International Arbitration: Lecture 4

International Arbitration: Lecture 4
Dr. Matteo Zambelli
[email protected]
University of West London
School of Law
1
Overview
A. Investment treaty arbitration.
B. The ICSID Convention.
C. BITs and MITs.
D. Expropriation in international investment law.
E. Fair and equitable treatment in international investment law.
F. Q&A.
2
What is investment treaty arbitration?
Public international law, which governs the relations among independent States,
contains rules regarding the treatment by States of foreign investments in their
territory.
Investment treaty arbitration is a form of international dispute settlement that
provides foreign investors with potential relief when they have experienced, or are
experiencing difficulties involving the government of a host country.
The jurisdiction of a commercial arbitration tribunal did not normally extend to
regulatory disputes arising from the state’s exercise of public authority with
respect to foreign nationals, including foreign investors.
With investment treaty arbitration a private adjudicative model is transplanted from
the commercial sphere into the realm of government, thereby giving privatelycontracted arbitrators the authority to make what are in essence governmental
decisions.
3
(cont.)
The evolution of investment arbitration into a system of international adjudicative
review follows from the conclusion of bilateral and regional investment treaties,
most of which provide for the compulsory arbitration of investment disputes
involving the state.
Investment treaties incorporate arbitration treaties in order to provide an
institutional forum and procedural framework for investment arbitration and for the
enforcement of arbitration awards by domestic courts.
There are now at least 2,800 bilateral investment treaties (BITs) in existence.
Several prominent multilateral investment treaties (
MITs) also exist, such as the
North American Free Trade Agreement (
NAFTA), the Energy Charter Treaty
(
ECT), the Dominican Republic – Central America Free Trade Agreement, the
Trans-Pacific Partnership (
TPP) (or the Trans Pacific Partnership Agreement) and
the proposed Transatlantic Trade and Investment Partnership (
TTIP) (between
the US and the EU).
4
Key features of investment arbitration
A key feature of investment arbitration is the authorisation of
international claims
by foreign investors against the state in disputes
arising from the state’s exercise of public authority, and without any
requirement for claims to be filtered by the investor’s home state or by an
international organisation. Under investment treaties, states give a
prospective – or general – consent to the arbitration of future investment
disputes.
In contrast to other international mechanisms, investment treaties
establish an individualised regime of state liability to remedy the unlawful
exercise of public authority. When making a claim under an investment
treaty, an investor normally seeks
damages for harm caused by a state’s
alleged breach of the treaty’s standards of investor protection.
5
(cont.)
Foreign nationals have always faced difficulties in having regulatory disputes
involving a state adjudicated, or awards against the state enforced. Domestic
courts of the respondent state itself commonly declined to rule on the
sovereign acts of governments, whether for reasons of sovereign immunity,
act of state, or non-justiciability. By incorporating the enforcement structure
of the Convention on the Settlement of Investment Disputes between States
and Nationals of Other Member States (
ICSID Convention) and the New
York Convention, investment treaties allow investors to overcome these
restrictions and seek
direct enforcement of an investment arbitration award
against assets of the respondent state before the domestic courts of any
state that is a party to these two treaties.
Investment treaties offer opportunities for forum-shopping. They do so
because they establish varying levels of legal protection for capital flows
between different states – depending on whether a treaty is in place and on
its terms – which in turn creates an incentive for multinational enterprises to
adapt their corporate structure to maximise their legal security.
6
ICSID
The International Centre for Settlement of Investment Disputes (ICSID) is an
international institution, set up under the auspices of the International Bank for
Reconstruction and Development (World Bank), which administers and provides
facilities for the conciliation and arbitration of international investment disputes. It
was set up pursuant to the ICSID Convention and it is considered to be the
leading international institution for the resolution of international investment
disputes.
The ICSID Convention is a multilateral treaty, formulated by the Executive
Directors of the World Bank. It was opened for signature on 18 March 1965 and
entered into force on 14 October 1966. There are currently over 160 signatories to
the ICSID Convention and, of these, over 150 have ratified the Convention. Only
contracting states and nationals of contracting states can participate in an ICSID
arbitration under the ICSID Convention.
7
(cont.)
The ICSID’s organisational structure is comprised of:
The Administrative Council.
The Secretariat.
The Administrative Council is ICSID’s governing body and is comprised of one
representative from each of the contracting states. The president of the World
Bank is, by virtue of its office, chairman of the Administrative Council but has no
rights to vote.
The Secretariat administers ICSID arbitrations and conciliations, and:
Maintains the arbitration files.
Deals with submissions and evidence.
Organises and minutes hearings.
Assists the arbitral tribunal.
The Secretariat is headed by a Secretary General who usually is also a Senior
Vice President and Group General Counsel of the World Bank.
8
ICSID arbitration
Arbitrations and conciliation may come under the auspices of the ICSID
Secretariat in a number of ways. The two main ones are pursuant to the: (a)
ICSID Convention, Rules of Procedure for the Institution of Conciliation and
Arbitration Proceedings (Institution Rules), Rules of Procedure for Arbitration
Proceedings (Arbitration Rules) and Administrative and Financial Regulations or
(b) the ICSID Additional Facility Rules.
The ICSID Secretariat can also, at the request of the parties and the tribunal,
administer and/or provide assistance with the resolution of investment disputes
conducted under ad hoc arbitration provision, such as the UNCITRAL Rules.
The ICSID Convention requirements are mandatory. The parties may modify the
Arbitration Rules by agreement and depart from the Regulations and Institution
Rules to the extent provided.
9
Requirements for the commencement of an ICSID arbitration
The claimant must ensure that it complies with the requirement set out by Article
25 of the ICSID Convention. It provides that: “
The jurisdiction of the Centre shall
extend to any legal dispute arising directly out of an investment, between a
Contracting State…and a national of another Contracting State, which the parties
to the dispute consent in writing to submit to the Centre. When the parties have
given their consent, no party may withdraw its consent unilaterally
.”
The ICSID Convention does not define “investment”. However, if a claimant is
able to point to a potential investment under a relevant BIT or MIT, then this
requirement should be met.
Where there is no relevant BIT (for example, in the case of contractual ICSID
arbitration), certain factors are relevant indicators that there is an “investment” for
the purposes of establishing jurisdiction. I.e. the project or transaction: (a) had a
significant duration; (b) provided a measurable return to the investor; (c) involved
an element of risk on both sides; (d) involved a substantial commitment on the
part of the investor; and (e) was significant to the state’s development.
10
(cont.)
The dispute must be between a “Contracting State” and a “national of another
Contracting State”.
A government subdivision or agency of a contracting state qualifies as a party if
the following two requirements are met:
The host state has designated the particular subdivision or agency to ICSID as being capable of being
party to an ICSID arbitration (Article 25(1), ICSID Convention).
The subdivision or the agency has consented to ICSID arbitration and that consent has been approved
by the state or the state has notified ICSID that such approval is not necessary (Article 25(3), ICSID
Convention).
“National of another Contracting State” means:
A natural person who had the nationality of the contracting state other than the state party to the
dispute on the date on which the parties consented to arbitration and on the date that the request for
arbitration was registered. It does not include any person who on either date also had the nationality of
the contracting state party to the dispute.
A juridical person which had the nationality of a contracting state other than the state party to the
dispute on the date on which the parties consented to submit to arbitration and any juridical person
which had the nationality of the contracting state party to the dispute on that date and which because of
foreign control, the parties have agreed should be treated as national of another contracting state for the
purposes of the ICSID Convention (Article 25(2)(a) and (b), ICSID Convention).
11
(cont.)
Both host state and the investor have consented to arbitration and such consent is
in writing
….
It is a fundamental requirement that the parties’ consent to ICSID arbitration is in
writing (Article 25(1), ICSID Convention). In general, the claimant can establish
consent in one of two ways: (a) by means of an arbitration clause in a contract
(sometimes referred to as “contractual ICSID arbitration”); or (b) noncontractually, that is pursuant to provisions in national investment legislation or
international treaties, such as BITs or MITs. With respect to point (b), the parties
can also express their consent to ICSID arbitration non-contractually and,
effectively, sequentially.
It usually happens as follows:
The host state consents to ICSID arbitration through its national investment laws, or an international
investment treaty to which it is a party. These national investment laws, BITs and MITs often contain
provisions that state that in the event of a dispute relating to the investment, the host state agrees to
resolve the dispute by reference to ICSID arbitration (among other options).
A claimant investor must then perfect the consent to ICSID arbitration by accepting the state’s offer to
so arbitrate. It can do so either by writing to the state accepting the offer of ICSID arbitration or by filing
a request to arbitrate with ICSID.
12
(cont.)
Applicable law: there are 4 potentially relevant laws in an ICSID
arbitration:
The law governing the validity of the arbitration agreement: there is no need for the
parties to select a law governing the validity of the arbitration agreement because this
issue is governed by the detailed provisions of Articles 25 and 26 of the Convention.
The law governing the arbitration proceedings: Article 44 of the ICSID Convention
provides that the proceedings are to be conducted in accordance with the procedural
provisions of the Convention (Articles 41-49) “and, except as the parties otherwise agree,
in accordance with the Arbitration rules in effect on the date on which the parties
consented to arbitration.” The parties cannot select a national procedural law or other
international arbitration procedural rules to govern their ICSID arbitration.
The law governing the substance/merits: the parties may select this law.
In the event of a conflict regarding the substantive law, the law that will resolve the
conflict: Article 42(1) of the ICSID Convention provides default choice of law and conflicts
rule: “
The Tribunal shall decide a dispute in accordance with such rules of law as may be
agreed by the parties. In the absence of such agreement, the Tribunal shall apply the law
of the Contracting State party to the dispute (including its rules on the conflict of laws)
and such rules of international law as may be applicable
.”
13
(cont.)
Most BITs do not have explicit rules with respect to the law applicable to the merits of
the dispute. Article 42(1) of the ICSID Convention provides that, where the parties have
not agreed the applicable law, the tribunal should apply “
the law of the contracting state
party to the dispute (including its rules on the conflict of laws) and such rules of
international law as may be applicable
“.
Tribunals in BIT arbitrations generally apply the substantive provisions of the relevant
treaty itself and other sources of international law rather than national law, even where
the governing law clause in a BIT refers to national law. See, for example,
Vivendi
Compañia de Aguas del Aconquija SA and Compagnie Générale des Eaux v Argentine
Republic
(ICSID Case No ARB/97/3) where the tribunal explained that: “in respect of a
claim based upon a substantive provision of that BIT … the inquiry which the ICSID
tribunal is required to undertake is one governed by the ICSID Convention, by the BIT
and by applicable international law. Such an inquiry is neither in principle determined,
nor precluded, by any issue of municipal law
.”
Article 1131(1) of NAFTA provides: “A Tribunal established under this Section shall
decide the issues in dispute in accordance with this Article and applicable rules of
international law
.”
14
ICSID decisions and awards
The ICSID Convention contemplates that a tribunal may issue both decisions and
awards. There is no express power in the ICSID Convention or ICSID Rules
entitling a tribunal to reconsider its decisions. By contrast, Articles 51 and 52 of the
ICSID Convention expressly permit the revision and annulment of awards. Once a
decision is incorporated into an award, that decision becomes subject to the
remedies in Articles 51 and 52.
There is conflicting authority on the issue of whether a tribunal may re-consider its
decisions. In some cases, tribunals have refused requests to re-open decisions,
holding that the relevant decisions were res judicata and binding even before
incorporated into an award (
ConocoPhillips v Venezuela (ICSID Case No.
ARB/07/30). By contrast, in
Standard Chartered Bank (Hong Kong) Ltd v Tanzania
Electric Supply Co Ltd
(ICSID Case No. ARB/10/20), the tribunal held that it had
the power to re-open and reverse an earlier decision on jurisdiction and liability
where one party had deliberately withheld materials from the tribunal.
The tribunal should draw up and sign the award within 120 days of closure of the
proceedings. The tribunal may extend this by a further 60 days (Rule 46, Arbitration
Rules).
15
Remedies or reparation
Relief awarded is almost always pecuniary damages, in part because investors almost
always frame claims in money terms, and also because the obligation to enforce an
award under Article 54 of the ICSID Convention only covers pecuniary obligations.
However, a tribunal may order non-pecuniary relief, such as an injunction, specific
performance or declaratory relief. For example in
Antoine Goetz v Burundi (ICSID Case
No ARB/95/3), the claimants (Belgians) owned a company incorporated in Burundi,
which had been granted a free zone certificate, conferring tax and customs exemptions.
When Burundi withdrew the certificate, the claimants instituted ICSID arbitration,
claiming annulment of the decision withdrawing the certificate and that Burundi should
pay damages. The tribunal rendered an interim decision on liability, finding
expropriation, and gave Burundi a choice either to give an indemnity (compensation to
render the expropriation lawful) or to revoke the decision that led to the withdrawal.
Ultimately, the parties reached a settlement, with Burundi agreeing to reimburse the
additional taxes and customs duties paid and to create a new free zone regime.
Article 1135 of NAFTA limits the final relief that a NAFTA tribunal may award to
monetary damages (plus interest) or restitution of property. Any award of punitive
damages is specifically prohibited (Article 1135(3), NAFTA).
16
Review procedure of arbitral awards
One of the aspects of ICSID arbitration that makes it so unique is its lack of
appeal process. A party wishing to challenge an award has no recourse under
national laws, it must proceed under the provisions of the ICSID Convention for
interpretation, revision or annulment of an award.
Article 53(1) of the ICSID Convention provides that “The award shall be binding
on the parties and shall not be subject to any appeal or any other remedy except
those provided for in this Convention
.”
An ICSID arbitration award is therefore even less susceptible to challenge in a
national court than an award rendered in accordance with the New York
Convention. It can only be reviewed or challenged under the regime set up under
the ICSID Convention. The national courts of contracting states to the ICSID
Convention must recognise and enforce monetary awards immediately, as if they
were judgements of their own courts.
17
(cont.)
Unlike arbitration under other mainstream commercial arbitration rules, the state
courts do not play a role under their own legislation. Nor does the tribunal have
power under the ICSID Convention, the ICSID Arbitration Rules or in the form of
an “inherent power” to amend its previous rulings or decisions (i.e. ConocoPhillips
Petrozuata and others v Bolivarian Republic of Venezuela (ICSID Case No
ARB/07/30) and
Perenco Ecuador Ltd v The Republic of Ecuador (ICSID Case No
ARB/08/6)).
It is accepted that annulment is distinct from appeal (MINE v Republic of
Guinea
(ICSID Case No ARB/84/4) (Decision on annulment) and Wena Hotels v
Egypt (ICSID Case No ARB/98/4) (Decision on annulment)); as such, the
annulment process is not concerned with the merits of the underlying decision.
ICSID awards are only subject to review under the ICSID Convention itself. To
safeguard the quality of the system, ICSID arbitration permits limited review of
awards by way of interpretation, revision and annulment. Hence enforcing ICSID
awards is less risky than enforcing other arbitral awards because national courts
are excluded and annulment of ICSID awards is very rare.
18
(cont.)
Interpretation: either party can apply to the Secretary General for an
interpretation of the award (Article 50, ICSID Convention). Interpretation does not
entail a review of the merits. ICSID tribunals have held that there are two
conditions for an application for interpretation to be admissible: (a) there must be
a dispute between the parties as to the meaning or scope of the award; and (b)
the purpose of the application must be to obtain an interpretation, not review, of
the award.
Revision: either party can request a revision of the award, but this is only
possible if it has discovered some fact of such a nature as decisively to affect the
award (Article 51, ICSID Convention). The applicant must be able to show that the
tribunal did not know of this fact at the time the award was rendered, and also,
that the applicant did not know the fact and that its ignorance of this fact was not
due to negligence. The application must specify the change sought in the award
(Rule 50(1)(c)(ii), Arbitration Rules). The time limit for requesting a revision is 90
days after the discovery of the fact, and in any event no later than three years
after the award has been rendered.
19
Annulment
A party may request the annulment of an award. A successful annulment
application leads to the invalidation of the award (or portions of it). If the award is
annulled by the ad hoc committee, the dispute may, at the request of either party,
be submitted to a new tribunal constituted in accordance with the ICSID
Convention Chapter 2 (Article 52(6), ICSID Convention).
An application for annulment must be made in writing to the Secretary General.
The application must be made within 120 days after the date on which the award
was rendered, unless the annulment is requested on the grounds of corruption, in
which case the request must be made within 120 days on which the corruption
was discovered.
On receipt of the request for annulment by the Secretary General, the Chairman
will then appoint an ad hoc committee of three arbitrators to deal with the
annulment application. The ad hoc committee will deal with the annulment
application in the same way as if it were an arbitration tribunal under the ICSID
Convention (Article 52(4), ICSID Convention).
20
Grounds on which annulment can be sought
The annulment application can only be based on the following grounds (which
resemble the NY Convention’s grounds):
The tribunal was not properly constituted. For example, if there has been a failure to
comply with the procedure for constituting the tribunal, including challenging members of
the tribunal, set out in the ICSID Convention (
Azurix Corp v The Argentina Republic
(ICSID Case No ARB/01/12) (Annulment proceeding)).
The tribunal has manifestly exceeded its powers. In Sempra Energy International v
The Argentine Republic
(ICSID Case No ARB/02/16) (Annulment proceeding), the
committee held that the tribunal had manifestly exceeded its powers by applying
customary international law rather than the BIT, a decision which is seen as controversial
and as blurring the distinction between review of law and annulment.
There was corruption on the part of a member of the tribunal.
There has been a serious departure from a fundamental rule or procedure. In
Fraport AG Frankfurt Airport Services Worldwide v Philippines, ICSID Case No.
ARB/03/25 a decision was annulled where the tribunal had failed to give the applicant an
opportunity to be heard on certain new evidence. This amounted to a breach of the right
to be heard, and constituted a serious departure from a fundamental rule of procedure for
the purposes of Article 52.
The award has failed to state the reasons on which it is based.
21
MITs
A MIT is an international investment agreement made between several countries
and containing provisions to protect investments made by individuals and
companies in each other’s territories. MITs are similar to provisions in the
“investment chapters” of multilateral economic co-operation treaties and free trade
agreements. For example:
Chapter 11 of the 1992 North American Free Trade Agreement (NAFTA) between
Mexico, Canada and the US.
Part III and Article 26 of the 1994 Energy Charter Treaty (ECT) that binds 51 states.
Chapter 10 of the Dominican Republic – Central America Free Trade Agreement
(CAFTA) between Costa Rica, the Dominican Republic, El Salvador, Guatamala,
Honduras, Nicaragua and the US.
1987 ASEAN Agreement for the Promotion and Protection of Investments.
1994 Protocol of Colonia for the Promotion and Reciprocal Protection of Investments
within MERCOSUR (Argentina, Brazil, Paraguay and Uruguay).
1994 Cartagena Free Trade Agreement (Colombia, Mexico and Venezuela).
With the exception of NAFTA and the ECT, there have been few investment
arbitrations under these multilateral investment treaty arrangements.
22
BITs
A BIT is an agreement between two nation states. Its aim is to encourage and
promote investment between the states and to provide a level of legal protection
to the investment. It requires both states to act in a certain way towards
investments made by the nationals of one state when those investments are
made in the other state.
BITs enable an aggrieved investor to bring a claim directly against a host state in
a neutral forum. Before BITs, the investor would have to petition its own
government to negotiate a diplomatic resolution with the host state, with varying
degrees of success.
As noted above in order for an investor to qualify for BIT protection, there must be
an “investor” with an “investment” located in the host state. When the dispute
arises, it must be between the investor and that host state/state entity. Each BIT
contains a definition of a qualifying investor, and typically this is broad. It will cover
an individual or a company that is a national of one of the states to the treaty.
Investment is equally widely defined; many BITs describe this as “any assets,
directly or indirectly controlled by the investor”
23
(cont.)
BITs between states are not in common form but tend to share certain
features. They generally provide that the state that is hosting the
investment will grant certain protections to an investor from the other
contracting state. As illustrated by case law, these protections typically
include:
Protection from expropriation without compensation. A change in
government or economic crisis can result in host states trying to gain
economic advantage by nationalising privately held economic interests. To
prevent such arbitrary measures, a BIT may require host states to pay
compensation in the event of expropriation.
Protection from treatment less favourable than that offered to nationals.
The attractions to a national government of offering better terms to its own
nationals than foreign investors are clear. Foreign investors do not vote or
provide local support for unelected governments. The ability of local investors
to, for example, obtain raw materials at a better price than foreign investors
makes the foreign investment less competitive and less attractive. A
requirement to treat nationals and non-nationals alike is therefore of
significant value.
24
(cont.)
Provision of full protection and security. A host state must take steps to
protect the assets of foreign investors. For instance, in
Wena Hotels Limited v
Arab Republic of Egypt (ICSID Case No ARB/98/4)
, Wena, a UK company,
entered into an agreement with a state owned Egyptian Company, EHC, to
develop and run two hotels in Luxor and Cairo. EHC repossessed both hotels
and evicted Wena. The Egyptian courts ruled that the eviction was illegal. The
hotels were returned to Wena but all the fixtures and fittings were missing.
The arbitral tribunal found that Egypt had failed to provide Wena with full
protection and security, in accordance with the requirements of the Egypt/UK
BIT. It was unclear whether Egyptian officials, other than officials of EHC,
participated in the repossession and eviction. However, Egypt was aware of
EHC’s intention to repossess the hotels and failed to stop it. In addition, once
the seizures occurred, Egypt did not take prompt action to return the hotels to
Wena.
25
(cont.)
Fair and equitable treatment. This is a developing concept but some broad
trends can be identified. They include a requirement that a host state
maintains a stable investment environment (in contrast, for example, to the
economic crisis in Argentina in the late 1990s). The reasonable expectations
of the investor when making the investment may also form the basis of a fair
and equitable treatment claim. This issue is discussed further on.
The right to the free transfer of investments and returns. Foreign
investors are likely to find their investments to be of limited value if there is no
mechanism for them to transfer their returns to their home state or elsewhere.
Under many BITs, currency control regulations or other actions freezing funds
can be challenged.
26
Umbrella Clauses
Umbrella clauses in varying forms appear in many BITs. Although these clauses
are frequently included at the end of BITs, such that they may appear as an “after
thought”, the object and effect of such clauses has been one of the most hotly
debated issues in investment treaty arbitration.
An “umbrella clause” (also known as an “observance of undertakings” clause) is a
promise made by one signatory state to an investment treaty to comply with all
obligations or commitments it has assumed towards investments made by
investors from the other signatory state. Umbrella clauses take a variety of forms
in different treaties. Typically, however, they are drafted in quite general terms
and do not specify which particular obligations are being undertaken by the host
state.
The term “umbrella clause” derives from the theory that the clauses are designed
to bring obligations or commitments into which a state has entered with respect to
an investment under the protective “umbrella” of the investment treaty.
27
(cont.)
The specific wording of an umbrella clause is crucial to ascertaining its scope and
effect. The following are some examples of umbrella clauses from BITs that were
considered in the well-known (and conflicting) arbitral awards in
SGS v Pakistan
and SGS v Philippines, respectively:
“Either Contracting Party shall constantly guarantee the observance of the commitments
it has entered into with respect to the investments of the investors of the other
Contracting Party” (Article 11, Switzerland-Pakistan BIT).
“Each Contracting Party shall observe any obligation it has assumed with regard to
specific investments in its territory by investors of the other Contracting Party” (Article
X(2), Philippines-Switzerland BIT).
The main issue that has arisen regarding umbrella clauses in the context of
investment treaty disputes is what the effect and scope of umbrella clauses is, in
particular whether they have the effect of “elevating” or “transforming” all
breaches of contract between a state and an investor into a breach of the treaty.
28
(cont.)
This issue was first expressly considered by an ICSID tribunal in SGS v Pakistan,
at the jurisdictional stage in August 2006. Shortly after that, the issue was
determined differently by another ICSID tribunal in SGS v Philippines. The effect
of these decisions is that two ostensibly conflicting lines of authority have been
created in relation to the application and interpretation of umbrella clauses:
The “plain meaning” or “expansive” approach, where the umbrella clause is
generally construed as extending to breaches of any obligation of a state in
relation to the investment (SGS v Philippines).
The “restrictive” approach, which advocates for a narrower interpretation of
umbrella clauses (SGS v Pakistan).
29
Expropriation
Expropriation is a taking by the state for which compensation is required. However,
it is difficult to define with precision the situations covered by the concept. The
definition in investment treaties is so general that it provides little guidance in a
specific case. In the absence of firm guidance, arbitral tribunals have relied on
several tests for assessing whether a state is responsible for expropriation under
international law.
The difficulty of precisely defining expropriation in international law is reinforced by
the fact that expropriation provisions in treaties (over 2,800 BITs) often contain
similar, though distinct definitions. This has led to disputes about the significance
of small variations in treaty definitions.
Expropriation may affect tangible property and also intangible assets of economic
value, in particular contractual rights. Whether expropriation extends to intangible
property in a particular case is a question of the applicable definition of “property”
or “investment”. As most investment treaties contain broad definitions of these
terms, intangible property will usually be protected against expropriation. However,
not all rights will necessarily be capable of giving rise to a claim of expropriation.
30
(cont.)
If intangible assets (including contractual rights) are protected property
rights potentially subject to expropriation, the main problem becomes to
distinguish between: (a) an ordinary breach of contract (which may entail
legal consequences in accordance with the applicable law, often national
law); and (b) an expropriation of contractual rights (which entails
consequences under international law).
The guiding principle in this respect is whether a state acted in its
sovereign capacity. The tribunal in
Azurix Corp v Argentine Republic
(ICSID Case No ARB/01/12) (Award) (14 July 2006) stated: “Whether
one or series of such breaches can be considered to be measures
tantamount to expropriation will depend on whether the State or its
instrumentality has breached the contract in the exercise of its sovereign
authority, or as a party to a contract.” (para 315)
31
(cont.)
Expropriation may be direct or indirect. The difference between the two depends
on whether the legal title of the owner is affected by the measure in question.
Direct expropriations are rare, as states are reluctant to attract negative publicity
by openly taking foreign property.
Indirect expropriations occur much more frequently. An indirect expropriation lets
the investor keep title to property, but prevents him from using it in a meaningful
way. Accordingly, definitions of indirect expropriations focus on the “unreasonable
interference”, the “prevention of enjoyment” or the “deprivation” of property rights.
An expropriation is a compulsory measure. Therefore, a tribunal will not find an
indirect expropriation if the investor has effectively consented to the state’s actions
or inactions.
32
(cont.)
“Creeping expropriation” describes a gradual expropriation through a series of
acts. A United Nations Conference on Trade and Development (
UNCTAD) study
defined the term as “
a slow and incremental encroachment on one or more of the
ownership rights of a foreign investor that diminishes the value of its investment
“.
In Siemens AG v Argentine Republic (ICSID Case No ARB/02/8) (Award) (6
February 2007), the tribunal found that a series of measures taken by Argentina
had amounted to an expropriation. The tribunal described creeping expropriation
in the following terms: “
By definition, creeping expropriation refers to a process, to
steps that eventually have the effect of an expropriation. If the process stops
before it reaches that point, then expropriation would not occur. This does not
necessarily mean that no adverse effects would have occurred. Obviously, each
step must have an adverse effect but by itself may not be significant or considered
an illegal act. The last step in a creeping expropriation that tilts the balance is
similar to the straw that breaks the camel’s back. The preceding straws may not
have had a perceptible effect but are part of the process that led to the break
.”
33
(cont.)
Identification of an indirect expropriation is decided by case-by-case analysis of
the specific facts.
In Plama Consortium v Republic of Bulgaria (ICSID Case No ARB/03/24) (Award)
(27 August 2008), a case under the ECT, the tribunal summarised the crucial
elements: “
(i) substantially complete deprivation of the economic use and
enjoyment of the rights to the investment, or of identifiable, distinct parts thereof
(i.e., approaching total impairment); (ii) the irreversibility and permanence of the
contested measures (i.e., not ephemeral or temporary); and (iii) the extent of the
loss of economic value experienced by the investor
.”
An insignificant restriction or interference with property rights does not constitute
indirect expropriation. However, at least a “substantial loss of control or value” or
“severe economic impact” is required.
34
(cont.)
Some tribunals have focused on the effect of a measure on the economic value of
an investment. In
Metalclad Corp v United Mexican States (ICSID Case No
ARB(AF)/97/1) (NAFTA) (Award) (30 August 2000) (Metalclad), the tribunal said
that expropriation includes “
covert or incidental interference with the use of
property which has the effect of depriving the owner, in whole or in significant part,
of the use or reasonably-to-be-expected economic benefit of property even if not
necessarily to the obvious benefit of the host State
“.
Numerous decisions endorse the view that a significant degree of deprivation of
property rights is required while continued control of an enterprise by the investor
goes against a finding that an indirect expropriation has occurred. The requirement
of a “total” or “substantial” deprivation led these tribunals to deny the existence of
an expropriation where the investor had retained control over the overall
investment, even though it had been deprived of specific rights. For example in
Grand River Enterprises Six Nations Ltd v United States of America (NAFTA)
(Award) (12 January 2011), a tribunal observed that “
ICSID tribunals have rejected
expropriation claims involving significant diminution of the value of a claimant’s
property where the claimant nevertheless retains ownership and control
.”
35
(cont.)
The concept of permissible regulatory action by the state that does not give rise to
compensation claims is generally accepted. The difficulty lies in distinguishing
between an indirect expropriation and a regulatory measure.
The tribunal in Saluka Investments BV (The Netherlands) v The Czech Republic
(UNCITRAL) (Partial Award) (17 March 2006) considered that: “international law has
yet to identify in a comprehensive and definitive fashion precisely what regulations
are considered “permissible” and “commonly accepted” as falling within the police or
regulatory power of States and, thus, noncompensable. In other words, it has yet to
draw a bright and easily distinguishable line between non-compensable regulations
on the one hand and, on the other, measures that have the effect of depriving
foreign investors of their investment and are thus unlawful and compensable in
international law
.”
There is consensus that a state is not liable to pay compensation to a foreign
investor when, in the normal exercise of its regulatory powers, it adopts in a nondiscriminatory manner bona fide regulations that are aimed at the general welfare. It
is also well-established in international law that property rights and investment
protection may not serve as insurance against ordinary business risks.
36
(cont.)
One of the central difficulties in distinguishing a regulatory measure from an indirect
expropriation lies in the identification of legitimate regulatory purposes. In this
context, the Restatement (Third) of the Foreign Relations Law of the United States
mentions “
bona fide general taxation, regulation, forfeiture for crime, or other action
of the kind that is commonly accepted as within the police power of states
” (in the
United States, governmental regulatory powers are referred to as “police powers”).
Also the lately signed or currently negotiated instruments include examples of
legitimate objectives, e.g. “
health, safety and the environment” (TPP and CETA); or
public health, safety, environment or public morals, social or consumer protection or
promotion and protection of cultural diversity
” (TTIP, EU Proposal of 12 November
2015).
Additional Protocol I of the European Convention on Human Rights lists taxation and
other contributions or penalties alongside a number of regulatory activities that it has
held to be covered by the notion of “use control” of property (for example, the
prohibition of construction on land, planning controls and rent control).
37
Expropriation and compensation
A state may exercise its sovereign power in issuing regulatory measures affecting
private property for the benefit of the public welfare. Compensation for expropriation
is required if the measure adopted by the state is “
irreversible and permanent and if
the assets or rights subject to such measure have been affected in such a way that
… any form of exploitation thereof … has disappeared
“. Conversely, a measure does
not qualify as equivalent to expropriation if the investment continues to operate,
even if profits are diminished.
For the purposes of compensation, the difference between lawful and unlawful
expropriation must be considered. The difference was recognised by the PCIJ in
The Factory at Chorzów (Germany v Poland) (Claim for Indemnity) (Merits), PCIJ
Series A, No 17 (1928) 47 and has been endorsed by most, if not all investment
tribunals. An expropriation will generally be deemed lawful if it is: (a) for a public
purpose; (b) non-discriminatory; (c) carried out under due process of law; and (e)
accompanied by payment of compensation.
38
(cont.)
In general terms international law requires compensation equivalent to the fair
market value of the investment taken, unless such compensation would lead to a
manifestly inequitable result. An investment tribunal, however, will usually be
required to apply the relevant treaty provision rather than general principles of
customary international law.
The standard of compensation in investment treaties is found in the expropriation
clause, which provides that the payment of compensation is one of the conditions
for a lawful expropriation The requirement of “adequate” compensation is
prevalent in investment treaties. Other treaty formulae refer to “compensation”
(without a qualification), to “just”, “fair”, “just and equitable” or “fair and equitable”
compensation. Treaty expropriation clauses provide more specific guidance on
the compensation standard. The term “fair market value”, universally deemed to
achieve the standard of full compensation, is prevalent.
The amount of compensation for unlawful expropriations is governed by
customary international law on state responsibility for internationally wrongful acts.
39
Fair and equitable treatment
Investment treaties frequently impose an obligation on host states to accord
foreign investments fair and equitable treatment (FET). FET is one of the most
widely invoked standards of investment protection, together with the right of
investors not to have their investment unlawfully expropriated.
There is no single definition of the FET standard and its precise meaning will in
part depend on the facts of a particular case. However, it is possible to discern
specific factual situations to which the standard will apply, including:
Denial of justice.
Lack of procedural fairness, due process or transparency.
Lack of good faith.
Coercion or harassment.
Lack of protection of investor’s legitimate expectations.
Lack of stable and predictable framework for investments.
Compliance with contractual obligations.
A requirement of proportionality in relation to measures affecting foreign investors.
Discrimination and arbitrary conduct.
40
(cont.)
A good definition of the FET standard was offered by the tribunal in Técnicas
Medioambientales Tecmed SA v Mexico (ICSID Case No ARB(AF)/00/2), Award of 29
May 2003 (Tecmed) : “…
in light of the good faith principle established by international
law, [FET] requires the Contracting Parties to provide to international investments,
treatment that does not affect the basic expectations that were taken into account by
the foreign investor to make the investment. The foreign investor expects the host State
to act in a consistent manner, free from ambiguity and totally transparently in its
relations with the foreign investor, so that it may know beforehand any and all rules and
regulations that will govern its investments, as well as the goals of the relevant policies
and administrative practices or directives, to be able to plan its investment and comply
with such regulations. Any and all State actions conforming to such criteria should
relate not only to the guidelines, directives or requirements issued, or the resolutions
approved thereunder, but also to the goals underlying such regulations. The foreign
investor also expects the host State to act consistently, i.e. without arbitrarily revoking
any pre-existing decisions or permits issued by the State that were relied upon by the
investor to assume its commitments as well as to plan and launch its commercial and
business activities. The investor also expects the State to use the legal instruments that
govern the actions of the investor or the investment in conformity with the function
usually assigned to such instruments, and not to deprive the investor of its investment
without the required compensation
.” (para 154)
41
(cont.)
The obligation to accord FET to foreign investments is incumbent on the host
state. Pursuant to the principles of state responsibility and attribution under
customary international law (as codified in the International Law Commission’s
(ILC) Articles on Responsibility of States for Internationally Wrongful Acts (2001)
(ILC Articles on State Responsibility)), a host state is responsible for the conduct
of all its organs, including all administrative, judicial and legislative organs at all
levels (Article 4, ILC Articles on State Responsibility).
The conduct of a person or entity that is not an organ of the state but is
nonetheless empowered by the state to exercise elements of governmental
authority will be considered an act of the state under international law (provided
the person or entity is acting in that capacity in the particular instance in question)
(Article 5).
The conduct of a person or group of persons is considered an act of a state under
international law if the person or group of persons is in fact acting on the
instructions of, or under the direction or control of that state, in carrying out the
conduct (Article 8).
42
(cont.)
Many investment treaty tribunals have interpreted the FET standard as importing
an obligation of proportionality. In
Occidental Petroleum Corporation v Republic of
Equador
, Award of 5 October 2012 (ICSID Case No. ARB/06/11), an ICSID
tribunal found that Ecuador’s termination of a contract with a subsidiary of
Occidental was not proportionate, even though this was a remedy which was
expressly foreseen by the relevant contract. The tribunal considered that: “
where
the administration wishes to impose a severe penalty, then it appears to the
Tribunal that the State must be able to demonstrate (i) that sufficiently serious
harm was caused by the offender; and/or (ii) that there had been a flagrant or
persistent breach of the relevant contract/law, sufficient to warrant the sanction
imposed; and/or (iii) that for reasons of deterrence and good governance it is
appropriate that a significant penalty be imposed, even though the harm suffered
in the particular instance may not have been serious
.” (para 416).
However FET is considered to be a general standard that also encompasses
other standards of treatment, such as prohibition of arbitrary or discriminatory
treatment or the obligation to provide full protection and security. Therefore, even
though those standards are considered separate, they often overlap with the FET
standard.
43
Q&A
Any Questions?
44