International investment protection and the implementation of measures of general interest: a difficult balance to strike?

Transcription

1 Faculty of Law Academic Year Exam Session 1 International investment protection and the implementation of measures of general interest: a difficult balance to strike? LLM Paper by Morgan Bechet Student number : Promoter : Prof. Dr. Diederik Bruloot

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3 PART I. INTRODUCTION 6 A. Context 6 B. Basic concepts 8 1. Investment 8 2. Investor 11 PART II. APPLICABILITY OF STANDARDS OF PROTECTION 15 A. Fair and equitable treatment 15 B. No expropriation without compensation The expropriation must serve a public purpose The expropriation must happen under due process of law The expropriation must be non-discriminatory or arbitrary The expropriation must be compensated 20 C. Damages 22 D. Conclusion 23 PART III. EXCEPTIONS FOR MEASURES OF GENERAL INTEREST 25 A. Regulatory freedom flowing from the investment treaty itself Admission of investments Application of investment treaties on future investments Restriction of ISDS Implicit exceptions Conclusion 31 B. Regulatory freedom flowing from other instruments than the investment treaty Introduction The state of necessity as determined by case law and the Articles on State Responsibility Subconclusion: is the necessity defence a viable option? 36 C. The Grey Area: regulation in the public interest Introduction Indirect expropriation 37 a. Degree of interference with the property right 39 b. Purpose and context of the governmental measure 41 c. Degree of interference with legitimate expectations 44 3

4 3. Sub-conclusion: can a State contradict the indirect expropriation as a viable defence? 44 D. The balance of rights: a proportionality test? 45 PART IV. DE LEGE FERENDA: A SOLUTION BASED ON CONTRACTUAL CONCEPTS? 49 PART V. CONCLUSION 52 BIBLIOGRAPHY 55 4

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6 PART I. INTRODUCTION A. Context 1. States increasingly conclude international investment agreements with each other. In these agreements, more often than not, investors who invest in the host state are granted a certain degree of investment protection. These rights include, but are not limited to, protection against (indirect) expropriation, fair and equal treatment and compensation measures whenever a State takes measures that could affect an investor s rights. This tension between States and investors interests could give rise to disputes, following which investor state dispute settlement mechanisms (ISDS) enter into force. The main reason why States grant such extensive rights to investors is to promote investment within their territory and thus boosting economic growth. 2. This phenomenon of international investment protection in investment treaties is not new. In February 2016, 2922 bilateral investment agreements have been signed, of which 2279 have entered into force. 1 In 2015 a record number of ISDS cases have been filed, namely However, with the recent negotiations on the Transatlantic Trade and Investment Partnership (TTIP), a mega free trade agreement between the United States and the European Union, the criticism on the protection of foreign investors has moved ahead quickly. This criticism is often expressed by civil society and NGO s on the one hand, and the Greens and the European Free Alliance in the European Parliament on the other. 3 The main criticism is that the investment protection scoops out the regulatory autonomy of host states, in their possibility to take measures for the protection of the general interest such as environmental and tax measures, etc 4 Another question that could be asked is whether there is a need for another investor dispute settlement mechanism. 5 1 Derived from the site of UNCTAD, htp://investmentpolicyhub.unctad.org/iia For an overview of their criticism, see 4 For other criticisms on the BIT system in general, and the ISDS mechanism in specific, see in this respect M. JACOB, International investment agreements and human rights, INEF Research Paper Series 03/2010, p. 21 et seq. 5 KLEINHEISTERKAMP concludes that there is no need for another mechanism for settling investor state disputes in the TTIP due to the fact that there are already appropriate judicial mechanisms in place for settling these problems. See J. KLEINHEISTERKAMP, Is there a need for Investor State Arbitration in the TTIP?, 7 p. 6

7 The reason why States could be reluctant to take regulatory measures is quite simple. If and when a State breaches the obligations as stated in the investment treaty, the investor could claim compensation or even damages. To illustrate this, we will give two examples, both in the assumption that the investment has occurred in a State bound by an investment treaty. The first example is about a sugar tax imposed on sugar-holding drinks, to protect public health. Suppose that an investor, a shareholder of the Coca-Cola Company sees its shares diminish in value due to that tax, could it claim expropriatory compensation from the host State? This will be up to the arbitral tribunal. A second example is about a renewable environmental permit. Suppose that a certain firm constructs a polluting nuclear plant in a certain State and that firm received all prior licenses and permits necessary for the construction. Does the investor have a claim against the host State for not renewing an environmental permit, whilst the State clearly regulates to the benefit of the environment? These are the kinds of questions we will seek an answer to. 4. Claims filed by investors are massive, to say the least. We will give just one example: in the Hulley Enterprises-case 6, an award was granted of 40 billion USD to the investor. There are however many other cases as well 7 : currently, there are a total of eight awards that granted damages over 500 million USD to an investor. Even when we look at other awards, there are over fifty awards that granted damages ranging from ten million to 500 million USD. Another interesting fact is that most cases are brought against developing countries 8 (Argentina 47 claims, Venezuela 36 claims, Egypt 26 claims, ) 9, by developed countries (USA 138 claims, Netherlands 80 claims, UK 59 claims, Germany 51 claims, ). This is remarkable to say the least. One could start to wonder if the benefit of attracting foreign investors outweighs the risk of being faced with multi-million dollar claims, especially in the context where these countries take measures to be able to develop sustainably This is exactly what this master s dissertation is about. In this paper, we will look for an answer to the question of what is left of a State s regulatory autonomy to adopt measures of general interest after the entry into force of a bilateral investment agreement. 6 Hulley Enterprises v. Russia, 18 July 2014, PCA Case N AA Derived from 8 See for a recent list 9 Derived from 10 For a more empirical research on investment treaty based arbitration of almost ten years ago, see S. FRANCK, Empirically evaluating claims about investment treaty arbitration, North Carolina Law Review, vol. 86, 2007, p. 88 et seq. 7

8 First of all, we will look at some basic concepts, as a means of introduction to the world of investment protection. Secondly, we will look at the consequences of international investment agreements. These parts will be mainly descriptive. Thirdly, we will investigate whether there is a possibility for Member States to derogate from investment protection treaties, for the adoption of measures of general interest, both from a de lege lata point of view and a de lege ferenda point of view. Finally, we will try and give a possible alternative to the modus operandi of current investment treaties, based on general contract law, more specifically with the concepts of force majeure and hardship. B. Basic concepts 6. In order to know how investment protection works, one needs to define the essential concepts within this system. One preliminary remark that could be made is that investment protection only works for cross-border operations, i.e. international investments. It is also essential to point at the role of the International Centre for the Settlement of Investment Disputes (ICSID), which is the main institution for international investment arbitration. 11 Investment protection is only granted to (i) investments, made by (ii) a foreign investor in the host State s territory Investment 7. As to the question when a certain act by an investor is to be considered an investment, and thus granting the benefit of investment protection, the BIT itself plays an essential role. It is in each BIT individually that we will find a definition of what could be considered an investment See in this respect C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p. 9 & 10 8

9 For instance, in the TTIP, the Commission has proposed the following definition of an investment in Art. X2: 'investment' means every kind of asset which has the characteristics of an investment, which includes a certain duration and other characteristics such as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk. Forms that an investment may take include: a) an enterprise; b) shares, stocks and other forms of equity participation in an enterprise; c) bonds, debentures and other debt instruments of an enterprise; d) a loan to an enterprise; e) any other kinds of interest in an enterprise; f) an interest arising from: i) a concession conferred pursuant to domestic law or under a contract, including to search for, cultivate, extract or exploit natural resources, ii) a turnkey, construction, production, or revenue-sharing contract, or iii) other similar contracts; g) intellectual property rights; h) any other moveable property, tangible or intangible, or immovable property and related rights; i) claims to money or claims to performance under a contract; As we can see, the BIT usually includes a general definition that is usually quite broad, followed by an exemplative list, which is not exhaustive However, the definition in the BIT itself is not constitutive. There is another element to take into account, namely Article 25 of the Convention on ICSID. This Article basically refers to the concept of investment as a precondition for jurisdiction of the ICSID, but fails to define it. Most arbitral tribunals have construed an autonomous approach vis-à-vis the definition of investment in Article 25 as opposed to what has been agreed in international investment agreements. 14 This is also called the double keyhole approach, which refers to a dual approach with regards to the concept of investment: first of all, the investment must be an investment within the meaning of Article 25 of the ICSID Convention. Secondly, the investment must be an investment within the specific BIT. 15 Only then will the arbitral tribunals consider themselves competent. 9. But, since the ICSID itself has not given a definition of what amounts to be an investment, it was for the arbitral tribunals to develop the general guidelines. They have done so in two landmark cases: Fedax v. Venezuela 16 and Salini v. Morocco R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 61 and 63; C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p See for instance Salini v. Morocco, 23 July 2001, ICSID n ARB/00/4, 42 ILM 609 (2003), para R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 62. This naturally only applies to the cases in which one wants to bring the case before the ICSID Tribunals; C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p Fedax v. Venezuela, 11 July 1997, ICSID n ARB/96/3, 37 LL.M (1998). 17 Salini v. Morocco, 23 July 2001, ICSID n ARB/00/4, 42 ILM 609 (2003). 9

10 The first case concerns a dispute on debt instruments. Fedax was a service provider for the Venezuelan government but at a certain point in time, the Venezuelan government could not pay Fedax in cash. They thus proposed to issue promissory notes to the benefit of Fedax, which was accepted by the latter. On the moment the debt was due however, the Venezuelan government could not pay. The main question at hand was whether the holding of promissory notes constituted an investment. The tribunal stated, on the basis of the travaux préparatoires that a broad understanding of investment must be given. It considered all circumstances of the case and concluded that the holding of promissory notes is to be considered an investment. So, the tribunal concludes that a broad definition of investment should be given. Secondly, in paragraph 43 of the Decision, it establishes the criteria that should be used to ascertain that a certain action amounts to an investment, as opposed to an ordinary commercial transaction. In this regard it holds that the basic features of an investment have been described as involving certain duration, a certain regularity of profit and return, assumption of risk, a substantial commitment and a significance for the host State s development. 18 The second case concerns the construction of motor highways in Morocco. Salini constructed, together with another company a highway infrastructure by order of the Moroccan government. Salini was however, never paid but they did have to make heavy capital investments and other long-term commitments. The case came before ICSID and Morocco contested that, among other things, the provision of a service, which is the construction of an infrastructure, does not amount to an investment. The tribunal basically reformulated what was previously considered in Fedax v. Venezuela and stated that the doctrine generally considers that investment infers: contributions, a certain duration of performance of the contract and a participation in the risks of the transaction In conclusion, one could state that four criteria should be met in order to speak of an investment: (1) a substantial contribution by the investor, (2) a certain duration of the investment, (3) a certain risk in the transaction and finally (4) a significance for the host State s development Fedax v. Venezuela, 11 July 1997, ICSID n ARB/96/3, 37 LL.M (1998), para Salini v. Morocco, 23 July 2001, ICSID n ARB/00/4, 42 ILM 609 (2003), para This last element is however contested, see R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p

11 As stated in Salini v. Morocco and in the doctrine 21, these criteria must be evaluated in a flexible way. They are not necessarily to be fulfilled cumulatively. Regards must be had to all the circumstances of each case. This test was later also known as the Salini-test Investor 11. The same remark can be made here: the BIT stipulates who the investor will be and who will thus be entitled to investment protection and compensation. Normally it is the nationality that will determine from which treaties an investor can benefit. Only nationals of a Member State to an investment treaty will receive international investment protection. 23 The law of the state whose nationality is claimed in turn determines whether the claimant is could be deemed a national. 24 It is very important in this context that the investor has a nationality that differs from the host state. It is exactly this criterion that determines whether an investment is foreign, regardless of where the investment is made. 25 Nationals of the host state are mostly excluded of the investment protection regime provided for in the BIT. 26 Most issues are concerning double nationality, but the extent of this paper does not allow us to discuss this Usually, BIT s will be quite clear on when an individual could be an investor. A more difficult question is the situation for corporations because legal systems differ so much on when a company can be considered to be a national of a specific legal system. Furthermore, a company can be structured in quite complex manners. There could be for example, multiple layers of shareholders etc. 28 In this regard, several criteria can be used to grant the nationality of a country to a company: formal criteria, such as constitution or incorporation in that 21 R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p See for example Soufraki v. UAE, 5 June 2007, ICSID n ARB/02/7; For a thorough explanation, see C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p

12 country, or registered office or more economic criteria, e.g. the place of central administration or the effective seat. 29 BIT s should be sufficiently clear and detailed when providing an answer to the question when a company is to be considered a national in order to delineate who enjoys investment protection. For instance, in the Belgium China BIT of 2009 a separate definition is used in Art. 1, 1 for each Party: for Belgium, a company is considered to be a national when it is constituted in accordance with the laws of Belgium and when it has its registered office in Belgium. For China, companies must be incorporated in China and have their seats in China. So, in essence it is the BIT itself that has to establish objective criteria in order to determine when a company is deemed to have the nationality of the State party to the BIT and thus be granted investor status. Often the company will, in addition, have to comply with the domestic requirements for companies. Sometimes a more economic link could be required (e.g. an effective seat). 13. To make the system more complex, one could wonder what to do with shareholders who invest in a foreign company. Two possible situations could arise. In the first situation, the shareholder meets the nationality criterion but the company in which he invests, does not. The second situation relates to the fact that the shareholder invests through a locally incorporated company. In both situations, the BIT will again have to deal with these issues. In the first situation, the International Court of Justice stated that investment treaties could deviate from the customary international rule pursuant to which there is no obligation for a Member State to provide diplomatic protection to a foreign company, even though its majority shareholders are nationals of that Member State. Shareholders were thus not entitled to pursue claims against the host state for damage done to the company. 30 In the second situation, it is the local company who will make the investment, but this company will have the nationality of the host state thus normally losing the benefit of the investment protection. For this problem, Article 25 (2) (b) of the ICSID Convention provides an answer, according to which a national company could be considered as foreign if foreign 29 R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 50; C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p. 19 et seq. 30 Barcelona Traction, Light and Power Company (Belgium v. Spain), Limited, Judgment, I.C.J. Reports 1970, p. 3; the Court did however specify three narrow exceptions in which bringing claims would be a possibility, see C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p

13 control is exercised over it. 31 It is also possible that the BIT itself gives independent recognition to shareholders as such, because of the fact that the purchase of shares is on itself seen as an investment. 32 In conclusion, it could be stated that especially in the latter situation, it is sufficient that the shareholder has the nationality of the State party to the BIT, even though the company has the nationality of the host state. Shareholding is, in most cases, considered to be an investment The nature of the investor does not matter. This means that it does not matter whether the investor is a public entity or a private entity. This has been confirmed in CSOB v. Slovak Republic. The tribunal did specify that this rule does not apply if the public entity acts within the context of a governmental function or as a state agent. 34 To make sure there are no discussions around this matter, the BIT could always specify whether state entities are ex or included from the investor definition. 15. In conclusion, we have seen that BIT s are an instrument for States to promote foreign investment and economic growth, by granting certain specific rights to investors. In this respect, we have seen that States especially conclude investment treaties on a bilateral basis, which causes international investment law to be very fragmented. Secondly, we have seen that in order to benefit from the investment protection, one has to assess and fulfil the conditions mentioned in each separate investment treaty. Speaking in general terms, it can be stated that it is necessary to be an investor with a nationality different from that of a host state. Furthermore, the investment must fulfil the double keyholeapproach, as developed by the case law, pursuant to which an investment must fulfil the conditions in the BIT and the criteria established by the ICSID Convention. The fulfilment of these conditions finally leads to the application of the international investment protection regime as specified within the BIT. 31 This however excludes minority shareholders. In this context, the CMS v. Argentina-case is interesting. In this case, the tribunal held that there is no requirement that the investment is made by the controlling shareholders. This applies of course to the extent that the BIT does not provide otherwise, see also CMS v. Argentina, 17 July 2003, ICSID n ARB/01/8, 42 ILM 788 (2003); see also C. YANNACA-SMALL, International investment law: Understanding concepts and tracking innovations, OECD Working papers on international investment, 2008, p. 33 et seq. 32 R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 57. See for instance, the US-Argentina BIT (1994). 33 R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p CSOB v. Slovak Republic, 4 May 1999, ICSID n ARB/97/4, para. 14 &

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15 PART II. APPLICABILITY OF STANDARDS OF PROTECTION 16. After we have looked at the essential characteristics of investors and investments, protected under BIT regimes, we shall now look at the consequences of precisely falling under such a regime. What benefits do investors have when falling under the ambit of an investment treaty? First of all, there is an obligation to treat investors fair and equitable. Secondly, states must respect the property of investors; if they do want to expropriate investors, compensation should be paid. Thirdly, damages can be claimed if a certain expropriation amounts to be unlawful or if the fair and equitable treatment standard is not met. 35 A. Fair and equitable treatment 17. The obligation for a host State to treat investments fair and equitable is probably one of the most invoked defences of investors. This concept is not new, but it was only applied in arbitral proceedings since It is for every investment treaty as such to define the standard. In Article 3 of the current TTIP proposal, one can read the following: 1. Each Party shall accord in its territory to covered investments of the other Party and investors with respect to their covered investments fair and equitable treatment and full protection and security in accordance with paragraphs 2 to A Party breaches the obligation of fair and equitable treatment referenced in paragraph 1 where a measure or a series of measures constitutes: (a) denial of justice in criminal, civil or administrative proceedings; or (b) fundamental breach of due process, including a fundamental breach of transparency and obstacles to effective access to justice, in judicial and administrative proceedings; or (c) manifest arbitrariness; or (d) targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief; or (e) harassment, coercion, abuse of power or similar bad faith conduct; or (f) a breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article. ( ) 4. When applying the above fair and equitable treatment obligation, a tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated. 35 Other standards of protection have to be met as well, such as the non-discrimination principle and the principle of full protection and security, the MFN-principle,... This goes however well beyond the ambit of this paper and they could actually be integrated within the obligation to treat investors fair and equitable; these standards will thus remain undiscussed. For a concise overview, see to this extent S. FRANCK, The legitimacy crisis in investment treaty arbitration: privatizing public international law through inconsistent decisions, Fordham Law Review, vol. 73, 2005, p et seq. 36 R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p

16 In essence, no general definition is being used, making it a very vague and circumstantial concept. It is intended, as a gap-filler, an overarching principle 37, to provide the investment protection the BIT wants to attain. The fair and equitable treatment standard (hereafter: FET standard) is an autonomous standard that must be met by the host State, in a unilateral manner. 38 This means that, for instance even when an investor has not been treated in a discriminatory way, it could still claim compensation because of the fact that he did not get treated fairly and equitably. It could be seen as an expression of the good faith-principle As stated before, the concept is not new but attempts at defining it have arisen only recently. The most famous case is the Tecmed v. Mexico-case. 40 In this case, Tecmed operated through Cytrar, a subsidiary in Mexico. It operated a landfill for hazardous waste. Cytrar obtained a licence to exploit this landfill in 1996, which expired in 1998 but was renewable. The problem was that it did not get renewed. Tecmed claimed that Mexico expropriated it in this case and that Mexico was in breach of the fair and equitable treatment standard. In paragraph 154 of its decision, the tribunal stated that international investments deserve treatment that do not affect the basic expectations that were taken into account by the foreign investor to make the investment. It is necessary for the host State to act in a consistent manner, free from ambiguity and totally transparent in its relations with the foreign investor. This way, the tribunal proceeds, the investor knows all rules that will govern its investment, as well as the goals pursued by them. The investor will thus be able to comply with them. One of these expectations is to act consistently, without arbitrarily revoking any pre-existing decisions, because the investor relies on these decisions to assume its commitments. The investor also expects a host State to abide by its legal obligations, such as not expropriating without compensation. 37 UNCTAD, International investment agreements: key issues, vol. I, 2004, p C. YANNACA-SMALL, Fair and equitable treatment standard in international investment law, OECD Working papers on international investment, 2004/3, OECD Publishing, 2004, p. 3; R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 123; M. JACOB, International investment agreements and human rights, INEF Research Paper Series 03/2010, p. 17; UNCTAD, Series on International Investment Agreements II, Fair and equitable treatment, 2012, p Waste management v. Mexico, 30 April 2004, ICSID n ARB/00/3, 43 ILM (2004) Tecmed v. Mexico, 29 May 2003, ICSID n ARB/00/2, 43 ILM (2004) 133; N. BERNASCONI-OSKERWALDER & L. JOHNSON, International investment law and sustainable development: key cases , IISD, 2010, p

17 In essence, the tribunal has established that the FET standard contains the obligation for a host State to act consistently, coherently and in a transparent manner such as not to act contrary to the investor s legitimate expectations The application of the Tecmed-approach with respect to the principle of fair and equitable treatment is very broad. Case law applied this description consistently and came to the following principles: First of all, the legal framework under which an investor operates creates legitimate expectations for that investor. This legal framework must thus be readily available, predictable and transparent. The legitimate expectations must be respected, based on what could have been legitimately and reasonably expected at the moment the investment was made. 42 Secondly, a State may be expected to fulfil its obligations under a contract with the investor, as an extension of the principle of legitimate expectations. Arbitral tribunals thus agree that the non-compliance with contractual obligations by the host State could amount to a breach of the FET standard. 43 Thirdly, a State must provide for a fair procedure and respect of the rights of the defence of the investor. This is a broad obligation, applying to all State organs. 44 Finally, a State may not coerce or harass the investor. This could amount to an inappropriate violation of the FET standard. 45 More generally, some authors consider the FET standard to be a general expression of the good faith obligation in international law N. BERNASCONI-OSKERWALDER & L. JOHNSON, International investment law and sustainable development: key cases , IISD, 2010, p See inter alia, Metalclad v. Mexico, 30 August 2000, ICSID n ARB/97/1; SD Myers v. Canada, Second partial award, 21 October 2002; Feldman v. Mexico, 16 December 2002, ICSID n ARB/99/1, 388, paragraph 128; C. YANNACA-SMALL Fair and equitable treatment standard in international investment law, OECD Working papers on international investment, 2004/3, OECD Publishing, 2004, p. 22 and 38; UNCTAD, Series on International Investment Agreements II, Fair and equitable treatment, 2012, p R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p Some tribunals do have a more restrictive view to this, see to this extent, p. 141 et seq. 44 See also Metalclad v. Mexico, 30 August 2000, ICSID n ARB/97/1; Middle East Cement v. Egypt, 29 May 2003, ICSID n ARB/99/6, 43 ILM (2004) 133; C. YANNACA-SMALL, Fair and equitable treatment standard in international investment law, OECD Working papers on international investment, 2004/3, OECD Publishing, 2004, p ; R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 142; X, Investment law reform: a handbook for development practitioners, The World Bank publishing, 2010, p. 39 & Tecmed v. Mexico, 29 May 2003, ICSID n ARB/00/2, 43 ILM (2004) 133, paragraph C. YANNACA-SMALL, Fair and equitable treatment standard in international investment law, OECD Working papers on international investment, 2004/3, OECD Publishing, 2004, p

18 B. No expropriation without compensation 20. Host states do not only have the obligation to treat investors fair and equitably. They should also respect the property rights of an investor, which is why most investment treaties contain provisions on expropriation. Expropriation essentially means that a State takes away the property title of a proprietor. This right of a State is not confined to investment issues. It is broader than that. However, when a State has signed an investment treaty, it agrees to subject its right to expropriate to certain conditions. 47 This only applies in the relationship between the host state and the investor. Usually, not only formal expropriation is caught under the definition; indirect expropriation, also known as measures tantamount to an expropriation will be caught under the definition as well. Indirect expropriation means that a State does not formally take away the property title of an investment, but it does interfere in a certain way with the rights of the investor, making the investment less profitable. 48 This form of expropriation will take place more in contemporary times than direct expropriation, but they are less apparent. Indirect expropriations have to fulfil the conditions in the same manner as direct expropriation. 49 We will see more on this later. 21. In the proposal of the TTIP, one can read the following text on expropriation: Article 5.1: Neither Party shall nationalize or expropriate a covered investment either directly or indirectly through measures having an effect equivalent to nationalisation or expropriation (hereinafter referred to as 'expropriation') except: (a) for a public purpose; (b) under due process of law; (c) in a non-discriminatory manner; and (d) against payment of prompt, adequate and effective compensation As we can see, in the TTIP, the right to expropriate as such is not touched upon. It is however made subject to certain conditions. These conditions are common to a lot of investment treaties. In essence there are four conditions to be met: (i) the expropriation must serve a public purpose, (ii) occur under due process of law, (iii) be non-discriminatory and there must 47 R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 89; X, Investment law reform: a handbook for development practitioners, The World Bank publishing, 2010, p R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p For more information, see i.a. K. SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p. 205 et seq. This concept will come back when we will look at the third section of this paper. 18

19 be (iv) prompt, effective and adequate compensation. 50 Each of these conditions will be discussed below briefly. 1. The expropriation must serve a public purpose 22. For an expropriation to be legal, the expropriating host State must act in the interest of the public, i.e. for a public purpose. This is a vague term and due to its openness, it does not give rise to significant discussion, although cases may arise occasionally. 51 SCHEFER describes this as being an expression of the utilitarian idea in international investment law: the rights of the individual are protected, but if there is an overriding interest of public purpose, a State should be allowed to expropriate, albeit under the obligation to pay compensation. A significant issue however is that, with the gradual increase of State s competences in all sectors of the economy, a State will usually act in the general interest, unless a certain act or decision clearly is for the personal interest of individual government officials. 52 This is exactly why this requirement usually does not give rise to much conflict, since the State has a wide margin of appreciation. 2. The expropriation must happen under due process of law 23. The principle of due process of law is again a very vague concept. Basically, it entails the right of an investor to be granted procedural fairness and a judicial system operating under the rule of law. This means that a host State must notify investors of pending expropriations, be transparent, etc. 53 In ADC v. Hungary 54, the requirements for a legal procedure, which satisfies this condition, were set. ADC was a Canadian construction firm that renovated the Budapest International Airport. In the agreement, there was a clause stipulating that ADC 50 See to this extent UNCTAD, International investment agreements: key issues, vol. I, 2004, p ; X, Investment law reform: a handbook for development practitioners, The World Bank publishing, 2010, p R. DOLZER & C. SCHREUER, Principles of international investment law, Oxford University Press, 2008, p. 91. See for example Amoco International Finance Corp v. Iran, 14 July 1987, ILM 1314 (1988). In this case Iran had terminated all contracts with foreign oil operators, due to the tensions on the international level. The arbitral tribunal had decided that a government cannot nationalize (oil) industries for purely financial motives, see also K. BANKS, NAFTA s Article 1110 can regulation be expropriation? in NAFTA Law & Bus. Rev. Am., 1999, vol. 5, p K, SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p K, SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p ADC v. Hungary, 2 October 2006, ICSID n ARB/03/16, paragraph

20 would be the sole operator of the terminal during a period of fifteen years. However, when the airport administration agency was privatized by Hungary, the operation was taken over by this new private-owned entity. ADC claimed that the expropriation did not occur under due process of law. The tribunal, in paragraph 435 states that a procedure must satisfy the following conditions: (1) reasonable advance notice, (2) a fair hearing (3) impartial adjudicators. In general it must be possible for the claimant to be heard and to formulate its legitimate claims. 3. The expropriation must be non-discriminatory or arbitrary 24. Generally speaking, the non-discrimination principle requires host States to treat foreign investors in the same manner as domestic investors, provided that they are in a similar situation (e.g. only expropriating foreign investors 55 ) and to treat them differently when they are in different situations. It entails the obligation to offer investors most favoured nation treatment and national treatment. 56 In the previously mentioned ADC-case, the tribunal stated in paragraph 441 that Hungary had treated ADC in a discriminatory manner by only expropriating foreign firms and not the national competing firm. 4. The expropriation must be compensated 25. Whenever a host state has exercised its right to expropriate, it is under most investment treaties obliged to pay compensation, even though all the abovementioned conditions were satisfied. Most of the discussions around expropriations are situated under this condition: what is the value of the expropriated investment? How should the compensation be estimated? Most of the times the investment treaty itself provides an answer to these questions. However, where the BIT fails to do so, an answer has to be sought in customary international law. 57 This customary international law is also known as the Hull -formula but is also heavily 55 This is however not always the case, see also Amoco International Finance Corp v. Iran, 14 July 1987, ILM 1314 (1988), paragraph 139 et seq. 56 K. SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p K. SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p

21 debated. 58 The Hull-formula provides for the obligation to pay prompt, adequate and effective compensation. A prompt compensation means that the host State is under the obligation to pay as soon as possible. An effective compensation means that the currency, in which the compensation must be paid, must be readily convertible. The requirement for the compensation to be adequate is the most controversial. 59 It means that the investor must receive the proper value of its investment. This comprises the value of the assets and the potential profits. The compensation must be assessed in function of the full value of the investment, and thus the compensation must be a full compensation, as opposed to an appropriate compensation It must however be stressed that each BIT can deviate from this customary rule, as a lex specialis to the lex generalis. 61 For instance, the text of the TTIP does not derogate from the Hull-formula (see article 5.1 (d): against payment of prompt, adequate and effective compensation ). It furthermore stipulates that the fair market value must be paid to expropriated investors, which is to be assessed at the moment prior to the expropriation (article 5. 3 TTIP proposal). Another example that leaves more to interpretation can be found in the former Indian Model BIT (article 5.1.: fair and equitable compensation. Such compensation shall amount to the genuine value of the investment expropriated ) A final remark must be made before proceeding to the section on damages. The obligation to pay compensation is only due for lawful expropriations, i.e. expropriations that occur under the conditions mentioned in the BIT. However, if a State violates one of these conditions (e.g. discriminatory measures/no adequate compensation/no public purpose) it commits an unlawful violation of the BIT, and it will be under the obligation to pay damages, which are calculated differently than how the adequate compensation is calculated. 58 See e.g. H. MARJOSOLA & A. PELLET, Chapter 32: police powers or the State s right to regulate, Kluwer Law International, 2015, p The main issue is that the Hull-formula could threaten the ability of a host state to take regulatory action when necessary. 59 K. SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p This discussion is mainly held between host States that are developing countries and the foreign investors (usually from industrialized home states). The first prefer to pay appropriate compensation, in order to pay less for the expropriation, the latter preferring receiving the full value of their investment when being expropriated. See also K., SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p. 189; H. MARJOSOLA & A. PELLET, Chapter 32: police powers or the State s right to regulate, Kluwer Law International, 2015, p ADC v. Hungary, 2 October 2006, ICSID Case n ARB/03/16, paragraph It must however be stated that there is a new Model BIT that is being drafted, where the Hull Formula is recognized. 21

22 C. Damages 28. When investment treaties set forth the conditions under which a State can legally take property from an investor, it assumes that the State fulfils the conditions as put forward in the investment treaty. When a State does not comply with these obligations the general rules of international law becomes applicable. Concluding otherwise, would put an illegal acting State on the same footing as its legal acting equivalent. 63 This was first acknowledged in a case before the Permanent Court of International Justice, in The Treaty of Versailles provided for the transfer of land owned by Germany to Poland. However, Poland did not expropriate only Germany s land but also the land of private companies. The Permanent Court of International Justice found this to be contrary to its obligations under international law and states that Poland had to pay reparation and this reparation must wipe out all the consequences of the illegal act and re-establish the situation, which would in all probability have existed if that act had not been committed. This clearly broadens the scope and level of damages that have to be paid: there is not a word on adequate compensation. More generally, all consequences must be wiped out from an illegal act. The measure for assessing this is the hypothetical situation whereby the act would not have occurred. The compensation will thus be higher for an illegally expropriated investor than for a legally expropriated; it will include expected profits and even consequential damages, next to the current value of the investment Finally, treaty provisions can differ from this general rule, increasing or decreasing the reparation standard in case of illegal acts. 63 K., SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p PCIJ, Chòrzow (Germany v. Poland), 13 September 1928, n K., SCHEFER, International investment law: texts, cases and materials, Northampton, 2013, p

23 D. Conclusion 30. In this section we have seen that States have restricted their sovereignty by signing investment treaties. By signing an investment treaty, the State agrees to give substantial protection to investors. This protection consists of several vague standards. First of all, the State is under an obligation to treat investors fair and equitably. This consists of the duty to respect legitimate expectations, to respect contractual obligations, to not harass the investor and to bring actions against it under due process of law. Secondly, the State is under an obligation to respect the property of an investor, directly by not taking away their property title, or indirectly by not adopting such measures that deprives the investor of the essential value of his investment. When a State fails to respect these obligations, it will be under the duty to pay compensation in the case of legal expropriations. This means that a State has respected the conditions mentioned in the BIT but it has expropriated nevertheless. In the case of illegal expropriations, the State will be under a duty to pay damages. The same applies to breaches of the fair and equitable treatment standard. 23

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25 PART III. EXCEPTIONS FOR MEASURES OF GENERAL INTEREST 31. After having finished the descriptive part of what investment treaties are and how they operate, we will now look at what is left of the State s regulatory autonomy once a BIT has entered into force. States must meet certain requirements when expropriating investors, treat investors fairly and equitably and even then, due to the often vague treaty wording, risk to face arbitral claims for damages if an investor claims that the protection standards are not met. This could lead to reluctance of States to take measures that could protect or enhance the general welfare, due to the fear of being sued by investors who claim they are expropriated or not treated fairly. In this chapter, we will research how and whether States can defend themselves against such claims, when they want to adopt measures that are in the general interest (this is also sometimes referred to as police powers ) 32. It is interesting to research this problem because of the fact that a delicate balance pops up. On the one hand, the investor seeks legal certainty as an essential precondition to invest in a certain country. On the other hand, host states want to retain flexibility in regulating in order to respond to certain national or global threats or challenges. Generally, this is not prohibited by investment agreements, but more often than not, they will entail obligations to compensate, which could demotivate host states to take regulatory action. This is the core problem of this research paper For the purposes of this dissertation, we will define measures of general interest as being any act, by any public entity, that aims or has as its objective the protection of certain legitimate interests, which override the interests of the private individual (i.e. the investor) Now we are going to look at the several defences that States could invoke, and in what stage of the proceedings. It is however very important to know that some actions of host States cause it to be liable, without there being a defence able to exclude this liability. It could 66 L. MARKERT, The crucial question of future investment treaties: balancing investors rights and regulatory interests of host states, in M. BUNGENBERG, J. GRIEBEL, S. HINDELANG (eds.), European yearbook of international economic law, special issue: international investment law and EU law, Springer, New York, 2011, p We use this definition as a broad term, due to the fact that the concept of general interest is really vague and usually entails cultural issues, environmental protection, health protection, 25