The Investor s Right to Waive Access to Protection under a Bilateral Investment Treaty

Transcription

1 The Investor s Right to Waive Access to Protection under a Bilateral Investment Treaty Anne K. Hoffmann* I. INTRODUCTION INVESTMENT ARBITRATION AWARDS REGULARLY touch upon the issue of a possible waiver of the investor s right to commence arbitration proceedings based upon a bilateral investment treaty (BIT). It usually arises when the arbitral tribunal has to decide whether the inclusion of a domestic forum selection clause into a subsequently concluded investment contract might constitute a waiver of the access to international arbitration provided for in a BIT. 1 Arbitral tribunals have responded to this issue in two ways: they introduced a distinction between treaty claims and contract claims and ruled that the contractual domestic forum selection clause only applied to disputes arising from the contract and did not deprive them of their jurisdiction to decide * Anne K. Hoffmann, LL.M. is a lawyer (admitted in England & Wales and Berlin) at Python & Peter, Geneva. She is a member of the Committee on Law of Foreign Investment of the International Law Association. The author thanks Profs. Christoph Schreuer, Ole Spiermann and Andrea K. Bjorklund as well as Antonio R. Parra for their valuable comments on a draft of this article. 1 Awards which raised this issue include, for example, Lanco v. Argentina, Decision on Jurisdiction, Dec. 8, 1998, para. 24 et seq.; Salini v. Morocco, Decision on Jurisdiction, July 23, 2001, para. 25 et seq.; CMS v. Argentina, Decision of the Tribunal on Objections to Jurisdiction, July 17, 2003, para. 70 et seq.; SGS v. Pakistan, Decision on Jurisdiction, Aug. 6, 2003, para. 146 et seq.; Azurix v. Argentina, Decision on Jurisdiction, Dec. 8, 2003, para. 83 et seq.; SGS v. Philippines, Decision on Jurisdiction, Jan. 29, 2004, para. 154; Eureko v. Poland, Partial Award, Aug. 19, 2005, paras. 174 and 175; Aguas del Tunari v. Bolivia, Decision on Jurisdiction, Oct. 21, 2005, para. 109 et seq. 69

2 70 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL whether rights under the treaty had been violated. 2 Another answer tribunals developed in certain cases was to rule that the local forums stipulated in the relevant contract did not actually qualify as a commonly agreed settlement procedure since they were administrative courts which could not be selected by mutual agreement. 3 Curiously, however, most awards raising this issue do not address whether the investor would be able at all to waive the guaranteed access to international arbitration. 4 This question arises due to the nature of the foundations of modern investment arbitration. It finds its basis in bilateral or multilateral investment agreements. These are concluded between states in order to promote and protect foreign direct investment, thereby granting the investor of the home state rights against the host state should the latter fail to accord the investor the protection foreseen in the treaty. Thus, the question arises whether the rights granted in treaties are rights bestowed directly upon the investor or rights the investor derives from the state to which they belong. 5 2 See, e.g., Compania de Aguas del Aconquija S.A. and Vivendi Universal v. Argentina (ICSID Case No. ARB/97/3), Decision on Annulment, July 3, 2002; CMS Gas Transmission Company v. Argentina (ICSID Case No. ARB/01/8), Award, May 12, 2005; SGS v. Pakistan (ICSID Case No. ARB/01/13), Decision on Objections to Jurisdiction, Aug. 6, 2003; Azurix Corp. v. Argentina (ICSID Case No. ARB/01/12), Decision on Jurisdiction, Dec. 8, 2003; Joy Mining Machinery Limited v. Egypt (ICSID Case No. ARB/03/11), Award, Aug. 6, 2004; Enron Corporation and Ponderosa Assets, L.P. v. Argentina (ICSID Case No. ARB/01/3), Decision on Jurisdiction (Ancillary Claim), Aug. 2, 2004; Siemens A.G. v. Argentina (ICSID Case No. ARB/02/8), Decision on Jurisdiction, Aug. 3, 2004; Consortium Groupement L.E.S.I. DIPENTA v. Algeria (ICSID Case No. ARB/03/8), Award, Jan. 10, 2005; AES Corporation v. Argentina (ICSID Case No. ARB/02/17), Decision on Jurisdiction, Apr. 26, 2005; Camuzzi International S.A. v. Argentina (ICSID Case No. ARB/03/2), Decision on Objections to Jurisdiction, May 11, 2005; Sempra Energy International v. Argentina (ICSID Case No. ARB/02/16), Decision on Objections to Jurisdiction, May 11, 2005; Eureko B.V. v. Poland, Partial Award and Dissenting Opinion, Aug. 19, 2005; Noble Ventures, Inc. v. Romania (ICSID Case No. ARB/01/11), Award, Oct. 12, 2005; Bayindir Insaat Turizm Ticaret Ve Sanayi A.S. v. Pakistan (ICSID Case No. ARB/03/29), Decision on Jurisdiction, Nov. 14, 2005; Jan de Nul N.V. and Dredging International N.V. v. The Arab Reublic of Egypt (ICSID Case No. ARB/04/13), Decision on Jurisdiction, June 16, The suggestion whereby the consent in the BIT of the host state to the submission of investment disputes to arbitration could be invoked in preference to any applicable previous agreement on the settlement of such disputes, such as might be embodied in the arbitration clause of an investment contract between the investor and the host state, was thus not followed. It was based on the assumption that the offer of the host state contained in the arbitration provision of the BIT, when accepted by the investor, simply supersedes their previous agreement. See A. R. Parra, Provisions on the Settlement of Investment Disputes in Modern Investment Laws, Bilateral Investment Treaties and Multilateral Instruments on Investment, 12 ICSID Rev. FILJ 335 (1997). 3 See, e.g., Lanco v. Argentina, para. 26; Salini v. Morocco, para Both the Azurix and the Aguas del Tunari Tribunals, as cited above, recognise this problem and, after addressing it briefly, conclude that they need not decide it (paras. 85 and 118, respectively). 5 For a discussion of this issue, see Z. Douglas, The Hybrid Foundations of Investment Treaty Arbitration, 74 British Yearbook of International Law 152 (2003); O. Spiermann, Individual Rights, State Interests and the Power to Waive ICSID Jurisdiction under Bilateral Investment Treaties, 20(2) Arb. Int l 179 (2004). The issue will also be addressed by J. van Haersolte-van Hof and Anne K. Hoffmann in The Relationship between International Tribunals and Domestic Courts in The Oxford Handbook of International Investment Law (forthcoming).

3 The Investor s Right to Waive Protection 71 In Eureko v Poland, 6 the Tribunal saw and addressed this problem briefly when it concluded: The Tribunal notes that the unconditional waiver contained in Article 1 of the First Addendum as regards BIT claims is effective and in accordance with international law which recognizes that a party may waive certain rights entitled to international protection. The Second and Third Restatements of Foreign Relations of the United States are clear on this point: A waiver or settlement by an alien of a claim against a state, made after an injury attributable to that state but before espousal is effective as a defense on behalf of the respondent, provided the waiver or settlement is not made under duress. A state s claim against another state for injury to its national fails if, after the injury, the person waives the claim or otherwise reaches a settlement with the respondent state. International law thus recognizes that an investor may, after a claim against a State has arisen, enter into a settlement agreement with that State and commit to a final waiver of those claims. 7 This statement, however, cuts a long story extremely short. It is still everything but undisputed whether an individual can be the subject of rights in public international law. Additionally, if that should be the case, it would need to be proven that modern investment treaties intend to vest such rights in the investor. These points shall be addressed subsequently. II. THE INDIVIDUAL AS SUBJECT OF INTERNATIONAL LAW Traditionally, international law was defined as governing the relations between states amongst each other. They made international law and were accountable 6 Partial Award, Aug. 19, Id. paras. 174 and 175 (emphasis added). The Tribunal in Aguas del Tunari v. Bolivia, Decision on Jurisdiction, Oct. 21, 2005, also addresses this point and states that it would appear that an investor could also waive its rights to invoke the jurisdiction of ICSID (para. 118) before coming to the conclusion it need not decide this issue in the case at hand. Also, in the Decision of the Tribunal on Preliminary Questions on Jurisdiction, dated June 17, 2005, the Tribunal in the matter of Gas Natural v. Argentina, states in para. 34: The scheme of both the ICSID Convention and the bilateral investment treaties is that in this circumstance, the foreign investor acquires rights under the Convention and Treaty, including in particular the standing to initiate international arbitration. However, a clear answer to the question whether these mentioned rights are direct or derived was not provided by this statement.

4 72 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL to each other. The term international law replaced the older terminology law of nations or droit de gens. 8 Hence, the classical doctrine of international law did and does not consider the individual a subject, but rather an object of international law similar to boundaries, rivers or territory. 9 According to that theory, the individual cannot be the subject of rights and duties under international law. However, this classical theory was not undisputed: Even early in the science of international law, a notion existed that the provisions of international law are directly binding on individuals without the state as an intermediary and that the state and the individual both were subjects of international law. 10 This understanding of the theory of international law has met growing acceptance especially since the inter-war period in the 20th century. Increasingly, the human being moved onto the centre stage of international law and it is now recognised that even states when acting do so in defending the interests of the persons behind them, their nationals. 11 The classical theory of international law recognising solely states as players on the international plane has been confronted with the fact that, although states remain central, international organisations, nongovernmental organisations, corporations and ad hoc transnational groups have increasingly gained influence in that sphere. 12 One of the best examples of such new players, especially international organisations, arriving on the international stage is the United Nations. 1. The Individual s Capacity to Possess Rights and Duties under International Law The main criterion in determining whether one deals with a subject of international law and the one often used in an attempt to prove that individuals are merely objects of international law is the subject s inherent capacity to possess rights and duties. 13 As early as the sixteenth century a minority of jurists 8 This can be traced back to Cicero, De officiis, lib. III, 17, 69 and reflects this traditional understanding of the role of international law. In certain languages, this term still remains unchanged, for example in German: Völkerrecht. 9 For an enlightening summary of this position, see R. Higgins, Conceptual Thinking About the Individual in International Law, in International Law A Contemporary Perspective (Falk, Kratochil and Mendlowitz eds., 1985), at M. Korowicz, The Problem of the Personality of Individuals, 50 AJIL 533, 534 (1956), with further references. 11 See, e.g., Westlake, International Law (1910), at 1 et seq.; Kelsen, Das Problem der Souveränität und die Theorie des Völkerrechts 128, 130 et seq., 159 et seq. (1928); Lauterpacht, International Law and Human Rights, 5 et seq., 10, and (1950). 12 For an overview of recent developments, see. E.B. Weiss, Invoking State Responsibility in the Twenty-First-Century, 96 AJIL 798 (2002); and P.K. Menon, The International Personality of Individuals in International Law: A Broadening of the Traditional Doctrine, 1 J. Transn l L. & Pol. 151 (1992).

5 The Investor s Right to Waive Protection 73 acknowledged contrary to the predominant view that non-state entities had internationally recognized legal rights. 14 Since then, it has been increasingly acknowledged that individuals enjoy rights, both human rights and others. The existence of human rights of individuals is manifested in various treaties and declarations, for example in the UN Charter, the Universal Declaration of Human Rights (1948), the International Covenant on Economic, Social and Cultural Rights, the International Covenant on Civil and Political Rights and very importantly, the Optional Protocol to the Covenant on Civil and Political Rights which sets out in Article 1: A State party to the Covenant [on Civil and Political Rights] that becomes a party to the present Protocol recognizes the competence of the Committee to receive and consider communications from individuals subject to its jurisdiction who claim to be victims of a violation by that State party or any of the rights set forth in the Covenant. Individual rights as human rights have also been enshrined in the European Convention for the Protection of Human Rights of 1950, the Inter-American Human Rights System, embodied in the American Convention on Human Rights of 1969, and the African Charter of Human and Peoples Rights of Within the European Community, the individual has been recognised as a subject of law equal to its member states. Thus, the European Court ruled that Community law intends to confer rights upon individuals and declared certain provisions of the Treaty to be directly applicable to individuals. 16 Finally, the International Court of Justice in its judgement in the LaGrand case also confirmed in 2001 that individuals possess international rights when it held regarding Article 36(1) of the Vienna Convention on Consular Relations of 1963 that [t]he clarity of these provisions, viewed in their context, admits of no doubt. It follows, as has been held on a number of occasions, that the Court must apply these as they stand. Based on the text of these provisions, the Court concludes that Article 36, paragraph 1, creates individual rights, which, by virtue of Article I of the Optional Protocol, may be invoked in this Court 13 Reparation for Injuries Suffered in the Service of the United Nations [1949] ICJ Reports 174, R. Higgins, supra note 9, at (with references to Plutarch and Francisco de Vitoria). 15 For a description of the features of these treaties, see P.K. Menon, supra note 12, at 171 et seq. 16 Van Gend en Loos, 1 C.M.L.R. 82, 129 (1963).

6 74 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL by the national State of the detained person. These rights were violated in the present case. 17 Equally, it is now widely acknowledged that individuals have duties under international law. Frequently used examples for the proof of such responsibilities are the prohibition of piracy as now codified in the United Nations Convention on the Law of the Sea, 18 the prohibition of the illegal use of a flag, 19 individual responsibility for the crime of genocide in accordance with the UN Convention on the Prevention and Punishment of the Crime of Genocide, 20 and prohibitions against airline hijacking in The Hague Convention for the Suppression of Unlawful Seizure of Aircraft of as well as the Montreal Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation of The responsibilities of individuals under these treaties have been described in detail by commentators. 23 Of special importance in that regard is the London Agreement of August 8, 1945, which was concluded by Great Britain, the United States, France and the USSR and to which nineteen other states adhered subsequently. It established a tribunal for the trial of war criminals whose offences had no particular geographical location. The Charter annexed to the Agreement, which defines constitution, jurisdiction and functions of the tribunal as well as principles of international law which the tribunal had to apply, mentions three categories of crimes for which individuals may be tried: crimes against peace, war crimes and crimes against humanity. The Nuremberg trials were conducted on this 17 LaGrand (Germany v. USA) [2001] ICJ Reports 466 (27 June), para. 77; see also Separate Opinion of Vice President Shi. By ruling so, the Court went one step further in developing a view which the Permanent Court of Justice (PCIJ) had already begun to articulate in the Polish Railways Workers case in In its Advisory Opinion, the PCIJ stated: It may be readily admitted that, according to a well established principle of international law, the Beamtenabkommen, being an international agreement, cannot, as such, create direct rights and obligations for private individuals. But it cannot be disputed that the very object of an international agreement, according to the intention of the contracting parties, may be the adoption by the parties of some definite rules creating individual rights and obligations and enforceable by the national courts. That there is such an intention in the present case can be established by reference to the terms of the Beamtenabkommen. Jurisdiction of the Courts of Danzig, Advisory Opinion, 1928 PCIJ (ser. B), No. 15, at (3 March), p. 17 (emphasis in original). 18 United Nations Convention on the Law of the Sea, Dec. 10, 1982, U.N. Doc. A/CONF 62/ Id. Art Convention on the Prevention and Punishment of the Crime of Genocide, December 9, 1948, 78 U.N.T.S. 277, Convention for the Suppression of Unlawful Seizure of Aircraft, 22 U.S.T. 1641, T.I.A.S. No Montreal Convention for the Suppression of Unlawful Acts Against the Safety of Civil Aviation, Sept. 23,1971, 24 U.S.T. 564, T.I.A.S. No See e.g., P.K. Menon, supra note 12, at

7 The Investor s Right to Waive Protection 75 basis. There, the Tribunal had to consider the issue of individuals as subjects of international law and ruled: It was submitted that international law is concerned with the actions of sovereign States, and provides no punishment for individuals; and further, that where the act in question is an act of State, those who carry it out are not personally responsible but are protected by the doctrine of the sovereignty of the State. In the opinion of the Tribunal, both these submissions must be rejected. That international law imposes duties and liabilities upon individuals as well as upon States has long been recognized. [ ] On the other hand the very essence of the Charter [the London Charter of the International Military Tribunal of 8 August 1945] is that individuals have international duties which transcend the national obligations of obedience imposed by the individual State The Individual s Standing Before International Tribunals Although the fact that individuals can possess rights and duties under international law has been widely acknowledged to some extent even by conservative jurists a crucial point of argument for denying an individual the status of a subject of international law has been for a long time the perceived lack of standing of individuals before international tribunals. 25 However, the issue of possessing a right is distinct from the ability to enforce it. The fact that an individual is not able to take measures in order to enforce rights in his own name shall not be taken as evidence for the assertion that he is not a subject of law or that they are rights of the state simply because it has the capacity to enforce them. 26 At the same time, this view of limitations on standing is 24 I. Brownlie, The Individual Before Tribunals Exercising International Jurisdiction, 2 Int l & Comp. L. Q. 701, (1962). The General Assembly of the UN adopted a Resolution on December 11, 1946 in which, after taking note of the Agreement, it affirmed the principles of international law recognised by the Charter of the Nuremberg Tribunal and the Judgement of the Tribunal. Id. at One of the crucial examples always referred to in that regard is the Statute of the ICJ, which provides in Art. 34 (1) that [o]nly States may be parties in cases before the Court. 26 See Sir Hersch Lauterpacht in International Law and Human Rights, supra note 11, who states: The position of the individual as a subject of international law has often been obscured by the failure to observe the distinction between the recognition, in an international instrument of rights enuring to the benefit of the individual and the enforceability of these rights at his instance. The fact that the beneficiary of rights is not authorized to take independent steps in his own name to enforce them does not signify that he is not a subject of the law or that the rights in question are vested exclusively in the agency which possesses the capacity to enforce them. [Id. at 27.] Similar observations may be found in H. Lauterpacht, The Subjects of the Law of Nations, 63 Law Quarterly Review 438, 451 (1947).

8 76 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL not entirely correct as examples exist of instruments which enable individuals to enforce their rights before international tribunals. 27 They include the Central American Court of Justice created in 1907 in Costa Rica 28 and the International Prize Court which was to be established through the never ratified Hague Convention XII in 1907 and would have allowed individuals injured by the decisions of national prize courts to bring claims against a foreign state. 29 Furthermore, under the Treaty of Versailles of June 1919, individuals who were nationals of the Allied and Associated Powers could bring actions against Germany before Mixed Arbitral Tribunals. 30 The last example of a treaty providing for individuals to advance claims against either state to be mentioned here 31 is the German Polish Convention of 15 May 1922, also called the Upper Silesia Convention. Article 5 of this Convention provided that the question as to whether or to what extent an indemnity for the abolition or diminution of vested rights must be paid by the State, will be settled directly by the Arbitral Tribunal on the complaint of the person enjoying the right. The Upper Silesia Convention is especially interesting as it grants individuals the right to sue not only the state of which they are not a national, but also their home state. 32 Today, examples granting individuals standing before international tribunals are no longer rare. The tables have turned with the arrival of the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, also known as the Washington or ICSID Convention, 33 and the by now more than 2500 bilateral investment treaties as well as important multilateral investment treaties 34 which grant individuals jurisdictional capacity under international law. All of these treaties lay down a foundation for the right of private investors to sue foreign governments for the illegal interference with 27 For an overview over the development of the procedural capacity of individuals, see P.K. Menon, supra note 12, Convention for the Establishment of Central American Court of Justice, 20 Dec. 1907, 2 AJIL 231 (Supp. 1908), Art. II. 29 Convention Relative to the Creation of the International Prize Court, in The Hague Conventions and Declarations of 1899 and 1907 ( James B. Scott ed., 1915), at Treaty of Versailles, June 28, 1919, Art. 297, 13 AJIL 151, 306 (Supp. 1919). 31 The Supreme Restitution Court established in 1952 pursuant to the World War II Convention is not discussed here in detail, but is another example of individuals being able to enforce their rights before tribunals. 32 M. Korowicz, The Problem of the Personality of Individuals, 50(3) AJIL 533, 554 (1956). 33 Convention on the Settlement for Investment Disputes between States and Nationals of Other States, March 18, 1965, 71 U.S.T. 1270, 575 U.N.T.S Best-known examples for multilateral treaties are of course the North American Free Trade Agreement (NAFTA), Jan. 1, 1994, between Canada, Mexico and the United States and the Energy Charter Treaty (ECT), Dec. 17, 1994.

9 The Investor s Right to Waive Protection 77 their investment made in another state. This development was not only not anticipated, it was outright unthinkable for many of the scholars addressing this issue even in the early second half of the last century. 35 It is thus apparent that individuals can possess rights and duties under international law directly, i.e., without the need for a state as an intermediary, and that they have been given the opportunity to ascertain these rights without the assistance of their home states before international tribunals. Therefore, individuals can be subjects of international law as much as states and international organisations a fact which is now established enough to have found its way into the Second and Third Restatement of Foreign Relations of the United States, as cited above. This capacity is not diminished by the fact that the scope of these rights and duties is dependent upon the will of the states as the treaties vesting individuals with rights remain instruments concluded between states. 36 The fact that an individual can be the carrier of rights and duties in international law does, however, not yet answer the question whether modern investment treaties intend to create a direct relationship between the investor and the state whereby he is given a direct right of action or whether he merely benefits from a permission by his home state to enforce rights which actually belong to the state parties to the treaty See J.L. Brierly, The Law of Nations An Introduction to the International Law of Peace (H. Waldock ed., 6th ed., 1963), who states: It has been suggested that a solution might be found by allowing individuals access in their own right to some form of international tribunal for the purpose, and if proper safeguards against merely frivolous or vexatious claims could be devised, that is a possible reform which deserves to be considered. For the time being, however, the prospect of states accepting such a change is not very great. [Id. at 277.] Earlier, M.O. Hudson observed similarly that [s]ome States, e.g. the United States of America, have not been willing to be required to defend against the claims of aliens generally before their own national claims courts; their assumption of an obligation to permit claims to be made against them by individual aliens in an international tribunal, is even more difficult to envisage. M. O. Hudson, International Tribunals 202 (1944). 36 Note that P.C. Jessup goes so far as to suggest that [a] treaty would thus no longer be properly defined as an agreement between states; it may be an agreement between a state and an individual. P.C. Jessup, A Modern Law of Nations 27 (1952). It is respectfully submitted that until now and at this point in time, treaties have been public agreements concluded between states on behalf of communities. A logical consequence of the fact that an individual can have the quality of a subject of international law would be that treaties can be concluded between individuals and states, both acting in their public international law capacity. However, until now, this remains only theoretical. 37 This debate is not new and has not occurred for the first time in relation to modern investment treaty arbitration. For example, in relation to the Iran-U.S. Claims Tribunal, it was discussed whether the claims brought arose from inter-state disputes or were genuine individuals claims against a state. For an enlightening overview of this issue, see Z. Douglas, supra note 5, at

10 78 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL III. THE INDIVIDUAL S PROTECTION PRIOR TO THE ENACTMENT OF INVESTMENT TREATIES Economic disputes arose frequently prior to the enactment of the investment treaty regime. Whenever the interests of foreign investors were endangered, the traditional method for the settlement of these disputes was and to the limited degree it still happens, is by means of diplomatic protection. By engaging in diplomatic protection, a state espouses the claim of its national and pursues this claim in its own name. 38 Before a state can exercise diplomatic protection, the investor needs to have exhausted all possible attempts to obtain relief through the local courts of the host state. When vindicated by means of diplomatic protection, the origin of the claim in an injury to a private interest is no longer relevant and the state becomes the sole claimant. Nevertheless, the state cannot maintain its claim unless the private party has exhausted the local remedies 39 and unless the investor remains a national of the espousing state. 40 Damages to the state are measured by the damages to the private party. 41 On the other hand, the investor has no right to diplomatic protection. He depends on the political discretion and goodwill of his state, which will take a variety of considerations beyond the investor s interests into account when considering whether to take up his case. Even if this state decides to do so, it may discontinue diplomatic protection at any time. It may waive the national s claim or agree to a reduced settlement. 42 Diplomatic protection can moreover lead to serious disruptions of international relations for the states involved. It leads to a politicization of these disputes and provides a source of international friction. 43 The political element inherent in this settlement process allows power differences to affect the resolution of investment disputes. 38 For a more detailed description of this procedure, see W. S. Dodge, Investor-State Dispute Settlement Between Developed Countries: Reflections on the Australia-United States Free Trade Agreement, 39 Vanderbilt J. Transn l L. 1 (2006). 39 See International Law Commission, Second Report on Diplomatic Protection, UN Doc. A/ CN.4/514 (2001) (prepared by John R. Dugard) (discussing exhaustion of local remedies); International Law Commission, Third Report on Diplomatic Protection, UN Doc. A/CN.4/523 (2002) (prepared by John R. Dugard) (discussing exceptions to the general principle that local remedies must be exhausted). 40 See International Law Commission, First Report on Diplomatic Protection, Addendum, UN Doc. A/CN.4/506/Add.1 (2000) (prepared by John R. Dugard) (discussing requirement of continuous nationality); International Law Commission, Fourth Report on Diplomatic Protection, UN Doc. A/ CN.4/530 (2003) (prepared by John R. Dugard) (discussing diplomatic protection of corporations and shareholders). 41 Factory at Chorzów (Merits), 1928 PCIJ (Ser. A) No.17, 28 (Judgm. Sept. 13). 42 For a further overview of the obstacles an investor seeking diplomatic protection has to overcome, see A. K. Bjorklund, Reconciling State Sovereignty and Investor Protection in Denial of Justice Claims, 45 Va. J. Int l L. 1,12 16 (2005). 43 H. Lauterpacht, The Subjects of the Law of Nations, supra note 26, at 454.

11 The Investor s Right to Waive Protection 79 All these shortcomings of diplomatic protection, in particular from the investor s perspective, are summarised in the statement of the International Court of Justice which held in the Barcelona Traction case that the State must be viewed as the sole judge to decide whether its protection will be granted, to what extent it is granted, and when it will cease, a discretion the exercise of which may be determined by considerations of a political or other nature, unrelated to the particular case. 44 The shortcomings led scholars to argue in favour of the individual s direct access to the International Court of Justice or special claims commissions for claims of violations of international law. 45 The proponents of the view that the modern investment treaty regime merely creates a means whereby the investor is entitled to enforce rights on behalf of the state advocate the idea that investment treaties simply institutionalise and reinforce (rather than replace) the system of diplomatic protection. 46 The Tribunal in The Loewen Group, Inc. & Raymond L. Loewen v. United States of America, a NAFTA case, endorsed this very view by stating: There is no warrant for transferring rules derived from private law into a field of international law where claimants are permitted for convenience to enforce what are in origin the rights of Party states. 47 This view has generally been expressed by Canada, 48 Mexico 49 and the United States 50 as respondents in NAFTA proceedings and has been supported by scholars. 51 It essentially adheres to the Mavrommatis Formula of Diplomatic Protection. In the Mavrommatis Palestine Concessions case, the judges held that: 44 Barcelona Traction, Light and Power Company, Ltd. (Belgium v. Spain), 1970 ICJ 3, 44 (Judgm. Feb. 5). 45 H. Lauterpacht, The Subjects of the Law of Nations, supra note 26, at ; P.C. Jessup, Responsibility of States for Injuries to Individuals, 46 Colum. L. Rev. 903, 908 (1946). 46 J. Crawford, The ILC s Articles on Responsibility of States for International Wrongful Acts: A Retrospect, 96 AJIL 874, 888 (2002). 47 ICSID Case No. ARB (AF)/98/3 (2003), Award, June 26, 2003, 42 ILM 811, para Amended Memorandum of Fact and Law of the Applicant, the Attorney General of Canada, The Attorney General of Canada v. S.D. Myers, Inc, Court File No. T , para. 67, available at < C.H. Brower, Investor-State Disputes under NAFTA: The Empire Strikes Back, 40 Colum. J. Transn l L. 43, 63, 70 (2001) (citing part of Mexico s submissions in United Mexican States v. Metalclad Corporation). 50 Reply to the Counter-Memorial of the Loewen Group, Inc. on Matters of Jurisdiction and Competence (Apr. 26, 2002), at 33 et seq., available at < organization/9947.pdf>. 51 M. Sornarajah, State Responsibility and Bilateral Investment Treaties, 20 Journal of World Trade Law 79, 93 (1986).

12 80 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL 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, from whom they have been unable to obtain satisfaction through the ordinary channels. By taking up the case of one of its subjects and by resorting to diplomatic action or international judicial proceedings on his behalf, a State is in reality asserting its own rights its rights to ensure, in the person of its subjects, respect for the rules of international law. 52 Although the validity of this approach in classic cases of diplomatic protection is not questioned here, it remains to be seen whether this approach, reflected in the opinion referred to above, whereby investors do not have a direct legal relationship with the host state, is consistent with the reality in modern investment arbitration. Moreover, in investment treaty arbitrations brought under the ICSID Convention, diplomatic protection is excluded by Article 27. It seeks to protect the balance of interest between the parties which would be disturbed if the host state, after consenting to arbitration, would also have to fear to be subjected to proceedings of diplomatic protection. This provision is mandatory. In case an attempt to commence diplomatic protection proceedings is made nevertheless, this does not affect the jurisdiction of the Centre or an arbitral tribunal but will enable the host state to resist them. However, this will change if the state does not comply with an award which was rendered against it in ICSID proceedings. IV. THE INVESTMENT TREATY REGIME AS A SOURCE OF RIGHTS FOR THE INDIVIDUAL 53 Investment treaties themselves do not expressly name the actual beneficiary of the rights enshrined in them. Therefore, in order to be able to assess their intention in that regard, reference shall be made to Article 31 of the Vienna Convention on the Law of Treaties which provides: A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 52 Mavrommatis Palestine Concessions (Greece v. UK), Jurisdiction, (1924) PCIJ Rep Series A No. 2., (30 Aug.) p The context and structure of this article naturally lead to the discussion of the question whether or not BITs grant rights to individuals as opposed to states. However, the same applies should the investor be a corporation rather than an individual. Only human rights, the role of which is mentioned frequently in this discussion, cannot be claimed by corporations.

13 The Investor s Right to Waive Protection 81 Furthermore, Article 31(3) of the Vienna Convention provides that for the interpretation of treaties [t]here shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. The general object and purpose of investment treaties, namely to create favourable conditions for greater direct foreign investment, does not help in drawing any conclusions concerning the issue of the true beneficiary of the rights enshrined in them. Under both possible approaches the investor and his investment enjoy the protection that might bear the incentive to encourage investments. As recourse to travaux préparatoires is difficult due to the fact that these do barely exist, recourse must be had to the ordinary meaning of the terms of the treaty in their context as well as the means set out in Article 31(3) of the Vienna Convention. Of crucial importance will thus also be the practice regarding the application of the treaty as it establishes the agreement of the parties regarding its interpretation. A subsequent agreement between the parties regarding the interpretation of the treaty as mentioned in Article 31(1) exists in the shape of the Free Trade Commission s interpretation of Article 1105 of the NAFTA; however, this does not deal with the issue at hand. Hence, some of the essential features of investment treaties, their meaning within the context of the treaty and their application by tribunals and courts will now be examined here-below. 54 Of special importance will thereby be the approach followed in the context of diplomatic protection as set out above as it provides the theoretical basis for the theory pursuant to which only states can be the direct beneficiaries of the rights at issue. 54 These criteria have been addressed in far more detail by Z. Douglas, supra note 5, at (2003). For the purpose of this analysis, it is perceived that the criteria addressed are those essentially illustrating the differences between proceedings truly involving two states and those involving an individual and a state, and they will therefore be used here too in order to discuss the issue at hand.

14 82 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL 1. Control Over the Claims Brought by the Investor Claims brought within the framework of an investment treaty are exclusively controlled by the investor commencing the proceedings. He is not obliged to consult or even only inform his home state at any point prior, during or after the commencement of his arbitration, neither regarding its existence nor concerning procedural or substantial issues arising from it. The investor himself is entitled to the damages he may recover and he himself has to bear the costs. This is in stark contrast to the features of claims brought under the regime of diplomatic protection which has been set out above. There, the state controls the claim, decides when to begin and when to terminate it. The individual is in the hands of the state. The state, when deciding if and how to proceed against another government, will have to take numerous other considerations into account. In contrast, in proceedings under investment treaties, the investor pursues only his own interests. Therefore, if the right acted upon were that of the state, it is difficult to explain why the investor nevertheless is at complete liberty with regard to the commencement and handling of the claim and is under no obligation to at least inform the relevant authorities of his home state. However, provisions stipulating such requirement have not been traced by the authors. On the contrary, there are instances where the home state actually opposed the proceedings brought by the investor before a treaty tribunal. 55 The aforementioned facts support the view that the investor in modern treaty arbitration pursues his own right rather than that of the state. 2. The Nationality of Claims Modern investment treaties and jurisprudence arising from them display considerable flexibility with regard to the nationality requirement they are conditioned upon. Of course, all investment treaties are based on the condition that the investor seeking protection under it has the nationality of one of the state parties to the treaty. With regard to corporations, most modern BITs adopt the test of incorporation. As far as individuals are concerned, only 55 In Gami Inc. v. United States of Mexico, NAFTA arbitration under the UNCITRAL Arbitration Rules (Final Award rendered on November 15, 2004), the home state of the investor, the United States of America, intervened pursuant to NAFTA Article 1128 and asserted that the Tribunal had no jurisdiction to hear the claim. This argument was rejected (see paras. 11, 29 of the Award); in Mondev International Ltd. v. United States of America, Canada, the home state of Claimant, made submissions which insinuated that Mondev s claims should be dismissed. See Second Submission of Canada pursuant to NAFTA Article 1128, July 6, 2001, <

15 The Investor s Right to Waive Protection 83 few BITs contain special requirements going beyond and qualifying the one of nationality, for example, by also requiring the investor to be a resident of the home state. 56 Nevertheless, modern treaties allow for significant flexibility in complying with these requirements. The fact that the nationality test for corporations is satisfied pursuant to the respective seat of incorporation has furthered a growing practice of establishing investment vehicles in a jurisdiction which is covered by a favourable treaty with the host state of the investment. Often these vehicles may be shells, which will transfer the revenue from the investment to a parent company in a different jurisdiction. Investment treaties sometimes contain so-called denial of benefits clauses requiring that substantial business activity be conducted within this jurisdiction for the investment to be protected by the treaty (see for example ECT Article 17(1) and NAFTA Article 1113). Moreover, modern investment treaties have taken no precaution against claims relating to a single loss by investors with multiple nationalities due to the broad definition of an investment. Thus, some treaties define an investment as the ownership of either a company incorporated in the host state or the shares in this company. 57 This may lead to claims by investors of different nationality under different investment treaties with either type of legal interest in the same investment. 58 The acceptance of an indirect interest, i.e., an interest channelled through other companies, in an investment as sufficient to qualify for an investment can equally lead to competing national claims. This was the case in CME v. Czech Republic 59 and Lauder v. Czech Republic, 60 two UNCITRAL proceedings under 56 For a discussion of nationality requirements in modern investment arbitration, see e.g., R. Wisner and N. Gallus, Nationality Requirements in Investor-State Arbitration, 5(6) J. World Inv. & Trade 927 (2004); A. Sinclair, The Substance of Nationality Requirements in Investment Treaty Arbitration, 20 ICSID Rev. FILJ 357 (2005). 57 For example, the U.S. Model BIT, Art. 1(d); Austria Model BIT, Art. 1(2); Sweden Model BIT, Art. 1(b); Energy Charter Treaty, Art. 1(6)(b); NAFTA Art This was for example the case in CMS v. Argentina, ICSID Case No. ARB/01/8, Decision of the Tribunal on Objections to Jurisdiction, July 17, 2003, where the Tribunal, after evaluating the facts and upon recognition that its finding might open the door to competing claims from different investors under different treaties in relation to damages suffered by the same company, stated that the fact that the claimants investment fell with in the definition of an investment was sufficient to confer standing upon it in relation to its cause of action and proceeded to rule that [ ] that it is not possible to foreclose rights that different investors might have under different arrangements. (paras. 65, 86). See also Azurix v. Argentina, ICSID Case No. ARB/01/12, Decision on Jurisdiction, Dec. 8, 2004, paras. 64, Partial Award, Sept. 13, Final Award, Sept. 3, 2001.

16 84 ICSID REVIEW FOREIGN INVESTMENT LAW JOURNAL two different BITs in which the conduct of the same executive organ of the Czech Republic was considered in relation to the same investment. Within ten days, both tribunals reached different conclusions. Both proceedings could exist alongside each other because the CME Tribunal recognised CME s shareholding of 99 percent in a Czech company with the rights to operate a television licence as an investment for the purposes of the Treaty between the Netherlands and the Czech Republic 61 whereas the Lauder Tribunal found that Mr. Lauder s who is a U.S. citizen shareholding in the parent company of CME met the definition of an investment under the Treaty between the US and the Czech Republic. 62 Subsequent decisions have confirmed this approach. 63 In the decision Tokios Tokelès v. Ukraine, 64 however, the Tribunal refused to base its decision on the fact that the investment, a company incorporated in Lithuania, was owned up to 99 percent by Ukrainian nationals, but solely relied on the incorporation of the company in Lithuania in accordance with local rules and regulations, justifying this approach on the ground that it fulfils the parties expectations, increases the predictability of dispute settlement procedures, and enables investors to structure their investments to enjoy the legal protections offered under the treaty. 65 The variety of options under modern investment treaties is fundamentally different from the approach taken in matters of diplomatic protection. There, with regard to protection of corporate interests the ICJ ruled in the Barcelona Traction case 66 that the decisive criterion for the determination of the nationality of the claim is the place of incorporation, thus deciding that Canada as place of incorporation had jus standi. Belgium was denied the right to bring a claim although 88 percent of the shares of the company belonged to Belgian nationals. 67 A similarly strict approach was taken in the Nottebohm decision, where in relation to individuals the ICJ imposed a requirement of an effective or genuine link between the individual who has suffered the injury and the national state prosecuting the claim in order for the claim to be admissible. 68 Thus, the Court ensured that only one state would be able to 61 CME, supra note 59, para Lauder, supra note 60, para See, e.g., Waste Management, Inc. v. United Mexican States, ICSID Case No. ARB (AF)/00/3, Award, Apr. 30, 2004, para. 80; and Franz Sedelmayer v. The Russian Federation, Award, July 7, 1998, p. 59, however, with a dissenting opinion on this point. 64 ICSID Case No. ARB/02/18, Decision on Jurisdiction, Apr. 29, Id. at [1970] ICJ Rep [1970] ICJ Rep. 42, para. 70.

17 The Investor s Right to Waive Protection 85 bring a claim for harm suffered by an individual on the basis that this individual is in fact more closely connected with the population of the State conferring nationality than with that of any other State. 69 Therefore, looking at these two landmark decisions it becomes apparent that in cases of diplomatic protection much effort is placed on channelling the various interests of private individuals and corporations into a single category of nationality with just one claimant state representing the interests at issue. 70 It thus becomes impossible that different claimants vindicate claims essentially based upon the same prejudice of interests. As has been shown above, under the investment treaty regime no such channelling of interests is apparent in relation to claims advanced by juridical as opposed to physical persons. However, an exception to this liberal approach under modern investment treaties was made in the Loewen case. 71 In the absence of a special provision in NAFTA dealing with the temporary aspects of the nationality of claims, the Tribunal strictly imposed upon Claimant the continuous nationality rule whereby the nationality must be that of the home state at the time of the events giving rise to the claim through to the date on which the award is rendered. The claimant company was incorporated in Canada at the time of the events giving rise to the claim, but was reorganised into a U.S. company after notice of the claim was filed. It assigned its claim to a Canadian company established for the sole purpose of retaining the legal title to the claim. 72 The Tribunal, recognising that the ultimate recipient of the benefits of the claim would be the reorganised U.S. company, held that the Canadian special purpose vehicle could not qualify as a continuing national for the purposes of this proceeding. 73 This decision has caused much controversy as the rule of continuous nationality is itself much debated in public international law, 74 let alone in the context of investment arbitration. This debate shall not be repeated here; it suggests however, that it might not be easily applied in the future. With regard to individuals, it appears settled in the context of investment treaty arbitration that an individual with more than one citizenship has the 68 [1955] ICJ Rep Id. 70 See also the Draft Articles on Diplomatic Protection, adopted by the United Nations International Law Commission at its 58th Session (2006), paras. 4 et seq. (on the issue of nationality). 71 Loewen v. United States, Award, June 26, Id. para Id. para For an overview of the positions, see Z. Douglas, supra note 5, at note 92.