The Origin and Evolution of Investment Treaty Standards
Stability, Value, and Reasonableness
FEDERICO ORTINO
3
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Acknowledgements
This book has been a long time coming. It is my attempt at understanding a very chaotic and evolving area of international law. This journey started in the International Investment Agreements Section at UNCTAD in 2003, continued in the Investment Treaty Forum at BIICL between 2005 and 2007 and has persevered at King’s College London ever since. Along the way, many people have, in different ways, contributed to the making of the book. In particular, I would like to thank Anna Joubin-Bret, Professor Peter Muchlinski, Professor Christoph Schreuer, Audley Sheppard, and Professor M Sornarajah for having introduced me to the world of investment treaties. For their friendship and insights, I am moreover greatly indebted to the many colleagues at King’s College London and beyond, in particular, Lorand Bartels, Megan Bowman, David Caron, Jan Dalhuisen, Piet Eeckhout, Jessica Gladstone, Florian Grisel, Ori Herstein, Holger Hestermeyer, Christoph Kletzer, Petros Mavroidis, Cian Murphy, Nikki Palmer, Mona PinchisPaulsen, Lauge Poulsen, Chris Townley, Irit Samet, Karl Sauvant, Michael Schillig, Thomas Schultz, Anthony Sinclair, Johnny Veeder, Guglielmo Verdirame, Gaetan Verhoosel, Philippa Webb, Sam Wordsworth and Lorenzo Zucca. I would like to thank Ceyda Knoebel and two of my former doctoral students, Emily Lydgate and Maria Laura Marceddu, for their invaluable research assistance. I would also like to thank all of my students, who have been a big part of this journey and endured stoically my protracted efforts at ordering chaos.
Finally, I am grateful to my family, in particular, my wife, Maria, and our children, Noah, Elias and Greta, for their unconditional love and support and for helping me keep things in perspective. This book is dedicated to them.
Federico Ortino
London, July 2019
B.
C.
Stability in the Strict sense and (the Little Known Case of)
1. Linking FET and legal stability in the strict sense: the early attempt
2. The majority of investment tribunals have rejected the link between FET and stability in the strict
FET, regulatory change and recent arbitral practice: still in muddy
(a) Some tribunals’ failure to take a clear position on whether or not FET includes a strict
(b) Some tribunals’ failure to clearly address the precise ambit of, and relationship between, the obligation to provide a stable legal framework and the obligation to protect the investor’s legitimate
(c)
1. Textual emphasis on adverse ‘effect’ on the foreign ‘investment’
2. What relevance for the host State measure’s public purpose?
B. Indirect Expropriation in Investment Arbitral Practice: ‘Sole-Effect’ versus ‘Police Powers’
1. Initial interpretations and the exclusive relevance of the measure’s (adverse) economic effect
2. The relevance of the measure’s purpose in assessing the existence of an indirect expropriation 65
3. ‘Sole effect’ versus ‘police powers’: an enduring but evolving inconsistent arbitral tribunal practice 68
C. ‘Expropriatory Effect’: A Concept in Search of a Definition 72
1. The threshold question: substantial versus total deprivation 73
2. The denominator problem 76
3. The object of deprivation: property interest, control or value? 81
(a) Implications of investment treaties’ emphasis on ‘effect’: substance over form 81
(b) Early arbitral practice: a broad view with a few dissenting voices 84
(c) Arbitral practice beyond the early years: conflicting views remain and minority dissenting voices become louder
Treaty Practice
A. The Origin of Reasonableness-Based Provisions in Modern Investment Treaties
1. Express references in early investment protection instruments to ‘standards’
2. What is the ‘original’ meaning of ‘fair’, ‘equitable’, ‘unreasonable’, ‘arbitrary’, ‘discriminatory’? Clues pointing to extensive protection
(a) No clear link between investment treaty standards and customary law
(c) Open-ended nature of investment treaty standards
3. Investment treaty standards (such as fair and equitable treatment, full protection and security, non-impairment through arbitrary, unreasonable or discriminatory measures) as reasonableness-based standards
(a) Focus on the merit or soundness of the host State’s conduct
(b) Focus on a variety of factors
(c) Focus on balancing different interests
B. Full Protection and Security and Due Diligence
1. The very first case: AAPL v Sri Lanka
2. Subsequent arbitral practice and divergent application of the ‘due diligence’ standard
3. What standard when assessing acts of State organs causing harm to the investment?
C. Fair and Equitable Treatment (and Non-Impairment) Standards: Good Faith, Arbitrariness and Legitimate Expectations
1. Good faith
2. Arbitrary (or unjustifiable or unreasonable) conduct
(a) Arbitrariness and the ‘high threshold’ approach
(b) Arbitrariness and the broader (more intrusive) reach
(c) Arbitrariness and investment tribunals’ ambivalent approach
3. The protection of legitimate expectations
(a) Balancing investors’ legitimate expectations and host States’ right to regulate: sketching two approaches followed by investment tribunals
(b) Balancing exercise and standard of review
D. Indirect Expropriation and the ‘Legitimate’ Exercise of Police Powers
1. Several versions of the ‘police powers’ doctrine
2. Means–ends rationality (or bona fide regulation for a public purpose)
(a) Host State’s measure is a bona fide measure
(b) Host State’s measure is a legitimate exercise of its right to sanction violations of domestic law
(c) Host State’s measure is a legitimate exercise of its rights under the investment contract
3. Proportionality balancing
(a) Tecmed and the sensitivity of putting different values on the proportionality scale
(b) Subsequent arbitral practice and various applications of proportionality
(c) Proportionality balancing in the context of the host State’s exercise of its rights under the investment contract
Table of Cases
Abengoa, SA y COFIDES, SA v United Mexican States, ICSID Case No. ARB(AF)/09/2, Award, 18 April 2013 . . . .
70–71n77
AEDF v United States, ICSID Case No. ARB (AF)/00/1, Award, 9 January 2003 134–35n140
AES Summit Generation Limited and AES-Tisza Erömü Kft v The Republic of Hungary, ICSID Case No ARB/07/22, Award, 23 September 2010 18, 27, 87–88, 138–39, 140 Alex Genin v Estonia, ICSID Case No. ARB/99/2, Award, 25 June 2001 . . . . 135–36, 137–38
American Manufacturing & Trading, Inc (AMT) v Republic of Zaire, ICSID Case No ARB/93/1, Award, 21 February 1997 .
.118–19
Ampal–American Israel Corporation and others v Arab Republic of Egypt, ICSID Case No ARB/12/11, Decision on Liability, 21 February 2017 124, 125
Antaris Solar GmbH and Dr Michael Göde v Czech Republic, PCA Case No 2014-01, Award, 2 May 2018 .
.33, 37, 142–43
Antin Infrastructure Services Luxembourg Sàrl and Antin Energia Termosolar BV v Kingdom of Spain, ICSID Case No ARB/13/31, Award, 15 June 2018 . . . . 147n198
Asian Agricultural Products Limited (AAPL) v Republic of Sri Lanka, ICSID Case No ARB/87/3, Award, 27 June 1990 51–52n12, 119
AWG v Argentina, UNCITRAL, Decision on Liability, 30 July 2010 .
Bayindir Insaat Turizm Ticaret Ve Sanayi AS v Islamic Republic of Pakistan, ICSID Case No ARB/03/29, Award, 27 August 2009
. 87–88n139
130
Bear Creek Mining Corporation v Republic of Peru, ICSID Case No ARB/14/21, Award, 30 November 2017 97–98
Bernhard von Pezold and others v Republic of Zimbabwe, ICSID Case No ARB/10/15, Award, 28 July 2015
121–22n78, 124 BG v Argentina, UNCITRAL, Award, 24 December 2007
90n150
Bilcon of Delaware et al v Government of Canada, PCA Case No 2009-04, Award on Jurisdiction and Liability, 17 March 2015 138n157, 142n175, 167n291
Biwater Gauff v Tanzania, ICSID Case No ARB/05/22, Award, 18 July 2008 87, 126
Blusun SA, Jean-Pierre Lecorcier and Michael Stein v Italian Republic, ICSID Case No ARB/14/3, Final Award, 27 December 2016
.37, 39, 150–51
Burlington Resources Inc v Republic of Ecuador, ICSID Case No ARB/08/5, Decision on Liability, 14 December 2012 80n118, 88
Cargill v Mexico, ICSID Case No. ARB(AF)/05/2, Award, 18 September 2009 73n88
CEF Energia BV v Italy, SCC Case No 158/2015, Award, 16 January 2019 .
12, 148n201, 151
Charanne and Construction Investments v Spain, SCC Case No V 062/2012, Final Award, 21 January 2016 30n111, 146n196, 147n198, 150n210
Chemtura Corporation v Government of Canada, UNCITRAL (formerly Crompton Corporation v Government of Canada), Award, 2 August 2010 74, 77, 80, 131n119, 160
CME Czech Republic BV v Czech Republic, UNCITRAL, Partial Award, 13 September 2001 .
8n13, 19n64, 84–85n129, 88–89n145
CMS Gas Transmission Company v The Republic of Argentina, ICSID Case No ARB/01/8, Award, 12 May 2005 21, 23–24, 25n91, 28, 34, 40n140, 74n92, 90
Compania de Aguas del Aconquija and Vivendi Universal v Argentina, Case No ARB/97/3, Award, 20 August 2007 131–32n120, 146n196
Compañíadel Desarrollo de Santa Elena, SA v Costa Rica, Case No ARB/96/1, Award, 17 February 2000
Continental Casualty Company v The Argentine Republic, ICSID Case No ARB/03/9, Award, 5 September 2008
65, 93
26
Copper Mesa Mining Corporation v Republic of Ecuador, PCA No 2012-2, Award, 15 March 2016 70–71n77, 79n112
Crystallex International Corporation v Venezuela, ICSID Case No ARB(AF)/11/2, Award, 4 April 2016
Dan Cake v Hungary, ICSID Case No ARB/12/9 . .
146, 148
133n129
Deutsche Bank AG v Democratic Socialist Republic of Sri Lanka, ICSID Case No ARB/09/2, Award, 31 October 2012 70–71, 161
EDF (Services) Limited v Romania, ICSID Case No AR/05/123, Award, 8 October 2009 . .
27, 28–29
EDF International SA, SAUR International SA and León Participaciones Argentinas SA v Argentine Republic, ICSID Case No ARB/03/23, Award, 11 June 2012 8 October 2009 159n253
Eiser Infrastructure Limited and Energía Solar Luxembourg Sàrl v Kingdom of Spain, ICSID Case No ARB/13/36, Award, 4 May 2017
El Paso Energy International Company v The Argentine Republic, ICSID Case No ARB/03/15, Award, 31 October 2011
40n142, 42–43
31n112, 34n120, 40n142, 40n144, 41n144, 44, 91–93, 95–96, 126n95, 145–46, 147n198, 147n199, 159
Electrabel v Hungary, ICSID Case No. ARB/07/19, Decision on Jurisdiction, Applicable Law and Liability, 30 November 2012
80n118, 88–89n144
Elettronica Sicula SpA (ELSI) (United States of America v Italy), Judgment of 20 July 1989, [1989] ICJ Rep 15
. . 102–3n10, 114–15, 122–23, 134–35, 137–38, 140, 141
Eli Lilly and Company v The Government of Canada, UNCITRAL, ICSID Case No UNCT/14/2, Final Award, 16 March 2017 35n126, 40n142, 41–42
Enkev Beheer BV v Republic of Poland, PCA Case No 2013-01, First Partial Award, 29 April 2014
Enron Corporation and Ponderosa Assets, LP v Argentine Republic, ICSID Case No ARB/01/3, Award, 22 May 2007
75
21nn72–74, 21–22n77, 25n91, 34, 88n145, 90nn148–149, 136–37
Eureko v Poland, UNCITRAL, Partial Award, 19 August 2005 125n92, 126n96
Flemingo Duty Free Shop Private Limited v The Republic of Poland, UNCITRAL, Award, 12 August 2016
79
Foresight Luxembourg Solar Sàrl et al v Kingdom of Spain, SCC Arbitration V (2015/150), Final Award, 14 November 2018 43n153, 70–71n77 Frontier v Czech Republic, UNCITRAL, Award, 12 November 2010 130, 131
Gami Investments Inc v Mexico, UNCITRAL, Final Award, 15 November 2004
Glamis Gold v United States, UNCITRAL, Award, 8 June 2009.
74n91, 129–30n114
89–90, 135n142, 137, 166
Goetz and Consorts v Burundi, ICSID Case No. ARB/95/3, Decision on Liability, 2 September 1998 61, 84, 88–89n145, 91, 92
Gold Reserve v Venezuela, ICSID Case No. ARB(AF)/09/1, Award, 22 September 2014
156–57, 163
Grand River Enterprises v USA, UNCITRAL, Award, 12 January 2011 80 Greentech Energy Systems et al v Italy, SCC Case No. V 2015/095, Final Award, 23 December 2018 148n201, 151–53
Guimont v Clarke 121 Wn. 2d 586 (1993) 854 P.2d 1
95–96n168
ImpregiloSpA v The Republic of Argentina, ICSID Case No ARB/07/17, Award, 21 June 2011 30, 149nn208–209
Inmaris Perestroika Sailing Maritime Services GmbH and others v Ukraine, ICSID Case No ARB/08/8, Award, 1 March 2012 88n141
Ioan Micula, Viorel Micula, S European Food SA, S Starmill SRL and SC Multipack SRL v Romania, ICSID Case No ARB/05/20, Final Award, 11 December 2013
.30n111, 32n117, 140, 148n201, 149
Joseph Charles Lemire v Ukraine, ICSID Case No ARB/06/18, Decision on Jurisdiction and Liability, 10 January 2010 31n112, 32n117, 148n201, 150–51n213
Les Laboratoires Servier, SAA, Biofarma, SAS, Arts et Techniques du Progres SAS v Republic of Poland, UNCITRAL, Award, 14 February 2012
70–71n77
LFH Neer and Pauline Neer (USA) v United Mexican States, United Nations, Reports of International Arbitral Awards, 1926, IV 108–9, 132, 138
LG&E Energy Corporation, LG&E Capital Corporation and LG&E International, Inc v Argentine Republic, ICSID Case No ARB/02/1, Decision on Liability, 3 October 2006 .
21nn72–74, 22–23, 133n149, 134—–35, 137–38, 140, 159n253
Malicorp v Egypt, ICSID Case No. ARB/08/18, Award, 7 February 2011 156–57nn244–245
Mamidoil Jetoil Greek Petroleum Products Societé SA v Republic of Albania, ICSID Case No ARB/11/24, Award, 30 March 2015 .
40n141, 92–93
Marfin Investment Group v The Republic of Cyprus, ICSID Case No ARB/13/27, Award, 26 July 2018 154n232
Marvin Roy Feldman Karpa v United Mexican States, ICSID Case No ARB(AF)/99/1, Award, 16 December 2002 65, 84
Merrill & Ring Forestry LP v Canada, ICSID Case No UNCT/07/1, Award, 31 March 2010. .
80n116, 138, 166
Metalclad Corporation v The United Mexican States, ICSID Case No ARB(AF)/97/1, Award, 30 August 2000 20n69, 61, 63-–65, 74, 84, 90, 91
Methanex v United States, UNCITRAL, Final Award, 3 August 2005, part IV, chapter D 94–95, 153–55, 160
Mezzanine v Hungary, ICSID Case No. ARB/12/3, Award, 17 April 2015 . . . . . . . 95–96n167
Middle East Cement Shipping and Handling Co SA v Arab Republic of Egypt, ICSID Case No ARB/99/6, Award, 12 April 2002 .
69, 84–85, 91–92
MTD Equity Sdn Bhd and MTD Chile SA v Republic of Chile, ICSID Case No ARB/01/7, Decision on Annulment, 21 March 2007 25–26, 146–47n197
Murr v Wisconsin, 137 SCt 1933, 2017 78n107
National Grid plc v Argentina, UNCITRAL, Award, 3 November 2008 . . . . . 23n64, 133n127, 137 Noble Ventures, Inc v Romania, ICSID Case No ARB/01/11, Award, 12 October 2005 121–23, 135, 136 Novenergia II—Energy & Environment (SCA) (Grand Duchy of Luxembourg), SICAR v The Kingdom of Spain, SCC Case No 2015/063, Final Award, 15 February 2018 .
70–71n77
Nykomb v Latvia, SCC, Award, 16 December 2003 86n134
Occidental Exploration and Production Company v The Republic of Ecuador (Occidental v Ecuador I), LCIA Case No. UN3467, Final Award, 1 July 2004 6–7, 19, 20, 22–23n81, 25n91, 34, 141, 164
Olin Holdings Limited v Libya, ICC Case No 20355/MCP . . .
Oxus Gold v Republic of Uzbekistan, UNCITRAL, 17 December 2015. .
133n127, 133n131
33n118, 126n95
Pantechniki SA Contractors and Engineers (Greece) v The Republic of Albania, ICSID Case No ARB/07/21, Award, 30 July 2009 123–24
Parkerings-Compagniet AS v Republic of Lithuania, ICSID Case No ARB/05/8, Award, 11 September 2007 .
26–28, 28n103, 29n108, 30, 122
Patrick Mitchell v The Democratic Republic of Congo, ICSID Case No ARB/99/7, Decision on the Application for Annulment of the Award, 1 November 2006 70
Paushok v Mongolia, UNCITRAL, Award on Jurisdiction and Liability, 28 April 2011 28n102, 29n108
Perenco Ecuador Limited v The Republic of Ecuador and Empresa Estatal Petróleos del Ecuador (Petroecuador), ICSID Case No ARB/08/6, Decision on Remaining Issues of Jurisdiction and Liability, 12 September 2014
31, 32n117, 147n199
Philip Morris Brands Sàrl, Philip Morris Products SA and Abal Hermanos SA v Oriental Republic of Uruguay, ICSID Case No ARB/10/7, Award, 8 July 2016 34, 35, 37–38, 39, 41, 73, 78–79, 80, 88n140, 141, 142, 159–61
PL Holdings Sàrl v Republic of Poland, SCC Case No V 2014/163, Partial Award, 28 June 2017
Popeand Talbot v Canada, UNCITRAL, Interim Award, 28 June 2000
.161–62
61, 86n134
PSEG Global, Inc, The North American Coal Corporation and Konya Ingin Electrik Üretimve Ticaret Limited Sirketi v Republic of Turkey, ICSID Case No ARB/02/5, Award, 19 January 2007
21–22, 23n86
Quiborax SA, Non Metallic Minerals SA and Allan Fosk Kaplún v Plurinational State of Bolivia, ICSID Case No ARB/06/2, Award, 16 September 2015 71–72, 76, 133n127, 156
Railroad Development Corporation v Republic of Guatemala, ICSID Case No ARB/07/23, Award, 29 June 2012
Renta 4 v Russia, SCC No. 24/2007, Award, 20 July 2012
.131–32
.72n83
The Rompetrol Group NV v Romania, ICSID Case No ARB/06/3, Award, 6 May 2013 127n102
Ronald S Lauder v Czech Republic, UNCITRAL, Award, 3 September 2001 68–69, 85-–86, 134n133, 135–36, 140, 141, 141n174
RosInvest Co UK Lt v The Russian Federation, SCC Case No V079/2005, Final Award, 12 September 2010
76n101
RREEF Infrastructure (GP) Limited and RREEF Pan-European Infrastructure Two Lux Sàrl v Kingdom of Spain, ICSID Case No ARB/13/30, Decision on Responsibility and Principles of Quantum, 30 November 2018 26, 31–32n113
Saar Papier Vertriebs GmbH v Poland, UNCITRAL, Award, 16 October 1995 . . . . . . . . 61, 73
Saluka Investments BV v The Czech Republic, UNCITRAL, Partial Award, 17 March 2006 7, 25, 28–29, 57n19, 68n67, 129, 131–32n120, 147–48, 150, 153–54, 155–56
SD Myers v Canada, UNCITRAL, Partial Award, 13 November 2000 65–66, 68–69, 85
Sempra Energy International v The Argentine Republic, ICSID Case No ARB/02/16, Award, 28 September 2007 . . . . . . . . . . . . . . . . . . . . 12n38, 21–22, 23n86, 25n91, 74–75, 88–89n145, 90, 128–29n109
Señor Tza Yap Shum v The Republic of Peru, ICSID Case No ARB/07/6, Award, 7 July 2011 70–71n77
SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan, ICSID Case No ARB/01/13, Decision on Jurisdiction, 6 August 2003 . . . . . . .
. . . . . 7–8n12, 11n31
SGS Société Générale de Surveillance SA v Republic of the Philippines, ICSID Case No ARB/02/6, Decision on Jurisdiction, 29 January 2004 . . . . . . . . . . . . . 7–8n12, 11n32
Siemens AG v The Argentine Republic, ICSID Case No ARB/02/8, Award, 6 February 2007 131n118, 135–36n147
Spyridon Roussalis v Romania, ICSID Case No. ARB/06/1, Award, 7 December 2011 ............87n139
Suez, Sociedad General de Aguas de Barcelona SA and Inter Aguas Servicios Integrales del Agua SA v The Argentine Republic, ICSID Case No ARB/03/17, Decision on Liability, 30 July 2010 146n196
Técnicas Medioambientales Tecmed, SA v The United Mexican States, ICSID Case No ARB(AF)/00/2, Award, 29 May 2003
20, 22–23, 25–26, 34, 65, 67–68, 70–71, 73, 85, 90n145, 91, 92, 122–23, 128–29, 153–54, 157, 159
Teinver SA, Transportes de Cercanías SA and Autobuses Urbanos del Sur SA v The Argentine Republic (Teinver v Argentina), ICSID Case No ARB/09/1 133n128, 138, 146n196
Telenor Mobile Communications AS v Republic of Hungary, ICSID Case No. ARB/04/15, Award, 13 September 2006
80n116, 87n137
Tippets, Abbet, McCarthy, Stratton v TAMS–AFFA Consulting Engineers of Iran, Iran–US Claims Tribunal, 22 June 1984, 6 Iran–US CTR 219
95–96
Total SA v The Argentine Republic, ICSID Case No ARB/04/01, Decision on Liability, 27 December 2010 27, 28, 29, 88–89
Tulip Real Estate and Development Netherlands BV v Republic of Turkey, ICSID Case No ARB/11/28, Award, 10 March 2014
126n96, 126–27, 156–57n245
UAB E energija (Lithuania) v Republic of Latvia, ICSID Case No ARB/12/33, Award, 22 December 2017 133n126, 141n174
Valeri Belokon v Kyrgyzstan, UNCITRAL, Award, 24 October 2014
71, 75 Venezuela Holdings BV, Mobil Cerro Negro Holding Limited et al v Venezuela, ICSID Case No. ARB/07/27, Award, 9 October 2014.
88
Vigotop Limited v Hungary, ICSID Case No ARB/11/22, Award, 1 October 2014 163
Vivendi v Argentina, ICSID Case No ARB/97/3, Award, 20 August 2007 69–70n73, 74–75, 131–32n120
Waguih Elie George Siag and Clorinda Vecchi v The Arab Republic of Egypt, ICSID Case No ARB/05/15, Award, 1 June 2009
125n94, 126 Waste Management, Inc v Mexico II, ICSID Case No ARB(AF)/00/3, Award, 25 June 2003 69–70, 74, 128–30, 131–32, 135, 167 Wena Hotels Limited v Arab Republic of Egypt, ICSID Case No ARB/98/4, Award, 8 December 2000.
Windstream Energy LLC v Government of Canada, PCA Case No 2013-22, Award, 27 September 2016
123
80n116
Introduction
This book’s principal aim is to provide a conceptual and legal analysis of the distinctive guarantees that emerge from international treaties signed since 1959 for the promotion and protection of foreign investment.
While investment treaties include a variety of different provisions (mainly ‘standards’),1 the focus of this study is principally on those provisions that have caused the greatest controversy, particularly following the exponential increase in claims brought by foreign investors before ad hoc arbitral tribunals alleging the violation of such provisions by the host State.2 These provisions include the requirements to accord foreign investments ‘fair and equitable treatment’ (FET) and ‘full protection and security’ (FPS), the requirement to compensate for ‘direct and indirect expropriation’, the prohibition of ‘arbitrary, unreasonable and discriminatory’ measures and the requirement to observe any commitments undertaken by the host State vis-à-vis the foreign investment.3
A basic assumption of this study is that, while the international investment law system is a complex system (based on more than 3000 treaties and lacking a formal multilateral institutional structure), investment treaties on the whole (and at least up until the early 2000s) are rather similar in terms of ‘objective’ and ‘content’.
1 Federico Ortino, ‘Refining the Content and Role of Investment “Rules” and “Standards”: A New Approach to International Investment Treaty Making’ (2013) 28 ICSID Rev 152.
2 As of the time of writing, the total number of known investor–State arbitrations based on investment treaties has reached 942, two-thirds of which have been concluded and the remaining one are still pending. See United Nations Conference on Trade and Development (UNCTAD) database https:// investmentpolicy.unctad.org/investment-dispute-settlement accessed 20 May 2019.
3 Based on data collected by UNCTAD, it appears that the investment treaty provisions that have been relied the most by investors include: FET (in 83% of the 553 arbitrations), indirect expropriation (71%), FPS (42%), arbitrary, unreasonable or discriminatory measures (33%), observance of obligations (23%), national treatment (23%) and most-favoured-nation (MFN) treatment (18%). See UNCTAD database, ‘Breaches of IIAs Provisions Alleged and Fund’ https://investmentpolicy.unctad. org/investment-dispute-settlement accessed 20 May 2019. Scholarly publications in the past ten years have focused on several of these treaty provisions: Ioana Tudor, The Fair and Equitable Treatment Standard in the International Law of Foreign Investment (OUP 2008); Roland Kläger, Fair and Equitable Treatment’ in International Investment Law (CUP 2011); Alexandra Diehl, The Core Standard of International Investment Protection: Fair and Equitable Treatment (Kluwer Law International 2012); Martins Paparinskis, The International Minimum Standard and Fair and Equitable Treatment (OUP 2013); Jonathan Bonnitcha, Substantive Protection under Investment Treaties: A Legal and Economic Analysis (CUP 2014); Sebastián López Escarcena, Indirect Expropriation in International Law (Edward Elgar 2014); Caroline Henckels, Proportionality and Deference in Investor–State Arbitration (CUP 2015); Gebhard Buecheler, Proportionality in Investor–State Arbitration (OUP 2015); and Valentina Vadi, Proportionality, Reasonableness and Standards of Review in International Investment Law and Arbitration (Edward Elgar 2018).
The Origin and Evolution of Investment Treaty Standards. Federico Ortino, Oxford University Press (2019). © Federico Ortino.
DOI: 10.1093/oso/9780198842637.001.0001
In terms of objective, while the ‘object’ (or immediate aim) of investment treaties is to afford protection to foreign investments operating in a host State, the ‘purpose’ (or long-term aim) of such treaties4 is to encourage capital flows and in turn contribute to the prosperity and development of the contracting parties.
In terms of content, despite the various differences across the more than 3000 investment treaties, there clearly exists a core of investment protection guarantees that are found in the great majority of such treaties, as shown in the mapping exercise carried out by UNCTAD (of more than 2500 investment treaties). In quantitative terms, this core includes provisions on transfer of funds (found in almost 100% of the treaties mapped by UNCTAD), MFN treatment (99%), investor–State dispute settlement (ISDS) (98%), expropriation (98%), subrogation (96%), fair and equitable treatment (FET) (95%), and national treatment (NT) (87%).5 In qualitative terms, these provisions are, on the whole, rather homogeneous, particularly those on FET and expropriation (certainly at least until the early 2000s). Furthermore, the existence of broadly worded MFN treatment clauses in most investment treaties has contributed to the multilateralization of international investment law.6
The present analysis focuses on both the ‘origin’ and ‘evolution’ of investment treaty standards. In terms of origin, the work considers the broader context at the time when the first modern investment treaty (the 1959 Treaty between the Federal Republic of Germany and Pakistan for the Promotion and Protection of Investments) was concluded. In terms of evolution, the work examines (a) the many decisions of ad hoc arbitral tribunals that, in the past twenty years, have been called upon to apply these treaties in order to resolve the several hundred investor–State disputes, as well as (b) some of the recent investment treaties that in the past ten to fifteen years have attempted to clarify and/or reform the content and scope of investment protection guarantees.
This study argues that the key investment protection provisions in investment treaties (and thus much of the related controversy) revolve around three distinct concepts: legal stability, investment’s value and reasonableness. Accordingly, the main three chapters of the present book attempt to explain the origin and evolution of these key provisions through these three distinct concepts.
Chapter I investigates the extent to which investment treaties include a guarantee of ‘legal stability in the strict sense’. A guarantee of legal stability in the strict sense may require (a) the host State to observe its contractual undertakings vis-à-vis the
4 Isabelle Buffard and Karl Zemanek, ‘The “Object and Purpose” of a Treaty: An Enigma?’ (1998) 3 ARIEL 311, 326. See Gus Van Harten, Investment Treaty Arbitration and Public Law (OUP 2007) 140.
5 Other provisions that feature in many investment treaties include provisions on full FPS (84%), non-impairment through unreasonable, arbitrary or discriminatory measures (68%) and observance of obligations (so-called umbrella clauses) (42%). See UNCTAD database ‘Mapping of IIA Content’ https://investmentpolicy.unctad.org/international-investment-agreements accessed 20 May 2019.
6 Stephan Schill, The Multilateralization of International Investment Law (CUP 2009).
foreign investment (contractual stability); or (b) the host State to avoid subjecting the foreign investment to (adverse) changes in the applicable regulatory framework (regulatory stability). In the presence of any such strict stability guarantee, a breach of the investment treaty would be established if the investor was successful in demonstrating that the host State had either violated its contractual obligations or introduced a change in the underlying regulatory framework negatively affecting the investment. Crucially, justifications advanced by the host State based on the need to act in the public interest are irrelevant for the purposes of establishing host States’ responsibility under a strict stability guarantee. This chapter addresses in particular the following three investment treaty provisions: the umbrella clause, the stabilization clause and the FET clause.
Chapter II investigates the extent to which investment treaties require compensation when a host State’s measure deprives the investor of the value of its investment. In the presence of a guarantee based on the adverse impact on the (value of the) investment, a breach of the investment treaty is established if the investor is successful in demonstrating that a measure of the host State has caused such deprivation. As in the case of the guarantee of stability in the strict sense, crucially, justifications advanced by the host State based on the need to act in the public interest are also irrelevant for purposes of establishing the host State’s responsibility pursuant to a guarantee to protect the value of the investment. This chapter focuses principally on investment treaties’ provision on (indirect) expropriation.
Chapter III investigates the extent to which investment treaties include a ‘reasonableness’ guarantee aimed at requiring fairness and rationality in the conduct of the host State affecting foreign investment. A reasonableness guarantee may include certain fairness requirements that go to the substance of an act or omission of the host State (substantive reasonableness) as well as to the process leading up to the adoption of the relevant conduct under review (procedural reasonableness).
While there may be several conditions, a breach of a reasonableness-based provision in an investment treaty will crucially require the investor to demonstrate lack of fairness, justification or rationality in the substantive or procedural aspects of the conduct of the host State under review. Focusing on substantive reasonableness only, this chapter examines the following investment treaty provisions: FPS, FET, non-impairment through arbitrary or unreasonable measures and expropriation.
The book’s underlying argument is two-pronged. First, from the very beginning, the protection afforded to foreign investments by modern investment treaties has been exceptionally broad (and, as such, restrictive of the host State’s ability to regulate). Such protection included guarantees vis-a-vis the host State’s (a) breach of investment contracts and regulatory change; (b) substantial deprivation of the value of the foreign investment; and (c) unreasonable conduct.
Second, while a growing number of investment treaty tribunals as well as new investment treaties have reined in such broad protections, the evolution of key investment treaty provisions has been (and in many ways still is) marred by
inconsistency and uncertainty. In particular, the same investment treaty provision has been interpreted by arbitral tribunals as providing different kinds of guarantee. For example, some tribunals have interpreted the provisions on indirect expropriation as a guarantee vis-à-vis the host State’s substantial deprivation of the value of the investment and other tribunals as a guarantee vis-à-vis the host State’s unreasonable conduct. Similarly, some tribunals have interpreted the FET provision as a guarantee of legal stability in the strict sense and other tribunals as a guarantee vis-à-vis the host State’s unreasonable conduct, although it may at times be difficult to decipher what a specific tribunal’s position actually is.
Furthermore, while there appears to be a growing preference in arbitral practice (as well as treaty practice) for reasonableness-based guarantees, there is still no clarity with regard to the specific reasonableness test that should be employed in order to review the lawfulness of the host State conduct under an investment treaty. For example, whether for purposes of assessing the existence of an indirect expropriation or for purposes of determining a violation of FET, some investment tribunals have employed a (more deferential) means–ends rationality test, while other tribunals have employed a (more intrusive) proportionality balancing test.
Guarantees of Legal Stability in the Strict Sense
Respect of Host State’s Undertakings with Regard to Foreign Investments
B. Regulatory Stability in the Strict Sense and (the Little Known Case of) Investment Treaties’ Stabilization
C. Strict Stability through the Fair and Equitable Treatment (FET) Standard 19
1. Linking FET and legal stability in the strict sense: the early attempt 20
2. The majority of investment tribunals have rejected the link between FET and stability in the strict sense 25
3. FET, regulatory change and recent arbitral practice: still in muddy waters 33
(a) Some tribunals’ failure to take a clear position on whether or not FET includes a strict stability obligation
(b) Some tribunals’ failure to clearly address the precise ambit of, and relationship between, the obligation to provide a stable legal framework and the obligation to protect the investor’s legitimate expectations
(c) Some tribunals’ failure to clarify the kind of regulatory change that qualifies for a breach of the FET
Introduction
Stability, whether legal, political, economic, financial or monetary, seems to represent one of the core values of today’s society.1 Unsurprisingly, stability in all the above-mentioned meanings also represents one of the key desiderata of economic operators, particularly when they invest in a foreign market. For example, stability with regard to the host State’s political environment (political stability) or with regard to the rate of inflation in the foreign market (economic stability) will ensure predictability and reduce the risks that may ultimately undermine the viability of the investor’s business venture. With regard to legal stability, foreign investors’ focus is on the stability of both the underlying investment contract (contractual
1 Political stability is one of the six Worldwide Governance Indicators (WGI) according to the World Bank Group (WBG) (https://info.worldbank.org/governance/wgi/#home); ensuring monetary and financial stability is the main goal of the International Monetary Fund (IMF) (https://www.imf.org/external/about/howwedo.htm). For the argument that trade agreements address uncertainty, see Nuno Limão and Giovanni Maggi, ‘Uncertainty and Trade Agreements’ (2015) 7 AEJ: Microeconomics 1.
The Origin and Evolution of Investment Treaty Standards. Federico Ortino, Oxford University Press (2019). © Federico Ortino.
DOI: 10.1093/oso/9780198842637.001.0002
stability) and the applicable regulatory framework in the host country (regulatory stability). A recent World Bank Group survey confirms that, among the so-called political risks facing foreign investors, ‘breach of contract’ and ‘adverse regulatory change’ by the host State represent the most pressing ones.2
The concept of stability may, however, be somewhat controversial. Stability as a general value, or even as an aspiration, is more likely to be a ‘relative’ (or soft) rather than an ‘absolute’ (strict) concept. According to its dictionary definition, stability in fact highlights the ‘state of something that is not easily changed’ rather than something that cannot (or should not) be modified. In other words, stability is not understood as a total standstill but more as gradual movement. This definition is also reflected in the notion of stability as one of the formal elements of the rule of law, which is often seen as implying a system of norms that is ‘sufficiently resistant to change’3 or as requiring that the ‘demands [that] laws make on citizens should remain relatively constant’.4 The reference to stability at times expressly included in the preamble of international investment treaties should be understood in this softer sense.5
When it comes to investment treaty obligations, there can, however, be two alternative understandings of the concept of legal stability, which highlight two conceptually distinct obligations. According to one view, legal stability may be understood to include an obligation of legal stability in the strict sense (akin to socalled ‘freezing clauses’ in investment contracts). According to this understanding, the mere failure to preserve the more advantageous regulatory framework applicable to the investment will lead to a violation of the investment treaty (regulatory stability in the strict sense). Similarly, failure to observe a contractual undertaking vis-à-vis the foreign investment will lead to a treaty violation (contractual stability in the strict sense).
According to a second view, the obligation of legal stability may be understood in a softer sense, according to which violation of the investment treaty can only be found if the non-observance of the investment contract or the change in the regulatory framework (detrimental to the foreign investment) cannot be justified by the legitimate exercise of public policy powers.
Early investment tribunals were divided on the question of whether or not investment treaties provided strict legal stability obligations. For example, investment tribunals interpreting the fair and equitable treatment provision in order to address adverse regulatory change contain statements supporting either the ‘strict’ or ‘soft’ understanding of a stability obligation. One of the paradigmatic examples of a strict obligation of regulatory stability under the fair and equitable treatment
2 Multilateral Investment Guarantee Agency (MIGA)–Economist Intelligence Unit (EIU) Political Risk Survey 2013.
3 Jeremy Waldron, ‘The Rule of Law and the Importance of Procedure’ (2011) 50 Nomos 3.
4 Colleen Murphy, ‘Lon Fuller and the Moral Value of the Rule of Law’ (2005) 24 L Phil 239, 241.
5 See eg the 1991 United States–Argentina bilateral investment treaty (BIT).
(FET) standard is the 2004 decision in Occidental v Ecuador I. Having stated that ‘[t]he stability of the legal and business framework is [ . . ] an essential element of fair and equitable treatment’,6 the Occidental v Ecuador I tribunal found a breach of the FET provision, as the tax framework under which the investment had been made and had been operating ‘has been changed in an important manner by the actions adopted by the [Ecuadorian tax authorities]’.7 The tribunal also noted that a determination of whether there is a breach of the FET standard is premised on whether or not the host State has ‘alter[ed] the legal and business environment in which the investment has been made’.8
On the other hand, one example adopting a softer, more deferential, interpretation of regulatory stability as part of FET is the 2006 decision in Saluka v Czech Republic 9 In the view of the Saluka tribunal, in order to be protected, the investor’s expectations ‘must rise to the level of legitimacy and reasonableness in light of the circumstances’10 and a determination of a breach of the FET standard ‘requires a weighing of the Claimant’s legitimate and reasonable expectations on the one hand and the Respondent’s legitimate regulatory interests on the other’.11
Similarly, early investment tribunals were divided on the protection provided by the so-called ‘umbrella clause’. In particular, tribunals disagreed on whether or not ‘a simple breach of contract, or of municipal statute or regulation, by itself, would suffice to constitute a treaty violation on the part of a Contracting Party and engage the international responsibility of the Party’.12
It is clear that from the perspective of the foreign investor, a strict stability obligation would afford a very high level of protection vis-à-vis the risk of contractual or regulatory change (as the investor will be compensated for the existence of the contract breach or adverse regulatory change). On the other hand, a soft stability obligation would afford a greater degree of discretion to the host State as, at a minimum, the existence of a treaty violation (and the duty to compensate the investor)
6 The Occidental v Ecuador I tribunal relied on the clear statement found in the preamble of the underlying treaty (the 1993 Ecuador–United States BIT) that FET ‘is desirable in order to maintain a stable framework for investment and maximum effective utilization of economic resources’. Occidental Exploration and Production Company v The Republic of Ecuador (Occidental v Ecuador I), Final Award, 1 July 2004, para 183.
7 ibid, paras 183–84.
8 ibid, para 191. See Rudolf Dolzer, ‘Fair and Equitable Treatment: Today ‘s Contours’ (2013) 12 Santa Clara J Int’l L 7, 22. See also Rudolf Dolzer and Christoph Schreuer, Principles of International Investment Law (2nd edn, OUP 2012) 145.
9 Saluka Investments BV v The Czech Republic, UNCITRAL, Partial Award, 17 March 2006.
10 ibid, para 304.
11 ibid, para 306.
12 SGS Société Générale de Surveillance SA v Islamic Republic of Pakistan, ICSID Case No ARB/01/ 13, Decision on Jurisdiction, 6 August 2003, para 168. But see SGS Société Générale de Surveillance SA v Republic of the Philippines, ICSID Case No ARB/02/6, Decision on Jurisdiction, 29 January 2004, para 128: ‘To summarize the Tribunal’s conclusions on this point, Article X(2) makes it a breach of the BIT for the host State to fail to observe binding commitments, including contractual commitments, which it has assumed with regard to specific investments.’
would depend in relevant part on an assessment of the public policy justification underlying the contractual breach or regulatory change at issue.
The aim of this chapter is to inquire whether—and if so, the extent to which— investment treaties contain guarantees of strict legal stability. More specifically, this chapter asks whether investment treaties contain provisions (a) guaranteeing that contractual undertakings vis-à-vis the foreign investment are respected (contractual stability in the strict sense); and/or (b) ensuring that adverse regulatory changes will not be applied to foreign investments (regulatory stability in the strict sense).
Three main arguments are advanced in this chapter. First, legal stability in the strict sense does represent one of the guarantees in international investment treaties, provided specifically through investment treaties’ umbrella clauses (section A) and stabilization clauses (section B). Second, despite an attempt by a few early tribunals to read the FET provision as imposing a strict stability obligation on host States,13 most investment treaty tribunals faced with the task of interpreting FET, seem to have recognized the need to balance the protection visà-vis adverse contractual and regulatory changes and host States’ right to regulate in the public interest. However, one can still find recent arbitral decisions where the role of legal stability within the FET standard remains at best ambiguous, and which thus fail to assuage the fears that the FET standard may indeed function as imposing an obligation of stability in the strict sense (section C). Third, investment treaties signed in the past ten years clearly show a retreat of provisions guaranteeing legal stability in the strict sense (section D).
A. Respect of Host State’s Undertakings with Regard to Foreign Investments and the Umbrella Clause
While contracts are principally used to define parties’ respective rights and obligations, they are drafted in order to bring a level of stability and thus predictability in the parties’ contractual relationship. Subject to the usual clauses addressing exceptional events (such as force majeure, or changed circumstances), contracts are legally binding on the parties, they are enforceable before courts and tribunals and remedies are available in case of contractual breaches.
Investment contracts, negotiated by the investor and the host State, are no different: ‘[i]n principle, it will be the intention of both sides to create a legal framework that will last from the beginning to the end of their common project’.14
13 Some early tribunals have also interpreted the ‘full protection and security’ as requiring a strict stability obligation. See eg CME Czech Republic BV v Czech Republic, UNCITRAL, Partial Award, 13 September 2001, para 613.
14 Dolzer and Schreuer, Principles of International Investment Law (n 8) 82.
However, in the international investment context, contractual mechanisms face particular challenges in providing a high level of stability, as the State party to the contract has the ability to affect unilaterally the terms of the investment contract as well as the likely law applicable to such contract (ie the law of the host State).15
International investment treaties have for a long time provided for a clause specifically designed to promote and ensure stability in the strict sense with regard to the contractual relations between foreign investors and host States. The so-called ‘umbrella clause’ (or ‘observance of undertakings clause’) requires the host State to observe any obligation it may have entered into with regard to foreign investments.16 While language varies across the various investment treaties, roughly 40–50% of existing treaties contain an umbrella clause.17
The last sentence of Article 7 of the 1959 Germany and Pakistan BIT, the first modern investment treaty, reads as follows: ‘Either Party shall observe any other obligation it may have entered into with regard to investments by nationals or companies of the other Party.’18 While some variations exist, the text of most umbrella clauses in modern investment treaties look similar to the one contained in the very first modern BIT.19
As evidenced by Dr Sinclair, the origin of umbrella clauses is to be found in a movement during the 1950s in Western Europe pressing for the sanctity of longterm investment contracts (particularly, concessions)20 and epitomized in Article II
15 ibid, 82–6 (pointing to stabilization clauses as a mechanism used in state contracts to preserve the sanctity and stability of the contract; as well as to renegotiation clauses focusing on guaranteeing the economic equilibrium of the contract, rather than its legal stability). See Peter Cameron, International Energy Investment Law: The Pursuit of Stability (OUP 2010) 27 noting the in-built vulnerability of the contractual relationship following from the fact that a state has the power under its municipal law to alter the terms of a contract, and indeed to terminate it entirely.
16 See generally Stephan Schill, ‘Enabling Private Ordering—Function, Scope and Effect of Umbrella Clauses in Internationa Investment Treaties’ (2009) 18 Mich J Int’l L 1; Thomas Wälde, ‘The “Umbrella Clause” in Investment Arbitration: A Comment on Original Intentions and Recent Cases’ (2005) 6 JWIT 183.
17 Katia Yannaca-Small, ‘Interpretation of the Umbrella Clause in Investment Agreements’ (2006) OECD Working Papers on International Investment, 5–6:
It is estimated that, of the 2500 or more BITs currently in existence approximately forty per cent contain an umbrella clause. Treaty practice of States does not point to a uniform approach to the treatment of these clauses. While Switzerland, the Netherlands, the United Kingdom and Germany, often include umbrella clauses in their BITs, France, Australia and Japan include umbrella clauses in only a minority of their BITs. Of 35 French BITs examined, only 4 contain an umbrella clause while only 5 out of 20 Australian BITs and 2 of the 9 Japanese BITs examined. Canada is the only OECD member state examined in this study which has never included an umbrella clause in its BITs. [ . . . ] 34 of the 41 US BITs examined, based on the former Model, contained an umbrella clause [ . . ] [footnotes omitted].
18 See Article 7 of the 1959 Germany–Pakistan BIT.
19 As of 20 May 2019, out of 2571 investment treaties mapped by the United Nations Conference on Trade and Development (UNCTAD), 1107 contain an umbrella clause. See UNCTAD database, ‘IIA Mapping Project’ http://investmentpolicyhub.unctad.org accessed 20 May 2019.
20 Anthony Sinclair, ‘The Origin of the Umbrella Clause in the International Law of Investment Protection’ (2004) 20 Arb Int’l 411, 423–4.
