PBIT Capacity Building Lecture 3

“IMPLICATIONS OF KEY BIT PROVISIONS”

Ms. Nida MahmoodLL.B (Hons), LL.M with merit in Law & Development, London

Investment Law Consultant

Research Society of International Law, Pakistan

Historical Context

• Law developed in response to the changing political and economic situation of the world.

• European Empires vs. Newly Independent States• Focus: Protection of Investment• Basis: Diplomatic Protection and State Responsibility

PCIJ – Mavrommatis Palestine Concessions Case (1924)

“It is an elementary principle of international law that a state is entitled to protect its subjects, when injured by acts contrary to international law committed by another state…”

ICJ – Barcelona Traction Case (1970)“When a state admits into its territory foreign investments of foreign nationals… it is bound to extend to them the protection of the law

and assumes obligations concerning treatment to be afforded them.”

Customary International Law Principles

• International Minimum Standard of Protection• Fair and Equitable Standard• National Treatment• Most Favored Nation Treatment• Lawful Expropriation• Standard of Compensation in event of

Expropriation (Prompt, Adequate & Effective)

Recent Developments

1. BITs have not only reiterated the CIL, but have: • extended the scope of such rules to a great extent• added new provisions designed to offer as much protection as possible to Foreign Investors

2. International Arbitration Tribunals such as ICSID have gone even further by extending the scope and application of some of the BIT provisions when interpreting them.

Protection under BITs

• Preamble• Definition of Investor and Investment • Admission and Establishment of Investment• Investment Promotion Provisions• Absolute Standards of Treatment– International Minimum Standard, Fair and

Equitable Treatment, Due Process, Non-Discrimination, Right to Property, Compensation for Lawful Expropriation, Full Protection and Security

Protection under BITs (Contd.)

• General Standards of Treatment– National Treatment– Most Favored Nation Treatment– Lawful Expropriation

• Umbrella Clauses– Elevate Contractual Claims to BIT Claims

• Stabilization Clauses– Freeze the Law for duration of investment– certainty

• Dispute Resolution Mechanisms

Implications of Preamble

• Constitutes part of the context of agreements (A 31 Vienna Convention on law of Treaties 1969)

• Intrinsic aid to interpretation

• Has to be consistent with the substantive provisions of BITs

Categories of PreamblesGROUP A (TRADITIONAL) GROUP B (RECENT)

Focus on fostering economic cooperation, respecting sovereignty/local laws, mutual growth and benefit through technology transfer and human resource development etc

See: Mongolia-Singapore (1995) Australia-Egypt (2001)

Focus on the same however, subject to: public policy, health, environment and labor standards etc.

See: US-Uruguay (2005) Korea-Trinidad & Tobago (2002)

Benefits of adhering to Group B Preambles:• More discretion to host states• Does not limit regulatory freedom of states• Makes it clear that investment promotion is subject to

democratic responsibility of states.

Section of Definitions

• Purpose: to determine the object to which the rules apply– i.e. pre or post establishment/entry– Who will be considered an ‘investor’?– Does MFN extend to procedural provisions?

• Caution: need to be very careful while defining because definitions determine the scope of application of the principles in the treaty.

Traditional (broad- asset based definition)

INVESTMENTClosed List Exclusion of Certain

Transactions List“every kind of asset,” “any kind of asset including/ in particular… etc” “any kind of assets or rights related to it provided investment has been made in accordance with laws and regulations…” “any kind of investment invested by investors… in conformity with laws… etc” “any kind of asset owned or controlled by an investor of a contracting party”See: Azerbaijan- Finland (2003)

Ample but finite list

See: Canadian Model BIT (2004)

Techniques that exclude certain transactions from definition

See: Canadian Model BIT (2004)

The more broadly and loosely you go on defining, the more extensive the protection would be, i.e. the greater the types of ‘investments’ that will be covered for protection.

Investor

• Two categories: Natural and Juridical• Natural: Prospective Investors v Actual Investors

» Person who has made investment or even those who seek to…

• Juridical: Place of Incorporation V Control– Control: Direct or Indirect?

Implication of adding ‘control’ to the definition:Even the assets controlled indirectly by investors of

contracting parties are covered regardless of the country in which the company directly owning the assets has been incorporated.

See: Barcelona Traction case (1970) ICJ.

In short: veil of incorporation lifted to grant rights to Shareholders.

Entry of Investment• Two Models

ADMISSION CLAUSE MODEL (European States)

RIGHT OF ESTABLISHMENT MODEL ( US, Canada and Japan)

Allows host states to apply admission and screening mechanism

Determine the conditions on which foreign investment will be allowed

States can: include the list of industries/activities/laws/regulations to which MFN and NT won’t apply in pre-establishment stage.

Plus no obligation to eliminate discriminatory legislation affecting the establishment of foreign investment

Caters to the customary right of states to regulate entry of aliens for eco-socio-political or national security grounds.

Calls for MFN and NT even at the establishment stage i.e. pre entry stage.

In that, prospective investors are to receive treatment no less favorable with regard to investing than domestic investors and investors from third countries.

Effect: Liberalizing investment flows

Option: NT+MFN with exceptions or reservations model See: Canada-Costa Rica (1998) Azerbaijan-US (1997)

Investment Promotion Provisions

• Statements pronouncing the obligation of states to promote investment

• Caution: need to be careful with words from dispute resolution point of view. Hungary-India (2003), “shall encourage and create favorable

conditions for investors to make investments in its territory.” Spain-Uzbekistan (2003), “shall in its territory promote as far

as is possible…”

• Advice: go for softer proclamations as in Spain-Uzbekistan BIT.

Absolute Standards of Treatment

1. International Minimum Standard– Customary Principle of International Law– Treatment of foreign investors must never fall below the

international minimum i.e. bare minimum standard (of justice, equity, fairness, human rights)

– If National Treatment better > the National treatment to foreigners

– If not > then no excuse that nationals & foreigners treated equally badly.

– In that case > Treatment = International Minimum Standard

Tenets of International Minimum Standard

• Expropriation for public purpose• Without discrimination• Against prompt adequate and effective

compensation• Due process of law • Guarantee of basic human rights including

right to property

Absolute Standards of Treatment

2. Fair and Equitable Standard Precise definition = not clear

Two meanings:a) Part of International minimum standard, orb) It is given its plain, ordinary meaning

Implication

As part of International Minimum Standard:

a) the test of whether a country has breached its obligation is objective, b) standard based on existing body of customary international law of state responsibility for injury to aliens

Higher standard to meet, not so easily breached.

Implication of Fair & Equitable

Of Plain and Ordinary Meaning:a) The test is more subjective,b) It will suffice that a country commits an action found to be

unfair or inequitable in view of arbitral tribunal.

• Threshold much lower, • Numerous governmental regulatory actions can thus be

inconsistent with BIT obligations,• Any violation of any other obligation in bit could in effect be

violation of fair n equitable standard if plain meaning given.

Implication of Fair & Equitable

How to overcome: define clearly, and expressly link it to international minimum standard.

NAFTA Free Trade Commission which is composed of the trade ministers of the three contracting parties, issued a Note of Interpretation on 31 July 2001 stating, among other aspects, that the fair and equitable treatment standard as set out in NAFTA’s Article 1105 did not entail any treatment beyond that established by customary international law.

See Also: USA-Uruguay (2005).

Relative Standards of Treatment

1. National Treatment (NT)UNCTAD 1999 Report: “National treatment can be defined as principle whereby a host country extends to foreign investors treatment that is at least as favorable as the treatment that it accords to national investors in like circumstances…”

Issue 1: pre or post entry?See: Japan-Vietnam (2003), Hong Kong-New Zealand (1995)Issue 2: To investments or investors or both?See: Mauritius-Zimbabwe (2000), Russia-Thailand (2002)

Good Ways of Expressing National Treatment

a) Make NT contingent on domestic legislation of host country See: India-Indonesia (1999), Hong Kong-New Zealand (1995)

b) Stating existing non-consistent legislation to remain applicable, but no new non conforming measures that will increase degree of discrimination See: China-Netherlands (2001)

C) “Shall accord to investors and investment treatment no less favorable than treatment it accords in like circumstances to its own investors….”See: Japan-Vietnam (2003)

Relative Standards of Treatment

2. Most Favored Nation Treatment (MFN)UNCTAD Report (1999): MFN treatment in the context of foreign investment means that ‘a host country treats investors from one foreign country no less favorably than investors from any other foreign country.’• Has the potential to render the obligations in a BIT ‘Obligations

Erga Omnes’ (i.e. binding against all) See: Maffezini v Kingdom of Spain (2003)

Spain’s mistakes: 1st BIT = very broad MFN clause (Argentina) “all matters subject to this…”

2nd BIT = very good dispute resolution (Chile) clause

See also: Austria-Saudi Arabia (2001): explicitly extends MFN to dispute resolution

Most Favored Nation Treatment

Issue 1: Should MFN be applicable to substantive provisions alone or should it extend to Dispute Resolution provisions as well?– Approach of tribunals: not consistent, not clear

Advice: make it clear, expressly + make use of exceptionsSee: Jordan-US (1997), Diplomatic Note (Nepal-UK) 1965Issue 2: Pre entry MFN Treatment or Post entry only?See: NAFTA A 1103, A 10 (7) Energy Charter Treaty

Expropriation

• Limited right of host states which allows states to take over the assets of Foreign investors for:

a) Public Purposeb) On a non-discriminatory basisc) In accordance with due process of lawd) With prompt, adequate & effective

compensation

Expropriation

Issue: ambit has been expanded owing to NAFTA and ICSID decisions in cases such as ‘Metalclad’Wherein words or statements like:• ‘indirect expropriation’ or • ‘measures that tantamount to expropriation’ or • ‘having the equivalent effect of expropriation’ see: China-Jordan (2001)

Restrict the ‘Regulatory Freedom’ of host states.

ExpropriationIndirect expropriation is a governmental action, whether formal or informal, that impacts (or undermines) the normal operation of a foreign company in a negative manner.

Facts of Metalclad Corp v United Mexican States (2000)ICSID: Decision by a local government authority ‘to withhold planning permission’ to construct a facility by Metalclad for the disposal of hazardous waste, in accordance with the agreement between company and the Mexican government, was regarded as treatment that did not meet the standard of fair and just treatment under NAFTA.

See also: Reko Diq case, Government of Balochistan denying to issue mining license.

ExpropriationMETALCLAD CASE:

ICSID: “expropriation under NAFTA includes not only open, deliberate and acknowledged takings of property, such as outright seizure or formal or obligatory transfer of title in favor 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 expected economic benefit of property even if not necessarily to the obvious benefit of the host state”

Implication: potential to give rise to challenges to any governmental regulatory measure, whether these are related to human rights or environmental protection, by foreign investors, if such measures go against their interests, notwithstanding that international law recognizes rights of states to take regulatory measures relating to environment and essential development work.

Umbrella Clauses

“contracting parties shall observe any other obligation it may have entered into with regard to investments…”

i.e. host country usually assumes the responsibility to respect other obligations it has with regard to investments of investors of the other contracting party

Effect: Elevates contractual breaches to BIT breaches See: JVA Reko Diq, SGS v Philippines

Protects investors contractual rights (private law) Broad scope of application, ample protection to investors

Exception: SGS v Pakistan: “Umbrella clause does not derogate from widely accepted international law principle that a contract breach is not by itself a breach of international law.”

Stabilization ClausesStipulate that: law prevailing at the time the decision was taken by foreign investors to invest in host countries would be applicable to them, and such laws would not be altered to the detriment of such investors.i.e. it ‘freezes’ the law in time in relation to those investors

Purpose: certainty, stability

Effect: prevents host states from enacting new legislation or undertaking new international obligations which would affect the profitability of the relevant foreign investors.

See: Petroleum Production Sharing Agreement of 10 November 1995 between the State Oil Company of Azerbaijan and a Consortium of Oil Companies

Investor-State Dispute Resolution

Importance• Certainty against Risks

• Circumvention of Political Pressure

• Enforcement of Obligations Ensured

• No Need to Resort to Diplomatic Protection

Legal Standing

Will depend upon the definition of ‘investor’i.e. whether it includes subsidiaries controlled directly or indirectly by investors or not?

Implication: if so, even domestically incorporated companies in the host state, which are subsidiaries will have an international claim against the host state.

Types of Dispute Resolution Provisions

a) Starting with amicable negotiations see: Chile-New Zealand (1999)

b) Apply to disputes directly arising out of an Investment (most common), (followed by ICSID also) see: Ethiopia-Russian Federation (2000)

c) Apply to dispute ‘concerning an obligation’ under the BIT (wider in scope) see: China-Guyana (2003)

Types of Dispute Resolution Provisions

d) Disputes relating to interpretations or applications of the agreement (limited scope) see: Chile-Peru (2000)

e) Disputes regarding amount of compensation (limited scope) see: Mauritius-Swaziland (2000)

f) if investor incurs a loss/damage as a result of the breach only then = dispute mechanism see: US-Uruguay (2005)

Summary

Features of Admission Clause Model

1. Preamble = Group B2. Investment = not to

include the ones that are ‘indirectly controlled’

3. Investor = Actual (post) Juridical = place of Incorporation4. Post entry NT-MFN

Features of Right of Establishment Model

1. Preamble = Group A2. Investment = includes

those that are ‘indirectly controlled’

3. Investor = Prospective (pre) Juridical = control element

4. Pre entry NT-MFN

SummaryFeatures of Admission Clause Model

5. Fair & Equitable = International Minimum Standard

6. MFN = not to dispute settlement provisions

7. Expropriation = Direct

8. Umbrella Clause = SGS v Pakistan

Features of Right of Establishment Model

5. Fair & Equitable = Plain meaning

6. MFN = extends to dispute resolution provisions

7. Expropriation = Indirect

8. Umbrella Clause = SGS v Philippines