LIKENESS AND LESS FAVOURABLE TREATMENT IN INVESTMENT ARBITRATION

Transcription

1 LIKENESS AND LESS FAVOURABLE TREATMENT IN INVESTMENT ARBITRATION Guiguo Wang* Abstract: National treatment is an old trading concept, which has found its way into bilateral investment treaties and the investment chapter of free trade agreements. These treaties and agreements provide that a foreign investor or investment must be accorded treatment no less favourable than the treatment accorded to domestic comparators who are in like circumstances, but fail to define or explain the terms less favourable or like circumstances. This has led to arbitration tribunals interpreting these terms in the exercise of considerable and mostly unguided discretion. Such exercise of discretion has resulted in a number of inconsistent and at times conflicting decisions, which adversely affect the effective operation of the international investment mechanisms. This article examines the approaches that different arbitral tribunals have adopted in the interpretation of national treatment and proceeds to examine how to improve the unsatisfactory situation. It argues that adherence to the precepts of the Rule of Law in the conduct of arbitration proceedings will lead to more consistent arbitration decisions. Keywords: national treatment; less favourable treatment; like circumstances; likeness; Rule of Law; discriminatory treatment; differential treatment; discretion; good faith; jus cogens I. Introduction Economic globalisation, a result of technological innovation and scientific progression particularly in the fields of transportation, information and communication, has resulted in ever-increasing cross-border movement of goods, services, investment, capital, intellectual property rights and people. This movement leads to socio-economic, political, legal and cultural integration between diverse national systems. At the same time, national legal norms are routinely incorporated into treaties and agreements The Anti-Dumping Agreement, Subsidies and Countervailing Measures Agreement and Trade-Related Aspects of International Property Rights of the World Trade Organization (WTO) are typical examples. As required by the WTO Agreement (1995), Members must implement these agreements and in doing so adopt these international norms into their * Eason-Weinmann Chair of International and Comparative Law, School of Law, Tulane University, New Orleans, USA; University Professor of Law, Zhejiang University, Hangzhou, China; Chairman of the Hong Kong WTO Research Institute; President of International Academy of Belt and Road; Distinguished Professor of Law, Hunan Normal University, Changsha, China; JSD (Yale), LLM (Columbia). [(2016) 3:1 JICL 73 96] JICL-3(1).indb 73

2 74 Journal of International and Comparative Law domestic laws. This process is called globalisation of law. 1 This is not a simple transplantation of national norms into international instruments or transplantation of international norms into national laws in fact, this is a process which leads to universal adoption of the Rule of Law, 2 an adoption which is recognised as a guarantee of sustainable development and globalisation. 3 International investment is an area where the effects of globalisation of law are clearly felt. Alongside the ever growing body of bilateral investment treaties (BITs) and free trade agreements (FTAs), investor State arbitration plays a key role in shaping the mechanisms and rules relating to investment. Previous decisions are now, without exception, cited as precedent in arbitral proceedings, giving investment arbitration decisions a de facto precedential effect. In a way, investment tribunals function more like public quasi-judicial bodies than ordinary commercial arbitration tribunals which are only accountable to the disputing parties. 4 Yet investment arbitration tribunals have not conscientiously observed the rules and norms applicable to the public dispute resolution bodies such as the International Court of Justice (ICJ) and the WTO Appellate Body. The interpretation of the national treatment clause of BITs and FTAs illustrate this point. The BITs and FTAs contain not very well-defined national treatment clauses. 5 This has resulted in arbitration tribunals exercising wide discretion in applying the national treatment clause and 1 Professor Koh of Yale Law School argues that through this process international norms become part of the national laws. See Harold Hongju Koh, Is There a New New Haven School of International Law? Faculty Scholarship Series of Yale Law School (2007), available at fss_papers/ For a discussion of the globalisation of law and globalisation of the Rule of Law see Spencer Zifcak (ed), Globalisation and the Rule of Law (Routledge: London, New York, 2005); Guiguo Wang, Globalising the Rule of Law (2008) 48(1) Indian Journal of International Law Henry Kissinger critiques that in the 21st century world order, political and economic structures are at variance with each other. The international economic system has become global whereas the political structure of the world has remained based on the nation state. He observes that while the international political system is still largely based on contrasting ideas of world order and reconciliation of national interests, the global economic impetus is on removing obstacles to the flow of goods and capital. See Henry Kissinger, World Order: Reflections on the Character of Nations and the Course of History (Penguin: New York, 2014) pp See, on the changing nature of investment arbitration, Bernardo M Cremades and David JA Cairns, The Brave New World of Global Arbitration (2002) 3 The Journal of World Investment: Law, Economics, Politics ; Gus Van Harten, Private Authority and Transnational Governance: The Contours of the International System of Investor Protection (2005) 12(4) Review of International Political Economy For instance, art.9.3 (National Treatment) of the FTA between China and Australia provides as follows: 1. Australia shall accord to investors of China treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. 2. China shall accord to investors of Australia treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the expansion, management, conduct, operation and sale or other disposition of investments in its territory. 3. Australia shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. JICL-3(1).indb 74

3 Likeness and Less Favourable Treatment in Investment Arbitration 75 related concepts such as like circumstances and less favourable treatment. Such inconsistent and sometimes contradictory application of fundamental terms adversely impacts not only on investment mechanisms but also on investment itself. The aim of this article is to examine national treatment in international investment law. Section II of this article examines three tribunal decisions to show how investment arbitration tribunals have interpreted and applied like circumstances and the underlying reasoning for such interpretations. Likewise, Section III will examine a further selection of tribunal decisions to see how discretion has been exercised in the determination of what constitutes less favourable treatment. Section IV will examine what constitutes less favourable treatment in the light of discretionary interpretations that emerge from cases which were discussed in Sections II and III. Section V, the concluding section, will provide some thoughts on how decision-making by investment tribunals may be improved in order to better uphold the Rule of Law. II. The Puzzle of Like Circumstances Most BITs and FTAs stipulate that foreign investments and investors should be accorded national treatment if they are in like circumstances with local investments or investors. None of them, however, define or clarify what may constitute like circumstances, giving a wide discretion to investment tribunals. Since foreign investments operate in diverse economic sectors, it is not easy to decide what factors should be taken into account in determining like circumstances. It has been observed that because national treatment is intended to protect foreign investors and foreign investment and because BITs do not provide what particular risks must be protected against, [i]n order to ensure coherence and effective operation, the different treaty standards should be matched to particular risks faced by foreign investors. 6 As will be discussed later, the approach of investment tribunals is far from consistent. In this section of the article we will examine three arbitral awards, all focusing on art.1102 of the North American Free Trade Agreement (NAFTA) which guarantees national treatment. Article 1102 provides as follows: 1. Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors 4. China shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments of its own investors with respect to the expansion, management, conduct, operation and sale or other disposition of investments in its territory. Text of the FTA is available at official-documents.aspx. 6 Jürgen Kurtz, The Use and Abuse of WTO Law in Investor-State Arbitration: Competition and Its Discontents (2011) 8(3) Transnational Dispute Management 749, 764. JICL-3(1)-04.Likeness and Less Favourable Treatment.indd 75 10/06/16 6:05 PM

4 76 Journal of International and Comparative Law with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. 2. Each Party shall accord to investments of investors of another Party treatment no less favorable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. The three cases selected for in-depth analysis are SD Myers v Government of Canada, 7 Pope & Talbot v Government of Canada 8 and Methanex v United States of America. 9 A. SD Myers v Government of Canada This is the earliest case 10 involving interpretation of the national treatment clause under NAFTA. The Claimant, a US company specialising in disposal of hazardous chemical waste, established a presence by incorporating a subsidiary in Canada, SD Myers (Canada) Inc in order to export chemical waste from there for disposal in its plant in USA. SD Myers argued successfully that Canada had caused it economic harm by favouring Canadian competitors when it banned hazardous chemical waste disposal other than in Canada. While recognising that, consistently with the policy objectives of the Basel Convention on the Control of Trans-boundary Movements of Hazardous Waste and Their Disposal, it was legitimate for Canada to maintain the ability of Canadian industry to process the chemical waste in question, preventing SD Myers from exporting the chemical waste to USA for processing was not a legitimate way of achieving Canada s policy objective; much less intrusive measures were available to Canada to achieve that objective. When Myers set up SD Myers (Canada) in 1993, the US Canada border was closed to the import and export of polychlorinated biphensyls (PCBs) (a hazardous chemical) and PCB waste for disposal by action of the US Government taken in On the Canadian side, the PCB Waste Export Regulations 1990 effectively banned the export of PCB waste from Canada to the USA, except with the prior approval of the US EPA. 12 After much lobbying by Myers, the US Environmental Protection Agency issued a special exemption (an enforcement discretion ), valid from 15 November 1995 to 31 December This allowed Myers to import PCB waste from Canada for disposal in USA, provided that it met certain conditions 7 First Partial Award of 13 November Interim Award on Merits Phase 2 (10 April 2001). 9 Final Award on Jurisdiction and Merits, NAFTA Arbitration (3 August 2005). 10 SD Myers v Government of Canada (n.7). 11 Ibid., [101]. 12 Ibid., [100]. JICL-3(1).indb 76

5 94 Journal of International and Comparative Law with regard to the issue of discrimination. 98 Taking it at its highest, the majority decision in Feldman is controversial. The lack of convincing reasons has made Feldman a decision that by other tribunals find difficult to follow. This case shows how important it is to provide adequate reasoning for arbitral decisions, especially where there is no unanimity among Tribunal members. V. Conclusion: Towards More Certainty? Like circumstances and less favourable treatment are closely linked. Any error in determining like circumstances is bound to affect the determination of whether the foreign investor in question has received less favourable treatment. To the extent there are no uniform criteria to identify entities in like circumstances, the jurisprudence of international investment law is far from satisfactory in the implementation of the national treatment clause. This lack of certainty is not conducive to promoting foreign direct investment, or its ultimate purpose improving economic development and raising standards of living. 99 Foreign direct investment is now more than just portfolio investment and capital flows. It is closely related to the sustainability of the world economy. 100 In order to maximise the contribution of investment treaties to global sustainability, it is necessary that potential investors are able to know with sufficient certainty what their rights and obligations are. Such certainty can be ensured if rules of treaty interpretation are correctly followed in the implementation of investment treaties. In this regard, in addition to arts 31 and 32 of the Vienna Convention on the Law of Treaties, which are often referred to in investment arbitration, the Preamble of that Convention should be considered, particularly the provision that disputes concerning treaties, like other international disputes, should be settled by peaceful means and in conformity with the principles of justice and international law. 101 In the context of investor-state arbitration, the Preamble, thus, requires a balanced consideration of the rights and obligations of the disputing parties in accordance with international law. The word justice should be understood as meaning justice to all the disputing parties. 98 Ibid. 99 It has been said, for instance, that inconsistent investment arbitration decisions create uncertainty and damage the legitimate expectations of investors and Sovereigns. See Susan D Franck, The Legitimacy Crisis in Investment Treaty Arbitration: Privatizing Public International Law through Inconsistent Decisions (2005) 73 Fordham Law Review 1521, It has been said that the World Summit on Sustainable Development recognised trade and investment as necessary tools for achieving the goals of sustainable development. See Marcos Orellana, Investment Agreements & Sustainable Development: The Non-Discrimination Standards (2011) 11(3) Sustainable Development Law & Policy, Preamble of the Vienna Convention on the Law of Treaties (Effectuated 1980), available at treaties.un.org/doc/publication/unts/volume%201155/volume-1155-i english.pdf JICL-3(1).indb 94

6 Likeness and Less Favourable Treatment in Investment Arbitration 95 As the International Centre for Settlement of Investment Disputes (ICSID) Tribunal remarked in Phoenix v Czech Republic Award, 102 international investment law should not be read and interpreted in isolation from public international law and its general principles including jus cogens and good faith. The Tribunal added that: nobody would suggest that ICSID protection should be granted to investments made in violation of the most fundamental rule of protection of human rights, like investments made in pursuance of torture or genocide. 103 Thus, whilst BITs and investment chapters of FTAs protect the interests of foreign investors, the regulatory power of host States, as a key component of the broader principles of public international law, should be respected at the same time. Investment arbitration tribunals have not yet demonstrated their willingness to observe such principles. There are inconsistent and even contradictory decisions when dealing with similar treaty provisions and similar or even identical facts. Thanks to modern information and communication technology, investment arbitration decisions are almost instantly available online and referenced to in later cases. While investment arbitration decisions are not strictly binding precedents, frequent references to previous relevant decisions have given them a de facto precedential effect. As such, the existence of inconsistent decisions does not assist in achieving certainty in investment principles and is not conducive to a healthy environment for international investment. This situation is usually considered a result of a lack of checks and balances on the operation of investment arbitration tribunals. 104 A deeper analysis, however, reveals that the problem appears to have been caused by the lack of self-control of investment tribunals. Investment tribunals now function more like public quasi-judicial bodies than ordinary commercial arbitration tribunals, which are only accountable to the disputing parties. 105 As such, they should observe the rules and norms applicable to the members of bodies such as the judges of ICJ and members of the WTO Appellate Body. Investment arbitration tribunals should be more conscious that their decisions are likely to have spill-over effects from the disputing parties to the investment system as a whole. Hence, they should be guided by the principles of the Rule of Law that govern judicial bodies. There is of course no complete agreement on a precise definition of the Rule of Law as different persons tend to analyse it from different perspectives and with 102 ICSID Case No ARB/06/05, Award (2009) [77] [78]. 103 Ibid., [78]. 104 For instance, it has been said that: often the reason for disregard by the investor-state tribunals and intergovernmental dispute settlement bodies of the customary law requirement of settling international disputes in conformity with principles of justice and human rights is the lack of adequate constitutional checks and balances. See Ernst-Ulrich Petersmann, International Rule of Law and Constitutional Justice in International Investment Law and Arbitration (2009) 16(2) Indiana Journal of Global Legal Studies 513, On the changing nature of investment arbitration, see Cremades and Cairns, The Brave New World of Global Arbitration (n.4); Van Harten, Private Authority and Transnational Governance: The Contours of the International System of Investor Protection (n.4). JICL-3(1).indb 95

7 96 Journal of International and Comparative Law varied emphases. 106 Despite the imprecise nature of the concept, it is generally accepted that the Rule of Law requires consistency in their decision-making by the bodies in charge, even though such bodies may have discretionary powers. As James Spigelman, Chief Justice of New South Wales, has explained, the law must operate to constrain the arbitrary exercise of power, both private power and public power. Persons and institutions who have power must exercise that power within, and subject to, a comprehensive framework of binding rules. 107 In his view, unless the laws are enforced in the sense of being reasonably, fairly and consistently applied to determine the actual outcome of disputes about rights and duties, 108 there cannot be a Rule of Law to speak of. To prevent excessive exercise of discretion, tribunals should make their decision-making process transparent by offering adequate reasoning on important issues. It is submitted that countries, developed and developing alike, should accede to the UN Convention on Transparency in Treaty-based Investor State Arbitration so that the application of the UNCITRAL Rules will become a legal requirement. In conclusion, applying the requirements of the Rule of Law discussed earlier in deciding investment disputes is not a foreign concept for investment arbitration tribunals, as they always apply these tests and standards in assessing the liability of a host State. In order to uphold the integrity of investment dispute settlement mechanisms, it is crucial that investment tribunals should not only require host states to abide by the requirements of the Rule of Law, 109 but that they should themselves observe these rules in adjudicating cases. Only by doing so could the purposes and objectives of the world investment system be achieved. 106 On Rule of Law issues, see Lon L Fuller, The Morality of Law (Yale University Press: New Haven,1964); Joseph Raz (ed), The Authority of Law: Essays on Law and Morality (ClarendonPress: Oxford, 1979); and Cheryl Saunders and Katherine Le Roy (eds), The Rule of Law (The Federation Press: NSW, Australia, 2003). 107 James Spigelman, The Rule of Law and Enforcement address at ICAC Interpol Conference, Hong Kong, 22 January 2003), available at See (2003) 26 University of New South Wales Law Journal Ibid. 109 Spigelman CJ articulated the following points as important in a Rule of Law community: (1) Accessibility: Laws must be public and ascertainable or knowable perhaps with the assistance of a lawyer. (2) Certainty: Laws must be reasonably clear in their meaning. (3) Coherence: Laws should generally be consistent and not in conflict. There should be mechanisms to resolve the conflicts or tensions that inevitably arise. (4) Achievability: Laws should not require impractical, let alone impossible, conduct. (5) Prospectivity: Laws should generally be prospective in their operation, rather that retrospective. (6) Generality: Laws should be generally applicable and not specifically directed to individuals and small groups. (7) Stability: Laws should be relatively stable so that conduct with implications for longer periods of time can be engaged in with confidence. (8) Enforcement: Laws must be enforced in a rational and fair manner to enable the reasonable expectation of citizens to be realised. Ibid. JICL-3(1).indb 96