International Investment Law: A Handbook 3832968989, 9783832968984

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Bungenberg / Griebel / Hobe / Reinisch International Investment Law

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International Investment Law edited by

Prof. Dr. Marc Bungenberg, LL.M. Prof. Dr. Jörn Griebel, D.E.S. Prof. Dr. Stephan Hobe, LL.M. Prof. MMag. Dr. August Reinisch, LL.M. Yun-I Kim (ass. ed.)

in cooperation with the

International Investment Law Centre Cologne University of Cologne and the

Department of European, International and Comparative Law University of Vienna

2015

C.H.BECK . Hart . Nomos

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Published by Nomos Verlagsgesellschaft, Waldseestraße 3-5, 76530 Baden-Baden, Germany email: [email protected] Co-published by Verlag C.H.BECK oHG, Wilhelmstraße 9, 80801 München, Germany, email: [email protected] and Hart Publishing, 16C Worcester Place, Oxford, OXI 2JW, United Kingdom, email: [email protected] Published in North America (US and Canada) by Hart Publishing, c/o International Specialized Book, Services, 930 NE 58th Avenue, Suite 300, Portland, OR 97213-3786, USA, email: [email protected]

ISBN 978-3-8329-6898-4 (Nomos) ISBN 978-3-406-63419-2 (C.H.BECK) ISBN 978-1-84946-363-8 (Hart Publishing) First Edition 2015 © Nomos Verlagsgesellschaft, Baden-Baden 2015. Printed in Germany. This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically those of translation, reprinting, re-use of illustrations, broadcasting, reproduction by photocopying machine or similar means, and storage in data banks. Under § 54 of the German Copyright Law where copies are made for other than private use a fee is payable to »Verwertungsgesellschaft Wort«, Munich, Germany.

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Editors’ Foreword Four years have passed since our first discussion about a Handbook on International Investment Law in January 2010. This has been a time of conceptual work, numerous e-mail exchanges with some 90 authors, and correspondence with our publisher. The main purpose of this handbook – aside from providing basic information – is to strive for more clarity and an attempt to achieve some coherence in this relatively young discipline of international law, a system consisting of arbitral awards and doctrinal interpretations, constituting the most dynamic field of international economic law. After a relatively slow beginning as an integral part of customary international law, international investment law has in the past decade evolved like almost no other field of public international law, especially on the basis of an increasing number of bilateral investment treaties. In this regard, the book approaches the most crucial aspects of international investment law and thereby hopefully provides answers to many questions arising in this field. We are particularly grateful to the contributors who have anxiously awaited the publication of this work. We owe them not only thanks for their contributions, but also for their patience. We are equally grateful to our assistant editor, Ms Yun-I Kim, for her skilful, meticulous and dedicated management of the entire editorial process. Whoever has edited a book of approximately 2000 pages will appreciate such outstanding commitment. Thanks also go to Mr Christoph Hölken and Ms Katharina Diel-Gligor who supported Ms Kim during parts of the editing process, and to the publisher for their excellent cooperation. Finally, it should also be mentioned that the resources at both the International Investment Law Centre Cologne (IILCC) and at the Department of European, International and Comparative Law of the University of Vienna, provided the necessary basis for such a comprehensive work. It goes without saying that this first attempt at providing an encompassing overview on existing international investment law is far from perfect. There is an academic responsibility of each author for every article, but also an overall responsibility of the editors who have read each contribution and where necessary, have discussed them with the authors. Therefore, any proposal for improvement of contributions is most welcome and can be directed to the authors as well as to the editors. In any event, we hope that you enjoy reading this handbook! Cologne, Siegen, and Vienna, December 2014 Marc Bungenberg

Jörn Griebel

Stephan Hobe

August Reinisch

V

List of Abbreviations AAA AANZFTA AAPPI AC ACFTA ACHPR ACHR ACIA AcP ADR AF AfCHPR AFD AFDI AFR AGP AJCEPA AJIL ALI Am. Econ. Rev. Am. J. Comp. L. Am. Soc’y Int’l L. Proc. Am. U. Int’l L. Rev. Annuaire a.o. APEC APV AR Arb. Arb. Int’l ARE ARIEL ARSIWA Art(s). ASCM ASEAN Asian Int’l Arb. J. Asian J. Comp. L. Asper Rev. Int’l Bus. & Tr. L.

American Arbitration Association ASEAN–Australia–New Zealand Free Trade Agreement ASEAN Agreement for the Promotion and Protection of Investments Law Reports, Appeal Cases ASEAN–China Free Trade Agreement African Commission on Human and Peoples’ Rights American Convention on Human Rights ASEAN Comprehensive Investment Agreement Archiv für die civilistische Praxis alternative dispute resolution Additional Facility African Charter on Human and Peoples’ Rights Agence Française de Developpement Annuaire Français de Droit International Administrative and Financial Regulations Agreement on Government Procurement ASEAN–Japan Comprehensive Economic Partnership Agreement American Journal of International Law American Law Institute American Economic Review American Journal of Comparative Law Proceedings of the Annual Meeting of the American Society of International Law American University International Law Review Annuaire de l’Institut de Droit International and others; amongst others Asia Pacific Economic Cooperation adjusted present value Arbitration Rules Arbitration Arbitration International Arab Republic of Egypt Austrian Review of International and European Law ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts Article(s) Agreement on Subsidies and Countervailing Measures Association of South East Asian Nations Asian International Arbitration Journal Asian Journal of Comparative Law Asper Review of International Business and Trade Law

XIII

List of Abbreviations

ATNIF Austl. YB Int’l L. Austrian Arb. YB Austrian Rev. Eur. & Int’l L. AVR BB B.C. Int’l & Comp. L. Rev. Berkeley J. Int’l L. BEE BGBl. BGE BHR BIICL BIRD BIT(s) BOO BOT Brook. J. Int’l L. Bus. Law. Bus. L. Int’l BVerfGE BYIL c. CAFTA CALS CAMCA Can. TS Can. YBIL CARIFORUM CAT CCF CCP CDE Centre CESCR CEPA CEPMLP CETA cf. XIV

Australian Treaties Not Yet in Force Australian Yearbook of International Law Austrian Arbitration Yearbook Austrian Review of European and International Law Archiv des Völkerrechts (Archive of Public International Law) Betriebs-Berater Boston College International and Comparative Law Review Berkeley Journal of International Law Black Economic Empowerment Bundesgesetzblatt Entscheidungen des Bundesgerichts (Switzerland) Business History Review British Institute of International and Comparative Law Bank for International Reconstruction and Development Bilateral Investment Treaty(ies) build-own-operate build-operate-transfer Brooklyn Journal of International Law Business Lawyer Business Law International Entscheidungen des Bundesverfassungsgerichts (Decisions of the German Constitutional Court) British Yearbook of International Law contre (against) United States – Dominican Republic – Central America Free Trade Agreement Centre for Applied Legal Studies Commercial Arbitration and Mediation Center for the Americas Canada Treaty Series Canadian Yearbook of International Law Caribbean Forum; Forum of the Caribbean Group of African, Caribbean and Pacific (ACP) States Convention against Torture capitalised cash flow Common Commercial Policy Clean Development Mechanism see ICSID Committee on Economic, Social and Cultural Rights Comprehensive Economic Partnership Agreement Centre for Energy, Petroleum and Mineral Law and Policy Comprehensive Economic Trade Agreement confer (compare)

List of Abbreviations

CFI ch. Chi. J. Int’l L. Chinese J. Int’l L. CIAA CIEL CIME

Court of First Instance chapter Chicago Journal of International Law Chinese Journal of International Law Common Investment Area Agreement Centre for International Environmental Law Committee on International Investment and Multinational Enterprises CIRDI Centre International pour le Règlement des Différends relatifs aux Investissements CIS Commonwealth of Independent States CJ Court of Justice CJEU Court of Justice of the European Union CLP Current Legal Problems CMIT Committee on Capital Movements and Invisible Transactions CMLR Common Market Law Review Colo. J. Int’l Envtl. L. & Colorado Journal of International Environmental Law Pol’y and Policy Colum. Hum. Rts. L. Rev. Columbia Human Rights Law Review Colum. J. Transnat’l L. Columbia Journal of Transnational Law Colum. L. Rev. Columbia Law Review COMESA Common Market for Eastern and Southern Africa Conf. Rep. Conference Report Conn. L. Rev. Connecticut Law Review Constr. L. J. Construction Law Journal Contemp. Asia Arb. J. Contemporary Asia Arbitration Journal Convention ICSID Convention Cornell Int’l L. J. Cornell International Law Journal Cornell L. Q. Cornell Law Quarterly Cowp. Cowper’s King’s Bench Reports CR Conciliation Rules CRCICA Cairo Regional Centre for International Commercial Arbitration CYIL Czech Yearbook of International Law DAC Development Assistance Committee DB Der Betrieb D.C. District of Columbia DCF discounted cash flow DEG Deutsche Investitions- und Entwicklungsgesellschaft mbH Denv. J. Int’l L. & Pol’y Denver Journal of International Law and Policy DFAIT Foreign Affairs and International Trade Canada DFI Development Finance Institution Disp. Res. Int’l Dispute Resolution International Disp. Res. J. Dispute Resolution Journal

XV

List of Abbreviations

Doc. DPCI Duke L. J. EBRD ECHR ECJ ECommHR Econ. & Pol. ECOWAS ECT ECtHR ed ed(s) EFTA e.g. EHRR EIA EIB EJIL Emory Int’l L. Rev. Energy L. J. ERPL ESG esp. et al. et seq. EU Eur. L. J. Eur. Pub. L. Exch. exh. EYIEL F. F. Supp. FAO FATF FDI Fed. Reg. FILJ FIPA fn. Fordham Int’l L. J. Fordham L. Rev. FPS

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Document Droit et pratique du commerce international Duke Law Journal European Bank for Reconstruction and Development European Convention on Human Rights European Court of Justice European Commission of Human Rights Economics and Politics Economic Community of West African States Energy Charter Treaty European Court of Human Rights edition editor(s) European Free Trade Association exempli gratia (for example) European Human Rights Reports Environmental Impact Assessment Estonian Innovation Bank European Journal of International Law Emory International Law Review Energy Law Journal European Review of Private Law Environmental, Social, and Corporate Governance especially et alii (and others) et sequens (and the following) European Union European Law Journal European Public Law Exchequer Cases Exhibit European Yearbook of International Economic Law Federal Reporter Federal Supplement Food and Agriculture Organization of the United Nations Financial Action Taskforce Foreign Direct Investment Federal Register Foreign Investment Law Journal Foreign Investment and Protection Agreement (Canada) footnote Fordham International Law Journal Fordham Law Review Full Protection and Security

List of Abbreviations

FSIA

Foreign Sovereign Immunities Act of the United States of 1976 FTA Free Trade Agreement FYIL Finnish Yearbook of International Law GA General Assembly GAFTA Grain and Feed Trade Association GAR Global Arbitration Review GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade Geo. Int’l Envt’l L. Rev. Georgetown International Environmental Law Review Geo. J. Int’l L. Georgetown Journal of International Law Geo. Mason U. L. Rev. George Mason University Law Review Geo. Wash. Int’l L. Rev. George Washington International Law Review Geo. Wash. L. Rev. George Washington Law Review German L. J. German Law Journal GHG Greenhouse Gas Glob. Envt’l Pol. Global Environmental Politics Glob. Trade & Customs J. Global Trade and Customs Journal Global Community YILJ Global Community Yearbook of International Law and Justice GYIL German Yearbook of International Law Harv. Int’l L. J. Harvard International Law Journal Harv. L. Rev. Harvard Law Review Hastings Int’l & Comp. Hastings International & Comparative Law Review L. Rev. IACHR Inter-American Convention on Human Rights IACtHR Inter-American Court of Human Rights IACommHR Inter-American Commission of Human Rights IAR Investment Arbitration Reporter IBA International Bar Association ibid. ibidem (the same) IBLJ International Business Law Journal ICC International Chamber of Commerce ICCPR International Covenant on Civil and Political Rights ICERD International Convention on the Elimination of All Forms of Racial Discrimination ICESCR International Covenant on Economic, Social and Cultural Rights ICJ International Court of Justice ICJ Rep. ICJ Reports ICLR International Construction Law Review ICLQ International and Comparative Law Quarterly ICRMW International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families ICSID International Centre for Settlement of Investment Disputes

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List of Abbreviations

ICSID Convention

Convention on the Settlement of Investment Disputes between States and Nationals of other States ICSID Rep. ICSID Reports ICSID Rev.–FILJ ICSID Review – Foreign Investment Law Journal ICtHR International Court of Human Rights id. idem (the same) IDATB Integrated Database of Trade Disputes for Latin America and the Carribean IDI Institut de Droit International i.e. id est (that is) IEL International Environmental Law IFAD International Fund for Agricultural Development IIA International Investment Agreement IFC International Finance Corporation IIC International Review of Intellectual Property and Competition Law; Inter-American Investment Corporation IIL International Investment Law IISD International Institute for Sustainable Development ILA International Law Association ILC International Law Commission ILM International Legal Materials ILO International Labor Organisation ILR International Law Reports ILSA J. Int’l & Comp. L. ILSA Journal of International and Comparative Law Ind. J. Global Legal Stud. Indiana Journal of Global Legal Studies infra below INTERIGHTS International Centre for the Legal Protection of Human Rights Int’l International Int’l Arb. L. Rev. International Arbitration Law Review Int’l Fin. L. Rev. International Financial Law Review Int’l J. International Journal Int’l Judicial Monitor International Judicial Monitor Int’l L. Forum International Law Forum Int’l Law. International Lawyer Int’l Neg. International Negotiation Int’l Stud. Q. International Studies Quarterly Int’l Tax & Bus. L. International Tax and Business Lawyer Int’l Trade Brief International Trade Brief IP Intellectual Property IPR Intellectual Property Rights IPRax Praxis des Internationalen Privat- und Verfahrensrechts IR Institution Rules Iran–US CTR Iran–United States Claims Tribunal, Iran–United States Claims Tribunal Reports IStR Internationales Steuerrecht (International Tax Law)

XVIII

List of Abbreviations

Ital. YIL ITLOS ITN IWG-SWF

Italian Yearbook of International Law International Tribunal for the Law of the Sea Investment Treaty News International Working Group of Sovereign Wealth Funds J. Journal J. Air L. & Com. Journal of Air Law and Commerce J. Bus. L. Journal of Business Law J. Chartered Inst. Arb. Journal of the Chartered Institute of Arbitrators J. Comp. Econ. Journal of Comparative Economics J. Constr. Engin. & Mgmt Journal of Construction Engineering and Management J. Econ. Growth Journal of Economic Growth J. Econ. Hist. Journal of Economic History J. Int’l Arb. Journal of International Arbitration J. Int’l Disp. Settlement Journal of International Dispute Settlement J. Int’l Econ. L. Journal of International Economic Law J. L. & Econ. Journal of Law and Economics J. L. Econ. & Org. Journal of Law, Economics and Organization J. Monetary Econ. Journal of Monetary Economics J. Pol. Econ. Journal of Political Economy J. Pub. L. Journal of Public Law J. Transnat’l L. & Pol’y Journal of Transnational Law and Policy JDI Journal du Droit International JDIA Journal of Damages in International Arbitration JERL Journal of Energy and Natural Resources Law JIDS Journal of International Dispute Settlement J.O. Journal Officiel JWELB Journal of World Energy Law and Business JWI Journal of World Investment JWIT Journal of World Investment & Trade JWT Journal of World Trade JWTL Journal of World Trade Law KfW Kreditanstalt für Wiederaufbau KSzW Kölner Schrift zum Wirtschaftsrecht L. Law Law & Bus. Rev. Am. Law & Business Review of the Americas Law & Contemp. Probs. Law and Contemporary Problems Law & Phil. Law and Philosophy Law. Am. Lawyer of the Americas LCIA London Court of International Arbitration LDCs Least Developed Countries LDR Law and Development Review Leiden J. Int’l L. Leiden Journal of International Law LGDJ Librairie Générale de Droit et de Jurisprudence LIEI Legal Issues of Economic Integration

XIX

List of Abbreviations

lit. LNG LNTS loc. cit. Loy. L.A. Int’l & Comp. L. Rev. LPICT LQR LRC Ltd. m MAI Max Planck UN YB McGill L. J. MDB MEA MEP Mercosur MFN Mich. J. Int’l L. Mich. L. Rev. MIGA Minn. J. Global Trade Minn. J. Int’l L. Minn. L. Rev. mn. Modern L. Rev. n. NAAEC N.C. J. Int’l L. & Com. Reg. NCP NDP NAFTA NAFTA FTC New York Convention NGO NIEO NILR No. n.s. Nw. J. Int’l L. & Bus. NY CPLR NYIL XX

litera (character) liquefied natural gas League of Nations Treaty Series loco citato (in the place cited) Loyola of Los Angeles International and Comparative Law Review Law and Practice of International Courts and Tribunals Law Quarterly Review Legal Resources Centre Limited million Multilateral Agreement on Investments Max Planck Yearbook of United Nations Law McGill Law Journal multilateral development banks Multilateral Environmental Agreement Member of the European Parliament Mercado Común del Sur Most Favoured Nation Michigan Journal of International Law Michigan Law Review Multilateral Investment Guarantee Agency Minnesota Journal of Global Trade Minnesota Journal of International Law Minnesota Law Review marginal number The Modern Law Review note North-American Agreement on Environmental Cooperation North Carolina Journal of International Law and Commercial Regulation National Contract Point non-disputing party North American Free Trade Agreement NAFTA Free Trade Commission Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 non-governmental organisation New International Economic Order Netherlands International Law Review Number new series Northwestern Journal of International Law & Business New York Code – Civil Practice Law and Rules Netherlands Yearbook of International Law

List of Abbreviations

NY L. Sch. J. Int’l & Comp. L. NYLJ NYU Env. L. J. NYU JILP NYU L. Rev. NYU LQR OECD Off. Gaz. OGEL OJ OP op. cit. ÖZöR p., pp. Pace Int’l L. Rev. para(s). PCA PCIJ PDR PECL PEEREA Penn St. L. Rev. Pepp. L. Rev. P.L. PRC PRI Prof. PROPARCO Quart. J. Econ. QMLJ R&D RabelsZ R.B.D.I. RC RCADI RCAKL RCDIP RdE RDI REIO

New York Law School Journal of International and Comparative Law New York Law Journal New York University Environmental Law Journal New York University Journal of International Law and Politics New York University Law Review New York University Law Quarterly Review Organisation for Economic Co-operation and Development Official Gazette Oil, Gas & Energy Law Official Journal of the European Union Optional Protocol opere citato (in the work cited) Österreichische Zeitschrift für österreichisches Recht page(s) Pace International Law Review paragraph(s) Permanent Court of Arbitration Permanent Court of International Justice People’s Democratic Republic Principles of European Contract Law Protocol on Energy Efficiency and related Environmental Aspects Penn State Law Review Pepperdine Law Review Public Law People’s Republic of China Principles for Responsible Investment Professor Société de Promotion et de Participation pour la Coopération Économique The Quarterly Journal of Economics Queen Mary Law Journal Research and Development Rabels Zeitschrift für ausländisches und internationales Privatrecht (The Rabel Journal of Comparative and International Private Law) Revue belge de droit international Recueil des Cours Recueil des Cours de l’Académie de Droit International Regional Centre for Arbitration Kuala Lumpur Revue critique de droit international privé Recht der Energiewirtschaft Rivista di Diritto Internazionale Regional Economic Integration Organisation XXI

List of Abbreviations

Res Rev. Arb. RGDIP RIAA RIW RTA Rule S. Treaty Doc. SADC San Diego L. Rev. SCC

Resolution Revue de l’Arbitrage Revue Générale du Droit International Public Reports of International Arbitral Awards Recht der Internationalen Wirtschaft Regional Trade Agreement Arbitration Rule Senate Treaty Documents Southern African Development Community San Diego Law Review Arbitration Institute of the Stockholm Chamber of Commerce SchiedsVZ Zeitschrift für Schiedsverfahren (German Arbitration Journal) S.D.N.Y. Southern District of New York Sec. Section Ser. Series SFDI Société française pour le droit international SMEs small and medium-sized enterprises Soc. & Legal Stud. Social & Legal Studies SPS Sanitary and Phytosanitary Measures Stan. J. Int’l L. Stanford Journal of International Law Stan. L. Rev. Stanford Law Review Stat. Statute Stockholm Arb. Rep. Stockholm Arbitration Report Stockholm CC Stockholm Chamber of Commerce Stockholm Int’l Arb. Rev. Stockholm International Arbitration Review Suffolk Transnat’l L. Rev. Suffolk Transnational Law Review Suppl. Supplement supra above Sw. J. Int’l L. Southwestern Journal of International Law SWF Sovereign Wealth Fund Syracuse J. Int’l L. & Syracuse Journal of International Law and Commerce Com. Tampa Bay Bus. J. Tampa Bay Business Journal TBT Technical Barriers to Trade TDM Transnational Dispute Management Temp. L. Rev. Temple Law Review TEU Treaty on European Union Tex. Int’l L. J. Texas International Law Journal TFEU Treaty on the Functioning of the European Union Tilburg L. Rev. Tilburg Law Review TNC Transnational Corporation TPA Trade Promotion Agreement TPP Trans-Pacific Partnership TPPA Trans-Pacific Partnership Agreement XXII

List of Abbreviations

TRIMs TRIPS U. Miami Int.-Am. L. Rev. U. Pa. J. Const. L. U. Pa. J. Int’l Econ. L. U. Pa. J. Int’l L. U. Pa. L. Rev. U. Toronto L. J. U. Toronto Fac. L. Rev. UC Davis J. Int’l L. & Pol’y UDHR UK UKTS UMIC UN UNASUR UNCC UNCITRAL UNCLOS UNESCO UNIDROIT UNRIAA UNTS US USA USC USR UST v. Va. J. Int’l L. Vand. J. Transnat’l L. VAT VCLT viz. Vol. WACC WAMR Wis. L. Rev. WLR WM

Agreement on Trade-Related Investment Measures Agreement on Trade-Related Aspects of Intellectual Property Rights University of Miami Inter-American Law Review University of Pennsylvania Journal of Constitutional Law University of Pennsylvania Journal of International Economic Law University of Pennsylvania Journal of International Law University of Pennsylvania Law Review University of Toronto Law Journal University of Toronto Faculty of Law Review UC Davis Journal of International Law and Policy Universal Declaration of Human Rights United Kingdom United Kingdom Treaty Series upper middle income countries United Nations Unión de Naciones Suramericanas United Nations Compensation Commission United Nations Commission on International Trade Law United Nations Convention on the Law of the Sea United Nations Educational, Scientific and Cultural Organization International Institute for the Unification of Private Law United Nations Reports of International Arbitral Awards United Nations Treaty Series United States United States of America United States Code United States Reports United States Treaties and Other International Agreements versus (against) Virginia Journal of International Law Vanderbilt Journal of Transnational Law Value Added Tax Vienna Convention on the Law of Treaties videlicet (namely) Volume weighted average cost of capital World Arbitration and Mediation Review Wisconsin Law Review Weekly Law Reports Wertpapier-Mitteilungen XXIII

List of Abbreviations

World Trade Rev. WTO WTO DSU WTOA Yale J. Int’l L. Yale L. J. YB YB Int’l Inv. L. & Pol’y YBILC YCA ZaöRV ZVglRWiss

XXIV

World Trade Review World Trade Organization WTO Dispute Settlement Understanding WTO Agreement Yale Journal of International Law Yale Law Journal Yearbook Yearbook on International Investment Law and Policy Yearbook of the International Law Commission Yearbook Commercial Arbitration Zeitschrift für ausländisches öffentliches Recht und Völkerrecht Zeitschrift für Vergleichende Rechtswissenschaft

Notes on the Contributors Zeynep Akçay is a qualified lawyer in France. She holds a Bachelor and a Master in business law from Université de Strasbourg. She holds an LLM in public international law from LSE. She currently works for the Department of the European Social Charter at the Council of Europe. Vivienne Bath is Professor of Chinese and International Business Law at Sydney Law School, University of Sydney, Director of the Centre for Asian and Pacific Law and Chair of the China Studies Centre Research Committee at the University of Sydney. Her teaching and research interests are in International Business Law and Chinese law (particularly Chinese investment and commercial law). She has first class honours in Chinese and in Law from the Australian National University, and a Master of Laws from Harvard University. She is admitted to practice in Australia, New York, England and Wales and Hong Kong and, prior to joining Sydney Law School, was a partner of international law firm Coudert Brothers. She has extensive professional experience in Sydney, New York and Hong Kong, specialising in international commercial law, with a focus on foreign investment and commercial transactions in the People's Republic of China and the Asian region and was recently appointed to the Shanghai Arbitration Commission list of arbitrators. Representative publications include: Burnett and Bath, Law of International Business in Australasia, Federation Press 2009; Bath, V, ‘Foreign investment, the national interest and national security – foreign direct investment in Australia and China,’ (2012) 34 Sydney Law Review 5-34); Bath and Nottage (eds), Foreign Investment and Dispute Resolution Law and Practice in Asia, Routledge, 2011 and Bath, V, ‘ASEAN: The Liberalization of Investment through Regional Agreements,’ in Trackman and Ranieri (eds) Regionalism in International Investment Law, Oxford University Press, 2013. Professor Bath speaks Chinese (mandarin) and German. Dr. Morris Besch is a litigation lawyer in the Noerr LLP’s office in Dresden representing German and international clients in national and international litigation and arbitration proceedings, inter alia regarding post M&A-, corporate-, commercial- and price adaptation disputes and disputes with regard to renewable energies. He published the book ‘Schutz von Auslandsinvestitionen – Risikovorsorge durch Investitionsverträge’ – a practical guide for private foreign investors on contractual protection mechanisms in State Contracts. Christina Binder is Associate 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 was a visiting fellow at the Lauterpacht Center for International Law in

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Notes on the Contributors

Cambridge (2007–08) and at the Max Planck Institute for Comparative Public Law and International Law in Heidelberg (2008–10). She is member of the Young Academy of the Austrian Academy of Sciences and of the ILA Committees on the Implementation of the Rights of Indigenous Peoples and on Feminism in International Law. Christina has likewise worked as legal and electoral expert for election observation and assessment missions with the EU and the OSCE/ODIHR. Nicholas Birch, Law Offices of Stewart and Stewart, Washington D.C., is an Associate with the Law Offices of Stewart and Stewart in Washington, D.C. and a J.D./M.B.A graduate from Georgetown University. Mr. Birch has practiced in trade remedies, U.S. regulatory, and international investment law. He has also been involved in research and writing on international investment, arbitration, and trade law and development, and has been featured in multiple books and articles. Dr. Jan Asmus Bischoff serves as inhouse counsel at the privately-owned bank M.M.Warburg & CO in Hamburg. He is admitted as ‘Rechtsanwalt’ to the Bar in Hamburg. Before joining M.M.Warburg & CO, he worked as attorney in the field of investment arbitration, commercial arbitration, offshore energy, and shipping law. After obtaining his first legal degree from the University of Hamburg in 2005, he worked for four years as a researcher at the Max Planck Insitute for Comparative and International Private Law, Hamburg. In 2008, he obtained his master’s degree as Hauser Scholar from New York University, School of Law. From 2008 to 2010, he did his legal clerkship (‘Referendariat’) at the Hamburg Higher Regional Court. In 2010, he completed his Ph.D. thesis. Jan Bischoff regularly publishes articles on international law and European law. Andrea K. Bjorklund is the L. Yves Fortier Chair in International Arbitration and International Commercial Law at McGill University Faculty of Law. She is Chair of the Academic Council of the Institute of Transnational Arbitration, an adviser to the American Law Institute’s project on restating the U.S. law of international commercial arbitration. Prior to entering the academy, Professor Bjorklund was an attorney-adviser in the U.S. State Department; senior counsel to Thelma Askey of the U.S. International Trade Commission; law clerk to Judge Sam J. Ervin, III, of the U.S. Court of Appeals for the Fourth Circuit; and an associate at Miller & Chevalier in Washington, DC. She received her J.D. from Yale Law School; her M.A. in French Studies from New York University, and her B.A. (High Honors) in History and French from the University of Nebraska. Karl-Heinz Böckstiegel Independent Arbitrator; Professor Emeritus for international business law, University of Cologne; practice as arbitrator and president of arbitration tribunals in many national and international arbitrations of ICSID, XXVI

Notes on the Contributors

ECT, ICC, LCIA, NAFTA, CAFTA, UNCITRAL, PCA, DIS, AAA, SCC, Swiss Rules, DIAC, VIAC, disputes between States, and others. Chairman of the Board, German Institution of Arbitration (DIS) 1996–2012; The Patron, Chartered Institute of Arbitrators 2007–2010; President, International Law Association (ILA) 2004–2006; President, London Court of International Arbitration (LCIA) 1993–1997; Panel Chairman, United Nations Compensation Commission 1994–1996. President, Iran–United States Claims Tribunal, The Hague, 1984–1988. Chair, ‘Arbitration of the Century’, IBA Conference Amsterdam 2000. Dr. Achim-Rüdiger Börner is a single practitioner attorney in Cologne. He advises on regulated and deregulated industries, especially the energy sector, and foreign investments (inbound and outbound OECD and MENA region). He is specialized in long-term commitments and their adjustments, acting as counsellor, arbitrator, and mediator. After studies of law, macro-economics (monetary policy and economic development) and orientalism at the universities of Cologne and Bonn, a doctoral thesis on US secured transactions law and a bank internship, he acted as an in-house lawyer in leading positions and was an associate in a M&A boutique law firm before starting his own firm in 1989. He has published some 150 papers on various issues of his main subjects which he likes to call ‘oil and money’. Gabriel Bottini, Adjunct Professor of Public International Law, University of Buenos Aires, Argentina, is an international arbitrator and advisor on issues of international law. He is the former National Director of International Affairs and Disputes of the Treasury Attorney-General’s Office of Argentina. The Treasury Attorney General’s Office defends Argentina before international arbitral tribunals. Mr. Bottini has extensive experience in ICSID, UNCITRAL and ICC arbitrations. Mr. Bottini teaches international law at the University of Buenos Aires, Argentina. He has lectured at many universities and international organizations around the world on issues of investment litigation and international law, and has published extensively on such matters. He has been awarded scholarships by the Fulbright Commission and other international institutions. Mr. Bottini holds a law degree magna cum laude from the University of Buenos Aires, an LLM from New York University School of Law and a post-graduate degree from Cambridge University. Professor Chester Brown is Professor of International Law and International Arbitration at the Faculty of Law, University of Sydney; a Barrister at 7 Selborne Chambers, Sydney, and a door tenant at Essex Court Chambers, London, and Maxwell Chambers, Singapore. He previously served as Assistant Legal Adviser at the Foreign and Commonwealth Office, London, and prior to this, he was a Senior Associate in the International Law and International Arbitration

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Group of Clifford Chance LLP, London. Professor Brown is the editor of Commentaries on Selected Model Investment Treaties (OUP, 2013), co-editor of Evolution in Investment Treaty Law and Arbitration (CUP, 2011), co-author of The International Arbitration Act 1974: A Commentary (LexisNexis, 2011), and author of A Common Law of International Adjudication (OUP, 2007). He is a graduate of the Universities of Melbourne, Oxford and Cambridge. Helene Bubrowski is a political journalist at the Frankfurter Allgemeine Zeitung. She holds a doctoral degree from the University of Cologne, the First and Second German State Examinations and a Maîtrise/LL.M. from the Université de Paris I (Panthéon-Sorbonne). Her doctoral thesis on international investment law focuses on the relationship between domestic courts and international arbitral tribunals. She was awarded the prize for the best thesis in international law of the University of Cologne. Ms Bubrowski was a visiting scholar at McGill University in Montreal. She practiced arbitration at an international law firm and acted as the Secretary to the Tribunal in several international arbitration proceedings. She is author or co-author of numerous articles on arbitration and investment law. Professor Dr. Marc Bungenberg, LL.M., University of Siegen, Germany/Visiting Professor at the University of Lausanne, Switzerland, is Professor for European Law, Public International Law and International Economic Law at the University of Siegen in Germany and visiting Professor at the Swiss Universities of Lausanne (permanent) and Lucerne. He is also Academic Council to the International Investment Law Centre Cologne. His main fields of research are European and international economic law, esp. state aids, public procurement, common commercial policy and WTO-law as well as of course international investment law. Manuel Busch is a partner at Chinese-German consulting firm Saide Germany. His principal consulting activities have been concerned with Sino-German business relations and investment projects. He is a graduate of Heinrich-Heine-University law school in Düsseldorf, Germany, where he also worked at the Chair of German and Foreign Public Law, European Law and Public International Law. Manjiao Chi, BA, LLM, Ph.D (law), is an associate professor of law, Law School, Xiamen University, China; Fellow, FoKoS Center, the University of Siegen, Germany. Formerly, he worked in the Department of Treaty and Law, Ministry of Commerce of the PRC. Prof. Chi’s major research area covers international economic law (investment and trade law) and international dispute settlement. Prof. Chi was Edwards Fellow of Columbia Law School and visiting fellow of the Max Planck Institute of International Law (Heidelberg) and UNIDROIT. He is Council Member, Chinese Society of International Law and Member, American Society of International Law. He also serves as arbitrator

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and expert witness in international and domestic arbitration cases and consultant for transnational companies on international investment and commercial issues. James Crawford AC SC FBA is Whewell Professor of International Law, University of Cambridge. He was a member of the International Law Commission from 1992–2001 and was its Special Rapporteur on State Responsibility (1997– 2001). He has had an extensive practice before international courts and tribunals. His recent work includes Brownlie’s Principles of Public International Law (8th edn 2012) (Oxford: Oxford University Press) and State Responsibility: The General Part (2013) (Cambridge: Cambridge University Press). Anna Crevon-Tarassova is counsel in Dentons’ Paris office. Her practice focuses on international arbitration, both investor-state and commercial. Anna represented clients in a wide range of arbitration cases conducted under the auspices of ICSID, LCIA, ICC and SCC, as well as ad hoc arbitrations, with particular emphasis on oil & gas, pharmaceutical and other regulated sectors. She has extensive experience advising on matters relating to the Energy Charter Treaty as well as bilateral investment protection treaties. A graduate of the Moscow State University, University Paris I – Sorbonne and University Paris II – Assas, she was admitted to the Paris Bar in 2004. Anna’s working languages are English, French and Russian. Jonathan E. Davis, an associate with the international arbitration group in the New York office of Freshfields Bruckhaus Deringer at the time of writing, is now an Attorney-Adviser in the Office of the Legal Adviser at the U.S. Department of State. He holds degrees from the New York University School of Law, the Woodrow Wilson School of Public and International Affairs at Princeton University, and the University of Georgia. Armand de Mestral, C.M. is an Emeritus Professor of Law at McGill University and holds the Jean Monnet Chair in the Law of International Economic Integration. He served as Co-Director of the Institute of European Studies at McGill/ Université de Montréal from 2002–2008 and as Interim Director of the Institute of Air and Space Law at McGill University from 1998–2002. His recent publications include Improving International Investment Agreements (Routledge, 2012) edited with C. Levesque, International Law (7th ed, 2006) as co-author, Law and Practice of International Trade (2nd edition, 1999), and The North American Free Trade Agreement – A Comparative Study, Hague Academy of International Law, Recueil des cours (2000). He has served as panelist and arbitrator in disputes under the WTO, CUFTA, and NAFTA. From 1973–1980, he was a member of the Canadian Delegation to the UN Law of the Sea Conference. He has also served as consultant to NACEC and Law Commission of Canada. He presided over the Canadian Red Cross Society from 1999–2001 and was appointed Member of the Order of Canada on 28 December 2007.

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Katharina Diel-Gligor is a doctoral candidate at the Law Faculty of Heidelberg University and currently a legal trainee at the Cologne Regional Court, Germany. During her research period at the Max Planck Institute for Comparative Public Law and International Law in Heidelberg, she focused primarily on international investment and trade law, and dispute resolution. She published several articles in these fields of study. Katharina Diel-Gligor holds an LL.M. degree from Columbia University, a Maîtrise en droit degree from Paris XII University (Val-de-Marne), and a Mag. iur. degree from Mainz University. She is admitted as an Attorney-at-law in New York. Kabir Duggal is an associate in the International Arbitration group of Curtis, Mallet-Prevost, Colt and Mosle LLP. His practice focuses on investor-state arbitration, commercial arbitration, and on issues and disputes relating to public international law. He is a graduate of the University of Mumbai, University of Oxford (Law Faculty), and NYU School of Law (Hauser Global Scholar). Mr. Duggal is also a Lecturer-in-Law at the Columbia Law School, teaching “International Investment Arbitration,” and also gives lectures at the Georgetown University Law School. He also serves on ICSID Review’s Peer Review Board and is a Fellow at the Columbia Center on Sustainable Investment. Patrick Dumberry, Ph.D. (Graduate Institute for International Studies, Geneva, Switzerland), is an Associate Professor at the University of Ottawa, Canada (Faculty of Law, Civil Law Section). He practiced international arbitration for several years with law firms (Lalive in Geneva and Ogilvy Renault in Montreal), as well as with Canada’s Ministry of Foreign Affairs (Trade Law Bureau). He publishes in the fields of international law and international investment law. His most recent book is The Fair and Equitable Treatment Standard: A Guide to NAFTA Case Law on Article 1105 (Wolters Kluwer, 2013). He is currently working on another book to be entitled A Study on the Rules of Customary International Investment Law, with Specific Reference to the Fair and Equitable Treatment Standard. Professor Pierre-Marie Dupuy is an emeritus Professor of International Law at the University of Paris (Panthéon-Assas) and at the Graduate Institute of International and Development Studies in Geneva. He was visiting professor at the universities of Michigan (Ann Arbor), Munich (LMU) and Madrid (Complutense) and a professor at the European University Institute in Florence from 2000 to 2008. He gave the general course at the Academy of International Law in The Hague (2000). He is the author of Public International Law (Ed. Dalloz, last ed. 2014 with Y. Kerbrat) and of numerous writings on the theory of public international law, general international law, international law of responsibility, of human rights, International Environmental Law and International Economic Law. He has a large experience as counsel of States before the International Court of Justice and as international arbitrator (ICSID, UNCITRAL, PCA).

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Joshua Fellenbaum is a member of Debevoise & Plimpton’s International Dispute Resolution Group residing in the London office. He primarily focuses on international arbitration and has been involved in disputes covering a variety of sectors including mining, energy, automotive, commodities, telecommunications and infrastructure. He also has experience representing clients in matters involving state responsibility and public international law. Mr. Fellenbaum has been involved in cases under the rules of various arbitral institutions, including the ICC, LCIA, FCCC, PCA and SCC. He has also been involved in ad hoc proceedings under the UNCITRAL rules and the Swedish Arbitration Act. Mr. Fellenbaum previously worked for Mannheimer Swartling in Stockholm, Sweden and Clayton Utz in Sydney, Australia. He currently serves on the Peer Review Board of ICSID Review and was appointed to the ICDR Young & International’s Global Advisory Board. John Gaffney is an international arbitration lawyer, based in Abu Dhabi with Al Tamimi & Company. An Irish national, John is admitted as a Solicitor in England & Wales and the Republic of Ireland. John's practice focuses on international arbitration. He has substantial experience in disputes involving construction, energy, investment, IP and telecommunications matters. He has also developed a particular expertise in the area of investment treaty arbitration, having acted for governments in the defense of investment treaty claims. John has worked with the international arbitration practices of King & Spalding and Freshfields Bruckhaus Deringer in Paris, and Skadden, Arps Slate Meagher & Flom in London. John also served as a legal officer with the United Nations Compensation Commission (UNCC) in Geneva, a subsidiary organ of the UN Security Council whose mandate was to process claims and pay compensation for losses and damage suffered during the so-called Gulf War in 1991. He also practiced with some of the leading commercial law firms in Ireland. In addition to his work as counsel, John is a member of a number of international and domestic arbitration panels and sits as an arbitrator in WIPO domain name disputes and an Expert in ICC Expertise proceedings. John is the Case Notes editor of the European International Arbitration Review, an Associate Editor of Transnational Dispute Management, an Associate Editor and Contributor of Investment Claims, and Rapporteur for the OGEMID listserv. He has published and spoken widely on international dispute resolution. John is listed in the Who’s Who of International Commercial Arbitration (2010, 2011), the Euromoney Guide to Leading Commercial Arbitration Experts (9th and 10th eds.) and the Legal 500 (2011) for Dispute Resolution – Ireland. Arno E. Gildemeister is a lawyer and arbitrator, practising International, German and French law. He teaches international arbitration and mediation at Sciences Po, Paris (Master Droit Economique) and at the University of Versailles (Master Arbitrage et Commerce International). He is also Head of the Dispute XXXI

Notes on the Contributors

Resolution department of TÜV Rheinland group, Cologne, a leading international testing, inspection and certification company. He regularly publishes in the fields of public international law, international business and construction law and international arbitration. He has worked within the arbitration departments of Shearman & Sterling, Paris and Heuking Kühn Lüer Wojtek, Düsseldorf where he has gained significant practical experience, inter alia in investment proceedings. Arno’s PhD thesis ‘L’arbitrage des différends fiscaux en droit international des investissements’, supervised by Professors Emmanuel Gaillard (Paris) and Gerald Mäsch (Münster) has been published by LGDJ and received several prizes and distinctions. John Gotanda is the Arthur J. Kania Dean and Professor of Law at Villanova University School of Law. He has previously served as Associate Dean for Academic Affairs, Associate Dean for Faculty Research, and Director of the J.D./ M.B.A. Program. He has published widely on the subject of damages in international law, and has been cited by courts, tribunals and commentators, including most recently by the U.S. Supreme Court. He has spoken widely on the subjects of damages and the CISG, including at the Hague Academy of International Law, Gray’s Inn in London (at the invitation of the British Institute of International and Comparative Law), and the International Chamber of Commerce in Paris. He also serves as an expert on damages and an arbitrator in international investment disputes. He is a member of the Advisory Council of the United Nations Conventions on Contracts for the International Sale of Goods, an Associate Member of the ICC Institute of World Business Law, and the Co-Editor of The Journal of Damages in International Arbitration. Jörn Griebel is Associate Professor of Public Law, International Law and International Investment Law at the International Investment Law Centre Cologne (University of Cologne). He studied at the University of Cologne and University College London. He gained the qualification diplôme d'études supérieures (D.E.S.) from the Institut Universitaire de Hautes Études International (Geneva) and holds a Ph.D. (Dr. jur.) degree from the University of Cologne. He regularly publishes in various fields of law, in particular international law, European law and international investment law. His practical experience includes inter alia investment proceedings. Henning Grosse Ruse-Khan is a University Lecturer in Intellectual Property Law at the University of Cambridge and a Fellow at King’s College. In Cambridge, Henning is a Fellow at the Lauterpacht Centre for International Law and the Centre for Intellectual Property and Information Law. He also holds positions at the Max Planck Institute for Intellectual Property and Competition Law in Munich (Germany) and the Centre for International Sustainable Development Law (McGill University, Montreal). Henning’s research and teaching focuses on international intellectual property protection and development issues, world

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trade and investment law, as well as on interfaces among distinct legal orders in international law. He advises international organisations, NGOs as well as developing- and developed country governments on international IP, WTO and investment law issues and works as a legal expert for the World Intellectual Property Organization (WIPO). Professor Dr. Michael Hahn, LL.M., holds the Chair for European Law and is a Director of the LL.M. Programme in International and European Economic and Commercial Law at the University of Lausanne. Michael is a German lawyer and holds a doctorate from Heidelberg and an LL.M. degree from Michigan Law School. He has been a visiting professor in many universities, amongst them Ghent (2014–2015), PUCP Lima, Paris (Sorbonne Paris Cité), the World Trade Institute in Berne, UNSW Sydney, the Chicago-Kent College of Law and the Europainstitut of Saarland University. Michael is also an honorary professor at the University of Waikato Law School in Hamilton, New Zealand, where he was a full professor, before joining the Lausanne Faculty. Michael’s main research interests are European law and international trade law. Dr. Richard Happ is partner of Luther, based in the Hamburg office and cohead of the firm’s arbitration practice group. He graduated in 1996 from University of Kiel. After three years as a research assistant at the University of Kiel, he undertook his legal clerkship (Referendariat) in Kiel, Hamburg and Brussels (Energy Charter Secretariat). He joined Luther in 2001 and became a partner in 2009. He has acted as counsel or arbitrator in cases under DIS, ICC, SCC, UNCITRAL, ad hoc and ICSID rules. Among those cases were disputes arising out of foreign investments, international sales contracts, oil and gas joint ventures, service and marketing contracts, commercial production agreements and power plant construction. His practice focuses on national and international arbitration in general and investment arbitration in particular. Dr. Happ speaks German and English and has conducted arbitral proceedings in each of these languages. Rudolf Hennecke is a partner of Borris Hennecke Kneisel PartmbB Rechtsanwälte, Cologne, Germany. He specializes in international and domestic arbitration and litigation. His activity as counsel includes, inter alia, the representation of parties in investment arbitrations under the ICSID and UNCITRAL Rules, in commercial arbitrations under the ICC, SIAC, DIS and UNCITRAL Rules, as well as in other ad hoc arbitration proceedings. He has acted as arbitrator in ICC, DIS, and ad hoc arbitration proceedings. He publishes frequently on issues of international arbitration, and is a co-author of the 2012 Commentary on the New York Convention (Wolff, ed., C.H. Beck/Hart/Nomos). Professor Dr. Stephan Hobe is a Director at the International Investment Law Centre Cologne (IILCC) and the Director of the Institute of Air and Space XXXIII

Notes on the Contributors

Law of Cologne University. Furthermore, he holds the Chair for Public International Law, European Law, European and International Economic Law at Cologne University. He teaches public international law, international economic law including the law of the WTO and International Investment Law, European Union law and air and space law. He has published about 25 books as author or editor and 220 articles on constitutional law, public international law, European and international economic law as well as air and space law. He serves on the Board of Directors of the German Branch of the International Law Association (ILA) as well as the boards of various other international organizations and institutions, inter alia the Council of the German Society of International Law. Kaj Hobér is a Partner in Mannheimer Swartling, Stockholm. He is former Professor of East European Commercial Law at the University of Uppsala from 1997 to 2009 and former Professor of International Law at the Centre for Energy, Petroleum and Mineral Law and Policy (CEPMLP), University of Dundee during 2010. As of 1 May 2012 he is Professor of International Investment and Trade Law at Uppsala University. Prof. Hobér has taught international trade law and international arbitration for decades. He has been involved in dozens of trade – and trade related – disputes. His arbitration experience includes several hundreds of arbitrations as counsel and arbitrator in investment treaty as well as commercial disputes. He is past chair of the IBA sub-committee on Investment Treaty Arbitration and past vice-chair of the IBA Arbitration Committee. He is the author of several books on international arbitration and international investment and trade law, including Investment Arbitration in Eastern Europe (2007), International Commercial Arbitration in Sweden (2011), Selected Writings on Investment Treaty Arbitration (2013), Res Judicata and Lis Pendens in International Arbitration, Lectures at the Hague Academy of International Law (2014), as well as of numerous articles. Anne K. Hoffmann is a Special Counsel at Al Tamimi & Co. in Dubai which she joined in 2013 after having practiced in London and Geneva for more than a decade. A lawyer qualified to practice both in Germany as well as in England & Wales, Anne’s practice focuses on international commercial and investment arbitration where she regularly acts as counsel in disputes arising under all major rules (in particular ICC, LCIA, ICSID, Swiss Rules, DIAC, UNCITRAL) as well as in ad hoc proceedings. Anne also regularly serves as arbitrator. Anne is also a visiting lecturer at Humboldt University Berlin and regularly speaks and publishes on arbitration issues. She speaks English, German, French and Russian. Rainer Hofmann, holds a Dr. iur. degree from Heidelberg University and is currently Professor of (German) Public Law, Public International Law and European Law at Goethe University, Frankfurt and Co-Director of the Wilhelm-Merton-Centre for European Integration and International Economic Order; he is a

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Member of the Advisory Council on Public International Law of the German Ministry of Foreign Affairs and Secretary-General of the German Association of International Law (German Branch, International Law Association). He has published widely on general international law, human rights law and investment law. Jean-Christophe Honlet is a partner in Dentons’ Paris office and the co-head of Dentons’ international arbitration practice. He has over 20 years of experience acting as counsel, expert witness or arbitrator in arbitrations involving multinational companies, individuals, states and state entities, in commercial and investment treaty arbitrations. He graduated from the Ecole Supérieure des Sciences Economiques et Commerciales, the University of Paris I Pantheon Sorbonne and was a Lavoisier Scholar at the Maison Française, University of Oxford. He is a member of the Paris Bar. Dr. Marc Jacob, LL.M. (Harvard) is a member of Shearman & Sterling’s International Arbitration Group and Public International Law Practice. He focuses on investment treaty arbitration and international commercial matters. He advises and represents States, State-owned entities, international organizations and private corporations. He is also a lecturer in international law at the University of Tübingen and was previously a Senior Research Fellow at the Max Planck Institute for Comparative Public Law and International Law. Joachim Karl, of German nationality, is Chief of the Policy Research Section in UNCTAD's Division on Investment and Enterprise. Before joining the UN in November 2005, he worked for seven years on international investment matters at the OECD and the Energy Charter Secretariat in Brussels. He started his professional career in the German Ministry of Economics in 1987, where he dealt with regional state aids, European Law issues and international investment agreements. Mr. Karl holds a PhD in international law from the University of Konstanz in Germany, and a Master of Public Administration degree from Harvard's J.F.Kennedy School of Government. He has written numerous articles on European law and international investment issues, and was a lecturer at the German Federal Academy of Public Administration. Carsten Kern is a qualified lawyer specializing in international arbitration, international and comparative civil procedure, private and public international law. He worked for the international arbitration practice group of a leading international firm focusing on both international commercial and investor-State arbitration. In addition, he worked as a Consultant at the UNIDROIT Secretariat in Rome, as a Research Fellow at the Institute of Comparative Private, Private International and International Business Law at the University of Heidelberg and as a case assistant to Professor James Crawford SC. He is a College Research Associate and an Affiliated Lecturer at the University of Cambridge.

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Catherine Kessedjian is the Deputy Director of the European College of Paris. She teaches European Business Law and International Dispute Resolution at the University Panthéon-Assas Paris II, where she is the Director of a Master programme in European Law. In 2004, she was appointed a Hauser Global Professor at New York University School of Law where she teaches International Commercial Transactions and a seminar on Rule Making Processes in a Global World. In 2010, she taught a class in International Dispute Resolution at Yale Law School. She currently acts as mediator or arbitrator in a selected number of transnational disputes either ad hoc or under the auspices of, among others, ICSID, ICC, LCIA and AAA. She was a practising attorney in Paris from 1982 to the end of 1998, focusing on transnational litigation and international business transactions. Yun-I Kim is a Research Assistant to Associate Professor Dr. Jörn Griebel at the International Investment Law Centre Cologne (IILCC). She holds a law degree from Cologne University and is currently a PhD candidate at the Friedrich Alexander University of Erlangen-Nürnberg. She has worked as case assistant for Professor Dr Karl-Heinz Böckstiegel and has served as secretary to arbitral tribunals in inter-State, investor-State and commercial arbitration proceedings. She has also gained experience by assisting counsel in various investment arbitration proceedings and publishes regularly on the subject of international investment law and arbitration. Ulrich Klemm studied law in Berlin and Freiburg (Germany) and sat his second state exam in 1976 in Hamburg (Germany). He then worked as a legal advisor for a consultancy firm of the Dresdner Bank Group in Sao Paulo (Brazil) for four years. In 1981, he joined the legal department of DEG (DEG - Deutsche Investitions- und Entwicklungsgesellschaft mbH) as an in-house lawyer, where he initially advised on the structuring and drafting of contracts for international project financing in Latin America. In 2003 he was appointed General Counsel (Chefsyndikus) and head of the legal department. Ulrich Klemm’s advice focuses on structuring, negotiating and drafting contracts for international project financing and acquisition financing. He has extensive local knowledge of Latin America, in particular of Brazil. In addition, he also advises on investment protection law and how to safeguard against adverse political decisions as well as banking supervisory law. Dr. Christina Knahr works at the Austrian Federal Ministry of Science, Research and Economy. From 2006-2011 she has been a Post-Doctoral Researcher at the Department for European, International and Comparative Law at the University of Vienna. She holds Master’s degrees in Law from the University of Vienna and in Public Administration from Harvard University as well as a Doctorate in Law from the University of Vienna. She has published several articles and co-edited three books on international investment arbitration and has given a

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number of presentations in this field. She is a member of the ILA Committee on Non-State Actors and of the Organizing Panel of the SIEL Investment Network. Dr. Sabine Konrad is a partner in McDermott Will & Emery LLP in Frankfurt. She focuses her practice on commercial international arbitration and public international law. She acts regularly for investors and governments in investment protection matters. She has represented clients in a broad range of industries, including energy and infrastructure. Dr. Konrad also acts as arbitrator both in investment treaty and international commercial arbitration cases. In 2007 and 2013, she was designated by the German government to ICSID’s Panel of Arbitrators. She is a member of the roster of arbitrators of the International Development Law Organisations (IDLO), the list of practitioners of the Vienna International Arbitral Centre (VIAC) and the panel of the Kuala Lumpur Regional Centre for Arbitration (KLRCA). Dr. Konrad is listed in GAR’s Who’s Who Legal and in the Roster of International Arbitrators and ranked by Chambers Global. Dr. Konrad founded the Frankfurt International Arbitration Moot Court, the leading international moot court in the investment treaty field. Markus Krajewski is professor of public law and international law at the University of Erlangen-Nuremberg (Germany). Previously he held positions at the universities of Bremen and Potsdam and at King's College London. His research interests include WTO law, trade in services, international investment law, external relations of the EU and the treatment of public services under European and international law. He is a regular consultant on international trade and investment law for national and international governmental institutions, trade unions and civil society groups. Ursula Kriebaum is Professor of International Law at the University of Vienna. Since 2010 she is responsible for the Field of Specialization ‘Law of International Relations’ of the University's Law School. She teaches courses in international investment law, international human rights law and general public international law. She is Alternate Member of the Court of Conciliation and Arbitration within the OSCE, Former Member of the Austrian Human Rights Advisory Board. She was a Member of the Team of the Special Envoy for Restitution Issues Dr. Ernst Sucharipa for the Austrian Holocaust Restitution Negotiations 2000/2001. She was appointed by the Austrian government as a candidate for the 2007 election as judge at the European Court of Human Rights. She has served as legal expert in investment arbitrations and human rights cases. She has extensively published in international law with a focus on investment arbitration and in the fields of human rights law. Stefan Kröll, Rechtsanwalt, Prof. Dr. iur., LL.M. (London), Honorary Professor Bucerius Law School, Visiting Reader School of Arbitration, CCLS – Queen Mary, London; Director Willem C Vis Moot, National Correspondent for Germany to UNCITRAL; practice as arbitrator in national and international cases XXXVII

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under DIS, ICC, WKO, SCC, Swiss Rules and UNCITRAL Rules and in other ad hoc proceedings; member of the board of editors of the ‘International Arbitration Law Review’ and of ‘Internationales Handelsrecht (IHR)’; author of various books, articles and case notes on arbitration including co-author of ‘Comparative International Commercial Arbitration’. Veronica Lavista is currently undertaking post graduate studies at the University of Oxford. Prior to that she worked at the National Direction of International Affairs and Disputes of the Treasury Attorney General's Office of the Argentine Republic. There she acquired extensive experience in international arbitration on investment disputes. Ms. Lavista also teaches international law at the University of Buenos Aires. She holds a law degree and a Master in Finance from the Torcuato Di Tella University, Argentina and an LL.M. in International Legal Studies from New York University. Barton Legum is a partner in Dentons’ Paris office and head of the firm's investment treaty arbitration practice. Barton has over 25 years' experience in litigating complex cases and has argued before numerous international arbitration tribunals, the International Court of Justice and a range of trial and appeals courts in the United States. His practice focuses on international arbitration and litigation in general and arbitration under investment treaties in particular. From 2000 to 2004, Barton served as Chief of the NAFTA Arbitration Division in the Office of the Legal Adviser, United States Department of State. In that capacity, he acted as lead counsel for the United States Government defending over $2 billion in claims submitted to arbitration under the investment chapter of the North American Free Trade Agreement (NAFTA). The United States won every case decided under his tenure. Professor Dr. Ralph Alexander Lorz was born 1965 at Nuremberg. He studied Law and Economics at the University of Mainz and took his First State Examination in Law in 1988. Afterwards, he worked as a research assistant at the University of Marburg and earned his Ph.D. there in 1992. Following his Second State Examination in 1993, he attended Harvard Law School, was awarded the degree of Master of Laws (LL.M.) in 1994 and became a member of the New York Bar. He then joined the University of Mannheim as an assistant professor until his post-doc examination („Habilitation“). In 2000, he was called to the Chair of German and Foreign Public Law, European Law and Public International Law at the Heinrich Heine University of Duesseldorf. From 2007 to 2009 and from 2012 to 2014, however, he took sabbatical leaves to serve as a Vice Minister in the State Government of Hesse, first in the Ministry of Science, Research and the Arts, then in his second term in the Ministry of Public Education. In January 2014, he eventually assumed responsibility for the latter as Minister of State.

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Ben Love is a senior associate in the international arbitration and public international law groups of Freshfields Bruckhaus Deringer LLP in Paris. He has advised and represented clients in a variety of cases under all major arbitral rules, including in over two dozen investment treaty matters. Ben serves on the Peer Review Board of the ICSID Review, the Advisory Board of the Institute for Transnational Arbitration, and the editorial boards of International Legal Materials and World Arbitration & Mediation Review. He publishes and speaks regularly on topics related to international law and international arbitration. Qualified to practice in New York and Texas, Ben speaks English and French, reads Spanish, and holds law degrees from the University of Texas and Université de Paris I Panthéon-Sorbonne. Mariana Lozza, Adjunct Director, National Direction of International Affairs and Disputes, Treasury Attorney-General’s Office of the Argentine Republic, is an international lawyer with extensive experience in international arbitration on investment disputes. Currently, she is the Adjunt National Director of International Affairs and Disputes of the Treasury Attorney-General’s Office of Argentina. The Treasury Attorney General’s Office defends Argentina before international arbitral tribunals. In the past, she worked as legal advisor at the Administrative Tribunal of the Organization of American States. Ms. Lozza also teaches international law at the University of Buenos Aires and Torcuato Di Tella University, Argentina. Ms. Lozza holds a law degree from the Nacional del Sur University, Argentina, and an LLM from American University Washington College of Law. Irmgard Marboe is Associate Professor of International Law at the Department of European, International and Comparative Law, Section for Public International Law and International Relations, at the Faculty of Law of the University of Vienna. She studied law and Roman languages at the University of Vienna (Austria) and at the Universidad Complutense de Madrid (Spain). For her post-doctoral thesis (habilitation) she undertook research on the issue of compensation and damages in international jurisprudence, with a special focus on international investment arbitration. The results of this research were published, amongst others, in the book “Calculation of Compensation and Damages in International Investment Law” (OUP, 2009). Other areas of interest include state responsibility, state liability, human rights, European competition law, space law, and Islamic law. Lars Markert is an associated partner in the international dispute resolution department of Gleiss Lutz's Stuttgart office, currently on secondment with the international arbitration group of Japanese law firm Nishimura & Asahi, Tokyo, until the end of 2014. He is admitted to the German and New York bars and frequently advises Western and Asian clients in both investor-state and international commercial arbitrations. Lars has experience in representing investors and

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states in proceedings under the ICSID Convention and the UNCITRAL Arbitration Rules. Besides his German legal education, Lars holds law degrees from France (maitrise, Aix-en-Provence) and the US (LL.M., Georgetown University), as well as a PhD in investment arbitration from the University of Cologne. He is an academic advisor to the International Investment Law Centre Cologne (IILCC) and regularly teaches, speaks and publishes on issues of investment law and arbitration. Andrew Newcombe is Associate Professor, Faculty of Law, University of Victoria, British Columbia, Canada, where he teaches international arbitration, international investment law, international trade law and commercial law. Prior to joining the University of Victoria in 2002, he worked in the International Arbitration and Public International Law groups of Freshfields Bruckhaus Deringer in Paris. Professor Newcombe’s research focuses on investment treaty law and arbitration. He is the co-author of Law and Practice of Investment Treaties: Standards of Treatment (Kluwer, 2009) and co-editor of Sustainable Development in World Investment Law (Kluwer, 2011). He created and operates italaw, a research website focused on investment treaty arbitration. Professor Newcombe is Associate Editor for the ICSID Review–Foreign Investment Law Journal, a contributing editor of the Investor-State Law Guide, Canadian treaty editor for Investment Claims, and a regular contributor to the KluwerArbitrationBlog. In addition to his academic work, Professor Newcombe advises governments, investors and non-state actors and acts as counsel and arbitrator in international arbitrations. Dr. Luke Nottage specialises in arbitration, contract law, consumer product safety law and corporate governance, with a particular interest in the Asia-Pacific region. He is Associate Dean (International) and Professor of Comparative and Transnational Business Law at Sydney Law School. Luke’s many books include International Arbitration in Australia (Federation Press, 2010, co-edited with Prof Richard Garnett) and Foreign Investment and Dispute Resolution Law and Practice in Asia (Routledge, 2011, co-edited with Prof Vivienne Bath). Luke is an ACICA Special Associate and founding member of the Rules drafting committee, the Australasian Forum for International Arbitration council’s Japan Representative, and on the panel of arbitrators for the JCAA and KCAB. He has also consulted for law firms world-wide, the EC, OECD, UNDP, ASEAN and the Japanese government, and is founding Director of Japanese Law Links Pty Ltd (japaneselawlinks.com). Professor Dr. Karsten Nowrot, LL.M. (Indiana) is Professor of Public Law, European Law and International Economic Law as well as Head of the Department of Law at the School of Socio-Economics of the Faculty of Business, Economics and Social Sciences at Hamburg University, Germany. He received his legal education at the Universities of Kiel/Germany, Surrey/UK, Halle-Witten-

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berg/Germany and the Indiana University School of Law/USA. Karsten Nowrot holds two German law degrees with distinction from 1997/2001 and was awarded the degree of Master of Laws in 1998 as well as his Ph.D. (Dr. iur.) in 2005, both with distinction. In 2012 he completed his habilitation (post-doctoral degree) in law at Martin Luther University Halle-Wittenberg, Germany. Simon Olleson, MA (Cantab); LLM (NYU); Dip Int Law (Cantab) is a barrister in private practice and a tenant at 13 Old Square Chambers, Lincoln’s Inn, London, specializing in public international law. Markus Perkams is an attorney in Skadden’s International Arbitration and Litigation Group. He is based in Frankfurt and represents clients in national and international arbitration proceedings as well as before German and English state courts. He is admitted as Rechtsanwalt in Germany and as a solicitor in England and Wales. Dirk Pulkowski is a Legal Counsel at the Permanent Court of Arbitration (PCA) in The Hague, where he serves as registrar in arbitrations between States and investor-State arbitrations. He is currently the PCA’s representative in Mauritius, from where he leads the institution’s Africa work. Prior to joining the PCA, Mr. Pulkowski worked as a lawyer at the trade and arbitration group of an international law firm in Brussels. Mr. Pulkowski holds a doctoral degree from the University of Munich and an LL.M. degree from Yale Law School. He has published widely on questions of general international law, legal theory, the law of the World Trade Organization, and international arbitration. Mr. Pulkowski is qualified to practice law in Germany. Matilde Recanati is currently Research fellow in European and International Law at Bocconi University in Milan, Italy. Her area of expertise is international economic law, in particular, the law of international trade and investment on which she has published articles in books and journals both in Italian and notItalian publications. Before Bocconi she worked as Associate with Clyde & Co Law Firm in Hong Kong and Shanghai where she advised clients on matters related to foreign direct investments in China. She was admitted to practise law in Italy in 2006, after completing her studies in Law and received a Ph.D. in International and European Law at the University of Macerata, Italy in 2008. Lucy Reed is head of the Freshfields global international arbitration group. She specializes in investment treaty arbitrations and other public international law disputes. In addition to representing private and public clients in international arbitration, Lucy was a Member of the Ethiopia-Eritrea Claims Commission and a co-director of the Claims Resolution Tribunal for Dormant Accounts in Switzerland. Before joining Freshfields, Lucy served as the US State Department’s Agent to the Iran-United States Claims Tribunal and as General Counsel of the Korean Peninsula Energy Development Organization (an international organizaXLI

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tion dealing with North Korea). Lucy is on the board of the Investment Treaty Forum and a member of the Council on Foreign Relations, and served as President of the American Society of International Law (2008–2010). Lucy was educated at the University of Chicago Law School and Brown University. August Reinisch has been a professor of international and European law at the University of Vienna since 1998. He currently serves as Head of its Law Schools Section of International Law and International Relations and as Director of the LL.M. Program in International Legal Studies. His professional experience includes arbitrator and expert adviser in Austrian and foreign court litigation as well as in international, mostly investment arbitration. He has served as arbitrator in investment cases mostly under ICSID and UNCITRAL Rules, and frequently provided expert opinions in the field. Noah Rubins is the head of the international arbitration group at Freshfields Bruckhaus Deringer's Paris office, and also head of Freshfields’ worldwide CIS/ Russia Dispute Resolution Group. He has advised and represented clients in arbitrations under ICSID, ICSID Additional Facility, ICC, AAA, SCC, LCIA, CRCICA, ICAC, and UNCITRAL rules. He specialises in energy disputes and investment arbitration and has also practiced law in New York, Washington, Houston, and Istanbul. He has served as arbitrator in 32 cases, including two investment treaty disputes adjudicated under the UNCITRAL Rules and one under the ICSID Rules. Noah received a Masters degree in dispute resolution and public international law from the Fletcher School of Law and Diplomacy, a J.D. from Harvard Law School, and a bachelors degree in international relations from Brown University. He speaks English, French and Russian fluently, and has a working knowledge of Hebrew and Spanish. Borzu Sabahi is an attorney in the International Arbitration Group of Curtis Mallet-Prevost Colt & Mosle LLP. He has acted as counsel and expert in international arbitrations pursuant to bilateral and multilateral investment treaties as well as complex contracts, under the rules of ICC, ICDR, ICSID, LCIA, and UNCITRAL. His industry experience includes acting in disputes involving oil & gas, mining, construction, gambling, telecommunications, licensing, tax, and allocation of water under international treaties. He is an Adjunct Professor at Georgetown and Columbia Law Schools where he co-teaches seminars on investor-State arbitration. He is Co-Director of the International Investment Law Center at the International Law Institute, and an editor of Oxford University Press’ Investment Claims website. Mr. Sabahi has widely published on various aspects of international investment law and arbitration and regularly speaks in and chairs professional conferences on these topics. Giorgio Sacerdoti is Professor of International Law and European Law at Bocconi University, Milan, Italy, since 1986. Professor Sacerdoti is a former Member of the WTO Appellate Body (2001–2009), where he was chairman in 2006– XLII

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2007. He was Vice-Chairman of the Organisation for Economic Cooperation and Development (OECD) Working Group on Bribery in International Business Transactions until 2001, where he was one of the drafters of the Anticorruption Convention of 1997. He has acted as consultant to the Council of Europe, UNCTAD, and the World Bank in matters related to foreign investments, trade, bribery, development and good governance. He has served as arbitrator at ICSID in investment disputes under BITs and in international commercial disputes. Professor Sacerdoti has published extensively on international law, trade,investments,international contracts and arbitration and has lectured extensively at universities around the world. He was a Senior Braudel Fellow at the European University Institute in 2012. Dr. Monique Sasson initially qualified as an Italian Avvocato and practiced in Rome, where she appeared before arbitral tribunals and Italian courts. In 2000, she joined Herbert Smith’s international litigation/arbitration practice group in London, qualified as an English solicitor (and subsequently as a solicitor advocate), and acted for clients in a number of international arbitration cases as well as litigation matters. In 2009, Monique obtained her Ph.D. degree, and the following year Kluwer published a revised version of her doctoral thesis under the titleSubstantive Law in Investment Treaty Arbitration: the Unsettled Relationship between International law and Municipal Law. Monique currently resides in New York City, is a member of the New York Bar, and serves on the New York City Bar Committee on Arbitration. She is an associate editor of Kluwer Arbitration Blog, and the Co-Managing Editor of the ITA Arbitration Report and the ITA Board of Reporters. Monique is also the Co-Managing Editor of World Trade and Arbitration Materials, Co-Managing Editor of theITA Scoreboard of Adherence to Transnational Arbitration Treaties, and a Member at Large of the ITA Advisory Board and its Executive Committee. Jan Schäfer, LL.M., Rechtsanwalt, Partner, International Arbitration, resident in the Frankfurt office of King & Spalding LLP. He works as counsel and regularly sits as arbitrator in investment and commercial arbitration cases under the ICC, SCC, ICSID and DIS rules as well as ad hoc proceedings. He studied law in Passau, London, Freiburg, Utrecht and Singapore (LL.M., National University, 1999). He is admitted in Germany since 2001 and sits on the ADR committee of the German Bar. He is listed in all relevant directories as a leading German arbitration lawyer and Global Arbitration Review included him on its list of "45 under 45" in 2011. He has published widely on arbitration and co-chairs the German Discussion Forum on Investment Law and Arbitration since 2004. Bruno Simma, Professor of international law at the University of Munich since 1973 (retired). Professor of Law at the University of Michigan Law School (currently on leave). Member of UN Committee on Economic, Social and Cultural Rights 1987–1996 and of the International Law Commission 1997–2002.

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Judge at the International Court of Justice 2003–2012. Since 2012 Judge at the Iran–United States Claims Tribunal. Arbitrator in a number of inter-State cases under the auspices of the PCA, in (BIT- and NAFTA-based) investor-State arbitrations administered by ICSID and the PCA and an international commercial arbitration within the International Chamber of Commerce, presiding in some of them. General Course at the Hague Academy of International Law 2009. Around 150 publications. Associate Member of the Institut de Droit international. Dr. Stephan Schill, LL.M. (NYU) is Senior Research Fellow at the Max Planck Institute for Comparative Public Law and International Law in Heidelberg and Principal Investigator in the ERC-project on “Transnational Public-Private Arbitration as Global Regulatory Governance”. He is admitted to the bars in Germany and New York, has acted as counsel before the European Court of Human Rights, and is a Member of the ICSID List of Conciliators. He is the Editor-inChief of the Journal of World Investment and Trade and the author of two books and numerous articles on international investment law and arbitration. Professor Dr. Burkhard Schöbener is one of the Directors of the International Investment Law Centre Cologne. He also holds the Chair for Public Law, Public International Law and European Law of the University of Cologne. His research focuses on International Economic Law (including WTO and International Investment Law) as well as German and European Economic Law. He publishes articles and papers on these subjects on a regular basis. Christoph Schreuer is a graduate of the Universities of Vienna, Cambridge and Yale. Former Professor at Johns Hopkins University and University of Vienna. Member of the ICSID Panel of Arbitrators. Arbitrator in ICSID and UNCITRAL cases. Author of numerous publications in international investment law. Dr. Anthony Sinclair, BA, LLB (First Class Hons) (Canterbury, New Zealand) LLM (First Class Hons), Ph.D. (Cambridge) is a partner at Quinn Emanuel Urquhart & Sullivan LLP, based in London. He specialises in international commercial arbitration, investment treaty arbitration, and public international law, as counsel and arbitrator. His work spans a broad range of industry sectors, with particular focus on the oil and gas, energy and mining, telecommunications, infrastructure and utilities sectors, especially in emerging markets. Dr. Sinclair is co-author of the second edition of The ICSID Convention: A Commentary (Cambridge University Press, 2009). Ole Spiermann is a partner with Bruun & Hjejle Law Firm in Copenhagen specialising in dispute resolution as well as international and public law. He has been professor in international law at the University of Copenhagen and holds a PhD degree from the University of Cambridge. A special field of expertise is claims against governments, e.g. on be-half of foreign investors or holders of XLIV

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human rights. Ole Spiermann has advised foreign investors in claims against a number of states as well as parties and applicants before the EU Court of Justice and the European Court of Human Rights. Joachim Steffens, Alternate Director for Germany at the Board of Directors, European Bank for Reconstruction and Development, London, UK, a lawyer by training, has a long and distinguished career in the German institutions. He held several high ranking advisor roles in the Federal Chancellery, the Federal Ministry of Economics and in the Freestate of Saxony. From 2005 to 2012 he headed the division for International Investments and Finance in the Department for Foreign Economic Policy at the Federal Ministry of Economics and Technology. Mr Steffens was also an expert in Brussels, at the European Commission, for economic relations with Japan from 2001–2005. Dr. Christian Tietje is Professor (tenure) for European Law and International Economic Law, director of the Institute for Economic Law, and director of the Transnational Economic Law Research Centre (TELC) at the Law School at Martin-Luther-University Halle-Wittenberg, Germany. His primary research interests lie in the areas of EU common commercial policy and international economic law (world trade law, investment protection and arbitration, global financial markets). Christian Tietje received his legal education at the Universities of Kiel/Germany, Paris V, and University of Michigan Law School, Ann Arbor. He holds two German law degrees with distinction and is a Professor of Law since 2001. He has published several books and more than 150 articles and has advised Governments, international organizations, non-governmental organizations, business associations and multilateral companies in the above-mentioned research areas. He has been appointed legal expert and arbitrator is several investment arbitrations, was leading a working group of the investment law committee of the German branch of the International Law Association (ILA) dealing with the relationship of international investment law and general public international law, and is a member of the ‘ILA Study Group on the Role of Soft Law Instruments in International Investment Law’. He has been appointed by the EU on the roster of panelist for financial services under the EU–Korea free trade agreement. Catharine Titi is a postdoctoral research fellow at the University Panthéon-Assas Paris II. She holds a Ph.D. in Law from the University of Siegen, Germany, and she has completed earlier studies in Greece, France and the United Kingdom. Catharine also holds a postgraduate qualification from the Courtauld Institute of Art, London, and has previously worked in management consulting for PwC, UK. She has published in a variety of academic journals in English and French on international investment law and investment arbitration and has contributed to edited volumes, such as in the Yearbook on International Investment Law & Policy (Oxford University Press). Her monograph on The Right to Regu-

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late in International Investment Law was published in 2014 by Nomos and Hart Publishing. Jorge E. Viñuales is the Harold Samuel Professor of Law and Environmental Policy at the University of Cambridge. He has published widely in his specialty areas, most recently his books Foreign Investment and the Environment in International Law(Cambridge University Press, 2012), Harnessing Foreign Investment to Promote Environmental Protection: Incentives and Safeguards (Cambridge University Press, 2013, co-edited with P.-M. Dupuy), and Diplomatic and Judicial Means of Dispute Settlement (Martinus Nijhoff, 2012, co-edited with L. Boisson de Chazournes and M. G. Kohen). Professor Viñuales has wide experience as a practitioner. He has worked on many cases under ICSID, UNCITRAL, ICC or LCIA rules, including several high profile inter-State, investor-State, and commercial disputes, and he regularly advises companies, governments, international organisations or major NGOs on different matters of environmental law, investment law, and public international law at large. Professor Viñuales was educated in France (Doctorat – Sciences Po, Paris), the United States (LL.M. – Harvard Law School), Switzerland (Licence and Diplôme d’études approfondies in international relations – HEI; liz jur – Universität Freiburg; Licence and Diplôme d’études approfondies in political science – Université de Genève), and Argentina (Abogado – UNICEN). His native language is Spanish and he is fluent in English, French and Italian. Michael Waibel is a University Lecturer in Law at the University of Cambridge and a Fellow of Jesus College and the Lauterpacht Centre for International Law. His main research interests are public international law, international economic law with a particular focus on finance and the settlement of international disputes. He teaches international law and European Union law. Richard E. (Rory) Walck is a founding partner of Global Financial Analytics LLC, a Washington, DC area consultancy specializing in the evaluation of damages in commercial and investment treaty arbitration. He has nearly forty years of experience in business management, public accounting and financial consulting. He received B.A. degrees with high honors in philosophy and business, and an MBA in accounting and finance, and holds numerous professional credentials in accounting, finance and valuation. He has consulted on several hundred contested matters, and has testified as an expert on financial issues nearly one hundred times. He has authored several articles on topics relating to the determination of damages, and serves as the co-editor (with John Gotanda) of The Journal of Damages in International Arbitration. André von Walter is a Legal officer in the Directorate General for Trade of the European Commission. Prior to his current position, he acted as a political advisor and negotiator for international investment at the French Ministry of Foreign and European Affairs. André von Walter has lectured public international law XLVI

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and international economic law at the University of Paris (Panthéon-Sorbonne) and worked as a Senior Research Fellow at the Institute for public international law of Bonn University. He has authored several publications on international law and investment arbitration in English, German and French. Stephan Wittich is Associate Professor at the Department of International Law and International Relations at the University of Vienna Law School. He has published widely in and teaches public international law at the University of Vienna and several other universities in Austria and Slovakia. Professor Dr. Andreas R. Ziegler studied economics, international relations and law at the Universities of St. Gallen, Switzerland (BA, MA, BLaw, MLaw, PhD), Madrid (Escuela Diplomatica), Paris (SciencesPo), Florence (LL.M, European University Institute), Oxford and London (SOAS). He was a civil servant working for several Swiss Ministries in Berne as well as the EFTA Secretariat in Geneva and the European Commission in Brussels before being appointed full professor of law at the University of Lausanne in 2003. He currently is the Director of its LL.M. Program in International and European Economic and Commercial Law. He has represented clients in arbitral proceedings (UNCITRAL Arbitration Rules) and before the Swiss Federal Supreme Court and the European Court of Human Rights and is counsel with a law firm specialized in economic and business law (Blum & Grob Attorneys-at-law, Zurich). He is on the permanent roster of panelists of the WTO and ICSID.

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Chapter 1: General Introduction to International Investment Law Marc Bungenberg, Jörn Griebel, Stephan Hobe and August Reinisch The last two decades have firmly established international investment law (IIL) as one of the most important subfields of international economic law. The development has demonstrated the degree to which the conclusion of investment treaties has fostered and influenced the development not only of a new field of law but of the whole of public international law, especially by giving private investors extensive subjective rights and direct access to international dispute resolution. This is a development that we only find in this specific field of international law. The concept of IIL is disputed. This handbook presents a broad perspective of investment law, comprising all rules concerning investment protection. This embraces rules of general international law, in particular the rules governing the treatment of foreigners (international minimum standard)1 as well as the law of investment contracts.2 While ‘national’ investment law is within the scope of such an investment law definition, this handbook only covers ‘international’ investment law instruments. The most important field of international investment law is that stemming from by now more than 3,200 bi- and multilateral investment treaties as well as free trade agreements which have investment chapters. It is the wealth of arbitral jurisprudence based on bi- and multilateral investment agreements as well as investment contracts that has solidified the main concepts of IIL and given a more precise meaning to the often vague investment standards found in numerous similarly worded treaties. International investment agreements (IIAs) have been around since 1959, when the first bilateral investment treaty (BIT) was concluded between Germany and Pakistan,3 and some of their concepts have been expressed even in earlier treaties from the 19th century, such as those covering friendship, commerce, and navigation.4 The rise of direct investor-State arbitration since the end of the 1960s was made possible in its enormous scope only through the introduction of dispute settlement clauses in modern IIAs and has led to the current system of investment arbitration. This de-centralised enforcement of internationally agreed upon

1 See Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’, ch. 2.I., 6–22. 2 See André von Walter, ‘Investor-State Contracts in the Context of International Investment Law’, ch. 3.I., 80–92 and Morris Besch, ‘Typical Questions Arising within Negotiations’, ch. 3.II., 93–152 in this volume. 3 See Chester Brown, ‘The Evolution of the Regime of International Investment Agreements: History, Economics and Politics’, ch. 4.I., 153–185 in this volume. 4 See Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’, ch. 2.I., 6–22 in this volume.

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obligations as subjective rights by individual ‘market participants’ stands out as one of the distinctive features of IIL, as such mechanisms cannot be found in other fields of international economic law. It emerged by interpreting the arbitration clause in BITs as a unilateral offer by host States that can be accepted by investors from the other contracting State by merely instituting arbitral proceedings. This simplified form of consent to arbitration, sometimes referred to as ‘arbitration without privity’,5 was first accepted in an arbitral award of 1990 in the AAPL v. Sri Lanka case6 and has become established practice since the beginning of the new millennium. The importance of this development can hardly be overemphasised as it demonstrated that the right of investors to bring claims on the international level for the purpose of defending rights conferred to them within investment treaties worked. At the same time, it may have become obvious to some treaty negotiators what powerful mechanisms they had provided for within investment treaties, mechanisms possibly not intended by all of them. 5 This development toward investor-State arbitration was also strongly influenced by the establishment of the International Centre for Settlement of Investment Disputes (ICSID) in 1965/66. Created as an institution designated to administer arbitrations in investor-State disputes arising under investor-State contracts (contract-based investment arbitration), it strongly contributed to the idea of investment treaty-based arbitration as signified by the many references to ICSID in bi- and multilateral investment treaties. To date, most investment arbitrations (about 60 % of all known investment arbitrations) are taking place under the auspices of ICSID. In the meantime, the total number of arbitrations based on investment treaties has exceeded 600, the great majority of which have been initiated within the past ten years. Other arbitration rules and mechanisms such as the UNCITRAL rules have responded to this development by way of adapting their rules to better address the needs of investment arbitration. These will likely become more relevant again with the EU as a new actor in IIL. 6 The creation of investor-State arbitration also implied that dispute settlement was taken out of sovereign control, including political considerations whether or not to espouse the cause of one’s nationals.7 Here again the ICSID Convention played an important role as it prohibits the exercise of diplomatic protection by the home State of the investor where its national and another contracting State have consented to submit a dispute to arbitration under the ICSID rules. It is inter alia this ‘de-politicisation’8 that led to the described sharp increase in investment ‘treaty arbitration’, as opposed to diplomatic protection as well as the

5 Jan Paulsson, ‘Arbitration Without Privity’ (1995) 10 ICSID Rev.–FILJ 232–257. 6 Asian Agricultural Products Limited v. Sri Lanka, ICSID Case No. ARB/87/3, Award and Dissenting Opinion, 27 June 1990, (1991) 6 ICSID Rev.–FILJ 526. 7 See Rainer Hofmann, ‘The Protection of Individuals under Public International Law’, ch. 2.III., 46–63 in this volume. 8 See Ibrahim Shihata, ‘Towards a Greater Depoliticization of Investment Disputes: The Roles of ICSID and MIGA’ (1986) 1 ICSID Rev.–FILJ 1–25.

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classical ‘contract arbitration’ that was premised on a contractual arbitration stipulation between investors and host States.9 ‘Freed’ from State control, investment arbitration has produced an immensely 7 rich, albeit sometimes controversial and inconsistent jurisprudence. Within remarkably few years, the surge of investment arbitration has produced a wealth of cases unprecedented in the field of international law arbitration and dispute resolution in public international law. This has led to a new wave of scholars dealing with IIL, in turn critically reviewing recent developments and contributing to a new and more thorough discussion of fundamental questions of public international law. IIL has become a laboratory of public international law. Fundamental topics of international law such as State responsibility, treaty law, and customary international law principles governing the status and rights of foreigners and their property, are addressed and reflected in modern IIL. While IIL cannot operate without general international rules, it is also influencing these as well as the general concepts of public international law. This is particularly true for the status of investors in investment law, which strongly influences the degree of international personality awarded to the individual in general.10 Further and more intense debates are necessary to adjust the current set of rules for the purpose of achieving a more balanced and lasting system. It is one of the greatest challenges of the field to provide for rules which adequately reconcile the interests of the most relevant stakeholders. IIL currently faces many further challenges. First, the public and particularly 8 critical NGOs have taken notice of the system with all its advantages and disadvantages, and concern has been expressed regarding the sustainability of the current system.11 Additionally, a new player has entered the stage which can be expected to strongly influence the future shape of IIL. The European Union (EU) has assumed far-reaching powers in the field of investment protection from its member States by way of the Treaty of Lisbon.12 It has concluded its first free trade agreement comprising an investment chapter with Canada, and it is negotiating comparable FTAs, inter alia with Japan, the United States, Singapore and India as well as a stand-alone BIT with China. Even irrespective of MFN clauses13 in these treaties one can expect that the rules provided for therein will in the future strongly influence global standards of investment protection. Discussions within the EU as well as various lobby groups and NGOs focus 9 on two significant topics: the future design of the investor-State dispute settle9 See Michael Waibel, ‘Investment Arbitration: Jurisdiction and Admissibility’, ch. 11.II., 1212–1287 in this volume. 10 See Yun-I Kim, ‘Investment Law and the Individual’, ch. 13.I., 1587–1603 in this volume. 11 See Markus Krajewski, ‘Investment Law and Public Services’, ch. 13.III., 1631–1645 in this volume. 12 On this Marc Bungenberg and Stephan Hobe, ‘The Relationship of International Investment Law and European Union Law’, ch. 13.II., 1605–1631 in this volume, Jörn Griebel, ‘The New EU Investment Policy Approach’, ch. 4.III.D., 304–325 in this volume and August Reinisch, ‘The Likely Content of Future EU Investment Agreements’, ch. 14.IV., 1886–1905. 13 See August Reinisch, ‘Most Favoured Nation Treatment’, ch. 8.IV., 807–845 in this volume.

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ment mechanism as well as the balance between the investors’ protection and host States’ interest to regulate for the protection of inter alia the environment, public health or human rights. As for investor-State dispute resolution and the role of transparency it is widely agreed that the current investor-State mechanism should be preserved in principle. There are, however, intense debates concerning the wish of some actors to provide for as much transparency of investment arbitration proceedings as possible. Others prefer leaving the choice of the appropriate arbitral institution to the disputing parties, which covers the right to conduct proceedings in complete confidentiality. It can be expected, however, that the future EU system of investment dispute resolution will be a transparent one. As far as the States’ ‘right to regulate’ is concerned, contemporary investment treaties hardly provide for explicit exceptions from their standards of protection comparable to the established rules within the WTO system. Here again one can expect that the system will change considerably and that future EU investment treaties will provide for clauses laying down the conditions under which a State may legitimately intervene in an investment without violating investment treaty standards. Another problem which may not necessarily be resolved in the emerging new IIL system is the relationship between investment rules and conflicting rules of other international law regimes, such as human rights,14 environmental law,15 or the trade regime.16 International law suffers from fragmentation which often leads to solutions being adopted in one regime without properly observing conflicting rules and interests within others. While attempts have been made to consolidate the various conflicting fields of international law by way of interpretation or otherwise, it can only be hoped that future investment treaties will appropriately address this problem. In the meantime academic writings such as those in this handbook, as well as arbitral decisions, will contribute to finding solutions fostering a systemic integration of the various regimes. IIL is currently in a process of consolidation. While some States withdrew from the ICSID Convention and started to terminate their investment treaties due to negative experiences with the system (the termination by South Africa of its BIT with Germany being one of the most recent examples), it can be expected that the transformation IIL is currently undergoing will contribute to a greater acceptance of the system by the most relevant actors, the States. In light of the many new co-operations in the field of investment law which are currently being established in all regions of the world as well as the mostly identical investment provisions negotiated in these contexts, it is in fact surprising that the experience 14 See Pierre-Marie Dupuy and Jorge Viñuales, ‘Human Rights and Investment Disciplines: Integration in Progress’, ch. 13.VIII., 1741–1769 in this volume. 15 See Jorge Viñuales, ‘Investment Law and Sustainable Development: The Environment breaks into Investment Disputes’, ch. 13.VII., 1716–1740 in this volume. 16 See Andreas Ziegler, ‘Investment Law in Conflict with WTO Law?’, ch. 13.X., 1786–1803 in this volume.

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of the failed multilateral agreement on investments negotiated under the auspices of the OECD in the 1990s still hinders the idea of a genuine multilateral regime.17 Another important aspect of IIL can be seen in its hybrid nature as a paradig- 14 matic example of transnational law. This is clearly evidenced by the fact that the applicable law in most investment cases is not limited to public international law, but also comprises national law (i.e. the law of the host State or the national or international law applicable to an investment treaty) as well as often general principles of law.18 Furthermore, the hybrid nature of IIL is also evident in the dual pedigree of investment arbitration as a combination of commercial arbitration and dispute settlement under public international law.19 Due to these characteristics, the precise nature of IIL still remains contested today. While it is certainly too early to conclude that the law concerning investment 15 protection has been fully clarified, it has become obvious that the existing adjudicatory practice of investment tribunals as well as the treaty practice of States outline the major contours of IIL. The editors of this handbook thus consider it important to present a ‘tour d’horizon’ of the entire field. The 80 plus chapters of the present volume represent an overview of the main substantive and procedural aspects of IIL, but they are not limited to them. The handbook situates the development of IIL in a historical context, embeds IIL into the larger field of public international law, explains regional divergences of investment protection, and provides a broader outlook.20 Furthermore, the handbook offers cross-referencing analysis by explaining the links to other sub-fields of international law and international economic law21 in particular. While an edited volume like the present handbook is intended to address as 16 many of these issues as possible, it is not capable of addressing them all. We hope, however, that it will contribute to the conceptual clarification of fundamental IIL aspects. Any comments by readers are much appreciated, and will improve this handbook for future readers.

17 See Stephan Schill, ‘Multilateralization: An Ordering Paradigm for International Investment Law’, ch. 13.XII., 1819–1840 in this volume. 18 See Ole Spiermann, ‘Investment Arbitration: Applicable Law’, ch. 11.IV., 1374–1391 in this volume. 19 See Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 151–284. 20 See chapter 14 with contributions by Karl-Heinz Böckstiegel, Kaj Hobér, Catherine Kessedjian, August Reinisch and Christoph Schreuer on the future of investment arbitration. 21 See Andreas Ziegler, ‘Investment Law in Conflict with WTO Law?’, ch. 13.X., 1786–1803 in this volume.

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Chapter 2: The Law Relating to Aliens, the International Minimum Standard and State Responsibility I. The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law

Stephan Hobe A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Development of the Origins of International Investment Law a) Developments until 1945. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Developments after 1945 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Substantive Aspects of the International Minimum Standard . . a) National Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Protection of Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Adronico O. Adede, ‘The Minimum Standards in a World of Disparities’ in Ronald S. J. MacDonald and Douglas M. Johnston (eds), The Structure and Process of International Law (Martinus Nijhoff Publishers, 1983) 1001–1026; Justus Alenfeld, Die Investitionsförderungsverträge der Bundesrepublik Deutschland (Athenäum, 1971); Rainer Arnold, ‘Law of Aliens’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (Elsevier, 1997) 102 et seq.; Wolfgang Benedek, ‘Drago-Porter Convention (1907)’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (North Holland, 1981) 1102 et seq.; Andrea Bjorklund, ‘National Treatment’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 29–58; Edwin M. Borchard, ‘Responsibility of States at the Hague Codification Conference’ (1930) 24 AJIL 517–540; Tomer Broude, ‘Investment and Trade: The “Lottie and Lisa” of International Economic Law?’ in Pierre Sauvé and Roberto Echandi (eds), New Directions and Emerging Challenges in International Investment Law and Policy (Cambridge University Press, 2012) 139–155; Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003); Carlos Calvo, Le Droit International – Théorique et Pratique, vol. VI (Guillaumin, 1896); Stephen Canner, ‘The Multilateral Investment Agreement’ (1998) 31 Cornell Int’l L. J. 657–681; Fons Coomans, ‘The Ogoni Case Before the African Commission on Human and Peoples Rights’ (2003) 52 ICLQ 749– 760; Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985); Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008); Rudolf Dolzer and André von Walter, ‘Fair and Equitable Treatment – Lines of Jurisprudence and Customary Law’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law: Current Issues, vol. II (BIICL, 2007) 99–115; Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008); Ulrich Häde, ‘Der völkerrechtliche Schutz von Direktinvestitionen im Ausland – Vom Fremdenrecht zum Multilateralen Investitionsabkommen’ (1997) 35 AVR 181–212; Kay Hailbronner, ‘Der Staat und der Einzelne im Völkerrecht’ in Wolfgang Graf Vitzthum (ed), Völkerrecht (De Gruyter, 2007) 149–243; Günther Jaenicke, ‘Havana Charter’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 2 (North Holland, 1999) 679–683; Robert Jennings and Arthur Watts, Oppenheim’s International Law (Oxford University Press, 1996); Joachim Karl, ‘The Promotion and Protection of German Foreign Investment Abroad’ (1996) 11 ICSID Rev.–FILJ 1–36; Joachim Karl, ‘Das Multilaterale Investitionsabkommen’ 6

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I. The Development of the Law of Aliens (1998) RIW 432–440; Kläger, Fair and Equitable Treatment in International Law (Cambridge University Press, 2011); Joseph L. Kunz, ‘The Mexican Expropriations’ (1940) 17 NYU LQR 327–384; Roland Richard B. Lillich, Burns H. Weston and David J. Bederman, International Claims: Their Settlement by Lump Sum Agreements, 1975–1995 (Transnational, 1999); Peter T. Muchlinski, The Rise and Fall of the Multilateral Agreement on Investment: where now? (2000) 34 Int’l Law 1033–1053; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer Law International, 2009); Shabtai Rosenne, The Law and Practice of the International Court 1920–1996, vol. II (Martinus Nijhoff, 1997); Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010); Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 JWIT 357–386; Christoph Schreuer, ‘The Concept of Expropriation under the ECT and other Investment Protection Treaties’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (Juris, 2006) 108–159; Nico Schrijver, Sovereignty over Natural Resources (Cambridge University Press, 2008); Malcolm N. Shaw, International Law (Cambridge University Press, 2008); Donald R. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (University of Minnesota Press 1955); Ibrahim Shihata, ‘Towards a Greater Depolitization of Investment Disputes’ (1986) 1 ICSID Rev.–FILJ 1–25; Alexander M. Stuyt, Survey of International Arbitration, 1794–1989 (Martinus Nijhoff, 1976); Emer de Vattel, Law of Nations, Book II, Ch. VIII (T. & J. W. Johnson, 1883); Katia Yannaca-Small, ‘Fair and Equitable Standard: Recent Developments’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 111–130.

A. Introduction

As is well known the international law of aliens covers those rules that grant a 1 certain standard of protection to foreign legal and natural persons vis-à-vis the host State.1 The early development of general international law thereby did not pay particular tribute to the situation of investors but followed in the legal assessment in a much more general way the situation of an alien. In the following the development of the standard of protection for foreigners is described all with a view to assess how much this has contributed to the position that a foreign investor possesses today in the host State. Therefore, in the following, first the brief development of the origins of international investment law will be described (1.), before the current standard especially under the general principles is laid down as a rough overview (2.). 1. The Development of the Origins of International Investment Law a) Developments until 1945

Already in early political communities outsiders, then often known as aliens,2 2 were treated quite differently compared to the national.3 Famous writers such as Francisco de Vitoria and Hugo Grotius pleaded for a right to travel, live and trade in foreign countries as well as a level of non-discrimination in the treat1 Rainer Arnold, ‘Law of Aliens’ in: Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (Elsevier, 1997) 102 et seq. 2 This stems from the Latin word ‘alius’ which means: the other. 3 Rainer Arnold (n. 1) 102.

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ment of foreigners. Emmerich de Vattel first addressed the status of foreigners in its ‘Law of Nations’ of 1758 in more detail. He held that a State would be able to control and determine the requirements to admit foreigners to stay in the country. After admission they would be subject to local laws. Moreover, such State would be obliged to protect foreigners in the same manner as its own citizens.4 3 Even older is the right to diplomatic protection.5 Under this doctrine any injury to a State’s national was considered an injury to the State itself for which compensation could be claimed from the responsible State. In 1924 the Permanent Court of International Justice (PCIJ) recognised a States’ right to exercise diplomatic protection over its nationals as an ‘elementary principle of international law’.6 Also the settlement of disputes in the area of diplomatic protection led to the early establishment of ad hoc commissions and arbitral tribunals to adjudicate specific claims. Here the famous Treaty of Amity, Commerce and Navigation between Great Britain and the United States of America, called the Jay Treaty of 1794, is the most famous early example. It established a commission to decide claims regarding the treatment of British and US nationals during and after the American Revolution.7 Since the entry into force of this treaty numerous mixed claims commissions were established for the purpose of resolving problems of injury to aliens.8 4 It must not be overlooked that the standard of protection awarded to aliens was developed in an era of colonialism and imperialism.9 The time was characterised by States protecting the interests of their nationals abroad by all possible means, be they political, economic or even military. Thus, in the 19th and early 20th century means of diplomatic protection by powerful States often were accompanied by ‘gunboat diplomacy’, which involved the threat or the use of force in order to achieve political aims. This was the case although in the 1899 and 1907 Hague Convention for the Pacific Settlement of International Disputes the involved parties made a strong plead for the Pacific Settlement of Disputes. One such incident gave rise to the establishment of the Drago Doctrine.10 When English, German and Italian forces had intervened in Venezuela in 1902 to enforce claims relating to State-issued bonds, the then Argentine Foreign Minister 4 Emer de Vattel, Law of Nations, Book II, Ch. VIII (T. & J. W. Johnson, 1883) paras. 100, 104, 108 and 109. 5 See Ian Brownlie, Principles of Public International Law (Oxford University Press, 2003) 500. 6 Mavrommatis Palestine Concessions (Greece v. UK), 1924, PCIJ Series A, Nos. 2 and 12. Details by Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer Law International, 2009) 16 et seq. 7 See Alexander M. Stuyt, Survey of International Arbitration, 1794–1989 (Martinus Nijhoff, 1976) 2–3. 8 See Richard B. Lillich, Burns H. Weston and David J. Bederman, International Claims: Their Settlement by Lump Sum Agreements, 1975–1995 (Transnational, 1999) 25 et seq. 9 See Andrew Newcombe and Lluís Paradell (n. 6) 8. 10 See Wolfgang Benedek, ‘Drago-Porter Convention (1907)’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 1 (North Holland, 1981) 1102 et seq.

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Drago sent a diplomatic note to the US in December 1902 arguing that the political debt of Latin American countries should not give rise to any armed intervention by outside States. This diplomatic statement led to the development of the Drago Doctrine, later incorporated into the Hague Convention of 1907 which asked to respect the limitations of the use of force for the recovery of contract debts, the so-called Drago–Porter Convention.11 This Convention brought about an agreement not to use armed force for the recovery of State debts until there was the refusal to submit the claim to arbitration. Moreover, the expansion of trade and investment in the 19th and early 20th century led to diverging views on the standard of protection of foreigners abroad. Various commercial treaties, State practice and the decisions of arbitral tribunals and mixed commissions led to the consolidation of a certain body of international law at that time. In the early 20th century the major capital-exporting countries – including the US and the United Kingdom – took the position that foreign nationals and their property were entitled, under customary international law, to a minimum standard of treatment. This standard equalled the one accepted by so-called ‘civilised States’ including the US and European States. In response to such an assertion of a minimum standard of treatment other States, particularly those in Latin America, endorsed the doctrine of a national treatment. As early as 1868 the Argentine jurist Carlos Calvo had argued against the exercise of diplomatic protection and the existence of a minimum standard of treatment. Calvo held that due to the standard of equality of States, foreigners would not be entitled to a better treatment than host State nationals.12 More precisely the Calvo Doctrine held that foreign nationals were entitled to no better treatment than the host State nationals, that the rights of foreign nationals were governed by host State law and that finally host State courts had exclusive jurisdiction over disputes involving foreign nationals. Absolute equality of foreigners with nationals and the principle of non-intervention characterised this doctrine which however, as has been held correctly, never attained the quality of a norm of customary international law.13 This was also due to the fact that according to the revolutionary movement in Russia in 1917 all private property at least with regard to the means of production, was abolished which included the property of foreign nationals. The protection of foreign property had never been challenged before World War II. This was, however, the case with regard to the Soviet nationalisation of property after 1945. Moreover, ideological differences started to develop. Jurisprudence with regard to the minimum standard of treatment included a judgement of the US– 11 Hague Convention II of 1907, 18 October 1907, (1907) 205 Consolidated Treaty Series 250. 12 See Carlos Calvo, Le Droit International – Théorique et Pratique, vol. VI (Guillaumin, 1896) 231. 13 Donald R. Shea, The Calvo Clause: A Problem of Inter-American and International Law and Diplomacy (University of Minnesota Press, 1955) 20.

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Mexico General Claims Commission of 1923 which rejected Calvo’s Doctrine and affirmed the existence of the minimum standard of treatment.14 10 Moreover, in 1922 a commission between Norway and the US declared that international law required ‘just compensation’ for the taking of property rights. Very important were the judgements of the PCIJ. In the famous Mavrommatis Palestine Concessions case, the PCIJ held that diplomatic protection was an ‘elementary principle of international law’15 and in 1926 in the case Concerning Certain German Interests in Polish Upper Silesia the PCIJ confirmed that vested rights of foreign nationals must be recognised.16 Finally in the 1928 case Concerning the Factory at Chorzów the PCIJ held that an illegal seizure of property required reparation.17 With these judgements it was held that the treatment of foreigners and their property enjoyed a minimum standard of treatment.18 11 Thereafter, there were numerous efforts to codify the existing rules. In 1924 the League of Nations had established a committee of experts for the progressive codification of international law which had pleaded in 1927 for a conference on the codification of international law including the responsibility of States for damage done in their territory to the person or property of foreigners.19 Numerous private associations like the Institut de Droit International, the Association de Droit International du Japon and the American Institute of International Law delivered interesting proposals. The 1930 Hague Conference with an Article 10 of a draft codification brought a slight majority of 21 to 17 States maintaining the existence of a minimum standard of treatment.20 Finally with an attempt to conclude a Convention on the Treatment of Foreigners under the auspices of the League of Nations in 1929 this led to the unsuccessful end of this attempt to qualification.21 Here also differences of opinion between capital-importing and exporting States on the principle of equality led to an end of these attempts. In 1933 the Convention on the Rights and Duties of States, the so-called Montevideo Convention, finally supported the Latin American perspective of an equality of treatment standard in Article 9 of this Convention.22

14 See the Harry Roberts case, (1927) 21 AJIL 357; the Neer case, (1926) IV RIAA 60, the Hopkins case, (1927) 21 AJIL 160, the Faulkner case, (1927) 21 AJIL 349, and the Way case, (1929) 23 AJIL 466. 15 Mavrommatis Palestine Concessions (Greece v. UK) (n. 6) 12. 16 See Case Concerning Certain German Interests in Polish Upper Silesia (Germany v. Poland), 1926, PCIJ Series A, No. 7, 22 and 42. 17 Case Concerning the Factory at Chorzów (Claim for Indemnity) (Germany v. Poland), 1928, PCIJ Series A, No. 17, 47. 18 Andrew Newcombe and Lluís Paradell (n. 6) 17. 19 League of Nations, (1925) 5 Official Journal 143. 20 See Edwin M. Borchard, ‘Responsibility of States at the Hague Codification Conference’ (1930) 24 AJIL 517, 533–537. 21 1929 Draft Convention on the Treatment of Foreigners, L.N. Doc. C. 36.M.21.1929.II; see for the conference proceedings in L.N. Doc. C.23.1930.II. 22 Convention on the Rights and Duties of States, 26 December 1933 (entry into force 26 December 1924), (1933) 165 LNTS 19.

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Finally in 1938 then US Secretary of State, Cordell Hull, in response to the 12 expropriation of American-held oil interest by Mexico argued that ‘adequate effective and prompt payment for the properties ceased’23 was required under international law. Mexico, on the other hand, had held that it was required only to pay compensation in accordance with its national laws. Of course the question as to the standard of international law with regard to 13 the compensation for the expropriated property could be asked. But at that time as well as for the early times after World War II one must really state a fundamental disagreement between, on the one hand, capital-exporting countries, represented more or less by the opinion of the US and of the capital-importing countries for whom more or less the opinion of Mexico was representative. The US insisted on the Hull formula of prompt, adequate and effective compensation – which in itself met with disagreement by the capital-importing countries and could thus not evolve to some customary international law24 and by Mexico which held that in case of expropriation it was only required to pay compensation in accordance with its national laws.25 b) Developments after 1945

As just indicated, questions of the adequate standard of treatment of foreign- 14 ers abroad as well as the standard of the required compensation were subject to discussion also even more after the Second World War. With regard to post-World War II developments we must first take into ac- 15 count that attempts had failed to establish a centralised International Trade Organization (ITO) as a third pillar besides the new international financial system alongside the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, the so-called World Bank). The then adopted Havana Charter26 for the ITO only briefly addressed the issue of investment protection by providing a prohibition on ‘unreasonable or unjustifiable action’ and prohibiting the ITO to make recommendations for bilateral or multilateral investment agreements. The provisionally applied General Agreement on Tariffs and Trade (GATT) did not contain a specific chapter on investment protection. Thus the protection of investment developed independently from the international trade agreements. As is discussed in this volume this protection was done on a bilateral basis, first in the form of international treaties on friendship,

23 See US Secretary of State to Mexican Ambassador, 22 August 1938, in (1938) 32 AJIL, Suppl., 191–201. 24 See e.g. Joseph L. Kunz, ‘The Mexican Expropriations’ (1940) 17 NYU LQR 327. 25 Mexican Minister of Foreign Affairs to US Ambassador, 1 September 1938, in ‘Mexico–US: Expropriation by Mexico of Agrarian Properties Owned by American Citizens’ (1938) 33 AJIL Suppl. 201–207. 26 Havana Charter for an International Trade Organization, US Department of State, Publ. 3206; see on this Günther Jaenicke, ‘Havana Charter’ in Rudolf Bernhardt (ed), Encyclopedia of Public International Law, vol. 2 (North Holland, 1999) 679 et seq.

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commerce and navigation and later on, as will be described infra, through bilateral and also few multilateral investment treaties. 16 Besides this lack of institutionalised investment protection in the area of international trade,27 a strong movement for decolonisation characterised the first twenty years after the Second World War. Many of the newly independent States, along with Eastern European communist States adopted socialist economic policies which allowed for nationalisations of key sectors of their economies. A new policy perspective started to develop in that countries like China, Cuba and countries in Latin America had nationalised their industries (including the Egyptian nationalisation of the Suez Canal) or in the Middle East and Northern Africa like in Algeria, Iran, Iraq, Libya, Kuwait, and Saudi Arabia which brought the issue to attention as to what extent acquired rights through the natural resource concession granted by colonial powers had to be respected and moreover, which standard of compensation for the expropriation of those acquired rights was due. 17 The claims of developing countries were furthermore stipulated in some international law documents such as the Declaration on the Permanent Sovereignty over Natural Resources.28 This was a United Nations (UN) General Assembly (GA) Resolution which, although non-binding, had an eminent political value. Moreover, in 1962 the GA passed Resolution 1803 which declared that ‘the rights of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interest of their national development and of the well-being of the people of the state concerned’.29 This resolution reaffirmed that the admission of foreign investment was subject to the authorisation, restriction or prohibition of the host State. Moreover, the move of developing countries culminated in other GA resolutions including the 1974 Declaration on the Establishment of a New International Economic Order (NIEO)30 and the 1974 Charter of Economic Rights and Duties of States.31 Here the principle of permanent sovereignty over natural resources and economic activities was reaffirmed.32 These declarations were more of political than of legal value. In the important arbitral award Texaco Overseas Petroleum Co. (TOPCO) and Californian Asiatic Oil Co. v. Libya33 it was observed that these resolutions were sup27 See on this e.g. Tomer Broude, ‘Investment and Trade: The “Lottie and Lisa” of International Economic Law?’ in Pierre Sauvé and Roberto Echandi (eds), New Directions and Emerging Challenges in International Investment Law and Policy (Cambridge University Press, 2012) 139–155. 28 Resolution on the Permanent Sovereignty over Natural Resources, UN GA Res. 626 (VII), 21 December 1952, (1952). 29 Resolution on the Permanent Sovereignty over Natural Resources, UN GA Res. 1803 (XVII), 14 December 1962, (1963) 2 ILM 223. 30 Declaration on the Establishment of a New International Economic Order, UN GA Res. 3201, 1 May 1974, (1974) 13 ILM 715. 31 Charter of Economic Rights and Duties of States, UN GA Res. 3281, 12 Dec. 1974 (1975), 14 ILM 251. 32 See on this development esp. Nico Schrijver, Sovereignty over Natural Resources (Cambridge University Press, 2008) passim.

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ported ‘by a majority of states but not any of the developed countries with market economies which carry on the largest part of international trade’.34 Other instruments such as the Draft UN Code of Conduct on Transnational 18 Corporations or the OECD Declaration on International Investment and Multinational Enterprises did not reach overarching consensus of the international community. To a certain extent, however, the creation of the International Centre for Set- 19 tlement of Investment Disputes (ICSID) in 1965 under the auspices of the World Bank helped to ease the discussion and to further development. ICSID was designed to provide a neutral forum for the settlement of investment disputes. So there was the outspoken aim to create a forum of mutual confidence.35 Created not as a permanent international arbitral tribunal but as a legal and organisational framework for the arbitration of disputes between contracting States and investors who qualify as nationals of other contracting States, ICSID has succeeded in getting growing international acceptance, both by capital-importing as well as -exporting countries. Just little before, as a response to then existing uncertainties and inadequacies 20 of customary international law on State responsibility for injuries of aliens and their property, countries began to enter into bilateral investment treaties (BITs). Before this new phase of the investment treaties, treaties on friendship, commerce and navigation had served that purpose in depth in that they had contained a considerable portion of investment protection. With the first BIT between Germany and Pakistan in 195936 the contracting States undertook to summarise their natural investment interests. This treaty as well as the subsequent BITs contained clauses asking for the encouragement of foreign investment, a non-discrimination clause for host investment activities, provisions for the compensation due in the event of an expropriation, guarantees on the transfer of capital and investment return and also State to State dispute settlement, at that time by a three person arbitral tribunal selected from the International Court of Justice. Later on and most importantly BITs started to include also the possibility for investor–State arbitration. The BIT between Chad and Italy of 1969 was one of the first of such new BITs.37 At the beginning of this new phase States were

33 Texaco Overseas Petroleum Co. (TOPCO) and Californian Asiatic Oil Co. v. Libya, (1977) 104 JDI 350 (French original) and (1979) 53 ILR 358 (English translation). 34 Ibid., at (1979) 53 ILR 491, para. 86. 35 See particularly Ibrahim Shihata, ‘Towards a Greater Depolitization of Investment Disputes’ (1986) 1 ICSID Rev.–FILJ 1. 36 Agreement Between the Federal Republic of Germany and the Islamic Republic of Pakistan on the Encouragement and Reciprocal Protection of Investments, 25 November 1959, (1961 II) German Law Gazette 793; for a description of the development of German BITs, see Justus Alenfeld, Die Investitionsförderungsverträge der Bundesrepublik Deutschland (Athenäum, 1971) and Joachim Karl, ‘The Promotion and Protection of German Foreign Investment Abroad’ (1996) 11 ICSID Rev.–FILJ 1–36. 37 Accord entre le Gouvernement de la République Italienne et le Gouvernement de la République du Tchad en vue de Proteger et Favoriser les Investissements de Capitaux, 11

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relatively reluctant to enter into BITs. This lasted approximately until the end of the 1980s. Between the end of the 1980s and the end of the century the number of BITs grew, however, quite significantly. This was mostly due to a greater commitment of States, both developed and developing, to economic liberalism and the free flow of good services in investment. Moreover, developing countries had to learn that there were very few alternatives to foreign direct investments with regard to the furtherance of their economies. So until now, there is a worldwide net of approximately 3000 BITs. Attempts to arrive at a Multilateral Investment Agreement (MAI) failed, however. Some groups of States particularly under Ch. XI of the North American Free Trade Agreement (NAFTA) as well as under the Energy Charter Treaty (ECT) have included in these instruments of rather limited reach a specific chapter on investment. 21 The MAI,38 negotiated between 1996 and 1998, was to develop universally applicable investment protection standards in order to replace the bilateral model of the BITs. After enormous general protests France had announced in October 1998 that it would not adhere to the Agreement. This was the end of the respective negotiations with the effect that until now there is no international agreement among States with regard to any universally agreed principles. 22 In Asia the Draft Agreement on a Trans-Pacific Partnership39 among eleven countries, including the US, expressly includes clauses on environmental protection and public welfare. Clauses on investor-State arbitration permitting investors to bring claims directly against States that had expropriated their property are subject to protest of anti-globalisation groups. They basically criticise that the traditional claims of investment protection would be incompatible with environmental and human rights protection. In order to enhance the openness of investor-State arbitration, amicus curiae submissions are allowed. Moreover the treaty expressly requests on the partners to publish all aspects of the proceedings in order to increase transparency. 2. The Substantive Aspects of the International Minimum Standard 23

As had been shown in the previous section, the law of aliens had started to develop from the middle ages on. This law has developed until today more in the form of customary international law than in the form of treaties. However, the basic principles as will be laid down in the following can also be extracted June 1969. On the importance of the Chad–Italy BIT, see Andrew Newcombe and Lluís Paradell (n. 6) 45 with further remarks in fn. 266. 38 On the MAI, see Stephen Canner, ‘The Multilateral Investment Agreement’ (1998) 31 Cornell Int’l L. J. 657–681; Joachim Karl, ‘Das Multilaterale Investitionsabkommen’ (1998) RIW 432–440; Peter T. Muchlinski, The Rise and Fall of the Multilateral Agreement on Investment: where now? (2000) 34 Int’l Law 1033–1053. 39 For the text of the Draft Agreement and an all-encompassing overview on the current status of the negotiations, see http://www.mfat.govt.nz/downloads/trade-agreement/transpacific/mainagreement.pdf and http://www.mfat.govt.nz/Trade-and-Economic-Relations/2-Trade-Relationships-and-Agreements/Trans-Pacific/index.php (Trans–Pacific Strategic_Economic_Partnership).

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from the BITs. These follow a basic structure that includes certain minimum rights, as will be briefly described in the following. 24 There is, first of all, (1) the recognition of a right to legal personality as a basic requirement for any legal position. Moreover, there is an entitlement to the right to life and the protection of the body.40 Furthermore, (2) one can find some law-abiding procedures in case of detention and (3) the right to fall to a non-obstructed access to court. Finally, one would (4) also include the right not to be expropriated without the requirements and the requisites for expropriation being completely fulfilled.41 There are, however, at least three areas where it is contested whether the stan- 25 dard of the international law of aliens encompasses also those areas as an international minimum standard. Such areas are the standard of national treatment, the standard of fair and equitable treatment and the standard of protection in cases of an unlawful expropriation. These three areas shall therefore be discussed in the following. a) National Treatment

It is contested whether foreigners may enjoy a right to be treated equally to a 26 national as a rule contained in the international minimum standard. Such legal position has been accepted in the legal literature where some authors even go so far as to describe this as a principle of customary nature.42 But the acceptance of such a position raises fundamental doubts. States are free to treat their own nationals more favourably than the foreigners living on their territory. Such privilege of the State is only limited or even eliminated in cases where a concrete treaty provision as in the area of the GATT establishes a standard of non-discrimination or national treatment. Therefore, it is more than doubtful that the national treatment standard can be understood as part of customary international law.43 Rather one must state that arguably there is no protection of aliens against any economic discrimination in the relation to the domestic competitors included in the international minimum standard. Jurisprudence of arbitral tribunals acting under the ICSID Convention clearly goes in this direction. In the Methanex award the panel held that ‘[i]n the absence of a contrary rule of international law 40 See inter alia, Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008) 62 et seq. 41 See Kay Hailbronner, ‘Der Staat und der Einzelne als Völkerrechtssubjekte’ in Wolfgang Graf Vitzthum (ed), Völkerrecht (De Gruyter, 2011) 157, 243; Rainer Arnold (n. 1) 102, 105. 42 See Ulrich Häde, ‘Der völkerrechtliche Schutz von Direktinvestitionen im Ausland – Vom Fremdenrecht zum Multilateralen Investitionsabkommen’ (1997) 35 AVR 181–212. 43 See Jörn Griebel (n. 40) 15.

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binding on the States’ parties, whether of conventional or customary origin, a State may differentiate in its treatment of nationals and aliens’.44 27 In principle the national treatment obligation aims at abandoning protectionist attitudes of governments which try to protect home producers from foreign competition.45 Rather any host State must treat foreigners and nationals in a ‘like’ manner if those are in a comparable situation. Thus the claimant must be in ‘like circumstances’ with the more favourably treated entity. As has been shown in the previous part of this chapter, Carlos Calvo strongly opted in favour of national treatment as being the most a foreign investor could demand.46 In principle, however, a certain degree of discrimination is permissible as a matter of customary international law.47 28 It should be noted that the scope of national treatment varies by treaty.48 If it comes to interpreting the national treatment obligations of investment agreements, relatively rarely recourse is had to the practice under GATT and the General Agreement on Trade in Services (GATS) as the panel in the above quoted Methanex award has made it clear.49 Many legal issues in the more recent past were based on an identification of the appropriate domestic comparator, followed by the analysis which treatment was less favourable and then whether the host government could give legitimate reasons for the difference in treatment.50 Hereby the identification of the appropriate comparator is the most important part of this analysis of national treatment.51 Various approaches were taken in order to identify the comparator. Typical cases are S.D. Myers v. Canada,52 Pope & Talbot v. Canada,53 Feldman v. Mexico,54 Occidental Exploration and Production Co. v. Ecuador,55 Loewen Group Inc. v. USA,56 Gami v. Mexico57 and United Parcel Service Inc. v. Canada.58 Thereby it has been analysed that the determination of ‘like circumstances’ was a fact-specific inquiry.59 Furthermore 44 Methanex Corp. v. USA, UNCITRAL (NAFTA), Award, 3 August 2005, Part IV, Ch. C, No. 25. 45 Andrea Bjorklund, ‘National Treatment’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 29–58. 46 Andrea Bjorklund (n. 45) 29, 31. 47 Robert Jennings and Arthur Watts, Oppenheim’s International Law (Oxford University Press, 1996) 932. 48 Andrea Bjorklund (n. 45) 32 with numerous examples. 49 Methanex Corp. v. USA (n. 44) Part II, Ch. B, para. 6. 50 Andrew Newcombe and Lluís Paradell (n. 6) 19–20. 51 Andrea Bjorklund (n. 45) 38. 52 S.D. Myers Inc. v. Canada, UNCITRAL (NAFTA), Partial Award, 13 November 2000. 53 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award on the Merits of Phase 2, 10 April 2001. 54 Feldman v. USA, ICSID Case No. ARB(AF)/99/1, Award, 16 December 2002. 55 Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN 3467, Final Award, 1 July 2004. 56 The Loewen Group Inc. & Raimond L. Loewen v. USA, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003. 57 Gami Investments v. Mexico, ICSID Case No. ARB(AF)/00/1, Award, 9 January 2003. 58 United Parcel Service of America Inc. v. Canada, UNCITRAL (NAFTA), Award, 24 May 2007.

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the claimant must show that the respective treatment is less favourable then that accorded to the domestic comparator, this involving de jure as well as de facto discrimination on the basis of nationality. Such was e.g. the case in Methanex.60 Thereby in general the claimant bears the burden of proof.61 Thus, in conclusion, the national treatment requirement is an important re- 29 quirement although it has decreasing importance and many of the issues have been discussed under the standard of fair and equitable treatment as a standard which could be treated more easily in practice.62 b) Fair and Equitable Treatment

With regard to fair and equitable treatment it is again contested what precisely 30 is covered by this principle and whether or not this principle belongs to the international minimum standard.63 Thereby it is already controversial whether at all such an international minimum standard exists.64 Two different concepts can be observed: one opinion holds that the fair and equitable standard reflects the international minimum standard whereas another opinion is of the view that the standard is autonomous and adds to the international minimum standard. The first opinion, often advanced by developing countries can hint to the US Model BIT as well as to the Canadian Model BIT and to certain arbitral decisions.65 Others hold that the equitable standard would be autonomous and higher than 31 the minimum standard because otherwise a clear reference to the minimum standard would have been sufficient; also the entire uncertainty about the existence of a minimum standard would have necessitated an explicit statement of its inclusion which however never existed.66 In any case there is a significant overlap

59 Andrea Bjorklund (n. 45) 48. 60 Summary of the jurisprudence by Andrea Bjorklund (n. 45) 48–54. 61 Shabtai Rosenne, The Law and Practice of the International Court 1920–1996, vol. II (Martinus Nijhoff, 1997) 1083. 62 Andrea Bjorklund (n. 45) 58. 63 On fair and equitable treatment, see Rudolf Dolzer and André von Walter, ‘Fair and Equitable Treatment – Lines of Jurisprudence and Customary Law’ in Federico Ortino, Lahra Liberti, Audley Sheppard and Hugo Warner (eds), Investment Treaty Law: Current Issues, vol. II (BIICL, 2007) 99–115; Christoph Schreuer, ‘Fair and Equitable Treatment in Arbitral Practice’ (2005) 6 JWIT 357–386. 64 This controversy is inter alia reflected in the Calvo Doctrine and later in the 1974 Charter on Economic Rights and Duties of States respectively in the Hull formula; see inter alia Adronico O. Adede, ‘The Minimum Standards in a World of Disparities’ in Ronald S.J. MacDonald and Douglas M. Johnston (eds), The Structure and Process of International Law (Martinus Nijhoff Publishers, 1983) 1001–1026; Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 23–54. 65 Art. 5 of the US Model BIT of 2004, available at www.ustr.gov/sited/default/files/U.S.%20model%20BIT.pdf; as well as Genin v. Estonia, ICSID Case No. ARB/99/2, Award, 25 June 2001; Occidental Exploration and Production Company v. Ecuador (n. 55); S.D. Myers Inc. v. Canada (n. 52), separate opinion by Dr Bryan Schwartz, (2001) 40 ILM 1447 et seq.; as well as Pope & Talbot v. Canada (n. 53) 7 ICSID Rep. 102, 105–112. 66 See correctly Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 227.

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between the international minimum standard and the fair and equitable treatment standard.67 As to the contents of this principle one can state that it encompasses several facets. Certainly the components of this principle encompass sovereignty, legitimate expectations, non-discrimination, as well as the procedural principles of fair procedure, denial of justice, administrative due process and transparency. Thereby the meaning of sovereignty has been subject to some controversy. Incontestably one must anticipate an understanding of sovereignty as meaning sovereignty under law and its consequential restriction to the domaine réservé as being consented during the time and in the course of the process of decolonisation. As mentioned above this time brought about claims like the one on National Sovereignty over Natural Resources of 1962 and the Charter on Economic Rights and Duties of States of 1974. These resolutions meant a challenge to but eventually no final knock-out criterion for sovereignty. Still the notion of sovereignty remained broad enough in order to be opposed to a certain level of protection for a foreign investor.68 This standard would encompass a variety of legal positions such as the right to an orderly procedure, the right to be heard in court and the protection against wilful detention. Those positions can certainly be considered to be part of a recognised principle of fair and equitable treatment.69 Moreover, there are indications to recognise the principle of fair and equitable treatment as a standard which has achieved customary nature.70 However, despite the customary value of such regulation one must always look into the concrete context of the BIT in order to gain the importance of such principle in the concrete case. Moreover the fair and equitable principle encompasses an element of protection of the foreign investor’s legitimate expectations. This covers the fact whether and in how far public statements or decisions notified by officials can be relied upon.71 Arbitral tribunals have acknowledged the investors’ interest in stability and predictability. They have also developed criteria for the assessment of the legitimacy of the investor’s expectations. This kind of protection is relatively well established in the jurisprudence on the protection of the investors’ interests.72 The element of non-discrimination turns out to be one key concept inherent in the concept of fair and equitable treatment which is, however, not entirely uncontroversial in the interpretation of the tribunals. Arbitral tribunals have recog-

67 Jeswald Salacuse (n. 66) 227. 68 See Roland Kläger, Fair and Equitable treatment in International Law (Cambridge University Press, 2011) 163 et seq., on the importance of a relative concept of sovereignty. 69 See Rudolf Dolzer and André von Walter (n. 63) 112. 70 See id. 71 See on this aspect particularly Katia Yannaca-Small, ‘Fair and Equitable Standard: Recent Developments’ in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 111, 124 et seq. 72 See the examples given by Katia Yannaca-Small (n. 71) 124 et seq.

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nised the value of the principle73 and a court held in CME v. Czech Republic74 that the Czech Republic was discriminatory against the investor. On the other hand, another tribunal has eventually found the opposite in Methanex Corp. v. USA. By applying a narrow approach the tribunal negated the fulfilment of the criterion of non-discrimination to be an element of fair and equitable treatment.75 But in sum one can hold that arbitral tribunals strongly support non-discrimination as an element of fair and equitable treatment.76 Finally an element of sustainable development has already been established. 37 Arbitral tribunals in Ogoniland77as well as in other cases make evident that the jurisprudence has accepted that the concept of sustainable development is a well established principle in international law.78 This principle demands a comprehensive balancing of all relevant factors and interests.79 Next to procedural principles like fair procedure80 and administrative good 38 process there is finally an element of transparency contained in the fair and equitable standard.81 c) Protection of Property

Most contested in the framework of the international law of aliens were, as 39 has been indicated above, all questions involving the protection of property. Particularly questions of an unlawful expropriation respectively of an unlawful nationalisation were and are contested. It is rather clear under international law that any State is legitimised to adopt measures of nationalisation on its own territory.82 As a consequence, measures with expropriating effect are in principle legitimate; however, there are some restrictions of public international law that respect basic property right of individuals as well as of foreigners. Therefore one can say that the expropriation of alien property is legitimate,83 but only under certain conditions.84 73 See S.D. Myers Inc. v. Canada (n. 52) fn. 804. 74 CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, esp. para. 611. 75 See Methanex Corp. v. USA, UNCITRAL, Final Award, 3 August 2002, Part IV. 76 See Roland Kläger (n. 68) 195 with further references. 77 Decision of the African Commission on Human and Peoples’ Rights, Communication No. 155/06 (2001), 13 October 2001 (based on the 1981 African Charter on Humans and Peoples’ Rights); see also Fons Coomans, ‘The Ogoni Case Before the African Commission on Human and Peoples’ Rights’ (2003) 52 ICLQ 749–760. 78 On the problem of language see Roland Kläger (n. 68) 21. 79 Id., at 206 et seq. 80 Id., at 213 et seq. 81 Id., at 130. 82 See De Sanchez v. Banco Central de Nicaragua and others, 770 F.2d 1385 (5th Cir. 1985), 1397, (1992) 88 ILR 75, 89; Malcolm N. Shaw, International Law (Cambridge University Press, 2008) 828. 83 See Amco v. Indonesia, ICSID Case No. ARB/81/1, Award, 20 November 1984, (1992) 89 ILR 405, 466. 84 See World Bank Guidelines on the Treatment of Foreign Direct Investment, (1992) 31 ILM 1363.

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It is not contested that all international human rights documents such as the Universal Declaration on Human Rights and the two Human Rights Covenants of the United Nations (e.g. in Article 17) protect property only against wilful expropriation but not generally from expropriation without indemnification. International law distinguishes direct and indirect expropriation. The latter does not infringe upon property in a direct way but only de facto. However, the international law of aliens protects also against de facto expropriation.85 It is clear that expropriation involves the taking of property, but actions short of direct possession of the assets in question may also fall within this category.86 That includes ‘any such unreasonable interference with the use, enjoyment or disposal of property as to justify interference that the owner thereof will not be able to use, enjoy or dispose of the property within a reasonable period of time after the inception of such interference’.87 The Iran–US Claims Tribunal held that measures taken by a state can interfere with property rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the state does not purport to have expropriated them and the legal title to the property formerly remains with the original owner.88

The taking of property can also constitute a process rather than one clear act. In these cases it is decisive when the process has reached the point at which an expropriation in fact has occurred. One would speak in these cases of a so-called creeping expropriation.89 Most important are the requirements under which an expropriation or nationalisation is legitimate under international law of aliens. The PCIJ held in the famous case of Certain German Interests in Polish Upper Silesia that an expropriation must be for ‘reason of public utility, judicial liquidation and similar measures’.90 In the BP case91 the reason for the expropriation of BP property was the Libyan belief that the UK had encouraged Iran to occupy certain Persian Gulf islands. It was made clear that the taking had violated international law, ‘as it was made for purely extraneous political reasons and was arbitrary and discriminatory in character’.92 42 In the LIAMCO case93 the tribunal held that ‘the public utility principle is not a necessary prerequisite for the legality of a nationalization’.94 The 1962 UN GA 41

85 See Christoph Schreuer, ‘The Concept of Expropriation under the ECT and other Investment Protection Treaties’ in Clarisse Ribeiro, Investment Arbitration and the Energy Charter Treaty (Juris, 2006) 108–159, particularly sub. 2. and 3. 86 See 1961 Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens in Louis B. Sohn and Richard R. Baxter, ‘Responsibility of States for Injuries to Economic Interests of Aliens’ (1961) 55 AJIL 545 et seq. 87 See ibid., 545, 553–554. 88 The Interlocutory Award, 19 December 1983, 4 Iran–US CTR 122, (1991) 85 ILR 349. 89 See e.g. Generation Ukraine v. Ukraine, ICSID Case No. ARB/00/9, Award, 16 September 2003, (2005) 44 ILM 404. 90 Case of Certain German Interests in Polish Upper Silesia (Germany v. Poland), 1926, PCIJ Series A, No. 7, 22. 91 British Petroleum (BP) Exploration Co (Libya) Ltd v. Libya, Award, 10 October 1973, (1979) 53 ILR 297. 92 Ibid., 329.

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Resolution on Permanent Sovereignty over Natural Resources repeats this requirement, but the 1974 Charter of Economic Rights and Duties of States does not.95 Finally a tribunal in the Santa Helena v. Costa Rica case was of the opinion that international law permitted expropriation of foreign-owned property, for example for a public purpose and noted that this might include a taking for environmental reasons.96 Thus, in principle, expropriation is possible even against foreign nationals. The first requirement is that this expropriation must have taken place in the public interest. Moreover, the expropriation shall not have any discriminatory character. This is a rather disputed principle. Only certain facts may hint as to whether or not these requirements are fulfilled. An essential hint for any discrimination could be that the expropriation may also indicate the importance of the nationality of an enterprise as a necessary criterion. The real dispute, however, is the standard of compensation. At least this was the case for a long time. This involved the fundamental question on the existence of a minimum standard of protection of property which started with the controversy between the Hull and Calvo Doctrine97 and was reiterated in the second half of the 20th century with respect to the UN GA Resolution on Permanent Sovereignty over Natural Resources, the Charter of Economic Rights and Duties of States and other documents. Whereas some assert that today the Hull formula according to which indemnification must be prompt, effective and adequate can be considered to be the general rule accepted by international law, case law is not so clear. Many cases did not use the Hull Formula.98 Moreover, the 1962 Permanent Sovereignty Resolution made reference to the so-called additional standard of appropriate compensation. This was reiterated by the arbitrator in the TEXACO case.99 It was furthermore underlined in the AMINOIL case.100 Here the tribunal referred to the standard of appropriate compensation, including the 1962 resolution as codifying positive principles.101 The 1974 Charter of Economic Rights and Duties of States linked the formula only to domestic considerations. Sec. IV(1) of the World Bank Guidelines on the Treatment of Foreign Direct Investment finally provides that a State may not ex93 Libyan American Oil Company v. the Libya (LIAMCO case), ad hoc Award, 12 April 1977, (1981) 20 ILM 1. 94 Ibid., at 58, 59. 95 See para. 4 of the 1962 Resolution; and Art. 2 para. 2 lit. c. of the 1974 Charter of Economic Rights and Duties of States. 96 Compañía del Desarrollo de Santa Elena S.A. v. Costa Rica, ICSID Case No. ARB/96/1, Award, 17 February 2000, (2000) 39 ILM 1317, 1329. 97 See supra, sub. A.1.a). 98 See for example the Chorzów Factory case, 1928, PCIJ Series A, No. 17, 46. 99 Texaco Overseas Petroleum Company v. Libya, ad hoc Award, 19 January 1977, (1978) 17 ILM 3, 29. 100 Kuwait v. The American Independent Oil Company (AMINOIL), ad hoc Award, 24 March 1982, (1982) 21 ILM 976. 101 Ibid., 1033.

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propriate foreign private investment except where this is done in accordance with applicable legal procedures, in pursuance of good faith of a public purpose, without discrimination on the basis of nationality and against the payment of appropriate compensation. Here the following sec. IV(2) notes that compensation is considered to be appropriate when it is adequate, prompt and effective.102 The same criterion is more or less taken up by Article 1110 of the NAFTA of 1992. Also Article 13 of the ECT of 1994 provides that the expropriation must be for a purpose which is in the public interest, non-discriminatory, carried out under due process of law and accompanied by the payment of prompt, adequate and effective compensation.103 So in sum we can conclude that the standard of the Hull formula after some turbulences in the 1960s and 70s may, by today, be the generally accepted standard of also customary international law under the law of aliens.104 B. Conclusion

It is evident that the international law of aliens can protect the investor only to a limited extent. Many relevant dangers for the success of an investment are not really protected. There are only limited prohibitions of discrimination. But there is an explicit permission of the discriminatory treatment of a foreigner vis-à-vis the national. Whereas the standard of protection concerning the indemnification may be adequate in the sense of the formula, by today the extent of compensation may also give rise to some problems105 with references to State practice. 48 Today international investment law which basically operates through a web of bilateral and multilateral investment treaties has very much taken up the function of enriching the international law of aliens in a considerable way in order to come to an adequate balance of all interests involved. Although international investment law cannot deny its roots in the international law of aliens, it has made considerable steps of development and thus must be regarded as a new and as an original contribution to general international law. 47

102 The World Bank Guidelines on the Treatment of Foreign Direct Investment, 21 September 1992, (1992) 31 ILM, 1382. 103 The Energy Charter Treaty, 17 December 1994, (1995) 34 ILM 391. 104 Such is the leading opinion, see only Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 92 et seq., Andrew Newcombe and Lluís Paradell (n. 6) 34 et seq. 105 See on the following Malcolm N. Shaw (n. 82) 835–837.

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Stephan Wittich A. The Concept of State Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Outline of the Historical Development of the Law on State Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Codification Efforts outside the ILC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Private and Regional Codification Work . . . . . . . . . . . . . . . . . . . . . . . . . . b) The League of Nations and the Hague Conference (1925–1930) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Work of the ILC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Early Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) A New Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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C. Conceptual Issues concerning State Responsibility in Relation to Investment Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Hybrid Nature of Investment Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Scope of the ILC Articles on State Responsibility . . . . . . . . . . . . . . a) General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Open Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: James Crawford, The International Law Commission’s Articles on State Responsibility: Introduction, Text and Commentaries (Cambridge University Press, 2002); James Crawford, ‘Investment Arbitration and the ILC Articles on State Responsibility’ (2010) 25 ICSID Rev.–FILJ 127–199; James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010); James Crawford, State Responsibility. The General Part (Cambridge University Press, 2013); Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 152–289; Zachary Douglas, ‘Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 815–842; Yoshiro Matsui, ‘The Transformation of the Law of State Responsibility’ (1993) 20 Thesaurum Acroasium 5–65, reprinted in René Provost (ed), State Responsibility in International Law (Ashgate, 2002) 3–63; Martins Paparinskis, ‘Investment Treaty Arbitration and the (New) Law of State Responsibility’ (2013) 24 EJIL 617–647; Alain Pellet, ‘La Codification du droit de la responsabilité internationale: tâtonnements et affrontements’ in Laurence Boisson de Chazournes and Vera Gowlland-Debbas (eds), The International Legal System in Quest of Equity and Universality. Liber Amicorum Georges Abi-Saab (Martinus Nijhoff, 2001) 285–304; Alain Pellet, ‘Les Articles de la CDI sur la responsabilité de l’État pour fait internationalement illicit. Suite – et fin?’ (2002) 50 AFDI 1–23; Christian Tams, ‘All’s Well That Ends Well: Comments on the ILC’s Articles on State Responsibility’ (2002) 62 ZaöRV 759–808; Stephan Wittich, ‘The ILC’s Articles on the Responsibility of States for Internationally Wrongful Acts Adopted on Second Reading’ (2002) 15 LJIL 891–919.

A. The Concept of State Responsibility

State responsibility is the term describing the sum of rules of international 1 law concerning the origin and the consequences of breaches of norms of international law by States. This broad perception of State responsibility can be traced back to a general principle of law common to all, or at least the major, legal sys-

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tems according to which every violation of a legal norm entails the legal accountability of the wrongdoing subject. In its narrowest, and probably most important, form this legal accountability covers the obligation to make good the consequences of the unlawful act. Such is the gist of the very idea of being a subject of the law as a holder of rights and obligations. This common understanding of State responsibility as a general principle of law is already reflected in the famous pronouncement of the Permanent Court of International Justice in the merits phase of the Chorzów Factory case where it stated that ‘it is a principle of international law, and even a general conception of law, that any breach of an engagement involves an obligation to make reparation’.1 2 Similar to liability and responsibility in other legal orders, State responsibility performs an important task of ensuring, within the confines of the overall structure of the international legal order, the observance and ultimately the effectiveness of international law. A potential law-breaker anticipating certain adverse effects of his own breach will be induced to comply with his obligations rather than ignore them. But State responsibility is also warranted by various other considerations such as legal certainty, stability and predictability, and the continued validity and force of the law even if it was breached in a given case. By making the law-breaker legally accountable for his wrongdoing and by attaching some form of ‘sanction’ in the broadest, most general sense, the validity of the norm breached is strengthened, and it is ensured that, in principle, the breach does not generate new law (ex iniuria non oritur ius). 3 In international law, the concept of State responsibility encompasses a variety of aspects or, if viewed in a procedural sense, stages of the process of responsibility. These include the generating conditions or the origin of responsibility – notably attribution and defences (that is, circumstances precluding wrongfulness in the parlance of the Articles of the International Law Commission (ILC)) – and the consequences of a wrongful act. The latter comprise new legal relationships (rights and obligations) between the author of the wrongful act, the injured State and, exceptionally, other States than the injured one or even non-State entities. The consequences also include the rules on how the responsibility of the wrongdoing State is to be implemented. 4 The aim of this chapter is twofold. First it shall outline the historical development of the law of State responsibility, primarily by depicting the various efforts of codification by different bodies (section B.). Secondly, it shall briefly discuss two related conceptual problems of State responsibility in relation to international investment law (section C.). The particular application of the rules of State re-

1 Factory at Chorzów (Germany v. Poland), PCIJ Judgment, Merits, (1928) PCIJ (Ser. A) No. 17, 29. See also Judge Huber in Spanish Zone in Morocco, (1923) 2 RIAA 615, 641, stating that ‘[l]a responsabilité est le corollaire nécessaire du droit. Tous droits d’ordre international ont pour conséquence une responsabilité internationale. La responsabilité entraîne comme conséquence l’obligation d’accorder une réparation au cas où l’obligation n’aurait pas été remplie.’

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sponsibility to investment law and the problems arising from their scope will be dealt with elsewhere in this volume.2 B. Outline of the Historical Development of the Law on State Responsibility 1. General

In its earliest form, which however continued to exist until the second half of 5 the 20th century, the law of international responsibility was characterised by several features. First, it was an exclusively inter-State law, and international responsibility was even equated with State responsibility. This means that only the breach of obligations owed by one State to another could give rise to international, that is, State responsibility. Accordingly, the potential responsibility of other actors was not the subject of the international law rules of responsibility. Secondly, State responsibility was generally treated in relation to specific substantive areas of international law, notably the treatment by the host State of aliens on its territory.3 This strong focus on responsibility for the treatment of foreigners was certainly influenced by the arbitral practice at the time which almost exclusively concerned injuries to foreigners and diplomatic protection exercised by the home State of the individual in enforcing its international rights against the host State. At the same time, however, this narrow focus on the treatment of aliens had a somewhat broadening effect on earlier codification efforts as they not only attempted to lay down the consequences of wrongful acts and the procedural rules of implementation – especially the conditions for the exercise of diplomatic protection, such as the rule of the exhaustion of local remedies –, but also endeavoured to codify in detail the relevant substantive, or primary, norms containing obligations breach of which would give rise to State responsibility. Thirdly and closely connected thereto, the focus on the law concerning the 6 treatment of foreigners laid much emphasis on the concept of damage. One reason for this is that most primary rules in this field indeed require the infliction of some kind of damage or harm in order to be breached.4 Indeed, the entire law on the treatment of foreigners was equated with the rules concerning the injuries caused to them (standard of treatment, expropriation, prevention, and damages). Another reason for the ‘prominent’ role of damage is again to be found in arbi2 See chapter 5.III. on ‘The Application of Rules on State Responsibility’, chapter 5.IV. on ‘Circumstances Precluding Wrongfulness’, and chapter 9 on ‘Restitution, Damages and Compensation’ in this volume. 3 See in particular the private efforts to codify the law of State responsibility as discussed below in section B. But the approach to State responsibility as focusing on the treatment of aliens persisted well into the 20th century, see e.g. Chittharanjan F. Amerasinghe, State Responsibility for Injuries to Aliens (Clarendon Press, 1967); Richard B. Lillich (ed), International Law of State Responsibility for Injuries to Aliens (University Press of Virginia, 1983). 4 This is already borne out by the designation of the topic as State responsibility for injuries suffered by foreigners.

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7

8

9

10

tral practice because many tribunals dismissed claims for reparation absent any, particularly material, damage. Yet, the motivation for this case law was not based on the conceptual understanding that damage is a constitutive element (or fait générateur) of State responsibility; rather the jurisdiction of the tribunals in these cases usually was clearly confined to awarding the specific remedy of damages for tangible harm or loss that could be quantified and assessed in monetary terms. As a result, these tribunals simply did not possess jurisdiction in cases where no damage had occurred, but that does not mean that they viewed the existence of responsibility as depending on the existence of some form of (material) damage. Finally, responsibility was considered as being purely civil in nature, concerning only the relations between the wrongdoing and the injured State, similar to the situation in municipal private law. Broader collective or, for that matter, public interests affecting other States or a community of States – or even the international community as a whole – were largely unknown to that early understanding of State responsibility. It was not until the second half of the 20th century that public law considerations found their way into the law of State responsibility. Viewed against that backdrop, the modern law of international responsibility, especially State responsibility, is fundamentally different as to its nature, concept, and structure.5 With the broadening of subjecthood, resulting in a much larger circle of international law subjects, international responsibility is no longer restricted to States. Suffice it to refer to the impressive development of international criminal responsibility during the last two or so decades, as well as the still embryonic, yet existent law of responsibility of international organisations. Furthermore, and much more pertinent for present purposes, States may not only become responsible for breaches of obligations owed to other States, but also for violations of obligations owed to individuals, such as investors. On the other hand, the modern law of State responsibility is subject to an important conceptual limitation. As is well known and nowadays uncontested, the law of State responsibility largely is confined to setting forth the secondary rules, that is, the rules concerning its origin, content and implementation, whereas it is generally without prejudice to the primary norm whose breach is at issue.6 Also, the concept of damage has long been abandoned as a distinct condition for the origin of State responsibility7 – if it ever was viewed this way in the past. 5 Yoshiro Matsui, ‘The Transformation of the Law of State Responsibility’ (1993) 20 Thesaurum Acroasium 5–65. 6 Eric David, ‘Primary and Secondary Rules’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 2733; Jean Combacau and Denis Alland, ‘Primary and Secondary Rules in the Law of State Responsibility: Categorizing International Obligations’ (1985) 16 NYIL 81–109. 7 See James Crawford, ‘The System of International Responsibility’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 17, 23–24.

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Accordingly, damage is principally a matter of the primary norm which may indeed require the infliction of damage for its own breach. This, to be sure, does not mean that damage has become irrelevant to issues of State responsibility. Thus, damage usually plays an important role in assessing the form and amount of reparation and in determining the State or States entitled to invoke responsibility. And finally, the modern law of State responsibility has paved the way for an attenuated form of ‘responsibility in the public interest’, particularly in, but not restricted to, cases where serious violations of peremptory norms of general international law are at issue.8 As noted at the beginning, the entire concept of State responsibility as well as 11 many of its individual aspects or rules (such as attribution, circumstances precluding wrongfulness, reparation, causation) are but a manifestation of general principles of law to be found in the major legal systems. As such they were taken up by arbitral and judicial practice which refined and adapted them to the particular needs of international law and relations. This process culminated in the emergence of a body of customary international law largely codified and further developed in significant details by the ILC in its 2001 Articles on Responsibility of States for Internationally Wrongful Acts. In the following, the major steps and contributions in this process of development shall be outlined. 2. Codification Efforts outside the ILC a) Private and Regional Codification Work

Given the fact that already in the late 19th and early 20th century there existed 12 a bulk of arbitral practice in the field of State responsibility, it is little surprising that State responsibility was the object of several codification projects already at an early stage. These early attempts were made by both private and public institutions and were largely driven by the conviction that the law of State responsibility had already been sufficiently consolidated by the wealth of case law, even though mainly limited to cases of injuries to foreigners and the exercise of diplomatic protection.9 Notably the work of the mixed claims commissions and other arbitral bodies during the first third of the 20th century provided fertile ground on which to proceed in terms of codification.10 The beginning of the 20th century therefore saw a number of private drafts all 13 of which concerned responsibility of States for injury to foreigners, or particular aspects thereof. Private institutions or societies, such as the Institut de droit in8 See in particular Bruno Simma, ‘Bilateralism and Community Interest in the Law of State Responsibility’ in Yoram Dinstein (ed), International Law at a Time of Perplexity: Essays in Honour of Shabtai Rosenne (Nijhoff, 1989) 821–844; Bruno Simma, ‘From Bilateralism to Community Interest in International Law’ (1994) 250 RC 217–384. 9 Patrick Daillier, ‘The Development of the Law of Responsibility through the Case Law’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 37, 39. 10 This conviction, however, turned out to be deceptive in the case of the Hague Conference of 1930, see below B.2.b).

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ternational (IDI), the International Law Association (ILA), or national societies in the field of international law, have undertaken various studies in the field of State responsibility.11 The most elaborate and most influential private codification work was carried out by Harvard Law School and resulted in the 1929 Harvard Draft Convention on Responsibility of States for Damage Done in their Territory to the Person or Property of Foreigners.12 The Harvard Draft was prepared under the lead of Professor Borchard during the preparation of the Hague Conference and was intended to assist the conference in its work. It consisted of 18 articles accompanied by comprehensive and lengthy commentaries. It was guided by the idea of combining ‘a restatement of the existing law with proposals for moderate changes which seem[ed] necessary to secure the acceptance of the convention by all countries’.13 While it had virtually no influence on the Hague Conference, some 25 years later the 1929 Harvard Draft made a great impression on the ILC, particularly given its detailed articles and commentaries and its overall high quality. Thus, the ILC secretariat took the initiative of requesting the Harvard Law School Research Center to revise the Draft and bring it up to date,14 an initiative confirmed by the Commission in 1956, that is, the starting year of the ILC’s work on State responsibility. The task of revision was entrusted to Professors Louis Sohn and Richard Baxter, and their work resulted in the substantially revised Draft of 1961, consisting of 40 articles and again quite lengthy explanatory notes.15 This second Harvard Draft was greatly influenced by the ideas of the first Special Rapporteur of the ILC on State responsibility, Mr García Amador. Although it remained within the strict confines of the responsibility for injuries to aliens, the Draft envisaged an important place of the individual in the law of State responsibility, including the entitlement of individuals to present their claims directly to the defendant State.16 But just like

11 Draft on International responsibility of States for injuries on their territory to the person or property of foreigners, prepared by the IDI 1927, reprinted in (1956) YBILC, vol. II, 227– 229; Resolution on ‘The rule of the exhaustion of local remedies’, adopted by the IDI in 1956, (1956) Annuaire, vol. 46, 364; Resolution on ‘The national character of an international claim presented by a State for injury suffered by an individual’, adopted by the IDI in 1965, (1965) Annuaire, vol. 51 (II), 269–271; Draft code of international law that included ‘Rules concerning the responsibility of a State in relation to the life, person and property of aliens’, adopted by the Japanese branch of the ILA, Report of the Thirty-Fourth Conference, 1926, 382–383. See also the project on ‘Diplomatic protection’, prepared by the American Institute of International Law in 1925, reprinted in (1956) YBILC, vol. II, 227; Draft convention on the responsibility of States for injuries caused in their territory to the person or property of aliens, prepared by the German Society of International Law, translated in (1969) YBILC, vol. II, 149– 151. 12 (1929) 23 AJIL Special Supplement, 131, reprinted (albeit without commentaries) in (1956) YBILC, vol. II, 229, annex 9. 13 (1929) 23 AJIL Special Supplement, 140. 14 (1969) YBILC, vol. II, 133, para. 46. 15 Draft Convention on the International Responsibility of States for Injuries to Aliens, reprinted in (1961) 55 AJIL 548. The draft without explanatory notes is also reprinted in (1969) YBILC, vol. II, 142. 16 See the very detailed Article 22.

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Amador’s work17 the revised Harvard Draft too had no lasting impact on the work of the ILC. On the regional level, the International Conferences of American States and 14 the Inter-American Juridical Committee engaged in preparing recommendations and principles in the field of State responsibility,18 and even a Convention.19 Finally, there are also drafts elaborated by individual German scholars20 who, quite interestingly, approached State responsibility from a more general perspective, by not limiting it to the breach of specific obligations in the field of the law concerning foreigners. b) The League of Nations and the Hague Conference (1925–1930)

As for institutional efforts, the Hague Conference was the first, and in fact the 15 only ‘official’, body until the International Law Commission to assume the task of codifying the law of State responsibility.21 That effort was undertaken in a three-tier process. In 1924, the Assembly of the League of Nations requested the League’s Council to convene a committee of experts (representing ‘the main forms of civilization and the principal legal systems of the world’) to set up a provisional list of topics of international law apparently suitable for codification, of preliminary reports and memoranda upon each, of questionnaires on these submitted to governments, analysis and arrangement of the replies thereto. The committee held four sessions from 1925 to 1928. Already during the general debate it soon became clear that the Committee of Experts, consisting of 17 members, significantly disagreed on its mandate.22 The questions raised ranged from 17 See below B.3.a). 18 Recommendation concerning ‘Claims and Diplomatic Intervention’, adopted at the First International American Conference (Washington, 1889–1890), reprinted in (1956) YBILC, vol. II, 226; Resolution on ‘International Responsibility of the State’, adopted at the Seventh International Conference of American States (Montevideo, 1933), reprinted in ibid.; Principles of international law that govern the responsibility of the State in the opinion of the Latin American States, prepared by the Inter-American Juridical Committee in 1962, reprinted in (1969) YBILC, vol. II, 153; Principles of international law that govern the responsibility of the State in the opinion of the United States of America, prepared by the Inter-American Juridical Committee in 1965, reprinted in ibid. 19 Convention relative to the rights of aliens, signed at the Second International Conference of American States (Mexico City, 1902), reprinted in (1956) YBILC, vol. II, 226. 20 See, e.g., Draft treaty concerning the responsibility of a State for internationally illegal acts, prepared by Professor Strupp in 1927 (Karl Strupp, Die völkerrechtliche Haftung des Staates insbesondere bei Handlungen Privater, Abhandlung zur fortschreitenden Kodification des internationalen Rechts, Heft 1, Kiel, 1927), translation in (1969) YBILC, vol. II, 151–152; Draft convention on the responsibility of States for International wrongful acts, prepared by Professor Roth in 1932 (Anton Roth, Das völkerrechtliche Delikt vor und in den Verhandlungen auf der Haager Kodifications Konferenz 1930 [1932] 177–178), translated in ibid., 152. 21 Clémentine Bories, ‘The Hague Conference of 1930’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 61; Yoshiro Matsui (n. 5) 24–40. For contemporary conference reports see Jesse S. Reeves, ‘The Hague Conference on the Codification of International Law’ (1930) 24 AJIL 52; Manley O. Hudson, ‘The First Conference for the Codification of International Law’, (1930) ibid., 447; Green H. Hackworth, ‘Responsibility of States for Damages Caused in Their Territory to the Person or Property of Foreigners’, ibid., 500; Edwin M. Borchard, ‘“Responsibility of States,” at the Hague Codification Conference’, ibid., 517.

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the meaning of codification, especially whether it should be confined to existing law or also develop it further, the desirability to include questions of private international law or whether it was necessary to study the methods which might lead to the unification of national law. Eventually, the committee appointed a Drafting Sub-Committee entrusted with the task of ‘collating the various lists of subjects’.23 Among the subjects chosen by that committee was ‘Responsibility of a State for Crimes [sic] committed against Foreigners’.24 For each of the subjects, a sub-committee was established. The Sub-Committee for Responsibility, whose ‘mandate’ included the question to examine a possible drafting of a convention,25 submitted a report entitled ‘Responsibility of States for Damage Done in Their Territories to the Person or Property of Foreigners’ which had largely been drafted by Rapporteur Gustavo Guerrero.26 Throughout his report, Guerrero favoured equal treatment of foreigners with nationals over an international standard of protection, and it was mainly for this reason that the report was heavily criticised by several members of the committee as not reflecting international practice or international law.27 The report was adopted by the committee only after several modifications and, tellingly, only as ‘the personal work of the Rapporteur’.28 16 After State governments had considered the topic of State responsibility for injuries to foreigners ripe for codification in 1927,29 the Assembly of the League agreed to limit the programme of codification to three subjects, among them State responsibility,30 and decided to convene a first Codification Conference which should also deal with the topic of State responsibility. For that purpose the Council was asked to appoint a Preparatory Committee that should elaborate detailed bases of discussion in order to facilitate the work of the conference. Initially it was intended to prepare complete drafts which might be used to serve as a detailed starting point for the negotiations at the conference. But, as the experience of the Committee of Experts showed, this soon turned out to be impossible for lack of time and (financial) resources.31 The committee held three sessions in

22 See the summary in Shabtai Rosenne (ed), League of Nations Committee of Experts for the Progressive Codification of International Law (Oceana Publications, 1972), vol. I, xlii-lii. 23 Ibid., 27. 24 Ibid., 34. 25 The somewhat enigmatic mandate of the Sub-Committee was to examine ‘(1) Whether, and in what cases, a State may be liable for injury caused on its territory to the person or property of foreigners; (2) Whether and, if so, in what terms it would be possible to contemplate the conclusion of an international convention providing for the ascertainment of the facts which may involve liability on the part of a State, in prohibiting in such cases recourse to measures of coercion before the means of pacific settlement have been exhausted’. Ibid., 49. 26 Ibid., vol. II, 118; also reprinted in (1926) 20 AJIL 177. 27 See the discussion ibid., vol. I, 75–101. 28 Ibid., 172. 29 Ibid., vol. II, 1–2 and 116–117. 30 League of Nations Official Journal, special supplement no. 54, Records of the 8th ordinary session, Plenary meetings, 484–488, Annex 35. The two other subjects were nationality and territorial waters.

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1928 and 1929, and within this relatively short period of less than two years, and in light of the replies from governments to questionnaires, it drew up ‘Bases of Discussion’ on each subject.32 Somewhat surprisingly, the Bases of Discussion deviated in some respects from the work of the Committee of Experts. For example, when replies from the governments displayed divergent opinions on a question, the committee would virtually always opt for one that affirmed responsibility or that provided for responsibility broader in scope.33 Furthermore, unlike Guerrero’s report, they clearly advocated an international standard of justice. To be sure, these changes did not indicate a new direction in the committee’s approach to State responsibility as its work still focused on the responsibility of States for damage done in their territories to the persons or property of foreigners, since after all this was the mandate of the Preparatory Committee.34 But it nevertheless significantly compromised the preparatory work carried out by both the Committee of Experts and the Preparatory Committee. The Hague Conference itself was held from 13 March to 12 April 1930 and 17 attended by 47 States. Overall, it was not successful in exercising its mandate in relation to State responsibility. This was clearly expressed by the oral communication of the chairman of the Third Community, that is, the committee on State responsibility, J. Basdevant, who tersely said: ‘I have the honour to report to the Conference that the Third Committee has been unable to finish the examination of the questions relating to the responsibility of States (…). The Third Committee accordingly is not in a position to submit to the Conference any conclusions on this point.’35 The reasons for the almost total failure of the Third Committee are manifold. 18 Some of them concerned the Hague Conference as a whole. In the first place, the conference was under extreme time pressure as only four weeks were allocated to produce a draft convention in each of the topics selected. Secondly, although five years had been devoted to preparing the drafts, and while the work of both the Committee of Experts and the Preparatory Committee was extraordinary in terms of substantive analysis of the various issues, the conference was insufficiently prepared.36 The list of errors includes rather ‘technical’ flaws, such as the 31 Manley Hudson (n. 20) 464; Shabtai Rosenne, League of Nations Conference for the Codification of International Law (1930), vol. I, xviii. 32 For the bases of discussion concerning responsibility and the responses see League of Nations Conference for the Codification of International Law (n. 31), vol. II, 432–702. 33 Yoshiro Matsui (n. 5) 29. 34 This despite the suggestions of some States, see for instance the observations by Germany: ‘Most authorities on international law, however, consider the problem of the responsibility of States in its more restricted sense, as distinct from the law of foreigners. They argue that the responsibility of States does not include all the duties of a State with regard to the treatment of foreigners, but amounts merely to the determination of the conditions under which such responsibility arises when the corresponding rules of international law are broken (…) After careful consideration of the problem, the German Government has come to the conclusion that (…) it will be desirable to limit the discussion (…) to the problem of the responsibility of States in the more restricted sense.’ League of Nations Conference (n. 31), vol. II, 166. 35 Ibid., vol. III, 745–746.

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composition of the Preparatory Committee37 – which led to discontinuance, in relation to the Committee of Experts, in terms of the preparation of the issues and the contents of the work38 – or the chaotic organisation and conduct of the conference itself;39 but also more ‘tactical’ errors, such as the little involvement by the Committee of Experts of participating States in preparing the Bases of Discussion40 or the undecidedness of the idea and purpose of codification,41 were crucial for the generally disappointing outcome of the conference. 19 Other reasons for failure related specifically to the topic of State responsibility. In particular, and despite the earlier assumption of the Committee of Experts, the topic was obviously not yet ripe for codification.42 Unsurprisingly, the main bone of contention was the deep disagreement on the substantive standard of protection of foreigners. The committee floundered on the cardinal question of whether foreigners were entitled to preferential treatment over, or at least equal treatment with, the nationals of the host State.43 As a matter of principle, the topic of State responsibility seems to have affected the vital interests of many States, a fact that prevented any political compromise.44 To select State responsibility as a topic for codification ultimately turned out to be too daring a choice. This problem was again exacerbated by the overly ambitious agenda for the little time allotted to the conference. In fact, the Third Committee could only spend 50 or so hours for its deliberations.45 It soon realised that not all of the Bases of Discussion could be fully examined and hence focused on the more fundamental issues.46 But it is precisely here that the conference indeed produced some results that proved to have lasting significance. 20 Thus, while some contemporary commentators were extremely harsh in their assessment of the conference,47 it may well be said that its efforts are not to be 36 Ramaa P. Dhokalia, The Codification of Public International Law (Manchester University Press, 1970) 128. 37 The Committee consisted of five members appointed by the League Council, four of whom came from Western Europe and the fifth from Latin America. 38 Yoshiro Matsui (n. 5) 29. 39 See ibid., 38; Clémentine Bories (n. 21) 6. 40 Ramaa Dhokalia (n. 36) 121. See also League of Nations Conference for the Codification of International Law (n. 31), vol. I, xxxv, speaking of the weaknesses in the ‘diplomatic aspects’ of the preparatory work of the conference. 41 Ramaa Dhokalia (n. 36) 129. 42 Alain Pellet, ‘La Codification du droit de la responsabilité internationale: tâtonnements et affrontements’ in Laurence Boisson de Chazournes and Vera Gowlland-Debbas (eds), The International Legal System in Quest of Equity and Universality. Liber Amicorum Georges AbiSaab (Martinus Nijhoff, 2001) 285, 287. 43 Manley Hudson (n. 21) 460; Yoshiro Matsui (n. 5) 38. 44 League of Nations Conference (n. 31), vol. I, xli. 45 Yoshiro Matsui (n. 5) 38. 46 In fact, only ten out of thirty-one Bases of Discussion were discussed. See the draft report of the Rapporteur of the Third Committee (Charles de Visscher), in League of Nations Conference (n. 31), vol. IV, 1661. 47 In a speech to the Grotius Society, Sir Cecil Hurst for instance delivered a devastating critique, saying that the Conference ‘was ushered in with high hopes and ended in dismal failure’ as it ‘achieved nothing worth speaking of beyond a series of disagreements’. Cecil Hurst, ‘A

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underestimated even with regard to the topic of State responsibility on which the work of the conference was the least successful. A number of rules and principles, notably on the origin of State responsibility, which today are beyond dispute but which were not generally shared at the time, were agreed upon.48 For instance, the conference acknowledged the principle according to which a State cannot escape its responsibility under international law by invoking its municipal law, something not self-evident then.49 It further clarified that a breach of international law may be committed by any State organ, whether it exercises legislative, judicial or executive functions and irrespective of whether it acted outside its competences. Agreement was also reached on the principle that responsibility entails the obligation to make reparation for the damage caused by the breach and that the local remedies have to be exhausted before the victim State may raise a claim. That the conference left its mark even on the 2001 ILC Articles is borne out by the fact that the commentaries refer to it – notably the detailed Bases of Discussion – on several occasions.50 As a final remark, it is telling that the principles agreed upon by the confer- 21 ence pertain to what is commonly categorised as secondary norms, whereas it totally failed to reach any agreement on the substantive obligations, that is, the primary norms. This can perhaps be seen as a first sign indicating a new direction of the development of the law of State responsibility that eventually resulted in the latter’s conceptual transformation during the work of the International Law Commission. Yet it was not until its second attempt to codify the law of State responsibility that the International Law Commission learned that lesson from the almost complete failure of the Hague Conference of 1930. 3. The Work of the ILC a) The Early Work

Within the United Nations, work on State responsibility kicked off with a 22 memorandum prepared by the UN Secretariat and entitled ‘Survey of Interna-

Plea for the Codification of International Law on New Lines’ (1946) 32 Transactions of the Grotius Society 135, 139. 48 See e.g. the judgement of the delegate of the United States to the Conference, Green H. Hackworth (n. 21) 515, stating that ‘[w]hile no tangible results were achieved (…) the Conference was beneficial, in that the discussions (…) marked some progress toward the crystallization of certain principles’. See also Ramaa Dhokalia (n. 36) 125; Clémentine Bories (n. 21) 64–65. 49 See e.g. the observations by Romania: ‘We cannot admit absolutely the principle (…) which presupposes the existence of an international law on a higher plane than the constitution and internal law of the various States. In principle, a sovereign State may enact any measures it thinks necessary to ensure its existence, and no restriction can be imposed upon it in this respect without interfering with its independence (…)’. League of Nations Conference (n. 31), vol. II, 445 (paragraph break suppressed). 50 See e.g. commentary to Article 3, para. 5; commentary to Article 4, paras. 4 and 8; commentary to Article 5, para. 4; commentary to Article 7, para. 3; commentary to Article 10, para. 13; introductory commentary to Part One, Chapter V, para. 5; commentary to Article 49, para. 2, n. 787.

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tional Law in Relation to the Work of Codification of the International Law Commission’.51 That survey listed a number of selected topics for codification among which featured the treatment of aliens – under the section on the individual in international law – and the law of State responsibility as distinct sections. This clearly shows that already at this preliminary stage of codification in the ILC, the law of State responsibility was viewed as independent of, though still related to, the law on the treatment of aliens. On the basis of the Secretariat’s memorandum, the ILC decided at its first session to include these two topics in its provisional list of topics for codification.52 It was however not until 1953 that the General Assembly requested the ILC ‘to undertake the codification of the principles of international law governing State responsibility’.53 Yet given its workload at the time, it took the Commission another four years to appoint Francisco V. García Amador as Special Rapporteur.54 23 As its whole history shows, the topic of State responsibility still was anything but uncontroversial. For Western States, State responsibility meant the substantive body of law on the treatment of foreigners abroad, whereas ‘other’ States, in particular in Latin America, thought that the most important aspect of State responsibility was that it limited the exercise of diplomatic protection and to thus uphold the sovereignty of the host State as far as possible. García Amador was well aware of that split of opinion and attempted to overcome this ‘traditional’ divide. He presented six reports between 1956 and 1961. 24 His first report was very innovative and departed from the traditional approach of diplomatic protection in the field of injuries to aliens.55 He basically combined, by way of a suggested synthesis, the concept of diplomatic protection with the ‘international recognition of the essential rights of man’. Thus while conceptually still confining the topic to responsibility for injuries to foreigners and hence also equating the consequences of international responsibility with reparation, García Amador strongly advocated a human rights approach to State responsibility, where the individual not only enjoyed, in a substantive sense, fundamental rights, but would also have the capacity to enforce and directly claim those rights against the respondent State. As such, direct recourse by the individual would supplement diplomatic protection by the State and provide a tool to mitigate the shortcomings of the latter.56 Furthermore García Amador also envisaged a place for criminal law aspects within State responsibility, including the 51 Survey of International Law in Relation to the Work of Codification of the International Law Commission: Preparatory work within the purview of article 18, paragraph 1, of the International Law Commission – Memorandum submitted by the Secretary-General, A/CN. 4/1/ Rev. 1, available at http://legal.un.org/ilc/documentation/english/a_cn4_1_rev 1.pdf. 52 (1949) YBILC 281. 53 Request for the Codification of the Principles of International Law Governing State Responsibility, GA Res. 799 (VIII). 54 (1955) YBILC, vol. I, 190; ibid., vol. II, 42. See Daniel Müller, ‘The Work of García Amador on State Responsibility for Injury Caused to Aliens’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 69–74. 55 Francisco García Amador, International responsibility, (1956) YBILC, vol. II, 173.

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remedy of punitive damages. In sum, as Philip Allott noted, García Amador’s concept, at least initially, was ‘full of dramatic views as to the very nature of international law and many of its leading principles’.57 However, as is well known, García Amador’s ideas were not approved either 25 by the commission or by the member States. He subsequently toned down his approach significantly and his second report was but a pale shadow of the first. Yet even his humble proposals that were ‘purified’ to the traditional law of State responsibility for damage caused to the person and property of foreigners, were not substantially discussed in the commission, not only because of the ambitious agenda of the commission at the time – which seems to have been a pretext or a polite representation of a more complex reality – or because of the enlargement of the commission from 15 to 21 members. The main reason for the commission’s ignorance was the fact that García Amador’s work again met with widespread disapproval. The commission’s divisiveness and undecidedness suggested that there was no agreement as to the way forward. It is probably an irony of history that one of the most progressive ideas of García Amador’s, that is the concept of capacity of individuals to enforce their own rights in case of breach, has in the meantime been realised in some important areas of international law, such as human rights law and investment law, and that this realisation has had an enormous influence on the confirmation and strengthening of the law of State responsibility as expressed in the ILC Articles. b) A New Approach

Given the importance of the topic, the commission decided to go ahead and to 26 start the work on State responsibility afresh in 1963. With Roberto Ago, first as chairman of the relevant sub-committee and subsequently as (second) Special Rapporteur, the whole project underwent a veritable ‘revolution’.58 The linchpin for the new approach was the detachment, for the purpose of codifying the rules of State responsibility, of the substantive rules whose breach might give rise to responsibility (the so-called ‘primary norms’) from the rules that regulate the 56 This could have offered the ideal basis for political compromise: on the one hand Amador’s approach would have made the codification of State responsibility more acceptable to the Latin American States as diplomatic protection would only have taken a subsidiary role. On the other hand, direct action by the individuals affected would have made enforcement of their rights more effective and less dependent on the political imponderabilities of the exercise of diplomatic protection. 57 Philip Allott, ‘State Responsibility and the Unmaking of International Law’ (1988) 29 Harvard Int’l L. J. 503, 507. But see Richard B. Lillich, ‘The Current Status of the Law of State Responsibility for Injuries to Aliens’ in Richard B. Lillich (ed), International Law of State Responsibility for Injuries to Aliens (University Press of Virginia, 1983) 18–19, stating that Amador ‘was not so much “bridging the gap” between the international minimum standard and the national treatment doctrine as he was adopting the former and then progressively developing it by vouching in contemporary international human rights norms’. 58 Alain Pellet, ‘The ILC’s Articles on State Responsibility for Internationally Wrongful Acts and Related Texts’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 75, 76–78 (with bibliographical references at 92–94).

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‘origin’ of responsibility, particularly those concerning the faits générateurs (i.e. the constitutive elements generating responsibility), as well as the content (notably reparation) and implementation of responsibility (especially invocation and countermeasures). This enabled Ago to focus on the general rules of responsibility that apply to each and every breach irrespective of the nature of the specific norm breached or the holder of the right at issue. As such, responsibility was no longer confined to the consequences of a breach, damage was no longer considered a constituent element of wrongfulness, and the conceptual understanding Ago introduced into the ILC paved the way for the elaboration of a general theory of State responsibility that has proved valid until today.59 27 Under the lead of Roberto Ago, the Commission adopted 35 Draft Articles, making up Part One of the Draft. Of Special Rapporteur Willem Riphagen’s proposed set of articles on the content, forms and degrees of State responsibility the commission only adopted five Articles provisionally. The text was finished by Special Rapporteur Gaetano Arangio-Ruiz who not only covered the content and forms of responsibility, but also its implementation. By 1996, the ILC completed the first reading of the Draft, consisting of 60 Articles and two annexes (on dispute settlement by conciliation and arbitration, respectively). As to both its structure and content the 1996 Draft was a well-elaborated text which however raised a number of – often minor – technical problems, but also more significant questions. As to the former, the text adopted on first reading suffered from many general drafting deficiencies, such as excessive prescription and over-refinement, and it injected far more complexity into the draft than necessary. In particular, the provisions on attribution consisted of a series of convoluted articles establishing a typology of obligations, which turned out to be unnecessarily complex, unhelpful and even counterproductive because the distinction did not entail any significant consequence.60 The same holds true for cumbersome definitions, such as that on the injured State (Draft Article 40), which were hardly understandable even if one read the commentary carefully. 28 In hindsight, the articles adopted on first reading, as compared to those finally adopted, give the impression of an attempt to detailed statutory regulation in an exhaustive manner, rather than of a set of rules which seeks to give real and firm guidance for State conduct in everyday inter-State relations. This result was perhaps partly due to the fact that the Special Rapporteurs during the first reading had a civil law background. In that respect, it was certainly an advantage that the last Special Rapporteur, James Crawford, represented the common law tradition, which emphasises pragmatic and practice-oriented approaches, much more than does the civil law tradition. On the other hand, it was no doubt an achievement 59 See the recommendation of the sub-committee in (1963) YBILC, vol. II, 228, para. 5, endorsed by the Commission, ibid., vol. I, 86, para. 75. Ago also provided for the general structure of the draft, consisting of three main parts, see YBILC (1975), vol. II, 56, para. 41. 60 See James Crawford, The International Law Commission’s Articles on State Responsibility (Cambridge University Press, 2002) 20–23.

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of the civil law tradition to provide the project with an overall structure which proved to be coherent and comprehensive and which stood the test of time. Among the more substantial problems of the text adopted on first reading fig- 29 ured the idea of international crimes of States which eventually was abandoned and replaced by the concept of serious breaches of obligations arising under peremptory norms of general international law (Part Two, Chapter III). Former Part Three on the settlement of disputes, containing obligatory conciliation for all disputes concerning the application of the draft and obligatory arbitration for all disputes concerning countermeasures, was deleted as dispute settlement is not specific to the topic of State responsibility and, moreover, as the proposed articles were not approved by most States. In terms of reparation, the focus shifted from the wrongdoing State and its obligations to the injured State and its rights. Furthermore, the structure of the regime of countermeasures was improved and the substantive and procedural limitations were refined. Finally, the commission and the General Assembly left open the question of the form of the Articles, a decision that proved to be wise in the end. For the Articles are regularly applied and invoked in practice even though – or perhaps precisely because – they are not per se binding, but generally considered reflective of customary international law. Thus it may be said that the impact of the Articles does not hinge on the conclusion of a convention; quite to the contrary, the latter approach might have been detrimental to their effect in practice, given the possibility of only few States ratifying the treaty, or of watering down individual provisions through or reservations or even substantial amendment by a State conference. C. Conceptual Issues concerning State Responsibility in Relation to Investment Law 1. The Hybrid Nature of Investment Law

Unlike the general law on State responsibility, which is well entrenched in, 30 and forms part of, ‘traditional’ public international law, international investment law is multi-layered. It conceptually and structurally differs from traditional public international law in that it not only provides for norms protecting legal interests between States but also – and in fact mainly – governs the relationship between the host State and the investor. In this sense one may speak of the ‘hybrid nature’ of investment law.61 While these two sets of relationships in investment law (State/State and State/investor) theoretically are designed to perform complementary functions in terms of responsibility and enforcement, they assume a quite distinct position in practice, notably when it comes to enforcement.

61 Zachary Douglas, ‘The Hybrid Foundations of Investment Treaty Arbitration’ (2003) 74 BYIL 152 passim.

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This double feature is implied in any international treaty on investment protection, be it a specific bilateral investment treaty, a sectoral or regional treaty (such as the Energy Charter Treaty or NAFTA), or a treaty providing for a procedural framework for investment dispute settlement, notably the ICSID Convention. The main expression of this double layer are the respective dispute settlement provisions providing for investor-State arbitration for disputes concerning the investment, on the one hand, and State-to-State arbitration or adjudication for disputes between the contracting parties of the BIT or the ICSID Convention. Direct disputes between contracting States may concern a number of different issues, such as matters of general treaty law (for instance interpretation or termination), breach of (treaty) obligations, responsibility and implementation (particularly diplomatic protection), procedural aspects such as the relationship between investor-State arbitration and State-to-State arbitration, or recognition and enforcement of arbitral awards.62 32 Given the overall effectiveness of investor-State arbitration, cases involving disputes arising directly as between the host State and the home State of the investor are extremely rare. Yet such disputes have occurred in practice63 and may also touch upon issues of responsibility. Thus in Italy v. Cuba, Italy exercised diplomatic protection on behalf of several companies and claimed violation of its own rights under the Italy–Cuba BIT. In its submissions, Italy alleged a number of breaches of the BIT and claimed the whole range of remedies under the law of State responsibility (cessation, guarantees of non-repetition, compensation, and satisfaction).64 While the tribunal rejected these claims, partly on jurisdictional and merits-related grounds, it did in principle – and by analogy to Article 27 of the ICSID Convention – uphold the right of the national State of the investor to exercise diplomatic protection, at least in situations where the investor has not (yet) consented to international arbitration with the host State, or submitted the dispute to arbitration.65 Thus, Italy v. Cuba illustrates some of the State responsibility aspects raised by, and inherent in, the hybrid nature of investment law. 31

62 See Zachary Douglas, ‘Other Specific Regimes of Responsibility: Investment Treaty Arbitration and ICSID’ in James Crawford, Alain Pellet and Simon Olleson (eds) (n. 6) 815, 816– 817. 63 Empresas Lucchetti v. Peru, ICSID No. ARB/03/4, Award on Jurisdiction, 7 February 2005, paras. 7 and 9 (in which the host State challenged the jurisdiction of the ICSID tribunal by initiating inter-State proceedings under the BIT and by seeking suspension of the investorState arbitration which, however, was denied); Ecuador v. USA, PCA (unpublished, but the tribunal declined jurisdiction absence a dispute; Ecuador obviously wanted to challenge an earlier interpretation by the investor-State arbitral tribunal of a provision of the BIT, see Dapo Akande, ‘Ecuador v. United States Inter-State Arbitration under a BIT: How to Interpret the Word “Interpretation”?’ EJIL: Talk!, available at http://www.ejiltalk.org/ecuador-v-unitedstates-inter-state-arbitration-under-a-bit-how-to-interpret-the-word-interpretation. 64 Italy v. Cuba, Interim Award, 15 March 2005, Final Award, 1 January 2008, available at http:// www.italaw.com/cases/580. See Michael Potestà, ‘Case Note’ (2012) 106 AJIL 341. 65 Italy v. Cuba, Interim Award (n. 63) para. 65. But see Zachary Douglas (n. 61) 189–193.

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2. The Scope of the ILC Articles on State Responsibility a) General

As mentioned above, the ILC Articles on State Responsibility are the yard- 33 stick for any assessment of issues of responsibility in international law, whatever the precise subject. However, in order to adequately ascertain the significance of the law of State responsibility to international investment law it is necessary to answer the question whether the Articles are applicable at all to investment law, especially where that law regulates the relationship between States and investors as non-State entities. For a start, this question seems moot as the very idea of the codification of the rules of State responsibility by the ILC precisely was to establish a general set of (secondary) rules that, as the ILC Commentary points out, ‘apply to the whole field of the international obligations of States, whether the obligation is owed to one or several States, to an individual or group, or to the international community as a whole’.66 This is illustrated by the broad approach in Article 2 which only sets forth two conditions for the existence of an internationally wrongful act, namely conduct which (a) is attributable to a State under international law, and (b) constitutes a breach of an international obligation of that State. However, the Articles do not contain a provision that lays down their scope in a general, unitary way, but distinguish as to their scope between their individual parts. Accordingly, the scope of these parts must be determined by way of contextual interpretation.67 Thus, while the idea of the rules on State responsibility as a coherent ‘system’ 34 of rules is a recurring feature of the Articles,68 it is crucial to point out that it is limited to Part One of the Articles,69 dealing with the concept of the internationally wrongful act, that is, the origin of State responsibility. The situation with regard to other parts, especially Part Two on the content and implementation of re66 Preliminary Commentary to the ILC Articles, para. 5 (emphasis added). 67 The problem of the scope of the Articles cannot be avoided or circumvented simply by arguing that the Articles mirror customary law because the binding force of the Articles can in any case only be derived from this source. What is more, the customary character cannot dispose of the problem that the substantive or personal scope of the Articles themselves, independent of their source, is allegedly confined to inter-State obligations. In other words, if the scope of the rules on State responsibility is limited, this is so irrespective of whether the applicable rules derive from custom or not. See however Kaj Hobér, ‘State Responsibility and Attribution’ in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 549, 553, concluding that the Articles in their entirety are applicable to investment arbitration qua customary law. 68 See the commentary to Article 1, para. 5: ‘Thus the term “international responsibility” in article 1 covers the relations which arise under international law from the internationally wrongful act of a State, whether such relations are limited to the wrongdoing State and one injured State or whether they extend also to other States or indeed to other subjects of international law’ (emphasis added). The commentary to Article 12, para. 12 similarly states that ‘there is a single régime of State responsibility’. 69 This is for example expressed in the above-mentioned commentary to Article 12 which, in its full wording, provides that ‘[a]s far as the origin of the obligation breached is concerned, there is a single general régime of State responsibility’.

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sponsibility, clearly is different. Most importantly, Part Two contains an express provision on its scope. Article 33 stipulates that ‘[t]he obligations of the responsible State set out in this Part may be owed to another State, to several States, or to the international community as a whole, depending in particular on the character and content of the international obligation and on the circumstances of the breach’ (para. 1), and further that Part Two ‘is 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’ (para. 2). Now this would clearly suggest that in contrast to Part One of the ILC Articles, Part Two is confined to setting out the rules on the content of the responsibility for breach of inter-State obligations only.70 35 This reading is further confirmed by the commentary to the Articles. In the first place, the commentary to Article 28,71 which introduces Part Two, provides: Article 28 does not exclude the possibility that an internationally wrongful act may involve legal consequences in the relations between the State responsible for that act and persons or entities other than States. This follows from article 1, which covers all international wrongful obligations of the State and not only those owed to other States. Thus State responsibility extends, for example, to human rights violations and other breaches of international law where the primary beneficiary of the obligation breached is not a State. However, while Part One applies to all the cases in which an internationally wrongful act may be committed by a State, Part Two has a more limited scope. It does not apply to obligations of reparation to the extent that these arise towards or are invoked by a person or entity other than a State. In other words, the provisions of Part Two are 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, and article 33 makes this clear.72

Similarly, the Introductory Commentary to Chapter 1 of Part Two clarifies that ‘article 33 specifies the scope of the Part, both in terms of the States to which obligations are owed and also in terms of certain legal consequences which, because they accrue directly to persons or entities other than States, are not covered by Parts Two or Three of the Articles’.73 37 As for Part Three of the Articles, entitled ‘The Implementation of the International Responsibility of a State’, a perusal of the relevant Articles shows that they are invariably formulated in terms of the injured State or, per Article 48, of a State ‘other than the injured State’. On that basis, the commentary to Article 33 expressly states that the ‘articles do not deal with the possibility of the invocation of responsibility by persons or entities other than States’ and refers to the 36

70 Zachary Douglas, The International Law of Investment Claims (Cambridge University Press, 2009) 97; id., ‘Specific Regimes of Responsibility: Investment Treaty Arbitration’ in James Crawford, Alain Pellet and Simon Olleson (eds), The Law of International Responsibility (Oxford University Press, 2010) 815, 820. 71 Article 28, entitled ‘Legal consequences of an internationally wrongful act’, provides that ‘[t]he international responsibility of a State which is entailed by an internationally wrongful act in accordance with the provisions of Part One involves legal consequences as set out in this Part’. 72 Commentary to Article 28, para. 3 (emphasis in the original). 73 Introductory Commentary to Part Two, Chapter 1, para. 1 in fine.

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relevant primary norm to determine whether and to what extent persons or entities other than States are entitled to invoke responsibility on their own account.74 Thus the Articles concerning both the invocation of responsibility and countermeasures do not apply in relation between a wrongdoing State and a non-State entity as victim of the breach. This contextual interpretation of the Articles clearly shows that only Part One 38 of the ILC Articles is applicable to investor-State relations, whereas Parts Two and Three are confined to inter-State relations. For international investment law this means that the Articles in their entirety only apply in the extremely rare cases of inter-State disputes between State parties to a BIT.75 And yet, most investment tribunals in investor-State disputes do refer to the Articles without distinction as to questions of attribution – to which the Articles apply – or of reparation – to which they do not. The point of the scope of the Articles is hardly ever made in the practice of investment arbitration. An exception in this regard was the tribunal in Wintershall Aktiengesellschaft v. Argentina, which expressly invoked Article 33 and concluded that [t]he ILC’s Articles on State Responsibility is a detailed and official study on the subject but it contains no rules and regulations of State Responsibility vis-à-vis non-State actors. Tribunals are left to determine ‘the ways in which State Responsibility may be invoked by non-State entities’ from the provisions of the text of the particular Treaty under consideration.76

Similarly, the annulment committee in MTD v. Chile referred to Article 33(2) 39 when stating that ‘Part II of the ILC Articles (…) is concerned with claims between States’.77 Other tribunals reach the same result by applying the lex specialis rule.78 For example, mingling the lex specialis with Article 33, the tribunal in Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. United Mexican States held: The customary international law that the ILC Articles codify do not apply to matters which are specifically governed by lex specialis – i.e., Chapter Eleven of the NAFTA in the present case. These matters also include the possibility of private claimants (who are nationals of a NAFTA Member State) invoking in an international arbitration the responsibility of another NAFTA Member State, as it is a matter of the particular provisions of Chapter Eleven to determine whether and to what extent persons or entities other than States are entitled to invoke responsibility on their own account. This is confirmed by Article 33 (2) of the ILC Articles, which provides that the customary rules on state responsibility codified by the ILC Articles operate ‘(...) 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.’ Customary international law – pursuant to which only sovereign States may invoke the responsibility of another State – does not therefore affect the rights of non-State ac-

74 Commentary to Article 33, para. 4. 75 See above section C.1. 76 Wintershall Aktiengesellschaft v. Argentina, ICSID Case No. ARB/04/14, Award, 8 November 2008, para. 113. 77 MTD Equity Sdn Bhd. & MTD Chile S.A. v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, para. 99. 78 The lex specialis rule is contained in Article 55 of the Articles which reads: ‘These articles do not apply where and to the extent that the conditions for the existence of an internationally wrongful act or the content or implementation of the international responsibility of a State are governed by special rules of international law.’

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Chapter 2: The Law Relating to Aliens tors under particular treaties to invoke state responsibility. This rule is not only true in the context of investment protection, but also in the human rights and environmental protection arena.79

40

To be sure, both tribunals ultimately went too far in holding that the ILC Articles did not contain any rules concerning responsibility in relation to non-State actors, or did not at all apply to matters governed by lex specialis. Furthermore, the lex specialis rule only operates if and to the extent there are specific rules applicable, whereas Article 33 generally renders Part Two of the Articles inapplicable irrespective of whether there are such specific rules. In any event, tribunals usually do not enter into such sophisticated discussions but take the Articles for granted and apply them or invoke them regardless of their expressly limited scope. This is particularly striking in the context of reparation, especially with regard to Articles 31,80 34,81 35,82 36,83 38,84 and 39,85 but also concerns other provisions.86

79 Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. Mexico, ICSID Case No. ARB(AF)/04/05, Award, 21 November 2007, para. 118. 80 CME Czech Republic B.V. v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, paras. 580, 583 and 616; LG&E Energy Corp., LG&E Capital Corp., LG&E International Inc. v. Argentina, ICSID Case No. ARB/02/1, Award on Damages, 25 July 2007, para. 31; BG Group plc. v. Argentina, UNCITRAL, Final Award, 24 December 2007, paras. 427– 428; Archer Daniels Midlands v. Mexico (n. 79) paras. 275 and 280; Joseph Charles Lemire v. Ukraine, ICSID Case No. ARB/06/18, Award, 28 March 2011, para. 147; Gemplus SA, SLP SA, Gemplus Industrial SA de C.V. and Talsud S. v. Mexico, ICSID Case Nos. ARB(AF)/04/3 and ARB(AF)/04/3, Award, 16 June 2010, at paras. 11.9–11.10, 11.12–11.13, 12.51, 13.79– 13.80, 13.82–13.83; Chevron Corporation and Texaco Petroleum Company v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, paras. 665–668 and 673; EDF International SA v. Argentina, ICSID Case No. ARB/03/23, Final Award, 11 June 2012, para. 1302 in n. 91. 81 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 399 in n. 211; Nykomb Synergetics Technology Holding AB v. Latvia, Award, 16 December 2003, 38–39; LG&E Energy Corp. (n. 80) paras. 32; Archer Daniels Midland Company (n. 79) para. 280. 82 Nykomb Synergetics (n. 81) 38–39; CMS Gas Transmission v. Argentina (n. 81) para. 400; Sempra Energy International v. Argentina, ICSID Case No. ARB/02/16, Award, 28 September 2007, para. 401; ADC Affiliate Limited and ADC & ADMC Management Limited v. Hungary, ICSID Case No. ARB/03/16, Award, 2 October 2006, paras. 494–495; Occidental Petroleum Corporation and Occidental Petroleum and Exploration Company v. Ecuador, ICSID Case No. ARB/06/11, Decision on Provisional Measures, 17 August 2007, para. 82; Desert Line Projects LLC v. Yemen, ICSID Case No. ARB/05/17, Award, 6 February 2008, para. 227; Burlington Resources Oriente Limited v. Ecuador and Empresa Estatal Petroleos del Ecuador, ICSID Case No. ARB/08/5, Procedural Order No. 1, 29 June 2009, para. 70. 83 Joseph Charles Lemire v. Ukraine (n. 80), paras. 151 and 155–156; Gemplus SA v. Mexico (n. 80), at paras. 13.79–13.83; CME v. Czech Republic (n. 80) para. 501; CMS Gas Transmission v. Argentina (n. 79) paras. 401–402; LG&E Energy Corp. v. Argentina (n. 80) paras. 41–43 and 51; ADC Affiliate v. Hungary (n. 82) paras. 494–495; Siemens A.G. v. Argentina, ICSID Case No. ARB/02/8, Award, 6 February 2007, paras. 349–352; Sempra Energy International v. Argentina (n. 80) para. 401.

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b) Open Questions

But the conclusion that Parts Two and Three are not applicable in investor- 41 State disputes raises a number of issues, some of them being uncomplicated, others being trickier. First of all, the Articles remain of course applicable in those cases where the State parties to a BIT or other international treaty (like the ICSID Convention) have a dispute.87 Given the fact that these cases are extremely rare and that they usually do not concern substantive matters of State responsibility, this situation is however negligible. Secondly, the fact that the ILC Articles concerning invocation and implementation are inapplicable is without prejudice to the enforcement of investor rights as they are usually guaranteed by specific dispute settlement clauses providing for direct access of the investor, notably to arbitral tribunals, in order to enforce his rights. As much is acknowledged in the ILC commentary to Article 33, where it is stated that ‘[i]n cases where the primary obligation is owed to a non-State entity, it may be that some procedure is available whereby that entity can invoke the responsibility on its own account and without intermediation of any State. This is true, for example, (…) in the case of rights under bilateral or regional investment protection agreements’.88 In any event, as the Italy v. Cuba case indicates,89 the national State of the investor may even exercise diplomatic protection on the inter-State level, at least as long as the investor has not consented to arbitration. However, one issue that raises a number of questions concerns the content of 42 State responsibility, particularly the forms of reparation. For it is difficult to see how the routine application of the modes and forms of reparation to investorState disputes is reconcilable with the clear and unambiguous restriction of the scope of Part Two in Article 33(2). Several considerations might help to sort that problem out.90 First of all, it is important to note that Article 33(2) is a saving 84 CME Czech Republic B.V. v. Czech Republic (UNCITRAL) Final Award, 14 March 2003, para. 647; Siemens A.G. v. Argentina (n. 83) paras. 394–396; Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case ARB/01/3, Decision on Claimant’s Request for Rectification and/or Supplementary Decision of the Award, 25 October 2007, paras. 45–47; SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Order on Further Proceedings, 17 December 2007, para. 16, n. 19. 85 MTD Equity Sdn Bhd. & MTD Chile S.A. v. Chile, ICSID Case No. ARB/01/7, Decision on Annulment, 21 March 2007, para. 99; Occidental Petroleum Corporation, Occidental Exploration and Production Company v. Ecuador, ICSID Case No. ARB/06/11, Award, 5 October 2012, paras. 665–668, 673; Joseph Charles Lemire (n. 80) para. 245. 86 Reference to Article 44 was made for example in The Loewen Group, Inc. and Raymond L. Loewen v. USA, ICSID Case No. ARB(AF)/98/3, Award, 26 June 2003, para. 149, and in Wintershall Aktiengesellschaft (n. 76) para. 126. In the Eurotunnel case, the tribunal referred to Article 47, see In the Matter of an Arbitration before a Tribunal Constituted in Accordance with Article 19 of the Treaty between the French Republic and the United Kingdom of Great Britain and Northern Ireland Concerning the Construction and Operation by Private Concessionaires of a Channel Fixed Link Signed at Canterbury on 12 February 1986, Partial Award of 30 January 2007, paras. 173–174. 87 See above C.1. 88 Commentary to Article 33, para. 4. 89 Above (n. 63).

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clause that suggests neither that the rules on State responsibility to individuals are the same as the ones applicable in inter-State relations, nor that they are different.91 Secondly, it must be recalled that the whole concept of State responsibility is but the manifestation of a general principle of law,92 according to which every unlawful act entails responsibility with specific consequences, irrespective of the nature of the person to whom the violated right accrues. And the specific forms of reparation, aimed at making good the damage caused, are general principles, too. This character as general principles, is evident in case of restitution and compensation (or the payment of damages), which are to be found in municipal private law as well and which, in the ILC Articles, are formulated in vague, because general, terms.93 43 It is against the background of these considerations that, in the context of the forms of reparation, particularly compensation, the ILC commentary itself heavily draws on the practice of courts and tribunals dealing with disputes and claims involving individuals. Thus, with regard to Article 36 on compensation, the commentary states that ‘[t]he rules and principles developed by these bodies in assessing compensation can be seen as manifestation of the general principle stated in article 36’.94 Examples of such ‘bodies’ mentioned include the Iran–US Claims Tribunal, human rights courts and, most importantly, also ICSID tribunals. If the rules on reparation contained in Part Two were not also applicable to relations between States and non-State entities or individuals, this reference would be completely out of place. In any event, it would be unreasonable for investor-State tribunals to ‘invent’ rules that would be different to those of the ILC Articles. This was for instance alluded to by the ad hoc committee in MTD v. Chile which, after stating that Article 39 on contribution to the injury is located in Part Two of the Articles which is concerned with claims between States, held that ‘[t]here is no reason not to apply the same principle of contribution to claims for breach of treaty brought by individuals’.95 Such an approach by analogy is also warranted by considerations of uniformity and consistency, unless of course the applicable law (as lex specialis) provides otherwise. Furthermore, given the lack of any other coherent body on the rules of responsibility and reparation applicable to the investor-State relation, ‘[t]here is simply no source of 90 For a thorough and convincing discussion of some of the problems involved see Martins Paparinskis, ‘Investment Treaty Arbitration and the (New) Law of State Responsibility’ (2013) 24 EJIL 617, 636–640. 91 Sergey Ripinsky and Kevin Williams, Damages in International Investment Law (BIICL, 2008) 30. 92 See above section A. 93 The situation is conceptually different in case of satisfaction which is a form of reparation that invariably applies in inter-State relations only. 94 Commentary to Art. 36, para. 6 (emphasis added). See also Ahmadou Sadio Diallo (Guinea v. Congo) (Compensation), ICJ Judgment, 19 June 2012, para. 13, invoking the case law inter alia of the European Court of Human Rights, the Inter-American Court of Human Rights, the Iran–US Claims Tribunal, and the UN Compensation Commission, ‘which have applied general principles governing compensation when fixing its amount’. 95 MTD v. Chile (n. 85) para. 99.

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guidance on the international law of compensation better than the Articles’.96 Finally, the vast practice of investor-State tribunals subsequent to the adoption of the ILC Articles that have consistently invoked and applied Part Two have ultimately not only confirmed the usefulness of the ILC Articles for settling questions of responsibility in investment law, but probably also constitutively enhanced the scope of the Articles.97

96 Sergey Ripinsky and Kevin Williams (n. 91) 31, referring also to David D. Caron, ‘The ILC Articles on State Responsibility: The Paradoxical Relationship between Form and Authority’ (2002) 96 AJIL 857, 866. 97 This is considered by Martins Paparinskis (n. 90) 639 as at least ‘provid[ing] the law-making seal of approval to the practice that may initially “have simply been wrong as a matter of law”’.

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III. The Protection of Individuals under Public International Law

Rainer Hofmann A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Individuals under Traditional Public International Law . . . . . . . . . . . . . . . . . . 1. Subjects of Public International Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. The Legal Status of Individuals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. The Essential Role of Diplomatic Protection . . . . . . . . . . . . . . . . . . . . . . . . .

5 6 7 8

C. Individuals under Contemporary Public International Law . . . . . . . . . . . . . . 1. Individuals as Subjects of Public International Law . . . . . . . . . . . . . . . . . a) Individuals as Holders of Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Individuals as Bearers of Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Human Rights and Their Enforcement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Universally Applicable Human Rights Treaties . . . . . . . . . . . . . . . . . . . b) Regionally Applicable Human Rights Treaties . . . . . . . . . . . . . . . . . . . . 3. Human Rights Protection Systems and Their Potential Relevance for International Investment Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10 11 12 15 17 18 20

D. Diplomatic Protection under Contemporary Public International Law. . 1. A Decline of the Relevance of Diplomatic Protection?. . . . . . . . . . . . . . 2. A Renaissance of the Relevance of Diplomatic Protection? . . . . . . . . 3. Diplomatic Protection under Contemporary Public International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Internationally Wrongful Acts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Nationality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Exhaustion of Local Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Means of Diplomatic Protection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27 28 31

E. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

44

24

35 36 37 42 43

Literature: Tillmann Braun, Ausprägungen der Globalisierung: Der Investor als partielles Subjekt im Internationalen Investitionsrecht (Nomos, 2012); John Dugard, ‘Diplomatic Protection’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (Oxford University Press, 2012), vol. III, 114–134; Simone Gorski, ‘Individuals in International Law’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (Oxford University Press, 2012), vol. V, 147–157; Walter Kälin and Jörg Künzli, The International Law of Human Rights Protection (Oxford University Press, 2009); Kate Parlett, ‘Diplomatic Protection and Investment Arbitration’ in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law (Nomos, 2011), 211–229; Christian Walter, ‘Subjects of International Law’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (Oxford University Press, 2012), vol. IX, 634–643.

A. Introduction

The scope and contents of the protection of individuals (understood throughout this contribution as encompassing both natural and legal persons) under public international law depends, to a very large extent, on the status accorded to the individual under public international law. Insofar, there is a most fundamental difference between the situation under traditional public international law and contemporary public international law. 2 Under the former (i.e. traditional public international law), States were the sole subjects of public international law, and the individual did not have any in1

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dividual rights under public international law or, if so, was unable to enforce them but dependent on the State of his or her nationality to enforce them by way of diplomatic protection. Therefore, under traditional public international law, diplomatic protection constituted the key element as concerns the actual protection of the individual (and his or her rights) under public international law. Under the latter (i.e. contemporary public international law), individuals have 3 acquired the status of (partial) subjects of public international law, at least as regards the field of human rights. In this field, the individual is also empowered by the various human rights instruments to enforce such human rights by action of him- or herself taken before the competent international monitoring bodies, be they human rights courts or other institutions. Notwithstanding all its shortcomings, this human rights machinery constitutes the most important element of the present system of protection offered to the individual by public international law and might be of particular relevance for the effective protection of foreign investments outside the scope of international investment law as such. This development results in the question as to whether diplomatic protection 4 still has a role to play in contemporary public international law. While the establishment of the present human rights protection system and the creation of modern international investment law providing the investor with individual rights not only as regards the actual legal protection of the investment, but also the procedural enforcement before international arbitral tribunals seemed to diminish the relevance of diplomatic protection, the pertinent work of the United Nations International Law Commission on Draft Articles on Diplomatic Protection, adopted in 2006, as well as the 2010 judgement of the International Court of Justice in the Diallo case might point to a renaissance of diplomatic protection in current and future public international law. B. Individuals under Traditional Public International Law

For the purposes of this paper, the term ‘traditional’ public international law 5 refers, in line with the dominant position in the literature,1 to the period between 1648, the year of the conclusion of the Westphalian Peace Treaties, and 1919 or 1945, the years in which the League of Nations or the United Nations were founded, respectively. The following overview is concerned with three elements of this ‘traditional’ public international law which are of central relevance for this paper, i.e. its subjects,2 the legal status of the individual3 and the essential 1 On the history of public international law, see Stephan Verosta, ‘History of International Law, 1648 to 1815’ in Rüdiger Wolfrum (ed), Max Planck Encyclopedia of Public International Law (MPEPIL) (Oxford University Press, 2012), vol. IV, 823–843; Hans-Ulrich Scupin, ‘History of International Law, 1815 to World War I’, ibid., 843–869; Martti Koskenniemi, ‘History of International Law, World War I to World War II’, ibid., 925–934; and Martti Koskenniemi, ‘History of International Law, Since 1945’, ibid., 902–925; all the articles published in the 2012 print edition of MPEPIL are also available in the online edition (www.mpepil.com), last visited on 31 October 2011.

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role of diplomatic protection as the only effective means to protect the rights of the individual during that period.4 1. Subjects of Public International Law 6

The Westphalian Peace Treaties created the Westphalian System5 which, at least in the Anglo-Saxon doctrine, seems to be tantamount to the traditional system of public international law as an international order characterised by States, in the 19th century national States, which interacted on the basis of sovereign equality. It is generally seen as an international legal order the primary purpose of which was to regulate the co-existence of States as the sole subjects of that international legal order and, therefore, international law; this order was not based on any value system, i.e. it did not have any primary goals such as, e.g., the preservation of peace. Notwithstanding the foundation of the first international organisations,6 States remained for quite some time the only (relevant) subjects of public international law: as international organisations were founded by States and their existence was fully dependant on the will of the States concerned, the international legal personality of such international organisations remained disputed. Moreover, this period of time was also characterised by the almost total demise of non-State subjects of public international law such as the Hanseatic League or other trading companies which previously had been able to act to quite a considerable extent within the realm of international law. Only very few non-State subjects of public international law maintained their status as subjects of international law such as the (Sovereign) Order of Malta7 after its expulsion from Malta by Napoleon I in 1798, or the Holy See8 after the end of the Papal States in 1870. 2. The Legal Status of Individuals

7

As to the legal status of individuals, it is clear that, under traditional public international law, individuals did not have, in principle, any legal personality.9 If 2 See e.g. James Crawford, Brownlie’s Principles of Public International Law (Oxford University Press, 2012), 115 et seq.; and Malcolm Shaw, International Law (Cambridge University Press, 2008), 195 et seq.; see also Christian Walter, ‘Subjects of International Law’ in MPEPIL (n. 1), vol. IX, 634–643. 3 See e.g. James Crawford (n. 2) 121; and Malcolm Shaw (n. 2) 257 et seq.; see also Simone Gorski, ‘Individuals in International Law’ in MPEPIL (n. 1), vol. V, 147–157. 4 See e.g. Edwin M. Borchard, The Diplomatic Protection of Citizens Abroad or the Law of International Claims (The Banks Law Publishing, 1916); and John Dugard, ‘Diplomatic Protection’ in MPEPIL (n. 1), vol. III, 114–134. 5 See e.g. Rainer Grote, ‘Westphalian System’ in MPEPIL (n. 1), vol. X, 870–874. 6 See e.g. James Crawford (n. 2) 166 et seq.; and Malcolm Shaw (n. 2) 1282 et seq.; see also Robert Kolb, ‘International Organizations or Institutions, History of’ in MPEPIL (n. 1), vol. VI, 1–10. 7 See e.g. Malcolm Shaw (n. 2) 243; see also Francesco Gazzoni, ‘Malta, Order of’ in MPEPIL (n. 1), vol. VI, 984–988. 8 See e.g. Malcolm Shaw (n. 2) 243; see also Gerd Westdickenberg, ‘Holy See’ in MPEPIL (n. 1), vol. IV, 953–958.

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they had been accorded some limited rights protected under international law, such as the freedom of religion guaranteed to the Christian minorities in the Ottoman Empire or the rights of some religious or ethnic minorities in Eastern Central Europe or the Balkans10 or the rights encompassed by the law of aliens11 as developed during the 19th century, such rights were always depending on action and guarantees by States; this meant that States were always in a position to limit such rights or even fully withdraw them. 3. The Essential Role of Diplomatic Protection

This legal status of the individual during that period has generally – and cor- 8 rectly – been described as the Mediatisierung12 of the individual: individuals could invoke such rights, if at all, only before the administrative authorities and judicial bodies of the respective State; they had no independent access to international courts or tribunals; standing before such institutions was limited to States only, which, in their capacity as subjects of public international law, could, by exercising their right to diplomatic protection, invoke the alleged violations of the rights accorded to their nationals under the law of aliens – and invoke them as rights of their own, i.e. rights of the State of nationality and not by way of claiming the rights of their nationals.13 Finally, it should be mentioned that this situation has not changed as regards many international courts and tribunals: suffice it to mention the International Court of Justice (ICJ) which, as concerns the issue of standing, is not different from its predecessor, the Permanent Court of International Justice (PCIJ). As the individual could not enforce his or her rights guaranteed under the law of aliens, i.e. under public international law, as public international law did not provide for any effective remedies to enforce such rights, the individual had to rely on action taken by his or her State of nationality as a subject of public international law. Thus, diplomatic protection played an essential – if not decisive – role in protecting such rights.14 9 See Simone Gorski (n. 3) mn. 11. 10 See e.g. Rainer Hofmann, ‘Religion und Minderheitenschutz’ in Andreas Zimmermann (ed), Religion und Internationales Recht (Duncker & Humblot, 2006) 157–181, 158; and Zdenka Machnyiková, ‘Religious Rights’ in Marc Weller (ed), Universal Minority Rights (Oxford University Press, 2007), 179–202. 11 See Stephan Hobe, ‘The Development of the Law of Aliens and the Emergence of General Principles of Protection under Public International Law’, ch. 2.I., 6–22; and Malcolm Shaw (n. 2) 823 et seq.; see also James Crawford (n. 2) 613–614; and Hollin Dickerson, ‘Minimum Standard’ in MPEPIL (n. 1), vol. II, 235–240. 12 See e.g. Kay Hailbronner und Marcel Kau, ‘Der Staat und der Einzelne im Völkerrecht’ in Wolfgang Graf Vitzthum (ed), Völkerrecht (de Gruyter, 2010) 159. 13 See e.g. John Dugard (n. 4) mn. 7; and Malcolm Shaw (n. 2) 810. This approach was approved by the Permanent Court of International Justice in the Mavrommatis Palestine Concessions Case (Greece v. Great Britain), Jurisdiction, PCIJ Series A No. 2, at 12 [see e.g. Robert Uerpmann-Wittzack, ‘Mavrommatis Concessions Case’ in MPEPIL (n. 1), vol. VII, 28–32] and later endorsed by the International Court of Justice in the Nottebohm Case (Liechtenstein v. Guatemala), Second Phase, ICJ Rep. 1955, 4, 24 [see e.g. Oliver Dörr, ‘Nottebohm Case’ in MPEPIL (n. 1), vol. VII, 839–843]. 14 On the history of diplomatic protection, see e.g. John Dugard (n. 4) mn. 3–4.

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Against this background, the main features and purposes of diplomatic protection have been rightly described as follows: ‘Under international law, a State is responsible for injury to an alien caused by that State’s wrongful act or omission. Diplomatic protection is the procedure employed by the State of nationality of the injured person to secure protection of that person, and to obtain reparation for the internationally wrongful act inflicted. Such protection extends to both natural and legal persons.’15 C. Individuals under Contemporary Public International Law

10

Since 1945, natural (and to some extent also legal) persons have acquired the status of subjects of public international law; this enlargement process has fundamentally changed the basic structure of international law and constitutes one of the most relevant elements of modern international law.16 1. Individuals as Subjects of Public International Law

11

In the framework of this contribution it is clearly impossible to address the various stages of this complex process or to discuss all the possible repercussions for the future international law; the focus must be on individuals, i.e. natural and legal persons, as holders of rights and possibly also bearers of duties under international law. a) Individuals as Holders of Rights

First, it is beyond any doubt that natural persons and, to some extent, also legal persons have become, as holders of human rights, partial subjects of international law. Initially, this was based on the regionally and universally applicable human rights treaties; presently, however, there seems to be no doubt that the basic human rights constitute customary international law and are, therefore, binding upon also those States which have not ratified the respective human rights instruments.17 13 Second, and this is much more important for natural and legal persons and their status as (partial) subjects of international law, such treaty-based human rights can be invoked before various international monitoring bodies by these persons themselves,18 and not only – and increasingly less so – by their States of nationality exercising their right to diplomatic protection. Such procedural human rights are best protected under the various regional human rights treaties, in particular the European Convention on Human Rights,19 but also the InterAmerican Convention on Human Rights (IACHR)20 and, possibly to a more li12

15 16 17 18

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John Dugard (n. 4) mn. 1. See e.g. Christian Walter (n. 2) mn. 15–18. See e.g. Malcolm Shaw (n. 2) 275. See e.g. Thomas Buergenthal, ‘Human Rights’ in MPEPIL (n. 1), vol. IV, 1021–1031, mn. 19–23.

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mited extent, the African Charter on Human and Peoples’ Rights.21 While it is true that the various UN human rights instruments do not provide for any competent court to hand down binding judgements, it ought to be stressed that all these treaties now foresee the possibility of addressing individual communications to the respective monitoring committees.22 In addition to human rights law, some other branches of (present) public inter- 14 national law are seen to accord rights to individuals. This applies, in particular, to international humanitarian law which has been traditionally understood as granting rights only to States; however, some relevant treaty provisions might indeed be interpreted as conferring rights also to natural persons, i.e. some individuals.23 Moreover, it is beyond doubt that modern international investment law constitutes a prime example of a branch of public international law according both substantive and procedural rights to individuals, both natural and legal persons.24 b) Individuals as Bearers of Duties

For the purposes of this contribution the question as to whether individuals 15 are also bearers of duties under present public international law is only of limited relevance. As to natural persons, suffice it to point to the fact that the establishment of international criminal law in the 1990s imposed international legal obligations upon individuals (natural persons) and, thus, added duties as components of his or her status as partial subject of international law.25 Whereas this development does not seem to be disputed, the question remains 16 as to whether legal (less so: natural) persons might be considered as addressees of obligations or duties under international human rights law. The pertinent discussion focuses on the issue of international or transnational corporations which are seen, by an increasing number of scholars, not only as holders of human rights, such as the right to a fair trial or the right to property, but also as bearers of duties.26 While it must be noted that, even for the proponents of this opinion, 19 See e.g. David Harris, Michael O’Boyle and Colin Warbrick (eds), Law of the European Convention on Human Rights (Oxford University Press, 2009) 757 et seq.; and Robin White and Clare Ovey, The European Convention on Human Rights (Oxford University Press, 2010) 24 et seq.; see also Jochen A. Frowein, ‘European Convention for the Protection of Human Rights and Fundamental Freedoms’ in MPEPIL (n. 1), vol. III, 882–889; and Malcolm Shaw (n. 2) 347 et seq. 20 See Gerald L. Neuman, ‘American Convention on Human Rights’ in MPEPIL (n. 1), vol. I, 327–336; and Malcolm Shaw (n. 2) 381–391. 21 See Fatsah Ouguergouz, ‘African Charter on Human and Peoples’ Rights’ in MPEPIL (n. 1), vol. I, 136–147; and Malcolm Shaw (n. 2) 391–395. 22 See Walter Kälin and Jörg Künzli, The Law of International Human Rights Protection (Oxford University Press, 2009) 220 et seq.; see also Simone Gorski (n. 3) mn. 21–24. 23 See e.g. Simone Gorski (n. 3) mn. 23. 24 See e.g. John Dugard (n. 4) mn. 9; and Simone Gorski (n. 3) mn. 42; see also Marc Jacob, ‘Investments, Bilateral Treaties’ in MPEPIL (n. 1), vol. VI, 317–328. 25 See e.g. Antonio Cassese, International Criminal Law (Oxford University Press, 2008) 33 et seq.; and Malcolm Shaw (n. 2) 397 et seq.; see also Simone Gorski (n. 3) mn. 44–49.

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States remain the subjects of international law primarily responsible for the protection and enforcement of human rights, there are good reasons to argue that some of these transnational corporations are vested with such economic powers that they can exercise quite a significant influence on ‘weak’ or corrupt governments in order to make them less willing to enforce compliance by such transnational corporations as very important employers and tax-payers, for the so-called core social and labour rights. In order to solve this problem, it is proposed to consider such corporations as (secondary) addressees of these human rights; this would imply that they are not under a duty to respect human rights of others, but under a responsibility to respect and to protect the human rights of others by exercising ‘human rights due diligence’. Whether and to what extent non-compliance with such a responsibility to respect and protect human rights of others might result in an obligation to pay compensation remains to be seen;27 this is, in any case, the approach which has been (and still is) particularly popular in the United States where the Aliens Tort Statute has been (and still is being) used as a means to sue such corporations before domestic courts.28 In this perspective, one category of individuals, i.e. natural persons, might be able to seek protection against human rights violations attributable to another category of individuals, i.e. legal persons. 2. Human Rights and Their Enforcement 17

As mentioned above, international human rights law differs, as regards the enforcement systems available, considerably between human rights treaties drafted under the aegis of the United Nations and, thus, vested with, in principle, global or universal applicability, and those human rights instruments established under the various regional systems. Importantly, however, they practically all provide for some kind of international monitoring system which can be accessed by individuals. a) Universally Applicable Human Rights Treaties

18

On the universal level, the major general human rights instrument is the 1966 International Covenant on Civil and Political Rights (ICCPR).29 Its substantive rights can be individually enforced by means of individual complaints (commu26 See on this issue Peter Muchlinski, ‘Corporations in International Law’ in MPEPIL (n. 1), vol. II, 797–813, mn. 32–37; see also James Crawford (n. 2) 121–123; and Malcolm Shaw (n. 2) 249 et seq. 27 This is the approach proposed by John Ruggie, the Special Rapporteur of the UN SecretaryGeneral on the issue of human rights and transnational corporation and other business enterprises; see his Report to the Human Rights Council, UN Doc. A/HRC/14/27 (9 April 2010), also available at http://198.170.85.29/Ruggie-report-2010.pdf. 28 See e.g. James Crawford (n. 2) 475–476; and Walter Kälin and Jörg Künzli (n. 22) 83 et seq.; see also the decision of the United States Supreme Court of 17 April 2013 in the case of Kiobel v. Royal Dutch Shell (569 U.S. (2013) where the Court held unanimously that the Alien Tort Statute does not apply extraterritorially; electronically available at www.supremecourtgov/opinions/12pdf/10-1491_16gn.pdf.

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nications) addressed to the Human Rights Committee30 which eventually might formulate legally non-binding views, as provided for in the 1966 Optional Protocol to the ICCPR. In contrast thereto, the 1966 International Covenant on Economic, Social and Cultural Rights (ICESCR),31 conceived as a kind of complimentary instrument to the ICCPR, originally did not provide for any complaint mechanism available for individuals; this situation changed, however, with the recent opening for signature of the 2009 Optional Protocol to the ICESCR which, once entered into force, will allow individuals to submit communications to the Committee on Economic, Social and Cultural Rights.32 After the adoption by the UN General Assembly, on 19 December 2011, of 19 the Third Optional Protocol to the 1989 Convention on the Rights of the Child,33 all human rights treaties applicable on the universal level now provide for complaints mechanisms which can be accessed by individuals: their legal bases are to be found in Article 14 of the 1966 International Convention on the Elimination of All Forms of Racial Discrimination (ICERD),34 Article 22 of the 1984 Convention against Torture (CAT)35 as well as the 1999 Optional Protocol to the 1979 Convention on the Elimination of all Forms of Discrimination against Women36 and the 2006 Optional Protocol to the 2006 Convention on the Rights of Persons with Disabilities;37 in contrast to these instruments, the Committee on Migrant Workers established under the 1990 International Convention on the Protection of the Rights of All Migrant Workers and Members of Their Families (ICRMW) is not yet entitled to receive individual complaints pending the necessary number of ten declarations to be made by State parties under Article 77 of

29 See e.g. Simone Gorski (n. 3) mn. 28; and Christian Tomuschat, ‘International Covenant on Civil and Political Rights (1966)’ in MPEPIL (n. 1), vol. V, 639–650. 30 See e.g. Malcolm Shaw (n. 2) 314–322; and Christian Tomuschat, ‘Human Rights Committee’ in MPEPIL (n. 1), vol. IV, 1058–1068. 31 See e.g. Simone Gorski (n. 3) mn. 29; Eibe Riedel, ’International Covenant on Economic, Social and Cultural Rights’ in MPEPIL (n. 1), vol. V, 650–667; and Malcolm Shaw (n. 2) 308– 311. 32 See e.g. Eibe Riedel, ’Committee on Economic, Social and Cultural Rights’ in MPEPIL (n. 1), vol. II, 427–435. 33 See e.g. Simone Gorski (n. 3) mn. 32; and Malcolm Shaw (n. 2) 331–333: see also Evarist Baimu, ‘Children, International Protection’ in MPEPIL (n. 1), vol. II, 138–145. 34 See e.g. Simone Gorski (n. 3) mn. 30; and Malcolm Shaw (n. 2) 311–314; see also Dinah Shelton, ‘Human Rights, Individual Communications/Complaints’ in MPEPIL (n. 1), vol. IV, 1086–1097, mn. 10; and Theo van Boven, ‘Racial and Religious Discrimination’ in MPEPIL (n. 1), vol. VIII, 608–617. 35 See e.g. Simone Gorski (n. 3) mn. 30; and Malcolm Shaw (n. 2) 326–332: see also David Kretzmer, ’Torture, Prohibition of’ in MPEPIL (n. 1), vol. IX, 950–964, mn. 40–45. 36 See e.g. Simone Gorski (n. 3) mn. 31; and Malcolm Shaw (n. 2) 322–326; see also Christine Chinkin, ‘Women, Rights of, International Protection’ in MPEPIL (n. 1), vol. X, 891–901, mn. 7–17. 37 See e.g. Simone Gorski (n. 3) mn. 31; and Malcolm Shaw (n. 2) 334; see also Theresia Degener, ‘Disabled Persons, Non-Discrimination of’ in MPEPIL (n. 1), vol. III, 140–146, mn. 12–15.

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the ICRMW.38 Again, it must be stressed that all the monitoring bodies are only vested with the power to formulate legally non-binding opinions. b) Regionally Applicable Human Rights Treaties

Monitoring mechanisms open for individual complaints were first conceived within the framework of the Council of Europe: under the 1950 European Convention on Human Rights (ECHR),39 individuals were entitled to submit such complaints to the then European Commission of Human Rights (ECommHR) if the State concerned had accepted its jurisdiction. After several steps taken gradually to improve the access of individuals to the very European Court of Human Rights (ECtHR),40 the decisive step was taken with the entry into force of Additional Protocol No. 11 in 1998, which abolished the ECommHR and offered direct access to the ECtHR for all individuals claiming a violation of their rights protected in the ECHR and its various Additional Protocols. In contrast to the monitoring bodies acting under the UN human rights treaties, the ECtHR is empowered to hand down legally binding judgements. 21 The legal position of the individual under the 1969 American Convention on Human Rights41 is comparable to the European system of human rights protection prior to the entry into force of Additional Protocol No. 11: all individuals are entitled to submit complaints to the Inter-American Commission of Human Rights (IACommHR);42 access, at a later stage of procedures, to the Inter-American Court of Human Rights (IACtHR)43 is only available if the State party concerned has made a declaration accepting the jurisdiction of that court. Like its European counterpart, the IACtHR hands down legally binding judgements. 22 Originally, the 1981 African Charter on Human and Peoples’ Rights (Banjul Charter)44 foresaw only a quasi-judicial body, the African Commission on Human and Peoples’ Rights45 which could be accessed by individuals but was not empowered to issue legally binding judgements. This situation changed, in principle, upon the establishment of the African Court of Human and Peoples’ Rights46 pursuant to the pertinent 1999 Protocol; now, States may declare that 20

38 See e.g. Simone Gorski (n. 3) mn. 33; and Malcolm Shaw (n. 2) 333–334, see also Ryszard Cholewinski, ‘Migrant Workers’ in MPEPIL (n. 1), vol. VII, 139–149, mn. 11–12. 39 See e.g. Frowein (n. 19) mn. 3. 40 See e.g. Mario Oetheimer and Guillem Cano Palomares, ‘European Court of Human Rights’ in MPEPIL (n. 1), vol. III, 894–903, mn. 15–45. 41 See e.g. Gerald Neuman (n. 20) mn. 26–32. 42 See e.g. Claudio Grossman, ’Inter-American Commission for Human Rights’ in MPEPIL (n. 1), vol. V, 251–261, mn. 22–30; and Dinah Shelton (n. 34) mn. 24. 43 See e.g. Gerald L. Neuman, ’Inter-American Court of Human Rights’ in MPEPIL (n. 1), vol. V, 261–270, mn. 16–25. 44 See e.g. Ouguergouz (n. 21) mn. 35–38. 45 See e.g. Rachel Murray, ’African Commission on Human and Peoples’ Rights’ in MPEPIL (n. 1), vol. I, 147–154; and Dinah Shelton (n. 34) mn. 25. 46 See e.g. Frans Viljoen, ’African Court of Human and Peoples’ Rights’ in MPEPIL (n. 1), vol. I, 157–161; and Dinah Shelton (n. 34) mn. 26.

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they accept the competence of that court to deal with individual complaints. Up to now, however, only very few States have made such a declaration. Finally, under the 2004 Arab Charter on Human Rights,47 elaborated under 23 the aegis of the League of Arab States, an Arab Commission on Human Rights was established which, however, is not vested with the power to receive individual complaints. 3. Human Rights Protection Systems and Their Potential Relevance for International Investment Law

Among all these human rights protection systems, only those of a general 24 character have some (potential) relevance for international investment law: in order to do so, they must at least provide for procedural rights of investors such as fair trial or due process which might be – allegedly – impaired during an administrative or judicial procedure concerning State actions taken in the context of the establishment or termination of an investment, in particular in cases of alleged expropriation or regulatory takings. Such human rights instruments acquire more such relevance if they provide, in addition to such procedural rights, also for substantive rights such as, in particular, the right to property. Insofar it is important to note that the right to property48 is only protected on 25 the regional level, i.e. under Article 1 of the 1952 Additional Protocol to the ECHR, Article 21 of the IACHR, Article 14 of the Banjul Charter and Article 31 of the Arab Charter. There is no such protection under the ICCPR which, however, guarantees, in its Article 14, the right to a fair trial – similarly to Article 6 of the ECHR, Article 8 of the IACHR, Articles 7 and 26 of the Banjul Charter and Article 13 of the Arab Charter. As regards international investment law, the ECHR (and the Court, respec- 26 tively) might be of particular relevance.49 Suffice it to mention the Yukos case.50 It must be borne in mind, however, that the protection of property under the human rights system considerably differs from the protection of property under international investment law: in the field of human rights, courts are concerned with the protection of fundamental individual rights whereas international investment law and its tribunals are primarily concerned with the (balanced) regu47 See e.g. Mervat Rishawi, ’Arab Charter on Human Rights (2004)’ in MPEPIL (n. 1), vol. I, 480–493. 48 See e.g. James Crawford (n. 2) 620–622; and Ursula Kriebaum and August Reinisch, ’Property, International Protection’ in MPEPIL (n. 1), vol. VIII, 523–533, mn. 7. 49 See e.g. Christina Pfaff, ’Investment Protection by Other Mechanisms: The Role of Human Rights Institutions and the WTO’ in Rainer Hofmann and Christian Tams (eds), The International Convention on the Settlement of Investment Disputes (ICSID) (Nomos, 2007) 267–321, 290 et seq. 50 See ECtHR, OAO Neftyanaya Kompanyia Yukos v. Russia, Application No. 14902/04, Judgement (Chamber), 20 September 2011, where the Court held that there had been a violation of Art. 1 of Additional Protocol No. 1 to the ECHR. The judgement became final on 8 March 2012 when the Panel of the Grand Chamber rejected the request to refer under Article 43 ECHR. The Court has still to decide on the amount of an eventual just satisfaction.

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lation of the mainly economic interests of all actors involved.51 Therefore, human rights courts might play a relevant role mainly (or exclusively) in situations where the parties to a dispute cannot rely on a bilateral or multilateral investment treaty providing for direct access to an investor-State arbitration procedure. D. Diplomatic Protection under Contemporary Public International Law 27

This development resulting in the individual gradually acquiring the status of a (partial) subject of public international law led some to consider that diplomatic protection might have lost some (or most) of its relevance. So, one might argue that diplomatic protection is in an era of decline. On the other hand, as mentioned above, the International Law Commission finalised, only some years ago, the drafting of its Articles on Diplomatic Protection,52 and the International Court of Justice has been seized again in some cases involving issues of diplomatic protection.53 So, there might also be indications for a renaissance of diplomatic protection. In any case, the recent adoption by the International Law Commission, of its Draft Articles on Diplomatic Protection justifies a short overview of its contents and mechanisms under present public international law. 1. A Decline of the Relevance of Diplomatic Protection?

28

One of the major arguments in favour of the assessment that there is a considerable decline in the relevance of diplomatic protection is linked to the just mentioned development in the field of human rights, in particular the entry into force of human rights treaties for a large majority of States. These treaties, both on the universal and regional level, confer rights to every individual: to nationals against their own government (which constitutes the very raison d’être of human rights) and to aliens (foreigners) against the government of the State in which they happen to be (the sole difference as compared to traditional law of aliens being the extent and scope of the rights conferred).54 Large parts of this human rights treaty law can be rightly considered as forming part of customary international law.55

51 See e.g. Ursula Kriebaum, Eigentumsschutz im Völkerrecht (Duncker und Humblot, 2008) 32. 52 UN International Law Commission, ‘Draft Articles on Diplomatic Protection’, GAOR 61st Session Supp. 10, 16. 53 See International Court of Justice, Barcelona Traction (Belgium v. Spain), ICJ Rep. 1970, 3; see e.g. Stephan Wittich, ‘Barcelona Traction Case’ in MPEPIL (n. 1), vol. I, 832–840; International Court of Justice, Elettronica Sicula (USA v. Italy), ICJ Rep. 1989, 15, see e.g. Peter Tomka, ‘Elettronica Sicula Case’ in MPEPIL (n. 1), vol. III, 377–382; and International Court of Justice, ICJ Rep. 2007, 20; and International Court of Justice, Ahmadou Sadio Diallo (Republic of Guinea v. Democratic Republic of Congo), Judgment, 30 November 2010, General List No. 103, see e.g. Kirsten Schmalenbach, ‘Ahmadou Sadio Diallo Case’ in MPEPIL (n. 1), vol. I, 224–231. 54 See e.g. John Dugard (n. 4) mn. 9. 55 See e.g. Malcolm Shaw (n. 2) 275.

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Under traditional law of aliens, one of the most important fields of application 29 was the protection of foreign investment against arbitrary interference by host State authorities. Here, the previous customary law rules have been replaced or superseded, to a very large extent, by the vast set of bilateral investment treaties (BITs).56 The dispute settlement mechanisms provided for by these treaties offer indeed ‘greater advantages to the foreign investor than the customary international law system of diplomatic protection, as they give the investor direct access to international arbitration, avoid the political uncertainty inherent in the discretionary nature of diplomatic protection and dispense with the conditions for the exercise of diplomatic protection’.57 Also the third main area of diplomatic protection, the actual exercise of such 30 protection by diplomatic and consular staff, has become the subject of treaty law: Article 3(1)(b) of the 1961 Vienna Convention on Diplomatic Relations58 and Article 5(9) of the 1963 Vienna Convention on the Law of Consular Relations59 recognise the right of diplomats and consular officials to protect nationals of the sending State within the receiving State. It has been rightly stated60 that these treaties give further (treaty-based) recognition to the (customary lawbased) right of diplomatic protection: furthermore, Article 36 of the Vienna Convention on Consular Relations expressly endorses one of the most important mechanisms of diplomatic protection, namely the right of consular officials to communicate with and to assist nationals imprisoned in the receiving State. The relevance of this right has been highlighted by the International Court of Justice in its judgements in both the LaGrand case61 and the Avena case.62 2. A Renaissance of the Relevance of Diplomatic Protection?

But do these developments really mean that there is a decline of the relevance 31 of diplomatic protection? As regards the development in the field of diplomatic and consular relations, the answer must clearly be negative: the two mentioned treaties do nothing but codify some (most relevant) aspects of the rights of States encompassed under diplomatic protection; what have been before customary rules of law have now been turned into treaty law provisions. This develop-

56 See e.g. John Dugard (n. 4) mn. 12; and Marc Jacob (n. 24) mn. 2–18; see also Malcolm Shaw (n. 2) 837–840. 57 John Dugard (n. 4) mn. 12. 58 See e.g. Holger Hestermeyer, ‘Vienna Convention on Diplomatic Relations (1961)’ in MPEPIL (n. 1), vol. X, 697–709. 59 See e.g. Andreas Paulus and Anne Dienelt, ‘Vienna Convention on the Law of Consular Relations (1963)’ in MPEPIL (n. 1), vol. X, 683–697. 60 John Dugard (n. 4) mn. 11. 61 International Court of Justice, LaGrand (Germany v. USA), ICJ Rep. 2001, 466; see e.g. Pierre-Marie Dupuy and Christina Hoss, ‘LaGrand Case (Germany v United States of America)’ in MPEPIL (n. 1), vol. VI, 629–637. 62 International Court of Justice, Avena (Mexico v. USA), ICJ Rep. 2004, 12; see e.g. PierreMarie Dupuy and Christina Hoss, ‘Avena Case (Mexico v United States of America)’ in MPEPIL (n. 1), vol. I, 768–775.

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ment and in particular the fact that both Germany and Mexico achieved condemnations by the International Court of Justice in its judgements in the LaGrand and Avena cases of the United States of America, for their failure to respect these two States’ right to exercise diplomatic protection, rather points to a renaissance of the relevance of diplomatic protection. 32 The situation seems to be different, however, as regards the field of international investment law.63 Notwithstanding the recent judgement of the International Court of Justice in the Diallo case, the above-reported statement64 by John Dugard seems to be correct. Dugard, as the former Special Rapporteur of the International Law Commission on Diplomatic Protection and the author of its pertinent Draft Articles, can surely not be held likely to minimise the relevance of diplomatic protection: as long as investors can rely on a BIT (or a multilateral treaty such as the North American Free Trade Agreement (NAFTA) or the Energy Charter) or any other legal document such as an investor-State contract which allows them to directly access an international arbitration tribunal, be it under ICSID, UNCITRAL or any other rules of procedure, there seems to be a very strong tendency to do so. In addition to the aspects mentioned by John Dugard himself, there is also the issue of the execution or enforcement of such arbitral awards; especially those rendered by a tribunal established under ICSID, are to be executed in every State party respecting, however, the customary law rules pertaining to State immunity.65 This constitutes a clear advantage as compared to judgements by international courts or tribunals rendered in the context of diplomatic protection procedures. 33 As regards human rights, the situation depends very much on the specific human rights treaty system. It is true that while these offer extensive guarantees of substantive rights, they do not offer equally extensive (let alone effective) procedural remedies. This is obviously the case with regards to the whole UN human rights treaty machinery in which no treaty foresees the establishment of a court which would be empowered to hand down legally binding judgements. The situation is, at least prima facie, different in respect to the regional human rights treaties which, however, do not extend to Asia and Oceania; moreover, considerable doubts remain as to the extent to which future judgements of the African Court of Human and Peoples’ Rights will actually be domestically respected and implemented. Whereas there clearly is much more respect for and implementation of judgements rendered by the Inter-American Court of Human Rights, 63 On this issue, see also Kate Parlett, ‘Diplomatic Protection and Investment Arbitration’ in Rainer Hofmann and Christian Tams (eds), International Investment Law and General International Law (Nomos, 2011) 211–229. 64 See text accompanying n. 57. 65 See Stefan Kröll, ‘Enforcement of Awards’, ch. 11.VII., 1483–1505; see also Stephan Schill, ‘International Investment Law and the Law of State Immunity: Antagonists or Two Sides of the Same Coin?’ in Rainer Hofmann and Christian Tams (n. 63) 231–275; Christoph Schreuer, ‘International Centre for Settlement of Investment Disputes’ in MPEPIL (n. 1), vol. V, 309– 407, mn. 65–70; and Xiadong Yang, State Immunity in International Law (Cambridge University Press, 2012) 327.

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there still seem to persist some problems regarding the attribution of full satisfaction in cases of violations of human rights. Even in Europe, there seems to be an increasing number of judgements rendered by the European Court of Human Rights which, notwithstanding pertinent action by the competent Committee of Ministers, are not adequately implemented and executed on the national level. So, it might indeed be argued that there remains space for diplomatic protection also in the field of human rights; or, as John Dugard states: ‘Diplomatic protection remains the most effective means for the individual to secure redress for injury suffered abroad’66 – at least as concerns the situation outside Europe, one might be tempted to add. This assessment justifies a short overview on the present state of diplomatic 34 protection. 3. Diplomatic Protection under Contemporary Public International Law

The following short overview is based on the mentioned Draft Articles on 35 Diplomatic Protection, prepared by Special Rapporteur John Dugard and adopted by the International Law Commission in 2006.67 These 19 draft articles are generally considered to constitute a good codification and restatement of existing rules of customary law. Therefore, their structure reflects the traditional conditions which have to be fulfilled to allow a State to exercise its right to diplomatic protection in accordance with international law: first, there must be an internationally wrongful act attributable to the State against which diplomatic protection should be directed; this internationally wrongful act must have violated the rights of an individual having the nationality of the State wishing to exercise diplomatic protection; and, finally, diplomatic protection, as a rule, might only be resorted to after the prior exhaustion of local remedies by the individual concerned. Moreover, States are no longer free to choose the means by which they wish to exercise diplomatic protection. a) Internationally Wrongful Acts

As any act of diplomatic protection is only compatible with international law 36 if it seeks to address the results of a violation of the internationally protected rights of a national of the plaintiff State, this State must first establish that there has been a violation, attributable under the applicable rules of the law of State responsibility68 to the defendant State, of a primary rule of the international law of aliens. This is, as a rule, the case when the conduct of the defendant State is 66 John Dugard (n. 4) mn. 10. 67 For the following see John Dugard (n. 4) mn. 19–73; see also Chittaranjan Felix Amerasinghe, Diplomatic Protection (Oxford University Press, 2008); and Annemarieke VermeerKünzli, ‘Exercising Diplomatic Protection’ (2006) 66 ZaöRV 321–350; for a critical analysis see Alain Pellet, ‘Le projet d’articles de la CDI sur la protection diplomatique: une codification pour (presque) rien’ in Marcelo Kohen (ed), Promoting Justice, Human Rights and Conflict Resolution through InternationalLaw: Liber amicorum Lucius Caflisch (Nijhoff, 2007) 1133–1156.

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incompatible with the international minimum standards69 required for the treatment of the person and the property of aliens. Today, this minimum standard corresponds largely with the standards enshrined in the major international human rights treaties.70 b) Nationality

The clearly most important precondition for the lawful exercise of diplomatic protection is the bond of nationality. This precondition as such is generally recognised, its application in specific cases might be utterly complex and controversial. It should also be mentioned that States may indeed, under some human rights treaties (inter-State proceedings as foreseen, e.g., in the ECHR) and under customary international law, act in order to protect the human rights of non-nationals, but such action does not constitute diplomatic protection in the legal sense.71 There is, however, a growing acceptance of States exercising actual diplomatic protection on behalf of refugees and stateless persons who are lawfully and habitually resident on their territory as recognised by, e.g. Article 8 of the ILC Draft Articles.72 38 In the framework of this contribution, it is not possible to embark upon a thorough presentation and analysis of the current state of international law as regards issues of nationality.73 It is a well-known feature of international law that, in principle, questions of nationality are within the domaine reservé of States.74 39 As regards natural persons, international law accepts as modes of acquisition of nationality75 upon birth descent (ius sanguinis) and birth on the territory of a State (ius soli); at a later stage, persons might be granted nationality by naturalisation, usually subsequent to a period of lawful residence. Cases of State succession inevitably impact on the nationality of the persons concerned. There may also be specific rules applicable to spouses. As regards the loss of nationality against the will of the person concerned (denaturalisation), international law provides for only very few limitations to domestic legislation.76 There has been some controversy as to the true meaning of the ruling of the ICJ in the Nottebohm case:77 it has been sometimes construed in such a way as to require that a 37

68 See e.g. James Crawford, ‘State Responsibility’ in MPEPIL (n. 1), vol. IX, 517–533, mn. 17– 22; and Malcolm Shaw (n. 2) 778 et seq. 69 See e.g. Hollin Dickerson (n. 11) mn. 11–20; and Malcolm Shaw (n. 2) 823–827. 70 John Dugard (n. 4) mn. 18. 71 John Dugard (n. 4) mn. 20. 72 On this issue see John Dugard (n. 4) mn. 47–49. 73 For an overview see Oliver Dörr, ‘Nationality’ in MPEPIL (n. 1), vol. VII, 496–510; see also James Crawford (n. 2) 511–512. 74 For an overview of the pertinent practice of international courts see Seline Trevisanut, ‘Nationality Cases before International Courts and Tribunals’ in MPEPIL (n. 1), vol. VII, 517. 75 See Oliver Dörr (n. 73) mn. 11–23. 76 See Rainer Hofmann, ‘Denaturalization and Forced Exile’ in MPEPIL (n. 1), vol. III, 27–36, mn. 17. 77 See Oliver Dörr (n. 12) mn. 12–15.

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claimant State must prove, in addition to the nationality of the person concerned, that there exists a ‘genuine link’ between the injured individual and the claimant State. Today, the ruling is predominantly understood in such a way as to be limited to cases of dual or multiple nationality where the genuine link requirement is used as a means to determine which of the various States involved may indeed lawfully exercise diplomatic protection. Whereas international law sought, for a long period of time, to eliminate such cases of dual or multiple nationality,78 present international law is characterised by a strongly growing acceptance of such cases.79 Such cases raise intricate issues as regards diplomatic protection; there seems to be growing acceptance that the State of dominant or effective nationality may indeed bring claims against another State of nationality.80 In deciding which nationality is dominant or effective, tribunals have had to consider various factors such as (length) of residence, family ties, etc.81 As in international investment law, the ‘nationality’ of legal persons, as a rule 40 corporations, raises specific and sometimes intricate problems. International law as such does not provide for any pertinent rules but accepts that, depending on the relevant domestic law, the ‘nationality’ of a corporation might be governed by the place of its incorporation or its registered office.82 For the purposes of diplomatic protection, however, the real problem is whether the State of nationality of the shareholders of a corporation which is not the State of either incorporation or seat, may – and, if so, under what circumstances – exercise diplomatic protection.83 While the ICJ in its famous decision in the Barcelona Traction case84 held that corporations are to be protected by the State of their nationality and not by the State or States of nationality of their shareholders, recent practice seems to indicate some exceptions to this rule, in particular if the State of nationality of the corporation is itself inflicting injury onto the (alien) shareholders.85 Finally, it ought to be stressed that claimant States must prove that the injured 41 person was a national from the date of the injury to the date of the presentation of the claim or, possibly, even to the date of judgement (principle of continuous nationality).86 c) Exhaustion of Local Remedies

The third precondition for the lawful exercise of diplomatic protection is the 42 requirement that the injured individuals, both natural and legal persons, have ex78 79 80 81 82 83 84 85 86

See Peter Spiro, ‘Multiple Nationality’ in MPEPIL (n. 1), vol. VII, 416–421, mn. 5–12. See Peter Spiro (n. 78) mn. 13–18. See John Dugard (n. 4) mn. 26–27. See John Dugard (n. 4) mn. 28–29. See James Crawford (n. 2) 527–530; and Peter Muchlinski (n. 26) mn. 19–24. For the following see John Dugard (n. 4) mn. 35–44. For a discussion see Stephan Wittich (n. 53) mn. 19–27; see also John Dugard (n. 4) mn. 35. See John Dugard (n. 4) mn. 37–40. See John Dugard (n. 4) mn. 46.

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hausted all available local remedies (exhaustion of local remedies rule).87 This rule is generally considered as reflecting customary international law.88 There are equally well-established customary law exceptions to this rule: local remedies do not need to be exhausted if they are ineffective or if their exercise would be futile;89 this is the case if there are no reasonably available local remedies to provide effective redress, or the existing local remedies do not provide for any reasonable possibility of such redress – examples would be lack of jurisdiction of the local courts or their notorious lack of independence. The burden of proof as to the existence of such exceptions is on the claimant State.90 Finally, there is the possibility that the respondent State has, expressly or impliedly, waived the requirement that local remedies be exhausted.91 d) Means of Diplomatic Protection 43

Present international law recognises various means of diplomatic protection;92 in contrast to the situation before World War I, it is clear that they must not include the use of armed force.93 Usually, a distinction is made between diplomatic actions such as protests, requests for mediation, measures of retorsion, severance of diplomatic relations, and economic measures, and international judicial proceedings. Such proceedings require the consent of the respondent State, either given on ad hoc basis or, prior to the incident, in a pertinent treaty or other agreement. E. Conclusions

44

By way of conclusion, it seems justified to state that present public international law provides for a significant amount of rules aimed at protecting the individual. Most relevant are the various human rights treaties, both on the universal and regional level, which confer to individuals a wide range of rights on which they can rely against any State, including the State of their nationality. Insofar, present public international law differs fundamentally from traditional public international law which was only concerned with the rights of aliens. It must be seen, however, that only very few of these instruments, possibly only the ECHR, provide for truly effective (international) remedies: none of the UN human rights instruments provides for the establishment of a human rights court which could 87 For an overview see e.g. James Crawford (n. 2) 710–715; and James Crawford and Thomas Grant, ‘Local remedies, Exhaustion of’ in MPEPIL (n. 1), vol. VI, 895–905. 88 See John Dugard (n. 4) mn. 53. 89 See James Crawford and Thomas Grant (n. 87) mn. 19–25; and John Dugard (n. 4) mn. 58– 59. 90 See John Dugard (n. 4) mn. 67. 91 See James Crawford and Thomas Grant (n. 87) mn. 14–18; and John Dugard (n. 4) mn. 63. 92 See John Dugard (n. 4) mn. 68–73. 93 See, however, the discussion in John Dugard (n. 4) mn. 70 on actions such as the military intervention by the United States of America in Grenada (1983) or the raid by Israeli forces to Entebbe in Uganda (1976).

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be directly accessed by individuals and which would be empowered to render legally binding judgements. Moreover, considerable doubts remain as to the effectiveness of the human rights protection system provided for in the regional human rights treaties; this assessment applies in particular as regards the African Court on Human and Peoples’ Rights which still has to develop jurisprudence of any significance, and, although to a much lesser extent, to the Inter-American Court of Human Rights. But even in the European context, one must not overlook the fact that there is a growing number of judgements of the European Court of Human Rights which are not or only partially implemented on the national level; this is a situation which clearly calls for a considerable strengthening of the enforcement mechanisms foreseen in the European Convention on Human Rights. This means, indeed, that the traditional institute of diplomatic protection still 45 has to play a significant role in public international law. To some extent, its customary law rules have been codified in the 1961 Vienna Convention on Diplomatic Relations and the 1963 Vienna Convention on Consular Relations; as regards violations of human rights of aliens, it retains some of its previous importance in view of the described lack of effective remedies for the enforcement of the rights enshrined in the universally applicable human rights treaties. The one area, however, where diplomatic protection seems to have lost most of its previous importance is international investment law: the establishment of the current legal system protecting foreign investment which entitles investors to directly address international arbitration tribunals which then render awards which can in many cases be effectively enforced, seem to limit the relevance of diplomatic protection to those investments which, for whatever reasons, are not protected under any of the treaties constituting the present body of international investment law.

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Burkhard Schöbener* A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. The Rules of International Law that Protect Investments . . . . . . . . . . . . . . . . 1. The Protection of Property as a Human Right . . . . . . . . . . . . . . . . . . . . . . . . 2. Protection under Customary International Law via the International Minimum Standard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Neer Formula . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The ICJ’s Decision in ELSI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Recognised Content of the International Minimum Standard. . . .

2 3

C. The Further Development of the International Minimum Standard through IIAs? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. State of International Legal Jurisprudence. . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Restrictive Line of the ICJ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Evolutionary Understanding of Investment Arbitration Awards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Possibility of the Further Development of the International Minimum Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The Prerequisites for the Formation of Customary International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Requirement of Uniform State Practice. . . . . . . . . . . . . . . . . . . . . . . c) The Requirement of Opinio Juris. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) The States’ Limited Willingness to be Bound . . . . . . . . . . . . . . . . . (2) BITs as leges speciales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D. The Customary International Legal Applicability of Individual Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Protection of Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. National and Most Favoured Nation Treatment . . . . . . . . . . . . . . . . . . . . . . 4. Fair and Equitable Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) An Independent Standard or a Component of Customary International Law?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Influence of Customary International Law?. . . . . . . . . . . . . . . . . . . . . . . E. Conclusion and Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 7 9 11 13 14 15 19 21 22 23 24 25 28 30 32 33 36 40 43 44 47 50

Literature: Steffen Hindelang, ‘Bilateral Investment Treaties, Custom and a Healthy Investment Climate – The Question of Whether BITs Influence Customary International Law Revisited’ (2004) 5 JWIT 789–809; Bernard Kishoiyian, ‘The Utility of Bilateral Investment Treaties in the Formulation of Customary International Law’ (1994) 14 Nw. J. Int’l L. & Bus. 327–375; Campbell McLachlan, ‘Investment Treaties and General Invernational Law’ (2008) ICLQ 361–399; Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2004) 204–267; Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford University Press, 2008); Thomas W. Wälde, ‘The Specific Nature of Investment Arbitration’ in Philippe Kahn and Thomas W. Wälde (eds), New Aspects of International Investment Law (Martinus Nijhoff Publishers, 2007) 43–120. * The author thanks advocate Dr. Andrea Schernbeck and legal trainee Mr. Markus Jobst, both of whom have worked at the Department for Public Law, International Law, and European Law at the University of Cologne, for their attentive support throughout the preparation of this chapter.

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A. Introduction

In international law, foreign investments are protected not only through inter- 1 national investment agreements (IIAs), but also by customary international law and by the human rights-based protection of property. Against the background of the developments of the last century, this chapter examines whether a recognised customary international protection of investments – the development of which has likely been promoted through more than 3100 IIAs, including more than 2800 bilateral investment treaties (BITs)1 – is recognised or, alternatively, will be recognised in the foreseeable future. In this regard, this chapter sheds light on the decisions of the International Court of Justice (ICJ) and other arbitral tribunals and provides a critical examination of the many viewpoints represented in the literature. To make a prognosis with respect to future developments, however, one must begin by evaluating past developments and the present legal situation. B. The Rules of International Law that Protect Investments

In addition to IIAs, the human rights-based protection of property and the in- 2 ternational minimum standard found in customary international law also serve to protect investments. 1. The Protection of Property as a Human Right

In the area of human rights, the protection of property – as an object/purpose 3 of international treaties – is largely confined to regional conventions. The European, American, and also the African human rights conventions contain such rules providing for the protection of property. These provisions provide individuals with an effective enforcement mechanism by enabling them to file individual complaints.2 Protection of foreign assets could, in any event, be a result of the acceptance 4 of globally applicable human rights norms (i.e. those extending beyond the regional guarantees).3 Undeniably, as a result of the human rights declarations and pacts that followed World War II, there has been a development in public international law that at least acknowledges that an individual can be a subject in international law.4 Today, human rights norms such as the respect for human dig1 UNCTAD, World Investment Report 2012 (United Nations, 2012) xx, available at http:// www.unctad-docs.org/UNCTAD-WIR2012-Full-en.pdf (last access in January 2014). 2 To date, however, only very few of the State signatories to the African Charter on Human and Peoples’ Rights (AfCHPR) have recognised the AfCHPR’s instrument for the individual complaint. 3 Regarding the topic of the protection of property through human rights, see Bernhard Kempen, ‘Eigentum: Ein universelles Menschenrecht?’ (2009) Wirtschaft und Verwaltung (Economy and Administration, WuV) 19–30; Burkhard Schöbener, ‘Der menschenrechtliche Schutz des privaten Eigentums im universellen Völkerrecht’ in Michael Sachs and Helmut Siekmann (eds), Der grundrechtsgeprägte Verfassungsstaat (Duncker & Humblot, 2012) 901 et seq.

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nity and the prohibition of torture, among others, are not only categorised as customary international law,5 but are also at least partially regarded as having jus cogens character and erga omnes effect. The prevailing legal opinion, however, does not confer these attributes to the human right of property. Nevertheless, there are good reasons to argue that the right to property is also recognised as a universal human right.6 Even if one is to proceed from the basis of a universal human right to property, the protection that arises from such a human right remains far behind the protection provided through BITs and IIAs. Faced with the lack of an effective enforcement mechanism, the investor remains dependent on his or her home State’s exercise of diplomatic protection, in order to submit his or her claims of a violation of human rights vis-à-vis the host State. 2. Protection under Customary International Law via the International Minimum Standard

The rules of customary international law that serve to protect the individual are characterised as the international minimum standard. Every investor who makes an investment in a foreign country is, based on his or her characteristic of being an alien in the territory of the host State, protected by the international minimum standard. Insofar as property and foreign investments are concerned, the international minimum standard already provides international legal protection. 6 The applicability of the international minimum standard under customary international law has always been controversial. Latin American countries, in particular, have always refused to allow their trade practices to be measured by international standards.7 Instead, foreign nationals, pursuant to the so-called ‘Calvo Doctrine’ would receive the same treatment as did domestic nationals.8 A much observed confirmation of the customary legal applicability of the international minimum standard was elaborated in the Neer case of 1926.9 This case, as well as the ELSI decision from 1989,10 is frequently used by investment tribunals to determine the normative content of the international minimum standard. 5

4 Cf. Nadja Gaus, Materiell-rechtliche Gewährleistungen und verfahrensrechtliche Durchsetzbarkeit völkerrechtlich garantierter Menschenrechte (Peter Lang Verlag, 2011). 5 Cf. Thomas Buergenthal, ‘The Evolving International Human Rights System’ (2006) 100 AJIL 783–807, 783 et seq. 6 For extensive elaboration on this topic, see Burkhard Schöbener (n. 3) 901 et seq. 7 Hollin Dickerson, ‘International Standards’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, online edition available at www.mpepil.com), last access in March 2012, para. 5. 8 Patrick Juillard, ‘Calvo Doctrine’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, online edition available at www.mpepil.com), last access in January 2014, para. 3. 9 LFH Neer and Pauline Neer (USA v. Mexico), American–Mexican Claims Commission, Award, October 1926, 4 RIAA 60. 10 Elettronica Sicula SpA (ELSI) (USA v. Italy), ICJ Judgment, 20 July 1989, ICJ Rep. 1989, 15 et seq.

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a) The Neer Formula

In Neer, the General Claims Commission (Mexico and the United States) de- 7 termined that a violation of the international minimum standard exists, if: the treatment of an alien (...) amount[s] to an outrage, to bad faith, to wilful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency.11

Even today, investment tribunals and others engaged in the making or elabo- 8 ration of investment law continue to use the Neer Formula as a benchmark.12 The importance of this arbitral award is, however, over-stated. While Neer is among the first judicial confirmations of the customary international legal applicability of the international minimum standard,13 the General Claims Commission based its conclusion not on the required analysis of State practice, but rather on individual scholarly opinions.14 Furthermore, since the decision is based on uncertain legal terms and does not take further ‘international standards’ into consideration, the Neer Formula does not bring about a concretisation of the international minimum standard. b) The ICJ’s Decision in ELSI

In addition to the Neer Formula, a large portion of investment awards rely on 9 the ICJ’s decision in ELSI in determining the content of the international minimum standard.15 According to the ELSI standard, a State has international responsibility when its behaviour displays ‘(…) a willful disregard of due process of law, which shocks or at least surprises a sense of judicial propriety.’16 The applicability of this statement is, however, limited to the determination of 10 the breadth of the international minimum standard. The ICJ’s reasoning in ELSI 11 LFH Neer and Pauline Neer (USA v. Mexico) (n. 9) 61–62. For more information concerning the development of the international minimum standard, see Hollin Dickerson (n. 7) para. 2 et seq. 12 See also Alex Genin, Eastern Credit Limited, Inc. and A.S. Baltoil v. Estonia, ICSID Case No. ARB/99/2, Award, 25 June 2001, para. 367; Glamis Gold Ltd. v. USA, UNCITRAL, Award, 8 June 2009, para. 616, and Cargill Incorp. v. Mexico, ICSID Case No. ARB(AF)/05/2, Award, 13 August 2009, para. 271. 13 Although Jan Paulsson and Georgios Petrochilos, ‘Neer-ly Misled’ (2007) 22 ICSID Rev.– FILJ 242–257, 244 correctly argue that the arbitral decision, based on the prior decisions of the Permanent Court of Arbitration, Norwegian Ship Owners (Norway v. USA), Award, 13 October 1922, (1922) UNRIAA, vol. 1, 307 et seq. and Certain German Interests in Polish Upper Silesia (Germany v. Poland), PCIJ Judgment, 25 May 1926, Series A, vol. 6 (1925) 1 et seq., 22, do not demonstrate a fully new tendency. 14 See also the criticism in the decision Railroad Development Corp. v. Guatemala, ICSID Case No. ARB/07/23, Award, 29 June 2012, para. 216. 15 See e.g. Mondev International Ltd. v. USA, ICSID Case No. ARB(AF)/99/2, Award, 11 October 2002, para. 127; Loewen Inc. and Loewen v. USA, ICSID Case No ARB(AF)/98/3, Award, 25 June 2003, para. 131 et seq.; International Thunderbird Gaming Corp. v. Mexico, UNCITRAL, Award, 26 June 2006, para. 200. In the field of BIT jurisprudence see Jan de Nul N.V. & Dredging Int. N.V. v. Egypt, ICSID Case No. ARB/04/13, Award, 6 November 2008, para. 193 et seq. 16 Elettronica Sicula SpA (ELSI) (USA v. Italy) (n. 10) para. 128.

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was not based on customary international law, but rather on the text of a ‘Treaty of Friendship, Commerce and Navigation.’17 c) Recognised Content of the International Minimum Standard

Based on Neer, individual lines of cases concerning the international minimum standard have developed in other court decisions and in the literature. These include the right to legal personality, the right to life, the right to bodily integrity and the protection of the person, and also the right to due process.18 In addition and already beginning in the 18th century, the customary international legal principle that foreign property is to be protected and can only be expropriated upon payment of compensation, developed.19 From the investor’s perspective, this was very important. 12 An individual, however, cannot assert a claim for a violation of the international minimum standard. Rather, he or she is dependent on the exercise of diplomatic protection by his or her home State. 11

C. The Further Development of the International Minimum Standard through IIAs? 13

Since the very existence of customary international law is based on dynamic prerequisites – prerequisites that are always changing and developing – one can imagine that the international minimum standard has been further developed through tendencies in international law that protect the individual. As a result of the rapid increase in the conclusion of BITs and the increasing reach and use of BITs, however, it is more often asserted that the normative content of the international minimum standard corresponds with the BIT standards. The following sections will address this issue from the perspective of international jurisprudence (1.). In closing, the fundamental possibility of such a further development of the international minimum standard will be examined (2.). 1. State of International Legal Jurisprudence

14

Two competing tendencies can be derived from international jurisprudence in response to the issues above. While the investment law arbitral decisions note that the international minimum standard has experienced significant further de17 Stephen Vasciannie, ‘The Fair and Equitable Treatment Standard in International Investment Law and Practice’ (1999) 70 BYIL 99–164, 137. 18 Cf. Jörn Griebel, Internationales Investitionsrecht (C.H. Beck, 2008) 14 et seq.; Hollin Dickerson (n. 7) para. 11. 19 Regarding the amount of compensation, the Hull Formula (‘prompt, adequate and effective compensation’) had long enjoyed customary international legal recognition. It is debatable, however, whether in the time following the Second World War, as well as during the decolonisation, the Hull Formula could be applied. Regarding the historic development and the current status of the Hull Formula, see Burkhard Schöbener, Jochen Herbst and Markus Perkams, Internationales Wirtschaftsrecht (C.F. Müller, 2010) para. 4/31 et seq., 4/66 et seq.

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velopment through the conclusion of more than 3100 IIAs (b), the ICJ refuses to recognise a customary international applicability of these IIA standards (a). a) The Restrictive Line of the ICJ

In its 1970 decision in Barcelona Traction,20 the ICJ made the following re- 15 mark: Considering the important developments of the last half-century, the growth of foreign investments and the expansion of the international activities of corporations, in particular of holding companies, which are often multinational, and considering the way in which the economic interests of States have proliferated, it may at first sight appear surprising that the evolution of law has not gone further and that no generally accepted rules in the matter have crystallized on the international plane.

The ICJ did not adopt the position that the IIAs that the parties had entered 16 into led to a change or further evolution of the then existing customary international law within the field of investment law.21 According to the ICJ, those BITs, as well as the other international conventions regarding the protection of investments, were to be regarded as lex specialis to the then existing customary international law.22 The ICJ repeated this evaluation in Diallo23 in 2007. In that case, Guinea ar- 17 gued that a clause contained in investment agreements had developed into a generally applicable rule of customary international law. The ICJ, however, rejected Guinea’s argument24 and instead stated: The fact invoked by Guinea that various international agreements, such as agreements for the promotion and protection of foreign investments and the Washington Convention, have established special legal régimes governing investment protection, or that provisions in this regard are commonly included in contracts entered into directly between States and foreign investors, is not sufficient to show that there has been a change in the customary rules of diplomatic protection; it could equally show the contrary.25

The ICJ further supported its decision by stating that the required State prac- 18 tice – contrary to Guinea’s arguments – could not be established upon further investigation.26

20 Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain), ICJ Judgment, 5 February 1970, ICJ Rep. 1970, 3, para. 89. For a basic evaluation of the case in relation to the later development of customary international investment law, see Ian A. Laird, ‘A Community of Destiny – The Barcelona Traction Case and the Development of Shareholder Rights to Bring Investment Claims’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID (Cameron May Ltd 2005) 77–96. 21 See also Ian Laird (n. 20) 77, 84. 22 Cf. Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) (n. 20) para. 89. 23 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo), Preliminary Objections, 24 May 2007, ICJ Rep. 2007, 582. 24 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 89. 25 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 90. 26 Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 89.

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b) The Evolutionary Understanding of Investment Arbitration Awards 19

A completely opposite understanding of customary international law is found in investment jurisprudence. Indeed, there is a nearly uniform prevailing legal view that the international minimum standard has been strongly developed through the conclusion of numerous IIAs. In 2002, the NAFTA tribunal in Pope & Talbot noted as follows: The true number [of bilateral investment treaties] is in excess of 1800. Therefore, applying the ordinary rules for determining the content of custom in international law, one must conclude that the practice of states is now represented by those treaties.27

20

Also, other subsequent arbitral decisions note the further development of the international minimum standard28 and the tremendous influence that IIAs have had on this development.29 An examination of the concrete impact of IIAs and the degree of further development of the international minimum standard is, however, missing from the arbitral awards. 2. Possibility of the Further Development of the International Minimum Standard

21

Fundamentally, it is recognised that customary international law can develop from bilateral treaties.30 In this regard, therefore, even a further evolution of already existing customary international legal rules through bilateral treaties – such as the international minimum standard – is also possible. a) The Prerequisites for the Formation of Customary International Law

22

Proof of the existence of both elements for the development of customary international law is always necessary.31 The prevailing legal opinion views these 27 Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002, para. 62. 28 ADF Group Inc. v. USA, ICSID Case No. ARB(AF)/00/1 (NAFTA), Award, 6 January 2003, para. 179; Waste Management Inc. v. Mexico, ICSID Case No. ARB(AF)/00/3 (NAFTA), Award, 30 April 2004, para. 92; Thunderbird Gaming Corp. v. Mexico (n. 15) para. 194; Merrill & Ring Forestry v. Canada, UNCITRAL, Award, 31 March 2010, para. 193; Chemtura Corp. v. Canada, UNCITRAL, Award, 2 August 2010, para. 121. 29 Mondev v. USA (n. 15) paras. 117, 125; Chemtura Corp. v. Canada (n. 28), UNCITRAL, Award, 2 August 2010, para. 121. 30 Cf. Richard R. Baxter, ‘Treaties and Custom’ (1970) 129 RC 27–105, 75 et seq.; Muthucumaraswamy Sornarajah, The International Law on Foreign Investment (Cambridge University Press, 2010) 176 et seq.; Mark E. Villiger, Customary International Law and Treaties (Kluwer Law International, 1997), ch. 6, 167–192, para. 296. For the development of customary international law through a series of numerous, identically worded bilateral treaties, see also Nottebohm (Liechtenstein v. Guatemala), 6 April 1955, ICJ Rep. 1955, 4 et seq., paras. 23 et seq. 31 Cf. Steffen Hindelang ‘Bilateral Investment Treaties, Custom and a Healthy Investment Climate – The Question of whether BITs influence Customary International Law Revisited’ (2004) 5 JWIT 789–809, 795; Mark Villiger (n. 30), para. 296; contra Andreas F. Lowenfeld, ‘Investment Agreements and International Law’ (2003) 42 Colum. J. Transnat’l L. 123–130, 129 et seq., which also recognises the differentiation among the sources of law within Art. 38

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as a uniform State practice (b), combined with the States’ belief that their behaviour is required by legal norms, the so-called ‘opinio juris’ (c).32 The ICJ solidified its views on the development of customary international law from conventional international law, in particular, in its decision in the North Sea Continental Shelf case. Accordingly, a conventional international legal norm must be ‘of a fundamentally norm-creating character such as could be regarded as forming the basis of a general rule of law’ in order for customary international law to develop from it.33 The prerequisite to this is the basic interest of the contracting States to create an all-encompassing and generally applicable rule.34 b) The Requirement of Uniform State Practice

The ubiquitous argument in the international investment law literature and ar- 23 bitral decisions is the overwhelming number of BIT conclusions in the past decades. The conclusion of a treaty (namely, the acts of negotiation, signing, and ratification) in and of itself, however, contains no normative content with respect to the creation of customary international law. Rather, only the State’s post-contractual, BIT conforming behaviour can be valued as legally significant State behaviour. The second prerequisite for the customary international legal applicability of BITs – uniform practice grounded in the belief that it is legally required (‘opinio juris’) – must be connected with the behaviour that follows the treaty’s conclusion. Here, however, the State in question will always act based on the belief that it is contractually (and not necessarily customarily) bound to behave in such a manner.35 It is possible that the opinio juris of the community of States, as a result of the wide distribution of BITs and their connected homogenous, treaty-conforming behaviour, has also transformed with the passage of time. The answer to the question of whether BITs have thus far earned customary international legal validity depends, in decisive part, upon whether the opinio juris of the community of States has emerged.

32

33 34 35

of the ICJ Statute, and that they have been overtaken, and declares BITs to be the new form of ‘international legislation.’ Cf. North Sea Continental Shelf (Germany v. Denmark), 20 February 1969, ICJ Rep. 1969, 3 et seq., para. 73 et seq.; Richard K. Gardiner, ‘International Law’ (Pearson Longman, 2003), 101 et seq.; Malcom N. Shaw, International Law (Cambridge University Press, 2003) 68 et seq. The definition of the prerequisites to the formation of customary international law is also debated. For general information concerning the development of customary international law, see e.g. Stephan Hobe, Einführung in das Völkerrecht (UTB, 2008) 191; Tullio Treves, ‘Customary International Law’ in Rüdiger Wolfrum (ed), The Max Planck Encyclopedia of Public International Law (Oxford University Press, online edition available at www.mpepil.com), last access in January 2014, para. 17. North Sea Continental Shelf (Germany v. Denmark) (n. 32) para. 72 et seq. Also approving of the view held by the ICJ in the aforementioned decision: Markus Notter, Völkerrechtlicher Investitionsschutz ([s.n.] 1989), 44 et seq. Karl Doehring, ‘Gewohnheitsrecht aus Verträgen’ (1976) 36 ZaöRV (Heidelberg Journal of International Law) 77–95, 87. See also Mark E. Villiger, Customary International Law and Treaties (Martinus Nijhoff, 1985) 11, para. 36.

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c) The Requirement of Opinio Juris 24

The statement that a uniform opinio juris of the community of States exists, often rests on the same argument as given by Guinea in Diallo, namely, the multiplicity of BITs. The failure of numerous attempts – in particular by the OECD – to reach an agreement on a multilateral basis, however, stands in sharp contrast to the strong increase of BIT conclusions.36 In this regard, it is disputable whether such a uniform opinio juris between States exists or that IIA-contracting States have the intention to establish an obligation of a ‘fundamentally norm-creating character’. (1) The States’ Limited Willingness to be Bound

The creation of customary international law through the observance of bilateral treaties is a well-known phenomenon in international law. For instance, the recognised customary international law concerning consular law developed from numerous bilateral consular treaties.37 In the field of diplomatic and consular relations, it was only possible to establish an all-encompassing, customary international legal obligation of all States due to the necessity of consistent, uniform rules. Based on the necessity of this uniform regulation – as well as the willingness of States to bind themselves as a matter of customary international law – States obligated themselves vis-à-vis numerous States in a similar manner. 26 In contrast, however, in the field of international business and investment law, the willingness and necessity of States to bind themselves under the same conditions as one another cannot be established. On the contrary, the global economy is based on national economies competing to attract foreign investment. If BITs had customary international applicability, this competition would be abolished, since investors – independent of treaty obligations – would be subject to the same standards and obligations in all countries. Moreover, international business and investment law is based on the principle of differentiation within national economic orders. Indeed, even the possibility to differentiate in the treatment of foreign investments, trade, and services (such as pursuant to the State of origin) establishes the willingness of States to open their markets to foreign investments and international trade.38 If BIT standards – in particular the prohibition on dis25

36 Concerning the efforts to find a multilateral solution, see Ahmad A. Ghouri, ‘The evolution of bilateral investment treaties, investment treaty arbitration and international investment law’ (2011) 14 Int’l Arb. L. Rev. 189–204, 192 et seq.; Andreas Lowenfeld (n. 31) 123–130, 123 et seq.; see also contribution of Joachim Karl, ‘The Negotiations on the OECD Multilateral Agreement on Investment’, ch. 4.III.F., 342–360. 37 Stephen S. Schwebel, ‘The Influence of Bilateral Investment Treaties on Customary International Law’ (2005) 2 TDM 26–30, at p. 29 referring to the Report of the International Law Commission on the work of its twelfth session, 2 YBILC 145, UN Doc. A/4425 (1960). For a general overview concerning the question of whether BITs in toto can have an influence on customary international law see also Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im Völkerrecht (Springer, 1985) 54 et seq. 38 The numerous exceptions to the prohibitions on discrimination within the WTO confirm this. In addition to the general exception rules (such as in Art. XX of the GATT 1994), there are

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crimination and guarantees of national or most favoured nation (MFN) treatment – were to create customary international law, States would basically be robbed of the possibility to differentiate based on origin. This would entail a significant loss of the State’s sovereignty. In these circumstances, no general opinio juris for States to bind themselves 27 to all other States and their citizens in a consistent, general, BIT-conforming manner can be assumed. (2) BITs as leges speciales

Contracting States constantly pursue the goal of creating incentives for for- 28 eign investment when concluding BITs. Customary international law originally offered inadequate protection to foreign investors.39 To increase trust in certain business locations, risks that are typical to investments needed to be minimised through binding regulations – regulations upon which the investor could rely, without having to depend on the diplomatic protection of his or her home State.40 Since BITs should provide incentives for foreign investment, they confer very significant rights to investors, while restricting the actions and regulatory powers of the contracting State. This necessarily presupposes that a State does not wish to admit investors from all States, but rather only those from its chosen contracting State parties and only after individual negotiations. BIT provisions are, therefore, to be understood in relation to the international minimum standard as leges speciales, whose benefits will apply only to the respective party and its investors. In this regard, the existence of an opinio juris among the community of States 29 to ensure these additional rights to all foreigners on a State’s territory – independently from treaty obligations – would be unthinkable. d) Conclusion

Investment protection legal standards include commitments that affect sensi- 30 tive areas of national economic systems – areas that are so sensitive that States in the international community are unwilling to bind themselves towards third States or their nationals. As compared to customary international law, therefore, BITs are intended as more specific regulations whose benefits would be subject

also clauses in individual trade agreements that guarantee the principles of most favoured nation treatment (i.e. GATS Art. II:2, TRIPS Art. 4 lit. a–d) and national treatment (e.g. GATT 1994 Art. III:8 and GATS Art. XIII:1). See Peter-Tobias Stoll and Frank Schorkopf, WTO – Welthandelsordnung und Welthandelsrecht (Heymanns, 2002) para. 125 et seq., 143 et seq., 145 et seq.; Peter van den Bossche, The Law and Policy of the World Trade Organization (Cambridge University Press, 2008) 320 et seq., 342 et seq. 39 The individual aspects of the customary international legal protection of property are, in this regard, debated. In addition, the diplomatic protection of the home State does not constitute a satisfactory or reliable medium for the resolution of disputes. Regarding the deficits of customary international law, see Jörn Griebel (n. 18) 14 et seq. 40 Jörn Griebel (n. 18) 14 et seq.

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only to the respective party and its nationals. Both arguments stand against the adoption of a comprehensive opinio juris and the norm-creating character required by the ICJ. Even if a general BIT-conforming State practice would be detectable, this would not be based on the conviction that the State is committed to such conduct based on customary international law. 31 Since the BITs differ greatly in terms of their structure and text, the customary international legal validity of BITs is, in toto, unthinkable. The individual treaty standards that are regularly included in BITs diverge in many ways. It is, however, nevertheless still possible that individual contractual standards may have a ‘fundamentally norm-creating character’ and have attained customary international law status. D. The Customary International Legal Applicability of Individual Clauses 32

The following section examines whether particular treaty provisions, which are often found in BITs, have further developed the international minimum standard such that they have now become a component of the customary international legal rights recognised for every investor. 1. Arbitration Clauses

Through the arbitration clauses regularly contained in IIAs, contracting States express their consent to resolve their treaty-based disputes through investorState arbitration proceedings. Although such a clause is included in all IIAs, it cannot crystallise into customary international law, since the essential feature of international law is that States are only subject to international jurisdiction if they have given their express consent thereto.41 Such general consent cannot be assumed from the consent given in a bilateral IIA. 34 The fact that the design of arbitration clauses in treaties is not uniform also prevents the formation of a customary international legal recognition of a generalised consent to investor-State arbitration. Indeed, the concrete formulation often depends not only on whether the parties are members of the ICSID Convention,42 but also on whether and how the inter-State assertion of a breach is required.43 There, different rules can also be found. In this respect, due to the divergent treaty terms, the State practice necessary for the formation of customary international law cannot be demonstrated. 33

41 Here, the ICSID Convention can be used as an example. Pursuant to Art. 1(2) of the ICSID Convention, the Convention is applicable to ‘(...) Contracting States and nationals of other Contracting States (...)’. For a similarly disapproving view, see Stephen Schwebel (n. 37) 26– 30, 30. 42 Cf. the different German model treaties, which distinguish between ICSID contracting parties and States that have not accepted the ICSID Convention. 43 Cf. Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 217. Regarding the question of the extent to which the exhaustion of domestic remedies is required, see Waste Management v. Mexico (n. 28) para. 97.

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A customary international legal protection of investments – without the dis- 35 pute resolution mechanism of the investor-State procedure that is specific to investment law – is conceivable. Should any substantive provisions from IIAs be so strengthened as to form customary international law, these would be enforced through the diplomatic protection of the home State. 2. Protection of Shareholders

In BIT-based arbitration, the prevailing view is that not only the injured cor- 36 poration, but also those standing behind the corporation – the shareholders – may bring BIT claims.44 Even minority or non-controlling shareholders are, accordingly, entitled to initiate proceedings independently of the corporation.45 This raises the question of whether the protection extended to the shareholder 37 through BITs and the shareholder’s associated direct right to bring an action, also have customary international legal validity.46 In such a situation, the grant of diplomatic protection in favour of shareholders would be permissible. This would play a role especially where the company has the nationality of its host State, but the shareholders have a different nationality. In this manner, the shareholder’s home State could grant diplomatic protection with regard to the host State’s acts of infringement against the company. The arbitral tribunal in CMS v. Argentina seems to advocate for this when it states that the investors’ independent legal standing is mostly the result of lex specialis and specific treaty arrangements that have so allowed, the fact is that lex specialis in this respect is so prevalent that it can now be considered the general rule, certainly in respect of foreign investments and international claims and increasingly in respect of other matters.47

It must be recalled that the tribunal’s conclusion in CMS v. Argentina is the 38 result of the interpretation of the term ‘investment’ found in the ICSID Convention and the underlying BIT. Thus, it concerns a specific question of the term ‘investment’ – one that cannot, on its own, be transferred over to the realm of customary international law. Moreover, the definition of the term ‘investment’ in BITs is not uniform. While the vast majority of BITs make no restriction of the term and, thus, enable an unlimited possibility of standing, other treaties, such as Article 1 of the US 2004 Model BIT and Article 1 No. 6 b) of the ECT, restrict the term to cases where the plaintiff investor holds a controlling stake in the in-

44 Cf. Maffezini v. Spain, ICSID Case No. ARB/97/7, Decision on Objections to Jurisdiction, 25 January 2000, para. 65; CME v. Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para. 392; CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Decision on Objections to Jurisdiction, 17 July 2003, para. 48; GAMI Investments Inc. v. Mexico, UNCITRAL, Award, 15 November 2004, para. 27 et seq.; Daimler Financial Services AG v. Argentina, ICSID Case No. ARB/05/1, Award, 22 August 2012, para. 90. 45 CMS v. Argentina (n. 44) para. 48; CMS v. Argentina, Decision on Annulment, 25 September 2007, para. 69; Daimler Financial Services AG v. Argentina (n. 44) para. 90. 46 See Ian A. Laird (n. 20) 85. 47 CMS v. Argentina (n. 44) para. 48.

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jured company. Given this non-uniformity of treaty practices, a rule of customary international law that supports the diplomatic protection of shareholders has not crystallised from the BITs. 39 Finally, in Diallo, the ICJ affirmed its attitude in the Barcelona Traction judgment48 and rejected Guinea’s arguments concerning the development of customary international law through BITs.49 In both cases, the ICJ found that, in the absence of differing international conventions, such as BITs, only the home State of a company, and not the home State of the shareholders, was entitled to exercise diplomatic protection.50 3. National and Most Favoured Nation Treatment

The substantive protection standards most commonly contained in IIAs include national and most favoured nation treatment. Occasionally, it is represented in the literature that national treatment is generally encompassed by the international minimum standard and is, therefore, recognised under customary international law.51 The traditional sovereign right of States to grant their nationals political rights and, in particular, better economic benefits as compared to foreigners stands, however, in stark contrast to this.52 This is demonstrated by the necessity in most countries of the world that non-citizens obtain work permits. Moreover, this is also demonstrated by the mere existence of the international minimum standard in international law, which permits different treatment of nationals and foreigners. Otherwise, an accepted customary international legal norm, which obliges States to maintain a certain minimum standard for the treatment of aliens in their territory, could not be explained.53 41 International arbitral decisions also recognise that there is no rule of international law that prohibits States from treating their own and foreign nationals dif40

48 Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) (n. 20). 49 Cf. Case Concerning Ahmadou Sadio Diallo (Guinea v. Congo) (n. 23) para. 90; for an equally critical evaluation, see Rudolf Dolzer and Christoph Schreuer (n. 43) 56. 50 Cf. Case concerning the Barcelona Traction, Light and Power Company, Limited (Belgium v. Spain) (n. 20) para. 90. For an analysis of this decision, see also Burkhard Schöbener, Jochen Herbst and Markus Perkams (n. 19) para. 1/216 et seq.; 4/175. 51 Cf. Ulrich Häde, ‘Der völkerrechtliche Schutz von Direktinvestitionen im Ausland’ (1997) 35 AVR 181–212, 187 (accepting this for the event of the prior admission of the investment). 52 Andrea K. Bjorklund, ‘The National Treatment Obligation’ in Katia Yannaca-Small (ed), Arbitration under International Investment Agreements (Oxford University Press, 2010) 412, 413. 53 The fact that the international minimum standard does not concern uniform rules for the equal treatment of foreign and domestic investors can result in foreigners receiving better treatment than nationals do. Presently, it is uncontroversial that the expropriation of a foreigner’s property can only be lawful when conducted according to certain pre-conditions and the payment of compensation. There is, however, no universal international rule for the expropriation of a State’s national’s property. Cf. Burkhard Schöbener, Jochen Herbst and Markus Perkams (n. 19) para. 4/59 et seq., 4/442 et seq. The convergence of the contents of the international minimum standard and the human rights-based protection of property, however, are becoming more apparent. For more on this, see Burkhard Schöbener (n. 3) 917 et seq.

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ferently.54 Agreement on a national treatment clause is usually the result of extensive negotiations. An inter-State agreement to treat foreign investors and residents alike will only be concluded if the State in question aims to receive a benefit from such an agreement. The personal scope of such provisions is restricted to the investors from the State parties. Where the will to be bound is clearly limited to a certain circle of people, such arrangements cannot simultaneously contribute to the formation of customary international law, as this would also apply to investors of third States. The principle of national treatment is, thus, exclusively the result of an explicit contractual agreement of the States. For the same reason, the fact that most favoured nation clauses are often 42 adopted in BITs does not lead to the creation of an identical rule under customary international law. An agreement between the contracting parties on the principle of ‘most favoured nation treatment’ is, like with the clauses for national treatment, the result of extensive negotiations and, therefore, is to be evaluated like a quid pro quo determination, knowingly only agreed to between the parties. 4. Fair and Equitable Treatment

The fair and equitable treatment standard (FET), contained in virtually all 43 BITs, is the most often claimed cause of action in investor-State disputes before arbitral tribunals.55 Despite its general formulation, many lines of cases could be and in fact have been built through arbitral decisions. The recognised content of FET includes the prohibition of denial of justice,56 commitment to due process,57 and the freedom from coercion and harassment.58 The most important protection provided by FET is the protection of legitimate expectations.59 This protects the foreign investor from any State action that would violate his or her legitimate expectations. 54 Cf. Methanex Corp. v. USA, UNCITRAL (NAFTA), Final Award, part IV, ch. C, para. 25. 55 Cf. Andrea Schernbeck, Der Fair and Equitable Treatment Standard in internationalen Investitionsabkommen (Nomos, 2013); Rudolf Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005) 39 Int’l Law. 87–106, 87; Burkhard Schöbener, Jochen Herbst and Markus Perkams (n. 19) para. 4/198; Alexandra Diehl, The Core Standard of International Investment Protection (Kluwer Law International, 2012). 56 See e.g. Waste Management v. Mexico (n. 28) para. 108; Rumeli Telekom AS and Telsim Mobil Telekomikasyon Hizmetleri AS v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 21 July 2008, para. 651; Jan de Nul & Dredging Int. v. Egypt (n. 15) para. 188. 57 See Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (Oxford University Press, 2008) 157. 58 See Ioana Tudor (n. 57) 157. 59 Cf. Técnicas Medioambientales Tecmed S.A. v. Mexico, ICSID Case No. ARB (AF)/00/2, Award, 29 May 2003, para. 154; Waste Management v. Mexico (n. 28) para. 98; Saluka v. Czech Republic, Award, 17 March 2006, para. 302; Separate Opinion of arbitrator Wälde in the decision Thunderbird v. Mexico (n. 15), Award, 26 June 2006, para. 25; Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007, para. 320; Duke Energy v. Ecuador, ICSID Case No. ARB/04/19, Award, 18 August 2008, para. 339 et seq.; EDF (Services) Limited v. Romania, ICSID Case No. ARB/05/13, Award, 8 October 2009, para. 216; Walter Bau v. Thailand, UNCITRAL, Award, 1 July 2009, para. 12.1; 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. 205.

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a) An Independent Standard or a Component of Customary International Law?

The relationship between FET and customary international law has long been a highly controversial issue. This is due not in least part to the fact that FET clauses vary considerably and individual clauses make an explicit reference to customary international law. 45 Article 5 § 1 of the US Model BIT of 2004 calls for ‘treatment in accordance with customary international law, including fair and equitable treatment.’60 In most BITs, FET is not limited in its wording. Due to the different wording of the clauses, one can convincingly differentiate between the freestanding clauses that do not further limit FET, and such clauses that connect FET with customary international law. In the first case, FET must be understood as an independent standard. In contrast, in the scope of the NAFTA61 and US Model BIT, FET has to be understood as a part of customary international law, due to the unambiguous wording. 46 This view has now become accepted, although arbitration tribunals admit that the distinction between freestanding FET obligations and FET clauses with a link to customary international law does not matter for the normative content in a particular case.62 The arbitration tribunals no longer differentiate between the two types of clauses. It has developed into a largely uniform standard. 44

b) Influence of Customary International Law?

A further question is whether FET, which is so widely included in IIAs, has now attained customary international legal applicability. 48 That conclusion would be precluded by the fact that FET is a very broad general clause. State parties that have included this clause in IIAs have, thereby, left the concretisation of FET and its normative content in the hands of the arbitrators. Given the absence of clear normative content, the clause cannot have a fundamentally norm-creating character and is, therefore, as established by the ICJ, not suited to be elevated to customary international law. 49 That the FET cannot be a part of customary international law is evidenced by the fact that investment arbitration case law includes the protection of legitimate expectations. Protection of legitimate expectations of individuals is not a protected area of the international protection minimum standard, but rather goes beyond the customary international legal protection.63 47

60 This wording is derived from the formulation in NAFTA Art. 1105 para. 1 (emphasis added). 61 Cf. contribution of Andrea Bjorklund, ‘NAFTA’s Contributions to Investor-State Dispute Settlement’, ch. 4.III.B., 261–282. 62 See Saluka v. Czech Republic (n. 59) para. 291. 63 See also Hussein Haeri, ‘A Tale of Two Standards: “Fair and Equitable Treatment” and the Minimum Standard in International Law – The Gillis Wetter Prize’ (2011) 27 Arb. Int’l 27– 45; Christoph Schreuer, ‘Fair and Equitable Treatment (FET): Interactions with other Standards’ (2007) 5 TDM, 1–26, 17; Catherine Yannaca-Small, ‘Fair and Equitable Treatment Standard in International Investment Law’ in OECD Working papers on international investment 3/2004, available at http://dx.doi.org/10.1787/675702255435, last access in September

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E. Conclusion and Outlook

An investment law that goes beyond the international minimum standard and 50 independently goes beyond customary international investment law cannot easily be won from the many BITs. The individual BIT clauses are too varied to evolve themselves in toto into customary international law. Moreover, the individual clauses lack the ‘fundamentally norm-creating character’, required by the ICJ. Such a character can only be assumed when the particular interest of the contracting States indicates that the provision is of general validity. In the field of international investment law, such interest is lacking. Rather, IIAs are dominated by quid pro quo negotiations and interests. In that regard, neither the IIAs in toto nor the individual clauses examined provide an adequate basis for the emergence of new customary international law. If one retains the traditional requirements of State practice and opinio juris 51 for the formation of customary international law, then there are many arguments against BITs having an impact on the development of custom.64 Nevertheless, arbitral tribunals have recognised that BITs may have had just such influence on the international minimum standard. In this context, thus, BITs cannot be completely ignored. How this tendency will be reconciled with the traditional view to the formation of customary international law remains unclear. Furthermore, the content and scope of the international minimum standard re- 52 main equally unclear. Sornarajah has stated that it is true that, ‘[o]ne knows that there is such a standard but what the standard contains and what its modern limits are, are unclear.’65 The same is true when defining the content and scope of the future development of the international minimum standard.

2012, 37. Contra Tilman M. Dralle, ‘Der Fair and Equitable Treatment-Standard im Investitionsschutzrecht am Beispiel des Schiedsspruchs Glamis Gold v. United States’ (2011) 115 Beiträge zum transnationalen Wirtschaftsrecht 21 et seq. 64 For the possibility that the traditional prerequisites of State practice and opinio juris have possibly been overtaken, see Andreas Lowenfeld (n. 31) 128–130. 65 Muthucumaraswamy Sornarajah (n. 30) 346.

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Chapter 3: State Contracts and the Relevance of Investment Contract Arbitration I. Investor-State Contracts in the Context of International Investment Law

André von Walter* A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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B. Investor-State Contracts between National and International Law . . . . . .

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C. Internationalisation of Investor-State Contracts through Arbitral Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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D. Protection of Investor-State Contracts through Contractual Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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E. Protection of Investor-State Contracts through International Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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F. Tentative Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26

Literature: Chittharanjan Amerasinghe, ‘States Breaches of Contracts with Alien and International Law’ (1964) 58 AJIL 881–915; Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380; Piero Bernardini, ‘Les arbitrages pétroliers et le droit appliquée par les arbitres (1987) 1 Euro-Arab Arbitration 282–297; Piero Bernardini, ‘The Renegotiation of the Investment Contract’ (1998) 13 ICSID Rev.–FILJ 411–425; Piero Bernardini, ‘Stabilization and Adaptation in Oil and Gas Investments’ (2008) 1 JWELB 98– 112; Karl-Heinz Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (Athenäum, 1971); Derek W. Bowett, ‘State Contracts with Aliens: Cotemporary Developments on Compensation for Termination or Breach’ (1988) 59 BYIL 49–74; Geneviève Burdeau, ‘Droit international et contrats d’Etats. La sentence Aminoil/Koweït du 23 mars 1982 (1982) AFDI 454–470; Syamal Kumar Chatterjee, ‘The Stabilization Clause Myth in Investment Agreements’ (1988) 5 J. Int’l Arb. 97–111; Margarita T. B. Coale, ‘Stabilization Clauses in International Petroleum Transactions’ (2002) 30 Denv. J. Int’l L. & Pol’y 217–238; Nicolas David, ‘Les clauses de stabilité dans les contrats pétroliers. Questions d’un praticien’ (1986) JDI 79–107; Georges R. Delaume, ‘State Contracts and Transnational Arbitration’ (1981) 75 AJIL 784–819; Georges R. Delaume, ‘The Proper Law of State Contracts Revisited’ (1997) 12 ICSID Rev.–FILJ 1–28; Ahmed Sadek El-Kosheri and Tarek F. Riad, ‘The Changing Roles in the Arbitration Process (With Regard to the Applicable Law governing the New Generations of the Petroleum Agreements)’ (1987) 1 Euro-Arab Arbitration 253–281; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses – Legal Protection vs. Functional Value’ (2006) J. Int’l Arb. 317–336; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts’ (2003) 36 Vand. J. Transnat’l L. 1461–1473; Christopher Greenwood, ‘State Contracts in International Law – The Libyan Oil Arbitrations’ (1982) 53 BYIL 27–81; James N. Hyde, ‘Economic Development Agreements’ (1962) 105 RC 270–374; Robert Y. Jennings, ‘State Contracts in International Law’ (1961) 37 BYIL 156–182; Eduardo Jiménez de Aréchaga, ‘International Law in the Past Third of a Century’ (1978) 159 RC 1–343;

* The views expressed are exclusively those of the author and in particular may not in any circumstances be regarded as stating a position of the European Commission.

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A. Introduction

The legal regime applicable to contracts concluded between States and for- 1 eign investors has attracted considerable attention in academic literature and arbitral case law, especially in times which preceded the boom of investment arbitration based on international investment protection treaties. Indeed, investorState contracts relating to foreign investments have been a part of international André von Walter

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economic relations for centuries. Early international concession contracts, not very different from currently prevailing contract practices, can be traced back as far as the beginning of the 16th century1 and arbitral awards rendered between States and foreign investors with regard to such agreements have been reported as early as in the 19th century.2 Yet, the most important doctrinal and judicial developments in this field of international economic law have taken place between the 1950s and 1980s, when several arbitral rulings prompted the international legal community to reflect on the legal foundations of what are commonly referred to as ‘State contracts’. 2 Contracts between States and foreign nationals can cover a variety of economic areas, such as trade, debt, finance or investments. Even though much attention has been paid to contracts relating to foreign debt and financial issues,3 the most prominent legal developments have focussed on trans-border investment contracts, which require the immobilisation of private resources abroad for a long-time period. It is in this particular context that the potential tensions between the interests of the parties to such contracts have become particularly visible. On the one hand, investors seek stability and the observance of the contractual commitments which have formed the basis of their decision to invest and ensure the long-term economic viability of their investments. On the other hand, the investments’ host States may change their policy towards foreign investors in general, or simply adapt their domestic legislation in order to take into account new domestic policy objectives. 3 Against this background, one of the fundamental questions which has emerged was whether those contracts shall be governed by the national law of the investment’s host State – subject to possible changes of the host State’s policies –, or whether it would be possible to subject those contracts to another legal order, preferably to the international legal order, which could not be unilaterally modified by one of the parties. Numerous arbitrators and scholars who have addressed this question have come to innovative but also diverging solutions and the question is not unanimously resolved as of today. Another related question was whether it was possible for a State, through a special contractual commitment, to renounce its right to amend its legislation during the lifespan of a particular investment. Finally, in the current context of proliferation of intergovernmental investment protection agreements, investors also commonly claim the respect of contractual commitments on the basis of such treaties, but the exact scope of this additional protection for contractual rights also remains subject to debate. 1 For examples of early State contracts, see Charles Leben, ‘La théorie du contrat d’Etat et l’évolution du droit international des investissements (2003) 302 RC 197–368, 213–215. 2 See, e.g., the award rendered on 6 July 1864 by emperor Napoléon III between M. de Lesseps and the Vice-King of Egypt with regard to a concession contract relating to the construction of the Suez Canal, reprinted in Albert Geouffre de Lapradelle and Nicolas Politis, Recueil des arbitrages internationaux, vol. 2 (Pedone, 1856–1872) 362–373. 3 See, e.g. Frederick A. Mann, ‘The Law Governing State Contracts’ (1944) BYIL 11–33.

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It is not possible to address all the legal questions relating to investor-State 4 contracts within this short introductory contribution. The aim of this sub-chapter is solely to give a short and selective overview of the impressive doctrinal and arbitral developments which have emerged from the conclusion of trans-border investment contracts since the beginning of the second half of the 20th century. For more detailed information, an abundant body of literature is available.4 The next sub-chapter of this volume also addresses some of these questions in a more detailed way from a practitioner’s point of view. B. Investor-State Contracts between National and International Law

As mentioned earlier, one of the fundamental questions which arose in the 5 context of disputes relating to investor-State contracts was whether those contracts shall be governed by the national law of the investment’s host State, or whether such contracts could be subject to rules and principles of international law, which are out of the reach of the host State’s legislative powers. The answer given to this question by the classic rules of public international 6 law was straightforward: according to the Permanent Court of International Justice’s decision in the Serbian Loans case, ‘[a]ny contract which is not a contract between States in their capacity as subjects of international law is based on the municipal law of some country’.5 The applicable municipal law, so the Permanent Court continued, must be determined by ‘that branch of law which is at the present day usually described as private international law or the “doctrine of the conflict of laws”’.6 Hence, because foreign investors are not subjects of international law, contracts entered into between individuals and States could not be governed by international law according to the classic rules of public international law. The applicable law to those contractual relations would necessarily be ‘national’ law, and, more concretely, the national law determined by the applicable rules of conflict of laws. And indeed, in the absence of an explicit choice of law to the contrary by the parties, the applicable municipal law determined by the rules of conflict of law would generally be the investment’s host

4 For some of the most influential writings see, inter alia, Arnold McNair, ‘The General Principles of Law Recognized by Civilized Nations’ (1957) BYIL 1–19; Alfred Verdross, ‘Protection of Private Property under Quasi-International Agreements’ (1959) Nederlands Tijdschrift voor Internationaal Recht 355–362; Robert Y. Jennings, ‘State Contracts in International Law’ (1961) BYIL 156–182; James N. Hyde, ‘Economic Development Agreements’(1962) 105 RC 270–374; Prosper Weil, ‘Problèmes relatifs aux contrats passés entre un Etat et un particulier’ (1969) 128 RC 94–240; Karl-Heinz Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (Athenäum, 1971); Jean-Flavien Lalive, ‘Contrats entre Etats ou entreprises étatiques et personnes privées. Développements récents’ (1983) 181 RC 9–283; Pierre Mayer, ‘La neutralisation du pouvoir normatif de l’Etat en matière des contrats d’Etat’ (1986) 5 JDI 5– 78; Charles Leben (n. 1) 197–386. 5 Serbian Loans case (France v. Serb-Croate-Slovene State), PCIJ Judgment of 12 July 1929, (1929) PCIJ (Ser. A) No. 20, 41. 6 Id.

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State’s municipal law, as the law with which the contract is the most closely connected.7 7 This application of classic rules of international law should not, however, lead to the conclusion that public international law could not require the respect of contracts entered into between States and foreign investors. An impressive amount of diplomatic exchanges and State-to-State dispute settlement procedures shows indeed that the non-respect of contracts entered into with foreign nationals can, in principle, be considered as being contrary to rules and principles of public international law and give rise to the international responsibility of the State party to the contract.8 However, in such situations, not every disregard of contractual commitments would automatically be considered as constituting an internationally wrongful act. In order to rise to the level of an internationally wrongful act under public international law, a breach of contract would need to be contrary to generally accepted rules concerning the treatment of aliens, i.e., for example, being confiscatory, arbitrary or constitutive of an abuse of right.9 8 As a consequence, the application of classic rules of public international law to investor-State contracts does not transform the contract itself into an international legal act. It is only in the case of an additional breach of public international law, such as the customary international law rules concerning the treatment of aliens, that a breach of contract would trigger the international responsibility of the contracting State in its relations with the home State of the investor who would be entitled to exercise diplomatic protection and to refer the dispute to agreed forums of State-to-State dispute settlement. In the relations between the investor and the investment’s host State, national law would be applicable and, in the absence of another agreed dispute settlement mechanism, the host State’s national tribunals would normally be competent to rule on disputes relating to the observance of the contractual commitments.10

7 See, e.g., Article 4 of the Rome Convention on the Law Applicable to Contractual Obligations, as well as Article 4(4) of Regulation (EC) 593/2008 of the European Parliament and of the Council of 17 June 2008 on the law applicable to contractual obligations (Rome I). See also, the judgment of the Permanent Court of International Justice in the Brazilian Loans case (France v. Brazil), PCIJ Judgment of 12 July 1929, (1929) PCIJ (Ser. A) No. 21, 121, according to which a sovereign State: ‘(…) cannot be presumed to have made the substance of its debt and the validity of the obligations accepted by it in respect thereof, subject to any law other than its own.’ 8 See, e.g., the memorial submitted on behalf of the Hellenic Government before the International Court of Justice on 30 August 1951 in the Ambatielos case (Greece v. United Kingdom), ICJ Judgment of 19 May 1953, ICJ Rep. 1951, 71, and the memorial submitted on behalf of the Swiss Confederation before the Permanent Court of International Justice on 7 January 1936 in the Losinger case (Switzerland v. Yugoslavia), (1936) PCIJ (Ser. C) No. 78, 32. See also the statements of Secretary of State Marshall of 23 September 1800 quoted in John B. Moore, A Digest of International Law (Government Printing Office, 1906), vol. VI, 754. 9 See, e.g., Ian Brownlie, Principles of Public International Law (Clarendon Press, 1990) 548– 549; Chittharanjan F. Amerasinghe, ‘State Breaches of Contracts with Aliens and International Law (1964) 58 AJIL 881–915; American Law Institute, Restatement of the Law, Foreign Relations of the United States (1986), § 712.

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This classic dichotomy between, on the one hand, the application of interna- 9 tional law within the State-to-State relations and, on the other hand, the application of municipal law within the investor-State relations became somehow blurred when investor-State contracts started to include arbitration clauses conferring upon international arbitral tribunals the power to resolve disputes arising under the contracts. In addition, many investor-State contracts concluded throughout the 20th century contained sometimes unclear choice of law clauses which did not seem to exclusively refer to the national law of the investment’s host State. In this new context, international arbitral tribunals called upon to rule on investment contract disputes had to decide on the proper substantive law applicable to the contractual relations between States and foreign investors. C. Internationalisation of Investor-State Contracts through Arbitral Practice

From the investor’s perspective, the advantages of submitting investment con- 10 tracts to rules and principles of international law are evident: the national law of its investment’s host State may be unilaterally modified by its contracting partner and, under most national legal systems, promises given by one government or legislator may also be revoked by the same or a successive government or legislator (cujus est condere legem, ejus est abrogare). Under the rules of international law, however, the principles of pacta sunt servanda and of Article 27 of the Vienna Convention on the Law of Treaties11 would render inoperative unilateral changes to internationally contracted commitments through the national law of either party. As a consequence, the application of international law to investor-State contracts would place both contracting parties on an equal footing from a legal perspective, as opposed to what is common for relations between States and individuals under many domestic legal systems.12 The first arbitral tribunals who referred to principles of international law for 11 the resolution of investor-State contract disputes did not, however, explicitly justify their reasoning by the need to protect the investor against unilateral changes of the law by the investment’s host State. In its award rendered in the 1930 Lena Goldfields Arbitration,13 the tribunal simply applied the concept of ‘unjust enrichment’ as part of general principles of law, without further justifying its démarche. In the 1951 Abu Dhabi Arbitration,14 the declared reason for apply10 See also the ruling of the Permanent Court of Justice in the Panevezys-Saldutiskis Railway case (Estonia v. Lithuania), PCIJ Judgment, (1939) PCIJ (Ser. A/B) No. 76, 18 (‘In principle, the property rights and the contractual rights of individuals depend in every State on municipal law and fall therefore more particularly within the jurisdiction of municipal tribunals.’). 11 Article 27 of the Vienna Convention on the Law of Treaties reads: ‘A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty.’ 12 See, e.g., the French notion of ‘contrat administratif’, which allows for unilateral changes of the contract by the public party in certain circumstances. 13 Lena Goldfields Arbitration, Award of 2 September 1930. For an analysis and excerpts of the award see Arthur Nussbaum, ‘The Arbitration between the Lena Goldfields Ltd. And the Soviet Government’ (1950–1951) Cornell L. Q. 31–53.

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ing general principles of law was that the law of Abu Dhabi did not contain ‘any settled body of legal principles applicable to the construction of modern commercial instruments’. A similar reason was given by the arbitrator deciding in Ruler of Qatar v. International Marine Oil Company,15 where, in addition, the tribunal noted that the application of the municipal Islamic law could render invalid several parts of the agreement. 12 The objective of protecting the investor against changes to, or shortcomings in, the normally applicable national law was however clearly expressed in the 1958 Aramco Arbitration.16 After having designated the law of Saudi Arabia as being the applicable law to the concession contract, the tribunal nevertheless held that this law must be ‘interpreted or supplemented by the general principles of law, by the custom and practice in the oil business and by pure jurisprudence, in particular whenever certain private rights (…) would not be secured in an unquestionable manner by the law in force in Saudi Arabia’.17 13 Even more explicitly, the sole arbitrator ruling in Sapphire v. Iran18 found that the particularities of an oil concession contract, which involve considerable investments and risks, would prevent the application of the national law of the State party to the contract, as this law would not ensure sufficient legal security to the foreign investor. In the view of this tribunal, [u]nder the present agreement, the foreign company was bringing financial and technical assistance to Iran, which involved it in investments, responsibilities, and considerable risks. It therefore seems natural that they should be protected against any legislative changes which might alter the character of the contract, and that they should be assured of some legal security. This could not be guaranteed to them by the outright application of Iranian law, which is within the power of the Iranian State to change.19

The arbitrator found support for this reasoning in the presence of the arbitration clause and in the reference to the concepts of good faith and goodwill in the concession contract, which, according to the tribunal, called for the application of general principles of law, thus giving the contract a ‘quasi-international character which releases it from the sovereignty of a particular legal system’.20

14 Abu Dhabi Arbitration (Petroleum Development Ltd. v. Sheikh of Abu Dhabi), Award of September 1951, (1951) 18 Int’l L. Reporter 144–161. 15 Ruler of Qatar v. International Marine Oil Company, Award of June 1953, (1953) 20 Int’l L. Reporter 534–547. 16 Aramco Arbitration (Saudi Arabia v. Arabian American Oil Company), Award of 23 August 1958, (1963) 27 Int’l L. Reporter 117–233. 17 Id., at 169. 18 Sapphire International Petroleums Ltd. v. National Iranian Oil Company, Award of 15 March 1963, (1967) 35 Int’l L. Reporter 136–192. 19 Id., at 171. 20 Id., at 173.

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The three arbitral tribunals who had to rule on the nationalisations of several 14 oil concessions by the Libyan government between 1971 and 197421 all had to interpret the same choice of law clause which called for the application of (…) the principles of law of Libya common to the principles of international law and in the absence of such common principles then by and in accordance with the general principles of law, including such of those principles as may have been applied by international tribunals.22

It is not possible, within this sub-chapter, to examine in detail the different analyses and reasoning adopted by these three tribunals which have attracted considerable attention and commentaries from legal scholars.23 It can be noted, however, that all three tribunals accepted to resort to the application of general principles of law in case of the non-conformity of Libyan law with international law. In the award Texaco-Calasiatic v. Libya,24 arbitrator R.-J. Dupuy emphasised that the recourse to general principles of law is to be explained not only by the lack of adequate legislation in the State concerned (…). It is also justified by the need for the private contracting party to be protected against unilateral and abrupt modifications of the legislation in the contracting State; it plays, therefore, an important role in the contractual equilibrium intended by the parties.25

Numerous other arbitral awards rendered in the context of long-term invest- 15 ment contracts, such as for example Aminoil v. Kuwait,26 Elf Aquitaine v. NIOC,27 AGIP v. Congo,28 or Mobil Oil v. Iran29 have accepted, although with sometimes diverging reasoning and terminologies, that principles of internation21 BP Exploration Company (Libya) Ltd. v. Libya, Awards of 10 October 1973 and 1 August 1974, (1979) 53 Int’l L. Reporter 297; Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya, Awards of 27 November 1975 and 19 January 1977, (1979) 53 Int’l L. Reporter 389; Libyan American Oil Company (Liamco) v. Libya, Award of 12 April 1977, (1981) 20 ILM 1. 22 See, e.g., BP Exploration Company (Libya) Ltd. v. Libya (n. 21) 298. 23 See, among others, Brigitte Stern, ‘Trois arbitrages, un même problème, trois solutions. Les nationalisations pétrolières libyennes devant l’arbitre international’ (1980) Rev. Arb. 3–34; Robert B. von Mehren and P. Nicholas Kourides, ‘International Arbitration between States and Foreign Private Parties: The Libyan Nationalization Cases’ (1981) 75 AJIL 476–522; Robin C. A. White, ‘Expropriation of the Libyan Concessions – Two conflicting International Arbitrations’ (1981) 30 ICLQ 1–19; Christopher Greenwood, ‘State Contracts in International Law – The Libyan Oil Arbitrations’ (1982) 35 BYIL 27–81; Ahmed Sadek El-Kosheri and Tarek F. Riad, ‘The Changing Roles in the Arbitration Process (With Regard to the Applicable Law governing the New Generations of the Petroleum Agreements)’ (1987) 1 Euro-Arab Arbitration 253–281; André von Walter, ‘Arbitration on Oil Concession Disputes’ in: Rüdiger Wolfrum (ed), Max-Planck Encyclopedia of Public International Law (Oxford University Press, 2008). 24 Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya (n. 21), Awards of 27 November 1975 and 19 January 1977, (1979) 53 Int’l L. Reporter 389. 25 Id., para. 42. 26 Aminoil Arbitration (Government of Kuwait v. American Independent Oil Company), 24 March 1982, (1982) 21 ILM 976. 27 Elf Aquitaine Iran (France) v. National Iranian Oil Company, Preliminary Award of 14 January 1982, (1994) 96 Int’l L. Reporter 251. 28 AGIP SPA v. Congo, Award of 30 November 1979, 1 ICSID Rep. 306. 29 Mobil Oil et al v. Iran, Award of 14 July 1987, 16 Iran–US CTR 3.

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al law could be applied to the interpretation and application of contracts concluded between States and foreign investors. At the same time, prominent scholars have put forward impressive doctrinal analyses which aim at justifying, again with sometimes different reasoning, the recourse to some elements of international law in the context of long-term international investment agreements.30 16 It is noteworthy, however, that most of the abovementioned arbitral rulings have equally emphasised the applicability of the investment’s host State’s law as the law determined by the principles of private international law, whereas international law often only played a corrective or supplemental function. It is equally noteworthy that most of those arbitral tribunals have justified the recourse to international law by reference to specific clauses contained within the concessions contracts. Such clauses have either been explicit choice of law clauses, as in the Libyan oil disputes, or clauses relating to the interpretation and application of the contracts referring to general principles of law such as good faith. The presence of clauses submitting disputes between the contracting parties to international arbitration has also often been considered as a relevant factor for the application of international law.31 17 Given the differences in the reasoning of arbitral tribunals and the variety of opinions expressed in legal scholarship, it cannot be assumed today that every investor-State contract would automatically fall under the ambit and protection of international law. As a consequence, the concrete terms of each contract remain of fundamental importance for the contractual equilibrium of long-term investor-State contracts. D. Protection of Investor-State Contracts through Contractual Commitments 18

The specific content of each Investor-State contract can indeed be of utmost relevance in deciding whether the contract will be governed by the domestic law of the investment’s host State alone, or whether some additional international law principles will contribute to ensure the stability of the contractual arrangements. Contracts which simply refer to the national law of the host State without any further qualifications will most commonly be governed by that domestic law alone, whereas contracts containing clauses which also refer to international law, principles of international law, or international means for the settlement of investment disputes may arguably benefit from an additional protection derived from the realm of international law.

30 See, notably, Arnold McNair (n. 4) 1–19; Alfred Verdross (n. 4) 355; Prosper Weil (n. 4) 94– 240; Pierre Mayer (n. 4) 5–78. 31 See, e.g., Texaco Overseas Petroleum Company & California Asiatic Oil Company (TopcoCalasiatic) v. Libya (n. 21) 389, para. 44; Sapphire International Petroleums Ltd. v. National Iranian Oil Company (n. 18) 136–192, 172.

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Another technique which aims at ensuring stability in the contractual relations 19 between investors and States is the inclusion, within investor-State contracts, of so-called ‘stabilisation clauses’, by which the investor’s host State commits itself not to alter the legal framework applicable to the contract during a certain period of time. Such clauses can foresee the application of the host State’s legislation as it exists at a certain date, prohibit subsequent changes of the legal framework without the investor’s consent, or provide that such changes would not be applicable to the contract in question. It is not possible to analyse in detail within this short contribution all these different techniques, or to even cursorily present the manifold doctrinal and arbitral developments which have been prompted by the use of this contractual technique. An abundant body of literature32 and the following sub-chapter are available for more detailed analyses. It can be noted, however, that the question of the validity of such stabilisation 20 commitments seems once again to be closely related to the question of the legal order in which investor-State contracts operate. In many domestic legal systems, a promise given by the legislator not to exercise its legislative powers during a certain period of time would not be legally valid. As a consequence, it may be argued that stabilisation clauses will only be effective, if the law applicable to the relations between the State and the investor is international law or, at the least, a legal order which is distinct from the domestic law of the investor’s host State. Hence, scholars and arbitral tribunals have interpreted stabilisation commitments as being one of the factors which lead to the internationalisation of State contracts,33 or concluded that contracts containing stabilisation clauses must be governed by international law in order to give effect to such clauses.34 Nevertheless, the legal validity and exact scope of so-called stabilisation 21 clauses remains subject to debate.35 An interesting application of a stabilisation 32 See, inter alia, Prosper Weil, ‘Les clauses de stabilisation ou d’intangibilité insérées dans les accords de développement économique’ in Mélanges offerts à Charles Rousseau (Pedone, 1974) 301–328; Esa Paasivirta, ‘Internationalization and Stabilization of Contracts versus State Sovereignty’ (1989) 60 BYIL 315–350; Nicolas David, ‘Les clauses de stabilité dans les contrats pétroliers. Questions d’un praticien (1986) JDI 79–107; Syamal Kumar Chatterjee, ‘The Stabilization Clause Myth in Investment Agreements (1988) J. Int’l Arb. 97–111; Thomas Wälde and George Ndi, ‘Stabilizing International Investment Commitments: International Law versus Contract Interpretation (1996) 31 Tex. Int’l L. J. 215–267; Margarita T. B. Coale, ‘Stabilization Clauses in International Petroleum Transactions’ (2002) 30 Denv. J. Int’l L. & Pol’y 217–238; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses – Legal Protection vs. Functional Value’ (2006) J. Int’l Arb. 317–336. 33 Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya (n. 21) 389, para. 45. 34 Pierre Mayer (n. 4) 5–78. 35 For views in favour of the validity of such stabilisation commitments, see, e.g., Prosper Weil (n. 4) 94–240, as well as the arbitral awards rendered in Texaco Overseas Petroleum Company & California Asiatic Oil Company (Topco-Calasiatic) v. Libya (n. 21) 350–389, 371, para. 71; Libyan American Oil Company (Liamco) v. Libya (n. 21) 1–87, 60; and AGIP SPA v. Congo (n. 28) 306–329, 327, para. 86. For critical views, see, inter alia, Eduardo Jiménez de Aréchaga, ‘International Law in the Past Third of a Century’ (1978) 159 RC 1–343; Muthucumaraswamy Sornarajah, ‘The Myth of International Contract Law’ (1981) 15 JWTL 187– 217.

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commitment included in an oil concession contract can be found in the wellknown Aminoil arbitration award.36 While accepting the validity of stabilisation clauses in principle, the majority of this tribunal found that such undertakings must be explicit and limited in time37 and, in the particular case, only took the clause into account in the context of determining the compensation due to the foreign investor.38 This approach has been positively commented upon in legal literature,39 but it seems as if a clear-cut and unanimous view on the validity and functioning of such clauses still needs to emerge. 22 In any event, the more recent practice relating to long-term investment contracts frequently complements or replaces stabilisation commitments by socalled adaptation or renegotiation clauses, which allow for adaptations of the contractual equilibrium during the lifespan of the investment.40 Such clauses, which are also sometimes called ‘economic equilibrium clauses’, will be addressed in detail within the next sub-chapter of this volume.41 E. Protection of Investor-State Contracts through International Investment Agreements 23

In the current context with around 3,000 intergovernmental investment protection treaties in force, foreign investors often rely upon such international investment agreements (IIAs) for resolving disputes which relate to contracts entered into with the investment’s host State. A prominent feature of such IIAs is 36 Aminoil Arbitration (Government of Kuwait v. American Independent Oil Company) (n. 26) 976 et seq. 37 Id., at 1023, para. 95. 38 Id., at 1023, para. 96. See, however, also the separate opinion of judge Fitzmaurice at p. 1053. 39 See, inter alia, Philippe Kahn, ‘Contrats d’Etat et nationalisation: les apports de la sentence arbitrale du 24 mars 1982’ (1982) 109 JDI 844–909, 868; Geneviève Burdeau, ‘Droit international et contrats d’Etats. La sentence Aminoil c. Koweït du 24 mars 1982 (1982) AFDI 454– 470, 470; Ahmed Sadek El-Kosheri and Tarek F. Riad (n. 23) 253–281, 277. 40 See, e.g., Jan Paulsson, ‘L’adaptation du contrat’ (1984) Rev. Arb. 249–257; Wolfgang Peter, Arbitration and Renegotiation of International Investment: A Study with particular reference to means of conflict avoidance under natural resources investment agreements (Nijhoff, 1986); Nagla Nassar, Sanctity of contracts revisited: a study in the theory and practice of long-term international commercial transactions (Nijhoff, 1995); Piero Bernardini, ‘The Renegotiation of the Investment Contract’ (1998) 13 ICSID Rev.–FILJ 411–425; Abba Kolo and Thomas Wälde, ‘Renegotiation and Contract Adaptation in International Investment Projects’ (2000) 1 JWI 5–58; Jeswald W. Salacuse, ‘Renegotiating International Business Transactions: the Continuing Struggle of Life Against Form’ (2001) 35 Int’l Law. 1507–1541; Jeswald W. Salacuse, ‘Renegotiating International Project Agreements’ (2001) 24 Fordham Int’l L. J. 1319–1370; Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts’ (2003) 36 Vand. J. Transnat’l L. 1461–1473; Stefan Kröll, ‘The Renegotiation and Adaptation on Investment Contracts’ in Norbert Horn (ed), Arbitrating Foreign Investment Disputes (Kluwer, 2004) 425–470; Piero Bernardini, ‘Stabilization and Adaptation in Oil and Gas Investments’ (2008) 1 JWELB 98–112. 41 See contribution of Morris Besch, ‘Typical Questions Arising within Negotiations’, ch. 3.II., 93–152.

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that they allow investors to resort to international arbitration for the settlement of investment disputes, even when the contracts concluded between the investors and the host States do not foresee international means of dispute resolution. Treaty-based investment arbitration also allows the investor to rely on additional substantive international law standards, such as the prohibition of expropriation or the standard of fair and equitable treatment, and many IIAs explicitly call for the application of rules and principles of international law for the resolution of investment disputes.42 As a consequence, in this context, contracts entered into between foreign investors and States can arguably be analysed through the lens of public international law concepts such as arbitrariness, fair and equitable treatment, respect of acquired rights, or good faith. Nevertheless, it should be noted that the legal foundations of such claims will 24 be the substantial international law standards and principles which are included or incorporated into the intergovernmental investment protection agreements. Hence, it is not the respect or non-respect of particular clauses contained in the underlying investment contracts which will be subject of international dispute settlement, but the overall behaviour of the investment’s host State in its relations towards the foreign investor.43 The purely ‘contractual’ aspects of the dispute will normally remain subject to the dispute settlement procedures foreseen within the investment contract or, in the absence of any choice of forum in the contract, to the domestic courts of the investment’s host State. Hence, at least from a conceptual point of view, the situation remains similar to the classic approach described above under which the breach of a contract entered into with a foreign investor would only amount to a breach of international law if it is contrary to the internationally accepted standards of treatment of aliens. One attempt to overcome this classical dichotomy between contractual and 25 international law commitments is the inclusion, within intergovernmental investment protection treaties, of so called ‘umbrella clauses’, by which the contracting State commits itself to respect contractual obligations entered into with foreign investors.44 The interpretation and application of such clauses in the context of international investment disputes will be described in detail in another chapter of this book.45 For the purpose of these cursory remarks on State contracts, it is 42 See, for example, the 2004 Canadian model bilateral investment protection agreement which directs tribunals to decide the issues in dispute ‘in accordance with this Agreement and applicable rules of international law’ (article 40-1). In the absence of an explicit choice of law, article 42 of the Convention establishing the International Centre for Settlement of Investment Disputes calls for the application of the law of the contracting State party to the dispute and ‘such rules of international law as may be applicable’. 43 Investment tribunals usually distinguish between so-called ‘treaty claims’ (which claim the non-respect of a provision of an applicable intergovernmental investment protection agreement) and so-called ‘contract claims’ (which claim the non-respect of purely contractual commitments), in particular since the decision on annulment in Compañía de Aguas del Aconquija, SA & Vivendi Universal v. Argentina, ICSID Case No. ARB/97/3, Decision on Annulment, 3 July 2002, 41 ILM 1135. 44 Such clauses are sometimes also named ‘mirror clauses’, ‘elevator clauses’, ‘respect of undertakings clauses’, or ‘pacta sunt servanda clauses’.

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however interesting to note that some arbitrators have been reluctant to give full effect to such clauses, as the consequences would be ‘destructive of the distinction between national legal orders and the international legal order’.46 F. Tentative Conclusions

It is difficult to conclude on the exact role and legal nature of investor-State contracts in the current context of international investment law. It is a fact that many international investment operations require sometimes complex contractual arrangements between foreign investors and the public authorities of the investment’s host State. Different drafting techniques are available to foreign investors in order to ensure the stability and predictability of such contractual commitments. These techniques will be described in detail within the next subchapter from a practitioner’s perspective. But governments will also need to carefully reflect on the contractual balance to be found between, on the one hand, ensuring the necessary stability for the operation of long-term investment projects, and, on the other hand, the possibility to adapt their legal framework in line with evolving public policy objectives. The precise role to be given to the national judiciary in the resolution of foreign investment disputes should also be carefully considered. 27 From a more theoretical point of view, it appears that investor-State contracts still seem to somehow oscillate between national and international law. Many efforts have been made to equate breaches of investor-State contracts to breaches of international law, such as through contract drafting techniques, arbitral and doctrinal developments, or the inclusion of umbrella clauses in international investment protection agreements. Yet, such efforts have not always been completely effective, as demonstrated by the diverging positions expressed in arbitral case law on the functioning of the umbrella clause. At the same time, many governments have been reluctant to include umbrella clauses within their international investment protection agreements. Many of such agreements also point to international law alone as the law applicable to international investment disputes, while domestic remedies remain available for other claims. 28 It therefore seems as if there is still no clear consensus on the precise position of investor-State contracts within the broader field of international investment law. Despite numerous attempts to equate such contracts with public international law instruments, there also seems to remain some appetite for maintaining a distinction between, on the one hand, the law governing investment contracts and, on the other hand, the international law governing foreign investment. 26

45 See contribution of Anthony Sinclair, ‘Umbrella Clause’, ch. 8.VII., 887–958. 46 El Paso Energy International Company v. Argentina, ICSID Case No. ARB/03/15, Decision on Jurisdiction, 27 April 2006, para. 82. See also SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case No. ARB/01/13, Decision on Jurisdiction, 6 August 2003, (2003) 43 ILM 1290 et seq., para. 167.

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Morris Besch A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. Choice of Law Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Importance of Explicit Choice of Law in State Contracts . . . . . . . . . . . 2. Exclusive Selection of Non-National Rules . . . . . . . . . . . . . . . . . . . . . . . . . . a) Admissibility of the Selection of a Non-National Law . . . . . . . . . . . . b) Selectable Non-National Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Selection of International Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Selection of General Legal Principles . . . . . . . . . . . . . . . . . . . . . . . . (3) Selection of a Lex Mercatoria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Trends in Modern State Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Exclusive Application of the National Law of the Host State . . . . b) Combination of Non-National Law with National Law . . . . . . . . . .

4 5 9 11 12 13 17 20 25 26 30

C. Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. The Concept of Stabilisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Stabilisation Techniques. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Freezing Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Non-Application Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Clauses of Non-Intervention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Economic Equilibrium Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Scope of Stabilisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Full Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Limited Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Restriction of Stabilisation to Specific Statutes . . . . . . . . . . . . . . (2) Restriction of Stabilisation to Specific Legal Areas. . . . . . . . . . (3) Stabilisation of the Stabilisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Advantages and Disadvantages of a Limited Stabilisation Clause . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) ‘Qualified’ Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Inconsistency Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Non-Discrimination Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Time-Limited Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Limitation on the Duration of the Investment Project . . . . . . . (2) Limitation on Certain Phases of the Investment Project. . . . . 4. Hybrid Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Stabilisation Clauses in State Contracts with State Enterprises . . . . . 6. Validity of Stabilisation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) No Breach of International Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) No Invalidity due to Restriction on Legislative Sovereignty . . . . . c) Validity According to Lex Causae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7. Binding Effect of the Stabilisation Clause on the Host State. . . . . . . . a) Binding Effect in Case of Application of National Law . . . . . . . . . . b) Binding Effect in Case of the Application of International Law 8. Legal Effects of Stabilisation Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Explicit Agreement on Legal Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Restitutio in Integrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Compensation for Non-Performance. . . . . . . . . . . . . . . . . . . . . . . . . . (3) Contractual Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Legal Effects in the Absence of Express Agreement on Legal Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Legal Consequences under National Law . . . . . . . . . . . . . . . . . . . . (2) Legal Consequences under Non-National Regulations . . . . . .

35 36 38 39 41 43 45 48 49 52 56 58 60 62 65 66 68 71 72 74 76 77 80 81 83 86 88 89 92 97 98 101 104 106 108 110 113

D. ‘Dynamic’ and ‘Flexible’ Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 1. The Concept of Dynamic and Flexible Clauses . . . . . . . . . . . . . . . . . . . . . . 115

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Chapter 3: State Contracts and the Relevance of Investment Contract Arbitration 2. Renegotiation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Stipulation of the Trigger Events for Renegotiation . . . . . . . . . . . . . . (1) Renegotiation Clauses without Specific Trigger Events . . . . . (2) Renegotiation Clauses with General Trigger Events . . . . . . . . (3) Detailed list of Trigger Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Renegotiation Clauses with Backup Provision . . . . . . . . . . . . . . . b) Stipulation of the Scope of Renegotiation . . . . . . . . . . . . . . . . . . . . . . . . . (1) Renegotiation Clauses without Restrictions . . . . . . . . . . . . . . . . . . (2) Partial Renegotiation Obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Objective of Renegotiation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Obligations of the Parties and the Legal Effects of Renegotiation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) General Negotiation Obligations of the Parties. . . . . . . . . . . . . . (2) Right to Agreement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Amendment of Contract through Arbitration . . . . . . . . . . . . . . . . . e) Combination of Dynamic Clauses and Stabilisation Clauses . . . .

118 120 122 124 126 130 132 133 135 137

E. Dispute Resolution Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Advantages of Arbitration Compared to National Courts. . . . . . . . b) Arbitration as binding on the Host State . . . . . . . . . . . . . . . . . . . . . . . . . . c) Ad Hoc Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Institutional Arbitration Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Alternative Dispute Resolution Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Mediation or Conciliation Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Concept of Mediation or Conciliation . . . . . . . . . . . . . . . . . . . . . . . . (2) Mediation or Conciliation Clauses in a State Contract . . . . . (3) UNCITRAL Conciliation Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Institutional Mediation/Conciliation Rules . . . . . . . . . . . . . . . . . . . b) Expert Proceeding Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Dispute Review Boards Clauses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Hybrid Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

158 160 161 166 168 173 178 180 180 181 183 185 188 193 196

138 139 142 151 156

F. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

Literature: Adebayo Adaralegbe, ‘Methods of Dispute Settlement for State Contracts in the Nigerian Petroleum Sector’ (2003) 69 (4) J. Chartered Inst. Arb. 265–271; Amazu A. Asouzu, International Commercial Arbitration and African States: Practice, Participation and Institutional Development (Cambridge University Press, 2001); Ellis Baker and Anthony Lavers, ‘The Expert in Dispute Resolution: A Common Law Perspective’ (2004) 70 (1) J. Chartered Inst. Arb. 9–18; Martin Bartels, Contractual Adaptation and Conflict Resolution. Based on venture contracts for mining projects in developing countries (Kluwer, 1985); Jürgen F. Baur and Stephan Hobe (eds), Rechtsprobleme von Auslandsinvestitionen. Konzessionen, Vertragsanpassung, Vergabeverfahren (Nomos, 2003); Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380; Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer Law International, 2001); Klaus Peter Berger, Private Dispute Resolution in International Business: Negotiation, Mediation, Arbitration. vol. II: Handbook (Kluwer Law International, 2009); Piero Bernardini, ‘The Renegotiation of the Investment Contract’ (1998) 13 (2) ICSID Rev.–FILJ 411–425; Piero Bernardini, ‘Stabilization and adaptation in oil and gas investments’ (2008) 1 (1) JWELB 98–112; Morris Besch, Schutz von Auslandsinvestitionen – Risikovorsorge durch Investitionsverträge (Verlag Recht und Wirtschaft, 2008); R. Doak Bishop, James Crawford and Michael W. Reisman, Foreign Investment Disputes: Cases, Materials and Commentary (Kluwer Law International, 2005); Nigel Blackaby, David M. Lindsey and Alessandro Spinillo (eds), International Arbitration in Latin America (Kluwer Law International, 2002); John P. Bowman, ‘Dispute Resolution Plan-

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II. Typical Questions Arising within Negotiations ning for the Oil and Gas Industry’ (2001) 16 (2) ICSID Rev.–FILJ 332–407; Michael A. G. Bunter, The promotion and licensing of petroleum prospective acreage (Kluwer Law International, 2002); Margarita T.B. Coale, ‘Stabilisation clauses in international petroleum transactions’ (2002) 30 (2) Denv. J. Int’l L. & Pol’y 217–237; John Collier and Vaughan Lowe, The settlement of disputes in International Law. Institutions and Procedures (Oxford University Press, 2000); Lorenzo Cotula, Investment contracts and sustainable development: How to make contracts for fairer and more sustainable natural resource investments (International Institute for Environment and Developments, 2010); Bernardo M. Cremades and David J. A. Cairns, ‘The Brave New World of Global Arbitration’ (2002) 3 (2) JWI 173–209; Georges R. Delaume, ‘The Proper Law of State Contracts Revisited’ (1997) 12 ICSID Rev.–FILJ 1–28; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses. Legal Protection vs. Functional Value’ (2006) 23 (4) J. Int’l Arb. 317–336; Mohamed Al Faruque, ‘Typologies, Efficacy and Political Economy of Stabilization Clauses: A Critical Appraisal’, (2007) 5 TDM 31– 33; Patrick Fiedler, Stabilisierungsklauseln und materielle Verweisung im internationalen Vertragsrecht (Peter Lang, 2001); Pierre Michel Genton, ‘The Role of the DRB in Long-term Contracts’ (2002) 18 (1) Constr. L. J. 8–19; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts, Revisited.’ (2003) 36 Vand. J. Transnat’l L. 1461–1473; Horacio A. Grigera-Naón, ‘The settlement of investment disputes between states and private parties: an overview from the perspective of the ICC’ (2000) 1 (1) JWI 59–103; Sam Foster Halabi, ‘Efficient Contracting between Foreign Investors and Host States: Evidence from Stabilization Clauses’, (2011) 31 Nw. J. Int’l L. & Bus. 261–313; Norbert Horn and Stefan Kröll (eds), Arbitrating Foreign Investment Disputes (Kluwer Law International, 2004); Dyalá Jiménez-Figueres, ‘Amicable Means to Resolve Disputes: How the ICC ADR Rules Work’ (2004) 21 (1) J. Int’l Arb. 91–101; Stefan M. Kröll, Die Ergänzung und Anpassung von Verträgen durch Schiedsgerichte. Eine Untersuchung zum deutschen und englischen Recht (Heymanns, 1998); Julian D. M. Lew, Loukas A. Mistelis and Stefan M. Kröll, Comparative International Commercial Arbitration (Kluwer Law International, 2003); Munir Maniruzzaman, ‘Internationalization of Foreign Investment Agreements: Some Fundamental Issues of International Law’ (2000) 1 JWI 293–320; Howard Mann, ‘Stabilization in investment contracts: Rethinking the context, reformulating the result’ (2011) 1 (2) ITN 6–8; Thomas Markert, Rohstoffkonzessionen in der internationalen Schiedsgerichtsbarkeit (Nomos, 1989); Hanno Merkt, Investitionsschutz durch Stabilisierungsklauseln. Zur intertemporalen Rechtswahl in State Contracts (Verlag Recht und Wirtschaft, 1990); Nagla Nassar, Sanctity of Contracts Revisited: A Study in the Theory and Practice of Long-Term International Commercial Transactions (Nijhoff, 1995); Andreas Nelle, Neuverhandlungspflichten – Neuverhandlungen zur Vertragsanpassung und Vertragsergänzung als Gegenstand von Pflichten und Obliegenheiten (Beck, 1993); Sangwani Ng’ambi, ‘Stabilisation Clauses and the Zambian Windfall Tax’ (2011) 1 (1) Zambia Social Science Journal 107–117; Ucheora Onwuamaegbu, ‘The Role of ADR in Investor-State Dispute Settlement: The ICSID Experience’ (2005) 22 (2) News from ICSID 12–14; Esa Paasivirta, Participation of States in International Contracts and Arbitral Settlement of Disputes (Finnish Lawyer’s Publishing, 1990); Wolfgang Peter, Arbitration and Renegotiation of International Investment Agreements, Second Revised and Enlarged Edition (Kluwer Law International, 1995); Mauro Rubino-Sammartano, International Arbitration Law and Practice (Kluwer Law International, 2001); Giorgio Sacerdoti, ‘Investment Arbitration under ICSID and UNCITRAL Rules: Prerequisites, Applicable Law, Review of Awards’ (2004) 19 (1) ICSID Rev.–FILJ 1–48; Jeswald W. Salacuse, ‘Renegotiating International Project Agreements’ (2001) 24 Fordham Int’l L. J. 1317–1370; Jeswald W. Salacuse, ‘Renegotiating International Business Transactions: The Continuing Struggle of Life Against Form’ (2001) 35 Int’l Law. 1507–1588; Stephen M. Schwebel, International Arbitration: Three Salient Problems (Grotius, 1987); Muthucumaraswamy Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International, 2000); Muthucumaraswamy Sornarajah,

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A. Introduction

In making foreign investments, private investors are subject to many risks. Apart from financial risks these are above all political risks which decisively influence both the contract negotiations between the host State and the investor but also the investment decision itself. 2 Since the host State functions simultaneously both as the contractual partner and the legislator, there is particularly the risk that once most of the investment is made the host State will subsequently change investment conditions and the legislative framework for the investment. In addition, in politically unstable States the foreign investor must always expect arbitrary, legal or discriminating acts of governments, e.g. confiscation and breach of contract by the host State or a corrupt administration apparatus rendering successful investments considerably more difficult or even impossible.1 Moreover in the event of any such arbitrary act of the host State, the investor often cannot rely on impartial and just proceedings before national courts of the host State and effective legal protection.2 1

1 See on these political risks Morris Besch, Schutz von Auslandsinvestitionen – Risikovorsorge durch Investitionsverträge (Verlag Recht und Wirtschaft, 2008) 5 et seq.; Margarita T. B. Coale, ‘Stabilisation clauses in international petroleum transactions’ (2002) 30 (2) Denv. J. Int’l L. & Pol’y 217–237, 221 et seq.; Muthucumaraswamy Sornarajah, The Settlement of Foreign Investment Disputes (Kluwer Law International, 2000) 14; Abdullah Faruque, ‘Validity and Efficacy of Stabilisation Clauses. Legal Protection vs. Functional Value’ (2006) 23 (4) J. Int’l Arb. 317– 336, 317; Sam Foster Halabi, ‘Efficient Contracting between Foreign Investors and Host States: Evidence from Stabilization Clauses’ (2011) 31 Nw. J. Int’l L. & Bus. 261–313, 267 et seq.; Peter D. Cameron, Stabilisation in Investment Contracts and Changes of Rules in Host Countries: Tools for Oil & Gas Investors, AIPN Final Report, 5 July 2006, 12, available at http:// www.rmmlf.org/Istanbul/4-Stabilisation-Paper.pdf; Lorenzo Cotula, ‘Rethinking investor-state contracts through a sustainable development lens’ (2011) 1 (2) ITN 4–5, 5. 2 Amazu A. Asouzu, International Commercial Arbitration and African States: Practice, Participation and Institutional Development (Cambridge University Press, 2001) 34 et seq.; JeanFlavien Lalive, ‘Contrats entre Etats ou entreprises étatiques et personnes privées’ (1983-III) 181 RC 9–283, 64; Jan Paulsson, ‘Third World Participation in International Investment Arbitration’ (1987) 2 ICSID Rev.–FILJ 19–65, 44 et seq.

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Private foreign investors therefore endeavour to include precautions in their 3 State contracts against such risks and to insist on contractual clauses which secure the investment project independently of any existing bilateral or multilateral investment protection treaties. Contract clauses which typically arise in this context in the course of contract negotiations with a host State are namely choice of law clauses (B. below), stabilisation clauses (C. below), dynamic and flexible clauses (D. below) and dispute resolution clauses (E. below). B. Choice of Law Clauses

To maximise protection for the investment project, private foreign investors 4 usually agree in their State contracts on explicit choice of law clauses. In a choice of law clause, the investor and the host State stipulate the substantive law applicable to the investment agreement and to disputes out of or in connection therewith. 1. Importance of Explicit Choice of Law in State Contracts

Choice of law clauses are not a phenomenon exclusive to State contracts. 5 They are adequately known and usual in international contracts between purely private parties. With a choice of law clause, the parties – whether private or State – aim at avoiding primarily legal uncertainty by specifying the applicable law and also by selecting the legal jurisdiction most suitable for them. In State contracts however a choice of law clause has an additional function with particular importance: choice of law clauses are often deliberately used by private investors to minimise the risk of unilateral intervention of the host State in the investment project.3 The reason for this is the particular position of the host State which is not on- 6 ly the contractual partner of the private foreign investor, but at the same time the legislator. Without an explicit choice of law agreement the national law of the host State would usually apply in accordance with the applicable national conflict of law rules, since a dispute about an investment project being conducted in the host State will usually have the closest connection to the law of the host State.4 If the national law of the host State applies exclusively to the State contract, the host State would have the possibility to amend the law applicable to

3 See on the function of choice of law clauses in State contracts Julian D. M. Lew, Loukas A. Mistelis and Stefan M. Kröll, Comparative International Commercial Arbitration (Kluwer Law International, 2003) 451 et seq.; Morris Besch (n. 1) 85 et seq. 4 See Morris Besch (n. 1) 119 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 429; Horacio Grigera-Naón, Choice-of-Law Problems in International Commercial Arbitration (Mohr Siebeck, 1992) 41; Wolfgang Peter, Arbitration and Renegotiation of International Investment Agreements (Kluwer Law International, 1995) 136; Mauro Rubino-Sammartano, International Arbitration Law and Practice (Kluwer Law International, 2001) 429; Heleni Theodorou, Investitionsschutzverträge vor Schiedsgerichten (Duncker & Humblot, 2001) 350 et seq.

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the State contract unilaterally after the conclusion thereof in the course of the long-term investment projects in a manner unfavourable to the investor. The host State could thereby de facto dictate subsequently to the investor the rules by which the State contract is to be interpreted and by which the legality of State intervention in the investment project is to be assessed.5 7 Foreign private investors therefore developed contractual mechanisms in their State contracts intended to prevent such a unilateral right of intervention of the host State in the investment project and the associated risk of abuse. These mechanisms include – apart from the agreement on a stabilisation clause (see C. below) – in particular the choice of an applicable law other than the law of the host State, e.g. the application of the rules of international law, a lex mercatoria or general legal principles. 8 The protection of such a choice of law clause is – at least theoretically – thinkable with the help of two kinds of choice of law clauses: the agreement of exclusive application of non-national legal provisions (2. below) or the agreement of the application of non-national legal provisions in addition to the national foreign law (3. below). 2. Exclusive Selection of Non-National Rules

Mainly in older State contracts, choice of law clauses are found which provide for the exclusive application of non-national rules. The protection intended by such internationalisation of the State contract is based on a relatively simple idea: the national law of the host State should not apply to the State contract from the outset because it is subject to manipulation. If the national law of the host State does not apply – that is at least the fundamental idea6 – it cannot be unilaterally amended by the host State. 10 This concept is however not watertight. The exclusive choice of non-national rules while legally admissible, cannot completely exclude the application of national law of the host State. In addition, it is also in practice usually linked to certain difficulties and rarely can be insisted upon in the contract negotiations with the host State. In modern State contracts, therefore, such clauses are rarely found today. 9

5 Matthias Herdegen, ‘Rechtsprobleme des internationalen Konzessionswesens – insbesondere aus völkerrechtlicher Sicht’ in Jürgen F. Baur and Stephan Hobe (eds), Rechtsprobleme von Auslandsinvestitionen. Konzessionen, Vertragsanpassung, Vergabeverfahren (Nomos, 2003) 13–35, 17; A. F. Munir Maniruzzaman, ‘Stabilisation in Investment Contracts and Change of Rules in Host Countries: Tools for O&G Investors’, Association of International Petroleum Negotiators (2007); Wolfgang Peter (n. 4) 144. 6 See on the idea of internationalisation of State contracts Prosper Weil, ‘The State, the Foreign Investor, and International Law: The No Longer Stormy Relationship of a Ménage À Trois’ (2000) 15 ICSID Rev.–FILJ 401–416, 404 et seq.; Karl-Heinz Böckstiegel, Der Staat als Vertragspartner ausländischer Privatunternehmen (Athenäum Verlag, 1971) 85; Frederic-Alexander Mann, ‘The Proper Law of Contracts Concluded by International Persons’ (1959) 35 BYIL 34–57, 46; Rainer Velten, Die Anwendung des Völkerrechts auf State Contracts in der internationalen Schiedsgerichtsbarkeit (Duncker & Humblot, 1987) 28.

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a) Admissibility of the Selection of a Non-National Law

The choice of law usually is made with the support of a conflict of laws refer- 11 ence to the applicable substantive law. Unlike in a mere substantive law reference in which the parties incorporate certain rules into the State contract and thereby integrate them as content of the contract, in a conflict of laws reference the parties submit their contract to a national or non-national jurisdiction entirely. In this manner, it is possible for the parties to exclude not only the discretionary but also the mandatory provisions of local law – with the exception of any overriding mandatory and conflict of law provisions of the host State’s law.7 In State contracts a conflict of laws reference to non-national rules is in the overwhelming view regarded as admissible.8 A conflict of laws reference to non-national regulations is admitted also by many modern national rules of arbitration, especially rules based on the UNCITRAL model law, and by institutional rules of arbitration (cf. only Art. 42(1) of the ICSID Convention and Art. 21(1) of the International Chamber of Commerce (ICC) Rules of Arbitration). An arbitration tribunal is bound by this choice of law. b) Selectable Non-National Rules

In order to remove the State contract from the national law of the host State, 12 the selection of international law, the general legal principles or transnational law or a lex mercatoria may be considered.9 However, if selected alone, all of these available alternatives cause certain dogmatic and above all practical difficulties and therefore are not necessarily suitable for a State contract.

7 Patrick Fiedler, Stabilisierungsklauseln und materielle Verweisung im internationalen Vertragsrecht (Lang, 2001) 52; Abdullah Faruque (n. 1) 334; Giuditta Cordero Moss, ‘Lectures on International Commercial Law’ (2003) 92 CEPMLP Internet J., 1, 14; A. F. Munir Maniruzzaman, ‘International Arbitrator and Mandatory Public Law Rules in the Context of State Contracts: An Overview’ (1990) 7 J. Int’l Arb. 53–64, 53 et seq. 8 See Hercules Booysen, ‘Völkerrecht als Vertragsstatut internationaler privater Verträge’ (1995) 59 RabelsZ 245–257, 247 et seq.; Frederic-Alexander Mann, ‘The Theoretical Approach Towards The Law Governing Contracts Between States and Private Persons’ (1975) 11 R.B.D.I. 562–567, 562 et seq.; Giorgio Sacerdoti, ‘Investment Arbitration under ICSID and UNCITRAL Rules: Prerequisites, Applicable Law, Review of Awards’ (2004) 19 (1) ICSID Rev.–FILJ 1–48, 16; Guido Santiago Tawil, ‘Applicable Law’ in UNCTAD (ed), Dispute Settlement. International Centre for Settlement of Investment Disputes (United Nations, 2003) 7; other view: Jutta Stoll, Vereinbarungen zwischen Staat und ausländischen Investoren (Springer, 1982) 79; Heleni Theodorou (n. 4) 372, accepting only a mere substantive law reference. 9 See in detail e.g. Ahmed Z. El Chiati, ‘Protection of Investment in the Context of Petroleum Agreements’ (1987-IV) 204 RC 9–169, 121 et seq.; Juha Kuusi, The Host State and the Transnational Corporation. An Analysis of Legal Relationships (Saxon House, 1979) 59 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 451 et seq.; Jean-Pierre Regli, Contrats d’Etat et arbitrage entre Etats et personnes privées (Georg, 1983) 115 et seq.; Erich Schanze, Investitionsverträge im internationalen Wirtschaftsrecht (Metzner, 1986) 111 et seq.; Jutta Stoll (n. 8) 67 et seq.

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(1) Selection of International Law

The selection of international law has at first glance the advantage that it is the only jurisdiction which exists independently of national State law. With the selection of international law it can be excluded that – with the exception of overriding mandatory and conflict of law provisions of the host State – the applicable substantive law will be unilaterally amended unfavourably to the private contractual party.10 14 Nevertheless the exclusive selection of international law is mostly seen in older State contracts.11 In modern State contracts the exclusive selection of international law is on the contrary seldom encountered.12 This has – apart from the general trend to renationalisation of State contracts (see 3. below) – a number of reasons: 15 Firstly the selection of international law causes certain dogmatic difficulties. In particular, it is disputed in the literature whether and to what extent private investors can be fully or partially subjects of international law, e.g. of the provisions of the Vienna Convention on the Law of Treaties13 or whether rules of international law can at least be applied to private persons analogously.14 This is 13

10 Karl-Heinz Böckstiegel (n. 6) 99; Frederic-Alexander Mann (n. 6) 565; Robert B. von Mehren and P. Nicholas Kourides, ‘International Arbitrations between States and Foreign Private Parties: the Libyan Nationalisation Cases‘ (1981) 75 AJIL 476–552, 511 et seq.; Ivars Mēkons, ‘State Contracts: The True and Unparallelled Reaches of Their Binding Force. Reflections on Public and Private International Law’ (2011), available at http://ssrn.com/abstract=1887724, p. 28 et seq. 11 Arghyris A. Fatouros, ‘International Law and the Internationalized Contract’ (1980) 74 AJIL 134–141, 135; Thomas Markert, Rohstoffkonzessionen in der internationalen Schiedsgerichtsbarkeit (Nomos, 1989) 118; Jean-Pierre Regli (n. 9) 13. E.g. in Art. 29.1. of the State Contract between P.T. Indonesian Nickel Development Co., Ltd. and Indonesia dated 2nd April 1969 it is stated: ‘Any such dispute referred for settlement by arbitration (…) shall be decided in accordance with such rules of international law (…)’, cited in Martin Bartels, Contractual Adaptation and Conflict Resolution. Based on venture contracts for mining projects in developing countries (Kluwer, 1985) 110, n. 136 (emphasis added). 12 Abdullah Faruque (n. 1) 333; Martin Bartels (n. 11) 109 et seq.; Theodor Schweisfurth, Völkerrecht (Mohr Siebeck, 2006) mn. 170. 13 Affirmative (partially subject of international law) inter alia: Karl-Heinz Böckstiegel (n. 6) 184, 344; Georg Dahm, Jost Delbrück and Rüdiger Wolfrum, Völkerrecht, vol. I/2, Der Staat und andere Völkerrechtssubjekte; Räume unter internationaler Verwaltung (de Gruyter, 2002) 257; negative: Albert Bleckmann, Völkerrecht (Nomos, 2001) 48; Alexander Catranis, ‘Probleme der Nationalisierung ausländischer Unternehmen vor internationalen Schiedsgerichten’ (1982) 28 RIW 19–27, 23; Karl Doehring, Völkerrecht (Müller, 2004) 174 et seq.; Ole Lando, ‘Renegotiation and Revision of International Contracts’ (1980) 23 GYIL 37–58, 39; Muthucumaraswamy Sornarajah, ‘The Myth of International Contract Law‘ (1981) 15 JWTL 187– 217, 207; Stephen J. Toope, Mixed International Arbitration – Studies in Arbitration Between States and Private Persons (Grotius, 1990), 85 et seq. 14 Affirmative (inter alia): Herrmann Mosler and Finn Seyersted, ‘Les accords entre un Etat et une personne privée étrangère‘ (1980-II) 58 Annuaire 42–103, 64, 74 et seq.; Hercules Booysen (n. 8) 250; negative (inter alia): Jiménez E. de Aréchaga, ‘International Law in the Past Third of a Century‘ (1978-I) 159 RC 1–343, 308; Karl Doehring (n. 13) 175; Otto Sandrock, ‘Choice of Law and Choice of Forum in Civil Law Jurisdictions’ in Kolo Yelpaala, Mauro Rubino-Sammartano and Dennis Campbell, Drafting and Enforcing Contracts in Civil and Common Law Jurisdictions (Kluwer Law and Taxation Publishing, 1986) 145–194, 167.

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not the place to go into this primarily academic dispute again. For details, the references stated can be referred to. It remains to be stated here however, that the investor selecting international law as proper law, can expect to be met with such dogmatic objections of the host States in the event of a legal dispute. Secondly, it is questionable whether international law is suitable at all to satis- 16 factorily regulate a State contract. International law rules have been developed to deal with the legal relations between sovereign States. They therefore include very few provisions appropriate for the resolution of investment disputes with private parties.15 International law regulations may be in some areas (e.g. in the law on confiscation and the law on the environment) more developed and may contain provisions which are more favourable for the private investor than the regulations of many national jurisdictions.16 In these areas at least the additional reliance on international regulations can be useful. International law does not however cover the entire range of legal questions arising in State contracts. (2) Selection of General Legal Principles

The same applies to the exclusive selection of general legal principles. ‘Gen- 17 eral Legal Principles’ are the legal principles accepted by all or at least most national jurisdictions and are therefore regarded as the expression of the common legal philosophy.17 They are part of international law according to Art. 38(1)(c) of the Statute of the International Court of Justice. In the context of investment disputes, the principles of estoppel (venire contra factum proprium), pacta sunt servanda, clausula rebus sic stantibus and unjustified enrichment are relevant as general legal principles. The general legal principles are even less appropriate as the exclusive law ap- 18 plicable to a State contract than international law as a whole. Like international law in general, the general legal principles as part of international law are not suitable to adequately regulate an investment relationship between private investors and a host State. Due to their general or transnational application, general legal principles necessarily have a high degree of triviality.18 With regard to 15 Guido Santiago Tawil (n. 8) 8; Patrick Fiedler (n. 7) 211; Munir Maniruzzaman (n. 5) 34 et seq.; Esa Paasivirta, Participation of States in International Contracts and Arbitral Settlement of Disputes (Finnish Lawyer’s Publishing, 1990) 61; Alan Redfern, ‘The Arbitration between the Government of Kuwait and Aminoil’ (1984) 55 BYIL 65–110, 80 et seq.; Heleni Theodorou (n. 4) 371 et seq. 16 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 465 et seq. See on the application of international law on confiscation to State contracts Uwe Kischel, State Contracts: Völker-, schieds- und internationalprivatrechtliche Aspekte des anwendbaren Rechts (Boorberg, 1992) 339 et seq.; Hanno Merkt, Investitionsschutz durch Stabilisierungsklauseln. Zur intertemporalen Rechtswahl in State Contracts (Verlag Recht und Wirtschaft, 1990). 17 See Guido Santiago Tawil (n. 8) 20 et seq.; John O’Brien, International Law (Cavendish Publishing, 2002) 85 et seq.; Ivars Mēkons (n. 10) 24 et seq. 18 Philippe Leboulanger, Les contrats entre Etats et entreprises étrangères (Economica, 1985) 220; Thomas Markert (n. 11) 126; Hanno Merkt (n. 16) 127 et seq.; Jutta Stoll (n. 8) 38; Stephen Toope (n. 13) 71; John Collier and Vaughan Lowe, The settlement of disputes in International Law. Institutions and Procedures (Oxford University Press, 2000) 245; Christoph

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their precise application, they are often not capable of being adequately specified, allowing an arbitration tribunal under general legal principles to justify any result, and in that connection be subject to the suspicion of having exceeded its jurisdiction as amiables compositeurs. In this context, considerable difficulties can arise in the recognition and execution of arbitration awards issued on the basis only of the general legal principles.19 19 For the above reasons, the exclusive selection of general legal principles is seldom found in modern State contracts. At most, the supplementary selection of general legal principles with the national law of the host State may be considered (cf. 3.b). (3) Selection of a Lex Mercatoria

Moreover, it is discussed whether the private investor can protect himself against subsequent legal amendments of a host State by agreeing with the host State on the application of a lex mercatoria (or a transnational law) to the State contract.20 21 This lex mercatoria is intended to constitute a third autonomous legal jurisdiction together with national law and international law. Lex mercatoria is said to include all rules which are applied uniformly and unanimously by the ‘transnational community’ or the ‘international business community’, e.g. international trade customs, arbitration practice, international legislation or resolutions of international organisations.21 Sometimes, only legal regulations from sources not clearly attributable to a specific State law or international law are included in the foundations of a lex mercatoria.22 22 This approach has a certain charm at first glance: with the application of a ‘third’ jurisdiction independent of international law and national law – that is at least the basic idea – the investor is protected from future legislative measures of the host State. The classic understanding of international law would thereby – contrary to the case of the selection of international law (see above) – not be breached. Moreover, the application of uniformly applied rules of business people seems to be at first view more adequate in international investment business20

19 20

21 22

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H. Schreuer, ‘Commentary on the ICSID Convention: Article 25’ (1996) 11 (2) ICSID Rev.– FILJ 318–492, 414 et seq. Hanno Merkt (n. 16) 129. See inter alia Georges R. Delaume, ‘The Myth of the Lex Mercatoria and State Contracts’ in Thomas E. Carbonneau, (ed), Lex Mercatoria and Arbitration: A Discussion of the New Law Merchant (Juris Pub., 1998), 111–132; Yves Fortier, ‘New Trends in Governing Law: The New, New Lex Mercatoria, or, Back to the Future’ (2001) 16 (1) ICSID Rev.–FILJ 10–19 with further references. See in detail Ursula Stein, Lex Mercatoria. Realität und Theorie (Klostermann, 1995) 184 et seq.; Felix Dasser, Internationale Schiedsgerichtsbarkeit und lex mercatoria (Schulthess Polygraphischer Verlag, 1989) 43 et seq. So e.g. Jan Paulsson, ‘La lex mercatoria dans l’arbitrage CCI’ (1990) Rev. Arb. 55–100, 69 et seq.; Bernhard Goldman, ‘Nouvelles réflexions sur la lex mercatoria’ in Christian Dominicé, Robert Patry and Claude Reymond, Etudes De Droit International en l’Honneur de Pierre Lalive (Helbing & Lichtenhahn, 1993) 241–255, 241 et seq.

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es than the application of State law.23 However, unlike in purely private international contracts, the selection of a lex mercatoria plays only a very subordinate role in State contracts for a number of reasons: it is firstly doubted that in the area of foreign investments there actually exists a ‘transnational community’ or a ‘community of business people’, which conduct their investment projects consciously in accordance with uniform rules recognised in practice. Investment projects of foreign private investors are not in the least standardised. They can, depending on the industry, region and the nature and duration of the investment project be very different. In addition, there has been a dispute for decades between developing and industrial countries with relation to very significant questions of international investment law, e.g. the long-term binding to State contracts. Against this background it appears to be utopian to assume that there is – not to mention generally trivial legal principles – a source of generally accepted rules of investment law which could resolve investment disputes comprehensively and in a foreseeable manner and form.24 Secondly, apart from the lack of clarity about the existence, the content, and 23 the scope of a lex mercatoria, the selection of a lex mercatoria as the proper law vis-à-vis the host State is hardly enforceable in contract negotiations for another reason. The host State is bound to law and statutes and regards itself accordingly, primarily bound to national and international law. If the rules of a lex mercatoria agree with those of national law or international law, the application of the lex mercatoria is not critical. Problems arise if the rules of a lex mercatoria contradict the rules of national law or international law. In that case, the host State can hardly adopt a position contrary to its own national law or international law in favour of a third jurisdiction, the existence of which is not clarified and which has not been created or at least approved in a regulated democratic legislative process. Otherwise, the government of the host State would be subject in its own country to the suspicion of subjecting itself to the rules and practices of foreign private investors instead of the written law and statutes.25 Accordingly, the application of a lex mercatoria is very rarely agreed upon in 24 international contracts and if so, then at most as supplement to the applicable national law of the host State (see below). 3. Trends in Modern State Contracts

In modern contracts an increasing trend to ‘renationalisation’ of State con- 25 tracts is to be observed.26 In modern State contracts, choice of law clauses with 23 Ursula Stein (n. 21) 212 et seq.; Klaus Peter Berger, ‘The new law merchant and the global market place’ in Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer Law International, 2001) 1–21, 2 et seq. 24 Yves Fortier (n. 20) 11 et seq.; Morris Besch (n. 1) 108 et seq.; Heleni Theodorou (n. 4) 341; Keith Highet, ‘The Enigma of the Lex Mercatoria’ in Thomas E. Carbonneau (ed), Lex Mercatoria and Arbitration: A Discussion of the New Law Merchant (Juris Pub., 1998) 133–142, 139. 25 Morris Besch (n. 1) 110.

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an exclusive choice of a non-national law are very rarely met. Host States and investors increasingly tend to agree that the national law of the host State is exclusively applicable to their State contracts (cf. a) or at least agree on a compromise – the application of non-national rules in addition to the national law (cf. b). a) Exclusive Application of the National Law of the Host State 26

Host States increasingly succeed in their State contracts by imposing the exclusive choice of their national law as the proper law.27 Many host States already provide in their standard State contracts the sole application of their national law. In Article 32.1 of the Bid Round Deep Water Model Production Sharing Contract of Trinidad and Tobago it is stated e.g.: The validity, interpretation and implementation of this Contract shall be governed by the laws of the Republic of Trinidad and Tobago.28

Similar standard clauses are found e.g. in the standard State contracts of Cyprus,29 Bangladesh,30 Tanzania31 and India.32 28 This increasing ‘renationalisation’ of State contracts which is clearly discernable from the early 1970s, is due not only to the practical and dogmatic difficulties linked to the exclusive selection of non-national rules as proper law, but to a considerably stronger political self-confidence of many developing States most 27

26 See Georges R. Delaume, ‘The Proper Law of State Contracts Revisited’ (1997) 12 ICSID Rev.–FILJ 1–28, 1 et seq.; Ahmed El-Kosheri and Tarek Riad, ‘The Law Governing a New Generation of Petroleum Agreements: Changes in the Arbitration Process’ (1986) 1 ICSID Rev.–FILJ 257–288, 258 et seq.; Matthias Herdegen (n. 5) 20; Juha Kuusi (n. 9) 16 et seq.; Wolfgang Peter (n. 4) 142; Muthucumaraswamy Sornarajah, ‘Supremacy of the Renegotiation Clause in International Contracts’ (1988) 5 J. Int’l Arb. 61–114, 99 et seq.; Heleni Theodorou (n. 4) 323 et seq. 27 Guido Santiago Tawil (n. 8) 7; Georges R. Delaume, ‘State Contracts and Transnational Arbitration’ (1981) 75 AJIL 784–819, 796; Esa Paasivirta (n. 15) 57 et seq.; Munir Maniruzzaman, ‘Internationalization of Foreign Investment Agreements: Some Fundamental Issues of International Law’ (2000) 1 JWI 293–320, 293 et seq. 28 Available at http://www.energy.gov.tt/wp-content/uploads/2013/11/Deep_Water_Depth_PSC. pdf. 29 Art. 35.1 of the Model PSC of Cyprus (2012): ‘This Contract and the Hydrocarbons Operations carried out under said Contract shall be governed by the legislation at any time in force in the Republic of Cyprus’, available at http://www.mcit.gov.cy/mcit/mcit.nsf/all/2300DDB36D859732C22579AA002BDE09/$file/Model%20PSC.pdf?openelement (emphasis added). 30 Art. 29 of the Model PSC of Bangladesh (2012): ‘The validity, interpretation and implementation of this Contract shall be governed by the law of the People’s Republic of Bangladesh’, available at http://www.petrobangla.org.bd/offshore-bidding-round-2012/Model_PSC_2012. pdf (emphasis added). 31 Art. 29 of the Model Production Sharing Contract of the United Republic of Tanzania (2013), ‘This Agreement shall be governed by, interpreted and construed in accordance with the Laws of the United Republic of Tanzania.’available at http://www.tpdc-tz.com/Model%20Production%20Sharing%20Agreement%20(2013).pdf. 32 Art. 32.1 of the Model Production Sharing Contract of India (2010): ‘This Contract shall be governed and interpreted in accordance with the laws of India.’ Available at http:// petroleum.nic.in/nelp93.pdf (emphasis added).

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recently at the end of the 1960s and beginning of the 1970s in connection with the demand for a new world economic system, increasingly resisting an ‘internationalisation’ of their State contracts and increasingly insisting on the application of their own national laws.33 Many host States passed in recent years investment acts accordingly providing for the mandatory application of national law.34 In addition, the international competition for foreign private investment and 29 the associated creation of investor-friendly legal environments and liberal and modern legal systems in many developing countries, has clearly strengthened the confidence of investors in the national law of many States and at the same time reduced the urgent necessity of investors to choose non-national rules.35 b) Combination of Non-National Law with National Law

However, the confidence of foreign private investors in such an investor- 30 friendly legal environment can be deceiving. No private investor has a guarantee that an initially investor-friendly legal environment continues to be so in the course of a long-term investment project. Changes of government, political turbulences or changes in attitude toward foreign private investment can rapidly and unexpectedly lead to subsequent changes in the legal environment to the disadvantage of investors or even to direct intervention of the host State in the investment project.36 A foreign private investor should therefore establish at least a minimum of 31 protection against such risks in the choice of law clause. Since host States on the above grounds are usually not willing to waive the application of their national law, the private investors can offer as ‘compromise’ a combination of national law and non-national rules (e.g. principles of international law and/or general legal principles). Such combined clauses offer certain advantages both for the host State and also the investor. By the primary application of the national law it is usually ensured – unlike in 32 the case of the sole choice of non-national rules – that a legal system is provided which is at least appropriate to regulate legal questions arising in the course of an investment project adequately. The primary application of the national law also takes account of the close connection of the investment project to the law of the host State. 33 Muthucumaraswamy Sornarajah (n. 1) 27 et seq.; Muthucumaraswamy Sornarajah (n. 13) 206 et seq.; Thomas Wälde, ‘Revision of Transnational Investment Agreements: Contractual Flexibility in Natural Resources Development’ (1978) 10 Law. Am., 265–298, 265 et seq.; Heleni Theodorou (n. 4) 317 et seq. 34 E.g. see Art. 12(1) of the Investment Law of Senegal (2004), further examples cited in Munir Maniruzzaman (n. 27) 294, fn. 5; Hanno Merkt (n. 16) 154. 35 Georges R. Delaume (n. 26) 2; Matthias Herdegen (n. 5) 20. 36 Lorenzo Cotula, ‘Regulatory Takings, Stabilization Clauses and Sustainable Development’, OECD Global Forum on International Investment VII, 27–28 March 2008, available at http:// www.oecd.org/dataoecd/45/8/40311122.pdf, 12; Peter Cameron (n. 1) 20 et seq. See e.g. to the nationalisation of many international energy groups in Bolivia in 2006, UNCTAD World Investment Report 2006 (United Nations, 2006) 76.

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For the host State, such a combined clause has the attraction that the host State can show itself to be investor-friendly by the cumulative or secondary acceptance of non-national rules without, however, completely giving up the application of its own national law. For the investor, such a combined clause – depending on its drafting – permits at least a certain minimum protection by way of quality control of the national host State’s law. Interventions of the host State in the investment will be assessed according to the combined choice of law clause not only according to national law but also to international standards of protection which present greater demands on the legality of any State intervention (with regard to the nature and the amount of compensation) and which in addition cannot be manipulated by the host State subsequently.37 34 In order to ensure such a quality control, it must be observed in the negotiation of the choice of law clause that in the clause itself the relationship between national and non-national law is explicitly determined. For example, it can be agreed that the national law only applies if it is reconcilable with the generally recognised international law standards.38 In the absence of an explicit condition on the relationship between national and non-national law, considerable difficulties of interpretation can arise in a court proceeding or arbitration and therefore a certain legal uncertainty.39 This is e.g. illustrated by the lively discussion in the literature and arbitration practice of the actual interpretation of Art. 42(1), (2) of the ICSID Convention which – in the absence of a choice of law – specifies the application of national law and international rules without determining the concrete relationship between them.40 33

C. Stabilisation Clauses 35

Investor-friendly legal environments in a host State only have real value for the investor if they remain investor-friendly throughout the long period of the investment project and if the host State does not endanger the financial success of the investment project by arbitrary measures. Private foreign investors should therefore above all in countries of risk take precautions in the State contract against such subsequent unfavourable amendments of national law. The classic

37 Nigel Rawding, ‘Protecting Investments Under State Contracts: Some Legal and Ethical Issues’ (1995) 11 (4) Arb. Int’l 341–372, 351; Morris Besch (n. 1) 115 et seq. 38 See e.g. Art. 29.5 of the oil concession of 6 November 1990 between the Oil & Gas Development Corp., Texaco Exploration Pakistan Inc. and Pakistan: ‘This Agreement shall be governed and interpreted in accordance with and shall be given effect under the laws of Pakistan to the extent that such laws and interpretations are consistent with generally accepted standards of International Law including principles as may have been applied by international tribunals.’, cited in R. Doak Bishop, James Crawford and Michael Reisman, Foreign Investment Disputes: Cases, Materials and Commentary (Kluwer, 2005) 256. 39 Esa Paasivirta (n. 15) 63 et seq., Nigel Rawding (n. 37) 35; Georges R. Delaume (n. 26) 2; Georges R. Delaume (n. 20) 116. 40 See in detail with further references Guido Santiago Tawil (n. 8) 17 et seq.; Morris Besch (n. 1) 126 et seq.

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instrument for this – apart from the choice of non-national rules as quality control of the national law (cf. B.3.b) above) – is the agreement of a stabilisation clause in the State contract. 1. The Concept of Stabilisation

The term stabilisation clause refers to agreements in State contracts having 36 the function of protecting the legal position of the foreign investor against subsequent amendments to national host State’s law. By stabilisation clauses, the State contract is intended to be insulated against subsequent legal amendments. At least a reasonable financial compensation shall be ensured in the event of subsequent unfavourable legal amendments.41 At the same time stabilisation clauses are used by the host States to give confidence to investors at the initial stage of the investment and to present itself as investor-friendly in order to encourage foreign investment. Hence for the host State stabilisation clauses have also a certain promotional function.42 In practice lenders often view stabilisation clauses as essential to the bankability of an investment project, particularly in emerging markets.43 In particular with regard to the nature of the stabilisation technique (see 2. be- 37 low) and the scope of the national law to be stabilised (see 3. below), there is a wide range of types of stabilisation clauses. 2. Stabilisation Techniques

In order to protect the investor from subsequent legal amendments in the host 38 State, a number of different stabilisation techniques have been developed in contractual practice. a) Freezing Clauses

One of the classic stabilisation techniques is the freezing technique. In freez- 39 ing clauses, the law of the host State, if applicable to the contract, is fixed by the parties at a particular point of time. The parties agree that only the law of a par41 On the concept of stabilisation clauses see inter alia Margarita Coale (n. 1) 222; Patrick Fiedler (n. 7) 55 et seq.; Hanno Merkt (n. 16) 35 et seq.; Nagla Nassar, Sanctity of Contracts Revisited: A Study in the Theory and Practice of Long-Term International Commercial Transactions (Nijhoff, 1995) 121; Muthucumaraswamy Sornarajah (n. 1) 50; Abdullah Faruque (n. 1) 317 et seq., 321; Bertrand Montembault, ‘The Stabilisation of State Contracts Using the Example of Oil Contracts: A Return of the Gods of Olympia?’ (2003) 6 IBLJ 593–643, 599; Lorenzo Cotula (n. 36) 5 et seq.; Piero Bernardini, ‘Stabilization and adaptation in oil and gas investments’ (2008) 1 (1) JWELB 98–112, 100; Ivars Mēkons (n. 10) 21 et seq.; Thomas W. Wälde and George K. Ndi, ‘Stabilising international investment commitments’ (1996) 31 Tex. Int’l L. J. 215–268, 216; Andrea Shemberg, ‘Stabilization Clauses and Human Rights’ (11 March 2008), available at http://www.ifc.org, p. 4. 42 Howard Mann, ‘Stabilization in investment contracts: Rethinking the context, reformulating the result’ (2011) 1 (2) ITN 6–8, 6; Lorenzo Cotula (n. 36) 2; Abdullah Faruque (n. 1) 322 et seq.; Andrea Shemberg (n. 41) 5. 43 Andrea Shemberg (n. 41) 5.

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ticular date applies to the State contract.44 Quite common is an agreement that the national law is fixed at the time of the conclusion45 or at the time of coming into effect of the State contract.46 40 The stabilisation concept of a freezing clause is in principle very simple: the freezing has the effect that the host State can subsequently change its national law without breaching the stabilisation clause. However, the subsequent amendment does not apply to the State contract, since only the law valid at the time the State contract is concluded or comes into effect applies to it. If the host State nevertheless applies the subsequently amended law to the investor in spite of the agreed freezing clause, the host State acts under the State contract without any legislative basis and therefore in breach of contract47 (as to the legal consequences see 7. below). b) Non-Application Clauses 41

Non-application clauses are very similar to freezing clauses with regard to the stabilisation technique and the legal effects. In a non-application clause, the freezing is merely described in negative form:48 quite common is an agreement that subsequent legal amendments do not apply to the State contract or are not intended to have any effect on the State contract.49 The same effect can be achieved by agreements giving the contract priority over subsequent legislation.50 44 On freezing clauses see Margarita Coale (n. 1) 223; Morris Besch (n. 1) 137; Patrick Fiedler (n. 7) 59 et seq.; Munir Maniruzzaman (n. 5) 25 et seq.; Hanno Merkt (n. 16) 41 et seq.; Abdullah Faruque (n. 1) 319; Lorenzo Cotula (n. 36) 6; Guido Santiago Tawil (n. 8) 15; Sam Foster Halabi (n. 1) 292 et seq.; Peter Cameron (n. 1) 28 et seq.; Ivars Mēkons (n. 10) 30; Andrea Shemberg (n. 41) 5 et seq. 45 E.g. Article 33 of the State contract between Texas Pacific Ghana Inc. and Ghana of 1979: ‘This Agreement shall be governed by and construed in accordance with the Laws of Ghana existing of the date of this Agreement (…).’, (emphasis added) cited in Hanno Merkt (n. 16) 42, fn. 46; see also ICSID Model Clause 10, which suggests the insertion of the words ‘as in force on the date on which this agreement is signed’, (1997) 4 ICSID Rep. 364. 46 E.g. Art. 30.5 of the Model Petroleum Concession Agreement for Onshore Area of Pakistan (2013): ‘All the rules, laws, regulations in effect on the Effective Date, including the Workers’ Welfare Fund Ordinance, 1971 and the Companies Profits (Workers’ participation) Act, 1968 shall apply to this Agreement, throughout its terms, whether or not subsequently amended or revised.’ (emphasis added), available at http://www.ppisonline.com/PEPC2013/Downloads/MCA2013.pdf. 47 Hanno Merkt (n. 16) 223; Pierre-Yves Tschanz, ‘Contrats d’Etat et mesures unilatérales de l’Etat devant l’arbitre international’ (1985) 74 RCDIP 47–84, 61; Abdullah Faruque (n. 1) 319. 48 Patrick Fiedler (n. 7) 65 et seq.; Morris Besch (n. 1) 137 et seq.; Thomas Markert (n. 11) 201; Hanno Merkt (n. 16) 43 et seq.; Abdullah Faruque (n. 1) 319; Guido Santiago Tawil (n. 8) 15; Piero Bernardini (n. 41) 100. 49 E.g.: ‘The (…) Laws and Decrees which may in the future impose higher rates or more progressive rates of [tax] or would otherwise impose a greater (…) tax liability than that anticipated under Section (…) of the Upstream Project Agreement shall not apply to the Company.’ (emphasis added), cited in Andrea Shemberg (n. 41) 6. 50 E.g. Sec. 9 of a 2000s Sub-Saharan extractive agreement: ‘In the event of any conflict between this Agreement or the rights, obligations and duties of a Party under this Agreement,

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The legal effects of the non-application clause correspond to those of the 42 freezing clause. With the agreement of a non-application clause the host State is not prevented from amending its national law after the conclusion of the contract. The host State may not, however, apply the amended law to the State contract. The host State can e.g. in spite of the stabilisation of tax law subsequently amend originally investor-friendly tax law in the course of the investment project without breaching the non-application clause. A breach of contract arises only if the State in spite of the non-application clause charges the investor more under the amended law as would have been possible under the original tax law (see 7. below). c) Clauses of Non-Intervention

Clauses of non-intervention are based on a completely different stabilisation 43 technique than freezing clauses and non-application clauses. Clauses of non-intervention are not limited to the mere non-application of subsequent legal amendments but are rather directed at preventing the passing of legal amendments.51 However, by clauses of non-intervention, the host State is usually not prevented from amending its law at all. Such a clause would hardly be accepted by a host State with regard to its sovereignty and legislative competence. Therefore in most cases the parties agree to exclude only such subsequent legal amendments which affect the State contract or the investor itself. In Article 30.1(e) of the Model Production Sharing Contract of Mozambique (2001) it was stated e.g. that [t]he Government will not without the agreement of the Contractor exercise its legislative authority to amend or modify the provisions of this Agreement and will not take or permit any of its political subdivisions, agencies and instrumentalities to take any administrative or other action to prevent or hinder the Contractor from enjoying the rights accorded to it hereunder.52

The State therefore does not breach the non-intervention clause by passing 44 new legislation but only if it includes the investor or the contract in the application of the new legislation. In contrast to freezing and non-application clauses, the host State directly breaches the prohibition stated in the non-intervention clause by passing legislation as soon as it does not exclude the investor or the State contract from its application.53

and any other Law, including administrative rules and procedures and matters relating to procedure, and applicable international law, then this Agreement shall govern the rights, obligations and duties of the Parties.’ (emphasis added), cited in Andrea Shemberg (n. 41) 6, fn. 14. 51 See Andreas Bucher, ‘Droit international privé suisse’, tome I/2: Partie générale – Droit applicable (Helbing & Lichtenhahn, 1995) mn. 240; Margarita Coale (n. 1) 223; Patrick Fiedler (n. 7) 62 et seq.; Uwe Kischel (n. 16) 75; Hanno Merkt (n. 16) 44 et seq.; Esa Paasivirta (n. 15) 162; Heleni Theodorou (n. 4) 458. 52 Cited in Peter Cameron (n. 1) 29. 53 Richard W. Bentham, ‘The Law of Development: International Contracts’ (1990) 32 GYIL 418–434, 426 et seq.; Hanno Merkt (n. 16) 227 et seq.

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d) Economic Equilibrium Clauses

Economic equilibrium clauses are often found in modern State contracts.54 These clauses are not aimed at protecting the investor against subsequent legal amendments or even preventing the host State from amending its law unfavourably for foreign investors but rather at protecting the investor against financial disadvantages arising from a subsequent legal amendment.55 The host State is free to subsequently amend its national law and to apply the new law to the State contract. The host State undertakes, however, to compensate any losses which are thereby suffered in order to re-establish financial parity.56 46 Instead of a financial compensation the economic equilibrium clause can also state an obligation to renegotiate the State contract with the objective of maintaining or re-establishing the original yield for the investor. By this stabilisation clause and renegotiation clause (see on this D.2.a)(3) below) are combined.57 45

54 See on the regional and sectoral usage of economic equilibrium clauses Sam Foster Halabi (n. 1) 297 et seq.; Peter Cameron (n. 1) 31 et seq.; Andrea Shemberg (n. 41) 7 et seq. 55 On economic equilibrium clauses see Peter Cameron (n. 1) 31 et seq.; Abdullah Faruque (n. 1) 320 et seq., 331 et seq.; Lorenzo Cotula (n. 36) 6; Mohamed Al Faruque, ‘Typologies, Efficacy and Political Economy of Stabilization Clauses: A Critical Appraisal’, (2007) 4 TDM 31– 33, 31 et seq.; Sam Foster Halabi (n. 1) 297 et seq.; Piero Bernardini (n. 41) 102; Ivars Mēkons (n. 10) 31 et seq.; Andrea Shemberg (n. 41) 7 et seq. 56 E.g.: ‘In the event of the occurrence of a Change in Law (including a Change in Law that becomes applicable to the Company because of damage to and the restoration of the Plant) that requires a material modification or a material capital addition to the plant, which is completed by the Company, or in lieu thereof or in addition thereto, an increase or decrease in operating costs including the use or quality of fuel or consumables by the Plant, and this Agreement is not terminated by (…) pursuant to Article (…), the Company will be entitled to receive Recovery Allowance payments under (…) from (…) to recover fully the costs of complying with the Change in Law, including the costs of any material modifications or material capital additions to the Plant that are necessary for the Company to come into compliance with the Change in Law. The amount of any Recovery Allowance due under this Article shall be determined pursuant to Article (…).’, cited in Andrea Shemberg (n. 41) 7. 57 E.g. Article XIX of the Concession Agreement of 2002 for Petroleum Exploration & Exploitation between ARE and The Egyptian General Petroleum Corporation & Dover Investments Limited: ‘In case of changes in existing legislation or regulations applicable to the conduct of Exploration, Development and production of Petroleum, which take place after the Effective Date, and which significantly affect the economic interest of this Agreement to the detriment of CONTRACTOR or which imposes on CONTRACTOR an obligation to remit to the A.R.E. (Arab Republic of Egypt) the proceeds from sales of CONTRACTOR’s Petroleum, CONTRACTOR shall notify EGPC (the NOC) of the subject legislative or regulatory measure. In such case, the Parties shall negotiate possible modifications to this Agreement designed to restore the economic balance thereof which existed on the Effective Date. The parties shall use their best efforts to agree on amendments to this Agreement within ninety (90) days from aforesaid notice. These amendments to this Agreement shall not in any event diminish or increase the rights or obligations of CONTRACTOR as these were agreed on Effective Date. Failing Agreement between the Parties during the period referred to above in this Article XIX, the dispute may be submitted to arbitration, as provided in Article (…) of this Agreement’ (emphasis added), cited in Peter Cameron (n. 1) 31. See on economic equilibrium clauses with contractual duties to negotiate adjustments also Sam Foster Halabi (n. 1) 300; Thomas J. Pate, ‘Evaluating Stabilization Clauses in Venezuela’s Strategic Association Agreements for Heavy-Crude Extraction in the Orinoco Belt: The Return of a Forgotten Contractual Risk Reduction Mechanism for the Petroleum Industry’ (2009) 40 U. Miami Inter-Am. L. Rev. 347– 412, 374 et seq.

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The reason for the popularity of economic equilibrium clauses is that they do 47 not seek to prevent the host State from enacting subsequent legislation, but tries to mitigate its adverse impact on the economic equilibrium of the State contract. Therefore they provide a good compromise for both parties by accepting the host State’s legislative freedom and giving to the host State more flexibility on the one hand and satisfying the investor in his need for economic planning reliability on the other.58 3. Scope of Stabilisation

Stabilisation clauses may vary considerably not only with regard to the stabil- 48 isation technique but also as to the extent of the right to stabilisation. a) Full Stabilisation Clauses

Full stabilisation clauses are clauses which aim at comprehensive protection 49 against subsequent amendments of national law without any restrictions on the rules to be stabilised. Full freezing clauses,59 full non-application clauses60 and full non-interven- 50 tion clauses61 become rare in modern State contracts. Host States seldom accept such unrestricted stabilisation clauses. In particular, a full non-intervention clause would usually be seen by the host State as irreconcilable with its legislative freedom and therefore rejected by the host State. Such full stabilisation clauses are found today only occasionally in the extractive sector in State contracts with developing countries, e.g. in Sub-Saharan Africa, North Africa and the Middle East or East Asia. In State contracts of European States and OECD countries, full freezing, non-application and non-intervention clauses are, on the contrary, rather unusual.62 Full economic equilibrium clauses are encountered in modern State contracts 51 much more frequently.63 This has good reasons: the agreement of a full economic equilibrium clause has the advantage for the host State that it can, by accepting such a clause, appear to be very investor-friendly but is not thereby directly restricted in its legislative power – contrary to the case of the agreement of a full clause of non-intervention. In addition, the government of the host State is – contrary to full freezing and full non-application clauses – not exposed internally to the accusation that a foreign investor is not obliged to comply with State law due to an agreement with the government of the host State.

58 Abdullah Faruque (n. 1) 321, 331; Lorenzo Cotula (n. 36) 7; Piero Bernardini (n. 41) 102 et seq. 59 See the example clauses cited under C.2.a) above. 60 See the second example clause cited unter C.2.b). 61 See the example clauses cited under C.2.c) above. 62 See on the regional, sectoral and asset-specific usage of such full stabilisation clauses in practice Sam Foster Halabi (n. 1) 294 et seq.; Andrea Shemberg (n. 41) 19 et seq. 63 See Andrea Shemberg (n. 41) 24 et seq.

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b) Limited Stabilisation Clauses

In contract negotiations host States usually endeavour – depending on their negotiating power – to restrict the material application of the stabilisation clause as far as possible. This has good reasons: 53 even if the host State succeeds in avoiding full freezing, non-application or non-intervention clauses but agreeing to a full economic equilibrium clause, this would have a significant indirect influence on the later legislation of the host State. While the host State would not then be prevented from passing new statutes and applying these to the investor, with every legislative measure the host State would, however, have the financial consequences for the investor in the back of its mind. The host State would therefore, while not directly, be indirectly restricted in its freedom to pass intended new legislation.64 54 The usually very difficult manageability of a full stabilisation clause is an additional factor. In particular, if the host State in various State contracts has agreed stabilisation clauses with various investors with different effective dates, the State must consider in the course of every single legal amendment the application to or financial consequences of the new provisions on the relevant private investors. In addition, the authorities must, with considerable administrative effort, reconstruct for each investment project the entire host State’s law for the effective date applicable to each individual investor and apply the old laws to the investors in each case.65 55 The agreement of such a full stabilisation clause is therefore not acceptable in particular for such host States in which the political risk is not particularly high for the foreign private investor. In order to at least secure partial protection against subsequent legal amendments, the agreement of a limited stabilisation clause is available to the foreign investor in these cases. In a limited stabilisation clause, not the entire law of the host State will be stabilised. There is a wide range of possibilities as to how a restriction of stabilisation can technically be achieved. 52

(1) Restriction of Stabilisation to Specific Statutes 56

It is thinkable and in practice quite usual to restrict the stabilisation to actual statutes.66 These statutes are then either specifically named in the stabilisation clause or even repeated in full in an annex to the contract. In the identical stabilisation clauses (Art. 16.2) in the contracts on which the three well-known Libyan nationalisation cases were based it is stated, e.g. that [t]his Concession shall throughout the period of its validity be construed in accordance with the Petroleum Law and Regulations in force on the date of execution of the agreement of amendment by which this paragraph (2) was incorporated into this concession agreement. Any amendment to or

64 Howard Mann (n. 42) 6; Morris Besch (n. 1) 139. 65 Morris Besch (n. 1) 139. 66 Abdullah Faruque (n. 1) 318; Sam Foster Halabi (n. 1) 293, 301 et seq.; Andrea Shemberg (n. 41) 6.

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Likewise it is possible to declare specific legislation generally to be inapplica- 57 ble thereby also excluding the application of later amendments to such legislation. (2) Restriction of Stabilisation to Specific Legal Areas

Instead of individual statutes, in practice stabilisation of individual legal areas 58 of particular significance for the investor is often agreed.68 The investor usually agrees on at least the stabilisation of the financially extremely important fiscal and tax law (‘tax freezing’).69 In modern State contracts, there are further clauses which, e.g., provide for stabilisation of the law of property,70 foreign currency law,71 import and export law72 or the entire foreign trade law. If many legal areas are stabilised, it may be indicated from the contractual 59 point of view to proceed in reverse and only to specify the non-stabilised areas. In this context in recent years particularly the stabilisation or non-stabilisation of human rights or environmental standards plays an important role. Unlimited stabilisation clauses trigger certain tensions between a host State’s international obligation to comply with evolving new international human rights or environmental standards on the one hand and the host State’s obligation to honour the contractual commitment on the other hand. There is uncertainty as to whether or not stabilisation clauses implicitly include a kind of ‘compliance with international law’ exception which allows the host State to comply with its internation67 Cited in (1979) 53 ILR 297 et seq., 322 (emphasis added). 68 Abdullah Faruque (n. 1) 318; Peter Cameron (n. 1) 30; Howard Mann (n. 42) 6; Andrea Shemberg (n. 41) 6. 69 See e.g. Art. 16.11 of the model State contract Kazakhstan of 1997: ‘The tax regime established by the Contract shall be in effect without alterations until the termination of the Contract’s validity. Any amendments in the Tax Legislation made after the Contract was signed must not influence the tax obligations of the Contractor.’ (emphasis added), cited in R. Doak Bishop, James Crawford and Michael Reisman (n. 38) 298. 70 E.g. Art. 17b of the Project Contract between Bougainville Copper Pty. Ltd. und Papua Neu Guinea of 2 October 1967: ‘(…) the Administration (…) shall not resume or expropriate or permit the resumption or expropriation of any asset (whether movable or not) of the Company used in connection with any of its operations under this Agreement, any of the products (whether processed or otherwise) resulting from such operations, the business of the Company, or any shares held or owned by any person in the Company.’, cited in Wolfgang Peter (n. 4) 218 et seq. 71 E.g. Art. 17.5. of the State Contract between UTAH/ARCO and the Perusohaan Negara Tambang Batubara (an Indonesian State enterprise) of 5 February 1981: ‘Der Gaststaat garantiert dem Investor für die Laufzeit des Vertrags das Recht, Zahlungen unbeschränkt in das Ausland und in ausländischen Währungen zu leisten’, cited and translated in Hanno Merkt (n. 16) 323. 72 E.g. Art. XIV of the State Contract between Indonesia and the investors of the Asahan Hydroelectric and Aluminium Project of 7 July 1975: ‘During the term of this Agreement as provided in Article (…), the Company, its contractors and subcontractors may import into and use in Indonesia free of duties, sales taxes and other levies by any route and by any means of transport, having due regard to existing procedures in accordance with prevailing laws and regulations (…).’, cited in Wolfgang Peter (n. 4) 220.

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al obligations despite the unlimited stabilisation clause.73 To avoid such uncertainty, an explicit agreement in the State contract is advisable, e.g. stating that amendments have been enacted in order to comply with international standards.74 (3) Stabilisation of the Stabilisation

For the foreign private investor it is advisable not only to work towards the stabilisation of various legal areas of material importance to him, but also towards the stabilisation of the conflict of law rules of the host State, in particular the principle of party autonomy, the stabilisation of legislation which relates to the admissibility and legal effect of stabilisation clauses and the binding of the host State to the stabilisation clause (‘stabilisation of the stabilisation’).75 61 By a stabilisation of the stabilisation it can – depending on the content of the stabilisation clause – be ensured that the host State does not declare the inadmissibility of the agreement of a stabilisation clause in State contracts, cancel or restrict the principle of party autonomy, cancel its adherence to the stabilisation clause or amend the legal consequences of breach of the stabilisation clause in its favour by subsequent amendments of law with retrospective effect. 60

(4) Advantages and Disadvantages of a Limited Stabilisation Clause 62

If a full stabilisation clause cannot be insisted upon vis-à-vis the host State, the agreement on a limited stabilisation clause presents a reasonable compromise between the host State and foreign private investors. The investor can, by the stabilisation of targeted areas of particular significance for the financial security of his investment, e.g. tax law or financial administration law, cover a considerable part of his actual risk. Legal areas which are – possibly – of subordinate significance for the investor, but possibly of great value to the host State (e.g. labour and social law) are, on the contrary, excluded from the stabilisation. 73 See on this discussion Lorenzo Cotula (n. 36) 9 et seq.; Ivars Mēkons (n. 10) 52; Howard Mann (n. 42) 7 et seq.; Andrea Shemberg, ‘Principles for responsible contracts: integrating the management of human rights risks into investor-state contract negotiations’ (2011) 1 (2) ITN 9–10; Andrea Shemberg (n. 41) 10 et seq., 35 et seq. 74 Lorenzo Cotula (n. 36) 15; Sam Foster Halabi (n. 1) 293; Andrea Shemberg (n. 41) 26; Kyla Tienhaara, ‘Foreign Investment Contracts in the Oil & Gas Sector: A Survey of Environmentally Relevant Clauses’ (2011) 1 (2) ITN 12–15, 12. E.g.: ‘Notwithstanding the generality of the foregoing or anything to the contrary, the Parties acknowledge that the provisions of [the economic equilibrium clause] shall not apply if (…) the new law or decree has been enacted by the Government [state] with the intent of protecting health, safety, the environment, [human rights] or security, and is generally applicable to all ventures having the same general purpose as does the Project.’, cited in Sam Foster Halabi (n. 1) 293 (supplement [human rights] added by author). 75 See e.g. Art. 17 III of the State contract of 16 December 1974 between Bong Mining Company Inc. and Liberia: ‘(…) The Arbitral Tribunal shall apply the law of the Republic of Liberia (including its rules on the conflict of law and its treaties and other rules of international law as may be applicable), excluding, however, any enactment passed or brought into force in the Republic of Liberia before or after the date of this Concession Agreement which is inconsistent with or contrary to the express terms hereof (…)’, cited in Erich Schanze (n. 9) 207.

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It will be easier for the host State to accept a stabilisation clause which does not, either directly or indirectly, restrict its legislative power in legal areas of considerable internal political importance.76 Limited stabilisation clauses are, however, – apart from their limited scope of 63 application – subject to the disadvantage and risk that in a later dispute uncertainties could arise regarding the question of what has and what has not been stabilised. Individual legal areas are not always capable of being clearly distinguished from each other. The borders between individual legal areas are often fluid. It can therefore be difficult in some cases to assess whether new legislation passed by a host State is attributable to the stabilised or non-stabilised legal areas. There is therefore the risk that the host State would attempt to escape its contractual obligations by availing itself of the fluid borders between legal areas with skilful drafting of its legislation. This could, e.g., occur when new legislation in a stabilised legal area is passed in the guise of a legislative package on a non-stabilised legal area. In addition legal amendments in non-stabilised areas could indirectly affect stabilised areas. If in State contracts, e.g., property law but not tax law is stabilised, subsequent amendments to tax law (e.g. excessive tax liability for foreign investors) could have the effect that the economic use of property becomes simply impossible.77 This risk of demarcation when agreeing on a limited stabilisation clause can- 64 not be fully excluded from the point of view of the investor. It can – insofar as the negotiation power of the investor allows – at most be reduced by expressly including the legal areas related to the primarily stabilised legal area or which would affect the stabilised legal areas in the scope of application of the stabilisation clause. Also thinkable is a clarifying provision that requires new legislation attributable to a stabilised legal area or legislation, but located by the host State formally in a non-stabilised law or legal area, also be covered by the stabilisation clause. c) ‘Qualified’ Stabilisation Clauses

Stabilisation clauses may be restricted not only with regard to their substan- 65 tive area of application but also by a certain restriction of their application (‘qualified stabilisation clauses’). Qualified stabilisation clauses are clauses, which affect only such subsequent legal amendments which have specific effects.78

76 Morris Besch (n. 1) 139 et seq. 77 Philippe Kahn, ‘Les investissements étrangers dans les pays en voie de développement’ (1971) 80 Revue de droit des pays d’Afrique, 115–126, 163–213, 333–356, 190; Morris Besch (n. 1) 141. 78 See Philippe Leboulanger (n. 18) 93 et seq.; Hanno Merkt (n. 16) 54 et seq.; Prosper Weil (n. 6) 311.

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(1) Inconsistency Clauses

The most usual form in practice are inconsistency clauses.79 These provide that only those legal amendments which are irreconcilable with the provisions of the State contract or in conflict therewith are affected by the stabilisation clause.80 The agreement on such an inconsistency clause is an appropriate approach to balance the interests of both parties. The host State could hardly agree that it may not make subsequent legal amendments which do not in any way touch the investor and provisions of the State contract. Such subsequent legal amendments would not have any adverse influence on the investor and would not have any legal consequences either (cf. below 7.). On the other hand inconsistency clauses – as well as non-discrimination clauses (see below (2)) – make sure that only unfavourable legal amendments do not apply to the State contract, but the investor can participate in favourable legal amendments after conclusion of the State contract. 67 As with the limited stabilisation clauses, difficulties can arise in the practical implementation of the clause. It can be difficult to decide whether a new statute is irreconcilable with the provisions of the contract or not. A problematic question arises as to whether, for the application of the inconsistency clauses, even indirect effects on the State contract suffice or whether legal amendments which are directly in conflict with the contractual provisions are necessary. Clarification in the State contract is advisable on this point. 66

(2) Non-Discrimination Clauses 68

The scope of application of the stabilisation clause can further be restricted by the agreement of non-discrimination clauses.81 These provide that only such subsequent legal amendments are intended to be covered by the protection of the stabilisation clause which operate as ‘discriminatory’ against the investor or worsen his position, e.g.: The Sultan agrees that no discriminatory laws or decrees affecting the SUN GROUP or its operations will be enacted.82

69

Non-discrimination clauses are also usually associated with certain difficulties of interpretation which could further restrict the protection of the investor.83 79 See Lorenzo Cotula (n. 36) 6; Morris Besch (n. 1) 141; Ivars Mēkons (n. 10) 30 et seq. 80 See e.g. Art. 18.1 of the State contract between Dublin International Petroleum (Damascus) Ltd. and Syria of 2004: ‘CONTRACTOR and the Operating Company shall be subject to all laws and regulations of local application in force in the S.A.R. (Syrian Arab Republic) provided that CONTRACTOR or the Operating Company shall not be subject to any laws, regulations or modifications thereof which are contrary to or inconsistent with the provisions of this Contract and which are in effect at any time from the Effective Date and throughout the Term of this Contract.’ (emphasis added), cited in Munir Maniruzzaman (n. 5) 19. 81 See Hanno Merkt (n. 16) 55; Morris Besch (n. 1) 141 et seq.; Sam Foster Halabi (n. 1) 303; Andrea Shemberg (n. 41) 32. 82 Art. 22.3 of the State contract between the SUN GROUP and Oman of 4 February 1973 (emphasis added), cited in Hanno Merkt (n. 16) 45, fn. 65.

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Whether a legal amendment worsens the position of the investor or not can usually be reliably ascertained. Difficulties can arise, however, with new provisions unfavourable to the investor on one point but favourable on another in compensation. A dispute could arise between the State and the investor as to whether the investor can rely on a new provision favourable to him without at the same time being bound by an unfavourable provision. Cherry-picking between favourable and unfavourable legal amendments will usually be regarded by the host State as a breach of good faith. Here, too, clarification in the State contract can be beneficial. Additionally, the question of whether a certain subsequent legal amendment 70 ‘discriminates’ against the investor can involve considerable difficulties. With a very general non-discrimination clause as quoted above, it is not quite clear what comparable group should be used to assess discrimination. A comparison with other foreign investors, with nationals, with national or foreign investors in the same industry etc. may be considered. It is advisable to clarify this in the non-discrimination clause, but even if a comparison group is fixed, it can be quite difficult for the investor to prove actual discrimination in court. The agreement of a non-discrimination clause is therefore linked with considerable legal uncertainties for the investor. d) Time-Limited Stabilisation Clauses

Not only the material application but also the duration of the application of a 71 stabilisation clause can be limited. (1) Limitation on the Duration of the Investment Project

Host States will at least demand in contract negotiations that the stabilisation 72 of its law shall be limited to the duration of the investment project. Such a provision is at first sight reasonable because no host State can be obliged to stabilise its national law forever. Difficulties can arise however, if the host State is constitutionally permitted to 73 pass laws after the ending of the investment project with retrospective effect to the time of the investment project. In order to exclude this risk from the outset, it may be beneficial for the investor to exclude either retrospective legislative amendments from the time restriction or agree to an express time limitation on an inconsistency clause. With the agreement of an inconsistency clause the investor achieves that only such subsequent legal amendments are covered by the stabilisation clause which are irreconcilable with the provisions of the State contract or in conflict with it. By this means, a time limit can in fact, be achieved because subsequent legal amendments can no longer be irreconcilable with the State contract if the State contract has already ended or has ceased to have effect. The inconsistency clause therefore ensures that the host State must not sta83 Morris Besch (n. 1) 142.

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bilise its law forever. At the same time, the clause guards against the risk of retrospective effects. The inconsistency clause would also apply if, after the ending of the State contract, legal amendments with retrospective effect are passed. (2) Limitation on Certain Phases of the Investment Project

If the host State resists the inclusion of a stabilisation clause, the clause can possibly be made more appealing for the host State by restricting the time of its application to certain phases of the overall duration of the investment project, e.g. to the particularly critical commencement phase or the yield and profit phases of the project.84 75 Such a clause does not offer comprehensive protection against subsequent legal amendments. For example, it is hardly foreseeable at the time of the conclusion of the State contract, what time periods in the possibly years or decades of the investment project, will render stabilisation of the national law particularly necessary and which will not. Such a clause can, however, represent a certain minimum compromise in difficult contract negotiations. 74

4. Hybrid Stabilisation Clauses 76

Stabilisation clauses can – as has been shown – provide for different stabilisation techniques and different material and time application conditions. In practice, the various alternatives are often combined with each other depending on the negotiating power of the parties in order to find a balance between the interests of both parties, taking into account the interest of the investor with the greatest possible protection against subsequent legal amendments and also the interest of the host State in restricting its legislative power only to the extent necessary. The various alternatives can be flexibly used. In particular, time restrictions as well as qualitative and material restrictions of the stabilisation clause, permit the investor to increase the acceptance of the stabilisation clause for the host State and therefore at least ensure the stabilisation of particularly critical legal areas within particularly critical phases of the investment project.85 5. Stabilisation Clauses in State Contracts with State Enterprises

77

In modern State contracts, the foreign investor is often dealing not directly with the government of the host State itself but with a State enterprise. In these cases, there is the obvious risk that the State intervenes in the State contract with legislation in favour of its own State enterprise and to the detriment of the foreign private investor. Since, between the host State and the investor, there is no direct contractual privity and a separate contract with the foreign government is 84 Georges R. Delaume, ‘Transnational Contracts. Applicable Law and Settlement of Disputes. A Study in Conflict Avoidance’ (loose leaf collection) vol. I, booklet 3 (Oceana, Dezember 1989), § 2.07, p. 26; Morris Besch (n. 1) 144. 85 See on hybrid stabilisation clauses Hanno Merkt (n. 16) 61 et seq.; Sam Foster Halabi (n. 1) 298; Andrea Shemberg (n. 41) 8, 26 et seq.

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only rarely achievable, this risk cannot usually be covered with the agreement of a stabilisation clause with the host State itself.86 It is therefore often agreed in modern contracts with State entities that the 78 State enterprise is liable for the financial loss, incurred by the foreign private investor through unilateral intervention of the host State in the investment. Such clauses are quite similar to economic equilibrium clauses in State contracts. Such an apportionment of risk is appropriate to the balance of interests because the State enterprise is closer to the source of the risk than the investor. Financially, the same result is thereby achieved as in the cases in which the host State does not act in the investment project through a State enterprise controlled by it but is itself the contractual partner of the foreign investment.87 In order to maintain or re-establish the economic equilibrium similar to eco- 79 nomic equilibrium clauses in State contracts, the investor and the State enterprise can alternatively agree on an obligation to renegotiate the contract in case of interventions of the host State in the investment project. 6. Validity of Stabilisation Clauses

Stabilisation clauses are widely recognised as effective both in the literature88 80 and in arbitration practice.89 The occasional doubts about the validity of stabilisation clauses, usually expressed by authors from developing countries, have not been echoed in the remainder of the literature or in arbitration practice. Significantly, the ICSID arbitration tribunal in the case CMS v. Argentina in its arbitration award of 12 May 2005 assumed the validity of the stabilisation clause agreed in the licence between CMS Gas Transmission Company and Argentina without further ado.90

86 Thomas Wälde and George Ndi (n. 41) 18; Morris Besch (n. 1) 145. 87 Thomas Wälde and George Ndi (n. 41) 18; Piero Bernardini (n. 41) 103; Morris Besch (n. 1) 145. 88 Abdullah Faruque (n. 1) 323 et seq.; Lorenzo Cotula (n. 36) 7 et seq.; Morris Besch (n. 1) 149 et seq.; Moshe Hirsch, ‘The Arbitration Mechanism of the International Centre for the Settlement of Investment Disputes’ (Nijhoff, 1993) 143; Thomas Markert (n. 11) 202; Wolfgang Peter (n. 4) 222; Thomas Wälde and George Ndi (n. 41) 17. 89 See Anglo Iranian Oil Company v. Iran, Award, 22 July 1952, ICJ Rep. 1952, 90; Saudi Arabia v. Arabian American Oil Company (ARAMCO), ad hoc arbitration Award, 23 August 1958, (1963) 27 ILR 117–233, 168; Texaco Overseas Petroleum Company, California Asiatic Oil Company v. Libya, ad hoc Award, 19 January 1977, (1978) 27 ILM 1 et seq., 71; Libyan American Oil Company (LIAMCO) v. Libya, Award, 12 April 1977, (1980) Rev. Arb. 132– 191, 136; Kuwait v. American Independent Oil Company (AMINOIL), Award, 24 May 1982, (1982) 21 ILM 976 et seq., 1020 et seq., 90 (2); AGIP v. Kongo, ICSID Case No. ARB/77/1, Award, 30 November 1979, (1982) 21 ILM 726 et seq., 735 et seq.; Liberian Eastern Timber Corp. (LETCO) v. Liberia, ICSID Case No. ARB/83/2, Award, 31 March 1986, (1987) 26 ILM 647 et seq., 666. 90 CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005, para. 302 et seq.

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a) No Breach of International Law

Particularly, stabilisation clauses, contrary to the view of some authors,91 do not constitute a breach of principles of international law, in particular they do not breach the principle of ‘permanent sovereignty of the state over its natural resources’ established by UN Resolution No. 1803.92 It is already doubtful whether the principle established in said UN Resolution has at all achieved the status of a binding rule of international law. A UN resolution is not, according to Article 10f. together with article 13f. of the UN Charter, binding in principle. It acquires the status of an international rule at most if States put it almost unanimously into effect.93 This cannot be said to be the case with regard to the agreement of stabilisation clauses. On the contrary, for decades, host States all over the world have agreed on stabilisation clauses in their State contracts and usually admit the agreement of such stabilisation clauses in their investment legislation. There is no State practice directed at the invalidity of stabilisation clauses.94 82 Even if one would suppose that the above UN Resolution were binding, no prohibition on host States to bind themselves contractually in a stabilisation clause can be derived therefrom. The principle of ‘permanent sovereignty over natural resources’ has neither priority nor the effect of restricting the equally fundamental right of a State to conclude contractual obligations.95 81

b) No Invalidity due to Restriction on Legislative Sovereignty

Contrary to the minority opinion of some authors,96 stabilisation clauses are not invalid because of an inadmissible intervention in the legislative jurisdiction of the host State, i.e. its sovereign right to pass legislation within its own territory: 84 freezing, non-application and economic equilibrium clauses do not, as has already been stated, present a direct intervention in the legislative jurisdiction of the host State. The host State can freely continue to amend its laws without 83

91 Mohammed Bedjaoui and Ali Mebroukine, ‘Le nouveau droit de l’arbitrage international en Algérie’ in (1993) 120(2) Clunet 873–912, 63 et seq.; Ahmed El Chiati (n. 9) 163; Muthucumaraswamy Sornarajah (n. 13) 210; Muthucumaraswamy Sornarajah (n. 26) 103. See also the argumentation of the government of Kuwait in the AMINOIL case (n. 89) (1982) 21 ILM 976 et seq., 1021. 92 UN Res. 1803 on Permanent Sovereignty over Natural Resources dated 14 February 1962, GA Res. 1803, 17 UN GAOR Annexes, vol. I, agenda item no. 39, p. 59, (1963) 57 AJIL 710–712. 93 Albert Bleckmann (n. 13) 85 et seq.; Karl Doehring (n. 13) 135 et seq. 94 Munir Maniruzzaman (n. 5) 66 et seq.; Morris Besch (n. 1) 150 et seq.; Thomas Markert (n. 11) 203. 95 Wolfgang Peter (n. 4) 222; Heleni Theodorou (n. 4) 462 et seq.; Abdullah Faruque (n. 1) 324; Munir Maniruzzaman (n. 5) 78 et seq. 96 Muthucumaraswamy Sornarajah (n. 1) 50; Henri Batiffol and Ignaz Seidl-Hohenveldern bei Georges van Hecke, ‘Les accords entre un Etat et une personne privée étrangère’ (1977-I) 57 Annuaire 192–265, 214 and 233; David Flint, ‘Foreign investment and the new international economic order’ in Kamal Hossain and Subrata Roy Chowdhury (eds), Permanent sovereignty over natural resources in international law (Pinter, 1984) 144–185, 162.

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breaching these clauses. The host State’s sovereignty to pass legislation is not directly affected.97 At most, the agreement of a non-intervention clause may be considered as a direct intervention in the legislative jurisdiction because it obliges the host State to exclude the investor or the investment project from the material and personal application of new legislation unfavourable for the investor.98 It is also at least theoretically thinkable that the indirect effects of a freezing, non-application and economic equilibrium clause on the legislative freedom of the host State legislator can be seen as a restriction of the legislative sovereignty of the host State. However, in arbitration practice, direct and indirect restrictions on the legis- 85 lative jurisdiction arising from the agreement of the stabilisation clause are generally regarded as unproblematic.99 With the agreement of a stabilisation clause, it is not the sovereignty of the host State which is restricted – on the contrary, the sovereignty of the host State is precisely manifested in its capacity to agree such contractual obligations.100 In other words, the sovereignty of the host State includes its right to partially restrict its own sovereignty contractually. If a State, due to its sovereignty – perhaps for a number of decades – agrees a stabilisation clause in its State contracts, it cannot subsequently plead that precisely the stabilisation clause restricts its sovereignty. c) Validity According to Lex Causae

In the literature, the question of the validity of a stabilisation clause is often 86 neither generally affirmed nor rejected but assessed under lex causae at the time of agreement of the stabilisation clause.101 Since, in modern State contracts, usually exclusively or primarily the national law of the host State is chosen (see B. 3. above), the question of the validity of the stabilisation clause according to this view is adjudicated in most cases according to national host State’s law. If the national host State’s law – as in almost all modern investment statutes – 87 admits stabilisation clauses – then stabilisation clauses are to be viewed as valid. 97 Hanno Merkt (n. 16) 239; Morris Besch (n. 1) 151 et seq.; Thomas Wälde, ‘Contract stability: Adaptation and conflict resolution’ in United Nations (ed), Legal and Institutional Arrangements in Minerals Development (Mining Journal Books, 1982) 166 et seq.; Munir Maniruzzaman (n. 5) 21 et seq. 98 Martin Bartels (n. 11) 22; Hanno Merkt (n. 16) 239; Matthias Herdegen (n. 5) 23. 99 Saudi Arabia v. ARAMCO (n. 89) 168; Revere Copper & Brass, Inc. v. Overseas Private Investment Corp. (OPIC), Award, 24 August 1978, (1978) ILM 17, 1321 et seq., 1342. 100 See Saudi Arabia v. ARAMCO (n. 89): ‘Nothing can prevent a State, in the exercise of its sovereignty, from binding itself irrevocably by the provisions of a concession and from granting to the concessionaire irretractable rights’, (1963) 27 ILR 117 et seq., 168. Affirmative inter alia: Jean-Flavien Lalive (n. 2) 112; Sangwani Ng’ambi, ‘Stabilisation Clauses and the Zambian Windfall Tax’ (2011) 1 (1) Zambia Social Science Journal 107–117, 113; Matthias Herdegen (n. 5) 23; negative (holding the view that non-intervention clauses in general affect the legal sovereignty of the host State): cf. n. 96. 101 Martin Bartels (n. 11) 22 et seq.; Hanno Merkt (n. 16) 240 et seq.; Morris Besch (n. 1) 153; Esa Paasivirta (n. 15) 171; Heleni Theodorou (n. 4) 463; Thomas Wälde and George Ndi (n. 41) 17.

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Then because of the principal of venire contra factum proprium the host State can hardly, after the conclusion of the contract, invoke an inadmissible restriction on its legislative sovereignty.102 Not even a subsequent amendment to the investment legislation helps the host State in this respect. According to the cited overwhelming opinion in the literature, only the legal position at the time of the agreement of a stabilisation clause is decisive.103 Subsequent legal amendments are therefore irrelevant. Even if one wishes to regard subsequent retrospective legal amendments as relevant for the question of the validity of stabilisation clauses, it would have to be taken into account that such retrospective legislation would be admissible only within the limits of the constitutional law of the host State. The remaining risk can be covered by the investor with a contractual stabilisation of the stabilisation (cf. C.b)(3) above). 7. Binding Effect of the Stabilisation Clause on the Host State 88

The question of the validity of the stabilisation clause must be distinguished from the question of whether host States in fact in every case are bound throughout the entire period of the State contract to the stabilisation clause. On this question, doubt could arise in particular if the investment project is set up for a period of many decades and the political and financial situation in the host State has considerably changed since the conclusion of the investment project. States will seek to use the argument against the binding effect of stabilisation clauses in such cases that the foreign investor at the conclusion of the State contract could not in all seriousness have assumed that the State would leave its legislation unchanged for 30, 40 or more years for the foreign investor. Whether this objection of the host State is justified is again to be decided according to the law applicable to the State contract.104 a) Binding Effect in Case of Application of National Law

If the law of the host State – as in most modern State contracts – applies to the State contract, the binding effect on the host State of the stabilisation clauses will be adjudicated under its national law. 90 National legal systems usually contain legal principles similar to pacta sunt servanda according to which the parties are bound in principle to their contractual obligations, as well as certain exceptions which admit release from contractual duties or renegotiation of the contract in the course of its duration. In the civil law States – e.g., according to the principle of ‘Störung der Geschäftsgrundlage’ of German law or in French law the ‘imprévision’ doctrine – a con89

102 Hanno Merkt (n. 16) 240 et seq.; Morris Besch (n. 1) 153; Heleni Theodorou (n. 4) 467; Abdullah Faruque (n. 1) 323 et seq.; restrictive: Lorenzo Cotula (n. 36) 8 (no legal validity in case of unconstitutional stabilisation commitments, e.g. regarding the constitutional principle on the separation of powers). 103 See n. 101; Peter Cameron (n. 1) 50. 104 Martin Bartels (n. 11) 22 et seq.; Morris Besch (n. 1) 156 et seq.; Nagla Nassar (n. 41) 139.

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tractual amendment or renegotiation of the contract is thinkable as an exception if during its performance difficulties and unforeseen changes occur which affect the contractual basis of the parties and would render it unreasonable for one of the parties to continue the unchanged contract.105 In the common law States, release from the principle of the ‘sanctity of contract’ under the English ‘doctrine of frustration’ is available only in very narrowly defined cases in which the financial objective of the State contract can no longer be achieved due to changed circumstances.106 The foreign private investor should therefore, prior to agreeing to a stabilisa- 91 tion clause, review the possibilities of achieving release from its contractual obligations granted to the host State by national law. The investor should deal with the risk that the host State could amend its national law during the investment project in its own favour by extending the material application of the stabilisation clause to national law on the binding effect of contractual obligations on the host State (stabilisation of the stabilisation, cf. 3.b)(3) above). b) Binding Effect in Case of the Application of International Law

If the parties agree to the application of international law rules to the State 92 contract, the principle pacta sunt servanda, anchored in Art. 26 of the Vienna Convention on the Law of Treaties, applies – the host State is in principle bound to its contractual obligations for the entire duration of the State contract. Problems arise – as also in the case of the application of national law (see above a)) – only with the question of under what circumstances this principle can be dispensed with. In international law, the principle of rebus sic stantibus anchored in Art. 62 of the Vienna Convention on the Law of Treaties permits release from the original contractual agreements only under narrow conditions. Release from the principle of pacta sunt servanda is thinkable only if the circumstances which formed the fundamental basis for the conclusion of the contract have so fundamentally changed in the course of the term of the contract that the extent of the obligations still to be satisfied on the basis of the contract would be fundamentally altered.107

105 See Nagla Nassar (n. 41) 196 et seq.; Wolfgang Peter (n. 4) 189 et seq.; Ole Lando (n. 13) 48 et seq.; Thomas W. Wälde and Abba Kolo, ‘Renegotiation and Contract Adaptation in the International Investment Projects: Applicable Legal Principles & Industry Practices’ (2003) 2 OGEL 2, available at http://www.ogel.org/article.asp?key=135. 106 Stefan M. Kröll, Die Ergänzung und Anpassung von Verträgen durch Schiedsgerichte. Eine Untersuchung zum deutschen und englischen Recht (Heymanns, 1998) 135 et seq.; Stefan M. Kröll, ‘The Renegotiation and Adaptation of Investment Contracts’ in Norbert Horn and Stefan M. Kröll (eds) Arbitrating Foreign Investment Disputes (Kluwer Law International, 2004) 461 et seq. 107 See ICJ, Gabčikovo-Nagymaros case (Hungary v. Slovakia), ICJ Judgment, 25 September 1997, (1998) 37 ILM 162 et seq., 201 et seq.; ICC Arbitration Award No. 1512 (1971), (1976) YCA I, 128. See also Martin Bartels (n. 11) 56 et seq.; Thomas Markert (n. 11) 178 et seq.; Munir Maniruzzaman (n. 5) 95 et seq.; Nagla Nassar (n. 41) 200 et seq.; Wolfgang Peter (n. 4) 194 et seq.; Thomas Wälde and Abba Kolo (n. 105) 3 et seq.

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In arbitration and in the literature, the extent to which the host State can, in spite of having agreed to a stabilisation clause, rely on the principle of rebus sic stantibus is disputed: in arbitration practice and in the literature is sometimes expressed the view that a host State, having agreed to a stabilisation clause, is strictly bound to the principle pacta sunt servanda and cannot even in exceptional cases invoke the principle of rebus sic stantibus.108 By agreeing to a stabilisation clause the host State itself assumed the risk of not making any legal amendments affecting the State contract or not applying them to the State contract even in the case of future financial, political and social changes. The host State must therefore adhere to this risk apportionment.109 94 Probably the overwhelming view in the literature and in arbitration practice rejects an absolute bond of a host State to stabilisation clauses which are not, according to this view, to be adjudicated strictly and absolutely in accordance with the contractual text, but always relatively in the light of the development of the contractual relationship.110 A foreign investor cannot therefore expect to remain protected over decades against major financial, political or international transformations.111 Hence, in arbitration practice is expressed the opinion that stabilisation clauses can have only a protective effect subject to certain time limits. In the well-known AMINOIL proceedings, the arbitration tribunal decided, e.g., that stabilisation clauses could not protect the investor over a particularly long period – in the AMINOIL case 35 years – from nationalisation by the host State if in that period the contractual relationship or the nature of the contract and the legal environment had so fundamentally changed in an unforeseeable manner that it was no longer equitable for a foreign investor to rely on the original contractual conditions, which had long been overtaken by the development of the State contract.112 95 For the private investor this arbitration practice constitutes a certain legal uncertainty as to what period is referred to as a ‘particularly long period’ between the conclusion of the contract and subsequent legal amendments and from when the State contract has in that period completed a ‘metamorphosis’ comparable to the AMINOIL case by which the State contract has lost its original absolute character. In the MOBIL OIL case a period of 20 years was e.g. regarded as an ad93

108 See LETCO v. Liberia (n. 89) 666; AGIP v. Kongo (n. 89) 86. 109 Nagla Nassar (n. 41) 134 et seq. 110 Alexander Catranis (n. 13) 25; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 450; Thomas Markert (n. 11) 210; Nagla Nassar (n. 41) 135; Wolfgang Peter (n. 4) 224; Nigel Rawding (n. 37) 350; Heleni Theodorou (n. 4) 473 et seq.; Lorenzo Cotula (n. 36) 16 et seq. 111 Georges R. Delaume (n. 84) 23; Rainer Geiger, ‘The Unilateral Change of Economic Development Agreements’ (1974) 23 ICLQ 73–104, 104; Heleni Theodorou (n. 4) 474. 112 Kuwait v. AMINOIL (n. 89) 1020 et seq., para. 90(2). Cf. on this issue inter alia Martin Hunter and Anthony C. Sinclair, ‘Aminoil Revisited: Reflections on a Story of Changing Circumstances’ in Todd Weiler (ed), International Investment Law and Arbitration: Leading Cases from the ICSID, NAFTA, Bilateral Treaties and Customary International Law (Cameron May, 2005) 347–381, 347 et seq.; Geoffrey Marston, ‘The Aminoil-Kuwait Arbitration’ (1983) 17 JWTL 177, 182; Alan Redfern (n. 15) 65 et seq.; Abdullah Faruque (n. 1) 326; Lorenzo Cotula (n. 36) 17; Ivars Mēkons (n. 10) 35.

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missible period since the State contract had not gone through any such metamorphosis in that phase.113 In the KHEMCO case 35 years was regarded on the other hand as a ‘particularly long period’.114 In order to not simply negate the risk apportionment established contractually 96 originally in the stabilisation clause in the course of the investment project at the expense of the investor, a very restrictive treatment of the principles established in the AMINOIL case is necessary. Only in the most obvious exceptional cases comparable to the AMINOIL case should the host State be able to escape from the stabilisation clause. It is not sufficient that between the conclusion of the contract and subsequent legal amendments a number of decades passed. In fact, the investment relationship must, in the course of the long duration of the contract, have changed so seriously and in a manner unforeseeable at the conclusion of the contract that the foreign investor cannot any longer equitably insist on the stabilisation clause.115 8. Legal Effects of Stabilisation Clauses

The legal effects of a stabilisation clause are determined primarily by the con- 97 tractual agreement between the host State and the foreign investor. If there is no such express agreement, the legal effects are determined by the law applicable to the State contract. a) Explicit Agreement on Legal Effects

In order to avoid from the outset legal uncertainties with regard to the legal 98 effects of stabilisation clauses, the investor and the host State should expressly agree on what legal consequences follow from breaches of the obligations set down in the stabilisation clauses.116 If the State contract contains an economic equilibrium clause, this clause al- 99 ready provides for the legal consequences of a subsequent legal amendment by the host State which is – depending on the content of the clause – obliged to renegotiate the contract or compensate the investor for the financial disadvantages suffered by the investor by the application of the legal amendment to the investment project. In the case of an obligation of the host State to renegotiate, the additional question of whether an obligation to agree exists and what legal consequences result from a breach of the obligation to renegotiate must be provided for. If the State contract contains a freezing, non-application or non-intervention 100 clause, the investor should provide explicitly in the State contract what actual le113 Iran–U.S. Claims Tribunal, MOBIL OIL Iran Inc., et al. v. Iran, National Iranian Oil Company (NIOC), Arbitration Award, 14. July 1987, (1987-III) Iran–U.S. CTR 16, 3–75. 114 Iran–U.S. Claims Tribunal, AMOCO International Finance Corp. v. Iran et al., Award, 14 July 1987, (1987-II) Iran–U.S. CTR 15, 189 et seq., 243, obiter dictum. 115 Morris Besch (n. 1) 167. 116 Ivars Mēkons (n. 10) 37; Munir Maniruzzaman (n. 5) 167 et seq.

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gal consequences follow from a breach by the host State of the contractual provisions. Legal uncertainty (see b) below) can thereby be minimised from the outset. The range of drafting possibilities on this issue is wide: (1) Restitutio in Integrum

Firstly, it is thinkable that the host State is obliged, in the case of any breaches, to reinstate the status which existed prior to the breach (restitutio in integrum). 102 If, in spite of the agreed freezing or non-application clause, the host State applies subsequent legal amendments to the State contract, the reinstatement of the previous position could, e.g., consist of the host State remedying the actual consequences of the application of the new legislation on the investment project – e.g., by restitution of confiscated property. If the host State, e.g., imposes additional taxes on the investor under a new statute, which were not provided for by a statute at the time of the conclusion of the State contract, the host State must, in the case of such a legal consequences agreement, refund the additional taxes charged including interest thereon. 103 The situation is more complicated in the case of breach of a non-intervention clause. Since, under a non-intervention clause even the passing of a new statute applicable to the investor would be a breach of contract, a reinstatement of the previous situation would then mean that the host State would have to again retrospectively exclude the State contract from the application of the new statute. While the State could with its sovereignty enter into such a contractual obligation it would not, however, be enforceable. Legislation is usually passed in a constitutional legislative process. Because of the sovereignty of every State in this respect, no arbitration tribunal and no executing authority could force the State to pass certain statutes. If the host State, in spite of agreeing to a non-intervention clause, decides on a subsequent legal amendment, this cannot be prevented due to the ‘de facto’ power of the State nor can it be reversed without the cooperation of the State.117 This too is a significant reason why foreign private investors have increasingly tended in modern contractual practice to agree on an economic equilibrium clause which from the outset is directed at financial compensation for the investor rather than the non-intervention clause which is ultimately practically unenforceable. 101

(2) Compensation for Non-Performance 104

If the parties make a legal consequences agreement in a State contract, they will usually agree a contractual penalty (cf. (3) below) or compensation for non-

117 BP Exploration Company (Libya) v. Libya, Arbitration Award, 10 October 1973, (1979) 53 ILR 297 et seq., 354); Abdullah Faruque (n. 1) 334; Peter Cameron (n. 1) 13, 49; Ivars Mēkons (n. 10) 37.

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performance in the event of breach of contract – depending on the negotiating strength of each of the parties. In the latter case, the parties should define in the State contract if possible, the 105 actual method of calculating compensation. In particular, in State contracts to which international law applies exclusively or in addition, considerable legal uncertainty can arise on this issue in a later dispute without the matter having been clarified in the contract b)(2). If the parties can already agree on the legal consequences at the time of the conclusion of the State contract, it should be stated in particular what amount of compensation is payable (e.g. full compensation including loss of profit or only partial compensation). (3) Contractual Penalties

If the negotiating power of the foreign private investor permits, it may be 106 more advantageous for him to oblige the host State in the event of a breach of contract not to pay compensation but rather to pay a contractual penalty. It is, of course, clear that this functions only if and to the extent the law applicable to the State contract at all admits the agreement of a contractual penalty. The agreement of a contractual penalty establishes a certain legal certainty for 107 the foreign private investor with regard to the amount to be paid by the host State in compensation. It relieves the investor of having to prove actual loss, causality between the breach and the loss and – depending on the drafting of the contractual penalty – fault on the part of the host State. In order not to be in a worse position with the agreement of a contractual penalty than a compensation obligation, it should be agreed at the same time that claims for losses exceeding the contractual penalty remain unaffected by the agreement of a contractual penalty. b) Legal Effects in the Absence of Express Agreement on Legal Consequences

State contracts often contain no actual legal consequences clause. This may 108 be because the host State does not accept such provision or the parties deliberately exclude this subject in the contractual negotiations in order not to burden the beginning investment relationship, by discussions of the hypothetical case of a future contractual breach by the host State even prior to the conclusion of the State contract. In the absence of an express legal consequences agreement, the investor is not 109 unprotected against any contractual breach of the host State. The legal consequences of a contractual breach will be addressed in that case under the law applicable to the State contract. The legal consequences derived from the applicable law could, however, be less effective than what the investor imagined and/or may be associated with considerable legal uncertainties regarding the actual quantity of compensation.

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(1) Legal Consequences under National Law

The national law of the host State is often applicable to State contracts under the agreed choice of law clause or according to the applicable conflict of law rules. Host States’ law usually provides a claim for performance of contractual obligations and compensation for non-performance.118 111 No matter how the national law was at the time of the conclusion of the contract: there is a risk for the foreign investor that the host State amends the relevant national law retrospectively to the disadvantage of the investor. If such a retrospective provision is admissible under the constitutional law of the host State, the host State has the long-term effectiveness of a stabilisation clause in its own hands by amending the statutory legal consequences provisions. 112 The investor can anticipate this risk by including the law of the host State on the individual legal consequences of stabilisation clauses and breaches of contract in the substantive application of the stabilisation clause. For the legal consequences of a stabilisation clause then, the statutory provisions at the time of the conclusion or the coming into effect of the State contract apply. 110

(2) Legal Consequences under Non-National Regulations

The situation is more complicated if, instead of or together with the national State law, non-national rules, in particular international law is applicable to the State contract and must be consulted on the question of the legal consequences of the stabilisation clauses. 114 In arbitration practice and in the literature there is today almost unanimity that the investor has no right to restitutio in integrum under international law principles.119 The foreign investor therefore cannot claim under international law that the host State reverses a subsequent statute. There is at most unanimity that the stabilisation clause has at least a financially protective effect under international law and the foreign investor can claim compensation for breaches by the host State.120 The question of how such compensation is to be calculated has been the subject of a lively dispute for many decades. The range of alternatives in arbitration practice and the literature range from ‘prompt, adequate and effect113

118 Günther Jaenicke, ‘Consequences of a Breach of an Investment Agreement Governed by International Law, by General Principles of Law, or by Domestic Law of the Host State’ in Detlev Christian Dicke (ed), Foreign Investment in the Present and a New International Economic Order (University Press, 1987) 177–193, 177 et seq.; Ignaz Seidl-Hohenveldern, ‘L’évaluation des dommages dans les arbitrages transnationaux’ (1987) 23 Annuaire 1–31, 1 et seq. 119 See LIAMCO v. Libya (n. 89) (1981) 20 ILM 1–87, 62 et seq.; BP v. Libya (n. 117) 351 et seq.; Amco Asia v. Indonesia, ICSID Case No. ARB/81/1, Award, 21 November 1984, (1985) 24 ILM 1022 et seq., 1032; LETCO v. Liberia (n. 89) (1987) 26 ILM 647 et seq., 668; Alexander Catranis (n. 13) 26; Christopher Greenwood, ‘State Contracts in International Law – The Libyan Oil Arbitrations’ (1982) 53 BYIL 27–81, 77. 120 So also Kuwait v. AMINOIL (n. 89) 1020; Jiménez de Aréchaga (n. 14) 307; Benjamin Görs, Internationales Investitionsrecht (Verlag Recht und Wirtschaft, 2005) 48 et seq.; Munir Maniruzzaman (n. 5) 93; Abdullah Faruque (n. 1) 325 et seq.

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ive compensation’ (the Hull Doctrine)121 or ‘appropriate compensation’,122 full compensation including loss of profit123 through partial compensation to the view held by many developing countries that every State is entitled to freely determine the amount of compensation and the method of payment.124 Partly it is held that the existence of a stabilisation clause in the State contract and the regarding legitimate expectations of the investor, justify a higher amount of compensation in the case of interventions of the host State in the investment project.125 This is not the place to outline all details of this dispute. It must be said, however, that with the application of non-national law, considerable legal uncertainties with regard to the legal consequences of any breach by the State against the provisions of the State contract arise. In particular, in the case of fully or partially internationalised investment agreements it is therefore advisable to make an explicit agreement in the State contract on the legal consequences of a stabilisation clause. D. ‘Dynamic’ and ‘Flexible’ Clauses 1. The Concept of Dynamic and Flexible Clauses

With the agreement of choice of law and stabilisation clauses the investment 115 protection sought with a State contract is by no means complete. In the course of an investment extending over many years, situations can arise in which a strong bond of the parties to the original agreement is advantageous neither for the host State nor for the foreign investor. This can in particular be the case if the financial, political or social conditions in the host State or on the world market change significantly and destroy the contractual equilibrium in favour of one 121 See Reinhard Patzina, Rechtlicher Schutz ausländischer Privatinvestoren gegen Enteignungsrisiken in Entwicklungsländern (Decker, 1981) 60 et seq.; Martin Schäfer, Entschädigungsstandard und Unternehmensbewertung bei Enteignungen im allgemeinen Völkerrecht (Verlag Recht und Wirtschaft, 1997) 52 et seq. 122 Oscar Schachter, ‘Compensation for expropriation’ (1984) 78 AJIL 121–130, 123 et seq.; John A. Westberg, ‘Compensation in Cases of Expropriation and Nationalization: Awards of the Iran–United States Claims Tribunal’ (1990) 5 ICSID Rev.–FILJ 256–291 258 et seq.; see particularly the decisions of the Iran–US Claims Tribunal in the cases Sedco, Iran–US CTR 10 (1) (1984), 182 et seq., 187; Ebrahimi, (1995) YCA XX 404 et seq., 413; Kuwait v. AMINOIL (n. 89) 1037 and LIAMCO v. Libya (n. 89) (1981) 62 ILR 140 et seq., 210 (‘equitable compensation’). 123 So the arbitrators in the cases AGIP v. Kongo (n. 89) (1982) 21 ILM 726 et seq., 737 et seq.; S.A.R.L. Benvenuti & Bonfant v. Congo, ICSID Case No. ARB/77/2, Award, 15 August 1980, (1982) 21 ILM 740 et seq., 758 et seq.; LETCO v. Liberia (n. 89) (1987) 26 ILM 647 et seq., 670. 124 See in detail Rudolf Dolzer, Eigentum, Enteignung und Entschädigung im geltenden Völkerrecht (Springer, 1985) 282 et seq.; Matthias Herdegen, Internationales Wirtschaftsrecht, 235 et seq.; Gudrun Zagel, Auslandsinvestitionen in Lateinamerika (Duncker & Humblot, 1999) 203 et seq.; Peter Cameron (n. 1) 49; Ivars Mēkons (n. 10) 37 et seq. 125 See Kuwait v. AMINOIL (n. 89) (1982) 21 ILM 976 et seq., 1037; Morris Besch (n. 1) 175 et seq.; Abdullah Faruque (n. 1) 330; Lorenzo Cotula (n. 36) 8; Ivars Mēkons (n. 10) 37; Munir Maniruzzaman (n. 5) 164.

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party and to the disadvantage of the other party. Natural catastrophes, civil wars, unexpected changes in raw material prices on the world market or the development of new cost-efficient technologies may be among such conditions. 116 Such circumstances unforeseeable at the time of conclusion of the contract can have the consequence that the contractual provisions of the State contract are no longer acceptable for one of the parties. If the host State is unilaterally disadvantaged by unforeseeable changes of the external circumstances of the investment project, it is unlikely to be advisable for the investor to insist for the remaining duration of the State contract strictly on the agreed provisions.126 Insisting on the original conditions considerably increases the risk of serious confrontation with the host State and of a unilateral intervention of the host State in the contract. Above all in politically unstable States, the government – possibly due to internal political pressure – will attempt, by means of its sovereignty, to compensate its disadvantage directly (e.g. by unilateral contract amendments, contract dissolution, etc.) or indirectly (e.g. by creeping confiscation, harassment, tax increases, etc.).127 117 Therefore, in modern contract practice, it is now usual that in addition to stabilisation clauses, flexible solutions are provided for the abovementioned exceptional cases. The object of these flexible or dynamic clauses is to leave the State contract in the condition which is favourable for both sides until the objectives of the investment project have been achieved both for the host State and for the investor. Conflicts arising and unilateral arbitrary measures of the host State are intended to be prevented from the start. Linked to the agreement of such flexible clauses is the psychological advantage that both parties are less conflict-oriented at the time of the conclusion of the contract but rather accommodating and flexible. Flexible clauses are therefore also a means of creating a harmonious investment environment in the course of the negotiations and securing it for the duration of the investment project.128 In practice, various forms of flexible and dynamic clauses have been developed. Apart from force majeure clauses129 and au126 Klaus Peter Berger, ‘Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators’ (2003) 36 Vand. J. Transnat’l L. 1347–1380, 1348 et seq.; Stefan Kröll (n. 106) 425 et seq.; Nagla Nassar (n. 41) 170; Thomas Wälde and Abba Kolo (n. 105) 8. 127 Muthucumaraswamy Sornarajah (n. 26) 106 et seq.; Muthucumaraswamy Sornarajah (n. 13) 214 et seq.; William A. Stoever, Renegotiation in International Business Transactions: The process of dispute-resolution between multinational investors and host societies (Lexington Books, 1981) 315; Thomas Wälde (n. 33) 279. 128 Samuel K. B. Asante, ‘Stability of Contractual Relations in the Transnational Investment Process’ (1979) 28 ICLQ 401–423, 407; Piero Bernardini, ‘The Renegotiation of the Investment contract’ (1998) 13 (2) ICSID Rev.–FILJ 411–425, 416 et seq.; Georges R. Delaume (n. 26) 3; John Y. Gotanda, ‘Renegotiation and Adaptation Clauses in Investment Contracts, Revisited.’ (2003) 36 Vand. J. Transnat’l L. 1461–1473, 1469; Morris Besch (n. 1) 178 et seq.; Matthias Herdegen (n. 5) 28 et seq.; Hanno Merkt (n. 16) 28; Nagla Nassar (n. 41) 237; Jeswald J. Salacuse, ‘Renegotiating International Project Agreements’ (2001) 24 Fordham Int’l L. J. 1317–1370, 1318; Thomas Wälde (n. 33) 267 et seq.; Thomas Wälde (n. 197) 101. 129 See Michael A. G. Bunter, The promotion and licensing of petroleum prospective acreage (Kluwer Law International, 2002) 306 et seq.; Norbert Horn, ‘Standard Clauses on Contract

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tomatic adjustment clauses130 the most frequently encountered clauses in State contracts are renegotiation clauses. 2. Renegotiation Clauses

Renegotiation clauses are clauses which oblige the parties to the State con- 118 tract to negotiate after a certain time or on the happening of significant changes on an amendment to the contract or a part thereof.131 The purpose of the renegotiation is to grant the parties the opportunity to react flexibly to the changed circumstances and to re-establish the contractual equilibrium which has been destroyed. Renegotiation clauses can be drafted in many different forms, particularly 119 with regard to the definition of the trigger events requiring the renegotiation (a), the extent of the renegotiation obligation (b), the criteria applicable to the renegotiation (c) and the legal consequences of the non-performance of the contractual renegotiation obligations (d). a) Stipulation of the Trigger Events for Renegotiation

The specification of the events triggering the renegotiation (‘trigger events’) 120 is of a special importance within the negotiation of the renegotiation clause. The objective of the foreign private investor should be on the one hand to achieve the widest possible application for the renegotiation clause, and on the other hand to define the trigger events so specifically that in the case of a dispute, no interpretation or subsumption difficulties arise and the right to renegotiation can ultimately be enforced against the host State. Not all renegotiation clauses encountered in practice ensure the achievement 121 of these objectives. This applies in particular for renegotiation clauses which are too general (1) and detailed renegotiation clauses which excessively limit the application of the renegotiation clause (2). In practice, clauses have proven of value which either in addition to the detailed agreement of individual trigger events include also a backup clause or which provide a general renegotiation obligation with a non-exclusive list of actual trigger events (3).

Adaptation in International Commerce’ in Norbert Horn (ed), Adaptation and Renegotiation of Contracts in International Trade and Finance (Kluwer, 1985) 111–140, 131; Wolfgang Peter (n. 4) 235; Heleni Theodorou (n. 4) 418. 130 On the different types of adjustment clauses see Martin Bartels (n. 11) 34 et seq.; Paul Fresle, ‘Variation and Escalation Clauses’ in Norbert Horn (ed), Adaptation and Renegotiation of Contracts in International Trade and Finance (Kluwer, 1985) 149 et seq.; Norbert Horn (n. 129) 122 et seq. 131 John Gotanda (n. 128) 1462; Norbert Horn (n. 129) 129; Andreas Nelle, Neuverhandlungspflichten – Neuverhandlungen zur Vertragsanpassung und Vertragsergänzung als Gegenstand von Pflichten und Obliegenheiten (Beck, 1993) 65.

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(1) Renegotiation Clauses without Specific Trigger Events 122

Particularly in older State contracts there are renegotiation clauses without any trigger events being defined. In Article 42.1 of the Concession Agreement between Papua New Guinea and the Dampier Mining Company Limited of 22 March 1976 it is, e.g., provided: The parties may from time to time by agreement in writing add to, substitute for, cancel or vary all or any of the provisions of this Agreement (…).132

123

Such clauses are not an appropriate basis for enforceable renegotiation rights of the foreign private investor. They contain no clearly defined obligation of the parties to renegotiate. They manifest ultimately only the good will of the parties to renegotiate and merely clarify that renegotiation of the contract is possible if both parties agree thereon. An agreed renegotiation of the contract is, however, possible at all times even without such clauses. The above quoted clause may help as an argument for renegotiation efforts of one party if the other party blocks an agreed renegotiation. A renegotiation, however, would not be enforceable in court on the basis of this clause.133 (2) Renegotiation Clauses with General Trigger Events

124

Likewise very rare in practice are renegotiation clauses which only generally refer to trigger events. In Article 47(b) of the 1974 Oil Exploration Agreement between Ghana and Shell Exploration and Production Company of Ghana Limited it was agreed: If during the term of this Agreement there should occur such changes in the financial and economic circumstances relating to the petroleum industry, operating conditions in Ghana and marketing conditions generally as to materially affect the fundamental economic and financial basis of this Agreement, then the provisions of this Agreement may be reviewed or renegotiated (…).134

125

On the one hand such clauses have the advantage that they, due to their general approach, cover a broad scope of trigger events and therefore do not limit the right of negotiation to narrowly defined risks. On the other hand such clauses contain no precise and concrete trigger events for a renegotiation. Interpretation difficulties on the question of what amendments in fact affect the ‘fundamental economic and financial basis’ of the agreement and which do not, are preprogrammed. (3) Detailed list of Trigger Events

126

In many renegotiation clauses the trigger events are precisely defined. For the foreign private investor and the host State, many factors arise which may justify renegotiation.135 Common in practice is, e.g., linking the renegotiation to a cer132 133 134 135

132

Cited in Nagla Nassar (n. 41) 175 et seq. See Martin Bartels (n. 11) 59; Nagla Nassar (n. 41) 176 et seq. Cited in Samuel Asante (n. 128) 417. Piero Bernardini (n. 41) 104.

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tain time after the start of production (e.g. five, seven, or ten years),136 the time at which the investor has recovered a certain proportion of its costs,137 changes to world market prices, change of ownership or control within the foreign investor, tax increases, new international investment treaties or changed investment conditions in another country comparable to the present State or unexpectedly high profits of the investor. It is also thinkable to define – in the context of an economic equilibrium clause (see C.2.d) above) – new national legislation or regulations of the host State which adversely affect the interest of the foreign investor, as trigger events.138 A subcategory of renegotiation clauses is formed by the hardship clauses, in 127 which renegotiation of the contract is prescribed if during the time of the contract events occur which render the performance for one of the parties financially unreasonable.139 Such unreasonableness will usually only be assumed if, in the course of the investment, events occur which were unforeseeable at the time of the conclusion of the contract and which so fundamentally change the contractual equilibrium that the financial losses of one of the parties considerably exceed what is reasonable and the affected party had not accepted this risk in the contract.140 In comparison to general renegotiation clauses, such detailed renegotiation 128 clauses have the advantage that they specify the trigger events and therefore minimise any interpretation or subsumption difficulties from the outset. A conclusive listing of trigger events, however, does have the disadvantage 129 that the right of renegotiation is limited to very specific and more or less narrowly defined risks. Circumstances not considered by the parties at the conclusion of the contract or those not foreseeable at the time of the conclusion of the contract are therefore frequently not covered. Because of the conclusive listing of trigger events, it will then be very difficult for the foreign private investor to argue, that even other events not included establish a renegotiation obligation. In 136 E.g. Art. 31.2 of the Model Mineral Development Agreement of Liberia (November 2008): ‘Five Year Review: This Agreement shall be subject to periodic review once every five (5) years after the date of the start of Production for the purpose of good faith discussions to effect such modifications to this Agreement as may be necessary or desirable in the light of any substantial changes in circumstances which may have occurred during the previous five years.’, available at http://www.molme.gov.lr/doc/MDA.pdf. 137 See e.g. Art. Q of the State Contract between Haiti und HIDECA (1976): ‘The contract will be open to renegotiation on the later of the two dates: (1) Seven years after the year of the contractor has been able to recover its costs out of the 40% cost recovery position of revenues, or (2) Ten years after the first commercial production.’ (emphasis added), cited in Wolfgang Peter (n. 4) 243. 138 See the second example clause cited under C.2.d) above. 139 Karl-Heinz Böckstiegel, ‘Hardship, Force Majeure and Special Risks Clauses in International Contracts’ in Norbert Horn (ed), Adaptation and Renegotiation of Contracts in International Trade and Finance (Kluwer, 1985) 159–169, 159; Ivars Mēkons (n. 10) 42 et seq. 140 See Art. 6.2.2. (Definition of Hardship) of the UNIDROIT Principles of International Commercial Contracts, in UNIDROIT (ed), Principles of International Commercial Contracts (Unidroit, 1994) 146 et seq. See also Clive M. Schmitthoff, ‘Hardship and Intervener Clauses’ (1980) 17 J. Bus. L. 82–91, 85.

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international business, it can be assumed that the parties with their assumed professional competence would have provided for possible risks in the renegotiation clause if they had intended to do so.141 (4) Renegotiation Clauses with Backup Provision

In order on the one hand not to excessively limit renegotiation clauses from the outset and on the other hand to ensure that concrete trigger events particularly important for the foreign private investor are covered by the renegotiation clause, it is advisable for the foreign private investor to combine a general clause with a detailed list of individual trigger events. 131 In practice, this can be achieved by two techniques: firstly, it is possible to agree to a general renegotiation clause and to add examples in a non-exclusive list of individual important trigger events, which in the view of the parties should be subsumed under the general renegotiation clause. In reverse, it is equally possible to add to the list of individual specific trigger events a backup clause granting the investor the possibility of subsuming later events not considered or not foreseeable at the time of the conclusion of the contract under the renegotiation clause. 130

b) Stipulation of the Scope of Renegotiation 132

A further important issue in the negotiation of renegotiation clauses is the question of the extent to which the State contract is subject to renegotiation on the happening of defined trigger events. Renegotiation clauses which provide for the renegotiation of the entire State contract on the happening of trigger events are thinkable. In practice, however, renegotiation clauses which contain restrictions on this issue are common. (1) Renegotiation Clauses without Restrictions

If a renegotiation clause contains no restrictions on the scope of the renegotiation, the party affected by a trigger event is entitled to renegotiate the entire State contract. 134 Such an unrestricted renegotiation right has the advantage for the affected party that it offers more flexibility in the renegotiation of the State contract. The parties need not on the conclusion of the contract specify which actual parts of the contract are subject to renegotiation and which are not. 133

(2) Partial Renegotiation Obligation 135

In State contracts renegotiation clauses are often found which admit only renegotiation of certain key points in the contract. The parties restrict themselves from the outset to renegotiation of parts of the contract which in their view have 141 See also Klaus Peter Berger, The Creeping Codification of the Lex Mercatoria (Kluwer Law International, 1999) 301; Klaus Peter Berger (n. 126) 1355, 1363.

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special significance for the contractual equilibrium of the parties. Typical of such clauses are those which provide only further renegotiation of the tax and financial provisions.142 Likewise thinkable is, e.g., the restriction of renegotiation to the price, employment issues or procedure provisions.143 Even the subsequent correction of an adjustment or renegotiation clause itself 136 can be the subject of a renegotiation clause. This is appropriate, e.g., in the event that an adjustment clause is unenforceable due to changed circumstances.144 c) Objective of Renegotiation

Furthermore renegotiation clauses in general determine the objective and 137 therefore the extent of the renegotiation. The parties of the State contract can refer to subjective standards, e.g. with renegotiation clauses which aim at ‘removing the unfairness’ or ‘adopting an equitable revision’. Thinkable are also objective standards which protect both parties (e.g. ‘restoring the original contractual equilibrium’) or only the private party (e.g. by making sure that the investor will obtain ‘the economic results anticipated under the terms and conditions of this Agreement’).145 Sometimes renegotiation clauses expressly provide that contract changes shall have no retroactive effect.146 d) Obligations of the Parties and the Legal Effects of Renegotiation Clauses

Few State contracts contain actual provisions as to the legal obligations for 138 the parties linked to such a renegotiation clause and the legal consequences in the event of breach of those obligations. However, even general renegotiation clauses without explicit provisions on this issue create certain obligations of the parties and link certain legal consequences to the breach of these obligations. (1) General Negotiation Obligations of the Parties

With the agreement of a renegotiation clause, the parties to the State contract 139 undertake at least to cooperate in the renegotiation in an efficient manner, i.e. aimed at successful negotiation. It is therefore to be expected from the parties that they seriously endeavour over a reasonable period to reach agreement, approach the negotiations flexibly, take appropriate account of the interests of the other party, make concrete and reasonable proposals and, in the case of difficult and complex negotiations, if necessary, obtain expert advice.147 The principle of fairness and of good faith immanent in the renegotiation clause, results in the 142 See e.g. Art. 6 of the ‘Rochelios’ Bauxite (suppl.) Agreement between Haiti and Reynolds Mining Corporation of 14 April 1971: ‘The State and the Concessionaire agree to have new negotiations in order to establish new minimum payments covering the corporate tax and the royalties in 1974 (…).’, cited in Wolfgang Peter (n. 4) 245. 143 See the overview in Martin Bartels (n. 11) 58 et seq.; Wolfgang Peter (n. 4) 244 et seq.; Thomas Wälde (n. 33) 283 et seq. 144 Norbert Horn, ‘Neuverhandlungspflicht’ (1981) 181 AcP 255–288, 258. 145 Piero Bernardini (n. 41) 105 with corresponding cited model clauses. 146 See Piero Bernardini (n. 41) 104 with an example clause.

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obligation of the parties to provide each other with information within reason which is relevant to the amendment, not to delay renegotiation in bad faith and not to place the other party unnecessarily before a fait accompli.148 These obligations apply to the parties mutually. If one party makes no effort to advance the negotiations, the requirement of the other party to negotiate is reduced correspondingly.149 140 In State contracts, the general principle of fairness and of good faith is sometimes expressly recorded in the renegotiation clause. In Article 34.12 of the model Exploration and Production Sharing Agreement of Qatar of 1994 it is, e.g., stated: Both Parties shall enter into negotiations in good faith in order to reach an equitable solution that maintains the economic equilibrium of this Agreement.150

141

The obligations resulting from the general principle of good faith in the renegotiation clause can of course also be specified by listing them. In order not to unnecessarily limit the obligations, the list should not, however, be conclusive, but only agreed as examples of the exercise of the principle of good faith. (2) Right to Agreement?

In the literature, the question of whether over and above the abovementioned general negotiation obligations the parties are subject to an enforceable obligation to in fact agree is extremely controversial. 143 Such a right to agreement is affirmed by some opinions, since otherwise a renegotiation clause would be futile. The party favoured by the changed circumstances would have it within its control to prevent any amendment by negotiating, but ultimately not agreeing to an amendment. A right to agreement would at least arise if the amendment criteria and the objective of the amendment are adequately specified.151 144 The majority opinion in the literature, however, rejects such a right to agreement.152 The actual content of a right to agreement simply cannot be specified. A renegotiation clause – unlike, e.g., automatic amendment clauses – does not 142

147 See in detail Klaus Peter Berger, Private Dispute Resolution in International Business: Negotiation, Mediation, Arbitration. Vol. II: Handbook, (Kluwer Law International, 2009), mn. 2–77 et seq.; Stefan Kröll (n. 106) 446 et seq.; Andreas Nelle (n. 131) 272 et seq.; Wolfgang Peter (n. 4) 246 et seq. See also Kuwait v. AMINOIL (n. 89) (1982) 21 ILM 976 et seq., 1014; Wintershall AG et. al. v. Qatar, Award, 31 May 1988, (1989) 28 ILM 795 et seq., 814 et seq. 148 Norbert Horn (n. 144) 284; Andreas Nelle (n. 131) 274 et seq., 286 et seq.; Ernst Steindorff, ‘Vorvertrag zur Vertragsänderung’ (1983) BB 1127–1131, 1130. 149 Klaus Peter Berger, ‘Internationale Investitionsverträge und Schiedsgerichtsbarkeit: Äquivalenzstörungen, Neuverhandlungsklauseln und Vertragsanpassung’ (2003) 102 ZVglRWiss 1–32, 18 et seq.; Stefan Kröll (n. 106) 447. 150 Cited in Piero Bernardini (n. 128) 416. Further examples cited in Nagla Nassar (n. 41) 178; Wolfgang Peter (n. 4) 245. 151 See e.g. Norbert Horn (n. 144) 283 et seq.; Stefan Kröll (n. 106) 154; Gino Lörcher, ‘Die Anpassung langfristiger Verträge an veränderte Umstände’ (1996) DB 1269–1273, 1270 et seq.

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provide for concrete results and concrete amendment alternatives. In fact, the result of a renegotiation is always open.153 In view of the innumerable contractual formulation possibilities, a court or arbitration decision on a new wording of the contract and a corresponding enforcement against the contractual partner are practically difficult. Even if a specific new wording of the contract could be enforced, such a uni- 145 lateral imposition of a contractual amendment would not correspond to the purpose and meaning of the renegotiation clause but, in fact, contradict it. The objective of a renegotiation clause is to secure harmonious continuation of the investment up to the successful conclusion of the investment project by means of agreed amendment of the contract appropriate to changed circumstances. This objective cannot, however, be achieved if amendment of the contract is imposed on one of the parties against its will.154 This would then not be an agreed solution which could be the basis for further harmonious cooperation. For this reason it is not necessarily advisable to include such a right to agree- 146 ment in the renegotiation clause. Such a right can hardly be enforced and would not be appropriate to sustainably resolve conflicts between the parties. Without such a right to agreement, the renegotiation clause is not superfluous. It obliges the parties to conduct negotiations according to the above described criteria and therefore establishes contractual obligations primarily procedurally rather than success-oriented.155 Since – unless the parties agree otherwise – there is no obligation on the par- 147 ties to reach agreement, the failure of renegotiation does not, in principle, result in any penalty for the parties. The opposite would be the case only if the failure of the negotiations could be proved to be based on a breach by one party of the general renegotiation obligation derived from the principle of good faith as described. This is, e.g., the case if one party delays the renegotiation without good reason, deliberately hinders it or even deceives or threatens the other.156 However, in litigation against the party blocking the renegotiation, the causality of

152 Accordingly e.g. Klaus Peter Berger (n. 147) mn. 2–81; Klaus Peter Berger (n. 126) 1367 et seq.; Piero Bernardini (n. 128) 419; Nagla Nassar (n. 41) 180 et seq.; Andreas Nelle (n. 131) 17; Wolfgang Peter (n. 4) 247; Heleni Theodorou (n. 4) 419; Thomas Wälde and Abba Kolo (n. 105) 6; Ivars Mēkons (n. 10) 31; Piero Bernardini (n. 41) 105. See also Kuwait v. AMINOIL (n. 89) (1982) 21 ILM 976 et seq., 1004: ‘An obligation to negotiate is not an obligation to agree.’; Wintershall v. Qatar (n. 147) 1989 ILM 795 et seq., 814: ‘(…) it is clear that such a duty [to negotiate] do not include an obligation (…) to reach agreement (…).’ 153 Klaus Peter Berger, ‘Power of arbitrators to fill gaps and revise contracts to make sense’ in Ian F. Fletcher, Loukas A. Mistelis and M. Cremona (eds), Foundations and Perspectives of International Trade Law (Sweet & Maxwell, 2001) 269–285, 281; Klaus Peter Berger (n. 126) 1368. 154 Morris Besch (n. 1) 188. 155 Andreas Nelle (n. 131) 17; Klaus Peter Berger (n. 147) mn. 2–81; Klaus Peter Berger (n. 126) 1368. 156 Klaus Peter Berger (n. 149) 21; Norbert Horn (n. 144) 283, 287; Nagla Nassar (n. 41) 182; Wolfgang Peter (n. 4) 247.

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the breach for the failure to reach agreement as well as the culpability therefore will often be difficult to prove.157 148 A breach causal for non-agreement results in a claim by the party affected for compensation. This claim is not, however, for damages for non-performance. Therefore the affected party will not be so placed as if agreement had been reached.158 There is no obligation between the parties to agree so that it cannot be assumed that with the performance of the general negotiation obligation agreement would have come about. In addition, an objective assessment of the results of the renegotiation is usually excluded for the reasons stated. 149 The claim of the affected party for compensation is usually limited to the loss arising due to the postponement of amendment and for reimbursement of costs incurred in confidence that the negotiations would be successful and which therefore were expended in vain due to the breach of the other party.159 150 In view of the difficulties to exactly quantify the loss in the case of such a breach, it may be advisable to include an amount for liquidated damages in the renegotiation clause.160 (3) Amendment of Contract through Arbitration

The fact that a renegotiation – unless otherwise agreed – establishes no obligation to agree and the disadvantaged party, even in the case of breach of the general negotiation obligation, is not placed in a position as if agreement had been reached, there is considerable doubt as to the effectiveness of the renegotiation clause. In cases in which the parties cannot agree on a contract amendment, there is the danger that the renegotiation clause is reduced to the status of a ‘toothless tiger’. 152 Against this background, foreign investors usually endeavour to include a mechanism in the State contract which provides practical solutions for the case of the failure to reach agreement. For example, an agreement is thinkable by which, in the event of failure of the renegotiation, a neutral third party, e.g. an arbitration tribunal, decides on the amendment of the contract. In the Sierra Leone Tonkilli–Iron Ore Agreement between Sierra Leone and Sierra Leone Development Company Limited e.g. the following clause is agreed: 151

If either the Government or the Company shall request a revision under paragraphs (a) or (b) of this Clause and the two parties shall be unable to agree as and to the extent of revision, the question shall be submitted to arbitration.161

157 Klaus Peter Berger (n. 126) 1369; Pascal Durand-Barthez, ‘La durée des accords de coopération et les clauses gouvernant leur adaptation’ (1984) DPCI 357 et seq., 372. 158 Andreas Nelle (n. 131) 328. 159 Norbert Horn (n. 144) 287; Andreas Nelle (n. 131) 322, 328. 160 Klaus Peter Berger (n. 126) 1369; Norbert Horn (n. 144) 287. 161 Cited in David N. Smith and Louis T. Jr. Wells, Negotiating Third World Mineral Agreements: Promises as Prologue (Ballinger, 1975) 123 (emphasis added).

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Such delegation of the contractual amendment to a third party must, however, 153 be carefully considered. A State contract is usually the result of prolonged negotiations. It usually constitutes a compromise between the various party interests with a balance of gains and risks. It is usually unacceptable for the parties to place the State contract and therefore the further fate of the investment project completely in the hands of a third party on whom the parties have no direct influence. Against this background, such express transfer of jurisdiction to third parties or to an arbitration tribunal is only seldom encountered in investment agreements. If the parties nevertheless decide for such a method, it is advisable to precisely define the events in which the arbitration tribunal is called upon and to provide the arbitration tribunal with clear guidelines for its decision.162 If there is no express transfer of jurisdiction in this sense, a contract amend- 154 ment by a third party is excluded. A general arbitration clause does not contain any such transfer of jurisdiction to an arbitration tribunal.163 In the case of an express clause in the above sense, the actual amendment of 155 the State contract by the arbitration tribunal is also only admissible if, at the same time, the law applicable to the State contract permits amendments by third parties164 and the arbitrator is procedurally entitled under the applicable law to make such a decision.165 e) Combination of Dynamic Clauses and Stabilisation Clauses

In contractual practice, it is quite usual to combine the abovementioned dy- 156 namic clauses with stabilisation clauses. The agreement of static stabilisation clauses on the one hand and dynamic clauses on the other are not mutually exclusive.166 By agreeing to an economic equilibrium clause with a duty to renegotiate (see C.2.d) above) the parties can even combine stabilisation clause and dynamic clause in one clause. But also outside the scope of such direct combinations stabilisation clauses and dynamic clauses can complement each other excellently in their protective effect: due to the agreed dynamic clause there is an incentive for the host State to refrain from legislative intervention in the contract in the event of changed circumstances because the changed circumstances have 162 Klaus Peter Berger (n. 153) 276; Piero Bernardini (n. 41) 106 et seq.; Piero Bernardini (n. 128) 421; John Gotanda (n. 128) 1466. 163 Piero Bernardini (n. 128) 421; Klaus Peter Berger (n. 149) 30 et seq.; Stefan Kröll (n. 106) 103; Thomas Markert (n. 11) 184; Heleni Theodorou (n. 4) 421; Kuwait v. AMINOIL (n. 89) (1982) ILM 976 et seq., 1016. 164 See Klaus Peter Berger (n. 153) 280; Piero Bernardini (n. 41) 107 et seq. 165 Piero Bernardini (n. 41) 107. See on the competences of ICSID arbitrators to adapt contractual terms Piero Bernardini (n. 41) 109 et seq.; Ivars Mēkons (n. 10) 32. 166 Morris Besch (n. 1) 212 et seq.; Piero Bernardini (n. 41) 98 et seq.; Lorenzo Cotula, Investment contracts and sustainable development: How to make contracts for fairer and more sustainable natural resource investments (International Institute for Environment and Developments, 2010), 73; John Gotanda (n. 128) 1469; Jeswald W. Salacuse, ‘Renegotiating International Business Transactions: The Continuing Struggle of Life Against Form’ (2001) 35 Int’l Law. 1507–1588, 1513 et seq.; Thomas Wälde (n. 97) 167; other view: Muthucumaraswamy Sornarajah (n. 26) 108, fn. 49.

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already been taken into account in the agreed renegotiation or adjustment.167 On the contrary, the existence of a stabilisation clause can also be of use in the renegotiation process. If the host State, based on the stabilisation clause, is not in a position to make an amendment to its national law unilaterally interfering in the contract or if it is liable for financial compensation in that event, the host State may be rather willing to agree to an amicable adjustment of the contract.168 157 Due to this complementary effect between stabilisation clauses and dynamic clauses, in practice for a long time already a combination of both types of clauses has been quite usual.169 E. Dispute Resolution Clauses

Choice of law, stabilisation and dynamic clauses are intended to prevent that the host State unilaterally intervenes in the investment project in a manner unfavourable to the investor. In the event that the host State cannot be prevented by contractual agreements and penalty clauses from taking arbitrary measures in a breach of contract, an additional contractual system is required to ensure the effective enforcement of compensation claims of the investor. For this purpose, dispute resolution clauses are usually agreed to in modern State contracts. These clauses provide the form in which disputes between the investor and a host State in connection with the investment project are to be resolved. In this instance the dispute resolution clauses have a dual function: firstly, they should provide effective legal protection. Secondly, they should prevent disputes and provide mechanisms preventing an escalation of disputes from the outset. 159 Modern State contracts usually contain arbitration clauses (1.) and/or alternative dispute resolution (ADR) clauses (2.) which are agreed to in practice often in combination with each other (3.). 158

1. Arbitration Clauses 160

Modern State contracts usually contain arbitration clauses. These are clauses providing for dispute resolution by an international arbitration tribunal and thereby simultaneously exclude decisions of a State court on the same matter. a) Advantages of Arbitration Compared to National Courts

161

Arbitration clauses are not specific to State contracts. In fact, they are also quite usual in international contracts between purely private persons. The advantages attributed to arbitration in comparison to national courts are, however, par167 John Gotanda (n. 128) 1469; Jeswald Salacuse (n. 166) 1513 et seq.; Thomas Wälde (n. 97) 167. 168 Morris Besch (n. 1) 213 et seq. 169 See e.g. Art. 17 of the AMINOIL Concession Agreement between Aminoil and Kuwait and the Renegotiation Clause agreed in Art. 9 of the Supplement Agreement of 1973, cited in (1982) 21 ILM 976 et seq., 992.

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ticularly relevant in the case of disputes concerning State contracts: by agreeing to an arbitration clause, it is possible for a foreign private investor to exclude the jurisdiction of national courts of the host State for future investment disputes. Instead of the national courts, an arbitration tribunal selected by the parties themselves, and thereby a neutral forum, decides the dispute.170 In this manner, the investor can prevent that the host State itself decides on the interpretation and performance of the State contract and thereby de facto would be the judge in its own case. Above all, in host States in which doubt about the impartiality of the State courts and an effective legal system exists, the creation of a private arbitration tribunal by the parties is an inestimable advantage.171 The right of the parties to select themselves the arbitrators usually contained 162 in an arbitration clause, has an even greater advantage in the case of investment disputes. Because of the complexity of an investment project and the extremely complex and disputed investment law, the demands of such a case often exceed the capacity of local courts, which often lack the competence, the experience and the means to satisfactorily resolve such international investment disputes.172 By agreeing to an arbitration clause, the parties can select specialists in investment law or specialists in the actual industry concerned in order to ensure an adequately expert decision. In addition, arbitration provides both parties with a considerably higher de- 163 gree of secrecy and/or confidentiality than national court proceedings. The arbitration is neither public nor are its decisions published unless otherwise agreed by the parties. The confidentiality of the proceedings benefits both parties. For the host State, it is of particular importance when political or financial questions or even national security issues are concerned. But the private foreign investor, too, will also be very reluctant to reveal technical, contractual and strategic details of its investment project in public.173 Both the host State and the investor must, however, be aware that this strict 164 confidentiality of the arbitration is not always greeted favourably by the public when major investment projects are involved. Above all, opponents of globalisation and non-governmental organisations (NGOs) fear that the apparently allpowerful multinational companies attempt to enforce their interests by means of

170 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) mn. 1–23 et seq.; Anna K. Myrvang, ‘An Illustration of how traditional arbitration is being changed by modern international investment law: Investor-State Arbitration under NAFTA Chapter XI and the Energy Charter Treaty’ (2003) 13 (11) CEPMLP Internet J. 6. 171 See Amazu Asouzu (n. 2) 34 et seq.; Jean-Flavien Lalive (n. 2) 64; Jan Paulsson (n. 2) 44 et seq. and the authors in n. 170. 172 Adebayo Adaralegbe, ‘Methods of Dispute Settlement for State Contracts in the Nigerian Petroleum Sector’ (2003) 69 (4) J. Chartered Inst. Arb. 265–271, 267; Morris Besch (n. 1) 14; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 8. 173 Hans Bagner, ‘Confidentiality – A Fundamental Principle in International Commercial Arbitration’ (2001) 18 (2) J. Int’l Arb. 243–249, 243 et seq.; Richard Garnett, Henry Gabriel, Jeff Waincymer and Jeff Epstein, A Practical Guide to International Commercial Arbitration (Oceana, 2000) 14; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 8.

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a secret and private arbitration against governments without any public and democratic discussion and without any political resistance in order to circumvent delicate and fundamental questions of, e.g., environmental protection, public health or security.174 Moreover the taxpayers, too, wish to be informed why the State may be obliged to pay several million dollars in compensation to a foreign investor. The foreign private investor is also subject to similar information demands from shareholders, insurers and lenders.175 This public discussion has not yet, however, led to a serious restriction of the principle of confidentiality in international arbitration.176 165 A further advantage of arbitration are the considerably better chances of enforcement for the private investor. An international arbitration award can be much more readily enforced against a host State than a national court judgement. The basis for the execution of arbitration awards against host States is the New York Convention with 147 member States as of September 2011, in which the member States undertake to enforce arbitration agreements and arbitration awards.177 b) Arbitration as binding on the Host State 166

Both in international arbitration and litigation practice178 as well as in international literature179 it is recognised that host States are bound to an arbitration agreement. Particularly, the host States cannot release themselves from the con174 See Jeffery Atik, ‘Legitimacy, Transparency and NGO Participation in the NAFTA Chapter 11 Process’ in Todd Weiler (ed), NAFTA – Investment Law and Arbitration: Past Issues, Current Practice, Future Prospects (Transnational, 2004), 135–150, 149 et seq.; Bernardo M. Cremades and David J. A. Cairns, ‘The Brave New World of Global Arbitration’ (2002) 3 (2) JWI 173–209, 179; Susan D. Franck, ‘The legitimacy crisis in Investment Treaty Arbitration: Privatizing public international law through inconsistent decisions’ (2005) 73 Fordham L. Rev. 1521–1625, 1544, fn. 87 with further references. 175 Nigel Blackaby, ‘Public Interest and Investment Treaty Arbitration’ in Gabrielle KaufmannKohler and Blaise Stucki (ed), Investment Treaties and Arbitration. ASA Swiss Arbitration Association Conference in Zürich of January 25, 2002 (Swiss Arbitration Association, 2002) 146 et seq. 176 Morris Besch (n. 1) 17 et seq.; Nigel Blackaby (n. 175) 146 et seq. 177 See on the recognition and enforcement of arbitration awards in detail Richard Garnett, Henry Gabriel, Jeff Waincymer and Jeff Epstein (n. 173) 101 et seq.; Georgios Petrochilos, Procedural Law in International Arbitration (Oxford 2004) mn. 7.01. et seq. 178 See e.g. Société KFTIC v. Société Icori Estero et autres, Cour d’Appel de Paris, Decision, 13 June 1996, (1997) Rev. Arb. 251; Gatoil International Inc. v. National Iranian Oil Company, High Court of Justice, Queen’s Bench Division, Decision, 21 Dezember 1988, (1992) XVII YCA 587 et seq., 591 et seq.; (1990) ICC Award No. 6162, (1992) XVII YCA 153 et seq., 158 et seq.; (1994) ICC Award No. 7263, (1997) XXII YCA 92, 100. 179 See inter alia Karl-Heinz Böckstiegel, Arbitration and State Enterprises – A Survey on National and International Law and Practice (Kluwer Law and Taxation Publishing, 1984) 25 et seq.; Georges R. Delaume, ‘Reflections on the Effectiveness of International Arbitral Awards’ (1995) 12 (1) J. Int’l Arb. 5–19, 14 et seq.; Yves Derains, ‘Transnational Law in ICC Arbitration’ in Klaus Peter Berger (ed), The Practice of Transnational Law (Kluwer Law International, 2001) 43–51, 50 et seq.; Jan Paulsson, ‘May a State invoke its Internal Law to Repudiate Consent to International Commercial Arbitration?’ (1986) 2 Arb. Int’l 90– 103, 97; Wolfgang Peter (n. 4) 273.

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tractual bond by arguing that the host State is in fact not entitled under its own law to conclude an arbitration agreement with a foreign private investor. The host State would breach the principle of venire contra factum proprium if it initially, in spite of internal statutory restrictions, concluded an arbitration agreement with a foreign private investor who acts in good faith and then later when conflict arises invoked the invalidity of the arbitration clause.180 Also the objection of some host States that they are not bound to arbitration 167 agreements because of their sovereignty is not usually successful before arbitration tribunals since it breaches the generally accepted principle of pacta sunt servanda and the State would also behave contradictorily in the meaning of venire contra factum proprium if it first freely – as an expression of its sovereignty – concludes an arbitration agreement with a private investor and then, when conflict arises, due to its sovereignty no longer feels itself bound by the agreement.181 c) Ad Hoc Arbitration Clauses

The parties have a wide range of possibilities when drafting the arbitration 168 clause. A first major decision of the parties is to decide in favour of an institutional arbitration (see below d) or an ad hoc arbitration tribunal. Ad hoc arbitration tribunals are tribunals organised for the particular case not bound to any institution. The proceedings are not governed by the rules of any institution. The formation of an ad hoc arbitration tribunal has the advantage for the par- 169 ties that they can frame their own rules flexibly not bound by institutional arbitration rules. In addition, no extra charge for the administration of the arbitration by an arbitration institution is incurred.182 These aspects, which on first sight appear to be advantageous, can rapidly 170 turn out to have considerable disadvantages. If the parties do not resort to institutional rules of arbitration which have been tested in practice and are generally accepted, they must themselves draft the rules of arbitration – unless they wish 180 Hilmar Raeschke-Kessler and Klaus Peter Berger, Recht und Praxis des Schiedsverfahrens, (RWS-Verlag, 2006) 53; Stephen M. Schwebel, International Arbitration: Three Salient Problems (Cambridge University Press, 1987) 68 et seq.; Jean-Pierre Regli (n. 9) 43. See also Art. 5 of the Santiago de Compostela Resolution of the Institut de Droit International of 1989, cited in (1991) XVI YCA 233 et seq., 238 and the express legal provision under Art. 177(2) of the Swiss Federal Code on Private International Law, Art. 2(2) of the new Spanish Arbitration Law, cited in (2004) 43 ILM 480 et seq., 493; Art. 2 of the Organization for the Harmonization of Business Law in Africa (OHADA) Uniform Act on Arbitration (1999), which serves many African States as model law, see on this Amazu Asouzu (n. 2) 148 et seq. 181 Société de Grands Travaux de Marseille (S.G.T.M.) v. East Pakistan Industrial Development Corporation (E.P.I.D.C.), ICC Award No. 1803/1972, excerpts cited in (1980) V YCA, 179 et seq.; BP v. Libya (n. 117), (1979) 53 ILR 297 et seq.; TEXACO v. Libya (n. 89) (1978) 27 ILM 1 et seq.; LIAMCO v. Libya (n. 89) (1981) 20 ILM 1 et seq.; Alcoa Minerals of Jamaica, Inc. v. Jamaica, ICSID Case No. ARB/74/2, Decision on Jurisdiction and Competence, 6. July 1975, (1979) IV YCA 206 et seq., 207 et seq. 182 Morris Besch (n. 1) 37.

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to rely on the national arbitration statutes which may be applicable. This can, at the time of the contract negotiation at which there is usually still an intact business relationship between the parties, become quite a difficult task. It will be difficult for the parties prior to the beginning of the investment project to enter into negotiation on detailed rules for the hypothetical and unwanted situation of a later dispute. On the other hand, such detailed rules are necessary to ensure the effective conduct of an arbitration in the absence or inadequacy of statutory arbitration rules.183 171 If the parties, nevertheless, decide to draft the rules of the arbitration themselves, they should make rules on the absence of one of the parties, on appeal, costs, confidentiality and the language of the proceedings in addition to those on the composition of the arbitration tribunal and the nomination of arbitrators.184 172 If the parties do not wish to negotiate the procedural rules in detail but nevertheless do not wish to subject themselves to the rules of an international arbitration institution, they can – as a compromise solution – resort to precedent rules for their own ad hoc arbitration. Here the UNCITRAL arbitration rules185 may be considered. These rules were prepared by the UN Commission on International Trade Law for the conduct of international arbitration. Their application was recommended by the General Assembly of the United Nations. They therefore enjoy wide-ranging acceptance not only in the industrial States but also in the developing States. They contain all aspects of the arbitration from the establishment of the arbitration tribunal up to the writing of an arbitration award.186 They can be adopted by the parties by a simple clause in the State contract referring to the UNCITRAL rules. The following clause e.g. may be used: Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity hereof, shall be settled by arbitration in accordance with the UNCITRAL Arbitration Rules. (a) The appointing authority shall be... [name of institution or person];(b) The number of arbitrators shall be... [one or three];(c) The place of arbitration shall be... [town and country];(d) The language to be used in the arbitral proceedings shall be [...].187

d) Institutional Arbitration Clauses 173

Instead of an ad hoc arbitration, the parties can proceed in accordance with the rules of a specific arbitration institution. The arbitration institutions them-

183 Karl-Heinz Böckstiegel (n. 179) 285. 184 See in detail Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 165 et seq.; Wolfgang Peter (n. 4) 279 et seq.; Paul A. Gèlinas, ‘Arbitration Clauses: Achieving Effectiveness’ in Albert Jan van den Berg (ed), Improving the Efficiency of Arbitration and Awards: 40 Years of Application of the New York Convention (Kluwer Law International, 1999) 47–66, 53 et seq. 185 Cited in (1976) 15 ILM 701 et seq. 186 See to the UNCITRAL arbitration rules inter alia Giorgio Sacerdoti (n. 8) 1 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) mn. 2–34 et seq.; Pieter Sanders, The Work of UNCITRAL on Arbitration and Conciliation (Kluwer Law International, 2004). 187 Annex to the UNCITRAL Arbitration Rules (2013), available at http://www.uncitral.org/pdf /english/texts/arbitration/arb-rules-2013/UNCITRAL-Arbitration-Rules-2013-e.pdf, p. 29.

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selves do not provide judicial activity but provide rules of procedure and fulfil administrative tasks. This procedure has the advantage that the parties have access to tried and test- 174 ed arbitration rules and the support of an experienced arbitration institution in the conduct of the arbitration.188 Recourse to established institutional arbitration rules at the same time increases the degree of legal certainty because the course of the proceedings is for both parties considerably more transparent and predictable. In addition, with the involvement of an internationally recognised arbitration institution, the probability that host States will voluntarily comply with arbitration awards issued is increased.189 Within the institutional resolution of investment disputes, the International 175 Centre for Settlement of Investment Disputes (ICSID) is of special significance. ICSID is a special arbitration institution tailored to investment disputes between States and foreign private investors. Because the World Bank is behind ICSID, ICSID enjoys considerable acceptance both among investors and also host States throughout the world and embodies a certain authority.190 Foreign investors therefore often succeed in entering into State contracts with 176 an ICSID arbitration clause. Correspondingly many host States provide in their model State contracts ICSID arbitration clauses.191 In order to establish the jurisdiction of ICSID for disputes in connection with the State contract, the agreement of a standard ICSID clause in the State contract which, e.g., could be as follows, suffices: The [Government]/[name of constituent subdivision or agency] of name of Contracting State (hereinafter the ‘Host State’) and name of investor (hereinafter the ‘Investor’) hereby consent to submit to the International Centre for Settlement of Investment Disputes (hereinafter the ‘Centre’) any dispute arising out of or relating to this agreement for settlement by arbitration pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (hereinafter the ‘Convention’).192

Apart from ICSID, also other arbitration institutions, e.g. the International 177 Chamber of Commerce (ICC),193 the American Arbitration Association (AAA), the London Court of International Arbitration (LCIA),194 the Arbitration Insti188 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 36 et seq.; Wolfgang Peter (n. 4) 277; Jan Paulsson, Nigel Rawding, Lucy Reed and Eric Schwartz, The Freshfields Guide to Arbitration and ADR. Clauses in International Contracts (Kluwer Law International, 2010) 51. 189 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 36 et seq.; Wolfgang Peter (n. 4) 277. 190 Amazu Asouzu (n. 2) 225 et seq.; Georges R. Delaume, ‘ICSID Arbitration’ in Julian D M. Lew (ed), Contemporary Problems in International Arbitration (Nijhoff, 1987) 23–39, 23; Kathirgamar V. S. K. Nathan, ICSID Convention: The Law of the International Centre for Settlement of Investment Disputes (Juris, 2000) 52 et seq. 191 E.g. Art. 28.1 of the Model Petroleum Concession Agreement For Onshore Area of Pakistan (2009) (n. 46), Art. 22.2 of the Model Production Sharing Contract of Cyprus (2007) (n. 29), Art. 26.1.2 of the Model Production Sharing Contract of Equatorial Guinea (2006) (n. 31). 192 This and other ICSID model clauses available at http://icsid.worldbank.org/ICSID/StaticFiles/model-clauses-en/main-eng.htm. 193 See John Collier and Vaughan Lowe (n. 18) 47 et seq.; Horacio A. Grigera-Naón, ‘The settlement of investment disputes between states and private parties: an overview from the perspective of the ICC’ (2000) 1 (1) JWI 59–103, 59 et seq. See e.g. the ICC clause in Sec. XII

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tute of the Stockholm Chamber of Commerce (SCC) as well as the Permanent Court of Arbitration in The Hague may be considered for investment disputes.195 For US American investors in Iran, the Iran–US Claims Tribunal established in 1981 is relevant.196 2. Alternative Dispute Resolution Clauses

The agreement to an arbitration clause in a State contract provides the investor with the possibility to obtain a binding arbitration award against the host State before an international arbitration tribunal in the event of a dispute. However, the primary objective of any foreign investor must be to prevent an escalation of disputes and the necessity of arbitration from the outset. In many cases the conduct of an arbitration proceeding also means the end of the investment relationship between the host State and the foreign investor. For many investors and host States, if they have been opponents in arbitration, it is unthinkable that they will after a short period again consider an investment project together. If a harmonious investment relationship can no longer be created, the successful conclusion of the investment project is also unlikely. If the investment relationship is once destroyed, every host State has enough possibilities to openly or covertly prevent a trouble-free and profitable investment of the foreign investor. Even if the parties succeed in creating a harmonious investment relationship after the conclusion of the arbitration, valuable investment years will have already been lost.197 Therefore, in contractual practice, alternatives to arbitration or litigation have been developed to prevent an escalation of disputes from the outset – alternative dispute resolution methods (ADR). 179 Alternative dispute resolution methods include – apart from negotiations between the parties which are possible at all stages of a dispute without any ex178

194

195

196

197

146

of the State contract between Libyan National Oil Corp. and Occidental (1974), cited in (1975) 14 ILM 645 et seq. See e.g. Article 42.1 (c) of the Model Production Sharing Contract of Kurdistan 2007: ‘If the dispute is not settled by mediation in accordance with Article 42.1 (b) within sixty (60) days of the appointment of the mediator, or such further period as the Parties to the Dispute may otherwise agree in writing, any party to the Dispute may refer the Dispute to, and seek final resolution by arbitration under the LCIA Rules, which Rules shall be deemed to be incorporated by reference into this Article.’, available at http://www.krg.org/pdf/ 3_krg_model_psc.pdf. See on these institutions R. Doak Bishop, James Crawford and Michael Reisman (n. 38) 428 et seq.; R. Doak Bishop, Sashe D. Dimitroff and Craig S. Miles, ‘Strategic Options Available When Catastrophe Strikes the Major International Energy Project’ (2001) 36 (4) Tex. Int’l L. J. 635–688, 658 et seq.; Michael Bunter (n. 129) 320 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 38 et seq. See on the Iran–US Claims Tribunal e.g. Charles N. Brower and Jason D. Brueschke, The Iran–United States Claims Tribunal (Nijhoff, 1998) 1 et seq.; David D. Caron and John R. Crook, The Iran–United States Claims Tribunal and the process of international claims resolution: A study by the Panel on State Responsibility of the American Society of International Law (Ardsley, 2000); Georgios Petrochilos (n. 177) 228 et seq. Thomas W. Wälde, ‘Pro-active Mediation of International Business and Investment Disputes Involving Long-Term Contracts: from Zero-sum Litigation to Efficient Dispute Management’ (2004) 5 (1) Bus. L. Int’l 99–109, 100 et seq.; Morris Besch (n. 1) 71.

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press agreement198 – particularly mediation or conciliation (a), expert decisions (b) and the establishment of a permanent Dispute Review Board (DRB) (c). This is not the place to consider all details of the individual ADR methods. A short review of the methods most important for State contracts and their contractual structure is at this point sufficient. a) Mediation or Conciliation Clauses (1) Concept of Mediation or Conciliation

If the parties cannot resolve a dispute by negotiation, there remains the possi- 180 bility of calling on an independent third party, namely a mediator or conciliator, to help settling the dispute.199 A mediator or conciliator has the task of guiding the negotiation, listening to both parties, making recommendations and supporting the parties in finding an agreed solution with which both are satisfied and which does not mean that one of the parties is shown to be the loser (‘win-win situation’). A mediator or conciliator attempts to direct the view of the parties away from their alleged ‘legal’ rights towards their actual interests and to propose a solution advantageous to both parties.200 Unlike in arbitration, the mediator or conciliator usually does not issue a binding and executable decision. In fact, the agreement reached only becomes binding on the conclusion of a settlement between the parties.201 This does not however mean, that the mediation is less effective than an arbitration. On the contrary, there is often even a higher 198 Christian Bühring-Uhle, Arbitration and Mediation in international business: Designing procedures for effective conflict management (Kluwer Law International, 1996) 157 et seq.; John P. Bowman, ‘Dispute Resolution Planning for the Oil and Gas Industry’ (2001) 16 (2) ICSID Rev.–FILJ 332–407, 404; John Collier and Vaughan Lowe (n. 18) 20 et seq.; Luc Demeyere, ‘About Dispute Resolution and Conflict Management’ (2003) 19 (3) Arb. Int’l 313– 331, 318; Peter Fischer, Die internationale Konzession (Springer, 1974) 412 et seq.; Margaret Wang, ‘Are Alternative Dispute Resolution Methods Superior to Litigation in Resolving Disputes in International Commerce?’ (2000) 16 (2) Arb. Int’l 189–211, 191. 199 The terms ‘mediation’ and ‘conciliation’ are partly used synonymously, see e.g. Luc Demeyere (n. 198) 321; Hilmar Raeschke-Kessler and Klaus Peter Berger (n. 180) 23 et seq.; Pieter Sanders, Quo Vadis Arbitration? Sixty Years of Arbitration Practice (Kluwer Law International, 1999), chapter VI; some authors hold the view that a conciliator plays a more active role providing concrete proposals for a settlement to the parties; e. g. Jan Paulsson, Nigel Rawding, Lucy Reed and Eric Schwartz (n. 188) 109 et seq.; other authors view exactly contrary the ‘mediator’ as more active than a ‘conciliator’, see e.g. Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 13 et seq. In the following both terms are used synonymously. 200 On mediation and the role of the mediator see Christian Bühring-Uhle (n. 198) 272 et seq.; Luc Demeyere (n. 198) 319 et seq.; Richard H. Kreindler, Jan K. Schäfer and Reinmar Wolff, Schiedsgerichtsbarkeit. Kompendium für die Praxis (Verlag Recht und Wirtschaft, 2006) 23 et seq. Thomas W. Wälde, ‘Efficient Management of Transnational Disputes: Mutual Gain by Mediation or Joint Loss in Litigation’ (2006) 22 (2) Arb. Int’l 205–232, 211 et seq.; Thomas Wälde (n. 197) 101 et seq.; Margaret Wang (n. 198) 192. 201 Klaus Peter Berger, ‘Integration of Mediation Elements into Arbitration. “Hybrid” Procedures and “Intuitive” Mediation by International Arbitrators’ (2003) 19 (3) Arb. Int’l 387– 403, 391; Margaret Wang (n. 198) 193. However, the parties can grant the mediator or conciliator an even more active role in the finding of a fair solution and instruct him to propose a settlement.

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probability that the parties voluntarily adhere to the agreement arrived at in the course of mediation because it is a solution developed by themselves, guided more strongly by the interests of the parties.202 (2) Mediation or Conciliation Clauses in a State Contract

The parties can at any time if a dispute arises conclude an ad hoc mediation agreement. This is appropriate if there is a readiness between the parties to compromise although they cannot reach an agreement without the help of a neutral third party. It is however thinkable that a meditation agreement is already included in the State contract.203 Such a mediation clause in the State contract has the advantage that it compels the parties to first exhaust all possibilities of reaching an amicable agreement before commencing arbitration or litigation. This advantage would be converted into a disadvantage only if the parties were not prepared to compromise on the dispute and therefore mediation is condemned to fail from the outset. In that case, the compulsion to mediate leads only to unnecessary delay or can even be abused by one of the parties as a delaying tactic.204 Such a delaying tactic can at most be resisted with the agreement of certain reasonable time limits in the mediation agreement.205 182 A mediation agreement in the State contract can also contain provisions for the appointment of the mediator, the procedure and course of the mediation, confidentiality of the parties and the mediator and use of the knowledge achieved in the mediation in any subsequent arbitration or litigation. These detailed provisions can however – in order not to overload the State contract with details – be left to a separate mediation agreement with the later mediator. 181

(3) UNCITRAL Conciliation Rules 183

In order not to have to include the details of the mediation/conciliation proceedings in the State contract, the parties – as in the arbitration clauses (cf. above) – can resort to precedent conciliation rules. For example, the UNCITRAL Conciliation Rules are recommended by the UN General Assembly206 and are therefore accepted by industrial and developing States. They con202 Horacio Falcão and Francisco J. Sánchez, ‘Mediation – An Emerging ADR Mechanism in Latin America’ in Nigel Blackaby, David M. Lindsey and Alessandro Spinillo (eds), International Arbitration in Latin America (Kluwer Law International, 2002) 415–438, 418; Margaret Wang (n. 198) 206. 203 See e.g. Art. 13.01.a. of the State contract between Jamaica and Kaiser Bauxit: ‘Any dispute (…) shall, unless settled by mutual agreement of the parties or by conciliation (…) be referred to Jamaican courts.’, cited in Martin Bartels (n. 11) 80 with further examples. 204 Morris Besch (n. 1) 77. 205 See e.g. Art. 41.3 of the Model Production Sharing Contract of Kurdistan (2007): ‘If the dispute is not settled by mediation within thirty (30) days of the commencement of the mediation, or such further period as the Parties shall agree in writing, the dispute shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules shall be deemed to be incorporated by reference into this Article.’ (n. 194). 206 UNCITRAL CR, Official Protocol of the UN General Assembly (1981) 20 ILM 300 et seq. On the UNCITRAL Model Law on International Commercial Conciliation (2002)

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tain comprehensive provisions on the conduct of a conciliation process.207 In the State contract, the parties can agree the precedent clause according to Art. 20 of the UNCITRAL Conciliation Rules.208 Alternatively, the parties can also provide for a binding conciliation under the 184 UNCITRAL Conciliation Rules. The precedent clause itself does not contain such a binding mechanism. It says rather only that in the event that the parties wish to conduct conciliation, it shall take place according to the UNCITRAL rules. (4) Institutional Mediation/Conciliation Rules

Most international arbitration institutions also offer their services for media- 185 tion/conciliation. In investment disputes, e.g. the settlement procedure under the ICSID settlement rules or the ICC Mediation Rules are provided. Art. 28 to 35 of the ICSID Convention and the Rules of Procedure for Concil- 186 iation Proceedings (ICSID Conciliation Rules) contain detailed provisions for the conduct of a settlement proceeding. The ICSID conciliation proceeding is not, unlike arbitration, directed at a binding decision. In accordance with Art. 34 of the ICSID Convention it is rather a matter for the settlement commission to clarify the dispute between the parties and to endeavour to create a solution acceptable for both parties.209 Since 1 January 2014 the ICC Mediation Rules and the non-binding Media- 187 tion Guidance Notes210 apply which replace the ICC ADR Rules that have been used for amicable dispute resolution worldwide since 2001. Like the ICSID settlement procedure, the ICC Mediation procedure does not aim at an executable decision but at an amicable agreement of the parties with the help of a neutral third party.211

207

208

209

210 211

(U.N.Doc. A/CN.9/WG.II/WP.108) see Eric van Ginkel, ‘The UNCITRAL Model Law on International Commercial Conciliation: A Critical Appraisal’ (2004) 21 (1) J. Int’l Arb. 1– 65, 1 et seq. See in detail Frédéric Eisemann, ‘Conciliation as a Means of Settlement of International Business Disputes: The UNCITRAL Rules as Compared with the ICC System’ in: Jan Schultsz and Albert Jan van den Berg (eds) The Art of Arbitration. Essays on international arbitration. Liber Amicorum Pieter Sanders (Kluwer, 1982), 121–128, 124. ‘Where, in the event of a dispute arising out of or relating to this contract, the parties wish to seek an amicable settlement of that dispute by conciliation, the conciliation shall take place in accordance with the UNCITRAL Conciliation Rules as at present in force.’, model clause available at http://www.uncitral.org/pdf/english/texts/arbitration/conc-rules/concrules-e.pdf. On ICSID conciliation see in detail James C. Baker, Foreign Direct Investment in Less Developed Countries. The Role of ICSID and MIGA (Quorum Books, 1999) 56 et seq.; Ucheora Onwuamaegbu, ‘The Role of ADR in Investor-State Dispute Settlement: The ICSID Experience’ (2005) 22 (2) News from ICSID 12–14, 13 et seq.; Nassib Ziadé, ‘ICSID Conciliation’ (1996) 13 (2) News from ICSID 3–8, 4 et seq. ICC Mediation Rules and Mediation Guidance Notes, available at http://www.iccwbo.org/ products-and-services/arbitration-and-adr/mediation/rules/. See on the new ICC Mediation Rules Ben Hornan, ‘ICC launches new mediation rules’ (2013) 9(1) Global Arbitration Review.

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b) Expert Proceeding Clauses 188

189

190

191

192

Investment disputes may be of a purely technical and business nature. In these cases, it can be appropriate instead of an arbitration, to involve individual experts or a group of experts for the resolution of the disputes. The competences of the experts can be stated in various ways. It is thinkable that the experts are only instructed to contribute their expertise in the quest for an amicable agreement, to issue recommendations or to monitor certain measures without making binding proposals or decisions themselves.212 Alternatively, experts can be involved in making binding decisions (‘Expert Determination’).213 The involvement of experts is often included in a staged system of various dispute resolution methods. Such a staged system including a binding expert decision is e.g. provided in Art. 33 of the Model Production Sharing Contract of India.214 The conduct of such expert proceedings has the advantage compared to arbitration that it is usually considerably cheaper and more expeditious. Contrary to arbitration, the expert can e.g. undertake his own investigations without being dependent on information from the parties or having to wait for this.215 The instruction of an expert has also the psychological advantage that no official dispute proceeding is commenced.216 The conduct of an expert procedure is therefore less burdensome on the investment relationship between the host State and the foreign investor. Unlike arbitration awards of an international arbitration tribunal, the decision of the expert cannot, however, be executed under the New York Convention. The decision is rather only contractually binding. If one party refuses to implement the decision, an execution procedure before national courts is required.217 c) Dispute Review Boards Clauses

193

Precisely in the context of a very prolonged investment project, it can be appropriate to involve experts not only in case of dispute but also as a permanent expert committee (dispute review board). A dispute review board is involved in the project from the beginning, meets regularly and attempts to ensure that irregularities are avoided and disputes prevented from arising.218 212 See Martin Bartels (n. 11) 102 et seq.; Marc Blessing, ‘Drafting an Arbitration Clause’ in Marc Blessing (ed), The Arbitration Agreement – Its Multifold Critical Aspects (Swiss Arbitration Association, 1994) 32–77, 66; Richard Garnett, Henry Gabriel, Jeff Waincymer and Jeff Epstein (n. 173) 16. 213 See Ellis Baker and Anthony Lavers, ‘The Expert in Dispute Resolution: A Common Law Perspective’ (2004) 70 (1) J. Chartered Inst. Arb. 9–18, 9 et seq.; Marc Blessing, Introduction to Arbitration – Swiss and International Perspectives (Helbing & Lichtenhahn, 1999) 308 et seq.; Michael Bunter (n. 129) 318 et seq.; Peter Fischer (n. 198) 415 et seq.; Paul Gèlinas (n. 184) 53 et seq.; Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 10 et seq. 214 See n. 32. 215 Michael Bunter (n. 129) 284 et seq., 319. 216 Stefan Kröll (n. 106) 276. 217 Julian Lew, Loukas Mistelis and Stefan Kröll (n. 3) 10 (mn. 1–34).

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The members of the board are from the beginning very intensively involved 194 in the project and have therefore – unlike an arbitrator or mediator – background knowledge on the project and the interests of the parties. The competences of the experts but also their close relationship to the investment project and to the parties increase the probability that the host State and the foreign private investor voluntarily accept the experts’ decision. The parties can draft the rules, procedure and competence of a dispute resolu- 195 tion board in the State contract in detail or resort to an institutional dispute review board procedure, e.g. the ICC Dispute Board Rules.219 In the State contract, it can be stated whether the decision of the committee is binding or nonbinding, provisional or final.220 If the decision is not binding, the State contract can also provide that the opinion of the board can be used as evidence in a possible subsequent litigation or arbitration.221 3. Hybrid Clauses

In modern State contracts, the dispute resolution methods are usually com- 196 bined with each other and it is attempted to avail of the advantages of each method for the parties. Usual and quite useful is the agreement to a staged dispute resolution system.222 At the first stage, when disputes arise, the mildest form of dispute resolution – 197 amicable agreement by the parties without the involvement of a third party – is usually provided for. Most day-to-day differences of opinion can already be resolved by this method. If technical or business questions are concerned – as they often are in complex investment projects – a specially created internal expert committee can be consulted. In the event that the parties do not reach an amicable solution, the involve- 198 ment of third parties is usually agreed on at the second stage. In order to avoid burdening the investment relationship with arbitration or litigation, a mediation/ conciliation procedure or an expert procedure is often inserted. Only for the case

218 See in detail Marc Blessing (n. 213) 306 et seq.; Christian Bühring-Uhle (n. 198) 323; Anthony Connerty, ‘The Role of ADR in the Resolution of International Business Disputes’, (1996) 12 (1) Arb. Int’l 47–55, 53; Pierre Michel Genton, ‘The Role of the DRB in Longterm Contracts’ (2002) 18 (1) Constr. L. J. 8–19, 8 et seq.; Kathleen M. J. Harmon ‘Effectiveness of Dispute Review Boards’ (2003) 129 (6) J. Constr. Engin. & Mgmt 674–679, 674 et seq.; Anton van Langelaar, ‘Dispute Boards as an Alternative Dispute Resolution Mechanism on Construction Projects in Southern Africa’ (2004) 70 (2) J. Chartered Inst. Arb. 99– 102, 9 et seq. 219 See Caroll S. Dorgan, ‘The ICC’s New Dispute Board Rules’ (2005) 22 (2) ICLR 142–150, 142 et seq.; Ragnar Harbst and Volker Mahnken, ‘ICC Dispute Board Rules: the Civil Law Perspective’ (2006) 72 (4) J. Chartered Inst. Arb. 310–319, 310 et seq. 220 Martin Bartels (n. 11) 105; Marc Blessing (n. 213) 307; Christian Bühring-Uhle (n. 198) 323. 221 Christian Bühring-Uhle (n. 198) 325. 222 Klaus Peter Berger (n. 147) mn. 2–71; Christian Bühring-Uhle (n. 198) 323 et seq.; Horacia Falcão and Francisco Sánchez (n. 202) 432 et seq.

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that all attempts at an amicable solution fail, the last step as ultima ratio will be the conduct of arbitration or litigation.223 F. Summary

There are a number of contractual mechanisms available to foreign private investors to protect them against unilateral intervention of the host State in the investment project. 200 Some clauses, namely dynamic clauses and ADR clauses are intended to prevent disputes arising with the host State in the course of the investment project from escalating and to enable an amicable agreement to be found between the parties facilitating the successful continuation of the project. Preventative effect is also available from choice of law and stabilisation clauses. The financial consequences linked to these clauses may discipline the host State with regard to unilateral amendments of host State’s law or arbitrary interventions in the State contract at the expense of the investor. 201 If the host State, in spite of agreed choice of law, stabilisation and dynamic clauses, is not deterred from arbitrarily amending legislation and thus intervening in the investment project, arbitration clauses in the State contracts ensure that the investor can effectively enforce compensation claims resulting from the choice of law or stabilisation clauses against the host State. 202 The purely contractual protection of the investor can be improved by bilateral or multilateral investment treaties of the host State penalising the breach of the State contract by the host State at international law level and enabling the investor, on the basis of such protection provisions in treaties, to enforce both contractual claims and also treaty claims directly against the host State for any breach by the host State. 199

223 See e.g. Art. 33 of the Model Production Sharing Contract of India (n. 32).

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Chapter 4: International Investment Agreements – History, Approaches, Schools I. The Evolution of the Regime of International Investment Agreements: History, Economics and Politics

Chester Brown A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

B. International Investment Law in the Era before BITs . . . . . . . . . . . . . . . . . . . . 1. Bilateral Friendship, Commerce and Navigation Treaties . . . . . . . . . . . 2. Uncertainties in the Customary International Law of Investment Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3 3

C. Multilateral Efforts for the Promotion and Protection of Foreign Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1. Early Multilateral Initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (1957) . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Abs–Shawcross Draft Convention on Investments Abroad (1959) a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens (1961) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) General Principles and Scope of Application . . . . . . . . . . . . . . . . . . . . . c) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. OECD Draft Convention on the Protection of Foreign Property (1962) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Standards of Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Settlement of Disputes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965). . . . . . . . . . . . . . . . . . . . . . . . . . . a) Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Jurisdiction of ICSID. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Procedural Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7 14 14 17 17 18 19 21 21 22 24 27 33 33 35 36 37 41 41 42 44 48 55 55 56 58

D. The Emergence of Bilateral Investment Treaty Programmes . . . . . . . . . . . . 1. The First BIT: The Germany–Pakistan BIT (1959) . . . . . . . . . . . . . . . . . . 2. Development of States’ BIT Programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Content and Characteristics of BITs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

60 60 65 72

E. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

78

Literature: Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013); Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010); Ignaz Seidl-Hohenveldern, ‘The Abs–Shawcross Draft Convention to Chester Brown

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A. Introduction

It is well-known that the first modern bilateral investment treaty (BIT) was the Germany–Pakistan BIT which was signed on 25 November 1959 and entered into force in 1961.1 In subsequent years, other developed States commenced their own programmes of BIT negotiations, including France (in 1960), Switzerland (1960), the Netherlands (1963), Italy (1964), the Belgo–Luxembourg Economic Union (1964), Sweden (1965), Denmark (1965), Norway (1966), the United Kingdom (1975), Austria (1976), Japan (1977), and the United States (1977).2 By the end of 2011, UNCTAD reported that there were 2,833 BITs in existence.3 But the Germany–Pakistan BIT of 1959, and the subsequent efforts by States to negotiate these BITs did not, as Professor Salacuse has aptly put it, ‘arise suddenly and miraculously the way Athena sprang from the head of Zeus.’4 Nor did investment treaties fill a space that was a vacuum devoid of any applicable rules. Rather, the negotiation of BITs and other modern-day international investment agreements (IIAs) was inspired by the diverse economic interests of nations and also built on important foundations of pre-existing international law governing the protection of foreigners and their investments.5 The negotiation of BITs was predated by several initiatives by non-governmental organisations to foster international investment flows, and various multilateral efforts to reach agreement on the protection of investments. The purpose of this chapter is to examine those progenitors of the Germany–Pakistan BIT of 1959, provide a historical overview of the evolution of the regime of international investment agreements, and consider the development of BITs since 1959. 2 Part B reviews the development of the international law rules on the protection of aliens in the era before BITs were negotiated, focussing on the instrument 1

1 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, signed 25 November 1959, Bundesgesetzblatt II, No. 33 (6 July 1961) 793. 2 See, e.g., Kenneth Vandevelde, Bilateral Investment Treaties (Oxford University Press, 2010) 55; Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties: Standards of Treatment (Kluwer, 2009) 42–44. 3 UNCTAD, ‘Latest Developments in Investor-State Dispute Settlement’, IIA Issues Note: No 1 (April 2012) 1, available at http://unctad.org/en/PublicationsLibrary/webdiaeia2012d10_en.pdf. 4 Jeswald Salacuse, The Law of Investment Treaties (Oxford University Press, 2010) 37. 5 Ibid., at 37.

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which is widely considered to be the precursor to the BIT, the bilateral friendship, commerce and navigation treaty (FCN treaty), but also addressing uncertainties in the substantive rules of customary international law. Part C then turns to a consideration of multilateral efforts to reach global agreement on the applicable rules for the protection of foreign investments. Following the failure of States to reach multilateral agreement on their substantive obligations, Part D examines the evolution of the IIA regime through the negotiation of BITs, and regional IIAs, and identifies some issues where States are developing the content of such agreements. This chapter concludes that the practice of States in negotiating IIAs has been the principal contributing factor in the development of international investment law, although the precise contours of the rights of investors, and the obligations on States, have been developed in the practice of arbitral tribunals which have been constituted under IIAs to determine investment disputes; in this sense, arbitral tribunals have also made a major contribution to the development of the international investment regime. B. International Investment Law in the Era before BITs 1. Bilateral Friendship, Commerce and Navigation Treaties

Prior to the early 1800s, the amount of world trade was ‘modest’; Kenneth 3 Vandevelde reports that in 1820, only about one per cent of the world’s goods moved in international trade.6 Three events then triggered a process of globalisation that transformed the international economy. These were the end of the Napoleonic Wars in 1815, which heralded a century of relative peace in Europe; the advent of the industrial revolution, which created a demand for imported raw materials; and the emergence of liberal economic theory, which promoted free competitive markets and international trade.7 It was, accordingly, in the early 1800s that European States began entering into bilateral FCN treaties as their commercial activities expanded (although the United States had been concluding FCN treaties since the 1770s; according to Kenneth Vandevelde, the US Model FCN treaty ‘was approved by the Congress in September 1776, a little more than two months after the United States declared independence from Great Britain.’).8 Perhaps the very first such treaty was the Treaty of Amity and Commerce between the United States and France of 6 February 1778;9 and the United States entered into many further treaties for the protection of commercial and trading interests.10 It is difficult, however, to draw a clear line between the prac6 Kenneth Vandevelde (n. 2) 20. 7 Ibid., at 21. 8 Ibid., at 21, fn. 14. For one of the earliest FCN treaties, see the Spain–United States Treaty of Friendship, Limits and Navigation of 1795, signed 27 October 1795, 55 Consolidated Treaties Series 9; see further Kenneth Vandevelde (n. 2) 21–23. 9 Hermann Walker, ‘Provisions on Companies in United States Commercial Treaties’ (1956) 50 AJIL 373, 374.

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tice of States in concluding FCN treaties and State practice in agreeing on protections for private property in other contexts. This is because many treaties concluded at the end of hostilities, including the Treaty of Amity, Commerce and Navigation of 17 November 1794 between Great Britain and the United States (the ‘Jay Treaty’), also made provision for the protection of privately-owned property.11 Even earlier, the British–Spanish Treaty of Peace and Friendship of 1667 had included a general clause for the protection of property,12 and these provisions had also been incorporated into the Treaty of Utrecht of 1713.13 4 The United Kingdom and the United States were leading States in establishing networks of FCN treaties; the United Kingdom entered into around 100 FCN treaties,14 as did the United States.15 Other States which had programmes of negotiating FCN treaties included the Netherlands,16 Colombia,17 Germany,18 Italy,19 Japan,20 Latvia,21 and the Soviet Union.22 Many such FCN treaties are still in force, and have served to provide the basis of jurisdiction of the ICJ in a number of international disputes.23 10 For discussion of United States’ FCN Treaties, see Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 92; Robert Wilson, ‘Accessto-Court Provisions in United States Commercial Treaties’ (1953) 47 AJIL 20–48; Robert Wilson, ‘Natural Resources Provisions in United States Commercial Treaties’ (1954) 48 AJIL 355–379; Hermann Walker, ‘Provisions on Companies in United States Commercial Treaties’ (1956) 50 AJIL 373–393; Hermann Walker, ‘Treaties for the Encouragement and Protection of Foreign Investment: Present United States Practice’ (1956) 5 Am. J. Comp. L. 229–247; Hermann Walker, ‘Modern Treaties of Friendship, Commerce and Navigation’ (1957–58) 42 Minn. L. Rev. 805–824; Kenneth Vandevelde (n. 2) 19–59; Kenneth Vandevelde, United States International Investment Agreements (Oxford University Press, 2009) 19; and Lee Caplan and Jeremy Sharpe, ‘United States’ in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 755. 11 Treaty of Amity, Commerce and Navigation, signed 17 November 1794, 8 Stat 116, TS No 105 (Great Britain–United States); see generally Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 91–92. 12 British–Spanish Treaty of Peace and Friendship (1667), Arts. 29, 31, 33–34 (British and Foreign State Papers, vol. I, pt. I, 573–575, 623). 13 Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 94. 14 For a list of the United Kingdom’s FCN treaties (which appears to be incomplete), see the United Kingdom Treaties Library, available at http://www.bailii.org (last accessed 11 March 2012). For further discussion, see, e.g., Kenneth Vandevelde (n. 2) 21; and Georg Schwarzenberger, Foreign Investments and International Law (Praeger, 1969) 23, 91. 15 Hermann Walker, ‘Modern Treaties of Friendship, Commerce and Navigation’ (1958) 42 Minn. L. Rev. 805, 805. 16 See, e.g., Nico Schrijver and Vid Prislan, ‘Netherlands’ in Chester Brown (ed) (n. 10) 535. 17 See, e.g., José Antonio Rivas, ‘Colombia’ in Chester Brown (ed) (n. 10) 183. 18 See, e.g., Rudolf Dolzer and Yun-I Kim, ‘Germany’ in Chester Brown (ed) (n. 10) 289. 19 See, e.g., Federico Ortino, ‘Italy’ in Chester Brown (ed) (n. 10) 321. 20 See,.e.g, Shotaro Hamamoto and Luke Nottage, ‘Japan’ in Chester Brown (ed) (n. 10) 347; see also Shuji Yanase, ‘Bilateral Treaties of Japan and Resolution of Disputes with Respect to Foreign Direct Investment’ in Albert van den Berg (ed), International Commercial Arbitration: Important Contemporary Issues (Kluwer, 2003) 426–443. 21 See, e.g., Martins Paparinskis, ‘Latvia’ in Chester Brown (ed) (n. 10) 425. 22 Kenneth Vandevelde (n. 2) 49. 23 See, e.g., Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. USA), Jurisdiction and Admissibility, ICJ Rep. 1984, 392 et seq., and Military and Paramilitary Ac-

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These general economic treaties typically focussed on ‘the protection of prop- 5 erty rights and the business interests of foreigners’, rather than investments.24 The content of FCN treaties developed over time, but the States usually guaranteed the right of access to the territory of the other State party; the right of access to that State’s courts; the right to protection and security; most favoured nation (MFN) treatment either with respect to taxes, or to trade more generally; and sometimes (although less frequently) national treatment.25 Early FCN treaties typically did not provide for any form of dispute settlement. In the case of some of the early FCN treaties which contemplated the possibility of disputes, it was anticipated that if a negotiated settlement could not be reached, the parties were permitted to go to war,26 although the Jay Treaty of 1794 was an exception, as it provided for the establishment of mixed commissions to hear claims.27 In addition, early FCN treaties did not reflect all of the rules of customary international law that applied to the protection of aliens and foreign property; there was, for instance, typically no recognition in early FCN treaties of the principle of ‘reasonableness’, which is reflected in the obligation on host States not to engage in arbitrary or unreasonable interference with an investment.28 The 19th century saw a great expansion in world trade and foreign investment. 6 But beginning in 1914, a number of events – the First World War (1914–1919), the Great Depression (1930s), and the Russian Revolution of 1917 – caused the international investment regime to collapse.29 These events ‘profoundly challenged the international community’s commitment’ to the principles of access, non-discrimination, and protection and security for foreign-owned property,30 and saw the introduction of protectionist trade policies and large-scale expropriations.31 Professor Vandevelde reports that by 1932, world trade was, remarkably, ‘at only one-third of 1929 levels’.32 The First World War and the Soviet

24 25 26 27

28 29 30 31

tivities in and against Nicaragua (Nicaragua v. USA), Merits, ICJ Rep. 1986, 14 et seq., which was a claim brought under, inter alia, the Nicaragua–United States FCN Treaty of 1956; Elettronica Sicula SpA (USA v. Italy), ICJ Judgment, ICJ Rep. 1989, 15 et seq., which was brought under the Italy–United States FCN Treaty of 1948; and Oil Platforms (Iran v. USA), Preliminary Objection, ICJ Rep. 1996, 803 et seq.; and Oil Platforms (Iran v. USA), Merits, ICJ Rep. 2003, 161 et seq., in which the ICJ’s jurisdiction was based on the Iran–US Treaty of Amity, Economic Relations and Consular Rights, signed on 15 August 1955 (entered into force 16 June 1957); Andrew Newcombe and Lluís Paradell (n. 2) 22–23. Andrew Newcombe and Lluís Paradell (n. 2) 41. Kenneth Vandevelde (n. 2) 21–23; see also Robert Wilson, ‘Property Protection Provisions in United States Commercial Treaties’ (1951) 45 AJIL 83, 92. See, e.g., General Treaty of Amity, Commerce and Consular Privileges (El Salvador–United States), signed 6 December 1870, 18 Stat 725, TS No. 310; cited in Kenneth Vandevelde (n. 2) 25. See, e.g., the Betsey case before the Commission established under Art. VII of the Jay Treaty: John Bassett Moore, History and Digest of the International Arbitrations to which the United States has been a Party (1898), vol. III, 2277, and discussed in Chester Brown, A Common Law of International Adjudication (Oxford University Press, 2007) 61–62. Kenneth Vandevelde (n. 2) 26. Ibid., at 31–35. Ibid., at 34. Ibid., at 34.

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expropriations in particular (as well as nationalisations carried out in a number of Latin American countries), gave rise to a large number of claims for loss of property, some of which were submitted to the Permanent Court of International Justice (PCIJ), and some of which were submitted to mixed claims commissions and mixed arbitral tribunals.33 It is therefore appropriate to consider the content and development of customary international law that was applied in the resolution of these claims. 2. Uncertainties in the Customary International Law of Investment Protection

In light of the global political and economic developments, it is perhaps unsurprising that the customary international law and general principles of law concerning the protection of aliens generated much disagreement among States. A line could be drawn between the views of developed, capital-exporting States on the one hand, and the views of developing, capital-importing States on the other,34 on a range of issues. 8 One such issue was the standard of treatment that States were required to accord to aliens. A number of developed States considered that aliens should be treated in accordance with an ‘international minimum standard’, which was set by international law, rather than the peculiarities of national legal systems. This view was expounded by the US Secretary of State, Elihu Root, as follows: 7

There is a standard of justice, very simple, very fundamental, and of such general acceptance by all civilised countries as to form a part of the international law of the world. The condition upon which any country is entitled to measure the justice due from it to an alien by the justice which it accords to its own citizens is that its system of law and administration shall conform to this general standard. If any country’s system of law and administration does not conform to that standard, although the people of that country may be content or compelled to live under it, no other country can be compelled to accept it as furnishing a satisfactory measure of treatment to its citizens.35

9

For their part, developing States tended to consider that it was sufficient for foreigners to be accorded ‘national treatment’; this view was perhaps most 32 Ibid., at 33. 33 See, e.g., Certain German Interests in Polish Upper Silesia (Germany v. Poland), PCIJ Judgment, (1926) PCIJ (Ser. A) No. 7; see also, e.g., the claims reported in Abraham H. Feller, The Mexican Claims Commissions: 1923–1934 (Macmillan, 1935); and the many decisions of the inter-war mixed arbitral tribunals in the Recueil des Décisions des Tribunaux Arbitraux Mixtes (TAM) series of reports; see further Kenneth Vandevelde (n. 2) 35. 34 Jeswald Salacuse (n. 4) 46. 35 Elihu Root, ‘The Basis of Protection to Citizens Residing Abroad’ (1910) 4 AJIL 517, 521– 522. This view was shared by Lord Palmerston, the British Foreign Secretary, who put his view as follows: ‘We shall be told, perhaps, as we have already been told, that if the people of the country are liable to have heavy stones placed upon their breasts, and police officers to dance upon them; if they are liable to have their heads tied to their knees, and to be left for hours in that state; or to be swung like a pendulum, and to be bastinadoed as they swing, foreigners have no right to be better treated than the natives, and have no business to complain if the same things are practiced upon them. We may be told this, but that is not my opinion, nor do I believe it is the opinion of any reasonable man’: Lord Palmerston’s Address to the House of Commons at the time of the Don Pacifico Affair, extracted in Root, 522.

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prominently put in the writings of the Argentine jurist and Minister for Foreign Affairs, Carlos Calvo.36 As the expansion of Western economic powers became entrenched in the 10 nineteenth and first half of the twentieth centuries, the principle of the international minimum standard became dominant.37 A frequently cited arbitral decision, that of the United States–Mexico Claims Commission in the Neer claim, in 1926, was influential in the acceptance of the international minimum standard.38 Yet disagreement persisted, particularly among Latin American States. In 1933, at the Seventh International Conference of American States, the States present adopted the Convention on the Rights and Duties of States, Article 9 of which provided that: ‘Nationals and foreigners are under the same protection of the law and the national authorities, and the foreigners may not claim rights other or more extensive than those of the nationals.’39 In 1938, in the wake of the Mexican oil nationalisations, the Mexican Minister for Foreign Affairs stated that: [T]he foreigner who voluntarily moves to a country which is not his own, in search of a personal benefit, accepts in advance, together with the advantages he is going to enjoy, the risks to which he may find himself exposed. It would be unjust that he should aspire to a privileged position.40

A second prominent issue on which the views of developed and developing 11 States diverged was the protection under customary international law from expropriation without compensation. International law has always recognised that States have the power to take property (and, indeed, writers argue that a State may not validly bind itself not to exercise this power),41 so long as the taking is accompanied by compensation.42 One disagreement between developed and developing States emerged in relation to the applicable standard of compensation. Developed States advocated use of the ‘Hull formula’, so named after Cordell 36 See especially Carlos Calvo, Le Droit international théorique et pratique (Rousseau, 1896), vols. 1–6; cited in Jeswald Salacuse (n. 4) 49. 37 Jeswald Salacuse (n. 4) 48. 38 L. F. H. Neer and Pauline Neer v. Mexico (1926) 4 RIAA 60, 61. As for the actual test to be applied, the Commission stated that in order to constitute an ‘international delinquency’, the treatment of an alien had to amount to ‘an outrage’, to ‘bad faith’, to ‘wilful neglect of duty’, or to ‘an insufficiency of government action so far short of international standards that every reasonable and impartial man would readily recognise its insufficiency’. See, however, Jan Paulsson and Georgios Petrochilos, ‘Neer-ly Misled?’ (2009) 22 ICSID Rev.–FILJ 242–257, who argue that the United States–Mexico Claims Commission’s decision in the Neer case does not establish the international minimum standard in cases of direct liability (which is provided by the decision of the United States–Mexico Claims Commission in the Roberts case, the test being ‘whether aliens are treated in accordance with ordinary standards of civilisation’: (1926) 4 RIAA 77, 80), but rather that the Neer case only provides the standard of treatment in cases of indirect responsibility, i.e., denial of justice. 39 Convention on the Rights and Duties of States, signed 26 December 1933, 165 LNTS 19, Art. 9; see also Kenneth Vandevelde (n. 2) 36. 40 ‘Official Documents’ (1938) 32 AJIL Suppl. 181, 188; also cited in Edwin Borchard, ‘The “Minimum Standard” of the Treatment of Aliens’ (1939) 33 Am. Soc’y Int’l L. Proc. 51, 51; Jeswald Salacuse (n. 4) 47. 41 Jeswald Salacuse (n. 4) 54. 42 Ibid., at 54–55; Ian Brownlie, Principles of Public International Law (Oxford University Press, 2008) 533–536.

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Hull, the US Secretary of State who asserted this in correspondence with the government of Mexico, which required payment of ‘prompt, adequate and effective compensation’. 43 For its part, Mexico maintained that public international law did not require States to pay compensation if the expropriations were general in nature.44 Other developing States contended that other considerations should be taken into account in determining the standard of compensation, including whether the measure was adopted as part of a broader nationalisation programme, and the State’s ability to pay.45 These debates persisted throughout the 1960s and 1970s in the various resolutions and declarations adopted by the United Nations General Assembly.46 12 A further issue was that under traditional international law, injured aliens had no standing to present claims against the State which was responsible for an internationally wrongful act. This was because only States were subjects of international law and had the capacity to present a claim on the international plane.47 Any individuals whose property had been affected by actions of the host State were required to seek the diplomatic protection of their State of nationality, who would consider espousing their claim and presenting it on the international plane. In doing so, the State would be asserting its own rights, rather than those of its national; for individuals could not bear rights in international law.48 13 The foregoing paragraphs have set out the disagreement among States on the applicable rules of customary international law in relation to the protection of aliens, and the issues arising from the individual’s lack of legal personality in international law. The resultant uncertainty for foreign investors led to various proposals for a multilateral agreement on the obligations that States have when receiving foreign investment; these proposals are considered in Part C.

43 ‘Official Documents’ (1938) 32 AJIL Suppl. 181, 188; also cited in Edwin Borchard (n. 40) 51. 44 Kenneth Vandevelde (n. 2) 36. 45 See, e.g., Ian Brownlie (n. 42) 533–538; Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (Oxford University Press, 2008) 13–15. 46 The UNGA Resolutions included: the Resolution on Permanent Sovereignty over Natural Resources, GA Res 1803 (XVII), 14 December 1962, UN Doc A/5217; the Declaration on the Establishment of a New International Economic Order, GA Res 3201 (S-VI), 1 May 1974, (1974) 13 ILM 715, in which States declared that they had ‘full permanent sovereignty’ over their natural resources; the Charter of Economic Rights and Duties of States (1974) GA Res 3281 (XXIX), 12 December 1974, (1975) 14 ILM 251, which declared that each State had the right ‘to nationalise, expropriate or transfer ownership of private property, in which case appropriate compensation should be paid by the State adopting such measures, taking into account its relevant laws and regulations and all circumstances that the State considers pertinent.’ 47 See, e.g., Lassa Oppenheim, International Law (Longmans, Green & Co, 1st ed, 1912) vol. I. 48 See especially Mavrommatis Palestine Concessions (Greece v. Britain), PCIJ Judgment, (1924) PCIJ (Ser. A) No. 2. States did not, of course, always exercise diplomatic protection by instituting judicial or arbitral proceedings. If a State’s nationals suffered injury as a result of an international wrong for which no compensation was paid, States were also known to engage in ‘gunboat diplomacy’, by instituting, for instance, a blockade of the ports of the responsible State: see, e.g., Ian Brownlie (n. 42) 729.

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C. Multilateral Efforts for the Promotion and Protection of Foreign Investment 1. Early Multilateral Initiatives

It has already been observed that States had, beginning in the late 1700s, 14 started entering into bilateral treaties for the protection of economic interests. However, many of these treaties pre-dated the events of the early 1900s which had a devastating impact on international investment and trade flows, and they only went so far in resolving the underlying conflict between developed States and developing States on the content of the international law on the protection of aliens. Non-governmental bodies, and developed States, began to seek agreement on these issues in various multilateral fora. Early diplomatic efforts to conclude multilateral codes for the protection of 15 private foreign investment had, however, routinely come to nought; such efforts included initiatives at the League of Nations in 1928, the Geneva and Havana Conferences of 1947 and 1948, and the Bogota Conference of 1948.49 In 1948, a non-governmental organisation, the International Law Association (ILA), published ‘Draft Statutes of the Arbitral Tribunal for Foreign Investment and the Foreign Investment Court’.50 The following year, in 1949, another non-governmental organisation, the International Chamber of Commerce (ICC), issued a draft document that resembled (and perhaps inspired) a later proposal by the Germany-based ‘Society to Advance the Protection of Foreign Investments’.51 In 1957, the ICC reiterated its proposal, and suggested that the United Nations Economic and Social Council (ECOSOC), as well as the International Bank for Reconstruction and Development (the World Bank) and the International Finance Corporation might convene an international conference to consider the adoption of a draft convention.52 The ICC argued that: Agreements, whether bilateral or multilateral, arising out of a model convention of this kind, would be of inestimable value to capital-importing countries as well as to investors. By making clear in advance in an agreed and binding form under United Nations’ auspices the treatment to be applied to foreign capital in their territories, the former would improve their prospects of attracting capital from overseas. At the same time investors would be in a better position to assess some at least of the non-economic risks involved in a particular area.53

Germany, in particular, had a special interest in securing international agree- 16 ment on the protection of foreign investments; this was partly inspired by the 49 Stanley Metzger, ‘Multilateral Conventions for the Protection of Private Foreign Investment’ (1960) 9 J. Pub. L. 133–146; see also Andrew Newcombe and Lluís Paradell (n. 2) 15–20. 50 UNCTAD, International Investment Agreements: A Compendium, vol. III, 259; Andrew Newcombe and Lluís Paradell (n. 2) 21. 51 ‘International Code of Fair Treatment for Foreign Investments’ (ICC Brochure No. 129, 1949), reprinted in UNCTAD, International Investment Agreements: A Compendium, vol. III, 273; Arthur Miller, ‘Protection of Private Foreign Investment by Multilateral Convention’ (1959) 53 AJIL 371, 371–372; Andrew Newcombe and Lluís Paradell (n. 2) 20–21. 52 Resolution of the 16th Congress of the ICC (May 1957), published in ICC Brochure No. 193; cited in Arthur Miller (n. 51) 372. 53 Cited in Arthur Miller (n. 51) 372.

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fact that Germany had lost the bulk of its foreign investment in settlements agreed after World War II.54 It was therefore no accident that the calls for an international agreement were led by an organisation of German businessmen, the ‘Society to Advance the Protection of Foreign Investments’, led by Mr Hermann Abs, the Director-General of the Deutsche Bank, which in 1957 argued for such a multilateral treaty.55 It was, of course, Germany, that concluded the first BIT with Pakistan in 1959, but it is first convenient to consider more closely these multilateral efforts. 2. International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (1957) a) Introduction 17

Hermann Abs had first broached the idea of a multilateral agreement on the protection of foreign investment at the International Industrial Development Conference in San Francisco in October 1957, calling for a ‘Magna Charta for the Protection of Foreign Property’ in the form of a global treaty.56 The ‘Society to Advance the Protection of Foreign Investments’ then published its draft code, titled the ‘International Convention for the Mutual Protection of Private Property Rights in Foreign Countries’ in November 1957.57 The Convention consisted of 15 provisions, and it sought an agreement which contained not only specific standards of protection, but also the establishment of a permanent arbitral tribunal for the settlement of any disputes.58 b) Standards of Treatment

18

Articles IV through VIII of the International Convention set out the substantive standards of protection. Article IV contained ‘guarantees of the right of free economic or business activity on a non-discriminatory basis as between nationals and non-nationals’, including ‘provisions to protect against measures unduly inhibiting business activity’, such as ‘levying incommensurate taxes’.59 Article V also set forth limited exceptions on the freedom of business activity concerning industry sectors of vital importance to the State (such as public utilities).60 Article VI contained a guarantee that an investment would not be expropriated for a period of 30 years after the making of the investment;61 and when and if an expropriation took place, Article VII required that it would have to be accompa54 Rudolf Dolzer and Christoph Schreuer (n. 45) 18. 55 See, e.g., Arthur Miller (n. 51) 371–372. 56 Rudolf Dolzer and Christoph Schreuer (n. 45) 18; see also Arthur Miller (n. 51) 372. Hermann Abs’s speech to the International Industrial Development Conference is reprinted in (1957) Recht der internationalen Wirtschaft (RIW) 229–230. 57 Arthur Miller (n. 51) 371. 58 Rudolf Dolzer and Christoph Schreuer (n. 45) 18. 59 Arthur Miller (n. 51) 374. 60 Ibid. 61 Ibid.

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nied by compensation.62 Finally, Article VIII confirmed that all of these protections would continue to apply during time of war (including between any of the State parties to the convention), subject only to ‘the right of control of that property during the conflict.’63 c) Settlement of Disputes

Article IX recognised that both the State, and its nationals, were entitled to 19 rights under the Convention.64 For the settlement of any disputes, Article X of the Convention proposed the creation of a permanent international tribunal, the details of which were to be agreed in a separate instrument.65 Article X also envisaged the establishment of a committee to decide questions concerning the adequacy of any compensation due following an expropriation.66 As for the available remedies, Article XI of the Convention contemplated that tribunals would have the power to request cessation of the unlawful act within three months, and if this was not complied with, the tribunal would make a public declaration of the State’s breach of its obligations.67 If this, too, did not have the desired effect, then it would be possible for economic sanctions to be imposed (including, for instance, the withholding of any loans).68 The Convention was, however, regarded as being too ambitious.69 This led to 20 a more modest proposal which was a result of the joint efforts of Hermann Abs and Lord Shawcross, the former Attorney-General of the United Kingdom, namely the Abs–Shawcross Draft Convention on Investments Abroad, which was published in April 1959.70 3. Abs–Shawcross Draft Convention on Investments Abroad (1959) a) Introduction

The Abs–Shawcross Draft Convention, which was issued in April 1959, con- 21 sisted of ten articles, and an Annex on the establishment of an arbitral tribunal. The purpose of the Abs–Shawcross Draft Convention was stated by its authors as being to restate ‘what are believed to be fundamental principles of international law regarding the treatment of the property, rights, and interests of aliens.’71 The authors considered it necessary to record those fundamental prin62 63 64 65 66 67 68 69 70

Ibid. Ibid. Ibid. Ibid. Ibid. Ibid. Ibid. Rudolf Dolzer and Christoph Schreuer (n. 45) 18; Arthur Miller (n. 51) 375–378. ‘Draft Convention on Investments Abroad’ (1960) 9 J. Pub. L. 116–118; see also (1959) RIW 150–151; see also Rudolf Dolzer and Christoph Schreuer (n. 45) 18; Andrew Newcombe and Lluís Paradell (n. 2) 21–22. 71 ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119.

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ciples, as ‘international trade and commerce cannot thrive and prosper in an atmosphere of doubt and uncertainty’.72 The restatement of the applicable rules of mutual conduct in a convention would ‘assure to the nationals of the participating countries such measure of security and protection of their property, rights, and interests as is indispensable to encourage the flow of foreign investments.’73 b) Scope of Application 22

The Abs–Shawcross Draft Convention protected the ‘property’ of ‘nationals’, and these are the only two defined terms. ‘Property’ was defined as including ‘all property, rights, and interests, whether held directly or indirectly’, and the Draft Convention also stated that ‘a member of a company shall be deemed to have an interest in the property of the company.’74 ‘Nationals’ in relation to a State party were defined as including: (i) companies which under the municipal law of that Party are considered national companies of that Party and (ii) companies in which nationals of that Party have directly or indirectly a controlling interest. ‘Companies’ includes both juridical persons recognised as such by the law of a Party and associations even if they do not possess legal personality.75

23

Two points are noteworthy in relation to the definitions. The first is that both ‘property’ and ‘nationals’ were defined as including directly and indirectly held interests. The second is that the definition of ‘nationals’ did not expressly include natural persons, although it seems to have been assumed that natural persons were included.76 c) Standards of Treatment

24

In Article I of the Draft Convention, the State parties agreed to ensure ‘fair and equitable treatment’ to ‘the property of the nationals of the other Parties’, and also agreed that such property was to be accorded ‘the most constant protection and security within the territories of the other Parties’. Article I also provided that ‘the management, use and enjoyment [of such property] shall not in any way be impaired by unreasonable or discriminatory measures.’77 Article II of the Draft Convention contained an ‘observance of undertakings’ clause, now known 72 Ibid. 73 Ibid. For further discussion, see especially Rudolf Dolzer and Christoph Schreuer (n. 45) 18– 19; Andrew Newcombe and Lluís Paradell (n. 2) 21–22; Stanley Metzger, ‘Multilateral Conventions for the Protection of Private Foreign Investment’ (1960) 9 J. Pub. L. 133–146; Georg Schwarzenberger, ‘The Abs–Shawcross Draft Convention on Investments Abroad: A Critical Commentary’ (1960) 9 J. Pub. L. 147–171; Ignaz Seidl-Hohenveldern, ‘The Abs–Shawcross Draft Convention to Protect Private Foreign Investment: Comments on the Round Table’ (1961) 10 J. Pub. L. 100–112; Georg Schwarzenberger, Foreign Investments and International Law (Praeger, 1969) 109–134. 74 Abs–Shawcross Draft Convention, Art. IX. 75 Ibid. 76 See, e.g., Georg Schwarzenberger, ‘The Abs–Shawcross Draft Convention on Investments Abroad: A Critical Commentary’ (1960) 9 J. Pub. L. 147, 150–152. 77 Abs–Shawcross Draft Convention, Art. I.

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as the ‘umbrella clause’, in which the State parties agreed that they shall ‘at all times ensure the observance of any undertakings which it may have given in relation to investments made by nationals of any other Party.’78 Article III of the Abs–Shawcross Draft Convention contained a protection from expropriation, which provided in part that: ‘No Party shall take any measures against nationals of another Party to deprive them directly or indirectly of their property except under due process of law and provided that such measures are not discriminatory or contrary to undertakings given by that Party and are accompanied by the payment of just and effective compensation.’79 Article IV provided that any breach of the Convention ‘shall entail the obliga- 25 tion to make full reparation.’80 It further provided that the State parties were obliged not to ‘recognise or enforce within their territories any measures conflicting with the principles of [the] Convention and affecting the property of nationals of any of the Parties until reparation is made or secured.’81 Article V established certain exceptions, namely that a State party may not ‘take measures derogating from the present Convention unless it is involved in war, hostilities, or other public emergency which threatens its life; and such measures shall be limited in extent and duration to those strictly required by the exigencies of the situation.’82 The reference in Article V to a public emergency that ‘threatens [the] life’ of a State would appear to be a reference to the defence of necessity in customary international law.83 Article VI, while not containing a substantive standard of treatment per se, 26 provided that the provisions of the Convention ‘shall not prejudice the application of any present or future treaty or municipal law under which more favourable treatment is accorded to nationals of any of the Parties.’84 d) Settlement of Disputes

Article VII of the Abs–Shawcross Draft Convention contained procedures for 27 the settlement of disputes. The authors of the Abs–Shawcross Draft Convention appear to have regarded the dispute settlement machinery as being equally important as the substantive standards of protection. In their commentary, they expressed the view that:

78 79 80 81 82 83

Ibid., Art. II. Ibid., Art. III. Ibid., Art. IV. Ibid., Art. IV. Ibid., Art. V. Ibid. The commentary states that Art. V resembles Art. 15 of the Convention for the Protection of Human Rights and Fundamental Freedoms and Art. 28(1) of the European Convention on Establishment: ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 124. 84 Abs–Shawcross Draft Convention, Art. VI. The commentary indicates that this resembles Art. 25 of the European Convention on Establishment: ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 124.

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Chapter 4: International Investment Agreements – History, Approaches, Schools There must, at the heart of any instrument dedicated to the creation of an atmosphere of confidence, always lie a provision for the effective adjudication by an impartial body of all disputes which may arise. Undertakings without the machinery for determining their content and application cannot achieve the desired end.85

Article VII(1) provided for a procedure for the settlement of inter-State disputes, which was international arbitration ‘with the consent of the interested Parties’ in accordance with the procedures set forth in the Annex to the Draft Convention. In the absence of consent to international arbitration, ‘the dispute may be submitted by either Party to the International Court of Justice.’86 The Annex to the Draft Convention essentially provided that each State party was to appoint one arbitrator, and the third arbitrator (the Umpire) was to be appointed by agreement of the parties; if the parties could not reach agreement, the President of the ICJ was to make the appointment; and if the President failed to make the appointment, the task fell to the Secretary-General of the United Nations.87 It is not clear whether the final sentence of Article VII(1) is a true compromissory clause for the submission of disputes to the ICJ; this seems at least to have been the intention of the authors of the Draft Convention, as they stated in the commentary that ‘provision has been made for the residual compulsory jurisdiction of the International Court of Justice in those cases where the parties to the Draft Convention do not elect to make use either of the machinery of arbitration therein provided or of other specific modes of settlement.’88 29 Turning to Article VII(2), this, interestingly, provided for the settlement of investor-State disputes, although it only contains the conditional consent of the State parties to the Convention. This is noteworthy because the Germany–Pakistan BIT, which was signed in 1959, did not envisage the possibility of investorState dispute settlement. Article VII(2) of the Abs–Shawcross Draft Convention stated that: 28

A national of one of the Parties claiming that he has been injured by measures in breach of this Convention may institute proceedings against the Party responsible for such measures before the Arbitral Tribunal referred to in paragraph 1 of this Article, provided that the Party against which the claim is made has declared that it accepts the jurisdiction of the said Arbitral Tribunal in respect of claims by nationals of one or more Parties, including the Party concerned.89

The commentary to this provision explains that: ‘The notion that an individual may enjoy a right of access directly to an international tribunal is not new’, and that it is ‘no real departure from legal tradition to suggest that similar rights be conferred on individuals in connection with investment matters.’90 31 Article VIII of the Abs–Shawcross Draft Convention provided that if a Party against which a judgment or award was rendered failed to comply with the terms 30

85 86 87 88 89 90

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‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 123. Abs–Shawcross Draft Convention, Art. VII(1). Ibid., Annex. ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 123. Abs–Shawcross Draft Convention, Art. VII(2). ‘Comment on the Draft Convention by its Authors’ (1960) 9 J. Pub. L. 119, 123.

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of that judgment or award, then the other State parties would be entitled ‘individually or collectively, to take such measures as are strictly required to give effect to that judgment or award.’91 Like the International Convention for the Mutual Protection of Private Prop- 32 erty Rights in Foreign Countries (1957) the Abs–Shawcross Draft Convention did not garner sufficient support to be considered as a basis for a multilateral treaty, although it later proved to be influential in the framing of the OECD Draft Convention on the Protection of Foreign Property (1962) and BITs. 4. Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens (1961) a) Introduction

The next instrument which sought to provide a basis for multilateral agree- 33 ment on the international law on the protection of aliens was the ‘Harvard Draft Convention on the International Responsibility of States for Injuries to Aliens’, which was prepared by Professors Louis Sohn and Richard Baxter of Harvard Law School. This initiative was undertaken at the suggestion of Dr Yuen-li Liang, the then Director of the Codification Division of the Office of Legal Affairs at the United Nations Secretariat.92 The purpose of the Harvard Draft Convention was ‘to codify with some particularity the standards established by international law for the protection of aliens and thereby to obviate, as far as possible, the necessity of looking to customary international law.’93 In preparing the Harvard Draft Convention, Professors Sohn and Baxter had regard to an earlier Draft Convention prepared by Professor Edwin Borchard, also of Harvard Law School, in 1929, titled the ‘Draft Convention on Responsibility of States for Damage Done on Their Territory to the Person or Property of Foreigners’.94 The preparation of the Harvard Draft Convention aimed to complement the International Law Commission’s ongoing work on the ‘Responsibility of States for Internationally Unlawful Acts’, which was then in the hands of Special Rapporteur F. V. García-Amador of Cuba.95 Dr García-Amador submitted six reports during his tenure as Special Rapporteur between 1956 and 1961, but the ILC had failed to make much progress. As James Crawford would remark in 2002, this was largely because: The divisiveness of the general debate in 1957 suggested that there was no agreement as to the way forward. Some sought to limit the topic to diplomatic protection; others thought that the rules of diplomatic protection outmoded. An initial decision was made to limit the topic to ‘civil’ responsibility – not surprisingly since the focus was to be on injuries to aliens. (…) The disagreements were

91 Abs–Shawcross Draft Convention, Art. VIII. 92 Louis Sohn and Richard Baxter, ‘Responsibility of States for Injuries to the Economic Interests of Aliens’ (1961) 55 AJIL 545, 545. 93 Ibid., at 547. 94 (1929) 23 AJIL Special Suppl. 131–239. 95 See especially Louis Sohn and Richard Baxter (n. 92) 545–547.

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In light of the ILC’s torpor on this topic, the Harvard Draft Convention sought to make progress on the applicable rules of international law on injuries to aliens. The Harvard Draft Convention dealt only ‘with such acts and omissions of States as cause an injury to an alien, and it is not concerned with Stateto-State responsibility for other injurious acts or for violations of international treaties or of other rules of international law.’97 b) General Principles and Scope of Application

35

Section A of the Harvard Draft Convention, containing Articles 1 and 2, set forth its ‘General Principles and Scope’. Article 1(1) provided that a State is ‘internationally responsible for an act or omission which, under international law, is wrongful, is attributable to that State, and causes an injury to an alien.’98 Article 1(2) contained requirements relating to the exhaustion of local remedies and nationality.99 Article 2(1) provided that the responsibility of a State was to be determined in accordance with public international law.100 A State was not entitled to avoid international responsibility by invoking its domestic law.101 Article 2(3) contained a ‘without prejudice’ provision that entitled an alien to invoke its rights under municipal law of the State against which a claim is made, if that law was more favourable to him or her than the Harvard Draft Convention.102 c) Standards of Treatment

36

Section B of the Harvard Draft Convention identified categories of ‘wrongful acts and omissions’. Article 3 set forth the ‘general rule’, namely that ‘an act or omission which is attributable to a State and causes an injury to an alien is “wrongful”’, (a) ‘if without sufficient justification, it is intended to cause, or to facilitate the causing of, injury’; (b) ‘if without sufficient justification, it creates an unreasonable risk of injury through a failure to exercise due care’; (c) ‘if it is an act or omission defined in Articles 5 to 12’; or (d) ‘if it violates a treaty.’103 Article 4 gave a detailed definition of what would amount to ‘sufficient justification’. These included, among others, ‘the imposition of punishment for the commission of a crime’; ‘the actual necessity of maintaining public order, health, or morality in accordance with laws enacted for that purpose’, and ‘the valid exercise of belligerent or neutral rights or duties under international law’.104 Subse96 James Crawford, ‘Introduction’ in The International Law Commission’s Articles on State Responsibility (Cambridge University Press, 2002) 1, 1–2. 97 Louis Sohn and Richard Baxter (n. 92) 546. 98 Harvard Draft Convention, Art. 1(1). 99 Ibid., Art. 1(2). 100 Ibid., Art. 2(1). 101 Ibid., Art. 2(2). 102 Ibid., Art. 2(3). 103 Ibid., Art. 3.

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quent provisions in Section B identified particular wrongful acts and omissions relating to: the arrest and detention of an alien (Article 5);105 the denial of access to a tribunal or other administrative authority (Article 6);106 denial of a fair hearing (Article 7);107 adverse decisions or judgments (Article 8);108 the destruction of or damage to property (Article 9);109 the taking and deprivation of use or enjoyment of property (Article 10);110 the deprivation of means of livelihood (Article 11);111 the violation, annulment, and modification of contracts and concessions (Article 12);112 and lack of due diligence in protecting aliens (Article 13).113 d) Settlement of Disputes

The Harvard Draft Convention contemplated that aliens would have the right 37 to present a claim directly against the State alleged to be responsible, and Section F (Articles 20–22) set forth a procedure for the presentation of such claims. Article 20 first provided that ‘[a] claim may be presented (…) by an injured alien or by a person entitled to claim through him.’114 An ‘injured alien’ was defined as including ‘the alien who has suffered an injury’, as well as, in the case of the killing of an alien, an alien who was a spouse of the deceased; a parent of the deceased; a child of the deceased; or a relative by blood or marriage actually dependent on the deceased for support.115 It also included an alien who held shares or an analogous interest in a legal person, and who suffered an injury to that interest through, e.g., the dissolution of that legal person.116 Article 21 contained relevant definitions, e.g., of ‘alien’, ‘person’, and ‘national’ of a State. Article 22 then provided the relevant procedure. Most striking is that Article 38 22 only permits injured aliens to present claims directly against the State which is alleged to be responsible for an unlawful act or omission,117 or directly to an international tribunal which may have jurisdiction;118 it does not provide for the creation of such an international tribunal. Article 22 also contained a number of limitations to the types of claims that might be presented, relating in particular to certain types of injuries identified in Article 14, such as injuries sustained in activities involving a high degree of risk.119 A legal person was not permitted to 104 105 106 107 108 109 110 111 112 113 114 115 116 117 118

Ibid., Art. 4. Ibid., Art. 5. Ibid., Art. 6. Ibid., Art. 7. Ibid., Art. 8. Ibid., Art. 9. Ibid., Art. 10. Ibid., Art. 11. Ibid., Art. 12. Ibid., Art. 13. Ibid., Art. 20. Ibid., Art. 20(2). Ibid., Art. 20(2). Ibid., Art. 22(1). Ibid., Art. 22(2).

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present a claim as an ‘injured alien’ if the controlling interest in that person was in ‘nationals of the State alleged to be responsible or in an organ or agency of that State’,120 and the requirement of continuous nationality on the part of the injured alien was also confirmed.121 39 Article 23 of the Harvard Draft Convention contained the procedure for the espousal and presentation of claims by States under the traditional approach of diplomatic protection.122 Other provisions in the Harvard Draft Convention relevant to the settlement of disputes provided guidance on the requirement of the exhaustion of local remedies;123 the waiver, compromise, or settlement of claims;124 the application of the doctrine of extinctive prescription in the presentation of claims;125 and the content of the obligation to provide reparation,126 including an identification of the categories of damages which could be awarded.127 40 Much of the Harvard Draft Convention reflected customary international law, and various provisions were later included in the ILC’s Articles on State Responsibility. However, like the International Convention for the Mutual Protection of Private Property Rights in Foreign Countries (1957) and the Abs– Shawcross Draft Convention (1959) before it, States did not adopt the Harvard Draft Convention as the basis of a multilateral treaty. 5. OECD Draft Convention on the Protection of Foreign Property (1962) a) Introduction 41

The OECD Draft Convention on the Protection of Foreign Property was prepared by a Committee of the OECD in 1962, and derived from instructions given by the Council of the OECD in April 1960.128 The OECD Convention was reissued, with minor revisions, in 1967, after its adoption by the OECD Council.129 119 120 121 122

123 124 125 126 127 128 129

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Ibid., Art. 22(5)–(6). Ibid., Art. 22(7). Ibid., Art. 22(8). Ibid., Art. 23. The right of the State to present a claim on behalf of one of its nationals was not affected by whether the national had already presented his or her claim under the procedure set forth in Art. 22. Like the procedure for the presentation of claims by individuals, Art. 23 contained similar restrictions, such as requiring the exhaustion of local remedies and continuous nationality. Ibid., Art. 19. Ibid., Arts. 24–25. Ibid., Art. 26. Ibid., Art. 27. Ibid., Arts. 28–36. OECD Draft Convention on the Protection of Foreign Property (1963) 2 ILM 241; see Andrew Newcombe and Lluís Paradell (n. 2) 30–31. OECD Draft Convention on the Protection of Foreign Property (1968) 7 ILM 117; see Andrew Newcombe and Lluís Paradell (n. 2) 30–31. The revisions to the OECD Draft Convention affected Art. 3(ii) (on the conditions applying to the taking of property); Art. 5 (on the consequences of any breach of the Convention, and in particular the deletion of a provision

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b) Scope of Application

Like the Abs–Shawcross Draft Convention (1959), the OECD Draft Conven- 42 tion sought to protect ‘property’ of ‘nationals’. The term ‘property’ was defined in Article 9(c) as meaning ‘all property, rights and interests, whether held directly or indirectly, including the interest which a member of a company is deemed to have in the property of the company.’130 The commentary to the OECD Draft Convention states that ‘property’ was intended to be ‘used in its widest sense which includes, but is not limited to, investments.’131 It also clarifies that the term ‘member’ is used in preference to the term ‘shareholder’, which has a more limited meaning in some legal systems.132 The term ‘nationals’ expressly included both ‘natural persons’ and ‘companies’.133 The term ‘company’ was defined as meaning ‘any entity which, under the law of a Party, either is recognized as a legal person or, as an entity or through its members, has the capacity to dispose of property or to institute legal proceedings.’134 The commentary to Article 1 of the OECD Convention (which contains the 43 States’ obligations on treatment of foreign property) also appears to assume that a condition of legality is included, stating that ‘[g]enerally, to come within the provisions of the Convention, the property must be lawfully acquired or invested by the foreign national or his predecessor in title.’135 Article 11 of the OECD Draft Convention is also relevant to its scope of application, as it provides for the extension of the Convention’s territorial application ‘to any of the territories for whose international relations [a Contracting State] is responsible’.136 This provision has been adopted by, e.g., the United Kingdom in Article 13 of its Model BIT.137 c) Standards of Treatment

The substantive standards of treatment are contained in Articles 1, 2, 3, 4, and 44 6. Article 1 of the OECD Draft Convention, titled ‘Treatment of Foreign Property’, provided in paragraph (a) that the State parties agreed to accord ‘fair and equitable treatment’ to the property of the nationals of other State parties, and also to accord within their territory ‘the most constant protection and security’ to such property. The term ‘fair and equitable treatment’ was explained in the commentary as referring to ‘the standard set by international law for the treatment

130 131 132 133 134 135 136 137

on the non-recognition of wrongful measures in Art. 5(b)); and Art. 6 (on derogations and exceptions), although these amendments are relatively minor. Art. 9(c) also provided for two exceptions: Art. 9(c)(i) and (ii). ‘Notes and Comments to Article 9(c)’ (n. 128) (1963) 2 ILM 241, 264. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 9(a). Ibid., Art. 9(b). ‘Notes and Comments to Article 1’ (n. 128) (1963) 2 ILM 241, 243. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 11. See, e.g., Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697.

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due by each State with regard to property of foreign nationals.’138 The obligation to accord ‘most constant protection and security’ was explained as referring to ‘the obligation of each Party to exercise due diligence as regards actions by public authorities as well as others in relation to such property.’139 State parties also agreed not to impair the ‘management, maintenance, use, enjoyment or disposal’ of such property by ‘unreasonable or discriminatory measures’.140 Article 1(b) also provided that: ‘The provisions of this Convention shall not affect the right of any Party to allow or prohibit the acquisition of property or the investment of capital within its territory by nationals of another Party’,141 thus confirming the post-establishment nature of the protections contained in the OECD Draft Convention. 45 Article 2 of the OECD Draft Convention contained an ‘observance of undertakings’ clause, or ‘umbrella clause’, which provided that ‘Each Party shall at all times ensure the observance of undertakings given by it in relation to property of nationals of any other Party.’142 This clause was explained as expressing the general principle of pacta sunt servanda, or ‘the maintenance of the pledged word’.143 As for the nature of the ‘undertaking’ sought to be protected by this provision, the commentary states that ‘[a]n undertaking may be embodied in a contract or in a concession – it is not possible on legal grounds to draw a distinction between the two, and such an undertaking may represent a consensual or a unilateral engagement on the part of the Party concerned. However, it must relate to the property concerned; it is not sufficient if the link is incidental.’144 46 Article 3 provided for the protection against expropriation, stating generally that State parties were not permitted to take any measure depriving a national of another State party of his or her property unless (i) the measures were taken ‘in the public interest and under due process of law’; (ii) the measures were ‘not discriminatory’ which the State party may have given; and (iii) the measures were accompanied by the ‘provision for the payment of just compensation’; this compensation was to represent the ‘genuine value of the property affected’, was to be paid ‘without undue delay’, and was to be transferable to the extent necessary to make it effective for the national entitled to the compensation.145 The commentary to Article 3 observed that this provision restated the conditions that had to be complied with ‘according to recognised rules of international law.’146 47 Article 4 of the OECD Draft Convention made a ‘recommendation’ with respect to free transfer of ‘income from and proceeds upon liquidation of such

138 139 140 141 142 143 144 145 146

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‘Notes and Comments to Article 1’ (n. 128) (1963) 2 ILM 241, 244. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 1(a). Ibid., Art. 1(b). Ibid., Art. 2. ‘Notes and Comments to Article 2’ (n. 128) (1963) 2 ILM 241, 247. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 3. ‘Notes and comments to Article 3’ (n. 128) (1963) 2 ILM 241, 249; (1968) 7 ILM 117, 125.

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property’. It stated that, although the provision did not give rise to any binding obligations, each State party would ‘endeavour to grant the necessary authorisation for such transfers to the country of the residence of that national and in the currency thereof.’147 Article 5 confirmed that any State responsible for a breach of the OECD Convention had the obligation to make full reparation, thus reaffirming the principle recognised by the PCIJ in Factory at Chorzów.148 Article 6 of the OECD Draft Convention contained the exceptions provision, which permitted States to derogate from their obligations ‘only if’ they were ‘involved in war, hostilities or other grave national emergency due to force majeure or provoked by unforeseen circumstances or threatening its essential security interests; or (ii) taken pursuant to decisions of the Security Council of the United Nations or to recommendations of the Security Council or General Assembly of the United Nations relating to the maintenance or restoration of international peace and security.’ Article 6 further provided that ‘[a]ny such measures shall be limited in extent and duration to those strictly required by the exigencies of the situation.’ d) Settlement of Disputes

The OECD Draft Convention also contained a dispute settlement procedure, 48 which was to be found in Article 7. Article 7(1) provided for an inter-State dispute settlement procedure, namely that: Any dispute between Parties as to the interpretation or application of this Convention may be submitted by agreement between them either to an Arbitral Tribunal established in accordance with the provisions of the Annex to this Convention, which shall form an integral part thereof, or to any other international tribunal.149

Article 7(a) further provided that if the parties failed to agree within 60 days 49 of the date on which written notice of an intention to institute proceedings was given, the arbitral tribunal would be constituted in accordance with the Annex to the Draft Convention.150 The commentary to the OECD Draft Convention stated 147 OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 4. 148 Factory at Chorzów (Germany v. Poland), PCIJ Judgment, (1928) PCIJ (Ser. A) No. 17, 47. Art. 5 of the OECD Draft Convention on the Protection of Foreign Property (1962) included an additional paragraph (Art. 5(b)), which obliged Contracting States not to recognise any measures adopted by any State which were taken in breach of Arts. 2 or 3 of the OECD Draft Convention. 149 OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 7(a). 150 Ibid. The Annex to the OECD Draft Convention provided for the constitution of a threemember arbitral tribunal. The arbitral tribunal was to have the power to decide on its jurisdiction, and to determine its procedure. It was obliged to afford all parties a fair hearing, and was permitted to render an award on the default of a party. Interestingly, it also had the express power to permit ‘intervention by a Party which considers that it has an interest of a legal nature which may be affected by the decision in the case’; to ‘consolidate pending proceedings with the agreement, where necessary, of any other Arbitral Tribunal established in accordance with this Annex’; and to ‘stay proceedings if other proceedings arising out of the same facts and raising substantially the same issues are pending before any other international Tribunal or Commission’, provided that no objection was made by any party to the

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that although States should always seek to settle any disputes by diplomatic means, ‘in the case of an instrument dedicated to the creation of an atmosphere of confidence there is a vital need to make also provision for the effective adjudication of such disputes.’151 The commentary to the OECD Draft Convention explained that the default forum for the settlement of any disputes should be an arbitral tribunal, rather than the ICJ.152 However, the State parties to the dispute could of course agree to refer any dispute to the ICJ or any other international tribunal.153 50 Like the Abs–Shawcross Draft Convention (1959), as well as the Harvard Draft Convention (1961), Article 7(b) of the OECD Draft Convention also provided for the possibility of claims by nationals. It provided that: A national of a Party claiming that he has been injured by measures in breach of this Convention may institute proceedings against any other Party responsible for such measures before the Arbitral Tribunal referred to in paragraph (a), provided that: (i) (ii)

the Party against which the claim is made has accepted the jurisdiction of that Arbitral Tribunal by a declaration which covers that claim; and the Party of which he is a national has indicated that it will not institute proceedings under paragraph (a) or, within six months of receiving a written request from its national for the institution of such proceedings, has not instituted them.154

Article 7(c) clarified that a declaration made by a State party may be ‘general or particular’, and that it ‘may be made or revoked at any time’.155 Article 7(d) complemented the rule in Article 7(b)(ii) which sought to eliminate the possibility of parallel proceedings, providing that a State may institute inter-State proceedings after the six-month period referred to in Article 7(b)(ii) had elapsed, but if this occurred, any investor-State proceedings were to be suspended until the inter-State proceedings were terminated.156 52 In the case of a claim made by a national, the same Annex would apply as regards the constitution and powers of the arbitral tribunal, but two additional provisions catered specifically for the possibility of investor-State claims. It provided that in an investor-State claim, the tribunal may, upon an application by the respondent: ‘(i) order that national to give security for costs; or (ii) dismiss 51

151 152

153 154 155 156

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proceedings: ‘Annex Relating to the Statute of the Arbitral Tribunal’ (n. 128) (1963) 2 ILM 241, 266, 267. ‘Notes and Comments to Article 7’ (n. 128) (1963) 2 ILM 241, 258. According to the commentary, the reasons for preferring international arbitration over the ICJ were: ‘(i) the [arbitral tribunal] was a forum more appropriate for disputes, many of which were of a technical nature; (ii) the [arbitral tribunal] was easy to convene and a country in the process of economic development might feel reassured by the possibility of choosing one of its members; (iii) its decision was given in a shorter time and the procedure entailed less cost; and that (iv) countries in the process of economic development might prefer the [arbitral tribunal] because disputes could be determined there without much publicity’: ibid., at 259. Ibid. OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 7(b). Ibid., Art. 7(c). Ibid., Art. 7(d).

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the claim if, from the statements made by that national to the Tribunal, the institution of the proceedings appears frivolous or vexatious.’157 The remainder of the provisions in the OECD Draft Convention were either 53 clarificatory or were in the nature of ‘final provisions’. Article 8 of the OECD Draft Convention, like Article VI of the Abs–Shawcross Draft Convention, clarified that the rights and obligations in the OECD Draft Convention were without prejudice to other more favourable provisions in other international agreements from which the nationals of a State party may benefit.158 The OECD Draft Convention was not concluded by the OECD member 54 States as an international agreement. However, like the Abs–Shawcross Draft Convention (1959) before it, the OECD Draft Convention was influential in providing much of the content for the model BITs of many OECD member States. 6. Convention on the Settlement of Investment Disputes between States and Nationals of other States (1965) a) Introduction

At the time that the OECD Draft Convention was being drafted, considered, 55 and revised by the member States of the OECD, the General Counsel of the World Bank, Mr Aron Broches, had the idea of establishing a facility for the settlement of international investment disputes.159 He had observed the efforts to create a framework convention for the protection of international investment, but he had noticed that these exercises revealed persistent disagreement on the underlying substantive issues. In light of the controversy, Mr Broches considered that it would be more productive to seek to reach multilateral agreement on a procedure for the resolution of investment disputes, rather than trying to agree on the applicable standards of treatment.160 These efforts resulted in the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention), which was opened for signature in 1965 and entered into force in 1966. The ICSID Convention established the International Centre for Settlement of Investment Disputes (ICSID).161 The purpose of ICSID was ‘to provide facilities for conciliation and arbitration of investment disputes between Contracting States and Nationals of other Contracting States in accordance with the provisions of [the] Convention.’162 ICSID itself does not conduct 157 ‘Annex Relating to the Statute of the Arbitral Tribunal’ (n. 128) (1963) 2 ILM 241, 266, 267. 158 OECD Draft Convention on the Protection of Foreign Property (n. 129) Art. 8. 159 Christoph Schreuer, Loretta Malintoppi, August Reinisch and Anthony Sinclair, The ICSID Convention: A Commentary (Cambridge University Press, 2009) 2. 160 See further Lucy Reed, Jan Paulsson and Nigel Blackaby, Guide to ICSID Arbitration (Kluwer, 2011) 1–2. 161 Convention on the Settlement of Investment Disputes between States and Nationals of other States, opened for signature 18 March 1965, 575 UNTS 159 (entered into force 14 October 1966) (ICSID Convention). 162 ICSID Convention (n. 161) Art. 1(2).

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arbitration proceedings, but it is an institution which administers their initiation and functioning. Importantly, both developed and developing States have become State parties to the ICSID Convention, which has resulted in the very high level of membership of 147 States.163 b) Jurisdiction of ICSID 56

Article 25 of the ICSID Convention is the key provision that sets out the jurisdiction of the Centre. In the opening paragraph of that article, the Contracting States agree: 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.164

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The types of disputes which were referred to ICSID were, originally, contractual in nature, being disputes arising out of investment contracts, or concession contracts, between an investor and a State, or State agency. However, an arbitral clause in a contract is not the only means by which a dispute can be referred to ICSID arbitration. Another means by which parties can consent to refer a dispute to ICSID is by the host State stating so in a piece of legislation, such as a domestic law on foreign investment.165 Finally, the basis of the consent might be found in a BIT or other IIA. c) Procedural Provisions

58

The remaining provisions of the ICSID Convention deal with the procedures for conciliation proceedings (Articles 28–35); the procedures for arbitration proceedings, including issues such as the constitution of the tribunal, the powers and functions of the tribunal, the award, the availability of post-award procedures, including annulment proceedings, and recognition and enforcement of the award (Articles 36–55); the procedures for the disqualification of conciliators and arbitrators (Articles 56–58); the cost of proceedings (Articles 59–61); the place of proceedings (Articles 62–63); the procedures for inter-State disputes (Article 64); and finally, procedures for amendment and other final provisions (Articles 65–75).166

163 It should be added that three States have decided to withdraw from the ICSID Convention: these States were Bolivia (which denounced the ICSID Convention on 2 May 2007), Ecuador (which did so on 9 July 2009), and Venezuela (which denounced the ICSID Convention on 24 January 2012). With Venezuela’s denunciation taking effect in July 2012, the ICSID Convention has 146 States parties, barring any other changes. 164 ICSID Convention (n. 161) Art. 25. 165 See, e.g., Albania’s Law on Foreign Investment of 1993, which was the basis of the tribunal’s jurisdiction in Tradex Hellas SA v. Albania, ICSID Case No ARB/94/2, Decision on Jurisdiction, 24 December 1996.

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This part has reviewed the various multilateral efforts that were undertaken 59 by non-governmental organisations, international organisations, and States in the 1950s and 1960s to seek agreement on the substantive law on the protection of aliens, as well as to establish procedures to facilitate the settlement of investment disputes. Of those initiatives, the ICSID Convention is the only one to have resulted in an international agreement that attracted sufficient support to enter into force, although the provisions of the Abs–Shawcross Draft Convention (1959), the Harvard Draft Convention (1961) and the OECD Draft Convention (1962) were influential in the negotiation of BITs. Part D of this chapter now turns to the efforts of States to reach bilateral agreement on issues of investment promotion and protection. D. The Emergence of Bilateral Investment Treaty Programmes 1. The First BIT: The Germany–Pakistan BIT (1959)

With remarkable prescience, Germany considered it unlikely that the various 60 multilateral initiatives that have been outlined above would result in agreement on the protection of international investment in the near future, and in 1959, it embarked on a programme of negotiating BITs. Germany signed its first BIT with Pakistan on 25 November 1959, and a few weeks later, on 16 December 1959, Germany signed its second BIT, with the Dominican Republic. The Germany–Dominican Republic BIT was in fact the first BIT to enter into force on 3 June 1960.167 The Germany–Pakistan BIT protected ‘investments’, which were defined in 61 Article 8(1) as comprising ‘capital brought into the territory of the other Party for investment in various forms in the shape of assets such as foreign exchange, goods, property rights, patents and technical knowledge.’168 The term ‘investment’ was also defined as including ‘returns derived from and ploughed back into such “investments”.’ Article 8(1) further provided that: ‘Any partnerships, companies or assets of similar kind, created by the utilisation of the above mentioned assets shall be regarded as “investments”.’169 The substantive obligations on the State parties were contained in Articles 1– 62 7. Article 1 contained provisions on admission, in which the State parties agreed to ‘endeavour to admit’ investments by nationals of the other State party (Article 1(1)), and also agreed not to discriminate against such investments on the grounds of foreign ownership (Article 1(2)), although this obligation was made 166 For a commentary of the relevant provisions in the ICSID Convention, see especially Schreuer et al. (n. 159); and Malcolm Holmes and Chester Brown, The International Arbitration Act 1974: A Commentary (LexisNexis Butterworths, 2011) 241–338. 167 Kenneth Vandevelde (n. 2) 54. 168 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, Art. 8(1). 169 Ibid.

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dependent on existing national laws and regulations.170 In Article 2, the State parties also agreed not to subject any activities as regards the ‘effective management, use or enjoyment’ of investments to discriminatory treatment ‘unless specific stipulations are made in the documents of admission of an investment’.171 Article 3 contained further substantive protections. Article 3(1) provided for the obligation to accord ‘protection and security’; Article 3(2) contained the protection from expropriation; and Article 3(3) stated that nationals or companies who suffered the loss of investments due to ‘war, other armed conflict, revolution or revolt’ should be accorded most favoured nation treatment ‘as regards restitution, indemnification, compensation or other considerations’, and that the transfer of any funds resulting from such payments should also benefit from most favoured nation treatment.172 Article 4 guaranteed the free transfer of investments and returns from such investments,173 and Article 5 envisaged the possibility of the subrogation of claims.174 Article 6 set forth specific requirements on the free transfer of funds.175 Article 7 of the Germany–Pakistan BIT was the ‘without prejudice’ provision which was also to be found in Article VI of the Abs–Shawcross Draft Convention (1959), i.e., that if the legislation of either State party or any international obligations between the State parties provide for better treatment than that required by the BIT, then the BIT does not affect the operation of any such legislation or obligations. Article 7 also included the ‘umbrella clause’ as part of the same provision.176 63 Article 11 of the Germany–Pakistan BIT contained the inter-State dispute settlement provision, in which the States agreed that any disputes concerning the interpretation or application of the BIT could be referred to the ICJ, with both parties’ agreement, but if there was no such agreement, then an arbitral tribunal would decide such disputes.177 64 It can be seen that the first-ever BIT contained basic provisions on non-discriminatory treatment, protection and security, protection from expropriation, most favoured nation treatment as regards compensation for losses suffered in the course of civil strife, and the free transfer of funds. On the whole, these provisions are not greatly dissimilar from those which were contained in the more recent FCN treaties. However, it is interesting to note two points. First, the obligation to accord ‘fair and equitable treatment’ was not included in the Germany– Pakistan BIT, even though this obligation had already become part of the ‘international legal landscape’ in the Havana Charter, a treaty dating from 1948, which sought to establish the International Trade Organisation (ITO).178 The 170 171 172 173 174 175 176 177

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Ibid., Art. 1. Ibid., Art. 2. Ibid., Art. 3. Ibid., Art. 4. Ibid., Art. 5. Ibid., Art. 6. Ibid., Art. 7. Ibid., Art. 11(2)(b).

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obligation to accord ‘fair and equitable treatment’ to the capital of nationals and companies of the other State party was also included in the United States’ postSecond World War FCN treaties with Uruguay, Ireland, Germany, and various other countries,179 and the contemporaneous Abs–Shawcross Draft Convention (1959) and the later OECD Draft Convention (1962) included the provision. The second noteworthy issue is that the Germany–Pakistan BIT did not provide for investor-State arbitration; such a provision was not included in a BIT until the late 1960s. 2. Development of States’ BIT Programmes

Shortly after Germany began negotiating BITs, other States followed suit. 65 These countries were France (which commenced negotiating BITs in 1960), Switzerland (1960), the Netherlands (1963), Italy (1964), the Belgo-Luxembourg Economic Union (1964), Sweden (1965), Denmark (1965), and Norway (1966).180 Some of the treaties that were negotiated in this early period were not strictly limited in their scope to issues of investment promotion and protection, but also addressed other issues of economic and technical cooperation. For instance, Article 10 of the Germany–Pakistan BIT (1959) provided that the State parties were to ‘co-operate with the other in furthering the interchange and use of scientific and technical knowledge and development of training facilities particularly in the interest of increasing productivity and improving standards of living in their territories.’181 This was also the case of the early Swiss BITs, which were known ‘treaties of commerce, investment protection, and technical cooperation.’182 Early Netherlands BITs were also referred to as ‘economic cooperation agreements’.183 There were several reasons for the shift to negotiating BITs rather than FCN 66 treaties, but a major factor was the realisation on the part of developed States that issues of trade would be primarily dealt with in the context of the General Agreement on Tariffs and Trade, which had been negotiated and opened for signature in 1947.184 This led to BITs being shorter and more focussed on invest178 Jeswald Salacuse (n. 4) 218. Art. 11(2) of the Havana Charter provided that the ITO had the power to make recommendations for and to promote bilateral and multilateral agreements on measures designed to assure ‘just and equitable treatment for the enterprise, skills, capital, arts and technology brought from one Member country to another.’ 179 Ibid., at 219–220; Rudolf Dolzer and Christoph Schreuer (n. 45) 120. The Germany–United States FCN Treaty (1954) provided, for instance, in Art. I(1) that: ‘Each Party shall at all times accord fair and equitable treatment to the nationals and companies of the other Party and to their property, enterprises, and other interests.’ 180 See, e.g., Kenneth Vandevelde (n. 2) 54–55; Andrew Newcombe and Lluís Paradell (n. 2) 42–43. 181 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments, Art. 10. 182 Kenneth Vandevelde (n. 2) 55; see also Michael Schmid, ‘Switzerland’ in Chester Brown (ed) (n. 10) 651. 183 Kenneth Vandevelde (n. 2) 55; see also Nico Schrijver and Vid Prislan, ‘Netherlands’ in Chester Brown (ed) (n. 10) 535.

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ment issues, and the absence of non-investment issues also made such treaties easier to negotiate.185 BIT negotiations were typically between a developed State and a developing State; the developed State would be seeking protections for its nationals who wished to invest abroad, and the developing State would be keen to attract foreign investment to assist in its quest for economic development.186 The negotiations usually proceeded on the basis of a ‘model BIT’ that developed States would prepare. The texts of these model BITs were based, to greater or lesser extent, on the OECD Draft Convention for the Protection of Foreign Property (1962), which led to a good deal of consistency in the terms of various BITs. 67 As has already been remarked above, it is noteworthy that the earliest BITs did not contain an investor-State dispute settlement procedure. The first BIT to include such a provision was the Indonesia–Netherlands BIT (1968), although like the Abs–Shawcross Draft Convention (1959) and the OECD Draft Convention (1962), this only provided for investor-State arbitration on the basis that the Contracting State on the territory of which a national of the other Contracting State makes or intends to make an investment ‘shall assent to any demand on the part of such national (…) to submit, for conciliation or arbitration, to [ICSID].’187 This was, therefore, a qualified or imperfect form of consent to investor-State arbitration. The first BIT to include unqualified consent to investorState arbitration would appear to be the Italy–Chad BIT (1969). This provided in Article VII that: Tout différend relatif aux investissements faisant l’object du présent Accord, qui pourrait surgir entre l’une des Parties contractantes (ou l’une quelconque des institutions ou organisations relevant de ladite Partie ou contrôlée par ladite Partie) et une personne physique ou morale ayant la nationalité de l’autre Partie, est soumis à la juridiction du Centre International pour le Règlement des Différends Relatifs aux Investissements, conformément à la Convention Internationale de Washington du 18 mars 1965.188

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The wave of expropriations which took place in the 1970s saw other countries taking up BIT programmes, including the United Kingdom (1975),189 Austria (1976),190 Japan (1977),191 and the United States (1977).192 Even States which 184 General Agreement on Tariffs and Trade, opened for signature 30 October 1947, 55 UNTS 194 (entered into force 1 January 1948); see, e.g., Kenneth Vandevelde (n. 2) 57–58. 185 Kenneth Vandevelde (n. 2) 57. 186 Ibid., at 57–58. 187 Agreement on Economic Cooperation between the Government of the Republic of Indonesia and the Government of the Kingdom of the Netherlands (7 July 1968), Art. 11, as cited in Andrew Newcombe and Lluís Paradell (n. 2) 44–45. This has since been replaced by the Agreement between the Government of the Kingdom of the Netherlands and the Government of the Republic of Indonesia on Promotion and Protection of Investment signed on 6 April 1994, which entered into force on 1 July 1995, in which both States provide their unqualified consent to investor-State arbitration. 188 Accord entre la République du Tchad et la République d’Italie pour protéger et favoriser les investissements du capitaux (1969), Art. VII, cited in Andrew Newcombe and Lluís Paradell (n. 2) 45. 189 Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697. 190 August Reinisch, ‘Austria’ in Chester Brown (ed) (n. 10) 15.

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had socialist planned economies, such as the Soviet Union, Eastern European countries within the Soviet sphere of influence, and China, began entering into BITs.193 However, some of these States did not wholeheartedly embrace all of the protections typically contained in BITs, such as the national treatment obligation,194 as well as in particular, the investor-State arbitration provision.195 These States would usually agree to investor-State arbitration, but the scope of the provision would be quite narrow.196 For instance, the United Kingdom–China BIT (1986) provides in Article 7(1) that: A dispute between a national or company of one Contracting Party and the other Contracting Party concerning an amount of compensation which has not been amicably settled after a period of six months from written notification of that dispute shall be submitted to international arbitration.197

Such ‘narrow’ investor-State dispute settlement provisions are now less fre- 69 quently agreed; a recent BIT entered into by China, the Germany–China BIT (2003), provides in Article 9 that ‘any dispute concerning investments’ which is not settled by negotiation ‘shall, at the request of the investor (…) be submitted for arbitration.’198 A further impetus in the negotiation of BITs came in the late 1980s and early 70 1990s, in the form of the collapse and fragmentation of the Soviet Union, the emergence of Central and Eastern European States as market economies, and the actions of Latin American countries in seeking to attract foreign investment. As Professor Vandevelde puts it: ‘While fewer than four hundred BITs had been concluded in the thirty years from 1959 to 1989, during the next fifteen years some two thousand BITs would be concluded.’199 During this period, a number of regional multilateral agreements were negotiated which contained investment protection provisions, such as the North American Free Trade Agreement,200 and the Energy Charter Treaty,201 although an OECD-led attempt to negotiate a uni191 Shotaro Hamamoto and Luke Nottage, ‘Japan’ in Chester Brown (ed) (n. 10) 347. 192 Lee Caplan and Jeremy Sharpe, ‘United States’ in Chester Brown (ed) (n. 10) 755; Kenneth Vandevelde (n. 2) 56–57. 193 See, e.g., Sergey Ripinsky, ‘Russia’ in Chester Brown (ed) (n. 10) 593. 194 See, e.g., Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009) 165–171. 195 August Reinisch, ‘How Narrow are Narrow Dispute Settlement Clauses in Investment Treaties?’ (2011) 2 J. Int’l Disp. Settlement 115, 117. 196 See especially ibid. 197 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China concerning the Promotion and Reciprocal Protection of Investments (15 May 1986), Art. 7(1); see further Eileen Denza and Sheelagh Brooks, ‘Investment Protection Treaties: United Kingdom Experience’ (1987) 36 ICLQ 908–923. 198 Agreement between the Federal Republic of Germany and the People’s Republic of China on the Encouragement and Reciprocal Protection of Investments (2003), Art. 9. 199 Kenneth Vandevelde (n. 2) 64 (footnotes omitted). 200 North American Free Trade Agreement, signed 17 December 1992, 32 ILM 289 (entered into force 1 January 1994). 201 Energy Charter Treaty, opened for signature 17 December 1994, 34 ILM 360 (entered into force 16 April 1998).

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versal investment protection treaty, the Multilateral Agreement on Investment, was abandoned in 1998 in the face of disagreement among developed States on issues of access, and stiff opposition from developing States and non-governmental organisations.202 But this has not prevented other regional multilateral agreements with investment protection provisions from being concluded. Such agreements have included the ASEAN Comprehensive Investment Agreement (which applies to the ASEAN member States, namely Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam), and the ASEAN–Australia–New Zealand Free Trade Agreement.203 Other multilateral investment negotiations are afoot.204 71 Today, the States with the most expansive BIT networks are Germany (with 130 BITs in force), China (having signed 130 BITs, with 101 in force), Switzerland (with 128 BITs signed, and 113 in force), and the United Kingdom (with just over 100 BITs signed, and 95 in force).205 3. Content and Characteristics of BITs 72

As the majority of BITs have largely been based on similar negotiating models, BITs follow, by and large, a relatively predictable pattern, and cover much the same content. It is worth examining the content of a BIT that was concluded relatively early, namely the United Kingdom’s first ever BIT, the United Kingdom–Egypt BIT (1975). This BIT was negotiated based on a model BIT that has remained quite consistent to the present day.206 It includes an obligation to encourage and create favourable conditions for bilateral investment between the two countries, and also imposes an obligation on each State party to admit such investments, subject to each State’s laws.207 It requires the contracting parties to accord fair and equitable treatment to investments of nationals or companies of the other contracting party, and to accord full protection and security to such investments.208 The contracting States are also obliged not to impair the management, maintenance, use, enjoyment or disposal of investments by unreasonable or discriminatory measures;209 and the BIT also contains an ‘umbrella clause’.210 202 Kenneth Vandevelde (n. 2) 69–70. 203 ASEAN Comprehensive Investment Agreement, signed 26 February 2009, available at www.aseansec.org/20632.htm (last accessed 20 March 2012); ASEAN–Australia–New Zealand Free Trade Agreement, signed 27 February 2009, available at www.dfat.gov.au/fta/ aanzfta/index.html (last accessed 20 March 2012). 204 For, e.g., the Trans-Pacific Partnership Agreement. 205 UNCTAD, ‘Recent Developments in International Investment Agreements (2008–June 2009)’, IIA Monitor No 3 (2009) – International Investment Agreements, UN Doc. UNCTAD/WEB/DIAE/IA/2009/8, p. 2; see also Rudolf Dolzer and Yun-I Kim, ‘Germany’ in Chester Brown (ed) (n. 10) 289; Wenhua Shan and Norah Gallagher, ‘China’ in Chester Brown (ed) (n. 10) 131; Michael Schmid, ‘Switzerland’ in Chester Brown (ed) (n. 10) 651; Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697. 206 Chester Brown and Audley Sheppard, ‘United Kingdom’ in Chester Brown (ed) (n. 10) 697. 207 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt, Art. 2(1). 208 Ibid., Art. 2(2).

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It further provides that the State parties have the obligation to accord most favoured nation treatment and national treatment to investments of nationals and companies of the other contracting party, as well as to those nationals and companies;211 the obligation to provide compensation for losses caused by civil strife on a most favoured nation or national treatment basis;212 the obligation not to expropriate investments without compensation;213 and the obligation to permit the free transfer of funds.214 The United Kingdom–Egypt BIT also includes provisions on investor-State dispute settlement, and inter-State dispute settlement,215 as well as provisions on other issues such as exceptions, the subrogation of claims, and ‘final provisions’.216 It was characteristic of these early BITs that they did not provide much in the 73 way of detail on the content of the substantive obligations for the benefit of any tribunals which might later be constituted to determine investor-State or interState disputes. The fair and equitable treatment provision in the United Kingdom–Egypt BIT, for instance, states quite simply that: ‘Investments of nationals or companies of either Contracting Party shall at all times be accorded fair and equitable treatment’,217 leaving investor-State tribunals to interpret this provision under the rules set forth in the Vienna Convention on the Law of Treaties, and against the background of existing customary international law.218 However, more recent BITs of a number of States do provide guidance on the 74 interpretation of a number of provisions. For instance, with respect to Article 1105 of the NAFTA, the State parties to that treaty, in the context of the NAFTA’s Free Trade Commission, issued an interpretative declaration in July 2001 on how that provision was to be interpreted and applied. This was done largely in response to the decisions of a number of NAFTA tribunals which had found that the obligation to accord fair and equitable treatment in Article 1105 of NAFTA provided for treatment greater than that required by customary international law.219 The Free Trade Commission clarified in its interpretative declaration that: ‘Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.’220 It also stated that: ‘The 209 210 211 212 213 214 215 216 217 218

Ibid. Ibid. Ibid., Art. 3. Ibid., Art. 4. Ibid., Art. 5. Ibid., Art. 6. Ibid., Arts. 8–9. Ibid., Arts. 7, 10, 11–13. Ibid., Art. 2(2). For an excellent discussion, see especially Martins Paparinskis, ‘Investment Treaty Interpretation and Customary International Law: Preliminary Remarks’ in Chester Brown and Kate Miles (eds), Evolution in Investment Treaty Law and Arbitration (Cambridge University Press, 2011) 65. 219 See, e.g., Pope & Talbot v. Canada, UNCITRAL Arbitration, Award of the Merits of Phase 2, 10 April 2001, paras. 105–118.

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concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.’221 Consistent with the NAFTA Free Trade Commission’s interpretative declaration, the US Model BIT (2004) and the Canadian Model BIT (2004) include similar language.222 75 Another issue on which the United States and Canada (and a number of other States) have sought to provide guidance to investment treaty tribunals is the concept of ‘indirect expropriation’. The US Model BIT (2012) contains an ‘Annex B’ on ‘Expropriation’, which confirms that Article 6 on expropriation ‘is intended to reflect customary international law concerning the obligation of States with respect to expropriation’,223 and goes on to state that: 4(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: (i)

(ii) (iii)

76

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; the extent to which the government action interferes with distinct, reasonable investmentbacked expectations; and the character of the government action.224

Annex B of the US Model BIT (2012) adds by way of clarification 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.225

77

This clarificatory provision is not included in the BITs of most other States, but it is noteworthy that similar language is also being adopted by other countries, such as Colombia, in its model BIT.226 E. Conclusion

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This chapter has examined the evolution of the IIA regime, and it has revealed that the early efforts to reach multilateral agreement – even though these were largely unsuccessful – were nonetheless influential in the practice of States 220 NAFTA Free Trade Commission, ‘Notes of Interpretation of Certain Chapter 11 Provisions’ (31 July 2001), available at www.international.gc.ca/trade-agreements-accords-commerciaux/disp-diff/nafta-interpr.aspx?lang=en&view=d (last accessed 20 March 2012). 221 Ibid.; see also Andrea Bjorklund, ‘NAFTA Chapter 11’ in Chester Brown (ed) (n. 10) 465. 222 North American Free Trade Agreement, signed 17 December 1992, 32 ILM 289 (entered into force 1 January 1994). See especially Lee Caplan and Jeremy Sharpe, ‘United States’ in Chester Brown (ed) (n. 10) 755; and Céline Lévesque and Andrew Newcombe, ‘Canada’ in Chester Brown (ed) (n. 10) 53. 223 US Model BIT (2012), Annex B, para. 1. 224 US Model BIT (2012), Annex B, para. 4(a). 225 Ibid., para. 4(b). 226 See especially José Antonio Rivas, ‘Colombia’ in Chester Brown (ed) (n. 10) 183.

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in negotiating almost 3,000 BITs which are currently in force. In this sense, the negotiation by States of IIAs has been the principal contributing factor in the development of international investment law. However, many BIT contours of the rights of investors, and the obligations on States, have been developed in the practice of arbitral tribunals which have been constituted under IIAs to determine investment disputes. Arbitral practice has also thrown up systemic problems in the regime of international investment law. These issues are considered in later chapters in the present volume.

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II. Bilateral Approaches A. European Bilateral Approaches

John P. Gaffney and Zeynep Akçay 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. European BITs within the International Legal Order . . . . . . . . . . . . . . . . a) The Genesis and Development of European BITs . . . . . . . . . . . . . . . . . b) Basic Features of European BITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) A Protective Framework for Substantive Rights . . . . . . . . . . . . . (2) An Effective Legal Redress: the Advent of Investor-State Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Comparisons with Other Approaches . . . . . . . . . . . . . . . . . . . . . . . . . (a) Copyrights and Industrial Property Rights . . . . . . . . . . . . . . (b) Fair and Equitable Treatment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (c) Test of Nationality for Companies . . . . . . . . . . . . . . . . . . . . . . . . (d) Claims to Money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (e) Concessions and Similar Rights . . . . . . . . . . . . . . . . . . . . . . . . . . 3. European BITs within the EU Legal Order . . . . . . . . . . . . . . . . . . . . . . . . . . . a) A Complex Interaction between Intra-EU BITs and EU Law . . . . b) The Potential Conflict of Extra-EU BITs with EU Law. . . . . . . . . . . 4. The Lisbon Treaty – a New Era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) The EU’s Exclusive Competence for ‘Foreign Direct Investments’ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) The Future of European BITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3 4 11 12 15 19 23 24 25 26 27 28 29 40 46 47 53 54

Literature: George Bermann, ‘Navigating EU Law and the Law of International Arbitration’ (2012) Arb. Int’l 397–445; Chester Brown (ed), Commentaries of Selected Model Investment Treaties (Oxford University Press, 2013); Julien Chaisse, ‘Promises and pitfalls of the European Union policy on foreign investment – How will the new EU Competence on FDI affect the emerging global regime?’ (2012) 28 Arb. Int’l 397–445; (2012) J. Int’l Econ. L. 51–84; Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995); Andrew Newcombe and Lluís Paradell, Law and Practice of Investment Treaties (Kluwer, 2009); Michele Potestà, ‘Bilateral Investment Treaties and the European Union. Recent Developments in Arbitration and before the ECJ’ (2009) 8 LPICT 225–245.

1. Introduction

The purpose of this chapter is to identify typical European traditions and to identify whether and, if so, how bilateral investment treaties (BITs) of a European origin (European BITs) have differed from other important approaches like that of the United States. 2 The chapter reviews the development of European bilateral approaches in the last century, compares those approaches with those in other geographic regions, considers the profound impact that EU membership of European BIT contracting parties is having on European bilateral approaches, and notes the future development of European bilateral approaches. 1

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II.A. European Bilateral Approaches

2. European BITs within the International Legal Order

In this section of the chapter, we briefly examine the development of Euro- 3 pean bilateral approaches in their international context. a) The Genesis and Development of European BITs

During the nineteenth and for a large part of the twentieth century, bilateral economic relations took the form of friendship, commerce and navigation treaties (FCNs) and constituted the forerunners of BITs. FCNs contained provisions on foreign property and aimed mainly at facilitating trade.1 In parallel, after World War II, several attempts were made at establishing a multilateral legal framework for investment. The first initiative took place during the negotiations on the so-called Havana Charter (Havana Charter) for the proposed International Trade Organization (ITO). Thus several articles in earlier drafts of the Havana Charter contained provisions on investment protection with provisions for national treatment, most favoured nation (MFN) treatment and just compensation for expropriation. However, the negotiating parties were unable to reach an agreement on these standards. Consequently, the final draft of the Havana Charter contained only a prohibition on ‘unreasonable or unjustifiable action’. In any case, the Havana Charter never came into force and the ITO was never established. Later, a non-governmental initiative of European origin led to the development of the 1959 Draft Convention on Investments Abroad (the so-called Abs– Shawcross Draft Convention). The Draft Convention was elaborated under the supervision of Hermann Abs, the Director-General of Deutsche Bank, and Lord Shawcross, a former Attorney General of the UK. The main provisions of the Abs–Shawcross Draft Convention were the minimum standard of treatment, i.e., ‘fair and equitable treatment’, protection against ‘unreasonable or discriminatory measures’, observance of undertakings, ‘just and effective’ compensation for expropriation,2 and most importantly the provision for direct investor-State arbitration.3 The Draft Convention never entered into force, but it had a profound influence on the development of European BITs. Germany decided to introduce the Abs–Shawcross Draft Convention to the Organisation for Economic Co-operation and Development (OECD), which in turn published in 1962 a Draft Convention on the Protection of Foreign Property. A few years later, the OECD revised and approved the Draft Convention on the Protection of Foreign Property. The OECD Council Resolution that approved the Draft Convention underlined that it ‘embodies recognized principles relating to the protection of foreign property’ and that it ‘will be a useful docu1 Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995) 3 and 10. 2 Abs–Shawcross Draft Convention on Investments Abroad, April 1959 (1960) 9 J. Pub. L. 115, Arts. I–III. 3 Abs–Shawcross Draft Convention Annex, para. 1.

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ment in the preparation of agreements on the protection of foreign investment’.4 The notion of the minimum standard of treatment enshrined in the draft Convention therein reflected the position of the major capital exporting States: Each Party shall at all times ensure fair and equitable treatment to the property of the nationals of the other Parties. It shall accord within its territory the most constant protection and security to such property and shall not in any way impair the management, maintenance, use, enjoyment or disposal thereof by unreasonable or discriminatory measures. The fact that certain nationals of any State are accorded treatment more favourable than that provided for in this Convention shall not be regarded as discriminatory against nationals of a Party by reason only of the fact that such treatment is not accorded to the latter.’5

Even though the 1967 Draft Convention also never entered into force, its substantive provisions have served as a basis for the development and formulation of future BITs6 that were negotiated by OECD member States, including European States. 8 It was in this context, that the development of European BITs began after World War II, when European countries started negotiating bilateral treaties that dealt exclusively with foreign investment. These countries aimed to create an international framework to govern investments made by nationals of one country in the territory of another. The first BIT was signed between Germany and Pakistan on 25 November 1959.7 Germany proceeded, then, to negotiate similar investment treaties with the developing world and remains one of the leaders in BITs, with over 127 existing BITs.8 9 Other capital-exporting European countries followed Germany’s initiative in concluding BITs.9 Later, with the end of the communist era in the late 1980s, the emerging economies of Eastern and Central Europe started in their turn concluding such treaties. Nowadays, all European countries, with the exception of the Republic of Ireland, are parties to at least one BIT.10

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Resolution of the OECD Council, 12 October 1967 (1968) 7 ILM 117. Art. 1(a) of the Resolution. Rudolf Dolzer and Margrete Stevens (n. 1) 2. The Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments. 8 Germany has concluded 127 treaties as of November 2011. See UNCTAD, Investment Instruments Online, available at http://www.unctadxi.org/templates/DocSearch.aspx?id=779 (last updated 14 November 2011). 9 For example, the Convention between the Government of the Kingdom of the Netherlands and the Government of the Tunisian Republic concerning the Encouragement of Capital Investment and the Protection of Property.of 23 May 1963; the Accord entre la République Italienne et la République de Guinée pour favoriser les investissements de capitaux of 20 February 1964; the Convention entre le Gouvernement de la République française et le Gouvernement de la République tunisienne sur la protection des investissements of 30 June 1972, and the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Arab Republic of Egypt of 11 June 1975. 10 EU member States are party to approximately 1350 BITs at the time of counting per the List of the bilateral investment agreements referred to in Article 4(1) of Regulation (EU) No. 1219/2012 of the European Parliament and of the Council establishing transitional arrangements for bilateral investment agreements between Member States and third countries pub-

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The goals behind the multiplication of BITs are threefold: promotion, protec- 10 tion and liberalisation. Historically, the primary goal has been the promotion of foreign investment in developing countries, which is aimed to reduce poverty and stimulate development. The second goal is the protection of the investment made in developing countries through the creation of a stable international legal framework. The third goal is the liberalisation of the developing country’s economy, which is made possible through the facilitation of the entry of the partner’s investment.11 b) Basic Features of European BITs

BITs provide both substantive protection of foreign investment, in the form of 11 binding guarantees, and procedural protection, in the form of investment dispute resolution, which help to ensure the enforcement of those guarantees. Generally speaking, the structure and the composition of European BITs are relatively uniform. They begin with pre-ambular statements concerning the purpose of the BIT, define the scope of application, enumerate substantive investor protections, and, usually provide for an investor-State dispute settlement. (1) A Protective Framework for Substantive Rights

Generally, European BITs have a broad scope of applications. Thus, in defin- 12 ing what constitutes an ‘investment’, reference is often made to the term ‘every kind of asset’,12 to which is added a list of specific rights,13 which is not exhaustive. There are typically several general standards of treatment contained in a BIT, 13 which can provide for some or all of these standards. These standards are notably the guarantees of fair and equitable treatment, full protection and security, unreasonable or discriminatory measures, international law and contractual obligations. Among European BITs, the fair and equitable treatment is a key standard, in the sense that it protects against a wide range of adverse actions that a host State may take against an investment.14 Traditionally, European BITs have not provided for the protection of other 14 standards such as labour law, environmental law, or human rights, which invariably would limit the scope of investor protections. As we will see later on, a noticeable shift is taking place in relation to this issue, especially as EU law has an

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lished in the Official Journal of the European Union (2013/C 131/02) available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:C:2013:131:0002:0098:EN:PDF. Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff Publishers, 1995). For example, the Treaty between the Federal Republic of Germany and Ceylon for the Promotion and Reciprocal Protection of Investments of 8 November 1963. For example, traditional property rights, rights in companies, monetary claims, copyrights, industrial property rights, etc. Swedish National Board of Trade, Securing High investment Protection for EU Investors (National Board of Trade, 2011).

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increasing impact on investment treaty law and the EU emerges as a significant actor in the area. (2) An Effective Legal Redress: the Advent of Investor-State Arbitration

Investor-State arbitration was a fundamental innovation that was introduced into BITs in the mid-1960s. This provision ensures an effective legal redress against a host country’s violations of an applicable BIT. 16 Until 1968, BITs only provided for State-to-State dispute resolution, notably through the establishment of an arbitral tribunal or the submission of disputes to the International Court of Justice (ICJ). The first BIT that incorporated provisions for investor-State arbitration was the BIT concluded between the Netherlands and Indonesia although this involved the qualified State’s consent to investor-State dispute resolution. A year later, a similar provision, but this time involving unqualified State consent, was to be found in the BIT concluded between Italy and Chad. However, these provisions were not typical – at first only a few treaties provided for State consent to investment arbitration. It was not until the 1970s and 1980s that unqualified State consent to investor-State arbitration in BITs became more common.15 And it was only during the 1990s that investment arbitration actually began to be employed as an international mechanism for the settlement of investment disputes. European BITs gave the impetus to this trend by incorporating provisions on investor-State arbitration. 17 This marks the true beginning of modern BIT practice, since for the first time investors had an effective remedy for unlawful actions that might be committed against investments by host States. Thus investors no longer depended upon ‘gunboat diplomacy’ or on the espousal of their claim by their home State, as was the case previously. Likewise, European BITs do not normally require the investor to exhaust local remedies before resorting to international arbitration (although in some cases investors are obliged to pursue local remedies for a limited period of time, after which the arbitration of the dispute becomes possible). These features have come to be seen as essential in order to attract foreign investors, as a result of their right to bring an action before an international tribunal against a sovereign State in case of a dispute without the necessity of pursuing their claims before domestic State courts. 18 The most common forum chosen for the settlement of investment disputes is the International Centre for Settlement of Investment Disputes (ICSID), which was established in 1965 to resolve disputes between host countries and foreign private investors. The centre assists parties in the initiation of arbitration, the constitution of the tribunal and in helping in the conduct of the proceedings. ICSID arbitration is only available where the host State and the investor’s home State are parties to the ICSID Convention. If only one of the States is party to the Convention, ICSID arbitration is not an option but the ICSID Additional Fa15

15 UNCTAD, Bilateral Investment Treaties in the Mid-1990s (United Nations, 1998) 8–10.

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cility is available. If none of the States are parties to the Convention then investment treaties may also provide for ICSID arbitration, but only pursuant to the Additional Facility Rules. (3) Comparisons with Other Approaches

European BITs were also a source of inspiration for BITs concluded by other countries from other parts of the world, such as the US, which ultimately launched its own BIT programme in 1981. But while initially an inspiration for the US Model BIT, some differences have emerged over the last few decades between the US and European models. While both models aim at the liberalisation of foreign direct investment, the approaches adopted by Europe and the US to the achievement of this objective differ. First, from a formal perspective, European BITs are more concise and therefore offer a more open-ended interpretation, whereas US BITs contain much more detailed provisions. This is not surprising considering that many European countries’ legal systems are based on civil law, which favours a less detailed approach. It may be said, therefore, that the US Model BIT offers a greater degree of legal certainty, but lacks the flexibility inherent in the European model. Second, from a substantive viewpoint, there exists a significant difference between European and US BITs in so far as the admission of the investment is concerned. The admission of the investment refers to the entry of investments of investors of a contracting party into the territory of another contracting party. According to the European model, also called the admission clause, investments of investors of the other contracting party are admitted only if such investments conform to the host country’s legislation. The host country is thus able to determine the conditions on which the investment will be permitted. The investor is only granted post-establishment rights. In contrast, the US model thus confers certain rights – the national treatment and the most favoured nation treatment – to investors of the other contracting party during the pre-establishment phase (so called rights of establishment). The US approach thus provides for a more liberal approach, whereby the investor sees its investment protected even before it is established. Other differences exist as well between US and European BITs, especially those involving continental European States, and these are enumerated in the following sections.

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(a) Copyrights and Industrial Property Rights

French and German BITs cover copyrights, industrial property rights, techni- 23 cal processes, trade names and goodwill. French,16 German17 and UK BITs used 16 Accord entre la République Française et l’Etat des Emirats Arabes Unis sur l’Encouragement et la Protection Réciproques des Investissements of 9 September 1991.

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to express this category of rights in general terms, such as ‘intellectual property rights and goodwill’, but have now expanded the wording to include ‘technical processes and know-how’.18 In contrast, US BITs are considerably more detailed than European BITs: the definition of ‘intellectual property’ includes, ‘inter alia, rights relating to: literary and artistic works, including sound recordings; inventions in all fields of human endeavor; industrial designs; semiconductor mask works; trade secrets, know-how, and confidential business information; and trademarks, service marks, and trade names (…)’.19 Unlike European BITs, US BITs also make express mention of intellectual property rights with respect to national treatment.20 (b) Fair and Equitable Treatment 24

In French, Belgian, Luxembourg BITs, the principle of fair and equitable treatment is given a prominent position, at the beginning of the general treatment clauses. German BITs refer to the standard in the admission clause. In US BITs (as well as in UK BITs), the principle is combined with the provisions on the protection and security of the investment. (c) Test of Nationality for Companies

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In determining the nationality of companies, US BITs (as well as UK BITs) favour the incorporation theory,21 whereas German BITs favour the seat theory22 and Dutch BITs refer to the control theory.23 (d) Claims to Money

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17 Treaty between the Federal Republic of Germany and the Kingdom of Swaziland concerning the Encouragement and Reciprocal Protection of Investments of 5 April 1990. 18 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of Argentina for the Promotion and Protection of Investments of 11 December 1990. 19 Treaty between the United States of America and the Republic of Ecuador concerning the Encouragement and Reciprocal Protection of Investment of 27 August 1993. 20 Treaty between the United States of America and the Arab Republic of Egypt concerning the Reciprocal Encouragement and Protection of Investments of 29 September 1982. 21 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of Barbados for the Promotion and Protection of Investments of 7 April 1993. 22 Treaty between the Federal Republic of Germany and the Co-operative Republic of Guyana concerning the Encouragement and Reciprocal Protection of Investments of 6 December 1989. 23 Agreement between the Kingdom of the Netherlands and the Republic of Paraguay on Encouragement and Reciprocal Protection of Investments of 29 October 1992. 24 Accord entre la République Française et la République Fédérative Tchèque et Slovaque sur l’Encouragement et la Protection Réciproques des Investissements of 13 September 1990.

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an economic value’.25 US treaties are worded similarly, but go on to expressly state that such claims must be ‘associated with an investment’.26 The difference may not be that material, since the European BITs seem to indirectly link money claims to the creation of value, which is at least one defining feature of investments. (e) Concessions and Similar Rights

UK BITs expressly refer to ‘business concessions conferred by law or under 27 contract, including concessions to search for, cultivate, extract or exploit natural resources’.27 French and German treaties contain provisions that are similar in this respect to the British definition.28 US BITs are more general: they refer to ‘any right conferred by law and contract, and any licences and permits pursuant to law’.29 3. European BITs within the EU Legal Order

While, as noted in our introduction, some interesting differences have 28 emerged between the approaches to investment protection manifested in European and US BITs, another interesting and potentially far more significant, aspect of any discussion of European bilateral approaches is the profound impact that EU membership will have on European bilateral approaches. a) A Complex Interaction between Intra-EU BITs and EU Law

According to the United Nations Conference on Trade and Development 29 (UNCTAD) there are at present approximately 190 intra-EU BITs.30 This high number is explained by the fact that in the beginning of the 1990s, prior to their accession to the EU, former socialist States, such as Hungary, the Czech Republic or Romania entered into BITs with EU member States in order to attract foreign direct investment to their newly opened market economies.31 As a result of 25 Vertrag zwischen der Bundesrepublik Deutschland und der Argentinischen Republik über die Förderung und den gegenseitigen Schutz von Kapitalanlagen of 9 April 1991. 26 Treaty between the United States of America and the Republic of Bulgaria concerning the Encouragement and Reciprocal Protection of Investment of 23 September 1992. 27 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Co-operative Republic of Guyana for the Promotion and Protection of Investments of 27 October 1989. 28 Accord entre le Gouvernement de la République Française et le Gouvernement de la République Argentine sur l’Encouragement et la Protection Réciproques des Investissements of 3 July 1991; Treaty between the Federal Republic of Germany and the Kingdom of Swaziland concerning the Encouragement and Reciprocal Protection of Investments of 5 April 1990. 29 Treaty between United States of America and the Argentine Republic concerning the Reciprocal Encouragement and Protection of Investment of 14 November 1991. 30 The list of BITs entered into by each State is available on UNCTAD’s website at www.unctad.org. 31 Examples: the Accord entre le Gouvernement de la République française et le Gouvernement de la République populaire hongroise sur l’encouragement et la protection réciproques des

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the accession of these States to the EU, their BITs with other EU member States consequently became what are known as ‘intra-EU BITs’. This phenomenon has raised two fundamental questions: the conformity of these BITs with EU law and the admissibility of investor-State arbitrations brought under these treaties.32 The question of conformity is addressed in a note prepared in 2006 by the European Commission’s Directorate General responsible for the Internal Market and Services.33 Three main concerns are raised by the EU Commission. The first relates to the difference in the standards of protection provided pursuant to intra-EU BITs and EU law. As we noted earlier, BITs usually provide enhanced investment protection, such as fair and equitable treatment, national treatment, most favoured nation treatment, protection from expropriation, and full protection and security. In comparison, EU law provides only minimum standards for investment protection. The second concern is that intra-EU BITs may lead to an unequal treatment of investors from different member States. In particular, intra-EU BITs offer one considerable advantage: the possibility of pursuing claims through investment arbitration rather than having to seek redress in the national court systems. The Commission argues that investors not protected under intra-EU BITs will suffer discrimination on grounds of their nationality contrary to Article 18 of the Treaty on the Functioning of the European Union (TFEU).34 The third concern is the possibility that mandatory provisions of EU law might not be interpreted and enforced by arbitral tribunals in line with the jurisprudence of the Court of Justice of the European Union (CJEU) and might, consequently, be removed from the control of this latter. Thus, if a member State grants rights to an investor that are contrary to EU law the approach of the CJEU would be to accord priority to EU law. By contrast, the Commission underlines that the same could not be expected from an investment tribunal established under an intra-EU BIT. investissements of 6 November 1986; Treaty concerning the promotion and reciprocal protection of capital investment (between France and Hungary) of 12 October 1979; Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic of 29 April 1991. 32 See George Bermann, ‘Navigating EU Law and the Law of International Arbitration’ (2012) Arb. Int’l 397–445. 33 The Free Movement of Capital, Note for the Economic and Financial Committee, prepared by the European Commission, Internal Market and Services DG, Nov 2006 (‘The risk remains that arbitration instances, possibly located outside the EU, proceed with investor-to-state dispute settlement procedures without taking into account that most of the provisions of such BITs have been replaced by provisions of Community law. (…) This could lead to arbitration taking place without relevant questions of EC law being submitted to the ECJ, with unequal treatment of investors among Member States as a possible outcome.’) in Eastern Sugar B.V. (Netherlands) v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007, para. 126. 34 Article 18 of the TFEU states: ‘Within the scope of application of this Treaty, and without prejudice to any special provisions contained therein, any discrimination on grounds of nationality shall be prohibited.’

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The question of the admissibility of arbitral proceedings brought under intra- 35 EU BITs has been considered in a number of recent cases. It was first addressed in the Eastern Sugar case in 2007.35 In that case, both the respondent, the Czech Republic, and the European Commission, intervening as amicus curiae, argued that intra-EU BITs ceased to be valid upon its accession as a result of the principle of the supremacy of EC law.36 The tribunal rejected that argument and concluded that BITs between EU 36 member States are not automatically superseded by EU law. The tribunal noted that the relationship between the BIT and EU law was addressed neither by the treaties regulating the Czech Republic’s entry into the EU nor by the relevant BIT.37 The tribunal rejected the notion that the intra-EU BIT terminated as a result of its alleged conflict with EU law according to the Vienna Convention on the Law of Treaties (VCLT), in particular with Article 59.38According to Article 59 of the VCLT, one of the two following conditions has to be fulfilled for a treaty to be terminated or suspended: both treaties concern the ‘same subjectmatter’ or there exists an incompatibility between the treaties. In Eastern Sugar, the tribunal noted that the EC Treaty and the intra-EU BIT did not concern the ‘same subject-matter’, given that the former is concerned with cross-border investment and does not cover issues such as investor-State arbitration or fair and equitable treatment. Moreover, the tribunal noted that the Czech Republic was unable to prove that it was intended that the subject-matter should be solely governed by the EC Treaty or that the BIT was ‘incompatible’ with the EC Treaty. The arbitrators concluded instead that both instruments were ‘complementary’.39

35 Eastern Sugar B.V. (Netherlands) v. Czech Republic, SCC Case No. 088/2004, Partial Award, 27 March 2007. 36 In its submissions to the tribunal, the respondent argued: ‘Based on ECJ jurisprudence [former] Article 307 EC is not applicable once all parties of an agreement have become Member States. Consequently, such agreements cannot prevail over Community law. For facts occurring after accession, the BIT is not applicable to matters falling under Community competence. Only certain residual matters, such as diplomatic representation, expropriation and eventually investment promotion, would appear to remain in question. Therefore, where EC Treaty or secondary legislation are in conflict with some of these BITs’ provisions – or should the EU adopt such rules in the future – Community law will automatically prevail over the non-conforming BIT provisions. (…) The Commission therefore takes the view that intra-EU BITs should be terminated in so far as the matters under the agreements fall under Community competence.’ 37 Eastern Sugar v. Czech Republic (n. 19) paras. 142–154. 38 Article 59 of the VCLT entitled ‘Termination or suspension of the operation of a treaty implied by conclusion of a later treaty’, sets forth that: ‘1. A treaty shall be considered as terminated if all the parties to it conclude a later treaty relating to the same subject matter and: (a) it appears from the later treaty or is otherwise established that the parties intended that the matter should be governed by that treaty; or (b) the provisions of the later treaty are so far incompatible with those of the earlier one that the two treaties are not capable of being applied at the same time.’ 39 Eastern Sugar v. Czech Republic (n. 19) para. 169 (Bermann (n. 16) describes this as an ‘accommodation strategy’ 429 et seq.).

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More recently, in Eureko v. The Slovak Republic,40 another tribunal came to the same conclusion as the Eastern Sugar tribunal, that is, that BITs between EU member States are not automatically superseded by EU law and therefore arbitral tribunals derive their jurisdiction from the BIT, which is a treaty governed by public international law. The award on jurisdiction has been contested by Slovakia who filed an application with the Frankfurt Higher Regional Court, challenging the award. However, the court confirmed in its decision dated 10 May 2012 the award of the tribunal. The court reasoned that EU law does not affect the validity of the arbitration clause since Article 344 of the TFEU41 only applies to disputes between EU member States and does not address the situation under scrutiny where a dispute arises between an investor and an EU member State.42 38 In conclusion, the European Commission’s position on intra-EU BITs is clear – it considers them to be discriminatory and contrary to EU law and thus pressures EU member States to terminate their intra-EU BITs.43 Some Central and Eastern European States (notably those States that are dealing with numerous BIT claims, such as the Czech Republic) have already started the process of terminating their BITs with other European countries.44 39 Other EU member States tend to resist the idea of terminating intra-EU BITs, since they share the idea that intra-EU BITs offer an extra layer of protection to investors in addition to the rights they enjoy under EU internal market rules. Given the fact that intra-EU BITs grant higher protection standards to investors, which is in conformity with the purpose of EU law, it seems rather odd that the Commission is not opting for an extension of intra-EU BITs to all European investors, through the adoption of appropriate legislative measures at the European level, rather than calling for their elimination.45 It remains to be seen whether these member States will change their position in the event that infringement proceedings are brought against them by the European Commission before the CJEU. 37

40 Eureko v. Slovakia, PCA Case No 2008–13, Award on Jurisdiction, Arbitrability and Suspension, 26 October 2010. 41 Article 344 of the TFEU states: ‘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.’ 42 Decision of the Frankfurt Higher Regional Court, 10 May 2012, 26 SchH 11/10, available at http://www.italaw.com/documents/26schh01110.pdf. 43 Luke Peterson, ‘EC Asks Member-States to signal by year’s end whether they will terminate their intra-EU investment treaties; spectre of legal actions loom’, IAR of 23 October 2010. 44 Luke Peterson, ‘Czech Republic terminates investment treaties in such a way as to cast doubt on residual legal protection for existing investments’, IAR of 1 February 2011. 45 See Nikos Lavranos, ‘Bilateral Investment Treaties and EU law’, ESIL Conference 2010, 26– 27.

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b) The Potential Conflict of Extra-EU BITs with EU Law

The EU Commission has identified a number of issues in relation to which BITs concluded with non-EU States, so called extra-EU BITs, may conflict with EU law.46 One of these issues is the free movement of capital. Some pre-accession BITs concluded by some EU member States before their accession to the EU provide for a free transfer of capital. And while free movement of capital between EU member States and between EU member States and third countries is fundamental to the EU order the TFEU permits some restrictions on capital movements that can be imposed by the Council of the EU. While no actual conflicts arose, the European Commission nonetheless initiated infringement proceedings against Austria, Sweden and Finland47 for their failure to take the necessary steps to remove potential incompatibilities between the free transfer provisions of their pre-accession extra-EU BITs48 and the restrictions permitted under EU law. In these three cases the CJEU upheld the Commission’s actions against these States. First, the Court accepted that the free transfer clauses contained in the BITs are, in principle, consistent with EU law. The CJEU thus recognised that according to Article 351(1) of the TFEU (formerly Article 307(1) of the EC) pre-accession treaties entered into by EU member States continue to be applicable regardless of EU law obligations. The Court, however, stressed that Article 307(2) of the EC (now Article 351(2) of the TFEU) imposes on member States an obligation to ‘take all appropriate steps to eliminate the incompatibilities established’. Accordingly, the CJEU concluded in all these cases that the contradiction between the BITs and the relevant EU law provisions concerning the possibility of imposing restrictions constituted an incompatibility within the meaning of Article 351(2) of the TFEU (formerly Article 307(2) of the EC), which was to be eliminated by the EU member States concerned. The Court’s judgment under the second paragraph of Article 351(2) of the TFEU appeared to demonstrate that from an EU perspective, EU law will always be accorded priority within the EU legal order. The CJEU applied a hypothetical incompatibility test according to which EU member States are obligated to eliminate perceived conflicts between their pre-accession BITs and EU law obligations even where no actual conflicts arise. It is also interesting to note that the Court called for mutual assistance between member States in eliminating the incompatibilities rather than requiring 46 Areas in respect of which the Commission has expressed concerns regarding potential conflicts: public policy exceptions in European Commission, Communication of the Commission on certain legal aspects concerning intra-EU investment, OJ C 220, 19 July 2007, 15–18; state aid prohibitions in Commission Decision on the State Aid Award by Hungary through Power Purchase Agreements, C(2008) 2223 final, 4 June 2008 in Case C 41/2005. 47 ECJ, 3.3.2009, Case C-205/06, Commission v. Austria and Case C-249/06, Commission v. Sweden; ECJ, 19.11.2009, Case C-118/07, Commission v. Finland. 48 According to which investors of either party to the BIT enjoy the right to freely transfer, without undue delay, the capital in connection with their investment.

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denunciation of the BITs. The CJEU also called for the Commission to play an active role in the adoption of a common attitude.49 By this the Court meant most likely that the Commission would have to assist member States in renegotiating their BITs with third countries so as to render them fully compatible with EU law. The Commission undertook a similar exercise a few years ago, when it assisted acceding and candidate States in adapting their BITs with the United States, in order to remove all potential incompatibilities between EU law and these BITs through the Memorandum of Understanding and a number of subsequent ‘additional protocols’ amending the BITs.50 44 However, more recently, the CJEU issued a judgment in Case C-264/09, Commission v. Slovakia,51 in which it appeared to alter its position. In this case the international obligation was one covered by Article 351 of the TFEU, i.e., the liberalisation of the electricity market. In 2009, the Commission initiated an infringement proceeding pursuant to Article 258 of the TFEU (formerly Article 226 of the EC) against Slovakia, who refused to terminate contractual priority electricity transmission rights that it granted to a Swiss investor pre-accession. According to the Commission, such priority access was violating non-discrimination obligations52 imposed under the directive concerning common rules for the internal market in electricity.53 The CJEU held that Article 351 of the TFEU recognises the effectiveness of Slovakia’s international obligations in relation to investors’ rights protection under the Swiss–Slovak BIT and, therefore, dismissed the Commission’s action.54 45 The Court justified its reasoning as follows. First, the Court stated that Article 307(1) of the EC (now Article 351 of the TFEU) ‘exists to clarify, in accordance with the principles of international law, (…), with article 30(4)(b) of the Vienna Convention on the law of treaties, that the application of the EC Treaty does not affect the duty of the EU member state to respect the rights of non-EU member States under a prior agreement and to perform its obligations’.55 Then, the Court 49 Ibid. 50 US Department of State, Understanding Concerning Certain U.S. Bilateral Investment Treaties, signed by the U.S., the European Commission, and acceding and candidate countries for accession to the European Union, 22 September 2003, available at http:// www.state.gov/s/l/2003/44366.htm. The additional protocols are available on the US Senate’s webpage at www.senate.gov. 51 ECJ, 15.9.2011, Case C-264/09, Commission v. Slovakia. 52 In Commission v. Slovakia (n. 51) the Court ‘declares that, by failing to grant non-discriminatory access to its transmission system, the Slovak Republic has failed to fulfill its obligations under Articles 20(1) and 9(e) of Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity and repealing Directive 96/92/EC.’ 53 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity, OJ L 176, 15 July 2003, 0037– 0056. 54 Commission v. Slovakia (n. 51) paras. 29–30 (it is interesting to note that the Court did not discuss the Energy Charter Treaty (ECT) in this case, because it considered that the BIT was ‘directly relat[ing] to investment protection’). 55 Commission v. Slovakia (n. 51) para. 41.

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noted that ‘in the context of Article 307 EC Treaty, the member States have a choice as to the appropriate steps to be taken to eliminate any incompatibilities existing between a pre-Community convention and the EC Treaty, if a member State encounters difficulties which make adjustment of an agreement impossible, an obligation to denounce that agreement cannot be excluded.’56 Since, the contract at issue did not provide for a denunciation clause,57 the Slovak Republic was not obliged to denounce such an agreement as an ‘appropriate step’ in the context of Article 307 of the EC Treaty with a view to eliminate incompatibilities between an earlier treaty and the EC Treaty. 4. The Lisbon Treaty – a New Era

As may be seen, the actions of the EU Commission have been creating uncer- 46 tainty for investors who have made investments in the EU, whether under intraEU BITs or extra-EU BITs. This uncertainty is likely to continue, as the EU itself emerges as a significant actor in the field of investor protection, thus heralding a new era in European bilateral approaches. As we shall see, however, the EU has taken some steps to provide greater legal certainty in the case of extraEU BITs. a) The EU’s Exclusive Competence for ‘Foreign Direct Investments’

The Lisbon Treaty has introduced (since 1 December 2009) a fundamental 47 change in the Common Commercial Policy (CCP) through Article 207 of the TFEU by bringing ‘foreign direct investments’ within the exclusive competence of the EU. Thus, the EU Commission has been tasked with negotiating and concluding agreements relating to ‘foreign direct investments’ as part of the EU’s CCP. This transfer of competence raises the fundamental question of the status of the existing BITs concluded by the EU member States with third countries pending their replacement by a unique EU instrument. Under public international law, existing European BITs will remain in force until their expiry or termination (and possibly longer because of treaty provisions that may extend the protection extended by the BIT for a further 10 to 20 years after their termination). Nevertheless, under EU law, it was not clear at the time whether existing European BITs would still be applicable and effective. The European Commission clarified this issue in a Regulation (EU) No. 48 1219/2012 ‘establishing transitional arrangements for bilateral investment agreements between member States and third countries’.58 Article 3 of the Regulation provides for maintenance in force of existing EU member State BITs subject only to the member States’ obligation to notify them to the Commission pursuant 56 Commission v. Slovakia (n. 51) para. 44. 57 Commission v. Slovakia (n. 51) para. 46. 58 Regulation (EU) No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, OJEU L 351/40, 20 December 2012.

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49

50

51

52

to Article 2 of the Regulation, until a BIT between the EU and the same country enters into force.59 The ‘grandfathering rule’, which allows the member States to maintain their BITs in force, conditions the automatic authorisation to the notification of the BITs by the member States. However, pursuant to Article 5 of the Regulation the Commission may review all notified BITs to evaluate whether ‘one or more of their provisions constitute a serious obstacle to the negotiation or conclusion’ by the EU of BITs with third countries. In the event that the Commission establishes that a notified member State BIT constitutes ‘a serious obstacle to the negotiation or conclusion’ by the EU of BITs with third countries, the member State concerned and the Commission are required to consult on ‘with a view to identifying the appropriate actions to resolve the matter.’60 The Commission may later indicate the appropriate measures to be taken by the member State concerned ‘to remove the obstacles’.61 In the event that the Commission orders the termination of a member State BIT, it seems likely that the protections conferred by the BIT would endure for some time after termination, as a result of the ‘survival’ or ‘sunset’ clauses normally laid in these BITs which guarantee protections for existing investments, usually for 10–15 years after termination. The regulation is thus intended to provide legal certainty for European and foreign investors benefiting from investment protection offered in member States’ pre-Lisbon extra-EU BITs (i.e., those which entered into force on or before December 2009). It clarifies the legal status of those agreements under EU laws and confirms that they may be maintained in force until they are replaced by an EU investment agreement. Intra-EU BITs fall outside the scope of the regulation. b) The Future of European BITs

53

As mentioned earlier, the Lisbon Treaty, which entered into force on 1 December 2009, has introduced a fundamental change in the CCP through Article 207(1) of the TFEU62 by integrating ‘foreign direct investments’ within the ex59 However, this authorisation might not be automatic, as demonstrated by the recent judgments against Austria, Sweden and Finland where the CJEU concluded that member States were in breach of their EU law obligations and thus obliged to negotiate with the respective third countries the inclusion of additional clauses. In these cases the incompatibility of capital transfer provision was under scrutiny, but there are other problematic issues of compatibility such as special benefits that are contravening the rules on State aid prohibitions and liberalisation (see e.g., Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19; AES Summit Generation Ltd and AES-Tisza Erömü Kft v Hungary, ICSID Case No. ARB/07/22). 60 Article 6 of the Regulation (Duty of cooperation). 61 Article 6(2) and Article 6(3) of the Regulation. In the original proposal for the Regulation the Commission was authorised to withdraw authorisation of the BIT for lack of conformity with any one of a number of grounds. 62 TFEU Article 207(1): ‘The common commercial policy shall be based on uniform principles, particularly with regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to trade in goods and services, and the commercial aspects of intellectual property,

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clusive competence of the EU. For instance, the EU Commission has engaged in or concluded negotiations with the United States, Canada, India and Singapore on comprehensive trade agreements that would each include an investment chapter. The Council Negotiating Directives of 12 September 201163 concerning these negotiations set forth the EU’s official position concerning investment related issues. It provides that investment chapters should include provisions concerning fair and equitable treatment, full protection and security, national treatment and most favoured nation treatment, as well as guarantees against uncompensated expropriation and an umbrella clause. However, the objectives of the EU investment policy, while gradually developing, still remain unclear.64 Notably, though, it may be gleaned from the Commission’s communications, as part of its ‘Civil Society Dialogue’ that the EU intends to balance a high level of protection for investors with the integration of societal concerns such as environmental protection, upholding labour standards, and the observance by investors of Corporate Social Responsibility principles.65 Additionally, the EU seems likely to introduce a major change to that manifested in the European BITs, according to which the EU BITs would adopt the US model of granting pre-establishment rights to foreign investors.66 5. Conclusion

Having led the way in investment treaty protection, and inspired similar ap- 54 proaches in other regions, European States seem destined in time to cede individual bilateral approaches in favour of a unified EU approach, in which EU policy concerns will likely limit the broad scope of investment protections that have characterised traditional European bilateral approaches.

63 64 65 66

foreign direct investment, the achievement of uniformity in measures of liberalization, export policy and measures to protect trade such as those to be taken in the event of dumping or subsidies. The common commercial policy shall be conducted in the context of the principles and objectives of the Union’s external action.’ Council Negotiating Directives (Canada, India and Singapore) of 12 September 2011; available at http://www.bilaterals.org/spip.php?article20272&lang=en and http://www.s2bnetwork.org/themes/eu-investment-policy/eu-documents/text-of-the-mandates.html. August Reinisch, ‘The EU on the Investment Path – Quo Vadis Europe? The Future of EU BITs and other Investment Agreements, 22 March 2013, available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=2236192. EU investment policy State of Play, Civil Society Dialogue, Brussels, April 2013. EU, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions, Towards a comprehensive European international investment policy, COM(2010) 343 final, Brussels, 7 July 2010: ‘[A] comprehensive common international investment policy needs to better address investor needs from the planning to the profit stage or from the pre- to the post-admission stage. Thus, our trade policy will seek to integrate investment liberalization and investment protection’.

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B. The Americas

Andrew Newcombe 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Post-NAFTA BIT Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Central America and the Caribbean . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. South America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Literature: Lee Caplan and Jeremy Sharpe, ‘The 2004 U.S. Model Bilateral Investment Treaty’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013); Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero (eds), Latin American Investment Protections (Martinus Nijhoff, 2012); Céline Lévesque and Andrew Newcombe, ‘Commentary on the Canadian Model Foreign Investment Promotion and Protection Agreement’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013); Mary H. Mourra (ed), Latin American Investment Treaty Arbitration: The Controversies and Conflicts (Kluwer Law International, 2008); José Antonia Rivas, ‘Colombia’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013); Kenneth J. Vandevelde, U.S. International Investment Agreements (Oxford University Press, 2009); Kenneth J. Vandevelde, ‘A Comparison of the 2004 and 1994 US Model BITs: Rebalancing Investor and Host Country Interests’ (2008–2009) YB Int’l Inv. L. & Pol’y 283–315.

1. Introduction

Bilateral investment agreement (BIT) practice in the Americas has been heavily influenced by the United States’ economic, political and military dominance in the region. Core doctrines in international investment law, including the Hull rule, arose out of economic and political conflicts between the United States (US) and Latin American States. More recently, the Washington Consensus of the early 1990s set the ideological framework within which many Latin American States adopted liberal economic policies. In accordance with the orthodoxy of the time, Latin American States significantly liberalised restrictions on foreign direct investment (FDI) and entered into international investment agreements (IIAs) en masse with provisions that reflected a rejection of the traditional Latin American adherence to the Calvo Doctrine. 2 In 1992, Canada, Mexico and the US concluded the North American Free Trade Agreement (NAFTA), which includes Chapter Eleven (Investment).1 Although the US insisted on the inclusion of investment protections in NAFTA because of the troubled history of American FDI in Mexico, Chapter Eleven resulted in an unexpected number of investor-State claims against the US and Canada. 1

1 See Andrea Bjorklund, ‘NAFTA’s Contributions to Investor-State Dispute Settlement’, ch. 4.III.B., 261–282.

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American and Canadian experience as serial respondents in NAFTA arbitrations has had a formative effect on their BIT and IIA practices. The 2012 US Model BIT (2012 US Model)2 and the 2004 Canadian Model 3 Foreign Investment Promotion and Protection Agreement (2004 Canadian Model)3 incorporate American and Canadian experiences respectively with the NAFTA.4 In contrast to the brief, principles-based approach common in European BIT practice, where the typical BIT is eight to ten pages, American and Canadian practice currently attempts to clarify the scope of substantive and procedural provisions in great legislative detail, resulting in IIAs that can run to over 50 pages long. The proliferation of Latin American BITs in the 1990s provided the breeding 4 ground for a ‘baby boom’5 in investment treaty claims beginning in the early 2000s. Numerous treaty claims along with economic and political upheaval have had a mixed effect on IIA practice. On the one hand, some States, notably Bolivia, Ecuador and Venezuela have adopted socialist and nationalist models of economic development,6 rejected aspects of the existing IIA regime and focused on new bilateral and regional approaches.7 On the other hand, other States, notably Chile, Colombia, Costa Rica and the Dominican Republic, have continued with policies of economic liberalisation. Their IIA practices have been heavily influenced by Chapter Eleven of the NAFTA, the 2004 US Model BIT8 and their 2 2012 US Model Bilateral Investment Treaty, available online: Office of the United States Trade Representative, http://www.ustr.gov/sites/default/files/BIT%20text%20for%20ACIEP%20Meet ing.pdf (last accessed 26 July 2012). 3 Agreement between Canada and [Country] for the Promotion and Protection of Investment, available at Foreign Affairs and International Trade Canada (DFAIT), http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf (2004 Canadian Model BIT) (last accessed 26 July 2012). For commentary on the current Canadian Model BIT and the evolution of Canadian BIT practice, see Céline Lévesque and Andrew Newcombe, ‘Commentary on the Canadian Model Foreign Investment Promotion and Protection Agreement’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) 53–130. 4 Andrea J. Menaker, ‘Benefitting from Experience: Developments in the United States’ Most Recent Investment Agreements’ (2005) UC Davis J. Int’l L. & Pol’y 121–129 at 123–134; Barton Legum, ‘Lessons Learned from the NAFTA: The New Generation of US Investment Treaty Arbitration Provisions’ (2004) 19 ICSID Rev.–FILJ 344–356. 5 Stanimir A. Alexandrov, ‘The “Baby Boom” of Treaty-Based Arbitrations and the Jurisdiction of ICSID Tribunals: Shareholders as “Investors” and Jurisdiction Ratione Temporis’ (2005) 4 LPICT 19–59. 6 Katia Fach Gomez, ‘Latin America and ICSID: David versus Goliath’ (2011) 17 Law & Bus. Rev. Am. 195–230, 226. 7 The Union of South American Nations (UNASUR) has discussed a regional energy security treaty that would include provisions on investor-State dispute settlement. See Fernando Cabrera Díaz, ‘South American alternative to ICSID in the works as government create an Energy Treaty’, ITN, 6 September 2008. The Bolivarian Alliance for the Americas (Alianza Bolivariana para los Pueblos de Nuestra América (ALBA)) has also made a series of announcements regarding regional alternatives. See Fernando Cabrera Diaz, ‘ALBA moves forward with Plan to Create Regional Investment Alternative to ICSID at 7th Summit’, ITN, November 2009. 8 Treaty between the Government of the United States of America and Government of [Country] Concerning the Encouragement and Reciprocal Protection of Investment, available at US State Department, http://www.state.gov/documents/organization/117601.pdf (last accessed 26 July

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free trade agreements (FTAs) with the United States, all of which contain investment chapters that reflect changes in US BIT practice. 5 This chapter provides a broad overview of bilateral approaches in North America (Part 2), Central America and the Caribbean (Part 3) and South America (Part 4). What emerges is a complex story of changing treaty practices. The dynamic nature of IIA practice in the Americas clearly reflects State reaction to the frequency of investor-State treaty claims. As of the end of 2011, States in the Americas are the most frequent respondents in investor treaty claims – indeed six States in the Americas rank in the list of the top ten respondents worldwide: Argentina (51 claims), Venezuela (24 claims), Ecuador (23 claims) and Mexico (19 claims) top the list as the States with the most claims against them. Notably, Canada (17 claims) is in sixth place and the US (14 claims) in tenth place.9 2. North America 6

Current bilateral approaches to IIAs in Canada, Mexico and the US have been shaped by Chapter Eleven (Investment) of the NAFTA. American, Canadian and Mexican BIT practice post-NAFTA reflects both innovations in treaty practice pioneered in the NAFTA and changes to treaty practice as a result of those States’ experiences as respondents in NAFTA arbitrations. This part provides an overview of American, Canadian and Mexican BIT practice. a) United States

7

The US began its BIT programme in 197710 and over the past 35 years has concluded over 45 BITs and 11 free trade agreements (FTAs) with investment chapters based on its successive model BITs.11 Prior to launching its modern BIT programme, the US had entered into Friendship, Commerce and Navigation (FCN) treaties, some dating back to the late 18th century.12 Over the course of its BIT programme, the US has developed seven identifiable model texts, the most recent model dating from April 2012.13

9 10 11

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2012) (2004 US Model BIT). For commentary on the 2004 US Model BIT and the evolution of US BIT practice, see Lee Caplan and Jeremy Sharpe, ‘The 2004 U.S. Model Bilateral Investment Treaty’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) 755–851. UNCTAD, ‘Latest Developments in Investor-State Dispute Settlement’, IIA Issues Note: No. 1 (April 2012), available at http://unctad.org/en/PublicationsLibrary/webdiaeia2012d10_e n.pdf (last accessed 26 July 2012). For a comprehensive study on US BITs, see Kenneth J. Vandevelde, U.S. International Investment Agreements (Oxford University Press, 2009). For BITs, see US Department of State, United States Bilateral Investment Treaties, available at http://www.state.gov/e/eb/ifd/bit/117402.htm (last accessed 11 July 2012). For FTAs, see Office of the United States Trade Representative, Free Trade Agreements, available at http:// www.ustr.gov/trade-agreements/free-trade-agreements (last accessed, 11 July 2012). Kenneth Vandevelde (n. 10) 11. The first US FCN was with France (1778), Kenneth Vandevelde (n. 10) 19. The six models (1983, 1984, 1992, 1994, 1998 and 2004) are reprinted as annexes in Kenneth Vandevelde (n. 10). See 2012 US Model BIT (n. 2).

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The US BIT programme was spurred by three primary concerns.14 First, US businesses perceived that they were at a competitive disadvantage compared to European investors whose home States had established BIT programmes. Second, US businesses felt vulnerable to the increase in expropriatory acts in the 1970s. Third, minimum standards of treatment and the obligation to compensate for expropriation were increasingly contested in international law, as reflected in the 1974 Charter of Economic Rights and Duties of States.15 A key objective of the US BIT programme was the ‘legal consideration of building a body of state practice in international law in support of protecting foreign investment.’16 In his comprehensive treatise on the US BIT programme, former US BIT negotiator Kenneth Vandevelde identifies three waves of US BITs.17 The first wave of ten BITs (1982–1986) was with developing States, principally in Africa and the Caribbean.18 The small number of BITs concluded during this period can be attributed to the unwillingness of US negotiators to compromise on investment protection for the sake of obtaining an agreement. The US refused to conclude a treaty if the other State was not willing to accept the standards of treatment and the investor-State arbitration provisions in the US model negotiating text.19 The second wave of 35 BITs (1989–1999) was principally with States in transition from communism. BITs of this period reflect policy considerations of supporting and affirming the transition of former socialist and communist States to a market economy.20 US BIT practice with transitional economies generally did not differ significantly from the first wave, other than the addition of a State-enterprise provision to ensure that host States did not use State enterprises to avoid BIT obligations.21 Another important feature of the second wave was the changing view of FDI in States around the world. The period from 1989 to 1999 was characterised by the disintegration of the Soviet Union and the entrenchment of the Washington Consensus – a consensus between the IMF, the World Bank and the US Treasury on the policies for developing States’ economic development and stabilisation. The pillars of the Washington Consensus were fiscal austerity, privatisation and market liberalisation. The original 1989 consensus included the promotion of FDI and the enforcement of property rights. Countries that were previously hostile to foreign investment took a more positive outlook. This turn of events was particularly noticeable in the Caribbean and Latin America. In the first wave of 14 See discussion in Kenneth Vandevelde (n. 10) 25–27. 15 GA Res. 3281, 12 December 1974, (1975) 14 ILM 251. 16 Kenneth Vandevelde (n. 10) 31. This remains one of the basic aims of the US BIT Program. See US Department of State, Bilateral Investment Treaties and Related Agreements, available at http://www.state.gov/e/eb/ifd/bit/index.htm (last accessed 12 July 2012). 17 Kenneth Vandevelde (n. 10) 30. 18 Kenneth Vandevelde (n. 10) 2. 19 Kenneth Vandevelde (n. 10) 32. 20 Kenneth Vandevelde (n. 10) 43–44. 21 Kenneth Vandevelde (n. 10) Section 6.12.

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BITs, the US had concluded BITs with Grenada, Haiti and Panama. In the second wave, it signed BITs with eight Latin American States.22 12 The third wave began in 2004, with the significantly revised 2004 Model BIT, which reflected the United States’ experience as a serial respondent in NAFTA claims and also the FTA negotiating objectives set out in the Bipartisan Trade Promotion Authority Act of 2002 (the TPA).23 As discussed below in the section on post-NAFTA developments in Canada, Mexico and the United States,24 the 2004 US Model and the 2004 Canadian Model, as well as Mexican BIT practice is characterised by a policy of rebalancing and clarifying BIT obligations. As Kenneth Vandevelde cogently explains: In the first wave, the United States assumed the stance of the embattled defender of investor interests against a hostile world of developing and socialist countries (…) In the second wave, the United States was the confident victor who, having won the ideological battle that gave rise to the first wave, was able to conclude BITs with far fewer concessions. In the third wave, the United States acknowledged the unanticipated consequences of its victory: treaty provisions drafted to raise the level of investment protection provided by governments that were historically hostile to foreign investment could be used to challenge regulatory actions by a government that historically provided one of the most secure environments for investment in the world. Thus, in preparing the 2004 model, (…) U.S. BIT negotiators sought to achieve a balance between investor interests and host state regulatory prerogatives.25

13

Although the texts of the seven US model BITs have changed considerably over time, becoming more complex and detailed, from the beginning US BITs have incorporated six principles:26 –

–

–

investors and their ‘covered investments’ are entitled to be treated as favourably as the host State treats its own investors and their investments or investors and investments from any third State, affording the better of national treatment (NT) or most favoured nation (MFN) treatment for the full life cycle of investment, i.e., from its establishment or acquisition, through its management, operation and expansion, to its disposition; there are clear limits on the expropriation of investments and provision for payment of prompt, adequate and effective compensation when expropriation takes place; funds are transferable into and out of the host State without delay using a market rate of exchange;

22 Argentina, Bolivia, Ecuador, El Salvador, Honduras, Jamaica, Nicaragua and Trinidad & Tobago. 23 Public Law 107–210, 6 August 2002, 116 Stat. 993. The TPA facilitated the political process for the US government to enter into FTAs, many of which contained investment chapters based on the US Model BIT. Between 2002 and 2007, the US concluded ten FTAs with investment chapters. Kenneth Vandevelde (n. 10) 3. 24 Infra, Part 2.d. 25 Kenneth Vandevelde (n. 10) 77. 26 See US Department of State, Bilateral Investment Treaties and Related Agreements, available at http://www.state.gov/e/eb/ifd/bit/index.htm (last accessed 12 July 2012), which states that US BITs ‘provide investments with six basic benefits, which we often refer to as the “core” BIT principles’.

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– – –

there are limits on the circumstances in which performance requirements can be imposed; investors have the right to submit an investment dispute with the treaty partner’s government to international arbitration; and investors have the right to engage the top managerial personnel of their choice, regardless of nationality.

As the above principles highlight, from the beginning, US BIT practice dif- 14 fered from typical BIT practices, including the model provided by the 1967 OECD Draft Convention on the Protection of Foreign Property (OECD Draft Convention),27 in three respects. First, the US has always insisted on establishment rights and the requirement that host States not discriminate against foreign investors on the basis of nationality at the time of admission or establishment of an investment. This approach differs from treaty practice elsewhere, including Europe, where BIT obligations typically only apply post-establishment. This does not mean that national treatment obligations are absolute. Existing nonconforming measures as well as some future measures are carved out from BIT obligations through a series of annexes that list any non-conforming measures or sectors to which the obligations do not apply.28 It is important to highlight that establishment rights do not necessarily liberalise the admission of foreign investment. The extent of any liberalisation will depend on the scope of the carveouts. The listing of specific measures and sectors, however, does serve to protect against the host State adopting a more protectionist foreign investment regime in the future. Second, US BITs have always included provisions prohibiting host States 15 from imposing performance requirements. Initially, the prohibitions focused on trade-related performance requirements such as the use of local materials or a requirement to export. Over time, the scope and complexity of the provisions on performance requirements have significantly expanded.29 Third, from the beginning, US BITs have included provisions regarding the 16 hiring of managerial staff. Article 3(ii) of the 1982 US Model referred to ‘the employment of professional, technical and managerial personnel of their choice’.30 The provision in the 2012 US Model focuses on senior management and boards of directors.31 27 OECD Draft Convention on the Protection of Foreign Property (1968) 7 ILM 117. 28 The current US practice is to list non-conforming measures (a negative listing approach). For example, Article 14(1) (Non-Conforming Measures), 2012 US Model BIT, contemplates the listing of non-conforming measures in Annexes I and III. Article 14(2) contemplates the listing of sectors, subsectors and activities in Annex II. National treatment, MFN treatment, the prohibition on performance requirements, and the provisions on senior management and boards of directors do not apply to annexed measures or sectors. 29 The provisions on performance requirements in Article 8, 2012 US Model BIT are very detailed. In addition to trade-related performance requirement, the requirement ‘to transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory’ (Article 8(1)(f)) is also prohibited. For an exhaustive analysis of US BIT practice on this issue, see Kenneth Vandevelde (n. 10) 387–410.

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Three others features of US BIT practice are worth highlighting. First, although the US Department of State refers to a guarantee of treatment in accordance with international law as a ‘basic benefit’ of the US BIT programme,32 US model BITs from 1983 onwards require fair and equitable treatment in accordance with international law. As discussed below, current US BIT practice equates fair and equitable treatment with the customary international law minimum standard of treatment of aliens. The failure to mention a guarantee of international minimum standards as a core benefit of US BIT practice is a notable omission and is likely explained by political sensitivities in acknowledging that foreigners might be entitled to better investment protections than US nationals (as reflected in the negotiating objective in the TPA). Next, US BIT practice has been to include a ‘measures not precluded’ exception to treaty obligations. The scope, meaning and application of this type of provision have proven to be exceedingly controversial in claims brought under the US–Argentina BIT arising out of the Argentine economic crisis.33 Finally, US BIT practice with respect to observance of obligation clauses (so-called ‘umbrella clauses’) has varied over time. Early BIT models include the obligation to observe ‘any obligation’ with respect to investments,34 but post-NAFTA this provision was eliminated due to concerns about its potential scope.35 The 1994 US Model omitted the observance clause and instead provided that investors may submit to arbitration claims arising from an investment agreement or authorisation.36 This approach continues and is reflected in the 2012 US Model.37 b) Canada

18

Canada is a relative latecomer to BIT practice and has been somewhat slow in catching up to other countries.38 Of the G8 countries, only Japan has fewer BITs. 30 See also Article 2(2), 1982 US Model BIT on entry and sojourn of aliens. See Kenneth Vandevelde (n. 10) 361–384. 31 Article 9 (Senior Management and Boards of Directors), US Model BIT. 32 See n. 26. 33 See José Enrique Alvarez and Tegan Brink, ‘Revisiting the Necessity Defense’ (2010–2011) YB Int’l Inv. L. & Pol’y 319–362. 34 The observance of obligations clause in the Argentina–US BIT (Treaty between United States of America and the Argentine Republic Concerning the Reciprocal Encouragement and Protection of Investment) has been the subject of a number of claims. See, for example, CMS Gas Transmission Company v. Argentina, ICSID Case No. ARB/01/8, Award, 12 May 2005; Enron Corporation and Ponderosa Assets, L.P. v. Argentina, ICSID Case No. ARB/01/3, Award, 22 May 2007; and LG&E v. Argentina, ICSID Case No. ARB/02/1, Decision on Liability, 3 October 2006. 35 Kenneth Vandevelde (n. 10) 261. 36 Art. 9, 1994 Model BIT, reprinted in Kenneth Vandevelde (n. 10), Appendix G. 37 See Article 24, 2012 US Model BIT and the detailed definitions of ‘investment agreement’ and ‘investment authorization’. 38 This part draws on Céline Lévesque and Andrew Newcombe, ‘Commentary on the Canadian Model Foreign Investment Promotion and Protection Agreement’ in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) 53–130.

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Canada signed its first Foreign Investment Promotion and Protection Agreement (FIPA) with the USSR in 1989. As of 1 March 2012, Canada has FIPAs in force with 24 countries. In addition to the NAFTA, Canada also has three FTAs in force that contain investment chapters and provide for investor-State dispute settlement. Three ‘generations’ of FIPAs can be identified. The first five FIPAs were 19 signed with transition economies and Argentina. Although Canada refers to these FIPAs as following the OECD model,39 the OECD Draft Convention and first generation FIPAs differ substantially. First generation FIPAs resemble the 1984 US Model BIT more than the OECD Draft Convention.40 There are 16 second generation FIPAs, which were signed after the NAFTA was concluded and are generally based on the NAFTA model, with some important exceptions, notably the inclusion of general exceptions (modelled on Article XX of the General Agreement on Tariffs and Trade) in the 16 FIPAs. The third generation of FIPAs are those based on the 2004 Canadian Model, which in turn is heavily influenced by Chapter Eleven of the NAFTA and the contemporaneous 2004 US Model BIT. Current Canadian IIA practice mirrors that of the United States in including 20 establishment obligations, prohibiting certain types of performance requirements and including provisions on senior managers and directors. Canadian FIPAs, unlike early US BITs, have never included an observance of undertakings or umbrella clause. Some Canadian FTAs provide a special mechanism for investorState arbitration of ‘juridical stability agreements’41 or ‘legal stability agreements’,42 but a general observance of undertakings clause is not present in Canadian FIPAs. c) Mexico

Mexican IIA practice has been heavily influenced by its relationship with the 21 United States. As is well known to students of international investment law, foreign investment disputes between the United States and Mexico have resulted in influential doctrines and cases, notably the Hull rule with respect to prompt, adequate and effective compensation.43 Disputes between these countries have also generated a body of jurisprudence (notably, the Neer case),44 from the US–Mex39 According to the DFAIT website, ‘Canada began negotiating FIPAs in 1989 to secure investment liberalisation and protection commitments on the basis of a model agreement developed under the auspices of the OECD (Organization for Economic Cooperation and Development).’ DFAIT, Canada's Foreign Investment Promotion and Protection Agreements (FIPAs), available at www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fipaapie/index.aspx (last accessed 26 July 2012). 40 The 1984 US Model BIT is reproduced in Kenneth Vandevelde (n. 10), Appendix C. 41 See Section D, Investment Chapter, Canada–Colombia FTA. See also Arts 9.20, 9.21, Canada–Panama FTA with respect to investor-State arbitration of certain types of agreement. 42 See Art. 819(2), Canada–Peru FTA. 43 The Hull Rule is named after US Secretary of State Hull, who, in response to the expropriation of American-held oil interests by Mexico in the 1930s, argued that ‘prompt, adequate and

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ican Claims Commission, established in 1923 to adjudicate claims arising out of the political unrest and revolution in Mexico.45 22 Given the troubled history between the US and Mexico on the treatment of US investment in Mexico, one of the primary reasons for the inclusion of investment protections in the NAFTA was to provide greater protection for US investment in Mexico.46 The contemporaneous US Model BIT heavily influenced Chapter Eleven of the NAFTA.47 The acceptance of the NAFTA investment chapter was a significant change of policy for the Mexican government. By agreeing to Chapter Eleven, the government of President Carlos Salinas de Gotari reversed Mexico’s historical commitment to the Calvo Doctrine48 and committed Mexico to significant liberalisation of its investment regime, an acceptance of minimum international standards and binding international arbitration. 23 As of July 2012, Mexico had concluded 28 BITs and 12 FTAs (all concluded post-NAFTA).49 Its first BIT was concluded with Switzerland in 1995.50 Although Mexico does not appear to have a model BIT, from the beginning its BITs have been heavily influenced by the NAFTA.51 For example, its first BIT with Switzerland, although containing elements of the Swiss Model BIT, such as the observance of obligations clauses (Article 10(2)), contains other provisions that take their lineage from NAFTA.52

44 45 46 47 48

49 50 51 52

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effective compensation’ was required under international law. See Andreas Lowenfeld, International Economic Law (Oxford University Press, 2002) 397–403. Neer v. Mexico, 15 October 1926, IV RIAA 60. Abraham H. Feller, The Mexican Claims Commissions, (1933–1934) 19 Iowa L. Rev. 225, 227. Tali Levy, ‘NAFTA’s Provision for Compensation in the Event of Expropriation: A Reassessment of the “Prompt, Adequate and Effective” Standard’ (1995) 31 Stan. J. Int’l L. 423 on US–Mexican foreign investment disputes. Jon Johnson, The North American Free Trade Agreement: A Comprehensive Guide (Aurora: Canada Law Book Inc., 1994) 278. Bernardo Sepulveda Amor, ‘International Law and National Sovereignty: The NAFTA and the Claims of the Mexican Jurisdiction’ (1997) 19 Houston J. Int’l L. 565 and Justine Daly, ‘Has Mexico Crossed the Border on State Responsibility for Economic Injury to Aliens? Foreign Investment and the Calvo Clause in Mexico After the NAFTA’ (1994) 25 St. Mary’s L. J. 1147. Secretaría de Economía, International Trade Negotiations, available at http://www.economia.gob.mx/trade-and-investment/foreign-trade/international-trade-negotiations (last accessed 17 July 2012). ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). Francisco González de Cossío, ‘National Report for Mexico’ (2011) in Jan Paulsson (ed), International Handbook on Commercial Arbitration (Kluwer Law International, 1984, last updated September 2011, Supplement No. 66). The Swiss Model is published in Rudolf Dolzer and Margrete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995) at 218. For examples, the provision with respect to consolidation of claims (Schedule, Article 6) and the definitions section in the Schedule closely resemble the corresponding NAFTA provisions.

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d) Post-NAFTA BIT Practice

American, Canadian and Mexican BIT practices have been heavily influenced 24 by the architecture of the NAFTA investment chapter and these States’ experiences as serial respondents in NAFTA investor-State claims.53 NAFTA investorState arbitrations gave rise to concerns that the investment promotion and protection function of the IIA regime might unduly fetter a State’s ability to pursue regulation in the public interest. Further, a range of concerns was expressed regarding the legitimacy and transparency of the investor-State arbitration process in the NAFTA.54 US BIT practice was also heavily influenced by the negotiating objectives in 25 the TPA. Of particular note is section 2102(b)(3), which states that: (3)

FOREIGN INVESTMENT. – Recognizing that United States law on the whole provides a high level of protection for investment, consistent with or greater than the level required by international law, the principal negotiating objectives of the United States regarding foreign investment are to reduce or eliminate artificial or trade-distorting barriers to foreign investment, while ensuring that foreign investors in the United States are not accorded greater substantive rights with respect to investment protections than United States investors in the United States, and to secure for investors important rights comparable to those that would be available under United States legal principles and practice (…).

Although this US policy might be characterised as an adoption of the Calvo 26 Doctrine, since it reflects the sentiment that foreigners should not be treated any better than US nationals, current US policy is not – like the Calvo Doctrine – a rejection of the international minimum standard of treatment.55 Rather, there is an assumption that US legal protections are as good or better than international minimum standards. Further, there is a conscious effort to reflect US legal principles and standards in BIT texts. This is explicit in sec. 2102(b)(3)(D) and (E), TPA: (D) (E)

seeking to establish standards for expropriation and compensation for expropriation, consistent with United States legal principles and practice; seeking to establish standards for fair and equitable treatment consistent with United States legal principles and practice, including the principle of due process.

These objectives are reflected in the 2004 and 2012 US Models and current 27 US BIT practice. The 2004 and 2012 US Models equate fair and equitable treatment with the customary international law minimum standard of treatment of aliens and explicitly state that: ‘concepts of “fair and equitable treatment” and “full protection and security” do not require treatment in addition to or beyond 53 See Céline Lévesque, ‘Influence on the Canadian FIPA Model and the US Model: NAFTA Chapter 11 and Beyond’ (2006) 44 Can. YBIL 249–298. 54 See Kenneth Vandevelde (n. 10). For book-length treatments, see Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford University Press, 2007); Michael Waibel, Asha Kaushal, Kyo-Hwa Liz Chung and Claire Balchin, The Backlash Against Investment Arbitration (Kluwer Law International, 2010); and José Enrique Alvarez, The Public International Law Regime Governing International Investment (The Hague Academy of International Law, 2011). 55 Kenneth Vandevelde (n. 10) 74.

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that which is required by that standard, and do not create additional substantive rights.’56 The 2004 Canadian Model57 and recent Mexican BITs58 take a similar approach using very similar language. 28 Consistent with the TPA objectives, the US 2004 and 2012 Model BITs contain detailed annexes on expropriation, which set out a test for expropriation drawing on US takings jurisprudence:59 (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: (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.60

The 2004 Canadian Model61 takes a similar approach with almost the same text. In contrast, recent Mexican BITs do not attempt to define expropriation.62 30 With respect to other investment treatment obligations, the 2004 and 2012 US Model BITs and the 2004 Canadian Model draw heavily on the NAFTA and contain similar types of investment protection standards including pre- and postestablishment national and MFN treatment obligations,63 prohibitions on performance requirements,64 and provisions on senior management and boards of directors.65 31 The US and Canadian models also generally follow NAFTA practice with respect to the scope of application.66 The 2004 Canadian Model67 continues with the NAFTA approach of setting out a comprehensive but not open-ended list of categories of investment. In contrast, the 2004 and 2012 US Models moved away from the NAFTA approach and define investment by reference to characteristics, followed by an illustrative list.68 Recent Mexican BITs have used both 29

56 See Art. 5 (Minimum Standard of Treatment), 2012 US Model BIT. 57 Art. 5, 2004 Canadian Model BIT. 58 Art. 5 of the Agreement between the United Mexican States and the Slovak Republic on the Promotion and Reciprocal Protection of Investments (2007); and Art. 5 of the Agreement between the Government of the United Mexican States and the Government of the Republic of India on the Promotion and Protection of Investments (2007). 59 Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1978). 60 Annex B, Expropriation, Art. 4(a). 61 Annex B.13(1), Expropriation, 2004 Canadian Model BIT. 62 Art. 8, Mexico–Slovakia BIT (n. 58); and Art. 7, India–Mexico BIT (n. 58). 63 See Arts. 3 and 4, 2004 and 2012 US Model BITs; and Arts. 3 and 4, 2004 Canadian Model BIT. 64 See Art. 8, 2004 and 2012 US Model BITs; and Art. 7, 2004 Canadian Model BIT. 65 See Art. 9, 2004 and 2012 US Model BITs; and Art. 6, 2004 Canadian Model BIT. 66 See definitions of ‘investment’ and ‘investor of a Party’ and Art. 2 (Scope of Application) in the 2004 and 2012 US Model BITs and Art. 7, 2004 Canadian Model BIT. See Art. 9, 2004 and 2012 US Model BITs and Art. 6, 2004 Canadian Model BIT. 67 In contrast, Canada’s first and second generation used the broad, asset-based definition commonly used in many other BITs.

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approaches.69 Both the United States and Canada include so-called ‘denial of benefits’ clauses in their model BITs and their recent IIAs.70 The 2004 and 2012 US Models and the Canadian 2003 Model, as well as 32 Mexican BITs, have also adopted a number of the procedural mechanisms used in the investor-State arbitration mechanism in NAFTA. These include: – –

– –

requiring the submission of a notice of an intent to submit a claim to arbitration;71 preventing concurrent dispute settlement procedures regarding the same measure by requiring that the notice of arbitration be accompanied by a waiver of the right to initiate or continue other dispute resolution procedures;72 requiring claimants to bring a claim within three years; and73 allowing for the consolidation of multiple claims that have a question of law or fact in common.74

The US 2004 Model BIT also introduced a number of changes to implement 33 TPA negotiating objectives,75 including (i) containing mechanisms to eliminate frivolous claims and to deter the filing of frivolous claims;76 (ii) providing for the fullest measure of transparency in the dispute settlement mechanism by ensuring that all proceedings, submissions, findings, and decisions are promptly made public,77 all hearings are open to the public78 and by establishing a mechanism for acceptance of amicus curiae submissions from businesses, unions and non-governmental organisations;79 and (iii) providing for an appellate body or similar mechanism to interpret investment provisions coherently in trade agreements.80 68 The definition of investment in the 2004 and 2012 US Model BITs includes the following chapeau, followed by an illustrative list of investment: investment means ‘every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.’ 69 See definition of ‘investment’, Mexico–Slovakia BIT (n. 58), which follows the NAFTA model, while the definition of ‘investment’, Art. 5, India–Mexico BIT (n. 58) follows the NAFTA approach subject to the asset in question having certain defined characteristics. 70 Art. 17, 2004 US Model BIT; Art. 18, 2004 Canadian Model BIT. Mexican practice varies. 71 Art. 24(2), 2004 and 2012 US Model BITs; Art. 24, 2004 Canadian Model BIT; Art. 13, Mexico–Slovakia BIT (n. 58); and Art. 12, Mexico–India BIT (n. 58). 72 Art 26(2)(b), 2004 US Model BIT, Art 26(1)(e) and 26(2)(e) 2004 Canadian Model BIT; Art. 13, Mexico–Slovakia BIT (n. 58), and Art. 12, Mexico–India BIT (n. 58). 73 Art. 26(1), 2004 and 2014 US Models BIT; Art. 26(1)(c) and 26(2)(c), 2004 Canadian Model BIT; Art. 13, Mexico–Slovakia BIT (n. 58); and Art. 12, Mexico–India BIT (n. 58). 74 Art. 33, 2004 and 2012 US Models BITs, Art. 32, 2004 Canadian Model BIT; Art. 16, Mexico–Slovakia BIT (n. 58). 75 Sec. 2102(b)(3)(G) and (H), TPA. 76 Art. 28(4), 2004 US Model BIT; Art. 37, 2004 Canadian Model BIT. 77 Art. 29(2)–(4), 2004 US Model BIT; Art 38(2)–(8), 2004 Canadian Model BIT. 78 Art. 29(2), 2004 US Model BIT; Art. 38(1), 2004 Canadian Model BIT. 79 Art. 28(3), 2004 US Model BIT; Art. 39, 2004 Canadian Model BIT. 80 Annex D, 2004 US Model BIT.

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The 2004 and 2012 US Models and the 2004 Canadian Model reflect a conscious policy by these States that balances their ‘offensive’ interests in protecting their nationals abroad with their ‘defensive’ interests in maintaining regulatory space. This approach is reflected in the various provisions discussed above and also, more generally, in the preambles. The preamble to the Canadian Model refers specifically to the ‘promotion of sustainable development’. Similarly, the preamble in the US Model refers to the desire ‘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’. 35 Commentators have noted the significant differences between the 2004 US Model BIT and earlier BIT models.81 For example, José Alvarez has argued that compared to the 1987 US Model BIT, the 2004 US Model BIT has ‘dramatically’ shrunk ‘virtually every right originally accorded to foreign investors’.82 Another prominent commentator, Judge Stephen Schwebel, former President of the International Court of Justice (ICJ), has characterised the 2004 US Model as a ‘regressive’ development.83 Other commentators have viewed the changes more charitably. Former US State Department lawyer, Mark Clodfelter, has written that the innovations of recent model BITs ‘reflect the efforts of an increasing number of States to find a new balance between two competing objectives: the promotion and protection of investments and the right to properly regulate for public welfare purposes.’84 36 In addition to the various elements noted above, the ‘balancing’ approach is reflected in the extensive use of reservations and exceptions to obligations,85 including a wide carve-out for taxation measures86 and, in the case of Canada, an 34

81 See Kenneth Vandevelde, ‘A Comparison of the 2004 and 1994 US Model BITs: Rebalancing Investor and Host Country Interests’, (2008–2009) YB Int’l Inv. L. & Pol’y 283–315, 283– 289 and José Alvarez, ‘The Return of the State’ (2011) 20:2 Minn. J. Int’l L. 223–264. 82 José Alvarez (n. 81) 235. Stephen M. Schwebel, ‘The United States 2004 Model BIT and Denial of Justice in International Law’, in Christina Binder, Ursula Kriebaum, August Reinisch, and Stephan Wittich (eds), International Investment Law for the 21st Century: Essays in Honour of Christoph Schreuer (Oxford University Press, 2009) 519–521. 83 Stephen M. Schwebel, ‘The United States 2004 Model Bilateral Investment Treaty: An Exercise in the Regressive Development of International Law’ in Gerald Aksen, Karl-Heinz Böckstiegel, Michael Mustill, Paolo Pantocchi and Anne Marie Whitesell (eds), Global Reflections on International Law, Commerce and Dispute Resolution: Liber Amicorum in Honour of Robert Briner (ICC, 2005) 815–824. 84 Mark A Clodfelter, ‘The Adaptation of States to the Changing World of Investment Protection through Model BITs’ (2009) 24:1 ICSID Rev.–FILJ 165–175, 174. 85 Article 14 (Non-conforming Measures), Article 20 (Financial Services), and Article 21 (Taxation), US 2004 and 2012 Model BITs; Art. 9 (Reservations and Exceptions), Art. 17 (Prudential Measures), Art. 21 (Limitation of Claims with Respect to Financial Institutions), Annex I (Reservations for Existing Measures and Liberalization Commitments) and Annex II (Reservations for Future Measures), 2004 Canadian Model BIT. Canadian FIPAs are unique in their early adoption and continuous use of Article XX, GATT-like general exceptions in its IIAs. All of its International Investment Agreements since 1994 include such a provision. See Andrew Newcombe, ‘General Exceptions in International Investment Agreements’ in MaireClaire Cordonier Segger, Markus Gehring and Andrew Newcombe (eds), Sustainable Development in World Investment Law (Kluwer Law International, 2010) 351–370. 86 Art. 21, 2004 US Model BIT; Art. 16, 2004 Canadian Model BIT.

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exception for measures related to cultural industries.87 The current American and Canadian models both provide for self-judging essential security provisions. They also include provisions that refer to the protection of health, safety and the environment,88 and, in the case of the United States, labour rights.89 The 2012 US Model expands the scope of environmental obligations to include a duty to enforce local environmental laws.90 On 20 April 2012, the US government released its new model BIT. The 2012 37 US Model is a product of review process from an advisory committee made of a diverse group of various stakeholders.91 The official press release notes that: The Administration made several important changes to the BIT text so as to enhance transparency and public participation; sharpen the disciplines that address preferential treatment to state-owned enterprises, including the distortions created by certain indigenous innovation policies; and strengthen protections relating to labor and the environment.92

There are no substantial changes between the 2004 and 2012 US Models, ei- 38 ther with respect to substantive investment protection standards or dispute settlement. Overall, the changes are minor and reflect a rejection of proposals by groups critical of investment treaties to scale back investment protection and avoid investor-State arbitration.93 At the same time, the 2012 US Model also fails to improve on key investment protection standards as recommended by proponents.94 Notable changes include clarifying the application of BIT obligations to State enterprises;95 a new provision on performance requirements prohibiting preferences for use of local technologies;96 new provisions on transparency of regulations of general application and standard setting;97 new provisions on the environment and labour protections that require States to effectively 87 88 89 90 91 92

93

94

95 96 97

See definition of ‘cultural industries’, 2004 Canadian Model BIT. Art. 11, 2004 Canadian Model BIT. Arts. 12 and 13, 2004 US Model BIT. Art. 12, 2012 US Model BIT. See Report of the Subcommittee on Investment of the Advisory Committee on International Economic Policy Regarding the Model Bilateral Investment Treaty, 30 September 2009, available at http://www.state.gov/e/eb/rls/othr/2009/131098.htm (last accessed 26 July 2012). Office of the United States Trade Representative, Press Release April 2012, ‘United States Concludes Review of Model Bilateral Investment Treaty’, available at http://www.ustr.gov/ about-us/press-office/press-releases/2012/april/united-states-concludes-review-model-bilateral-inves (last accessed 15 July 2012). See Institute for Policy Studies, ‘The New U.S. Model Bilateral Investment Treaty: A Public Interest Critique’, available at http://www.ipsdc.org/reports/the_new_us_model_bilateral_investment_treaty_a_public_interest_critique (last accessed 16 July 2012) arguing that the ‘new U.S. model BIT does not go far enough to address the concerns that labor unions and environmental, development, and other nongovernmental organizations have raised consistently for many years’. Those concerns (as well as opposing views) are reflected in the Annex to the Report of the Subcommittee (n. 94). See Emergency Committee for American Trade Press Release, 20 April 2012, ‘ECAT Applauds Obama Administration Commitment to Open Markets and Protect U.S. Investment Through Updated Model BIT and Urges Quick Resumption of Negotiations’, available at http://www.ecattrade.com/#!__press (last accessed 16 July 2012). See footnote 8 to Article 2 (Scope and Coverage). Article 8(h). Article 11.

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enforce environmental and labour laws and not to derogate from core labour rights;98 an expedited arbitral process for certain financial services matters;99 and the removal of Annex D, which appeared in the 2004 US Model, on the possibility of a bilateral appellate mechanism and the requirement to assess whether to establish such a mechanism within three years from the entering into force of the treaty. 39 American, Canadian and Mexican IIA practices now also encompass a series of FTAs with investment chapters. In the case of the US and Canada, these investment chapters are based on the State’s model BIT, with modifications to reflect the legal architecture and particular features of the FTA.100 3. Central America and the Caribbean

Central American States, with the exception of Costa Rica101 and El Salvador,102 were not early BIT adopters.103 Moreover, when they have concluded BITs, these States have generally followed the BIT models of the other State party in question.104 The most significant development in Central American IIA practice is the conclusion of the Dominican Republic–Central America–United States Free Trade Agreement (CAFTA–DR), which includes five Central American States – Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. The text of the CAFTA–DR investment chapter closely follows the 2004 US Model BIT. 41 Likewise, Caribbean States have not been active participants in BIT negotiations and have generally signed BITs based on models of developed, capital exporting States.105 The Caribbean States with the most BITs are Cuba (14), Ja40

98 Article 12 (Investment and Environment) and Article 13 (Investment and Labour). 99 Article 20 (Financial Services). 100 For Canadian FTAs, see online: DFAIT http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/index.aspx?view=d. For US FTAs, see online: Office of the United States Trade Representative http://www.ustr.gov/trade-agreements/free-trade-agreements. For Mexican FTAs, Secretaría de Economía, available at http://www.economia.gob.mx/trade-and-investment/foreign-trade/international-trade-negotiations/international-investment-agreements (last accessed 26 July 2012). 101 Agreement between the Swiss Confederation and the Republic of Costa Rica on the Promotion and Reciprocal Protection of Investments (1965). 102 Convention entre le gouvernment de la République Française et le gouvernement de la République de El Salvador sur l’encouragement et la protection réciproques des investissements (1978). El Salvador was the first Latin American country to ratify the ICSID Convention in 1984. 103 Central American States have signed the following number of BITs: Belize (3), Costa Rica (16), El Salvador (11), Guatemala (7), Honduras (8), Nicaragua (8) and Panama (11). ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). 104 For examples, the BITs between the Netherlands and its treaty partners Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama all follow the same (Dutch) model. 105 For example the Treaty between the United States of America and Grenada concerning the Reciprocal Encouragement and Protection of Investment, the Treaty between the United States of America and Jamaica concerning the Reciprocal Encouragement and Protection of Investment, the Agreement between the Government of Canada and the Government of Bar-

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maica (8), and Dominican Republic, Jamaica and Trinidad and Tobago (6 each).106 4. South America

Historically, South American States have displayed significant antipathy to 42 the international law governing foreign investment, in part because of military intervention by European States and the US to protect their nationals’ property and to force the payment of debts.107 The Calvo and Drago Doctrines reflect this opposition to the exercise of various forms of diplomatic protection. Throughout the 1960s and 1970s, South American States maintained their general opposition to investment protection standards and international investment arbitration. In the 1980s, however, Latin American States began liberalising their foreign investment policies. By the 1990s, Latin American States were signing BITs en masse, leaving behind the Calvo Doctrine and opposition to the minimum standard of treatment as well as to international adjudication of investment disputes.108 South American BITs signed in the 1990s tend to be based on the models of 43 developed, capital exporting States.109 There is no evidence during this time of South American States developing their own model BITs. For example, the investment treaties giving rise to the numerous arbitration claims against Argentina, Bolivia, Ecuador and Venezuela110 are based overwhelmingly on the models and treaty practice of France, Germany, Italy, the Netherlands, Spain, the United Kingdom and the United States.111 Some of these BITs have a so-called ‘soft’

106 107 108

109 110

111

bados for the Reciprocal Promotion and Protection of Investments, and the Agreement between the Government of Canada and the Government of the Republic of Trinidad and Tobago for the Reciprocal Promotion and Protection of Investments. ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). See Mary Helen Mourra, ‘The Conflicts and Controversies in Latin American Treaty-Based Disputes’ in Mary H. Mourra (ed), Latin American Investment Treaty Arbitration: The Controversies and Conflicts (Kluwer Law International, 2008) 5–68. See Katia Fach Gomez, ‘Latin America and ICSID: David versus Goliath’ (2011) 17 Law & Bus. Rev. Am. 195–230; Mary H. Mourra (ed), Latin American Investment Treaty Arbitration: The Controversies and Conflicts (Kluwer Law International, 2008); Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero, Latin American Investment Protections (Martinus Nijhoff, 2012) and Christian Leathley, International Dispute Resolution in Latin America: An Institutional Overview (Kluwer Law International, 2007). The BITs between the Netherlands and its treaty partners Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama all follow the same (Dutch) model BIT. On 25 June 2012, Global Arbitration Review reported that Venezuela (with 24) has overtaken Argentina (with 23) as the State with the largest number of pending ICSID claims. See Clemmie Spalton, ‘Venezuela edges ahead at ICSID’, 25 June 2012, GAR, available at http://www.globalarbitrationreview.com/news/article/30633/venezuela-edges-ahead-icsid (last accessed 18 July 2012). Although there are some notable exceptions that highlight the rise in developing State-developing State investment treaty practice, such as Tidewater Inc. et al. v. Venezuela, ICSID Case No. ARB/10/5, a claim under the Agreement between the Government of Barbados and the Government of the Republic of Venezuela for the Promotion and Protection of Investments.

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Calvo Clause – a requirement to submit claims to national courts for a set period of time before resorting to international arbitration.112 44 Despite the dominance of developed–developing State BITs based on capital exporting State models,113 there is some limited practice of intra-regional BITs and developing–developing State BITs, with Chile being the most active in this regard.114 45 BIT claims and awards against Latin American States and the renewed interest in nationalising energy industries have led some Latin American States to reconsider their commitment to investor-State arbitration under IIAs. Prominent manifestations of this concern are Bolivia’s, Ecuador’s and Venezuela’s denunciations of the ICSID Convention115 and termination of investment treaties by Bolivia, Ecuador and Venezuela.116 A related development has been the increased interest amongst South American States in creating indigenous investment treaties and dispute settlement mechanisms. Bolivia and Ecuador have taken steps to develop new model agreements.117 46 Although the denunciation of ICSID and termination of BITs has received significant attention, the trend should not be overemphasised. South American States continue to enter into more BITs than they denounce. Further, practice is not consistent. Both Chile and Colombia have active BIT programmes. Chile has signed 49 BITs,118 although not based on a common model.119 In addition to 112 See Bernardo Cremades, ‘Disputes Arising Out of Foreign Direct Investment in Latin America: a New Look at the Calvo Doctrine and Other Jurisdictional Issues’ (2004) 59 Disp. Res. J. 78. 113 Latin America and the Caribbean continued to be the least active region in 2008. In total, the region accounted for 483 agreements or 18 per cent of all BITs. UNCTAD, ‘Recent Developments in International Investment Agreements’, IIA Monitor No. 3 (2009) 4, available at http://unctad.org/en/docs/webdiaeia20098_en.pdf (last accessed 27 January 2014). 114 Argentina, Chile and Bolivia have entered into a series of BITs with other South American States. 115 Bolivia in 2007, Ecuador in 2009 and Venezuela in 2012. See ICSID, available at http:// icsid.worldbank.org/ICSID/Index.jsp. 116 See UNCTAD, ‘Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims’, UNCTAD IIA Issues Note No. 2, December 2010, available at http:// www.unctad.org/en/docs/webdiaeia20106_en.pdf (last accessed 18 July 2012) and Notice of Termination of the Treaty between the Government of the United States of America and the Government of the Republic of Bolivia concerning the Encouragement and Reciprocal Protection of Investment, 23 May 2012, available at https://www.federalregister.gov/articles/ 2012/05/23/2012-12494/notice-of-termination-of-united-states-bolivia-bilateral-investmenttreaty (last accessed 18 July 2012). 117 See Damon Vis-Dunbar, ‘Analysing Latin America’s New Model Bilateral Investment Treaties’, 17 July 2008, Investment Treaty news online, available at http://www.iisd.org/itn/ 2008/07/17/in-depth-latin-america-s-new-model-bilateral-investment-treaties (last accessed 18 July 2012). See International Institute for Sustainable Development, Annual Forum of Developing Country Investment Negotiators, available at http://www.iisd.org/investment/dci (last accessed 18 July 2012). 118 See listing of BITs on the Chilean Foreign Investment Committee website, available at http://www.inversionextranjera.cl/index.php?option=com_content&view=article&id=230&Itemid=61 (last accessed 14 July 2014). Also see Gonzalo Biggs, ‘Chile’ in Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero (eds), Latin American Investment Protections (Martinus Nijhoff, 2012) 126.

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BITs with developed, capital exporting States, Chile has an extensive network of 16 BITs with Central and South American States.120 Between 2006 and 2012, Colombia negotiated 14 BITs, heavily influenced by successive model BITs121 and has also concluded FTAs with investment chapters.122 Although Colombia’s 2003 Model followed the European model of a short, 47 principle-based agreement, Colombia’s current (2009) model adopts some of the more detailed provisions that appear in the 2004 US Model (and the Colombia– United States FTA, concluded in 2007). These include reference to the minimum characteristics of an investment,123 equating fair and equitable treatment with customary international law standards,124 defining the meaning and scope of expropriation125 and a number of refinements to the investor-State arbitration provisions, such as the requirements to bring claims within three years126 and to have preliminary rulings on competence and admissibility.127 Brazil has generally abstained from entering BITs. Although it negotiated 14 48 BITs in the 1990s, it has not ratified any BITs,128 a reflection of its traditional reluctance to consent to investor-State arbitration. Paradoxically, it remains the largest recipient of FDI in South America. 5. Conclusion

The high rate of IIA claims against States in the Americas has led to signifi- 49 cant changes in BIT practices. NAFTA investor-State arbitration cases have had a decisive effect on treaty practices in North America. The new US and Canadian Model BITs clarify and limit investment protection obligations in an attempt to balance investment protection and regulatory sovereignty. Ironically, it could be argued that China’s current BITs provide greater property rights protections than those of the United States. Although there are significant differences be119 See Gonzalo Biggs (n. 118) 129 and L. Andrés, ‘National Report for Chile’ (2010) in Jan Paulsson (ed), International Handbook on Commercial Arbitration (Kluwer Law International, 1984, last updated May 2010, Supplement No. 59) 1–68. 120 ICSID, Investment Promotion and Protection Treaties (Oceana, 1983, last updated August 2011). 121 See José Antonia Rivas’ commentary on the Colombia Model BIT in Chester Brown (ed), Commentaries on Selected Model International Investment Agreements (Oxford University Press, 2013) describing earlier the 2003 and 2006 models and analysing the 2009 Model in detail. See also Eduardo Zuleta, ‘National Report for Colombia’ (2010) in Jan Paulsson (ed), International Handbook on Commercial Arbitration (Kluwer Law International, 1984, last updated December 2010, Supplement No. 62) 71–80. 122 See Gonzalo Biggs (n. 118) 127. 123 Article I(2.4). 124 Article III(4). 125 Article VI. 126 Article IX(10). 127 Article IX(13). 128 See Pedro Paulo Cristofaro and Luiz Fernanado Teixeira Pinto, ‘Brazil’ in Jonathan C. Hamilton, Omar E. García-Bolívar and Hernando Otero (eds), Latin American Investment Protections (Martinus Nijhoff, 2012) at 91. Also see Jean Kalicki and Suzana Medeiros, ‘Investment Arbitration in Brazil’ (2008) 24(3) Arb. Int’l 423–446.

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tween bilateral approaches in North America, Europe, India and China, a series of ongoing negotiations between States from these regions raise the possibility of converging approaches. For example, both the US and Canada have engaged China and India in BIT negotiations. Canada has also joined the US, Chile and Peru in the negotiations of the Trans-Pacific Partnership (TPP), which is expected to include investment obligations. In addition, Canada and the EU have been negotiating a Comprehensive Economic Trade Agreement (CETA),129 the draft text of which includes an investment chapter. The agreements that come out of these negotiations might well serve as models for future bilateral practice, and eventually a multilateral agreement. Meanwhile, in Latin America, there are two distinct trends – one nationalist and regional and the other internationalist.

129 Foreign Affairs and International Trade Canada, Canada–European Union: Comprehensive Economic and Trade Agreement Negotiations, available at http://www.international.gc.ca/tra de-agreements-accords-commerciaux/agr-acc/eu-ue/negotiations-negociations.aspx?lang=en g&view=d (last accessed 12 July 2012).

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C. Chinese Investment Law1

Marc Bungenberg and Manjiao Chi 1. Introduction – Chinese Investment Policymaking: The Economic Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Instruments of Investment Promotion and Protection: An Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) Domestic Instruments in Regard to Foreign Investment. . . . . . . . . . b) Bi- and Multilateral Investment Protection Instruments . . . . . . . . . 3. Development of Chinese Investment Treaty-Making . . . . . . . . . . . . . . . . a) The Different Generations of Chinese BIT Practice . . . . . . . . . . . . . . b) China’s More Recent Treaty-Making Practice Part I: Conclusion of Trade and Investment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . c) The US–China Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) The China–EU BIT Negotiations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. Litigation on the Basis of Chinese Investment Treaties . . . . . . . . . . . . . 5. Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 5 9 11 12 19 29 31 34 39

Literature: Jose Alvarez, ‘The Once and Future Foreign Investment Regime’ in Mahnoush H. Arsanjani, Jacob Cogan, Robert Sloane and Siegfried Wiessner (eds), Looking to the Future: Essays on International Law in Honour of W. Michael Reisman (Martinus Nijhoff, 2011) 607–648; Jose Alvarez, ‘The Return of the State’ (2011) 20(2) Minn. J. Int’l L. 223–264; Axel Berger, ‘Investment Rules in Chinese Preferential Trade and Investment Agreements: Is China following the global trend towards comprehensive agreements?’ (2013) 7 Deutsches Institut für Entwicklungspolitik Discussion Paper 1–31; Axel Berger, ‘The Politics of China’s Investment Treaty-Making Program’ in Tomer Broude, Marc L. Busch and Amelia Porges (eds), The politics of international economic law (Cambridge University Press, 2011) 162– 185; Emmanuel Gaillard, ‘Anti-Arbitration Trends in Latin America’(2008) 108 New York Law Journal 239–254; Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009); Wenhua Shan, Towards a new legal framework for EU–China Investment Relations (2000) 34 JWT 137–179; Wenhua Shan and Sheng Zhang, ‘The Potential EU–China BIT: Issues and Implications’ in Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements: Open Questions and Remaining Challenges (Nomos and Hart, 2013) 87–120; Wei Shen, ‘The Good, the Bad or the Ugly? A Critique of the Decision on Jurisdiction and Competence in Tza Yap Shum v. The Republic of Peru’ (2011) 10(1) Chinese J. Int’l L. 55–95; Catharine Titi, ‘The Arbitrator as a Lawmaker: Jurisgenerative Processes in Investment Arbitration’ (2013) 14(5) JWIT 829– 851; Valentina Vadi, ‘Converging Divergences: The Rise of Chinese Outward Foreign Investment and Its Implications for International (Investment) Law’ (2011–2012) YB Int’l Inv. L. & Pol’y 705–724.

1 This contribution is partly based on Marc Bungenberg and Catharine Titi, ‘The Evolution of EU Investment Law and Future of EU–China Investment Relations’ in Wenhua Shan and Jinyuan Su (eds), International Investment Law and Arbitration: The 20th Anniversary of China in the ICSID (Brill, 2014) (forthcoming).

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1. Introduction – Chinese Investment Policymaking: The Economic Background

China’s investment policymaking has undergone changes.2 In recent decades, China has been receiving high inflows of foreign direct investment,3 and, according to UNCTAD data, in 2011 foreign direct investment flows into China reached an all-time high of USD 124 billion.4 More concretely, in that same year, FDI inflows to China rose by nearly 8 per cent5 and this popularity is corroborated by investment promotion agencies (IPAs) that in 2011 rated China as the ‘most promising investor home economy for FDI in 2012–2014’.6 In this survey, China was selected by more than 60 per cent of IPA respondents as a ‘most promising investor home economy’.7 Although FDI inflows in 2012 declined,8 China has remained at the top of IPA ratings.9 In terms of sectoral distribution of incoming foreign direct investment, recent trends indicate a decline in inflows in manufacturing and an increase in inward investment in services, while FDI inflows to the finance sector are expected to grow, as China continues to open its financial markets and foreign banks (such as HSBC, a UK investor, and Citigroup, a US investor) continue to expand their presence in the country.10 2 At the same time, China has moved from the position of a mere investment importer to also become an important source of foreign investment.11 Despite a decrease in outward FDI levels (in 2011 FDI outflows from China marked a 5.4 per cent decline from 2010),12 China’s outward foreign direct investment has been growing rapidly: from less than USD 5 billion in accumulated outward FDI flows in 1991,13 Chinese FDI outflows reached USD 35 billion in 200214 and stood in 2011 at USD 65 billion.15 1

2 See Wenhua Shan and Sheng Zhang, ‘The Potential EU–China BIT: Issues and Implications’ in Marc Bungenberg, August Reinisch and Christian Tietje (eds), EU and Investment Agreements: Open Questions and Remaining Challenges (Nomos and Hart, 2013) 87–120, 90 et seq.; Valentina Vadi, ‘Converging Divergences: The Rise of Chinese Outward Foreign Investment and Its Implications for International (Investment) Law’ (2011–2012) YB Int’l Inv. L. & Pol’y 705–724. 3 UNCTAD, World Investment Report 2012 – Towards a new Generation of Investment Policies (United Nations, 2012) 44, available at http://www.unctad-docs.org/files/UNCTADWIR2012-Full-en.pdf (accessed 14 March 2014). 4 UNCTAD (n. 3) xvi, 43. 5 UNCTAD (n. 3) 4. 6 UNCTAD (n. 3) 21, incl. Figure I.13. 7 UNCTAD (n. 3) 21, incl. Figure I.13. 8 UNCTAD, World Investment Report 2013 – Global Value Chains: Investment and Trade for Development (United Nations, 2013) passim, available at http://unctad.org/en/publicationslibrary/wir2013_en.pdf (accessed 14 March 2014). 9 UNCTAD (n. 8) 21. 10 UNCTAD (n. 3) 44. 11 Valentina Vadi (n. 2) 705, 707 et seq. 12 UNCTAD (n. 3) 5, 44. 13 UNCTAD, E-Brief – China: an emerging FDI outward investor, 4 December 2003, 2, Figure 2, available at http://unctad.org/sections/dite_fdistat/docs/china_ebrief_en.pdf (accessed 14 March 2014). 14 UNCTAD (n. 13) 2, Figure 2.

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Among developing economies, in 2011 China was the second largest investor 3 in less developed countries and it remained the largest investor in least developed countries (LDCs) (after India), contributing USD 2.8 billion in 20 projects.16 Generally, Chinese outward FDI is focused on countries that share ‘close cultural links’,17 and in its bulk it remains in Asia,18 while, as noted elsewhere Chinese investment in Europe remains low. It is noteworthy that China has tended to include investor-State dispute settlement provisions in its BITs with developing countries,19 which are the main destination of Chinese outbound foreign direct investment.20 2. Instruments of Investment Promotion and Protection: An Overview

The Chinese framework of investment law includes domestic, bilateral and 4 multilateral instruments.21 a) Domestic Instruments in Regard to Foreign Investment

Before the 1970s, China was largely an economically closed and politically 5 isolated country, and had little international investment engagements. China’s foreign investment law began to develop since the end of the 1970s when China adopted the Open Door Policy and launched its economic reform. China’s investment law focuses on laws of enterprises, and is composed of several major laws and a large number of regulations, dealing with a broad range of issues concerning both inbound and outbound investments. Specifically, the three major laws are generally deemed to have laid down the foundation of China’s investment law regime: the Law of Sino-Foreign Equity Joint Ventures,22 the Law of Sino-Foreign Contractual Joint Ventures23 and the Law of Foreign-Owned Enterprises24 (collectively ‘foreign investment laws’). China’s investment law 15 16 17 18 19

20 21 22 23 24

UNCTAD (n. 3) 5, 44. UNCTAD (n. 3) 66. UNCTAD (n. 3) 7 Box I.2. Valentina Vadi (n. 2) 705, 708. Axel Berger, ‘The Politics of China’s Investment Treaty-Making Program’ in Tomer Broude, Marc L. Busch and Amelia Porges (eds), The politics of international economic law (Cambridge University Press, 2011) 162–185, 175–176; Axel Berger, ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’, Paper prepared for the American Society of International Law International Economic Law Interest Group (ASIL IELIG) 2008 biennial conference ‘The Politics of International Economic Law: The Next Four Years’, Washington, D.C., 14–15 November 2008, 11, available at http://www.die-gdi.de/uploads/media/Berger_ChineseBITs.pdf (accessed 14 March 2014). See also Axel Berger, ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ (n. 19) 11. See Wenhua Shan, Towards a new legal framework for EU–China Investment Relations (2000) 34 JWT 137–179, 141. Adopted on 20 September 1983 and amended on 15 January 1986, 21 December 1987 and 22 July 2001. Adopted on 13 April 1988 and amended on 31 October 2000. Adopted on 12 April 1986 and amended on 31 October 2000.

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regime has played a successful role in attracting FDI in the past decades. However, it becomes obsolete and faces various challenges nowadays. 6 Significantly, in terms of FDI promotion measures, China has published ‘Guidelines for Industries of Foreign Investment’ regularly, with the currently valid one issued in 2012.25 In general, these guidelines categorise industries into four major types to which foreign investments are encouraged, restricted and prohibited respectively, and any industries that are not expressly mentioned in the guidelines are deemed as allowed. Based on its economic development situation, China makes necessary revisions on the guidelines every five years. The guidelines are deemed as an important instrument and primary standard for China’s foreign investment regulatory authorities in regulating and approving FDI into China. For instance, the 2012 guidelines encourage foreign investment in strategic nascent industries in energy efficiency, high tech and environmental protection, also in industries in manufacturing and services.26 It appears that these measures are linked to specific lists identifying industries where FDI is encouraged, but equally those where FDI is limited or entirely prohibited.27 7 In the near future, China’s foreign investment law may experience substantive improvements due to its further economic opening. On 29 September 2013, China officially established the Shanghai Pilot Free Trade Zone (Shanghai FTZ).28 The establishment of the Shanghai FTZ is aimed at furthering China’s economic opening up. In order to provide necessary legislative support for the smooth functioning of the Shanghai FTZ, the State Council and various ministries of China as well as the Shanghai municipality have revised various administrative regulations and rules or suspended the application of certain regulations and rules in the FTZ. Most of these regulations and rules concern foreign investment governance in the FTZ, especially the establishment of foreign investment.29 It is hoped that the launch of the Shanghai FTZ could serve as a pioneer for China’s full-round economic reform in the future. Such reform, if carried out, will undoubted bring about fundamental impacts onto China’s foreign investment law. 8 On the whole, China’s economic rise contributes to talk of an ‘Asian’ or a ‘Pacific Century’, encapsulating the concept that economic and political power

25 Accessible at http://www.gov.cn/flfg/2011-12/29/content_2033089.htm (accessed 14 March 2014) (official Chinese version). 26 UNCTAD (n. 3) 78, Box III.3. 27 UNCTAD (n. 3) 82. 28 A Detailed introduction of the Shanghai Free Trade Zone is available at http:// finance.people.com.cn/GB/8215/356561/368338 (accessed 14 March 2014) (in Chinese). 29 A list of such laws and regulations is available at http://www.deloitte.com/view/zh_CN/cn/ services/tax/7b93b359bbab1410VgnVCM3000003456f70aRCRD.htm (accessed 14 March 2014) (in Chinese).

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expands eastwards,30 while escalating Chinese FDI outflows confirm ‘China’s economic rise as an active and influential player in international relations’.31 b) Bi- and Multilateral Investment Protection Instruments

Over the last 30 years, China has built a dense network of BITs as well as a 9 few comprehensive economic cooperation agreements. Of these, as already mentioned, China has concluded over 130 BITs32 and around a dozen FTAs including investment chapters.33 China’s treaty partners cover a wide range of countries, including developed, developing and least developed countries, and covering almost all areas of the world. Interestingly, although the US is one of China’s major trade partners, China has not concluded a BIT with the US up to now. Nowadays, China and the US are still in the process of negotiating their first BIT. Internationally, China is a party to the Convention on the Settlement of In- 10 vestment Disputes between States and Nationals of Other States (ICSID Convention)34 and the Convention of Establishing the Multilateral Investment Guarantee Agency (MIGA Convention).35 In recent years, Chinese investors appear to get gradually used to resorting to ICSID arbitration for protecting their overseas investments. For instance, in the past few years, several ICSID arbitration cases have been initiated by Chinese investors, such as Tza Yap Shum v. Peru36 and Ping An v. Belgium.37 With China’s growing overseas investment, it can be reasonably expected that ICSID arbitration initiated by Chinese investors while relying on Chinese BITs will become more frequently seen in the future.

30 See respectively United States Congress, Senate and Committee on Foreign Relations, Security and Development Assistance: Hearings Before the Committee on Foreign Relations, United States Senate, Ninety-ninth Congress, First Session (U.S. Government, 1985) 541 and Hillary Clinton, America’s Pacific Century, Foreign Policy, November 2011, available at http:// www.foreignpolicy.com/articles/2011/10/11/americas_pacific_century (accessed 14 March 2014); Valentina Vadi (n. 2) 705, 707 incl. fn. 12 and 13. 31 Valentina Vadi (n. 2) 705, 708; see further Wei Shen, ‘The Good, the Bad or the Ugly? A Critique of the Decision on Jurisdiction and Competence in Tza Yap Shum v. The Republic of Peru’ (2011) 10(1) Chinese J. Int’l L. 55–95. 32 An incomplete list of China’s BITs is available at http://tfs.mofcom.gov.cn/aarticle/Nocategory/201111/20111107819474.html (accessed 14 March 2014); a list of (most) bilateral investment agreements concluded by China, 1 June 2013 is available at http://unctad.org/Sections/ dite_pcbb/docs/bits_china.pdf (accessed 14 March 2014). 33 A list of China’s FTAs is available at http://fta.mofcom.gov.cn/english/fta_qianshu.shtml (accessed 14 March 2014). 34 International Centre for Settlement of Investment Disputes, ICSID Convention, Regulation and Rules, available at https://icsid.worldbank.org/ICSID/StaticFiles/basicdoc/CRR_Englishfinal.pdf (accessed 14 March 2014). 35 Available at http://www.miga.org/documents/miga_convention_november_2010.pdf (accessed 14 March 2014). 36 Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, available at http://www.italaw.com/cases/ 1126 (accessed 14 March 2014). 37 Ping An v. Belgium, ICSID Case No. ARB/12/29, available at http://www.italaw.com/cases/ 2042 (accessed 14 March 2014).

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3. Development of Chinese Investment Treaty-Making 11

In general, the development of Chinese investment treaty-making is prompted and even motivated by its changing need of economic development. The present section will discuss firstly the different generations of Chinese international investment agreements and then secondly examine in more detail the most recent Chinese investment agreements, and it will briefly consider the US–China negotiations on the conclusion of a new BIT, as well as the ongoing negotiations with the EU. a) The Different Generations of Chinese BIT Practice

There are several ‘generations’ of Chinese BITs38 as is pointed out by various scholars.39 13 The first generation of Chinese BITs starts in the early 1980s with China’s first bilateral investment treaty concluded with Sweden in 198240 and it lasts until the late 1990s.41 Generally, China’s first generation of BITs is conservative and often contains certain basic provisions, such as definitions, expropriation, compensation, and transfer clauses.42 These BITs are characterised by a narrow scope of the investor-State dispute settlement (ISDS) clauses (mainly regarding consent to submit investment disputes to international arbitration). 14 In this timeframe, China negotiated a total of 80 ‘restrictive’43 treaties containing important reservations about substantive as well as procedural protections of foreign investment.44 More particularly, these early BITs did not offer national treatment.45 In reality, although China did begin to consent to some form of international arbitration since 1985, this was limited to determining the amount of compensation due for expropriation and only after exhaustion of local remedies.46 Upon joining the ICSID system in 1993, China filed a notification, in conformity with Article 25(4) of the ICSID Convention, to the effect that ‘the Chinese Government would only consider submitting to the jurisdiction of the 12

38 E.g. Axel Berger, ‘Investment Rules in Chinese Preferential Trade and Investment Agreements: Is China following the global trend towards comprehensive agreements?’ (2013) 7 Deutsches Institut für Entwicklungspolitik Discussion Paper 6 et seq., available at http:// www.die-gdi.de/uploads/media/DP_7.2013.pdf (accessed 14 March 2014); Wenhua Shan and Sheng Zhang (n. 2) 87. 39 See on this Elodie Dulac, ‘The Emerging Third Generation of Chinese Investment Treaties’ (2010) 7(4) TDM 1 et seq.; Norah Gallagher and Wenhua Shan, Chinese Investment Treaties: Policies and Practice (Oxford University Press, 2009) 35–43. 40 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 7; Elodie Dulac (n. 39) 1 et seq. 41 Valentina Vadi (n. 2) 705, 711. 42 Norah Gallagher and Wenhua Shan (n. 39) 36–38. 43 See Axel Berger (n. 38) 7, 10. 44 Wenhua Shan and Sheng Zhang (n. 2) 87, 91. 45 Valentina Vadi (n. 2) 705, 711. 46 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 9; Wenhua Shan and Sheng Zhang (n. 2) 87, 91; Valentina Vadi (n. 2) 705, 711.

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ICSID over compensation resulting from expropriation or nationalization’.47 The legal effect of this notification is highly disputed;48 it is questioned for example whether this notification constitutes a reservation within the meaning of the Vienna Convention on the Law of Treaties or whether, more probable, it does not weigh in this manner against ratification of the ICSID Convention and express consent in an investment treaty.49 It is of interest to note that although first generation Chinese BITs tended to refer to this notification, newer generation agreements do not generally make such mention.50 The prevailing interpretation accepts that where the treaty in question does not reproduce the Chinese government’s notification, as is typically the case in second and third generation Chinese BITs, consent to arbitration is not affected.51 By and large, the confines of China’s consent to dispute settlement in the first 15 generation of its investment treaties inexorably reduce the effectiveness of the investor-State dispute settlement mechanism relegating it to a largely symbolic role.52 First generation Chinese BITs count, among others, the investment agreements with France (1984),53 Denmark (1985),54 Singapore (1985),55 the United Kingdom (1986),56 the Philippines (1992),57 Laos (1993),58 Indonesia (1994)59 47 Wei Shen (n. 31) 55, 82; Valentina Vadi (n. 2) 705, 711. 48 For a discussion of the legal effects of a notification under Article 25(4) of the ICSID Convention in arbitration, see PSEG Global Inc., The North American Coal Corporation, and Konya Ilgin Elektrik Üretimve Ticaret Limited Sirketi v. Turkey, ICSID Case No. ARB/02/5, Decision on Jurisdiction, 4 June 2004, para. 144 et seq., available at http://www.italaw.com/ sites/default/files/case-documents/ita0695.pdf (accessed 14 March 2014). See further Emmanuel Gaillard, ‘Anti-Arbitration Trends in Latin America’ (2008) 239 (108) New York Law Journal, 5 June 2008. 49 Wei Shen (n. 31) 55, 82; see also Elodie Dulac (n. 41) 1, 28; Emmanuel Gaillard (n. 48). 50 Wei Shen (n. 31) 55, 83. 51 Elodie Dulac (n. 39) 1, 28. 52 Axel Berger (n. 19) ’China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 10; Axel Berger (n. 39) 8. 53 Agreement between the Government of the People’s Republic of China and the Government of the Republic of France on the Reciprocal Promotion and Protection of Investments, signed 30 May 1984 (invalidated), re-concluded 26 November 2007 (entry into force 20 August 2010), available at http://unctad.org/sections/dite/iia/docs/bits/france_china_fr.pdf (accessed 14 March 2014). 54 China and Denmark Agreement concerning the Encouragement and Reciprocal Protection of Investments, signed 29 April 1985 (entry into force 29 April 1985), available at http:// unctad.org/sections/dite/iia/docs/bits/china_denmark.pdf (accessed 14 March 2014). 55 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Singapore on the Promotion and Protection on Investments, signed 21 November 1985 (entry into force 7 February 1986), available at http://unctad.org/sections/ dite/iia/docs/bits/china_singapor.pdf (accessed 14 March 2014). 56 Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the People’s Republic of China concerning the Promotion and Reciprocal Protection of Investments, signed 15 May 1986 (entry into force 15 May 1986), available at http://unctad.org/sections/dite/iia/docs/bits/uk_china.pdf (accessed 14 March 2014). 57 Agreement between the Government of the People’s Republic of China and the Government of the Republic of the Philippines concerning the Encouragement and Reciprocal Protection of Investments, signed 20 July 1992 (entry into force 8 September 1995), available at http:// unctad.org/sections/dite/iia/docs/bits/china_philippines.pdf (accessed 14 March 2014).

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and Cambodia (1996).60 It should be noted that some of these BITs, such as the China–France BIT of 1984, have been renegotiated and replaced by new agreements. 16 The second generation of Chinese BITs commences in 1998, with the conclusion of the China–Barbados BIT,61 wherefrom China starts to conclude treaties that contain an ISDS clause comparable to provisions found in treaties of OECD countries.62 In particular from 2000 onwards, China began to include more substantial national treatment provisions63 and offer consent to regular investorState dispute settlement. To take an illustration, the 2001 BIT between the Netherlands and China64 expressly provides for ‘unconditional consent’ to international arbitration.65 17 This second generation of Chinese BITs coincides with China’s encouragement of outward FDI in accordance with the country’s ‘Going Global’ policy66 launched in the late 1990s.67 China’s ‘Going Global’ strategy has set a number of objectives, both macroeconomic and microeconomic, such as improving the global competitiveness of Chinese enterprises through the creation of ‘global champions’ and securing future energy and raw materials supplies.68 At the 58 Agreement between the Government of the People’s Republic of China and the Government of the Lao People’s Democratic Republic concerning the Encouragement and Reciprocal Protection of Investments, signed 31 January 1993 (entry into force 1 June 1993), available at http:// unctad.org/sections/dite/iia/docs/bits/china_laos.pdf (accessed 14 March 2014). 59 Agreement between the Government of the Republic of Indonesia and the Government of the People’s Republic of China on the Promotion and Protection of Investments, signed 18 November 1994 (1 April 1995), available at http://unctad.org/sections/dite/iia/docs/bits/ china_indonesia.pdf (accessed 14 March 2014). 60 Agreement between the Government of the Kingdom of Cambodia and the Government of the People’s Republic of China for the Promotion and Protection of Investment, signed 19 July 1996 (entry into force 1 February 2000), available at http://unctad.org/sections/dite/iia/docs/ bits/china_cambodia.pdf (accessed 14 March 2014). 61 Agreement between the Government of Barbados and the Government of the People’s Republic of China for the Promotion and Protection of Investments, signed 20 July 1998 (entry into force 1 October 1999) (available at http://www.investbarbados.org/docs/BIT%20-%20Republic%20of%20China.PDF (accessed 14 March 2014). 62 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 10; Axel Berger (n. 39) 9; Wenhua Shan and Sheng Zhang (n. 2) 87, 93; Elodie Dulac (n. 41) 1, 24. 63 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 12. 64 Agreement on Encouragement and Reciprocal Protection of Investments between the Government of the People’s Republic of China and the Government of the Kingdom of the Netherlands, signed 26 November 2001 (entry into force 1 August 2004), available at http:// unctad.org/sections/dite/iia/docs/bits/china_netherlands.pdf (accessed 14 March 2014). 65 Article 10(3) of the Netherlands–China BIT (2001) (n. 64). 66 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 6; Elodie Dulac (n. 40) 1; see also Ken Davies, ‘Outward FDI from China and its policy context’ (2010) Columbia FDI Profiles, 18 October 2010. 67 Ken Davies (n. 66) 5. 68 Ken Davies (n. 66) 5; Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 6; Elodie Dulac (n. 39) 1.

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same time, some authors clearly attribute the ‘Going Global’ policy to China’s desire to protect its investors as the country evolves from a mere capital importer to also constituting a source of considerable outbound foreign direct investment.69 It is of interest to remark that since the launch of China’s ‘Going Global’ policy, Chinese BITs with developing countries have endorsed ‘qualified’ national treatment provisions, while Chinese BITs with developed partners generally contain higher investment protection commitments.70 It has also been argued that a third generation of Chinese BITs appears to 18 emerge from 2008.71 These are generally new generation treaties, influenced by more State-friendly provisions in more balanced treaties (e.g. they may contain essential security exceptions and general exceptions modelled after Article XX of the GATT, see below), which are also more detailed.72 For instance, third generation BITs contain lengthier dispute resolution provisions than their precursors, containing specific provisions on tribunal constitution, consolidation, costs, and transparency.73 This third generation of Chinese BITs is the equivalent of the global new generation of international investment agreements, launched with the US74 and Canadian75 model BITs of 2004 and which slowly appear to be gaining over the international investment law landscape.76 A detractor of the trend in this respect is a 2009 BIT concluded with Switzerland,77 which conforms to the traditional (‘old generation’) European model. The opinion has been expressed that this approach only demonstrates China’s flexibility and readiness to adapt to the preferred model of its partner countries.78 b) China’s More Recent Treaty-Making Practice Part I: Conclusion of Trade and Investment Agreements

Following its 2001 accession to the WTO, China has started to negotiate 19 FTAs with investment chapters.79 69 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 7. 70 Axel Berger (n. 19) ‘China’s new bilateral investment treaty programme: Substance, rational and implications for international investment law making’ 12–13. 71 E.g. Valentina Vadi (n. 2) 705, 711–713; Elodie Dulac (n. 40) 1. 72 Elodie Dulac (n. 39) 1; Jose Alvarez, ‘The Return of the State’ (2011) 20(2) Minn. J. Int’l L. 223–264, 237–238. 73 Elodie Dulac (n. 39) 1. 74 Available at http://www.state.gov/documents/organization/117601.pdf (accessed 14 March 2014). 75 Available at http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf (accessed 14 March 2014). 76 See also Catharine Titi, ‘The Arbitrator as a Lawmaker: Jurisgenerative Processes in Investment Arbitration’ (2013) 14(5) JWIT 829–851. 77 Agreement between the Swiss Federal Council and the Government of the People’s Republic of China on the Promotion and Reciprocal Protection of Investments, signed 27 January 2009 (entry into force 13 April 2010), available at http://unctad.org/sections/dite/iia/docs/bits/ Switzerland_China_new.pdf (accessed 14 March 2014). 78 Axel Berger (n. 38) 11. 79 See Axel Berger (n. 38) 1–2.

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In 2008, China concluded an FTA with Singapore,80 which incorporates the Association of Southeast Asian Nations (ASEAN)–China investment agreement.81 Currently, China is engaged in FTA negotiations with the Gulf Cooperation Council, Australia, Iceland, Norway, and the Southern African Customs Union,82 and also with Japan and South Korea.83 21 Irrespective of its recent approach of also including investment chapters in broader FTAs China continues to conclude standalone BITs as well as plurilateral and regional investment agreements. It is interesting to note that the investment chapters of FTAs and of BITs often appear quite similar, though differences do exist. As an illustration may be mentioned China’s FTAs with Pakistan (2006),84 New Zealand (2008),85 and Peru (2009).86 22 Three of the most recent important investment agreements concluded by China are the investment agreement between China and ASEAN,87 the China– Japan–Korea investment agreement88 and the more recent Canada–China BIT.89 23 The ASEAN–China investment agreement is part of the so-called ASEAN– Plus agreements (another recent agreement involving ASEAN is the agreement with Australia and New Zealand).90 It is important to note that this investment 20

80 China-Singapore Free Trade Agreement, signed 23 October 2008 (entry into force 1 January 2009), available at http://www.fta.gov.sg/fta_csfta.asp?hl=27 (accessed 14 March 2014). 81 Elodie Dulac (n. 39) 1, 2. 82 See http://fta.mofcom.gov.cn/english/fta_tanpan.shtml (accessed 14 March 2014). 83 See UNCTAD (n. 3) 85. Presumably, such FTA negotiations do not involve an investment chapter, given that the parties have concluded the trilateral investment agreement, as discussed elsewhere in this chapter. 84 Agreement on the Early Harvest Program for the Free Trade Agreement between China and Pakistan, signed 24 November 2006 (entry into force 10 October 2009), available at http:// fta.mofcom.gov.cn/pakistanarticle/chpakistan/pakhwmy/200809/467_1.html (accessed 14 March 2014). 85 Free Trade Agreement Between The Government of the People’s Republic of China And The Government of New Zealand, signed 7 April 2008 (entry into force 1 October 2008), available at http://gjs.mofcom.gov.cn/accessory/200804/1208158780064.pdf (accessed 5 March 2014). 86 Free Trade Agreement between the Government of the People’s Republic of China and the Government of the Republic of Peru, signed 28 April 2009 (entry into force 1 March 2010), available at http://fta.mofcom.gov.cn/bilu/annex/bilu_xdwb_en.pdf (accessed 14 March 2014). 87 Agreement on Investment of the Framework Agreement on comprehensive Economic Cooperation between the Association of Southeast Asian Nations and the People’s Republic of China, signed 15 August 2009 (entry into force 1 January 2010), available at http://www.miti.gov.my /storage/documents/46f/com.tms.cms.document.Document_d5b6cac4-c0a81573-5b605b60-f9 19ea54/1/ACFTA%20Investment%20Agreement%20-%20ASEAN%20Version%20%20(19% 20Nov%202008%20clean).pdf (accessed 14 March 2014). 88 Agreement among the Government of Japan, the Government of the Republic of Korea and the Government of the People’s Republic of China for the Promotion, Facilitation and Protection of Investment, signed 13 May 2012 (not in force yet), available at http://www.meti.go.jp/press/ 2012/05/20120513001/20120513001-3.pdf (accessed 14 March 2014). 89 Agreement Between the Government of Canada and the Government of the People’s Republic of China for the Promotion and Reciprocal Protection of Investments, signed 9 September 2012 (not yet in force), available at http://www.international.gc.ca/trade-agreements-accordscommerciaux/agr-acc/fipa-apie/china-text-chine.aspx?lang=eng (accessed 14 March 2014). 90 See UNCTAD (n. 3) 86; Agreement establishing the ASEAN–Australia–New Zealand Free Trade Area, signed 27 February 2009 (entry into force 1 January 2010 for the following coun-

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agreement has not terminated the nine BITs in force between individual ASEAN countries and China.91 One agreement that has marked 2012 is the trilateral China–Japan–Korea in- 24 vestment agreement, which ‘has an economic weight that is not far from that of the North American Free Trade Agreement’.92 It is noted that the three parties to this investment treaty account for one fifth of world population and global GDP.93 It is noteworthy that the agreement reserves host State policy space in respect of specific policy objectives.94 Here again, the new treaty exists in parallel with BITs in force between the signatories, thus guaranteeing investors the most favourable treatment granted under any of these treaties. This trilateral agreement incorporates the WTO TRIMs agreement and be- 25 cause of broadly formulated investor-State dispute settlement clauses introduces the possibility of direct applicability of specific WTO law before international arbitration tribunals. The main reason for this choice of incorporating also the TRIMs agreement is that the TRIMs agreement imposes obligations of national treatment and elimination of quantitative restrictions on host States, which actually prohibit many types of performance requirements on foreign investors and investment.95 Although, by linking WTO law with the investment agreement, the contracting States actually retain some more policy space, it is not clear how an international arbitral tribunal would apply and interpret WTO law and the impacts thereof. 2012 also witnessed the conclusion of the Canada–China BIT, the first BIT 26 between China and a North American country. Nearly twenty years were needed for the conclusion of this bilateral investment agreement: pourparlers had already commenced in 1994, were later suspended until China’s accession to the World Trade Organisation (WTO) and resumed in 2004.96 The Canada–China BIT is an example of the new generation of international investment agreements: close to the Canadian Model BIT, it excludes from its protective provisions cultural industries97 and it contains a general exceptions clause modelled after Article XX of the GATT;98 it further incorporates a provision, typical of Canadian and US BITs negotiated on the basis of these countries’ 2004 (or more

91 92 93 94 95 96 97 98

tries: Australia, Brunei, Myanmar, Malaysia, New Zealand, Singapore, the Philippines, and Viet Nam. The agreement entered into force for Thailand on 12 March 2010 and Lao PDR and Cambodia on 1 and 4 January 2011 respectively. Entry into force for Indonesia: 10 January 2012), available at http://www.dfat.gov.au/fta/aanzfta/contents.html (accessed 14 March 2014). UNCTAD (n. 3) 86. UNCTAD (n. 3) 85. UNCTAD (n. 3) 85. E.g. see Article 18 of the China–Japan–Korea investment agreement (n. 88). Art. 2 of the Agreement on Trade-Related Aspects of Investment Measures, signed 15 April 1994, available at http://www.wto.org/english/res_e/booksp_e/analytic_index_e/trims_01_e.ht m#article2 (accessed 14 March 2014). See Elodie Dulac (n. 39) 1, 3. Article 33(1) of the Canada–China BIT (n. 89). Article 33(2) of the Canada–China BIT (n. 89).

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recent) model treaties, to the effect that ‘except in rare circumstances’, non-discriminatory measures designed and applied to protect public interest objectives, such as health, safety and the environment, do not constitute indirect expropriation.99 27 Nonetheless, it is important to emphasise that the Canada–China BIT is in many respects not an innovation. On the contrary, such more balanced provisions in Chinese BITs, including provisions on the non-lowering of environmental standards, general exceptions clauses modelled after Article XX of the GATT (or the mutatis mutandis incorporation of this article in the BIT) and the provision that general regulatory measures, as described above, do not constitute indirect expropriation, are present in other recent BITs concluded by China; for example, the China–New Zealand FTA100 contains exceptions for the protection of a party’s essential security interests and incorporates Article XX of the GATT in its general exceptions.101 The same agreement comprehends further exceptions for serious balance of payments difficulties,102 prudential103 and taxation measures,104 as well as a special GATT Article XX-like general exception for measures adopted by New Zealand to accord more favourable treatment to Maori in respect of matters covered by the FTA including the fulfilment of New Zealand’s obligations under the Treaty of Waitangi.105 An Annex to the same FTA contains a provision to the effect that, except in rare circumstances, ‘measures taken in the exercise of a state’s regulatory powers as may be reasonably justified in the protection of the public welfare, including public health, safety and the environment, shall not constitute an indirect expropriation’.106 28 Another treaty that has recently attracted some attention is the Cross-Strait investment agreement, concluded in the summer of 2012, and which is reported not to include access to international investor-State arbitration.107 The treaty, that appears not to have been made public at the time of writing, has followed the earlier Cross-Strait Economic Cooperation Framework Agreement,108 which 99 Annex B.10, para. 3 of the Canada–China BIT (n. 89). 100 Free Trade Agreement Between The Government of the People’s Republic of China And The Government of New Zealand, signed 7 April 2008 (entry into force 1 October 2008), available at http://www.chinafta.govt.nz/1-The-agreement/2-Text-of-the-agreement/0-downloads/ NZ-ChinaFTA-Agreement-text.pdf (accessed 14 March 2014). 101 Articles 200 and 201 respectively of the China–New Zealand FTA (n. 100). 102 Article 202 of the China–New Zealand FTA (n. 100). 103 Article 203 of the China–New Zealand FTA (n. 100). 104 Article 204 of the China–New Zealand FTA (n. 100). 105 Article 205 of the China–New Zealand FTA (n. 100). On the Treaty of Waitangi, see the official site of the New Zealand Government at www.treatyofwaitangi.govt.nz (accessed 14 March 2014). 106 Annex 13, para. 5 of the China–New Zealand FTA (n. 100). 107 See the China–Taiwan Bilateral Investment Protection Agreement: dispute resolution mechanisms exclude international arbitration. Herbert Smith Freehills, ‘China-Tawain Bilateral Investment Protection Agreement: dispute resolution mechanisms exclude international Arbitration’ (2012) Dispute Resolution Arbitration Notes, 23 August 2012, available at http://h sf-arbitrationnews.com/2012/08/23/china-taiwan-bilateral-investment-protection-agreementdispute-resolution-mechanisms-exclude-international-arbitration (accessed 14 March 2014).

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provided in its Article 5 on ‘investment’ that the signatories would conduct consultations to reach agreement on an investment protection mechanism, increased transparency, the gradual reduction of restrictions on mutual investment between the parties and investment facilitation. c) The US–China Negotiations

Of particular interest in the context of the present discussion are the negotia- 29 tions between China and the United States on the conclusion of a bilateral investment treaty. The initial opening of negotiations dates to the 1980s, but discussions were later suspended.109 One author comments that the reason China has so far not concluded a BIT with the United States is the US desire to combine investment protection with investment liberalisation, to which China has remained hostile for a long time.110 But the state of play is clearly evolving. The more recent round of US–China negotiations opened within the framework of the US–China Strategic Economic Dialogues in 2008111 and, following a May 2012 decision of the two countries to intensify negotiations, pourparlers resumed in October 2012.112 General agreement appears probable on a number of issues, including on the protection of all investors, including State-owned enterprises, pegging the fair and equitable treatment to the customary international law minimum standard, confining the scope of application of the most favoured nation (MFN) treatment to substantive standards and circumscribing indirect expropriation.113 Among the thorny issues, on which agreement may prove more difficult, are the question of whether the national treatment shall apply to the establishment phase114 and whether the opt-out approach should be adopted. By and large, notwithstanding the initial large discrepancy between the respective goals of the parties, it is remarkable that the third generation of Chinese BITs is on a par with the US Model BIT; in other words, it appears that Chinese and US investment treaty-making practice have converged on a number of crucial issues.115 It seems that for the first time China has during the latest US–China Strategic and Economic Dialogue accepted that the BIT negotiations would cov108 An English translation of the agreement is available at http://www.moea.gov.tw/mns/populace/news/whandnews_file.ashx?news_id=19723&serial_no=6 (accessed 14 March 2014). 109 Warren H. Maruyama, Jonathan T. Stoel and Charles B. Rosenberg, ‘Negotiating the U.S.– China Bilateral Investment Treaty: Investment Issues and Opportunities in the Twenty-First Century’ (2010) 7(4) TDM 1, 8. 110 Axel Berger (n. 38) 6. 111 Jose Alvarez, ‘The Once and Future Foreign Investment Regime’ in Mahnoush H. Arsanjani, Jacob Cogan, Robert Sloane and Siegfried Wiessner (eds), Looking to the Future: Essays on International Law in Honour of W. Michael Reisman (Martinus Nijhoff, 2011) 607– 648, 634; Warren Maruyama, Jonathan Stoel and Charles Rosenberg (n. 109) 8; Karl P. Sauvant and Huiping Chen, ‘A China–US bilateral investment treaty: A template for a multilateral framework for investment?’ (2013) 85 Columbia FDI Perspectives 85. 112 Karl Sauvant and Huiping Chen (n. 111). 113 Karl Sauvant and Huiping Chen (n. 111). 114 Karl Sauvant and Huiping Chen (n. 111). 115 Jose Alvarez (n. 111) 607, 634.

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er all stages of investment and will practically be based on the US Model BIT 2012 as a starting point.116 30 The importance of the outcome of US–China negotiations on a bilateral investment treaty is self-evident. It is further stressed by the launch of negotiations on the EU–US Transatlantic Trade and Investment Partnership,117 and, naturally, the prospect of the EU–China investment agreement. Assuming that negotiations between the three parties will continue separately – if not independently – of one another, the progress of the status of each of the three sets of negotiations, as well as the first of these treaties to be concluded, will doubtlessly influence the provisions and levels of investment protection in the treaties to come between the other parties. d) The China–EU BIT Negotiations 31

China officially started its BIT negotiation with the EU in late 2013. Already in 2003, the EU and China concluded a Framework Agreement for Establishing an Industrial Policy Dialogue118 in order to ‘strengthen and consolidate ties between the two Parties, promote and enhance mutual understanding and awareness of current and forthcoming policy approaches, legislation and related issues in the industrial sector’.119 According to the Framework Agreement, the parties aim to ‘contribute to the improvement of the competitiveness of businesses from both sides, by ensuring a business-friendly level playing field for industry operators’.120 In 2006, the European Commission in its Communication entitled ‘EU – China: Closer partners, growing responsibilities’ identified China’s recent emergence as a major economic and political power.121 In its Communication of 2010, the European Commission identified China as a key partner with which a standalone investment agreement should be considered.122 During an executiveto-executive meeting in April 2010, European Commission President Manuel Barroso and Chinese Premier Wen Jiabao decided that their teams would examine the options for improving bilateral relations between the EU and China, leading to the establishment in the summer of 2010 of a ‘Joint EU–China Invest116 See U.S. Department of the Treasury, ‘U.S. and China Breakthrough Announcement on the Bilateral Investment Treaty Negotiations’, 15 July 2013, available at http://www.treasury.gov/connect/blog/Pages/U.S.-and-China-Breakthrough-Announcement-.aspx (accessed 14 March 2014). 117 See U.S Department of the Treasury (n. 116). 118 Framework Agreement Establishing Industrial Policy Dialogue between the Commission of the European Community and the Government of the People’s Republic of China, signed 30 October 2003, available at http://eeas.europa.eu/china/docs/ipd_291003_en.pdf (accessed 14 March 2014). 119 Framework Agreement Establishing Industrial Policy Dialogue (n. 118) preamble. 120 Framework Agreement Establishing Industrial Policy Dialogue (n. 118) Article II. 121 European Commission, Communication, EU – China: Closer partners, growing responsibilities, COM(2006) 631 final, {COM(2006) 632 final}, Brussels, 24.10.2006, 2, available at http://eur-lex.europa.eu/LexUriServ/site/en/com/2006/com2006_0631en01.pdf (accessed 14 March 2014). 122 European Commission (n. 121) 7.

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ment Task Force’ whose goal was to explore the potential for deeper cooperation on investment, including the potential conclusion of a standalone investment agreement.123 A joint public announcement by the EU and China of their interest in such an agreement was made in the context of the EU–China Summit, which took place on 14 February 2012.124 On the European side the Council adopted on 18 October a mandate for the Commission to negotiate on behalf of the EU an investment agreement with China.125 The negotiating directives foresee an agreement that would deal both with an improved access to the market for investors from the EU and China. The European Parliament, which has to give its consent to the conclusion of a future EU–China BIT, has asked in a first resolution from October 2013126 for various points to be included in such a BIT between China and the EU: transparency obligations especially in regard to sovereign wealth funds (SWF) and State-owned enterprises (SOE),127 provisions on market access and corporate social responsibility, etc. To the exclusion of Ireland, all EU member States, including Croatia as a new 32 EU member State from July 2013, have concluded a BIT with China.128 The Regulation establishing transitional arrangements for investment agreements between Member States and third countries should pave the way for the smooth passage from member State BITs to the new agreements, ensuring the application of the former until the conclusion of the prospective EU–China agreement and thus guaranteeing legal certainty. A standalone EU–China IIA will replace the current EU member States–China BIT system.129 Although it is not impossible to envisage a provision that would guarantee the existence of the 26130 BITs in force in parallel with the new BIT, this is unlikely to result in practice, given 123 European Commission, DG Trade, Summary of contributions to the European Commission’s public consultation on ‘The future investment relationship between the EU and China’, 2011, available at http://trade.ec.europa.eu/doclib/docs/2011/december/tradoc_148394.pdf (accessed 14 March 2014). 124 European Commission, DG Trade, Roadmap of EU–China investment relations, 21 March 2012, available at http://ec.europa.eu/governance/impact/planned_ia/docs/2012_trade_03_ch ina_investment_agreement_en.pdf (accessed 14 March 2014). 125 European Commission, Memo, EU investment negotiations with China and ASEAN, 18 October 2013, available at http://europa.eu/rapid/press-release_MEMO-13-913_en.htm (accessed 14 March 2014). 126 European Parliament Resolution of 9 October 2013 on the EU–China Negotiations for a Bilateral Investment Agreement (2013/2674(RSP)), available at http://www.europarl.europa.eu /sides/getDoc.do?pubRef=-%2F%2FEP%2F%2FTEXT%2BTA%2BP7-TA-2013-0411%2B 0%2BDOC%2BXML%2BV0%2F%2FEN%&language=EN (accessed 14 March 2014). 127 On this Marc Bungenberg, ‘Scope of Application’ in Marc Bungenberg and August Reinisch, The Anatomy of the (invisible) EU Model BIT, JWIT Special Issue 2/2014, 402– 421. 128 See European Commission (n. 125) in conjunction with http://unctad.org/en/Pages/DIAE/Int ernational%20Investment%20Agreements%20%28IIA%29/Country-specific-Lists-of-BITs. aspx (14 March 2014). 129 European Commission (n. 121) 7. See also Article 3 of the Regulation No 1219/2012 of the European Parliament and of the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries, Official Journal 2012/L 351/40, available at http://trade.ec.europa.eu/doclib/docs/2013/ february/tradoc_150494.pdf (accessed 14 March 2014).

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that it would be contrary to the very purpose of the transfer of competence to the EU, which is to replace the patchwork system of individual member State BITs with a uniform system of investment protection. It would be preferable to not have a prospective agreement in force in parallel with older member State BITs. 33 The conclusion of a prospective EU–China IIA offers the two economies the opportunity to upgrade their existing BIT policy to new international standards and best practices and, at the same time, it allows them to improve their bilateral relations. ICSID will cease to be the be-all and end-all of investment arbitration, with all the attendant consequences, such as those related to award enforcement. But as history shows, it is most likely that an improved system of dispute settlement will be – if necessary – also established in future EU–China (and probably US) international investment law. 4. Litigation on the Basis of Chinese Investment Treaties 34

Chinese investment agreements have given rise to very limited litigation,131 while a general presumption exists that such litigation will in fact become more frequent in the future.132 Up to present, there are only four investment arbitration cases relying on Chinese BITs, namely (1) Tza Yap Shum v. the Republic of Peru (Tza v. Peru),133 relying on the China–Peru BIT;134 (2) China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd. and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v. Mongolia (Heilongjiang et al. v. Mongolia),135 relying on the China– Mongolia BIT,136 (3) Ekran Berhad v. People’s Republic of China (Ekran v. China),137 relying on the China–Malaysia BIT;138 and (4) Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium (Ping An v. Belgium),139 relying on the China– 130 The seeming discrepancy in the number (27 member States have an investment treaty with China, but there are 26 BITs in total) is explained by the fact that Belgium and Luxembourg sign their BITs together as part of the Belgium–Luxembourg Economic Union (BLEU). 131 Wei Shen (n. 31) 55, 56; Valentina Vadi (n. 2) 705, 713. 132 See for example Valentina Vadi (n. 2) 705, 713, 717 et seq. 133 Tza Yap Shum v. Peru (n. 36). 134 Agreement between the Government of the People’s Republic of China and the Government of the Republic of Peru concerning the Encouragement and Reciprocal Protection of Investments, signed 9 June 1994 (entry into force 1 February 1995), available at http://unctad.org/ sections/dite/iia/docs/bits/peru_china.pdf (accessed 14 March 2014). 135 China Heilongjiang International Economic & Technical Cooperative Corp., Beijing Shougang Mining Investment Company Ltd. and Qinhuangdaoshi Qinlong International Industrial Co. Ltd. v. Mongolia, UNCITRAL, PCA, available at http://italaw.com/cases/279 (accessed 14 March 2014). This case is administered by the PCA. 136 Agreement between the Government of the People’s Republic of China and the Government of the Mongolian People’s Republic concerning the Encouragement and Reciprocal Protection of Investments, signed 25 August 1991 (entry into force 1 November 1993), available at http://unctad.org/sections/dite/iia/docs/bits/china_mongolia.pdf (accessed 14 March 2014). 137 Ekran Berhad v. People’s Republic of China, ICSID Case No. ARB/11/15. 138 Agreement between the Government of the People’s Republic of China and the Government of Malaysia Concerning the Reciprocal Encouragement and Protection of Investments, signed 21 November 1988 (entry into force 31 March 1990).

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Belgium BIT.140 Among these cases, only the tribunal in Tza v. Peru has rendered a jurisdictional decision, touching upon the investor-State arbitration clause of the China–Peru BIT, among other things. The other three cases are either pending or have been suspended. Therefore, these cases failed to yield any consistent and uniform practice with regard to the eligibility of disputes based on Chinese BITs. Probably the most important factor explaining the absence of litigation are the 35 obstacles imposed on investors regarding access to international arbitration in first generation Chinese BITs.141 As mentioned, three out of the four investment arbitration cases involve the first generation of Chinese BITs, only the most recent Ping An v. Belgium relies on a second generation of Chinese BIT. The dispute settlement provisions in the latter, as described earlier, concerned solely the determination of the amount of compensation in case of expropriation and were often subject to the exhaustion of local remedies. It is also true, however, that this limited litigation activity dovetails with the general scarceness of investorState arbitrations brought by Asian investors,142 while some authors indicate further a desire on the part of Chinese investors to ‘preserve reputation and future business opportunities’.143 Nevertheless, with the newer generations of Chinese investment treaties and 36 China’s increasing importance as a capital importer, traditional perceptions and absence of investment arbitrations are slowly but drastically changing. The Tza Yap Shum v. Peru case, the first known investment dispute to reach investment arbitration under a Chinese BIT,144 is particularly important in this respect. The case was adjudicated on the basis of the China–Peru BIT which provides access to investor-State dispute resolution only in relation to the amount of expropriation that is due in case of expropriation; however, the tribunal called upon to decide the case reasoned that the provision granting it jurisdiction to determine the amount of expropriation could not but imply that it also had jurisdiction to decide whether an expropriation had taken place in the first instance.145 The tribunal found that this ISDS clause of the China–Peru BIT can be interpreted to include both disputes concerning compensation and expropriation, while following the treaty interpretation rules laid down in Arts. 31 and 32 of the Vienna

139 Ping An v. Belgium (n. 37). 140 Agreement between the Belgium–Luxembourg Economic Union and the Government of the People’s Republic of China on the Reciprocal Promotion And Protection Of Investments, signed 6 June 2005 (entry into force 1 December 2009), available at http://unctad.org/ sections/dite/iia/docs/bits/China_belgium.pdf (accessed 14 March 2014). 141 See also Wei Shen (n. 31) 55, 56–57. 142 See Valentina Vadi (n. 2) 705, 714 with further citations. 143 Valentina Vadi (n. 2) 705, 715, 717. 144 Wei Shen (n. 31) 55, 58. 145 Tza Yap Shum v. Peru, ICSID Case No. ARB/07/6, Decision on Jurisdiction and Competence, 19 June 2009, para. 188, available at http://www.italaw.com/sites/default/files/casedocuments/ita0880.pdf (accessed 14 March 2014).

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Convention on the Law of Treaties (VCLT). To justify its expansive interpretation, the tribunal observed that to give meaning to all the elements of the article, it must be interpreted that the words ‘involving the amount of compensation for expropriation’ includes not only the mere determination of the amount but also any other issues normally inherent to an expropriation, including whether the property was actually expropriated in accordance with the BIT provisions and requirements, as well as the determination of the amount of compensation due, if any.146

The Tza Yap Shum v. Peru award plainly digresses from earlier investment jurisprudence having interpreted similar provisions147 and could have significant ramifications for investors covered under older Chinese BITs (mainly first generation Chinese BITs) that contain similarly restrictive investment arbitration provisions.148 Being the first ICSID case in which a Chinese BIT has been applied, this decision has somehow set up an example for arbitral tribunals to expansively interpret narrow ISDS clauses at least in some first generation Chinese BITs, though in a strict sense ICSID cases do not have the status of precedence. 38 As mentioned, a few more cases brought under Chinese BITs have been decided or are currently pending. The China Heilongjiang International et al. v. Mongolia case brought under UNCITRAL Rules is still pending. According to the ICSID website, the Ekran Berhad v. China, the first ICSID case against China, has already been suspended.149 While regarding the Ping An Life Insurance v. Belgium case, as this case relies on a second generation Chinese BIT with a broad ISDS clause, one may believe that Ping An might encounter less jurisdictional challenges than Tza Yap Shum has met with regards to the consent of submitting disputes to ICSID. 37

5. Outlook 39

Over the past decades, China has gradually developed its foreign investment law framework. This framework is complicated in contents as it is composed of various levels of domestic laws and regulations, BITs, FTAs and a few multilateral conventions, such as the ICSID Convention. The past years also witnessed China’s rapid economic development. Alongside its economic rise, China has become one of the major FDI destinations in the world. More recently, China has shifted its status from a mere FDI importing country to become a major FDI exporting country as well.

146 Tza Yap Shum v. Peru (n. 145) para. 188. 147 E.g. Berschader v. Russia, SCC Case No. 080/2004, Award, 21 April 2006, para. 153, available at http://italaw.com/sites/default/files/case-documents/ita0079_0.pdf (accessed 14 March 2014); Austrian Airlines v. Slovak Republic, UNCITRAL, Final Award, 20 October 2009, available at http://www.italaw.com/sites/default/files/case-documents/ita0048.pdf (accessed 14 March 2014). 148 See also Valentina Vadi (n. 2) 705, 719. 149 See https://icsid.worldbank.org/ICSID/FrontServlet?requestType=CasesRH&reqFrom=ListCases&caseId=C1600&actionVal=viewCase (accessed 14 March 2014).

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China’s economic development and opening up has exerted and will further 40 exert fundamental impacts on the development and improvement of China’s foreign investment law. Such impacts could be shown on both domestic law making and treaty-making levels. At domestic law making level, China’s existing foreign investment laws 41 mainly serve two purposes: trying to attract and protect foreign investments and also stressing administrative regulation of foreign investments. However, with China’s further economic reform and opening up, it is necessary for China to reform its existing foreign investment laws or to adopt new laws to enhance investment liberalisation. Although it remains premature to conclude whether China’s domestic law making is sufficient to support its ongoing investment liberalisation endeavours, the establishment and operation of the Shanghai FTZ provides a good window to make some observations. At treaty-making level, as mentioned, China has concluded a large number of 42 BITs and various FTAs and is a contracting State to various multilateral conventions. While Chinese BITs have undergone changes over the past decades to serve its economic development, further improvements are still needed. China has already become a major FDI exporting country in the world and a large part of its investments have been channelled to politically unstable and economically underdeveloped countries. Chinese overseas investors are in dire need nowadays to seek treaty protection for their investments in these countries. In light of such background, China needs to adopt a more ‘proactive’ approach in future BIT negotiations. In brief, such approach would mean that, regarding substantive rules, future BITs need to stress more investment liberalisation; regarding procedural rules, future BITs need to provide wider access for investors to ISDS. With the ongoing China–US BIT and China–EU BIT negotiations, one may have reason to believe that China’s future investment treaty-making would become more proactive.

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III. Pluri-/Multilateral and Regional Approaches A. The Energy Charter Treaty

Richard Happ 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a) History. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) A Unique Scope of Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Investment Protection under the Energy Charter Treaty . . . . . . . . . . . . . a) Scope of Protection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Investor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Article 10(1) of the ECT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) First Sentence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Second Sentence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Third Sentence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) Fourth Sentence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) Last Sentence. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Article 13 of the ECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d) Article 17 of the ECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) Requirements to Exercise the Right . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) Exercising the Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3) Effects of Exercising the Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Investment Arbitration under the Energy Charter Treaty . . . . . . . . . . . . 4. Investment Protection under the Energy Charter Treaty after Twenty Years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 2 5 13 20 21 21 24 25 27 29 31 33 34 36 39 43 47 48 54 63

Literature: Peter D. Cameron, International Energy Investment Law (Oxford University Press, 2010), Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (JurisNet, 2008); Graham Coop (ed), Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty (JurisNet, 2011); Richard Happ, Schiedsverfahren zwischen Staaten und Investoren nach Artikel 26 Energiechartavertrag (Peter Lang, 2000); Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet, 2006); Thomas Roe and Matthew Happold, Settlement of Disputes under the Energy Charter Treaty (Cambridge University Press, 2011); Thomas Wälde, The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996).

1. Introduction 1

The Energy Charter Treaty1 (ECT) is a multilateral treaty with 48 contracting parties. It entered into force on 16 April 1998 and, inter alia, protects investments in the energy sector. More importantly, it allows investors to directly start arbitral proceedings against a contracting party to the ECT if that State has violated any of its obligations on investment protection.

1 Energy Charter Treaty, Annex 1 to the Final Act of the European Energy Charter Treaty Conference, 17 December 1994, reprinted in (1995) 34 ILM 381.

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a) History

The background and the negotiation and conclusion of the ECT are influ- 2 enced by the events of the years 1990–1994.2 In February 1990, in the light of the breakdown in Eastern Europe, then Dutch Prime Minister Ruud Lubbers suggested the cooperation of all European States, including Eastern Europe in a ‘European Energy Community’, which was to be codified in a European Energy Charter. This idea was picked up, negotiations began in July 1991 and the European Energy Charter was signed in The Hague on 17 December 1991. It is not a treaty, but a political declaration of intent. It nevertheless is the basis for the Energy Charter Treaty, as its object and purpose links back to the Charter (see below). As of the time of writing of this Chapter, it had been signed by 61 States.3 Parallel to the negotiation of the European Energy Charter, the idea was de- 3 veloped to complement it by a treaty.4 The negotiations were considerably influenced by two major political events. The first was the first Iraq war: western States became aware that they might need to secure alternative sources for oil and gas. Such sources existed around the Caspian Sea and in Siberia. The second reason was the breakdown of the Soviet Union: exploration and development of the reserves needed considerable investments, and the newly independent States had no adequate legal infrastructure for the protection of these investments. What is more, transporting any oil and gas found to Western Europe was problematic. While formerly the pipeline system had been in the hands of a single operator – Gazprom – and gas had flowed even during the cold war, there were now several States, each with its own national pipeline operator, between the energy sources and the consumers in Western Europe. It thus was considered necessary to create a legal framework allowing for transit of oil and gas through those countries. After three years of intense negotiations, the Energy Charter Treaty was 4 opened for signature in Lisbon on 17 December 1994 and since then has been signed by 52 and ratified by 47 States of Western and Eastern Europe, Asia and the European Communities.5 With the ECT, a treaty was concluded which, on the one hand, should facilitate investments in the newly independent countries, 2 On the background, see Richard Happ, Schiedsverfahren zwischen Staaten und Investoren nach Artikel 26 Energiechartavertrag (Peter Lang, 2000) 115–116; Julia Doré, ‘Negotiating the Energy Charter Treaty’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 137–155; Thomas Wälde, ‘International Investment under the 1994 Energy Charter Treaty’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 251–320. 3 According to the information on the website of the Energy Charter Secretariat (www.encharter.org), the last signatory was Montenegro in 2012. Reportedly, Yemen and Lebanon are expected to sign the Energy Charter in the near future. Also the accession of Jordan is expected in due course. This and further information is available at http://www.encharter.org/index.php? id=639&L=0. 4 Part III of the European Energy Charter explicitly contains the undertaking of the signatories to negotiate ‘in good faith a Basic Agreement and Protocols’. That Basic Agreement is what later became the Energy Charter Treaty.

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strengthen their economy and their ties to Western Europe, thus assisting them in their transition, and on the other hand, should secure access of Western Europe to these alternative energy sources. b) Structure

The ECT has an extremely complex structure, consisting of eight parts, fourteen annexes, five conference decisions integrated into the treaty, and several ‘understandings’ relevant for the interpretation of the treaty as a whole or to certain specific provisions.6 What is more, the ECT must be read in the light of the European Energy Charter. The ECT’s purpose is to create a legal framework which will promote long-term co-operation in the energy field, ‘based on complementarities and mutual benefits, in accordance with the objectives and principles of the Charter’ (Art. 2). 6 The ECT is much more than a multilateral investment treaty.7 Its main pillars are provisions on Trade and Transit (Part II), Investment Promotion and Protection (Part III), and Dispute Settlement (Part V). It seems apposite to briefly sketch out these pillars before going into detail of the investment protection provisions. 7 Trade in ‘Energy Materials & Products’ is regulated by the provisions of the ECT as amended by the Trade Amendment of 1998, pursuant to which the provisions of the GATT (meaning both GATT 1947 and GATT 1994) and WTO law apply by reference.8 Thus, WTO law is applicable between contracting parties to the ECT even if one of them is not a WTO member. Art. 5 contains an explicit prohibition of trade-related investment measures. 8 Transit is regulated in Art. 7.9 Transit thus takes place if ‘Energy Materials and Products’10 (e.g. gas or oil) are carried from the ‘Area’11 of State A through 5

5 The current status of the membership is available at the website www.encharter.org. The USA and Canada were heavily involved in the negotiations, but shortly before the end of the negotiations dropped out and did not sign it. 6 For a comprehensive overview of the Treaty, see the Reader’s Guide to the Energy Charter Treaty, published by the Energy Charter Secretariat and available via the Secretariat’s website www.encharter.org. 7 See Graham Coop, ‘The Energy Charter Treaty: More than a MIT’ in Clarisse Ribeiro (ed), Investment Arbitration and the Energy Charter Treaty (JurisNet, 2006) 3–21. 8 Ingrid Frasl, ‘The Trade Rules of GATT and Related Instruments and the Energy Charter Treaty’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 459–496. 9 See also Martha M. Roggenkamp, ‘Transit of Network–bound Energy: The European Experience’ in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (Kluwer, 1996) 499–518; Craig Bamberger, ‘Adjudicatory Aspects of Transit Dispute Conciliation Under the Energy Charter Treaty’ (2006) 2 TDM 1; Colin Brown, ‘Transit Disputes, Supply Disputes and the ECT: Towards an East-West Thaw?’ in Graham Coop (ed), Energy Dispute Resolution (Kluwer, 2011) 285–295; Peter Cameron, ‘The Energy Charter Treaty and East-West Transit’ in Graham Coop (ed), Energy Dispute Resolution (Kluwer, 2011) 297–313. 10 Energy Materials and Products are defined in Annex EM to the ECT. 11 Cf. ECT Art. 1(10): ‘Area’ means with respect to a State that is a contracting party: (a) the territory under its sovereignty, it being understood that territory includes land, internal waters

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the ‘Area’ of State B and are destined for the ‘Area’ of State C, or are carried through the ‘Area’ of State B in order to reach again the ‘Area’ of State A (a ‘Uturn’).12 The sixth and seventh paragraph of Art. 7 provide for a conciliation mecha- 9 nism in case of transit disputes. As far as it is known, the transit dispute procedure has neither been used in the 2006 nor in the 2009 gas transit disputes.13 The reasons for that are not entirely clear and subject to speculation. It is possible that the mechanism was not invoked because it was unclear who was responsible for the transit disruption: Russia or Ukraine. Russia considers not to be bound by the ECT. To invoke a dispute settlement mechanism if the real cause of the dispute is unknown and where a potentially responsible party (i.e. Russia) considers not to be bound by the dispute settlement mechanism is hardly effective. The third part of the ECT (Arts. 10–17) contains the substantive obligations 10 on investment promotion and protection. The provisions on investment promotion and protection differentiate between the pre-investment phase and the postinvestment phase. As regards the making of investments, the ECT merely obliges contracting parties to ‘endeavour to accord’ national treatment. According to Art. 10(4), further obligations were to be set out in a supplementary treaty, which however was never concluded. Once an investment is made, the ECT protects it against various forms of political risks, such as discrimination, unfair or inequitable treatment, arbitrary or discriminatory measures (Art. 10) or direct or indirect expropriation without compensation (Art. 13). Arts. 18–25, constituting the fourth part of the ECT, contain miscellaneous 11 provisions on environment, taxes, and the liability of the State for sub-national authorities and State enterprises. The fifth part regulates the settlement of disputes: investor-State disputes (Art. 26), as discussed in more detail below, and disputes between contracting parties (Arts. 27 and 28). It provides for mandatory arbitration but with important caveats. Disputes relating to competition (Art. 6), the environment (Art. 19) or trade-related disputes (Arts. 5 and 29) might not be submitted to mandatory arbitration. As for transit disputes, separate mechanisms exist for these kinds of disputes. The sixth part contains various transitional provisions. The ECT has also created an international organisation known as the Energy Charter Conference (Art. 34) with a permanent Secretariat located in and the territorial sea; and (b) subject to and in accordance with the international law of the sea: the sea, sea-bed and its subsoil with regard to which that contracting party exercises sovereign rights and jurisdiction. 12 It is to be noted that only Canada and the United States, which both have not even signed the ECT, are listed in Annex N which excluded such form of transit. 13 On the 2006 gas transit dispute, see Jonathan Stern, ‘The Russian-Ukrainian gas crisis of January 2006’ (Oxford Institute for Energy Studies (OIES), 2006), available at http://www.oxfordenergy.org/wpcms/wp-content/uploads/2011/01/Jan2006-RussiaUkraineGasCrisisJonathanStern.pdf, (2006) 3 TDM 1–17. On the 2009 dispute, see Simon Pirani, Jonathan Stern and Katja Yafimava, The Russo-Ukrainian gas dispute of January 2009: a comprehensive assessment (OIES, 2009), available at https://www.oxfordenergy.org/2009/02/the-russoukrainian-gas-dispute-of-january-2009-a-comprehensive-assessment.

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Brussels.14 Art. 45 provides that the treaty shall be provisionally applicable15 for each signatory pending its entry into force for such signatory.16 Art. 47 regulates that in case of withdrawal of a party, the obligations towards foreign investors shall nevertheless remain in force for an additional 20 years.17 12 The provisions of the Treaty can be supplemented by Energy Charter Protocols negotiated between its contracting parties. There is only one Protocol currently in force: the ‘Protocol on Energy Efficiency and related Environmental Aspects’ (PEEREA). A Protocol on Energy Transit had been under negotiation since 1999. The contracting parties early on had decided that it was necessary to supplement Art. 7 of the ECT. Its aim would have been to create a legal framework for grid-bound transit through its contracting parties. The Transit Protocol should supplement and expand on Art. 7 of the ECT by providing for provisions on, inter alia, negotiated access to available capacity for transit and transit tariffs. However, negotiations of the Transit Protocol have been fraught with political difficulties and a web of conflicting interests.18 The negotiations stalled in May 2006 mainly due to objections by the European Union and Russia.19 The withdrawal of Russia from the ECT has given the negotiations the final deathblow. Without Russia, a Transit Protocol makes little sense.20 c) A Unique Scope of Application 13 14

There are five factors which determine the scope of application of the ECT. The first factor is the limited sectoral scope of application. While most biand multilateral treaties protect all kinds of investment, the treaty only protects investments ‘associated with an Economic Activity in the Energy Sector’, ECT Article 1(6). ‘Economic Activities in the Energy Sector’ are defined in ECT Art. 1(5) and, if oil is taken as one example, pretty much include everything 14 The Secretariat’s website can be found under www.encharter.org. 15 VCLT Art. 25 provides: ‘(1) A treaty or part of the treaty is applied provisionally pending its entry into force if: (a) the treaty itself so provides; (…).’ 16 On the topic of provisional application, see Yas Banifatemi, ‘Provisional Application of the Energy Charter Treaty, the negotiating history of Art. 45’, in Graham Coop (ed), Energy Dispute Resolution: Investment Protection, Transit and the Energy Charter Treaty (JurisNet, 2011) 191–210; Alexandre de Gramont and Emily Alban, ‘The Sun never Sets: provisional application and the Energy Charter Treaty’, id., at 211–248; and Michael Polkinghorne and Laurent Gouiffès, ‘Provisional Application of the Energy Charter Treaty: the conundrum’, id., at 249–282. 17 This is of pertinence for investors from other contracting parties active in Russia. It is to be noted that in August 2009, Russia has sent to the depository of the ECT, the Government of Portugal, a notice of intention of not becoming a contracting party. With such a notice, Russia terminated the provisional application of the ECT, which it applied until 18 October 2009 inclusive. 18 Cf. the various documents available at www.encharter.org. 19 Cf. Transit Protocol, Background to the Negotiations, available at http://www.encharter.org/ index.php?id=37&L=0. 20 The working relationship with Russia has however improved again, see Urban Rusnak, ‘Modernization of the Energy Charter’, Article from 27 December 2013, available at http:// www.encharter.org/fileadmin/user_upload/document/Modernisation_of_the_Energy_Charter_-_Russia_in_Global_Affairs_-_27_Dec_2013.pdf.

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from the exploration for oil over its production and transportation to the marketing of gasoline (this applies similarly, inter alia, to coal, wood, gas or nuclear energy). The ECT thus creates a specific legal regime for energy-related investments upstream, midstream and downstream – along the whole value-chain. It does so, however, and that is the second factor, on an unprecedented geographic scale. When it was signed, it applied provisionally from Portugal to Japan. Between the Atlantic and the Pacific Ocean, a single unified regime for the protection of foreign investments in the ‘Energy Sector’ came into existence. And even though Russia now has declared that it will never ratify the ECT, thus ending provisional application, the ECT continues to apply in Russia for existing investments for a further 20 years, ECT Art. 45(3)(b). There is no other comparable investment treaty. While NAFTA might come near in terms of geographical scope, NAFTA has only three member States, not 48 contracting parties. The third factor is the interconnectedness of the ‘Energy Sector’ of the economies of the contracting parties. The ECT does not only protect investments made by companies, e.g., from Western Europe in the CIS States. It also protects direct and indirect investments made into those companies, i.e. by shareholders. Many of the major European players in the ‘Energy Sector’ have subsidiaries in other contracting parties and in turn are listed on the stock exchange, with direct and indirect shareholders from Europe and other contracting parties. That is why under the ECT, claims against European States (e.g. against Poland, Hungary, Germany, the Czech Republic, Bulgaria, Croatia, and Spain) have become a reality. The fourth factor is that the ECT protects investors against regulatory measures of the host State if those measures are contrary to the ECT’s investment protection obligations. Regulatory measures such as the fixing of transmission fees, the allocation of emission trading certificates or unexpected collateral clauses in power plant permits of course may be in breach of the ECT. The ECT does not contain a ‘police powers’ exemption – quite to the contrary, Art. 24 of the ECT clarifies that the investment protection provisions of the ECT even apply where measures are taken, e.g. to protect the environment. What is more, under ECT Art. 10(1), the contracting parties are obliged to create ‘stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area.’ It has been considered by tribunals that such obligations lead to the protection of legitimate expectations of the investor. Thus, an unexpected and disadvantageous change of the regulatory framework, but also a discriminatory or unfair application of the existing legal framework, might be considered by a tribunal to be in breach of the ECT. The fifth and final factor is the applicability of the ECT both within the EU and against the EU. All member States of the EU, but also the EU itself, are contracting parties to the ECT. The applicability of the ECT between member States of the EU has not been put in doubt by arbitral tribunals and is well supported by academic literature. However, also the EU itself is a contracting party to the Richard Happ

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ECT. Investors from other contracting parties, including EU member States,21 which are harmed by actions of the EU, might rely on ECT Art. 26 to start an investment arbitration.22 Upon the ECT’s entering into force, the EU issued a statement according to which it will comply with its obligations under the ECT.23 Aggrieved investors may submit the dispute to the ECJ (being the relevant domestic court according to ECT Art. 26(2)(a), see infra) but also to arbitration. 19 The ECT thus creates a sector-specific ‘bill of rights’ for investors in the ‘Energy Sector’ from Portugal to Japan. It is not comparable to any other investment treaty in force. 2. Investment Protection under the Energy Charter Treaty 20

Among the ECT’s various provisions, its investment protection provisions have gained considerable importance. They bestow direct rights on investors and thus make them partial subjects of international law.24 At the time of writing, 43 cases (including 10 arbitrations instituted in 2013 alone) were officially known to have been instituted against various contracting parties.25 The following section briefly discusses the personal and material scope of application, limited by the definitions of ‘Investor’ and ‘Investment’, and the three articles in Part II which so far have gained major practical relevance: ECT Arts. 10, 13, and 17.26 a) Scope of Protection (1) Investment

21

The ECT uses a broad, asset-based definition of the term ‘investment’. Similar definitions also appear in most modern investment treaties. According to

21 Richard Happ, ‘The legal status of the investor vis-à-vis the European Communities: some salient thoughts’ (2007) 10 Int’l Arb. L. Rev. 74–81. This view is not undisputed. 22 See Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, para. 4.166. 23 Statement of 9 March 1998, OJ L 69/115. This statement was issued on the basis of ECT Art. 26(3)(b), pursuant to which certain contracting parties listed in Annex ID (among them the European Communities) do not give their consent that a dispute submitted to their national courts can be resubmitted to arbitration. Cf. Electrabel S.A. v. Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012, paras. 4.135–4.136. 24 See Richard Happ, Schiedsverfahren zwischen Staaten und Investoren nach Artikel 26 Energiechartavertrag (Peter Lang, 2000) 163. 25 The website of the Energy Charter Secretariat provides a respective list. 26 ECT Art. 11 regulates the entry of key personnel and the right of the investor to employ any key person of his choice. ECT Art. 12 obliges contracting parties to compensate an investor for any loss suffered due to war, a national emergency, or other similar event. This obligation has already been part of customary international law in the early 19th century. ECT Art. 14 provides for the right of the investor of the free transfer of his profits in a freely convertible currency. In the light of the payment crisis in Russia and in Argentina, comparable provisions may gain in importance.

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Art. 1(6) of the ECT, ‘Investment’ means every kind of asset, owned or controlled directly or indirectly by an investor and includes: (a) (b)

(c) (d) (e) (f)

tangible and intangible, and movable and immovable, property, and any property rights such as leases, mortgages, liens, and pledges; a company or business enterprise, or shares, stock, or other forms of equity participation in a company or business enterprise, and bonds and other debt of a company or business enterprise; claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment;27 Intellectual Property; Returns; any right conferred by law or contract or by virtue of any licences and permits granted pursuant to law to undertake any Economic Activity in the Energy Sector.

From the chapeau of Art. 1(6) it is clear that this list is only illustrative. Other 22 assets, insofar as they are directly or indirectly owned or controlled by an investor, may also qualify as investments. Art. 1(6) of the ECT does not explicitly state that an investment must be made in the area of a contracting party. However, this is explicitly required by Art. 26 of the ECT. Thus, only investments in the territory of the respondent contracting party can become the object of an ECT arbitration case. An asset needs to be owned or controlled, directly or indirectly, by an in- 23 vestor. The standard case of indirect ownership of investments is where the investment at issue is owned by a corporation which in turn is owned by another company. If the intermediate company is situated in a non-contracting party but the ultimate owner in a contracting party, the ultimate owner would indirectly own or control the investment and be protected. As regards ‘control’, Understanding No. 3 to the ECT clarifies that ‘control in fact, determined after an examination of the actual circumstances in each situation’ is meant. It prescribes to take all ‘relevant factors’ into consideration but then lists several which only apply for the determination of control over a company. The burden of proving ‘control’ is on the investor, raising the hurdle for unjustified claims. (2) Investor

According to Art. 1(7), an ‘Investor’ of a contracting party is either a natural 24 person having that contracting party’s citizenship or permanently residing in that party, or a company or other organisation organised in accordance with the law applicable in that contracting party. It may be noted that the wording does not require legal personality for such ‘other organizations’. The ECT does not contain rules on investors with potential multiple nationalities. However, Art. 17 (see below) contains a clear rule for companies controlled by third-State nationals. In the light of that rule, it seems debatable whether it is possible to read into 27 According to the tribunal in Petrobart Limited v. Kyrgyzstan, UNCITRAL, Award, 13 February 2003, this encompasses also claims for the contract price under a contract for the sale of gas.

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the ECT further provisions which could have been included by the contracting parties, but were not included. In the three Yukos cases, the tribunals rejected Russia’s arguments that the claimants were no eligible ‘investors’ since they were ultimately owned by Russians. It considered it not possible to read requirements into the ECT going beyond the ‘organized in accordance with the law’ requirement in the host State.28 b) Article 10(1) of the ECT 25

ECT Art. 10(1) reads as follows: Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment. Such Investments shall also enjoy the most constant protection and security and no Contracting Party shall in any way impair by unreasonable or discriminatory measures their management, maintenance, use, enjoyment or disposal. In no case shall such Investments be accorded treatment less favourable than that required by international law, including treaty obligations. Each Contracting Party shall observe any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.

26

This complex provision contains in every sentence at least one substantive investment protection obligation. They shall now be analysed in their respective order. (1) First Sentence

Contracting parties are obliged to ‘encourage and create stable, equitable, transparent and favourable conditions for Investors of other Contracting Parties’. The ‘conditions’ refer, inter alia, to the legal framework which the State can influence and which the investor, upon making his investment, accepts and accommodates into his plans. This follows from Art. 20 (‘Transparency’) which obliges contracting parties to promptly publish ‘Laws, regulations, judicial decisions and administrative rulings of general application’ so as to enable investors to become acquainted with them. 28 There does not seem to be a comparable provision in other investment treaties (although in the vast universe of 2700+ BITs similar provisions may exist). Many other tribunals have considered that a similar obligation is part of the obligation to provide fair and equitable treatment, not vice versa.29 Nevertheless, 27

28 Yukos Universal Limited (Isle of Man) v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 411; Veteran Petroleum Limited (Cyprus) v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 411; Hulley Enterprises Limited (Cyprus) v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 411. See also Philippe Pinsolle, ‘The Dispute Resolution Provisions of the Energy Charter Treaty’ (2007) 10 Int’l Arb. L. Rev. 82–91, 85. 29 For a detailed discussion, see Marc Jacob and Stephan Schill, ‘Fair and Equitable Treatment’, ch. 8.I., 700–763.

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ECT tribunals and parties very likely will rely on conclusions and reasonings developed by those other tribunals. It is interesting to note that the interpretation of NAFTA’s provision on transparency given by the Metalclad30 tribunal would fit perfectly under the wording of Art. 10(1). (2) Second Sentence

The wording of the second sentence of Art. 10(1) is a bit unusual: ‘Such con- 29 ditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment.’ However, this does not mean that States are merely obliged to ‘encourage and create’ conditions (Art. 10(1), 1st sentence) which then would include a commitment of fair and equitable treatment. Art. 10(1), 2nd sentence, directly obliges contracting parties to provide fair and equitable treatment.31 Several reasons militate for this: firstly, the further obligations in the 3rd to 5th sentence are formulated unconditional, but are linked to the ‘conditions’ (e.g. 3rd sentence ‘such investments shall also enjoy...’ (emphasis added) and there is no valid reason to differentiate between the individual obligations. Second, if Art. 10(1) was understood to oblige contracting parties only to create conditions which would allow for fair and equitable treatment, contracting parties could act unfair or inequitable without being in breach of the ECT. That would be an absurd result.32 The obligation to provide fair and equitable treatment is potentially of great 30 significance in ECT-based investment disputes. The energy sector is usually heavily regulated and of considerable political importance. While investments such as power plants, pipeline grids or oilfields are based on long-term business plans, politicians tend to think in electoral cycles. A governmental change in energy policy can seriously affect the viability of an energy project. (3) Third Sentence

The obligation to provide most constant protection and security to invest- 31 ments is an obligation found in nearly every investment protection treaty. There is no apparent reason why this obligation should be interpreted differently. Since it relates to ‘investments’, however, and investments also include non-corporal assets such as rights, it seems doubtful whether the provision only obliges con30 Metalclad Corporation v. Mexico, ICSID Case No. ARB(AF)/97/1, Award, 30 August 2000, paras. 90–99. 31 Cf. Christoph Schreuer, ‘Fair and Equitable Treatment’ (2007) 4/5 TDM; Thomas Wälde, ‘Energy Charter Treaty-based Investment Arbitration’ (2004) 5 JWIT 373, 384 et seq.; cf. also Petrobart Ltd. v. Kyrgyzstan, SCC Case No. 126/2003, Award, 29 March 2005, 76. 32 A similar view has been adopted by the tribunal in Occidental v. Ecuador. It concluded that the obligation (in tax matters) to ‘strive to accord fairness and equity’ would be no different from the obligation to provide fair and equitable treatment; Occidental Exploration and Production Company v. Ecuador, LCIA Case No. UN 3467, Award, 1 July 2004, para. 70; cf. El Paso Energy International Company v. Argentina, ICSID Case No. ARB/04/15, Award, 27 April 2006, para. 108; Mohammad Ammar Al-Bahloul v. Tajikistan, SCC Case No. V064/2008, Partial Award on Jurisdiction and Liability, 2 September 2009, para. 248.

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tracting parties to provide physical protection to investments.33 ‘Investments’ are also non-physical assets such as rights and patents. How does one physically protect non-physical assets? 32 The prohibition to impair by ‘unreasonable’ or discriminatory measures the use, enjoyment, etc. of investments very likely is also based on comparable provisions in bilateral investment treaties. These are discussed in detail in the contribution on ‘Arbitrary and/or Discriminatory Treatment’ by Kriebaum.34 It has been argued that a formal test according to which ‘[t]he standard of “reasonableness” therefore requires, in this context as well, a showing that the State’s conduct bears a reasonable relationship to some rational policy,’35 would be apposite for Art. 10(1).36 Measures would be unreasonable if they do not serve a reasonable purpose or are unproportional to that purpose.37 (4) Fourth Sentence 33

Art. 10(1), 4th sentence, prohibits contracting parties to treat investments less favourable than required by international law, including treaty obligations.38 This obligation could be understood to make a violation of WTO law, such as the TRIMS Agreement, actionable under the ECT. Interpreting Art. 10(1) in the context of the other provisions of the ECT indicates that this might be a tenable proposition. Art. 5(1) prohibits contracting parties to impose any trade-related investment measure inconsistent with Arts. III or XI of the GATT.39 Art. 10(11) states that any such breach of Art. 5(1) shall be considered a breach of the obligations under Art. 10, thus making a breach of these GATT provisions actionable under Art. 26.40 Whether further provisions of the GATT/WTO law will be 33 See Richard Happ and Noah Rubins, Digest of ICSID Awards and Decisions 2003–2007 (Digest II) (Oxford University Press, 2009) 359–360 and Richard Happ and Noah Rubins, Digest of ICSID awards and decisions 1974-2002 (Digest I) (Oxford University Press, 2012) 354. 34 Ursula Kriebaum, ‘Arbitrary/Unreasonable or Discriminatory Measures’, ch. 8.III., 790–806. 35 Saluka Investments B.V. v. The Czech Republic, PCA–UNCITRAL Arbitration Rules; IIC 210 (2006), Partial Award, 17 March 2006, para. 360; confirmed in Biwater Gauff v. Tanzania, Case No. ARB/05/22, Award, 24 July 2008, para. 692; Rumeli Telekom A.S. and Telsim Mobil Telekomunikasyon Hizmetleri A.S. v. Kazakhstan, ICSID Case No. ARB/05/16, Award, 29 July 2008, para. 679. 36 Veijo Heiskanen, ‘“Unreasonable or discriminatory measures” as a cause of action under the Energy Charter Treaty’ (2007) 10 Int. Arb. L. Rev. 104, 109. 37 Cf. Richard Happ, ‘Dispute Settlement under the Energy Charter Treaty’ (2002) GYIL 331, 352. 38 The reference to treaty obligations does not include decisions taken by international organisations, even if binding under international law. Cf. Understanding No. 17 to the ECT. 39 ‘GATT’ is defined as encompassing GATT 1947 and GATT 1994, ECT Art. 1(11)(a, b). Pursuant to Understanding No. 6 to the ECT, nothing can be derived from ECT Art. 5(1) as to whether the TRIMs Agreement is part of GATT Arts. III and XI. 40 This interpretation is strengthened by an e contrario argumentation. Upon the signing of the treaty, Australia had made a declaration with respect to ECT Arts. 5 and 10(11), noting that it would not be appropriate for dispute settlement bodies established under the Treaty to give interpretations of GATT Arts. III and XI in the context of disputes between an investor of a party to the GATT and another party to the GATT. In Australia’s opinion, the only issue that can be considered under Art. 26 is the issuance of arbitral awards in the event that a GATT

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actionable under ECT Art. 26 is unclear, but not very likely. If the contracting parties had wanted to make such a general referral to the GATT, ECT Arts. 10(11) and 5 would be superfluous. However, further treaty obligations might be actionable, if their content is investment-related and is directly applicable to the case. (5) Last Sentence

Art. 10(1), last sentence, reads as follows: ‘Each Contracting Party shall ob- 34 serve any obligations it has entered into with an Investor or an Investment of an Investor of any other Contracting Party.’ This is an umbrella clause, making a breach of contractual obligations entered into between investor or its investment and contracting party a breach of the ECT. Clauses of this type are discussed in detail in the contribution ‘Umbrella Clauses’ by Sinclair.41 The wording of this umbrella is special: the clause applies to obligations en- 35 tered into with an investor or its investment. There has been considerable debate in literature and jurisprudence whether other umbrella clauses apply also to contracts entered into between a State and a domestic subsidiary of an investor.42 That discussion has no relevance for the ECT. The wording of Art. 10(1), last sentence, is explicit: obligations entered into with an investment of an investor, e.g. a locally incorporated and controlled company, are covered by Art. 10(1). It has been argued that ECT Art. 22 extends the scope of the umbrella clause also to State enterprises, at least where they act in relation to the sale or provision of goods.43 c) Article 13 of the ECT

Art. 13(1) is a standard expropriation clause, covering both direct and indirect 36 expropriations and making them unlawful except where such expropriation is for a public purpose, not discriminatory, carried out under due process of law, and accompanied by the payment of prompt, adequate and effective compensation. Art. 13(2) gives an affected investor the right ‘to prompt review, under the 37 law of the Contracting Party making the Expropriation, by a judicial or other competent and independent authority of that Contracting Party, of its case, of the valuation of its Investment, and of the payment of compensation, in accordance

panel or WTO dispute settlement body first established that a trade-related investment measure maintained by the contracting party is inconsistent with its obligations under the GATT or the Agreement on Trade-Related Investment Measures. 41 Anthony Sinclair, ‘Umbrella Clauses’, ch. 8.VII., 887–958. 42 See for a general overview Richard Happ and Noah Rubins, Digest II (n. 33) 363; for a specialised discussion of umbrella clauses see Anthony Sinclair, ‘The Origins of the Umbrella Clause in the International Law of Investment Protection’ (2004) 20 Arb. Int’l 411–434. 43 Kaj Hobér and Sophie Nappert, ‘Provisional Application and the Energy Charter Treaty’ (2007) 10 Int’l Arb. L. Rev. 53, 55; see also Michael Feit, ‘Responsibility of the State Under International Law for the Breach of Contract Committed by a State-Owned Entity’ (2010) 28 Berkeley J. Int’l L. 142, 168–176.

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with the principles set out in paragraph (1).’ Making use of this right does not amount to making a choice under Art. 26(2) and thus does not prohibit an investor from later on submitting a dispute to arbitration. The investor has the right to have, inter alia, its ‘case’ reviewed. This also applies to determining whether an expropriation has occurred. As the term ‘expropriation’ is defined in Art. 13(1) as also encompassing indirect expropriations, Art. 13(2) is an interesting tool for an investor to force the State to review a case of indirect expropriation. Difficulties might arise as the right of review can only be exercised ‘under the law of the Contracting Party making the Expropriation’. Whether that domestic law always allows for such a review, and in particular for court actions to determine payment of compensation for indirect expropriations, is unclear.44 38 Art. 13(3) clarifies that the scope of Article 13 of the ECT includes cases where the State expropriates the assets of a locally incorporated company in which an investor has an investment (not limited to shares). As Art. 13(3) does not require that the investor owns or controls the locally incorporated company (Art. 13(3) then would be unnecessary) this paragraph goes beyond the scope of indirect expropriation. d) Article 17 of the ECT 39

Denial of benefit clauses first seem to have surfaced in US treaty practice after the Second World War, e.g. the Japan–US FCN Treaty.45 There had been extreme reluctance before the Second World War even to include corporations into the protection of such treaties, and the denial of benefits clauses might have been included due to the fear of preventing, via the incorporation of a company, ‘free riders’ from third countries to gain protection.46 Such clauses subsequently have been included in nearly all FCN treaties or BITs concluded by the United States. They can also be found in the BITs of other States as well as in Free Trade or Economic Cooperation Agreements.47 They are discussed in more de-

44 As has been set out above, Understanding No. 16 to the ECT sets out that contracting parties are not obliged to incorporate Part III of the ECT into their domestic law. 45 Treaty of Friendship, Commerce, and Navigation between the United States of America and Japan, 9 April 1953 (entry into force 30 October 1953), (1953) 206 UNTS 143, available at http://tcc.export.gov/Trade_Agreements/All_Trade_Agreements/exp_005539.asp. See also Richard Happ, ‘Denial of Benefit Clauses and other Mechanism that Limit the Scope of BITs for Investors’ in ILA, German Branch, Sub-Committee on Investment Law, The Determination of the Nationality of Investors under Investment Treaties (Transnational Economic Law Research Center, 2011) 61–68, available at http://telc.jura.uni-halle.de/sites/default/files/ BeitraegeTWR/Heft%20106.pdf. 46 Herman Walker, ‘Provision on Companies in US Commercial Treaties’ (1956) 50 AJIL 373, 388; see also Loukas Mistelis and Crina Baltag, ‘Denial of Benefits and Article 17 of the Energy Charter Treaty’ (2009) 113 Penn St. L. Rev. (2009) 1301–1321. 47 For example, Article VI (‘Denial of Benefits’) of the ASEAN Framework Agreement on Services of December 1995 provides that ‘[t]he benefits of this Framework Agreement shall be denied to a service supplier who is a natural person of a non-Member State or a juridical person owned or controlled by persons of a non-Member State constituted under the laws of a Member State, but not engaged in substantive business operations in the territory of Member

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tail in the contribution on ‘Denial of Benefits concerning Aspects of Investments’ by Hoffmann.48 Art. 17 has been the object of considerable discussion in academic litera- 40 ture.49 Arts. 17(1) and 17(2) address two different sets of facts. While Art. 17(1) regulates situations where the possible ‘investor’ is controlled by persons not themselves protected by the ECT, Art. 17(2) applies to situations in which the denying contracting party and the ‘third State’ no longer maintain diplomatic relationships with each other or where measures of foreign economic law of the denying contracting party prohibit transactions with investors of such a State or would be circumvented by granting such advantages. This provision serves to avoid conflicts between the ECT and measures of foreign policy adopted by a contracting party in relation to another State. It is not restricted to investments of investors of non-contracting parties, but also applies to investments of investors of contracting parties. It is Art. 17(1), however, which since the Plama Decision on Jurisdiction50 41 has been the object of much discussion in case law and literature. Unfortunately, further tribunals treated Plama as a kind of binding precedent and copied the reasoning without much further review. There are, however, good arguments to consider that the Plama tribunal might have used the wrong reasoning to justify the – presumably – correct result. Metaphorically speaking, the tribunal used a sledgehammer to break a nut. 42 An analysis of Art. 17(1) should start with its wording. Each Contracting Party reserves the right to deny the advantages of this Part to: (1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized; (…).

(1) Requirements to Exercise the Right

The factual preconditions for the application of ECT Art. 17(1) are the fol- 43 lowing: (1.) there must be a legal entity without substantial business activities in the contracting party in which it is organised and (2.) it needs to be owned or controlled by citizens or nationals (3.) of a third State. The term legal entity should be sufficiently clear. It encompasses companies 44 ‘or other organizations’ which would qualify as an investor pursuant to ECT Art. 1(7)(a)(ii). The ECT, however, does not define the term substantial business activities. The plain meaning suggests that the business activities of the company must not merely formally exist in the legal realm, but must have ‘substance’ States(s)’. The full text of this Agreement is available at http://unctad.org/Sections/dite/iia/ docs/compendium/en/88%20volume%204.pdf. 48 Anne Hoffmann, ‘Denial of Benefits’, ch. 6.II.G., 598–613. 49 See, inter alia, Loukas Mistelis and Crina Baltag (n. 46); Stephen Jagusch and Anthony Sinclair, ‘Denial of advantages under Article 17 (1)’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection and the Energy Charter Treaty (JurisNet, 2008) 17–45. 50 Plama Consortium Limited v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005.

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and be present in the ‘real’ physical world.51 The wording further suggests that ‘substantial’ business activities must be more than the ‘minimal’ activities that any company organised in accordance with the law of a certain contracting party may be involved in by the mere fact of their incorporation (such as the payment of taxes) or the basic activities that any company must perform.52 In addition, ‘substantial’ business activities should involve considerably more activities than the activities pro forma required by the company’s articles of association. A company usually is represented by its directors – which must meet and take decisions. The mere formal existence of such meetings and the taking of decisions cannot constitute ‘substantial’ business activities, since, again, otherwise every company not being completely dormant would have such ‘substantial business activities’, depriving this requirement of any meaning. 45 Art. 17(1) requires that the entity is owned or controlled by nationals or citizens of a third State. The ultimate owner or controller is relevant. If an indirect owner or controller sits in a third State, but is ultimately owned or controlled by an investor from a contracting party (different from the host State) then that investor always would indirectly own or control that investment (according to Art. 1(6)) and thus be protected. 46 Art. 17(1) further requires that the nationals or citizens are from a third State. The term ‘third State’ is not defined in the ECT. A non-contracting party to the ECT in any case is a ‘third State’. If the State is not a contracting party, its nationals and citizens are not protected under the ECT, and Art. 17(1) applies to prevent such nationals and citizens from gaining the protection of the ECT via a company without substantial business activities in a contracting party. Art. 7(10) (a)(i) and Art. 17(2) seem to indicate that ‘third State’ may also be a contracting party. While that would make much sense as it would preclude claims where the company is ultimately owned by host State nationals, tribunals consistently have held that the meaning would be limited to non-contracting parties.53 (2) Exercising the Right 47

Contracting parties have the right to deny the advantages of this part to certain legal entities. This clearly requires that the right is exercised.54 The ECT does not specify how the right is to be exercised. The Plama tribunal argued that 51 Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Award, 26 March 2005, para. 69; see also Loukas Mistelis and Crina Baltag (n. 46) 1315. 52 See also Stephen Jagusch and Anthony Sinclair (n. 49) 20. 53 See also Stephen Jagusch and Anthony Sinclair (n. 49) 19; but see Yukos Universal Limited (Isle of Man) v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 544; Veteran Petroleum Limited (Cyprus) v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 555; Hulley Enterprises Limited (Cyprus) v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 543; Libananco v. Turkey, ICSID Case ARB/06/8, Award, 2 September 2011, paras. 553–556. 54 Plama Consortium v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 28 October 2005, para. 155; see also Herman Walker (n. 46) 388.

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‘a general declaration in a Contracting State’s official gazette could suffice; or a statutory provision in a Contracting State’s investment or other laws; or even an exchange of letters with a particular investor or class of investors.’55 On the basis of that holding, it has been argued that States should exercise their right with a law containing an abstract and general denial of benefits provision.56 That is not convincing. Where the drafters of the ECT wanted the contracting parties to give some general notification, they provided for annexes with which the contracting parties could opt out of some provisions.57 If the drafters had wanted to require such a notification, they could have explicitly provided for it. In addition, the idea of a ‘general’ notification is not practically useful. The exercise of the right under Art. 17 requires an examination of all the facts of a specific case to determine whether a legal entity has substantial business activities. The suggested general provision would not have any legal effect under the treaty as the exercise would not result in the denial of benefits to a specific investor.58 It would be nothing more than a repetition of Art. 17 itself. (3) Effects of Exercising the Right

With the exercise of the right under Art. 17, an investor who might otherwise 48 benefit from the advantages of Part III is denied these advantages. The ‘advantages’ are the rights granted to investors under Part III. The exercise of the right under Art. 17 thus deprives the legal entity of substantive protection granted by Part III of the ECT. Art. 26, which forms the basis of the possible jurisdiction of an ECT tribunal, is not contained in Part III and therefore not affected by the denial of benefits. However, a valid exercise of the right under Art. 17 in relation to a legal entity nevertheless deprives an ECT tribunal of jurisdiction as regards disputes submitted by that entity to arbitration. The consent of contracting parties to submit disputes with investors of other contracting parties to arbitration is limited to disputes concerning an alleged breach of their obligations under Part III of the ECT. Once a contracting party has validly exercised its right under Art. 17 in relation to what is the claimant, the claimant does not have any rights under Part III of the ECT. There are no obligations of a contracting party to that claimant. The facts alleged by the claimants, even if taken to be true, cannot amount to a breach of the respondent contracting party’s obligation under Part III of the ECT. Consequently, a tribunal does not have jurisdiction.59 Contrary to the suggestions by the Plama tribunal,60 this interpretation would 49 not deprive an investor of procedural remedies. It is a generally accepted principle of arbitration law, enshrined in Article 41(1) of the ICSID Convention, that 55 56 57 58 59 60

Plama Consortium v. Bulgaria, id., para. 157. Holger Essig, ‘Balancing Investor’s Interests and State Sovereignty’ (2007) 4 TDM 1, 10. See Annexes ID and IA. See also Loukas Mistelis and Crina Baltag (n. 46) 1319. See also Stephen Jagusch and Anthony Sinclair (n. 49) 44. Plama Consortium v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 28 October 2005, paras. 148–151.

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the ‘Tribunal shall be the judge of its own competence’. A claimant to whom the advantages of Part III have been denied is still free to nevertheless submit a claim to an arbitral tribunal under Art. 26. It then is the task of the tribunal to determine whether the factual preconditions of Art. 17(1) have been fulfilled and whether the contracting party therefore has validly exercised its right or not.61 50 A main point of controversy seems to be whether the exercise of the right in Art. 17(1) has a ‘retrospective’ or a ‘prospective’ effect. This labelling, which has been used by the tribunal in Plama and which has been picked up by other tribunals is very unfortunate. It is based on the implied proposition that with the exercise of the right under Art. 17, the ‘legal entity’ referred to in this provision is deprived of rights it initially had enjoyed. 51 If a contracting party exercises its right of denial under Art. 17(1), a condition already inherent in the legal and factual situation of the legal entity is triggered. If an investor is aware of the ECT at all, it can also be aware of its Art. 17. The main question is whether it merely terminates the existing rights from the moment of declaration on (i.e. a prospective effect) or has a dissolving/resolutory effect, i.e. it dissolves any advantages which the legal entity might have enjoyed under the ECT. Neither the literal meaning nor the wording in its context shed any light on that. The Plama tribunal held that the exercise of the right in Art. 17 could only have a prospective effect such that it could not operate to prevent an investor from bringing a claim and proceeding to the merits.62 This reasoning seems to deprive Art. 17(1) of much of its potential scope of application.63 The premise for this finding has been aptly summarised by the Fraport tribunal: 343. Broadly speaking, there are two types of international investments. The first is comprised of an investment based on or accompanied by some explicit agreement with or unilateral communication from the host state: the second involves an investment in the market of the host state without an accompanying specific agreement between the investor and the government of the host state.64

52

Where there is the first type of investment, the State will be aware of the foreign investor. Such was presumably the situation in Plama, where the dispute

61 Richard Happ (n. 45) 66; Laurence Shore, ‘The jurisdiction problem in Energy Charter Treaty claims’ (2007) 10 Int’l Arb. L. Rev. 58, 63; James Chalker, ‘Making the Energy Charter Treaty Too Investor Friendly: Plama Consortium Limited v. the Republic of Bulgaria’ (2006) 3 TDM 1, 15; cf. Limited Liability Company Amto v. Ukraine, SCC Case No. 080/2005, Award, 26 March 2005, para. 64. 62 Plama Consortium v. Bulgaria, ICSID Case No. ARB/03/24, Decision on Jurisdiction, 28 October 2005, paras. 161–162; also Loukas Mistelis and Crina Baltag (n. 46) 1319; Yukos Universal Limited (Isle of Man) v. Russia, PCA Case No. AA 227, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 458; Veteran Petroleum Limited (Cyprus) v. Russia, PCA Case No. AA 228, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 514; Hulley Enterprises Limited (Cyprus) v. Russia, PCA Case No. AA 226, Interim Award on Jurisdiction and Admissibility, 30 November 2009, para. 457. 63 See also Stephen Jagusch and Anthony Sinclair (n. 49) 40–41; also Anthony Sinclair, ‘The Substance of Foreign Nationality Requirements in Investment Treaty Arbitration’ (2005) 20 ICSID Rev.–FILJ 357, 385. 64 Fraport AG v. The Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007, para. 343.

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arose out of the privatisation of the Plama oil refinery. The tribunal’s holding of a prospective effect was clearly based on this particular set of facts, in which a contracting party might have the possibility to deny benefits once it becomes aware that the preconditions in Art. 17 are met in respect of that foreign investor.65 The tribunal ignored, however, the second type of investments. Unless a State controls each and every foreign investment coming into its territory, which would be incompatible with the stated objective (in the preamble of the ECT) to liberalise investment flows, a State will not be aware of the foreign investor until it is confronted with a notice of arbitration. If the interpretation adopted by the Plama tribunal were apposite, contracting parties in such cases would not be able to effectively exercise their rights under Art. 17 although the preconditions for its exercise are fulfilled. In short, ascribing to the exercise of the right under Art. 17 a merely prospec- 53 tive effect as put forward by the Plama tribunal would severely curtail the scope of application and thus seem contrary to the very object and purpose of this article. 3. Investment Arbitration under the Energy Charter Treaty

This section briefly discusses Art. 26 of the ECT, which allows for direct 54 State-investor dispute settlement.66 Art. 26(1) is the main ‘gateway’ for ECT dispute settlement. Its requirements 55 must be fulfilled before an investor can submit the dispute to arbitration or one of the other fora mentioned in Art. 26(2). There must exist a dispute between a contracting party and an investor of another contracting party. The dispute must relate to an investment of the investor in the ‘Area’67 of the contracting party and must concern an alleged breach of the obligations of the contracting party under Part III of the ECT. The breach need only be ‘alleged’. This is below the standards of substantiation required, e.g., under the so-called ‘Oil Platforms test’.68 The dispute shall be settled, if possible, amicably. As set out in Art. 26(2), this 56 requires that one of the parties (usually the investor) requests amicable settlement by sending a respective letter (a ‘notice of dispute’), to the State. If the dispute cannot be settled amicably within three months after amicable settlement was requested, the investor may choose to submit it (a) to domestic courts or ad65 In Plama, however, Bulgaria even claimed that the claimant had misrepresented its true ownership. In such a case, a State would be forced to distrust foreign investors and make inquiries on its own. 66 For further views, see Juliet Blanch, Andy Moody and Nicholas Lawn, ‘Access to dispute resolution mechanisms under Article 26 of the Energy Charter Treaty’ in Graham Coop and Clarisse Ribeiro (eds), Investment Protection under the Energy Charter Treaty (JurisNet, 2008) 1–16; Adnan Amkhan, ‘Consent to submit Investment Disputes to Arbitration under Article 26 of the Energy Charter Treaty’ (2007) 10 Int’l Arb. L. Rev. 65–73. 67 See the definition in ECT Art. 1(9). 68 Cf. Richard Happ and Noah Rubins, Digest II (n. 33) 332; Oil Platforms (Iran v. USA), ICJ Judgment, 6 November 2003, ICJ Rep. 2003, 161 et seq.

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ministrative tribunals of the contracting party, (b) to any applicable, previously agreed dispute settlement or (c) to arbitration in accordance with Art. 26(3)–(8). It is to be noted that the ‘dispute’ relates to the dispute mentioned in para. 1, i.e. relating to an investment and alleging a breach of the obligations under Part III of the ECT.69 Prudent investors will try to settle, even if seemingly difficult, and wait for the three months period to expire.70 57 Art. 26(3)(a)–(c) provides the consent of contracting parties to submit a dispute to international arbitration. However, the consent is subject to the provisions of sub-paragraphs (b) and (c). Sub-paragraph (b)(i) seems equivalent to an ‘opt-in’ fork in the road clause. Contracting parties listed in Annex ID71 do not give such unconditional consent where the investor had previously submitted the ‘dispute’ to domestic courts or previously agreed dispute settlement mechanisms. For claims against those contracting parties, choosing a forum is final. Consequently, for claims against contracting parties not listed in Annex ID, choosing a forum is not final. The dispute can first be submitted to domestic courts or contractual dispute settlement and subsequent to arbitration.72 Subparagraph (c) provides that contracting parties listed in Annex IA do not give their unconditional consent with respect to disputes arising under the ECT’s umbrella clause. The investor only has the choice to submit to domestic courts (Art. 26(2)(a)) or contractually agreed dispute settlement (Art. 26(2)(b)). 58 Art. 26(4) sets out the three different arbitration venues from which the investor can choose. When the investor chooses to submit a dispute to arbitration, it further has to provide its consent in writing for the dispute to be submitted to one of those venues. It is common practice in investment arbitration to consider the consent of the investor to be implied in a request for arbitration/statement of claim. A prudent investor, however, will write a separate letter providing his consent.73 59 That is because of Art. 26(5). The contracting parties have already given their unconditional consent to such arbitration in Art. 26(3)(a). Together with the written consent of the investor given under Art. 26(4), a written arbitration agreement satisfying the requirements of the New York Convention and the various arbitration rules is deemed to be in existence.74 The arbitration rules of the venue chosen then automatically become part of the arbitration agreement thus concluded. Art. 26(5)(b) is important for those investors who do not submit the dispute to ICSID. It provides, firstly, that any arbitration at the request of any

69 See also Adnan Amkhan (n. 66) 67, who gives further references to the travaux préparatoires. 70 Id., at 71, who argues that it is a jurisdictional requirement. 71 Australia, Azerbaijan, Bulgaria, Croatia, Cyprus, the Czech Republic, the European Communities, Finland, Greece, Hungary, Ireland, Italy, Japan, Kazakhstan, Mongolia, Norway, Poland, Portugal, Romania, Russia, Slovenia, Spain, Sweden, Turkey. 72 Whether it can first be submitted to arbitration and then to domestic courts is a matter of domestic procedural law. 73 Adnan Amkhan (n. 66) 69. 74 ECT Art. 26(5)(a).

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party to the dispute shall be held in a member State of the New York Convention. Secondly, claims submitted to arbitration shall be held to arise out of a commercial relationship or transaction for the purposes of Art. 1 of the New York Convention. Both provisions ensure that a non-ICSID award can be enforced pursuant to the New York Convention. According to Art. 26(6), an arbitral tribunal established under paragraph 4 has 60 to decide the issues in dispute in accordance with the ECT and ‘applicable rules and principles of international law’. This does not give a tribunal leeway to import into the ECT further substantive investment protection provisions. Part III cannot be broadened except due to provisions contained in Part III, such as the MFN obligation. Rather, paragraph 6 is the basis for the tribunal to apply, e.g. the principles of State responsibility. Art. 26(7) needs to be read in conjunction with Art. 25(2)(b) of the ICSID 61 Convention. It provides that an investor ‘other than a natural person’ (i.e. a company or other organisation) having the nationality75 of the contracting party (i.e. being organised in accordance with its laws) which is controlled by investors of another Contracting Party for the purposes of ICSID shall be considered ‘nationals of another contracting state’. Thus, the protection of the ECT is expanded to the companies controlled by investors from other contracting parties.76 It has been suggested that the travaux préparatoires to the ECT indicate this provision applies mutatis mutandis to arbitrations running under UNCITRAL or SCC arbitration rules.77 Art. 26(8) provides that awards shall be final and binding on the parties to the 62 dispute. The second sentence of this paragraph indicates that under the ECT, specific performance is, as a matter of principle, an available remedy. For where the award concerns a measure of a sub-national government or authority, the national government (which is responsible for those actions under international law) might not be able to implement an award ordering specific performance. It is for this reason that the award shall provide that ‘the Contracting Party may pay monetary damages in lieu of any other remedy granted.’ 4. Investment Protection under the Energy Charter Treaty after Twenty Years

The first case under the ECT which finally ended with an award, Nykomb 63 Synergetics Technology Holding AB (Sweden) v. Latvia78 was registered in December 2001. What is the situation after thirteen years? It can safely be said that considerable use has been made of the ECT. 43 cases were known to have been

75 Note that ECT Art. 1(7)(a)(ii) does not use the term ‘nationality’ for companies. That might be an oversight. 76 Philippe Pinsolle (n. 28) 85. 77 Adnan Amkhan (n. 66) 70. 78 Nykomb Synergetics Technology Holding AB (Sweden) v. Latvia, SCC Case No. 118/2001, Award, 16 December 2003.

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filed until November 2011. According to two useful surveys presented at the 4th Energy Charter Treaty Conference in June 2011 in Stockholm,79 the outcome shows that tribunals in general act with due diligence and do not lightly award damages. The ‘success ratio’ for investors is not higher than in non-ECT investment treaty arbitration. So far, 24 awards have been rendered, including four settlement awards by consent. The currently pending and very likely upcoming future cases will lead to awards which further clarify the ECT’s provisions. While the holdings of one tribunal do not bind subsequent tribunals, all those holdings will relate to the same treaty. It is therefore likely that tribunals will consider these holdings as precedents and that lines of consistent jurisprudence will emerge. That, on the one hand, would create legal certainty but, on the other hand, make it difficult to correct ‘bad’ lines of jurisprudence. 64 While between 2002 and 2013, only Afghanistan has acceded to the ECT, the last year has seen a considerable number of States preparing to join the ECT. Montenegro signed the Energy Charter in 2012 and the 2013 Charter Conference in Nikosia endorsed the requests of Yemen and Lebanon to sign the ECT. From the Middle East and North Africa (MENA) region, also Jordan seems to be nearing accession. Morocco, Serbia and Indonesia seem to be interested likewise.80 The next ten years will be even more interesting. Oil might get scarce and renewable energy needs to be invested in. Great potential for renewable energy might lie in the MENA countries (cf. the ‘Desertec’ idea). The situation seems comparable to 1991: new sources of energy are available, but require considerable investments and political stability. This could easily be a field for the ECT. Some of the potential host States are already signatories, and other States in the area have created instruments similar to the ECT.81 65 So let’s wait and see what we can report in ten years.

79 Nils Eliasson, 10 years of Energy Charter Treaty Arbitration, 6 June 2011, available at http:// www.chamber.se/filearchive/4/41105/Report%20Ten%20Years%20of%20ECT%20Arbitratio n,%2030%20June%202011.pdf; Lucy Reed, The Practicalities of Arbitration under the ECT, 9–10 June 2011, available at http://www.sccinstitute.com/filearchive/4/40959/Lucy%20Reed_ presentation.pdf. 80 See Urban Rusnak (n. 20). 81 See the ECOWAS Energy Protocol, A/P4/1/03, 31 January 2003, available at http:// www.comm.ecowas.int/sec/en/protocoles/WA_EC_Protocol_English-_DEFINITIF.pdf.

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Andrea K. Bjorklund 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2. Treaty-Based Procedural Innovations under NAFTA . . . . . . . . . . . . . . . . a) Binding Interpretations of NAFTA Issued by the Free Trade Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) NAFTA Party Submissions to Tribunals on Issues of Interpretation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Consolidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3. Practice-Based Procedural Innovations under NAFTA . . . . . . . . . . . . . . a) Transparency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Amicus Curiae Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Jurisprudential Development and Control Mechanisms . . . . . . . . . d) Frivolous Claims Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4. NAFTA’s Development of Substantive Protections . . . . . . . . . . . . . . . . . . a) National Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b) Minimum Standard of Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) Expropriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 7 8 14 19 26 27 31 35 37 40 41 47 49 53

Literature: Henri C. Alvarez, ‘Arbitration Under the North American Free Trade Agreement’ (2000) 16 Arb. Int’l 393–430; T. Leigh Anenson, ‘Defining State Responsibility under NAFTA Chapter Eleven: Measures ‘Relating to’ Foreign Investors’ (2005) 45 Virginia J. Int’l L. 675–735; Jeffrey Atik, ‘Repenser Chapter 11: A Catalogue of Legitimacy Critiques’, (2003) 3 Asper Rev. Int’l Bus. & Tr. L. 215–234; Frédéric Bachand and Emmanuel Gaillard (eds), Fifteen Years of NAFTA Chapter 11 Arbitration (JurisNet, 2011); Andrea K. Bjorklund, ‘NAFTA Chapter 11’, in Chester Brown (ed), Commentaries on Selected Model Investment Treaties (Oxford University Press, 2013) 465–533; Andrea K. Bjorklund, ‘National Treatment’, in August Reinisch (ed), Standards of Investment Protection (Oxford University Press, 2008) 28–58; Andrea K. Bjorklund, ‘The Promise and Peril of Arbitral Precedent: The Case of Amici Curiae’, in Anne K. Hoffmann (ed), Protection of Foreign Investments through Modern Treaty Arbitration – Diversity and Harmonisation (Association suisse de l’arbitrage, 2010), 165–187; Charles H Brower II, ‘Why the FTC Notes of Interpretation Constitute a Partial Amendment of NAFTA Article 1105’ (2006) 46 Virginia J. Int’l L. 347–363; Maxwell A. Cameron and Brian W. Tomlin, The Making of NAFTA: How the Deal Was Done (Cornell University Press, 2000); William S. Dodge, ‘National Courts and International Arbitration: Exhaustion of Remedies and Res Judicata Under Chapter Eleven of NAFTA’ (2000) Hastings Int’l & Comp. L. Rev. 357–383; Meg Kinnear, Andrea K. Bjorklund and John F. G. Hannaford, Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International, 2006, updated 2008, 2009); Céline Lévesque, ‘Influences on the Canadian FIPA Model and the US Model BIT: NAFTA Chapter 11 and Beyond’ (2006) Annuaire canadien de Droit international, 249–298; Daniel M. Price, ‘An Overview of the NAFTA Investment Chapter: Substantive Rules and Investor-State Dispute Settlement’ (1993) 27 Int’l Lawyer 727–736; Sergio Puig and Meg Kinnear, ‘NAFTA Chapter Eleven at Fifteen: Contributions to a Systemic Approach in Investment Arbitration’, (2010) 25 ICSID Rev.–FILJ 225–267; Noah Rubins, ‘Loewen v United States: The Burial of an Investor-State Arbitration Claim’ (2005) 21 Arb. Int’l 1–36; Julie A. Soloway, ‘NAFTA’s Chapter 11: The Challenge of Private Party Participation’ (1999) 16(2) J. Int’l Arb. 1–14; J. Christopher Thomas, ‘InvestorState Arbitration under NAFTA Chapter 11’ (1999) Can. YBIL 99–136; J Christopher Thomas, ‘Reflections on Article 1105 of NAFTA: History, State Practice and the Influence of

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1. Introduction

The genesis for NAFTA was the decision by President Carlos Salinas de Gortari and President Bush to commence negotiations for a free trade agreement (FTA) between the United States and Mexico. After some hesitation Canada joined the NAFTA negotiations.1 Canada already had an FTA with the United States (which contained an investment chapter but did not provide for investorState arbitration),2 but feared losing its status as the United States’ leading trade partner if the United States and Mexico negotiated a bilateral agreement. NAFTA included investor-State dispute settlement largely because of perceptions about Mexico’s potential volatility as a destination for foreign investment.3 The single strongest influence on the final form of NAFTA Chapter 11 was existing US treaty practice as the United States had the most developed BIT programme at the time of the negotiations but, as a trilateral agreement, NAFTA is to some degree a compromise reflecting the investment policies of three countries.4 2 NAFTA Chapter 11 is notable both for its innovative investor-State dispute settlement provisions and for spawning changes in subsequent agreements negotiated by the United States and Canadian governments in particular, but also in agreements and in procedural rules outside those two States’ direct sphere of influence. It has also generated a considerable number of cases interpreting three of the major standards of treatment in international investment law: national treatment; the minimum standard of treatment; and the prohibition against unlawful expropriation. 3 NAFTA contains several unusual and sometimes controversial procedural provisions, three of which are of particular note. First, its Article 1131(2) enables the Free Trade Commission, which comprises the trade ministers of the three member States, to issue an interpretation of the Agreement that will be binding on tribunals considering cases under the treaty. Second, it permits the non-disputing State Parties to make submissions on questions of interpretation of the agreement. Third, it has an article governing consolidation of related disputes that removes any decision about consolidation from the parties and places it in the hands of a tribunal convened especially to consider that issue. The first 1

1 Maxwell A. Cameron and Brian W. Tomlin, The Making of NAFTA: How the Deal Was Done (Cornell University Press, 2000) 65–66. 2 Free Trade Agreement between Canada and the United States of America (1988) 27 ILM 281. 3 Jeffrey Atik, ‘Repenser Chapter 11: A Catalogue of Legitimacy Critiques’ (2003) 3 Asper Rev. Int’l Bus. & Tr. L. 215, 216; T. Leigh Anenson, ‘Defining State Responsibility under NAFTA Chapter Eleven: Measures “Relating to” Foreign Investors’ (2005) 45 Virginia J. Int’l L. 675, 677. 4 Meg Kinnear, Andrea K. Bjorklund, and John F. G. Hannaford, Investment Disputes Under NAFTA: An Annotated Guide to NAFTA Chapter 11 (Kluwer Law International, 2006, updated 2008, 2009), General Section 23, 30–36.

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two practices in particular are apt to have an impact on the substance of Chapter 11 disputes as well. The NAFTA Parties notably, and not without criticism, used the Article 1131 interpretation procedure to specify that NAFTA’s Article 1105 offers investments of investors only the customary international law minimum standard of treatment, and not free-standing ‘fair and equitable treatment’. Practice under NAFTA has also highlighted issues that have caused the 4 NAFTA States and others in the investment community to alter their practices. The NAFTA governments have been at the forefront of the movement to bring transparency to investor-State dispute settlement, including the now-common perception that investment arbitral tribunals have the authority to permit amici curiae to participate in investment case, when appropriate. Tribunals deciding cases under NAFTA have developed an extensive and generally public body of ‘case law’ around one particular treaty. Concerns about divergent practice and incorrect decisions prompted the United States to include first in its Free Trade Agreement with Chile a provision requiring those States to consider the desirability of establishing an appellate body to hear cases arising from decisions of first-instance tribunals convened under the investment chapter.5 Subsequent FTAs have had similar provisions, though neither the United States nor its treaty partners have taken any action with respect to the establishment of an appellate body. In addition, the NAFTA Parties were early and vigorous proponents of frivolous claims allegations, a stance that sparked the inclusion in subsequent US and Canadian investment agreements of a mechanism to permit the expeditious dismissal of meritless claims, another innovation that sparked changes in the ICSID rules as well. With respect to substantive provisions, most of the investment law cases in- 5 terpreting national treatment provisions have been based on NAFTA. NAFTA’s international minimum standard of treatment provision has sparked a good deal of interest, both due to the Free Trade Commission’s interpretation of it and to lingering differences of opinion about what the standard actually requires. Finally, several cases have caused tribunals to interpret NAFTA’s expropriation provision and the NAFTA Parties and others have reacted to potentially far-reaching arguments by including in subsequent investment agreements language limiting the reach of indirect expropriation in particular. NAFTA’s influence is magnified not just because of the economic power of 6 the three State parties but because the treaty parties have sought to effect change based specifically on their experiences in early investment arbitrations. In addition, one of its innovations – transparency in tribunal decisions – has had an outsized effect on tribunal practice simply because prior decisions are available for use by counsel and by tribunals and are subject to scrutiny by all those interested in investment arbitration. 5 Chile–United States Free Trade Agreement, entry into force 1 January 2004, available at http:// www.ustr.gov/sites/default/files/uploads/agreements/fta/chile/asset_upload_file1_4004.pdf, Annex 10-H.

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2. Treaty-Based Procedural Innovations under NAFTA 7

The NAFTA Parties included in the Agreement detailed and elaborate provisions governing both the substantive obligations undertaken by the NAFTA Parties and the resolution of investor-State disputes. Three are of particular note. a) Binding Interpretations of NAFTA Issued by the Free Trade Commission

Article 1131 of NAFTA is entitled ‘governing law’ and directs tribunals to ‘decide the issues in dispute in accordance with this Agreement and applicable rules of international law.’6 Article 1131(2) of NAFTA provides: ‘An interpretation by the [Free Trade] Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section.’ The freedom of tribunals to interpret the Agreement in a manner that departs from the direction in an interpretive note is thus curtailed by the explicit language of Article 1131(2). 9 As of July 2014, the NAFTA Free Trade Commission had used its Article 1131(2) power only once. On 31 July 2001, the Commission issued Notes of Interpretation regarding access to documents and regarding Article 1105, which is entitled ‘minimum standard of treatment’ and which requires NAFTA Parties to accord investments of investors ‘treatment in accordance with international law, including fair and equitable treatment and full protection and security.’7 The Article 1105 interpretation has raised a good deal of controversy as to the extent of the Commission’s powers under Article 1131, with a focus on the potential for unfairness inherent in the ability of States that are respondents in a pending case to issue interpretive notes that could work in their favour and on the possibility that the Commission effected an amendment rather than an interpretation.8 10 The note regarding access to documents has aroused virtually no controversy within the Chapter 11 context. It provides in part: ‘Nothing in the NAFTA imposes a general duty of confidentiality on the disputing parties to a Chapter Eleven arbitration, and, subject to the application of Article 1137(4), nothing in the NAFTA precludes the Parties from providing public access to documents submitted to, or issued by, a Chapter Eleven tribunal.’ At first blush one might think it should be even more controversial than the Article 1105 interpretation, given that there is virtually no relevant text to interpret. Yet the NAFTA Parties have embraced transparency, as described further in section 3(a) below, and there is sufficient agreement that access to documents serves the public good that part one of the Notes of Interpretation has not only escaped criticism but has 8

6 North American Free Trade Agreement, entered into force 1 January 1994, 32 ILM 605, 639, Art. 1131(1). 7 NAFTA Free Trade Commission, Notes of Interpretation (31 July 2001), available at http://ww w.international.gc.ca/trade-agreements-accords-commerciaux/topics-domaines/disp-diff/NAFT A-Interpr.aspx. 8 On the question of amendment, see Charles H. Brower, II, ‘Why the FTC Notes of Interpretation Constitute a Partial Amendment of NAFTA Article 1105’ (2006) 46 Va. J. Int’l L. 347– 363.

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influenced subsequent treaty practice in the United States and Canada in particular.9 In the second of the 2001 notes, the Commission stated its view that the refer- 11 ence to international law in Article 1105 of NAFTA refers to ‘the customary international law minimum standard of treatment of aliens’, and does not establish autonomous obligations of free-standing fair and equitable treatment or full protection and security. The Commission also included a statement to the effect that finding that a State has breached another NAFTA provision or another international law obligation does not establish a violation of Article 1105. Limiting the protection in Article 1105 to the international minimum standard of treatment has been controversial because it is usually seen as imposing less stringent obligations on host governments, and accordingly providing less protection to investors, than an autonomous fair and equitable treatment standard.10 The Notes were issued whilst several cases were pending against the respondent States, and there was some concern that the standard included in the binding note could be outcome-determinative. Though NAFTA undisputedly gives the Commission the right to issue binding notes of interpretation, the question still arises whether it violates due process for a party in a case to use its authority to influence the outcome.11 Moreover, to the extent the ‘interpretation’ could be viewed as an ‘amendment’, arguments against retroactive changes in the law become that much stronger. It is easy to understand why the NAFTA Parties included a binding interpreta- 12 tion mechanism in their agreement. Issues requiring clarification or interpretation can be expected to arise in a treaty of long duration which contains legal obligations that are open textured or that have not been tested in practice. Yet fundamental notions of justice and due process argue against retroactive changes in the law that work to the detriment of either party in an ongoing case; the no9 Both the 2003 Canadian Model FIPA and the 2004 U.S. Model BIT (and the treaties and investment chapters in FTAs based on them, including the 2012 U.S. Model BIT) provide for public access to documents in investor-State arbitrations brought under those agreements. 2004 U.S. Model BIT, available at http://www.ustr.gov/sites/default/files/U.S.%20model %20BIT.pdf, Art. 29; 2012 U.S. Model BIT, available at http://www.ustr.gov/sites/default/ files/BIT%20text%20for%20ACIEP%20Meeting.pdf, Art. 29; 2003 Canadian Model FIPA, available at http://italaw.com/documents/Canadian2004-FIPA-model-en.pdf, Art. 38. 10 See, e.g., Rudolf Dolzer, ‘Fair and Equitable Treatment: A Key Standard in Investment Treaties’ (2005) 39 Int’l Lawyer 87; Todd J. Grierson-Weiler and Ian A. Laird, ‘Standards of Treatment’, in Peter Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford University Press, 2008) 259–304. See also the commentary in section 4(b) below. 11 The tribunal in Pope & Talbot v. Canada, UNCITRAL (NAFTA) was very exercised by the potential for interference with an on-going case. It was also unhappy that initially the government of Canada had said there was no negotiating history for NAFTA (or at least none that was publicly available), while in another case a series of draft agreements was provided to the tribunal. Pope & Talbot v. Canada, UNCITRAL (NAFTA), Award in Respect of Damages, 31 May 2002, paras. 25–42. Ultimately the tribunal concluded that Canada had breached Art 1105 even under the less stringent post-interpretation standard, and thus it did not definitively rule on the extent to which it was bound by the FTC statement. Ibid., paras. 46–47.

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tion that one party can influence the interpretation of the law to the detriment of the other only exacerbates that concern. One way to diminish concerns would be to permit interpretive notes to be applied only prospectively. This result would eliminate the effect on ongoing cases and alleviate concerns about interference with a quasi-judicial mechanism. It could still give rise to controversy given the argument that investors’ rights, on which they might have relied in making an investment, would be curtailed. Yet to the extent investors were accorded individual rights they were always subject to the control by State parties included in Article 1131. So long as the change is indeed an interpretation rather than an amendment, the investors should have little cause for complaint. If it is an amendment, the question becomes more difficult. Certainly States can and do amend treaties; whether and to what extent an investor’s right outlasts the change to the treaty will depend both on the treaty language – many treaties have survival clauses in the event of their termination, but those are not necessarily applicable in the event of amendment – and on one’s conception of the nature of the individual rights under a treaty and when they vest.12 13 An Article 1131(2)-type provision is not the only avenue by which States can influence their obligations; Article 31(3)(b) of the Vienna Convention on the Law of Treaties provides that tribunals interpreting a treaty should take into account, along with the context ‘any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation.’ A. Roberts has persuasively demonstrated the potential for States to influence the interpretation of their treaties in this manner.13 Yet States still have to show a subsequent practice that establishes agreement of the parties. This has not always been easy in practice; in the set-aside petition in Mexico v. Cargill, the Ontario Court of Appeal determined that the submissions of the State parties did not establish agreement on the practice in question in accordance with the Vienna Convention, notwithstanding the fact that the NAFTA Parties themselves argued to the contrary.14 Moreover, even if they establish the practice they would also have to convince the tribunal to take note of it; the directive to ‘take into account’ the practice together with other context imposes much less constraint on a tribunal than a ‘binding’ interpretation. In fact, the existence of Article 1131(2) might make it