Human Rights19 have stated that the nationals of the interfering State cannot profit from these principles. According to the European Court of Human Rights, foreigners are protected by these general principles of international law, while nationals are not.20 15 16 17

18 19 20

James and Others v United Kingdom, supra note 14, para 58. I. Brownlie, supra note 13, p. 18. See U. Kriebaum, ‘Nationality and the Protection of Property under the European Convention on Human Rights’ in I. Buffard et al. (eds), International Law between Universalism and Fragmentation (2008) p. 651. Gudmundsson v Island, supra note 12, pp. 423 et seq; x v brd, supra note 12, p. 226. James and Others v United Kingdom, supra note 14, paras 59–66; Lithgow v United Kingdom, supra note 14, paras 111–119. See on this issue, eg: K. Gelinsky, Der Schutz des Eigentums gemäß Art. 1 des Ersten Zusatzprotokolls zur Europäischen Menschenrechtskonvention (1996) p. 109; U. K ­ riebaum, Eigentumsschutz, supra note 1, pp. 31, 354, 477–483; J.A. Frowein, ‘Der Eigentumsschutz in der Europäischen Menschenrechtskonvention’ in G. Pfeiffer, G. Wiese, and K. Zimmermann (eds), Festschrift für Heinz Rowedder zum 75. Geburtstag (1994) pp. 49, 56 et seq; I. Seidl-Hohenveldern, ‘Eigentumsschutz nach der emrk und nach allgemeinem Völkerrecht im Lichte der egmr-Entscheidungen in den Fällen James und Lithgow’ in M. Nowak, D. Steurer, and H. Tretter (eds), Fortschritt im Bewusstsein der Grund- und Menschenrechte. Festschrift für Felix Ermacora (1988) pp. 181 et seq; E. Riedel, ‘Entschädigung für Eigentumsentzug nach Artikel 1 des Ersten Zusatzprotokolls zur Europäischen Menschenrechtskonvention,’ 15 Europäische Grundrechte-Zeitschrift 333 (1988) pp. 336 et seq; R. Dolzer, ‘Eigentumsschutz als Abwägungsgebot’ in W. Fürst, R. Herzog, and D.C. Umbach (eds), Festschrift für Wolfgang Zeidler 1677 (1987) pp. 1685 et seq; W. Peukert, supra note 7, pp. 107 et seq.

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However, according to the Court’s interpretation of Article 1 of P1-1, the norm itself implies the payment of compensation as a necessary condition for the lawful taking of property from anyone within the jurisdiction of a Contracting State. It is well established in the Courts’ case law that the terms of compensation are an important factor in the assessment of whether an interference imposes a disproportionate burden on the applicant.21 The Court has developed this requirement out of the proportionality principle, which it found inherent in the Convention and also reflected in the structure of Article 1 P1-1. In addition, the Court relied on the national legal systems of the Contracting States. It observed: … that under the legal systems of the Contracting States, the taking of property in the public interest without payment of compensation is treated as justifiable only in exceptional circumstances …. As far as Article 1 (P1-1) is concerned, the protection of the right of property it affords would be largely illusory and ineffective in the absence of any equivalent principle. Clearly, compensation terms are material to the assessment whether the contested legislation respects a fair balance between the various interests at stake and, notably, whether it does not impose a disproportionate burden on the applicants (…).22 3 Only Direct or also Indirect Expropriations? It is by now undisputed in national legal orders, regional human rights treaties and investment law that expropriations can be direct or indirect.23 The critical

21

22 23

See, e.g.: echr, James and Others v United Kingdom, supra note 14, para 54; Lithgow v United Kingdom, supra note 14, para 120; see also echr, The Holy Monasteries v Greece, Judgment of 9 December 1994, Series A, No. 301-A, para 71; Pressos Compania Naviera S.A. and Others v Belgium, Judgment of 20 November 1995, Series A, No. 332, para 38; The Former King of Greece and Others v Greece [gc], Judgment of 23 November 2000, 2000XII echr, para 89; Platakou v Greece, Judgment of 11 January 2001, 2001-I echr, para 55; Malama v Greece, Judgment of 1 March 2001, 2001-II echr, para 48; Zvolský and Zvolska v The Czech Republic, Judgment of 12 November 2002, 2002-IX echr, para 70; Jahn and Others v Germany, echr, [gc], Judgment of 30 June 2005, Application Nos. 46720/99, 72203/01, 72552/01, para 94; Straĭn and Others v Romania, echr, Judgment of 21 July 2005, Application No. 57001/00, para 52; Draon v France, echr [gc], Judgment of 6 October 2005, Application No. 1513/03, para 79. James and Others v United Kingdom, supra note 14, para 54. See the literature mentioned in, supra notes 1, 2.

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issue in all of these legal orders is which measures amount to indirect expropriations requiring compensation. Legitimate regulation, or the right to regulate have been the object of considerable debate. It is impossible to compensate property owners or foreign investors for every measure taken by the State that has some adverse effect, however minimal, on its business operation. Such a requirement would severely impair the State in its sovereign functions.24 On the other hand, the fact that a regulatory measure serves some legitimate public purpose, cannot automatically lead to the conclusion that no expropriation or compensable interference has occurred.25 Treaty provisions on expropriation that form part of a comprehensive right to the protection of property need not and usually do not contain an ­explicit reference to indirect expropriation. This is unnecessary, since any type of i­nterference will be scrutinized and can in principle trigger a compensation requirement. Therefore, such treaties also protect against indirect ­expropriation. Only investment treaties explicitly mention indirect expro­priations. A Common Problem: Rules to Identify Compensable Interferences with Property Rights None of the norms, neither national ones, those of regional human rights protection, nor international investment treaties have been able to develop a clear and predictable distinction between compensable and non-compensable interferences with property rights. Therefore, in all legal systems it has been left to the judiciary to tackle the problem and to develop principles which can be used to make appropriate determinations. All interpreters, domestic as well as international, struggle with the problem where to draw the line between the State’s right to regulate without a need to compensate and regulatory takings that do require compensation.

4

24 See Telenor v Hungary, icsid Case No. ARB/04/15, Award, 13 September 2006, para 64: ‘It is well established that the mere exercise by government of regulatory powers that create impediments to business or entail the payment of taxes and other levies does not of itself constitute expropriation.’ 25 See, e.g.: adc v Hungary, icsid Case No. ARB/03/16, Award, 2 October 2006, paras 423–424.

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The Different Approaches

1 echr Under the European Convention on Human Rights, protection against uncompensated interferences with property rights, forms part of a comprehensive right to property.26 Regulatory interferences can either be de facto expropriations, controls of use, or other interferences. In the first category (de facto expropriation), compensation is, with small exceptions, mandatory.27 In the second category (control of use), it can be a requirement for compatibility with the Convention.28 Under the European Convention on Human Rights, a regulation in the public interest will in most cases not lead to a duty to compensate, but also not automatically exclude a right to be compensated.29 The Court only considers a regulation to constitute a de facto expropriation, if it has led to a loss of all economic value of the property. If this is not the case, it will consider the measure under the ‘control of use’ or the ‘other interference’ rule.30 In deciding whether a violation occurred, the Court assesses 26

27 28

29

30

See, e.g.: Ch. Grabenwarter, European Convention on Human Rights – Commentary (2014) pp. 371 et seq; U. Kriebaum, ‘Art. 1 1. zp zur emrk’ in K. Pabel, and S. Schmahl (eds), Internationaler Kommentar zur Europäischen Menschenrechtskonvention, (16 2013) p. 153. See, e.g.: echr, Kozacioglu v Turkey, No. 2334/03 [gc], Judgment, 19 February 2009, para 64. See, e.g.: ECommHR, Pinnackle Meat Processors Company and 8 Others v United Kingdom, Decision of 21 October 1998; echr, Galtieri v Italy, No. 72864/01, Decision of 24 January 2006, p. 12. See, e.g.: echr, Lena Aschan and Others v Finland, No. 37858/97, Decision of 15 February 2001; Brosset-Triboulet and Others v France, No. 34078/02 [gc], Judgment, 29 March 2010, para 94. echr, Tre Traktörer Aktiebolag v Sweden, Judgment of 7 July 1989, Series A, No. 159, para 55; Mellacher v Austria, Judgment of 19 December 1989, Series A, No. 169, para 44; Fredin v Sweden (No. 1), Judgment of 18 February 1991, Series A, No. 192, para 45; Spadea and Scalabrino v Italy, Judgment of 28 September 1995, Series A, No. 315-B, para 28; Scollo v Italy, Judgment of 28 September 1995, Series A, No. 315-C, para 27; Olbertz v Germany, No. 37592/97, Decision of 25 May 1999, echr 1999-V; Chassagnou and Others v France, Judgment of 29 April 1999, echr 1999-III, para 74; Immobiliare Saffi v Italy, Judgment of 28 July 1999, echr 1999-V, para 46; Lena Aschan and Others v Finnland, No. 37858/97, Decision of 15 February 2001; Hutten-Czapska v Poland [gc], No. 35014/97, Judgment of 19 June 2006, para 160. For a similar approach by the South Korean Constitutional Court concerning Article 21 of the Korean Constitution, see: ‘Green Belt Case,’ Constitutional Complaint against Article 21 of the Urban Planning Act [10-2 kccr 927, 89 Hun-Ma 214, 24 December 1998] available at: < http://search.ccourt.go.kr/ths/pr/eng_pr0101_E1.do?seq=1&cname=%EC% 98%81%EB%AC%B8%ED%8C%90%EB%A1%80&eventNum=661&eventNo=89%ED% 97%8C%EB%A7%88214%0A&pubFlag=0&cId=010400> accessed 9 January 2016.

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whether there has been a reasonable relationship of proportionality between the means employed and the aim sought to be realized.31 In doing so, it also takes into account whether any compensation has been paid.32 Yet, absence of compensation does not automatically lead to a violation of the right to the protection of property. The Court inquires whether an owner can legitimately expect to continue using his property unaffected by the new regulation.33 It takes into account the effect of the interference and compares it with other individuals in a similar situation, establishing whether, in the absence of compensation, there is still a fair balance between the interests of the individual and the community at large. In all of these cases, the European Court of Human Rights focusses on the peculiarities of the case. The ultimate aim is not indemnification, but to establish a fair balance between the rights of the property owner and the needs of society at large.34 31

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This requirement was expressed in other terms already in the Sporrong and Lönnroth judgment by the notion of the ‘fair balance’ that must be struck between the demands of the general interest of the community and the requirements of the protection of the individual’s fundamental rights (echr, Sporrong and Lönnroth v Sweden, Judgment of 23 September 1982, Series A, No. 52, p. 26, para 69). For a similar approach see, e.g.: echr, James and Others v United Kingdom, Judgment of 21 February 1986, Series A, No. 98, para 50; Van Marle v Netherlands, Judgment of 26 June 1986, Series A, No. 101, para 43; Tre Traktörer Aktiebolag v Sweden, Judgment of 7 July 1989, Series A, No. 159, para 59; Allan Jacobson v Sweden, Judgment of 25 September 1989, Series A, No. 163, para 55; Mellacher v Austria, Judgment of 19 December 1989, Series A, No. 169, para 48; Fredin v Sweden (No.1), Judgment of 18 February 1991, Series A, No. 192, para 51; Beneficio Cappella v San Marino, Judgment of 13 July 2004, para 33. See, e.g.: ECommHR, Pinnackle Meat Processors Company and 8 Others v United Kingdom, Decision of 21 October 1998; echr, Ian Edgar v United Kingdom, No. 37683/97, Decision of 25 January 2000; Lena Aschan and Others v Finland, No. 37858/97, Decision of 15 February 2001; Posti and Rahko v Finland, No. 27824/95, Judgment of 24 September 2002, para 77. See, e.g.: echr, Fredin v Sweden (No.1), Judgment of 18 February 1991, Series A, No. 192, paras 54, 55; Ian Edgar v United Kingdom, No. 37683/97, Decision of 25 January 2000; Galtieri v Italy, No. 72864/01, Decision of 24 January 2006, para 11. See, e.g.: echr, James and Others v United Kongdom, Decision of 21 February 1986, Series A, No. 98, para 50. echr, Sporrong and Lönnroth v Sweden, Judgment of 23 September 1982, Series A, No. 52, p. 26, para 69; Lithgow v United Kingdom, Decision of 8 July 1986, Series A, No. 102, para 121; The Holy Monasteries v Greece, Decision of 9 December 1994, Series A, No. 301-A, para 70; Pressos Compania Naviera S.A. and Others v Belgium, Decision of 20 November 1995, Series A, No. 332, para 38; The Former King of Greece v Greece, Decision of 23 November 2000, echr 2000-XII, para 89; Lallement v France, No. 46044/99, Decision of 11 April 2002, para 18; Motais de Narbonne v France, No. 48161/99, Decision of 2 July 2002, para 19; Pincová and Pinc v The Czech Republic, Decision of 5 November 2002, echr

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Compensation is just one important aspect in this equation.35 2 ecj Property protection in eu law follows the European Convention on Human Rights. The structure of Article 17 of the Charter of Fundamental Rights replicates the structure adopted in the case law of the European Court of Human Rights with regard to Article 1 P1-1. For expropriation, Article 17 of the Charter of Fundamental Rights of the eu explicitly requires compensation.36 The eu 2002-VIII, para 52; Broniowski v Poland [gc], No. 31443/96, Decision of 22 June 2004, echr 2004-V, para 150; Jahn and Others v Germany [gc], Nos. 46720/99, 72203/01, 72552/01, Decision of 30 June 2005, para 93; Straĭn and Others v Romania, No. 57001/00, Decision of 21 July 2005, para 51; Draon v France [gc], No. 1513/03, Decision of 6 October 2005, para 78. 35 echr, James and Others v United Kingdom, Decision of 21 February 1986, Series A, No. 98, para 54; The Holy Monasteries v Greece, Decision of 9 December 1994, Series A, No. 301-A, para 71; Pincová and Pinc v The Czech Republic, Decision of 5 November 2002, echr 2002VIII, para 53; Broniowski v Poland [gc], No. 31443/96, Decision of 22 June 2004, echr 2004-V, para 176; Jahn and Others v Germany [gc], Nos. 46720/99, 72203/01, 72552/01, Decision of 30 June 2005, para 94; Straĭn and Others v Romania, No. 57001/00, Decision of 21 July 2005, para 52; Draon v France [gc], No. 1513/03, Decision of 6 October 2005, para 79. 36 Article 17 Charter of Fundamental Rights of the European Union: ‘1. Everyone has the right to own, use, dispose of and bequeath his or her lawfully acquired possessions. No one may be deprived of his or her possessions, except in the public interest and in the cases and under the conditions provided for by law, subject to fair compensation being paid in good time for their loss. The use of property may be regulated by law in so far as is necessary for the general interest.’ See also Art 6 (3) Treaty on European Union: 3. Fundamental rights, as guaranteed by the European Convention for the Protection of Human Rights and Fundamental Freedoms and as they result from the constitutional traditions common to the Member States, shall constitute general principles of the Union’s law. C. v Milczweski, Der grundrechtliche Schutz des Eigentums im Europäischen Gemeinschaftsrecht (1994); O. Müller-Michaels, Grundrechtlicher Eigentumsschutz in der Europäischen Union (1997); U. Penski and B.R. Elsner, ‘Eigentumsgewährleistung und Berufsfreiheit als Gemeinschaftsgrundrechte in der Rechtsprechung des Europäischen Gerichtshofs’ (2001) 54 Die Öffentliche Verwaltung pp. 265 ff; N. Bernsdorff, ‘Art. 17’ in J. Meyer (ed), Kommentar zur Charta der Grundrechte der Europäischen Union (2003) pp. 242–252; P. Sturma, ‘eu Network of Independent Experts on Fundamental Rights,’ Commentary of the Charter of Fundamental Rights of the European Union (2006) available at: accessed 9 January 2016; C. Calliess, ‘Section 16.4’ in D. Ehlers (ed), Europäische Grundrechte und Grundfreiheiten (3rd ed 2009); F. Wollenschläger, ‘Article 17 – Right to Property, Article 17(1)’ in S. Peers, T. Hervey, and J. Kenner (eds.), The eu Charter of Fundamental Rights: A Commentary (2014) pp. 465–487.

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lacks the competence to formally expropriate.37 Therefore, only a very limited amount of case law is available. The ecj has differentiated between restriction and deprivation.38 A regulation must be proportionate to the public interest pursued and it must not deprive the owner of the substance of its property rights.39 Otherwise, compensation is due.40 The eu institutions enjoy a wide margin of appreciation.41 The ecj inquires whether there is a reasonable relationship between the measures provided for by the regulation and the aim pursued by the eu.42 A complete destruction of the economic value is considered to be disproportionate43 and leads to a duty to compensate.44 37

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39 40

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U. Penski and B.R. Elsner, ‘Eigentumsgewährleistung und Berufsfreiheit als Gemeinschaftsgrundrechte in der Rechtsprechung des Europäischen Gerichtshofs’ (2001) 54 Die Öffentliche Verwaltung p. 269; C. Calliess, ‘Section 16.4’ in D. Ehlers (ed), Europäische Grundrechte und Grundfreiheiten (3rd ed 2009) p. 596. Case 44/79 Hauer v Land Rheinland-Pfalz (1979) ecr 3727, para 19. Article 17 Charter of Fundamental Rights of the European Union distinguishes between ‘regulation’ and ‘deprivation’ (see supra note 36). Case 44/79 Hauer v Land Rheinland-Pfalz (1979) ecr 3727, para 23. Although the ecj has not explicitly affirmed such compensation liability (see supra note 44 for related cases), Calliess has noted that in light of the constitutional traditions of eu Member States and jurisprudence on Article 1 P1-1 to the echr (binding on the eu by virtue of Article 6 (2) Treaty on European Union), confirmed by Article 17 of the Charter of Fundamental Rights of the European Union, such liability arises as a direct result of the principle of proportionality applicable to the pertinent property guarantee: ‘Trotz aller offener Fragen, lässt sich aus den Verfassungsüberlieferungen der Mitgliedsstaaten sowie der Art 1 1. zp emrk konkretisierenden Rechtsprechung (Art 6 ii euv; 6 ii euv-e), bestätigt durch Art 17 GRCh, folgern, dass sich unmittelbar aus der Eigentumsgarantie und dem dabei anzuwendenden Grundsatz der Verhältnismäßigkeit eine Entschädigungspflicht ergibt.’ C. Calliess, ‘Section 16.4’ in D. Ehlers (ed), Europäische Grundrechte und Grundfreiheiten (3rd ed 2009) p. 613. Case C-351/04 Ikea Wholesale Ltd v Commissioners of Customs & Excise (2007) ecr I7723, para 40; Case C-398/05 agst Draht- und Biegetechnik GmbH v Hauptzollamt Aachen (2008) ecr I-1057, para 33; Case C-373/08 Hoesch Metals and Alloys GmbH v Hauptzollamt Aachen (2010) ECR- I-951, para 61. Supra note 39. The ecj has been criticized for its intransparent methodology, as well as rarely and rudimentarily applying the test of reasonability; C. Calliess, ‘Section 16.4’ in D. Ehlers (ed), Europäische Grundrechte und Grundfreiheiten (3rd ed 2009) pp. 616, 618. Case C-368/96 The Queen v The Licensing Authority established by the Medicines Act 1968 (acting by The Medicines Control Agency), ex p Generics (uk) Limited (1998) ecr I-7967, para 85. Notwithstanding the lack of explicit jurisprudence in this regard (see supra note 40), the ecj has made several pertinent indications. Case 74/74 Comptoir National Technique Agricole (cnta) sa v Commission of the European Communities (1975) ecr 533, para 44: ‘In the absence of an overriding matter of

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3 German Courts German Courts strictly differentiate between expropriations pursuant to Article 14(3) German Basic Law on the one hand and regulations and limitations of the Right to property on the other.45 Regulations and limitations are provided for in Article 14(1) sentence 2 German Basic Law. The Federal Constitutional Court requires intent to expropriate and loss of title for an expropriation.46

45

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public interest, the Commission has violated a superior rule of law, thus rendering the Community liable, by failing to include in Regulation No 189/72 transitional measures for the protection of the confidence which a trader might legitimately have had in the Community rules.’ Case 5/88 Hubert Wachauf v Federal Republic of Germany (1989) ecr 2609, para 19: ‘Having regard to those criteria, it must be observed that Community rules which, upon the expiry of the lease, had the effect of depriving the lessee, without compensation, of the fruits of his labour and of his investments in the tenanted holding would be incompatible with the requirements of the protection of fundamental rights in the Community legal order. Since those requirements are also binding on the Member States when they implement Community rules, the Member States must, as far as possible, apply those rules in accordance with those requirements.’ Case T-113/96 Édouard Dubois et Fils v Council of the European Union and Commission of the European Communities (1998) ecr II-125, para 57: ‘On which legal basis and to which extent, therefore, would the Community be obliged to act and compensate the applicant? First, there is no obligation to do so under the Single Act itself or under any other formal rule of Community law. Second, in the present case, there is likewise no need to investigate whether there is any general principle of law by virtue of which the Community would be obliged to compensate a person who has been subject to a measure expropriating his property or restricting his freedom to enjoy his right to property in such a way as to entitle him to bring an action on the basis of the second paragraph of Article 215 of the ec Treaty. Such an obligation to grant compensation would be conceivable only in relation to acts of expropriation emanating from the Community institutions themselves, since the Community cannot be obliged to make good damage caused by acts which cannot be imputed to it.’ See, e.g.: P. Axer in V. Epping and C. Hillgruber (eds), Beck’scher Online Kommentar Grundgesetz, 23rd edn, accessed 1 December 2014; M. Perkams, Internationale Investitionsschutzabkommen im Spannungsfeld zwischen effektivem Investitionsschutz und staatlichem Gemeinwohl (2011) pp. 356 ff; H.-J. Papier, ‘Article 14’ in Th. Maunz and G. Dürig (eds), Kommentar zum Grundgesetz, (2, 2002); J. Rozek, Die Unterscheidung von Eigentumsbindung und Enteignung (1998); D. Waschull, Das Unternehmen im engeren Sinne als verfassungsrechtliches Eigentum: zum Begriff des Eigentums in Art. 14 gg (1999); B. Wegener, ‘Economic Fundamental Rights’ in D. Ehlers (ed), European Fundamental Rights and Freedoms (2007) pp. 130–150. BverfG, Beschluss der 3. Kammer des Ersten Senats vom 20. Februar 2008 – 1 BvR 2389/06, para 8; M. Perkams, Internationale Investitionsschutzabkommen im Spannungsfeld zwischen effektivem Investitionsschutz und staatlichem Gemeinwohl (2011) p. 364.

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Here, form trumps effect. Article 14 in its entirety provides for comprehensive property protection.47 Most of the measures which constitute indirect expropriations in investment law, would be covered by para 1 sentence 2 of Article 14 of the German Basic Law (limitations and regulations).48 German Courts (Federal Constitutional, Federal Supreme and Federal Administrative Court) apply a proportionality test between the public interest to regulate and the need to respect the guarantee of private property.49 Only if the impact of a measure exceeds a certain threshold, may compensation be required.50 The legitimate expectations of the owner play an important role in this assessment.51 The reasonableness of the measure, whether it interferes with an already exercised use or an objectively suitable use as well as a comparison with other owners are also relevant factors in the courts’ assessments.52 If the possibility of any economic use has been withdrawn, the State regulation can be denied and make a formal expropriation necessary.53 4 us Supreme Court Since the Fifth Amendment only protects against takings and not against lesser interferences, it is of decisive importance to know whether an expropriation 47

48 49

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51 52 53

Article 14, Basic Law for the Federal Republic of Germany: (1) Property and the right of inheritance shall be guaranteed. Their content and limits shall be defined by the laws. (2) Property entails obligations. Its use shall also serve the public good. (3) Expropriation shall only be permissible for the public good. It may only be ordered by or pursuant to a law that determines the nature and extent of compensation. Such compensation shall be determined by establishing an equitable balance between the public interest and the interests of those affected. In case of dispute concerning the amount of compensation, recourse may be had to the ordinary courts. M. Perkams, Internationale Investitionsschutzabkommen im Spannungsfeld zwischen effektivem Investitionsschutz und staatlichem Gemeinwohl (2011) p. 367. bgh, Urteil vom 28. 4. 2010 – viii zr 223/09 (lg Schwerin), para 11; BVerfG, Beschluss der 1. Kammer des Ersten Senats vom 15. September 2011 – 1 BvR 2232/10, paras 35, 41; BVerwG, Urteil vom 26.06.2013 – 6 C 1.12, paras 19, 22. BVerwG, Urteil des 7. Senats vom 24.06.1993 – 7 C 26.92, para 36; bgh, Urteil vom 28. 4. 2010 – viii zr 223/09 (lg Schwerin), para 11; BVerfG, Beschluss der 1. Kammer des Ersten Senats vom 15. September 2011 – 1 BvR 2232/10, paras 35, 41. BVerfG, Beschluss des Ersten Senats vom 02. März 1999 – 1 BvL 7/91, para 96. bgh, Urteil vom 26-01-1984 – iii zr 216/82, para 24; BVerwG, Urteil vom 24.06.1993 – 7 C 26/92, para 36. bgh, Urteil vom 18.02.1993 – iii zr 20/92, para 21; BVerfG, Beschluss des Ersten Senats vom 02. März 1999 – 1 BvL 7/91, para 92; BVerwG, Urteil vom 26.06.2013 – 6 C 1.12, para 19.

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occurred. The us Supreme Court has, for a long time, tried to establish the right balance between an exercise of eminent domain of the State, which provides for the possibility to expropriate against compensation and the exercise of police powers, which allows for necessary regulation in the public interest without compensation.54 In the case Penn Central Station v New York City55 it developed three c­ riteria for that purpose which had an important impact on the discussion regarding regulatory takings in investment law: The economic impact of a ­measure, the  interference with investment backed expectations and the character of the g­ overnmental action are factors to be considered when deciding on the ­existence of an expropriation.56 Furthermore, in its case law, the Supreme Court established two situations which always trigger an obligation to compensate. One is a permanent physical occupation of property,57 the other a deprivation of all economically beneficial use.58 In both these situations there is a taking that must be compensated, unless the owner had to expect such an interference.59

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See, e.g.: W.A. Fischel, Regulatory Takings, Law, Economics, and Politics (1995); L.A. Fennell, ‘Picturing Takings’ (2012) 88 Notre Dame Law Review pp. 57–113; E.M. Peñalver and L.J. Strahilevitz, ‘Judicial Takings or Due Process’ (2012) 97 Cornell Law Review p. 305; L.A. Fennell and E.M. Peñalver, ‘Exactions Creep,’ University of Chicago Coase-Sandor Institute for Law & Economics Research Paper No. 665; R. Meltz, ‘Substantive Takings Law: A Primer,’ United States Court of Federal Claims, 27th Annual Judicial Conference, November 17, 2014 available at: accessed 9 January 2016. Penn Central Transportation Co. v New York City, 438 u.s. 104 124 (1978). Penn Central Transportation Co. v New York City, 438 u.s. 104, 124 (1978): ‘The economic impact of the regulation on the claimant and, particularly, the extent to which the regulation has interfered with distinct investment-backed expectations are, of course, relevant considerations. … So, too, is the character of the governmental action.’ Loretto v Teleprompter Manhattan catv Corp., 458 u.s. 419, 435 (1982): ‘To the extent that the government permanently occupies physical property, it effectively destroys each of these rights.’ Lucas v South Carolina Coastal Council, 505 u.s. 1003, 1015, 1029 (1992): ‘We believe similar treatment must be accorded confiscatory regulations, i.e., regulations that prohibit all economically beneficial use of land: Any limitation so severe cannot be newly legislated or decreed (without compensation) … .’ Arkansas Game & Fish Commission v United States, 568 u.s. 133, 511 (2012): ‘Factors pertinent to whether temporary flooding effects a taking include severity, duration, character of parcel, and owner’s expectations regarding parcel’s use.’

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5 Investment Tribunals The normative situation before investment tribunals is comparable to that before the us Supreme Court, insofar as investment treaties also lack a comprehensive property protection clause and only require compensation in case of expropriation. It is generally accepted by investment tribunals that one can speak of an expropriation only if there is a total or at least substantial deprivation of an ­investment.60 In many cases, legitimate regulation will not lead to a substantial deprivation of all or most of the benefits of an investment for a substantial period of time. In such cases, tribunals deny the existence of an expropriation for lack of sufficient severity.61 60

61

See, e.g.: Metalclad Corp. v Mexico, icsid Case No. ARB(AF)/97/1 (nafta), Award, 30 August 2000, para 103; Pope & Talbot v Canada, uncitral (nafta), Interim Award, 26 June 2000, para 102; cms Gas Transmission Company v Argentina, icsid Case No. ARB/01/8, Award, 12 May 2005, para 262; Telenor v Hungary, supra note 24, paras 64–65; Compañia de Aguas del Aconquija S.A. and Vivendi Universal v Argentina (Vivendi ii), icsid Case No. ARB/97/3, Award, 20 August 2007, paras 7.5.11, 7.5.17, 7.5.24–7.5.30; Sempra Energy International v Argentina, icsid Case No. ARB/02/16, Award, 28 September 2007, para 284; Merrill & Ring Forestry L.P. v Canada, uncitral, (nafta), Award, 31 March 2010, para 145; Suez, Sociedad General de Aguas de Barcelona S.A., and InterAgua Servicios Integrales del Agua S.A. v Argentina, icsid Case No. ARB/03/17, Decision on Liability, 30 July 2010, para 123; Chemtura Corporation v Canada, uncitral (nafta), Award, 2 August 2010, paras 244–249; aes Summit Generation Limited and aes-Tisza Erömü Kft. v Hungary, icsid Case No. ARB/07/22, Award, 23 September 2010, para 14.3.1; Alpha Projektholding GmbH. v Ukraine, icsid Case No. ARB/07/16, Award, 8 November 2010, para 408; Total S.A. v Argentina, icsid Case No. ARB/04/01, Decision on Liability, 27 December 2010, para 195; El Paso Energy International Company v Argentina, icsid Case No. ARB/03/15, Award, 31 October 2011, paras 233, 244–256; Spyridon Roussalis v Romania, icsid Case No. ARB/06/1, Award, 7 December 2011, paras 328, 354. U. Kriebaum, Eigentumsschutz im Völkerrecht, Eine vergleichende Untersuchung zum internationalen Investitionsrecht sowie zum Menschenrechtsschutz (Duncker & Humblot 2008) pp. 297–325. See, e.g.: Spyridon Roussalis v Romania, supra note 60, paras 354–359; White Industries Australia v India, uncitral, Award, 30 November 2011, para 12.3.6; El Paso Energy International Company v Argentina, supra note 60, paras 245–256, 299; Paushok v Mongolia, uncitral, Award, 28 April 2011, paras 331–336; Total S.A. v Argentina, supra note 60, paras 195–199; aes Summit Generation Limited and aes-Tisza Erömü Kft. v Hungary, supra note 60, paras 14.3.1–14.3.4; Chemtura v Canada, supra note 60, paras 244–247, 259, 264–265, 267; Suez, Sociedad General de Aguas de Barcelona S.A., and InterAgua Servicios Integrales del Agua S.A. v Argentina, supra note 60, paras 123–129, 134; Suez, Sociedad General de Aguas de Barcelona S.A., and Vivendi Universal S.A. v Argentin /AWD Group v Argentina, icsid Case No. ARB/03/19, Decision on Liability, 30 July 2010, paras 134, 140, 145; Merrill

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In only little more than a dozen cases have investment tribunals found an indirect expropriation.62 None of them concerned general regulation by the host State. Tribunals that had to decide on the existence of indirect expropriations have grappled with the distinction between regulatory expropriation and legitimate regulation in a number of cases. Three main lines of authority exist with regard to the method by which the line between regulation not requiring compensation and regulatory expropriation is to be drawn by arbitral tribunals.

62

& Ring Forestry L.P. v Canada, supra note 60, paras 145, 152; Toto v Lebanon, icsid Case No. ARB/07/12, Decision on Jurisdiction, 11 September 2009, paras 183–186; Glamis Gold Ltd v United States, uncitral (nafta), Award, 8 June 2009, para 536; National Grid plc v ­Argentina, uncitral, Award, 3 November 2008, para 154; Metalpar S.A. and Buen Aire S.A. v Argentina, icsid Case No. ARB/03/5, Award, 6 June 2008, paras 173–174; Corn Products International, Inc. v Mexico, icsid Case No. arb (AF)/04/1 (nafta), Decision on Responsibility, 15 January 2008, paras 82, 87, 91–94; bg Group Plc v Argentina, u ­ ncitral, Award, 24 December 2007, paras 268–272; Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v Mexico, icsid Case No. arb (AF)/04/5 (nafta), Award, 21 ­November 2007, paras 240, 244–252; Sempra Energy International v Argentina, ­supra note 60, paras 285–286; Tokios Tokelės v Ukraine, Award, 26 July 2007, paras 120–122; ­Enron v ­Argentina, icsid Case No. ARB/01/3, Award, 22 May 2007, paras 245–246; E­ astern S­ ugar v The Czech Republic, scc Case No. 088/2004, Award, 27 March 2007, para 210; pseg v T ­ urkey, icsid Case No. ARB/02/5, Award, 19 January 2007, paras 278–280; lg&e Energy Corp, lg&e Capital Corp., lg&e International Inc. v Argentina, icsid Case No. ARB/02/1, Decision on Liability, 3 October 2006, paras 189–191, 198–200; Telenor v Hungary, supra note 24, paras 79–80; Azurix Corp. v Argentina, icsid Case No. ARB/01/12, Award, 14 July 2006, para 322; Iurii Bogdanov, Agurdino-Invest Ltd. and Agurdino-Chimia jsc v Moldova, scc, Award, 22 September 2005, para 4.2.5; cms Gas Transmission C ­ ompany v Argentina, supra note 60, paras 262–263; Occidental Exploration and Production ­Company v ­Ecuador, lcia Case No. UN3467, Award, 1 July 2004, para 89; Nycomb Synergetics Technology Holding ab, Stockholm v Latvia, Arbitration Institute of the Stockholm Chamber of Commerce (ect), Award, 16 December 2003, para 4.3.1; Pope & Talbot v Canada, supra note 60, paras 96, 102; S.D. Myers, Inc. v Canada, uncitral (nafta), First Partial Award, 13 November 2000, para 283. Biloune and Marine Drive Complex Ltd. v Ghana Investments Centre and the Government of Ghana, uncitral, Award on Jurisdiction and Liability, 27 October 1989, 95 ilr 184, paras 209–210; Southern Pacific Properties (Middle East) Ltd. v Egypt, icsid Case No. ARB/84/3, Award, 20 May 1992, 3 icsid Reports 189, para 164; Antoine Goetz v Burundi, icsid Case No. ARB/95/3, Award, 10 February 1999, 6 icsid Reports 5, para 124; Metalclad Corp. v Mexico, supra note 60, para 103; Wena Hotels Ltd. v Egypt, icsid Case No. ARB/98/4, Award, 8 December 2000, 6 icsid Reports 68, para 99; Wena Hotels Ltd. v Egypt, icsid Case No. ARB/98/4, Decision on Interpretation, 31 October 2005, para 120; cme v The Czech Republic, uncitral, Partial Award, 13 September 2001, 9 icsid Reports 121, para 606;

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a Sole Effects Doctrine: Applied by nafta & bit Tribunals Some tribunals have tended to disregard the regulatory purpose of the measures taken. They only rely on the effects of a measure to decide whether an expropriation has occurred. If only the interference is substantial, i.e. deprives the investor of all or most of the benefits of the investment permanently or for a substantial period of time, an expropriation will have occurred. This is called the sole effects doctrine.63 b Police Powers For other tribunals, it follows from the existence of a public interest in the interference that no expropriation will have occurred if the interference is non-discriminatory and in accordance with due process requirements.64 The situation would only be different in case of a specific commitment by the government to the foreign investor that the government would refrain from such regulation.65 This is called the radical police powers approach.66

63

64 65 66

Middle East Cement Shipping and Handling Co. S.A. v Egypt, icsid Case No. ARB/99/6, Award, 12 April 2002, 7 icsid Reports 178, para 107; Tecnicas Medioambientales Tecmed S.A. v Mexico, icsid Case No. arb (AF)/00/2, Award, 29 May 2003, 43 ilm 133 (2004), para 115 citing Pope & Talbot. Referred to with approval by bg Group Plc v Argentina, supra note 61, para 268; Compañia de Aguas del Aconquija S.A. and Vivendi Universal v Argentina (Vivendi ii), supra note 60, paras 7.5.29, 7.5.34; Eureko B.V. v Poland, Ad Hoc Arbitration, Partial Award, 19 August 2005, paras 241, 243; adc v Hungary, supra note 25, paras 423–444; Siemens v Argentina, icsid Case No. ARB/02/8, Award, 6 February 2007, paras 264–266, 271, 272; Biwater Gauff (Tanzania) Ltd. v Tanzania, Case No. ARB/02/18, Award, 24 July 2008, para 814; Rumeli v Kazakhstan, icsid Case No. ARB/05/16, Award, 29 July 2008, para 708; Saipem S.p.A. v Bangladesh, icsid Case No. ARB/05/07, Award, 30 June 2009, paras 124–161, 128–129; Gemplus S.A., slp S.A. Gemplus Industrial S.A. de C.V. v Mexico/ Talsud S.A. v Mexico, icsid Case Nos. ARB(AF)/04/3 and ARB(AF)/04/4, Award, 16 June 2010, paras 8-21–8-28; Alpha Projektholding GmbH. v Ukraine, supra note 60, para 408. See, e.g.: R. Dolzer, supra note 1, pp. 79–80; U. Kriebaum, ‘Expropriation,’ supra note 1, pp. 37 et seq. Examples of cases where tribunals applied the sole effects doctrine are: Tippetts, Abbett, McCarthy, Stratton v tams-affa Consulting Engineers of Iran, Award No. 141-7-2, 29 June 1984, 6 iusctr 219; Phelps Dodge Corp. et al. v Iran, Award No. 217-99-2, 19 March 1986, 10 iusctr 121; Biloune and Marine Drive Complex Ltd. v Ghana Investments Centre and the Government of Ghana, supra note 62; Southern Pacific Properties (Middle East) Ltd. v Egypt, supra note 62; Metalclad Corp. v Mexico, supra note 60; Compañia de Aguas del Aconquija S.A. and Vivendi Universal v Argentina (Vivendi ii), supra note 60, paras 7.5.20, 7.5.21; Merrill & Ring Forestry L.P. v Canada, supra note 60, para 143. See, e.g.: Chemtura Corporation v Canada, supra note 60, para 266. See, e.g.: Methanex v usa, Final Award, 3 August 2005, Part iv – Chapter D, para 7. U. Kriebaum, ‘Regulatory Takings,’ supra note 1, pp. 725–727.

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Under this approach, three of the criteria (public interest, non-discrimination, due process) traditionally used to decide on the legality of an expropriation, are now used to decide whether an expropriation occurred at all. This method seems to take compliance with three of the conditions for a legal expropriation as evidence for the absence of an expropriation and ­hence, as obviating the forth requirement, compensation. Therefore, under this theory, with rare exceptions, only illegal regulatory takings will be considered expropriations. Even outside the area of investment law specific assurances have played a crucial role. In the case law of the European Court of Human Rights they have been relevant for the question of the requirement of compensation in the context of regulations of the use of property.67

67

For tribunals following this approach See, e.g.: Methanex v usa, uncitral (nafta), Award, 3 August 2005, 44 ilm 1343 (2005), Part iv, Chapter C, para 7; Fireman’s Fund Insurance Company v Mexico, icsid Case No. arb (AF)/02/1 (nafta), Award, 17 July 2006, para 176 ((j) and (k)); Saluka Investments bv (The Netherlands) v The Czech Republic, uncitral, Partial Award, 17 March 2006, para 255. On the discussion of this approach See, e.g.: T. Weiler, ‘Methanex Corp. v u.s.a. Turning the Page on nafta Chapter Eleven?’ (2005) 6 jwit pp. 903–920, 918–919; U. Kriebaum, ‘Regulatory Takings,’ supra note 1, p. 726; J. Elcombe, ‘Regulatory Powers vs. Investment Protection Under nafta’s Chapter 1110: Metalclad, Methanex, and Glamis Gold’ (2010) 68 University of Toronto Faculty of Law Review p. 71. See e.g: Fredin v Sweden (No. 1), Judgment of 18 February 1991, Series A, No. 192, paras 54, 55. There, the Court held: ‘54. … In addition, it is clear that the authorities did not give them any assurances that they would be allowed to continue to extract gravel after this date. Thus, the decision to grant them a permit to build a quay contained an express statement to the effect that that decision did not imply that ‘any position [had] been taken as to the possibility of a future reconsideration of the gravel exploitation activities on the property’ (see paragraph 16 above). Accordingly, when embarking on their investments, the applicants could have relied only on the authorities’ obligation, when taking decisions relating to nature conservation, to take due account of their interests, as prescribed in Section 3 of the 1964 Act (see paragraph 34 above). This obligation cannot, at the time the applicants made their investments, reasonably have founded any legitimate expectations on their part of being able to continue exploitation for a long period of time. 55. … the Court finds that it cannot be said that the revocation decision complained of by the applicants was inappropriate or disproportionate.’ Therefore, no violation of Article 1 of the P1-1 of the European Charter of Human Rights was found, although Fredin had not been compensated for the interference.

Indirect Expropriation: A Comparative Approach

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c The Balancing Approach A third group of tribunals also considers the context and purpose of the interference and applies a proportionality test.68 To establish whether an expropriation has taken place, these tribunals first decide whether a substantial deprivation has occurred. If this is the case, they will balance the interests of the investor against the public purpose of the interference. The award in Tecmed69 can serve as example for this approach. It balanced the public interest presumably pursued by the interference against the burden imposed on an investor.70 In doing so, it applied a proportionality test and in that way established a relationship between the two criteria ‘effect’ and ‘purpose’ of the interference.71 It held that the situation prevailing in the region did not give rise to a serious urgent situation, crisis or social emergency. It weighed this fact against the deprivation of the economic value of the investment and reached the conclusion that the interference did amount to an expropriation. It stated that three factors are of particular relevance in the balancing process: (1) the reasonableness of the government measures with respect to their goals; (2) the deprivation of economic rights (i.e. the effect of the measure); (3) the legitimate expectations of the investor. Other tribunals welcomed and followed this approach.72 IV

The Changing Requirements for the Existence of an Indirect Expropriation in Investment Treaties

Because of the relative uncertainty as to the exact delimitation between compensable and non-compensable interferences common to all the p ­ roperty

68

69 70

71 72

See, e.g.: Tecnicas Medioambientales Tecmed S.A. v Mexico, supra note 62; Azurix Corp. v Argentina, supra note 61, paras 311, 312, 322; lg&e Energy Corp, lg&e Capital Corp., lg&e International Inc. v Argentina, supra note 61, paras 189, 194–195; El Paso Energy International Company v Argentina, supra note 60, paras 233, 237–243, 297–299. Tecnicas Medioambientales Tecmed S.A. v Mexico, supra note 62. Ibid, para 122. It based itself on the judgment in Matos and Silva: Matos e Silva v Portugal, European Court of Human Rights, Application No. 15777/89, Judgment, 27 August 1996, para 92. See: U. Kriebaum, ‘Regulatory Takings,’ supra note 1. Tecnicas Medioambientales Tecmed S.A. v Mexico, supra note 62, para 122. See, e.g.: Azurix Corp. v Argentina, supra note 61, paras 311, 312, 322; lg&e Energy Corp, lg&e Capital Corp., lg&e International Inc. v Argentina, supra note 61, paras 189, 194–195; El Paso Energy International Company v Argentina, supra note 60, para 233.

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protection systems analysed, in 2004, the us and Canada73 chose to define the scope of protection under expropriation clauses in investment treaties. They inserted criteria that define how to establish the existence of an ­indirect

73

Annex B.13(1) Canada Model bit 2004, available at: accessed 9 January 2016, reads in this regard: Annex B.13(1) Expropriation The Parties confirm their shared understanding that: (a) Indirect expropriation results from a measure or series of measures of a Party that have an effect equivalent to direct expropriation without formal transfer of title or outright seizure; (b) The determination of whether a measure or series of measures of a Party constitute an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: (i) the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of a Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred; (ii) the extent to which the measure or series of measures interfere with distinct, reasonable investment-backed expectations; and (iii) the character of the measure or series of measures; (c) Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation. Annex B us Model bit 2004, available at: accessed 9 January 2016, reads in this regard: Annex B Expropriation The Parties confirm their shared understanding that: 1. Article 6 [Expropriation and Compensation](1) is intended to reflect customary international law concerning the obligation of States with respect to expropriation. 2. 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. 3. 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. 4. 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 case-by-case, fact-based inquiry that considers, among other factors:

Indirect Expropriation: A Comparative Approach

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­expropriation74 and introduced a regulation exception.75 According to the exception, non-discriminatory regulation will only in rare circumstances constitute indirect expropriation. Their respective Model bits of 2004 and investment protection treaties adopted thereafter contain an annex with this new approach on indirect expropriation. Some European Model bits followed this example. Among them is the Austrian Model bit.76 The ceta77 draft also adopts this approach.78

74 75 76

(i) the economic impact of the government action, although the fact that an action or series of actions by a Party has an adverse effect on the economic value of an investment, standing alone, does not establish that an indirect expropriation has occurred; (ii) the extent to which the government action interferes with distinct, reasonable investment-backed expectations; and (iii) the character of the government action. (b) 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. See, e.g. Annex B us Model bit 2004 supra note 73, 4(a). See, e.g. Annex B us Model bit 2004 supra note 73, 4(b). Article 7 Austrian Model bit 2010 accessed 2 December 2015. Article 7: Expropriation and Compensation (1) A Contracting Party shall not expropriate or nationalise directly or indirectly an investment of an investor of the other Contracting Party or take any measures having equivalent effect (hereinafter referred to as expropriation) except: (a) for a purpose which is in the public interest, (b) on a non-discriminatory basis, (c) in accordance with due process of law, (d) accompanied by payment of prompt, adequate and effective compensation in accordance with paragraphs (2) and (3) below. (2) Compensation shall: (a) be paid without delay. In case of delay any exchange rate loss arising from this delay shall be borne by the host State. (b) be equivalent to the fair market value of the expropriated investment before the expropriation occurred. The fair market value shall not reflect any change in value occurring because the expropriation had become publicly known earlier. (c) be paid and made freely transferable to the State designated by the claimants concerned and in the currency of the State of which the claimants are nationals or in any freely convertible currency accepted by the claimants. (d) include interest at a commercial rate established on a market basis for the currency of payment from the date of expropriation until the date of actual payment. (3) An investor of a Contracting Party which claims to be affected by expropriation by the other Contracting Party shall have the right to prompt review of its case, i­ ncluding the valuation of its investment and the payment of compensation in a­ ccordance with

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By contrast, classic expropriation clauses that are found in the large majority of bits concluded by eu Member States in recent years do not contain any definition of indirect expropriation. The same is true for national constitutional texts and regional human rights conventions.

77

78

the provisions of this Article, by a judicial authority or another competent and independent authority of the latter Contracting Party. (4) Except in rare circumstances, such as when a measure or series of measures are so severe in the light of their purpose that they cannot be reasonably viewed as having been adopted and applied in good faith, non-discriminatory measures of a Contracting Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriation. Annex X.11 Comprehensive Economic and Trade Agreement between the eu and Canada (ceta) draft published on 26 September 2014, available at: accessed 9 January 2016. Annex X.11: Expropriation The Parties confirm their shared understanding that: 1. Expropriation may be either direct or indirect: direct expropriation occurs when an investment is nationalised or otherwise directly expropriated through formal transfer of title or outright seizure; and indirect expropriation occurs where a measure or series of measures of a Party has an effect equivalent to direct expropriation, in that it substantially deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without formal transfer of title or outright seizure. 2. The determination of whether a measure or series of measures of a Party, in a specific fact situation, constitutes an indirect expropriation requires a case-by-case, fact-based inquiry that considers, among other factors: the economic impact of the measure or series of measures, although the sole fact that a measure or series of measures of a Party has an adverse effect on the economic value of an investment does not establish that an indirect expropriation has occurred; the duration of the measure or series of measures by a Party; the extent to which the measure or series of measures interferes with distinct, reasonable investment-backed expectations; and the character of the measure or series of measures, notably their object, context and intent. 3. For greater certainty, except in the rare circumstance where the impact of the measure or series of measures is so severe in light of its purpose that it appears manifestly excessive, non-discriminatory measures of a Party that are designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, do not constitute indirect expropriations. For a more detailed analysis see: U. Kriebaum, ‘fet and Expropriation in the (Invisible) eu Model bit’ (2014) 15 Journal of World Investment and Trade pp. 454–483.

Indirect Expropriation: A Comparative Approach

V

453

Summary and Conclusions

Difficulties in identifying an indirect expropriation in the context of regulatory measures can be found in all legal systems. The right balance between the interests of the State in effective regulation aiming to achieve a public purpose and the protection of the possibility to make use of one’s property, must be found in all systems of property protection, be they national constitutional law, regional human rights conventions or international investment law. In all legal systems, courts have for a long time been searching for the right balance between non-compensatory regulation and regulatory measures requiring compensation. No legal order offers the magic formula providing for a clear cut dividing line. Case law plays an important role in all systems. In all systems, the legislator enjoys a certain margin of appreciation when adopting a regulation in the public interest. Furthermore, all jurisdictions provide for fact-specific decisions and rely on legitimate expectations of the investor as one of the elements in the balancing exercise. Interference with use already exercised weighs more heavily than the prohibition of potential use of property. It makes a difference whether an investor operates in a highly regulated area where new regulations are likely, or whether it was unpredictable that a particular use would be prohibited. If the owner is deprived of every economically viable use of his property by a regulation, this will trigger an obligation to compensate under all national property protection norms examined here, as well as under the European Convention on Human Rights. So far, there is no case law under the new formula in investment protection treaties elaborating on what is to be understood by the ‘rare circumstances,’ where compensation is required and where an interference is not proportionate to public policy objectives. However, it can be assumed that if an owner is deprived of every economically viable use of its property and unable to anticipate the regulation adopted, such a rare circumstance will be present.

Index Abuse of rights 129, 199 Abuse of process 199, 200, 213, 243 American Convention on Human Rights 230 Amici curiae 216, 227–228, 232–233, 240, 242, 246, 312 Admissibility of unsolicited briefs by third parties 47–48, 246, 256, 312–313 Arbitral practice on amicus curiae submissions 247–250, 50–51 European Commission acting as amicus curiae 79, 83 Function of amicus curiae briefs 50, 246, 250–251 Annulment and setting aside of awards Annullability of determinations on jurisdiction and admissibility 134 Manifest excess of powers 40 Grounds for annulment 180, 337 Excess of powers 180–181 Failure to apply the correct law 371 Failure to state reasons 182 Serious departure from a fundamental rule of procedure 181 Grounds for setting awards aside 174–175 Public policy 175 Viability of appellate review 156 Applicable law 184 Applicability of eu law in investor-State proceedings 105 Applicability of human rights law in arbitration 228, 236, 241, 256–257, 307 Applicability of international law at large 236–237, 257 Applicability of police powers doctrine 337, 340 Arbitration Act 1996 171–172 Arbitrators Pro-investor bias 97 Referring to human rights ex officio 228, 251 Referring to investment arbitration practice 32, 153–154, 187, 349 asean Comprehensive Investment Agreement 384

Basel Convention on the Control of Transboundary Movements of Hazardous Waste and their Disposal 307 Bilateral Investment Treaties 222 Application after termination (sunset clauses) 126 Arbitration clauses 4, 81, 166, 255 Denunciation 125 Exhaustion of local remedies 162 Fork in the road clauses 163–164 General exceptions 339, 384 Historical evolution 222 Interpretation in light of international law 230 Interpretation in light of preambles 262 Legality requirements Causing a lack of jurisdiction 203 Domestic legality 196, 205–206, 217 Illegality as a defense on the merits 205–207, 212, 236 International legality 197, 213–218 Nature of the irregularity 202–204, 206 Model bits Austria 451 Canada 296, 299, 314, 450 India 292, 300–301 United States 2004 297, 314, 450 United States 2012 292, 297, 300, 314, 329, 338 Pre-arbitration requirements Waiting periods 140 Protection standards 262 Expropriation See dedicated entry Fair and Equitable Treatment See dedicated entry mfn clauses See dedicated entry National treatment clauses See dedicated entry References to international law 230 Clean hands 194, 199, 205, 207, 209, 215 Compensation See Expropriation Comprehensive Economic and Trade Agreement (ceta) 52, 54, 95, 105, 291, 299, 329, 338, 451

456 Confidentiality 45–46 Consolidation of claims 159 Consent 118 Lack of consent in the presence of illegal investments 203 Revocability of consent 122–123 State consent and derivative rights of investors 128–129, 352 Constitutionalisation of isds 223, 242 Cooling-off clauses 117 Corporate social responsibility 216, 227, 236–237, 260, 267 Corruption 201, 205, 213, 288 Costs Allocation determined by the investor’s bad faith 199, 213 Counter-claims Admissibility of counter-claims 255 Based on human rights protection 236–237 Customary international law 111 Clean hands 207–208 Denial of justice 229 Full reparation 65 Police powers 326–327, 337, 340 Protection of legitimate expectations 347–348 Unjust enrichment 174 Damages Calculation affected by illegalities of investment 63–64, 206–207, 211–212,  253, 265 Compensation for loss of value  69–70 Compensation for lost profits 71 Equitable calculation of damages 63 Hull formula 64 Principle of full compensation 62, 65 Relationship with unjust enrichment 272, 280–281 Disputes Existence of disputes 114–115 Existence of new disputes 116 Facts leading to a legal dispute 116 Notification of a dispute 117 Time at which disputes arise 114–115

Index Energy Charter Treaty 77 Application before entry into force 119–120 Principle of legality 196 Enforcement of awards 83–84, 88, 101, 166–167 Estoppel 129, 199, 352, 363 Interplay with clean hands 209 eu Charter of Fundamental Rights 434, 440 eu free trade agreements 93–94 ceta See dedicated entry eu-Singapore fta 53–55, 85, 95, 101 eu-South Korea 303 eu-Vietnam fta 53–55, 95, 105, 303 ttip See dedicated entry European Commission 52, 316 Acting as amicus curiae 79, 83 On sustainable development 302 Proposal of Investment Court System 75, 95–97, 155 European Convention on Human Rights Accession of the European Union 99–100 Compensation 62 Due process 230, 235 Just satisfaction 73 Right to property 231, 239, 306, 340–341, 364, 368, 433–434, 438 European Court of Human Rights 152, 306, 435 Margin of appreciation 244–245 No res judicata effects of ECtHR decisions 233–234 Protection of legitimate expectations 364–365, 368 Relevance of ECtHR case law 235, 239–240, 244, 252, 306 Right to property 433–436 European Court of Justice 101, 169, 440–441 Exclusive competence 79, 81, 86 Preliminary rulings for arbitral tribunals 102–103, 106–107 European Union 76 Accession to the echr 99 bits concluded between eu members 78, 86–87 bits concluded between eu members and non-eu countries 88–89

Index Interplay with other sources of international law 99–100 Principle of autonomy 98, 100, 106 Principle of non-discrimination 78 Principle of public order 102 Principle of sincere cooperation 78 Regulation no. 912/2014 92–94, 101 Expropriation 214 Compensation as legality requirement 429, 438 Compensation standards 62, 240, 310–311, 332, 335–336 Criteria for lawfulness 433 Determined by reference to human rights standards 229 Distinction between direct and indirect expropriation 430, 436–437, 452 Distinction between lawful and unlawful expropriation 62, 64–67, 429 Expropriation of immaterial property 252 Hull doctrine 327–329 In domestic legal orders Germany 442–443 United States 443–444 Police powers 447 Regulatory actions incapable of constituting expropriation 244, 332, 335–336, 438 Depending on proportionality 439, 449 Relevance of dispossession 445, 449, 453 Relevance of regulatory good faith or illegality 232, 240, 327, 330–332,  333, 447 Regulatory takings 309–310 Fair and equitable treatment Compensation for fet breaches 68 Definition of the standard 345 Interpretation in light of human rights standards 231, 263 Legitimate expectations 244, 262–264, 339, 367 Definitions 374–375 Protection in domestic jurisdictions 356 England 357–359

457 European Union 363–364 France 361 Germany and Switzerland 359–361 United States 362 Protection in investment arbitration 370–373 nafta minimum standard of treatment of aliens 232 General Agreement on Tariffs and Trade 379 National treatment 380–381 General exceptions 241, 297 General Agreement on Trade in Services 264, 379 National treatment 381 General principles of law Clean hands doctrine 207–208, 215, 260 Common but differentiated responsibilities 317 Confidentiality 46 Definition and function 3–4, 19–20, 60–61, 275–276 Due process 268 Denial of justice 229, 235 Fairness in the proceedings 5, 434 Good administration of justice 6, 366–367 Presumption of innocence 234 Right to defense 234 Unreasonable delay in proceedings 230 Equality 366 Equity 63, 219, 226, 272 Fair trial See Due process Inherent powers of tribunals 43 To issue provisional measures 6, 28, 31–32, 40, 43 Good faith See dedicated entry Kompetenz-Kompetenz 171 Legal certainty 78, 89, 363, 365, 433 Lis pendens 152 Ne bis in idem 152 Necessity 239, 241, 247 Non-discrimination 379 Non-fettering doctrine 366

458 General principles of law (cont.) Origin of general principles of law 2–3, 25–26, 275, 353 Pacta sunt servanda 77–78, 84 Police powers See Regulatory autonomy of states Precautionary principle 317 Principle of legality 147–148, 196–197, 199, 213, 217–218, 288, 366, 368 Principles of interpretation Contemporaneity 414–415 Effet utile 417–418 Ejusdem generis (in the application of mfn clauses) 399, 402–403, 409–412, 427–428 Expressio unius 412–414 Pacta tertiis See Res inter alios acta Res inter alios acta 401 Principles of justice 225, 273, 287, 345 Proportionality and balancing 212, 219, 241, 245, 252, 264–265, 317, 324, 332–334, 366, 368, 439 Protection of human rights 226, 305 As a defense for host state 236 As a duty of the host state 254 Indigenous peoples’ rights 214, 216–217, 231 Labor rights 232, 242 Privacy 236 Protection against racial discrimination 248 Protection of cultural sites 308 Protection of the environment 307– 308, 325 Relevant in applying treaty clauses 231, 262 Right to health 51, 240, 243–244, 311–312, 324 Right to property 239, 252, 340–341, 364–365 Compensation for expropriatory acts 430 Right to water 236–237, 239–240, 242–243, 247, 302, 309–310 Protection against arbitrary acts 370 Protection of legitimate expectations  See also dedicated entry 347, 370–372 Public order 324

Index Relevance in investment arbitration 2 Reciprocity 212, 219–220 Res judicata 152, 161–162, 174–175, 179, 234 Rule of law 354 Sustainable development 315 Definition 292–293, 315 Stare decisis 152 State sovereignty 225–226 Transparency 46, 236 Elements of transparency 47–48 Unjust enrichment 270–271 Rooting in domestic legal orders 275–276, 284–287 Good faith 129, 193–195, 215, 218, 345, 371–372 Lack of good faith in the making of the investment 148, 200, 211–212, 259, 288 Lack of good faith after the making of the investment 204–205, 259 Manifestations of the principle of good faith 202 icsid Convention 86 Art. 6 37 Art. 25 121, 123, 136, 138, 145 Art. 26 162 Art. 27 87 Art. 46 236 Art. 47 33–34, 44 Art. 52 40, 177–178 Art. 53 156, 167, 183 Art. 54 76, 83, 166 Art. 71 122–123 Art. 72 122–123 Denunciation 122–123 Notions of competence and jurisdiction 134 Relevance of the notion of admissibility 139 Travaux preparatoires 37, 123, 177, 182 icsid Rules of Arbitration Revision of 2006 56 Rule 36 312 Rule 37 51, 249, 312 Rule 47 of the Additional Facility Arbitration Rules 38 Inadmissibility Bad faith of the investor 199 Clean Hands 207–208, 215, 259–260 Corruption 139, 149–150, 201, 205

Index Difference from inadmissibility circumstances 7, 131–132, 143, 150 Admissibility objections being temporary 133 Irrelevance of the distinction 134 Relevant to application of mfn clauses 143, 163 Reviewability of respective determinations 134 Exclusive jurisdictional clauses in contracts 164–165 Forum-selection clauses 140–142, 162 Forum non conveniens 151 Illegality of the investment 147–148, 200–201, 211, 216, 258–259 Illegality tainting the post-investment phase 204–205, 259 Mass-claims 145 Non-bindingness of circumstances warranting inadmissibility 117 Non-ripeness of the claim 139, 161 Relevance under the icsid Convention 139 Indigenous communities 214, 216–217, 231 Institut de Droit International Resolution on investor-State arbitration 68 Inter-American Court of Human Rights 62, 252, 429 Investment Agreement for the Common Investment Area of the Common Market for Eastern and Southern Africa (comesa) 338 International Court of Justice Art. 38 of the Statute 26, 28, 275, 327, 352, 435 On mfn clauses 401–402 Provisional measures 35–36 International Covenant on Civil and Political Rights 230, 234 International Covenant on Economic Social and Cultural Rights 237, 302 International law Relationship with investment arbitration 2 Sources of international law 26–27, 59, 349–350 Unilateral declarations 350–351 International Law Commission

459 Draft Articles on mfn Clauses 1978 405– 407, 410, 420, 423 Study Group Report on mfn Clauses 2015 419–421 Investments Definition Economic contribution to the host state’s development 259 icsid definition and non-icsid definitions 136 Lawsuits as investments 229 Sovereign debt as investments 146, 256 Legality of investments See Bilateral Investment Treaties, General Principles, Jurisdiction and Inadmissibility Investors Dual nationals 137 Invoking human rights 228, 230, 234 Iran-us Claims Tribunal Discussing legitimate expectations 373 Discussing police powers 326, 330 Discussing unjust enrichment 271–272, 279, 282–283 Granting provisional measures 43 Jurisdiction of arbitral tribunals Based on the consent of the parties 132 Corruption 143 Difference from inadmissibility circumstances 7, 131–132, 143, 150 Admissibility objections being temporary 133 Irrelevance of the distinction 134 Relevant to application of mfn clauses 143 Reviewability of respective determinations 134 Interplay between icsid requirements and other treaty requirements 135–138 Lapse of arbitration agreement in intra-eu bits litigation 79, 87 Pre-arbitration requirements 140–143, 145, 162–164 Ratione materiae 197–198, 203 Definition of investments under the icsid and outside icsid 135–137

460 Jurisdiction of arbitral tribunals (cont.) Jurisdiction over claims based on custom 229 Jurisdiction over contract claims 5, 164–166 Jurisdiction over investment-related disputes 255 Lack of jurisdiction due to domestic or international illegalities 147–148, 196, 199, 217–218, 255, 258 Lack of jurisdiction over human rights claims 229–230 Lack of jurisdiction over indigenous claims 232 mfn-based jurisdiction 144 Ratione personae 138 Mass-claims 145, 157–158 Shareholder claims 157 Ratione temporis 113–114, 128 Most-Favoured Nation clauses 316, 399 Application to procedural issues 143, 154, 163, 409–410, 421 Ejusdem generis principle 399, 409–411, 427–428 Meaning of “treatment” 415–416, 422–425 Practice of arbitration tribunals 409 Practice of the icj 401–402 Temporal scope of mfn clauses 425–427 Using jurisdiction/admissibility distinction to determine applicability 143 National treatment In gatt and gats 379–382 In investment treaties 382 Likeness 383 Likeness of circumstances 385–390, 392 Natural law 26 Negotiations 117 As a pre-litigation requirement 117–119 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 96, 170, 172 Non-governmental organisations 294, 312 North American Free Trade Agreement 296 Art. 1102 308, 385–390

Index Art. 1105 371, 375 Art. 1110 329 Art. 1121 162 Art. 1128 251 Preamble 232 Minimum standard of treatment 232 oecd Investment Policy Framework 296 Pact of Bogota Application after withdrawal by a party 124–125 Parallel proceedings Between international tribunals and domestic courts 162–164 Closely related claims 156–159 Successive proceedings 160 Paris Court of Appeal 176 Permanent Court of International Justice 25–28, 37 Police powers See Regulatory autonomy of states Provisional measures 6 Binding force of provisional measures 31, 34–35 Measures indicated by the International Court of Justice 35–36 Regulatory autonomy of states Police powers 311, 324, 334 Definition 324 Relevance to the determination of expropriation 447–448 Regulatory discretion 238, 264 Right to regulate 75, 97, 303, 335 Res judicata Effects of decisions of ECtHR 234 Soft law 220 State responsibility 325–326, 342 Duty to pay damages for wrongful and lawful acts 272 ilc Articles on State Responsibility 59 Art. 27 343 Art. 31 59 Art. 36 60, 265 Responsibility for acts of the judiciary 167

461

Index Stockholm (Svea) Court of Appeal 170 Swiss Federal Public International Law Act 174 Third-party interventions Home states participation in the proceedings 251 Third party interventions 256, 312–313 Transatlantic Trade and Investment Partnership (ttip) 52, 96, 104, 291, 303–304 Trans-Pacific Partnership Agreement (tpp) 297, 329, 338 Treaties Application after termination 121–124 Application of obligations before entry into force 119 Application ratione temporis 112–113, 116, 119, 125 Provisional application 120 Treaty on the Functioning of the European Union 81–82, 89–91, 100–103, 301 uncitral Arbitration Rules 49 1976 uncitral Arbitration Rules 40 Art. 26 41–42 uncitral Model Law on International Commercial Arbitration 169–170, 176 Art. 34 176–177

uncitral Rules on Transparency 48, 53 un Convention on Transparency in Treatybased Investor-State Arbitration 49, 53 unctad 294–295 Policy Framework 295 unesco Convention 309 United States Supreme Court 173 Universal Declaration of Human Rights 231, 237, 302 Vienna Convention on the Law of Treaties Preamble 226 Art. 18 119 Art. 25 119 Art. 28 111 Art. 30 79–81, 116–117 Art. 31 215, 226, 257–258 Art. 37 128–129 Art. 54 127–129 Art. 56 127 Art. 59 79–81, 126 Art. 65 79 Art. 69 274 Art. 70 128, 274 Travaux preparatoires 404 World Health Organisation 311