Foreign investment disputes: cases, materials, and commentary

823 Pages·2014·5.446 MB·English

by  James Crawford, R. Doak Bishop, William Michael Reisman

KluwerArbitration
Acknowledgements
Document information
Acknowledgements
Publication
In preparing the second edition of this book, the authors have received extraordinary
Foreign Investment
assistance in research, editing, proofreading, and typing from many people without whom
Disputes: Cases, Materials
this manuscript would never have seen the light of day. The authors owe a debt of
and Commentary (Second
gratitude to these people who contributed so much to this book. The list of these people
Edition)
include: Louis-Alexis Bret, Callista Harris, Heide Iravani McHugh, Julie Jirikowic, Nathaniel
Khng, Sarah Kraus, Jorge Mattamouros, Tiina Pajueste, Mike VanderHeijden, Eileen Zelek
and Yeqing Zheng. Above all, we acknowledge the extraordinary assistance of Mr.
Topics
Cameron Miles, Ms. Cina Teixeira Santos and Ms. Carol Tamez.
Investment Arbitration
The authors also wish to acknowledge the invaluable assistance they received in
preparing the first edition of this book from Kylie Evans, Adam Muchmore, Darren
Peacock, Bart Szewczyk, Deborah Egurrola, William Russell, Roberto Aguirre Luzi, Craig
Bibliographic Miles, Carol Tamez and Cina Santos.
reference
P v
'Acknowledgements', in W
Michael Reisman , James
Richard Crawford , et al.
(eds), Foreign Investment
Disputes: Cases, Materials
and Commentary (Second
Edition), 2nd edition
(© Kluwer Law
International; Kluwer Law
International 2014) pp. v - v
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Chapter 1: Foreign Investment Disputes
Document information
§1.01 INTRODUCTION
Publication
The field of foreign investment law continues to expand rapidly and to change. The
Foreign Investment
number of investment treaties in effect has continued to increase, and there has been a
Disputes: Cases, Materials
veritable explosion of foreign investment disputes being resolved through international
and Commentary (Second
arbitration. The best-known institution specializing in investment disputes – the
Edition)
International Centre for Settlement of Investment Disputes, known by its acronym of ICSID
– was established in 1965. In the first thirty years of its existence, ICSID handled an
average of only one case per year. Since 1995, up to 30 cases have been filed in a year.
Topics
Just as significant for the growth of the law is the fact that most of the ICSID decisions are
Investment Arbitration being published. In the meantime, the Permanent Court of Arbitration (PCA), the London
Court of International Arbitration (LCIA), the International Court of Arbitration of the
International Chamber of Commerce (ICC) and the Stockholm Chamber of Commerce
Arbitration Court (SCC) have also become significant venues for investment arbitration.
Bibliographic
Since the first edition of this book was published, the International Court of Justice (ICJ)
reference has decided another investment case.
'Chapter 1: Foreign Of even greater significance has been the proliferation of bilateral investment treaties
Investment Disputes', in W (BITs). Almost 3,000 BITs have been signed in the past forty years with remarkably similar
Michael Reisman , James provisions, leading some scholars to conclude that they may now express the customary
Richard Crawford , et al. international law standards for foreign investment. Each of these treaties creates
(eds), Foreign Investment actionable standards of conduct for governments in their treatment of foreign
Disputes: Cases, Materials investment, when the governments consent, through the conclusion of the treaty, to
and Commentary (Second international arbitration for disputes arising from allegations of a violation of the treaty.
Edition), 2nd edition
In 1992, the governments of Canada, Mexico and the United States of America (USA)
(© Kluwer Law
concluded the North American Free Trade Agreement (NAFTA). Chapter 11 of NAFTA
International; Kluwer Law
includes obligations by governments providing standards of treatment for investors from
International 2014) pp. 1 -
another NAFTA country. As in BITs, each of the governments consents to international
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arbitration of any investment disputes with qualifying private investors from the other
contracting countries. Since NAFTA entered into force, each of the contracting
governments has been the target of several NAFTA arbitrations. Although the awards are
technically confidential, the NAFTA governments have laudably embarked on a policy of
transparency for NAFTA decisions, publishing them for future reference. The Association of
Southeast Asian Nations (ASEAN) members have created the ASEAN Comprehensive
Investment Agreement. Other multilateral investment treaties have been concluded,
however, without institutional arrangements that are comparable to NAFTA's.
ICSID and NAFTA awards have substantially developed foreign investment jurisprudence,
P 2 adding to the ‘case law’ from mixed arbitral tribunals, such as the Iran-United States
Claims Tribunal (IUSCT), and a few well-publicized decisions of the ICJ and ad hoc arbitral
tribunals.
Under traditional international law, corporations and individuals did not have standing
to bring claims directly against governments. Only governments were subjects of
international law. If one government's citizens were mistreated by another government,
the citizen's only remedy lay in seeking diplomatic protection from its own government.
The government, if it were so inclined, would espouse the claim of its citizen against the
offending government, most often through an exchange of diplomatic notes, but
occasionally, in the nineteenth century by military force, or more recently by bringing a
claim before the ICJ. For an individual or corporation to bring a claim in its own name
directly against a government required the consent of the government.
Consent is a critical factor. Underlying the enormous number of new cases against
governments filed by companies and individuals is the prior consent of the impleaded
governments, which is to be found in contracts, bilateral or multilateral treaties or in
domestic foreign investment laws. This widespread pattern of consent to arbitration of
investment disputes is one of the more remarkable developments in international law in
the past forty years. But with the restrictive doctrine of foreign sovereign immunity in
many national legal systems, the possibility of investment disputes being brought before
national courts has also increased.
Arbitration proceedings instituted by individuals and corporations directly against
governments are sometimes referred to as mixed arbitral tribunals to distinguish them
from private commercial arbitrations brought by an individual or corporation against
another private individual or corporation and from state-to-state (or inter-state)
arbitrations in which one government initiates an arbitral proceeding against another
government. A proceeding at the international level brought by a corporation against a
government is ‘mixed’ in the sense that it involves both private and public parties.
§1.02 A BRIEF HISTORY OF FOREIGN INVESTMENT
Foreign investment in some sense likely dates back to the days of the pharaohs in Egypt,
with investments being made by the State itself or by merchants from Egypt, Phoenicia
and Greece in other countries. The Egyptians, for example, mined tin (necessary for
forging bronze) and other metals beyond their borders. The Phoenicians built harbors for
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their trading ships around the Mediterranean, each at a day's sail from another, at some
points establishing trading centers, and at later dates colonizing areas like Carthage.
They made a significant investment in ancient Israel in the reign of Solomon, providing
the skilled craftsmen and lumber to build his Temple. Ancient Israel, for its part, invested
in areas as distant as Spain.
In more recent times, England invested in India and Canada at the beginning of the
seventeenth century through the establishment of a new form of business association –
charter companies, such as the British East India Company and the Hudson Bay Trading
Company. The Dutch created their own East India Company.
Although the most prevalent form of foreign investment in the early nineteenth century
was indirect, through loans and government bonds, modern foreign direct investment
(FDI) began to take shape in the mid-nineteenth century, stimulated by two independent,
but interrelated, trends – the rapidly-increasing rate of technological invention and the
P 3 growth of corporations and other forms of business association as methods of raising,
accumulating and deploying capital. Railroad and telegraph companies, for example,
located in Europe and the USA contracted to construct the infrastructure necessary to
operate railroads and telegraph systems in Latin America, Asia and Africa. These
companies brought together under one roof the technology, expertise and capital
required to build and operate such large infrastructure projects. Given the scale of their
investments, and the insufficiency of a local market to provide an economic return, the
markets they sought were necessarily worldwide in scope. Other FDI at this time was
directed to the operation of plantations for the cultivation of export crops and to the
exploitation of natural resources such as mining for minerals and drilling for oil. Shortly
thereafter came the construction of telephone systems, electrical power systems, street
lighting, automobile factories, and road building projects. Much of this was not simply
financed, but built and often operated by foreign investors.
The large infrastructure projects introduced by foreign companies and based on new
technologies had an important, but unintended effect on the countries where they were
constructed. They allowed for more and faster travel and communication, increasing the
power of national governments and perhaps stimulating or contributing to a sense of
nationalism among their populations. Because the large infrastructures came to be seen
as vital to the welfare of the populations and the security of the State, it was soon felt by
the politically conscious strata in many of those countries that they should be controlled
by the governments, or at least by citizens of those countries.
When the national governments of States hosting foreign investments expropriated
foreign-owned projects, they purported to rely upon the international law principle of
territorial sovereignty. Local courts were often unsympathetic to foreign investors or
obliged to give effect to the local expropriating decree, so the investors turned to their
own governments for assistance. The investors' governments, if they were inclined to help
their nationals, responded either with a show of military force (so-called ‘gunboat
diplomacy’) or by providing ‘diplomatic protection’. The latter was based on the
international law principle of nationality, the governments of the foreign investors
claiming an interest in the treatment of their nationals by other governments. Diplomatic
protection was usually pursued through exchanges of diplomatic notes between
governments, with the investor's government formally protesting the taking of the
investor's property and demanding either its return or the payment of compensation. It
could also be exercised by the investor's government espousing a formal claim on behalf
of its national, on a government-to-government basis, creating, by joint action, ad hoc
arbitral tribunals or mixed claims commissions to adjudicate a single claim or certain
categories of claims. The vigorous investor State reactions to the expropriations of the
railroads in parts of Latin America in the nineteenth century prompted Carlos Calvo, a
distinguished Argentine lawyer, to propound what came to be known as the Calvo
Doctrine in 1868. According to the Calvo Doctrine, foreign investors were entitled to
treatment no different or better than the citizens of the country where they invested and
were to have their claims heard only by the courts of the countries where they invested.
But they were not entitled to seek the diplomatic protection of their governments or to
have their claims presented to international arbitral tribunals. Capital-exporting
governments, like the USA, rejected the Calvo Doctrine but many Latin American
governments adopted it as their view of international law.
Diplomatic protection proved unsatisfactory for many reasons. For the investor, the
willingness of its government to act was always uncertain, for the government always had
many interests to consider. For the government, it was an unwieldy instrument for dealing
P 4 with the problems arising from foreign investments. The intervention of the investor's
government inevitably created confrontation and conflicts with the host government. As
the problems that governments faced became more complex and governments
developed larger organizations to handle them, it became clear that more economical
alternatives to the full intervention of governments were necessary, but an analogue to
national adjudication was not feasible, for international law at that time did not
recognize natural or juridical persons as proper subjects of its realm.
The first problem to be addressed was the prohibition of the heavy-handed use of
military force to collect foreign debts. It was put to rest by the Hague Convention (No. II)
Respecting the Limitations of the Employment of Force for the Recovery of Contract Debts
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[Drago-Porter Convention] of 1907, which imposed limitations on the use of military force
to collect public debts. The second problem, the inherently cumbersome and politically
costly procedure of diplomatic protection, was not effectively addressed until the latter
half of the twentieth century.
In the first half of the twentieth century, foreign investment disputes were precipitated,
for example, by land reform measures in certain countries, the nationalization of the
petroleum industry in Mexico in the 1930s, the repudiation of some government
concessions in Central America, the transformation of the entire Czarist economy in the
Soviet Union to socialism in 1917, and the disruptions and displacements that resulted
from World War I. The dismantling of the Ottoman Empire and the creation of new
governments (e.g., Iraq), with new nationalities for the inhabitants of certain areas,
provided fertile ground for foreign investment disputes.
The 1899 and 1907 Hague Convention for the Pacific Settlement of International Disputes
were the first multilateral treaties providing an established structure for arbitration –
and thus peaceful resolution – of inter-state disputes. But the existence of these
conventions failed to prevent World War I.
The period following World War I witnessed the creation of the Permanent Court of
International Justice (PCIJ), which heard three important investment disputes in the
1920s: the Oscar Chinn case, (1) the Chorzow Factory case (2) and the Mavrommatis
Palestine Concessions case. (3) Many mixed claims commissions and ad hoc arbitral
tribunals were also created to handle particular claims for one country's nationals
against a foreign government.
Following World War II, investment disputes resulted from the imposition of socialist
economies in Eastern Europe, the nationalization of certain industries in Western Europe
(France and the United Kingdom), the emergence to independence of former colonial
territories, and the nationalization of certain petroleum and mining concessions in
various countries like Libya, Kuwait, Iran, Chile, and Jamaica, among others.
Significant law-making achievements occurred after World War II. Property rights
(including the right to compensation for expropriation) were enshrined in the Universal
Declaration of Human Rights (UDHR), the European Convention on Human Rights (ECHR)
and its protocols and the American Convention on Human Rights, as well as in the
constitutions of many governments.
Efforts to organize both international protection for foreign investment and methods for
resolving disputes began in earnest after World War II. The Final Act of the United Nations
P 5 Conference on Trade and Employment [Havana Charter] of 1948, which sought but
failed to create an international trade organization, included some provisions dealing
with investment issues but foundered on conflicts between developed and developing
nations. The Economic Agreement of Bogotá of 1948, involving western hemisphere
governments, which was specifically designed to address the treatment of foreign
investors, also failed to become effective. Some private initiatives were more successful:
in 1949, the ICC adopted the International Code of Fair Treatment for Foreign Investors.
Some countries sought to regulate and limit foreign investment through a variety of
methods. Many socialist countries banned FDI in their territories altogether. Some
governments required formal approval for FDI proposals. Others excluded or limited any
FDI in certain strategic industries. Still others mandated certain preconditions for FDI,
such as the participation of local investors in some specified percentage of ownership
(sometimes local nationals had to be the majority owners) or the transfer of certain
technologies or know-how. After the 1970s, many countries eased these restrictions.
In the 1950s, countries still negotiated treaties of Friendship, Commerce and Navigation
(FCN), a genre of treaty from the late nineteenth century. FCN treaties contained a few
provisions regulating the treatment of foreign investment but did not commit States to
arbitration with investors. The British government brought an investment dispute against
Iran to the newly-formed ICJ arising out of the nationalization of the Anglo-Iranian Oil
Company. In 1952, the ICJ found it lacked jurisdiction.
In 1959, a Draft Convention on Investments Abroad was proposed by European business
leaders and attorneys, but it never became effective. In 1961, Harvard Law School
Professors Louis Sohn and Richard Baxter, published a Draft Convention on the
International Responsibility of States for Injuries to Aliens. Although only a proposal, it
had a profound influence on the development of international investment law.
A different direction was taken in 1962, when the United Nations General Assembly
adopted Resolution 1803 (XVII), entitled ‘Permanent sovereignty over natural resources',
declaring the authority of governments to nationalize investments in their natural
resources, provided that ‘appropriate compensation’ was paid to the investors whose
property was taken. Resolution 1803 also stated that foreign investment agreements
‘shall be observed in good faith’. This and other UN resolutions stimulated the debate
over the standard of compensation for expropriations of natural resources.
In 1963, a Draft Convention on the Protection of Foreign Property was published by the
Organization for Economic Cooperation and Development (OECD). A revised version was
adopted by the Council of the OECD in 1967. Although this Draft Convention never came
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into effect, it too influenced later efforts to protect foreign investment.
In 1965, under the auspices of the International Bank on Reconstruction and Development
(World Bank), the Convention on the Settlement of Investment Disputes between States
and Nationals of Other States [ICSID or Washington Convention] was concluded and came
into effect in 1966. The Convention created the ICSID to administer arbitrations between
contracting governments and nationals of other contracting governments for disputes
relating directly to an investment. ICSID, in turn, promulgated sets of arbitral and
conciliation rules. ICSID was the first institution designed specifically to administer
arbitrations of foreign investment disputes. As of this publication, almost 150 countries
have ratified the ICSID Convention.
P 6
In the late 1960s, the ICJ considered the Barcelona Traction, Light and Power Co. Ltd. case,
(4) in which Belgium espoused the claims of its nationals who were shareholders in a
Canadian company (Barcelona Traction) for measures taken against the company itself by
the government of Spain. The ICJ disappointed many observers who had hoped to see the
Court address the merits of the case. Instead, the ICJ found that Belgium lacked standing
to bring this foreign investment dispute on behalf of its nationals as shareholders
because the relevant company was incorporated in a third country.
If the 1960s were prolific in creating foreign investment law and institutions, the 1970s
provided severe tests for them. In the early 1970s, the then new regime of Mu'ammar
Qaddafi in Libya nationalized the petroleum industry, an action that provoked three
celebrated ad hoc arbitration awards for, respectively, British Petroleum, (5) Texaco (6)
and the Libyan American Oil Company. (7) Chile nationalized copper mining and Jamaica
drove foreign bauxite mining companies out of the country by repudiating its contracts
and imposing higher levies on the companies. The end of the decade saw Kuwait
nationalize the petroleum interests of the American Independent Oil Company, which led
to another famous ad hoc arbitration award in the early 1980s. (8) In this same period
occurred the Iranian Revolution of 1979, which led to the expulsion of US companies and
the establishment of the IUSCT.
In the decade of these turbulent expropriations, the United Nations General Assembly
adopted Resolutions 3201 (S-VI) and 3281 (XXIX) in 1974, entitled, respectively,
‘Declaration on the Establishment of a New International Economic Order’ and ‘Charter of
Economic Rights and Duties of States'. These resolutions were designed to create a so-
called ‘new international economic order’, asserting each country's right to choose its
own economic system and exercise sovereignty over its own natural resources, and
providing that any disputes over expropriations must be resolved by the law of the host
government and in its own courts. These declarations were backed by a majority of
developing States but by almost no developed countries.
In the late-1960s and early-1970s, many concessions and other international investment
agreements were renegotiated to the benefit of the host governments; the host
government often took over all or a portion of the investment. The 1970s also saw
international attempts to regulate the conduct and activities of corporations that did
business on a worldwide scale, with the OECD drafting a set of voluntary Guidelines for
Multinational Enterprises and the promulgation of a United Nations Draft Code of
Conduct on Transnational Corporations.
Some developments in the 1970s were more favorable to investors. First, in the early-
1970s, the USA incorporated the Overseas Private Investment Corporation (OPIC) as a
wholly owned US government company to provide political risk insurance to US investors
doing business overseas. OPIC took over the USA's political risk insurance program from
the US Agency for International Development (AID), which had previously operated it.
P 7 There were also positive developments on the prescriptive front. Although a few
countries had begun negotiating BITs in the 1960s, the USA commenced its BIT program in
the late-1970s, developing a Model BIT. The USA has now entered into more than forty
BITs, but it is by no means the leader in the field. Switzerland, for example, has entered
into more than one hundred BITs, as have China and South Korea. As we will see later, the
proliferation of BITs has profoundly transformed international investment law.
The 1980s saw the evolution of the USA's first Model BIT: the developed countries of the
USA and Europe concluded many new BITs. In 1985, the World Bank sponsored the
Convention Establishing the Multilateral Investment Guarantee Agency (MIGA). MIGA was
created to provide political risk insurance to foreign investors, particularly those
investors whose own governments do not have a national political risk insurance
program, such as OPIC for USA investors. MIGA has developed an official commentary on
the MIGA Convention, a standard form contract of guarantee, a set of general conditions
of guarantee for equity investments, and a set of arbitral rules similar to ICSID's for
resolving political risk insurance claims.
In the late 1980s, the USA brought the Electronica Sicula S.p.A. (ELSI) foreign investment
dispute to a Chamber of the ICJ. In 1989, the ICJ accepted jurisdiction but rejected the
claim. (9) But importantly, the Chamber elaborated the meaning of certain substantive
standards provided in the Italy-USA Treaty of Friendship, Commerce and Navigation.
In the 1990s, the USA's Model BIT continued to evolve and the number of BITs entering
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into force increased dramatically. The European Community negotiated successive Lomé
Conventions with countries in Africa, Asia and the Caribbean. In 1992, the World Bank
issued its Guidelines on the Treatment of Foreign Direct Investment, and that same year
also saw the conclusion of NAFTA. In 1994, the Energy Charter Treaty (ECT) came into
effect, and now includes more than fifty member States, mostly in Eastern and Central
Europe; the ECT deals with investment issues specifically targeted toward the energy
industry. Also in 1994, two protocols to MERCOSUR addressed issues of foreign investment
in South America.
In Asia in the 1990s, the Asia-Pacific Economic Cooperation (APEC) adopted Non- Binding
Investment Principles, and the ASEAN prepared the Framework Agreement on the ASEAN
Investment Area. Perhaps the most ambitious initiative in the area of international
investment law in the 1990s was the ultimately-unsuccessful effort by the OECD in 1995 to
negotiate a comprehensive Multilateral Agreement on Investment (MAI).
The first decade of the twenty-first century showed some contrary trends. More bilateral
and multilateral investment treaties and Free Trade Agreements (FTAs) with investment
chapters were concluded. Moreover, many more BITs were concluded between
developing countries. At the same time, criticisms of BITs for supposedly being one-sided
became sharper. A few States withdrew from ICSID and threatened denunciation of their
BITs. Australia declared that it would henceforth not conclude investment agreements
P 8 providing for binding arbitration.
§1.03 THE INTERNATIONAL COMMITMENT TO ENCOURAGING AND
PROTECTING FOREIGN INVESTMENT
Although developed and developing countries have not always agreed on the standards
for treatment of foreign investment or the content of the international law that governs it,
there is no dispute concerning the necessity for foreign investment. Since the late-1970s,
a remarkable consensus has emerged concerning the standards for treatment of foreign
investment as demonstrated by the proliferation of BITs and other investment treaties
such as NAFTA and the ECT, which contain remarkably similar provisions. Foreign
investment was once viewed as an evil in certain quarters, although at times a necessary
evil; now it is universally viewed as a necessity.
Authorities have estimated that in the past few decades the gap between the standard of
living in developed and developing countries has increased. Many developing countries
have populations with high birth rates, low levels of education, relatively few
opportunities for employment, and low wages, often below the poverty line. In these
countries, health care is usually poor, in some places virtually non-existent. Life
expectancy may be significantly lower than in developed countries. In some nations,
corruption by government officials siphons off a significant percentage of the gross
national product, leaving little for improving the national infrastructure.
Moreover, poverty begets poverty. Parents with little education are less likely to send
their children to school for a sustained period. Uneducated people are less likely to
develop the modern skills to deal with complex equipment and technological changes
and, more generally, with the daunting challenges of rapid social change. Poor parents
are unlikely to possess much land, goods or money to pass on to their children. Perhaps
most importantly, parents with poor diets, few good economic role models, little
motivation, and little hope for the future are more likely to pass on the same habits and
attitudes to their children.
The economic and legal structures of some developing countries often stifle financial
risk-taking and entrepreneurial innovation, disincentivizing citizens from starting or
growing businesses. Such disincentives may be found in many parts of the legal system,
but most prominently appear in the corporate, criminal, bankruptcy, tax, and labor laws.
Many such laws were promulgated in a good faith effort to protect workers, creditors and
society, but may have unintended consequences of discouraging citizens from
undertaking the risks of starting their own businesses.
Foreign investment is not a panacea for all that ails such societies, but in many cases it
can provide a way to jump-start economies, a short cut to higher wages, an improved
infrastructure, better schools and hospitals, and more efficient and cost effective public
services. Psychologically, it can provide economic role models, generate financial
incentives and create hope. In short, it can be a motivational force. At a minimum, it can
build, maintain and operate important parts of a country's infrastructure or introduce
complex technology to a country lacking it.
Because of these substantial benefits, the international community today endorses and
encourages foreign investment. According to the International Monetary Fund (IMF), as of
the end of 2001, the book value of the world's FDI stood at approximately USD 6.8 trillion.
P 9 (10) Foreign affiliates employ about 54 million people, and their sales have amounted
to almost US USD 19 trillion. Global FDI inflows, according to the United Nations
Conference on Trade and Development (UNCTAD), rose 10% in 2011, against a background
of higher profits of transnational corporations and high economic growth in developing
countries. (11)
From the perspective of foreign investors, the most important aspects of any potential
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investment are financial (i.e., the potential to earn a reasonable profit) and legal (i.e., the
ability to protect the corpus of the investment and its profit-making potential from
confiscation, either directly or through unreasonable interference). Prudent investors
generally will not risk substantial capital in a foreign enterprise unless the financial
prospects are promising and the legal structure is sufficient to protect the investment,
the sine qua non of a prudent investment.
With the importance of increasing foreign investment recognized and authoritatively
endorsed, the international community has acted to lay the foundation for an adequate
legal infrastructure for foreign investment. Although no comprehensive worldwide
convention on the standards for the treatment of foreign investment yet exists, almost
3,000 BITs have been concluded by both developed and developing countries covering
every region of the world. While differences in some standards may be found among
these many treaties, there is an astonishing similarity in the most important rules. In
addition, strong regional investment treaties exist. These include NAFTA (covering North
America), the ECT (covering most countries in Central and Eastern Europe and the
Commonwealth of Independent States (CIS) countries, with respect to the energy
industry), the protocols to MERCOSUR (covering large portions of South America), the
Non-Binding Investment Principles and the Framework Agreement on the ASEAN
Investment Area (covering much of Asia), the Agreement on Promotion, Protection, and
Guarantee of Investments among Member States of the Organization of the Islamic
Conference (covering the Middle East), and the Fourth ACP-EEC Convention (Lomé IV)
(between the African, Caribbean and Pacific Group of States (ACP) and the European
Community).
With the ICSID Convention having been ratified by almost 150 countries, the ICSID Centre
provides an almost universal forum for resolving investment disputes through arbitration.
The PCA at The Hague constitutes another forum, comparable in some respects to ICSID.
To the extent other forums are necessary, the LCIA, ICC, SCC and the Arbitration Rules
promulgated by the United Nations Commission on International Trade Law (UNCITRAL)
provide attractive alternatives. MIGA provides an institution for offering affordable
political risk insurance worldwide in order to protect investors from non-commercial
risks.
The substantive standards created by investment treaties and buttressed by customary
international law, the arbitral forums for resolving investment disputes provided by
ICSID, the PCA, the ICSID Additional Facility, and the UNCITRAL Arbitration Rules, and the
political risk insurance program offered by MIGA (as well as national programs like OPIC)
constitute an infrastructure that evidences a strong international commitment to legal
P 10 stability, transparency and predictability for foreign investment.
§1.04 WHAT IS A FOREIGN INVESTMENT DISPUTE?
The foregoing discussion has set the stage for locating disputes between private entities
and States, but the full panoply of possible disputes is not the subject of this treatise.
This book is limited to foreign investment disputes. It is natural then to ask, what is an
investment dispute?
The present discussion is only intended to introduce the subject. A foreign investment
dispute is one between an investor from one country and a government that is not its own
that relates to an investment in the host country. While this definition seems simple on
its face, hidden within it are various complex issues.
The critical question is what is an ‘investment’? Once this is known, the relationship of the
dispute to the investment can be examined to determine if it qualifies, jurisdictionally,
as an investment dispute.
The term ‘investment’ is not defined in the ICSID Convention, but usually is defined in
most BITs. Whether the BITs' definition of investment is sufficient, or whether additional
‘inherent’ characteristics are necessary, is a matter of some controversy in interpreting
Article 25 of the ICSID Convention. The characteristics sometimes asserted as inherent in
the nature of investment include the following. First, it has a certain temporal duration. It
does not involve a single sale. Second, there is a commitment by the investor of capital
or something of monetary value. Third, there is an expectation of profit. It is not a non-
profit enterprise. Fourth, there is an undertaking of risk by the investor, and sometimes
by the host government as well. Another frequent (but subjective and therefore
controversial) characteristic is the contribution of the investment to the development of
the State, by building or enhancing its infrastructure or its economy, or otherwise
contributing to it.
Examples of investments include oil exploration and production projects, mining
operations, and the construction and operation of factories and hotels. Even the issuance
of promissory notes and the making of loans for the development of a country's
infrastructure have been held to constitute investments.
A conflict between a State and a foreign-controlled but locally-incorporated entity in the
country may also constitute a foreign investment dispute under the ICSID Convention and
some investment treaties. The rules here express an important international policy. Much
of foreign investment is conducted through companies that are locally incorporated,
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either because of local law requirements or because of a desire to isolate the risks
inherent in the foreign investment by creating a separate investment vehicle. If the
capital or expertise comes from abroad, the fact that it is funneled through a local entity
should not disqualify it as a foreign investment dispute.
§1.05 INVESTMENT TREATIES
Since the 1970s, as noted earlier, the US government has made a concerted effort to
negotiate a series of bilateral investment treaties (BITs) with various governments. In the
course of that effort, the US government has developed a series of model treaties, which
have been refined and changed over time. The USA has recently promulgated its 2012
Model BIT. The USA is presently a party to more than forty BITs. The United Kingdom, The
Netherlands, Germany, France, Spain, Japan, Switzerland, Belgium, Luxembourg,
Denmark, and other developed countries have also entered into BITs with developing
P 11 countries.
The typical US BIT includes obligations that each government undertakes towards
investors from the other country. These obligations fall into four categories: (1) general
obligations toward the investment; (2) standards for expropriation; (3) currency transfer
standards; and (4) dispute settlement procedures. Three of these types of obligations are
substantive in character (although they may also require certain internal procedural
safeguards), while the fourth provides governmental consent, in advance, to the
jurisdiction of an international arbitral forum for resolving disputes that may arise
concerning the substantive obligations. It should be noted that the consent provided in
the treaty may enable a foreign investor to initiate arbitration in an international arbitral
forum even if the investor does not have an arbitration clause in its contract with the
government or, for that matter, even if the investor has no contract with the government
at all. One noted authority has coined this state of affairs as ‘arbitration without privity’.
The consent to international arbitration given by governments in BITs is a key factor
accounting for the recent explosion of foreign investment disputes.
In many of the BITs, governments make a commitment to provide foreign investors with
national treatment (treatment as favorable as that provided to the host country's
citizens), most favored nation treatment (treatment as favorable as that given to other
countries' citizens), fair and equitable treatment, full protection and security for the
investment, and treatment at least as favorable as that provided by international law. In
addition, governments often agree not to engage in arbitrary, unreasonable or
discriminatory conduct that restricts the operation, management, maintenance, or
expansion of the investment. Standards for lawful expropriation are also established.
Property may be expropriated if it is taken for a public purpose, in a non- discriminatory
manner, in accordance with due process of law, and full, adequate and effective
compensation is promptly paid. Some BITs also require the host government to comply
with any obligations it may have undertaken with the investor. This is the so-called
‘umbrella clause’. The precise meaning and application of the fair and equitable
treatment provision and the umbrella clause, as well as the contours of regulatory and
‘value’ expropriations, are a matter of debate and are still being developed.
Provisions similar to those found in bilateral investment treaties are found in two
multilateral investment treaties – NAFTA and the ECT. Chapter 11 of NAFTA has been
mentioned. Suffice it to say that it includes substantive obligations undertaken by the
three governments toward foreign investors similar to, but not necessarily the same as,
those found in BITs. It also includes governmental consent to international arbitration of
NAFTA Chapter 11 claims.
The ECT is an unusual investment treaty because it is specific to the energy industry. More
than fifty nations are parties to the ECT, mostly in Europe. Like the BITs and NAFTA
Chapter 11, the ECT provides governmental consent to international arbitration to resolve
disputes with foreign investors arising from their substantive obligations, which are also
similar to those of BITs and NAFTA.
The USA has also entered into FTAs with countries such as Australia, Chile and Singapore
and has negotiated a regional FTA with Central American governments, known as CAFTA-
DR. Each of these agreements include a chapter on investment, replete with provisions
for arbitration. Interestingly, these FTAs also contain references to an Appellate Body for
P 12 foreign investment disputes, although no such body has been created.
§1.06 INTERNATIONAL FORUMS FOR RESOLVING INVESTMENT DISPUTES
Two arbitral institutions and a set of ad hoc arbitral rules are responsible for most foreign
investment disputes that are arbitrated.
The arbitral institution that specifically specializes in international investment disputes
is ICSID, which has already been mentioned above. It is important to understand ICSID,
not only because it specializes in investment disputes, but also because it has certain
unique features which make it advantageous to both investors and host States. Unlike
any other arbitral institution, ICSID is a division of the World Bank. As part of a
multilateral lending institution, ICSID thus enjoys a ‘perception’ advantage – it is
perceived that most countries will comply with their ICSID obligations so as not to forfeit
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the good will of the World Bank. ICSID is also supported by a multilateral treaty – the
ICSID Convention. As a result, any violation of an ICSID Convention obligation is a treaty
violation, and thus, a violation of international law.
The ICSID Centre is available to administer three types of procedures: a fact finding
procedure, a conciliation, and a binding arbitration. The ICSID Convention provides that
when the arbitration procedure is used, ICSID is the exclusive forum for any disputes
submitted to it, and the annulment procedure provided before a second ICSID tribunal,
known as an ‘ad hoc committee’, is the only recourse against an ICSID arbitral award; no
appeal of an award may be taken to a national or other international court. A final ICSID
award must be complied with by the host country and enforced by any other country that
is a party to the ICSID Convention as if it were a final, non-appealable decision of a court
of the contracting country where enforcement is sought. Thus, national courts are
expected to play no role in a dispute submitted to ICSID arbitration, except for the
implementation of an ICSID award.
Unlike other arbitral institutions, the ICSID Convention contains some special
jurisdictional requirements, which are set out in Article 25. To satisfy the jurisdictional
prerequisites of the ICSID Convention, an investor must show (1) the existence of a legal
dispute; (2) that arises directly out of an investment; (3) that arises between a
government that is a party to the ICSID Convention and a private investor from another
country that is a party to the ICSID Convention; and (4) the consent of both parties to
ICSID jurisdiction to resolve the dispute. Even if the jurisdictional prerequisites are not
met, the ICSID Additional Facility is available to arbitrate investment disputes if the
parties consent to it and the ICSID Secretary General approves.
In addition to the ICSID and the ICSID Additional Facility forums, many governments have
also agreed to arbitrate investment disputes under the UNCITRAL Arbitration Rules in ad
hoc arbitrations (i.e., those that are not administered by an institution). UNCITRAL has
prepared a set of arbitration rules and the Model Law on International Commercial
Arbitration, but it does not administer arbitral cases. Other arbitral institutions may
supervise UNCITRAL arbitrations. Arbitration under the UNCITRAL Arbitration Rules is one
of the choices, along with ICSID, specifically provided to investors under many BITs,
NAFTA Chapter 11 and the ECT. If the UNCITRAL Arbitration Rules apply and an
administering institution becomes necessary, the parties may agree to the institution; in
the absence of such agreement, the Permanent Court of Arbitration (PCA) at The Hague
P 13 will appoint an institution, or the parties may agree to it.
When major upheavals have occurred in countries, often involving a change in
governments, other nations whose investors have been affected have at times negotiated
the establishment of mixed arbitral tribunals with jurisdiction to hear and decide claims
of the other nations' investors against the host government. An example of such a tribunal
is the IUSCT, which, following the 1979 revolution, was set up in 1981 to decide the claims
of US investors against the Islamic Republic of Iran. A similar institution, although not
technically involving investment disputes, is the United Nations Compensation
Commission, established to hear claims of various companies and individuals against the
government of Iraq arising from the damage suffered by companies and individuals as a
consequence of its invasion of Kuwait.
Although no public international tribunal specializes only in investment disputes,
international tribunals that may at times adjudicate investment disputes include the ICJ
(if espoused by the investor's government), the European Court of Human Rights (ECtHR),
the Inter-American Commission on Human Rights (IACHR) and the Inter-American Court of
Human Rights (I/A Court HR). The latter two institutions deal with investment disputes
only to the extent of expropriation claims in violation of the European and American
conventions on human rights. The I/A Court HR only exercises jurisdiction over claims of
individuals against governments; it has decided not to exercise jurisdiction over claims
filed by corporations.
When large numbers of US citizens have been harmed by other governments, the USA has
at times found it convenient to negotiate a lump sum settlement of all of its citizens'
claims. For such situations, the US government has created the Foreign Claims Settlement
Commission (FCSC) as a domestic institution to determine the claims of US citizens
against foreign governments and to allocate the proceeds of the government-to-
government settlements of such claims. Although a domestic entity, the FCSC adjudicates
claims based on the application of international law.
Finally, investment claims by foreign investors may be brought in national courts, usually
the courts of the host country but occasionally in the courts of another country. In the
United Kingdom, cases brought against a foreign government must meet the
requirements of the State Immunities Act of 1978, while in the USA, the Foreign Sovereign
Immunities Act (FSIA) of 1976 governs all claims against foreign sovereigns brought in any
courts in the USA, whether state or federal.
§1.07 POLITICAL RISK INSURANCE
An alternative to suing a foreign government is for the foreign investor to make a claim
under a political risk insurance policy, depending upon the terms of the particular policy.
Some policies allow a claim to be brought directly under the policy without first pursuing
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a claim against the government, while others require that claims against the relevant
government be pursued first.
OPIC was established by the US government to insure the investments of US nationals
abroad against various political risks. The three historically-covered political risks
include expropriation, damage caused by political violence and currency transfer and
convertibility risks. Other types of political risks may also be covered. Other developed
countries such as the United Kingdom, France, Germany, and Japan have their own
P 14 political risk programs that cover their own nationals.
MIGA is an international institution within the World Bank system. It performs
internationally services similar to those that OPIC provides for US companies. Some
private insurance companies also write political risk insurance policies.
§1.08 APPLICABLE LAW
The application of international law to investor-state contracts has evolved over the past
fifty years. Historically, such contracts were grounded in the national law of a particular
country. For investment disputes, that law was almost always the law of the host country.
The past fifty years, however, have witnessed a trend toward the internationalization – or
denationalization – of the law applicable to investor-state contracts. Thanks to the
international aspects of the foreign investor-state relationship, either international law
or general principles of law are now applied to many investor-state agreements. Some
commentators have opined that this trend is reversing because of the absence of an
international law of contracts and the development of investment treaties.
For cases brought before ICSID, the ICSID Convention provides that a tribunal will apply
the law chosen by the parties or, in the absence of such a choice, the law of the host
country and ‘such principles of international law as are applicable’. This formulation has
inspired a spirited debate over the role of international law in the absence of a choice by
the parties. Some arbitrators and commentators take the view that international law is
limited to a supplementary and corrective role. It is supplementary in that it may fill
lacunae in the host country's law, and it is corrective in the sense that it applies if the
host State's law violates international law. Other commentators see this role as even
more limited, noting that national law often contains rules to fill its own gaps, which
would exclude international law from a supplementary role in those instances, and
national law violates international law only if the relevant principle of international law
rises to the level of jus cogens or peremptory rule. Other experts have suggested that
international law always applies because either national law is consistent with it or, if it
is not, then international law prevails over it.
Many nations incorporate international law into their national laws, thus avoiding, at
least theoretically any conflict. Even when the host State's law applies, many countries'
legal systems derive from older and more developed systems such as the French or
British legal systems, which can sometimes be consulted at least as persuasive authority
to fill gaps or interpret the law of the host State.
§1.09 INTERNATIONAL CLAIMS
Some claims may arise under customary international law. The most common
international claim in the foreign investment area is for expropriation of an investor's
property without adequate compensation. Under international law, a government has the
right to expropriate the property of foreign investors for a public purpose, in a non-
discriminatory manner, and according to due process of law, provided that compensation
is paid. An expropriation may be direct, which is to say it is executed by an act or decree
of the government that expressly takes property or rights, or it may be indirect – a so-
called ‘creeping’ expropriation that results from a series of acts none of which purports
P 15 expressly to be a taking. Many investment treaties employ the term ‘measures
tantamount to expropriation’ to express a similar concept.
The factual threshold for an expropriation is the subject of some disagreement in the
international community. Some arbitral tribunals have suggested that an expropriation
may occur only if the government intends to expropriate, takes title to particular
property and benefits from the expropriation. More often, however, tribunals and
commentators state that an expropriation may occur in the absence of a change of title
and regardless of any expropriatory intent, if the government takes action that
substantially and unreasonably interferes with the control, use or enjoyment of property
to an extent that is more than ephemeral. The concepts of regulatory expropriation and
‘value’ expropriation, that is non- discriminatory measures that reduce the value of an
investment, have only recently begun to be explored in international law.
The standard for compensation for an expropriation has also been controversial. The
best-known formulation of ‘full, prompt and effective compensation’ was strongly
criticized in the 1960s and 1970s by some developing country governments and by some
commentators as too restrictive. Alternative standards of ‘just compensation’, ‘equitable
compensation’ or ‘appropriate compensation’ were proposed; the content to be given to
any of these tests was to be left to the discretion of the decision-maker. Some developing
country governments argued during that same timeframe that compensation should be
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