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Posts Tagged ‘BIT’

International Moot Court Competition Association (IMCCA)

and Oleg Temnikov

I. Bureau Veritas v. Republic of Paraguay

In the recent Further decision on objections to jurisdiction dated October 9, 2012 the tribunal in Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Paraguay (ICSID Case No. ARB/07/9) dismissed BIVAC’s claim based on violation of the fair and equitable standard by reasoning that the dispute relates to mere refusal to pay invoices under a pre-shipment inspection contract and that, in doing so, Paraguay has not acted “in a manner that is qualitatively different from an ordinary contracting party.” The tribunal thus upheld the traditional distinction between mere breach of contract and treaty breach stating that “[s]omething more than mere breach of contract is needed.” (para. 246)

II. The traditional conception of the contract-treaty divide

Under the dogmatic conception of the contract-treaty divide, “the breach by a State of a contract does not as such entail a breach of international law. Something further is required… such as a denial of justice by the courts of the State…” (Comm. 6 to Art. 4 ILC’s Articles on State responsibility; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Decision on annulment, 3 July 2002, para. 95; etc.) In this regard, the BIVAC tribunal noted that it does not exclude the possibility that:

“a substantial breach of a contract could, as such, give rise [sic] a breach of [the FET standard]… [but] even [assuming that such a situation could] arise, the continued unhindered availability of a contractually agreed forum… would be a significant factor imposing an additional hurdle for a claimant to overcome.” (para. 246)

III. Can the investor succeed on a claim for expropriation or breach of the FET standard based on the host State’s refusal to pay?

The authors do not deny the traditional view of the contract-treaty divide. However, we find it more intellectually challenging to argue here for the investor who is faced with such an “additional hurdle”. Can he succeed on a claim of expropriation or breach of the FET standard that is a treaty claim? Moreover, it turns out that under the dogmatic view, a State may escape international responsibility by merely refusing to pay under a contract instead of taking covert measures which fall squarely into the definition of expropriation.

At the outset, we make the clarification that we are dealing here with the scenario in which the underlying contract qualifies as protected investment under the applicable BIT, the BIT does not contain an umbrella clause and the contract contains a forum selection clause referring all disputes to the host State’s courts. (Cf. Siemens A.G. v. the Argentine Republic, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 249)

3.1. The test of puissance publique is irrelevant

Previous tribunals dealing with the question of whether breach of contract may amount to expropriation or breach of the FET standard have applied a test of puissance publique, that is, they have sought to satisfy themselves that the State, in breaching the contract, acted in sovereign capacity (by e.g. enacting a law or decree attempting to expropriate or annul the debt) rather than as mere contracting party. (SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on jurisdiction, 29 January 2004, para. 161; etc.)

In the words of the Consortium RFCC v. Morocco tribunal:

“a State may perform a contract badly, but this will not result in a breach of treaty provisions, unless it be proved that the state… has gone beyond its role as a mere party to the contract, and has exercised the specific functions of a sovereign.” (ICSID Case No. ARB/00/6, Award, 22 December 2003, para. 65 translated in Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 53)

Thus, the BIVAC tribunal held that, in refusing to pay, Paraguay acted as mere contracting party. (para. 246) On the facts, however, it seems strange to qualify the conduct of investigations and the establishment of a special Commission as ordinary commercial acts. (paras. 51, 60)

In any event, international law does not distinguish for the purposes of State responsibility whether the State acted as holder of jure imperii or not. (See Comm. 6 to Art. 4 of the ILC’s Articles on State responsibility) Notably, the tribunal in Bayindir Insaat Turizm Ticaret ve Sanayi A.Ş. v. Pakistan determined that:

“the test of ‘puissance publique’ would be relevant only if Bayindir was relying upon a contractual breach… In the present case, Bayindir… pursues exclusively Treaty Claims. When an investor invokes a breach of a BIT by the host State… the alleged treaty violation is by definition an act of ‘puissance publique’.” (ICSID Case No. ARB/03/29, Decision on jurisdiction, 14 November 2005, para. 183)

Similarly, in Impregilo S.p.A. v. Pakistan, the tribunal determined that:

“Only the State in the exercise of… puissance publique and not as a contracting party, may breach the obligations assumed under the BIT.” (ICSID Case No. ARB/03/3, Decision on jurisdiction, 22 April 2005, para. 260)

However, when making this statement the tribunal was speaking of Impregilo’s claims regarding unforeseen geological conditions which are outside the sovereign activity or even the control of the State. (para. 268; Cf. para. 284)

On the other hand, the case mostly cited in support of the view that “mere non-performance of a contractual obligation is not to be equated with a taking of property” is Waste Management. (Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 174) Close examination or the text of the award shows, however, that the tribunal did not deny that “the outright refusal by a State to honour a money order or similar instrument… may well constitute… an actual expropriation.” (para. 168) The tribunal went on to distinguish the case at hand in that “[t]he question here is not one of final refusal to pay (combined with effective obstruction and denial of legal remedies)…” (para. 176; as to ‘denial of legal remedies’ see infra 3.3.) Rather, the tribunal referred to the Mexican financial crisis which affected payment under the contract. (para. 112)

3.2. The intention of the host State shall be taken into account

Some tribunals have looked to the intention of the State. Thus, the investor’s claim in Waste Management could have succeeded had it shown evidence of “sectoral or local prejudice.” (para. 115; see also, Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 278; Eureko B.V. v. Poland (Netherlands-Poland BIT ad hoc arbitration) Partial Award, 19 August 2005, para. 233) Be that as it may, our main proposition is that, even without providing evidence of the State’s motivation, the investor may overcome the aforesaid jurisdictional hurdle.

3.3. Recourse to local courts is not a pre-condition for treaty claims

Under the dogmatic view as above described, “[a] mere refusal to pay a debt is not an expropriation of property… where remedies exist in respect of such a refusal.” (SGS v. Philippines, para. 161) The problem with this proposition is that, absent contrary stipulation in the BIT, the exhaustion of local remedies is not a prerequisite to an ICSID tribunal’s jurisdiction, rather the idea was to dispose of this requirement. (See Article 26 ICSID Convention)

Therefore, a forum selection clause found in the underlying contract – providing for the jurisdiction of the host State’s courts in contractual matters – shall not obstruct the investor’s treaty claims. (See e.g. Vivendi v. Argentina, para. 101)

Importantly, the Committee in Helnan International Hotels A/S v. Egypt has held:

“[Such a requirement would] do by the back door that which the Convention expressly excludes by the front door… [I]t would empty the development of investment arbitration of much of its force and effect, if, despite a clear intention of States parties not to require the pursuit of local remedies as a pre-condition to arbitration, such a requirement were to be read back in… It would leave the investor only with a complaint of unfair treatment based upon denial of justice.” (ICSID Case No. ARB/05/19, Decision on annulment, 14 June 2010, paras. 47, 53)

Similarly, the tribunal in Alpha Projektholding GmbH v.Ukraine observed:

“Whether Claimant could have enforced its rights in local courts… is not relevant… Claimant chose to seek a remedy through international arbitration instead, as it is entitled to do.” (ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 411)

In this regard, the BIVAC tribunal’s reasoning that “a substantial breach of a contract could constitute a violation of a treaty [so far as there is] preliminary determination” by the competent local court (para. 274) is to be criticized for dismissing the investor’s claim without a second thought.

3.4. The investor’s legitimate expectations include the host State’s obligation to observe contractual obligations

As to the FET standard, in finding no arguable case under it, the BIVAC tribunal noted that “the Claimant has not been able to cite any authority for the proposition that international law imposes any obligation as such on a State to pay moneys owing under a contract.” (para. 270) Such a sweeping statement shall be measured against other decisions in which there is support for the proposition that observance of contracts falls into investor’s legitimate expectations. Thus, the tribunal in Toto Costruzioni Generali S.P.A. v. Lebanon observed that “[l]egitimate expectations may follow from… representations made by the host state, or from its contractual commitments.” (ICSID Case No. ARB/07/12, Award, 7 June 2012, para. 159)

Moreover, the tribunal in Noble Ventures, Inc. v. Romania stated:

“[The FET] standard… can be consider[ed] to be a more general standard which finds its specific application in inter alia the duty… to observe contractual obligations towards the investor.” (ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 182)

Further, the tribunal in Impregilo S.p.A. v. Argentina dismissed Impregilo’s claim based on the FET standard stating that “the existence of legitimate expectations and the existence of contractual rights are two separate issues.” (para. 292) But the sole reason upon which the tribunal based its pronouncement was the test of puissance publique (para. 294) and we already showed above why this reasoning is not persuasive.

IV. The need for reconsideration

The above survey of arbitral practice shows that the existing inconsistency of decisions and the preconception that a host State’s refusal to pay under a contract does not amount to expropriation or breach of the FET standard deserve further clarification.

This will also affect the question of admissibility of claims and stay of proceedings in cases such as SGS Société Générale de Surveillance S.A. v. Pakistan (ICSID Case No. ARB/01/13, Decision on jurisdiction, 6 August 2003), SGS v. Philippines and BIVAC. The preferred approach is that in SGS v. Paraguay where the tribunal held that treaty claims are not co-extensive with contract claims “they are not necessarily disposed of by the four corners of the Contract.” (SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/07/29, Decision on jurisdiction, 12 February 2010, para. 173) The tribunal, therefore, declined to stay proceedings awaiting the decision of the national court, otherwise it would be “at risk of failing to carry out its mandate” (para. 172) which is a ground for annulment under Article 52(1)(b) ICSID Convention.

V. Conclusion

As the tribunal in Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States (ICSID Case No. ARB(AF)/97/2, Award, 1 November 1999) noted “[l]abelling is… no substitute for analysis… The egregiousness of any breach is in the eye of the beholder…” (para. 90)

This analysis shows that neither the test of puissance publique, nor the existence of available local remedies is a good reason to dismiss claims for expropriation or breach of the FET standard based on the State’s ‘mere’ refusal to pay. It is hoped that arbitrators will keep an open eye and more importantly, an open mind, when facing such claims in the future.

Inna Uchkunova wishes to thank Oleg Temnikov for the little conversations which have instilled great inspiration for this and other projects.

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

International Moot Court Competition Association (IMCCA)

and Oleg Temnikov

I. Bureau Veritas v. Republic of Paraguay

In the recent Further decision on objections to jurisdiction dated October 9, 2012 the tribunal in Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. Paraguay (ICSID Case No. ARB/07/9) dismissed BIVAC’s claim based on violation of the fair and equitable standard by reasoning that the dispute relates to mere refusal to pay invoices under a pre-shipment inspection contract and that, in doing so, Paraguay has not acted “in a manner that is qualitatively different from an ordinary contracting party.” The tribunal thus upheld the traditional distinction between mere breach of contract and treaty breach stating that “[s]omething more than mere breach of contract is needed.” (para. 246)

II. The traditional conception of the contract-treaty divide

Under the dogmatic conception of the contract-treaty divide, “the breach by a State of a contract does not as such entail a breach of international law. Something further is required… such as a denial of justice by the courts of the State…” (Comm. 6 to Art. 4 ILC’s Articles on State responsibility; Compañía de Aguas del Aconquija S.A. and Vivendi Universal S.A. v. Argentina, ICSID Case No. ARB/97/3, Decision on annulment, 3 July 2002, para. 95; etc.) In this regard, the BIVAC tribunal noted that it does not exclude the possibility that:

“a substantial breach of a contract could, as such, give rise [sic] a breach of [the FET standard]… [but] even [assuming that such a situation could] arise, the continued unhindered availability of a contractually agreed forum… would be a significant factor imposing an additional hurdle for a claimant to overcome.” (para. 246)

III. Can the investor succeed on a claim for expropriation or breach of the FET standard based on the host State’s refusal to pay?

The authors do not deny the traditional view of the contract-treaty divide. However, we find it more intellectually challenging to argue here for the investor who is faced with such an “additional hurdle”. Can he succeed on a claim of expropriation or breach of the FET standard that is a treaty claim? Moreover, it turns out that under the dogmatic view, a State may escape international responsibility by merely refusing to pay under a contract instead of taking covert measures which fall squarely into the definition of expropriation.

At the outset, we make the clarification that we are dealing here with the scenario in which the underlying contract qualifies as protected investment under the applicable BIT, the BIT does not contain an umbrella clause and the contract contains a forum selection clause referring all disputes to the host State’s courts. (Cf. Siemens A.G. v. the Argentine Republic, ICSID Case No. ARB/02/8, Award, 6 February 2007, para. 249)

3.1. The test of puissance publique is irrelevant

Previous tribunals dealing with the question of whether breach of contract may amount to expropriation or breach of the FET standard have applied a test of puissance publique, that is, they have sought to satisfy themselves that the State, in breaching the contract, acted in sovereign capacity (by e.g. enacting a law or decree attempting to expropriate or annul the debt) rather than as mere contracting party. (SGS Société Générale de Surveillance S.A. v. Philippines, ICSID Case No. ARB/02/6, Decision on jurisdiction, 29 January 2004, para. 161; etc.)

In the words of the Consortium RFCC v. Morocco tribunal:

“a State may perform a contract badly, but this will not result in a breach of treaty provisions, unless it be proved that the state… has gone beyond its role as a mere party to the contract, and has exercised the specific functions of a sovereign.” (ICSID Case No. ARB/00/6, Award, 22 December 2003, para. 65 translated in Azurix Corp. v. Argentina, ICSID Case No. ARB/01/12, Award, 14 July 2006, para. 53)

Thus, the BIVAC tribunal held that, in refusing to pay, Paraguay acted as mere contracting party. (para. 246) On the facts, however, it seems strange to qualify the conduct of investigations and the establishment of a special Commission as ordinary commercial acts. (paras. 51, 60)

In any event, international law does not distinguish for the purposes of State responsibility whether the State acted as holder of jure imperii or not. (See Comm. 6 to Art. 4 of the ILC’s Articles on State responsibility) Notably, the tribunal in Bayindir Insaat Turizm Ticaret ve Sanayi A.Ş. v. Pakistan determined that:

“the test of ‘puissance publique’ would be relevant only if Bayindir was relying upon a contractual breach… In the present case, Bayindir… pursues exclusively Treaty Claims. When an investor invokes a breach of a BIT by the host State… the alleged treaty violation is by definition an act of ‘puissance publique’.” (ICSID Case No. ARB/03/29, Decision on jurisdiction, 14 November 2005, para. 183)

Similarly, in Impregilo S.p.A. v. Pakistan, the tribunal determined that:

“Only the State in the exercise of… puissance publique and not as a contracting party, may breach the obligations assumed under the BIT.” (ICSID Case No. ARB/03/3, Decision on jurisdiction, 22 April 2005, para. 260)

However, when making this statement the tribunal was speaking of Impregilo’s claims regarding unforeseen geological conditions which are outside the sovereign activity or even the control of the State. (para. 268; Cf. para. 284)

On the other hand, the case mostly cited in support of the view that “mere non-performance of a contractual obligation is not to be equated with a taking of property” is Waste Management. (Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004, para. 174) Close examination or the text of the award shows, however, that the tribunal did not deny that “the outright refusal by a State to honour a money order or similar instrument… may well constitute… an actual expropriation.” (para. 168) The tribunal went on to distinguish the case at hand in that “[t]he question here is not one of final refusal to pay (combined with effective obstruction and denial of legal remedies)…” (para. 176; as to ‘denial of legal remedies’ see infra 3.3.) Rather, the tribunal referred to the Mexican financial crisis which affected payment under the contract. (para. 112)

3.2. The intention of the host State shall be taken into account

Some tribunals have looked to the intention of the State. Thus, the investor’s claim in Waste Management could have succeeded had it shown evidence of “sectoral or local prejudice.” (para. 115; see also, Impregilo S.p.A. v. Argentina, ICSID Case No. ARB/07/17, Award, 21 June 2011, para. 278; Eureko B.V. v. Poland (Netherlands-Poland BIT ad hoc arbitration) Partial Award, 19 August 2005, para. 233) Be that as it may, our main proposition is that, even without providing evidence of the State’s motivation, the investor may overcome the aforesaid jurisdictional hurdle.

3.3. Recourse to local courts is not a pre-condition for treaty claims

Under the dogmatic view as above described, “[a] mere refusal to pay a debt is not an expropriation of property… where remedies exist in respect of such a refusal.” (SGS v. Philippines, para. 161) The problem with this proposition is that, absent contrary stipulation in the BIT, the exhaustion of local remedies is not a prerequisite to an ICSID tribunal’s jurisdiction, rather the idea was to dispose of this requirement. (See Article 26 ICSID Convention)

Therefore, a forum selection clause found in the underlying contract – providing for the jurisdiction of the host State’s courts in contractual matters – shall not obstruct the investor’s treaty claims. (See e.g. Vivendi v. Argentina, para. 101)

Importantly, the Committee in Helnan International Hotels A/S v. Egypt has held:

“[Such a requirement would] do by the back door that which the Convention expressly excludes by the front door… [I]t would empty the development of investment arbitration of much of its force and effect, if, despite a clear intention of States parties not to require the pursuit of local remedies as a pre-condition to arbitration, such a requirement were to be read back in… It would leave the investor only with a complaint of unfair treatment based upon denial of justice.” (ICSID Case No. ARB/05/19, Decision on annulment, 14 June 2010, paras. 47, 53)

Similarly, the tribunal in Alpha Projektholding GmbH v.Ukraine observed:

“Whether Claimant could have enforced its rights in local courts… is not relevant… Claimant chose to seek a remedy through international arbitration instead, as it is entitled to do.” (ICSID Case No. ARB/07/16, Award, 8 November 2010, para. 411)

In this regard, the BIVAC tribunal’s reasoning that “a substantial breach of a contract could constitute a violation of a treaty [so far as there is] preliminary determination” by the competent local court (para. 274) is to be criticized for dismissing the investor’s claim without a second thought.

3.4. The investor’s legitimate expectations include the host State’s obligation to observe contractual obligations

As to the FET standard, in finding no arguable case under it, the BIVAC tribunal noted that “the Claimant has not been able to cite any authority for the proposition that international law imposes any obligation as such on a State to pay moneys owing under a contract.” (para. 270) Such a sweeping statement shall be measured against other decisions in which there is support for the proposition that observance of contracts falls into investor’s legitimate expectations. Thus, the tribunal in Toto Costruzioni Generali S.P.A. v. Lebanon observed that “[l]egitimate expectations may follow from… representations made by the host state, or from its contractual commitments.” (ICSID Case No. ARB/07/12, Award, 7 June 2012, para. 159)

Moreover, the tribunal in Noble Ventures, Inc. v. Romania stated:

“[The FET] standard… can be consider[ed] to be a more general standard which finds its specific application in inter alia the duty… to observe contractual obligations towards the investor.” (ICSID Case No. ARB/01/11, Award, 12 October 2005, para. 182)

Further, the tribunal in Impregilo S.p.A. v. Argentina dismissed Impregilo’s claim based on the FET standard stating that “the existence of legitimate expectations and the existence of contractual rights are two separate issues.” (para. 292) But the sole reason upon which the tribunal based its pronouncement was the test of puissance publique (para. 294) and we already showed above why this reasoning is not persuasive.

IV. The need for reconsideration

The above survey of arbitral practice shows that the existing inconsistency of decisions and the preconception that a host State’s refusal to pay under a contract does not amount to expropriation or breach of the FET standard deserve further clarification.

This will also affect the question of admissibility of claims and stay of proceedings in cases such as SGS Société Générale de Surveillance S.A. v. Pakistan (ICSID Case No. ARB/01/13, Decision on jurisdiction, 6 August 2003), SGS v. Philippines and BIVAC. The preferred approach is that in SGS v. Paraguay where the tribunal held that treaty claims are not co-extensive with contract claims “they are not necessarily disposed of by the four corners of the Contract.” (SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case No. ARB/07/29, Decision on jurisdiction, 12 February 2010, para. 173) The tribunal, therefore, declined to stay proceedings awaiting the decision of the national court, otherwise it would be “at risk of failing to carry out its mandate” (para. 172) which is a ground for annulment under Article 52(1)(b) ICSID Convention.

V. Conclusion

As the tribunal in Robert Azinian, Kenneth Davitian, & Ellen Baca v. The United Mexican States (ICSID Case No. ARB(AF)/97/2, Award, 1 November 1999) noted “[l]abelling is… no substitute for analysis… The egregiousness of any breach is in the eye of the beholder…” (para. 90)

This analysis shows that neither the test of puissance publique, nor the existence of available local remedies is a good reason to dismiss claims for expropriation or breach of the FET standard based on the State’s ‘mere’ refusal to pay. It is hoped that arbitrators will keep an open eye and more importantly, an open mind, when facing such claims in the future.

Inna Uchkunova wishes to thank Oleg Temnikov for the little conversations which have instilled great inspiration for this and other projects.

More from our authors:

	Litigation in the Netherlands. Civil Procedure, Arbitration and Administrative Litigation - 2nd Edition by Marieke van Hooijdonk, Peter V. Eijsvoogel € 70
	Yearbook Commercial Arbitration Volume XXXVII 2012 by Albert Jan Van Den Berg (ed.) € 215
	International Arbitration: Law and Practice by Gary B. Born € 30
	Procedure and Evidence in International Arbitration by Jeffrey Waincymer € 350

In Part I it was argued that the proper law applicable in the investor-State disputes under Article 42 (1) ICSID Convention depends on the substantive grounds of the investor’s claim. In support of this, I have outlined three factual scenarios and types of claims with evidence from case law. Part I dealt with host State domestic law and  the direct relationship between investor and State. The ICSID case law on the latter supporting the analysis from Part I is as follows:

2.1.                        Case law examples

In SOABI v Republic of Senegal (ARB/82/1) there was a contract between the investor and the Government of Senegal. In para 5.02 of the award the Tribunal directed itself straight to Senegalese law, i.e. host State law, without any consideration of international law. The Tribunal explicitly recognised in its reasoning two connecting factors of the investment to Senegal and its national law – the project was located in the country and Senegalese parties were involved as well. The award may be interpreted as also providing support for the following conclusions:

• Where there is a nexus, especially a contractual one, between the investor and the host State, the relationship and the dispute arising out of it should be exclusively within the realm of national law of the host State.
• Even if there is a choice of law in the nexus instrument, the Tribunal may make use of private international law technique as to determine proper applicable law, which the case seems to demonstrate by the use of connecting factors to direct the project exclusively within the scope of domestic law.

In Autopista Concesionada de Venezuela v Bolivarian Republic of Venezuela (ARB/00/5) the Tribunal had to make an assessment of the applicability of international law in a dispute arising out of a concession agreement. It was acknowledged that this situation calls for a different treatment from the one under international law instruments like BITs. The nature of the dispute was contractual and the relationship was recognised as governed by domestic Venezuelan law. The Tribunal reiterated that international law should have corrective and supplementary role but not beyond this extent for that particular dispute (para 102 of the award). However, under Venezuelan domestic law, international law should have primacy over contradicting national legislation. Hence, the position of the Tribunal should not be surprising since the acknowledged role of international law in the dispute is predetermined by the general place of international law within the system of host State law – international law may in fact correct contradicting domestic law. The Tribunal refused delving into greater importance of international law in this scenario and treated the disputed as a mere contractual claim applying the status of Venezuelan law, including incorporated international law.

3                Scenario 3: basis of the investor’s claim is a public international law instrument

3.1.                        Scenario 3 bears a stark difference to Scenarios 2 and 3. If the investor relies on rights granted by virtue of a bilateral or multilateral international law instrument, then the applicable rules should be evinced from the bulk of international law. The precise scope of this bulk may be determined by reference to the Statute of the International Court of Justice, Article 38, which lays down the array of source of international law. The primary rules governing the relationship between the parties to the dispute would be, however, the particular BIT or MIT (which does not rule out the applicability of customary international law). As subsidiary and complementary rules the tribunal should apply other treaties or customary international law and, if necessary, make use of judicial decisions and doctrine. Furthermore, as the investor seeks to trigger the liability of the State for internationally wrongful acts, this calls for the application of the rules on state responsibility which are rules of public international law (e.g. International Law Commission’s Draft Articles on State Responsibility, and relevant case law).

Would there be, however, any relevance of national law of host State in this scenario?

As a matter of fact, the dispute arises out of circumstances primarily related to host State. The rights acquired by the investor are usually those stemming from relations situated within the host State. No matter whether the investor has obtained licenses, permits, authorizations, etc. from the authorities of the host State, or contracted with local natural or corporate persons, or acquired real estate rights, corporate membership, etc., all these rights of the investor, and the respective duties of the host State or third local parties are, usually, based on host State’s national law. However, a line of distinction should be drawn. The provisions of national law may be relevant as governing the outlined array of rights and duties. But the purpose of the proceedings brought before the arbitral tribunal constituted under ICSID Convention due to a BIT/MIT claim is to assess the compatibility of State’s conduct as a fact against the standards required by particular international law instrument(s). Therefore national law would not be, properly speaking, applicable law. The role of national law would be as a fact that the tribunal should treat and take into account in its consideration and application of the appropriate law. To a great extent, this role resembles the relevance of foreign law in municipal court proceedings or municipal law before international tribunals such as International Court of Justice, European Court of Human Rights, etc.

3.2.                        Case law examples

In El Paso Energy International v Argentine Republic (ARB/03/15) the Tribunal made an extensive pronouncement on the interplay between BIT application, international law and national law. It agreed with other Tribunals, for instance in Asian Agricultural Products v Sri Lanka (ARB/87/3), that the international law instrument granting rights to the investor, serving as basis of its claim, is the lex specialis where the determination of applicable law should start from (para 24 of the award). The application of a public international law instrument naturally calls for the application of all relevant rules of international law (e.g. on interpretation of treaties, liability for breach of treaties, etc.), thus rendering international law primary and having a leading role. Therefore, a preliminary issue that should be dealt with prior to establishing a breach of international law is to what extent State’s acts and omissions are compatible with the international standards. The nature of these acts and omissions is governed by national law and relations between the investor and the State, and any third parties, are governed by the domestic law of the host State. This is why the Tribunal concluded that:

“The fact that the BIT and international law govern the issue of Argentina’s responsibility for violation of the treaty does not exclude that the domestic law of Argentina has a role to play too. The Tribunal agrees with the Claimant that this role is to inform the content of those commitments made by Argentina to Claimant that the latter alleges to have been violated. Thus, in order to establish which rights have been recognised by Argentina to the Claimant as a foreign investor, resort will have to be had to Argentina’s law. However, whether a modification or cancellation of such rights, even if legally valid under Argentina’s law, constitutes a violation of a protection guaranteed by the BIT is a matter to be decided solely on the basis of the BIT itself and the other applicable rules of international law.” (para 135 of the award)

Similarly in Azurix Corp v Argentine Republic (ARB/30/3) the Tribunal determined that the Argentinean law should necessarily be dealt with in the decision making process for the purposes of inquiring into host State’s liability. However, the treaty basis of the claims did not allow further utilization of national law (para 67 of the award).

Is it possible that in this scenario host State law may still function as law? The relevant criterion is whether a tribunal should give rise to the legal consequences that a domestic rule of law engenders or would use the rule to be measured against a standard in an international law instrument and thus trigger the consequences envisioned in the international instrument. If such an international law instrument makes a reference to a national rule, a tribunal should treat this reference like the function of conflict rules in private international law. The international standard directs to giving rise of a domestic law rule and thus it renders it applicable – not relevant as a fact but applicable as law. This analysis seems to find support in Asian Agricultural Products v Sri Lanka where (paras 21 and 24 of the award) the Tribunal reasoned that a BIT may incorporate domestic law rules and thus render them source of law  supplementary to international law. A BIT, as in that case, may refer to certain rules or standards in host State law, which the tribunal would have to apply directly as the international law instrument requires so.

Conclusion

Article 42 (1) of ICSID Convention should be perceived, as demonstrated by this analysis, as a general source of powers of the arbitral tribunal regarding the pool of rules from which the tribunal may select the particular rules appropriate for application in the concrete factual situation. Which rules would be proper for application is thus premised on the factual circumstances (and the cause of action) and are not a priori determined by the ambit of the provision of the Convention. The case law examples demonstrate a differentiated approach of Tribunals and one of the criteria for such diversity may exactly be the cause of action relied upon by the investor. Neither domestic law nor international law provide for conclusive result as to proper applicable law determination. It is important to note the distinction between Scenarios 1 and 2, on one hand, and Scenario 3, on the other. If international law is applied on equal basis with national law in Scenarios 1 and 2, this would in fact “internationalise” investor-State relations, especially contracts, while such relations by their nature are primarily absorbed into a domestic law system. The true “internationalisation” is in Scenario 3, which is engendered by the treaty basis of the claim and the basis of the protected rights.

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In Part I it was argued that the proper law applicable in the investor-State disputes under Article 42 (1) ICSID Convention depends on the substantive grounds of the investor’s claim. In support of this, I have outlined three factual scenarios and types of claims with evidence from case law. Part I dealt with host State domestic law and  the direct relationship between investor and State. The ICSID case law on the latter supporting the analysis from Part I is as follows:

2.1.                        Case law examples

In SOABI v Republic of Senegal (ARB/82/1) there was a contract between the investor and the Government of Senegal. In para 5.02 of the award the Tribunal directed itself straight to Senegalese law, i.e. host State law, without any consideration of international law. The Tribunal explicitly recognised in its reasoning two connecting factors of the investment to Senegal and its national law – the project was located in the country and Senegalese parties were involved as well. The award may be interpreted as also providing support for the following conclusions:

• Where there is a nexus, especially a contractual one, between the investor and the host State, the relationship and the dispute arising out of it should be exclusively within the realm of national law of the host State.
• Even if there is a choice of law in the nexus instrument, the Tribunal may make use of private international law technique as to determine proper applicable law, which the case seems to demonstrate by the use of connecting factors to direct the project exclusively within the scope of domestic law.

In Autopista Concesionada de Venezuela v Bolivarian Republic of Venezuela (ARB/00/5) the Tribunal had to make an assessment of the applicability of international law in a dispute arising out of a concession agreement. It was acknowledged that this situation calls for a different treatment from the one under international law instruments like BITs. The nature of the dispute was contractual and the relationship was recognised as governed by domestic Venezuelan law. The Tribunal reiterated that international law should have corrective and supplementary role but not beyond this extent for that particular dispute (para 102 of the award). However, under Venezuelan domestic law, international law should have primacy over contradicting national legislation. Hence, the position of the Tribunal should not be surprising since the acknowledged role of international law in the dispute is predetermined by the general place of international law within the system of host State law – international law may in fact correct contradicting domestic law. The Tribunal refused delving into greater importance of international law in this scenario and treated the disputed as a mere contractual claim applying the status of Venezuelan law, including incorporated international law.

3                Scenario 3: basis of the investor’s claim is a public international law instrument

3.1.                        Scenario 3 bears a stark difference to Scenarios 2 and 3. If the investor relies on rights granted by virtue of a bilateral or multilateral international law instrument, then the applicable rules should be evinced from the bulk of international law. The precise scope of this bulk may be determined by reference to the Statute of the International Court of Justice, Article 38, which lays down the array of source of international law. The primary rules governing the relationship between the parties to the dispute would be, however, the particular BIT or MIT (which does not rule out the applicability of customary international law). As subsidiary and complementary rules the tribunal should apply other treaties or customary international law and, if necessary, make use of judicial decisions and doctrine. Furthermore, as the investor seeks to trigger the liability of the State for internationally wrongful acts, this calls for the application of the rules on state responsibility which are rules of public international law (e.g. International Law Commission’s Draft Articles on State Responsibility, and relevant case law).

Would there be, however, any relevance of national law of host State in this scenario?

As a matter of fact, the dispute arises out of circumstances primarily related to host State. The rights acquired by the investor are usually those stemming from relations situated within the host State. No matter whether the investor has obtained licenses, permits, authorizations, etc. from the authorities of the host State, or contracted with local natural or corporate persons, or acquired real estate rights, corporate membership, etc., all these rights of the investor, and the respective duties of the host State or third local parties are, usually, based on host State’s national law. However, a line of distinction should be drawn. The provisions of national law may be relevant as governing the outlined array of rights and duties. But the purpose of the proceedings brought before the arbitral tribunal constituted under ICSID Convention due to a BIT/MIT claim is to assess the compatibility of State’s conduct as a fact against the standards required by particular international law instrument(s). Therefore national law would not be, properly speaking, applicable law. The role of national law would be as a fact that the tribunal should treat and take into account in its consideration and application of the appropriate law. To a great extent, this role resembles the relevance of foreign law in municipal court proceedings or municipal law before international tribunals such as International Court of Justice, European Court of Human Rights, etc.

3.2.                        Case law examples

In El Paso Energy International v Argentine Republic (ARB/03/15) the Tribunal made an extensive pronouncement on the interplay between BIT application, international law and national law. It agreed with other Tribunals, for instance in Asian Agricultural Products v Sri Lanka (ARB/87/3), that the international law instrument granting rights to the investor, serving as basis of its claim, is the lex specialis where the determination of applicable law should start from (para 24 of the award). The application of a public international law instrument naturally calls for the application of all relevant rules of international law (e.g. on interpretation of treaties, liability for breach of treaties, etc.), thus rendering international law primary and having a leading role. Therefore, a preliminary issue that should be dealt with prior to establishing a breach of international law is to what extent State’s acts and omissions are compatible with the international standards. The nature of these acts and omissions is governed by national law and relations between the investor and the State, and any third parties, are governed by the domestic law of the host State. This is why the Tribunal concluded that:

“The fact that the BIT and international law govern the issue of Argentina’s responsibility for violation of the treaty does not exclude that the domestic law of Argentina has a role to play too. The Tribunal agrees with the Claimant that this role is to inform the content of those commitments made by Argentina to Claimant that the latter alleges to have been violated. Thus, in order to establish which rights have been recognised by Argentina to the Claimant as a foreign investor, resort will have to be had to Argentina’s law. However, whether a modification or cancellation of such rights, even if legally valid under Argentina’s law, constitutes a violation of a protection guaranteed by the BIT is a matter to be decided solely on the basis of the BIT itself and the other applicable rules of international law.” (para 135 of the award)

Similarly in Azurix Corp v Argentine Republic (ARB/30/3) the Tribunal determined that the Argentinean law should necessarily be dealt with in the decision making process for the purposes of inquiring into host State’s liability. However, the treaty basis of the claims did not allow further utilization of national law (para 67 of the award).

Is it possible that in this scenario host State law may still function as law? The relevant criterion is whether a tribunal should give rise to the legal consequences that a domestic rule of law engenders or would use the rule to be measured against a standard in an international law instrument and thus trigger the consequences envisioned in the international instrument. If such an international law instrument makes a reference to a national rule, a tribunal should treat this reference like the function of conflict rules in private international law. The international standard directs to giving rise of a domestic law rule and thus it renders it applicable – not relevant as a fact but applicable as law. This analysis seems to find support in Asian Agricultural Products v Sri Lanka where (paras 21 and 24 of the award) the Tribunal reasoned that a BIT may incorporate domestic law rules and thus render them source of law  supplementary to international law. A BIT, as in that case, may refer to certain rules or standards in host State law, which the tribunal would have to apply directly as the international law instrument requires so.

Conclusion

Article 42 (1) of ICSID Convention should be perceived, as demonstrated by this analysis, as a general source of powers of the arbitral tribunal regarding the pool of rules from which the tribunal may select the particular rules appropriate for application in the concrete factual situation. Which rules would be proper for application is thus premised on the factual circumstances (and the cause of action) and are not a priori determined by the ambit of the provision of the Convention. The case law examples demonstrate a differentiated approach of Tribunals and one of the criteria for such diversity may exactly be the cause of action relied upon by the investor. Neither domestic law nor international law provide for conclusive result as to proper applicable law determination. It is important to note the distinction between Scenarios 1 and 2, on one hand, and Scenario 3, on the other. If international law is applied on equal basis with national law in Scenarios 1 and 2, this would in fact “internationalise” investor-State relations, especially contracts, while such relations by their nature are primarily absorbed into a domestic law system. The true “internationalisation” is in Scenario 3, which is engendered by the treaty basis of the claim and the basis of the protected rights.

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Rationalizing applicable law in investor-State disputes in absence of express choice of law under Article 42 (1) of ICSID Convention

PART I

Article 42 of the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention) determines the powers of an arbitral tribunal constituted under the ICSID Convention as to applicable law in investor-State disputes.

Paragraph 1 of the Article has been subject of varying interpretation in both practice and doctrine, especially as to the determination of applicable law in cases of absence of express choice of law. The interpretation of the Article oscillates from absolute focus on national law of host State to complete preference of international law. However, it is possible to rationalize the scope of applicable law under Article 42 (1) in light of the model factual scenarios which may be brought to the ICSID dispute resolution mechanism.

The present diversity of views as to the proper understanding of Article 42 (1) is engendered by the attempt to reach an overarching and absolute interpretation of applicable law “wrapping” domestic law and international law in an indivisible package. However, it is hereby proposed that Article 42 (1) should rather be interpreted as delimiting the general array of powers provided to ICSID tribunals, i.e. the law that may be applied, while the concrete law applicable to a particular case would depend on the circumstances of this case and, most of all, the legal basis of the aggrieved investor’s claim so that the tribunals may apply either domestic or international law, or both. The substantive grounds for the Investor’s claim lie in a substantive law already tightly linked to the facts of the case.  Hence, there is a trigger prior to the stage where the tribunal exercises its powers under Article 42 (1) in the absence of express choice of law and this is the claim brought by the investor and its cause of action, its substantive law basis – which actually incorporates his substantive rights that the investor claims to be prejudiced.  Below follows an analysis of three factual situations which predetermine what would be the proper law determinable under Article 42 (1).

1.                      Scenario 1: basis of investor’s claim is a national law provision of the host State.

1.1                    An investor-State dispute may arise out of national legislation, for instance laws enacting incentives to investors. In such case the rights of the investor and the respective obligations of the State stem from the domestic law of the host State. Without surprise the proper applicable law would be the national law of the host state.

This may be supported by an argument borrowed from the area of private international law (conflict of laws). In a situation involving a foreign entity making investment in another country the relations between the investor and the host State has to be connected to certain legal order. Although usually located on the territory one country, the investment apparently features an international element which triggers the relevance of private international law techniques. The variety of types of rights the investor has acquired – real estate, stock/debentures, contractual in personam rights, intellectual property, etc., would all be granted by the national law of the host State and hence the investment would be linked in closest manner to the domestic law of the host State. On basis of these closest connecting factors the lex proximus should be the law of the host State.

Would there be any application of international law in this scenario? It can be argued that international law may be applicable but only to the extent it is a part of the municipal law of the host State. In such regard the starting point should be to determine the position of the host State to international law – whether a monist or dualist one, and in what manner rules of international law become incorporated in its national law. Each domestic law lays down the hierarchical place of international law, both treaties and customary international law, within its structure.

A number of tribunals (and doctrine) have considered that international law may have corrective role, derogating contrary provisions of national law, or subsidiary role if national law features lacunae to be filled by international law. However, if a national law features lacunae, the proper way to address the issue would be to seek sources of solution within the body of rules (and principles) of national law instead of direct recourse to public international law.  Therefore, it is more reasonable to adopt a view based on the relevance of international law as incorporated within the host State law, as would be demonstrated by the review of case law.

1.2.                    Case law examples

In SPP v Arab Republic of Egypt (ARB/84/3) the dispute arose out of provisions of the national legislation of Egypt with respect to a hotel construction project adjacent to the pyramids near Cairo. The legal basis of investor’s claim was the Egyptian Law No. 43 of 1974. When considering the ambit of applicable law (paras 74-80 of the award) the Tribunal acknowledged the applicability of national law of the host State. However, the Tribunal did not rule out application of rules of international law. As a theoretical consideration, it was suggested that international law would enter into play in case of lacunae to be filled by it. Moreover, the Tribunal applied rules regarding attribution of acts and omissions of State from the area of State responsibility as customary international law but it explicitly recognised that acts of State officials are in breach of principles of international law, thus considering two separate grounds for liability of Egypt – its national legislation, which the Tribunal applied, and potential violation of international standards (e.g. from customary international law), which streamlines the role of application of international law rules such as those on attribution from the area of State responsibility.

Similarly, in Tradex Hellas v Republic of Albania (ARB/94/2), the cause of action of the investor was Albanian Law No. 7764 of 1993. The Tribunal reasoned (para 69 of the award) that the proper applicable law should be the law of the host State. International law could have been invoked only to the extent of interpretation of concepts such as expropriation that were already incorporated in the national legislation of the host State (Albania).

The decision of the Annulment Committee in Wena Hotels v Arab Republic of Egypt (ARB/98/4) can be interpreted as an argument in the same vein. The Committee had to establish the relationship between domestic Egyptian law and application of international law and whether the Tribunal in the case made manifestly erroneous application of law. The Committee based its conclusions regarding the role of international law upon Egyptian constitution which granted priority of international law instruments over national legislation. Therefore it may be construed that the applicability of rules of international law does not draw upon the postulate of Article 42 (1) alone but it is triggered by the place of international law within the system of particular domestic law, as a result of which the Tribunal may make recourse to it. In such a case international law can have a corrective, supplementary or controlling function – but this would be so by virtue of international law’s position as being incorporated in municipal law, and not merely due to the second sentence of Article 42 (1).

2.                       Scenario 2: basis of investor’s claim is a direct “nexus” with the host State

2.1.                   This point first begs clarification of the term “nexus”. A “nexus” may be understood as a contractual link or a unilateral grant of rights, i.e. license, concession, authorization, permit, etc. in both cases establishing direct connection between the investor and the State. The analysis of this situation is to a significant extent similar to the one in Scenario 2.  The primary applicable rules would be those particular rules governing the nexus-based relationship. Since the nexus is a national law instrument, any relevant rules of national law should be applied as well.

It is possible that the parties to a contractual nexus, i.e. the investor and the State, choose applicable law different from the national law of the host State, given that this national law allows so. This choice of law, if properly made, seems to divert the applicable law under Article 42 (1) away from the national law of the host State. However, two possible corrections may be pertinent in this regard:

First, by virtue of a general technique of private international law, the choice of law of the nexus would not possibly derogate from cornerstone provisions of host State law, e.g. overriding mandatory rules, public policy, etc. so that these may be relevant to the application of the chosen law and thus, again, bring host State national law to the front.

Second, even if the parties to the nexus (most often a contract) opt for law applicable to the nexus other than that of the host State, the relationship between the investor and the State yet remains in closest connection to the host State and, therefore, its national law. If the lex proximus is in fact the law of the host State, this would suggest to the arbitral tribunal that the national law should be applied in its entirety without regard to the choice of law stipulated in the nexus.

The role of international law in such a situation would be as in Scenario 1.

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International Moot Court Competition Association (IMCCA)

and Oleg Temnikov

There is a Taoist fable of the three stupid men who were traveling together from one village to the next. They rested for the night under a banyan tree. In the morning, it turned out that the travelers have forgotten whose shoes are whose. Because none of the three men was able to walk in another man’s shoes or to recognize his own their journey ended under the banyan tree.

Foreword

On February 8, 2013 the tribunal in Tidewater and ors v. Venezuela (ICSID Case No. ARB/10/5) issued its Decision on jurisdiction. To the present authors it was of particular interest for the following passage:

“[Investment treaties] … may provide for investor-state arbitration, but only for a class of claims that is more limited ratione materiae than the total corpus of substantive rights vouchsafed under the treaty.” (para. 128)

Using this decision as an occasion, we here join in the debate as to whether the investor has substantive rights under a BIT or he is rather only permitted to step “into the shoes and asserting the rights of the home State”. (Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc. v. The United Mexican States, ICSID Case No. ARB(AF)/04/05, Award, November 21, 2007, para. 169)

The roots of the debate: Investor’s substantive rights and countermeasures

The debate as to whether investors possess individual rights under BITs was brought to the forefront by the three “sweetener” cases which dealt with the question whether Mexico can rely on a defence of countermeasures against the United States to justify its breach of the NAFTA. To understand the matter, consider Comm. 5 to Art. 49 of the ILC’s Articles on State responsibility:

“[C]ountermeasures may […] incidentally affect the position of third States or indeed other third parties […] If they have no individual rights in the matter they cannot complain.”

It follows that if investors have individual rights under BITs, the host State cannot rely on a defence of countermeasures.

The first tribunal in Archer Daniels denied that investors have individual rights under the NAFTA and found that investors are permitted to enforce what are in essence inter-State rights: “Chapter Eleven sets forth substantive obligations which remain inter-State, without accruing individual rights for the Claimants.” (para. 168; See also paras. 169-180) As a result, the tribunal held that the Respondent State can rely on countermeasures. (para. 180)

The second tribunal in Corn Products International, Inc. v. The United Mexican States (ICSID Case No. ARB(AF)/04/01, Decision on responsibility, January 15, 2008) took exactly the opposite view: “In the case of Chapter XI of the NAFTA, the Tribunal considers that the intention of the Parties was to confer substantive rights directly upon investors.” (para. 169)

Therefore, it rejected the defence of countermeasures:

“A central purpose of Chapter XI… was to remove such claims from the inter-State plane and to ensure that investors could assert rights directly against a host State. The Tribunal considers that, in the context of such a claim, there is no room for a defence based upon the alleged wrongdoing not of the claimant but of its State of nationality, which is not a party to the proceedings.” (para. 161; See also paras. 176, 192)

Finally, the third tribunal in Cargill, Incorporated v. United Mexican States (ICSID Case No. ARB(AF)/05/2, Award, September 18, 2009) also supported the position that countermeasures may not preclude the wrongfulness of an act in breach of obligations owed to nationals of the ‘offending State’. (para. 422, See also para. 429)

None of the three tribunals discussed the possible implications of the Monetary Gold principle. According to said principle, whether legal interests of a third State (in the above cases the United States) not participating to the proceedings “would not only be affected by a decision, but would form the very subject-matter of the decision”¹ the judicial or arbitral body before which the claim is presented shall decline to exercise jurisdiction since the consent of the third State is a necessary precondition. This is another ground on which the defence of countermeasures must fail.²

Further support for the view that investors have substantive rights under BITs

Other arbitral awards³ as well as national court decisions⁴ recognize that investors have substantive rights. The International Law Commission has also supported this view in its study on the MFN clause:

“While the obligation to accord most-favoured nation treatment is undertaken by one State vis-à-vis another, the treatment promised thereby is one actually given in most cases to persons…” (Comm. 2 to Article 5 1978 Draft Articles on most-favoured-nation clauses with commentaries)

It is therefore submitted that the rights of investors are substantive and that they cannot be stripped of those rights by the host State’s exercise of countermeasures.⁵

This proposition is further supported by the fact that home States have no control over the investor’s claims. Likewise, the tribunal in Corn Products mentioned that:

“The individual may even advance a claim of which the State disapproves… That occurred in GAMI, in which the United States filed a submission that the Tribunal lacked jurisdiction…” (para. 173)

Other implications of the direct/procedural rights debate

The other implications of the debate turn on issues such as the continuous nationality rule⁶ and waiver of rights.

As to the continuous nationality rule it suffice to mention that since the rights under BITs accrue to investors and are not constrained in the inter-State diplomatic protection model⁷ there is no requirement that the claimant shall have the nationality of the home State continuously from the date of the injury to the date of the award, but need only establish that it had the nationality of the home State on the two dates specified in Article 25(2)(a) of the ICSID Convention, namely “on the date on which the parties consented to submit such dispute to conciliation or arbitration as well as on the date on which the request was registered.” (Corn Products, para. 172)

As to waiver, it shall be stated that investors may make valid waiver of their rights, if it is explicit and unambiguous⁸ contrary to the view once expressed by the tribunal in SGS Société Générale de Surveillance S.A. v. Philippines (ICSID Case No. ARB/02/6, Decision on jurisdiction, January 29, 2004, para. 154).

We do not go so far as to suggest that due to the direct nature of the investor’s rights a defence based on necessity would be unsuccessful.⁹ Notably, in 2007 the German Constitutional Court held that:

“currently no rule of general international law can be ascertained entitling a State, vis-à-vis private individuals, to suspend the performance of due obligations for payment arising under private law by invoking necessity based on an inability to pay”.¹⁰

However, this topic deserves further research.

Are individuals subjects of international law?

Finally, one last and more general implication of the debate concerns the status of individuals as subjects of international law. The most authoritative definition of subjects of international law given so far is that provided by the ICJ in the Reparation for injuries Advisory Opinion:

“a subject of international law [is] capable of possessing international rights and duties, and… it has capacity to maintain its rights by bringing international claims.”¹¹

The theory of international legal personality has some inherent ambiguities. Firstly, it is not clear whether subjectivity is acquired a posteriori; that is, it follows the conferment of rights and duties, or, on the contrary, the latter flows from the recognition of international personality. Secondly, under the theory that individuals are subjects of international law since they are capable of possessing rights and duties under international law, it turns out that only certain individuals – and not the whole class of individuals or their formations – would qualify as subjects. For example, only protected investors have rights under BITs, as suggested above, or, in the field of human rights, only those nationals of States parties to the First Optional Protocol to the ICCPR are capable of bringing individual communications.

Be that as it may, it appears generally agreed that individuals qualify as subjects of international law. This view is supported by the two latest treatises on the subject.¹² Similarly, the tribunal in Plama Consortium Limited v. Bulgaria (ICSID Case No. ARB/03/24, Decision on jurisdiction, February 8, 2005) prominently held that:

“By any standards, Article 26 is a very important feature of the ECT which is itself a very significant treaty for investors, marking another step in their transition from objects to subjects of international law.” (para. 141)

Conclusion

The majority of arbitral tribunals have opined that investors possess substantive rights under BITs and this has important implications as above described. To return to the leitmotif contained in the beginning of this post, the investor is now able to walk in the field of international investment law comfortably on his own legs and in his own shoes.

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Herbert Smith Freehills LLP,
for YIAG

On February 6, 2013, Achmea (a Dutch insurer, better known by its former name, Eureko) initiated UNCITRAL arbitration proceedings against the Slovak Republic on the basis of the Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic (the “Netherlands-Slovakia BIT“) [The Agreement on encouragement and reciprocal protection of investments between the Kingdom of the Netherlands and the Czech and Slovak Federal Republic was signed on 29 April 1991 and came into force on 1 October 1992.] These proceedings appear to be of a new kind: aimed at preventing a likely expropriation [Achmea press release "Achmea undertakes legal steps against Slovak Republic", 6 February, 2013; L. E. Peterson, "Dutch investor seeks to test limits of investment treaty arbitration by asking arbitrators to block state from expropriating its assets", IA Reporter; K Karadelis, "Measures targeting health insurers lead to new claim against Slovakia", GAR, 7 February 2013].

The 2013 arbitration proceedings are the latest episode in a dispute between Achmea and the Slovak Republic dating back to 2006. In 2006, the Slovak Republic enacted a law banning private health insurers operating in the country from distributing profits to their shareholders. Further to Achmea’s (Eureko at the time) previous claim, an arbitral tribunal upheld jurisdiction on the basis of the BIT and found Slovakia liable for breaching the fair and equitable treatment and the free transfer provisions of the Netherlands-Slovakia BIT in December 2012 [Achmea v Slovakia, PCA Case No 2008-13, Award of 7 December 2012 (not public); Achmea press release, "International arbitration tribunal rules in favour of Achmea", 7 December 2012]. Although the Slovak Constitutional Court reversed the law as unconstitutional in 2011, the arbitral tribunal ordered Slovakia to compensate Eureko, to the amount of €22 million, for the damage suffered within the period during which the law was in force. Slovakia challenged the final award before the German courts, as it had already done, without success, in respect of the decision on jurisdiction.

With the re-election of prime-minister Robert Fico in spring 2012, the dispute entered a new stage. On July 25, 2012, the government voted unanimously in favour of a new project aiming at instituting a single, state-run health insurer and pushing out the two existing private providers by 2014 [The Slovak Spectator, "Fico targets private health insurers again", 26 July 2012]. On October 13, 2012, the Health Ministry presented a draft proposal containing three alternatives to the government: the acquisition by the state of the shares in the private health companies, the takeover of management of the private insurers’ client portfolios or the expropriation of the private health insurance companies. In order to take effect, however, the draft law still has to receive parliamentary approval.

Achmea’s new notice of arbitration dated 6 February 2013 appears to be a direct reaction to the new regulation that may be enacted by the State. The request for arbitration is not publicly available and the only information available so far is based on Achmea’s press release, according to which the arbitration “seeks to avert the outright expropriation of UZP.” Assuming that there is no other claim, this arbitration thus amounts to a request for purely pre-emptive measures against a State; in other words a request that a State refrain from enacting a law that would constitute a violation of the BIT.

The Achmea II case thus presents two original elements.

First, according to the press release, it seems that no pecuniary measures have been requested at this stage, since no damage has occurred. Although not uncommon in international arbitration against states (investment tribunals have on several occasions agreed to grant non-monetary relief [On non-monetary relief in investment arbitration, see for instance: C. Schreuer, "Non-pecuniary Remedies in ICSID Arbitration", AI, 2012; M. Endicott: "Remedies in Investor-State arbitration: restitution, specific performance and declaratory awards" in P. Kahn, T. Wälde, New aspects of international investment law, 2007; C. Malinvaud, "Non-pecuniary Remedies in Investment Treaty and Commercial Arbitration", ICCA Congress Series, 2009; P. Dunand, M. Kostytska, "Declaratory Relief in international arbitration", JIA, 2012] in the form of declaratory awards [See for instance: Saudi Arabia v Aramco, 27 ILR 117, 1963; Biwater Gauff v Tanzania, ICSID case n° ARB/05/22, Award of July 24, 2008], orders for specific performance [See for instance: Texaco v Libya, J.D.I, 1977, pp. 350-389], prohibitory injunctions or mandatory orders [ATA v Jordan, ICSID case n° ARB/08/2, Award of May 18, 2010. In two pending cases, the Claimant made requests for provisional injunctions: Philip Morris v Uruguay (UNCITRAL), Request for arbitration of February 19, 2010; Chevron v. Ecuador, PCA Case No 2009-23, First Interim Award on Interim Measures of January 25, 2012] ), arbitral tribunals generally favour pecuniary measures [C Dugan, D Wallace, N Rubins, B Sabahi, Investor State Arbitration, 2008, p. 569]. Furthermore, claims based solely on such measures are quite rare [To our knowledge, only the Saudia Arabia v Aramco case was entirely limited to non-pecuniary remedies in the field of investor-state. This was, however, a very specific case since the parties had agreed that the award should be only declaratory. Saudi Arabia v. Arabian American Oil Company (Aramco), see above].

Second, by contrast with existing awards ordering non-pecuniary measures, the investor’s new claim is entirely aimed at pre-emptively challenging a new regulation which has not yet been adopted, thus assuming that the contemplated expropriation would not be in the public interest, would not be implemented in accordance with due process and would be discriminatory.

This kind of action raises a number of unresolved questions. Some of these questions are at the heart of the rationale of investor-state arbitration, according to which an arbitral tribunal is only entitled to exercise jurisdiction over disputes which the parties have agreed to submit to arbitration: (1) whether there is an existing dispute where there is a threat of expropriation but none has yet occurred, and (2) whether the State’s consent to arbitration under the Netherlands-Slovakia BIT would apply to this kind of pre-emptive claim.

1. Is there a “dispute” between Achmea and Slovakia?

1.1 Pursuant to article 8 of the Netherlands-Slovakia BIT, “Each Contracting Party hereby consents to submit a dispute (…) to an arbitral tribunal…” [Netherland –Slovakia BIT, Article 8].

1.2 The pre-emptive nature of the Achmea II case raises the question of the existence of a dispute when the investor has not yet suffered any prejudice, and where expropriation is envisioned as a possibility but the conditions of its implementation remain unknown.

1.3 Under general international law, the ICJ has defined a legal dispute as a “disagreement on a point of law or fact, a conflict of legal views or interests between the parties” [See for instance: Mavrommatis Palestine Concessions, Judgment No 2, 1924, P.C.I.J.; Case Concerning certain property (Liechtenstein v Germany), Preliminary objections, Judgment of 10 February 2005, §24]. Several ICSID arbitral tribunals have used this definition [See for instance: Maffezini v Spain, ICSID Case n°ARB/97/7, Decision on Jurisdiction, 25 January 2000, §94; Tokios Tokelès v Ukraine, ICSID Case n°ARB/02/18, Decision on Jurisdiction, 29 April 2004, §106] and there appears to be no reason why an ad hoc tribunal whose jurisdiction is based on a BIT should not follow the same path.

1.4 In addition, while commenting on article 25 of the ICSID Convention, Pr. Schreuer states that “[t]he existence of a dispute may be in doubt in several ways. An open question may not have matured into a dispute between the parties. Or a difference of opinion may not be sufficiently concrete to amount to a dispute that is susceptible of conciliation or arbitration” [C. Schreuer, The ICSID Convention: A Commentary, 2009, Article 25, §41].

1.5 Although it remains uncertain whether this commentary can be applied directly to non-ICSID arbitrations [AES v Argentina, ICSID Case n° ARB/02/17, Decision on Jurisdiction of April 26, 2005, §43], an interpretation of the “ordinary meaning” of article 8 of the BIT in accordance with general international law [Pursuant to Article 31 of the Vienna Convention on the Law of Treaties] might lead to a similar conclusion.

1.6 The question would thus be whether a mere draft law aimed at expropriating assets of a foreign investor, but not yet voted on by the Parliament, might rise to the level of a dispute under this definition.

1.7 In the ICSID case of Enron v Argentina [Enron v Argentina, ICSID Case n°ARB/01/3, Award of 14 January 2004], the investor alleged that certain taxes which had been assessed but not yet collected amounted to a breach of the BIT. As here, Enron had thus not yet suffered any damage and would probably not suffer any should, ultimately, no taxes be collected. Logically, Argentina argued that the dispute between the parties was purely hypothetical, since the taxes might never be collected, or be collected only in a small amount [Enron v Argentina, §72]. The arbitral tribunal however rejected this argument on the ground that once taxes are assessed, there is, from the state’s perspective, a liability on the part of the investor and a claim seeking protection under the treaty is thus no longer hypothetical because a specific dispute can be identified [Enron v Argentina §74].

However, in Achmea’s case, the dispute is one step earlier: the act of the state at the origin of the dispute, and which is aimed at the expropriation of Achmea’s subsidiary Union, has not even been voted on by the Parliament. Furthermore, the exact conditions under which the project would be implemented do not appear clear, as three are scenarios concerning how to return to a single-insurer system but none has been selected. Accordingly, whether an arbitral tribunal will, following the same line of reasoning as Enron, consider that, from the state’s perspective, there is already, at this stage, a liability on the part of the investor remains doubtful. The context of the dispute and the previous regulations enacted by the State could, however, constitute an argument for Achmea that there is actually a dispute which is not hypothetical, in view of the state’s previous attitude.

1.8 In any event, one might also ask whether Slovakia consented to submit purely pre-emptive claims to the arbitral tribunal by signing the BIT.

2. Did Slovakia consent to submit requests for pre-emptive claims to an arbitral tribunal under the BIT?

2.1 It is likely that Slovakia will argue that the arbitral tribunal does not have jurisdiction because, under the Netherlands-Slovakia BIT, it has not agreed to UNCITRAL’s jurisdiction for pre-emptive claims. The investor will thus have to prove that the parties’ consent to arbitration under the Netherlands-Slovakia BIT would extend to purely pre-emptive actions. It has long been established within the framework of ICSID arbitration that consent is the “cornerstone” of the jurisdiction of ICSID tribunals. The same can be said for ad hoc arbitrations in which the consent to arbitrate is based on a BIT.

As such, ordering purely pre-emptive remedies might collide with the fact that “[r]estrictions upon the independence of states cannot be presumed [Permanent Court of International Justice, Decision of September 7th, 1927, §18] “. According to this principle, the state should explicitly agree to any restriction of its legislative power. No aspect of the Netherlands-Slovakia BIT indicates any intent on the part of the contracting states to grant the tribunal powers to deal with a hypothetical future violation of the Netherlands-Slovakia BIT. Accordingly, the tribunal may also refuse jurisdiction over Achmea’s claim on the ground of lack of consent.

2.2 However, the arbitral tribunal might equally consider that the absence of any reference to claims of this sort in the Netherlands-Slovakia BIT does not necessarily mean that it has no jurisdiction over these claims, which are of a peculiar nature. For instance, the arbitral tribunal might interpret Achmea’s claim as a purely procedural question, to be solved in the course of the proceedings. This is the approach adopted when issuing injunctive orders during arbitration. However, in those cases, the arbitral tribunals are not seized solely on the basis of the non-pecuniary relief sought against a state.

The question of consent appears therefore in a specific light in the Achmea II case, and it remains to be seen which position the tribunal will adopt.

In conclusion, Achmea’s claim raises jurisdictional questions in relation to the notion of an actual dispute as well as to the scope of the State’s consent to investor-state arbitration. At the same time, considering the overall context of this dispute, the practical interest of the kind of claim made by Achmea is obvious: this is a situation where the investor has already been subject to measures by the same government that have been considered by an arbitral tribunal to be a violation of the Netherlands-Slovakia BIT. An arbitral tribunal may thus be tempted to consider that this new claim is part of a broader dispute in which the investor has openly and repeatedly been targeted by Mr. Fico. On that basis, an arbitral tribunal may want to consider that there is a dispute and that as the State has agreed to submit all disputes to arbitration, without specific restriction, it has jurisdiction.

Should that be the case, however, what would be the kind of award that an arbitral tribunal could then pronounce on the merits without interfering with the state’s sovereignty? It would not be acceptable to order a State not to enact a law. Could it be a declaration that, should the State enact the law in question, it will be in breach of the Netherlands-Slovakia BIT? How then would the arbitral tribunal determine the frontier between granting or refusing a pre-emptive measure and according to what criteria? How then would such an award be enforced against the State? Even assuming that an arbitral tribunal would have jurisdiction over such a claim, a number of additional open questions would remain.

The author would like to thank Lisa Bohmer for her valuable assistance in preparing this blog.

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International Moot Court Competition Association (IMCCA)

Akbar the Great once drew with his royal hand a line in the sand. He then told his wise men that if they wanted to keep their jobs, they must invent a way to make the line shorter without touching any part of it. Wise man after wise man approached the line and stood in dismay. No one else but Birbal came with the solution. He stepped forward and drew another line in parallel to the first one, but drew it longer than it. Everyone in the court agreed that the line drawn by the King was shorter and untouched. (A koan)

Foreword: In the eyes of a taxpayer

In the past two weeks civil unrest erupted in Bulgaria causing the Government to step down as a result of the energy prices increase. Protesters demanded termination of the power-distribution contracts concluded with foreign-owned companies. The present post seeks to examine the situation of an investor whose investment is threatened but he does not have access to ICSID arbitration. Is corporate restructuring an option?

For this purpose, treaty-shopping may be defined as the process of routing an investment so as to gain access to a BIT where one did not previously exist or for gaining access to a more favorable BIT protection. The focus is on restructuring by transfer of shares or otherwise at the time when the investment is already under some threat such as in the case of a revocation of a license or termination of a contract.

First, it must be stated that treaty-shopping is not, in principle, prohibited under international investment law, as the purpose of BITs is exactly encouragement of investment. (See CME Czech Republic B.V. (The Netherlands) v. The Czech Republic, Partial Award of 13 September 2001 (UNCITRAL Arbitration Proceedings) at para. 419; cf. Mobil Corporation, Venezuela Holdings, B.V. et al. v. Bolivarian Republic of Venezuela, ICSID Case No. ARB/07/27, Decision on Jurisdiction dated 10 June 2010 at para. 204)

Secondly and by way of admission, the Aguas del Tunari, S.A. v. Republic of Bolivia case (ICSID Case No. ARB/02/3, Decision on Respondent’s Objections to Jurisdiction dated 21 October 2005) is a strong case for investors in a situation similar to the above described, although it must be noted that every case of alleged abuse of process must be judged on its own circumstances.

The topic of nationality planning has been recently examined by Prof. Schreuer. He has concluded that:

“[t]he validity of nationality planning [is] primarily dependent on the time of the restructuring in relation to the dispute. If the restructuring was undertaken early i.e. before the outbreak of the dispute, the newly acquired nationality will be honoured. But a last minute change of nationality in the face of an existing dispute will be rejected.” (Schreuer, C., Nationality Planning, Fordham Conference, London, 27 April 2012. Revised 12 October 2012, http://www.univie.ac.at/intlaw/wordpress/wp-content/uploads/2012/11/nationality-Planning-Fordham-revised.pdf, p. 18)

In the above-mentioned Aguas del Tunari, S.A. v. Republic of Bolivia, after a water and sanitary sewer concession contract was concluded, the so-called “water war” started in 1999 and local population demanded termination of the contract out of fear that prices will skyrocket. In the meantime, Aguas del Tunari changed its upstream ownership by transferring 55% ownership stake to a Dutch company in December 1999. (This is only briefly stated. For more details see the case itself and also de Gramont, A., After the Water War: The Battle for Jurisdiction in Aguas Del Tunari, S.A. v. Republic of Bolivia in 3 TDM (2006)). Four months later the concession was terminated. The tribunal thus accepted that at the time of restructuring the investor could not have contemplated the events which followed in the spring of 2000 and concluded that in casu the restructuring did not amount to abuse of process. Similarly, in Mobil v. Venezuela the tribunal distinguished between the already existing disputes relating to royalty payment and income tax payment and a future one relating to the termination of the concession. Only in the latter hypothesis was the restructure legitimate. (paras. 204-205.) Notably, in this case the process of restructuring started three years before the nationalization. (para. 203)

For the sake of clarity, the cases of Tokios Tokelės v. Ukraine (ICSID Case No. ARB/02/18, Decision on Jurisdiction, 29 April 2004), Phoenix Action, Ltd. v. The Czech Republic (ICSID Case No. ARB/06/5, Award of 15 April 2009) and Pac Rim Cayman LLC v. The Republic of El Salvador (ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections of 1 June 2012) must be distinguished. The first concerns restructuring which took place six years before the entry into force of the BIT in question (para. 56), the second – downstream reorganization upon already existing dispute (para. 95), and in the third case, the State led the investor to believe that the withheld permits will be eventually issued (para. 2.83.).

These important distinctions may serve to emphasize that the question remains largely unsettled and that Aguas del Tunari, S.A. v. Republic of Bolivia case might not serve as a powerful ‘precedent’ for future tribunals. Already in the World Duty Free v. Kenya case the tribunal recognized that “law protects not the litigating parties but the public; or in this case, the mass of tax-payers and other citizens making up one of the poorest countries in the world.” (World Duty Free Company Limited v. Republic of Kenya, ICSID Case No. ARB/00/7, Award of 4 October 2006 at para 181.)

I am looking into this question with the eyes of a tax-payer and – more importantly – of a citizen of Europe’s poorest country. I am therefore arguing that treaty-shopping in the above described situation amounts to abuse of process and thus an ICSID tribunal will lack jurisdiction to consider the claim. Nonetheless, I admit that, given the considerable uncertainty prevailing at the time, a strong case can be made for the legitimacy of such restructuring.

I. The case “against” lawfulness of corporate restructuring

1. Restructuring of the investment does not qualify as a protected investment as it is made in violation of the host State’s law

My first thesis is that restructuring made closely following the first of a series of acts which form the dispute between the parties may not constitute a covered investment as being established contrary to the laws of the host State. Whether the BIT contains or not a requirement that the investment shall be established in accordance with the law of the host State, tribunals have concluded that a BIT “leaves investments made illegally outside of its scope and benefits.” (See Inceysa Vallisoletana S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award of 2 August 2006 at para. 206; See also Smutny & Polášek, Unlawful or Bad Faith Conduct as a Bar to Claims in Investment Arbitration in Werner & Ali (eds.) A Liber Amicorum: Thomas Wälde Law Beyond Conventional Thought (Cameron May 2009) pp. 277-296)

Many, if not all, municipal laws contain a prohibition against circumvention of law. On this ground, it may be argued that the investment was established in violation of this prohibition and is thus outside the scope of the host State’s consent. Should this not be accepted as a valid ground for dismissing the Claimant’s claims there are two alternative arguments as it follows.

2. Restructuring of the investment does not qualify as a protected investment as it does not meet the requirement of “contribution to the host State’s development”

From the intention behind the investment in the midst of a growing dispute it would be obvious that the investment is not made with the purpose of contributing to the host State’s development. This requirement for determining the existence of an investment is, admittedly, controversial. (Schreuer, C. et al., The ICSID Convention: A Commentary (Cambridge University Press, 2nd edn 2009) at pp. 131-134) However, in the circumstances, such a factor cannot be left out of account, especially when combined with the requirement of duration. The tribunal in Phoenix Action, Ltd. v. The Czech Republic held that “This alleged investment was not made in order to engage in national economic activity, it was made solely for the purpose of getting involved with international legal activity.” (para. 142)

3. Restructuring of the investment does not qualify as a protected investment as it does not meet the requirement of “duration”

Prof. Schreuer in his Commentary on the ICSID Convention has identified the requirement of certain duration as one of the elements to be taken into account in determining the existence of an investment. He has observed that “Tribunals seem to have regarded a period of two to five years as sufficient.” (p. 130) In consequence, when a claim is presented shortly after the restructuring has taken effect it becomes apparent that the investment is made for the sole purpose of gaining access to ICSID arbitration and amount to an abusive manipulation of the system of international investment protection.

II. The case “for” foresight in corporate restructuring: Foreseeability v. the fact “which really gave rise to the dispute”

Most recently, the tribunal in Pac Rim Cayman LLC v. The Republic of El Salvador held that:

“[T]he dividing-line occurs when the relevant party can see an actual dispute or can foresee a specific future dispute as a very high probability and not merely as a possible controversy. In the Tribunal’s view, before that dividing-line is reached, there will be ordinarily no abuse of process; but after that dividing-line is passed, there ordinarily will be. The answer in each case will, however, depend upon its particular facts and circumstances, as in this case.” (para. 2.99.)

Irrespective of how ambiguous this dividing line is, the tribunal laid emphasis on the foreseeability of the dispute. This implies that should subsequent tribunals adopt a first-fact approach (i.e. after the first in a series of facts giving rise to a dispute has taken place), an after-the-fact restructuring will amount to an abuse of rights and such an investment will not be covered by the consent of the host State. As in the story of Akbar mentioned at the beginning of this post, investors shall not be allowed to draw a longer line which would completely blur the limits between legitimate nationality planning and manipulation of the ICSID dispute settlement system.

In the interest of fairness, however, I shall mention that when dealing with limitations ratione temporis in declarations of acceptance of its jurisdiction excluding facts of situations occurring prior to the date of the declaration, the Permanent Court of International Justice has held that it must look at the “the facts which really gave rise to the dispute.” (Phosphates in Morocco, Judgment (Preliminary objections), Permanent Court of International Justice Series A/B No. 74 (1938) at p. 26) In the Electricity Company of Sofia and Bulgaria case the Court added that

“it is true that a dispute may presuppose the existence of some prior situation or fact, but it does not follow that the dispute arises in regard to that situation or fact. A situation or fact in regard to which a dispute is said to have arisen must be the real cause of the dispute.” (See Judgment (Preliminary objections), Permanent Court of International Justice Series A/B No. 77 (1939) at p. 82; This approach has been upheld by the International Court of Justice in Case concerning Right of Passage over Indian Territory (Merits), Judgment of 12 April 1960 I.C.J. Reports 1960, p. 34)

Under this analysis, it cannot be maintained (however repulsive this might seem in the eyes of a tax-payer) that the protests in the above scenario currently unfolding in Bulgaria are the real cause of the dispute. Only the subsequent termination of the contracts will lead to the crystallization of the dispute. Thus, restructuring prior to termination would be legitimate.

On the other hand and as far as continuing wrongful acts are concerned, the decision in Pac Rim Cayman LLC v. The Republic of El Salvador contains an important finding:

“Where the alleged practice is a continuous act …, this means that the practice started before the Claimant’s change of nationality and continued after such change. This analysis would found the basis of the Tribunal’s jurisdiction ratione temporis under CAFTA; but it would preclude the exercise of such jurisdiction on the basis of abuse of process if the Claimant had changed its nationality during that continuous practice knowing of an actual or specific future dispute, thus manipulating the process under CAFTA and the ICSID Convention in bad faith to gain unwarranted access to international arbitration.” (para. 2.107.)

The same reasoning would apply to composite acts (See Article 15 of the ILC’s Articles on Responsibility of States) in which category falls for example creeping expropriation. A temporary interference, for its part, (such as temporary closure of a State’s border which obstructs the operations of an investor) will fall into the category of completed acts. Likewise, the Commentaries to the ILC’s Articles on Responsibility of States point out that “[a]n act does not have a continuing character merely because its effects or consequences extend in time.” (Comm. 6 to Article 14 of the ILC’s Articles on Responsibility of States)

The present post does not concern itself with the question of denial of benefits clauses found in some BITs. States are, however, well advised to include in contracts with investors a requirement of prior notification so as to be aware of the consequences. Or, if this requirement is not observed, this may well serve as evidence of bad faith. Additionally, in cases of internationalization of a domestic dispute, i.e. when a national of the State opts for a nationality of convenience in the face of a growing or already existing dispute this shall be deemed per se an abuse of rights. (See also Cementownia “Nowa Huta” S.A. v. Republic of Turkey, ICSID Case No. ARB(AF)/06/2, Award of 17 September 2009 at para. 117)

A look into the future

A case of interest which may shortly test the above propositions is Philip Morris v. Australia. Immediately after Australia committed to introduce plain packaging legislation in 2010 Philip Morris Limited acquired shares in PM Australia and thus, it was alleged, the company was able to “buy into a dispute [which] is either existing or highly probable.” (Philip Morris Asia Limited v. The Commonwealth of Australia, PCA Case No. 2012-12 (UNCITRAL Rules 2010), Procedural Order No. 4 Regarding the Procedure until a Decision on Bifurcation of 26 October 2012 at paras. 29-30.) Under the timetable of proceedings the Claimant is to file its Statement of Claim by 28 March 2013.

Whichever of the above approaches prevails in the future, it is with a view to legal certainty that arbitrators must take their decisions. Ideally, preventing abusive claims will foster a climate of mutual trust between investors and host States which is as important in the XXI century as it was in the era when foreign protection law emerged. Otherwise, States may be encouraged to denounce the ICSID Convention or to take outright measures such as abrupt termination of contracts in the face of a growing dispute.

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Mishcon de Reya

In recent years, African states have taken several initiatives to increase the protection of and legal security offered to foreign investors. However, a lot of work is unfinished and some of it is even frustrated. Some examples.

1. Bilateral Investment Treaties

Bilateral investment treaties (‘BITs’) are critical to foreign investors considering investing in Africa. Such BITs grant foreign investors and their investments substantive protection, including the right to sue foreign governments if they can establish that they are nationals of one of the contracting states and have an ‘investment’ in the territory of the other contracting state.

To date, African states have entered into 767 BITs. This is the good news. The bad news, however, is that 338 of them, a staggering 44%, have not entered into force for lack of completing the ratification process.

Breaking down the BITs on the basis of the nationality of the counterparty, there is a substantial difference between the BITs signed with a non-African counterparty and those signed with an African one.  Of the 622 BITs signed between an African and a non-African state, 64% are in force today and 36% are not. Of the 145 BITs signed between two African states, only 20% are in force and 80% are not.

These numbers suggest that, in general, non-African states ratify their BITs and make sure that the African counterparts do the same on their end. African states, on the contrary, seem to care far less about ratification and turning BITs into legally binding and enforceable commitments.

The situation is even more dramatic when the intra-African BITs are broken down geographically.  Whereas most states in North and East Africa have ratified about 30% of their BITs, the Western, Central and Southern-Africa states have ratified less than 10% of their BITs with another African state.

II.         Multilateral Investment Agreement

A frequently heard critique about the current generation of BITs, especially those concluded between developed and developing states, is that they cater only to the needs of the capital exporting state. These BITs would have the protection of the interests of the foreign investor as their sole stated objective, to the detriment of the host state’s right to regulate and govern to further public interests, protect human rights and foster sustainable development.

It is against this background that the then nineteen member states of the Common Market for Eastern and Southern Africa (‘COMESA’) adopted in May 2007 a multilateral Investment Agreement for the COMESA Common Investment Area (‘CCIA Agreement’). The signing parties included Burundi, Comoros, DRC, Djibouti, Egypt, Eritrea, Ethiopia, Kenya, Libya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda, Zambia and Zimbabwe.

The CCIA Agreement seeks to offer a new model of and approach to investor-state arbitration, taking the realities and sensitivities of developing African states far more into account than traditional BITs.  For example, to qualify as a protected investor, criteria such as the amount of investment brought into the host state, the number of jobs created, its effect on the local community and the length of time the business has been in operation are examined. Also in terms of substantive rights, the CCIA Agreement departs from the ‘traditional’ BITs. For example, it provides for a degree of flexibility in the interpretation of the fair and equitable treatment standard based on the level of development of the host state.

Had the CCIA Agreement entered into force, it would have been an important new instrument in the protection of African companies investing in Africa and foreign controlled subsidiaries duly incorporated and operating out of Africa. However, it did not. The CCIA Agreement required the ratification by six states and six years after its signing this threshold has still not been met.

It is unlikely that this will change any time soon as the CCIA Agreement is not even mentioned anymore on the official website of COMESA. Therefore, this promising project appears to have been abandoned.

III.        SADC Tribunal

Fifteen African states are members of the Southern African Development Community (SADC), established by the SADC Treaty in 1992. They include Angola, Botswana, DRC, Lesotho, Malawi, Madagascar, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.

The SADC Tribunal is the judicial arm of this regional economic community. The SADC Tribunal has jurisdiction over disputes between natural or legal persons and a SADC member state in relation to the interpretation and application of the SADC Treaty. Article 4 of the SADC Treaty provides that SADC member states are required to act in accordance with ‘principles of human rights, democracy and the rule of law’.

As demonstrated in Mike Campbell v. Zimbabwe (Case No SADCT 2/07), the SADC Tribunal has jurisdiction over claims of expropriation of property in breach of the rule of law and of racial discrimination. In a decision of 28 November 2008, the Tribunal found the Government of Zimbabwe in breach of its treaty obligations and ordered it to protect the investments and pay the evicted farm owners a fair compensation.

Whereas this decision was hailed by the international community and perceived as an important precedent in the protection of investors in the region, it came as a shock to the SADC member states who subsequently suspended the activities of the SADC Tribunal until further notice. At this moment in time, there are no judges anymore and the SADC Tribunal is not receiving any new cases until a new Protocol on the SADC Tribunal has been adopted by the SADC members.

At the 32nd Session of the Summit of the Heads of State and Government of SADC, held on 17 and 18 August 2012, the member states rejected a report of their respective Attorney Generals on the subject matter and postponed their decision on a new Protocol for an undetermined period of time. It is, however, unlikely that any new Protocol, whenever it will be adopted, will grant jurisdiction to the SADC Tribunal to hear claims from individual investors.

IV.        Other international courts  

The African Court on Human and Peoples’ Rights is an international court established to ensure protection of human and peoples’ rights in Africa. It was established in June 1998 by the Protocol to the African Charter on Human and Peoples’ Rights on the Establishment of an African Court on Human and Peoples’ Rights. To date, fifteen years later, only twenty-six states or just half of the fifty-one signatories have ratified the Protocol.

The African Court on Human and Peoples’ Rights has jurisdiction over disputes concerning the interpretation and application of the African Charter on Human and Peoples’ Rights. Article 14 of the Charter guarantees the right to property. It may only ‘be encroached upon in the interest of public need or in the general interest of the community and in accordance with the provisions of appropriate laws’. Individual investors who would see their property forcefully expropriated by an African state, could therefore bring a claim before the African Court on Human and Peoples’ Rights, but only to the extent that the latter has effectively ratified the above-mentioned Protocol.

In 1999, the then fifty-three African states established the African Union (‘the AU’) to accelerate the process of integration on the African continent. The principal judicial organ of the AU is the Court of Justice of the African Union, established by the 2003 Protocol of the Court of Justice of the African Union.  The Protocol was ratified by only sixteen, or just over a quarter, of the member states.

Concerned over the growing number of AU institutions that the member states could not afford, the AU decided in 2008 to merge the African Court on Human and Peoples’ Rights and the Court of Justice of the African Union and create the new African Court of Justice and Human Rights. This new Court was established by a 2008 Protocol which requires the ratification by fifteen member states so as to enter into force. To date, only three member states have ratified the 2008 Protocol, i.e. Burkina Faso, Libya and Mali. The African Court of Justice and Human Rights is therefore not in place yet.

V.         Conclusion

African states are aware that foreign investors require legal protection and they have taken numerous initiatives to provide that protection. They have signed over 750 BITs, adopted a multilateral investment agreement within COMESA, set up an international tribunal within SADC and established another three international tribunals within the African Union.  All of these instruments entitle investors, Africans and others, to bring proceedings, in one form or another, against the host state if they believe that their rights have been violated. This is at least the theory.

In practice, however, the picture is very different. 338 BITs, or 44 %, are not ratified and therefore not in force. The multilateral Investment Agreement appears to have disappeared completely. The SADC Tribunal was suspended as soon as the SADC member states realised its potential. The various Protocols establishing the international tribunals are ratified by only a minority of the African states, if at all.

If African states want to offer investors a better protection, both in their own interest and in the interest of the investor, and want to play a more significant role in the arena of international law, they can do so very quickly. They do not have to go back to the drawing board and start all over again. They can simply commit to what they have already agreed to, by ratifying a substantial part of the outstanding BITs and Protocols and by making the necessary funds and human resources available to equip the various tribunals that are waiting to take up their position.

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International Moot Court Competition Association (IMCCA)

by Inna Uchkunova and Oleg Temnikov

Foreword

“The whole exercise was great fun and for me, I was then 26 years old, a great eye-opener – I learned a lot.”

- Sir Elihu Lauterpacht on his advice given to the Anglo-Iranian Oil Co. in 1954, on which occasion it emerged the idea that

“any contract made between, on the one hand, the Company and such other oil companies … and NIOC and/or the Iranian Government on the other, shall be incorporated or referred to in a treaty between Iran and the United Kingdom in such a way that a breach of the contract or settlement shall be ipso facto deemed to be a breach of the treaty.” (Conversations with Professor Sir Elihu Lauterpacht, Second Interview, 2008, Squire Law Library – University of Cambridge, p. 8; and Sinclair, A. C., The Origins of the Umbrella Clause in the International Law of Investment Protection, 20 Arb. Int’l 412 (2004)).

Fifty-eight years later the situation with the umbrella clause, given the divergence of views on it, is not that funny. Currently – to the knowledge of the authors – there are forty-four awards and decisions dealing with the question of the umbrella clause; some are representing different stages of the same case, while others are referring to the issue only obiter dictum. The recent award rendered in Bosh v. Ukraine (ICSID Case no. ARB/08/11, Award of October 25, 2012) is the last one in this long line of cases. We took this case as an occasion to revisit the matter.

Who is left under the rain? Contracts concluded between an investor and a State entity

Of the above mentioned forty-four awards, twenty-two have dealt with the so-called it question or, in other words, whether contracts concluded between an investor and a State entity may be assimilated, for jurisdictional purposes, to investor-host State commitments. This is with a view to the language used in most of the umbrella clauses: “Each Contracting Party shall observe any obligation it has assumed …”

Sixteen of these twenty-two awards stand of the opinion that it is a precondition for the operation of the umbrella clause that the contract be concluded between the investor and the host State. See for e.g. Impregilo v. Pakistan, ICSID Case no. ARB/03/3, Decision on Jurisdiction of April 22, 2005, para. 223; Azurix v. Argentina, ICSID Case no. ARB/01/12, Award of July 14, 2006, para. 52; CMS v. Argentina, ICSID Case no. ARB/01/8, Decision on the Application for Annulment of September 25, 2007, para. 95(b); Amto v. Ukraine, Arbitration no. 080/2005 SCC Rules, Final Award of March 26, 2008, para. 110; EDF (Services) Limited v. Romania, ICSID Case no. ARB/05/13, Award of October 8, 2009, para. 318.

As the tribunal in Gustav F W Hamester GmbH v. Ghana concluded,

“a contractual obligation between a public entity distinct from the State and a foreign investor cannot be transformed by the magic of the so-called ‘umbrella clause’ into a treaty obligation of the State towards a protected investor”. (Gustav F W Hamester GmbH v. Ghana, ICSID Case no. ARB/07/24, Award of June 18, 2010, para. 346, emphasis added, referring to the CMS Annulment, para. 95(c); see also Vivendi v. Argentina, ICSID Case no. ARB/97/3, Decision on the Application for Annulment of July 3, 2002, para. 96)

The EDF v. Romania tribunal added that:

“[T]he attribution to Respondent of AIBO’s and TAROM’s acts and conduct does not render the State directly bound by the ASRO Contract or the SKY Contract for purposes of the umbrella clause”. (para. 318, emphasis added)

The question of attribution under international law simply does not arise. (See Vivendi First Annulment, para. 96)

It may be added that the same reasoning applies vis-à-vis contracts concluded between the host State and an investment, i.e. the subsidiary of a protected shareholder. The latter cannot claim – absent specific language in the umbrella clause – rights under a contract to which it is a third party based on the principle res inter alios acta. (See Gallus. N., An Umbrella Just For Two? BIT Obligations Observance Clauses and the Parties to a Contract, 24 Arb. Int’l 157 (2008))

The inadmissible umbrella

Another interesting question which has been considered by ICSID tribunals is that of the exclusive forum selection clause (“FSC”) which gives jurisdiction over all contractual matters to the host State’s courts, to the exclusion of any other forum.

The tribunals in the cases of SGS Société Générale de Surveillance S.A. v. Philippines, (ICSID Case no. ARB/02/6), Toto Costruzioni Generali S.p.A. v. Lebanon, (ICSID Case no. ARB/07/12) and Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. (BIVAC) v. Paraguay (ICSID Case no. ARB/07/9) have found the umbrella clause claims inadmissible due to such an exclusive FSC contained in the underlying contract. As the tribunal in Malicorp v. Egypt usefully explained:

“In principle, it is up to the party claiming to have been injured by the breach of a contract to pursue its contracting partner using the avenues laid down for this purpose. So long as a procedure of this type exists for protecting investment, it is not possible to resort to the special methods provided for by treaty…” (Malicorp Limited v. Egypt, ICSID Case no. ARB/08/18, Award of February 7, 2011, para. 103(c))

Only the decision in SGS v. Paraguay stands as an exception in this regard. There the tribunal held that to dismiss the umbrella clause claims on such grounds would be tantamount to “having jurisdiction over an empty shell.” (SGS Société Générale de Surveillance S.A. v. Paraguay, ICSID Case no. ARB/07/29, Decision on Jurisdiction of February 12, 2010, paras 176-177) This case may be distinguished from SGS v. Philippines, SGS v. Pakistan and BIVAC v. Paraguay were proceedings have been stayed and dismissed, based on the fact that the decision of the municipal court concerned was a “a factual or legal predicate”. (SGS Société Générale de Surveillance S.A. v. Pakistan, ICSID Case no. ARB/01/13, Decision on Jurisdiction of August 6, 2003, para. 186; see also SGS v. Philippines, Decision on Jurisdiction of January 29, 2004, para. 175; BIVAC v. Paraguay, Decision on Jurisdiction of May 29, 2009, para. 161) The SGS v. Paraguay approach and overall analysis of the umbrella clause is very interesting and may be commended for saving time and resources in the consolidation of all claims before one body.

On one hand, the reciprocal nature of the obligations owed under a contract must not be disregarded, i.e. the investor cannot be left to absolve himself from the obligation to observe the exclusive FSC as long as it has been freely agreed to. On the other hand, it is the respondent State itself which has refused to pay under the contract. Commenting on the “cherry-picking” argument, the BIVAC v. Paraguay tribunal opined that:

“The broader point, however, having regard to the fundamental principle that the autonomy and will of the parties is to be respected, is that the parties to a contract are not free to pick and choose those parts of the Contract that they may wish to incorporate into an “umbrella clause” provision such as Article 3(4) and to ignore others.” (para. 148)

Can the investor rely then on a kind of exceptio non adimpleti contractus in order to release himself from the obligation to have recourse to domestic courts? Interestingly, the SGS v. Philippines tribunal, which initially stayed the proceedings pending resolution of the contractual dispute, admitted that it was not its intention to order a stay sine die and lifted the stay. (See SGS v. Philippines, Order on Further Proceedings of December 17, 2007, para. 5) It may thus be read between the lines of the order in SGS v. Philippines that if the parties continue to disagree on the contractual dispute, the stay will be eventually lifted but at additional cost of time and resources.

Can an umbrella clause be imported by the operation of an MFN clause?

As recently as 2006, Yannaca-Small has estimated that about 40% of the then existing BITs contained umbrella clauses. (See Yannaca-Small, K., Interpretation of the Umbrella Clause in Investment Agreements, OECD Working paper Number 2006/3, p. 5) This leads to the question whether this percentage can be increased by importing umbrella clauses through the operation of an MFN clause, where applicable.

At the time of writing, only three tribunals have been seized with such claims but found it unnecessary under the circumstances to rule definitely on the question. See Impregilo v. Argentina (ICSID Case no. ARB/07/17, Award of June 21, 2011), Abaclat v. Argentina (ICSID Case no. ARB//07/5, Decision on Jurisdiction of August 4, 2011, para. 322) and Siag v. Egypt (ICSID Case no. ARB/05/15, Award of June 1, 2009, para. 464). Still, the Impregilo v. Argentina case suggests that this question should be answered in the negative:

”The substantive protection of the MFN clause is very wide in so far as it relates to all matters regulated by the BIT. Nevertheless, the reference to matters regulated by the BIT sets an outer limit, and it is debatable whether contractual breaches are matters regulated by the BIT.” (para. 184)

What is under the umbrella?

The question regarding the scope and effect of the umbrella clause has divided tribunals and scholars alike. Despite fears of “opening the floodgates”, only in eight cases have the tribunals read into the text of the applicable umbrella clause non-textual limitations such as a requirement of the host State’s exercise of “puissance publique” (See Impregilo v. Pakistan, para. 260; El Paso v. Argentina, ICSID Case no. ARB/03/15, Decision on Jurisdiction of April 27, 2006, para. 79; Sempra v. Argentina, ICSID Case no. ARB/02/16, Award of September 28, 2007, para. 310), or a special link between the contract and the investment (Duke Energy v. Ecuador, ICSID Case no. ARB/04/19, Award of August 18, 2008, para. 324) or that the contract be an investment contract (see for e.g. El Paso v. Argentina, para. 77; Pan American & BP America v. Argentina, ICSID Case nos. ARB/03/13 and ARB/04/8, Preliminary Objections of July 27, 2006, para. 106, which distinguish between “ordinary commercial contract” and an “investment agreement”)

To give an example, consider the reasoning of the SGS v. Philippines tribunal which found that non-payment under the contract does not amount to expropriation:

“…no case of expropriation has been raised. Whatever debt the Philippines may owe to SGS still exists; whatever right to interest for late payment SGS had it still has. There has been no law or decree enacted by the Philippines attempting to expropriate or annul the debt, nor any action tantamount to an expropriation…” (Decision on Jurisdiction, para. 161)

It becomes obvious that if the umbrella clause (in order to have effect) was intended to give extra protection, as was stated in LG&E Energy Corp., LG&E Capital Corp., and LG&E International, Inc .v. Argentina, ICSID Case no. ARB/02/1, Decision on Liability of October 3, 2006, para. 170, – i.e. to provide for cases other than expropriation, breach of the FET standard, etc. which already presuppose governmental authority – the exercise of puissance publique is not a condition for the operation of the clause.

It may thus be concluded that it is now settled that the umbrella clause means what is says and will cover “any commitments”, as the language of most of such clauses provides. (This is, of course, subject to the caveat that umbrella clauses are not uniform and due regard must be paid to their exact wording.) Such “commitments” include, but are not limited to, contractual obligations and must be specific, that is, they cannot be contained in acts of general application such as national legislation. (See LG&E v. Argentina, para. 174; GEA Group v. Ukraine, ICSID Case no. ARB/08/16, Award of March 31, 2011, para. 354 applying the test of “clear and unambiguous promise”.)

In conclusion on the issue of the effect of the umbrella clause, it emerges from the arbitral practice that these clauses represent a mechanism to grant tribunals jurisdiction over contractual claims. The proper law of the contract (lex contractus) does not change, i.e. it is not substituted for international law. A breach of the contract will, however, entail the host State’s responsibility under international law. (See for e.g. SGS v. Philippines, Decision on Jurisdiction, para. 128; CMS Annulment, para. 95(c); BIVAC v. Paraguay, para. 142; Toto v. Lebanon, Decision on Jurisdiction of September 11, 2009, para. 202. See also Newcombe & Paradell, Law and Practice of Investment Treaties: Standards of Treatment, Kluwer L. Int’l: 2009, p. 450)

Notably, the question whether an umbrella clause claim qualifies as a treaty claim proper remains somewhat ambiguous. To give an example, under the Vivendi “fundamental basis of the claim” test (See Vivendi First Annulment, para. 101), it would qualify as a contract claim and thus a FSC would operate as a bar to admissibility. Similarly, the BIVAC v. Paraguay tribunal held that:

“In the present case, in relation to Article 3(4) we do not see how it could be concluded that ‘the fundamental basis of the claim’ was the BIT rather than the Contract. Any other approach strikes us as being so artificial as to be unreasonable.” (para. 149)

On the other hand, the tribunals in Burlington Resources v. Ecuador (ICSID Case no. ARB/08/5, Decision on Jurisdiction of 2 June 2010, para. 189) and SGS v. Paraguay (Decision on Jurisdiction, para. 166) held that umbrella claims are treaty claims. This question would also affect that of circumstances precluding wrongfulness. Thus in Continental Casualty v. Argentina the tribunal accepted the plea of necessity for the breach of the umbrella clause (Continental Casualty v. Argentina, ICSID Case no. ARB/03/9, Award of September 5, 2008, para. 303), while in SGS v. Paraguay the tribunal dealt with excuses under the applicable municipal law (SGS v. Paraguay, Award of 10 February 2012, paras. 112-156).

What is the scope ratione temporis of the umbrella clause?

The SGS v. Philippines case suggests that “a host State assumes obligations with regard to specific investments at the time of entry”. (SGS v. Philippines, Decision on Jurisdiction, para. 117, emphasis added) On the other hand, in SGS v. Paraguay the respondent State was held to account for failing “to abide by subsequent alleged promises to honour the Contract and to pay such debts”. (SGS v. Paraguay, Decision on Jurisdiction, para. 163, emphasis added) In view of the text of Article 25 of the ICSID Convention requiring an existing “investment” as a condition for jurisdiction ratione materiae it may not be argued that undertakings preceding the establishment of the investment (pre-investment activities) fall within the purview of the umbrella clause.

Does the umbrella clause protect contractual obligations which may have already been time-barred under the applicable municipal law?

This question may be answered in the affirmative. The SGS v. Paraguay tribunal reasoned that “the BIT at issue in this dispute does not contain a limitation period that would prevent Claimant from bringing a claim several years after the events in question took place”. (SGS v. Paraguay, Award, para. 166; see also Bayindir v. Pakistan, ICSID Case No. ARB/03/29, Decision on Jurisdiction of November 14, 2005, para. 165)

How does the operation of the umbrella clause affect the question of remedies?

This question is important specifically for the avoidance of double-counting. The CMS v. Argentina ad-hoc committee, in annulling only paragraph 1 of the operative part of the award, recalled that “the umbrella clauses invoked by the Claimant do not add anything different to the overall Treaty obligations”. This partial annulment did not, as a consequence, affect the amount of compensation. (CMS Annulment, para. 100) The SGS v. Paraguay tribunal, on the other hand, accepted that:

“In light of the Tribunal’s conclusion that Respondent breached Article 11 of the BIT by failing to meet its payment obligations under the Contract, the Tribunal need not address Claimant’s remaining claims. Each of those claims arises from the same facts, and reduces to a claim that Respondent failed to pay the invoices. Even if the Tribunal were to find in favor of Claimant with respect to these claims, Claimant’s damages would be unchanged.” (SGS v. Paraguay, Award, para. 161)

Introducing contract claims through the back door

Before concluding, it deserves mentioning the problem of broad dispute resolution clauses contained in some BITs, using language which has sometimes been viewed as permitting the tribunal to deal with contract-based claims, for e.g. dispute resolution clauses defining an investment dispute under the BIT as “any dispute between a Party and a national or company of the other Party arising out of or relating to an investment”.

The better view is that such clauses are not an independent treaty standard and cannot (especially in the absence of an umbrella clause) serve to introduce contract claims through the back door. The contrary would render the substantive standards of protection superfluous; in order to establish the tribunal’s jurisdiction it would suffice to have a broad dispute resolution clause only. See Vivendi First Annulment, para. 55; SGS v. Pakistan, para. 161.

Postscript. What is the forecast for tomorrow?

The umbrella clause has turned into a tug-of-war between investors and host States. A review of the arbitral practice already suggests that we are now close to achieving uniformity on most of the thorny issues involved in the umbrella clause debate – bit by bit and BIT by BIT. The clear victors would be both the investor and the respondent State since predictability is important not only in arbitration but it is fundamental to the legal order.

The authors owe a special debt of gratitude to Mr Niels van Tol from Peace Palace Library, The Hague, for his valuable assistance.

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