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Posts Tagged ‘International Law’

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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Yukov, Khrenov & Partners

Last year, international media reported that the Ministry of Defense of Iran and Aerospace Industries Organization have commenced an arbitration against their Russian state-owned defense contractor Rosoboronexport over the latter’s refusal to deliver five batteries of the potent S-300 surface-to-air missiles under the contract signed back in 2007. Following the adoption of UN Security Council Resolution 1929, which banned supply, sale or transfer of arms to Iran, Russia’s then President Medvedev issued an order to discontinue performance of the sale contract. Shortly afterwards, Rosoboronexport refunded the USD 167 million advance payment.

The Iranian party initially sought USD 900 million in damages. Subsequently, the amount in controversy rose to USD 4 billion. The averment of the Iranian envoy to Russia, Ambassador Sajjadi, that the Geneva-seated tribunal added another USD 3 billion to the quantum in the midst of the ongoing arbitration “without the claimants’ request and notice” sounds somewhat bewildering. Even though the claim at hand is quite a straightforward political maneuver, the legal aspects thereof do deserve closer attention. In the author’s view, the legal effect of UN Security Council Resolutions in the framework of international commercial arbitration is one of the most prominent issues raised by the controversy over the failed arms deal.

The dilemma

The fundamental question here is whether the imposition of economic and other sanctions by the Security Council serves to relieve a party to any relevant agreement from its contractual obligations. In the same vein, it is not immediately clear if a state (its subdivision) or a private entity against which a UN embargo is directed has a legal basis to seek damages arising out of the other party’s compliance with a UN Security Council Resolution.

On the assumption that the subject matter of the contract (i.e., sale of S-300 missiles) is encompassed by UN Security Council Resolution 1929, the claim against Rosboronexport constitutes an attempt to overcome the UN embargo that has been prompted by Iran’s failure to observe previous Security Council Resolutions. Because UN Resolutions are often issued as a response to wrongful conduct of a state, the principle ex turpi causa non oritur actio (which sets forth that a claimant is unable to pursue a cause of action arising out of her own illegal act) may suggest that the state lacks a solid foundation to claim compensation for the economic consequences of its wrongdoing. Obviously, the aforesaid principle also applies to non-state claimants acting contrary to the terms of a UN Resolution. The chances of bona fide claimants in proceedings relating to UN sanctions that are at odds with existing contractual relationships of the parties are less clear.

Historical precedent and modern interpretation

In 1998, the UN Compensation Commission (UNCC) had to decide on whether corporate claimants may pursue claims for losses associated with business activities that violated the UN embargo against Iraq. UN Security Council Resolution 661 adopted on 6 August 1990 under Chapter VII UN Charter was designed to address the invasion of Kuwait by Iraq. In particular, it ordered states to prevent the availability of funds or other financial or economic resources to Iraq and Kuwait, or to any commercial, industrial or public utility operating within them, except for medical or humanitarian purposes.

The UNCC held that losses incurred by claimants in connection with the transfer of goods and capital into Iraq were not compensable as the underlying transactions violated the UN sanctions. The line of reasoning employed by the UNCC indicates that non-compliance with UN Security Council Resolutions results in the inability of a transgressor to obtain compensation for damages arising out of or associated with its misconduct.

On its face, the UNCC’s stand on the role of UN Security Council Resolutions calls for two remarks. First, the Compensation Committee reaffirmed the binding nature of Resolutions issued in terms of Chapter VII UN Charter. As will be discussed below, the legal status of UNSC Resolutions adopted under the preceding Chapter is not a settled matter. Notably, the UNCC award recognized, albeit implicitly, that nationals of the United Nations member states are also bound by UN Resolutions, even when the language of a Resolution expressly addresses state actors. Second, the UN adjudicatory body indicated that rights derived from commercial contracts that are performed in violation of UN Security Council Resolutions generally do not enjoy legal protection.

In light of the cited UNCC decision, should the Russian state-owned arms manufacturer deliver missile systems to Iran in breach of a UN Resolution and not get paid, then, more likely than not, the seller would not be able to enforce its contractual entitlements against the Iranian parties. But does this corollary justify a conclusion that a mandatory UN Resolution may effectively relieve a party from its contractual obligations assumed prior to the imposition of economic restrictions? The author is inclined to answer in the affirmative, for to hold otherwise is equivalent to stating that either party to a contract which runs counter to UN sanctions is effectively trapped between the negative consequences of non-compliance with binding UN Security Council Resolutions (i.e., loss of legal protection of the party’s contractual rights) and those of contract breach. Technically, a UN Resolution could be deemed to operate in many different ways depending on the interrelation between the municipal law applied to any given commercial agreement and international law.

Legal status of UN Security Council Resolutions

As mentioned previously, the effect of UN Security Council Resolutions is subject to controversy in literature and practice. Some scholars tend to differentiate between Resolutions passed under Chapter VI (Pacific Settlement of Disputes) and Chapter VII (Action with Respect to Threats to the Peace, Breaches of the Peace and Acts of Aggression) UN Charter by ascribing the binding character to the latter category of Resolutions only. It is frequently argued that Chapter VI Resolutions are not legally binding because they have no enforcement mechanism. However, this view was countered by the majority of the ICJ panel in the Namibia advisory opinion (1971), which stated in the relevant part the following:

The Court stresses that a binding determination made by a competent organ of the United Nations [in the Security Council Resolution 276 (1970)] to the effect that a situation is illegal cannot remain without consequence … By occupying the Territory without title, South Africa incurs international responsibilities arising from a continuing violation of an international obligation.

The Court also held that the interpretation of the Security Council decisions taken under Chapter VI as non-binding declarations would render Article 25 UN Charter (which obligates the UN members to accept and carry out decisions of the Security Council) “superfluous, since this [binding] effect is secured by Articles 48 and 49 of the Charter”, and that the “language of a resolution of the Security Council should be carefully analyzed before a conclusion can be made as to its binding effect”. It bears noting that the ICJ stand on the legal effect of UN SC Resolutions is not undisputed as it is sometimes contended that the ICJ reading of UN decisions undermines the structural division of competencies foreseen by Chapters VI and VII.

Unlike their Chapter VI counterparts, Resolutions adopted in terms of Chapter VII are largely recognized as binding thus forming part of the body of international public law. International arbitral tribunals are thus able to apply norms embedded in mandatory UN Resolutions, where appropriate, in like manner as they would enforce other international law rules, provided that all disputing parties (or their home states) fall within the UN Security Council territorial ambit of regulation.

In the case at hand it is hard to identify a reason for non-application of UN SC Resolution 1929 to the merits of the pending dispute between Iran’s Ministry of Defense, Aerospace Industries Organization and Russia’s leading arms producer Rosoboronexport. For one thing, the mandatory character of the said Resolution is quite obvious as the text thereof explicitly states that the Security Council adopted it “Acting under Article 41 of Chapter VII” UN Charter. By the same token, all three parties to the arbitration proceedings are either directly or indirectly bound by the terms of UN Resolution 1929. Therefore, the arbitral tribunal in the present case will most likely not be able to avoid passing on the fundamental issue of whether the subject matter of the terminated SPA (sale of S-300 missiles) is encompassed within UN Security Council Resolution 1929, i.e, to apply and give interpretation to a UN decision, even though the ongoing proceedings distinctly fall outside the UN dispute settlement system.

Concluding points

Commercial arbitration disputes involving public law matters are not rare. Yet a number of arbitral proceedings related to UN Security Council decisions is rather modest which may explain the lack of attention to the topic in scholarly literature.

In the author’s view, the full potential of UN Security Council Resolutions in international arbitration may simply be not yet discovered, although such UN decisions often intrude into the private law domain. First, the jurisprudence of the UN Compensation Committee implicitly attests that the Security Council Resolutions, especially those imposing economic sanctions, may create obligations for non-state actors. Second, UN Security Council decisions can affect the substantive rights of private parties to commercial contracts that run counter to UN SC Resolutions. Third, there are no reasons to believe that international arbitration tribunals are prevented from interpreting and applying the Security Council Resolutions to commercial disputes, on a case-by-case basis, where the merits thereof so require.

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New York Law School,
for ITA

By Tai-Heng Cheng* & Lucas Bento**

Introduction

On October 5th, 2012, a split ICSID tribunal determined that the Republic of Ecuador had breached the US-Ecuador bilateral investment treaty (“BIT”), and awarded damages of US$1.77 billion (US$2.3 billion with interest applied), reportedly the largest award ever to have been issued by an ICSID tribunal. This award is remarkable not only because of the large quantum of damages (and of the tribunal’s 326-page decision), but also because it addresses cutting edge issues in international investment law, including the principle of proportionality and the assessment of damages. The award also demonstrates the vast power that tribunals wield and raises important normative questions about ICSID.

Facts

Occidental Petroleum Corp. (“Oxy”) started doing business in Ecuador in the mid-1980s under a services contract with Petroecuador, Ecuador’s national oil company. In 1993, Ecuador amended its Hydrocarbons Law to allow parties to enter into participation contracts. After protracted negotiations, on May 21, 1999, Ecuador and Oxy entered into a Participation Contract to explore and exploit hydrocarbons in Block 15 of the Ecuadorian Amazon region.

On 19 October, 2000, Oxy sought to explore ways to finance the expansion of its operations in Ecuador and diversify and reduce its exposure in the country. Coincidentally, Alberta Energy Corporation Ltd (“AEC”) was looking to expand its investment in Ecuador. In order to further these goals, Oxy and AEC entered into a Farmout Agreement where AEC acquired a 40% economic interest in Block 15 in return for certain capital contributions. The transfer, however, violated both the Participation Contract and Ecuadorian law, which required ministerial approval.[1]

When the government learned of the Farmount Agreement, it came under heavy political pressure to terminate its relationship with Oxy. On May 15, 2006, following a number of demonstrations against the government and Oxy, the government of Ecuador issued a decree (the “Caducidad Decree”) terminating with immediate effect its Participation Contract with Oxy.

On May 16, 2006, government officials arrived at Oxy’s offices in Quito and seized all of its property. The next day, officials and the Ecuadorian National Police seized Oxy’s oil fields in Block 15, including wells, drills and storage facilities. Two days later, Oxy filed a request for arbitration.

Arguments

At its core, the dispute concerned the termination of the Participation Contract between Oxy and Ecuador. Specifically, Oxy advanced two arguments. First, in terminating the Participation Contract without cause (i.e. in the absence of a termination event under the Contract), Ecuador breached its obligations under both the Participation Contract and BIT. In particular, Oxy argued that the Farmout Agreement did not operate as an assignment of rights in violation of Ecuadorian law. Second, assuming a termination event was found to have occurred, Oxy argued that the termination would still be in breach of the Ecuador’s obligations under the BIT and Ecuadorian law because it was unfair, arbitrary, discriminatory and disproportionate.[2]

In its defense, Ecuador argued that the Farmout Agreement effected an assignment and thus required ministerial approval, as required by Ecuadorian law. It also argued that Oxy was liable for a number of violations of Ecuador’s Hydrocarbons Regulations. Finally, Ecuador argued that the Caducidad Decree complied fully with the BIT and international law, and that no expropriation took place.

Decision

The tribunal held that the Farmout Agreement effected an assignment in violation of Ecuadorian law, since it was not approved by the Ecuadorian government. However, the tribunal held that the termination of the Participation Contract was a disproportionate response to Oxy’s assignment of rights under the Farmout Agreement.

As part of its proportionality analysis, the tribunal held that there were a number of alternatives to terminating the Participation Contract and that the latter should have thus been a measure of last resort. The tribunal also found that Ecuador did not suffer “any quantifiable loss as a direct result of AEC taking an economic interest in Block 15.”[3] Thus, the Caducidad Decree was disproportionate to its objective.

The tribunal noted that the principle of proportionality is observed in a variety of international law settings, including its application to potential breaches of BIT obligations, such as fair and equitable treatment obligations.[4] To this end, the tribunal noted:

“. . . the overriding principle of proportionality requires that any [] administrative goal must be balanced against [the investor’s] own interests and against the true nature and effect of the conduct being censured.”[5]

The Caducidad Decree was issued in violation of Ecuadorian law, which recognizes the proportionality principle, and in breach of the BIT and customary international law. The tribunal also held that Ecuador’s measures were “tantamount to expropriation.”[6]

Damages

Of particular interest here are the issues of contributory negligence and the impact of the Farmout Agreement on Oxy’s damages.

With regard to contributory negligence, the tribunal reduced Oxy’s damages because of its own wrongful conduct, namely its violation of Ecuadorian law in entering the Farmout Agreement without ministerial authorization. Accordingly, the tribunal found that Oxy contributed to the extent of 25% to the prejudice which it suffered when Ecuador issued the Caduciad Decree.

With respect to the impact of the Farmout Agreement on Oxy’s recovery, the tribunal rejected Ecuador’s argument that any calculation of damages to be awarded to Oxy must be limited to a 60% interest in Block 15 because of Oxy’s transfer of 40% interest under the Participation Contract to AEC. The tribunal reasoned that the assignment of rights under the Participation Contract pursuant to the Farmout Agreement was null and void because it lacked ministerial authorization, as required by Ecuadorian law. Thus, no reduction based on the assignment was possible, given the nullity of the transfer of rights.

Applying these findings, the majority awarded Oxy US$1.77 billion plus interest.

Professor Brigitte Stern dissented with respect to how the majority calculated damages, describing the majority’s decision to nullify and void the assignment as “manifest excess of power.”[7]

Commentary

This decision illustrates the application of the proportionality principle as an element of fair and equitable treatment under BITs. To this end, the award is a valuable addition to a growing number of ICSID awards applying the proportionality principle in the international investment context. The award is also one of the largest in ICSID’s history, though it may not be final. In October 11, 2012, a few days after the tribunal issued its award, Ecuador filed a request for annulment of the award.

Whatever the result of the annulment proceedings, the Oxy award demonstrates the great power of investment treaty arbitration tribunals. It is unsurprising that tribunals routinely allocate responsibility between governments and foreign corporations for failed investment projects. But observers should now realize that with this authority comes the power to impose damages of over a billion dollars to rectify wrongful acts. This power is nothing short of the ability to radically alter the wealth of shareholders and workers of investor companies, as well as the well-being of citizens and residents of host states. Fundamental issues about ICSID, such as its role in increasing foreign investment and its compatibility with democratic accountability, can no longer be reserved for polite academic discussions. After the Oxy award, these issues must also be confronted in rigorous policy debates.

_________________
* Tai-Heng Cheng is the international disputes partner at Quinn Emanuel Urquhart & Sullivan in New York.
** Lucas Bento is an associate at the firm and a member of the international arbitration group.

[1] An interesting issue considered by the tribunal involved whether the transfer of an economic interest amounted to an assignment of legal rights. See Occidental Petroleum Corporation v The Republic of Ecuador, Award, ICSID Case No. ARB/06/11 (Oct. 5, 2012) [hereinafter Award], ¶306.
[2] Award, ¶206.
[3] Award, ¶445.
[4] Award, ¶404; see also MTD Equity SDN.BHD. and other v. The Republic of Chile, ICSID Case No. ARB/01/7 (25 May 2004); LG&E Energy Corp. and others v. The Argentine Republic, ICSID Case No. ARB/02/1 (3 October 2006); Tecmed S.A. v. The United Mexican States, ICSID Case No. ARB (AF)/00/2 (29 May 2003); Azurix Corp. v. The Argentine Republic, ICSID Case No. ARB/01/12 (14 July 2006).
[5] Award, ¶450. The tribunal also noted that the principle of proportionality was recognized under the Ecuadorian constitution.
[6] Award, ¶455.
[7] Occidental Petroleum Corporation v The Republic of Ecuador, Dissent, ICSID Case No. ARB/06/11 (Oct. 5, 2012), ¶5.

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Notre Dame Law School

So we all know that investment arbitration tribunals have relied on WTO precedent for persuasive authority as to the meaning of various terms in bilateral investment treaties. (Think the emergency exception in the Argentina arbitrations and references to WTO Article XXI). But does the reverse also happen? Do WTO panels or the WTO Appellate Body reference investment arbitration awards as persuasive authority?

The short answer is almost never. The only significant example was four years ago when the WTO Appellate Body addressed the question of what to do about past precedent. A crisis was brewing within the WTO because a WTO panel had openly disagreed with an earlier Appellate Body ruling on the same question. What’s the point of Appellate Body rulings to promote uniformity if subsequent panels openly ignore them? Here’s what the WTO Appellate Body in United States—Final Antidumping Measures on Stainless Steel From Mexico had to say:

Dispute settlement practice demonstrates that WTO Members attach significance to reasoning provided in previous panel and Appellate Body reports. Adopted panel and Appellate Body reports are often cited by parties in support of legal arguments in dispute settlement proceedings, and are relied upon by panels and the Appellate Body in subsequent disputes. In addition, when enacting or modifying laws and national regulations pertaining to international trade matters, WTO Members take into account the legal interpretation of the covered agreements developed in adopted panel and Appellate Body reports. Thus, the legal interpretation embodied in adopted panel and Appellate Body reports becomes part and parcel of the acquis of the WTO dispute settlement system. Ensuring “security and predictability” in the dispute settlement system, as contemplated in Article 3.2 of the DSU, implies that, absent cogent reasons, an adjudicatory body will resolve the same legal question in the same way in a subsequent case. [¶ 160]

It then dropped a footnote and quoted, inter alia, the ICSID case of Saipem S.p.A. v. The People Republic of Bangladesh, for the proposition that:

“[t]he Tribunal considers that it is not bound by previous decisions. At the same time, it is of the opinion that it must pay due consideration to earlier decisions of international tribunals. It believes that, subject to compelling contrary grounds, it has a duty to adopt solutions established in a series of consistent cases. It also believes that, subject to the specifics of a given treaty and of the circumstances of the actual case, it has a duty to seek to contribute to the harmonious development of investment law and thereby to meet the legitimate expectations of the community of States and investors towards certainty of the rule of law.” [Saipem Award at ¶ 67]

The Appellate Body then issued a much-quoted smack down of the WTO panel for defying past precedent:

“We are deeply concerned about the Panel’s decision to depart from well-established Appellate Body jurisprudence clarifying the interpretation of the same legal issues. The Panel’s approach has serious implications for the proper functioning of the WTO dispute settlement system, as explained above. Nevertheless, we consider that the Panel’s failure flowed, in essence, from its misguided understanding of the legal provisions at issue. [¶ 162]”

Trade scholars have wrestled with the meaning of this decision. It seemed to suggest that Appellate Body jurisprudence has a degree of precedential value beyond simply persuasive authority. Perhaps it does not rise to the level of stare decisis, but it is close.

What trade scholars have not done is second-guessed the authority cited by the WTO to support this proposition. Is it just me, or does it seem odd that the WTO Appellate Body would cite an ICSID award for a proposition about the value of past precedent? Its reliance on Saipem is hardly representative of the true state of affairs in investment arbitration, which is famous for its struggles with conflicting awards. Indeed, it is a frequent lament that investment arbitration does not have a method similar to the WTO to ensure greater uniformity.

That’s it. One major reference to one ICSID Award to support a proposition that is of doubtful validity in investment arbitration. To be sure, WTO jurisprudence has the occasional reference to the practice of international tribunals, including ICSID, the PCA, the Iran-United States Claims Tribunal, and various mixed claims commissions. (See, for example, United States- Antidumping Act of 1916 at paragraph 54.) But in such cases they are not citing investment arbitration awards to support their propositions. And these passing references pale in comparison to the frequency with which the WTO cites the International Court of Justice.

Given the growing importance of investment arbitration, it is surprising that the WTO does not rely on arbitration precedent as persuasive authority in appropriate circumstances. What does it say about investment arbitration awards that other international tribunals do not give them greater persuasive authority?

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Linklaters

The decision handed down by the High Court of Australia, just weeks ago, regarding Australia’s plain packaging legislation is just the beginning of what is destined to be a long battle. And a battle that is being closely watched by legislators around the world, including the EU which is shortly due to publish a draft revision to its 2001 Tobacco Products Directive (here).

On 15 August Australia’s High Court handed down its decision in favour of the government, finding that the plain packaging legislation does not violate the Australian Constitution. The High Court has not yet published its reasoning on the decision.

In a media release Australia’s Trade Minister announced that — on the same day that the High Court decision was handed down — the Ukraine, which had requested WTO consultations with Australia back in March 2012 regarding the plain packaging legislation, filed a request for the establishment of a WTO panel (here) (although the formal document suggests that the request was filed one day earlier (here)).

On Friday 31 August, Australia blocked the Ukraine’s attempt to establish a WTO panel, the government describing the plain packaging legislation as “a sound, well-considered measure” (here). It is now open to the Ukraine to make a second request for the constitution of a WTO panel, which request will likely be deliberated at the next Dispute Settlement Body meeting which is scheduled for later this month. Australia does not have a second opportunity to block the action; the decision whether or not to establish the panel will lie with the Dispute Settlement Body.

Remaining in contention then for Australia – now that the High Court battle has been resolved and presuming that the Ukraine will be successful in a second attempt to form a WTO panel – are the following:

- first and foremost the bilateral investment dispute under the Hong Kong/Australia BIT (for earlier posts on this see here and here) which at the moment is in its early stages;

- WTO consultations with Honduras and the Dominican Republic; and

- a formal WTO dispute with Ukraine.

As mentioned above, keeping a close eye on all this action – alongside various governments such as New Zealand, Britain, Norway, India and South Africa – is the EU which this Autumn is looking to publish a draft revision to its 2001 Tobacco Products Directive. It is reported that the EU is considering plain packaging alongside various other options, and hopes to have implementation of its final Directive, whatever it shall include, between 2014 – 2016.

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Essex Court Chambers,
for ITA

By Martin Hunter and Javier García Olmedo

In a previous blog we discussed the concept of plain packaging of tobacco products and the pending investment arbitration claims brought by Philip Morris International (PMI) against Uruguay and Australia. The question raised was whether these anti-tobacco schemes contravene the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the Paris Convention for the Protection of Industrial Property (Paris Convention). In particular, whether plain packaging infringes the right to use trademarks and/or interferes with the core function of trademarks. The present contribution is intended to open the floor for discussion as to whether plain packaging amounts to compensable expropriation.

Plain packaging of tobacco products does not affect the ownership of PMI’s trademark rights, nor does it prohibit PMI from selling tobacco products in Australia or Uruguay. In this sense, considering that plain packaging measures only involve prohibition of the use of non-word marks (such as logos, colour schemes and graphics) and restrictions on the use of word marks (brand names), it can only amount to indirect expropriation of PMI’s intellectual property rights. Intellectual property rights, such as trademarks, are considered valuable intangible assets and are thus a form of investment. Article 1 of the Switzerland-Uruguay BIT includes in its definition of investment any kind of asset, including industrial property rights such as trademarks. Similarly, Article 1 of the Australia-Hong Kong BIT defines an investment as any type of asset, including intellectual property rights arising out of trademarks.

PMI claims that the measures adopted by Uruguay and Australia amount to indirect expropriation of its investment due to the substantial deprivation of its intellectual property rights. The tobacco company contends that such expropriation is unlawful as it does not meet certain fundamental requirements under the BITs in question, including the failure to provide adequate and effective compensation.¹ Two issues for discussion arise at this stage; first, whether plain packaging measures ‘substantially’ interfere with PMI’s investment or its economic benefit; secondly, whether, in the event that indirect expropriation occurred, such expropriation is compensable.

Regarding the first issue, there is no doubt that the measures taken by Uruguay and Australia do interfere with PMI’s use and enjoyment of its trademarks. PMI is not only obliged to reserve 80% of the surface area of each pack for health warning images, but it is also forced to display the cigarette brand name in a prescribed small font size. This may prevent consumers from distinguishing the investor’s tobacco products from those of its competitors, thereby affecting the economic value of the particular brand. It is nonetheless important to consider that the right to use trademarks is not expressly granted by the TRIPS Agreement or the Paris Convention. Furthermore, the fact that the brand name may be displayed on the pack, albeit in small print, raises the issue as to whether or not PMI has been ‘substantially’ deprived of the use and enjoyment of its trademarks.

Regarding the second issue, in deciding whether to award compensation for indirect expropriation, arbitral tribunals have taken into account situations in which a non-discriminatory measure has been adopted and enforced, in good faith, for the protection of legitimate public health. For instance, in Methanex Corporation v. United States of America the tribunal noted that:

as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enacted in accordance with due process and, which affects, inter alios, a foreign investor or investment is not deemed expropriatory and compensable unless specific commitments had been given by the regulating government to the then putative foreign investor contemplating investment that the government would refrain from such regulation.²

Australia and Uruguay might therefore argue that, even if there had been a substantial deprivation of PMI’s use and enjoyment of its investment, plain packaging measures should not give rise to compensable expropriation because such measures were adopted for a public purpose. However, the burden of proof is on the two respondent governments. They will have to show not only a clear and genuine intention to protect public health, but also that such measures are effective in reducing tobacco consumption.

PMI is not alone in taking legal action as result of Australia’s new anti-tobacco legislation. In March and April 2012, respectively, Ukraine and Honduras filed a dispute at the WTO against Australia in connection with the new plain packaging measures covering tobacco products. Ukraine claims that:

Australia’s measures, especially viewed in the context of Australia’s comprehensive tobacco regulatory regime, appear to be inconsistent with a number of Australia’s obligations under the TRIPS Agreement, the TBT Agreement, and GATT 1994.

Similarly, Honduras argues that:

measures regulating the plain packaging and appearance of tobacco products for retail sale appear to be inconsistent with Australia’s obligations under […] the TRIPS Agreement, the TBT Agreement and the GATT 1994.

These issues (and those raised in our earlier blog) are by no means the only questions to be considered in connection with the modern ‘tobacco wars’. Our next contribution will review the prospects of striking a balance between, on the one hand, the obligations of WTO Members’ under the World Health Organisation Convention on Tobacco Control and, on the other hand, intellectual property rights conferred on investors such as PMI under national and international law.

For now, we open the floor for discussion and invite readers to comment on the matters discussed in this contribution and our earlier blog on ‘plain packaging’ regulation.

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The concept of good faith has been a subject of perennial controversy since it was derived from the Roman legal equivalent ‘bonas fides’. Juristic views on and the legal conceptualization of the idea of good faith may often vary across the cultural divides and legal traditions. At a higher level of abstraction there may be a semblance of understanding that it is a moral principle and is reflective of all good senses such as honesty, good conscience, fairness, equity, reasonableness, equitable dealing or fair dealing, etc., but its application may cause the divergence of opinions. This has caused some uncertainty about the nature of the concept itself and the consequent unpredictability of the outcome of its application.

When focused on the content of good faith, the courts in different countries as well as academic commentators seem to be often baffled. Nor in the sources of the lex mercatoria such as the UNIDROIT Principle of International Commercial Contracts, the European Principles of Contract Law, and the United Nations Convention on Contracts for the International Sales of Goods (CISG or the Vienna Sales Convention) can one find a clear definition of the content of the notion of good faith. In order to rationalise good faith jurists have proffered various legal theories ranging from efficiency arguments to formal entitlements in the spirit of solidarity to its conceptualisation in a more specific sense as ‘a true behavioural standard’. This dilemma pervades in international law, in general, and in the emerging case law of international investment law in particular. Therefore, it proves the international arbitrator’s task in an investment dispute all the more difficult as in any other field when it comes to define the concept and to render any decision on the basis of it.

It thus merits a fresh look at the concept of good faith in order to understand its scope and function in a contractual relationship which is the focus of this blog. In order to apply the concept to a particular context good faith could be considered a functional or objective one in the sense of a framework of relationship between the parties to a contract and cooperation being its underlying current. In this respect good faith is a framework concept based on cooperation as its philosophical foundation. In international business-contracting the consideration of mutual interests of the contracting parties in the spirit of cooperative dealing seems to get favour in some quarters as a manifestation of modern trend of collectivism as opposed to the nineteenth century legacy of individualism. Farnsworth, however, observes:

“Good faith performance has always required the cooperation of one party where it was necessary in order that the other might secure the expected benefits of the contract. And the standard for determining what cooperation was required has always been an objective standard, based on the decency, fairness or reasonableness of the community and not on the individual’s own beliefs as to what might be decent, fair or reasonable. Both common sense and tradition dictate an objective standard for good faith performance.” [E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. CHI. L. REV. 666 (1963)].

It needs to be stressed that co-operation should not be understood in the sense of familial relationship such as motherly love or brotherly affections, but must be confined to the contractual relationship, hence the notion of good faith as a framework concept, i.e. fidelity to the bargain, as mentioned earlier. As far as the content of good faith is concerned the focus has to be specific in a particular context concerned in the contractual framework to see if the parties have acted in the spirit of cooperation, i.e. ‘good-faith cooperation’ [L Carvajal-Arenas, ‘Good Faith in the Lex Mercatoria: An Analysis of Arbitral Practice and Major Western Legal Systems’ (PhD thesis, University of Portsmouth 2011)]. In numerous domestic court decisions (e.g. United Group Rail Services Limited v Rail Corporation New South Wales and in international judicial (e.g. the North Sea Continental Shelf cases (ICJ), and arbitral decisions [e.g. Wintershall v Qatar (1990), Mechema Ltd. (England) v S.A. Mines, Minérais et Métaux (MMM) (Belgium) (1982)] there seems to be a tendency to give weight to the context in which the concept is to be meant. Article 31 (1) of the Vienna Convention on the Law of Treaties also points out the importance of the context of the terms of the treaty while interpreting it in good faith. Therefore, the content of the concept of good faith is more of a contextual nature than the concept itself understood in the abstract sense. The International Court of Justice observed: “(t)he principle of good faith is ‘one of the basic principles governing the creation and performance of legal obligations’; it is not in itself a source of obligation where none would otherwise exist.” [Border and Transborder Armed Actions Case (ICJ), (Nicaragua v. Honduras), Jurisdiction and Admissibility, Judgment, 20 December 1988, ICJ Rep 69, at 105 (1988)].

One may thus wonder if good faith can be understood in two senses, viz., ‘macro good faith’ and ‘micro good faith’. In respect of the former the abstract notion of good faith in the sense of honesty, fairness, reasonableness signifying its subjectivity may be meant, i.e. ‘macro good faith’ – a horizontal approach, a layer of idea which is generic (i.e. an idea at a higher level of abstraction) and may not be understood the same in different factual patterns as it will depend on its application to them. Thus, from the notional point of view good faith in the macro sense is considered to act as a major interpretative principle. While, on the other hand, it should be appreciated that what appears to be good faith in one context may not appear the same in another context with a different pattern of facts, situations or surrounding circumstances. Thus, the notion of good faith focusing on the particular context concerned – i.e. the vertical approach – may be understood as ‘micro good faith’ which brings with it the sense of objectivity rather than subjectivity understood in the horizontal sense, i.e. ‘macro good faith’. It should be appreciated that the pacta sunt servanda principle, being the foundation of all contracts, is the manifestation of ‘macro good faith’. But ‘micro good faith’ being applied in specific factual contexts may limit the application of the pacta sunt servanda principle in order to conform to it, even in changed circumstances that affect the contract. Therefore, the pacta sunt servanda principle in a contractual relationship may not be applied as an incantation or in the abstract sense, rather it should be assessed in terms of ‘micro good faith’.

In international investment law, substantive standards of treatment (investment treaty provisions) such as ‘fair and equitable treatment’, ‘full protection and security’, ‘protection of legitimate expectation’, ‘transparency’, ‘non-discrimination’, ‘national treatment’ and ‘most favoured national treatment’, etc., are considered fundamentally based on good faith, or manifestations or corollaries of good faith, but their content depends on the specific contexts in which they are applied. Here comes the crunch point when one asks: even if a state literally complies with the foregoing standards in respective cases, will it be always considered to have acted in good faith in its relationship to the other contracting party? Inversely, if a state acts in good faith to comply with its non-investment international treaty obligations relating to human rights, the environment or climate change that may interfere with investors’ rights, will it be implicated in bad faith vis-à-vis the foreign investors? It is difficult to give any straightforward answers to these questions; the answers, however, may be found specifically in the contexts in which the notion of good faith is to be examined. In investment arbitration jurisprudence such a contextual extrapolation seems to be increasingly endorsed rather than the simple meaning attributed to a standard of treatment (e.g., the S.D. Myers, Mondev, ADF, Loewen and Waste Management cases). Often, in order to reflect good-faith cooperation in an investment contract situation the aforementioned standards of treatment for foreign investors may have to be weighed against the state party’s competing public interests, such as the protection of the environment, the promotion and protection of human rights and the securing of the economic development of the host country. There seems to be a growing support for such a stance amongst various stakeholders such as host countries, NGOs, international organizations (the World Bank and the IMF, etc.) and others, though this aspect of international investment law is still in the early stage of development.

The scope and content of the standards of treatment for foreign investors may differ from contexts to contexts entailing the understanding of good faith in the micro sense. As the comments to section 205 of the U.C.C. also states, in a different domain of law though, that “[t]he phrase ‘good faith’ is used in a variety of contexts, and its meaning varies somewhat with the context.” To get a result then it would be advisable to look at the notion of ‘micro good faith’ – a context-based one with the objectivity that underscores the framework of relationship, co-operation being its philosophical foundation. Good faith in a particular situation should thus be understood not as an abstract concept but as a functional or objective one, i.e. in the micro sense, covering all stages of a contract.

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The concept of good faith has been a subject of perennial controversy since it was derived from the Roman legal equivalent ‘bonas fides’. Juristic views on and the legal conceptualization of the idea of good faith may often vary across the cultural divides and legal traditions. At a higher level of abstraction there may be a semblance of understanding that it is a moral principle and is reflective of all good senses such as honesty, good conscience, fairness, equity, reasonableness, equitable dealing or fair dealing, etc., but its application may cause the divergence of opinions. This has caused some uncertainty about the nature of the concept itself and the consequent unpredictability of the outcome of its application.

When focused on the content of good faith, the courts in different countries as well as academic commentators seem to be often baffled. Nor in the sources of the lex mercatoria such as the UNIDROIT Principle of International Commercial Contracts, the European Principles of Contract Law, and the United Nations Convention on Contracts for the International Sales of Goods (CISG or the Vienna Sales Convention) can one find a clear definition of the content of the notion of good faith. In order to rationalise good faith, jurists have proffered various legal theories ranging from efficiency arguments to formal entitlements in the spirit of solidarity to its conceptualisation in a more specific sense as ‘a true behavioural standard’. This dilemma pervades in international law, in general, and in the emerging case law of international investment law in particular. Therefore, it proves the international arbitrator’s task in an investment dispute all the more difficult as in any other field when it comes to define the concept and to render any decision on the basis of it.

It thus merits a fresh look at the concept of good faith in order to understand its scope and function in a contractual relationship which is the focus of this blog. In order to apply the concept to a particular context good faith could be considered a functional or objective one in the sense of a framework of relationship between the parties to a contract and cooperation being its underlying current. In this respect good faith is a framework concept based on cooperation as its philosophical foundation. In international business-contracting the consideration of mutual interests of the contracting parties in the spirit of cooperative dealing seems to get favour in some quarters as a manifestation of modern trend of collectivism as opposed to the nineteenth century legacy of individualism. Farnsworth, however, observes:

“Good faith performance has always required the cooperation of one party where it was necessary in order that the other might secure the expected benefits of the contract. And the standard for determining what cooperation was required has always been an objective standard, based on the decency, fairness or reasonableness of the community and not on the individual’s own beliefs as to what might be decent, fair or reasonable. Both common sense and tradition dictate an objective standard for good faith performance.” [E. Allan Farnsworth, Good Faith Performance and Commercial Reasonableness Under the Uniform Commercial Code, 30 U. CHI. L. REV. 666 (1963)].

It needs to be stressed that co-operation should not be understood in the sense of familial relationship such as motherly love or brotherly affections, but must be confined to the contractual relationship, hence the notion of good faith as a framework concept, i.e. fidelity to the bargain, as mentioned earlier. As far as the content of good faith is concerned the focus has to be specific in a particular context concerned in the contractual framework to see if the parties have acted in the spirit of cooperation, i.e. good-faith cooperation. In numerous domestic court decisions (e.g. United Group Rail Services Limited v Rail Corporation New South Wales) and in international judicial (e.g. the North Sea Continental Shelf cases (ICJ), and arbitral decisions [e.g. Wintershall v Qatar (1990), Mechema Ltd. (England) v S.A. Mines, Minérais et Métaux (MMM) (Belgium) (1982)] there seems to be a tendency to give weight to the context in which the concept is to be meant. Article 31 (1) of the Vienna Convention on the Law of Treaties also points out the importance of the context of the terms of the treaty while interpreting it in good faith. Therefore, the content of the concept of good faith is more of a contextual nature than the concept itself understood in the abstract sense. The International Court of Justice observed: “(t)he principle of good faith is ‘one of the basic principles governing the creation and performance of legal obligations’; it is not in itself a source of obligation where none would otherwise exist.” [Border and Transborder Armed Actions Case (ICJ), (Nicaragua v. Honduras), Jurisdiction and Admissibility, Judgment, 20 December 1988, ICJ Rep 69, at 105 (1988)].

One may thus wonder if good faith can be understood in two senses, viz., ‘macro good faith’ and ‘micro good faith’. In respect of the former the abstract notion of good faith in the sense of honesty, fairness, reasonableness signifying its subjectivity may be meant, i.e. ‘macro good faith’ – a horizontal approach, a layer of idea which is generic (i.e. an idea at a higher level of abstraction) and may not be understood the same in different factual patterns as it will depend on its application to them. Thus, from the notional point of view good faith in the macro sense is considered to act as a major interpretative principle. While, on the other hand, it should be appreciated that what appears to be good faith in one context may not appear the same in another context with a different pattern of facts, situations or surrounding circumstances. Thus, the notion of good faith focusing on the particular context concerned – i.e. the vertical approach – may be understood as ‘micro good faith’ which brings with it the sense of objectivity rather than subjectivity understood in the horizontal sense, i.e. ‘macro good faith’. It should be appreciated that the pacta sunt servanda principle, being the foundation of all contracts, is the manifestation of ‘macro good faith’. But ‘micro good faith’ being applied in specific factual contexts may limit the application of the pacta sunt servanda principle in order to conform to it, even in changed circumstances that affect the contract. Therefore, the pacta sunt servanda principle in a contractual relationship may not be applied as an incantation or in the abstract sense, rather it should be assessed in terms of ‘micro good faith’.

In international investment law, substantive standards of treatment (investment treaty provisions) such as ‘fair and equitable treatment’, ‘full protection and security’, ‘protection of legitimate expectation’, ‘transparency’, ‘non-discrimination’, ‘national treatment’ and ‘most favoured national treatment’, etc., are considered fundamentally based on good faith, or manifestations or corollaries of good faith, but their content depends on the specific contexts in which they are applied. Here comes the crunch point when one asks: even if a state literally complies with the foregoing standards in respective cases, will it be always considered to have acted in good faith in its relationship to the other contracting party? Inversely, if a state acts in good faith to comply with its non-investment international treaty obligations relating to human rights, the environment or climate change that may interfere with investors’ rights, will it be implicated in bad faith vis-à-vis the foreign investors? It is difficult to give any straightforward answers to these questions; the answers, however, may be found specifically in the contexts in which the notion of good faith is to be examined. In investment arbitration jurisprudence such a contextual extrapolation seems to be increasingly endorsed rather than the simple meaning attributed to a standard of treatment (e.g., the S.D. Myers, Mondev, ADF, Loewen and Waste Management cases). Often, in order to reflect good-faith cooperation in an investment contract situation the aforementioned standards of treatment for foreign investors may have to be weighed against the state party’s competing public interests, such as the protection of the environment, the promotion and protection of human rights and the securing of the economic development of the host country. There seems to be a growing support for such a stance amongst various stakeholders such as host countries, NGOs, international organizations (the World Bank and the IMF, etc.) and others, though this aspect of international investment law is still in the early stage of development.

The scope and content of the standards of treatment for foreign investors may differ from contexts to contexts entailing the understanding of good faith in the micro sense. As the comments to section 205 of the U.C.C. also states, in a different domain of law though, that “[t]he phrase ‘good faith’ is used in a variety of contexts, and its meaning varies somewhat with the context.” To get a result then it would be advisable to look at the notion of ‘micro good faith’ – a context-based one with the objectivity that underscores the framework of relationship, co-operation being its philosophical foundation. Good faith in a particular situation should thus be understood not as an abstract concept but as a functional or objective one, i.e. in the micro sense, covering all stages of a contract.

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	Yearbook Commercial Arbitration. Volume XXXVI. 2011 by Albert Jan van den Berg € 255
	Confidentiality in International Commercial Arbitration by Ileana Smeureanu € 145

The Rules, Practice, and Jurisprudence of International Courts and Tribunals (Martinus Nijhoff Publishers, 2012) has just shipped.

I am the (proud) editor and a contributor of the book and am delighted to have the opportunity to bring it to the attention of this group. I think it will be of special interest to arbitration practitioners.

The book examines the main existing international dispute resolution bodies in a systematic, comprehensive and accessible way.

To the extent possible, chapters are structured similarly, and each chapter explores a specific dispute resolution forum.

After a short introduction of the forum, each chapter provides essential information of the institution examined, including its composition, seat, operation, costs, applicable law, and detailed analysis of its jurisdiction.

This introduction is followed by a procedural overview, which includes rules of procedure, the structure of the proceedings, role of third parties, interim measures of protection, languages used and available remedies and enforcement procedures.

Uniquely, each chapter also includes an extensive review of the essential jurisprudence of the institution examined, which will be particularly relevant for academics and practitioners in international law alike.

Additionally, the similar structure makes each forum both easily accessible and comparable with other fora included in the book.

International courts and tribunals analyzed in the book include:

- Courts and tribunals of general jurisdiction, such as the International Court of Justice and the Permanent Court of Arbitration;

- Fora of specialized jurisdiction, such as the International Tribunal for the Law of the Sea, the International Centre for the Settlement of Investment Disputes, and the World Trade Organization’ dispute settlement system;

- Human rights courts, such as the European Court of Human Rights, the Inter-American Court of Human Rights and the African Human rights system;

- International criminal courts and tribunals, including the International Criminal Court, the International Criminal Tribunal for the Former Yugoslavia and the International Criminal Tribunal for Rwanda, as well as hybrid and internationalized tribunals;

- Courts and tribunals of regional integration agreements, including NAFTA, the European Union system and by other regional economic integration agreements.

The book also includes a chapter reviewing the administrative tribunals of international organizations, and chapters on the United Nations Claims Commission, the Iran-US Claims Tribunal and the Claims Resolution Tribunal.

The complete table of contents is here.

Many well know practitioners and contributors to this blog have contributed to this book, including the blog’s general editor, Roger Alford, as well as Laurence Boisson de Chazournes, Brooks Daly, Timothy Feighery, Carolyn Lamm, Andrea Menaker, Sean Murphy and Jeremy Sharpe. A complete list of authors is available here.

My hope is that this book will fill a vacuum that I identified when teaching an introductory class on international courts and tribunals for a simple but comprehensive review of the rule and practice of international courts and tribunals.

I would love to hear feedback from readers!

Chiara Giorgetti
White & Case LLP

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	The 33rd America's Cup Judicial and Arbitral Decisions by Henry Peter, Hamish Ross, Graham McKenzie € 125
	Yearbook Commercial Arbitration. Volume XXXVI. 2011 by Albert Jan van den Berg € 255
	Confidentiality in International Commercial Arbitration by Ileana Smeureanu € 145

In February 2010, Philip Morris International (PMI) filed a request for arbitration under the ICSID Convention against the Republic of Uruguay. ¹ The claim relates to two pieces of legislation enacted by Uruguay which require tobacco companies to comply with strict plain packaging measures. These regulations limit the use of registered tobacco trademarks, allowing the brand name of the tobacco product to be written in a standard font only. In addition, health warnings will be displayed on the package, which will leave tobacco corporations with no option but to sell cigarettes in generic packages.

PMI contends that the Uruguayan regulations violate several provisions of the Switzerland-Uruguay BIT. Furthermore, PMI is arguing, inter alia, that the intellectual property rights of Abal Hermanos (PMI’s subsidiary in Uruguay) have been infringed as a consequence of the limitations imposed on the right to use its legally protected trademarks.² This is not, however, the only case where this international corporation has launched an arbitration claim against a state as a result of similar plain packaging measures.

In November 2011, Hong Kong-based Philip Morris Asia Limited (PM Asia), which owns Australian affiliate Philip Morris Limited, initiated arbitration proceedings against the Australian government over new legislation on plain packaging of cigarettes. The new Australian law imposes strict limitations on the use of registered trademarks. For instance, it requires cigarettes to be sold in generic olive green packages, without brands or logos. This legislation is expected to come into force in December 2012. ³

As in the claims of PMI against Uruguay, PM Asia is arguing, inter alia, that it has, whether as owner or licensee, rights to use registered and unregistered trademarks. PM Asia claims that the new Australian legislation infringes its intellectual property rights and diminishes the value of its trademarks. Furthermore, it contends there has been a violation of the Australia-Hong Kong BIT. ⁴

At this stage, it is important to distinguish between two different types of trademarks: non-word marks and word marks. Plain packaging of tobacco products involves the prohibition of the use of non-word marks (such as logos, colour schemes and graphics) and the limitation on the use of word marks (brand name).

Several questions arise in relation to these two arbitration claims. One of them is whether these anti-tobacco schemes contravene the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) and the Paris Convention for the Protection of Industrial Property (Paris Convention). In particular, whether plain packaging infringes the right to use trademarks as well as affects the core function of trademarks.

There are strong arguments to suggest that the plain packaging measures adopted by Uruguay and Australia are consistent with their international obligations under the TRIPS Agreement and the Paris Convention. In this sense, it is important to point out that these measures do not impose limitations on the sale of tobacco products but on the use of trademarks related to such products.

The tobacco corporation claims that plain packaging unfairly limits its rights to use its legally protected trade mark. However, the right to use trademarks is not expressly granted by the TRIPS Agreement and the Paris Convention. Trademark owners only have the exclusive right to prevent third parties from using their trademarks without their consent. This is a negative right relating to the ‘exclusion’ of use rather than to the use per se. ⁵ Neither PMI nor PM Asia are claiming protection from an unlawful use of their trademark by a third party.

It can nonetheless be argued that the registration of a trademark provides an inherent right to use it. In this sense, under the TRIPS Agreement, WTO Members may make registrability depend on use.⁶ This argument could therefore be sustained in cases where the WTO Member in question established that the use of a trademark is a compulsory requirement for obtaining its registration.

In addition, it might be argued that plain packaging prevents consumers from distinguishing PMI´s tobacco products from others competitors, thereby affecting the core function of a trademark. ⁷ A trademark would lose its value if it creates the likelihood of confusion with other trademarks. However, the fact that the brand name can be displayed in the package raises doubts as to the strength of this argument.

The outcome of these cases will certainly set a precedent that could be adopted by future arbitral tribunals and national courts deciding disputes arising out of plain packaging schemes. Furthermore, the decisions adopted by the respective tribunals will have significant repercussions on the investment relationships between PMI and the countries in which it operates.

This ‘anti-tobacco movement’ has just begun. In fact, other countries, such as the United Kingdom, Canada and New Zealand, are considering introducing similar measures in their national laws, which will inevitably lead to an increasing wave of investment claims brought by tobacco companies against states.

There are of course further questions that arise in the context. For example, does plain packaging amount to indirect expropriation? Is it possible to strike a balance between the WTO Members’ obligations under the World Health Organisation Convention on Tobacco Control (WHO FCTC) and the intellectual property rights conferred to investors such as PMI? Does plain packaging amount to an unfair and inequitable treatment under the said BITs? Such questions will be examined in upcoming blogs. For now, we open the floor for discussion and invite the readers to comment on what has been discussed in this blog.

By Martin Hunter and Javier García Olmedo

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