International Investment law

Module 1: The history of International Investment Law

Chp 1: the Genesis of International Investment Law
Chp 2: the Development of International Investment Law
Chp 3: the Current Features of International Investment Law

The Genesis of International Investment Law

Historical Context: Expansionist ambitions of European States

- In the 18th century, Movement of Europeanism lead to movement of europeans all across the
world.
How should they be treated abroad? they are important for all Foreigners in the territory of
states. What were the features and content? What arguments were put forward in favour or
against?

Section 1: Substantive protection

Section 2: Procedural dimension

Context:
- No issue with regard to the protection and treatment to their nationals in other developed
States
- Developed states were concerned with the level of protection and treatment granted to their
nationals in other States LDC (eg south america). Law did not give sufficient protection to
other nationals.
- Develop states argued that all states must treate foreigners in accordance with the min
standardard of treatment.
- they argued that it was a legal requirement under international law
- If treatment was below minimum, Aliens could still avail this under internaitonal law

Controversial: Denied by Carlos Carvo: rejected the min standard, favoured national treatment
Developed states could not insist to treat Foreign investors more favourably than own
nationals

Disagreements Between Nationalisations and Expropriations could be carried out:

- Developed states require prompt, adequate and effective compensation to foreign nationals
(Expressed by Cordell Hull, Secretary of State US )

Status under International law was Initially open to debate. But Overtime, they became
Customary international law

1
1. Min Standard under International law: 1926 Neer Decision (US and Mexico Claims
Commission)

"The treatment of an alien, in order to constitute an international delinquency, should amount

to an outrage, to bad faith, to wilful neglect of duty, or to an insuffinciency of Governmental
action so far short of international standards that every reasonable and impartial man would
readily recognize its insufficiency"

2. State Contracts: Foreign Private Companies to protect their interests abroad

eg. Applicable Law clauses due to contract. remove Contract from domestic law to specific
operations.

Eg Application of another law (Lex Mercatoria) instead of domestic law

or "Freezing" the domestic law of host states at the time of the conclusion of the contract

It prevented the host state from changing domestic law to their interests regardless whether it
is arbitrary or not. (State Contract) Eg for oil concessions

Concern of Developed States:

- They were also concerned with Enforcement of nationals rights and settlement of disputes
between nationals and Host States.

Due to Lack of impartiality of Domestic Tribunals in host states. Deciding against Foreigners in
favour of State
- Solution: Internationalization of Dispute Settlement between foreign nationals and host states

Use of Force Under IL:

When the threat or use of force was legal under IL:
- Developed states initially didnt hesitate to use force to protect their nationals abroad
("Gunboat Diplomacy")
- Was seen in the military intervention against Venezuela (1902,1903)
- Intiated by Germany and UK, to recover contractual debts

Now its prohibited under International law

- States are required to turn to methods of dispute settlement

Diplomatic Protection:
- the State of Nationality endorses the claim of its nationals against the Host State

2
- Elevates the Dispute to inter-state level ( Inter- State Problem)

Drawbacks of Diplomatic Protection:

1. State of Nationality has no obligation to exercise its diplomatic protection

Political interests can play an interest

2. Any Monetary compensation is paid directly to the State of Nationality, which has no
obligation to transfer this to the national
This is problematic for people in trade and investment

Dispute Settlement provisions

therefore, Foreign Companies are begining to include dispute settlements provisions in their
contracts with States
- Any disputes from the interpretation of contracts to be referred to Arbitration
- Contracts were the first types of contracts to refer to Arbitration.

The Development of International investment law

- History context, issues
- Strategies of developed and developing states

Decolonization and independence

- the end of WWII resulting in state gaining politcal Sovereignty and economic soverignty over
natural resources. ( UNGA Resolution 1803 on permanent Sovereignty over natural resources,
adopted by UN General Assembly UNGA )

- Claims of "Developing States" : Adoption of UNGA Resolutions 3201, 3202, 3281

Establishing a New International Order and Charter of the economic rights and duties of States

Charter of economic rights and duties of states

- Charter to treat Foreigners according to domestic law
- Compensation of expropriations according to domestic law and regulations

Developing states promote rules Contrary to Existing Customary International Law (CIL)
- UNGA resolutions are not binding but have an impact on CIL rules
What were the impact on CIL?

There was no creation of new CIL Rules: Due to No Opinio Juris

- due to strong opposition of "Developed" States

3
- The resolutions were considered to have Dismantled existing CIL rules

These 3 Resolutions resulted in

- Legal Uncertainty: Detrimental to foreign investors, and "developing states" in need of FDI
operations to foster economic development .

The systematic "package deal" between european states and Developing states

History of Bilaterial Investment Treaties (BIT):

- the first BIT was concluded between Germany n Pakistan (1959):
US waited till 1982 to conclude its first BIT with Panama

- European BIT were modelled on the 1967 OECD Draft convention of hte protection of foreign
property.

3 Reasons BITs are seen as Unbalanced:

1. Obligations on States and not foreign investors:

- Due to the issues of Foreign investors rights by european states, and obligations of
corporations as advanced by Developing states

Discussed at Multilateral level: Guidelines for multinational enterprises were first issued in 1976

2. Non- Reciprocal in Practice:

- treaties operated exclusively to protect persons from developing states.

3. BIT are hardly negotiated as Developed states use their own BIT model to conclude treaties
with dveloping states

We need to look at the international framework and economic context to see if Investment law
is biased

The Economic Context:

- Investors were reluctant to invest in developing states due to the ambiguity of the regulatory
framework and lack of insurance against political risk

Solution The legal framework:

- Insurances granted in Developed states in exchange for protection
through Conclusion of BITs, or the adoption of Domestic legislation granting protection to
foreign investors.

4
2 objectives of International Investment Law:
- protecting Foreign investors is only subsidiary and instrumental

Instrumental: Protection to attract Foreign Investors

Subsidary: Attraction to foster States economic Development

Seen in Preamble on 1965 Convention of investment disputes between states and nationals of
other states or Report on Executive Directors of the Internaitonal bank for reconstruction and
development

International Centre for Investment and disputes (ICSID)

- was created by this convention.
- It was the first special institution for arbitration to host states and Investors
- Not popular until the 1990s.

Other institutions that play a role besides ICSID :

- ICJ : international Court of Justice (barcelona Traction)
- Iran-United states Claims Tribunal (1981, setup following hostage crisis, use to decide claim
between US citizens and IRan)

Current Feature of international Investment law

- What are the features of treaties and arbitration
- Investment practices

1. Bilateral Investment treaties

- First concluded in 1959, betw Germany and Pakistan.
- Today there are 2386 BITs enforced
- In BITs between developing and developed States, we can see a
De Facto "Bilateralizaiton" of BITs
- BITs have become more reciprocal in practice, Investors from developing states are
increasing investing in developed states.
- Assimilation between "developing" States as Host states and "Developed " States as Home
states is becoming Mute

Due to arbitration proceedings by developing states, BIT Models are redrafted by Developed
states (Eg USA)
- Clarify treaty standards.

2. Rise of Multilateral containing investment provisions:

5
- 303 Notable Free trade agreements
- Started through the 1994 North American Free Trade Agreement (NAFTA)
- 2016: Comprehensive Economic and Trade Agreement by EU and Canada
- A development: due to failure of all past attempts to establish a multilateral investment
agreement (Eg convention of protection of property, Multilateral agreement for investment in
1960s)

Explosion of Investor State Disputes at ICSID

Figures:
(1970s :1 case , 2015/2016: 52,48 cases )

Reason for Surge in Cases :

1. growing number of treaties that contain investment provisions
2. Opportunity for investors to initiate arbitration proceedings against host states directly

Direct initiation of proceedings by investors:

Initially, through State Contracts

- SInce 1988 decision (SPP v Egypt), 1990 (APPl vs Sri Lanka), investors can initiate proceedings:
- basis of dispute settlement in domestic investment code of Host state
- In international investment agreement.

NO NEED for contractor relationships with host states. greater number of investors in dispute
settlement

Chilling Effect of Investor State Arbitration

This has given rise to "Chilling Effect" of investor state arbitration:

- When State have adopted measures harmful to investment, They can threaten states with
arbitration to make states withdraw.
- States refrain from Regulating as a result

Controversial:
- Investor state arbitration is currently the subject of intense criticism;
- Arguments for these reforms have been prompted by States.

Questions

Which Trends do not Charaacterise treaty practice:

-the fall in the number of treaties concluded between ‘developing’ States

6
- the rise in the number of multilateral treaties containing only investment provisions

During the first half of the Twentieth century, what was the claim of ‘developed States’ with
regards to expropriation?:
- States are free to expropriate the property of foreigners, notably on the condition that they
provide them with prompt, adequate and effective compensation correct

Why have bilateral investment treaties traditionally been seen as unbalanced?

- they have been concluded on the basis of the bilateral investment treaty models of ‘developed’
States
- they have contained obligations binding only upon States

To which phenomenon does the ‘de facto bilateralisation’ of bilateral investment treaties in
recent times refer?
- investors from ‘developing’ States have increasingly benefited from the treaty protection as a
result of the fact that they have increasingly begun investing in ‘developed’ States

-------------------------------------------------------------------------------------------------
Module 2: The Standards of treatment
- Main standards of treatment provided in international investment agreements, how they must
treat foreign investments (BIT)
- Fair treatment standard
- The legitimate expectations: the rights of states to regulate
- the standard of full protection and security
- The most favoured nation standard, and the national treatment standard
- Umbrella clauses

The Fair and Equitable Treatment Standard (FET Standard)

- What does "fair and equitable" actually mean?
- What rights does the FET standard gives investors?

The FET Standard in International treaty practice (IIA)

- We have a wide diveristy in the IIA
Structure:

1. FET Standard combined with other standards( ie national treatment nd most favoured
nation)

2. Stand-alone provision

7
2. Stand-alone provision

All the different structures have the terseness of the FET provision:
- Some give to:
International Law
Principals of International Law
Customary IL
Minimum standard of treatment

FET only refer to the terms Fair, Equitable, treatment and nothing else

Art 2 UK- Egypt BIT: "Investments of nationals or companies of either contracting party shall at
all tiems be accorded Fair and Equitable Treatment and shall enjoy full protection and security
in the territory of the other contracting party"

What is fairness and equity?

- This means that Host states have had to define these standards themselves to assess whether
the FET provisions are violated

Thus there has been a De Facto Conferral of interpretative powers to Arbitrators

Clarification of FET standards:

- Some states wanted to clarify the FET standard in newly adopted instruments
Eg 2016: Comprehensive Economic n Trade Agreement (CETA) between EU and Canada

Art 8 (10) para 1:

"Each party shall accrod in its territory to covered investments of the other party and to
investors with respects to their covered investments fair and equitable treatment and full
protection and security in accordance with para 2 through 6"

para 2:
"A party breaches fair and equitable treatment if a measure or a series of measures
constitutes:
a. Denial of justice in criminal, civil or adminstratvie proceedings
b. Fundamental breach of due process, including a fundamental breach of tranparency
in judicial and adminstrative proceedings
C. manifest arbitrariness
D. Targeted discrimination on manifestly wrongful grounds , Such as gender, race or religious
beliefs
8
E. Abusive treatment of investors such as coercion, duress and harassment
F A breach of any further elements of the FET obligations adopted by the Parties
in accordance to para 3 of this article"

- Article 8, verse 4 also specifies that the tribunal may take into account a specific
representaiton given by a Party to an investor.

- The CETA largely codifies mainstream Arbitration practice regarding FET standard

Controversial : Withdrawal of any reference to the FET :

Eg 2017 Mercosur's protocol for Cooperation and Facilitation of Investments

The FET standard in Arbitration practice

- Determinaition by Arbitration tribunals on whether host states had acted fairly and equitably:
Notion of fairness and equity is on Factual Assessment
However, Courts need Legal Categories to analyse facts

Legal Categories: FET content are clarified and delineated FET Sub Standards
- Still debate on the exact content on FET standards and Substandards
- the existence of the Sub Standards is well merited and necessary to guide factual assessment
of whether host states have acted fairly to foreign investors.

4 FET Sub-standards for Arbitration:

1. Host States should provide Transparency and stability, Including Respect of legitamate
expectation

- legitamate expectations is the most controversial as it threaten the states right to regulate

2. They shall respect Due Process, not commiting any denial of justice with respects to foreign
investors.

3. host states shall not act in any Arbitrary or discriminatory manner and Prohibition of
Coercion and Harassment on foreign investors

4. Treatement of Foreign investors guided by Good Faith

The Fair and equitable treatment Standard (Min standard of treatment)

9
-For IIA provisions that do not establish such a link, The min standard of treatment can still be
relevant to the FET standard,
esp in the interpretation process

Art 31, 3C of the 1969 Geneva Convention on law of treaties: "

Any relevant rules of international law which is applicable in the relations between the parties
can be taken into account"

Can the min standard of treatment be defined aas the FET standard as a tool of law?

Controversial: - the nature of the link between the 2 standard and its consequence:

(a) Evolution of the min standard of treatment : The Min stnadard of treatment has involved
and become part of customary law
- The 2 standards can be seen as one and same
- Any reference to the Min standard is purely circular, they share the same normative content
and purpose
- It has strong practical implications: Determines How states attitude to foreign investors will be
assessed.

(b) Definition of MST in Neer still valid

- Despite changes in the circumstances of application

2 Types of threshold Standards

Disagreement in States: Should that of "egregiousness" or "Reasonableness" should be applied

1. Standard of Egregiousness

Egregiousness: Requires the conduct to reach higher threshold before violating FET Standard

Cargil Vs Mexico:
"In reviewing the awards cited and, as importantly, the evidence of custom analyzed in those
proceedings, this Tribunal agrees in part wit the assessment cited above.
The tribunal observes a trend in previous NAFTA award, not so much to make the holding of the
NEER arbitration more exacting, but rather to adapt the principal underlying the holding of the
NEER arbitration to the more complicated and varied economic positions held by foreign
nationals today. Key to this adaptation is that, even as more situations are addresssed, the
required severity of the conduct as held in NEER is maintained.

10
2. Standard of Reasonableness

Reasonableness: Lower standard thus increasing the number of sitations where FET standards
are violated (Broaden Situations)

Merill Vs Canada:
"A requirement that aliens be treated fairly and equtably in relation to business ,
trade and investment is the outcome of this changing reality and as such it has become
suffficiently part of widespread and consistent practice so as to deostrate that it is reflected
today in customary international law as opinio juris. In the end , the name assigned to the
standard does not really matter. What matters is that the standard protects against all such
acts or behaviours that might infringe a sense of fairness, equity and reasonableness.

Consequences:
- Arbitration tribunals are thus split into 2 camps in the interpretation of the FET Standard
- the appraoch will have important practical implications for host states and investors.

"Legitimate Expectations" SubStandard

- Substandard of the FET Standard
- Affects the issue of the right of States to regulate. Highly criticized due to e
"Freezing" Effect on the regulatory powr of host states.

What does treaties and arbitration practices teach us about these features
What type of states meaasures grant legitimate expectations
What are its origins?

The Origins of Legitimate Expectations

- It was traditionally not found in treaty practice.
- Plays a Fundamental role in Arbitration practice

Eg MESA vs Canada:
Consider that the breach of Legitimate expectations by host states does not in itself violate FET
provisions, other tribunals have viewed it as a substandard

Fundamental Role in Arbitration practice

- Tribunals view it as a self standing substandard

Thunderbird vs Mexico:
"One can observe over the last year a significant growth in the role and scope of Legitimate

11
expectation principal, from an earlier function as a subsidiary interpretative principal to
reinforce a particular interpretative appraoch chosen, to its current role as a self standing
subcategory and independent bases for a claim under the "FET".."

- violation of Legitimate expectations by the host state is sufficient to establish the violation of
the FET provision.

- >1 element has to be taken into account to determine if the FET standard is violated

Justification of the use of Legitimate expectations (3 Characteristics of LE)

- Use in past arbitration awards
- Good faith as customary international law (Charanne vs Spain)
- General principal of law recognized by civilized nations
- Refer to domestic legal systems
(Primary source of Public IL , normative content must be
common to all domestic legal system worldwide)

Legitimate Expecations in Domestic Law

- Provides a Useful Guide for LE in Investment Law
- Distinct between the Procedural (More impt) & Substantive Legitimate Expectations

2 Step Reasoning of Legitimate Expecations in Domestic Law

1. has the claimant has Legitimate expectations

- Assessment based on a specific commitment, promise or representations
- take into account all the circumstances of the case, notably the foreseeability of the
reconsideration and the diligence of the claimant

If there is Legitimate Expectations

2. Proportionality Test
- Was it permissible for the State to frustrate the Claimant's expectations

What type of state measures creates Legitimate Expectations and States cannot Frustrate?

2 Approaches in Arbitration:

1. Regulatory Framework ( tecmed Vs Mexico)

"the foreign investors expect the host state to act in a consistent manner,

12
Free from ambiguity and totally transparent in its regulations with the foreign investor, so taht
it may know beforehand any and all rules and regulations that will govern its investments, as
well as the goals of the relevant policies and administrative practices or directives, to be able to
plan its investments and comply with such regulations"

- Legitimatimate expectations arise from the Entire Regulatory framwork applicable to the
investment at the time it was made.

Controversial as it regulates power of host state:

- Subject of much criticism from tribunals

EDF vs Romania
"the idea that legitimate expectaitons, and therefore FET imply the stability of the legal and
business frameowrk, may not be correct if stated in an overly-broad and unqualified
formulation. The FET might then mean the virtual freezing of the legal regulation of economic
activities, in contrast with thet States's normal regulatory power and the evolutionary
character of economic life. "

2. Limiting the Basis of LE to Specific Acts instead of a framework

(Crystallex Vs Venezuela, 2016:

"A legitimate expectation may arise in cases where the Adminsistration has made a promise or
representaiotn to an investor as to a substantive benefit, on which the invesor has relied in
making its investments, and which later was frustrated by the conduct of the Administration. To
be able to give rise to such legitimate expectations, such promise or representation, addressed
to the individaul investor, must be sufficiently specific, meaning it must be precise as to its
content and clear as to its form."

- Most used standard.

- Limitation of the basis of the legitimate expectations to specific acts as opposed to the entire
framework
- Balance between the foreseeability that foreign investors need and States regulatory power.
- In line with Domestic Courts
- In line with Recent treaty practice : basis of legitimate expectations limited to specific
representation and commitments.
(2016 Comprehensive Economic and Trade agreement by the EU and Canada)

Other Radical Approaches:

- Excusion of "legitimate Expectations" form the scope of IIA

13
Art 6,4 of BIT between Chile & Hong Kong (China SAR)
"For Greater certainty the mere fact that a Party takes or fails to take an action that may be
inconsistent with an investor's expecations does not contribute to the breach of this Article,
even if there is loss or damage to the covered investments as a result"

Recent Trend in treaty practice: between codification of mainstream arbitraition practice and
exclusion of the "legitimate expectations" (Common Ground)

FULL PROTECTION AND SECURITY STANDARD (FPS)

- What is the normative content of the standard
- Against which conducts does it protect foreign investors and under what circumstances?

The FPS Standard in International Practice

- Part of Customary international law:
typical provision in all IIAs

In its Drafting there is a Diversity Of formulation or way it is drafted:

1. Full protection and security
2. Most constant protection and securty
3. Protection and constant security
4. Full and complete protection and security
5. State parties shall protect investors.

Controverisal:

(a) these text differences have been invoked by tribunals to justify their diverging
interpretations of FPS provisions

(b) Vaugueness: Exact treatmet it guarantees is not specified .

New rules have clarified the standard

Eg Art 3,5 of the Argentina- Qatar BIT
" Full protection and security is to be referred to the provision of adequate physical protection
pursuant to Customary International Law"

- Mainstream practice limits it to Physical Protection

Consensus: FPS obligation is that of Due Diligence

14
- Obligation of effort:
"shall endeavour to prevent or to repress certain conducts that harm foreign investors or their
investments in their territory"

Montario 2016 award: tribunals have to take into account all the circumstances of their case,
eg resources.

- States are Only required to do their outmost (obligation of Effort) vs Result (Achieveing result)

Tenaris Vs Venezuela: Not necessary to establish Malice or negligence on the part of the Host
states authorities in order to evidence a breach of the FPS provisions.

Obligation of effort vs Obligation of result

- Obligation of Result is fulfilled only by achieving the result and not merely
endeavouring to achieve it (Effort)

Types of Protection

Surez vs Argentina

1. Protection from whom?

2. Protection against what?

1. Protection from Non State Entities (Not Host States)

Eg Oxus Gold vs uzbekistan (2015)

Justification: The FPS Standard is different from the FET which protects investors from host
states.

- Controversial Broader Approach : Some argue Protection from Host states could lie under the
FPS standard

(Eg Biwater vs Tanzania: Justifies it in the meaning of the word "Full" in "Full protection and
security" and the purpose of BIT for the protection of foreign investors, thus FPS standard
should be broadly interpreted to maximize protection. )

2. Protection against Physical

- Does the FPS standard grant only a physical protection or does it cover legal security and the
stability of the legal framework?

15
Approach of most tribunals: Only Physical Protection
Justification: NO Overlaps with the FET standard which covers Transparency and Stability

- Controversial broader approach: Not only Physical

Justifications: the Specific language of the FPS provision (2016 Houben Vs Burundi: Provides for
the "exclusion of any unjustified or discriminatory measure whcih could hamper in fact or in
law", notably in BIT)

Eg Biwater Vs Tanzania : Purpose of the treaty

"It would ... be unduly artificial to confine the notion of "Full Protection" only to one aspect of
security, particularly in light of the use of this term in a BIT, directed at the protection of
commercial and financial investments"

NATIONAL TREATMENT AND MOST FAVOURED NATIONS STANDARD

- what are the rationales for these standards
- What type of protection do they bring to Foreign Investors, and in which circumstances

The Principal of Non-Discrimination

- Common objective for both treatment standards: they do not suffer any discrimination.
- Conventional Embodiments of the Non-Discrimination principal (Customary IL)

Definitions

National Treatment: Prevents the investors of one state party to a BIT be discriminated by
another state party vis a vis its own state nationals.

MFN Treatment: Protects investors of each state party to a BIT from discrimination they suffer
vis a vis investors of any State non-party to this BIT.

Nature of the Standards:

- Not an absolute standard (unlike FET )
- A relative standard (based on factual comparisions)

NATIONAL TREATMENT STANDARD

- It is a sensitive political Issue

Past: Minimum Standard of Treatment

- Promoted by Developed States

16
- opposed by Calvo: unacceptable that foreigners not be treated as nationals

Today: States want to help their nationals and not to foreign investors.
- explains the differences in treaty practice regarding standards,
- explains why the National treatment standard is absent from some IIA.
But these still contain FET (protects investors from Disciminatory treatment)

FET acts as a substitute in the absence of a national treatment standard

2 Application of the National Treatment Standard:

- Main difference : Application (apply or not) to the establishment of Foreign investors and their
investments.

1. Apply to both Establishment phase and post-establishment (USA)

Art 1102 NAFTA

"Each party shall accord to investments of investors of another party treatment no less
favourable than that it accords, in like circumstances, to investments of its own investors with
respect to establishment, acquisiiton, expansion, management, conduct, operation and sale or
other disposition of investment"

2. Apply only to post-establishment period and not Establishment

- Encourages Admission.

2014 Greece - UAE BIT

Art 3(1)
"Each contracting party promotes in its territories investments by investors of other contracting
party and admits such investments in accordance with its laws and regulations."

The national treatment in Arbitration Practice:

- Its application is based on Facts (Relative Standard)

3 step approach to assess Discriminatory Treatment:

1. Identification of a group of nationals with whom to compare the claimant

2. Comparison of the treatment the two groups have received and assessment whether the
treament received by the claimant is less favourable than that granted to the group of
Nationals
3. Evaluation whether the 2 groups are in like circumstances or whether certain factors exist
whcih could justify any differential treatment.

17
- Results in "Discriminatory treatment"

Saluka Vs Czech Republic:

"State conduct is discriminatory, if
(i) similar cases are
(ii)treated differently
(iii) and without reasonable justification "

MOST FAVOURED NATION TREATMENT STANDARD(MFN)

- not as politically sensitive as NST
- In many IIAs:

Nigeria-Singapore BIT, Art 4

"Each Party shall accord to investments of investors of the other party treatment no less
favourable than it accords, in like circumstances, to investments in its territory of investors of
any non-Party with respect to Management, Conduct, Operation and sale or other disposition
of investments"

- Ensure is no less favourable to the treatment it gives to the investors of other states
(Eg other states like Germany In like circumstances)

If a more favourable treatment exist to Non State Parties

- It must be granted to State Parties as well
- Results in equal treatment

Reciprocity: Same obigation of Singapore as regards Nigerian Investors.

More favourable treatment extended by a state party to be found in:

- Domestic Law
- IIAs concluded with other States

Ejusdem Generis Principal:

- MFN provision attracts the provisions of other agreements limited to:
where there is a Substantial Identity between the subject- matter of the 2 sets of provisions.
(Eg same product Category)

1978 Draft articles on the MFN Clause:

"If the MFN treatment Provision promises Most-Favoured Nation treatment solely for Fish, then

18
such treatment cannot be claimed under the same clause for meat"

Scope of application:
- Depends on the exact language (Phasing)
- Many treaties phrase the MFN treatement differently.

2 Application of the MFN Standard:

1. Apply to both Establishment phase and post-establishment (USA)

2. Apply only to post-establishment period and not Establishment

Some IIA exclude certain advantages or rights from the scope of the provision

Iran-Japan BIT,Art 4(2)

"If a contracting party has accorded or would accord in future special advantages or rights to
investors of any non contracting party by virute of any agreement establishing a free trade area,
a customs union, a common market or a simiar regional organization or by virute of any
conveniton for the avoidance of double taxation, it shall not be obliged to accord such
advantage or rights to investors of the other contracting party"

3 Main Situations where the MFN treatment is Disputed (De nanteuil et al)

- Similar Factual and legal challenges:

Is the treatment that the Foreign investor is seeking is more favourable?
Does the argument comply with the ejusdem generis principal?

1. Usage of MFN to attract another treatment provided for in a substantive provision of

another IIA Concluded between Host and Third State.
Eg Fair Equitable treatment provision, not controversial

2. Change the scope of application of an IIA by Investors

Eg giving a wider definition to "investment" to expand the category of investments to which that
IIA is applied. MFA cannot be used in such situations

3. Avail of a dispute settlement provision in another IIA by investors

- Another IIA more favourable than the dispute settlement provision than their home-Host
- Most frequent and controversial

19
Split in MFA applicability in dispute settlement
Maffezini vs Spain (2000) & Plama vs Bulgaria( 2005)

1. Application of MFA in Dispute Settlement

- Matter of principal

2. Non application
- Many IIA agree with this
Eg Nigeria-Singapore BIT (Art4(3))

THE UMBRELLA CLAUSE

- Origins and rationale of the clause
-What protection does it mean for Foreign investors

Origins and Rationale of the Umbrella Clause

-Divide in IL & Domestic Law: A breach of contract under domestic law does not ential a breach
of IL (IIA)

Thus the umbrella clause was conceived to establish a link between contractual breaches and IL

Rationale :
- To Oblige Host States to Respect their obligations towards foreign investors as International
law.

Origins

- Proposal by Elihu Lauterpacht to the Anglo-Iranian Oil company (1950s); Settlement of the
Iranian Oil Nationalisation dispute

- Past: Elevate a contractual Obligation into the Conventional realm through an

"umbrella treaty"

-Today: Elevate obligations towards foreign investors thorugh a specific provision contained in
an IIA

EG Abs-Shawcross Draft convention on Foreign investment

Eg Draft Convention on the protection of foreign property by OCED

20
Umbrella Clauses in IIA

Paraguay- Netherlands BIT, Art 3(4)

"Each contracting paty shall observe any obligation it may have entered into with regards to
investments of nationals of the other contracting party"

Umbrella clause wording varies

- Diversity has used to justify diverging interpretations.

6 characteristics / scope of the UC:

1. Obligation of R esults:

Paraguay- Netherlands BIT, Art 3(4)

2. Obligation of Effort (like FPS):

Australia- Poland BIT, Art 10

"A Contracting party shall, subject to its law, do all in its power to ensure that a written
undertaking given by a competent authority to a national of the other contracting party with
regard to an investment is respected"

3. No specification of the type of obligations and commitments covered

4. Limitation to contractual obligations

Eg Austria-Chile BIT , 1997

5. Limitation to Written Obligations

Eg Australia-Poland BIT

6. Limitation to "specific investments"

- obligation entered into with respect to specific investment
Eg Swiss-Philippines BIT

2 Reasons for Divergent interpretations of Umbrella Clauses

1. Difference in Treaty practice

2. Different Approaches that cannot be reconciled simply by differences in drafting

21
BVAC vs Paragual 2009.
- Many relate in particular to the type of obligations covered under Umbrella clauses
- Issue of contracts

Are Obligations under domestic law and regulations covered by umbrella clauses?

- Not problematic: Eg. Limits Scope to Contractual obligations (IIA)

Australia Chile BIT

- Problematic: Vague wording

"Each party shall observe any obligations it may have entered into with regards to investments"

3 different approches dealing with vagueness:

1. Does not cover General Commitments (Legislative acts)

- When the clause contains the phrase "entered into"
- They are limited to specific commitments (eg Noble vs Romania)

2. Nuance Approach: Cover unilateral commitments Not General

- arising from provisions of thier law regulating a particular business sector and addressed
specifically to foreign investors in relation to their investments.
Eg Continental Casualty Company vs argentina

3. Clauses cover obligations stemming from laws and regulations

Noble vs Ecuador

Differences in the interpretation not explained by the language of "umbrella clause" but by
irreconcilable views about the rationale and effect of Umbrella clauses

Are contracts excluded from UC?:

- Affected by tribunals' views about Their rationale and effect (Like UC)

1. Exclude Contracts from UC:

"As a matter of textuality therefore the scope of Art 11 of the BIT, while consisting in its entireity
of only one sentence <Refers to UC>, appears susceptible of almost indefinite
expansion...considering futher thath the legal consequences that the Claimant would have us
attribute to this Article.... are far reaching in scope, and so automatic and unqualified and
sweeping in their operation, so burdensome in their potential impact upon a Contracting Party,
we beleive that clear and convincing evidence must be adduced by the Claimant"

22
2. Contracts are not excluded from the scope of umbrella clauses
- Mainstream View
- Disagreements: to the way umbrella clauses apply to contracts
due to exclusive forum selection clause .

Admissibiity Issue: Can Tribunals exercise Jurisdiction?

1. Inadmissible: Forum selection clause made the claim inadmissible

- leads them to stay the proceedings .
Eg SGS vs Philippians

"Claims might become admissible where the tribunals do not meet the standards of the sounds
adiminstration of justice or where states disregard their decision (2012 BIVAC vs Paraguay)

2. Admissible: Forum Selection clause do not make the claim inadmissible

- Irrational to declare them inadmissible

-----------------------------------------------------------------------------------------------
Questions

Which ones of the following elements can play a role in assessing the existence of legitimate
expectations of foreign investors?: (several expected answers)
- Socio-economic Circumstance, Diligence of Foreign investors, Existance of a fraud to get a
specific promise

Which ones of the following statements characterise the national treatment standard?: (several
expected answers)
- National treatment Sets a Relative Standard, National treatment standard protect foreign
invesments they may suffer vis a vis nationals of the host state

What is the purpose of "Umbrella Clauses"

- Link Breaches of Contract to International Law

With respect to the interpretation of the full protection and security standard, some arbitration
tribunals refer to the fair and equitable treatment standard in order to argue that:
- the full protection and security standard does not cover legal security and the stability of the
legal framework
-the full protection and security standard should be interpreted in such a way as to avoid
overlaps with the fair and equitable treatment standard

23
A most-favoured-nation clause contained in a bilateral investment treaty aims at:
-ensuring that the treatment granted to investors of one State party to the treaty by the other
State party is no less favourable than the treatment it gives to the investors of third States
-avoiding discriminatory treatment against investors of one of the State party to a treaty by the
other State party vis-à-vis investors from third States

Which one of the following proposals characterises the practice of arbitration tribunals with
regards to contract-based ‘umbrella clause’ claims and those contracts which contain an
exclusive forum selection clause?
-some tribunals argue that the claim may become admissible if the State disregards the decision
of the tribunal benefiting from the exclusivity conferred by the contractual exclusive forum
selection clause

Which ones of the following elements can play a role in assessing the existence of legitimate
expectations of foreign investors?
- socio-economic circumstances
the diligence of foreign investors
the existence of fraud to get a specific premise

Which ones of the following statements characterise the national treatment standard?:
- national treatment sets a relative standard
- the national treatment standard protects foreign investors from the discrimination they may
suffer vis-à-vis the nationals of the host State

What is the purpose of ‘umbrella clauses’?:

-linking breaches of a contract to international law

------------------------------------------------------------------------------------------------
Module 3: The protection against Illegal Expropriations
- The protection again Illegal expropriatiions

Since Expropriation is teh soverign prerogative of States, Expropriation is not prohibited but
subjected to Conditions of Legality

- Foreign investors are protected from different types of Expropriation (types)

- There are conditions that must be fulfiled for it to be legal with compensation
- Identification of indirect expropriations
- Distinction between Regulatory measures and Expropriation Measures

24
Categories of Expropriation
- be deduced from International Law and IIAs

Almost all IIA have the provision:

" Neither Contracting party shall expropriate or nationalize investments in its Area of Investors
of the other Contracting Party or take any measure equivalent to expropriation or
nationalization..." (BIT Uraquay and Japan)

Distinction between Nationalization and expropriation: SCOPE of Applications

- Nationalisation: Concern the entire sector of the economy

- Expropriation: Concern only specific investments

Both must fulfil Same conditions of legality

- But arbitraiton mainly ask to rule the legality of Expropriations (preeminence of expropriations)

Expropriations give rise to many issues

- what does "Prohibit a State from taking any measure equivalent to expropriation" mean?
- what are the features of these measures?
- What is the difference between Expropriations and measures equivalent to expropriations

1. Direct Expropriation

Historical relevance:
- Historically: At forefront of State Policies and Arbitration Practice.
- Now: Less important
- State have become reluctant to Expropriate as they need to attract Foreign investment.
- Recent Years: Increase of Direct expropriations

No definitional or legal issue with Direct Expropriation

- Consensus among Tribunals (Myers vs Canada)

"The Term Expropriation in Article 1110 must be interpreted in light of the whole body of State
practice treaties and judicial interpretations of that term in International Law Cases. In General,
the term Expropriation carries with it the Connotation of a "taking" by a Governmental-type
authority of a person's "property" with a view to transfer ownership of that property to another
person, usually the authority that exercised its de jure or de facto power to do the
"undertaking"

- Transfer of the legal title alone is sufficient to establish direct appropriation

25
Eg Bernhard von pezold vs Zimbabwe: The transfer of the Legal titles by zimbabwe, constituted
a Direct expropriation, despite the claimants still retain a de facto control over parts of property)

2. Indirect Expropriation
- "Any Measure equivalent to Expropriation" (Art 16(1) of 2015 BIT between Japan and
Uraguay)
"Measures Tantamount to expropriation"
Creeeping Expropriation

"Indirect Expropriation"

However They provide the same protection to foreign investors.

Lack of definition to the meaning of "measures equivalent to expropriation"

- Issue seen in relation to treatment standards

Lack of Criteria:
what Criteria Tribunals should use to determine whether a state measure is an indirect
expropriation?

Defining IE: Meaning of "Measure":

- Traditionally not defined, in any IIA provisions

"Any type of Administrative, legislative or judicial acts performed by any of hte branches of the
state or any entity whose acts can be attributed to the State"
(OI European Group V Venezuela)
Eg Regulatory measure

Measures can consist of ommission and actions

- They do not need to benefit the State
- State intent is Irrelevant
Eg Revocation of Decrees or licenses
increase in Tax

2 Categories of "indirect expropriation"

1. Single Measures that have a effect equivalent to expropriation

2. A series of measures having together an expropriatory effect (Creeping Expropriation)

"Creeping Expropriation is a form of indirect expropriation with a distinctive temporal quality in

26
the sense that it encapsulates the situation whereby a series of acts is attributed to the State
over a period of time culminate in the Expropriatory taking of such property"

- Each measure alone isnt sufficient

- However Collectively become a Indirect expropriation

Eg Siemens vs Argentina
"The last step in a creeping expropriation that tilts the balance is similar to the straw that
breaks the camel's back. the preceding straws may not had a perceptible effect but are part of
the process that led to the break"

Conditions for Legality of Expropriations

- The conditions of legality of Expropriations as stated in IIAs
- What are the conditions for expropriations?
- What issues do they raise?

Legal Expropriations
- Expropriations are Legal if Certain conditions are met

- States have the Freedom to exercise their Regulatory power with the view to or with the
effect of expropriating Investors (Soverign Preogative of States)

- States have adopted this approach "Codified" in treaty practice, in IIAs

Characteristics of Legality

1. In order for the Expropriation to be lawful, all conditions must be satisfied

- Each Condition is conjunctive than disjunctive
(Adel A Hamadi Al Tamini v Oman, 2015)

2. Consistency of Legality
The Conditions of legality across the IIAs are very consistent.

Art 7(1) of teh 2014 BIT bet Egypt & Mauritius

" Investments of an investor of either Contracting Party in the territory of the other Contracting
Party shall not be subjected to nationalization or expropriation or subjected to any other
measure having an effect equivalent to nationalization or expriopriation unless the measures are
taken on a non discriminatory basis , for Public Purpose, in accordance with due process of law
and against payment of compensation in accordance with this Article"

27
4 Main Conditions of Legality

1. Public Purpose
2. Non- Discrimination
3. Due process of Law
4. Compensation

Additional Conditions:
-Not contrary to any undertaking given by the Host State (Netherlands - Poland BIT)

1. Public Purpose
- wide margin of appreciation in determining Public Purpose (Crystallex v Venezuela)

Reason: Tribunals have considered that it is not their role to second guess the appropriateness
of measures adopted by the Organs of a Sovereign State
(2016 Rusoro Mining V Venezuela)

Limits to States Discretion

- To prevent them from pursuing other objectives under PP

States fail to demostrate a link between Measure and a Public Purpose .

Eg Belokon v Kyrgyz Republic tribunals 2014

2. Non- Discrimination:
- important component of IIAs (FET, National treatment, MFN, and Expropriation)
- In Assessment, Tribunals take the approach in the case of

Saluka v Czech Republic

Were similar Cases treated differently without reasonable justification?

Eg 2015 Quiborax vs Bolivia Tribunal took this approach

Assessment of Reasonableness:
- A measure does not cease to be discriminatory merely because it aims to achieve a laudable
or necessary goal.

Practice: Rare to conclude illegal base on discriminatory

28
- Tribunals Have rearely concluded that an expropriation was illegal purely/Solely on the basis
that it was discriminatory.

Additional Ground + Discriminatory = Illegal

ADC v Hungary: They conclude that it was illegal on the additional ground that it did not pursue
a public purpose

3. Due process of law (Procedure of Measure)

Requirements of Due process :

"The Requirement does not specifically refer to teh municipal expropriation law of Venezuela.
But due to due process in general, a generic concept to be construed in accordance with
International law. In essence, due process requires
(i) that the decision to nationalize be properly adopted, and
(II) the expropriated investor has an opportunity to challenge such decision before an
independent and impartial body" (Rusora vs Venezuela)

- Due process relates to the procedure not the substance of measure

4. Compensation

Compensation as Legality Vs Compensation as Breach (Reparation)

- Compensation (Legality) is part of Conditions which prohibit Illegal Expropriation

- Compensation (Breach) : Due to violation of this primary obligation

Also called Reparation
(An internationally wrongful act)

Historical issues of Compensation

- Originally: It was a sensitive issue, notably in the Hull Formula (popular in IIA)

- Today, Hull's Formula is accepted in IIAs: Expropriation must be

prompt, adequate and effectively compensated

4 standards of compensation in IIAs:

29
1. Fair Market value
- Equivalet of the fair market value of the expropriated investment at the time when the
expropriation is publicily announced or immediately before the expropriation occurred,
whichever is earlier.

2. include interest
- Compensation should also include interest at a commercial reasonable rate

3. without Delay
- Be paid without undue delay

4. Effectively Realizable and transferable

- Be effectively realizable and freely transferable

Eg Japan-Uraguay BIT

Problems of Compensation:

- Technical:
How should the firm's fair market value be interpreted
Which valuation method should be used to determine the fair market value of the investment

Does an expropriation which meets all the conditions of legality except compensation be
considered legal? (legal Issue)

3 Views of solution

(a) Depends on the terms of offer:

Legality depends on the terms of the offer:

- the fact that the investor has not received compensation does not mean its unlawful as the
offer has been made
(Eg Venezuela Holdings vs Venezuela)

(B) Potentially Lawful

- Potentially Lawful expropriation: (Quiborax Vs Bolivia)
- A long as fair compensations is granted, Situations is reestablished and condition fulfilled

30
(C) Unlawful:
- lack of payment alone is sufficient to be unlawful

The Identification of indirect Expropriation

Language in traditional treaty practice

- IIAs prohibit indirect expropriations using a number of different formulations:
(a) Indirect expropriations
(B) Measures having an equivalent effect to expropriation
(C) Measures tantamount to expropriation

- All gives the same protection against Indirect Expropriation

- Criteria is usually not specified in IIAs to determine if its indirect exposure.

- This vagueness results in doctrines.

Determination of Indirect Expropriation

- States have recently been more clear in their definitions to provide guidelines
in apply provisions

EG US BIT model: Provides a non-exhaustive list of criteria in Anne B(4)(a) to be used by

tribunals.

"the determination of whether an action or series of actions by a Party, in a specific fact

situation, constitutes an indirect expropriation, requires a case-by-case, fact-based inquiry that
considers, among other factors:
(i) the economic impact of the government action, although the fact that an aciton or a series
of action by a Party has an adverse effect on the economic value of an investment, Statnding
alone, does not establish that an indirect expropriation has occurred;
(ii) the extent to which the government action interferes with distinct, reasonable investment-
backed expectations; and
(iii) the character of the government action"

31
- Origins: Penn Central vs New York (Case law). This criteria influences many other States in
practice

Annex 8A of Comprehensive Economic and Trade Agreement

EU - Cananda
- More Specific than US-BIT:
adds the duration of the measure(s)
Character includes there object, context and intent

2 Doctrines of Indirect Expropriation

-Seen as conflicting

1. "Police Powers" Doctrine:

- Part of Customary International Law

- Focus on the object of the measure to determine its nature:

Measures protecting a public interest : Not indirect expropriation

- controversial: Tribunals have disagreed to the exact content of this doctrine.

2 types of PP

(a) Radical Approach: Any Non- Discriminatory measure protecting a public interest and
enacted in accordance with due process is NOT an indirect exposure, no matter the impact
(Mathanex vs US)

(B) Nuanced Approach : Some argued that measures could not be expotriatory as it is an
exerciese of the state's soverign power or of its police power.
- non discriminatory measure may be indirect discrimination

2. "Sole Effects" Doctrine

- Effect of the state measure than the object (Result)

- Disagreement as to the exact content of the doctrine

2 types of SE :

(a) radical Approach:

"Thus, Expropriation under NAFTA includes not only open, deliberate and acknowledged takings

32
of property, such as outright seizure or formal or obligatory transfer of title in favour of the
host State, but also covert or incidental interference with the use of property which has the
effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be
expeected economic benefit of property even if not necessarily to the obvious benefit of the host
State"
-Outright Seizure, obligatory transfer, covert interference

(B) Nuance Approach: the Deprivation of the economic use and Enjoyment of the investmnet
must be no less than Radical
(Tecmed vs Mexico)

The Proportionality Approach:

- More popular in Recent Years
- Takes Effect and object of measures (All circumstances of case)
(tecmed vs Mexico)

"In additon to the negative financial impact of such action or measures, the Arbitral Tribunal will
consider, in order to determine if they are to be characterised as expropriatory, whether such
actions or measures are proportional to the public interest presumably protected thereby and
to the protection legally granted to investments, taking into account taht the significance of scuh
impact has a key role upon deciding the proportionality... There must be a reasonable
relationship of proportionality between the charge or weight imposed to the foreign investor
and the aim sought to be realized by any expropriatory measure" (tecmed vs Mexico)

Regulatory Measures vs Expropriatory Measures

- Related to the issue of the right for states to regulate
- Right of State to regulate is curtailed by some law. (eg in environment, public helath)

The distinction have been promoted by some arbitration tribunals

- to Reinforce the regulatory power of host states

The legal appraisal of Regulation

Origins: Promoted in arbitration than treaty practice.

(Methanex vs United States)

"As a matter of General International Law, a non-discriminatory regulation for a public
purpose, which is enacted in accordance with due process and, which affects, inter alios, a
foreign investor or investment is not deemed expropriatory and compensable unless specific

33
commitments had been given by the regulating government to the then putative foreign
investor comtemplating investmetn that the government would refrain from such regulation"

- Regulatiory measure Does not account effect of the measure, even when the deprivation is
radical

Differences between measures in compensation:

Regulatory Measure: Not to compensate

- Conditions for the legality:
Methanex v canada
A regulatory measure depriving radically an investor of her property need not be compensated
when it does not discriminate, pursues a public purpose and follows due process.

Expropriatory Measure: Must Compensate

An expropriatory measure which does not discriminate, pursue a public purpose and follow due
process SHALL BE COMPENSATED to be legal

Justification: Why is Compensation paid for expropriatory measures and not regulatory
measures?:

Public interest?
- Is the public interest at stake in each case?
- Can we expect arbitration tribunals to engage in the classification of public interest?
- There might result in Legitimacy issues for local populations.

Practical Consequence of the distinction

- Issue: Limits the scope of Expropriatory measures
(Combined effect of 2 elements)

2 elements in the limitation of Expropriatory Measures

1. Exclusion of the effect as a criteria to characterise a state measure

2. Use of the object as a criteria to characterize a state measure

Problematic: Object (Public Interest) as Criteria is used to assess legality of measure in indirect
Expropriation

34
- Virtually all State measures pursue a public interest objective
- States are given large margin of appreciation

Consequence: ALL measures are characterized as non-compensable regulations

All Regulatory Measures

unless discriminatory or non compliance with due process

As all measures are in the spirit of
Public interest

This limits the scope of compensable expropriations.

Eg Pope & talbot Vs Canada

- argues tht it a gaping loophole in international protections against expropriations

Newer Agreements:

(a) Careful Approach to the divide (Indirect Expropriation)

- Many newer agreements adoped the careful approach to the divide

Eg US BIT:
"Except in Rare circumstances, non-discriminatory regulatory actions by a Party that are
designed and appied to protect legitimate public welfare objectives, such as public health,
safety and the environment, do not constitute indirect expropriations"

Exceptions to the rule:

- non discriminatory regulatory actions aiming to protect a welfare objective shall not be
characterised as indirect expropriatios (Nuanced method)

Clarification about Rare Circumstances:

EG Art 8A(3) of the 2016 CETA gives clarifications to the rare circumstances:
"Circumstances where the impact of the measure or a series of measures is so Circumstances (Effect) than object

severe in light of its purpose that it appears manifestly excessive"

- Effect of the measure as a criteria to indirect expropriation

Controversial: Not all Agreements provide for the Exception

(No Rare Circumstances)

Art 5 India BIT:

"Non discriminatory regulatory measures by a Party or measures or awareds by judicial bodies

of a Party that are designed and applied to protect legitimate public interest or public purpose
objectives such as public health, safety and the environment shall not constitute Expropriation

35
under this article"
------------------------------------------------------------------------------------------------------------------------------
Questions:
Which of the following proposals do not characterise ‘creeping expropriation’?
-it is a form of direct expropriation
-it is the result of a single measure which has a continuing character

Which of the following proposals do not characterise the ‘police powers’ doctrine and the way
it is used in investor-state arbitration?: (several expected answers)
- when determining the existence of a direct expropriation, some tribunals have applied the
‘police powers’ doctrine
- the ‘police powers’ doctrine unequivocally entails that any non-discriminatory measure which
protects a public interest and which is enacted in accordance with due process does not
constitute an indirect expropriation, whatever its impact
- the ‘police powers’ doctrine is unanimously accepted by arbitration tribunals

Which of the following proposals is correct?

-some newly concluded international investment agreements provide that a non-discriminatory
regulatory measure aiming at the protection of a legitimate public welfare objective can be
characterised as an indirect expropriation in rare circumstances
-some newly concluded international investment agreements provide that a non-discriminatory
regulatory measure aiming at the protection of a legitimate public purpose objective shall not
be characterised as an indirect expropriation
--------------------------------------------------------------------------------------------------------------------
Modules 4 : Investor- State Arbitration: Institutional and Procedural aspects
- How disputes are setteled when a Foreign investor alleges that a host state has breached
international investment agreements
- Arbitration. Investor-State disputes and Investor State Arbitration (1965 ICSID Convention and
its rules of procedure for arbitration proceedings, ICSID Rules of Arbitration)
- Institutionsal n procedural of Arbitration proceedings.
- Distinctive characteristics of Arbitration
- Jurisdiction of Arbitration
- Provisional Measures
- Annulment Proceedings: Arbitration can be annuled.

The Features of hte Settlement of investor-State dispute

- What is a investor state dispute
- How are they settled? Characteristics?

Meaning of "dispute" in International law

36