Students will be expected to have a good understanding of the following awards. Students however will be expected to have some familiarity from secondary sources on other awards. The six are chosen only so that students may have a flavour of the types of ICSID and other awards that exist in the field. It is obviously not possible to survey all the awards in this short course. The awards are available for download from the Workbin:
1. Fraport AG Frankfurt Airport Services Worldwide v. Republic of the Philippines , Award of August 16, 2007 (ICSID Case No. ARB/3/25)
Annulment Award in Fraport.
3. Malaysian Historical Salvors Sdn Bhd v. The Government of Malaysia, Award on Jurisdiction of May 17, 2007 (ICSID Case No. ARB/05/10) and annulment.
4. CMS Gas Transmission Company v. Argentine Republic, Award of May 12, 2005 (ICSID Case No. ARB/01/8)
5. Yaung Chi Oo v. Government of the Union of Myanmar, Award of March 31, 2003 (ASEAN I.D. No. ARB/01/1)
7. We will also follow the Philips Morris v Australia arbitration currently before ICSID.
References will be made to articles and other texts in the course of the lectures.
Most of the arbitral awards referred to in the course can be found in the following websites:
There are several books that deal with this area. They are kept on the reference shelves in the CJ Koh Library. Some important works are:
McLachlan, Shore and Mistelis, International Investment Arbitration (OUP, 2008).
Duggan, Wallace, Rubins and Sabahi, Investor-State Arbitration
Zachary Douglas, The International Law of Investment Claims (CUP, 2009).
Sornarajah, The Settlement of Investment Disputes (2001).
A monumental work on the ICSID Convention is Christoph Schreuer, The ICSID Convention: A Commentary (2nd. ed.,2009)
A convenient work on the substantive law is M Sornarajah, The International Law on Foreign Investment (3rd ed. 2010).
Also, Dolzer and Schreuer, International Investment Law (2009).
Students need to read only relevant portions of these works, IF AT ALL. The relevant pages will be posted on ivle.
Students are advised to read the Lecture Outlines before coming for each lecture.
THESE OUTLINES ARE INDICATIVE ONLY AND COULD BE CHANGED PRIOR TO LECURES
ARBITRATION OF INVESTMENT DISPUTES
LECTURE ONE. (INTRODUCTION) 17 JANUARY 2013
This course deals with a specialised type of arbitration concerning disputes that arise between states or entities of states and foreign investors. It is important to place it among other types of arbitration and to understand the similarities and the differences.
The Origins of arbitration. Consent as the basis of arbitration. Consent is the most fundamental principle common to all arbitrations
Early hostility of courts to arbitration. Progressive reduction. The modern position in the UNCITRAL Model Law. The general acceptance of the Model Law. There are swings between acceptance and partial hostility in modern times.
Court assistance important to the conduct of arbitration. Initial problems of constitution of the tribunal. Orders against third parties; enforcement of the award after it is made.
The four major types of arbitration. i. domestic arbitration ii. international commercial arbitration iii foreign investment arbitration iv arbitration of disputes between states. Distinction and shared characteristics.
Distinction between domestic arbitration and international commercial arbitration. (i) there must be forum and the lex fori must dictate rules of procedure. ii. There must be a law applicable to the contract; iii the resulting award must have a nationality so that it could be enforced.
Need for international commercial arbitration to be supported by treaties and harmonized rules. The New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958); The Washington Convention on the Settlement of Investment Disputes between States and National of Other States (1965); The UNCITRAL Arbitration Rules (1976) The UNCITRAL Model Law (1985 and Revisions in 2006).
Some basic rules relating to arbitration.
The jurisdiction of all tribunals depends on the consent of the parties, given in writing. Three types of documents in which the consent is expressed. i. the main contract containing an arbitration clause; ii. a submission agreement made after the dispute had arisen. iii. in the case of foreign investment, through a standing consent given by a host state in an investment treaty, such as the Singapore-China investment treaty.
The clause containing the consent survives the extinction of the contract. This, known as the separability doctrine, ensures that the competence of the tribunal to determine its competence survives.
The subject matter of the dispute must be arbitrable. It must be a commercial dispute and not implicate the public interest. Eg. a crime or a matrimonial dispute are not arbitrable.
Submission may be to ad hoc tribunals or to arbitral institutions like the ICC, LCIA, SIAC. In the case of foreign investment disputes, the principal institution is ICSID (International Centre for the Settlement of Investment Disputes, a World Bank body, set up by the ICSID Convention mentioned above in 1965.
There must be basic rules of natural justice observed in the consent of the proceedings. No bias; both parties must be given hearing.
Role of courts is diminished to control at the beginning deciding on arbitrability and composition of tribunal and at the end, deciding on whether correct procedures had been followed and whether the tribunal had jurisdiction.
THERE WILL BE NO LECTURES IN THE WEEK BEGINNING 21 JANUARY 2013
Foreign Investment Disputes. Origins of disputes and dispute settlements in early views in international law on the diplomatic protection of nations.
31 January 2013
THE INTERNATIONAL LAW BACKGROUND.
1. The theory of diplomatic protection. Nationality of claims. The injury to the national is an injury to the state in respect of which the state may claim relief.
2. Law on State Responsibility for injuries to aliens. First, the affected alien should seek remedies from local courts. Exhaustion of local remedies rule. If the remedies sought amont to a denial of justice,
state responsibility would arise. A denial of justice is not just an error in law by a court but a judicial act so egregious and offensive as to shock the conscience of a bystander. There must be an inordinate error and a gross and manifest deviation from the law for there to be a denial of justice.
Secondly, there must be a violation of the international minimum standard
. The Neer Claim
(1926). (The treatment should "amount to an outrage, to bad faith, to wilful neglect of duty or to an insufficient of governmental action so far shor of intenational standards that a reasonable and impartial man would readily recognize its insufficiency".
Early system had an element of force. States were forced into arbitration of the dispute. Latin American states began to feel that arbitration was linked to power. This history colours attitudes to arbitration still.
2. Early schism on the protection of nationals between US and Latin America. The international minimum standardar vs the Calvo Doctrine.
3. Decolonization in the mid twentieth century. The espousal of the Calvo Doctrine by the newly independent states of Africa and Asia. The universalization of the split between the international minimum standard and the national standard. The New International Economic Order resolutions at the General Assembly of the United Nations.
4. Given the vagueness in the law, two strategies were devised. 1. Contractual protection. This idea has been in existence from the time of the Lena Goldfields Case (1930) described in an article by Veeder. This article is on ivle. The notion was refined as time passed. 2. Treaty protection. The international law situation being unclear, treaties were made bilaterally to deal with the situation.
5. The practice of making bilateral investment treaties commenced in 1959 with the German-Pakistan treaty of that year.
6. The treaties provided for compensation and mandated treatment standards. In 1992, in AAPL v Sri Lanka, the first invocation of the treaty provision on unilateral protection of the right of investment in the foreign investor. As a result, there was a dramatic rise of foreign investment arbitration from 1991.
7. Form a clear idea of the distinction between contract violations which the first system protected and the violation of treaty standards which the second system protected. The second system was meant to protect against violations of international law standards of treatment such as the international minimum standard and against expropriation. We shall look at this distinction more carefully later on.
LECTURE ON 7 February 2013.
THE FOREIGN INVESTMENT CONTRACT
1. All transnational contracts seek the avoidance of risk. eg. the international sales transaction. Risks avoided through insurance, documentary credits, choice of law and arbitration.
2. Foreign investment transactions; the risks are greater as (i) there is a longer duration (ii) the government is the other party; it can change laws. (iii) political and economic changes affecting the industry or state will bring about disputes as governments will have to respond to these changes. (iv) The law on state contracts provides for the accommodation of such changes. (v) But, this offers no protection to the foreign investor.
3. Protection of foreign investment is the reason why arbitration assumes centrality in investment law. Neutral, overseas arbitration using external legal standards is seen as balancing off the power of the state to effect changes to its law and thereby affecting the interests of the foreign investor.
4. Crucial to understand how the technique of invoking arbitration is employed. Basically there are two ways in which arbitration is made possible. (i) The existence of an arbitration clause in the original contract. (ii) the existence of an investment treaty indicating the right of an investor who is a national of one of the parties to invoke arbitration against the state unilaterally. We will deal with each of these methods in turn.
5. It must have been made in accordance with the laws of the host state. Otherwise, the contract would be potentially illegal
and therefore void.
6. Illegality is a productive source of challenge to arbitration. Technically, the law is that an arbitration tribunal has the right to decide on its own jurisdiction (competence-competence). This is on the theory that the arbitration agreement is distinct from the main agreement. It may not apply where circumstances that affect the whole transaction exist. Illegality
may be such a situation.
7. So for whatever type of arbitration (whether under contract or under treaty, or whatever other distinction that may be drawn), the absence of a valid agreement means that there would be an absence of jurisdiction in the tribunal. Yaung Chi Oo Ltd. v Myanmar
; Fraport v Philippines.
What of illegality during performance?
There is a case for argument that an investor who violates internal law moves out of protection. This depends on the nature of the illegality. Consider facts in Amco v Indonesia
8. Another situation in which the agreement becomes so tainted that it becomes invalid and hence cannot support arbitration is where it is obtained through bribery
. The position in domestic law is that if the bribery does not affect the arbitration clause, then, the arbitration tribunal decides on jurisdiction. Fiona Trust and Holding Corporation v Yuri Privalov  UKHL 40. But, international tribunals have generally frowned on bribery. World Duty Free Ltd v Kenya
. Cleary, bribery is unlawful, offends public policy and is now frowned upon in internatonal documents such as the UN Convention on Bribery and the OECD Convention on Illiticit Payments. Also, national legislation prohibits it. In the US, the Foreign Corrupt Practices Act applies extraterrioally. In the case of Singapore nationals, it is possible that the singapore legislation also applies extraterritorially.
9. The problem often arises whether an agreement made by a state corporation is illegal where it is made ultra vires.
The dominant rule is that the state cannot rely on its own law to plead ultra vires as it would know its own law better than the foreigner. The rule is drawn from the law on treaties that a state cannot withdraw from its treaty obligation on the ground that the treaty did not conform to its constitution. The application of this principle to contracts is difficult yet a large number of arbitral awards agree that the internal law of the state could not be used to resile from its contractual obligations on the basis of the ultra vires prnciple.
10. Is there an arbitrability doctrine
in foreign investment arbitration? The argument is that there is not, because, as we shall see, the contract is located in either international law or transnational law. But, in Phoenix Action v The Czech Republic
(2009), the argument is made on the basis of ius cogens principles, that an agreement that violates basic norms of international law are void so that an agreement that involves forced labour, the commission of genocide or torture will be invalid.
11. Where a contract exists and its arbitration clause is valid, then, the tribunal has jurisdiction to consder the case. (Note the Competence-Competence Doctrine and the extent of its applicability to foreign investment arbitration).
THE THEORY OF INTERNATIONALIZATION.
12. The Choice of Law in Foreign Investment Contracts.
The construction of the doctrine. Lena Goldfields Arbitration (1930). Idea remains dormant until three Middle Eastern arbitrations. The Abu Dhabi Arbitration
(1951); the Qatar Arbitration
(1953) and the Aramco Arbitration
13. The policy reason: foreign investment will not flow unless there is security provided for the contract. Hence, necessary to base the contract in an external, transnational system. Philip Jessup, Transnational Law (1956). Lord McNair, "General Principles of Law" (1958) 33 BYIL 1.
14. The legal argument relating to internationalisation of contracts: (i) the stabilization clause. (ii) the choice of law clause indicating general principles. (iii) an arbitration clause indicating external tribunal. Party autonomy principle supports internationalisation.
15. Sanctity of contracts as the main general principle. Pacta Sunt Servanda. Note the application of a principle of international law of treaties and the attempted elevation of the foreign investment contract to the status of treaties.
16. Confirmation of the doctrine in the Libyan Arbitrations. Texaco v Libya
; BP v Libya
; Liamco v Libya
. Texaco is the highpoint of the internationalization theory. See extracts from Texaco v Libya
14 February 2013
THE STORY AFTER TEXACO.
1. The Aminoil Case
(See Workbin for extract of Text from Harris).. Takes into account changed circumstances. Emphasizes renegotiation of contract in face of changed circumstances. Clausula Rebus sic Stantibus in opposition to Pacta Sunt Servanda. Aminoil also must be taken as supporting the theory of internationalization.
2. The developing states react by seeking to localize contracts. Three efforts. (i) Activity at the international level through General Assembly resolutions associated with the NIEO. (ii) Domestic legislation on entry and operation of foreign investment (iii) State entities created to operate in specific economic sectors and regulation of these sectors.
3. Article 42 of the ICSID Convention. Party autonomy. If not, then, the law applicable would be the “law of the host state and international law”. The tribunals have held that there is a supervisory role that international law plays so that if the host state laws are contrary to international law, they must give way. Triumph of international law (if it exists). Is international law that created by tribunals and writings of publicists? Can these weak sources stand against the expressed wishes of large group of states in the NIEO documents and their own domestic legislation?
4. Three Indonesian Cases: .Himpurna
, Karaha Bodas
, Phaiton Energy.
. The Indonesian Cases after Suharto. Himpurna, Karahabodas, Phaiton Energy. Antisuit injunctions by the Indonesian courts. Tribunals treat them as not binding because they are international tribunals applying international law. Firmly establish the internationalization theory and show that it is alive and kicking.
6. Enforcement of the decree in Karaha Bodas v Pertamina.
The relevance of the New York Convention on the Reciprocal Enforcement of Foreign Arbitral Awards..
7. The law is still unclear on this issue. (Depends who you ask. This is the view I take in my book but most Western international lawyers would disagree.) But,there is a disagreement hence necessary to think in terms of an alternative system. Here is where investment treaties come in.
8. Before looking at the treaties, I will make another survey of the position in international law, leading upto the making of the investment treaties from 1959 onwards. It is also important to look at the trends in the 50 years of treaty making.
MOOT PROBLEM FOR DISCUSSION.
Mudistan is a state which abuts the Blue Sea which is an internal sea that is rich in oil. Underwater exploration of such oil has to be funded by external capital as Mudistan lacks the technology or the financial resources to undertake undersea exploration. It makes a contract with Oilco which is willing to explore the area. Oilco finds oil but Mudistan which now has a new government refuses to permit Oilco to exploit the resources through which alone it could recover the initial capital and other resources it had spent on the exploration. The reason given for the breach of contract by Mudistan is that the exploitation in the area is risky because of the hydrochloride gases that further underwater drilling would cause to escape, posing a danger to the coastal area. It also states that a rare species of sturgeon will be destroyed if the drilling is carried out. The contract has a stabilisation clause and an arbitration clause. An arbitration tribunal has been constituted to hear the dispute.
Argue the Case for Mudistan (Eric and Muthucumaran) the case for Oilco (David and Sornarajah).
THE INTERNATIONAL LAW PRIOR TO THE TREATIES AND AS IT EXISTS OUTSIDE THE TREATIES.
1. The law was based on diplomatic protection of aliens and their property. This almost meant recourse to war or exerting pressure through gun-boat diplomacy in the old days. The Latin Americans resisted this system arguing against intervention by the home state of the alien. The principle arguments were couched in the form of the Calvo Doctrine.
2. But, the US insisted on such protection where it believed that international minimum standards were violated. These were external standards to which the host state had to conform.
3. Latin American resistance led to some compromises. Firstly, it was a requirement that the alien should have recourse to local remedies except where such remedies were illusory.
4. This led to the exhaustion of local remedies rule. It is only if the local courts acted atrociously in misapplying the law in a manner that would shock the conscience of a bystander that state responsibility arose. There must then be a denial of justice. The Neer Claim.
5. Developing countries resisted even this compromise arguing that the only remedy that alien could seek was the remedy provided by local courts under local laws. A schism then continued to exist.
6. The International Law Commission sought to codify the law on state responsibility. Its efforts at stating the substantive principles failed as developing countries refused to accept them.
7. The International Law Commission then changed tack and concentrated on defining the less controversial secondary or adjectival rules on state responsibility. The Draft Code produced had statements on the law on attributability of acts to the state, liability for ommissions to act and circumstances precluding liability like necessity.
8. Procedural laws existed as there was the ICSID Convention and other institutional rules relating to the conduct of arbitration.
9. The system made it possible for the procedural and adjectival rules to be invoked by claimants so that the substantive law could be decided on by arbitrators.
10. Into this system, came the investment treaties which contained the necessary substantive rules on state liability which could be applied by tribunals.
1. Again, I assume that the law outside the treaties is different. Here too there is a disagreement between the position I take and that taken by most, not all, Western international lawyers. Many Western international lawyers believe that treaty principles are customary international law because there are over 2700 investment treaties now. I, along with others, take the view that they are individually negotiated treaties each with its own internal balance and hence cannot be regarded as contributing to custom.
2 My view is that the treaties do not affect customary international law, if such a law had existed. There were two sets of rules contending for dominance; one the Western view which emphasized the external minimum standard and the other the Calvo doctrine which had been espoused by the newly independent states of Africa and Asia.
3. Given this situation, capital exporting states began to make bilateral investment treaties with capital importing states. Investment treaties are lex specialis
creating law as between the parties, given the confusion that existed as to the principles on the area of investment in international law.
4. Why would states want to make treaties limiting the right of expropriation and treatment and thereby limiting the exercise of their sovereign powers of control over foreign investment? We have to go to the same policy reasons that support the theory of the internationalisation of foreign investment contracts.
21 February 2013
TREATY-BASED INVESTMENT ARBITRATION.
1. We have so far dealt with contract based arbitration where jurisdiction is based on the arbitration clause and damages are claimed on the breach of contract. Now, we go on to consider the type of investment arbitration that has evoked greater attention- arbitration based on jurisdiction based on the dispute settlement provision of an investment treaty and claims based on the violations of standards or provisions in the treaty.
2. It is necessary to look at the background and the structure of the treaties. The treaty practice began in 1959. The first treaty between Germany and Pakistan was concluded in December 1959.
3. The reason for the bilateral treaties are that states party to them made the treaties so that as between the two of them the law on investment protection would be certain, though general international law was in a state of chaos. An investment treaty contains lex specialis.
4. There were around 900 treaties in 1990. The number of the treaties sky-rocketed to almost 2600 within ten years. Yet, no multilateral investment treaty applicable globally has been made. The last attempt was in 1995 when the OECD attempted such an exercise. It failed because of the opposition of developed states to some provisions. Effort within the WTO to bring about an instrument on investment also failed.
5. Failure indicates that there are no multilaterally accepted norms on investment protection. Yet, there are claims to the existence of such a global or multilateral law because (i) the 2700 treaties constitute customary international law. This is not so, as each treaty, though similar in form, contains differently negotiated provisions. (ii). the most favoured nation provision in the treaties could be used to create a network of rules that apply universally.
6. The 1990s also the period of neo-liberalism. The aim of the treaties was to promote liberalisation of the flows of foreign investment. The world was caught up in the vortex of privatisation and liberalisation of movement of assets. it resulted in less regulatory control over the economy and greater leeway for market forces.
7. The neo-liberal policies were brought to an abrupt end in Asia with the economic crisis. It result was the in state instituting greater controls. An example is the institution of greater controls over currency flows in Malaysia. There was a return to regulation and for more indigenous presence in business.
CAUSES OF ACTION UNDER THE TREATIES.
8. In the West too there was disillusionment with globalization and economic theories of those favouring it. By, 2004, this disenchantment had set in. The global economic crisis took place in 2008. We can identify three distinct periods in these developments. The first period of treaties (1959 to 1990) where the aim was to provide certain rules on investment protection given the contest of norms within international law. The second was the neo-liberal period where the treaties emphasized liberalization (particularly those of the US, Canada, Japan and South Korea) and investor-state dispute settlement. The third was a change away from neo-liberalism introducing space for the state to regulate foreign investment and for balancing concerns with human rights, labour rights, the environment and other issues of social welfare.
9. As a prelude, we shall look at two treaties reflecting the first and the third phases. We shall look at the principle provisions of the 1975 treaty between Singapore and the UK first.
10. Like all investment treaties, the Preamble states that the treaty recognises that mutual flows of investment will promote prosperity in both states. This cannot be as flows would be one way. The treaty is asymmetrical. It requires one party to give protection to investments on standards in the treaty which are enforced by external arbitration.
11. This is followed by a definitional article. Investments are defined as "every kind of asset" and then the types of investment are spelt out. Three broad categories: tangible, intangible (intellectual property) and business concessions obtained from the government.
12. Then investors are defined as (i) nationals (ii) corporate nationals. The test is one of incorporation. Two problems. (i) Non-nationals could incorporate and receive protection. (ii). Through incorporation a foreign investor could lose its nationality and acquire the nationality of the host state.
13. Article 2 deals with standards of treatment. It creates the first cause of action under the treaty. Three standards are referred to in Article 2 (2). They are (i) the fair and equitable standard of treatment (ii) full protection and security and (iii) non-discriminatory standard of treatment or otherwise referred to as the national standard of treatment.
14. Article 3 deals with the most favoured nation treatment. This innocuous provision has been put to creative uses as we shall later see.
15.Article 5 deals with the other cause of action, namely expropriation. As would be expected, in 1975, this was the focus of attention in investment law. The principal ingredients of expropriation law are spelt out in the Article.
16. No expropriation or nationalisation or any measure equivalent to an expropriation or nationalisation except for (i) a public purpose (ii) payment of prompt adequate and effective compensaiton. (the Hull formula). What the formula means is spelt out. Prescription of valuation and procedure for valuation.
17. Problem here. Protects the property of the foreigner more effectively than that of nationals. No right to property in Singapore but the right to property of the British investor is guaranteed as he is given full compensation which is proteced by overseas arbitration. Argument that treaty creates global constitutional standards at variance with national constitutions.
18. There is a right to repatriation of profits and assets provided in Article 6. The violation of this right is the third cause of action. Again, in times, say of crisis calling for exchange controls, the foreign investor may have a right to send money out.
19. Article 8 is the crucial provision. It provides for dispute settlement. It provides for advanced consent of the state so that a foreign investor could bring an arbitration in the event of an alleged breach of any of the provisions giving rise to a cause of action by unilateral filing of a request for arbitration at ICSID.
20. This is referred to as "arbitration without privity" (Paulsson, article in Workbin). But, this is a misnomer. An arbitration agreement is constructed. There is advanced consent given in the treaty provision by the state. It is accepted by the foreign investor the moment a request for arbitration is filed thereby giving rise to the arbitration agreement.
21. This techniqe is invoked in two situations. (i) on the basis of the treaty, its first invocation being in 1990 in AAPL v Sri Lanka and (ii) where the foreign investment legislation promises arbitration, this is also construed as advanced consent. There is a transfer of judicial sovereignty
to outside tribunals. Also, enforcement of awards can be done by foreign courts.
22. The treaty creates an effective regime of investment protection. The Singapore - UK treaty is the basic structure of such investment treaties.
23. In the intervening years, the treaty system underwent significant evolution. As pointed out, a profusion of treaties were made in the 1990s which were characterized by liberalization. This is broadly the second period of the evolution of the treaties. They were strong on liberalization and protection. The US treaties contained what is referred to as "pre-entry" national treatment which involves a right of entry into the state of the treaty partner by any US foreign investor.
24. Now we shall consider the 2010 Australia-New Zealand-ASEAN treaty. It is the most recent of such treaties and indicates the evolution that the system has gone through.
2010 ASEAN, AUSTRALIA, NEW ZEALAND TREATY
25. The first obvious difference is that only covered investments
are protected. The state seeks to protect regulatory space. The investment must be admitted according to laws of host state.
26. investment is defined broadly to include every kind of assset and is spelt out as before but includes rights under contracts and business concessions.
27. Investor is defined to include natural and juridical persons. A juridical person is one organized under the laws of the host state.
28. Treaty preserves or captures WTO law and other concepts in the free trade arrangement. It applies to services with a commercial presence. (Article 3.2). Also, performance requirments are prevented to the extent inconsistent with TRIMS.
28. National treatment is assured. But, the notion of "like circumstances" is introduced. (Article 4.).
29. Main treatment standard as in the Singapore-UK treaty is the fair and equitable standard of treatment. But, this standard undergone evolution. So, it is described more fully in Article 6 as tied to the notion of denial of justice, a concept of customary international law.
7th Marcgh 2013
DEVELOPMENTS IN TREATY BASED INVESTMENT ARBITRATION.
1. The law on treaty based arbitration has now been explained. The next two lectures will develop theoretical themes in making an analysis of these developments.
2. Treaties, like statutes, are interpreted by tribunals and courts which apply them. Guidance in treaty interpretation in the Vienna Convention on the Law of Treates that is given matches to a large extent in interpreting statutes. But, there are underlying theoretical conflicts in both the interpretation of statutes as well as in the interpretation of treaties.
3. The provision in the Vienna Convention dealing with the interpretation of treaties, Article 33 (1) states: "A treaty shall be interpreted in good faith in accordance with the ordinary meaning to the given to the terms in their context and in the light of its object and purpose. Unfortunately, it combines within it two distinct schools. The first is the "strict constructionist" view which does not permit deviations from the language of the text of the treaty or statute. The other is the "teleological" view which has regard to the object and purpose of the treaty. There is subjectivity in both approaches but the scope for subjectivity is greater in the teleological approach. When applied to statutes the criticism is that it borders on judicial legislation. When applied to treaties, the criticism is that tribunals are going beyond intentions of sovereign states.
3. Subjectivity is accentuated when arbitrators have distinct views as to what the law on a given subject should be. Some, either come from a commercial tradition which favours contractual sanctity and the protection of the expectations underling business transactions or are international lawyers who believe in the internationalization of foreign investment contracts. Others are strict constructionists who believe that their mandate is confined to the strict words of the treaty from which they derive their jurisdiction.
4. Given the open ended nature of some of the treaty formulations such as "fair and equitable standard of treatment", "full protection and security", "tantamount to a taking", differences are inevitable particularly when economic theories which favour expansionism exist.
5. The 1990s were a period which was dominated by neo-liberal theories that favoured market freedom, an absence of regulation and liberal flows of capital. The spurt in treaty making is in itself evidence of the rise of neo-liberalism.
6. In this context, some of the expansionary trends that took place and the conflicts that resulted among arbitrators as well as the reaction of the states to quickly stem these trends can be understood.
7. First, we take a look at jurisdiction. We see a distinct basis being given for the rise in the tide of arbitration through the theory of "arbitration without privity". We see that in Tokio Tokeles v Ukraine,
round tripping is held permissible. In Aguas v Bolivia
, migration of companies for purposes of treaty shopping is held permissible. States react to this trend by including denial of benefits clauses in their newer treaties.
8. States also use the teleological view. They emphasize that the main purpose of the investment treaty is economic development as mentioned in the preamble. The preamble becomes an important feature in constricting protection or expanding it. We see tribunals in Patrick Mitchell v Congo, Malaysian Salvors v Malaysia getting involved in a controversy as to the basic elements of a protected investment.
9. States also hit back by emphasising restrictive aspects of the protected investment. Eg. Frapport v Philippines. Now, the argument is made that only investment made in accordance with the host state's law can secure protection.
10. States increasingly attack the formation of the contract by raising pleas regarding bribery, the shadow of which hangs over most foreign investment transactions and fraud. ( African Duty Free v Kenya; Feldman v Mexico).
11. Then we look at the substantive law. Here, the scope for expansionism and conflict has been even greater. We shall look at this in the next lecture.
14 March 2013
DEVELOPMENTS IN TREATY BASED INVESTMENT ARBITRATION. THE SUBSTANTIVE LAW
1. The same analysis could be made of the substantive principles of investment treaties. Discordant views have arisen in the interpretations of the treaty provisions.
2. The reasons for the confusion that has resulted have to be sought. They lie largely in the predisposition of arbitrators to certain theoretical approaches to the manner in which the causes of action could be used.
3. Since the law on the causes of action have been already explained, it is sufficient to take just two instances to illustrate the issues of interpretation of substantive provisions: expropriation and fair and equitable treatment, specifically the use of the rules on legitimate expectations.
4. Regarding expropriation, the expansionists hit upon the term "tantamount to an expropriation" to extend the limits of expropriation. The theory in the Ethyl Case
that any depreciation in value of the property is expropriation is the classic example. This expansionist trend was ended in the Methanex Case
also introduced into the law or rather rediscovered a category of regulatory expropriation which considerably limits the scope of expropriation as a cause of action. Regulatory expropriaton introduces much uncertainty into the law.
6. It is because expropriation as a cause of action has become difficult that attention has now been diverted to the fair and equitable standard of treatment, particularly the view that any measure of the state that affects the legitimate expectations of the investor becomes actionable. We see its formulation in CMS v Argentina
7. Since most states would have made promises and committments to attract foreign investment, the new base of action held out unlimited possibilities. Most particularly, it would seek to give effect to stabilization clauses in contracts and other committments made in contracts.
8. Again, we see reaction setting in as some arbitrators were unwilling to read too much into the fair and equitable standard. Some of them speak of the need to look at the conduct of the foreign investor in assessing equity and the conditions prevailing in the country at the time of the measure in assessing fairness. The reaction to the expansion indicates that sooner an expansionary trend arises, another view that limits its effect arises because of the existence of competing theories of interpretation. Not all arbitrators buy the theory that the purpose of the treaty is solely the protection of investment.
9. Given the expansionary views that have been enunciated, new trends have emerged in the law. States obviously are going to hit back at the system that becomes unmoored from the original intention in the treaties. They respond either by withdrawing from the system (Bolivia, Ecuador, Venezuela with regard to oil) or by leaving out phrases like fair and equitable treatment from their newer treaties (or linking it with the international minimum standard). Some treaties leave out investor-state dispute settlement altogether like some new Philippines treaties.
10. The treaties have become the focus of attention of those interested in specific areas such as environmental protection and human rights. Environmentalists argue that environmental treaties have greater force as they are multilateral or at least equal force so that were environmental action is taken by the state it should be regarded as not involving a violation of the investment treaty.
11. Similarly, human rights lawyers would argue that human rights- based inteferences must not be regarded as violations of the treaty. Some would argue that human rights obligations should have higher priority than investment protection. So, eg. Aguas del Tunari v Bolivia
, the right to water was involved.
12. States have also responded by introducing new provisions in treaties, particularly regarding defences, both jurisdictional and substantive. There are denial of benefits
clauses which give rights to deny benefits to companies which are not truly controlled by nationals of the other state, thus prohibiting results such as in Tokios Tokeles
13. The regulatory taking exception is now stated in the treaties. The fair and equitale treatment is either not referred to or is tied to customary law standards preventing expansion.
14. The defence of necessity is spelt out in clear subjective terms, preventing the possibility of the type of cases against Argentina. The Argentine cases also establish that wider defences available to state liability in general international law can be used in arbitration of investment disputes.
15. Newer treaties clearly spell out that measures taken to protect the "health, welfare and morals" of the society are justifiable. This constitutes a broad defence.
16. The law then is not as certain as it used to be. With the economic crisis that is taking place, there would be an increasing number of regulatory measures. Developed states have had recourse to nationalisation of banks. The investment picture is also changing. Sovereign wealth funds have entered the picture with enormous capital to invest.
17. Given the uncertainty, corporations may well find that the old system of structuring their protection through contracts may be better.
STANDARDS OF TREATMENT : IN PARTICULAR THE FAIR AND EQUITABLE TREATMENT.
1. The second important cause of action relate to treatment standards. Under this are grouped a diverse number of standards that are in the different treaties. Again, one must not that all treaties are not alike. What is described is the generality of treaties. The patterm of treaties are the same. This does not mean that formulation of inclusions of standards are the same or that the language used in them is the same.
1A. The national standard of treatment. Equal treatment with national entrepreneurs. Likeness criterion. Comparator must be in like circumstances. SD Myers v Canada.
2. International Minimum Standard : it is necessarty to start with the customary law standarad that is included in the treaties: the international minimum standard. It is clear that this is the basis from which discussion must begin. The US had in its practice supported an international minimum standard of treatment. As we know, the standard is imprecise.
3. The most clear case in which there is a violation of the international minimum standard is in the situation where there is an egregious denial of justice that shocks the conscience of a by-stander. This is the Neer formula (1926). It was approved by the International Court in the ELSI Case (1989). There is a slight variation in language in the later formulation.
4. The argument was made that variation of the language supports the view that the Neer standard has evolved and that the same high standard is not necessary in modern times. But, this view has not been accepted.
5. A denial of justice requires consideration of the violation of the international minimum standard (ims) by a local court and it is the court's denial of justice that provides a cause of action. This requires that the domestic courts should first have the opportunity to pronounce on the violation. A violation of the international minimum standard would be difficult to prove.
6. So, the problem now is that ims and expropriation have become blocked. It has, from the foreign investor's point of view, become necessary to explore the other standards: fair and equitabble standard (f&e) and full protection and security.
7. The Fair and Equitable Standard:
A dormant standard for over 50 years with no content attributed to it. When ims had not been worked out for over a century, difficult to contemplate f&e being worked out fully. Yet, some felt a compulsion to build up this unexplored standard.
8. Its most important component relates to legitimate expectations. The formulation is traceable to the views of Orrego-Vicuna, a leading arbitrator, who suggested it in a speech and later gave effect to it in CMS v Argentina and several other arbitrations in which he sat.
9. Orrego-Vicuna stated that the idea is drawn from English administrative law. But, there is not much support for a substantive principle based on legitimate expectations in English administrative law.
MORE ON TREATMENT STANDARDS.
1. The use of legitimate expectations in interpreting the f and e standard has been challenged and has had to be narrowed considerably.
2. First, if fairness and equity are the criterion, then, the foreign investors role also has to be examined. Were his expectations reasonable? Was he fishing in
troubled waters knowing that conditions in the state, having regard to past history were unstable? Was there an onus to make and independent judgement rather
than rely on assurances of state officials?
3. Evolutionary nature of economic life means that expectations must be modulated accordingly. Investor must expect state to respond to change.
4. BIT does not provide insurance for the foreign investor or promise stability of expectations.
5. But, some tribunals stress balance between the interests of the state and the expectations of the foreign investor so as not to leave the foreign investor without
Full Protection and Security.
1. Customary law standard. But, effort to enlarge it to include stability of conditions for success of foreign investment.
2. This view not accepted now. Generally, customary standard will be used.
Defences to Liability.
1. Unlike in the older treaties, newer treaties state defences to liability. Also, in recent times, there have been exploration of possibility of defences outside the investment treaty itself.
2. As a result, uncertainties in the law have increased.
Chin and his family own a chicken rice stall in food market in Fingapore. But, the business soon became successful that Chin’s Chicken Rice stalls expanded all over Fingapore. Chin then expanded into the immediate region quite successfully. He then embarked on the idea of extending even further by opening a stall in Hangalore in Lindia. This idea hit Chin when he read a brochure of the Lindian Tourist Board which sought to promote the cuisine of different regions of the world in Lindia so that tourists could enjoy such cuisine in Lindia. The Board promised all assistance and pointed out that Lindia had a hospitable investment climate. Chin was attracted by the idea. He felt that his investment would be secure because of the FTA between Lindia and Fingapore which is in exactly the same terms as the India-Singapore CECA. He also believed that since Lindians had not been used to eating chicken rice, the market was new and that he could succeed in it without difficulty. Chin’s Chicken Rice operated with large profit in the first few months of its operation.
But, Chin had calculated without Mr Nanjundan who had successfully seen of Kenlucky Fried Chicken, a popular foreign chicken outlet, from Lindia through his demonstrations. He was a member of the City Council of Hangalore. First, he got the City Council to pass a resolution requiring the Cooperative Chicken Farm which was a monopoly that controlled sales of chicken in the Hangalore region to supply the local chicken outlets and markets first before giving excess supply of chicken to foreign food outlets. Then, he organized a protest which involved the protesters sitting around the chicken stall of Chin not allowing anyone to go in or out of the area of the stall. The protest went on for over five days with Chin and his workers trapped in the chicken stall with no food to eat but the stale chicken rice. During the third day of the protest, Chin found that water to his stall has been cut off. His calls to the City Council which supplied water went unanswered. On the sixth day of the protest Chin capitulated and agreed to close down the chicken rice stall and go home.
Chin later discovered that Nanjundan’s son in law ran several tandoori chicken restaurants in Hangalore and was hurt by the competition given by Chin’s Chicken Rice.
Chin comes back to Fingapore. He commences an arbitration the Lindia-Singapore FTA’s provisions on investment protection against Lindia.
The moot is based on the issues that arise from the above facts.
THE EMERGENCE OF DEFENCES
1. The national security defence. It is usually stated in the treaties. The Argentine cases arguing that economic crises give rise to the defence. Subjective formulation used in many US treaties but not in the US - Argentina treaty. Hence, objective standard used in the Argentine cases with some cases (LGE v Argentina) holding that the defence may apply during the pendency of the crisis. Now, US Model treaty uses the subjective criterion.
2. The necessity defence. Drawn from customary international law as stated in Art.25 of the ILC Draft on State Responsibility. It must be shown that the state had not contributed to the situation and that there were no alternative means other than that adopted by the state. In the Argentine cases, refusal was based on findings that there were alternative means, such as getting a loan from the IMF.
3. Many of the causes of action, as we have seen, now have wide defences. Eg. in the case of expropriation, the claim that the expropriation was a regulatory taking or in the case of the fair and equitable standard that the measures were a response to conduct of the foreign investor. These are broad defences. They are facilitated by ideas such as the margin of appreciation but constrained by balancing tests.
4. The argument that there are competing obligations of the state as a result of other multilateral treaties also provide for defences. Eg. environmental obligations (SD Myers v Canada, Santa Helena v Costa Rica) and human rights obligations. The role that NGOs play in this regard and their amicus curiae status to intervene.
5. The erga omnes obligations. Eg. use of torture and slavery. Possible lesser obligations like violation of the right to clean environment.
Fingaporean company, the Gayland Resorts Ltd had successfully constructed resort and entertainment hubs all around the region. When it knew that the government of Moronia had decided to begin building a gambling resort in Moronia, it tendered for the project. It had ascertained what the price in the lowest tender was just before tenders closed by giving a large gift to the secretary of the tender board and quoted a lower price. Gayland Resorts was awarded the tender. It was to build and operate the resort for twenty years and earn its capital and profits from such operation. The tender board stated that the tender was awarded to Gayland Resorts not because it had a lower price but because it had superior experience in running such resorts.
The government of Moronia had encouraged the venture in the hope of attracting gambling funds into the country. Moronia, in calling for tenders, had announced that a helipad would be built by the government close to the resort so that foreign tourists could be taken to the resort. It was also to construct a highway from the capital of Moronia to the resort.
But, after it had commenced building, the Moral Movement of Moronia (MMM) began a campaign in Moronia arguing that the gambling dens would lead to the lowering of moral values of the society and to the eventual decay of civilized life in the country. MMM entered politics on the basis of this single issue and at the next elections won sufficient votes to influence the formation of the new government. The new government of Prime Minister Pompy had made a pact with the MMM that in return for MMM’s support, it would institute stringent controls over how the gambling resort, which had by now been built and had commenced operations, was run.
The Pompy Government, though it accomplished the construction of the helipad, refused licenses for the fleet of helicopters run by Gayland Resorts to land at the helipad. It also required that the foreigners coming to the Resort could stay there only for three days so that they do not to corrupt the values of the local people. It required that only local people with expendable assets of over 100,000 dollars alone could use the gambling facilities of the Resort. Entry into the gambling areas of the Resort was controlled so that only locals who fulfilled this criterion would be allowed. The expected profits of Gayland Resorts did not materialize. Gayland Resorts institutes an arbitration under the investment treaty. Fingapore and Moronia have an investment treaty similar to the investment provisions of the Singapore –United States FTA.