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Posts Tagged ‘Investment agreements’

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.

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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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	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.

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

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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University of Victoria Faculty of Law

At a conference a few years back, a well-known and respected arbitrator was speaking on the topic of predictability and consistency of arbitral decision making in investment treaty arbitration.  The arbitrator asked whether arbitrators should fly solo or in flocks.  He made a strong and persuasive case for the independence of the arbitrator, to fly solo—perhaps into uncharted territory.  The arbitrator used the example of the condor—flying high in the sky, with clear-sighted vision taking in the expanse of the territory below it.

Using animal and bird metaphors for arbitrators and arbitral tribunals has its dangers. The condor is a member of the Vultur genus. According to Wikipedia, a “vulture is primarily a scavenger, feeding on carrion. It prefers large carcasses”.  It nests “at elevations of up to 5,000 m…. generally on inaccessible rock ledges”.  Particularly in light of the publication of the controversial report Profiting from Injustice, most arbitrators probably do not wish to characterized as inaccessible scavengers feeding on large carcasses.  (The report, in any event, only uses the ignominious term “legal vultures” to refer to law firms!)

Canada is well known for its iconic animals, many of which are featured on our currency: the hard-working beaver on the five cent coin, the majestic polar bear on the two dollar coin, the migrating Canada goose on the silver dollar and the great northern loon on the dollar coin.   But as animal metaphors for arbitral tribunals, there are some troubling public relations issues.  We have a nocturnal, large semi-aquatic rodent, a hunter and carnivore, a bird that makes an annoying honk and, truth be told, is not very smart and, finally, the loon is now immortalized on our one dollar coin, known as the loonie—enough said.

There is no dearth of views on the question of whether arbitrators should go solo or fly in flocks. The Freshfields lectures by Professor Kaufmann-Kohler in 2006 and by Professor Reisman in 2012 are reflective of two very different approaches.  In articles and a series of arbitral decisions, Professor Kaufmann-Kohler has expressed the view that arbitrators have a duty to strive for consistency and predictability, and thus to follow a consistent line of cases.   This view is reflected in the oft-quoted statement by the tribunal in Saipem v. Bangladesh, which postulates two duties on tribunals: (i) a duty to adopt solutions established in a series of consistent cases; and (ii) a duty to seek to contribute to the harmonious development of investment law.  In contrast, in his Freshfields lecture in November 2012, Professor Reisman is reported as saying that investment arbitrators “best serve the system by being case specific”, while acknowledging three exceptions: (i) thoughtful consideration of previous awards, (ii) interpretation of the object and purpose of an investment treaty and (iii) “occasional” supplementary interpretation.

Professor Kaufmann’s Kohler’s and Professor Reisman’s lectures highlight two different approaches to the role of arbitrators and to the question of whether predictability and consistency of arbitral decision-making is important.  Few would argue that predictability and consistency are not important aspects of the rule of law.  If the application of legal standards is so unpredictable and inconsistent that results become arbitrary or depend on the personal views of the judge, there is little left of the rule of law. Further, few would argue that decision makers should not have at least an eye to the harmonious development of the law.  Having a collection of inconsistent and contradictory rules is antithetical to the rule of law. But, in the context of investment treaty arbitration, aspirations for predictability, consistency and harmonious development of the law should not be viewed as imposing a duty on arbitrators to adopt the solution in a consistent line of cases.  Rather, the overriding duty of arbitrators is one of providing clear reasons for their decisions.  Where there is a jurisprudence constante (the development of doctrine through the accretion of a consistent line of cases), arbitrators do not have a decisional duty to adopt the solution in the doctrine, rather, I agree with other commentators who argue that arbitrators have a duty to provide cogent and detailed reasons for not following jurisprudence constante (see Irene Ten Cate, “The Costs of Consistency: Precedent in Investment Treaty Arbitration” on decisional burdens).   The duty is not one of result (adopting the solution) in a consistent line of cases.  The duty is one of means—there is a persuasive or argumentative burden on the arbitrator to demonstrate why jurisprudence constante should not be followed (see Stephen Schill, “From Sources to Discourse: Investment Treaty Jurisprudence as the New Custom” on argumentative burdens).

In a number of decisions, Professor Stern has written that the duty of the arbitrator is to decide each case on its own merits independently of any jurisprudential trend.  This approach goes too far if it is interpreted as meaning that the arbitrator has a duty to decide the case without any reference to jurisprudential trends.  Where there is a jurisprudential trend, the arbitrator has the duty to confront that jurisprudence in his or her reasons.  And certainly, this is what Professor Stern has done in practice, as exemplified by her 32 page dissenting opinion in Impregilo v. Argentine on the question of the application of an MFN clause to investor-state arbitration provisions.  (To be clear, I not arguing that there is  jurisprudence constante on whether a “garden variety” MFN clause applies to dispute settlement.  I am simply using Prof. Stern’s opinion as an example of the type of thoroughly reasoned decision that arbitrators have a duty to provide if they are going to depart from jurisprudence constante.)

In Glamis v. The United States, the Tribunal stated at para. 8 that: “a NAFTA tribunal, while recognizing that there is no precedential effect given to previous decisions, should communicate its reasons for departing from major trends present in previous decisions, if it chooses to do so.” [emphasis added].  That proposition should be reframed to say that a tribunal must communicate its reasons for departing from major trends.  From where does this duty arise?  It arises from the arbitrator’s duty to apply the applicable law and the duty to provide reasons, particularly in the context where the parties have made extensive submissions referring to previous cases.

The predictability and consistency challenge faced in a number of areas of investment law is, of course, that there is no jurisprudence constante and that there may be conflicting jurisprudential trends.  This can been seen most obviously on the question of the interpretation of MFN and observance of undertakings clauses. I am not optimistic that predictability and consistency is attainable in light of the varied approaches tribunals have taken to the interpretation of specific MFN and observance of undertakings clauses.  We do not have an investment treaty system with a vertical hierarchy.  We have a fragmented, horizontal network of treaties, institutions, rules and actors.  Further, just like there are pathological arbitration agreements, there are pathological treaty provisions that point in multiple directions at the same time.  In this disorder, arbitrators are the guardians of a process—not the gatekeepers of consistency.

By making this comment, I do not want to be understood as suggesting that there is massive inconsistency and unpredictability in international investment law.  My view is quite the opposite.  In Stephen Schill’s recent article on the literature and sociology of international investment law he writes that following:

The monographs on international investment law that had been published since 2007 all dealt with the theme of fragmentation as it emerged from these inconsistent arbitral decisions. Almost paradoxically, however, mainstream international investment law literature did not perceive inconsistent arbitral awards as a fundamental problem, nor did it view it as an obstacle to the doctrinal reconstruction of substantive and procedural investment law. Instead, convergence in arbitral jurisprudence is the main theme of the numerous textbooks dealing with international investment law, even though the substantive law is enshrined in a myriad of bilateral treaties and implemented by one-off arbitral tribunals.

What is most striking to me is not inconsistent jurisprudential trends, but that after 23 short years of investment treaty jurisprudence, there is such a remarkable level of jurisprudence constante in an area of international law where there has been such intense ideological divisions in the past.

I will conclude this post with a few thoughts on how to improve consistency.

• Ultimately, only States can resolve deep jurisprudential divides such as whether an MFN clause in a particular treaty applies or does not apply to dispute settlement. It is unlikely that this type of issue can be resolved jurisprudentially within the existing structure of investment treaty arbitration.
• States have to take a more active role in clarifying the meaning of existing treaty obligations.   In future treaties, they must ensure that treaty provisions are clearly drafted to address the jurisprudential divides – for example by either clearly specifying that MFN applies or does not apply to dispute settlement.
• Arbitrators should welcome, rather than be hostile to, the possibility of applying Article 31(3)(a) and (b) of the Vienna Convention, which provide that (i) any subsequent agreement between the treaty parties and (ii) and subsequent practice establishing an agreement of the parties with respect to interpretation of the treaty shall be taken into account.  The concern that States will use this mechanism abusively to provide restrictive or unreasonable interpretations is exaggerated, given the practical and political difficulties of the home state of the investor agreeing to an interpretation that seriously prejudices its own investors.  Claims that the NAFTA Free Trade Commission’s interpretative statement on Article 1105, Minimum Standard of Treatment were abusive, unfair, contrary to the rule of law or an unauthorized amendment of NAFTA are simply wrong and fail to recognize the mandatory rules in the Vienna Convention.
• With respect to tribunals, one proposal I would like float is that whenever there is a disputed question of treaty interpretation, that the tribunal take steps to request the investor’s home state to provide its views on contested matters of treaty interpretation.  This would ensure that the tribunal has the views of both treaty parties, as well as the investor, before it.  Where the tribunal cannot make the request on its own initiative under the applicable rules because of duties of confidentiality, it could seek the agreement of the parties to provide for such a process.  This default procedure would ensure that both State parties to the treaty are given an opportunity to provide their views on the proper interpretation of the treaty.  Any agreement between the State parties regarding interpretation or subsequent practice that establishes agreement of the State parties regarding interpretation shall – must be taken into account.
• More generally, state parties should take a more active role in treaty interpretation and the new generation of investment treaties should include mechanisms for the involvement of all state parties whenever there is a contested interpretation – which, of course, will likely be in every case.

Anthea Robert’s thesis in her wonderful article, Power and Persuasion in Investment Treaty Arbitration: The Dual Role of States, is compelling.  Arbitral tribunals and states share interpretative powers.  There should be a greater emphasis and encouragement of home state practice in the interpretation of investment treaty obligations.  Although this will not necessarily result in greater predictability and consistency, there is a greater likelihood that any tribunal interpretation will be more, rather than less, consistent with the state parties’ treaty obligations.

Returning to the introduction, if I was forced to choose an animal metaphor for an arbitral tribunal it would be an owl.  The owl is solitary and, of course, wise.  The owl has 360 degree vision.  The owl acts independently but provides wise reasons for its decisions, reasons that identify and illuminate tensions in the cases and result in a reasoned decision.  One owl’s decision does not create law or jurisprudence constante.  But it is different with a group of owls – the literary collective noun for a group of owls is a parliament – and parliaments have a law making function.  A parliament of owls establishes a jurisprudence constante.  Tribunals are key actors in the creation of law—they play a constitutive role in law creation by interpreting and applying treaties.  The doctrine of legitimate expectations as an element of fair and equitable treatment is a creation of tribunals—it was not mandated by the treaty term fair and equitable treatment.

The only problem with the owl metaphor for arbitrators is that owls approach small prey silently from above, eat it whole and regurgitate the indigestible parts.  But, then again, no one really wants to have to read anything indigestible in a tribunal award.

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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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Investment Arbitration Reporter

In an earlier post, I’d highlighted five notable legal highlights from 2012. Below, and somewhat belatedly, I offer my post-mortem on some key policy developments from 2012.

1. Venezuela and South Africa beat a retreat

Venezuela’s exit from ICSID was perhaps the most visible policy story of 2012. The move could bolster the caseload of the Permanent Court of Arbitration over the next few years. However, Venezuela has much unfinished business at ICSID – with 28 claims still pending there as of this writing. So, it remains to be seen whether the government will swallow its pride and honor any award emanating from the Washington-based Centre.

While Venezuela’s retreat from ICSID got a lot of attention in the mainstream media, the Republic of South Africa has taken steps that could be of much greater consequence: moving to phase out a whole string of BITs with various European trading partners.

In the post-Apartheid era, South Africa signed off on many boilerplate treaties without any real consideration of their domestic policy implications. The casualness with which South Africa approached these BIT commitments is all the more surprising given that the country was engaged in an exhaustive contemporaneous discussion about the proper degree of constitutional protection to be accorded to property rights under domestic law.

Sooner or later, the South African government was bound to wake up to the fact that these BITs permit large swathes of foreign investors (and even savvy domestic ones with an offshore address) to opt out of the constitutional compromise that was struck – and to bypass the local courts altogether.

Now that South Africa has decided to get rid of these first-generation BITs, the critical question is what comes next?

It’s unlikely South Africa will sign new (but more circumscribed) BITs with individual EU countries. After all, the EU is now taking the lead on external investment negotiations, which means that South Africa and the 27 member EU will need to reach a compromise on a suitable template.

The South African authorities are touting investor protections that will be built into domestic law. But, given the recent clamouring for outright nationalization in Southern Africa, and given that South Africa and its neighbours have recently presided over the neutering of the tribunal of the Southern African Development Conference, it might be nice to see some protective framework beyond what domestic law offers for European investors (even if this were a narrow safety-valve that can be accessed only after exhausting domestic remedies).

In the mean time, European investors will likely be looking to restructure their holdings so as to bring them under the roof of one the several dozen investment treaties that South Africa has no (current) plans to terminate.

2. The U.S. and China stick to their guns

Not every government is in retreat from international investment law commitments. In fact, the two most significant countries in the world are eagerly negotiating BITs on multiple fronts – and are in advanced talks with each other on a bilateral pact.

In a recent commentary, Karl Sauvant and Huiping Chen have speculated that, if China and the United States can reach a compromise, the resulting BIT could become a template for a future multilateral agreement. Personally, I’m not sure how a U.S.-China BIT would get through a ratification vote in the U.S. Senate – not least as a major negotiating goal for China is to roll back restrictions on outward investment by Chinese state-owned enterprises. My hunch is that the US and China might need to bring on board a raft of other governments so as to multi-lateralize their talks before they are concluded; any resulting agreement could be pitched to the U.S. Senate as a more innocuous “multilateral” deal, rather than a lightning rod deal with China only.

Given that the EU is also gearing up for investment talks with China, a genuinely multilateral pact could gain a lot of momentum in a short amount of time if the EU, China and the US were to all get on the same negotiating page.

3. Extra-EU BITs dodge the guillotine

When the European Commission was handed a mandate in December of 2009 to negotiate external investment agreements on behalf of the 27 EU member-states, questions arose as to what to do with the 1000+ existing bilateral investment treaties already in force between individual EU governments with non-EU countries.

In 2010, the Commission’s trade negotiations unit surprised with an ambitious plan to phase out these Extra-EU BITs within the near-term – even if new EU-level agreements were not ready to take their place immediately. That plan was quickly nixed, but the Commission’s revised proposal also worried fans of the existing BITs status quo, not least as it called for the Commission to review extra-EU BITs to make sure that they conformed to a checklist of Commission priorities and concerns.

Fast-forward to May of 2012, and the final terms of a tripartite deal hammered out between the Commission, the European Parliament and the European Council, offered an even more watered-down plan. Under this compromise, the vast majority of extra-EU BITs are likely to remain in place until EU-level agreements are ready to replace them – and with no need for a “review” of each agreement. In the case of low-priority countries, that could mean that existing BITs stay in place for many years while the Commission works its way down its list of negotiating priorities.

4. The European Commission’s ambitions for ICSID are scaled back

In mid 2011 a pair of internal discussion papers prepared by staff at the European commission’s DG Trade crossed my desk. The papers offered a window into the thinking of DG Trade as it worked with the various EU member-states to agree on a negotiating template to be used in future EU investment agreements with external trading partners.

The paper on dispute settlement made clear that the Washington-based ICSID enjoyed greater “legitimacy” than private institutions such as the courts of arbitration of the International Chamber of Commerce and Stockholm Chamber of Commerce. The DG Trade proposed that ICSID administer all investor-state disputes arising under EU external investment agreements – including those arbitrated under the UNCITRAL or ad-hoc rules.

However, the DG Trade encountered push-back from member-states, with several advocating for references to one or more national arbitration venues. While yearning to pledge its fidelity to ICSID, the European Commission, had by mid-2012, reconciled itself to something more akin to an “open relationship” with the Washington-based facility: future EU investment agreements will likely permit investor-claimants to pursue arbitration under ICSID or UNCITRAL auspices, but will also give them the right to seek arbitration under any “other” rules provided that the relevant host-state gives its blessing

5. No consensus on wide application of UNCITRAL rules on transparency

The fight for greater transparency of investor-state arbitrations has been rumbling on at the UN Commission for International Trade Law for more than a half a decade – outlasting the process of revising the UNCITRAL rules themselves, as well as the attention-spans of many observers. But, while the transparency debate at UNCITRAL has receded from the headlines lately, it may be that 2012 proves to be a watershed year.

Delegations have made great strides in elaborating guidelines on transparency that would open up written and oral proceedings to public view. But, there is no consensus in favor of applying those guidelines to disputes arising under existing bilateral investment treaties that contain a generic reference to UNCITRAL arbitration. Indeed, many governments have pushed for wording which could limit the application of the transparency guidelines to those cases where parties “have agreed to their application.”

Such an approach could foreclose the potential applicability of any UNCITRAL rules on transparency to disputes under the vast number of the thousands of bilateral investment treaties already in force.

A handful of governments, including Canada, the United States, and Australia have urged a more progressive approach, arguing that it should be left to tribunals to judge whether a “dynamic” interpretation of a given treaty permits the rules on transparency to be read as implicitly forming part of the arbitration bargain. However, at the most recent meeting of UNCITRAL Working Group II in Vienna, in October of 2012, there was no consensus in favour of this proposal.

Advocates for wider transparency in this context have recently warned that the protracted discussions may “lead to rules that are state of the art in terms of content and form, but that are in reality largely irrelevant because not applicable to the majority of investment disputes.”

Barring a major reversal at next week’s meeting of Working Group II in New York, 2012 may go down as the year that UN delegations made clear their limited appetite for sweeping transparency in investor-state arbitration.

Luke Eric Peterson is the Editor of InvestmentArbitrationReporter.com an online news and analysis service focused on investor-state arbitration and policy. He has been a contributor to Kluwer’s Arbitration Blog since its launch.

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Arnold & Porter LLP

by Patricio Grané and Brian Bombassaro

The year 2012 brought eight new investor-state arbitration decisions on umbrella clauses.¹ Although tribunals in three of the disputes resolved claims without confronting controversial aspects of umbrella clauses,² the other five tribunals issued yet another vintage of divergent decisions. Placing the decisions of 2012 within the framework of prior umbrella clause decisions also presents an opportunity to examine how that framework has been evolving.

Early Development of the Umbrella Clause Jurisprudence
Umbrella clauses, known also as “observance of undertakings” clauses, are common to investment treaties and exist in myriad formulations. Under a more expansive version, each state commits to “observe any obligation it may have entered into with regard to investments.”³ Controversy over these provisions erupted in August 2003 with the decision in SGS v. Pakistan. Concerned that, “[a]s a matter of textuality,” the umbrella clause “appears susceptible of almost indefinite expansion,” the tribunal in that case held that the claimant needed to adduce “clear and convincing evidence” that the parties to the investment treaty intended that the umbrella clause elevate a contract breach to the level of a treaty breach.⁴ Finding that the claimant failed to provide sufficient evidence, the tribunal rejected its proposed interpretation and denied the claim.⁵

Only five months later, in January 2004, the tribunal in SGS v. Philippines interpreted another umbrella clause, worded slightly differently,⁶ to “say, and to say clearly, that each Contracting Party shall observe any legal obligation it has assumed, or will in the future assume, with regard to specific investments covered by the BIT.”⁷ But despite firmly concluding that the provision “means what it says,”⁸ the tribunal then decided that an exclusive forum selection clause in the contract precluded it from adjudicating the alleged breach of contract, a necessary antecedent to deciding the treaty claim. As a result, the tribunal stayed arbitration proceedings pending resolution of the contract claim in the forum contemplated in the contract.

Since then, discussion about umbrella clauses has tended to begin with a framework in which SGS v. Pakistan and SGS v. Philippines rest at the two poles: SGS v. Pakistan as the “narrow” or restrictive interpretation, and SGS v. Philippines as the “broad” interpretation. Meanwhile, an intermediate set of decisions exists in which a pivotal element is the nature of the state’s conduct — whether the state formed or breached the contract acting in its capacity as a sovereign (ius imperii), or acting solely in a commercial capacity (ius gestionis).⁹

Evolution from the Early Umbrella Clause Jurisprudence
Not all umbrella clause decisions, including those rendered in 2012, however, fit neatly in one of these three categories. For instance, there have been decisions that focus on the issue of contract privity; that is, whether claimants may base an umbrella clause claim on contractual obligations that are not due directly from the state to the investor (for example, when either a state agency or an investor subsidiary, rather than the state itself or the investor itself, is party to the contract). On this issue of contract privity, the jurisprudence is not unified. Other decisions have focused on whether an umbrella clause covers any legislative and regulatory obligations or only such obligations that specifically address investors.

Another development that justifies rethinking the traditional mapping of the umbrella clause jurisprudence is the emergence of a decision that appears to be more favorable to claimants than SGS v. Philippines, therefore expanding the range of umbrella clause decisions and succeeding SGS v. Philippines as the representative of the “broad” pole. In February 2010, the SGS v. Paraguay tribunal found the umbrella clause to mean that a contract breach leads to a treaty breach, while also finding — unlike SGS v. Philippines¹⁰ — that a forum selection clause in the contract was no obstacle to reaching this legal conclusion. The SGS v. Paraguay tribunal explicitly rejected “non-textual limitations” to the umbrella clause that the respondent had proposed.¹¹

In light of these developments since the initial two SGS disputes, a remapping of the landscape of umbrella clause decisions is warranted. A more accurate categorization of the decisions could still encompass three categories, but defined in a slightly different manner. First, there is the narrow or restrictive pole, of which SGS v. Pakistan, with its avowed “prudential” interpretation,¹² remains the hallmark. Second, there is the broad “plain meaning” pole, but instead of SGS v. Philippines, its standard-bearer would be SGS v. Paraguay. In a third and more nuanced category, between the two poles, are a cluster of decisions that reflect a “conditional plain meaning” application of umbrella clauses.

The “conditional plain meaning” group would include, among others, SGS v. Philippines. The SGS v. Philippines tribunal reached a plain meaning interpretation, but before the investor could vindicate its rights, it first needed to abide by the contract’s forum selection clause — essentially an implied condition that the claimant reciprocate observation of contractual obligations,¹³ with the submission of disputes to the selected forum being an obligation that the investor owes to the state. Later decisions, such as Toto Costruzioni v. Lebanon and BIVAC v. Paraguay, have followed SGS v. Philippines when examining similar scenarios. Together, these decisions constitute one line of holdings within the “conditional plain meaning” category.

Other tribunals have likewise been willing to grant claimants access to a plain meaning interpretation while subjecting that access, for practical purposes, to conditions. At least five such conditions are identifiable: for claims founded on a contract breach, (1) that the investor comply with its own contract obligations, viz., that it honor a forum selection clause in the contract, (2) that the state entered the contract as an act of ius imperii, (3) that the state breached the contract as an act of ius imperii, and (4) that the state and claimant each be parties to the contract (i.e., privity of contract). The fifth condition is unique to the context of legislative or regulatory obligations: (5) that the legislative or regulatory obligations target investors specifically. Some of these conditions could prove to be quite restrictive in effect and, collectively, could even be insurmountable.

2012 Count: Narrow: 0; Broad: 2; Conditional: 3; Abstaining: 3
Using the new framework identified above, an attempt may be made to classify the eight umbrella clause decisions that tribunals issued in 2012:

Narrow, Restrictive, or Prudential
• No decisions of 2012 seem to fit in this category.

Broad, Unconditional Plain Meaning
• SGS v. Paraguay (Feb. 2012) (rejecting conditions #1 and #3): Contract obligations regarding forum selection had no bearing on whether the state breached other, independent obligations in the contract, and the state failed to establish that if the investor had breached other aspects of the contract, which was not proven, then such breach would have relieved the state of its contractual obligations; breach of the umbrella clause did not require an abuse of sovereign power.

• EDF v. Argentina (June 2012) (rejecting condition #4): Breach of a contract between an Argentine province and a company in which the claimant was a majority shareholder constituted a breach of the umbrella clause (although also suggestive that a breach of the umbrella clause may require that the contract breach be due to an act of ius imperii, condition #3)

Conditional Plain Meaning
• BIVAC v. Paraguay (Oct. 2012) (endorsing condition #1): Following its decision of 2009, the tribunal issued a continued stay pending a disposition of the alleged contract breach in Paraguayan courts. In the prior award, the tribunal determined that an exclusive forum selection clause in the contract rendered the umbrella clause claim inadmissible. In the 2012 decision, the tribunal remarked that if the state does not comply with any eventual decision by Paraguayan courts, the umbrella clause claim “might then become admissible.”¹⁴

• Bosh v. Ukraine (Oct. 2012) (endorsing condition #1): The alleged contract breach was not attributable to the state, but even if the alleged breach had been attributable to the state, the tribunal would have deferred to a forum selection clause in the contract and denied the umbrella clause claim.

• Burlington Resources v. Ecuador (majority) (Dec. 2012) (endorsing condition #4): Because only a subsidiary of the claimant was privy to the contract, not the claimant itself, the tribunal rejected the umbrella clause claim. (The dissenting opinion, by Francisco Orrego Vicuña, would fall in the category of broad or unconditional plain meaning; Orrego Vicuña opined that the BIT’s umbrella clause covered contractual obligations related to direct or indirect investments regardless of whether the obligation was due directly to the claimant, rejecting condition #4.)

The three remaining decisions from 2012 did not discuss in detail the umbrella clauses at issue in those cases. In Swisslion v. FYROM (July 2012), the tribunal found that the claimant was unable to establish any contract breach, thus obviating any need to interpret the provision in depth. In Daimler Financial Services v. Argentina (Aug. 2012) and Occidental v. Ecuador (Oct. 2012), the tribunals likewise reached a disposition without entangling themselves in the more controversial elements of an umbrella clause interpretation. In Daimler Financial Services, the tribunal found the argument against its jurisdiction over umbrella clause claims to be “patently groundless.”¹⁵ In Occidental, the tribunal found that the state was in breach even under its own proposed interpretation of the umbrella clause.

While classifying the range of umbrella clause decisions is useful for understanding how tribunals have applied such clauses, caution is due in attempting to generalize. Each decision typically examines only a particular umbrella clause (which, as noted, can take any of myriad textual formulations) in a specific fact scenario. Also, decisions that rejected possible implied conditions did not evaluate every recognized or potential implied condition, so they should be viewed as suggesting an unconditional plain meaning only with regard to the proposed conditions that the tribunals considered and rejected.

Conclusion: More Evolution To Come
The decisions of 2012 did not bridge the chasm that separates divergent conclusions on umbrella clauses. But those decisions nevertheless contribute to the jurisprudence by helping to more clearly identify and delineate patterns that have developed over nearly a decade of searching inquiries. Perhaps 2013 will bring more clarity on this issue, but it is reasonable to expect that umbrella clauses will remain among the most controversial and uncertain areas of international investment law, at least for the near future.

*Patricio Grané is Counsel of Arnold & Porter LLP and Adjunct Professor of Law at Georgetown University Law School; Brian Bombassaro¹⁶ is an associate at Arnold & Porter LLP. The opinions expressed by the authors are their own and should not be attributed or used against any past, existing, or future client of Arnold & Porter LLP.

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Public Citizen

As described in Part 1 of this post, the mounting debate about investor-state dispute resolution (ISDR) has crescendoed in the current Trans-Pacific Partnership (TPP) negotiations. There are at least two “schools” of concern with ISDR, both of them voiced inside and outside the TPP context.

Threats to Public Interest Policy

For a growing array of domestic policymakers, civil society organizations and people impacted by ISDR decisions, ISDR is viewed as a threat to vast swaths of public interest policy achieved through decades of struggle, and to the prospect of further advances. Either by winning an investor-state attack and collecting millions in compensation, or by preemptively chilling government actions to address critical public needs, international investor rights and private investor-state enforcement are seen as imposing significant limits on progressive reforms related to health, the environment, water or other natural resources. Further, the ISDR system is increasingly being understood as a threat to governments’ ability to effectively respond to emergent demands, such as financial crises or climate change, the redress of which requires new policies and approaches.

The mere filing of an ISDR challenge can have a chilling effect on needed policy initiatives. Important mining policy reforms affecting access to clean water for millions of people in El Salvador have been bogged down in the face of ISDR challenges under CAFTA. The threat of a NAFTA claim by insurance firms against Ontario, Canada’s proposed no-fault government auto insurance regime led to the abandonment of that proposal. Canada also reversed a nationwide ban on MMT, a gasoline additive banned in many U.S. states as a probable carcinogen, after the U.S. Ethyl Corporation filed a NAFTA investor-state case.

The filing of ISDR cases is also increasingly being used as a form of rough bargaining. Consider the Renco case against Peru under the U.S.-Peru FTA, which relates to the severe pollution created by a metal smelter owned by Renco subsidiary Doe Run in the town of La Oroya, which was listed as one of the top 10 most polluted sites in the world. The Peruvian government shut down the facility after Renco’s years of delay in implementing environmental improvements. Renco has taken no action on the FTA case itself since its initial 2010 notice, despite being authorized to do so since April 2011.

But, Renco has used the investor-state case as a tactic to pressure the Peruvian government to allow it to reopen its smelter without installing pollution-capturing devices, and to evade a U.S. court case seeking compensation for children injured by the past pollution. Renco’s investor-state case demands $800 million in compensation from Peru over the denial of a third extension on a 1997 environmental remediation agreement after failing to fulfill contractual commitments to the Peruvian government to install pollution devices in the facility in La Oroya.

The Peruvian government has allowed the La Oroya smelter to restart zinc smelting operations and in November 2012 Doe Run took the first steps to restart lead smelting, which has already resulted in reports of fresh emissions. Meanwhile, Renco has also successfully used the mere filing of its investor-state case to delay and possibly derail a Missouri state court case demanding compensation for Oroyan children poisoned by the smelter.

After Renco’s three unsuccessful attempts to remove the case from state courts where it would face more favorable prospects, the filing of the ISDR case led a federal judge to approve Renco’s fourth attempt at removal. Why? “[U.S. law] allows removal of any action in state court in which ‘the subject matter … relates to an arbitration agreement or award falling under the Convention’ [Convention on the Recognition and Enforcement of Foreign Arbitral Awards],” she ruled.

Threats to Systems of Justice

For jurists, legal scholars and domestic practitioners, the ISDR critique is structural, focusing on the details of a parallel system of privatized justice.

Many of the lawyers who serve on ISDR tribunals also represent corporations in attacking governments, which creates inherent conflicts of interest by allowing lawyers to rotate between roles as arbitrators and advocates for investors in a manner that would be unethical for judges. Specific conflicts of interest have raised alarm, such as in the Vivendi v. Argentina case, in which the award was not annulled despite one of the tribunalists serving on the board of directors of a bank that held shares in Vivendi. The tribunalist did not disclose the conflict, much less recuse herself.

In addition, the bill-by-the-hour fee structure for tribunalists, in contrast to domestic judges who are not paid for piecework, creates an incentive for lengthy proceedings, for which governments are usually billed even if a case is ultimately dismissed. This fee structure creates a dynamic in which the mere filing of a case creates an incentive for governments to concede to investor demands to avoid costs.

Another, more fundamental legal concern with the ISDR regime is that it empowers foreign corporations to not only circumvent sovereign immunity protections, but to directly challenge domestic laws and regulations outside of domestic courts. Exhaustion of domestic remedies is not required before proceeding to international tribunals even though the exhaustion requirement is a fundamental principle of international law.

Furthermore, as arbitral tribunals have extended beyond awards of cash damages and issued injunctive relief, severe conflicts of law problems are being created with investor-state actions being used to meddle in domestic court processes. For instance, in the Chevron v. Ecuador case under the U.S.-Ecuador BIT, a tribunal ordered Ecuador’s executive branch to violate its constitutional separation of powers and somehow halt the enforcement of an Ecuadorian appellate court ruling that ordered Chevron to pay for its contamination of the Ecuadorian Amazon.

This case, alongside Renco, also highlights how the investor-state regime is increasingly being used to evade justice in domestic courts. Legal claims against Chevron were lodged in U.S. courts on behalf of indigenous and campesino farmer residents affected by the company’s oil operations in the Ecuadorian Amazon. After a decade of litigation, the case was heading to a jury trial in U.S. federal court when Chevron moved in 2002 to transfer it to Ecuadorian courts, arguing that it could only obtain a fair trial in Ecuador. The plaintiffs consented to the transfer after Chevron signed an agreement to abide with the final ruling of Ecuador’s courts. In 2011, after an eight-year trial in Ecuador that generated over 220,000 pages of evidence, the Ecuadorian court ordered Chevron to pay $18 billion to clean up the environmental damage. An Ecuadorian appellate court affirmed the decision in January 2012. Chevron’s executives vowed never to pay, despite Chevron’s promise to U.S. courts that it would abide by the decision as a condition of moving the trial to Ecuador.

Having lost the case in Ecuador’s domestic courts on the merits, Chevron – one of the wealthiest corporations on the planet, with revenues of $240 billion in 2011 – sought to escape its liability by commencing an investor-state case under the U.S.-Ecuador BIT that would shift the clean-up costs to the government of Ecuador, a country where the per capita income is $4,000 per annum. Ostensibly, the BIT was designed to allow U.S. investors to seek monetary damages from the government of Ecuador for expropriation or unfair treatment. But Chevron is using ISDR to try to immunize itself from liability in private litigation. It is asking a tribunal of three private lawyers to substitute its judgment for that of 18 years of robust U.S. and Ecuadorian court proceedings with respect to the merits of who is liable to clean up the toxic mess in the Ecuadorian Amazon. Although this BIT took effect in 1997, five years after the oil company abandoned its Ecuador operations, the tribunal issued an initial award ordering Ecuador’s government to interfere in its independent judiciary and somehow suspend enforcement of the appellate court ruling until the ISDR investment tribunal can rule.

Increasingly Expansive Tribunal Interpretations of Obligations and Jurisdiction

Governments that previously agreed to ISDR provisions without trepidation have shown rising concern with a trend of tribunals creating new obligations for States with enormously elastic interpretations of the “minimum standard of treatment” and related “fair and equitable treatment” standards. By fabricating new obligations under these standards – obligations not contemplated when countries signed FTAs and BITs – tribunals are then issuing stunningly arbitrary awards. Tribunal-fabricated obligations related to fanciful notions of investors’ expectations and what a tribunal deems a proportionate response by a government to an investor’s malfeasance open the door to ISDR claims and awards over a wide range of government measures that are otherwise permissible under nations’ constitutions and legal systems.

Such concerns were confirmed with the recent and historic $1.8 billion judgment (plus compound interest) against Ecuador in a case brought by Occidental under the U.S.-Ecuador BIT. While the press focused on the staggering penalty—the largest to ever come out of an International Centre for Settlement of Investment Disputes (ICSID) tribunal—that may not have been the real news. Perhaps even more shocking is the illogic that the tribunal used to rule that Ecuador violated the BIT’s Fair and Equitable Treatment and Indirect Expropriation obligations.

The tribunal acknowledged that Occidental breached a government contract by selling a 40 percent share of its oil concession. The contract included a provision stating that the assignment of any share to another party without government consent would terminate the contract. And, the tribunal noted the Ecuadorian law that stated that such an action could result in forfeiture of the concession altogether. Thus, the tribunal concluded that Oxy should have expected its contract to be terminated and noted that it had a right to challenge this outcome in domestic court. But, the tribunal created a “proportionality” obligation, and opined that Ecuador’s action in enforcing the exact language of the contract was unduly harsh. Having found a FET violation, the tribunal declared that this also equated to an indirect taking without further analysis or explanation. It then ordered Ecuador to pay 100 percent of the lost future earnings under the contract, even though the whole conflict related to Oxy’s sale of a 40 percent share.

Recognizing and seeking to limit tribunals’ expansive interpretations of governments’ obligations to investors, some States have attempted clarifications and interpretive annexes to rein in ISDR tribunals. But this summer’s CAFTA Railroad Development Corporation v. Guatemala award showed that the touted U.S. Customary International Law (CIL) Annex has proved quite useless in foreclosing tribunals from generating ever-expanding interpretations of States’ obligations to investors, such as those based on fanciful notions of investors’ expectations. Rejecting the arguments raised by Guatemala, the United States, El Salvador and Honduras that the minimum standard of treatment obligation must be interpreted under a CIL state practice and opinio juris analysis, the tribunal instead imported an inventive MST interpretation from the NAFTA Waste Management II award and ordered Guatemala to pay $11.3 million, plus backdated compound interest and fees, for actions that did not violate the CIL denial of justice standard.

While ISDR tribunals have expanded States’ obligations to investors, they have also been widening the jurisdiction through which the investors can seek to enforce those “obligations.” Despite the standard “Denial of Benefits” language, investors from countries that are not signatories to an agreement increasingly are launching investor-state cases via subsidiaries. For example, in the Pacific Rim v. El Salvador case brought under CAFTA, a Canadian firm reincorporated a Cayman Islands subsidiary as a U.S. corporation three months before launching a CAFTA investor-state case against El Salvador. The case made it through CAFTA’s preliminary objections process. Only after three years and millions in costs did the tribunal dismiss the CAFTA aspect of the case. The tribunal agreed with El Salvador’s denial of benefits arguments, but noted that had the firm done a more careful job of setting up its U.S. subsidiary, the Canadian firm could have used CAFTA’s ISDR provisions.

Perhaps the most glaring example of the increasingly common and unfair practice of nationality-shopping can be found in the multi-front war being waged against cigarette plain packaging health policies. Philip Morris International moved the head office of its Australian subsidiary to Hong Kong shortly before it attacked Australia under the Hong Kong-Australia BIT in 2011. However, the corporation claimed to be a Swiss-based company when it launched its 2010 ISDR attack against Uruguay under a Uruguay-Swiss BIT. Meanwhile, the firm described itself as a U.S.-based company when it made a submission in 2010 to the Office of the U.S. Trade Representative in support of including ISDR in the TPP.

The Perfect Storm over ISDR Makes Landfall in the TPP

With public and policymaker alarm about ISDR growing in parallel to the upward trajectory of arbitrary ISDR awards against common public interest policies, the TPP negotiations could have been a venue to address well-founded concerns. Instead, U.S. official have dismissively waived off congressional and civil society reform proposals, doubling down to try to expand both the substantive investor rules and the scope of ISDR. This does not bode well, neither for the TPP, nor the future of the investor-state dispute resolution system.

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